Intellectual Property Development Corporation v Primary Distributors New Zealand Limited (T/A Primary Sales and Marketing) HC Auckland Civ-2006-404-4695

[2010] NZHC 2379

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

CIV-2006-404-004695

BETWEEN  INTELLECTUAL PROPERTY DEVELOPMENT CORPORATION First Plaintiff

ANDHEFTY NZ LIMITED Second Plaintiff

ANDPRIMARY DISTRIBUTORS NEW ZEALAND LIMITED (TRADING AS PRIMARY SALES AND MARKETING) First Defendant

ANDDONALD JOHNSTONE GRAHAM Second Defendant

ANDROBERT JOHN JONES Third Defendant

Hearing:         25-27 May 2010

Counsel:         G C Williams for the plaintiffs

F M R Cooke QC and C Boel for the defendants

Judgment:      9 December 2010 at 3pm

JUDGMENT OF ASHER J

This judgment was delivered by me on Thursday, 9 December 2010 at 3pm pursuant to r 11.5 of the High Court Rules.

Registrar/Deputy Registrar

Solicitors/Counsel:

AL Ringwood/GC Williams, Bell Gully, PO Box 4199 Auckland (garry[email protected] ) J Macdonald, Short & Partners, PO Box 137241, Parnell, Auckland (j[email protected] ) FMR Cooke QC, PO Box 1530, Wellington 6140 (francis[email protected] )

INTELLECTUAL PROPERTY DEVELOPMENT CORPORATION AND ANOR V PRIMARY DISTRIBUTORS NEW ZEALAND LIMITED (TRADING AS PRIMARY SALES AND MARKETING) AND ORS HC AK CIV-2006-404-004695  9 December 2010

Table of Contents

Para No

Introduction  [1] Background  [4] The issues  [19] Issue (a): Passing off

Is it open to the plaintiffs to claim passing off?  [21]

Discussion  [34] Does IPDC own the goodwill in the name Hefty?  [40] Should judgment be given on the passing off cause of action?                   [49]

Issue (b) and (h): Should there be apportionment of the profits?

The respective arguments  [54]

Discussion of apportionment  [61]

Issue (c): Are the second and third defendant directors jointly and

severally liable for breach of trademark and passing off with PDNZ?        [82]

Issue (d): Additional liability of Messrs Graham and Jones  [90]

Issue (e) and (f): Whether PDNZ’s storage and destruction costs and

overheads for the last two months are a deduction  [98]

Issue (i): Assuming no apportionment, the quantum of overheads to be

taken into account in determining the profit made by the first defendant  [103]

Issue (g): Interest  [122] Issue (j): Costs  [125] Result  [126] Further orders  [128]

Introduction

[1]      Intellectual Property Development Corporation Pty Limited is the owner of a number   of   trademarks   registered   in   New   Zealand.      Intellectual   Property Development Corporation Pty Ltd and Hefty NZ Limited (“IPDC”) brought proceedings in the High Court for an account of profits from Primary Distributors New  Zealand  Limited  (“PDNZ”)  for  infringement  of  its  trademarks  and  other wrongs by unlawful sales of products under the brand name “Hefty”.

[2]      This decision deals with the plaintiffs’ claim for an account of profits against the defendants, following a finding that the defendants were liable to the plaintiffs for breach of trademark.

[3]      During the course of the hearing it became clear that there were ten particular matters  for  determination,  not  all  of  which  related  directly to  the  taking  of  an account.  The proceeding has already been to the Court of Appeal, and there are few areas on which the parties have any measure of agreement.  It is necessary to set out

the facts in some detail, which I draw from both the High Court and Court of Appeal judgments.

Background

[4]      Until March 2005, products labelled with the name “Hefty” were sold in New Zealand by an Australian company, Cartigny Pty Limited (“Cartigny”).   Cartigny was  the  registered  proprietor  of  three  New  Zealand-registered  Hefty trademarks through its New Zealand subsidiary, Cartigny (NZ) Limited (“Cartigny NZ”).  The Hefty range included cling-film wraps, papers and other domestic products.  From the mid-1990s PDNZ was the exclusive distributor of Hefty-labelled products for Cartigny  in  New  Zealand.    PDNZ  did  not  purchase  the  Hefty  products  from Cartigny.  It acted as Cartigny’s agent in New Zealand.  Its main customer for Hefty products in New Zealand was the Foodstuffs group (Foodstuffs through its supermarket chains which included Pak N Save, New World and Four Square). PDNZ did not sell directly to the public.

[5]      Up  until  2003  the  Hefty-labelled  products  had  been  manufactured  in Australia.   In 2003 that manufacture was transferred to Thailand, where a Thai company, Cartigny (Thailand), commenced production.  Although this company was called “Cartigny” it was in fact an entirely separate company from the Cartigny companies in Australia and New Zealand.   Cartigny (Thailand) shipped the manufactured product directly to Cartigny NZ, and PDNZ arranged the marketing and distribution once those products arrived.

[6]      In 2006, a different Thai company, Care Siam Pty Co. Ltd (“Care Siam”), took over the manufacture of the product.

[7]      In  March 2005  Cartigny  was  placed  into  receivership  in  Australia.    The Sydney   officer   of   the   accounting   firm   Ferrier   Hodgson   was   appointed   as administrator under Australian insolvency legislation.   On 31 March 2005, PDNZ through its directors Mr Graham and Mr Jones, entered into a trademark licence agreement with the administrator of Cartigny for a period of three months.  By that agreement PDNZ had three months to sell the Hefty stocks left in New Zealand.  The

licence only related to Hefty products purchased by PDNZ from Cartigny NZ, and did not give any general licence to import Hefty-labelled products from Thailand or elsewhere, or to sell such products.

[8]      Under this licence agreement PDNZ was a purchaser and distributor for the three month period, rather than an agent.  PDNZ agreed that on expiry of the licence it would promptly cease to use all the trademarks and return to Cartigny or its nominees all products on which the trademarks appeared.   It acknowledged specifically that the trademarks remained the property of Cartigny.

[9]      On  1 April 2005,  Cartigny was  placed  into  liquidation.    Ferrier Hodgson continued to administer its assets.   Those assets were for sale.   On 21 April 2005

PDNZ offered $8,000 to the administrators to purchase the Hefty trademarks in New Zealand.  Messrs Graham and Jones thought that they would have a good chance of acquiring those assets given PDNZ’s knowledge of the Hefty product, and history of marketing the brand in New Zealand.  The administrators did not respond to PDNZ’s offer.   In the meantime, unbeknown to PDNZ, the administrators were negotiating with IPDC for the purchase by IPDC of various trademarks, including the Hefty marks.

[10]     In the meantime PDNZ decided to purchase Hefty-labelled product direct from Cartigny (Thailand) as it waited for a decision on its purchase offer, despite having no licence to use the Hefty trademarks.  In April 2005, PDNZ made an initial purchase of two containers of product from Cartigny (Thailand) and then imported further supplies regularly.  After the expiry of the three month licence agreement on

31 June 2005, PDNZ also continued to sell the remainder of the stock that it had purchased from Cartigny NZ.  Thus, in two general respects PDNZ was in breach.  It was breaching Cartigny’s rights to the Hefty brand in importing the product from Thailand, and breaching the 31 March 2005 agreement as well.

[11]     In  mid-2005,  Care  Siam  was  also  endeavouring  to  acquire  the  Hefty trademarks.  By late 2005 Messrs Jones and Graham had accepted that PDNZ’s offer to purchase the trademarks was probably going to be superseded by a higher offer of Care Siam.  PDNZ expected to remain the New Zealand supplier if that happened,

because of its existing relationship with Care Siam.   During the trial PDNZ acknowledged  its  infringement  of  the  Hefty  trademarks  but  the  evidence  of Messrs Graham and Jones was that they had hoped to sell the products lawfully once the tender was accepted, and had thought it reasonable to continue to sell through

2005 in the meantime.

[12]     By agreement dated 20 December 2005, the Cartigny administrators sold the Hefty trademarks to IPDC.  I will return to the terms of that assignment later in this judgment.

[13]     In  early  February 2006,  Care  Siam  informed  PDNZ  that  it  had  been unsuccessful in acquiring the Hefty trademarks.   PDNZ became aware that IPDC was the owner of the trademarks and there was an exchange between PDNZ and IPDC.   PDNZ continued to import and distribute the Hefty-labelled products manufactured by Care Siam.  PDNZ realised that it might not be able to arrange to use the Hefty label with IPDC and made arrangements with Care Siam to import a product labelled “By Care”.  However, this did not happen immediately, and through the first half of 2006 PDNZ continued to import and sell Hefty-labelled products in New Zealand without any issue being taken by IPDC.  The first load of wrap and floor products labelled “By Care” arrived in New Zealand on 25 June 2006, and sales were made under that label by PDNZ from that time on.

[14]     On 13 July 2006, IPDC wrote to PDNZ advising that it had become aware that PDNZ was distributing products bearing the Hefty label in New Zealand.  The letter  required  an  undertaking  by  PDNZ  to  desist  distribution,  and  demanded financial compensation.  In response, PDNZ gave undertakings as sought by IPDC not to market any Hefty-labelled products in New Zealand pending further order of the Court.   It stopped selling its remaining Hefty stock.   IPDC then issued these proceedings.

[15]     The trial was heard before me on 12–14 February 2008.  The plaintiffs relied on three causes of action; breach of registered trademarks, breach of various sections of the Fair Trading Act 1986, and passing off.  It was accepted during that trial by the defendants that PDNZ had infringed the Hefty registered trademarks.   It was

stated at [19] of my judgment, Intellectual Property Development Corp & Anor v

Primary Distributors NZ Ltd & Ors:1

The essential issue in the case is therefore whether IPDC is entitled to an order that PDNZ account for all profits made on the sale of Hefty-labelled products in breach of the Hefty trademarks.

[16]     The defendants accepted that the plaintiffs were entitled to an account of profits  in  respect  of  Hefty-labelled  products  acquired  from  Cartigny  NZ  in March 2005 and sold in New Zealand after 30 June 2005.   They accepted that the plaintiffs were entitled to an account of profits in respect of all sales of Hefty- labelled products that PDNZ, the distributors, imported into New Zealand and sold in New Zealand between 21 April 2005 and 31 August 2005.   In addition, in my judgment I held that the plaintiffs were entitled to an account of profits for a further period from 31 August 2005 to 18 January 2006.  I declined to order an account of profits for the further period from 18 January 2006.

[17]     IPDC appealed that judgment to the Court of Appeal.   That appeal was allowed.2   It was held that IPDC was entitled to an account of profits from the time of the commencement of the infringement through to 13 July 2006.  The account for profits period was extended accordingly.  The file was remitted back to this court for the account of profits calculation to be carried out for the extended period directed by the Court of Appeal.  In addition, it was submitted by IPDC that an account of profits should have been ordered against the two directors of PDNZ, Messrs Graham

and Jones (the second and third defendants).  It was recorded in the Court of Appeal judgment that it had been conceded that they should be jointly and severally liable for amounts payable by PDNZ.3    It was not agreed, however, that there should be any disgorgement of any personal profits of the directors as distinct from the profit earned by PDNZ.  The Court of Appeal stated:4

It was agreed at the hearing of the appeal that the pragmatic course was to remit this matter back to the High Court for determination by that court as to

1      Intellectual Property Development Corp & Anor v Primary Distributors NZ Ltd & Ors (2008)

8 NZBLC 102,274.

2      Intellectual Property Development Corporation Pty Ltd v Primary Distributors NZ Ltd [2010]

2 NZLR 729.

3 At [91].

4 At [92].

whether any order for an account of profits with regard to Mr Jones and Mr Graham should also extend to any personal profits made as a result of the infringement.

[18]     It was also argued by IPDC in the Court of Appeal that I should, in my judgment, have addressed the passing off cause of action which, it was submitted, was still a live issue.  Mr Cooke QC for PDNZ submitted that the passing off cause of action had not been pursued by IPDC, and it was not open to IPDC to argue

passing off.  The Court of Appeal concluded on this point:5

We remit this issue [of whether the passing off cause of action remained a live issue] to the High Court for reconsideration ...

The issues

[19]     Towards the close of the hearing before me it emerged that there were, in essence,  10  issues  that  needed  to  be  determined.     With  the  co-operation  of Mr Williams for IPDC and Mr Cooke QC for PDNZ the ten issues have been agreed. They are as follows:

a)       Whether the first defendant is liable in passing off as well as for trademark infringement.

b)Whether or not there should be any apportionment of the profits made by the first defendant from the sales of products which bore the Hefty brand undertaken as part of the account of profits.

c)       Whether or not the second and third defendants are personally liable for passing off and trademark infringement.

d)Whether  the  second  and  third  defendants  are  personally  liable  to account for the profits they made (if any) as a result of the alleged passing off and trademark infringement.   (From the plaintiffs’ perspective this requires the Court to consider and determine whether

5 At [95].

the second and third defendants have to disgorge the proportion of the management  fees  that  they were  paid  that  was  attributable to  the infringing conduct).

e)       Whether the cost of the stock that was destroyed in August 2009, the storage costs relating to that stock and the costs associated with its destruction, need to be taken into account in determining the profit made by the first defendant from the relevant sales.

f)        Whether the proportion of the general overheads of the first defendant that were incurred in August and September 2006 should be taken into account in determining the profit made by the first defendant from the relevant sales.

g)       The extent to which the plaintiffs are entitled to interest (including compound interest) on the sums payable by the defendants pursuant to the account of profits.

h)Given the conclusions on the above issues, and if apportionment is allowed in (b), the amount the defendants are to pay the first plaintiff.

i)If apportionment is not allowed, the quantum of the overheads of the first defendant that can be taken into account in determining the profit made by the first defendant from the relevant sales.

j)         Costs.

[20]     I propose dealing with the passing off issue (issue (a)) first, as there is an issue whether there should be different outcomes of the account of profits exercise, turning on whether that cause of action is available.  I will then deal with the account of profits issues and, finally, deal with the issue of the liability of Messrs Graham and Jones.

Issue (a): Passing off

Is it open to the plaintiffs to claim passing off?

[21]     Mr Cooke argued for the defendants that there is no question of them now being liable to account in passing off.  In particular, he submitted that the cause of action was abandoned at trial, but to the extent that there was evidence on it, that IPDC could not have succeeded in passing off, and that in any event the plaintiffs can only win once and must elect which cause of action it adopts to enforce its judgment.   Mr Williams, on the other hand, submitted that although not actively pursued, passing off remained a pleaded cause of action through the trial, and was referred to in both opening and closing.  The issue has assumed importance since the

original hearing, as Mr Williams wishes to rely on the “middleman” doctrine6  in

relation to passing off to claim all, rather than apportioned, profits made from the sale of Hefty products by PDNZ.

[22]     The Court of Appeal made these comments:7

[93]     Mr Williams submits that Asher J wrongly failed to address the passing off cause of action. This was a live issue, as shown by IPDC’s opening submissions in the High Court. While it was not covered in IPDC’s closing written submissions, Mr Williams says that he did cover it orally. He also  says  that  the  issue  is  important  to  IPDC  as,  in  his  submission,  a judgment in passing off would avoid potential arguments that could arise in a trade mark context, that there should be apportionment of the profit that Primary Distributors is liable for: see Colbeam Palmer (1968) 122 CLR 25 at 37 and 42 - 43.

[94]     We are not surprised that Asher J did not deal with the passing off cause of action. While it was mentioned in the opening for IPDC and orally in closing, it appears the Judge was not told of any possible differences in remedy. Nor was he, as we understand it, given any assistance in assessing if the elements of the cause of action had been proved.

[95]      We remit this issue to the High Court for reconsideration, on the basis that Primary Distributors is 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.   We are of course not to be taken as making any comment on whether or not that is the case.

6 See [55]–[80].

7      At [93]–[95].

[23]     The issue has now been argued before me.   There was some contention before me as to what exactly happened during the original trial, and what was said in relation to passing off.  To deal with those arguments it is necessary to traverse the issues in further detail.

[24]     Passing off was the fourth cause of action in the statement of claim.   The pleading was that the defendants’ actions were likely to cause confusion or deception in  the  course  of  trade,  and  that  the  use  of  particular  barcodes  on  the  “Hefty counterfeit goods” made the goods instruments of deception.   In the statement of defence filed on 8 February 2010, trademark infringement was admitted, and passing off was denied.

[25]     Previously  on  8 February 2008,  the  defendants  had  filed  a  memorandum conceding breach of trademark and consenting to an order for an account of profits for a limited period.  It was conceded in that memorandum that the sale of the Hefty- labelled products “… constituted both trademark infringements and conduct in trade which  was  likely  to  mislead.”     On  8 February 2008,  the  plaintiffs  filed  a memorandum.  Issue was taken and clarification sought in relation to aspects of the defendants’ memorandum.  It was then stated that the plaintiffs no longer needed to pursue their second cause of action for breach of s 16 of the Fair Trading Act.  There was no reference to the third cause of action, which was also a Fair Trading Act cause of action, or to the passing off cause of action.

[26]     On 12 February 2008, an amended memorandum was filed by the defendants where that statement was reiterated.  It is common ground between the plaintiffs and defendants that the Fair Trading Act allegation was not proceeded with.  The cause of   action   was   referred   to   in   the   written   opening   of   the   plaintiffs   dated

11 February 2008.   It was also referred to as one of the causes of action in the defendants’ opening submissions.

[27]     Mr Cooke argued that by the time closings had been completed passing off was no longer at issue.   At the conclusion of the opening passing off was still technically before the court.   However, the focus of the actual trial right from the beginning was on the duration of the period for which there should be an account of

profits, and there was no emphasis on the particular causes of action.   This was reflected by the fact that the defendants presented their evidence first.  This was on the basis that they had accepted liability for breach of trademark, and the argument was about the account of profits.

[28]     In the written closings presented by both sides there was no reference at all to the passing off cause of action.   Mr Williams maintains that during the course of those closing submissions in the February trial he made a “throwaway comment” to the effect that the admissions on the trademark cause of action also proved passing off.  He has no note of this comment being made.  Defence counsel who was at the trial, who made extensive notes in shorthand, has no record of such a comment being made.  I have no recollection of such a comment being made, and I must conclude that any remark made by Mr Williams was not of sufficient force or clarity to constitute a submission.  The fact is, however, that no one was focusing on the cause of action.  As Mr Williams accepted, it was not realised at that stage that anything could turn on what particular cause of action was proceeded with.   Given the defendants’ concession on breach of trademark, it did not matter whether passing off was pursued or not.

[29]     The defendants are now asserting that a great deal turns on whether passing off was a pleaded cause of action or not.  This is because IPDC are now relying on the “middleman” principle that will be referred to later in this judgment, and the defendants are contending that the middleman principle does not apply to breach of trademark but only in relation to passing off.  It is for this reason that the cause of action has now assumed such importance.  The plain fact is that it was put to one side and ignored by counsel at the hearing because it did not appear to be of any importance.

[30]     When  considered  on  an  overview  the  plaintiffs’  memoranda  of  8  and

12 February, and the memorandum of the plaintiff of 12 February 2008, leave a clear impression that the only cause of action upon which the account of profits is to proceed are those referred to in the defendants’ memoranda conceding liability.  At paragraph 1 of both it is trademark infringements and conduct in trade which was likely to mislead which are admitted.  At paragraph 4 of the plaintiffs’ memorandum

of 12 February, it is stated that a “close analysis of the defendants’ pleading” reveals certain things that are not admitted.  Passing off is not included amongst the matters. There is a reference at paragraph 8 to the plaintiffs no longer needing to pursue one of the Fair Trading Act causes of action, but on an overview of these memoranda it has not been suggested that passing off is still in issue.

[31]     I conclude that the defendants were entitled to infer from the exchange of memoranda, that the plaintiffs were content with the admissions made, subject to the further matters referred to in paragraph 4 of the memorandum, which it is conceded at paragraph 5 the plaintiffs are still required to prove.  Passing off did not need to be addressed.  The defendants were entitled to believe that this was confirmed by the lack of any reference to passing off through the trial, and the lack of any reference to passing  off  in  the  submissions.    If  there  was,  as  Mr Williams  says,  a  passing reference to the fourth cause of action, it was not sufficiently significant for it to be noted in the detailed notes of the defendants or by counsel or by me.

[32]     Mr Cooke also argued that in events occurring after the trial the plaintiffs elected not to proceed with passing off.  On 21 February 2008, the defendants filed a memorandum clarifying those matters that they consented to.  Mr Cooke argues that by sealing the judgment based on that memorandum, which made no reference to the passing off action, there was an election.  I cannot accept this argument.  There is no reference in the wording of the memorandum to the actual causes of action being admitted.  The focus is entirely on the wording of the account of the profits orders. The source of the liability is not referred to.   Thus, the plaintiffs in sealing the judgment did not make any election in relation to liability, save to accept the defendants’ general and unspecific acknowledgement of liability that was implicit in the orders.

[33]     I consider that if there is to be any allocation of fault between the plaintiffs and the defendants in relation to the lack of argument on passing off, it rests with the plaintiffs.  If they wished to pursue judgment on a cause of action they should have made that clear in closing, and it was not made clear.

Discussion

[34]     Mr Cooke submitted that the defendants were prejudiced because passing off was not addressed.  The defendants’ evidence did not address any issues of passing off  liability.     The  matter  was  not  pursued  in  cross-examination  or  in  any submissions.  If it had been appreciated that passing off was a live issue there would have been cross-examination on the extent of any goodwill in the Hefty trademark. Mr Cooke argued that because of the lack of any pursuit of the passing off cause of action that claim was abandoned or, in the alternative, that the plaintiffs should be seen as electing not to proceed with that cause of action.

[35]     However, I do not think that the concepts of abandonment or election can determine how the issue should be dealt with.   The plaintiffs were not obliged to elect between breach of trademark and passing off.   The two causes of action are entirely compatible and could both proceed.  Rather, all that has happened is that in the light of admissions made in relation to breach of trademark, passing off ceased to be the object of any focus.

[36]     The passing off cause of action had been properly pleaded and not withdrawn as a basis of claim.  From my own perspective I assumed that as a result of liability for breach of trademark being conceded, I was not required to determine whether there was passing off.   I was not told of any possible differences in remedy, and received no submissions on the elements of the cause of action or whether they were proven.   However, I do not consider that any form of withdrawal of the cause of action can be implied from the facts as I have outlined them.  Passing off was not pursued,  not  because  it  was  abandoned,  but  because  it  did  not  seem  to  matter whether it was proven or not.  I conclude that there was no waiver or abandonment in any legal sense of the passing off cause of action.

[37]     The passing off cause of action remained not struck out and not withdrawn throughout the course of the trial.  It was and is still before the court in that sense. The only basis upon which Mr Cooke’s submission can succeed, is for the court in its inherent jurisdiction to strike it out as now an abuse of procedure.  The correct basis for concluding that it is an abuse of procedure is that the plaintiffs by their

conduct through the first trial in not actively pursuing passing off have placed the defendants  at  a  disadvantage,  and  that  the  prejudice  suffered  cannot  now  be remedied.   If I was satisfied that the plaintiffs’ lack of reference to passing off through  the  trial  lulled  the  defendants  into  not  doing  things  they  would  have otherwise done, or into doing things they would not have otherwise done, then it would be unfair on the defendants to allow IPDC to proceed with passing off.

[38]     When the briefs were filed, passing off was clearly a current cause of action. So there was no prejudice at that stage.  PDNZ filed its evidence knowing that there was a passing off allegation.  There is a difficulty with Mr Cooke’s submission that the defendants would have cross-examined in a different way should passing off have been clearly signalled.  There was no one really to cross-examine on the issue of goodwill.  Mr Withers, IPDC’s major witness, gave no evidence about goodwill in the Hefty brand name, and would have known nothing about Hefty goodwill in New Zealand as he had had nothing to do with the Hefty brand name until the trademark was purchased in Australia.  Mr Cooke did not point to any specific questions that he could have put or evidence that he could have called, if passing off was put directly at issue at the outset of the hearing.

[39]     In terms of submissions, Mr Cooke has now made full submissions on the passing off cause of action and I do not discern any prejudice in that area.  PDNZ had a full opportunity to put forward evidence about passing off.  Therefore, I am unable to see any prejudice to the defendants in the plaintiffs effectively reactivating the passing off cause of action.   The absence of any withdrawal or waiver of the cause of action, and the absence of any prejudice or abuse of procedure by IPDC means that it can continue to rely on it.

Does IPDC own the goodwill in the name Hefty?

[40]     Mr Cooke argued that if passing off  was still  arguable,  that the deed  of assignment of 20 December 2005 between Cartigny and IPDC did not transfer the goodwill  associated  with  the  goods  that  were  being  distributed  by  PDNZ  for Cartigny Pty Limited.  The deed of assignment at paragraph 2 reads as follows:

2.    Assignment

The Assignor hereby assigns, transfers and set over to the Assignee any and all of its worldwide legal and beneficial rights, title and interest (whether presently existing or in the future) in and to:

(a)   all Intellectual Property Rights;

(b)   all the goodwill associated with the Trademarks worldwide;

(c)   the right to  apply for  trademark registration  or  other  industrial  and intellectual   property  rights   relating  to   the  Trademarks   including applying for any Madrid protocol application based on or relating to the Registrations in the Assignee’s own name as the registered proprietor of the Trademarks by virtue of this assignment;

(d)   all rights, powers, liberties and immunities conferred on the proprietor of   trademarks   or   applications   or   registrations   relating   to   the Trademarks; and

(e)   the right to sue and claim (and retain) any damages and other remedies (including but not limited to an account of profits) for past infringement of and wrongful interference to any of the Registrations which arose before this assignment

which affect from the date of this Deed.

[41]     Mr Cooke  argued  that  the  assignment  transferred  only  the  trademarks themselves and not the goodwill associated with the goods, which would be fatal to the passing off claim.

[42]     In considering whether there is passing off, I adopt the approach restated by the House of Lords in Reckitt & Colman Products Ltd v Borden Inc8  where the trinity of elements of goodwill or reputation attached to the goods, a misrepresentation by the defendant and the likelihood of damage by the plaintiff, were confirmed.

[43]     There had been significant sales of the Hefty brand of product by PDNZ on behalf of the then owner of the Hefty trademark, Cartigny Pty Limited, through to mid-2005.  Although there is no specific evidence on this point, I am satisfied that Cartigny Pty Limited had built up goodwill in the trade name “Hefty”.  While I note Mr Jones’ evidence that sales were achieved from the perspective of PDNZ through their contacts with Foodstuffs and other wholesalers or retailers, rather than the

public itself, I have no doubt that in terms of the section of the public who were buying significant quantities of Hefty product, that customers would have made an association between the name Hefty and the get up of the goods, and the product itself.   There were some customers who would come into a shop and having previously purchased Hefty glad wrap or other Hefty products, would do so again because of the label on the goods or because they associated the goods’ appearance with goods previously purchased.   I have no doubt that in that respect there was goodwill.

[44]     To establish passing off it is not necessary for a plaintiff to prove that the ultimate purchasers who are likely to be misled necessarily know the name of the plaintiff: William Edge & Son Ltd v William Niccolls & Sons Ltd.9    It is often the case that a customer will not know the identity of the manufacturer of the goods.  A plaintiff’s goodwill is in those circumstances the association by the public of the goods with the marks which appear on the goods and, on occasions, on the forms of packaging.   Thus, it is not necessary for a plaintiff’s packaging to refer to the plaintiff’s name at all: Rich v BH Bennetts & Co. Ltd10 and Shotover Gorge Jetboats

Ltd v Marine Enterprises Ltd.11     All that is necessary is that the public should

recognise the plaintiff’s mark as denoting a particular trade source.  The public must be misled by the defendant’s use of the mark into thinking that the defendant’s goods are from the same source.

[45]     Thus, the cause of action in passing off rests on the goodwill attached to the name and get-up, and derives from the public’s belief that the goods come from the same source as the original Hefty products.   This is exactly what is transferred in paragraph 2 of the deed of assignment of 20 December 2005.   IPDC received all intellectual property rights and the goodwill associated with the trademarks worldwide, and this included the right to sue persons who had appropriated the goodwill that was built up in the Hefty trademark that was owned by Cartigny Pty Ltd.

9      William Edge & Son Ltd v William Niccolls & Sons Ltd [1911] 1 AC 693 at 705, 709.

10     Rich v BH Bennetts & Co. Ltd (1978) 1 NZIPR 188.

11     Shotover Gorge Jetboats Ltd v Marine Enterprises Ltd [1984] 2 NZLR 154 at 158.

[46]     Further, it is recognised  that a foreign business  may have  goodwill in a jurisdiction even though it does not trade there in its own right.  Thus, in Scandecor Development v Scandecor Marketing,12 it was observed:

We accept that, in an appropriate case, it is legally and factually possible for a business based overseas to acquire a goodwill in this country by the supply of its products or services through a subsidiary, agent or licensee.  Whether or not that occurs must depend on the facts of the particular case.

[47]     There  is  an  assignment  of  all  Cartigny’s  intellectual  property  rights  and goodwill  associated  with  the  trademarks  worldwide.     This  must  include  all intellectual property rights and goodwill associated with the name “Hefty”.  It must include the association that New Zealand customers would have made between the Hefty  trademark  and  the  Cartigny  Pty  Limited  goods.    The  language  in  the assignment is as broad as it can be.  I am satisfied that “intellectual property rights” at clause 2(a) in the assignment includes goodwill in the get up of goods, and that “trademarks” at clause 2(b) includes unregistered trademarks and all goodwill associated with them.  I bear in mind the factual background to the assignment.  It was an assignment by a receiver, who would have had no interest in retaining any interest or right to sue, in the trademarks or their get up.

[48]     I conclude that Cartigny Pty Ltd acquired goodwill in the trade name “Hefty” and the get up of the Hefty goods, and that it transferred that goodwill to IPDC in the deed of assignment.  It was open, therefore, for IPDC to pursue a claim in passing off.

Should judgment be given on the passing off cause of action?

[49]     I am satisfied that that cause of action was proven.  I have found that there was goodwill in the trade name “Hefty”.  It is common ground that PDNZ without permission sold products previously marketed on behalf of Cartigny Pty Ltd under the trade name Hefty.   The actions of PDNZ in marketing goods under the trade name Hefty were likely to lead to the belief among consumers that the Hefty goods were those offered by the person who had been marketing Hefty products over the previous years.  That was a wrong assumption.  Customers who thought that were

deceived.  It was now PDNZ in its own capacity rather than Cartigny Pty Ltd or its duly authorised assignee that was marketing the product.  The plaintiff does not need to prove that confusion has actually occurred.   If the Court is of the opinion that there is a strong probability of confusion in the normal course of trade, that is sufficient: Morris Motors (1926) Ltd v Morris Motors Ltd.13     PDNZ was appropriating  the  goodwill  of  the  owner  of  that  goodwill.    The  fact  that  the immediate  purchasers,  generally  Foodstuffs,  may  not  have  been  deceived  is irrelevant.   PDNZ had  put goods into the market which were likely to deceive

ultimate purchasers or consumers.   This is relevant to the middleman doctrine, discussed later in the judgment.14

[50]     I am satisfied therefore that there was a misrepresentation.  I am also satisfied that the use of the trademark by PDNZ was like to cause damage to IPDC.  PDNZ used IPDC’s goodwill in the brand for its own purposes.   While IPDC was not trading in New Zealand at that time, it was about to enter the market with the same product, and indeed did so.   At that point PDNZ had been passing off its own product as Hefty product for over a year.  I find likelihood of damage to have been proven on the facts.

[51]     I do not accept Mr Cooke’s submission that the trademark claim and passing off claim were alternatives.  Under s 88 of the Trademarks Act 2002 it is expressly stated that nothing in the Act effects the law relating to passing off.  The plaintiffs are able to succeed in both and no election was required.

[52]     In essence I treat this application for judgment on the passing off cause of action on the same basis as I would have if there had been an application to recall my judgment under r 11.9 of the High Court Rules.  While my earlier judgment has in fact been sealed, I have jurisdiction to give judgment on the passing off cause of action as a consequence of the Court of Appeal judgment, allowing the appeal and referring the proceeding back to me.  If I had been asked to recall the judgment prior to sealing to give judgment on the passing off cause of action I would, after having heard  argument  along  the  lines  I have  heard  in  this  hearing,  have  allowed  the

13     Morris Motors (1926) Ltd v Morris Motors Ltd [1929] GLR 279 at 282.

judgment to be recalled.  It would have seemed to me to be fair and in the interests of justice to allow the plaintiff to pursue all the causes of action it pleaded, and unfair if, without prejudice to the defendants, that cause of action could not be considered on its merits on the material before the Court.   It was ultimately the plaintiffs’ responsibility to make it clear that judgment was sought on the cause of action. However, in the circumstances, given the way in which events transpired, and the lack of appreciation of the significance of the passing off cause of action as a matter of law, there is no reason to penalise IPDC for its failure to actively pursue it.

[53]     Thus, in addition to the finding of liability based on breach of trademark, as a consequence of the defendants’ consent to judgment being entered under that head, I also find passing off proven by IPDC against PDNZ.

Issues (b) and (h): Should there be apportionment of the profits?

The respective arguments

[54]     It is the issue of apportionment which occupied the most time in submissions during this hearing.  It is an important issue.  Mr Cooke submits that the account of profits will show a figure of zero or, at the most, $8,000 or $9,000 as owing.  This is because, he submits, there is clear evidence that the Hefty trademark had very little market  value.    Therefore,  the  trademark  itself  is  unlikely to  have  caused  many customers to purchase the goods.   On an account of profits approach, without apportioning the profits on Hefty products to those attributable to the use of the Hefty trademark, the net profit received by PDNZ in respect of infringing sales was

$267,862 for the 13 month period from 1 July 2005 to 31 July 2006.   Mr Cooke submitted that this sum must be apportioned and, if there is liability it is only for the very small amount of sales that can be attributed to the Hefty trademark.

[55]     Mr Williams seeks an account of profits based on that total amount of sales. He submitted that there can be no apportionment.  He asserted that when an importer or dealer puts into circulation “instruments of deception” in the form of goods with misleading indicia on them, the disposition of such goods to a wholesaler or “middleman” is deemed to be wrongful whether or not anyone is or will ever be

deceived, and the plaintiff in such cases is entitled to an account of all the profits made on the sales of all those inherently deceptive goods.  There is no apportionment exercise.   He relies on the following statement in Wadlow’s The Law of Passing- Off:15

10-52   The rule of law that a trader is liable to account for his profits on inherently deceptive goods disposed of by him to middlemen dates back to the decision of Lord Westbury L.C. in Edelsten v Edelsten [(1863) 46 ER 72] which was followed in Lever v Goodwin [[1887]

36 Ch D 1] in which the Court of Appeal affirmed that the defendant’s liability on the account could not depend on whether the middlemen to whom goods bearing a deceptive get-up were consigned were themselves guilty of passing off in their dealings with the general public.

In Weingarten v Bayer [[1904–7] All ER 877] the parties were both firms of corset manufactures. The trial judge ordered an account of all profits made by the defendants “by reason of the sale by them of corsets … under the name Erect Form Corsets”.   The Court of Appeal allowed an appeal by the defendants.  The House of Lords held that only the device of a “scroll” in which Erect Form was written was distinctive of the plaintiffs and ordered an account of the profits derived by the defendants from the sale of corsets in boxes bearing an imitation of the scroll.  In this case too, the sales appear to have been to middlemen rather than to the general public.  It is noteworthy that the defendants were the leading British corset manufacturers and had enormous goodwill of their own.   The proportion of their profits on the infringing goods attributable to copying the scroll as such (as opposed to copying the words Erect Form and the design of the corsets, both of which were legitimate) must have been tiny, but that was not the basis on which the order for the account was made.   Every sale of goods bearing the scroll was tortious and therefore the whole of the profit on every such sale had to be accounted for.

10-53   The logic of the foregoing cases is that the tort of passing-off is complete upon a trader putting deceptive goods into the hands of middlemen.  In general, however, an act cannot constitute passing- off unless there is both a misrepresentation and damage.   To this extent the law stated in the foregoing section is anomalous, but some such  rule  is  necessary  if  passing-off  actions  are  to  be  brought against traders other than retailers, and the authority for the rule cannot be denied.

(emphasis added)

15     Christopher Wadlow The Law of Passing-Off (3rd ed 2004, Sweet & Maxwell, London) at 10-52.

[56]     In Drysdale and Silverleaf’s Passing-Off Law and Practice,16 it is stated that where there are sales to middlemen who are not themselves deceived:

...the defendant will be obliged to account for the profits on all such sales, irrespective of how the goods were subsequently dealt with.   Further, the profits for which the defendant must account are the totality of those derived from the carrying on of the wrongful activity and not merely the additional profit attributable to the passing off.

(footnotes omitted)

The doctrine is referred to in Halsbury’s Laws of England17 and in The Laws of New

Zealand18 where it is stated:

Accordingly, on the sale of goods by the defendant to a middleman, the profit for which the defendant must account is the profit that it has made by the sale of the goods to the middleman, and it is immaterial whether or not the middleman itself passes off or infringes by its own sales of the goods to retailers.

(footnotes omitted)

[57]     The proposition Mr Williams puts forward  is  supported in Drysdale  and Silverleaf, and is also set out in a much older text, The Law of Trademarks.19   There is more modern support from F Patfield in her article “The Modern Remedy of Account”.20   These authorities relate largely to the cause of action of passing off, but Mr Williams submitted that there is no reason why the principle should not also apply to a breach of trademark case.  He submitted that it is clear that the supplies here  were  to  “middlemen”,  in  particular  to  Foodstuffs  Ltd  which  would  then distribute the goods to retailers.   Therefore, he submitted, there can be no apportionment.

[58]     Mr Cooke submitted that the starting point was the observations in the Court of Appeal21 as set out below:

[76]      The notion of accounting for profits is at base concerned with the gain made by a defendant and is designed to prevent unjust enrichment.

16     John Drysdale and Michael Silverleaf, Passing Off Law and Practice (2ed 1995 Butterworths

London) at 7.54.

17     Halsbury’s Laws of England Vol 48, para 444.

18     Intellectual Property: Trademarks, para 304.

19     The Law of Trademarks, Sebastian, 1911.

20     [1987] Adelaide Law Review 1-31.

21     At [76], [77] and [80].

Kerly’s (2005) at [19-143] states “an account is confined to profits actually made, its purpose being to deprive the defendant of unjust enrichment rather than to punish him.”   See also Cornish & Llewelyn Intellectual Property (5ed 2003) at [2-44] and Grantham & Rickett “Restitutionary Remedies” in Blanchard (ed) Civil Remedies in New Zealand (2003) 363 at 399.

[77]     Case  law  supports  the  view  that  an  account  of  profits  is  a restitutionary remedy.  In Celanese International Corp v BP Chemicals Ltd [1999] RPC 203 at [36] (Ch) Laddie J said that, instead of looking to the harm inflicted on the plaintiff, an account of profits considers the profit made by the infringer. Defendants are treated as if they conducted their business and made profits on behalf of the plaintiff. In Spring Form Inc v Toy Brokers Ltd [2002] FSR 276 at [7] (Ch) Pumfrey J, in the context of a patent infringement, that an account of profits is a restitutionary remedy whose purpose is to deprive the defendant of the profits which he or she has improperly made by wrongful acts committed in breach of the plaintiff’s rights and to transfer those profits to the plaintiff. The purpose is to prevent the unjust enrichment of the defendant.

...

[80]    The principle behind the grant of a restitutionary remedy in infringement cases is to restore to a plaintiff the “transfer of value” to a defendant  which  has  resulted  from the  defendant’s wrong:  see  Edelman Gain-based Damages (2002) at 66. In the case of trade marks this transfer of value has occurred through the use of the plaintiff’s property to generate profit (see s 9(1) of the Trade Marks Act, set out above at [6], where a trade mark is characterised as personal property). User damages recognise the fair value of a right of which the defendant wrongly deprives the plaintiff.

[59]   Mr Cooke submitted that the middleman concept runs contrary to the restitutionary character of the remedy of an account of profits.  It is a remedy where the purpose is to deprive the defendant of unjust enrichment rather than to punish. He submitted that the issue that arises is, in the end, one of causation, and the apportionment is a manifestation of that principle.   He referred to a number of leading cases where there has been apportionment.   He submitted that the apportionment issue that arises in this case is different.  He argued further that none of the “middleman” cases relied on by Mr Williams have been mentioned in New Zealand, and that it would be wrong to follow them in New Zealand.

[60]     Mr Cooke  relied  on  observations  of  Slade J  in My  Kinda  Town  v  Soll.22

There the defendants had passed off their restaurant as a branch of the plaintiffs by the inclusion of the term “Chicago Pizza” in its name.   This was reinforced by

similarities in get-up and the way in which the restaurant traded.   The plaintiffs sought an account of profits irrespective of the proportion of customers who had believed there to have been a connection between the parties.  Slade J did not accept this and directed an apportionment.   His finding on liability was not upheld on appeal, but in Wadlow’s The Law of Passing-Off,23 the principle applied by Slade J is stated to be correct.  In his decision Slade J had stated, in an extract relied on by Mr Cooke:24

Thus, in my judgment, the six authorities relied on by the plaintiffs afford authority for the proposition that, in ordering an account of profits in a passing off case or a case involving breach of confidence, the court will ordinarily direct the account in a form wide enough to include all profits made by the defendant from his tortious acts or breaches of confidence. None of these cases, however, is, in my judgment, on all fours with a passing off case, such as the present, where the defendants have carried on business under a misleading name, in the course of which they have sold goods not only to some purchasers who have been confused by this choice of name, but also to many other purchasers who are not middlemen and have not been in the least misled.

Discussion of apportionment

[61]     Both counsel referred to the summary of the basic principles applying to accounts of profits in trademark cases, set out in Kitchen, Kerly’s Law of Trade Marks and Trade Names.25   The learned authors, after noting that accounts of profits in trademark cases have been rare in the United Kingdom, set out those principles, relying  considerably  on  the  decision  of  Laddie  J  in  Celanese  International Corp v BP Chemiclas Ltd:26

(1)An account is confined to profits actually made, its purpose being to deprive the defendant of unjust enrichment rather than to punish him.

(2)An account is addressed to identifying profits caused, in the legal sense, by the infringement.

(3)The fact that the defendant’s profits could have been made in a non- infringing fashion is irrelevant.

23     At 10-53.

24 At [154].

25      Kitchen, Kerly’s Law of Trade Marks and Trade Names (14th ed 19–143).

26     Celanese International Corp v BP Chemiclas Ltd26 [1999] RPC 203.

(4)The claimant must take the defendant as he finds him, and may not argue that the defendant could have made greater profits by trading in a different fashion.

(5)Where only parts of the defendant’s activities infringed, profits attributable to the non-infringing parts are not caused by the infringement, and the overall profits must be apportioned.

(6)Overheads should be dealt with so as to arrive as closely as possible at the true profit.

(7)       The defendant cannot generally deduct opportunity cost.

(8)General overheads may be apportioned to the infringing activity, subject to the above principles.

(footnotes deleted)

[62]     Apportionment is, therefore, usual in trademark cases and rightly so, as it follows from the restitutionary approach.   It has been accepted as applicable to a breach of copyright claim in New Zealand,27  and to a breach of trademark claim in Australia.28    However, in the preceding paragraph of Kerly’s Law of Trade Marks and Trade Names the middleman doctrine is referred to under the general discussion of loss of profits without criticism.29

[63]     I accept that at least in relation to passing off, the middleman concept is an exception to the usual apportionment approach.  Although not supported by recent English authority, or any New Zealand authority, it has some pedigree.  The earliest case generally cited for the “middleman” concept is Edelsten v Edelsten30 where the Lord  Chancellor  Lord  Westbury  held  in  a  passing  off  case  that  the  successful plaintiff would not be deprived of a remedy in equity, even if the person who bought

the goods was aware that they were not of the defendant’s manufacture.

[64]     He upheld the decree of Vice Chancellor Wood, who had stated:31

...though the person to whom the sale was made might not be deceived, still the action lay, because the article was sold by them, and they might go and deceive everyone else; and that those who committed a fraud must take all the consequences.

27     ABB Ltd v New Zealand Insulators Ltd (No 2) (2007) 11 TCLR 978.

28     Colbeam Palmer Limited v Stock Affiliates Pty Ltd (1968) 122 CLR 25.

29     At 19–142.

30     Edelsten v Edelsten (1863) 46 ER, (1863) 1 De G J & Sm 185.

31 (1863) 1 De G J & S 185, 196.

[65]     The doctrine was articulated specifically by reference to “middlemen” in Lever  v  Goodwin.32    Cotton  LJ  who  gave  the  leading  judgment  with  which Lindley LJ and Bowen LJ agreed, said in rejecting an argument that the plaintiff had to prove sales to mislead members of the public:33

But, in my opinion, that is mistaking the whole gist of this action.   The Defendants, as I understand, do not sell anything to retail purchasers.  What they sell they sell to middlemen, that is to say, to people who purchase from them as wholesale merchants, and who are going to sell it by retail; and the complaint against the Defendants is this: “You have dressed up your soap in such a dress that those middlemen to whom you sell it are enabled, by its having that deceptive dress upon it, to sell it to the usual purchasers as the soap of the Plaintiffs.”  The profit for which the Defendants must account is the profit which they have made by the sale of soap in that fraudulent dress to the middlemen.  It is immaterial how the middlemen deal with it.  If they find it for their benefit not to use it fraudulently, but to sell the soap to the purchasers  from  them  as  Goodwin’s,  that  cannot  affect  the  question whether the sale by the Defendants to those middlemen of this soap in a fraudulent dress was a wrongful act.  It still remains a wrongful act, because it put in the hands of the middlemen the means of committing a fraud on the Plaintiffs by selling the soap of the Defendants as the soap of the Plaintiffs.

(emphasis added)

[66]     Edelsten   was   applied   to   the   assessment   of   damages   in   Weingarten Bros v Bayer & Co.34    The middleman concept was then considered in some depth by the English Court of Appeal in Draper v Trist35  where it was held that it was unnecessary to show, in proving damages for passing off, any fraudulent re-sales by a middleman:36

The defendant, therefore, has put upon the market,, and sent in to the market, a quantity of goods which, on the face of them, and ex hypothesi, are saying something about themselves which is calculated to mislead.  That is the very gist of the conception of passing off.   It is manifest that, if the plaintiff, before he could recover damages, had to show that, in the case of each sale, the  purchaser  was  deceived  –  because  it  is  on  the  assumption  that purchasers are deceived that the plaintiff’s damages are based – then his task, save in very exceptional circumstances, would be a quite impossible one.   On the other hand, it is equally true to say that to impose upon a defendant the task of showing that the purchasers were not deceived would be an equally impossible one.  It is, in my opinion, misleading to consider too much the question of onus of proof in a case of this kind.   The real

32     Lever v Goodwin [1887] 36 Ch D 1, 7.

33     At 7.

34     Weingarten Bros v Bayer & Co [1904-7] All ER 879.

35     Draper v Trist [1939] All ER 513.

36     At pp 518–519, 522.

problem is, when all the facts are considered and all the considerations on either side are given fair weight, the proper sum at which to estimate the plaintiff’s damage.   That a jury would be entitled, if it were shown that goods were sold under a deceptive appearance or description, to award something more than nominal damages is, in my opinion, the law.

…

I may relate that to one specific matter to which Luxmoore LJ refers – the case of the sales to the middleman in the present case.  Luxmoore LJ calls attention to the fact that resales by those middlemen were not proved.   It seems to me, with all respect, that, if a large quantity of deceptive goods is sold to a middleman who in the ordinary course of business, will resell them, even if a jury is not entitled to infer that, in the ordinary course of business, those goods had been resold, they can surely take into account the necessary damage to the plaintiff’s business caused by having overhanging his market, so to speak, a quantity of deceptive goods which are liable to be sold at any moment.

…

In the case of a sale to a middleman, the tort is really complete when the offending goods are sold to him.  That matter was decided by this court in Lever v Goodwin, where the controversy was as to the form of the account of profits, which was the particular type of relief which the plaintiff elected to take in that case.   Of course, in taking an account of profits, which is the equitable relief, the damage which the plaintiff has suffered is totally immaterial.  The object of the account is to give to the plaintiff the actual profits which the defendants have made and of which equity strips them as soon as it is established that the profits were improperly made.

(emphasis added)

[67]     The middleman principle was recognised and applied by Pennycuick J in Peter Pan Manufacturing Corporation v Corsets Silhouette.37   It was also recognised by Slade J in My Kinda Town Ltd v Soll.38    He reviewed the cases referred to, and others including Ford v Foster39  which he also regarded as a middleman case.  He distinguished those cases from the facts before him, but did not in any way doubt the

authority of the middleman doctrine.   I do not consider that the decision offers support for Mr Cooke’s argument.

37     Peter Pan Manufacturing Corporation v Corsets Silhouette [1963] RPC 45 at 59–60.

38     My Kinda Town Ltd v Soll [1982] FSR 147.

39     Ford v Foster [1872] 7 Ch App 611.

[68]     The principle was also noted but distinguished by Windeyer J in Colbeam Palmer Ltd v State Affiliates Pty Ltd.40    He referred to Lever v Goodwin and observed:41

In a case of that sort, when a man sells goods by a false representation, the profit for which he is accountable may well be the profit which he makes by selling the goods.

He  did  not  apply  the  doctrine  noting  that  the  cause  of  action  was  breach  of trademark,  and  there  was  no  evidence  that  the  name  had  come  to  denote  the plaintiff’s goods.

[69]     I have already noted some of the academic commentaries referred to by counsel which accept the existence of the middleman doctrine.  The doctrine has also been accepted in Canada42  and referred to without criticism in Australia.43     The

reference  to  the  doctrine  in  The  Laws  of  New  Zealand44   is  based  on  a  similar

reference in Halsbury.45   Together they constitute a formidable endorsement.

[70]     The doctrine is based on pragmatism.  It is not usually possible, when there has been a sale to a middleman, to prove the effect of the misrepresentation on actual sales by the middleman to retailers and to the public.   The doctrine resolves this problem by anomalously, given the restitutionary nature of an account of profits, assessing profits presumptively at the time of the middleman sale.

[71]     Mr Cooke argues that here it is possible to establish the value of that which was passed off, because of the offer of $8,000 for the goodwill by PDNZ and the actual sale of AUS$10,000 to  IPDC.   There is, however,  a distinction between goodwill  to  be  paid  for  future  potential  sales  and  the  profit  on  actual  sales  to deceived customers.   The fact that there is empiric evidence of potential future goodwill does not establish the profits gained on past sales, although it indicates that

they were modest.   I note later that not a lot can be taken from these offers.46    In

40     Colbeam Palmer Limited v Stock Affiliates Pty Ltd (1970) 122 CLR 25 at 38.

41 At [30].

42     Ray Plastics Ltd v Canadian Tire Corp 62 CPR (3rd) 247.

43     Colbeam Palmer Limited v Stock Affiliates Pty Ltd (1970) 122 CLR 25 at 38.

44     The Laws of New Zealand Intellectual Property: Trademarks para 304.

45     Halsbury 4th ed 2000, Re-issue Vol 48 para 444.

46 See [80].

Lever v Goodwin it was noted that the fact that there may have been  no sales exploiting the deception by the middleman at all, was not a basis not to award an account  of  all  profits  on  the  sale  to  that  middleman.47      The very complaint  of Mr Cooke,  that  the  application  of  the  doctrine  will  give  the  plaintiff  an  unfair advantage, is accepted as a necessary consequence of the doctrine.  Although I am not strictly bound by any New Zealand authority to apply it, I consider that I should do so.   There is good reason for the doctrine, despite its inconsistency with the restitutionary nature of an account of profits.

[72]     The  cases  that  establish  the  middleman  doctrine  were  passing  off  cases. Mr Williams submitted that the doctrine can also apply to a breach of trademark case where the sale is to a middleman.  It is not strictly necessary to determine the issue given that I have found that the passing off cause of action is available to the plaintiffs and proven, but in case I am wrong I proceed to consider the doctrine’s applicability to trademark infringement.

[73]     There  is  a  conceptual  distinction  between  passing  off  and  breach  of trademark that was noted by Windeyer J in Colbeam Palmer Ltd v Stock Affiliates Pty Ltd.48   A defendant using a trademark does not necessarily pass off the item sold as goods of the plaintiff.   In infringement proceedings there is no need for the plaintiff to prove goodwill or a misrepresentation.  The plaintiff’s right in relation to trademark infringement is more a species of property right, rather than a right to sue based on a tort.49

[74]     Despite  this  conceptual  distinction,  I  see  no  reason  not  to  apply  the middleman doctrine to breach of trademark.   Both passing off and trademark infringement can occur innocently.  The successful plaintiff has a right to damages if the elements are proven, whatever the defendants’ state of mind.    The misrepresentation does not need to be knowing or fraudulent.  The problems of proof apply equally to both causes of action.  They both can involve the difficulty that the passing off or infringement occurs in a supply to a wholesaler who may or may not

47     Lever v Goodwin [1887] 36 Ch D 1 at 7.

48     Colbeam Palmer Limited v Stock Affiliates Pty Ltd (1970) 122 CLR 25 at 38.

49     Kerly’s Law of Trade Marks and Trade Names at 15–031.

be labouring under a misrepresentation, but who then sells to unknown members of the public, who may or may not be influenced by the false mark.

[75]     Thus, the pragmatic consideration that lies behind the doctrine applies just as much to breach of trademark.   If the infringing mark is on the goods sold to the middleman, it will be impossible to establish exactly which end customers relied on it when they purchased.  The requirement then to disgorge all profits on the sale to the middleman resolves the dilemma of proof.

[76]     The problems do not apply to the same extent to a breach of copyright claim of the sort that was proven in ABB Ltd v New Zealand Insulators Ltd (No 2),50 a case relied on by Mr Cooke.   Their apportionment was possible because the part that infringed was an identifiable part of the whole final product.   There is no such precise basis for apportionment in a passing off or trademark infringement case such as this where the end purchasers cannot be identified.

[77]     While the issue is not directly addressed in Kerly’s Law of Trade Marks and Trade Names the middleman doctrine is referred to in relation to an order for account for infringement of trademark or passing off.51   No distinction is made between the causes of action in this respect.  F Patfield in her article suggests that the doctrine should apply to a trademark claim.52    It would be arbitrary to apply the middleman doctrine to passing off but not to trademark infringement, and I do not do so.   I therefore accept Mr Williams’ submission that it should be applied to both the passing off and trademark infringement causes of action.  Therefore, I conclude that there should be no apportionment on either bases of claim.

[78]     In case I am wrong in this conclusion in relation to the availability and application of the doctrine to passing off and trademark infringements, I address briefly the damages I would have awarded should apportionment apply.   I strike immediately the problem that led to the development of the middleman doctrine.  It is not possible to say with any certainty what portion of the ultimate sales would

50     ABB Ltd v New Zealand Insulators Ltd (No 2) (2007) 11 TCLR 978.

51     At 19–142.

52     The Modern Remedy of Account [1987] Adelaide Law Review, 1 at 27.

have turned on the display of the Hefty brand.  I do not see how it would have been possible for any definitive evidence on the point to be adduced.

[79]     Mr Cooke submitted that the award for profits attributable to the sales of Hefty product should be limited.   When IPDC launched its own product on the market after PDNZ stopped its Hefty sales, the IPDC brand did not succeed and was outsold by PDNZ’s replacement label.  However, despite Mr Jones’ evidence to the contrary, I consider that there must have been some goodwill in the name Hefty. This was shown by the anxiety of PDNZ to have the use of it, and in its willingness to pay at least something for it.  It must have been the case that the sales of Hefty products over the years had established some buyer awareness of the brand.  PDNZ offered  only  $8,000  to  the  administrators  to  purchase  the  Hefty  trademark  on

21 April 2005.  Then when IPDC ultimately purchased 20 trademarks for use in New Zealand, including the Hefty trademark, AUS$10,000 was paid.   Mr Jones gave unchallenged evidence that the primary reason for the wholesalers purchasing the Hefty product was not the name, but the connection that PDNZ had with Foodstuffs, both at head office and retailer level, and the price of the goods.  But that is not to say that some customers would not have relied on the brand.

[80]     There was a cheap Foodstuffs brand at a similar price.   In my view, there must have been some reliance by some end customers on the Hefty brand which led to them choosing that product over others.   Any exact assessment is not possible. Mr Hussey, who gave expert evidence for PDNZ, assumed that 90 percent of the sales of Hefty product actually achieved would have been achieved in any event with an alternative label.   He assessed the attributable profit of 10 percent at $33,274. This is a lot more than the $8,000 offered by PDNZ for the label.  It nevertheless seems to me to be a more realistic figure, but it is still just a principled guess.  The fact that a low sum was offered by PDNZ and a low sum accepted by the administrators of Cartigny for all the Hefty brands does not prove that PDNZ sales profits were limited to a per annum figure of around that sum.  That sale was in a liquidation situation where a below market offer may have been acceptable.  I am not satisfied that it establishes the limited value that PDNZ puts forward.

[81]     In the end, I am unable to offer a clear and principled analysis leading to an end figure.  However, if apportionment was required I would have fixed the profits attributable to the use of the Hefty brand and resulting from customer reliance on it, at a figure equating to Mr Hussey’s 10 percent figure of $33,000.

Issue (c): Are the second and third defendant directors jointly and severally liable for breach of trademark and passing off with PDNZ?

[82]     It  only  emerged  towards  the  end  of  the  hearing  that  this  was  an  issue. Mr Williams for IPDC submitted that liability of the second and third defendants in relation to the trademark cause of action was conceded in the initial memoranda of the defendants.  In the defendants’ memoranda of 8 February and 12 February 2008, the admission was expressed to be on behalf of all defendants.  Thus, it was stated in paragraph 1 that “… the defendants have admitted that the first defendant’s sales of Hefty-labelled products … constituted … trademark infringements …”.   All three defendants consented to an order that the first defendant account for profits.  In the memorandum of 21 February 2008, provided by the defendants after the hearing, in relation to the wording of the account of profits it was stated at paragraph 14:

The defendants consent to orders being made for them to account for profits earned on sales made by the first defendant as follows …

The rest of the wording of the memorandum is consistent with their joint and several liability.  However, in this hearing Mr Cooke did not accept that there was such joint and several liability.

[83]     In my judgment of 24 April 2008, I did not address the issue of the particular liability for an account of profits, and gave leave for the parties to return to Court if they needed specific directions in relation to the account of profits.  I had understood from the memoranda filed by the defendants that all three defendants accepted joint and several liability, and that any order that  I made would be against all three defendants.    This  appears  also  to  have been  the  understanding of the  Court  of

Appeal.  The Court of Appeal recorded:53

53 At [91].

However, Mr Cooke submits that any order for an account of profits made against the directors should be limited to an order that the directors be jointly and severally liable for amounts payable by Primary Distributors.

[84]   The Court of Appeal remitted the matter back to the High Court for determination of the issue of whether there should be an order for an account of profits in relation to the personal profits of Messrs Graham and Jones in addition to the profits of PDNZ.54   That is a different issue to their joint and several liability for the profits of PDNZ and will be dealt with later in this judgment.55

[85]     I  consider  that  in  filing  the  various  memoranda  I  have  referred  to,  in particular in consenting to orders being made for them to account for profits made by PDNZ, the second and third defendants admitted liability for breach of trademark. There could be no other basis upon which they were to account for profits.   An account for profits order cannot be made in the vacuum of an absence of liability.

[86]     However,  the  second  and  third  defendants  cannot  be  said  to  have  ever admitted liability for passing off.  It is necessary to consider whether they could be so liable.   Directors of a company may be liable with the company as joint tort feasors if the actions of the directors are identified with those of the company itself,

as representing its directing mind and will: Trevor Ivory v Anderson.56     Where a

director or employee exercises control over a particular operation or activity liability will follow: Adler v Dixon.57    As Randerson J observed in DB Breweries Ltd v The Domain Name Company Ltd: 58

These principles were applied by Smellie J in International Business Machines Corporation v Computer Imports Ltd (1989) 3 TCLR 163 at 197, where His Honour held that these people controlling the day-to-day activities of the first defendant company were also liable as joint tort feasors on the basis that they had procured another to commit a tort.

[87]     The Court of Appeal also noted:59

54 At [92].

55     At [90]–[97]

56     Trevor Ivory v Anderson [1992] 2 NZLR 517 at 524 and 527.

57     Adler v Dixon [1955] 1 QB 158.

58     DB Breweries Ltd v The Domain Name Company Ltd HC Auckland M724/00, 15 March 2001 at [20].

59 At [90].

No separate defence in relation to that period was raised on behalf of the directors.

This observation is consistent with them being jointly and severally liable. [88]       Mr Williams’ submitted that:

a)        PDNZ was a small company run by Messrs Graham and Jones in, as

Mr Jones stated in evidence, a “hands on” way.

b)They were both intimately engaged in the importing and selling of the Hefty-labelled products, and they both had full knowledge that the company was not the trademark owner or owner of the goodwill.

c)       Both the second and third defendants signed the limited trademark licence dated 31 March 2005.

d)They both authorised the purchase of the infringing products from the manufacturer in Thailand.

[89]     It  is  clear  from  the  evidence  of  Mr Jones  (Mr Graham  was  not  cross- examined),  that  he  and  Mr Jones  ran  PDNZ  and  made  the  important  decisions together.  They were the sole directors of PDNZ.  Mr Graham did swear an affidavit and the overwhelming impression I am left with is that he and Mr Jones effectively operated as a partnership and shared decisions.  They were both involved in dealing with IPDC.  Mr Cooke in his submissions did not seek to differentiate between them. I am satisfied that they were both involved in the decision to market Hefty products despite the fact that they did not have the trademark and were not authorised to do so, and that they both participated in the marketing process.  Their involvement was far more than passive involvement at board level.  They were actively involved in the actions that constituted breach of trademark and passing off.  I conclude that they are jointly and severally liable with PDNZ in respect of both causes of action.

Issue (d):  Additional liability of Messrs Graham and Jones

[90]     Mr Williams submitted that in addition to their joint and several liability, Messrs Graham and Jones were personally liable to account for the profits they made as a result of the infringing conduct as well as being jointly and severally liable for the amounts payable by PDNZ.  In particular he argued that they should disgorge the proportion of the management fees that they were paid by PDNZ that were attributable to the infringing conduct.

[91]     The short answer to this submission is that it is an effort to obtain the same profits twice.  IPDC is to get the relevant part of PDNZ’s profits.  This will ensure that there is a complete remedy for the wrong done to it.  If it gets more by obtaining a share of the directors’ management fees, it gets more than PDNZ’s profits and the directors, who are liable because of their personal involvement, are doubly penalised both in losing their share of the PDNZ profits, and in having to disgorge their management fees which were based on those profits.

[92]     The practical reality is that there were no profits received by the directors in relation to the Hefty brand that were not PDNZ’s profits.  They should not then have to  lose  again  by  repaying  management  fees.    It  follows  that  the  appropriate assessment of PDNZ’s profits that should be disgorged justly provides restitution. This does not mean that Messrs Graham and Jones are profiting from their own wrong.  The management fees are not profit in the usual sense, but rather a payment for services rendered.  Someone had to sell the goods and be paid for doing so.  I accept Mr Hussey’s evidence they have not personally benefited from the infringement.

[93]     To give IPDC 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.

[94]     I also accept Mr Cooke’s submission that this is a new claim in this hearing, not advanced at the original trial, or clearly alluded to in the pleadings.

[95]     Mr Williams relied on a statement in Leplastrier & Co Ltd v Armstrong- Holland Ltd where Harvey CJ of the New South Wales Supreme Court observed in relation to a defendant who had sold machines that infringed a patent:60

Under no circumstances can he claim any remuneration to himself, nor under any  circumstances  can  he  claim  in  my  opinion  any  director’s  fees  for carrying on the business.

[96]     However,  the  Australian  High  Court  in  Dart  Industries  Inc  v  Decor Corporation Pty Ltd61  has described Leplastrier in relation to the concept of the referability of overheads as not a persuasive authority.  I do not interpret Leplastrier as stating that no director fees received during a period of infringement can be retained.  If that is what the statement means, however, I decline to apply it.

[97]     This extra head of claim against them therefore fails.

Issues (e) and (f): Whether PDNZ’s storage and destruction costs and overheads for the last two months are a deduction

[98]     Mr Cooke argued that the cost of the stock that was destroyed in August

2009, the storage costs relating to that stock and the costs associated with its destruction should be taken into account in determining the profits to be paid.  There was a cost of $33,500 incurred by PDNZ in acquiring the stock that was not sold, storing it and then destroying it.  There were also overheads incurred during the two months following the giving of the interim injunction undertakings.  PDNZ says that there were costs incurred for the purposes of generating profit associated with the Hefty products.

[99]     In response Mr Williams relied on this statement in Laws of Australia:62

60     Leplastrier & Co Ltd v Armstrong-Holland Ltd (1926) 26 SR(NSW) 585 at 596.

61     Dart Industries Inc v Decor Corporation Pty Ltd (1993) 179 CLR 101 at 132.

62     Laws of Australia Vol 15 para 15.11.730.

In relation to intellectual property, the final figure of profit should notionally represent the sum of profits on each relevant sale.  It is not the profit on the business which is being claimed, hence if some articles are sold at a profit and some at a loss, the latter cannot be deducted from the former.

[100]   The authority cited is Leplastrier which was not accepted in Dart Industries63 as good authority.  Nevertheless, I accept the proposition stated in Laws of Australia that it is the profits on individual sales that should be considered.   I accept the evidence of IPDC’s expert accountant Mr McKay that the post-undertaking costs of PDNZ relating to the unsold product did not contribute to the profits realised by PDNZ on the sale of the infringing products.

[101]   It is the profit on the sales that constitutes the profit.   Losses incurred at a point later to the sale, and which arise from the wrongful accumulation of product for later intended unlawful sales, are not deductable.  Those losses are just an added misfortune that must be suffered by the wrongdoer.  They cannot be turned by the wrongdoer into a profit reducing mechanism.

[102]   Thus, the costs of storage, destruction, and the overheads incurred during the interim injunction period are not proper deductions.   These deductions are not allowed.

Issue (i):  Assuming no apportionment, the quantum of overheads to be taken into account in determining the profit made by the first defendant

[103]   It is necessary now to consider this issue, which is numbered (i) in the list. Mr Cooke submitted that if apportionment is not allowed, the quantum of the overheads of the first defendant can be taken into account in determining the profit made by the first defendant from the relevant sales.

[104]   Two experts were called for the plaintiffs and defendants, Mr A J McKay for the plaintiff and Mr S F Hussey for the defendants.  In the course of their evidence there was a measure of give and take, and both prepared a summary of their position in the course of their oral evidence.  Much was agreed.  In particular, it was agreed

63     At 132.

that the amount of gross profit that could be properly attributed to sales of Cartigny product was $359,299.  The issue between the parties is the appropriate deduction from that gross profit for overheads.  The parties differ in their submissions on the principles to be applied, and to a limited extent in relation to the actual figures for deduction.

[105]   Mr  Cooke  for  the  defendants  argued  for  what  he  described  as  a  “fully absorbed” basis for calculation, meaning that all of the costs of the business needed to be absorbed over all of the revenues, including the Cartigny revenue.  Mr Cooke argued that in addition to the direct costs involved in selling the Hefty brand, it was appropriate for there to be deduction for general infrastructure costs.  He relied on the Australian High Court decision of Dart Industries Inc v Decor Corporation Pty

Ltd64 where the High Court held when it did not follow Leplastrier:

In calculating an account of profits, the defendant may not deduct the opportunity cost, that is, the profit forgone on the alternative products. But there would be real inequity if a defendant were denied a deduction for the opportunity cost as well as being denied a deduction for the cost of the overheads which sustained the capacity that would have been utilised by an alternative product and that was in fact utilised by the infringing product. If both were denied, the defendant would be in a worse position than if it had made no use of the patented invention. The purpose of an account of profits is not to punish the defendant but to prevent its unjust enrichment.

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.

[106]   Mr Williams submitted nevertheless that it was necessary for the overheads in question to be directly attributable to the manufacture and sale of the infringing product.

[107]   In Dart the High Court refused to follow the decisions of Leplastrier and Teledyne Industries Inc v Lido Industrial Products65  where it was stated that the expenses needed to be “solely referable” to the manufacture or sale of the infringing article.   The High Court in Dart considered the “solely referable” approach to be flawed for the purposes of an account of profits.   As the majority observed the

64     Dart Industries Inc v Decor Corporation Pty Ltd (1993) 179 CLR 101 at 114.

65     Teledyne Industries Inc v Lido Industrial Products (1982) 68 CPR (2d) 204.

purpose was not to punish the defendants but to prevent their unjust enrichment. Dart was followed in Tiny Intelligence Ltd v Resport Ltd.66     The need  to make allowance for general overheads attributable in part to the manufacture and sale of the infringing product is consistent with the general restitutionary concept behind an account of profits.  I propose adopting the approach set out in Dart.

[108]   I  am  satisfied  that  there  were  general  infrastructure  costs  involved  in importing and marketing the Hefty product.  I accept Mr Williams’ submission that it is not every overhead that is properly apportioned and deductible.   But general overheads, if they are fairly attributable to the manufacture or sale of the infringing product can be deductible, even if they are not specifically referable to that manufacture or sale.   In this sense “attribution” means something different from

“attribution” discussed earlier in relation to the cause of action of passing off.67

Rather than using the word “attribution” to refer to the use of the trademark, the word  here  is  used  to  describe  an  overhead  being  fairly  attributable  to  the manufacture and sale of the infringing products.

[109]   Thus,  it  is  not  just  a  matter  of  totalling  the  overheads  and  making  a percentage deduction.  It is necessary to examine each item for which a deduction is sought to ensure that the deduction is fairly attributable to the manufacture or sale. As was stated in Dart:68

Whether Décor and Rian should succeed in their contentions depends upon whether, as a matter of fact and substance, the overheads which they seek to have deducted are attributable to the manufacture and sale of the infringing product. In arriving at an answer, the court must consider such questions as whether the  overheads  in any particular  category were increased  by the manufacture  or  sale  of  the  product,  whether  they  represent  costs  which would have been reduced or would have been incurred in any event, 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. Dealing with the last of these questions may require the use of the concept of opportunity cost. If any of the categories are to be brought into account, the proportion to be allocated to the infringing product must be determined and it is here that approximation rather than precision may be necessary.

66     Tiny Intelligence Ltd v Resport Ltd [2007] 2 NZLR 263 at [19].

67     At [54]–[81].

68     At p 119.

[110]   Hefty had good relationships with those whom it supplied, and I have no doubt that if it could not have supplied Hefty product it would have supplied other products, whether they were cling film wraps or different products.  Indeed, once it stopped selling the Hefty product, it found a substitute product which it then proceeded to sell to wholesalers as it had the Hefty product.  Mr Williams argued that  consistently with  PDNZ  having  surplus  capacity Mr  Graham  had  to  go  to Thailand to engage in product development.  However, that was just part of the usual process of managing brands and was not indicative of surplus capacity.  There was some delay in starting up the new product but I am satisfied that was because there was no urgency and it was a low priority.  I am satisfied that if PDNZ had not been engaged in selling the Hefty product, its capacity would have been taken up in the marketing of alternative products.

[111]   Thus, I approach the assessment of overheads from the point of view that general overheads, if they can be attributed in part to the obtaining of profit from Hefty products by Primary, can be taken into account.

[112]   Mr Hussey’s calculation of the Cartigny profit attributable to the sale of the

Hefty product was $122,520 calculated as follows:

Cartigny gross profit per Appendix 1  359,299

Less overheads allocated against Cartigny

Adjusted overheads per Table 1           1,878,305

Cartigny share of overheads based on

Cartigny sales to total sales                        12%

(225,397)

Profit attributable to Cartigny business  133,902

Hefty sales at % of Cartigny sales

(per Appendix 1)       91.5% Cartigny profit attributable to Hefty   122,520

He added:

Note – the $122,520 is before deduction for:

-   Cost of product destroyed (para 54)	(33,500)
-   2 months of overheads (para 54)	(34,000)
$55,020

[113]   This methodology was in general terms accepted by Mr McKay, although he chose 11 percent as the appropriate deduction rather than 12 percent.  In particular, he accepted that a figure of 91.5 percent should be used in attributing the Cartigny profit to Hefty.   The area of disagreement that remained was which particular overheads were properly taken into account.  Both parties accepted the onus was on the defendant to establish that any items of cost were incurred in relation to the sale

of the Hefty profit.  In this regard they were relying on a statement in Leplastrier69

and approved in Dart.70

[114]   Mr R J Jones gave detailed evidence of overheads for Primary.   He was cross-examined on that evidence and the accountants in turn commented on it.  In the evidence he gave at the conclusion of the hearing, Mr McKay conceded that a considerable  number  of  the  overheads  he  had  previously  asserted  were  not attributable in any way to sales of the Hefty product were indeed so attributable or may have been.   Having heard Mr Jones and Mr Hussey I am satisfied that the evidence that Mr Jones gave at paragraph 8 in his brief in reply, where he set out in detail the overheads that were attributable to the Hefty sales, was correct.  I found his evidence on this issue to be credible.  I do not propose going through each item.  I do, however, refer to the major item of merchandising expenses of $341,098.  I am satisfied this was an overhead related to the sale of the Hefty products.   I accept Mr Jones’ evidence that PDNZ employed more than 50 merchandisers nationwide and it was necessary for them to continually visit the supermarkets up to three times a week to maintain goodwill.  I am satisfied that most of the 22 items of overheads that he referred to are properly deducted from the profits on an apportioned basis. There are, however, some exceptions to this which I must deal with.

[115]   First I consider that the overheads claimed for advertising, debt recovery charge, goodwill amortisation, interest and loss on sale should not be deducted.  This arises largely from concessions that Mr Jones and the defendants have made.  I am not satisfied that they were incurred in relation to the sale of the Hefty product. These items came in total to $27,354.

[116]   The issue of management fees is more difficult.  Initially a figure of $630,972 was put forward for management fees, but Mr Jones in his reply brief accepted that there was an element of profit extraction in that sum.   The figure ultimately put forward for management fees was $328,100.  Mr Jones and his partner Mr Graham were fully involved in running the business of PDNZ, Mr Graham looking after the sales and marketing aspects and Mr Jones the administration.   I accept Mr Jones’ evidence that the Hefty product was one of the items that required constant attention. In particular, it had to be monitored to ensure that in a highly competitive market it was priced at the right level and marketed in the right way.  Mr Hussey considered that  the  amount  allocated  for  management  fees  of  $328,100  (which  was  much reduced from the original claim by PDNZ) was fairly attributable.  Mr McKay in the end limited his objection primarily to legal principle.

[117]   Mr Williams relied on the extract of Leplastrier in opposing the inclusion of these management fees.  In Leplastrier71 it was stated:

Under no circumstances can he, in my opinion, 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 in my opinion director’s fees for carrying on the business.

[118]   While these particular sentences were not dealt with directly in Dart the general  tenor  of  the  judgment  was  to  disapprove  the  paragraph  in  which  this statement  is  made.    If  PDNZ  is  not  allowed  to  claim  for  management  fees legitimately attributed to the sale of the Hefty product, it is effectively being penalised.  As already observed, someone had to do the work that Mr Graham and Mr Jones did.  If it was anyone other than Mr Graham or Mr Jones there is no doubt that the deduction would be appropriate.   There seems to be no basis to prohibit PDNZ from recovering those expenses simply because its shareholder/directors were the employees who did the work.  To do so would be to punish the wrongdoer and

that is not the purpose of the assessment of a loss of profit claim.72

[119]   I conclude, therefore, that the deduction of $328,100 for management fees was appropriate.   In the end I am satisfied that Mr Hussey’s calculation of the

Cartigny profit attributable to Hefty of $122,520 is accurate, with an adjustment being made for the $27,354 of overheads wrongly included.

[120]   I consider it preferable to apply the 12 percent adopted by Mr Hussey to the

11 percent adopted by Mr McKay.   His methodology was sound.   I do, however, reject Mr Jones’ evidence that a 20 percent deduction would be appropriate.  This was  a  percentage  greater  than  that  put  forward  by  his  own  expert.    If  in  fact Cartigny’s share of the overheads was 20 percent, this would mean that there was no profit made by PDNZ on the Hefty business.  From the evidence that I have heard, I have no doubt that the Hefty business was in fact regarded by Messrs Graham and Jones as profitable.  I was not satisfied having heard Mr Jones that it could be fairly said that the Cartigny share of the business involved a greater percentage of overheads than other aspects of the business.

[121]   Thus,  the  12  percent  adjustment  will  be  made  affecting  the  Cartigny percentage of sales to total, with the adjustment for the $27,354.  This means that the Cartigny share of overheads based on 12 percent is slightly less than that calculated by Mr Hussey and is $222,114.12.  When that sum is deducted from $359,299 the result is that the profit attributable to the Cartigny business is $137,184.88.  From this the calculation of the Hefty proportion of the Cartigny sales of 91.5 percent must be  applied,  which  leaves  a  Cartigny  profit  attributable  to  the  Hefty  brand  of

$125,524.16.  That is the profit enjoyed by PDNZ properly attributable to the sale of the Hefty products, and accordingly that is the amount for which judgment will be entered in favour of the plaintiffs.   I put to one side the additional $55,020 in Mr Hussey’s calculation as I have found that those costs are not properly offset

against the profits.73

Issue (g):  Interest

[122]   Mr Williams seeks compound interest.  The Court has jurisdiction to award compound interest, but would only do so in exceptional circumstances.  There was no evidence that the profits were being used as working capital to earn significant

73 See [98]–[102].

further profits.  In Equiticorp Industries Group Ltd (In Statutory Management) v The

Crown74 Smellie J declined to award compound interest noting:

My conclusion is then, that not only is fraud not a basis for imposing compound  interest,  but  only  if  the  money  has  been  used  in  trade  or commerce and it can either be proved, or safely assumed, that profit equal to or greater than compound interest has been made, will it be imposed.

[123]   I am not satisfied that a profit equal to or greater than simple interest has been made by PDNZ on its gains from unlawfully trading Hefty products, or indeed that it was used as working capital for any further profits at all.  The position is different from that in LED Builders Pty Ltd v Eagle Homes Pty Ltd75  a case relied on by Mr Williams, as in that case the Judge was able to infer that the further profits had been earned by the use of the original profits.  This is not the case here.  There is no

basis here for departing from the usual award of simple interest under the Judicature

Act 1908.

[124] I award such interest at seven percent per annum from the date of commencement of the proceedings.

Issue (j):  Costs

[125]   The plaintiffs and defendants have both succeeded in this hearing in some areas and failed in others.  However, I have had no submissions on costs, and reserve them for further argument if necessary.   If the parties, or a party, seek costs, submissions should be filed within 14 days with further submissions in seven days or the parties can work out their own timetable and submit a consent memorandum setting that out.

Result

[126]   The defendants are jointly and severally liable for $125,524.16 being all profits made from:

74     Equiticorp Industries Group Ltd (In Statutory Management) v The Crown [1996] 3 NZLR 690 at 701.

75     LED Builders Pty Ltd v Eagle Homes Pty Ltd [1999] FCA 1141 at para 40.

a)       All sales of Hefty-labelled products that the first defendant acquired from Cartigny NZ Ltd in March 2005 and sold in New Zealand after June 2005; and

b)All sales of Hefty-labelled products that the first defendant imported into New Zealand and sold in New Zealand between 21 April 2005 and 13 July 2006.

[127]   Interest is payable on the $125,524.16 at seven percent from the date of filing the proceedings.

Further orders

[128]   This proceeding has had a fraught history.  I reserve leave for the parties to make further application if there are any issues left unresolved, or matters not of a substantive nature that require attention.

……………………….

Asher J