In an intellectual property agreement, it is common for parties to agree on a stipulated amount that one party is obligated to pay when said party defaults. In practice, the types of damages clause can be divided into two categories: one is liquidated damages, i.e. the pre-estimated total damages to be caused by the party’s default, while the other is penalty/punitive damages. The main difference between the two is that in the latter category, the non-defaulting party may, in addition to the stipulated amount, claim for further compensation should there be other damages caused by the default. Therefore, penalty is more favorable for the non-defaulting party. Notwithstanding the type of clause, Article 252 of Civil Code provides that the court may reduce the stipulated amount to a reasonable level if it finds the quantum disproportionately high. In August this year, the Supreme Court entered a ruling on the reduction of penalty arising out of copyright license agreement (107-Tai-shang-tzu No. 776), which we summarized as follows:
Facts and Issues:
The defendant was commissioned by the plaintiff to produce two television dramas, A and B. The agreement required the defendant to produce the program with the consent of the original copyright owner, and that the defendant should assist the plaintiff in obtaining the rights to broadcast and re-play the same both in Taiwan and overseas; the plaintiff is entitled to penalty up to NT$ 3 million in the event of default. After 10 years, the plaintiff sub-licensed a third party to broadcast drama A but was notified by the defendant that the original copyright owner only agreed to grant a 10-year license to create derivative work for television dramas. The plaintiff was forced to cancel the aforesaid sub-license, and thereby requested the defendant to compensate for its loss of license and to pay the agreed NT$ 3 million penalty. During the litigation, the defendant argued that the penalty was disproportionately high and requested the court to reduce it.
Holding of the Intellectual Property Court (IP Court) :
The IP Court denied the defendant’s request and ruled that the penalty was not disproportionately high, because the agreed penalty only constituted 4.8% of the production fee of drama A, plus the plaintiff also lost the opportunity to acquire royalty through multiple licenses of drama A.
Holding of the Supreme Court:
The Supreme Court vacated the aforesaid IP Court’s judgment. The Supreme Court first outlined the relevant factors to be considered when evaluating the reduction of penalty based on the Supreme Court’s past decisions, including, as provided by Article 251 of Civil Code, when there is partial performance, the court may reduce the penalty in view of the creditor’s enrichment due to the partial performance. In particular, the court should cautiously consider whether the reduced amount is of penalty in nature, where the creditor may, to a considerable degree, recover its loss since the creditor may still request for specific performance or further compensation caused by the default in addition to requesting the debtor to pay the penalty. Next, the Supreme Court held that defendant’s default was limited to drama A, not including drama B, and that the plaintiff already acquired the 10-year license to create derivative work for TV drama. As a result, the IP Court was found erroneous in not properly looking into the degree the plaintiff had been enriched by the defendant’s partial performance, and whether the loss incurred would be reduced in view of the plaintiff’s aforesaid enrichment. The Supreme Court vacated the IP Court’s decision, and remanded the case back to the IP Court to further evaluate the reduction of penalty in view of the aforesaid partial performance.
In practice, it is rare that a court would leave the amount of penalty unreduced, which explains why in this case the IP Court’s otherwise decision is challenged by the Supreme Court. Based on the holding of the Supreme Court, when: 1) there are multiple licensed rights involved in intellectual property agreement, 2) the agreement has been performed for certain period of time, and 3) the alleged default is limited to only one of the contracted objects, the lower court is expected to look into the degree the creditor had been enriched by the partial performance, and evaluate whether the loss incurred was reduced due to the partial performance. Moreover, to avoid further dispute, the parties should make proper arrangements by taking into account the aforesaid factors when stipulating a default penalty provision.