Stretchline Intellectual Properties Ltd v H & M Hennes & Mauritz UK Ltd

Following my judgment on liability for breach of contract in this action, the Claimant, (“Stretchline”), applies for an injunction to prevent further breaches of the Settlement Agreement and also for Island Records disclosure to enable it to elect between an account of profits and a damages inquiry.

The Defendant (“H&M”) claims that it is inappropriate to grant an injunction in the circumstances of this case and furthermore, given that this is an action for breach of contract, submits I would need to find exceptional circumstances in order to consider ordering an account of profits. H&M submits that no such exceptional circumstances exist, and therefore, no question of an election arises.

The starting point is that this is an action for breach of a settlement agreement and the remedies that I am considering are remedies for breach of contract. The action was originally commenced claiming breach of contract and infringement of patent. Following a judgment of the Court of Appeal, the action for infringement of patent was discontinued. It is relevant to consider the reasoning of the Court of Appeal judgment which led to this discontinuance.

In Stretchline Intellectual Properties Ltd v H & M Hennes & Mauritz UK Ltd [2015] EWCA Civ 516 Kitchin LJ said at [38]-[39]

“38 There can be no doubt that Stretchline has, by entering into the settlement agreement, compromised the earlier proceedings, accepted the settlement sum in full and final settlement of its claims in those proceedings and any other claim relating to the subject matter of that litigation, and agreed not to pursue further proceedings arising out of or relating to those proceedings. Accordingly if, after the date of the settlement agreement, H&M had continued selling the very same products the subject of those proceedings, Stretchline could only have sued it for breach of the agreement, and I understood Mr Caddick to have accepted that was so. But the terms to which I have referred and the general structure of the agreement make clear that its scope extends a good deal further and reflects the intention of the parties that henceforth any dealings by H&M in products falling within the scope of the Patent and its equivalents in other jurisdictions should be regulated by the agreement and not by resort in all of those jurisdictions to claims for infringement, which claims would no doubt be met with defences of invalidity and counterclaims for revocation. Such an array of claims and counterclaims is precisely what the parties intended to avoid by entering into this agreement.

39 For all of these reasons I would therefore hold that the present proceedings do relate to or arise out of the original claims and that Stretchline is precluded by the settlement agreement from pursuing its claim for infringement of the Patent in parallel with its claim for breach of contract.”

The reasoning of the Court of Appeal was that because Stretchline had chosen to settle its claims for infringement of patent, it had elected to pursue contractual rights against H&M in respect of future infringement. It has therefore substitutes contractual remedies for the remedies that would have been available in an action for infringement of patent.

Turning now to the question of injunctive relief, Mr. Caddick QC, who appears for Stretchline, referred me to the judgment of Daniel Alexander QC sitting as a Deputy Judge of the High Court in Cantor Gaming Ltd v GameAccount Global Ltd [2008] F.S.R. 4. Mr. Alexander said:

“101 It is normal for an injunction to be granted in a case involving infringement of intellectual property rights, once it has been established that there has been infringement and the infringement has not completely ceased at the time of trial. Part of the reason that an injunction will normally be granted in such a case is that, at trial, there often remains a dispute as to whether the defendant is or is not entitled to undertake the acts of which complaint is made. The defendant is usually maintaining that it does have the right to do so and may expressly or implicitly be threatening to do so.

102 The approach in copyright cases was set out by the Master of the Rolls, Lord Woolf, giving the judgment of the Court of Appeal in Phonographic Performance Ltd v Saibal Maitra [1998] F.S.R 749 at 771:

“… when a person establishes infringement of copyright and a threat to continue infringement, an injunction will in the ordinary case be granted without restriction. … But the court, when granting an injunction, is still required to exercise a discretion and in so doing there could be circumstances where restriction or refusal of an injunction would be warranted.”

103 A similar approach was taken by the Court of Appeal in the patent case Coflexip SA v Stolt Comex Seaway MS Ltd [2001] R.P.C. 9, where Aldous L.J. said at [6] and [7]:

“… whenever a court at the end of a trial grants permanent injunctive relief, the purpose should be to give effect to its judgment on liability … The injunction granted should protect the plaintiff from a continuation of the infringements of his rights by the threatened activities of the defendant. But the injunction must also be fair to the defendant.” 

“…. Normally, when a defendant has infringed, the court will assume it is not a one-off activity and will grant an injunction to stop repetition. This course is not inevitable. In a few cases courts have concluded that even though infringement has occurred, no future threat exists. In such cases, injunctive relief has been refused …”

104 The same principles must surely apply where a person establishes that there has been a breach of contract which prohibits an act akin to infringement of an intellectual property right.”

I respectfully agree with Mr. Alexander that, in a case where a party has settled litigation by promising not to infringe an intellectual property right, a claimant should have no more difficulty in obtaining an injunction where that party has broken its word, than in a case where no settlement has been reached and the court has found infringement of patent. Therefore I intend to apply the same principles to the grant of injunctive relief that I would apply had this been a successful action for infringement of patent.

Stretchline cites the principle in Terrell on the Law of Patents (17^th ed. 2011), at 19-03 that “the fact that [a Defendant] has been guilty of an infringement of the patent rights will, in most circumstances, be sufficient evidence that he intends to continue his infringement (…)”. Terrell goes on to say that an actual infringement of the patent is taken by the court to imply an intention to continue the infringement, notwithstanding any promises not to do so. It may, of course, be different if a person undertakes before proceedings are commenced not to infringe. The principles are well known.

However, it is an equally well established principle that injunctive relief is a discretionary remedy and the court must be satisfied that it is appropriate in all the circumstances. In particular, it is inappropriate to grant an injunction if the court is satisfied that it is unnecessary for a preventive purpose. The principle was set out as long ago as 1889 by Cotton LJ in Proctor v Bayley (1889) 42 Ch. D. 390 who said as follows:

"It does not follow that because a man has done a wrongful act an injunction will be granted against him, though he is liable to damages for the wrong. The Court of Chancery said, 'Where a man threatens and intends to do a wrongful act, we will, before it is done, grant an injunction to prevent his doing it, and we will grant it where the act has been done and is likely to be repeated' - the jurisdiction is simply preventive."

There are a number of examples of cases since Proctor v Bayley where a court has declined to grant an injunction in respect of an intellectual property right which has been infringed because, on the evidence, it has concluded that the infringements are historic.

Terrell summarises the principle at paragraph 19-02:

"The basis of an injunction is the threat, actual or implied, on the part of the defendant that he is about to do an act which is in violation of the claimant's right; so that not only must it be clear that the claimant has rights, but also that the defendant has done something which induces the court to believe that he is about to infringe those rights."

Aldous LJ stated in Coflexip SA v Stolt Comex Seaway MS Ltd [2001] R.P.C. 9:

"[It] will not happen as a matter of course as an injunction is a discretionary remedy. It is for that reason that there have been cases where injunctions have been refused, for example, where the defendant satisfied the court that further infringement was not likely."

I will now consider the evidence to determine whether I am satisfied that further infringement is not likely.

The evidence that I must consider is contained in the witness statement of Ms. Rydell on behalf of H&M. In summary, Ms. Rydell considers not just the twelve infringing items that, by way of example, were the subject of the claim, but, according to her, other similar infringements amounting to about 51,000 garments. I am not entirely clear whether that is confined to the United Kingdom or not. The relevance of that I will come to in a moment.

However, in respect of the twelve infringing items, she makes clear that they were all supplied to H&M over two and a half years ago. The last infringing item identified in an H&M store was in March 2014, almost two years ago. If one considers the detail of the twelve infringing items, seven were purchased in September 2012, two were purchased in June 2013, two were purchased in August 2013 and one was purchased in March 2014. Therefore, it will be seen that, in so far as there have been infringements, those which have been discovered have grown less and less over the years.

I found in my judgment on liability that garments supplied by two Turkish suppliers, Rimteks and Devsel, contained fusible yarn above the low volume limit permitted by the Settlement Agreement. The supply by Rimteks and Devsel occurred on or before November 2012, according to Ms. Rydell. Since that date H&M has refused to purchase from those suppliers without their confirmation that no fusible yarn was being used. In any event, it has subsequently ceased to source any undergarments from Turkey. Devsel and Rimteks therefore are no longer suppliers of H&M's garments.

Since November 2012, the only fusible yarn that has been identified in H&M's products was in the products supplied by a Chinese supplier known as Takefast. That infringing garment was identified in March 2014, since when no further infringing items have been identified.

H&M's solicitors recently wrote to Stretchline's solicitors asking, amongst other things, for details of any tests on garments which Stretchline had undertaken since March 2014. That request was not answered. I would be very surprised if Stretchline had not undertaken further sample purchases and further tests since March 2014 on H&M garments to see if they infringed, given that each side has spent well over £1 million on this litigation and therefore it was very much in Stretchline's interests to identify further infringements.

The infringing garments had been supplied to H&M before August 2013. They found their way into the shops by way of stock being sold off. Hence the sale in March 2014. In August 2013, H&M obtained from all suppliers, including Takefast, signed certificates affirming that they would not use fusible yarn in garments supplied to H&M.

Furthermore, Ms. Rydell states that on 19 November 2015, after receiving the Court's judgment, H&M issued a further notice to all its stores instructing them to search for and remove any remaining stock of the items that the court has found to be infringing. No further stock was found.

Ms. Rydell also gives evidence that a further notice has been sent out to suppliers since the judgment, reminding them of the obligation not to use fusible yarn in any brassieres to be supplied to H&M. The evidence in support of that was an e-mail, the text of which was unclear, dated from 2011. This did not satisfy me that H&M was making all possible efforts, since the judgment, to comply. However, Mr. Green QC, who appeared on behalf of H&M in relation to this matter, has obtained and given appropriate undertakings that a further letter will be sent and will be disclosed to Stretchline and those suppliers to whom it is sent will be identified.

In all the circumstances, I am satisfied that the infringements complained of are historic and are unlikely to occur again. If they do occur again, contrary to Ms. Rydell's expectation, then there is nothing to prevent Stretchline from returning to court to seek an injunction and I would imagine that if there is a repetition the court's attitude will be rather different to the question of an injunction from my conclusion in this judgment.

I should also emphasise that the fact that I am declining to grant an injunction does not mean that the breaches of contract that I have found are not serious. I think they are serious. There has been more than one breach since the Settlement Agreement was entered into and it would be most regrettable if any further breach occurs again. I am satisfied on the evidence that this is most unlikely.

In addition, were I to grant an injunction, I would be very concerned about the effect of that injunction on H&M. As the vendors of these garments, H&M can only do so much to check that they do not infringe, which I believe that they are doing, for the reasons that I have set out. If I were to grant an injunction, and an accidental infringement occurred, then H&M would have to argue on contempt proceedings that no relief should be granted because such infringement was accidental. I believe that that would be disproportionate, given current information on the amount of infringements that have occurred and the measures which H&M has taken in order to prevent any recurrence.

Furthermore, I do not consider that this is a simple case where there is an undertaking not to infringe a patent. This can be seen from the terms of the Settlement Agreement. As well as the negative obligation not to supply/sell garments in infringement of various patents, the parties have agreed that any identified breach would trigger a mutual co-operation arrangement. In particular, clause 3.3 provides that if Stretchline discovers a product within a specified territory that it believes to be in violation of this agreement, Stretchline must promptly bring the matter to H&M's attention and H&M must investigate the issue and the parties must work together to resolve the situation to each other's satisfaction.

Mr. Caddick points out that this is without prejudice to Stretchline's rights. That is true. It does not prevent Stretchline, in the case of a breach, from suing in respect of that breach. However, if Stretchline sued in respect of a breach without following the procedure of clause 3.3, it would itself be in breach of contract. That obligation is mandatory.

Clause 3.3, in my view, sets out a mutually agreed remedy and procedure for the situation in which a potential breach is identified. It would be inconsistent with the agreed arrangement that the parties have reached for H&M to have an immediate right to bring contempt proceedings.

I should add that if another breach occurred, in spite of Ms. Rydell's evidence, I would not take this view. There must come a point when clause 3.3 can no longer prevent an injunction. I do not believe we have reached that point yet.

In addition, I accept Mr. Green's submission that a real problem would be created by the fact that H&M has undertaken to investigate and report any future alleged breach of the Settlement Agreement. If a permanent injunction was granted Clause 3.3 would require H&M to investigate and disclose its own allegedly criminal conduct in the context of contempt proceedings. Such investigation would require H&M to report any further similar breaches. Given the right against self-incrimination, the openness envisaged and required of H&M by clause 3.3 would be undermined by H&M's right not to incriminate itself or its officers.

For these reasons, I decline to grant the injunction. I should add that even if I had decided to grant an injunction, I would certainly not have granted the injunction in the form requested by Stretchline, which sought to extend the injunction beyond the United Kingdom and beyond the patent in respect of which I had decided that a breach of contract had occurred.

On an inquiry as to damages it may be open to Stretchline to plead that patents other than the patent which I have considered have been breached and that therefore, sales outside the United Kingdom were made in breach of contract. That will be a matter, if Stretchline decides to pursue that allegation, for the judge hearing any damages inquiry to decide.

However, I can say that for present purposes I am perfectly satisfied that there was no pleaded allegation of breach of, for example, EU Patent No. 0,802,269, German Parent No. DE 69700104 or indeed any other patent. I have not seen these patents and therefore it would be entirely inappropriate for me to grant an injunction at this stage in respect of alleged infringements which are now said to constitute additional breaches of the settlement agreement.

For those reasons I refuse to grant the injunction, based on the undertaking that Mr. Green has provided.

Turning then to the right to elect to seek an account of profits. Mr. Caddick is perfectly correct that the election between account of profits and inquiry as to damages is the normal order in patent infringement cases and that a limited amount of information is normally granted, often by way of a schedule, in order to enable the successful claimant to make an informed election. However, as pointed out earlier in this judgment, I am not dealing with a case of infringement of patent. I am dealing with a case of breach of contract.

The reason why this sort of election is standard in patent cases is because an account of profits is a statutory remedy for patent infringement under section 61(1)(d) of the Patents Act 1977, which does not, of course, apply to a contract case.

The availability of accounts of profits in respect of breaches of contract is set out in some detail by Lord Nicholls of Birkenhead in the well known case of Attorney-General v Blake [2001] 1 A.C. 268. In that case, it appears that, at the instigation of the House of Lords, the Attorney-General advanced an argument that restitutionary principles ought to operate to enable the Crown to recover from Mr. Blake, who was described by Lord Nicholls as a “notorious, self-confessed traitor”, profits arising from his breach of contract.

Lord Nicholls made clear that such a claim was possible in an exceptional case. He said at page 284A:

"The claim is for all the profits of Blake's book which the publisher has not yet paid him. This raises the question whether an account of profits can ever be given as a remedy for breach of contract. The researches of counsel have been unable to discover any case where the court has made such an order on a claim for breach of contract."

He went on to say at 284C:

"There is a light sprinkling of cases where courts have made orders having the same effect as an order for an account of profits, but the courts seem always to have attached a different label."

Lord Nicholls then said:

"My conclusion is that there seems to be no reason, in principle, why the court must in all circumstances rule out an account of profits as a remedy for breach of contract. I prefer to avoid the unhappy expression 'restitutionary damages'. Remedies are the law's response to a wrong (or, more precisely, to a cause of action). When, exceptionally, a just response to a breach of contract so requires, the court should be able to grant the discretionary remedy of requiring a defendant to account to the plaintiff for the benefits he has received from his breach of contract."

Lord Nicholls went on to say on page 285 at C:

"... in certain circumstances an account of profits is ordered in preference to an award of damages. Sometimes the injured party is given the choice: either compensatory damages or an account of the wrongdoer's profits. Breach of confidence is an instance of this. If confidential information is wrongfully divulged in breach of a non-disclosure agreement, it would be nothing short of sophistry to say that an account of profits may be ordered in respect of the equitable wrong but not in respect of the breach of contract which governs the relationship between the parties. With the established authorities going thus far, I consider it would be only a modest step for the law to recognise openly that, exceptionally, an account of profits may be the most appropriate remedy for breach of contract."

I do not understand that Lord Nicholls was saying in this passage that exceptional circumstances are satisfied merely by the fact that an undertaking is given not to infringe an intellectual property right.

This conclusion is illustrated by a number of cases including WWF World Wide Fund for Nature v World Wrestling Federation Entertainment Inc. [2002] F.S.R. 32 and Experience Hendrix LLC v PPX Enterprises Inc. and Anr [2003] EWCA Civ 323, where, to put the matter generally, owners of intellectual property rights who sued under a settlement agreement were not awarded an account of profits, because exceptional circumstances, which could justify such an award, did not exist.

In the present case I see nothing exceptional which would induce me to order an account of profits in respect of a successful claim for breach of contract and I decline to do so. Therefore the question of Island Records disclosure does not arise in the present case and I will not order it.