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General damages and an account of profits—an Irish innovation?

General damages and an account of profits—an Irish innovation? The author David Brodsky is an economist, registered Irish trade mark agent, and European trade mark and design attorney. This article This article considers the ‘orthodox’ rule requiring an election between damages or an account of profits in light of a recent Irish court decision that would appear to open the door for the granting of both remedies. Following a brief review of the background and historical development of the ‘orthodox’ view, the specific judicial arguments underlying the decision are presented. The crux of the judge's reasoning centred on the distinction between special and general damages. Interpreting these terms in the manner set forth by the Irish Supreme Court for trade mark/passing off cases, the judge concluded that the ‘rule’ requiring a plaintiff to make an election between the two remedies refers to an election between special damages and an account of profits, so that nothing precludes a plaintiff from making a claim for general damages and an account of profits. This article shows that the legal and economic logic underlying the judgment is not easily refuted. Moreover, at least in certain situations the ‘orthodox’ position can be seen to send a clear, albeit unintended, signal to potential infringers that they need not worry unduly about the quality of their workmanship, or tarnishing the victim's trade mark or reputation. Since Neilson v Betts,1 the ‘orthodox’ view has been that damages and an account of profits are mutually exclusive remedies in intellectual property litigation.2,3 A recent, and little-commented upon decision of the Irish High Court,4 however, would appear to open the door in Ireland, and perhaps elsewhere, for the granting of both damages and an account of profits. The decision was based on an apparently novel argument, at least in the judicial arena, to explain why the simultaneous application of the two remedies, in the appropriate circumstances, would not be excessive. The initial section of this article will briefly review the background and historical development of the ‘orthodox’ view of the non-cumulative nature of the two remedies. The second section will then present the specific judicial arguments forming the basis of the recent Irish court decision. Following this, the issue will be examined from a law and economics perspective, with specific reference to the underlying logic of the Irish judgment and a consideration of several pertinent examples. The ‘orthodox’ view The ‘orthodox’ view that damages and an account of profits cannot be cumulated, and that an election must therefore be made between the two, originates from the linked cases of Neilson v Betts (1871)5 and De Vitre v Betts (1873).6 The unchallenged nature of the orthodox position has been such that, as observed nearly 50 years ago, it is ‘now trite’.7 Perhaps somewhat surprisingly, in the decade and a half preceding Neilson v Betts there had been a number of cases in which both inquiries into damages and an account of profits were ordered.8 The possibility of such ‘double’ awards had arisen as a result of judicial reforms in which common law courts had been given the possibility to order an account of profits in patents cases (18529) and courts of equity the power to award damages in all appropriate cases (185810). The reasoning underlying such ‘double’ awards was explained by Lord Chelmsford in Betts v Neilson (1868) in terms which, as we shall see, foreshadow the reasoning of Cregan J in the Irish case that is the principal subject of this article: Before Lord Cairns’ Act, 21 & 22 Vict. c. 27, damages could only be obtained at law, and where a Plaintiff in a case of the present description prayed for an account, but afterwards desired to proceed at law for damages, he was not allowed to do so except upon the terms of waiving his claim to an account.… There is nothing in the Act to prohibit the Court from awarding damages as well as directing an account.… It is so obvious to me that in many cases the account alone will not satisfy the entire equity of a Plaintiff, that there being nothing against principle, nor contrary to the enactment of the statute, in granting the double relief, I shall hold the Vice-Chancellor’s decree to be right in this respect.11 The award of double damages in Betts v Neilson was reversed, however, by the House of Lords in Neilson v Betts,12 thus laying the grounds for the orthodox policy which has continued to the present day. There are two basic, and fundamentally differing, explanations for why the two reliefs cannot be combined. The first, ‘original’, one—known variously as ‘condonement theory’,13 ‘ratification principle’14 or ‘waiver of tort’—goes back to Lord Westbury’s explanation in Neilson v Betts that ‘the two things are hardly reconcilable, for if you take an account of profits you condone the infringement’.15 In effect, the defendant acts as the plaintiff’s agent (or licensee), so it would be logically inconsistent for the plaintiff to plead for damages once the tort has been ‘condoned’16—or more concisely put, ‘a party cannot be permitted to approbate and reprobate’.17 The second explanation, simpler and more ‘modern’,18 is to ensure that ‘overlapping is prevented’,19 that is, that the plaintiff/claimant20 is not effectively compensated twice for the same loss. Aldi Stores (Ireland) Limited v Dunnes Stores (No. 3)21 This was the third decision issued by Cregan J in the dispute involving these two parties. In the first,22 he had ruled that the defendant’s advertising infringed the regulations on comparative advertising,23 as well as the plaintiff’s trade marks. In the second,24 he had concluded that the court should exercise its discretion to grant an injunction,25 and that preliminary matters (only) should go forward with regard to the damages module of the trial, in view of the defendant’s stated intention to appeal the issue of liability to the Court of Appeal.26 The present case (while the liability issue was still on appeal) concerned the defendant’s application to the court for an order requiring the plaintiff to make an election between (i) an inquiry into damages or (ii) an account of profits. The decision of the court, announced in March 2016, has elicited little follow-up comment, and what little there has been has largely focused on the issue of the timing of the election, rather than the potentially paradigm-changing ruling on the fundamental nature of the election. After reviewing the relevant UK and Irish authorities, Cregan J turned to an analysis of fundamental principles.27 He first noted that: It is clear from the authorities that there is a rule of law in trademark and patent infringement cases that a plaintiff who has established an infringement must make an election between an inquiry into damages or an account of profits. However the scope of this rule, the operation of this rule and the underlying principles or rationale for the rule are not so clear. In his view, the ‘underlying reason’ for such an election was to ensure that the plaintiff was not overcompensated: Therefore if a plaintiff could recover damages for his loss of profits on his loss of sales and also obtain an award of the defendant’s profits on his sales he would enjoy an unmerited windfall. He would, in effect, recover ‘on the double’. This would mean that a plaintiff would be ‘over-compensated’ and a defendant would be ‘over-penalised’. However, courts should not apply this rule (for an election) in a ‘mechanistic’ way; rather they should seek to: understand the rationale for the rule and to apply it in each case in an appropriate manner to ensure justice is done to the plaintiff for the infringement whilst also ensuring that the plaintiff is not over-compensated in a manner which would do an injustice to the defendant. Special versus general damages The judge then turned to what for him was the crux of the issue—the distinction between special and general damages.28 While these terms have not always been interpreted in a uniform manner,29 in the context of trade mark infringement and passing off they have been defined by the Irish Supreme Court as follows:30 special damages: ‘pecuniary loss’, specifically ‘all financial loss such as loss of business profits or expenses incurred’ general damages: ‘non-pecuniary loss’, specifically ‘damage to reputation or goodwill’ Cregan J then observed that a plaintiff was clearly entitled to recover both special damages and general damages, so defined, and that in such case it was clear there would be no overcompensation. But ‘if that be so, then it cannot be argued that a plaintiff who is seeking general damages and an account of profits is being over-compensated’ since one pecuniary measure (special damages) is effectively being substituted by another (account of profits).31 Not surprisingly, the defendant objected strenuously to this radical reformulation of the ‘election’ between damages and an account of profits, and cited numerous judicial authorities in support. However, [T]he defendant ... accepted that it was not able to point to a single case which clearly stated the proposition that a plaintiff must make an election between a right of general damages or an account of profits. The judge’s view was that ‘the case law, when properly analysed, in fact refers to an election between the plaintiff’s right to special damages (not general damages) or an account of the defendant’s profits’. Thus, he concluded that: the rule of law which requires a plaintiff to make an election between an inquiry as to damages or an account of profits must mean an election between the plaintiff’s inquiry as to special damages or an account of the defendant’s profits. Hence the plaintiff’s claim to general damages (in addition to an account of profits) remained ‘intact’. In April 2017, the decision in the original case32 was reversed by the Court of Appeal,33 thus converting the radical reformulation of the orthodox doctrine set forth by Cregan J into an obiter dicta. It remains to be seen whether this radical reformulation will be followed in future trade mark infringement/passing off cases in Ireland. A law and economics perspective The key to the judicial reasoning set forth by Cregan J is the inherent substitutability of special damages and an account of profits. This inherent substitutability also emerges directly from an economic analysis of the nature of damages themselves. In relation to the economic torts, the classic definition of damages is that provided by Lord Wilberforce in General Tire and Rubber Co v Firestone Tyre and Rubber Co Ltd:34 ‘that sum of money which will put the injured party in the same position as he would have been in if he had not sustained the wrong’. From the point of view of the firm that has suffered infringement (or passing off), the economic value of damages, so defined, can be decomposed into two basic elements: (a) those that have already occurred (ie backward-looking) and are ‘precisely quantifiable’; and (b) those that will occur, or at least are foreseeable (ie forward-looking) and can only be estimated.35 The former can be calculated as the loss of profits suffered in the period from the start of infringement to the present. The latter, on the other hand, can be estimated as the decrease in the present value of the anticipated stream of future profits. As the italicized term is effectively the economic/financial definition of ‘goodwill’,36 forward-looking damages can thus be seen to compensate for damages to goodwill. Hence the dichotomy backward- versus forward-looking damages essentially reduces to the definition adopted by the Irish Supreme Court37 for special and general damages that was used by Cregan J as the basic starting point for his legal argument. Viewed in this context, it is clear that an account of profits, which is entirely backward-looking, can properly be viewed as a substitute only for special damages, and is completely independent of forward-looking general damages. A practical illustration By way of example, in a trade mark/passing off context, assume that Firms A and B produce essentially identical goods in a ‘branded’ market where consumers select based on personal brand preferences (beer, breakfast cereals, etc). Now assume that Firm B commits trade mark infringement and/or passing off by marketing its goods under Firm A’s brand-name. Firm B’s ‘illicit’ sales are £20 million, with profits of £10 million, so that an award to Firm A of an account of profits would provide compensation of £10 million. In this case ‘special’ damages—specifically, ‘the loss of business profits’—can be calculated as the additional profits that Firm A would have earned if it had been able to produce and sell the ‘illicit’ goods in place of Firm B.38 Relationship between an account of profits and special damages The relationship between an account of profits and calculated (‘special’) damages will depend on a number of factors. In the above example, ceteris paribus, it will be a function of the relative costs of production of the two firms and the extent to which, if any, Firm A has capacity limitations that would have restricted its ability to recapture the sales ‘stolen’ by Firm B. This is illustrated in the table below, where a capacity constraint of 50% means that Firm A could have produced only 50% of the ‘stolen’ sales, and 100% means it had no capacity to increase production. CALCULATED (‘SPECIAL’) DAMAGES A’s costs relative to B equal lower (20%) higher (20%) Capacity constraint none 10 [normal] 12 8 50% 5 6 4 100% 0 0 0 CALCULATED (‘SPECIAL’) DAMAGES A’s costs relative to B equal lower (20%) higher (20%) Capacity constraint none 10 [normal] 12 8 50% 5 6 4 100% 0 0 0 CALCULATED (‘SPECIAL’) DAMAGES A’s costs relative to B equal lower (20%) higher (20%) Capacity constraint none 10 [normal] 12 8 50% 5 6 4 100% 0 0 0 CALCULATED (‘SPECIAL’) DAMAGES A’s costs relative to B equal lower (20%) higher (20%) Capacity constraint none 10 [normal] 12 8 50% 5 6 4 100% 0 0 0 Thus, in the ‘normal’ case (italicized)—equal production costs and no binding capacity constraint—special damages and an account of profits are both £10 million, so that the two remedies truly are reverse sides of the coin. In the other cases, there will generally be a divergence between the two,39 and it will obviously be in Firm A’s interest to elect the remedy offering larger recompense. Where in certain cases it might thus appear to be in Firm A’s interest to turn a ‘blind eye’ to the infringement/passing off, and later reclaim all of Firm B’s profits (which would exceed Firm A’s calculated damages), the court in such cases will likely refuse to order an account of profits, or will limit the account to the period before the plaintiff/claimant became aware of the infringement/passing off.40 Note that, to this point, the issue of general damages does not arise: there is no damage to reputation or goodwill, or other non-pecuniary loss. In other words, using the terminology employed earlier, there are no ‘forward-looking’ damages. Of course, during the period of the infringement/passing off, there is a real ‘confusion’ as to source (and a ‘dilution’ of Firm A’s mark), but this disappears the moment the offending action ceases, leaving (special) damages to be calculated precisely as above. General damages Let us take as our ‘base’ case the one above in which Firm A has a 50% supply constraint and equal costs to Firm B. Then calculated (special) damages, according to the table, will be £5 million, and Firm A will clearly elect an account of profits which will compensate it with £10 million. Now, let us assume that Firm B produces an inferior product, but everything else remains the same. In addition to the special damages that can be calculated as £5 million, there will now be general damages resulting from the damage to Firm A’s goodwill/reputation arising from its association with an inferior product—consumers will of course hold Firm A responsible for Firm B’s shoddy workmanship. Let us further assume that this damage to goodwill/reputation can be valued at £3 million; this might represent, for example, the projected future cost of an advertising campaign informing the public that Firm A was the ‘innocent’ party and not to be held responsible for the temporary decline in quality. Under the ‘orthodox’ approach, Firm A would be given the following choice: Total Damages = £8 million or Account of Profits = £10 million Special = £5 million General = £3 million Total Damages = £8 million or Account of Profits = £10 million Special = £5 million General = £3 million Total Damages = £8 million or Account of Profits = £10 million Special = £5 million General = £3 million Total Damages = £8 million or Account of Profits = £10 million Special = £5 million General = £3 million Obviously in this case, it would once again elect the account of profits of £10 million. Comparing this outcome with the previous case (no general damages), it is clear that Firm B will effectively escape liability for the additional damage to goodwill/reputation that it has caused.41 On the other hand, if the ‘Irish’ approach were adopted, Firm A would have the possibility of opting for general damages plus an account of profits, thus providing total compensation of £13 million. In this case, Firm B pays an explicit price for the (additional) damage to goodwill/reputation. This example clearly illustrates that, at least in certain circumstances,42 the orthodox approach effectively sends an all-too-clear message to potential infringers that they are free to produce shoddy merchandise (within limits43) or otherwise ‘tarnish’ the trade mark or reputation of the firm: should they eventually be called to account for their transgression, the amount they will have to pay will be independent of the quality of the goods they produce44 or the resulting tarnishment of the mark/reputation. This is clearly an undesirable result however one looks at it, and it is perhaps the single strongest argument for allowing the simultaneous award of general damages and an account of profits. Conclusion The decision in Aldi Stores v Dunnes Stores (3), although now rendered obiter dicta, merits further consideration. The legal and economic logic underlying the judgment—allowing the cumulative remedy of general damages plus an account of profits in trade mark and passing off cases45—is not easily refuted. Moreover, from a law and economics perspective, it can easily be confirmed that, at least in certain situations, the ‘orthodox’ position sends a clear, albeit unintended, signal to potential infringers that they need not worry unduly about the quality of their workmanship, or tarnishing the victim’s trade mark or reputation. Footnotes 1 (1871) LR 5 HL 1. 2 For a detailed discussion on how this orthodoxy arose, see S. Watterson, ‘An Account of Profits or Damages? The History of Orthodoxy’ (2004) 24 OJLS 471–94. 3 This has to a certain extent been called into question by the EU IP Enforcement Directive (2004/48/EC) whose ‘ambiguous wording’ can be interpreted as permitting, or indeed perhaps requiring, cumulative remedies for ‘lost profits’ and ‘unfair profits’. See P. Johnson, “‘Damages” in European Law and the Traditional Accounts of Profit’ (2013), 3 Queen Mary Journal of Intellectual Property 296–306. UK courts have consistently held that the ‘orthodox’ position is consistent with the Directive, a recent example being Absolute Lofts South West London Ltd v Artisan Home Improvements Ltd & Anor [2015] EWHC 2608 (IPEC) at 52. 4 Aldi Stores (Ireland) Limited v Dunnes Stores (No. 3) [2016] IEHC 256. 5 Above, n 1. 6 (1873) LR 6 HL 319. 7 Colbeam Palmer Ltd v Stock Affiliates Pty Ltd (1968) 122 CLR 25 at 32. 8 Watterson, above n 2, 478–84. 9 As well as the ‘equitable’ remedy of granting injunctions; Patent Law Amendment Act 1852 (15 & 16 Vict. c. 83), s 42. 10 Chancery Amendment Act 1858 (21 & 22 Vict. c. 27) [Lord Cairns’ Act], s 2. 11 (1868) LR 3 Ch App 429 at 440–1 (italics added). 12 Above, n 1. 13 Watterson, above, n 2. 14 J. Marshall and W. Lister,‘Compensatory Damages and Account of Profit: Separate Elections for Separate Causes of Action—Trade Mark Infringement and Passing Off’ (2016) 11 JIPLP 291. 15 Above n 1 at 22 (italics added). 16 ‘[A] patentee who elects to take an account of profits stands in the shoes of the infringer and condones his wrong-doing, and is entitled only to the profits made by the infringer.’ Saccharin Corpn v Chemicals and Drugs Co [1900] 2 Ch 556 at 558. 17 Personal Representatives of Tang Man Sit v Capacious Investments Ltd [1996] AC 514 at 516. 18 See Watterson, above, n 2 at 485–6 for an extended discussion of the inadequacy of the condonement theory. 19 Watson, Laidlaw & Co Ltd v Pott, Cassels & Williamson (1914) 31 RPC 104 at 119. 20 In Ireland, ‘claimaints’ are still ‘plaintiffs’. 21 Above, n 4. 22 Aldi Stores (Ireland) Ltd v Dunnes Stores [2015] IEHC 495. 23 S.I. No. 774/2007 - European Communities (Misleading and Comparative Marketing Communications) Regulations 2007. 24 Aldi Stores (Ireland) Ltd v Dunnes Stores (No. 2) [2015] IEHC 551. 25 One factor being the defendant’s ‘cavalier attitude toward a breach of a competitor’s trade marks’, which did not inspire the judge with confidence that the situation would not recur. 26 Established in 2014, the Irish Court of Appeal now handles the large majority of cases that previously were appealed from the High Court to the Supreme Court. 27 At paras 32–44. 28 At paras 45–59. 29 With regard to special damages, a difficulty noted judicially at least as early as 1892: ‘Lest we should be led astray in such a matter by mere words, it is desirable to recollect that the term “special damage”, which is found for centuries in the books, is not always used with reference to similar subject-matter, nor in the same context’; Ratcliffe v Evans [1892] 2 QB 524 CA at 528, per Bowen LJ. 30 Tommy Hilfiger Europe v McGarry & ors [2008] IESC 36. 31 See further discussion below in the section ‘A law and economics perspective’. 32 Above, n 22. 33 Aldi Stores (Ireland) Ltd & Anor v Dunnes Stores [2017] IECA 116. 34 [1976] RPC 197 at 212. In Ireland this definition of damages was cited by the Irish Supreme Court in connection with trade mark infringement/passing off in Tommy Hilfiger Europe v McGarry & ors (above n 30). 35 Cf. the discussion of ‘general and special damages’ in S. Deakin, A. Johnston and B. Markesinis, Markesinis and Deakin’s Tort Law, 7th edn (OUP, Oxford, 2012), 794. 36 ‘Using the present value of future income method, goodwill may be estimated as the present value of the future income to be earned from providing future goods or services to future, unidentified, customers.’ R. F. Reilly and R. P. Schweihs, Guide to Intangible Asset Valuation, 2nd edn (AICPA, New York, 2014), 709. 37 Above, n 30. 38 Plus any additional expenses incurred to date as a result of the infringement, assumed to be zero. 39 The remedies will also turn out to be equal if Firm A’s capacity limitation is precisely compensated for by its lower cost of production. Thus, in the above example, if Firm A can produce 80% of ‘stolen’ sales and has a 25% cost advantage, it would have had increased sales of £16 million and increased costs of only £6 million, leaving it with ‘special’ damages of £10 million. 40 Or from the date of the letter before action. For case references, see J. Mellor et al., Kerly’s Law of Trade Marks and Trade Names, 15th edn (Sweet & Maxwell, London, 2011) para. 20-156. 41 Thus representing one of the ‘many cases’ noted by Lord Chelmsford in Betts v Neilson where ‘the account alone will not satisfy the entire equity of a Plaintiff’ (above, n 11). 42 Namely, when the ‘victim’ firm has limited capacity and/or when the potential infringer is a low-cost producer. 43 In this example, if Firm B were to ‘overdo’ the shoddiness to the extent that general damages rose above £5 million, it would face a potential compensation bill in excess of £10 million. 44 Note that if the reduction in quality is due to reduced costs, Firm A will receive additional compensation since the account of profits will increase. So for the purposes of the example it is assumed that the inferior quality is due simply to shoddy workmanship arising from the lack of accountability. 45 And, by extension, in other intellectual property disputes. © The Author(s) 2018. Published by Oxford University Press. All rights reserved. This article is published and distributed under the terms of the Oxford University Press, Standard Journals Publication Model (https://academic.oup.com/journals/pages/about_us/legal/notices) http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Journal of Intellectual Property Law & Practice Oxford University Press

General damages and an account of profits—an Irish innovation?

Journal of Intellectual Property Law & Practice , Volume Advance Article (8) – Mar 7, 2018
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Oxford University Press
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© The Author(s) 2018. Published by Oxford University Press. All rights reserved.
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1747-1532
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1747-1540
DOI
10.1093/jiplp/jpx234
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Abstract

The author David Brodsky is an economist, registered Irish trade mark agent, and European trade mark and design attorney. This article This article considers the ‘orthodox’ rule requiring an election between damages or an account of profits in light of a recent Irish court decision that would appear to open the door for the granting of both remedies. Following a brief review of the background and historical development of the ‘orthodox’ view, the specific judicial arguments underlying the decision are presented. The crux of the judge's reasoning centred on the distinction between special and general damages. Interpreting these terms in the manner set forth by the Irish Supreme Court for trade mark/passing off cases, the judge concluded that the ‘rule’ requiring a plaintiff to make an election between the two remedies refers to an election between special damages and an account of profits, so that nothing precludes a plaintiff from making a claim for general damages and an account of profits. This article shows that the legal and economic logic underlying the judgment is not easily refuted. Moreover, at least in certain situations the ‘orthodox’ position can be seen to send a clear, albeit unintended, signal to potential infringers that they need not worry unduly about the quality of their workmanship, or tarnishing the victim's trade mark or reputation. Since Neilson v Betts,1 the ‘orthodox’ view has been that damages and an account of profits are mutually exclusive remedies in intellectual property litigation.2,3 A recent, and little-commented upon decision of the Irish High Court,4 however, would appear to open the door in Ireland, and perhaps elsewhere, for the granting of both damages and an account of profits. The decision was based on an apparently novel argument, at least in the judicial arena, to explain why the simultaneous application of the two remedies, in the appropriate circumstances, would not be excessive. The initial section of this article will briefly review the background and historical development of the ‘orthodox’ view of the non-cumulative nature of the two remedies. The second section will then present the specific judicial arguments forming the basis of the recent Irish court decision. Following this, the issue will be examined from a law and economics perspective, with specific reference to the underlying logic of the Irish judgment and a consideration of several pertinent examples. The ‘orthodox’ view The ‘orthodox’ view that damages and an account of profits cannot be cumulated, and that an election must therefore be made between the two, originates from the linked cases of Neilson v Betts (1871)5 and De Vitre v Betts (1873).6 The unchallenged nature of the orthodox position has been such that, as observed nearly 50 years ago, it is ‘now trite’.7 Perhaps somewhat surprisingly, in the decade and a half preceding Neilson v Betts there had been a number of cases in which both inquiries into damages and an account of profits were ordered.8 The possibility of such ‘double’ awards had arisen as a result of judicial reforms in which common law courts had been given the possibility to order an account of profits in patents cases (18529) and courts of equity the power to award damages in all appropriate cases (185810). The reasoning underlying such ‘double’ awards was explained by Lord Chelmsford in Betts v Neilson (1868) in terms which, as we shall see, foreshadow the reasoning of Cregan J in the Irish case that is the principal subject of this article: Before Lord Cairns’ Act, 21 & 22 Vict. c. 27, damages could only be obtained at law, and where a Plaintiff in a case of the present description prayed for an account, but afterwards desired to proceed at law for damages, he was not allowed to do so except upon the terms of waiving his claim to an account.… There is nothing in the Act to prohibit the Court from awarding damages as well as directing an account.… It is so obvious to me that in many cases the account alone will not satisfy the entire equity of a Plaintiff, that there being nothing against principle, nor contrary to the enactment of the statute, in granting the double relief, I shall hold the Vice-Chancellor’s decree to be right in this respect.11 The award of double damages in Betts v Neilson was reversed, however, by the House of Lords in Neilson v Betts,12 thus laying the grounds for the orthodox policy which has continued to the present day. There are two basic, and fundamentally differing, explanations for why the two reliefs cannot be combined. The first, ‘original’, one—known variously as ‘condonement theory’,13 ‘ratification principle’14 or ‘waiver of tort’—goes back to Lord Westbury’s explanation in Neilson v Betts that ‘the two things are hardly reconcilable, for if you take an account of profits you condone the infringement’.15 In effect, the defendant acts as the plaintiff’s agent (or licensee), so it would be logically inconsistent for the plaintiff to plead for damages once the tort has been ‘condoned’16—or more concisely put, ‘a party cannot be permitted to approbate and reprobate’.17 The second explanation, simpler and more ‘modern’,18 is to ensure that ‘overlapping is prevented’,19 that is, that the plaintiff/claimant20 is not effectively compensated twice for the same loss. Aldi Stores (Ireland) Limited v Dunnes Stores (No. 3)21 This was the third decision issued by Cregan J in the dispute involving these two parties. In the first,22 he had ruled that the defendant’s advertising infringed the regulations on comparative advertising,23 as well as the plaintiff’s trade marks. In the second,24 he had concluded that the court should exercise its discretion to grant an injunction,25 and that preliminary matters (only) should go forward with regard to the damages module of the trial, in view of the defendant’s stated intention to appeal the issue of liability to the Court of Appeal.26 The present case (while the liability issue was still on appeal) concerned the defendant’s application to the court for an order requiring the plaintiff to make an election between (i) an inquiry into damages or (ii) an account of profits. The decision of the court, announced in March 2016, has elicited little follow-up comment, and what little there has been has largely focused on the issue of the timing of the election, rather than the potentially paradigm-changing ruling on the fundamental nature of the election. After reviewing the relevant UK and Irish authorities, Cregan J turned to an analysis of fundamental principles.27 He first noted that: It is clear from the authorities that there is a rule of law in trademark and patent infringement cases that a plaintiff who has established an infringement must make an election between an inquiry into damages or an account of profits. However the scope of this rule, the operation of this rule and the underlying principles or rationale for the rule are not so clear. In his view, the ‘underlying reason’ for such an election was to ensure that the plaintiff was not overcompensated: Therefore if a plaintiff could recover damages for his loss of profits on his loss of sales and also obtain an award of the defendant’s profits on his sales he would enjoy an unmerited windfall. He would, in effect, recover ‘on the double’. This would mean that a plaintiff would be ‘over-compensated’ and a defendant would be ‘over-penalised’. However, courts should not apply this rule (for an election) in a ‘mechanistic’ way; rather they should seek to: understand the rationale for the rule and to apply it in each case in an appropriate manner to ensure justice is done to the plaintiff for the infringement whilst also ensuring that the plaintiff is not over-compensated in a manner which would do an injustice to the defendant. Special versus general damages The judge then turned to what for him was the crux of the issue—the distinction between special and general damages.28 While these terms have not always been interpreted in a uniform manner,29 in the context of trade mark infringement and passing off they have been defined by the Irish Supreme Court as follows:30 special damages: ‘pecuniary loss’, specifically ‘all financial loss such as loss of business profits or expenses incurred’ general damages: ‘non-pecuniary loss’, specifically ‘damage to reputation or goodwill’ Cregan J then observed that a plaintiff was clearly entitled to recover both special damages and general damages, so defined, and that in such case it was clear there would be no overcompensation. But ‘if that be so, then it cannot be argued that a plaintiff who is seeking general damages and an account of profits is being over-compensated’ since one pecuniary measure (special damages) is effectively being substituted by another (account of profits).31 Not surprisingly, the defendant objected strenuously to this radical reformulation of the ‘election’ between damages and an account of profits, and cited numerous judicial authorities in support. However, [T]he defendant ... accepted that it was not able to point to a single case which clearly stated the proposition that a plaintiff must make an election between a right of general damages or an account of profits. The judge’s view was that ‘the case law, when properly analysed, in fact refers to an election between the plaintiff’s right to special damages (not general damages) or an account of the defendant’s profits’. Thus, he concluded that: the rule of law which requires a plaintiff to make an election between an inquiry as to damages or an account of profits must mean an election between the plaintiff’s inquiry as to special damages or an account of the defendant’s profits. Hence the plaintiff’s claim to general damages (in addition to an account of profits) remained ‘intact’. In April 2017, the decision in the original case32 was reversed by the Court of Appeal,33 thus converting the radical reformulation of the orthodox doctrine set forth by Cregan J into an obiter dicta. It remains to be seen whether this radical reformulation will be followed in future trade mark infringement/passing off cases in Ireland. A law and economics perspective The key to the judicial reasoning set forth by Cregan J is the inherent substitutability of special damages and an account of profits. This inherent substitutability also emerges directly from an economic analysis of the nature of damages themselves. In relation to the economic torts, the classic definition of damages is that provided by Lord Wilberforce in General Tire and Rubber Co v Firestone Tyre and Rubber Co Ltd:34 ‘that sum of money which will put the injured party in the same position as he would have been in if he had not sustained the wrong’. From the point of view of the firm that has suffered infringement (or passing off), the economic value of damages, so defined, can be decomposed into two basic elements: (a) those that have already occurred (ie backward-looking) and are ‘precisely quantifiable’; and (b) those that will occur, or at least are foreseeable (ie forward-looking) and can only be estimated.35 The former can be calculated as the loss of profits suffered in the period from the start of infringement to the present. The latter, on the other hand, can be estimated as the decrease in the present value of the anticipated stream of future profits. As the italicized term is effectively the economic/financial definition of ‘goodwill’,36 forward-looking damages can thus be seen to compensate for damages to goodwill. Hence the dichotomy backward- versus forward-looking damages essentially reduces to the definition adopted by the Irish Supreme Court37 for special and general damages that was used by Cregan J as the basic starting point for his legal argument. Viewed in this context, it is clear that an account of profits, which is entirely backward-looking, can properly be viewed as a substitute only for special damages, and is completely independent of forward-looking general damages. A practical illustration By way of example, in a trade mark/passing off context, assume that Firms A and B produce essentially identical goods in a ‘branded’ market where consumers select based on personal brand preferences (beer, breakfast cereals, etc). Now assume that Firm B commits trade mark infringement and/or passing off by marketing its goods under Firm A’s brand-name. Firm B’s ‘illicit’ sales are £20 million, with profits of £10 million, so that an award to Firm A of an account of profits would provide compensation of £10 million. In this case ‘special’ damages—specifically, ‘the loss of business profits’—can be calculated as the additional profits that Firm A would have earned if it had been able to produce and sell the ‘illicit’ goods in place of Firm B.38 Relationship between an account of profits and special damages The relationship between an account of profits and calculated (‘special’) damages will depend on a number of factors. In the above example, ceteris paribus, it will be a function of the relative costs of production of the two firms and the extent to which, if any, Firm A has capacity limitations that would have restricted its ability to recapture the sales ‘stolen’ by Firm B. This is illustrated in the table below, where a capacity constraint of 50% means that Firm A could have produced only 50% of the ‘stolen’ sales, and 100% means it had no capacity to increase production. CALCULATED (‘SPECIAL’) DAMAGES A’s costs relative to B equal lower (20%) higher (20%) Capacity constraint none 10 [normal] 12 8 50% 5 6 4 100% 0 0 0 CALCULATED (‘SPECIAL’) DAMAGES A’s costs relative to B equal lower (20%) higher (20%) Capacity constraint none 10 [normal] 12 8 50% 5 6 4 100% 0 0 0 CALCULATED (‘SPECIAL’) DAMAGES A’s costs relative to B equal lower (20%) higher (20%) Capacity constraint none 10 [normal] 12 8 50% 5 6 4 100% 0 0 0 CALCULATED (‘SPECIAL’) DAMAGES A’s costs relative to B equal lower (20%) higher (20%) Capacity constraint none 10 [normal] 12 8 50% 5 6 4 100% 0 0 0 Thus, in the ‘normal’ case (italicized)—equal production costs and no binding capacity constraint—special damages and an account of profits are both £10 million, so that the two remedies truly are reverse sides of the coin. In the other cases, there will generally be a divergence between the two,39 and it will obviously be in Firm A’s interest to elect the remedy offering larger recompense. Where in certain cases it might thus appear to be in Firm A’s interest to turn a ‘blind eye’ to the infringement/passing off, and later reclaim all of Firm B’s profits (which would exceed Firm A’s calculated damages), the court in such cases will likely refuse to order an account of profits, or will limit the account to the period before the plaintiff/claimant became aware of the infringement/passing off.40 Note that, to this point, the issue of general damages does not arise: there is no damage to reputation or goodwill, or other non-pecuniary loss. In other words, using the terminology employed earlier, there are no ‘forward-looking’ damages. Of course, during the period of the infringement/passing off, there is a real ‘confusion’ as to source (and a ‘dilution’ of Firm A’s mark), but this disappears the moment the offending action ceases, leaving (special) damages to be calculated precisely as above. General damages Let us take as our ‘base’ case the one above in which Firm A has a 50% supply constraint and equal costs to Firm B. Then calculated (special) damages, according to the table, will be £5 million, and Firm A will clearly elect an account of profits which will compensate it with £10 million. Now, let us assume that Firm B produces an inferior product, but everything else remains the same. In addition to the special damages that can be calculated as £5 million, there will now be general damages resulting from the damage to Firm A’s goodwill/reputation arising from its association with an inferior product—consumers will of course hold Firm A responsible for Firm B’s shoddy workmanship. Let us further assume that this damage to goodwill/reputation can be valued at £3 million; this might represent, for example, the projected future cost of an advertising campaign informing the public that Firm A was the ‘innocent’ party and not to be held responsible for the temporary decline in quality. Under the ‘orthodox’ approach, Firm A would be given the following choice: Total Damages = £8 million or Account of Profits = £10 million Special = £5 million General = £3 million Total Damages = £8 million or Account of Profits = £10 million Special = £5 million General = £3 million Total Damages = £8 million or Account of Profits = £10 million Special = £5 million General = £3 million Total Damages = £8 million or Account of Profits = £10 million Special = £5 million General = £3 million Obviously in this case, it would once again elect the account of profits of £10 million. Comparing this outcome with the previous case (no general damages), it is clear that Firm B will effectively escape liability for the additional damage to goodwill/reputation that it has caused.41 On the other hand, if the ‘Irish’ approach were adopted, Firm A would have the possibility of opting for general damages plus an account of profits, thus providing total compensation of £13 million. In this case, Firm B pays an explicit price for the (additional) damage to goodwill/reputation. This example clearly illustrates that, at least in certain circumstances,42 the orthodox approach effectively sends an all-too-clear message to potential infringers that they are free to produce shoddy merchandise (within limits43) or otherwise ‘tarnish’ the trade mark or reputation of the firm: should they eventually be called to account for their transgression, the amount they will have to pay will be independent of the quality of the goods they produce44 or the resulting tarnishment of the mark/reputation. This is clearly an undesirable result however one looks at it, and it is perhaps the single strongest argument for allowing the simultaneous award of general damages and an account of profits. Conclusion The decision in Aldi Stores v Dunnes Stores (3), although now rendered obiter dicta, merits further consideration. The legal and economic logic underlying the judgment—allowing the cumulative remedy of general damages plus an account of profits in trade mark and passing off cases45—is not easily refuted. Moreover, from a law and economics perspective, it can easily be confirmed that, at least in certain situations, the ‘orthodox’ position sends a clear, albeit unintended, signal to potential infringers that they need not worry unduly about the quality of their workmanship, or tarnishing the victim’s trade mark or reputation. Footnotes 1 (1871) LR 5 HL 1. 2 For a detailed discussion on how this orthodoxy arose, see S. Watterson, ‘An Account of Profits or Damages? The History of Orthodoxy’ (2004) 24 OJLS 471–94. 3 This has to a certain extent been called into question by the EU IP Enforcement Directive (2004/48/EC) whose ‘ambiguous wording’ can be interpreted as permitting, or indeed perhaps requiring, cumulative remedies for ‘lost profits’ and ‘unfair profits’. See P. Johnson, “‘Damages” in European Law and the Traditional Accounts of Profit’ (2013), 3 Queen Mary Journal of Intellectual Property 296–306. UK courts have consistently held that the ‘orthodox’ position is consistent with the Directive, a recent example being Absolute Lofts South West London Ltd v Artisan Home Improvements Ltd & Anor [2015] EWHC 2608 (IPEC) at 52. 4 Aldi Stores (Ireland) Limited v Dunnes Stores (No. 3) [2016] IEHC 256. 5 Above, n 1. 6 (1873) LR 6 HL 319. 7 Colbeam Palmer Ltd v Stock Affiliates Pty Ltd (1968) 122 CLR 25 at 32. 8 Watterson, above n 2, 478–84. 9 As well as the ‘equitable’ remedy of granting injunctions; Patent Law Amendment Act 1852 (15 & 16 Vict. c. 83), s 42. 10 Chancery Amendment Act 1858 (21 & 22 Vict. c. 27) [Lord Cairns’ Act], s 2. 11 (1868) LR 3 Ch App 429 at 440–1 (italics added). 12 Above, n 1. 13 Watterson, above, n 2. 14 J. Marshall and W. Lister,‘Compensatory Damages and Account of Profit: Separate Elections for Separate Causes of Action—Trade Mark Infringement and Passing Off’ (2016) 11 JIPLP 291. 15 Above n 1 at 22 (italics added). 16 ‘[A] patentee who elects to take an account of profits stands in the shoes of the infringer and condones his wrong-doing, and is entitled only to the profits made by the infringer.’ Saccharin Corpn v Chemicals and Drugs Co [1900] 2 Ch 556 at 558. 17 Personal Representatives of Tang Man Sit v Capacious Investments Ltd [1996] AC 514 at 516. 18 See Watterson, above, n 2 at 485–6 for an extended discussion of the inadequacy of the condonement theory. 19 Watson, Laidlaw & Co Ltd v Pott, Cassels & Williamson (1914) 31 RPC 104 at 119. 20 In Ireland, ‘claimaints’ are still ‘plaintiffs’. 21 Above, n 4. 22 Aldi Stores (Ireland) Ltd v Dunnes Stores [2015] IEHC 495. 23 S.I. No. 774/2007 - European Communities (Misleading and Comparative Marketing Communications) Regulations 2007. 24 Aldi Stores (Ireland) Ltd v Dunnes Stores (No. 2) [2015] IEHC 551. 25 One factor being the defendant’s ‘cavalier attitude toward a breach of a competitor’s trade marks’, which did not inspire the judge with confidence that the situation would not recur. 26 Established in 2014, the Irish Court of Appeal now handles the large majority of cases that previously were appealed from the High Court to the Supreme Court. 27 At paras 32–44. 28 At paras 45–59. 29 With regard to special damages, a difficulty noted judicially at least as early as 1892: ‘Lest we should be led astray in such a matter by mere words, it is desirable to recollect that the term “special damage”, which is found for centuries in the books, is not always used with reference to similar subject-matter, nor in the same context’; Ratcliffe v Evans [1892] 2 QB 524 CA at 528, per Bowen LJ. 30 Tommy Hilfiger Europe v McGarry & ors [2008] IESC 36. 31 See further discussion below in the section ‘A law and economics perspective’. 32 Above, n 22. 33 Aldi Stores (Ireland) Ltd & Anor v Dunnes Stores [2017] IECA 116. 34 [1976] RPC 197 at 212. In Ireland this definition of damages was cited by the Irish Supreme Court in connection with trade mark infringement/passing off in Tommy Hilfiger Europe v McGarry & ors (above n 30). 35 Cf. the discussion of ‘general and special damages’ in S. Deakin, A. Johnston and B. Markesinis, Markesinis and Deakin’s Tort Law, 7th edn (OUP, Oxford, 2012), 794. 36 ‘Using the present value of future income method, goodwill may be estimated as the present value of the future income to be earned from providing future goods or services to future, unidentified, customers.’ R. F. Reilly and R. P. Schweihs, Guide to Intangible Asset Valuation, 2nd edn (AICPA, New York, 2014), 709. 37 Above, n 30. 38 Plus any additional expenses incurred to date as a result of the infringement, assumed to be zero. 39 The remedies will also turn out to be equal if Firm A’s capacity limitation is precisely compensated for by its lower cost of production. Thus, in the above example, if Firm A can produce 80% of ‘stolen’ sales and has a 25% cost advantage, it would have had increased sales of £16 million and increased costs of only £6 million, leaving it with ‘special’ damages of £10 million. 40 Or from the date of the letter before action. For case references, see J. Mellor et al., Kerly’s Law of Trade Marks and Trade Names, 15th edn (Sweet & Maxwell, London, 2011) para. 20-156. 41 Thus representing one of the ‘many cases’ noted by Lord Chelmsford in Betts v Neilson where ‘the account alone will not satisfy the entire equity of a Plaintiff’ (above, n 11). 42 Namely, when the ‘victim’ firm has limited capacity and/or when the potential infringer is a low-cost producer. 43 In this example, if Firm B were to ‘overdo’ the shoddiness to the extent that general damages rose above £5 million, it would face a potential compensation bill in excess of £10 million. 44 Note that if the reduction in quality is due to reduced costs, Firm A will receive additional compensation since the account of profits will increase. So for the purposes of the example it is assumed that the inferior quality is due simply to shoddy workmanship arising from the lack of accountability. 45 And, by extension, in other intellectual property disputes. © The Author(s) 2018. Published by Oxford University Press. All rights reserved. This article is published and distributed under the terms of the Oxford University Press, Standard Journals Publication Model (https://academic.oup.com/journals/pages/about_us/legal/notices)

Journal

Journal of Intellectual Property Law & Practice – Oxford University Press

Published: Mar 7, 2018

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