|Counting profits: |
Benedict's favourite weekend activity
Sunday, 1 May 2016
Account of profits in trade mark infringement and passing off cases? The IPKat is delighted to host a guest contribution by Simon Chapman (Lewis Silkin) on this very topic and on a case (Jack Wills v House of Fraser) in which he and his team have acted for the defendant.
Here's what Simon writes:
"Following Mr Justice Arnold’s finding (Jack Wills Limited v House of Fraser (Stores) Limited  EWHC 110 (Ch)) that retailer House of Fraser was liable for trade mark infringement and passing off after adopting a pigeon logo that was confusing similar to Jack Wills pheasant trade mark, HHJ Pelling gave judgment (Jack Wills Limited v House of Fraser (Stores) Limited  EWHC 626(Ch)) in the account of profits, with the final profit figure being identified in the form of order hearing last week.
Judgments in respect of accounts of profits are rare, primarily on consideration that the parties usually come to an agreement on the level of profit that the defendant has made from its infringement after preliminary disclosure because they wish to avoid the costs of further legal proceedings that can be very expensive. However, following the Court of Appeal’s decision in Hollister Inc v Medik Ostomy Supplies Limited  EWCA Civ1419, some commentators believed that defendants would be unable to deduct general overheads (ie overheads that support the defendant’s business in general, such as rent, management and advertising) from their profits after direct costs (such as VAT and cost of purchasing or manufacturing the infringing items) had been deducted.
And so it was that Jack Wills, the British clothing brand particularly popular with well-heeled twenty-somethings, sought to recover over £650,000, that sum being the entirety of House of Fraser (HoF)’s sales revenues less VAT and cost of manufacture, and without any apportionment of the profits between the infringing use and other factors, such as the design of the garments. On the other hand, HoF claimed that the amount payable was in the region of £50,000 after the deductions of both direct costs, general overheads and apportionment.
A few days before the hearing, the Court of Appeal handed down its judgment in Design & Display Limited v OOO Abbott and another  EWCA Civ 95. In that case, the Court of Appeal overturned a judgment by HHJ Hacon, ordering that a defendant should be able to deduct general overheads from the profit figure if he has foregone an opportunity to sell non-infringing products. In that case, Lewison LJ agreed with Kitchin LJ’s reliance on an Australian case, Dart Industries Inc v Décor Corp Pty Limited  FSR 567, in which the court had held that “… where a defendant has foregone the opportunity to manufacture and sell alternative products it will ordinarily be appropriate to attribute to the infringing product a proportion of the general overheads which would have sustained the opportunity. On the other hand if no opportunity is forgone and the overheads involved were costs which would have been incurred in any event, then it would not be appropriate to attribute the overheads to the infringing product. Otherwise the defendant would be in a better position than it would have been in if it had not infringed".
Jack Wills had pleaded that a defendant needed to show it was operating at full capacity, or else it could not show that it had foregone an opportunity to sell non-infringing products, i.e. that capacity was a threshold condition. However the Court of Appeal in Design and Display made it absolutely clear (to the extent there ever was any ambiguity) that capacity was not a threshold condition. HHJ Pelling found that the true test was “whether HoF has demonstrated that (a) the same overheads would have been incurred even if the infringement had not occurred and (b) the sale of infringing products would have been replaced by sale of non-infringing products which would have been sustained by the overheads in fact used to sustain the infringement.”
On the facts, HoF satisfied this burden: it showed that it had a consistent range of products year on year; it sold broadly the same number of products each season; and that the infringing products replaced non-infringing garments before subsequently being replaced by non-infringing garments. This was not a case where the defendant had added a new line of infringing items to its existing business.
Jack Wills argued that even if HoF could deduct some overheads it would need to show to the requisite evidential standard that the specific overhead had supported sales of the infringing products. HoF on the other hand argued that the whole business was supported by all of the costs.
With the exception of some small costs the court allowed HoF to deduct all of its general overheads. This had the effect of substantially reducing the amount payable and putting it much more in line with the profit levels of the whole business.
As a further point, there was significant argument over the basis of calculating the applicable percentage of overheads. HoF’s expert witness sought to deduct overheads by reference to sales turnover as HoF did in its management accounts. Jack Wills’ expert witness claimed this was not the best way and that a ‘square-footage’ basis was preferable. Essentially, the judge decided that, except where one particular method is clearly superior, it is a judgment call as to which of the imperfect measures is most appropriate for a particular category of overhead. He then applied each method to the particular category in dispute as he considered most appropriate.
Having arrived at a net profit figure, the court then had to determine the further question of whether to award Jack Wills that or just those profits attributable to the infringement. Jack Wills argued that it was entitled to all of these, but HoF claimed that the garments themselves had value over and above the value of the pigeon logo that had been found to infringe, i.e. there was value in the design, fit, quality and other intangible qualities of the garments and value in the store environment itself. HoF claimed that to require it to pay over 100% of the profit it made, would be to give Jack Wills a windfall and punish it, which is not the purpose of an account of profits. Jack Wills had of course been entitled to elect for damages at the outset instead of profits, but had chosen not to.
HoF argued that there was no different test to be applied to trade mark cases than is the case in respect of other IP rights; there is value in the product aside from the value of the infringed IP. Further, the evidence was that there was no increase in sales or profitability following the adoption of the infringing logo.
HHJ Pelling was not persuaded that trade mark cases are by their nature different from other IP cases and accordingly, held that 41% of the net profits were attributable to the infringing mark. That figure was based on HoF’s expert witness evidence regarding typical royalties for the use of third party brands.
The amount of profits that HoF was ordered to pay to Jack Wills totaled £53,281, against the £650,000 that had been claimed.
For many IP owners, it is the costs consequences of the judgment that will be the cautionary tale. At the form of order hearing, the court heard that HoF had made several offers to settle the claim and that Jack Wills had failed to beat one made very early on in the account proceedings. The court therefore ordered that Jack Wills should pay HoF’s costs of the account from the expiry of that offer. As such, despite Jack Wills finding itself in the position of having won on liability it will be substantially out of pocket. Claimants will need to keep firmly in mind that the value of IP litigation is primarily in obtaining an injunction and consider very carefully indeed whether to elect for damages or profits after a successful decision on liability."