Royal Courts of Justice, Rolls Building
Fetter Lane, London, EC4A 1NL
Before :
HIS HONOUR JUDGE HACON
Between :
KOHLER MIRA LIMITED | Claimant |
- and - | |
BRISTAN GROUP LIMITED | Defendant |
Douglas Campbell (instructed by Wragge & Co LLP) for the Claimant
Hugo Cuddigan (instructed by Withers & Rogers LLP) for the Defendant
Hearing date: 29th April 2014
Judgment
Judge Hacon :
Introduction
This is an inquiry as to damages following the judgment of HH Judge Birss QC (as he then was) of 28 January 2013, reported at [2014] FSR 1, and his order of the same date. The action was about electric shower units. It was for infringement of two Community registered designs (“RCDs”) and a number of UK unregistered design rights (“UDRs”). Judge Birss found that the RCDs were valid and not infringed. He also found that three products sold by the Defendant (“Bristan”), namely the Glee, Joy and Smile electric showers, infringed certain of the UDRs owned by the Claimant (“Kohler”). This inquiry therefore relates only to the damages due to Kohler for infringement of the UDRs.
Damages are claimed by Kohler under 4 heads. They are:
Profits lost by Kohler on the sale of showers that Kohler would have made if Bristan had not infringed.
A royalty on sales by Bristan of infringing showers which did not cause Kohler to lose sales.
Additional advertising and promotional costs incurred by Kohler as a result of Bristan’s infringement.
An uplift of 10% on the sums due under heads (1) to (3) for moral prejudice caused to Kohler by the infringement, having regard to art.13(1)(a) of the Intellectual Property Enforcement Directive 2004/48/EC.
Kohler accepts that the damages available are subject to two caps:
The £500,000 overall cap on damages applicable in this court.
The cap on damages provided for by s.239(1)(c) of the Copyright, Designs and Patents Act 1988 (“the 1988 Act”). This provides that where the defendant has undertaken to take a licence of right under UDRs in infringement proceedings, the damages shall not exceed double the amount which would have been payable by him as a licensee, if such a licence had been granted before the earliest infringement.
Innocence
Before turning to the heads of damage claimed by Kohler, it is convenient to deal first with an argument advanced by Bristan based on s.233(1) of the 1988 Act. This reads:
“Where in an action for infringement of design right brought by virtue of section 226 (primary infringement) it is shown that at the time of the infringement the defendant did not know, and had no reason to believe, that design right subsisted in the design to which the action relates, the [claimant] is not entitled to damages against him, but without prejudice to any other remedy.”
Reliance on s.233(1) was not pleaded by Bristan in its Defence in the substantive proceedings and so this was not a matter which concerned Judge Birss. It gives rise to two sub-issues: (a) was Bristan entitled to raise s.233(1) for the first time in the inquiry and (b) if so, does it afford Bristan a good defence?
Whether Bristan can rely on s.233(1) for the first time at the inquiry
Bristan advanced the following reasons in support of its case that, notwithstanding its failure to plead or otherwise raise s.233(1) at the trial before Judge Birss, it could do so now.
Time was short at the trial.
The trial was also concerned with RCDs, in relation to which Kohler did not succeed. But had it succeeded, Kohler would have obtained an injunction and damages such that there would be no reason to be concerned about the level of parallel damages for infringement of UDRs. Argument in relation to s.233(1) would have been a waste of time.
Section 233(1) only bites on damages prior to 6 December 2011.
Kohler relied on a number of UDRs of which 4 were held to attract design right protection and to be infringed. The innocence defence might have been sensitive to which UDRs were held to subsist and be infringed.
Kohler argued that it was too late now to take the point under s.233(1). Its reasons were:
It is too late as a matter of law, see the judgment of Warren J in Adobe Systems Inc v Netcom Online.co.uk Limited[2012] EWHC 446 (Ch).
Kohler would have cross-examined the relevant witnesses at trial, whereas Bristan has not called the witnesses who know the relevant facts at the inquiry.
Taking Bristan’s points first, the issue being addressed in Adobe was not quite the same as that arising in these proceedings. In Adobe there was a consent order by which the defendants acknowledged that their importation of certain products had infringed the claimant’s registered trade mark. At the inquiry the defendants sought to raise three arguments which, if correct, would have established that in fact they had defences to the allegation of trade mark infringement. These three new arguments were:
(a) the claimant’s trade mark rights had been exhausted by the time of the defendants’ importation since the products had been marketed with the consent of an undertaking economically linked with the claimant;
(b) the claimant had abused its dominant position contrary to art.102 of the Treaty on the Functioning of the European Union (“TFEU”);
(c) the claimant had entered into agreements restricting competition contrary to art.101 TFEU.
Warren J assumed without going further that all three points were arguable. Regarding the first of them, Warren J had no hesitation in ruling that it was too late to raise the defence at the inquiry because of the public interest in the finality of litigation (see [37]-[39]). In relation to the second and third new arguments, Warren J took the view that the position was less straightforward since there was a countervailing policy consideration, namely that the courts should not enforce arrangements which are in breach of competition law (see [40]). Nonetheless the strong public interest in the finality of litigation should prevail and the fact of the order having been made meant there was no failure to meet the requirements of EU competition law (see [49]-[53]). It was also not open to the defendants to raise exactly the same defences under the guise of arguments in relation to the assessment of quantum of damages (see [83]-[84]).
The present case differs in that Bristan does not seek to impugn any part of the order of Judge Birss made following his judgment. His declaration that certain of Kohler’s UDRs were infringed is unchallenged. Bristan argues that s233(1) is only engaged now because it is just about the availability of damages – it is not concerned with infringement.
That may be right, but seems to me to ignore policy issues which, although they are not identical to those considered by Warren J, are important for all that. Parties should know where they stand in relation to each side’s arguments by the time the pleadings are closed – not least in the IPEC. If it is a defendant’s case that damages to which the claimant would be entitled if he wins are never going to be available because of s.233(1), this should be made clear in the pleadings for the trial on liability. It may have a significant effect on the way the claimant pursues the proceedings and also the degree to which the claimant may be amenable to settlement. If the claimant succeeds at trial, knowledge of whether an argument is being advanced under s.233(1) might easily affect whether the claimant elects to go for an inquiry or an account of profits. Mr Cuddigan, who appeared for Bristan, argued that if Kohler made the wrong election in the present case, that was its own fault for not taking into account the possibility that Bristan might rely on s.233(1). I reject that. It was Bristan’s choice whether to rely on the subsection and Kohler’s right to know in good time what choice Bristan had made.
In this court cards should not be held behind the back of litigants after the case management conference, to be played as and when seems tactically best, or alternatively only when a party notices that a card might be put into play.
If Bristan had pleaded reliance on s.233(1), it would have been perfectly legitimate at the case management conference in the substantive proceedings for Bristan to have raised the question whether, as a matter of procedural economy, argument on the point might better be left to the inquiry, if there was to be one. The various arguments now raised by Bristan (summarised above) could have been advanced. The court might have decided they were telling and may have ruled that s.233(1) should be left to the inquiry. There would have been no question of either party concealing part of its case from the other and in particular Kohler would have approached the proceedings in full knowledge of all points being taken against it.
It seems to me that just as Warren J felt he had a discretion to allow defences to be raised for the first time at an inquiry (or so I infer from his judgment) and that such discretion should be exercised by reference to policy considerations, I should approach Bristan’s application to rely on s.233(1) in the same way. In my judgment Bristan is not entitled to rely on that subsection for the reasons of policy I have referred to. These are not outweighed by other considerations.
Whether there is a good defence under s.233(1)
In case I am wrong in the exercise of that discretion, I turn to consider whether Bristan has established a defence under s.233(1). Bristan must show that at the time of the infringement either
it did not know, or
it had no reason to believe
that design right subsisted in the four relevant designs.
Bristan understandably focussed on the second limb, no reason to believe, since both have to be satisfied for the defence to apply. The test of knowledge and having reason to believe appear in the positive sense (as opposed to having no knowledge or reason to believe) in the context of secondary infringement in ss.22, 23, 24 and 26 of the 1988 Act. In L.A. Gear Inc v Hi-Tec Sports plc[1992] FSR 121 Morritt J said (at p.129):
“…it seems to me that ‘reason to believe’ must involve the concept of knowledge of facts from which a reasonable man would arrive at the relevant belief. Facts from which a reasonable man might suspect the relevant conclusion would not be enough. Moreover, as it seems to me, the phrase does connote the allowance of a period of time to enable the reasonable man to evaluate those facts so as to convert the facts into a reasonable belief.”
This was approved by the Court of Appeal (same citation) at page 139 (per Nourse LJ, with whom Staughton LJ and Sir Michael Kerr agreed). The same passage in Morritt J’s judgment was considered by Mann J in Nouveau Fabrics Limited v Voyage Decoration Limited [2004] EWHC 895 (Ch). Mann J made the following observations at [47], although they are mainly directed to the position following a complaint by the claimant:
“Accordingly, ‘reason to believe’ requires more than ‘reason to suspect’, and it requires an evaluation of all factors known to the defendant in order to see whether he fulfils the test. He does not have to accept a claimant's assertions at face value, but he cannot ignore them either. Having been made aware of the claim of copyright and copying, he has to evaluate it. What start as grounds for suspicion have to harden into grounds for belief, whether or not the defendant actually believes it. His evaluation will, in many cases (and certainly in the present) have to include making reasonable inquiries, and the answer to the question of whether he has reason to believe will have to take the result of those inquiries into account.”
The crux of Mr Cuddigan’s argument for Bristan was that s.233(1) imposed an obligation on the owner of the design right. Two obligations in fact. The first was to communicate to the world sufficient information to provide a basis for a belief that design right subsists in the design in question. If that is not done, the owner may provide that basis for belief to a party by means of a letter before action and here the second, related, obligation arises: the letter before action must provide sufficient information such that the defendant is given the necessary basis for belief.
The initial hypothesis must be that the potential defendant becomes aware of the design in question. Although Mr Cuddigan did not put his argument quite this way, I think his starting point is the simplest case, where the defendant will know nothing at all about the design embodied in the article. In that simplest case, a reasonable man in the shoes of the defendant would have no knowledge whatever from which to arrive at a belief either that design right subsists or that it does not. Therefore, Bristan argues as I understand it, s.233(1) would afford a defence because the reasonable man cannot be aware of any facts from which he could reach the belief that design right subsists. This is the default position. To move from there to a position in which the defendant becomes aware of facts from which a reasonable man would conclude that design right subsists, so that the defence under s.233(1) ceases to apply, requires the communication of sufficient relevant facts to the defendant.
One difficulty with this reading of s.233(1) is that it would impose a wholly unreasonable burden on all owners of UDRs. Unless articles are labelled with a notice that design right subsists, the owner is at risk of being deprived of damages for infringement because there may be no other information from which potential infringers could reasonably infer the subsistence of design right.
I think the fallacy of the argument lies in the suggestion that in the normal course a defendant who comes across an article will have no reason to believe that design right subsists. In the context of an industrial article, that will generally not be the case. If the defendant picks up a stone from a beach, plainly a reasonable man in his position would have no reason to believe that design right subsists in its design. By contrast, he is likely to have good reason to suppose that design right subsists in an industrial article. He is deemed familiar with the law relating to UDRs, otherwise he could never reach any concluded view as to the subsistence of design right. Also, part of his reasonable make up is the knowledge that industrial articles are commonly protected by UDRs. He is not an innocent abroad. Of course each case will depend on its facts. For instance, it may be that a design is apparently so old that absent information to suggest the contrary, the reasonable man would have no reason to believe that design right still subsists in the design. Alternatively, a defendant might make sufficient enquiries from which the reasonable man would conclude that design right does not subsist. In grey areas, by which I mean where the circumstances are such that a reasonable man could entertain doubts either way about whether design right subsists, it is to be recalled that the test is whether he has no reason to believe. The evidential burden in each case will also depend on the facts.
I turn to the facts of this case. Bristan’s evidence was thin. The only witness put forward was Jason Smith, a director of Bristan. He said that Bristan knew about the law in relation to UDRs but Bristan did not know that design right subsisted in the designs embodied in Kohler’s electric showers. In cross-examination it became apparent that his knowledge of the law was hazy. He was aware that Bristan was running an ‘innocence’ defence but took this to mean that Bristan were not aware that it was infringing the design rights relied on. He had not discussed this defence with the designers of Bristan’s infringing showers, but was very clear that he had been told by them that they had not copied Kohler’s design (contrary to what the judge subsequently found). This reinforces the impression that Mr Smith had not addressed the issue arising under s.233(1) and therefore could say nothing useful about Bristan’s state of mind.
In the end, Bristan’s argument under s.233(1) came down to Kohler having a US parent: Kohler Inc. It was argued that the reasonable man would therefore think that creator of the designs might be a US citizen, so design right may not subsist in those designs.
In my view this comes nowhere close to establishing a defence under s.233(1).
First head of damages – lost profits from lost sales
From 2010 to 2013 inclusive Bristan sold 63,204 infringing showers. Under this first head the questions are: (a) what extra sales would Kohler have made had those 63,204 showers not been on the market and (b) what profit would Kohler have made from those extra sales?
Kohler sells electric showers at different prices. For present purposes it is enough to identify two price bands. The upper band contains the Azora, Galena and Alero showers. They were collectively referred to as “the Mira Originals”. These embody the infringed UDRs and are sold by Kohler at around £200. Kohler’s lower band showers are the Go, Vie and Zest which sell at around £53 to £86.
Bristan’s infringing showers are the Glee, Joy and Smile models. Judge Birss found they share sufficient similarities with the designs of the Mira Originals to infringe. But they sell in the lower price range, at a price a little higher than the Go, Vie and Zest. It was not suggested that Kohler’s competitors in that price range (Go, Vie and Zest) are visually similar.
Kohler realistically recognised that because of the price difference between the infringing showers and the Mira Originals, it could not infer that the absence of infringing showers from the market would have led to equivalent sales of Mira Originals. So Kohler’s approach under this head was to reason as follows:
• If the infringing showers had not been available, some customers would have still wanted a similar design and would have bought a Mira Original. Others would have gone for one of Kohler’s showers in a similar price band to the infringing showers, i.e. one of the Go, Vie or Zest.
• It was not possible to tell how the split between sales of Mira Originals on the one hand and Go, Vie or Zest on the other would have worked out. The profit margin on the Mira Originals was significantly higher. Therefore Kohler would calculate its lost profits, in Bristan’s favour, as if the margin on the Mira Originals was the same as on the Go, Vie and Zest.
• Taking the shower market generally, i.e. all price bands, in the relevant period Kohler had 30% of the market. Therefore it was entitled to assume that had the 63,204 infringing Bristan showers not been available on the market, 30% of the sales would have gone to Kohler instead.
• Kohler’s loss was calculated at 30% of 63,204 sales multiplied by the average net profit on Kohler’s Go, Vie and Zest showers.
• This was subsequently modified when Bristan argued that the Go showers were sold through a trade channel, DIY outlets, which is different to that employed by Bristan’s infringing showers. These were exclusively sold through trade merchants. Kohler’s loss under this head was recalculated to be based on the average net profit from just the Vie and Zest showers.
Bristan argued that the only market in which Kohler competed with the infringing showers was in the market for sales of showers at less than £150 through trade merchants. In this market the Go, Vie and Zest models had an average of 13% of the market at the relevant time. Therefore assuming Kohler was entitled to any compensation for loss of profits, which was disputed, this was to be calculated by assuming that of the 63,204 customers for the infringing products, 13% would have bought a Go, Vie or Zest if the infringing products had not been available. (Kohler believed that Bristan had a further argument relating to the black version of the infringing Joy shower but if so, it was not pursued by Bristan and I have ignored it.)
Bristan also had a substantive argument on the law. It was not in dispute that Kohler’s Go, Vie and Zest showers did not embody any of the UDRs relied on by Kohler. Bristan argued that losses, if any, to Kohler consequent on reduced sales of these showers could never be claimed as damages for infringement of the UDRs. I will consider this argument on the law first.
Lost sales of products unprotected by the design rights infringed – the law
The starting point, as with all inquiries as to damages is the well known passage from the speech of Lord Blackburn in Livingstone v Rawyards Coal Co. (1880) 5 App.Cas., 25 in which he defined the appropriate measure of damages as (at 39):
“…that sum of money which will put the party who has been injured, or who has suffered, in the same position as he would have been in if he had not sustained the wrong for which he is now getting his compensation or reparation.”
Dating back at least as far as the early 18th century, the courts have considered the extent to which a claimant who has established liability in respect of a primary interest is entitled also to compensation for damage in respect of a secondary interest. I was principally referred to Gerber Garment Technology Inc v Lectra Systems Ltd[1997] RPC 443, which I think is sufficient for this case.
It is clear that it is possible to claim for damage to a secondary interest which is unprotected by the right which has been infringed. The most obvious example is the interest in what are sometimes referred to as ‘convoyed goods’. In the context of an intellectual property action, these are goods commonly sold either together with the product protected by the IP right, or as spare parts for the protected product, or are possibly goods sold after the IP right has expired. Gerber was a patent case in which the patent protected a machine for the automatic cutting of fabric. In addition to damages for loss of sales on the cutting machines, the plaintiff was awarded damages for (i) lost sales of computer aided design machines (CAD systems) used with the cutting machines, (ii) lost sales of spare parts, (iii) lost profits on servicing and (iv) springboard damages for the period after the expiry of the patent.
Staughton LJ (with whom Hobhouse and Hutchison LJJ agreed) rejected the submission that damages were limited to the profits that would have been made from activities covered by the patent (at 451):
“Mr. Hobbs submits that the damages which a patentee can recover from an infringer by way of loss of profits are limited to the profits that would have been earned in activities for which the patent provides a monopoly. In other words, any activities of the infringer that do not in themselves constitute infringements cannot form part of a claim for lost profits. For the purpose of the present case, that submission would disqualify the claim in respect of the CAD systems. They could be sold by the infringers without infringing any right of the patentees; they are not within section 60(2) and (3); at most they are what are called convoyed goods (or “fellow travellers” as I would say), because they are commonly sold together with the patented product. The argument also extends to spare parts, servicing, and the springboard damages which relate to goods sold after the patent has expired.
There is no such limitation to be found in the Patents Act.”
Nor, I would add, is there any such limitation in the 1988 Act. Staughton LJ went on to consider where the limit of damages recoverable for a tort is to be found (at 452):
“Infringement of a patent is a statutory tort; and in the ordinary way one would expect the damages recoverable to be governed by the same rules as with many or most other torts. We were referred to Halsbury's Laws of England (4th edn) vol. 12 para 1128 and following, to establish the elementary rules (i) that the overriding principle is that the victim should be restored to the position he would have been in if no wrong had been done, and (2) that the victim can recover loss which was (i) foreseeable, (ii) caused by the wrong, and (iii) not excluded from recovery by public or social policy. The requirement of causation is sometimes confused with foreseeability, which is remoteness. The two are different - see Halsbury para 1141:
1141. Causation in tort. Subject to foreseeability and the principles of public policy it is prima facie necessary and sufficient for a plaintiff to prove that a defendant's wrongdoing was a cause and not necessarily the sole or dominant cause of his injuries, as a matter of physical consequences or common sense, but subsidiary principles associating foreseeability and causation have been evolved in certain categories of concurrent or intervening causes.
It is not enough that the loss would not have occurred but for the tort; the tort must (for present purposes at any rate) be, as a matter of common sense, a cause of the loss.”
Staughton LJ reviewed the cases on damages for infringement of an intellectual property right. He reached the following conclusion (at 455-6):
“Viewing the cases as a whole, I cannot find any rule of law which limits the damages for infringement in a patent case in such a way as to exclude the loss claimed by the patentees in the present case. In General Tire & Rubber Co. v. Firestone Tyre & Rubber Co. Ltd. [1976] R.P.C. 197 at page 214Lord Wilberforce approved a passage in the judgment of Fletcher Moulton L.J. in the Meters case which concluded:
“But I am not going to say a word which will tie down future judges and prevent them from exercising their judgment, as best they can in all the circumstances of the case, so as to arrive at that which the plaintiff has lost by reasons of the defendant doing certain acts wrongfully instead of either abstaining from doing them, or getting permission to do them rightfully.”
Beyond that the assessment of damages for infringement of a patent is in my judgment a question of fact. There is no dispute as to causation or remoteness in the present case; nor can I see any ground of policy for restricting the patentees' right to recover. It does not follow that, if customers were in the habit of purchasing a patented article at the patentee's supermarket, for example, he could claim against an infringer in respect of loss of profits on all the other items which the customers would buy in the supermarket but no longer bought. The limit there would be one of causation, or remoteness, or both. But the present appeal, in so far as it seeks to restrict the scope of recovery, should be dismissed.”
I draw the following principles from those passages:
(1) A claimant who has established infringement of his IP right may, in principle, claim compensation for damage in relation to goods and/or services not protected by the IP right.
(2) Such damage can be claimed if it is (a) foreseeable, (b) caused by the wrong with the defendant has been found to have committed and (c) is not excluded by public or social policy.
(3) In relation to causation, it is not enough that the loss would not have occurred but for the wrong committed. The wrong must, as a matter of common sense, be the cause of the loss.
Lost sales of products unprotected by the design rights infringed – this case
I think that Kohler probably lost some sales of showers because of Bristan’s sales of the infringing showers. The problem is that it is impossible to reach any kind of rational view as to how many, save that probably the number is low.
I take the view that Kohler’s approach to calculating lost profit disguises the very limited extent to which Kohler has been able to establish a likelihood of lost sales. Kohler implicitly acknowledges that the price differential between the Mira Originals and the infringing showers is such that it is impossible to say how many, or even if any, sales of Mira Originals would have been lost. Equally no real attempt has been made to establish the degree to which customers who bought an infringing shower would instead have bought a Go, Vie or Zest shower. Kohler’s recalculation, ignoring the profit margin on Go showers, implicitly accepts that few and possibly none of Bristan’s customers would have bought Go showers because of the difference in trade channels.
Essentially Kohler is assuming that to the extent that Bristan’s customers would not have opted for a Mira Original or Go shower, they would necessarily have been driven towards buying a Vie or Zest shower to make up the 30% market share enjoyed by Kohler.
I cannot accept that this has been established. It is possible, though unlikely. It is just as possible that 13% of Bristan’s custom, or less, or pretty much any other percentage, may have gone to Kohler. Mr Baker, marketing director of Kohler, gave evidence that in Kohler’s view sales were lost right across its range of shower units because of competition from Bristan. But there was nothing more precise than that. There was no evidence even to establish the extent to which Bristan’s customers would have regarded the Go, Vie and Zest showers as suitable alternatives. It is common ground that there were third parties competing for sales. It could be that one or more of those third parties had showers more likely to secure the sales, whether because of price, appearance, specification, trade channels or a combination of all four. I find no reasonable basis to assume that 30% of Bristan’s sales would have gone to Kohler or to fix on any other figure.
The losses claimed under the first head of damages are too speculative and too open to inaccuracy to provide a useful basis for calculating damages. The evidence is insufficient to enable me, even approaching the matter on a rough and ready basis, to arrive at an assessment of damages on the loss of profit basis (see Gerber at page 486).
I must therefore calculate the damages due to Kohler on the basis of a reasonable royalty to be charged on all 63,204 infringing sales.
Head 2 – reasonable royalty
It was common ground that there are no comparable licences from which a reasonable royalty can be inferred. I was directed to the very helpful review of authorities by Newey J in 32 Red plc v WHG (International) Limited[2013] EWHC 815 (Ch). These relate to matters which the court must take into account when assessing damages according to the ‘user principle’, i.e. by way of payment of a reasonable sum for the use of another’s property. For the purposes of these proceedings, I need only note the following:
The royalty is assessed on the assumption that both licensor and licensee are willing to negotiate a licence and would reach a deal. Nothing may be taken into account which is inconsistent with the premise of a deal being made and a royalty agreed (at [38]).
That said, it is relevant if the licensee had alternative opportunities to take a licence from elsewhere, even if such a licence would have been less attractive. It is to be assumed that such alternative possibilities would have been taken into account when negotiating the royalty (at [34]-[42]).
Mr Campbell, who appeared for Kohler, argued that in the hypothetical negotiations Bristan would have realised that a licence would provide the opportunity to sell showers of a design which, as Judge Birss found, was significant leap forward in the design of electric shower units when compared to the existing design corpus, of which most were dull white boxes (at [31]). The Mira Originals which embodied the new design were commercially successful. At the time Bristan had not yet entered the market for shower units, so it would have been prepared to pay a high price to gain access to the market using Kohler’s design.
I accept that the attractiveness of Kohler’s design would have been a factor in the mind of the hypothetical negotiator on behalf of Bristan. On the other hand, it was not established that Kohler’s designs were so uniquely appealing that there were no viable alternative licensors at all, not even any which owned designs a little less attractive.
Kohler also argued that it would have had no incentive to grant a licence and would therefore have driven a hard bargain. I do not accept this in the way it was put. Kohler must be assumed to have wanted to grant a licence. Of course it would seek the best deal possible, but then so would Bristan.
Kohler proposed a royalty of 7.5% of Bristan’s price to its customers.
Bristan argued that the figures show that it made a loss on the sales of the infringing showers. This was surprising because Bristan had conducted the apparently loss-making business in infringing products with some determination in the face of opposition from Kohler. Nevertheless Bristan argued that it would have known at the time of the hypothetical negotiations that it would make a loss on the proposed sales and therefore Bristan would have agreed only a low royalty. Bristan proposed 1% of its sales price as the correct figure. I turn to consider the evidence on Bristan’s profits.
The profit made by Bristan on the infringing sales
The evidence came from Kenneth Ellis who is finance director of Bristan. His figures were not significantly disputed (I return to this below) and I will summarise them by reference to the totals for all years of infringing sales, 2010 to 2013. The total value of sales was £3,353,348. The costs identified by Mr Ellis in relation to those sales were £3,703,646, so on that basis there was a total loss on infringing sales of £350,298.
The costs were broken down as follows:
(i) Material cost, freight & duty £2,234,730
(ii) Marketing & development £ 375,740
(iii) Warehouse & distribution £ 482,352
(iv) Selling & admin expense £ 610,823
In Hollister Inc v Medik Ostomy Supplies Ltd[2012] EWCA Civ 1419; [2013] FSR 24, the Court of Appeal was concerned with an account of profits for infringement of trade marks. One of the issues the Court had to deal with was whether the defendant was entitled to apportion part of the overheads that supported both the infringing business and other businesses carried on at the same premises as a deductable expense when calculating the profits made from the infringing business. The Court of Appeal ruled that the defendant was not so entitled unless it could show that the infringing business had increased the overheads, i.e. that they were higher than they would have been if the defendant had not conducted the infringing business.
The parties were agreed that if the same approach were taken in relation to Mr Ellis’s figures, the deductions for ‘warehousing & distribution’ and ‘selling & admin expense’ would be disallowed.
Bristan argued that Hollister was about an account of profits, so different considerations should apply. It was also submitted that in the real world businessmen would approach a profit and loss account in the way that Mr Ellis had done, not as the Court of Appeal did in Hollister, and the real world approach would have formed the background thinking on Bristan’s part in the hypothetical negotiations with Kohler.
I do not accept this. First, it makes no difference to the proper calculations of profits from an infringing business whether they are done in the context of an account of profits or an inquiry as to damages. Secondly, it must be assumed that the approach taken by the Court of Appeal in relation to which costs can be deducted in a calculation of net profits is the approach which is fairest and most appropriate. Moreover I am bound by what was said in Hollister. Bristan’s profits are therefore to be assessed without the deductions for warehousing and distribution or selling and administration.
Kohler criticised Mr Ellis’s figures for ‘marketing & development’ on the ground that the figures for 2010 and 2011 were £108,055 and £233,171 respectively, but plunged to £34,514 in 2012 although his figures also show that sales in 2012 went up significantly. I was invited to ignore this deduction. More generally, Mr Ellis was criticised for not having provided a sufficiently reasoned basis for any of his figures. I cannot accept these criticisms because they were not to Mr Ellis. For instance, it may be that Bristan chose to push its marketing effort for the infringing products in 2010 and 2011 but cut back in 2012 even though sales continued on an upward trend in that year.
I therefore calculate that Bristan made a net profit of £742,878 on its infringing sales. I believe that to be an average profit of 22.2% on its sales price.
The appropriate royalty
One way of assessing the royalty is by the ‘available profits’ method. The profits actually made by the defendant are calculated. It is then assumed that the parties would have accurately predicted this figure in advance and had it in mind when negotiating the licence. Available profits is a method commonly used for the settlement of royalties in a licence of right, see for example Cabot Safety Corp’s Patent [1992] RPC 39 (Aldous J settling the terms of a patent licence) and Sterling Fluid System Ltd [1999] RPC 775 (a licence for right for the use of copyright works). I think this approach is something of a fall-back in that the existence of comparable licences or other more compelling evidence may in many cases provide a more satisfactory basis for arriving at the correct figure for a royalty. But in the present case I think it is the best approach available. Bristan promoted ‘available profits’ as an appropriate way forward and Kohler did not resist it.
I have calculated the profits available to be 22.2% of Bristan’s sales price. The next question is how this should be split between Kohler and Bristan. In NIC Instruments Ltd[2005] RPC 1, Mr Peter Hayward, acting for the Comptroller, had to settle the terms of a licence of right in respect of design rights relating to a bomb disposal kit. He said this:
“[40] I now have to decide how to split that profit between the two sides. Mr Mitcheson urged me to adopt the 50:50 split which, he said, had been used in many patent licence of right cases and, for example, in Cabot. Mr Reed argued for 25:75, with the 75 per cent going to the licensee. This is an issue I have had to consider in previous cases such as E-UK Controls (at p.848) and Sterling Fluid System Ltd's Licence of Right (Copyright) Application [1999] R.P.C. 775(at p.789), and nothing Mr Mitcheson or Mr Reed have said on this occasion has persuaded me that the line I adopted in the previous cases is unsound. As I said in Sterling, whilst a 50:50 split may be appropriate in the very specialised field of pharmaceuticals, where manufacturing costs are very low compared to the massive research and development costs, I do not believe it is the sort of ratio that willing parties would agree in other fields. True it was also used in Cabot, but as Mr Reed observed, the point doesn't seem to have been argued in that case. In the present case, which is concerned with relatively routine mechanical components whose development costs are unlikely to have been very great, I am satisfied willing parties would have gone for Mr Reed’s 25:75 split or something pretty close to it.”
The designs hypothetically licensed in the present case are for mechanical components, as in NIC Instruments, but I do not think it would be accurate to describe them as routine mechanical components. In his judgment in the substantive proceedings Judge Birss made it clear that the designs for the Mira Original showers were something of a breakthrough in the industry and, as I have said, the hypothetical negotiating parties would have been aware of that. I think that this should be recognised by increasing the proportion of profits due to Kohler from 25% of those available to 30%. I calculate the royalty payable by Bristan to be 30% of the total 22.2% available profits on infringing sales, that is to say a royalty of 6.7% on its sales price of the infringing products.
Head 3 – additional advertising and promotional costs
Kohler claims about £60,000 for the expenses incurred in promoting its Zest shower unit to mitigate losses due to Bristan’s infringement. I can see that it might have been foreseeable that Kohler would seek to mitigate its losses in the face of infringing sales, but the likelihood of this was not explored in the evidence. I am left with no impression at all as to the quantum of extra promotion justifiable, assuming any was. If it is Kohler’s argument that it was entitled to spend as much as it liked to promote any products it liked (only the Zest shower was apparently favoured) and that this sum may now be claimed by way of damages, I reject that argument. On balance I make no award under this head.
Head 4 – an uplift of 10% having regard to the IP Enforcement Directive
Kohler relied on arts.3(2) and 13 of Directive 2004/48/EC on the enforcement of intellectual property rights, although attention was really focussed on art.13(1)(a) which reads:
“1. Member States shall ensure that the competent judicial authorities, on application of the injured party, order the infringer who knowingly, or with reasonable grounds to know, engaged in an infringing activity, to pay the rightholder damages appropriate to the actual prejudice suffered by him as a result of the infringement.
When the judicial authorities set the damages:
(a) they shall take into account all appropriate aspects, such as the negative economic consequences, including lost profits, which the injured party has suffered, any unfair profits made by the infringer and, in appropriate cases, elements other than economic factors, such as the moral prejudice caused to the rightholder by the infringement; …”
Mr Campbell argued that Kohler was entitled to a 10% uplift on the overall award for damage caused by moral prejudice. He admitted that 10% was a figure plucked from the air. He said the moral prejudice was the loss of exclusivity for a striking design. That seems to me to be an economic loss. The one thing which is clear about ‘moral prejudice’ is that it relates to something which is not an economic factor. I think it is likely to arise only in very particular circumstances and these are not those.
Interest
I will hear argument on interest when the form of order is settled.
Licence of right
The terms of a licence of right need to be settled but that lies with the Comptroller. I will say no more about it here save that it follows from the way damages have been calculated above that the cap on damages under s.239(1)(c) has no practical effect.
Conclusion
Damages due to Kohler for Bristan’s infringement of its UDRs shall be equivalent to a royalty payment at the rate of 6.7% of the price at which Bristan sold the infringing shower units to its customers. No damages are excluded pursuant to s.233(1).