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Account of profits v damages: when and why does it matter?
Since 2007, Experience Hendrix LLC(Hendrix) and Times Newspapers Ltd (Times) have been litigating over the intellectual property rights (IPR) in a recording of a Jimi Hendrix concert that took place at the Royal Albert Hall in February 1969. In September 2006 Times distributed a free CD, or covermount, with each edition of The Sunday Times. A claim was issued against Times in March 2007 for infringement of copyright and performers’ rights under the Copyright, Designs and Patents Act 1988. In March 2008 the High Court held that Times had infringed the IPR in the recording and Hendrix elected to have an inquiry as to damages in respect of that infringement. The case has given rise to some complex issues as to the basis for the quantification of damages, and the inquiry is due to be heard next year, but the case is also a reminder of more general considerations in relation to remedies in IPR cases, and why the basis for quantification of those remedies can have far reaching consequences for a successful claimant.
It has long been the case in English law that a successful claimant in a claim for infringement of IPR will be entitled to either an account of profits or damages to compensate its loss. The claimant is not entitled to both; it must elect between them before judgment is entered. The decision can have serious consequences for the claimant who, subject to the facts, stands to recover substantially different amounts depending on its choice. In some cases, for example where the infringer has not made any profits but the claimant has suffered loss, the preference will be clear. However, not all cases lend themselves so obviously to one remedy over the other and careful consideration should be given to the decision.
The essential difference between the two remedies is the principles from which they derive. An award of damages is a remedy of right and will be awarded to compensate the claimant for its loss arising out of the infringement. Provided liability is established, the claimant will be entitled to damages. In contrast, an account of profits is an equitable remedy and as such is discretionary. The principle is that the claimant should be entitled to recover, by way of compensation, the profits received by the defendant as a result of its use of the claimant’s IPR. As an equitable remedy, it can be defeated by the equitable defences of delay, or clean hands, or the court may decide it is not equitable to grant the remedy where it finds on the facts that it would be inequitable to do so. For example, where an infringement was innocent and the infringer ceased the infringing activity upon notice, it was held that an account of profits was not an appropriate remedy (although it was also held in that case that the fact of innocent infringement alone was not sufficient to preclude an account of profits).
However, provided these hurdles can be overcome, an account of profits can result in an effective windfall for the claimant who is not required to prove the extent of its loss as it would be in a claim for damages. If the defendant used the infringing IPR in such a way that results in significant profits, the claimant could recover significantly more from an account of profits than from a claim for damages or, ironically, if the defendant had utilised its infringement less effectively. But the decision does not have to be a gamble. The defendant must disclose relevant information sufficient to allow the claimant to elect between the two remedies. The idea behind this disclosure, known as ‘ Island v Tring disclosure’, is that the claimant should not have to blindly elect an account of profits over damages only to find there is nothing in the pot. The defendant must adduce information as necessary to allow the claimant to make an informed decision.
Of course the claimant is not entitled to recover profits that result from an enterprise that includes both an infringing act and a legitimate act. In those cases the profit from the latter will not be recoverable. Therefore, it would not be wise to elect an account of profits simply on the basis that the defendant is a successful company or an individual who has made significant profits during the period of the infringement; to be recoverable those profits must have resulted from the infringement. This can be difficult to establish where profits have resulted from the use of a mixture of IPR, not all of it belonging to the claimant, as the claimant will have to establish the proportion of profits derived from the use of his IPR specifically. However, helpfully for the claimant, where the infringement was part of a larger enterprise, the onus will be on the defendant to show that an order for an account of total profits is inequitable.
There has been a suggestion since the implementation of Directive 2004/48/EC (the Directive) – by way of the Intellectual Property (Enforcement) Regulations 2006 (the Regulations) – that the concept of an election as to account of profits or damages may be dispensed with. The Directive was intended to harmonise the laws of enforcement of all IPR to tighten the net around infringers or potential infringers and prevent them from taking advantage of more lenient enforcement in some jurisdictions. The Regulations deal with several issues arising out of enforcement of IPR such as evidence, interim remedies and costs. The Regulations also deal with the quantification of damages and the drafting of Regulation 3, specifically, has called into question the way in which economic remedies may be administered by the English Court in the future.
Regulation 3(2) provides that an award of damages should take into account ‘all appropriate aspects’ including negative economic consequences, lost profits of the claimant, unfair profits of the defendant, and any ‘moral prejudice’ to the claimant. This has muddied the waters to some extent, although case law on the point is limited, not only because ‘moral prejudice’ is not defined and some have suggested this may allow a punitive element to be factored into the calculation of damages, but also because Regulation 3(2) does not distinguish between compensatory damages and an account of profits. The drafting arguably blends the two and therefore may allow for the recovery of both, or an award that includes elements of both. It remains to be seen whether this ambiguity will be addressed by the English Court, particularly in a case where it would be appropriate and practicable to compensate the claimant and require the defendant to surrender unfair profits. So for the time being if you are a successful claimant, you are still required to elect an account of profits over an award of damages if that is your preference. And if your infringing defendant happens to be business-minded and profitable, so much the better.
By Alex McGurk,
solicitor, Harbottle & Lewis LLP. E-mail: firstname.lastname@example.org.