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UK – Hollister v Medik Ostomy

Posted: November 15th, 2012

Hollister Incorporated and Dansac A/S v Medik Ostomy Supplies Limited, 9 November 2012, Court of Appeal, Case No. A3/2012/0331 and 0334

In an important decision for the assessment of compensation for infringement of intellectual property rights, the Court of Appeal in London has held that when calculating an “account of profits” it is not permissible for a defendant simply to allocate a proportion of general overheads to an infringing activity, in order to reduce the level of profits payable to the rights holder.  On the contrary, the defendant must show that the relevant overheads are properly attributable to the infringing activity.

The effect of this decision is that we are likely to see an increase in patentees and holders of other intellectual property rights electing to receive an account of profits, instead of general damages, following successful infringement actions in the UK.

Background

Medik was a parallel importer of the claimants’ ostomy products. Medik had admitted trade mark infringement and, after reviewing Medik’s disclosure, the claimants made an election for an account of profits. At the subsequent inquiry, Judge Birss ordered Medik to pay half of its net profits assessed on the normal basis under English law. Both sides appealed. A number of issues fell to be determined by the Court of Appeal, including the correct approach to assessing net profits.


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Assessment of net profits
It was clear that an account must be of the net profits made by the infringer who was entitled to deduct any direct costs associated with the infringement plus any overheads to the extent they had been increased by the infringement (or, put another way, any overheads that would not have been incurred but for the infringement). In addition, the first instance judge had also allowed Medik to deduct a portion of its general overheads such as the cost of premises and staff.

The Court of Appeal first confirmed that despite referring only to the award of “damages”, Directive 2004/48/EC (the Enforcement Directive) did not preclude the award of an account of profits. The term “damages” was used in a broad sense and encompassed both reimbursement of the right holder’s lost profits and the return of profits made by the infringer.

However, Judge Birss had erred in his calculation of the net profits owing to the claimants: the Judge ought not to have allowed Medik to deduct a proportion of its general overheads without evidence that such overheads were properly attributable to the importation and sale of the infringing products. In determining whether the overheads were so attributable, it was relevant to consider whether the defendant had surplus capacity, whether the infringing activity was an additional line to an established business and whether the defendant's overheads had been increased as a result of the infringing activity or whether its overheads would have been lower had it not engaged in that activity.

In the event, Medik had not pleaded that it had foregone an opportunity to make and sell other non infringing products nor that its general overheads had been increased by reason of the infringement. Accordingly, to allow Medik to deduct a proportion of its general overheads from its gross profits would be to impermissibly allow it to profit from its unlawful activity, which would undermine the purpose of the account.

This judgment will be welcomed by intellectual property rights owners since its application will, in many cases, result in a higher net profits award since the infringer will be entitled to deduct fewer overheads.

Account for breach of BMS condition 5
The Court of Appeal also considered whether account of profits ought to be available as a remedy in a case where the action for trade mark infringement stemmed not from a “typical” act of infringement under Article 9 Community Trade Marks Regulation but rather from failure to notify the claimant before a repackaged version of his product was put on sale. The requirement to notify derives from the Court of Justice decision in Bristol-Myers Squibb v Paranova A/S [1996] ECR I-3457 and is referred to as “BMS Condition 5”.

BMS Condition 5 has been considered in some detail by the UK courts and the Court of Justice in the Glaxo v Dowelhurst and Boehringer Ingelheim v Swingward line of cases. Ultimately, the Court of Justice has held that where a parallel importer has marketed goods without giving prior notice to the trade mark proprietor, the proprietor is entitled to claim financial remedies on the same basis as if the goods had been spurious (i.e. “typical” infringements).

It was for the national court to determine the amount of the financial remedy available to the trade mark proprietor according to the circumstances of each case in the light of, in particular, the extent of damage to the trade mark proprietor caused by the parallel importer’s infringement and in accordance with the principle of proportionality. Thus, where a parallel importer failed to give prior notice concerning a repackaged product, all parallel imports made until notice was given would be regarded as infringements for which compensation was available. The sanction for such infringements must be not only proportionate but also sufficiently effective and a sufficient deterrent to ensure that the Trade Marks Directive was fully effective.

It was against this background that Judge Birss was required to conduct an inquiry into the amount of Medik’s profits which should be awarded to the claimants. The Judge first confirmed that an account of profits was a remedy which was available for a breach of BMS Condition 5. The Court of Appeal agreed with Judge Birss, holding that an account of profits was proportionate since it did not compensate the trade mark owner for the loss he had suffered nor punished the defendant but simply ensured that the infringer did not benefit from his wrong. Furthermore, an account was an effective deterrent because the infringer knew that he would not retain any profits derived from his infringement.

Judge Birss then went on to stipulate the approach that he should adopt in assessing quantum following the Glaxo v Dowelhurst and Boehringer line of cases was as follows:

i) Assess the account on the normal basis under English law;
ii) Consider the extent of damage caused to the proprietor by the infringement and the issue of proportionality in all the circumstances of the case;
iii) Decide what final sum should be awarded having regard both to the sum assessed on the account at step (i) and the factors considered at step (ii).

The Judge acknowledged that the outcome of this approach may be that the sum awarded at the end of step (iii) was equivalent to the sum produced at step (i), although it could equally be a lesser sum. In the event, the Judge weighed various factual factors (such as the number of BMS conditions breached by Medik, the fact that if the claimants had made the sales which were infringing sales, they would have earned more by way of profits than Medik’s gross profit, and whether there were any particular counterfeiting issues) and arrived at an award of half of Medik’s profits.

The Court of Appeal held that Judge Birss had fallen into error in adopting this three step approach. The Court of Appeal held that it was not permissible to embark on step (ii), an assessment of the damage caused to the claimants by the infringement and a general inquiry into the proportionality of the remedy by reference to the claimants' state of mind since an assessment of the damage caused to the claimant formed no part of an account of the profits made by an infringer.

The approach adopted by Judge Birss therefore constituted an illegitimate amalgamation of two quite different ways of assessing compensation. Further, Judge Birss had erred in embarking on step (iii) which involved an impermissible weighing of various factual factors. This approach formed no part of a conventional account of profits under English law and was not required by the Court of Justice decisions in the above mentioned cases.

Read the judgment (in English) here.

Head note: Gina Lodge and Graham Burnett-Hall

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