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Sunday, 25 November 2012

Accounting of Profits with the Court of Appeal: Hollister v Medik Ostomy Part I

The AmeriKat loves assessment of damages, more so
when she can take naps in the defendant's money
The AmeriKat is a total geek for assessment of damages, having devoted much of the past few years to such a case. So when a Court of Appeal decision was recently delivered in Hollister Incorporated and Dansac A/S v Medik Ostomy Supplies Limited [2012] EWCA 1419, she wiggled with excitement, made some peppermint tea with her beloved Tea Pigs and got to highlighting the 108 paragraph judgment delivered by Lord Justice Kitchin that held that His Honour Judge Birss QC was incorrect in the method by which he calculated Hollister's damages for trade mark infringement based on account of profits.

The Facts

In 2003, Medik, a parallel importer, began to import into and sell in the UK ostomy products placed on the market in the European Economic Area by Hollister. However, Medik repackaged the products and re-applied Hollister's registered marks for HOLLISTER or DANSAC. Under  Bristol-Myers Squibb v Paranova condition ("the BMS conditions"), Condition 5 requires the importer to give notice to the trade mark owner before any repackaged product is put on sale, and, on demand, supplies him with a specimen. Medik failed to do so and, consequently, Hollister commenced trade mark infringement proceedings against Medik. Medik admitted trade mark infringement and a consent order was made which directed that Medik provide disclosure of its infringing activities and that there be an inquiry as to damages or an account of profits at Hollister's election.  Hollister elected for an account of profits.

In undertaking the account of profits, Judge Birss QC adopted a three stage approach whereby
1. the court should assess the account of profits on the normal basis under English law;

2. then consider the extent of damage caused to the trade mark proprietor by the infringement and the issue of proportionality, in all the circumstances of the case; and

3. then decide what the final sum should be awarded in light of the first two considerations.
The judge, in applying this approach, awarded Hollister half of Medik's net profits, but then permitted Medik to deduct not only the direct costs associated with the importation and sale of the infringing products but a proportion of its general overhead costs.  The judge also resolved a dispute regarding the number of infringing products sold by Medik.  Hollister appealed arguing that the sum calculated under the normal basis under English law should not have been deducted.  Medik argued that the judge should have found that Hollister was not entited to any of Medik's profits.

The Law

Article 5 of Directive 2008/95/EC sets out the rights of a registered trade mark owner which include, under Article 5(1) and Article 5(3), affixing an identical sign to identical goods or to the packaging thereof and the offering, importing, exporting or using of the sign on business papers and in advertising. Article 5 is subject to Article 7 which provides that a trade mark owner is not entitled to prohibit the use of the trade mark, including importation, in relation to goods which have been put on the market in the Community under that mark by the trade mark owner or with his consent, i.e. where the trade mark owner's rights are exhausted. However, under Article 7(2), where there are legitimate reasons for the trade mark owner to oppose further commercialization of the goods, especially where the condition of those goods has been changed or impaired after they were put on the market, then the doctrine of exhaustion will not apply and the trade mark owner can do something about it.

But, of course, there needs to be legitimate reasons to oppose further commercialization and in the context of repackaged products the Court of Justice of the European Union (CJEU) articulated such circumstances in the five BMS conditions. The BMS conditions state that Article 7(2) must be interpreted as meaning that the trade mark owner may legitimately oppose the further marketing where an importer has repackaged the product and re-affixed the trade mark unless, broadly,
(1) the trade mark owner is relying on its rights to oppose the further marketing in order to artificially partition the markets between Member States; 
(2) the repackaging cannot affect the original condition of the product inside; 
(3) the repackaging clearly states who repackaged the product and the name of the manufacturer and clearly dispels any suggestion that the manufacturer is responsible for the repackaging; 
(4) the repackaging is not of such a quality as to damage the reputation of the trade mark and its owner, i.e. its not defective, of poor quality or untidy; and 
(5) the importer gives notice to the trade mark owner before the repackaged product is put on sale and, on demand, supplies him with a specimen of the repackaged product.
Condition 5 was at issue in this case, and lucky for the court, Mr Justice Laddie had considered this condition in detail in Glaxo Group & Ors v Dowelhurst Ltd (No 2) [2000] FSR 529. Although he accepted the CJEU's submission and case law (including BMS), he was not enthusiastic about the position because, inevitably, it would "empower trade mark owners to prevent the importation of their own products when that importation would do them no relevant harm". Such a position was counter-intuitive to the free movement of goods. Further, he was not convinced that the full effect of Condition 5 had been brought to the CJEU's attention. As a result he referred a number of questions to the CJEU.

Parallel importation 
In Advocate General Jacobs opinion in Joined Cases C-143/00 and C-443/99 Boehringer Ingelheim KG & Ors v Swingward Ltd & Ors [2003] Ch 27 (Boehringer I) he stated that the notice requirement in Condition 5 dated from the Hoffmann-La Roche & Co AG v Centrafarm Bertriebsgesellschaft Pharmazeutischer Erezeugnisse mBH [1978] ECHR 1139 where that Court explained that the trade mark owner's interest in ensuring that the consumer is not misled as to the origin of the product means that a trader (i.e. parallel importer) should be allowed to sell a repackaged product only on the condition he give the proprietor notice and he state that the product has been repackaged. The notice requirement, itself, had been confirmed in Frits Loendersloot v George Ballantine & Sons Ltd [1977] ECR I-227. Against this solid weight of case law and "cogent reasons" for the requirement , the Advocate-General said that the notice requirement could not depend on whether there was actual prejudice to the specific subject matter of the trade mark, the mere fact that the repackaging was liable to prejudice coupled with the advance notice requirement gave the trade mark owner the opportunity to verify the position for himself. There was no reason to depart from the CJEU's clear indications regarding Condition 5's requirement and the only realistic remedy for the failure to satisfy Condition 5 was liability for trade mark infringement.

The CJEU followed A-G Jacobs's logic and when the cases returned to Laddie J he applied the reasoning and held that the claimants would be entitled to damages. That was not the end of the story and the case went to appeal.  On appeal, the Court of Appeal held that it was not clear whether, if notice was not given, the products imported until notice was given should be considered infringements with the consequence that the importer must pay damages or render an account of profits. The Court of Appeal also did not consider that the question as to financial remedies had been fully resolved in the previous cases before the CJEU and therefore made a further reference on that question.  This time, it was Advocate General Sharpston up to bat.  In differing from A-G Jacobs, A-G Sharpston observed that the notice requirement did not have any Treaty basis and was rationalized merely as a procedural requirement.  It followed, that a breach of such a requirement must attract a sanction distinct from the sanctions applicable for breach of the other substantive BMS conditions. A-G Sharpston further opined that if the other four BMS conditions were fulfilled it would be disproportionate to sanction as severely the parallel importer for failure to give notice. A sanction should of course be required but it should be effective and dissuasive, not equal to the sanction for breach one or more of the substantive conditions.

The CJEU in the reference -- Boehringer Ingelheim KG v Swingward Ltd [2007] ETMR 71 (Boehringer II) --did not follow the Advocate General's opinion. Instead, the CJEU reiterated the previous case law as set out in its Boehringer I decision and stated that if a parallel importer has failed to give notice the importer will infringe the right of the proprietor until notice is given. As regards financial remedies for the breach, the CJEU reiterated the Commission's position, that compensation for failure to give prior notice must be determined in accordance with principles of national law on financial remedies provided they were compatible for Community and international law and, in particular, with the principles of equivalence, effectiveness and proportionality. Community law does not set out any specific sanctions for trade mark infringement and therefore the burden is on national authorities to adopt the appropriate measures. The CJEU, however, stated that the trade mark owner is entitled to financial remedies on the same basis as if the goods had been spurious -- such a basis of calculation is, the Court said, not contrary to the principle of proportionality -- but, nevertheless
"it is for the national court to determine the amount of the financial remedies according to the circumstances of each case, in the light of, in particular, the extent of damage to the trade mark proprietor caused by the parallel importer's infringement and in accordance with the principle of proportionality."
The Patents County Court Decision

HHJ Birss QC
The above section of Boehringer II was at the heart of Judge Birss QC's consideration in how to go about calculating the account of profits available to Hollister for breach by Medik of BMS condition 5. However, in assessing the amount of financial remedy he considered the extent of damage to Hollister caused by the infringement and whether the award was a proportionate and an effective deterrent. In doing so the judge considered that a trade mark owner's right to claim a remedy on the same basis as if the goods were spurious was not wrong per se, but the facts had to justify it in the relevant circumstances. Such factors would include reasons why the goods were infringing, whether other BMS conditions were breached, any impact on the trade mark owner's business and other circumstances of the case. The judge then set out his three step approach, as set out above. Accordingly, the judge awarded Hollister half of Medik's net profits of 392,096, i.e. 196,048.

The Starting Point

The Court of Appeal started by considering the nature of the wrongful act. The Court of Appeal cited the previous CJEU cases, including Boehringer II, where the CJEU clearly stated that repackaging itself is prejudicial to the subject matter of the mark. The notice requirement is an important aspect of the protection of the trade mark owner's interests as it allows it to ensure that the repackaging has not been carried out in a manner to affect the condition of the products or in a way which harms the reputation to the trade mark. It further serves to protect the owner against counterfeiting. By failing to give notice, Article 5 of the Directive had been infringed by Medik and Article 7(1) of the Directive did not apply because Hollister had legitimate reasons under Article 7(2) to oppose the further commercialization of the repackaged goods, i.e. by not being notified by Medik.

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