Licences of Right - Innermost Ltd v Warm

Intellectual Property Office Crown Copyright

Jane Lambert

Intellectual Property Office (Phil Thorpe) Innermost Ltd. v Warm BL 0/464/19 6 March 2020

Over the years the UK has consistently trailed its neighbours in the number of European patent applications.  In 2018. for instance, the UK filed 5,738 compared to 43,612 from the USA, 26,734 from Germany, 22,615 from Japan, 10,317 from France, 9,401 from China, 7,927 from Switzerland, 7,296 from South Korea and 7,149 from the Netherlands (see European Patent Office Annual Report 2018 Statistics at a Glance). I had always attributed our performance to the high cost of enforcement proceedings in the English courts but the changes to CPR Part 63 and the Part 63 Practice Direction which reduced and capped the costs of litigating in the Intellectual Property Enterprise Court in 2010 do not seem to have made much difference (see Jane Lambert New Patent County Court Rules 31 Oct 2010).  There may be another explanation.  Until 31 July 1989 functional designs were protected by copyright. This was a cheap and easy way of protecting innovations which in other countries would have been protected by utility models or even patents.  Industry in the UK got used to this form of protection and perhaps it has never really adjusted to its disappearance.

Under the Copyright Act 1956, copyright subsisted in a design drawing as an original artistic work.  Copying an article that had been made to a design drawing infringed such copyright and the remedies were draconian. In addition to damages or an account of profits under s.17 (2), the copyright owner could claim additional damages under s.17 (3) and conversion damages under s.18 (1) on the basis that every infringing copy of a copyright work belonged to the copyright owner.  Copyright came into being as soon as a design was recorded in a design drawing and it lasted for the life of the author plus 50 years.  Except for electrical circuitry which was excluded by s.9 (8) of the Act, just about everything from internal mechanisms to housing and packaging could be protected. Unlike a patent, the protection cost nothing and came into being automatically.  Apart from a few Commonwealth and other common law countries, no other country protected functional designs in this way.  The anomaly that an invention that might cost millions to develop could be protected for no more than 20 years after a rigours examination of its novelty, inventiveness and utility while a new teapot design could be protected from copying for decades was criticized widely. After the House of Lords' decision in British Leyland Motor Corp and others v Armstrong Patents Company Ltd and others [1986] ECC 534, [1986] AC 577, [1986] 2 WLR 400, [1986] FSR 221, (1986) 5 Tr LR 97, [1986] 1 All ER 850, [1986] UKHL 7, [1986] RPC 279 the government introduced legislation to overhaul copyright and design law,

The Copyright, Designs and Patents Act 1988 repealed the Copyright Act 1956 with effect from 1 Aug 1989 (see art 2 of The Copyright, Designs and Patents Act 1988 (Commencement No. 1) Order 1989). S. 51 (1) of the new Act abolished copyright protection for functional designs:

"It is not an infringement of any copyright in a design document or model recording or embodying a design for anything other than an artistic work or a typeface to make an article to the design or to copy an article made to the design."

However, s.213 (1) of the Act created a new intellectual property right known as "design right":

"Design right is a property right which subsists in accordance with this Part in an original design."

Design right conferred upon the owner "the exclusive right to reproduce the design for commercial purposes— (a) By making articles to that design, or (b) By making a design document recording the design for the purpose of enabling such articles to be made."

In presenting the Copyright, Designs and Patents Bill to the Lords, Lord Young, the Secretary of State for Trade and Industry said:

"I turn now to Parts III and IV of the Bill, which deal with designs. The House will be aware that this has been a contentious issue over many years. We take the view that all original designs deserve a limited amount of protection, quite simply because it is unfair to the designer if his new product can be copied in its entirety as soon as it comes on to the market. Where is the incentive to invest time, money and effort in producing a new product when others can hitch a free ride? We are therefore providing a new right for original designs which will give protection against copying for a 10-year period."(see Hansard HL Deb 12 November 1987 vol 489 cc1476-540).

The objective was to give the original designer a head start over those who might wish to copy the design. Lord Young added:

"we do not wish to keep competition out of the market for as long as 10 years and we have therefore provided that licences will be available as of right after five years, and even earlier if the Monopolies and Mergers Commission finds that the right is being exercised against the public interest."

That policy was implemented by s.237 (1):

"Any person is entitled as of right to a licence to do in the last five years of the design right term anything which would otherwise infringe the design right."

Applications for licences of right often come from infringers because s.239 (1) provides:

"If in proceedings for infringement of design right in a design in respect of which a licence is available as of right under section 237 or 238 the defendant undertakes to take a licence on such terms as may be agreed or, in default of agreement, settled by the comptroller under that section—
(a) No injunction shall be granted against him, 
(b) No order for delivery up shall be made under section 230, and 
(c) The amount recoverable against him by way of damages or on an account of profits shall not exceed double the amount which would have been payable by him as licensee if such a licence on those terms had been granted before the earliest infringement."   

Sometimes the parties can negotiate terms, but s.237 (2) enables the Comptroller-General of Patents, Designs and Trade Marks to settle the terms of a licence agreement where they cannot.

Somewhat unusually, the Comptroller received an application to settle a licence of right from a former licensee of the design right owner in Innermost Ltd v Warm BL O/464/19.  The designs were of lampshades which had been created by one Corinna Warm.  One set was known as "Glaze pendant lights" and the other as "Circus pendant lights".   There was also a range of wall lights known as "Circus wall lights". The company had manufactured and distributed both sets of lights under licence. After the terms of those licence agreements had expired the parties tried unsuccessfully to negotiate their renewal.  When negotiation failed they tried mediation.  When that failed too, Innermost Ltd applied to the Comptroller to settle terms under s.247. The application came on before Mr Phil Thorpe on 19 Feb 2019.  Mr Thorpe delivered his decision on 9 Aug 2019 though it was not published until 6 March 2020.

At a case management conference held on 8 Aug 2018, the following issues were identified:

"i) In respect of the Glaze pendant lights: 
a. the date at which the articles were first made available for sale or hire, and thus the start date of the licence of right period, and 
b. the royalty rate (4% is offered by Innermost whereas Ms Warm seeks 5%). 

ii) In respect of the Circus pendant lights: 
a. the royalty rate (4% offered, 7% sought). 

iii) In respect of the Circus wall lights: 
a. whether design right subsists, 
b. if design right does subsist, the date at which the licence of right period commences, and 
c. the royalty rate (4% offered, 7% sought)."

The agreement with regard to the "Glaze pendant lights" was dated 1Nov 2011 but not signed and dated by both parties until April 2013). It granted Innermost an exclusive worldwide right to manufacture and sell the Glaze range of products over a 5-year period commencing April 2011 in return for an initial 7% royalty rate on paid net sales of the Glaze products up to 31st August 2014 after which it dropped to 5%. The first sales by Innermost Ltd were made in January 2013. 

As a licence of right is available only for the last 5 years of the design right term, it is imperative to ascertain when that term begins. S.216 (2) provides that design right expires:

"(a) fifteen years from the end of the calendar year in which the design was first recorded in a design document or an article was first made to the design, whichever first occurred, or 
(b) if articles made to the design are made available for sale or hire within five years from the end of that calendar year, ten years from the end of the calendar year in which that first occurred."

S.216 (2) further provides:

"The reference in subsection (1) to articles being made available for sale or hire is to their being made so available anywhere in the world by or with the licence of the design right owner."

Mr Thgope's first task was to decide when Glade pendant lights were first made available for sale or hire for the purposes of s.216 (2) (b).   Innermost argued that it was when Ms Warm exhibited prototypes at a trade fair in Milan in 2011. Ms Warm argued that it was when Innermost launched the product in 2013. The hearing officer referred to paragraphs [116] to [119] of Lord Justice Jacob's judgment in Dyson Ltd v Qualtex (UK) Ltd. [2006] RPC 31, [2006] EWCA Civ 166:

“[116] If a man offers and takes orders for sale of articles for sale at the end of December, but does not actually deliver any until January, when does the five-year period of s.216 (1) (b) start to run? When are articles “made available for sale or hire?” In [307] the judge held that it when the public first actually could get the articles. So in the example, it is January. And it would make no difference if there had been prior manufacture of a prototype, shown to the public but no more. The judge held merely taking orders with future delivery (contemplated by the contract or in fact) was not enough. The first actual delivery is when the article is 'made available for sale.
[117] Mr Arnold said that was wrong—the statute was aimed at exploitation of designs. This starts when orders for the article are actually taken. Mr Carr submitted that UDR was for a short period in itself. It was unlikely that in some cases (e.g. the example above) the period of full protection would be cut down to virtually four years only. 
[118] Neither argument is particularly persuasive. Again the provision is not well-thought out—potentially it makes a 20 per cent difference in the period of full protection whichever party is right. In the end I think the judge was right to go by the actual words without any notion of underlying policy to guide him. He reasoned thus: 

'I consider that the natural meaning of the expression ‘made available’ connotes something that is actually in existence. If one imagines a case of an offer of goods which have yet to be made (in the sense that none of them are yet made) then I would not consider that those goods are ‘available’ for sale even if advance orders for them are taken. Taking orders for them is not making them available.'

[119] I agree and see no point in trying to say the same in my own words.”

Mr Thorpe disregarded the making and exhibiting of prototypes and the signing of the licence agreement. In his view, the time that the Glaze design was actually made available for sale was when the first sales of actual products took place by Innermost in January 2013. It followed that the design right in the Glaze design expires 10 years from 31 Dec 2013 and that the licence of right period, therefore, commenced on  1 Jan 2019.

At the start of the hearing, Innermost sought a reduction of the royalty from 5% to 4% to reflect the loss of exclusivity while Ms Warm demanded a minimum of 5% and preferably higher to recoup income on unlicensed sales. During the hearing, Innermost offered to increase the rate to 5% which Mr Thorpe accepted. Absent that concession, the hearing officer explained that he would have determined what would have been agreed by a willing licensor and willing licensee negotiating at arm's length in accordance with  General Tyre & Rubber Co v Firestone Tire & Rubber Co Ltd  (No 2)  [1975] FSR 273.

In the case of the Circus pendant lights, the parties had an agreement dated 1 April 2011 which was later extended to cover Circus wall lights.  The parties agreed at the CMC that the design right term began in 2012 and the licence of right period in 2017. The only issue in dispute was the royalty rate. Under the 1 April 2011 agreement, Innermost had paid 7% for the first two years dropping to 5% for the remainder of the term.  Mr Thorpe fixed the rate at 5% to reflect the loss of exclusivity because he believed that a 5% rate struck a fair compromise between the very different starting positions for this licence of right application and was consistent with the rate to be set for the Glaze range.

With regard to the Circus wall lights, there had been an informal agreement between the parties whereby Innermost paid a royalty of 5% for the remainder of the 1 April 2011 agreement.  Ms Warm argued that the wall lights were a new design with their own design right term and that the right to seek a licence of right did not accrue until 2021. Innermost denied that a separate design right subsisted in the wall design either because it was a variation of the pendant design or because it fell within the "must match exception" of s.213 (3) (b) (ii) of the Copyright, Designs and Patents Act 1988.

The hearing officer found that "Ms Warm has taken the existing Circus lampshade as a starting point and designed a complimentary wall mount and arm arrangement which together support a swivel-mounted LED unit covered by the lampshade – the lampshade being made using existing tooling. It’s a collection of parts that are designed to work in aesthetic harmony with one another." He added at paragraph [72] of his decision:

"Ms Warm has employed originality in arriving at a new creation, something that is different to the Circus pendant lampshade. Certainly, the Circus lampshade has been used as a basis for the design and, except for some minor modifications to the modesty cap and cosmetic cover there appears to be very little, if any, difference in the shade’s shape or configuration. So does the combination of the shade and everything else result in something that is more than a mere collocation and render it original? I think it does. Whether this is regarded as adding ‘old’ to ‘new’, or ‘new’ to ‘old’, I think the result is a visually very different product, one where the whole is quite different to any one of its component parts. Ultimately the overall design is not a copy. I therefore conclude that design is original and thus design right does subsist."

Earlier in his decision, Mr Thorpe struggled to see any grounds for the "must match" argument. He explained at [63]  "Innermost has not demonstrated that there are any features of shape or configuration of the article (whether it be the lampshade, the arm, or the two covers, alone or in combination) which are dependent upon the appearance of another article of which the article is intended by the designer to form an integral part. I conclude that the exclusion of section 213 (3) (b) (ii) does not apply in respect of the wall light."

The hearing officer held that the design right term for the wall-mounted Circus lights began in 2015 and that he had no jurisdiction to consider a licence of right application.  The earliest such an application could be made was 1 Jan 2021. 

He had circulated to the parties two draft licences along the lines of their previous agreements before delivering his decision.  As the relationship had broken down, Ms Warm requested a number of amendments relating to territorial scope, disclosure of information and confidentiality. Mr Thorpe saw no need to accede to those requests observing that it was obvious that this was an agreement for the UK alone, that the agreement contained penalties for non-compliance and that he had power to award indemnity costs of a party's conduct merited it.  Copies of the agreements that the hearing officer settled are to be found at the end of his decision and they are good precedents (templates) for similar design right licences.  Mr Thorpe made no order for costs and reminded the parties of their rights to appeal to the Appointed Person which do not appear to have been exercised.

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