England and Wales High Court (Chancery Division) Decisions

IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION

		Royal Courts of Justice Strand London WC2A 2LL
		2nd March 2010

J U D G M E N T
1. MR JUSTICE BRIGGS: On 9^th December 2008 Arnold J gave judgment for the claimants, Hotel Cipriani SRL, Hotelapa Investimento Hoteleiro SA and Island Hotel (Madeira) Ltd, against the defendants, Cipriani (Grosvenor Street) Ltd, Guiseppe Cipriani and Cipriani International SA, after a 9-day trial of a claim for trademark infringement and passing off ("the 2008 judgment"). The claimants then elected for an account of profits, and on 7^th May 2009 Arnold J ordered the account to be taken before a judge, gave directions for pleadings, the sequential exchange of evidence, including expert evidence, and the other matters necessary for a 2 to 3-day hearing. The hearing was, shortly after that, arranged to take place in a window for March 2010.
2. The defendants went first with their evidence and served a report by Mr Mark Bezant dated 17^th November 2009. The claimants served a report by Mr Richard Bolton dated 11^th February 2010 and a supplementary report dated 22^nd February 2010 dealing with profits in and after 2009. Meanwhile, pursuant to permission given by the trial judge and amplified by the Court of Appeal, the defendants appealed the 2008 judgment. The appeal was dismissed by the Court of Appeal, Jacob, Lloyd and Stanley Burnton LJJ, on 24^th February 2010. Meanwhile, the claimants had obtained an order for an interim payment on account of one million pounds from the third defendant from Lewison J on 26^th June 2009. That order was neither appealed nor complied with by the third defendant.
3. The gist of the 2008 judgment was that the first defendant was liable for trademark infringement and passing off by carrying on a restaurant business in Central London under the name Cipriani London (commonly referred to and known as "Cipriani"), and that the second and third defendants were liable as joint tortfeasors. The second defendant was the sole director of the first defendant, and the third defendant is a Luxembourg corporation which, for reward, licensed the first defendant to use the name Cipriani.
4. The first claimant runs the famous Hotel Cipriani in Venice and has the benefit of a community trademark in the name Cipriani for, among other things, restaurant services. Pursuant to the 2008 judgment, Arnold J granted a permanent injunction restraining further use of the name Cipriani by the defendants in relation to the restaurant, but its effect was stayed pending appeal. Following appeal the defendants have a two-month period of grace running from 23^rd February 2010 in which to rearrange their affairs before the injunction comes into full effect. I must therefore determine the amounts which the defendants must pay by way of an account of profits from the use of the name Cipriani in connection with the running of the restaurant from May 2004, when the first defendant's restaurant opened, until it complies with the injunction, which I will assume will occur on or about 23^rd April 2010.
5. After a vigorous defence, including the making of preparations to defend the account proceedings, the defendants decided, after the dismissal of the appeal, not to appear either by counsel, solicitors, directors or in person at the hearing of the account, which took place yesterday. By a letter received yesterday morning, the defendants, by their solicitors who remain on the record asked me to call their expert, Mr Bezant, to give his expert evidence later this week and to be cross-examined on that evidence, but sought no other involvement in the hearing. Out of courtesy, Mr Bezant attended yesterday together with an assistant solicitor from the defendants' solicitors, but in her case only to take a note. As she declined at my invitation to address the court, the defendants have been otherwise entirely unrepresented at the hearing, though of course notified of it.
6. Although the court has power to call a witness, I declined to call Mr Bezant. His report was available and referred in detail in Mr Bolton's own report which followed it. The defendants did not assert impecuniosity as a reason for their non-attendance, and I did not regard Mr Bezant's attendance, still less his cross-examination, as necessary to enable a just account to be taken. The first and third defendants' accounts, including management accounts for 2009, were available and formed the factual basis for both experts' opinions. In fact, as so often happens, there was a large measure of common ground between the experts as to an appropriate method for carrying out the account, although their conclusions turned out far apart in amount. Having read both reports and received oral and written submissions from Mr Purvis QC and Mr Brandreth, counsel for the claimants, it is sufficient for me to resolve the issues separating the experts quite briefly.
7. I must first deal with the relevant legal principles. By contrast with joint liability as tortfeasors for damages, including damages calculated on a royalty basis, an account of profits operates against each defendant separately, requiring him or it to disgorge such profits as are shown to have been derived by that defendant from the relevant infringements. In that respect, there is no difference between trademark infringement and passing off, even though the basis of liability for one is statutory and, for the other, based on the common law. The claimants acknowledge that there must be no double counting, so where, for example, a shareholder such as the second defendant receives a distribution of profits made by a company such as the first or third defendants, his receipt is not a separate additional profit because it derives from his right to share in his company's profit. Here, to avoid double counting, the claimants have been content to pursue the first and third defendants and to leave the second defendant alone. The measure of liability is the profit derived by the defendant from the infringement.
8. The principles are well settled and summarised by Millett J in Potton v Yorkclose [1990] FSR 11 at pages 14 to 16. First, the purpose is to deprive the defendants of the profits which they have improperly made by the wrongful acts committed in breach of the claimants' rights and to transfer those profits to the claimants. Secondly, it is no answer to such a claim to say that similar profits could have been made in a non-infringing way – see Celanese v BP [1999] RPC 203 at 219 to 220. Thirdly, profits include accrued profits, for example a legal right arises to receive payment, even if payment is yet to be made. Fourthly, where a single head of profit is attributable to a number of causes, some of them infringing and some not, it is necessary and appropriate for the court to conduct an apportionment so as to work out on a broad-brush basis what proportion of the profit was due to the act of infringement.
9. There is also an issue relating to tax, namely whether an account of profits should be of post-tax or pre-tax profits. After a less than enthusiastic (and not fully researched in terms of the relevant tax legislation) attempt to persuade me to a more rigorous view, Mr Purvis was content for me in the event simply to follow the approach used by Laddie J in Celanese v BP, to which I have already referred, based on O'Sullivan v Management Agency [1985] 1 QB 428. This approach is, first, that the defendant is entitled to deduct from the profits made from the infringement tax actually paid on those profits as long as it is irrecoverable from the revenue, but not tax not yet paid, whether or not it would be payable but for the infringement. Secondly, rather than debate recoverability of tax paid, which in an appropriate case the court may in due course do, the court can (and did in the Celanese case) direct the defendant to account for any actual recovery of tax paid on relevant profits and to keep the claimant informed in the meantime of any attempt to do so. At counsel's invitation, that is the approach which I intend to apply in the present case, without finally deciding one way or the other whether some more rigorous approach should be applied to the question of recoverability.
10. It is convenient to take the third defendant's profits first. The third defendant licensed the first defendant to use the name Cipriani by a written agreement ("the London licence") dated 1^st January 2004, the relevant provisions of which are as follows:

"2.1 Grant The Licensor hereby grants to the Licensee, and the Licensee hereby accepts, an exclusive license, for the Term, to use the Licensed Trademark within the Territory.

1.2.5 Licensed Trademark; The name "Cipriani London" and derivatives thereof and the logo as set forth on Schedule A hereto.

Licensed Trademarks

CIPRIANI LONDON

CIPRIANI LONDON Logo

Trademark Application and Registration Details

Trademark	Number	Class	Specification	Status
CIPRIANI LONDON	E4869228	43	Providing food and drink; restaurant, bar and lounge services	Community Trademark Application – Pending
CIPRIANI LONDON Logo	E4869251	43	Providing food and drink; restaurant, bar and lounge services	Community Trademark Application - Pending

3. TERM

The term of this Agreement (the "Term") shall commence on the date hereof and, unless sooner terminated as provided herein, shall continue until terminated by either party upon 30 days' prior notice.

4. ROYALTIES

In consideration of the license granted by the Licensor to the Licensee hereunder, the Licensee shall pay to the Licensor Royalties as follows:

4.1 Term For each License Year during the Term, the Licensee shall pay to the Licensor Royalties equal to 11.5% of Gross Sales.

In the form in which it appears in the bundle, Schedule A identifies the logo licensed by reference to a particular trademark application number, namely E4869251. It is apparent from a copy of that appended to counsel's skeleton argument that the logo in question consists of the prominently displayed name Cipriani, with beneath it in smaller type "London" and above it what has come to be known as the "bartender logo", i.e. a small outline of a person serving drinks at a bar. Much the most prominent asset of the logo is the name Cipriani.

11. There was no dispute about the first defendant's gross sales or, therefore, about the third defendant's gross remuneration entitlement under the London licence. That entitlement was £4,197,000 for the period 2004 to 2008 and £949,000 for 2009. Ordinarily one would have expected the third defendant to be able to make a deduction for operating costs as claimed in general terms in paragraph 4.1 of its points of defence on the account. But after failing to provide any documentary evidence of such costs, this claim was abandoned by the third defendant's solicitors' letter of 11^th February 2010. The result is that neither expert includes any cost deduction in calculating the relevant profits made by the third defendants, and since the third defendant has not troubled to prove any such deduction, nor do I. It is not for the court to speculate about a fact which a party can but fails to prove.
12. Mr Bolton's view was that the third defendant's profit from infringement was therefore the whole of the royalty revenue payable under the London licence, since the use both of the name and of the logo amounted to relevant infringements. Mr Bezant's view was that only 10% of that revenue was properly attributable to the infringing use, the 90% being attributable to general goodwill and to the logo, by which I think Mr Bezant meant the bartender logo, which is only part of the logo licence, neither of which, in his opinion, involved infringement. I accept Mr Bolton's evidence and opinion in this regard. The most prominent part of the logo actually licensed was the name Cipriani below the bartender picture. The goodwill was, so far as I can see, entirely appendent to the use of the name and the logo, and it was not separately assigned, even if it could have been. In my judgment, therefore, all the royalties payable under the London licence derived from the infringement.
13. I have dealt with the period 2004 to 2009. As for 2010, the profits should be calculated down to 1^st March on the basis of one-sixth of the 2009 revenues. There is no evidence since the end of last year of any downturn in the gross receipts of the first defendant upon which the third defendant's remuneration is based, and although one might assume that January and February are normally quiet months for most restaurants, again there is no reason why the court should speculate in relation to that which it was open to the defendants to prove. The defendants' disclosure does not include monthly figures for any year from which any pattern of differing proportionate gross receipts in the early months of the year could be calculated.
14. Thereafter, i.e. after 1^st March 2010, profits must be calculated on the basis of a monthly calculation based on one-twelfth of the 2009 revenues, and if it is necessary to apportion within a month, then a daily apportionment will have to be carried out.
15. There is no evidence that the third defendant has actually paid any tax in relation to these revenues and, therefore, no post-tax deduction falls to be made.
16. I turn now to the position of the first defendant, which is necessarily more complex.
17. The claimants did not suggest that the whole of the first defendant's profits were attributable to infringement. Both experts relied upon the distribution of costs approach, which I can summarise as follows. It is a rough and ready way of allocating profits to different aspects of the business, using the proportion of the costs of the business attributable to each aspect. It was explained by Laddie J in the Celanese case at page 81 as follows:

"A useful guide is likely to be provided by ordinary accounting principles, whereby in the absence of some special reason to the contrary the profits of a single project are attributed to different parts or aspects of the project in the same proportions as the costs and expenses are attributed to them."

The problem with this rough and ready approach is that it over simplifies the position, because it assumes that each cost item is equally profitable in terms of a return on investment. So some form of weighting is necessary. As Laddie J again explained in the Celanese case:

"In other words, the distribution of costs approach tells you nothing about weighting, or, to use Millett J's words, 'It does not tell you if there are special reasons why even distribution is inappropriate.' The distribution of costs approach does not set out to distinguish between relatively critical and relatively trivial parts of the whole, but it does provide a measure of the base allocated profits attributable to the part in issue. Any question of weighting the figure up or down if possible is dependent upon taking into account other more nebulous considerations."

18. In the present case, the experts are agreed that it is necessary to apply a measure of weighting, and they both adopt the same mechanism for this approach. The only question is as to the figures inputted to the mechanism for the purpose of producing the ultimate result. The experts start by distinguishing the profit margin associated with the basic activities of a restaurant, i.e. buying food, rent, paying chefs and waiters and so forth, which they refer to as "functional activities", as opposed to intangible elements of a restaurant business which gives its special value such as branding, marketing, etc. This is because a free market will only permit a marginal profit to be made from the provision of any service per se. Therefore, profits made over and above that level are likely to be as a result of something other than the service. By definition, the extra profit is caused by whatever intangibles are giving the service provider an edge over others in the same market.
19. Both experts approach the identification of the profits attributable to the functional costs by applying a mark-up or return on costs. They differ only in the percentage return. Mr Bezant applies 7.5% and Mr Bolton applies 5%. Those differences make a significant result, albeit small in terms of absolute percentages.
20. For the reasons which he gives, I accept Mr Bolton's 5%. In particular, I reject, for the reasons given by Mr Bolton, Mr Bezant's use of a return on capital approach. It is, in my judgment, not appropriate to a restaurant business such as the present business which is, on the face of it, a low capital, high running cost business.
21. Having thus identified and set on one side that part of the first defendant's profits not attributable to intangibles, the question remains how to identify that part of the remainder, i.e. the part attributable to intangibles, derived from the infringing use of the name. Mr Bolton's solution, which I accept, was to use as the best guide the ratio between (a) the royalty payable to the third defendant under the London licence for the use of the name and logo at a rate of 11.5% of gross sales, and (b) the third defendant's entitlement to payment under a management agreement with the first defendant, also dated 1^st January 2004. That agreement provided for the third defendant to make restaurant consultancy and management services available to the first defendant for 3% of gross receipts. The ratio is therefore 3 against 11.5, so that the contribution of the infringing use of the name to the first defendant's profits derived from intangibles is, on that analysis, 79%.
22. While it is possible that the 3% versus 11.5% split adopted by the defendants themselves as between the management agreement and the London licence was not their true evaluation of the relative contribution from each to the restaurant's profitability, the defendants have made no effort to say so or otherwise to explain why those figures were chosen. Mr Bolton was, therefore, in my judgment, entitled to assume that the two agreements, although of course between connected parties, were made on arm's length terms.
23. As for tax, Mr Bolton has included an appropriate proportion of the tax shown in the first defendant's accounts actually to have been paid on its profits in accordance with the principles to which I have already referred.
24. I can turn, therefore, to the results, and I have rounded them all to the nearest £1,000. Starting with the third defendant, the revenue entitlement to the third defendant from the London licence from May 2004 until the end of 2008 was £4.197 million, and the revenue entitlement from the London licence for the whole of 2009 was £949,000. The estimate of revenues from the London licence from 1^st January to 1^st March 2010 on my calculation is £158,000. I have rounded down Mr Bolton's figure because it seemed to me to involve an inappropriate and slightly too broad-brush rounding up. No costs are to be deducted or taxes, for reasons which I have given, and the aggregate figure, therefore, for May 2004 to 1^st March 2010 is £5,304,000, and on my calculation there is to be added a monthly amount for March onwards until the infringement ceases of £79,000 with an apportionment in relation to any incomplete month on a daily basis.
25. The order against the third defendant must, of course, take into account the £1 million interim payment order already made by Lewison J, albeit it has not yet been satisfied.
26. Turning to the first defendant, the relevant amounts are as follows. The earnings before interest and tax for the period May 2004 to December 2009 amount to £1,666,000, to which must be added back deductions in the accounts for legal professional fees to 31^st December 2009 on the assumption which Mr Bolton makes, and which I accept, that those figures were, save for irrelevant items which the first defendant has not chosen to identify, attributable to this litigation. That leads to adjusted earnings before interest and tax for that same period of £3,826,000. The first defendant's functional costs for the same period were £34,640,000 and, applying Mr Bolton's 5% mark-up, that produces pre-tax profits on functional costs of £1,732,000, leaving pre-tax profit on intangibles of £2,094,000. Applying the 79% factor to that amount, for the reasons which I have given, it produces a pre-tax profit on intangibles attributable to the London licence, in other words to the infringements, of £1,661,000. From that, the attributable amount of tax for deduction is calculated by Mr Bolton, and I accept, at £345,000, and the profits for which the first defendant is accountable for January and February, i.e. until 1^st March 2010, are £76,000. The total profit, therefore, attributable to the London licence for the period from May 2004 to 1^st March 2010 is £1,392,000. A profit liability will continue to accrue at £38,000 a month hereafter, with an appropriate daily rate apportionment for any incomplete month.
27. I must now deal with interest. The claimants seek interest at the simple rate of 1% over LIBOR. There has been no argument to the contrary from the defendants. It is a standard rate applied in the Commercial Court and, in my judgment, an appropriate rate for present purposes. The claimants sought to run interest on the full amount from a mid point struck in the whole relevant period rather than by doing a more detailed calculation. That would be a fair approach if the evidence showed that the profits were, broadly speaking, level over the entire period, but unfair to the defendants if, as is the case, those profits were on a gently rising curve during the entire period viewed as a whole. In my judgment, therefore, interest should be recalculated on the basis of each year's profits and run from a mid point in each year, or for part of the year in relation to 2004, and I will invite counsel, please, after that calculation has been done, to certify the calculation in a minute of order.
28. As for costs, the first and third defendants must pay the claimants' costs of the account on the standard basis, to be the subject of detailed assessment if not agreed.