Not so innocent infringer ordered to pay reasonable royalty

In an inquiry as to damages following successful infringement proceedings by Kohler Mira Limited in respect of its unregistered design rights in electric shower units, Judge Hacon has awarded damages against Bristan Group Limited calculated by way of a reasonable royalty. Judge Hacon also gave guidance about when Section 233(1) of the Copyright, Designs and Patents Act 1988, which provides that innocent infringers of unregistered design rights are not liable to pay damages, may apply (Kohler Mira Limited v Bristan Group Limited ([2014] EWHC 1931 (IPEC)).

Kohler and Bristan are both manufacturers of electric shower units. On January 28 2013, the then HH Judge Birss QC found that Bristan had infringed certain of Kohler’s unregistered design rights through Bristan’s sale of its Glee, Joy and Smile shower units. Kohler had also claimed that Bristan had infringed its registered Community designs (RCDs), which were found to be valid but not infringed. Kohler elected for an inquiry as to damages.

Kohler claimed damages under four heads. First, it claimed profits lost on the sale of shower units that Kohler would have sold but for Bristan’s infringing acts. Second, Kohler claimed a royalty on Bristan’s sales. Thirdly, it claimed its additional costs for advertising and promotion incurred due to Bristan’s infringement. Finally, it claimed an uplift on damages awarded of 10% for moral prejudice caused to Kohler by the infringement under Article 13(1)(a) of the IP Rights Enforcement Directive (2004/48/EC).

In response, Bristan sought to rely on Section 233(1) of the Copyright, Designs and Patents Act, which provides that, where “at the time of infringement the defendant did not know, and had no reason to believe, that the design right subsisted in the design… the [claimant] is not entitled to damages”. Bristan had not raised Section 233(1) at the liability trial.

First, Bristan advanced a number of arguments about why it should be entitled to plead Section 233(1) for the first time at the inquiry. These included that time was short at the trial and that the trial was primarily focused on the RCDs, so had that case succeeded, then there would have been no need to raise Section 233(1). Kohler argued that it was too late to raise Section 233(1) as a matter of law and that the relevant witnesses were not called before the Inquiry.

Bristan’s arguments were rejected. As a matter of public policy, especially in the IPEC, the parties are entitled to know their position after the liability trial has finished. Had this section be raised at the liability trial, it might have influenced Kohler’s decision to elect for an Inquiry. Additionally, Bristan could have raised the possibility of relying on Section 233(1) at the case management conference to decide whether it was better left to the inquiry.

In any event, Judge Hacon considered that Bristan could not have benefited from Section 233(1). Section 233(1) requires that the infringing party did not know, or had no reason to believe, that design right subsisted. According to Morritt J in LA Gear Inc v Hi-Tec Sports plc ([1992] FSR 121), "'reason to believe' must involve the concept of knowledge of facts from which a reasonable man would arrive at the relevant belief. Facts from which a reasonable man might suspect the relevant conclusion would not be enough.”

In effect, Bristan argued that, unless a party was put on notice of the subsistence of the design right, then it should be presumed to have no reason to believe the rights existed. This, the judge considered, would place a wholly unreasonable burden on the owners of unregistered design right. The judge gave the examples of where an article was so old that it was reasonable to expect the rights has expired, or where reasonable enquiries were made as to the existence of right as occasions where Section 233(1) could apply. Bristan’s reliance was based on the assumption that the designs were created by a US citizen, as Koehler has a US parent company, and thus the designs would not be protected, which was not sufficient to rely on Section 233(1).

With regard to the first head of damages (lost profits from lost sales), the judge noted the difficulties in establishing the number of sales Kohler lost due to Bristan’s infringement. In particular, the infringing articles had a lower price than Kohler’s products, and were sold through different sales channels. There were also a number of other competitors which could have acquired the sales if Bristan’s products were not on the market. Judge Hacon concluded that this head of damages was too speculative and open to inaccuracy, even to be relied upon as a rough approximation. He therefore decided to quantify the damages by way of a notional reasonable royalty on all sales of the infringing articles.

As the parties agreed there were no comparable licences, Judge Hacon sought to assess the level of royalty by way of the user principle. He noted that to establish a reasonable sum for the use of Kohler's property required the assumption that both parties were willing to negotiate and to reach a deal. Judge Hacon then considered the level of profit Bristan made on the sales of the infringing goods. This was complicated by the fact that Bristan submitted evidence that, when overheads were taken into account, the sales were loss making. Following the Court of Appeal in Hollister Inc v Medik Ostomy Supplies Ltd ([2012] EWCA Civ 1419), Judge Hacon assessed profits without deductions for overheads as these had not been increased by the conduct of the infringing business. This resulted in an average profit margin of 22.2%. When considering typical profit sharing arrangements, the judge relied upon the evaluation of Mr Peter Wayward, acting for the comptroller, in NIC Instruments Ltd ([2005] RPC 1), and applied an uplift to recognise the breakthrough the designs represented, arriving at a royalty of 30% of profits, or 6.7% on the sale price.

Having reached this royalty rate, the judge turned to the final heads of damages claimed. Additional advertising and promotional costs were rejected as the evidence did not allow for the quantum of justifiable extra promotion to be defined. Judge Hacon also rejected an uplift under Article 13(1)(a) of the Enforcement Directive as this concerns “moral prejudice”; the harm suffered in the present case was found to be purely economic.

Judge Hacon provides a useful summary of the case law concerning Section 233(1), and the level of belief required to rely upon it. It is clear that Section 233(1) does not impose the obligation on a right holder to bring unregistered design rights to the attention of a third party in order to be entitled to recover damages.

Each inquiry as to damages will turn heavily on the individual facts of not only the case but the industry concerned. This decision demonstrates the difficulties a court can have in assessing lost profits as a head of damages, as the sale of infringing goods will not necessarily equate to the loss of a sale for the right holder. As with several other recent inquiries, a reasonable royalty based on the user principle was applied.

Leigh Smith, Clifford Chance LLP, London