How do you calculate counterfactual damages?
Miss Charlotte May KC, sitting as a Deputy High Court Judge, has made a detailed calculation of damages due for infringement of a patent relating to a geosynthetic trackbed liner, a product used to stabilise railway tracks (Geofabrics Ltd v Fiberweb Geosynthetics Ltd).
In a decision that was upheld by the Court of Appeal, the High Court had found that Geosynthetics Ltd’s product called Hydrotex 2 infringed the patent. Geofabrics Ltd, the patent proprietor, sells a competing product called Tracktex.
The primary customer for the products was Network Rail, and the infringement occurred from the launch of Hydrotex 2 in July 2012 until the Court of Appeal judgment in June 2021.
Geofabrics claimed damages for lost profits on lost sales of Tracktex, lost profits on historic sales due to price competition, lost profits on future sales as a result of ongoing price depression caused by the historic price competition, and interest. This required the Court to analyse what would have happened in the counterfactual, i.e. if there had been no infringement.
Key issues to decide
This was a complex case, with each side deploying a fact witness and a forensic accountant during a hearing that lasted six days in total.
Reviewing the case law, the judge noted that it is not enough for a claimant to show that “but for” the infringement, the damage would not have occurred: “Instead, the claimant must demonstrate that the defendant’s infringing acts were a cause of the loss (although it is unnecessary to evaluate competing causes and ascertain which one of them is dominant)”.
She added that the “loss of a chance” analysis applies “if the uncertainty on quantum rests on hypothetical future events or the actions of a third party. By contrast, where the uncertainty on quantum rests on what the claimant hypothetically would have done, then this is determined on the balance of probabilities.”
One critical issue in the damages analysis was whether, in the counterfactual, Geofabrics would have sold directly to Network Rail or entered into an exclusive distribution agreement with Aqua, a supplier in the railway industry (as Geosynthetics argued). The judge found, on the balance of probabilities, that Geofabrics would have continued the supply arrangements that were in place immediately before Hydrotex 2 came onto the market. She also found that there was no evidence showing that there was a real chance that Aqua would have demanded an exclusive distribution agreement.
She also had to consider how many sales of Tracktex there would have been in the counterfactual. Rejecting the defendant’s arguments, she concluded that every sale of Hydrotex 2 in the actual world would have been a sale of Tracktex in the counterfactual:
“I was not persuaded that the Defendant had won any meaningful sales through its marketing efforts with contractors which would not have otherwise come to the Claimant via Aqua. … The Claimant would have achieved the direct orders from Network Rail in any event. I was also not persuaded that the duopoly situation in the actual grew the overall size of the market more than it would have done in a monopoly situation in the counterfactual.”
In addition, she found that Geofabrics would have had capacity to manufacture the Tracktex product required in the counterfactual.
The next question was what prices Geofabrics would have achieved. After reviewing the various numbers provided, she found that the prices should be based on the respective 2011-2012 price matrices, with annual price increase of 3.25% every two years (for Network Rail) and 2% every year (for non-Network Rail). However, the damages should be reduced by £189,009 to reflect the savings that would have been made from redundancies that would not have occurred in the counterfactual.
Turning to future sales, she said that the Tracktex price depression would have likely happened over a two-year period from May 2021, and the calculation of the actual estimated future sales price should be based on sales of Tracktex, not Hydrotex 2, in the actual.
A complex exercise
While speculating about “what might have happened if …” might be fun at a dinner party or even on a conference panel, this judgment shows that it is a difficult challenge for the courts.
As the judge noted at various points in the judgment, evidence in this case was frequently either not available or it was contradictory. That made the counterfactual exercise complex and detailed: the judgment has nearly 300 paragraphs.
In the UK, it is quite common for parties to resolve damages issues out of court following a finding of infringement. It is therefore very helpful to have such a thorough assessment of how to assess a counterfactual from the High Court.