Apand Pty Limited & Anor v The Kettle Chip Company

[1999] HCATrans 425

IN THE HIGH COURT OF AUSTRALIA

Office of the Registry
  Sydney  No S74 of 1999

B e t w e e n -

APAND PTY LIMITED (FORMERLY CCA SNACK FOODS PTY LIMITED)

First Applicant

ASSOCIATED PRODUCTS AND DISTRIBUTION PTY LIMITED

Second Applicant

and

THE KETTLE CHIP COMPANY PTY LIMITED (IN LIQUIDATION) (NOW KNOWN AS ACN 003 655 132 PTY LIMITED)

Respondent

Application for special leave to appeal

GLEESON CJ
McHUGH J

TRANSCRIPT OF PROCEEDINGS

AT SYDNEY ON TUESDAY, 30 NOVEMBER 1999, AT 10.47 AM

Copyright in the High Court of Australia

______________

MR D.F. JACKSON, QC:   If the Court please, I appear with my learned friend, MR P.R. WHITFORD, for the applicant. (instructed by Clayton Utz)

MR D.K. CATTERNS, QC:   May it please the Court, I appear with my learned friend, MS S.J. GODDARD, for the respondent. (instructed by Mallesons Stephen Jaques)

GLEESON CJ:   Yes, Mr Jackson. 

MR JACKSON:   Thank you, your Honours.  Your Honours, this is a case where we were found liable for both passing off and contravention of section 52 of the Trade Practices Act by engaging in particular conduct which the Court will see referred to at page 103 of the application book in paragraph 8, and the nature of that is of some importance for the argument which I wish to address and may I come to it in terms.

At page 103 of the application book your Honours will see extracted the conduct which was held to amount to passing off on the contravention of section 52, and then there is selling, offering for sale, advertising and promoting potato chips under a particular name.  We had done the various things set out in paragraph 1(a) and (b), and then in paragraph 2 there is a reference to doing it in particular packaging.  That goes over to the top of the next page.

Now, your Honours, the respondent sought an account of profits, not damages.  Those are alternative remedies and an account of profits aims to have the defendant account for the actual profit - if I could use the expression seen in the cases, “no more and no less” - that it has gained from the infringement in respect of which relief is given.  Your Honours will see that adverted to in this Court’s decision in Dart Industries Inc v Decor Corporation Pty Ltd 179 CLR 101 – it is case No 1 in the volume of cases we have given your Honours. Could I go to page 110, the last two lines on page 110:

Damages and an account of profits are alternative remedies.

Your Honours will see the passage goes through to the top of page 111 and in particular your Honours will see, amongst other things, about the seventh or eighth line on page 111:

An account of profits is confined to profits actually made, its purpose being not to punish the defendant but to prevent its unjust enrichment.

The second passage, your Honours, is page 116 and about three-quarters of the way down the page immediately above the last paragraph, the last three lines above the last paragraph:

is that an account of profits aims to have the defendant account for the actual profit, no more and no less, which it has gained from the infringement.

Now, your Honours, I have mentioned those things because the judgments below yet have the effect that, first, the actual profits from the infringing sales are not the subject of the order, but rather a notional figure based on sales of a non-infringing product.  That is the first thing.  The second thing is that on the sale of the business, part of which had been the sale of the non-infringing product, part of the business, I mean, a part of the price paid for the business is treated as profit, even though the plaintiff in the infringement action would be entitled to sue the purchaser in respect of any infringement by doing the things that were the subject of the order.

McHUGH J:   Mr Jackson, you know what my views are about this matter, I expressed them in Decor, but does not what was done here flow from what the majority said or arguably flowed ‑ ‑ ‑

MR JACKSON:   Your Honour, I am just about to say, if I may, two things about that.  The first is that the case does raise importantly the operation of the Court’s decision in Dart v Decor but, secondly, the question whether, if the joint reasons of the four members of the Court have the effect that is embodied in the reasons for judgment, the case should itself be reconsidered.

Your Honours, what we would seek to say is that, as is apparent from the materials, the application concerns two aspects of the case:  first, the deduction for fixed costs which does raise directly the issue which your Honour Justice McHugh was mentioning a moment ago - and may I come to elaborate on that in a second – but, secondly, the question of capital profits which is, with respect, a quite new area and one in relation to which it is manifest from the reasons of the Full Court that a new turn was being taken.

Could I come to the question of the deduction for fixed costs.  The case was really one where the basic facts were, with respect, quite short.  The infringing product was a product called “Country Kettle” chips.  They were sold for about eight months.  The basic figures were not in doubt, they appear at page 112 commencing at about line 12.  In the last column you will see the figure “Net Sales”, the starting point was the revenue from the sales, it was $10.219 million.  The costs of two types fell to be deducted, first of all the ordinary direct costs, which your Honours will see at about line 21, amounted to $6.719 million.

But, your Honours – and this is the point that gives rise to the case – there were also indirect or overhead costs, that is, costs attributable to our snack food business overall.  Your Honours, they are described in that document as allocated costs at about line 23.  They were generally allocated on the basis of the proportion which the sales of the infringing product bore to the sales of the business overall in that period, which was 3.88 per cent.  There were some variations, your Honours. but, as Justice Emmett said in the Full Court, at page 75 paragraph 109, the way in which they are worked out would ordinarily be a perfectly appropriate way of working out what profit was.  That is, I think I said, paragraph 109 on page 75, the first three lines.

What was done in the Full Court and by the primary judge was not to take what was the ordinary way of working out the profit, but to allow only 30 per cent of those allocated costs, and the 30 per cent being arrived at by reference to the, on the one hand, actual and, secondly, likely performance of an earlier non-infringing product called “Smith’s Classic”.  Your Honours, that was derived from – and I can give your Honours where one sees this done:  page 49, about line 14 in the quotation.  Your Honours will see the sentence:

During a somewhat longer, but comparable period, its sales were at an average rate of about 23% of that achieved by Country Kettle.

That is the starting point.  Secondly, at line 47 on the same page there is an allowance which brings it up to 30 per cent, reflecting possibly improved sales if the infringing product had not gone on the market.

McHUGH J:   It certainly does seem to me, I have to say, a very artificial way of going about - finding out what profit had been made by ‑ ‑ ‑

MR JACKSON:   Well, your Honours, could I say in relation to that, if one is speaking about the alternative being damages or an account of profit, one really takes – and the cases seem to say this – one really takes the infringer as one finds the infringer.  I do not mean that in any facetious fashion, but what one gets is what one takes as the prospect that the infringer will not be a particular efficient infringer.  You either get the damages you have lost or you get the profits they have made.  There is not, in our submission, any reason why one should adopt some artificial basis of looking at the profits that might have been made.  May I come back to that in just a moment, your Honour.

Your Honours, what I was going to say was that the approach that was adopted by the Full Court and by the primary judge was said to derive from Dart v Decor which seems to establish, with respect, two propositions.  The first, your Honours, is that it is proper to take into account overheads.  Your Honours will see that, if I could go to Dart v Decor again, which is case 1 in our book.  At page 117, about point 6 on the page, their Honours say:

But that decision accepted the view, in our opinion correctly, that in some cases profit can only be properly assessed by deducting a proportion of at least some of the overheads, including fixed costs.

Now, your Honours, that is the four members of the Court, and your Honour Justice McHugh at page 124, about point 6 on the page, in a passage which goes through to page 125, about point 3.

The second aspect that appears to have been at the heart of the Court’s decision in that case was that the ultimate question was whether the overhead costs to be taken into account were those attributable to the sale and manufacture of the infringing product.  Your Honours will see that proposition stated at page 119 in the same case, about point 4 on the page, and it is the commencement of the second new paragraph, the first sentence there referred to is in the terms which I submitted a moment ago.  But, your Honours, the simplicity of that proposition is, if I may say so with respect, blurred by some other observations made in the reasons of the four Justices.  Could I refer your Honours particularly to the passage at page 114, about point 4 on the page, the passage commencing “In calculating an account of profits” which goes through to point 2 on page 115.  Your Honours will see particularly, if I could go to page 114 in the second sentence about point 4, their Honours say:

there would be real inequity if a defendant were denied a deduction for the opportunity costs as well as being denied a deduction for the cost of the overheads which sustained the capacity that would have been utilized by an alternative product and that was in fact utilized by the infringing product.

Now, your Honours will see from there, there seems to develop a notion that somehow one has to take into account what might or might not have been done with the capacity, on the one hand, that is actually – that is used in fact, I am sorry, to produce the infringing product.

Your Honours, what we would submit is this, that it is very difficult, with respect, to see that if a plaintiff elects to have an account of profits and if the object of the account is not punishment but restitution, the infringer should have to pay over a greater profit than it, in fact, made, because to do that brings back the element of restitution.  Your Honours, we would submit it is an inherent ‑ ‑ ‑

McHUGH J:   The notion that seems to run through the arguments against what I put in Decor is that these fixed costs would have to paid in any event, but it overlooks the fact that so-called fixed costs themselves will vary according to what you are producing, for example, even administrative costs.  You will get rid of employees, you have superannuation, rates, power, all those general overhead matters.

MR JACKSON:   Well, your Honour, if one is producing less, modern businesses would tend to reduce overheads, would they not?

McHUGH J:   Yes, exactly.

MR JACKSON:   Your Honours, we would submit it is an inherent aspect of an account that you take the infringer as it is.  Could I give your Honours a recent reference to that, a decision of a single judge in England in Celanese International Corp v BP Chemical Ltd (1999) RPC 203 at page 242. It is paragraph 109 and I am simply referring your Honours to an observation at the commencement of paragraph 109 between lines 10 and 15 on that page. His Lordship said:

It is inherent in any account that the defendant is allowed to deduct from revenues all allowable costs.  This means that, in a sense, the infringement is paying those costs which, in many instances, can be said to benefit the infringer.  It is no answer to that to say that the allowance of such costs could encourage a devious infringer to deliberately increase his costs so as to reduce his profits.  One of the weaknesses of taking an account from a plaintiff’s point of view is that it is necessary to take the defendant as he is.

What we would submit is that the purported application of the principle in this case has resulted in a calculation based on the costs of producing a product which is not the infringing product.

McHUGH J:   What do you say about Justice Emmett’s comment that option B would have been a proper approach and that he would have, in fact, given the respondent the greater sum than it got under the method adopted by Justice Burchett?

MR JACKSON:   We would submit that method B was not an appropriate approach.  The position simply was, in our submission, that if one took the basic figures which were not in dispute – the ones at page 112 – the way one looked at it was to - and there was some trivial adjustments that are referred to and quantified but, if one looked at those figures, the approach taken was an appropriate approach, they resulted in the fact that we made a loss in producing the infringing goods.  It is as simple as that, your Honours, with respect.  We would submit the better view is that to which your Honour Justice McHugh referred in Dart v Decor and we would invite the Court to reconsider, to take the case with a view to reconsidering that in any event.

Could I go then to the question of capital profits.  This issue arises because we sold the whole snack food business after the eight month period of sales of the infringing product.  In the application book at page 108, paragraph 29 of our written submissions, we have endeavoured to summarise what took place, and your Honours will see in paragraph 29 that we sold the business for:

$155,000,000 for trademarks and the sum of $77,950,000 for goodwill.

It is as simple as this:  because Country Kettle, the infringing product, was 2.4 per cent of total earnings for the 1993 year, we were held liable to account for 2.4 per cent, the same percentage, of those sums, which was $5.95 million.  The profits, in our submission, which are properly the subject of an order for account are those which are made by the relevant wrongful acts.  Could I give your Honours two references which support that proposition.  The first is the case which is the last in the bundle of authorities which we gave your Honours, My Kinda Town v Soll (1983) RPC 15 at 49. Justice Slade, in the first new paragraph on page 49 said:

As I understand the relevant principles, the object of ordering an account in cases such as the present is to deprive the defendants of the profits which they have improperly made by wrongful acts committed in breach of the plaintiffs’ rights and to transfer such profits –

et cetera.  The second reference is a decision of Justice Windeyer in the case which is behind tab 4, Colbeam Palmer v Stock Affiliates 122 CLR 25 at page 42. At page 42 about the second sentence in the paragraph commencing at the middle of the page his Honour said:

The true rule, I consider, is that a person who wrongly uses another man’s industrial property…..is accountable for any profits which he makes which are attributable to his use of the property which was not his.  An early form of the order in a patent case is for “an account of all profits actually made by the defendant by means of the infringement”.

The infringing conduct here was that which is specified at page 102.  I have already taken your Honours to the terms at page 102 and I shall not go back to it.  The order for an account of the capital profits was something which was not a profit, in our submission, which could be regarded as being in consequence of any of those infringements.  It was something which was quite novel.

Could I submit finally that the third question which we put about whether an amount could be derived from it; it relates to the question of the evidence available to support the apportionment.  Your Honours, that is tied up with the legal question, in our submission.  It is not a lengthy or complicated issue, and we would refer to what we have summarised from Justice Emmett’s reasons in our footnote on page 109 of the application book.

McHUGH J:   But on the capital profit point, is not the correct principle more correctly stated by Justice Windeyer in Colbeam Palmer rather than by Justice Slade in My Kinda Town where at 42 Justice Windeyer said in Colbeam, what the defendant must account for is what it made by its “wrongful use” of the plaintiff’s property.

MR JACKSON:   Your Honour, I accept that.  Could I say, however, that that does involve identifying the wrongful use.  Here the wrongful use – may I, perhaps, just answer your Honour’s question – here the wrongful use is that specified in the order which specifies the infringement, and that does not relate to anything, that is the sale itself.  Your Honours, those are our submissions.

GLEESON CJ:   Yes, Mr Catterns.

MR CATTERNS:   May it please the Court.  Your Honours, may I first submit that these two issues are severable, entirely distinct; and if the Court feels that only one warrants the grant of special leave, then I would submit it would be appropriate to limit the grant to that.  As to the first question, the question of trading profit, we would respectfully submit that this case is just an application of the majority view in the Dart v Decor Case.

McHUGH J:   It does lead to a very artificial notion of profit that you determine what profit is made by taking the hypothetical costs and making an alternative product which is not the cost of the actual product that was made and which infringed your mark.

MR CATTERNS:   Your Honour, with respect, may I just pick up, slightly tangentially, something that your Honour said to our friends.  If the fixed costs can be changed, assuming that these are surplus capacity, overheads that would have been incurred in any event ‑ ‑ ‑

McHUGH J:   The term “surplus capacity” itself is an invitation to error.  I mean, what does it mean, “surplus capacity” in business.

MR CATTERNS:   Costs which would have been incurred in any event.  Your Honour, any of the costs that would have been reduced, such as by laying off staff, are not in this argument today.  They have already been deducted as variable costs in accordance with what your Honour would have said and with what the majority has said.  So, the question is, costs that are irreducible, at least over the short run; and what the majority said is that they took as a starting point what his Honour Justice Windeyer did in the Colbeam Palmer Case, which was a so‑called sideline with which your Honour disagreed, and in that case the theory is that none of this capacity could have been utilised with respect to an infringing product – nought could have been used.  It is a sideline.

In the instant case before your Honours in Dart v Decor, it was part of an integrated product line, and 100 per cent of it could have been used.  So, the factual situation that this particular case brings up is one where something much less than 100 per cent – 23 percent or 30 per cent – would have been used.

McHUGH J:   But I can only think of about two types of costs, perhaps three, that are fixed in the sense that they can never be reduced.  Rates are one, rent is another.  Maybe land tax is another.  But once you take those three out of the equation almost any other cost is a variable, or arguably the cost of producing a product must take into account those factors – whether it be printing and stationery, or whether it be administrative costs, they are just ‑ ‑ ‑

MR CATTERNS:   All of those sort of ones that were in any way variable were taken out long before we come to the present argument.  Perhaps if your Honours would not mind going to page 31 where we can see the items we are arguing about.  They are the ones at the bottom of the page, the eight or nine items that have about “30.00%” beside them.  All of the other variable costs in those columns, the third last column perhaps, the total column, marketing and selling, the costs of the chips themselves, of course, were long since deducted.  Our only argument is about a number of items down here which were not able further to be reduced.  That is the hypothesis, that they are fixed costs.  So, the question is if nought of them could have been used elsewhere, his Honour Justice Windeyer says and the majority agrees, you cannot deduct any of those.

Where 100 per cent would have been able to be used in a parallel product, as in the case of Dart v Decor, then, to use the majority’s phrase, those costs are attributable.  Your Honour used the phrase “assisted in”.  So, your Honour would not allow, with respect, this warehouse – let us assume, to pick a silly example, it is not quite a sideline but you can sell a single packet of the other chips.  On your Honour’s reasoning the whole of this warehouse assisted in the sale of that single packet of chips, and your Honour would therefore allow the whole of them to be brought to account.

Perhaps your Honour might not, because of something I will take your Honours to in your Honour’s reasons.  Your Honour did notice the possibility that there may be a different amount of, use of, the overheads.  If your Honours would not mind going to Dart v Decor at 124, your Honour Justice McHugh begins the discussion of opportunity cost, at the bottom of 123. At 124 there is a paragraph four lines down beginning:

To say that general overhead would have been incurred “in any event”-

Then your Honour says:

If a preferred product cannot be…..distributed…..a rational entrepreneur will choose the next best alternative.  General overheads will then be partially absorbed in the cost of the substitute product. 

If your Honours would look at the footnote:

Depending upon the circumstances, however, the absorption may not be as great as in the case where the product first chosen –

So, your Honour here, on the findings, the absorption was 23 or 30 per cent – 30 per cent.  If I can just go back to the ‑ ‑ ‑

McHUGH J:   Yes, but that assumes that what you are taking 23 per cent of would have remained constant.

MR CATTERNS:   Yes, your Honour.  All the variable ones, I reiterate, I am sorry, were taken out already.  We are only talking about things like the

head office costs of a huge organisation where if they could have laid somebody off the evidence would have shown that and it would have been deducted already.  These are the overall overheads which, as to 100 per cent, were used by the infringing product but which could only have been used as 30 per cent by a non‑infringing product.  On the majority’s reasoning, we would submit, very clearly in Dart v Decor his Honour is right in applying that. That is at pages 113 and 114. The distinction that their Honours draw is at 113, between his Honour Justice Windeyer’s sideline, which is complete surplus capacity. That is in the passage beginning “The explanation of the direction given by Windeyer J”. That is a 0 per cent alternative product, but in the instant case there is, in effect, a 100 per cent alternative product. Then, your Honours, there is the passage at 114 that our friends refer to.

So, your Honours, with respect, as to trading profit, our friends have to overturn the 4:1 majority, and we respectfully submit that his Honour satisfactorily applied those principles.  As to capital profit, the High Court was unanimous in relation to the application ‑ ‑ ‑

GLEESON CJ:   We do not need to hear you on that issue.

MR CATTERNS:   May it please the Court.

GLEESON CJ:   Yes, Mr Jackson.

MR JACKSON:   Your Honours, so far as concerns the particular items, if one does go to page 31 and looks at the “30.00%” items which commence between lines 40 and 45, what you see is that they are items such as the wire stands on which they display particular sorts of snack foods, the various customer rebates and things of that kind, and then the accounting and management services and interest, and proportion of the costs of a warehouse.

The real question if one goes right to the heart of the matter is whether, if the business carried on is one that involves a number of things, is it not appropriate to attribute the cost to the particular items that are produced?  It is not clear, in our submission, from the majority, if I can call it that, in Dart v Decor that the course that we would suggest is the inappropriate one, but if it does appear that it is inappropriate, then we would submit that the Court should revisit that case.

GLEESON CJ:   In relation to the primary issue which the applicant seeks to agitate the decisions in the Federal Court turned upon the application of Dart Industries Incorporated v Décor Corporation Pty Ltd 179 CLR 101 to the particular facts and circumstances of the case. In so far as there may be a need to reconsider some aspects of the majority judgment in that case, the present is not a suitable vehicle for such reconsideration.

In relation to the other issue which the applicant seeks to agitate, there is insufficient reason to doubt the correctness of the decision of the Full Court of the Federal Court to warrant the grant of special leave.  The application is refused with costs.

We will adjourn for a time to reconstitute.

AT 11.18 AM THE MATTER WAS CONCLUDED