England and Wales Court of Appeal (Civil Division) Decisions

IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM CHANCERY DIVISION
MR JUSTICE JACOB

		Royal Courts of Justice Strand, London, WC2A 2LL
		13th March 2003

Lord Justice Aldous:

1. Coflexip SA are the proprietors of European Patent (UK) No. 0478742 and their associated company, Coflexip Stena Offshore Limited are exclusive licensees. I will refer to them as Coflexip.
2. Coflexip sued the defendants, which I will refer to as Stolt, for infringement and Laddie J held that the patent was valid and infringed. His judgment was upheld on appeal and a petition for permission to appeal to the House of Lords has been refused. At that stage Coflexip took appropriate steps to bring before the court the enquiry as to damages that had been ordered. Pursuant to a directions order, Coflexip filed Points of Claim which were amended and refiled on 20th September 2001. That Amended Points of Claim has been amplified in a response to a request for further information. Stolt have filed an Amended Points in Answer.
3. Coflexip's contentions are difficult to discern from the Amended Points of Claim, but it is apparent that they claim damages on the basis that Stolt's infringements caused them damage due to (a) loss of profits, (b) the need to reduce prices and (c) in the alternative, loss of a reasonable royalty.
4. By an application dated 3rd May 2002 Stolt applied to strike out the part of the Amended Points of Claim that claimed damages for loss of profits upon the ground that it disclosed no reasonable grounds for bringing the claim. In the alternative, they sought an order that Coflexip should provide a statement of case in relation to their claim for damages for lost profits and price reduction. That application came before Jacob J on 30th July 2002. He concluded that the submissions of Stolt were correct. It followed that the pleading was insufficient and therefore Coflexip should replead their case for loss of profits in the light of his judgment. He so ordered and against that decision Coflexip appeal. For reasons that appear later in this judgment, Coflexip are prepared to replead their case, but they contend that the judgment of the judge was based upon a wrong view of the law with the consequence that the requirement that their repleaded case should reflect the judge's conclusions was wrong.
5. A second application was made on 18th October 2002 to strike out the parts of the Amended Points of Claim which claimed damages because the acts of Stolt had caused Coflexip to reduce their prices. The judge came to a similar decision and made a similar order. Coflexip appeal that decision and order for the same reasons. As the parties accept that the issues that arise are the same, it is sufficient to concentrate upon Coflexip's claim for loss of profits.
6. The patent is for an invention entitled "Device and process for unrolling of flexible tubular conduits essentially vertically." The object of the invention is said to be the laying of flexible conduits at depths in the sea that are substantially greater than those which are feasible by using the known means. Claim 1 is to the process and claim 3 is to a device for operating the process of claim 1. As found by Laddie J, the invention overcame serious and longstanding problems and provided increased safety and speed of laying.
7. At trial the acts held to infringe involved the laying of flexible pipe from a ship called the "Seaway Falcon." As yet there has not been complete disclosure of the documents surrounding those contracts, but from what we were told, the documents would show that some of the contracts specified laying using the Seaway Falcon, others were silent as to what process was to be used and at least one referred to a different ship which used a non-infringing process.
8. The Amended Points of Claim is an obscure document which makes little attempt to follow the normal rules of pleading. That Mr Miller QC, who appeared for Coflexip, nearly admitted to be correct. I believe he realised that his clients' case needed to be repleaded and to assist he provided a draft containing an overview of Coflexip's case which contained a clearer statement of what was intended to be alleged in the Amended Points of Claim. In that draft it is alleged that Stolt used the Seaway Falcon in an infringing manner on 15 contracts. The draft continued as follows:

"2. The Claimants contend that but for the Defendants' wrongful acts the First Claimant's appropriate UK operating subsidiary would have performed all or a proportion of those Infringing Contracts. Further if the First Claimant's appropriate UK operating subsidiary had performed the Infringing Contracts the Claimants would have made, in respect of each Infringing Contract, those profits which are referred to as lost profits in section B, and those uplifts and other amounts referred to hereunder in paragraphs 3, 4 and 5. The Claimants claim those lost profits and said uplifts and other amounts in respect of each of the Infringing Contracts.

The wrongful acts relied upon hereunder are

(a) In the case of Infringing Contracts (i), (ii), (iii) and (vi) the use of and offer for use of an infringing process as claimed in the Patent with the Vertical Lay System,

(b) In the case of all the Infringing Contracts the use of the Vertical Lay System which is an infringing product.

2A. In determining the proportion of Infringing Contracts which but for the Defendants wrongful acts would have been performed by the First Claimant's appropriate UK operating subsidiary the Claimants will, in addition to relying upon evidence relating to each of the individual Infringing Contracts, rely upon the loss of chance of performing the Infringing Contracts. In particular the Claimants rely upon those facts and matters pleaded in section F and that during the period 1995 – 31st July 2000 the Second Claimant's share of the UK flexible pipe installation market (excluding Infringing Contracts) was 60.8% and that during the period 1997 – 31st July 2000 the Second Claimant's share of the relevant UK rigid pipe installation market was 45%. The Claimants will contend that based upon this loss of chance the proportion (by value) of the Infringing Contracts which but for the Defendants said wrongful acts would have been performed by the First Claimant's appropriate UK operating subsidiary would have been (a) in the case of infringing flexible pipe installation contracts (contracts (i) to (vii), (xii), (xiv), (xv) not less than 60.8% and (b) in the case of those pipe installation contracts which included the laying of both flexible conduit and rigid pipe (contracts (viii) – (x), (xiii)) not less than 45%.

3. Some of the prices set out in Section B were reduced due to the Defendants' infringing competition. Accordingly, where there has been such price reduction, the Claimants claim an uplift to the Section B losses as set out in Section C below.

…

Reasonable Royalty

7. In respect of that proportion of the Infringing Contracts for which the Claimants are not awarded damages for loss of profits, the Claimants will claim a royalty in respect thereof at a rate expressed against the particular contract value calculated by reference to 25% of the Defendants' anticipated incremental profit for the contract.

8. If, contrary to the First Claimant's contention set out in Section B below in respect of Magnus Swift, Magnus MP5/J2, Magnus J7, Foinaven and Dauntless/Durward, the First Claimant is not entitled to recover the loss of profit suffered by its operating subsidiary, then the Claimants will, in the alternative, claim a reasonable royalty in respect thereof.

Additional losses for Price Reduction (Non-Infringing Contracts)

9. The Claimants contend that but for the presence of the Defendants' Vertical Lay System in the market and the Claimants' belief that the Defendants were in direct competition with the First Claimant's appropriate UK operating subsidiary the said subsidiary would not have lowered its prices as particularised in tables 3 and 4 of the Confidential Schedule. The Claimants contend they are entitled to recover those losses arising from it lowering its prices as aforesaid together with an uplift to such losses in respect of variation in workscope as more particularly set out in Table 8 of the Confidential Schedule."

9. Stolt submitted to the judge that the Amended Points of Claim did not properly plead any causal link between the loss of profits claimed and the infringement of the patent. They submitted that the loss claimed arose at the time that the contracts were awarded to Stolt. For Coflexip to recover damages for that loss, they needed to plead and prove that a cause of the award of the contract to Stolt was the infringing method of pipe laying that was used or use of infringing apparatus. If the method by which the pipes were to be laid was not a requirement of the contract, then the loss of the contracts was not caused by the infringement. The pleading did not allege that a cause of the award of the contracts to Stolt was that they were going to use the infringing process or infringing apparatus. Coflexip contended that no such allegation was necessary. They submitted that it was sufficient to plead and prove that but for the infringement by Stolt, Coflexip would have been awarded the contracts or a proportion of them.
10. The parties are agreed that there is an issue of law between them. However they were unable to agree a form of words which defined that issue. I tentatively suggest that it could be generally stated as – "To obtain damages for loss of profits is it sufficient for Coflexip to allege and prove that Coflexip carried out infringing acts and that but for those acts Coflexip would have obtained the contracts or some of them, or must Coflexip go further and allege and prove that the contracts were lost because of a desire or need that Stolt should use an infringing process or apparatus?"
11. The judge's reasoning can be gathered from this part of his judgment.

"It boils down to this, that in these extremely complicated and involved contracts which take a lot of negotiation, the claimants are not in a position to show that the use of the apparatus or process of the invention was considered crucial or indeed even material for either the defendants or their customers. So this is not a case like Gerber where there were really only two machines in the market -- plaintiffs' and the defendants' -- and it was the machines themselves which the customer wanted. It is not a case like The United Horse Shoe and Nail where it was the nails made by this process which the customer wanted. I infer from the report of that case that they were better than other nails, possibly because the process made better nails. This is a case in which it is alleged that the defendants used a particular method of laying the pipe. That, it is said, in itself entitles the claimants to say the competition damaged them by reason of the infringement. The say they are entitled to all the consequences of that competition. What is lacking, in my judgment, is any nexus between the patented invention and the contracts. Whether one puts it on the basis that all the contracts would have been obtained or that there was a chance that the contracts would have been obtained, I am of the view that the current pleadings make it impossible to proceed because they do not disclose any basis for deciding either one or the other or what the chance might have been.Mr. Miller submitted that the defendants here were simply, in effect, saying that they could have got the contracts by non-infringing means, as was contended by the defendants in The United Horse Shoe. Whilst at this level of court that proposition cannot be challenged, it seems to me that in any event this is different. In The United Horse Shoe it was the process which produced the nails which the public wanted: they were special nails. Here things are different: the customer was not interested in the process at all and it was not necessary to specify it to obtain the contract.

I think the appropriate thing to do is to give the claimants an opportunity to replead. Mr. Miller said there may be more information that he wants to put in. I was originally minded to strike it all out as it stands, but if he is going to replead, he will have to plead how and why the use of this invention was causative of the loss of prospect of each contract. That will depend upon the technology and not merely an assertion that the invention happened to be used in the course of the execution of the contract."

12. The issue between the parties as to Coflexip's claim to recover in respect of reduction of prices raises the same issue of law. In broad terms Coflexip contend that to recover damages for price reduction they need only plead and prove that the acts of Stolt caused them to reduce their prices and that those acts were wrongful. Stolt contend that Coflexip must go further and plead and prove that a cause of the price reduction was the use of the infringing process.
13. Both parties urged us to resolve the issue of law even though they were unable to agree how that issue should be expressed. Despite the urging of the parties, I have come to the conclusion that it would be wrong at this stage of the enquiry to decide an issue of causation, perhaps including a dispute on remoteness, when the issue is not defined and none of the facts have been found. From what we were told, it would appear that each contract is negotiated separately with the tender documents costing around £100,000 to complete. They all involved different tasks. Thus the advantages of the patented process and apparatus could have been relevant to one or all of the contracts or for none. It follows that a decision on causation may vary from contract to contracts. It may be that that is the reason why the parties cannot define the issue.
14. I have come to the conclusion that Coflexip should replead their case in the light of submissions made before the judge and in this Court. When so doing, they should not be prevented from pleading causation in the manner indicated in their draft pleading set out above. Their view of the law of causation, which appears to differ from that of the judge, is in my view at least arguably correct. A definite decision should only be made when the facts are known. I therefore give my reasons for saying that Coflexip's view of the law of causation is at least arguable. The views expressed should not bind the judge who hears the enquiry. He will have the advantage a properly pleaded case and of knowing the facts and will therefore be in a better position to decide the legal issues that arise.
15. The basic law was stated by Lord Wilberforce in General Tire Firestone Tyre and Rubber Company Limited [1976] RPC 197 at 212:

"As in the case of any other tort (leaving aside cases where exemplary damages can be given) the object of damages is to compensate for loss or injury. The general rule at any rate in relation to "economic" torts is that the measure of damages is to be, so far as possible, that sum of money which will put the injured party in the same position as he would have been in if he had not sustained the wrong. (Livingstone v. Rawyards Coal Co. 5 A.C. 25, 39, per Lord Blackburn.)

… The respondent did not elect to claim an account of profits: their claim was only for damages. There are two essential principles in valuing that claim: first, that the plaintiffs have the burden of proving their loss: second, that the defendants being wrong-doers, damages should be liberally assessed but that the object is to compensate the plaintiffs and not punish the defendants. (Pneumatic Tyre Co. Ltd. v. Puncture Proof Pneumatic Tyre Co. Ltd. (1899) 16 R.P.C. 209 at p. 215).

These elemental principles have been applied in numerous cases of infringements of patents. Naturally their application varies from case to case. Reported authorities, many of which were cited in argument, may be useful as illustrations of judicial reasoning, but are capable of misleading if decisions on a particular set of facts and observations in judgments leading up to such decisions are later relied upon as establishing a rule of law. Nevertheless I think it useful to refer to some of the main groups of reported cases which exemplify the approaches of courts to typical situations.

1. Many patents of inventions belong to manufacturers, who exploit the invention to make articles or products which they sell at a profit. The benefit of the invention in such cases is realised through the sale of the article or product. In these cases, if the invention is infringed, the effect of the infringement will be to divert sales from the owner of the patent to the infringer. The measure of damages will then normally be the profit which would have been realised by the owner of the patent if the sales had been made by him (see The United Horse-Shoe and Nail Co. Ltd. v. John Stewart & Co., 13 A.C. 401.) An example of this is Boyd v. The Tootal Broadhurst Lee Co. (1894) 11 R.P.C. 175 where the plaintiff manufacturers proved that a profit of 7s. per spindle would have been made, and settlements of litigation for lesser rates were discarded.

Other patents of inventions are exploited through the granting of licences for royalty payments. In these cases, if an infringer uses the invention without a licence, the measure of the damages he must pay will be the sums which he would have paid by way of royalty if instead of acting illegally, he had acted legally.

…

In some cases it is not possible to prove either (as in 1.) that there is a normal rate of profit, or (as in 2.) that there is a normal, or established, licence royalty. Yet clearly damages must be assessed. In such cases it is for the plaintiff to adduce evidence which will guide the court. This evidence may consist of the practice, as regards royalty, in the relevant trade or in analogous trades; perhaps of expert opinion expressed in publications or in the witness box; possibly of the profitability of the invention; and any other factor on which the judge can decide the measure of loss. Since evidence of this kind is in its nature general and also probably hypothetical, it is unlikely to be of relevance, or if relevant of weight, in the face of the more concrete and direct type of evidence referred to under (2). But there is no rule of law which prevents the court, even when it has evidence of licensing practice, from taking these more general considerations into account. The ultimate process is one of judicial estimation of the available indications."

16. Mr Miller submitted that, for the purpose of this case, the most important statements of the law were contained in the speeches of the House of Lords in The United Horse Shoe and Nail Company Ltd v Stewart and Company (1888) 5 RPC 260. In that case two patents were held valid and infringed. The first patent was for an invention for improvements in a process for manufacturing horse-shoe nails designed to avoid blanks, from which the nails were made, from being obstructed during movement towards two rolls. The second related to a mechanism for punching out nails from blanks and for producing the blanks.
17. Counsel for the infringer drew attention to the fact that the only object of second patent was to save waste material and the object of the first patent was to prevent clogging. He submitted:

"If it could be shown that successful competition was only possible by using the waste saving invention, we admit that substantial damages might be recovered. But the evidence is that competition was due to other causes and not the infringement, and, therefore, only nominal damages are recoverable. …

The second head of infringement is for an "interrupter", a contrivance to prevent clogging of the machinery at a particular stage. No interrupter was used in the making of several of the cases of nails. The interrupter had nothing to do with the sales. The evidence shows that the greatest fall in price took place at a time before the Defendant's competition would have affected it …"

18. Those submissions of counsel are to an extent similar to those made by Mr Watson QC who appeared for Stolt. He submitted that the pleaded case of causation could not succeed as it was not pleaded that the competition provided by Stolt arose because of use of the invention. Coflexip had to plead and prove that the invention played a part in securing the contracts before loss of profit could be claimed.
19. The Lord Chancellor in the United Horse Shoe case said at page 264:

"… The actual infringement complained of consists in the sale of cases of nails produced by patent machines, which are admitted to be infringements of the Pursuers' patents. Every nail thus produced was an infringement of the Pursuer's patents, the sale of which could have been interdicted, and would give a right of action against all concerned in its production and sale. The question appears to me to arise solely on the assessment of damages. But I think the admissions in this case render unnecessary, and, indeed, irrelevant, an examination into the various parts of the patents. The cases of nails tales quales were infringements, and in so far as these nails, such as they were, interfered with the sale of the Pursuer's own goods, they were properly the measure of the damages which the Pursuers were entitled to obtain. I say, so far as they interfered with the sale of the Pursuer's own goods, and while I agree with the Lord Ordinary that the Pursuers can only recover compensation for the actual loss which they have sustained, the estimate of the particular sum which is to be arrived at when assessing compensation for the injury is purely a matter for a jury, and can rarely be made the subject of exact arithmetical calculation.

I am satisfied, however, that the boxes and cases of nails sold by the Defenders did, in fact, interfere with the Pursuers' sale. I am unable to agree with Lord Adam that there is nothing in the proof to show, or make it probable that the Pursuers would have made these sales. I do not say all these sales. I think there is considerable evidence to show that purchasers generally would have sought that particular nail, and I do infer that the Pursuers, but for the intervention of the Defenders, would have effected a large part of these sale. And I certainly find from the evidence that among the competing nails in the market they were not all equally sought after, but that the Pursuers' nails had a higher reputation. I think it is nothing to the purpose to show, if it is shown, that the Defenders might have made nails equally good, and equally cheap, without infringing the Pursuers' patent at all. I will assume that to be proved, but if one assumes that the nails which were, in fact, made by the pirated machines injured the Pursuers' sales, what does it matter if it is ever so much established that the loss which the Pursuers have sustained by the unlawful act of the Defenders might also have been sustained by them under such circumstances as would give the Pursuers no right of action?

Your Lordships have to deal with the facts as they exist, and those facts, as I say, are that the Defenders have in derogation of the Pursuers' rights sold cases of nails which they have no right to sell, and for which to the extent to which they have interfered with the sale of the Pursuers' patented nails, the Pursuers are entitled to damages."

20. Lord Macnaughton was of a similar view. He said at page 268:

"The decision in the patent action and the minute of admission in the present case established beyond question that in selling the Shoe-brand nails the Respondents infringed the Appellants' rights. The sale of each and all of those nails was unlawful. It appears to be beside the mark to say that the Respondents might have arrived at the same result by lawful means, and that, without infringing the Appellants' rights, they might have produced a nail which would have proved an equally dangerous rival of the Globe nail. The sole question is, what was the loss sustained by the Appellants by reason of the unlawful sale of the Respondents' nails? … There remains the other head of damage: loss of sales by reason of the competition of the Respondents. I think the Appellants are entitled to take into account the total quantity of nails sold by the Respondents, and that they are not limited, as the Lord Ordinary held they were, to the period commencing on the 27th of June 1883. Although that was the date on which the Appellants acquired their title to the patents, they succeeded to the rights and to the property of their predecessors in title. Then comes the question to what extent did the wrongful acts of the Respondents operate to prevent sales by the Appellants. I think it would be going too far to say that if the Respondents had not been in the field the Appellants would have sold an additional quantity equal to the amount sold by the Respondents. But considering that the Respondents seemed to have worked the ground occupied by the Appellants, and having regard to the progressive increase in sales during the previous years, and to the fact that the sales of the Appellants and of the Respondents taken together did not largely exceed the Appellants' sales in 1882, I think it is a fair inference that if the Appellants had been left undisturbed the natural increase of their business would have come near the aggregate of the quantity sold by the Appellants and Respondents together. If it were assumed that but for the interference of the Respondents, the Appellants would have sold 5752 boxes in addition to what they actually sold, their loss, taking the actual prices, would be £611. I think it would be reasonable to strike off from the amount a moderate percentage as representing sales due to increased activity protected by the rivalry of two competitors."

21. Mr Miller particularly relied upon the statements in those speeches that it was irrelevant that the infringer might have made similar nails without infringing. It followed, he submitted, that it was irrelevant that Stolt might have carried out the infringing contracts in a non-infringing way. Performance of the contracts was unlawful and damages should be assessed upon the basis that the contracts would have been performed by others, in particular Coflexip, but for the wrongful acts of Stolt.
22. Mr Watson sought to distinguish the United Horse Shoe case upon the basis that the inventions had conferred benefit on the product. That submission was based upon the sentence in the Lord Chancellor's speech at page 264 line 42 – "I think there is considerable evidence to show that purchasers generally would have sought that particular nail …". Having read the patents which are reported at (1888) 2 RPC 122, and the argument in the House of Lords, I believe that the Lord Chancellor was referring generally to the reputation of the patentee's nails and not making a statement that the inventions had produced a better nail. Certainly no such statement appears in the other speeches.
23. Mr Watson also submitted that causation was not really in issue in the United Horse Shoe case in that it was clear that the defendants had caused a loss, whereas in the present case the issue was whether the defendants' infringement caused the losses claimed. For my part I do not understand that submission unless it be based upon the fact that in the United Horse Shoe case the nails were manufactured using infringing machines and then offered for sale whereas in the present case the contracts were signed before the infringing process and machinery were used. That is a distinction, but it is at least arguable that the conclusion and reasoning would not have been different in the United Horse Shoe case if there had been a contract for the manufacture of ten boxes of nails which had then been manufactured using the inventions.
24. Mr Watson also drew attention to statements of Lord Wilberforce in the General Tire case which cautioned against relying upon observations of judges in particular cases to establish a rule of law. He submitted that the reasoning in the United Horse Shoe case was no longer good law in the light of the modern statement of the law by Lord Nicholls in Kuwait Airways Corp v Iraqi Airways Co [2002] UKHL 19; 2002 2 AC 833; [2002] 2 WLR 1353.
25. There is no clear statement of the law in the speech of Lord Nicholls in the Kuwait Airways case that would throw doubt upon the correctness of the United Horse Shoe case. That case has constantly been referred to, for example in the General Tire case and by this Court in Gerber Garment Technology Inc. v Lectra Systems Ltd & anor [1977] FSR 443.
26. The judge distinguished the United Horse Shoe case in two sentences:

"It is not a case like United Horse Shoe and Nail where it was the nails made by the process which the customer wanted. I infer from the report of that case that they were better nails."

The judge gave no reason for that inference. The speech of Lord Macnaughton could not have formed a basis for that inference and a reading of the patents could well have led the judge to a contrary view. The patents were not directed towards producing better nails. They were directed at better processes which no doubt would provide cheaper and quicker production.

27. Mr Miller also relied upon a judgment of Anderson J, sitting in the High Court of New Zealand, in Gallagher Electronics Ltd v Donaghys Electrics Ltd [1991] 4TCLR 344. In that case the patent was for an electrical circuit for use in electric fencing energisers. The evidence established that the problem in the electric circuit that was solved by the patent could be solved by other electronic designs. The patentees were the market leader for electric fencing energisers and the infringing devices were sold as comparable to the patentees, but no mention was made of the patented circuit. In fact there was evidence that the safety function provided by the invention was not considered important as a selling strategy. That being so, it was arguable that use of the invention was not the cause of the plaintiffs' loss of profits. That was not the approach of the judge. Having referred to a number of cases including the United Horse Shoe case and General Tire he said at page 348:

"Although the question whether and to what extent a plaintiff shall have sustained damage by reason of infringement is a question of fact assessed in the light of the broad principles mentioned above, certain methods of determining and assessing loss have been followed. One method is to ascertain whether the plaintiff has actually suffered a loss of sales which would otherwise have been made but for the competition of the infringing product. In cases where the patent holder has a monopoly of the product or its essential means of production, the issue is fairly readily answered since every sale of an infringing copy must have been at the expense of the monopoly. In a legally competitive market the plaintiff must show on the balance of probabilities that some sales have been lost by reason of the infringement, and the extent of such loss. Plainly such issues can be examined in only a general way, hence the frequent judicial observations about such matters being essentially jury issues. Naturally the difficulty of establishing loss does not relieve the plaintiff of the burden of proving loss. It is just that the matters for determination must necessarily be approached in a broad way which seeks to take account of all factors which may reasonably bear on the issue. In cases where the plaintiff cannot show an impact on its own sales by reason of infringement, it has not followed that the tortfeasor can be liable in only nominal damages. In such cases it has been held that the infringer can be liable in damages equivalent to a royalty. The justice of and commercial indications for such an approach are obvious."

28. Anderson J came at page 351 to consider the evidence called by the defendants which was to the effect that the patented circuit was not a major factor when purchasing the device. He then examined the implications of the hypothesis of the defendant being in the market with an alternative, but non-infringing device. He cited a passage from the speech of Lord Halsbury in the United Horse Shoe case and continued at page 352:

"It is self evident that if the defendant had not infringed the plaintiff could not recover damages. The fact of the matter is that the defendant had infringed and it does not avail defendants to suggest that they might infringe with impunity because if they so wish they might compete lawfully."

29. Anderson J awarded damages for loss of profit upon about a third of the sales made by the defendants, and an amount equal to a reasonable royalty in relation to the rest. The split was based upon the judge's estimate of the sales that the plaintiffs would have made if the defendants had not made those sales.
30. The judgment of Anderson J appears consistent with the case sought to be advanced by Coflexip. They wish to contend that if Stolt had not infringed, they would have ended up with all or some of the contracts. They accept that the actual number will depend upon the evidence, but may well be about 60% by way of remuneration as that is the percentage of contracts that they normally obtain.
31. Stolt submitted that the Gallagher case was distinguishable as the patented circuit gave a commercial advantage. They may be right, but the evidence was that that advantage did not influence customers and that an alternative device could have been provided. If the attractions of the patented device had been influential then the proportion of the sales that the judge held the plaintiffs would have made would perhaps have been higher.
32. In argument it was envisaged that there were only two companies that laid pipe, Coflexip and Stolt, and that Stolt had obtained 15 contracts and laid pipe in an infringing way. Mr Watson submitted that in such a situation Coflexip could not recover for loss of profit unless they pleaded and proved that the contracts were obtained with the aid of the invention. It was only when that was done could the loss of profit have been caused by the infringement. That submission presupposes that Stolt could have performed the contract in a non-infringing way. In my view Coflexip are entitled to contend that that submission is contrary to statements made in the United Horse Shoe case which were applied in Gallagher. For my part I am not prepared to hold, in the absence of a proper pleading and findings of fact, that Mr Watson's submission is correct.
33. The issue that appears to arise in the present case was not, I believe, argued in Catnic Components Ltd & anor v Hill & Smith Ltd [1983] FSR 512. However Falconer J did apply the reasoning in the United Horse Shoe case and made observations consistent with Coflexip's case. At page 524 he said:

"For the plaintiffs Mr. Bateson submitted that it would be consistent with the attitude of the law to an infringer for the law to assume that the plaintiffs would have made, with their patented lintels, those sales made by the defendants with the infringing lintels unless and in so far as the defendants proved the contrary. In a case such as this, where the plaintiffs had been established for a number of years as the market leaders with their patented construction, having available ample production capacity and stocks (except for the temporary steel strike shortage in one part of their range to which I have referred), but never having granted any licence under their patent, and where defendants not previously in business in this field at all, entered the market with the object of doing so at the expense of the plaintiffs and using an infringing version of the plaintiffs' patented construction, in my judgment that is a proper approach for the court to adopt. (See Lord Wilberforce's first group of cases in the passage I have cited from the General Tire case.) Mr. Bateson accepted that if an infringer could show that his customer would have dealt with a lawful competitor of the plaintiffs that would have the effect of reducing the number of sales in respect of which the plaintiffs could claim loss of profit. I would just add to that that a defendant infringer might be able to establish that a plaintiff patentee would not have made an infringing sale for some other reason.

The defendants contended that the plaintiffs have failed completely to prove their case that they have suffered damage through loss of profits. This contention was based on two arguments as I understand it, namely,

(i) if the defendants had not made and sold infringing lintels they would have made and sold non-infringing lintels and retained their share of the market; (ii) if the defendants had not supplied their customers with lintels, lintels other than the plaintiffs' lintels would have been bought by the customers, i.e. lintels of other competitors of the plaintiffs.

I have to say at once, that in my judgment the first of those arguments (i.e. argument (I)) is not open to the defendants in law: see principle (d) above. The United Horse Shoe and Nail Company Limited case–see especially the passages I have already cited from the speeches in the House of Lords–is authority for the proposition that an infringer is barred from defeating a plaintiff patentee's claim for damages for loss of profits by saying: "Yes, I infringed but I could have taken this market from you by not infringing." Much of Mr. Gratwick's address on the "loss of profits" part of the claim was devoted to, and much of the defendants' evidence directed to, this argument, but as in my view the argument is wrong in law the evidence directed to it is irrelevant and I need not consider it further."

34. Both parties relied upon the judgment of Staughton LJ in Gerber Garment Technology Inc. v Lectra Systems Ltd & anor [1997] FSR 443. At page 452 he said:

"Infringement of a patent is a statutory tort; and in the ordinary way one would expect the damages recoverable to be governed by the same rules as with many or most other torts. We were referred to Halsbury's Laws of England (4th edn) vol. 12 para 1128 and following, to establish the elementary rules (i) that the overriding principle is that the victim should be restored to the position he would have been in if no wrong had been done, and (2) that the victim can recover loss which was (i) foreseeable, (ii) caused by the wrong, and (iii) not excluded from recovery by public or social policy. The requirement of causation is sometimes confused with foreseeability, which is remoteness. The two are different - see Halsbury para 1141:

"1141. Causation in tort. Subject to foreseeability and the principles of public policy it is prima facie necessary and sufficient for a plaintiff to prove that a defendant's wrongdoing was a cause and not necessarily the sole or dominant cause of his injuries, as a matter of physical consequences or common sense, but subsidiary principles associating foreseeability and causation have been evolved in certain categories of concurrent or intervening causes."

It is not enough that the loss would not have occurred but for the tort; the tort must (for present purposes at any rate) be, as a matter of common sense, a cause of the loss.

There is no dispute about foreseeability or causation in the present case. It is conceded that both requirements (if there are two) are satisfied. What is said is that either the general rules in Halsbury do not apply to the Patents Act, or else there is now a fourth limitation which must be satisfied.That fourth limit is to be derived from the speech of Lord Hoffmann in South Australia Asset Management Corporation v. York Montague Ltd. [1996] 3 WLR 87 (aka the Banque Bruxelles case) at pages 92-l94:

"Much of the discussion, both in the judgment of the Court of Appeal and in argument at the Bar, has assumed that the case is about the correct measure of damages for the loss which the lender has suffered.

…

I think that this was the wrong place to begin. Before one can consider the principle on which one should calculate the damages to which a plaintiff is entitled as compensation for loss, it is necessary to decide for what kind of loss he is entitled to compensation. A correct description of the loss for which the valuer is liable must precede any consideration of the measure of damages. For this purpose it is better to begin at the beginning and consider the lender's cause of action.

…

In the present case, there is no dispute that the duty was owed to the lenders. The real question in this case is the kind of loss in respect of which the duty was owed.

How is the scope of the duty determined? In the case of a statutory duty, the question is answered by deducing the purpose of the duty from the language and context of the statute: Gorris v. Scott (1874) L.R. 9 Ex. 125. In the case of tort, it will similarly depend upon the purpose of the rule imposing the duty.

Rules which make the wrongdoer liable for all the consequences of his wrongful conduct are exceptional and need to be justified by some special policy. Normally the law limits liability to those consequences which are attributable to that which made the act wrongful. In the case of liability in negligence for providing inaccurate information, this would mean liability for the consequences of the information being inaccurate.""

35. Mr Watson relied upon this section in that judgment: "It is not enough that the loss would not have occurred but for the tort; the tort must (for present purposes at any rate) be, as a matter of common sense, a cause of the loss.". He submitted that the tort, the laying of pipes with the apparatus on the Seaway Falcon, did not cause any loss of profit. Mr Miller submitted that those acts had caused the loss. If Stolt had not infringed, Coflexip would have got all or some of the work. It was not relevant that Stolt could have completed the contracts in a non-infringing way. Such a submission has a basis in the speeches in the United Horse Shoe case and I believe that its validity should be determined after the claim has been properly pleaded and against a background of fact.
36. Mr Watson placed considerable reliance upon the following passages from the speech of Lord Nicholls in the Kuwait Airways case.

"69. How, then, does one identify a plaintiff's "true loss' in cases of tort? This question has generated a vast amount of legal literature. I take as my starting point the commonly accepted approach that the extent of a defendant's liability for the plaintiff's loss calls for a twofold inquiry: whether the wrongful conduct causally contributed to the loss and, if it did, what is the extent of the loss for which the defendant ought to be held liable. The first of these enquiries, widely undertaken as a simple "but for' test, is predominantly a factual inquiry. The application of this test in cases of conversion is the matter now under consideration. I shall return to this in a moment.

70. The second inquiry, although this is not always openly acknowledged by the courts, involves a value judgment ("ought to be held liable..'). Written large, the second inquiry concerns the extent of the loss for which the defendant ought fairly or reasonably or justly to be held liable (the epithets are interchangeable). To adapt the language of Jane Stapleton in her article "Unpacking ""Causation" ' in Cane and Gardner (ed) Relating to Responsibility (2001), page 168, the inquiry is whether the plaintiff's harm or loss should be within the scope of the defendant's liability, given the reasons why the law has recognised the cause of action in question. The law has to set a limit to the causally connected losses for which a defendant is to be held responsible. In the ordinary language of lawyers, losses outside the limit may bear one of several labels. They may be described as too remote because the wrongful conduct was not a substantial or proximate cause, or because the loss was the product of an intervening cause. The defendant's responsibility may be excluded because the plaintiff failed to mitigate his loss. Familiar principles, such as foreseeability, assist in promoting some consistency of general approach. These are guidelines, some more helpful than others, but they are never more than this.

71. In most cases, how far the responsibility of the defendant ought fairly to extend evokes an immediate intuitive response. This is informed common sense by another name. Usually, there is no difficulty in selecting, from the sequence of events leading to the plaintiff's loss, the happening which should be regarded as the cause of the loss for the purpose of allocating responsibility. In other cases, when the outcome of the second inquiry is not obvious, it is of crucial importance to identify the purpose of the relevant cause of action and the nature and scope of the defendant's obligation in the particular circumstances. What was the ambit of the defendant's duty? In respect of what risks or damage does the law seek to afford protection by means of the particular tort? Recent decisions of this House have highlighted the point. When evaluating the extent of the losses for which a negligent valuer should be responsible the scope of the valuer's duty must first be identified: see Banque Bruxelles Lambert SA v Eagle Star Insurance Co Ltd [1997] AC 191. In Reeves v Commissioner of Police of the Metropolis [2000] 1 AC 360 the free, deliberate and informed act of a human being, there committing suicide, did not negative responsibility to his dependants when the defendant's duty was to guard against that very act.

72. The need to have in mind the purpose of the relevant cause of action is not confined to the second, evaluative stage of the twofold inquiry. It may also arise at the earlier stage of the "but for' test, to which I now return. This guideline principle is concerned to identify and exclude losses lacking a causal connection with the wrongful conduct. Expressed in its simplest form, the principle poses the question whether the plaintiff would have suffered the loss without ("but for') the defendant's wrongdoing. If he would not, the wrongful conduct was a cause of the loss. If the loss would have arisen even without the defendant's wrongdoing, normally it does not give rise to legal liability. In Barnett v Chelsea and Kensington Hospital Management Committee [1969] 1 QB 428 the night watchman's death did not pass this test. He would have died from arsenic poisoning even if the hospital casualty department had treated him properly. Of course, even if the plaintiff's loss passes this exclusionary threshold test, it by no means follows that the defendant should be legally responsible for the loss.

73. This threshold "but for' test is based on the presence or absence of one particular type of causal connection: whether the wrongful conduct was a necessary condition of the occurrence of the harm or loss. In the Barnett case the hospital's negligence was not a necessary element in the conditions which led to the watchman's death. He would have died anyway. In very many cases this test operates satisfactorily, but it is not always a reliable guide. Academic writers have drawn attention to its limitations: see, for example, the late Professor Fleming's The Law of Torts, 9th ed (1998), pp 222-230, and Markesinis & Deacon Tort Law, 4th ed (1999), pp 178-191. Torts cover a wide field and may be committed in an infinite variety of situations. Even the sophisticated variants of the "but for' test cannot be expected to set out a formula whose mechanical application will provide infallible threshold guidance on causal connection for every tort in every circumstance. In particular, the "but for' test can be over-exclusionary."

37. I find nothing in those passages which is clearly inconsistent with the view expressed in United Horse Shoe case, Gallagher or Gerber Garments case. However I can envisage that Stolt could reasonably argue that they ought not to be liable for a loss that did not arise from any need or advantage derived from the invention. Perhaps that is a submission that the loss claimed was too remote. Again the validity of that argument should only be decided against a background of fact.
38. Mr Watson submitted that the correct approach to a claim for loss of profit was that advocated in the judgment of the court, which is now the US Court of Appeals for the Federal Circuit, in Panduit Corporation v Stahlin Bros Fibre Works Inc 575 F.2d 1152, 197, U.S.P.Q 726.

"To obtain as damages the profits on sales he would have made absent the infringement, i.e., the sales made by the infringer, a patent owner must prove: (1) demand for the patented product, (2) absence of acceptable noninfringing substitutes, (3) his manufacturing and marketing capability to exploit the demand, and (4) the amount of the profit he would have made."

39. In the present case, Mr Watson drew to our attention that there were acceptable non-infringing substitutes. Therefore he submitted, causation could not be established without showing that the customers wanted the infringing process to be used.
40. Mr Miller referred to State Industries Inc v Mon-Flo Industries 883 F.2d 1573; 1577-1579 where the US Court of Appeals referred to the Panduit four part test as "a non-exclusive standard for determining lost profits."
41. Despite the interesting submission on US law, it is not right at this stage of the enquiry to doubt the correctness of the United Kingdom cases. When the facts are found then perhaps guidance from such cases could be of assistance.
42. The judge's view of the law was, I believe, based upon a superficial analysis of the cases. For the reasons I have given it should not be accepted as correct at this stage of the enquiry. The allegations for which Coflexip contend must be properly pleaded and when so pleaded they should not be struck out as their correctness should be decided in the light of the facts. To do otherwise would be fraught with danger, particularly as the parties cannot agree what is the issue of law between them. If there were a determination of an issue of law, I have no doubt there would still be considerable argument as to whether lost profits were claimable in respect of each contract varying as they do as to their terms. Even if my statement of the issue between the parties were accepted to be correct and it is decided in favour of Stolt, it is likely that each of the 15 contracts would have to be analysed to decide whether the technology of the invention played a part and if so what part. No doubt Coflexip would allege that Stolt chose to infringe and that they must have done that for a good reason, namely to gain an advantage when competing with Coflexip. Perhaps the onus would be upon Stolt to show that the technology of the patent played no part in obtaining the contract. Such a submission should not be decided at the pleading stage.
43. For the reasons I have given, I believe that the judge was right to require Coflexip to replead their case. However I have concluded that he was wrong to have required the repleaded case to reflect his view of the law. I would therefore allow the appeal to that extent.

Lord Justice Kay:

44. I agree with the conclusions and reasoning of Aldous LJ. The pleading of its case by the claimant is clearly inadequate and the case which was outlined to the court by Mr Miller QC needs to be set out clearly and in sufficient detail for the defendant to be able to meet it.
45. I too am unpersuaded that the court should seek to resolve the issues relating to causation until a firm factual basis has been established. Judges and academic lawyers have found it impossible to lay down straightforward expressions of principle that readily provide the answer to all the many issues that may arise in considering such questions. That is probably because as Lord Nicholls made clear in the Kuwait Airways case in the passage quoted by Aldous LJ at paragraph 36 of his judgment, the second aspect of the inquiry involves "a value judgment". Decisions of such a kind are frequently nigh on impossible to resolve without first establishing the factual basis upon which the matter has to be considered but once the facts are established evoke "an immediate intuitive response", the "informed common sense" of which Lord Nicholls spoke. Thus save in a case where the loss claim clearly failed the "but for" test, or is manifestly too remote, or for some other reason the defendants responsibility would obviously be excluded, issues of this kind do not generally lend themselves to resolution at an interlocutory stage but should await the outcome of the determination of the facts.

Lord Justice Jonathan Parker:

46. I also agree with the order which Aldous LJ has proposed, for the reasons which my Lords have given.
47. In particular, I agree with their conclusion that it would be wrong at this stage of the inquiry to decide an issue of causation. As Lord Nicholls makes clear in Kuwaiti Airways Corp v. Iraqi Airways Co at paragraphs 69 to 73 (quoted in paragraph 36 above), the fact that 'but for' the wrongful act the injury would not have occurred may not necessarily lead to the conclusion that, for the purpose of establishing tortious liability, the injury was caused by the wrongful act. As I understand it, that is because causation cannot be isolated from liability. As Lord Hoffmann said in Kuwaiti Airways at para 128 (echoing what he said in Banque Bruxelles Lambert SA v. Eagle Star Insurance Co Ltd [1997] AC 191 at 211B):

"There is therefore no uniform causal requirement for liability in tort. Instead, there are varying causal requirements, depending upon the basis and purpose of liability. One cannot separate questions of liability from questions of causation. They are inextricably connected. One is never simply liable: one is always liable for something and the rules which determine what one is liable for are as much part of the substantive law as the rules which determine which acts give rise to liability. It is often said that causation is a question of fact. So it is, but so is the question of liability. Liability involves applying the rules which determine whether an act is tortious to the facts of the case. Likewise, the question of causation is decided by applying the rules which lay down the causal requirements for that form of liability to the facts of the case."

48. In the instant case, it is incumbent on the claimant to plead the facts on which it relies in support of the claim that the loss in respect of which compensation is claimed is a loss of a kind for which the defendant is liable – including facts relating to causation. It follows that where the facts pleaded, if proved, are insufficient to establish the defendant's liability for the loss, the claim will be liable to be struck out. But in my judgment the court should be extremely wary of striking out a claim such as the present on that ground, for the very reason that the issue of causation is "inextricably connected" with the issue of liability, which is in turn dependent on the facts as found. No doubt in some cases it will be plain and obvious that the facts pleaded are insufficient, even if established, to make good the claim, but in my judgment the instant case is far from being such a case.
49. It follows that, like my Lords, I do not regard the invitation extended to us by both sides in this case to make a binding ruling as to causation in the absence of any findings of fact as an invitation which it would be right for us to accept. Even if the parties had been able to agree a formulation of the issue between them, which they were signally unable to do, I would still have adhered firmly to the view that no such ruling should be made at this stage in the inquiry.
Order: Appeal allowed in part; the order as to costs made by Jacob J be set aside; it is ordered that there be no order for costs in this court and below; order otherwise as per draft as agreed between the parties. (Order does not form part of the approved judgment)