ON APPEAL FROM THE CHANCERY DIVISION
INTELLECTUAL PROPERTY ENTERPRISE COURT
HIS HONOUR JUDGE HACON
CC12P01174
Royal Courts of Justice
Strand, London, WC2A 2LL
Before :
SIR TERENCE ETHERTON
(CHANCELLOR OF THE HIGH COURT)
LORD JUSTICE TOMLINSON
and
LORD JUSTICE LEWISON
Between:
DESIGN & DISPLAY LIMITED | Appellant |
- and - | |
OOO ABBOTT & ANR | Respondents |
Thomas St Quintin (instructed by Appleyard Lees Solicitors) for the Appellant
Hugo Cuddigan QC and Chris Aikens (instructed by Gordons Partnership LLP) for the Respondents
Hearing date: 16/02/2016
Judgment
Lord Justice Lewison:
Introduction and background
The issues raised on this appeal concern the taking of an account of profits in a case of infringement of intellectual property rights; in this case patent infringement. In this case the patent is European Patent (UK) No 1 816 931 (“the patent”).
In his judgment dated 30 May 2013 Birss J held that the patent was valid and infringed. The claimants elected for an account of profits, rather than damages; and the account was taken by HHJ Hacon in the Intellectual Property Enterprise Court (“IPEC”). The hearing lasted only one day, and that included live evidence, although no expert accounting evidence was adduced. It is from Judge Hacon’s judgment ([2014] EWHC 2924 (IPEC)) that this appeal is brought.
In his judgment on liability ([2013] EWPCC 27) Birss J described the background to the invention:
“[4] The case concerns display panels used in shops. Shopfitters often use a wooden wall called a slatwall as a panel on which to construct displays. Today the slatwall is made of MDF and has horizontal slots. Back plates or other shelf fixings can be fitted into the slots in order to secure display accessories such as shelves, brackets and hangers. The merchandise is displayed from the display accessories. The fittings are inserted into the jaws of the mouth of the slot and hooked into the top of an internal chamber of the slot lying behind its mouth.
[5] The slots are made by a computer controlled router moving across the width of the panel. A router makes a T shaped slot and leaves visible machined surfaces within the slot having machined away the decorative veneer that generally covers the face of the MDF. Also the edges of the veneer around the mouth of the slot are susceptible to damage as display accessories are hooked in and removed.
[6] For these reasons it became standard practice to provide inserts for slots, as protection against damage and to hide the machined surfaces. To an extent the inserts also strengthen the panel. The accessories are then fitted into the inserts rather than being fitted directly into the bare slots.
[7] The inserts are made by extrusion. By 2004 the standard inserts used were of two kinds: “slide-in” or “snap-in”. As the name suggests slide-in inserts were slid into place from the edge of the slat wall. They were made of aluminium. They could be T-shaped, corresponding to the T shaped cross-section of the slot or else they could be L-shaped, using only the top arm of the slot. A problem with slide-in inserts was that if the edge of the slatwall was not accessible, for example at a corner, there is no room to slide the insert into place. Snap-in inserts solve this problem by being inserted from the front with a spring action. Because they needed to be compressible, they were made of PVC instead of aluminium.
[8] The invention in this case is a snap-in insert made from a resilient metal like aluminium.”
Claim 1 of the patent claimed:
“1. A display panel (10) having an outer face (11), at least one elongate slot (12) of re-entrant shape extending across the panel and having a mouth in the plane of the outer face,
and an elongate insert (19) having substantial rigidity in the lengthwise direction thereof and adapted to be received in the slot,
which insert is resiliently deformable
and has a base portion (20) from one side of which extends an arcuate leg (21), and from the other side of the base portion there extends an angled leg (22) having a substantially planar first part (27) lying generally parallel to the part of the arcuate leg near the base portion and a substantially planar second part (28) turned outwardly with respect to the first part,
an outwardly-directed abutment (30) being formed along the free edge region (29) of the second part and extending along the length of the insert (19),
characterised in that the insert is made of a resilient metal,
in that a first rib (25) upstands from the free edge (23) of the arcuate leg (21), a second rib (26) extends parallel to the first rib and is disposed further from the free edge of the arcuate leg than the first rib so that a channel (24) is defined by the first and the second ribs, said channel extending along the length of the insert (19) and being directed outwardly with respect to the curvature of the free edge region (23) of the arcuate leg (21),
and further in that the spacing between said channel (24) and said abutment (30) is slightly greater than the width of the mouth of the re- entrant slot (12) whereby the insert (19) may be entered into the slot (12) from the outer face (11) of the panel (10) with the base portion (20) leading into a re-entrant part of the slot until the abutment (30) engages the corner region (32) between the outer face (11) of the panel (10) and one side of the slot, and the channel (24) is engaged with the corner region (33) between the outer face of the panel and the other side of the slot.”
Birss J found that the defendant Design & Display had infringed the patent, but he did not describe their activities in any detail: it was unnecessary for him to do so. Judge Hacon described those activities as follows:
“[5] Design & Display manufactures and sells retail equipment, including display panels for use in shops. … [Its] primary business was as a joiner for shopfitters, making bespoke items of shop furniture, … called ‘equipment’. This equipment included displays, some of which had slatted panels (sometimes referred to as slatboards or slatwalls) sold both in standard sizes and as custom-sized panels. These were the panels with horizontal slots into which the aluminium inserts could be introduced – in the case of the infringing inserts, introduced by a snap-in process. Shelves or hangars for displaying the goods could then by located into the inserts.
[6] In the relevant period Design & Display sold the slatted panels in two ways. First, it sold the panels with inserts separately for subsequent assembly by the customer. At the trial these were referred to as ‘unincorporated’ panels and inserts. Secondly, Design & Display sold pre-assembled displays of which the panels with inserts were part. These were referred to as ‘incorporated’ panels and inserts. In addition, some unincorporated inserts were sold without slatted panels.
[7] Design & Display did not itself make the inserts but purchased them from an aluminium extruder in the form of lengths which were cut into sections to make the individual inserts. The panels were purchased in the form of plain MDF panels into which the slots were machined by Design & Display.”
The first main question raised by the appeal is whether Design & Display are liable for the whole of the profits made on the sale of panels sold together with infringing inserts. The second main question is whether Design & Display are entitled to set off any part of their general overheads against the gross profit for which they are accountable.
Profits on sale of incorporated panels
Section 61 (1) (d) of the Patents Act 1977 entitles a patentee to claim against an infringer an account of the profits “derived by him from the infringement”. An account of profits is confined to profits actually made, its purpose being not to punish the defendant but to prevent his unjust enrichment. The underlying theory is that the infringer is treated as having carried on his business (to the extent that it infringes) on behalf of the patentee. The broad principle is that the patentee is entitled to profits that have been earned by the use of his invention. If the patentee does not recover those profits, the infringer will have been unjustly enriched. So the purpose of the account is to quantify the extent to which the infringer would be unjustly enriched if he were to retain the profits derived by him from the infringement. That requires the fact finder first to identify the patentee’s invention and second to decide what (if any) profits the infringer derived from the use of that invention. The second of these questions may give rise to difficulty where the infringer sells products associated with the subject matter of the patent (often called “convoyed goods”) or products into which the subject matter of the patent is incorporated. The court must determine what profit has been earned, in a legal sense, by the infringer’s wrongful acts. It is clear, then, that an account of profits looks at the facts through the lens of what the infringer has done; and what the patentee might have suffered by way of loss in the real world is irrelevant.
The first question requires the identification of the invention. It is common ground that, for the purpose of assessing damages or taking an account of profits, the scope of the invention is not necessarily co-terminous with the scope of the claims. Laddie J explained the reason for this in Celanese International Corp v BP Chemicals Ltd [1999] RPC 203 at [51]:
“Someone invents a new form of tin whistle. With the aid of his patent agent he obtains a patent. Regrettably, but as is now common, the patent ends with claims of ever greater particularity and narrowness. … Claim 1 is for the tin whistle. Claim 10 is for a funnel to which the new tin whistle is connected. Claim 15 is for a battleship with a funnel to which the tin whistle is connected. No doubt none of the subsidiary claims are independently valid over Claim 1 but they are probably not per se invalid. Nor is there any doubt that an injunction or an order for delivery up would be directed to the tin whistle alone rather than the whole battleship. Similarly on an account substance not form counts. What the defendant has to account for is the profit made by exploitation of the invention, i.e. the whistle, not profits made by exploitation of material or activities which are not attributable to the plaintiff's ingenuity, i.e. the rest of the battleship.”
In our case the judge considered the inventive concept of the patent at [27] and [28]. He considered that the invention was best described by the characterising part of claim 1. He said:
“In my view the inventive concept was not just the idea of an insert made of a resilient metal (which was known). It was the composite idea of an insert made of such a metal and its having a particular shape and its interacting with the slot of the panel in a particular way, such that the metal insert could engage with the panel by snap-in means.”
Mr St Quintin disputes the judge’s conclusion on two grounds. First, he said that the inventive concept had already been decided by Birss J in the liability judgment; and that the judge could not or should not have gone behind Birss J’s determination which created an issue estoppel. Second, he said that in any event the judge’s characterisation of the invention was wrong.
The relevant parts of Birss J’s judgment are the following:
“[8] The invention in this case is a snap-in insert made from a resilient metal like aluminium.
[20] It is worth noting that claim 1 is not to an insert per se but to a display panel with at least one slot into which an insert has been fitted. The first two characterising parts of the claim relate to the insert. The insert must be made of a resilient material. It must have certain ribs and a channel, in particular a “second rib” which corresponds to item 26 in figure 1. The way in which the insert works is defined in a third characterising part. The words boil down to saying that the insert must be able to be fitted from the front and will in effect snap into place. The jaws of the insert are wider than the corresponding size of the slot. The second rib makes a channel with the first rib which is supposed to engage with what would be the lower lips of the mouth of the slot.
[33] … I have construed claim 1 above as well. This case is not one in which it would be helpful to extract out a distinct inventive concept.”
I do not consider that paragraph [8] of Birss J’s judgment will bear the weight that Mr St Quintin seeks to give it. If Birss J had decided in that paragraph that the limit of the inventive concept was that the insert was made of aluminium rather than plastic, he would not have said what he did in paragraph [33]. Nor, having construed the claim, was it necessary for him to identify the inventive concept for the purpose of assessing damages or an account of profits. His only concern was to decide whether the claim was obvious over prior art. The issue on the account is a different one. In addition it is clear that in construing the claim Birss J placed considerable weight at [20] to the way in which the insert engages with the panel.
So far as the substance of the point is concerned, Mr St Quintin relied heavily on the fact that slat boards were part of common general knowledge and hence could not form part of the inventive concept. However, the slat board itself was not the inventive concept that the judge described. His description was much more limited, consisting of the material from which the insert was made, its particular shape, and the way in which it interacted with the slat board so as to enable it to be snapped in from the front. I can see nothing wrong with the judge’s identification of the inventive concept. I note at this stage that although claim 1 of the patent claimed a panel, the judge thought that the panel itself was not part of the inventive concept (see judgment at [26]), and that conclusion has not been challenged, in my opinion rightly.
Having identified the inventive concept of the patent, it is then necessary to address the question of causation. It has been consistently said that an assessment of damages for patent infringement and the taking of an account of profits proceed on a common principle of legal causation: Celanese International Corp v BP Chemicals Ltd at [37] (citing Imperial Oil v Lubrizol [1966] 71 CPR (3d) 26). But the question whether an infringement has caused a loss (in the legal sense) and the question whether the infringer has derived a profit from the infringement are different questions. Mr Cuddigan QC submitted that the question of causation was to be answered as a matter of common sense, relying on Gerber Garment Technology Inc v Lectra Systems Ltd [1997] RPC 443. However, as Lord Hoffmann pointed out in Environment Agency v Empress Car Co (Abertillery) Ltd [1999] 2 AC 22, 29:
“… common sense answers to questions of causation will differ according to the purpose for which the question is asked. Questions of causation often arise for the purpose of attributing responsibility to someone, for example, so as to blame him for something which has happened or to make him guilty of an offence or liable in damages.”
Having given examples he said at 31:
“These examples show that one cannot give a common sense answer to a question of causation for the purpose of attributing responsibility under some rule without knowing the purpose and scope of the rule.”
In Gerber Garment Technology Inc v Lectra Systems Ltd Staughton LJ adverted to the difference between an assessment of damages and an account of profits. He said at 452:
“It may be that the remedy of an account of profits is also somewhat confined, since it speaks of “profits … derived from the infringement”: see Encyclopaedia of UK and European Patent Law para 10–124A and n (63), Dart Industries Inc v Decor Corp Pty Ltd [1994] FSR 567. As to whether that would include convoyed goods I express no opinion; it seems to me of little or no weight in determining the extent of the words “damages in respect of the infringement” in section 61(1).”
Gerber Garment Technology Inc v Lectra Systems Ltd was concerned with the assessment of damages, rather than an account of profits, and the observations of the Court of Appeal must be read with the distinction between the two remedies borne firmly in mind. Having put the question of an account of profits to one side, Staughton LJ went on to discuss the availability of damages. The patented article in that case was a machine for cutting fabric; and the patentee claimed damages for lost sales. The question was whether the lost sales could include sales of CAD systems (which were not protected by the patent) which would have been sold with the patented machine. The court held that they could. Staughton LJ said at 453:
“My answer would be, at first impression, that the Patents Act is aimed at protecting patentees from commercial loss resulting from the wrongful infringement of their rights. That is only a slight gloss upon the wording of the statute itself. In my judgment, again as a matter of first impression, it does not distinguish between profit on the sale of patented articles and profit on the sale of convoyed goods. So I must look to see whether any such distinction emerges from the case law.”
He then considered a number of cases including Meters Ltd v Metropolitan Gas Meters Ltd (1910) 27 RPC 721, (1911) 28 RPC 157. He concluded that there was no rule of law which restricted the loss for which the patentee could claim to lost sales of the patented article alone. Having quoted from the judgment of Fletcher Moulton LJ in Meters Ltd v Metropolitan Gas Meters Ltd he concluded at 456:
“Beyond that the assessment of damages for infringement of a patent is in my judgment a question of fact. There is no dispute as to causation or remoteness in the present case; nor can I see any ground of policy for restricting the patentees' right to recover. It does not follow that, if customers were in the habit of purchasing a patented article at the patentee's supermarket, for example, he could claim against an infringer in respect of loss of profits on all the other items which the customers would buy in the supermarket but no longer bought. The limit there would be one of causation, or remoteness, or both. But the present appeal, in so far as it seeks to restrict the scope of recovery, should be dismissed.”
Meters Ltd v Metropolitan Gas Meters Ltd was another case of the assessment of damages for patent infringement. The patented article was a mechanism for controlling the supply of gas in a pre-paid gas meter. The patentee was a manufacturer of gas meters, and claimed damages representing lost sales of gas meters. It did not claim an account of profits. The Defendant had sold 19,500 gas meters incorporating the patented article. However, the patentee claimed the profit on sales which it claimed that it would have made if the Defendant had not infringed. It did not claim the profit that the infringer had made. The number of lost sales on which damages were awarded was assessed by the Master at 5,000 meters, although on appeal Eve J reduced that number to 3,500. It was in that context that the judge had to decide whether the damages should be assessed as the whole of the profit that the patentee would have made on the lost sales, or only such part of that profit was attributable to the patented article, which represented approximately 1/44th of the whole profit. It was in that context that Eve J said:
“… the parts incorporating the invention, are, in my opinion, component and essential parts of the meter regulating and controlling – from the Gas Company's point of view – the most important functions of the meter, that is to say the supply of the exact amount of gas to which the consumer is entitled having regard to the amount he has paid and the current price of gas. In my opinion, the mechanism protected by these Patents is of the very essence of the meter; … and … it is no answer to the Plaintiffs whose invention has been infringed to say that similar results could have been achieved without infringing the Patent. In this case I think that the inclusion in the Defendants’ meter of the infringement results in the meter itself being an infringement … and that the Master has rightly held that the profit on the meters is a proper factor to be taken into the calculation and not the profit only on those parts of the inventions.”
The important point is that what the judge was doing was assessing the loss suffered by the patentee, not the profit made by the infringer.
In Gerber Garment Technology Inc v Lectra Systems Ltd Staughton LJ referred to Dart Industries Inc v Decor Corp Pty Ltd with apparent approval on the question of the scope of an account of profits; and part of the reasoning in that case has also been expressly approved by the Court of Appeal in Hollister Inc v Medik Ostomy Supplies Ltd [2012] EWCA Civ 1419, [2013] FSR 24. I begin with Dart Industries Inc v Decor Corp Pty Ltd which deals with both the issues that arise in our case, although in the opposite order.
Decor was a manufacturer of plastic kitchen canisters. The canisters had lids incorporating a press-button seal. The seal infringed Dart’s patent. In giving directions for the taking of an account the primary judge ruled that only costs which were directly attributable to manufacture or sale of the infringing product should be taken into account. He also directed that the profits for which Decor had to account were the profits from the manufacture and sale of the complete canisters, including the press-button seals. The intermediate appeal court (the Full Court) reversed the primary judge on the first of those directions, holding that Decor would be at liberty to show that various categories of overhead costs contributed to the obtaining of the relevant profit, and to show how and in what proportion they should be allocated in the taking of the account of profits. However they upheld the primary judge on the second direction. Dart appealed to the High Court on the first direction and Decor sought leave to cross-appeal on the second.
The High Court refused leave to cross-appeal against the second direction because there were concurrent findings of fact against Decor by both the primary judge and the Full Court. But as I read their judgment they approved the way in which the Full Court described the question to be answered:
“The respondent cannot gainsay that it is only entitled to the profits obtained by the infringement. If, for example, a patented brake is wrongfully used in the construction of a motor car, the patentee is not entitled to the entire profits earned by sales of the motor car. He must accept an appropriate apportionment. But the question is how that principle shall be applied to a situation where the patent relates to the essential feature of a single item . . . it seems to us that it was open to the judge to find, and he correctly found, that what characterised the infringing product was the press button lid, without which this particular container would never have been produced at all.”
The High Court went on to approve the statement of Windeyer J in Colbeam Palmer Ltd v Stock Affiliates Pty Ltd [1972] RPC at 315:
“If one man makes profits by the use or sale of some thing, and that whole thing came into existence by reason of his wrongful use of another man's property in a patent, design or copyright, the difficulty disappears and the case is then, generally speaking, simple. In such a case the infringer must account for all the profits which he thus made.”
On the facts, as shown by the quotation from the Full Court, Dart Industries Inc v Decor Corp Pty Ltd was a case in which but for the invention the canister “would never have been produced at all.”
Laddie J discussed at length the perspective from which an account of profits should be taken in Celanese International Corp v BP Chemicals Ltd. He discussed in particular how profits should be dealt with when the infringement was only part of the overall process. At [43] he said:
“Although the infringer cannot avoid paying over profits by relying on possible non-infringing alternatives, the patentee, as noted above, cannot recover profits which were not earned by use of his invention. I have already referred to a case where the defendant has two businesses, one infringing and the other not. But the same approach should apply where only part of a product or process infringes. Profits attributable to the non-infringing parts were not caused by or attributable to the use of the invention even if the use of the invention was the occasion for the generation of those profits. For example imagine a case in which there is a 3-stage process for making a product. The profits achieved by making and selling the product are attributable to each of the three stages. Assume also that each stage is protected by a separate patent. There is only one profits “pot” which has to be divided amongst the three stages. Where each stage is as expensive to run and as important to the characteristics of the final product as the other stages it may be that one third of the profits should be attributed to each of them. If this is so, then that attribution applies whether the three patents are owned by the same or different proprietors. It must also apply even when one or more of the patents expires or even if one or other patent has not been applied for. The existence or expiry of patent protection does not alter which stages make what profit. In such a case it is necessary to apportion the total profits actually made among the stages or parts which generated it.”
Laddie J also referred to Dart Industries Inc v Decor Corp Pty Ltd. At [47] he said:
“Sometimes the court may come to the conclusion that all the profits are attributable to the act of infringement. That is what Pennycuick J did in [Peter Pan Manufacturing Corp v Corsets Silhouette Ltd [1963] RPC 45]. There the whole of the defendant's brassieres were made by misuse of the plaintiff's confidential information. Without it brassieres to that design would not have existed. No apportionment was appropriate. Similarly, the court may come to the conclusion, as a matter of fact, that the invention was the essential ingredient in the creation of the defendant's whole product or process. If so, it may be appropriate not to apportion. See Dart Industries v Decor Corp.”
Thus he, too, concluded that an apportionment would be inappropriate where without the infringement the infringing articles would not have existed or where the invention was an essential ingredient in the creation of the infringer’s whole product.
The judge in our case found that some sales of incorporated panels were caused by the sale of the infringing inserts. He said at [30]:
“I will consider first just the sales of the infringing inserts. It is likely that in at least some cases the customer either specified or was recommended the infringing inserts because of the advantages they offered for particular displays and for use of the panel in which they were incorporated. Mr Lloyd in cross-examination accepted that there were such advantages. I have no real doubt that in those circumstances the sale of infringing inserts drove the sale of the compatible panels in which they were incorporated.”
Mr St Quintin makes no specific criticism of that paragraph. The judge then turned to consider other sales on the hypothesis that the customer was indifferent to the insert in the panel. He said at [31]:
“However, I will assume that some sales of panels with incorporated infringing inserts went ahead with the customer indifferent to the type of inserts used. I will also assume that while the panels must have been machined to be compatible with the infringing inserts, they may also have been compatible with non-infringing inserts (although it was the evidence of Mr Chasmer, the Second Claimant, that there is little if any such cross-compatibility in the industry). In those circumstances the sales of the infringing inserts were not in the same way the driving force behind the sales of panels but in the end I think it makes no difference. The customer will have specified panels with incorporated inserts (and also possibly that the panels were incorporated into a display, it doesn't matter). Design & Display was thus either going to make a sale of inserts and panels both, or no sale at all. The sales necessarily went hand in hand. Design & Display chose to sell infringing inserts. Because the sales went together, the sale of the inserts caused (in the relevant sense) the sale of the panels in which they were incorporated. It was also foreseeable that the sale of the panels would be a consequence of the sale of the inserts.”
He added at [32]:
“It goes further. As I have said, part of the inventive concept was embodied in the shape of a section of the panel. The fact that it was a modest section makes no difference. The sale of that section of the panel both caused the sale of the panel as whole and the latter sale was a foreseeable consequence of the former.”
Based on these findings the judge concluded at [33]:
“Design & Display did infringe and in my view the scope of the profit derived from such infringement extends to the profit made from sales of panels in which the infringing inserts were incorporated.”
Mr Cuddigan made the fair point that at [31] the judge was not making positive findings of fact, but was making assumptions. However, the primary question for us is whether, on the assumptions that he made, the judge’s legal reasoning was correct. If it was not, then the case may have to be returned to him to make the necessary findings of fact.
Mr St Quintin of course accepts that so much of the profit made on the sale of the incorporated panel as is attributable to the infringing insert must be included in the account. But he says that this is not a case in which the article itself (the incorporated panel) would not have come into existence at all but for the infringement. Nor was it an essential ingredient in Design & Display’s whole product (i.e. a panel with an insert). That is demonstrated by the fact that Design & Display continued to sell incorporated panels after it ceased to use the infringing insert without any drop in sales. In those circumstances he argues that the overall profit should be apportioned between the insert on the one hand and the panel on the other. Mr Cuddigan said that this argument was not permissible because of the way that the issue was framed. The issue was framed as follows:
“Are the Claimants entitled to claim the profits which accrued to [the Defendant] as a result of the sale of slatted panels sold together with the clip in aluminium extrusion?”
He argued that this was a binary question which the judge had to answer either “Yes” or “No”. I do not agree. It was open to the judge to answer the question by holding that such profits could be recovered in some circumstances but not in others.
Let me revert to the example given by the Full Court in Dart Industries Inc v Decor Corp Pty Ltd. A manufacturer sells a car which includes a patented brake. If the car did not have brakes, the manufacturer could not have sold it, but it did not have to have that particular brake. In those circumstances the Full Court clearly thought that it would be unjust to charge the manufacturer with the whole profit made on the car; and I agree with them. In my judgment the legal error that the judge made was to ask whether the sale of the panel plus insert would have happened separately rather than to ask himself how much of the profit on the sale was derived from the infringement. In a case in which the infringement does not “drive” the sale it seems to me that it is wrong in principle to attribute the whole of the profit to the infringement. In particular it does not follow from the fact that the customer wanted a slat wall that incorporated an insert that the customer wanted a slat wall that incorporated the infringing insert. Mr Cuddigan argued that the infringing inserts and the slot were the “very essence” of the incorporated and unincorporated panels. But the judge made no such finding, and his observations at [32] suggest the contrary. In addition I do not consider that the judge was correct at [31] in saying that “because the sales went together, the sale of inserts caused … the sale of the panels…” The mere fact that the two went together is not, in my judgment, sufficient to establish that the whole of the profit earned on the composite item was derived from the invention. One might just as well say that the sale of the panel caused the sale of the insert. As the judge himself recognised the customer specifies panels, and on the hypothesis that he was considering at [31] the customer is indifferent about the inserts (provided that some form of insert is included). On the judge’s approach, because the sale of the patented brake went with the sale of the car, the whole of the profit on the car would be included in the account. If the judge had found on the facts that the infringing insert was “the essential ingredient in the creation of the defendant's whole product” (i.e. the incorporated panel), then he would have been justified, on the facts, in declining to apportion the profit. But I cannot see that he made that finding.
In my judgment therefore in cases simply falling within the factual hypothesis discussed at [31] the judge should have apportioned the overall profit. The question of apportionment will therefore have to be returned to IPEC, although the judge would not be precluded from finding as a fact that the infringing insert was the “essential ingredient” of the incorporated panel.
Overheads
As mentioned, in Dart Industries Inc v Decor Corp Pty Ltd the High Court of Australia dealt with the question of overheads in connection with an account of profits. The majority held at 574:
“In calculating an account of profits, the defendant may not deduct the opportunity cost, that is, the profit forgone on the alternative products. But there would be real inequity if a defendant were denied a deduction for the opportunity cost as well as being denied a deduction for the cost of the overheads which sustained the capacity that would have been utilised by an alternative product and that was in fact utilised by the infringing product. If both were denied, the defendant would be in a worse position than if it had made no use of the patented invention. The purpose of an account of profits is not to punish the defendant but to prevent its unjust enrichment.
Where the defendant has forgone the opportunity to manufacture and sell alternative products it will ordinarily be appropriate to attribute to the infringing product a proportion of those general overheads which would have sustained the opportunity. On the other hand, if no opportunity was 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. It is not relevant that the product could not have been manufactured and sold without these overheads. Nor is it relevant that absorption method accounting would attribute a proportion of the overheads to the infringing product. The equitable principle of an account of profits is not to compensate the plaintiff, nor to fix a fair price for the infringing product, but to prevent the unjust enrichment of the defendant.” (Emphasis added)
In my judgment the question posed by the court is a relatively simple one to ask (even if it may not be easy to answer): if the defendant had not infringed the patent would he have carried on a non-infringing business which would have been sustained by the overheads in fact used to sustain the infringement? Slightly earlier in their judgment the majority said:
“But there was no evidence in this case that Décor … had unused or surplus capacity. There was evidence that the infringing canisters were an integral part of one consistent product range produced, marketed and sold according to a common system. From this it might be inferred that, had those companies not been engaged in the manufacture and marketing of the infringing press-button seal canisters, their capacity for those activities would have been taken up in the manufacture and marketing of alternative products.” (Emphasis added)
Thus the relevant question on the facts was whether the infringer would have devoted his capacity to the manufacture and/or marketing of non-infringing products.
In Hollister Inc v Medik Ostomy Supplies Ltd this court was concerned only with the first of the directions that the High Court considered in Dart Industries Inc v Decor Corp Pty Ltd, namely the apportionment of general overheads in a case of trade mark infringement. Kitchin LJ gave the only reasoned judgment. Having quoted the passages from Dart Industries Inc v Decor Corp Pty Ltd that I have set out he said:
“[85] I find this reasoning persuasive and am satisfied that it is not permissible for a defendant simply to allocate a proportion of its general overheads to an infringing activity…. The defendant must show that the relevant overheads are properly attributable to that activity. All will depend upon the facts and circumstances of the case. For example, it may be relevant to consider whether a defendant has surplus capacity, whether the infringing activity was an additional line to an established business and whether the defendant’s overheads have been increased as a result of the infringing activity or whether its overheads would have been lower had it not engaged in that activity.
[86] We heard little argument on the question of opportunity costs and they have formed no part of the case advanced by either side so I need express no final conclusion upon them. Nevertheless, I believe that if the defendant’s business is not running to capacity, the defendant has not foregone an opportunity to make and sell other non infringing products, and the defendant’s general overheads have not been increased by reason of the infringement and would have been incurred in any event, then to allow it to attribute such overheads, or a proportion of them, to the infringements would be to allow it to profit from its unlawful activity. I believe such a result would not be just and would undermine the purpose of the account.”
I do not consider that Kitchin LJ was suggesting any departure from Dart Industries Inc v Decor Corp Pty Ltd particularly since he said in terms that he found the reasoning persuasive. His observations at [86] were clearly and avowedly obiter. But in any event as I read paragraph [86] all four conditions will need to be fulfilled before an infringer is prevented from offsetting any overheads against the gross profits derived from the infringement. It seems to me to be clear that if the infringer would have manufactured or sold non-infringing products had he not infringed and would have incurred overheads in supporting that manufacture or sale, then he ought to be allowed a proportion of his general overheads. The question is not dependent on whether the infringer is or is not working to capacity. The bottom line is whether (a) the overheads would have been incurred anyway even if the infringement had not occurred and (b) the sale of infringing products would not have been replaced by sale of non-infringing products. It is in those circumstances that an allowance for overheads will not be permitted.
This is, I think borne out by [87] in which Kitchin LJ said:
“In this case Medik has not attempted to prove its business was running to capacity or that, but for the infringement, it would have sold some other products.”
The two are clearly expressed as alternatives. As I read the judgment (and as I also read the judgment of the majority in Dart Industries Inc v Decor Corp Pty Ltd) if the infringer establishes that but for the infringement it would have manufactured or sold other (non-infringing) products then to the extent that its actual overheads would have been used in sustaining that alternative production or sale, those overheads may be deducted in computing the relevant profits for which the infringer must account.
On this issue at [38] the judge referred to the summary (itself derived from Hollister Inc v Medik Ostomy Supplies Ltd) in the judgment of HH Judge Pelling QC in Woolley v UP Global Sourcing [2014] EWHC 493. He then directed himself as follows:
“(1) Costs associated solely with the defendant's acts of infringement are to be distinguished from general overheads which supported both the infringing business and the defendant's other businesses.
(2) The defendant is entitled to deduct the former costs from gross profits.
(3) A proportion of the general overheads may only be deducted from gross profits in two circumstances:
(a) if an overhead was increased by the acts of infringement (i.e. the increase would not have occurred but for the acts of infringement), that increase may be deducted;
(b) if the defendant was running to maximum capacity such that the infringing business displaced an alternative business which otherwise would have been conducted, the apportioned overheads incurred by the infringing business (and which would have been incurred by the displaced business) may be deducted.
(4) The evidential burden is on the defendant to establish any of the above.”
At [44] the judge summarised Design & Display’s argument as follows:
“(1) The switch from sales of infringing inserts to sales of non-infringing inserts made no difference to sales figures. Design & Display would have sold just as many products if it had not infringed. Therefore the overheads claimed which supported the infringing business would have supported a non-infringing business if Design & Display had chosen not to infringe.
(2) Because it would have received no less custom had it sold non-infringing inserts, its business was working to capacity in the sense that there was no more business to be had by selling infringing inserts.
(3) Mr Lloyd gave evidence that it did not have staff or machines standing idle ready to exploit other opportunities. If an exceptional opportunity arose (as happened because of a contract with Vodafone in 2012) Design & Display took on contract workers, hired equipment and a temporary building to accommodate the extra work. The employee headcount varied from year to year. This showed that the company was working to maximum capacity.”
He dealt with those arguments shortly:
“[46] Design & Display's arguments instead focussed on its business operating to capacity. Taking the first two arguments above to begin with, I think they mistake what the Court of Appeal had in mind by working to maximum capacity such that the defendant suffers an opportunity cost. I accept Mr Lloyd's evidence that when Design & Display stopped selling infringing inserts, its sales remained constant. This does not show that the company was working to maximum capacity. At most it might show that the market did not attach much importance or practical value to the infringing inserts, but not necessarily even that – it is also consistent with Design & Display focussing its selling strategy on a different sector of the market.
[47] The third argument does not suggest that Design & Display suffered an opportunity cost. On the contrary, if a sales opportunity arose the company was able to adapt to meet that opportunity alongside its existing sales. Apparently no business was foregone.
[48] In my view Design & Display has not satisfied the evidential burden to show that it is entitled to make any of the deductions from gross profits claimed in its table.”
I do not consider that the judge’s reasoning at [46] led to the conclusion that he reached. What he appears to me to have found is that in effect the same overheads would have been incurred in the sale of non-infringing products. Whether those non-infringing products were slat boards or a different product completely does not seem to me to matter. What matters is that if it had not been selling infringing products Design & Display would have used the self-same overheads in generating profits by lawful trading. Accordingly in my judgment Design & Display’s argument as summarised at [44] (1) was legally correct if the asserted facts were established. Because he rejected the argument on legal grounds the judge did not say whether or not he found those asserted facts to have been proved. Nor, in my judgment, does his reasoning at [47] support the conclusion he reached. What he appears to me to have held in that paragraph is that Design & Display would have increased its business (and hence its overheads) to meet expanding demands. But the logic of that finding is that if Design & Display had not been selling infringing products it would have been able to take on new work without any increase in overheads; or if it did not take on new work, would have reduced its overheads. Mr Cuddigan accepted that the judge’s reasoning at [47] could not be justified.
Mr St Quintin also submitted that in formulating his self-direction the judge wrongly conflated a number of alternatives. HH Judge Pelling had said in the course of his summary:
“… in any case where a defendant seeks to deduct an element of general overheads it will be for it to prove its business was running to capacity or that but for the infringement it would have sold other products or that its overheads would have been lower if it had not infringed.” (Emphasis added).
The Judge, by contrast expressed this principle as:
“…if the defendant was running to maximum capacity such that the infringing business displaced an alternative business which otherwise would have been conducted, the apportioned overheads incurred by the infringing business (and which would have been incurred by the displaced business) may be deducted.” (Emphasis added).
The judge therefore thought that running to maximum capacity was a threshold condition, and that it had to have the consequence that alternative business was displaced. For the reasons I have given I consider that the judge incorrectly stated the law, and that HHJ Pelling’s summary is preferable. I do not doubt that, as Mr Cuddigan submitted, if an infringer in fact has spare capacity which he has not used he may find that a tribunal is sceptical about his evidence to the effect that had he not been infringing he would have used his overheads to support a non-infringing line of business. As Mr Cuddigan said, the obvious question would be: if you had spare capacity why did you not use it to support the non-infringing line of business?
However, in my judgment the judge’s error in his self-direction means that his decision on overheads cannot stand.
Disposal
I would allow the appeal. I do not think that on the basis of the facts that the judge found it is possible for this court to assess the profits to which the patentee is entitled. Regrettably the matter will have to be remitted to IPEC. Mr Cuddigan warned us that under CPR Part 62.23 (which applies to IPEC) save in exceptional circumstances the court will not permit a party to submit material which has not been ordered at the CMC. Whether the circumstances of this case are exceptional will be a matter for IPEC to decide. If it decides they are not, then it will have to reach a conclusion as best it can on the basis of the material before it. The cases emphasise that mathematical precision is impossible, and that the evidential burden lies on the infringer. But those are, in my judgment, matters for another day.
Lord Justice Tomlinson:
I agree.
Sir Terence Etherton, Chancellor of the High Court:
I also agree.