ITMA 322 APRIL 2005

Design & Copyright
The Costs of Copying Precedents
London General Holdings Ltd & Ors v USP PLC & Anor [2005] EWCA Civ 931
This was an appeal regarding the level and basis of
damages and royalty awarded in respect of a precedent
document that had been copied by a competitor.
The defendants offered a wide range of financial
services including extended warranties for electrical
goods. These extended warranties were classified as a
form of insurance and consequently attracted insurance
tax. In the 1997 budget, the insurance tax
payable on premiums was raised from 2.5 % to 17.5%.
In 1998 a series of draft documents was developed
by the second claimant, Unicorn, to provide an
extended warranties scheme which would not be
liable for insurance tax (the New Scheme). One of the
documents was the Collections Account Agreement
(CAA). This was not a finished document as it
required alteration and development to be effective,
but it contained the ideas on which the New Scheme
was based. These included the implementation of a
trust which was a necessary component if the New
Scheme were to avoid insurance tax liability.
In 1999 Unicorn assigned all of its intellectual property
rights, including the copyright in the New
Scheme including the CAA and other documents, to
the First Claimant, USP.
Scottish Power
In 1997/1998 Scottish Power, one of the first defendant’s
(LGH) customers, was interested in setting up
an extended warranty scheme which avoided the
insurance tax premiums. Both LGH and Unicorn
made presentations to Scottish Power, who favoured
Unicorn’s scheme. However, the new Scottish Power
scheme was to be administered by LGH.
During negotiations to determine the exact wording
of the documents required for the Scottish Power
scheme, LGH and Unicorn signed a mutual confidentiality
agreement. The CAA was then sent to LGH.
This draft was subsequently reworked to create an
effective document, but in essence remained faithful
to the substance of the draft CAA. LGH saved an
electronic version of the redraft. It was this electronic
version of the redrafted CAA, and clones of this
redraft, which made up the infringing copies and on 8
November 2002 the High Court held that LGH had
infringed USP’s copyright and was entitled to damages.
The Apollo contract
In April and early May 1999 LGH used the saved
electronic version of the redrafted CAA to prepare a
document as part of a trust-based scheme for Apollo
2000 Limited (Apollo). LGH also sent the redrafted
CAA to a firm of solicitors for advice.
At the trial for liability only, Judge Weeks held that
the use of the redrafted CAA infringed the copyright
in the original draft CAA. At the damages inquiry
LGH was found to be liable for the infringements
relating to Apollo. However, there were two other
incidents of the redrafted CAA being used in similar
ways to the Apollo contract.
In the damages inquiry Master Price held, in relation
to Apollo, that “the right way to proceed to
assess these damages is by way of notional royalty”.
He then awarded £15,000 by way of compensation for
the labour and skill involved in producing the template
CAA as a notional royalty, but did not comment
on the other times LGH used the redrafted CAA to
provide extended warranty schemes which were
based on the New Scheme.
The Powerhouse contract
The main issue in the appeal related to a claim for
damages in respect of a contract to provide this trustbased
extended warranty scheme with another company,
Powerhouse. LGH and USP were in competition
with each other for this contract.
LGH used the electronic version of the redrafted
CAA to prepare documents for a trust-based extended
warranty scheme. LGH disclosed the existence, but
not the actual text, of the redrafted CAA to
Powerhouse as the basis for LGH’s scheme.
Powerhouse was initially concerned about the robustness
of LGH’s scheme although it was “keener on
price” than the scheme offered by USP. Accordingly,
LGH took advice and after further discussions,
Powerhouse was persuaded that LGH’s scheme was
sufficiently robust. It was not suggested by either of
the parties that Powerhouse had actually seen a copy
of the redrafted CAA.
Powerhouse then told USP about the alternative
LGH scheme. As a result, USP subsequently reduced
its price, to the effect that USP would make £111,720
less profit over the lifetime of the scheme. USP was
awarded the contract and sought to claim the loss of
profit from LGH for infringement of copyright.
At the damages inquiry Master Price awarded USP
damages of £126,720 consisting of £111,720 for loss of
profit in relation to the Powerhouse contract and a
notional royalty of £15,000 in relation to the Apollo
contract.
Appeal
At the appeal LGH argued that there had been double
recovery because USP had been awarded both damages
and notional royalty in respect of the contract
with Powerhouse. However, the Court of Appeal said
that this argument was “misconceived”, as an infringing
copy could be put to several uses, each of which
could give rise to a separate damages claim.
The Court of Appeal also dismissed LGH’s arguments
that a lack of foreseeability and lack of causation
meant that the loss of profit in the Powerhouse
contract was not attributable to the breach of copyright
in respect of the draft CAA. The court dismissed
this argument, but said that the damages award for
the loss of profit should be struck off in any event,
Continued on page 12
December 2005 ITMA Review 11