Fairlight Instruments Pty Ltd and Australian Trade Commission
[2013] AATA 231
[2013] AATA 231
Division GENERAL ADMINISTRATIVE DIVISION File Number
2012/3205
Re
Fairlight Instruments Pty Ltd
APPLICANT
And
Australian Trade Commission
RESPONDENT
DECISION
Tribunal Ms N Bell, Senior Member
Date 17 April 2013 Place Sydney The decision under review is set aside and remitted to the Australian Trade Commission with the direction that section 94(1)(b)(ii) of the Export Market Development Grants Act 1997 does not apply.
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Ms N Bell, Senior Member
CATCHWORDS
TRADE AND COMMERCER – Industry assistance – Export market development grant – Whether new business a continuation of previous business – whether old and new business are similar – decision under review set aside and remitted
LEGISLATION
Export Market development Grants Act 1997 (Cth), ss 94, 94(1), 94(1)(b)(ii)
CASES
Amlink Technologies Pty Ltd and Australian Trade Commission (2005) 86 ALD 370
Magee and Australian Trade Commission (1994) 36 ALD 304
SECONDARY MATERIALS
Export Market Development Grants (Change in Ownership of Business) Guidelines 2006
EMDG Administrative Guidelines, July 2011
REASONS FOR DECISION
Ms N Bell, Senior Member
The Fairlight CMI was an icon of 1980s music.
A large and costly computer musical instrument, it enabled an operator to sample sounds and play them back on a music keyboard at the chosen pitch. It was the world’s first commercial sampler, preceding the introduction of personal computers, and, over the next decade, achieving such popularity among those who had the funds to acquire it that one prominent popular musician included in the jacket notes to his album the words: “There is no Fairlight on this Record”. (Phil Collins, No Jacket Required, 1985).
Fairlight Instruments Pty Ltd was incorporated in 1975 by Peter Vogel and Kim Ryrie. The company’s most notable product was the CMI. In 1989, two years after Peter Vogel left the company to pursue other activities, Fairlight Instruments Pty Ltd went into administration, following the production of less expensive samplers by Japanese competitors. The company’s assets were purchased by Fairlight ESP Pty Ltd. After moving away from musical instruments and into the production of recording and mixing consoles, Fairlight ESP Pty Ltd went into administration in 2003. Its assets were purchased by Fairlight AU Pty Ltd which pursued production of recording and mixing devices and continues in that business today.
After more than 20 years away from the music industry and with no continuing involvement with Fairlight Instruments Pty Ltd, Fairlight ESP Pty Ltd or Fairlight AU Pty Ltd, Peter Vogel began a new company, Fairlight Instruments Pty Ltd (the new Fairlight Instruments). The “old” Fairlight Instruments Pty Ltd had been de-registered in 1992. The new Fairlight Instruments commenced to design, sell and distribute the CMI-30A, a computer musical instrument that looks very much like the old CMI.
The old Fairlight Instruments had been granted ten development grants under the Export Market Development Grants Act 1974, the predecessor to the 1997 Act of the same name. This number of grants exceeds the current limit of seven grants per applicant. The new Fairlight Instruments’ application for a grant was refused on the basis that the new company was a continuation of the old company and had exhausted its entitlement to grants.
Section 94(1) of the 1997 Act provides for the particulars (including any history of grants paid) of one business owner to be treated as those of the applicant for a grant where the same or part of the same business is being carried on by the grant applicant or where a grant applicant’s new business is similar to an old business to such an extent that the CEO of Austrade is satisfied that the new business should be treated as a continuation of the old business.
94 Change in ownership of business etc.
(1) Subsection (2) applies if:
(a) at any time, a person (the previous owner) carried on a particular business (the old business) in Australia; and
(b) at a later time, another person (the new owner) carries on:
(i) the business or a part of the business (the relevant part); or
(ii) a business (the new business) that, at that time, is similar to the old business, or a part of the old business (the relevant part), carried on by the previous owner before that time, to such an extent that the CEO of Austrade is satisfied that the new business should be treated as a continuation of the old business; and
(c) the new owner applies for a grant in respect of a grant year.
Note: Decisions whether 2 businesses are similar are subject to guidelines determined by the Minister under section 101.
It is uncontroversial between the parties that section 94(1)(b)(i) does not apply in this case. However, Mr Vogel argued that, because there was no transfer of any kind between the two businesses, section 94 has no application at all.
The Act does not require a transfer in order for section 94(1)(b)(ii) to apply. Indeed section 94(1)(b)(ii) was amended in 2006 to remove a requirement that there be a “sale or other transfer of a business or part of a business, a change in the membership of the partnership that carried on the relevant activity, or any other business arrangement”. It is possible that most situations to which section 94(1) applies would involve some kind of transfer or sale. There exist internal guidelines, called the EMDG Administrative Guidelines, that, by the examples used in them, suggest that in the bulk of cases some transfer or sale would have taken place.
However, all section 94(1)(b)(ii) requires is similarity to an extent that warrants treatment of the new business as a continuation of the old. The issue for me to consider is whether the new Fairlight Instruments is sufficiently similar to the old Fairlight Instruments to be treated in this way.
Decisions as to whether a business should be treated as a continuation of an old business must comply with Guidelines determined by the Minister. Those Guidelines require a decision maker to have regard to a range of similarities and differences:
4 Change in ownership of business
(1)In determining, for the purposes of subparagraph 94 (1) (b) (ii) of the Export Market Development Grants Act 1997, whether a business or a part of a business (the old business) that was carried on by a person is similar to a business (the new business) being carried on by another person to such an extent that the new business should be treated as a continuation of the old business, Austrade must comply with these Guidelines.
(2)In determining whether the new business is similar to the old business, Austrade must have regard to the similarities (if any) and the differences (if any) between:
(a)the product of the new business and that of the old business; and
(b)the activities that are carried out in the course of the business of the new business and the activities that were carried out in the course of the old business; and
(c)the customers, including the export market customers, of the new business and those of the old business; and
(d)the directors, shareholders, and management personnel of the new business and those of the old business; and
(e)the suppliers to the new business and those to the old business; and
(f)the overseas representatives of the new business and those of the old business; and
(g)the employees of the new business and those of the old business; and
(h)the markets, including the export markets, of the new business and those of the old business; and
(i)the premises from which the new business is conducted and the
premises from which the old business was conducted; and(j)the logo of the new business and that of the old business; and
(k)the property and assets, including the intellectual property, of the new business and those of the old business.
I will deal with each of these listed areas in turn.
Products
The products of the old Fairlight Instruments were the CMI music synthesiser (its best known product), a video synthesiser called the CVI, a pitch to midi converter known as Voicetracker and general purpose computers including the QASAR OEM Computer System and the Lightwriter Word Processing System.
The products of the new Fairlight Instruments are the new CMI, an
“app” for iPhones and iPads and consulting services. The product common to the old company and the new company is the CMI.
However, there are significant differences between the new CMI and the old CMI. The old CMI used 1980s computer technology and components, including green cathode ray tubes for the display, pre CD 8 bit sound technology, eight inch floppy discs and a light pen. Many of the components and all of the software used in the old CMI are now unavailable. It took two people to carry it and, as Mr Vogel said, cost as much as a house at that time.
The new CMI uses a liquid crystal display, a crystal core media processor, 24 bit sound technology including a sound card, a magnetic sensor instead of a light pen, and contemporary and upgradeable software. Mr Vogel said the new CMI had to be built from the ground up, could not use or incorporate the old CMI technology and took two years to develop. The new CMI can do everything the old CMI could do, including produce the particular sound or tone that was characteristic of the old CMI – a slight distortion of whatever original sound had been sampled by the device. The new CMI achieves this by providing for variable sound quality. But the new CMI has additional functions. It can play a much larger number of instrumental sounds simultaneously. It enables high fidelity sound as well as the “80s” sound of the old Fairlight. It can digitally interface with other equipment. It can connect to the internet, download applications from the internet and can be remotely controlled through the internet. It can run other software besides the CMI software because it incorporates a complete personal computer. It can record and mix audio input, whereas the old CMI was simply a keyboard and necessitated input into a mixing console in a recording studio. New technology means that cost and size are dramatically reduced.
But, the old CMI and the new CMI look the same. The user interfaces are similar with distinctive retro green on black graphics. The original CMI sound library can be imported into the new CMI. According to Mr Vogel, this was a deliberate marketing strategy. He said he had been approached repeatedly over the previous 20 years by people urging him to get back into the music field and “invent something”. 2009 was the 30th anniversary of the sale of the first CMI – to Stevie Wonder. Mr Vogel said he had the idea to make a 30th anniversary product and trade on the nostalgia. The Fairlight trademark had passed from the old Fairlight company to Fairlight ESP Pty Ltd and then on to Fairlight AU Pty Ltd which had become its registered owner. Mr Vogel arranged to licence the trademark from Fairlight AU and arranged with it to develop the necessary software and supply some of the components necessary for the product. He registered a new company – Fairlight Instruments Pty Ltd – and set about developing a commemorative product, designed to emulate the appearance of the old Fairlight. The marketing angle was “Peter Vogel and his Fairlight are back”.
Mr Vogel said his intention was to use the new CMI to “announce to the world that I’m back in business and that there’s something new and exciting coming along”. He referred to plans for a keyboard aimed at the retail market, with models ranging from $500 to $3,000. As for the CMI, he plans to produce 100 at a price of $20,000 each, a limited edition. He referred to it as a flagship product and estimates a gross profit of $1,000,000.
The prototype of the new CMI was exhibited at the National Association of Music Merchants’ show in Anaheim, US in 2011.
In addition to consulting services in Australia, the other product of the new Fairlight is an iPhone and iPad “app” that provides a modified experience of the CMI. The app is sold in two versions, the “introductory” version at $10 and the “professional” version at $50. Mr Vogel said he was astonished that the company has sold 14,000 of these apps over the last year, one third of them the professional version. He noted that the app allows sound to be played into the memory and saved and for the sound to then be played back on the keyboard. A simple composition can be played into a sequencer and then the sequencer can be made to play those sounds. The “professional” version allows for sound to be edited. The “introductory” version does not.
When asked if he regards the app as a toy, Mr Vogel said that is one interpretation of the app, but he sees it as a marketing tool and “just something that anyone can afford to buy and have a bit of fun with”. He agreed that it was designed to return his personal profile to the music instrument area because he plans for other products in the future. In the grant year the app was the new Fairlight’s main product in terms of dollar value and number of sales.
Activities
The old Fairlight Instruments was involved in the design, manufacture, sale and distribution of the old CMIs, a video synthesiser, a pitch to midi converter and general purpose computers. The new Fairlight Instruments is involved in all of those activities in respect of the new CMI, with the exception of manufacture which it has contracted, along with software development, to Fairlight AU. It also designs and sells the apps for iPhone and iPad and provides consulting services within Australia.
Customers
The gap of twenty years makes it most unlikely that the individuals who purchased the expensive CMI of the 1980s will also purchase the new CMI. Questions of customer lists do not arise. As a souvenir limited edition, the new CMI will most likely appeal to collectors of vintage instruments, although it is clear from various business documents that the new CMI has been marketed to professional musicians and a stripped down or “naked” version, without the nostalgic housing, is to be available at a lower cost and could appeal to the hobbyist market or to those musicians who do not want the retro dimension.
The old CMI, at a cost of $100,000, had as its customers the upper echelon of the music industry – professional music studios and professional recording artists.
The app, as a completely new technology, has no point of comparison because apps did not exist in the 1980s. There were no customers for it then.
Directors, Shareholders and Management Personnel
Austrade made much of Mr Vogel’s key position as a director of each of the companies. Mr Vogel sought to minimise the significance of his involvement. He was a founder of each of the companies and it was his particular expertise and inventions that sparked each of the enterprises. It cannot be denied that the role played by him in each company is not only significant but seminal. His role as “Fairlight Father” is, not surprisingly, exploited in the marketing of the new Fairlight Industries. A recent change of company name to Peter Vogel Instruments Pty Ltd is also not without significance. However, he was absent from the industry for twenty years, commencing two years before the old Fairlight ceased to trade. His involvement in developments in computer musical instruments generally was not continuous and for twenty years there was no company, engaged in the development and production of computer musical instruments, with which he was involved. If some continuity is to be found, it must be recognised that it was interrupted for by two decades.
Mr Vogel urged me to concentrate on the numerical differences between the old company and the new :
Old Fairlight New Fairlight Directors 6 2 (1 in common, 16%) Shareholders 20(est) 5(1 in common, 5%) Management personnel 10(est) 3(1 in common, 10%)
While I accept this quantitative difference between the directors, shareholders and management personnel of old company and the new, I am also mindful of the quality of the role played by Mr Vogel as a director and shareholder and the fact that when the old Fairlight Instruments was established, Mr Vogel was one of just two directors. This lends more significance to his common directorship of the two companies than would attach to, for example, an in-common middle manager or even a venture capitalist.
Suppliers
There is no evidence to suggest that the old Fairlight Instruments and the new Fairlight Instruments shared suppliers. Fairlight AU, the company that purchased the assets of Fairlight ESP Pty Ltd, supplies software development and hardware components to the new Fairlight Instruments. This has no bearing on the question of whether the old Fairlight Industries and the new have similar suppliers.
Overseas Representatives
The new Fairlight has no overseas representatives. The old Fairlight Instruments had several. There is no similarity between the companies in this respect.
Employees
Mr Vogel described himself as both a director and an employee of the new Fairlight Instruments. Similar considerations apply in respect of the employees of the old Fairlight Instruments and the new company as do in respect of directors, shareholders and management, discussed above. As the only common employee, he is a very significant one.
However, it is also significant that the old Fairlight Instruments, at its height, had more than 100 employees. The new company has three.
Markets
The markets of the old Fairlight Instruments were Australia, Germany, Italy, France, Japan and the US. The new Fairlight Instruments’ CMI-30A Market Exposure and Analysis document states that target markets for the CMI are:
·Europe, including the UK;
·Americas;
·Japan;
·Asia Pacific;
·Rest of world.
As at the date of the Market Exposure and Analysis document (8 May 2011) deposits had been taken for sales of the CMI to:
·Germany;
·Switzerland;
·Japan;
·France;
·Italy;
·USA;
·Canada; and
·Hong Kong
In addition, sales of the app, through iTunes, in the grant year, also included, in addition: Mexico, UK, Spain, Hungary, Poland, Norway, Czechoslovakia, China, Lebanon, Thailand, Indonesia, Holland, Greece, Finland, Belgium, Denmark, Austria, Portugal, Norway, United Arab Emirates, Russia, Croatia, Singapore, Turkey, Korea, Israel and Brazil.
The markets of the two companies overlap to some extent, but the new company’s markets are more extensive.
Premises
There is no commonality of premises between the two companies.
Logo
As part of its marketing strategy, the new Fairlight Instruments licensed the Fairlight trademark from Fairlight AU. It had passed from the old Fairlight company to Fairlight ESP Pty Ltd and then on to Fairlight AU Pty Ltd who had become its registered owners.
Mr Vogel said the particular logo used on the new CMI had been used briefly by the old Fairlight Instruments and only appeared when the old company had brought out a product called “MFX” in 1988. The company ceased trading a year later. He said the particular logo was used by the old company for only the last of its 14 years. He also said that the logo had not been used by anyone for many years prior to the trademark being licensed by the new Fairlight Instruments.
The clear aim was to brand the new CMI in a way that evoked memories of the old CMI. It matters not which of the particular Fairlight logos was chosen to do this. The fact remains that the logo used by the new Fairlight Instruments is the same as one of the logos used by the old Fairlight Instruments.
Property and Assets
With the exception of the logo and the sound library, both of which have been licenced by the new Fairlight Instruments from Fairlight AU Pty Ltd, there is no commonality of property and assets.
SHOULD THE NEW FAIRLIGHT INSTRUMENTS BE TREATED AS A CONTINUATION OF THE OLD FAIRLIGHT INSTRUMENTS?
Is the new company a continuation of the new? In my view it is not, given the passage of 20 years between the demise of the old company and the birth of the new. But that is not the question posed by the section. The section requires that the new company be treated as a continuation of the old company if it is sufficiently similar to the old company. The ascertainment of differences and similarities requires comparison.
I was referred to five decisions of this Tribunal that deal with the application of section 94 or its predecessor. Only two of those apply section 94 in its current form. Some of the remainder apply a different test altogether (concerning “business activity” rather than the comparison of businesses as a whole and the question of “substantial similarity”). None of the decisions concern circumstances where there has been a 20 year hiatus between the operation of the first company and the operation of the second. For these reasons they are of limited assistance.
In respect of suppliers, overseas representatives and premises the two companies are completely different. There is no commonality between the companies in these areas.
Comparison of the product said to be common to both companies, in both cases a synthesiser, is liable to distortion because of the iconic status of the vintage CMI product. The new company itself was at pains to exploit this status and seized the opportunity to market itself by reference to this icon. For this reason it set out to produce something that looked like, sounded (in part) like and reminded everyone of the original CMI. But that is where the similarities end and where the significance of the 20 year hiatus begins.
In those 20 years the technology behind the original CMI became not only obsolete, but impossible to replicate. The new CMI had to be developed from scratch – even in the ways in which it exploits nostalgia and reproduces some of the qualities of the original. Its components draw on technology that could not be anticipated when the old CMI was developed. It uses internet connectivity, 24 bit sound technology, custom developed software and liquid crystal display in order to perform its functions – both those of the original and its new and expanded functions. The new CMI costs one fifth of the old – and significantly less in real terms. It does not require two people to carry it.
In Magee and Australian Trade Commission (1994) 36 ALD 304 the Tribunal considered two businesses, both of which promoted and developed a patented valve monitoring device for use in the control of the supply of water for fire fighting. Mr Magee had been Managing Director of both companies through which he marketed improved versions of his product sequentially. The Tribunal considered that the differences between the business activities of the two companies were “manifestations of the normal product development which takes place in a company as a response to competitive market needs and aided by general technical advances.”
In Amlink Technologies Pty Ltd and Australian Trade Commission (2005) 86 ALD 370 the Tribunal referred to the later company’s products having “evolved to the point where they are clearly superior in terms of functionality and technically different. However, both businesses developed and sold (or develop and sell) event management software. One has evolved from the other to become bigger, better and different in the process – exactly the result intended by the (Export Market Development Grant) scheme.”
Notions of “development” and “evolution” are inapposite in circumstances where no work has been done on a product for two decades. These words imply a gradual and continuous process of improvement or enhancement. That is not what happened here. The original product became obsolete; the new product had to be developed, 20 years later, “from the ground up” and in the intervening period the inventor of each had no involvement with either the product or product type or the industry sector it inhabited. It is also significant that during the two decades that passed before the new CMI was developed green cathode ray tubes and analogue sound disappeared and in their place digital sound and liquid crystal display emerged. The internet arrived. It was a significant 20 years in the field of sound technology.
The differences between the two CMIs are huge. The new CMI is a new and different product.
Then there are the differences between the other products of the two companies; they bear no resemblance to each other at all, in function or in form.
But the comparison required by the section is not limited to its products. The comparison to be made is between two businesses.
There are similarities between the companies’ activities, although the new company does not manufacture and their activities are in respect of different products. In terms of customers and markets there is some overlap, but the differences are equally compelling. There is even less similarity in respect of property and assets.
There are significant differences between the companies in their directors, managers and employees, with just one individual in common. He is an important individual to each enterprise, but the differences are not obliterated by his importance.
The companies share a logo, amongst others held by the old Fairlight Instruments, and this is in line with the marketing strategy of the new Fairlight Instruments and its exploitation of the iconic status of the old CMI.
These comparisons and their cumulative effect do not constitute a mathematical exercise. I must weigh the similarities and differences and arrive at an overall conclusion. The conclusion I have reached is that the old Fairlight Instruments and the new Fairlight Instruments are not sufficiently similar to warrant treating the new company as a continuation of the old company.
DECISION
The decision under review is set aside and remitted to the Australian Trade Commission with the direction that section 94(1)(b)(ii) of the Export Market Development Grants Act 1997 does not apply.
I certify that the preceding 56 (fifty -six) paragraphs are a true copy of the reasons for the decision herein of Senior Member Bell. ...[Sgd].....................................................................
Associate
Dated 17 April 2013
Date of hearing 12 February 2013 Advocate for the Applicant Mr P Vogel Counsel for the Respondent Ms R Henderson Solicitors for the Respondent Lachlan Partners Legal
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