Décor Corporation Pty Ltd v Dart Industries Inc
[1991] FCA 844
•20 DECEMBER 1991
Re: THE DECOR CORPORATION PTY. LTD. and RIAN TOOLING INDUSTRIES PTY. LTD.
And: DART INDUSTRIES INC.
No. V G74 of 1991
FED No. 844
Appeals - Patents
(1992) AIPC 90-856
(1991) 104 ALR 621
23 IPR 1
(1991) 33 FCR 397
COURT
IN THE FEDERAL COURT OF AUSTRALIA
VICTORIA DISTRICT REGISTRY
GENERAL DIVISION
Sheppard(1), Burchett(1) and Heerey(1) JJ.
CATCHWORDS
Appeals - leave to appeal from an interlocutory judgment - whether the full court should regard itself as bound to apply a formula derived from Niemann v. Electronic Industries Ltd (1978) VR 431 - width of the discretion to grant leave to appeal under s. 24(1A) of the Federal Court of Australia Act 1976.
Patents - taking of an account of profits - whether any part of general overhead costs is allowable as a deduction in the determination of the profits made by an infringer - principles relating to the taking of an account of profits - whether the case of a side-line is an exceptional case - reference to standard accountancy methods as indicating what must be deducted in order to determine the amount of a profit - discussion of a line of cases establishing the approach adopted in the United States to the solution of this problem - onus on wrongdoer who has mixed legitimate activities with activities involving infringement of another's property right to justify the particular apportionment of costs adopted by him in his accounts - declaration of principle that the infringer is generally at liberty to show that various categories of overhead contributed to the obtaining of the relevant profit and to show in what proportion they should be allocated in the taking of the account of profits - discussion of whether the profits for which the defendants must account are (in the case of a patented closure for a canister) the profits for the closures only or for the closures and canisters to which they are fitted - whether the infringer's particular pricing policy can be relied on by him as a contribution by him to the profits unrelated to the patent - whether the profits of the whole canister and closure are fairly traceable to the use by the infringer of the invention.
Federal Court of Australia Act 1976, s 24(1A)
Niemann v. Electronic Industries Ltd. (1978) VR 431, discussed
Sharp v. Deputy Federal Commissioner of Taxation (1988) 88 ATC 4184, referred to
Commissioner of Taxation v. Hydrocarbon Products Pty. Ltd. (1987) 14 FCR 359, referred to
Nationwide News Pty. Ltd. v. Bradshaw (1986) 84 FLR 49, referred to
Colbeam Palmer Limited v. Stock Affiliates Pty. Limited (1968) 122 CLR 25, distinguished
Leplastrier and Co. Ltd. v. Armstrong-Holland Ltd. (1926) 26 SR(NSW) 585, considered
Arthur Murray (NSW) Pty. Limited v. The Commissioner of Taxation of the Commonwealth of Australia (1965) 114 CLR 314, referred to
Sheldon v. Metro-Goldwyn Pictures Corporation (1939) 106 F2d 45 at 54 (affirmed (1940) 309 US 681), applied
Frank Music Corporation v. Metro-Goldwyn-Mayer, Inc. (1985) 772 F2d 505, applied
Duplate Corporation v. Triplex Safety Glass Co. (1936) 298 US 448, applied
HEARING
MELBOURNE
#DATE 20:12:1991
Counsel for the Applicants/Appellants: Mr R.J. Ellicott QC
with Dr C.N. Jessup QC
and Mr C.D. Golvan
Solicitors for the Applicants/Appellants: Messrs Phillips Fox
Counsel for the Respondent: Mr D.L. Harper QC with Mr
A.J. Maryniak
Solicitors for the Respondent: Messrs Arthur Robinson and
Hedderwicks
ORDER
Leave be granted, to the applicants for leave to appeal, to appeal from the decision of the Honourable Mr Justice King made 21 December 1990.
The appeal be allowed in part and dismissed in part.
In so far as the orders appealed from include a declaration that in determining the total costs associated with:
a. obtaining each of the canisters referred to in the orders
and getting them to the first defendant's store or place of business;
b. holding each of the first defendant's canisters in the store or place of business;
c. selling and delivering each such canister by the first
defendant to the purchaser thereof;
d. manufacturing and storing each of the said canisters by the second defendant; and
e. selling and delivering of each such canister by the second defendant to the purchasers thereof,
no part of general overhead costs is allowable as a deduction, the said declaration be set aside, and in lieu thereof, IT BE DECLARED that the appellants are at liberty to show that overheads falling within the various categories of overhead contributed to the obtaining of the relevant profit and to show how and in what proportion such overheads should be allocated in the taking of the account of profits.
In so far as the orders appealed from include a declaration that the profits for which the appellants must account are the profits for the closures and containers to which they are fitted, the order of the Honourable Mr Justice King be affirmed.
In so far as the orders of the court below dealt with the costs of the determination of the questions the subject of this appeal, those orders as to costs be set aside, and in lieu thereof IT BE ORDERED that there be no order as to costs in respect of the determination of these questions on the hearing below.
There be no order as to the costs of the application for leave to appeal or of the appeal.
NOTE: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.
JUDGE1
In this matter, the court granted leave to appeal from an interlocutory judgment of a judge of the Supreme Court of Victoria, reasons being reserved, and proceeded to hear the appeal. It is appropriate that, before we deal with the issues raised upon the appeal, we state our reasons for the grant of leave.
The question was raised whether, on an application for leave to appeal, the court should regard itself as bound to apply a formula said to have been laid down in Niemann v. Electronic Industries Ltd (1978) VR 431. In Sharp v. Deputy Federal Commissioner of Taxation (1988) 88 ATC 4184 at 4186 (and see also Merman Pty Ltd v. Cockburn Cement Limited (1989) ATPR 49951 at 49954; Tetijo Holdings Pty Ltd v. Keeprite Australia Pty Ltd (French J., unreported, 15 January 1991)) Burchett J. stated the "major consideration(s)", to be applied by the court upon an application for leave, for which Niemann is authority. The first test, which relates to the prospects of the proposed appeal, is "whether, in all the circumstances, the decision is attended with sufficient doubt to warrant its being reconsidered by the Full Court." The second
"is whether substantial injustice would result if leave were
refused, supposing the decision to be wrong.
In my opinion, the sufficiency of the doubt in respect of
the decision and the question of substantial injustice
should not be isolated in separate compartments. They bear
upon each other, so that the degree of doubt which is
sufficient in one case may be different from that required
in another. Ultimately, a discretion must be exercised on
what may be a fine balancing of considerations."In our opinion, the major considerations to be derived from Niemann do provide an appropriate litmus test for the general run of cases in which leave to appeal from an interlocutory decision is sought. If differently constituted courts are to give consistent rulings, it is necessary that they be guided by relevant principles. There is a considerable body of authority which supports the approach taken in Niemann. But we do not understand the judges who decided Niemann to have laid down any rigid rules that might destroy a court's discretion in all cases but those falling within them. That, so far as this court is concerned, would be contrary to the unqualified terms of s 24(1A) of the Federal Court of Australia Act 1976 which confer on the court an unfettered discretion.
Niemann has received detailed consideration in the decision of the Court of Appeal of the Northern Territory in Nationwide News Pty Ltd v. Bradshaw (1986) 84 FLR 49, where it was not accepted as laying down "rigid or exhaustive criteria" (O'Leary C.J. at 55, Nader J. at 62). However, Asche J. (as he then was) treated Niemann as laying down the normal rule. The Court of Appeal of New South Wales has adopted the general practice that reasons are not given for the grant or refusal of leave to appeal: Southern Cross Exploration NL v. Fire and All Risks Insurance Company Ltd (No. 2) (1990) 21 NSWLR 200 at 215, 218. However, in that particular case reasons were given. The reasons of the majority (Mahoney and Handley JJ.A.), who refused leave, consider the two aspects referred to in Niemann. Kirby P., who would have granted leave, relied on more general considerations, including what he saw as the public interest and the effective finality of the order challenged. In the earlier decision, Merton Enterprises Pty Ltd v. Nelson (1988) 13 NSWLR 454 at 457, the joint judgment of the Court of Appeal (Samuels, Priestley and McHugh JJ.A) put the ground of refusal of leave on the terse basis: "The Court ... did not ... think the reasons advanced were sufficient to warrant the granting of leave".
A full court of this court in Commissioner of Taxation v. Hydrocarbon Products Pty Ltd (1987) 14 FCR 359 at 375, while testing the matter before it by reference to a formulation of the criteria stated in Niemann, stated the reservation: "Without regarding that formulation as an exhaustive test to be applied to all cases". In National Mutual Holdings Pty Ltd v. The Sentry Corporation (1988) 19 FCR 155 at 161 and United States Tobacco Company v. Minister for Consumer Affairs (1988) 20 FCR 520 at 522, full courts granted leave on the footing that, in each case, a matter of importance was raised which it was appropriate should be determined by a full court.
In our opinion, the principles discussed in Niemann and in the other cases to which we have referred provide general guidance which a court should normally accept. However, there will continue to be cases raising special considerations, and the court should not regard its hands as tied in any case beyond this, that by s. 24(1A) the legislature has evinced a policy against the bringing of interlocutory appeals except where the court, acting judicially, finds reason to grant leave. When the court comes to exercise its discretion on a particular application, an important distinction to be observed is that between the common interlocutory decision on a point of practice - concerning which the High Court has given (see Adam P. Brown Male Fashions (infra, at 177) a strong warning that "a tight rein" should be kept on appeals - and an interlocutory decision determining a substantive right - where leave will more readily be granted. Although the judgments of Jordan C.J. in In re the Will of F.B. Gilbert (deceased) (1946) 46 SR(NSW) 318 at 323 and of the majority of the High Court in Adam P. Brown Male Fashions Proprietary Limited v. Philip Morris Incorporated (1981) 148 CLR 170 are not concerned with the question of the granting of leave, they emphasize this distinction, which was applied to the granting of leave in Ex parte Bucknell (1936) 56 CLR 221 and Sharp (ubi supra). In the present case, the interlocutory decisions in respect of which leave is sought are certainly attended with difficulty, and their correctness is open to dispute. If they are wrong, significant consequences will be suffered by the applicants. We regard this as a clear case for the grant of leave.
The questions, which were debated upon the hearing of the appeal, arose out of an order for the taking of an account of profits, following a successful suit for infringement of a patent. The patent related to what were described as press button lids for the sealing of open-mouthed containers. Further details of the patent will be found in Decor Corporation Pty Ltd v. Dart Industries Inc. (1988) 13 IPR 385. The practical application of the patent, the application in which it was infringed, related to plastic kitchen canisters with press button lids, for swift and easy removal and replacement, with a good seal. The defendants, who are the appellants, having filed accounts, two questions were debated before the learned judge, which were the subject of orders containing directions for the ascertainment of the profit obtained by the making and selling of the infringing products. Against these orders, the appeal is brought. The first question decided by the orders is whether any part of general overhead costs is allowable as a deduction to the appellants in the determination of the profits made by them by the infringement. The second question is whether the profits for which the appellants must account are the profits in respect of the whole item being the container with its closure, or whether those profits should be apportioned between the container and the closure itself, which was the subject of the patent.
The distinction between an account of profits and an award of damages was stated succinctly by Windeyer J. in Colbeam Palmer Limited v. Stock Affiliates Pty Limited (1968) 122 CLR 25 at 32: "By the former the infringer is required to give up his ill-gotten gains to the party whose rights he has infringed: by the latter he is required to compensate the party wronged for the loss he has suffered." The principle upon which a court of equity would entertain a bill for an account of profits was stated in Story's Commentaries on Equity Jurisprudence s 513 in the following terms:
"(I)t is inequitable that (the wrongdoer's) estate should
receive the benefit and profits of the property of another
person. It would be a reproach to equity, if a man, who has
taken the property of another, ... should ... throw the
proceeds into his own assets, and leave the injured party
remediless."
In My Kinda Town Ltd v. Soll (1982) FSR 147 at 149, Slade J. said:
"As I understand the relevant principles, the object of
ordering an account in cases such as the present (this was
an account of profits improperly made by passing off) 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 to the
plaintiffs."
He also made it clear (at 158-159) that mathematical exactness was not required "but only a reasonable approximation", there being, in that case, a problem of dissecting profits made by passing off from profits not related to any passing off. My Kinda Town was referred to in Potton Limited v. Yorkclose Limited (1990) FSR 11 at 15 where Millett J. cited the statement of Sir John Romilly M.R. in Cartier v. Carlile (1862) 31 Beavan 292 at 298; 54 ER 1151 at 1153 that equity will make one who infringes a trade mark "account for such advantage, if any, as he may have derived from its user". Millett J. commented: "The remedy is given in order to prevent the unjust enrichment of the defendant."The reported cases, in Australia and in England, reveal very little consideration of the question whether a proportion of general overhead is to be allocated as an expense in the taking of an account of profits of this kind. The learned judge was referred to the decision of Sir John Harvey C.J. in Eq. in Leplastrier and Co. Ltd. v. Armstrong-Holland Ltd. (1926) 26 SR(NSW) 585 and to the decision of Windeyer J. in Colbeam Palmer Limited v. Stock Affiliates Pty Limited (supra). The judge cited a passage from the former decision (at 592-593) including the statement:
"Under no circumstances can he (i.e. the defendant), in my
opinion, deduct interest on his capital employed in the
business. Under no circumstances can he claim any
remuneration to himself, nor under any circumstances can he
claim in my opinion any director's fees for carrying on the
business. I have no desire at the present stage to say
exactly what can be taken into account as the costs of
manufacture. It is clear that costs of material can be
taken; it is clear that costs of wages can be deducted. 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. 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."Following that statement, the judgment in Leplastrier continued (at 593-594):
"In my opinion the onus is on the defendant of establishing
that any item of costs has been incurred in regard to the
manufacture of these individual machines. ... (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; nor
could he obtain any remuneration for his own services in
connection with it; but if, as a matter of fact, he has had
to borrow capital and the company, or he himself, has had to
pay interest and he can show that that has been incurred to
some extent solely by reason of this manufacture, he might
be entitled to deduct such interest."The learned judge purported to apply the view of Sir John Harvey in holding "that the only expenses which can be deducted in the present case are those solely referable to the obtaining or manufacture (as the case may be) and sale and delivery of the goods concerned." He added:
"The difficulty in allowing as deductions the `general
overhead costs' to which I have taken the question to refer
(i.e. the question raised for the purposes of the taking of
the accounts) is that to do so one must assume that each
product in a range of products has been equally involved in
the incurring of such costs. This may be a satisfactory
accounting technique for business purposes, but to be
applicable to an account of profits it must appear on the
basis of evidence that the proportion of overhead costs
allocated to the relevant goods was in fact directly
incurred with relation to them. Until it so appears the
said assumption is speculative. As long therefore as such
general overhead costs are not shown to be directly incurred
with relation to press button canisters they cannot be taken
into account."This reasoning involves some difficulties. It is true that Sir John Harvey used the expression "solely referable to the manufacture of the particular machine", but it is plain from the context of the passage we have quoted that he did not mean to exclude an allocated proportion of proper general overheads. Such an allocated proportion would be, as Sir John Harvey used the expression, solely referable to the making of the infringing product. He specifically referred to an allocation of depreciation on machinery used both to manufacture infringing machines and to manufacture machines which did not infringe, and said "it may be proper to allow" this allocated proportion of depreciation. He also referred to interest on borrowed capital which might be shown to have been "incurred to some extent solely by reason of this manufacture", which might be deducted.
The other difficulty is with the comment that a deduction related to general overheads assumes each product in a range has been equally involved in the incurring of the costs. That formed no part of Sir John Harvey's reasoning. He left it to be determined, as a question of fact, upon the taking of the accounts, whether particular items of general overhead should be the subject of deduction, and what the deductions should be.
Although the matter has not been examined in detail in the English and Australian cases, American courts have examined it elaborately and have, we think, demonstrated that it is a question of fact, in each case, whether a purely proportionate allocation is appropriate, or whether the special characteristics of the business demand an allocation tailored to meet the requirements of the particular situation. It should not be overlooked that normal business and accounting practices, by which general overheads are allocated according to broad principles and by standard accountancy methods, reflect the general understanding among practical business people of what must be deducted in order to determine the amount of a profit: cf. Arthur Murray (NSW) Pty Limited v. The Commissioner of Taxation of the Commonwealth of Australia (1965) 114 CLR 314 at 318. It is no less true of the ascertainment of a profit than it is of the ascertainment of the derivation of income that, as Barwick C.J., Kitto and Taylor JJ. there said,
"a conclusion as to what (the general understanding among
practical business people) is may be assisted by considering
standard accountancy methods, for they have been evolved in
the business community for the very purpose of reflecting
received opinions as to the sound view to take of particular
kinds of items."The learned judge also referred to a passage in the judgment of Windeyer J. in Colbeam Palmer Limited (supra, at 39), where Windeyer J. excluded, as a deduction,
"any part of the general overhead costs, managerial expenses
and so forth of the defendant's business, as it seems that
all these would have been incurred in any event in the
ordinary course of its business in which as it was put in
evidence the (infringing items) were a `side line': cf.
Leplastrier and Co Ltd v. Armstrong-Holland Ltd."However, the judge expressly added that it was not shown by the evidence, in the present case, that the sale of the infringing goods was a "side line". On the contrary, he said that "(t)he evidence shows that the first defendant's range of press button canisters form part of a much larger range of container systems, storage systems and canisters. The sales share of the first defendant's press button canisters has ranged from 3.1 per cent in 1981/82 to 1.3 per cent in 1986/7." It seems to us to follow that the particular reason given by Windeyer J., which possibly he thought was also applicable to Leplastrier, does not apply to the circumstances in evidence here. On that basis, Colbeam Palmer Limited should be regarded as a special case, not representative of the ordinary situation where an infringing item is part of a much larger range of items.
As has been indicated, there has been an elaborate examination of this problem in the United States. An indication of the solution which has emerged there is to be obtained from Nimmer on Copyright (1985) vol. 3 s. 14.03 (B). The learned author says that the question which expenses will be regarded as deductible costs
"will generally turn upon the definition of costs under
accepted accounting practices. ... In general it may be
said that only those expenses which are proven with some
specificity to relate to the infringing work may be deducted
in determining the profits attributable to such work.
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. This determination of overhead presents an
issue of fact. The defendant has the burden of proving that
each item of general expense contributed to the production
of the infringing items, and of further offering a fair and
acceptable formula for allocating a given portion of
overhead to the particular infringing items in issue. The
appropriate formula for allocation may well vary in
different industries. For example, it has been held that a
music publisher's overhead should be allocated on the basis
of the number of songs published in a given period, without
reference to the number of copies sold of each such song.
This is to be compared with the overhead of a motion picture
producer where it has been held that overheads should be
allocated according to the direct cost of production of each
motion picture."When statements are read in American textbooks about the onus of proof of deductions, the statutory provisions which affect this issue in the United States should not be forgotten. But the position there appears to be the same in the absence of such provisions: see McCarthy on Trade Marks and Unfair Competition 2nd ed. (1984) vol. 2 s. 30:26B. This authority says (ibid): "Where the infringer can show from his books the percentage of gross income derived from the sale of infringing goods separate from that of noninfringing goods, overhead costs should generally be apportioned in the same proportion as gross sales."
It would be wearisome and unnecessary to go through all the many cases in which these principles have been discussed in the United States. The court was referred to a considerable number of them. We will content ourselves by examining some. In Sheldon v. Metro-Goldwin Pictures Corporation (1939) 106 F 2d 45 at 54 Learned Hand J., speaking for the United States Court of Appeals, second circuit, said (at 54):
"Next is a challenge to any allowance for `overhead' at all,
on the theory that the defendants did not show that it had
been increased by the production of the infringing picture.
(This was a copyright case.) The correct rule upon this
point is stated in Levin Bros. v. Davis Mfg. Co., 8 Cir, 72
F 2d 163, and in substance it is this. `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. In the case at
bar the infringing picture was one of over forty made by the
defendants, using the same supervising staff and
organization, which had to be maintained if the business was
to go on at all. Without them no picture could have been
produced; they were as much a condition upon the production
of the infringing picture as the scenery, or the plaintiffs'
play itself."Upon the same principle, Learned Hand J. allowed deduction of the cost of pictures never exhibited, such wastage "being a condition upon all production" and therefore "a part of the cost of production". The decision was affirmed by the Supreme Court of the United States: Sheldon v. Metro-Goldwyn Pictures Corporation (1940) 309 US 681. In The W.E. Bassett Company v. Revlon, Inc. (1970) 435 F 2d 656 at 665, the United States Court of Appeals, second circuit, held:
"Subject to a determination of the reasonableness of the
claimed deductions, Revlon should be able to deduct from its
net sales its overhead, most of its operating expenses, and
the federal income taxes on the `Cuti-Trim' items (it was a
trade mark infringement suit relating to these items). The
only one of the claimed deductions which Revlon should not
be allowed is the over-labelling expense, because Revlon
should have to bear the cost of correcting its own wrongdoing."In Sammons v. Colonial Press, Inc. (1942) 126 F 2d 341 the plaintiffs argued no allocated deduction in respect of rent should be allowed because the infringer would have had to pay rent for his premises in any event. Magruder J. rejected this proposition, saying (at 351):
"As we read the decided cases allowing an infringer to
deduct that portion of the general overhead expense properly
allocable to the particular job, they are referring to
`overhead' in the general accounting usage, not in the
restricted sense now urged by the plaintiffs. We hold that
such deduction of a proper proportion of those general
overhead expenses which assisted in the production of the
infringement is allowable, at least in a case like the
present where the infringement was not conscious and
deliberate."Frank Music Corporation v. Metro-Goldwyn-Mayer, Inc. (1985) 772 F 2d 505 concerned copyright infringement of a play called "Kismet" involved in a production known as "Hallelujah Hollywood". The United States Court of Appeals, ninth circuit, stated (at 516):
"The evidence defendants introduced at trial segregated
overhead expenses into general categories, such as general
and administrative costs, sales and advertising, and
engineering and maintenance. Defendants then allocated a
portion of these costs to the production of Hallelujah
Hollywood based on a ratio of the revenues from that
production as compared to MGM Grand's total revenues. The
district court adopted this approach.
We do not disagree with the district court's acceptance of
the defendants' method of allocation, based on gross
revenues. Because a theoretically perfect allocation is
impossible, we require only a `reasonably acceptable
formula.' ... We find, as did the district court, that
defendants' method of allocation is reasonably acceptable.
We disagree with the district court, however, to the extent
it concluded the defendants adequately showed that the
claimed overhead expenses actually contributed to the
production of Hallelujah Hollywood. Recently, ... we stated
that a deduction for overhead should be allowed `only when
the infringer can demonstrate that (the overhead expense)
was of actual assistance in the production, distribution or
sale of the infringing product.' ... We do not take this
to mean that an infringer must prove his overhead expenses
and their relationship to the infringing production in
minute detail. ... Nonetheless, the defendant bears the
burden of explaining, at least in general terms, how claimed
overhead actually contributed to the production of the
infringing work."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, 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. 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, salaries of administrators, and depreciation, which are attributable to a range of products 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. So will cases where an infringing product is produced by a particular division of a large enterprise, the organisation of which makes it reasonable to confine attention to the overheads allocated to that division in the books of the enterprise. But if this allocation, however convenient for the enterprise, produces a distorting effect upon the profits of the division, in a way which may disadvantage the party entitled to an account of profits, that party may be entitled to insist upon a reallocation. Where a wrong-doer has mixed his legitimate business with activities involving infringement of someone else's property right, on general principle the burden must be upon him to justify the particular basis of disentanglement he adopts in his accounts. This principle was asserted by the Supreme Court of the United States in Westinghouse Electric and Manufacturing Company v. Wagner Electric and Manufacturing Company (1912) 32 SCR 691 at 696 and again, in an opinion of the court delivered by Cardozo J. in Duplate Corporation v. Triplex Safety Glass Co. (1936) 298 US 448 at 458, where that learned judge said: "The wrongdoer bears the burden in cases of confusion."
Insofar as the order appealed from declares that "in determining the total costs associated with (various listed aspects of the production and sale of the infringing canisters) no part of general overhead costs is allowable as a deduction", we think it must be set aside. The true position is that the appellants are at liberty to show that various categories of overhead contributed to the obtaining of the relevant profit, and to show how and in what proportion they should be allocated in the taking of the account of profits.
The next question, as the learned judge stated it, is "whether the profits for which the defendants must account are the profits for the closures only, or for the closures and the canisters to which they are fitted." His Honour said:
"The basic legal principle is that the relevant profits are
those accruing to the defendants from their use and exercise
of the plaintiff's patented invention. Where the
defendants' products are, as here, composites of the
invention and other features the determination of such a
question is one of fact."The judge referred to evidence that the infringing range was introduced in response to requests from retailers for press button canisters, and that the only feature distinguishing that range from some other containers in the first defendant's range of products was the press button lid the subject of the patent. He came to the conclusion that "sales of press button canisters are for present purposes attributable to use of the patented invention", which represented the feature given prominence in their marketing. He therefore found that the profits for which the defendants had to account were the profits from the containers to which the patented closures were fitted.
The appellants challenged this finding on the footing that the base of the item must contribute something to its value. They also argued that the press button canisters were the subject of a specific pricing policy under which they were sold more cheaply than similar canisters with a different lid. It was claimed that the defendants' own pricing policy contributed to the success of the article, and should be taken into account by an apportionment of the profits.
The last point can, we think, be quickly disposed of. It was answered, many years ago, by Cardozo J. in Duplate Corporation v. Triplex Safety Glass Co. (supra, at 457). That case concerned an infringement of a patent for the making of shatterproof laminated glass for use in automobiles. The infringer claimed that an allowance should be made for his exploitation, in producing the infringing glass, of patented devices of his own which contributed to the manufacture. Cardozo J. said:
"But this is to misconceive utterly the position of an
infringer accounting for illicit profits. `An infringer
cannot be heard to say that his superior skill or
intelligence enabled him to realize profits by his
infringement which a person of less skill might not have
realized.' ... He will be heard with no more patience in
an endeavor to diminish liability by ascribing his profits
to the capacity indwelling in a patent. Whatever is at his
call in the service of the enterprise - brawn and
intelligence, factories and lands, patents and machinery -
will be viewed upon an accounting as if held upon a
quasi-trust to contribute what it can to the profits of the
business. The wrongdoer must yield the gains begotten of
his wrong."
This reasoning is entirely applicable to the present appellants' attempt to press into the service of their case the alleged benefits of their pricing policy.The other argument is more formidable. The respondent cannot gainsay that it is only entitled to the profits obtained by the infringement. If, for example, a patented brake is wrongfully used in the construction of a motor car, the patentee is not entitled to the entire profits earned by sales of the motor car. He must accept an appropriate apportionment. But the question is how that principle shall be applied to a situation where the patent relates to the essential feature of a single item. Take, for instance, a patent for a soft drink. The drink cannot be sold without a container. Would it be right to attempt to apportion the profits from sales of bottles of infringing soft drink? The entire reason for the sale of the bottle was as a container for the drink. Similarly, it seems to us that it was open to the judge to find, and he correctly found, that what characterized the infringing product was the press button lid, without which this particular container would never have been produced at all.
To allow the appellants to retain an allocated proportion of the profits in relation to the base would be the precise equivalent of allowing them to charge against the profits of the whole item an amount for the supply of the base, not at cost, but at sale price including a profit. That is what (amongst other things) the defendant attempted to do in Duplate Corporation v. Triplex Safety Glass Co (supra), where the special glass used to produce the infringing laminate was obtained by one defendant from its co-defendant. The defendants claimed a deduction for the glass, not at cost, but at its market value. Cardozo J. said (at 456):
"The acceptance of such a measure would enable the
infringers to profit by their wrong. There was no use in
the automobile industry for glass so thin as this except in
connection with the process described in the complainant's
patent. ... If there had been no infringing business, the
large amount of glass that went into the infringing product
would never have been sold at all. ... If as part of this
accounting (the defendant that supplied the glass) is given
credit for the glass at a price above the cost, it will
thereby have enlarged its market to an equivalent extent and
reaped a profit as infringer. Equity forbids that this
result should be attained."The approach taken by Cardozo J. is grounded in the principle upon which the account is taken. As Windeyer J. said in Colbeam Palmer Limited (supra, at 42-43):
"What the defendant must account for is what it made by its
wrongful use of the plaintiffs' property. ... The true
rule, I consider, is that a person who wrongly uses another
man's industrial property - patent, copyright, trade mark -
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': Elwood v. Christy (1865) 18
CB(N.S.) 494.
If one man makes profits by the use or sale of some thing,
and that whole thing came into existence by reason of his
wrongful use of another man's property in a patent, design
or copyright, the difficulty disappears and the case is
then, generally speaking, simple. In such a case the
infringer must account for all the profits which he thus
made."
In Goodlet v. Fowler (1876) 14 SCR(NSW) 496 at 499, Sir James Marti n C.J. referred to "the profits which are fairly traceable to the use by (the infringer) of that invention, and no more." In Cartier v. Carlile (supra, at 299; 1153) Sir John Romilly M.R. said: "I shall consider how much of the profits are properly attributable to the user of the Plaintiff's trade mark."
In our opinion, the learned judge was right to hold, on the facts of the present case, that the whole of the profits are attributable to the infringement of the respondent's patent. It was the press button closure which alone created the market for these bases.
The result is that the appeal succeeds upon one question and fails upon the other. As concerns costs, we would order that the costs order made below be set aside, and that there be no order as to the costs of the hearing below, of the application for leave, or of the appeal.
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