Case No. EWHC-932-(IPEC)

The law 52.In his discussion of the law Lewison LJ again referred with approval to the judgment of the High Court of Australia in Dart v Decor and identified the overall issue regarding deductible overheads in the following way:“[39] In my judgment the question posed by the court is a relatively simple one to ask (even if it may not be easy to answer): if the defendant had not infringed the patent would he have carried on a non-infringing business which would have been sustained by the overheads in fact used to sustain the infringement?”53.Lewison LJ went on to consider Hollister Inc v Medik Ostomy Supplies Ltd [2012] EWCA Civ 1419; [2013] F.S.R. 24 and applied it to the present case:“[42] … 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been incurred anyway even if the infringement had not occurred and (b) the sale of infringing products would not have been replaced by sale of non-infringing products.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.”54.Thus, issues such as opportunity cost and working to capacity, which were given some prominence in Dart should not be central to the question whether the infringer should be permitted to deduct overheads from his profits. The infringer working to capacity is not a threshold requirement, but nor is it irrelevant. If the infringer is working to capacity the infringing business is likely to have displaced non-infringing business without increasing overheads. Had there been no infringement the business would have had the same overheads, the non-infringing business would not have been displaced and therefore the sale of infringing products would have been ‘replaced by’ the sale of non-infringing products. Condition (b) would not be satisfied and the allowance for the overheads would be permitted. In other words, working to capacity can be a useful way for an infringer to demonstrate that it is entitled to deduct overheads.55.By extension, not working to capacity could raise an evidential difficulty for the infringer. Lewison LJ said:“[51] … I do not doubt that, as Mr Cuddigan submitted, if an infringer in fact has spare capacity which he has not used he may find that a tribunal is sceptical about his evidence to the effect that had he not been infringing he would have used his overheads to support a non-infringing line of business. As Mr Cuddigan said, the obvious question would be: if you had spare capacity why did you not use it to support the non-infringing line of business?”56.With regard to the evidential burden generally, in Hollister the Court of Appeal indicated (at [85]) that the burden rests on the defendant to show that overheads are attributable to the infringing activity and may thus be deducted from its profits.57.In paragraph 38 of the first account judgment, I summarised the principles to be applied to whether costs incurred by a defendant in his infringing business may be deducted from the gross relevant profits assessed by the court in an account of profits. The Court of Appeal criticised the third principle. Guided by this and so that the parties understand how I have approached the second remitted issue, I amend and restate that summary as follows:(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.58.The same approach was taken by HHJ Pelling QC in Jack Wills Ltd v House of Fraser (Stores) Ltd [2016] EWHC 626 (Ch), at [22]. Second remitted issue: what deductions (if any) for general overheads may Design & Display make? The Island Records disclosure 59.After the trial on liability, Judge Birss ordered Island Records disclosure. This was given in broad brush form, as was appropriate. It indicated that Design & Display had made a net profit of nearly £106,000 from sales of infringing inserts alone, this assuming that Abbott had no claim in relation to panels and that all the deductions from profits then claimed were to be allowed. Abbott elected for an account of profits. In the evidence for the trial of the account Design & Display’s profit had been transformed into a loss. Design & Display now says that no payment at all is due.60.While it is to be expected that detailed evidence will provide a different figure in an account from that given in Islands Records disclosure, a transformation such as this one could be the result of negligent or even deliberately misleading disclosure at the Island Records stage by the infringer. In an appropriate case it would be open to the claimant to apply to re-elect for an inquiry as to damages and claim the costs thrown away. That was not done here, so I need consider the discrepancy no further. Costs associated solely with Design & Display’s acts of infringement 61.In the first account judgment, one set of costs was identified which was associated solely with Design & Display’s acts of infringement. These were the labour costs incurred in cutting the slots in MDF panels to accommodate the infringing inserts. My finding in respect of these labour costs was not disturbed by the Court of Appeal and so they should be directly deducted from the profits from infringement. Abbott has speculated that other costs could also be better characterised as directly attributable costs rather than general overheads, but I am not satisfied of this. I am here just concerned with the general overheads, as required by the Court of Appeal. It should go without saying – though late submissions from the parties suggest that it may need spelling out – the labour costs to be directly deducted from Design & Display’s profits cannot also form part of the general overheads. Whether Design & Display can deduct general overheads 62.Following the ruling by the Court of Appeal, Design & Display had to establish on the facts that if its infringements had not occurred:(a)it would have incurred the same overheads; and(b)its sales of non-infringing products would have been at the same level as its sales of infringing plus non-infringing products made in reality. Level of overheads 63.Mr Lloyd’s evidence was that the cost of sales and administrative expenses are not dependent on the type of insert sold. Abbott complained that this was a mere assertion and not supported by any documentary evidence. That is true, but there was nothing in the evidence to suggest that the part of the business using non-infringing inserts was conducted in a way significantly different from the business in infringing inserts. I would find it surprising if it was.64.Abbott also pointed out that there was a difference in price between infringing and non-infringing inserts. Some of the non-infringing alternatives were cheaper, some more expensive. Therefore, given the same level of sales, the revenue generated would be different. If revenue were used to apportion overheads, the apportionment would have been different had there been no sales of infringing inserts. This again is true, but on the information I have I think Abbott was grinding the argument too fine. Some non-infringing alternative cost more, some cost less – this may have broadly evened out, at least sufficiently for a necessarily broad-brush account of profits.65.I think it is likely that a particular level of business by Design & Display in inserts and panels incurred the same overheads whether it was dealing with infringing or non-infringing inserts. The first criterion of the Court of Appeal is satisfied. Level of sales 66.I have accepted Mr Lloyd’s evidence that after sales of infringing inserts came to an end, Design & Display’s sales exhibited no significant fall. That may have been because non-infringing inserts were given greater promotion, but that would no doubt have been the case if the infringing inserts had never been available in the first place. Abbott suggested another possibility: customers were lured to Design & Display by the offer of infringing inserts and after those inserts ceased to be available, customers bought alternative inserts out of apathy. That is possible and Abbott is right to point out that there was no evidence from customers, which could have been brief. But Abbott’s suggestion was too speculative in my view to be given much weight. The Court of Appeal’s second criterion is also satisfied.67.Accordingly, Design & Display is entitled to deduct general overheads from its profits on the infringing business. Specific arguments raised by Abbott in relation to overhead deductions Whether overheads should be apportioned by reference to the entire business 68.Abbott argued that apportioning overheads by reference to the entire business was bound to create anomalies unless the entire business in question is homogeneous. But Abbott did not identify a simple and fairer alternative and I cannot see that there is one. Whether apportionment should be by reference to revenue or volume 69.Design & Display has apportioned its overheads on a sales revenue basis. It calculated the percentage of revenue generated by sales in the infringing business as a percentage of sales revenue generated by its total business during the period of infringement. That percentage of total overheads has been apportioned to the infringing business and deducted from costs.70.Abbott pointed to several unsatisfactory aspects of apportionment by sales revenue and argued that apportionment should have been done by reference to volume of goods. Abbott went on to argue that since Design & Display had not done that, and it was too late now to do so, there should be no apportionment of overheads at all. That was optimistic.71.HH Judge Pelling QC considered alternative means of apportionment – a square footage basis and the sales revenue basis – in some detail in Jack Wills Ltd v House of Fraser (Stores) Ltd [2016] EWHC 626 (Ch) at [51]-[60]. Similar criticisms were made against the revenue basis. Judge Pelling came to the conclusion that the least unsatisfactory means of assessment was by sales revenue in that case. In another case the facts could be sufficiently different to take a different approach. But I respectfully agree with what Judge Pelling said and in my view a similar conclusion should be reached here. Apportionment should be done on a sales revenue basis. Payments to directors 72.Design & Display is controlled by Mr Lloyd and his wife, Virginia. They are the only two directors and together they own 90% of the shares. Mr Chasmer said that all payments by the company to the directors, by way of directors’ emoluments, contributions to their pensions, payments to shareholders and similar expenses are, in fact, a means of distributing profits to directors. The extent of that profit is presumably decided by Mr and/or Mrs Lloyd. Mr Chasmer stated that it cannot be assumed that the money received by the directors in this way bore any proportion to the contribution they made to any particular part of the business, including the infringing business.73.I have to say that without some more detailed information, I am dubious about treating these costs as just another overhead. Although Mr Lloyd responded to Mr Chasmer’s evidence on a number of points, he chose to say nothing about that.74.Mr Aikens relied on what Judge Birss said in Hollister Inc v Medik Ostomy Supplies Ltd [2011 EWPCC 40; [2012] F.S.R. 17 at [93] to [97], where he refused to allow a deduction for directors’ emoluments, relying on Le Plastrier v Amstrong-Holland (1926) 26 S.R. (NSW) 585. Mr St Quintin took me to the judgment of the Australian High Court in Dart v Decor, which concluded that Le Plastrier was not persuasive authority for the proposition that directors’ emoluments should be disallowed. Moreover, in Jack Wills HHJ Pelling QC said that in principle directors’ emoluments are part of the general overheads of a trading limited liability company and an allowable deduction, at [66].75.The company in question in Jack Wills was House of Fraser (Stores) Limited. There is a difference between a large public company, widely monitored by financial analysts, shareholders and others, and a company such as Design & Display where the emoluments are very much at the private whim and control of the directors.76.I think that in the present case Design & Display was under an obligation to make a reasonable attempt to justify payments to the directors and proportionality between such payments and the contribution made by the directors to the infringing business, alongside the rest of the business. Absent such evidence I do not allow the apportionment of any payments to the directors by way of overheads. The exception is rent, to which I turn next. Rent 77.Design & Display claim rent paid for its premises as an overhead. This is paid to Mr and Mrs Lloyd. Mr Chasmer suggested that the rent may not be charged at a market rate. That is possible but it is a matter that could only be resolved by quite extensive evidence from which I would have to decide what the market rate is. I will instead assume that the rent charged is fair and is a deductible overhead. Delivery charges 78.It is usually possible to identify delivery charges as a directly attributable expense in relation to the infringing business. Abbott said that there was separate invoicing for delivery. However, late submissions from Design & Display stated that this was only the case in a handful of sales with special requirements. I am persuaded that it would be cumbersome and therefore disproportionately costly to treat delivery charges as a cost directly attributable to infringement. They must be treated as part of the general overheads. Conclusion 79.The parties were agreed that they would calculate the profit, if any due to be paid by Design & Display to Abbott, once the principles had been decided. I invite the parties to do so