Dart Industries Inc v The Decor Corporation Pty Ltd

[1992] HCATrans 86

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IN THE HIGH COURT OF AUSTRALIA

Office of the Registry

Melbourne No M7 of 1992

B e t w e e n -

DART INDUSTRIES INC

Applicant

and

THE DECOR CORPORATION PTY LTD

and RIAN TOOLING INDUSTRIES PTY

LIMITED

Respondents

Application for special leave

to appeal

MASON CJ
DEANE J

GAUDRON J

Dart 1 13/3/92

TRANSCRIPT OF PROCEEDINGS

AT MELBOURNE ON FRIDAY, 13 MARCH 1992, AT 2.09 PM

Copyright in the High Court of Australia

MR J. McL. EMMERSON, QC: If the Court pleases, I appear

with my learned friend, MR A.J. MARYNIAK, for the

applicant. (instructed by Arthur Robinson &

Hedderwicks)

MR R.J. ELLICOTT, QC:  I appear with MR C.D. GOLVAN for the

respondents. (instructed by Phillips Fox)

MR EMMERSON: If the Court pleases, this application raises

the issue of which of two types of accounting is

the appropriate one to use in cases in which a

defendant has been held liable to give an account

of his profits. The distinction is between what is

called in the papers variously, ttthe incremental

differential methodtt, on the one hand, and ttthe

average or absorption cost accountingtt, on the

other.

The reason for the importance of the

distinction is that the first of the methods

determines the difference produced by the activity

in question. The second apportions all overheads

regardless of whether the connection is found

between infringing or non-infringing activities.

Now, it is our contention in this application that the correct method for an accounting for

profits is the differential or incremental method

and we say that accordingly the way one should

proceed is to start with the gross revenue received

from the sale of infringing products and subtract,
first, direct costs solely due to the manufacture

and sale of infringing products and, secondly,

overheads to the extent only that they have been

increased by the manufacture and sale of infringing
products. Thus, on the view for which we contend,

no part or proportion of any expenditure which

would have been incurred had the infringing

manufacture not taken place is allowable as a

deduction.

Now, in the proceedings below, His Honour

Mr Justice King, at first instance, held in favour

of the incremental or differential method and, in
our submission, did so correctly.

The Full Court, in our submission, erred in substituting the alternative test and the way in

which the court put it was that anything that

contributed to obtaining the relevant profit could

be taken into account on a taking of an account of
profits and that would be so whether or not the

overheads which contributed in this way were ones

which would have been incurred whether or not the

infringing manufacture had taken place.

Dart 13/3/92

Now, the distinction is a very important one

because if, as in the present case, infringing
products are simply added to a range of

commercially similar but non-infringing products, a

large amount of overheads may contribute to the
infringing manufacture even if they are not

increased by the infringing manufacture. And the amount of overheads in the present case is of the order of $50 million.

In our submission, the approach that was taken

by the Full Court is first wrong in principle;

secondly, on a true analysis, inconsistent with and, thirdly, it wrongly purports to follow United

States' cases which we say are based on a quite different jurisprudential basis. I will take those

three objections to the correctness of the decision

of the Full Court in turn.

First, as to the basic principle of an

accounting for profits, in our submission it is

clear that the basic principle under Australian law

is that the person giving the account must give up
all his ill-gotten gains, that is to say, he must

account for the whole of the profit from his

infringing activities.

We note that the cases make it clear that at least under Australian law there is a clear

distinction drawn between an accounting for profits

which involves the giving up of the ill-gotten

gains and an assessment of damages which looks

rather to the position of the plaintiff to see what

damage he has suffered. The two, under our law,

are entirely distinct and one looks only to see

what are the gains of the defendant party.

Now, if this basic principle is right, and we

say it clearly is, then if the respondent is

permitted to set off against revenue derived from

infringement some part of the overheads which it

would have incurred anyway, then it is being

permitted to retain that part of its ill-gotten

gains and we say that is wrong in principle. The

principle is that the respondent should disgorge

all its profits and should not be permitted to

retain part of them by setting them off against

overheads which would have been incurred in any

event.

So far as the authorities are concerned, there are relatively few in Australia. The two leading

cases are ones which are quoted in the appeal

papers, the first of these being Leplastrier v

Armstrong-Holland. For immediate purposes, it is

sufficient to refer the Court to the extract from

Dart 3 13/3/92

this case set out at page 18 of the application

book.

His Honour, after considering the contrary

submission, started off by identifying what he says

is a fundamental fallacy in that the account filed

by the defendant assumed that what the defendant

had to show were the profits of a business. Now,

that same fallacy runs through the respondents'

submissions in the present case because in taking

the absorption cost method of accounting it is

assuming that the purpose of the exercise is to

divide revenue stream amongst various activities

regardless of whether infringing or not.

Now, in Leplastrier, the learned judge went on

to say why that was wrong and in the sentence

beginning at line 18 on page 18, he says this:

Every sale of a machine gives the plaintiff a

separate right to recover profits made on the

sale of that machine, and the plaintiff has a

right to require that he shall have details of

the sale and the cost of every individual

machine. That is the inquiry that is

directed.

And that, in our submission, is clearly correct.

Then, further on, the learned trial judge in

the present case quoted from pages 592 to 593 of

the Leplastrier case, and in isolating what was the

relevant principle he sets out, at line 40:

It is possible that other costs may be taken, but I think the test which is to be applied is

that the only expenses which can be deducted

are those which were solely referable to the

manufacture of the machines.

So, the test is that of sole reference to the

machines.

The court in Leplastrier went on to repeat

that point in a passage which is not included in

the appeal papers and which can be passed up to the

Court in a volume if this would be convenient but,

for the time being, perhaps it is sufficient if I

take the Court to one further short passage from

Leplastrier which is to be found in the passage

spanning pages 593 and 594. This is not reproduced

in the appeal papers.

MASON CJ: Well, there is a passage at page 37 on pages 593

and 594. That may not be the one you want.

Dart 13/3/92

MR EMMERSON:  I am indebted to Your Honour. It is, in fact,

the passage. It is the one that states the

principle and that is to be found beginning at line

35 on page 37 of the appeal papers.

(T)he principle which in my opinion applies

is, that you start with the gross profits

which the defendant earns from the sale, and

he is entitled to set off against that any

actual expenses which he can show he has

incurred as being solely referable to the

manufacture of the particular machine, but

that he is not entitled to any interest on his

capital employed in the manufacture, as that

would be to allow him to get a profit out of

the manufacture of the machines.

MASON CJ:  It would be deductible even on this theory if, in

fact, he borrowed money for the purpose of making

these infringing copies.

MR EMMERSON: That would be correct, yes, Your Honour.

DEANE J: But that seems to have been understood by the

trial judge in a different sense to. the way you are

understanding it in that he seems to have said that

that means that no overheads or no part of

overheads can be apportioned even though or

regardless of whether overheads have been increased

by the particular manufacture.

MR EMMERSON:  With respect, we would disagree with that,

Your Honour. The relevant passages in the learned

trial judge's reasons are to be found at page 19

immediately below a quotation from Leplastrier in

which he says:

I adopt with respect Harvey CJ's view,

and hold that the only expenses which can be

deducted in the present case are those solely

goods concerned.	the case may be) and sale and delivery of the referable to the obtaining or manufacture (as
Now, the test that His Honour is there

applying, as we would understand him, is a question
of sole referability rather than whether the costs

are categorized as overheads or not as overheads.

DEANE J: Did His Honour make a finding that overheads were

not increased by the additional manufacture?

MR EMMERSON:  His Honour was not called upon to do this

because what His Honour was asked to do was decide

some questions which are stated at page 7 of the

application book. These were questions raised by

the respondents for the purpose of ascertaining how

Dart 13/3/92

the accounting was to take place.	Now, it is
paragraph (A) that is relevant.	Now, what

His Honour does is he quotes those:

"(A) Whether general overhead costs may be

deducted from gross profits in determining the

total costs ..... or whether only direct costs

are allowable?

So, the question that was put to His Honour draws a

distinction between general overhead and direct

costs.

DEANE J: Well, how would you say that should be answered?

Should it be "Yes, general overheads may be

deducted", to the extent that general overheads are increased by reason of the infringing manufacture"?

Throw in an "if at all", if you like.

MR EMMERSON:	We would say that the distinction that divides the parties is that we accept that to the extent
that they are increased by the infringing
manufacture, then they are deductible but to that
extent only, and we say that it has to be shown.

DEANE J: Well, I understand that. I did not read

His Honour as conceding that.

MR EMMERSON:  Could I take the Court perhaps to two other

passages - - -

DEANE J:  Not really, Dr Emmerson. You have correctly

identified the dispute between the parties. That,

no doubt, disposes of the problem I had with

His Honour's judgment in that regard.

MR EMMERSON:	If Your Honour pleases. The other relevant Australian case is Colbeam Palmer v Stock
Affiliates and, again, there is a substantial
extract from that in the application book. The
particular point that I want to come to immediately
is the extract which appears at page 20 of the
application book where the learned judge says:

He -

that is to say, Sir Victor Windeyer in Colbeam

Palmer -

said that in respect of his requirement that

the defendant should ascertain the total cost
to it of selling and delivering the articles

sold by it:-

"This will include any costs directly

attributable to such sales and deliveries.

But it should not, I think, include any part

Dart 6 13/3/92

of the general overhead costs, managerial

expenses and so forth of the defendant's

business, as it seems that all these have been
incurred in any event in the ordinary course
of its business in which as it was put in

evidence the painting sets were a "side

line"."

Now, save for the last phrase in that passage,

in our submission, it is perfectly clear that what

His Honour is there saying is that one uses a

differential costing method, not an absorption

costing method.

The Full Court wrongly, in our submission,

distinguished that decision by taking the words in

which, as it was put in evidence, "the painting

sets were a 'side line'" as if those words were the

test that was being propounded by His Honour. Now,

in our submission, that is a misreading of what the

learned judge was saying. In our submission, the

underlying principle is - and His Honour was so

holding - that you cannot deduct costs which would
have been incurred in any event in the ordinary

course of its business and that the reference to
"side line" was no more than an evidentiary

indication that these were costs which would have

been incurred in any event in the ordinary course

of business.

So, we would say that in Colbeam Palmer the

Court is not making the test a test of what is or what is not a sideline, that is merely something
which may assist in resolving the underlying

question which is whether the costs would have been

incurred in any event. So, we say that Colbeam

Palmer is a correct statement of the law and that

the Full Court in seeking to distinguish it or

limit its application to sideline cases was, in

fact misconstruing the effect of the decision in

Colbeam Palmer.

This can in fact be illustrated fairly

graphically by the facts of the present case. The

facts of the present case are that the infringing

activities were the production of goods which fell

within the scope of the claims. Those goods,

however, were part of a larger range. Now, we say

that those facts, including the fact that they

formed only a small part of the larger range,

somewhere between 1 and 3 per cent in the period of

time under review, is an indication that it is by

no means clear that overheads would be increased by

the addition of the infringing manufacture to the
ordinary range of the respondents. So, we say that

is a matter to be inquired into and only if the

respondents can show that there was such an

Dart 13/3/92

increase will it be appropriate for the respondents

to deduct a portion of those overheads when giving

its accounting for profits.

Now, those are the Australian cases which deal with the matter. So far as the United Kingdom is

concerned, there are again a relatively small

number of cases. The locus classicus - - -

MASON CJ:  You might confine your reference, if you can, to

the best case, Mr Emmerson. We do not want to go

through all of them if that can be avoided.

MR EMMERSON:  Could I perhaps take the Court to the earliest

one because this serves a double purpose?

MASON CJ: Yes.

MR EMMERSON: That is the case of Crosley v Derby. Perhaps

it would be convenient if I passed up for the

assistance of the Court a copy of a folder which we
have prepared which set out some of the relevant
cases. I do not want to burden this application

with extensive citation from authority but it is

convenient to look at that now.

Crosley v Derby is to be found behind tab 4 in

the folder. The extract which has been copied for

the Court, I think, comes from the English Reports.

Now, it was a decision of Lord Chancellor Cottenham

and the particular problem which had arisen in that

case was as follows: the case was concerned with a

patent for gas meters and the defendant had sold

infringing gas meters. It had also used infringing

gas meters as part of its business of distributing

gas.

Now, the question arose, as part of the

accounting for profits, what was the advantage

gained by the defendant by the use of the

infringing gas meters over and above its advantage

by sale. The argument went as follows: by using

the infringing gas meters the gas company was able

to obtain payment for a larger amount of gas than

would otherwise have been the case. So, the

question was:  how should that apportionment take

place? The defendant company said that one should

apportion the average cost of the gas. The court

held that that was wrong and that what one should

look at was the incremental costs of the gas. The

learned Lord Chancellor deals with that at the
bottom of page 433 in the original report, which is

to be found towards the bottom of page 993 in the

English Reports included in the folder.	What
His Lordship says is this:

Dart 8 13/3/92

The whole principle of the calculation

appears to me to be founded in error. The

supposed profit is, in fact, a protection

against a loss. The sum charged for any

quantity of gas supplied must not only cover
all the expenses of the establishment,

machinery, materials, labour and interest of

capital, but also the profit of the company.

The actual loss sustained in making 250 cubic

feet over and about the 1000 cannot, however,

be measured by a proportional part of these

charges and outgoings. By far the greater

part of these would be the same though 1000

only were produced.

And then His Lordship cites an example, which we

say is an instructive one:

After printing 1000 copies of a newspaper, the

expense, to the proprietor, of printing 250

more will very little exceed the value of the

paper and labour employed, and if we suppose

some defect in the machinery for printing, in
consequence of which 250 copies out of every
1250 are rendered unfit for use, would not the

loss consist in the paper and other materials,

and the labour employed in printing the 250

useless copies? Would it be reasonable to
calculate the loss at one-fourth part of the

price for which the 1000 good copies were

sold? By the same rule, if the company were

repaid the value of the materials actually

consumed in producing the additional 250 cubic

feet, and of the additional labour paid for,

with a due allowance for the additional wear

of the machinery employed, their loss would be

repaid to them.

So, in this case, which we say is strictly

analogous, what is to be calculated is the

differential cost, that is to say, by what measure

the costs are increased when you go from 1000 to

1250. His Lordship says the correct way is to deal

with the differential cost and he so holds.

MASON CJ:  Now, could I interrupt you at this stage to seek

clarification of the declaration that appears to

have been made by the Full Court of the

Federal Court; in particular, what appears at

page 54 of the application book, and to ascertain

from you what precisely do you object to in that

declaration?

MR EMMERSON:  The words that we object to in the declaration

at page 54 are the words, "contributed to the
obtaining of the relevant profit", because by using

the language of "contributed to the obtaining",

Dart 9 13/3/92

what the court is doing is moving to the absorption cost method where you look to see whether there has

been a contribution from the expenditure to the

obtaining rather than whether the expenditure was

caused by the infringing activity which is what one

has when one is dealing with the incremental or

differential method.

Now, in overruling the trial judge on this

point - - -

DEANE J: But is that not correct? I mean, surely what you

are complaining about is what is not said in the

next two lines. I mean, what if the next line

said, "and in what proportion such overheads should

be allocated in the taking of the account of

profits on the basis that they should be so taken

into account only to the extent that they were

increased"?

MR EMMERSON: Well, Your Honour, I would accept that if the

court had gone on to say that, then we would not

quarrel with the declaration.

DEANE J:  And what about the learned trial judge's

declaration on page 28, number 4?	Do you seek to
maintain that?

MR EMMERSON: This is, "no part of general overhead costs"?

We would accept that but with a view as to what is meant by the "general overhead costs", namely,

those which were going to be incurred in any event

rather than the increase produced by the infringing

activity.

DEANE J:  I would have thought it should have said that.

MR EMMERSON: Well, in each case, Your Honour, no doubt, I,

standing at the bar table, could wish that things

had been expressed in a slightly different language

but the fact is we say that on a fair reading of

what the learned trial judge was talking about, he
was talking about incremental cost accounting, and

the Full Court, we say, were clearly talking about

absorption cost accounting and this becomes clear

both by their rejection of what the learned trial

judge said and by the whole reasoning leading up to

the passage at page 45 of the appeal papers in

which, at line 21 and following, the Full Court

spell out what their view is. They say:

But items such as rent, salaries of

administrators, and depreciation, which are

attributable to a range of products including

an infringing product, because they make a contribution the exploitation of all those

products in the business, should be

Dart 10 13/3/92

apportioned, and an appropriate apportionment

allocated to the expenses of the infringing

product. The example of a true side-line is exceptional, although such cases will occur.

Now, in our submission, what the Full Court is

doing is rejecting the statement of

Sir Victor Windeyer in Colbeam Palmer as not being

suitable save in the exceptional case of what they

call a "true side-line" and is adopting a

contribution test as distinct from a causation test

and it is that which takes one from one set of

accounting principles to the opposed set of

accounting principles.

If the Court pleases, I was dealing with the

United Kingdom cases and had taken the Court to

Crosley v Derby which is an old but much cited

case. A more recent case which we say also

supports the view that we are putting is the Peter

Pan case which can be found behind tab 6 in the

list of authorities; that is Peter Pan

Manufacturing Corporation v Corsets Silhouette Ltd,

(1964) 1 WLR 96. That was a case in which the

accounting was ordered against the defendant in an

action for breach of confidence and the manner in

which the accounting was to be conducted was, we

say, entirely in accordance with the principles

that we have outlined.

If the Court turns to page 108, which is the second-last page of the report in the paragraph

which begins on the preceding page, right at the

end of that paragraph His Lordship says this:

It seems to me that on the plain terms of

those orders, what the plaintiff who elects in

favour of an account of profits is entitled

to, is simply an account of profits in the

sense which I have indicated, that is: What

has the plaintiff expended on manufacturing

these goods? What is the price which he has

received on their sale? and the difference is

profit. That is what the plaintiffs claim in

the order for an account as formulated by
them; that is simply an account of the profits

made by the defendants in the manufacture and

sale of the brassieres -

in question. I interpolate that in the passage

that I quoted, the word "plaintiff" in that first

sentence should presumably read "defendant"; "What

has the defendant expended on manufacturing these

goods?", since it is clear, of course, that it is
the defendant who is required to give the account,

not the plaintiff.

Dart 11 13/3/92

So, the principle set out in Peter Pan is one

which, again, takes the differential view of
accounting. It is simply looking to see what is
the difference, money in and money out, involved in

the infringing activity.

Now, similarly, in our submission, the

Canadian cases, although we accept and I will be

submitting in the context of United States cases,

one has to be cautious in stepping outside the more

familiar areas of Australian and United Kingdom

law, we say again support the view that the method

of accounting is the differential one. There is

one case which we have included in the book of

papers behind tab 12 which is the Teledyne case.

We have included that because that seems to be the one which is most often cited in subsequent

Canadian decisions for this particular proposition.

If the Court would turn to page 213 in the

report, in the short paragraph beginning about

half-way down the page, this is said:

To summarize: the infringer is entitled

to deduct only those expenses, both variable

and fixed, which actually contributed to the

sums received and for which he is liable to

account. It follows that no part or

proportion of any expenditure which would have been incurred had the infringing operation not taken place, is to be considered as

deductible.

So, again, the test is whether the item sought to

be deducted is one which would have been incurred

without the infringing activity. If that is so,
then it is not deductible.

Now, that, again, is clearly inconsistent with

an absorption method of accounting in which a
defendant would be permitted to make a deduction

without first showing that without the infringing

activity the expenditure would not have taken

place. There are other Canadian cases which follow the Teledyne principle, but again, it is sufficient for the purposes of the present application to

quote but one case in that line.

In departing, as we say, from these

authorities the Full Court relied, as I have

already submitted, partly on distinguishing the

Colbeam Palmer case and we would say it is simply

not following Leplastrier, but it also relied, in

part, on United States authority and, in our

submission, that is a very dangerous exercise in

the context of the present case because United

Dart 12 13/3/92

States authorities are based on a quite different

jurisprudence.

It is interesting to observe that it would

appear that this type of argument had been raised

before Mr Justice Windeyer in Colbeam Palmer
because in that case, which is behind tab 3 in the
papers that we have handed up, His Honour makes a

reference to United States cases at page 44 in a

paragraph beginning about two-thirds of the way

down the page.	He makes one general and one
specific point.	He says:

Cases in the United States must be used

cautiously, because of certain special

provisions in the Trade Marks Act there

and I will make a reference to that in a moment -

and because in appropriate cases damages may

there be had as well as profits.

Now, going first to His Honour's specific

point about "damages may be had as well as profits",

that takes me to the first of what we say our major

differences in jurisprudence between the United

States and Australia so far as these matters are

concerned. First, under our law, the principle so

far as damages or an account of profits are

absolutely settled and, indeed, are referred to by

Sir Victor Windeyer as being trite.

Since the decision of the House of Lords in

Neilson v Betts in 1870, it has been held that when

a plaintiff, in a patent or, if it comes to that, a

trade mark case or other cases in which an account

may be given, succeeds on liability he is then

required to elect between damages as a remedy or an

account of profits as a remedy. He is not entitled

to have both.

Now, that principle well established in the

general law, in fact, is incorporated in
section 118 of the Patents Act 1952, which is the
relevant Act for the purpose of the present

proceedings.

And that provides as follows in

subsection (1): 

The relief which a court may grant in an

action or proceeding for infringement of a

patent includes an injunction (subject to such

terms, if any, as the court thinks fit) and,

at the option of the plaintiff, either damages

or an account of profits.

Dart 13 13/3/92

So, the two, under our law, are clearly set out as

alternatives and the plaintiff is required to

elect.

Under United States law, and, indeed, in a

number of the cases and references relied upon by
the Full Court, the position is in the United

States that a successful plaintiff can have both damages and an account of profits save that the account of profits is reduced to the extent that

that would involve double counting. So that they

have a double remedy whereas we have a required and

strict election.

MASON CJ:  Now, Mr Emmerson, we do seem to be taking a long time in this case. I would appreciate it if you

could put the balance of your argument as

succinctly as possible.

MR EMMERSON:  If Your Honour pleases. What I propose to do

in the balance of my argument is to simply say there are certain demonstrable points in which

United States jurisprudence differs from ours. We

say that those are highly relevant to considering

the particular US authorities relied upon by the

Full Court and I would propose to indicate briefly

why that is. Therefore, we say, that the court was
wrong in choosing to follow those United States'

authorities rather than what we say is the

fundamental principle established in Australian, UK

and Canadian authorities.

Can I perhaps take the Court to the second of the two points which is relevant in considering

these US authorities and that is this: under our

law there is a provision to protect an innocent

infringer, that is to say, innocent in the sense

that he does not know of the existence of a patent
and that is set out in section 124 of the Patents

Act. So, under our law the usual result of a

finding that the infringement was innocent in the

relevant sense, is that there will be no accounting

at all.

Under US law, at least in some circuits,

because there are further complications and

variation of practice between circuits, the position appears to be that the question of

innocence or otherwise is not dealt with as a

threshold test in order to determine whether or not

an accounting takes place but, rather, it affects

the quantum of accounting and the things that are

taken into account on that accounting.

So, again, it is unsafe, in our submission, to

take US authorities as giving proper guidance to

our courts about the quantum of accounting, and

Dart 14 13/3/92

this is particularly so where, as in at least one

of the cases relied upon by the Full Court, the

infringement itself is innocent, so under our law

one would not get to an accounting at all. So,

that is the second of the major matters.

The third of the major matters is that while

it is settled under our law that the giving of an

account does not contain within it a punitive

element, the possibility of a punitive element

seems to be a further thing which can be taken into

account in US authorities and, in fact, was in one

of the cases relied upon by the Full Court.

Because, in one of those cases, the court proceeds

on the footing that there is no damage; there is no

profits to be accounted for but because the

behaviour of the defendant was wrongful, then it is

appropriate to award a partial accounting against

him. So, again, the jurisprudential basis is quite

different.

The fourth and final distinction in the US law

is that in the manner in which these matters are
administered, that is to say, as procedural

matters, it appears that the procedure varies from

circuit to circuit so that in some circuits you get

the cases which are cited by the Full Court but in
others you get support for incremental differential

style of accounting instead and, so, again, the

impression that one would get from the reading of

the judgment of the Full Court that United States'

law was a single body of law all tending one way is

incorrect.

Now, to show how that impinges on the various cases relied upon by the Full Court, beginning at

page 41 there is an extract from Nimmer on

Copyright. Copyright gives rise to particular difficulties because there are more major

differences in United States copyright law and

ours than it would appear in most of the other

relevant sections.

Now, the passage quoted by the Full Court,

however, is instructive because at line 20 on

page 41 of the application book the learned author

is quoted as saying:

A proper allocation of that portion of

defendant's overhead attributable to the cost

of the said infringing items may be deducted,

at least where the infringement was not

conscious and deliberate.

So, the learned author is confining his statement

to the case of innocent infringement which, as I

Dart 15 13/3/92

say, under our law is dealt with expressly by statute under section 124 of the Patents Act.

Further than that, the actual language used by the learned author is, in fact, vague and does not,

in our submission, provide any assistance on the
distinction which is crucial for the present case,

that is to say, the distinction between incremental

and absorption cost accounting.

The next case that is mentioned, at the bottom

of page 42 of the application book - - -

MASON CJ: Well now, Mr Emmerson, I do not think it is

necessary to go through these cases one by one.	I
mean, on the presentation of a special leave
application it is a matter of identifying what the
nature of your attack is on the judgment below.

MR EMMERSON: 

Yes. If the Court pleases, I have indicated

the nature of the attack. There is different
jurisprudential bases and we say, further, on a
close analysis, it is by no means clear that even
subject to that warning, the cases cited by the

Full Court stand for the proposition which is

ultimately drawn from that.

If the Court pleases, we say there is

therefore, to put the matter no more strongly,
considerable reason for doubting the correctness of

the decision of the Full Court. It is a point

which is important because it goes absolutely to

the fundamentals of the way one determines a

particular remedy available at law. It is also a
point which, if one were to adopt the view of the

Full Court and treat the Leplastrier and Colbeam

Palmer cases as being distinguishable on their

facts, it is a point which has not been dealt with

by a superior court in Australia before and we say

it is therefore of great public importance that

this matter should be dealt with by this Court.

the Court pleases. If

MASON CJ: Yes, thank you. Yes, Mr Ellicott?

MR ELLICOTT:  Your Honours, our best case is the judgment of

Learned Hand in Sheldon's case so far as the

overseas authorities are concerned and we would

submit that what he says is quite consistent with

what Mr Justice Harvey was saying in Leplastrier's

case. He says at the foot of page 42:

'Overhead' which does not assist in the

production of the infringement should not be

credited to the infringer; that which does,

should be; it is a question of fact in all

cases.

Dart 16 13/3/92

Now, there is an important passage in the

judgement of Mr Justice Harvey - it is set out at

page 37 of the application book - which makes it

clear that Mr Justice Harvey was not saying that

overhead costs could not be allocated and therefore

be chargeable. He says at line 15:

If, for instance, for the purpose of

manufacturing these machines the defendant

found it necessary to install a particular

piece of machinery which was useful for making

these machines and for nothing else, then it

might be that depreciation of this machinery

would be a proper item to allow him as part of

his costs of manufacturing the machine; if his

machinery is used partly for the purpose of
making these machines and partly for the

purpose of other machines it may be proper to

allow him such depreciation for wear and tear

on the value of his machinery as may be

properly allocated to the work which has been

done on the infringing machines as compared

with the work done on other machines.

Now, it is abundantly clear that that is a

case where there was no incremental costs, that is,

the old machinery was used to make the infringing

machines as well as other machines and His Honour

was saying in such a case depreciation could be allowed. So, he was not rejecting, whether you

call it the absorption method or whatever you call

it - - -

MASON CJ: But that was a case of extra wear and tear, was

it not, by reason of the use of the machines for

producing the infringing articles?

MR ELLICOTT:  It was, Your Honour, but it was not a case -

this is the point: it was also a case where there

was no incremental cost. Now, my friend's argument

is that if there is incremental cost, you are

cannot get anything. In the case of existing	allowed; if there is no incremental cost, you
machines, Mr Justice Harvey is saying, "Yes, you
can, even though you would have suffered that
depreciation in any event."

GAUDRON J: But he is talking about increased wear and tear

which is really an exact counterpart of incremental

cost, is it not?

MR ELLICOTT: There is still the need from year to year to

set aside amounts for depreciation, and in ordinary
accounting terms depreciation is allowable from

year to year on the machine.

Dart 17 13/3/92

GAUDRON J: Yes, but that is ignoring the underlying wear

and tear.

MR ELLICOTT: With respect not. It is looking at the

depreciation on the machine and that depreciation

is based on an accountancy principle.

MASON CJ: Yes, but, of course, that accountancy principle

applies whether or not the machine is being used or

not being used.

MR ELLICOTT: Yes, and all I am saying is that you cannot

gather from Leplastrier that Mr Justice Harvey was

saying that you cannot claim incremental cost and
therefore to say from that, as apparently the trial

judge did, you cannot claim any overhead cost, is a

non sequitur from what Mr Justice Harvey said.

That is my point.

MASON CJ: But the difficulty is the passage does not help

very much, does it, because underlying it is the

notion of extra wear and tear?

MR ELLICOTT:  Your Honour, what I am seeking to answer is a

claim that Leplastrier is somehow a case in my

friend's favour and was in favour of what the judge

determined below and against what Their Honours

said in the Full Court and my point simply is that

Leplastrier does not say that. Our case is this,

that this is ultimately a question of fact and what

the trial judge has said in that order at page 24 of the appeal book, number 4, he said, in effect,

that we are not entitled to anything. It does not

matter if there was an incremental overhead cost,

we are not entitled to that. Now, that is one

attack that can be made on what His Honour said.

Quite apart from that, however, our argument below and in support of the judgment is a simple

question of fact: what, according to ordinary

principles - because that is all that we claim - is
the cost of making these machines?	And the cost of

making these machines is a cost worked out

according to accountancy principles. They are well

known. Allocations are done every day of the week

by accountants in relation to overhead and there is

always great argument, but once the allocation is

made according to accountancy principle, that

allocated cost of overhead is directly attributable to those particular goods or services in respect of

which they are allocated.

There are words such as "direct costs" and

"indirect costs" which are used in the books on

accounting. But when it comes to allocation, what

is being done is to take out of a general pool of

costs that is attributable to a number of cost

Dart 18 13/3/92

pools, to take out of them by a method of

allocation, which is necessarily not scientific in

all cases, those amounts of which you can say that

is directly attributable or properly attributable

to these particular products.

Now, that was our case below, and the Full

Court is agreeing with that	and we would submit
that that is common sense.	And when they said, at
page 45:

In our opinion, the correct answer is to

be obtained by keeping firmly in view the

object of an accounting for profits. That

object is not to punish the defendant -

well, that is what my friend's argument would do -

but it is to ensure that he disgorges, and the
plaintiff receives an amount which truly

represents the profit obtained by the

infringement. Because of the diversity of

situations in which the pursuit of profit by

infringement may occur, the achievement of

that end will involve seemingly different

treatment of items of overhead in different

cases.

So, they have allowed for that.

But the consistency which should be sought is

consistency of principle, not consistency of

treatment of a particular item the bearing of

which upon profit may vary from case to case.

If a business is so compartmentalised that

particular items of general overhead,

affecting one department, have no relationship

to the obtaining of a profit, in the

operations of another department, by an

infringement, those items will of course not

be allowable. But items such as rent,

which are attributable to a range of products	salaries of administrators, and depreciation,
including an infringing product, because they make a contribution to the exploitation of all those products in the business, should be apportioned, and an appropriate apportionment
allocated to the expenses of the infringing
product. The example of a true side-line is exceptional, although such cases will occur.
Now, Your Honours, we would submit that that

statement of principle is unexceptionable and all the more so in the light of this case because, on another ground, if ever there was a case, we would

submit in our submission, that should not go on

Dart 19 13/3/92

appeal, is one that is interlocutory and where the

facts have not yet been found.

This matters comes up - there were

applications for discovery as appears from the

judgment below before Mr Justice King, and these

questions were then asked and the whole of the

evidence was not then before the court, and

His Honour was invited, true, by the parties, to

answer these questions. But what may be the

ultimate situation will depend on the facts that
are found, no doubt, by the master, in relation to
the matter and then go before the judge. But to

deal with this now - this is another ground of why

Your Honours should reject the application at this

stage - is to deal with it at the stage when,

before this Court, there will be great speculation

about what the facts would be.

GAUDRON J: But it is a fairly uncontroversial factual

issue, is it not? The question can be stated quite

simply, can it not, that would come up before this

Court?

MR ELLICOTT:  I am sure Your Honour has had experience of

accounting cases but one of the most difficult

issues of fact is the issue of incremental cost.

If you have to, for instance, determine what is the
incremental cost attributable to an electricity

bill - and this is the sort of thing that will have

to be asked - in relation to every item in this

very large establishment over a period of eight

years, it becomes an extremely complex question.

Now, this is our point: an understanding of

what is the nature of determining incremental cost is itself very important to a consideration by the

High Court.

GAUDRON J:  However, there are some which would be

uncontroversial. If, for example, you had to pay	land rates on that land on which your factory was
built year after year, no matter whether you used the factory on the land to produce an infringing
product, it would be clear, at least what we were
talking about in this area, would it not? You are
talking about costs that simply were not increased.

MR ELLICOTT:  It may or may not. You would not know until

you knew the facts. It may be that a decision was

made during the year - who knows; hypothetical -

that the lease be continued because you are

continuing the product, this other product.	Take
the case of non-infringing products -

DEANE J: But, Mr Ellicott, do you not have to first face up

to the question whether "incremental" is a relevant

Dart 20 13/3/92

consideration? I mean, if you are saying you are
only entitled to take account of incremental cost
to the extent of the increment and apportionment

can be a factor of doing that in appropriate

circumstances, then obviously what you are saying

is right. But, as I read the judgment of the

Full Court, it seems to be saying you are not concerned about incremental costs or economies of

scale or the like, you simply go straight to

apportionment of any overhead that applies to the

whole range of production.

MR ELLICOTT:  Which is not a sideline.

DEANE J: Yes. Well now, if that is what they are saying,

whether they be right or wrong in that is a real

question and a question of importance which, even

though this is an interlocutory matter, would be of

considerable importance to what goes on hereafter.

MR ELLICOTT: What I am submitting, Your Honour, is that

before this Court entertains that question, it

ought to know something about incremental cost.

That is not a legal proposition, that is an

accounting proposition and the complexities of

incremental cost are not readily apparent. It

sounds all right.

MASON CJ:  You will be able to instruct us though,

Mr Ellicott.

MR ELLICOTT:  I do not think so, Your Honour. I think I

will be finding resistance because Your Honours

will want to simplify it and I will want to tell

Your Honours the truth about the matter of how

complex it is

MASON CJ: Well, that will be unusual.

MR ELLICOTT:	Your Honour, I have only got to give one example: supposing you have a factory in which	there are non-infringing products - that is the	first thing - then along comes a decision to make a
product which is found to be infringing, and then later on some additional products are added which
are non-infringing products. The complexities of
that situation - and Your Honours are being asked
to lay down a principle, and this is the point,
about whether incremental costing is the appropriate principle without a full appreciation
being put before the Court as to the nature of
incremental costing or, on the other hand, the use of absorption costing or of simple allocation of
overhead as practised by the business community.

Now, Your Honours may feel that you are

equipped to do that but all we would want to submit

Dart 21 13/3/92

is that, with very great respect, the appropriate
time, if Your Honours want to entertain this

matter, is not now but to send the parties away and

tell them to come back if they wish to.

Now, we have another point, of course, in the

case and that is do you assess the profit in
relation to the lid alone or do you assess the
profit in relation to the lid and the container?

MASON CJ: What, you are going to seek special leave to

appeal on that point?

MR ELLICOTT:  We would have to seek special leave in relation to that. The Court, I assume, would want

us to do that if it granted special leave.

MASON CJ: We will have to bear that prospect with such

fortitude as we can muster.

MR ELLICOTT: Yes, Your Honour, but what I am again putting

to Your Honour is this, that in relation to that

matter the facts are not currently before this

Court. This is an interlocutory matter, as

Your Honours fully appreciate.

MASON CJ:	I think the message is getting through.
MR ELLICOTT:	I think it is, Your Honour, but I do not think

it is getting much receipt. Your Honours, those

are our submissions for suggesting Your Honours

should not grant special leave, and I regret that I

have had to warn the Court about what it might come

across if it proposes to give special leave in this

case.

MASON CJ:  We may have occasion to remember that in the future, Mr Ellicott.

There will be a grant of special leave to

appeal in this case.

AT 3.24 PM THE MATTER WAS ADJOURNED SINE DIE

Dart 22 13/3/92