Intellectual Property Enterprise Court

IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
INTELLECTUAL PROPERTY ENTERPRISE COURT

		Rolls Building 7 Rolls Buildings London EC4A 1NL
		19 May 2015

Mr Iain Purvis QC:

Introduction

1. This was a passing off action concerning nail care products manufactured by the Second Defendants in the United States and sold by the First and Third Defendants in the United Kingdom under the trade mark 'LUMOS'. The Claimant sells 'anti-ageing' skin care products under the same name. At trial, the claim for passing off was rejected by Mr Recorded Douglas Campbell, sitting as a Deputy Judge of the Patents County Court (as this Court was then known), on the basis that there was no likelihood of confusion amongst the relevant public. The Court of Appeal however, by a majority (Lloyd and McFarlane LJJ, Sir Bernard Rix dissenting), reversed his decision. They held that the judgment was vitiated by certain errors in the Judge's treatment of the evidence (in particular his consideration of the likelihood of confusion amongst trade customers, rather than end-users) such that they could substitute their own view for that taken by the Judge. They considered that there was a likelihood of confusion amongst end users of the Claimant's skin care products, who, seeing the same brand name used for nail care products, would be likely to assume that they came from the same or an economically associated source.
2. The involvement of the various Defendants in the tort may be summarised as follows. The First Defendant was appointed as the UK distributor of the products in question by the Second Defendant. It made its first sales in the United Kingdom on or after the end of October 2010. The business of the First Defendant was transferred to the Third Defendant on 30 November 2010, at which point the Third Defendant became the UK distributor. The Second Defendant accepted at trial that it was jointly liable with the First and Third Defendants for the activities which were found to constitute passing off.
3. A final order was made by the Court of Appeal on 14 June 2013. This contained in paragraph 4 a rudimentary Island Records v Tring provision, requiring the Defendants to disclose by witness statement their income from the LUMOS products, the cost of obtaining those products, and the gross profit made on the sale of those products. By paragraph 5, the Claimant was required, within 28 days of being served with the witness statements, to elect between an inquiry as to damages or an account of profits and to apply to the Court for further directions.
4. The witness statements were duly served, but it appears that the Claimant was not satisfied with them. It made an application for inspection of the underlying records of the First and Third Defendants, and a direction that the Second Defendant complied with the Court of Appeal Order. This application was dismissed by Arnold J, sitting as an IPEC Judge, on 15 July 2014. He took the view that the witness statements were perfectly adequate for the purpose of Island Records v Tring disclosure.
5. Ultimately, the Claimant elected for an account of profits, and made an application for directions pursuant to the order of the Court of Appeal. Those directions were given by Morgan J, sitting as an IPEC Judge, on 12 January 2015. The Order of Morgan J recorded that the 'issues in the account' were 'identified in the Schedule hereto'. The Schedule was headed 'List of issues'. I reproduce it below for convenience:

'1. Is the Second Defendant liable to account to the Claimant for its profits arising out of its supply to the First and/or Third Defendants of the products listed on the first page of exhibit SS2 to the witness statement of Samuel Sweet dated 5 September 2013 (the 'Defendants' Lumos Products')?

2. What was the total revenue derived by:

(a) the First and Third Defendants from their sales in the UK of the Defendants' Lumos Products; and

(b) the Second Defendant from its supply to the First and/or Third Defendants of the Defendants' Lumos Products?

3. What was the total purchase or manufacturing cost to each Defendant of the Defendants' Lumos Products?

4. What expenses, overheads and/or other costs may each Defendant lawfully deduct from the figures determined in issue 2?'

6. By the time the matter came before me on the hearing of the account, the disputes between the parties on these issues had crystallised into a number of discrete points. I propose to take the general issues in the order set out in Morgan J's Order, and to deal with each discrete point within the scope of that issue in turn. I shall conclude this Judgment by resolving the total amount due on the account from each Defendant.
7. Evidence was filed on behalf of the Defendants by Mr Nordstrom (a director and shareholder of the Second Defendant) and Mr Sweet (a director and shareholder of the First and Third Defendants). A short witness statement was filed on behalf of the Claimant by its director and shareholder, Mr Brann. Mr Nordstrom's evidence was subject to a Civil Evidence Act Notice.
8. Mr Sweet was cross-examined on his statement. He came across in his oral evidence as an honest and fair witness. Mr Hall, for the Claimant, made two specific criticisms of his evidence. The first concerned an apparent discrepancy between (i) his oral evidence in cross-examination in which he claimed to have 'invested time and money promoting LUMOS extensively in the UK', and (ii) paragraph 18 of his third witness statement in which he stated that:

'the Court will appreciate that a brand in the UK which is the subject of hard fought litigation with an uncertain outcome and where we might be required to pay damages is not one in which we invested time or money promoting extensively in the UK. We were waiting for the outcome of the case. It is clear we were right to do so.'

The context of this paragraph in the witness statement was that Mr Sweet was dealing with the suspicion of the Claimant (at an early stage in the account) that the Defendants had concealed the true extent of their sales of LUMOS products. He was pointing out that his companies had made no great efforts to build up a market given the risks inherent in the litigation. The context of his answers in cross-examination on the other hand was that the Defendants were seeking to treat part of the costs of the trade shows and catalogues in which LUMOS had been promoted as an allowable expense on the taking of this account.

9. Mr Hall suggested that this discrepancy showed that Mr Sweet was happy to 'trim' his evidence to suit the point he was advancing at the time. I do not accept this. The word 'extensively' is so vague that one cannot read too much into it. I suspect that in his witness statement Mr Sweet had in mind a concentrated and individualised promotion of the LUMOS brand. This does not seem to have happened on a substantial scale, certainly not after the commencement of the litigation. However, the brand did feature as one of the portfolio of products promoted at trade shows and in catalogues. These trade shows and catalogues, taken as a whole, plainly involved the expenditure of considerable time and money. His answer in cross-examination was perfectly justified in that sense.
10. The other issue with Mr Sweet's evidence concerned paragraphs 4 and 5 of his fifth witness statement, in which he was explaining that he had wrongly included certain non-UK sales in the first set of figures provided in his second witness statement. These paragraphs contained numerous errors concerning the identity of the witness statements in question, their dates and the relevant exhibits in which the figures had been provided. The result was a complete shambles. However, there is no suggestion of malicious intent, and I suspect that Mr Sweet had simply (and perfectly reasonably in the circumstances) relied on his solicitors to provide the correct information.
11. I now turn to the issues which I have to resolve.

Issue 1:

'Is the Second Defendant liable to account to the Claimant for its profits arising out of its supply to the First and/or Third Defendants of the products listed on the first page of exhibit SS2 to the witness statement of Samuel Sweet dated 5 September 2013 (the 'Defendants' Lumos Products')?'

12. It will be recalled that the Second Defendant accepted joint liability in this action for the acts of passing off carried out by the First and Third Defendants. This was on the basis of the pleaded case that those acts were carried out pursuant to a 'common design' between all the Defendants, and/or were procured by the Second Defendant.
13. As a result of that finding of joint liability, all the Defendants have been ordered to account for their profits accrued by reason of the passing off. The Second Defendant's position as advanced by its counsel Ms McFarland is that it should not be made liable for any profits because they all arose out of sales to the First and Third Defendants which were not in themselves acts of passing off (either because they took place outside the UK or because they did not involve a misrepresentation).
14. This argument is entirely without merit. The Second Defendant has been found liable for passing off because it was engaged in a common design with the First and Third Defendants to pass off by selling nail care products in the United Kingdom under the LUMOS brand. The Claimant is entitled under the Court of Appeal Order to recover whatever profit has accrued to the Second Defendant by reason of that common design. It has plainly accrued such a profit in respect of the extra LUMOS products it sold to the First and Third Defendants for the UK market. Indeed, those profits were the whole point of the common design so far as the Second Defendant was concerned. The fact that the acts of sale to the First and Third Defendants did not in themselves amount to passing off is entirely irrelevant, since the finding against the Second Defendant was one of secondary liability for the acts ultimately carried out by the First and Third Defendant.
15. Mr Hall advanced another argument against Ms McFarland's contention, to the effect that the sales to the First and Third Defendants did amount to primary acts of passing off, relying on the 'instruments of deception' doctrine. Given my findings above, it is not necessary for me to express a view on this point, although I would note that no case of primary liability for the supply of instruments of deception was advanced on the pleadings or proved at trial. I would therefore have required considerable persuasion to accept the argument on the taking of this account.

Issue 2(a):

What was the total revenue derived by the First and Third Defendants from their sales in the UK of the Defendants' Lumos Products?

16. The total revenue derived by the First and Third Defendants from their sales of LUMOS products was £79,783.66. However, of this overall sum, as belatedly pointed out by Mr Sweet in his fifth witness statement, £6,012.76 was attributable to sales made to customers elsewhere in Europe, mostly Ireland and Spain. Thus only £73,770.90 worth of sales was made to customers in the UK.
17. The point which divides the parties on this issue is whether the revenue for the purposes of this account should include the Irish and other European sales. Passing off is of course a strictly territorial tort. The Claimant pleaded and proved its goodwill in the United Kingdom, and only sought relief in relation to the United Kingdom. The injunction is limited to the United Kingdom and the order for delivery up specifically excluded products which were intended for delivery to the Republic of Ireland. The Claimant therefore (as it accepts) cannot rely on the sales to Irish or other European customers as comprising acts of passing off and giving rise to a requirement to disgorge profits on that basis.
18. Mr Hall's argument is that the Irish and other European sales were likely to have been made as a result of marketing activities taking place in the United Kingdom, in particular the trade shows at which LUMOS products were promoted. Since those activities amounted to acts of passing off, he contends that there must be liability for all revenues accruing as a result, including sales to customers from abroad.
19. I do not accept that argument for two reasons. First of all, there is no evidence which establishes that these foreign sales did take place as a result of UK trade shows or other activities taking place in the UK. There are many other ways in which the availability of LUMOS products may have come to the attention of European customers, for example the distribution of marketing material abroad. Secondly, the passing off which has been established in this case is based on UK goodwill (which may be defined as a reputation with UK customers). This goodwill cannot be damaged by a misrepresentation to a non-UK customer, even if the misrepresentation occurs in the UK. It is hard to see, therefore, how the Claimant can be entitled to profits made on sales to non-UK customers in any event, regardless of how those sales were made.
20. In the circumstances, I will deduct the sales made to the Irish and other European customers, giving total revenue for the First and Third Defendants of £73,770.90.

Issue 2(b)

What was the total revenue derived by the Second Defendant from its supply to the First and/or Third Defendants of the Defendants' Lumos Products?

21. The total income from sales of LUMOS products to the First and Third Defendants was said by the Second Defendant to be $59,117. Converted to pounds sterling at the contemporaneous rates, this came out at £37,352.51. For reasons which have not been explained, this is significantly less than the amount said by the First and Third Defendants to have been paid to the Second Defendant, which was £40,783.66. As Mr Hall pointed out, it does not matter to the Claimant which one of these figures is chosen, provided that we use the same figure to represent the revenue to the Second Defendant and the cost to the First and Third Defendants. He suggested that I took a median figure of £39,000. Ms McFarland (who appears for all the Defendants) did not demur from this, so I propose to follow Mr Hall's suggestion.
22. The first issue between the parties is whether to reduce this figure to take account of the sales destined for Irish and other European customers. For the reasons given above, it is appropriate to do so. This reduces the figure by £5,914.18 to give total revenue of £33,085.82.
23. The second issue is whether to deduct the first invoice from the total revenue figure. This totals £6,716.00. Ms McFarland contends that the revenues represented by this invoice should not be included because they date from August 2010. She relies on paragraph 22 of the Judgment of Mr Recorder Douglas Campbell, which I quote as follows:

'Nor was it disputed that the relevant date for assessing the Claimant's goodwill was the date when the Defendants commenced the activities complained of: [there follows a long list of authorities to support this well-established proposition]. Moreover the parties agreed that this date was October 2010.'

24. So, argues Ms McFarland, since goodwill was only proven to exist as from October 2010, nothing which happened before then has been established to be an act of passing off, and therefore the invoice of August 2010 was not a benefit or an unjust enrichment accruing to the Second Defendant as a consequence of the acts of passing off.
25. The first point to be made here is that it is accepted by the Defendants that the goods which were sold and supplied under the August 2010 invoice were not put on the market in the UK until after the end of October 2010 (they seem to have been shipped to the UK some time in mid-October 2010). This is not surprising, given (as we have seen) that the parties had agreed at trial that the LUMOS products were only put on the market in the UK after the end of October.
26. That being the case, there is no dispute that the goods which were the subject of the August 2010 invoice were used as part of the common design to commit passing off in the UK. In the circumstances, I do not understand on what basis the profits accruing to the Second Defendant from the sale of those goods to the First Defendant can be excluded from this account. The fact that the goods were paid for 'up front' before they were actually used to tortious effect is neither here nor there. All that this establishes is that the common design was entered into between the Defendants before the overt acts of passing off pursuant to that design actually began.
27. I therefore decline to exclude the £6,716.60 revenue accruing to the Second Defendant under the invoice of August 2010.

Issue 3

What was the total purchase or manufacturing cost to each Defendant of the Defendants' Lumos Products?

28. For the reasons given above, I shall take the total cost of purchase so far as the First and Third Defendants are concerned as £33,085.82.
29. The point which arises on issue 3 concerns the manufacturing costs of the Second Defendant. In his third witness statement, Mr Nordstrom exhibited a table indicating that the total cost of sales for the products which were ultimately sold in the UK was $23,413. The Claimant took issue with this, contending in effect that the evidence was too vague to enable them to challenge it or to establish whether the right cost elements have been taken into account. In his fourth witness statement, Mr Nordstrom provided the underlying documents from which his figures appear to have been derived. They comprise printouts from the Second Defendant's Netsuite accounting software representing each invoice to the First and Third Defendants for LUMOS products. The accounting software calculates the 'gross profit' for each batch of products supplied to the First and Third Defendants under the relevant invoice. The gross profit is calculated by taking the 'average cost' of the individual items within the batch, multiplying this by the number of items in the batch, and deducting it from the revenue.
30. Mr Hall criticises the approach taken by the Second Defendant to providing this information. He relies on the undoubtedly correct proposition (stated, if authority were needed, in OOO Abbott v. Design & Display [2014] EWHC 2924 (IPEC) at paragraph 38) that the evidential burden is on the Defendant on an account to establish its costs associated with the acts of infringement. He says that here the evidence put forward by the Second Defendant is so imprecise and inadequate that it has failed to discharge that burden, with the result that I should entirely ignore the evidence and assume a 'zero' manufacturing cost.
31. I have some sympathy with the Claimant's position, in that the printouts from Netsuite were provided extremely late in the day, and neither Mr Nordstrom nor the Second Defendant's solicitors has bothered to explain in any detail precisely how the costs used by his account system are calculated. However, in the end I consider that the Second Defendant has done enough to satisfy the evidential burden in this case. The invoices which have been provided are from an established provider of accounting software. They calculate a 'gross profit' which is an established accounting term for the difference between selling price and the direct cost of manufacture and sale of an item. Gross profit as ordinarily understood does not include overheads, tax, rent, administrative costs or other indirect expenses. If there is a difference between the accounting concept of gross profit and the nature of the profits which will be allowed by a Court on the taking of an account, I am not sure what it is, and I am sure it is a fairly marginal one in any event. In the circumstances, given the relatively small amounts of money at stake, I consider that the approach taken by Mr Nordstrom in submitting the extracts from his accounting software was reasonable and proportionate (albeit that some further explanation should have been given). It may be worth pointing out that there is nothing to suggest that he has attempted artificially to reduce the profit. On the contrary, the figures he has given represent a gross profit margin of around 55%, which seems high.
32. Mr Hall cited the decision of Briggs J in Hotel Cipriani v. Cipriani (Grosvenor Street) Limited [2010] EWHC 628 Ch in which the third Defendant had neglected to prove any deduction for operating costs in relation to the licence fees it had received from the trading Defendants. In those circumstances, Briggs J noted that '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.' I note however that in that case the third Defendant had (i) failed to file any evidence at all; (ii) not quantified the costs in any way; (iii) expressly abandoned the point by solicitor's letter. That is plainly a long way from the situation in the present case.
33. I therefore accept the Second Defendant's evidence that the total costs of manufacture are $23,413. No-one has produced a sterling figure for these costs, but applying the standard rate used for the other calculations of $1 being worth £0.6226, this comes out at £14,577.

Issue 4

What expenses, overheads and/or other costs may each Defendant lawfully deduct from the figures determined in issue 2?

34. The primary issue here is whether the First and Third Defendants are entitled to deduct from their profits a proportion of their expenditure on various trade shows and catalogues. They seek to deduct 5% of the total cost of running stands at a number of trade shows at which LUMOS was promoted (amongst a series of other products), and 2% of the cost of issuing catalogues including the LUMOS products. The total of these deductions, were they allowed, comes to £19,948.91.
35. The rules on overheads are well established, and were authoritatively set out by the Court of Appeal in Hollister v Medik Ostomy Supplies Limited [2012] EWCA CIV 1419. At paragraph [86] Kitchin LJ concluded:

'I believe that if the defendant's business is not running to capacity, the defendant has not foregone an opportunity to make and sell other non infringing products, and the defendant's general overheads have not been increased by reason of the infringement and would have been incurred in any event, then to allow it to attribute such overheads, or a proportion of them, to the infringements would be to allow it to profit from its unlawful activity. I believe such a result would not be just and would undermine the purpose of the account.'

36. In the present case, Ms McFarland expressly accepted that her clients' business had not been shown to be operating at capacity and there was certainly no clear evidence that they had foregone an opportunity to sell other products in favour of the LUMOS products. Furthermore, her own witness Mr Sweet readily accepted in cross-examination that the trade show costs would have been the same whether or not LUMOS had been there (and it seems to me that the same must necessarily apply to the catalogues, of which LUMOS contributed only a part of a single page). In all the circumstances, I cannot see how the Defendants can be permitted, on the basis of established authority, to deduct any part of the costs of the trade show or the catalogues.
37. The other point between the parties related to the costs of advertising specifically promoting the LUMOS products. The Claimant accepts in principle that those costs are deductible. However, in opening it maintained a challenge to the deduction of some invoices which were added at a late stage. Having heard the evidence of Mr Sweet, I cannot see that there is any basis for that challenge, and I had the impression that Mr Hall was not minded to press it either.
38. A small point arose in relation to certain freight costs, the Claimant seeking to exclude them on the basis that the shipment in question included a small quantity of another product. I do not think there is anything in that point. The other product was small in quantity and in size and weight. Mr Sweet said in evidence that it could have been sent separately by airmail if the shipment of LUMOS had not been going out anyway. I can see no reason to exclude the costs as alleged by the Defendants.
39. There were also certain additional freight costs only discovered by the Defendants late in the day. The parties ultimately agreed that 3 of these had been shown to relate to LUMOS orders, totalling £1,314.59.
40. Finally, an issue arose in relation to the airfare costs of flying Mr and Mrs Nordstrom to the UK to the launch of LUMOS. The Claimant was willing to agree the costs of Mrs Nordstrom (paid by the Second Defendant) on the basis that there was evidence from Mr Nordstrom that this was for the direct purpose of promoting and selling LUMOS in the UK. This totals £666.16. The Claimant was not willing to accept the costs of a ticket for Mr Nordstrom (apparently paid for by the First and/or Third Defendant), on the basis that there was no evidence of the purpose of that trip. I agree that in the absence of proper evidence there is no basis for making that deduction.

Conclusion

41. On the basis of the above findings, so far as the First and Third Defendants are concerned, the total revenue was £73,770.90, the total costs of purchase amounted to £33,085.82 and the total additional costs and deductions which I have found to be allowable amounted to £16,223.50. This gives an overall figure on the account of £24,461.48.
42. So far as the Second Defendant is concerned, the total revenue was £33,085.82, the total cost of manufacture was £14,577 and the total additional costs and deductions which I have found allowable amounted to £666.16. This gives an overall figure on the account of £17,842.66.
43. It will be noted that I have not sought to allocate the sum due as between the First and Third Defendants. This is because there has been no attempt to perform that exercise either in evidence or in argument (although it is clear that the vast bulk of the profits must have accrued to the Third Defendant, since the First Defendant only sold LUMOS for about 1 month before the hand over of the business). I am proceeding on the assumption that the Defendants have not sought to make the distinction because the Third Defendant is willing to accept complete liability on behalf of the First Defendant (the two companies being controlled by the same people, and the First Defendant being dormant). In the draft Judgment which was handed down I invited the Defendants to inform me if that assumption was incorrect, and if so that I would seek to deal with the precise allocation between the two Defendants in a supplementary decision. No such indication has been given, so this will not be necessary. The Order will be made as against both Defendants who will be jointly and severally liable.