Infringer's overheads should not be taken into account when carrying out account of profits

In Hollister Incorporated v Medik Ostomy Supplies Ltd ([2012] EWCA Civ 1419, November 9 2012), the Court of Appeal has upheld an appeal against the decision of HHJ Birss QC in the Patents County Court concerning an account of profits in a parallel importation claim, where the defendant failed to comply with the requirement to give notice to the trademark owner before the repackaged product was put on sale.

In doing so, the Court of Appeal has confirmed that, when assessing net profits for the purposes of any IP claim, an infringer's general overheads should not be taken into account when carrying out an account of profits, unless those overheads would not have been incurred but for the infringement.

Medik Ostomy Supplies Ltd imported, repackaged and sold the claimants’ ostomy products in the United Kingdom, but failed to give Hollister Inc or Dansac A/S notice before putting the repackaged goods on sale, as required by the fifth condition of Bristol-Myers Squibb v Paranova A/S (BMS condition 5).

Medik admitted infringement and entered into a consent order that restrained further infringement and directed that there be an inquiry as to damages or an account of the profits made by Medik.

The claimants elected an account of profits. When determining the sum due, the judge considered the decision of the Court of Justice in Boehringer Ingelhelm KG v Swingward Ltd (Boehringer II) (Joined Cases C-143/00 and C-443/99) which had concluded (at Paragraph 64):

“…where a parallel importer has failed to give prior notice to the trademark proprietor concerning a repackaged pharmaceutical product, he infringes that proprietor's rights on the occasion of any subsequent importation of that product, so long as he has not given the proprietor such notice. The sanction for that infringement must be not only proportionate, but also sufficiently effective and a sufficient deterrent to ensure that Directive 89/104 is fully effective. A national measure under which, in the case of such an infringement, the trademark proprietor is entitled to claim financial remedies on the same basis as if the goods had been spurious, is not in itself contrary to the principle of proportionality. It is for the national court, however, to determine the amount of the financial remedies according to the circumstances of each case, in the light in particular of the extent of damage to the trademark proprietor caused by the parallel importer's infringement and in accordance with the principle of proportionality.”

The judge then adopted a three-stage approach for the assessment of the sum due to the claimants. First, he assessed the account of profits on the normal basis. He then considered the extent of damage caused to the claimants by Medik’s infringement and the issue of proportionality in all of the circumstances. In doing so, he found that:

• the claimants had not suffered any damage relating to the purposes for which BMS condition 5 was provided;
• the infringement constituted only a breach of BMS condition 5, which was a procedural requirement only; and
• the claimants had known of Medik’s repackaging activities.

Having weighed the various factors, the judge awarded the claimants half of Medik’s profits, which he considered was a proportionate remedy and a sufficient deterrent.

The claimants appealed, submitting that the judge should not have made any deduction and that he had adopted the wrong approach to Medik’s business overhead costs when assessing Medik’s net profits. Medik cross-appealed, contending that the claimants were not entitled to any profits at all.

Lord Justice Kitchin, who gave the leading judgment in the Court of Appeal, considered that it was clear from Boehringer II that a failure to give notice constituted an infringement of the trademark owner’s rights and should not be characterised as a procedural deficiency only, and that the claimants were entitled to a financial remedy.

Considering the appropriate remedy, Kitchin LJ noted that, as a matter of domestic law, a claimant could seek either:

• damages, to restore the claimant to the position he would have been in if the infringement had not been committed; or
• an account of the profits made by the infringer.

Article 13 of th IP Rights Enforcement Directive (2004/48/EC) did not preclude the award of an account of profits and, since Community law did not lay down a specific remedy, this was a matter for national law.

In the view of Kitchin LJ, the remedy of an account of profits clearly satisfied the principles of proportionality, equivalence and effectiveness. An account of profits ensured that an infringer did not benefit from his wrongdoing, but did not contain any element of punishment and, since it was an equitable remedy, it could also be refused if it might produce an unjust result. Further, it was an established remedy for infringement of all types of IP rights, and comprised an effective deterrent because an infringer knows it will not retain any profits derived from its infringement.

The Court of Appeal therefore held that the claimants were entitled to a conventional account of Medik's profits in respect of its infringing activities and that the judge had fallen into error when making deductions. Since the purpose of an account of profits was to deprive the infringer of the profits it has made by the infringement, the losses suffered by the claimant by reason of the infringement were not relevant.

Before the Patents County Court, Medik had argued that it was entitled to deduct a portion of its general overhead costs, such as the cost of premises and general staff costs, when calculating net profits. There was no suggestion that these costs had been incurred due to the infringing acts.

The judge allowed a deduction to be made, considering that he was bound by the reasoning of Laddie J in Celanese International Corp v BP Chemicals Ltd ([1999] RPC 203). In Celanese, Laddie J reasoned that sharing of costs allows businesses the opportunity to make use of economies of scale. If a claimant took the benefit of the costs sharing without taking into account the proper proportion of costs borne by the relevant business unit, this would wrongly increase the notional profits made by the defendant.

In upholding the claimants' appeal, Kitchin LJ confirmed that, when calculating the net profits of the infringer, it was permissible to deduct any direct costs of the infringement and any overheads that would not have been incurred but for the infringement. However, it was not permissible for an infringer to simply allocate a proportion of its general overheads to an infringing activity and deduct them; to allow a defendant to attribute overheads that would have been incurred in any event to the infringements would allow it to profit from its unlawful activity.

To the extent that Laddie J had decided to the contrary in Celanese, Kitchin LJ disagreed. It was necessary for an infringer to first show that the relevant overheads were properly attributable the infringing activity. This would depend upon the facts and circumstances of the case, such as whether:

• the defendant had surplus capacity (in which case the court might take into account whether the defendant had foregone an opportunity to make and sell other non-infringing products);
• the defendant's overheads had been increased as a result of the infringing activity; or
• its overheads would have been lower had it not engaged in that activity.

Jennifer Gibson, Burges Salmon LLP, Bristol