Account of profits and damages compensation in IP infringement proceedings: the latest landmark in case-law

By decision No. 20800 of 19 July 2023, the First Section of the Italian Court of Cassazione ruled on the main and cross-appeals filed against two judgments (partial and final) of the Court of Appeal of Turin, providing clarifications on the application of the so-called "account of profits" principle pursuant to Article 125(3) of the Italian Industrial Property Code (“IPC”), as well as on the proper calculation of the damages compensation in case of IP rights’ infringement [1].

The appeals can be summarised as follows, as per the order of arguments followed by the Supreme Court:

a. violation of Article 125(3) IPC, in that the Court of Appeal ordered the account of profits against the infringer, lacking the subjective element of negligence on its part (ground of appeal put forward in the cross-appeal);

b. erroneous calculation of the profits to be returned based on an equitable criterion, having the Court of Appeal deducted costs unconnected with the manufacturing and distribution of the infringing goods [2] (the so-called “incremental costs”), without taking into account a part of the profits actually made by the infringer as a consequence of its unlawful activities (the so-called “incremental profits”).

With reference to the ground of appeal listed above under letter a) concerning the account of profits for blameless infringement of IP rights, the Supreme Court held that the cross-appeal was unfounded by virtue of the principle stating that the law recognises the right of the owner of an IP right claiming its infringement to request - instead of the compensation for the loss of profits - the return of the profits gained by the infringer as a consequence of the infringement. This simply by filing a specific claim pursuant to Article 125 IPC, it being unnecessary to allege and prove that the infringer acted with wilful misconduct or negligence (ex multiis, Court of Cassazione No. 21832/2021). Therefore, the infringer, even if it acted in the absence of such subjective element (wilful or negligent), must return to the holder of the infringed right the profits realised as a consequence of its activity. This principle is aimed at safeguarding the holder of the IP right as it would be otherwise deprived of any protection if the infringement was caused in the absence of wilful misconduct or negligence. Paragraph 3 of Art. 125 IPC provides, indeed, that the holder of the infringed right may request "in any case" the return of the profits made by the infringer, as an alternative to the compensation for the loss of profits, or to the extent that such profits exceed that compensation.

The Court of Cassazione thus confirmed that the account of profits represents a peculiar remedy, having restorative nature, inspired by a composite logic - in part compensatory and in part as dissuasive/deterrent - suitable to strike the party responsible for the infringement also in case the right’s holder (perhaps less well equipped, efficient, or dimensioned) did not have the capacity to draw the same profits from the exploitation of the infringed right.

Contrary to the cross-appeal, the grounds of the main appeal (listed under letter b) above) were upheld.

It is worth mentioning that the account of profits is strictly connected to the principle of the “necessary causal derivation from the wrongful act” under Article 1223 of the Italian Civil Code. It follows that the sum, once ascertained as revenues gained by the infringer, must be deprived of the (incremental) costs borne by the latter for the manufacturing/marketing of the infringing products, but must also consider the (incremental) profits actually and effectively made thanks to the infringement.

The application of the incremental criterion to both costs and profits also requires that the respective items are precisely and exhaustively determined in such a way as to capture every activity linked to the unlawful use of the infringing right (in the case at hands, trademarks).??????

In the present case, the Court of Appeal equitably calculated the profits made by the infringer,?inter alia?by considering irrelevant the break-up price of the infringing goods, given that the sale of the goods in question took place after the time of the occurrence of the facts presented to the Court.

This reasoning was not considered well-founded by the Court of Cassazione, which also noted the lack of clarity of the criteria adopted by the Court of Appeal for the determination of the incremental costs to be deducted from profits.

Hence, the Court of Cassazione deemed the other grounds of appeal absorbed and set the judgments of the Court of Appeal of Turin aside with respect to the first three grounds of the main appeal: the case was thus referred back to the Court of Appeal of Turin, with a different board, for reconsideration of the dispute.

In conclusion, the Supreme Court restated the principle that the holder of an IP right that complains its infringement is entitled to demand the account of the profits made by the infringer, regardless of whether the infringer acted with wilful misconduct or negligence.???????????????????????????

The Supreme Court also clarified the margin of precision required for calculating the incremental profits realised and causally linked to the infringement, and for determining the incremental costs incurred for the manufacturing and distribution of the infringing products.

[1] As a brief recap of the main events, by summons dated 2016, the plaintiff companies - one of which was the owner of certain fashion trademarks, being the other in charge of the study, creation and industrialization of the products on which such trademarks were to be affixed - summoned two of their former business partners before the Court of Turin (IP Chambers), which had continued to manufacture and sell items featuring the aforesaid trademarks even after the expiry of the relevant agreement. In a judgment delivered in 2018, the Court of Turin found that the defendants had infringed the trademarks in question by an unauthorized use of the signs and ordered the defendants to pay damages. The first instance decision was then appealed and the Court of Appeal of Turin, with a partial judgement of 27 May 2019, rejected the appeal relating to the part of the judgement concerning the assessment of the infringement of the trademarks, and instead upheld the subordinate appeal relating to the quantum of the compensation, ordering, by means of a separate order, the continuation of the preliminary investigation for the appointment of a Court’s expert in order to calculate the profits made thanks to the infringing activities, taking into account the costs incurred. In a final judgement of 2 November 2020, the Court of Appeal confirmed the account of the profits, but to a lesser extent than the first instance judgement.

[2] The first ground of the main appeal, relating to the partial decision, alleges infringement and misapplication of Article 113 of the Italian Code of Civil Procedure (“ICCP”) and Article 125(3) IPC, to the extent that the Court of Appeal applied the principle of the account of profits, quantifying the amount equitably by deducting non-incremental higher costs. The second and third grounds of appeal, relating to the final judgment, allege respectively (i) infringement and misapplication of Articles 113, 115 and 116 ICCP, in that the Court of Appeal calculated the sums to be returned using as the basis of calculation, from which to deduct the infringer's incremental costs, the sum equitably liquidated by the court of first instance and (ii) infringement and misapplication of Articles 115 and 116 ICCP in that the Court of Appeal calculated the sums to be returned by deducting from the sum liquidated at first instance fixed costs not directly attributable to the infringing products. As pointed out by the Court of Cassazione itself, the second instance decision is unclear as to the criteria applied in calculating the amount to be refunded and, in any event, is characterized by a significant deviation from the principles set out by the court of first instance (in particular in relation to the incremental principle, erroneously applied as to costs and, in fact, disapplied with respect to a significant portion of profits as better described below).