Intellectual property litigation: how is the amount of profits payable by an infringing party calculated? Recent High Court decisions

Written on 11 May 2016

The amount of profits payable by an infringing party in intellectual property cases has traditionally been an uncertain calculation. Often the amount will be agreed between the parties out of court following a judgement on liability, so there have been very few cases on this issue. Earlier this year the Court of Appeal in Design & Display Limited v Ooo Abbott & Anr (Abbott) provided some much- needed guidance on the principles which apply when calculating an account of profits following a patent infringement.  The High Court in Jack Wills Limited v House of Fraser (Stores) Limited has now applied these principles to a trademark infringement case.

Background

In January 2014, the High Court found that House of Fraser (HoF) had infringed Jack Will’s (JW) pheasant logo by use of a similar pigeon logo on some of its own brand clothing.  This was, in the court’s opinion, a classic case of a retailer seeking to enhance the attraction of its own brand goods by adopting an aspect of the get up of prestigious branded goods (as many retailers have done before – Puffin/Penguin, Pitchers/Pimms etc).  The court further found that HoF had taken unfair advantage of the reputation of JW’s trade mark.

Decision

Following a finding of infringement, the rights holder has a choice whether to ask for damages or an account of profits. JW applied for an account of profits and HH Judge Pelling QC was tasked with deciding how this should be calculated.  JW argued that it was entitled to all profits made from the sale of the infringing goods.  Rejecting this argument, Pelling reiterated the principle which has been set out in various other cases: that an account of profits is not penal, its purpose is to prevent unjust enrichment of the infringer.  The key principle being that the infringer is required to pay all profits ‘properly attributable to the infringement’.

There were two main issues for Pelling to consider: ‘overheads‘ and apportionment of profits.

Overheads

The court was asked to consider which, if any, overheads HoF was entitled to set off against the profits made from the sale of the
infringing items.  Pelling followed the approach in Abbott and Dart Industries Inc v Décor Corp Pty Ltd that the question is, if the defendant had not infringed, would he have carried on a non-infringing business which would have been sustained by the overheads in fact used to sustain the infringement?

Pelling put to bed the notion that had been dismissed in Abbott, and discussed at length in the JW v HoF trial, as to whether the infringer needed to demonstrate that it was running at full capacity as a threshold condition to setting off overheads. The Court of Appeal in Hollister Inc v Medik Ostomy Supplied Limited (which concerned trade mark infringement) had implied that this might be a condition, on the basis that the infringer should have to prove it was running at capacity so that the infringing business must have displaced an alternative, non-infringing, business. Pelling, following Abbott rejected this approach.

The court held that to establish whether HoF was entitled to set off overheads there were only two questions to be considered:

  • firstly, whether HoF had demonstrated that the same overheads would have been incurred even if the infringement had not occurred; and
  • secondly, if HoF had demonstrated that the sale of infringing products would have been replaced by sale of non-infringing products which would have been sustained by the overheads in fact used to sustain the infringement.

On the facts, the acts of infringement had no effect on the general overheads, so the key question was whether HoF would have replaced the sale of infringing goods with non-infringing goods.  HoF submitted that it would have sold the same type of goods but without the logo and presented evidence that it had sold similar goods before, during and after the period when the infringement took place.  On this basis, it was entitled to set off some of the overheads incurred.

Apportionment

The court was then asked to consider how (if at all) the profits should be apportioned. Again, Pelling relied heavily on the decision in  Abbott where Lord Justice Lewisham said ‘in a case in which the infringement does not “drive” the sale, it seems to me that it is wrong in principle to attribute the whole of the profit to the infringement’.

Pelling had some room to depart from Abbott which was a patent infringement case, as the Patents Act 1977 s61(1)(d) reads ‘for an account of the profits derived by him from the infringements’, which was explained in Abbott as being what (if any) profits the infringer derived from the use of that invention.  The Trade Mark Acts 1994, however, merely says ‘all such relief by way of damages, injunctions, accounts or otherwise is available to him as is available in respect of the infringement of any other property right‘, at section14(2). It does not explicitly refer to profits derived from the use of the infringing mark.

It is likely to be much harder for a trade mark owner to show that the use of its mark drove the sale of the infringing item, as there will almost always be underlying value in the goods with the mark on. In this case Pelling explicitly said ‘The infringing goods were clothes. They have a value to consumers independent of the presence on the goods of the Logo’. A patentee can more easily demonstrate that the incorporation of the infringing feature drove the sale, and that without this feature there would be no value in the underlying goods.

For example in Dart, it was said that where the infringed patent relates to an essential feature of a single item and without it the item would never have been produced at all, apportionment would not be appropriate.  In Abbott it was held that the infringing item did not drive that sale. The reasoning was that ‘in particular it does not follow from the fact that the customer wanted a slat wall that incorporated an insert, that the customer wanted a slat wall which incorporated the infringing insert’. Arguably in trade mark cases, it will be quite often be the case that the customer wanted the clothes specifically with the infringing mark. However given the reasoning used above, this may not be enough to show use of the infringing mark drove the sale.

The High Court held the profits JW was entitled to were those properly attributable to the infringing use of the mark and not all the profits derived from the sale of the items. On the facts there was no evidence that using the logo had any significant or lasting effect on the sale of the products concerned. Pelling used the percentage which HoF paid to licensees for use of third party brands to award JW around 41% of net profits made from the infringing article.

Implications

There have been many decisions in the IPEC (Intellectual Property Enterprise Court) on specific issues on damages. These decisions are creating more clarity on this area.  This decision will be welcomed by retailers who are required to account for profits following a finding of trade mark infringement. It provides more certainty and guidance as to what costs they can offset and the approach the court will take to apportioning.