account of profits

An account of profits focuses on the profits made by the defendant, without reference to the damage suffered by the claimant at the hands of the defendant (which is the case with damages awards). In legal proceedings a successful claimant may elect between damages and an account of profits as the means to be compensated. There are significant differences between the methods of calculating the two.

An account entitles the claimant to a sum of money equal to the profit made by the defendant as a result of its unlawful conduct, rather than when claiming damages.  Accounts of profits are available, inter alia, in actions for breach of contract, infringement of intellectual property rights and breach of fiduciary duties.

Comparison with Damages

The purpose of the account of profits is to prevent the unjust enrichment of the defendant by the use of the claimant’s invention. The claimant is treated as if they were conducting the business of the defendant, and made the profits of the defendant. As such, the upper most limit of an award is the sum of profits made by the defendant caused by the infringement. In most cases, an award of damages will equal or exceed the maximum award in an account of profits; however an account of profits may greatly outstrip an award of damages in the right case. When assessing an award, to say that a defendant should have generated higher profits is immaterial: the claimant must take the defendant as he finds him.

Damages are principally compensatory in nature such that a claimant is placed in the position they would have been if the act or omission that was contrary to law had not taken place. Damages are sought by claimants in litigation, and the remedy seeks to compensate the innocent party in money for the losses suffered by the particular breach of the law.

Calculating Accounts of Profits

The profits must have been earned from the use of the claimant’s invention, and if the infringed invention formed only part of the overall product or process, then only that part of the profit attributable to the patented invention is recoverable. This is where most difficulty is experienced in assessing the profits earned by the defendant and a number of approaches may be taken during the assessment. Courts take the view that this would be unfair upon the defendant for the claim to be awarded all of the profits where attribution of profits is possible. Manufacturing processes that use the patent in question as a small step in the manufacturing process provide a typical example, in that it clearly cannot be said that the entire profit of the application of the process is attributable to the infringement. Where it is appropriate to apportion losses, the reference for the assessment will involve splitting the profits between infringing and non-infringing parts of the process.

There are instances where it is appropriate for the claimant to recover all of the profits of an invention, however whether this is so turns on the facts of the case.

Accounts in Intellectual Property

Defendants are not obliged to hand over the gross profit obtained by reason of the infringement. In keeping with the approach that the claimant is said to stand in the shoes of the defendant for the purposes of calculating an account of profits, a court will make allowances to the defendant for parts of the gross profit that are attributable to proper expenses associated with making sales, such as advertising and marketing; increases in value of goods or services once sold or provided and additional features of the product or service that are outside the infringing invention (such as value added services).

Making assessments of damages and accounts of profits frequently require the involvement of forensic accountants with some knowledge of the industry in which the infringement has taken place. As a general rule, an account of profits will probably be preferred in cases where the claimant cannot point to any damage in their own business. This will usually be the case where the margins of the defendant outstrip the profits that of the claimant.