Fashionista has been reading the decision in the long-running dispute between casual clothing manufacturer Jack Wills and department store House of Fraser has given the High Court a welcome opportunity to set guidelines on the apportionment of profits in IP infringement cases at  EWHC 626 (Ch).
Background to the claim
Back in January 2014, Mr Justice Arnold ruled that House of Fraser’s use of a logo consisting of a pigeon with a bow tie and top hat infringed Jack Wills’ rights in their registered Community trademark of an image of a cock pheasant wearing a top hat and carrying a walking cane, aka “Mr Wills”. House of Fraser had used the infringing pigeon logo on a number of garments in its own label ‘Linea’ menswear range.
Fast forward two years and the parties have been unable to agree the account of profits owed by House of Fraser to Jack Wills for the trademark infringement and passing off. The parties agreed the total profit from the sale of the infringing goods was £591,532: Jack Wills argued it was entitled to the whole of those profits, while House of Fraser sought to deduct a proportion of overheads.
When can overheads be deducted?
The deduction of overheads from net profits was considered in relation to a patent claim in the recently decided Design & Display Ltd v Ooo Abbott and another  EWCA Civ 95. The Court of Appeal allowed the infringing defendant to set off a proportion of its general overheads (attributable to the infringement) on the grounds that those overheads would also have sustained a non-infringing business, and in manufacturing the infringing goods, the defendant had foregone the opportunity to manufacture non-infringing products.
In the present case, HHJ Pelling QC, sitting as a High Court judge, held two factual questions needed to be decided:
- Had House of Fraser demonstrated that the same overheads would have occurred even if the infringement had not incurred?
- Would the sale of infringing products have been replaced by the sale of non-infringing products?
On the facts, House of Fraser’s infringing goods displaced non-infringing goods of the same type and style, namely Linea brand products without the infringing logo which had been sold for many years. Accordingly, House of Fraser was permitted to deduct its overheads from the sales of the infringing products. The judge stressed the decision in Design & Display, that the issue to be considered was not whether the infringer had been working at capacity.
What overheads can be deducted?
The question then turned to which overheads were deductible. It was held in order to be deductible, the expenditure had to be “wholly or partly attributable to the trading activities of House of Fraser as a whole incurred during the period when the infringing goods had been sold”. The parties agreed an apportioned deduction should be made for employment, property, establishment and depreciation costs, amounting to £274.6 million.
Among the remaining heads of expenditure, a number of points were contested. Jack Wills disputed £13.85 million within the operations budget, which had been spent advertising specific, non-infringing products. However, House of Fraser was permitted to deduct this expenditure, on the grounds that the advertising had an indirect effect of increasing store footfall and website visitors, even where the advertised product was itself non-infringing.
Jack Wills also disputed £10 million of the store support centre costs and the ‘onerous leases’ element of House of Fraser’s finance costs. Here House of Fraser was less fortunate. The judge ruled House of Fraser had failed to show its store support centre costs satisfied the test for deductibility, and that the onerous lease costs could not be deducted as they related to a period before the sales of infringing goods took place.
What method of apportionment should be used?
The parties agreed property, depreciation and establishment costs should apportioned on a “square footage” basis, but the means of apportioning employment, distribution, store support centre and finance costs was disputed, with House of Fraser preferring a “sales revenue” calculation.
HHJ Pelling QC held the appropriate method to apportion the costs was the one which produced the “least unrealistic” outcome. In this instance, the sales revenue basis was preferred, simply because it reflected House of Fraser’s internal accounting policy.
When is a further apportionment to reflect infringing use?
Design & Display clarified that where there has been IP infringement, the account of profit should reflect the profit of the sale which was derived from the infringement. In his judgment, HHJ Pelling QC said he considered that this area of law had now been “settled”.
The evidence was that House of Fraser’s Linea brand clothing had been on sale both before and after the infringement without the infringing pigeon logo. There was no evidence that the logo’s inclusion had any significant or lasting effect on sales, or that any increase in either sales or margins came about through House of Fraser’s use of the logo. On this basis, the judge considered that an apportionment of 41% of House of Fraser’s net profits would strike a fair balance, based on a royalty rate of 1.5% for the use of third-party brands.
So what do we learn?
In most infringement cases the parties can agree the amount to be paid without recourse to the courts. Fashionista found this decision useful as it provides welcome guidance and confirms that the same principles of apportionment will apply in trademark cases as well as in patent cases. It is also an important reminder that account of profits is not intended to penalise the infringing party in any way, but rather to deprive the defendant of the profits he has earned unlawfully.