In the recent case of Design & Display Ltd -v- Ooo Abbott and Anr [2016] EWCA Civ 95, the Court of Appeal heard an appeal by the Defendants, Design & Display, against the decision of His Honour Judge Hacon in the IPEC regarding an account of profits.
The case concerned infringement by Design & Display of a patent for a snap-in insert for use with display panels. The inserts are made from a resilient metal, such as aluminium, for use in displays fitted onto shop walls. In his Judgment on liability in 2013, Mr Justice Birss held that the patent was valid and that Design & Display had infringed through the manufacture and sale of their own snap-in panels. As a result, the Claimant was given the option whether they wanted financial compensation to be the damage that the Claimant had suffered or an account of the profits "derived from the infringement" by the Defendant (under s.61(1)(d) of the Patents Act 1977); the Claimant elected for the latter. The trial on the account of profits was heard by His Honour Judge Hacon, after which, the Defendant appealed.
The two main issues which were raised by the Defendants on appeal were:
- Whether they were liable for the whole of the profits made on the sale of non-infringing panels sold together with infringing inserts; and
- Whether they were entitled to set off any part of their general overheads against the gross profit for which they were accountable.
In the Court of Appeal, Lord Justice Lewison delivered the leading judgment.
Liability for the whole of the profits?
Lord Justice Lewison began by stating that the purpose of an account of profits was to prevent the unjust enrichment of the Defendant through the infringing use of the patentee's invention. This requires the Court to look at what the infringer has done as a matter of fact. First, the Court must determine the inventive concept of the invention. Second, the Court must consider causation, specifically what profit was generated by the infringement of the patent; i.e. assess how much profit the product as a whole generated, estimate what proportion of that was due to the infringement, and apportion accordingly. Importantly, he stated that the test of causation differed between an account of profits and compensatory damages for loss, the latter determined on a tortious basis by a wider 'but for' test.
Lord Justice Lewison reasoned that, traditionally, it is difficult to identify a causative link between infringement and profit where the concept of the invention was incorporated into a more complex product (known as a convoyed good). In such instances, it is appropriate to apportion the profits the Defendant must account for. He also considered those cases where, on the facts, the convoyed product would not have existed at all but for the infringement. Finally, he considered those cases where the infringement was an essential ingredient in the convoyed product as a whole.
In the first instance decision on quantum, His Honour Judge Hacon had held that Design & Display only sold non-infringing panels with infringing inserts. Thus, the non-infringing element of the sale was indistinguishable from the infringing element of the sale and apportionment of the profit was not possible. The key assumption was that the respective components would not be sold separately.
Lord Justice Lewison held that this finding was made in error: the question was not whether the sale of the panel would have happened separately to the insert, but rather how much of the profit on the sale was derived from the infringement. . He cited the example given in an earlier Australian case (Dart Industries Inc v Decor Corp PTY Ltd [1994] FSR 567) of a manufacturer selling a car with a patented brake; if the car did not have brakes, the manufacturer could not have sold it, but clearly it did not need to have that particular brake, and accordingly it would be unjust for an account of profits to be assessed as the whole profit derived from the car. Lord Justice Lewison went on to conclude that in a case in which the infringement does not “drive” the sale, 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 product that incorporated an insert that the customer wanted a product that incorporated the infringing insert. The mere fact that product and insert went together was therefore not sufficient to establish that the whole of the profit from product and insert was derived from the invention. Had His Honour Judge Hacon decided that the infringing insert was an essential ingredient of the whole product his finding may have been justified. As it was, he had erred.
Overheads
Profit is of course dependent on overheads, and the sums attributable to overheads were also the subject of this appeal. In terms of apportioning general overhead of the business, Lord Justice Lewison stated the question is whether:
- The overheads would have been incurred anyway, even if the infringement had not occurred; and
- The sale of infringing products would not have been replaced by sale of non-infringing products.
In these circumstances an allowance for general overhead of the business will not be permitted.
The purpose of this is to prevent the Defendant deducting general overheads from the sum it has to pay to the Claimant where the overheads would have actually been incurred anyway through its other lawful activities. If the infringing activity meant the Defendant was operating at full capacity, general overheads will only be deductible if the same cost would have been incurred through lawful trading. In the words of Lord Justice Lewison, if the infringer establishes that, but for the infringement, it would have manufactured or sold non-infringing products, then to the extent the actual overheads would have been the same, they may be deducted after apportionment for calculating the profits that must be accounted for.
At first instance, Design & Display argued that their overheads would have supported a non-infringing business because the volume of sales they made of the product would have remained the same. It did not matter to customers whether the insert was infringing or not. Design & Display argued that this showed they were working to capacity and there was no further business to be had by selling non-infringing products. Therefore, the general overhead was deductible. However, His Honour Judge Hacon rejected this argument on the basis that it did not show they were operating at capacity: at most, it showed the market was indifferent to whether the inserts were infringing or not.
Lord Justice Lewison stated that His Honour Judge Hacon had, essentially, found that the same overheads would have been incurred had non-infringing products been sold. He then stated that what mattered was whether Design & Display would have used the same overheads in generating profits by lawful trading. He held that Design and Display's argument was legally correct, what mattered was whether they could prove it on the facts. Because His Honour Judge Hacon had rejected this argument, he therefore did not go on to consider the facts; in the absence of decided facts to which the Court of Appeal could apply the right test, the case had to be remitted back to IPEC for determination.
For these reasons, the Court of Appeal found His Honour Judge Hacon had erred and the case was thus remitted to the IPEC for the account of profits to be re-determined.
Comment
The findings of the Court of Appeal will have ramifications for successful claimants who are considering which remedy to elect. If an account of profits is preferred, claimants will need to consider the time and cost which may now be required in scrutinising the apportionment of profits. This may be easier when dealing with a discrete component which infringes the patent, even if part of a complex product, such as a foot-brake in a car. However, the task is more onerous where the infringing component is an essential part of the defendant's product. Particularly difficult convoyed goods may be pharmaceutical products, products comprising a mixture of software and hardware or products; it is a particular difficulty, for example, in the mobile phone sector where a product such as a handset may incorporate hundreds of patented inventive concepts to identify the profit derived from an infringement of one or a few patents.
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