Inquiries as to Damages in the Intellectual Property Enterprise Court: Henderson v All Around the World Recordings Ltd.

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I last discussed this litigation in Success Fees and ATE Premiums in the Patents County Court: Henderson v All Around the World Recordings Ltd 4 May 2013. I set out the basic facts in my case note:

"This was an action for infringement of a performer's rights which Judge Birss QC (as he then was) decided in Henderson v All Around the World Recordings Ltd and Another [2013] EWPCC 7 (13 Feb 2013)....... She had not been entirely successful and the costs of an unsuccessful copyright claim and half the costs of an application were awarded against her but she had succeeded overall."

The claimant had entered a conditional fee agreement with specialist solicitors and counsel because it was the only way she could bring this litigation. Her total costs and disbursements including success fees and after-the-event premiums would have been £232,676.20 had they been allowed but Judge Birss QC (as he then was) awarded her only £52,484.25.It followed that the balance would have to come from whatever moneys she might receive on an inquiry as to damages or an account of profits.

It is worth explaining at this stage to readers who are not lawyers and indeed lawyers who do not practise in England or Wales or specialize in intellectual property law non-specialist lawyers that intellectual property cases usually proceed in two stages in this country.  The first stage is the determination of liability which may require a hearing with oral evidence from witnesses known as a "trial". The second stage, which typically takes place a year after trial, is the assessment of the money that is due to the claimant which may be damages (compensation for his loss) which are determined at a hearing called an "inquiry" or an account of profits (surrender of the wrongdoer's ill gotten gains).  It is a fundamental principle of English law that a successful claimant can have damages or an account of profits or not both. The claimant will, of course, opt for the remedy that brings him more money but in most cases he will not know or even care what that is until after trial,   In this case, the claimant opted for damages.  Judge Birss QC ordered an inquiry which came on before His Honour Judge Hacon in Henderson v All Around the World Recordings Ltd [2014] EWHC 3087 (IPEC) (3 Oct 2014).

When a judge orders an inquiry he usually directs the claimant to serve points of claim on the defendant pursuant to paragraph 5 of PD40A - Accounts, Inquiries etc.  These are a type of pleading or statement of case where the claimant sets out his claim for money.   They are ordered because pleas for damages tend to be very short in the claimant's particulars of claim. The formula that I tend to use goes something like this:

"The claimant has suffered loss and/or damage as a result of the defendant's wrongdoing the precise nature and full extent of which can only be determined upon an inquiry."

It is usually necessary to prove that the defendant has suffered some kind of loss or damage at trial especially in causes of action like passing off where damages is one of the elements of the cause of action but there is no need to go into any detail.  The only exception is where the claimant seeks additional damages in a copyright, rights in performances or design right claim because paragraph 22.1 of the Part 63 Practice Direction - Intellectual Property Claims ("PD63") requires these to be pleased in the particulars of claim.

In this case the claimant claimed damages under the following heads:

(1)  Loss of royalties from a record deal other than one with the defendant record company;
(2)  Further damages under reg. 3 of The Intellectual Property (Enforcement, etc.) Regulations 2006 SI 2006 No 1028 ("the enforcement regulations"); and
(3) additional damages pursuant to s.191J (2) of the Copyright, Designs and Patents Act 1988 ("CDPA").

In his skeleton argument and oral submissions the claimant modified the first head into a claim for

"royalties that would have been paid had there been a licence which would have made the infringing acts lawful, negotiated between willing licensor and willing licensee, sometimes called the 'user principle')."

Before the inquiry the judge struck out allegations in the points of claim seeking damages for "unfair profits" under the enforcement regulations since that was tantamount to a claim for profits as well as damages which (as I have observed above) is not allowed in English law and additional damages since she had not pleaded those in her particulars of claim as required by para. 22 .1 of PD63.  The claimant applied for the allegations to be restored and as the defendant had addressed both points in its skeleton argument the judge allowed argument on both points which is perhaps just as well for we now have a definitive statement of the law on those points from Judge Hacon.

As to the general law relating to inquiries as to damages the judge referred to his previous decision in SDL Limited v Next Row Limited [2014] EWHC 2084 (IPEC) at paragraph [31]:

"I derive the following principles from authorities in relation to an inquiry as to damages:

(1) A successful claimant is entitled, by way of compensation, to that sum of money which will put him in the same position he would have been in if he had not sustained the wrong, see Livingstone v Rawyards Coal Co. (1880) 5 App.Cas., 25 per Lord Blackburn at 39.

(2) The claimant has the burden of proving the loss, see General Tire and Rubber Company v Firestone Tyre and Rubber Company Limited [1976] RPC 197, at 212.

(3) The defendant being a wrongdoer, damages should be liberally assessed but the object is to compensate the claimant, not punish the defendant, see General Tire at p.212.

(4) The claimant is entitled to recover loss that was (i) foreseeable, (ii) caused by the wrong and (iii) not excluded from recovery by public or social policy, see Gerber Garment Technology Inc v Lectra Systems Ltd [1997] RPC 443, at 452.

(5) In relation to causation, it is not enough for the claimant to show that the loss would not have occurred but for the tort. The tort must be, as a matter of common sense, a cause of the loss. It is not necessary for the tort to be the sole or dominant cause of the loss, see Gerber at p.452.

(6) An inquiry will generally require the court to make an assessment of what would have happened had the tort not been committed and to compare that with what actually happened. It may also require the court to make a comparison between, on the one hand, future events that would have been expected to occur had the tort not been committed and, on the other hand, events that are expected to occur, the tort having been committed. Not much in the way of accuracy is to be expected bearing in mind all the uncertainties of quantification. See Gerber at first instance [1995] RPC 383, per Jacob J, at 395-396.

(7) 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. If on balance the act caused the loss, the claimant is entitled to be compensated in full for the loss. It is irrelevant whether the court thinks that the balance only just tips in favour of the claimant or that the causation claimed is overwhelmingly likely, see Allied Maples Group v Simmons & Simmons [1995] WLR 1602, at 1609-1610.

(8) Where quantification of the claimant's loss depends on future uncertain events, such questions are decided not on the balance of probability but on the court's assessment, often expressed in percentage terms, of the loss eventuating. This may depend in part on the hypothetical acts of a third party, see Allied Maples at 1610.

(9) Where the claim for past loss depends on the hypothetical act of a third party, i.e. the claimant's case is that if the tort had not been committed the third party would have acted to the benefit of the claimant (or would have prevented a loss) in some way, the claimant need only show that he had a substantial chance, rather than a speculative one, of enjoying the benefit conferred by the third party. Once past this hurdle, the likelihood that the benefit or opportunity would have occurred is relevant only to the quantification of damages. See Allied Maples at 1611-1614."

In addressing the claimant's first head of damage as actually argued. the royalties that would have been negotiated between a willing licensor and willing licensee negotiating at arms' length, the judge reminded himself of the principles which Mr Justice Arnold had listed in  Force India Formula One Team Limited v 1 Malaysia Racing Team Sdn Bhd  [2012] RPC 29, [2012] EWHC 616 (Ch):

"(i) The overriding principle is that the damages are compensatory: see Attorney-General v Blake at 298 (Lord Hobhouse of Woodborough, dissenting but not on this point), Hendrix v PPX at [26] (Mance L.J., as he then was) and WWF v World Wrestling at [56] (Chadwick L.J.).

(ii) The primary basis for the assessment is to consider what sum would have [been] arrived at in negotiations between the parties, had each been making reasonable use of their respective bargaining positions, bearing in mind the information available to the parties and the commercial context at the time that notional negotiation should have taken place: see PPX v Hendrix at [45], WWF v World Wrestling at [55], Lunn v Liverpool at [25] and Pell v Bow at [48]–[49], [51] (Lord Walker of Gestingthorpe).

(iii) The fact that one or both parties would not in practice have agreed to make a deal is irrelevant: see Pell v Bow at [49].

(iv) As a general rule, the assessment is to be made as at the date of the breach: see Lunn Poly at [29] and Pell v Bow at [50].

(v) Where there has been nothing like an actual negotiation between the parties, it is reasonable for the court to look at the eventual outcome and to consider whether or not that is a useful guide to what the parties would have thought at the time of their hypothetical bargain: see Pell v Bow at [51].

(vi) The court can take into account other relevant factors, and in particular delay on the part of the claimant in asserting its rights: see Pell v Bow at [54]".

To these he added the following additional principles listed by Mr Justice Newey in 32Red Plc v WHG (International) Ltd and Others [2013] EWHC 815 (Ch) (12 April 2013):

"(vii) There are limits to the extent to which the court will have regard to the parties' actual attributes when assessing user principle damages. In particular
(a) the parties' financial circumstances are not material;
(b) character traits, such as whether one or other party is easygoing or aggressive, are to be disregarded [29]-[31].

(viii) In contrast, the court must have regard to the circumstances in which the parties were placed at the time of the hypothetical negotiation. The task of the court is to establish the value of the wrongful use to the defendant, not a hypothetical person. The hypothetical negotiation is between the actual parties, assumed to bargain with their respective strengths and weaknesses [32]-[33].

(ix) If the defendant, at the time of the hypothetical negotiation, would have had available a non-infringing course of action, this is a matter which the parties can be expected to have taken into account [34]-42].

(x) Such an alternative need not have had all the advantages or other attributes of the infringing course of action for it to be relevant to the hypothetical negotiation [42].

(xi) The hypothetical licence relates solely to the right infringed [47]-[50].

(xii) The hypothetical licence is for the period of the defendant's infringement [51]-[52].

(xiii) Matters such as whether the hypothetical licence is exclusive or whether it would contain quality control provisions will depend on the facts and must accord with the realities of the circumstances under which the parties were hypothetically negotiating [56]-[58]."

Applying these principles the judge considered the negotiation that might have been conducted between the parties immediately before the recording of the claimant's performance was released. He reminded himself that the claim was merely for infringement of the claimant's performance right and not her copyrights in the words or music. Both sides would have wanted an agreement but the defendant was in the stronger bargaining position. The judge considered comparable negotiations that the claimant had entered and concluded that the claimant would have received a 6% royalty on sales of her recording less costs. He assessed her damages under the user principle at £30.000.

As I said earlier, it is a fundamental principle of English law that a successful claimant can claim damages or an account of profits but not both. The claimant argued that reg 3 (1) (a) of the enforcement regulations which requires the court to take account of "any unfair profits made by the defendant" had changed that rule. His Honour rejected that contention for the following reasons. First, the enforcement regulations are intended to implement Directive 2004/48/EC of the European Parliament and of the Council of 29 April 2004 on the enforcement of intellectual property rights OJ L 196/16 2.6.2004. Art 13 (2) of that directive makes clear that states can provide provide for the recovery of profits as an alternative to an inquiry as to damages. Secondly. courts have continued to apply the rule that damages are alternatives since the directive came into effect.

In the judge's view reg 3 (1) (a) was intended to allow a court to award an additional sum related to the profit the defendant has made from knowing infringement. Such a case might arise

"if the defendant made no direct financial profit from the infringement – so an account of profits would be of little use – but his business expanded in volume and/or in reputation on the back of loss-leader infringements. For the claimant, aside from losing sales there would be a likelihood of further loss because of the expansion of a competing business. The expansion would not constitute a profit by the defendant in the usual direct sense, but it would be a contingent profit nonetheless and an unfair one."

His Honour considered that the present case provided an example of unfair profits as contemplated by the regulation in that she was not given proper recognition for her performance the credit having gone to another artiste. For that loss the judge awarded her another £5,000.

The judge declined to reverse his order striking out the additional damages claim. However, he observed that this was a case where justice required an additional award of £5,000 and that had already been made under reg 3 (1) (a). The claimant's total damages were therefore £35,000.

This is a very useful case that will no doubt be relied on frequently. It analyses reg 3 of the enforcement regulations and the directive that it implements and should prevent fresh attempts to inflate damages claims by reliance on the reference to "unfair profits". Secondly, it formulates all the principles that the court should take account when calculating a notional royalty between willing licensor and licensee bargaining at arms' length. Thirdly, it is a salutary reminder of the need to plead additional damages whenever they are required.   Should amplification or clarification of any point be requited readers should call me on 020 7404 5252 during office hours or fill in my contact form at any time.