It is rare for an English court to be asked to determine an account of profits in an IP infringement action and even rarer for an account of profits to be determined by the Court of Appeal. The recent Court of Appeal decision in Hollister Inc v Medik Ostomy Supplies Ltd, which largely overturned the earlier Patents County Court decision, provides useful guidance on the determination of an account of profits (for further details please see "Take notice: court orders parallel importer to account for half of its profits").
Under the European law of free movement of goods, parallel importers may import goods from one EU member state and repackage, relabel and resell them in another EU member state, such as the United Kingdom, provided that certain requirements are satisfied. One requirement, set down in Bristol-Myers Squibb v Paranova A/S, is known as 'BMS Condition 5'.(1) This requires the parallel importer to give prior notice to the rights holder allowing it the opportunity to check the repackaged goods before resale in order to protect itself against counterfeiting and damage to its brand.
Under English law a successful claimant in an IP infringement action may elect for an account of profits instead of a damages inquiry. An account of profits is an equitable remedy available at the court's discretion. The purpose is not to punish the infringer or assess the damage caused to the rights holder, but to prevent the infringer from benefiting from the infringement. The benefit is that the rights holder is not required to prove the extent of its loss,(2) but is entitled to the profits made by the infringer.
Hollister is a manufacturer, distributor and seller of medical devices, including ostomy products. It owns the trademarks HOLLISTER and DANSAC in Classes 5 and 10. Medik is a parallel importer of ostomy products from the European Union to the United Kingdom; its activities include relabelling and repackaging Hollister and Dansac products for resale. Medik admitted trademark infringement, as it had failed to provide Hollister with adequate notice under BMS Condition 5, but argued that damages should be nominal, since Hollister had suffered no actual damage. Hollister elected to pursue an account of profits and claimed that it was entitled to the gross profits derived from the infringement.
At first instance before the Patents County Court, Judge Birss acknowledged that Hollister had suffered no relevant loss from what he saw as a mere breach of a procedural requirement and awarded Hollister half of Medik's net profits. The judge also allowed Medik to deduct a portion of its general overheads, such as the premises rent and staff costs (not directly incurred by carrying out the infringing acts), from its net profits.
Both parties appealed the decision.
The Court of Appeal held that it was clear from the European Court of Justice decision in Boehringer II(3) that failure to give notice under BMS Condition 5 rendered resales an infringement of the rights holder's trademark. Birss was wrong to consider this as merely procedural.
Further, the Court of Appeal held that Birss had incorrectly departed from the established principles for account of profits in two material ways:
- The loss suffered by the claimant was not a relevant consideration, even if the infringement was merely "technical" in nature – Birss had awarded Hollister only half of Medik's net profits, as Hollister had suffered no relevant loss.
- General overheads (eg, the cost of premises and staff) should not be deducted from net profits without evidence that such overheads are properly attributable to carrying out the infringing acts (ie, the import, repackaging and resale of the products). In determining whether overheads are attributable, factors such as the defendant's surplus capacity should be considered.
Medik had not pleaded that it had passed up an opportunity to resell other non-infringing products or that its general overheads had been increased by the infringing acts. Therefore, to allow Medik to deduct a proportion of its general overheads from its gross profits would allow it to profit from its unlawful activity.
This decision will be welcomed by rights holders, as its application will in many cases result in a higher net profits award, since the infringer will be entitled to deduct fewer overheads.
The Court of Appeal decision also confirms that Article 13 of the EU IP Enforcement Directive, implemented by Regulation 3 of the Enforcement Regulation, does not change the established principles for assessing an account of profits.
The effect of this decision is that an increase is likely to be seen in holders of other IP rights electing to receive an account of profits instead of general damages following successful infringement actions in the United Kingdom.
For further information on this topic please contact Paul Joseph or Nicole Jahanshahi at RPC by telephone (+44 20 3060 6000), fax (+44 20 3060 7000) or email (email@example.com or firstname.lastname@example.org).
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