A Recent English Decision on Accountings of Profits

Jeremy Phillips posted a very short blog on this case the other day on PatLit, but I thought I would elaborate on it because it touches on several important issues concerning the remedy of an accounting (disgorgement) of an infringer's profits.  The case, OOO Abbott v. Design & Display Ltd, [2014] EWHC 2924 (IPEC) (Eng.), involves the U.K. portion of European Patent No. 1,816,931, for "a snap-in insert made from a resilient metal like aluminium" (para. 2).  In an earlier proceeding, Justice Birss held that the patent was valid and infringed.  The plaintiff opted for an accounting of the defendant's profits, and Judge Hacon published the above opinion on September 4.  From an economic perspective, three matters in particular stand out.

First, the court reaffirms Justice Laddie's holding in Celanese Int'l Corp. v. BP Chemicals Ltd. [1999] R.P.C. 203, that " it should be no answer to an account that the defendant could have made the same profits by following an alternative, non-infringing course. The question to be answered is 'what profits were in fact made by the defendant by the wrongful activity?' It should not matter that similar profits could have been made in another, non-infringing way" (para. 16).  This principle was first articulated in a lost profits case, United Horse Shoe and Nail v. Stewart (1888) 3 R.P.C. 260, and as I have noted in my book (pp. 187-89) and on this blog, the English courts have continued to adhere to it ever since.  The rule has no basis in economics.  If in reality the defendant would have resorted to a noninfringing alternative, but for the infringement, an award of either plaintiff's lost profits or defendant's profits that fails to take the existence of such an alternative into account overvalues the patented invention and leaves the patent owner better off than it would have been absent the infringement.   Adhering to United Horse Shoe also requires the courts to engage in some convoluted analysis when dealing with situations in which the inventive concept is only a small portion of the claimed invention.  See, for example, paras. 19-20 of OOO Abbott, discussing Justice Laddie's hypothetical example of a claim to a battleship fitted out with an inventive whistle.  To avoid an obvious overvaluation problem that would result if damages in such a case were based on sales of the entire battleship, the courts concede that "the inventive concept is relevant tot he scope of an inquiry or account" but that "the scope will commonly not be limited to products precisely embodying it" (para. 20).  Overvaluation problems could be avoided more easily, however, simply by recognizing that the next-best available noninfringing alternative to the hypothetical claimed invention would be a battleship with a less inventive whistle, or with no whistle at all.

The overcompensatory and overdeterrent potential of United Horse Shoe is further heightened when the court awards profits based on sales of convoyed goods (para. 31).  Making matters worse, the court actually credits the defendant's argument that it "could have traded just as profitably without infringing," stating "No doubt that is true, but for the reasons discussed above it is irrelevant" (para. 33).  The court also recognizes that not taking the noninfringing alternative into account means that it is ignoring the defendant's opportunity cost of not infringing (para. 39); and, of course, opportunity costs are real costs, even if they are not usually quantified as accounting costs.  But precedent is precedent, and United Horse Shoe is a House of Lords decision.  Perhaps some day it will meet its long overdue demise.

Second, the court followed the Court of Appeals decision in Hollister Inc. v. Medik Ostomy Supplies Ltd in not deducting a portion of the defendant's allocable overhead from its gross profits.  Specifically, the court states (para. 38):

(1) Costs associated solely with the defendant's acts of infringement are to be distinguished from general overheads which supported both the infringing business and the defendant's other businesses.

(2) The defendant is entitled to deduct the former costs from gross profits.

(3) A proportion of the general overheads may only be deducted from gross profits in two circumstances:

(a) if an overhead was increased by the acts of infringement (i.e. the increase would not have occurred but for the acts of infringement), that increase may be deducted;

(b) if the defendant was running to maximum capacity such that the infringing business displaced an alternative business which otherwise would have been conducted, the apportioned overheads incurred by the infringing business (and which would have been incurred by the displaced business) may be deducted.

(4) The evidential burden is on the defendant to establish any of the above.

As I mentioned in  my May 2013 blog post on Hollister (here), "Although the court does not cite the German Federal Supreme Court's 2000 decision in Gemeinkostenanteil, see my book pp. 271-72, the court appears to be adopting an approach similar to the one applied there to the deduction of overhead.  The combination of these two holdings in Hollister could lead to substantially higher awards of profits in the U.K., as others have noted."  Further, although from an economic perspective it is a debatable issue whether allocable overhead should be deducted, there are some reasons to believe that such a deduction better reflects economic reality.  See my book pp. 206-08, citing and discussing Stephen E. Margolis, The Profits of Infringement: Richard Posner v. Learned Hand, 22 Berkeley Tech. L.J. 1521 (2007).       

Third, on the issue of intent, the court noted (para. 50) that under section 62(1) of the Patents Act 1977:

"In proceedings for infringement of a patent damages shall not be awarded, and no order shall be made for an account of profits, against a defendant or defender who proves that at the date of the infringement he was not aware, and had no reasonable grounds for supposing, that the patent existed; and a person shall not be taken to have been so aware or to have had reasonable grounds for so supposing by reason only of the application to a product of the word "patent" or "patented", or any word or words expressing or implying that a patent has been obtained for the product, unless the number of the patent accompanied the word or words in question."

The court concluded that the defendant had not raised this issue in a timely fashion, but beyond that stated the following (paras. 54-56): 

Even it had been, I am not satisfied that Design & Display has established the necessary lack of knowledge or reasonable grounds for supposing that the Patent existed. In cross-examination Mr Lloyd said that he had only heard of patents because he was a local historian and he did not know whether his colleagues knew what a patent was. While it is easy for those whose working lives are concerned with patents to over-assume how much the general public know about patents, I think most individuals, such as Mr Lloyd and presumably his colleagues, will have heard of the concept of patents and will have on board the basic notion that you can get one to protect your idea. It seems to me unlikely that an interest in local history is needed to know that much. 

Mr Lloyd made two further points. The first was that Design & Display's production director had drawn a snap-in insert of the type protected by the Patent so there was no reason for Design & Display to believe that patent protection was available in relation to that product. This may have happened but it was surprising since, as Mr Aikens pointed out to Mr Lloyd, such a drawing and the alleged home-grown conception of the idea had not been raised at the trial before Birss J despite Design & Display's arguments that the idea was obvious (and also despite its conceivably raising a defence pursuant to s.64 of the 1977 Act). Mr Lloyd's second point was that at the time the Claimants' patented insert had been introduced in 2007 Design & Display was, as he put it, not remotely interested in what its competitors were doing – although Mr Lloyd conceded that this might not have been true of the sales department.  

I think that to satisfy the burden under s.62(1) it would have been necessary for Design & Display to have produced satisfactory evidence from the sales department to show that the complete indifference to competition and therefore to any patent protection which the competition held, or alternatively total ignorance of the concept of patent protection, both of which Mr Lloyd relied on, ran throughout the company. Absent that, I would by default have inferred that Mr Lloyd or his sales colleagues had reasonable grounds to have become aware of the PCT parent application for the Patent, which was published in June 2006.

In my view, to the extent it makes sense at all to award the infringer's profits as a remedy for patent infringement, such awards should be limited only to cases of deliberate copying, in order to avoid pressuring innocent defendants to settle and thus potentially deterring lawful conduct.  Parliament should consider amending the statute to avoid such adverse consequences.