Summary of the case
On May 1 2015, Medion
Research Laboratories Inc (Medion) filed a patent infringement lawsuit against
11 companies including NeoChemir. On June 28 2018, the Osaka District Court
ordered NeoChemir to pay ¥111,077,895 (approximately $1,009,799), and the
judgment became final and binding. However, other than Medion’s recovery of a
total of ¥7 million through seizure of the deposit money, NeoChemir did not make
Defendant P1 was
the representative director of NeoChemir, and Defendant P2 was the director of NeoChemir.
On September 24 2020, Defendant P1 established a new company. Defendant P1
filed a petition for commencement of bankruptcy proceedings against NeoChemir,
and on December 7 2020 received an order of commencement of bankruptcy
proceedings. Medion claimed damage against Defendants P1 and P2 pursuant to
Article 429, Paragraph 1 of the Companies Act.
Judgment of September
28 2021, Osaka District Court
The Osaka District
Court (Presiding Judge Tani) ordered Defendants P1 and P2 to pay ¥101,291,485 to
Medion, holding as follows.
If a director has
pointed out that the company’s act may constitute infringement of a third
party’s patent right, he or she should carefully examine the company and opponent’s
grounds regarding the infringement or the validity. Th director should make the
most appropriate business judgment in that case, while comprehensively considering
the following, which is considered to be the content of the duty of due care of
a prudent manager as directors: the infringement or the validity of the patent
may not be determined until a judgement is rendered; the judgment may not be
advantageous to the company; normal business activities should not be suspended
without reason, however a situation where a company infringes a third party’s
right and incurs damage obligation should be avoided as much as possible; and even
in the case of infringement, the damage obligation should be limited as much as
measures are found as follows:
- Cease or
change the structure of the product considering the probability of
non-infringement or invalidity;
- Set a
royalty rate reflecting the company’s arguments of non-infringement or
invalidity with the patentee and continue the working of the patent by paying a
the working of the patent by a provisional agreement so that the company can
obtain compensation for such period after the judgment of non-infringement or
invalidity is finalised;
the working of the patent and reserve the amount equivalent to damages from
profits so that the company will compensate immediately after the judgment of
infringement and validity is finalised, and the company will not substantially
bear the damage obligation.
It is necessary to
examine whether the business judgment made by the directors was appropriate
according to the characteristics of each case.
(2) Bad faith and
gross negligence of Defendant P1
non-infringement and invalidity arguments lack sufficient basis. Due to lack of
understanding of the basics of the patent system, Defendant P1 continued manufacture
and sales of the accused products under the misunderstanding that they would
not be infringing the patent rights if they were the working of the NeoChemir
patent, and explained the same to their trading partners.
It was possible to
avoid the infringement of patent rights and the damage obligation on the
company by taking the measures (i) through (iv) above. Nevertheless, the Defendant
P1 did not take any of these measures and continued manufacture and sales of
the accused products.
NeoChemir had earned profits from the sale of the accused products, it would
have been possible to prevent NeoChemir from bearing a definite damage obligation
if it had compensated for the damages without delay after the judgment became
final and binding by reserving an amount equivalent to damages in the event of
P1 did not voluntarily compensate and filed a petition for commencement of
bankruptcy proceedings while leaving NeoChemir in an insolvency.
obtained non-infringement or invalidity opinions from several attorneys-at-law
and patent attorneys. However, the judgment states that Defendant P1’s
non-infringement and invalidity arguments lack sufficient basis, and due to
lack of understanding of the basics of the patent system Defendant P1 misunderstood
It would be
dangerous for the directors to expect that their bad faith and gross negligence
will be denied by the fact that they had obtained advantageous opinions from
attorneys-at-law and patent attorneys during freedom to operate (FTO) analysis.
If this judgment is affirmed by the Court of Appeal, with the recent trend of
higher damage amount, it will promote the further use of directors and officers
(D&O) liability insurance.
If the defendant
chooses to fight against the patentee, it is required under this judgment to
take measure (iv) above. Reserving an amount equivalent to damage from profits
is equal to reserving the entire amount of profits. Small and medium-sized
enterprises may be in a risk of fund shortage. Even in the case of large enterprises,
if the company has many disputes on a regular basis, calculating the amount to
be reserved for each lawsuit and reserving the said amount may become an undue
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