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Disgorgement of Profits in Israeli Law

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Disgorgement of Profits

Part of the book series: Ius Comparatum - Global Studies in Comparative Law ((GSCL,volume 8))

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Abstract

The study of disgorgement of profits in Israeli law demonstrates the availability of this remedy in nearly all legal areas. The extensive development of this remedy can only be explained in view of Israeli private law being the product of a mixed legal system with special characteristics. Accordingly, this study offers an overview of the special characteristics of Israeli private law (part 2); addresses the terminology regarding disgorgement of profits (part 3); the application of disgorgement of profits in different areas of the law (part 4); the calculation of profits to be disgorged (part 5); adjacent areas, such as negotiorum gestio (part 6) and punitive or aggravated damages (part 7); the links between administrative financial sanctions and private law remedies (part 8); and ends with an evaluation (part 9).

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Notes

  1. 1.

    Barak (1994), 473, 483 et seq.; Zweigert and Kötz (1998), 235 et seq.

  2. 2.

    Zimmermann, “Preface”, in: Siehr and Zimmermann (2007), V.

  3. 3.

    Friedmann (1975), 192.

  4. 4.

    For an English translation of the Draft, see Siehr and Zimmermann (2007), 249–365.

  5. 5.

    Deutch (2005), 27 et seq.

  6. 6.

    Adras v. Harlow & Jones GmbH, Further Hearing 20/82, 42(1) PD 221–285 (11 February 1988), note: Friedmann (1988), 383. An English translation was published in Restitution Law Review (RLR) [1995] 235–277. The case is one of the very few private law cases annotated in “The Courts of Law: Fifty Years of Adjudication in Israel” (see Friedmann (1999)).

  7. 7.

    With respect to fiduciary relations cf. para. 4.9 infra.

  8. 8.

    Harlow & Jones v. Adras, CA (Civil Appeal) 815/80, 37(1) PD 225 (10 October 1982).

  9. 9.

    The Court based this conclusion on Friedmann (1982a), 22, 43–45 (in Hebrew); Friedmann (1982b), 299 et seq.; Friedmann (1980), 504.

  10. 10.

    Reference is made to: Dawson (1959), 175, whose support is in fact speculative, ibid., 181, 185–192; Friedmann (1980), 504; most American scholars, although only one (Canadian) is mentioned: Palmer (1978); Goff and Jones (1978), 377–378; Jones (1983), 443; Waters (1984–1985), 1111.

  11. 11.

    Treitel (1999), Chap. 16, at 24–25, para. 42–44; Farnsworth (1970), 1145, 1177; Farnsworth (1984–1985), 1339.

  12. 12.

    §4, Contracts (Remedies for Breach of Contract) Law.

  13. 13.

    Reference is made to Friedmann (1982b), 46; Friedmann (1980), 513 – “Contract relations may also give rise to interests that come within the ambit of ‘property’ for purposes of restitution.” Friedmann (1980), 510 et seq. submits that, according to “modern notions of property”, contractual rights are themselves property or quasi-property. Since property rights are protected against misappropriation by restitution rules, the same protection should apply, in pari materia, to contractual rights.

  14. 14.

    Reference is made to Friedmann (1982a), at 266.

  15. 15.

    Grossman & K.B.K. v. The Administrators of Biderman’s Estate, CA 726/71, 26(2) PD 781 (28 November 1972).

  16. 16.

    Cf., e.g., Butkovski & Co. v. Gat, CA 692/86, 44(1) PD 57 (10 December 1989) – the case concerned an unsigned document, containing the location of the real estate in Tel Aviv, the price and schedule of payments, however no information regarding the mode of securing 90 % of the price, that were to be paid months after the signing of the proper contract, that the parties had agreed would be drafted by a lawyer. The contract has never been concluded. Instead, the land was eventually sold to a third party for a lower price, and the disappointed plaintiff initiated proceedings demanding compensation for breach of contract. The Supreme Court held that the unsigned document sufficed, and remanded the case to the District Court to determine the quantity of damages.

  17. 17.

    Einstein v. Ossi Ltd., Application for Permission to Appeal 2371/01, 57(5) PD 787 (31 July 2003).

  18. 18.

    In Israel, information regarding the sale of land and the sale price are made readily available to the public by the Betterment Tax authorities.

  19. 19.

    CA 8728/07, Nevo electronic database (15 July 2010).

  20. 20.

    The considerations that the Court should take into account in such cases are further elaborated in para. 4.3.2 infra.

  21. 21.

    Uliel v. Adler, Civil Case (District Court, Haifa) 10103-11-13, Nevo electronic database (9 December 2013).

  22. 22.

    Sonnenschein v. Brothers Gabsu Ltd., CA 702/89, 42(2) PD 278 (12 June 1988); Klammer v. Guy, CA 986/93, 50(1) PD 185 (12 June 1996). In the latter case, the contract had been partially performed. It is submitted that performance by the parties should substitute the need for a written document.

  23. 23.

    Kal Binyan Ltd. v. A.R.M. Ra’ananah Ltd., 56(3) PD 289 (17 February 2002). In this case, the defendant, a private company, made a request for proposals for construction works. The plaintiff was the lowest bidder, the terms of the contract were negotiated by the company management, however the company’s board of directors refused to approve the contract, a matter which should have been a pure formality, according to the Supreme Court. Thereafter, a contract was concluded with a company that had not participated in the bid. The Supreme Court held that, once the terms of the contract had been negotiated and concluded, the defendant could no longer back out of the contract. By doing so, the defendant acted in bad faith. Since the terms of the contract with the plaintiff had already been agreed, and it was just the refusal of the defendant’s board of directors that prevented the contract from coming into effect, the Court held that §12(b) should not bar an award of expectation damages, ie, the profits that the plaintiff had expected to make by performing the work.

  24. 24.

    State of Israel – Ministry of Construction and Housing v. Apropim Housing and Promotion (1991) Ltd., CA 9073/07, Nevo electronic database (3 May 2012).

  25. 25.

    Zalski and Navi v. The Local Committee for Construction and Building, Rishon Le-Zion, CA 5610/93, 51(1) PD 68 (7 April 1997).

  26. 26.

    Cf. Sh.G.M. Parking Ltd. v. The State of Israel, CA 290/80, 37(2) PD 633 (25 May 1983). That case concerned the use made by a State entity, during the 1973 Yom Kippur War of the parking lot, without permission. The Supreme Court held that the State entity was a trespasser. Since the plaintiff incurred no losses (during the war the parking lot was nearly empty, so the trespassing cars did not prevent other cars from parking there), it brought proceedings (successfully) for the sums that the State should have paid for the use it made of the property; cf. Herman (2006), 327 et seq., with further references.

  27. 27.

    Supra n. 6.

  28. 28.

    Supra n. 19.

  29. 29.

    CA 280/73, 24(1) PD 597 (23 December 1974). Cf. Grosskopf and Medina (2009).

  30. 30.

    Supra n. 19.

  31. 31.

    This is the Talmudic expression for the principle that a wrongdoer should not profit thereby.

  32. 32.

    Cf. Friedmann (1998), para. 17.1, 595; Friedmann’s book, Chap. 17, 594–601, entitled “Restitution because a sinner is not rewarded”, provides an analysis of this head of restitution in Israeli law, with further references to Israeli and foreign case law and legal literature.

  33. 33.

    Levy-Weinreb (2013).

  34. 34.

    Friedmann (1998), para. 15.12 et seq.

  35. 35.

    Supra n. 6.

  36. 36.

    A.Sh.I.R. v. Forum Accessories and Consumer Goods Ltd., CA 5768/94 52(4) PD 289 (23 September 1998).

  37. 37.

    The difference between full fledged IP rights and unregistered ones has been underlined in a recent Supreme Court decision – Merck & Co Inc v Teva Pharmaceutical Industries Ltd, Application for Permission to Appeal 6025/05 (19 May 2011), holding that, as long as the patent has not been granted, its use cannot be enjoined on the basis of patent law, and that, by relying on the registration files of innovative medicines for the registration of generic medicines during the pre-grant period, the Ministry of Health did not misappropriate Merck’s trade secret, in the sense of the Commercial Torts Law. Until the patent is granted the plaintiff has no property right that Israeli law protects. If a patent is eventually granted, the competitor, who had marketed the patented product in the interim period, may end up paying the patent owner infringement damages, retroactively from the date of the application. On the basis of the regulation provided by the Patent Law, on the one hand, and the Unjust Enrichment Law, on the other, the Court concluded that unjust enrichment law should not be integrated into the patent law rules with respect to the issue under consideration. It is noteworthy that under Israeli law the grant of a patent may take considerable time, since opposition to a patent may be filed and considered following the submission of the application, prior to its grant.

  38. 38.

    Friedmann (1998), para. 15.18 et seq.

  39. 39.

    Licht (2013), 272 et seq.

  40. 40.

    Lieberman v. Tadbik Ltd., CA 10137/05, Nevo electronic database (14 August 2008); cf. the analysis with further references by Licht (2013), 281 et seq.

  41. 41.

    Licht (2013), 286 et seq.

  42. 42.

    Klein v. Balas, attorney-at law and CPA, CA 4845/04, Nevo electronic database (14 December 2006).

  43. 43.

    By Licht (2013), para. 3.3, at 288 et seq.

  44. 44.

    Tsafrir (2005), 177–184.

  45. 45.

    Tsafrir (2005), 179. Nevo electronic database was searched for such cases on 2 April 2014 – TE.

  46. 46.

    Gal and Israeli (2012), at 22 et seq., 31 et seq.

  47. 47.

    State of Israel v. Ohalecha Ya’akov Ltd., Criminal Case (Jerusalem) 209/96, PM [5762–2002](1), 493, at 495–496 (17 December 2012).

  48. 48.

    Cf. in general, regarding the difficulties facing private claimants in bringing civil proceedings Gal and Israeli (2012), 31 et seq.; cf., in particular, the difficulties faced by Karmit as a result of the injunction obtained by Straus Ltd. enjoining the Director General of the Israel Antitrust Authority from granting access to Karmit to the report the Authority had made in that case, concluding, on the basis of ample evidence, that Straus-Elite had abused its monopolistic position in the Israeli market (Elite, which later merged with Straus, was declared a monopoly in the chocolate market by the Director-General of the Antitrust Authority on 26 March 1989) to prevent Karmit from marketing Cadbury chocolate in Israel – Karmit v. Straus, Civil Case (Magistrate Court, Tel Aviv) 23419/08, Nevo electronic database (24 May 2011). The criminal case, initiated by the Antitrust Authority, was settled for ca. one million USD (approved by the Restraints of Trade Tribunal, 10 January 2007), notwithstanding the very harsh report prepared at the Authority on the case. In 2010, on the basis of additional evidence, Karmit initiated civil proceedings against Straus – Karmit v. Strauss, Civil Case (District Court, Central District) 38852-01-10, claiming that its losses (including expected profits) were ca. 50 million NIS, but, to limit court fees, it limited the claim to 22 million NIS (ca. 5.5 million USD). Cf., further, Levy-Weinreb (2014).

  49. 49.

    Regarding disgorgement under company law, cf. para. 4.7 supra.

  50. 50.

    The Israeli trust differs from the common law trust, in that it defines (§1) a trust as a “relationship to any property by virtue of which a trustee is bound to hold the same, or to act in respect thereof, in the interest of a beneficiary, or for some other purpose”. The Supreme Court has held that the said “relationship” need not be ownership, and that exercise of control suffices. In fact, a leading commentary expressly warns against the risks of transferring title to trustees – cf. Kerem (2004), 7–11, stating specifically that, as a general rule, one should refrain from transferring title in the trust assets to the trustee (p. 9) and that one should only do so when strictly necessary (p. 11).

  51. 51.

    For a critical analysis of the Israeli case law on disgorgement of profits and tracing in the context of fiduciary relations cf. Licht (2013), paras. 4.3.1 et seq., 312–373. Licht criticizes especially the following in Israel of outdated English law, distinguishing between, on the one hand, “following” which is proprietary in nature, and therefore governed by property law, and “tracing” which is quasi-proprietary, and governed by unjust enrichment law, on the other – Licht (2013), 318 et seq., referring to the Supreme Court’s decision in Canaan v. US Government, Further Hearing 2568/97, 57(2) PD 632, 673 (20 February 2003).

  52. 52.

    Cf. part 2 supra.

  53. 53.

    Canaan v. US Government, supra n. 51, with further references to pre-1980 Israeli precedents in this matter.

  54. 54.

    Kossoy v. Bank Feuchtwanger, CA 817/79, 38(3) PD 253.

  55. 55.

    Cf., Kretin v. Ateret Securities (2000) Ltd., CA 3654/97, 53(3) PD 385 (27 June 1999).

  56. 56.

    Ben-Tal v. Ben-Tal, CA 578/75, 31(1) PD 57 (21 September 1976); Friedmann considers that such an expense may be allowed, depending upon the nature of the illegality, but that, in any case, it will be up to the defendant to prove that the profits would not have been made without making the illegal payment. If there is any doubt about it, deduction of the expenditure should not be allowed – Friedmann (1998), para. 18.6.

  57. 57.

    Kretin v. Ateret Securities (2000) Ltd., CA 3654/97, 53(3) PD 385 (27 June 1999).

  58. 58.

    Eg, in defamation cases – Haaretz v. Mizrahi, CA 670/79, 41(2) PD 169 (12 April 1987), Azur v. Can West Global Communications Corp., CC (Tel Aviv) 1702/07, Nevo electronic database (20 June 2012); intentional harm to person and to property – eg, Rabinovich v. Sela Ltd., CA 277/55, 12 PD 1261(17 July 1958); mishandling of human remains – Ben Zvi v. Prof. Yehuda Hiss, CA 4576/08, Nevo electronic database (7 July 2011).

  59. 59.

    Seiman v. Komeran, CA 9225/01, Nevo electronic database (13 December 2006).

  60. 60.

    For an in-depth study of the Law, including its legal history, cf. Gabbay (2012).

  61. 61.

    Decisions of the Administrative Enforcement Committee (in Hebrew) are available on http://www.takdin.co.il/searchg/\%D7\%94\%D7\%95\%D7\%95\%D7\%A2\%D7\%93\%D7\%94\%20\%D7\%9C\%D7\%A2\%D7\%99\%D7\%A6\%D7\%95\%D7\%9D\%20\%D7\%9B\%D7\%A1\%D7\%A4\%D7\%99\%20\%D7\%9E\%D7\%A9\%D7\%A8\%D7\%93\%20\%D7\%94\%D7\%90\%D7\%95\%D7\%A6\%D7\%A8.html

  62. 62.

    Gabbay (2012), 282 et seq.

  63. 63.

    Gabbay (2012), at 283.

  64. 64.

    Cf. Securities Authority, Minutes of Authority meeting no. 2013–4 of 12 May 2013, part 3 – Regulations regarding compensation of infringement victims.

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Einhorn, T. (2015). Disgorgement of Profits in Israeli Law. In: Hondius, E., Janssen, A. (eds) Disgorgement of Profits. Ius Comparatum - Global Studies in Comparative Law, vol 8. Springer, Cham. https://doi.org/10.1007/978-3-319-18759-4_17

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