Background

This case was about how to calculate an account of profits (see below for an explanation of this term) following a judgment that the defendant had infringed the claimants’ patent. The patent was for a display panel used in shops made up of ‘slatted panel’ and ‘snap-in’ aluminium inserts. The inserts may be sold both pre-assembled into the panels or separately.

Account of Profits

An account of profits is a remedy available in the majority of intellectual property actions including patent infringement claims. It requires the defendant to pay the claimant profits it has made as a result of infringing the patent.

The Law

The judge considered two main issues:

1. Which profits were to be included in the account?

The court confirmed the principle set out in Celanese Int'l Corp. v. BP Chemicals Ltd that in an account of profits the court is trying to determine what profits have been caused by the defendant’s wrongful acts. However, where the inventive concept of the claimant’s product is only a small part of the infringing article, it is not always easy to decide the extent to which sales from such products should be included.

In this case Judge Hacon decided that the inventive concept did not include simply the inserts but was “the composite idea of an insert… having a particular shape and its interacting with the slot of the panel in a particular… snap-in means.” The inventive concept included the insert, the panel and the design & creation of the hole. The scope of the account of profits should therefore include sales of the defendants’ inserts as well as sales of the panels into which they were incorporated.

2. Which costs may be deducted from the gross profits?

The Court of Appeal's decision in Hollister Inc. v. Medik Ostomy Supplies Ltd established that a defendant may deduct direct costs and overheads from an account of profits. However, they may only allocate a proportion of general overheads to an infringing activity in certain circumstances.

Judge Hacon has clarified the meaning of the second element of this principle, stating that a proportion of general overheads may only be deducted from gross profits if:

  1. an overhead was increased only because of the acts of infringement (in which case the increase may be deducted); or
  2. the defendant was running to maximum capacity such that it displaced an alternative non-infringing business which would otherwise have been conducted. The apportioned overheads incurred by the infringing business may then be deducted.

He also confirmed that the evidential burden is on the defendant to establish that these circumstances apply

Decision

In this case the defendants did not attempt to show that any of their costs were solely attributable to the infringing business. They were all presented as proportions of general overheads. They were therefore required to show that either i) or ii) above applied.

Judge Hacon allowed the defendants to deduct the labour costs of cutting the holes for the inserts in the infringing products. This was because those costs were solely and directly associated with the defendants’ infringing activities.

However, the defendants were not permitted to deduct any other costs or overheads. This was because they were not able to establish a clear link between a particular cost and the infringing activity or that they were operating to maximum capacity.

Intent

Under section 62(1) of the Patents Act 1977, in proceedings for infringement of a patent, the court will not award damages or order an account of profits if a defendant proves that, at the date of the infringement, they were not aware (and had no reasonable grounds to believe) that the patent existed.

The defendants tried to rely on this section of the Act by arguing that:

  • the managing director had only heard of patents because he was a local historian. Others in the company may not have been aware of the concept of patents;
  • the defendants’ production director had drawn a snap-in insert of the type protected by the patent in question so there was no reason for the defendants to have believed that patent protection was available in relation to that product; and
  • when the claimant’s product came onto the market, the defendants were not interested in what their competitors were doing.

Judge Hacon decided that the defendants had raised the issue too late in the proceedings and were therefore unable to rely on s.62(1). However, he said that even if they had been entitled to rely on it, they had not produced satisfactory evidence that i) the director’s lack of patent knowledge or ii) the lack of interest in competition ran throughout the company.

Further decision on 10 October 2014

A further decision was given about costs in this case on 10 October 2014. Judge Hacon considered two issues:

  1. whether the £500,000 cap on damages in the IPEC applies in relation to all defendants or to each of them; and
  2. whether the cap includes additional amounts which arise from a Part 36 Offer. The claimant (Abbott) had previously offered the defendant a sum of money to settle the claim under Part 36 of the Civil Procedure Rules. This is known as a Part 36 Offer, which carries specific costs consequences. The defendant rejected the offer. Abbott was then awarded more at trial than what was in the offer. In these circumstances the court can award the party who made the offer an additional sum – known as an ‘additional amount’ under Civil Procedure Rule 36.14(3)(d). The issue to be considered was whether this additional amount was to be treated as damages, and therefore form part of the £500,000 damages cap in the IPEC, or whether it was a separate payment, unaffected by the cap.

It was held that if a claimant chooses to bring single proceedings, or if proceedings against numerous defendants are consolidated into one, a single cap of £500,000 will apply in the IPEC. To claim more than £500,000 a claimant must bring separate proceedings against each defendant. Alternatively, a single action could be brought in the Chancery Division where there is no costs cap.

In relation to the additional amount due under Part 36, it was held that this amount had nothing to do with compensating a claimant for any wrong committed by the defendant in the substantive dispute. It was solely intended to serve as an incentive to encourage claimants to make and defendants to accept appropriate Part 36 offers: he was quite clear that the additional benefits of Part 36 were not subject to the cap. Note that the additional amount to be awarded is yet to be decided because the damages hearing for the second defendant has not yet taken place.

Comment

The case provides a useful summary of the case law applicable to accounts of profits, and s.62(1) of the Patents Act 1977, in the UK. It shows that a defendant cannot seek to reduce what it owes in an account of profits simply by referring to very general costs or overheads associated with its business, without showing a very definite link between those costs/overheads and the infringing activity. It is also a reminder that unless exceptional circumstances apply, a defendant will not be able to rely on s.62(1) PA 1977 if it is raised too late (in this case it was after the CMC).

The decisions on costs provide welcome clarity about the damages caps applicable in the IPEC.