A Recent English Decision on Accountings of Profits

The case is Design & Display Ltd v Ooo Abbott & Anor [2016] EWCA Civ 95, an appeal from a 2014 decision of the Intellectual Property Enterprise Court.  (Hat tip to Norman Siebrasse for calling this appellate decision to my attention.  I blogged about the 2014 IPEC decision here.)  The patent in suit concerns "display panels used in shops" (para. 3), claim 1 of which is reproduced in para. 4 and the "inventive concept" of which was summarized by the trial judge (Justice Birss) as "not just the idea of an insert made of a resilient metal (which was known)," but rather "the composite idea of an insert made of such a metal and its having a particular shape and its interacting with the slot of the panel in a particular way, such that the metal insert could engage with the panel by snap-in means" (para. 9).  The Court of Appeal (per Lord Justice Lewison) framed the appeal as presenting two issues:

The first main question raised by the appeal is whether Design & Display are liable for the whole of the profits made on the sale of panels sold together with infringing inserts. The second main question is whether Design & Display are entitled to set off any part of their general overheads against the gross profit for which they are accountable (para. 6).

On the first issue, the trial court had awarded the defendant's entire profit on sales of infringing displays, on the theory that although only some consumers bought the displays because of the inventive concept of the patent in suit, the defendant was "going to make a sale of inserts and panels both, or no sale at all. . . . Because the sales went together, the sale of the inserts caused (in the relevant sense) the sale of the panels in which they were incorporated. It was also foreseeable that the sale of the panels would be a consequence of the sale of the inserts" (para. 30).  The Court of Appeal disagreed, however:

Let me revert to the example given by the Full Court in Dart Industries Inc v Decor Corp Pty Ltd. A manufacturer sells a car which includes a patented brake. If the car did not have brakes, the manufacturer could not have sold it, but it did not have to have that particular brake. In those circumstances the Full Court clearly thought that it would be unjust to charge the manufacturer with the whole profit made on the car; and I agree with them. In my judgment the legal error that the judge made was to ask whether the sale of the panel plus insert would have happened separately rather than to ask himself how much of the profit on the sale was derived from the infringement. In a case in which the infringement does not "drive" the sale it seems to me that it is wrong in principle to attribute the whole of the profit to the infringement. In particular it does not follow from the fact that the customer wanted a slat wall that incorporated an insert that the customer wanted a slat wall that incorporated the infringing insert. Mr Cuddigan argued that the infringing inserts and the slot were the "very essence" of the incorporated and unincorporated panels. But the judge made no such finding, and his observations at [32] suggest the contrary. In addition I do not consider that the judge was correct at [31] in saying that "because the sales went together, the sale of inserts caused … the sale of the panels…" The mere fact that the two went together is not, in my judgment, sufficient to establish that the whole of the profit earned on the composite item was derived from the invention. One might just as well say that the sale of the panel caused the sale of the insert. As the judge himself recognised the customer specifies panels, and on the hypothesis that he was considering at [31] the customer is indifferent about the inserts (provided that some form of insert is included). On the judge's approach, because the sale of the patented brake went with the sale of the car, the whole of the profit on the car would be included in the account. If the judge had found on the facts that the infringing insert was "the essential ingredient in the creation of the defendant's whole product" (i.e. the incorporated panel), then he would have been justified, on the facts, in declining to apportion the profit. But I cannot see that he made that finding.

In my judgment therefore in cases simply falling within the factual hypothesis discussed at [31] the judge should have apportioned the overall profit. The question of apportionment will therefore have to be returned to IPEC, although the judge would not be precluded from finding as a fact that the infringing insert was the "essential ingredient" of the incorporated panel (paras. 36-37). 

In my opinion, Lord Justice Lewison is right to require apportionment of the defendant's profit where the patent did not drive demand for the defendant's product, because otherwise the defendant is being required to disgorge more than the value of the patented invention to it:  it's being required to disgorge profits that are properly attributable to other features.  With all due respect, however, the principle actually cuts deeper than the court seems to recognize.  From an economic perspective, the value of the invention to the defendant is only the surplus profit the defendant earned over and above what it would have earned from the use of the next-best available noninfringing technology.  Unfortunately, the House of Lords over a century ago in United Horse-Shoe & Nail Co. v. John Stewart & Co. (1888) L.R. 13 App. Case 401 held that the fact that the defendant could have resorted to a noninfringing alternative is irrelevant to the amount of the plaintiff's lost profit, and in Celanese Int'l Corp. v. BP Chemicals Ltd. [1999] R.P.C. 203 Justice Laddie held that the same principle applies to awards of defendant's profits.  The principle that noninfringing alternatives are irrelevant necessarily leads to overcompensation, as I discuss in my book at pp. 110-14, 189-90, 198-203, and as I have discussed several times on this blog (see here, here, here, here, and here); and as I further argue at pp. 199-200 of my book, apportionment and the relevance of noninfringing alternatives are "inseparable concepts." At least Lord Justice Lewison's opinion for the court undoes some of the damage of ignoring alternatives.

As for the second issue, the court holds that allocable overhead should be deducted under a wider range of circumstances than Justice Birss believed:

It seems to me to be clear that if the infringer would have manufactured or sold non-infringing products had he not infringed and would have incurred overheads in supporting that manufacture or sale, then he ought to be allowed a proportion of his general overheads. The question is not dependent on whether the infringer is or is not working to capacity. The bottom line is whether (a) the overheads would have been incurred anyway even if the infringement had not occurred and (b) the sale of infringing products would not have been replaced by sale of non-infringing products. It is in those circumstances that an allowance for overheads will not be permitted (para. 42).

As I have noted before (here), economic analyses of the question of whether courts awarding the defendant's profit should deduct allocable overhead from the defendant's gross profit are divided, though I am inclined to agree that as a general matter they should be.  So I think the Court of Appeal got this point right too.

For my September 2013 blog post discussing a range of other issues that policymakers must confront in deciding whether or how to award infringer's profits, see here.  For a critique of the U.S. rule, which (in design patent cases only) awards the defendant's entire profit, see here.