Court of Appeal issues important guidance on compensation for IP infringements

When a claimant is successful at the liability phase of an intellectual property infringement case, it is typically given the opportunity to elect whether to seek compensation based on the damages it has suffered or the profits the defendant has made. To make this choice, the defendant is often required to provide evidence to the claimant on each aspect. But what are the consequences if that initial evidence proves to be wrong? This is the situation that the Court of Appeal had to grapple with in the recent decision in Lufthansa Technik AG (Lufthansa) -v- Panasonic Avionics Corporation (Panasonic).

Background
In January 2022, Lufthansa filed a patent infringement claim against Panasonic regarding electric plug sockets used on airplanes. Panasonic were found liable for infringement at the liability stage. Lufthansa was then allowed to choose between damages or an account of profits as a remedy based on evidence ordered to be provided by the defendant in accordance with the practice first adopted in 1996 in Island Records v Tring. To recap, damages can be calculated by reference to the sales that the claimant has lost as a result of the infringement or the licence fee that the claimant would have charged the defendant for use of its IP rights. Alternatively, if the defendant has made a lot of profits from the infringement, then the claimant might recover more by electing for the defendant to pay those profits over to it. Obviously, a claimant therefore needs evidence from the defendant on these issues (eg the sales it has made, the revenue derived and the costs it incurred in making those sales) so that it can make a reasonably informed choice about which remedy to pursue.

In this case, Panasonic was ordered by the first instance judge to deliver a witness statement made by a director of the company, detailing financial information with the profits made from the infringement. This evidence was provided by an employee (not a director). Having received it and seen the profits that Panasonic said it had made, Lufthansa elected for an account of profits. However, Panasonic served a further witness statement three months later, this time made by a director, the effect of which was to reduce the profits made by Panasonic by USD30m.

Lufthansa argued that, having already made its election for an account of profits, it was now too late for Panasonic to change their underlying evidence. Therefore, Panasonic should not be allowed to rely on the revised figure at all. Panasonic responded by saying that the appropriate thing to do would be to allow Lutfhansa a second opportunity to elect for either damages or an account of profits now that more accurate evidence had been provided. The difference between these two positions was obviously quite stark.

Ruling
At first instance, both parties proceeded on the basis that there had been a breach of the court order for disclosure by Panasonic and therefore Panasonic required relief from sanctions. This is a stringent test to satisfy, and at the first instance the judge found that Panasonic failed to meet it. Accordingly, Panasonic were precluded from relying on the evidence showing a reduction in profits of USD30m.

However, before the Court of Appeal, Panasonic changed its approach, stating it was not an application for a relief from sanctions at all. The Court of Appeal agreed. It held Panasonic could rely on the new evidence. Introducing it at this stage did not prejudice the trial date (which was a year away) and the appropriate and proportionate approach was to allow Lufthansa to make its election, again between damages or an account of profits. If Lufthansa then elected for damages, any costs wasted by its earlier decision to seek an account of profits could be met by Panasonic. However, the position might have been different if the parties were closer to the trial, serving as a warning that defendants should not be too cavalier with their evidence.

More General Guidance on Island Records Disclosure Principles
Giving the leading judgement in the Court of Appeal, Lord Justice Birss also made it clear that when applying the principles of Island Records, in allowing a party to choose between an account of profits or damages, they should be able to make an informed decision, but it need not be necessary for the defendant to provide full and comprehensive financial disclosure. Such can wait until later in the process after the claimant has made their election. Instead, the information provided by the defendant at that earlier stage can be a summary of readily available information based on approximate estimates. The concept behind this is that the information can be provided quickly and in a proportionate manner. So, provided that more accurate information delivered later in the process by the defendant does not materially alter the position (as had clearly occurred in the Lufthansa case), the claimant will be held to its election for damages or an account of profits.

The full decision in Lufthansa Technik AG (Lufthansa) v Panasonic Avionics Corporation (Panasonic) can be found here.

With thanks to Stephanie Keen, a current trainee in the Dispute Resolution team, for contributing to this article.

This publication is a general summary of the law. It should not replace legal advice tailored to your specific circumstances.

By Ian De Freitas,
Farrer & Co LLP,
London, England