Case alert - Court of Appeal clarifies the "user principle"

The Court of Appeal considered the "user principle" for intellectual property cases in Eight Mile Style, LLC v New Zealand National Party [2018] NZCA 596, [2019] 2 NZLR 352.  It allowed an appeal of the High Court decision, reducing damages from $600,000 to a sum of $225,000.  

"User principle" key concepts

The Court of Appeal confirmed the following legal principles:

(a) Where intellectual property rights relating to a product are infringed, the measure of damages will vary depending upon the manner in which the holder of the right chooses to exploit the right [26].

  • Where the benefit of the right is realised through the sale of a product and infringement results in a diversion of sales, the measure of damages will normally be the profit which would have been realised by the owner of the intellectual property [27].
  • By contrast where IPRs are exploited through the granting of licences for royalty payments, and an infringer uses the right without a licence, the measure of the damages for infringement will be the sums which the IPR holder would have received by way of royalty [27].
  •  If neither of those scenarios applies, recourse is generally had to the approach known as the “user principle”.  This involves the assessment of a notional licence fee or royalty, being the price that the IPR holder would reasonably have charged for permission or authorisation to carry out the infringing act [28].

(b) The key features of the “user principle” were correctly synthesized in the summary in Copinger and Skone James on Copyright, as set out in the Court of Appeal’s Judgment at paragraph [29], including:

  • The fact that one or both parties would not in fact have reached an agreement is irrelevant.
  • In a case within this group, the court may have to call into play “inference, conjecture and the like”, and apply “a sound imagination and the practice of the broad axe”.

(c) User damages are compensatory in nature [39], being compensation for the use wrongfully made of property, which prevents the owner from exercising a valuable right to control its use [37].

(d)  The existence of alternative available non-infringing alternatives is a recognised factor that may be considered in applying the user principle [47].

(e) The value of an infringing use to a defendant is a factor to be taken into account [51].

(f) The territory of use and its size were factors relevant to the commercial negotiation of a licence.  In evaluating those factors, it is important to have regard to the object of the intended use [59].

Reasons for reducing damages award

The damages award in Eight Mile Style was reduced primarily because:

  • Too much weight had been placed on the global exposure of the advertising (much of which had been caused by the copyright dispute), whereas those targeted by the advertising were New Zealand voters [61], [65] and [111].
  • The analysis incorrectly incorporated a subjective reluctance on the part of the licensor to associate with the National party’s politics [88] and [124].
  • The National Party’s subjective special willingness was wrongly considered as a bargaining deficit to the licensee, which resulted in an incorrectly used higher starting point [92].
  • The analysis did not give proper consideration to the National Party’s alternative non-infringing options [96].

Conclusion

Overall, the Court of Appeal has confirmed the appropriateness of the “user principle” to quantify compensatory damages for infringement of intellectual property rights, in circumstances where cannibalised sales or royalties are not available as a better alternative measure.