Intellectual Property Development Corporation Pty Ltd v Primary Distributors New Zealand Ltd
[2012] NZCA 403
•31 August 2012
| IN THE COURT OF APPEAL OF NEW ZEALAND |
| CA37/2011 [2012] NZCA 403 |
| BETWEEN INTELLECTUAL PROPERTY DEVELOPMENT CORPORATION PTY LIMITED |
| AND HEFTY NZ LIMITED |
| AND PRIMARY DISTRIBUTORS NEW ZEALAND LIMITED |
| AND DONALD JOHNSTONE GRAHAM |
| AND ROBERT JOHN JONES |
| Hearing: 17 May 2012 |
| Court: Arnold, Ellen France and Wild JJ |
| Counsel: G C Williams for Appellants |
| Judgment: 31 August 2012 at 2.30 pm |
JUDGMENT OF THE COURT
AThe appeal is dismissed.
BThe appellants must pay the respondents costs in this Court for a standard appeal on a band A basis and usual disbursements.
____________________________________________________________________
REASONS OF THE COURT
(Given by Ellen France J)
Table of Contents
Para No
Introduction [1]
Background [3]
The High Court judgment [11]
The competing contentions[16]
Account of profits – the principles[22]
Conclusion [38]
Application of the principles to Messrs Graham and Jones[39]
Should a portion of the management fees reflecting the
proportion of the Hefty business be disgorged? [55]
Result and costs [64]
Introduction
Donald Graham, the second respondent, and Robert Jones, the third respondent, are the directors of Primary Distributors New Zealand Ltd (Primary Distributors), the first respondent. The respondents all admitted liability for a breach of trademark by unlawful sales of products under the brand name “Hefty”. The first appellant, Intellectual Property Development Corporation Pty Ltd (Intellectual Property) is the owner of the Hefty trademark.
The respondents consented to orders for them to account for profits. However, Mr Graham and Mr Jones resisted a claim that they should disgorge a portion of the directors’ management fees that they were paid by Primary Distributors. On the taking of an account of profits, Asher J concluded Mr Graham and Mr Jones did not have to account for their management fees.[1] The appellants appeal against that decision. The appeal turns on whether the link between the infringing conduct and a portion of the management fees has been established.
Background
[1]Intellectual Property Development Corporation v Primary Distributors New Zealand Ltd (2010) 89 IPR 599 (HC).
There is no material dispute about the factual background, which is set out in full in the judgment of Asher J.[2] The description that follows draws on the judgment and on the summary in the written submissions for the respondents.
[2]At [4]–[18].
From the mid-1990s, Primary Distributors was the exclusive distributor of Hefty-labelled products in New Zealand. The Hefty range of products included cling-film wraps, papers and other domestic products. Hefty products competed at the lower end of the market against supermarket brands like “Pams”, with the more expensive “Glad Wrap” at the top of the market.
Primary Distributors’ main customer for the Hefty products in New Zealand was the Foodstuffs Group through its supermarket chains such as New World and Four Square. Primary Distributors did not sell directly to the public.
In March 2005 the Australian supplier of Hefty products went into receivership, and in April 2005 it was placed into liquidation. Primary Distributors wished to continue distribution. In April 2005 they offered NZ$8,000 to the receivers to buy the Hefty trademarks in New Zealand. However, the receivers agreed to sell to Intellectual Property a group of trademarks in several countries for AUD$10,000. The sale included as one of the trademarks the mark “Hefty” in New Zealand.
Primary Distributors had continued to sell Hefty branded cling-film wrap in New Zealand under a three-month agreement with the receivers. The three month period expired on 31 June 2005 but Primary Distributors nonetheless continued to sell the Hefty branded products. Intellectual Property initially took no steps to prevent Primary Distributors from using the trademark but, when steps were taken in mid-July 2006, Primary Distributors gave undertakings as sought by Intellectual Property not to market any Hefty-labelled products in New Zealand pending further order of the Court. It stopped selling the remaining Hefty products. Intellectual Property then issued proceedings.
A trial proceeded before Asher J in early 2008. Intellectual Property relied on breach of registered trademarks, breach of various sections of the Fair Trading Act 1986, and passing off. Primary Distributors accepted during the trial that the company had infringed the Hefty registered trademarks. They also accepted that Intellectual Property was entitled to an account of profits. There was a dispute over the period that the account was to cover. The respondents said that they should not be required to account for profits for the period of time when the appellants had decided not to object to the misuse of the trademark. That view was accepted by Asher J,[3] but that decision was appealed successfully to this Court.[4]
[3] Intellectual Property Development Corporation Pty Ltd v Primary Distributors New Zealand Ltd[4]Intellectual Property Development Corporation Pty Ltd v Primary Distributors New Zealand Ltd [2009] NZCA 429, [2010] 2 NZLR 729.
This Court held that Intellectual Property was entitled to an account of profits from the time of the commencement of the infringement through to 13 July 2006. The account of profits period was extended accordingly and the matter remitted back to the High Court for the account of profits calculation to be carried out for the extended period.
Intellectual Property also submitted that an account of profits should have been ordered against Messrs Graham and Jones. This Court recorded that it had been conceded that they should be jointly and severally liable for amounts payable by Primary Distributors. Whether or not there should be any disgorgement of any personal profits of the directors as distinct from profits earned by Primary Distributors was a matter of dispute. That issue was one of the questions then dealt with by Asher J in the judgment under appeal.
The High Court judgment
We come back later to the detail of some of the reasoning but for present purposes we need only note, first, Asher J’s finding that it was open to Intellectual Property to pursue a claim in passing off. The Judge was satisfied that this cause of action was proven.
The second point we need to note is that Asher J rejected the respondents’ argument that revenue from the sale of the Hefty products should be apportioned so that only that portion of the profits attributable to the breach of the Hefty trademark, as opposed to the entire profit from the sale of Hefty-branded goods, should be awarded to the appellants. Instead, the Judge accepted the appellants’ submission that the “middleman” principle applied. The appellants had contended that when Primary Distributors put the Hefty-labelled goods into circulation, the disposition of the goods to a wholesaler or “middleman” (Foodstuffs) was wrongful whether or not anyone was or would be deceived. Further, the appellants said that the plaintiff in these cases is entitled to an account of all profits made on the sales of the goods, as opposed to the profits attributable to the infringing use of the trademark on those goods. On this approach there is no apportionment of the revenue from infringing sales. The effect of the different approaches in this case is that, on an apportionment basis, the Judge would have fixed the profits at close to $33,000 being approximately 10 per cent of the relevant revenue. Instead, the ultimate award in the appellants’ favour was over $125,000.
The third point we note is the finding that Mr Graham and Mr Jones were jointly and severally liable with Primary Distributors for the breach of trademark and passing off.
Finally, Asher J rejected the appellants’ claim that Mr Graham and Mr Jones should disgorge their management fees on the basis this would amount to double counting. Asher J also took the view that the claim for disgorgement of the management fees was a new claim. It had not been advanced at the initial trial nor clearly pleaded.
After dealing with other issues not relevant to this appeal, judgment was awarded in favour of Intellectual Property in the sum of $125,524.16 plus interest. Costs were reserved.
The competing contentions
The parties’ respective positions can be summarised in the manner we set out below.
The appellants say that on the basis of Leplastrier & Co Ltd v Armstrong-Holland Ltd,[5] the Judge was wrong to reject their claim for a portion of the management fees. In that case, Harvey CJ said:[6]
Under no circumstances can he [the defendant], ... deduct interest on his capital employed in the business. Under no circumstances can he claim any remuneration to himself, nor under any circumstances can he claim ... any director’s fees for carrying on the business.
[5] Leplastrier & Co Ltd v Armstrong-Holland Ltd (1926) 26 SR (NSW) 585.
[6] At 593.
The appellants’ submission is that on the basis of this principle Mr Graham and Mr Jones should disgorge a portion (11 per cent) of the total management fees of $328,000. On that approach the appellants would, broadly, recoup a sum consistent with the portion of the respondents’ business that represented the infringing business. Split equally between Messrs Graham and Jones that would amount to $18,040.00 plus interest each.
The respondents say that the management salaries paid to Mr Graham and Mr Jones were not attributable to the infringing conduct. They emphasise that it was not disputed at trial that the management fees were anything other than part of the general overheads of the business. As such, they could not be identified as attributable to any particular sales of the products of the business. Nor was Mr Jones challenged on his evidence that he and Mr Graham had made no personal profit from the infringement.
The submission is also made that the Judge was right in holding that to allow recovery from the directors would involve a double counting of the same profit.
Finally, the respondents argue that the appellants’ approach amounts to “cherry picking” as between the applicable principles. Having successfully resisted apportionment in relation to the revenues of Primary Distributors, they now seek some apportionment and disallowance of common costs.
Account of profits – the principles
An account of profits is a restitutionary remedy.[7] This remedy is “at base concerned with the gain made by a defendant and is designed to prevent unjust enrichment”.[8] An account is restricted to profits “actually made”.[9] In determining those profits, defendants are treated as if they conducted their business and made profits on behalf of the plaintiff.[10]
[7]Intellectual Property Development Corporation Pty Ltd v Primary Distributors New Zealand Ltd, above n 4, at [77].
[8]Intellectual Property Development Corporation Pty Ltd v Primary Distributors New Zealand Ltd, above n 4, at [76].
[9]Kerly’s Law of Trade Marks and Trade Names (14th ed, Sweet & Maxwell, London, 2005) at[10]Intellectual Property Development Corporation Pty Ltd v Primary Distributors New Zealand Ltd, above n 4, at [77].
The decision of Harvey CJ in Leplastrier relied on by the appellants dealt with the nature of the expenses the infringing party can set off against “gross profits” on sale in determining the relevant profits.[11] The account in that case related to the sale of concrete mixing machines in breach of patent. In the context of considering the costs of manufacture of the concrete mixing machines, Harvey CJ said that the only expenses which can be deducted are those “solely referable” to the manufacture of the machines.[12]
[11]Harvey CJ appears to have used the term "gross profits" to mean simply the revenues derived from the sale of the infringing products: see Leplastrier, above n 5, at 593-594. We will use the term in the sense it was used by the accounting experts in the present case to reflect revenue earned from the infringing items less the total direct cost of sales.
[12] At 593.
Subsequent to Leplastrier, a more sophisticated approach to the assessment of costs that may be set off against the revenues earned from the infringing product has been taken. The approach reflects the concern to meet the purpose of an account of profits, that is, not to punish but to prevent unjust enrichment. The modern approach is set out by the High Court of Australia in Dart Industries Inc v Decor Corporation Pty Ltd.[13]
[13] Dart Industries Inc v Decor Corporation Pty Ltd (1993) 179 CLR 101 (HCA).
The High Court in Dart accepted that in calculating an account of profits, the defendant may not deduct the opportunity costs, that is, the profit forgone on alternative products.[14] But the Court said it would be unfair if, in addition to the inability to deduct opportunity costs, a defendant also could not claim “a deduction for the cost of the overheads which sustained the capacity that would have been utilized by an alternative product and that was in fact utilized by the infringing product”.[15] In Dart the Court said it might be inferred from the evidence that had the companies not been engaged in manufacturing and marketing the infringing product, their capacity for those activities would have been occupied by manufacturing and marketing alternative products. The Court continued:[16]
Where the defendant has forgone the opportunity to manufacture and sell alternative products it will ordinarily be appropriate to attribute to the infringing product a proportion of those general overheads which would have sustained the opportunity. On the other hand, if no opportunity was forgone, and the overheads involved were costs which would have been incurred in any event, then it would not be appropriate to attribute the overheads to the infringing product. Otherwise the defendant would be in a better position than it would have been in if it had not infringed.
[14] At 114.
[15] At 114.
[16] At 114.
The High Court of Australia said that it did not appear that in Leplastrier the concept of opportunity cost had played any part in the reasoning of Harvey CJ. The Court suggested that the English authorities had not grappled with that concept. Although in those cases it was recognised that the purpose of an account was not to punish but to recoup profits improperly made, there was “little examination of the principles to be employed in ascertaining which profits were derived from the infringement”.[17]
[17] At 115, citation omitted.
The process envisaged by the High Court in Dart requires an examination of each item for which a deduction is sought to check that the expense is fairly attributable to the manufacture or sale. That would encompass an inquiry into whether the particular overheads were increased by the manufacture or sale of the product, whether they reflected costs which would have been reduced or would have been incurred anyway, and whether they were “surplus capacity or would, in the absence of the infringing product, have been used in the manufacture or sale of other products”.[18] The concept of opportunity cost may be utilised in answering the last of these questions.[19]
[18] At 119.
[19]Laddie J took a similar approach to that in Dart in Celanese International Corp v BP Chemicals Ltd [1999] RPC 203 (Ch) at [90]. This approach has also been applied in New Zealand in Tiny Intelligence Ltd v ResportLtd [2007] 2 NZLR 263 (HC). The High Court’s approach on this issue was not challenged in the further appeals to this Court and the Supreme Court ([2008] NZCA 281, [2009] 1 NZLR 590; and [2009] NZSC 35, [2009] 2 NZLR 581).
We agree with the respondents that the other cases relied on by the appellants can be distinguished on the basis that they involve fees claimed by the infringer for the very infringement and/or where all of the business revenue earned is attributable to the infringement.
The case of Tenderwatch Pty Ltd v Reed Business Information Pty Ltd[20] is in the first category, that is, it involved fees claimed by the infringer for the very infringement. The infringing conduct in that case involved copying and use of a manual at a workshop. The infringer, a Mr Wallz, had been paid a little over $2,700 for conducting the workshop using the infringing manual. Mr Wallz had earlier conducted similar workshops for the plaintiff, Tenderwatch, using its manual. Tenderwatch claimed the whole of this sum as the profit for which Mr Wallz must account. Mr Wallz said that printing costs and the costs of his own time in compiling the manual and preparing for the workshop should also be deducted as well as a GST component.
[20] Tenderwatch Pty Ltd v Reed Business Information Pty Ltd [2008] FCA 931, (2008) 78 IPR 329.
Heerey J said that although Mr Wallz made use of his own knowledge and relevant experience when he conducted the workshop, he would not have been able to take up the opportunity to do so had it not been for his use of the Tenderwatch manual. That use was fundamental to the presentation of the workshop involving the infringing conduct. The gross revenue received by him should be the starting point for the calculation of profit.
Heerey J considered that nothing the majority said in Dart cast doubt on the opening part of Harvey CJ’s statement in Leplastrier. It followed that the Judge found that it would be wrong in principle to allow Mr Wallz a deduction for the time spent preparing for his presentation with the assistance of the Tenderwatch manual. As the Judge put it:[21]
... This would be tantamount to making a copyright owner pay an infringer for the time and effort spent in infringement. As was said in SheldonvMetro-Goldwyn Pictures Corp 106F 2d 45 (1939) at 51, “a plagiarist may not charge for his labour in exploiting what he has taken”.
[21] At [18].
The costs of printing and GST were properly allowable because they had reduced the actual profit or benefit derived by Mr Wallz from the infringement. Accordingly the profit for which Mr Wallz had to account reflected the gross receipt for conducting the workshop less printing costs and GST.
In Liquideng Farm Supplies Pty Ltd v Liquid Engineering 2003 Pty Ltd the Court did not allow a former employee, Mr Edwards, to deduct money for wages relating to infringing activity.[22] That decision is explicable on the basis that the defendant company in that case was found to be “essentially a one-man operation” over which Mr Edwards had “complete control”.[23] There were no other employees although Mr Edwards’ wife occasionally helped with paperwork. The company was found to be the “alter ego” of Mr Edwards.[24] Further, there was little satisfactory evidence about profit. Before giving oral evidence of costs Mr Edwards had “written some figures” on a piece of paper but that paper was not in evidence.[25]
[22]Liquideng Farm Supplies Pty Ltdv Liquid Engineering 2003 Pty Ltd [2009] FCAFC 7, (2009) 79 IPR 437.
[23] At [14].
[24] At [14].
[25] At [17].
As Mr Cooke QC for the respondents submits, the observation of Learned Hand J in SheldonvMetro-Goldwyn Pictures Corp set out above, that a plagiarist may not charge for his or her own efforts in infringing, was made in a similar context to that in Tenderwatch.[26] The particular costs in issue were the costs of labour directly attributable to the infringing act of copying a play which was then made into a movie.
[26] Sheldon v Metro-Goldwyn Pictures Corporation 106 F 2d 45 (1939) at 51.
Similar issues to those before us arose in an Australian case decided very shortly prior to the hearing of this appeal, namely, Polyaire Pty Ltd v K-Aire Pty Ltd.[27] In that case, the defendant companies, and two directors, were found liable for infringing the plaintiff’s monopoly in the design of an air-conditioning air outlet. The plaintiff pursued an account of profits against one of the directors, a Mr Colebatch, in respect of his director’s salary. Relying on Leplastrier and Tenderwatch, counsel for the plaintiff argued the director should account for a proportion of his salary based on the revenue the companies derived from their sale of the infringing product.
[27]Polyaire Pty Ltd v K-Aire Pty Ltd [2012] SASC 75. We decided that it was not necessary to give the parties an opportunity to make submissions on this case because it is simply a recent illustration of the application of the principles from the earlier cases.
White J said the authorities relied on by the plaintiff showed that in the calculation of the profit derived from the infringing conduct, the infringer could not claim any deduction for his or her own time or effort. However, White J said that he did not see that principle as of assistance because it ignored the prior question, namely, whether Mr Colebatch’s salary, or some part of it, could be attributed to the defendants’ infringing conduct. If it could be so attributed, there was no need to apply Leplastrier, Dart and Tenderwatch to decide that Mr Colebatch should have to disgorge it. But, if that attribution could not be made then the Leplastrier and Tenderwatch principle could not “make good the deficiency”.[28] As the Judge explained:
[51] ... One cannot by a process of inverted reasoning infer from the principle that no deduction from the profits made by an infringer may be made on account of the infringer’s own time and energy that an amount which the infringer did receive must be regarded as profit, let alone a profit attributable to the infringing conduct. Perhaps put more shortly, one cannot use a principle relating to the deductions which may properly be made from an acknowledged profit to determine the antecedent question of whether the infringer has received any benefit at all from the infringing conduct.
[28] At [51].
In that case, the Judge concluded there was nothing in the salary received that could be characterised as profit attributable to the infringing conduct.
Conclusion
The conclusion we draw from the authorities discussed is that to the extent Leplastrier would have proscribed the ability to deduct the management fees as an overhead from the gross profit of the business, it is no longer good law. However, that does not detract from the general principle that Messrs Graham and Jones may have to disgorge a portion of the management fees if it has been shown that they received that remuneration on account of their infringing conduct. We turn then to consider that question.
Application of the principles to Messrs Graham and Jones
Mr Cooke’s first argument for the respondents relies on the characterisation of the management fees as general overheads for the purposes of calculating the profit in the hands of Primary Distributors. In discussing this submission, it is helpful to say something about the evidence on this point and a little more about Asher J’s relevant findings.
Two accounting experts were called by the parties, Andrew McKay for the appellants, and Shane Hussey for the respondents. As Asher J noted, there was a great deal of agreement between the two experts. In particular, they largely agreed on the methodology for determining the profit for Primary Distributors attributable to sales of the Hefty products. The two experts agreed that the gross profit figure was $359,299. They also agreed that a relatively small proportion of the business was attributable to the infringing conduct. The disagreement between the parties related to the appropriate deduction from the gross profit for overheads.
The appellants argued that overheads had to be directly attributable to the manufacturing and sale of the infringing products in order to be deductible. The respondents said that all the costs of business had to be absorbed over all of the revenues and that general infrastructure costs could be deducted.
Asher J applied Dart over Leplastrier on this point. Accordingly, allowances were made for general overheads attributed in part to the manufacture and sale of the infringing products. Further, general infrastructure costs that were fairly attributable to importing and marketing the Hefty products were also deducted.
The Judge said that the issue of management fees was “more difficult”.[29] Initially, a figure of over $630,000 as a deductible overhead was advanced but, in his reply brief, Mr Jones accepted that some of the management fees reflected a profit extraction mechanism. Mr Hussey and Mr McKay both agreed that the management fee included some excess which was a form of distribution of profit. Ultimately, for the purposes of his calculation of the appropriate deduction from the overheads, Mr Hussey adjusted that amount to reflect the profit element, resulting in a deduction of $328,100. But for his understanding of the legal position, Mr McKay agreed that Mr Hussey’s adjustments correctly accounted for the relevant profits.
[29]Intellectual Property Development Corporation v Primary Distributors New Zealand Ltd, above n 1, at [116].
However, the fact the management fees were part of the company’s overheads for the purposes of ascertaining the profits of Primary Distributors does not preclude the possibility that fees in the hands of the directors may comprise profit attributable to their infringing conduct. The two exercises are separate. As was the case in Polyaire it is still necessary to consider the directors’ remuneration and determine whether some of that is profit received on account of the infringing activity.
Mr Cooke relies in this context on Asher J’s acceptance of Mr Hussey’s evidence that Mr Graham and Mr Jones had not benefited personally from the infringement.
Mr Hussey’s evidence on this was that the benefit that Mr Graham and Mr Jones might be considered to have received was the total profit arising from the sale of Hefty-branded products less additional costs (taken in the form of additional management fees), as opposed to what might have been rendered but for the infringement of the Hefty brand. This amount was countered by the fact that as shareholders they had not received their share of the distribution of the final reserves they would otherwise have received because the company had spent that money on legal fees. Mr Hussey explained in cross-examination that because the company spent the money on its legal fees it was not available to Mr Graham and Mr Jones and because of that they had not benefited overall from the infringement. Asher J accepted this evidence and so found that the directors had not personally benefited from the infringement.
We do not agree with this reasoning. Mr Jones explained that as he and Mr Graham were full owner operators, they “accordingly drew a monthly fee”. He said he did not see why the work they did for the Hefty products should have been done for free. That may be so but the end result is they have received money a portion of which may be attributable to infringing conduct.
We turn then to Mr Cooke’s second argument, namely, that requiring the directors to account for the management fees would amount to double counting. Asher J decided that if the appellants received more than the sum recouped from Primary Distributors, the directors would be doubly penalised. That was because the profits received by the directors in relation to the Hefty brand were the company’s profits. Accordingly, the Judge said that:
[93] To give [Intellectual Property] the management fees would go beyond restitution and would involve a punishment/profit factor. In allowing Messrs Graham and Jones to retain the management fees they received, they are not being permitted to profit from their own wrong. They are allowed to retain their remuneration from the company in their capacity as employees. The disgorgement of the company’s profit will mean that Messrs Graham and Jones’ profit from the company will be appropriately reduced. It would be unfair to make them pay again.
Asher J said he did not interpret Leplastrier as authority for the proposition that no director fees received during a period of infringement can be retained. The Judge said that if that is what Harvey CJ meant, he declined to apply it.[30]
[30] At [96].
The potential double-counting issue was referred to by White J in Polyaire. Counsel for the director, Mr Colebatch, in that case also argued that if salary and wages were taken into account in calculating the companies’ profit, they could not be characterised as profit in the hands of the recipient. White J did not decide the point as it was not necessary to do so but expressed some reservations about the approach. White J said:[31]
As a general proposition, [this] submission may require some qualification. It by no means follows that a payer’s legitimate expense may not be profit in the hands of the recipient, or that the characterisation of a payment from the payer’s perspective will be decisive of the characterisation of the payment in the payee’s hands.
[31] Polyaire Pty Ltd v K-Aire Pty Ltd, above n 27, at [54].
As we have indicated already, we agree that the characterisation of a payment from the company’s perspective is not necessarily decisive of its characterisation in the hands of Messrs Graham and Jones. Some of the monthly management “fee” received by Mr Graham and Mr Jones may contain an element of profit made from the infringing conduct. To the extent that the appellant proved that it did, the two directors must disgorge that profit because they were infringers.[32] They were in a different position than those employed by the company to liaise with the supermarkets and grocery store owners – those employees were not infringers. We thus do not agree with Asher J’s statement[33] (set out above)[34] that “[t]-hey (Messrs Graham and Jones) are allowed to retain their remuneration from the company in their capacity as employees”.
[32]Intellectual Property Development Corporation, above n 1, at [89]; Asher J found that the two respondents were jointly and severally liable.
[33] At [93].
[34] At [48].
In terms of Mr Cooke’s submission that the appellants are cherry picking, Mr Williams for the appellants acknowledged that the application of the “middleman” principle has the effect of overcompensating the appellants in that they are much better off than they would have been if they had conducted the infringing business themselves. This matter is not before us because there was no cross appeal on that aspect of the judgment. However, we record that it may be appropriate in a future case to reconsider the application of the middleman principle to situations such as the present. Three points are relevant here. The first arises from the rationale for the middleman principle, namely, to overcome the difficulty, where the sale(s) is to a middleman, of proving the effect of the misrepresentation (that Primary Distributors is legitimately entitled to sell the Hefty products) on actual sales by the middleman (supermarkets and groceries) to the public, or the extent to which the company’s profits can be attributed to its unlawful use of the trademark (those are the passing off and infringement of trademark causes of action respectively). In this case, however, the Judge was able to indicate the figure ($33,000) that he would have used if an apportionment was made. Secondly, in the present case the evidence was that the infringing company was directly involved in the retail sales with its merchandisers dealing directly with the grocery manager or supermarket owner to develop the retail sales strategy for the product. Finally, the evidence also showed that the key determinant in terms of sales of the Hefty products was price rather than brand.
That said, as matters stand, the appellants are entitled to pursue the course they have done. The issues raised by the respondents are not a bar to the relief sought.
Accordingly, we accept the appellants’ submission that the respondents may, in principle, be required to disgorge a portion of the management fees.
Should a portion of the management fees reflecting the proportion of the Hefty business be disgorged?
On the appellants’ analysis, once the matters raised by the respondents have been put to one side, that is the end of the inquiry because there is evidence showing that Messrs Graham and Jones’ work included some work on the infringing products. However, the appellants needed to point to evidence showing Messrs Graham and Jones had obtained some profit attributable to the infringement.[35] The appellants contend that it is appropriate to require an account on the basis that they recoup a sum reflecting the proportion of the business that represented the infringing business (here, 11 per cent). Mr McKay said that this was one way of calculating the proportion. However, White J in Polyaire rejected this proportion of the business approach. On the state of the evidence, we consider this approach is not appropriate here.
[35] Polyaire Pty Ltd v K-Aire Pty Ltd, above n 27, at [45].
We accept that because there is some evidence that the work on the Hefty products occupied some of the respondents’ time, the appellants’ position is a little stronger than that of the plaintiffs in Polyaire. In Polyaire, White J saw as determinative the absence of any evidence about various matters including the way in which Mr Colebatch’s salary came to be determined or of the allocation of his time to the various business activities. White J also considered he could infer that Mr Colebatch’s salary had no direct relationship with the companies’ gross sales because, despite considerable fluctuations in the companies’ gross revenue (including from sales of the infringing articles) over the relevant seven years, Mr Colebatch’s salary remained stable (save for one increase). In other words, there was no increase that might be seen as attributable to the infringing conduct.
We turn then to the evidence in this case.[36] Mr Jones in his evidence said that the Hefty products were one of the group of items needing constant attention and so providing that attention was part of the work he and Mr Graham undertook. Asher J accepted that evidence. The Judge said the Hefty products “had to be monitored to ensure that in a highly competitive market” it was priced and marketed correctly.[37] Mr McKay also noted that the management fees would have included payment for managing the Hefty business.
[36] Asher J at [89] refers to an affidavit from Mr Graham. We have not seen that.
[37] At [116].
However, Mr Jones also explained in his evidence that by 2005 they had employed a national sales manager, six sales representatives and up to 50 part-time merchandisers. The merchandisers dealt directly with the grocery buyers or supermarket managers. His description of the work the merchandisers undertook indicated the merchandisers were “hands on” in terms of the Hefty products. Mr Jones said the merchandisers’ work involved working out product positioning and pricing. The merchandisers were in the supermarkets two to three times a week to check on the retail sales.
There was no cross-examination of Mr Jones about the impact of the work of the sales force on the time spent on the Hefty products by Mr Graham and Mr Jones. In light of that it is not at all clear that the time the respondents spent on infringing conduct equates to 11 per cent of their work or some lesser percentage. There is a gap, then, in terms of the evidence as to the allocation of time to the infringing conduct. That may reflect the way in which the case developed. The latter point underlies Mr Cooke’s complaint that when the respondents admitted liability the appellants gave no indication they sought to deprive the respondents of anything above the profit from the infringing sales.
Further, in terms of how the management fees were set, there is some support for the view that the directors would have been paid their management fees regardless of the infringing conduct. Both of the accountants agreed that once the profits had been stripped out, the management fees reflected a fair market rate of remuneration given the nature of the company’s business and the full-time involvement of Mr Jones and Mr Graham in it.[38] In addition, the Judge concluded that Primary Distributors had good relationships and if they could not supply the Hefty products they would have supplied other products. That was apparent from the fact that once they stopped selling the Hefty‑labelled products they found a substitute product. We add that Mr Hussey’s evidence suggests there was no significant increase in the management fees over the relevant period in comparison with those immediately prior to the commencement of the infringing conduct.
[38]The position was similar in Polyaire where it was agreed that “Mr Colebatch had been remunerated at a ‘commercial rate’ throughout the period of manufacture and sale of the infringing articles”: above n 27, at [46].
As was the case in Polyaire, it thus seems unlikely that the infringing conduct was a significant feature in the setting of the management fees. It is relevant also here that the infringing conduct did not reflect any change in the business but rather a continuation of the same business absent the right to use the Hefty brand. There is accordingly a contrast with other cases where any increase may be obvious because the infringing business is new business.
The appellants’ approach, that is, adopting the 11 per cent figure representing the portion of the company’s sales attributable to Hefty sales, also assumes Messrs Graham and Jones were equally involved in this work. We accept that seems to have been the way in which the case was approached. This is apparent in the Judge’s explanation as to why Messrs Graham and Jones were jointly and severally liable for the infringing conduct. Asher J stated the two men ran the company and “made the important decisions together. [They] effectively operated as a partnership and shared decisions”.[39] Further, the Judge noted that Mr Cooke in his submissions did not seek to differentiate between Messrs Graham and Jones and that both were actively involved in the infringing conduct. However, we do not accept that this evidence would sufficiently sheet home equal responsibility, even if the appellants were able to establish the portion of the management fees attributable to the infringing conduct.
[39] Intellectual Property Development Corporation, above n 1, at [89].
In these circumstances, we consider the evidence falls short of establishing what if any portion of their management fees the directors should be required to account for.
Result and costs
For these reasons, the appeal is dismissed. Asher J’s decision that the respondents not be required to disgorge any part of their management fees stands. The respondents, having succeeded, are entitled to costs in this Court for a standard appeal on a band A basis and usual disbursements. We order accordingly.
Solicitors:
Bell Gully, Auckland for Appellants
Short & Partners, Auckland for Respondents
(2008) 8 NZBLC 102,274 (HC).
[19–143]; for the most recent edition, see Kerly’s Law of Trade Marks and Trade Names (15th ed, Sweet & Maxwell, London, 2011) at [20-153].
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