This general report is based on 24 national reports from Australia,⁶ Austria,⁷ Belgium,⁸ Brazil,⁹ Canada,¹⁰ Chile,¹¹ China,¹² Croatia,¹³ England and Wales,¹⁴ France,¹⁵ Germany,¹⁶ Greece,¹⁷ Ireland,¹⁸ Israel,¹⁹ Italy,²⁰ Japan,²¹ Norway,²² Portugal,²³ Romania,²⁴ Scotland,²⁵ Slovenia,²⁶ South Africa,²⁷ Spain,²⁸ and Turkey.²⁹ We had hoped to receive national reports from Colombia, Egypt, the Netherlands, Paraguay and the United States as well, but the number is quite satisfying.

The initial question for the idea of disgorgement of illegal profits is in which branch of law it is or should be dealt with and what instruments they offer. In the majority of legal systems it seems to be accepted that combating unlawful profits is not just a task for one branch of law but that criminal, administrative and private law have to work closely together to achieve the best result possible.³⁰ For this reason criminal and administrative law often foresee a whole arsenal of more or less efficient particular instruments focussing on disgorgement of unlawful profits:³¹ they can e.g. either be confiscated, skimmed-off by authorities, or administrative or criminal fines can be calculated according to the illegal profits. These instruments can be general in nature, i.e. applicable to all forms of violations, or limited to specific areas of law (such as competition law, unfair commercial practices law, etc.).

Where the functional distribution regarding disgorgement of profits is concerned it does appear that there has been a shift in view in several countries over the past decades: if one focuses almost solely or primarily on criminal and administrative law then in the course of the rise of the notion of private enforcement there is an increasing emphasis of the significance of private law.³² The actual significance in practice of the public law regulations on disgorgement of profits was dealt with differently in the national reports. Whilst most national reporters indicated the considerable practical relevance in their country this view was not present in all reports; in fact the relevance was questioned in some instances.³³ In many countries it can be observed that there is an increase in the – often criticised – so-called “legal hybrids”, i.e. legal instruments that combine private law and public law elements in order to give rise to a disgorgement of profits. These often require a private party to seize the initiative, though the disgorged profits will be paid to the state.³⁴

Arguably the most discussed and most distinct private law instrument when it comes to the disgorgement of profits are the so-called disgorgement, restitutionary³⁵ or gain-based damages.³⁶ Furthermore, there are additional other terms for this legal instrument, which of course complicates its understanding. In strong contrast to the “regular” compensatory damages they are measured only according to the wrongdoer’s gain based on the infringement rather than the plaintiff’s losses and represent an anomaly in a number of legal systems. Thus, the plaintiff might gain damages that exceed his losses considerably; he receives what is called a “windfall profit”.³⁷ The profit to be paid out is therefore calculated separately from the harm that has arisen and can, as such, be much greater; a link to the actual harm is therefore not made. This understanding shall form the basis of the term “disgorgement damages” used in this report. Accordingly, it also means that this notion is understood as being entirely independent of national perceptions and structure; it therefore might cover instances that the national legal systems indeed describe, though using other terms. Creating a useful and valuable general report can therefore only be achieved by using such an international, independent and uniform notion of disgorgement damages which extends across the national borders.

With regard to disgorgement damages national reporters have had to face several problems: as just indicated above, there is the question of different terminology – not only in English, but also in numerous other languages (see e.g. in French ‘faute lucrative’ and in German “Gewinnherausgabe” or “Gewinnabschöpfung”), which complicates a uniform understanding. An Israeli statute on disgorgement of profits derived from Publications Concerning Criminal Acts Law, 5765-2005, uses the term “disgorgement of profits” (hilut revahim).³⁸ This or similar terminology is often found in common law and mixed or composite jurisdictions;³⁹ in civil law systems it is less known.⁴⁰ Even worse: not every civil law jurisdiction recognises this topic as a specific issue as such.⁴¹ In contrast, the separate meaning of disgorgement of profits is much clearly indicated in the common law and mixed or composite jurisdictions and is, in principle, recognised therein as a uniform legal topic.⁴²

A further problem regarding pinpointing and identifying disgorgement damages is that possible remedies for disgorging unlawful profits are, in contrast to administrative and criminal law, often less “obvious” in the private law sector. Sometimes they seem to be almost “hidden” under the banner of compensatory damages or other obfuscatory labels.⁴³ Often they are widely spread all over the private law system, which complicates a common understanding of the problem.⁴⁴ Additionally, disgorgement damages are covered in part by statute law, but also by case law and the legal requirements may differ considerably (e.g. scope of application, level of fault). The notion of disgorgement damages in purely civil law systems can be found in statute law and sometimes even in case law. In common law countries there is also a divide between private law actions which historically arose in common law courts and private law actions which historically arose in equity in the courts of Chancery. Although the account of profit (disgorgement) arose in the common law, it was taken up by the courts of equity and became principally available for equitable wrongs.⁴⁵ Thus traditionally, the remedy was not generally awarded for common law wrongs such as breaches of contract and torts. However, in some mixed jurisdictions, such as Israel and Scotland, there is no division between “common law” and “equitable” remedies in the English sense.⁴⁶ In Australia, the historical division between equity and common law remains a significant barrier to the award of disgorgement damages in areas of private law which have their origins in the common law, such as contract and tort.⁴⁷ The melding of common law causes of action with remedies which historically arose in equity is said to produce “fusion fallacy” by ignoring historical precedent.⁴⁸ By contrast, the US is unconcerned about a fusion of common law and equity,⁴⁹ and this is reflected in its much greater willingness to award disgorgement (and punitive) damages for a wide range of actions.

The identification of disgorgement damages is further complicated by the use of other specific legal instruments that (at least) also serve the function of disgorgement of profits, i.e. they contribute to ensuring that the wrongdoer does not retain his unlawful profits. In some respects it can thus be seen that functional equivalents do exist.⁵⁰ For instance, damage multipliers as e.g. the American treble damages⁵¹ in competition law or punitive or exemplary damages in common law systems⁵² have a function of disgorging profits along with other functions.⁵³ The same is also true for the right of subrogation (so-called “Eintrittsrechte”) that can be found in particular in the German law family or the constructive trust in some common law countries.

Despite the almost consistent efforts at a comprehensive (private law) disgorgement of unlawful profits and support of the statement “tort should not pay” it can nevertheless be observed that the legal reality tells a different story. Almost all national reports emphasised and regretted the inefficiency of their own national legal system with respect to this problem and came to the result that unlawful behaviour is often worthwhile. Nonetheless, the analysis of the national reports shows that in most legal systems disgorgement damages are not considered as a general remedy for all kind of unlawful conduct; thus often a general legal basis is lacking.

For example, in the US, traditionally it has been denied that disgorgement damages (aside from several specific laws in intellectual property law) should always be awarded – see for instance E. Allan Farnsworth.⁵⁴ But more recently Melvin Eisenberg has argued that such damages are already accepted in American law⁵⁵ – see Snepp v US.⁵⁶ And in the 2011 US Restatement of Restitution and Unjust Enrichment, it is clearly recognised that disgorgement may be appropriate in some cases.⁵⁷ In other common law countries such as England and Wales, Australia, Ireland, and New Zealand, and mixed or composite legal systems such as Canada and Scotland, disgorgement damages have traditionally been available mainly for equitable causes of action⁵⁸ such as breach of fiduciary duty⁵⁹ and breach of confidence where they are known as the “account of profits”.⁶⁰

However, this principle has increasingly wavered over the past decades. For example, the Irish High Court ruled in Hickey v Roches Stores ⁶¹ that there could be disgorgement damages arising from both contractual and tortious wrongs, in cases where the defendant acted in bad faith (“male fide”) by calculating and intending to achieve a gain by his wrongdoing.⁶² Finlay P accepted that, although the general aim of damages in contract and tort is compensation, contract damages need not always be strictly limited to compensation. He indicated that the circumstances giving rise to disgorgement could vary between different causes of action.⁶³ He set out a general rule that, “where a wrongdoer has calculated and intended by his wrongdoing to achieve a gain or profit which he could not otherwise achieve and has in that way acted mala fide then irrespective of whether the form of his wrongdoing constitutes a tort or a breach of contract the Court should in assessing damages look not only to the loss suffered by the injured party but also to the profit or gain unjustly or wrongfully obtained by the wrongdoer.” However, the outlines of these disgorgement damages in Irish law still remain unclear due to insufficient case law and are therefore still awaiting clarification.⁶⁴ Nonetheless, the decision could be the starting point for ensuring comprehensive disgorgement damages, i.e. in contract and in tort, in Ireland.

In addition, the 2001 landmark decision of the British House of Lords in Attorney-General v Blake ⁶⁵ calls into question several of the earlier principles of the common law-jurisdictions.⁶⁶ As noted above, until recently it was generally accepted for English law that damages for breach of contract were compensatory only and that any kind of gain-based damages⁶⁷ could not be awarded for a “pure” breach of contract. However, in the decision referred to the House of Lords held that an account of profits could be awarded against a contract-breaker, albeit only in “exceptional circumstances”. Lord Nicholls said that the remedy would not be awarded unless normal contractual remedies (compensatory damages and specific remedies) would be “inadequate”. Although what might qualify as “exceptional circumstances” has not yet been precisely determined, it can nevertheless be maintained that the account of profits for a breach of contract is rather a seldom phenomenon.⁶⁸ A further unresolved matter concerns how the decision in Attorney-General v Blake will impact on other common law jurisdictions and mixed legal systems.⁶⁹ Moreover, one will be kept in suspense as to whether a similar remedy may be afforded for other wrongs for which there is no present authority for profit-stripping awards⁷⁰ (mostly, a significant number of common law torts) when “exceptional circumstances” exist.⁷¹

Israel seems to be the only legal system covered by this report, where disgorgement damages are almost fully available and also used in practice. The landmark Israeli Supreme Court decision is the case of Adras,⁷² which was the first to apply the disgorgement principle to a breach of a contract not involving fiduciary relations, has blurred the lines between contract law, property law and unjustified enrichment, and has profoundly affected Israeli private law ever since. The factual situation of Adras was as follows: In 1973, the defendant, a German company, contracted to sell to the plaintiff, an Israeli company, iron for a determined price. As a result of the October 1973 war between Israel and its neighbouring Arab countries delivery of some of the iron was delayed. The defendant notified the plaintiff that, because of the high storage costs, it had to sell the remaining quantity to a third party. The plaintiff responded promptly with a demand that the iron be delivered to it. The defendant did not comply and, instead, sold the iron for a much higher price to a third party. In 1976 the plaintiff sued for recovery of the defendant’s gains. By that time the market price of iron returned to its former level and therefore the plaintiffs could not recover losses under their contract. Instead, it claimed the profits made by the defendant under unjust enrichment.

In its first decision,⁷³ the Israeli Supreme Court dismissed the claim on the basis of ULIS (Convention relating to a Uniform Law for the International Sale of Goods), the predecessor of the CISG (United Nations Convention on Contracts for the International Sale of Goods). Since the plaintiff could not prove that it had suffered a loss due to the breach it could not succeed in its claim. Had the plaintiff avoided the contract immediately after the breach it could have sued for the difference between the contract price and the market price on the date of avoidance (article 84 ULIS). The claim in unjust enrichment was likewise dismissed, since the law of unjust enrichment was considered inapplicable between the parties to a contract. Section 6(a), Unjust Enrichment Law, 5739-1979, provides that “[t]he provisions of this Law shall apply where no other Law contains special provisions as to the matter in question and no agreement between the parties provides otherwise.”

The plaintiff was granted a further hearing, in which two questions had to be decided by an extended panel of five justices of the Israeli Supreme Court: Whether unjust enrichment law applies between the parties to a contract? If the answer to the first question is positive – what would be the consequences for the parties in this case? The majority decided that unjust enrichment law applied also between parties to a contract. Consequently, the seller was required to transfer its profits to the buyer.⁷⁴

What about civil law jurisdictions? In the majority of them there is no general rule on disgorgement damages.⁷⁵ Also in Germany and Austria a general instrument “disgorgement damages” is lacking in their respective Civil Codes. However, Gerhard Wagner has argued in his report to the 66th Deutscher Juristentag (German Jurists’ Forum) for an inclusion of disgorgement damages in the German law of damages (for intentional infringements).⁷⁶ And according to section 1316(5) of the draft Austrian damages legislation the “advantages are to be considered, which the party causing the harm gained through the behaviour giving rise to liability” when calculating the ideal amount of damages. However, this may not be a genuine disgorgement of profits in the sense used for this general report.

Some jurisdictions do prima facie have a promising general legal basis for disgorgement damages as, for instance, The Netherlands. Article 6:104 of the Dutch Civil Code of 1992 seems to provide a legislative basis for such damages: “If someone, who is liable towards another person on the basis of tort or a default of complying with an obligation, has gained a profit because of this tort or non-performance, then the court may, upon the request of the injured person, estimate that damage in line with the amount of this profit or a part of it.” However, in its decision in Waeyen-Scheers v Naus, the Dutch Supreme Court concluded that this provision is only a means of assessing damages and not an independent and specific remedy for disgorgement damages.⁷⁷ J.D.A. Linssen considers unjustified enrichment to be a better ground for disgorgement in the Netherlands.⁷⁸

Chinese law is of great interest with respect to a general rule on disgorgement damages as it is undergoing a number of changes due to its very dynamic development. Even though there is no comprehensive, general rule for all types of disgorgement damages, the Chinese law – alongside numerous specific rules on disgorgement damages – does contain a general rule on this matter for the area of tort law (article 20 Tort Liability Law).⁷⁹ It provides that “where any harm caused by a tort to a personal right or interest of another person gives rise to any loss to the property of the victim of the tort, the tortfeasor shall make compensation as per the loss sustained by the victim as the result of the tort. If the loss sustained by the victim is difficult to be ascertained and the tortfeasor obtains any benefit from the tort, the tortfeasor shall make compensation as per the benefit obtained. If the benefit obtained by the tortfeasor from the tort is difficult to be ascertained, the victim and the tortfeasor disagree to the amount of compensation after consultation, and an action is brought to a people’s court, the people’s court shall determine the amount of compensation based on the actual situation”.⁸⁰ This article serves as a basis for disgorgement damage in Chinese tort law even though in this respect disgorgement damages arise only subsidiarily, i.e. only when a specific calculation of damages does not come into consideration. Furthermore, the actual effectiveness of disgorgement damages in Chinese law is clearly limited due to the payment of the illegal gains to the national treasury and the damages are thus seldom used to relieve the injured party.⁸¹ This approach has the further consequence of blurring the boundaries between public and private law and leads to the creation of legal hybrids.

In comparison to most of the national legal systems those more recent, comparative law-based Principles in Europe are more open to the creation of general rules on disgorgement damages. For instance, in non-contractual matters the injured party can, according to article VI.-6:101(4) Draft Common Frame of Reference (DCFR) and article 6:101(4) Principles of European Private Law: Non-contractual Liability Arising Out of Damage Caused to Another (PEL Liab. Dam.), recover any advantage obtained from the tortfeasor in connection with causing the damage, though only where this is reasonable.⁸² The disgorgement of profits should be rendered possible here because “the profits made from a civil wrong should not be retained by the wrongdoer“and ”[p]otential wrongdoers are warned that there is not profit to be made from a civil wrong.”⁸³ The comments to article 10:101 Principles of European Tort Law (PETL) also describe the possibility of prohibiting unjust enrichment (at least in the area of intellectual property rights) by including the payment of profits within the context of calculating the extent of compensation.⁸⁴ However, a search in the European principles for a general disgorgement of profits for all forms of breaches of contract and statute law is of no avail.

The aforementioned statements have shown on the whole that a general, overarching remedy of “disgorgement damages” applicable to all types of breaches of contract and of legislation is normally lacking, at least in the legal systems examined in this report. In turn, the consequence is that no general theory of disgorgement damages has emerged and that the topic is often neglected.

In spite of the general reluctance to acknowledge disgorgement damages as a general remedy there are, nonetheless, several branches of law in which they have been intensively discussed and often acknowledged. These particular areas of law will be outlined in more detail below. There is the area of breaches of fiduciary duties and/or confidence and furthermore the award of disgorgement damages in cases of intellectual property rights infringements. Another important branch for the idea of disgorgement is the (intentional) infringement of personality rights by mass media for gain. We also draw attention to the world of competition law – even though private enforcement is here (with the exception of the United States) generally a relatively new phenomenon. Nonetheless also in this area there is the discussion in some legal systems as to whether the plaintiff may disgorge unlawful profits (based on an infringement of competition law) as damages. The same is also applicable to the breach of unfair commercial practices law, as such this branch of law is also to be included.