SDL's lost chance for Ego Boost

How do you calculate damages to compensate an injured business for something that never happened? This is the underlying issue when a person who has been wrongly threatened with proceedings for patent infringement is able to establish that the threats received were unwarranted and that, in result of them, his business activities didn't turn out the way he'd planned.  A recent decision illustrates how counterfactual reconstruction can guide the court in assessing the proper sum to award.  The Kats are all grateful to Katfriend and occasional guest blogger Paul England (Taylor Wessing) for teasing out the relevant facts and explaining them so succinctly here:

Factual Background

SDL Hair Ltd v Next Row Ltd & others [2014] EWHC 2084 is the inquiry as to damages judgment of Judge Hacon in the Intellectual Property Enterprise Court, England and Wales, that followed the decision of 14 June 2013 on liability by Mr Recorder Richard Meade QC [noted on PatLit here]. Mr Meade made a declaration that three letters and an email sent by certain of the defendants constituted groundless threats of patent infringement of UK patent No 2 472 483. The claimant in the inquiry, SDL, and six other parties, had been sued for infringement of the patent in that action. 

The alleged infringements in the liability proceedings concerned the offer for sale in the UK by SDL of 'Ego Boost', a unit for heating hair rollers using induction heating technology. This activity began in April 2012 at a trade show in Manchester called 'Pro Hair Live'. This prompted interest from companies including the QVC shopping channel, and the distributors Alan Howard. A letter dated 3 May 2012 to SDL from representatives of the first and second defendants followed, after which came three further letters to each of QVC, Alan Howard and another distributor called Ideal Hair & Beauty Supplies Ltd, all dated 9 May 2012. These letters alleged that the Ego Boost product fell within the claims of the patent application. The latter letter was not at issue in the inquiry, but SDL claimed that the other letters caused disruption to their business in sales of the Ego Boost. In particular:

Disruption following from the threats

SDL

On receiving the letter of 3 May 2012 SDL had to ask its Chinese manufacturer to stop production of its first order of 6,000 units, which had been placed in February 2012. Further to the receipt of an engineer's opinion that the Ego Boost did not infringe the patent, the Chinese manufacturer was asked to begin production on or about 18 June 2012. The overall effect was that all deliveries of Ego Boost to SDL were delayed by six weeks.

QVC

Shortly after receiving their letter, QVC suspended the special promotion it had arranged for Ego Boost, known as 'Today's Special Value' or 'TSV' whereby each day one product is chosen for enhanced marketing on the channel. The TSV was then cancelled on the advice of QVC's in-house counsel, until after the judgment from Mr Meade – a hiatus from 3 July 2012 to 14 June 2013. A new TSV was subsequently organised in August 2013 for Ego Boost. SDL had to negotiate a reduction of £5 in the price charged to QVC per unit in order to obtain this TSV.

Alan Howard

Despite concerns, Alan Howard persevered with the product after receiving its groundless threat. It spent about £200,000 on the promotion of the product in May. However by mid-June 2012 there was a large drop-off in orders and a loss of confidence in the Ego Boost product at the distributor. To take the product forward the price per unit charged to Alan Howard was discounted, but the company nonetheless reduced its sales targets and directed the energies of its sales team elsewhere. Customer enthusiasm for the product also reduced and there were some cancellations of orders.

When products arrived, work was conducted on a second round of promotion in the September period, prior to receiving the further groundless threat by email from the third defendant on 18 September. As a consequence of the email a decision was taken to do no further promotion of the Ego Boost, and sales of the product were largely limited to fulfilling pre-existing orders. A further consignment of product was nonetheless received, approximately two thirds of which was sold, leaving over 1,000 units remaining in Alan Howard's warehouse by the end of 2012 with no further orders until after the judgment of Mr Meade. Eventually, less than a quarter of this stock was sold, between September and Christmas 2013. Alan Howard's sales force were paid £5 by SDL for each Ego Boost sold during this period. A reduction of £5 in the price of each Ego Boost was also agreed for projected sales in 2014 to 2016.

The claim for loss

The question for Judge Hacon was how to determine the losses to SDL arising from the letters to SDL, QVC and Alan Howard and the email to Alan Howard.

In summarising the general principles applicable to inquiries as to damages, the judge drew attention to Allied Maples Group v Simmons & Simmons [1995] WLR 1602, and following authorities, on loss of chance. The principle established by Allied Maples is that where the claim for past loss depends on the hypothetical act of a third party, i.e. where the claimant has to prove a causal link between an act done by the defendant and the loss sustained by the claimant, the court must determine such causation on the balance of probabilities. However, the quantification of the claimant's loss in such circumstances is decided not on the balance of probability but on the court's assessment, often expressed in percentage terms, of the loss eventuating.

In total, at trial, SDL claimed nine heads of loss based on the reaction to the unjustified threats, plus interest. Judge Hacon divided these up as follows:

First head of loss – the cancelled TSV

SDL claimed the loss of profits corresponding to lost sales of 3,600 units from what would have been the TSV on 3 July 2012. SDL's claim under this head was dealt with as the loss of chance of having two TSVs (a second one in November 2012), which chance depended on the attitude taken by QVC. However, making a counterfactual assessment on the hypothetical basis that the threats had never been made, the judge found that, even if the threat had not occurred, the earliest any units could have been delivered was 2 July. This was too late for the TSV arranged for 3 July anyway. Nonetheless, SDL had a substantial chance and not merely a speculative one, of benefiting from a second TSV in November. That chance was lost because of the QVC letter. The chances of success at this TSV were 35%. The total loss to SDL caused by the threat would be the same as the loss of the profit it would have made at the first of the TSVs, had it happened, assessed on the basis of the cost to SDL per unit (£33.48), the price charged to QVC per unit (£56.62) and the number of units that would have been sold (held to be 3600 units). The total loss would be £(56.62 – 33.48) x 3600 = £83,304. But this figure must then be adjusted to 35%. This gave the (rounded-up) figure of £30,000 loss.

Second head of loss – profits on lost sales to QVC from TSV to judgment

This head of loss is tied to the first. Following the hypothetical TSV in November 2012, it was held likely that there would have been further sales up to judgment on 14 June 2013. This head of loss must also be adjusted to 35%. The judge was prepared to assume some loss of sales in the period December 2012 to 14 June 2013 caused by the QVC Letter. Sales were assumed at an average rate of 200 per month from December 2012 to 14 June 2013. This is (200 x 6½ months) = 1300 sale

Third head of loss – reduction in price charged to QVC

The third head of loss claims the loss caused by SDL having to negotiate a reduction of £5 in the price charged to QVC per unit in order to obtain the TSV in August 2013. SDL claimed that if there had been no threats QVC would not have negotiated the price down. However, in Judge Hacon's judgment, QVC would have obtained the lower price even in the absence of the threats.

Fourth to Ninth heads of loss – Alan Howard

All of these claimed losses in relation to lost sales to, and price reductions obtained by, Alan Howard were held not to be caused by the threats. Instead, it was held that the disillusionment that set in at Alan Howard with regard to the first promotion of Ego Boost, particularly that of its sales force, was due to the failure of SDL to supply product when they had said they would be able to (as above, even in the counterfactual scenario, this would have been delivered much later than promised and too late to benefit from the first promotional efforts of Alan Howard). This lack of faith in the product followed through to the second promotion in the run up to Christmas 2013 and was also responsible for the poor sales in that period.