Josh Henderson

Give me all of your profits – obtaining an account in IP disputes

Josh Henderson

30 January 2013

Copyright Designs Patents Trade marks

You obtain a Court order that your opponent infringes your patent (or trade mark/design/copyright). What happens next? The short answer is that the parties’ (and the Court’s) attention turns to the money to be paid to the victor.

 

In IP disputes, the monetary remedies are either damages or an account of profits. These are alternate remedies and once the successful applicant chooses one, the other is abandoned. We will focus on the account.

 

Should I elect an account of profits or damages?

 

An account of profits entitles the applicant to recover the net profit the respondent obtained from the infringement. The profits are usually calculated by the sale price minus the cost of manufacturing and delivering each infringing item.

 

The purpose of an account is for the respondent to disgorge any profit that it made. This is different to damages, where the purpose is to compensate the applicant for loss that has been suffered as a result of the infringement. This could be, for example, loss of sales that the applicant should have made rather than the respondent.

 

Whether or not an applicant should elect an account will depend on a number of different factors. The key issue is the success of the infringing item. If the infringing item has been very successful, it may be that the respondent has made more money than the applicant could have so an account is more desirable.

 

What evidence do I need to obtain an account of profits?

 

Usually the Court will order that some discovery is given about quantum of infringing items sold. This could be by way of discovery order or by way of notices to produce. The documents usually sought are the financial statements and accounting records that relate to the particular infringing item.

 

The Court usually also makes directions for evidence to be filed after the inspection of those documents. Forensic accounting experts are commonly used to analyse the financial documents and provide an expert report. Those experts analyse the financial documents and provide an opinion about the profit derived by the respondent as a result of the infringement. This can be a difficult analysis.

 

How much do I get?

 

It is no easy question to determine profit made by the respondent. The analysis of the financial documentation can be complex and will depend on the precise nature of each case. It will require the Court to understand the infringement in the context of the respondent’s business. It may also require the Court to make an approximation. Some of the accounting issues that the Court may need to grapple with include:

1. Apportioning profit

 

In some cases the infringing product may be one component of a larger device. This can be a really complex question. Should the profit be apportioned? Or should the applicant be awarded the entirety of the profit?

 

In relation to patents and designs, the key question is whether the infringing item is an essential part of the larger product. If it is, then the Court is likely to award the entirety of the profit to the applicant. In relation to other IP rights, such as trade marks and passing off, the question is whether the respondent’s entire business relates to the application of the infringing the mark. If it has, then a Court is more likely to order the respondent to account for all of the profits made in conducting that business.

 

2. Overheads

 

Overheads can be significant and, if they are deducted, may substantially reduce the amount of profit made by the respondent. The general rule is that overheads cannot be deducted from the profits made by the sale of the infringing item. However, costs directly attributable to selling and delivering the infringing articles can be deducted from the revenue. This can really complicate the matter and requires the Court to analyse different costing methods.

 

3. Capital profit

 

An account of profits can include capital profit as well as profit from revenue. However, the Court must be satisfied that the respondent made such a profit as a result of the infringement.

 

4. Payment to directors

 

Some infringers argue that the infringing company’s directors’ drawings should be deducted from the profit. However, this has been giving short shrift in the case law. For example, in Tenderwatch Pty Ltd v Reed Business Information Pty Ltd [2008] FCA 931, Heerey J found that it would be tantamount to making a copyright owner pay an infringer for the time and effort spent on infringement.

 

What happens after an order is made?

 

Once the Court has assessed the evidence and made a determination as to quantum, the order will need to be enforced. If payment is not made, then you will need to proceed with enforcement whether by issuing a statutory demand or a bankruptcy notice.