Court Decision Finding Liability for Damages on Director of Company that Infringes Patent Right

1. Director’s liability to third parties (Companies Act Article 429)

Under the Companies Act, directors of a company owe a duty to engage in business with due care of a prudent manager and a duty of loyalty. According to the Companies Act Article 429, if the directors have breached their obligations in the course of duty or neglected the duty, such directors are liable not only to the company, but also to a third party for damages as a result thereof.

Companies Act Article 429(1)

If Officers, Etc. have acted in bad faith or with gross negligence in performing their duties, such Officers, Etc. are liable to a third party for damages arising as a result thereof.

In cases on claims for damages, the liability for damages may be sought against the directors as well, based on Companies Act Article 429. For example, in a trial known as “MariCar” case (2018 (Ne) 10081), a violation of the Unfair Competition Prevention Act was found for unauthorized use of the name of a popular game, costumes of its characters, and the like. The court found “negligence of duties resulting from bad faith or gross negligence”, and ordered the director of the company who committed such unfair competition action to pay compensation for damages jointly and severally with the company.

Now, we will introduce a rare court decision in patent infringement matters, finding that directors are liable for compensation of damages to a third party, based on the Companies Act Article 429 (1).

2. Court Decision (Osaka District Court 2019 (Wa) 5444, Judgment rendered on September 28, 2021)

(1) Summary of Litigation

Plaintiff was a patentee of two patents of the inventions titled “Carbon Dioxide-Containing Viscous Composition”. Prior to filing the subject litigation, Plaintiff filed a separate litigation against a total of 11 companies, including Company A and B, seeking compensation for damages, etc., on the grounds that the manufacturing and sale of the defendants’ products constitute infringement of the present two patents. As a result of the trial in the separate litigation, the court ruled that Company A should pay approximately 111 million yen and Company B should pay approximately 12 million yen. A judgment in the separate litigation became final and binding due to the dismissal of appeals by seven companies, including Company A and B. However, Company A and B did not make any payment except for the deposits seized by Plaintiff. Moreover, Company A had been ruled the commencement of bankruptcy procedures.

Plaintiff thus filed the subject litigation against defendants P1 and P2 that were directors of Company A, and defendants P3 and P4 that were directors of Company B, seeking compensation for damages and for any delay damages, based on the Companies Act Article 429(1).

The court ruled that all defendants P1 to P4 had in bad faith or gross negligence in performing their duties as directors of the companies. In addition, the court applied presumption of the value of damages prescribed in Patent Act Article 102 (2), as in the judgment in the separate litigation. The court therefore deducted the amount of money that had already been recovered by Plaintiff from the damages calculated in the separate litigation, and ordered the defendants P1 and P2 to pay jointly and severally approximately 101.2 million yen, the defendants P3 and P4 to pay jointly and severally approximately 7.4 million yen, and the defendant P3 to pay approximately 3.2 million yen.

(2) Presented Framework for judging directors’ bad faith and gross negligence

In the subject litigation, the framework for determining directors’ bad faith and gross negligence in patent infringements was presented. The following I) to IV) are specific examples of a duty to engage in business with due care of a prudent manager of a company in cases where the company is pointed out a possibility of infringing a patent right.

“As part of the duty to engage in business with due care of a prudent manager, the directors, must not lead to the company to engage in actions infringing a patent right of a third party, and also have a duty to monitor operations executed by other directors not to let the company engage in such actions.”

“The director who has been pointed out that actions of his/her company may infringe a patent right of a third party is required to carefully consider the company’s arguments and those of the third party with respect to whether the patent infringement or the validity of the patent right will be determined. As stated above, the patent infringement and the validity of the patent right may not be determined until a public authority judgment is finalized, and such judgment may not always be finalized in the company’s favor. Although normal business activities of the company should not be stopped without grounds, the company should avoid infringing the right of the third party and incurring the liability for damages as a result thereof as much as possible. Further, even if an infringement is determined, the liability for damages should be minimized as much as possible, and the most appropriate business judgment should be made, comprehensively taking into consideration the minimization of the liability for damages to be borne as much as possible, and thus this is also applied to the subject case. Such business judgment can be considered as the duty to engage in business with due care of a prudent manager.

Specifically, the company has possible options I) to IV) as follows:

I) Stopping the implementation action or changing the manufacturing, the configuration/composition etc., of the accused product, taking into consideration the possibility of obtaining a judgment of non-infringement or invalidity;

II) Setting, with the opponent, a rate that reflects the company’s claim regarding non-infringement or invalidity, and continuing the implementation action while paying a royalty;

III) Stopping the implementation action based on a provisional agreement with the opponent, and if the judgment of non-infringement or invalidity is confirmed, then obtaining compensation in a period in which the implementation action is stopped; and

IV) Continuing the implementation action while reserving an amount equivalent to the compensation for damages from its profits or the like so that, if the judgment of infringement and validity is confirmed, the compensation will be immediately provided and the company need not bear the liability for damages.

Whether the business management decision made by the director is appropriate should be determined depending on the situation of each case.”

3. Conclusion

The court decision described here is just at a district court level. However, we believe that it is significant in that the court explicitly demonstrates the duty to engage in business with due care of a director in patent infringement cases at stages of the dispute. We hope that this will be helpful to you in exercising your patent rights in the future.

Edited by Hiroko Iwatsuki

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