For the half-year to 31 December 2014, the IPKat's regular team is supplemented by contributions from guest bloggers Rebecca Gulbul, Lucas Michels and Marie-Andrée Weiss.

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Thursday, 12 January 2012

Deterrent damages and dodgy infringement: judicial legislation in the EU

This member of the IPKat team has always been fascinated by the remedy of an account of profits, a traditional doctrine of equity that seeks to separate the wrongdoer from his ill-gotten gains. Its relevance to intellectual property infringement is obvious, though its manner of application may not be.  Take, for example, Hollister Inc and another v Medik Ostomy Supplies Ltd [2011] EWPCC 40, a case decided last month, while the pine leaves glistened freshly on a forest of Christmas trees and flocks of red-breasted robins made their annual appearance on the nation's greeting cards.

Medik Ostomy, a lawful business which parallel imported genuine Hollister ostomy products from elsewhere in the EU and sold them in the United Kingdom, slipped up by failing to comply with the requirement for a parallel importer to give prior notice to the trade mark owner that he was going to sell repackaged or relabelled goods bearing the HOLLISTER and DANSAC marks. After Medik Ostomy admitted trade mark infringement, Hollister sought an account of profits, arguing that the profits derived from the infringement were Medik Ostomy's gross profits for supplying the relevant products.

Medik Ostomy disagrees: surely the sum to be paid was nil, or a token sum, because the acts of infringement were due solely to the failure to give adequate notice and Hollister had not suffered any damage as a result of that failure. Citing Case C-348/04 Boehringer Ingelheim KG v Swingward Ltd, it said the appropriate financial remedy should be assessed in the light of the extent of damage caused to Hollister by the infringement, this being assessed in accordance with the principle of proportionality. Even if this were not the case, if and so far as the sum due was to be assessed by looking at its profit, the relevant profit was its net profit it had made (this being its gross profit less properly attributable costs).

Judge Birss QC, sitting in the Patents County Court, came up with the following analysis:
  • English law focused on the profits made by the infringer rather than the damage suffered by the proprietor -- these being its net profits [This is not a novel proposition: this Kat can't remember a time when it didn't apply]. This figure was reached by deducting from its gross profits all of its costs that were shown to have nothing to do with the infringed intellectual property right. These included centrally incurred costs for business support, such as costs of distribution and sale, staff salaries, office rental, computer and other support.

  • The fact that some costs would be incurred even if there was no infringement at all was irrelevant: thus a proper proportion of fixed, centrally incurred overhead costs should be deducted from the gross profits.

  • When assessing the amount of the financial remedy for a parallel importer's infringement of the notice requirement, the national court was required by Community law to consider the extent of damage to the trade mark caused by the parallel importer's infringement and the principle of proportionality. However, token or trivial damages were unlikely to be appropriate because the remedy had also to be effective and a sufficient deterrent [Deterrent damages in civil law?  The word "deterrent" appears just once in the IP Enforcement Directive 2004/48 -- and that's in the recital, when it isn't even talking about damages: "(27) To act as a supplementary deterrent to future infringers and to contribute to the awareness of the public at large, it is useful to publicise decisions in intellectual property infringement cases"].

  • The proper approach, when assessing an account of profits for failure to comply with the notice requirement, is as follows:

    (i) assess the account of profits on the normal basis under English law;

    (ii) consider the extent of damage caused to the proprietor by the infringement and the issue of proportionality, in all the circumstances of the case;

    (iii) decide what sum should be awarded having both regard to the sum assessed for (i) and (ii).
  • Factors tending towards awarding a lower fraction of Medik Ostomy's net profits included that the infringement arose only from a breach of the notice requirement. Factors tending towards a higher fraction were the need for the remedy to be effective and a sufficient deterrent, and the fact that, had Hollister made the sales which were infringing sales, they would in all probability have earned more by way of profits themselves than Medik Ostomy's gross profit. Whatever sum was awarded was therefore likely not to be giving Hollister more than they probably lost.

  • All in all, Hollister should receive half of Medik Ostomy's profits, this being an effective deterrent to dissuade those engaged in repackaging and relabeling from not giving notice, as well as being proportionate to the reality of this case, which was nothing more than a breach of a procedural requirement.
The IPKat has always been unhappy at the bit in Case C-348/04 Boehringer Ingelheim KG v Swingward Ltd: where the Court of Justice of the European Union said:
"Where a parallel importer has failed to give prior notice to the trade mark proprietor concerning a repackaged pharmaceutical product, he infringes that proprietor’s rights on the occasion of any subsequent importation of that product, so long as he has not given the proprietor such notice. The sanction for that infringement must be not only proportionate, but also sufficiently effective and a sufficient deterrent to ensure that First Directive 89/104 in relation to trade marks is fully effective [Note: like the IP Enforcement Directive, trade mark harmonisation directive 89/104 and its successor say nothing about damages awards having to have deterrent effect]. A national measure under which, in the case of such an infringement, the trade mark proprietor is entitled to claim financial remedies on the same basis as if the goods had been spurious, is not in itself contrary to the principle of proportionality. It is for the national court, however, to determine the amount of the financial remedies according to the circumstances of each case, in the light in particular of the extent of damage to the trade mark proprietor caused by the parallel importer’s infringement and in accordance with the principle of proportionality".
What we actually have is some regrettably judge-made law being built on a platform of judge-made law: this is because not only the need for an award to have a deterrent effect but also the very notion that failure to notify a pharmaceutical trade mark owner of one's intention to perform an otherwise non-infringing act of parallel importing a branded product within the EU are not to be found anywhere in the recitals to the European Union's trade mark legislation or in its substantive provisions.  Why bother with a legislative procedure at all, when you have a court to make the rules up as it goes along?

Merpel wonders how other EU Member States have been handling 'failure-to-give-notice' damages and account of profit claims: is there a best-buy jurisdiction for those who fail to give notice of intention to import? Presumably such litigation will only occur in destination countries -- these being basically the more profitable Northern/Scandinavian zones.

8 comments:

Karl-Friedrich Lenz said...

That bit about "deterrent effect" is standard when talking about sanctions for infringement of EU law, coming from the Commission vs Hellenic Republic Court of Justice Case of 1989 (Case 68/88), Paragraph 24 of which reads:

"For that purpose, whilst the choice of penalties remains within their discretion,they must ensure in particular that infringements of Community law are penalized
under conditions, both procedural and substantive, which are analogous to those applicable to infringements of national law of a similar nature and importance and
which, in any event, make the penalty effective, proportionate and dissuasive."

This is the standard that applies for all cases where EU law does not specify the sanctions and leaves that to Member States.

Jeremy said...

@Karl-Friedrich - You are quite correct to draw attention to Case 68/88 -- but that wasn't a civil dispute between traders of the sort that the Enforcement Directive and the TM Directive contemplate; it was an action brought by the European Commission against Greece for failing to deal with its own complicity in a fraudulent scheme for passing Yugoslavian maize off as Greek maize. The case contemplates criminal and regulatory sanctions, not regular civil damages.

Anonymous said...

In Sweden : Damages provisions of all intellectual property laws has been clarified 2009 with respect to the matters to be considered in determining damages when infringement has been completed intentionally or negligently. All the laws provide explicitly that the judge must take into account in particular:
First, right holder's loss of profit,
Second, profit that the person who committed the violation has got,
Third, damage to the rightholder's reputation
Forth, non-pecuniary damage and
Fifth, right holder's interests in the infringement of intellectual property rights are not being committed.

Mats Björkenfeldt

Anonymous said...

I'm doubtful that there is any social utility in dissuading the commission of a tort from which the tortfeasor profits even after full compensation for the wrong.

Thomas Dillon said...

Article 3(2) of the Enforcement Directive requires all the remedies to be "dissuasive", which is indeed the usual suave EU term for deterrent. This sounds a really wrong-headed decision. You should not have to consider damage when the claim is for profits and the Enforcement Directive does not require a Member State to reduce its remedies in favour of infringers (see Art. 2(1)). If the plaintiff has suffered greater damage than that represented by the profits, he can claim it. Then, and only then, should the judge consider proportionality. It can never be disproportionate to recover the net profits that the infringer actually made. Admittedly the then-Government implemented Article 13 in the silliest way.

Jeremy said...

@Thomas -- Thanks for your comment. I have received some emails too about the use of the word "dissuasive", from readers who see it as a synonym of "deterrent".

I don't see the two words as having the same meaning at all. For example, a per diem fine or damages award for non-compliance with an award is dissuasive, but not deterrent.

Thomas Dillon said...

Certainly the EU never uses "deterrent" in its legislation and the Court is a bit vague on the issue (but see von Colson and Kamann Case 83/14). My argument would be that we have to interpret this time-honoured phrase in the light of the EU's obligations under Article 41 of TRIPs to provide remedies "which constitute a deterrent". I note that the French version of this is "qui constituent un moyen de dissuasion".

Karl-Friedrich Lenz said...

@Jeremy

While it is true that the case I cited had a criminal law background, I am not sure why that changes the analysis. If anything, in criminal law one should be more reluctant to allow for sanction without legislation (at least in Germany that is a general principle of criminal and Constitutional law.)

While I think that in situations where the choice of sanctions is left to the Member States the "effective, proportionate and dissuasive" standard is often found in various Directives (try googling that formula), and that that formula was developed in the case I cited, I do agree with your point.

The side that needs to be dissuaded from abusing trademark law to build impediments to the internal market by blocking parallel imports are the plaintiffs. Or in other words, the EU law rule violated here has not much merit in the first place and therefore is not deserving of the usual "effective, proportionate and dissuasive" sanction standard.

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