HC-2013-000089 - [2025] EWHC 2376 (Ch)

The availability of licence fee damages, sometimes described as “negotiating damages” or “user damages”, for certain types of infringement of intellectual property rights and breaches of contract, is well-established in the case-law. An early example in relation to a patent infringement was the case of Watson, Laidlaw & Co v Pott, Cassels and Williamson (1914) SC (HL) 18; 31 RPC 104, where the question was whether the claimants could recover damages for sales of infringing products in a territory where the claimants could not themselves have traded. Lord Shaw considered that they could, under a principle which he described as “price or hire”. In a passage at p. 31, he noted that this principle applied not only to patent cases, but also “wherever an abstraction or invasion of property has occurred”. He endorsed the approach adopted by Fletcher Moulton LJ in Meters v Metropolitan Gas Meters (1911) 28 RPC 157, where it was said at p. 165:

“The reward to a patentee for his invention is that he shall have the exclusive right to use the invention, and if you want to use it your duty is to obtain his permission. I am inclined to think that it would be right for the court to consider what would have been the price which – although no price was actually quoted – could have reasonably been charged for that permission, and estimate the damage in that way.”

In Morris-Garner v One Step [2018] UKSC 20, Lord Reed (with whom Baroness Hale, Lord Wilson and Lord Carnwath agreed) described the principle as applying not only to patent infringements but also to breaches of other intellectual property rights of a proprietary character (§§4 and 26). Following a long discussion of the previous case-law, he concluded that the principle could also apply, in certain circumstances, to breaches of contract. Those circumstances were (as described at §§91–92) ones in which:

“… the loss for which compensation is due is the economic value of the right which has been breached, considered as an asset. The imaginary negotiation is merely a tool for arriving at that value. The real question is as to the circumstances in which that value constitutes the measure of the claimant’s loss. … such circumstances can exist in cases where the breach of contract results in the loss of a valuable asset created or protected by the right which was infringed, as for example in cases concerned with the breach of a restrictive covenant over land, an intellectual property agreement or a confidentiality agreement. … The claimant has in substance been deprived of a valuable asset, and his loss can therefore be measured by determining the economic value of the asset in question. The defendant has taken something for nothing, for which the claimant was entitled to require payment.”

Lord Reed’s conclusions on the availability of negotiating damages, set out at §95, included the following points in particular:

“(1)

Damages assessed by reference to the value of the use wrongfully made of property (sometimes termed ‘user damages’) are readily awarded at common law for the invasion of rights to tangible moveable or immoveable property … The rationale of such awards is that the person who makes wrongful use of property, where its use is commercially valuable, prevents the owner from exercising a valuable right to control its use, and should therefore compensate him for the loss of the value of the exercise of that right. He takes something for nothing, for which the owner was entitled to require payment.

(2)

Damages are also available on a similar basis for patent infringement and breaches of other intellectual property rights.

(3)

Damages can be awarded under Lord Cairn’s Act in substitution for specific performance or an injunction, where the court had jurisdiction to entertain an application for such relief at the time when the proceedings were commenced. Such damages are a monetary substitute for what is lost by the withholding of such relief.

(4)

Onepossible method of quantifying damages under this head is on the basis of the economic value of the right which the court has declined to enforce, and which it has consequently rendered worthless. Such a valuation can be arrived at by reference to the amount which the claimant might reasonably have demanded as a quid pro quo for the relaxation of the obligation in question. The rationale is that, since the withholding of specific relief has the same practical effect as requiring the claimant to permit the infringement of his rights, his loss can be measured by reference to the economic value of such permission.

(5)

That is not, however, the only approach to assessing damages under Lord Cairn’s Act. It is for the court to judge what method of quantification, in the circumstances of the case before it, will give a fair equivalent for what is lost by the refusal of the injunction.

…

(10)

Negotiating damages can be awarded for breach of contract where the loss suffered by the claimant is appropriately measured by reference to the economic value of the right which has been breached, considered as an asset. That may be the position where the breach of contract results in the loss of a valuable asset created or protected by the right which was infringed. The rationale is that the claimant has in substance been deprived of a valuable asset, and his loss can therefore be measured by determining the economic value of the right in question, considered as an asset. The defendant has taken something for nothing, for which the claimant was entitled to require payment.”

Earlier in the judgment, in a passage relied on in particular by MSD, Lord Reed acknowledged the difficulties that inevitably arise in the assessment of the fee resulting from a hypothetical negotiation, and the limitations of that approach:

“74.

It is also necessary to recognise that the assessment of a hypothetical release is itself a difficult and uncertain exercise. In cases such as Wrotham Park, Bracewell v Appleby and Jaggard v Sawyer, judges estimated in a rough and ready way the amount which the claimant might fairly and reasonably have demanded as a quid pro quo for the relaxation of the obligation in question. More recently, the practice has developed of instructing forensic accountants to give expert evidence about a hypothetical negotiation between a reasonable person in the position of the claimant and a reasonable person in the position of the defendant. Such imaginary negotiations have become increasingly elaborate, and a host of questions can emerge as to the basis on which they should be hypothesised. …

75.

The artificiality of the exercise can be a further problem. Since the aim is to arrive at an objective valuation, the fact that the claimant might in reality have been unwilling to release the defendant from the obligation is not necessarily a problem … But the premise of the hypothetical negotiation – that a reasonable person in the claimant’s position would have been willing to release the defendant from the obligation in return for a fee – breaks down in a situation where any reasonable person in the claimant’s position would have been unwilling to grant a release, as was found to be the position in Marathon Asset Management LLP v Seddon …”

At §75, Lord Reed was making the point that it is not a bar to the application of licence fee damages that, on the evidence, one or both parties might not actually have entered into the agreement that is being postulated. A similar point was made by Lord Sumption in his judgment in Morris-Garner, at §107, noting that “the assumption of a willing buyer and a willing seller, acting reasonably, means that one is not trying to reconstruct what the particular parties would hypothetically have done”. Lord Sumption cited in this regardthe comments of Lord Walker in Pell Frischmann Engineering v Bow Valley [2009] UKPC 45, §49, that:

“It is a negotiation between a willing buyer (the contract-breaker) and a willing seller (the party claiming damages) in which the subject-matter of the negotiation is the release of the relevant contractual obligation. Both parties are to be assumed to act reasonably. The fact that one or both parties would in practice have refused to make a deal is therefore to be ignored.”

The postulation of a hypothetical negotiation, as a tool for the assessment of the value of the asset lost or compromised, does not therefore require a finding that the parties in question would or might actually have carried out such a negotiation, but rather asks whether such a negotiation could reasonably have taken place. Lord Reed’s comments at §75 recognised that there might be cases where such a negotiation cannot reasonably be posited, such as the situation in Marathon Asset Management v Seddon [2017] EWHC 300 (Comm), [2017] FSR 36, to which Lord Reed referred. In that case, Leggatt J observed:

“234.

There are other cases, however, in which it is unrealistic to value the benefit obtained by the defendant in this way because the defendant could not reasonably have expected to purchase a licence from the claimant for its activity … A patent, trademark, copyright or confidential information may be a means of generating revenue for the owner of the right through the granting of licences … But in other cases it may be relied on to protect intellectual property which the owner of the right would not be willing to allow anyone else to exploit at all – or not at a price which would rationally be paid for a licence.

235.

In cases where the defendant could not reasonably have expected to purchase a licence from the claimant for its use of the claimant’s property (nor to obtain an equivalent benefit in another way) it in my view makes no sense to value the benefit by postulating a hypothetical negotiation between a willing seller and a willing buyer. Such a method makes no sense because in such a context the negotiation is not merely fictional in the sense that it did not actually happen but fictional in the stronger sense that it lacks any verisimilitude. The law ought not to employ fictions of the latter sort.”

That is no doubt why Lord Reed’s conclusions emphasised that a valuation by reference to a hypothetical negotiation is one possible method for quantifying damages for the use wrongfully made of property, but is not the only possible approach; and that it is for the court to judge in each case what method of quantification will give a fair equivalent for the value of the loss.