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

There was some discussion in the parties’ submissions as to the correct approach to the counterfactual in a case where the court is applying a licence fee approach. The starting point is that in a case where the damages payable in respect of an intellectual property infringement or breach of contract are quantified on a licence fee basis, the court postulates a hypothetical situation where the relevant infringing acts were instead carried out pursuant to a licence or agreed release of obligation. That was explained by Lord Shaw in Watson, Laidlaw & Co at p. 32:

“…the cardinal question which remains always to be answered in these infringement suits [is] the question put by Vice-Chancellor Page Wood in Penn v Jack, viz: ‘What would have been the condition of the plaintiff if the defendants had acted properly instead of acting improperly. That condition if it can be ascertained, will, I apprehend, be the proper measure of the plaintiff’s loss.’ To apply the principle: The appellants did this Java trade improperly. Had they done it properly they would have done it under royalty. That royalty the respondents would have obtained.”

In assessing the value of the notional licence or contractual release that would have been negotiated, the court will of course have regard to the existing rights and obligations of the parties. That is perhaps an obvious point: the court cannot ascertain the value of a release of a particular contractual obligation without considering the extent of the rights initially granted under the agreement said to have been breached. This is a specific example of the general principle that the hypothetical negotiation is assumed to have taken place on the basis of the commercial context existing at the time. As Arnold J noted in Force India Formula One Team v 1 Malaysia Racing Team [2012] EWHC 616 (Ch), [2012] RPC 29, §386, (ii):

“The primary basis for the assessment is to consider what sum would have [been] arrived at in negotiations between the parties, had each been making reasonable use of their respective bargaining positions, bearing in mind the information available to the parties and the commercial context at the time that notional negotiation should have taken place”.

Consistent with these comments, Newey J in 32Red v WHG [2013] EWHC 815 (Ch), §32, noted that the court should have regard to the circumstances in which the individual parties were placed at the time of the hypothetical negotiation, since the hypothetical negotiation is designed to establish the value of the wrongful use to the actual parties, rather than as between hypothetical parties. Likewise, both Arnold J in Force India (at §436) and Newey J in 32Red (§§46–50), emphasised that the subject matter of the hypothetical negotiation should be the specific infringing conduct.

I set out these points because of the submissions of both parties (and Mr Hobbs in particular) on this issue. I do not, however, understand any of these points to be controversial; nor, ultimately, did anything appear to turn on these points when applied to the specific elements of the damages quantification in the present case.