High Court shows lock developer the exit door

Automotive Latch Systems Limited (ALS) vs Honeywell International INC [2008] EWHC2171 (Comm)

The High Court has ruled that, a company called ALS (the corporate vehicle of a Mr Chevalier, the inventor of a car door latch mechanism (called ULS)) could not rely on past breaches as grounds for terminating and claiming damages under a joint collaboration agreement (JCA) with a manufacturer, Honeywell. The decision highlights the risks for an organisation in terminating its commercial agreements (in this case, a long term product development collaboration that had gradually turned sour) and the importance of keeping a clear documentary trail for the purposes of any later contract claims. In particular:

• risks of wrongful rermination: terminating a contract for alleged breach (or material breach) by a counterparty continues to carry risk for the party alleging breach since if it transpires that termination was defective under the contract, the party making the allegation is itself open to a counterclaim. In this case, even though the court found that there was evidence to show that the Honeywell had not complied fully with its obligations to ALS, these breaches could not justify termination. ALS was therefore found to be in repudiatory breach of contract, as a result of its wrongful termination;
  
• failure to notify the defaulting party of breach: of particular importance appears to be the timing of ALS' notice of breach when reviewed against the termination clause in the JCA. Construing the JCA's termination provisions strictly, the judge (Mr Justice Flaux) noted that the provisions (a) referred to present and not past breaches; and (b) allowed the defaulting party an opportunity to take steps to remedy the breach. To the extent that Honeywell had breached the agreement, these were found to have occurred six months before the date of ALS' notice of termination and ALS had not acted in relation to those breaches at the time they occurred. The court therefore rejected ALS' arguments justifying its later termination as 'artificial'; 
  
• general performance obligations and failure to document: claimants also face difficulties in trying to assert failure to meet performance obligations when these are based on general obligations (e.g. reasonable behaviour) that are difficult to measure objectively. Much of ALS' claim was based on Honeywell failing to meet the JCA obligation to take "all reasonable actions without unreasonable delay to manufacture the latch at competitive cost". The court found that although Honeywell was in breach of requirements to act without unreasonable delay, these were not sufficient as grounds for termination (since they did not ultimately cause the project's failure). ALS' claim was also not helped by the fact that it had failed to document meetings and conversations with Honeywell during the 28 month course of the project. This meant it could not point to specific failures. On the other hand, Honeywell were able to produce emails, minutes of meeting and other documents to back up their defence. As a consequence, ALS appeared to have an uphill task in convincing the court of its claims. The eyewitnesses and expert evidence led by ALS also clearly failed to impress Mr Justice Flaux who noted that the inventor, Mr Chevalier whilst prepared to give evidence to an "unparalleled extent", struck him as a Walter Mitty like figure; 
  
• unrealistic expectations: it is also apparent that many of the problems came about as a result of some degree of 'overselling' on both sides which gave rise to misunderstandings and unrealistic expectations between the parties when entering into the project – perhaps not uncommon in many projects. In particular there was a misunderstanding as to how advanced the ULS product prototype was when entering into the JCA and also Honeywell's previous experience as a manufacturer in this specific field. Interestingly, while the Judge could not accept a Honeywell claim for misrepresentation by ALS in entering into the JCA, the court could review ALS' behaviour prior to entering into the JCA when assessing whether Honeywell's actions had been "reasonable" or not under the JCA; 
  
• damages for loss of a chance/lost profits: the case also illustrates the evidential difficulties for claimants seeking damages for loss of a chance (and ensuing profits) in the UK courts. ALS had claimed for damages for lost profits ranging between £332 million and £457 million, which were dismissed as "wholly unrealistic". Here, the judge noted that Honeywell had an express right to terminate the JCA (without penalty) in its sole discretion if continued performance was not commercially viable (i.e. applying the principle that in assessing loss or damage the assumption is that the defendant would have performed the contract in the way least onerous to itself). Continuing problems with development of the ULS after termination of the Honeywell relationship were also noted (and the fact that nearly 5 years after termination of the relationship, the ULS has not been produced in any volume by any car equipment manufacturer).

05 November 2008

High Court decision highlights how to calculate the value of a pharmaceutical market opportunity

The Case

Les Laboratoires Servier and another ('Servier') and Apotex Inc and others ('Apotex')

The Facts

Servier owned the patent for the pharmaceutical Penindropil, which is used to treat hypertension. This expired in 2006, and Servier applied for a patent relating to a 'new' form of the drug (the 'new patent').

Apotex, a manufacturer of generic drugs, went ahead with launching its competing generic version of the new form of Penindropil at the end of July 2006 "at risk" of infringing Servier's new patent, having obtained advice that the new patent was invalid.

Servier commenced infringement proceedings at the beginning of August 2006, and the court granted an interim injunction against Apotex. Servier successfully argued that it would be easier to calculate Apotex's damages in the event of the injunction being wrongly granted than to calculate Servier's loss if the injunction was wrongly withheld.

In August 2007, the High Court held that Servier's new patent was invalid on the basis of obviousness and lack of novelty and the injunction was discharged. This finding was confirmed by the Court of Appeal, which commented that Servier's patent was "the sort of patent which can give the patent system a bad name."

Assessment of Damages

At the beginning of October this year, the High Court addressed the issue of damages payable to Apotex for the loss of profits during the period it was prevented by injunction from selling the generic form of the new drug.

As a result of the interim injunction, Apotex was denied exploitation of its opportunity to enter the market and the judge, Mr Justice Norris, assessed the damages on the basis of this lost opportunity.

When the injunction was lifted in 2007, there were competing manufacturers preparing to sell the generic form of the new Penindropil, and Apotex's market share was smaller and at a lower price. Servier claimed that damages should be assessed on this basis, amounting to a £400,000 loss.

Apotex, however, claimed that damages of £27 million should be awarded. In the short period before the interim injunction was granted, Apotex had made sales amounting to a 60% market share. The loss should be assessed on the basis of the higher market share and price it would have had during the "at risk" period when Apotex began marketing the drug.

The court preferred Apotex's approach, assessing damages on the basis of the hypothetical market for the new version of Penindropil in August 2006.

Damages for loss of opportunity are assessed on the basis of a particular hypothesis, and then reduced by reference to the percentage chance of that hypothesis occurring. Based on the hypothetical market situation in 2006, Apotex's potential loss of profit would have been around £22.5 million, and the court determined that this had around a 67% chance of occurring. As a result, the court awarded Apotex damages of £17.5 million.

Comment

It is a unique feature of the pharmaceuticals market that generic manufacturers are willing to market generic versions of particular drugs "at risk" of infringing another manufacturer's weak patent. The potential losses are huge, although the benefits equally rewarding should the patent transpire to be invalid.

Holders of pharmaceutical patents often seek injunction to prevent generic manufacturers from infringing their patent. This protects their investment and allows them to recoup the costs of the research, development and marketing of their new invention. However, in Servier's case, the new patent was obtained to keep generic competitors out of the market and it did not genuinely qualify for patent protection.

The court commented that what is required is a rapid method of revoking such a patent before it causes harm to competitors and to the public interest. However, the risk of having to compensate competitors as illustrated in this case may act as a deterrent to prevent pharmaceutical companies from unreasonably defending and obtaining injunctive relief in relation to an invalid patent.

05 November 2008

Copyright and Xpression of an idea

A new musical show which is showing across the UK has been forced to pull out of forthcoming fixtures as a result of threatened legal action by Talkback Thames, the company which own rights to the television show, the X Factor.

The musical, eXtra Factor, is largely based on the format of the X Factor, and provides a satirical look at "reality" television talent shows, with a celebrity cast posing as wannabe singers hoping to become pop stars.

The producers of the musical were advised that further legal action would ensue if the show continued. The basis of Talkback's proposed action appears to be the assertion that the musical infringed the X Factor brand and logo, and that there was also a copyright infringement in relation to the format of the musical being similar to that of the X Factor.

Television show formats are hugely important in commercial terms to broadcasting and production companies, producing large profits by exploiting the fundamental ideas that give rise to the show formats. Over the years there have been a number of legal actions brought on the grounds of copyright infringement in the context of television programme formats.

Such actions have encountered difficulties frequently, especially when we consider that copyright protects the expression of an idea, rather than the idea itself. Accordingly, the concept which underpins the format of a show cannot be afforded protection under copyright laws. The idea will acquire copyright protection once it has been expressed in a material form – such as being reduced to writing, or fixed on film.

The X Factor was also the subject of court action based on copyright infringement in 2005, when 19TV, the company which owns rights to the television shows Pop Idol and American Idol, raised proceedings against the producers of the X Factor, claiming that the X Factor format was explicitly based on the Pop Idol format. The action was settled, and therefore the question of to what degree is television programme format protected by copyright was left unanswered on this occasion.

The question of copyright in television show formats was also considered recently by an Australian court in relation to two home renovation programmes – Dream Homes and The Block. On giving its judgement, the court found that copyright could exist in a particular show format, although there are certain elements which are generic to a particular type of programme that cannot be protected – for example, holding auditions and having a panel of judges would be common to the talent quest format.

The reality television show, Big Brother has also been embroiled in copyright infringement proceedings in the Netherlands when the makers of "Survivor", another programme in the reality genre, claimed that Big Brother had copied several key elements of the Survivor format. In its ruling, the court stated that a programme format consisted of a number of unprotected elements, and copyright infringement would be an issue if a number of these elements had been copied in an identifiable way.

Copyright law is regulated by statute in the UK, in particular the Copyright Designs and Patents Act 1988. It is perhaps time that clear principles in relation to the protection of television show formats are introduced and incorporated in statute. What is clear is that actions of this type will undoubtedly increase due to the increasing popularity with viewers and financial importance to production companies of programmes such as the X Factor.

05 November 2008

Decisions, decisions for successful IP infringement claimants, but should they have to make a choice?

It tends to be a little known fact in intellectual property court disputes that a successful claimant must elect to either recover any losses by seeking damages or, alternatively by an account of profits, each of which has its benefits and drawbacks depending on the claimant's circumstances.

The two different options focus on the affairs of the different parties.

In an award for damages, the focus is on the losses sustained by the claimant. There is no upper limit on the amount which can be sought. However any losses which are not caused by the defending party are not recoverable.

Alternatively with an account of profits, no reference is made to the loss suffered by the claimant. Instead, the focus is on the benefit obtained by the defender as a result of their infringement of the claimant's intellectual property. Ultimately the raison d'etre for this method is to prevent the defender from being unjustifiably enriched as a result of his wrongdoings. However, unlike an award of damages, as discussed earlier, opting for an account of profits limits the pay-out to the amount of profit which has been made by the infringing party.

A further problem with this option is that it can very often be a complex calculation to ascertain precisely what profits resulted as a consequence of the infringement. This distinction is made even more complex where the infringing party has profited partly as a result of infringing the claimant's intellectual property but also partly as a result of legitimate, non-infringing actions. In this case, only the part of the profit which is attributable to the infringement will be payable. Clearly, this distinction can, at times, be very difficult to make.

Normally an award of damages will at least equal (and will often exceed) an award under an account of profit. However many commentators have suggested that, in the right case, an award under an account of profit could potentially far exceed that of damages.

The issue on whether such a 'choice' is still relevant arose in the recent case of Magical Marking Ltd and Andrew Phillis v Holly and others where, in his decision, the judge stated that he was going to give the claimant's the right to elect for account of profits in lieu of damages or equitable compensation. However, the judge also ordered an enquiry as to damages or equitable compensation in the event of infringement of copyright, database right or confidential information.

As a result of this case, a debate has emerged as to whether IP claimants should be made to elect between damages and an account of profits especially in light of the fact that it does not appear as though there is anything within the IP Enforcement Directive (2004/48/EC) which indicates that this should necessarily be the case. Instead, several commentators believe that, where appropriate, a choice should not have to be made and a claim for both damages and also for an account of profits should be possible. While there does not appear to be much further guidance on this issue at the moment, it is likely to be an area which will develop and be the subject of much debate in the months to come, so watch this space.

05 November 2008

Court of Appeal not “Boulter” over by novel defence

It will come as no surprise to our readers to learn that the Criminal Division of the Court of Appeal has been dealing with a conviction for criminal trade mark infringement and an appeal thereof. The individual defending himself against this conviction was one Gary Boulter who had been caught with a stash of 1,640 DVDs of feature films, 457 DVDs of pornography and 232 compacts discs, all of which featured infringing logos. What may surprise many of you is the line of argument that Mr Boulter ran in his appeal against his conviction. The logos involved were those of EMI and “other companies of similar repute”. Mr Boulter's defence was that the material bearing the trade marks was of such poor quality that there was no likelihood of the public being deceived or confused.

It is worth noting that it was not the quality of the films, pornography or music on the CDs that was of poor quality but rather the logos which constitute the marks.

You will be glad to know that there are no more surprises to spring on you in reporting this case because, as you might hope and expect, the Court dismissed the application.

In its judgment, the Court spent time clarifying what is required to establish an infringement under the Trade Marks Act 1994 (the Act).

Under section 10(1) of the Act which deals with the same mark applied to the same goods there is no need to prove that a likelihood of confusion exists.

Under section 10(2) of the Act which deals with similar marks applied to similar goods; similar marks applied to the same goods; and the same mark applied to similar goods it is necessary for a likelihood of confusion to be proved.

Despite Mr Boulter’s claims and the poor quality of the marks the Court held that the marks on the goods in Mr Boulter’s possession were identical to the registered marks of EMI and the other wronged parties, and proceeded on the basis that present case was a section 10(1) case.

The Court then went on to satisfy itself in respect of the other tests required to establish liability for a section 10(1) case, namely:

1. that the goods in Mr Boulter’s possession to which the infringing marks had been applied where identical to the goods for which those trade marks were registered; and
2. that Mr Boulter held those goods in the course of his trade.

The Court held that he case was indeed a section 10(1) case, that there was therefore no need to establish a likelihood of confusion and that the tests for liability for a section 10(1) case had been satisfied. The Court therefore dismissed the appeal having found that Mr Boulter was liable for infringement. In making this judgment, the Court commented that it could not conceive that Parliament would have intended to create a situation where a defendant could escape liability on the basis that the quality of the infringing mark was so poor that it would not be likely to cause confusion.

Mr Boulter’s attempt was not entirely in vain however as the Court noted that his attempted claim that the quality of the counterfeiting was so poor that it was not likely to cause confusion could potentially provide a valid defence. However unfortunately for Mr Boulter the Court found that there was no foundation for this defence in this case.

05 November 2008