What’s it worth? The assessment of damages and valuation of IP in the case of Hotel Cipriani

This note is adapted from my presentation at the FICPI conference in Venice, Italy on 27 October 2017. For the full paper, please get in touch or download here.

Enlight344.jpgIn the second and final part of this topic, we apply the principles to calculate the damages awarded in the famous case of the Hotel Cipriani, which remains the largest ever largest ever award for trade mark infringement in English history.

Damages for trade mark infringement in Hotel Cipriani

  • In Hotel Cipriani SRL & Others v Cipriani (Grosvenor Street) Ltd [18] (see background here), the English courts considered an allegation of trade mark infringement and passing off brought by the owners of the luxurious Hotel Cipriani in Venice.
  • The proceedings were brought against three defendants who ran a restaurant in London called Cipriani London. The first defendant operated the day-to-day running of the restaurant. The second was an individual who was the sole director of the first defendant. The third defendant was a Luxembourg corporation which licensed the use of the name Cipriani to the first defendant.
  • The claimants succeeded in establishing infringement and that the mark was well known. The defendants’ arguments were rejected and the decision was upheld on appeal. Having established liability and with no settlement being reached, the case moved to a quantum trial. The claimants sought an account of profits.
  • In his judgment on quantum, detailed management accounts were filed in evidence and each party relied on forensic accountants as expert witnesses. The judge sought to identify precisely what profits each of the defendants had earned from their infringing activities since the restaurant opened.

The licensor’s liability

  • The liability of the third defendant, the licensor based in Luxembourg, was considered first as it was the most straightforward. The licence agreement to the first defendant allowed it to use several trade marks in exchange for 11.5% of gross sales. The court found that all of the marks contained in the licence agreement infringed those of the claimants. The court therefore held that all of the entitlement due under the licence was attributable to infringing activity. This meant that 11.5% of the gross sales of the restaurant during the infringing period would be payable in damages to the claimants. The gross sales were £34,640,000. The entitlement under the licence was therefore £5,304,000.

The restaurant operator’s liability

  • The first defendant’s liability was a little more complex. The claimants never claimed that all of the profits were attributable to the infringement. Some profits, after all, could be attributed to other, non-infringing, factors. The difficulty was in separating out these other bits from the profits relating to the misuse of the Cipriani brand.
  • Both expert witnesses in the case favoured a “distribution of costs” approach, which broadly speaking means the profits of a business are allocated in an approximate manner to different business units based on the proportion of the costs and expenses borne by each unit. However, this can over-simplify the calculation as it means that each cost is assumed to be equally profitable. The judge accordingly recognised that some weighting must be applied.

Calculate the functional profit and the intangible profit

  • The judge therefore tried to identify what is the functional profit level, that is, what is the ordinary margin at which a restaurant would expect to operate based on service alone. His view was that any profit made beyond this threshold would be attributable to other intangibles which give a special value, such as branding and marketing. He said:

a free market will only permit a marginal profit to be made from the provision of any service per se. Therefore, profits made over and above that level are likely to be as a result of something other than the service. By definition, the extra profit is caused by whatever intangibles are giving the service provider an edge over others in the same market.

  • The claimant submitted 7.5% was a typical profit margin for a restaurant, though the judge favoured the defendants’ submission that 5% was more appropriate. The judge then calculated 5% of the turnover of the defendant to give a functional profit figure of £1,732,000. This could be deducted from the profit to leave a value which is attributable to profit from intangibles of £2,094,000.

Calculate the proportion of profits attributable to the infringement

  • However, this figure was inappropriate because some intangibles did not infringe, for instance the logo aspects of the branding. How could those be separated out?
  • The judge, following the guidance of the expert witnesses, decided that the best guide was the ratio payable between (a) the royalty under the licence agreement for the use of the name and logo (11.5% of turnover), and (b) the management fee for running the business affairs (3% of turnover). This equated to 79% of the profits being allocated to intangibles.

The calculation

  • Using the first defendant’s turnover and the licence and management agreements with the third defendant, the court was therefore able to calculate the damages from the date when the restaurant opened to the date of the injunction as almost £6,965,000 excluding interest and costs.

Table 1 below illustrates the damages calculation  

 Item  Description Value  

Explanation

 

 

A

 

Gross sales

 

£34,640,000

 

 

Disclosed in evidence.

 

B

 

Total profit earned

 

 

£3,826,000

 

Disclosed in evidence.

 

C

 

Functional profit

 

5% of gross sales, £34,640,000 (A)

 

 

£1,732,000

 

This identifies profit which would be expected to accrue through a typical business.

 

 

D

 

Intangible profit

 

Total profit (B) less functional profit (C)

£3,826,000 – £1,732,000 =

 

£2,094,000

 

 

 

This identifies profit which is above the functional profit level and therefore which is attributable to other special value items, such as branding and marketing.

 

 

E

 

Proportion of which royalty payments form part of all payments to D3 to run the business.

 

Royalty rate = 11.5%

Management rate = 3.5%

 

Ratio = 11.5 /(11.5+3.5) =  0.793

 

79%

 

 

 

 

 

 

 

 

This identifies the proportion of the intangible profit (D) which relates to the infringing activity.

 

 

F

 

Infringing profit

Intangible profit (D) x

Proportion of profit attributable to infringing activity (E)

 

79% of £2,094,000 =

 

 

£1,661,000

 

This identifies the profit which has accrued through the infringing activity.

 

 

 

G Damages payable by first defendant  

£1,661,000

 

 
H Damages payable by third defendant  

£5,304,000

 

I Total damages (before interest and costs)  

£6,965,000

 

If you would like to discuss IP valuation or trade mark infringement in more detail, please get in touch here.

All content and images © Robert Cumming


[18] Hotel Cipriani SRL & Others v Cipriani (Grosvenor Street) Ltd [2008] EWHC 3032 (Ch), [2010] EWCA Civ 110, [2010] EWHC 628 (Ch)

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