Facts:

This was an appeal as to whether, in an action for an account of profits arising out of admitted trade mark infringement, the plaintiff could require directors of the first defendant (Primary Distributors) to disgorge a portion of the directors’ management fees which they had been paid.

From the mid-1990s, Primary Distributors was the exclusive distributor of HEFTY-labelled products in New Zealand.  The HEFTY range of products included cling-film wraps, papers and other domestic products and competed at the lower end of the market.  Primary Distributors’ main customer was the Foodstuffs Group through its supermarket chains.  Primary Distributors did not sell directly to the public. 

In March 2005, the Australian supplier of HEFTY products went into receivership and in April 2005, it was placed into liquidation. Primary Distributors wished to continue distribution and in April 2005 offered to buy the HEFTY trade marks in New Zealand.  However the receivers agreed to sell to the plaintiff (IPDC) a group of trade marks in several countries. The sale included the trade mark HEFTY in New Zealand. 

Primary Distributors had continued to sell HEFTY branded clean-film wrap in New Zealand under a three month agreement with the receiver.  The three month period expired on 31 June 2005, but Primary Distributors nevertheless continue to sell the HEFTY branded products.  IPDC initially took no steps to prevent Primary Distributors from using the trade mark but, when steps were taken in mid-July 2006, Primary Distributors gave undertakings not to market any HEFTY-labelled products in New Zealand pending further order of the Court.  It stopped selling remaining HEFTY products.  IPDC then issued proceedings. 

At the first instance trial in 2008, ((2008) 77 IPR 215), Primary Distributors accepted that the company had infringed certain registered trade marks in selling the HEFTY products and that IPDC was entitled to an account of profits. There was a dispute over the period of time that the account of profits should cover.  The defendants claimed that they should not be required to account for profits for the period of time when IPDC had not objected to misuse of the trade marks.  In an earlier appeal, ([2009] NZCA 429) the Court of Appeal had held that IPDC was entitled to an account of profits from the time of commencement of infringement through until 13 July 2006. 

Following that appeal, the matter was remitted back to the High Court for the account of profits calculation to be carried out for the extended period.  IPDC also claimed that an account of profits should have been awarded against the two directors, Graham and Jones.  It had been conceded that they should be jointly and severally liable for amounts payable by Primary Distributors.  However, it was a matter of dispute whether there should be disgorgement of any personal profits of the directors as distinct from profits earned by Primary Distributors. 

At that further hearing, the High Court had found ((2010) 89 IPR 599) that:

(a)   It was open to IPDC to pursue a claim in passing off;

(b)  On the “middle man” principle, IPDC was entitled to the whole of the profits from infringing sales, being a total of $125,000;

(c)   That Graham and Jones were jointly and severally liable with Primary Distributors;

(d) That Graham and Jones were not required to disgorge their management fees as this would amount to double counting.

IPDC appealed against the last finding, and contended that Graham and Jones should disgorge a portion of their total management fee of $328,000 representing that portion of Primary Distributors’ business that was infringing business (11%). 

Held, dismissing the appeal:

(1)   The courts have taken a more sophisticated approach to the assessment of costs that may be set off against the revenues earned from infringing products. [24] The process requires an examination of each item for which a deduction is sought to check that the expense is fairly attributable to the manufacture or sale of the infringing product.  That will encompass an inquiry into whether the particular overheads were increased by the manufacture or sale of the product, whether they reflected costs which would have been reduced or would have been incurred anyway and whether they were surplus capacity or would, in the absence of the infringing product, have been used in the manufacture or sale of other products.  The concept of opportunity cost might be utilised in answering the last of these questions. [27]

Dart Industries Inc v Décor Corporation Pty Limited (1993) 179 CLR 101 followed; Polyaire Pty Limited v K-Aire Pty Limited [2012] SASC 75 referred to;Leplastrier & Co Limited v Armstrong-Holland Limited (1926) 26 SR (NSW) 585 doubted.

Tenderwatch Pty Limited v Reed Business Information Pty Limited (2008) 78 IPR 329; Liquideng Farm Supplies Pty Limited v Liquid Engineering 2003 Pty Limited (2009) 79 IPR 427 distinguished.

(2)   The fact that management fees paid to directors were part of the company’s overheads for the purposes of ascertaining the profits of Primary Distributors did not preclude the possibility that fees in the hands of directors might comprise profit attributable to their infringing conduct.  The two exercises were separate.  It was still necessary to consider the directors’ remuneration and determine whether some of that was profit received on account of the infringing activity. [44]  Some of the monthly management “fee” received by Graham and Jones might contain an element of profit made from the infringing conduct.  If the plaintiff proved that it did, the two directors must disgorge that profit because they were infringers. [51]

Polyaire Pty Limited v K-Aire Pty Limited [2012] SASC 75 referred to.

(3)   (Obiter) Although there was no cross-appeal on the application of the “middle man” principle, it might be appropriate in future cases to reconsider the application of the “middle man” principle to situations such as this:

(a)   The rationale of the “middle man” principle was the difficulty of proving the effect of the misrepresentation on actual sales by the middle man (i.e. supermarkets and groceries) to the public or the extent to which the company’s profits could be attributed to its unlawful use.  Yet here the first instance Court had been able to indicate the apportioned figure ($33,000) that the Court would have used if an apportionment were made;

(b)   The evidence was that Primary Distributors was directly involved in the retail sales with its merchandisers directly dealing with the grocery managers or supermarket owners to develop retail strategy for the infringing product;

(c)   The evidence showed that the key determinant in sales of the infringing product was price rather than the brand. [52]

(4)   On the state of the evidence, it was not appropriate to require disgorgement of a proportion of the management fees representing the proportion of the Primary Distributors’ business that represented the infringing business (11%). [55]  The evidence was that by 2005, the defendants had employed a national sales manager, six sales reps and 50 part-time merchandisers.  The merchandisers dealt directly with grocery buyers or supermarket managers. [58]  There had been no cross-examination as to the impact of the work of the sales force on the time spent on HEFTY products by Graham and Jones.  It was therefore not at all clear that the time they spent on infringing conduct equated to 11% and there was a gap in the evidence. [59]  Further, there was some support for the view that the directors would have been paid their management fees regardless of the infringing conduct. [60]  It seemed unlikely that the infringing conduct was a significant feature in the setting of management fees. [61]  The Court considered that the evidence fell short of establishing what, if any, portion of their management fees the director should be required to account for. [63]