Merck KGaA v Merck Sharp & Dohme LLC & Ors

Licence fee damages may be awarded for infringement of trade mark rights where the loss is properly measured by the economic value of the right as an asset. The hypothetical negotiation is a valuation tool. It does not require proof that the actual parties would have granted or accepted the licence, provided that the negotiation could reasonably have taken place.

The court must select the method that gives a fair equivalent for the loss. A comparables analysis cannot support an award where its statistical foundation is meaningless. An economic benefits approach may instead value the licence by reference to the licensee’s incremental benefits and avoided costs. The court may use a broad assessment, but it must retain evidential support and avoid speculation.

The claimant brought an inquiry into damages after the defendants were found to have breached a 1970 agreement and infringed the claimant’s trade marks through use of the word Merck in the UK. The claimant sought damages by reference to a notional licence fee.

The claimant initially relied principally on comparable licences, but its expert accepted that the statistical study underlying the proposed royalty rate was unreliable. The claimant then relied on an economic benefits approach. The defendants disputed the availability of licence fee damages and challenged both valuation methods.

The central issues were whether a notional licence was an appropriate basis of assessment, whether the comparables evidence was reliable, and how the economic benefits should be quantified.

1. Licence fee damages were available in principle. The court applied the reasoning in Morris-Garner v One Step and held that there was no principled distinction preventing such damages for trade mark infringement. The Merck mark was commercial property capable of licensing. The fact that Merck would not actually have granted the licence did not prevent a hypothetical negotiation, because the question was whether such a negotiation could reasonably have taken place.

2. The hypothetical licence had to reflect the parties’ existing rights and obligations, the commercial context at the relevant time, and the specific infringing conduct. The negotiation was assumed to concern the precise uses found to constitute breaches and infringements.

3. The comparables approach was rejected. The proposed 0.33% royalty rate derived from the EY benchmarking study, but the underlying samples were statistically meaningless. Once that starting point was abandoned, there was no evidential basis for selecting another figure. Any such selection would have been speculation.

4. The economic benefits approach was available on the pleaded case. The relevant bargaining range was bounded by MSD’s incremental benefits and Merck’s incremental loss. The court adopted, conservatively and in Merck’s favour, the entirety of MSD’s quantified incremental benefits as the licence fee.

5. The court included avoided website costs of £4.33m, avoided social media costs of £781,703 and avoided marketing costs of £566,000 before inflation and discounting. It excluded email migration costs, web traffic gains and staff training costs because the evidence did not establish reliable incremental benefits.

6. The court would not permit a party to introduce a materially new damages case through cross-examination or closing submissions after the expert evidence had been completed. The assessment had to be based on the cases and expert analyses properly advanced during the trial.

7. The notional licence was assumed to have been paid as a lump sum on 1 January 2010. The appropriate discount was a risk-free rate rather than MSD’s weighted average cost of capital. The court adopted a 4% rate based on the 10-year UK Treasury bond rate.

8. The precise licence figure was left for further submissions, subject to the court’s stated conclusions.