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A guide to damages calculations for trade mark infringement

Courts in the EU have wide discretion to set damages in trade mark infringement cases. Bonita Trimmer explains the factors they take into account so IP owners can shape their litigation strategies

One-minute read
In the UK, successful claimants in trade mark infringement cases are entitled to damages. A claimant will usually be free to choose between an inquiry as to damages and an account of profits for his financial remedy. The guidance we have as to how financial compensation for trade mark infringement is to be calculated in the UK is limited because the parties often settle their dispute before hearing of the inquiry or account is due to take place. The article summarises the guidance that is available, and contrasts the situation to that in France and Germany. It concludes by suggesting that the UK courts may accept a hypothetical licence with an uplifted royalty rate as the basis on which to compensate a trade mark owner where there is no likelihood of confusion but there is dilution or tarnishing.
A claimant who has succeeded in an action for trade mark infringement in the UK is entitled to damages as of right. If the claimant appears to have suffered more than nominal damage then he will generally be entitled to what is referred to as an inquiry as to damages. This is a separate legal process and hearing, the purpose of which is to ascertain the extent of his losses and restore him to the position he would have been in if the infringement had not been committed.

Choice of remedy

However, a claimant will usually be free to choose between an inquiry as to damages and an account of profits for his financial remedy. As an account is an equitable remedy the court may refuse it. For example, the court may (but does not often) refuse this remedy if the infringement was entirely innocent, or the trade mark owner delayed in bringing proceedings, so that the grant of an account would be unjust. The UK courts have made it clear the availability of these financial remedies and this either/or approach is fully compliant with the EU Intellectual Property Enforcement Directive.

Inquiries and accounts are infrequent in trade mark infringement cases. This is because where trade mark infringement is established an injunction is usually granted soon after the liability trial (although it may be stayed until the outcome of an appeal). As the hearing of the inquiry or account occurs some months later, the injunction (or the prospect of it) more often than not leads to a settlement before this hearing.

Accordingly, the guidance we have as to how financial compensation for trade mark infringement is to be calculated in the UK is limited. There is even less guidance available where the finding of infringement was not based on the straightforward use of an infringing brand for competitive goods. In competitive goods situations, where consumers have been confused, sales made by the defendant are likely to have been sales which would otherwise have been made by the trade mark owner. Therefore the trade mark owner will properly be compensated by being awarded its lost profits on such lost sales. Similarly where the trade mark owner is in the business of licensing his mark(s), for example where the trade mark is licensed for merchandising, the proper basis of damage is clear. The owner's damage would then be the royalties it would have obtained had the defendant entered into its usual appropriate licencing arrangement.

Complex harms

However, trade mark infringement now extends to more complex and less easily quantifiable harms that may be suffered as a result of infringing use of a similar brand. How is the trade mark owner to be financially compensated for these?

Under Article 5(2) of the EU Trade Marks Directive 2008/95/EC, if the trade mark owner can establish that its mark has "a reputation" in the UK then it will be able to establish infringement if a defendant has used a similar mark without due cause and such use has taken unfair advantage of, or caused detriment to, the distinctive character or repute of its trade mark. One type of detriment to the distinctive character of a mark is the harm that would be done to the essential distinguishing function by a likelihood of origin confusion resulting from use of the defendant's similar sign. However, detriment may also take the form of making the owner's trade mark either less distinctive by erosion of its exclusivity (often described as dilution) or less attractive to its target consumers (tarnishing).

Classic dilution is a possible form of harm to the essential function (caused by erosion of the mark's exclusivity making it less well equipped to serve its essential/distinguishing function). In the L'Oreal lookalike and smell alike perfumes case, the Court of Justice of European Union (the CJEU) explained that tarnishment was detriment which occurred when "the trade mark's power of attraction is reduced … in particular from the fact that the goods or services offered by the third party possess a characteristic or a quality which is liable to have a negative impact on the image of the mark's reputation". It is therefore a form of harm to the "investment function" (often also called the "image function").

EU rules on damages

Article 13 of the EU Intellectual Property Enforcement Directive provides that when the judicial authorities set the damages:

  • they shall take into account all appropriate aspects, such as the negative economic consequences, including lost profits, which the injured party has suffered, any unfair profits made by the infringer and, in appropriate cases, elements other than economic factors, such as the moral prejudice caused to the right holder by the infringement; or
  • as an alternative to (a), they may, in appropriate cases, set the damages as a lump sum on the basis of elements such as at least the amount of royalties or fees which would have been due if the infringer had requested authorisation to use the intellectual property right in question.

New forms of harm

However, that is not the end of it. Other new forms of harm to the acknowledged functions can be recognised on a case-by-case basis. For example, in the Interflora trade mark case, the Advocate General recognised degeneration (otherwise known as genercide) as a relevant detriment to the distinctive character/distinguishing function of the trade mark.

Taking unfair advantage of the distinctive character or reputation of a mark can also amount to infringement. This is often said to arise where the conflicting mark seeks to associate itself with the mark with a reputation and gains an unfair benefit or boost by doing so. In other words by free riding on that established mark's reputation or image. Again how is a trade mark owner to be compensated for this form of unfair competition?

The leading intellectual property infringement damages inquiry cases in the UK have concerned patent infringement, but have been held to apply to the assessment of trade mark infringement damages also. The basic principles are: "the measure of damages is to be, so far as possible, that sum of money which will put the injured party in the same position as he would have been in if he had not sustained the wrong … There are two essential principles in valuing that claim; first, that the claimants have the burden of proving their loss; second that the defendants being wrong-doers, damages should be liberally assessed, but the object is to compensate the claimants and not punish the defendants."

Where the claimant is not able to show loss of trade or licensing opportunity as a result of the defendant's infringement he is still entitled to compensatory damages, but on what basis? In the 32Red Plc v WHG (International) Ltd & Ors trade mark infringement damages inquiry, a notional royalty basis was used to assess damages under the so-called user principle or negotiating damages basis. If damages are assessed on this basis the court awards what it determines to be the fee which a hypothetical willing licensor and willing licensee would agree to in order to permit the use which would otherwise amount to trespass on the property of the licensor.

The user principle

However, it should be noted that in the 32Red case both parties eventually agreed to a user principle assessment. The Court of Appeal had, some years earlier, expressed doubt that the user principle should be applied to trade mark infringement damages where the trade mark owner was not in the business of licensing its mark. Despite this, in 2010 the Patents County Court awarded trade mark infringement damages on this basis having concluded "there is no reason in principle why damages should not be available, calculated on a "user" basis". Hopefully therefore these doubts have been consigned to history as negotiating damages provide the most rational starting point available in these sorts of situations. The alternative would appear to be to grasp a figure from the air or make a merely nominal award. However this can hardly be said to comply with the Intellectual Property Enforcement Directive's requirement that remedies for infringement of intellectual property rights are "effective, proportionate and dissuasive".

Calculating damages using the user principle

If damages are assessed under the user principle, the court will take into account the following:

  • The primary basis for calculation is what sum would have been arrived at in negotiations between the parties, had each been making reasonable use of their respective bargaining positions, bearing in mind the information available to the parties and the commercial context at the time that notional negotiation should have taken place;
  • Usually the notional negotiation is assumed to take place as at the date of the infringement;
  • The fact that one or both parties would not in practice have agreed to make any deal is irrelevant (i.e. the parties are assumed to be willing to negotiate and to be reasonable in doing so);
  • Other relevant factors, and in particular delay on the part of the claimant in asserting its rights can be taken into account;
  • One such factor which has been acknowledged by the courts to be relevant is "the [easy] availability of a non-infringing alternative". Presumably therefore the practical non-availability of such an alternative must also therefore be relevant;
  • Finally, the court will not make an award that is "out of all proportion to the benefit that the defendants derived from their infringement of [the marks in issue] and to any loss that [the claimant] could realistically be thought to have suffered".
Negotiating damages would also seem to be the most logical basis for assessing damages where what is being compensated is harm to the additional functions of a trade mark (for example, to the investment or image function). The dispute between Talksport and Eddie Irvine provides support for this view. Although granted in respect of a passing off dispute, the court's award of damages was on the basis of the fee which Talksport would have negotiated with Irvine for the use it made of his reputation as a celebrity without his consent. In that false endorsement case, the judge was clear that the law "will vindicate the claimant's exclusive right to the reputation or goodwill. It will not allow others to so use goodwill as to reduce, blur or diminish its exclusivity". The judge also acknowledged that the reputation of a celebrity may enhance the attractiveness of those goods or services to which it is connected. Use of such a reputation without its owner's consent "is taking the benefit of the attractive force which is the reputation..." Very similar language is used in respect of the forms of harm that may be done to a trade mark's additional functions. What the judge said of celebrities with a reputation can equally be said of trade marks with a reputation. The appeal court confirmed the judge's decision on liability and the applicability of the user principle as the basis for assessing damages but increased the size of the award made.

Alternative means for assessing damages for these more intangible but insidious harms are:

  • the sum the trade mark owner would need to devise, register and promote an alterative trade mark to the point that its attractive force was as "powerful" as the mark was immediately prior to the first infringements; or
  • the sum required to compensate the trade mark owner for the loss in value of its mark/brand as an intangible asset.

Evidence from a marketing expert would be required for the former and accountancy evidence would be required to establish what the latter would be (there are various competing brand valuation methodologies which can be used). Although both these are used in other jurisdictions they have barely gained a foothold in the UK and it is not clear whether they comply fully with the Intellectual Property Enforcement Directive.

Account of profits

The purpose of an account of profits is very different from the purpose of an inquiry as to damages. As noted above, the purpose of an inquiry is to ascertain the extent of the trade mark owner's losses and restore him to the position he would have been in if the infringement had not occurred. The purpose of an account however is to deprive the infringer of the profits he has made from the infringement and to transfer such profits to the claimant.

The relevant principles for an account of profits in intellectual property infringement were summarised in the Cipriani trade mark infringement case:

  • it is no answer to a claim for an account to say that similar profits could have been made in a non-infringing way;
  • profits include accrued profits, for example a legal right arises to receive payment, even if payment is yet to be made;
  • where a single head of profit is attributable to a number of causes, some of them infringing and some not, it is necessary and appropriate for the court to conduct an apportionment so as to work out on a broad-brush basis what proportion of the profit was due to the act of infringement.

The fear that the defendant's expert accountants may be able to persuade the court that rather than a profit it made a loss from its infringing activities is one reason why trade mark owners generally opt for an inquiry into damages instead. In calculating the net profits made by the infringer, the judge can, of course, deduct direct costs associated with the infringement, and also any overheads that would not have been incurred but for the infringement. However, the Court of Appeal may have now reduced such fears by stressing that it is not permissible for an infringer to simply allocate a proportion of its general overheads to the infringing activity. Evidence must establish that such proportion of the overheads is properly attributable to that activity (such as sales of infringing items) for it to be legitimately deducted.

However, the need to identify that portion of the profit attributable to the use of the infringing mark still means that in most cases a trade mark owner is likely to elect for an inquiry into damages rather than an account. For example, if an ice cream manufacturer used a similar brand to the registered trade mark of a rival business and was held to infringe, what proportion of its profits would be attributable respectively to the use of its brand and to the qualities of the ice-cream it sold under it (taste, shape, packaging)?

The situation in France and Germany

In France issues of liability and quantum are not split into separate hearings so damages for trade mark infringement are awarded at the main trial. French judges have a wide discretion as to what damages figure they award; however damages are, as in the UK, compensatory and not punitive.

Further reading
Austria: Compensation and damages
Argentina: Damages calculation not required in trade mark case
Patent damages reined in
How damages reform could shape trade secret strategies
Also, similar to the position in the UK, the trade mark owner can be compensated for the profits which it would have made if it had made the infringing sales itself or for the profits it would have obtained had it not been deprived of the opportunity to license the mark. Unlike in the UK, the French courts will frequently award damages for what is known as moral prejudice, basing the assessment of such damages on commercial disruption or prejudice. In the UK there has yet to be an award for moral prejudice in a trade mark infringement case.

Accounts of profits are not awarded in France although on rare occasions the defendant's unfair profits are taken into account in the damages awarded.

The German courts may assess compensation for trade mark infringement by one of three alternative methods:

  • transfer of profits made by the defendant;
  • a hypothetical licence royalty; or
  • compensation for losses actually suffered;

Unlike the position in the UK (b) and (c) cannot be combined (that is, (c) being used for the defendant's infringing sales in market sectors where it is competing with the claimant and (b) being used in respect of the defendant's other infringing sales).

Also in contrast to the UK, compensation for losses actually suffered is rarely the preferred method of compensation for trade mark infringement in Germany. This is because the German courts require strict proof that the infringements have actually caused the lost profits claimed and this is often very difficult to establish. There is no principle that "the defendants being wrong-doers, damages should be liberally assessed" as there is in the UK.

In respect of (a) and the transfer of unfair profits, a defendant is not entitled to deduct overheads or other costs that it cannot justify as directly related to the sale of the infringing products. Therefore, this is often the preferred option in Germany.

Looking to the future

The UK courts are still somewhat suspicious of the additional functions of a trade mark (advertising, communication and investment) which have now been acknowledged as protected by the CJEU. Harm to these additional functions tends to be established alongside a likelihood of confusion and harm to the essential function in the UK, rather than on a standalone basis. As such, it may be some time before an inquiry into damages is heard in the UK where the only form of harm claimed is to the additional functions of the mark.

Interestingly, in Germany, compensation for detriment to the reputation of the trade mark may be taken into account by increasing the royalty rate of a hypothetical licence; a licensor will want significantly more money if the license he is to grant is likely to harm the image or distinctive character of his trade mark. Consequently, a hypothetical licence with an uplifted royalty rate may well come to be the accepted method by which the UK courts compensate a trade mark owner where there is no likelihood of confusion but there is dilution or tarnishing.

Bonita Trimmer

© Bonita Trimmer 2014. The author is an associate in the intellectual property department at Wragge Lawrence Graham & Co


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