English courts can undoubtedly award a punitive/quasi-punitive remedy directly and openly via an award of ‘exemplary damages’ – a form of non-compensatory damages specifically designed to punish, deter and express disapproval of the most outrageous examples of civil wrongdoing. Such awards have long been, and remain, highly controversial. In the modern landmark in their development, Rookes v Barnard,⁶ the House of Lords regarded exemplary damages as an anomaly – an attempt to pursue, within civil proceedings, an aim that was primarily and most appropriately the preserve of the criminal law. Despite this, their Lordships felt unable to abolish exemplary damages altogether, and opted instead to confine their availability to two limited categories of cases, where it was considered that such awards might retain a useful role: (i) unconstitutional, arbitrary or oppressive action by servants of government (‘category 1’); and (ii) wrongdoing calculated to make a profit which might well exceed any compensatory damages payable to the victim (‘category 2’).⁷ For some time, it was also thought that exemplary damages were further confined to the forms of wrong for which they had been awarded before the 1964 decision in Rookes v Barnard.⁸ This arbitrary restriction was finally rejected in Kuddus v Chief Constable of Leicestershire.⁹ Nevertheless, exemplary damages remain an exceptional, last resort remedy.¹⁰ Thus, even if facts falling within ‘category 1’ or ‘category 2’ are shown, the remedy is limited to the most outrageous and punishment-worthy examples of this sort of conduct,¹¹ which cannot be adequately remedied by other means.

‘Category 2’ exemplary damages have obvious relevance for any account of gain-based remedies in English law. As Lord Devlin put it in Rookes v Barnard, “[w]here a defendant with a cynical disregard for a [claimant’s] rights has calculated that the money to be made out of his wrongdoing will probably exceed the damages at risk, it is necessary for the law to show that it cannot be broken with impunity” – “to teach a wrongdoer that tort does not pay”.¹² Some opponents of exemplary damages have argued that ‘category 2’ exemplary damages are redundant and should be abolished, in light of modern developments in the availability of gain-based remedies.¹³ However, this may be an error. ‘Category 2’ exemplary damages are not strictly gain-based awards. They are a different, larger remedy, which aims to punish a defendant for his outrageous, profit-motivated wrongdoing, and to deter other, similarly-motivated parties. This different motive explains why such exemplary damages may be available whether or not any gain is actually made;¹⁴ why their quantum is not necessarily limited to the amount of the gain actually made;¹⁵ and why, more generally, the factors that bear on their assessment are different from those appropriate for ‘pure’ disgorgement.¹⁶

Whilst these ‘category 2’ exemplary damages are not therefore gain-based, their recognition may have wider relevance. In past cases, such awards have been made for some wrongs for which there is no authority for gain-based awards, in any form. Some scholars have contended that the availability of these exemplary damages provides good grounds for thinking that in circumstances falling within ‘category 2’ – i.e. where a defendant has committed a wrong deliberately and cynically with a view to profit – the courts should be willing to award a lesser, gain-based remedy which strips a wrongdoer’s actual profits as a mechanism for deterrence.¹⁷

For a number of civil wrongs, English law also makes available monetary awards that are transparently profit-stripping – being measured by the positive gains that actually accrue to a wrongdoer, whatever their source. The additional words – “whatever their source” – are important in signifying that these profit-stripping awards can in principle require a wrongdoer to give up gains that are not acquired from the claimant. Thus conceived, these awards can effect ‘disgorgement’, rather than a more limited form of ‘restitution’ to the claimant.

Historically, such profit-stripping awards have been made via various remedial forms – equity’s account of profits, the common law’s action for money had and received, damages, and interest awards.¹⁸ This continuing diversity makes little sense. Looking forwards, the account of profits may prove to be the focus for future development of English law’s profit-stripping awards. It is the primary and most transparently profits-based remedy, and, despite its equitable origins, it is not limited to merely equitable wrongs. There is a long history of the remedy being given for some common law torts;¹⁹ in 2001, the House of Lords decided that the remedy could exceptionally be awarded for breaches of contract;²⁰ and this has, in turn, reinforced an assumption in at least some recent cases that if a profit-stripping remedy is available for a wrong, of whatever quality, it is in this form.²¹

As the authorities now stand, a profit-stripping measure of this sort is potentially available for, inter alia, (a) breaches of trust/fiduciary duty,²² as well as the associated ancillary liabilities that may be incurred by third parties who are dishonest accessories to such breaches,²³ or by knowing recipients of assets that have been applied in an unauthorised manner by trustees, or without authority by other types of custodian;²⁴ (b) major intellectual property wrongs, in particular patent infringement,²⁵ copyright infringement,²⁶ trademark infringement,²⁷ and passing off,²⁸ (c) misuse of confidential information;²⁹ (d) the wrongful appropriation of/lesser interferences with rights to possess chattels or land;³⁰ and (e) breaches of contract.³¹ As explained below, this is probably not an exhaustive list.³² Indeed, the recent extension of this remedy to breaches of contract, long assumed to be a wrong that could not attract such an award, raises a question whether the courts might award a profit-stripping remedy for any type of wrong in an appropriate case.³³

Taking the account of profits as the paradigm and primary profit-stripping remedy, several general principles of quantification appear from the cases. First, the remedy has so far been limited to positive gains, and does not extend to merely negative gains – where the wrongdoer merely saves himself from expense without making any actual profit.³⁴ Secondly, the remedy is not limited to monetary gains, but can also extend to non-monetary gains not yet realised in money – as, for example, where a house, not yet sold, was built without permission to a copyrighted design.³⁵ Thirdly, a wrongdoer is generally only accountable for the amount of his wrongful profits net of the costs that he can prove are properly attributable to earning them.³⁶ Fourthly, the wrong must ordinarily be at least a ‘but for’ cause of the wrongdoer’s profits.³⁷ Fifthly, a wrongdoer is not necessarily liable for 100 % of his net profits. The courts may well apportion his profits between multiple causes,³⁸ make ‘just’ allowances for the wrongdoer’s skill and effort,³⁹ and disregard certain gains as ‘too remote’.⁴⁰

Despite what has just been said, it is important to recognise that the account of profits – as a profit-stripping mechanism – is far from uniform across all contexts in which it is potentially available. This is for several reasons.

First, in some settings, the quantification principles just outlined are applied, or perhaps disregarded, in a manner that may yield a larger award. This is certainly true of cases involving fiduciaries’ profits.⁴¹ For example, the courts show particular caution before apportioning profits or otherwise making allowances for a fiduciary’s skill and effort;⁴² and they have refused to allow a fiduciary to avoid or reduce his liability on the basis that he would have profited in any event, even if he had acted properly.⁴³ The best explanation for this greater rigour is debatable. A very plausible narrow view is that it reflects the peculiar juristic nature and basis of a fiduciary’s accountability.⁴⁴ An alternative view is that the courts might make such ‘enhanced’ profit-stripping awards in wider circumstances, to achieve a stronger measure of deterrence and/or for quasi-punitive motives.⁴⁵

Secondly, although it is often said that the account of profits – reflecting the remedy’s equitable origins – is a ‘discretionary’ remedy,⁴⁶ the court’s jurisdiction to award the remedy is neither radically, nor uniformly, discretionary. As one recent decision put it, the remedy is “not discretionary in the true sense” – it is “granted or withheld on the basis of equitable principles”.⁴⁷ Consistently with this, there is inherent flexibility when interpreting and applying the quantification principles just highlighted, and an account of profits can be refused or limited by a court on a limited number of recognised equitable grounds.⁴⁸ Beyond this, in the absence of such disqualifying circumstances, not all species of wrongdoing are treated identically. A fiduciary is liable to account for unauthorised profits resulting from his position without further qualification – the account of profits is uncontroversially an automatic response in such cases. For other, non-fiduciary wrongdoing, the picture looks more varied. For example, the account of profits is a long-established, standard remedy for the major intellectual property wrongs, which is available more or less as a matter of course where the claimant elects for it.⁴⁹ In contrast, the courts seem inclined to more tightly confine the availability of such profit-stripping for other wrongs, whether by explicitly setting additional threshold conditions (e.g. the “inadequacy” of other remedies and/or the presence of “exceptional circumstances”), or by claiming the liberty to grant or withhold the remedy according to whether it is the “appropriate” response in all the circumstances⁵⁰ (e.g. whether it would be a ‘disproportionate’ response to the wrong).⁵¹

Finally, some variations just highlighted arguably reflect a deeper feature of English law: that an order for an account of profits may not have a uniform juristic basis. In general, such awards are readily analysed as a profit-stripping/disgorgement remedy triggered by the defendant’s wrong. However, it is more controversial whether a fiduciary’s accountability for profits resulting from his position is properly analysed in this way. Although it is widely assumed that it is triggered by a wrong – a “breach of fiduciary duty” – a plausible alternative analysis is that the fiduciary’s accountability actually reflects what has been labelled a “rule of primary attribution”.⁵² On this view, a fiduciary relationship inherently entails a primary duty for a fiduciary to render profits arising from his position to the relationship’s beneficiary, and a corresponding primary right of the beneficiary to such profits.⁵³ As such, the account of profits is not strictly a remedy for any wrong committed by the fiduciary; it enforces performance of the fiduciary’s primary duty. This alternative analysis is consistent with some unusual features of a fiduciary’s accountability; and if correct, might mean that fiduciary cases are unsafe material from which to derive any general principles regarding the availability of a profit-stripping response to civil wrongs in English law.

The profit-stripping awards just described effect ‘disgorgement’ – they are measured by the profits that have actually accrued to the wrongdoer from his wrongful conduct, whatever their source. Another possible measure of gain-based award is different and more limited. It achieves ‘restitution’ to a claimant in a narrower sense – restoring to the claimant the value of the benefit immediately obtained by the wrongdoer from the claimant/at the claimant’s expense. This category of awards is referred to here as ‘restitutionary awards’.

Although one might expect these restitutionary awards to be more widely granted, it is surprisingly difficult to find unequivocal support for their availability. This could be attributed – to a large extent – to an inevitable overlap with other remedies, which means that even where such awards are theoretically available, they are not routinely resorted to, and/or that some awards that could be analysed as restitutionary awards for a wrong can also be explained in other terms. So, in particular: (a) in many cases of ‘subtractive’, wrongful enrichment, a claimant is likely to be able to obtain a similar sum from the defendant as compensatory damages for the wrong (potentially more, if consequential losses are also compensated); (b) on the same facts, the claimant may also be entitled to another remedy with similar restitutionary effects, most likely: (i) a personal restitutionary remedy for unjust enrichment;⁵⁴ or (ii) a proprietary restitutionary remedy, in the form of rescission of a transaction under which property has been transferred to the defendant, together with ancillary monetary orders; or the imposition of a trust over property transferred to the defendant which restores beneficial title to the claimant.⁵⁵

Consider, for example, a case where the defendant obtains property from the claimant by fraudulent misrepresentations. The defendant commits the tort of deceit, for which he will be liable to pay compensatory damages, extending to all direct consequential losses – a measure that should exceed and subsume any award assessed on a restitutionary basis. Alongside this claim, the claimant may be entitled to a personal restitutionary remedy in unjust enrichment; he may be able to seek rescission of the transaction, bringing about a revesting of title to the property transferred in his favour; and in the absence of a transactional barrier, the law might achieve a similar effect by imposing an immediate constructive trust over the property transferred, in favour of the claimant, as a response to the defendant’s fraud.⁵⁶ All of this means that it may be unusual to find a monetary award being claimed and made that is only explicable as a restitutionary award made specifically for the tort of deceit. Nevertheless, one way or another, restitution is what can be and is often being achieved, at least by functional equivalents.

The fact that a ‘restitutionary award’ may not often be required does not, of course, prove that English courts cannot make such awards in response to a civil wrong – requiring the defendant to repay money, the value of property, or the value of some other benefit obtained from the claimant by wrongdoing. Indeed, there is a reasonable amount of material to suggest that they can do so,⁵⁷ causing one leading scholar to suggest that the law should in principle respond to any wrong by a restitutionary award.⁵⁸

In practice, the largest collection of cases that could be rationalised as restitutionary awards are those cases where the defendant commits a wrong against the claimant, and the courts order the defendant to pay a sum reflecting the reasonable value of the liberty to do as the defendant did (or in some cases, to do as he proposes to do in future).⁵⁹ These awards – referred to here as ‘reasonable fee awards’ – have several historic roots, and English courts have yet to develop consistent terminology for them. Depending upon the context and judicial preferences, such awards are made under a variety of labels – in particular, user damages, damages assessed by reference to a reasonable or notional royalty, mesne profits awards, wayleave awards, Wrotham Park damages, negotiation damages, and Lord Cairns’s Act damages.

What these reasonable fee awards have in common is that they see the courts requiring a wrongdoer to pay a sum which represents the reasonable (objectively-determined) value of the liberty/right to do as he did (or in some cases, the value of the liberty/right to do as he proposes to do in future). The necessary valuation exercise can occur in various ways. Sometimes, a reasonable sum is simply plucked from the air. More often, the courts (a) identify an appropriate market rate, or (b) as a fall-back, adopt a ‘hypothetical negotiations’ approach, which is directed at identifying the price that might reasonably be agreed to legitimate the defendant’s wrongful conduct. This last approach is inevitably more complex. The courts do not attempt to re-construct any actual bargaining process that might have occurred – in truth, the claimant might not have been prepared to bargain away his rights to the defendant at any price, or at least at a price that the defendant could or would pay. Instead, the courts imagine a bargain struck between two willing parties, acting reasonably, generally before the defendant’s wrongful course of conduct begins, and without the benefit of hindsight. These parties are not assumed to share the personal characteristics of the claimant and defendant, but they are assumed to be situated as the claimant and defendant were. Accordingly, when determining the outcome of the hypothetical bargain, a court can factor in a wide range of circumstances that would strengthen or weaken either party’s hands, or reasonably influence their preparedness to strike a deal.⁶⁰

Such reasonable fee awards are widely available, and certainly, more readily awarded than profit-stripping awards. Thus, the cases support their availability for: (a) the major intellectual property wrongs (reflecting a reasonable/notional royalty for the relevant infringing act);⁶¹ (b) breaches of confidence (reflecting the sum that could reasonably be demanded for relaxation of any confidentiality obligation);⁶² (c) wrongful interferences with rights to possess chattels (typically in the form of a reasonable user fee for a period of temporary wrongful user);⁶³ (d) wrongful interferences with rights to possess land,⁶⁴ or lesser rights of use and/or control (in the form of a reasonable user fee for a period of temporary wrongful user or the sum that could reasonably be negotiated for permission to do as the defendant did);⁶⁵ and (e) breach of contract (reflecting the sum that could reasonably be demanded for relaxation of the relevant contractual obligation).⁶⁶

An important obstacle to understanding exactly when these reasonable fee awards should be made, and on what assumptions, is a continuing controversy as to their nature. The cases and the literature divide on whether these awards are properly characterised as gain-based/restitutionary at all – many judges and scholars insist that they should be classified as ‘compensatory’ awards. On one analysis, they are compensatory in a conventional sense, being designed to compensate a real financial loss which consists of the claimant’s genuinely lost opportunity to bargain with the defendant for the relaxation/exploitation of his rights.⁶⁷ According to another, now more popular analysis, they are compensatory in a different sense – a form of ‘substitutive’ compensation, reflective of the value of the infringed right, which does not depend on the presence or proof of consequential financial/material losses.⁶⁸

If these awards are properly characterised as gain-based/restitutionary, as a number of cases assume,⁶⁹ they are nevertheless clearly distinguishable from the profit-stripping awards exemplified by the account of profits. For some wrongs, where a wrongdoer has profited and an account of profits is an available remedy, the courts often opt to make a reasonable fee award instead.⁷⁰ It might then appear tempting to view this measure as a lesser form of partial profit-stripping/disgorgement. However, that would risk missing the distinctive nature of reasonable fee awards, if properly understood as gain-based awards. As an objective measure of the benefit that immediately accrues to the wrongdoer from the unlicensed appropriation or infringement of the claimant’s rights, these reasonable fee awards are available whether or not the wrongdoer actually makes any profits consequent on his wrong, and regardless of the extent of the profits which he does actually make.

For example, where courts quantify a reasonable fee award by adopting a market basis for valuation (e.g. requiring a defendant who has wrongfully possessed the claimant’s land to pay a reasonable rental) the wrongdoer can be liable to pay a substantial sum, reflecting the market value of this benefit, whether or not this reflects any actual profitable use during the period of wrongful possession.⁷¹ So too, when the courts quantify a reasonable fee award by assessing damages on a ‘hypothetical negotiation’ basis, an important factor bearing on the readiness of a person in the defendant’s position to strike a deal, and on the price that could reasonably be agreed, is the extent of the profits which the defendant could reasonably have anticipated. For this purpose, however, it is the anticipated profits that are crucial. Any award assessed on this basis might therefore exceed the profits that, with hindsight, can be seen actually to have accrued to the defendant, if the defendant’s conduct is less profitable than expected or, in fact, unprofitable.⁷²

Deterrence is undoubtedly a popular explanation for profit-stripping awards,⁷⁷ and might provide a plausible explanation for some important features of English law. In particular, (a) strongly prophylactic concerns are widely assumed to underlie the core duties and strict accountability of fiduciaries;⁷⁸ (b) outside of the fiduciary sphere, some level of deliberate wrongdoing may often be required before a profit-stripping remedy is awarded;⁷⁹ and (c) the presence of ‘category 2’ exemplary damages supports the view that deliberate and cynical wrongdoing, committed with a view to profit, is conduct that can and should be deterred.⁸⁰

Nevertheless, English law does not yet precisely match Edelman’s vision of when so-called “disgorgement damages” should be awarded. On the one hand, despite the existence of ‘category 2’ exemplary damages, English courts have not yet clearly accepted that deliberate or reckless wrongdoing with a view to profit is a sufficient, general basis for a profit-stripping award. There are many examples of such wrongdoing that have not yet attracted a profit-stripping award, or are remedied only by a reasonable fee award, at least in the absence of further “exceptional circumstances”.⁸¹ On the other hand, deliberate or reckless wrongdoing with a view to profit is not invariably required for a profit-stripping award. For example, there are several intellectual property wrongs for which profit-stripping awards can be made against defendants who are not conscious/deliberate infringers.⁸²

It may be tempting to dismiss this unevenness as the accidental product of English law’s ad hoc development. However, there are other inferences that might be drawn. They include:

Different issues arise in relation to what have been labelled as ‘restitutionary awards’ – best exemplified by ‘reasonable fee awards’. This is a fragile category of gain-based award because of the continuing controversy regarding whether they should be understood, exclusively, in different terms – as compensatory awards.⁸⁸ If they are gain-based, then they are manifestly different in quantum from profit-stripping awards. However, there is no clear consensus as to the implications of this. Two broad lines of opinion are identifiable.

One view, reflecting Edelman’s analysis,⁸⁹ is that the reasonable fee awards are one manifestation of a wider species of gain-based award that is different in nature and underlying rationale from awards that effect disgorgement of a wrongdoer’s actual profits, whatever their source, in order to deter. These ‘restitutionary’ awards effect restitution of a benefit wrongfully obtained by the defendant from the claimant/at the claimant’s expense, in the same sense as restitutionary remedies awarded to reverse an unjust enrichment. They should in principle be available for any wrong, without more.⁹⁰

A different view is that the reasonable fee/restitutionary awards are not susceptible to such simple, separate rationalisation: they merely represent a lower point on a single spectrum of possible gain-based awards. On this view, the availability of a reasonable fee/restitutionary award, and the choice between such an award and an award that removes all or part of a wrongdoer’s actual profits, turns on the interplay of a more complex set of considerations – including the importance and vulnerability of the claimant’s protected interest, the extent and culpability of the defendant’s wrongful conduct, the extent to which any profit accruing to the defendant is causally attributable to the defendant’s wrong, the adequacy of alternative remedies/sanctions, and the strength of concerns to deter.⁹¹

Profit-stripping, via an account of profits,⁹² is the/a primary response where a fiduciary contravenes the ‘no conflict’ and ‘no profit’ rules that underpin the core requirement for undivided loyalty to the beneficiary of the fiduciary relationship – the closely-related rules that demand that a fiduciary must not find himself in a position of unauthorised conflict of interest and duty, and that he must not make any unauthorised profit from his position. The stringency of these proscriptions is such that it is no defence that the fiduciary acted in good faith, in the best interests of the beneficiary, without breaching any other duty owed to the beneficiary, and without causing him any loss.⁹³ These rules are widely justified as strictly prophylactic in aim – designed to prevent a fiduciary from finding himself in a position where he might be tempted by the prospect of personal gain to act inconsistently with his duty.⁹⁴ The ready availability of profit-stripping mechanisms, in robust form, is the obvious remedial counterpart of these stringent rules. As recently put in Murad v Al-Saraj,⁹⁵ “the law imposes exacting standards on fiduciaries and an extensive liability to account” “in the interests of efficiency and to provide an incentive to fiduciaries to resist the temptation to misconduct themselves”.

Closely related is the ancillary wrong committed by a person who dishonestly assists or otherwise participates in another’s breach of trust or fiduciary duty.⁹⁶ Recent authority confirms that where a ‘dishonest assistant’ profits by such wrongdoing, an account of profits may also be awarded, whether or not the beneficiary suffered loss, and even though the trustee’s/fiduciary’s wrong may not have involved any misapplication of assets held for the beneficiary.⁹⁷ Given the high level of conscious wrongdoing required, and the high degree of protection generally afforded to trust/fiduciary relations, this liability might be readily explained as a deterrent/prophylactic measure.⁹⁸

There are, however, some important differences between the position of a dishonest assistant and that of a defaulting fiduciary – a fiduciary’s accountability is stricter and more extensive.⁹⁹ In particular, (a) unlike a fiduciary’s liability, the liability of a dishonest assistant is necessarily limited to circumstances demonstrating a high degree of conscious fault; (b) the courts have refused/limited accounts of profits against dishonest assistants using causal reasoning that does not appear to constrain a fiduciary’s accountability;¹⁰⁰ (c) as with other non-fiduciary wrongdoers, the availability of an account of profits against a dishonest assistant is said to be subject to the court’s “discretion”, whereas a fiduciary’s accountability is peremptory and follows automatically where a relevant profit is made;¹⁰¹ and (d) a fiduciary is accountable for any relevant profit in specie, whereas the dishonest assistant’s liability seems to be a merely personal, monetary liability.¹⁰²

These differences almost certainly reflect the distinctive juristic nature and basis of a fiduciary’s accountability. Although often said to be liable in the same manner as a trustee,¹⁰³ a dishonest assistant is not, without more, a fiduciary. This means that dishonest assistants are not subject to the proscriptive rules, and associated disabilities and liabilities, that are fundamental incidents of a fiduciary relationship – including the so-called “inflexible” rule that requires a fiduciary to account for any unauthorised profit resulting from his position. If an account of profits is ordered against a dishonest assistant, this is naturally viewed as a profit-stripping/disgorgement remedy, triggered by the wrong committed by the dishonest assistant. In contrast, the fiduciary’s accountability may be more satisfactorily understood in different terms: not as a profit-stripping remedy for any wrong committed by the fiduciary, but the result of a distinctive primary duty, which is peculiar to the fiduciary relationship and a concomitant of the core requirement of loyalty, to render any relevant profit to the relationship’s beneficiary.¹⁰⁴ On this view, a fiduciary cannot make any unauthorised profit from his position because of a “primary rule of attribution”, which means that anything that the fiduciary tries to extract from the relationship is attributed to the relationship’s beneficiary, as a matter of primary right/duty.

In practice, in situations involving unauthorised dealings with trust assets by trustees, and unauthorised dealings with assets managed by other forms of custodian for another’s benefit, equity often achieves the functional equivalent of a gain-based remedy more widely, without this needing to be characterised as a gain-based liability for wrongdoing. For example, where assets held on trust are disposed of without authority, English law is generous in affording the trust’s beneficiaries an ability (i) to assert equitable proprietary rights to any unauthorised traceable substitute asset in the trustee’s hands; and (ii) corresponding rights to the original asset or traceable substitute in the hands of a third party recipient.¹⁰⁵ Such a third party recipient, once he acquires sufficient knowledge of the misapplication as to make it unconscionable for him to retain the benefit of his receipt,¹⁰⁶ may also incur an equitable personal liability for “knowing receipt”, which ordinarily involves an immediate liability to restore the misapplied assets or their value to the trust,¹⁰⁷ but might also generate a further liability to account for his profits.¹⁰⁸

English law has also long made available the remedy of an account of profits for major intellectual property (‘IP’) wrongs, originally via proceedings in courts of equity as an adjunct to a claim for injunctive relief. This practice pre-dates modern IP statutes, which now expressly confirm the remedy’s availability for patent,¹⁰⁹ copyright,¹¹⁰ and trademark¹¹¹ infringements, as well as for the infringement of a number of other rights.¹¹² Passing off remains a common law wrong, for which an account of profits is undoubtedly available.¹¹³ Three features of these profit-stripping awards, when awarded in IP cases, stand out.

First, it is widely assumed that an account of profits is readily available for these wrongs, as an alternative to ordinary compensatory damages, at the election of the claimant. In practice, claimants rarely make this election. Nevertheless, where it is made, the courts apparently exercise only a very limited discretion to refuse the remedy and leave the claimant with ordinary compensatory damages in lieu.¹¹⁴

Secondly, there is unevenness in relation to the degree of fault needed to justify an account of profits. Conscious/deliberate wrongdoing is certainly not universally required. For trademark infringement or passing off, the courts may refuse an account of profits against an infringer who did not knowingly infringe the claimant’s rights.¹¹⁵ In contrast, an account of profits seems to be available for merely negligent patent infringement: a statutory “innocent infringement” defence protects an infringer from liability for damages or an account of profits if he proves that “at the date of the infringement he was not aware, and had no reasonable grounds for supposing, that the patent existed”.¹¹⁶ For copyright,¹¹⁷ performers’ property rights,¹¹⁸ (unregistered) design right,¹¹⁹ and in future, registered design right,¹²⁰ an infringer who neither knew nor had reason to believe that the rights existed is only protected from liability for “damages”; other remedies, including an account of profits, are expressly preserved.¹²¹

Thirdly, whilst many commentators emphasise deterrence as the primary basis for profit-stripping awards, this has not been an explicit feature of judicial reasoning in modern IP cases. Where a substantial explanation is articulated, it is typically the prevention of the infringer’s “unjust enrichment”¹²² – perhaps implying that in the IP context, a profit-stripping award is thought warranted without any need to refer to the aim of deterrence. The absence of any general requirement for conscious/deliberate wrongdoing may also reinforce the view that deterrence is not a necessary premise on which these awards are made; or it may suggest that some commentators¹²³ are wrong to assume that conscious/deliberate wrongdoing is always a necessary condition for profit-stripping to be warranted on deterrent-grounds. Either way, English courts may well make more explicit reference to the requirements of deterrence in future, in light of EU law requirements embodied in the recent EU Enforcement Directive.¹²⁴ These require Member States to provide remedies to enforce IP rights that are, inter alia, “effective”, “proportionate” and, crucially, “dissuasive”.¹²⁵

Where a claimant elects to recover damages rather than an account of an infringer’s profits, the basic premise on which these damages are assessed and awarded is that they are intended to compensate the claimant’s losses – e.g. lost sale or licensing profits. However, in patent cases, it has long been assumed that every infringement is a wrongful act for which substantial damages should be payable by reference to a reasonable or notional royalty, in the absence of other proven losses, and apparently even though the claimant would not have licensed the defendant’s acts.¹²⁶ This is an example of the ‘reasonable fee’ measure. Similar awards have been accepted for copyright infringement;¹²⁷ as well as more recently, with more equivocation, for trademark infringement and passing off.¹²⁸ As in other contexts, the cases remain ambivalent as to whether this measure is properly classified as ‘compensatory’ or ‘restitutionary’.¹²⁹

It is worth noting, finally, that this general picture is complicated by the fact that Parliament has expressly provided for a sui generis measure of award, known as “additional damages”, for copyright infringement¹³⁰ and a number of other wrongs.¹³¹ These damages can be awarded in addition to ordinary compensatory damages¹³² in an appropriate case, “as the justice of the case may require”, “having regard to all the circumstances, and in particular to – (a) the flagrancy of the infringement, and (b) any benefit accruing to the defendant by reason of the infringement”. This is an unusual, hybrid remedy, which occupies an uncertain status as between (a) aggravated compensatory damages, (b) a gain-based measure, and (more doubtfully) (c) exemplary damages.¹³³ It remains a live question whether, post-Kuddus, ‘category 2’ exemplary damages could be awarded for an IP wrong.¹³⁴

Liability for breach of confidence has a wide reach in English law, encompassing actions for misuse of information in breach of an obligation of confidentiality assumed by contract or imposed by law, without formal distinction between types of information – e.g. technological, commercial, political, or personal. Courts of equity have had long-running involvement in these cases, both in restraining breaches by injunctions, and in imposing confidentiality obligations in the absence of any contract. There is a long-running debate about the proper classification of the action available in the latter cases – if not a common law claim in contract or in tort, then it looks like an equitable wrong, prompting some arid debates about the jurisdictional basis for courts to make compensatory awards.¹³⁵ More immediately important, however, is the long-standing assumption that a profit-stripping remedy, via the equitable remedy of an account of profits, may be awarded for breach of confidence.¹³⁶

It has sometimes been argued that the victim of a breach of confidence, much like the victim of an IP wrong, has a free election between damages and an account of profits, subject only to the court’s discretion to refuse the remedy on general equitable grounds.¹³⁷ However, recent cases suggest that this is mistaken, and that the courts are taking a more discriminating approach to the availability of this remedy – refusing it altogether where it is not regarded as the “appropriate” response to the breach.¹³⁸ It would seem that the line is not simply a line between conscious/deliberate and non-deliberate wrongdoing, although conscious/deliberate wrongdoing may be a necessary condition for an award.¹³⁹ Instead, and consistently with the wide range of circumstances embraced within actions for breach of confidence, the courts appear to be assuming a spectrum of cases, with the extent of the law’s remedial response graded, inter alia, according to importance of the interest in confidentiality, the extent to which any profit accruing to the defendant is causally attributable to the defendant’s wrong, and the strength of the need for deterrence. ¹⁴⁰ For example, confidential information obtained within a fiduciary relationship, or state secrets,¹⁴¹ may be given the highest level of protection in the form of an account of profits. In contrast, for breaches of confidence between parties to a purely commercial relationship, the courts appear likely, at least in the absence of (as yet undefined) “exceptional circumstances”, to regard the more appropriate remedy as a lesser ‘reasonable fee’ award – i.e. damages assessed on a hypothetical negotiation basis, reflecting the price that the claimant could reasonably have demanded as the price for agreeing to relax the confidentiality obligation.¹⁴² As in other contexts, the cases remain equivocal as to the true characterisation of this latter remedy, as ‘compensatory’ or ‘restitutionary’;¹⁴³ and as in the IP cases, there may be a tendency to treat the measure as a residual measure, awarded if the claimant cannot prove that he has suffered financial loss in the form of lost profits from exploiting the information, by sale or licensing, or a genuinely lost opportunity to bargain with the defendant.¹⁴⁴

English law is robustly protective of rights to possess chattels or land. An unauthorised, wrongful appropriation of another’s chattel is likely to result in strict liability for a common law tort – most likely, the tort of conversion. Such wrongdoing readily yields a liability to pay damages measured by the market value of the chattel (if the chattel is not returned),¹⁴⁵ or if it has been sold, a liability for the proceeds of sale.¹⁴⁶ In principle, a similar position applies to land, where it is permanently expropriated.¹⁴⁷

Where another’s chattel or land is merely wrongfully used – most likely, amounting to the tort of trespass to goods or land – the courts have also routinely held the defendant liable to pay a reasonable sum for the wrongful use. This is another example of the reasonable fee measure, variously described as ‘user damages’,¹⁴⁸ ‘mesne profits’,¹⁴⁹ a ‘wayleave’ award,¹⁵⁰ or ‘hypothetical negotiation damages’.¹⁵¹ It is harder to find cases where the courts have gone further, and made a profit-stripping award that captures part or all of the profits actually earned by wrongful use.¹⁵² The most recent cases imply that such a remedy may be available against a conscious wrongdoer in (as yet undefined) “exceptional circumstances”.¹⁵³

There is no doubt that the most outrageous examples of this variety of wrongdoing can attract ‘category 2’ exemplary damages.¹⁵⁴ Mention must also be made of the special statutory tort of unlawful eviction of a “residential occupier”, created by the Housing Act 1988.¹⁵⁵ The “landlord” is liable for a statutory measure of gain-based damages, reflecting the increase in the market value of the landlord’s interest in the property as a result of the eviction.¹⁵⁶ This was specifically designed, in part, to provide a powerful deterrent for landlords tempted to evict their tenants with a view to gain.¹⁵⁷

Interferences with lesser rights to land, short of rights to possession, have also attracted what look like reasonable fee awards. In particular, breach of a restrictive freehold covenant will readily yield an award of damages assessed on a hypothetical negotiation basis where injunctive relief is not awarded to undo a past breach and/or to prevent future breaches.¹⁵⁸ Interference with an easement, such as a right to light¹⁵⁹ or right of way¹⁶⁰ – actionable via the tort of nuisance – has attracted a similar measure of award. As yet, there are no cases in which an account of profits has been awarded in these situations. Indeed, it remains unclear whether a nuisance can ever attract a profit-stripping award, via an account of profits or otherwise.¹⁶¹ It seems to be assumed again that (as yet undefined) “exceptional circumstances” will at least be required.¹⁶²

Until remarkably recently, it was a long-standing assumption that damages for breach of contract were compensatory only; neither exemplary damages¹⁶³ nor gain-based damages¹⁶⁴ could be awarded for a ‘pure’ breach of contract. However, in 2001, in the landmark decision in Attorney-General v Blake,¹⁶⁵ a majority of the House of Lords held that an account of profits could be awarded against a contract-breaker, albeit only in “exceptional circumstances”. Lord Nicholls, giving the leading judgment, said that the remedy would not be awarded unless normal contractual remedies (compensatory damages and specific remedies) would be an “inadequate” response to a breach. Beyond that, no “fixed rules” could be prescribed for identifying what would qualify as “exceptional circumstances”, although a “useful” but “not exhaustive” guide was “whether the [claimant] had a legitimate interest in preventing the defendant’s profit-making activity and, hence, in depriving him of his profit”.¹⁶⁶

Blake was an extreme case,¹⁶⁷ and much ink has been spilt in an attempt to give further content to Lord Nicholls’s words. It is certainly clear that an account of profits was expected to be highly unusual; that it was viewed primarily as a mechanism for deterrence; and that it is not sufficient to warrant the remedy that the breach of contract was deliberate and cynical, with a view to profit.¹⁶⁸ Precisely what more is required remains unsettled. Some commentators plausibly suggest that a key to identifying when such awards may legitimately be available as a mechanism to deter breaches of contract is whether the obligation which the defendant breached is one for which courts might be prepared to order specific performance.¹⁶⁹ Post-Blake decisions are not straightforwardly explained in these terms; nevertheless, two things, at least, are clear. First, an account of profits is very rarely awarded.¹⁷⁰ Secondly, where the necessary “exceptional circumstances” cannot be identified, the courts often make a more limited reasonable fee award instead – assessing damages on a hypothetical negotiations basis, reflecting the price that could reasonably be agreed for the relaxation of the defendant’s contractual obligation – at least if ordinary compensatory damages would be an inadequate remedy.¹⁷¹

What about other wrongs? English courts clearly do not regard profit-stripping awards/disgorgement as an automatic, or even common, response to every wrong. Nevertheless, the recognition in Attorney-General v Blake ¹⁷²