Accounting of Profits with the Court of Appeal: Hollister v Medik Ostomy Part II

Damages, Account of Profits and EU Law

The motto that some infringers
abide by when preparing their
Tring statement

As regards to remedies, the various pieces of trade mark legislation make clear that an action for infringement of a UK or Community registered trade mark provides relief by way of damages or an account of profits. Under UK law, the central purpose of an inquiry as to damages is to restore the claimant to the position he would have been in if the infringement had not been committed. Alternatively, a claimant may seek an account of profits which is an equitable remedy and designed to deprive the infringer of the profits he has made as a result of the infringement. The court has discretion whether or not to award an account of profits. The court may not award an account of profits if the infringer was innocent or the trade mark owner delayed in bringing proceedings. The losses the claimant has suffered by reason of the infringement are not relevant. To determine on which basis - damages or an account - a claimant will proceed, the court will normally order a defendant provide disclosure (usually by way of an Island Records v Tring statement) and will direct the claimant to make his election within a reasonable time.

These principles of damages under national law, recognized the Court of Appeal, had to be compatible with Community law and namely the Enforcement Directive's (Directive 2004/48/EC) Article 13 which deals with the assessment of damages. These provisions set out the various factors that judicial authorities should take into account when awarding damages (which, is interpreted broadly to also include account of profits - see Recital 26). Article 13 has itself been implemented by Regulation 3 of the Intellectual Property (Enforcement) Regulations 2006 which require that when awarding damages all appropriate aspects will be taken into account including any lost profits the claimant has suffered and any unfair profits made by the defendant and other non-economic factors including moral prejudice.

The standard "money shot"

None of these provisions, held the Court of Appeal, are interpreted as meaning that an account of profits is inconsistent with the Regulation or the Enforcement Directive. Further, it is established law that it is for the domestic law of Member States to ensure the effective protection of rights under Community law. Where Community law does not lay down specific sanctions for infringement, such as in the case with trade mark infringement, national authorities are tasked with adopting appropriate measures which must be proportionate but also effective and a sufficient deterrent to ensure that the rights are fully effective (Boehringer II). The CJEU in Boehringer II made clear that the remedy that is provided for when spurious products are put on the market must also be provided for when products are put on the market in breach of one of the BMS conditions, namely Condition 5 -- in both cases the products should not have been put on the market. Being able to claim damages on the same basis is not contrary to the principle of proportionately and it is for the national court to determine the amount of compensation in the light of the circumstances of each case. The Court of Appeal held that the remedy of an account of profits plainly satisfied these principles because that remedy simply deprived the infringer from profits he made from the activity that he should have never engaged in, it does not contain any element of punishment and acts as a deterrent because an infringer knows he cannot profit from his actions. Further, the remedy, being an equitable remedy, is discretionary and not awarded if it is unjust to do so. Medik never argued that it was unjust, indeed it agreed to the consent order directing that the claimant would elect between an inquiry as to damages or an account of profit.

Lord Justice Kitchin explained that he felt reinforced in this conclusion by reference to the German Federal Supreme Court case of Zoladex (Case IZR 87/07) of 29 July 2009. The case concerned similar facts as Hollister. The trade mark owner sought surrender of the defendant's entire profits. The German Federal Supreme Court explained that recovery of the defendant's profits was not contrary to Community law.

The Court of Appeal's Decision

Applying this conclusion to the facts of the appeal, the Court of Appeal held that it was not permissible to embark on the second step of Judge Birss QC's three-step approach - an assessment of the damage caused to the claimants by the infringement and a general inquiry into the proportionality of the remedy by reference to the claimants' state of mind and whether the sales had some impact on the purposes underlying the BMS condition. Assessment of the damage caused to the claimant forms

"no part of an account of profits made by an infringement and the approach adopted by the judge constitute an illegitimate amalgamation of two quite different ways of assessing compensation".

It was also not permissible to embark on the third step which involved the weighting of various factors all of which did not form part of "a conventional account of profits as a matter of domestic law" and in the Court of Appeal's judgment was not required by the decision of the CJEU in Boehringer Ingelheim KG v Swingward Ltd [2007] ETMR 71.

Lord Justice Kitchin telling it like it is on
account of profits

The Court of Appeal further held that the judge was entitled to deduct any direct costs associated with the infringement (i.e. costs that would not have been incurred but for the infringement) but was not allowed to deduct general overhead costs.  Medik had argued, citing Celanese international Corp v BP Chemicals Ltd [1999] RPC 203, that it was entitled to deduct a portion of general overheads - cost of premises and general staff costs. Judge Birss QC agreed with Medik and considered that a proportion of fixed, centrally incurred costs are deductible and, in any event, he was bound by Celanese. The Court of Appeal disagreed, explaining that for overhead costs to be deducted, a defendant must show that the relevant overheads are properly attributable to the infringing activity, otherwise the court would be allowing the defendants to profit from an unlawful activity. A defendant should not be permitted to simply allocate a proportion of its general overheads to an infringing activity. Whether or not an overhead is properly attributable to the infringing activity depends on the facts and circumstances. For example, the Court held:

"...it may be relevant to consider whether a defendant has surplus capacity, whether the infringing activity was an additional line to an established business and whether the defendant's overheads have been increased as a result of the infringing activity or whether its overheads would have been lower had it not engaged in that activity.

We heard little argument on the question of opportunity costs and they have formed no part of the case advanced by either side so I need express no final conclusion upon them. Nevertheless, I believe that if the defendant's business is not running to capacity, the defendant has not foregone an opportunity to make and sell other non infringing products, and the defendant's general overheads have not been increased by reason of the infringement and would have been incurred in any event, then to allow it to attribute such overheads, or a proportion of them, to the infringements would be to allow it to profit from its unlawful activity. I believe such a result would not be just and would undermine the purpose of the account.

In this case Medik has not attempted to prove its business was running to capacity or that, but for the infringement, it would have sold some other products. Moreover, Medik has not attempted to prove that the relevant general overheads increased as a result of its infringement or that those overheads would have been lower if it had not infringed. In my judgment it follows that the judge fell into error on this issue too. He ought not to have allowed Medik to deduct a proportion of its general overheads without evidence that such overheads were properly attributable to the importation and sale of the infringing products, and that he did not have."

But it was not all bad news for Judge Birss's judgment, concluding their decision, the Court of Appeal did not overturn his finding on the number of infringing products sold.

The AmeriKat has some sympathy for the reasoning of the lower court - why should a party have to compensate a rights holder for an activity that probably didn't cause much (if any) harm besides interference with a "procedural requirement" albeit that it is dressed up as a right?  Kitchin LJ says at paragraph 47 that "it is wrong to characterize the failure to give notice simply as a procedural deficiency" and that the CJEU has explained that repackaging is, in itself, prejudicial to the subject mater of the mark.  But why?  If Condition 5 is the only of the BMS conditions not fulfilled, where is the prejudice?

Nevertheless, no matter how convincing A-G Sharpston's Opinion was in Boehringer II or how innovative Judge Birss's judgment is in this case, the CJEU's dicta is clear on how damages for breach of Condition 5 should be assessed - like that of suprious goods. Faced with such a wall of case law, the Court of Appeal was bound to follow suit.