Polyaire Pty Ltd v K-Aire Pty Ltd
[2012] SASC 75
•10 May 2012
SUPREME COURT OF SOUTH AUSTRALIA
(Civil)
POLYAIRE PTY LTD v K-AIRE PTY LTD & ORS
[2012] SASC 75
Judgment of The Honourable Justice White
10 May 2012
INTELLECTUAL PROPERTY - DESIGNS - INFRINGEMENT - REMEDIES
Plaintiff was successful against the defendants in an action regarding the infringement of a registered design - plaintiff elected for remedy to be by way of an account of profits under s 32B(1) of the Designs Act 1906 - plaintiff seeks that the third defendant account to it in respect of a portion of the salary received by the third defendant as managing director of the principal infringer during the period of the infringing conduct.
Whether the managing director of a co-infringer is required to account for a portion of the salary he received in that capacity.
Held: dismissing the plaintiff's claim, no portion of the third defendant's salary can be characterised as profit attributable to the infringing conduct.
Designs Act 1906 (Cth) s 32B, referred to.
Colbeam Palmer Ltd v Stock Affiliates Pty Ltd (1968) 122 CLR 25; Dart Industries Inc v Decor Corporation Pty Ltd (1993) 179 CLR 101; Decor Corporation Pty Ltd v Dart Industries Inc (1991) 33 FCR 397; Leplastrier & Co Ltd v Armstrong-Holland Ltd (1926) 26 SR (NSW) 585; Polyaire Pty Ltd v K-Aire Pty Ltd (2003) 226 LSJS 109; K-Aire Pty Ltd v Polyaire Pty Ltd (2003) 60 IPR 512; Polyaire Pty Ltd v K-Aire Pty Ltd (2005) 221 CLR 297; Tenderwatch Pty Ltd v Reed Business Information Pty Ltd [2008] FCA 931; Warman International Ltd v Dwyer (1995) 182 CLR 544, considered.
POLYAIRE PTY LTD v K-AIRE PTY LTD & ORS
[2012] SASC 75Civil
WHITE J. Is an infringer of a registered design, who must account for any profits he derived from the manufacture or supply of infringing articles, required to account for a portion of the salary he received as managing director of the principal infringer? That is the principal question remaining in this action.
There are subsidiary issues. If the first question is answered in the affirmative, how is the portion of salary to be calculated? Is the salary to be assessed in some way by reference to the income generated by the sales of the infringing articles only or, alternatively, by reference to the income generated by the sale of kits which include the infringing articles?
Background
The plaintiff (Polyaire) commenced these proceedings in 1996. Ultimately it sought relief against nine defendants of whom all but two were corporate entities. Mr Colebatch is the third defendant and Mr Benfield the fourth defendant. The second defendant is Kemalex Pty Ltd. The ninth defendant was formerly known as Kemalex Plastics Pty Ltd. Mr Colebatch was the managing director of those two companies at the relevant times.
Polyaire claimed that the defendants had infringed its monopoly in the design of an air-conditioning air outlet director registered under the Designs Act 1906 (Cth). An outlet director is that part of an air‑conditioning unit which directs the flow of air from the unit into the area to be air‑conditioned.
On 19 May 1999 the Court ordered that the issues of liability should be determined separately from, and in advance of, the remaining issues.
Following the trial of the liability issues, Besanko J found that a fraudulent imitation of registered design No 110628 (to which the parties applied the shorthand “RD2”) had been applied to two articles.[1] Those articles were outlet directors manufactured by Kemalex and, later, by Kemalex Plastics and sold, offered for sale, or kept for sale, by five of the corporate defendants.
[1] Polyaire Pty Ltd v K‑Aire Pty Ltd [2003] SASC 41; (2003) 226 LSJS 109.
Besanko J found Mr Colebatch to be jointly liable with the five corporate entities for the acts of those companies which infringed Polyaire’s monopoly in RD2 on the following basis:
Mr Colebatch is jointly liable with K-Aire, Kemalex, K-Aire Sales, K-Aire Wholesale and Kemalex Plastics for such acts of those companies which infringed the plaintiff’s monopoly in RD2. He directed and procured the relevant acts and I also find that he acted in concert with each company pursuant to a common design to carry out the relevant acts. At all material times, Mr Colebatch has been the sole director of K-Aire and Kemalex Plastics. At all material times he was the managing director of Kemalex and it seems that he controlled the activities of that company. In addition, he or interests associated with him, owned Kemalex via Redgum Pty Ltd.
I am satisfied that Mr Colebatch was in a position to control, and did in fact control, the activities [of] K-Aire, Kemalex and Kemalex Plastics.[2]
[2] Ibid at [393]-[394]; 172.
Besanko J made similar findings concerning Mr Benfield in relation to the first, fifth and sixth defendants.
There were appeals[3] arising from Besanko J’s decision to which it is not necessary to refer presently.
[3] K-Aire Pty Ltd v Polyaire Pty Ltd [2003] FCAFC 310; (2003) 60 IPR 512; Polyaire Pty Ltd v K-Aire Pty Ltd [2005] HCA 32; (2005) 221 CLR 287.
Besanko J later made orders to facilitate Polyaire making an election between a remedy by way of damages and a remedy by way of an account of profits. These included orders requiring Mr Colebatch to swear affidavits as to a number of specified matters. Mr Colebatch swore two such affidavits: one on 10 February 2006 and one on 26 June 2007 (the Colebatch affidavits).
On 19 October 2007, Polyaire elected, in the following terms, for an account of profits in lieu of damages:
… [T]he plaintiff now elects for an account of profits to be given by each of the defendants in respect of all infringing acts committed by them relating to Australian Registered Design 110628. For the avoidance of doubt, the plaintiff requires that such account include an account of the profits derived by each of the defendants from the manufacture and/or supply of other products supplied as part of packages or kits which include the infringing articles (following the decision of His Honour Justice Besanko delivered on 30 September 2005 in this matter).
Counsel for Polyaire acknowledged that the words in parentheses at the end of this passage did not add anything of substance to its election. Although Polyaire did not refer expressly to s 32B(1) of the Designs Act 1906, it seems that it made the election under that provision.
It is no longer possible for Polyaire to pursue an account of profits claim against the first, fifth, sixth, seventh and eighth defendants, as they have been deregistered. The second and ninth defendants were placed in liquidation on 21 June 2006, and Polyaire no longer pursues its claims against them in this Court. Instead, it lodged proofs of debt relating to its claim with the liquidators. Those proofs were not admitted in full. Polyaire is now pursuing appeals in the Federal Court against the liquidators’ disallowances.
On 21 November 2011, Polyaire informed the Court that it no longer pursued its claim for an account of profits against Mr Benfield. That leaves Mr Colebatch, the third defendant, as the only defendant against whom Polyaire now seeks relief in this Court by way of an account of profits in respect of the infringing conduct of the defendants.
Polyaire contends that Mr Colebatch should account to it in respect of the salary he received as a director of Kemalex in the financial years ending on 30 June in 1997 and 1998, and in respect of the salary he received as a director of Kemalex Plastics in the financial years ending on 30 June 1999 to 30 June 2005 inclusive. It accepts that, apart from his salary and related benefits, Mr Colebatch did not receive any other profit or income from Kemalex or Kemalex Plastics in any relevant period which can be attributed to the defendants’ infringements.
Polyaire recognises that the salary paid to Mr Colebatch in the period from 1997 to 2006 was undivided, whether by reference to activity or time. It was the one salary which he received for all his activities as managing director. Polyaire also recognises that the manufacture and sale of air-conditioning units containing the infringing articles comprised only a small portion of the products manufactured and sold by Kemalex and Kemalex Plastics respectively. It asserts that in these circumstances, it should be entitled to an account in respect of a portion of the salary paid to Mr Colebatch. It proposes an apportionment by applying to Mr Colebatch’s annual salary, the percentage of gross revenue which Kemalex and Kemalex Plastics derived from their sales of the infringing articles.
Polyaire does not make any claim in the alternative, ie, that, should its claim for a portion of the salary fail, Mr Colebatch should account to it on some other basis. Further, Polyaire does not make any claim against Mr Colebatch of a derivative kind, ie, that he be required to account to it for the profits made by his co‑infringers.
At least in theory, it may have been appropriate to consider separately the salary which Mr Colebatch received in each year of the infringing conduct. However, neither party submitted that this was necessary. That being so I will consider the matter in the same global way as did counsel.
It is an agreed fact that each of Kemalex and Kemalex Plastics manufactured and sold kits which included air‑conditioning outlet directors (outlet directors) which infringed RD2. The kits comprised a register, a frame, acetal clips, metal clips and outlet directors. Mr Holmes’ report of 26 October 2011 shows that all of the infringing outlet directors manufactured by Kemalex were sold as part of these kits, and that 99.9 per cent of those manufactured by Kemalex Plastics were sold in that way.
Polyaire’s principal claim is that the account of profits by Mr Colebatch should be made by reference to the sale of the kits. In the alternative, it contends for an account of profits by reference to the sale of the outlet directors alone.
Mr Colebatch denies that he is obliged to account to Polyaire in respect of the salary which he received as a director from Kemalex and Kemalex Plastics. He contends, in the alternative, that if he is so obliged, the account should be by reference to the sale of the outlet directors only.
The parties agreed on a number of matters concerning the computation of Polyaire’s claims in the event that it is entitled to an account on either basis. These included the salary paid to Mr Colebatch, the percentage proportions of the general revenue received by each of Kemalex and Kemalex Plastics from the sales of kits and outlet directors in each relevant financial year, and the amounts calculated by reference to those matters. The parties’ agreement can be summarised in the following table:
Kemalex
FYE Salary
$
Proportion of
General
Revenue
from Sale
of KitsProportion of
General
Revenue
from Sale
of Kits as a
Proportion ofSalary
$
Proportion of
General
Revenue from
Sale of
Outlet DirectorsProportion of
General
Revenue
from Sale of Outlet
Directors as
a ProportionOf Salary
$
30/6/97
100,000
2.498%
2498.00
1.578%
1,578.00
30/6/98
100,000
5.738%
5,738.00
3.631%
3,631.00
Kemalex Plastics
30/6/99
119,321
7.187%
8,575.60
4.491%
5,358.71
30/6/00
150,000
6.599%
9,898.50
4.12%
6,180.00
30/6/01
149,999
8.392%
12,587.92
5.243%
7864.45
30/6/02
174,627
4.32%
7,543.89
2.698%
4,711.44
30/6/03
174,627
2.952%
5,154.99
1.843%
3,218.38
30/6/04
174,121
2.115%
3,682,66
1.322%
2,301.88
30/6/05
163.545
0.967%
1,581.48
0.606%
991,08
Total $57,261.04 $35,834.94
Thus, Polyaire contends that Mr Colebatch should account for a total sum of $57,261.04 together with interest. In the alternative, if it is entitled to its account by reference to the outlet directors only, it claims the sum of $35,834.94 together with interest.
Counsel for Polyaire acknowledged the modesty of these claims and also the absence of any previous authority indicating the appropriateness of the form of account which Polyaire now proposes.
The Proceedings and the Evidence
Following the filing of the Colebatch affidavits (and corresponding affidavits by Mr Benfield) a Judge of this Court ordered Polyaire to file points of claim as to the profits which it alleged had been derived by Messrs Colebatch and Benfield from the infringements, and the latter to file points of defence. Thereafter the taking of the account has proceeded by reference to those pleadings and, since Polyaire’s abandonment of its claim against Mr Benfield, by reference to the pleadings concerning Mr Colebatch only.
Polyaire tendered two reports from an accountant, Mr Holmes, and made him available for cross-examination. The facts and assumptions made by Mr Holmes in each of his reports were agreed. Apart from this evidence, Polyaire relied on the admissions in the pleadings and on a series of agreed facts.
During the course of his cross-examination of Mr Holmes, counsel for Mr Colebatch tendered the Colebatch affidavits on the basis that they had been relied upon by Mr Holmes. I refused to accept the tender on that basis. However, counsel later renewed the tender as part of Mr Colebatch’s own case. The only objection which Polyaire then made to the tender was one of relevance, which I overruled.
General Principles
Section 32B(1) of the Designs Act 1906 provided:
32B(1) The relief that a court may grant in an action or proceeding for the infringement of the monopoly in a registered design 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.
Thus, the relief for which Polyaire has elected is statutory in origin although, as counsel for Mr Colebatch put it, relief with an equitable pedigree. Windeyer J referred to this aspect of the remedy in Colbeam Palmer Ltd v Stock Affiliates Pty Ltd:[4]
[T]he account of profits retains the characteristics of its origin in the Court of Chancery. By it a defendant is made to account for, and is then stripped of, profits he has made which it would be unconscionable that he retain. These are profits made by him dishonestly, that is by his knowingly infringing the rights of the proprietor of the trademark.[5]
Later, Windeyer J said:
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, trademark – 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” ….[6]
(Citation omitted)
[4] (1968) 122 CLR 25.
[5] Ibid at 34.
[6] Ibid at 42.
The approach of Windeyer J in Colbeam Palmer was followed by the High Court in Dart Industries Inc v Décor Corporation Pty Ltd.[7] The majority said:
Damages and an account of profits are alternative remedies. An account of profits was a form of relief granted by equity whereas damages were originally a purely common law remedy. As Windeyer J pointed out in Colbeam Palmer Ltd v Stock Affiliates Pty Ltd, even now an account of profits retains its equitable characteristics in that a defendant is made to account for, and is then stripped of, profits which it has dishonestly made by the infringement and which it would be unconscionable for it to retain. 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 ordinary requirement of the principles of unjust enrichment that regard be paid to matters of substance rather than technical form is applicable.[8]
(Citations omitted)
[7] (1993) 179 CLR 101.
[8] Ibid at 110-11.
Reference may also be made to Warman International Ltd v Dwyer,[9] a case concerning the liability of a defaulting fiduciary to account for the profit made, in which the High Court said:
The assessment of the profit will often be extremely difficult in practice; accordingly it has been said that “[w]hat will be required on the inquiry … will not be mathematical exactness but only a reasonable approximation”. What is necessary however is to determine as accurately as possible the true nature of the profit or benefit obtained by the fiduciary in breach of his duty.[10]
(Citations omitted)
[9] (1995) 182 CLR 544.
[10] Ibid at 558.
Thus, in an account of profits under s 32B, a defendant will be required to disgorge any profit or benefit which can be attributed to its unlawful use of the registered design, and which it would be unconscionable for it to retain.
Possible Revised Claim by Polyaire
In some of its final submissions, Polyaire indicated that it was not seeking an account of profits in the sense discussed in the authorities but instead some more generalised form of equitable relief. Counsel’s submissions included statements to the effect that Polyaire was seeking relief “in the nature of [an] account of profits”; that this case was outside “the classic accounting exercise”, that “it is a claim that seeks to draw on the equitable principles that underpin an account of profits but [it] is not a true accounting case”; and the “situation of equity fashioning a remedy to the facts of the case” was required so that some portion of Mr Colebatch’s salary could be regarded as his profit.
To the extent that these submissions indicated that Polyaire was pursuing some revised claim, or a revised from of relief, I agree with counsel for Mr Colebatch that it should not be permitted. It is outside the relief contemplated by s 32B(1) of the Designs Act 1906, outside the terms of Polyaire’s own election, outside the terms of Polyaire’s pleading in support of that claim, and was not mentioned in the opening by counsel of Polyaire’s case. The parties presented their evidence on the basis that Polyaire was seeking an account of profits, rather than any other form of relief.
This litigation has a very long history, having been on foot in this Court since 1996, and the appeals arising from the judgment of Besanko J having been finalised in 2005. It is time that it is finalised. Apart from indicating that it now suited Polyaire’s purposes, counsel did not advance any submission justifying a departure from its previously pleaded and identified case. Nor did counsel refer to any authority which may permit a court to proceed other than in accordance with the established principles which apply in cases such as the present.
In these circumstances, I consider that Polyaire’s claim for an account of profits by Mr Colebatch should be determined in accordance with the principles discussed in the authorities referred to above.
Was Mr Colebatch’s Salary or a Portion of it a Profit Derived from the Infringement of Polyaire’s Registered Design?
The first submission of Mr Colebatch was that his salary in the relevant years was neither profit nor attributable to the use of Polyaire’s registered design. It is convenient to consider these two issues together.
Polyaire faces difficulties in having any portion of Mr Colebatch’s salary characterised for present purposes as profit attributable to the infringing conduct.
Polyaire led no evidence of the way in which Mr Colebatch’s salary came to be determined, of Mr Colebatch’s duties as managing director of Kemalex and Kemalex Plastics respectively, or of the allocation of his time to the various business activities of the defendants or, for that matter, as to the nature and scale of the businesses of those companies.
Some information about these matters can be discerned from the evidence. It seems that each of Kemalex and Kemalex Plastics was engaged in the general manufacture of plastics products; Kemalex in 1997 and 1998, and Kemalex Plastics from 1999 to 2005. Mr Holmes’ first report indicates that Kemalex Plastics’ gross revenue from sales in the financial years ending on 30 June 2001 through to 30 June 2001 ranged from approximately $12m to approximately $21m. The corresponding information is not available in respect of the earlier years.
As can be seen from the table set out earlier in these reasons, the sales of outlet directors and kits accounted for a relatively small proportion of the gross revenue of Kemalex and Kemalex Plastics, indicating that they must have had other significant business activities. This makes it less likely that the infringing conduct may have been a significant feature in the determination of Mr Colebatch’s annual salary.
Some inferences may be drawn from the salary amounts. It seems improbable that Mr Colebatch’s salary had a direct relationship with the companies’ gross sales. If it were otherwise, it is unlikely that Mr Colebatch would have received identical, or relatively identical, salaries in 1997 and 1998; in 2000 and 2001; and in 2002, 2003 and 2004. This is particularly so given that Mr Holmes’ first report reveals considerable fluctuations in the gross revenue of Kemalex Plastics in the years 2001 to 2005. It is also to be observed that, apart from the increase (in round terms) of $25,000 between 2001 and 2002, Mr Colebatch’s salary during that period was stable.
Putting these matters around the other way, the fact that Mr Colebatch’s salary in the years 2001 to 2005 was generally stable, while there were in those same years considerable fluctuations in the gross revenue of Kemalex Plastics and in the contribution which sales of the infringing articles made to that gross revenue, contraindicates some form of direct relationship between his remuneration and the turnover of the companies, or of any particular business activity.
Polyaire did not lead any evidence as to Mr Colebatch’s salary before 1997, from which an inference could be drawn (if it was open) that, because some increase in salary had occurred contemporaneously with the commencement of the infringing conduct, it was to be attributed to that conduct. Even if it could, Mr Colebatch could be called upon to account only for the amount of that increase.
This makes it difficult to conclude that the salaries paid to Mr Colebatch would or may have been different were it not for the infringing conduct, or at least that they were influenced in some way by reason of the infringing conduct and its consequences. No doubt, some regard was had in a general way to the financial performance of Kemalex and Kemalex Plastics when Mr Colebatch’s salary was determined. In this general way there may be some link between the income derived by Kemalex and Kemalex Plastics from the infringing conduct, but the evidence does not go beyond that. There is no basis upon which the Court can conclude that, other than in this very indirect way, Mr Colebatch received any benefit in his salary from the infringing conduct.
Polyaire did not lead any evidence to the effect that Mr Colebatch had been able to retain his position as managing director because of the infringing conduct. That is, evidence to the effect that his procurement of Kemalex and Kemalex Plastics to engage in the infringing conduct had somehow enabled him to retain the position of managing director and the emoluments which went with it.
At one stage, Polyaire submitted that it was Mr Colebatch who should bear the consequence of the absence of evidence on these matters. Counsel submitted that, in the absence of evidence that Mr Colebatch had any other functions or duties as managing director, the Court could infer that he had none. This submission ran counter to Polyaire’s own acceptance that it had the onus of establishing that Mr Colebatch had obtained some profit attributable to the infringement and is, in any event, contrary to the ordinary understanding of the functions and responsibilities of a managing director in businesses of the apparent size of Kemalex and Kemalex Plastics. It also seems inconsistent with Polyaire’s agreement with Mr Holmes’ assumption that Mr Colebatch’s remuneration was “at a commercial rate”.
Polyaire did not lead any evidence to the effect that the salary paid to Mr Colebatch was, even in any single year, some form of colourable transaction. That is, that although payments were expressed as salary they were in truth the diversion to Mr Colebatch of amounts which could have been more readily identified as profits in the hands of Kemalex or Kemalex Plastics. On the contrary, Mr Holmes identified in [5.3.1] of his first report his assumption that Mr Colebatch had been remunerated “at a commercial rate” throughout the period of manufacture and sale of the infringing articles. The statement of agreed facts indicated that this was one of the assumptions made by Mr Holmes which was agreed. Polyaire’s agreement to that effect is inconsistent with any suggestion by it that Mr Colebatch was paid a salary as a form of colourable device, or that the amount which he was paid was not justified having regard to his general duties.
I add that on my reading of Mr Holmes’ first report it is not entirely clear that he was aware of the actual salary paid to Mr Colebatch in any one year. He does not refer to the actual figures. However, having regard to the materials made available to Mr Holmes for the purposes of the preparation of his reports it seems that he must have had access to documents containing Mr Colebatch’s salary, and I think it appropriate to proceed on that basis.
Counsel for Polyaire referred to the authorities indicating that, in the calculation of the profit made from an infringement, the infringer is not entitled to deduct an amount for his or her own time and effort in effecting the infringement. In Leplastrier & Co Ltd, v Armstrong‑Holland Ltd,[11] Harvey CJ in Eq said:
Under no circumstances can [the infringer], 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 be 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.[12]
The majority in Dart Industries Inc v Decor Corporation Pty Ltd referred to this passage,[13] although noting that it took no account of opportunity costs.
[11] (1926) 26 SR (NSW) 585.
[12] Ibid at 593.
[13] (1993) 179 CLR 101 at 111-5.
Next, Polyaire referred to Tenderwatch Pty Ltd v Reed Business Information Pty Ltd,[14] a copyright infringement case. Heerey J referred to Leplastrier and Dart and said:
However, nothing that the majority said in Dart casts doubt on the opening part of Harvey CJ in Eq’s statement quoted above. It would be wrong in principle to allow Mr Wallz a deduction for the time he had spent working up his presentation with the aid of Tenderwatch’s Original Manual. This would be tantamount to making a copyright owner pay an infringer for the time and effort spent in infringement. As was said in Sheldon v Metro‑Goldwyn Pictures Corp 106 F 2d 45 (1939) at 51, “a plagiarist may not charge for his labour in exploiting what he has taken”.[15]
[14] [2008] FCA 931.
[15] Ibid at [18].
These authorities show clearly enough that in the calculation of the profit derived from an infringement, the infringer cannot claim any deduction for his or her own time and effort.
However, I do not regard that principle as being of assistance in the present case. In my opinion, counsel’s reliance on it begged the question to be decided, namely, whether Mr Colebatch’s salary, or some portion of it, could be attributed to the defendants’ infringing conduct. If it could, there would be no need to resort to Leplastrier, Dart and Tenderwatch in order to conclude that Mr Colebatch should be required to disgorge it. But if no such attribution can be made, the Leplastrier and Tenderwatch principle cannot make good the deficiency. One cannot by a process of inverted reasoning infer from the principle that no deduction from the profits made by an infringer may be made on account of the infringer’s own time and energy that an amount which the infringer did receive must be regarded as profit, let alone a profit attributable to the infringing conduct. Perhaps put more shortly, one cannot use a principle relating to the deductions which may properly be made from an acknowledged profit to determine the antecedent question of whether the infringer has received any benefit at all from the infringing conduct.
Polyaire’s submissions amounted in effect to the following: Mr Colebatch had been remunerated for the services which he provided to Kemalex and Kemalex Plastics; these services included directing and procuring the infringing conduct; so Mr Colebatch must have been remunerated for that conduct. At a level of generality, this simple syllogism cannot be gainsaid, but it does not establish that Mr Colebatch received some profit attributable to the infringing conduct of the defendants, let alone a profit which it would be unconscionable for him to retain.
It was an agreed fact that Kemalex had claimed the salary paid to Mr Colebatch in the financial years ending on 30 June 1997 and 30 June 1998 in its calculation of profit for those years, and that Kemalex Plastics had done likewise in the financial years ending on 30 June 1999 through to 30 June 2005. Counsel for Mr Colebatch submitted that if salary or wages paid are correctly taken into account in the calculation of the profit, they cannot, conceptually, form part of the profit of the recipient, such as Mr Colebatch. He argued that this was an additional matter indicating that Mr Colebatch’s salary could not be regarded as profit.
As a general proposition, I think that the submission may require some qualification. It by no means follows that a payer’s legitimate expense may not be profit in the hands of the recipient, or that the characterisation of a payment from the payer’s perspective will be decisive of the characterisation of the payment in the payee’s hands.
However, it is not necessary or appropriate to reach a final view about the submission. The Court has only limited evidence; insofar as the submission turns on the proper characterisation of the payments made by Kemalex and Kemalex Plastics, that will, on my understanding, be a live issue in the appeals in the Federal Court against the liquidators’ partial disallowances of Polyaire’s proofs of debt; and it is not necessary for this Court to determine the issue in order to resolve Polyaire’s present claim. Those matters indicate the desirability of this Court exercising caution about deciding Polyaire’s claim on the basis of this submission of counsel for Mr Colebatch.
I conclude that although Mr Colebatch was remunerated by Kemalex and later by Kemalex Plastics during the period in which the defendants engaged in infringing conduct, the evidence does not establish that the salary which he received, or any portion of it, should be characterised as profit attributable to the infringing conduct. It is the absence of any link between the salary, on the one hand, and the infringing conduct on the other, which is the critical matter. Accordingly I consider that Polyaire’s claim that Mr Colebatch should account to it for some portion of his salary should be dismissed.
By which Sales should the Profits be Calculated?
Given the finding which I have just made this issue does not, strictly speaking, require determination. However, in case this matter goes further, I will state my views.
As noted earlier, Polyaire submits that the account of profits for which it elected should be made by reference to the sales of the kits sold by Kemalex and Kemalex Plastics which contained the infringing outlet directors. It submits that the outlet directors were an essential component of the kits, so that by reason of their infringement, Kemalex and Kemalex Plastics were able to obtain sales of the kit, and thereby derive greater revenue than if the outlet directors had been sold individually. Accordingly, it submits that the profit for which the defendants should account are those derived from the sales of the kits as a whole, and not just from the outlet directors.
Issues of this kind arise frequently in the accounting for profits derived from the use of another’s intellectual property. That is because it is common for infringers to sell the infringing articles as part of a composite whole, or to make some improvements to it, or in some other way to apply their own skill and judgment in obtaining sales.
Windeyer J referred to the problem in Colbeam Palmer Ltd v Stock Affiliates Pty Ltd:[16]
It has been recognised that it very difficult sometimes to establish how much of the total net profit which an infringer has made by sales of his goods is to be attributed to his selling them under another man’s mark. That problem, the apportionment of a total profit, has been discussed many times, … It is similar to the difficulty … of a patent infringed by the incorporation or use of a patented invention or process as part of a larger machine or process. The same questions and the same difficulty in accounting for profits or assessing damages can also arise if a copyright is infringed by the publication of copyright material as part only of a larger work …
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.[17]
[16] (1968) 122 CLR 25.
[17] Ibid at 43.
In Dart Industries Inc v The Décor Corporation Pty Ltd,[18] the High Court confirmed the principle stated by Windeyer J and said that its application in the circumstances of a given case was ultimately a question of fact.[19] The majority noted that the issue could be addressed by consideration of the reason for sale of the composite product, or the reason for its production.
[18] (1993) 179 CLR 101.
[19] Ibid at 121.
In Dart, the trial Judge considered that the sales achieved by Decor were attributable to its unlawful use of the press‑button seals and for that reason directed that the profits for which Decor should account included the profits from the canisters to which the press‑buttons seals were fitted. On appeal, the Full Federal Court applied the reason for production approach:
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 characterised the infringing product was the press‑button lid, without which this particular container would never have been produced at all.[20]
(Emphasis added)
[20] Decor Corporation Pty Ltd v Dart Industries Inc (1991) 33 FCR 397 at 407.
Polyaire adduced relatively little evidence to assist in the resolution of the issue of fact in this case. It relies principally on the analysis of Mr Holmes that all of the 51,376 outlet directors sold by Kemalex were part of a kit and that 99.9 per cent of the 375,977 outlet directors sold by Kemalex Plastics were part of a kit. Kemalex Plastics sold only 345 of the infringing outlet directors as individual components. Polyaire submits that the Court should infer from Mr Holmes’ “statistical analysis” that the sales of the kits as a whole were attributable to the inclusion in the kits of the outlet directors.
In his judgment following the trial, Besanko J referred to the practice of outlet directors being sold as part of a kit. He said:
Outlet directors are generally sold as part of a kit which includes ducting and other componentry. There are a number of advantages in a purchaser being able to purchase all of his requirements from the one vendor.[21]
It is to be noted that the advantage to which Besanko J referred was that of a purchaser being able to deal with one vendor, rather than that of the outlet directors having a distinctive influence in the kit which purchasers will select.
[21] [2003] SASC 41 at [402]; (2003) 226 LSJS 109 at 173.
However, Besanko J did also refer to evidence in the trial to the effect that the outlet directors produced by Polyaire were much admired in the market and were popular.[22]
[22] Ibid at [116], [367] and [376]; 129, 168 and 170.
It is also reasonable to infer that the defendants made their fraudulent imitation of Polyaire’s design because of the assistance which they considered it would give them in the market.
However, in my opinion, these matters, even when considered in combination, fall short of establishing that the outlet directors were such an important element of the kits that the kit sales achieved by Kemalex and Kemalex Plastics should be attributed to their inclusion. The defendants’ practice of including outlet directors in kits was not novel and cannot be said to have been prompted by their infringement of Polyaire’s registered design. As Besanko J noted, this is the usual way by which outlet directors are sold. That finding of Besanko J makes rather unsurprising Mr Holmes’ conclusion that all of the outlet directors sold by Kemalex, and virtually all of the outlet directors sold by Kemalex Plastics, formed part of a kit.
I also consider that the inference which Polyaire submits can be drawn from Mr Holmes’ “statistical analysis”, ie, the inference that the kit sales were attributable to the inclusion of the infringing outlet directors, is not sound. In the first place, it rather overstates things to describe the process in which Mr Holmes engaged as “a statistical analysis”. Although it was no doubt a time consuming task, Mr Holmes did no more than total the number of outlet directors sold, total the number of kits which were sold, and then express the former as a percentage of the latter. The results of that arithmetical exercise suggest that it was no coincidence or chance that the outlet directors were sold as part of kits, but that was a matter which had in any event been a subject of the previous finding by Besanko J.
In any event I do not consider that it can be inferred that Kemalex and Kemalex Plastics achieved the sales of the kits which they did principally because of the inclusion of the infringing articles. The evidence recounted by Besanko J in his trial judgment suggests that there were, at the time, other types of outlet directors which did not infringe Polyaire’s registered design. Polyaire has not led any evidence to the effect that these alternatives were not substitutable, nor any expert evidence as to the extent of the sales which may have been expected, had those alternatives been used.
Further, Polyaire had not led evidence bearing on the importance (or lack of importance) of the other components in the kits sold by Kemalex and Kemalex Plastics to the sales which were achieved. At least on the evidence in these proceedings, it is just as possible that it was the design or construction of those components which was attractive to purchasers and which accounts for the sale of the kits.
I am conscious that it is the defendants who are the wrongdoers, and that Polyaire invokes a remedy which has equitable origins. This suggests that the Court should not be astute to make findings adverse to Polyaire on these issues. However, even when regard is had to that consideration, I am not persuaded that the evidence upon which Polyaire relies justifies the conclusion that, in the event that it is entitled to an account of profits, that account should be made by reference to the sale of the kits, rather than to the outlet directors alone.
Conclusion
For the reasons given above, I conclude that there is no amount in respect of which Mr Colebatch should be held required to account to Polyaire. I will hear from the parties as to the orders which are appropriate to give effect to this conclusion, and as to costs.
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