Disgorgement of Profits
by Tobias Helms
a) Definition and concepts of disgorgement
Disgorgement of profits can be viewed as the opposite of a damages claim. While damages compensate for the loss that an aggrieved party has suffered disgorgement of profits serves to restore the benefit gained by a person who illegally encroached on another’s rights. However, there are difficulties in distinguishing between both concepts because the profits gained from the infringement can be assessed in two different ways: on the one hand, an illegal benefit can be seen as the entirety of assets that have accrued to the infringer as a result of the infringement; alternatively, an illegally gained benefit can be seen in the sum of money the infringer avoided to pay by using another’s right without authorization. Under the first approach, which is fundamentally aimed at disgorging all illegally obtained benefits, the infringer is treated as if he had been acting as an agent or trustee of the aggrieved party and must, therefore, disgorge to the principal everything he gained by the action (eg proceeds from a production infringing another party’s patent). By contrast, under the second approach, which emphasizes the saved expenditures, the infringer is put in the position as if he had paid the aggrieved party the usual remuneration for the use of his legally protected interests (eg reimbursement of the current licence fee for the use of a foreign patent). In the present essay, ‘disgorgement of profits’ refers to the first form of—comprehensive—disgorgement of profits.
b) Unjustified enrichment
An obvious basis for claims to a disgorgement of profits would appear to be a claim of unjustified enrichment based on the infringement of another’s right. However, from a historical viewpoint the law of unjustified enrichment is not designed to disgorge all benefits gained by the infringement of rights. In this regard, the writings of Friedrich Carl von Savigny are characteristic of the law of unjustified enrichment in the 19th century. He saw the ‘enrichment of an estate by diminution of another estate’ (Erweiterung eines Vermögens durch Verminderung eines andern Vermögens) as the fundamental principle of the law of unjustified enrichment, following Pomponius’ famous maxim in D. 12,6,14 (also D. 50,17,206): ‘iure naturae aequum est neminem cum alterius detriment et iniuria fiery lucupletiorem’. von Savigny thus deemed it necessary that the assets enriching the infringer have once been part of the estate of the person who now wants to base a condictio on it, as ‘the reclaiming of what has left our estate is the real reason for all regular condictiones’. This doctrine thus interpreted the condictio as an instrument of compensation that was restricted to the extent of the enrichment. Even today, claims for unjustified enrichment are in some countries limited to the loss suffered by the plaintiff, especially in the Romanistic legal systems (France, Italy, Spain, the Netherlands). Consequently, claims for unjustified enrichment based on the infringement of another’s right tend to be sidelined in those legal systems, as these claims are usually seen as a remedy that is subsidiary vis-à-vis contractual or delictual claims. It is hardly surprising, therefore, that a broader, more comprehensive concept of disgorgement of profits is rarely discussed in those countries.
Nevertheless, the general position currently prevailing in Europe today is that, in the case of an infringement of another’s rights (no matter it was based on fault or not), the amount has to be paid that would have had to be paid if the aggrieved party had permitted to make use of these rights; and that is true even if the aggrieved party has not suffered any tangible loss. While many legal systems base such a claim on the law of unjustified enrichment (see also Arts VIII.-1:101(1), VII.-3:102(1)(c) with VII.-5:101(3) or VII.-5:102(1) Draft Common Frame of Reference (DCFR)), other legal systems permit an assessment of damages which is detached from the specific loss suffered (eg restitutionary damages under English law, see also Art 10:201 of the Principles of European Tort Law (PETL)). A general claim for disgorgement of all illegally gained profits above and beyond that is almost unanimously rejected within the law of unjustified enrichment. The reasoning behind this may be that a claim for unjustified enrichment normally has no requirement of fault: whoever infringes another’s rights without fault should be able to assume that he can keep the profit gained by his own efforts (apart from the royalty he saved by usurping the legally protected interest). The almost unanimous position of European legal systems is thus reflected in the DCFR, where claims for unjustified enrichment are restricted in principle to the ‘monetary value’ of the legal position directly usurped (Art VII.-5:101 ff DCFR).
2. Potential legal bases for disgorgement of profits
a) Intentional acts in one’s own interest
If one accepts the view that liability for disgorgement of profit arises when the infringer is treated as if he had been acting as an agent or trustee of the aggrieved party (see 1. above), one might seek the solution in the rules on negotiorum gestio (where the infringer would be termed gestor). Under the rules of the negotiorum gestio the principal may sue the gestor for the restoration of whatever the latter may have acquired in the course of executing the gestio. But the decisive question here is whether liability is dependent on the animus negotia aliena gerendi—on a person’s knowingly managing another’s affairs with the intention of benefiting that other person (‘genuine’ negotiorum gestio (echte Geschäftsführung ohne Auftrag)) or whether it may also extend to ‘non-genuine’ negotiorum gestio (unechte Geschäftsführung ohne Auftrag or Geschäftsanmaßung), ie instances where a gestor objectively takes care of a matter pertaining to another person but in the gestor’s own interest. Under the ius commune the actio negotiorum gestorum directa required the gestor to disgorge any gains made by infringing another’s rights (regardless of whether he had the intention of benefiting another or even knew that he interfered with the affairs of another). In contrast, a more restrictive approach increasingly asserted itself in the later ius commune, whereby the rules of negotiorum gestio only applied when the gestor acted with animus negotia aliena gerendi since liability along contractual lines required that the parties had reached a quasi-contractual concurrence of their intentions. Nonetheless, in instances where someone intentionally took advantage of another’s legally protected interests to his own benefit, the lack of animus negotia aliena gerendi presented no obstacle to an actio negotiorum gestorum directa: for equitable reasons the gestor could be treated as if he had acted with animus negotia aliena gerendi (unechte Geschäftsführung ohne Auftrag).
According to this approach, which is followed in German law, anyone who treats the affairs of another as his own, knowing that he is not entitled to do so, is treated like a gestor (see § 687(2) BGB); he must therefore surrender all profits. However, this approach is not a particularly compelling model for other European countries given that it has not even been followed in the other legal systems of the Germanic legal family. Swiss law adopted the solution of the older ius commune, for according to Art 423(1) Swiss Code of Obligations (OR) the rules of ‘non-genuine’ negotiorum gestio (unechte Geschäftsführung ohne Auftrag) do not depend on fault. Although Swiss lawyers debate whether the bona fide gestor should be liable, it is accepted that someone who negligently interferes with another’s affairs must surrender the profits he makes. In contrast, in Austrian law the rules on negotiorum gestio require the gestor to act with animus negotia aliena gerendi (§§ 1035 ff ABGB).
In other legal systems such approaches hardly play a role any longer. Thus, even though the gestion d’affaires under French law is formulated in an objective manner (Art 1372 CC), it is generally accepted that liability for negotiorum gestio always requires the gestor’s intention to act in the interests of the principal. English law does not even recognize negotiorum gestio as a separate legal institution. The Draft Common Frame of Reference thus represents the prevailing view in Europe when it declares that the rules on negotiorum gestio only apply if the gestor ‘acts with the predominant intention of benefiting another’ (Art V.-1:101(1) DCFR).
However, the German approach to disgorgement of profits under § 687(2) BGB is based on the broader idea of making disgorgement of profits available where rights of another have been intentionally infringed. On the one hand, this is because the belief of a person who intentionally infringes another’s right that he will be allowed to keep his illegally gained profits is not worthy of protection. On the other hand, the intentional infringer poses a specific potential danger in view of the fact that he is in a position to weigh up whether the benefit he receives from the infringement is greater than the damage he causes (and may have to pay for). English law also points in this direction when it awards punitive damages in the form of ‘exemplary damages’, inter alia, in cases where the defendant has cynically disregarded the plaintiff’s rights because he has speculated that the expected gain to be made from the illegal act would exceed the amount of the anticipated damages claim. The justification for this approach is that punitive damages must be awarded ‘whenever it is necessary to teach a wrongdoer that tort does not pay’ (Rookes v Barnard (1964) AC 1129). Even though the making of a profit is not decisive for measuring the damages, it is the intentional and calculating approach that triggers the claim against the infringer. This approach was also adopted in the French preliminary draft for the reform of the law of obligations (Projet Catala), in which an award of punitive damages was proposed in cases of profitable infringements of another’s rights and overt breaches of duty (Art 471).
b) Breach of fiduciary duties
While the doctrine of ‘non-genuine’ negotiorum gestio attempts to justify why someone who neither committed himself contractually nor intended to act for another should be liable to surrender his profits, the legal starting point of persons who actually are bound by a particular fiduciary relationship—such as partners, executive directors, or administrators—is completely different. Where an autonomous and influential position is entrusted to someone, there is inevitably a risk that he will exploit it to his own benefit. The most important instances are the acceptance of bribes from third parties, the pursuit of economic activities in competition with those of the trustor, or the use of the entrusted goods and resources for his own purposes. In these kinds of cases English law has, already for a long time, provided for an account of profits: if the infringement of a fiduciary duty creates a conflict of interests, the profits attained are to be restored to the trustor even if the latter has not suffered any measurable damage and would never have made the profits himself. There are similar principles in German law which, however, find an express statutory basis only for cases of unfair competition (see § 61(1) HGB; § 113(1) HGB; § 88(2)2 AktG); for other cases similar rules have been developed on the basis of general principles of liability law.
That someone who abuses a position of trust for his own ends must surrender all profits is not really seen to require any special justification in English and German law. Liability is seen as a natural consequence of the specific nature of the duty that has been infringed.
c) Deficits concerning the compensation of damages
At first sight it seems contradictory to ask whether disgorgement of profits can be seen as a form of compensation of damages given that restoration of profits and a claim for damages constitute opposites (see 1. above). However, a closer look reveals important similarities between the two approaches. To begin with, it is evident that illegal gains made through the infringement of another’s right can correspond to the damage suffered by the aggrieved party. But even where the profits made do not correspond to the damages suffered the profit made through the illegal exploitation of another person’s legal interest indicates the potential for pecuniary exploitation inherent in that interest. Moreover, demanding precise evidence of actual damages suffered by the aggrieved party is sometimes unrealistic. Especially problematic, in this context, is the infringement of immaterial rights. If, for example, a patent or a personality right is infringed, the aggrieved party suffers no direct tangible damage (as with damage to a material object). Indeed, the patent or personality right can still be used and/or exploited unreservedly by its holder. It is also often difficult to prove what gain the aggrieved party has foregone through the unauthorized use of the right by the other person. If one confines oneself to compensating specific damages that can be proved by the aggrieved party, one runs the risk of having no effective sanction for such infringements.
It is apparent that the need for a specific claim providing for the disgorgement of profits depends greatly on the rules existing for the compensation of damages. Thus, in the Romanistic legal systems where judges traditionally have a wide margin of discretion in determining damages (especially for the infringement of immaterial property), the development of separate claims for the disgorgement of profits was not, traditionally, regarded as particularly important. In contrast, many other European legal systems introduced special claims or developed case law to allow for the disgorgement of profits where an industrial property right or a copyright has been infringed. Special rules concerning the infringement of personality rights are rather rare (but cf Switzerland: Art 28a(3) Swiss Civil Code (ZGB)) but in determining the amount of compensation for immaterial damage, the defendant’s intention to make a profit will often be a decisive factor. Thus, the German Federal Supreme Court has expressly emphasized that the award of damages must also reflect the fact that the personality rights were infringed in order to attain a profit. The Court stated that a ‘real deterrent effect’ must be inherent in the damages such that they can ‘counterbalance’ the perpetrator’s illegal gain (BGHZ 128, 1 ff).
In the Netherlands, disgorgement of profits has, in the guise of damages, found general recognition. Article 6:104 Burgerlijk Wetboek (BW) gives the judge the power to award damages in cases of tort/delict or breach of contract so that they equal the profit (or a part thereof) attained through the infringement. Although this provision might have been understood as an independent basis for granting claims for disgorgement of profits, the prevailing opinion would seem to be that the provision is a special rule for assessing damages which is inapplicable if damages have definitively not been caused. Disgorgement of profits as a means of compensation damages is now also prescribed by the EU Directive on the enforcement of intellectual property rights of 29 April 2004 (Dir 2004/48). In case of an infringement of intellectual property rights, the ‘actual prejudice’ is to be compensated (Art 13(1)1) whilst taking all ‘appropriate aspects’ into account, including ‘any unfair profits made by the infringer’ (Art 13(1)3).
The Draft Common Frame of Reference converges with the state of European legal development and provides for the disgorgement of profits as an alternative to claiming damages ‘but only where this is reasonable’ (Art VI.-6:101(4)).
3. Disgorgement of profits as a general principle?
It appears doubtful whether the three previously described approaches can be reduced to a uniform formula setting forth the prerequisites for a disgorgement of profits. The only European legal system that has made such an attempt—at least for breaches of contractual duties—would appear to be England. In 2000 the House of Lords established the principle that disgorgement of profits represented a sort of subsidiary legal remedy that the court may order at its discretion when ‘exceptional circumstances’ prevent the general remedies of damages, specific performance and injunction from granting appropriate redress. However, not every intentional breach of contract gives the plaintiff a claim for the disgorgement of the illegally gained profits. Instead it is decisive whether the plaintiff has a ‘legitimate interest in preventing the defendant’s profit-making activity and, hence, in depriving him of his profit’ (Attorney General v Blake (2000) 3 WLR 625 (HL)). As far as can be presently ascertained, the experiences with this formula do not seem particularly encouraging. One rather encounters a considerable degree of uncertainty and perplexity about the application of these—quite vague—guidelines.
The rules for the disgorgement of profits in Europe cannot be traced back to a general principle, nor is the same level of importance attributed to the issue throughout Europe. Three different approaches can be distinguished. Sometimes, the justification for ordering a disgorgement of profits (or, at least, for the granting of punitive damages) is found in the infringer’s intentional and calculated way of proceeding. Of central importance is an appreciation of the specific dangers posed by intentional perpetrators which are not adequately addressed by the mere prospect of (normal) liability for damages. In some legal systems, however, an order for the disgorgement of profits can also arise from the specific nature of the legal duty that has been infringed. Liability for the breach of fiduciary duties features particularly prominently. Apart from that, disgorgement of profits is also employed as a means of a comprehensive compensation for the damages suffered. This would seem to be justified where liability for damages that can specifically be proved typically turns out to be inadequate, with the result that there would be a structural undercompensation of the aggrieved party, while the infringer would unjustifiably benefit from his illegal conduct. This conception is, however, diametrically opposed to the other two approaches toward the disgorgement of profits in that the overriding aim is not the comprehensive disgorgement of illegally obtained benefits, but rather the adequate compensation of the damages suffered.
Detlef König, ‘Gewinnhaftung’ in Festschrift Ernst von Caemmerer (1978) 179; Samuel J Stoljar, ‘Negotiorum Gestio’ in IECL X (1984) ch 17; Johannes Köndgen, ‘Immaterialschadensersatz, Gewinnabschöpfung oder Privatstrafen als Sanktionen für Vertragsbruch?’ (1992) 56 RabelsZ 696; Pietro Sirena, La gestione di affari altrui: ingerenze altruistiche, ingerenze egoistiche e restituzione del profitto (1999); Johannes Köndgen: ‘Gewinnabschöpfung als Sanktion unerlaubten Tuns. Eine juristisch-ökonomische Skizze’ (2000) 64 RabelsZ 661; Konrad Rusch, ‘Restitutionary Damages for Breach of Contract: A Comparative Analysis of English and German Law’ (2001) 118 South African Law Journal 59; Holger Fleischer, ‘Legal Transplants in European Company Law—The Case of Fiduciary Duties’  ECFR 378; Christian von Bar (ed), Principles of European Law, Benevolent Intervention in Another’s Affairs (2006); Gerhard Wagner, ‘Neue Perspektiven im Schadensersatzrecht—Kommerzialisierung, Strafschadensersatz, Kollektivschaden’ in Gutachten für den 66. Deutschen Juristentag (DJT), vol I (2006); Tobias Helms, Gewinnherausgabe als haftungsrechtliches Problem (2007); Ole Böger, System der vorteilsorientierten Haftung im Vertrag: Gewinnhaftung und verwandte Haftungsformen anhand von Treuhänder und Trustee (2009).