ON APPEAL FROM THE PATENTS COUNTY COURT
His Honour Judge Birss QC
 EWPCC 40
Strand, London, WC2A 2LL
B e f o r e :
LORD JUSTICE KITCHIN
MR JUSTICE PETER SMITH
| HOLLISTER INCORPORATED
|- and -
|MEDIK OSTOMY SUPPLIES LIMITED
Richard Hacon (instructed by DWF LLP) for the Defendant/Cross-Appellant
Hearing dates: 3-4 October 2012
Crown Copyright ©
Lord Justice Kitchin:
i) assess the account on the normal basis under English law;
ii) consider the extent of damage caused to the trade mark proprietor by the infringement and the issue of proportionality, in all the circumstances of the case;
iii) decide what final sum should be awarded having regard both to the sum assessed on the account at step (i), and the factors considered at step (ii).
i) whether the judge erred in his approach to the taking of an account for infringement arising from a breach of BMS condition (5);
ii) whether the judge erred in his approach to the assessment of net profits, a point of general importance in intellectual property cases;
iii) whether the judge erred in finding that Medik had sold a total of 58,211 infringing products.
An account for breach of BMS condition (5)
"Rights conferred by a trade mark
1. The registered trade mark shall confer on the proprietor exclusive rights therein. The proprietor shall be entitled to prevent all third parties not having his consent from using in the course of trade:
a. any sign which is identical with the trade mark in relation to goods or services which are identical with those for which the trade mark is registered;
3. The following, inter alia, may be prohibited under paragraphs 1 and 2:
a. affixing the sign to the goods or to the packaging thereof;
b. offering the goods, or putting them on the market or stocking them for these purposes under that sign, or offering or supplying services thereunder;
c. importing or exporting the goods under the sign;
d. using the sign on business papers and in advertising."
"Exhaustion of the rights conferred by a trade mark
1. The trade mark shall not entitle the proprietor to prohibit its use in relation to goods which have been put on the market in the Community under that trade mark by the proprietor or with his consent.
2. Paragraph 1 shall not apply where there exist legitimate reasons for the proprietor to oppose further commercialisation of the goods, especially where the condition of the goods is changed or impaired after they have been put on the market."
"Article 7(2) … must be interpreted as meaning that the trade mark owner may legitimately oppose the further marketing of a pharmaceutical product where the importer has repackaged the product and reaffixed the trade mark unless:
(1) it is established that reliance on trade mark rights by the owner in order to oppose the marketing of repackaged products under that trade mark would contribute to the artificial partitioning of the markets between Member States …;
(2) it is shown that the repackaging cannot affect the original condition of the product inside the packaging; …;
(3) the new packaging clearly states who repackaged the product and the name of the manufacturer in print such that a person with normal eyesight, exercising a normal degree of attentiveness, would be in a position to understand; similarly, the origin of an extra article from a source other than the trade mark owner must be indicated in such a way as to dispel any impression that the trade mark owner is responsible for it; however, it is not necessary to indicate that the repackaging was carried out without the authorization of the trade mark owner;
(4) the presentation of the repackaged product is not such as to be liable to damage the reputation of the trade mark and of its owner; thus, the packaging must not be defective, of poor quality, or untidy; and
(5) the importer gives notice to the trade mark owner before the repackaged product is put on sale, and, on demand, supplies him with a specimen of the repackaged product."
"(5) Where an importer or someone dealing in imported goods intends to use the proprietor's trade mark on, or in relation to, those goods and such use does and will not prejudice the specific subject matter of the mark, must he nevertheless give the proprietor advance notice of his intended use of the mark?
(6) If the answer to the previous question is in the affirmative, does that mean that failure of the importer or dealer to give such notice has the effect of entitling the proprietor to restrain or hinder the importation or further commercialisation of those goods even though such importation or further commercialisation will not prejudice the specific subject matter of the mark?
(7) If an importer or someone dealing in imported goods must give prior notice to the proprietor in respect of uses of the trade mark which do not prejudice the specific subject matter of the mark, (a) does that requirement apply to all such cases of the trade mark, including in advertising, relabelling and repackaging or, if only some uses, which; (b) must the importer or dealer give notice to the proprietor or is it sufficient that the proprietor receives such notice; (c) how much notice must be given?
(8) Is a national court of a member state entitled, at the suit of the proprietor of trade mark rights, to order injunctions, damages, delivery up and other relief in respect of imported goods or the packaging or advertisements therefore where the making of such an order (a) stops or impedes the free movement of goods placed on the market within the EC by the proprietor or with his consent but (b) is not for the purpose of preventing harm to the specific subject matter of the rights and does not help to prevent such harm?"
(3) Where a parallel importer has failed to give notice in respect of a repackaged product as required by the fifth condition of Bristol-Myers Squibb and Others, and accordingly has infringed the proprietor's trade mark(s) for that reason only:
(a) is every subsequent act of importation of that product an infringement or does the importer only infringe until such time as the proprietor has become aware of the product and the applicable notice period has expired?
(b) is the proprietor entitled to claim financial remedies (i.e. damages for infringement or the handing over of all profits made by infringement) by reason of the importer's acts of infringement on the same basis as if the goods had been spurious?
(c) is the granting of financial remedies to the proprietor in respect of such acts of infringement by the importer subject to the principle of proportionality?
(d) if not, upon what basis should such compensation be assessed given that the products in question were placed on the market within the [European Economic Area] by the proprietor or with his consent?"
"61. It follows that the trade mark owner's right to prevent parallel importation of pharmaceutical products which, while not spurious, have been marketed in breach of the requirements to give prior notice to that proprietor is not different from that enjoyed by the proprietor in respect of spurious goods.
62. In both cases, the products ought not to have been marketed on the market concerned."
"63. Thus, a national measure under which, where a parallel importer has marketed goods which are not spurious without giving prior notice to the trade-mark proprietor, that proprietor is entitled to claim financial remedies on the same basis as if the goods had been spurious, is not in itself contrary to the principle of proportionality. However, it is for the national court to determine the amount of the financial remedies according to the circumstances of each case, in the light of, in particular, the extent of damage to the trade mark proprietor caused by the parallel importer's infringement and in accordance with the principle of proportionality.
64. In the light of the foregoing, the answer to the third question must be that, where a parallel importer has failed to give prior notice to the trade mark proprietor concerning a repackaged pharmaceutical product, he infringes that proprietor's rights on the occasion of any subsequent importation of that product, so long as he has not given the proprietor such notice. The sanction for that infringement must be not only proportionate, but also sufficiently effective and a sufficient deterrent to ensure that Directive 89/104 is fully effective. A national measure under which, in the case of such an infringement, the trade mark proprietor is entitled to claim financial remedies on the same basis as if the goods had been spurious, is not in itself contrary to the principle of proportionality. It is for the national court, however, to determine the amount of the financial remedies according to the circumstances of each case, in the light in particular of the extent of damage to the trade mark proprietor caused by the parallel importer's infringement and in accordance with the principle of proportionality."
"What criteria are to be used in order to determine whether the outcome is one which achieves those objectives? The answer is to have regard to proportionality and the extent of the damage to the proprietor caused by the infringement. I believe the decision the Court reached was that the amount of the financial remedy depends on all the facts and circumstances. Giving the proprietor the right to claim the remedy on the same basis as if the goods were spurious is not wrong "in itself". A proprietor may be able to justify a claim like that. However the facts may not justify it."
"67. The upshot of the Court's judgment in Boehringer II is that, in assessing the amount of the financial remedy, the result may turn out to be just the same as the one which would be arrived at if the goods were spurious but on the other hand it may not be. That is what paragraph 63 is getting at. If the Court of Justice had decided that the assessment of the amount of the financial remedy in this sort of case was always going to be precisely the same as the case in which the goods were spurious, they would have said so. It could have been stated in very short and simple terms. It was not stated that way.
68. Pulling this together, the approach I should adopt is the following:
i) Assess the account on normal basis under English law;
ii) Consider the extent of damage caused to the proprietor by the infringement and the issue of proportionality, in all the circumstances of the case;
iii) Decide what final sum should be awarded having regard both to the sum assessed on the account at step (i), and the factors considered at step (ii).
69. The outcome may be that the sum awarded is the sum produced at step (i). That would be the same as the outcome if the goods were spurious and it may well be justified in a given case. Equally however the outcome may be a lesser sum. It is unlikely that the result will produce a token or nominal account since that would not be an effective remedy or sufficient deterrent."
"128. Factors tending to a lower fraction are: the fact that the infringement arises only from a breach of BMS (5), the claimants' knowledge in this case and the lack of any impact on the purposes for which the BMS (5) condition was created. Factors tending to a higher fraction are: the need for the remedy to be effective and a sufficient deterrent, the fact that had the claimants made the sales which in this case were infringing sales, they would in all probability have earned more by way of profits themselves than Medik's gross profit. Thus whatever sum I award I am tolerably sure that I am not giving the claimants more than they probably lost. Although that is not normally relevant on the English account of profits, it is hard to see how it is not at least a relevant consideration as a result of Boehringer II.
129. I will award the claimants half of Medik's profits. That seems to me to be an effective deterrent to dissuade those engaged in repackaging and relabeling from not giving notice which accords with being proportionate to the reality of this case as a breach of a procedural requirement and nothing more."
"(2) The trade mark laws applicable in the Member States before the entry into force of Directive 89/104/EEC contained disparities which may have impeded the free movement of goods and freedom to provide services and may have distorted competition within the common market. It was therefore necessary to approximate the laws of the Member States in order to ensure the proper functioning of the internal market.
(4) It does not appear to be necessary to undertake full-scale approximation of the trade mark laws of the Member States. It will be sufficient if approximation is limited to those national provisions of law which most directly affect the functioning of the internal market …
(10) It is fundamental in order to facilitate the free movement of goods and services, to ensure that registered trade marks enjoy the same protection under the legal systems of all the Member States. This should not, however, prevent the Member States from granting at their option extensive protection to those trade marks which have a reputation."
"14 Action for infringement.
(1) An infringement of a registered trade mark is actionable by the proprietor of the trade mark.
(2) In an action for infringement all such relief by way of damages, injunctions, accounts or otherwise is available to him as is available in respect of the infringement of any other property right."
(1) The Community Trade mark courts shall apply the provisions of this Regulation.
(2) On all matters not covered by this Regulation a Community trade mark court shall apply its national law, including its private international law.
(3) Unless otherwise provided in this Regulation, a Community trade mark court shall apply the rules of procedure governing the same type of action relating to a national trade in the Member State in which the court is located.
(1) Where a Community trade mark court finds that the defendant has infringed or threatened to infringe a Community trade mark, it shall, unless there are special reasons for not doing so, issue an order prohibiting the defendant from proceeding with the acts which infringed or would infringe the Community trade mark. It shall also take such measures in accordance with its national law as are aimed at ensuring that this prohibition is complied with.
(2) In all other respects the Community trade mark court shall apply the law of the Member State in which the acts of infringement were committed, including the private international law."
"Remedies in infringement proceedings
5.-(1) This regulation is without prejudice to the duties of the Community trade mark court under Article 98(1) of the Community Trade Mark Regulation.
(2) In an action for infringement of a Community trade mark all such relief by way of damages, injunctions, accounts or otherwise is available to the proprietor of the Community trade mark as is available in respect of the infringement of any other property right."
"(3) On or before 4.00pm on 5 July 2010 the Defendant shall serve on the Claimants a witness statement verified by a statement of truth signed by a director or an individual of equivalent authority setting out the following information:
(a) the number of sales of all Infringing Products sold by the Defendant;
(b) the sums received or receivable relating to such sales; and
(c) the approximate cost of marking those sales together with a statement as to how that estimate was made.
(4) The Claimants shall, within 56 days of receiving the information referred to in paragraph (3) above, elect whether to proceed with an inquiry as to damages or an account of profits in respect of the Infringing Products.
(5) There shall be an inquiry as to damages, or if the Claimants so elect an account of profits, in relation to the Defendant's acts of trade mark infringement in respect of the Infringing Products ("the Claimants' Inquiry or Account").
(6) For the avoidance of doubt the disclosure to be given pursuant to paragraph (3) above and the Claimants' Inquiry or Account covers all products bearing one or more of the trade marks identified in the Particulars of Claim imported and repackaged by the Defendants between 1 July 2003 and 19 October 2009.
(7) The Defendant shall pay the Claimants such sums as are found due upon the Claimants' Inquiry or Account."
1. Member States shall ensure that the competent judicial authorities, on application of the injured party, order the infringer who knowingly, or with reasonable grounds to know, engaged in an infringing activity, to pay the rightholder damages appropriate to the actual prejudice suffered by him as a result of the infringement.
When the judicial authorities set the damages:
(a) they shall take into account all appropriate aspects, such as the negative economic consequences, including lost profits, which the injured party has suffered, any unfair profits made by the infringer and, in appropriate cases, elements other than economic factors, such as the moral prejudice caused to the rightholder by the infringement;
(b) as an alternative to (a), they may, in appropriate cases, set the damages as a lump sum on the basis of elements such as at least the amount of royalties or fees which would have been due if the infringer had requested authorisation to use the intellectual property right in question.
2. Where the infringer did not knowingly, or with reasonable grounds to know, engage in infringing activity, Member States may lay down that the judicial authorities may order the recovery of profits or the payment of damages, which may be pre-established."
"With a view to compensating for the prejudice suffered as a result of an infringement committed by an infringer who engaged in an activity in the knowledge, or with reasonable grounds for knowing, that it would give rise to such an infringement, the amount of damages awarded to the rightholder should take account of all appropriate aspects, such as loss of earnings incurred by the rightholder, or unfair profits made by the infringer and, where appropriate, any moral prejudice caused to the rightholder. As an alternative, for example where it would be difficult to determine the amount of the actual prejudice suffered, the amount of the damages might be derived from elements such as the royalties or fees which would have been due if the infringer had requested authorisation to use the intellectual property right in question. The aim is not to introduce an obligation to provide for punitive damages but to allow for compensation based on an objective criterion while taking account of the expenses incurred by the rightholder, such as the costs of identification and research."
"Assessment of damages
(1) Where in an action for infringement of an intellectual property right the defendant knew, or had reasonable grounds to know, that he engaged in infringing activity, the damages awarded to the claimant shall be appropriate to the actual prejudice he suffered as a result of the infringement.
(2) When awarding such damages –
(a) all appropriate aspects shall be taken into account, including in particular –
(i) the negative economic consequences, including any lost profits, which the claimant has suffered, and any unfair profits made by the defendant; and
(ii) elements other than economic factors, including the moral prejudice caused to the claimant by the infringement; or
(b) where appropriate, they may be awarded on the basis of the royalties or fees which would have been due had the defendant obtained a licence.
(3) This regulation does not affect the operation of any enactment or rule of law relating to remedies for the infringement of intellectual property rights except that it is inconsistent with the provisions of this regulation."
"The transfer to the Plaintiff of the entire profit made by the Defendant from selling the drug "Nolvadex" is also not contrary to community law. The European Court of Justice gave its opinion in the "Boehringer/Swingward II" judgement (GRUR 2007, 586 marginal note 57 et seq.) on the question of whether the owner of a trademark used for a drug can demand financial compensation for an infringement by the parallel importer on the same basis as in a case of counterfeiting goods. In the present context too the arguments in marginal numbers 61 and 63 of the decision … are of particular interest. Here the Court did not accept the opinion of Advocate-General Sharpston in her closing remarks on 6th April 2006, that the sanction in the case of a failure to provide advance information must be less punitive than in the case of an infringement of the other four repacking conditions (marginal number 76)."
Assessment of net profits
i) All costs shown to have nothing to do with the manufacture and sale of the A4 and A5 acetic acid should be ignored.
ii) All costs relating only to such manufacture and sale should be allowed in their entirety.
iii) All other costs, that is to say costs relating to the manufacture or sale of A4 and A5 acetic acid and other products as well should be divided between the former and the latter, and the part relating to A4 and A5 acetic acid should be allowed.
"I do not accept HC's arguments. Take a case where a company has two separate products which cost the same to make and sell and which generate the same revenues. The company employs one salesman to sell both products. No doubt if the company had to stop making one product it would continue to have to employ the salesman to sell the other and vice versa. On HC's "but for" approach, the cost of the salesman would not be allowable against the revenues of either product. The commercial reality is different. A company like BP tries to make use of the economies of scale. Certain costs are shared between a number of activities in the hope and expectation that centralising things such as support services will reduce the costs burden on each activity. The effect of such economies of scale is to increase the profitability of each activity. To take the example just given, the profitability of each product is enhanced because, instead of each having to pay the full costs of its own dedicated salesman, they share one salesman between them. The profitability of A4 and A5 acid is increased by BP not having to have separate services for those plants but sharing them with others in the Acetyls Business Unit. To allow HC to take all the benefits of such costs sharing by BP without taking into account the proper proportion of costs borne by the Unit would be unfair to BP and would wrongly increase the notional profits made on A4/A5."
"In calculating an account of profits, the defendant may not deduct the opportunity cost, that is, the profit forgone on the alternative products. But there would be real inequity if a defendant were denied a deduction for the opportunity cost as well as being denied a deduction for the cost of the overheads which sustained the capacity that would have been utilised by an alternative product and that was in fact utilised by the infringing product. If both were denied, the defendant would be in a worse position than if it had made no use of the patented invention. The purpose of an account of profits is not to punish the defendant but to prevent its unjust enrichment.
Where the defendant has forgone the opportunity to manufacture and sell alternative products it will ordinarily be appropriate to attribute to the infringing product a proportion of those general overheads which would have sustained the opportunity. On the other hand, if no opportunity was forgone, and the overheads involved were costs which would have incurred in any event, then it would not be appropriate to attribute the overheads to the infringing product. Otherwise the defendant would be in a better position than it would have been in if it had not infringed. It is not relevant that the product could not have been manufactured and sold without these overheads. Nor is it relevant that absorption method accounting would attribute a proportion of the overheads to the infringing product. The equitable principle of an account of profits is not to compensate the plaintiff, nor to fix a fair price for the infringing product, but to prevent the unjust enrichment of the defendant.
Of course, further possibilities may in some cases be open on the evidence. Overhead costs might have been increased by the manufacture and sale of the infringing product, or overhead costs might have been reduced had the infringing product not been produced. In either case it may be appropriate to attribute the difference in overhead costs to the infringing product."
"Whether Decor and Rian should succeed in their contentions depends upon whether, as a matter of fact and substance, the overheads which they seek to have deducted are attributable to the manufacture and sale of the infringing product. In arriving at an answer, the court must consider such questions as whether the overheads in any particular category were increased by the manufacture or sale of the product, whether they represent costs which would have been reduced or would have been incurred in any event, and whether they were surplus capacity or would, in the absence of the infringing product, have been used in the manufacture or sale of other products. Dealing with the last of these questions may require the use of the concept of opportunity cost. If any of the categories are to be brought into account, the proportion to be allocated to the infringing product must be determined and it is here that approximation rather than precision may be necessary. But such an approach has long been accepted. As was said in Colburn v Simms (1843) 2 Hare 543 at 560; 67 ER 224 at 231:
The court, by the account, as the nearest approximation which it can make to justice, takes from the wrongdoer all the profits he has made by his piracy, and gives them to the party who has been wronged.
It follows that we consider that King J. was in error in directing that "no part of general overhead costs is allowable as a deduction" and that the Full Court was substantially correct in directing, as it did, that "the appellants are at liberty to show that various categories of overhead contributed to the obtaining of the relevant profit, and to show how and in what proportion they should be allocated in the taking of the account of profits". But it would be better, we think, if the word "contributed" were replaced by the words "are attributable"."
The number of infringing products
"105. Medik contend they have disclosed all the sales of relevant goods to the claimants. The claimants do not accept that. Documents called Assembly Reports were disclosed and are an accurate record of the volume of relabelling and repackaging for the periods they cover. However there are gaps. For the relevant period of roughly four years, gaps for more than 700 days exist. The claimants submit that it is inconceivable that there was no relabelling of relevant products in the missing periods. Medik say this is all wrong. They have disclosed the relevant reports. No relevant activity took place in the gap.
106. Mr Geale was permitted to carry out a checking process for certain products. He found nothing missing or wrong in the materials he was checking but the nature of the checking process means that he would not have been able to tell if other repackaging of different relevant products had taken place. One thing Mr Geale did find was that for the products he checked (3 Hollister and 8 Dansac) there was only one purchaser of Dansac products and one for Hollister. Mr Fernando pointed out that in a letter of 21st October Medik's solicitors had indicated they had 9 customers and submitted it was incredibly unlikely that the products chosen for the sample just happened to be products bought by only one customer. His point was to show that there must be more going on that was catered for in the disclosed documents.
107. There is no doubt that the numbers of relevant products bought by Medik is higher than the number repackaged. The difference can be seen by its effect on the gross profit figures. The claimants contend, based on number of products purchased, that the figure should be £546,150 whereas, based on the Assembly Reports but otherwise on the same basis the figure is £445,864. It may be noted that although it can be said that Assembly Reports for half the period are missing, the difference in numbers is about 20-25%.
108. Medik say the difference is simply because many products were sold without repackaging and are therefore not infringing. The claimants contend that in the absence of a proper explanation for the gaps in the Assembly Reports, I should infer that all the products purchased were in fact repackaged and should be accounted for.
109. Mr Badiani was the witness whose evidence would have verified the numbers of products in question but for the reasons I have explained, he did not give evidence. If I had heard from Mr Badiani then this is an issue on which his credibility as a witness may have played a part.
110. However on the other hand I am quite satisfied that Medik did sell non-repackaged versions of these goods. Thus to simply use the figures for goods purchased would certainly produce a number which was too high. It seems to me that, unverified though they are, I have no other realistic option but to accept the figures contended for by Medik. I will do so."
i) the judge erred in his approach to the taking of the account; the claimants were entitled to an account of the net profits made by Medik from its infringement;
ii) the judge erred in his approach to the calculation of net profits; Medik did not establish that it was entitled to deduct a portion of its general overheads;
iii) there is no basis for challenging the judge's finding as to the number of infringing products sold by Medik.
Mr Justice Peter Smith:
Lord Justice Jackson: