Assessing Damage Caused by Trademark Infringement: Law and Practice

Eduard L. Tregubov

Introduction

The existence of effective and flawless intellectual property legislation is a prerequisite for making Ukraine attractive for investment and ensuring appropriate conditions for doing successful business in our country. It is the government’s duty to ensure that a trademark owner can protect his rights and claim compensation for trademark infringement. Despite all the attempts that are being made by legislators to provide this area of business with thorough and detailed regulation, some provisions of law remain difficult to apply in practice.

This article offers an insight into the problems that arise when damage caused by trademark infringement needs to be assessed.

Legal aspects

Ukrainian legislation provides for several options available to owners of trademarks for the enforcement of their IP rights:

1. The mechanism set forth by the On Protection against Unfair Competition Act of Ukraine

Section 4 of the Act states that the use of a name, brand name, trade and service marks, advertising materials, the design of packaging and periodicals, other signs and marks without permission (consent) of a business that was the first to begin using the same or similar signs for goods or services where such use resulted or may result in a likelihood of confusion, is considered illegal.

Section 21 of this Act defines that an infringer who used a trademark without the owner’s permission may be subjected to a fine of 5% of total proceeds earned by the infringer in selling goods or services during the reporting year that immediately precedes the year when the fine is imposed. Departments and agencies of the Antimonopoly Committee of Ukraine have jurisdiction over the imposition of such fines.

Fines so imposed and late payment penalties are handed over to the State Treasury.

It should be noted that this mechanism has the following characteristics:

— liability may be imposed only on a business that infringed intellectual property rights to a trademark. Those individuals who have been directly involved in committing the violations may be subjected to liability under relevant sections of the Code of Administrative Offences and Penal Code of Ukraine;

— the Act does not vest departments and agencies of the AMCU with any rights whatsoever to award restitution damages to persons whose rights have been infringed, and to seize goods infringing a trademark.

This means that when the AMCU departments establish the fact of violation of the Act, they or a person whose rights were infringed may apply to a court for an order to recall and definitively remove from the channels of commerce the infringing goods and to seize such goods from both manufacturers and sellers.

The court order to recall and remove trademark infringing goods is made only if the likelihood of confusion cannot be solved in some other manner.

Persons who suffered losses as a result of trademark infringement may seek damages in court.

2. Protection under civil law

The Protection of the Trademarks and Service Marks Act of Ukraine is a specialised piece of legislation that governs relationships in the area of intellectual property rights to trademarks and service marks. Under Section 20 of the said Act, any violation of the rights of the owner of a registered trademark, including the failure to obtains the owner’s permission to use a trademark when the permission is required, and conspiring to do the same, is considered a trademark infringement and is subject to liability under the law. At the request of the owner of a registered trademark such infringement must be ceased, and the infringer must pay the owner damages.

The owner of a registered trademark may demand that the trademark or the sign or a similar mark or sign the use of which may result in the likelihood of confusion, be removed from goods or its packaging, or that the same be destroyed.

A person who has purchased a licence from the owner to use trademarks may also seek protection of such rights that have been infringed.

Rights to a trademark or service mark may be enforced both in court and by means of other mechanisms set forth by law.

Under section 432 (1) of the Civil Code of Ukraine, any person may seek protection of their intellectual property rights in court in a manner determined by Section 16 of the Code. In appropriate cases and subject to requirements set out by law, a court may make the following orders:

— to apply provisional measures for the prevention of imminent infringement and preserving evidence;

— to cease import to and export from Ukraine of infringing goods;

— to recall and definitively remove goods from trade channels and destroy infringing goods;

— to recall and definitively remove from trade channel materials and implements principally used in the creation or manufacture of infringing goods, or to seize and destroy such materials and implements;

— to impose a lump-sum penalty on the infringer as an alternative to awarding damages for the illegal use of intellectual property rights. The size of the penalty is determined in proportion to the infringement and by taking into account other material circumstances;

— to disseminate information concerning the infringement and the court decision made in connection with it.

3. The mechanism for imposing administrative or criminal sanctions on infringers

It should be noted that the illegal use of intellectual property rights is considered an offence, and a violator may be subjected to sanctions laid down by administrative and criminal law.

The sanctions depend on the amount of damage sustained by the owner of an infringed trademark.

a) Section 51-2 of the Code of Administrative Offences lays down a fine ranging between 10 and 200 personal income tax allowances and confiscation of infringing goods and materials and implements used in manufacturing such goods in case of illegal use of intellectual property rights to literary and artistic works, performance, sound records, broadcast works, software, databases, scientific discoveries, inventions, utility models, industrial designs, marks for goods and services, lay-out designs (topographies) of integrated circuits, innovations, sorts of plants; or in case of plagiarism, or in case of other intentional infringements of the said rights.

b) Under Section 229 (1) of the Penal Code of Ukraine, the unlawful use of goods and service marks, brand names, geographical indications, or other intentional infringement of the same rights that resulted in causing damage on a large scale is punishable by a fine of between 200 and 1,000 personal income tax allowances, or up to two years of correctional labor, or up to two years in prison, and seizure and destruction of infringing goods, materials and implements predominantly used in the manufacturing of such goods. This Section also determines that damage on a substantial scale should be understood to mean the damage the cost of which ranges between 20 and 200 personal income tax allowances.

c) Under Section 229 (2) of the Penal Code of Ukraine, if the same illegal acts resulted in damage on a large scale (that exceeds a personal income tax allowance more than two hundredfold) is punishable by a fine ranging between 1,000 and 2,000 personal income tax allowances, or by up to two years of correctional labor, or from two to five years in prison, and seizure and destruction of infringing goods, materials and implements principally used in the manufacture of such goods.

d) Under Section 229 (3) of the Penal Code of Ukraine, if the same illegal acts resulted in damage on a particularly large scale (that exceeds more than one thousandfold a personal income tax allowance) is punishable by a fine ranging between 2,000 to 3,000 personal income tax allowances, or by from three to six years in prison, and disqualifying a person guilty of the offence from holding certain offices or engaging in certain activity, or otherwise, and seizure and destruction of infringing goods, materials and implements principally used in the manufacture of such goods.

The Code also sets forth certain special characteristics of this offence including, among other things, recurrence of an offence, conspiracy, the commission of an offence by an official by abusing his/her position of authority, or by an organised group.

Practical aspects

Intellectual property rights to trademarks can be violated in a number of ways. The most common infringement is the manufacture and distribution of goods bearing infringing trademarks.

As a rule, the owner of a trademark who has discovered that infringing goods have been manufactured and/or distributed pursues two major objectives:

1. to cease the infringement and to recall and definitively remove from trade channels the infringing goods;

2. to seek and be awarded damages.

It is the recovery of damages that poses the major problem. Section 22 of the Civil Code of Ukraine determines that a person who sustained losses as a result of violation of his/her rights may seek damages. Damage in this case is determined as follows:

1) losses suffered as a result of destruction or damage caused to property, and expenses which a person has incurred or will have to incur to restore an infringed right (actual losses);

2) profits the injured party would have received if the right had not been infringed (lost profits).

Significant problems arise when the fact that infringing goods have been manufactured has been established but it is impossible to determine how many units of infringing goods have actually been sold. Normally, until infringing goods are brought into market the bare fact of the manufacturing of infringing goods does not mean that the owner of the infringed trademark has sustained any damage, including actual losses and lost profits.

In practice, to tackle this problem damages are calculated on the basis of the total value of infringing goods, as well as by making controlled purchases. However, such practices have been repeatedly discouraged by the Supreme Court of Ukraine as being questionable.

Under such circumstances those companies that have valid licensing agreements to use trademarks in place find themselves in a better position, as the damage can be assessed on the basis of royalties or fees determined by relevant agreements regardless of whether or not infringing goods have been brought into the market. Lost profits can also be calculated on the same grounds, hence allowing the imposition of criminal or administrative sanctions on infringers and compensating an injured party for a damage sustained.

If licensing agreements do not exist, the owner of an infringed trademark will be able to assess the amount of damages by taking into account the quantity of goods that has been sold by the infringer. An investigation is normally required. However, until the damage sustained by an injured party has been assessed, a law-enforcement department will not be able to institute criminal proceedings.

Here we have a vivid example of Catch-22 when criminal proceedings cannot be instigated until the damage has been assessed, and the owner of an infringed trademark cannot assess the damage without information that can be discovered only during the course of an investigation.

However, it does not mean that the active law does not allow any chances for the recovery of damages. At the same time, there is no universal approach to solving such difficulties. In order to protect and enforce intellectual property rights against infringement it seems advisable and expedient to use all the remedies and reliefs allowed by law and to implement a well-considered approach to documenting all the evidence. However, to make this task easier owners of trademarks are strongly advised to use a pro-active approach and have their trademarks valued; register their trademarks in the prescribed manner; and put in place adequate licensing agreements, etc.