In December 2024 Eurojust and Euipo prepared the annual report calculation of damages in criminal IP crimes using information obtained from online sources, national judgements published in open databases and legislation in effect at the time of writing.
Purpose of the damages in criminal IP cases
Key findings emphasise the importance of determining the financial harm caused by illegal activities such as streaming, counterfeiting and piracy. In criminal cases, the primary objective is to compensate rights holders, who often are also referred to as injured parties, for their losses, restore their financial standing and assess the seriousness of the offense.
Courts often rely on expert analysis and server data to estimate the number of users and the duration of illegal activity in order to calculate damages.
In most jurisdictions across the EU, the injured parties can file a civil law claim within the criminal proceedings and submit comprehensive evidence on the damage they suffered related to the alleged crime.
There is no established methodology on how to calculate damages in criminal IP cases at either the international, EU or national levels. This leads to diverse and sometimes contradictory practice in different countries and different courts. Traditionally, courts aim to calculate damages based on a detailed assessment of the economic harm suffered by the injured parties. This approach seeks to provide precise compensation that accurately reflects the losses, thereby avoiding overcompensation.
Courts often rely on submissions from injured parties, including market analyses, financial records and expert testimonies. Despite the importance of such evidence, there are cases where precise calculations are impractical or impossible due to insufficient data or the inherent complexity of the infringement’s impact. In these cases, criminal courts sometimes refer civil claims to civil courts to avoid undue delays in criminal proceedings. Alternatively, courts may resort to awarding lump sum compensation as a practical solution, ensuring that injured parties receive some form of redress.
Calculation of damages to determine aggravating circumstances
Often, determining the damages caused by the criminal offense can also be used to ascertain aggravating circumstances or to qualify the criminal offense as a misdemeanour. This assessment of damages plays a crucial role in the judicial process by providing a more comprehensive understanding of the crime’s impact.
Calculation of damages as a mandatory element of the criminal offence
In some rare instances, criminal codes set damages as a constituent element of the criminal offense itself. Certain IP laws might specify that only violations causing damages above a particular monetary value are treated as criminal offenses, while violations causing less damage are managed through administrative penalties.
Different methods to calculate damages
The most common approaches in calculating the damages include the assessment of lost profit, assessment of royalties that would have been due if the infringer had legally licensed IP rights, market value analyses and assessment of non-pecuniary damages.
Rights holders’ lost profit
Lost profits are generally defined as the earnings the rights holder would have earned if the criminal offence had not occurred. This concept aims to restore the rights holder to the financial position they would have been in if their IP rights had been respected. However, there is no standardised method for calculating them.
Copyright violation cases
In copyright cases, the most common method to calculate lost profit is based on the assumptions that each infringing sale or download directly substitutes a legitimate sale. In this case, the rights holder needs to demonstrate the number of infringing copies sold or the number of times the copyright-protected work was downloaded or streamed, and apply their profit margin to those lost sales.
The calculation of damages in cases of illegal IPTV services
The calculation of damages in cases of illegal IPTV services was addressed in great detail by the Swedish courts. The courts recognised that illegal streaming causes significant harm to the injured parties because the subscription fees, which are an essential part of their business, are not collected.
Swedish court practice follows a model for calculating fair compensation based on the fees that the affected companies would have received through subscriptions for the actual use. It is irrelevant how much the service was actually used; the main consideration is that the service was illegally made available to users. This model also generally excludes the VAT.
In the US legal system, two distinct terms are used in IP crime cases: ‘infringing amount’ and ‘actual loss’. The infringing amountis used to determine the sentence and represents the overall scale of the illegal activity, while actual lossrefers to the financial damage caused to the injured parties and is used to calculate compensation. For actual loss, the US court added an extra consideration – how many users would have subscribed to legal IPTV services.
In the US court system, the infringing amount is typically calculated by multiplying the number of infringing items by the retail value of the genuine or legitimate item. This calculation is straightforward in cases involving tangible goods, such as a specific number of illegally sold movie DVDs, as demonstrated with the French court’s decision above.
How was the model for infringing amount adapted to illegal IPTV cases?
Number of infringing items = number of months customers subscribed to the illegal services.
Retail value of genuine or legitimate items = price of legitimate monthly subscription.
How to determine the number of months of illegal IPTV use if the beginning of the illegal act is unknown?
Revenue model
This model is based on the illegal revenue earned by the defendants from the illegal IPTV services.
Subscriber records model
This method is based on the number of subscribers in provider IPTV’s customer database. The database contained the start and end dates of services for each customer and their last login date.
Trademark violation cases
The determination of damages in these cases relates to the unique nature of trademarks as intangible assets, whose value stems from the resources and time the trademark holder invests in creating a product and building its reputation.
The most common approach is to estimate the loss of profit incurred by the trademark holder. This involves assessing the financial impact on the trademark holder’s business due to the unauthorised use of the trademark, which often requires detailed analysis and expert testimony to ensure accuracy and fairness in the compensation awarded.
How to determine the lost profit?
As for the factors used to undertake the calculation of lost profits, it is often the net profit that is taken into consideration. The number of infringing products is multiplied by a price per product as determined by the court.
Reasonable royalty
One prevalent method adopted by various Member States for assessing damages is based on a reasonable royalty. This approach estimates the amount of royalties that would have been due if the infringer had sought proper authorisation, such as a license, from the rights holder. Reasonable royalty damages aim to provide fair compensation that reflects the value of the infringed IP, ensuring that rights holders receive a monetary equivalent of what they would have earned through lawful licensing agreements.
Non-pecuniary (moral) damages
Most of the time, damages are evaluated by monetary compensation, which evaluates very specific loss of profit or reputation. However, recently some courts have started to also award compensation for non-pecuniary or moral damages in IP infringement cases.
To determine the moral damages in this case, the Spanish court estimated them to be 25 % of the potential profit the injured parties would have earned if the criminal offense had not occurred. The Spanish Supreme Court confirmed this calculation, stating that it represents a reasonable assessment of various factors, ensuring that the damage to the company’s reputation is compensated without resulting in excessive over-compensation.
Lump sum or predetermined damages
The standard practice is that damages in criminal IP cases should be awarded based on a detailed calculation of the loss suffered by the injured parties due to the criminal acts. This approach ensures that rights holders are reasonably compensated without leading to unreasonable overcompensation.
Some courts recognise the option to award a lump sum when a precise calculation of damages is not possible.
Studio dal Pozzo, law firm based in Milan, provides assistance to private individuals, organizations and businesses.
