CJEU confirms extrajudicial costs are ‘other expenses’ which may be claimed in IP infringement cases

http://ipkitten.blogspot.com/2022/06/cjeu-confirms-extrajudicial-costs-are.html

In IP infringement cases, the compensation of extrajudicial/out-of-court costs is a tricky subject. It is not uncommon that the infringing party may be willing to cease the infringement, but unwilling to compensate all the legal costs claimed. 

In various Member States, law firms have built a business model on retrieving such legal costs for the rightholder. As a response, some courts apply caps on the maximum legal costs that can be recovered in court proceedings. This creates tension with two rights provided under the Enforcement Directive (Directive 2004/48), namely the right of compensation of damages as mentioned in article 13 and the right to be reimbursed legal costs as set out in article 14.  Under the latter, reasonable and proportionate legal costs as well as ‘other expenses’ can be claimed, unless such would lead to an inequitable outcome. 

The CJEU recently rendered a ruling in the case of Koch Media v. FU, C-559/20 where it elaborated on the meaning of ‘other expenses’ and the extent that legal costs may be capped in court proceedings. 

A Kat eagerly calculating his costs

Background

The facts are straightforward. Koch Media is the rights owner of a computer game which is sold in Germany. FU, a natural person, infringed the IP rights of Koch Media by offering this game, without authorization, on a peer-to-peer filesharing platform. 

A cease-and-desist letter was sent to FU requesting to stop the infringement and to compensate the legal costs borne. FU refused to commit to the latter and proceedings were brought before the court of first instance of Saarbrücken, Germany (Amtsgericht Saarbrücken), which accepted the infringement claims but merely awarded a fraction of the legal costs. Koch Media subsequently appealed to the court of second instance (Landgericht Saarbrücken). This court observed that, on the basis of German law, the legal costs are capped to a certain maximum amount if the infringement has been committed by a natural person without a commercial motive. A deviation from the cap is only allowed if the application thereof would be ‘inequitable’. 

Being unsure whether this national provision would be compatible with article 14 of the Enforcement Directive, the court stayed the proceedings and referred two questions to the CJEU for a preliminary ruling.

The decision of the CJEU

Rephrasing the questions, the CJEU addressed. first of all, the meaning of ‘other expenses’ as mentioned in article 14 of the Enforcement Directive and notably if extrajudicial/out-of-court costs fall within its scope.

The CJEU found that pre-litigation actions, such as sending warning or cease-and-desist letters, essentially serve to avoid legal proceedings altogether. As such, they contribute to the goals of the Enforcement Directive, namely the protection of IP and rightholders. Therefore, it must be assumed that the Enforcement Directive equally applies to both judicial and extrajudicial/out-of-court proceedings.

Although costs for sending a warning letter or the assistance in out-of-court proceedings cannot be classified as ‘legal costs’ within the meaning of article 14 of the Enforcement Directive, the CJEU concluded that they can be considered as ‘other expenses’ within the meaning of that same provision. However, the CJEU emphasized that, in line with its ruling in United Video Properties, only those costs that directly and closely relate to the concerned proceedings may fall under ‘other expenses’.
On the question of capping costs, the CJEU recalled that article 14 of the Enforcement Directive only provides compensation of ‘reasonable and proportionate’ legal costs and other expenses. Therefore, capping of costs is in principle allowed if it serves that purpose.
Nonetheless, the requirement of proportionality does entail that the successful party in proceedings should have the right to reimbursement of, at the very least, a significant and appropriate part of the reasonable costs actually incurred by that party. If, due to the capping of costs, the infringing party only faced compensating a fraction of the actual costs incurred by the rightholder, the dissuasive effect of an action for infringement would be seriously diminished. This would be incompatible with the purpose of the Enforcement Directive. 
Therefore, the CJEU concluded that the national courts should have the option to deviate from a fixed maximum or a cost cap if, in light of the specifics of such a case, the application thereof would be inequitable or disproportionate. 

Comment

In this ruling, the CJEU further expaneds on its decision in United Video Properties and confirmed that out-of-court costs fall within the scope of article 14 of the Enforcement Directive. Although the CJEU cautioned that not all costs can be considered as ‘other expenses’, it can be expected that rightholders (and their representing law firms) will try to claim as much of their actual costs. 

To avoid an influx of new cases by rightholders, the possibility of fixed or maximum caps for legal costs seems sensible. Yet, as the CJEU rightfully emphasized, courts should always have the option to deviate from such caps, should the specifics of a case warrant that. The judgment therefore strikes a fair balance between fair and excessive compensation.

Picture is by Takashi Hososhima made available under a Creative Commons Attribution-Share Alike 2.0 Generic license
 

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