High Court Awards Notional Licence Fee Damages In Co-existence Dispute – Trademark

The latest judgment in the long-running dispute between Merck
KGaA (“Merck”) and Merck Sharp &
Dohme LLC (“MSD”) provides useful
guidance on notional licence fee damages in trade mark infringement
and breach of contract claims.

Background

Merck is the successor to a German family-run business
established in the 1600s, E. Merck. In the 1800s, a member of the
Merck family set up an economically linked business in the USA. MSD
is a successor to this entity.

An agreement entered into between Merck and MSD in 1955 (amended
in 1970) set out each party’s entitlement to the
“Merck” trade mark across the world. MSD had the
exclusive right to use “Merck” in the USA and Canada, and
it was only permitted to use “Merck & Co” or
“Merck Sharp & Dohme” outside of these countries if
it was paired with a geographical designation.

In 2013, Merck alleged that MSD had breached the agreement and
infringed its trade marks by using “Merck” in the UK
including on its websites, email domains, social media and
marketing materials. After various judgments, the Court granted
Merck injunctive relief to restrain further breaches and
infringements and ordered this inquiry to damages.

Issues

The issues for the Court to determine included:

Whether it is appropriate to award damages based on the
notional licence fee;

If so, whether a comparables approach is a reliable basis for
the notional fee, and if so, what adjustments should apply;
and

Whether, as an alternative, Merck is able to rely on the
economic benefits approach, and if so, how this should be
quantified.

Notional licence free

The Court confirmed that licence fee damages are available for
trade mark infringement and breach of contract claims where the
right that has been infringed is a valuable commercial asset.

When assessing the notional licence fee, it is irrelevant
whether the parties would have actually entered into the licence,
only that negotiations could have reasonably taken place. The
Court, therefore, dismissed several arguments that Merck would not,
or could not, have granted MSD a licence to use
“Merck”.

For example, MSD argued that by granting such a licence Merck
would render its own trade marks liable for revocation under
s46(1)(d) Trade Marks Act 1994, as it would have misled the public
as to the nature, quality or geographical origin of the goods and
services. MSD also relied on Article 21 of the Agreement on
Trade-Related Aspects of Intellectual Property Rights (TRIPS) which
prohibits compulsory licences. The Court noted that these
provisions cannot be interpreted to preclude an award of notional
licence fee damages.

Comparables approach

A comparables approach relies on royalty rates in similar
licences to the hypothetical licence. Merck relied on a 0.33%
royalty rate in its intragroup licencing scheme, which was based on
an EY study. However, under cross-examination of Merck’s
expert, it became apparent that the EY study was ‘statistically
meaningless’ due to the small sample size used. The Court held
(with Merck’s expert ultimately accepting) this was not a
reliable basis for the comparables analysis. As there was no
reliable evidence to base a comparables analysis on, the Court
could not award damages to Merck on the comparables approach.

Economic benefits approach

The Court instead adopted the economic benefits approach, which
is based on the incremental economic benefits MSD expected to
obtain through its use of the rights granted by the licence, and
the costs to Merck as a result of granting the rights. The Court
considered the benefits to be:

Avoided websites costs of £4.33 million by not
implementing geo-blocking technology and maintaining mirror
websites to MSD-branded sites,

Avoided social media costs of £781,703 for maintaining
MSD-branded social media pages, and

Avoided marketing costs of £566,000 as by linking its
products and services to Merck in the UK, MSD avoided costs it
would have otherwise incurred in developing and marketing the MSD
brand.

Due to a lack of evidence, the Court rejected claims for avoided
costs of email migration from @merck.com, the gain to MSD from web
traffic diverted to MSD’s website, and avoided costs for staff
training to ensure compliance with the 1970 agreement.

The licence period was set as 1 January 2010 – 28 July
2020, with the licence fee being deemed to have been paid in a lump
sum at the start of the period. The experts are required to
calculate adjustments to the above figures to reflect inflation and
discounting, which is to be based on a discount rate of 4% to
reflect the UK Treasury’s ten-year bond rate as at January
2010.

Key takeaways

The Court in this case made it clear it will award notional
licence fee damages for trade mark infringement and breach of
contract where the right functions as a commercial asset, and that
whether the parties would have actually entered into a licence
arrangement is not a bar to the Court granting notional licence fee
damages. The judgment also provides useful reminders in relation to
evidence in a damages assessment:

A party relying on the economic benefits approach should ensure
it properly identifies and supports each of the incremental
benefits and avoided costs it seeks to rely on, and

If you are relying on benchmarking reports and brand licences
for a comparables assessment, your evidence needs to be reliable
and statistically robust.

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.