FEDERAL COURT OF AUSTRALIA

Apand Pty Ltd v Kettle Chip Co Pty Ltd [1999] FCA 483

INTELLECTUAL PROPERTY – passing off – account of profits – trading profits – allocation of overhead costs – deducted from gross profit – method of allocating overhead expenses – capital profit – whether capital profit recoverable as an account of profit.

Dart Industries Inc v Décor Corporation Pty Ltd (1993) 179 CLR 101 considered

Colbeam Palmer Ltd v Stock Affiliates Pty Ltd (1968) 122 CLR 25 considered

Schnadig Corp. v Gaines Mfg. Co., Inc. (1980) 620 F. 2d 1166 considered

My Kinda Town Ltd v Soll [1983] RPC 15 considered

Potton Ltd v Yorkclose Ltd [1989] 17 FSR 11 considered

Sheldon v Metro-Goldwyn Pictures Corp. 309 U.S. 390 (1940) considered

Warman International Ltd v Dwyer (1995) 182 CLR 544 considered

Federal Commissioner of Taxation v Slater Holdings Ltd (1984) 156 CLR cited

Brandt v W G Tatham Pty Ltd (1965) NSWR 126 cited

Duplate Corp v Triplex Safety Glass Co (1936) 298 US 448 cited

Wardley Australia Ltd v Western Australia (1992) 175 CLR 514 cited

Marks v GIO (1998) 158 ALR 333 cited

McLaurin v Federal Commissioner of Taxation (1960) 104 CLR 381 cited

Colburn v Simms (1943) 2 Hare 43, 67 ER 224 cited

APAND PTY LIMITED (formerly CCA SNACK FOODS PTY LIMITED) ACN 000 398 514 v THE KETTLE CHIP COMPANY PTY LIMITED (in liquidation) (now known as ACN 003 655 132 PTY LIMITED) and ASSOCIATED PRODUCTS AND DISTRIBUTION PTY LIMITED ACN 008 449 194 v THE KETTLE CHIP COMPANY PTY LIMITED (in liquidation) (now known as ACN 003 655 132 PTY LIMITED)

NG 729 OF 1998

JUDGES:       BEAUMONT, HEEREY & EMMETT JJ.

DATE:            23 APRIL 1999

PLACE:          SYDNEY

ON APPEAL FROM A SINGLE JUDGE OF THE FEDERAL COURT OF AUSTRALIA

THE COURT ORDERS THAT:

1.         The appeal be dismissed, with costs.

Note:    Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

ON APPEAL FROM A SINGLE JUDGE OF THE FEDERAL COURT OF AUSTRALIA

REASONS FOR JUDGMENT

BEAUMONT J:

INTRODUCTION

1                     The background to these appeals is described in the reasons of the other members of the Court, which I have had the advantage of reading.  As is there explained, two main issues of principle have emerged, and separate questions have arisen as to their application by the learned primary Judge in the present circumstances.  It will be convenient to consider each of these matters in turn.

GENERAL OVERHEADS, INCLUDING FIXED OR INDIRECT COSTS, IN THE TAKING OF AN ACCOUNT OF PROFITS

2                     The specific context in which this main issue arose was the account brought in by Apand Pty Limited, then trading under the name “Smith’s” (“Smith’s”), purporting to show a significant net loss in respect of the potato chips “Country Kettle”.  In its account, Smith’s purported to allocate, by way of deduction from gross profits, in addition to direct or variable costs (as to which there is no contention), amounts in respect of general finance and administration and other fixed or indirect costs.  Smith’s claimed that allocation of each item of fixed costs was based on the most appropriate measure;  for example, the percentage of Country Kettle sales to total product sales, being 3.88 per cent. 

3                     Smith’s account showed the following non-contentious items:

·                    “Net sales” (i.e. gross sales less discounts) of $10,219,000.

·                    Less “direct costs” of $6,866,000.  These included, e.g. “standard prime costs” of $4,242,000.

The difference was thus $3,353,000.

4                     Moving to the contentious items, the account then purported to further deduct several “allocated costs”, including the following:

·                    “Direct marketing” - $676,000.

(His Honour allowed 30 per cent of this item.)

·                    “Marketing, selling” – non-vending machine - $1,411,000.

(Thirty per cent of $1,082,000 was allowed;  of the balance, more than $200,000 was allowed in full by his Honour.)

·                    Distribution – interstate - $249,000.

(Thirty per cent allowed.)

·                    Warehouse - $389,000.

(The Kettle Chip Company Pty Ltd (“Kettle”) agreed that $228,000 of this was, in part, a variable item;  of the balance of $161,000, 30 per cent was allowed.)

·                    Production overheads - $1,487,000.

(Fully allowed.)

·                    Accounting and management services - $649,000.

(His Honour allowed 30 per cent.)

·                    Interest - $329,000.

(Thirty per cent allowed.)

5                     (The expert evidence referred to “overheads” or “indirect” costs as those that do not relate to specific products, and thus are unaffected by levels of manufacture or sale.  Costs that vary with those levels, and which would not be incurred if there were no production or sale, were described as “direct” costs.)

6                     Before going to the approach taken by the trial Judge and the grounds of Smith’s appeal in this connection, it will be necessary to refer to the general legal principles.

(a)               The principles in Dart’s Case

7                     The principles in this area were explained by the High Court in Dart Industries Inc v Décor Corporation Pty Ltd (1993) 179 CLR 101, holding that a patent infringer was at liberty to show that various categories of overheads were attributable to the obtaining of the relevant profit, and to show how and in what proportion the overheads should be allocated.  Accordingly, it was there held that a direction given at first instance, that no part of general overhead costs be taken into account as a deduction from gross profits, should be set aside.  Whilst the High Court was not required to adjudicate upon the deductibility of any actual item of overhead or fixed costs, its explication of the general principles is, of course, authoritative for our purposes.

8                     The majority, Mason CJ, Deane, Dawson and Toohey JJ, observed (at 111) that an account of profits retains its equitable characteristic in that a defendant is made to account for profits made “dishonestly” by the infringement, and which it would be “unconscionable” for it to retain.  Moreover, the ordinary requirement of the principles of unjust enrichment, that regard be paid to “matters of substance rather than technical form”, applies.  Whilst “mathematical exactitude is generally impossible” in isolating those costs which are “attributable” to the infringement, “some assistance may be derived form the principles and practices of commercial accounting”.  An account of profits, as the majority later put it (at 116), “aims to have the defendant account for the actual profit, no more and no less, which it has gained from the infringement”.

9                     Their Honours (at 113) noted the (exceptional) case of the manufacture of a “side line”, as in Colbeam Palmer Ltd v Stock Affiliates Pty Ltd (1968) 122 CLR 25, where overheads were not allowed because there was unused or surplus capacity and the overheads would have been incurred in any event.

10                  Turning to the case where there is no unused or surplus capacity, the majority observed (at 114) that the cost of manufacturing and marketing the infringing product may have included the cost of forgoing a profit from manufacture and marketing of alternative products, that is, profit as “an opportunity cost”;   but, whilst the infringer cannot deduct such a profit, it should not also be denied a deduction which sustained the capacity that would have been utilized by an alternative product and that was, in fact, utilized by the infringing product.  Where the infringed has forgone the opportunity to manufacture and sell alternative products, it will ordinarily be appropriate to “attribute” to the infringing product a proportion of those general overheads which would have sustained the opportunity.

11                  Their Honours (at 115) referred also to other possibilities, e.g. that overhead costs may have been increased by the infringing product;  or reduced if it had not been produced.  In either case, it may be appropriate to attribute the difference in overhead costs to the infringing product.

12                  The majority said (at 117) that the overheads, if any, to be deducted and the basis of apportionment will depend upon the facts of each case, bearing in mind always that the aim of the exercise is to arrive as closely as possible at “the true profit”.  Their Honours held (at 118) that the onus is upon the infringer to establish that overheads in any particular category are “attributable” to the manufacture or sale of the infringing product, since, inter alia, the relevant facts are likely to be peculiarly within its knowledge.

13                  Finally, their Honours noted (at 119) that in determining the proportion of overheads to be allocated, “approximation rather than precision may be necessary”.

14                  McHugh J also held that the direction given at first instance should be set aside.  His Honour noted (at 124) that overhead is part of the cost of producing any product and favoured a practical approach in allocating overheads;  that is, to apply “those commercial and accounting principles… used in business to determine… profit….” (at 126).

15                  His Honour (at 132) viewed Colbeam, above, as an example of the (debatable) “side line exception”, involving short term decisions to make and/or sell a product on the basis of utilizing excess capacity, or for short term proportions or gains.

16                  McHugh J was of the view (at 133) that the “absorption method” is the proper method for allocating overheads, the test being one of fact, whether the overhead item actually assisted in the production of the infringing product;  and that the infringer bears the onus (1) of showing which overheads so assisted;  and (2) of providing a fair basis for allocating overheads (at 134).

17                  In his Honour’s opinion, in this area the Court should accept a reasonable approximation.  The accounting method generally used by the producer in the ordinary course will generally be regarded as a “reasonably acceptable formula” (at 135).

(b)               The approach of the primary Judge on the principles to be applied

18                  Burchett J (155 ALR 134 at 138) accepted for his purposes that Dart, above, by the decision of its majority, held (at 118) that the onus was on the defendant (1) to establish that any item of costs was incurred in relation to the manufacture of the infringing articles;  and (2) to provide a reasonably acceptable basis for allocation.

19                  The primary Judge (at 139) referred to the majority reasoning in Dart (at 114; 119 – 120) on the significance of “opportunity cost” for present purposes, and went on to say (at 140):

“In Dart…no suggestion was made that the alternative product would have been much less successful than the infringing product.  But where such a suggestion is made, and appears to be justified, the logic of the position expounded by the majority of the High Court seems to demand some elaboration of the simple propositions to which I have referred.  The question before the High Court did not require their Honours to go into the detail of the range of complexities that might be encountered in practice.  But they were not unaware of those complexities, and the proposition they laid down, it seems to me, made deliberate allowance for the kaleidoscope of differing circumstances which might be found to exist.”

20                  His Honour then cited the majority opinion (at 117) that the basis of any apportionment of overheads will depend upon the facts of each case, and said (at 140 – 141):

“This appears quite explicitly to authorise the court to examine the circumstances in evidence, with a view to the selection of the most appropriate ‘basis of apportionment’.  In doing so in the present case, I may (as was stated at CLR 119) ‘use… the concept of opportunity cost’, which tells me that in fact Smith’s did not forgo an opportunity of recouping the full proportion of fixed costs recouped by Country Kettle, but only something of the order of 23% of that proportion.  (Of course, I am not speaking of actual sums paid, but of allocations in accordance with accounting principles designed to represent, as fairly as possible, the true cost of business operations in respects that did not involve discrete, identifiable payments.)  When considering whether I should reflect in my decision the paucity of the opportunity forgone, the majority judgment instructs me (at CLR 116:  ALR 391) that ‘the guiding principle… is that an account of profits aims to have the defendant account for the actual profit, no more and no less, which it has gained from the infringement’.  If Smith’s does not account for so much of the fixed costs recouped by Country Kettle as would not have been recouped by an alternative product, then, to that extent, it will not have accounted for the actual profit gained from the infringement.  As I have already pointed out, the earlier passage in the majority judgment (at CLR 114), speaking specifically of the allowance of overheads on the basis of a forgone opportunity to recover them, relies on the proposition that the infringer should not be permitted to be in a better position than if there had been no infringement.”

(c)                The method applied by the trial Judge

21                  His Honour referred (at 137) to “impressive” expert accounting evidence called on behalf of Kettle, expressing the opinion that, if the alternative product would have recovered a much smaller percentage of fixed costs than the infringing product actually recovered, it would be unfair to the injured party to allow the infringer to deduct the full amount of an allocation of fixed costs calculated proportionately to sales, or on any similar basis:  the infringer would thereby benefit from its own wrongdoing.

22                  Burchett J said (at 137):

“In the present case, the court is not without some guidance concerning the contribution that might have been made by an alternative product.  Smith’s Classic, which was designed to compete with the applicant’s Kettle chips pending the launch of Country Kettle, was faded out as Country Kettle was introduced.  In the absence of Country Kettle, Smith’s Classic would doubtless have continued to be sold.  During a somewhat longer, but comparable, period, its sales were at an average rate of about 23% of that achieved by Country Kettle.  It is true that, had it continued to be sold instead of Country Kettle, or had a product resembling it been launched, the advertising effort that was put into Country Kettle might possibly have been put into the alternative product, with some effect on sales.  But Smith’s Classic does not seem to have been successful, and a product that was not passed off as associated with the applicant’s extremely successful Kettle chips would have been likely to have suffered two disadvantages.  It would have been slower to make an impact on the market in which Kettle chips were, to put it colloquially, ‘the flavour of the month’;  and any impact it made, being less clearly focused on the segment already occupied by Kettle chips, would have been likely to have been at the expense of the other brands in the market generally, and thus of Smith’s itself as by far the largest seller in the market.  The detriment to Smith’s which I have hypothesised was in fact the subject of a considerable amount of evidence.  It is a well known phenomenon in marketing called ‘cannibalisation’.  The reality of these considerations is confirmed by the very fact that Smith’s chose to take the risky course of marketing Country Kettle in the way that it did….”

His Honour went on to say (at 137):

“Furthermore, there is always the question whether a less successful product would actually have received, and could in the time have recouped, the expensive advertising that was devoted to Country Kettle.  Of course, to the extent that Country Kettle itself replaced other Smith’s products, that is, to the extent that its sale involved cannibalisation, Smith’s lost the opportunity of selling those other products.  But the evidence satisfies me that Country Kettle was clearly focused on the segment of the market occupied by Kettle chips, so as to minimise cannibalisation;  and I am also satisfied that a proportion of any sales lost would have been lost to the growing popularity of Kettle chips, had Country Kettle not won them.”

23                  His Honour concluded (at 141) that the amount of the allocated proportionate deductions of fixed costs claimed should be reduced to 30 per cent, reflecting an allowance for the extent to which Smith’s Classic, or an alternative product, might have improved, during the relevant part of 1992, upon the previous performance of Smith’s Classic, had Country Kettle not been launched on the market.

(d)               Consideration of Smith’s grounds of appeal

24                  Smith’s raises two grounds here, one of principle, the other factual.

(i)                 Was the method employed by the trial Judge permissible in principle?

25                  On behalf of Smith’s, it is submitted that an approach which would accord with the majority reasoning in Dart would have regard to the fixed costs actually incurred by the infringing product, and to allocate them on some reasonable basis.  Yet his Honour took the fixed costs to be applied to an alternative product (Smith’s Classics) and made various assumptions as to the proportion of those costs which would have applied had Country Kettle not been produced.  In adopting this approach, the argument runs, Burchett J introduced a notion of “recovery” or “recoupment” of fixed costs, holding by way of a gloss upon Dart, that the infringer would benefit from its own wrongdoing if the alternative product would have recovered a much smaller percentage of fixed costs than the infringing product actually recovered.  But, although Dart recognised the notion of unjust enrichment as the foundation for this remedy, it was not open to his Honour to use that notion to hold that part of the “profit” which the infringer made was the “partial recoupment of fixed overheads which would not otherwise have occurred” (at 140).

26                  It is further submitted for Smith’s that the fact that Smith’s Classics were produced as an interim “Kettle” style chip product demonstrates that the production of such a chip was not merely a sideline;  and that an alternative product would have been produced in the absence of the infringing product.  However, the argument runs, Smith’s Classics was no more than an interim measure – it was produced only until Smith’s were able to use the most effective technology for production of a “Kettle” style chip.  From that time on, any product produced as an alternative to the infringing County Kettle would, it is contended, have been identical save for the packaging.  Although the “final” product received significant financial (marketing) support, this was never intended for the interim product.

27                  In oral submission, it was contended for Smith’s, necessarily formally, that the reasoning of McHugh J in Dart, ought to be preferred to that of the majority where they differ, especially in his Honour’s preference for the “absorption” method.

28                  I am not persuaded that Burchett J fell into any error of principle in the present area, assuming, as I must, that the majority opinion in Dart is, in its general terms, binding on us in this connection.

29                  It is true that the majority did not specifically address the particular type of question thrown up by these facts.  But, equally, there is nothing there in point of principle that contradicts the approach taken by the trial Judge.

30                  For present purposes, the most pertinent observations in the reasons of the majority appear to be their opinions (at 114), first, that the infringer is allowed a deduction for the cost of “the overheads which sustained the capacity that would have been utilized by an alternative product” (my emphasis);  and secondly, that where the defendant has forgone the alternative opportunity, it will “ordinarily” be appropriate to attribute a proportion of “those general overheads which would have sustained the opportunity” (my emphasis).

31                  It may be accepted, as is contended for Smith’s, that none of these observations require, at least explicitly, that the proportion of the fixed overheads to be attributed to the infringing product should be some notional figure, i.e. something calculated otherwise than by reference to actual cost.  But, at the same time, the twice used language of “would have” indicated a need for a hypothetical exercise to be undertaken.  Moreover, the use of “ordinarily” and the notion of “attribution” itself are further indications of the need to make a judgment about something that was necessarily hypothetical.  In essence, this was what his Honour sought to do.  I can see no error of principle in that approach.

32                  The need for such a hypothetical judgment in this type of context, that is, of opportunity forgone, is explained by Dobbs, “Law of Remedies” (2^nd ed.), in the general area of the burden of proof of apportionment (at 643):

“… courts have sometimes placed the burden on the defendant to show the ‘right’ amount of apportionment, holding him liable for the entire profits if he cannot do so.  This burden of proof rule is not like the rule that puts the burden on the defendant to show business expenses that should be deducted from gross profits.  Business expenses are provable and the defendant is the right party to prove them because the defendant will know better than the plaintiff how much rent it paid on the factory and wages it paid to workers.  But neither party can show how much of a manufacturer’s profit results from the use of the plaintiff’s trademark on the defendant’s goods and how much is due to the defendant’s own investment.  The apportionment problem cannot be resolved by direct proof the way the problem of expense deductions can.  An informed estimate about apportionment might be better than a liability we know exceeds the defendant’s illicit gains.”

33                  This is not, of course, to suggest that the judgment required should be arbitrary or unreasonable.  Here, the judgment made by his Honour can, I think, legitimately be viewed as analogous to, and equally justified as, a finding that there was, or would have been, surplus or unused capacity to some extent.  As such, this conclusion may be vindicated, in principle, as falling within the parameters of the available discretion envisaged by the majority in Dart.

34                  Moreover, viewed from the appellate perspective, we should generally, be reluctant to interfere in this area.  As Engel J, in delivering the judgment of the Sixth Circuit Court of Appeals in Schnadig Corp. v Gaines Mfg. Co., Inc. (1980) 620 F. 2d 1166, said (at 1174):

“The common thread running through the cases which have addressed this issue is a grant of considerable discretion to the trial court.  Although the proper treatment of fixed expenses can be viewed as a question of law, most courts have perceived the real question to be the relationship between the particular fixed costs and the infringing production in each case, and this has been treated as a question of fact.  This was the view expressed by the Supreme Court in Sheldon v. M.G.M., 309 U.S. 390… (1940).”

35                  It is true that we are here dealing with secondary, not primary facts.  But given the present circumstances of a long and complex trial conducted by an experienced judge, we should be especially reluctant to disturb his Honour’s conclusion, provided that some reasonable principle basis to underpin it does exist.  In my opinion, that basis exists here in the form of the analogy of partial surplus or unused capacity.  It follows that it was open to his Honour, and thus permissible under the principles enunciated in Dart, to adopt the approach he did.

(ii)               Did his Honour err in fact in allowing a deduction of only 30 per cent of some fixed costs?

36                  On behalf of Smith’s, this conclusion is sought to be challenged upon the footing that it was inconsistent with accounting evidence that all of these costs assisted in, or contributed towards, the manufacture and sale of Country Kettle.

37                  But, as has already been discussed, this conclusion was not merely a finding of primary fact.  Rather, it involved an exercise of judgment in the hypothetical area of an opportunity forgone.  As has been said, I am not persuaded that the primary Judge erred in his approach.  It is consistent with a preference for substance over form.

(iii)             Did his Honour err in his identification of Smith’s Classic as the alternative product?

38                  On behalf of Smith’s, it is contended that the trial Judge failed to give sufficient weight to the circumstance that Country Kettle was replaced by another product, “Mr Smith’s Slow Cooked Potato Chips” (“Mr Smith’s”), which was identical to Country Kettle as a product.

39                  Again, I cannot accept the submission.  His Honour’s conclusion was open, for at least two reasons:  (1) Smith’s Classic was manufactured and marketed in the material period;  and (2) Mr Smith’s was produced and sold by United Biscuits Holdings Plc, not Smith’s, so that the direct and indirect costs would not necessarily be comparable.

CAPITAL PROFIT

(a)               The legal principles

40                  On 10 July 1995, the primary Judge formally noted that Kettle had “elected for [Smith’s] to make an account of profits…”.  No limitation, at least nothing explicit, was thereby imposed upon the kind of profits to be accounted for, although the words used must, of course, always be viewed in their proper context.

41                  As has been noted, the majority in Dart observed (at 111) that an account of profits “is confined to profits actually made, its purpose being not to punish the defendant but to prevent its unjust enrichment”.  Three authorities, two English and one American, are cited.

42                  First, My Kinda Town Ltd v Soll [1983] RPC 15 at 55, where observations are made, in a passing off case, on the practical difficulties in making an apportionment of the defendant’s profits so as to ascertain those profits attributable to the use of the plaintiff’s name, or in the case of patent infringement, the plaintiff’s invention.

43                  Slade J said (at 55 – 56):

“… the court will not order an account of profits in a wider form than it regards as equitable, that, if it considers it necessary in the interests of justice, it will direct an apportionment and that it will not necessarily be deterred from so doing by the practical difficulties to which such an apportionment may give rise.

……

The purpose of ordering an account of profits in favour of a successful plaintiff in a passing off case is not to inflict punishment on the defendant.  It is to prevent an unjust enrichment of the defendant by compelling him to surrender those profits, or those parts of the profits, actually made by him which were improperly made and nothing beyond this.  Before specifying the form of the account, the court therefore should, I think, initially ask itself this question:  What categories of the relevant profits or parts of such profits ought to be treated as having been improperly made by the defendants?  The facts of many particular cases may justify the conclusion that the whole of the relevant profits should be so treated.  The facts of the present case, however, do not in my judgment justify such a conclusion.”

44                  Secondly, Potton Ltd v Yorkclose Ltd [1989] 17 FSR 11 at 14 – 15, where the defendants in an action for infringement of copyright in architectural drawings admitted infringing by constructing several houses, but denied infringement by sale;  the plaintiff, having elected for an account of profits, the defendants contended that the plaintiff was only entitled to an account of profits actually made, not to an account on the basis of wilful default of profits that  could or should have been made;  accordingly, the defendants said, a plaintiff is not entitled to an account of “unrealised” profits.  It followed, the defendants’ argument ran, that since profits were realised by selling the houses, not by building them, there was nothing to account for.

45                  Rejecting the argument, Millett J (at 15) cited observations of Romilly MR in Cartier v Carlisle [1862] 31 Beavan 292 (at 298) that in restraining an imitator of a trade mark, “[e]quity… will make him account for such advantage, if any, as he may have derived from its user”.  Millett J said (at 15 – 16):

“Those are wide words and I do not see why they should exclude unrealised profits.  The remedy is given in order to prevent the unjust enrichment of the defendant.  The making of a real though unrealised profit by the unauthorised use of another’s intellectual property is plainly an advantage which is capable of resulting in unjust enrichment.  A builder who builds a house in infringement of copyright is unjustly enriched whether he builds it for sale or for his own use and occupation.”

Millett J went on to say (at 16):

“… however, the houses have been sold, and in my judgment the question is not whether the plaintiffs are entitled to an account of unrealised profits, but how the profits realised by the sale of the houses should be apportioned between those attributable to the infringing acts of building them and those attributable to other acts of the defendants such as selling them.”

46                  Thirdly, the opinion of the Supreme Court of the United States in Sheldon v Metro-Goldwyn Pictures Corp., above, at 399, describing the remedy (for an account of profits) as “appropriate equitable relief incident to a decree for injunction… not to inflict punishment but to prevent an unjust enrichment” by allowing injured complainants to claim that which ex aequo et bono, “is theirs, and nothing beyond this”.

47                  The Supreme Court affirmed an apportionment by the Court of Appeals of net profits made by a wilful infringer of copyright in exhibiting a motion picture.  In making the “best estimate it could”, the Court of Appeals had allowed the injured party one-fifth of the net profits.  There had been negotiations for the rights, fixing a price, but no bargain had been concluded.

48                  The nature of the account of profits remedy was further considered by the High Court in the context of a breach of fiduciary duty in Warman International Ltd v Dwyer (1995) 182 CLR 544, where an employee diverted part of his employer’s business to his own company.  Mason CJ, Brennan, Deane, Dawson and Gaudron JJ said (at 561 – 562):

“In the case of a business it may well be inappropriate and inequitable to compel the errant fiduciary to account for the whole of the profit of his conduct of the business or his exploitation of the principal’s goodwill over an indefinite period of time.  In such a case, it may be appropriate to allow the fiduciary a proportion of the profits, depending upon the particular circumstances.  That may well be the case when it appears that a significant proportion of an increase in profits has been generated by the skill, efforts, property and resources of the fiduciary, the capital which he has introduced and the risks he has taken, so long as they are not risks to which the principal’s property has been exposed.  Then it may be said that the relevant proportion of the increased profits is not the product or consequence of the plaintiff’s property but the product of the fiduciary’s skill, efforts, property and resources.  This is not to say that the liability of a fiduciary to account should be governed by the doctrine of unjust enrichment, though that doctrine may well have a useful part to play;  it is simply to say that the stringent rule requiring a fiduciary to account for profits can be carried to extremes and that in cases outside the realm of specific assets, the liability of the fiduciary should not be transformed into a vehicle for the unjust enrichment of the plaintiff.

It is for the defendant to establish that it is inequitable to order an account of the entire profits.  If the defendant does not establish that that would be so, then the defendant must bear the consequences of mingling the profits attributable to the defendant’s breach of fiduciary duty and the profits attributable to those earned by the defendant’s efforts and investment, in the same way that a trustee of a mixed fund bears the onus of distinguishing what is his own.”

49                  Thus, there appears to be nothing in Dart or in the cases there cited, or in Warman, that would, in principle, eliminate from the account a profit having a capital, rather than a revenue, character.  Moreover, as Gibbs CJ noted in Federal Commissioner of Taxation v Slater Holdings Ltd (1984) 156 CLR 447 (at 460), in its ordinary sense, “profits” often means the excess of returns over the outlay of capital (see also Brandt v W G Tatham Pty Ltd (1965) NSWR 126;  cf. Black’s Law Dictionary (1996) at 505 – 506).

(b)               The trial Judge’s approach to the question of principle

50                  His Honour proceeded (at 141 – 142) on the basis that the question of  law, whether any capital profit arising from the sale by Smith’s of its snack food business was liable to be accounted for, was not the subject of any authority.  But the primary Judge was of the opinion (at 142) that it should be, because “the object [of the remedy] is to prevent an infringer’s unjust enrichment…”.  Citing Cardozo J in Duplate Corp v Triplex Safety Glass Co (1936) 298 US 448 at 456, his Honour said (at 143):

“If [Smith’s] are not required to account for any capital profit that arose out of the disposal of the trademarks and goodwill of Country Kettle, they will have strengthened the business of Smith’s ‘and reaped a profit as infringer[s]’.  As Cardozo J said, equity forbids that this result should be attained.  In forbidding it, equity’s concern is not with the nature of the profit, but with the fact of the profit.”

Burchett J concluded (at 144) that –

“…the distinction between capital and revenue profits is not of significance for the purposes of the taking of an account of profits in an action for passing off.  The account relates to all profit gained by the wrongful conduct in question.”

(c)                Consideration of Smith’s challenge to his Honour’s approach to the question of principle

51                  On behalf of Smith’s, it is submitted that the object of an order for an account “is to deprive [a] defendant[ ] of the profits which [it has] improperly made by wrongful acts committed in breach of the plaintiff’s rights…” (My Kinda Town, above at 49).  It is then said that the wrongful act here was the passing off of the product, not the sale of the business, and any capital profit made on the sale was not one improperly made as a result of the passing off.

52                  I have difficulty with the submission.

53                  Even if it be accepted, as it must be, that only profits made “by” the wrongful act are involved, the critical notion for present purposes is encapsulated in the word “by”.  In this context, it requires an inquiry which seeks to identify a relevant causal connection (see Wardley Australia Ltd v Western Australia (1992) 175 CLR 514 at 525;  Marks v GIO (1998) 158 ALR 333 at 346).  Thus, in Colbeam, above, Windeyer J said (at 42):

“What the defendant must account for is what it made by the wrongful use of the plaintiffs’ property.  The plaintiffs’ property is in the mark, not in the painting sets.  The true rule, I consider, is that a person who wrongly uses another man’s industrial property – patent, copyright, trade mark – is accountable for any profits which he makes which are attributable to his use of the property which was not his.  An early form of the order in a patent case is for ‘an account of all profits actually made by the defendant by means of the infringement’:  Elwood v. Christy.”  (Emphasis added).

54                  In my opinion, there is no reason, of logic or experience, to limit the concept of “profits” in this context to those derived on revenue account, to the exclusion of any capital profit.  Again, it is consistent with a preference for substance over form.

(d)               The trial Judge’s method of calculation of capital profit

55                  After describing the course of the negotiations for the sale of the snack food business, his Honour (at 147) found that –

“… Country Kettle formed part of the total assets for which the new sum of $430 million was agreed to be paid.  The applications for the Country Kettle trademarks were expressly included in the agreement, just as its earnings were included in the profits represented to United Biscuits in respect of the total business.  The prospect that those profits would continue was the essential basis for the value attributed to the goodwill and trademarks of the business when the final price of $430 million was fixed.”

Burchett J went on (at 147) to conclude that –

“… capital profits were received in respect of Country Kettle upon the sale which was settled on 4 January 1993.  The two sums of $155 million and $77.95 million, for trademarks and goodwill respectively, included the trademarks and goodwill of Country Kettle.  Those trademarks involved the passing off in respect of which the account is being taken, and that goodwill was a product of the same passing off.  In my opinion, the capital profits so received must be accounted for to the applicant.  Since the respondents reaped these profits by a sale in which were intermingled legitimate capital profits with the capital profits of passing off, the court is faced by a problem of disentanglement.”

His Honour accepted a calculation of the value attributable to Country Kettle –

“… [which] assumed that a valuation of Country Kettle late in 1992 would have been made on the basis of the prospective earnings for 1993, having regard to the fact that Country Kettle was, on the one hand, very new, and on the other, showing all the signs of success.  On the further assumption that in late 1992 experienced businessmen would have predicted with reasonable accuracy the likely sales in 1993, the calculation takes the actual earnings of Country Kettle in that year and expresses them as a percentage of the earnings of Smith’s in that year.  The percentage is 2.4%.  This percentage of the sum of $155 million is $3.72 million, and this percentage of $77.95 million is $1,870,800, making a total of $5,590,800 as the proportion of the capital profits received which is attributable to Country Kettle.”

(e)               Consideration of Smith’s challenge to his Honour’s method of calculation

56                  Smith’s now challenges the methodology of the trial Judge on the grounds that it proceeded without any direct or positive evidence to justify the conclusion;  that, instead, the parties to the sale struck a global price rather than one built up from components;  and that no separate consideration was then given to revenues derived from Country Kettle or to its value.

57                  It is true that, at no stage, did the parties to the transaction make, or even attempt, an apportionment of the sale price nor did either of them, even if only for their own purposes, seek to allocate any particular worth to Country Kettle.  What his Honour did was an exercise in rationalisation after the event.  It is also true that, in some legal contexts, it is not permissible, after the event, to attempt such a re-allocation or reconstruction (see McLaurin v Federal Commissioner of Taxation (1960) 104 CLR 381).

58                  But it does not, in my opinion, follow that it was not open to his Honour to inquire into, and to find, that the infringer actually made some profit when it sold, inter alia, the Country Kettle marks and accompanying goodwill.  As has been noted from the observations cited from the majority in Dart (at 111), an infringer is to account for “profits actually made”.  As a matter of principle, I cannot see that the absence of any apportionment by the parties can have the consequence that the Court is precluded from embarking on the inquiry whether the infringer made some profit by means of the infringement.  There must, of course, be some evidence of some actual profit.  In my view, the spectacular commercial success of this product meant that it was open to the primary Judge that there was a liability to account for some capital profit, albeit a notional one.  It is the exercise of estimating its amount that is difficult, and to my mind, the really contentious issue here.  Although the force of what Emmett J has written is considerable, I am not, on balance, persuaded that it is appropriate that an appellate court should disturb the primary Judge’s estimation.  True, the figure arrived at is necessarily artificial, in the sense that it is notional.  But it was arrived at in a reserved judgment with the benefit of a considerable body of business and expert accounting evidence;  and it was open to the trial Judge to accept a calculation which had the endorsement of Kettle’s expert, Mr Bryant, and of Smith’s witness, Dr Ferrier.

CONCLUSIONS ON THE APPEAL

59                  I would dismiss the appeal, with costs.

Associate:

Dated:       23 April 1999

REASONS FOR JUDGMENT

HEEREY J:

60                  The respondent produced and sold potato chips using distinctive packaging and the word “Kettle” as a brand name. The first appellant subsequently marketed a similar product under the name “Country Kettle”.  The respondent alleged a passing off.  Its claim was upheld by Burchett J :  Kettle Chip Co Pty Ltd v Apand Pty Ltd (1993) 46 FCR 152.  The judgment was afterwards affirmed on appeal, subject to a minor variation of the relief granted:  Apand Pty Ltd v Kettle Chip Co Pty Ltd (1994) 52 FCR 474.  (The second appellant accepted liability as a joint tortfeasor.  Its case raises no separate consideration for present purposes.  I shall hereafter refer to the first appellant simply as “the appellant”.)

61                  The respondent elected for an account of profits.  It claimed an account not only of trading profits but also of capital profit made by the appellant on the sale of its snack food business, which included the infringing brand name.  On its accounting, the appellant claimed the infringing product made a trading loss.  The appellant further claimed that as a matter of law a capital profit was not recoverable.  Burchett J rejected the appellant’s case on both issues:  Kettle Chip Co Pty Ltd v Apand Pty Ltd (1998) 155 ALR 134.  Since this litigation has already been the subject of three reported decisions, the following account of the evidence will not be as detailed as might otherwise have been the case. 

The passing off

62                  The appellant, which at the relevant time traded under the name “Smith’s”, had for many years manufactured snack foods, including the well known “Smith’s” brand of potato chips.  The appellant was by far the largest supplier of potato chips in Australia.  In December 1989 the respondent began selling, in a selected segment of the market, a potato chip of a notably different flavour and texture, using distinctive packaging and “Kettle Chips” as a brand name.  The product was, in the words of the trial judge, a “huge success”.  Within about two years it had taken five per cent of the market.

63                  The appellant reacted in two ways.  In June 1991 it launched a new product called “Smith’s Classic” as a short term measure.  It also commenced planning another new product for the longer term.  The latter product was intended to be closely similar to the respondent’s Kettle Chips.  The name “Country Kettle” was adopted.  Packaging was in some respects similar to the respondent’s and in particular featured a representation of a cooking pot type kettle.  The Country Kettle product was introduced on to the market on 1 May 1992 and promoted with a large advertising budget.  Smith’s Classic was then phased out.  Sales of Country Kettle grew rapidly until 4 January 1993 when the respondent sold its entire snack food business to United Biscuits Holdings PLC (“United Biscuits”) a United Kingdom company.

64                  In the meantime, on 1 May 1992, the respondent launched the present proceeding against the appellant.

Sale of business

65                  In April 1992 the appellant lodged Australian trade mark applications for the names “Smith’s Country Kettle” and “Country Kettle” and a Country Kettle label.  None of these trade marks had been registered by the time of judgment.  Early in 1992 an approach was made by the Chief Executive of United Biscuits to the Managing Director of Coca Cola Amatil Limited (“CCA”), the parent company of the appellant.  As a result an offer was made by United Biscuits in February to purchase the international snack foods business of CCA, including the appellant, for $423 million.  On 1 April 1992 the board of CCA rejected this offer.  Further meetings were held in July and August.  At the conclusion of the latter meeting the Chief Executive of United Biscuits told the Managing Director of CCA that United Biscuits would be prepared to offer $437.5 million subject to certain conditions.  On 7 August the CCA board approved a sale for that price.  In September the transaction changed from a share sale to an asset sale.  The assets included trade marks, trade mark applications and associated goodwill, along with other assets such as plant and equipment, stock and leaseholds. 

66                  However the final agreement was not executed until 10 November 1992 and the sale not completed until 4 January 1993.  Further negotiations took place which included Mr John Ballard, the Managing Director of the appellant, visiting the corresponding officer of United Biscuits in England.  During the course of these discussions the current performance of the business became a matter of concern.  At the time of finalising the agreement the parties resolved the problem of the possibility of a further reduction in profit for 1992 by a separate letter dated 10 November 1992 which fixed a formula for assessing whether an adjustment of price should be made, and if so, how much, in the event that the aggregate profits of the snack food business for the 1992 year were less than $35 million.  The price ultimately agreed to, subject to this possible adjustment, was $430 million. 

67                  On 9 October CCA wrote to United Biscuits discussing allocation of the price which was said to be based on financial accounts as at June 1992.  The proposed trade mark figure was $140 million as a “preliminary suggestion”.  At a meeting on 14 October a representative of United Biscuits told CCA officers that his company was “happy with the valuation of $140 million for the trade marks”.  At the same meeting someone on behalf of CCA, possibly the corporate solicitor, said that the Kettle Chip trial was fixed for hearing commencing on 23 November 1992 and “at this stage there are no signs of settlement.  Ellicott is leading for the defendant and he is confident”.

68                  By a letter dated 10 November 1992 CCA made certain formal disclosures to United Biscuits.  These included a disclosure of the existing Kettle Chip litigation although, as already noted, that was a matter already known to United Biscuits.  On the same day the formal sale agreements were executed.  These included a “Snack Foods Trademarks Agreement” by which CCA and an associated company agreed to sell and United Biscuits agreed to buy “the trade marks”, defined to mean “all the registered trade marks and applications for trade marks held by the Vendors in connection with CCA’s international snack food operations and all rights attaching to them including goodwill”.  The purchase price for the trade marks was $155 million and for goodwill $77.95 million.  The marks and applications sold included some 126 Australian trade marks and applications for trade marks, including an application for “Smith’s Country Kettle”, together with many foreign marks.  The agreement does not allocate any part of the purchase price to particular marks. 

69                  The trial concluded on 16 February 1993.  A report to the CCA board by a Mr McMaster on 12 February 1993 noted that it was “anticipated that the case will result in (a) decision favourable to the Company”.

Trading profit

70                  In the light of the High Court’s decision in Dart Industries Inc v The Decor Corporation Pty Ltd (1993) 179 CLR 101 the following propositions can be stated:

(i)         An account of profits is confined to profits actually made; the purpose is not to punish the defendant but to prevent its unjust enrichment:  Dart at 111, 116.

(ii)        The starting point is the gross revenue earned by the infringing product.

(iii)       Deductions must be made for variable costs directly incurred in production and sale of the infringing product, for example raw materials, labour, selling commission.

(iv)       An appropriate allocation of general overhead costs, which cannot be specifically traced to a particular product, for example rent, light, heating or office expenses, can be deducted by the defendant if such costs are attributable to the manufacture or sale of the infringing product. 

(v)        The allocation of overhead costs may vary from case to case.  It is a question of fact:  Dart at 117.

(vi)       The onus is on the defendant to provide a reasonably acceptable basis for allocation:  Dart at 118.

(vii)      The criterion for deduction of general overhead costs is not the extent to which overheads are increased by the manufacture and sale of the infringing product (sometimes called incremental cost accounting):  Dart at 116.

(viii)      If the production and sale of the infringing product takes up unused or surplus capacity in the form of overhead costs which would have been incurred in any event, the defendant cannot deduct such costs:  Dart at 113, Colbeam Palmer Ltd v Stack Affiliates Pty Ltd (1968) 122 CLR 25 at 39. 

(ix)       Where there is no unused or surplus capacity, the defendant may have suffered an opportunity cost, that is to say the cost of foregoing the profit from the manufacture and marketing of alternative products:  Dart at 114. 

(x)        The defendant may not deduct the profit foregone on the alternative product:  Dart at 114.

(xi)       However, the defendant may deduct the cost of the overheads which sustained the capacity which would have been used by the alternative product and was in fact used by the infringing product:  Dart at 114.

(xii)      “Where the defendant has foregone the opportunity to manufacture and sell alternative products it will ordinarily be appropriate to attribute to the infringing product a proportion of those general overheads which would have sustained the opportunity”:  Dart at 114.

71                  In the last mentioned proposition, their Honours were speaking of a proportion of the general overheads of the defendant’s business as a whole, and not of a proportion of overheads attributable or allocatable to the alternative product.  Their Honours were not concerned, on the facts of Dart, with a proportion of a proportion. 

72                  As McHugh J demonstrated (at 123-124), opportunity cost can come into the equation in answer to a plaintiff’s contention that some part of the overhead claimed by the defendant would have been incurred in any event. 

73                  In the present case the learned trial judge said (155 ALR at 137):

“Mr M Bryant of Arthur Andersen, accountants, the very impressive expert called on behalf of the applicant, contended that ‘the amount by which Apand Pty Ltd was better off, measured as the actual trading profit after income tax but before deducting fixed costs, was at least $2,251,000’.  If, however, a proportion of fixed costs should be attributed to Country Kettle because, had it not been produced, an alternative product would have been, Mr Bryant argued for an assessment of the contribution the alternative product would have made to those fixed costs as required for ‘determining the extent to which an infringer is better off through selling one product rather than another’.  If the alternative product would have recovered a much smaller percentage of fixed costs than the infringing product actually recovered, it would be unfair to the injured party to allow the infringer to deduct the full amount of an allocation of fixed costs calculated proportionately to sales, or on any similar basis.  The infringer would thereby benefit from his own wrongdoing.”  (Emphasis added)

74                  In my opinion, his Honour correctly applied the law as expounded in Dart.  In that case the evidence did not suggest any possibility of an alternative product which might have made a lesser contribution to general recovery of overhead than did the infringing product.  The infringer had a large range of products generically similar to the infringing product.  The percentage of sales of the infringing product (3.1 to 1.3 per cent over a six year period) was similar to the percentage of sales of other products:  179 CLR at 119.  In the present case, the appellant relied on a hypothetical alternative product based on an actual product, the Smith’s Classic.  In so doing, the appellant no doubt sought to avoid any finding that some of its claimed overhead costs would have been incurred in any event.  But in fact, as his Honour found, the hypothetical alternative product, like the actual Smith’s Classic, would have been much less successful than the infringing product since, ex hypothese, it was not using the respondent’s Kettle name and packaging.  So it would be unfair to allow the appellant to deduct an allowance for overhead contribution on the basis that the alternative product would have been a complete replacement for the infringing product.  Put another way, to the extent that the alternative product would not have recovered overhead costs, there was surplus or unused capacity.

75                  His Honour found that the sales of Smith’s Classic during a comparable period were 23 per cent of those of the infringing product.  This was an appropriate basis for estimating the sales of a hypothetical alternative product.  His Honour increased that percentage to 30 per cent to allow for the effect of possible improvement in the sales of the alternative product had the infringing product not been launched on the market.  The percentage of Country Kettle sales to total product sales was 3.88 per cent.  His Honour accordingly reduced that percentage of total overhead costs, in the case of some items, by 70 per cent.

76                  Allocation of overhead is a question of fact.  His Honour’s conclusion was consistent with Dart and well open on the evidence.

Capital profit

77                  Counsel for the appellant argued that any profit the appellant made on the sale of the Country Kettle name and goodwill (as part of the sale of its entire snack food business) did not arise from the conduct found to be an infringement of the respondent’s rights.  That conduct was the selling, offering for sale, advertising and promoting of potato chips under the name Country Kettle, and in the packaging adopted by the appellant.  The sale of the appellant’s snack food business was not a passing off, and did not involve an invasion of any right of the respondent. 

78                  The appellant’s argument raised issues as to whether

(i)         as a matter of principle capital profit is recoverable on an account of profits;

(ii)        the appellant in fact made any capital profit at all on the sale of the Country Kettle trade marks and goodwill; and

(iii)       if so, the learned trial judge’s assessment of the quantum of that profit was open on the evidence.

79                  As to (i), the appellant’s argument is correct as far as it goes, but overlooks the fundamental purpose of the remedy for an account of profits.  The infringer has to disgorge the profit it has made as a result of the infringement of the innocent party’s rights.  There is no reason in principle or logic why an infringer should be required to disgorge a trading profit, but not a capital profit.  In both cases there is gain which the infringer would not have received but for its wrongful conduct.  As the learned trial judge said (155 ALR at 147), “the goodwill was a product of the same passing off”.   

80                  As his Honour pointed out, there is no direct authority either way, a situation perhaps explicable by the rarity of the situation which arose.  Ordinarily sales or other dealings with an infringing product will have been brought to an end by injunction, interlocutory or permanent, and the infringer will have nothing to sell.  But in the present case the appellant’s rights to the infringing product were sold during the course of litigation, but before judgment.  There was no interlocutory injunction in place.

81                  No questions of double counting or double recovery are involved.  The capital profit is something separate from and additional to the trading profit.  The infringer, having already received trading profits, receives a capital sum from the buyer in return for a right to the future income stream which the buyer expects the property will generate.

82                  As to (ii), it is no answer to the respondent’s claim that the property in question was not allocated a particular value in the course of negotiations between the appellant and United Biscuits or in the sale agreement.  Still less does it matter that CCA initially calculated its asking price at a time when no sales figures for Country Kettle were available.  As a result of “horse trading” a global sum was agreed upon.  This is by no means an unusual course for commercial negotiations to take.  As far as the evidence disclosed, no other trade mark or application for a trade mark was the subject of any allocated figure.  If the appellant’s argument is correct, it would follow that no mark had value and United Biscuits were paying over $200 million for several hundred worthless marks.  Moreover, the appellant obviously expended much time, money and effort in defending its use of the Country Kettle name in the present litigation, and was confident of success.  The inescapable inference is that the Country Kettle name and associated goodwill were regarded by the appellant as things which generated good sales and thus had value.  The name and goodwill therefore were to be defended in the courts and not disposed of without adequate consideration.

83                  As to (iii), the learned trial judge’s approach commenced with the total price received by the appellant in the sale of its business, viz $155 million for trade marks and $77.95 million for goodwill.  His Honour then dealt with the “problem of disentanglement” by calculating the percentage of Country Kettle earnings in 1992 to the whole of the appellant’s earnings for that year.  The figure was 2.4 per cent.  That percentage of the sums of $155 million and $77.95 million amounted to $5,590,800.

84                  His Honour concluded that the risk of litigation was compensated for by allowing for only one year’s projection for a product that was showing strong progress.  His Honour was able to draw this conclusion more confidently because of the unexplained absence from the witness box of the appellant’s managing director Mr Ballard:  Jones v Dunkel (1959) 101 CLR 298.  Mr Ballard was a particularly notable absentee.  After the sale he went to work for United Biscuits and so was well placed to support the proposition that Country Kettle had no value, or a value greatly reduced by the litigation, and was so treated by vendor and purchaser. 

85                  His Honour’s approach was of course necessarily an approximation, but as such was based on long established principle.  As was said in Colburn v Simms (1843) 2 Hare 43 at 560, 67 ER 224 at 231, cited with approval in Dart at 119:

“The Court, by the account, as the nearest approximation which it can make to justice, takes from the wrongdoer all the profits he has made by his piracy, and gives them to the party who has been wronged.”

I see no error in his Honour’s application of this principle.

86                  The appellant further argued that its capital profit was not “derived at the expense of the respondent” because the respondent’s rights suffered no dilution by virtue of the sale of the snack food business.  The respondent still retained its rights to sue the purchaser for passing off and have the purchaser disgorge profits.  In fact it did sue United Biscuits.  The evidence did not reveal the outcome of that litigation. 

87                  However the issue here is not the loss made by the respondent but the profit made by the appellant.  In the words of Windeyer J in Colbeam Palmer 122 CLR at 32:

“But what a plaintiff might have made had the defendant not invaded his rights is by no means the same thing as what the defendant did make by doing so.”

88                   An infringer who has made a profit cannot keep that profit and point the innocent party towards litigation with another infringer who may or may not have made a profit also.

Order

89                  The appeal will be dismissed with costs, including reserved costs.

Associate:

Dated:              23 April 1999

ON APPEAL FROM A SINGLE JUDGE OF THE FEDERAL COURT OF AUSTRALIA

AND

REASONS FOR JUDGMENT

EMMETT J:

90                  Prior to 4 January 1993, the first appellant, Apand Pty Ltd, formerly known as CCA Snack Foods Pty Ltd (“Apand”) was engaged in the business of manufacturing and selling snack foods including potato chips.  Specifically, Apand was the manufacturer of potato chips under the brand “Smiths” which had dominated the market for many years.  Apand was a wholly owned subsidiary of Coca Cola Amatil Ltd (“CCA”).  The second appellant, Associated Products & Distribution Pty Ltd (“Associated Products”) was also a wholly owned subsidiary of CCA.  In 1992, both Apand and Associated Products were the holders of registered trade marks and applications for registered trade marks which were used by CCA and its subsidiaries, including Apand, in the conduct of snack food business.

91                  In late 1989, the respondent, ACN 003 655 132 Pty Ltd (“the Kettle Chip Company”) began to put on the market potato chips made by a process quite unlike the mass production methods employed to make Smiths chips, which had been employed for many years.  The new method made chips by batch cooking and the chips of the Kettle Chip Company were distinctive in flavour and texture.  They were sold under the name “Kettle Chips”. 

92                  In April and May 1992, Apand brought on to the market a new line of potato chips closely resembling the potato chips sold by the Kettle Chip Company.  Apand’s chips were not produced by a batch cooker, or by any means which could possibly be described as hand cooking, but by a multi zone fryer designed to mimic closely the cooking process undergone by potato chips in a batch cooker such as that used by the Kettle Chip Company.  Apand’s product was sold under the name “Country Kettle”.

93                  The Kettle Chip Company then commenced proceedings in the Court seeking orders restraining Apand from making, selling or offering for sale, advertising and promoting in Australia potato chips under the name “Country Kettle” or chips under any name or in connection with any logo or in any packaging the same or deceptively similar to those of the chips of the Kettle Chip Company.  The Kettle Chip Company alleged that Apand had contravened section 52 of the Trade Practices Act 1974 and had passed itself off as the maker of the potato chip product of the Kettle Chip Company.

94                  In a separate proceeding against Associated Products, the Kettle Chip Company sought a declaration that Associated Products was a person involved in the contravention by Apand of section 52 of the Trade Practices Act and a declaration that Associated Products knowingly contributed to and assisted in the commission by Apand of conduct amounting to passing off and, by reason thereof, was a joint tortfeasor with Apand. 

95                  The Kettle Chip Company sought against both Apand and Associated Products damages under section 82 of the Trade Practices Act, damages and other orders pursuant to section 87 of the Trade Practices Act, damages for passing off and an account of profits.

96                  The proceeding against Apand was heard by a Judge of the Court who, on 26 November 1993, made, inter alia, the following declarations:

“1.       By selling, offering for sale, advertising and promoting in Australia potato chips under the name ‘Country Kettle’ the respondent has:

(a)       passed off its potato chips as and for the applicant’s potato chips; and

(b)       engaged in conduct that is misleading or deceptive or is likely to mislead or deceive and thereby contravened s 52 of the Trade Practices Act 1974.

2.         By selling, offering for sale, advertising and promoting in Australia potato chips in the packaging examples of which are Exhibits 7R pages 1-7 and 7R pages 8-16, the respondent has:

(a)       passed off its potato chips as and for the applicant’s potato chips; and

(b)       engaged in conduct that is misleading or deceptive or is likely to mislead or deceive and thereby contravened s 52 of the Trade Practices Act 1974.”

97                  His Honour, having granted leave to Apand to appeal from the orders, ordered that the proceeding, including the claim for damages or an account of profits stand over until further order – see (1993) 46 FCR 152.  On appeal to the Full Court of this Court, the declarations referred to above were confirmed – (1994) 52 FCR 474.  Accordingly, it became necessary for the Court to consider the claim for damages or for an account of profits.  On 10 July 1995 the Kettle Chip Company notified the Court that it had elected for Apand and Associated Product to make an account of profits, thereby foregoing any claim for damages.  On 24 July 1995, the Trial Judge gave a direction that Apand file and serve:

“Its account of profits and verifying affidavit together with such other affidavit evidence that it considers necessary to support the account of profits.”

98                  Voluminous evidence was filed by both parties in relation to the taking of accounts. The Trial Judge resolved the issues raised on the taking of accounts in reasons published on 2 June 1998 – see (1998) 155 ALR 134.  The Trial Judge ordered judgment for the Kettle Chip Company against Apand in the sum of $4,057,386.36 made up as follows:

(a)        Trading profit:  $655,000;

(b)        Capital profit:  $1,870,800;

(c)                Interest:  $1,531,586.36.

99                  His Honour also ordered judgment for the Kettle Chip Company against Associated Products in the sum of $5,975,722.56 made up as follows:

(a)        Capital profit:  $3,720,000;

(b)        Interest: $2,255,722.56.

100               Apand and Associated Products have now appealed to the Full Court from those orders.  Only two questions arise on the appeal.  The first relates to the trading profit and the second relates to the capital profit referred to in the orders.

TRADING PROFITS/LOSS

101               Apand brought in a set of accounts described as “Special Profit and Loss Statement” (“the Apand Account”) which disclosed a net loss of $1,094,000.  The Apand Account may be summarised as follows:

102               The first question concerns the extent to which Apand is entitled to deduct from the amount of “Total Contribution” the items identified as “Allocated Costs”.

103               Certain of the allocated costs were accepted by the Kettle Chip Company as properly allowable deductions.  The costs which remained in issue may be summarised as follows:

104               It appears to have been common ground, and the Trial Judge accepted, that all of the allocated costs in issue were expenses properly “attributable” to the derivation of the gross profit in respect of infringing sales of potato chips.  The issue was as to the manner of the “allocation” of those expenses.  In respect of each of the disputed items, the Trial Judge allowed only 30% of them.  When 70% of those expenses is added back into the figures in the Apand Account, together with other adjustments not in issue, the result is a net profit of $655,000.  That is the trading profit referred to in the order against Apand.

105               Each of the expenses in question was an expense which might be characterised as an overhead expense or indirect expense.  That is to say, while they were expenses the incurring of which could not be attributed directly to the derivation of particular sales by Apand, they were expenses of a nature which were necessarily incurred in order to derive the sales.  Putting it another way, they were expenses incurred in conducting the overall business of Apand.  The business consisted of the selling, offering for sale, advertising and promoting of, not only potato chips, but many other items of “snack food”.  However, it would not have been possible for potato chips to be sold without incurring the expenses in question.

106               The expenses in question were allocated by Apand by a process of apportionment.  For example, the expense for wire display stands totalled $34,000.  Wire display stands were used for the display of a range of Apand’s products, including Country Kettle chips.  Such stands had to be filled by merchandisers and sales representatives employed by Apand.  The accounting records of Apand do not specifically relate particular wire display stand costs to the Country Kettle product.  However, because such wire display stands were used to display the Country Kettle product, the cost of the wire display stands can be said to be attributable to the sale of the Country Kettle product.

107               The costs of the stands were allocated on the basis of the number of packets of the Country Kettle product sold by use of wire stands, as a proportion of all products of Apand sold by use of wire display stands.  The view was taken that that was the most appropriate method of allocation because the number of packets sold is a reasonable indicator of the space occupied on the wire display stands.  The proportion of Country Kettle packets to total number of packets sold by use of the wire display stands was 2.78% and that was the basis of allocation in respect of the expense for wire display stands. 

108               Other expenses have been allocated on a similar basis although the proportions varied in some instances.  For example, the expense for “Accounting and management services” related to costs such as wages and salaries, computer costs, stationery, debt collection costs, couriers, postage, telephone and communications, bank charges, insurance, payroll and photocopy expenses.  Those costs were incurred in the production of all products produced by Apand, including the Country Kettle product.  It was considered that the most appropriate method of allocating those costs was the percentage of Country Kettle sales to total product sales because higher levels of sales were usually associated with or linked to a higher instance of accounting and management costs and expenses.  The relevant percentage was 3.88%.

109               There appears to have been no dispute but that the allocations adopted by Apand were in accordance with well established and accepted accounting principles relating to the determination of profit for a trading enterprise.  The question, however, is whether that is an appropriate course to adopt on the taking of an account of the profits derived from passing off.  The object of such an enquiry is to ascertain the profits actually made by an infringer, its purpose being not to punish the infringer, but to prevent the unjust enrichment of the infringer – Dart Industries Inc. v Décor Corporation Pty Ltd (1993) 179 CLR 101 at 111.  Thus, it does not necessarily follow that a trading account in respect of the Country Kettle business of Apand will satisfy the requirement for an account of the profits made in selling, offering for sale, advertising and promoting the potato chips in question.  The guiding principle is that an account of profits aims to have the infringer account for the actual profit, no more and no less, which it has gained from the infringement – Dart Industries Inc. v Décor Corporation Pty Ltd at 116.

110               The Trial Judge had before him, inter alia, the evidence of Mr Mark Bryant, an accountant from Messrs Arthur Andersen, whom his Honour considered to be a “very impressive expert”.  Mr Bryant, in a report which was in evidence before his Honour, identified three measures of trading profit which were possible in this case, as follows:

·        The contribution which Apand earned from selling Country Kettle chips (“method A”).  Mr Bryant considered that method A was the correct measure of the extent to which Apand was better off through selling the Country Kettle product on the assumption that it is inappropriate to consider the contribution which might have been earned from an alternative non-infringing product.  Mr Bryant used the term “contribution” as meaning:

“The amount by which a business is better off through selling a product and the amount by which it would be worse off (all other things being equal) if it did not sell that product.”

·        As for method A, but deducting any contribution which it is reasonable to conclude would have been earned from any product which Apand might have manufactured as an alternative to Country Kettle chips (“method B”).  Thus the difference from method A is that an additional enquiry would be required to determine the “contribution” which would have been made if, instead of producing Country Kettle chips, Apand had produced a non-infringing alternative product.

·        The contribution which Apand earned from selling Country Kettle chips less allocations or attributions of fixed costs (“method C”).  Fixed costs were defined by Mr Bryant as:

“Costs (sometimes called ‘overheads’ or ‘indirect’ costs) which do not relate to specific products.  By definition, such costs are unaffected by levels of production or by which product lines are sold.”

111               Fixed costs are to be distinguished from “variable costs” which Mr Bryant defined as follows:

“Those costs which vary with the level of production of a specific product and which would not be incurred if there was no production of that product.  Such costs are directly attributable to individual products and are sometimes called ‘direct’ costs.”

112               Mr Bryant considered that method C would result in the amount by which Apand was better off through selling the infringing product, on the assumption that it is appropriate to allow credit for profits that would have been earned had Apand produced a non-infringing alternative product and on the further assumption that the non-infringing product would have been exactly as profitable as the infringing product. 

113               Method A would take the figure of $3,353,000 shown in the summary set out above as “Total Contribution”.  After deducting from that amount income tax at the standard corporate rate of 39%, the resulting profit, for the purposes of an account in accordance with method A, would be $2,045,000.  Method A does not entail any deduction for overhead or indirect costs.

114               Mr Bryant’s explanation of method B assumed that the “Smiths Classic” chips product launched by Apand in June 1991 was an appropriate alternative non-infringing product upon which to base a calculation.  The Smiths Classic product was intended to provide an interim competitor to the product of the Kettle Chip Company until Apand was in a position to launch its own “Kettle” style product, namely the Country Kettle product.  His Honour found that the Smiths Classic product “was designed to compete with the [Kettle Chip Company’s] Kettle Chips”.  It was assumed, therefore, that if there had been no Country Kettle product, Apand would have continued with the Smiths Classic product.

115               For reasons which he explained, Mr Bryant assumed that the sales volume of Smiths Classic chips would not have risen significantly had Country Kettle chips not been introduced to replace it.  3,883,386 packets of Smiths Classic were sold over the 13 month period from June 1991 to June 1992.  On average, therefore, Smiths Classic sold at approximately 300,000 packets per month.  In contrast, however, 10,700,000 packets of Country Kettle chips were sold between May 1992 and December 1992.  That equates to an average of 1,337,500 packets per month.  At that rate, the average monthly volume of Smiths Classic chips sold in the 13 months to June 1992 was less than 23% of the average monthly volume of Country Kettle chips sold in the 8 months to December 1992.

116               Apand’s records showed that Apand received $11,494,000 from the sale of the 10,700,000 packets at an average of $1.07 per packet.  Mr Bryant assumed that Smiths Classic would have been priced at the same levels as the Country Kettle product.  Accordingly, as an alternative product, Smiths Classic would have continued to generate average sales of 300,000 packets per month at an average of $1.07 per packet which would have produced gross sales in the 8 months from May to December 1992 of $2,568,000. 

117               To derive the contribution Apand could have made from the sale of Smiths Classic chips in the 8 months to 31 December 1992, it is necessary to deduct the variable costs which Apand would have incurred in producing the sum of $2,568,000 sales revenue.  The Apand Account indicates that “direct costs” incurred to produce the Country Kettle product represented some 68% of gross sales for the period, leaving a contribution margin of 32%.  If that contribution margin is applied to the revenue of $2,568,000, the resulting contribution which Apand could have expected to derive, had it produced Smiths Classic chips rather than Country Kettle chips between May and December 1992, would have been $822,000, being 32% of $2,568,000.

118               On that basis, the amount by which Apand was better off by producing and selling Country Kettle chips rather than Smiths Classic chips would be calculated as follows:

Thus, by method B, the amount in respect of which Apand should account to the Kettle Chip Company would be $1,544,000.

119               Mr Bryant considered that method C was the method adopted in the Apand Account.  That method results, as indicated above, in a net loss after tax of $1,094,000, indicating that Apand derived no profits from selling, offering for sale, advertising and promoting the potato chips in question.

120               Mr Bryant also made other adjustments to the figures shown in the Apand Account.  The parties have reached agreement as to the relevant figures and the outstanding issue is limited to the appropriate method for determination of the profits for which Apand should account.  Thus, the calculations summarised above do not necessarily reflect the agreed figures but they illustrate relevant alternative approaches.

121               Untutored by authority, one could be excused for concluding that method B would afford a result which accords with the object of the taking of accounts as stated by the High Court in Dart Industries Inc v Décor Corporation Pty Ltd (1993) 179 CLR 101 namely a determination of the profits “actually made” (at 111) and “the actual profit” (at 116).  Method B fairly indicates the extent to which Apand was better off as a result of engaging in the wrongful conduct of selling, offering for sale, advertising and promoting the potato chips in question.  It also makes allowance for Apand having foregone the opportunity of using its assets for the production of an alternative non-infringing product. 

122               In Dart v Décor, the majority confirmed that a party in the position of Apand is at liberty to show that various categories of overhead are attributable to the obtaining of the relevant profit and to show how and in what proportion they should be allocated in the taking of the account of profits (at 119-120).  However, the issue in Dart v Décor was whether there should be any deduction of overhead expenses at all.  The particular question which arises in the present proceeding, namely, as to how overhead expenses are to be allocated to the relevant enterprise, did not arise. 

123               Both parties relied heavily on the decision of the High Court.  The majority in the High Court clearly rejected method A in so far as their Honours indicated that an allowance should be made for opportunity cost.  Further, several observations were made by the majority which, on one view, might indicate that method B is not the appropriate basis for determining profits.  As a consequence, the Trial Judge adopted what appears to be a variation of method C.

124               Apand sought comfort from the dissenting judgment of McHugh J.  McHugh J agreed with the orders made by the majority subject to one change.  The majority, in effect, ordered a declaration that the infringing party was:

“at liberty to show that overheads falling within the various categories of overhead are attributable to the obtaining of the relevant profit and to show how and in what proportion such overheads should be allocated in the taking of the account of profits.”

McHugh J would have substituted the words “assisted in” for the words “are attributable to” in the order proposed by the majority.

125               The majority in Dart v Décor observed that the cost of manufacturing and marketing the infringing products may have included the cost of foregoing the profit from the manufacture and marketing of alternative products.  That cost was characterised as “opportunity cost” which was defined at 114 as:

“The value of the alternative foregone by adopting a particular strategy or employing resources in a specific manner… As used in economics, the opportunity cost of any designated alternative is the greatest net benefit lost by taking an alternative.”

126               The majority considered (page 114) that, in calculating an account of profits, an infringing party may not deduct an opportunity cost consisting of the profit foregone on the alternative products.  Nevertheless, the majority considered that there would be inequity if an infringing party were denied a deduction for the opportunity cost as well as being denied a deduction for:

“The cost of the overheads which sustained the capacity that would have been utilised by an alternative product and that was in fact utilised by the infringing product.” (at 114)

127               The majority considered that, if both were denied, the infringing party would be in a worse position than if it had not infringed and that the purpose of the account of profits is not to punish the infringer but to prevent its unjust enrichment.

128               Accordingly, the majority considered that where an infringing party has foregone the opportunity to manufacture and sell alternative products, it will ordinarily be appropriate to attribute to the infringing product a proportion of those general overheads which would have sustained the opportunity.  Whether an infringing party will be entitled to have overhead costs allowed will depend upon whether, as a matter of fact and substance, the overheads which they seek to have deducted “are attributable to the manufacture and sale of the infringing product” (at 119).  It is necessary to consider, apart from other questions, whether the overheads in any particular category were surplus capacity or would, in the absence of the infringing product, have been used in the manufacture or sale of other products. If any of the categories are to be brought into account, the proportion to be allocated to the infringing product must be determined.  In that regard, approximation rather than precision may be necessary (at 119).

129              The Trial Judge considered the principles to be gleaned from Dart v Décor (at 114) and observed that it follows, from the way in which the High Court put the matter, that the allowance of fixed overheads involves a matching of the contributions made by the particular overheads to the manufacture of the infringing product with the contribution that the same overheads would have made to the manufacture of the alternative product.  His Honour considered that where the suggestion is made that the alternative product would have been less successful than the infringing product, and such a suggestion is justified, the logic of the position expounded by the majority demanded some elaboration of the simple propositions to be found in the judgment.  His Honour considered that the observation made by the majority (at 117) that in some cases profit can only be properly assessed by deducting a proportion of at least some of the overheads, including fixed costs, authorises the Court to examine the circumstances of the particular case, with a view to the selection of the most appropriate “basis of apportionment”.

130               The Trial Judge concluded, on the facts before him, that the amounts of the allocated proportion of deductions of fixed costs claimed in the Apand Account should be reduced to 30% of those amounts.  That percentage reflected, his Honour considered, an allowance for the extent to which Smiths Classic chips or any other alternative product, might have improved, during the relevant part of 1992, upon the previous performance of Smiths Classic, if the Country Kettle product not been launched on the market.  That was an increase from 23% which was the proportion which the average monthly sales of Smiths Classics bears to the average monthly sales of Country Kettle chips.

131               His Honour acknowledged that, had Smiths Classic continued to be sold instead of Country Kettle, the advertising effort that was put into Country Kettle might possibly have been put into the alternative effort with some effect on sales.  However, his Honour considered that Smiths Classic did not seem to have been successful and a product which was not passed off as associated with the Kettle Chip Company’s extremely successful product would have been likely to have suffered two disadvantages.  First, it would have been slower to make an impact on the market.  Secondly, any impact it made would have been likely to have been at the expense of the other brands on the market generally, and thus of Apand products.  Apand was by far the largest seller in the market.  His Honour was satisfied, therefore, that a proportion of any sales lost would have been lost to the growing popularity of Kettle Chips, had Country Kettle not won them. 

132              The Trial Judge concluded, therefore, that Apand did not forego any opportunity of recouping the full proportion of the fixed costs recouped by Country Kettle.  His Honour considered that Apand forewent the opportunity of recouping only something of the order of 23% of that proportion.  His Honour considered that, if Apand did not account for so much of the fixed costs recouped by Country Kettle as would not have been recouped by an alternative product, then, to that extent, it will not have accounted for the actual profit derived from the infringement.  In those circumstances, his Honour reached the conclusion, referred to above, that the amounts of the allocated proportionate deductions of fixed costs claimed in the Apand Account should be reduced to 30% of those amounts.  The increase from 23% to 30% was to reflect the possibility that sales of Smiths Classic may have improved had the advertising effort, which was put into the Country Kettle product, been put into the Smiths Classic product.

133              In his separate judgment in Dart v Décor, McHugh J considered that the correct question is whether the overhead item actually assisted in the production of the infringing profits.  Whether the overhead did actually assist in the production or sale, etc. of the infringing product will be a question of fact in all the circumstances of the case (at 123).  His Honour considered that the correct rule is that any part of the general overheads of the infringer, which assisted in deriving gross revenue from the infringing product, is a deductible expense.  The object of the account is to make the infringer give up its gains in order to prevent its unjust enrichment.  If an infringer has expended its own money or resources in producing or distributing the infringing product, it is not unjust for it to recoup that expenditure before accounting for the revenue derived from the product (at page 123).

134               McHugh J considered that the best approach for determining the profit derived from the infringement might be to estimate the profit of the product after allowing a proportion of the overheads and then deduct the opportunity costs of producing the infringing product.  That would show the true gain of the infringer from producing or distributing the infringing product instead of the next best alternative.  His Honour considered that another, although less exact, method of determining the profit and preventing the unjust enrichment of the infringer might be to determine what was the best alternative open to the infringer, determine what gross revenue would have been obtained from that alternative, and deduct that sum from the gross revenue obtained from the infringing product (at 125).  That is precisely Mr Bryant’s method B.  His Honour also considered another suggested method whereby there would be a deduction for that part of the overhead which would have been absorbed in producing or selling the alternative to the extent that it was used in producing or selling the infringing product. 

135               However, McHugh J considered that to adopt any of those methods would make a complex subject more complex than it already is and would very likely increase the prospect of contested litigation over the taking of the account and the cost and length of the hearing while the parties and their witnesses investigated and debated the hypothetical.  For example, the person taking the accounts might have to estimate one or more of:

·        The gross revenue from the alternative.

·        The direct costs of the alternative.

·        The proportion of overhead attributable to the alternative.

136               His Honour considered (at 126) that a more practical approach was to apply those commercial and accounting principles which are used in business to determine what profit has resulted from the manufacture or sale of a product.

137               McHugh J acknowledged that the commercial or accounting approach may mean that, in the account of profits, the infringer is credited with an amount of overhead greater than would be the case if no infringement had taken place.  On the other hand, the converse might also be true.  His Honour considered that whatever the outcome in a particular case may be, the commercial or accounting approach has one clear advantage over other methods, namely, it deals with historical facts and commercial reality and not hypotheses (at 126). 

138               Thus, his Honour’s conclusion is one based on expediency rather than principle.  In circumstances where it is not practically feasible to estimate the gross revenue from the alternative, or the direct cost of the alternative or the purported overhead attributable to the alternative, his Honour’s approach has practicability to recommend it.  However, in a particular case where, as the Trial Judge in this case concluded, information concerning the putative alternative product is readily available, common sense suggests that a method of showing the true gain should be adopted.  Mr Bryant’s method B most accurately reflects the actual profit, no more and no less, which Apand has gained from its infringement.  In those circumstances, that was an appropriate method to adopt.

139               As indicated above, the result produced by the approach of the Trial Judge is, in fact less than the result which would have been produced by the application of method B.  There has been no cross appeal by the Kettle Chip Company.  The Kettle Chip Company was entitled to at least the amount which resulted from his Honour’s orders.  Accordingly, the appeal should fail as regards the question of the account in respect of trading profit.

CAPITAL PROFIT

140               On 4 January 1993, Apand and Associated Products completed the sale of their snack food business to the Smiths Snackfood Co. Ltd (“the Purchaser”).  The Purchaser is a wholly owned subsidiary of United Biscuits Holdings PLC (“United Biscuits”).  The consideration for the sale included the sum of $155,000,000 for trade marks and the sum of $77,950,000 for goodwill.  The Trial Judge concluded that, since the trade marks and goodwill of the Country Kettle product were included in the sale, any sale proceeds received in respect of them should be accounted for to the Kettle Chip Company.  His Honour found that the proportion which the actual earnings of the Country Kettle brand in 1993 bore to the total earnings of Apand in 1993 was 2.4%. His Honour concluded therefore that 2.4% of the two sums of $155,000,000 and $77,950,000 was attributable to the Country Kettle brand and that, accordingly, those amounts, being $3,720,000 and $1,870,800 making a total of $5,590,800, should be treated as profits in respect of which Apand and Associated Products were required to account to the Kettle Chip Company. 

141               The consideration received by Apand and Associated Products was payable pursuant to arrangements entered into on 10 November 1992.  Several instruments were executed by the parties on that day.  They were as follows:

·        Snack Foods (Australia) Business Purchase Agreement;

·        Planters Licence Novation Agreement;

·        Regency Park Deed;

·        Snack Foods (Australia) Share Purchase Agreement;

·        Snack Foods (NSW) Offer to Sell;

·        Snack Foods Trade Marks Agreement;

·        Snack Foods Acquisition Linkage Deed.

The second, third and fourth instruments are of no present relevance.  However, something should be said about the other four instruments.

142               The parties to the Business Purchase Agreement were CCA, Apand, Associated Products, United Biscuits and the Smiths Snackfoods Co. Ltd.  Apand and Associated Products are together referred to as “the Vendors” and the Smiths Snackfoods Co. Ltd is referred to as “the Purchaser”.

143               The Business Purchase Agreement recited that United Biscuits, through its subsidiary, the Purchaser, wished to acquire the snack food business which CCA, through its subsidiaries, the Vendors, operated in the Commonwealth of Australia except New South Wales.  The principal operative clause provided:

“2.1     The Vendors agree to sell the Assets to the Purchaser and the Purchaser agrees to purchase the Assets from the Vendors for the Purchase Price and on the terms and conditions of this agreement.”

144               The term “the Assets” was defined to include both goodwill and intellectual property rights.  Those expressions were in turn defined as follows:

“Goodwill means the goodwill of the Business including, but not limited to, the exclusive right of the Purchaser to represent itself as carrying on the business as the successor to the Vendors but excluding the goodwill comprised in the Business Names and Trade Marks.

Intellectual Property Rights means:

(a)       the Business Names;

(b)       all Unregistered Trade Marks owned or used at any time by the Vendors in connection with the Business;

(c)        …”

The expression “trade marks” was defined as:

“The trade marks registered or applied for by the Vendors in connection with the Business.”

145               There was expressly excluded from the definition of “Assets” the “Excluded Assets”.  Excluded Assets were defined as including “Trade Marks” together with other assets.  The reason for excluding the Excluded Assets is that they were the subject of separate arrangements.  The purchase price provided for goodwill, intellectual property rights and certain other assets in clause 3.1 of the Business Purchase Agreement was $77,950,000.

146               The Offer to Sell was an offer addressed to United Biscuits and the Purchaser by CCA and the Vendors.  It recited that United Biscuits through the Purchaser wished to acquire the snack food business which the Vendors carried on in New South Wales.  The operative provision was clause 2.1 which provided as follows:

“The vendors offer to sell the assets to the purchaser for the purchase price and on the terms and conditions of this offer.”

147               The structure of the Offer to Sell was very similar to the Business Purchase Agreement.  The expression “Assets” was defined as including goodwill and intellectual property rights but excluding Excluded Assets.  Excluded Assets included the Trade Marks.  The purchase price for goodwill and intellectual property rights was $25,878,000.  It may be possible, if relevant, to draw an inference that the distinction between New South Wales and the balance of the Commonwealth of Australia had its origin in stamp duty legislation.  In any event, the net effect of the two arrangements was a sale of the goodwill and other assets of the snack food business, other than the Excluded Assets, for a consideration which aggregated $103,828,000.

148               The parties to the Trade Mark Agreement were once again CCA, the Vendors, United Biscuits and the Purchaser.  The Trade Marks Agreement recited that the Vendors held registered trade marks and applications for registration of trade marks which CCA and its international subsidiaries use in the conduct of their snack food business and that United Biscuits, through the Purchaser, wished to acquire the Trade Marks.  The operative provision was as follows:

2.1       The Vendors agree to sell and transfer the Trade Marks to the Purchaser and the Purchaser agrees to purchase the Trade Marks from the Vendors on the terms and conditions of this agreement.”

The expression “trade marks” was defined as follows:

“All the registered trade marks and applications for trade marks held by the Vendors in connection with CCA’s international snack food operations and all rights attaching to them including goodwill.”

The purchase price was expressed to be $155,000,000.

149               The Trade Marks Agreement also contained a clause dealing with warranties and representations including the following:

“7.1     CCA and the Vendors represent and warrant to the Purchaser that each of the statements set out in the appendix to this agreement is accurate.  Each of the statements is to be treated as a separate representation and warranty and the interpretation of any statement made may not be restricted by reference to or inference from any other statement.

7.2       The warranties are not extinguished or affected by any investigation made by or on behalf of the Purchaser into the affairs of the Vendors or by any other event or matter, unless:

(a)       …

(b)       the claim relates to a matter which is fairly disclosed in a formal disclosure letter given by or on behalf of CCA to [United Biscuits] before the date of this agreement.

(c)        …”

150               The warranties set out in the appendix included the following:

“1.       Schedule 1 is a complete and accurate list of all the Trade Marks at the date of this agreement.

………………………………

14.       The Vendors are not involved in any litigation or arbitration proceedings relating to the Trade Marks and there are not facts known to CCA or the Vendors likely to give rise to any such proceedings except as previously disclosed in writing to [United Biscuits].

15.       No claim has been made against the Vendors in connection with any trade mark except as previously disclosed in writing to [United Biscuits].

………………………………”

The schedule included a reference to two applications for registration of trade marks including the words “Country Kettle” together with many other trade marks.

151               On 10 November 1992, CCA wrote a letter of disclosure to United Biscuits as contemplated by clause 7.2 of the Trade Marks Agreement (“the Disclosure Letter”).  In the Disclosure Letter, CCA disclosed the following:

“[Apand] is the defendant in proceedings in the Federal Court of Australia taken by [The Kettle Chip Company] seeking an injunction and other relief in respect of the use of the trade mark “Country Kettle” and in respect of certain features of the package in which potato crisps are sold under that trade mark.”

That was clearly a reference to the proceeding which was then current before the Trial Judge.

152               The parties to the Snack Foods Acquisition Linkage Deed included CCA, Apand, Associated Products, United Biscuits and the Purchaser.  The Acquisition Linkage Deed contained the following recitals:

“A.      [United Biscuits] through its subsidiaries in Australia and overseas wishes to acquire the international snack food operations which CCA operates through its subsidiaries in Australia and overseas.

B.       CCA has agreed to procure it subsidiaries to sell and [United Biscuits] has agreed to procure its subsidiaries to purchase the international snack food operations which CCA operates through its subsidiaries in Australia and overseas.

There are six principal components of this acquisition:

(a)       Sale and purchase of the snack food businesses in Papua New Guinea and also in each State and Territory of Australia except New South Wales…

(b)       Written offer to sell the snack food business conducted in New South Wales…

(c)        Novation or assignment of the following agreements in connection with the Planters Licence…

(d)       Sale and purchase of all the issued shares in the capital of the following wholly owned subsidiaries of CCA which conduct snack food operations in Australia and overseas…

(e)        Sale and purchase of all the registered snack food trade marks held by the following wholly owned subsidiaries of CCA:

(i)        [Associated Products]

(ii)       [Apand]

(f)        sale and purchase of the real property held by [certain subsidiaries] of CCA in connection with CCA’s snack food operations…

………………………………

C.        Each of the parties has agreed that completion of each of the agreements required for the acquisition other than [certain identified agreements] is a condition precedent to completion of each of the other agreements.”

153               Clause 5 of the Acquisition Linkage Deed provided as follows:

“5.1    In connection with the pricing of the acquisition, [United Biscuits] and CCA acknowledge that:

(a)       They have agreed a global price for the sale and purchase of the international snack food operations conducted by CCA and its subsidiaries.

(b)       The total price is $430,000,000 on an ungeared basis subject to adjustment for the movement in “funds employed” in the international snack food operation between 26 June 1992 and 31 December 1992.

(c)       Schedule 1 is an allocation of the $430,000,000.

(d)        ………………………………

(e)       In respect of each of the business purchases, the consideration will be calculated based on an amount of goodwill which has been allocated to the businesses, plus the value of the assets which are purchased, less the liabilities which are undertaken in accordance with a formula contained in each of the business purchase agreements.

(f)        The purchase price for the trade marks held by [Associated Products and Apand] is $155,000,000.  The only valuation of trade marks which are to be acquired which appears in the accounts as at 26 June 1992 is an amount of $1,268,750 in the accounts of [Associated Products].

………………………………”

154               Schedule 1 contains an allocation of the purchase price as follows:

The Schedule was stated to be “based on 28 June balances”.

155               It is clear that the entry into and completion of the transactions described above did not constitute an infringement of the rights of the Kettle Chip Company because those transactions did not constitute a passing off.  The only infringement alleged was the passing off of the Country Kettle product as the Kettle Chip Company’s product.  The benefit derived from any such infringement was the profit, if any, generated by that conduct.  His Honour held, in effect, that the business of manufacturing and selling the Country Kettle product gave rise to an asset of Apand and Associated Products which was realised upon completion of the transactions on 4 January 1993.  The proceeds of such realisation were held to be a profit derived from the conduct which infringed the rights of the Kettle Chip Company.

156               Whether the making or realisation of a profit is attributable to an infringement is a factual question of causation, not a question of law.  If the infringing conduct did in fact give rise to some realisable asset on the part of Apand and Associated Products, the value of that asset might be characterised as profit derived from the infringing conduct.  If that is so, it may be a profit in respect of which an account should be given.  There is no prohibition per se against including a capital profit in an account of profits – Warman International Ltd v Dwyer (1995) 182 CLR 544 at 563 and Potton Ltd v Yorkclose Ltd [1990] 17 FSR 11 at 14-16. 

157               In concluding that there is no reason why a capital profit should not be the subject of an account, the Trial Judge referred to the doctrine of precedent in the Anglo Australian legal system and suggested that the concept is much older than the common law (155 ALR at 142). By way of illustration, his Honour cited the Roman historian, Tacitus.  Tacitus reports the Emperor Claudius, in an address to the Senate, as having justified particular action by precedent and as having asserted that his action itself would be a precedent. The Roman emperor was an autocrat and the enactments of the emperor, whether by decree, edict or legal ruling, had the status of a “lex” or statute (G.1.5 and D 1.4.1.1).  In that sense, the pronouncements of the emperor always had the effect of a binding precedent but only until the emperor or his successor decided otherwise.

158               The decisions of judges in the Roman Empire had no value as precedent.  On the other hand, the opinions of jurists were accorded great authority in Roman jurisprudence.  Indeed, Augustus and subsequent emperors afforded eminent Roman jurists the ius publice respondendi.  The opinions (or responsa) of those jurists could then be cited with authority before the courts. However, the extent to which responsa might constitute binding precedent was itself a matter for the emperor. In the second century, successive emperors adopted the practice of issuing legal rulings in response to requests from public officials and private citizens. Such legal rulings (or rescripta) were prepared by professional jurists employed on the staff of the emperor and were issued under the emperor’s signature. Rescripta, however, were binding as precedent only to the extent allowed by the emperor. Thus, any notion of precedent to which Claudius may have referred is somewhat removed from the doctrine of precedent in the common law and does not reflect concepts of precedent in Roman jurisprudence.

159               Nevertheless, assuming that a capital profit may be the proper subject of a capital account, the amount received upon realisation of such an asset will normally be a good indication of the value of that asset.  The primary question in the present case, however, is whether, on the evidence before the Trial Judge, a conclusion should have been reached that some part of the capital sum received by Apand and Associated Products on completion of the transactions on 4 January 1993 was in fact attributable to the Country Kettle product.  Only then could it be said that an amount was received from the realisation of an asset generated by or derived from the infringing conduct.

160               The subject matter of the transactions, which I have described, was the totality of the snack food business conducted by CCA and its subsidiaries.  The consideration involved was an agreed global price of $430,000,000.  So much follows from the Acquisition Linkage Deed.  While the total global price was apportioned among various assets, there was no apportionment to the individual product lines which made up the snack food business.

161               It was clear, on the evidence, as the Trial Judge held, that United Biscuits and the Purchaser were buying the total earnings of the snack food business.  However, his Honour also concluded that it was appropriate to apportion the global price to each product line according to the contribution to earnings of such product line for the 1993 year notwithstanding that there was no evidence that the inclusion of the Country Kettle product in the sale resulted in a higher sale price than would otherwise have been the case.  His Honour drew an inference that the global price could be apportioned, pro rata, to the turnover for all products for the 1993 year. 

162               Whether any part of the global price received by CCA and its subsidiaries should be attributed to the Country Kettle product is an exercise in speculation.  Mr Bryant agreed that an available hypothesis was that the price may well have been the same whether or not the Country Kettle product was included.  Mr Bryant considered that whether that is a correct hypothesis is something that he simply could not determine.  He also agreed that the use of sales as an allocation basis assumed that the Country Kettle product had a positive budget and that United Biscuits and the Purchaser paid in order to acquire that positive budget.  He agreed, however, that one cannot conclude that an asset has value just because it generates sales. 

163               Mr Bryant agreed that the method of allocating the global price in proportion to sales assumes that some part of the proceeds derived on the sale of the business reflected the inclusion of the Country Kettle in the sale.  He then agreed that that method assumes the answer to one of the questions to which an answer is sought, namely whether the inclusion of Country Kettle product in the sale increased the profit on the sale of the business beyond what would otherwise be the case.

164               The evidence demonstrated that the global price was struck as a result of a “horse trade” rather than “building a price up from the bottom”.  The price initially proposed by CCA for the snack foods business was supported by CCA’s valuation of the business prepared using the 1993 operational business plan.  That plan was based on the 1992 budget.  In addition, provision was made for the adjustment of the global price by reference to the performance of the business against the 1992 budget.  It is of critical significance, however, that the Country Kettle product was not included in the 1992 budget.   In addition, the disclosure of the proceedings in the Disclosure Letter removed any possible ground of complaint by United Biscuits or the Purchaser by reason of the determination that the use of the Country Kettle name constituted an infringement of the rights of the Kettle Chip Company. 

165               Those considerations give rise to an inference that the presence of the Country Kettle product as part of the snack food business was not a factor which operated in arriving at the global price provided for in the instruments of 10 November 1992.  The absence of any direct evidence that United Biscuits and the Purchaser would have paid something less if the Country Kettle product was not included, coupled with the fact that the price was based on figures which did not include the Country Kettle product, indicates that there was no factual basis for attributing any part of the global price to the value of the Country Kettle product.  Rather, the material to which I have referred precludes any inference to that effect.  I consider, therefore, that the Trial Judge erred in concluding that Apand and Associated Products should bring to account any part of the consideration received from United Biscuits and the Purchaser in connection with the sale of the snack food business.

CONCLUSION

166               I would uphold the appeal by Associated Products and set aside the orders made against it on 2 July 1998.  In lieu of those orders, I would dismiss the proceeding against Associated Products and order that the Kettle Chip Company pay Associated Products’ costs of the proceeding in so far as it related to the taking of an account.  I would order the Kettle Chip Company to pay Associated Products’ costs of the appeal.

167               I would uphold the appeal by Apand in part and set aside the orders made against it on 2 July 1998.  In lieu thereof there would be judgment for the Kettle Chip Company against Apand for the sum of $655,000 together with interest calculated in accordance with the principles adopted by the Trial Judge.  The question of Apand’s costs is somewhat complicated.  It is not clear how much of the time occupied by the proceeding before the Trial Judge was taken by the trading profit question on the one hand and the capital profit question on the other.  I would be disposed to order that Apand pay one half of the costs of that proceeding.  I would make no order as to the costs of Apand’s appeal.

Associate:

Dated:              23 April 1999