Ifejika v Ifejika & Anor

This is an account of profits. It marks the end phase of a long dispute between Mr Victor Ifejika and his brother Mr Charles Ifejika. I hope they will not take objection to my referring to them by their first names in this judgment for obvious reasons of avoiding confusion and for brevity.

Victor brought proceedings against Charles for infringement of a UK registered design and infringement of UK unregistered design rights. All rights relied on by Victor concerned the design of a contact lens cleaning device. Two products were alleged to infringe, called the ‘Lenscare product’ and the ‘AMO product’. These were marketed by the Second Defendant (“Lens Care”).

In a judgment dated 23 November 2011 HH Judge Birss QC found that Charles was jointly entitled to have been registered as proprietor of the registered design and cancelled the registration. He ruled that some of the unregistered design rights relied on by Victor were infringed by sales on the part of Lens Care of both the AMO and Lenscare products. He also found that Charles was personally liable for the infringements of Lens Care.

Damages in relation to the Lenscare product were summarily assessed. The parties had agreed that in relation to that product the maximum damages could be was £35. Judge Birss pointed out that the infringing parts of the Lenscare product were by no means the whole of the article and made an apportionment taking into account the significance of the infringing part. He awarded damages of £10.

Judge Birss ordered an inquiry (or alternatively, by implication, an account) in relation to the sales of the AMO product, noting (at [192]) that the parties’ position on likely damages ranged from £25,000 (Charles) to £½ million (Victor). He made three observations. First, that fewer aspects of the AMO product infringed Victor’s unregistered design rights than was the case in relation to the Lenscare product and that this would influence the apportionment to be conducted when assessing damages (or profits). Secondly, a licence of right was available under the unregistered design rights from 2003 to 2007 (specifically 1 January 2003 to 31 December 2007). Thirdly, what Judge Birss referred to as the ‘hinge aspect’ of the unregistered design rights expired in 2002.

The design rights relied on by Victor were in the design of what was called the ‘Hot House prototype’ lens care product. Before Judge Birss Victor identified 10 features of the Hot House prototype in which he said design right subsisted. The first of these related to the body of the lens holder, or case, and was divided into 3 aspects. So there were 12 design features relied on in total. Judge Birss found that design right subsisted in 8 of them. He found that the Lenscare product infringed 5. The AMO device infringed just 2, namely what were called the ‘hinge arrangement’ (or aspect) and the ‘undercut’.

As the Judge anticipated, the hinge aspect fell away for the purposes of this account because there were no sales by Lens Care after design right in that feature had expired. So this inquiry was solely about Lens Care’s profits derived from the infringement of one design right: that subsisting in the undercut aspect the AMO product.

Victor and Charles appeared on their own respective behalves as litigants in person, with Charles also representing Lens Care. Although the arguments on both sides were still in a state of evolution during the trial, the submissions from Victor and Charles were in both cases well delivered.

Charles’s calculation of Lens Care’s profits made from sales of the ADO product evolved between his first and second witness statement. I do not think that there was a deliberate attempt on Charles’s part to submit misleading calculations. The changes were prompted largely by objections from Victor which Charles accepted.

By the time of the trial the starting point in the debate was the calculations in Charles’s second witness statement. These identified a total sales figure of about 350,000 units, i.e. lens care products containing the infringing undercut feature. This figure was not accepted by Victor.

On 6 December 2013 I had ordered, among other things, disclosure of documents evidencing the number of AMO products purchased and sold by the defendants. Following such disclosure Victor remained unsatisfied that he had received sufficient documentation to establish the correct figure for sales. On 26 March 2014 I ordered disclosure of invoices from the company in York which had supplied Lens Care with AMO products, McKechnie Plastic Components Limited (“McKechnie”), for certain periods between 2003 and 2006 in respect of which the invoices had been missing thus far. I was told at the trial that Charles had not retained these.

In the end, at the hearing of the account Victor mounted his objection to the figure of 350,000 sales not by reference to the McKechnie invoices, but using figures taken from Lens Care’s VAT returns and from a single purchase order from Lens Care to McKechnie from May 2004 (“the May 2004 Purchase Order”).

During the trial Victor handed up to me a summary of sales and purchases of AMO products derived from Lens Care’s VAT returns for the relevant period. (I understood at the time that this summary had been prepared by Victor. After the parties had received a draft of this judgment, in an email dated 29 July 2014 Victor stated that the summary was prepared by Charles and that it had been emailed to Victor on 16 June 2014, i.e. the day before the trial. I did not invite Charles to comment because the summary was not challenged by Charles at trial and therefore I am entitled to treat it as an agreed document). The summary stated that Lens Care had purchased AMO products from McKechnie to a total value of £1,142,670. The purchases were broken down into three monthly periods from the quarter ending February 2003 to the quarter ending November 2005.

Victor referred to Charles’s second witness statement in which Charles stated that the total gross profits made from AMO sales were (about) £425,000 and that the gross profits constituted 49.2% of sales. This implied total sales of about £863,000. Victor pointed out that this was not consistent with purchases from McKechnie valued at about £1,143,000 for a business in AMO products which, by common consent, was profitable. This assumed, of course, that all the AMO products purchased from McKechnie, as recorded in the VAT returns, were products in relation to which Lens Care infringed Victor’s UK design rights. Charles did not dispute that the products purchased from McKechnie all became infringing products (and, as will be seen, Charles accepted that his figure of 350,000 sales was too low). Victor stated that these figures showed that sales of AMO products by Lens Care had been underestimated by about 25%.

Before continuing with Victor’s argument, I should say something about the financial arrangement between Lens Care and McKechnie. It was common ground that the cost of the tool used by McKechnie to make the products was paid for by Lens Care by way of amortising its cost over the purchase price of initial batches of products sold to Lens Care. McKechnie charged Lens Care £2.50 per unit in these initial batches, which included an amortising charge of 50p. Once the amortisation had been exhausted the products were sold without the charge, i.e. at £2.00 per unit.

Charles’s evidence was that Lens Care sold the AMO products for £3.80 per unit, which implied an initial gross profit of £1.30 per unit, rising to £1.80 once amortisation was over. Charles separately stated that the profit margins were £1.23 and £1.73 respectively, by a relatively complex calculation based on the costs and profits of individual parts of the product. I accept Victor’s more straightforward approach which gives the gross profit margins of £1.30 and £1.80.

In a Reply dated 22 January 2014 from Charles to a Request from Victor, Charles said that 314,417 units purchased from McKechnie carried the 50p amortisation charge or ‘tooling charge’. At £2.50 per unit, this would amount to products with a total purchase value of £786,042.50.

In Charles’s second witness statement of 6 May 2014 he said that the amortisation charge had been borne by only 260,000 units, implying a total purchase price of £650,000 for these initial batches. Charles’s evidence was thus inconsistent regarding the purchases carrying the tooling charge.

Some light on this was shed by the May 2004 Purchase Order. Victor submitted that it identified when the switchover to purchases without the tooling charge happened. In the period covered by the May 2004 Purchase Order 11,165 units were purchased from McKechnie which carried the tooling charge, out of a total of 49,560. It followed that 38,395 sales did not carry the charge in that period. This makes sense, except that it is not clear from the face of the May 2004 Purchase Order which period it refers to. It cannot be the three months ending May 2004 because the Order records deliveries up to 10 May 2004. Also, the total purchase price stated, £133,739.25, does not tally with the figure of £275,780 given in Victor’s summary taken from Lens Care’s VAT returns for the quarter ending May 2004.

I think all I can draw from the May 2004 Purchase Order is that the changeover to payment to McKechnie without the amortisation charge happened in about May 2004.

I also note that on the face of the May 2004 Purchase Order apparently none of the deliveries in the period concerned were in the UK. The correspondence between purchases of AMO products by Lens Care from McKechnie in York and infringement of UK unregistered design right by Lens Care was not explored in the judgment of Judge Birss and was not raised before me by either Victor or Charles. So I can take this no further.

Victor argued that the May 2004 Purchase Order corroborated the summary taken from the VAT returns. I am unable to accept that. It is not possible to tally the figures on the Order with those in the summary in a way that one set of figures supports the other.

However I can take matters this far: on the (unchallenged) summary figures taken from VAT returns, it appears that in the quarters up to February 2004 Lens Care paid McKechnie £425,595. During this period all units carried the 50p amortisation charge, so this corresponds to purchases of about 170,000 units. In the period from the quarter ending November 2004 to that ending November 2005 purchases of £441,295 were made, none of them with the tooling charge. This is odd because sales are said to have been at £2.00 per unit and the total is not an even number. The explanation may be that the price charged by McKechnie was close to, but not exactly £2.00. Anyway, I will assume that £441,295 corresponds to purchases of about 220,000 units. To both figures for units of AMO products purchased should be added the relevant units purchased during the ‘switchover’ quarter ending May 2004. The summary indicates that in this quarter there were purchases to a total value of £275,780. On a rough and ready basis I will assume that the sales were split evenly between those which carried the tooling charge and those which did not. On this assumption (a) they had an average price of £2.25 and (b) 122,000 units were purchased, which I will round down to 120,000 units.

That makes a total of about 510,000 AMO products purchased by Lens Care from McKechnie. 230,000 bore the tooling charge and 280,000 did not.

I return to the submissions of the parties with regard to how many sales of infringing AMO products by Lens Care there were. As I have mentioned, at the trial Charles conceded that his figure of 350,000 was too low and adopted Victor’s first suggestion that it should increased by 25%. That would give a figure of 437,500. Victor’s calculation came to 691,920 units in his skeleton argument, though the basis of the calculation was not clearly stated. At the trial before me, using the summary taken from Lens Care’s VAT returns and calculating from that summary the figures for AMO products purchased by Lens Care from McKechnie, then rounding up some places, Victor came to a total of 565,000 infringing AMO products sold by Lens Care.

Both Victor’s and Charles’s approaches to the total number of infringing units sold are highly approximate, and the summary taken from Lens Care’s VAT returns and the May 2004 Purchase Order are not obviously consistent.

As I have said, my broad brush estimate puts the figure at 510,000. I will adopt that figure and find that this is the number of AMO products sold by Lens Care incorporating the undercut feature which infringed Victor’s UK unregistered design right.

I also find, for the reasons given above, that of the 510,000 purchased from McKechnie, 230,000 carried the tooling charge and 280,000 were purchased without the charge. This means that the gross profit was £(230,000 x 1.30) + (280,000 x 1.80) = £803,000 gross profit.

The only deductable cost claimed by Charles was £12,350 for additional packaging costs. I allow this to give a total net profit of £790,650, which I will round down to £790,000.

I now turn to the proportion of that profit which might be said to be attributable to the undercut feature. In assessing this I am again obliged to adopt a broad brush approach.

Charles pointed out that the undercut feature is physically a very modest part of the totality of the lens case and suggested that the correct proportion of net profits to be attributed to this feature was 1%. Victor described the undercut feature as being the “central hub” of the design of the lens case and rejected the 1% figure without suggesting an alternative.

I accept Victor’s implied submission that it is not appropriate to assess the proportion of profits to be attributed to the undercut feature solely by its physical proportion to the whole, which is in any event hard to gauge. Its functional importance is relevant. But I am not in a position to assess in detail whether it is, as Victor submitted, a key functional feature or whether, as Charles submitted, it plays a marginal role.

I have come to the view that the figure of 2% of net profits is about right on the basis that I doubt that the undercut feature is quite as insignificant as Charles suggests, but as best as I can judge, more than doubling Charles’s figure of 1% would be going too far in allotting importance to the feature. That means that the relevant profit made by Charles from the sale of the infringing AMO products was 2% of £790,000, which is £15,800.

Judge Birss referred to the fact that during the sales of the infringing products licences of right were available pursuant to s.237 of the Copyright, Designs and Patents Act 1988 (“the Act”). This matters only if Charles has undertaken to take a licence on such terms as may be settled by the Comptroller. In that event, pursuant to s.239(1)(c) of the Act the amount recoverable by Victor in this account shall not exceed double the amount which would have been payable by him as a licensee if a licence on the terms settled by the Comptroller had been granted before the earliest infringement.

There was some doubt as to whether Charles had, in fact, undertaken to take a licence. Pursuant to s.239(2) he may do so at any time before final order in the proceedings. I interpret that to mean that if he has not already done so, Charles could still give the undertaking and I will treat these proceedings as if he has.

However in my judgment it makes no difference. I do not think there is realistic prospect that the Comptroller would settle a licence at less than 1% of the net profits made from the sales of AMO products.

Charles shall pay Victor the sum of £15,800.