© 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_1
1. Original Questionnaire: Disgorgement of Profits
Molengraaff Institute for Private Law, University of Utrecht, Utrecht, The Netherlands
Lehrstuhl für Bürgerliches Recht, Medizinrecht, IPR und Rechtsvergleichung, University of Göttingen, Göttingen, Germany
This Chapter sets out the original questionnaire submitted to the national reporters.
KeywordsContractCompetition lawDamagesDisgorgement of profitsEnforcement directiveFiduciary dutiesGain-based remediesIntellectual property rightPersonality rightsUnfair commercial practicesUnjust enrichment
In preparing this questionnaire we have profited from the various suggestions by the national reporters from Australia (Katy Barnett), Belgium (Marc Kruithof) and Israel (Talia Einhorn).
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
This famous sentence by Lord Hatherly in Jegon v Vivian is already more than 140 years old but still seems to be completely in line with today’s rhetoric.2 It is 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
Unfortunately, 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 duties are generally highly profitable for the wrongdoer. Thousands of millions of Euros or dollars of unlawful profits remain with the wrongdoers every year.4 Thus, in practice tort or in general unlawful conduct often pays.5
From a private law perspective the reasons why unlawful conduct at the end 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 of each individual is low (and thus the incentive to claim damages is low as well) but as a lot of 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 (efficient or profitable breach of 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 breaches of equitable wrongs.6 Thus it was not traditionally awarded for breaches of common law wrongs such as contract and tort.
The initial question for the idea of disgorgement of illegal profits is which branch of law is or should be in charge and what instruments they offer to ensure that law infringements do not pay and that illegally gained profits are disgorged. In the majority of legal systems it seems to be accepted that this combat against 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.7 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: They can e.g. either be confiscated,8 skimmed-off by authorities,9 or administrative or criminal fines can be calculated according to the illegal profits.10
For the private law sector however, it seems that possible remedies for disgorging unlawful profits are often less “obvious”, sometimes even almost “hidden” under the banner of compensatory damages or other obfuscatory labels. Often they are widely spread all over the private law system, which normally complicates a common understanding of the problem. Arguably the most discussed and most distinct private law instrument are the so-called disgorgement, restitutionary11 or gain-based damages.12 In strong contrast to compensatory damages they are measured according to the defendant’s gain based on the infringement of a right rather than the plaintiff’s losses. Thus, the plaintiff might gain damages that exceed his suffered losses considerably; he receives what is sometimes called a “windfall profit”.13
With regard to disgorgement damages national reporters have to face several problems: as already indicated above, there is the question of different terminology which complicates a uniform understanding. In addition, not every jurisdiction recognises this topic as a specific issue as such and this may also give difficulties to them.14 They might also have the problem that damage multipliers as e.g. the American treble damages15 in competition law or punitive or exemplary damages in Common Law16 systems have a function of disgorging profits along with other functions such as; thus a functional overlap might occur.17 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.18 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.19 By contrast, the US is unconcerned about a fusion of common law and equity,20 and this is reflected in its much greater willingness to award disgorgement and punitive damages for a wide range of actions.
In most legal systems disgorgement damages are not considered as a general remedy for all kind of law infringements; thus often a general legal basis is lacking. E.g. in the US, traditionally it has been denied that disgorgement damages should always be awarded – see for instance E. Allan Farnsworth.21 But more recently Melvin Eisenberg has argued that such damages are already accepted in American law22 – see Snepp v US.23 And in the 2011 US Restatement of Restitution and Unjust Enrichment, it is clearly recognised that disgorgement may be appropriate in some cases.24 Also in Germany a general instrument “disgorgement damages” is lacking in the Civil Code of 1900. However, recently well-known scholars as Gerhard Wagner do stick up for an inclusion of disgorgement damages in the law of damages (for intentional infringements).25 In common law countries such as England and Wales and Australia, and New Zealand, disgorgement damages have traditionally been available only for equitable causes of action such as breach of fiduciary duty26 and breach of confidence where they are known as the “account of profits”.27 However, it has been recognised by courts in England and Wales and Canada that disgorgement may be awarded outside the equitable sphere for other private law causes of action such as breach of contract.28 Some other countries however, do prima facie have a 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, but in the case of Waeyen-Scheers/Naus