Polyaire Pty Ltd v K-Aire Pty Ltd (No 2) - [2005] SASC 386

SUPREME COURT OF SOUTH AUSTRALIA
(Civil: Application)
POLYAIRE PTY LTD v K-AIRE PTY LTD & ORS (NO 2)
Reasons for Decision of The Honourable Justice Besanko
30 September 2005
INTELLECTUAL PROPERTY - DESIGNS - INFRINGEMENT
Fraudulent imitation of registered design – election by plaintiff between account of profits and damages – time of election – orders sought by plaintiff requiring disclosure of information and materials by defendants to facilitate election – whether infringing articles sold as part of kits or packages – whether sales of kits or packages attributable to registered design – plaintiff’s case reasonably arguable – orders for disclosure made.
Polyaire Pty Ltd v K-Aire Pty Ltd (2003) 226 LSJS 109; K-Aire Pty Ltd v Polyaire Pty Ltd (2003) 60 IPR 512; Polyaire Pty Ltd v K-Aire Pty Ltd (2005) 79 ALJR 1205; Polyaire Pty Ltd v K-Aire Pty Ltd [No 2] (2005) 79 ALJR 1387; Minnesota Mining & Manufacturing Co v C Jeffries Pty Ltd & Ors (1992) 24 IPR 413; LED Builders Pty Ltd v Eagle Homes Pty Ltd (No 3) (1996) 36 IPR 293; Island Records Ltd v Tring International Plc [1996] 1 WLR 1256; Dr Martens Australia Pty Ltd & Ors v Bata Shoe Company of Australia Pty Ltd & Ors (1997) 75 FCR 230; Tang Man Sit (Personal Representative of) v Capacious Investments Ltd [1996] AC 514; Dart Industries Inc v Decor Corporation Pty Ltd & Anor (1990) 20 IPR 144; Decor Corporation Pty Ltd & Anor v Dart Industries Inc (1991) 33 FCR 397; Colbeam Palmer Ltd & Anor v Stock Affiliates Pty Ltd (1968) 122 CLR 25; Duplate Corporation v Triplex Safety Glass Co 298 US 488 (1936); Dart Industries Inc v The Decor Corporation Pty Ltd & Anor (1993) 179 CLR 101, considered.

POLYAIRE PTY LTD v K-AIRE PTY LTD & ORS (NO 2)
[2005] SASC 386
Civil

BESANKO J         In this action and after a trial in relation to liability I made various orders in relation to the plaintiff’s claims. The following orders are the relevant orders for present purposes:
1.That there be judgment for the plaintiff on the claims pleaded at paragraphs 23 to 32 of its Fourth Further Amended Statement of Claim.
2.That a fraudulent imitation of registered design no. 110628 (“the registered design”) has been applied to the articles which are respectively exhibits P3 and P4 in this action (“the infringing articles”).
3.That each of the first, second, fifth, sixth, and ninth defendants, whether by itself, its servants, agents or otherwise howsoever, be restrained from manufacturing, selling or offering for sale any article in the form of the infringing articles.
4.That each of the third and fourth defendants, whether by himself, his servants, agents or otherwise howsoever, be restrained from directing or procuring any person to manufacture, sell or offer for sale and from acting in concert with any person to manufacture, sell or offer for sale any article in the form of the infringing articles.
5.That each of the seventh and eighth defendants, whether by itself, its servants, agents or otherwise howsoever, be restrained from aiding and abetting any person to manufacture, sell or offer for sale and from acting in concert with any person to manufacture, sell or offer for sale any article in the form of the infringing articles.
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7.An order that each defendant on or before 1 month after the making of this order:
7.1    deliver up to the plaintiff all of the infringing articles in its possession or control (provided that each defendant may retain not more than five of each such article for his or its records);
7.2    render each die used in the production of the infringing articles incapable of producing such articles; and
7.3    verify on oath that he or it has complied with each of his or its obligations under this order 7 and in so doing set out specific details of how each such die has been rendered incapable of producing infringing articles.
8.That further consideration of the plaintiff’s entitlement to damages from or an account of profits by the defendants in respect of their respective involvement in the manufacture, sale or offer for sale of the infringing articles be adjourned to a date to be fixed.
My reasons for judgment are reported at (2003) 226 LSJS 109. On appeal, my orders were overturned by the Full Court of the Federal Court (K-Aire Pty Ltd v Polyaire Pty Ltd (2003) 60 IPR 512) but reinstated by the High Court (Polyaire Pty Ltd v K-Aire Pty Ltd (2005) 79 ALJR 1205; Polyaire Pty Ltd v K-Aire Pty Ltd [No 2] (2005) 79 ALJR 1387).
On 10 May 1999 a judge of this Court made orders that there be a separate trial of all issues relating to liability and that, from that date, discovery of documents be limited to issues relating to liability.
The action has come back to this Court for, among other things, a determination of the plaintiff’s claim for an account of profits or damages.
It is not in dispute that the plaintiff has not yet elected whether to claim an account of profits or damages from the defendants. Nor is it in dispute that the plaintiff is entitled to certain orders requiring disclosure of information and materials by the defendants in order to facilitate its election. In fact I have already made certain orders by consent requiring disclosure of information and materials by the defendants. Relevantly, on 25 August 2005 I made the following orders:
4.For the purpose of enabling the plaintiff to make an election between its claim for damages and its claim for an account of profits, and reserving liberty to the plaintiff to apply for further directions before making the election:
4.1    Each of the first, second, fifth, sixth, seventh, eighth and ninth defendants, by its proper officer, make file and serve on or before 12 December 2005 an affidavit setting out in respect of all the infringing articles (being exhibits P3 and P4 in this action), the total number of such articles manufactured, sold and otherwise disposed of by it, the price at which each such article was sold or otherwise disposed of, the cost to the defendant of the manufacture, sale and disposal or such article, the approximate amount of profit it contends it made by the manufacture, sale or disposal of the said article, the method of allocating overheads, if any, which the defendant regards as reasonably acceptable, and the steps or reasoning by which the approximate amount has been calculated.
4.2    The third defendant make, file and serve on or before 12 December 2005, an affidavit setting out in respect of all the infringing articles manufactured, sold or otherwise disposed of by each of the first, second, fifth, sixth, and ninth defendants, the approximate amount of profit the third defendant contends he made from such activity by each of the said defendants, the amount of any further deduction to which he claims he is entitled in respect thereof, and the steps or reasoning by which the approximate amount has been calculated.
4.3    The fourth defendant make, file and serve on or before 12 December 2005, an affidavit setting out in respect of all the infringing articles manufactured, sold or otherwise disposed of by each of the first, fifth, sixth, seventh and eighth defendants, the approximate amount of profit the fourth defendant contends he made from such activity by each of the said defendants, the amount of any further deduction to which he claims he is entitled in respect thereof, and the steps or reasoning by which the approximate amount has been calculated.
4.4    Each of the defendants on or before 12 December 2005 make discovery on oath of all documents relating to the manufacture, sale or other disposal of the infringing articles and of all documents relied upon by the defendant for the purpose of making his or its affidavit referred to in the preceding sub-paragraphs hereof, and permit the plaintiff to inspect such documents by arrangement between the parties.
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6.The defendants file and serve on or before 22 September 2005 an affidavit deposing to the number of infringing articles sold, to whom such articles were sold and identifying the records kept in respect of such sales in the period from 1 October 2003 until 25 August 2005.
There was evidence before me on the trial in relation to liability that, at least at times, the infringing articles were sold as part of a kit or package. In my reasons for judgment, I said (at [402] and [404]):
Outlet directors are generally sold as part of a kit which includes ducting and other componentry. There are a number of advantages in a purchaser being able to purchase all of his requirements from the one vendor.
…
T & S Manufacturing sold KA2 as part of a kit which included ducting and other airconditioning components.
In addition to the orders I made on 25 August 2005, the plaintiff seeks the following further orders:
1.For the purpose of enabling the plaintiff to make an election between its claim for damages and its claim for an account of profits, and reserving liberty to the plaintiff to apply for further directions before making the election:
1.1 Each of the first, second, fifth, sixth, seventh, eighth and ninth defendants, by its proper officer, make file and serve on or before 11 November 2005 an affidavit setting out in respect of all packages or kits which comprised all of the components necessary to install a ducted airconditioning system (“the packages”) which included the infringing articles (being the exhibits P3 and P4 in this action):
1.1.1 the components comprised in the packages;
1.1.2details of which such components the relevant defendant manufactured and which were acquired from third parties and the name of such third party;
1.1.3the total number of the packages manufactured (if they were manufactured by the relevant defendant) sold and otherwise disposed of by it,
1.1.4the price at which each such package was sold or otherwise disposed of,
1.1.5the cost to the defendant of the manufacture (if applicable), sale or disposal of such package,
1.1.6the approximate amount of profit it contends it made by the manufacture, sale or disposal of the said package,
1.1.7the method of allocating overheads, if any, which the defendant regards as reasonably acceptable, and
1.1.8the steps or reasoning by which the approximate amount has been calculated.
1.2The third defendant make, file and serve on or before 11 November 2005, an affidavit setting out in respect of all the packages manufactured, sold or otherwise disposed of by each of the first, second, fifth, sixth, and ninth defendants, the approximate amount of profit the third defendant contends he made from such activity by each of the said defendants, the amount of any further deduction to which he claims he is entitled in respect thereof, and the steps or reasoning by which the approximate amount has been calculated;
1.3The fourth defendant make, file and serve on or before 11 November 2005, an affidavit setting out in respect of all the packages manufactured, sold or otherwise disposed of by each of the first, fifth, sixth, seventh and eighth defendants, the approximate amount of profit the fourth defendant contends he made from such activity by each of the said defendants, the amount of any further deduction to which he claims he is entitled in respect thereof, and the steps or reasoning by which the approximate amount has been calculated;
1.4Each of the defendants on or before 11 November 2005 make discovery on oath of all documents relating to the manufacture, sale or other disposal of the packages and of all documents relied upon by the defendant for the purpose of making his or its affidavit referred to in the preceding sub-paragraphs hereof, and permit the plaintiff to inspect such documents by arrangement between the parties.
The defendants submit that the above orders should not be made or, in the alternative, should not be made at this stage. The plaintiff submits that the infringing articles were from time to time sold in kits or packages and, to facilitate its right of election, orders for disclosure should be made in relation to those kits or packages. The dispute was not as to the form of the orders sought, although counsel for the defendants did refer to the breadth of the orders in support of his submission that the orders should not be made because they were too onerous, particularly having regard to the orders for disclosure already made.
I turn first to an examination of the nature of a plaintiff’s entitlement to disclosure to facilitate its right of election between an account of profits and damages, and, secondly, the circumstances in which an account of profits will be ordered in relation to a product of which the infringing article forms a part, as distinct from being the product itself.
I start with the nature of a plaintiff’s entitlement to disclosure to facilitate its right of election between an account of profits and damages. In Minnesota Mining & Manufacturing Co v C Jeffries Pty Ltd & Ors (1992) 24 IPR 413 Sheppard J decided that a plaintiff was entitled to an order for discovery before being called upon to elect between an account of profits and damages.
In LED Builders Pty Ltd v Eagle Homes Pty Ltd (No 3) (1996) 36 IPR 293 Lindgren J considered the obligation of a defendant who had been found liable for a breach of copyright to give discovery to facilitate the plaintiff’s election between an account of profits and damages. Lindgren J said (at 304) that the following statement by Lightman J in Island Records Ltd v Tring International Plc [1996] 1 WLR 1256 at 1258 – 1259 represented the law:
Third, a party should in general not be required to elect or be found to have elected between remedies unless and until he is able to make an informed choice. A right of election, if it is to be meaningful and not a mere gamble, must embrace the right to readily available information as to his likely entitlement in case of both the two alternative remedies. It is quite unreasonable to require the plaintiff to speculate totally in the dark as to whether or not the sum recoverable by way of damages will exceed that recoverable under an account of profits.
Lindgren J said (at 307):
I turn now to LED’s secondary submission. In my view, the general thrust of that submission should be accepted. Having regard to what the High Court has said in Dart v Decor on the issue of the allowance to be made in respect of an infringer’s overheads, a copyright owner cannot make an informed election in relation to an account of profits in the absence of any information about the infringer’s overheads.
That information should be provided by discovery or some other means.
Lindgren J also made observations as to the point in the proceedings by which the plaintiff must make its election.
In Dr Martens Australia Pty Ltd & Ors v Bata Shoe Company of Australia Pty Ltd & Ors (1997) 75 FCR 230 Goldberg J disagreed with Lindgren J’s conclusion as to the point in the proceedings by which the plaintiff must make its election and held that a plaintiff was not required to elect at least until the close of evidence and possibly until final judgment. That issue is not relevant here as there is no dispute that the plaintiff has not and is not required to elect at this stage. The reasons for judgment of Goldberg J do affirm the general principle that prior to making an election a plaintiff is entitled to discovery and other orders designed to give him the information he needs, and which in fairness he ought to have before deciding upon his remedy. Goldberg J referred with approval (at 235) to the following passage from the speech of Lord Nicholls in Tang Man Sit (Personal Representatives of) v Capacious Investments Ltd [1996] AC 514 at 521:
In the ordinary course, by the time the trial is concluded a plaintiff will know which remedy is more advantageous to him. By then, if not before, he will know enough of the facts to assess where his best interests lie. There will be nothing unfair in requiring him to elect at that stage. Occasionally this may not be so. This is more likely to happen when the judgment is a default judgment or a summary judgment than at the conclusion of a trial. A plaintiff may not know how much money the defendant has made from the wrongful use of his property. It may be unreasonable to require the plaintiff to make his choice without further information. To meet this difficulty, the court may make discovery and other orders designed to give the plaintiff the information he needs, and which in fairness he ought to have, before deciding upon his remedy.
I turn now to the circumstances in which an account of profits will be ordered in relation to a product of which the infringing article forms a part as distinct from being the product itself.
In Dart Industries Inc v Decor Corporation Pty Ltd & Anor (1990) 20 IPR 144 King J found that the defendant had infringed a patent in relation to press button seals used on canisters. The plaintiff elected for an account of profits. Two issues arose. One was as to the discovery to which the plaintiff was entitled and the other was as to the principles to be applied in the taking of an account of profits. King J decided that the defendants were only entitled to deduct from the profits the costs directly attributable to the manufacturing, obtaining, selling and delivery of the canister (“the first issue”). The costs that may be deducted is not an issue before me at this stage. King J also considered whether the profits for which the defendant was required to account were the profits for the seals only or for the closures and canisters to which they were fitted (“the second issue”). After referring to the relevant authorities he found that the sales of the canisters was attributed to the patented invention. The defendants appealed to the Full Federal Court: (1991) 33 FCR 397. That Court overturned the trial judge’s decision in relation to the issue of the costs which may be deducted by the defendants. The Court upheld the trial judge’s decision on the second issue. In the course of discussing the issue, the Court said (at 407):
The other argument is more formidable. The respondent cannot gainsay that it is only entitled to the profits obtained by the infringement. If, for example, a patented brake is wrongfully used in the construction of a motor car, the patentee is not entitled to the entire profits earned by sales of the motor car. He must accept an appropriate apportionment. But the question is how that principle shall be applied to a situation where the patent relates to the essential feature of a single item. Take, for instance, a patent for a soft drink. The drink cannot be sold without a container. Would it be right to attempt to apportion the profits from sales of bottles of infringing soft drink? The entire reason for the sale of the bottle was as a container for the drink. Similarly, it seems to us that it was open to the judge to find, and he correctly found, that what characterised the infringing product was the press-button lid, without which this particular container would never have been produced at all.
The Court referred with approval (at 408) to the following passage from the reasons for judgment of Windeyer J in Colbeam Palmer Ltd & Anor v Stock Affiliates Pty Ltd (1968) 122 CLR 25 (“Colbeam Palmer Ltd”) (at 42 – 43).
What the defendant must account for is what it made by its wrongful use of the plaintiffs' property ... The true rule, I consider, is that a person who wrongly uses another man's industrial property — patent, copyright, trade mark — is accountable for any profits which he makes which are attributable to his use of the property which was not his. An early form of the order in a patent case is for “an account of all profits actually made by the defendant by means of the infringement”: see Elwood v Christy (1865) 18 CB (NS) 494.
...
If one man makes profits by the use or sale of some thing, and that whole thing came into existence by reason of his wrongful use of another man's property in a patent, design or copyright, the difficulty disappears and the case is then, generally speaking, simple. In such a case the infringer must account for all the profits which he thus made.

There is also a helpful discussion of the relevant principle by Cardezo J in Duplate Corporation v Triplex Safety Glass Co, 298 US 488 (1936) at 456.
The defendants appealed to the High Court against the determination on the second issue and the plaintiff cross-appealed against the determination in relation to the first issue: (1993) 179 CLR 101. The High Court upheld the determination of the Full Federal Court on the second issue. Mason CJ, Deane, Dawson and Toohey JJ said (at 120) that the trial judge correctly identified the problem when he said:
The basic legal principle is that the relevant profits are those accruing to the defendants from their use and exercise of the plaintiff's patented invention. Where the defendants' products are, as here, composites of the invention and other features the determination of such a question is one of fact.
Their Honours referred to the passage from the reasons for judgment of the Full Federal Court set out above (at [15]) and the passage from the reasons for judgment of Windeyer J in Colbeam Palmer Ltd (see [16] above). Their Honours said (at 121):
It is true that there is some divergence between King J and the Full Court in relation to whether, in the circumstances of this case, primary emphasis should be placed on reason for sale or reason for production. Nonetheless, the overall approach of both accurately reflects the application of the correct general principle in the resolution of what is ultimately a question of fact.
The plaintiff in this case is entitled to such orders for disclosure as will give it the information it needs, and in fairness it ought to have, to decide whether to elect between an account of profits or damages. At this point it is reasonably arguable that where the infringing articles were sold as part of kits or packages those sales were attributable to the use of the plaintiff’s registered design and the plaintiff is entitled to account of profits in relation to those kits or packages. In my opinion that is sufficient to justify the orders for disclosure sought by the plaintiff. It is not possible at this stage to find that the plaintiff is entitled to an account of profits in relation to the kits or packages and it would not be appropriate at this stage to conduct a hearing to determine that one issue. Even if it were, at least some of the information or materials sought by the order now under consideration would be liable to disclosure prior to the hearing.
I realise that the orders will be onerous from the defendants’ point of view, but that is not a reason in a case such as this not to make the orders.
Conclusion
For these reasons I think the orders for disclosure sought by the plaintiff should be made.