Lilly Icos Llc & Ors v 8pm Chemists Ltd & Anor

This is my judgment on four inquiries as to the losses which the First Defendant (“8PM”) and the Third Defendant (“RDA”, which was referred to during earlier stages of the proceedings as “the Turkish Supplier”), who I shall refer to collectively as “the Defendants”, have suffered as a result of interim injunctions obtained by the Claimants in four actions for trade mark infringement and in respect of which the Claimants gave cross-undertakings to compensate the Defendants. The parties are poles apart. The Defendants claim that they have suffered losses running into millions of pounds as a result of the injunctions. The Claimants dispute that the Defendants have suffered any loss at all. The Claimants also contend that, even if the Defendants have suffered any loss, it is irrecoverable as a matter of law.

I shall have to examine the facts in more detail below, but in outline they are as follows. The litigation concerns the Defendants’ business of supplying branded pharmaceutical products sourced in Turkey to patients in the USA. Orders for products were placed by US patients holding a US doctor’s prescription with so-called Canadian internet pharmacies, who in turn contracted with the Defendants for the fulfilment of these orders. RDA, which purchased the products from Turkish wholesalers, dispensed and packaged products in response to each order and sent them in bulk to the UK where 8PM posted each package to the patient. The passage of the goods through the UK occurred under a customs procedure called “inward processing relief”. The Claimants alleged that the import and/or export of the goods infringed their registered trade marks. The lead action was brought by Lilly Icos LLC and Eli Lilly & Co (collectively, “Lilly”). On 19 October 2007 Lilly obtained a without notice interim injunction from Kitchin J. Subsequently Pfizer Enterprises SARL and six associated companies (collectively, “Pfizer”), Merck & Co Inc and three associated companies (collectively, “Merck”) and AstraZeneca AB and two associated companies (collectively, “AstraZeneca”) also obtained without notice injunctions. On 23 November 2007 Mann J granted an interim injunction until trial in the Lilly action. Subsequently the Defendants consented to interim injunctions in favour of Pfizer, Merck and AstraZeneca. (I shall refer to the four with notice injunctions as “the Injunctions”.) On 24 January 2008 the Court of Appeal discharged the Injunction granted by Mann J in favour of Lilly for reasons given on 5 February 2008. In short, the Court of Appeal held that Lilly had no cause of action for trade mark infringement. Its reasoning was equally applicable to the other Claimants. Subsequently the parties agreed that the other Injunctions should also be discharged (or, in one case, it expired). The Defendants contend that by the time the Injunctions were lifted their fulfilment business had been destroyed because their principal customer had gone elsewhere.

The Court of Appeal directed an inquiry under the cross-undertakings in the orders in the Lilly action. Subsequently it was agreed that there should be inquiries in the other three actions, and that all four inquiries should be heard together. On 26 March 2009 Warren J ordered that the inquiries be heard in two parts. This judgment is only concerned with the first part. The second part is due to be tried in December 2009.

The Defendants put their case in two main ways. Their primary case is that the losses which they claim were caused by the Injunction in the Lilly action. In the alternative, they say that the losses which they claim were caused by all four Injunctions. Although inquiries were directed under the cross-undertakings contained in the without notice injunctions, the Defendants do not contend that the losses which they claim were caused by those injunctions.

Lilly dispute that they are solely liable for the losses claimed by the Defendants if those losses are recoverable, while the other Claimants say that Lilly is solely liable. Lilly claim a contribution from the other Claimants in the event they are held solely liable for the losses claimed by the Defendants, but that claim is not presently before me. Nor is any question of apportionment if the Claimants are held jointly liable.

At the date of Mann J’s order, RDA was not a defendant to Lilly’s claim, although it was joined later. The cross-undertaking given to the Court by Lilly was in the following terms:

“If the Court later finds that this Order or carrying it out has caused loss to the Defendant or the Turkish Supplier (as defined in the confidential schedule to the statement of Mr Aggarwal) and decides that the Defendant or the Turkish Supplier should be compensated for that loss, the Claimants will comply with any Order the Court may make.”

The cross-undertakings given by Pfizer, Merck and AstraZeneca are in similar terms. There are small differences in wording, but it is not suggested that these are material.

A cross-undertaking in damages is normally required as a condition for the grant of an interim injunction. Its purpose is to ensure that the parties affected by the injunction are compensated if it later turns out that the injunction was wrongly granted. This purpose is fundamental to the courts’ approach to the grant or refusal of interim injunctions, particularly since American Cyanamid Co v Ethicon Ltd [1975] AC 396. It follows that the cross-undertaking is a very important means of ensuring that justice is done.

The basic principle applicable to an inquiry under a cross-undertaking is that the cross-undertaking should be enforced in accordance with its terms. In the case of a cross-undertaking expressed in terms such as those set out above, this involves two questions. First, has the order or carrying it out caused loss to the beneficiaries of the cross-undertaking, here 8PM and RDA? Secondly, if so, should the beneficiaries be compensated for that loss?

It follows that the court’s primary task is to compensate the beneficiaries, not to punish the parties that obtained the injunction or to require those parties to make restitution of any benefits that they may have gained as a result of the injunction. It has been held that aggravated damages may be awarded on a cross-undertaking (Columbia Picture Industries Inc v Robinson [1987] Ch 38) and it has been suggested that exemplary damages may be available (see Smith v Day (1882) 21 Ch D 421 at 428 and Digital Equipment Corp v Darkcrest Ltd [1984] Ch 512 at 516), but no such claim is raised in the present cases.

It is well established that the Court has a discretion to refuse to order an inquiry under a cross-undertaking even if the injunction in question is discharged: see Balkanbank v Taher [1995] 1 WLR 1056 and the earlier authorities discussed therein. In the present cases inquiries have been ordered, and the Claimants do not contend that an order for the payment of compensation should be refused on purely discretionary grounds. Nevertheless, for reasons that will appear, I shall have to return to this point below.

Until recently, the correct approach to the assessment of compensation under a cross-undertaking has generally been regarded as that set out in the obiter dictum of Lord Diplock in Hoffman-La Roche & Co AG v Secretary of State for Trade and Industry [1975] AC 295 at 361:

“The undertaking is not given to the defendant but to the court itself. Non-performance of it is contempt of court, not breach of contract, and attracts the remedies available for contempts, but the court exacts the undertaking for the defendant's benefit. It retains a discretion not to enforce the undertaking if it considers that the conduct of the defendant in relation to the obtaining or continuing of the injunction or the enforcement of the undertaking makes it inequitable to do so, but if the undertaking is enforced the measure of the damages payable under it is not discretionary. It is assessed on an inquiry into damages at which principles to be applied are fixed and clear. The assessment is made upon the same basis as that upon which damages for breach of contract would be assessed if the undertaking had been a contract between the plaintiff and the defendant that the plaintiff would not prevent the defendant from doing that which he was restrained from doing by the terms of the injunction: see Smith v. Day (1882) 21 Ch.D. 421, per Brett L.J., at p. 427.”

In recent years, however, there have been a number of cases in which judges of this Division have expressed doubts about the correctness of the approach articulated by Lord Diplock. Before turning to those cases, I would like to make three points.

First, the issue before the Court of Appeal in Smith v Day was whether Bacon V-C had correctly exercised his discretion to refuse to order an inquiry. The principal ground on which the Court of Appeal held that he had was that the application for an inquiry had not been made sufficiently promptly after the injunction was discharged. A secondary ground was that the defendant’s claim for damages rested upon an alleged agreement for a lease, but the Court held that there had been no such agreement. Thus Brett LJ’s remarks about the approach to assessment were obiter. Furthermore, what he actually said was this:

“Now in the present case there is no undertaking with the opposite party, but only with the Court. There is no contract on which the opposite party could sue, and let us examine the case by analogy to cases where there is a contract with, or an obligation to the other party. If damages were granted at all, I think the Court would never go beyond what would be given if there an analogous contract with or duty to the opposite party.”

It is true that he went on to consider the claim by reference to Hadley v Baxendale (1854) 9 Ex 341, but the passage quoted leaves open the possibility of assessment by reference to a non-contractual duty, such as a fiduciary duty.

Secondly, counsel for the Defendants pointed out that the conventional form of the cross-undertaking has changed since Hoffman-La Roche. At that time, the undertaking was “to abide by any order the court may make as to damages in case the court shall hereafter be of opinion that the defendant shall have sustained any damages by reason of this order [emphasis added]”. The same form of undertaking was in use at the time of Smith v Day. Counsel suggested that the reference to damages had been influential in the adoption of the contractual approach, and that the contemporary form of cross-undertaking meant that the court was not constrained to follow that approach. The form of the cross-undertaking used at the time of Smith v Day appears to have originated with Knight-Bruce V-C. At that time the Court of Chancery could not award common law damages, but did award equitable compensation. It seems unlikely that Brett LJ could have been misled by the label, but on the other hand it also seems unlikely that Knight-Bruce V-C would have contemplated assessing compensation applying a common law approach. Whatever the correct resolution of that conundrum, I would agree with counsel for the Defendants at least to this extent, that the contemporary form of undertaking is not only clearer as a matter of language, but also focuses attention more clearly on the correct questions to be considered.

Thirdly, counsel for the Defendants submitted that the contractual approach to assessment was conceptually difficult to apply in certain circumstances. The two examples he gave were without notice injunctions and cross-undertakings the beneficiaries of which are not parties to the proceedings. I think the latter example has more force than the former, but I am not convinced that either poses insuperable problems. As it happens, I think that a better illustration of the problems with the contractual approach is provided by the issue over the date of assessment discussed below.

In R v Medicines Control Agency ex p. Smith & Nephew Pharmaceuticals Ltd [1999] RPC 705 712-714 Jacob J (as he then was) reviewed Smith v Day and a number of later authorities, including the decision of the High Court of Australia in Air Express Ltd v Ansett Transport Industries (Operations) Pty Ltd (1981) 146 CLR 249, and stated:

“I have much sympathy with the view that the contract basis for assessment is or may be too narrow in some cases. After all, even if the injunctor is no wrongdoer, as compared with the wholly wrongly assailed injunctee, he stands a notch down. It was he who (as it turned out) wrongly assailed the injunctee. He was the ‘voluntary litigant’ as James LJ put it [in Graham v Campbell (1878) 7 Ch D 490]. There is a lot to be said for the view that the paying party should pay for all the damage directly caused to the injunctee by the wrongful injunction – that he must take his victim as he finds him. Of course, if, once he knows of the injunction, the injunctee does not spell out to the injunctor any special circumstances causing direct but, to the injunctor, unforeseeable damages, he may not be allowed to recover for that damage. Equity would be apt to blame an injunctee who stood by, letting the injunctor build up a liability on the cross-undertaking of which he had no knowledge.

I think that in an appropriate case the courts will have to examine the principles more closely. I do not think it is necessary for me to do so here.”

In Apex Frozen Foods v Ali [2007] EWHC 469 (Ch), [2007] All ER (D) 156 (Mar) Warren J referred to what Jacob J had said in the MCA case and continued:

“15.

I should, however, say that even if the contract basis of assessment is correct, I doubt that it would be right to incorporate all the principles which apply in relation to an assessment of damages. The starting point must surely be the true construction of the particular undertaking in question. That is to be judged against the background and purpose of the undertaking which is required by the court to be given in order to ensure that a mechanism is available to make good any detriment suffered by a defendant against whom injunctive relief is obtained when it is subsequently established that there should not be an injunction. …

16.

However, I do not need to decide, any more than Jacob J, whether the contract approach is too narrow…”

In Les Laboratoires Servier v Apotex Inc [2008] EWHC 2347 (Pat), [2009] FSR 3 Norris J said at [7]:

“First, I am following the obiter guidance contained in the opinion of Lord Diplock in Hoffman-La Roche because, on the evidence and argument presented at trial, it is sufficient to enable me to determine the issues that arise. For my own part, I think it should be recognised that the award is of equitable compensation (not of damages strictly so called) and that there may be occasion to examine whether such equitable compensation should be fettered by rigid adherence to common law rules; and further, that if common law rules are to be applied, whether those relating to contract are more appropriate than those relating to tort or some other breach of duty (in which connection it will be noted that the judgment of Brett L.J. upon which Lord Diplock founded his view referred to ‘[a] contract with or duty to the opposite party’).”

Counsel for the Claimants acknowledged the force of the observations of Jacob, Warren and Norris JJ, and accepted that the law appeared to be moving away from a rigidly contractual approach to assessment. For my part, I agree with Norris J that the remedy awarded under a cross-undertaking in damages is properly to be regarded as equitable compensation and not common law damages.

Two separate points were made by Norris J in Servier at [9]:

“Third, whilst it is for Apotex to establish its loss by adducing the relevant evidence, I do not think I should be over eager in my scrutiny of that evidence or too ready to subject Apotex' methodology to minute criticism. That is so for two reasons, quite apart from an acceptance of the proposition that the very nature of the exercise renders precision impossible. (a) Whilst, in order to obtain interlocutory relief, Servier will not have had to persuade Mann J. that it was easy to calculate Apotex' loss in the event of the injunction being wrongly granted, it will have had to persuade him that that task was easier than the calculation of its own loss in the event that the injunction was withheld. The passages I have cited from its skeleton argument and evidence show that it did so. Having obtained the injunction on that footing it does not now lie in Servier's mouth to say that the task is one of extreme complexity and that the court should adopt a cautious approach. Having emphasised at the interlocutory stage the relative ease of the process, it should not at the final stage emphasise the difficulty. (b) In the analogous context of the assessment of damages for patent infringement, in General Tire and Rubber Co v Firestone Tyre and Rubber Co Ltd (No.2) [1976] R.P.C. 197 at 212 Lord Wilberforce said:

‘There are two essential principles in valuing the claim: first, that the plaintiffs have the burden of proving their loss; second, that the defendants being wrongdoers, damages should be liberally assessed but that the object is to compensate the plaintiffs and not to punish the defendants.’

The principle of ‘liberal assessment’ seems to me equally applicable in the present context. Although a party who is granted interim relief but fails to establish it at trial is not strictly a ‘wrongdoer’, but rather one who has obtained an advantage upon consideration of a necessarily incomplete picture, he is to be treated as if he had made a promise not to prevent that which the injunction in fact prevents. There should as a matter of principle be a degree of symmetry between the process by which he obtained his relief (an approximate answer involving a limited consideration of the detailed merits) and that by which he compensates the subject of the injunction for having done so without legal right (especially where, as here, the paying party has declined to provide the fullest details of the sales and profits which it made during the period for which the injunction was in force).”

Causation is a familiar problem in many branches of the law. The basic, although not universal, test for causation both in contract and in tort is the “but for” test i.e. it must shown that the claimant would not have suffered the damage but for the defendant’s act. This is determined as a matter of common sense. The test can be difficult to apply, however, where there are multiple causes. In such a case, the application of the but for test depends on the circumstances. This can lead to different emphases in contract and tort. In contract, the claimant may recover damages for a loss only where the breach of contract was the “effective” or “dominant” cause of the loss, but it need not be the only cause: see Chitty on Contracts (30^th ed) at 26-032. If a breach of contract is one of two causes, both of which are effective to cause loss, the contract breaker is liable for the loss. It is sufficient that the breach is an effective cause, it does not have to be the more effective cause: Chitty at 26-041. In tort, the position is more complex. In general, however, it is sufficient to show that the tort was a cause of the loss, and not necessarily the sole or dominant cause: see Halsbury’s Laws (4^th ed reissue) vol. 12(1) at 854.

The approach of equity differs depending on the nature of the duty. In Bristol & West Building Society v Mothewt [1998] Ch 1 at 17 Millett LJ (as he then was) described the position with regard to the duty of a trustee or other fiduciary to use proper skill and care in the discharge of his duties as follows:

“Although the remedy which equity makes available for breach of the equitable duty of skill and care is equitable compensation rather than damages, this is merely the product of history and in this context is in my opinion a distinction without a difference. Equitable compensation for breach of the duty of skill and care resembles common law damages in that it is awarded by way of compensation to the plaintiff for his loss. There is no reason in principle why the common law rules of causation, remoteness of damage and measure of damages should not be applied by analogy in such a case. It should not be confused with equitable compensation for breach of fiduciary duty, which may be awarded in lieu of rescission or specific restitution.”

In Target Holdings Ltd v Redferns [1995] 1 AC 421 at 434 Lord Browne-Wilkinson described the position with regard to duties which are peculiar to trustees:

“The equitable rules of compensation for breach of trust have been largely developed in relation to such traditional trusts, where the only way in which all the beneficiaries' rights can be protected is to restore to the trust fund what ought to be there. In such a case the basic rule is that a trustee in breach of trust must restore or pay to the trust estate either the assets which have been lost to the estate by reason of the breach or compensation for such loss. Courts of Equity did not award damages but, acting in personam, ordered the defaulting trustee to restore the trust estate: see Nocton v. Lord Ashburton [1914] A.C. 932, 952, 958, per Viscount Haldane L.C. If specific restitution of the trust property is not possible, then the liability of the trustee is to pay sufficient compensation to the trust estate to put it back to what it would have been had the breach not been committed: Caffrey v. Darby (1801) 6 Ves. 488; Clough v. Bond (1838) 3 M. & C. 490. Even if the immediate cause of the loss is the dishonesty or failure of a third party, the trustee is liable to make good that loss to the trust estate if, but for the breach, such loss would not have occurred: see Underhill and Hayton, Law of Trusts & Trustees 14th ed. (1987), pp. 734-736; In re Dawson, decd.; Union Fidelity Trustee Co. Ltd. v. Perpetual Trustee Co. Ltd. [1966] 2 N.S.W.R. 211; Bartlett v. Barclays Bank Trust Co. Ltd. (Nos. 1 and 2) [1980] Ch. 515. Thus the common law rules of remoteness of damage and causation do not apply. However there does have to be some causal connection between the breach of trust and the loss to the trust estate for which compensation is recoverable, viz. the fact that the loss would not have occurred but for the breach: see also In re Miller's Deed Trusts (1978) 75 L.S.G. 454; Nestle v. National Westminster Bank Plc. [1993] 1 W.L.R. 1260. ”

He went on at 438-439 to cite three passages from the judgment of McLachlin J in Canson Enterprises Ltd v Boughton & Co (1991) 85 DLR (4^th) 129 and to approve them:

“At p. 160:

‘While foreseeability of loss does not enter into the calculation of compensation for breach of fiduciary duty, liability is not unlimited. Just as restitution in specie is limited to the property under the trustee's control, so equitable compensation must be limited to loss flowing from the trustee's acts in relation to the interest he undertook to protect. Thus, Davidson states [“The Equitable Remedy of Compensation” (1982) 3 Melbourne U.L. Rev. 349] “It is imperative to ascertain the loss resulting from breach of the relevant equitable duty” (at p. 354, emphasis added).’

At p. 162:

‘A related question which must be addressed is the time of assessment of the loss. In this area tort and contract law are of little help. . . . The basis of compensation at equity, by contrast, is the restoration of the actual value of the thing lost through the breach. The foreseeable value of the items is not in issue. As a result, the losses are to be assessed as at the time of trial, using the full benefit of hindsight.’ (Emphasis added.)

At p. 163:

‘In summary, compensation is an equitable monetary remedy which is available when the equitable remedies of restitution and account are not appropriate. By analogy with restitution, it attempts to restore to the plaintiff what has been lost as a result of the breach, i.e., the plaintiff's loss of opportunity. The plaintiff's actual loss as a consequence of the breach is to be assessed with the full benefit of hindsight. Foreseeability is not a concern in assessing compensation, but it is essential that the losses made good are only those which, on a common sense view of causation, were caused by the breach.’ (Emphasis added.)

In my view this is good law. Equitable compensation for breach of trust is designed to achieve exactly what the word compensation suggests: to make good a loss in fact suffered by the beneficiaries and which, using hindsight and common sense, can be seen to have been caused by the breach.”

Thus equity’s approach to causation, as distinct from remoteness, is little different to that of the common law. On the other hand, where distinctly equitable duties are engaged, equity does adopt a more flexible approach to questions such as the date of assessment. I shall return to this point below.

In the context of cross-undertakings, it can be important to consider whether the loss claimed was caused by the injunction or merely by the existence of the litigation. In Air Express the High Court were unanimous in holding that it was only damage caused by the injunction that was recoverable under a cross-undertaking and not damage caused by the fact of the litigation itself. In that case Air Express claimed for damage caused by an injunction which restrained the Secretary of the Department of Transport from issuing a permission under customs regulations to import aircraft into Australia. The majority of the High Court agreed with the judge, however, that on the balance of probabilities the Secretary would not have issued the permission once the litigation had been commenced anyway, and thus the injunction made no difference. Accordingly, Air Express was not entitled to recover its loss.

Barwick CJ did not address the correct approach to causation in his judgment. Gibbs J said at 312-313 (emphasis added):

“If the pendency of the litigation, rather than the making of the order, was the cause of the plaintiff's loss, the terms of the undertaking have no application, since the plaintiff has not sustained loss by reason of the order. Moreover, except in certain cases analogous to malicious prosecution, a defendant is not entitled to recover damages for loss resulting from legal proceedings brought against him - the only liability of the unsuccessful plaintiff is to pay costs. The court should no doubt scrutinize with care an assertion by a plaintiff that loss which has been suffered by a defendant has resulted from the litigation rather than from the making of the interlocutory order, since a plaintiff should not be allowed to evade payment of the price which he has agreed to pay for the grant of the injunction. In the end however the question becomes one of fact: did the making of the order cause the loss? The onus of proof must, in accordance with general principles, lie on the defendant who asserts that he sustained damage by reason of the order.

It was submitted on behalf of the appellant that it is enough that the making of the order should have been a cause of the damage, so that if both the making of the order and the continuance of the litigation are concurrent causes the undertaking will be applicable. However, in almost every case in which an injunction is granted the injunction will play some part in causing the party bound by it to act in accordance with its terms. To order a plaintiff to pay damages where it appears that the party bound by the injunction would have acted as he did even if the injunction had not been granted, would be to give the undertaking an effect obviously not intended. The party seeking to enforce the undertaking must show that the making of the order was a cause without which the damage would not have been suffered. It was further submitted that the onus lies on the plaintiff, against whom the undertaking is sought to be enforced, to disentangle any damage arising from the litigation from that which was caused by the making of the order. However, the onus of proof does not shift in this way; the defendant, who seeks to enforce the undertaking, must prove that the damage he has sustained was caused by the making of the order.

The present case is in a number of respects exceptional. …”

Stephen J said at 319-320 (emphasis added):

“It is appropriate enough, in claims under such undertakings, to rely upon analogies drawn from the common law in matters of remoteness of damages, the concern of Brett L.J. in Smith v. Day, as Lindley L.J. points out in Schlesinger v. Bedford (1893) 9 TLR 370 . It is quite a different thing to seek to apply common law rules of causation to a claim made under such undertakings; there is no such analogy as Lord Reid in Baker v. Willoughby (1970) AC 467, at p 492 found to exist in the case of workers' compensation. The reason for this is plain enough. In both contract and tort it is enough that the breach of contract or of duty is one direct cause of whatever damage a plaintiff has suffered - McGregor on Damages, 13th ed. (1972), pp. 69, 118. The breach is a wrongful act on the defendant's part and the common law visits him with liability for the consequences to the plaintiff, subject always to rules as to remoteness. But a plaintiff who sues for an injunction and obtains interlocutory relief, giving an undertaking to the court as the price of that relief, commits no wrongful act, no breach of contract or of duty when, at the trial, he fails to obtain any perpetual injunction. If, as a result of the grant of interlocutory relief, the defendant has been harmed there will, however, have been injustice and, an undertaking having been given, the court will thereby have been armed with jurisdiction, otherwise lacking, to right that injustice and compensate the defendant for the harm done to him.

From this it can be seen that it will only be if damage is suffered because of the grant of the injunction, and would not have been suffered but for it, that the court should compensate a defendant who claims damages under the undertaking. Its grant must be shown to be the causa sine qua non of the damage complained of before the defendant can be entitled to be compensated for what turns out to be the erroneous grant by the court of the injunction against it. Only then will the defendant have suffered, from the grant of the injunction, such ‘real harm’ as Cussen J. spoke of in Finnigan's Case what North J., in Attorney-General v. Albany Hotel Co. (1896) 2 Ch, at p 699 described as ‘the damages which were really sustained’.

It follows that it is for the claimant under an undertaking to establish by evidence, or by inference from evidence, a prima facie case both that the grant of the injunction was a cause of his damage and that but for it he would not have suffered that damage.”

Mason J said at 324-325:

“English law has not adopted a uniform approach to causation. Instead, it has tended to take refuge in the notion that causation is very largely a question of fact. But the many statements to this effect which are to be found in the decided cases do not attempt to deny the fact that the common law has applied a variety of theories and standards of causation, in each instance applying that which is in point of policy the most apt or appropriate to the question which arises for decision.

For this reason little is to be gained in the present case from an examination of the myriad authorities which deal with causation of damage in contract, tort and other situations many of which were pressed upon us in argument. We are better advised to look to the purpose which the undertaking as to damages is designed to serve and to identify that causal connexion or standard of causal connexion which is most appropriate to that purpose. The object of the undertaking is to protect a party, normally the defendant, in respect of such damage as he may sustain by reason of the grant of the interim injunction in the event that it emerges that the plaintiff is not entitled to relief. It is no part of the purpose of the undertaking to protect the defendant against loss or damage which he would have sustained otherwise, as for example, detriment which flows from the commencement of the litigation itself. That is loss or damage which the defendant must bear himself, as he does when no interim injunction is sought or granted. Consequently, it is for the party seeking to enforce the undertaking to show that the damage he has sustained would not have been sustained but for the injunction.”

He returned to the point at 332:

“Air Express bears the onus of showing the necessary causal connexion in the sense already explained between the damage and the injunction, that is, that the damage would not have been sustained but for the injunction. The crucial question is whether by establishing the sequence of events it has done enough to discharge that onus by making out a prima facie case.

Unless the circumstances indicate otherwise, when it appears that damage flows from the non-performance of an act and the performance of that act has been restrained by an interim injunction, the inference will generally be drawn that the damage has been occasioned by the injunction.”

It can be seen that their Honours were agreed that the correct test is the but for test: the defendant must show the damage claimed would not have been sustained but for the injunction. It also appears, however, that the defendant need only show that the injunction was a cause of the loss, not the sole cause. On the other hand, if the loss was caused as much by the existence of the litigation as by the injunction, then the defendant cannot satisfy the “but for” test.

That the defendant need not show that the injunction was the sole cause is supported by the decision of the Court of Appeal of New Zealand in Bonz (Pty) Ltd v Cooke [2000] NZCA 44. In that case the plaintiffs obtained an Anton Piller order and ex parte injunction in a claim for infringement of copyright. The injunction was subsequently varied in certain respects. At trial the plaintiffs’ claims were dismissed. The defendant claimed damages on the cross-undertaking for the collapse of her business. Two of the issues on the inquiry were whether the injunction had caused the loss and, if so, whether that was reasonably foreseeable. Blanchard J delivering the judgment of the Court of Appeal summarised the judge’s finding on the first of these issues as follows at [11]:

“Hansen J noted a submission on behalf of Bonz that Mrs Cooke had closed her business down to prepare for trial. He accepted that that was ‘part of the motivation’, but was satisfied, on the balance of probabilities, that it was the effect of the interim injunction that caused the business to close. ‘Although the variation of the order was intended to assist Mrs Cooke to continue running her business, that proved to be impossible.’”

Blanchard J went on to endorse this conclusion at [29] and [31]:

“In part, the decision to close the business may have been motivated by the need to devote time and money to the litigation, which was complex and expensive. But we are of the view that Hansen J was right to conclude that a significant determinant of that decision was the injunction.

…

Hansen J made allowance for the impact of the litigation generally - apart from the injunction - on Mrs Cooke's finances but it was on the evidence open to him to conclude that the existence of the injunction was an operating cause of the closure of the business”

I was referred to six first instance decisions in this country in which the issue of causation has been considered. For the most part, I consider that these represent decisions on the facts and do not assist in ascertaining the correct approach as a matter of law. I must, however, deal with the statement of Lightman J in Triodos Bank NV v Dobbs [2005] EWHC 108 (Ch), [2005] All ER (D) 121 at [37]:

“The Receivers must not only establish causation on a "but for" basis; they must show that, prima facie, the giving of the undertaking was the exclusive cause of the loss. This does not mean, however, that they must deal with every conceivable or theoretical cause of the damage (Tharros Shipping v. Bias [1994] 1 Lloyds Rep 577).”

With respect to Lightman J, in my judgment this is not a correct statement of the law. It does not appear that either Air Express or Bonz v Cooke was cited to Lightman J and the point may not have been argued before him. It appears that the basis for Lightman J’s statement is a passage in the judgment of Saville J (as he then was) at first instance in Financiera Avenida SA v Shiblaq (The Times, 21 November 1988) commenting on a passage from the judgment of Mason J in Air Express which was quoted by Waller J (as he then was) in Tharros v Bias. What Saville J actually said was this:

“I find [the reasoning of Mason J] convincing. However, in my view this approach does not mean that a party seeking to enforce an undertaking must deal with every conceivable or theoretical cause of the damage claimed, however unlikely this may be. Once a party has established a prima facie case that the damage was exclusively caused by the relevant Order, then in the absence of other material to displace that prima facie case, the Court can, and generally would, draw the inference that the damage would not have been sustained but for the order. In other words, the Court seeks to approach and deal with this question of causation in a commonsense way.”

As Waller J pointed out at 581, that case went to the Court of Appeal on another point, and the Court of Appeal remitted the case to Saville J without either approving or disapproving his approach to causation. Waller J went on to say at 582 that:

“In my view, it is right to approach the undertaking in damages question as it was approached by the Australian Judge and by Saville J, but one must take care in so doing. ….

In my judgment, a party must be able to show that he would not have suffered the damage ‘but for’ the injunction …”

In my judgment, neither Saville J nor Waller J was intending to apply a different test to that laid down in Air Express, nor did they mean that the claimant on the cross-undertaking had to go further than satisfying the but for test and show that the injunction was the exclusive cause of the loss.

In contract, the general rule is that damages are to be assessed as at the date of the breach, but this is not an inflexible rule. In Golden Strait Corp v Nippon Yusen Kubishika Kaisha [2007] UKHL 12, [2007] 2 AC 353 the charterers repudiated a charterparty in December 2001 and the shipowners accepted the repudiation. The earliest contractual date for re-delivery of the vessel was December 2005, but the charterparty provided that both parties had the right to cancel the charter if war broke out between certain countries. In December 2001 war was possible, but not probable. In March 2003 the Second Gulf War broke out, which would have entitled the charterers to terminate. The majority of the House of Lords held that the shipowners were only entitled to damages to March 2003, and not to December 2005. The principle applied by the majority was that a victim of a breach of contract was entitled to damages representing the value of the contractual benefit of which he had been deprived, no less and no more, and that this might require assessment at a date other than the date of breach.

As Lord Scott of Foscote stated at [36]:

“The same would, in my opinion, be true of any anticipatory breach the acceptance of which had terminated an executory contract. The contractual benefit for the loss of which the victim of the breach can seek compensation cannot escape the uncertainties of the future. If, at the time the assessment of damages takes place, there were nothing to suggest that the expected benefit of the executory contract would not, if the contract had remained on foot, have duly accrued, then the quantum of damages would be unaffected by uncertainties that would be no more than conceptual. If there were a real possibility that an event would happen terminating the contract, or in some way reducing the contractual benefit to which the damages claimant would, if the contract had remained on foot, have become entitled, then the quantum of damages might need, in order to reflect the extent of the chance that that possibility might materialise, to be reduced proportionately. The lodestar is that the damages should represent the value of the contractual benefits of which the claimant had been deprived by the breach of contract, no less but also no more. But if a terminating event had happened, speculation would not be needed, an estimate of the extent of the chance of such a happening would no longer be necessary and, in relation to the period during which the contract would have remained executory had it not been for the terminating event, it would be apparent that the earlier anticipatory breach of contract had deprived the victim of the breach of nothing. In Bwllfa and Merthyr Dare Steam Collieries (1891) Ltd v Pontypridd Waterworks Co [1903] AC 426, the Earl of Halsbury LC, at p 429, rejected the proposition that ‘because you could not arrive at the true sum when the notice was given, you should shut your eyes to the true sum now you do know it, because you could not have guessed it then’ and Lord Robertson said, at p 432, that ‘estimate and conjecture are superseded by facts as the proper media concludendi’ and, at p 433, that ‘as in this instance facts are available, they are not to be shut out’. Their Lordships were not dealing with a contractual, or tortious, damages issue but with the quantum of compensation to be paid under the Waterworks Clauses Act 1847 (10 & 11 Vict c 17). Their approach, however, is to my mind as apt for our purposes on this appeal as to theirs on that appeal.”

In my judgment, the general contractual rule is not applicable to the case of a claim under a cross-undertaking. The defendant will usually (although not always, as discussed below) sustain the loss claimed after the date of the notional breach of contract, i.e. the date of the injunction. Often, the loss will be a continuing one down to the date of discharge of the injunction. Furthermore, it would be artificial to regard the assessment as valuing the loss of a contractual benefit of which the defendant has been deprived. Rather, the defendant is being compensated for being prevented from carrying on its business in the way in which it normally would have done. Accordingly, I consider that the correct approach is that adopted by equity when awarding compensation for breach of fiduciary duty, namely to consider the position with the benefit of hindsight.

As counsel for the Claimants argued, however, even if compensation is to be assessed as at the date of judgment, it does not follow that all uncertainties or risks which existed as at the date of the injunction should be disregarded. I shall return to this point below.

In his closing submissions counsel for the Claimants accepted that none of the losses claimed by the Defendants were too remote. Accordingly, it is not necessary to consider whether, and if so in what circumstances, the beneficiary of a cross-undertaking may be refused compensation on the ground that its loss is too remote.

Although the Claimants pleaded that the Defendants had failed to mitigate their loss, in the light of the evidence counsel for the Claimants did not press this point. Accordingly, it is not necessary to consider whether, and if so to what extent, the beneficiary of a cross-undertaking is under a duty to mitigate its loss.

The principal factual witness was Vinesh Aggarwal, the Second Defendant. He is the managing director of 8PM and the majority owner of RDA. I found Mr Aggarwal to be an excellent witness: he was clear, precise and careful. I have no hesitation in accepting his evidence. Counsel for the Claimants accepted that Mr Aggarwal was an honest witness, but submitted that in certain respects the documentary record showed that he had persuaded himself of a different version of events to what had actually happened or at least had misremembered things. I am not persuaded of this. When the documents were put to Mr Aggarwal, I found his explanations persuasive.

I also heard from Steven Allen, who is the Director of the EMEA branch of Pfizer’s Global Security Group. He was a straightforward witness, but his evidence is not central to the issues I have to decide.

In addition I received a certain amount of written evidence from witnesses whose evidence was not challenged. Again, this is not central to the issues.

8PM was founded in 1992. Its principal business is that of retail pharmacy in the UK. It was acquired by Mr Aggarwal’s parents in 1996 and they are still the majority shareholders. Mr Aggarwal and his brother Mukesh became directors of the company in 1996. Mr Aggarwal is a chartered accountant. He had no involvement in pharmacy before starting to work at 8PM, but since then his main role in the company has been in product procurement. As a result, he has become very knowledgeable about the way in which the pharmaceutical market operates in Europe and in various other countries, including Turkey, the USA and Canada. It is clear that he is an intelligent and able businessman.

The US healthcare market is the largest in the world, with combined sales of prescription and over-the-counter drugs of approximately US$308 billion in 2007. The prices of patented prices in the USA are amongst the highest in the world. Prices can be as much as 80% lower in Canada. A major reason for this price discrepancy is that in Canada the Patent Medicine Prices Review Board regulates prices for patented medicines so that they cannot increase by more than the Consumer Price Index. In contrast, in the USA there is no price control of patented drugs.

Healthcare in the USA is primarily funded by employers, who provide health insurance to 60% of the population. The US Federal government provides health insurance assistance, primarily to people aged 65 or over, through the Medicare scheme. Individual states also administer their own schemes to provide coverage for those with low incomes through the Medicaid scheme. In January 2006, Medicare Part D was introduced in order to subsidise the cost of prescription drugs for Medicare beneficiaries. A key feature of Medicare Part D is its banded structure. Between US$295 and $2,700 (2009 figures), patients only have to pay 25% of the cost of their medication. Between US$2,700 and $6,154 patients have to pay 100% of the cost. This referred to as the “coverage gap” or “donut hole”. Above US$6,154 the required contribution falls to 5%.

The “coverage gap” is not the only problem with Medicare Part D. Others are that: (a) it does not cover everyone in the USA, so that there around 47 million people with no insurance coverage for drug costs; (b) Part D is complex and so patients do not make full use of it; (c) the premiums are increasing year on year; (d) the list of excluded drugs is also increasing year on year; and (e) there is an increasing need for medication in the population aged 45-65, but these people are not covered by Medicare unless they are chronically ill.

For the reasons given above, in the late 1990s US patients, especially those in neighbouring states, began travelling to Canada to buy prescription medicines to take home with them. This developed into a mail order trade, and from about 2000 into an internet trade. It appears that the trade started in Manitoba with some enterprising retail pharmacists who recognised that, with the then relatively weak Canadian dollar and low drug prices, they could offer drugs to US citizens at considerably lower prices than those persons could get locally. Through aggressive marketing, the industry took off and a large number of Canadian internet pharmacies (“CIPs”) appeared in the years immediately after 2000. These included CanadaDrugs.com (“CanadaDrugs”) in 2001.

In about 2003, it became clear to pharmaceutical companies that sales in the US were dropping while sales in Canada were increasing rapidly. They reacted by putting pressure on Canadian wholesalers not to supply CIPs. In addition, from early 2004 to late 2007, the Canadian dollar was strengthening against the US dollar. These pressures caused both a consolidation of the CIP industry through acquisitions and a move by CIPs to set up fulfilment operations off-shore to avoid the supply restrictions in Canada and to gain access to cheaper sources of drugs.

Initially, fulfilment moved to jurisdictions such as Australia, New Zealand, the UK and other European countries. As US patients became accustomed to non-Canadian drugs, fulfilment started from other countries such as Turkey and Israel.

By 2004-2005 the size of the CIP trade was very substantial. An approximate estimate of its value during this period is C$2 billion or US$1.5 billion.

The CIP industry faced additional pressure in 2006 with the introduction of Medicare Part D and with the continued strengthening of the Canadian dollar. This caused further consolidation in the industry. This was mainly amongst the smaller CIPs that did not have the resources to set up off-shore operations in order to obtain cheaper drugs to be able to compete more effectively. By the end of this process, about 10 or so major CIPs emerged and they remain dominant today. Although the Canadian dollar has fallen against the US dollar more recently, this is unlikely to result in fulfilment operations returning to Canada because of the supply restrictions there and products still being more attractively priced overseas.

The CIP trade is subject to two seasonal effects. The first is that a substantial proportion of people on Medicare Part D reach the coverage gap in July and August. This produces an autumn spike in orders placed with CIPs. There is a dispute as to whether the Defendants’ businesses experienced an autumn spike as a result and I shall return to that point below. The second seasonal effect is a New Year spike due to patients ordering drugs for the Christmas and New Year period.

Patient safety and satisfaction are very important to the CIPs. They want to ensure so far as possible that the products supplied are not counterfeits. They are also conscious of the need to offer a good service through call centres and to be responsive to customer queries and complaints. This has the effect that the US customers of CIPs tend to be loyal, which is illustrated by the fact that around 80% of the prescriptions handled by RDA were repeat prescriptions.

In 2004 Mr Aggarwal was contacted by an executive from CanadaPharmacy.com, the trading name and website name used by Pivotal Partners Inc. At this time, 8PM was a successful business owning several pharmacies around Wolverhampton, but it was not involved in the CIP industry. The executive explained to Mr Aggarwal the CIP industry and the possibilities that it offered, and asked whether 8PM was interested in fulfilling orders for US patients. 8PM was subsequently chosen as CanadaPharmacy.com’s fulfilment partner, supplying UK products and parallel imports of European origin. Beginning in September 2004, 8PM’s fulfilment business took off very quickly.

Once the business was underway, Mr Aggarwal approached around 20 CIPs offering to supply them. To begin with, this led to JanDrugs Inc., PolarMeds Inc. and Nexus becoming customers of 8PM. Subsequently other CIPs also became customers.

In June 2005, Hamza Musaphir, the then President of CanadaDrugs telephoned Mr Aggarwal. By that time CanadaDrugs was the largest CIP. Mr Musaphir was looking for a European fulfilment partner. He knew that 8PM was already undertaking fulfilment for CIPs such as CanadaPharmacy.com and he had spoken to other CIPs, such as JanDrugs, about and obtained references from them concerning 8PM. During the course of several meetings, Mr Musaphir gave Mr Aggarwal a set of 18 orders to fulfil as a test, which 8PM passed by fulfilling them promptly. 8PM started fulfilling orders for CanadaDrugs shortly afterwards. Shortly after that, Mr Aggarwal was told by CanadaDrugs’s Chief Financial Officer, Ron Sigurdson, that Mr Musaphir had left the company, but that CanadaDrugs remained keen to develop the relationship. This was borne out by events over the next few months. As CanadaDrugs became increasingly comfortable with 8PM, and gained confidence in the reliability of its service, more products were allocated to it.

No written contract was entered between 8PM (or later LNA or RDA) and CanadaDrugs at any stage. Mr Aggarwal agreed the prices and fees that 8PM would charge orally with Mr Musaphir during their meetings, and later with Mr Sigurdson by telephone. There was never any dispute between 8PM, LNA or RDA and CanadaDrugs over fees or payment of invoices.

Soon after entering the CIP trade, 8PM realised that there was a call for cheaper branded drugs. CanadaPharmacy.com told Mr Aggarwal that, for that reason, it sourced products from the Turkish market. He therefore started investigations into setting up a Turkish fulfilment operation. Gaining the CanadaDrugs account gave him the confidence to set up a company called LNA Ecza Deposu Sirketi (“LNA”) in Turkey in about August 2005. Mr Aggarwal owned 99% of shares in LNA. It started fulfilment operations in October 2005.

A few months later Mr Aggarwal realised that there would be various advantages to moving the business into a free trade zone. Such free trade zones have been in operation for over 20 years and were established to attract businesses transacting in hard currencies with the intention of attracting foreign currency revenues to Turkey to bolster the country’s foreign exchange reserves. This had a number of benefits: it enabled pharmaceuticals to be sourced from outside Turkey so reducing reliance on the Turkish market; the import/export procedures on purchases and consignments to 8PM were much more streamlined; purchases and consignments were free of KDV, the Turkish equivalent to VAT; there was no need to apply for licences on a product by product basis for imports; and no pharmaceutical wholesale licence would be needed in order to carry out the fulfilment service.

Mr Aggarwal therefore purchased RDA, which was then a shell entity based in the Istanbul free trade zone. RDA is a form of limited partnership, and Mr Aggarwal became the major partner with a 99% share. RDA took over the business of LNA without any formal purchase or other agreement being entered into. RDA began trading at the start of the third quarter of 2006, and by August 2006 it had taken over all of the fulfilment business of LNA. During September 2006 the remainder of LNA’s inventory was transferred to RDA. Mr Aggarwal continued to use LNA for the procurement of drugs from the Turkish market to sell on to RDA for a short period. LNA became dormant in February 2007 and remained so until Mr Aggarwal sold it in May 2008.

It is important to appreciate that 8PM’s UK fulfilment business continued once the Turkish fulfilment business was up and running. CanadaDrugs became a customer of LNA and then RDA, but it remained a customer of 8PM’s UK fulfilment business. The same was true of two other CIPs, BBG and JanDrugs. 8PM claims that its UK fulfilment business also suffered loss as a result of the Injunctions, but I am not concerned with that claim which is scheduled for trial in December 2009. The UK fulfilment business and the Turkish fulfilment business were distinct even though 8PM was involved in both. 8PM invoiced CanadaDrugs for all supplies on one invoice, however.

It is also important to understand precisely how the Turkish fulfilment business operated. For convenience I shall concentrate on the business with CanadaDrugs, although I do not think there was much difference in the case of the other customers. US patients ordered drugs from CanadaDrugs over the internet or by telephone. Most of the drugs were prescription drugs, although some were over-the-counter drugs. In the case of the prescription drugs, the prescription was sometimes sent to CanadaDrugs by the patient and sometimes it was sent directly by the prescribing physician. CanadaDrugs outsourced fulfilment of these orders to inter alia 8PM and RDA. 8PM and RDA supplied CanadaDrugs with information as to availability, price, pack size and so on. It was CanadaDrugs’s decision as to whether to allocate the order to 8PM or to RDA or elsewhere. Orders were placed and tracked by means of CanadaDrugs’s IT system called Pharmacywire, which 8PM and RDA had access to via the internet and a log-in password. 8PM and RDA had different accounts and different passwords.

In the case of orders allocated to RDA, a copy of the patient prescription was made available to RDA. The relevant products for a particular patient were dispensed and put in a plain brown box addressed to that patient in the USA. The dispensing label bore a pharmacy name and toll free telephone number in the USA operated by CanadaDrugs for the patient to ring in the event of queries or complaints. 8PM and RDA used different pharmacy names, namely “Nucare Pharmacy” and “Complete Care Pharmacy”, both of which were assigned to them by CanadaDrugs. As the order was processed, details were entered by RDA directly onto Pharmacywire. The packaged products were then air freighted in bulk consignments to 8PM in the UK. Two consignments of up to about 700 packages each were sent each week.

In the UK the consignments were handled under a suspensive customs procedure known as “inward processing relief” (IPR). This is a procedure which enables products to be imported into the UK, processed and exported without duty or VAT being payable. 8PM’s role in the Turkish fulfilment business was to fulfil the logistical function of opening up the consignments and sending the individual packages to the patients in the US by Royal Mail.

Some of the products supplied by RDA were generic products, but the Defendants make no claim under the cross-undertakings in respect of those. RDA also had a wholesale business which is not the subject of any claim.

The Defendants usually invoiced CanadaDrugs weekly, although occasionally an invoice was rendered covering a longer period. For each order, the Defendants charged CanadaDrugs a price for the product(s) supplied, a shipping fee and a dispensing fee. The Turkish fulfilment business became extremely profitable. According to the Defendants’ expert’s calculations, in the year from 1 August 2006 to 31 July 2007 it generated average monthly profits of about US$150,000.

Before long, CanadaDrugs became the Defendants’ biggest customer. During the year from August 2006 to July 2007, CanadaDrugs’s orders formed about 56% and 88% of 8PM’s and RDA’s fulfilment businesses respectively. During this period RDA supplied over a hundred different drugs to CanadaDrugs.

RxNorth was a competitor to CanadaDrugs which CanadaDrugs acquired in October 2006. As part of the acquisition CanadaDrugs acquired RxNorth’s stock. This included some stock which CanadaDrugs did not want. CanadaDrugs sold this to RDA. The stock was shipped from CanadaDrugs Barbados to RDA to Turkey. As related below, it was detained en route by HMRC at Heathrow airport.

Some time in or before late October 2006 CanadaDrugs set up a fulfilment facility in Barbados. CanadaDrugs had always had an in-house fulfilment capability. There is no direct evidence as to why the Barbados facility was established, but it seems likely that it was for tax reasons. Obviously CanadaDrugs was not able to source product from Barbados itself. Instead, Barbados was mainly used as a fulfilment centre for product sourced from Australia and New Zealand, although it seems that some quantities were sourced from elsewhere. In particular, Barbados began operations using stock acquired by CanadaDrugs from RxNorth.

Mr Aggarwal learnt about the Barbados operation at the end of October 2006 when he was contacted by the President of CanadaDrug.com (Barbados) Ltd, Tom Haughton. Mr Haughton told Mr Aggarwal that he wanted to air freight consignments from Barbados to 8PM in the UK to be broken down for posting of the individual packages of medicines to US patients (referred to as “bag and burst”). The reason Mr Haughton gave for wanting to use 8PM and the Royal Mail rather than posting from Barbados was that the Barbados mail system was “extremely challenged”. 8PM did not take up this offer, however.

The Claimants contend that, once CanadaDrugs’s Barbados fulfilment operation was established, it became CanadaDrugs’s primary supply centre with the Defendants’ businesses being relegated to a secondary source. I do not accept this, for a number of reasons.

First, although there is no evidence as to the scale on which the Barbados facility operated, given the absence of a local source of product and given the approach to 8PM, and the reason for that approach, it seems unlikely that it operated on a large scale.

Secondly, Turkish product was cheap. Although there is little comparative data, it seems clear that it tended to be cheaper than Australian or New Zealand product.

Thirdly, the Defendants’ Turkish fulfilment business continued to grow from October 2006 until September 2007. During this period CanadaDrugs’s orders represented the bulk of RDA’s business.

Fourthly, Mr Aggarwal gave evidence that there was a co-operative relationship between the Defendants and CanadaDrugs which extended to the Barbados operation. Thus the Barbados operation was not perceived by the Defendants as a competitive threat.

Fifthly, Mr Haughton visited 8PM in June 2007. Mr Aggarwal gave evidence, which I accept, that he discussed CanadaDrugs’s intentions with regard to 8PM and RDA with Mr Haughton during this visit. Mr Haughton’s answer was that CanadaDrugs wanted to maintain its relationship with 8PM and RDA, which was important to it. This was for a number of reasons. Strategically, it reduced the risks associated with orders being processed from one location only. The Turkish business was itself important to CanadaDrugs because of the prices it could offer. CanadaDrugs had researched the Turkish market and had been concerned about product authenticity, whereas Mr Haughton had confidence in RDA’s vigilance against counterfeits. He described the consequences of counterfeit drugs being sent to CanadaDrugs’s US patients as at best embarrassing and at worst “terrible”. The prices that CanadaDrugs had been quoted were higher than those at which RDA was supplying them. Lastly, Turkish wholesalers insisted on being paid in advance but CanadaDrugs had no relationship with them and no one on the ground to look after its interests. All told, the risks of trying to enter the Turkish market itself were too great for CanadaDrugs.

The Claimants rely upon an email from Ron Sigurdson of CanadaDrugs to Mr Aggarwal dated 3 October 2007 following the Birmingham detention (as to which see below), listing drugs that CanadaDrugs needed RDA to re-ship “as these products are either not available elsewhere or not available profitably elsewhere”. The Claimants point out that this list only consists of six out of 103 products detained. I am not persuaded by this. Mr Sigurdson did not say, and the evidence does not establish, that the other products were available equally profitably elsewhere. Furthermore, many of the products were sourced from 8PM’s own UK fulfilment business, not Barbados.

About 3% of RDA’s business was in Lilly products, about 10% in AstraZeneca products, about 19% in Merck products and about 25% in Pfizer products. Thus a total of about 57% of its business was in the Claimants’ products.

On 12 November 2006 Her Majesty’s Revenue and Customs (“HMRC”) detained a consignment of pharmaceuticals at Heathrow Airport en route from CanadaDrugs Barbados in Barbados to RDA in Turkey. This consignment consisted of the RxNorth stock which RDA had purchased from CanadaDrugs following CanadaDrugs’s acquisition of RxNorth. The consignment included seven AstraZeneca brands including Crestor and Seroquel. On 21 November 2006 HMRC sent samples of the detained products to AstraZeneca. Initially, AstraZeneca informed HRMC that the packaging of the Crestor and Seroquel products was counterfeit, while everything else was authentic. Subsequently, AstraZeneca discovered that AstraZeneca Turkey had arranged for the repackaging of Crestor locally in 2006 for regulatory reasons. Accordingly, AstraZeneca accepted that the Crestor products were authentic. In the meantime CanadaDrugs had challenged the detention and HMRC had commenced condemnation proceedings. On 17 August 2007 there was a joint inspection of the Seroquel products by CanadaDrugs and AstraZeneca. On about 19 September 2007 the dispute was resolved on the basis that CanadaDrugs accepted that the Seroquel packaging was counterfeit and there was no order for the costs of the proceedings.

Although the Seroquel was of Turkish origin, Mr Aggarwal gave unchallenged evidence that it had not been supplied to RxNorth by RDA but by one of RxNorth’s other suppliers.

The background to the events which led to the present proceedings remains somewhat murky in certain respects.

At some point Pfizer started routinely making test purchases of products from CIPs. The earliest such purchase in evidence is one from RxNorth on 4 April 2007. The package bore a label with the name “Complete Care Pharmacy” together with a PO Box address in Slough. Two further purchases from RxNorth on 24 June 2007 were similarly labelled, as were two purchases from CanadaDrugs on 25 June 2007. By late September 2007 Pfizer had made nine further purchases from RxNorth and CanadaDrugs of products labelled in the same way. As Mr Allen accepted, it would have been apparent to those at Pfizer dealing with these products that they were of Turkish origin.

Mr Allen accepted that Pfizer shared intelligence with other pharmaceutical companies as well as with HMRC. It is not clear, however, whether Pfizer shared the information it had obtained about these test purchases with any of the other Claimants.

On or shortly before 26 September 2007 HMRC at Birmingham Airport detained a consignment of pharmaceuticals en route from RDA to 8PM (“the Consignment”) pursuant to Council Regulation 1383/2003/EC of 22 July concerning customs action against goods suspected of infringing certain intellectual property rights and the measures to be taken against goods found to have infringed such rights (“the Customs Regulation”). The Consignment included Lilly, Pfizer, AstraZeneca and Merck brands.

On 26 September 2007 Kevin Moore, who is Lilly’s Investigation Manager EMEA, attended a meeting with representatives of United States Customs and if the Medicines and Healthcare Products Regulatory Authority (“MHRA”) to discuss ongoing cases. The meeting was also attended by representatives from Pfizer, AstraZeneca, Sanofi-Aventis and Abbott. While at the meeting Mr Moore received a message from an officer of HMRC at Birmingham airport notifying him of the detention of the Consignment. On the same day the same officer telephoned Mr Allen of Pfizer and Simeon Wilson of AstraZeneca with a similar message. Chris Merchant of Merck was also notified by HMRC on the same day.

HMRC detained the Consignment on suspicion that some or all of the goods were counterfeit. It is not clear why HMRC suspected this. The Defendants believe that it is likely that one of the Claimants tipped HMRC off. Mr Allen was unable to shed any light on this, and the Claimants have not called any witness who could. In the circumstances, the Defendants’ belief is an understandable one, but I am unable to say whether or not it is correct.

HMRC subsequently provided samples from the Consignment to each of Lilly, Pfizer, Merck and AstraZeneca. Mr Allen accepted that, when he received the samples, he appreciated that they were part of the CIP trade.

In due course all of the Claimants confirmed that the products bearing their respective trade marks were genuine and not counterfeit. The consequence of this was that HMRC could no longer detain the goods pursuant to the Customs Regulation. Accordingly, the Claimants set about commencing proceedings for trade mark infringement and applying for injunctions to stop the goods being released to 8PM.

On 12 October 2007 Mr Moore sent an email to representatives of Pfizer, Merck, Abbott, Sanofi-Aventis and GlaxoSmithKline, which was copied to two representatives of Lilly’s solicitors Baker & McKenzie, in which Mr Moore wrote:

“Following on from our conversations either yesterday or today regarding the recent UK customs seizure of 150kg medicines at Birmingham airport in which all our products are involved.

Our lawyers are considering action to prevent the action from being released. If your lawyers are willing to consider similar action I hope to bring them all together to maximise out efforts, avoid duplication and reduce costs. Please liaise with your lawyers to establish whether they are considering similar action, advise them to liaise with Wendy Pang at Baker and McKenzie in London.”

On 19 October 2007 Lilly applied without notice to Kitchin J for an interim injunction requiring 8PM to direct HMRC to deliver up, and HMRC to deliver up, to Lilly’s solicitors any goods bearing five Lilly trade marks within the Consignment except any goods identified by Lilly as being counterfeit (referred to as “the Infringing Goods”) and restraining 8PM from taking possession or custody of or dealing with the Infringing Goods. Kitchin J granted the order sought. 8PM was referred to in the application and order as “a person unknown being the importer of [the Consignment]”, although Lilly were aware of its identity, since Lilly was not permitted to use that information under the Customs Regulation. Accordingly, the order also required HMRC to disclose the identity of the importer to Lilly for the purposes of the proceedings.

The application was supported by witness statements made by Mr Moore and by Bruce Longbottom, Lilly’s Associate General Counsel, Trademarks and Copyright. In his witness statement Mr Moore stated, after referring to the message he received on 26 September 2007:

“I have now been informed that the Consignment contains over 1000 packages addressed to individual patients some of which appear to be in the United States, including: 24 packages of EVISTA, 42 of CIALIS, three of HUMALOG, and six of HUMULIN.”

Later he said:

“… these products appear to have originated from Turkey, been imported into the UK and then some at least are apparently intended to be posted the United States.”

Mr Moore went on to deal with communications he had had since 26 September 2006 with both HMRC and the MHRA about the Consignment. In particular, he related that he had contacted the MHRA on 11 October 2007 asking whether the MHRA was taking any action to ensure the destruction of the Consignment and referred to a telephone conversation he had had on the evening of 11 October 2007 with Mick Deats, the MHRA’s Head of Enforcement.

In his witness statement Mr Longbottom said:

“I am informed by Mr Moore and verily believe that Customs indicated to Mr Moore that the shipment was imported into the United Kingdom with a view to the individual packages within the Consignment being sent to individual patients many of whom appear to be located in the United States.”

It is not apparent on the face of either statement that Lilly had any evidence that any of packages were to be sent anywhere other than to patients located in the United States. Nor is that apparent now. Be that as it may, what is most striking about Mr Moore and Mr Longbottom’s statements when read now is that they contain no mention at all of the CIP trade.

In Lilly’s counsel’s skeleton argument in support of the application he stated:

“The main argument between the parties will be as to consent. Although Lilly only need satisfy the court of an arguable case, it can be seen that the Respondents are unlikely to make out a defence of consent…

Anticipating a further defence which the First Respondent may seek to run, parties sometimes seek to argue the goods will be exported outside the EEA and therefore that no infringing act will be committed in the relevant jurisdiction. In fact this is a non-runner. First, although some of the drugs were clearly destined for North America, this may not be true of the entire consignment. In any event, section 10(4)(c) provides that it is an infringement of trade mark to export goods under the sign…. ”

No reference was made either in the skeleton argument or in counsel’s oral submissions to either of the decisions of the Court of Justice of the European Communities in Case C-405/03 Class International BV v Unilever NV [2005] ECR I-8735 and Case C-281/05 Montex Holdings Ltd v Diesel SpA [2006] ECR I-10881. Nor was any reference made to IPR, since counsel was unaware that the goods were being processed under that regime.

During the course of these inquiries Lilly has disclosed the email which Mr Moore sent to Mr Deats and two others at the MHRA on 11 October 2007. In this email Mr Moore stated:

“It would appear that the consignment was import for export and contained addressed packages for posting in the UK on behalf of ‘Canadian’ internet pharmacies.”

The Defendants submitted that:

8PM contended unsuccessfully before Mann J that the injunction granted by Kitchin J should be discharged for non-disclosure by Lilly, but at that time 8PM did not have the email of 11 October 2007 and so was not in a position to rely upon it. The Defendants requested Lilly to make Mr Moore and Mr Longbottom available for cross-examination before me, in part so they could be asked about this matter, but Lilly refused to make them available.

Lilly submitted that this matter is irrelevant to any issue in these inquiries. I accept that. Furthermore, because it is not relevant, it has not been fully investigated. It would therefore be wrong for me to come to any conclusion about it. All I will say is that I can understand why the Defendants are concerned.

A separate point is that Kitchin J’s order contained a cross-undertaking in favour of 8PM and HMRC, but not in favour of RDA. (The same was true of the without notice injunctions obtained by Pfizer, AstraZeneca and Merck.) The Practice Direction – Interim Injunctions which supplements CPR Part 25 states at paragraph 5.1A:

“When the court makes an order for an injunction, it should consider whether to require an undertaking by the applicant to pay any damages sustained by a person other the respondent, including another party to the proceedings or any other person who may suffer loss as a consequence of the order.”

This provision was introduced following the decision of the Court of Appeal in SmithKline Beecham plc v Apotex Europe Ltd [2006] EWCA Civ 658, [2007] Ch 71 (although it is arguable that the need for it had been apparent since at least Berkeley Administration Inc v McClelland [1996] ILPr 772 and ex p. Smith & Nephew). In that case it was held that the Canadian manufacturers of a pharmaceutical intended to be marketed in the United Kingdom could not recover for loss sustained as a result of an interim injunction against an associated English company and two other companies restraining them from importing and selling the product because the cross-undertaking was only expressed to be in favour of the defendants.

Kitchin J was not reminded by counsel for Lilly about paragraph 5.1A, nor was he invited to consider the ambit of the cross-undertaking at all. In my view it is important that advocates applying for without notice interim injunctions, and judges hearing them, should give specific consideration to this point. In cases such as these, where the owner of an intellectual property right is applying for an injunction in respect of a consignment of goods which have been detained by HMRC under the Customs Regulation, particular consideration should be given to extending the benefit of the cross-undertaking to the consignor of the goods as well as the consignee.

Kitchin J’s order was served on 8PM on 23 October 2007 together with an application notice seeking an interim injunction to restrain 8PM from importing or dealing in goods under various Lilly trade marks (i.e. a wider injunction than that granted by Kitchin J) until trial.

On the same day Mr Moore sent an email to Mr Allen, Mr Wilson and Mr Merchant, copied to Ashley How of Pharmaceutical Security International (“PSI”), in which he said:

“Following on from the phone calls.

The official version of what I have written below will be circulated at 4pm. Please do not forward this email on and wait for the official version which will come from PSI at 4pm today. This is just to give you a heads up.

Last Friday in the High Court in the Strand our lawyers obtained an interim injunction against the customs not to release our products. They also obtained an interim injunction against the consignee (not named) and an order against the customs to name the consignee.

The injunction has been served on the customs and they have supplied the consignee’s details in a way that we can now name them in any future court hearing.

Our lawyers are serving a claim against the consignee to inform them that we are applying for a full injunction against them.

We are hoping to be back in court on Friday of this week.

Our lawyers are using the Trade marks Act 1994 Sec 10 sub sec 1 and Counsel [sic] Regulation 40/94 Article 9(1) sub sec 1 sub sec a.

The above may not be correct legal terminology but it gives you the gist of what is happening.

Our lawyers are Baker & MacKenzie [sic]. The lawyer dealing is Wendy Pang. …

If you need anything else please call me.”

The role of Mr How was described by Mr Moore in passing in his statement as follows:

“Ashley How of the Pharmaceutical Security Institute (‘PSI’) co-ordinates training to Customs on brands owned by a significant number of pharmaceutical companies. This has enabled him to develop good relations with Customs, such that various UK customs authorities use him as the unofficial central point of contact for all the pharmaceutical companies. In practice, when a UK Customs authority intercepts a consignment of pharmaceutical products, it will usually notify Ashley How first on an informal basis who would in turn informally notify the relevant pharmaceutical companies.”

Mr Allen confirmed that, as the email dated 23 October 2007 suggests, Mr How played a coordinating role in relation to the present matter.

On 26 October 2007 Blackburne J made an order by consent in which 8PM gave an undertaking in lieu of an injunction which continued the relief granted by Kitchin J until 31 October 2007. On 31 October 2007 Kitchin J made an order continuing the injunction until an effective hearing of the application and gave directions for evidence in the meantime.

On 26 October 2007 Pfizer applied without notice to Norris J for an injunction in similar form to that granted by Kitchin J on 19 October 2007. Norris J granted the order sought. Pfizer instructed the same solicitors and counsel. The application was supported by draft witness statements made by Mr Allen and by Julian Mount, Pfizer’s Vice-President of European Trade and Mature Brands. The content and format of these statements were broadly similar to those previously made by Mr Moore and Mr Longbottom. In particular, they contained very similar statements to those quoted above. Again there was no mention of the CIP trade. Nor was there any reference to Pfizer’s test purchases from CIPs.

On this occasion counsel’s skeleton argument stated:

“The main argument between the parties will be as to consent. Although Pfizer only need satisfy the court of an arguable case, it can be seen that the Respondents are unlikely to make out a defence of consent…

Anticipating a further defence which the First Respondent may seek to run, parties sometimes seek to argue the goods will be exported outside the EEA and therefore that no infringing act will be committed in the relevant jurisdiction. There are a number of reasons why Pfizer say that this is a non-runner.

(1)

First, although some of the drugs were clearly destined for North America, this may not be true of the entire consignment. We will not know where the individual packages were to be sent until each of them is inspected or the First Respondent explains what its intentions were.

(2)

Secondly, this does not appear to be a transit zone case where the goods are simply in customs warehouses. Although on the basis of the information which Pfizer are permitted to use under the Regulation, this is not something that can be investigated in any detail.

(3)

Thirdly, this does not appear to be case where a consignment is simply in transit. … The consignment was, it appears to be broken down in the United Kingdom and the individual packages were to be re-posted to other countries. There are acts in the United Kingdom which Pfizer will say amounts to export. Section 10(4)(c) provides that it is an infringement of trade mark to export goods under the sign….

(4)

Fourthly, … Pfizer asks why the importer is going to the lengths of the cost and delay in importing pharmaceuticals into the United Kingdom, breaking them down into individual packages, and re-sending them elsewhere, rather than simply sending the packages from Turkey which would be quicker and cheaper … what Pfizer believe (although they have no evidence, is that, in the case of pharmaceuticals not destined for the UK or elsewhere in the EEA but destined for North America, the purpose of entry into the UK of the pharmaceuticals, the separating of the consignment and the re-export from the UK in individual packages is that the goods are less likely to be searched by US customs…”

Again, there was no reference to Class International or Montex in the skeleton argument. Pfizer’s solicitors’ note of the hearing states, however:

“Anticipating a further defence which the First Respondent may seek to run, parties sometimes seek to argue the goods will be exported outside the EEA and therefore that no infringing act will be committed in the relevant jurisdiction. In the ECJ in Colgate v Palmolive qualification it was held that as the products were in transit they were not imported into the EEA. There are a number of reasons why Pfizer say that this is a non-runner…”

Colgate v Palmolive is a reference to Class International. It does not appear that Norris J was actually shown the authority, however.

Norris J’s order was served on 8PM on 29 October 2007. On 30 October 2007 Pfizer served on 8PM an application notice seeking an interim injunction restraining 8PM from importing or dealing in goods under certain Pfizer trade marks until trial.

On 6 November 2007 Warren J made an order by consent continuing the injunction granted by Norris J until not less than two days after judgment on the pending interim injunction application by Lilly.

On 29 October 2007 Merck applied without notice (save that informal notice was given that day) to Warren J for an injunction in similar form to those granted by Kitchin J on 19 October 2007 and by Norris J on 26 October 2007. Warren J granted the order sought. Merck instructed the same counsel, but different solicitors. The application was supported by witness statements made by Henry Parkinson, a Legal Officer employed by Merck, and by David Latham, a partner of Lovells LLP, Merck’s solicitors.

Mr Parkinson said in his statement:

“The label [on a sample packet] refers to the Complete Care Pharmacy and gives an address at a PO Box in Slough and a 1-800 number. I understand from a Google search that this is a telephone number for an online pharmacy website called www.canadadrugs.com. Below the Complete Care Pharmacy text appears an Rx number (i.e. Rx: 14749018). Rx is a commonly used abbreviation for ‘prescription’. A name also appears, presumably this is the name of the patient. Below this is a price in dollars and a date and immediately below this is a description of the product, in this case ‘8 tablets Fosamax 70mg’. Below this is the generic name of the product, a ‘DIN number’, the manufacturer (which is said to be MSD) and the dosing instructions, which in this case instruct the patient to ‘take half a tablet weekly’. I am informed that DIN is an acronym used by Canadia [sic] pharmacies and the Canadian regulatory agency as the Drug Identification Number….

Based on the information which appears on the over-stickered label, namely the 1-800 number which appears on the www.canadadrugs.com website … it seems likely that at least some of these drugs may be headed to final destinations in the USA or Canada.

… A price in dollars does appear on the labels and on this basis we suspect that the Merck Drugs may go to the USA or Canada, however there is no guarantee that they have not been paid for in dollars via a website but are to be delivered to patients within the EEA. I do not know whether any of the Turkish Drugs or Malaysian Drugs are destined for end users in the UK market. I do not know why the unnamed consignee has decided to arrange for these products to be imported into the UK, unless the intention is to supply the Merck Drugs in the UK.

It is my understanding that Merck have been told by HMRC that at least some of the products were contained in small ‘boxes’ or ‘packs’ … which … had the patient name and postal address labels applied. They were ready to be either franked or stamped for posting or to be put in express courier envelopes for onwards mail. HMRC have not told Merck which country or country these addresses are in…

For those packages which appear to be destined to the USA, it may be that US Customs would look less stringently at packages arriving from the UK than from other countries. Unless there is such an advantage in shipping via the UK, it would appear to me that it would make more commercial sense to ship the Merck Drugs direct from Turkey or Malaysia to the their final destination.”

This evidence goes further than that adduced by Lilly and Pfizer in putting the court into the picture with regard to the likely destination of the drugs in the USA and the Canadian connection, but it does not put it into context by explaining the nature of the CIP trade.

Counsel’s skeleton argument was in similar terms to his skeleton argument in support of the Pfizer application. Again, Class International was not mentioned in the skeleton argument, but is recorded in Merck’s solicitors’ note of the hearing as having been cited in argument.

Warren J’s order was served on 8PM on 31 October 2007. On 2 November 2007 Merck served an application notice seeking an interim injunction to prevent 8PM from importing or dealing in goods bearing certain Merck trade marks until trial.

On 12 November 2007 Lightman J made an order by consent continuing the injunction granted by Warren J until a hearing on or after 27 November 2007 or 14 days after judgment on the interim injunction application by Lilly, whichever was the later, with directions for evidence in the meantime.

On 1 November 2007 AstraZeneca applied without notice (save that AstraZeneca asked HMRC to notify 8PM of the application and HMRC did so on 31 October 2007) to Warren J for an injunction in similar form to those granted by Kitchin J on 19 October 2007, by Norris J on 26 October 2007 and by Warren J on 29 October 2007. Warren J granted the order sought. AstraZeneca instructed the same solicitors and counsel as Lilly and Pfizer. The application was supported by draft witness statements made by Mr Wilson and by Martin Broden, AstraZeneca’s Legal Counsel. The content and format of these statements were broadly similar to those previously made by Mr Moore and Mr Longbottom. In particular, they contained very similar statements to those quoted above. Again there was no mention of the CIP trade.

Warren J’s order was served on 8PM on 2 November 2007. On 6 November 2007 AstraZeneca served an application notice seeking an interim injunction to prevent 8PM from importing or dealing in goods under certain AstraZeneca trade marks until trial.

On 6 November 2007 Briggs J made an order by consent continuing the injunction granted by Warren J until not less than 10 days after judgment on the pending interim injunction application by Lilly.

8PM served evidence in opposition to Lilly’s application for an interim injunction consisting of witness statements made by Mr Aggarwal, Ralph Cox of 8PM’s solicitors Fasken Martineau Stringer Saul LLP and Donald Macarthur, a pharmacist, on 6 November 2007. This evidence was also relied upon in support of an application for summary judgment which was served by 8PM at around the same time.

In his statement Mr Aggarwal touched on the legal position regarding importation of foreign drugs into the USA, saying that it was not permitted although there had been pressure for a change in law. With regard to the damage which an injunction would cause, he said this:

“36.

If 8PM is unable to handle Lilly Products, in effect this means that we lose all of the business which includes, amongst the products ordered, any Lilly Products. In any event I understand other pharmaceutical companies are seeking injunctive relief similar to that being sought by Lilly and are being represented by the same solicitors.

37.

If 8PM is unable to handle Lilly and other Products, the Turkish Supplier will be in an extremely difficult position. All of the products it supplies are shipped through the UK. As mentioned above, there are good shipping and insurance routes as regards the UK. It is not reliable to ship directly from Turkey to the US, and insurance is difficult to obtain. I believe that to maximise commercial success, the Turkish Supplier would have to ship via a first world country. I know of no other country which would be acceptable to both the Turkish Supplier and US patients. Possibly some exist -- I just do not know. I do not believe that, if the Turkish Supplier were to lose the ability to ship via the UK, it would be able to organise transport through any other country fast enough to insure that its business survived.

38.

If interim relief were granted there is a serious risk that at least in the short to medium term the Turkish Supplier would not be able to deliver product promptly to the US. In such circumstances I would expect the Canadian Pharmacies would seek other sources of supply. I would expect such damage to commercial relations to occur in one to two months. This would cause unquantifiable loss to the Turkish Supplier and 8PM….

39.

If we are stopped from handling Lilly products other companies operating in this sector will take our business. If we stop operating, even for a short period, there will be a knock-on effect for our future business which will be unquantifiable.

…

42.

In the event that 8PM was injuncted for more than one or two months, I believe the Turkish Supplier would have to close, for the reason given above. I do not think that the Turkish Supplier would be able to arrange suitable alternative transport and insurance routes….

43.

Turkish Supplier has around $1 million of stock. If it was unable to supply goods, that stock, which has a limited shelf life, would begin to deteriorate.”

Lilly served evidence in reply consisting of second witness statements of Mr Moore and Mr Longbottom and a witness statement of William Harris, a Lilly research scientist, on 14 November 2007. Mr Longbottom dealt at some length with the position under US law, saying in short that importation of foreign versions of pharmaceuticals into the USA was generally illegal. With regard to the damage which an injunction would cause to the Defendants, he said this:

“47.

I should like to comment on paragraphs 34-44 of Mr Aggarwal’s statement regarding the harm which the Defendant might suffer in the events that an injunction was granted until the trial of this action.

48.

I have not seen the confidential annex to which Mr Aggarwal refers in paragraph 34. However, he confirms that the number of products of the Claimants in which the Defendant deals is ‘very small’. I believe this makes it quite easy to calculate the loss that the Defendant might suffer as a result of an injunction being granted as, equally, small and, I would submit, quantifiable….

50.

Mr Aggarwal refers to the fact that there are related actions pending of which I am also aware. However, I also understand there are a large number of pharmaceutical companies’ products involved in this Consignment. I believe that this Court is only concerned with the impact of an injunction on the parties to this action but, even if there is a wider concern of the impact of more than one injunction, I believe that the potential harm in terms of loss of sales is quantifiable…

56.

I should like to refer to paragraphs 48-52 of my First Witness Statement referring to the damage to the Claimants and, I reiterate, the damage that might be suffered by the Defendant and my undertaking on behalf of the Claimants of an undertaking in damages.”

8PM served evidence in rejoinder consisting of second witness statements of Mr Aggarwal and Mr Cox and witness statements of Anna McKay, an intellectual property consultant, and Barbara Scott, a customs consultant, on 19 November 2007. Lilly served further evidence consisting of witness statements of David Allen, Lilly’s Director of Manufacturing Science and Technology, Global Parenteral Products, and Paul Rawlinson of Baker & McKenzie on 20 November 2007.

Lilly’s application for an interim injunction until trial and 8PM’s cross-application for summary judgment were heard by Mann J between 21 and 23 November 2007. The other Claimants had representatives in court during the hearing. In his skeleton argument for the application, counsel for Lilly submitted:

“54.

This is [a] case where the balance of convenience heavily favours the grant of an injunction: Longbottom 2^nd, paras 47 to 59.

55.

… There is no question that Lilly are good for the money and any damage that 8PM may suffer (should it turn out the injunction was wrongly granted) can readily be quantified.

…

58.

Mr Aggarwal has raised in his statement the possible damage to the Turkish supplier. However, there is no application made on behalf of the Turkish supplier, and it is a stranger at present to the proceedings. What seems clear is that any losses that it suffers are likely to be quantifiable in financial terms…. ”

On 23 November 2007 Mann J granted the injunction sought by Lilly. In his judgment ([2007] EWHC 2829 (Ch), [2008] FSR 11) Mann J concluded that Lilly had an arguable case of trade mark infringement and that the balance of convenience favoured the grant of an injunction. He also held that Lilly was guilty of non-disclosure on the application before Kitchin J in one out of three respects alleged by 8PM, but that that did not justify either discharge of Kitchin J’s order or refusal of further relief.

I must quote three passages from Mann J’s judgment which are relevant to the issues before me. The first concerns the position of the other Claimants at [16]:

“I should also observe that I have been informed that three other drug companies or groups are interested in the overall consignment which was originally treated as suspicious by HMRC. Those other three companies, or perhaps there are four, have launched their own proceedings. Those proceedings are stayed pursuant to some form of agreement or pattern of agreements and they await the result of these proceedings.”

The second concerns the question of illegality at [44]:

“Although it is something of a movable feast at present, there are some restrictions on the importation of drugs into the United States. The US Food and Drug Administration (FDA) has the function of policing this or supervising it. The strict requirements are probably in the course of being formally relaxed and there are a number of de facto informal concessions made in favour of individual customers who import for their own purpose. The extent of all this is a matter of dispute in this action. However, it appears that the position is as follows. Strictly speaking, the importation of all or most of these drugs would be illegal. However, US Customs announced that from October 2006 they would not confiscate drugs mailed from Canada. Nevertheless, the position about drugs mailed from other countries is more fluid. [8PM]'s evidence is that the strict legal position is in the course of likely modification as a result of legislation, subject only to presidential veto, which no one has any reason to suppose will be forthcoming.”

The third concerns the question of whether the Defendants could be adequately compensated in damages if an injunction were to be wrongly granted:

“73.

… I next need to consider whether if I stop this trade in this particular manner, pending a trial, and it turns out that I should not have done so which is definitely arguable in this case, then the defendant and the Turkish supplier can be adequately compensated in damages. So far as 8 PM is concerned, I consider that it can. The damage will be quantifiable. Lost trade can be calculated by reference to past trade and I see no great problem about that. The level of trade in terms of 8 PM's business is undetermined because 8 PM has decided not to disclose the profitability to it of this trade. It is not apparent there will be any loss but if there is a loss I am satisfied it can be adequately compensated on the [cross] undertaking in damages and Eli Lilly are plainly good for that.

74.

The Turkish supplier is slightly different. I consider it right to take the position of the Turkish supplier into account because it is the Turkish supplier who will be the person mainly affected by this. Whether or not the transit of the goods through this jurisdiction is technically importation for the purposes of the Act, nevertheless the goods are effectively merely sent in transit through this jurisdiction and the business is really that of the supply of these drugs by the Turkish supplier either to Canadadrug or to the US end users. It matters not which view one takes for these particular purposes.

75.

Accordingly, since the grant of an injunction will shut off this particular route available to the Turkish supplier, it seems to me to be right and inevitable that I should take the position of the Turkish supplier into account. The Turkish supplier is more financially at risk because it is the person with the commercial risk in the sales. Whether it will lose sales or not depends on whether it can find a substitute route. Various routes were suggested in the evidence. It is not clear to me that no such route is available and it is possible that another route will be found at least temporarily.

76.

However, even if that is wrong, the loss which the Turkish supplier will sustain in this respect is not apparently the whole of its business and even if it is it will be only a relatively short-term because I propose to make an order for a speedy trial. Since the parties have told me that they think they can be ready for trial in three months, that is an objective for achieving a speedy trial. One is, therefore, only looking at a three month disruption of business.

77.

I bear in mind that it has been submitted to me that one is not talking about the mere loss of three months of business. It may be that business lost is not entirely business that can be regained if the tap is turned back on. I accept that may be the case but to the extent that is the case again that is something which sounds in damages.”

On 27 November 2007 an enforcement officer of the MHRA applied to a district judge sitting in Wolverhampton Magistrates Court for a warrant under section 111(5)(b) of the Medicines Act 1968 to enter and inspect 8PM’s premises. The district judge duly granted the warrant. It was executed by MHRA officers accompanied by representatives of the Royal Pharmaceutical Society of Great Britain and the police not only at 8PM’s premises, but also at Mr Aggarwal’s home. This is apparently on the basis that Mr Aggarwal’s home constituted “a place associated with [8PM’s] premises”, which I find surprising. Understandably, Mr Aggarwal believes that this action was prompted by Lilly and that its timing is explained by the grant of the Lilly Injunction, even though Lilly had already acknowledged by then that no counterfeits had been found in the Consignment. The search party did not find any counterfeit products or unlicensed products, and to date no action has been taken against 8PM or Mr Aggarwal as a result of the search.

At the time that the hearing before Mann J started the hearing of Merck’s with notice application was floating from 27 November 2007. During the course of the hearing before Mann J, it was agreed that this should be put back to 3 December 2007.

On 27 November 2007 Merck’s solicitors wrote to the Defendants’ solicitors in the following terms:

“We refer to the telephone conversations between us yesterday….

In those conversations you stated that at your client had agreed in principle to stay the above action and accept undertakings, in a form essentially following the injunction to trial granted in the Lilly action, to restrain it from importing products bearing the marks belonging to our clients which are the subject of this action until the trial of the Lilly action. Our client is also in principle agreeable to this approach and we therefore enclose a draft consent order for your consideration.

We should be grateful if you would discuss this with your client as a matter of urgency and indicate that your clients are agreeable to its terms….”

On 28 November 2007 there was a telephone conversation between the solicitors in which it appears that the Defendants’ solicitors requested that the cross-undertaking in the draft consent order be extended to the Turkish Supplier (i.e. RDA) and Merck’s solicitors said that they would take instructions. On the same day Merck’s solicitors emailed a revised draft consent order which had been amended in another respect. On 29 November 2007 the Defendants’ solicitors replied stating that it was essential that the Turkish Supplier was protected by the cross-undertaking and that this was the case with the order in the Lilly action.

After some further correspondence, Merck’s solicitors wrote to the Defendants’ solicitors on 4 December 2007 agreeing that the cross-undertaking should extend to the Turkish Supplier and enclosing a further draft of the consent order. On 5 December 2007 the Defendants’ solicitors replied that in principle 8PM was prepared to agree to an order in similar terms to that in the Lilly action, and accordingly Merck’s solicitors’ draft was broadly acceptable, but requesting some minor amendments. Merck’s solicitors responded on 6 December 2007 agreeing to most of the amendments and enclosing a further draft. On 10 December 2007 Merck’s solicitors sent a further draft following a telephone conversation that day.

On 14 December 2007 the Defendants’ solicitors wrote to Merck’s solicitors raising a concern over the wording of the draft order. After further correspondence, revised wording was agreed on 18 December 2007. Merck’s solicitors sent the Defendants’ solicitors the final version of the draft consent on 19 December 2007, and the Defendants’ solicitors signed and returned it the same day. The consent order was duly made by Master Bragge as of that date and sealed on 22 January 2008.

The Merck Injunction expressly provided that it took effect from the date of signature, namely 19 December 2007. Merck do not dispute that they became potentially liable under the cross-undertaking as from that date.

On 7 and 10 December 2007 Baker & McKenzie wrote on behalf of AstraZeneca and Pfizer respectively virtually identical letters to the Defendants’ solicitors in the following terms:

“Following the judgement in the claim number HC 07C02877 Lilly Icos LLC and Eli Lilly and Company v 8PM Chemist (the ‘Eli Lilly Case’), we assume that your client would be amenable to consenting to an order with our clients on the same lines as the Order entered on 30 November 2007 in that case (the ‘Eli Lilly Order’) pending the Eli Lilly trial decision.

We therefore enclose for your review a draft consent order that the return date be adjourned to a date after the trial in the Eli Lilly Case and that the above proceedings be stayed in the meantime.

As we are not aware of the identity of the Turkish Supplier, our clients are unable to give a cross undertaking in damages in relation to the Turkish Supplier.

If your client consents to the terms the draft consent order, we would be grateful if you would to sign this letter and the draft consent order and send copies to us by fax or e-mail.”

The Defendants’ solicitors replied to both letters on 13 December 2007 saying that the cross-undertakings should extend to the Turkish Supplier and disclosing its identity upon a confidential basis. On 18 and 21 December 2007 Baker & McKenzie replied enclosing revised draft consent orders which included the Turkish Supplier in the cross-undertakings. On 23 December 2007 the Defendants’ solicitors replied enclosing countersigned copies of the draft order. The letters included a statement to the effect that they had countersigned upon a certain understanding as to the meaning of the order. On 9 and 10 January 2008 Baker & McKenzie replied with their understanding, and said that they assumed the Defendants agreed and would lodge the signed orders unless the Defendants indicated otherwise. On 10 January 2008 the Defendants wrote agreeing to this.

On 16 January 2008 Baker & McKenzie wrote to the Defendants’ solicitors purporting to enclose the consent orders in both cases “entered on 15 January 2008”. In fact, through an administrative error by the Court, the documents in question were copies of the draft consent orders stamped “Chancery Division Received 15 January 2008” rather than sealed orders. As I understand it, the AstraZeneca order was subsequently made by Master Price on 7 March 2008 and entered, but it was later noticed that it accidentally omitted the words “and the Defendant’s Turkish supplier” before the words “should be compensated” in the cross-undertaking. This was corrected under CPR r. 40.12. The Pfizer order contained the same mistake, but to this day it has never been sealed. It is common ground, however, that nothing turns on this.

Mr Aggarwal gave unchallenged evidence that he understood that 8PM and Pfizer and AstraZeneca were bound by the consent orders on the date they were countersigned, namely 23 December 2007. In my judgment it was entirely reasonable for him to act on that understanding.

Mann J refused 8PM permission to appeal against his order. 8PM applied to the Court of Appeal for permission to appeal and for expedition of the appeal. Jacob LJ granted permission to appeal limited to the question of whether Lilly had an arguable case of trade mark infringement and expedited the hearing of the appeal.

The appeal was heard on 24 January 2008. At the conclusion of the hearing the Court of Appeal announced that it had concluded that Lilly did not have an arguable case of trade mark infringement for reasons which would be given in writing later, and discharged the Injunction granted by Mann J.

The Court of Appeal’s judgments ([2008] EWCA Civ 24, [2008] FSR 12) were handed down on 5 February 2008. In his judgment, with which Rix LJ and Sir William Aldous agreed, Jacob LJ held that it was acte clair in the light of Class International that a trade mark owner’s goods which were not released for free circulation under the Customs Code, and thus were non-Community goods, were not imported into or exported from the Community for trade mark infringement purposes, and that this applied to goods processed under IPR just as much as it did to goods processed under the Customs procedure which featured in Class International.

The Court of Appeal invited the parties to agree an order or in the absence of agreement to make written submissions. No agreement was reached and the parties duly filed submissions. On 11 March 2008 the Court of Appeal made an order allowing the appeal, granting summary judgment in favour of 8PM (subject to one point which as I understand it was not in the end pursued by Lilly) and discharging the Injunction granted by Mann J. Paragraph 4 of the order provided:

“there be an enquiry as to damages under the cross undertakings recorded in schedule 1 of the order of 19^th October 2007 and in the subsequent interim orders, including the orders of 26^th and 31^st October 2007 and 23 November 2007.”

On 28 January 2008 the Defendants’ solicitors wrote to Pfizer’s and AstraZeneca’s solicitors, and on 30 January 2008 the Defendants’ solicitors wrote to Merck’s solicitors, requesting their respective clients’ immediate consent to the release of 8PM from the principal injunctions granted against it. Each of Pfizer, AstraZeneca and Merck sought to agree terms for the release. Terms were agreed in the Pfizer and AstraZeneca actions on 26 February 2008. The Injunction in the Merck Action was limited in time to 1 March 2008 and expired on that date before terms for its release were agreed.

On 30 September 2008 Norris J made an order by consent in the Pfizer action for inquiries under the cross-undertakings in each of the orders dated 26 October 2007, 6 November 2007 and 15 January 2008. Patten J made a similar order in the AstraZeneca action on 1 October 2008. Master Bragge made a similar order in the Merck action on 12 December 2008.

I must now go back in time and address the first of the two principal factual dispute between the parties before me, which is as to what effect, if any, the Injunctions had on the Defendants’ Turkish fulfilment business. The Defendants’ case is that the Injunctions caused them to lose their Turkish fulfilment business since the customers went elsewhere. The Claimants’ case is that the Injunctions, as opposed to the Birmingham detention and/or the existence of the litigation and/or the without notice injunctions, caused the Defendants no loss because Mr Aggarwal had decided either to close the Turkish fulfilment business or to put it on hold pending the outcome of the litigation prior to the hearing before Mann J.

The state of the Defendants’ Turkish fulfilment business prior to the Birmingham detention. The Claimants contend that the Defendants’ Turkish business was in decline even before the Birmingham detention. At one stage the Claimants were contending that it was in decline even before August 2007, but I did not understand that suggestion to be pursued in the Claimants’ closing submissions. In any event, I consider that it is clear that the business was growing rather than declining up to that point.

The Claimants maintain that the business was in decline in September 2007. It is true that, if one looks at the value of the invoices to CanadaDrugs for the Complete Care business from number 106 dated 26 August 2007 to number 111 dated 30 September 2007, one can see a reduction in the figures from £83,331.43 to £52,845.94 (including shipping and dispensing fees). I do not accept that this shows that the business was in decline, however, for a number of reasons.

First, the period in question is only 5 weeks, so it is not a large sample of invoices from which to attempt to draw a conclusion. As one would expect, the invoice totals show a fair amount of weekly variation in any event.

Secondly, the figures include generic sales (which are not part of the claim) as well as branded products. Mr Aggarwal explained that the generic sales tended to be erratic because of delays in getting product from India. The Claimants say that the drop in generic sales is less than the drop in branded sales, but even if that is right it means that the drop in branded sales is lower than the figures quoted above suggests.

Thirdly, there was no significant decline in the number of branded products being sold by RDA to CanadaDrugs in September 2007.

Fourthly, the figure for the invoice dated 26 August 2007 was unusually high: although the Defendants had had one or two better weeks (for example, £84,680.91 in the invoice dated 14 January 2007), that week was one of their best. One possible explanation of this is that, if there was an autumn spike (as to which, see below), it arrived a little early that year; but it does not matter whether that is correct or not. The point remains the same whatever the explanation.

Fifthly, although the figure for the invoices dated 23 and 30 September 2007 were on the low side, the Defendants had previously had a number of worse weeks than those (for example, several invoices in February and March 2007).

Sixthly, as I shall explain in more detail below, after Mr Aggarwal was notified of the Birmingham detention, he temporarily delayed shipments from RDA. Thus there were fewer consignments in September 2007 than in a normal month. This is likely to have affected at least the invoice dated 30 September 2007.

Seventhly, no plausible reason has been identified as to why the business should have suddenly started to decline in September 2007. In their closing submissions the Claimants sought to avoid this point by saying that it was not necessary for the Court to determine why the decline occurred. In my view, however, the absence of any explanation for a decline having occurred suggests that the correct analysis is that there was no decline, merely a combination of an unusually high peak, normal weekly variation and the effect of the Birmingham detention.

The effect of the Birmingham detention. It is common ground that in the short term the Birmingham detention had a significant adverse effect on the Defendants’ Turkish fulfilment business. Thus the Complete Care invoice values dropped to £17,042.85 on 7 October 2007 and only £847.07 on 14 October 2007.

The reasons for this decline were not confined to the detention of the Consignment itself. Initially, Mr Aggarwal did not know that the Consignment had been detained by HMRC, just that it had not cleared. While trying to establish what had happened, he temporarily delayed further consignments being sent by RDA. By 1 October 2007 it was clear to him that it was a detention on suspicion that the consignment contained counterfeits, and so he contacted CanadaDrugs to inform them. Over the next few days, two consignments of replacement orders were sent. One was sent by the usual UK route, in part to test whether it would be detained or not, and the other by a non-UK route (via Amsterdam to Neopost, in the Caribbean island of St Maarten, to post on to the US patients). The UK consignment cleared customs after a few days’ delay, which gave Mr Aggarwal the confidence to re-start regular consignments.

It took longer for CanadaDrugs to recover confidence, however. When Mr Aggarwal informed CanadaDrugs of the detention, it switched orders to other fulfilment centres (its own centres in Barbados and Canada and to 8PM’s UK fulfilment business). But from mid-October 2007, the volume of orders from CanadaDrugs rose again. Indeed, on 22 October 2007 Ron Sigurdson sent Mr Aggarwal an email saying “The following products have already been moved back to CCP [i.e. Complete Care Pharmacy]. Some are very good movers”. He then listed 37 drugs. The effect of this can be seen in the figures: the Complete Care invoice dated 28 October 2007 was for £19,420.06.

It was suggested by the Claimants that the Birmingham detention was a defining event in that it demonstrated to CanadaDrugs that it could, or at least should, fulfil its orders by means other than the Defendants’ Turkish fulfilment business. In my judgment this suggestion is not supported by the evidence. On the contrary, the evidence shows that, once CanadaDrugs had started to regain confidence, it moved orders back to the Defendants in significant quantities.

The effect of the without notice injunctions and with notice applications. As noted above, the Lilly without notice injunction and application for a wider injunction were served on 8PM on 23 October 2007 and the Pfizer without notice injunction and application were served on 29 October 2007 and 30 October 2007 respectively. The Merck without notice injunction was served on 31 October 2007. Also on 31 October 2007 8PM was informed by HMRC of AstraZeneca’s application the following day. By 31 October 2007, therefore, Mr Aggarwal was aware that three groups of pharmaceutical companies had obtained without notice injunctions in respect of goods in the Consignment, of whom two were applying for wider injunctions, and that a fourth was applying for an injunction in respect of the Consignment. As he appreciated, the injunctions in respect of the Consignment were of limited effect, but the wider injunctions sought had the potential to prevent the Defendants from fulfilling orders from CanadaDrugs via the United Kingdom.

Mr Aggarwal informed CanadaDrugs about the without notice injunctions and the applications for wider injunction shortly after these were served. Mr Aggarwal accepted that, as a result, CanadaDrugs would have considered RDA as being “at risk” from 23 October 2007.

Nevertheless, it was Mr Aggarwal’s evidence that the Defendants’ Turkish fulfilment business continued to recover from the effect of the Birmingham detention in the following month. I accept this evidence, which is supported by the figures. Although the Complete Care invoices dated 5, 12 and 19 November 2007 were down from that dated 28 October 2007, the invoice dated 26 November 2007 was up at £22,113.55.

The redundancies. The reason for highlighting the position as at 31 October 2007 above is that at the end of October 2007 Mr Aggarwal gave four employees of RDA notice of redundancy with effect from the end of November 2007. In addition, he decided to give a fifth employee notice of redundancy at the end of November 2007 effective at the end of December 2007. (RDA had already made one employee redundant with effect from 31 October 2007 for reasons which Mr Aggarwal said, and I accept, were unconnected with this dispute.) Mr Aggarwal’s evidence as to the reason why he did this was as follows:

“I took the decision in order to hedge my bets against one or more of what were to be the 23 November injunction and Additional Injunctions being granted. If they were, so that the business would be stopped while an alternative shipping route was found, the Employees would have worked at least some of their notice periods by that time. If not, the Employees could be asked if they would like to stay on. … The date of the redundancies just reflects the precautionary measure I took to reduce staff costs quickly should the injunctions be granted.”

Mr Aggarwal explained that there was a high unemployment rate in Istanbul and so it was easy to recruit new workers if and when needed.

Mr Aggarwal was cross-examined on two emails from Tacettin Dolek (the manager of RDA) to him dated 26 and 31 October 2007 and an email from himself to Prateek Gupta (the minority partner in RDA) dated 2 November 2007 in which the redundancies were discussed. In my view the emails from Mr Dolek are not particularly significant: they are not easy to interpret due to the quality of the author’s English and Mr Aggarwal explained that Mr Dolek did not have the full picture anyway. The most that these emails show is that Mr Aggarwal was thinking about making staff redundant as early as 26 October 2007. More important is the email from Mr Aggarwal to Mr Gupta, in which he said:

“As you are now aware that we will sadly be loosing all of the workers (except Urgas) at the end of November and also Idil at the end of December. This situation was unavoidable due to difficulties in BHX [i.e. Birmingham airport] and the resulting decrease in order volumes in Turkey.”

Counsel for the Claimants submitted that the three emails, and in particular the one from Mr Aggarwal, demonstrated that Mr Aggarwal’s explanation for the decision to make the employees redundant which I have quoted above was false. When cross-examined about his email, Mr Aggarwal said that the second sentence I have quoted was shorthand for the effects of the litigation. The key passage of cross-examination is as follows:

“Q. You say you took the decision in order to hedge your bets

against one or more of what were to be the 23rd November and

additional injunctions being granted. I have to suggest to

you that, having looked at the e-mails that passed between you

and your operatives in Turkey, that it is quite plain that

decision to make those employees redundant was because of the

incident in Birmingham and the commencement of the litigation?

A. No. I do not agree with that, because by 31st October we can

see that order volumes which had declined as a result of the

detentions had already started creeping back up again and

Mr. Sigurdson was moving a significant number of products back

to CCP.

Q. That is not what you say in the e-mails?

A. I have already commented that Mr. Dolek was probably getting

confused between the facts of the detention and the

litigation. It may not be clear to him that two things are

distinct.

Q. Mr. Dolek may be getting confused but on page 436 you wrote at

the bottom, that you will be losing all of the workers at the

end of November and Idil at the end of December. This

situation was ‘unavoidable due to difficulties in Birmingham

and the resulting decrease in orders.’

A. I already qualified that reference to BHX was shorthand to the

litigation.

Q. Exactly. Therefore, you were asking the people to leave

because of firstly the detention and secondly the existence of

the litigation?

A. I think by 2nd November or 31st October I had gotten over the

detention, if I can put it that way, because I knew that there

was nothing wrong, HMRC were simply doing their job. Having

done their job the business had resumed to normality or some

form of normality. Obviously the orders volumes were still

not where they should be but I was confident they were going

to get there.

Q. If they were going to get there why did you need to dispense

with these people's services?

A. Because of the threat of litigation.

Q. The last time you were thinking of making someone redundant in

April/May time you did not tell the operative and you were

able to countermand the instruction before he had been told?

A. Correct.

Q. On this occasion the employees were told and you put a

transfer of responsibility into place with immediate effect?

A. Umm hmm.

Q. So those people were going to be made redundant come what may?

A.

No, because we knew what date the Lilly hearing injunction was

for so we knew that had things turned in our favour we could

still get those workers to not leave at the end of November.”

Mr Aggarwal went on to say that RDA had retained the managers in the organisation and so retained the necessary skills for effective operation and that the high rate of youth unemployment in Istanbul meant that it would be easy to replace the workers who had been made redundant if need be.

I accept that Mr Aggarwal was not intending in his short email to give a full statement of all his reasons for making the employees redundant. In my view the effect of the Birmingham detention was a factor in his thinking, but that was not the only factor. As I have said, I accept that by the date of this email sales were recovering from the effect of the Birmingham detention. Indeed, sales had risen to £19,420.66. I therefore consider that it is plausible that Mr Aggarwal had the litigation in mind as well.

As I have pointed out above, by 31 October 2007 the status of the litigation was that three without notice injunctions and two applications for wider applications had been served on 8PM and it had been informed by HMRC that a fourth application for a without notice injunction was to be made the following day. Mr Aggarwal rightly anticipated that further applications for wider injunctions would follow. The effect of the without notice injunctions on the Defendants’ business was limited, but the effect of the wider injunctions if granted would be much more serious. Mr Aggarwal knew that the hearing of Lilly’s application would take place in about three weeks’ time, and he appreciated that the decision on that application would effectively determine all of the with notice applications.

In the circumstances, and taking into account Mr Aggarwal’s unchallenged evidence about the state of the employment market in Istanbul, I consider it plausible that Mr Aggarwal was hedging his bets as he said. Accordingly, I accept his evidence on this point.

Counsel for the Claimants also submitted that certain passages in Mr Aggarwal’s witness statements, and in particular paragraph 66 of his third statement which is quoted below, together with this passage of cross-examination, demonstrated that it was the existence of the litigation, as opposed to the Injunctions, which caused any loss which the Defendants had suffered. I do not accept this submission, for the following reasons.

First, the basis for this submission was the assertion that Mr Aggarwal had decided to close the Turkish fulfilment business, or at least put it on hold, prior to the Lilly Injunction. I do not accept that Mr Aggarwal had made any such decision, however. The only evidence to support the assertion is the fact that Mr Aggarwal decided to make the five employees redundant at the end of October 2007. As I have said, I accept Mr Aggarwal’s explanation for that. All the other evidence is the other way. Mr Aggarwal pointed out that RDA had retained its skilled staff, in particular Mr Dolek. As I have already pointed out, sales in the last week before the Lilly Injunction rose to £22,113.55. That amounts to between a quarter and a third of the pre-detention level. Furthermore, RDA continued to purchase stock in October and November. Counsel for the Claimants suggested that that might have been for the wholesale business, but that suggestion was not put to Mr Aggarwal. In any event, I consider it unlikely that all stock purchased was the wholesale business.

Secondly, the submission depends upon a selective approach to Mr Aggarwal’s evidence. If his evidence is considered as a whole, I consider that it was clearly to the effect that the cause of the loss of the Turkish fulfilment business was the Injunctions.

Thirdly, it was not put to Mr Aggarwal in cross-examination that it was the existence of the litigation per se, as distinct from the Injunctions, which made him decide to make the employees redundant. Counsel for the Claimants submitted that this did not need to be put in view of Mr Aggarwal’s answer in the passage quoted above “Because of the threat of the litigation”. I do not agree. That answer has to be read in context. Read in context, I do not think that Mr Aggarwal was intending to distinguish between the threat of the litigation per se and the threat of the Injunctions. If the distinction was to be relied upon, the point needed to be squarely put to Mr Aggarwal, and it was not.

Fourthly, it was not put to Mr Aggarwal in cross-examination that it was the existence of the litigation per se, as distinct from the Injunctions, which caused the CIPs to take their custom elsewhere following the grant of the Lilly Injunction. In any event, the evidence points the other way. I do not doubt that the Defendants and the CIPs were concerned about the effect of the litigation, and in particular in the case of the Defendants the possibility of paying damages if they were to lose at trial, but this did not deter either the Defendants or the CIPs from continuing to do business on a significant scale right up to the Lilly Injunction.

Events following the Lilly Injunction. When Mann J granted the Lilly Injunction on 23 November 2007, Mr Aggarwal anticipated that the other Claimants would demand similar injunctions as well, and could see no reason for refusing to agree to such demands as they came. As can be seen from the account above, in the event such demands were not long in coming: Merck, AstraZeneca and Pfizer wrote requesting 8PM to consent to injunctions on 27 November 2007 (following a telephone call on 26 November 2007), 7 and 10 December 2007 respectively.

Over the weekend of 24-25 November 2007 Mr Aggarwal considered the implications of the Injunction, and in particular the possibility of using an alternative route. The Defendants had no alternative route in place and none had been investigated. Setting up an alternative route would require legal advice and potentially regulatory licences, and it would need to be tested. Mr Aggarwal estimated that this would take about 3-6 months.

In his third witness statement (his first on the inquiries), Mr Aggarwal gave the following account of conversations he had had with each of the Defendants’ three customers following the Lilly Injunction:

“66.

… during the week commencing 26 November 2007, I telephoned the CEO of CanadaDrugs.com, Kris Thorkelson, to inform him of the 23 November injunction. I telephoned him first because CanadaDrugs.com was the Turkish Supplier’s major supplier accounting for about 88% of the orders being fulfilled. He asked what our next steps were and I said that we were thinking about appealing the decision but were not sure yet. In terms of order processing, I told him that the 23 November injunction affected products of the Lilly group but that it was highly likely that the Additional Injunctions would follow affecting products of the Pfizer, Merck and AstraZeneca groups as well as potentially Novartis and Schering-Plough. He commented that this was quite a list. I explained my understanding that, technically, we could still dispense and ship non-Lilly products, at least for the time being in respect of Pfizer, Merck and AstraZeneca products, but that it was something we would be reluctant to do in respect of these 3 companies in case it turned out that shipping their products through the UK did amount to trade mark infringement.

67.

The CEO agreed with me that continuing to supply products from other manufacturers was risky and suggested that anyway the majority of the orders from CanadaDrugs.com would relate to products of the companies that had sought injunctions against 8PM and it would be difficult for CanadaDrugs.com to carry on using the Turkish Supplier for dispensing a minority of the products …. This also affected orders from single patients that consisted of products of both the Claimants and other companies because CanadaDrugs.com was not keen at all to split orders between two suppliers (i.e. for ‘partial fulfilment’ by each). It is only where there is no option at all to consolidate orders that internet pharmacies will split them or agree to partial fulfilment. This is because it increases costs, is administratively more complex and also customers do not like receiving part of their order only - often when they get the first part they believe there has been a mistake over the rest of it and ring up the CIP to complain. It was for this reason that, as I said in paragraph 35 of my first Witness Statement, the Turkish Supplier if it could not ‘satisfy one element of a particular prescription, it does not seek to satisfy any element’ but would notify the CIP so the patient could be asked if he or she wanted partial fulfilment. That procedure was feasible for occasional occurrences but not long-term or where there is an inability to supply any of a given company’s products and so, in paragraph 36, I anticipated that, because of knock-on effects it would have, ‘If 8PM is unable to handle Lilly products, in effect this means that we lose all of the business’. I was therefore not surprised by the CEO’s position on partial fulfilment. The conversation then ended by the CEO wishing me luck with the litigation and requesting that I keep him informed. I thanked him for his understanding and apologised for the inconvenience this would inevitably cause to his business. I added that we would also investigate alternative shipping routes which would avoid the UK and keep him informed of progress on this front too. I will discuss the alternative shipping routes investigated below.

68.

In the same week that I spoke to CanadaDrugs.com I also spoke to the president of BBG, Dr Simon Barclay. I informed him of the 23 November injunction, the likely Additional Injunctions and those companies’ products concerned (the same companies as I had mentioned to CanadaDrugs.com). The president’s reaction was that we should keep in touch and let him know if we became able to supply again. He was sympathetic but did not ask that we carry on with partial fulfilment only. BBG had fulfilment facilities other than the Turkish Supplier, for example in Singapore, and so I assume it would have channelled all of its orders through them. It could also have fulfilled orders with drugs from the New Zealand market although that would have had costs implications as that market is more expensive than, for example, Turkey.

69.

Still in this same week, I spoke to the owner of JanDrugs, David Janeson, to give him the same information about the 23 November injunction and Additional Injunctions and their implications as I had given to CanadaDrugs.com and BBG. He replied that JanDrugs was not currently using the Turkish Supplier much anyway and that he would switch what business had been coming to the Turkish Supplier to Canada or New Zealand with other pharmacy partners. The reason he was not using the Turkish Supplier much was that he preferred non-Turkish drugs but he would switch from other suppliers to the Turkish Supplier depending on how he wanted to position his website (balancing the source of a particular drug against its cost) or when other suppliers could not fulfil JanDrugs’ orders. However, he asked me to keep him informed as he wished to keep the Turkish Supplier as an option and also factors such as price and availability of drugs could change in the future which would make Turkey more favourable as place for the fulfilment of JanDrugs’ orders.”

I accept this account. It follows that the Defendants lost the business of the three CIPs, and in particular CanadaDrugs, as a result of Mr Aggarwal informing them in these conversations of the Lilly Injunction and of the likelihood of the other Injunctions being granted.

The effect on the Defendants’ Turkish fulfilment business was dramatic. The Defendants’ invoice to CanadaDrugs dated 3 December 2007 was for only £675.68. Thereafter the Defendants made no sales to CanadaDrugs (other than sales of stock on a wholesale basis as discussed below).

Mr Aggarwal’s evidence was that the business was not irretrievably lost at that point in time: if he could have gone back to the CIPs sufficiently quickly either to say that the Injunction had been discharged or that he had found a viable alternative route, then he could have got the business back. This is, of course, speculation on Mr Aggarwal’s part, but it is clear that was what Mr Aggarwal thought at the time, because he spent a certain amount of time, effort and money after these conversations in continuing to explore alternative routes (he started exploring this question before 23 November 2007). Since mitigation is no longer an issue, it is not necessary to go into the details of this. It suffices to say that among the alternatives he considered were Germany (using DHL and Deutsche Post), Switzerland and Norway, and that the Defendants retained the services of Ms Scott to investigate the latter two options. These investigations continued until very shortly before the hearing in the Court of Appeal. In addition, that this was Mr Aggarwal’s state of mind is supported by the fact that the Defendants applied to expedite the hearing in the Court of Appeal.

I consider that it is plausible that the Defendants could have rescued the business within a certain period of informing the CIPs about the Lilly Injunction and the likelihood of the other Injunctions being granted if the Lilly Injunction had been discharged sufficiently quickly. It is impossible to say precisely when matters reached the point of no return, but doing the best I can I estimate that it was about one month after these conversations i.e. in the last week of December 2007. By that point in time, the other Injunctions had been agreed or effectively agreed.

Events following the decision of the Court of Appeal. In his third witness statement, Mr Aggarwal gave the following account of conversations he had had following the decision of the Court of Appeal:

“98.

On 5 February 2008, the day that the Court of Appeal’s judgment in the Lilly Action was delivered, I received an email from Mr Thorkelson of CanadaDrugs.com congratulating me on the outcome. The email showed that he had been told by CanadaDrugs.com’s legal counsel who, I think, must have found the judgment on the internet as I had not by that stage notified CanadaDrugs.com of it.

99.

But that afternoon, I spoke to the CFO at CanadaDrugs.com first to inform him of the Court of Appeal decision (which he already knew) and secondly to ask whether, in light of the decision, CanadaDrugs.com would resume the fulfilment business with the Turkish Supplier. His reply was that the alternative arrangements were going well, but he would keep us in mind if the need arose. However I had the impression that he was just being polite and that there was no intention to resume business with the Turkish Supplier. The conversation then moved on to discuss the possibility of selling a batch of the Turkish Supplier’s stock to CanadaDrugs.com. He requested a list of the remaining stock to review. I will discuss the sales of stocks to CanadaDrugs.com below.

100.

During the same week, I also spoke to the owner of JanDrugs and the president of BBG to tell them of the lifting of the 23 November injunction and our ability to resume trade. I also informed them that the scale on which we could recommence business would depend on whether or not CanadaDrugs.com would go back to using the Turkish Supplier and the extent of any resumed business. This was because the Turkish Supplier could not offer the same level of service as it had prior to the Injunctions without the large volume of orders CanadaDrugs.com had been assigning to the Turkish Supplier. In particular, without the volume of orders from CanadaDrugs.com it would not be financially justifiable to send 2 consignments per week. I knew that only offering 1 consignment per week would not be attractive to JanDrugs or BBG as it would mean delays in the US patients receiving their pharmaceuticals. Also, although I did not mention it to BBG or JanDrugs, there would not be the same economies of scale and so the Turkish Supplier would have to charge increased fees and drugs costs. This is because of the reduced bargaining power with wholesalers due to lower purchase volumes and also because of the various fixed costs of the business, such as premises expenses. I ended the conversations by saying that I would keep JanDrugs and BBG informed of discussions with CanadaDrugs.com.”

“94.

I spoke to Mr Sigurdson, the CFO of CanadaDrugs.com, by telephone in the week commencing 25 February 2008 to find out how things were going with the alternative fulfilment arrangements and the possibility of doing business again with the Turkish Supplier. He replied that things were going well and therefore CanadaDrugs.com did not want to start re-using the Turkish Supplier. He then went on to say that CanadaDrugs.com had decided to stop using 8PM as well. I asked the reasons for these decisions. He replied that CanadaDrugs.com had been left with no choice but to set up alternative arrangements because, when the 23 November injunction was first granted, we could not say for certain if the Turkish Supplier would be able to operate again and in what time-frame. He also observed that the Additional Injunctions had been obtained and that 8PM was looking at the prospect of a full blown trial in May 2008. He added regarding 8PM that the decision was nothing to do with its performance or the service that it was providing but was an internal decision.”

Mr Aggarwal went on to recount a number of later contacts he had with the CIPs, each of which had proved equally fruitless. I accept Mr Aggarwal’s account. It follows that, by the time the Court of Appeal discharged the Lilly Injunction, it was too late for the Defendants to rescue the business. This is precisely in accordance with what Mr Aggarwal had predicted in paragraph 42 of his first witness statement prior to the Lilly Injunction, namely that if 8PM was injuncted for more than a month or two, then RDA would have to close.

Conclusion. Accordingly, I conclude that the Injunctions caused the Defendants’ Turkish fulfilment business customers to go elsewhere. In my judgment, all four Injunctions caused this, for the following reasons. First, the Lilly Injunction only affected 3% of the Defendant’s business, whereas the four Injunctions together affected 57%. Secondly, although only the Lilly Injunction had been granted at the time of Mr Aggarwal’s conversations with the CIPs, the other Injunctions had been applied for and it was rightly anticipated that they would follow. Thirdly, by the time the window of opportunity for regaining the CIPs’ custom closed, the other Injunctions had been agreed or effectively agreed.

Counsel for Pfizer, AstraZeneca and Merck argued that the Injunctions in those actions could not have caused loss before they were granted or at least finally agreed. I do not agree. As counsel for Lilly rightly accepted, an injunction may cause loss before it is actually granted. In particular, steps may be taken by a defendant in anticipation of an injunction being granted which result in loss being suffered by the defendant after the injunction is granted. An obvious example is where an injunction is applied for, and between the date of the application and the date of the hearing the defendant concludes that it cannot resist the injunction and therefore will consent to it, and having taken that decision it takes steps to comply with the forthcoming injunction which later result in it suffering loss. Taking a common-sense approach to causation, the injunction causes that loss. Of course, if a defendant takes steps in anticipation of an injunction which in the event is not granted, then loss suffered by the defendant as a result is not caused by the non-existent injunction, but that does not disprove the proposition I have just stated.

I now turn to the second major factual dispute, which is as to what would have happened if there had been no Injunctions. The Defendants’ case is that the Turkish fulfilment business would have recovered to the levels it achieved prior to the Birmingham detention and would have continued to generate the same profits. The Claimants’ case is that, even if there had been no Injunctions (and indeed no litigation), CanadaDrugs would have ceased to place orders with the Turkish fulfilment business by the end of December 2007, or at the latest around February or March 2008, in any event.

The Defendants’ case is supported by the evidence to which I have already referred about CanadaDrugs moving orders back to RDA and by the rise in the level of sales between the invoices dated 14 October 2007 and 26 November 2007. On the other hand, the levels of sales had not completely recovered by 26 November 2007, and it is not inevitable that they would ever have done.

I have already dealt with most of the matters relied upon by the Claimants in support of their case, but one remains. This relates to a company called River East Supplies Ltd (“River East”). There is very little evidence about this company, as opposed to speculation. The facts established by the evidence are follows.

River East was incorporated on 13 September 2007. Mr Haughton was appointed as a director on 10 October 2007. Cheryl Haughton, presumably his wife, was appointed as a director on 19 October 2007. Both gave an address in Barbados. As at 13 September 2008 Mr Haughton owned the sole issued share in the company.

In February 2008 River East was granted a wholesalers’ licence with parallel import rights by the MHRA. It typically takes up to 90 days for such a licence to be granted. The address given on the licence is an address in Nottingham.

Between 26 February 2008 and 20 June 2008 19 test purchases made by Pfizer from CanadaDrug’s websites resulted in deliveries of packages displaying the names UK Services and UK Pharmacy Services and the Nottingham address. None of these products were of Turkish origin.

Mr Aggarwal found out about River East, although not its precise connection with CanadaDrugs, in January 2008. At some point between then and March 2008 CanadaDrugs informed Mr Aggarwal that they were no longer going to use 8PM for UK fulfilment, and it became apparent to Mr Aggarwal that CanadaDrugs was wholly or partially transferring the UK fulfilment business to another operation i.e. River East. In early March 2008 8PM sold some stock to River East.

Although there have been no test purchases by Pfizer delivered from this source since 20 June 2008, in an email to Mr Aggarwal dated 3 February 2009 Mr Haughton said that “our operation[s] in Barbados and the UK have been working out fine”, which suggests that River East was continuing to perform that role.

Mr Aggarwal pointed out that, as at 10 October 2007, there were a number of reason why CanadaDrugs (or to be more precise, Mr Haughton) might have wanted a UK company other than 8PM to carry out fulfilment business. For example, it might have been to carry out the “bag and burst” operation for CanadaDrugs Barbados that 8PM declined to do. He also observed that, once the Injunctions were granted, it would have made sense for CanadaDrugs to use River East for fulfilment whatever the original plan was.

For their part the Claimants suggest that CanadaDrugs had decided even prior to the Birmingham detention, and certainly prior to the commencement of the Lilly action, to set up its own UK fulfilment business in place of 8PM. In my judgment the available evidence does not permit any such conclusion to be drawn. I accept Mr Aggarwal’s evidence that there were a number of other reasons why River East could have been established. On the balance of probabilities, I consider that it was not for the reason suggested by the Claimants, since it is unlikely that CanadaDrugs would switch the UK fulfilment business at a time when the evidence suggests it was planning to continue placing Turkish fulfilment business with the Defendants.

This leads to a separate point made by the Claimants. This is that the evidence indicates that, in the events that happened, CanadaDrugs moved all its fulfilment business from the Defendants to its own Barbados and UK operations. The Claimants contend that it is likely that the same thing would have happened even in the absence of the Injunctions. To my mind this is the Claimants’ best point on causation. Why, it may be asked, did CanadaDrugs continue with the Barbados and UK operations rather than go back to the Defendants once the Injunctions had been lifted? It seems clear that CanadaDrugs found that it could operate satisfactorily and profitably without the Defendants. Would it not have reached that conclusion anyway?

I have deliberated over this point for some time. In the end I am not persuaded by it. The reason why I am not persuaded is that during the period from 14 October 2007 to 26 November 2007 CanadaDrugs placed an increasing amount of orders with the Defendants. It was only following the Lilly Injunction that it took its custom elsewhere. The Claimants argue that the effects of the Birmingham detention made CanadaDrugs appreciate, if it did not appreciate already, that it could do without the Defendants. If so, why did it move orders back to the Defendants, and do so increasingly, prior to the Lilly Injunction? On the evidence, it seems to me that the more likely explanation is that CanadaDrugs wished to continue trading with the Defendants until the Lilly Injunction, and the likelihood of the other Injunctions being granted shortly thereafter, forced it to go elsewhere. Once it established new arrangements, it did not want to undergo the further disruption of going back to the previous arrangements with the Defendants and found that it could operate satisfactorily without doing so.

On the other hand, this does serve to emphasise the fragility of the Defendants’ trading relationship with CanadaDrugs. I shall return to this point below.

My overall conclusion is that the Defendants have satisfied the but for test in respect of all the Injunctions. I find that, but for the Injunctions, the Defendants would have continued to trade with CanadaDrugs and their other two customers and to generate profits after 23 November 2007.

Having reached that conclusion, I must now quantify the loss which the Defendants have sustained. The principal head of loss claimed is the lost profits of the Turkish fulfilment business after 23 November 2007, but there are two additional heads of loss which I will consider separately below.

Expert evidence as to quantum was given by three experienced forensic accountants. The Defendants called Mark Bezant, now a senior managing director of FTI Consulting. Lilly, Pfizer and AstraZeneca called Elizabeth Gutteridge of Deloitte. Merck called William Davies of Grant Thornton. All three experts were knowledgeable, articulate and fair in their evidence. I am concerned, however, about the costs implications of the Claimants having called two experts with the same expertise to deal with the same issues. I must therefore set out how that came about.

On 22 July 2008 Floyd J made an order by consent giving directions for the conduct of the inquiry under the cross-undertaking in the Lilly action. That order provided that Lilly and the Defendants could each call up to two experts witnesses. The names of the names of the experts were to be supplied on before 24 October 2008, the Defendants’ experts’ reports were to be served on or before 5 December 2008 and Lilly’s experts’ reports were to be served on or before 16 February 2009.

I was informed that Ms Gutteridge was instructed by Lilly in September 2008. She was duly nominated as an expert on 24 October 2008, as was Erika Lietzan (as to whom, see below). On the same day Merck’s solicitors wrote to the Defendants’ solicitors suggesting that, on the assumption that all the Claimants consented to the four inquiries being heard together, the disclosure and evidence be shared between the actions. This led to discussions between the Claimants with a view to agreeing common experts. Agreement was indeed reached that Ms Lietzan would act for all four Claimants, but on about 11 November 2008 it was discovered that Ms Gutteridge had a conflict of interest that prevented her from acting for Merck even though the issues upon which her expert evidence was sought all concerned the Defendants’ business and not any business of Merck. (Indeed, neither Ms Gutteridge nor Mr Davies said a word about their respective clients’ businesses in any of their reports.)

The reason for the conflict of interest was that the US member firm of Deloitte Touche Tohmatsu provides audit services to The Merck/Schering Plough Cholesterol Partnership, a joint venture between Merck & Co Inc and Schering Plough. Under rules promulgated by the US Securities and Exchange Commission, auditors are prohibited from providing an expert opinion or other expert service for an audit client, or an audit client’s legal representative, for the purpose of advocating an audit client’s interests in litigation or in a regulatory or administrative proceeding or investigation. This prohibition extends to affiliates of the audit client, and Merck & Co Inc falls within the definition of an affiliate. The policy rationale for this prohibition is obvious, and I accept it without reservation. Nevertheless, I wonder whether the rule was intended to apply to a situation such as the present where the expert is a member of a different (albeit connected) firm in a different country giving independent expert evidence on the joint instructions of a number of parties, most of whom the rule does not apply to, about the business of other parties to whom the rule does not apply either.

Be that as it may, the upshot was that Lilly continued to instruct Ms Gutteridge, as did AstraZeneca and Pfizer, while Merck instructed Mr Davies. Counsel for the Claimants submitted that Lilly was constrained to act in that way because of the time constraints under Floyd J’s order of 22 July 2008. I do not accept this. First, while I accept that Ms Gutteridge had carried out preparatory work by 11 November 2008, the main part of her work only started upon receipt of Mr Bezant’s report. As at 11 November 2008, Mr Bezant’s report had not been served and was not even due to be served until 5 December 2008. Secondly, at that date Lilly’s expert’s report was due on 16 February 2009. Thus there was ample time in which to instruct a new expert even on the existing timetable. Thirdly, if Lilly had revealed the problem to the Defendants and the Court at that stage (which they did not), there can be no doubt that any extension of time for service of the expert’s report that was needed would have been granted. Fourthly, just two days later on 13 November 2008 Floyd J made an order by consent in the Lilly case in almost identical terms to the 22 July 2008 order save that certain of the dates were changed. These included the dates for experts’ reports which were changed to 14 January 2009 and 1 April 2009. This meant that there was even less time pressure on Lilly to produce its expert’s report. (In the event, directions were subsequently agreed in the Merck action on 19 December 2008 which provided for experts’ reports to be served on 7 April 2009 and 8 May 2009, and both Ms Gutteridge’s and Mr Davies’ reports were served on the latter date.)

The result of the Claimants’ decision to instruct two different experts was predictable, namely that Ms Gutteridge and Mr Davies each served lengthy reports addressing the same issues. While there were certain differences between the points taken by them, and different emphases in relation to common points, there was a good deal of duplication. When I expressed concern about this on the first day of trial, counsel for the Claimants informed me that he had already indicated to counsel for the Defendants that he accepted that counsel for the Defendants should not have to cross-examine both witnesses on the same points. While saving cross-examination time, that course is not a satisfactory answer to duplication, because it means that one expert’s report on those points is a waste of time and money. Subsequently, counsel for the Claimants identified a selection of paragraphs from each expert’s reports which he said that counsel for the Defendants should cross-examine to, but accepted that the remainder need not be. While this procedure enabled the Claimants to cherry-pick the most favourable parts of the two experts’ reports, it still meant that the other parts of the reports were wasted.

In my judgment, what should have happened is that, when the conflict issue regarding Ms Gutteridge arose, the Claimants should have found an expert forensic accountant who was able to act for all of them. As Aldous J (as he then was) pointed out in Gerber Garment Technology Inc v Lectra Systems Ltd [1994] FSR 471 at 489:

“If they have the same expertise, then I only need one expert on each topic. It is contrary to the good administration of justice that there should be duplication. … There is no need to have two accountants, one is enough.”

The principle that duplication of experts should be avoided is one that has subsequently been strongly reinforced by Lord Woolf MR’s Access to Justice reports, and by CPR Part 35 and the case law thereunder. As frequently been pointed out, expert evidence is a major contributor to the expense of English litigation. It is vital that parties and their advisors take appropriate steps to ensure that expert evidence is not duplicated.

I will hear further argument on the costs consequences of the Claimants’ failure to take the correct course when this judgment is handed down.

Mr Bezant based his calculation of lost profits upon a database referred to as the “Combined Database”. The Combined Database was compiled from two sources.

The first source was a set of databases recording the trading history of the Turkish fulfilment business (“the underlying databases”). The underlying databases were provided by way of disclosure and were the Defendants’ Excel spreadsheets used for invoicing the CIPs. There is one underlying database for each of the three customers. They record in detail every individual patient order fulfilled by LNA and RDA. Much of the information in the underlying databases was originally downloaded from each CIP’s website, but the prices actually charged to the CIPs were added by Mr Aggarwal on a weekly or monthly basis as and when he dealt with invoicing of the CIP in question. There can be no doubt that the prices charged to the CIPs are accurate: invoices to the CIPs and bank statements have also been disclosed and it is possible to follow through individual patient orders and see that the prices shown as charged to the CIP were indeed paid.

The second source is a costs spreadsheet. This is an Excel spreadsheet containing details of all RDA’s purchases of drugs, from which an average price per product has been calculated. All of the underlying invoices were disclosed.

The Combined Database combines information from the three underlying databases (but with the generic pharmaceuticals stripped out for which no claim is made) with information from the costs spreadsheet. The Combined Database contains details of just under 100,000 patient orders. The Claimants were given the opportunity, which they accepted, of verifying the Combined Database by choosing entries at random and receiving all the supporting documents that existed in the Defendants’ control on each chosen entry. Nevertheless, the Claimants were not satisfied, and sought and obtained further disclosure of various categories of documents from the Defendants’ business records.

It is fair to say that some confusion was caused by the Defendants’ initial failure to reveal that they had operated a system of transfer pricing between 8PM and RDA. Once this was explained by Mr Aggarwal, however, it answered many of the queries which the Claimants and their experts had raised about the financial information upon which the claim is based.

By the time she came to give evidence at trial, Ms Gutteridge was largely satisfied by the disclosure that had been given and as to the accuracy of the financial information. Mr Davies was still not satisfied, but it was clear from his evidence that he would have not have been completely satisfied by anything less than full disclosure of the Defendants’ entire business records for the period in question. In my view, such a level of disclosure was not necessary or proportionate to test the Defendants’ claim.

It was common ground between the experts that, in order to calculate the Defendants’ lost future profits, it was necessary to identity a base period which was as representative as possible of the business prior to the Lilly Injunction. Ms Gutteridge considered that the correct base period was the year before the Injunction i.e. 24 November 2006 to 23 November 2007. Mr Bezant chose the period 1 August 2006 to 31 July 2007. He did so for two reasons. First, in order to exclude the effect of the Birmingham detention which he had been instructed was an exceptional event. Secondly, so as to include the whole of one autumn spike in sales within the year, rather than parts of two different autumn spikes.

The Claimants dispute that the Birmingham detention was an exceptional event or that there was an autumn spike in sales, and therefore contend that Ms Gutteridge’s approach is to be preferred.

I find that the Birmingham detention was an exceptional event so far as the Turkish fulfilment business is considered. First, it only happened to one out of more than 120 consignments. (The Heathrow detention was different for various reasons, not least that it was of a consignment from Barbados to Turkey.) Secondly, the Claimants have adduced no evidence at all as to how frequent such detentions are with regard to pharmaceutical products even in general terms, let alone specifically with regard to goods being processed under inward processing relief and/or imported from Turkey and/or exported to the USA in fulfilment of CIP business. The absence of such evidence is significant given the Claimants’ involvement with, and collective experience of, HMRC’s operations in this field. In the absence of such evidence, I infer that detentions are infrequent.

Looking forward in time from the Birmingham detention, the detention occurred because HMRC suspected the presence of counterfeit goods. Given that none were found, HMRC would have been unlikely to detain another consignment absent evidence of the presence of counterfeits. This is particularly so given that nothing was found when the search warrant was executed (in saying this, I am not overlooking the fact that HMRC was not itself party to the obtaining of the search warrant). Furthermore, in January 2008 HMRC changed its policy. Since then, HMRC has ceased to detain goods suspected of infringing trade marks which are in transit through, or being transhipped within, the UK en route from one third country to another unless there is evidence of likely diversion onto the UK or wider EU market (as to which, see Nokia Corp v HMRC [2009] EWHC 1903 (Ch)).

As to the autumn spike, there is some evidence of an autumn spike, although it is not compelling. More importantly, to my mind, the evidence suggests that, to the extent that there was an autumn spike, it was less pronounced and occurred earlier in 2007 than 2006. I find that, to the extent that there was an autumn spike, it had come to end before 23 September 2007. Thus it is not necessary to go as far back as the year ending 31 July 2007 to capture a whole spike. Furthermore, doing so has the effect of capturing the 2006 spike rather than the 2007 spike, which is less representative of the business as it existed at the time of the injunction. It also has the effect of including a period when exchange rates were rather favourable to the Defendants.

The Claimants suggested that, if the Birmingham detention was exceptional, the base period should taken as 1 October 2006 to 30 September 2007 on the basis that the effects of the detention were not felt until the beginning of October 2007. I am not convinced that this is correct, however. As noted above, the effects began to manifest themselves towards the end of September 2007.

Accordingly, I conclude that the base period should be the year to 23 September 2007.

Mr Bezant calculated the lost profits of the Defendants’ Turkish fulfilment business by comparing the projected incremental revenues and costs extrapolated from the information in the Combined Database together with information as to overheads provided by Mr Aggarwal. A number of points arise in relation to the profit margins calculated by Mr Bezant.

The first is that the sales information in the Combined Database shows sales of the products over time, whereas the cost information for each product is a simple average over the entire period of RDA’s trading. Mr Davies was of the view that using an average cost figure to calculate the profits in this way was not appropriate. Despite the length of time spent on this point during the trial, I can express my conclusion shortly. I was left in no doubt by the evidence of all the experts that, while using an average cost is undeniably a slightly crude approach, to attempt to calculate the cost of product for each sale, or even each month’s sales, would take a great deal of time and effort which would be quite disproportionate to the likely effect on the profit calculation.

The second is that the Claimants contend that, if the figures are scrutinised, they demonstrate that the gross profit margin of the Turkish fulfilment business was declining during August and September 2007 due to significant increases in the cost of a number of the biggest selling products. I am not persuaded that Mr Bezant’s profit figures should be adjusted for this reason. While I think the evidence does shows an increase in the Defendants’ costs during this period, I consider that it is likely that, if such increases had continued, the Defendants would have compensated by increasing their prices to CanadaDrugs. On the other hand, I accept that this illustrates that one of the risks to the Defendants’ business in the period after 23 November 2009 was the risk that their gross profit margin would be reduced. I have taken this into account when assessing the risk factor (as to which, see below).

The third is that the Claimants contend that there are certain credits which ought to have been included, but have not been, in particular for stock obsolescence. I do not accept this. As counsel for the Defendants submitted, the Claimants’ contention depends on matters which were not put to Mr Aggarwal or are speculation unsupported by evidence.

The fourth is that the Claimants contend that the profit margins claimed are generally suspect, and probably inflated, for various other reasons. I do not intend to go through these individually. Again, I agree with the submission of counsel for the Defendants that the matters relied on were either not put to Mr Aggarwal, contradicted by his evidence or that of Mr Bezant or speculation unsupported by evidence. Again, however, I have borne in mind when assessing the risk factor that there is no guarantee that the Defendants’ business would have continued to be as profitable in the future as in the past.

In order to calculate the future profits of the Turkish fulfilment business, Mr Bezant applied a growth rate of 4% for 2008 to 2012 and 1.9% thereafter. The figure of 4% was the lowest figure for this period given by Business Monitor International Inc in a report entitled United States Pharmaceuticals & Healthcare Report Q3 2008. According to the report, IMS Health forecasts pharmaceutical sales growth of 3-6% for the same period. It appears that both figures are in real terms i.e. excluding inflation. The figure of 1.9% is the forecast year-on-year change in consumer prices. The Defendants contend that these figures are, if anything, underestimated, since a report on Prescription Drug Trends published by the Kaiser Family Foundation in September 2008 states that the US Department of Health and Human Services projects an average annual increase of 8.2% over the period from 2006 to 2017.

Ms Gutteridge did not take issue with Mr Bezant’s growth rates. Mr Davies suggested a growth rate of 1.8% for 2008 and nil thereafter. In cross-examination his only real justification for this was caution. He also referred to the current recession, but did not appear to have taken into account the possibility that this might benefit the Turkish fulfilment business.

Accordingly, I accept Mr Bezant’s figures for the growth rate.

In projecting the lost profits which the Defendants’ Turkish fulfilment business would have made but for the Injunctions, it is necessary to take account of the risks to which that business was subject. These include the risk of the Defendants’ customers going out of business, the risk that one or more of those customers might transfer their business elsewhere and so on. It is common ground that it is appropriate to allow for this by applying an annual percentage risk factor to the calculation of future profits, representing the risk that the business would come to an end within that year.

Mr Bezant considered that the appropriate risk factor to be applied for the future was 10% per annum. He explained in cross-examination that this was not arrived at as a matter of accountancy practice, but through the exercise of professional judgment. He accepted that a higher risk factor might be appropriate, but not as high as 20% per annum.

Ms Gutteridge suggested that a risk factor of 20-25% was appropriate based on a list of risks set out in her first report. She was cross-examined at some length both on the individual risks she had taken into account and on the headline figure. In my judgment, the cross-examination demonstrated that she had over-estimated a number of the risks. By way of example, I consider that she overestimated the risks due to the absence of a written contract, illegality under US law (as to which see below) and competition in Turkey. She also looked at the matter from the perspective of a buyer of the business, whereas the Defendants were not intending to sell it.

Nevertheless, considering the evidence as a whole, I think that considerable caution as to the future of the business is required. This is not a business which had been established for a long period of time. Moreover, it was not operating in a well-established market sector. On the contrary, it had been established for a relatively short period of time and was operating in a fairly young and dynamic sector. Furthermore, the business was dependent on one customer for 88% of its business, and as noted above the relationship with that customer was a fragile one in the sense that the customer could decide to go elsewhere at any time. As stated above, I think it is also appropriate to take into account the risk that, even if the business continued, its profitability would decline. Accordingly, I consider that the appropriate risk factor for the future is 20% per annum.

Mr Bezant was instructed to assume that the Defendants business would have continued down to the date of his report. In his first report, he took this to be 31 December 2008 for convenience. In his second and third reports, he took it to be 31 March 2009. He therefore did not apply any risk factor for the period from 23 November 2007 until then. Mr Bezant was cross-examined on this assumption, and it was evident that he was uncomfortable with it. As counsel for the Claimants pointed out, it amounts to treating the risk that the business would have ceased prior to the trial as a question of fact to be evaluated on the balance of probabilities (i.e. applying the approach laid down in Hotson v East Berkshire Area Health Authority [1987] 1 AC 750); but treating the risk that the business would cease in the future as a contingency to be reflected in the quantum of compensation. This is inconsistent and over-compensates the Defendants.

Ms Gutteridge’s approach was to take 23 November 2007 as the date of assessment and then apply the same risk factor both to the period from then until trial and to the period from trial onwards. As counsel for the Defendants pointed out, this involves shutting one’s eyes to what has happened since 23 November 2007. There are also other problems with this approach: it involves applying a discount rate to this period and then adding interest back, and it has the effect of imposing exchange rate movement losses on the Defendants.

In my judgment neither approach is correct. As set out above, I consider that the correct approach is to assess the compensation with the benefit of hindsight. Hindsight is not available looking forward, and it is appropriate to reflect the contingencies to which the Defendants’ business was subject by the application of a risk factor. With regard to the period from 23 November 2007 to date, however, the Court does have the advantage of hindsight. As a result, it is now known that some of the contingencies did not materialise during that period. In particular, CanadaDrugs did not itself go out of business. On other hand, it is not known whether other contingencies would have materialised or not.

Accordingly, I conclude that a lower risk factor should be applied to the period from 23 November 2007 to date. In my judgment a risk factor of 10% is appropriate for this period.

In addition to applying a risk factor, it is necessary to calculate the net present value of the future income stream so as to make allowance for the advantage of accelerated receipt. It was common ground between the experts that it was appropriate to do this by means of a discounted cash flow (DCF) analysis. Mr Bezant used a discount rate of 15% in his DCF analysis. The Claimants did not in the end dispute the appropriateness of this rate.

For the reasons given above, I conclude that the quantum of the Defendants’ loss is represented by the sterling equivalent of a figure which is to be calculated by taking the profit calculated using Mr Bezant’s figures for the profit margin for the base period of the year to 23 September 2007, applying growth rates of 4% and 1.9%, a discount rate of 15% and risk factors of 10% for the period from 23 November 2007 to the date of this judgment and 20% thereafter. I invite the parties to try to agree this calculation.

The principal other head of loss claimed is for the losses on RDA’s stock at the time of the Injunctions. RDA has subsequently been able to sell some of this stock wholesale, but has been left with a considerable proportion which it has been unable to sell. The Defendants claim the sterling equivalent of US$455,159.87. Apart from the matters I have already considered, the only real challenge to this claim by the Claimants is that to allow it in addition to the lost profits claim would amount to double recovery. I disagree: this head of loss arises out of the fact that the Defendants’ Turkish fulfilment business was stopped dead in its tracks by the Injunctions rather than being wound down in an orderly manner. I find this loss proved.

Finally, the Defendants claim the sum of £4,000 for making RDA’s employees redundant. Again I find this loss proved.

The Defendants claim interest on any sums awarded. I do not understand there to be any dispute that in principle the Defendants are entitled to interest. I invite the parties to try to agree the calculation of interest.

The Claimants contend that any loss suffered by the Defendants is irrecoverable as a matter of law on public policy grounds. The basis for this contention is that the importation of pharmaceutical products such as those traded in by the Defendants into the USA is illegal under US law.

I received expert evidence as to US law from Erika Lietzan, a partner in the Washington DC office of Covington & Burling LLP. The Defendants served a report from Robert Pinco, senior counsel at Buchanan Ingersoll & Rooney PC, but did not in the end call Mr Pinco to give evidence. I do not intend any personal criticism of either expert, but I have to say that in my view the cost of this evidence must have been grossly disproportionate. Both experts served substantial reports. Ms Lietzan’s first report ran to 151 paragraphs with 267 footnotes and was accompanied by four schedules containing a further 114 paragraphs and 85 exhibits. Even though his differences from Ms Lietzan were only on certain points of detail and emphasis, Mr Pinco’s report ran to 58 paragraphs with 55 footnotes accompanied by 17 exhibits. Mr Lietzan’s second report in reply to Mr Pinco ran to 42 paragraphs with 54 footnotes and was accompanied by a further 24 exhibits. Yet the key point, which I have set out in the preceding paragraphs, has at all times been common ground between the parties. For a time the Claimants contended that the Defendants themselves were guilty of an offence under US law, but it appears that this was due to a misunderstanding as to the nature of the Defendants’ contractual arrangements with CanadaDrugs: as she explained in cross-examination, Ms Lietzan had not researched, or considered in her reports, the question of the extra-territorial effect of US law. As I understand it, the Claimants did not in the end pursue this contention; (Footnote: ¹) but it was not necessary to their case on public policy anyway. The principal difference between the parties was with regard to enforcement policy and practice; but this difference was not important to the Claimants’ case either. In the circumstances, I shall deal with the relevant US law quite shortly. I shall concentrate on the position under Federal law, although Ms Lietzan explained that State law was relevant as well.

Before doing so, however, I should deal with the submission of counsel for the Defendants that Ms Lietzan’s evidence should be treated with caution. The bases for this submission was that she had worked for PhRMA, a lobbying organisation for pharmaceutical companies, from 2003 to 2005 and that she was personally opposed to the importation of pharmaceuticals into the US. I am satisfied that she did not allow either of these factors to affect the discharge of her duty to the court as an expert witness.

The principal relevant statute is the Federal Food, Drug and Cosmetic Act (“FFDCA”), Chapter 9 of Title 21 of the United States Code. The US Food and Drug Administration (“the FDA”) has primary responsibility for implementing and enforcing the FFDCA, although the bringing of proceedings is the province of the Department of Justice. US Customs and Border Protection (“CBP”) has primary responsibility for administering federal laws relating to import, export and duties. The FDA is responsible for determining whether a drug offered for importation into the USA complies with the FFDCA. CBP is responsible for examining all imported merchandise, including merchandise imported by mail. The FDA and CBP have a co-operative relationship.

Under the FFDCA, no new drug may be marketed in the USA unless it has been approved by the FDA under either a New Drug Application (“NDA”) or an Abbreviated New Drug Application (“ANDA”). The USA does not recognise drug approvals by any other country as an equivalent to, or an acceptable substitute for, approval by the FDA. FDA approval only permits the marketing of a product which is manufactured according to the specifications, under the controls and in the facilities specified in the NDA and which is labelled and packaged in accordance with the NDA. Even if it is manufactured by the same manufacturer, a drug which has been approved by a foreign regulator is highly unlikely to conform in all respects to the terms of the NDA. In general, therefore, the importation of a drug into the USA will contravene the FFDCA either because it qualifies as a “new drug” and has not been approved for marketing in the USA or because it does not bear FDA-approved labelling. It is immaterial for these purposes that the drug is imported into the USA for personal use or that it is sent to the USA by mail. Accordingly, it is the FDA’s consistent position that the importation into the USA of drugs purchased from CIPs for personal use violates the FFDCA even if the patient has a valid US prescription.

The FDA does have a policy not to enforce the FFDCA with regard to personal importation in certain limited circumstances. The FDA’s Regulatory Procedures Manual states in Chapter 9 Import Operations and Actions:

“GENERAL GUIDANCE

The statements in this chapter are intended only to provide operating guidance for FDA personnel and are not intended to create or confer any rights, privileges, or benefits on or for any private person.

FDA personnel may use their discretion to allow entry of shipments of violative FDA regulated products when the quantity and purpose are clearly for personal use, and the product does not present an unreasonable risk to the user. Even though all products that appear to be in violation of statutes administered by FDA are subject to refusal, FDA personnel may use their discretion to examine the background, risk and purpose of the product before making a final decision. Although FDA may use discretion to allow admission of certain violative items, this should not be interpreted as a license to individuals to bring in such shipments.

…

Drugs, Biologics and Devices

When personal shipments of drugs and devices that appear violative are brought to FDA’s attention by CBP. FDA personnel will use their discretion to decide on a case by case basis whether to detain, refuse or allow entry of the product. Generally, drugs and devices subject to Import Alerts are not amenable to this procedure. Devices to be used by practitioners for treating patients should not be viewed as personal importations subject to this chapter. Drugs subject to Drug Enforcement Agency (DEA) jurisdiction should be returned to CBP for handling.

In deciding whether to exercise discretion to allow personal shipments of drugs or devices, FDA personnel may consider a more permissive policy in the following situations:

1.

when the intended use is appropriately identified, such use is not for treatment of a serious conditions, and the product is not known to represent a significant health risk; and

2.

when a) the intended use is unapproved and for a serious condition for which effective treatment may not be available domestically either through commercial or clinical means; b) there is no known commercialization or promotion to persons residing in the U.S. by those involved in the distribution of the product at issue; c) the product is considered not to represent an unreasonable risk; and d) the individual seeking to import the product affirms in writing that it is for the patient’s own use (generally not more than 3 month supply) and provides the name and address of the doctor licensed in the U.S. responsible for his or her treatment with the product, or provides evidence that the product is for the continuation of treatment begun in a foreign country.”

Ms Lietzan’s evidence was that importation of drugs such as those in issue in the present proceedings would not be covered by this policy. It is clear, however, that both the FDA and CBP have to decide how to allocate their resources. Furthermore, they are also subject to political pressures. The practical effects of these factors can be clearly seen from what happened during the period from November 2005 to October 2006. Starting in November 2005, CBP began systematically seizing foreign drugs that were being shipped to the USA by international mail. This led to CBP seizing some 40,000 packages. This policy was hugely unpopular. As a result, the Senate Committee on Homeland Security and Government Affairs investigated the matter and Senators Bill Nelson (Democrat, Florida) and David Vitter (Republican, Louisiana) sponsored legislation to stop CBP’s seizures. Their Bill passed the Senate, but did not become law. In addition, however, they put direct political pressure on CBP. As a result, CBP stopped seizing small packages of drugs sent by mail. CBP’s change of practice was announced by a press spokeswoman, but CBP did not formally change its policy with regard to the importation of drugs. In addition, the FDA was reported as having assured Senator Nelson that the FDA would not take action over such shipments, although again the FDA did not formally change its policy.

The upshot is the importation of drugs into the USA is generally illegal, and the responsible US agencies do not have a formal policy not to enforce the law in respect of personal importation by mail of drugs purchased from CIPs, but nevertheless in practice they choose to allocate their resources to other priorities.

It is neither necessary nor profitable to speculate as what legislative changes, if any, may be enacted by the US Congress in the future.

Finally, there is no evidence that the high price of branded pharmaceuticals in the USA is due to the relevant provisions of the FFDCA, as opposed to other factors, and in particular the fact that the products are generally protected by patents.

The Latin maxim ex turpi causa non oritur actio (no action can arise from an illegal or immoral act) encapsulates a public policy which English law gives effect to in different ways in different situations. Since there is no over-arching principle of universal validity in all contexts, it is necessary to identify the principle or principles applicable to the situation at hand.

Contract. The effect of illegality under English law on the enforceability of a contract was stated by Devlin LJ (as he then was) in Archbolds (Freightage) Ltd v S Spanglett Ltd [1961] 1 QB 374 at 388 as follows:

“The effect of illegality on a contract may be threefold. If at the time of making the contract there is an intent to perform it in an unlawful way, the contract, although it remains alive, is unenforceable at the suit of the party having that intent; if the intent is held in common, it is not enforceable at all. Another effect of illegality is to prevent a plaintiff from recovering under a contract if in order to prove his rights under it he has to rely on his own illegal act; he may not do that even though he can show that at the time of making the contract he had no intent to break the law and that at the time of performance he did not know that what he was doing was illegal. The third effect of illegality is to avoid the contract ab initio, and that arises if the making of the contract is expressly or impliedly prohibited by statute or is otherwise contrary to public policy.”

The effect of illegality under foreign law on the enforceability of a contract was stated by Robert Walker LJ (as then was) in Ispahani v Bank Melli Iran [1998] Lloyd’s Rep Bank 133 at 136-137 as follows:

“There are two associated principles. One is that where a contract is to be performed in a country where its performance is unlawful by the law of that country (lex loci solutionis), it will not be enforced by the English court. This principle is often identified with the well-known decision of this court in Ralli Brothers v Compania Naviera [1920] 2 KB 287, which was a case of supervening illegality. But the same (or a closely similar) principle applies to existing illegality: see Robert Goff J. in Toprak Mahsulleri v Finagrain [1979] 2 Lloyd’s Rep 98, 107, approved by the Court of Appeal [1979] 2 Lloyd’s Rep 112, 117. In this context ‘performance’ does not mean any activity required or contemplated by the contract; it has a relatively narrow and technical meaning (see Dicey & Morris, Conflict of Laws, 12th ed, pp. 357-363).

The other principle was stated as follows by Sankey LJ in Foster v Driscoll [1929] 1 KB 470, 521-522:

‘An English contract should and will be held invalid on account of illegality if the real object and intention of the parties necessitates them joining in an endeavour to perform in a foreign and friendly country some act which is illegal by the law of such country notwithstanding the fact that there may be, in a certain event, alternative modes or places of performing which permit the contract to be performed legally.’

Foster v Driscoll was the ‘bootlegging’ case in which, during prohibition, a group of persons in England and Scotland planned to ship 7,500 cases of whisky to North America, and hoped to make extraordinary profits. But they fell out and resorted to litigation between themselves.

In Toprak Robert Goff J. set out the above passage from Sankey LJ's judgment and analysed how it has been accepted as the relevant principle by the Court of Appeal and the majority of the House of Lords in another very well-known case, Regazzoni v Sethia [1958] AC 301. That case concerned a contract governed by English law for the sale of jute bags which were to be manufactured in India (although that was not a term of the contract). Both the seller and the buyer knew that the bags, although shipped c.i.f. Genoa, were intended to be resold to the Union of South Africa, contrary to an embargo which had the force of law in India. There was no evidence that the Indian shipper knew the intended ultimate destination.”

As counsel for the Claimants emphasised, both the principles discussed by Robert Walker LJ are underpinned by the principle of international comity, that is to say, respect for the laws and courts of other nations. Thus in Ralli Brothers v Compañia Naviera sota y Aznar [1920] 2 KB 287 at 304 Scrutton LJ said:

“This country should not in my opinion assist or sanction the breach of the laws of other independent States.”

In Foster v Driscoll [1929] 1KB 470 at 510 Lawrence LJ said:

“The ground upon which I rest my judgment that [a partnership formed for the main purpose of deriving profit from the commission of a criminal offence in a foreign and friendly country] is illegal is that its recognition by our Courts would furnish a just cause for complaint by the United States Government against our government (of which the partners are subjects)”, and would be contrary to our obligation of international comity as now understood and recognised, and therefore would offend against our notions of public morality.”

In Regazzoni v K.C. Sethia (1944) Ltd [1958] AC 301 at 318-319 Viscount Simonds said:

“It is … nothing else than comity which has influenced our courts to refuse as a matter of public policy to enforce, or to award damage for the breach of, a contract which involves the violation of foreign law on foreign soil, and it is the limits of this principle that we have to examine.

…

Just as public policy avoids contracts which offend against our own law, so it will avoid at least some contracts which violate the laws of a foreign state, and it will do so because public policy demands that deference to international comity.”

Similarly Lord Keith of Avonholm said at 327:

“In the present case I see no escape from the view that to recognise the contract between the appellant and the respondent as enforceable contract would give a just cause for complaint by the Government of India and should be regarded as contrary to conceptions of international comity.”

It should be noted that, despite being underpinned by considerations of international comity, both principles have a limit which was stated by Robert Walker LJ in Ispahani at 139-140 as follows:

“However, the absence of a reported decision clearly demonstrating the point ought not in my view to deter this court from affirming that the carrying out of prohibited acts within the territory in question is an essential and necessary element of the principle stated by Sankey LJ in Foster v Driscoll [1929] 1 KB 470, 521, and approved by the House of Lords in Regazzoni v Sethia [1958] A.C. 301. Apart from the formidable weight of judicial opinion behind that formulation of the principle, there are to my mind two compelling reasons against regarding as irrelevant the place where the prohibited acts are carried out. One reason is that international comity is naturally much readier to accept that a country’s laws ought to be obeyed within its own territory, than to recognise them as having extraterritorial effect. The other reason is that the Ralli Brothers principle, although now regarded as a distinct principle, grows from the same rootstock. In the Ralli Brothers line of authority it is clear beyond argument that it must be the law of the place of performance that prohibits the act of performance. For that I need refer only to Kleinwort Brothers v Ungarische Baumwolle Industrie [1939] 2 KB 678, in which MacKinnon LJ (at p.694) regarded the alternative as leading to preposterous results.”

This limit in itself would not be an answer to the Claimants’ case, since as noted above the Claimants do not rely upon any extra-territorial effect of US law. Instead, the Claimants rely upon the fact that the Defendants’ knowledge that (i) the object of the Turkish fulfilment business was to supply drugs to patients in the USA and (ii) importation of pharmaceuticals into the USA is generally illegal under US law. Nevertheless, the existence of this limit demonstrates that international comity cannot be pressed too far.

A more fundamental limit of both the Ralli Brothers principle and the Foster principle is that they only apply to claims to enforce a contract. Since the Defendants are not seeking to enforce any contract, bur rather an undertaking to the court enforceable in equity, it follows that neither principle applies to the present case. Counsel for the Claimants accepted this.

Tort. There is no doubt that a defence of ex turpi causa can apply to a claim in tort in appropriate circumstances. Thus in the recent case of Gray v Thames Trains Ltd [2009] UKHL 33, [2009] 3 WLR 167 the claimant had killed, and been convicted of the manslaughter of, another person while suffering from post-traumatic stress disorder as a result of the defendants’ negligence. The House of Lords held that the claimant’s claim for loss of earnings would be precluded on the narrow basis that a person cannot recover for damage which is the consequence of a sentence imposed on him for a criminal act, but went on to hold that, not only the claim for loss of earnings, but also claims for general damages and for an indemnity against claims by the deceased’s dependents were precluded by a wider rule that a person cannot recover for damage which is the consequence of his own criminal act.

Lord Hoffmann, with whom Lord Phillips of Worth Matravers and Lord Scott of Foscote agreed, analysed the wider rule as follows:

“52.

The wider principle was applied by the Court of Appeal in Vellino v Chief Constable of the Greater Manchester Police [2002] 1 WLR 218. The claimant was injured in consequence of jumping from a second-floor window to escape from the custody of the police. He sued the police for damages, claiming that they had not taken reasonable care to prevent him from escaping. Attempting to escape from lawful custody is a criminal offence. The Court of Appeal (Schiemann LJ and Sir Murray Stuart-Smith; Sedley LJ dissenting) held that, assuming the police to have been negligent, recovery was precluded because the injury was the consequence of the plaintiff's unlawful act.

53.

This decision seems to me based upon sound common sense. The question, as suggested in the dissenting judgment of Sedley LJ, is how the case should be distinguished from one in which the injury is a consequence of the plaintiff's unlawful act only in the sense that it would not have happened if he had not been committing an unlawful act. An extreme example would be the car which is damaged while unlawfully parked. Sir Murray Stuart-Smith, at para 70, described the distinction:

‘The operation of the principle arises where the claimant's claim is founded upon his own criminal or immoral act. The facts which give rise to the claim must be inextricably linked with the criminal activity. It is not sufficient if the criminal activity merely gives occasion for tortious conduct of the defendant.’

54.

This distinction, between causing something and merely providing the occasion for someone else to cause something, is one with which we are very familiar in the law of torts. It is the same principle by which the law normally holds that even though damage would not have occurred but for a tortious act, the defendant is not liable if the immediate cause was the deliberate act of another individual. Examples of cases falling on one side of the line or the other are given in the judgment of Judge LJ in Cross v Kirkby [2000] CA Transcript No 321. It was Judge LJ, at para 103, who formulated the test of “inextricably linked” which was afterwards adopted by Sir Murray Stuart-Smith LJ in Vellino v Chief Constable of the Greater Manchester Police [2002] 1 WLR 218. Other expressions which he approved, at paras 100 and 104, were ‘an integral part or a necessarily direct consequence’ of the unlawful act (Rougier J: see Revill v Newbery [1996] QB 567, 571) and ‘arises directly ex turpi causa’ (Bingham LJ in Saunders v Edwards [1987] 1 WLR 1116 , 1134.) It might be better to avoid metaphors like ‘inextricably linked’ or ‘integral part’ and to treat the question as simply one of causation. Can one say that, although the damage would not have happened but for the tortious conduct of the defendant, it was caused by the criminal act of the claimant? (Vellino v Chief Constable of the Greater Manchester Police [2002] 1 WLR 218). Or is the position that although the damage would not have happened without the criminal act of the claimant, it was caused by the tortious act of the defendant? (Revill v Newbery [1996] QB 567).”

In Hewison v Meridian Shipping Services PTE Ltd [2002] EWCA 1821, [2003] ICR 766 the claimant was employed by the defendants as a merchant seaman even though he suffered from epilepsy and regularly took anti-convulsive drugs. He knew that his condition debarred him from employment as a seaman, and repeatedly falsely denied suffering from fits and failed to disclose his medication when answering medical questionnaires. He was seriously injured as a result of the defendants’ negligence and breach of statutory duty. Although he returned to work, he suffered a fit which led to the defendants discovering his condition and dismissing him. The majority of the Court of Appeal held that his claim for loss of earnings calculated on the basis that he would have worked as a seaman until the normal retiring age, although not other heads of damage claimed, was precluded by public policy since the claimant could only have earned the sums claimed by continuing to deceive his employer and thereby committing the offence of obtaining a pecuniary advantage by deception contrary to section 16 of the Theft Act 1968.

Clarke LJ, with whom Tuckey LJ agreed, stated the relevant principles as follows:

“28.

… It is common ground that there are cases in which public policy will prevent a claimant from recovering the whole of the damages which, but for the rule of public policy, he would otherwise have recovered. The principle can perhaps be stated as a variation of the maxim so that it reads ex turpi causa non oritur damnum, where the damnum is the loss which would have been recovered but for the relevant illegal or immoral act. A classic example is the principle that a person who makes his living from burglary cannot have damages assessed on the basis of what he would have earned from burglary but for the defendant's negligence.

29.

To my mind the authorities support that approach. They seem to me to support the proposition that where a claimant has to rely upon his or her own unlawful act in order to establish the whole or part of his or her claim the claim will fail either wholly or in part. In the present context the principle can be seen from the decision of this court in Hunter v Butler [1996] RTR 396, although it has to be said that the case does give rise to some difficulties of interpretation.

…

33.

… The principle applied by Hobhouse LJ is, as I see it, that stated at p 405B, namely: ‘If a plaintiff comes to court and asserts as part of her case that she would have committed criminal acts and bases her claim on such an assertion she cannot recover in a court of law on that basis.’ That appears to me to be substantially the same test as that adopted in the ex turpi causa non oritur actio cases, as stated in the passage from the judgment of Beldam LJ in the Clunis case [1998] QB 978 , 986–987 quoted above.

34.

I am not sure whether it is quite the same principle as that applied by Waite LJ but it does not seem to me necessary to consider that question further because, since Hirst LJ agreed with the judgment of Hobhouse LJ and since the principle just stated is part of the ratio decidendi of Hunter v Butler, we are bound to follow it

…

36.

… In my opinion Hobhouse LJ must have had in mind a case where the claimant bases his or her claim upon his or her unlawful act in a substantial way. It is not, however, in my opinion sufficient that he or she has been party to some collateral or insignificant illegality or unlawful act. Thus, as Kemp & Kemp (2000) put it in para 13–080, a claimant is entitled to be compensated for his loss of earnings even though he had in the past failed to disclose them to the Inland Revenue: see Duller v South East Lincs Engineers [1981] CLY 577, a decision of Mr Edwin Jowett QC on 2 May 1980.”

It is not clear whether the principles applied in Gray v Thames and in Hewison v Meridian apply where the acts in question are unlawful because they are criminal offences under foreign law, but the principle of international comity suggests that they should.

Counsel for the Claimants accepted that the principles applied by the House of Lords in Gray v Thames were not applicable to the present case. He submitted that the principle applied by the majority of the Court of Appeal in Hewison v Meridian was applicable even though the Defendants are not claiming that the Claimants are liable for any tort. Before expressing a conclusion on this submission, it is convenient first to deal with two other points.

A broader principle? Counsel for the Claimants argued that the principles applied in the contract and tort cases were merely instances of a broader principle, namely that the Court will not order a defendant to compensate a claimant for loss, or a head of loss, which arises out of the claimant’s own involvement in an illegal activity whether under English law or foreign law. In my judgment, there is no such broader principle. My reasons are as follows.

First, as counsel for the Claimants accepted in argument and as the decision in Hewison v Meridian confirms, recovery is not precluded where the illegal activity is “incidental” (to use counsel’s word) or “collateral or insignificant” (to use the language of Clarke LJ) to the claim or the head of loss. In my view, this concession undermines the very existence of the broader principle, since it shows that it is not enough that the loss “arises out of” the claimant’s “involvement” in illegal activity. More is required.

Secondly, the existence of the broader principle is contradicted by the limits of the narrower principles applied in the cases discussed above. In the realm of contract, the three principles identified by Devlin LJ in Archbolds each have clear limits. Thus in an earlier decision in St John Shipping Corp v Joseph [1957] 1 QB 267 Devlin J (as he then was) held that the defendant cargo-owners were liable for freight due to the plaintiff shipowners even though the shipowners had been convicted of an offence under sections 44 and 57 of the Merchant Shipping Act 1932 as result of the ship being overloaded on the voyage in question. The cargo-owners’ arguments that the contract was illegal because it was performed in an illegal manner, that the shipowners could not rely upon their own illegal act and that the shipowners could not enforce rights which resulted from their crime were all rejected. In Archbolds itself, the Court of Appeal held that the plaintiffs were entitled to recover damages for the loss of 200 cases of whisky stolen due to the negligence of the defendants’ van driver notwithstanding that, unbeknownst to the plaintiffs, the defendants’ carriage of the goods was illegal since the defendants did not have the requisite licence under the Road and Rail Traffic Act 1933. Similarly, the Foster principle is limited in the way identified by Robert Walker LJ.

Thirdly and perhaps most importantly, the existence of the broader principle is contradicted by the decision of the House of Lords in Tinsley v Milligan [1994] 1 AC 340. In that case the majority held that a claimant to a interest in property, whether based on a legal or equitable title, was entitled to recover if he was not forced to plead or rely on an illegality, even though it transpired that the title on which he relied was acquired in the course of an illegal transaction or for an illegal purpose.

The leading speech for the majority view was given by Lord Browne-Wilkinson. He set out the position with regard to legal rights at 369-370:

“The position at law is well illustrated by the decision in Bowmakers Ltd. v. Barnet Instruments Ltd. [1945] K.B. 65. In that case Barnet acquired three parcels of machine tools which had previously belonged to Smith. The transaction was carried through by three hire-purchase agreements under which Smith sold the goods to Bowmakers who then hired them to Barnet. All three agreements were unlawful as being in breach of Defence Regulations: it is important to note that in the case of at least two of the parcels the illegality lay in the contract under which Bowmakers acquired the machine tools from Smith: see p. 69. Bowmakers succeeded in an action for conversion against Barnet. Even though it appeared from the pleadings and the evidence that the contract under which Bowmakers acquired the goods was illegal, such contract was effective to pass the property in the goods to Bowmakers who could therefore found their claim on the property right so acquired.

The position at law is further illustrated by Ferret v. Hill (1854) 15 C.B. 207 where A, with intent to use premises as a brothel, took a lease from B. B, having discovered that the premises were being used as a brothel, ejected A. A was held entitled to maintain ejectment against B notwithstanding that A entered into the lease for an illegal purpose.

In Taylor v. Chester, L.R. 4 Q.B. 309 the plaintiff had deposited with the defendant half a £50 note as security for payment due under an illegal contract with the defendant. The plaintiff was held unable to recover the half note as a special property in it (i.e. the security interest) had passed to the defendant.

In Alexander v. Rayson [1936] 1 K.B. 169 the plaintiff had leased a property to the defendant. For the purpose of defrauding the rating authorities, the plaintiff had carried through the transaction by two documents, one a lease which expressed a low rent the other a service agreement providing for additional payments sufficient to bring up the annual payment to the actual rent agreed. The plaintiff failed in an action to recover rent due under the agreements but the Court of Appeal, at p. 186, said that if the plaintiff had let the flat to be used for an illegal purpose, the leasehold interest in the flat would have vested in the defendant who would have been entitled to remain in possession of the flat until and unless the plaintiff could eject her without relying on the unlawful agreement.

From these authorities the following propositions emerge: (1) property in chattels and land can pass under a contract which is illegal and therefore would have been unenforceable as a contract; (2) a plaintiff can at law enforce property rights so acquired provided that he does not need to rely on the illegal contract for any purpose other than providing the basis of his claim to a property right; (3) it is irrelevant that the illegality of the underlying agreement was either pleaded or emerged in evidence: if the plaintiff has acquired legal title under the illegal contract that is enough.”

Lord Browne-Wilkinson then proceeded to consider the position in equity. At 372-373 he noted that early authorities, notably certain decisions by Lord Eldon, supported the proposition that equity would not aid a plaintiff who had transferred property to another for an illegal purpose. At 373-375 he considered later authorities which departed from Lord Eldon’s rule. At 375-376 he concluded:

“In my judgment, the explanation for this departure from Lord Eldon's absolute rule is that the fusion of law and equity has led the courts to adopt a single rule (applicable both at law and in equity) as to the circumstances in which the court will enforce property interests acquired in pursuance of an illegal transaction, viz., the Bowmakers rule [1945] K.B. 65. A party to an illegality can recover by virtue of a legal or equitable property interest if, but only if, he can establish his title without relying on his own illegality. In cases where the presumption of advancement applies, the plaintiff is faced with the presumption of gift and therefore cannot claim under a resulting trust unless and until he has rebutted that presumption of gift: for those purposes the plaintiff does have to rely on the underlying illegality and therefore fails.

The position is well illustrated by two decisions in the Privy Council. In the first, Singh v. Ali [1960] A.C. 167 a plaintiff who had acquired legal title to a lorry under an illegal transaction was held entitled to succeed against the other party to the illegality in detinue and trespass. The Board approved the Bowmakers test. Two years later in Palaniappa Chettiar v. Arunasalam Chettiar [1962] A.C. 294 the Board had to consider the case where a father, who had transferred land to his son for an illegal purpose, sought to recover it under a resulting trust. It was held that he could not, since he had to rely on his illegal purpose in order to rebut the presumption of advancement.

…

In my judgment these two cases show that the Privy Council was applying exactly the same principle in both cases although in one case the plaintiff's claim rested on a legal title and in the other on an equitable title. The claim based on the equitable title did not fail simply because the plaintiff was a party to the illegal transaction; it only failed because the plaintiff was bound to disclose and rely upon his own illegal purpose in order to rebut the presumption of advancement. The Privy Council was plainly treating the principle applicable both at law and in equity as being that a man can recover property provided that he is not forced to rely on his own illegality.”

At 376-377 Lord Browne-Wilkinson added a final point which is of some importance (emphasis added):

“Finally, I should mention a further point which was relied on by Miss Tinsley. It is said that once the illegality of the transaction emerges, the court must refuse to enforce the transaction and all claims under it whether pleaded or not: see Scott v. Brown, Doering, McNab & Co. [1892] 2 Q.B. 724. Therefore, it is said, it does not matter whether a plaintiff relies on or gives evidence of the illegality: the court will not enforce the plaintiff's rights. In my judgment, this submission is plainly ill founded. There are many cases where a plaintiff has succeeded, notwithstanding that the illegality of the transaction under which she acquired the property has emerged: see, for example, Bowmakers Ltd. v. Barnet Instruments Ltd. [1945] K.B. 65 and Singh v. Ali [1960] A.C. 167. In my judgment the court is only entitled and bound to dismiss a claim on the basis that it is founded on an illegality in those cases where the illegality is of a kind which would have provided a good defence if raised by the defendant. In a case where the plaintiff is not seeking to enforce an unlawful contract but founds his case on collateral rights acquired under the contract (such as a right of property) the court is neither bound nor entitled to reject the claim unless the illegality of necessity forms part of the plaintiff's case.”

Counsel for the Claimants submitted that the basis for the decision in Tinsley v Milligan was that legal or equitable property rights passing under illegal contracts lie where they fall. I am not convinced by this reading of the case, since it fails to explain why the courts enforce such property rights, but not an illegal contract. In my view the explanation is that the property rights are not themselves illegal. Accordingly, the courts will enforce them. As the last sentence I have quoted from Lord Browne-Wilkinson’s speech shows, the same applies to other collateral rights under an illegal contract. The position is different if the claimant has to rely upon his own illegality in order to establish his title to the property or other collateral right in the first place, just as it is different if the claimant is seeking to enforce an illegal contract or a contract which is to be performed illegally.

The principle applied by the majority of the Court of Appeal in Hewison v Meridian seems to me to be broadly consistent with this reading of Tinsley v Milligan: a claimant cannot recover a head of loss where he has to rely in a substantial way upon his own unlawful act to establish that loss. The essential difference between the majority and Ward LJ, who dissented, in that case was on the question of whether the claimant did have to rely upon his own unlawful act in order to establish his loss of earnings: compare the reasoning of Clarke LJ at [45](i)-(iii), (x)-(xi) and Tuckey LJ at [52] with that of Ward LJ at [83] and [88].

Recovery under a cross-undertaking. So far as counsel’s researches went, the question of the impact of illegality on a claim under a cross-undertaking has only arisen for consideration in one case, namely Columbia v Robinson. In that case Scott J (as he then was) found that the defendants had infringed the plaintiffs’ copyrights by reproducing pirate video tapes of films (and had committed passing off and trade mark infringement). He nevertheless held that the plaintiffs had seriously failed to comply with their duty of full and frank disclosure when obtaining a combined Anton Piller order and Mareva injunction, and that the Anton Piller order had been executed in an oppressive manner.

On the defendants’ application for an inquiry as to damages under the cross-undertaking, Scott J held as follows:

“The defendants seek damages under the cross-undertaking given by the plaintiffs. In view of my findings as to the manner in which the order was obtained and executed, the defendants are, in my judgment, prima facie entitled to damages. The problem is quantum.

Damages for breach of a cross-undertaking ought, in my judgment, to be primarily compensatory. But I do not think, in the present case, that is the whole of the basis on which damages can be granted. It is well settled that an increased level of damages, sometimes described as aggravated damages, can be awarded where trespass to land or trespass to goods has been accompanied by circumstances of contumely or affront: see McGregor on Damages, 14th ed. (1980), paras. 1082 and 1127. That has been so in the present case by reason, in my judgment, of the excessive and oppressive manner in which the Anton Piller order was executed. …

I have given thought to whether I should order an inquiry as to damages in order that the damage done by the order to the defendants' businesses at 8, Frederick Street and at the Mill Street shop may be properly assessed. I have concluded that I ought not to order an inquiry as to damages for the following reasons.

First, the compensatory element of any damages should compensate the defendants for damage to their legitimate interests. They cannot expect to be compensated for damage to the illicit part of the businesses carried on at the Mill Street shop and at 8, Frederick Street.

The stock of video tapes at the Mill Street shop was, as I have concluded from the evidence in this case, composed largely of pirate tapes. It is true that a substantial number of the tapes were not copies of films in which any of the plaintiffs is entitled to copyright or an exclusive licence. Nonetheless, to the extent that the tapes were pirate tapes, they belonged, under section 18 of the Copyright Act 1956, to the owners of the copyright. Further, every sale of every video tape from the Mill Street shop of which evidence has been given in this case seems to have been the sale of a pirate tape. The prospect of an inquiry as to the damage caused by the Anton Piller order to such a business brings to my mind the application by the highwayman against his partner for an account. The court would not countenance that application and I do not think I should countenance an inquiry into the damage caused by the order to the business of the Mill Street shop. Mr. Robinson will not of course suffer the fate of the highwayman, nor will Mr. Beveridge suffer the fate of his counsel.

As to the business carried on from 8, Frederick Street, I find it easy to accept that the business was, in part, legitimate although, as I have found, in part concerned with the reproduction of tapes in flagrant breach of copyright. But so far as the legitimate side of the business is concerned, it was, in my view, for a time carried on by Mr. Wickenden. I was presented in evidence by Mr. Robinson with a series of falsehoods regarding the business allegedly carried on by Mr. Wickenden. He was I think, no more than a front for Mr. Robinson. The business carried on at 8, Frederick Street after the execution of the Anton Piller order terminated in July 1983 or thereabouts on account of, first, the collapse of Centre Video Ltd. and, secondly, the floods which damaged the majority of the video machines. The cesser of that continued business was not attributable, directly at least, to the Anton Piller order or its aftermath. In view of these circumstances, and particularly in view of the false evidence given me by Mr. Robinson, I am not prepared to order an inquiry into the damage caused to the 8, Frederick Street business by the Anton Piller order.

I propose, therefore, to make an assessment here and now of the sum that the plaintiffs ought to pay the defendants under the cross-undertakings in damages. In spite of what I have said, there must be some compensatory element in the damages to be awarded. The combination of Anton Piller order and Mareva injunction made it impossible for the defendants to obtain credit. The retention by Hamlins of all the documents of the businesses made any continuity of business very difficult. There was a legitimate part, both of the 8, Frederick Street business and, perhaps to a very small extent, of the Mill Street shop business. The defendants' chance to continue on a small scale a legitimate business was impaired by the ex parte order being obtained and executed. In addition, this is, in my judgment, a case in which aggravated damages are justified.

I propose to order that damages of £10,000 be paid by the plaintiffs to the defendants under the cross-undertakings in damages. If it is relevant to split the sum between the defendants, I would allow £2,500 to the company and £7,500 to Mr. Robinson. This split recognises that contumely and affront affect individuals, not inanimate corporations. The damages are awarded against the plaintiffs jointly.”

Counsel for the Claimants submitted that this decision demonstrated that the court would not order compensation for the loss of an illegal business under a cross-undertaking, and that by virtue of international comity it could not matter whether the illegality was in England or overseas. Counsel for the Defendants submitted that the decision was merely an exercise of the court’s discretion not to enforce the cross-undertaking. To that counsel for the Claimants replied that, even if that was so, the result could not be different on an inquiry since the objection based on public policy was not a matter of discretion.

In my judgment counsel for the Defendants is correct that Scott J was exercising his discretion not to enforce the cross-undertaking by ordering an inquiry as to damages, but instead by making a summary award essentially to compensate the defendants for the wrongful obtaining and execution of the Anton Piller order. This can be seen particularly clearly from his reasons in relation to the 8 Frederick Street business, which included the false evidence given by Mr Robinson.

Nevertheless, it remains necessary to analyse the basis on which Scott J exercised his discretion, particularly so far as the Mill Street business was concerned. In my view, the basis of the decision was that virtually the entire business at Mill Street was unlawful in that it consisted of the sale or rental of video tapes which were pirate tapes, that is, infringing copies of films the copyrights in which were owned either by the plaintiffs or by other copyright owners. As counsel for the Defendants pointed out, Scott J clearly regarded it as significant that, by virtue of section 18 of the 1956 Act, the pirate tapes belonged to the copyright owner and hence the defendants were guilty of conversion. It is difficult to believe that Scott J would have taken a different view of this had the Anton Piller order been set aside for material non-disclosure prior to trial and he had been hearing an inquiry under the cross-undertaking. This reading is supported by Scott J’s reference to the notorious case of Everet v Williams (1725) 2 Pothier on Obligations, p. 3 (see Lindley & Banks on Partnership (18^th ed) at 8-07 footnote 22), which was also referred to by Lawrence LJ in Foster v Driscoll at 511.

Conclusion on the law. Columbia v Robinson was, of course, decided before either Tinsley v Milligan or Hewison v Meridian. In my view, however, the three cases are consistent with each other if read in the manner suggested above. I therefore conclude that the court will not award compensation under a cross-undertaking for the loss sustained by an unlawful business or where the beneficiary of the cross-undertaking has to rely to a substantial extent upon his own illegality in order to establish the loss. As a matter of international comity, it does not matter for this purpose whether the acts in question are unlawful under English law or under foreign law.

Application to the present case. In my judgment the principle set out in the preceding paragraph does not apply to the Defendants’ claim in the present case for the following reasons.

First, I do not regard the Defendants’ business as an unlawful one. It is beyond dispute that it was lawful so far as English law is concerned. As to US law, as already stated the Claimants do not now contend that US law has extra-territorial effect so as to make the Defendants’ acts in this country illegal. In my view, the fact that the Defendants’ business resulted in illegal acts being committed by others in the USA is not sufficient to make that business itself unlawful.

Secondly, in my judgment the Defendants do not have to rely upon their own illegality in order to establish their loss, and certainly not in a substantial way. They simply rely upon (i) the purchase of pharmaceuticals in Turkey, (ii) importation of those products into the United Kingdom, transhipment and export under IPR and (iii) sale of the drugs to CanadaDrugs upon terms that title and risk passed at the point where Royal Mail collected the goods from 8PM. None of these acts were illegal. It is the Claimants who seek to rely upon the illegal acts of importation into the USA by others as an answer to the claim.

Thirdly, even if the Defendants’ business is regarded as having depended upon the commission of illegal acts by others in the USA, by the date of the injunction it was an established business with a valuable goodwill. That business, and in particular the goodwill, was property which could have been sold to a third party. (Indeed, as already noted, Ms Gutteridge’s approach to valuing the lost business was essentially to consider what would be paid for it by a purchaser.) The Defendants’ claim is for the loss of that business, and thus may be viewed as a claim for the loss of that property. It is difficult to see why, following Tinsley v Milligan, that loss should be irrecoverable.

Finally, I should deal with the consequences of my findings that (i) since October 2006 the practice, if not the policy, of the FDA and CBP has not been to try to enforce the FFDCA against personal imports, and (ii) it has not been proved that the higher prices prevailing in the USA of which the Defendants were indirectly taking advantage are attributable to the relevant provisions of the FFDCA. In my judgment, neither of these findings would defeat the Claimants’ public policy argument if it were otherwise applicable. If I had a discretion in the matter, I would exercise it in favour of the Defendants for these reasons; but neither side contends that I do have a discretion.

The Defendants also advance a series of affirmative defences to the Claimants’ public policy argument. In view of my conclusion above, I shall deal with these relatively briefly.

First, the Defendants contend that the argument is precluded by the cross-undertaking when construed against the background matrix of fact in the present case. In my judgment, it is impossible to construe the cross-undertaking as precluding the Claimants’ argument. In reality, the Defendants’ contention is not that the argument is precluded by the wording of the undertaking, but that the surrounding circumstances preclude the Claimants from taking the point by virtue of election or estoppel etc.

Secondly, the Defendants contend that the Claimants elected not to argue before Mann J that there was no requirement for them to compensate the Defendants for any loss caused by the injunction and are bound by that election. I do not recognise that as an election either at common law or in equity, however.

Thirdly, the Defendants contend that the Claimants are estopped from raising illegality as a bar to the recovery of loss under the cross-undertaking. This is said to be an estoppel by convention, but I am not persuaded that there was any relevant common assumption at the hearing before Mann J. On the other hand, the Defendants’ case under this head can be analysed as one of estoppel by representation.

In short, the Defendants say that:

In my view, this argument has force. If necessary, I would accede to it. Nevertheless, it seems to me that the argument fits more comfortably under the next heading rather than attempting to shoehorn it into a case of estoppel by representation.

Fourthly, the Defendants rely upon the principle articulated by Sir Nicholas Browne-Wilkinson V-C (as he then was) in Express Newspapers plc v News (UK) Ltd [1990] 1 WLR 1320 at 1329:

“There is a principle of law of general application that it is not possible to approbate and reprobate. That means you are not allowed to blow hot and cold in the attitude that you adopt. A man cannot adopt two inconsistent attitudes towards another: he must elect between them and, having elected to adopt one stance, cannot thereafter be permitted to go back and adopt and inconsistent stance.”

In that case he applied this principle by holding that it was not open to the plaintiff to advance inconsistent cases on the claim and counterclaim which to all intents and purposes were mirror images of each other.

In my judgment this principle is applicable to the present situation. Lilly persuaded Mann J to grant an interim injunction on the basis that the damage to the Defendants’ business could be adequately compensated by an award under the cross-undertaking even though Lilly was contending that importation into the USA was illegal. The other Claimants subsequently adopted the same stance in obtaining piggy-back injunctions. It is quite inconsistent with that stance for the Claimants to turn around after the injunctions have been discharged and say such compensation is irrecoverable as a matter of law by virtue of that illegality.

The Claimants rely upon the fact that the extent of the illegality was in dispute before Mann J, as shown by his judgment at [44], and will only finally be resolved by this judgment. In my view that is immaterial, since it does not affect the inconsistency in the stances adopted by the Claimants.

The Claimants also say that Mann J would have been bound to follow the same course even if he had known that the Claimants were going to rely on illegality as a bar to recovery. In my view this cannot be assumed. In those circumstances Mann J would have been faced with quite a different balance to weigh, and might well have reached a different conclusion. I do not go so far as to say that he would inevitably have refused the injunction. Conceivably, he might still have granted it. But it would certainly have affected his reasoning. Moreover, the possibility that Mann J might still have granted the injunction does not excuse the inconsistency in the stances adopted by the Claimants.

Fifthly, the Defendants contend that the issue is now res judicata as a result of Mann J’s judgment. In my judgment this argument is a complete non-starter. There can be no issue estoppel in relation to a point which Mann J did not decide because it was not raised before him.

Sixthly, the Defendants contend that this point is not open to the Claimants because the Court of Appeal ordered an inquiry on the cross-undertaking in the Lilly action, and subsequently inquiries were ordered by consent in the other actions. Unlike in Balkanbank v Taher, the respective orders were not in a form which preserved the court’s discretion as to whether to enforce the undertaking. Accordingly, the Defendants say that the position is as stated by Neill LJ in Cheltenham & Gloucester Building Society v Ricketts [1993] 1 WLR 1545 at 1552:

“A decision that the undertaking should be enforced is a precondition for the making of an order of an inquiry as to damages.”

Even if this is correct, I do not see that it assists the Defendants. As noted above, the Claimants do not contend that the Defendants’ claim should be refused in the exercise of the court’s discretion, but rather that the loss is irrecoverable as a matter of law. That is clearly not a point which either the Court of Appeal’s order or the subsequent consent orders determined.

The Claimants contend that none of these points can trump the public policy objection in any event, on the basis articulated by Schiemann LJ in Awwad v Geraghty & Co [2001] 1 QB 570 at 596:

“Points on illegality are taken by the court of its own motion, not because of any consideration of fairness as between the two parties to the dispute but on wider considerations.”

While I acknowledge the force of this point, I am not persuaded that it is an answer to the Claimant’s third or fourth arguments. This is not a case like Awwad where a party is trying to enforce an illegal contract and is relying upon an estoppel to prevent the illegality being raised. One can well see why an estoppel should be not be countenanced in such circumstances. In this case, however, the court is enforcing an undertaking given to the court as the price of an interim injunction wrongly granted by the court. That undertaking was given by the Claimants on the implicit basis that such illegality as there was would not be a bar to recovery under the cross-undertaking. The Defendants’ argument is simply that the undertaking should be enforced on the same basis. If one looks outside considerations of fairness to the parties, in such circumstances it is also necessary for the court to protect the integrity of its own process.

Since I have found that the Defendants’ losses were caused by all four Injunctions, prima facie all the Claimants are jointly liable for those losses.

Counsel for Pfizer, AstraZeneca and Merck argued that, even if the Injunctions in those Actions were found to have caused loss, on the true construction of the cross-undertakings such loss was not covered by the cross- undertakings because the loss of the Turkish fulfilment business preceded the Injunctions. I disagree. In my judgment the cross-undertakings cover all losses caused by the Injunctions (subject, possibly, to questions of mitigation and remoteness which do not arise here).

Finally, I should note that a dispute arose during the parties’ closing submissions as to whether or not it was open to the Defendants to contend that the Claimants had acted in concert in applying for obtaining the Injunctions. In view of my finding as to causation, it is not necessary for me to resolve this dispute or to make any finding one way or the other.

I conclude that the Claimants are jointly liable to compensate the Defendants for (i) lost profits in a figure to be calculated in the manner set out above, (ii) loss on unsold stock in the sum of the sterling equivalent of US$455,159.97 and (iii) redundancy costs in the sum of £4,000. The Defendants are also entitled to interest.

Shortly before I handed down this judgment, my attention was drawn to yesterday’s decision of the House of Lords in Moore Stephens v Stone Rolls Ltd [2009] UKHL 39. I have only had a brief opportunity to consider this, but it does not appear to contradict my decision on the public policy issue.