Account of profits/damages as complex as validity/infringement

Aristocrat Technologies Australia Pty Limited v Konami Australia Pty Limited (No 3) [2022] FCA 1373

18 November 2022

Federal Court of Australia

Nicholas J

Background

Aristocrat Technologies Australia Pty Limited’s (Aristocrat) Patent no 754689 (Patent) concerned a random prize awarding feature on an electronic gaming machine (EGM) console, where the console also comprises means to trigger the feature on the occurrence of conditions based on the probability of achieving the desired average turnover between each occurrence.  Asserted claims fell into two categories: those directed to the feature/trigger (Trigger Claims) and those directed to gaming consoles including the feature/trigger (EGM Claims).  The Patent was held valid and infringed by the Federal Court in 2015 (Aristocrat Technologies of Australia Pty Ltd v Konami Australia Pty Ltd [2015] FCA 735, and Konami Australia Pty Limited’s (Konami) appeal to the Full Federal Court dismissed (Konami Australia Pty Ltd v Aristocrat Technologies Australia Pty Ltd [2016] FCAFC 103. 

Aristocrat elected to claim an account of Konami’s profits from the sale of EGMs on which infringing games were installed, and elected to claim compensatory and additional damages for conversions to install an infringing game on existing EGMs made by Konami without charge (NCCs).

Aristocrat led evidence from at least ten witnesses, Konami from almost fifteen.  These included representatives of the parties in sales, product development, management and accounting roles, together with external witnesses in gaming/computer science, intellectual property valuation, business analysis and tax.

Key Issues

Account of profits – apportionment

They key issue for determination with respect to Aristocrat’s account of profits claim was whether the profits otherwise payable by Konami should be reduced to reflect the proportion attributable to the infringing features of the Konami products that were subject to the infringement declaration in the merits proceeding.  As an account of profits requires the infringer to give up profits made on account of the infringement, apportionment is between components attributable to the invention, and those which were not.  This is a question of substance, not form, and so the form of the claims (ie Trigger Claims vs EGM claims) is not determinative as they would yield vastly different results.  While Nicholas J held that it was apparent from the 2015 and 2016 validity proceedings that the invention was an EGM incorporating the feature game and trigger, it was the feature/trigger which overcame the problems of the prior art and as such apportionment reflecting the contribution of the trigger was not precluded.

Aristocrat’s argument against apportionment with respect to the Trigger Claims was to the effect that the trigger was an essential component of the Konami EGMs, such that they would not have been made or sold without the trigger.  The Court applied a two stage test; first, whether causation is established, for which the onus was on Aristocrat, and second, whether some profits had no reasonable connection to the infringement, for which the onus rested with Konami.  The Court looked to the availability of non-infringing alternatives, not to ascertain whether apportionment was appropriate, but to assist in determining the value attributable to the infringement. Assessing the evidence as to the commercial value of the trigger invention, as opposed to other features of the Aristocrat games, the Court concluded that much of the appeal of these games was not attributable to the trigger, but to other factors such as the mathematics of the games and the overall presentation.  Moreover, evidence from Konami meetings demonstrated that the use of the trigger was not the key or even a substantial driver in the design of its EGMs.  Ultimately, informed by expert evidence comparing the financial turnover on games with and without this feature, and with adjustments for other factors, the Court decided on a weighting on 35% of profits attributable to the trigger.

Account of profits – deductions

The parties agreed that COGs and variable costs (such as freight) were deductable from the account of profits.  The key point of disagreement was for fixed overheads such as product design and development, and the key difference in evidence related to the opportunity cost of foregone design of other products.   Konami had the onus of establishing these were attributable to the manufacture and supply of infringing products.  The Court was satisfied Konami would have had the desire and ability to manufacture EGMs and games with non-infringing triggers, even if they would have been less commercially appealing.   The Court therefore allowed the deductions but with an adjustment reflecting that the resulting products would have provided lower profits.  Other overhead costs were apportioned to the infringing sales.

Konami incurred operating losses in some years during the period to which the account applied.  The Court held that Konami had not met its onus to establish that these losses were attributable to sales of products in profitable years, and therefore the losses were excluded from the calculations rather than offset against other years’ profits.  The Court held that, as there was no certainty that Konami could obtain a tax deduction for the payment made to Aristocrat, the profits should be calculated on a pre-tax basis, with a discount to reflect the delay it would experience in recovering any tax refund.

Damages

Aristocrat elected to claim damages in respect of the NCCs.   The Court held Aristocrat was entitled to these even if it would not have granted Konami a licence in other circumstances.   The Court looked to valuation experts and example licences for direction as to a reasonable royalty rate.    It excluded from consideration a previous licence between the same parties regarding the same Patent on the basis that it was entered into as part of a litigation settlement and therefore did not reflect ordinary commercial positions.  Evidence as to the commercial value of the Patent based on patent database metrics were excluded as problematic.  Ultimately the Court looked to a licence from a third party to a Konami subsidiary in relation to a patent to a different trigger mechanism, with an upward adjustment reflecting the commercial superiority of Aristocrat’s Patented trigger.  Like for like no charge conversions were held not to attract a royalty, but those replacing a non-infringing game with an infringing game were held to.

The Court held that Aristocrat had not established that Konami’s actions were flagrant or otherwise justified the award of additional damages.

Outcome

Having determined the method and factors for calculation of the profits and damages, the parties’ legal representatives and experts were instructed to confer for the purposes of reaching agreement on the amounts and interest Konami should pay.

Implications

Running to 180 pages, the decision is a detailed and exhaustive analysis of the method for assessing account of profits in particular.   Despite the time and expense to date, the potential for disputes as the parties move to the actual calculations phase remains.

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