New law changes rules around damages and settlements
Eduardo Kleinberg and Santiago Zubikarai Gonzalez Mariscal of Basham Ringe y Correa analyse the new Federal Law for the Protection of Industrial Property, examining the ways in which it affects damages and conciliation
On July 1 2020, a new Federal Law for the Protection of Industrial Property, which will come into effect on November 5 2020, was published in the Official Gazette. This will dramatically change the enforcement of industrial property rights such as registered trademarks and patents in Mexico. More specifically, this new law contains a substantial change to the way in which indemnifications for damages can be awarded, as well as important increases to fines for infringement and a new conciliatory proceeding, all of which have the potential to greatly benefit rights holders.
Article 1910 of the Federal Civil Code of Mexico contains the general rule, imitated by state civil codes, that anyone acting unlawfully or against good customs must pay for any damage caused to others by such actions. Therefore, an obligation to pay damages will arise only if three conditions are met: 1) an action that is unlawful or contrary to goods customs takes place; 2) damages are caused; 3) there is a causal connection between the unlawful action and the damages caused. Generally, a potential plaintiff that can prove these three conditions will be entitled to obtain an indemnification for damages. In the field of intellectual property rights, however, this has been far more complex than the Federal Civil Code would suggest.
The current Industrial Property Law of Mexico contains a catalogue of unlawful actions in Article 213. Comprising a total of 33 sections, Article 213 forbids a variety of conducts, including trademark infringement, patent infringement, unfair competition, misrepresenting that a trademark is registered, using or imitating geographical indications or appellations of origin and even omissions in mandatory information disclosures by franchisers. Furthermore, the law tasks the Mexican Institute of Industrial Property with investigating and punishing such unlawful actions. They can do this either ex officio or following a quasi-judicial proceeding in which the Mexican Institute of Industrial Property will decide on the basis of arguments and evidence submitted by the parties if the unlawful conducts of Article 213 of the Industrial Property Law invoked by the plaintiff have been committed. However, the Mexican Institute of Industrial Property is not allowed under the current law to award damages. Instead, if the plaintiff succeeds, the Mexican Institute of Industrial Property will issue a decision indicating the sections of Article 213 that are applicable and punish the defendant by imposing a fine, order that the infringing conduct be ceased under threat of additional fines and sometimes, impose additional punishments such as forcing a temporary closure of the infringing premises or destroying infringing goods.
Now, the plaintiff can claim damages either before the Mexican Institute of Industrial Property, through a motion once the infringement proceeding is favourably concluded, or directly before the courts.
If the plaintiff wants to pursue damages, he will have to wait until the Mexican Institute of Industrial Property rules against the defendant as per the prior paragraph and then, file a complaint before a civil judge claiming that damages were caused by the unlawful conduct indicated in the decision from the Mexican Institute of Industrial Property. In other words, under the current law of Mexico obtaining damages involves two steps: firstly obtaining a decision from the Mexican Institute of Industrial Property to prove that an unlawful conduct occurred and then, filing a civil case to prove that the unlawful conduct caused damage. Historically, this two-stepped process has proved impractical. Typically, plaintiffs who after years of litigation finally succeed in obtaining a final and conclusive decision from the Mexican Institute of Industrial Property have been reluctant to take the additional time and expense of filing such a decision along with a complaint for damages before a civil judge.
Moreover, while the decision from the Mexican Institute of Industrial Property does prove in the civil procedure that an unlawful action was committed, it does not prove that the unlawful conduct did in fact cause damage to the plaintiff. Plaintiffs who win before the Mexican Institute of Industrial Property and want to claim damages before a civil court, will not be exempt from demonstrating that damage was caused by the unlawful conduct. Furthermore, while the current Industrial Property Law states that the amount of damages to be awarded should be no less than 40% of the sales price to the public of each infringing product or service sold, in practice, demonstrating that the damage occurred and its value is difficult. The Mexican Federal Code of Civil Procedure does not have discovery rules such as those included in the Federal Rules of Civil Procedure used in the United States, and the plaintiff cannot count on any cooperation from the defendant. Thus, proving that damages did occur and establishing the amount of damages to be awarded is difficult, often requiring the plaintiff to provide documents and experts to support the claim, at additional expense.
For this reason, the main liability that an infringer has to consider in connection with IP rights such as registered trademarks and patents at this time and under the current law is not potential damages, but only fines that may be imposed by the Mexican Institute of Industrial Property. While these fines are severe, another issue is the difficulty in enforcing payment of them. The Mexican Institute of Industrial Property has agreements with state treasuries to assist with collecting the fines, but the reality is that it may take years for state treasuries to actually demand payment of the fines. Moreover, state treasuries are often focused on collecting local taxes, not federal fines imposed for the infringement of IP rights. Some state treasuries are unfamiliar with these fines and the laws relating to them.
For this reason, while the laws of Mexico do serve the purpose of deterring and punishing the infringement of IP rights, there are several areas for improvement that the new law will address.
Damages and fines
The reform changes the current paradigm by providing that the owner of an IP right can resort to either the courts or the Mexican Institute of Industrial Property to claim damages for infringement. In other words, if the potential plaintiff now wishes to resort to the courts, he can do so right away. This is a stark contrast to the current system, where the plaintiff has to first submit the infringement claim with the Mexican Institute of Industrial Property and only if he wins there will it be possible to resort to the courts to claim damages. Now, the plaintiff can claim damages either before the Mexican Institute of Industrial Property, through a motion once the infringement proceeding is favourably concluded, or directly before the courts. There will thus be no need, in principle, to go through two different procedures to obtain an award for damages. Some concerns have been raised about the fact that counterclaims against the validity of the IP rights sustaining the claim for damages would still need to be solved by the Mexican Institute of Industrial Property as well as about the constitutionality of having the Mexican Institute of Industrial Property award damages. However, the new law presents a more realistic opportunity for rights holders to receive a just indemnification for the infringement of their rights than the Mexican government has allowed in decades.
Instead of only stating that the damages awarded will be no lower than 40% of the sales price of the infringing goods and services, the new law provides for an amount no lower than 40% of a "legitimate measurement of value", further specifying that this may include not just the price of the infringing goods, but also the price of the legitimate goods, profits lost by the rights holder, the profits from the infringer and the market price of a licence from the rights holder. This will afford the plaintiff additional ways to support his claim for damages and may make it easier to justify his amount.
In addition, the new law increases the existing risk for infringers by substantially increasing the fines, more than 10 times in some cases, and also facilitating their collection. Under the new law the Mexican Institute of Industrial Property will not have to rely on state treasuries to collect the fines, but instead will be allowed to do so directly and to use, essentially, the same proceedings to compel their payment as the federal revenue service uses to force the payment of owed taxes. This means not only that infringers could face much higher fines, but also that the risk of having to pay the fine will be much more immediate. The new law provides a further incentive for the Mexican Institute of Industrial Property to collect the fines by establishing that they can be used to cover its operation costs, meaning it will provide this government authority with a potential source of additional revenue for its activities.
Conciliation and settlement
Under the current law, the Mexican Institute of Industrial Property has, at least in theory, the duty to conciliate between the plaintiff and the defendant in an infringement case. However, this obligation is hindered by the fact that the current law lacks any procedural rules on the subject. In practice, the Mexican Institute of Industrial Property does not actively try to help the parties reach a settlement. Instead, when a settlement is reached, it is usually at the initiative and through the informal communications of the parties themselves.
Under the new law the Mexican Institute of Industrial Property will not have to rely on state treasuries to collect the fines, but instead will be allowed to do so directly.
By contrast, the procedural rules for other matters such as those of the Commerce Code, as well as the applicable laws of Mexico City, the State of Mexico, Chihuahua, Jalisco and other states, contain detailed provisions for conciliation, mediation and other alternative dispute resolution mechanisms, including procedural rules for the judges to follow for the cases they hear. Further still, the Mexican Federal Copyright Law has rules for triggering a mandatory conciliatory proceeding before the Mexican Copyright Office to try to solve disputes involving copyright and related rights without the need for a formal judicial or quasi-judicial proceeding. Yet, when it comes to IP rights, the Mexican Institute of Industrial Property does not have any procedural rules for fulfilling its obligation to help the parties in an infringement case conciliate and settle the dispute.
The new law changes this by providing in detail that at any time before the final decision of a case is issued, either party in an infringement case before the Mexican Institute of Industrial Property may submit a written proposition for settlement. If the other party is interested, they may either accept the proposition on its terms or submit a counterproposal. If a counterproposal is submitted, the Mexican Institute of Industrial Property can then summon both parties to a mandatory conciliation hearing in which it will expose the case, have both parties present their proposals and generally try to mediate between them without judging the merits of the case. If necessary, another conciliation hearing can be set. Attendance is mandatory for the parties or else they will be fined. If the parties settle within this proceeding, the respective agreement shall not only end the infringement proceedings but shall also be considered as res judicata and shall be enforceable just like a final judgement would.
By providing these rules, the new law will make settlements in infringement cases considerably easier for the parties, since now there is a specific proceeding for it. If the other party is interested, they can be compelled to attend a hearing and hear the proposition. Moreover, by recognising the authority of the settlement agreement, the parties will now have the certainty that they are executing an enforceable agreement with which the other party will have to comply. This takes settlements in infringement cases out of the context of informal negotiations and into a place of legal certainty and predictability that will benefit both parties. With higher risks of fines and a more realistic possibility of damages awards, the new law will provide better incentives to settle infringement disputes.
In short, the new Federal Law for the Protection of Industrial Property will present new opportunities for the enforcement of IP rights in Mexico.
Eduardo Kleinberg has been a partner at Basham since 2003 and managing partner since 2014. He is head of the trademark, franchising and licensing practices and has vast experience in domestic and international matters. Eduardo has experience advising clients in IP matters in general; negotiating and drafting licence, franchise, copyright and confidentiality contracts; filing and prosecuting trademarks and patents before the Trademark Office; filing copyrights before the Copyright Office; due diligence in the field of IP; classifying and registering product and service trademarks belonging to Mexican and leading foreign companies; registration of trademarks in South and Central America, Europe, Asia and the USA, working with local counsel in each of these regions; counselling Mexican and international clients in e-commerce issues related to IP; registration of domain names and cancellation of domain names. He is a member of countless professional IP-related organisations such as INTA, IFA and ASIPI, and was in charge of the PI Chapter in the negotiation of the Trans-Pacific Partnership (TPP).
Santiago Zubikarai Gonzalez Mariscal
Santiago Zubikarai Gonzalez Mariscal has been working in the intellectual property department of Basham Ringe & Correa since 2009, primarily assisting clients with matters pertaining to trademark searches, registrations and litigation, the protection of works and characters and the preparation and review of agreements related to intellectual property.
He holds a bachelor's degree in law from Universidad Anahuac and has a master's degree from the University of Notre Dame. He has taken several courses relating to intellectual property, administered by WIPO and the Mexican Association for the Protection of Intellectual Property. He passed the Uniform Bar Exam (NY) on February 2018.