Disgorgement of Profits: Gain-Based Remedies Throughout the World
© Springer International Publishing Switzerland 2015Ewoud Hondius and André Janssen (eds.)Disgorgement of ProfitsIus Comparatum – Global Studies in Comparative Law810.1007/978-3-319-18759-4_26
26. Disgorgement of Profits: Gain-Based Remedies Throughout the World
Molengraaff Institute for Private Law, University of Utrecht, Utrecht, The Netherlands
Lehrstuhl für Bürgerliches Recht, Medizinrecht, IPR und Rechtsvergleichung, University of Göttingen, Göttingen, Germany
Ewoud Hondius (Corresponding author)
In academic discourse it is often said that “tort must not pay”. However, the legal reality looks very different. Infringements of e.g. competition law, unfair commercial practices law, capital market law, intellectual property rights, or personal rights by mass media, or the breach of fiduciary or confidentiality duties are – for various reasons – generally highly profitable for the wrongdoer. Thus in practice unlawful conduct regularly pays as the illegal profits remain with the wrongdoer. A general idea of disgorgement of unlawful profits does not exist yet. This general report now considers the question whether or not “disgorgement of profits” is a keyword to be introduced in legal discourse and how the law may be shaped in order for illegal profits to be disgorged as efficiently as possible and thus to reduce the incentives for unlawful behaviour. According to the approach selected here it is the private law instruments, in particular what is called “disgorgement damages”, which are at the centre of attention. Can their use contribute to an increase in efficiency and what national experiences are on hand? Which legal circumstances should be necessary for their application and what are the requirements?
KeywordsContractCompetition lawDamagesDisgorgement of profitsEnforcement directiveFiduciary dutiesGain-based remediesIntellectual property rightPersonality rightsUnfair commercial practicesUnjust enrichment
Professor of European Private Law, membre titulaire de l’AIDC, previous general reporter on precontractual liability (Montréal 1990: Hondius (1990)), extinctive prescription (Athens 1994: Hondius (1995)) and precedent and the law (Utrecht 2006: Hondius (2008)).
is a deputy professor at the University of Göttingen (Germany), and is a former researcher at the University of Turin (Italy) where his research on disgorgement of profits was supported by a Marie Curie Intra European Fellowship within the 7th European Community Framework Programme.
This Court never allows a man to make profit by a wrong […].1
It is with this statement by Lord Hatherly in Jegon v Vivian that we began our questionnaire, in which we suggested that this particular statement was in line with modern day rhetoric.2 In many jurisdictions, it seems to be a timeless statement. Maybe even more than in Lord Hatherly’s time there is a worldwide ideal that unlawful conduct (or more specific tort) should not pay and that, for this reason, the wrongdoer’s illegal profits must be disgorged.3
However, the legal reality looks very different from the rhetoric. Infringements of e.g. competition law, unfair commercial practices law, capital market law, intellectual property rights or personal rights by mass media or the breach of fiduciary or confidentiality duties are generally highly profitable for the wrongdoer. Millions of Euros or dollars of unlawful profits remain with the wrongdoers every year. Thus, in practice unlawful conduct often pays.4
From a private law perspective the reasons why unlawful conduct ultimately often pays are at least threefold: The first and most obvious one is when the chance to detect the wrongdoer is very low. In these situations he is “speculating” that he will not be held liable for his unlawful behaviour. The second reason can be the rational apathy of the injured parties in cases of so-called “trifling damages” or “nominal damages”. These are cases in which the damage suffered by each individual is low (and thus also the incentive to claim damages is low) but as many persons suffered these losses, the profit of the wrongdoers is (sometimes immensely) high. Another possible reason is that the wrongdoers’ expected profits are higher than the legal sanctions (especially damages) for the infringement. In these cases the calculated breach of law remains profitable despite all sanctions (profitable breach of law or contract).
This general report now considers the question whether or not “disgorgement of profits” is a keyword to be introduced in legal discourse and how the law may be shaped in order for illegal profits to be disgorged as efficiently as possible and thus to reduce the incentives for unlawful behaviour. According to the approach selected by the general reporters, it is the private law instruments, in particular what we call disgorgement damages, which are the focal point of the research.5 Can their use contribute to an increase in efficiency and what national experiences are on hand? Which legal circumstances should be necessary for their application and what are the requirements?
The general report is structured thus: after the introduction there is the presentation of the national reports, followed by the question of who is faced with the task of disgorging unlawful profits. The subsequent section begins first with the notion of disgorgement damages and the problems with its identification and localisation, followed by the examination of the extent to which disgorgement damages are a central remedy in the national legal systems. The sixth section analyses disgorgement damages in particular branches of law, more specifically in breach of fiduciary duties and confidence, infringements of intellectual property rights, infringements of personality rights by mass media, and unfair commercial practices and competition law. The penultimate section considers the possible functional equivalents. The report concludes with a summary of the results and proposals for future approaches.
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.
Disgorgement of Profits: Whose Task Is It?
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
The Notion of Disgorgement Damages and the Identification of Problems
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.
The Lack of Disgorgement Damages as a General Remedy in the National Legal Systems
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.
Disgorgement Damages in Particular Branches of Law
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.
Breach of Fiduciary Duties or Confidence
The question of the possibility of disgorgement damages has received considerable attention in the areas of breach of fiduciary duties or confidence.85 The majority of the national legal systems share the view that such breaches may not be allowed to be worthwhile, yet conceptual differences exist between the legal instruments chosen to combat such circumstances. The situation concerning disgorgement of profits resulting from breaches of fiduciary duties or confidence is clearest in the common law jurisdictions (e.g. Australia, England and Wales, Ireland)86 and in several mixed or composite jurisdictions (e.g. Canada).87 Here the equitable remedy of the account of profits, which seeks to strip profit from a wrongdoer, is clearly available for equitable causes for all kind of breaches of fiduciary duties or confidence. However, it remains to some extend unclear whether the victim of these forms of breaches has the free election between damages and the account of profits.88 In general it has been that the victim has in these cases 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.89 However, it seems that recently courts are taking a more discriminating approach to the availability of this remedy and refusing it where it is not regarded as the “appropriate” response to the breach.90 Alongside the account of profits, one can also note “constructive trusts” as a functional equivalent that allows for disgorgement of profits in the common law.91 Constructive trusts are an equitable proprietary remedy awarded for equitable causes of action such as breach of fiduciary duties or confidence. The plaintiff acquires an equitable proprietary interest in the profits and can thus demand payment of the profit. In a constructive trust the court holds the defendant to be a trustee of the profit and to be holding it for the benefit of the plaintiff.92
In several international sets of rules, which specifically deal with this area of law, there are provisions that allow for disgorgement damages in these situations. For instance, in the event of a “breach of confidentiality” article II.-3:302(4) DCFR provides that the injured party can require the other party to pay over “any benefit obtained by the breach”.93 A similar wording can be seen in article 2:302 PECL, which served a basis for the aforementioned DCFR provision.94 The commentary to the PECL again clarifies that the payment of profit can be demanded by the injured party “even if that party has not suffered any loss”.95 In several legal systems it can be seen that disgorgement damages are in general not obtained for all breaches of fiduciary duties or confidence, but specific legislation does provide that such damages are foreseen for at least some of such breaches. For example, this approach can be seen in the Chinese Company Law and Securities Law, which each contain a number of provisions that provide for disgorgement damages for particular breaches of fiduciary duties in the field of business law,96 e.g. article 61 Chinese Company Law governs the disgorgement of profits in violation of prohibition of business interests.97
In contrast, the issue of disgorgement damages for breaches of fiduciary duties or confidence is either unknown, controversial or not even discussed in other national legal systems.98 The gap that emerges from such non-recognition of disgorgement damages can in general not be filled or it is at least very difficult to fill this gap with unjust enrichment law as the criteria for its application are generally not fulfilled.99 There is rather the reference to the possible application of the benevolent intervention in another’s affairs and, above all, to the right to subrogation (“Eintrittsrechte”), which plays a significant role in several legal systems (albeit often limited to the breach of particular fiduciary duties in business law).100 The German Commercial Code, for instance, contains several rules giving the principle a right to subrogation in order to disgorge the agent’s profits due to breach of fiduciary duties (in relation to prohibition of competition, see section 61(1), 113(1) German Commercial Code).101 In these instances this right of subrogation represents a functional equivalent to disgorgement damages and is likewise supported by the underlying idea that the wrongdoer should not gain financially from a breach of fiduciary duties.
Infringements of Intellectual Property Rights
Intellectual property rights contain a number of special features that result in an increased need for protection. They are ubiquitous and can therefore be violated at any time and for an infinite number of times what makes an effective prior protection impossible. Moreover, in most of the legal systems the criminal law protection of intellectual property rights is traditionally weak, with breaches of such property rights often not being discovered and the infringing party remaining unidentified. There is therefore the dangerous combination of a high potential for profits that greatly exceed the actual loss that is suffered. In light of this situation it is not surprising that the improvement of the protection of intellectual property rights as well as the notion of disgorgement damages has been on the international political agenda for some time.
The starting point is the Agreement on Trade Related Aspects of Intellectual Property Rights (TRIPS), yet this only sets minimum standards. Article 41(1) TRIPS102 notes the objective of effective deterrence, whereas the legal effects of this general obligation are substantiated by article 45 TRIPS, namely that adequate damages are to paid to the injured party on account of the breach of its intellectual property rights.103 In contrast, article 45(2) TRIPS allows the member states to decide, inter alia, on the introduction of recovery of profits. This option is even possible when infringers did not knowingly, or with reasonable grounds to know, engage in infringing activity. Similarly, the – albeit rejected – Anti-Counterfeiting Trade Agreement (ACTA) also stated the objective of deterrence (see article 6(1) ACTA),104 with substantiation in article 9 ACTA. According to article 9(1) ACTA, the starting point is (as with TRIPS) adequate compensation for the culpable breach. Furthermore, article 9 ACTA contains more detailed requirements regarding the damages and, in particular, on the calculation on their extent.105 For the payment of profits (at least in cases of copyright, or related rights, or trademark counterfeiting) article 9(2) ACTA provides that in civil proceedings the courts have the authority to order the infringer to pay the right holder the profits that are attributable to the infringement.
The focal point of the further considerations regarding disgorgement damages for breaches of intellectual property rights shall, for the purposes of this general report, be article 13(1) of the so-called Enforcement Directive 2004/48/EC,106 which (with regard to intellectual property rights) has had a lasting influence on the entire law of damages of the EU Member States and the discussion of disgorgements of profits. Article 13(1) of the Enforcement Directive provides that:
Member States shall ensure that the competent judicial authorities, on application of the injured party, order the infringer who knowingly, or with reasonable grounds to know, engaged in an infringing activity, to pay the rightholder damages appropriate to the actual prejudice suffered by him/her as a result of the infringement.
When the judicial authorities set the damages:
they shall take into account all appropriate aspects, such as the negative economic consequences, including lost profits, which the injured party has suffered, any unfair profits made by the infringer and, in appropriate cases, elements other than economic factors, such as the moral prejudice caused to the rightholder by the infringement;
as an alternative to (a), they may, in appropriate cases, set the damages as a lump sum on the basis of elements such as at least the amount of royalties or fees which would have been due if the infringer had requested authorisation to use the intellectual property right in question.
The central question concerning this rule is, as in many national legal systems that provide for the inclusion of illegal profits (here: “When the judicial authorities set the damages they shall take into account […] any unfair profits made by the infringer”), how this is to be understood. Are the unlawful profits merely one of several factors that are to be considered in order to ultimately ensure compensation of the loss, which is sometimes complicated due to problems with calculation? Can, for instance, the infringing party provide evidence that the actual damage is lower (or has possibly even not occurred) than his unlawful profits? Or does the reference to the unlawful profits aim not just at compensation, but also and particularly at prevention, i.e. can the profits to be paid out exceed (even greatly) the actual losses in order to prevent worthwhile infringements? In short, does it concern a purely compensatory method of calculation of damages in intellectual property law, or a special remedy akin to disgorgement damages, or do these at least come very close?
For the Enforcement Directive (and thus for the corresponding national law) one will therefore have to assume that, in spite of the unclear wording of article 13(1)(a), the norm favours the creation of self-standing disgorgement damages (on equal footing alongside the alternative of correct calculation of loss or the payment of a licence fee) with focus on prevention.107 For EU law as a whole, as well as for the Directive in particular, there is the central notion of guiding behaviour through remedies with an actual deterring effect. It is a core aspect of European private and business law. Article 3(2) of the Enforcement Directive clearly states that the remedies have to be effective, proportionate and, above all, dissuasive. However, this is only the case when the instrument of disgorgement damages renders it is impossible for the infringing parties to retain their unlawful profits. Such an approach can thus contribute to the effective prevention of profitable breaches of intellectual property rights and can therefore encourage particular types of behaviour.
The majority of the EU Member States, which were all obligated to implement the Enforcement Directive into national law, have more or less transposed verbatim article 13(1) Enforcement Directive.108 Unfortunately, their national laws now feature the uncertainty regarding the interpretation of this provision vis-à-vis the question disgorgement damages, too. Whilst a far-reaching independence of disgorgement damages in intellectual property law appears to have pushed through (at the latest following the transposition of the Directive) in several legal systems (for instance in Germany),109 this is still controversial in other legal systems (see, for example, the situation in Belgium).110 However, in light of the described deterrent aspect of the Enforcement Directive and the ultimate decision competency by the CJEU in this matter it does not appear unlikely that article 13(1)(a) Enforcement Directive will in the future be understood consistently as self-standing disgorgement damages which focus at prevention and which must be separated from the existence and extent of the particular harm.
In addition, there is also the possibility of payment of profits as well as the compensation of the actual loss under US-American trade mark and copyright law. For example, section 504 Copyright Act 1976 provides that:
The copyright owner is entitled to recover […] any profits of the infringer that are attributable to the infringement and are not taken into account in computing the actual damages.[…]
By granting the entitlement to recover profits the legislator has not only focused on compensation but also on guiding behaviour. This is clearly shown by a House of Representatives’ report on the Copyright Act, which notes amongst other things that “[…] profits are awarded to prevent the infringer from unfairly benefitting from a wrongful act.”111 The preventive purpose therefore stands on equal footing with the notion of compensation.
In other national legal systems there are often special legislative provisions concerning damages in intellectual property law (see e.g. Brazil, Canada, China),112 which feature a link to the infringer’s profits. However, it cannot always be clearly identified from the national reports (and often neither from the legislative provisions, too) whether the object is merely ultimately the compensatory view of the profits or instead genuinely independent disgorgement damages that are granted entirely separately from the harm that has occurred. Furthermore, in several countries there are further restrictive requirements that are not provided in EU law (or to be more precise, in the Enforcement Directive). In Chinese intellectual property law the reference to the profits of the wrongdoer can only be made when the actual loss is difficult to calculate.113 In Australian intellectual property law the decision Colbeam Palmer Ltd v Stock Affiliated Ltd 114 has resulted in the requirement that the plaintiff can only claim “accounts of profit for intellectual property infringements” if “the defendant knowingly infringed the plaintiff’s intellectual property right.” In this jurisdiction there is thus “the innocent infringement defence”.115 In addition, in Japanese and Israeli intellectual property law the references to illegal profits are made within the scope of the assessment of damage. However, one appears to have the clear view that these are not genuine disgorgement damages, but in each case just viewing the profits from a compensatory perspective.116 The Japanese report explicitly notes that the infringer may present counter-evidence that the actual harm is lower than his profits.117
In particular it can be observed in intellectual property law that several national legal systems also, in part, use damage multipliers. In addition to other functions these at least also serve the disgorgement of profits and therefore exhibit an overlap in function with the disgorgement damages at the centre of this report.118 In other countries, such as Austria, Croatia, Greece and Norway, breaches of intellectual property rights generate double damages;119 whereas even triple damages are given in countries such as China or Slovenia.120 In several legal systems the use of damage multipliers is limited to particular fields of intellectual property rights, such as copyright law (see Croatia or Greece).121 It can be noted that the use of damage multipliers often places higher requirements on the level of fault than general tort and intellectual property law. In Austria, Croatia or Slovenia for instance damage multipliers require intentional or reckless infringements of intellectual property rights.122 With regard to the legal systems examined in this report it can be observed that unjust enrichment law and benevolent intervention in another’s affairs only play a subordinate role for the disgorgement of profits resulting from violations of intellectual property rights. On the whole, they therefore do not represent an adequate functional equivalent to disgorgement damages.123
Infringements of Personality Rights
When compared to intellectual property law it can be seen that personality rights also feature a similar need for protection: an infinite number of infringements are possible, effective prior protection does not exist and the protection from criminal law is often weak. There are indeed claims for injunctions, retractions and counterstatements which arise from infringements of personality rights. However, these are not suited to taking into account the high level of protection that is needed and are useless with respect to infringements that have already been committed. Furthermore, considerable profits can be made by infringing another’s personality rights. These profits do not have to correspond to the losses suffered, but can be much greater, especially as the harm cannot be estimated due to its intangible nature. The infringing party’s profits can therefore greatly exceed the harm. This familiar combination thus, in principle, makes every form of personality right infringement appear as a worthwhile alternative. This is especially true with regard to infringements of personality rights by the press (in particular with respect to celebrities) which aim at generating profits through sales. The societal and technical changes over the past decades have meant that the significance of this issue has greatly increased.
In light of this situation it is hardly surprising that the issue of disgorgement damages is of considerable importance in such instances. One has to refer to the leading case “Caroline of Monaco I”, decided in 1994 by the German Supreme Court and which represented a turning point, at least in Germany, in the area of the protection of personality rights.124 It was apparent prior to this decision that the insufficient protection of personality rights had already been improved by the decisions “Paul Dahlke”,125 “Herrenreiter” (gentleman rider)126 and “Ginsengwurzel” (ginseng root),127 yet the amount of compensation continued to be very low. The idea of disgorging unlawful profits had not yet emerged; the press could therefore take the risk of infringing personality rights as the amount of compensation to be paid would be much lower than the potential profits that would be gained. However, the attractiveness of this approach was changed at least to a particular extent by the aforementioned decision Caroline of Monaco I.
The decision was based on the following facts: The magazine “Die Bunte” published a fictitious interview with Princess Caroline of Monaco, who had expressly rejected previous requests for interviews. The interview was entitled “Caroline: The psycho-interview”. A later edition of the magazine published photographs of Princess Caroline and her partner at the time – the pictures were supposedly from the new family album, whereas the pictures had been in fact obtained by the paparazzi and were covert photographs taken from a long distance through telephoto lens. A sister publication “Glücksrevue” reported on the couple’s (alleged) forthcoming wedding and published, inter alia, a series of photographs of Princess Caroline wearing a veil and standing alongside her partner. The plaintiff primarily sought damages for the non-pecuniary loss caused by the infringement of her personality rights.
The decision contrasted with previous decisions by the German Supreme Court because the judges emphasised the preventive function of the damages in a manner that was previously unknown:128 the notion of compensation stepped back to make way for the preventive approach.129 This approach is apparent from the core statements on the possibility of gaining an advantage – the German Supreme Court did not just bear in mind the preventive effect of the disposition, but also wanted to make it expressly apparent that this point was considered in the award of damages. Accordingly, the damages for infringements of personality rights must constitute a “real counterweight” to the profits made by violating these rights – especially when it comes to the amount of damages to be paid. The profits obtained from the infringement are thus a factor to be considered in deciding the extent of the damages for the non-pecuniary loss. Moreover, the extent must thus have a genuine restrictive effect on the marketing of personal matters.130 As a consequence of this decision it can be seen that there has been a clear rise in the amount of damages for non-pecuniary loss (up to 400,000 Euros/claim). The damages are therefore no longer merely symbolic.131