Crimson SRL v Claudia Shoes Pty Ltd (No 4)

[2007] FMCA 1728

FEDERAL MAGISTRATES COURT OF AUSTRALIA

CRIMSON SRL & ANOR v CLAUDIA SHOES PTY LTD & ORS (No.4) [2007] FMCA 1728

TRADE PRACTICES – Misleading and deceptive conduct – passing off – quantum of damages.

Trade Practices Act 1974, ss.52, 82

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) 71 IPR 437
Autodesk Australia Pty Ltd v Cheung (1990) 17 IPR 69
Crimson SRL & Anor v Claudia Shoes Pty Ltd & Ors [2007] FMCA 828
Ductline Pty Ltd v Acric Investments Pty Ltd (1995) 32 IPR 419
Flamingo Park Pty Ltd v Dolly Dolly Creations 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 GoodviewElectronics Pty Ltd (2000) 49 IPR 578
Prince Manufacturing Inc v ABAC Corp Australian 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: SALAMAN 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: 16 October 2007

Date of last submission: 16 October 2007

Delivered at: Melbourne

Delivered on: 30 October 2007

REPRESENTATION

Counsel for the Applicants: Michael Wise

Solicitors for the Applicants: Middletons

Advocate for the First, Second & Third Respondents: No appearance

Solicitors for the First, Second & Third Respondents: MW Law

ORDERS

1. The first, second and third respondents pay the first applicant the sum of $2,820 by way of general damages for loss of profits.

2. The first, second and third respondents pay the second applicant the sum of $3,000 by way of general damages for loss of profits.

3. The first, second and third respondents pay the applicants the sum of $60,000 by way of general damages for loss of reputation and goodwill.

4. The first, second and third respondents pay the applicants the sum of $30,000 by way of exemplary damages.

5. The first and second applicants and the first, second and third respondents file and serve any written submissions on costs within 14 days.

6. The first and second applicants and the first, second and third respondents file and serve any written submissions in reply on costs within a further seven days.

7. The question of costs be dealt with on the basis of the written submissions, unless the first, second and third respondents make written application within seven days for an alternative method of dealing with the question of costs.

NOTATION

Pursuant to rule 16.05(2)(a) of the Federal Magistrates Court Rules 2001, the court may vary or set aside a judgment or order made in the absence of a party.

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

SALAMAN 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 judgment concerns the quantum of damages payable by the first, second and third respondents. The position of the fourth, fifth and sixth respondents is being dealt with separately. A summary judgment application was brought by notice of motion filed on 24 May 2007 and returnable on 30 May 2007. The solicitor for the first, second and third respondents appeared on that day to request an adjournment on the basis that his clients had had insufficient time to prepare. The summary judgment application in relation to the first, second and third respondents was adjourned to 15 June 2007. The first, second and third respondents did not appear on that date. The summary judgment application proceeded on an undefended basis. Summary judgment on liability was given against the first, second and third respondents on

   
   

   20 June 2007. The reasons for decision were published as Crimson SRL & Anor v Claudia Shoes Pty Ltd & Ors [2007] FMCA 828.

2. On 20 June 2007, the first, second and third respondents were ordered to give supplementary discovery of documents relevant to the issue of quantum by 29 June 2007 and were ordered to file and serve any affidavits they wished to rely upon in relation to the issue of quantum on or before 3 August 2007. The first, second and third respondents did not file any such affidavits and did not give supplementary discovery. The question of quantum was referred to a mediation scheduled for 3 August 2007. However, the first, second and third respondents cancelled the mediation.

3. The question of quantum was listed for hearing on 23 August 2007. However, an adjournment was granted by consent due to the ill-health of the applicants’ counsel. The solicitor for the first, second and third respondents signed a minute of proposed consent orders providing for the matter to be adjourned for hearing on 16 October 2007 and providing for the first, second and third respondents to file any affidavits they wished to rely on by 15 September 2007. No such affidavits were filed.

4. On 16 October 2007, the solicitor for the first, second and third respondents appeared and again sought an adjournment, claiming that he had not known that the matter was listed for hearing on that date, notwithstanding that he had signed proposed consent orders in which the matter was to be adjourned to 16 October 2007. The application for adjournment was refused for reasons given orally at the time. At that stage, the solicitor for the first, second and third respondents sought leave to withdraw. That leave was granted. Accordingly, the hearing of the question of quantum proceeded on an undefended basis.

5. The applicants claimed general damages, for loss of profit and loss of reputation and goodwill, and exemplary damages.

General damages:  loss of profit

1. In assessing damages under s.82 of the Trade Practices Act 1974 for misleading and deceptive conduct in breach of s.52 of that Act, the proper approach is to compare the position the applicant is in with the position in which he would have been if the misleading or deceptive conduct had not occurred: Gates v City Mutual Life Assurance Society Ltd (1986) 160 CLR 1 at 13-14. Where the contravention of s.52 also constitutes the tort of passing off, the appropriate measure of damages is that under the general law of passing off: Prince Manufacturing Inc v ABAC Corp Australian Pty Ltd (1984) 4 FCR 288. In relation to loss of profit, the calculation is based on the difference between the cost of the relevant item to the applicant and the amount for which the applicant would have sold it.

2. General damages may be awarded even though they are not capable of precise proof or calculation or where a claimant does not produce evidence of particular losses from particular transactions: Prince. General damages may be awarded on the basis of the loss which could be expected to result in the normal course from a particular type of conduct: Prince at 294 per Beaumont J. Furthermore, general damages may be awarded even though there is only slender evidence from which to assess those damages and even though the assessment necessarily involves a degree of speculation and guesswork: Ductline Pty Ltd v Acric Investments Pty Ltd (1995) 32 IPR 419.

3. Karin Blomquist, in an affidavit sworn on 25 May 2007, said that she had seen 20 to 30 infringing garments in Claudia's Boutique in about September 2006. On the other hand, the first, second and third respondents provided two invoices to the applicants which were exhibited to an affidavit sworn by Geoffrey Lynch on 3 July 2007. Those invoices reflected purchases of a total of seven garments in June 2006 from suppliers in Hong Kong. On 29 November 2006, Paul Asseraf, the purchasing officer of the first respondent, and the son of the second and third respondents, swore an affidavit in which he said that in February 2006 the first respondent had purchased 10 to 15 PianuraStudio garments from a wholesaler in Hong Kong. It is clear that the garments bought from Hong Kong were counterfeits. Adding the garments admitted to have been bought in June 2006 to those admitted to have been bought in February 2006 makes a total of between 17 and 22 garments.

4. As the first respondent bought some counterfeit garments in February 2006 and some more in June 2006, I infer that the garments bought in February sold well enough for the further garments to be acquired by the first respondent in June 2006. That is, I infer that the first respondent had bought more counterfeit garments than the 20 to 30 that were seen by Ms Blomquist in September 2006. Accordingly, I am prepared to accept that the first respondent purchased from persons other than the applicants at least 30 counterfeit PianuraStudio garments.

5. On behalf of the first applicant, Salvatore Pianura swore an affidavit on 1 August 2007 which contained a confidential exhibit. That exhibit set out details of the average cost to manufacture certain PianuraStudio garments, the average price at which the first applicant sold them and the average profit per garment. The first applicant’s average profit per garment is $94. Multiplied by 30, that gives a loss of profit on 30 garments of $2,820. General damages for loss of profit will be awarded to the first applicant in that amount.

6. On behalf of the second applicant, Geoffrey Lynch swore an affidavit on 3 July 2007 in which he said that the second applicant makes an average profit of $100 on each PianuraStudio garment, after taking into account the purchase price and the cost of import duty and freight. Multiplying $100 by 30 gives a loss of profit on 30 garments of $3,000. General damages for loss of profit will be awarded to the second applicant in that amount.

General damages: loss of reputation and damage to goodwill

1. In Flamingo Park Pty Ltd v Dolly Dolly Creations Pty Ltd (1986) 65 ALR 500 at 525, Wilcox J said that damages under s.82 of the Trade Practices Act 1974 may extend to damages for loss of reputation. His Honour also 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 has been 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.

2. It was accepted in the principal judgement in this proceeding that the applicants have a substantial reputation in the Australian market as manufacturers and distributors of high-end Italian fashion. The applicants submitted that their reputation had been damaged by the sale of counterfeit garments of a quality inferior to genuine PianuraStudio garments. It is clear that the sale of counterfeit garments of inferior quality would diminish the reputation of the original garments and the manufacturers and distributors of those garments.

3. The evidence that the counterfeit garments sold by the first, second and third respondents were of inferior quality to original PianuraStudio garments was somewhat circuitous. Geoffrey Lynch, in an affidavit sworn on 15 January 2007, said that he was familiar with the quality of genuine PianuraStudio garments. He said that the quality of the counterfeit garments sold by the fourth respondent:

   was clearly not that of a genuine PianuraStudio garment because the fabrics were inferior, some styles had some trims missing compared to the originals, there were shade variations in the colour of some garments and the internal finish of the garments is not the same as that of the original garments.

4. Karin Blomquist, in an affidavit sworn on 22 February 2007, said that she was the director of a company which acted as agent for a number of fashion houses and wholesale distributors of fashion garments. She said that she was very familiar with the PianuraStudio range and its labelling. She said that she believed that the counterfeit garments sold by the first respondent and the fourth respondent had the same manufacturer, importer and/or distributor because of certain identical features in the labelling and button holders on the counterfeit garments sold by both the first and the fourth respondents.

5. I find on the basis of this evidence that the counterfeit garments sold by the first and fourth respondents emanated from the same source. I infer that the quality of the garments sold by the first respondent was the same as the quality of the garments sold by the fourth respondent. I accept the evidence of Mr Lynch that the quality of the counterfeit garments was inferior to the quality of original PianuraStudio garments. I find that the conduct of the first, second and third respondents in selling and making available for sale counterfeit PianuraStudio garments of inferior quality to the originals damaged the reputation of the applicants.

6. Damages may also be awarded in cases such as this for damage to a person's goodwill: Ductline. The applicants submitted that, apart from the counterfeit garments being of inferior quality, the applicants’ goodwill had been damaged by the first respondent selling the counterfeit products at a considerable discount on the retail price of genuine PianuraStudio garments. It was submitted that the loss of goodwill arose as follows:

   a)customers who had bought genuine PianuraStudio garments in the past and who became aware that apparently genuine PianuraStudio garments were available at a substantially lower price would feel that they had been cheated;

   b)such customers would be reluctant to pay the full price for genuine PianuraStudio garments in the future as they would have an expectation that they could be bought for much less;

   c)some customers want the cachet of an article known to sell for a high price and would no longer wish to buy genuine PianuraStudio garments if apparently genuine PianuraStudio garments could be bought at a substantially lesser price; and

   d)retailers and distributors of genuine PianuraStudio garments would expect their customers to have the reactions outlined above and for those reasons would be less inclined to order the genuine PianuraStudio stock and would also feel put out themselves.

7. Karin Blomquist, in her affidavit sworn on 25 May 2007, gave evidence of the price differential between genuine PianuraStudio garments and the counterfeit PianuraStudio garments sold by the first respondent. She said that she went to the first respondent’s shop in September 2006 and noted that counterfeit PianuraStudio garments were being offered for sale at a substantially lesser price than the prices at which the retailers she supplied with genuine PianuraStudio garments were selling them.

8. In these circumstances, I accept that the applicants have suffered a loss of goodwill as a result of the conduct of the first, second and third respondents.

9. The applicants submitted that the quantum of damages for damage to their reputation and goodwill should be assessed in the range of $60,000 to $80,000. It was noted that in Flamingo Park, Wilcox J had assessed damages calculated in respect of the loss of profit in the sum of $8,762 and the damages for loss of reputation in the sum of $30,000. It was submitted that a larger sum was appropriate in the present case because 20 years had passed since Flamingo Park was decided and the applicants in the present case had larger operations than the applicant in Flamingo Park in terms of distribution channels and therefore a greater reputation.

10. In my view, the appropriate quantum of damages for the loss to the applicants’ reputation and goodwill caused by the first, second and third respondents is the sum of $60,000. It seems to me that this amount is proportionate to the damage to the applicants’ goodwill and reputation as manufacturers and distributors of high-end Italian fashion.

Exemplary damages

1. 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.

2. 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.”

3. 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.”

4. The applicants submitted that the conduct of the first, second and third respondents was flagrant and contumelious because:

   a)the first respondent had bought current style garments through Ms Blomquist (her affidavit of 25 May 2007) and the first, second and third respondents must have known of the wrongfulness of their conduct in purchasing the counterfeit garments at a reduced price;

   b)

   the second respondent and Paul Asseraf attempted to block Ms Blomquist's view of the counterfeit PianuraStudio garments when she attended their store in September 2006 (her affidavit of

   
   

   25 May 2007), again demonstrating their knowledge of the wrongfulness of their conduct;

   c)the counterfeit garments were being sold alongside genuine garments (Ms Blomquist's affidavit of 25 May 2007), again indicating the first, second and third respondents’ knowledge of the wrongfulness of their conduct;

   d)the counterfeit garments were being sold for a considerable period, being at least between February 2006, when Paul Asseraf bought them in Hong Kong, and September 2006, when Ms Blomquist saw 20 to 30 counterfeit garments on sale in Claudia’s Boutique; and

   e)the third respondent, on behalf of himself and the first and second respondents, refused to deliver up the counterfeit garments in September 2006 unless he was paid for them (affidavit of Solomon Asseraf sworn on 29 November 2006).

5. An unusual feature of this case is set out in the affidavit of Karin Blomquist sworn on 25 May 2007 on behalf of the applicants. She said that Paul Asseraf telephoned her in about December 2005 and told her that he might have bought some counterfeit PianuraStudio garments in Italy. He asked Ms Blomquist to attend his store to identify the garments. Ms Blomquist inspected the garments in question and formed the view that they might have been counterfeit. However, she said it was difficult for her to determine because they were such close imitations and she did not have a genuine version of the garments to perform a side-by-side comparison. Ms Blomquist said that later in December 2005 she telephoned Geoffrey Lynch, a director of the second applicant, and advised him of the garments that she had seen at the first respondent's store. It appears that Mr Lynch took no action at that stage.

1. In September 2006, Ms Blomquist was telephoned by a retailer who said that one of his customers claimed to have purchased a PianuraStudio garment from the first respondent's shop for substantially less than the retailer was selling it. On or about

   
   

   12 September 2006, Ms Blomquist inspected a garment bought from the first respondent's shop and formed the view that it was definitely a counterfeit PianuraStudio skirt. On or about 19 September 2006, Ms Blomquist attended the first respondent’s shop. She said that Mr Asseraf (it is not clear whether she meant the father or the son) initially said that she could inspect the garments and remove any counterfeit garments but he subsequently withdrew that offer. Shortly thereafter, the applicants instructed their lawyers to take steps to protect their rights.

2. It seems to me that Paul Asseraf tried to do the right thing when he telephoned Ms Blomquist in December 2005 and said that he might have bought counterfeit PianuraStudio garments from Italy. This was an action in the nature of a voluntary disclosure. I infer that Paul Asseraf, up to that point, had bought the garments innocently and had no wish to infringe the first or second applicant’s rights. Ms Blomquist at that stage was unsure whether the garments were counterfeit or not. I take that to be an indication that it was far from obvious that the garments were counterfeit in December 2005. Having alerted his supplier to the possibility that the garments were counterfeit in December 2005, Paul Asseraf apparently heard no more about the matter until September 2006.

3. However, on his own admission, Paul Asseraf bought garments with a PianuraStudio label in Hong Kong in February 2006. The invoices referred to previously showed that more garments with the PianuraStudio label were bought by the first respondent in Hong Kong in June 2006. I consider that any retailer in the fashion industry who had bought genuine high-end Italian fashion through an authorised distributor would know that similar looking garments bought in Hong Kong otherwise than through an authorised distributor were counterfeit. Accordingly, I consider that, in about February 2006, the first, second and third respondents were well aware that the garments bearing the PianuraStudio label that Paul Asseraf had bought in Hong Kong were counterfeit. They bought more such garments from Hong Kong in June 2006. They continued to display and sell counterfeit garments until at least September 2006. At that point, they refused to deliver up the counterfeit garments unless they were paid for. That is not the action of a person who wishes to ameliorate the wrong he has done.

4. I commend Paul Asseraf for contacting Ms Blomquist in December 2005 to say that he suspected that he had bought counterfeit PianuraStudio garments. I find it odd that the second applicant took no steps to clarify whether its rights had been infringed until September 2006. The second applicant should have acted swiftly at that stage. However, and in view of the matters enumerated by the applicants, I consider that the conduct of the first, second and third respondents, from February 2006, did amount to a flagrant and contumelious infringement of the applicants’ rights. The actions of the first, second and third respondents were deliberate, deceitful and serious.

5. In relation to the quantum of damages, the applicants referred to Amalgamated Mining Services Pty LtdvWarman International Ltd (1992) 111 ALR 269. The applicants submitted that, in that case, additional, or exemplary, damages of $3 million had been awarded. That is not entirely accurate. In fact, $3 million in compensatory damages were awarded and nothing was awarded by way of additional damages. However, the court said that, had $3 million not been appropriate for compensatory damages, the court would have awarded additional damages to take the total award up to $3 million.

6. In Aristocrat Technologies Australia Pty Ltd v DAP Services (Kempsey) Pty Ltd (in liq) (2007) 71 IPR 437, 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.

7. 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.

8. 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.

9. 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 extreme 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.

10. No evidence was adduced in the present case of the prevalence of passing off in the high-end fashion industry. It does not seem to me that detection of passing off in the high-end fashion industry would be any where near as difficult as it might be in the adult film industry. In the present case, a retailer alerted the applicants to the counterfeiting. Otherwise, there was no evidence about detection. On the other hand, I do accept that the applicants have been required to go to considerable lengths in this case to vindicate their rights.

11. I consider that an appropriate award for exemplary damages in this case is the sum of $30,000. I reach that conclusion taking into account the flagrancy of the misconduct, the objective of deterring the first, second and third respondents from similar misconduct in the future, the objective of deterring other potential wrongdoers from similar misconduct in the future and the objective of imposing a penalty on the first, second and third respondents to “indicate the court’s disapproval of the conduct of the respondents”. Orders will be made accordingly.

I certify that the preceding thirty-seven (37) paragraphs are a true copy of the reasons for judgment of Riley FM

Associate: Melissa Gangemi

Date: 30 October 2007