Deterrent damages and dodgy infringement: judicial legislation in the EU

This member of the IPKat team has always been fascinated by the remedy of an account of profits, a traditional doctrine of equity that seeks to separate the wrongdoer from his ill-gotten gains. Its relevance to intellectual property infringement is obvious, though its manner of application may not be.  Take, for example, Hollister Inc and another v Medik Ostomy Supplies Ltd [2011] EWPCC 40, a case decided last month, while the pine leaves glistened freshly on a forest of Christmas trees and flocks of red-breasted robins made their annual appearance on the nation's greeting cards.

Medik Ostomy, a lawful business which parallel imported genuine Hollister ostomy products from elsewhere in the EU and sold them in the United Kingdom, slipped up by failing to comply with the requirement for a parallel importer to give prior notice to the trade mark owner that he was going to sell repackaged or relabelled goods bearing the HOLLISTER and DANSAC marks. After Medik Ostomy admitted trade mark infringement, Hollister sought an account of profits, arguing that the profits derived from the infringement were Medik Ostomy's gross profits for supplying the relevant products.

Medik Ostomy disagrees: surely the sum to be paid was nil, or a token sum, because the acts of infringement were due solely to the failure to give adequate notice and Hollister had not suffered any damage as a result of that failure. Citing Case C-348/04 Boehringer Ingelheim KG v Swingward Ltd, it said the appropriate financial remedy should be assessed in the light of the extent of damage caused to Hollister by the infringement, this being assessed in accordance with the principle of proportionality. Even if this were not the case, if and so far as the sum due was to be assessed by looking at its profit, the relevant profit was its net profit it had made (this being its gross profit less properly attributable costs).

Judge Birss QC, sitting in the Patents County Court, came up with the following analysis:

• English law focused on the profits made by the infringer rather than the damage suffered by the proprietor -- these being its net profits [This is not a novel proposition: this Kat can't remember a time when it didn't apply]. This figure was reached by deducting from its gross profits all of its costs that were shown to have nothing to do with the infringed intellectual property right. These included centrally incurred costs for business support, such as costs of distribution and sale, staff salaries, office rental, computer and other support.
  
  
• The fact that some costs would be incurred even if there was no infringement at all was irrelevant: thus a proper proportion of fixed, centrally incurred overhead costs should be deducted from the gross profits.
  
  
• When assessing the amount of the financial remedy for a parallel importer's infringement of the notice requirement, the national court was required by Community law to consider the extent of damage to the trade mark caused by the parallel importer's infringement and the principle of proportionality. However, token or trivial damages were unlikely to be appropriate because the remedy had also to be effective and a sufficient deterrent [Deterrent damages in civil law?  The word "deterrent" appears just once in the IP Enforcement Directive 2004/48 -- and that's in the recital, when it isn't even talking about damages: "(27) To act as a supplementary deterrent to future infringers and to contribute to the awareness of the public at large, it is useful to publicise decisions in intellectual property infringement cases"].
  
  
• The proper approach, when assessing an account of profits for failure to comply with the notice requirement, is as follows:
  
  (i) assess the account of profits on the normal basis under English law;
  
  (ii) consider the extent of damage caused to the proprietor by the infringement and the issue of proportionality, in all the circumstances of the case;
  
  (iii) decide what sum should be awarded having both regard to the sum assessed for (i) and (ii).

• Factors tending towards awarding a lower fraction of Medik Ostomy's net profits included that the infringement arose only from a breach of the notice requirement. Factors tending towards a higher fraction were the need for the remedy to be effective and a sufficient deterrent, and the fact that, had Hollister made the sales which were infringing sales, they would in all probability have earned more by way of profits themselves than Medik Ostomy's gross profit. Whatever sum was awarded was therefore likely not to be giving Hollister more than they probably lost.
  
  
• All in all, Hollister should receive half of Medik Ostomy's profits, this being an effective deterrent to dissuade those engaged in repackaging and relabeling from not giving notice, as well as being proportionate to the reality of this case, which was nothing more than a breach of a procedural requirement.

The IPKat has always been unhappy at the bit in Case C-348/04 Boehringer Ingelheim KG v Swingward Ltd: where the Court of Justice of the European Union said:

"Where a parallel importer has failed to give prior notice to the trade mark proprietor concerning a repackaged pharmaceutical product, he infringes that proprietor’s rights on the occasion of any subsequent importation of that product, so long as he has not given the proprietor such notice. The sanction for that infringement must be not only proportionate, but also sufficiently effective and a sufficient deterrent to ensure that First Directive 89/104 in relation to trade marks is fully effective [Note: like the IP Enforcement Directive, trade mark harmonisation directive 89/104 and its successor say nothing about damages awards having to have deterrent effect]. A national measure under which, in the case of such an infringement, the trade mark proprietor is entitled to claim financial remedies on the same basis as if the goods had been spurious, is not in itself contrary to the principle of proportionality. It is for the national court, however, to determine the amount of the financial remedies according to the circumstances of each case, in the light in particular of the extent of damage to the trade mark proprietor caused by the parallel importer’s infringement and in accordance with the principle of proportionality".

What we actually have is some regrettably judge-made law being built on a platform of judge-made law: this is because not only the need for an award to have a deterrent effect but also the very notion that failure to notify a pharmaceutical trade mark owner of one's intention to perform an otherwise non-infringing act of parallel importing a branded product within the EU are not to be found anywhere in the recitals to the European Union's trade mark legislation or in its substantive provisions.  Why bother with a legislative procedure at all, when you have a court to make the rules up as it goes along?

Merpel wonders how other EU Member States have been handling 'failure-to-give-notice' damages and account of profit claims: is there a best-buy jurisdiction for those who fail to give notice of intention to import? Presumably such litigation will only occur in destination countries -- these being basically the more profitable Northern/Scandinavian zones.