What should you consider before choosing an account of profits?

An intellectual property owner’s first instinct on discovering an infringement is usually to obtain a speedy injunction to stop it. This achieved, however, the focus may turn to monetary compensation. In the (relatively rare) cases where this issue cannot be settled between the parties out of court, the successful right owner will usually be entitled to choose between an enquiry into damages and an account of the profits derived by the infringer from the infringement.

Damages aim to compensate the right holder for losses arising out of the infringement whereas an account is based on the infringer’s profits. The idea is that the infringer has unfairly profited from the exploitation of the right holder’s property (the IP right in question), so should pay this money over to the right holder. These are alternatives[i].

You must take the infringer as you find it

A major risk factor in relation to an account is that you must "take the infringer as you find it". The question is what profit the infringer has actually made, not what profit it could or ought to have made. This is inevitably very fact specific and unpredictable and may be affected by the infringer’s bad business decisions.

Allowable expenses

In arriving at a profit figure the infringer may deduct costs associated solely with the infringements. In addition, it may deduct a portion of its general overheads if the infringing sales would have been replaced by non-infringing sales. For example, the recent High Court case of Bei Yu Industrial Co v Nuby (UK)[ii], involved the importation and sale of baby baths that infringed Bei Yu’s registered design rights. The infringer (Nuby) was able to show that if it had not imported and sold the infringing baths it would have incurred the same overheads in relation to the sale of non-infringing products. As a result it was able to deduct a corresponding portion of its general overheads. If, by contrast, the infringing sales had used up spare capacity, Nuby would not have been entitled to deduct this portion of general overheads. Interestingly in this case the court also allowed improper payments to be deducted as general overheads, namely expense account items wrongly claimed by an employee. In another case, research and development costs were allowed to be deducted even though the results were not useful or used during the period of the infringement[iii].

Apportionment

The method of apportionment is also important, and the court may apply a different basis of apportionment for different types of overhead. In the baby bath case referred to above, the infringer, Nuby, argued for an apportionment based on the percentage of its total sales revenue referable to its infringing activities, and the court agreed that this was, in general, a fair broad-brush approach. However, it made an exception in relation to website, telephone, IT, stationery and office equipment where it made the apportionment by reference to the fact that the baby bath was one of 280 products being marketed by Nuby. This was in recognition that, for example, the cost of putting details of a product onto the website was much the same however expensive the product was. The judge commented that each approach was “an artificial mechanism adopted for pragmatic reasons” and the object was to provide “the least unrealistic outcome”[iv].

A careful but broad-brush approach

As can be seen from the above, the court takes a careful, but broad brush approach to the assessment of the infringer’s profit. There are a number of unpredictable elements, especially the question of general overheads and what expenses may be deducted, and the outcome will always be dependent on the particular business and the particular facts. Before the right holder makes the election the infringer must provide relevant commercial information to it, to enable it to make an informed choice. This does not, however, extend to the exact amount of any profits. The right holder will wish to consider this carefully before making the election, bearing in mind the factors described above. There will rarely be scope for a change of mind.