Pheasant sick as a parrot

In most trade mark infringement claims, that is the end of the story. While many IP cases run as ‘split trials’ (i.e. a trial on the amount of damages or profits to be paid by the infringer takes place after the trial on whether or not there is an infringement); in most cases the parties can agree the amount payable. Not so in this case.

The parties appeared before HHJ Pelling earlier this month for a three day hearing to determine how much profit House of Fraser had actually made in selling the garments bearing the logo. Jack Wills had claimed that it was entitled to the entirety of the amount received from sales less only the actual direct costs of purchasing the garments (i.e. gross margin). House of Fraser argued that it was entitled to deduct a proportion of its overheads, calculated as a percentage of sales revenue, from those sales (i.e. net margin). Further, House of Fraser argued that it was only required to hand over the profits attributable to the trade mark infringement, not the profits attributable to the House of Fraser and Linea brands and the design and quality of the garment itself. The difference was stark: if Jack Wills was correct, House of Fraser would have to hand over well in excess of half a million pounds; if House of Fraser was correct, the number would be a fraction of that. Of course, Jack Wills could have elected for damages, but it didn’t.

The hearing followed hot on the heels of, and was the first outing of the principles aired in the Design & Display appeal which was handed down at the end of February. In that case, clarifying a section from the judgment of the Court of Appeal in an earlier case (Hollister), the Court of Appeal ordered that the first instance judge ought to have allowed the infringing defendant to deduct a proportion of its overheads (if it could prove they were attributable to the infringement) and also force the infringer to hand over only the profits attributable to the IP (i.e. the patent that had been infringed). In doing so, the Court of Appeal cleared up some of the perceived ambiguity over whether or not a defendant needs to show it was operating at ‘capacity’ in order to be entitled to deduct overheads. In short, capacity is not a threshold test and a defendant needs to show that the infringing goods displaced non-infringing goods.

The crux of the argument on deducting overheads came down to whether or not the pigeon garments were part of an existing range, and accordingly displaced non-infringing products. Once the defendant had established that, it would be entitled to deduct overheads if (a) it would have incurred the same overheads even if the infringement had not occurred, and (b) the infringing products displaced non-infringing products, which but for the infringement would have been sustained by the overheads in fact used to sustain the infringement. So while infringers cannot deduct the profits they would have made on non-infringing products, it would be unfair for them not to be able to deduct the costs of selling infringing products that would have been paid for through the sale of non-infringing products.

HHJ Pelling decided that the evidence showed that the products bearing the pigeon clearly did displace the sale of non-infringing products. The pigeon garments formed part of a consistent range of own-brand menswear that House of Fraser had been producing and selling for years. Accordingly, HHJ Pelling permitted House of Fraser to deduct its overheads from the sales of infringing products, thereby reducing the amount payable to Jack Wills substantially and much more in line with the profit level of the business generally. This way Jack Wills was not able to make a windfall from the account of profits, and House of Fraser was only stripped of the profits made - not arbitrarily punished for infringement (which is not the purpose of an account of profits).

HHJ Pelling went on to decide that the products had intrinsic value and the court needed to take account of the value of the House of Fraser and Linea brands and the garments themselves (so as to avoid granting Jack Wills a windfall). He therefore ordered that Jack Wills was only entitled to the proportion of the net profit from the sale of the infringing products that was attributable to the logo, and on the evidence selected 41% as that figure. This is the first time that an infringing defendant has successfully managed to argue for apportionment in a trade mark infringement case (rather than a patent case). HHJ Pelling distinguished the present case from his earlier decision in Wooley, where he declined to apportion for the value of the IP, as that case was a ‘middleman’ case where the middleman was not confused as to the origin of the products. Had this been a middleman case, the judge may not have apportioned.

This case is an interesting and important airing of the principles behind an account of profits. While it is in no sense an open goal for infringers (a party found to have infringed a third party’s IP will have to get its evidence spot on in order to meet the test), with the Design & Display case it brings clarity to the area of accounts of profits and provides a substantial reality check to claimants that have unrealistic expectations of what they can hope to recover. The value of bringing a claim is primarily, and always has been in obtaining an injunction to prevent infringement. IP enforcement is not about the generation of profits through litigation.

Lewis Silkin LLP represented House of Fraser in this case.