Design and Display Limited V OOO Abbott and Another
In the UK, a successful claimant in a patent infringement action is entitled to claim ‘damages’, that is monetary compensation for damage actually caused by the infringement (but not punitive damages), or an account of the infringer’s profits derived from the infringement. Damages are more commonly claimed than an account of profits so Design and Display v OOO Abbott provides useful, and rare, guidance from the Court of Appeal on how an account of profits should be assessed.
There is very little recent case law relating to either damages or account of profits in the UK because the amount of damages or the account of profits are normally calculated in a separate hearing after the hearing on liability. Litigants therefore often settle the amount of damages or the account between themselves rather than going to the expense and trouble of another hearing with the accompanying risk of an adverse costs award. Also, given the choice between its own lost profits or an account of the profits made by the infringer, successful claimants usually opt for claiming their own lost profits because they are generally greater than the defendant’s gains and also because of fears that creative accounting might erode the defendant’s profits in the absence of clear guidance from the courts as to how profits are to be assessed.
The cap on recoverable costs together with the more streamlined, cheaper procedure has, however, driven an increase in litigation at the Intellectual Property Enterprise Court (IPEC) relating to the calculation of the damage or the account of profit. Recent cases at the IPEC include AP Racing Ltd. v. Alcon Components Ltd. (28 January 2016), Alfrank Designs Ltd v. Exclusive (UK) Ltd & Anor (May 18, 2015), Lumos Skincare Ltd v. Sweet Squared Ltd & Ors (May 19, 2015) and Harman v. Burge (July 29, 2014) and the subject of this briefing is a decision from the Court of Appeal on an appeal from the IPEC concerning an account of profits.
The case concerned display panels used in shops. Shop fitters often use a wooden wall called a slatwall as a panel on which to construct displays. Shelves, brackets and hangers can be fitted into slots in the slatwall. The slots into which the shelves, brackets and hangers are fitted are protected by inserts. Those inserts can be ‘slide-in’ or ‘snap-in’. Snap-in inserts were generally made of PVC, and the invention in this case was a ‘snap-in’ insert made from a resilient metal like aluminium. Design and Display, the Defendant, sold slatwalls and infringing inserts both separately (‘unincorporated’ panels and inserts) and pre-assembled (‘incorporated’ panels and inserts). In addition, they sold unincorporated inserts alone without panels.
Two questions were raised in the appeal. Firstly, although there was no appeal in respect of unincorporated sales, was the Defendant liable for the whole of the profit made on the sale of incorporated panels and inserts, or only some fraction of the profit? Secondly, was the Defendant entitled to set off any part of its general overheads against the gross profit, in order to calculate the net profit?
Profits on “Incorporated” Panels and Inserts
The Defendant argued that only some of the profit generated by the sale of incorporated products should be attributed to the patent infringement and therefore included in the account. The Claimant argued that it was entitled to the whole of the profits which accrued to the Defendant as a result of the sales of incorporated products.
The court discussed Laddie J’s decision in Celanese International Corp v BP Chemicals Limited at some length. In that case, the court found that a claimant may be entitled to all the profit on a product, without ‘apportioning’ some profit to the infringement and some not, in instances where: (a) the infringing articles would not have existed without the infringement, or (b) the invention was an essential ingredient in the creation of the infringer’s whole product. However, there are other circumstances in which it would be unjust to award the claimant the whole profit made on a multi-component product. For example, if an infringing brake is fitted in a car a patentee could not claim the defendant’s profit for the entire car simply because it included the patented brake, unless perhaps the presence of the particular brake was the driving factor in the purchase of the car.
In this case the presence of the infringing inserts drove some of the sales of the incorporated product, and for those sales the Claimant was entitled to the entire profit. However, there were also sales in which the customer was indifferent to the infringing insert. The Judge at first instance had held that the Defendant should also be held to account for the profit for the entire product in this latter type of sale (i.e. without apportioning). The Court of Appeal disagreed, holding that if the presence of the infringing insert did not drive the sale then the profit for each sale should be apportioned between profit attributable to the infringement, and profit not attributable to the infringement.
The case was then remitted back to the IPEC for the Judge to make the necessary apportionment. It was not all bad for the Claimant though, as the Court of Appeal noted that the Judge would not be precluded from finding that the infringing insert was the essential ingredient of the incorporated panel. In that event the Claimant would be entitled to all the profit for each such panel.
What overheads can be deducted from the gross profit in calculating the relevant profits to which the Claimant is entitled?
It is well established that overheads “properly attributable” to the infringing production can be deducted from the gross profit. Overheads “properly attributable” include those which relate only to the manufacture and sale of the infringing product: raw materials, maintenance of plant and machinery specific to the infringement, staff specific to the infringement, specific financing costs, etc. The Court here, however, had to decide whether a proportion of the general overheads of the Defendant could also be deducted from the gross profit to calculate the profit to which the Claimant is entitled. General overheads include, for example, cost for premises not acquired specifically for the infringing process, utilities for shared areas, staff not solely working on the infringing manufacture, etc.
The court noted that a certain proportion of the Defendant’s general overheads are used to support the infringing activity. If that proportion of general overheads cannot be deducted from the gross profit then the Defendant has spent money on overheads which cannot be recovered and the Defendant would be in a worse position than it would have been had it not carried on the infringing business. The purpose of an account of profits is not to punish the defendant but to prevent its unjust enrichment. Accordingly, that proportion of general overheads which supported the infringing activity is deductible.
The Court of Appeal held that the Judge at first instance had been wrong to decide that a portion of general overheads could only be deducted if the Defendant’s business was running at full capacity such that the infringing activity displaced lawful activity. The Court of Appeal, citing with approval the High Court of Australia in the case Dart Industries Inc v Decor Corp Pty Limited, ruled that the question was not dependent on whether or not the Defendant’s business was running at full capacity: if the Defendant can show that but for the infringement it would have sold non-infringing products then part of the general overheads can be deducted. Of course, if a business has spare capacity then it might struggle to convince a judge of this, but that was not an issue in this decision.
The Court of Appeal allowed the appeal and remitted the matter back to the IPEC to assess what proportion of the overheads should be deducted.
In summary, when a claimant elects for an account of profits following a finding of patent infringement, a defendant must account to the claimant for all of the gross profits on sales of:
(a)items which would not exist without the infringement;
(b)items in which the infringing item is an essential ingredient;
(c)items where the presence of the infringement has driven the sale.
The gross profit derived from sales of other products which also incorporate an infringement but which do not fall within one of those categories should be apportioned between profits attributable to the infringement, and profits not attributable to the infringement.
The defendant can then deduct from the gross profit on those items all "properly attributable" overheads together with that portion of general overheads which supported the infringing manufacture.
15 March 2016