Country specifics
Effectively determining the value of damages resulting from intellectual property (IP) infringement for litigation purposes requires consideration of local circumstances. There is no simple translation of the procedural practices of Anglo-Saxon countries in this area to the Polish reality. The following factors should be considered in the Polish market:
- Legal basis: Article 361 § 2 of the Civil Code, which introduces the principle of full compensation for damages (including both actual loss and lost profits).
- High probability of occurrence: To obtain compensation, it must be proven that obtaining a profit was almost certain in the normal course of events. “Loss of opportunity to profit” is usually not sufficient to award full compensation.
- Undisputed damages: A court cannot dismiss a claim simply because it is difficult to precisely calculate the amount of damages if the fact that the damage occurred is undisputed.
- Limitations of limitation: Business-related claims typically expire after three years.
Intellectual property
The history of the Polish Industrial Property Law (hereinafter “IPL”) dates back less than a quarter of a century. Disputes concerning intellectual property infringement are primarily handled under copyright law, industrial property law, and the Act on Combating Unfair Competition.
The past quarter-century has been characterised by the dynamic development of methods for valuing damages in business. The computing power of portable computers has increased. Easy access to vast information resources in the public domain and commercially obtained information has become available. The use of AI agents powered by large LLMs is rapidly becoming more widespread.
As a result, individual experts, including court experts, can now apply advanced computational techniques and analytical models to evaluate damages for legal purposes. Complex economic concepts, advanced financial models, and computational methods often go beyond the scope of legal knowledge. Ensuring effective communication between litigants is essential to improving the efficiency of evaluating the presented opinions, thereby increasing accuracy and reducing the costs of court proceedings.
Furthermore, new challenges are arising. For example, the reliability of experts’ personal preparation becomes questionable when they rely excessively and uncritically on modern AI tools.
Damage and general methods of calculating compensation
When we talk about compensation for damage, we have two types in mind. Compensation for:
- actual losses,
- lost profits.
Intellectual property infringement typically triggers a claim for damages for lost profits. It is necessary to prove that the defendant’s actions were highly likely to have caused events that resulted in losses to the plaintiff’s assets. Furthermore, these events caused the damage as a result of a foreseeable process. Therefore, it was not an extraordinary coincidence, a fortuitous event, or an external factor.
The perpetrator must foresee the negative consequences of their actions. The causal relationship between the identified events and the plaintiff’s lost profits is therefore normal, not exceptional. It is necessary to establish the probability that the plaintiff’s anticipated lost profits (revenues, profits) would have been real, highly probable, and almost certain.
This is achieved through a “but-for” analysis, which focuses on a hypothetical forecast of the outcome absent the tort. Justification of the reality of lost profits is typically achieved using:
- average (standardised) past results (presumably a continuing trend),
- reliable forecasts based on market events and trends,
- provisions contained in enforceable contracts,
- execution capabilities in the plaintiff’s business (organisation, resources),
- market and financial parameters.
In the literature and in litigation practice, the calculation of damages is based on a comparison of the plaintiff’s assets before and after the tort occurred. Commonly used methods for calculating compensation for lost profits include:
- “Before and after” method. This method is used when it is possible to forecast values after the tort date using data prior to the tort date (a “but-for” forecast).
- “Yardstick approach”. This method is used when there is a lack of historical data prior to the tort date, but a “but-for” forecast can be constructed using the comparative method.
Compensation calculation scheme for lost profits
It was assumed that the tort’s effects would be reversible, which is one of the reasons for compensation. The calculation of compensation takes into account:
- net profit category (i.e., lost revenues less direct costs),
- time value of cash flows (revenues/costs/expenses), in discounted form.
The chart below shows how to calculate compensation separately for two periods:
- The first period is between the date of the Judgment and the date of the Tort. Lost revenue will be calculated as the difference between the projected revenue on a “but-for” basis (in chart P1) and the actual revenue (R1).
- The second period is between the projected date of cessation of the negative effects of the Tort and the date of the Judgment. Lost revenue will be calculated as the difference between the projected revenue on a “but-for” basis (P2) and the projected revenue after the date of the Judgment (P3).
In Polish court practice, compensation will only be awarded for period No. 1.
The dominant model of reality in court proceedings
It seems that the belief in the deterministic nature of reality dominates in courts:
- In the period from the date of the Tort to the date of the Judgment, we compare projected data from the prior period with actual data from that period. This comparison sometimes gains credibility.
- Any calculations for the period after the date of the Judgment are considered overly speculative.
Note that the “but-for” analysis allows for a more reliable forecast (P1/P2) than the conditions for developing the P3 forecast. First and foremost, during the analysis period, events and data for periods prior to the Judgment date are known. The P3 forecast refers to the future after that date and, in the court’s opinion, is therefore characterised by a much greater level of uncertainty.
In my experience, the P1/P2 forecast is also implemented under conditions of uncertainty. Furthermore, stochastic methods are often used in forecasting, recognising a non-deterministic model of reality. See the article Deterministic versus stochastic model in valuation
The problem of uniqueness in intellectual property valuation
In IP valuation using comparative analysis, significant difficulties arise due to the nature of IP, particularly its uniqueness. Inventions, brands, works, and other IP assets are protected by law in various forms, for varying periods, and in various ways. It is difficult to construct a portfolio of comparable transactions that meets the acceptable comparability requirements.
Furthermore, it is generally believed that the prices of transactions concluded under market conditions should reflect the value of the underlying assets. However, this view does not hold true in practice. Experts agree that perceptions of value result from an opinion-forming process.
Value is a summary assessment of the future financial benefits of owning or using the subject of valuation, taking into account risk. Value is inherently subjective as an opinion expressed by a specific entity. Price is a current or future market fact. Price is usually the result of balancing supply and demand, while also reflecting the effects of decisions whose relationship to value is difficult to determine. Price is influenced by many factors that the parties to the transaction consider in their decision-making. See the articles: Value vs. Price, Deterministic versus stochastic model in valuation, Formulating Valuation Conclusions, Identification of the valuation subject
The informative function of transaction prices subsequently serves as a source for opinion formation, i.e., for valuations based on comparative analysis. Reliable use of transaction information requires access to reliable databases. Commercial and publicly available sources contain information on a small portion of concluded transactions. Data gaps also occur due to their confidential nature.
Even for assets as liquid in economic transactions as shares of listed companies, the price typically deviates from the intrinsic value. According to many recognised experts, share valuations vary significantly. For many years, experts have focused on standardising valuation methods by creating a common methodological benchmark. The International Valuation Standards Council (IVSC)[1] has achieved global reach in this regard, supporting the advancement of standardisation of IP valuation methods.
Sources of the dispute over the value of IP
Disputes regarding the value of industrial property rights often arise from:
- Internal (corporate/owner) and external audit decisions issued by offices and institutions. Dispute-generating decisions are issued by, for example, tax authorities, market regulators, the National Court Register, and managers of aid and investment funds. Such decisions typically challenge transaction prices or market values.
- Identified infringements of rights as a result of the conduct of the parties to the contract or competitors. Besides direct infringement of rights, there are various forms of indirect interference with the future benefits of their owner or user. Current areas of exploitation of rights may become less profitable, for example, through a change in the risk profile,
- Property settlements for IP co-owners (creators and investors): investment, transaction, inheritance, divorce.
Unfavourable tax decisions result in additional fiscal burdens, including criminal penalties. The consequences of decisions by other institutions and bodies can be equally severe, even devastating to a business project. For example, they may require the repayment of subsidies, increased guarantees, and financial security for the implementation of an intellectual property development project.
A finding of IP infringement gives rise to a demand to cease the infringement, to redress the damage, or to return any unfair profits obtained by the infringer.
In cases of unilateral transactions that are unacceptable to the co-owners of the IP, negotiations on compensation and settlement terms are needed. In each case, the final solution is a court hearing.
Dynamic development of valuation methods and models
International expert practice has developed principles for providing opinions in court disputes concerning the calculation of damages in business. Examples of professional literature include [2], [3], and [4]. Intellectual property valuation standards have been published (national, expert association, and international [1]). See the New version of the IVS standard. Detailed legal regulations have been introduced, requiring differentiation of valuation methods and value standards in relation to the valuation purpose:
- management, transaction, investment,
- tax (e.g., transfer pricing issues [5]),
- investment, balance sheet (e.g., the Accounting Act, International Accounting Standards (IAS), International Reporting Standards.
Despite these efforts, litigation drags on for years and generates high costs. A solution to this problem lies in improving communication between litigants, lawyers, and economists. Given the rapid development of IT tools (computing power, large databases, global communication), experts are turning to increasingly advanced methods. Few court experts can clearly present the sophisticated methods and mathematical models they employ. Legal regulations and valuation methods have not kept pace with the dynamic development of the digital economy, which is generating new digital assets.
Examples of issues in dispute resolution
Delayed decision and lack of secured information (evidence)
Claim
Compensation valuation is often a significantly delayed process and, therefore, subject to a high level of uncertainty related to historical data. This significantly hinders the court’s efficient resolution of a dispute or the conclusion of a settlement. On the other hand, considering the practice of awarding compensation, the longer the period between the judgment and the tort, the greater the chance of higher compensation.
Claims require the value of the subject of the dispute (the amount of compensation sought). This amount is determined based on a preliminary estimate shortly after the tort occurred (after obtaining the relevant information). Note that in such an estimate, Forecast P1/P2 is subject to the uncertainty characteristic of Forecast P3, and the date of the judgment is difficult to estimate.
Lawsuite
First, the parties’ attorneys and the court focus on legal matters, primarily procedural ones. Determining the parties’ legal interests, verifying evidence, including from personal sources. Considering appeals against individual court decisions can take years.
The court then determines that there is a high probability of a causal link between the defendant’s actions and the events that may have generated losses to the plaintiff’s assets.
In the next step, the court expert is commissioned to calculate compensation. From this point on, the battle to approve or reject the expert’s opinion, replace the experts, and appoint a judge begins.
Conclusion
A key principle in retroactive compensation valuation requires that all information used in the calculation be no later than the period of infringement.
The enormous growth in the amount of publicly available and commercial information is shortening the time available to store and access information. This applies primarily to publicly available archival information. The likelihood of reliably determining the information requirements for an IP valuation as of the tort date, 7-10 years ago, is diminishing. The valuation is an estimate because it does not meet the criteria set by the standards. The risk that the parties will effectively challenge any uncertain parameter of the financial calculation increases.
Given the high cost of economic expertise, including professional IP valuations, good procedural economy dictates preparing appropriate information at the time of the lawsuit. The expert should design valuation methods and prepare a list of the data required for collection. It is equally important to secure the sources of information and data at that date, in a form admissible to the court as evidence. Effective communication and collaboration between the lawyer and the economist are invaluable in this task.
Incorrect valuation of intellectual property for transaction purposes
Claim
The entrepreneur contributed a portfolio of patents and know-how in the area of innovative technology for manufacturing a new product as a non-cash contribution to the company’s capital. In its application to the National Court Register, it confirmed the value of the contributed industrial property rights (IPR) with its own valuation and a statement from the company’s management.
After five years of the company operating on the verge of financial losses, the tax authorities questioned the amount of the tax depreciation write-offs.
Practice
The authority used an independent expert’s valuation. The company responded by submitting its own valuation. The valuation was based on optimistic forecasts prepared using unsupported parameters. It failed to cite market research results, state-of-the-art studies, development trends, the activities of entities with competing technologies, or financial benchmarks available at the time this document was written.
Furthermore, the simplified risk assessment in this opinion did not account for “catastrophic” events, which could have been predicted with a significant probability at the time of the contribution. Furthermore, it turned out that at the time of the valuation, the same entity had patent applications protecting a more effective technology.
Result
Ultimately, given the current dispute with the authorities, it no longer matters whether the company’s management board trusted a substantively weak expert. It doesn’t matter whether the author of the opinion yielded to the demands of an irresponsible management board seeking to cut costs by avoiding the high costs of obtaining market information.
It’s true that the costs of purchasing market research reports from independent companies and information from commercial transaction databases are high. However, if a lawsuit does arise, a court-appointed expert will be required to assess the value of the contribution, drawing on the case files and specialised knowledge. The expert will have to establish the information conditions as of the date of the contribution, which can prove difficult, expensive, and sometimes impossible.
Unreasonable requirements and a lack of confidence in intangible property valuation methods
Unreasonable court requirements and a lack of confidence in intangible property valuation methods may result in the dismissal of plaintiffs’ claims, particularly those involving trademark infringement.
Claim
After several years of litigation, the infringement of the design and trademarks was ultimately found to be unfair competition. The infringer’s actions consisted of misleading consumers by making the product appear identical (in packaging and content). The plaintiff argued that the brand’s image suffered significant damage because the similar product was inferior in quality.
The plaintiff submitted extensive evidence of the existence of brand equity prior to the tort. Furthermore, it secured the data necessary to prove the causal link between the defendant’s specific actions and the loss of revenue and sales profit. The plaintiff interpreted this as resulting from losses in brand equity and disclosed the high costs incurred in building brand equity.
Practice
In practice, courts do not accept “abstract damages” or excessively speculative damage calculations. They consider damages consisting of the loss of part of a brand’s equity to be abstract. This is primarily due to a lack of understanding of marketing concepts and confidence in brand valuation methods. The concept of “brand equity” is too abstract and theoretical for the court. It could be argued that it is unrealistic because it is intangible. If damages cannot be proven, there is no point in calculating damages. Furthermore, calculating damages requires measuring the difference in brand value before and after the tort, and brand valuation methods are unreliable.
Even if the court is convinced of the tort’s long-term negative impact, it will consider only lost profits during the infringement period. The court will reject any calculations that include forecasts extending beyond the date of the expert opinion as overly speculative.
Note that in this case, the plaintiff’s profits during the period of brand equity infringement can be demonstrated based on accounting records. It’s much more difficult to substantiate what the profits would have been absent the tort. The defendant always raises the issue of overly speculative calculations in this regard.
Selling counterfeits
In cases of so-called “bazaar” sales of counterfeits, injunctions are usually obtained to prevent further sales. Courts often also order the seller to repay undue benefits. And that’s it. This type of “compensation” fails to satisfy plaintiffs and deter criminals from further illegal activity. Owners of well-known cosmetic, clothing, footwear, and stimulant brands (e.g., cigars, coffee) have been grappling with this problem for many years.
It is difficult to prove a causal link between the sale of a small quantity of counterfeit premium cigars offered at a low price in a bazaar and the hypothetical loss of similar sales by a legitimate distributor of that brand. It is assumed that customers of so-called “premium” brands do not buy from bazaars, so the brand does not lose customers. Linking the sale of counterfeits on a small scale to damage to the brand’s image is practically impossible.
Imprecise arrangements made by the R&D process participants at the investment agreement stage
The lack of precise arrangements at the investment agreement stage complicates future asset settlements, especially given the significant uncertainty in the R&D.
Example
After many years of joint investment in the development and commercialisation of the IP portfolio (patent applications, know-how), one of the main investors departs. Almost immediately, he claims compensation for the options stipulated in the investment agreement. These options granted him compensation in proportion to the increase in the value of the IP portfolio developed with his participation.
At the date of the claim hearing, both parties to the dispute agreed that the current value of the IP portfolio could be reliably determined. The parties accepted the current valuation prepared by an independent entity. The valuation result was also confirmed by the planned transaction transferring ownership of the IP Portfolio to an unrelated entity. Unfortunately, the investor’s compensation for the options exceeds the share of profits from the planned transaction.
Furthermore, the parties disagree regarding the original value of the IP portfolio as of the date of the investment agreement. Consequently, the defendant does not confirm the value of the options granted to the investor. The initial option valuation accounted for the investor’s forecasted R&D expenditures and the financial benefits from the commercialisation of the IP portfolio.
The key to resolving the dispute is the value of the IP Portfolio at the date of the agreement. The defendant currently believes that this value was incorrectly determined, and therefore, the initial opinion regarding the option value was erroneous. In its opinion, the value of the IP portfolio held at that time was significantly underestimated. The financial forecasts did not materialise, and the concluded investment agreement was imprecise in this regard. The dispute is also difficult to resolve due to the lack of reliable data to enable a court-appointed expert to value the IP portfolio and options as of the date of the investment agreement.
Literature
- IVSC, International Valuation Standards.
- Measuring Business Interruption Losses and Other Commercial Damages” – Patrick A. Gaughan, John Wiley & Sons.
- “The Comprehensive Guide to Lost Profits and Other Commercial Damages”, Vol. 1 and Vol. 2 “Case Law” – Nancy J. Fannon, Jonathan M. Dunitz, BVR, 2014.
- Jimmy S. Papas, William Scally, Steven M. Veenema: The Comprehensive Guide to Economic Damages, BVR, 2023.
- “Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations”, OECD, 2022.
We will continue in the following articles.
