Intellectual Property Enterprise Court

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

		Royal Courts of Justice, Rolls Building Fetter Lane, London, EC4A 1NL
		18/05/2015

Judge Hacon :

Introduction

1. This is an inquiry as to damages. It follows a Tomlin Order dated 29 October 2013 by which the Defendants agreed that there should be an inquiry on the basis that they had infringed unregistered EU and UK design rights owned by the Claimant ("Alfrank"). These related to the designs of two ranges of dining furniture. The inquiry is concerned with infringements only by the First Defendant ("Exclusive") pursuant to a directions Order dated 29 May 2014.
2. Alfrank and Exclusive are competing wholesalers of furniture. They sell to furniture retailers. The Second Defendant ("Harveys") is one such retailer which has in the past bought from both Alfrank and Exclusive, including purchases of infringing tables from Exclusive. There was an agreement by the parties embodied in an order dated 12 June 2014 that Exclusive's liability should extend to acts of infringement in the form of sales by Harveys but at the trial no separate claim was raised in this regard.
3. The loss claimed by Alfrank arises from Exclusive's sales of two styles of table. The first is given the name 'Modena' by Exclusive and 'Emperor' by Harveys. The second is called 'Opus' by Exclusive and 'Colosseum' by Harveys. For simplicity I will use Exclusive's names for these tables even in the context of sales by Harveys. The Modena table is an infringing copy of the design of Alfrank's 'Canberra' table; the Opus table is an infringing copy of Alfrank's design of its 'Strasbourg' table.

Heads of claim

4. In the usual way Alfrank claims the profit of which it was deprived due to lost sales of its own tables, which it says were caused by sales of the Modena and Opus tables. Alfrank's primary case is that it suffered a one-to-one loss, that is to say for every sale of an infringing table by Exclusive, through Harveys or otherwise, Alfrank lost a sale of its equivalent table. Secondly and alternatively, to the extent that it fails to prove a one-to-one loss, Alfrank claims a reasonable royalty in relation to those infringing sales which did not result in any loss of sale by Alfrank. Thirdly, to the extent that Alfrank can prove causation of loss of sales of its Canberra and Strasbourg tables, Alfrank claims in addition the profits it would have made from the sales of 'convoyed' goods – in this instance chairs, coffee tables, console tables, lamp tables and sideboards which, Alfrank says, would have been bought by customers along with the Canberra and Strasbourg tables, had Exclusive not infringed.
5. The numbers of each style of infringing table sold by Exclusive and Harveys were not in dispute.
6. The matters I have to resolve are:

(1) The proportion of sales of infringing tables by Exclusive which are to be treated as having caused equivalent loss of sales by Alfrank.

(2) In relation to each such loss of the sale of a table by Alfrank, the sales of convoyed goods, if any, that Alfrank also lost.

(3) The royalty to which Alfrank is entitled in relation to Exclusive's sales of infringing tables which caused Alfrank no loss of sales – i.e. damages according to the 'user principle'.

The parties were content to agree the maths between themselves once I have resolved those issues.

7. Mr St Quintin appeared for Alfrank and Ms Jamal for Exclusive.

The law

8. I attempted a summary of principles of law relevant to loss of profits in SDL Limited v Next Row Limited [2014] EWHC 2084 (IPEC) at [16]. In Henderson v All Around the World Recordings Ltd [2014] EWHC 3087 (IPEC) I discussed the law on 'user principle' damages (at [18]-[19]) and in OOO Abbott v Design & Display Limited [2014] EWHC 2924 (IPEC) I considered convoyed goods in an inquiry as to damages or an account of profits (at [23]-[25]). I will not repeat any of that here. There was no major dispute between the parties on the law, although a point arose in relation to convoyed goods which I will discuss in context below.

Alfrank's loss of sales caused by Exclusive's infringing sales

9. Alfrank puts its case on loss of sales in three ways:

(1) Had Exclusive not sold Modena and Opus tables to Harveys, Harveys would have bought equal numbers of Canberra and Strasbourg tables from Alfrank.

(2) Had Exclusive not sold Modena and Opus tables to other retail customers of Exclusive, those retailers would have bought equal numbers of Canberra and Strasbourg tables from Alfrank.

(3) Even if Exclusive's retail customers (including Harveys) would not have bought Canberra and Strasbourg tables, Alfrank had its own regular retail customers to which these tables were offered and supplied. Self-evidently there was consumer demand for tables of the Canberra/Modena and Strasbourg/Opus styles because it was satisfied by purchases of Modena and Opus tables. In the counterfactual history this proven demand would have been satisfied instead by equivalent consumer purchases of Canberra and Strasbourg tables from Alfrank's retailers.

10. Central to these arguments was the implied assumption that Exclusive's Modena table would have been considered by consumers to be equivalent to Alfrank's Canberra table from an aesthetic point of view and in relation to quality of build, or at least near enough. Likewise the Opus table would have been regarded as equivalent to the Strasbourg table. Harmeet Pangali is the Managing Director of Exclusive. In cross-examination he accepted that Modena and Canberra tables were identical in style to the naked eye and that the same was true of the Opus and Strasbourg tables. I was not shown the tables themselves but Mr Pangali's evidence confirmed my impression drawn from brochures advertising the tables. Nothing was said expressly about the relative qualities of build of Alfrank's and Exclusive tables but I imagine that if there had been anything to say about that, someone would have done so. I am prepared to assume that consumers, given the opportunity to compare, would have regarded the two sets of tables as interchangeable with regard to both style and quality.

Counterfactual sales by Alfrank to Harveys

11. Alfrank's first argument with regard to the sales it would have made to Harveys is that in 2010 it reached an oral agreement in China with Harveys for the supply of furniture including the Canberra table. This was before Harveys went on to buy the Modena table. There was no claim against Harveys for breach of contract and the argument was not advanced on the basis that Harveys was contractually bound to buy from Alfrank. Whatever the status of the agreement with Harveys, Alfrank appeared to treat it as terminable. The argument run was that in March 2010 Harveys was willing to agree to buy the Canberra table from Alfrank, that it only failed to do so because Exclusive stepped in with a better offer to sell infringing Modena tables and that absent this offer Harveys would have gone ahead and bought Canberra tables from Alfrank.
12. It is not in dispute that in about February 2010 Homestyle Group, the company which controls Harveys and a sister company, Reids, was sufficiently interested in the Canberra table to ask for a sample and that one was supplied by Alfrank. Frank Carroll is a director and the sole shareholder of Alfrank. In his written evidence he said that he met Alan Marnie, then Chief Buyer of Homestyle Group, in Houjie, China, in March or April of 2010 for dinner, which was also attended by Paul Walsh, a sales agent for Alfrank and James Chau, an employee of Alfrank, and by Donald McKinnon, a buyer for Harveys. Mr Carroll's written evidence was that hands were shaken over dinner on a deal for Alfrank to supply Harveys with Canberra tables. His account was specific about price: Alfrank was to charge a discount price of about 5-6% below the list price of £1,599 for a table and six chairs. (Dining tables in this market are almost always sold to retailers – and then on to consumers – with matching dining chairs.) A written agreement was to follow.
13. In cross-examination Mr Carroll's evidence became vaguer and he changed his account somewhat. He insisted that he had met Mr Marnie in China and his principal reason for recollecting the meeting was that it had been very difficult to set up what he described as 'an exhibition' of products for just one or two people. This seemed to differ from the meeting in a restaurant referred to in his witness statement. Mr Carroll said that his role at the meeting was only to give background information about the design; he would not have discussed prices – this would have been the role of Mr Walsh. Mr Carroll said he could no longer recall whether the figures he had given in his witness statement regarding prices were correct. He said that he had been given those figures either by Mr Walsh or by Alan Sweeney, Chief Executive Officer of Alfrank. When asked why no written agreement had followed the handshake agreement, Mr Carroll suggested that it might have done and this would have been dealt with by Mr Walsh.
14. Mr Walsh, in his written evidence, had confined himself to confirming what Mr Carroll had said about the meeting for dinner in Houjie. In cross-examination, as to the expected written agreement Mr Walsh said that there was none because in April 2010 Mr Marnie was replaced at Homestyle Group by Mr Struger as Chief Buyer (which is common ground). Mr Walsh added that in June or July 2010 he met Mr Struger who told him that Harveys had no interest in doing any business with Alfrank.
15. Mr Marnie had expenses documentation which tracked his moves in 2010. He was in China only in early March before he left Homestyle Group. The nearest to Houjie he came was a stay on 4 March 2010 at the Intercontinental hotel in Shenzhen, which was about two hours and 45 minutes from the Hyatt Garden hotel at Houjie where Mr Carroll and Mr Walsh were staying. Neither Mr Carroll nor Mr Walsh had a convincing explanation for why the dinner with Mr Marnie, or alternatively the exhibition of products, would have been set up in Houjie when Mr Marnie was in Shenzhen.
16. I have mentioned that Mr Carroll was very insistent that he had met Mr Marnie in China. So was Mr Walsh. I accept that there may have been a meeting with Mr Marnie at some time but I am not satisfied that it happened in or around March 2010, when Alfrank might have pitched for business with Harveys, and I am even less convinced that Harveys made a commitment to buy the Canberra table and chairs, whether for the precise sums specified by Mr Carroll in his written evidence, or at all.
17. And I doubt it matters. A new broom swept into the Homestyle Group and specifically Harveys in April 2010 in the form of Mr Struger. Mr Sweeney confirmed that Mr Struger knew nothing of the deal in China relied on by Alfrank and Harveys was not bound by it, even if it happened. Mr Walsh's evidence was that in June or July 2010 Mr Struger made it plain that Harveys would not buy from Alfrank. Mr Struger said that he had no recollection of being aware of Alfrank until early spring 2011 and that he would have preferred to deal with Harveys' regular suppliers rather than Alfrank which was not a supplier to Harveys.
18. I therefore place no weight on Alfrank's argument in relation to Harveys in so far as it relies on the alleged agreement in China. That is not quite an end of the argument though because Alfrank's case is that if the Modena and Opus tables had not been available, Harveys would have wanted tables just as good and Alfrank were ready and willing to supply the Canberra and Strasbourg tables to Harveys irrespective of any agreement in China. The difficulty with this part of the argument is proving that Harveys – specifically Mr Struger – would have been willing to pay the higher prices charged by Alfrank.
19. Mr Pangali's unchallenged evidence was that Exclusive charged Harveys £289 for a Modena table and £769 for a table plus six chairs. Alfrank's 2010 list prices show that Alfrank's charges for a Canberra table alone and with six chairs were £549 and £949 respectively. Alfrank's case was that in Houjie a 5-6% discount was offered, which (at a 6% discount) by my calculations would bring the Alfrank's prices down to £516 and £892. Even if Alfrank had stretched to a 10% discount the prices would have been £494 and £854. That would still be £205 and £123 higher than Exclusive's prices for the Modena table. Turning to the Strasbourg and Opus tables, the differences in price for the table plus 6 chairs (Exclusive did not offer the Opus table alone), assuming a 10% discount offered by Alfrank, was £85. This is less, but it was not shown that Harveys was ever interested in the Opus table and it was common ground that whereas the Canberra/Modena table was a commercial success, the Strasbourg/Opus table was less so.
20. These figures accord with Mr Struger's stated view that there was a difference between, on the one hand, prices charged by Alfrank and on the other prices at which Harveys would have wanted to buy. It is also consistent with an internal email sent by Mr Carroll to Mr Sweeney on 29 January 2010. This was early, around the time that Reids had asked for a sample of the Canberra table and before the alleged deal in China. Mr Carroll said this:

"…there is another group Harvey's who they say they would like to put the Canberra into 40 of their stores (all of us agree that this is probably unlikely as we feel the price point is too high for them). However the buyer wants it so we have to take it seriously …"

21. On that cumulative evidence I am not satisfied Alfrank has established that Harveys would have bought either the Canberra or Strasbourg tables if the Modena and Opus tables had been unavailable.

Counterfactual sales by Alfrank to other retailers

22. There was no direct evidence one way or another whether retailers other than Harveys to which Exclusive supplied the Modena and Opus tables would have turned to Alfrank and the Canberra and Strasbourg tables had the former not been on offer. Exclusive's prices to these other retailers were higher than those which Harveys were charged. For the Modena, Exclusive charged £849 for a table plus 6 chairs; for the Canberra Alfrank charged £949, a price difference of £100. I calculate that there would have been a £43 difference if Alfrank were to offer a 6% discount and £5 difference with a 10% discount. According to my own further calculations, the equivalent price differences in relation to the Strasbourg/Opus tables plus 6 chairs would have been £50 with no discount. Had Alfrank offered a 6% or 10% discount, its price would have been respectively £7 or £45 less than that actually charged by Exclusive.
23. This is to focus solely on price. Mr Sweeney accepted that retailers generally preferred to buy form existing suppliers if those suppliers had products they wished to buy at the right price. He said that longstanding relationships can build up between furniture suppliers and retailers and that this is quite an important part of the business.
24. These are retailers with whom Exclusive regularly traded, not Alfrank. The counterfactual hypothesis is that these retailers were never supplied with the Modena or Opus tables, so they would have no reason to believe that these two styles of table would be particularly good sellers – not unless this would have been apparent just from looking at the tables or because they were privy to sales figures for the Canberra and Strasbourg tables. There was no evidence of that nature. In reality the Canberra/Modena has sold well, the Strasbourg/Opus not so much. I have no reason to doubt that these retailers were reasonably satisfied both with the styles of tables on offer from their regular suppliers and with the profits they were making from sales of those tables. So I think that an allegation that in the counterfactual history these retailers would have gone out of their way to buy the Canberra and/or the Strasbourg table from Alfrank, without any obvious reason for doing so, required some solid evidence. There was none. In my view, subject to one further point Alfrank has not proved its case in relation to the Exclusive retailers other than Harveys. This further point emerged for the first time in Mr St Quintin's closing speech. He drew my attention to documentary evidence that 3 (out of about 80) regular Exclusive retailers had made purchases of Canberra tables from Alfrank before they switched to buying Modena tables, 18 Modena tables in all. He argued that at least these retailers would have bought more Canberra tables if Modena and Opus tables had not been available to them. They might have done, although even if they would have done it is far from certain that they would collectively have bought 18 Canberra tables from Alfrank. I will return to this after I have considered the argument in relation to Alfrank's retailers.

Increased sales by Alfrank, mostly to its regular retail customers

25. I turn to those retailers with which Alfrank regularly traded and Alfrank's third argument, namely that the consumers who bought a Modena or Opus table must have decided that the respective style was their favourite of those on the market at that price range; if Exclusive had not been able indirectly to supply that favourite style, these consumers would have bought the equivalent indirectly from Alfrank.
26. There are two assumptions in this argument. The first is that the retail price to consumers of the Canberra was much the same as the Modena and likewise the retail prices of the Strasbourg and Opus were much the same. In Alfrank's Points of Claim it stated its belief that the retail price of Exclusive's infringing tables was about 10% lower than the retail price of the equivalent Alfrank tables (paragraph 10(f); there follows in that sub-paragraph a comment on the price difference which is not easy to understand). In argument Ms Jamal directed me to figures which showed that the retail price charged by Harveys for a Modena table plus 6 chairs was £1,735 (Harveys was likely to offer the cheapest prices because it was supplied by Exclusive at the cheapest prices). Ms Jamal then pointed to Mr Pangali's evidence in his fourth witness statement which indicated that the recommended retail price of the Canberra table plus 6 chairs in retail stores varied between £2,399 and £1,799, though the sale price could be as low as £1,747. I calculate that the retail price for the Canberra plus six chairs was between 0.7% and 38% higher than the retail price for the Modena table plus 6 chairs.
27. The second assumption is that every consumer exhaustively researches all styles on line and in as many stores as it takes before settling on a favourite. I suspect that many consumers are less determined than that. Looking at the alleged counterfactual history, among the total of those who are assumed to be searching for the preferred Canberra/Modena or Strasbourg/Opus style (without knowing it), many would not have gone in for exhaustive research and would have settled for another style before ever seeing the Canberra or Strasbourg table in a store. It is to be borne in mind that the Canberra and Strasbourg tables would not have been found in Harveys and that those tables would have been absent from either all, or almost all, of Exclusive's retailers, which these customers are known to visit. Some consumers would have found the Canberra or Strasbourg table but, faced with the higher price, would have selected another style.
28. Taking all that into account I am prepared to accept that Alfrank would probably have sold some more Canberra and Strasbourg tables if Exclusive's infringing tables had not been on the market. My difficulty is putting figure on it. Any guess on my part approaches the extreme rough and ready end of the spectrum of accuracy, beyond which the court should give up and move on to assessing damages on the user principle. I will assume and I find that in relation to each of 20% of the sales of Modena tables by Exclusive, Alfrank would, had the Modena table not been sold, have made a sale of a Canberra table; likewise for each of 20% of Exclusive's sales of Opus tables, Alfrank would have sold a Strasbourg table if the sale of the Opus table had not happened. This includes the few sales of Canberra tables by Alfrank that would have been made to consumers via the three Exclusive retailers which, before buying Modena tables, had bought Canberra tables from Alfrank (see the end of paragraph 24).

Convoyed sales

29. Alfrank's Points of Claim states at paragraph 20:

"On average, on each occasion in 2010 that one of the Claimant's Canberra Dining Tables was sold, the purchaser also purchased the following:

a. 5.2 chairs, …

b. 0.34 coffee tables

c. 0.31 console tables

d. 0.45 lamp tables, and

e. 0.32 sideboards."

30. Equivalent figures for the Strasbourg dining table were given in paragraph 26:

"On average, on each occasion in 2010 that one of the Claimant's Strasbourg Dining Tables was sold, the purchaser also purchased the following:

a. 2.98 chairs

b. 1.78 coffee tables

c. 0.31 console tables

d. 1.76 lamp tables, and

e. 0.34 sideboards."

31. These figures were not challenged by Exclusive either in its Re-Amended Points of Defence or in argument. Mr Pangali was prepared to accept them. Most if not all the other items of furniture referred to were in the matching 'Canberra' or 'Strasbourg' range. The point made by Exclusive was that it is not enough to allege or even prove that sales of so many chairs and so on were made when a Canberra or Strasbourg table was sold. Alfrank had to satisfy the burdens of causation and remoteness generally (see Abbott, cited above, at [23]-[25]).
32. I agree. By way of an example, even if a supermarket claimant were to prove beyond doubt that for every packet of its own-brand cornflakes sold, statistically 0.23 tins of beans are sold to the same customer, together with 0.11 large wholemeal sliced loaves and so on, sales of the latter would not on that evidence have been caused by the sale of the cornflakes. In my view, to make good any claim to damages for loss of sales of convoyed goods, the claimant must prove that, assessed objectively, there was a causative link in the mind of the purchaser between his or her purchase of the infringing product and their purchase of one or more other specific products. Only then will the sale of the infringing product have caused the sale of those other products (within the legal sense of causation) – as opposed to the latter sales being merely statistically linked as a matter of probability. If causation is proved, subject to unusual facts being raised by the defendant, losses related to the latter sales will be expected to satisfy the requirements of the law on remoteness generally.
33. Mr Pangali, Exclusive's Managing Director, was cross-examined about consumer behaviour in the purchase of dining room tables:

Q. Provided a retailer has a big enough premises then they would expect to sell occasional furniture every time you sell a table?

A. If they had the space available, yes.

Q. From their perspective, that is a relatively predictable thing, is it not?

A. I do not know if it is predictable for them, but we do not predict that. We put a range out and that is it.

Q. Then you know that the purpose for you designing that range and going to the trouble of making prototypes is because you expect them to sell.

A. No, we hope they will sell.

Q. But in each of these cases, the dining table is the item of furniture which drives the sale.

A. I would say so, yes.

34. It was not in dispute that a consumer who buys a dining table in this market usually also buys dining chairs to go with it. I think a fair interpretation of Mr Pangali's evidence that a sale of a dining table 'drives' sales of occasional furniture is that consumers wishing to buy more than one item decide first which dining table they like. Having made that decision, they commonly buy items of occasional furniture which go with the table. There is, therefore, a causative link in the mind of the consumer who has decided on which style of dining table to go for and the purchase of the chairs and other furniture. I think this will be true whether the other items of furniture are from the same style range as the dining table or whether the consumer decides, for instance, that a lamp table from a different range is a better match for the selected dining table according to their taste and for their home.
35. I therefore find that for each lost sale of a Canberra or Strasbourg table in relation to which Alfrank is entitled to claim damages by way of loss of profits, it may also claim in respect of lost sales of other furniture, such sales being in the unchallenged proportions shown in the figures above taken from the Points of Claim.

Reasonable royalty

36. Ms Jamal raised a point of principle with regard to reasonable royalty. She said that it was important not to mix up loss of profits from lost sales, which could include lost sales of convoyed goods, and a reasonable royalty for sales of the infringing goods. Under the latter head there was no question of settling a reasonable royalty for a licence which covered convoyed goods since these had not been shown to be infringing goods and ex hypothesi required no licence. I should therefore focus on the reasonably royalty for importing and selling solely the infringing dining tables.
37. All that is true but I think it ignores the basis on which the reasonable royalty must be assessed. The hypothesis is that immediately before the first act of infringement the parties negotiate a licence which would render the acts lawful. This is done on a willing licensor/willing licensee basis, with the other assumptions and qualifications referred to in the authorities discussed in the cases I have cited above. Here, I think I must assume that in the hypothetical negotiations both Alfrank and Exclusive, being familiar with furniture retail, would know that a significant benefit to Exclusive of obtaining the licence would be that licensed sales of Modena and Opus tables would drive sales of dining chairs and other furniture. I don't believe that this will introduce double counting. Mr Pangali's evidence suggests that consumers tend to decide first on the style of table. So the licence granted to Exclusive would not only permit sales of Modena and Opus tables and drive sales of matching furniture, those further sales of other furniture would not happen – in any styles – without the licence.
38. No comparable licences were in evidence to assist in settling the royalty. In arguing the basis for a suitable royalty both parties focussed on available profits to Exclusive from the sales of Modena and Opus tables.
39. Alfrank argued that a licence awarding it 25% of those profits was a starting point and a fairer assessment would be an even split, giving Alfrank 50% of the profits because of the strength of the designs and because the licence would give Exclusive access to a sector of the market further up market to the sector in which it customarily sold. I give these two points no weight. Only the Canberra design proved to be strong in the sense that it sold well and higher sales would anyway give Alfrank higher royalties. The Modena and Opus were sold to Exclusive's usual dealers who, presumably, were in Exclusive's customary sector of the market.
40. Mr Pangali's evidence was that it would have been uneconomical for Exclusive to pay 50% of its profits to Alfrank. He did not say the same in relation to an obligation to pay 25%, but suggested that a reasonable figure was 7%.
41. I take these various figures to be a percentage of Exclusive's sale prices for the tables. On the facts of this case that does not work. First, the tables are usually sold with 4 or 6 chairs and the price to retailers is for table plus chairs. A royalty fixed as a percentage of the tables' sales price would be difficult to apply. Secondly, the profit that Exclusive would make from sales of other furniture driven by the sales of the licensed tables has to be taken into account.
42. To deal with this, in closing Mr St Quintin produced a very helpful table analysing the total profit made by Exclusive from sales of Modena and Opus tables, including proportionate profits from driven sales of other furniture, first in relation to sales to Harveys and secondly in relation to sales to other retailers. For the Modena table the figures were £387.14 and £472.92 respectively and for the Opus table £455.48 and £474.39 respectively. Approximately 40% of Exclusive's sales went to Harveys, but I think for present purposes it is sufficient for me to take the average figure in both cases, which I calculate to be £423 for the Modena table and £465 for the Opus table. Ms Jamal had no real time to check the maths done by Mr St Quintin, but since there has been no objection since the hearing I will assume that they are correct.
43. I have come to the conclusion that in the hypothetical negotiations Exclusive would have agreed to pay to Alfrank something around 25% of the profits it would generate from the sale of the licensed tables and driven sales of other furniture. Rounding the figure down a little, I find that the royalty payable is £100 in relation to each table sold by Exclusive, of both styles.

Conclusion

44. In relation to 20% of the sales of both Modena and Opus tables by Exclusive, Alfrank is entitled to the profit it would have made from sales of equal numbers of its own tables of equivalent design, plus the profit it would have made from sales of convoyed goods in the proportions set out above.
45. In relation to the remaining 80% of sales of infringing tables by Exclusive, Alfrank is entitled to damages of £100 per table.