What is an account of profits?

04 March 2022 by Paul Croft

What is an account of profits?

An account of profits is an equitable remedy that may be granted in cases where a defendant has profited from wrongful conduct and is an alternative remedy to damages. Where available, a plaintiff may claim both remedies in its pleadings; however, the plaintiff must ultimately choose between an award of damages or an account of profits.[i]

An account of profits is a way of ensuring that people in trusted positions who breach their duties or those who infringe intellectual property rights don’t benefit from their wrongful conduct. The purpose of an account of profits is not to punish the defendant but, rather, to serve justice by depriving the defendant of the profits made by the defendant in committing the wrongful acts and giving them to the plaintiff. As such, an account of profits differs to a calculation of compensatory damages which quantify the loss suffered by the plaintiff caused by the defendant’s wrongful conduct or actions.

To quantify an account of profits, a forensic accountant requires access to the defendant’s financial and other relevant books and records. As a plaintiff cannot be compelled to make an election between damages and an account of profits before being fully informed[ii], the legal process can be drawn out by a recalcitrant defendant who resists discovery or doesn’t fully provide all of the documents relevant to the calculation.

In contrast, a forensic accountant engaged to quantify the plaintiff’s damages from lost profits is unlikely to face similar information hurdles. This is because the plaintiff is intrinsically motivated to give access to information pertinent to calculating its damages (although this does not guarantee that full access to all relevant books and records will necessarily be provided!).

Common elements central to quantifying an account of profits

While case law as to the approach for calculating an account of profits is well settled[iii], technical accounting issues and operational factors can complicate the approach, increasing complexity in the calculation. Key elements of the calculation that may influence the degree of complexity include:

• Determining, categorising and apportioning the costs incurred (fixed and variable, direct, indirect and general overhead) in the manufacture and sale of the infringing product / service (relative to total costs) that should be deducted / not deducted from the revenues generated by the infringing product / service;
• Understanding and evaluating the extent to which the elements of the infringing product / service might be easily “disentangled” from the infringing product / service (in its entirety). This enables the forensic accountant to isolate that part of the infringing product revenues that relate to the component(s) associated with the defendant’s misconduct; and
• Assessing whether the sale of the infringing products or service represents either a side operation or a key component of the defendant’s business operations, with consequences for the costs a defendant is entitled to deduct against the infringing product / service revenues.

Notably, a defendant is not entitled to claim the opportunity cost of profits foregone on producing an alternative product / service when preparing an account of profits. However, the defendant may be entitled to deduct the overhead costs that would have sustained the capacity to produce an alternative product, but which were instead, utilised in producing by the infringing product or service.

Matters requiring an account of profits

As forensic accountants, we are engaged to prepare an account of profits in matters involving:

1. Breach of fiduciary obligations and duties

Fiduciary duties arise out of a fiduciary relationship between individuals, where one individual has the “trust” or “confidence” of another (the beneficiary) and pursuant to which the fiduciary must act in the beneficiary’s best interests. Breaches arise when the fiduciary (defendant) uses the fiduciary relationship as a basis for personal financial gain, opening the fiduciary to being sued by the beneficiary (plaintiff). Claims for breaches of fiduciary duty may arise from:

• Breaches of directors’ or trustees’ duties under the Corporations Act 2001 or the general law; and
• Breaches of confidentiality, restraint or other clauses in an employment contract.

2. Infringement of intellectual property rights

Intellectual property infringement occurs when another party:

• Contravenes the exclusive rights of an intellectual property owner under trademarks, patents, copyright, designs and plant breeder’s rights legislation;
• Misuses confidential information including trade secrets and other sensitive commercial information; or
• Misrepresents another party’s goods or services as their own for the common law tort of passing off.

Need advice?

Early forensic accounting input offers a simple, effective way for you to proactively manage the costs and risks associated with litigation. Engaging early will help to narrow the material financial and/or accounting issues in dispute, and identify the critical evidence required to develop and support the optimum legal strategy. This will help you lay the groundwork for building robust, defensible claims.

Contact one of our forensic accounting experts to discuss the problems at hand and discover why our services are right for you.

[i] See, for example, Calidad Pty Ltd v Seiko Epson Corporation (2020) 94 ALJR 1044, 384 ALR 577, [2020] HCA 41 at [206].

[ii] See, for example, LED Builders Pty Ltd v Eagle Homes Pty Ltd (No 3) (1996) 70 FCR 436 at 450 per Lindgren J, Dr Martens Australia Pty Ltd v Bata Shoe Co of Australia Pty Ltd (1997) 75 FCR 230 per Goldberg J, Norm Engineering v Digga Australia (No 3) (2007) 73 IPR 77, [2007] FCA 953 at [30] per Greenwood J.

[iii] See, for example, Dart Industries Inc v Decor Corporation Pty Ltd (1993) 179 CLR 101; [1993] HCA 54 and Apand Pty Ltd v Kettle Chip Co Pty Ltd (No 2) (1999) 88 FCR 568; [1999] FCA 483.