25 May 2012

Manager’s Salary Safe From Claim for Account of Profits

Polyaire Pty Ltd v K-Aire Pty Ltd & Ors [2012] SASC 75 (10 May 2012)

Infringement – remedies – account of profits – whether managing director of infringing company is required to account for salary paid during period of infringing conduct

Outlet directorIn the latest episode in a case that has been running since 1996, the Supreme Court of South Australia has ruled that a successful plaintiff in a design infringement case cannot claim a portion of a company director’s salary after electing to receive compensation in the form of an ‘account of profits’.

This decision arises out of two recurring features of intellectual property litigation in Australia, and the reasoning and outcome are presumably applicable to patent, trade mark and copyright cases, as well as to cases – such as this – involving infringement of registered designs.

The two relevant factors are:
  1. a successful plaintiff in an IP infringement action is generally entitled to elect compensation in the form of damages or an account of profits, but not both; and
  2. it is common for a plaintiff to bring proceedings not only against a company that may have been providing infringing products or services, but also against any company managers or directors who may be deemed to have controlled the activities of the company.
Damages are calculated based upon the harm done to the rights-holder, e.g. due to lost sales and/or other commercial opportunity.  An account of profits, on the other hand, is based upon the benefits accruing to the respondent as a result of the infringing activities.  Damages are likely to be the preferred option where an infringer has, for example, eroded the market share of the rights-holder by undercutting on price, such that the losses of the plaintiff exceed the profits made by the infringer for the same sales.  An account of profits would be preferred where the infringer has, for example, developed a market and made sales that would not have been made by the plaintiff.

When an account of profits is elected, the infringing company is clearly liable for all sales of infringing products or services.  But what about a company director?  Are there ‘profits’ accruing to an individual as a result of the infringement which must be accounted in addition to the company’s profits on sales?  Here, the South Australian court has said ‘no’.

BACKGROUND

As already noted, it was in 1996 that Polyaire Pty Ltd first commenced proceedings against K-Aire Pty Ltd and eight other respondents, alleging that they had infringed its monopoly in the design of an air-conditioning air outlet director registered under the Designs Act 1906.  (An outlet director is that part of an air-conditioning unit which directs the flow of air from the unit into the area to be air-conditioned.)

The litigation originated in the Supreme Court of South Australia where Justice Besanko (who is now a judge of the Federal Court of Australia) found that certain of the respondents’ products were ‘fraudulent imitations’ of Polyaire’s registered design no. 110628.  (A ‘fraudulent imitation’ under the 1906 Act was essentially an intentional copy.  This form of infringement no longer exists under the Designs Act 2003, under which attention is directed to objective similarity in overall appearance, without reference to intent.)

Justice Besanko’s decision was overturned on appeal to a Full Bench of the Federal Court, and subsequently reinstated on further appeal to the High Court.  Subsequent proceedings in the South Australian Supreme Court led to a further (unsuccessful) Full Federal Court appeal on procedural matters. 

In 2007, Polyaire elected relief by way of an account of profits.

Of the nine original respondents, seven were corporations and two were individuals – Mr Colebatch, who was managing director of two of the infringing companies at the relevant times, and Mr Benfield who was managing director of three others of the infringing companies.  Five of the infringing companies have since been deregistered, and two are in liquidation.  Polyaire is continuing a pursuit of the debt owed by the latter companies by action against the liquidators in the Federal Court.  It has discontinued its pursuit of Mr Benfield.

Thus the principal remaining question before the Supreme Court was whether Mr Colebatch is required to account for a portion of the salary he received as managing director of the principal infringer.  According to Polyaire’s theories, Mr Colbatch owed it either $57,261.04 or $35,834.94 (depending upon the proportion of sales corresponding with the infringement), based on his salary over the period between 1997 and 2005.

OUTCOME

The court essentially found that no portion of Mr Colbatch’s salary could be characterised as being derived from the infringement of Polyaire’s registered design.

It was particularly influenced in reaching this conclusion by the fact that there was no apparent relationship between Mr Colbatch’s remuneration, and sales of infringing products.  For example, the court noted (at [41]) that:

…the fact that Mr Colebatch’s salary in the years 2001 to 2005 was generally stable, while there were in those same years considerable fluctuations in the gross revenue of Kemalex Plastics and in the contribution which sales of the infringing articles made to that gross revenue, contraindicates some form of direct relationship between his remuneration and the turnover of the companies, or of any particular business activity.

The court also observed (at [42] to [46]) that Polyaire had led no evidence to demonstrate that:
  1. there had been any increase in Mr Colbatch’s salary in 1997 which could be attributed to commencement of the infringing conduct;
  2. Mr Colebatch had been able to retain his position as managing director because of the infringing conduct; or
  3. the salary paid to Mr Colebatch was, even in any single year, some form of ‘colourable transaction’, i.e. a diversion to Mr Colebatch of amounts which could have been more readily identified as profits in the hands of the companies he was managing, rather than a regular salary at ‘commercial rates’.
The court accepted that the financial performance of the companies would, in some general way, influence any review of Mr Colbatch’s salary, however in the absence of specific evidence, this indirect link was insufficient as a basis for any accounting of profits to Polyaire.

In other words, despite Mr Colbatch being no doubt in some way ‘responsible’ for the infringing conduct, in that he was managing the companies at the relevant time, the evidence did not demonstrate any way in which he directly profited from the infringement.  Revenue from sales of the infringing outlet directors never exceeded 5.25% of total revenues in any single year, and thus a majority of the company activities overseen by Mr Colbatch was non-infringing.  There was no evidence that his salary would have been any different but for the infringing conduct.

COMMENT

On the facts of this case, the decision seems quite reasonable.  Costly infringement litigation will generally impact severely on a losing party, and an order to pay damages or an account of profits will potentially harm not only the infringing company, but also its employees.  It is to be expected that the shareholders or the board would determine the appropriate action to be taken in relation to a manager who oversees activities which lead to such consequences.

In many cases, for the successful plaintiff to pursue a portion of the manager’s salary, in addition to any compensation order to be paid by the company, amounts to double-dipping by the plaintiff, and a compounded ‘punishment’ of the manager.  Individuals can certainly be liable for infringing conduct, but they should not be accountable in financial terms if their role was principally that of an employee without any specific personal interest or financial gain from the infringing conduct.

Of course, if an employee receives a salary component, such as an annual bonus, or a commission, which is directly tied to infringing sales, then this might well be a profit for which the employee could be required to account, if found liable as an infringer.  That was not, however, Mr Colbatch’s situation.

This should be of some comfort to employee managers everywhere, although it should certainly not be taken as a license to deliberately, negligently or recklessly direct infringing conduct within an organisation, without regard to the consequences.  An individual might be personally liable for damages, even in cases in which there is no identifiable profit, or even for additional (exemplary) damages in cases of particularly flagrant infringement.

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