Crimson SRL and Anor v Claudia Shoes Pty Ltd and Ors (No.7)

[2008] FMCA 109

FEDERAL MAGISTRATES COURT OF AUSTRALIA

CRIMSON SRL & ANOR v CLAUDIA SHOES PTY LTD & ORS (No.7) [2008] FMCA 109

TRADE PRACTICES – Passing off – assessment of damages – loss of profits – damage to reputation – exemplary damages.

Fair Trading Act 1987 (NSW), ss.42, 44(e), 44(f)
Trade Practices Act 1974, ss.52, 53(c), 82
Federal Court Rules 1979, O.12 r.4(2)
Federal Magistrates Court Rules 2001, rr.1.03, 1.05

Amalgamated Mining Services Pty Ltd v Warman International Ltd (1992) 111 ALR 269
Aristocrat Technologies Australia Pty Ltd v DAP Services (Kempsey) Pty Ltd (in liq) (2007) 157 FCR 564
Autodesk Australia Pty Ltd v Cheung (1990) 94 ALR 472
Brabazon v Western Mail Ltd (1985) 8 FCR 122
Crimson SRL & Anor v Claudia Shoes Pty Ltd & Ors(No.3) [2007] FMCA 1555
Ductline Pty Ltd v Arcric Investments Pty Ltd (1995) 32 IPR 419
Flamingo Park Pty Ltd v Dolly Dolly Creation Pty Ltd (1986) 65 ALR 500
Gates v City Mutual Life Assurance Society Ltd (1986) 160 CLR 1
Lamb v Cotogno (1987) 164 CLR 1
Microsoft Corp v Goodview Electronics Pty Ltd (2000) 49 IPR 578
Placer (Granny Smith) Pty Ltd v Thiess Contractors Pty Ltd (2003) 77 ALJR 768
Prince Manufacturing Inc v ABAC Corp Australia Pty Ltd (1984) 4 FCR 288
Zero Tolerance Entertainment Inc v Venus Adult Shops Pty Ltd [2007] FMCA 155

First Applicant: CRIMSON SRL

Second Applicant: LYNCH FASHION MARKETING PTY LTD (ACN 010 466 485)

First Respondent: CLAUDIA SHOES PTY LTD
(ACN 050 235 491)

Second Respondent: CLAUDIA ASSERAF

Third Respondent: SOLOMON ASSERAF (AKA SALAMON ASSERAF)

Fourth Respondent: YL IMAGE HOUSE PTY LTD
(ACN 113 824 230)

Fifth Respondent: XIAO LIN DONG

Sixth Respondent: YI LI QIAN

File number: MLG 1432 of 2006

Judgment of: Riley FM

Hearing date: 29 November 2007

Date of last submission: 29 November 2007

Delivered at: Melbourne

Delivered on: 29 February 2008

REPRESENTATION

Counsel for the Applicants: Michael Wise

Solicitors for the Applicants: Middletons

Counsel for the Fourth and Fifth Respondents: Marcus Young

Solicitors for the Fourth and Fifth Respondents: Dixon Holmes Du Pont

ORDERS

1. The fourth and fifth respondents jointly and severally pay the first applicant $780.20 by way of general damages for loss of profit.

2. The fourth and fifth respondents jointly and severally pay the second applicant $830.00 by way of general damages for loss of profit.

3. The fourth and fifth respondents jointly and severally pay the applicants jointly and severally $10,000 by way of general damages for loss of reputation and goodwill.

4. The fourth respondent pay the applicants jointly and severally exemplary damages of $30,000.

FEDERAL MAGISTRATES
COURT OF AUSTRALIA AT
MELBOURNE

MLG 1432 of 2006

CRIMSON SRL

First Applicant

And

LYNCH FASHION MARKETING PTY LTD (ACN 010 466 485)

Second Applicant

And

CLAUDIA SHOES PTY LTD (ACN 050 235 491)

First Respondent

And

CLAUDIA ASSERAF

Second Respondent

And

SOLOMON ASSERAF (AKA SALAMON ASSERAF)

Third Respondent

And

YL IMAGE HOUSE PTY LTD (ACN 113 824 230)

Fourth Respondent

And

XIAO LIN DONG

Fifth Respondent

And

YI LI QIAN

Sixth Respondent

REASONS FOR JUDGMENT

Background

1. This is the assessment of damages following findings in Crimson SRL & Anor v Claudia Shoes Pty Ltd & Ors(No.3) [2007] FMCA 1555 that the fourth respondent had:

   a)in trade or commerce engaged in misleading and deceptive conduct or conduct that was likely to mislead and deceive contrary to the provisions of s.52 and s.53(c) of the Trade Practices Act 1974; and

   b)committed the tort of passing off.

   and the fifth respondent, a director of the fourth respondent, had:

   c)in trade or commerce engaged in misleading and deceptive conduct or conduct that was likely to mislead and deceive contrary to the provisions of s.42 and s.44(e) and (f) of the Fair Trading Act 1987 (NSW);

   d)aided, abetted, counselled or procured the contraventions by the fourth respondent of s.52 and s.53(c) of the Trade Practices Act 1974; and

   e)been directly or indirectly knowingly concerned in, or party to, the contraventions by the fourth respondent of s.52 and s.53(c) of the Trade Practices Act 1974.

2. The applicants seek:

   a)general damages for loss of profits;

   b)general damages for loss of reputation and damage to goodwill; and

   c)exemplary damages.

Loss of profits

1. In assessing damages under s.82 of the Trade Practices Act 1974 for infringements of s.52 of that Act, the proper approach is to compare the position the applicant is in with the position that it would have been in if the misleading or deceptive conduct had not occurred.[1] If the infringement under s.52 also constituted the tort of passing off, as it did in this case, the appropriate measure of damages is that applied under the general law of passing off.[2] Damages may be recovered even though they are not capable of precise proof or calculation and even though a claimant does not produce evidence of particular losses from particular transactions, provided that the damage could be expected to result in the normal course of things from a particular type of conduct.[3]

   [1] Gates v City Mutual Life Assurance Society Ltd (1986) 160 CLR 1 at 13 – 14.

   [2] Prince Manufacturing Inc v ABAC Corp Australia Pty Ltd (1984) 4 FCR 288 at 294.

   [3] Prince at 294.

2. The first applicant is the manufacturer of high-end Italian fashion garments with the label PianuraStudio.  The second applicant is the Australian distributor of PianuraStudio garments.

3. The applicants gave unchallenged evidence as follows:

   a)the first applicant makes average profits of $84 on a skirt, $90 on a dress and $108 on a jacket;

   b)the second applicant makes an average profit of $100 on each PianuraStudio garment that it sells to retailers;

   c)

   a Ms Mulham observed about 40 to 50 PianuraStudio branded garments in the fourth respondent’s Centrepoint store on

   
   31 August 2006

   ;

   d)a Mr Lynch observed 12 to 14 PianuraStudio branded garments in the fourth respondent’s St Ives store on 10 January 2007; and

   e)

   Mr Lynch observed approximately 25 PianuraStudio branded garments at the fourth respondent's Centrepoint store on

   
   10 January 2007

   .

4. Based on their average profits, the applicants calculated that they had lost a total of $16,102, consisting of:

   a)$8,730 in respect of the approximately 45 garments seen by Ms Mulham at Centrepoint;

   b)$2,522 in respect of the approximately 13 garments seen by Mr Lynch at St Ives; and

   c)$4,850 in respect of the approximately 25 garments seen by Mr Lynch at Centrepoint.

5. The applicants observed that they had been unable to calculate their loss of profits more accurately as the fourth and fifth respondents (“the respondents”) had failed to discover any records of their purchases and sales of PianuraStudio branded garments, notwithstanding orders for discovery and a notice to produce. 

6. The applicants relied on the decision of Wilcox J in Autodesk Australia Pty Ltd v Cheung (1990) 94 ALR 472 to say that in assessing damages under s.82 of the Trade Practices Act 1974 for loss of profit, it was proper to take the licence fee approach that is sometimes used in copyright cases.  At 75, his Honour said:

   In a case where the court may infer that, presented with a choice between paying the licence fee and not using the work, the infringer would have paid the licence fee, the [licence fee] approach is a logical one.  Ex hypothesi the copyright owner has been deprived of a licence fee.  But, where this inference cannot be drawn, it is much more difficult to say that the damage sustained by the copyright owner is equal to a licence fee.  No assumption can be made that, if forced to obtain a licence, the defendant would have copied the work, or copied it to the same extent.

7. The applicants said that the evidence was that the respondents had continued to sell counterfeit PianuraStudio branded garments after being put on notice that their conduct was infringing and that damages would be sought.  From this, the applicants argued, it was proper to infer that the respondents were willing to pay the notional licence fee, equivalent to the applicants’ loss of profits, or alternatively that knowledge should be imputed to them that they would be required to pay that amount by way of damages.  The applicants argued that, under the licence fee approach, the appropriate amount of damages for loss of profit was $16,102.

8. Alternatively, the applicants submitted that, if the licence fee approach were rejected, the proper approach would be to treat the damages as being at large and assess them as a jury would.[4]  In that event, the applicant submitted that the same amount, being $16,102, would be the appropriate amount for general damages for loss of profit.

   [4] Autodesk at 76.

9. The applicants noted that in Ductline Pty Ltd v Arcric Investments Pty Ltd (1995) 32 IPR 419, Finn J awarded damages for loss of profit notwithstanding that the evidence was slender and the quantification involved “an uncomfortable degree of speculation and guesswork”.[5] His Honour noted at 428 that the applicant's claim in that case:

   … was based on the clearly untenable assumption … that all parts sold by the respondents to wholesalers … constituted, on the resale, lost sales to the applicant.

   Ultimately, his Honour awarded damages of 20% of the infringer's sales, saying it was a very generous estimate of the sales lost by the applicant by virtue of the infringement.[6]

   [5] Ductline at 424.

   [6] Ductline at 428.

10. Consistently with Ductline, the respondents argued that it was a false assumption that if the fourth respondent had not bought counterfeit PianuraStudio garments, it would have bought genuine garments from the applicants.  The respondents noted that the evidence suggested that the fourth respondent had obtained the counterfeit garments for one third of the price that the second applicant sold genuine PianuraStudio garments to retailers.  The respondents noted that there was no evidence that the respondents had ever bought genuine PianuraStudio garments and argued that there was no reason to suppose that they would have bought genuine PianuraStudio garments from the applicants if counterfeits had not been available. 

11. Moreover, the respondents argued that the applicants may well have double counted the 25 garments that Mr Lynch saw at the Centrepoint store, in that they may have been the remainder of the 40 to 50 garments that Ms Mulham saw there a few months earlier.    That may be so.  However, this is largely a problem of the respondents own making, given that they provided no discovery of documents concerning their purchases and sales.   I also note that it is a distinct possibility that the fourth respondent sold many more counterfeit PianuraStudio branded garments than were observed at its premises.  In all the circumstances, I consider that it is appropriate to proceed on the basis that the fourth respondent sold all of the PianuraStudio branded garments that were seen at its premises at various times by Mr Lynch and Ms Mulham. 

12. The respondents argued that the applicants had produced no evidence of their actual loss.  For example, there was no evidence of a reduction in sales of PianuraStudio garments at an outlet close to the fourth respondent’s St Ives store.  However, I accept the applicants’ argument that such evidence would be of minimal value, as there can be a multitude of reasons for variations in sales figures.

13. I note that in Placer (Granny Smith) Pty Ltd v Thiess Contractors Pty Ltd (2003) 77 ALJR 768 Hayne J, with whom Gleeson CJ, McHugh and Kirby JJ agreed, said at [37] to [38] that:

    Placer undoubtedly bore the burden of proving not only that it had suffered damage as a result of Thiess Contractors' breach of contract, but also the amount of the loss it had sustained. It goes without saying that it had to prove these matters on the balance of probabilities and with as much precision as the subject matter reasonably permittedhttp:// - #.

    It may be that, in at least some cases, it is necessary or desirable to distinguish between a case where a plaintiff cannot adduce precise evidence of what has been lost and a case where, although apparently able to do so, the plaintiff has not adduced such evidence. In the former kind of case it may be that estimation, if not guesswork, may be necessary in assessing the damages to be allowed. References to mere difficulty in estimating damages not relieving a court from the responsibility of estimating them as best it can may find their most apt application in cases of the former rather than the latter kind. This case did not invite attention to such questions. Placer sought to calculate its damages precisely. (footnotes omitted)

14. Following Placer, the Black CJ and Jacobson J said in Aristocrat Technologies Australia Pty Ltd v DAP Services (Kempsey) Pty Ltd (in liq) (2007) 157 FCR 564 at [34] to [36]:

    34 That is not to say thatAristocratcould not have discharged the onus of proving its loss. As Vidtech and Mr and Mrs Parry were found to be wrongdoers damages should be liberally assessed, in the sense that inferences will be more readily drawn against them, but the object remains to compensate Aristocrat, not to punish the respondents … .

    35 If a court finds that damage has occurred it must do its best to quantify the loss, even if some degree of speculation and guess work is involved … . But …  this principle applies only where a court finds that loss or damage has occurred; it is not enough merely to show wrongful conduct by a defendant. …

    36 In Placer at [37] – [38] Hayne J pointed to the stricter approach taken by the courts in assessing damages where a plaintiff has not adduced evidence that was apparently available to prove the loss. Rares J has set out the relevant passages from Placer at [101] of his reasons for judgment. We agree with Rares J that it was open to Aristocrat to prove the volume and prices of sales in overseas markets. We also agree that it was artificial to suggest that Aristocrat lost the value of a sale for each of the 400 infringing sales by Vidtech.

    37 Nevertheless, it may have been open toAristocrat to contend that it lost some proportion of the sales made by Vidtech which would otherwise have been made by Aristocrat  or a relevant member of the Aristocrat  Group. This approach was adopted by Emmett J in Sony Computer Entertainment Aust Pty Limited v Stirling [2001] FCA 1852 at [8]. His Honour did so notwithstanding that the respondent in that case sold counterfeit games for $15 whereas the sale price for the genuine article was $45 – $50.

    38 But the difficulty in adopting that approach here is that it was not adopted by Aristocrat. Its case was founded solely on the proposition that it lost the value of 400 sales and that proposition cannot be sustained.

15. In view of the fact that the respondents had never bought genuine PianuraStudio garments from the applicants, and in view of the fact that the counterfeit garments the respondents bought no doubt cost considerably less than the genuine garments, I am unable to infer that, given the choice, the respondents would have paid the price of genuine PianuraStudio garments.  I reject the argument that the respondents should be regarded as being willing to pay a licence fee on the basis of imputed knowledge.  Accordingly, it is not appropriate to apply the licence fee approach.  Damages therefore are to be assessed as a jury would assess them. 

16. I accept that the fourth respondent would not have bought genuine PianuraStudio garments from the applicants.   I also accept that most consumers who bought counterfeit PianuraStudio branded garments at a very substantial discount would not have bought genuine PianuraStudio garments at their full price.  Accordingly, I cannot accept that every counterfeit PianuraStudio garment sold by the respondents represented a lost sale to the applicants.  

17. In Aristocrat there was no argument that damages should be assessed on the basis of a proportion of the respondent’s sales representing lost sales to the applicant.  However, in this case the applicants argued that their damages for loss of profits should be assessed on the basis of what seems to the court to be the normal result of the respondents’ conduct.  In terms of Placer, I accept that this is a case where the applicants could not have produced reasonably useful evidence that a certain proportion of the sales by the respondents of counterfeit PianuraStudio garments resulted in lost sales to the applicants.  It seems to me that there are so many manufacturers and retailers in the clothing industry, and clothing purchases are based on so many variables, including factors that lead to impulse buying, that evidence of changes in sales volumes could not cogently be tied to the presence of cheap counterfeits in the marketplace. 

18. I am prepared to infer that some consumers who would have bought genuine PianuraStudio garments at their full price would have bought items that appeared to be genuine PianuraStudio garments at a much lower price, with the result that the applicants were deprived of some sales.  Doing my best, and given the price differential between genuine garments and counterfeit garments, I consider that the applicants would have been deprived of sales of about 10% of the 83 PianuraStudio branded garments seen in the fourth respondent’s shops.  

19. The first applicant made an average profit of $94 on skirts, jackets and dresses.  Multiplying that figure by 83 and dividing the result by 10 gives a loss of profit of $780.20.  The second applicant made an average profit of $100 on PianuraStudio branded garments.  Multiplying that figure by 83 and dividing the result by four gives a loss of profit of $830.00.  In my view, it is appropriate to award general damages for loss of profit to the applicants in those amounts.  There will be orders accordingly.

Loss of reputation and goodwill

1. Damages can be awarded under s.82 of the Trade Practices Act 1974 for loss of reputation arising from misleading or deceptive conduct in contravention of s.52 of that Act.[7] The same principles apply in assessing damages under s.82 and the law of passing off.[8]  In Flamingo Park Pty Ltd v Dolly Dolly Creation Pty Ltd (1986) 65 ALR 500 at 525, Wilcox J said:

   Any assessment of damages for loss of reputation must necessarily be made with a broad brush; as in a defamation case a court can do no more than fix a sum of money which, in the whole of the circumstances, appears to be proportionate to the damage which is being incurred.  The greater the reputation, the more vulnerable it is to damage.  In the present case the damage was in the area of greatest sensitivity; the applicant’s reputation for excellence and for limitation of output.  I think that the damage was likely to have been considerable and that an appropriate sum of money to allow for damage to reputation is $30,000.

   [7] Brabazon v Western Mail Ltd (1985) 8 FCR 122 at 718-720 per Toohey J.

   [8] Flamingo Park Pty Ltd v Dolly Dolly Creation Pty Ltd (1986) 65 ALR 500 at 525.

2. The applicant argued that Flamingo Park was similar to the present case.  In Flamingo Park, an Australian fashion designer, Jenny Kee, designed her own fabrics for exclusive use in garments designed for sale under her own label.  Ms Kee engaged Mercedes Textiles to manufacture fabric in accordance with Ms Kee's design.  Mercedes Textiles manufactured the fabric and provided it to Ms Kee.  However, Mercedes Textiles also manufactured a large quantity of additional fabric bearing Ms Kee’s design which it sold to third parties who used the fabric to make garments to their own designs.  The fabric, as part of its design, bore Ms Kee's signature.  It was accepted that the garments designed by the third parties were inferior to those designed by Ms Kee.

1. In the present case, the unchallenged evidence was that the PianuraStudio label had a substantial reputation in Australia, the counterfeit garments bore the PianuraStudio label and they were of inferior quality. It was also said that the applicants sought to ensure strict quality control of their garments and the presence on the market of counterfeit garments of inferior quality was damaging to their reputation. 

2. There was evidence that genuine PianuraStudio garments were being sold at $739 and $899, being four or five times the price of the counterfeit garments sold by the fourth respondent.  The applicant argued that the price differential between genuine and counterfeit garments in high end fashion also damaged the reputation in the relevant label because:

   a)a person who bought a genuine garment at the full price would feel cheated if they saw what appeared to be the same garment at a much lower price in another store;

   b)the cachet attached to owning expensive garments is lessened when there are cheap counterfeits available;

   c)for these reasons, retailers would be reluctant to stock genuine product when counterfeit product was on the market, and the applicants would thus sell less of their product to retailers.

3. The applicants argued that PianuraStudio was a larger operator with more outlets than in Flamingo Park and therefore its reputation was greater and the quantum of damages should be greater.  I do not accept that argument.  Reputation is not simply a function of size.  Tiffany's jewellers, for example, has a much greater reputation than a jeweller which has an outlet in every shopping mall.  Similarly, Rolls Royce has a greater reputation than Toyota, although there are undoubtedly more Toyota dealerships around the world than Rolls Royce dealerships.

4. The applicants also argued that, in view of the decrease in the value of money since Flamingo Park was decided, much more should be awarded for loss of reputation in this case than was awarded in Flamingo Park.  In that case, $30,000 was awarded for loss of reputation, in the context of lost sales being assessed at $8,762.

5. The respondents argued that the applicants had produced no evidence whatsoever that their reputation had been affected by the conduct of the respondents.  They noted that, in an affidavit sworn on 18 December 2006, evidence was given that a retailer of PianuraStudio garments in St Ives was then considering cancelling its forward orders.  However, there was no evidence that those or any other orders were in fact cancelled. 

6. The respondents noted that there was evidence that the PianuraStudio brand was sold in 30 countries around the world and in 32 outlets in Australia.  There was also evidence of a significant marketing campaign in Australian and international fashion magazines. However, there was no evidence as to the value of sales, and no evidence that the PianuraStudio label was even profitable for either of the applicants.

7. The respondents sought to distinguish Flamingo Park from the present case on the basis that Ms Kee was a very high profile individual who had an enormous reputation, notwithstanding that she produced a very small quantity of goods.  In fact, the respondents submitted, her reputation was so high because her production was strictly limited.  The respondents noted that the applicants had withheld their sales figures.  However, the respondents submitted that the applicants had clearly engaged in mass marketing on a world scale.  I take that submission to be confined to the first applicant.  The respondents also argued that there was no evidence independent of the applicants about the level of reputation of the PianuraStudio brand.

8. The respondents accepted that the court could properly conclude that there had been a small amount of damage to the applicants’ reputations.  However, the respondents argued that in the absence of proper evidence about the extent of the applicants’ reputations and the extent of the damage to them, the court should not award more than $10,000 in general damages for loss of reputation.

9. The applicants noted that there had been no cross-examination on the evidence that went to reputation. The applicants sought to argue by analogy with the assessment of damages against the first, second and third respondents. The respondents in the present matter sought to distinguish that assessment. As it happens, the assessment of damages against the first, second and third respondents has been set aside pursuant to r.16.05(2)(a) of the Federal Magistrates Court Rules 2001.  It is, accordingly, unhelpful. 

10. The respondents also argued that the applicants’ reputations had already been diminished by the actions of the first, second and third respondents before the fourth and fifth respondents had themselves inflicted any damage on the applicants’ reputations.  In theory, there may be some merit in this argument.  However, neither the applicants nor the respondents have put forward sufficiently detailed evidence for this argument to be fully factored in to any assessment of damages.

11. I accept that no independent evidence of the applicants’ reputations was advanced.  However, there was no cross-examination of the applicants’ own evidence of their reputations.  In the circumstances, I accept that the applicants have substantial reputations in Australia in the high end fashion market.  I also accept that the presence of cheap, counterfeit garments of inferior quality, bearing the PianuraStudio label, would damage the reputation of the applicants, as manufacturers and distributors of genuine PianuraStudio garments.  However, in addition, I accept the respondents’ point that it is difficult to determine a figure for damage to reputation when the evidence on damage to reputation is as vague as it is in the present case. 

12. I note that in Prince Manufacturing Inc v ABAC Corp Australia Pty Ltd (1984) 4 FCR 288 at 294, Beaumont J said:

    … damages which are not capable of precise proof and calculation but which could be expected to result in the normal course of things from a particular type of conduct … may be awarded even though a claimant does not produce evidence of particular losses from particular transactions.

13. In Ductline, at 429, Finn J was prepared to award damages for loss of profit and damage to reputation notwithstanding the uncomfortably slender evidence before the court. I also note that Wilcox J said in Flamingo Park that:

    Any assessment of damages for loss of reputation must necessarily be made with a broad brush …

14. In all the circumstances of this case, I consider that an appropriate amount for damages for the applicants’ loss of reputation and goodwill caused by the respondents is $10,000.  Orders will be made accordingly.

Exemplary damages

1. The applicants seek exemplary damages against the fourth respondent for passing off.

2. In Prince at 526, Wilcox J noted that:

   ... exemplary damages may be awarded, without rigid limitation as to categories, to punish a defendant whose conduct has been high-handed, insolent, vindictive, malicious or in contumelious disregard of the plaintiff's rights.  …

   ... passing off is a tort and it is not difficult to think of circumstances in which a passing off may be in contumelious disregard of the plaintiff's rights.

   In that case, his Honour considered that the passing off was accidental, and, accordingly, considered that there was no occasion for the award of exemplary or aggravated damages.

3. In Amalgamated Mining Services Pty Ltd v Warman International Ltd (1992) 111 ALR 269, Wilcox J said that the actions of the respondents were of “breathtaking flagrancy”. In that case, over a period of 10 years, engineering drawings were knowingly copied and sold in breach of the owner’s copyright. His Honour said that, “the courts must take a severe view in cases as blatant as this.”

4. In Microsoft Corp v Goodview Electronics Pty Ltd (2000) 49 IPR 578, Branson J said that flagrant conduct for the purposes of s.115(4) of the Copyright Act 1968 was conduct that was deliberate, deceitful and serious.  Her Honour said in that case that the respondents had engaged in a deliberate pattern of conduct, they had recognised the illegality of the enterprises they were engaged in and they had actively sought to conceal it.  Furthermore, they had acted with a calculated disregard for the applicant’s rights in pursuit of their own profits.  In those circumstances, her Honour considered it appropriate to award additional damages of $500,000 to “indicate the court’s disapproval of the conduct of the respondents.”

5. In Aristocrat Technologies Australia Pty Ltd v DAP Services (Kempsey) Pty Ltd (in liq) (2007) 157 FCR 564, Black CJ and Jacobson J said at [41] that the principles for the award of aggravated and exemplary damages at common law correspond to the principles for the award of additional damages under s.115(4) of the Copyright Act 1968. Their Honours said at [43]-[44] that the objectives of additional damages under s.115(4) of the Copyright Act 1968 included providing a deterrent and imposing a penalty.  At [45], their Honours said that there need not be any proportionality between the amount of compensatory damages and the amount of additional damages.  Their Honours awarded $1 in compensatory damages, because the applicant did not successfully quantify its loss, and $200,000 in additional damages.

6. In Lamb v Cotogno (1987) 164 CLR 1 at 9, the High Court said that the deterrent aspect of an award of exemplary damages in an action in tort did not only concern the specific wrongdoer who was the respondent in the current action but also other potential wrongdoers who might be minded to engage in the same sort of wrongful conduct.

7. In Autodesk Australia Pty Ltd v Cheung (1990) 17 IPR 69, Wilcox J said at 78 that “any assessment [of exemplary damages] must be arbitrary, in the sense that it is impossible to demonstrate its correctness by reference to provable fact.” In that case, additional damages were assessed in the sum of $35,000.

8. The applicants relied particularly on the case of Zero Tolerance Entertainment Inc v Venus Adult Shops Pty Ltd [2007] FMCA 155 where additional damages of $150,000 were awarded in a case of copyright infringement. The court was particularly concerned about the prevalence of the sale of unlicensed films and its significant increase in recent years. The court was also concerned about the ease with which films could be copied and sold and the difficulty of detecting and prosecuting copyright infringers in the adult film industry.

9. The applicants argued that exemplary damages of $100,000 were warranted in this case because:

   a)the fourth respondent did not deliver up the counterfeit garments after receiving the letter of demand dated 18 September 2006;

   b)the fourth respondent continued to sell the counterfeit garments after receiving the letter of demand;

   c)the fourth respondent continued to sell the counterfeit garments after the proceedings had been commenced;

   d)the fourth respondent continued to sell the counterfeit garments after the applicant had obtained an injunction restraining the sale of the garments by the fourth respondent;

   e)the fourth respondent supported the illegal activities of the manufacturers of the counterfeit garments by creating a market for such garments;

   f)the fourth respondent sold counterfeit PianuraStudio garments in the same shopping centre where genuine PianuraStudio garments were sold and from this it should be inferred that the fourth respondent knew the difference between the genuine product and the counterfeit products and the potential effect on the businesses of the applicants and the retailers of genuine product; and

   g)the fourth respondent’s conduct was flagrant in the extreme; it was committed over an extended period of time; it was committed after learning of the applicants’ rights; it was committed in cynical disregard of the applicants’ rights for the fourth respondent's own benefit; and

   h)there is a need to deter the fourth respondent and others from conduct of the type engaged in.

10. The fourth respondent argued that exemplary damages could not be awarded in this case because the applicants had not included exemplary damages in their prayer for relief.  The fourth respondent noted that the statement of claim did not seek exemplary damages for passing off or plead any matters that would give rise to exemplary damages. 

11. The fourth respondent referred to Order 12 rule 4(2) of the Federal Court Rules 1979 which provides that:

    Where a party pleading claims exemplary damages, he shall give particulars of the facts and matters on which he relies to establish that claim.

12. As to the substance of the matter, the fourth respondent said that it was not a manufacturer or importer of counterfeit goods but simply a shopkeeper.  The fourth respondent submitted that there was no evidence that it had promoted or encouraged counterfeiting or the passing off of the applicants’ goods.  While the fourth respondent conceded that it had continued to stock infringing garments for three months after receiving the letter of demand from the applicants, it submitted that there was no evidence of any further purchases of counterfeit garments after the letter of demand was received.  The fourth respondent argued that there was no evidence that it was difficult to detect the counterfeiting of high end fashion garments, unlike the pornographic videos considered in Zero Tolerance.

13. The applicants submitted that Order 12 rule 4(2) of the Federal Court Rules 1979 does not apply in this court. The objects of the rules of this court include helping the court to operate as informally as possible and to use streamlined processes. To assist the court, the parties are required by r.1.03 of the Federal Magistrates Court Rules 2001 to avoid undue technicality. Rule 1.05 of the Federal Magistrates Court Rules 2001 provides that those rules are to principally govern the practice and procedure of this court but, if those rules are insufficient or inappropriate, the court may apply the Federal Court Rules.  This court, by design, has minimal rules about pleadings.  I do not consider that it is appropriate in the context of this case to apply Order 12 rule 4(2) of the Federal Court Rules. 

14. Having said that, however, there is an overriding necessity for the parties to be given reasonable notice about the essential features of the case they will have to meet.  In the present case, written submissions were exchanged at about 3 p.m. on the day before the hearing for the assessment of damages.  The applicants’ written submissions clearly stated that the applicants were seeking exemplary damages and set out the facts on which that claim was based, more or less in the terms contained in paragraph 46 above.

15. When the question of the adequacy of the notice of the claim for exemplary damages was raised, the fourth respondent's counsel was asked if he wished to seek an adjournment for the purposes of putting in additional written submissions on exemplary damages.  The fourth respondent said that it was not simply a question of written submissions and the whole assessment of damages hearing may have been approached differently if exemplary damages had been properly pleaded.  However, the fourth respondent's counsel stated clearly that he did not wish to seek an adjournment for any purpose.  In these circumstances, I consider that the fourth respondent was given adequate notice of the claim for exemplary damages.

16. I do not consider that there is sufficient evidence before the court to draw the inference proposed in paragraph 46(f) above. I accept that good retailers probably learn a lot about the products sold by their nearby competitors. However, I am not prepared to infer, simply from the fact that genuine PianuraStudio garments were being sold in the same shopping centre, that the fourth respondent would have known the difference between the genuine product and the counterfeit product and the effect of the sale of counterfeit product on the applicants and retailers of the genuine product. 

17. In relation to the fourth respondent continuing to sell counterfeit garments after the injunction was granted on 20 December 2006 restraining such conduct, I note that the fourth respondent’s solicitor claimed that, due to the Christmas break, he had not notified the fourth respondent about the injunction until mid January 2007.  If that is true, it was very poor conduct on the part of the solicitor.  However, any injunction should be personally served by the party who sought the injunction on the party restrained to avoid issues arising about whether the party restrained was aware of the injunction.  Be that as it may, I am not persuaded that the fourth respondent was aware of the injunction before about 10 January 2007, when a director of the second applicant told the fifth respondent personally about the injunction.  I am not satisfied that the fourth respondent sold any counterfeit garments after that date.

18. Otherwise, I accept the matters set out in paragraph 46 above.  In particular, it was extraordinary that the fourth respondent continued to sell counterfeit garments after receiving a letter of demand that specified the wrongs that were occurring and in circumstances where the fourth respondent has never suggested that the garments were not counterfeit or that its officers believed that they were not counterfeit.  In my view, the circumstances of this case are sufficient for an award of exemplary damages.  It is important that those who have sold counterfeit garments are deterred from selling them in the future, and it is also important that other people who might be tempted to sell counterfeit garments are also deterred from selling them. 

19. In all the circumstances of this case, I consider that the fourth respondent should pay the applicants exemplary damages of $30,000. I will hear the parties on the question of costs.

I certify that the preceding fifty-six (56) paragraphs are a true copy of the reasons for judgment of Riley FM

Associate:  Catherine Wilson

Date:  29 February 2008