Dart Industries Inc v The Decor Corporation Pty Ltd and Rian Tooling Industries Pty Ltd
179 CLR 101(Judgment by: Mason CJ, Deane J, Dawson J, Toohey J)
Dart Industries Inc
vThe Decor Corporation Pty Ltd and Rian Tooling Industries Pty Ltd
Judges:
Mason CJ
Deane J
Dawson J
Toohey JMcHugh J
Legislative References:
Patents Act 1952 - The Act
Income Tax Assessment Act 1936 - s 31(1)
Patents Act 1952 - s 93(b); s 94
Judgment date: 29 September 1993
Judgment by:
Mason CJ
Deane J
Dawson J
Toohey J
The appellant ("Dart") was the successful plaintiff in an action in the Supreme Court of Victoria against the respondents ("Decor" and "Rian") for infringement of a patent in respect of press button seals, or lids, used to seal plastic kitchen canisters [1] . Rian manufactured, with tooling provided by Decor, and Decor produced and sold, plastic kitchen canisters with the press button seals.
Dart having elected between damages and an account of profits, the trial judge, King J, ordered an account of profits by Decor and Rian. In giving directions, King J dealt with two questions, the first of which falls to be determined upon this appeal and the second of which is raised in an application by Decor and Rian for special leave to cross-appeal. The first is whether any part of general overhead costs is allowable as a deduction to Decor or Rian in the determination of the profits made by them from the infringement. The second is whether Decor and Rian must account for profits arising from the manufacture and sale of the composite product, consisting of both the body of the canister and the press button seal, or merely for those profits attributable to the manufacture and sale of the press button seal alone, that being the patented invention.
King J answered the first question by directing that costs categorised as general overhead costs, in the sense that no part of them can be shown by Decor or Rian to be directly attributable to the manufacture or sale of canisters incorporating the patented invention, should not be taken into account as a deduction from gross profits. He directed that only costs which are directly attributable to manufacture or sale of the infringing product should be taken into account [2] . In answer to the second question, King J directed that the profits for which Decor and Rian must account are the profits from the manufacture and sale of the complete canisters, including the press button seals [3] . Upon appeal from the interlocutory orders made by King J, the Full Court of the Federal Court held that the first direction was in error and that Decor and Rian should be "at liberty to show that various categories of overhead costs 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" [4] . The Full Court upheld the second direction given by the trial judge [5] . Dart now appeals, pursuant to special leave, against the rejection by the Full Court of the first direction given by the trial judge and Decor and Rian seek special leave to cross-appeal against the second direction upheld by the Full Court.
Damages and an account of profits are alternative remedies [6] . An account of profits was a form of relief granted by equity whereas damages were originally a purely common law remedy [7] . As Windeyer J pointed out in Colbeam Palmer Ltd v Stock Affiliates Pty Ltd [8] , even now [9] 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 [10] . The ordinary requirement of the principles of unjust enrichment that regard be paid to matters of substance rather than technical form [11] is applicable.
But it is notoriously difficult in some cases, particularly cases involving the manufacture or sale of a range of products, to isolate those costs which are attributable to the infringement from those which are not so attributable [12] .Whilst it is accepted that mathematical exactitude is generally impossible, the exercise is one that must be undertaken, and some assistance may be derived from the principles and practices of commercial accounting [13] . Unfortunately, neither the Australian nor the English authorities contain any precise analysis of the problem.
Leplastrier and Co Ltd v Armstrong-Holland Ltd [14] involved an account of profits arising from the manufacture and sale of concrete mixing machines in breach of a patent. Harvey CJ in Eq drew a distinction between the profits made from the manufacture and sale of the infringing machines, which were to be accounted for, and the profits of the business in connection with the sale of those machines, which were not [15] . He expressed the view that the defendant bore the onus of establishing that the costs were incurred in the manufacture of the machines and observed [16] : "Under no circumstances can he, 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 machines; 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."
In giving the first direction, King J relied upon this passage in the judgment of Harvey CJ in Eq. and adopted the language of his Honour, saying that only costs which are "solely referable" to manufacture or sale of the infringing article may be deducted [17] . Dart relies upon the same passage to support its submission that the correct accounting principle to employ in the taking of an account of profits is incremental costing rather than absorption costing. Incremental costing takes account only of the change in costs incurred by the manufacture or sale of a particular product and does not seek to apportion to the manufacture or sale of that product any part of general overheads, such as rent, light, heating or office expenses, which cannot be identified as a direct result of producing that product. Absorption costing on the other hand is a costing method whereby general overheads are apportioned by some appropriate means, often by sales or volume, to the manufacture or sale of each product.
Dart's argument, based on incremental costing as the proper method for taking an account of profits of infringing activities, is as follows. The profit should be calculated by taking the gross revenue received from the manufacture and sale of the infringing product and deducting from it direct costs, such as materials or labour, solely due to the manufacture or sale of the infringing product, and also deducting overheads, but only to the extent that they were increased by the manufacture or sale of the infringing product. Otherwise, the defendant would be able to deduct expenditure which it would have incurred in any event. This should not be allowed because if any of the revenue from the sale or manufacture could be set off against general overheads which would have been incurred without the infringing activities, the defendant would profit from the infringing activities. The defendant would gain by reducing the cost of its overheads, but would not have to account to the plaintiff for this gain.
Not only does Dart rely on the passage cited from the judgment of Harvey CJ in Eq but it maintains that the same principle is to be seen in the judgment of Windeyer J in Colbeam Palmer Ltd v Stock Affiliates Pty Ltd. That was a case of infringement of a trade mark in which Windeyer J ordered an account of profits. In doing so, he directed that the cost of selling and delivering the infringing articles be taken into account. But he added [18] : "This will include any costs directly attributable to such sales and deliveries. But it should not, I think, include 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 painting sets were a 'side line'". The explanation of the direction given by Windeyer J is that mentioned by him, namely, that the infringing articles were a side line. There appears to have been unused capacity in the defendant's business in the form of overheads which would have been incurred whether or not the infringing articles had been sold and delivered. The sale and delivery of the infringing articles took up that surplus capacity or some of it, and none of the overhead costs was attributable to the infringing activities because those costs would have been incurred in any event.
But there was no evidence in this case that Decor or Rian had unused or surplus capacity. There was evidence that the infringing canisters were an integral part of one consistent product range produced, marketed and sold according to a common system. From this it might be inferred that, had those companies not been engaged in the manufacture and marketing of the infringing press button seal canisters, their capacity for those activities would have been taken up in the manufacture and marketing of alternative products.
Thus the cost of manufacturing and marketing the press button seal canisters may have included the cost of forgoing the profit from the manufacture and marketing of alternative products. The latter cost is called an opportunity cost. "Opportunity cost" can be defined as "the value of the alternative foregone by adopting a particular strategy or employing resources in a specific manner ... As used in economics, the opportunity cost of any designated alternative is the greatest net benefit lost by taking an alternative." [19] The practical reality of this concept was recognized in Schnadig Corp v Gaines Manufacturing Co Inc [20] , where the Court stated: "The alternative available uses of the facilities devoted to the infringement must be considered, and these too will vary."
In calculating an account of profits, the defendant may not deduct the opportunity cost, that is, the profit forgone on the alternative products. But there would be real inequity if a defendant were denied a deduction for the opportunity cost as well as being denied a deduction for the cost of the overheads which sustained the capacity that would have been utilized by an alternative product and that was in fact utilized by the infringing product. If both were denied, the defendant would be in a worse position than if it had made no use of the patented invention. The purpose of an account of profits is not to punish the defendant but to prevent its unjust enrichment.
Where the defendant has forgone the opportunity to manufacture and sell alternative products it will ordinarily be appropriate to attribute to the infringing product a proportion of those general overheads which would have sustained the opportunity. On the other hand, if no opportunity was forgone, and the overheads involved were costs which would have been incurred in any event, then it would not be appropriate to attribute the overheads to the infringing product. Otherwise the defendant would be in a better position than it would have been in if it had not infringed. It is not relevant that the product could not have been manufactured and sold without these overheads. Nor is it relevant that absorption method accounting would attribute a proportion of the overheads to the infringing product. The equitable principle of an account of profits is not to compensate the plaintiff, nor to fix a fair price for the infringing product, but to prevent the unjust enrichment of the defendant.
Of course, further possibilities may in some cases be open on the evidence. Overhead costs might have been increased by the manufacture and sale of the infringing product, or overhead costs might have been reduced had the infringing product not been produced. In either case it may be appropriate to attribute the difference in overhead costs to the infringing product.
It does not appear that in Leplastrier and Co Ltd v Armstrong- Holland Ltd the concept of opportunity cost played any part in the reasoning of Harvey CJ in Eq In allowing the deduction only of expenses "solely referable" to the manufacture of the infringing product, he seems to have intended to exclude overheads except to the extent that they were increased by the manufacture of the infringing product. The examples that he gave indicate such an approach. But this is hardly surprising since the English authorities, even the more recent ones, have not grappled with the concept. Whilst they recognize [21] that the purpose of ordering an account of profits is not to inflict punishment, but is limited to compelling the defendant to surrender profits improperly made, there is little examination of the principles to be employed in ascertaining which profits were derived from the infringement [22] .
In the United States the position is otherwise. It was early recognized in The Tremolo Patent [23] that in the ascertainment of profits arising from the infringement of a patented tremolo attachment to musical instruments, an apportionment of general overheads was required. Strong J in delivering the judgment of the Supreme Court said [24] : "We cannot see why the general expenses incurred by the defendants in carrying on their business, such expenses as store rent, clerk hire, fuel, gas, porterage, etc, do not concern one part of their business as much as another. It may be said that the selling [of] a tremolo attachment did not add to their expenses, and therefore that no part of those expenses should be deducted from the price obtained for such an attachment. This is, however, but a partial view. The store rent, the clerk hire, etc, may, it is true, have been the same, if that single attachment had never been bought or sold. So it is true that the general expenses of their business would have been the same, if instead of buying and selling one hundred organs, they had bought and sold only ninety-nine. But will it be contended that because buying and selling an additional organ involved no increase of the general expenses, the price obtained for that organ above the price paid was all profit? ... If, therefore, in estimating profits, every part is not chargeable with a proportionate share of the expenses, no part can be. But such a result would be an injustice that no one would defend." Employing a similar line of reasoning, Decor and Rian contend that in an account of profits, if overheads are disregarded save to the extent that they were increased by the manufacture of the infringing product, then in a case where every product produced by a defendant infringed a patent, there would be no allowance at all for overheads, even though they would clearly be expenses incurred by the defendant in making the total profit from all the infringements [25] . Such a result is, they contend, unacceptable and indicates that a proper allowance for general overheads should be made.
Some caution is to be exercised in the use of United States authorities dealing with accounts of profits because, in some instances, both damages and an account of profits are available, and because a distinction is drawn between wilful and non-wilful infringement which may affect the profits recoverable. Moreover, the approach adopted in the cases varies to some extent. But it is clear enough that the guiding principle in the United States, as here, is that an account of profits aims to have the defendant account for the actual profit, no more and no less, which it has gained from the infringement.
In Levin Bros v Davis Manufacturing Co [26] , which was a patent infringement case, the Eighth Circuit Court of Appeals upheld a ruling which disallowed any deduction for fixed costs - that is, costs already incurred for plant and the like which did not vary with the volume of production - in determining the profits made from the infringement. But the Court made it clear that it was laying down no invariable rule [27] : "The patent law gives the right to recover all profits from an infringement. 'Profit', as so used, is no mysterious phrase. It means simply all financial gains. Such gains are the difference between expenditures made to produce and sell the infringing articles and the receipts therefrom. Obviously, the application of this rule - the ascertainment of such actual profits - will occasion separate accounting and fact problems in each case because items entering into cost or into receipts will differ. Always, however, the task is to see that the patentee recover every dollar of advantage realized by the infringer from the infringement and no more. No fast and hard rules should or can be stated to guide application of this general rule to the infinite variety of fact situations developed in different cases. ... Because a recurring item, like overhead, is handled a certain way in a given case such is no statement of a rule of law that the same item must be similarly dealt with in all cases. The 'rules' contended for by the parties here are not rules of law. They are but illustrations of applications of the above single broad rule to different fact situations." The Court went on to observe [28] : "It often happens that overhead expenses are applicable to and should be spread over the entire business but where a business is established and in operation and another line is taken on without increase of overhead expenses it is just to the patentee that the actual situation be applied and none of such overhead be charged as an expense of the added line except as it participated in manufacture or sale of the infringing article." Not surprisingly, Levin Bros v Davis Manufacturing Co has been relied upon in the United States as an authority both for and against the deduction of overheads in an account of profits [29] . But that decision accepted the view, in our opinion correctly, that in some cases profit can only be properly assessed by deducting a proportion of at least some of the overheads, including fixed costs. The overheads, if any, to be deducted and the basis of apportionment will depend upon the facts of each case, bearing in mind always that the aim of the exercise is to arrive as closely as possible at the true profit.
The basis of apportionment may vary from case to case. Thus in Sheldon v Metro-Goldwyn Pictures Corp. [30] the Supreme Court of the United States upheld the decision of the Second Circuit Court of Appeals allowing the apportionment of overheads in the computation of profits. The Supreme Court said [31] that the questions involved were questions of fact which had been determined on the evidence. In that case the production of a motion picture infringed copyright. The Second Circuit Court of Appeals allowed the allocation of overheads between the infringing movie and other movies upon the basis of the cost of production. It observed that it was "more likely that a given picture required that proportion of the general services represented by its cost of production, than that each picture shared those services equally" [32] . Sheldon v Metro-Goldwyn Pictures Corp may be contrasted with Wilkie v Santly Bros Inc [33] in which there was infringement of copyright in a song. The music publisher's overheads were allocated upon the basis of the number of songs published within a given period, without regard to the number of copies sold of each song, because the publisher was unlikely to incur a greater proportion of overheads for a hit song than for other published songs.
The guiding principle would seem to be that the onus is on the infringer to provide a reasonably acceptable basis for allocation [34] . This may be the basis of allocation typically used by a manufacturer in that industry.
In My Kinda Town Ltd v Soll [35] Slade J was inclined to think that in the taking of an account of profits the onus of proof fell upon neither party. As we have said, a different view was taken by Harvey CJ in Eq in Leplastrier and Co Ltd v Armstrong-Holland Ltd [36] where he expressed the opinion that the onus is on the defendant to establish that any item of costs was incurred in relation to the manufacture of the infringing articles. The view of Harvey CJ in Eq would seem to be the preferable one, at least so far as it requires that the defendant establish that the overheads in any particular category are attributable to the manufacture or sale of the infringing product. It is a view which is supported by the United States authorities [37] and may also be justified because the relevant facts are likely to be peculiarly within the knowledge of the defendant.
In the present case, the trial judge accepted that the manufacture and sale of the infringing goods was not a side line. He found that Decor's range of canisters with press button seals formed part of a much larger range of container systems, storage systems and canisters [38] . On the evidence, the share of sales of the canisters with press button seals varied from 3.1 per cent to 1.3 per cent over a six-year period after they were added to Decor's existing range, and that percentage was similar to the percentage of sales of other types of containers in Decor's range.
Decor contends that it is possible to identify some overheads as direct costs which may be attributed to the press button seal canisters as actually incurred in respect of them, namely, the cost of product development/royalty expenses, media advertising, industrial design registration, legal fees and tooling expenses. It seeks to allocate all remaining overheads which are indirect costs by reference to the proportion which sales of canisters with press button seals bear to total sales.
Whether Decor and Rian should succeed in their contentions depends upon whether, as a matter of fact and substance, the overheads which they seek to have deducted are attributable to the manufacture and sale of the infringing product. In arriving at an answer, the Court must consider such questions as whether the overheads in any particular category were increased by the manufacture or sale of the product, whether they represent costs which would have been reduced or would have been incurred in any event, and whether they were surplus capacity or would, in the absence of the infringing product, have been used in the manufacture or sale of other products. Dealing with the last of these questions may require the use of the concept of opportunity cost. If any of the categories are to be brought into account, the proportion to be allocated to the infringing product must be determined and it is here that approximation rather than precision may be necessary. But such an approach has long been accepted. As was said in Colburn v Simms [39] : "The Court, by the account, as the nearest approximation which it can make to justice, takes from the wrongdoer all the profits he has made by his piracy, and gives them to the party who has been wronged."
It follows that we consider that King J was in error in directing that "no part of general overhead costs is allowable as a deduction" and that the Full Court was substantially correct in directing, as it did, 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". But it would be better, we think, if the word "contributed" were replaced by the words "are attributable".
The application by Decor and Rian for special leave to cross-appeal may be dealt with more shortly. In considering whether the profits for which an account was ordered should include those arising from the manufacture and sale of the canisters as well as the press button seals which were fitted to them, the trial judge correctly identified the problem when he said [40] : "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." In answering the question which he posed, King J found that "sales of press button canisters are for present purposes attributable to use of the patented invention" and for that reason directed that the profits for which Decor and Rian had to account included the profits from the containers to which the press button seals were fitted [41] .
The Full Court identified the same question in somewhat different terms [42] : "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. ... 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".
The questions posed by the trial judge and the Full Court concerning the apportionment of a total profit both accurately reflect the correct principle which was expressed in this Court by Windeyer J in Colbeam Palmer Ltd v Stock Affiliates Pty Ltd as follows [43] : "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. ... 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." It is true that there is some divergence between King J and the Full Court in relation to whether, in the circumstances of this case, primary emphasis should be placed on reason for sale or reason for production. Nonetheless, the overall approach of both accurately reflects the application of the correct general principle in the resolution of what is ultimately a question of fact.
It follows from what has been said above that, if special leave were granted, the cross-appeal would necessarily turn upon a question of fact upon which there are concurrent findings by the trial judge and the Full Court against Decor and Rian. It would for that reason be inappropriate to grant special leave to cross-appeal [44] . For these reasons we would dismiss the appeal and refuse special leave to cross-appeal.