Once liability for infringement before the court has been established, successful claimants in intellectual property disputes in England can choose to seek compensation assessed on either (i) an inquiry as to what damages they have suffered as a result of the infringement or (ii) the taking of an account of the profits made by the defendant are attributable to the infringing acts, by way of a separate process and hearing.

Where the choice is to seek an account of profits, the general principles upon which such an assessment would be based have been restated by the Court of Appeal in such decisions as Design & Display Ltd v. OOO Abbott [2016] EWCA Civ 95 and Hollister Inc. v Medik Ostomy Supplies Ltd [2012] EWCA Civ. 1419. Now in a decision by HH Judge Pelling handed down on 21 March 2016 in respect of Jack Wills Limited v. House of Fraser (Stores) Ltd [2016] EWHC 626, these principles relating to an account of profits has now been applied.

Background

On 31 January 2014, Mr Justice Arnold ruled in his judgment ([2014] EWHC 110 Ch) that the use by House of Fraser Stores (“HOF”) of an anthropomorphised pigeon logo, (the “Logo”, shown below right) infringed the registered cock pheasant trade mark, (the “Mark”, shown below left) owned by Jack Wills.

Click here to view the image.

In the judgment, the High Court decided that the use by HOF of the Logo in relation to some of the shirt products which HOF sold under its established own label LINEA brand, infringed Jack Wills’ registered rights in the Mark in that:

  • there is a likelihood of confusion on the part of the average consumer in accordance with Article 5(1)(b) Trade Marks Directive (the “TMD”) and Article 9(1)(b) Community Trade Mark Regulation (the “CTMR”); and
  • use of the Logo will have caused in the minds of some consumers a “..subtle but insidious transfer of image…” from the Mark to the Logo and hence from Jack Wills’ goods to HOF’s goods regardless of whether or not HOF had intended such a transfer. Accordingly, HOF had taken unfair advantage of the reputation of the Mark and had thus also infringed the rights of Jack Wills under Article 5(2) TMD and Article 9(1)(c) CTMR. Arnold. J held that this was “…a classic case of a retailer seeking to enhance the attraction of its own brand goods by adopting an aspect of the get up of prestigious branded goods…”.

Following its success before the High Court, Jack Wills chose to seek compensation by way of an account of those of HOF’s profits which were attributable to the infringement in preference to an award for damages. In all, about 20,000 of the LINEA branded shirts carried or referred to the Logo and the sales took place over a 15 month period from 2011 to 2013.

Accordingly, the hearing before HHJ Pelling has come about because, despite the trial on liability having been concluded more than two years ago, the parties had been unable to agree or resolve by mediation, the amount of profit that HOF would have to disgorge. Presumably, there is a risk that the cost of the assessment process might exceed the compensation that is to be awarded.

Are general overheads deductible?

One issue between the parties was whether HOF could set off any part of its general overheads against the gross profit earned from the goods which had been sold in relation to the Logo. The judge reminded the parties that an account of profits is not penal. It is a mechanism by which the infringer is required to pay over to the rights owner all properly attributable profits. Moreover, the rights owner must take the infringer as he finds him, and cannot argue that the profits earned from the infringement would have been greater had the infringer operated more efficiently. Conversely, the assessment cannot put the defendant in a better position than he had been.

Following the Court of Appeal’s decision in Design & Display, the judge held that he had to address whether (a) the same overheads would have been incurred even if the infringement had not occurred and (b) infringing product sales would have been replaced by the sale of non-infringing products which would have been sustained by the same overheads as used for the infringements. 

The judge found that, in addition to the LINEA in-house brand as having been established before the infringements, HOF sold similar goods before, during and after the period when the infringements took place. It was existing LINEA lines that were given the Logo and if the infringing goods had been replaced they would have been replaced with substantially similar garments but without the Logo. Moreover, although it was possible to consider the web sales cost base separately from the shop sales, this was not to be a factor unless there was reason for demonstrating that infringing shop sales but not infringing web sales, displaced non-infringing products.

The judge held that even if the shop and web based infringements had not taken place, HOF would have still sustained the relevant overheads.

What general overheads are deductible?  

The parties had agreed that an apportioned deduction could be made for the following general overheads incurred in the relevant period when the infringing sales were made:

  • employment
  • property
  • establishment
  • depreciation

In addition, the judge held that HOF could deduct a portion of the cost incurred on promotions and its advertising of specific non-infringing products, since the indirect effect of such expenditure is to attract footfall to the shop or website. However, the judge rejected HOF’s submission that it could deduct a portion of the cost of onerous leases as this was a cost that related to a period prior to the period when the infringing sales took place.

What portion of deductible general overheads should be deducted?

The judge held that when deciding what is a fair proportion of the deductible general overheads, that are to be deducted (described in the judgment as the “Overheads Apportionment Issue”), in this instance it was better to divide the deductible costs by total sales and then apply the resulting percentage to the infringing sales (the so-called “Sales Revenue Basis”). He rejected the proposition by Jack Wills for a metric that involved dividing the deductible costs of the total sales area of HOF’s business and multiplying that figure by the area occupied by the infringing products (described as the “Square Footage Basis”).

Identifying the impact of The Infringing Act 

The next step was to make an apportionment so as to reflect that the account is in respect of the act of the infringement, rather than the sale of the goods with the Logo (called the “Infringement Apportionment Issue”). In this regard, conscious that the LINEA brand and substantially similar goods continued after HOF had ceased use of the Logo, the judge (who had previously stated that he did not demur from the findings of Mr Justice Arnold), held that:

“…In my judgment it is simply not possible on the evidence to conclude that the infringement complained of drove the sale of the infringing product or was the essential ingredient in the infringing product…There is no evidence that the inclusion of the Logo had any significant or lasting effect on the sales of the products concerned…”.

Looking at usual trading margins and how HOF would generally pay a royalty rate of 1.5% on sales for a bare trade mark licence, the judge held that Jack Wills should recover 41% of what is the resultant net profits earned from the infringing sales after the relevant deductions.

A final hearing date of 27 April 2016 was set for identify the actual sum due on the taking of the account in light of the judge’s conclusions.