Woolley & Anor v Up Global Sourcing UK Ltd & Anor [2014] EWHC 493 (Ch)

[2014] EWHC 493 (Ch)Case No HC 10 C 00996
IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
Venue The Rolls Building, 7 Rolls Building, Fetter LaneDate 27 February 2014
London EC4A 1NL
Before
HIS HONOUR JUDGE PELLING QCSITTING AS A JUDGE OF THE HIGH COURT
Between
NIGEL WOOLLEYClaimantsTIMESOURCE LIMITEDClaimantUP GLOBAL SOURCING UK LIMITEDDefendantsTHE LACMANDA GROUP LIMITEDDefendant
Mr Simon Malynicz and Dr Stuart Baren (instructed by Collyer Bristow LLP) for ClaimantsMr Mark Platts-Mills QC and Mr Thomas Moody-Stuart (instructed by Kuits Steinhart Levy LLP) for DefendantsHearing Hearing dates: 17-20 February 2014
JudgmentHH Judge Pelling QC :Introduction
[1]This is the taking of an account pursuant to an Order made on 1 March 2012 by Mr Robert Englehart QC sitting as a Deputy Judge of the Chancery Division (“the Order”). The hearing before me took place between 17 and 20 February 2014. I heard oral evidence from the First Claimant (“NW”), Mr Luscombe, the Managing Director of the Second Defendant, Mr Gossage, the Chief Operating Officer of the First Defendant, Mr Clawley, the Trading Director of the First Defendant, Mr Screawn, the Finance Director of the First Defendant and from Mr McAuley, a buyer employed by Next Retail Limited, who was called by the Defendants. I also heard oral evidence from two experts – Ms Jackets, who was called by the Claimants, and Mr Beressi, who was called by the Defendants.[2]NW is a director of and the sole shareholder in the Second Claimant (“TSL”). TSL was founded by NW and commenced trading in 2004. NW has had a long and successful career in the wrist watch import and trade sales business. He founded TSL following his resignation as the managing director of a much larger company in the same business that he had jointly founded. TSL sell three ranges of watches of which the most successful is and was at all material times marketed under the brand name “Henley”. From the date when it commenced trading to 2010 TSL had sold about 1.3 million Henley watches. TSL is the exclusive licensee from NW of the Henley mark.[3]The Second Defendant was at all times material to these proceedings called Henley’s Clothing Company Limited and for convenience I refer to it hereafter as “HCL” being the phrase by which it is described in most of the relevant documentation. That company is controlled by Mr Luscombe. Its business is and was at all material times the sale of clothing principally targeted at males aged between 18 and 25 under the style or title “Henleys”. It sells and at all material times sold its products to retailers, mail order companies and internet sales companies and also through a small network of stores operated by a wholly owned subsidiary of HCL. There is no connection between HCL and the First Defendant (“UPL”) other than the commercial one to which I refer in greater detail below. There is no connection between either NW or TSL and either Defendant other than that referred to below.[4]UPL is an import and wholesale company with a very large business. In Paragraph 4 of Mr Englehart’s judgment it is described as importing and selling by wholesale some 4000 different products. In the period with which these proceedings are concerned UPL suffered a reverse of financial fortune. In the year ended 31 July 2010 its pre tax profit had been about £2.6 million on a turnover of £54.2 million but by the end of the year ended 21 July 2012, it had made a pre tax loss of in excess of £1 million on a sharply reduced turnover of about £40.5 million. I was told and have no reason to doubt that this was the result of the continuing effects of the economic recession.[5]UPL decided that it would be commercially beneficial for UPL to market a range of watches that sought to take advantage of the popularity of the clothes range sold by HCL. HCL informed UPL about the existence of NW and TSL and that TSL sold watches using the Henley mark. Against that background UPL entered into a Licence Agreement with NW dated 22 June 2007 (“the NW Licence”) and a Trade Mark Licence with HCL and Mr Luscombe dated 25 June 2007 (“the HCL 2007 Licence”). Under the terms of the NW Licence, NW granted UPL a non exclusive licence to use the Henley mark in relation to “… quartz analogue, digital, and mechanical gentlemen’s watches …” in consideration of the payment of a royalty of 5% of the net price for which such watches were sold. There were controls as to how the mark was to be used contained in Clauses 7 and 9 and the licence was terminable on one month’s notice – see Clause 17.[6]The HCL 2007 Licence provided for the payment by UPL to HCL of a royalty of 7% of a defined Net Wholesale Price (the definition of this phrase does not matter for present purposes) in consideration of the grant of an exclusive licence to UPL to use the Henleys marks in the manufacture, promotion, distribution and sale of watches and jewellery. That licence came into force on 1 August 2007 and was for a period of three years subject to certain renewal terms. Thereafter, UPL sold watches using the Henleys mark and paid royalties to both NW and HCL pursuant to the NW and HCL 2007 Licences respectively.[7]In July 2009, UPL terminated the NW licence (but not the HCL 2007 Licence) by notice but nonetheless continued to sell the Henleys watches. These proceedings were then commenced. As originally constituted, the causes of action relied on by the Claimants were(a) infringement by UPL of NW’s Community Trade Mark (“CTM”) and/or(b) Infringement by HCL of NW’s CTM and(c) passing off by each defendant.[8]As against HCL, it was alleged that it had been guilty of passing off and/or trade mark infringement by stocking and offering for sale on its website and in its stores watches (amongst other products) under the Henleys mark – see Paragraph 16 and 19 of the Re-amended Particulars of Claim. There were some other allegations concerning the use of the mark on sunglasses and on stationery which do not take matters further. In addition it was alleged in Paragraph 17 of the Re-amended Particulars of Claim that HCL was a joint tortfeasor in respect of infringements by UPL and thus jointly liable with UPL for UPL’s infringements – see Paragraphs 17 and 18 of the Re-amended Particulars of Claim. The allegations of joint tortfeasorship included(a) an allegation that HCL had conspired with UPL in a common design to exploit the Henleys mark in relation to watches amongst other goods or(b) that “… the Henleys licences demonstrates that the Second Defendant gave its tacit approval to the exploitation of the Henleys mark in relation to watches and jewellery …” – see Paragraph18.1 and18.2 of the Re-amended Particulars of Claim. In Paragraphs18.3 and18.4 it was alleged that:
“The HENLEYS Licences demonstrate both parties intention to: (a) use the mark HENLEYS mark in relation to watches and jewellery; (b) cooperate and collaborate closely in the exploitation of the HENLEYS mark in relation to watches and jewellery; (c) benefit financially from the exploitation of the HENLEYS mark in relation to watches and jewellery … Under the HENLEYS licences all goodwill deriving from use of the mark in relation to watches accrues to the Second Defendant” (a) use the mark HENLEYS mark in relation to watches and jewellery; (b) cooperate and collaborate closely in the exploitation of the HENLEYS mark in relation to watches and jewellery; (c) benefit financially from the exploitation of the HENLEYS mark in relation to watches and jewellery … 9. The “HENLEYS Licences” referred to in the Re-amended Particulars of Claim are defined in Paragraph 11 of that pleading as being the HCL 2007 Licence and the licence that replaced in dated 1 November 2009. It was not alleged in terms against either Defendant that the grant of the HCL 2007 Licence (or indeed the licence that replaced it dated 1 November 2009) constituted either trade mark infringement or passing off. The Defendants’ case concerning the allegation of joint tortfeasorship is pleaded at Paragraph 19 of the Amended Defence in these terms: “Insofar as the court finds the First Defendant liable for infringement of the First Claimant’s CTM in respect of goods sold under licence from the Second Defendant, it is admitted that the Second Defendant is jointly liable therefore. Save as aforesaid, paragraphs 17 and 18 are denied.”
[9]The Defendants commenced proceedings seeking to have NW’s CTM declared invalid and directions were given for a split trial of the claim. Liability was severed from quantum and the liability trial proceeded exclusively by reference to the Claimants’ passing off claim. That trial was heard by Mr Englehart. He gave judgment on 1 March 2012, when he also made the Order. The key conclusions set out in his judgment were that: i) HCL’s core business was selling its clothing products wholesale – see [7]; ii) During the period relevant to these proceedings Henleys’ products were sold retail by a HCL subsidiary called Henleys Retail Limited (“HRL”) at some 18 stores but they had closed by the time of the trial and HRL had been placed in administration – see [7]; iii) TSL had established a substantial goodwill in the sale of watches under the Henley name –see [35]; iv) The Henley and Henleys marks were virtually the same and the addition of the letter “s” was of little or no significance; the brand names were overtly presented on the dials of watches in a very similar fashion with the same typeface frequently being used; the way in which the watches were marketed, the retail prices and the outlets through which they were sold “substantially” overlapped; and both Henley and Henleys watches were marketed as “fashion” watches – see [38]; v) HCL had established considerable goodwill under its Henleys name in the clothing market, however “… I cannot accept that the Henleys clothing brand will be known to buyers of watches generally. Nor can I accept that purchasers will buy without regard to the reputation of the watches themselves and are simply interested in external associations” - see [39]; vi) “ … sales of watches under the brand name HENLEYS engenders the belief that the watches are or are associated with HENLEY watches … I emphasise that there is no question here of any deliberate deception of the public. But that is not the issue. The question is whether or not there has been a misrepresentation, and in my view there has” – see [40]; and vii) Damage had been suffered by the Claimants in consequence and in the result there had been passing off in relation to watches. – see [43]. Mr Englehart did not make any findings concerning the joint tortfeasorship issue. He did not make any findings concerning the allegation of conspiracy made in Paragraph 18.1 of the Re-amended Particulars of Claim.[10]There was an appeal from the Order made by Mr Englehart that was dismissed by a judgment of the Court of Appeal delivered on 26 July 2012. The lead judgment was given by Arden LJ. She recorded at Paragraph 10 that UPL had been granted a licence by HCL to use its Henleys brand name for the purpose of selling watches. In relation to the position of HCL, Arden LJ said at [45] of her judgment that “… I accept that concurrent goodwill was established by HCL by virtue of its fashion garment business under the name Henleys. The judge dealt with this at length and reflected it in the injunction that he made. However, concurrent goodwill did not constitute a defence to passing off because HCL did not prove that it had goodwill in the name HENLEYS on its own in the field of watches”. In relation to a submission on behalf of the Defendants that the Judge had failed to consider whether it had been shown that the misrepresentation that Henleys watches were or were associated with Henley watches had been made to a substantial number of members of the public, Arden LJ held at [46] that:
“… The judge was greatly influenced by the similarity between the HENLEY name and the HENLEYS name. They are in truth virtually identical. The judge was entitled to reach the view that they would be perceived as such by all, or almost all, prospective purchasers. It followed that a substantial number of members of the public would be involved. …”
[11]The Order contained a permanent injunction, a direction concerning destruction on oath and a direction concerning damages or the taking of an account of profits. In so far as is material the Order was in the following terms:
“ … IT IS ADJUDGED that … the Claimant succeed in their claim against the Defendants for passing off in relation to watches and judgment be entered for the Claimant on the said claim … AND IT IS ORDERED that: … The Defendants … be restrained from advertising, offering for sale, selling or supplying any watch bearing the name HENLEYS or any name colourably similar thereto or otherwise passing off watches not being those of the Claimants as and for such watches; Nothing in this Order shall prevent the Defendants from advertising offering for sale, selling or supplying any watch bearing the words HENLEYS CLOTHING on the face thereof provided that the word CLOTHING is of equal prominence to the word HENLEYS … The Defendants do on or before 4 p.m. on 15 May 2012 at their option deliver up to the Claimants or destroy or obliterate upon oath, all goods, labels, advertisements, and other material in their possession, custody or control the use of which would breach the terms of the foregoing injunction … … It is declared that the Claimants are entitled at their option to either: a. An enquiry into damages, if any, suffered by the Claimants by reason of the Defendants acts of passing off in relation to watches … or b. An account of profits, if any, made by the Defendants or either of them as a result of the said acts of passing off … ”
AND IT IS ORDERED that: a. An enquiry into damages, if any, suffered by the Claimants by reason of the Defendants acts of passing off in relation to watches … or b. An account of profits, if any, made by the Defendants or either of them as a result of the said acts of passing off … ”

The Issues

[12]The Claimants elected for an account of profits as they were entitled to do. Part of the effect of such an election was described by Briggs J (as he then was) in Hotel Cipriani SRL and others v. Cipriani (Grosvenor Street) Limited and others [2010] EWHC 628 (Ch) at [7] in these terms:
“By contrast with joint liability as tortfeasors for damages, including damages on a royalty basis, an account of profits operates against each defendant separately, requiring him or it to disgorge such profits as are shown to have been derived by that defendant from the relevant infringements… the measure of liability is the profit derived by the defendant from the infringement.”
[13]The Claimants maintain that on the taking of the account they are entitled to recover from UPL the sum of £210,107 being the sum of the profit which the Claimants maintain (but UPL disputes) UPL made from the sale of watches using the Henleys mark during the relevant part of UPL’s financial period for 2009 – 2010 and for the whole of the financial period 2010 – 2011. They maintain that a loss made in the period 2011 – 2012 (which their expert quantifies at £56,631 and the Defendants’ expert quantifies at £84,714) should be ignored in its entirety and that I should proceed simply on the basis that no profits were made in that period.[14]As against HCL, the Claimants seek to recover the whole of the royalty payments made by UPL to HCL during the relevant period. It is agreed between the parties that this sum is £294,401. It is also agreed between the parties that this sum represents profit in the hands of HCL and if it is recoverable in principle then the whole of the sum is recoverable by the Claimants. In addition, the Claimants claim profits which they allege were made by HCL as a result of direct selling of the watches. These were sold either through the network of shops operated by HRL, by internet sales by HCL and by sales on to a third party company called Topgrade Sportswear limited (“TSL”).[15]The issues that arise on the taking of the account are: i) As between UPL and the Claimants: a) Whether the whole of the profit otherwise attributable to the sale by UPL of Henleys watches should be adjusted to take account of the fact that (on the Defendants’’ case) a substantial number of the sales of Henleys watches was or would have been attributable to the concurrent goodwill that HCL established existed at trial. I refer to this issue as the “proportionality Issue” below; b) Whether in striking the profit made by UPL there falls to be deducted from sales revenue: i) Any element of central costs incurred by UPL; ii) An apportioned amount of the costs incurred by UPL’s watches division calculated by reference to the proportion of Henleys watches sales value or volumes bore to the total value or volume of sales generated during the relevant period by the Watches division (the position preferred by the Claimants’ expert) or by references to the number of purchase and/or sales orders relevant to Henleys watches as a proportion of the whole of the number of purchase or sales orders generated by the watches division; iii) Whether profits are to be calculated on a financial year by year basis with the year to 31 July 2012 being treated as a year that did not generate a profit (as the Claimants contend) or whether the account should be taken over the whole period of infringing activity as a single period with losses being set off against profits to arrive at the sum payable by UPL to the Claimants (as the Defendants contend); iv) Whether losses made after the date of judgment in these proceedings (1 March 2012) should be ignored on the basis they are attributable to the proceedings rather than arising in the ordinary course of business; ii) As between HCL and the Claimants: a) Whether the royalties are properly recoverable as profit made from passing off; b) Whether any sum is recoverable from HCL in respect of direct sales made through the Henleys shops operated by HRL given that it is common ground that the watches so sold were purchased by HCL from UPL and supplied to HRL at cost, that there is no evidence of what if any dividends were ever paid by HRL to HCL and that HRL is not and never has been a party to these proceedings and as to the calculation of the profit made from the direct sales other than those made by HRL. The Profits Claim as against UPL The Proportionality Issue

The Profits Claim as against UPL

[16]The Defendants contend that in striking the profit that is properly recoverable as against UPL (and for that matter HCL) it is necessary to approach the issue in two distinct stages being first the identification of the proportion of the sales of Henleys watches that was the result of the Defendants’ acts of passing off and secondly the quantification of the profits made from the sales of Henleys watches to which the proportion arrived at from the first of these exercises should then be applied – see [2] of the Defendants’ closing submissions. It is said that this approach is mandated both by the applicable case law and also on true construction of the Order. The Claimants maintain that this approach is one that is precluded by the terms of the Order and in any event is contrary to principle even if the terms of the Order is not decisive as to what sales are to be considered on the taking of the account – see [16] to [46] of the Claimants’ closing submissions.[17]In my judgment the Order cannot be construed otherwise than as a whole and by reference to the terms of the judgment that preceded it and by reference to the terms of the Court of Appeal judgment that followed and by which the Claimant’s appeal was dismissed and the Order left unaltered.[18]In the judgment that led to the making of the Order, Mr Englehart had rejected a similar argument to that which is now being advanced by the Defendants. At Paragraph 39 he had rejected a submission made on behalf of the Defendants that buyers of Henleys watches generally would purchase because of the association with the Henleys range of clothing and concluded that the sales of watches under the brand name Henleys engendered the belief that the watches were or were associated with Henley watches. This led him to conclude that there had been a misrepresentation. The misrepresentation was that the Henleys watches were or were connected with Henley watches. On appeal, Mr Englehart’s conclusions as to misrepresentation were challenged on a number of grounds that included a submission that he had failed to consider whether there was a substantial number of members of the public to whom the misrepresentation that Henleys watches were Henley watches was made – see the judgment of Arden LJ at [33]. Having recorded the submissions made in response to this assertion at [41], Arden LJ rejected the Defendants’ submission at [46] in the terms set out in paragraph 11 above. Thus in my judgment the Order is to be construed against the background that the Judge had concluded and the Court of Appeal upheld his conclusion that there were a substantial number of members of the public to whom it had been misrepresented that Henleys watches were Henley watches.[19]Paragraph 6(b) of the Order directed that there be an account of the profits made by the Defendants “… as a result of the said acts of passing off …”. This is a reference back to Paragraph 6(a) of the Order and thus means the Defendants’ “… acts of passing off in relation to watches …”. What constituted the Defendants’ acts of passing off were identified by Mr Englehart in his judgment as being the misrepresentation to the public generally of Henley’s watches as being or connected with Henley watches. In my judgment once it had been concluded by Mr Englehart that a substantial number of members of the public had been subjected to the relevant misrepresentation, and that judgment had been upheld by the Court of Appeal, that was conclusive as between the parties. It was that conclusion that led to the grant of the permanent injunction in the terms set out in Paragraph 1 of the Order qualified only by what is set out in Paragraph 2 of the Order, to the destruction order in Paragraph 4 and to the requirement for either an enquiry or account in the terms stated in Paragraph 6.[20]It was nonetheless submitted by Mr Platts-Mills QC on behalf of the Defendants that as a matter of general law I was required as part of the taking of the account to arrive at a conclusion as to the proportion of people likely to have been influenced by the misrepresentation which he suggested could safely be arrived at on a “broad brush” or entirely impressionistic basis in reliance on evidence given by various witnesses as to the strength of HCL’s concurrent goodwill. I am not able to accept that submission.[21]First there is nothing in the Order that suggests that the Account was to be confined in the manner suggested. If the terms of the account directed to be taken were to be challenged as being too wide the time and place for that challenge was at the hearing of the appeal – see the reasoning of Kitchin LJ in Hollister inc. v. Medik Ostomy Supplies Ltd [2013] FSR 502 at [58]. There was no such challenge and in my judgment it is simply not open to me to undertake an account on any terms save those that are set out in the Order.[22]In any event, that there was no qualification in Paragraph 6(a) of the Order of the sort for which the Defendants contend is not surprising. Having concluded that a substantial number of members of the public had been subjected to the relevant misrepresentation, what should then follow is a direction that an account be taken of all the profits made by the defendant from the tortious acts complained of – see Reckitt & Colman Properties Limited v. Borden Inc [1990] 1 WLR 491 at 499, where the question to be answered in deciding whether passing off had been established was identified as being whether it was likely on the balance of probability that a substantial number of members of the public would be misled. Once it is concluded that such is the position – and providing the other elements of the tort (claimant’s goodwill and damage caused by the misrepresentation) are established – then liability is established and the Claimant is entitled to recover at his option either damages or an account of the profits made from the sale of the misrepresented items. That is what has been ordered.[23]Moreover, in my judgment, the exercise that the Defendants wish me to undertake is one that it would be well nigh impossible to perform on any logically defensible basis. That this is so is emphasised by Mr Platts-Mills’ submission that I should adopt what he called a broad brush approach to the exercise. That is little more than an invitation to pluck a percentage (and on his submission a very high percentage) of total sales attributable to HCL’s concurrent good will from the air. This is all the more the case where, as here, there is no direct evidence that enables a judgment to be arrived at on this issue, and where the evidence given before me that was apparently relevant to this issue did no more than establish what had been established at trial namely that HCL had a substantial concurrent good will in the Henleys name by reason of its clothing business. The course suggested by Mr Platts- Mills is a recipe for unfairness and injustice so far as a claimant is concerned. The protection for a defendant is the requirement for a claimant to prove on the balance of probability that a substantial number of members of the public would be misled by the misrepresentation alleged. That has been proved in this case at the liability trial and although that finding was challenged on appeal, the appeal failed.[24]The impracticality of the exercise that Mr Platts-Mills maintains I should undertake was commented upon by the Court of Appeal in My Kinda Town Limited v. Soll [1983] R.P.C 407 (Lawton Oliver and Robert Goff LJJ) on appeal from My Kinda Town Limited v. Soll [1982] FSR 147 (Slade J). In that case the claimant brought passing off proceedings in relation to a restaurant name. The Claimant succeeded and the issue that then arose was as to the terms of the account of profits that was to be taken by the Master. Slade J directed that a Master should “… take an account of the profits made by the business of the second defendants carried on under the name L.S.Grunts Chicago Pizza Co … which are properly attributable to the use by the Defendants of such name in the said business” [Emphasis supplied]. This is in substance the qualification that the Defendants wish me to apply to the account to be taken in this case. Slade J’s justification for an order in these terms was that the usual form of order (being that adopted in this case) was not appropriate “… where the defendants have carried on business under a misleading name, in the course of which they have sold goods not only to some purchasers who have been confused by the choice of name but also to many other purchasers who are not middlemen and have not been in the least misled”. Aside from the reference to middlemen, Slade J’s reasoning is that which is relied on by the Defendants in this case.[25]On appeal the Court of Appeal held that the Claimant had failed to establish passing off. This is an important distinction between that case and this. Here, as I have said, Mr Englehart concluded and the Court of Appeal agreed that there had in the circumstances been an operative misrepresentation that led a substantial section of the public to believe that Henleys watches were or were connected to Henley watches. The Court of Appeal in My Kinda Town (ante) concluded that this critical finding could not be made on the evidence available in that case. This approach supports the point I have made in the preceding paragraph of this judgment that the protection for a defendant is the requirement for a claimant to prove on the balance of probability that a substantial number of members of the public would be misled by the misrepresentation alleged. As the Court of Appeal said in My Kinda Town (ante) the need to qualify the terms of the account in the way formulated by Slade J arose because the Claimant’s case had been pleaded by reference to alleged confusion caused by the similarities in the names of the Claimant’s and Defendant’s restaurants. However that is not the basis of a passing off claim, which is based on a misrepresentation by the defendant that the goods or services offered were those of or were connected to those offered by the claimant. In relation to the terms of the account formulated by Slade J, Oliver LJ observed:
“The difficulties created by the plaintiff’s pleaded case become I think only too apparent when one sees the form of the account that was finally ordered in this case, and which appears to me to be one that is virtually impossible to take and which emphasises what Mr Hoffmann has contended is an impermissible distinction between relevant and irrelevant confusion.”
In my judgment therefore the correct approach is this – first the Claimant must establish misrepresentation such as I have described. That has been established by the Claimants in this case. Once that is established then the appropriate account to be taken is one that is not qualified in the manner attempted by Slade J in My Kinda Town (ante) and which the Defendants urge me to adopt here.[26]Finally before leaving this topic, there are two further points to be made. First, it was suggested by Mr Platts-Mills that the approach that I have favoured is contrary to that established by cases such as Celanese International Corp v. BP Chemicals Ltd [1999] RPC 203. I do not agree. That case was a patent infringement action concerning a refinement to a particular method of manufacturing acetic acid. It was not a passing off action. The point that emerges from that case is not that when taking an account in a passing off case it is necessary to identify the portion of the profits attributable to the relevant misrepresentation being operative but the less controversial points that(a) where a defendant has two businesses one infringing and one not, the claimant can recover on an account only the profits made by the infringing business and(b) where only part of a product or process infringes then apportionment will be appropriate. This last point arises for example where a process consists of three stages only one of which is infringing. It was the point that Briggs J was concerned to address in the account that he had to take in Hotel Cipriani SRL and others v. Cipriani (Grosvenor Street) Ltd and others (ante) –see [8] and [17] and following. Neither of these situations arise here. It is not suggested by the Claimants that they should recover any of the profits made by the Defendants from selling watches other than Henleys watches. That is why the revenues earned from selling such other watches have been excluded and why it is agreed in principle that there should be an apportionment of the direct costs incurred by UPL’s watch division.[27]None of the practical problems that arise from the course that Mr Platts-Mills submits I should take in this case arise in mixed processes or mixed product cases (whether they be passing off or patent infringement claims), where the apportionment can be undertaken in a defensible manner. It does not arise either in relation to cases where infringing and non infringing businesses are operated by the relevant defendant, as is apparent from the facts of this case where the profits of the non infringing watch business carried on by UPL have been eliminated altogether from the accounting process.[28]The final point that needs to be made concerns the nature of the business carried on by UPL. In paragraph 41 of their written opening submissions, the Claimants submitted that UPL sold goods exclusively to “middlemen” - that is other traders who in turn trade on the goods – and on any view the whole of the profit made by the sale of infringing goods to such entities must be disgorged. It was submitted that this principle was established by a number of cases conveniently identified and summarised in Slade J’s judgment in My Kinda Town v. Soll (ante). The factual premise of this submission is not challenged, but in answer to it Mr Platts-Mills submits that those cases are relevant only if “… a party fraudulently provides another … with goods that are instruments of fraud which are calculated to mislead members of the public …” – see [40] of his opening submissions. He submits that it was not pleaded that the Henleys watches were instruments of deception and no such finding was made by Mr Englehart.[29]Before considering the pleading point, it is first necessary to consider whether the “middlemen” cases relied on by the Claimants are subject to the qualification contended for by the Defendants. I am not persuaded that this line of cases is to be confined in the manner asserted by the Defendants. First the distinction that Mr Platts-Mills relies on does not provide a logically defensible basis for the taking of an account. The taking of an account is concerned with the disgorgement of profits improperly made by the wrongful acts committed by the Defendants. Whilst there may be a logical basis for distinguishing between goods sold to middlemen and those sold to end users because by selling to a middleman, the vendor loses control of what is done with the goods sold, there is no logical basis for varying the terms of an account of profits to be taken depending on whether or not the Defendant has intentionally misrepresented the goods he is selling to be the goods of another. Secondly, Slade J did not consider the cases on which the Claimants rely to be confined in their effect in the manner suggested by the Defendants – see My Kinda Town v. Soll (ante) at 154, where he said that:
“… the six cases relied on … afford authority for the proposition that in ordering an account of profits in a passing off case … the court will ordinarily direct the account in a form wide enough to include all profits made by the defendant from his tortious acts …”
Thirdly, whatever might have been the position in relation to earlier cases, by the time Weingarten v. Charles Bayer & Co [1905] 22 RPC 341 came to be decided there was no such qualification articulated – see the speech of Lord McNaughten at 351 and Lord Lindley at 352.[30]I am satisfied that these cases apply to such middlemen cases irrespective of whether the misrepresentation that gives rise to the passing off claim was made intentionally or not. There is no magic in the phrase “instruments of deception” – it is no more than a short hand description in the context of this case of the misrepresentation to the public generally of Henleys watches as being or connected with Henley watches by reason of the facts and matters identified by Mr Englehart and summarised at Paragraph 9(iv) and (vi) above.[31]This leads me to conclude that even if all my other conclusions reached in this section of this judgment are wrong, this was nonetheless a middleman case so far as the claim against UPL is concerned and thus is one where on any view the sort of apportionment exercise that Mr Platts-Mills invites me to embark upon is of no application.[32]No pleading point arises. The case was pleaded both as a trade mark infringement and a passing off case. The passing off case was proved and the Claimants became entitled to the relief claimed – which included an account of the profits made by each Defendant. The points now being considered concern the basis on which that account is to be taken.[33]For these reasons I conclude that the Claimants are entitled to recover the profits made by each of the Defendants from the passing off of Henleys watches as being or being linked to Henley watches. On any view, the Claimants are entitled to recover all such profits made by UPL because it sold the misleading products to middlemen.

The Central Costs Issue

[34]In my judgment the applicable principles are those identified by the Court of Appeal in Hollister inc. v. Medik Ostomy Supplies Ltd (ante) at [74] to [87]. In summary: i) An infringer is entitled to deduct any direct costs associated with the infringement and also any overheads to the extent that they have been increased by the infringement – see [74]; ii) It is not permissible for a defendant to allocate a proportion of its general overheads to an infringing activity – see [85]; iii) The evidential burden rests on the infringer to show that the relevant overheads are properly attributable to the infringing activity – see [85]; and iv) It followed that in any case where a defendant seeks to deduct an element of general overheads it will be for it to prove its business was running to capacity or that but for the infringement it would have sold other products or that its overheads would have been lower if it had not infringed – see [87].[35]The central overheads issue is an important one in this case because if the Defendants are right then they are entitled to deduct a total of £152,153 from the revenues generated by the sale of infringing materials. It depends in the end on a difference of view between the experts and on the nature and quality of some evidence given by Mr Screawn, UPL’s Finance Director.[36]This issue emerged as an issue only in the supplemental expert reports. Up to that point both experts had been agreed that no allowance could be made in respect of central overheads. Mr Beressi, the expert accountant called by the Defendants, acknowledges that he has changed his position in relation to this issue – see Paragraph 3.12 of his second report – and maintains that he has done so in the light of further information provided to him by Mr Screawn – see Paragraph 3.13 of his second report. The issue is one that arises in relation to the salary and wages costs that are accounted for by UPL as part of its overhead and which are not otherwise included in the wages and salaries properly accountable for as a direct cost.[37]The material that apparently caused Mr Beressi to change his mind was apparently supplied to him by Mr Screawn in a conversation or conversations that took place between them following the service of Mr Screawn’s second witness statement. This is somewhat surprising. Had there been an issue concerning central overheads that is something that I would have expected would have been considered between the Defendants and their expert witness before not after the service of Mr Beressi’s first report. The reasoning relevant to this issue is set out in Paragraph 5 of Mr Screawn’s second statement. The reasoning set out in that paragraph is exactly the approach that the Court of Appeal held in Hollister (ante) was not appropriate on the taking of the account because it makes no attempt to address the issues or any of the issues identified by Kitchin LJ as critical to an attempt to deduct any element of central overheads.[38]The additional material that was supplied by Mr Screawn to Mr Beressi was the accounting record extract at GS/8 to the 3rd witness statement of Mr Screawn, the graph that is exhibit GS/9, and the calculation and headcount comparison table that are together exhibit GS/10, to Mr Screawn’s third witness statement. The graph shows that between mid-November 2010 and July 2013 UPL apparently reduced its non variable overhead from a high of in excess of £13.5 million to a low of £9.2 million. The calculation sheet was reproduced in a simplified form by Mr Beressi in Paragraph 3.13 of his second report. The short point that emerges from this is that UPL’s turnover dropped between July 2011 and July 2012 by a sum of in excess of £21.5 million and there was a reduction on centrally accounted for salaries over the same period of £1.3 million which equates to 6.06% of the reduction in turnover. It also reflects the fact that at a time when turnover declined by 27%, the number of staff reduced over the same period by 24%. From this material, Mr Beressi concludes that in relation to UPL “… a reduction in turnover results in lower corporate wages being incurred.” In consequence he concludes that the loss of the Henleys watch business would have resulted in a reduction in corporate wages.[39]Mr Beressi then makes a number of assumptions. First he assumes that the reduction that was experienced in 2012 is representative of the change that would have occurred had the Henleys watch business been lost. On that basis he extrapolates that had UPL not been trading in Henley’s watches, it would have reduced its corporate salaries cost in each of the relevant years by 6.06%. - see Paragraph 3.16 of his second report. This leads him to conclude that there should be deducted from the revenues generated by the sale of Henleys watches the sum of £48,928 for 2009-10, £63,388 for 2010-11 and £39,826 for 2011-2012.[40]Ms Jackets (the Claimants’ expert) considers this approach to be entirely misplaced. Her reasoning in summary was: i) The reduction in UPL’s global turnover that is the subject of Mr Screawn’s calculation was of 28% - a drop that she describes as being “ a level which one would ordinarily expect to lead to major restructuring in any business …”and ii) By contrast the Henleys watch business accounted for only 1.1 to 1.4% of UPL’s global turnover, the loss of which in her opinion “ … would not automatically be expected to trigger dramatic action in normal business”.[41]In my judgment Ms Jackets’ analysis on this issue is to be preferred. First, it was put to Mr Screawn in cross examination that it did not follow that because UPL had to reduce its headcount by 24% as a result of a massive drop in turnover, it would therefore have reduced its corporate headcount by between 1.1 to 1.4% if it had not had the Henley’s watch business. He did not provide a direct answer to that point – see Transcript, Day 1, page 172-3. More generally he could not provide any evidence concerning the existence or otherwise of spare capacity – see Transcript, Day 1, page 171 lines 21-23 and page 172, line 19 to page 173, line 4. I preferred Ms Jacket’s evidence concerning how a large business was likely to react to a drop in turnover of the magnitude of between 1.1 to 1.4% because not merely is she a highly competent accountant and analyst but she has worked in a senior capacity in such businesses. She is thus in a position to express an informed opinion on this sort of issue. Mr Beressi simply does not have that sort of experience.[42]I accept therefore that it is highly unlikely that a business of the size of UPL would respond to such a relatively small drop in turnover by cost cutting other than possibly in relation to direct costs. Not merely is it not obvious how such savings could practically be achieved given the volumes of employees that fall within the category I am now considering but I also accept her point that the costs of hiring and firing staff are significant, particularly amongst the more senior and the management of a large business would not contemplate cost cutting on such a micro scale. She compared and contrasted that approach, entirely cogently in my judgment, with the position that would apply for any company experiencing a drop in turnover of the sort that UPL had in fact to respond to which was obviously life threatening if not addressed radically.[43]In my judgment these points when taken together with the fact that no real attempt has been made by UPL to address the requirements identified in Hollister lead me to conclude that the central overheads issue must be resolved in favour of the Claimants and against UPL.[44]There was an additional minor point made by reference to the employment of agency staff in the warehouse. In essence the point is that agency staff can be reduced in number very quickly and at minimal cost and thus a drop in turnover even as small as that implied by the loss of the Henleys watch business could result in a drop of at least some of the agency staff employed in UPL’s warehouse or warehouses. I accept that in principle agency staff could be reduced in this manner. However, there is no evidence before me as to what if any activity in the warehouse was attributable specifically to Henleys watches, whether there was spare capacity within the warehouse and thus whether the notional loss of the Henleys watches business would have led to any and if so what reduction. This was an issue where the evidential burden rests on URL and in my judgment it has not been discharged.[45]The final issue that arises under this head concerns transport costs. I had regarded this issue as one that was encompassed within what I have said already concerning central overheads and initially had not dealt with the issue separately. After circulating my draft judgment it became apparent that there was a difference of view between the parties as to whether this item was to be treated as being a central overhead issue or not. I heard further argument on the issue and have added the remaining paragraphs of this section of the judgment at the conclusion of that argument.[46]Mr Platts-Mills submitted that there is a line to be found within UPL’s accounts for transport costs that is broken down trading division by trading division. There is such a line in the extracts from the accounts exhibited by Mr Screawn in his second statement as GS/4. It is common ground that there is such a line – it appears in the extracts under the sub-heading “Overheads” and there is a note by it saying “pro-rata based on sales. Mr Platts-Mills submitted that this was the line within the accounts that Mr Screawn gave oral evidence about at transcript, Day 1, pages 138-9. I am satisfied that is not the case because the questions there being answered arose at a stage in the cross examination when Mr Malynicz was asking Mr Screawn questions about processing costs as is apparent from transcript Day1, page 136, line 18. I am satisfied that transport costs were dealt with by Mr Screawn in cross examination starting at transcript Day 1, page 153, line 18. That being so, what emerges from that evidence is that the allocation between divisions was not based on actual costs but was a notional apportionment from the total transport costs incurred by UPL in any given year. The figure did not represent actually incurred transport costs - see transcript, Day 1, page 154, lines 4-5. and 155 lines 13-19.[47]It is now necessary to track through how this issue was considered by the experts in their various reports.[48]This issue was first mentioned by Mr Beressi by reference to a line within Appendix 4 to his first report, where some transport and distribution costs had been asserted as properly deductible by Mr Screawn. In Paragraph 3.12 of his initial report, Mr Beressi described transport and distribution costs as being an overhead that was specifically attributable to the watches division of UPL and one that was capable of being prorated as between Henleys watches and other watches as had been the case with other heads of direct expenses. It is apparent from the oral evidence referred to above that such was not the case.[49]Ms Jackets addressed this issue in Paragraphs 3.18 - 3.20 of her initial report, where she said that transport had been allocated from central overheads and was not a cost derived from prorating variable direct costs incurred by the watches division. This led her to exclude any assumed reduction in transport costs – see Paragraph 3.30 and 3.32. Mr Beressi returned to this issue in Paragraphs 3.10 and 3.11 of his supplemental report. Having noted that Ms Jackets had excluded transport costs he then asserted that such costs were incurred in order to ship goods to customers and therefore should be included as an expense for which credit was to be given before the true profit figure could be arrived at. He added that the “ … cost of transport which is via external carriers may be based on a central cost allocation but it is illogical to consider that the product can be delivered at no cost or that such costs would not have reduced if [UPL] had not sold Henleys watches.”. He concluded by accepting that it would be wrong to attempt to allocate or prorate these costs by reference to sales value but asserted that it was appropriate to do so on a volume basis. Ms Jackets then further considered this issue in her supplemental report at Paragraph 3.23(iv), where she concluded that because there was no evidence that the sums claimed were not all variable, they should all be treated as variable and allowed.[50]The evidence in relation to transport costs is not satisfactory. As the Claimants say in their closing submissions at Paragraph 61(a), there was some evidence that that a significant number of watches were dispatched FOB in China, where they are manufactured. There is no evidence as to whether the position is the same in relation to all the other goods covered by the transport costs that are centrally accounted for. There is no evidence as to whether the FOB position was materially different as between Henleys watches and other watches over the period when Henleys watches were being sold. Although the evidence was that watches were transported using external service providers it is entirely unclear what savings in such costs might have resulted from not dealing in Henleys watches. There was some evidence for example of a large number of deliveries made to Argos at particular parts of the year where the carrier carried mixed loads of different items. Thus the savings that could be achieved would not be directly referable to not trading in a particular range of watches. More generally, the transport costs that Mr Beressi seeks to deduct from the revenues derived from selling Henleys watches is an extrapolation from a particular element of UPL’s central accounted for overheads. The position adopted by Ms Jackets in relation to this item is not one for her because the question whether any part of the sums identified by Mr Beressi should be deducted from revenues is one of law. In my judgment on the facts of this case transport costs were accounted for centrally. It therefore follows that the Hollister principles identified above apply. The effect of Ms Jackets approach is to reverse the evidential burden that rests on UPL. I accept of course that transport costs that would not have been incurred but for the Henleys watch trade ought in principle to be deducted. However, UPL has not discharged the evidential burden that rests on it by operation of the principles summarised in Paragraph 34(i), (iii) and (iv) above. Apportionment of Direct Costs.[51]The issue that arises here concerns the method by which direct costs incurred by UPL’s watches division are apportioned between the Henleys watches business and all the other business conducted by that division. It is not suggested that these costs are irrelevant to the assessment of profit made by UPL but there is a dispute between the parties as to how the apportionment exercise ought to be carried out. If the method adopted allows too much of the relevant head of loss to be apportioned to Henleys watches business then the effect will be to understate the profit attributable to that business and thus prevent the disgorgement of all profits made by the sale by UPL of such watches.[52]Apportionment is necessary only because the information to enable costs attributable to the Henleys watches element of the business of UPL’s watch division to be more precisely identified has not been made available. Whilst applications have been threatened by the Claimants for specific disclosure, none in the end was proceeded with. The result is that whilst there is accounting material available that shows that various costs were incurred by UPL’s watches division, there is no material that demonstrates how much of each head of loss is attributable to Henleys watches and how much to the remainder of the business of the watches division. It is for that reason that the parties are agreed that in principle apportionment is the only practical way in which to proceed.[53]Given that apportionment is the only method available in the circumstances, Ms Jackets’ opinion is that potentially there are only two bases for carrying out such an exercise. Both involve prorating each head of expense – either by reference to the proportion of turnover or unit volumes of Henleys watches when compared to the total turnover of UPL’s watches division. As Ms Jackets says in Paragraph 3.24 of her initial report, if all the units being sold by the watches division were within the same price range then turnover would provide a tenable basis for apportionment. It may still do so where the cost head is one that depends on the value of the item being considered. However, where that is not so, and where there are differences between the prices at which Henleys watches are sold when compared to other watches sold by the watches division, then it is likely that unit volumes will provide a more accurate guide. The danger of prorating in relation to an inappropriate head of costs on the turnover basis is illustrated very clearly by the table set out by Ms Jackets at Paragraph 3.25 of her initial report.[54]The parties’ experts have identified those heads of cost where a sales value method has been agreed as the most appropriate. These include duty on imports, customer rebates and discounts, purchases and other direct costs, and gross margin items. The turnover value approach is justified in relation to these items for reasons that are obvious. In each case the cost incurred depends on the sales value of the products concerned.[55]The difference of view that I am now considering applies in relation to clearance charges, testing and inspection charges, factory audits, wages and salaries, motor and travelling and advertising and exhibitions. Ms Jackets remains of the view that the least unsatisfactory way of apportioning these costs is using the unit volume method that I have mentioned. Mr Beressi considers that the appropriate way to apportion these costs is by reference to the number of purchase and sales orders processed. The percentage of each cost head apportioned on this basis that is attributable to the Henleys watches business conducted by UPL’s watches division are set out in Paragraph 3.29 of Mr Beressi’s supplemental report. The figures differ from year to year in a range of between 53% in 2012 to 64% in 2011. The justification put forward by Mr Beressi for this approach is that:
“… this gives a more direct correlation to the activity involved. If there is a greater volume of orders this requires more staff time, testing, samples and travel expenditure to secure and process this business”
[56]In my judgment this approach is mistaken for the following reasons. First, the evidential burden rests on UPL to demonstrate that this methodology is necessary to identify accurately the profit attributable to the sale of Henleys watches. However, there is no evidence that enables me to conclude that this is so. There is no evidence as to what each of the headings I am now considering relate to. There is no evidence as to how the items have been charged for. As Ms Jackets observes in Paragraph 3.31 of her supplemental report, it is possible hypothetically to construct a case for either a purchase or sales order method or a volume based method. The real point is that such speculation is entirely unnecessary – had UPL troubled to disclose either the contracts that it had with its port agents or freight forwarders or at least the invoices rendered by each then the method by which charges were calculated would be apparent. Similar considerations apply to those carrying out inspections and factory audits. Indeed in relation to inspections, I would anticipate that the inspection house will be required to carry out an inspection of a proportion of the number of each item being shipped. If this is so it points sharply towards apportionment based on volumes rather than purchase order because a purchase order could relate to any number of items being shipped. Purchase order analysis in my judgment is not likely to be appropriate for wages, salaries, advertising and exhibitions or motor and travel expenses either. It is likely to be particularly difficult to attribute any of these last 4 items to purchase or sales orders. I emphasise that apportionment is an unsatisfactory method for arriving at deductible expense. The evidential onus rests on UPL to identify the expenses that in fact it has incurred. If apportionment is unavoidable then in a context such as this it is likely that one based on unit volumes will be the least unsatisfactory method.[57]As I have said the evidential onus rests on UPL to demonstrate what costs should be deducted. Ms Jackets’ evidence both in her report and in her oral evidence was that whilst sales and volumes information was regularly used as a basis for allocating costs within a business she had not come across the use of sales and purchase order data for such purposes. I regard that evidence as entirely persuasive. I say that because(a) using sales volume as a method of allocating cost is likely to give a broadly accurate outcome because sales volume correlates to cost in most cases, sales value will perform a similar role for some types of cost, both are likely to be based on a much greater sample size and thus is a method that is least likely to be affected by statistical anomalies and sensitivities whereas using sales and purchase order numbers is likely to be a much smaller sample and thus is most likely to result in anomaly because such orders can relate to any number of units and at variable prices;(b) Ms Jackets has a formidable track record not merely as an accountant in independent practice but in the commercial and in particular the consumer products sector and thus her view that Mr Beressi’s method is one she has not come across before whereas cost allocation based on sales volume or value is almost invariably used to allocate cost where specific information is not available is one that carries great weight and(c) because I can see no reason for thinking that Mr Beressi’s preferred method of valuation would result in a more accurate result in terms of identifying the profit made from the sale of infringing products in relation to the heads of cost I am now considering. Given that the sales value and volume tests are entirely conventional methods and that advocated by Mr Beressi is not, the onus rested on UPL that Mr Beressi’s method would yield a more accurate result. They have failed to discharge that evidential burden. The Third Year Points.[58]The first point made by the Claimant is that in essence I should take each of the three years separately and identify the profit that was made in each and direct UPL to account for that profit. In relation to 2012, where a loss was made, that loss should not be considered beyond reaching a conclusion that no profit was made in that year. The underlying rationale for this approach was identified in the Claimants’ closing submissions in these terms:
“It is nonsense to say that a business which has made a yearly profit for say 5 years and a loss in the final year can offset those losses against the profits made five years earlier. It could not do so for accounting purposes and should not be able to do so for an account of profits”
. In my judgment the Claimants are entirely mistaken in making this submission. I say this because the submission I am now considering fails to grapple with what is critical which is to identify the purpose for which a particular account is being prepared. Company statutory accounts are prepared in order that the company can comply with its reporting obligations under the Companies Act and are prepared for the Companies relevant accounting period. They will usually consist of a profit and loss account for the whole of the relevant period and a balance sheet showing the position of the company as at end of the relevant financial period. Management accounts are likely to be prepared either every quarter or more usually and for larger and more sophisticated businesses every month. That is not what the exercise I am concerned with is about. The Claimants are not concerned with what sums were made year on year. They are concerned to recover the profit in fact made by the Defendants respectively from the sale of the infringing products. The infringing business is to be taken as having been conducted for the Claimants and the purpose of the account is to force the Defendants to disgorge the profits (but no more than the profits) they have in fact made.[59]The losses made by UPL in the final year have to be taken into account when arriving at the profit made as a result of the passing off. If that was not the case then the Claimant would be receiving more than they are entitled to under the Order – that is the profits if any made by the passing off the subject of these proceedings. It is true to say that the Claimant is entitled to recover interest on the sums found due on the taking of the account – see the terms of Paragraph 6(b) of the Order. However the assessment of interest does not require losses to be assessed on an annualised basis any more than the assessment of interest in respect of any other continuing loss. Tax is not an issue in this case. Had it been, the fact that it would be necessary to consider the position year by year in order to calculate the effect of the incidence of tax would not lead to the conclusion that there should be an account of profits year by year – merely that each year would have to be examined in order to ascertain what profits had been made as a step towards arriving at the final profit figure for which the defendant concerned was accountable.[60]The final point that arises in relation to the final year is that identified by Ms Jackets in Paragraph 6.3-6.8 of her initial report. In essence the suggestion that is made is that there was a lower average selling price and a lower margin in the 5 months after 1 March 2012 when judgment was handed down on the liability issues in these proceedings than in the previous 7 months. Ms Jackets concludes that this was probably the result of discounting to reduce stock levels following the delivery of the initial judgment and thus that any loss after 1 March was attributable to the litigation rather than to any commercial issues arising in the ordinary course. As far as I can see this point was not suggested by the Claimants’ counsel to any of the witnesses called on behalf of the Defendants. Thus at an evidential level it is difficult to see how this point can be relied on by the Claimants. In any event there is at least another credible explanation for the down turn after 1 March 2012. It coincides with the sharp decline in overheads shown by the graph at GS/9 and the very substantial drop in turnover during that financial period compared with the previous one – see GS/4. If in truth losses made during this period are no more than reflective of the general difficulties faced by UPL at this time then this point is one that becomes unarguable. Indeed, even if what was suggested by Ms Jackets was correct, I do not see how that could lead to the conclusion that profits were made when in fact they were not - see Celanese (ante) per Laddie J at [42] and Dart Industries Inc v. Décor Corp. Pty. Ltd [1994] FSR 567 (HC of A).[61]In summary, in my judgment the account I am taking is not one from year to year but of the profits made by UPL over the period between 2009 and 2012 when in fact it sold Henleys watches. It follows that what I concerned with is the profit in fact made over the whole of that period. That requires me to take account of losses made as well as profits made. Thus the losses made in 2011-2012 must be set off against the profits made in 2009-2011 to arrive at the profit in fact made by UPL from the sale of Henleys watches.

The Profits Claim as against HCL

[62]By far the most important element of the profits claim as against HCL is in respect of the royalties that it received from UPL. As I have said the experts are agreed as to the sum received by HCL by way of royalties from UPL and they are also agreed that there are no expenses that are properly deductible if otherwise in principle the royalties are recoverable as profits for passing off. Ms Jackets expressed the view in Paragraph 6.11 of her initial report that the royalties were “ … effectively earned as a result of the passing off”. The question whether in fact the royalties were so earned is a question of law that was in issue between the parties.[63]As I have explained at the outset of this judgment, once UPL had decided that it wished to exploit the Henleys name for the purpose of selling watches, it had to acquire a licence from HCL to enable it to do so lawfully. Neither expert suggests that the royalties paid by UPL to HCL is anything other than a direct expense that has to be deducted from revenues received by UPL for the infringing watches in order to arrive at the profit for which it is accountable. It was not suggested by the Claimants that either of the licences by which HCL gave UPL permission to use the Henleys name and mark was anything other than a genuine transaction. Thus the royalties were not profits made by HCL misrepresenting the Henleys watches to be or to be connected with Henley watches but was a profit made by HCL from permitting UPL to exploit the Henleys name and mark. It is true to say that the licence permitted UPL to exploit the name in relation to watches and HCL had no goodwill in watches, but that does not strike me as centrally relevant. A licence to use a mark in a particular business without more is not a licence to do so by passing off goods manufactured and sold pursuant to that licence as the goods of someone else. As I have said earlier in this judgment, the Claimant alleged that UPL and HCL were joint tortfeasors. Whilst there is a finding by Mr Englehart that both Defendants were guilty of passing off, the basis of that finding at any rate as against HCL is not anywhere clearly spelt out. Certainly, there is no finding of conspiracy made against HCL.[64]The Claimants rely on Cipriani (ante) as supporting this element of their claim. It should be noted that the Defendants did not appear and were not represented at the hearing before Briggs J. At [3] he summarised the basis on which the various defendants had been found liable in these terms:
“The gist of the 2008 judgment was that the first defendant was liable for trademark infringement and passing off by carrying on a restaurant business in Central London under the name Cipriani London … and the second and third defendants were liable as joint tortfeasors. The second defendant was the sole director of the first defendant and the third defendant was a Luxembourg corporation which, for reward, licensed the first defendant to use the name Cipriani.”
Briggs J rehearsed the terms of the third defendant’s licence to the first defendant at [10] and then turned to a suggestion that there ought to be some discount from the profits otherwise recoverable because the mark that had been licensed contained a logo and a word that did not feature in the Claimant’s name. This argument was rejected at [12] and the Judge concluded that “… all the royalties payable under the … licence derived from the infringement”. The royalties were 11.5% of gross sales of the restaurant. The Claimants submit that Briggs J concluded as he did because there as here the royalties were a percentage of the proceeds of the infringing trading. However, if that was the basis of Briggs J’s conclusion he does not say that is so and it could as easily have been because of the conclusion reached at the end of the liability trial that each were to be treated as if they were joint tortfeasors.[65]I have read Arnold J’s judgment on the liability issues in Cipriani ([2008] EWHC 3032 (Ch)). The appeal was concerned exclusively with a trade mark point and thus is not material to the issue that I am now considering. It is clear from the opening section of Arnold J’s judgment that there were strong familial links between the individual defendants and between the individuals behind the corporate defendants and he also records that it was common ground that if the first defendant in that case was liable then all the defendants were jointly liable. Thus the difficulty as I see it is that(a) in that case unlike the present case there were strong links between the various defendants,(b) there was an express concession that the defendants were jointly liable and(c) the point I am now considering was not argued before Briggs J. There are therefore very considerable distinctions between this case and Cipriani.[66]In my judgment the royalties that were paid by UPL to HCL are not recoverable from HCL. My reasons for reaching that conclusion are as follows. First, it was not conceded in this case that the Defendants were jointly liable or were joint tortfeasors other than to the extent admitted in Paragraph 19 of the amended Defence. Secondly, it was not alleged as against the Defendants or as against HCL that by granting the licences to UPL, HCL was guilty of passing off. Indeed, it is difficult to see how that could be so since it was HCL who alerted UPL to the existence of the Claimants and the HCL 2007 Licence was entered into expressly in contemplation of the NW Licence – see Recital (E). Thirdly, there was no finding by Mr Englehart concerning any of the allegations made by the Claimants in Paragraphs 17 and 18 of the Re-amended Particulars of Claim. Fourthly, unlike the position in Cipriani, there were no links between HCL and UPL other than an arms length commercial transaction by which UPL sought HCL’s licence to use HCL’s name and mark. Fifthly, it is not alleged by the Claimants that the licences granted by HCL to UPL are shams or are otherwise than they appear. In consequence, all that HCL has authorised UPL to do is to use its brand in relation to watches. It has not either expressly or impliedly authorised UPL to pass off its products as or as connected to the Claimants. Sixthly, the grant of the licences to UPL do not constitute passing off coming within the scope of Paragraph 6(b) of the Order. In granting the licence, HCL has not passed off watches manufactured by or on behalf of UPL as or as connected with watches sold by the Claimants. The manufacture and sale of the Henleys watches by UPL was not a joint venture or anything similar between it and HCL. HCL licensed the use of its mark and bought watches from UPL which it then traded via its subsidiary HRL in Henleys shops and to a much lesser extent directly. Whilst the profits obtained from trading the watches in this manner were derived from passing off, those from licensing UPL to use HCL’s trading name and mark was not.[67]No profit is recoverable from HCL in respect of the watches sold in the shops operated by HRL. The watches were passed by HCL to HRL at cost price – see Paragraph 5.5 of Mr Beressi’s report. Any profits made by the sale of the watches transferred to HRL were made by HRL. There is no evidence of any dividends being paid by HRL, much less dividends attributable to the sale of the watches. It might have been arguable that a profit was made by HCL equivalent to the royalty paid on the watches supplied by HCL to HRL. This is so because although the watches were sold by UPL to HCL at cost, UPL paid the royalty on the watches so supplied – see Paragraph 5.2 of Mr Beressi’s initial report. If that is the position, then HCL obtained the watches for less than cost price once the payment of the royalty is taken into account. Thus, if the watches were sold on by HCL to HRL at cost price rather than cost price less royalty a profit would have been made by HCL. However, the Claimants did not advance this point and the evidence is not available to enable me to reach any final conclusions on the point.[68]The only remaining considerations so far as HCL is concerned relate to direct sales by HCL of watches acquired by it from UPL at cost price. The Defendants’ case is that the HCL purchased a total of 394 watches at a total price of £6,843.71 and sold them via the internet at a total price of £12,354.64. It is not suggested that there are any other expenses that should be debited against that figure apart from the cost of purchase. Again no account appears to have been taken of the incidence of royalties in relation to these sales. In the result the Defendants’ case on the issue I am now considering is that the Claimants are entitled to recover £5,511.93 in respect of those sales together with the further sum of £478.75 in respect of sales by HCL to Topgrade Sportswear Limited.[69]The difference between the Claimants and the Defendants on this issue is that the Claimants maintain that the profit attributable to internet sales by HCL is £8,494.42 – see the table at Paragraph 5.4 of Ms Jackets’ initial report. The difference is explained by the point summarised by Ms Jackets at Paragraphs 5.9 and 5.10 of her initial report. This point has not been the subject of any evidence from the Defendants. Had they wished to adduce evidence on this point they could have done so. The evidential burden was on them to make good the point asserted by Mr Beressi. As Paragraph 5.6 of his report makes clear, his conclusion was based on information supplied to him. It was not something that he ascertained or was otherwise known to him. Thus I conclude that Mr Jackets’ calculation is to be preferred over that of Mr Beressi on the evidence that is available to me.[70]The issue that remains is whether this sum is recoverable at all. Although Ms Jackets opines that she does not consider it to be recoverable, the Claimants submit that the question whether in principle the sum is recoverable is a question of law. On that the Claimants submit that it is recoverable applying the reasoning set out above concerning the proportionality issue in relation to the claim against UPL. The Defendants submit that the sum should be irrecoverable on the basis of their arguments concerning that issue. There is a difference however and it is this: whereas all the relevant sales made by UPL were to middlemen, the sales by HCL via the internet were not. Thus if I am correct in my analysis of the effect of the middlemen cases referred to earlier but otherwise wrong in the conclusions that I have reached on the proportionality issue, the profits I am now considering would not all be recoverable. However, for the reasons given earlier, I consider that the proportionality issue is to be resolved in favour of the Claimants on the wider basis I have identified and for that reason I conclude that the Claimants are likewise entitled to recover the profits made by HCL from selling watches via the internet.

Conclusions

[71]The Defendants are obliged to account to the Claimants for the profits applying the principles set out above. I had considered attempting to arrive at the correct final figures using the spread sheet provided to me. On reflection however, I consider it better if the parties were to agree a figure carrying into effect the conclusions set out above which can then be set out in the Order that will follow from this judgment. I ask that the parties prepare a schedule of profits to append to the judgment which reflects the conclusions set out above.

Cited in 4 later judgments