Dart Industries Inc v Decor Corporation Pty Ltd

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. 1. (1991) 33 F.C.R., at p. 407.

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] :

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. 1. (1968) 122 C.L.R., at pp. 42-43.

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] .

1. See Baffsky v Brewis (1976), 51 A.L.J.R. 170, at p. 172; 12 A.L.R. 435, at p. 438; The Commonwealth v Introvigne (1982), 150 C.L.R. 258, at pp. 262, 274; Muschinski v Dodds (1985), 160 C.L.R. 583, at p. 590.

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

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?

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.

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".

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?

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.

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] . An expense may be deductible, therefore, although it did not directly increase the cost of producing or distributing the infringing product.

1. 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 & Co. v Catalda Fine Arts (1949), 86 F. Supp. 399, at p. 415.

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] . The object of an account of profits is to make the infringer give up its gains in order to prevent its unjust enrichment [47] . No element of punishment is involved [48] . 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.

1. Patents Act 1952, s. 118(1); Patents Act 1990, s. 122; Cartier v Carlile (1862), 31 Beav. 292 [54 E.R. 1151]; Colbeam Palmer Ltd. v Stock Affiliates Pty. Ltd. (1968), 122 C.L.R. 25, at p. 43. 2. Potton Ltd. v Yorkclose Ltd. (1989), 17 F.S.R. 11, at p. 15. 3. Sheldon v Metro-Goldwyn Pictures Corp. (1940), 309 U.S. 390, at p. 399; My Kinda Town Ltd. v Soll [1983] RP.C. 15, at p. 55; Potton (1989), 17 F.S.R., at p. 15.

"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] . The relevance of the concept of opportunity cost in an infringement action was recognized in Schnadig Corp. v Gaines Manufacturing Co. Inc. [50] , 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]

1. Kohler's Dictionary for Accountants, 6th ed. (1983), pp. 362-363. 2. (1980) 620 F. 2d 1166, at p. 1175. 3. The concept of opportunity cost was also recognized by this Court, although in a different context to the present case, in Hungerfords v Walker (1989), 171 C.L.R. 125, at p. 143.

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] . 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.

1. 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 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] : "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.

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.

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?

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 L.J., who knew more about accounts of profits than most lawyers, once said [54] 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.

1. Siddell v Vickers (1892), 9 R.P.C. 152, at p. 162.

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 Q.B.E. Insurance Group Ltd. v Australian Securities Commission [55] , 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. 1. (1992) 38 F.C.R. 270, at pp. 288-289; see also Odeon Associated Theatres Ltd. v Jones [1973] Ch288, at p. 299.

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.

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] . The incremental method is generally used for setting short term prices and for one-time tactical decisions [57] . 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] .

1. Kohler , op. cit., p. 257. 2. Hirsch, Advanced Management Accounting (1988), pp. 50-51. 3. Helmkamp, Managerial Accounting (1987), pp. 165, 239, 550; Hirsch, op. cit., p. 51.

Standard accounting text books recognize 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] . 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 (e.g., 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 recognized in Sammons v Colonial Press [60] 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. 1. Helmkamp, op cit., p. 239; Hirsch, op. cit., p. 51. 2. (1942) 126 F. 2d, at p. 348.

In the present case, the question under the incremental method of accounting would be: "By what amount have 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] Only the absorption method will reveal whether Decor or Rian made a profit from the infringement.

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] , 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 E. I. Du Pont de Nemours & Co. v Commissioner of Patents [No. 3] [63] , 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] 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] , 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".

1. (1979) 38 F.L.R. 383; 10 A.T.R. 44; 79 A.T.C. 4,352. 2. (1989) 15 I.P.R. 296. 3. (1989) 15 I.P.R., at p. 307. 4. (1986) 4 N.S.W.L.R. 566, at p. 571.

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] , "if used with discrimination, American decisions on the point are illuminating and helpful".

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 Q.C., 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 summarized in Nimmer on Copyright [1] . 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.

1. Vol. 3, s14.03[B]; see also McCarthy, Trademarks and Unfair Competition, 2nd ed. (1984), vol. 2, s30:26B.

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

In The Tremolo Patent [2] , 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 of the Court, said [3] :

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. 1. (1874) 90 U.S. 518. 2. ibid., at pp. 528-529.

In Schnadig [4] , 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 [to] 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. 1. (1980) 620 F. 2d, at p. 1172.

In Sheldon v Metro-Goldwyn Pictures Corp. [5] , which concerned the copyright infringement of a play, the United States Court of Appeals for the Second Circuit allowed a deduction for general overhead. Judge Learned Hand, 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. 1. (1939) 106 F. 2d 45, at p. 54.

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" [5] . The decision was affirmed by the Supreme Court of the United States [6] .

1. (1939) 106 F. 2d 45, at p. 54. 2. See Sheldon v Metro-Goldwyn Pictures Corp. (1940), 309 U.S. 390.

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.

Thus, in Regis v Jaynes [7] 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 [8] , refused to allow any deductions for general overheads. Similarly, in Carter Products Inc. v Colgate-Palmolive Co. [9] , 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" [10] . 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.

1. (1904) 70 N.E. 480 (Mass.). 2. (1906) 77 N.E. 774. 3. (1963) 214 F. Supp. 383. 4. (1963) 214 F. Supp., at p. 402.

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 [11] , 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.

1. See, e.g., Century Distilling Co. v Continental Distilling Corp. (1953), 205 F. 2d (3d Cir.) 140.

The conflict in the United States cases can also be explained on another basis. In Schnadig [12] , 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. 1. (1980) 620 F. 2d, at p. 1174.

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 & Co. Ltd. v Armstrong-Holland Ltd. [13] . In determining the principles applicable for an account of profits, Harvey C.J. 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 C.J. in Eq. said [14] :

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. 1. (1926) 26 S.R. (N.S.W.) 585. 2. (1926) 26 S.R. (N.S.W.), at p. 593.

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.

Dart also relied on the decision of Windeyer J. in Colbeam Palmer [15] 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 [16] :

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" [17] . 1. (1968) 122 C.L.R. 25. 2. ibid., at p. 39. 3. cf. Leplastrier (1926), 26 S.R. (N.S.W.) 585.

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 utilizing 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.

Dart also relied on the leading Canadian case on accounting for profits [18] . 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 [19] 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.

1. Teledyne Industries Inc. v Lido Industrial Products (1982), 68 C.P.R. (2d) 204, esp. at pp. 210-214; followed in Hutton v Canadian Broadcasting Corp. (1989), 29 C.P.R. (3d) 398, at pp. 458-459. 2. Teledyne (1982), 68 C.P.R. (2d), at p. 210.

The absorption method is the proper approach for allocating overheads

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 & Co. v Catalda Fine Arts [20] 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. 1. (1949) 86 F. Supp., at p. 415.

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 & Co. Inc. [21] , 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 Judge Learned Hand pointed out in Sheldon [22] . 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.

1. (1984) 752 F. 2d 1326, at p. 1333. 2. (1939) 106 F. 2d 45; approved by the United States Supreme Court in Sheldon v Metro-Goldwyn Pictures Corp. (1940), 309 U.S. 390.

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. [23] , 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 [24] . ("It is too much to ask a plaintiff who has proved infringement also to do the defendant's cost accounting."). 1. (1985) 772 F. 2d 505, at p. 516. 2. See Kamar (1984), 752 F. 2d, at p. 1333; Taylor v Meirick (1983), 712 F. 2d 1112 (7th Cir.), at pp. 1121-1122.

In the earlier decision of Sammons [25] , 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. 1. (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), 885 F. 2d 1 (2d Cir.), at pp. 7-8.

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" [26] . 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 [27] , 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 [28] , the Court stated: "The calculation is to be made as a manufacturer calculates the profits of business."

1. Sheldon (1940), 309 U.S., at p. 408; see also Frank Music (1985), 772 F. 2d, at p. 516; Manhattan Industries (1989), 885 F. 2d, at pp. 7-8. 2. (1985) 772 F. 2d, at p. 516; see also Myers v Callaghan (1885), 24 F. 636 (C.C.N.D. Ill.), at pp. 638, 639; same case on appeal, sub nom. Callaghan v Myers (1888), 128 U.S. 617; Sheldon (1939), 106 F. 2d, at pp. 52, 53; affirmed (1940) 309 U.S. 409; Levin Bros. v Davis Manufacturing Co. (1934), 72 F. 2d 163 (8th Cir.); Ruth v Stearns-Roger Manufacturing Co. (1935), 13 F. Supp. 697 (D.C.D. Colo.); Sheldon v Moredall Realty Corporation (1939), 29 F. Supp. 729 (D.C.S.D.N.Y.), at p. 731. 3. (1870) 76 U.S. 788, at p. 804; cited with approval in Sammons (1942), 126 F. 2d, at pp. 348-349.

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 [29] and by writers [30] . There is no reason for not accepting it in the present case.

1. See Frank Music (1985), 772 F. 2d, at p. 516; Kamar (1984), 752 F. 2d 1326; Aitken, Hazen, Hoffman, Miller v Empire Construction Co. (1982), 542 F. Supp. 252; Wolfe v National Lead Co. (1959), 272 F. 2d 867 (9th Cir.); Sammons (1942), 126 F. 2d 341. 2. See, e.g., McCarthy, op. cit., s30:26B.

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.

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.

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