Flujo Sanguineo Holdings Pty Limited v Merisant Company Inc
[2019] NZHC 2891
•29 October 2019
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE
CIV-2017-404-1185
[2019] NZHC 2891
UNDER The Trade Marks Act 2002 and the Fair Trading Act 1986 IN THE MATTER OF
passing off
BETWEEN
FLUJO SANGUINEO HOLDINGS PTY LIMITED
Plaintiff
AND
MERISANT COMPANY INC
First Defendant
MERISANT AUSTRALIA PTY LIMITED
Second DefendantMERISANT COMPANY 2 SARL
Third DefendantNEW ZEALAND SUGAR COMPANY LIMITED
Fourth Defendant
Hearing: 29 October 2019 at 10:00am Appearances:
D L Marriott for the Plaintiff
J Rutter and S Redding for the First, Second and Fourth Defendants
No appearance for the Third Defendant
Judgment:
29 October 2019
ORAL JUDGMENT OF ASSOCIATE JUDGE R M BELL
Security for Costs
Solicitors/Counsel:
D L Marriott, Park Chambers, Auckland, for the Plaintiff
Clive Elliott QC, Shortland Chambers, Auckland, for the 1st, 2nd and 4th Defendants Hudson Gavin Martin (Tim Mahood), Auckland, for the Plaintiff
Kensington Swan (Jenni Rutter), Auckland, for the 1st, 2nd and 4th Defendants
FLUJO SANGUINEO HOLDINGS PTY LIMITED v MERISANT COMPANY INC [2019] NZHC 2891 [29
October 2019]
[1] The first, second and fourth defendants apply for security for costs. The third defendant has not been served and has accordingly taken no part in the application. The time for serving the third defendant under r 5.72 of the High Court Rules 2016 has expired and therefore the proceeding against the third defendant is deemed to have been abandoned, subject of course to any later application to reinstate the proceeding. The plaintiff more or less accepts that it should give security. The contest is about the amount of security and the terms of any orders for security.
[2] This proceeding started in June 2017. So far, no statement of defence has been filed. The case has been taken up with other matters. There was an application by the defendants to have the proceeding struck out as an abuse of process. There was then an appeal to the Court of Appeal. The defendants’ application and appeal were both unsuccessful. In June this year, the defendants applied for security for costs.
[3] This is intellectual property litigation. The plaintiff sues in passing-off, for trade mark infringement and breach of the Fair Trading Act 1986.
[4] The plaintiff is part of the Flujo group of companies based in Australia. They manufacture and distribute sweeteners derived from a plant, stevia. The products use the name “Natvia”. Their products are marketed in both Australia and New Zealand. The men behind the Flujo companies are Mark Hanna and Sam Tew. The plaintiff says that the get-up of the packaging is distinctive.
[5] The first three defendants are part of the Merisant group that produces foodstuffs, including sweeteners made from stevia. The first defendant is based in Chicago, Illinois, United States. The second defendant is an Australian subsidiary. The third defendant is a Swiss subsidiary and a parent of the second defendant. The fourth defendant is a New Zealand company, not a part of the Merisant group, but has been responsible for importing and distributing Merisant products in New Zealand.
[6] The plaintiff says that the way that the defendants have marketed their products, which are called “Natural”, makes them liable in passing-off, breach of a registered New Zealand trade mark and for misleading and deceptive conduct under the Fair Trading Act.
[7] The first defendant, an American corporation, is said to have protested the jurisdiction. In discussion, Mrs Rutter clarified that the protest was only over a matter arising out of a previous proceeding. Merisant Company Inc does not challenge the territorial jurisdiction of the New Zealand courts to hear the claim against it. That company has, in any event, engaged with the merits of the claims in this proceeding and has thereby submitted to the jurisdiction of the New Zealand courts.
[8] There has been an earlier proceeding against the Merisant defendants. That proceeding was brought by Flujo Holdings Pty Ltd, another company in the Flujo group.1 It challenged the packaging of the Merisant product and sued for passing-off, trade mark infringement and breach of the Fair Trading Act. Flujo Holdings applied for an interim injunction. Courtney J’s decision gives background:2
[4] The Natvia brand is the creation of Australian businessmen Mark Hanna and Sam Tew. In 2008 they began working on a table-top non-sugar sweetener made with stevia. At that stage there were no such products on the market; stevia was first approved for use as a food additive in Australia and New Zealand in August 2008.
[5] By the end of 2009 product and packaging development was complete, the “Natvia” name was registered as a trademark in Australia and Flujo had been incorporated for the purpose of holding the assets, including intellectual property associated with the product. The product was first distributed in Australia in February 2010 and in New Zealand in July 2010. Its packaging, which has remained largely unchanged, featured green, beige and brown with pink “call-out” boxes and a slogan “the 100% natural sweetener” prominently on the front. Flujo says that this look was a deliberate departure from the rather clinical look previously adopted by the makers of non-sugar sweeteners (which were largely artificial).
[6] Merisant is part of the Merisant group, which is active in the table-top sweetener market and is known for its artificial sweetener, Equal. At the same time as Flujo was developing Natvia, Merisant was also working on a stevia- based sweetener, Pure Via. It was launched in Australia 2009 but by 2012 was no longer being sold. In 2012 Merisant produced another stevia-based sweetener under the Equal brand. That product did not gain traction either.
[7] In October 2013, Merisant re-branded its stevia-based product as “Naturals” in new beige, brown and green packaging that included the statement “from the makers of Equal”. This package bore the slogan “100% natural” prominently on the front of the pack. The adoption of the “100% natural” claim had followed a decision by the Australian Advertising Claims Board dismissing NZ Sugar’s complaint about Flujo’s use of the phrase.
1 The defendants were not the same as in this proceeding.
2 Flujo Holdings Pty Ltd v Merisant Company [2016] NZHC 1779.
[8] Flujo had some concerns about the new Naturals packaging which had moved well away from the blue Equal packaging towards the colour scheme that it was using. It did not consider the similarities were likely to cause confusion, however, perceiving that there were sufficient distinguishing features, including the statement that the brand came from the makers of Equal.
[9] Between 2013 and 2016 the Natvia brand grew faster than the Naturals brand. Natvia presently has the majority of the market for natural non-sugar table top sweeteners. In 2015 Merisant re-designed the Naturals packaging and in January 2016 began selling its 40-stick box in new packaging. The re-design included removing the reference to Equal (Mr di Bennedetto, Merisant’s Regional Managing Director for Asia Pacific, explained that the Equal brand was a barrier because consumers associated it with the artificial sweetener) and adding a prominent banner on the front containing the words “100% natural sweetener”. Its other products are still being sold in the previous packaging but that is said by Merisant/NZ Sugar to be merely a function of the decision to update the packaging as existing stores run out; eventually all the Naturals products will be sold in the new packaging.
[9] Courtney J dismissed the application for the interim injunction. She held that there was no serious question to be tried. That case was to go to a substantive hearing. It was meant to start on 1 May 2017 but Flujo discontinued very shortly before the start of the hearing. Fitzgerald J ordered costs against Flujo Holdings Pty Ltd.3 Those costs have not been paid. The defendants took enforcement steps in Australia but without success. The lack of success in enforcement is relevant to this application for security.
[10] At about the same time as the proceeding by Flujo Holdings Pty Ltd was abandoned, that company assigned its intellectual property rights to Flujo Sanguineo Holdings Pty Ltd, which began this proceeding. Because they had not been paid their costs in the proceeding by Flujo Holdings Pty Ltd, the defendants in this case applied to strike out the proceeding for non-compliance with r 15.24 of the High Court Rules and as an abuse of process. Their application failed.4 They appealed without success.5 While the Merisant defendants were unsuccessful, both this court and the Court of Appeal commented on the delay or non-payment of costs by Flujo Holdings Pty Ltd as being relevant to questions of security for costs in this proceeding.6
3 Flujo Holdings Pty Ltd v Merisant Company [2017] NZHC 1656.
4 Flujo Sanguineo Holdings Pty Ltd v Merisant Company [2018] NZHC 54. (the “High Court decision”)
5 Merisant Company v Flujo Sanguineo Holdings Pty Ltd [2018] NZCA 390 (the “Court of Appeal decision”).
6 At [63] in this the High Court decision and at [36] in the Court of Appeal decision.
[11] In this proceeding, Flujo Sanguineo is suing as assignee of the intellectual property rights which Flujo Holdings Pty Ltd had asserted in the earlier proceeding. From discussion with counsel, I gained the impression that the issues in the two proceedings broadly overlap. Mr Marriott said that there were some nuanced differences. There are some differences in the parties. Whereas the earlier proceeding would have decided matters as at May 2017, this case will go to trial in 2020 or later. There may be changes in the market in the meantime. Nevertheless, both sides invested heavily in getting the earlier case to a hearing, made discovery and prepared evidence. That investment is likely to be useful for this proceeding as well. I understand that the defendants intend to call the same expert as they used in the earlier proceeding.
[12] The defendants have satisfied the threshold for making an order for security for costs. That is the threshold under r 5.45(1)(b) of the High Court Rules: that there is reason to believe that a plaintiff will be unable to pay the costs of the defendant if the plaintiff is unsuccessful in the proceeding.
[13] There is an alternative ground under r 5.45(1)(a)(ii), that the plaintiff is a corporation incorporated outside New Zealand. I do not rely on that ground. That is because the plaintiff is an Australian corporation. If it were solvent, enforcing a New Zealand order for costs against it ought to be relatively straightforward. That is because New Zealand orders for court costs can be readily enforced in Australia under the Trans-Tasman Proceedings Act 2010. A successful defendant is unlikely to incur significantly more costs in enforcing a judgment in Australia then they would in New Zealand. In cases such as that, orders for costs will be relatively modest. Instead there are good grounds to believe that Flujo Sanguineo may not pay costs if it loses.
[14] Rule 5.45(1)(b) uses the words “unable to pay the costs of the defendant”. “Unable to pay” normally indicates insolvency but “unable to pay” is not limited to insolvency. It can have a wider meaning in the case of corporations and companies.
In a liquidation case, I said:7
[41] Insolvency may be one cause of an inability to pay debts, but it need not be the only cause. If a company is unable to pay its debts for reasons other
7 Forward Plastics Ltd v NZ Distilled Water Ltd [2012] NZHC 1383.
than insolvency, it may still be appropriate to appoint a liquidator in the interests of creditors. A company’s inability to pay its debts may arise from the actions and policies of those with control and management of the company. If those with effective control and management of the company use their power to ensure that the company does not pay debts that are lawfully due, then the company will not have the ability to pay its debts. A company whose management decides that debts should not be paid is just as much unable to pay its debts as a company without sufficient liquidity. Both cases provide grounds for an application to be made for liquidation so that the court can consider whether the company should be put into liquidation.
(citations omitted)
As I say, that was in the context of a liquidation proceeding, but I see the matter in the same way as regards an application for security for costs. If there is a reasonable risk that those with the management of the company are likely to arrange for the company not to pay costs ordered against it, that falls within r 5.451(b) as inability to pay costs.
[15] The defendants have shown good reason to believe that Flujo Sanguineo will not pay costs. They draw on the failure of Flujo Holdings Pty Ltd to pay costs in proceedings taken to enforce its intellectual property rights. Those are not only the costs in the earlier proceeding in New Zealand but also in another proceeding in Australia. In the Australian proceeding in the Federal Court, Flujo Holdings Pty Ltd was required to pay substantial security for costs. The proceeding was dismissed for non-compliance with the orders for security for costs.
[16]The Merisant defendants say that the total costs awarded are in the order of
$250,000. There is evidence from an Australian solicitor acting for Merisant that Flujo Holdings Ltd is now in voluntary administration, although the evidence does not give any update as to the outcome of the administration. The point remains that the costs order in that earlier proceeding remains unpaid.
[17] The evidence also shows that other companies in the Flujo group have insolvency problems. Three of them were put into liquidation for non-payment of taxes. Mr Tew, one of the directors, has been disqualified from being the director of a company in Australia. Neither Mr Tew nor Mr Hanna are now directors of Flujo Sanguineo Holdings Pty Ltd. They have now been replaced by another man. There are other companies associated with Mr Hanna which have been subject to external administration or strike-off. The Merisant defendants have also suggested that there
are issues with the credibility of Mr Hanna and Mr Tew who have wrongly held out in affidavits that they are directors of companies after they have ceased to hold office. The general tenor is to show that there are strong risk factors, and it is legitimate to infer that if other companies in the Flujo group have insolvency problems then that that risk also attaches to Flujo Sanguineo Pty Ltd.
[18] There is limited information about Flujo Sanguineo Holdings Pty Ltd. It holds intellectual property rights. There is information from the administration of Flujo Holdings Pty Ltd that it paid $250,000 for those intellectual property rights. The evidence includes a bank statement showing a sum of approximately $300,000 held by the company, but that only shows a sum of money held at one point in time. The company has not provided any detailed information as to its financial position. The information it has provided is not enough to set aside the position established by the defendants that there is reason to believe that Flujo Sanguineo Holdings Pty Ltd will not be able to pay costs if it loses the case. Mr Tew has given assurances that costs will be paid but assurances by themselves do not count and are not enforceable if the company’s position takes a turn for the worst.
[19] As to the merits of the case, I take guidance from the decision of Courtney J on the interim injunction in the proceeding by Flujo Holdings Pty Ltd.8 She was not satisfied that there was a serious case to be tried and dismissed the application without considering matters of balance of convenience. Mr Marriott pointed out that the application was decided without expert evidence. I note that Flujo Holdings was prepared to carry on with the proceeding to trial, although it abandoned the trial on its eve. That would suggest that the company had received some professional advice indicating that it had prospects of success. Mr Marriott explained to me that the plaintiff’s case is that there is some subtlety to the way that the Merisant defendants have done their get-up as using reverse colouring, which may mean that consumers will not readily distinguish one product from the other. I simply note the point. While the claim is available it also appears that the Merisant defendants have good grounds for resisting the proceeding.
8 Flujo Holdings Pty Ltd v Merisant Company Inc [2016] NZHC 1779.
[20] There are no factors that count against security being ordered. There is a reasonable prospect that a costs order will be unenforceable or fruitless unless security is ordered. The balance I strike is that some security is required, but the security orders need to be moulded so as to allow a basis for Flujo Sanguineo Holdings Pty Ltd to continue with its proceeding while leaving some protection in place for the defendants.
[21] The defendants take a hard-nosed attitude towards security. They have calculated costs according to scale for a seven-day hearing at $75,000, and they have claimed disbursements, including an estimated expert’s fee of $20,000 to make a total of some $96,000. They want that sum paid up-front almost forthwith and an immediate stay; and in default of payment an unless order will operate so that the proceeding will be dismissed without further order of the Court.
[22] Mr Marriott understandably objected to those terms. He proposed that costs should be payable in tranches. Initially he proposed that security be fixed only for a first tranche and that the plaintiff should then come back to Court for later determinations for further tranches at different stages of the case. That also is unrealistic. It is inefficient to have the parties come back to Court repeatedly to set and reset security. It is an inefficient use of the parties’ time.
[23] Mrs Rutter made the point that while the defendants have calculated costs according to scale she anticipates that the actual costs incurred by the defendants will be significantly higher. That is unsurprising given that costs are normally fixed at what are regarded as two-thirds reasonable costs by a lawyer working in that field.
[24] Equally, when the Court fixes security for costs it does not invariably fix the amount of security at 100 percent of the scale costs. There is some recognition that a plaintiff may have some prospect of success. The amount of security is often adjusted in view of the Court’s view of the ultimate success of the proceeding. If a plaintiff’s case is a guaranteed winner cert there would be no reason for ordering security. If the defendant’s case is watertight, there would be reason to order high security. In a case like this where the merits are mixed, it is hard to predict. Some discounting from the scale is required.
[25] The defendants’ calculations have applied the rates that came into force on 1 August 2019, that is $2,390 a day for category 2. They have allowed for normal steps taken in a proceeding. There is no allowance for interlocutory hearings, apart from the present one. There is a claim for commencement of the defence because no statement of defence has been filed yet. I repeat my comment that there must be some room for economy from both sides, because they can use knowledge from the earlier proceeding to run this one.
[26] Counsel differ as to the likely length of the hearing. The defendants say that the case would require seven days for hearing. Mr Marriott says that only five days would be required. Mrs Rutter indicated that in the earlier case each side was to call one expert witness, the plaintiff had two other witnesses and the defendants had four other witnesses. On the rule of thumb that one expert requires a day and each other witness normally requires half a day, the case might be heard within five days. I take five days as the likely hearing time.
[27] I shall order security in tranches. That is with the view to making the proceeding more manageable for the plaintiff while also offering protection to the defendants. The tranches will be in three stages:
(a)the first will cover the steps up to inspection of documents;
(b)the second will cover the steps until delivery of the plaintiff’s evidence; and
(c)the third will cover the other steps, including the trial.
[28]I set the dates of payment as follows:
(a)the first tranche is to be paid by 5 December 2019.
(b)the second tranche is to be paid on the close of pleadings date; and
(c)the third tranche is to be paid four weeks before the trial commences.
[29]I fix the amounts for the tranches:
(a)for the first tranche: $17,000;
(b)for the second tranche: $25,000; and
(c)for the trial: $25,000.
[30] That total is $67,000. That is not as much as the defendants sought. I have applied some discounting, including the proposed expert’s fee. I understand that the same expert is going to be retained. In preparing his evidence he will already have the evidence he gave before. His work is likely to require some updating in preparation for trial.
[31] If any tranche is not paid on the due date, the proceeding will be stayed. If the last tranche is not paid, the fixture will be vacated.
[32] I reserve leave to apply further to fix security afresh. That may be needed if the case looks as though it is going to involve more than I have estimated in reaching security, but my intention is to set security in a way which allows the parties to continue with the proceeding without coming back to court.
[33] The defendants seek an unless order if security is not paid. That is not the standard approach when the court fixes security for costs. I have found a convenient way to deal with the matter is to fix a date which comes after the start of the stay. If the security has not been paid after that date, the defendant may apply to dismiss the proceeding for non-compliance with the order for security. In this case, taking into account that the plaintiff is an Australian corporation, I fix four months after the dates for payment as the dates after which the defendants may apply to dismiss if security is not paid. It will be for the judge hearing that application to decide, in the circumstances at that time, whether the proceeding should be dismissed for breach of the order. I am not to be taken as directing what should happen. That is for decision later.
[34] I was concerned that the defendants have not yet filed a statement of defence. Their position is that they will only provide a statement of defence if security is first provided. Some progress needs to be made regardless of the security question. This case is unusual for having run so long without a statement of defence having been filed at all. I gather that preparing a statement of defence will not be particularly demanding because the defendants will be able to draw on the pleadings in the earlier proceeding. Mrs Rutter did not signal that any new issues will arise.
[35] Accordingly, regardless of the other orders I make, I direct the defendants to file and serve their statements of defence by 26 November 2019. I direct the Registrar to allocate a case management conference. That conference will be vacated if the security is not provided by 6 December 2019.
[36] As to costs, Mr Marriott protested that the application was unnecessary because earlier the plaintiff made an offer to provide a first tranche of security. In the event the defendants have been largely vindicated, although I have not accepted their application entirely. In my judgment, this hearing was required to have security for costs fixed. I am not persuaded that the correspondence last week was by itself sufficient to clear up all issues. Accordingly, the defendants would ordinarily have costs.
[37] There is, however, another aspect. The defendants were unsuccessful in their application to dismiss the proceeding as an abuse of process. No costs order was made on that application. Ordinarily the defendants should have paid costs because they failed, as costs follow the event. While the rates have changed in the meantime, the amounts of costs on each interlocutory application are likely to be more or less the same. In the circumstances, I make no order for costs against Flujo Sanguineo Holdings Pty Ltd on the basis that it has not sought costs against the defendants in their application made in 2017. That is one set of costs is set off against the other to leave the position neutral between the parties on the interlocutory applications.
[38]I reserve leave to apply for further directions.
……………………………….
Associate Judge R M Bell
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