How much is that patent in the window? Court of Appeal in Design Display provides guidance on account of profits

Biggie once said "Mo money, mo problems"  The AmeriKat

feels the opposite, unless she is having to under go

a damages assessment

The AmeriKat is intimately familiar with the challenges that can face IP litigators when it comes to calculating damages or an account of profits as a result of IP infringement.  Besides general damages maxims, there is relatively limited judicial guidance given that "its all very fact specific" and parties often see sense and settle before making it to a full blown damages inquiry. The recent Court of Appeal case of Design & Display Limited v OOO Abbott & another [2016] EWCA Civ 95 is therefore a welcome addition to the patent litigator's toolbox when seeking to calculate an account of profit as Katfriend Eibhlin Vardy (A&O) explains:

"Background and technology

The case concerned Abbott's patent for covering 'snap-in' inserts used for shop panel display walls. Snap-in inserts have an advantage over 'slide-in' inserts in that slide-in inserts can be difficult to install where the edge of the display panel is not accessible (for example, at a corner). Snap-in inserts overcome this problem because they can be fitted from the front of the display panel with a spring action. 

Design & Display manufactured and sold retail equipment including display panels for use in shops. During the relevant period, it sold the panels with inserts separately for subsequent assembly by the customer and also pre-assembled displays of which the panels with inserts were part ('incorporated' panels and inserts).

At first instance, Birss J held that the patent was valid, and infringed by Design & Display ([2013] EWPCC 27). Abbott elected for an account of profits derived by from the Design & Display's infringement under s61(1)(d) of the Patents Act 1977, rather than compensatory damages. That account of profits was heard in 2014 in the Intellectual Property and Enterprise Court (IPEC) by HHJ Hacon ([2014] EWHC 2924) in a hearing lasting one day which, although included evidence, did not include expert accountancy evidence. It is from this judgment that the appeal was brought by Design & Display. The issues on appeal were as follows:

1. Was Design & Display liable for the whole of the profits made on the sale of the panels sold together with infringing inserts?

Lewison LJ reiterated at the outset that the purpose of an account of profits is to quantify the extent to which the infringer would be unjustly enriched if he were to retain the profits derived by him from the infringement. The approach of the Court is to firstly identify the patentee's invention, and secondly, decide what profits the infringer derived from the use of that invention. The latter issue becomes particularly complex where the infringer sells products associated with the subject matter of the patent, or products into which the subject matter of the patent is incorporated. The Court of Appeal's judgment reminds litigants that "an account of profits looks at the facts through the lens of what the infringer has done; and what the patentee might have suffered by way of loss in the real world is irrelevant."

(a) identify the inventive concept

At the inquiry stage, the IPEC found that the inventive concept was the composite idea of an insert made of a resilient "metal and its having a particular shape and its interacting with the slot of the panel in a particular way, such that the metal insert could engage with the panel by snap-in means". This was (at least on its face), a different formulation to the inventive concept identified by Birss J at the liability stage.

Counsel for Design & Display argued that HHJ Hacon should not have gone behind the inventive concept identified by Birss J in the liability judgment, and that this created an estoppel issue. This submission was rejected by the Court of Appeal. The scope of the invention at the inquiry stage is not necessarily coterminous with the scope of the claims at the liability stage. At the liability stage, Birss J's only concern was to determine whether the claim in issue was obvious over the prior art, and he construed the invention with that question in mind. Nor was there any issue with HHJ Hacon's substantive characterisation of the inventive concept, which was not in fact that dissimilar to Birss J's formulation when the liability judgment was read as a whole.

(b) the issue of causation

The Court of Appeal noted that it has consistently been said that an assessment of damages for patent infringement and the taking of an account of profits proceed on a common principle of legal causation. However, the Court of Appeal noted that the question of compensatory damages and an account of profits are in fact different questions. Analogies with previous cases involving the question of damages (such as Gerber v Lectra [1997] RPC 443) should be treated with some caution given that the two remedies are distinct.  

Design & Display accepted that the amount of profit made on the sale of the incorporated panel which is attributable to the infringing insert must be included in the account. However, as a matter of legal causation, it submitted that this was not a case where the article itself (the incorporated panel) would not have come into existence at all but for the infringement. On the facts, that was demonstrated by the fact that the defendant continued to sell incorporated panels after it ceased to use the infringing insert without any drop in sales. 

The AmeriKat once pressed a seal's button...
...it didn't end well.  

The Court of Appeal drew assistance from the Australian case of Dart Industries Inc v Decor Corp Pty Ltd [1994] FSR 567 which involved an account of profits. That case involved the manufacture of plastic kitchen canisters. The canisters had lids incorporating a press-button seal.  The seal infringed Dart's patent. The Court directed that profits for which the infringer had to account were the profits from the manufacture and sale of the complete canisters, given that the particular containers would never have been produced without the infringing seal. 

On the facts of the present case, Design and Display accepted that where the customer specified, or was recommended the infringing inserts because of the advantages that they offered for particular display areas, the sale of the infringing inserts did drive the sale of the compatible panels in which they were incorporated. However, in other cases, the customer was indifferent as to whether a 'snap-in' or 'slide-in' insert was supplied. In those circumstances, HHJ Hacon found that although the sale of the infringing inserts were not the driving force behind the sales of panels this made no difference because Design & Display chose to sell infringing inserts, and the sales of the panels went together with those infringing inserts. Counsel for Design and Display submitted that this was incorrect - this was not a case in which the article itself (the incorporated panel) would not have come into existence but for the infringement.  The overall profit should therefore be apportioned between the insert on the one hand and the panel on the other.

Lewison LJ for a unanimous Court of Appeal agreed that the judge should have apportioned the overall profit in relation to these sales, and explained his conclusion by reference to the example given in Dart v Decor, involving a patented brake:

"If the car did not have brakes, the manufacturer could not have sold it, but it did not have to have that particular brake. In those circumstances the Full Court clearly thought that it would be unjust to charge the manufacturer with the whole profit made on the car; and I agree with them. In my judgment the legal error that the judge made was to ask whether the sale of the panel plus insert would have happened separately rather than to ask himself how much of the profit on the sale was derived from the infringement.  

Automobile examples, the "go to" in patent cases

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. 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 that incorporated the infringing insert. Mr Cuddigan argued that the infringing inserts and the slot were the "very essence" of the incorporated and unincorporated panels. But the judge made no such finding, and his observations at [32] suggest the contrary. In addition I do not consider that the judge was correct at [31] in saying that "because the sales went together, the sale of inserts caused … the sale of the panels…" The mere fact that the two went together is not, in my judgment, sufficient to establish that the whole of the profit earned on the composite item was derived from the invention. One might just as well say that the sale of the panel caused the sale of the insert. As the judge himself recognised the customer specifies panels, and on the hypothesis that he was considering at [31] the customer is indifferent about the inserts (provided that some form of insert is included). On the judge's approach, because the sale of the patented brake went with the sale of the car, the whole of the profit on the car would be included in the account. If the judge had found on the facts that the infringing insert was "the essential ingredient in the creation of the defendant's whole product" (i.e. the incorporated panel), then he would have been justified, on the facts, in declining to apportion the profit. But I cannot see that he made that finding."

2. Was Design & Display entitled to set off any part of their general overheads against the gross profit for which they are accountable?

Lewison LJ again obtained assistance from the High Court of Australia in Dart v Décor to articulate the rationale behind the rule allowing an infringer to set off certain general overheads against gross profit:

"In calculating an account of profits, the defendant may not deduct the opportunity cost, that is, the profit forgone on the alternative products. But there would be real inequity if a defendant were denied a deduction for the opportunity cost as well as being denied a deduction for the cost of the overheads which sustained the capacity that would have been utilised by an alternative product and that was in fact utilised by the infringing product. If both were denied, the defendant would be in a worse position than if it had made no use of the patented invention. The purpose of an account of profits is not to punish the defendant but to prevent its unjust enrichment." (original emphasis)

The Court of Appeal stated that the question posed to the court is a relatively simple, even if it may not be easy to answer: if the defendant had not infringed the patent would he have carried on a non-infringing business which would have been sustained by the overheads in fact used to sustain the infringement?

Court of Appeal at the RCJ

Lewison LJ noted that HHJ Hacon had in effect found that the same overheads would have been incurred in the sale of non-infringing products. The Court of Appeal thought that whether those non-infringing products were display panels or a different product completely did not matter. What matters is that if it had not been selling infringing products Design & Display would have used the same overheads in generating profits by lawful trading. What the judge appears "to have held in that paragraph is that Design & Display would have increased its business (and hence its overheads) to meet expanding demands. But the logic of that finding is that if Design & Display had not been selling infringing products it would have been able to take on new work without any increase in overheads; or if it did not take on new work, would have reduced its overheads."

Furthermore, the judge had proceeded on the basis that running to maximum capacity was a threshold condition for set-off, and that it had to have the consequence that alternative business was displaced. This was rejected by the Court of Appeal, who instead approved HH Judge Pelling QC's summary in Woolley v UP Global Sourcing [2014] EWHC 493:

"… in any case where a defendant seeks to deduct an element of general overheads it will be for it to prove its business was running to capacity or that but for the infringement it would have sold other products or that its overheads would have been lower if it had not infringed."

However, Lewison LJ noted that if an infringer has spare capacity which he has not used, the court may be sceptical about his evidence that he would have used his overheads to support a non-infringing line of business. As Counsel for Abbott put it: "if you had spare capacity why did you not use it to support the non-infringing line of business?"

And the money?

We still do not know the value of Abbott's  award. On the basis of the facts found by the judge at the inquiry stage, it was not possible for the Court of Appeal to assess the profits to which the patentee is entitled. The unfortunate consequence is that the issues of apportionment and the deduction of overheads from gross profits, have now been remitted to IPEC, almost three years after the patent was found to be valid and infringed in the then named Patents County Court. 

The Court of Appeal concluded by yet again reminding litigants that "the cases emphasise that mathematical precision is impossible, and that the evidential burden lies on the infringer." 

The AmeriKat wonders if the Court of Appeal's decision will have a cooling effect on patentees electing for an account of profits given the apportionment of profits will be highly scrutinized and subject to considerable evidence as to what the "driving force" is for the sale of a product incorporating the patented component.  Merpel muses that this decision may make damages assessments based on the patentee's lost profit seem like the better option.