New guidance on assessing an account of profits for passing-off

04 April 2014

Background

The first claimant, Mr Woolley, was the owner of the Community trade mark HENLEY for, among other things, watches. He exclusively licensed the trade mark to the second claimant, Timesource Ltd, which offered a range of watches, including one range under the HENLEY brand.

The second defendant, Henleys Clothing Ltd (subsequently renamed The Lacmanda Group Ltd), was the owner of trade mark HENLEYS for, among other things, clothes. It granted the first defendant, Ultimate Products Ltd (subsequently renamed Up Global Sourcing UK Ltd), a licence to use its trade mark on watches. Ultimate Products then supplied a range of watches bearing the HENLEYS mark to wholesalers. It also supplied a small amount of these watches to Henleys Clothing, which sold them through its website and passed the remainder on at cost to its retail arm, Henleys Retail Ltd.

In 2010, the claimants brought a claim for trade mark infringement and passing-off. Pending the outcome of a central revocation attack on the Community trade mark, the trade mark infringement claim was stayed. However, the passing off action continued. In 2012, the High Court held that the defendants were passing-off. This was affirmed on appeal.

The claimants elected for an account of profits.

Issues

Among other things, HHJ Pelling QC had to decide:

  • Whether Henleys Clothing was liable to account for the royalty of £294,401 which it had received (the 'royalty issue')
  • Whether Ultimate Products was liable to account for the profit of £210,107 for all of the infringing goods which it had supplied or only a portion (the 'proportion issue');
  • Whether Ultimate Products could deduct certain overheads (the 'overheads issue'); and
  • How to apportion Ultimate Products' direct costs (the 'direct costs issue').

Judgment

Royalty issue

The claimants reasoned that the court had held that Henleys Clothing had committed acts of passing off and, as it had derived a royalty from infringing products, should account for these. Henleys Clothing countered that the act of licensing its trade mark had not been held to be an act of passing off and, as such, the order for an account of profits did not cover the royalty.

HHJ Pelling QC sided with the defendants. He reasoned that the trial judge had not addressed joint tortfeasance for passing off and, as such, did not have to account for the profits made from the infringing goods. This, he held, was supported by the order which addressed the selling of the infringing watches (a small amount of which had been sold by Henleys Clothing), but not granting a licence. Rather, he concluded "all that [Henleys Clothing] had authorised Ultimate Products to do is to use its brand in relation to watches."

Proportion issue

Here, Ultimate Products argued that the High Court had found that only a substantial proportion of the public would be misled (the legal test for establishing passing off) and, as such, the account should be only for a proportion of the infringing products.

The High Court disagreed on two grounds. Firstly, it held that, by operation of the law and on the wording of the order, once a court had "concluded that a substantial number of members of the public had been subject to the relevant misrepresentation, what then follow is a direction that an account be taken of all the profits made by the defendant from the tortious acts complained of ..."

Secondly, it relied on a line of case law which established that if goods are supplied to 'middle-men', for example wholesalers, then even though those 'middle-men' are not misled, the entire profit is to be accounted.

Overheads issue

Of the profits made, Ultimate Products wanted to deduct £152,153 attributable to overheads.

Here, much turned on the evidence. Ultimate Products' finance director sought to show that between mid-November 2010 and July 2013, in response to a reduction in turnover of 28%, Ultimate Products had reduced its non-variable overheads, including wages. He concluded that "the loss of the Henleys watch business would have resulted in a reduction in corporate wages". From this he inferred that the infringing goods increased the overheads.

The court gave this short shrift. It relied on the claimants' expert who noted that a reduction in 28% of turnover precipitated a major restructuring of Ultimate Products' business, including the need to reduce the wage bill. By contrast, the reduction in turnover as a result of not supplying the watches was 1.1 to 1.4% which, in her opinion, would "not automatically be expected to trigger dramatic action in normal business." On the evidence the overheads were not properly attributable to the infringing activity.

Direct costs issue

Ultimate Products had not disclosed how the direct costs were attributable nor adduced evidence to this effect. It, therefore, fell to be determined how the direct costs should be apportioned.

Ultimate Products argued that with regard to certain charges (for example, clearance, testing, inspection, factory audits, wages and salaries, motor and travelling and advertising and exhibitions) the appropriate way to apportion the costs was by reference to the number of purchase and sales orders processed for the infringing goods. In this way, the percentage of each cost apportioned to the infringing goods was between 53% and 64%.

The court held that Ultimate Products had not demonstrated that this methodology was necessary to identify accurately the profit attributable to the sale of the infringing goods. Rather, it preferred the claimants' evidence that, in the absence of any evidence, the least unsatisfactory way of apportioning the costs was by pro-rating each head of expense either by reference to the proportion of turnover or unit of volumes of the infringing goods when compared with the total turnover of Ultimate Products' watches division.

Analysis

With regard to the inability to claim for Henleys Clothing's royalty of £294,401, it is useful to contrast the court's finding with the position in Hotel Cipriani SRL and others v. Cipriani (Grosvenor Street) Limited and others [2010] EWHC 628 (Ch), where Briggs J held that:

"The gist of the 2008 judgment was that the first defendant was liable for trademark infringement and passing off by carrying on a restaurant business in Central London under the name Cipriani London ... and the second and third defendants were liable as joint tortfeasors. The second defendant was the sole director of the first defendant and the third defendant was a Luxembourg corporation which, for reward, licensed the first defendant to use the name Cipriani."

In his judgment, HHJ Pelling QC distinguished Cipriani on the facts. However, it highlights the need to ensure that the issue of joint tortfeasance is addressed in the pleadings and in the judgment. If omitted in the judgment, it is incumbent on the successful claimant to raise it on appeal.


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