Supreme Decree regarding fines: Finally "homogeneous" criteria

For a long time, the application of fines by diverse areas of Intellectual Property lacked a precise and predictable criterion, which allowed both the plaintiff and the defendant to foresee the fine to be imposed by the Authority.

 

By virtue of the above, Supreme Decree No. 32-2021-PCM has been published, the same that approves the scale, methodology and factors for determining the fines imposed by the deciding entities of INDECOPI with respect to the infringements punishable in the scope of their competence.

 

As stated in its Article 1, the object of the mentioned decree is approving the scale, methodology and factors for determining fines. As main premise, the fine (M) is established from the result of multiplying the estimated value of the base fine (m) by a component that captures the effect of the aggravating and extenuating circumstances that are present in each case (F); that is, the following formula will be used:

 

M = m x F

 

It is worth mentioning that the fine (M) cannot exceed the maximum amount legally established for each deciding entity of INDECOPI; so if the estimate of the fine exceeds said amount, it should be limited to the maximum amount established in its specific rules.

 

Before expounding the criteria for establishing the base fine (m), it results necessary to set out the Authority’s criteria with respect to the aggravating and extenuating factors (F), which can only reduce the base fine up to 50% or increase it up to 100%. Thus, the rule under analysis establishes a table with the following aggravating and extenuating circumstances for application by all the deciding entities, as we detail below:

 

-          Aggravating

o   Recurrence

o   Reiteration

o   The defendant’s behavior throughout the proceeding which contravenes the principle of procedural behavior

o   When the infringing behavior has jeopardized or damaged the health, life or safety of people

o   When the defendant, being aware of the infringing behavior, does not adopt the necessary measures for preventing or mitigating its consequences

o   When the infringing behavior has affected the collective or diffused interest

 

-          Extenuating

o   The presentation by the defendant of a conciliatory proposal within the administrative proceeding which coincides with the corrective measure ordered by the deciding entity

o   When the defendant proves having concluded with the illegal behavior as soon as it became aware of it and having initiated the necessary actions for remedying the adverse effects of said illegal behavior

o   When the defendant recognizes the imputations or accepts the claims (acquiescence to the claim) after submitting its defense arguments.

o   When the defendant recognizes expressly and in writing its responsibility prior to and subsequent to the Final Investigation Report.

o   When de defendant proves that it has an effective program for the compliance with the regulation contained in the body of rules.

 

Despite the table abovementioned, the rule states that if there exists other aggravating or extenuating circumstances in the specific regulations of the deciding entity, said regulations will outweigh, but trying to find a balance between said criterion and the Supreme Decree under analysis.  Moreover, the rule states that the diverse deciding entities can consider other aggravating or extenuating circumstances further to those previously listed, provided they are pertinent according to the characteristics of each particular case and to the extent that their special legal framework allows it. Finally, the absence of any of these circumstances will determine that (F) be equal to 1.

 

In order to establish the base fine (m), this being understood as the direct or indirect approach of the illicit benefit or affectation (economic damage) generated by the infringer (within a determined space and time) and of the level of desired dissuasion, three criteria are established for its determination:

 

-          Method based on pre-established values.

-          Method based on a percentage of the sales of the affected product or services.

-          Ad hoc method

 

Now then, with respect to the cases of Intellectual Property, the criteria for establishing the applicable base fine (m) will be (i) the method based on pre-established values and (ii) the ad hoc method.

 

 

(i)                  Method based on pre-established values

 

The supreme decree states that the present method results applicable to the cases seen in the different areas of Intellectual Property only with respect to infringements associated with refusals to the submission of information by the defendant within the framework of a punishing administrative proceeding, affecting minimally the resolution.

 

This means that the pre-established values will be applicable only to the non-compliance of information requirements made by the Authority.

 

Although the rule establishes a formula for this method –where the Base Fine (m) is calculated multiplying a first component of pre-established values according to the affectation and the size of the infringer (ki,j) by a second component which is called factor of Duration (Dt)– with respect to the cases of Intellectual Property, the duration factor is limited to be considered under the value of 1, so the pre-established value would be only taken into account according to the affectation and the size of the infringer (ki,j), which is obtained from the following table shown in the rule:

 

Type of Affectation	Size of the Infringer
	Micro-enterprise or Individual	Small-sized Enterprise	Medium-sized Enterprise	Large Enterprise
Very Low	2,85	5,70	8,62	15,43

 

 

(ii)                Ad hoc method

 

Finally, the ad hoc method, applicable to fines to be imposed by the diverse areas of Intellectual Property – except the cases of refusals to the submission of information which apply the method of pre-established values-, is obtained from dividing factor β (illicit benefit or economic damage) and factor ρ (detection possibility).

 

factor β

 

With respect to the illicit benefit, the rule establishes that this must be understood as the additional benefits obtained or expected from the infringement; thus, the increasing benefit may result from an increase in the incomes and/or a cost reduction. It further states that the benefit also can be determined by “avoided costs”, understood as the savings obtained from the infringement or from not making the investments or expenses required to comply with the sectorial or national regulations.

 

With respect to the economic damage, the regulations specify three types:

 

-          Consequential damages: loss in the wealth or assets of the economic agent, directly explained by the action or omission of the infringing agent.

-          Lost profits: the expected benefit that the affected economic agent would have received if the damaging event would have not taken place.  That is, a benefit that is not received due to the infringement.

-          Damage to the individual: It represents every injury to the integrity of the individual or its life project derived from the infringement that may cause at least a consequential damage or lost profit. 

 

Now then, in order to determine the value of factor β, taking into account the approaches previously exhibited, the rule states that the deciding entities need minimum information for said purpose, thus establishing the following chart, which can be complemented with information that the deciding entity believes appropriate for the case:

 

 

Item	Approach
	Illicit Benefit due to income increase	Illicit Benefit due to avoided cost	Economic damage caused
Variable	Sales or incomes (prices and amounts) of the specific product, and if appropriate, the profit or profit/sales ratio	Compliance costs	Incomes or value of the economic resources lost, excessive expenses or VVE
Agent	Infringer(s) and eventually an agent or market/industry as identical as possible		The affected party/parties and eventually an agent or market/industry as identical as possible
Period	Before, on and/or after the infringement and materialization of the effects thereof.   The duration of the period before or after the infringement must be similar to the period in which the infringement was developed or to one year-minimum.

 

Before the impossibility of determining the illicit benefit, avoided cost or economic damage or any other parameter to estimate factor β, or to obtain the information related to the conditions prior to infringement period, the rule establishes that alternatively other sources can be reasonably used which provide the required information (for example, public information of competitive companies operating in the same market or sector), or to use study parameters published by the academy or international organizations.

 

The regulations conclude mentioning that in the event the established approaches are not sufficient for the deciding entity to establish the base fine (m), said entity must support its reasons and must adopt in general an approach based on pre-established values or on a sales percentage of the affected product or service.

 

Factor ρ

 

With respect to the possibility of detection, the regulations establish three levels, low, medium and high.

 

It should be understood that there is a possibility of low detection when the infringing act is characterized by actions that lead to concealment of information, the existence of clandestinity /informality, or when infringement is detected by non-scheduled supervision or inspection actions.

 

Detection will be of medium level if it results from complaints or claims made by third parties, or if they submit information available but limited since it is insufficient, selected or scattered.

 

Detection will be of high level when detected by means of a self-report, by scheduled supervision and inspection actions or due to the existence of reliable, complete and easy-accessible information.

 

Bearing in mind the aforementioned, the rule establishes the following chart to determine the value of factor ρ:

 

Level of Possibility	Copyright Office	Office of Inventions	Office of Distinctive Signs
Low	5,46%	23,94%	6,40%
Medium	15,88%	57,27%	15,43%
High	23,46%	74,57%	23,66%

 

 

Finally, it must be taken into account that the instant rule will be in force together with the effective date of Law No. 31112, which establishes prior control of operations of entrepreneurial concentration, which in turn comes into force fifteen calendar days after issuance of the amendments to the Regulations of the Organization and Function Law of INDECOPI and all the other management instruments of the entity, carried out according to the publication of the Regulations of Law No. 31112 (March 04, 2021). 

 

In conclusion, we can notice that the new rule allows having homogeneous criteria to establish the amount of the fine to be applied, applicable in different areas and instances of the Administrative Authority. However, it will be the ad-hoc method which will need several decisions in order to have clearly established how to determine the illicit benefit and in this way, to properly calculate the base fine.