Damages - Original Beauty Technology v G4K Fashion

 

Jane Lambert

Chancery Division (Mr David Stone) Original Beauty Technology Co. Ltd and others v G4K Fashion Ltd and others [2021] EWHC 3439 (Ch) (20 Dec2021)

In Original Beauty Technology and others v G4K Fashion Ltd and others [2021] EWHC 294 (Ch) (24 Feb 2021), Mr David Stone, sitting as a deputy judge of the High Court, held that the defendants had infringed some of the first claimant's unregistered design rights and unregistered Community designs by selling bodycon and bandage clothing that reproduced those designs but that they had not passed off their business as or for the claimants'. I discussed that judgment in Designs - Original Beauty Technology v G4K Fashion on 25 June 2021.

Pecuniary Remedies

A party whose intellectual property rights are found to have been infringed is entitled to damages (compensation for the losses that it has suffered), or surrender of the profits that the infringer has gained, from the infringement but not both.  He or she is entitled to choose between those remedies and the infringer can be required to supply information that will enable that party to make an informed choice.  If the party whose rights have been infringed chooses damages, there is a further hearing known as an "inquiry" to determine the amount that is due to that party.  An inquiry proceeds in very much the same way as a trial.  The party seeking damages serves a pleading usually called "Points of Claim" and the opposing party responds with "Points of Defence".  There is usually a case management conference at which the court can order further information of the Points of Claim or Points of Defence under CPR Part 18, disclosure of documents and exchange of experts' reports and witness statements.

The Inquiry
The first and second claimants chose an inquiry.  In further hearings, Mr  Stone allowed the claimants to amend their claim in Original Beauty Technology Company Ltd and others v G4K Fashion Ltd and others [2021] EWHC 1848 (Ch) on 9 July 2021, ordered the defendants to give further information under Part 18 Original Beauty Technology Company Ltd and another v G4K Fashion Ltd and others [2021] EWHC 2555 (Ch) on 10 Sept 2021, dismissed the defendants' application to vacate the inquiry in Original Beauty Technology and others v Company Ltd G4K Fashion Ltd and others [2021] EWHC 2632 (Ch) on 1 Oct 2021 and refused the defendants' request for specific disclosure in  Original Beauty Technology Company Ltd and others v G4K Fashion Ltd and others [2021] EWHC 2748 (Ch) on 15 Oct 2021. Mr Stone heard the inquiry between 25 and 29 Oct 2021 and delivered judgment in Original Beauty Technology Co. Ltd and others v G4K Fashion Ltd and others [2021] EWHC 3439 (Ch) on 20 Dec 2021.  At para [156] of his judgment, Mr Stone ordered the defendants to pay damages of £450,124.56 of which £300,000 amounted to additional damages for the flagrancy of the infringement.

The Issues
The claimants sought damages under three heads:
(a)     lost profits on sales of garments which would otherwise have been made by the claimants;
(b)    a reasonable royalty on the defendants’ sales not covered under head (a); and
(c)    additional damages pursuant to Mr Stone's finding at trial that the Defendants’ infringement was flagrant.

The Claimants submitted that they should receive approximately £275,000 under heads (a) and (b) to be “topped up” to approximately £500,000 with additional damages to reflect the flagrancy of the infringement. The defendants denied that lost profits damages were payable at all. They accepted that a reasonable royalty was payable, but they valued that royalty at approximately £15,000, or £1 per infringing Oh Polly garment. They also accepted that additional damages were payable, but said that the deputy judge should order no more than a 20% uplift on the reasonable royalty, which they submitted is approximately £3,000, or 20p per infringing garment. 

The Authorities on Lost Profits
Mr Stone referred to para [47] of Mr Justice Kitchin's decision in Ultraframe (UK) Limited v Eurocell Building Plastics Limited and Another [2006] EWHC 1344 (Pat):

“(i) Damages are compensatory. The general rule is that the measure of damages is to be, as far as possible, that sum of money that will put the claimant in the same position as he would have been in if he had not sustained the wrong.
(ii) The claimant can recover loss which was (i) foreseeable; (ii) caused by the wrong; and (iii) not excluded from recovery by public or social policy. It is not enough 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.
(iii) The burden of proof rests on the claimant. Damages are to be assessed liberally. But the object is to compensate the claimant and not to punish the defendant.
(iv) It is irrelevant to a claim of loss of profit that the defendant could have competed lawfully.
(v) Where a claimant has exploited his patent by manufacture and sale he can claim (a) lost profit on sales by the defendant that he would have made otherwise; (b) lost profit on his own sales to the extent that he was forced by the infringement to reduce his own price; and (c) a reasonable royalty on sales by the defendant which he would not have made.
(vi) As to lost sales, the court should form a general view as to what proportion of the defendant’s sales the claimant would have made.
(vii) The assessment of damages for lost profits should take into account the fact that the lost sales are of “extra production” and that only certain specific extra costs (marginal costs) have been incurred in making the additional sales. Nevertheless, in practice costs go up and so it may be appropriate to temper the approach somewhat in making the assessment.
(viii) The reasonable royalty is to be assessed as the royalty that a willing licensor and a willing licensee would have agreed. Where there are truly comparable licences in the relevant field these are the most useful guidance for the court as to the reasonable royalty. Another approach is the profits available approach. This involves an assessment of the profits that would be available to the licensee, absent a licence, and apportioning them between the licensor and the licensee.
(ix) Where damages are difficult to assess with precision, the court should make the best estimate it can, having regard to all the circumstances of the case and dealing with the matter broadly, with common sense and fairness.”

He also referred to para [31] of Judge Hacon's judgment in SDL Hair Limited v Next Row Limited [2014] EWHC 2084 (IPEC):

"(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 v Lectra 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.”

He directed himself to apply a two-stage approach in relation to lost profit damages:

"(a) First, on the balance of probabilities, have the Claimants suffered some loss under the head claimed? If the answer is “no”, then the inquiry stops there. If the answer is “yes”, then the inquiry moves to the next stage.
(b) Second, on the basis of the available evidence, how much loss has been sustained?"

The Authorities on Reasonable Royalties
The deputy judge referred to paras [18]  and [19] of Judge Hacon's judgment in Henderson v All Around the World Recordings Limited [2014] EWHC 3087 (IPEC):

“[18] In Force India Formula One Team Limited v 1 Malaysia Racing Team Sdn Bhd [2012] EWHC 616 (Ch); [2012] RPC 29 Arnold J considered Wrotham Park damages, i.e. of the type awarded in Wrotham Park Estate Co Ltd v Parkside Homes Ltd [1974] 1 WLR 798. In Force India damages for breach of a restrictive covenant in a contract were taken to be the amount of money which could reasonably have been demanded by the claimant for a relaxation of the covenant. Arnold J identified the following principles (at [386]):

'(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 LJ, as he then was) and WWF v World Wrestling at [56] (Chadwick LJ).
(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]'.

The Court of Appeal in Force India ([2013] EWCA Civ 780; [2013] RPC 36) did not dissent from Arnold J’s summary of the law (at [97]).

[19] Wrotham Park damages, though they are for breach of contract, are in all relevant respects the same as those I have to consider under this head, so the foregoing principles set out by Arnold J apply. In the inquiry as to damages for infringement of trade marks in 32Red OKC v WHG (International) Limited and others [2013] EWHC 815 (Ch), Newey J’s assessment was by consent also on the basis of willing licensor and willing licensee. Newey J endorsed the principles identified by Arnold J and expanded on them as follows:

'(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].'"

Mr Stone took account of paras  [413] to [420] of Mr Justice Jacob's judgment in Gerber v Lectra:

“In relation to fixing the royalty for a licence of right, Dillon LJ said in Allen & Hanburys Ltd’s (Salbutamol) Patent [1987] RPC 327 that the position of the patentee as manufacturer is not to be taken into account (at 378-379). Fox LJ agreed, though Woolf LJ dissented (at 384-386). Moreover Dillon LJ (with both of the other members of the court) was of the view that the royalty need not be such that the licensee would find it commercially worthwhile to sell.

Mr. Floyd submitted that there may be a conflict here between the reasonable royalty for damages and the royalty which might be fixed by the Comptroller. In particular he suggested that when I came to fix the appropriate rate of royalty I should take into account the position of Gerber as manufacturer.

I do not agree. One is here considering a notional bargain about sales the patentee would not make. Whether one considers that in advance of the infringement or after seems to me to make no difference (Mr Floyd suggested it did). I do not see why the patentee could reasonably insist on his lost profits on transactions he would not have made.
…

7. Royalties on Sales Gerber would not have made

I have held that there would have been 11 of these. To these should, it is agreed, be added the 2 Irish sales. Gerber is entitled to a reasonable royalty. This is really a court-imposed notional bargain. I have held that Gerber’s lost profits would be irrelevant - because the negotiation does not cover lost Gerber sales.
…

As to how the “available profits” were to be split, absent the extra profits from spares etc. it was agreed that the split would be 25% to the patentee. Gerber’s expert suggested that this ought to be doubled because the licensee would be competing, leading to a royalty of 50% of the licensee’s sales revenue. As I have indicated I think this wrong - we are here talking about the non-competing sales.”

Computing Lost Profits

The claimants claimed damages for lost profits in accordance with the following formula:

“Lost profit = number of lost sales of the Infringing Garment (Lost Sales) x total per-unit profit for the Claimants’ garments incorporating the respective Infringed Design (Per Unit Profit)

Lost Sales = total number of Defendants’ sales of Infringing Garment x P

where 0 < P ≤ 1, representing the probability that a sale in fact made by the Defendants of an Infringing Garment was to a customer who would have purchased the respective Claimant’s Garment had the Infringing Garment not been available."

The defendants did not contest the formula but disputed the value of P.  The claimants argued first that P equalled 1 (every infringing sale made by the defendants was a sale lost by the claimants) but later conceded that it was 0.25 (for every hundred infringing sales made by the defendants, 25 were sales lost by the claimants).  The defendants contended that P equalled 0, that is to say, none of the defendants' sales was a sale lost by the claimants.

In accordance with the two-stage approach that I mentioned above, Mr Stone considered whether any of the sales of infringing articles was a loss to the claimants. There was no doubt in the learned deputy judge's mind that at least some of the infringing sales were sales lost by the claimants and that P must have been greater than 0.  Proceeding to the second stage, it was common ground that:

(a) The infringing garments were copies of the Claimants’ garments (or parts of the Claimants’ garments);
(b) The businesses of both the Claimants and the Defendants sell garments to fashion-conscious young women who are looking to buy sexy clothing online and, in particular, dresses for a night out;
(c) The Defendants (at the relevant time) considered House of CB to be their biggest competitor;
(d) There are some customers who buy from both House of CB and Oh Polly; and
(e) The Defendants’ retail prices for infringing garments were, generally speaking, lower than those of the corresponding garment of the Claimants.

He considered the correlation between the claimants' sales shown in blue in the chart above and the defendants' shown in red.  He said at paras [98] and [99]:

"[98] ......... I agree with the Claimants that P is clearly less than 1. I also consider that P is less than 0.25, but not significantly less than 0.25. I am mindful of the need to be “liberal” in my assessment of P (Ultraframe), forming a 'general view' (Ultraframe), and that “one cannot expect much in the way of accuracy” (Gerber). I must engage in a “process … of judicial estimation of the available indications” (General Tire), involving “the exercise of a sound imagination and the practice of the broad axe” (Watson, Laidlaw & Co Limited v Pott, Cassels and Williamson (1914) 31 RPC 104). This cannot be a scientific exercise, but I must do the best I can.

[99] Keeping all that in mind, in the exercise of my judicial estimation, taking into account the matters I have referred to above, and my findings from the liability trial, I have reached the conclusion that P = 0.2."

As there had been 15,393 sales of infringing garments, Mr Stone assessed damages for the profits of lost sales at £74,847.92.

Assessing the Royalty
 The claimants claimed £170,000 on the basis of £11 per garment.  The defendants offered £15,000 on the basis of £1 per garment. 

The deputy judge took the following facts into consideration:

"(a) The Defendants sold 15,393 infringing garments (net of returns). Of these sales, 10,269 were in the UK, 1,282 were in the EU (but not the UK) and 3,842 were outside the EU and UK;
(b) The Defendants’ total net revenues on those sales were £451,188 (including net postage income after tax of £69,188). Of this net revenue, £280,424 was from sales in the UK, £38,129 was from sales in the EU (but not in the UK) and £132,636 was from sales outside the EU and UK;
(c) The Defendants’ total gross profits on the infringing sales were £192,208, at a gross profit margin of 42.6%;
(d) The first infringing garment went on sale on 11 August 2016 and the last infringing garment went on sale on 25 June 2018. The last sale of an infringing garment was in December 2020, as the liability trial was taking place; and
(e) The Claimants sold 21,939 of their own garments from which the Defendants copied, with sales revenue of £1,755,268."

Mr Stone held at para [136] that the deal that the parties would have reached would have been as follows:

 

"(a) The parties would have agreed to calculate the royalty on the basis of the Defendants’ net sales revenue, that is, a percentage of the Defendants’ sales at the Defendants’ selling price. As is clear from the example agreements provided by [its expert], this is the usual way in which licences are agreed because it limits administration and future disputes;
(b) The parties would have treated partial designs and whole designs the same - what the Defendants were looking for were, on [its expert's] evidence, “trends”;
(c) For a design-conscious business seeking to attract customers looking for “trends”, the design of the products is important. The Defendants had no other source of on-trend designs from a successful business. They would therefore have been prepared to pay above average royalty rates to be able to license the Claimants’ garment designs - that is, outside [the claimants' expert's] “normal” range of 3-6%. Given the range in [its expert's] evidence, I consider that the Defendants would have been prepared to pay a royalty rate of 10%. This is more than the lowest rate of 1.8% or [his] calculated mean of 6.8%, but still significantly less than the top rate of 18%;
(d) The Claimants were not running a licensing business. They would therefore have wanted some certainty that the income from this licence was worth the administrative effort. They would therefore have wanted to set a minimum licence fee, as was provided for in a number of the licences in [the defendants' expert's] analysis. The Defendants on [his] evidence would have been prepared to pay £1,000 for a partial design or £3,000 for a whole design. In my judgment, this understates the reality. The Defendants had nowhere else to obtain on-trend designs from a successful design business. I estimate that they would have been prepared to agree to a minimum royalty of £4,000 for each design, whether whole or part; and
(e) A royalty at this level would have eaten into the Defendants’ profits, but it would not have rendered the garments 'loss-leaders'. Had the Defendants wished to maintain the same profits, they would know that they could increase the prices of some garments in order to pay the royalty and still make a meaningful profit. They would readily have done so up to [the defendants' expert's] 'sweet-spot' of £50 to £60."

He, therefore, assessed the royalty at £75,276.64.

Additional Danages

S.229 (3) of the Copyright, Designs and Patents Act 1988 provides:

"The court may in an action for infringement of design right, having regard to all the circumstances and in particular to— 

(a) the flagrancy of the infringement, and. 

(b) any benefit accruing to the defendant by reason of the infringement, 

award such additional damages as the justice of the case may require."

The Court of Appeal had given the following guidance on the award of additional damages in Phonographic Performance Limited v Ellis (trading as Bla Bla Bar) [2018] EWCA Civ 2812:

"(a) The legal character of additional damages is sui generis: whilst a fine may be a “suitable analogy”, additional damages are not a fine, and are payable to the Claimant (at paragraphs 36 and 37);
(b) The power to award additional damages extends to cases in which effective relief is available to the claimant (at paragraph 34);
(c) Additional damages may be partly or wholly punitive (at paragraph 37);
(d) Additional damages serve a valuable deterrent effect both to the infringer in the particular case under consideration, and also more widely in that they send the general message that infringement does not pay (at paragraph 38);
(e) In certain cases, additional damages may also enable a claimant to recover a contribution towards internal administrative costs which would not otherwise be recoverable as compensatory damages, because staffing had not been diverted from normal business activities (at paragraph 38);
(f) An award of additional damages cannot be made to make up for any shortfall between the litigation costs actually incurred and those which were allowed on an assessment (at paragraph 38);
(g) An award of additional damages must be “effective, proportionate and dissuasive” (at paragraph 41); and
(h) It may be that a particularly egregious award of exemplary damages would amount to an abuse of rights (at paragraph 42)."

Mr Stone awarded additional damages at £300,000. In arriving at that figure, he took the following into account at para [153]:

"...... the acts of infringement, being the 15,393 infringing garments sold by the Defendants: this was serious infringement on a large scale. It was also flagrant infringement, carried out over four years. I have taken into account the Defendants’ approach to their infringement, including continuing to deny copying (other than in relation to C35) through the liability trial. I have taken into account the need to punish the Defendants in a way that is effective, proportionate and dissuasive. Given the profit made from these infringing garments, and the size of the Defendants’ business, in my judgment, only an award of this size will be sufficient to punish them for what they have done, and to deter them from infringing again. No lesser amount would achieve that. This is what the justice of the case requires. I have considered carefully whether that award is proportionate, and in my judgment it is. I also do not consider it to be egregious or an abuse of rights."

The Award

He summarized his award as follows at [156]:
(a) 20% of the defendants’ infringing sales were sales that the claimants would have made entitling the claimants to lost profits damages in the sum of £74,847.92;
(b) On the remaining 80% of the defendants’ sales, the claimants are entitled to a reasonable royalty assessed on the basis of:
(i) 10% of the defendants’ net sales;
(ii) with a guaranteed minimum royalty of £4,000 per design,
which amounts to £75,276.64; and
(c) £300,000 in additional damages for the flagrancy of the infringement.

He ordered the defendants to pay £450,124.56 within 21 days.

Further Information
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