Apportionment of Infringer's Profits in the U.K.

As discussed recently on the EPLaw Blog, in late April Judge Richard Hacon (Intellectual Property Enterprise Court for England & Wales) handed down an opinion in OOO Abbott v. Design & Display, a case involving an award of the defendant's profits.  (I've previously blogged about earlier proceedings in this case here and here.)  The case involves EP No. 1,891,631, for a display panel, the "inventive concept" of which is an insert made of a resilient metal, typically aluminum.  In September 2014, Judge Hacon held that the defendant Design & Display was liable for an award of profits made on sales of panels that incorporated the infringing invention.  In addition, the judge also awarded profits on sales of inserts and panels, where the inserts and panels were sold separately.   Finally, he declined to allow Design & Display a deduction for an allocable portion of its overhead.  In February 2016, however, the Court of Appeal reversed, holding that (1) in awarding profits, the judge should have apportioned the profit (para. 37), and (2) allocable overhead is deductible in a somewhat wider range of circumstances that Judge Hacon had envisioned (paras. 51-52).  

On remand, Judge Hacon summarizes the legal principles relevant to the first point as follows (para. 37):

(1) In an account of profits the claimant is entitled to the infringer's profit made from the exploitation of the right infringed.

(2) Where the right is a patent, the invention must be identified. Where the invention is a product, the claimant is entitled to the infringer's profit made from the sales of articles or part articles which embody the invention.

(3) Where the patent protects only part of an article sold by the infringer, the claimant is entitled to the profit made by the infringer from the sale of the entire article if either

(a) the protected part is the essential feature of the entire article, or

(b) the entire article would never have been made by the infringer if there had been no infringement of the claimant's right.

(4) Part of an article is its 'essential feature' if the part is functionally and/or commercially the most significant part of the whole.

(5) If the patent protects part of an article and neither 3(a) nor (b) apply, the court must assess how much of the total profit made by the infringer on the sale of the article is to be apportioned to the protected part of the article. The claimant is entitled to that part of the total profit.

(6) Where the sale of an article protected by the patent drives the sales of other, unprotected, goods or services, the claimant is in addition entitled to the profit made by the infringer on the sale of those other goods and services (convoyed goods and services).

(7) The sale of an article 'drives' the sales of other goods or services if there is a causative link between the purchase of the article protected by the patent and a consequential purchase of the other goods or services.

(8) There will be a causative link where there is a perceived compatibility, functional interaction or other connection of that nature between the protected article and the other goods or services.

(9) The purchase of the putative convoyed goods or services must be consequential in the sense that the purchase of the protected article is the principal purchasing decision in the mind of the buyer and the purchase of the other goods or services follows as a consequence.

(10) In relation to the foregoing issues the evidential burden rests on the infringer.

Applying these principles here, the judge estimated first that, for instances in which the defendant sold the infringing inserts incorporated into panels, the inserts were an "essential feature" for only about 10% of those sales, such that Design & Display would have to pay its entire profit on only 10% of those sales (paras. 43-44).  Second, for instances in which the defendant sold the inserts and panels separately, the judge writes that "on a strict view the panels bought separately from the infringing inserts are not convoyed sales because part of the invention is embodied in the panels. There [sic] are therefore to be treated the same way as panels in which the infringing inserts were incorporated. . . .   I again estimate that in relation to sales of the panels with separate inserts, 10% of the sales of panels were driven by the sales of accompanying inserts in that way. Abbott is entitled to the whole of Design & Display's profit on 10% of its sales of infringing inserts and separate but associated panels" (paras. 45, 47). For the remaining 90% of instances in which customers "did not specify infringing inserts," Abbott was entitled to all of the profits on the inserts plus 10% of the defendant's profit on the associated panels (para. 51).  Altogether, this amounts to a substantial reduction from what the judge would have awarded prior to the appeal, where he concluded that Abbott was entitled to all of the profits from the sales of infringing inserts and the associated panels, despite the comparatively "modest" nature of the inventive concept (see para. 32 of the 2014 opinion).  As I suggested in my post on the Court of Appeal's 2016 opinion, the correction envisioned by the appellate court (and now carried out on remand) ameliorates some of the economic distortion introduced by the U.K. courts' adherence to the principle that, in awarding lost profits or infringer's profits, courts should not take into account the fact that the defendant could have made the same number of sale by employing a noninfringing alternative.  Perhaps something along these lines also will be relevant when the U.S. courts get around to applying the U.S. Supreme Court's rule in Samsung v. Apple that design patent owners are entitled only to the profit attributable to the "article of manufacture" that incorporates the infringing design, and not necessarily the profit on sales of the entire product (e.g., a smartphone) of which the article of manufacture is merely one component.

As for the second issue, the judge summarized the now-governing principles as follows (para. 57):

(1) Costs that were 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, non-infringing, businesses.

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

(3) A proportion of the infringer's general overheads may be deducted from gross relevant profits unless

(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 the sale of non-infringing products.

(4) The evidential burden rests on the defendant to support a claim that costs specific to the infringement and/or a proportion of general overheads are to be deducted from profits due to the claimant.

The difference between this summary and the  judge's first opinion is that the first opinion would have permitted a deduction only when (under 3(b)) "the defendant was running to maximum capacity."  Under the new approach, although the fact that the defendant was running at maximum capacity would be evidence that, absent the infringement, it would have replaced sales of infringing products with sales of noninfringing product, such a showing is not a necessary condition for proving that the defendant would have deployed the overhead to sell noninfringing products in the but-for world.