England and Wales High Court (Patents Court) Decisions

IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
PATENTS COURT

		Royal Courts of Justice Strand, London, WC2A 2LL
		30 July 2010

Mr Justice Kitchin:

Introduction

1. This is an application by the claimant ("Nuttall") for a payment on account of damages pursuant to CPR Part 25.7(1)(b).
2. Nuttall has successfully sued the defendants (collectively "Fri-Jado") for infringement of its patent GB 2,348,697 ("the Patent") for a self-service display cabinet in which food (such as roast chickens) may be kept hot. Such display cabinets are generally used in supermarkets and convenience stores.
3. Nuttall issued the proceedings in July 2006, originally claiming that the Patent was infringed by the Multi-Deck Mark 1 and Mark 2 cabinets made and sold by Fri-Jado. Fri-Jado denied infringement and alleged the Patent was invalid on the grounds of obviousness and insufficiency. Shortly before trial, Nuttall abandoned its allegation of infringement by the Mark 1 cabinet but maintained its allegation of infringement by the Mark 2. The trial took place in late April and early May 2008 and judgment was handed down on 12 June 2008. The judge held that the Patent was valid and infringed. Nuttall was awarded an enquiry as to damages or an account of profits and, on 30 July 2008, it elected for an enquiry as to damages.
4. Fri-Jado sought to appeal the findings of validity and infringement and that appeal was heard on 23 November 2009. The Court of Appeal delivered an ex tempore judgment on 24 November 2009 dismissing the appeal.
5. On 18 February 2010, Nuttall launched this application. It claims by way of payment on account the sum of £1 million from Fri-Jado. For their part, Fri-Jado do not contest that Nuttall is entitled to an interim payment, but consider the amount claimed is far too high. They have offered to make an interim payment of £70,000, but this has not been accepted.

Background

6. The Patent is concerned with display cabinets with the following characteristics:

i) an open front with an air curtain to act as a thermal barrier between the heated cabinet and the external environment;

ii) a heater;

iii) a duct at the rear of the cabinet which contains outlets to enable air to flow from the duct into the chamber;

iv) one fan causing air to pass over the heater, upwardly through the duct and then through the outlets into the chamber; and

v) a second fan being arranged to draw air from the other end of the chamber and use it in the formation of the air curtain at the front of the cabinet.

7. The commercial embodiment of the invention of the Patent sold by Nuttall is called the Turboserve and it was launched in 1999. It has, says Nuttall, revolutionised the self-service food market and earned Nuttall the Queen's Award for Innovation in 2005. It has been sold in different models that vary in width and electricity supply. Mr Michael Littlewood, the managing director of the first defendant, states that two different widths were available during the relevant period: the Turboserve models T1, T2 and T4 were approximately 120cm wide and the T3 approximately 60cm wide.
8. Fri-Jado launched the Multi-Deck Mark 1 cabinet in the late summer of 2004. It was described as a "pre- series sample" and it seems no more than about 26 of these cabinets were made and sold. Around the end of 2004 or the beginning of 2005 Fri-Jado launched the Multi-Deck Mark 2 cabinet. It was sold in four models of different widths: MD35 (35cm), MD60 (60cm), MD100 (100cm) and MD120 (120cm).
9. Following the finding of the Patents Court on 12 June 2008 that the Multi-Deck Mark 2 infringed the Patent and that the Patent was valid, Fri-Jado immediately switched to another cabinet, the Multi-Deck Mark 4, which Nuttall has accepted is non-infringing.

General principles

10. CPR 25.7 provides that the Court must not order an interim payment of more than a reasonable proportion of the likely amount of the final judgment. In Ultraframe v Eurocell [2005] EWHC 2111 (Ch) Pumfrey J provided the following guidance as to the matters the court should take into account in determining what, if any, order to make:

"1. Generally, interim payment procedures are not suitable where factual issues are complicated, or where difficult points of law arise;

2. This does not prevent an award from being made even in respect of part of a complex claim if that part can be identified as what Mr Justice Robert Walker calls "an irreducible minimum part without venturing too far into the disputed area of fact or law";

3. It may well be appropriate simply to ignore certain heads of claim altogether whilst concentrating on those parts of the claim which can be assessed on established principles with some confidence;

4. While a broad brush approach to detail may be appropriate to an enquiry as to damages (see, for example, Gerber v Lectra [1997] RPC 443), at this stage it is also necessary to take a conservative view, however broad the brush employed is.

5. Even though the rule contains provision to accommodate over-payment, the extent to which comfort can be derived from the thought that even if the amount awarded under heads that are considered at the interim stages excessive, the other unconsidered heads can make up for it is strictly limited. Hence Mr Justice Robert Walker's reference to "irreducible minimum" reflects a fundamental feature of the jurisdiction. All the same, I do not think the phrase merely suggests that the sums awarded must be undisputed. There is room for a degree of uncertainty provided that it is treated in a conservative manner."

11. In my judgment, the task of the court can be expressed rather more simply as being to ascertain what sum it can safely be assumed the claimant will recover in any event.

The basis of the application

12. In the enquiry Nuttall claims damages under a number of heads including, but not limited to:

i) loss of profits on sales made by Fri-Jado that Nuttall would have made, alternatively to the extent that Nuttall cannot establish that it would have made any particular sale, a reasonable royalty on each such sale;

ii) price depression;

iii) loss of profit on the sale of spare parts;

iv) losses arising from the time spent by key employees dealing with the infringement;

v) springboard damages;

vi) loss of sales on complementary and ancillary products.

13. For the purpose of this application, however, Nuttall limits its claim to loss of profits on the sales made by Fri-Jado which would have been made by Nuttall but for the infringement and a notional royalty on the remainder.
14. The key issues in dispute between the parties which bear upon the appropriate level of interim payment are therefore these:

i) whether Nuttall would have made any of the sales made by Fri-Jado, and if so, how many;

ii) the amount of lost profit on any sale which Nuttall would have made;

iii) the appropriate notional reasonable royalty to be applied to Fri-Jado sales which would not have been made by Nuttall;

iv) whether Nuttall should recover any damages accrued after proceedings commenced, given the manner in which Nuttall's case was advanced until shortly before trial.

Lost profits – number of sales

15. Details of sales of the Multi-Deck Mark 2 cabinets in the UK during the infringing period are set out in the second witness statement of Mr Littlewood dated 9 June 2010. As I have mentioned, Fri-Jado sold four different models of the Mark 2 cabinet in the UK, namely the MD35, MD60, MD100 and MD120. In summary, 357 MD 35s were sold generating a sales income of £839,526; 643 MD 60s were sold generating a sales income of £1,878,946; 71 MD100s were sold generating a sales income of £263,443 and 33 MD120s were sold generating a sales income of £141,823. So, in total, 1104 Mark 2 sales were made in the UK generating a sales income of £3,123,738.
16. In the third witness statement of Mr Brennan, the solicitor acting for Nuttall, dated 18 February 2010, he says that Nuttall is confident that at the substantive hearing of the enquiry it will be able to establish that it would have made all of these sales but for the infringement. This is disputed by Fri-Jado who contend that it is extremely unlikely that Nuttall will be able to establish that it would have made a significant number, or indeed, any of these sales. In order to assess the merits of these rival positions I must consider the sales of the various different models of the Mark 2 cabinets which Fri-Jado have made.

MD35

17. I begin with the 357 MD35 sales. The MD35 was developed by Fri-Jado for Pret-a-Manger ("Pret") who particularly wanted a narrow unit of this size. Fri-Jado's position in relation to these sales, is in short, as follows. The Turboserve was only made available in this dimension after July 2008. During the infringing period, the smallest Turboserve was the T3 which was approximately 60cm wide. As Nuttall did not have an equivalent size cabinet at the relevant time, Nuttall would not have made any of these sales if the MD35 had not been available.
18. Nuttall's response to this is explained by Mr Young in a witness statement dated 9 July 2010. He was Nuttall's sales manager responsible for the Turboserve from 2002 to 2006. He says that Nuttall has always placed considerable emphasis on its ability to provide bespoke solutions to customers' requirements and it had the capability and resources to make a 35cm Turboserve in the period from December 2004 to July 2008. Indeed, he continues, Nuttall offered to produce a 35cm Turboserve for Pret with a five week lead time in early 2006, several months before Fri-Jado started supplying its MD35. Specifically, he and Mr Joyce, Nuttall's commercial development manager, travelled to Pret's London offices in mid January 2006 to meet Mr Wissmann, Pret's equipment manager. During the course of that meeting they were told that Pret was in the process of trialling a Fri-Jado MD60 cabinet. Shortly after the meeting, on 26 January 2006, Mr Joyce wrote to Mr Wissmann with a number of proposed cabinet designs, including a design for a bespoke slimline 35cm version of the T3 Turboserve. However, Pret decided not to pursue Nuttall's proposal and instead began sourcing the MD35 Mark 2 from Fri-Jado and at a price substantially less than the price of between £2,500 and £3,500 per unit quoted by Nuttall. In short, Nuttall contends that Fri-Jado poached the Pret business from Nuttall by supplying the same machine that Nuttall had offered to supply at a lower price.
19. Powerful though this case appears on the face of Mr Young's evidence, it emerges from the third witness statement of Mr Littlewood dated 19 July 2010 that it is based upon an incomplete picture. Far from Pret seeking to source the MD35 from Fri-Jado in light of the presentation made to Pret by Nuttall, it seems that Fri-Jado had first been approached by Mr Metcalfe, the co-founder of Pret, in early 2005. He had seen one of Fri-Jado's MD60 cabinets in a Co-Op store and wanted to know whether Fri-Jado could develop a version of the cabinet for use in Pret stores. Mr Metcalfe apparently visited Fri-Jado's headquarters in Uxbridge in the summer of 2005 at which his proposal was discussed in detail. It was initially decided to trial one of the Fri-Jado MD60 machines in a Pret store in Victoria from November 2005 to see whether there was sufficient customer demand before incurring the development costs associated with a 35cm cabinet. Representatives of Pret visited Fri-Jado in the week of 16 January 2006 to discuss the proposal in more detail and, following that visit, Fri-Jado's distributor, Equipline, provided a quote for both proto-type and production machines to Pret on 23 January 2006. This quote was accepted and a proto-type unit was delivered to Pret on 27 March 2006. Therefore, Fri-Jado say, at the time Nuttall made its design proposals to Pret, Fri-Jado had already quoted to supply both proto-type and production MD35 cabinets. As to the suggestion that Fri-Jado must have substantially undercut Nuttall on price, this is also disputed by Fri-Jado. Mr Littlewood says that the price quoted to Pret by its distributor, Equipline, was £3,078 per unit, reducing to £2,843 for bulk orders of more than 100. The average income to Fri-Jado for each sale of the MD35 was £2,351. This difference reflected the up-lift charged by Equipline. Accordingly, Mr Littlewood believes, there being no real difference in price, there must have been some other reason why Pret did not proceed with Nuttall and, he observes, Nuttall only started marketing a 35cm wide cabinet in July 2008 and it appears not to have been a commercial success.
20. All this evidence, untested at this stage as it is, raises a number of important questions. First, it seems that Pret may well have been impressed by the Fri-Jado MD60 product both after seeing it in a Co-Op store and after trialling it itself. What cannot be determined at this stage is whether or not, if the MD60 cabinets had not been on the market, Pret would ever have decided to go for this sort of cabinet at all. Second, I have no evidence as to what communications there may have been between Nuttall and Pret following the letter of 26 January 2006 to which I have referred. The letter itself indicates that Mr Joyce would call Mr Wissmann to discuss the proposals in detail and with the aim of meeting again if possible to see if the project could be moved along. But I have no evidence as to what happened and why it is that Pret decided not to proceed with Nuttall. It seems very possible that, assuming no Mark 2 cabinets had ever been made and sold, Pret would never have gone to anyone and, if they had decided to go to someone, it may have been to one of the other manufacturers making heated self-service cabinets in the UK at that time, such as BKI or Counterline.
21. For all these reasons I feel quite unable to conclude with any degree of confidence that Nuttall would have made any Turboserve sales to Pret if there had been no infringement.

MD60

22. I turn then to consider the MD60 sales. 97% of the 643 MD60 sales were made to a single customer, a company called IAWS which trades as Cuisine de France. IAWS provides hot convenience snacks to a number of retailers in the UK and also supplies display cabinets to its customers on the basis that they are used to stock IAWS snacks in the customers' stores. The majority of IAWS customers are the proprietors of smaller convenience stores including Co-Op, Londis, Spar and Nisa.
23. Mr Walsh, who was employed by IAWS as Head of Business Development between May 2004 and January 2008, has made two statements in this action on behalf of Fri-Jado. In his first statement dated 22 February 2008, he explains that by mid-2004, IAWS had placed approximately 50 T3 Turboserves in stores such as Spar, Londis and the Co-Op throughout the UK. The Turboserve was initially popular because it operated on a 13 amp supply and so could be plugged into the standard power supply used by most customers. However, in August 2004, Mr Walsh began to receive complaints that the cabinets were not holding food products at the minimum required temperature, that products in the upper part of each cabinet had a low shelf life because they were drying out quickly and that the cabinets did not function properly if placed near an air conditioning unit or near the entrance door of a store. Nuttall's engineers attended the stores in issue in an attempt to solve the problems, but apparently without success. It was suggested the cabinets might be upgraded to run off 20 amps but the majority of IAWS customers in the convenience store sector did not have a 20 amp supply and it would have been prohibitively costly to introduce one.
24. It was against this background that IAWS began to seek an alternative supplier of hot food cabinets in 2004. It tried the Multi-Deck Mark 1 and found that it had a much improved performance, and it was this that persuaded IAWS to offer this to customers instead of the T3 Turboserve. It was then a natural step to offer the Multi-Deck Mark 2 following its introduction.
25. In his second witness statement dated 9 June 2010, Mr Walsh states unequivocally that IAWS would not have continued to purchase the T3 Turboserve even if Fri-Jado had not entered the market. The T3 simply was not performing to the level required by customers. IAWS would, he says, have sourced cabinets from other competing manufacturers, such as Counterline. Although, in his opinion, the Counterline cabinet was not ideal, it did keep food hot and was considerably cheaper than the cabinets made by Nuttall. He also says that BKI produced a hot display cabinet with an air curtain which ran off a 13 amp supply. The model available in 2004 was 130cm wide and therefore rather too large for many customers. However, BKI produced a narrower version in 2006 which would have been suitable.
26. All of this evidence is vigorously disputed by Nuttall. Mr Young says that it is simply wrong and that although a relatively small proportion of customers experienced performance issues with the T3 Turboserve, the problems were solved by moving the cabinet to a less draughty part of the store or upgrading to a 16 amp supply. He says that the suggestion that IAWS would not have continued to purchase the T3 even if Fri-Jado had not entered the market is simply not credible.
27. I cannot resolve this acute conflict of fact upon the materials before me on this application. It is, in my judgment, impossible to say that Mr Walsh is not to be believed and accordingly I cannot safely say that Nuttall would have made these sales but for the infringement.

The remaining sales

28. That leaves the remaining 20 MD60, 71 MD100 and 33 MD120 sales. In relation to these, Fri-Jado says that Nuttall would not necessarily have made any of the remaining 20 MD60 sales, as there were known performance problems with the Turboserve T3 product and there were alternative and cheaper products on the market. In this connection Mr Littlewood says that he does not consider it likely that other customers for the MD60, such as Budgens and Compass, would have purchased the T3 had the Multi-Deck not been on the market. He also doubts that Nuttall would have made all, or indeed any, of Fri-Jado's 71 MD100 or 33 MD120 sales in the light of the products available from BKI and Counterline. As I have said, BKI sold a 130cm cabinet which operated with a standard 13 amp supply and worked in a very similar way to the Multi-Deck Mark 1. Counterline had a cabinet available in the UK in a range of sizes from 90cm to 130cm. It used electrically heated shelves to maintain the temperature of the food and could run off a 13 amp supply. It is true to say that neither BKI nor Counterline initially had a 60cm version of their cabinets. However, as I have mentioned, BKI launched a 60cm version of its cabinet in about May 2006. I recognise that Nuttall claim that all of these cabinets used heating systems which caused a number of significant problems including uneven temperature distribution and product desiccation. The difficulty I have, however, on the limited evidence before me is that it is impossible to estimate, even on a conservative basis, the number of sales which Nuttall would have made if there had been no infringement. The difficulty is exacerbated because there were evidently difficulties with the T3, not just with IAWS, to which I have referred, but also with Tesco and another major purchaser, Grampian Connections. In addition, there were also problems with the larger T1 cabinet, which again emerged with Tesco and which, Fri-Jado say, led Tesco to switch to the BKI cabinet. Overall, therefore, I do not feel able to say with any confidence how many of the remaining 20 MD60, 71 MD100 or 33 MD120 sales Nuttall would have made if there had been no infringement.

Recoverable profit

29. In the light of my conclusions in relation to lost sales, I can address this issue relatively shortly.
30. The evidence as to Nuttall's profit margin is contained in the third witness statement of Mr Brennan. He says that over the period of the infringement Nuttall sold at least 965 Turboserve machines generating a net revenue £4,173,642, equating to an average net sales price of £4,325. He has been instructed that the gross marginal profit made by Nuttall is approximately 40% and that Nuttall's lost profit per Turboserve is therefore a minimum of £1,730. This profit margin is, he continues, substantially less than before the period of infringement as a result of the price depression attributable to the launch of the Multi-Deck Mark 2. The figure of £1,730 is, therefore, a very conservative estimate.
31. Fri-Jado responded to this evidence with a witness statement of Mr Martin Wawrzyniak, the managing director of the second defendant, dated 10 June 2010. As he explains, Fri-Jado requested details of the basis on which the gross marginal profit had been calculated but this request was refused. Further, Fri-Jado made it clear that they considered a 40% gross marginal profit on all Turboserve units sold during the period of infringement was significantly higher than the standard industry margin for this type of product, and that this was a matter upon which expert accountancy evidence would be required. Nuttall has not served any substantive evidence in reply but, by solicitors' letter dated 21 July 2010, on the eve of this hearing, it did purport to provide a break down of sorts, but this has come too late for Fri-Jado to be able to give it any proper consideration.
32. Given the paucity of evidence on this issue from Nuttall, I am not prepared to assume upon this application that Nuttall would have made any profit on its lost sales in excess of a notional reasonable royalty.

Notional reasonable royalty

33. Nuttall contends that in considering a reasonable royalty on sales made by Fri-Jado it is appropriate to apply the available profits approach and to take into account that the invention the subject of the Patent was fully developed and created a new market. Given that Nuttall was in the business of manufacturing, and was earning profits of around 40%, it contends a royalty rate of 10% is both conservative and appropriate.
34. Fri-Jado say that a royalty rate of 10% is far too high. In his third witness statement Mr Wawrzyniak says that, in his experience, royalty rates for patent licences are usually expressed either as a fixed percentage of the licensees' sales price or as a fixed price per item sold and the standard royalty rate for mechanical inventions such as heated self-service cabinets is usually around 5% of the licensee's sales price. There are, he continues, a number of factors that can cause a higher or lower royalty to be agreed and, in the context of the present case, point to a lower rate. First, he says there were a number of problems with the technology, many of which I have adverted to. Second, there were a number of competing products on the market. Third, in Fri-Jado's experience, it is relatively easy to produce a viable product that does not infringe the Patent, for example, the Mark 1 and Mark 4 products. Further, and by way of comparison, Fri-Jado point to the fact that they are currently licensees of a patent relating to the vacuum baking of bread, the royalty rate for which is 6% of the Fri-Jado sales price. This, Mr Wawrzyniak considers, is relatively high but Fri-Jado were prepared to pay more than the standard 5% rate because it is an exclusive world wide licence including know how, is in respect of a unique product without direct competitors and the licensed process allows significant savings in manufacturing cost.
35. Fri-Jado estimate their net profit on the infringing sales was around 14%. This is a matter which it is plainly appropriate to take into account adopting a profits available approach which involves ascertaining the profit made by the licensee absent a licence and apportioning this between the patentee and the licensee. I do not, however, consider it appropriate to take into account any further profits made by Equipline, Fri-Jado's distributor for at least some of the infringing products, since this company is neither a party to these proceedings nor do I have any idea what costs it has incurred.
36. Weighing all these matters together, I have reached the conclusion that a conservative rate to award by way of an interim payment is 5% of Fri-Jado's sales price, this being a figure which, overall, I believe it can safely be assumed Nuttall will recover in any event, subject to the issue of mitigation, to which I now turn.

Mitigation

37. Fri-Jado accept that in general it is not a defence to a claim for damages for patent infringement that the defendant could have competed without infringing. However, they submit there is also a duty on a patentee (as for any wronged party) to act reasonably to mitigate the damage caused by the infringing act and that he cannot recover for losses he might reasonably have avoided. In this case, Fri-Jado submit that Nuttall has not acted reasonably to mitigate its damage and that the damages claim should be reduced accordingly.
38. The submission runs as follows. At the relevant time, there were two versions of Fri-Jado's Multi-Deck cabinets – the Mark 1 and the Mark 2. Rather than confining its case to an allegation of infringement by the Mark 2, Nuttall alleged infringement by both cabinets. The allegation of infringement by the Mark 1 was maintained until just before trial when it was abandoned. As the judge recorded in his judgment on costs, the allegation of infringement by the Mark 1 could only have been advanced on a construction of the Patent claims which was so wide that the Patent would probably had been held invalid. The behaviour of Nuttall was the subject of some criticism by the judge, who concluded that Fri-Jado may have suffered some harm as a result.
39. Fri-Jado further say that, faced with the allegation that both the Mark 1 and Mark 2 cabinets infringed the Patent, they continued to supply the Mark 2. While the broad allegation was being pursued, Fri-Jado quite reasonably could conclude that the Patent was invalid and there was no incentive to restrict their activities. However, if Nuttall had behaved as it should have done and limited its claim to the Mark 2, Fri-Jado would have reduced their exposure to Nuttall by selling the Mark 1 until the issues raised with the Mark 2 had been resolved. Accordingly, they continue, Nuttall is only entitled to a royalty of Fri-Jado's sales price for the machines sold prior to the service of the claim form on 27 June 2006.
40. I have reached the conclusion that it is not appropriate upon this application to make a reduction on this ground. First, I am far from satisfied that this issue is one of mitigation at all. A claimant is not allowed to recover for losses which, though he did sustain, he might reasonably have avoided. But here, Fri-Jado are seeking to contend that but for the allegation of infringement by the Mark 1, they would not have infringed the Patent by making and selling the Mark 2. So it is not the loss but rather the infringement itself which Fri-Jado say Nuttall ought reasonably to have avoided.
41. Second, the obligation on a claimant is only to act reasonably and there is no evidence before me that it was ever apparent to Nuttall that if it dropped the allegation of infringement by the Mark 1, then Fri-Jado would cease making and selling the Mark 2 and revert to the Mark 1. Indeed, the evidence available to Nuttall suggested the contrary. The Mark 1 was a pre-series sample made available in only very limited numbers in the autumn of 2004. By the end of December 2004, the Mark 1 had been replaced by the Mark 2. Then, in pre-action correspondence Fri-Jado explained by letter from their patent attorneys dated 19 July 2006:

"It appears that your client has purchased a pre-series MD60 sample ("pre-series sample"). Our clients have distributed very few pre-series samples since, as a result of extensive internal testing and field results in relation to the first prototypes, Fri-Jado has improved its MD cabinets."

42. By the time of the commencement of proceedings, the Mark 1 had therefore been abandoned for at least 18 months. Furthermore, when the allegation of infringement by the Mark 1 was withdrawn, Fri-Jado did not return to it. Instead they developed and began to sell the Mark 4.
43. Accordingly, on the materials before me, I do not accept that Nuttall is attempting to recover for losses which it might reasonably have avoided.

Conclusion

44. In my judgment Nuttall is entitled to a payment on account of damages of £156,000, being 5% of Fri-Jado's sales price. This is a sum which I believe it can safely be assumed Nuttall will recover in any event. I will hear argument as to the form of order if it cannot be agreed.