Judge refuses to throw the baby out with the bathwater – IPEC on account of profits for design infringement

The decision of the UK Intellectual Property Enterprise Court (IPEC) in Bei Yu Industrial Co v Nuby (UK) LLP follows in the wake of Origin Beauty v Oh Polly (reported by Law-Now here) to further clarify the principles for calculating monetary sanctions for design infringement. The Oh Polly case – where the claimant was awarded an unprecedented six-figure sum (over £450,000) by way of standard and punitive damages due to the flagrancy of the infringement - was a sharp wake-up call for the design industry where financial sanctions for infringement have traditionally been more modest. The Nuby decision sets out some useful guidance on the factors which will be considered when calculating an account of profits for design infringement.

Key principles of a profits assessment

The defendant, Nuby, is the producer and importer of various baby products, including the Nuby baby bath which was held to infringe the EU and UK registered design rights of the claimant, Bei Yu. In its judgment following a trial on an account of profits, the IPEC recounted the steps for calculating profits for design infringement.

1. In contrast to damages (whose aim is to put the claimant in a position as if the infringement had never occurred), the purpose of an account of profits is to deprive the infringer of its improperly made profits, and to transfer these to the wronged party.
2. The relevant “profits” are calculated by taking the value of sales of the infringing products, minus the infringer’s allowable costs.
3. Broadly speaking, “allowable” expenses include:
   1. the direct costs of purchasing and importing the infringing products;
   2. the proportion of the infringer’s general overheads that is attributable solely to the infringing acts (meaning that general overheads which would have been incurred anyway are not deductible).
4. When a general overhead deduction can be made, it will be limited to the proportion of the overhead figure that can be fairly attributed to the infringing activities (as opposed to any non-infringing activities).

This method of calculation is complex as it involves potentially subjective determinations, such as what costs ‘would have been incurred anyway’ and what counts as being ‘solely’ or ‘fairly’ attributed to the infringing activities. These matters can be quite difficult to distil from a business’ accounts. The judgment put these principles under the microscope and shed some light on how they are applied in practice.

Disputed issues

Could the defendant make general overhead deductions?

The burden was on the defendant to prove that, if it had not imported and sold the infringing baby baths, it would have incurred the same overheads in relation to the sale of non-infringing products instead. The judge tackled this question by asking whether the defendant was so wedded to the infringing design that no other design would have been acceptable in its place. On the facts, he held that Nuby were not so wedded, and would have incurred the same overheads for non-infringing products. This was supported by evidence that the defendant had a constantly changing portfolio of products (with more than 60 new products a year), so the adoption of a different design would have presented no difficulties. Moreover, that the defendant did stop supplying the infringing product in 2021 and supplied all but two of its customers with different designs of the baby bath. Therefore, the infringing design was replaceable with a non-infringing one, so the deduction of general overheads was permissible.

Which overheads were deductible?

Nuby sought to deduct wages and consultancy costs from its gross profit. Wages were held non-deductible owing to a lack of evidence that those salaries had any relation to the design or development of the Nuby baby bath. Consultancy fees were held to be deductible despite arguments over whether they were “improper payments”, as the judge refused to engage in a debate on the extent to which particular items of company expenses were justified or reasonable, provided they were in fact incurred. Bad debts which were wholly unrelated to the infringing product were not deductible.

The correct approach to apportionment

The judge highlighted the three possible approaches to apportionment:

1. “Sales revenue” approach – working out the percentage of the infringer’s total sales revenue that was attributable to its infringing activities and apportioning the general overheads according to that percentage (this was Nuby’s proposed approach).
2. Product approach – making apportionment by reference to how many of the defendant’s products (in the sense of product lines or SKUs) were infringing. (This was Bei Yu’s proposed approach, who put to the judge that as Nuby’s baby bath was only one of 280 products marketed by Nuby, this led to a permitted deduction of 0.36% of the relevant overheads.)
3. Volume approach – calculating the number of infringing products (meaning volume of units) sold as against the total number of products sold by the infringer in the relevant period.

As the ‘volume’ approach had not been pleaded by either party, the judge deferred to Jack Wills Ltd v House of Fraser (Stores) Ltd [2016] EWHC 626 which allowed different methods of apportionment for different kinds of overhead, to achieve the “least unrealistic outcome.”

• For Nuby’s factoring costs (which included penalties, relevant marketing, baby shows, gross wages, legal fees, premises and repairs) the judge held that the “sales revenue” approach was the least unrealistic method of apportionment. The judge did concede that, in relation to penalties, gross wages, and cost premises, there may be little clear correlation between the cost claimed and the value of the sales of the Nuby baby bath as a proportion of the sales as a whole. However, he stated that Bei Yu’s proposed “product” approach (using the ‘one out of 280’ basis of apportionment) might be even more unrealistic.
• In relation to overhead costs for the website, the judge held that the “product” approach should be applied, rather than the sales revenue approach. This is because the cost of putting details of a product on to the website was not affected by the value of the sales of that product and would be broadly the same for all products. The judge also held that the “product” approach would be more realistic in relation to the overhead costs for telephone and IT, and the stationery and office equipment. This is because there was no evidence that the level of those costs was dictated by the value of the sales of particular products.

Conclusion

This judgment provides a helpful reminder and clarification of some of the key principles of calculating an account of profits in design infringement cases, and the evidential requirements. In order to be allowed to deduct general overheads, the defendant must be able to show that they were not so wedded to the infringing design that no other design would have been acceptable. Evidence of a fast-evolving product line, and ability to switch out the infringing product, will be compelling. The apportionment of overheads to infringing activities is likely to be the most difficult and subjective aspect of an account of profits, given the room for argument on the extent to which such expenses are truly relatable to the infringing product, distinct from those which would have been incurred in any event. The judge accepted that apportionment is a reasonably broad-brush exercise, and that a detailed analysis of the defendant’s financial records would not be proportionate. However, the court will take a pragmatic approach and can apply a combination of methods of apportionment to different categories of overheads, in order to provide the least unrealistic outcome.

Article co-authored by Georgina Morris, Trainee Solicitor at CMS.