Dart Industries Inc v Decor Corporation Pty Ltd ("Lettuce Crisper case") [1993] HCA 54; (1993) 179 CLR 101; (1993) 116 ALR 385; (1993) 67 ALJR 821; (1993) AIPC 91-028 (29 September 1993)

HIGH COURT OF AUSTRALIA

DART INDUSTRIES INC. v THE DECOR CORPORATION PTY. LTD. AND ANOTHER [1993] HCA 54; (1993) 179 CLR 101, (1993) 116 ALR 385, (1993) 67 ALJR 821, (1993) AIPC 91-028
F.C. 93/039
Number of pages - 23

Patent

HIGH COURT OF AUSTRALIA
MASON CJ(1), DEANE(1), DAWSON(1), TOOHEY(1) AND McHUGH(2) JJ

CATCHWORDS

Patent - Infringement - Account of profits - Overhead costs of infringer Whether deductible in determining profits - Composite product Wether profit on sale of whole or of part.

HEARING

1992, December 3, 4; 1993, September 29
29:9:1993

ORDER

Appeal dismissed with costs.

Application for special leave to cross-appeal refused with costs.

Vary the order of the Full Court of the Federal Court by replacing in par. 3 the word "contributed" by the words "are attributable".

DECISION

MASON CJ, DEANE, DAWSON AND TOOHEY JJ The appellant ("Dart") was
the successful plaintiff in an action in the Supreme Court of Victoria
against the respondents ("Decor" and "Rian") for infringement of a
patent in respect of press button seals, or lids, used to seal plastic
kitchen canisters ((1) The patent infringement proceedings are
reported in Dart Industries Inc. v. Decor Corporation Pty. Ltd. (1988)
11 IPR 385 and Decor Corporation Pty. Ltd. v. Dart Industries Inc.
(1988) 13 IPR 385.). Rian manufactured, with tooling provided by
Decor, and Decor produced and sold, plastic kitchen canisters with the
press button seals.

2. Dart having elected between damages and an account of profits, the trial judge, King J, ordered an account of profits by Decor and Rian.
In giving directions, King J dealt with two questions, the first of
which falls to be determined upon this appeal and the second of which
is raised in an application by Decor and Rian for special leave to
cross-appeal. The first is whether any part of general overhead costs
is allowable as a deduction to Decor or Rian in the determination of
the profits made by them from the infringement. The second is whether
Decor and Rian must account for profits arising from the manufacture
and sale of the composite product, consisting of both the body of
the canister and the press button seal, or merely for those profits
attributable to the manufacture and sale of the press button seal
alone, that being the patented invention.

3. King J answered the first question by directing that costs categorized as general overhead costs, in the sense that no part of
them can be shown by Decor or Rian to be directly attributable to the
manufacture or sale of canisters incorporating the patented invention,
should not be taken into account as a deduction from gross profits.
He directed that only costs which are directly attributable to
manufacture or sale of the infringing product should be taken into
account ((2) Dart Industries Inc. v. Decor Corporation Pty. Ltd.
(1990) 20 IPR 144, at p.152.). In answer to the second question,
King J directed that the profits for which Decor and Rian must account
are the profits from the manufacture and sale of the complete
canisters, including the press button seals ((3) ibid., at p.154.).

4. Upon appeal from the interlocutory orders made by King J, the Full Court of the Federal Court held that the first direction was
in error and that Decor and Rian should be "at liberty to show that
various categories of overhead costs contributed to the obtaining
of the relevant profit, and to show how and in what proportion they
should be allocated in the taking of the account of profits" ((4)
Decor Corporation Pty. Ltd. v. Dart Industries Inc. [1991] FCA 655; (1991) 104 ALR
621, at p.629.). The Full Court upheld the second direction given by
the trial judge ((5) ibid., at pp.631-632.). Dart now appeals,
pursuant to special leave, against the rejection by the Full Court of
the first direction given by the trial judge and Decor and Rian seek
special leave to cross-appeal against the second direction upheld by
the Full Court.

5. Damages and an account of profits are alternative remedies ((6) See Neilson v. Betts (1871) LR 5 HL 1, at p.22; Lever v. Goodwin (1887)
36 ChD 1, at p.7; Patents Act 1990 (Cth), s.122(1).).
An account of profits was a form of relief granted by equity whereas
damages were originally a purely common law remedy ((7) cf. Meagher,
Gummow and Lehane, Equity: Doctrines and Remedies, 3rd ed. (1992),
pp.659-660.). As Windeyer J pointed out in Colbeam Palmer Ltd. v.
Stock Affiliates Pty. Ltd. ((8) [1968] HCA 50; (1968) 122 CLR 25, at p.34.),
even now ((9) See Patents Act 1952 (Cth), s.118(1); Patents Act 1990
(Cth), s.122.) an account of profits retains its equitable
characteristics in that a defendant is made to account for,
and is then stripped of, profits which it has dishonestly made by the
infringement and which it would be unconscionable for it to retain.
An account of profits is confined to profits actually made, its
purpose being not to punish the defendant but to prevent its unjust
enrichment ((10) My Kinda Town Ltd. v. Soll (1983) RPC 15, at p.55;
Potton Ltd. v. Yorkclose Ltd. (1989) 17 FSR 11, at pp.14, 15;
Sheldon v. Metro-Goldwyn Pictures Corp. [1940] USSC 57; (1940) 309 US 390, at
p.399.). The ordinary requirement of the principles of unjust
enrichment that regard be paid to matters of substance rather than
technical form ((11) See Baltic Shipping Co. v. Dillon [1993] HCA 4; (1993) 176
CLR 344, at p.376.) is applicable.

6. But it is notoriously difficult in some cases, particularly cases involving the manufacture or sale of a range of products, to isolate
those costs which are attributable to the infringement from those
which are not so attributable ((12) See Siddell v. Vickers (1892) 9
RPC 152, at pp.162-163; My Kinda Town Ltd. v. Soll (1983) RPC, at
pp.57-58.). Whilst it is accepted that mathematical exactitude is
generally impossible, the exercise is one that must be undertaken, and
some assistance may be derived from the principles and practices of
commercial accounting ((13) See Odeon Associated Theatres Ltd. v.
Jones (1973) Ch 288, at pp.294, 299, 305; Federal Commissioner of
Taxation v. St. Hubert's Island Pty. Ltd. (In Liq.) [1978] HCA 10; (1978) 138 CLR
210, at p.228.). Unfortunately, neither the Australian nor the English authorities contain any precise analysis of the problem.

7. Leplastrier and Co. Ltd. v. Armstrong-Holland Ltd. ((14) (1926) 26 SR (NSW) 585.) involved an account of profits arising from the
manufacture and sale of concrete mixing machines in breach of a patent.
Harvey CJ in Eq. drew a distinction between the profits made from
accounted for, and the profits of the business in connection with the
sale of those machines, which were not ((15) ibid., at p.591.). He
expressed the view that the defendant bore the onus of establishing
that the costs were incurred in the manufacture of the machines and
observed ((16) ibid., at p.593.):

"Under no circumstances can he, in my opinion, deduct
interest on his capital employed in the business. Under
no circumstances can he claim any remuneration to himself,
nor under any circumstances can he claim in my opinion any
director's fees for carrying on the business. I have no
desire at the present stage to say exactly what can be taken
into account as the costs of manufacture. It is clear that
costs of material can be taken; it is clear that costs of
wages can be deducted. It is possible that other costs may
be taken, but I think the test which is to be applied is
that the only expenses which can be deducted are those which
were solely referable to the manufacture of the machines.
If, for instance, for the purpose of manufacturing these
machines the defendant found it necessary to install a
particular piece of machinery which was useful for making
these machines and for nothing else, then it might be that
depreciation of this machinery would be a proper item to
allow him as part of his costs of manufacturing the
machines; if his machinery is used partly for the purpose
of making these machines and partly for the purpose of other
machines it may be proper to allow him such depreciation
for wear and tear on the value of his machinery as may be
properly allocated to the work which has been done on the
infringing machines as compared with the work done on other
machines."

8. In giving the first direction, King J relied upon this passage in the judgment of Harvey CJ in Eq. and adopted the language of his
Honour, saying that only costs which are "solely referable" to
manufacture or sale of the infringing article may be deducted ((17)
Dart Industries Inc. v. Decor Corporation Pty. Ltd. (1990) 20 IPR,
at p.151.).

9. Dart relies upon the same passage to support its submission that the correct accounting principle to employ in the taking of an account
of profits is incremental costing rather than absorption costing.
Incremental costing takes account only of the change in costs incurred
by the manufacture or sale of a particular product and does not seek
to apportion to the manufacture or sale of that product any part of
general overheads, such as rent, light, heating or office expenses,
which cannot be identified as a direct result of producing that
product. Absorption costing on the other hand is a costing method
whereby general overheads are apportioned by some appropriate means,
often by sales or volume, to the manufacture or sale of each product.

10. Dart's argument, based on incremental costing as the proper method
for taking an account of profits of infringing activities, is as
follows. The profit should be calculated by taking the gross revenue
received from the manufacture and sale of the infringing product and
deducting from it direct costs, such as materials or labour, solely
due to the manufacture or sale of the infringing product, and also
deducting overheads, but only to the extent that they were increased
by the manufacture or sale of the infringing product. Otherwise, the
defendant would be able to deduct expenditure which it would have
incurred in any event. This should not be allowed because if any
of the revenue from the sale or manufacture could be set off against
general overheads which would have been incurred without the
infringing activities, the defendant would profit from the infringing
activities. The defendant would gain by reducing the cost of its
overheads, but would not have to account to the plaintiff for this
gain.

11. Not only does Dart rely on the passage cited from the judgment of Harvey CJ in Eq. but it maintains that the same principle is to be
seen in the judgment of Windeyer J in Colbeam Palmer Ltd. v. Stock
Affiliates Pty. Ltd. That was a case of infringement of a trade mark
in which Windeyer J ordered an account of profits. In doing so, he
directed that the cost of selling and delivering the infringing
articles be taken into account. But he added ((18) (1968) 122 CLR,

at p.39.) : "This will include any costs directly attributable to
such sales and deliveries. But it should not, I think, include
any part of the general overhead costs, managerial expenses
and so forth of the defendant's business, as it seems that
all these would have been incurred in any event in the
ordinary course of its business in which as it was put in
evidence the painting sets were a 'side line'".

The explanation of the direction given by Windeyer J is that
mentioned by him, namely, that the infringing articles were a side
line. There appears to have been unused capacity in the defendant's
business in the form of overheads which would have been incurred
whether or not the infringing articles had been sold and delivered.
The sale and delivery of the infringing articles took up that
surplus capacity or some of it, and none of the overhead costs was
attributable to the infringing activities because those costs would
have been incurred in any event.

12. But there was no evidence in this case that Decor or Rian had unused or surplus capacity. There was evidence that the infringing
canisters were an integral part of one consistent product range
produced, marketed and sold according to a common system. From this
it might be inferred that, had those companies not been engaged in
the manufacture and marketing of the infringing press button seal
canisters, their capacity for those activities would have been taken
up in the manufacture and marketing of alternative products.

13. Thus the cost of manufacturing and marketing the press button seal
canisters may have included the cost of forgoing the profit from the
manufacture and marketing of alternative products. The latter cost is
called an opportunity cost. "Opportunity cost" can be defined as "the
value of the alternative foregone by adopting a particular strategy or
employing resources in a specific manner ... As used in economics,
the opportunity cost of any designated alternative is the greatest net
benefit lost by taking an alternative." ((19) Kohler's Dictionary for
Accountants, 6th ed. (1983), pp.362-363.) The practical reality of
this concept was recognized in Schnadig Corp. v. Gaines Manufacturing
Co. Inc. ((20) [1980] USCA6 469; (1980) 620 F 2d 1166, at p.1175.), where the Court
stated: "The alternative available uses of the facilities devoted to
the infringement must be considered, and these too will vary."

14. In calculating an account of profits, the defendant may not deduct
the opportunity cost, that is, the profit forgone on the alternative
products. But there would be real inequity if a defendant were
denied a deduction for the opportunity cost as well as being denied a
deduction for the cost of the overheads which sustained the capacity
that would have been utilized by an alternative product and that was
in fact utilized by the infringing product. If both were denied, the
defendant would be in a worse position than if it had made no use of
the patented invention. The purpose of an account of profits is not
to punish the defendant but to prevent its unjust enrichment.

15. Where the defendant has forgone the opportunity to manufacture and sell alternative products it will ordinarily be appropriate to
attribute to the infringing product a proportion of those general
overheads which would have sustained the opportunity. On the other
hand, if no opportunity was forgone, and the overheads involved were
costs which would have been incurred in any event, then it would not
be appropriate to attribute the overheads to the infringing product.
Otherwise the defendant would be in a better position than it would
have been in if it had not infringed. It is not relevant that the
product could not have been manufactured and sold without these
overheads. Nor is it relevant that absorption method accounting would
attribute a proportion of the overheads to the infringing product.
The equitable principle of an account of profits is not to compensate
the plaintiff, nor to fix a fair price for the infringing product, but
to prevent the unjust enrichment of the defendant.

16. Of course, further possibilities may in some cases be open on the evidence. Overhead costs might have been increased by the manufacture
and sale of the infringing product, or overhead costs might have been
reduced had the infringing product not been produced. In either case
it may be appropriate to attribute the difference in overhead costs to
the infringing product.

17. It does not appear that in Leplastrier and Co. Ltd. v. Armstrong- Holland Ltd. the concept of opportunity cost played any part in the
reasoning of Harvey CJ in Eq. In allowing the deduction only of
expenses "solely referable" to the manufacture of the infringing
product, he seems to have intended to exclude overheads except to the
extent that they were increased by the manufacture of the infringing
product. The examples that he gave indicate such an approach. But
this is hardly surprising since the English authorities, even the more
recent ones, have not grappled with the concept. Whilst they
recognize ((21) See My Kinda Town Ltd. v. Soll (1983) RPC, at
p.55.) that the purpose of ordering an account of profits is not to
inflict punishment, but is limited to compelling the defendant to
surrender profits improperly made, there is little examination of the
principles to be employed in ascertaining which profits were derived
from the infringement ((22) See, e.g., Crosley v. The Derby Gas-Light
Co. (1838) 3 My and Cr 428 [1838] EngR 900; (40 ER 992); Peter Pan Manufacturing
Corp. v. Corsets Silhouette Ltd. (1963) RPC 45, at pp.59-60; My
Kinda Town Ltd. v. Soll (1983) RPC 15; Potton Ltd. v. Yorkclose
Ltd. (1989) 17 FSR 11.).

18. In the United States the position is otherwise. It was early recognized in The Tremolo Patent ((23) [1874] USSC 171; (1874) 90 US 518.) that in
the ascertainment of profits arising from the infringement of a
patented tremolo attachment to musical instruments, an apportionment of
general overheads was required. Strong J in delivering the judgment
of the Supreme Court said ((24) ibid., at pp.528-529.):

"We cannot see why the general expenses incurred by the
defendants in carrying on their business, such expenses as
store rent, clerk hire, fuel, gas, porterage, andc., do not
concern one part of their business as much as another. It
may be said that the selling (of) a tremolo attachment did
not add to their expenses, and therefore that no part of
those expenses should be deducted from the price obtained
for such an attachment. This is, however, but a partial
view. The store rent, the clerk hire, andc., may, it is true,
have been the same, if that single attachment had never been
bought or sold. So it is true that the general expenses of
their business would have been the same, if instead of
buying and selling one hundred organs, they had bought and
sold only ninety-nine. But will it be contended that
because buying and selling an additional organ involved no
increase of the general expenses, the price obtained for
that organ above the price paid was all profit? ... If,
therefore, in estimating profits, every part is not
chargeable with a proportionate share of the expenses, no
part can be. But such a result would be an injustice that
no one would defend."

Employing a similar line of reasoning, Decor and Rian contend that in
an account of profits, if overheads are disregarded save to the extent
that they were increased by the manufacture of the infringing product,
then in a case where every product produced by a defendant infringed a
patent, there would be no allowance at all for overheads, even though
they would clearly be expenses incurred by the defendant in making the
total profit from all the infringements ((25) cf. the example given by
Hodgson J in E I Du Pont de Nemours and Co. v. Commissioner of Patents
(No.3) (1989) 15 IPR 296, at p.307.). Such a result is, they
contend, unacceptable and indicates that a proper allowance for
general overheads should be made.

19. Some caution is to be exercised in the use of United States authorities dealing with accounts of profits because, in some
instances, both damages and an account of profits are available,
and because a distinction is drawn between wilful and non-wilful
infringement which may affect the profits recoverable. Moreover, the
approach adopted in the cases varies to some extent. But it is clear
enough that the guiding principle in the United States, as here, is
that an account of profits aims to have the defendant account for the
actual profit, no more and no less, which it has gained from the
infringement.

20. In Levin Bros. v. Davis Manufacturing Co. ((26) (1934) 72 F 2d
163.), which was a patent infringement case, the Eighth Circuit Court of
Appeals upheld a ruling which disallowed any deduction for fixed costs
- that is, costs already incurred for plant and the like which did not
vary with the volume of production - in determining the profits made
from the infringement. But the Court made it clear that it was laying
down no invariable rule ((27) ibid., at p.165.):

"The patent law gives the right to recover all profits
from an infringement. 'Profit', as so used, is no
mysterious phrase. It means simply all financial gains.
Such gains are the difference between expenditures made to
produce and sell the infringing articles and the receipts
therefrom. Obviously, the application of this rule - the
ascertainment of such actual profits - will occasion
separate accounting and fact problems in each case because
items entering into cost or into receipts will differ.
Always, however, the task is to see that the patentee
recover every dollar of advantage realized by the infringer
from the infringement and no more. No fast and hard rules
should or can be stated to guide application of this general
rule to the infinite variety of fact situations developed
in different cases. ... Because a recurring item, like
overhead, is handled a certain way in a given case such is
no statement of a rule of law that the same item must be
similarly dealt with in all cases. The 'rules' contended
for by the parties here are not rules of law. They are but
illustrations of applications of the above single broad rule
to different fact situations."

The Court went on to observe ((28) ibid., at p.166.):

"It often happens that overhead expenses are applicable to
and should be spread over the entire business but where a
business is established and in operation and another line is
taken on without increase of overhead expenses it is just to
the patentee that the actual situation be applied and none
of such overhead be charged as an expense of the added line
except as it participated in manufacture or sale of the
infringing article."

Not surprisingly, Levin Bros. v. Davis Manufacturing Co. has been
relied upon in the United States as an authority both for and against
the deduction of overheads in an account of profits ((29) Schnadig
Corp. v. Gaines Manufacturing Co. Inc. (1980) 620 F 2d, at p.1174:
cf. Sheldon v. Metro-Goldwyn Pictures Corp. (1939) 106 F 2d 45, at
p.54; Alfred Bell and Co. Ltd. v. Catalda Fine Arts Inc. (1949) 86
F Supp 399, at p.415; with Carter Products Inc. v. Colgate-Palmolive
Co. (1963) 214 F Supp 383, at p.403.). But that
decision accepted the view, in our opinion correctly, that in some
cases profit can only be properly assessed by deducting a proportion
of at least some of the overheads, including fixed costs. The
overheads, if any, to be deducted and the basis of apportionment will
depend upon the facts of each case, bearing in mind always that the
aim of the exercise is to arrive as closely as possible at the true
profit.

21. The basis of apportionment may vary from case to case. Thus in Sheldon v. Metro-Goldwyn Pictures Corp. ((30) [1940] USSC 57; (1940) 309 US 390.)
the Supreme Court of the United States upheld the decision of the
Second Circuit Court of Appeals allowing the apportionment of overheads
in the computation of profits. The Supreme Court said ((31) ibid., at
p.409.) that the questions involved were questions of fact which had
been determined on the evidence. In that case the production of a
motion picture infringed copyright. The Second Circuit Court of
Appeals allowed the allocation of overheads between the infringing
movie and other movies upon the basis of the cost of production. It
observed that it was "more likely that a given picture required that
proportion of the general services represented by its cost of
production, than that each picture shared those services equally"
((32) (1939) 106 F 2d, at p.52.).

22. Sheldon v. Metro-Goldwyn Pictures Corp. may be contrasted with Wilkie v. Santly Bros. Inc. ((33) (1943) 139 F 2d 264.) in which
there was infringement of copyright in a song. The music publisher's
overheads were allocated upon the basis of the number of songs
published within a given period, without regard to the number of copies
sold of each song, because the publisher was unlikely to incur a
greater proportion of overheads for a hit song than for other published
songs.

23. The guiding principle would seem to be that the onus is on the infringer to provide a reasonably acceptable basis for
allocation ((34) See Frank Music Corp. v. Metro-Goldwyn-Mayer Inc.
[1985] USCA9 1684; (1985) 772 F 2d 505, at p.516.). This may be the basis of allocation
typically used by a manufacturer in that industry.

24. In My Kinda Town Ltd. v. Soll ((35) (1983) RPC, at p.57.) Slade J was inclined to think that in the taking of an account of profits
the onus of proof fell upon neither party. As we have said, a
different view was taken by Harvey CJ in Eq. in Leplastrier and Co.
Ltd. v. Armstrong-Holland Ltd. ((36) (1926) 26 SR (NSW), at
p.593.) where he expressed the opinion that the onus is on the
defendant to establish that any item of costs was incurred in relation
to the manufacture of the infringing articles. The view of Harvey CJ
in Eq. would seem to be the preferable one, at least so far as it
requires that the defendant establish that the overheads in any
particular category are attributable to the manufacture or sale of the
infringing product. It is a view which is supported by the United
States authorities ((37) See, e.g., Westinghouse Electric and
Manufacturing Co. v. Wagner Electric and Manufacturing Co. [1912] USSC 158; (1912) 225
US 604, at pp.620-622; Duplate Corp. v. Triplex Safety Glass Co.
(1936) 298 US 448, at p.458.) and may also be justified because the
relevant facts are likely to be peculiarly within the knowledge of the
defendant.

25. In the present case, the trial judge accepted that the manufacture
and sale of the infringing goods was not a side line. He found
that Decor's range of canisters with press button seals formed part
of a much larger range of container systems, storage systems and
canisters ((38) (1990) 20 IPR, at p.152.). On the evidence, the
share of sales of the canisters with press button seals varied from 3.1
per cent to 1.3 per cent over a six-year period after they were added
to Decor's existing range, and that percentage was similar to the
percentage of sales of other types of containers in Decor's range.

26. Decor contends that it is possible to identify some overheads as direct costs which may be attributed to the press button seal
canisters as actually incurred in respect of them, namely, the cost of
product development/royalty expenses, media advertising, industrial
design registration, legal fees and tooling expenses. It seeks to
allocate all remaining overheads which are indirect costs by reference
to the proportion which sales of canisters with press button seals
bear to total sales.

27. Whether Decor and Rian should succeed in their contentions depends
upon whether, as a matter of fact and substance, the overheads which
they seek to have deducted are attributable to the manufacture and
sale of the infringing product. In arriving at an answer, the
Court must consider such questions as whether the overheads in any
particular category were increased by the manufacture or sale of the
product, whether they represent costs which would have been reduced or
would have been incurred in any event, and whether they were surplus
capacity or would, in the absence of the infringing product, have
been used in the manufacture or sale of other products. Dealing with
the last of these questions may require the use of the concept of
opportunity cost. If any of the categories are to be brought into
account, the proportion to be allocated to the infringing product must
be determined and it is here that approximation rather than precision
may be necessary. But such an approach has long been accepted. As
was said in Colburn v. Simms ((39) [1843] EngR 542; (1843) 2 Hare 543, at p.560 [1843] EngR 542; (67
ER 224, at p.231).):

"The Court, by the account, as the nearest approximation
which it can make to justice, takes from the wrongdoer all
the profits he has made by his piracy, and gives them to the
party who has been wronged."

28. It follows that we consider that King J was in error in directing that "no part of general overhead costs is allowable as a deduction"
and that the Full Court was substantially correct in directing, as
it did, that "the appellants are at liberty to show that various
categories of overhead contributed to the obtaining of the relevant
profit, and to show how and in what proportion they should be
allocated in the taking of the account of profits". But it would be
better, we think, if the word "contributed" were replaced by the words
"are attributable".

29. The application by Decor and Rian for special leave to cross- appeal may be dealt with more shortly. In considering whether the
profits for which an account was ordered should include those arising
from the manufacture and sale of the canisters as well as the press
button seals which were fitted to them, the trial judge correctly
identified the problem when he said ((40) (1990) 20 IPR, at p.152.):

"The basic legal principle is that the relevant profits
are those accruing to the defendants from their use and
exercise of the plaintiff's patented invention. Where the
defendants' products are, as here, composites of the
invention and other features the determination of such a
question is one of fact."

In answering the question which he posed, King J found that "sales of
press button canisters are for present purposes attributable to use of
the patented invention" and for that reason directed that the profits
for which Decor and Rian had to account included the profits from the
containers to which the press button seals were fitted ((41) ibid., at
p.154.).

30. The Full Court identified the same question in somewhat different terms ((42) (1991) 104 ALR, at pp.630-631.):

"The respondent cannot gainsay that it is only entitled to
the profits obtained by the infringement. If, for example,
a patented brake is wrongfully used in the construction of
a motor car, the patentee is not entitled to the entire
profits earned by sales of the motor car. He must accept an
appropriate apportionment. But the question is how that
principle shall be applied to a situation where the patent
relates to the essential feature of a single item. ... it
seems to us that it was open to the judge to find, and he
correctly found, that what characterised the infringing
product was the press button lid, without which this
particular container would never have been produced at all".

31. The questions posed by the trial judge and the Full Court concerning the apportionment of a total profit both accurately reflect
the correct principle which was expressed in this Court by Windeyer J
in Colbeam Palmer Ltd. v. Stock Affiliates Pty. Ltd. as follows ((43)
(1968) 122 CLR, at pp.42-43.):

"The true rule, I consider, is that a person who wrongly
uses another man's industrial property - patent, copyright,
trade mark - is accountable for any profits which he makes
which are attributable to his use of the property which was
not his. ...
If one man makes profits by the use or sale of some
thing, and that whole thing came into existence by reason
of his wrongful use of another man's property in a patent,
design or copyright, the difficulty disappears and the case
is then, generally speaking, simple. In such a case the
infringer must account for all the profits which he thus
made."

It is true that there is some divergence between King J and the Full
Court in relation to whether, in the circumstances of this case,
primary emphasis should be placed on reason for sale or reason for
production. Nonetheless, the overall approach of both accurately
reflects the application of the correct general principle in the
resolution of what is ultimately a question of fact.

32. It follows from what has been said above that, if special leave were granted, the cross-appeal would necessarily turn upon a question
of fact upon which there are concurrent findings by the trial judge
and the Full Court against Decor and Rian. It would for that reason
be inappropriate to grant special leave to cross-appeal ((44) See
Baffsky v. Brewis (1976) 51 ALJR 170, at p.172; 12 ALR 435, at
p.438; The Commonwealth v. Introvigne (1982) 150 CLR 258, at pp.262,
274; Muschinski v. Dodds [1985] HCA 78; (1985) 160 CLR 583, at p.590.).

33. For these reasons we would dismiss the appeal and refuse special leave to cross-appeal.

McHUGH J Two questions arise in this appeal against an order of
the Full Court of the Federal Court made in an action arising out of
the infringement of a patent. First, is any part of an infringer's
general overheads deductible in the taking of an account of profits
ordered as the result of the infringement? Second, if it is, what
is the principle or rule which determines what proportion of the
overheads is allocated to the infringing product?

2. The appellant is Dart Industries Inc. ("Dart") which is the licensee of a patent for an invention called "three-part press type
seal" (or "lid"). When the lid is fitted to a container, the
resulting product is commonly referred to as a press button seal
canister. The Decor Corporation Pty. Ltd. ("Decor"), the first
respondent, designs and markets, but does not manufacture, plastic
homeware and gardenware. Decor markets over 400 products. Every
aspect of its business is linked, and, according to one witness,
is highly integrated. Decor's manufacturing needs are met by
sub-contractors, one of whom was Rian Tooling Industries Pty. Ltd.
("Rian"), the second respondent. In the Supreme Court of Victoria,
King J held that a plastic closure fitted to a container which was
manufactured by Rian and marketed by Decor infringed Dart's patent.

3. Pursuant to the provisions of the Patents Act 1952 (Cth), Dart elected to take an account of profits in respect of the infringement.
King J ordered that only costs directly attributable to obtaining,
holding, manufacturing, storing, selling and delivering the infringing
product could be included in the account. The Full Court of the
Federal Court set aside that order. The Full Court ordered that the
respondents "are at liberty to show that overheads falling within the
various categories of overhead contributed to the obtaining of the
relevant profit and to show how and in what proportion such overheads
should be allocated in the taking of the account of profits".

4. Decor's list of general overheads includes the expenses involved in operating its bulk storage warehouse and other expenses, such
as accounting and auditing, cartage and wharfage, light and power,
overseas representation, printing, stationery and photocopying and
seminar/training expenses, bank charges, rates and taxes, rent and
superannuation. A proportion of the total overhead is allocated to
the cost of each product in Decor's range. Allocation is made on the
basis of sales to total sales. Given the nature of Decor's business,
it is impossible to directly trace the incurring of the overhead to
any particular product. Conversely, Decor allocates sundry income
items (such as discounts received, export grants, interest received
and others) to each product in its range. Rian's overheads include
electricity, delivery and cartage, insurance, rent, rates, lease
expenses, factory supervisors' wages and the cost of industrial waste
removal.

Are general overheads deductible in an account of profits for a patent
infringement?

5. Dart contends that, in taking an account of profits resulting from a patent infringement, no deduction is allowable for any expenditure
"which would have been incurred had infringing manufacture not taken
place". It contends that only two categories of costs can be deducted
from gross revenue. First, direct costs "solely due" to the
manufacture and sale of the product. Second, overheads to the extent
that they have been increased by the manufacture and sale of the
product. Decor and Rian, on the other hand, contend that all general
overheads which assist or contribute to the production or sale of the
infringing product are deductible.

6. In my opinion, the correct rule is that, in determining an account of profits in respect of the infringement of a patent, any part of
the general overheads of the infringer which assisted in deriving
gross revenue from the infringing product is a deductible expense.
By general overheads, I mean "those general charges or expenses,
collectively, in any business which cannot be charged up as belonging
exclusively to any particular part of the work or product (such) as
rent, taxes, insurance, lighting, heating, accounting and other office
expenses" ((45) Webster's New International Dictionary, 2nd ed.
unabridged, cited in Sammons v. Colonial Press (1942) 126 F 2d 341,
at pp.350-351 and Alfred Bell and Co. v. Catalda Fine Arts (1949) 86
F.Supp. 399, at p.415.). An expense may be deductible, therefore,
although it did not directly increase the cost of producing or
distributing the infringing product.

7. A plaintiff who establishes an infringement of its patent is entitled to an order that the infringer account for the profits
derived from the infringement ((46) Patents Act 1952, s.118(1);
Patents Act 1990, s.122; Cartier v. Carlile [1862] EngR 514; (1862) 31 Beav. 292 (54
ER 1151); Colbeam Palmer Ltd. v. Stock Affiliates Pty. Ltd. [1968] HCA 50; (1968)
122 CLR 25, at p.43.). The object of an account of profits is to
make the infringer give up its gains in order to prevent its unjust
enrichment ((47) Potton Limited v. Yorkclose Limited (1989) 17 FSR
11, at p.15.). No element of punishment is
involved ((48) Sheldon v. Metro-Goldwyn Corp. [1940] USSC 57; (1940) 309 US 390, at
p.399; My Kinda Town Ltd. v. Soll (1983) RPC 15, at p.55; Potton
(1989) 17 FSR, at p.15.). If an infringer has expended its own
money or resources in producing or distributing the infringing product,
it is not unjust for it to recoup that expenditure before accounting
for the revenue derived from the product. With that general
proposition, Dart agrees. But it contends that the case is different
when the expenditure would have been incurred "in any event". If the
infringer can claim the cost of expenditure which would have been
incurred in any event, Dart contends that the infringer will have
profited from its wrong. This argument has a certain plausibility.
But the answer to it lies in the concept of opportunity cost.

8. "Opportunity cost" can be defined as "the value of the alternative
foregone by adopting a particular strategy or employing resources
in a specific manner ... (I)n economics, the opportunity cost of any
designated alternative is the greatest net benefit lost by taking an
alternative" ((49) Kohler's Dictionary for Accountants, 6th ed.
(1983), pp.362-363.). The relevance of the concept of opportunity
cost in an infringement action was recognised in Schnadig Corp. v.
Gaines Mfg. Co., Inc. ((50) [1980] USCA6 469; (1980) 620 F 2d 1166, at p.1175.), where
the Court of Appeals for the Sixth Circuit said: "The alternative
available uses of the facilities devoted to the infringement must be
considered, and these too will vary." ((51) The concept of opportunity
cost was also recognised by this Court, although in a different context
to the present case, in Hungerfords v. Walker [1989] HCA 8; (1989) 171 CLR 125, at
p.143.)

9. To say that general overhead would have been incurred "in any event", does not necessarily lead to the conclusion, as Dart asserted,
that the respondents will profit from their wrong if an allowance is
made for that overhead. If a preferred product cannot be produced or
distributed (because, for example, it infringes property rights), a
rational entrepreneur will choose the next best alternative. General
overheads will then be partially absorbed in the cost of the
substitute product ((52) Depending upon the circumstances, however,
the absorption may not be as great as in the case where the product
first chosen is capable of being added to the range.). If the
infringing product had not been produced or sold, Decor, as a rational
entrepreneur, would have sought the next best alternative for its
resources. Thus, it might have produced another line of goods or more
of its existing lines. Whatever the next best alternative may have
been, that alternative, once adopted, would have absorbed part of the
general overheads. Consequently, in so far as general overhead or costs
that would have been incurred "in any event" assisted in the production
or distribution of the infringing product, they form a relevant cost
of that product. In the event that the next best alternative to
producing the infringing product was to produce nothing, Decor still
had the option of reducing some of its overheads.

10. If Dart's contention was accepted, general overhead could not form part of the cost of the infringing product for the purpose of
an account of profits. By definition, general overhead is that part
of the cost of running a business which cannot be allocated to any
specific product. Consequently, overhead would not be relevant in
determining what profit, if any, the infringer had derived from
producing or selling the product. Yet no business can be profitable
if its revenues fail to recoup its general overhead as well as the
direct cost of selling its products. That being so, no product can
generate a profit unless its selling price recoups both the direct
costs of its production and distribution and its proportionate cost
of the general overhead. Overhead is part of the cost of producing
any product. As the United States Court of Appeals, Sixth Circuit,
pointed out in Schnadig ((53) (1980) 620 F 2d, at p.1172.): "The
basic truth that no article of manufacture can be profitable in a real
sense if it cannot bear its proportionate share of the fixed costs is
hardly new." Adoption of Dart's contention might often lead to the
conclusion that the infringer had profited when commercially no profit
had been made. Certainly, adoption of Dart's contention would lead to
an inflated statement of profit.

11. To ignore overheads in the taking of an account of profits can also lead to absurd and unjust results. If all the products of a
defendant were infringing products, the defendant would be out of
pocket to the extent of its general overheads, even though no product
could have been produced or sold without the overheads being incurred.
If the infringing product was the first of a range of products, Dart's
contention would require that it alone should bear the cost of the
overheads. That would be to the detriment of the plaintiff.

12. The foregoing considerations require the rejection of Dart's contention. But upon what principle or rule is an allowance to be
made for general overheads?

What is the principle for allocating overheads?

13. In a litigious world of unlimited time and resources, the best approach for determining the profit derived from the infringement
might be to estimate the profit of the product after allowing a
proportion of the overheads and then deduct the opportunity cost of
producing the infringing product. This would show the true gain of
the infringer from producing or distributing the infringing product
instead of the next best alternative. Another but less exact method
of determining the profit and preventing the unjust enrichment of the
infringer might be to determine what was the best alternative open to
the infringer, determine what gross revenue would have been obtained
from that alternative, and deduct that sum from the gross revenue
obtained from the infringing product. Another suggested method is
that there should be a deduction for that part of the overhead which
would have been absorbed in producing or selling the alternative to
the extent that it was used in producing or selling the infringing
product. But to adopt any of these methods would make an often
complex subject more complex than it already is. Very likely, it
would increase the prospect of contested litigation over the taking of
the account and the cost and length of the hearing while the parties
and their witnesses investigated and debated the hypothetical.
Depending on which method was used, the person taking the accounts
would have to estimate one or more of the following figures: the
gross revenue from the alternative, the direct costs of the
alternative and the proportion of overhead attributable to the
alternative. Lindley LJ, who knew more about accounts of profits
than most lawyers, once said ((54) Siddell v. Vickers (1892) 9 RPC
152, at p.162.) that he did "not know any form of account which (was)
more difficult to work out, or may be more difficult to work out than
an account of profits". The Court should be slow to adopt a rule which
might increase that difficulty.

14. A more practical approach is to apply those commercial and accounting principles which are used in business to determine what
profit has resulted from the manufacture or sale of a product. In QBE
Insurance Group v. ASC ((55) (1992) 110 ALR 301, at pp.319-320; see
also Odeon Theatres v. Jones (1973) 1 Ch 288, at p.299.), Lockhart J
pointed out:

"The meaning of the word 'profits' is for the courts to
determine. But the identification of what in relation to
the affairs of a particular company constitutes its profits
is determined by the courts with close regard to the views
of the accountancy profession. The courts are influenced
strongly by the views adopted by professional accountancy
bodies and men of business and the evidence of accountants
is given great weight by the courts".

15. Admittedly, the commercial or accounting approach may mean that, in the account of profits, the infringer is credited with an amount of
overhead greater than would be the case if no infringement had taken
place. But the converse may sometimes be true. Whatever the outcome
in a particular case may be, the commercial or accounting approach has
one clear advantage over other methods: it deals with historical
facts and commercial reality and not hypotheses.

16. To determine the cost of a particular product, cost accountants use the incremental method of accounting and the absorption method of
accounting. "Incremental (or marginal) cost" has been defined as "the
change in aggregate cost that accompanies the addition or subtraction
of a unit of output" ((56) Kohler, op. cit., p.257.). The
incremental method is generally used for setting short term prices and
for one-time tactical decisions ((57) Hirsch, Advanced Management
Accounting, (1988), pp.50-51.). It focuses on the marginal difference
in costs (or revenues) as a result of adding a unit of production. In
contrast, the "absorption (or average or full costing)" method
allocates all fixed costs between the products of the business ((58)
Helmkamp, Managerial Accounting, (1987), pp.165, 239, 550; Hirsch, op.
cit., p.51.).

17. Standard accounting text books recognise that, in calculating the cost of a product for the purpose of identifying its profitability,
all costs which contribute to the ultimate sale of the product must be
included (i.e, the absorption method should be used) ((59) Helmkamp,
op cit., p.239; Hirsch, op. cit., p.51.). A decision to initiate,
continue or discontinue the production or sale of a product will not be
made solely on the data generated by incremental cost accounting. It
is the product's effect on the viability of the business as a whole
which is important. If an additional product has only a small
contribution margin but helps to defray the general overheads of a firm
(for example, by lowering the total cost per unit of running a
machine), then it is more likely to be added to the range than if it
did not absorb such costs. This concept of further spreading or
absorbing general overheads was recognised in Sammons v. Colonial Press
((60) (1942) 126 F 2d, at p.348.) where the Court of Appeals for the
First Circuit stated:

"Manufacturers are frequently glad to make a contract at a
price which yields no net profit on a strict cost accounting
basis but which does yield sufficient profit to carry a
portion of the inescapable overhead."

18. In the present case, the question under the incremental method of accounting would be: "By what amount has the general overhead costs
increased as a result of the addition of the press button canisters
to the respondents' range of products?" Under this method, only that
increase would be deductible from the gross profit of the infringing
product. The question under the absorption method would be: "To what
extent did the incurring of the overheads assist in the derivation of
revenue from the infringing product?" ((61) See Alfred Bell (1949) 86
F.Supp., at p.415.) Only the absorption method will reveal whether
Decor or Rian made a profit from the infringement.

19. Other branches of the law have rejected the incremental method of accounting as a basis for determining the cost of a product. In
Philip Morris Ltd. v. Federal Commissioner of Taxation ((62) [1979] FCA 53; (1979) 79
ATC 4,352.), Jenkinson J held that the adoption of the direct
costing or incremental method of costing would not reflect the "cost
price" of trading stock for the purpose of s.31(1) of the Income Tax
Assessment Act 1936 (Cth). His Honour held that the absorption costing
method was the appropriate method. In Du Pont v. Commissioner of
Patents (No.3) ((63) (1989) 15 IPR 296.), Hodgson J held that, in
determining the profits of a patentee for the purpose of s.93(b) of the
Patents Act 1952 (Cth), it was appropriate to apportion the general
overheads of the plaintiff's business. His Honour expressly rejected
((64) ibid., at p.307.) the submission "that there should be charged
against the income from (the) patent only amounts by which it could be
shown that the PET project increased the general overheads of the
plaintiff's business". The learned judge said that, if that
proposition was applied to every project undertaken by the plaintiff,
none of the general overheads of the business might be charged against
any project at all. Similarly in Re Application of PFIZER INC. ((65)
(1986) 4 NSWLR 566, at p.571.), Hodgson J held that, in
determining whether a patentee had been inadequately remunerated within
the meaning of s.94 of the Patents Act 1952, it was appropriate to
charge against gross receipts derived in Australia "a proportion of the
overall expenditure on the product and of the appropriate amount of
non-productive research, on the basis of Australia's approximate share
or percentage of the overall world market".

The United States authorities

20. Cases in the United States support the use of the absorption method of accounting in determining the cost of an infringing product
in an account of profits. Differences between the intellectual
property legislation of this country and the United States mean
that the United States cases must be used cautiously in Australia.
Nonetheless, as Windeyer J pointed out in Colbeam Palmer Ltd. v.
Stock Affiliates Pty. Ltd. ((66) (1968) 122 CLR, at p.44.), "if
used with discrimination, American decisions on the point are
illuminating and helpful".

21. The main idea which runs through the American cases is that the absorption method of accounting should be adopted in relation to
general overheads which can reasonably be shown to have assisted in
the derivation of revenue from an infringing product. Mr Ellicott
QC, for Decor, referred the Court to numerous cases (dating from
1874 to 1985) illustrating this proposition. However, the current
position in the United States is succinctly and conveniently
summarised in Nimmer on Copyright ((67) Vol.3, para 14.03(B); see also
McCarthy, Trademarks and Unfair Competition, 2nd ed. (1984), vol.2,
para 30:26B.). The learned author declares that the question of which
expenses will be regarded as deductible costs:

"will generally turn upon the definition of costs under
accepted accounting practices. ... In general it may be
said that only those expenses which are proven with some
specificity to relate to the infringing work may be deducted
in determining the profits attributable to such work. ...
A proper allocation of that portion of defendant's
overhead attributable to the cost of the said infringing
items may be deducted, at least where the infringement
was not conscious and deliberate. This determination of
overhead presents an issue of fact. The defendant has
the burden of proving that each item of general expense
contributed to the production of the infringing items, and
of further offering a fair and acceptable formula for
allocating a given portion of overhead to the particular
infringing items in issue. The appropriate formula for
allocation may well vary in different industries. For
example, it has been held that a music publisher's overhead
should be allocated on the basis of the number of songs
published in a given period, without reference to the number
of copies sold of each such song. This is to be compared
with the overhead of a motion picture producer where it has
been held that overheads should be allocated according to
the direct cost of production of each motion picture."

22. It is useful to refer to some United States cases to illustrate the application of those principles.

23. In The Tremolo Patent ((68) [1874] USSC 171; (1874) 90 US 518.), the Supreme Court held that, in an account of profits arising out of the infringement of
a patent, the defendant was entitled to prove the general expenses
incurred in the business affecting the sale of all its goods and deduct
a rateable proportion from the profits made by the sale of the
infringing product. Strong J, delivering the opinion the Court, said
((69) ibid., at pp.528-529.):

"We cannot see why the general expenses incurred by the
defendants in carrying on their business, such expenses as
store rent, clerk hire, fuel, gas, porterage, etc., do not
concern one part of their business as much as another. It
may be said that the selling (of) a Tremolo attachment did
not add to their expenses, and, therefore, that no part of
those expenses should be deducted from the price obtained
for such an attachment. This is, however, but a partial
view."

24. In Schnadig ((70) (1980) 620 F 2d, at p.1172.), the United States Court of Appeals, Sixth Circuit, said:

"By definition, the stipulated fixed expenses would have
been incurred regardless of whether the incremental
infringing production of Suite 495 had been undertaken.
Because these expenses were neither caused nor increased
by the infringing production, it may be argued that the
infringer should not be permitted to avoid the expense by
passing it on the patentee. The response to this argument
is that these expenses are necessary for each component of
production. Suite 495 could not have been produced without
expenses for utilities, administrative salaries, building
space and the like being incurred. Viewed in this light,
the fixed expenses are as necessary to the infringing
production as are the variable expenses, and should be
similarly treated."

25. In Sheldon v. Metro-Goldwin Pictures Corporation ((71) (1939) 106 F.
2d 45, at p.54.), which concerned the copyright infringement of a
play, the United States Court of Appeals for the Second Circuit allowed
a deduction for general overhead. Learned Hand J, speaking for the
Court, said:

"In the case at bar the infringing picture was one of over
forty made by the defendants, using the same supervising
staff and organization, which had to be maintained if the
business was to go on at all. Without them no picture could
have been produced; they were as much a condition upon the
production of the infringing picture as the scenery, or the
plaintiff's play itself."

26. Upon the same principle, the Court also allowed a proportionate deduction for the cost of pictures never exhibited, such wastage
"being a condition upon all production" and therefore "a part of the
cost of production" ((72) ibid.). The decision was affirmed by the
Supreme Court of the United States ((73) See Sheldon v. Metro-Goldwin
Corp. [1940] USSC 57; (1940) 309 US 390.).

27. Dart referred the Court to a number of United States authorities where the incremental (differential) cost accounting approach has been
adopted. However, the great majority of these decisions concerned
wilful infringements of intellectual property rights. Where
infringement is wilful, courts in the United States are less inclined
(for punitive reasons) to allow deductions for overhead than where
infringement is innocent.

28. Thus, in Regis v. Jaynes ((74) (1904) 70 NE 480 (Mass.)) which concerned an appeal against an accounting of profits stemming from the
deliberate and wrongful use of a trade-mark, the Master, whose decision
was upheld by the Supreme Judicial Court of Massachusetts ((75) (1906)
77 NE 774.), refused to allow any deductions for general overheads.
Similarly, in Carter Products Inc. v. Colgate- Palmolive Company ((76)
(1963) 214 F.Supp. 383.), which concerned an extreme form of
deliberate infringement of trade marks and trade secrets, the rejection
of a deduction for general overheads was upheld. The Court said that
the cases "indicate that the Tremolo rule should be applied unless
special circumstances would make its application unjust" ((77) ibid.,
at p.402.). The Court then pointed to several circumstances, such as
Colgate's deliberate and persistent wrongful acts, which made the
application of the Tremolo rule unjust in that case.

29. Most decisions in the United States which have applied the incremental approach to an account of profits are, therefore,
distinguishable on the basis of deliberate infringement. They are not
of direct relevance to the Australian position. If there are United
States cases which have applied the incremental approach to a
situation of innocent infringement, as I think there are ((78) See for
example, Century Distilling Co. v. Continental Distilling Corp. (1953)
205 F 2d (3d Cir.) 140.), they are contrary to the mainstream
approach adopted in the United States. They are also inconsistent with
the commercial and economic principles and rationales for determining
the profit derived from a product. This Court should not follow them.

30. The conflict in the United States cases can also be explained on another basis. In Schnadig ((79) (1980) 620 F 2d, at p.1174.), the
Court of Appeals, Sixth Circuit, said:

"The common thread running through the cases which have
addressed this issue is a grant of considerable discretion
to the trial court. Although the proper treatment of fixed
expenses can be viewed as a question of law, most courts
have perceived the real question to be the relationship
between the particular fixed costs and the infringing
production in each case, and this has been treated as a
question of fact."

The Australian cases

31. In support of his argument that incremental cost accounting is the
appropriate method to be used in ascertaining an account of profits
from an infringing product, counsel for Dart relied strongly on
Leplastrier and Co. Ltd. v. Armstrong-Holland Ltd. ((80) (1926) 26
SR (NSW) 585.). In determining the principles applicable for an
account of profits, Harvey CJ in Eq. adopted the "sole referability"
test (which essentially corresponds to the incremental method of cost
accounting). However, Leplastrier's Case should not be regarded as
authoritative at the present day. First, I suspect that the theory and
practice of cost accounting in Australia were not as sophisticated in
1926 as they are today. Secondly, however that may be, the decision
was made without reference to authority and without regard to the
decisions in the United States. Indeed, Harvey CJ in Eq. said ((81)
ibid., at p.593.):

"As far as I can find, there are no authorities in the
English books - and counsel could not find them - and I am
exceedingly obliged to counsel for their forbearance in not
venturing on the maze of American authorities, where the
cases are legion. I have not embarked on an investigation
of them either."

32. For these reasons, Leplastrier's Case is not a persuasive authority. The concept of "solely referable" as the benchmark for
the deductibility of overhead expenses in relation to an account of
profits of an infringing product is contrary to business theory and
practice. It is also contrary to the overwhelming weight of authority
in the United States whose courts have had long experience in this
field.

33. Dart also relied on the decision of Windeyer J in Colbeam Palmer ((82) [1968] HCA 50; (1968) 122 CLR 25.) which concerned the infringement
of a trade mark in relation to the painting sets. Part of his Honour's
direction to the Registrar was that in taking the account of profits,
there was to be included the total cost to the defendant of ((83)
ibid., at p.39.):

"selling and delivering the articles so sold to the buyers
of them. This will include any costs directly attributable
to such sales and deliveries. But it should not, I think,
include any part of the general overhead costs, managerial
expenses and so forth of the defendant's business, as it
seems that all these would have been incurred in any event
in the ordinary course of its business in which as it was
put in evidence the painting sets were a 'side line' ((84) cf.
Leplastrier (1926) 26 SR (NSW) 585.)".

34. Counsel for Dart submits that this passage means that "one
excludes 'general overhead costs, managerial expenses and so forth of
the defendant's business', because all these would have been incurred,
in any event, in the ordinary course of its business". However, it is
clear that Windeyer J was expressly confining his statement to cases
of "side line" products. Those cases involve short term decisions to
make and/or sell a product on the basis of utilising excess capacity
or for short term promotions or gains. Whether the side line
exception is good law is debatable. However, it is unnecessary to
express any concluded view on the subject because the trial judge
found that the infringement in the present case was not a side line
activity.

The Teledyne Case

35. Dart also relied on the leading Canadian case on accounting for profits ((85) Teledyne Industries Inc. v. Lido Industrial Products
(1982) 68 C PR (2d) 204, esp. at pp.210-214; followed in Hutton v.
Canadian Broadcasting Corp. (1989) 29 C.PR. (3d) 398, at
pp.458-459.). In Teledyne, the Federal Court (Trial Division,
Addy J) applied the incremental method which was referred to in that
case as the "differential or direct cost accounting method". Addy J
said ((86) Teledyne (1982) 68 C PR (2d), at p.210.) that to allow
the infringer to deduct "such part of all of its fixed costs as might
be attributable proportionately to the operation" would constitute in
effect unjust enrichment. For the reasons that I have given, however,
this analysis, with respect, is flawed.

The absorption method is the proper approach for allocating overheads

36. Based on the above analysis of accounting and economic principles and practice, as well as the United States cases, the absorption
method of cost accounting is the appropriate method of accounting for
general overheads in a case of infringement. The test to be applied
was concisely stated in Alfred Bell and Co. v. Catalda Fine Arts ((87)
(1949) 86 F Supp, at p.415.) where the Court said:

"The test is not whether such an overhead item had been
increased by the handling of the infringements but whether
this overhead item actually assisted in the production of
the infringing profits."

37. Whether the overhead did actually assist in the production or sale, etc. of the infringing product will be a question of fact in all
the circumstances of the case. In determining that question, the
judge will need to keep two matters in mind. First, the smallness of
the sales volume of the infringing product in the defendant's range is
not a ground for refusing to allocate any proportion of overheads to
the infringing product. Thus, in Kamar International Inc. v. Russ
Berrie and Company Inc. ((88) [1984] USCA9 2001; (1984) 752 F 2d 1326, at p.1333.), the
Court of Appeals for the Ninth Circuit refused to disallow a deduction
for overheads merely because the sales of the infringing items
constituted a small percentage of total sales. Secondly, the plaintiff
must take the business of the infringer as it is, as Learned Hand J
pointed out in Sheldon ((89) (1939) 106 F 2d 45; approved by the
United States Supreme Court in Sheldon v. Metro-Goldwyn Corp. [1940] USSC 57; (1940)
309 US 390.). The plaintiff is confined to the profits actually
made. It is irrelevant that the defendants could have used their
resources in a more efficient way and generated a higher profit.

Onus of proof

38. The defendant/infringer bears the onus of showing which overheads assisted in the production or sale of the infringing product and of
providing a fair basis for allocating the overheads. In Frank Music
Corp. v. Metro-Goldwyn-Mayer Inc. ((90) [1985] USCA9 1684; (1985) 772 F 2d 505, at
p.516.), the Court of Appeals for the Ninth Circuit pointed out that
an infringer does not need to prove its overhead expenses and their
relationship to the infringing production in minute detail, but
nevertheless:

"(A) deduction for overhead should be allowed 'only when the
infringer can demonstrate that (the overhead expense) was of
actual assistance in the production, distribution or sale of
the infringing product' ... We do not take this to mean
that an infringer must prove his overhead expenses and their
relationship to the infringing production in minute detail
... (T)he defendant bears the burden of explaining, at least
in general terms, how claimed overhead actually contributed
to the production of the infringing work ((91) See Kamar (1984)
752 F 2d, at p.1333; Taylor v. Meirick (1983) 712 F 2d 1112 (7th
Cir.), at pp.1121-1122.) . ('It is too much to ask a plaintiff who
has proved infringement also to do the defendant's cost
accounting.')."

39. In the earlier decision of Sammons ((92) (1942) 126 F 2d, at p.349.
For an illustration where the defendant did not satisfy this burden of
proof, see Manhattan Industries v. Sweater Bee By Banf. Ltd. [1989] USCA2 757; (1989) 885
F 2d 1 (2d Cir.), at pp.7-8.), the Court of Appeals,
First Circuit, said:

"The burden thus cast upon the defendant requires him to
give evidence of more than a blanket undifferentiated item
of 'overhead'; he must give satisfactory evidence of each
item of general expense or overhead, show that each item
assisted in the production of the infringement, and offer a
reasonably acceptable formula for allocating a portion of
the general overhead to the particular job. A theoretically
perfect allocation is impossible, but there must be a rough
approximation within the limits of practicality."

Method of allocation

40. By definition it is not possible to allocate general overhead specifically or with absolute precision to each product in a range
of products. In proof of the assistance which the general overhead
made to the derivation of revenue from the infringing product, "what
is required is not mathematical exactness but only a reasonable
approximation" ((93) Sheldon (1940) 309 US, at p.408; also see Frank
Music (1985) 772 F 2d, at p.516; Manhattan Industries (1989) 885 F.
2d, at pp.7-8.). Further, the appropriate method of allocation
will depend upon the nature of the business in question and the
circumstances of the cases. In Frank Music ((94) (1985) 772 F 2d, at
p.516; also see Myers v. Callaghan (1885) 24 F 636 (CCND Ill.), at
pp.638, 639; same case on appeal, sub nom. Callaghan v. Myers [1888] USSC 285; (1888)
128 US 617; Sheldon (1939) 106 F 2d, at pp.52, 53; affirmed [1940] USSC 52; (1940)
309 US 409; Levin Bros. v. Davis Mfg. Co. (1934) 72 F 2d 163 (8th
Cir.); Ruth v. Stearns-Roger Mfg. Co. (1935) 13 F.Supp. 697 (DCD
Colo.); Sheldon v. Moredall Realty Corporation (1939) 29 F.Supp. 729
(DCSDNY), at p.731.), the Court stated:
"Because a theoretically perfect allocation is impossible, we require
only a 'reasonably acceptable formula'." The accounting method
generally used by the producer in the ordinary course of its business
will usually be regarded by the courts as a "reasonably acceptable
formula". In Rubber Co. v. Goodyear ((95) [1869] USSC 135; (1870) 76 US 788, at
p.804; cited with approval in Sammons (1942) 126 F 2d, at pp.348-349.)
, the Court stated: "The calculation is to be made as a manufacturer
calculates the profits of business".

41. The sales ratio form of allocation (proposed by the respondents in the present case) has been endorsed as an acceptable formula in a
number of United States cases ((96) See Frank Music (1985) 772 F 2d,
at p.516; Kamar [1984] USCA9 2001; (1984) 752 F 2d 1326; Aitken, Hazen, Hoffman, Miller
v. Empire Construction Company (1982) 542 F.Supp. 252; Wolfe v.
National Lead Co. [1959] USCA9 376; (1959) 272 F 2d 867 (9th Cir.); Sammons (1942) 126
F 2d 341.) and by writers ((97) See for example, McCarthy, op. cit.,
para 30:26B.). There is no reason for not accepting it in the present
case.

A "side line" exception to the general principle?

42. One potential qualification to the general principles stated above
may be "side line" activities. The judgment of Windeyer J in Colbeam
Palmer would support such an exception. However, the argument that
overhead is a necessary element of the production of any good and
the concept of opportunity cost are as applicable to "side line"
activities as to other activities. If the infringer can prove that
its overhead assisted the production or sale of the sideline product
and can provide a fair and reasonable method of allocation, it is
difficult to see why a proportion of overhead should not be allowed.

Order

43. In my opinion the appeal should be dismissed, but I would substitute the words "assisted in" for the words "contributed to" in
the Full Court's order.

44. For the reasons given by Mason CJ, Deane, Dawson and Toohey JJ, the application for special leave to cross-appeal should be dismissed.