It is rare for an English court to be asked to determine an account of profits in an IP infringement action. The recent case of Hollister Inc v Medik Ostomy Supplies Ltd provides a useful reminder of the benefits of an account of profits over a claim for damages in cases where there has been a technical infringement, but it is difficult for the rights holder to prove losses.
Account of profits
A successful claimant in an IP infringement action is entitled to an inquiry as to damages as a matter of right, but may instead seek an account of the defendant's profits. Unlike damages, an account of profits is an equitable remedy and is granted at the court's discretion. If an infringer is found to have had no knowledge of the rights holder's intellectual property, an account will generally be refused.
The purpose of an account of profits is not to punish the infringer, but to prevent the infringer's unjust enrichment by its use of the rights holder's intellectual property. One of the benefits of an account of profits - if it is available - is that the rights holder is not required to prove the extent of its losses, as in the case of damages. Therefore, an account can be a particularly effective remedy where proving losses is difficult.
The principles governing an account of profits are as follows:
- The total profit made through the infringing acts must be identified and fixed, with centrally incurred overheads being deducted.
- Profits not resulting from the infringement must be excluded.
- It is no answer to an account that the infringer could have made the same profit by following an alternative, non-infringing course.
Parallel imports and repackaging
It is well established under EU law on the free movement of goods that importing pharmaceutical products from elsewhere in the European Union and selling them in the United Kingdom is lawful, provided that certain conditions are met. One such condition is that the trademark owner be given notice before repackaged or relabelled products are sold. This allows the rights holder to check the repackaging before the product goes on sale. One of the purposes of this requirement is to give the rights holder a better chance of protecting itself against counterfeiting.
To the extent that a parallel importer has not provided adequate notice, and in addition to following the general principles governing an account of profits, the court must consider the extent of damage caused when assessing the level of financial remedy to be paid.
Hollister owned various trademarks, including HOLLISTER and DANSAC, registered for surgical products. Medik was a parallel importer of surgical products, including relabelled and repackaged Hollister and Dansac products. Hollister sued Medik for trademark infringement, as Medik had failed to provide adequate notice. Medik admitted infringement and Hollister subsequently opted for an account of profits.
On the issue of the account of profits, Hollister argued that it was entitled to the gross profits derived from the infringement, which were over £500,000. Medik argued that the sum should be a token amount, given that the infringements were due solely to its failure to give adequate notice, and that Hollister had therefore suffered no damage as a result. In the alternative, Medik argued that the relevant profit figure to be assessed should be the net profit made by Medik (ie, the gross profit, less properly attributable costs).
The judge stated as follows:
- A proper proportion of fixed, centrally incurred overhead costs must be deducted when calculating total profits.
- The purpose of the apportionment of costs is to try to arrive at a fair figure for the costs that should properly be regarded as relevant to a product or activity - in this case, the parallel importing and repackaging of products. The judge decided to apportion these costs by units sold.
- The judge recognised that Hollister had not suffered relevant damage (ie, damage relating to the purposes for which the notice provision was provided). For example, Hollister's anti-counterfeiting campaign had not been affected as a result of the failure to provide notice.
- The judge stated that the financial remedy could not be a token sum, as it needed to be an effective and sufficient deterrent to ensure that parallel traders gave appropriate notice.
- In reaching his decision, the judge took account of all relevant factors, including the fact that Hollister knew about Medik's activities.
The judge awarded Hollister half of Medik's profits.
This case demonstrates how effective an account of profits can be - the judge found that Hollister was entitled to half of Medik's profits, even though Hollister had not suffered relevant damage. However, if a successful claimant can prove actual losses (eg, as a result of diverted sales caused by the infringement), a damages inquiry will often be the preferred option, not least because of the greater uncertainty as to what may be recoverable in an account of profits.