Intellectual Property Development Corporation Pty Limited v Primary Distributors New Zealand Limited HC Auckland CIV 2006-404-4695

[2009] NZHC 2590

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

CIV-2006-404-4695

BETWEEN  INTELLECTUAL PROPERTY DEVELOPMENT CORPORATION PTY LIMITED

First Plaintiff

ANDHEFTY NZ LIMITED Second Plaintiff

ANDPRIMARY DISTRIBUTORS NEW ZEALAND LIMITED

First Defendant

ANDDONALD JOHNSTONE GRAHAM Second Defendant

ANDROBERT JOHN JONES Third Defendant

Hearing:         16 December 2009

Appearances: G Williams for Plaintiffs

FMR Cooke QC for Defendants

Judgment:      16 December 2009

JUDGMENT OF ASHER J

Solicitors:

AL Ringwood/GC Williams, Bell Gully, PO Box 4199, Auckland

RJ Macdonald, Short & Partners, PO Box 137 241, Parnell, Auckland
Copy:

FMR Cooke QC, PO Box 1530, Wellington 6140

INTELLECTUAL PROPERTY DEVELOPMENT CORPORATION PTY LIMITED AND ANOR V PRIMARY DISTRIBUTORS NEW ZEALAND LIMITED AND ORS HC AK CIV-2006-404-4695  16

December 2009

[1]      It is necessary to give directions on a number of procedural issues in this proceeding.

[2]      The  plaintiffs,  Intellectual  Property  Development  Corporation  Pty  Ltd (“IPDC”), have succeeded against the first defendant, Primary Distributors New Zealand Limited (“PDNZ”), in establishing a breach of trademark.   An order was made by me in the High Court, (Intellectual Property Development Corporation Pty Ltd & Anor v Primary Distributors New Zealand Limited & Ors (2008) 8 NZBLC

102,274), that the plaintiffs are entitled to an account of profits, and the period in respect of which that account of profits is to be calculated was extended by the Court of Appeal following an appeal (CA296/08 23 September 2009).

[3]      My decision in the High Court had given the parties leave to come back to the Court for an account of profits exercise should they be unable to agree, and the Court of Appeal remitted the proceeding back to this Court so that that exercise could be undertaken.

[4]      A hearing date has been given for an account of profits hearing on 27 and

28 May 2010.  Given the issues involved, the scheduler should, if possible, extend this two day hearing to a three day hearing.

[5]      Various issues are in contention.  These are aspects of the ambit of discovery of both the defendants and the plaintiffs in relation to the account of profits.  The parties have, at least until today, been unable to agree on the order and timetable for filing briefs.  Mr Williams for the plaintiffs now seeks an additional hearing, which would take place prior to the actual account of profits hearing, where a variety of substantive issues still in contention could be resolved.

[6]      Issues of discovery relating to the defendants and the timetable and order of briefs have largely been resolved, but will be dealt with in this judgment.  The issues in respect of which there is still real contention are whether there should be the additional hearing, and whether the plaintiffs should be required to provide further discovery in relation to an account of profits.  I propose dealing with these disputed

issues first, beginning with the question of whether there should be an additional hearing.

Should there be an additional hearing?

[7]      Mr Williams for the plaintiffs, in support of his argument that an additional hearing is required, refers to a number of substantive issues that need to be determined.  While accepting that not all substantive issues could be determined at the additional hearing and that some will have to wait for the account of profits hearing, he identifies particular issues which he submits should be heard in that earlier hearing.

[8] The plaintiffs claim that all the defendants are liable in passing-off. This would include the two director defendants, the second and third defendants. I did not deal with that issue in my earlier judgment. The Court of Appeal, while stating it was not surprised that the issue was not dealt with given the way the case was argued, specifically remitted the passing-off issue back to this Court for reconsideration. This was on the basis that PDNZ was free to argue that passing-off should not be dealt with by the High Court because it had effectively been abandoned by IPDC in that Court: at [95].

[9]      Mr Williams submits that this issue as to the availability of passing-off, and whether  the  defendants  are  liable  in  passing-off,  should  be  dealt  with  in  this additional hearing.   He also submits that the issue of whether there should be apportionment of the defendants’ profits in the account of profits exercise should also be dealt with at that additional hearing prior to the account of profits hearing. The plaintiffs will argue that no apportionment exercise should be undertaken.  They will argue that the defendants’ use of the Hefty trademark made their products “instruments of deception”, and that as a matter of law the sales were tortious and the whole of the profit on every such sale has to be accounted for.   They will argue, therefore, that no apportionment arises.

[10]     There is also an issue as to whether the second and third defendants can be personally liable in relation to an account of profits.  They have received substantial

management fees, and the plaintiffs will be claiming that a portion of their management fees must be treated as profits that should be disgorged.

[11]     Mr Williams submits that a preliminary determination of these issues may mean, if the plaintiffs are successful, that apportionment evidence does not need to be provided.  In any event, he argues that it is proper to resolve all issues of liability before the hearing insofar as it is possible to do so.   He relies on Rapid Metal Developments (Aust) Pty Ltd v Rosato [1971] Qd R 82, in particular the statement at

89:

But where the state of the account, and therefore the balance, depend upon the determination of disputed questions of fact, such as, in this case, what items were delivered on hire, and at what rates, and what items were not returned, or were returned damaged, these questions must first be decided in the ordinary way upon evidence.

[12]     He also relies on the decision in Rockhampton Permanent Building Society v Peterson [1986] 1 Qd R 128 at 130, where it was stated that where a preliminary question is raised that goes to the right of the opposite party to recover in whole or in part:

It must be rare indeed for an order for accounts to be made before the questions of principle have been resolved.

[13]     Mr Cooke QC submits that there should not be two hearings.  He submits that this will be wasteful and unnecessary.  He notes that there are already a number of issues of principle which will have to await the account of profits exercise, and that there is no practical need for further split hearings.

A further hearing

[14]     I do not interpret the Rapid Metal Developments (Aust) Pty Ltd v Rosato or Rockhampton Permanent Building Society v Peterson cases as setting out a general principle that all substantive issues must be resolved before there is an account of profits hearing.  Rather, I see them as standing for the commonsense proposition that an order for an account of profits should not be made until all issues of principle relevant to whether such an order should be made have been determined.

[15]     There was still doubt in those cases whether an order for accounts should be made at all.  The point had not been determined.  Thus, it was stated in Rapid Metal Developments (Aust) Pty Ltd v Rosato at 90, that:

If ultimately an account is seen to be necessary, although I cannot at present see why it should, the learned trial Judge may exercise his powers to order one in the light of his findings on the main issues.

It was stated in Rockhampton Permanent Building Society v Peterson at 130:

It may even be, if the defence is to be taken at its face value, that the right of the mortgagee to recover at all will be denied.

Here the position is different.  An order for accounts has already been made.  There is no doubt about the plaintiffs’ right to such an order.   The end question is only, how much?

[16]     It is relevant that neither party here is envisaging the account of profits hearing turning only on the presentation of accounts in the form set out in the rules in Part 16 of the High Court Rules.   They both accept that for an accounting of profits exercise to be done properly, briefs of evidence are required, which will set out substantive information about the defendants’ affairs, and that there will have to be oral evidence.   Indeed, the timetable orders that it is proposed that I make will involve the provision of further discovery by the defendants, the filing of briefs of evidence by both the defendants and the plaintiffs, and the filing of reply evidence.

[17]     It is possible that an additional hearing might result in a determination that no apportionment exercise should take place.   It could result in a determination that there are passing-off causes of action available against all defendants, which would make such an exercise unnecessary.   However, equally, it might not.   There is nothing unusual about the Court hearing evidence as to loss in a liability hearing, where if certain questions are determined against the plaintiff the hearing of evidence of loss will prove to have been an irrelevant exercise.  That is the way of litigation.

[18]     I must weigh against any potential savings of time in determining issues of principle, the fact that there is always delay and cost in an additional hearing.  That has serious practical ramifications in this case where there is a date allocated for

May 2010 for the account of profits hearing.  If that was turned into the additional hearing, as is proposed by the plaintiffs, with a later hearing on an account of profits, there would undoubtedly be considerable further delay and cost.  There is always the risk also that any hearing that might take place on issues of principle when the exchanges of briefs of evidence have not been carried out and where that evidence has not been tested, might be unsatisfactory because all the information is not before the Court.  There is no certain indication that that would happen in this case but it is always a possibility and a danger when preliminary hearings are conducted.

[19]     Given that an account of profits hearing is necessary and two days are already set down for that hearing, I consider that the best course is for all issues to be determined at that hearing.

[20]     I make it clear that there is undoubtedly force in some of Mr Williams’ submissions in support of the additional hearing, and it may be that there will be evidence and submissions in the single hearing that will take place that are ultimately unnecessary.   It may also be that there is a certain clumsiness in combining the argument of issues of principle with an account of profits hearing.  However, I have to weigh against that the fact that there are going to be issues of principle that must be determined at the account of profits hearing in any event, and I weigh against it the cost and delay matters already referred to, and the advantage of having all the evidence and all the issues before the Court when it has to make a determination.

[21]     There will need to be a conference closer to that hearing to determine the most efficient procedure for the hearing, and in particular the order of issues to be argued and determined following the hearing of evidence.

[22]     I, therefore, rule that there will be a single hearing, at which all issues will be determined.

Discovery against the plaintiffs

[23]     Mr Cooke for the defendants seeks an order of discovery against the plaintiffs of documentation relevant to the plaintiffs’ attempts to enter the market with the

Hefty brand in 2006.  He submits that such discovery will be relevant to the question of apportionment and will assist the Court in assessing the extent to which the profit earned by PDNZ was earned through the use of the plaintiffs’ intellectual property right (the Hefty trademark) as opposed to the defendants’ own efforts.   It is the defendants’ argument that the primary reason for their sales has been their excellent product and distribution network in New Zealand supermarkets.  It is the defendants’ argument that there is little market power in the Hefty brand.

[24]     The background to this request is the fact that it is common ground that after the defendants stopped using the Hefty brand in about June 2006, the plaintiffs then endeavoured to sell Hefty product in  New  Zealand.   Ultimately this  was not  a successful exercise and the Hefty brand is no longer marketed in New Zealand by the plaintiffs.

[25]     The defendants really wish to gather the documents relating to the plaintiffs’ sales efforts in New Zealand to show the weakness of the Hefty brand.  It cannot be said that such documents will necessarily be irrelevant to an exercise of apportionment.   However, I consider that the relevance would be marginal.   The primary evidence on the defendants’ profits must come from the defendants themselves,  and  if  the  defendants  wish  to  show  that  the  sales  were  primarily achieved through their own particular efforts and product rather than the Hefty brand then they will obviously be able to adduce evidence on the point.   To turn the account of profits hearing into a hearing also on the plaintiffs’ performance in New Zealand would be to take the account of profits exercise beyond its normal boundaries.   Mr Cooke was not able to put forward any authority where such an exercise had been undertaken.

[26]     In the end the Court has a discretion as to the ambit of discovery.  Discovery needs to be proportionate.  I am mindful of the fact that the amount in issue in this case comes to no more than $100,000 - $300,000.  The fact of the plaintiffs’ failure after June 2006 to market Hefty is already before the Court and no documents are required to establish that.   In all the circumstances, in my discretion I decline to order further discovery against the plaintiffs.  I do not think that it is proportionate in the circumstances given the cost and effort involved in such discovery.  The natural

ambit of an account of profits exercise and the at best marginal relevance of any documents that would be disclosed militate against it.

Discovery against the defendants

[27]     This issue has been resolved, and orders can be made by consent.

[28]     The defendants will provide discovery by verified affidavits of all documents in their control which are relevant to the financial periods now to be subject to the account of profits that have not already been disclosed and, in particular:

a)       full copies of the first defendant’s yearly and management accounts for the period commencing 1 April 2005 to 31 August 2006;

b)all documents that identify the sales of the Hefty labelled product that the first defendant acquired from Cartigny NZ in March 2005 and sold prior to June 2005;

c)       all documents relating to the management fees or any other fees or payments  paid  to  the  second  and  third  defendants  by  the  first defendant during the period 1 July 2005 to 31 August 2006; and

d)all documents relating to or which support any allegation that any expense or general overhead incurred by the first defendant during the relevant period was attributable to the obtaining of the profits made from the infringing sales,

by 5:00 pm Wednesday, 10 February 2010.

Defendants’ briefs of evidence

[29]     The parties have now agreed that no formal accounts should be provided and that the best way to proceed is by the filing of briefs setting out the information relevant to an account of profits.  Mr Williams has sought a specific order setting out what  should  be  in  those  briefs.     What  he  proposes,  he  submits,  effectively

corresponds to what would, in any event, be set out in proper accounts filed in accordance with the Rules.  Mr Cooke has argued that unduly specific orders should not be made as it might not be possible for the defendants to comply.  It is not known yet what information is in fact available.

[30]     I have decided that the best way forward is to make the order sought by Mr Williams,  but  to  make  it  clear  that  it  only  applies  to  the  extent  that  the information is available.  However, if the information is not available there will have to be an explanation given.

[31]     I, therefore, direct the defendants to:

a)       File and serve a brief of evidence which verifies the sales of Hefty branded  product  which  were  made  by  the  first  defendant  and  in respect of which an account of profits must be given.  The brief will need to provide the following information, where possible, in relation to the relevant sales:

i)        The date each sale was made;

ii)       The purchaser, identified by retail or wholesale outlet;

iii)The type of product sold (ie whether it was Hefty branded cling film/wrap, baking/cooking paper, foil or greaseproof paper);

iv)      The quantities of each type of product sold; and v)     The relevant sale price for each item.

b)        The brief will also need to clearly identify which sales:

i)        Are of product that the first defendant acquired from Cartigny

NZ in March 2005 and sold in New Zealand after June 2005;

ii)       Are  a  product  that  the  first  defendant  imported  into  New

Zealand after 21 April 2005 and sold between that date and

30 June 2005.

If it is not possible to provide this information, an explanation should be given why this is so.

c)       Serve their witness statements for the account of profits exercise eight weeks before the date allocated for the date of hearing.

d)File and serve a bundle of documents upon which they intend to rely at the same time; and

e)       File  and  serve  a  detailed  document  outlining  their  contentions regarding the account of profits to be undertaken, which includes their contentions as to what expenses and overheads are to be taken into account in assessing the relevant profits (again eight weeks before the date allocated for the hearing).

Order of briefs/timetable

[32]     The defendants now accept that they should file their briefs first, and I make the following directions:

a)       The  defendants  will  provide  the  additional  discovery  referred  to within     21 days     of     today’s     date     (5:00 pm     Wednesday,

6 January 2010).

b)        The  defendants  will  file  their  briefs  of  evidence  by  5:00 pm

Thursday, 1 April 2010.

c)        The plaintiffs will file their briefs of evidence by 5:00 pm Thursday,

29 April 2010.

d)       Reply evidence and the defendants’ submissions are to be filed by

5:00 pm Thursday, 13 May 2010.

e)        The  plaintiffs’  submissions  to  be  filed  by  5:00 pm  Thursday,

20 May 2010.

[33]     At the hearing the defendants’ evidence will be heard first, followed by the plaintiffs’ evidence.

[34]     I give the parties leave to seek a further conference prior to the hearing on short notice.   I would be happy to hear counsel by telephone at 9:00 am on any convenient morning.

Costs

[35]     Given the outcome of this hearing there will be no order as to costs.

………………………………..

Asher J