Account of Profits - OOO Abbott and Another v Design & Display Ltd and Another
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| Royal Courts of Justice |
When a patent is infringed the patentee has the choice of an inquiry as to damages or an account of profits under s.61 (1) of the Patents Act 1977. A similar choice is available to any other intellectual property right owner whose right is infringed. In OOO Abbott and another v Design & Display Ltd and another [2016] EWCA Civ 95 Lord Justice Lewison set out the basic principles at para [7] of his judgment:
"Section 61 (1) (d) of the Patents Act 1977 entitles a patentee to claim against an infringer an account of the profits "derived by him from the infringement". An account of profits is confined to profits actually made, its purpose being not to punish the defendant but to prevent his unjust enrichment. The underlying theory is that the infringer is treated as having carried on his business (to the extent that it infringes) on behalf of the patentee. The broad principle is that the patentee is entitled to profits that have been earned by the use of his invention. If the patentee does not recover those profits, the infringer will have been unjustly enriched. So the purpose of the account 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. That requires the fact finder first to identify the patentee's invention and second to decide what (if any) profits the infringer derived from the use of that invention. The second of these questions may give rise to difficulty where the infringer sells products associated with the subject matter of the patent (often called "convoyed goods") or products into which the subject matter of the patent is incorporated. The court must determine what profit has been earned, in a legal sense, by the infringer's wrongful acts. It is clear, then, 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."
The judgment in which Lord Justice Lawson said those words was an appeal by Design & Display Ltd, against the decision of His Honour Judge Hacon in OOO Abbott and another v Design & Display Ltd and another [2014] EWHC 2924 (IPEC) (4 Sept 2014) in an account of Design & Display Ltd.'s profits ressulting from the infringement of European Patent (UK) No. 1,816,931 for a "Display panel and display system",
The Action
The account was ordered because Mr. Justice Birss had decided in OOO Abbott and another v Design & Display Ltd. and another [2013] EWPCC 27 that that patent was valid and had been infringed. His Lordship gave the claimants the choice of an inquiry as to damages or an account of profits and they elected an account. His Honour Judge Hacon took the account and directed a number of issues to be determined upon the taking of the account. The claimants and second defendant subsequently settled their differences so the account was between Design and Display Ltd. and the claimants.
The Patent
The patent in suit was described by Mr Justice Birss in his judgment as follows:
"[4] The case concerns display panels used in shops. Shopfitters often use a wooden wall called a slatwall as a panel on which to construct displays. Today the slatwall is made of MDF and has horizontal slots. Back plates or other shelf fixings can be fitted into the slots in order to secure display accessories such as shelves, brackets and hangers. The merchandise is displayed from the display accessories. The fittings are inserted into the jaws of the mouth of the slot and hooked into the top of an internal chamber of the slot lying behind its mouth.
[5] The slots are made by a computer controlled router moving across the width of the panel. A router makes a T shaped slot and leaves visible machined surfaces within the slot having machined away the decorative veneer that generally covers the face of the MDF. Also the edges of the veneer around the mouth of the slot are susceptible to damage as display accessories are hooked in and removed.
[6] For these reasons it became standard practice to provide inserts for slots, as protection against damage and to hide the machined surfaces. To an extent the inserts also strengthen the panel. The accessories are then fitted into the inserts rather than being fitted directly into the bare slots.
[7] The inserts are made by extrusion. By 2004 the standard inserts used were of two kinds: "slide-in" or "snap-in". As the name suggests slide-in inserts were slid into place from the edge of the slat wall. They were made of aluminium. They could be T-shaped, corresponding to the T shaped cross-section of the slot or else they could be L-shaped, using only the top arm of the slot. A problem with slide-in inserts was that if the edge of the slatwall was not accessible, for example at a corner, there is no room to slide the insert into place. Snap-in inserts solve this problem by being inserted from the front with a spring action. Because they needed to be compressible, they were made of PVC instead of aluminium.
[8] The invention in this case is a snap-in insert made from a resilient metal like aluminium."
The Infringing Activities
In his judgement, Judge Hacon found that the defendants had done the following:
"[5] Design & Display manufactures and sells retail equipment, including display panels for use in shops. The evidence of Clive Lloyd, managing director of Design & Display, was that its primary business was as a joiner for shopfitters, making bespoke items of shop furniture, which Mr Lloyd called 'equipment'. This equipment included displays, some of which had slatted panels (sometimes referred to as slatboards or slatwalls) sold both in standard sizes and as custom-sized panels. These were the panels with horizontal slots into which the aluminium inserts could be introduced – in the case of the infringing inserts, introduced by a snap-in process. Shelves or hangars for displaying the goods could then by located into the inserts.
[6] In the relevant period Design & Display sold the slatted panels in two ways. First, it sold the panels with inserts separately for subsequent assembly by the customer. At the trial these were referred to as 'unincorporated' panels and inserts. Secondly, Design & Display sold pre-assembled displays of which the panels with inserts were part. These were referred to as 'incorporated' panels and inserts. In addition, some unincorporated inserts were sold without slatted panels.
[7] Design & Display did not itself make the inserts but purchased them from an aluminium extruder in the form of lengths which were cut into sections to make the individual inserts. The panels were purchased in the form of plain MDF panels into which the slots were machined by Design & Display."
In his judgement, Judge Hacon found that the defendants had done the following:
"[5] Design & Display manufactures and sells retail equipment, including display panels for use in shops. The evidence of Clive Lloyd, managing director of Design & Display, was that its primary business was as a joiner for shopfitters, making bespoke items of shop furniture, which Mr Lloyd called 'equipment'. This equipment included displays, some of which had slatted panels (sometimes referred to as slatboards or slatwalls) sold both in standard sizes and as custom-sized panels. These were the panels with horizontal slots into which the aluminium inserts could be introduced – in the case of the infringing inserts, introduced by a snap-in process. Shelves or hangars for displaying the goods could then by located into the inserts.
[6] In the relevant period Design & Display sold the slatted panels in two ways. First, it sold the panels with inserts separately for subsequent assembly by the customer. At the trial these were referred to as 'unincorporated' panels and inserts. Secondly, Design & Display sold pre-assembled displays of which the panels with inserts were part. These were referred to as 'incorporated' panels and inserts. In addition, some unincorporated inserts were sold without slatted panels.
[7] Design & Display did not itself make the inserts but purchased them from an aluminium extruder in the form of lengths which were cut into sections to make the individual inserts. The panels were purchased in the form of plain MDF panels into which the slots were machined by Design & Display."
Judge Hacon's Decision
One of the issues that Judge Hacon determined was whether the claimants were entitled to the profits which accrued to either defendant as a result of the sale of slatted panel sold together with the clip in aluminium extrusions. Another was the allowable costs that the defendants were entitled to deduct from the accountable profits.
On the first issue Judge Hacon decided at para [33] that the scope of the profit derived from Design & Display's infringement extended to the profit made from sales of panels in which the infringing inserts were incorporated.
On the second, he allowed at para [49] the labour costs incurred in cutting the slots in the display panels to accommodate infringing inserts but no other expenses.
The Appeal
Design & Display Ltd appealed against Judge Hacon's findings. The questions before their Lordships were whether Design & Display was liable for the whole of the profits made on the sale of panels sold together with infringing inserts and whether Design & Display was entitled to set off any part of its general overheads against the gross profit for which it was accountable.
The Decision
The appeal was allowed and the Court of Appeal sent the case back to the Intellectual Property Court to reassess the moneys for which Design & Display had to account.
The Accountable Profits
Referring to para [7] of his judgment, which I have quoted above, Lord Justice Lewison said at para [8] that the first question was the identification of the invention. The reason for that was that for the purpose of assessing damages or taking an account of profits, the scope of the invention is not necessarily co-terminous with the scope of the claims. The late Mr Justice Laddie explained why that should be in Celanese International Corporation v BP Chemicals Ltd [1999] RPC 203 at [51]:
"Someone invents a new form of tin whistle. With the aid of his patent agent he obtains a patent. Regrettably, but as is now common, the patent ends with claims of ever greater particularity and narrowness. … Claim 1 is for the tin whistle. Claim 10 is for a funnel to which the new tin whistle is connected. Claim 15 is for a battleship with a funnel to which the tin whistle is connected. No doubt none of the subsidiary claims are independently valid over Claim 1 but they are probably not per se invalid. Nor is there any doubt that an injunction or an order for delivery up would be directed to the tin whistle alone rather than the whole battleship. Similarly on an account substance not form counts. What the defendant has to account for is the profit made by exploitation of the invention, i.e. the whistle, not profits made by exploitation of material or activities which are not attributable to the plaintiff's ingenuity, i.e. the rest of the battleship."
Once the invention is identified the court has to consider the question of causation. While assessment of damages for patent infringement and the taking of an account of profits proceed on a common principle of legal causation Lord Justice Lewison cautioned at para [14] "that the question whether an infringement has caused a loss (in the legal sense) and the question whether the infringer has derived a profit from the infringement are different questions."
The Court of Appeal held that Judge Hacon had correctly identified the invention but had erred on causation. Judge Hacon said at para [31] of his judgment:
"The customer will have specified panels with incorporated inserts (and also possibly that the panels were incorporated into a display, it doesn't matter). Design & Display was thus either going to make a sale of inserts and panels both, or no sale at all. The sales necessarily went hand in hand. Design & Display chose to sell infringing inserts. Because the sales went together, the sale of the inserts caused (in the relevant sense) the sale of the panels in which they were incorporated. It was also foreseeable that the sale of the panels would be a consequence of the sale of the inserts." He added at para [32]:
"It goes further. As I have said, part of the inventive concept was embodied in the shape of a section of the panel. The fact that it was a modest section makes no difference. The sale of that section of the panel both caused the sale of the panel as whole and the latter sale was a foreseeable consequence of the former."
The Court of Appeal held that Judge Hacon had correctly identified the invention but had erred on causation. Judge Hacon said at para [31] of his judgment:
"The customer will have specified panels with incorporated inserts (and also possibly that the panels were incorporated into a display, it doesn't matter). Design & Display was thus either going to make a sale of inserts and panels both, or no sale at all. The sales necessarily went hand in hand. Design & Display chose to sell infringing inserts. Because the sales went together, the sale of the inserts caused (in the relevant sense) the sale of the panels in which they were incorporated. It was also foreseeable that the sale of the panels would be a consequence of the sale of the inserts." He added at para [32]:
"It goes further. As I have said, part of the inventive concept was embodied in the shape of a section of the panel. The fact that it was a modest section makes no difference. The sale of that section of the panel both caused the sale of the panel as whole and the latter sale was a foreseeable consequence of the former."
That led him to the conclusion mentioned above that the scope of the profit derived from the infringement extended to the profit made from sales of panels in which the infringing inserts were incorporated.
Referring to an example discussed in the Australian case Dart Industries Inc v Decor Corporation Pty Ltd. [1993] HCA 54; (1993) 179 CLR 101; (1993) 116 ALR 385; (1993) 67 ALJR 821; (1993) AIPC 91-028 (29 Sept 1993) Lord Justice Lewison said at para [36]:
A manufacturer sells a car which includes 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. 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. ............ 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."
Referring to an example discussed in the Australian case Dart Industries Inc v Decor Corporation Pty Ltd. [1993] HCA 54; (1993) 179 CLR 101; (1993) 116 ALR 385; (1993) 67 ALJR 821; (1993) AIPC 91-028 (29 Sept 1993) Lord Justice Lewison said at para [36]:
A manufacturer sells a car which includes 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. 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. ............ 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."
The Lord Justice concluded that in cases simply falling within the factual hypothesis discussed in para [31] of Judge Hacon's judgment, His Honoour should have apportioned the overall profit.
Overheads
At para [38] of his judgment, Judge Hacon had directed himself that:
"(1) Costs associated solely with the defendant's acts of infringement are to be distinguished from general overheads which supported both the infringing business and the defendant's other businesses.
(2) The defendant is entitled to deduct the former costs from gross profits.
(3) A proportion of the general overheads may only be deducted from gross profits in two circumstances:
(a) if an overhead was increased by the acts of infringement (i.e. the increase would not have occurred but for the acts of infringement), that increase may be deducted;
(b) if the defendant was running to maximum capacity such that the infringing business displaced an alternative business which otherwise would have been conducted, the apportioned overheads incurred by the infringing business (and which would have been incurred by the displaced business) may be deducted. (4) The evidential burden is on the defendant to establish any of the above."
The judge found that Design & Display had failed to discharge that evidential burden. Design & Display had offered evidence that might have placed it within the exception in paragraph (3) (b) but His Honour declined to consider it on the ground that it would not lead to the proffered conclusion. In Lord Justice Lewison's vew that was a mistake:
"I do not consider that the judge's reasoning at [46] led to the conclusion that he reached. What he appears to me to have found is that in effect the same overheads would have been incurred in the sale of non-infringing products. Whether those non-infringing products were slat boards or a different product completely does not seem to me to matter. What matters is that if it had not been selling infringing products Design & Display would have used the self-same overheads in generating profits by lawful trading. Accordingly in my judgment Design & Display's argument as summarised at [44] (1) was legally correct if the asserted facts were established. Because he rejected the argument on legal grounds the judge did not say whether or not he found those asserted facts to have been proved. Nor, in my judgment, does his reasoning at [47] support the conclusion he reached. What he appears to me 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,"
Overheads
At para [38] of his judgment, Judge Hacon had directed himself that:
"(1) Costs associated solely with the defendant's acts of infringement are to be distinguished from general overheads which supported both the infringing business and the defendant's other businesses.
(2) The defendant is entitled to deduct the former costs from gross profits.
(3) A proportion of the general overheads may only be deducted from gross profits in two circumstances:
(a) if an overhead was increased by the acts of infringement (i.e. the increase would not have occurred but for the acts of infringement), that increase may be deducted;
(b) if the defendant was running to maximum capacity such that the infringing business displaced an alternative business which otherwise would have been conducted, the apportioned overheads incurred by the infringing business (and which would have been incurred by the displaced business) may be deducted. (4) The evidential burden is on the defendant to establish any of the above."
The judge found that Design & Display had failed to discharge that evidential burden. Design & Display had offered evidence that might have placed it within the exception in paragraph (3) (b) but His Honour declined to consider it on the ground that it would not lead to the proffered conclusion. In Lord Justice Lewison's vew that was a mistake:
"I do not consider that the judge's reasoning at [46] led to the conclusion that he reached. What he appears to me to have found is that in effect the same overheads would have been incurred in the sale of non-infringing products. Whether those non-infringing products were slat boards or a different product completely does not seem to me to matter. What matters is that if it had not been selling infringing products Design & Display would have used the self-same overheads in generating profits by lawful trading. Accordingly in my judgment Design & Display's argument as summarised at [44] (1) was legally correct if the asserted facts were established. Because he rejected the argument on legal grounds the judge did not say whether or not he found those asserted facts to have been proved. Nor, in my judgment, does his reasoning at [47] support the conclusion he reached. What he appears to me 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,"
At para [51] the Lord Justice explained that Judge Hacon's error was to think that running to maximum capacity was a threshold condition and that it had to have the consequence that alternative business would be displaced in order for the condition in para (3) (b) to take effect.
Conclusion
This is not an easy case to analyse. Lord Justice Lewison's judgment has to be read very carefully in conjunction with Mr Justice Birss's judgment in the Patents County Court and Judge Hacon's judgment on the issues that arose on the taking of the account to be understood properly. However, it does provide some clear principles for identifying the gross profits for which an infringer has to account and the overheads that he is entitled to deduct. This is likely to be useful for the taking of an account of profits generally and not just for patent cases.
Further Information
Should any of my readers wish to discuss this case or remedies for patent infringement generally they should not hesitate to call me during office hours in 020 7404 5252 or use my contact form.
Conclusion
This is not an easy case to analyse. Lord Justice Lewison's judgment has to be read very carefully in conjunction with Mr Justice Birss's judgment in the Patents County Court and Judge Hacon's judgment on the issues that arose on the taking of the account to be understood properly. However, it does provide some clear principles for identifying the gross profits for which an infringer has to account and the overheads that he is entitled to deduct. This is likely to be useful for the taking of an account of profits generally and not just for patent cases.
Further Information
Should any of my readers wish to discuss this case or remedies for patent infringement generally they should not hesitate to call me during office hours in 020 7404 5252 or use my contact form.
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