Comment on OOO Abbott & Anor v Design & Display Limited [2016] EWCA Civ 95

Background

The action relates to a patent for snap-in inserts used by shops in display panels. The snap-in inserts are used for fixing shelves and brackets to panels or slat walls to construct displays of merchandise. The inserts fit in to a horizontal slot on the panel or slat wall. The inserts that were the subject matter of the patent in dispute were sold by the defendant (Design & Display) which items were invariably sold with slatted panels into which the inserts were incorporated. Previously, on 30 May 2013, Birss J had held that the patent was valid and had been infringed by the defendant.

By way of compensation, rather than have the Court assess what damages it had sustained as a result of the defendant’s activities, OOO Abbott instead elected for an account to be held so that they would be awarded a sum equivalent to the scale of the unlawful profits made by Design & Display.

In September 2014, HHJ Hacon gave judgment in respect of quantum in the Intellectual Property Enterprise Court (“IPEC”), setting out a number of principles from which the sum payable by Design & Display should be calculated. He held that the scope of the relevant profit made by Design & Display derived from the infringement extended to the profit they made from sales of the panels into which the infringing inserts were incorporated. He also found that the general overhead costs could not be offset against the profits.

Design & Display appealed against this decision and as such the Court of Appeal addressed the following issues:

  1. was Design & Display liable for the whole of the profits made on the sale of non-infringing panels?
  2. was Design & Display entitled to set off its general overheads against the gross profit for which it was accountable?

Decision

On 24 February 2016, the Court of Appeal handed down its decision, with the lead judgment being given by Lewinson L.J, holding that the first instance judge had misdirected himself both with regard to the scope of what can be termed ‘recoverable unlawful profits’ and with regard to what portion of general overheads may be deducted from any notional profit figure. The Court has remitted the case back to the IPEC for application of its ruling and conduct of a further assessment of the compensation to be awarded.

Apportionment of profits

The purpose of an account of profits is not to punish the defendant but to prevent his unjust enrichment. In order to assess the extent to which the infringer would be unjustly enriched if he retained the profits derived from the infringement, it is necessary to:

  1. identify the invention as described in the patent; and
  2. decide what profits the infringer derived from the exploitation of that invention. In making an assessment, particular difficulties arise where, as in this case, the infringer sold non infringing products in conjunction or in association with the subject matter of the patent (“convoyed goods”).

HHJ Hacon in the IPEC had found that the patent’s inventive concept was the composite idea of an insert made of such a deformable metal, having a particular shape and interacting with the slot of the panel to enable such to be snapped in from the front. The Court of Appeal agreed with this identification of the inventive concept, rejecting Design and Display’s argument that this was contrary to the decision of Birss J.

Lewinson L.J reviewed the case law on apportionment of profits and in particular the approach of the High Court of Australia in the case of Dart Industries Inc v Decor Pty Ltd and another [1994] FSR 567 which was subsequently approved by the Court of Appeal in Hollister Inc Dansac AS v Medik Ostomy Supplies Ltd [2012] EWCA Civ 1419. To summarise the case law, it would not be appropriate to apportion profit between the unlawful profits arising from use of the invention and the profit made from the sale of convoyed goods where:

  • in the absence of the infringing activity, no sales would have occurred; or
  • the invention was an essential ingredient in the creation of the infringer’s whole product.

HHJ Hacon deemed that the sale of the inserts and sale of the panels went hand in hand. According to the Court of Appeal, from this conclusion, he then held incorrectly that the sale of inserts caused the sale of the panels. Lewinson L.J held that the mere fact the two products went together was not sufficient to establish that the whole of the profit earned from the composite item was derived from the infringing invention.

Lewinson L.J stated that had HHJ Hacon found that the infringing insert was the ‘essential ingredient’ in the creation of the defendant’s slatted panels, he would have been justified in not apportioning the profit, but he did not make that finding. Therefore in cases falling within the judge’s factual hypothesis, that some sales of panels with incorporated inserts were to customers who were indifferent to the type of inserts used, the judge should have apportioned the overall profit. As such the question of apportionment was remitted back to the IPEC but with the direction that the judge is not precluded from finding that the infringing insert was the ‘essential ingredient’ of the incorporated panel.

Overheads

Lewinson L.J held that the set-off of all or part of general overheads depended on whether firstly the overheads would have been incurred in the first place (regardless of whether or not the infringement had occurred), and secondly whether the sale of infringing products would have been replaced by the sale of non-infringing products. If the infringer established that but for the infringement, it would have sold other (non-infringing) products, then to the extent that its actual overheads would have been used in sustaining that alternative sale, the overheads could be deducted in computing the profits for which the infringer was required to account.

Design & Display had argued that its overheads should be deducted from its profits because the switch from sales of infringing to non-infringing inserts (following grant of the injunction) had had no adverse effect on its overall sales and therefore it would have sold just as many products even if they had not infringed. It also argued that because it would have received no less custom had they sold non-infringing inserts, the business must have been working to capacity in the sense that there was no more business to be obtained by selling infringing inserts.

HHJ Hacon had rejected such arguments by Design & Display but the Court of Appeal held that his reasoning did not lead to the conclusion reached.

The Court of Appeal stated that HHJ Hacon was wrong to reject Design & Display’s arguments on legal grounds, particularly without any assessment as to whether the defendant had proved the assertions made (i.e. that the same overheads would have been incurred in the sale of non-infringing products). Lewinson L.J held that the arguments were sound, and but Design & Display would need to prove the assertions it made as to what overheads would have been incurred, and sales would have been made, by non-infringing activities.

The Court of Appeal also found that HHJ Hacon had misstated the law when he held that running to maximum capacity was a threshold condition for apportionment and that it had to have the consequence that alternative business was displaced. The Court of Appeal agreed with OOO Abbott’s submission that, if an infringer has spare capacity which he has not used, he might find that a tribunal was sceptical about his evidence, to the effect that had he not been infringing he would have used overheads to support a non-infringing line of business. Nevertheless it was held that owing to the fact that HHJ Hacon incorrectly stated the law, his decision on overheads could not stand. The appeal was allowed and remitted to IPEC.

Comment

This case highlights the difficulties caused by apportionment, particularly in cases where the infringement only relates one product regularly (but more often than not) sold in conjunction with another product. It is clear that, in cases where apportionment is in issue, the decision will often turn on the specific facts on the case, and it is therefore unsurprising why in general (unless the award is likely to be significantly larger) successful claimants in patent cases tend to elect for the relative certainty of damages, rather than for account of profits.

However, the decision has usefully clarified a number of the key principles in intellectual property infringement cases, namely in relation to apportionment of profits and the circumstances in which a defendant may deduct a portion of general overheads from the profits it has made.