Punitive Damages in the European Court of Justice decisions

Lawyers Alessandro La Rosa

Directive 2004/48/EC provides that “Member States shall ensure that the competent judicial authorities, on application of the injured party, order the infringer who knowingly, or with reasonable grounds to know, engaged in an infringing activity, to pay the rightholder damages appropriate to the actual prejudice suffered by him/her as a result of the infringement.

Even if this such a statement does not imply that compensation for damages may have a punitive purpose, both European Union and member states judges have been inquired whether it would be admissible, both generically and on the particular matter of violation of Intellectual Property rights, to recognize damages having also a “sanctioning” function.

On an European Union level, the Court of Justice has been dealing with this issue more than once.

Although the subject matter was not exactly intellectual property, but unfair competition, in cases C-295-298/04, first the Advocate General and then the European Court have dealt with the following question referred for a preliminary ruling: “Is Article 81 EC to be interpreted as meaning that where the national court sees that the damages that can be awarded on the basis of national law are in any event lower than the economic advantage gained by the infringing party to the prohibited agreement or concerted practice, it should also award of its own motion punitive damages to the injured third party, making the compensable amount higher than the advantage gained by the infringing party in order to deter the adoption of agreements or concerted practices prohibited under Article 81 EC?

Such a question has to be solved in light of the principles of equivalence and effectiveness. Therefore, the Advocate General recalled that “The US federal antitrust legislation, for example, provides for the possibility of claiming ‘treble damages’. It goes without saying that making it possible for treble damages to be claimed raises the amount which may be involved in such claims to enormous proportions. The deterrent effect this may have is what the US federal legislator was seeking.

Even if no such rules exist in European law, some member states (like Ireland, United Kingdom and Cyprus) have introduced the possibility that the judges recognize punitive damages or demonstrative sanctions. Italy is not among these countries. And, actually, in the majority of member states prevails the opinion that compensation for damages has primarily the function of repairing for the prejudice suffered as a consequence of an illicit conduct, while not giving the damaged subject an economic advantage. At the same time, however, the same Advocate General observes that Community law does not “oppose this view”. Therefore, “As this aspect is not governed by provisions of Community law, it is for the domestic law of each Member State to set the criteria for determining the scale of the damages, provided that those criteria are no less favourable than those relating to similar claims based on national law and compensating for the harm suffered is not rendered impossible or excessively difficult.

Based on the same arguments, the Court of Justice concluded, accordingly, stating the following principles: “Therefore, first, in accordance with the principle of equivalence, if it is possible to award particular damages, such as exemplary or punitive damages, in domestic actions similar to actions founded on the Community competition rules, it must also be possible to award such damages in actions founded on Community rules. However, Community law does not prevent national courts from taking steps to ensure that the protection of the rights guaranteed by Community law does not entail the unjust enrichment of those who enjoy them.

Secondly, it follows from the principle of effectiveness and the right of individuals to seek compensation for loss caused by a contract or by conduct liable to restrict or distort competition that injured persons must be able to seek compensation not only for actual loss (damnum emergens) but also for loss of profit (lucrum cessans) plus interest.

More recently (case C-367/15), the European Court had the opportunity to address the topic again and in relation to the specific matter of copyright violation.

The question referred for preliminary ruling was about whether “Is Article 13 of Directive 2004/48 to be interpreted as meaning that the rightholder whose economic rights of copyright have been infringed may seek redress for the damage which it has incurred on the basis of general principles, or, without having to prove loss and the causal relationship between the event which infringed its rights and the loss, may seek payment of a sum of money corresponding to twice the amount of the appropriate fee, or, in the event of a culpable infringement, three times the amount of the appropriate fee”.

In such case the Court of Justice confirmed the opinion and the principles expressed by the Advocate General, by establishing that “Accordingly, Article 13(1)(b) of Directive 2004/48 must be interpreted as not precluding national legislation, such as that at issue in the main proceedings, which provides that the holder of economic rights of copyright that have been infringed may require the person who has infringed those rights to compensate for the loss caused by payment of a sum corresponding to twice the amount of a hypothetical royalty.

That interpretation cannot be called into question by the fact, first, that compensation calculated on the basis of twice the amount of the hypothetical royalty is not precisely proportional to the loss actually suffered by the injured party. That characteristic is inherent in any lump-sum compensation, like that expressly provided for in Article 13(1)(b) of Directive 2004/48.

On a national level, an important opening towards the admissibility of sanctioning components in damage compensation can be found in two decisions of the Italian Court of Cassation: order n. 9978 of May 16th, 2016, and ruling n. 16601 of July 5th, 2017 (this last one released by the Unified Panel of the Court of Cassation).