Inverness Medical Innovations, Inc v MDS Diagnostics Ltd HC Auckland CIV 2007-404-748

[2010] NZHC 1070

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

CIV 2007-404-748

BETWEEN  INVERNESS MEDICAL INNOVATIONS, INC. First Plaintiff

ANDINVERNESS MEDICAL SWITZERLAND GMBH Second Plaintiff

ANDMDS DIAGNOSTICS LIMITED First Defendant

ANDSIVA PRAKASH APPANNA Second Defendant

Hearing:         18-21 and 25-29 May, 4-5, 8-12 and 24 June 2009

Further written submissions filed:  To 3 July 2009

Appearances: C Elliott and S McLaughlin for the Plaintiffs

D Marriott and I Finch for the Defendants

Judgment:      24 June 2010 at 10:00 a.m.

JUDGMENT OF WOODHOUSE J

This judgment was delivered by me on 24 June 2010 at 10:00 a.m. pursuant to r 11.5 of the High Court Rules 1985.

Registrar/Deputy Registrar

……………………………………

Counsel:

Mr C Elliott, Barrister, Auckland
Mr D Marriott, Barrister, Auckland

Copy to:

Mr E A Oxnevad, Solicitor, Queenstown

Mr I Finch, James & Wells, Solicitors, Auckland

INVERNESS MEDICAL INNOVATIONS, INC. AND ANOR V MDS DIAGNOSTICS LIMITED AND ANOR HC AK CIV 2007-404-748  24 June 2010

TABLE OF CONTENTS

A. B. C. D. E. F. G.	Introduction The plaintiffs’ predecessors in title The issues in outline Ownership : Unipath copyright works Ownership : Acon copyright works The underlying science and technology Unipath copyright works and products Stage 1 : 1986-1988	[1] [7] [13] [17] [32] [47] [56] [58]
Stage 2 : 1988-1990 Copyright works for stages 1 and 2 : 1988-1990 Stage 3 : 1994-2002 : “SOAPSUD” Stage 4 : 1999-2002 : “Evolution”	[64] [67] [83] [91]
H.	Acon copyright works and products
1995-1999 Acon design review from 1999 The Acon copyright works Midstream copyright works Card copyright works Dipstick copyright works Completion of Acon’s revised midstream drawings : Acon-MDS agreement	[93] [102] [104] [105] [108] [109] [110]
I.	MDS and Dr Appanna
MDS history MDS products History of the Phamatech products : design trail : reliability and credibility Evidence on first production of MDS midstream version 3 : the evidence of Mr Glasser generally Dr Appanna’s answers to interrogatories on midstream design Altered midstream exhibit	[114] [122] [124] [132] [144] [151]
J.	Subsistence of copyright : originality	[155]
Does copyright subsist : originality : Unipath Does copyright subsist : originality : Acon	[156] [161]

K.      Infringement by copying

Principles  [166] Copying : the main witnesses and their approaches  [173] The idea and the expression of the idea  [186] Similarities  [193] Midstream  [196] The midstream cases  [201] The cards  [204] The dipsticks  [211] Other indications of copying  [215] Design constraints?  [228] The onus on the defendants  [243]

L.       Primary infringement : copying and issue of copies to the public  [247]

Copying in New Zealand or authorising copying  [250]

Issuing to the public  [252] M.      Secondary infringement by importation  [260] N.      Personal liability of Dr Appanna  [282] O.      The defence under s 75 : works “applied industrially”                   [302] P.       Damages  [319] Q.      Injunction  [335] R.      Plaintiffs’ further claims  [336] S.       MDS counterclaims  [338] T.       Result  [347] U.      Costs  [353] ANNEXURES 1 TO 41

A.      Introduction

[1]      This  copyright  case  concerns  artistic  works.     These  are  drawings  of pregnancy testing devices, or parts of the devices.  There are three devices, intended for easy use in the home or in medical clinics.   Each device is designed to take a sample of a woman’s urine and indicate, in a short time, whether the hormone human chorionic gonadotropin (hCG) is present.  hCG is produced in pregnancy.

[2]      At  the  heart  of  each  device  is  a  thin  rectangular  strip  of  nitrocellulose material.  The devices also have one or more small pads of porous material which are connected to the nitrocellulose.  The urine is applied to one end of the pads, or to a wick connected to the pads, and travels by capillary action through the pads to the nitrocellulose.  A result is indicated at a pre-determined point on the nitrocellulose.

[3]      I will refer to the pads and the nitrocellulose as “the strip”.   Drawings for construction and assembly of a strip, together with the wick, are in annexure 10. Photographs of three manufactured strips are in annexures 27 and 28.   These photographs show a device which also has a wick.[1]

[1] There are three separate photographs in these annexures, and in annexures referred to in the following paragraphs.   All of these annexures are best viewed from a landscape perspective, and references to right and left and top and bottom are from a landscape perspective in each annexure. The top and middle photographs are the plaintiffs’ products.  The bottom photograph in each case is the product of the first defendant.

[4]      The three types of device are referred to generically as midstream, card and dipstick.    The  midstream  is  a  handheld  device.    Photographs  of  three  of  the midstream devices are in annexures 29 to 33.  The strip is contained in a rigid plastic case.  The case is around 11 centimetres long, narrow and easy to hold.  As shown in annexure 30, the wick protrudes from one end of the case.   Results of a test are viewed through the apertures in the handle.   The wick connects to a porous pad inside the case.  A woman uses the midstream by applying her urine directly to the wick.

[5]      With the card, the strip is contained in a rigid plastic case which is generally rectangular, thin and roughly the size of a credit card.  Photographs of the device are in annexure 34.  Urine is collected in a container, then taken from the container with a pipette and applied through the hole shown at the left hand end of each device. Results are viewed through the other apertures in the middle of each device.

[6]      The dipstick is, in essence, the strip with a flexible plastic coating enabling the strip to be held in the hand.  Photographs are in annexure 35.  The strip is held at what is the right hand end in the photographs.  The arrows indicate the end that is dipped into a urine sample in a container.

B.       The plaintiffs’ predecessors in title

[7]      The claims relate to drawings made by, or on behalf of, Unipath Limited (Unipath),  a  United  Kingdom  company,  and  Acon  Laboratories,  Inc.  (Acon),  a United States company.   I will refer to the drawings as “the copyright works”, or “the works”, although there are issues whether copyright subsists in some of the drawings.

[8]      The plaintiffs say that Unipath was the pioneer in developing the technology for this type of pregnancy testing and in designing strips and cases.  Unipath was a subsidiary of Unilever UK Holdings Limited (Unilever).  Unipath launched its first product of relevance in June 1988.   It manufactured and sold midstream and card devices.

[9]      Some assets of the Unilever group were purchased by the first plaintiff (IMI) pursuant to an agreement with Unilever made in December 2001.  The plaintiffs say the assets transferred included ownership of copyright in drawings of strips and midstream and card cases.

[10]     Acon was established in the United States in 1995.  From around 1996 Acon manufactured and sold all three pregnancy testing devices, including the strips.

[11]     By agreement dated 24 February 2006 IMI purchased Acon assets.   The plaintiffs say the assets included ownership of copyright in drawings of strips, midstream and card cases, and dipsticks.

[12]     The second plaintiff (IMS) is a subsidiary of IMI.   The plaintiffs say IMS acquired other intellectual property from Unilever in 2002 and that, at the same time, IMS granted a licence to IMI to “exploit and enforce” all relevant interests in the copyright works.  There are issues as to whether the plaintiffs acquired ownership of copyright in the copyright works, but there are no material issues in respect of the different roles played by IMI and IMS.   Except where relevant, I will not draw a distinction between the plaintiffs and simply refer to them generally as Inverness.

C.      The issues in outline

[13]     The first defendant (MDS) sells midstream, card and dipstick devices in New Zealand.  These are manufactured overseas and imported into New Zealand by MDS. Over  the  relevant  period  most  of the  parts  of  the  products  sold  by MDS  were manufactured by, or on behalf of, an American company called Phamatech, Inc. (Phamatech).

[14]     Inverness alleges that the importation and sale of the MDS devices, and other actions  of  MDS  and  the second  defendant,  Dr  Appanna,  infringe  the  plaintiffs’ claimed copyright in the drawings.  Infringement is said to have occurred from the date  of  the  first  importation  by  MDS,  of  card  and  dipstick  devices,  in  about November 1999.  It is alleged, in essence, that the MDS devices have been copied directly from the copyright works, being drawings contained in patents, or indirectly by copying from products said to have been made from the copyright drawings.

[15]     Neither MDS nor Phamatech (or any other manufacturer of MDS products) had a copyright licence from Unipath, Acon or Inverness.  Apart from that, most of the broad issues that can arise in a copyright case do arise in this case.  They arise in respect of drawings of parts of the strips, the strips as a whole, the wick of the midstream, the midstream case, the card case, the dipstick and each device as a whole.  Issues arise, as distinct areas of inquiry, in respect of the Unipath drawings

and products, the Acon drawings and products, and the MDS products.  The inquiry is  confined  on  the  MDS  side  to  its  products  because  there  were  no  drawings produced by the defendants for the design of the defendants’ products.

[16]     The  broad  factual  inquiry,  and  the  range  of  issues  to  be  considered,  is indicated, at least to an extent, by the table of contents.  An outline of the principal issues is as follows:

1.        Do the plaintiffs own the copyright works?

2.Did  copyright  arise  in  each  copyright  work  when  created?    This requires an inquiry, in the usual way, into the extent of skill and labour  applied  by  Unipath  and  Acon  in  creating  their  respective works.   The inquiry is directed to copyright works for parts, and copyright works showing the relationship of various parts to each other – the arrangement of various features.

3.Has  there  been  infringement  of  copyright  by  copying  at  least  a substantial part of a copyright work (or works), either directly from a work, or indirectly from a Unipath or Acon product?   The relevant provisions of the Copyright Act 1994 (the Act) are ss 16(1)(a), 29 and

30.

A range of subsidiary issues arise, including the following:

•Prior access: were the Unipath and Acon works, or products, available  to  MDS  or  Phamatech  before  the  MDS  products were manufactured?

•What is the degree of similarity between the copyright works and the MDS products?

•If  there  are  similarities,  can  these  be  explained  by factors indicating that there was no infringement by copying?   For

example, do the similarities relate to commonplace things, or arise from constraints on design because of the underlying science or technology?

•Is there evidence other than relevant similarities which is indicative of copying?

•          Where there are differences, what is their significance?

•If the inquiry to this point indicates that at least a substantial part of a copyright work has been copied in an MDS product, can MDS prove that the MDS product was in fact not copied from the Unipath or Acon works?

The remaining issues arise if there was relevant copying.

4.Is there primary infringement by issuing copies of the work to the public?  See ss 16(1)(b), 29 and 31 and the definition of “issue to the public” in s 9 of the Act.

5.Is there primary infringement by authorising copying of the works or issuing of copies of the works to the public?  See ss 16(1)(i) and 29 of the Act.

6.Is  there  secondary  infringement,  pursuant  to  s 35  of  the  Act,  by importation of infringing copies, with knowledge of the infringement?

7.        The second defendant, Dr Appanna, is a director of MDS.   Is Dr

Appanna liable for copyright infringement?

8.In terms of s 75 of the Act, were the Unipath and Acon works applied industrially and, if so, when?  The principal issue here is whether the strips, once manufactured by Unipath and Acon, are two or three dimensional.

9.If there is infringement, are the plaintiffs entitled to damages, and if so, what is the quantum?   The plaintiffs elected to seek damages, rather than an account of profits.

10.There  are  two  separate  claims  by  Inverness,  essentially  alleging breach of confidence by the defendants.

11.There  are  three  counterclaims  by  MDS.    The  first  alleges  that Inverness issued the proceedings without proper justification or cause. The second alleges misleading and deceptive conduct by Inverness arising from correspondence in respect of the Inverness claims.  The third alleges breach of an agreement made in 2002 between MDS and Acon.

D.      Ownership : Unipath copyright works

[17]     No material issue was raised by the defendants as to the original ownership of the copyright works created by or on behalf of Unipath.   What was in issue is whether  Inverness  became  the  owner  pursuant  to  the  sale  agreement  dated  20

December 2001 between IMI and Unilever.

[18]     The  defendants  contended  that  the  agreement  is  unclear  as  to  whether ownership of copyright was transferred to IMI and that other evidence suggests that it was not.   I will note the relevant provisions before considering the defendants’ submissions in more detail.   In these provisions “Vendor” means Unilever and “Purchaser” means IMI.

[19]   The preamble to the agreement records the intention to transfer to IMI ownership of, amongst other things, the “Shares”, the “US Business Assets” and the “IP Assets”.  Clause 2 of the agreement makes provision for sale of the property just referred to, and some other items.

[20]     Clause 2(F) provides, so far as material at this point:

On the terms set out in this Agreement, the Vendor shall sell, or procure the sale of, and the Purchaser shall purchase, or procure the purchase by the relevant Designated Purchaser of, the full legal and beneficial interest in the IP Assets as at and with effect from Completion …

[21]     “IP Assets” is defined as meaning “the Business IPR, the Domain Names and the IP Licences”.

[22]     “Business IPR” is defined in part as follows:

… (ii) any or all of the Intellectual Property owned by a member of the Vendor’s Group which is used exclusively in the Transferring Business as at Completion; and (iii) any or all of the Intellectual Property owned by a member of the Vendor’s Group which has been used in the Transferring Business  but  has  never  been  used  in  any  other  business  carried  on  by members of the Vendor’s Group.   The Business IPR includes, without limitation, those patents, patent applications, trade marks and trade mark applications listed in the Disclosure Letter.

[23]     The relevant definitions of expressions used in the definition of the “Business

IPR” are:

(a)“Intellectual Property” means patents, trade marks, service marks, trade or business names, rights in designs, copyrights (including, without limitation, rights in computer software), rights in databases and topography rights (whether or not any of those is registered and including, without limitation, applications and rights to apply for registration of any such thing) and all rights or forms of protection of a similar nature or having equivalent or similar effect to any of these which may subsist anywhere in the world.

(b)“Vendor’s Group” means the vendor, Unilever N.V., Unilever PLC and their respective subsidiaries and subsidiary undertakings at the relevant time (but excluding the Companies).

(c)       “Transferring Business” means (i) the business as carried on at the date of this Agreement by the Companies (including through the occupation or use of the Bedford Property, the IP Assets and the Monoclonal Assets); (ii) the US Business; and (iii) the licensing …

(d)“Companies”   means   Unipath   Limited,   Unipath   Management Limited, Unipath Diagnostics GmbH, Unipath Scandinavia A.B. and Unipath B.V, and “Company” shall be construed accordingly.

[24]     These provisions, when construed in the light of the relevant background (the factual  matrix  relevant  to  interpretation)  appear  clearly  to  establish  that  full ownership of the Unipath copyright works was transferred by this agreement to IMI. However, Mr Marriott, for the defendants, submitted, in effect, that the plaintiffs

failed to prove certain facts necessary to remove uncertainty said to arise in respect of Unipath copyright works.

[25]     Mr Marriott referred to sub-clause (iii) of the definition of “Business IPR”. This has the effective proviso or exclusion, commencing with the word “but” in respect of intellectual property that had been used in any other business carried on by a member of the Vendor’s Group.   Except in respect of activities in the United States, which I will come to, Mr Marriott pointed to an absence of evidence to assist in determining whether the apparent exclusion in sub-clause (iii) applied to the Unipath copyright works.

[26]     It appears that the primary point made for the defendants in this regard was that the page of the agreement “identifying or defining the ‘Vendor’s Group’” had not been produced in evidence.   I do not consider that the omission of the page provides reasonable grounds for the submission.   The page was missing from the copy provided to the Court, along with a number of other pages in an agreement totalling 211 pages with 16 further attachments.  The main operative provisions were in 42 sections contained in the first 71 pages.  Schedule 1 to the agreement was an interpretation  section  covering  pages  72  to  93  of  the  agreement.    The  entire document up to page 87 – towards the end of the interpretation schedule – was produced (with some subsequent pages).  The only provision I have referred to not included in the original bundle of documents is the definition of “Vendor’s Group”. Following the hearing I asked for copies of the missing pages, including the balance of the interpretation schedule.  There was an objection from Mr Marriott.  I have no difficulty in concluding that I am entitled to call for and consider missing pages which assist in interpreting pages I have already received in evidence and on which

the defendants made submissions.[2]

[2] I note that I received from the plaintiffs the entire document, including all of the schedules and a large number of attachments.  I have not had regard to the additional pages, which are not relevant.  I also note that they contain clearly confidential information.

[27]     Apart from the missing pages, there is the question whether the apparent exclusion or proviso in sub-clause (iii) means that IMI did not acquire copyright in the Unipath copyright works.  The weight of the evidence adduced by the plaintiffs

was to the effect that the “Intellectual Property” represented by copyright in the Unipath copyright works was owned by Unilever, then a member of the Vendor’s Group, and was used exclusively in the business of Unipath; that is to say, used exclusively in the “Transferring Business”.   There was also no evidence that the “Intellectual Property” represented by the copyright works, having been used in the “Transferring  Business”  had  also  been  used  in  “other  business  carried  on  by members of the Vendor’s Group”.   Having regard to the weight of the evidence adduced for the plaintiffs, this was then a matter for the defendants to explore in cross-examination, or to challenge with defence evidence, if they wished.  There was no positive evidence adduced for the defendants in this regard.   And no questions were put to any of the plaintiffs’ witnesses who would have been in a position to answer the question.   In particular, there was evidence from Mr Veldhuis, the managing director of an Inverness subsidiary in Australia.   Mr Veldhuis was employed by Unilever, and was on secondment to Unipath, between 1995 and 2001. He  gave  unchallenged  evidence  of  his  knowledge  of  the  “various  acquisitions recently made by” Inverness, and in particular in relation to the agreements with Unilever and Acon.

[28]     I am satisfied that transfer of ownership of the Unipath copyright works was not effectively excluded by sub-clause (iii).   More particularly, in relation to this point, I am positively satisfied that the Unipath copyright works are part of the “Intellectual Property” included in the “IP Assets” transferred pursuant to clause

2(F).

[29]     Mr  Marriott’s  second  point  was  made  in  relation  to  clause  2(E)  of  the Unilever agreement.  Clause 2(E) states that Unilever shall sell to Inverness a range of “US Business Assets” (being a defined expression) but excluding a number of things.  One of the things excluded by clause 2(E)(xiii) is “any rights in relation to Intellectual Property used in the US Business”.   Mr Veldhuis gave evidence that Unipath products had been sold in the United States prior to the Unilever agreement. The defence submission from this was that “it appears that the IP in those products has not been assigned pursuant to this exclusion” in clause 2(E)(xiii).

[30]     This submission is not supported by clause 2(E)(xiii).   This provision is directed to “Intellectual Property used in the US Business”.  Mr Veldhuis’ evidence does not raise uncertainty as to whether the intellectual property represented by copyright in the Unipath copyright works produced in the United Kingdom might come within the exclusion in clause 2(E)(xiii).  If the defendants wished to pursue the applicability of clause 2(E)(xiii) more was required than the simple confirmation from Mr Veldhuis that Unipath products had been sold in the United States.

[31]     In any event, clause 2(E)(xiii) merely excludes “Intellectual Property used in the US Business” from the assets included in the “US Business Sale” under clause

2(E).  It did not exclude the sale of what the agreement elsewhere defines as “US IP Assets”.  Clause 2(F) was discussed above in relation to the defendants’ first point. This is the main operative clause for sale of intellectual property.  Clause 2(F) makes clear that “US IP Assets” are included in the “IP Assets” sold pursuant to clause

2(F).  This may be seen, firstly, by reference to the definition of “IP Assets”, and the definitions of the other expressions, as earlier set out.   The inclusion of “US IP Assets” in clause 2(F) is further made clear by a provision in clause 2(F) itself.  The opening  part  of  clause  2(F)  is  recorded  at  [20]  above.    The  clause  more  fully provides:

On the terms set out in this Agreement, the Vendor shall sell … and the Purchaser shall purchase … the full legal and beneficial interest in the IP Assets as at and with effect from Completion free from all liens, charges, equities, encumbrances and other rights exercisable by third parties (other than (i) in the case of the US IP Assets only, encumbrances of the type within paragraph (i) of the definition of Permitted Encumbrances set out in Schedule 1 (interpretation), and (ii) …

The qualification relating to encumbrances affecting US IP Assets would not be there if the US IP Assets were not being sold.

E.       Ownership : Acon copyright works

[32]     There is an issue whether the “acquisition agreement” between IMI and Acon and associated companies resulted in transfer of ownership of copyright in the Acon copyright works to Inverness.   There is also a question of original ownership in

respect of one of the works.  I will deal first with the question whether IMI acquired ownership of the copyright.

[33]     The  Acon  acquisition  agreement  was  entered  into  on  24  February  2006 between IMI as “Buyer”, Acon and associated companies as the “Seller Entities”, and a company defined as the “Parent” of the Seller Entities.  The fact that there was a number of “Seller Entities”, and that the “Parent” was a party to the agreement, is not material to the issues raised by the defendants.

[34]   The defendants’ argument that Inverness has not acquired ownership of copyright in the Acon works was founded on submissions as to the meaning of a number of clauses in the preamble.  I will set these out with one further preamble clause not referred to by Mr Marriott.   I have, for ease of reference, added clause numbers which do not appear in the original document:

[1]     WHEREAS, certain of the Seller Entities currently develop and manufacture, among other things, lateral flow immunoassay products and directly related products at an existing facility in Hangzhou China and sell these products to certain other Seller Entities that market, distribute and sell these products in, among other geographic locations, the United States, Canada, Europe, Israel, Australia, Japan and New Zealand;

…

[2]   WHEREAS, certain of the Seller Entities own or have the right to use certain intellectual property rights relating to lateral flow immunoassay products;

…

[3]   WHEREAS, Buyer and certain Affiliates of Buyer have been engaged in legal proceedings with certain of the Seller Entities or their Affiliates or customers and the Buyer and each of the Seller Entities desire to settle such legal proceedings pursuant to the terms and conditions set forth in the Transaction Documents;

[4]   WHEREAS, in the first phase of the transactions contemplated by this Agreement, and subject to the terms and conditions of this Agreement, (A) the Seller Entities desire to sell, transfer and assign to Buyer, and Buyer desires to purchase from the Seller Entities, the assets, properties, interests and business of developing, manufacturing, marketing and/or selling lateral flow  immunoassay  products  and  directly  related  products  in  the  United States,  Canada,  Europe  (excluding  (i)  Russia,  (ii)  the  former  Soviet Republics that are not part of the European Union as of the date of this Agreement, and (iii) Turkey), Israel, Australia, Japan and New Zealand, and (B) the Seller Entities desire to transfer and assign to Buyer and Buyer

desires to assume from the Seller Entities certain liabilities, in each case as solely to the extent provided in this Agreement;

[5]    WHEREAS, subject to the terms and conditions of this Agreement, certain Seller Entities will license to the Buyer certain intellectual property rights (i) necessary for the conduct of the business described above in the geographic locations described above, and (ii) necessary to develop and manufacture the products described above in China on the earlier of the New Facility Closing or July 31, 2006 (as provided in the ACON License);

[6]    WHEREAS, subject to the terms and conditions of this Agreement, certain Seller Entities (i) will agree to supply lateral flow immunoassay products  and  directly  related  products  to  Buyer  for  Buyer  to  market, distribute and sell such products in the geographic locations described above, (ii) will agree to supply, on arms-length terms, certain other products other than as provided in (i) above to Buyer for Buyer to market, distribute and sell such products, and (iii) will agree to provide Buyer with certain services to facilitate the transition to Buyer of the business described above in the geographic locations described above and the New Facility described herein;

[7]    WHEREAS, in the second phase of the transactions contemplated by this Agreement, and subject to the terms and conditions of this Agreement, LBI desires  to  sell,  transfer  and  assign  to  Buyer,  and  Buyer  desires  to purchase from LBI [one of the Seller Entities], the ownership of Rich Horizons International, Ltd., a British Virgin Islands company (“Rich Horizons”) which owns ABON (as defined herein) and own and operate through ABON the New Facility (including the research, development, manufacture and testing equipment therein) and thereafter, certain Seller Entities will manage, direct and oversee the operation of that portion of the New Facility which is not Fully Functional (as defined herein) until such time as such portion is Fully Functional and control of such portion of the New Facility that has been transferred to Buyer;

[35]     The clause not referred to by Mr Marriott is clause 7.   Although these are preambles, not the operative clauses, they were the main focus of the defendants’ submission and I will record my conclusions in that respect.  To the extent that the preamble bears on the effect of the agreement, it supports the conclusion that ownership was transferred to Inverness.

[36]     Mr  Marriott  submitted,  firstly,  that  “the  first  phase  of  the  acquisition agreement involves a licensing of intellectual property rights to IMI to enable it to sell Acon’s lateral flow immunoassay assets in the listed territories only”.  I do not agree.  The submission that there was licensing only in the first phase is founded on clause 5.  The submission ignores clause 4.  Clause 4 records the intention, in effect, to sell all interests owned by the Seller Entities in respect of immunoassay products. In the context, “immunoassay products” are pregnancy testing products.  I consider

that the wide terms of clause 4 include transfer of ownership of copyright in the copyright works.  Clause 5 does not qualify clause 4.  Clause 5 records an additional part of the agreement.

[37]     Mr Marriott further submitted that “the agreement clearly envisages a second phase involving an absolute assignment of copyright”.  Based on that proposition, he submitted that the plaintiffs had failed to establish ownership because there was no evidence as to the completion of the second phase.  This submission was made by reference to clauses 1 to 6 only.   It was founded on the unstated but necessary premise that the preceding argument was correct; that is to say, that the licensing referred to in clause 5 was the only thing that was to happen in the first phase.  The conclusion  I have  already reached  removes  the essential premise.   The defence submission also made no reference to clause 7.   Clause 7 expressly records the nature of the assets to be transferred in the second phase.   These assets do not include ownership of copyright in the Acon copyright works or, more broadly, Acon intellectual property.  Just as importantly, clause 7 does not qualify clause 4.

[38]     Mr Marriott submitted that one clause in the operative provisions of the agreement supported the primary submissions I have already dealt with.   This is clause 4.12(a)(ii) which defines “Assigned Acon Intellectual Property Assets” as “all Intellectual Property Assets owned by or purported to be owned by any or all of the Seller Entities and used exclusively in the First Territory Business”.  This provision does not support the primary submissions for the defendant.  This clause is contained in Section 4 of the agreement.  Section 4 is headed “Representations and Warranties of the Seller Entities” and that is what section 4 is concerned with.   The opening words of Section 4 make its ambit sufficiently clear:

As a material inducement to Buyer to enter into this Agreement and consummate the transactions contemplated hereby, the Seller Entities hereby jointly and severally make to the Buyer, the representations and warranties contained in this Section 4 …

[39]     The primary transaction “contemplated hereby” is contained in the principal operative clause in section 1 as follows:

SECTION 1.  PURCHASE AND SALE OF FIRST TERRITORY ASSETS.

1.1      Sale of Assets.

(a)       Subject to the provisions of this Agreement, at the First Closing (as defined herein) the Seller Entities shall sell, transfer and assign to Buyer, free and clear of any Liens (as defined herein) other than Permitted Liens (as defined herein), all right, title and interest (other than Intellectual Property Assets owned by a third party unless such Intellectual Property Assets are the subject of licenses or other agreements assigned hereunder) in and to all of the assets, properties, interests and business of researching, developing, manufacturing, marketing and/or selling lateral flow immunoassay products and all directly related products, including, those listed on Schedule 1.1(a) (together with all materials and components of such products to the extent directly related to the lateral flow immunoassay field) in the United States, Canada, Europe (excluding (i) Russia, (ii) the former Soviet Republics that are not part of the European Union as of the date of this Agreement, and (iii) Turkey), Israel, Australia, Japan and New Zealand (the “First Territory”) (such properties, interests and business, the “First Territory Business”, and such materials, components and products, the “First Territory Products”) of the Seller Entities (except for the Excluded Assets, as defined herein), of every kind and description, tangible and intangible, real, personal or mixed, wherever located, and whether existing as of the date of this Agreement or acquired prior to the First Closing, including, without limitation, as set forth below; provided, that Buyer acknowledges that Buyer is not acquiring any tangible manufacturing assets at the First Closing:

[40]     This operative clause puts into effect what is recorded in preamble 4.  The assets being transferred are expressed in very wide terms.   In my judgment they plainly include ownership of copyright in the Acon copyright works, being works related to the matter expressly recorded in this clause – “lateral flow immunoassay[3] products and all directly related products”.  The very wide terms of this clause are subject to exclusions.  These do not support the defendants’ submissions.

[3] “Lateral flow” and “immunoassay” are processes used in the strips.  They are explained in the next section of this judgment, section F.

[41]     I am satisfied that ownership of copyright in the Acon copyright works was transferred to IMI.

[42]     There is the separate question relating to original ownership of one copyright work that the plaintiffs claim is owned by Acon.  This is a work created by Ms Ying Yang.  Ms Yang was commissioned to produce a drawing for the exterior of Acon’s midstream case.   Ms Yang was not an employee of Acon (or any of the Acon

associated companies; again, I will refer simply to Acon).

[43]     Chinese law applies.  Mr Marriott submitted that, for Acon to be the owner, Ms Yang had to be “an employee of Acon and the engineering designs and product designs must have been created ‘mainly with the resources provided by the employer’”.

[44]     The relevant provision of Chinese law is article 11 of the 1991 Copyright

Law.  The English translation is as follows:

Except where otherwise provided in this law, the copyright in the work shall belong to its author.  The author of a work is the citizen who has created the work.   Where a work is created according to the will and under the sponsorship and the responsibility of a legal entity or an entity without legal personality, such legal entity or entity without legal personality shall be deemed to be the author of the work.   The citizen, legal entity, or entity without legal personality whose name is indicated on a work shall, in the absence of proof to the contrary, be deemed to be the author of the work.

[45]     Article 11 was amended in 2001.  It is not entirely clear whether the original provision or the amended provision applied, but the English translation of the amended provision shows that there was no material change.

[46]     The evidence makes clear that the work produced by Ms Yang was “created according to the will and under the sponsorship and the responsibility” of Acon.  I am satisfied that the copyright in this drawing was owned by Acon and was, therefore, included in the copyright works in respect of which ownership was transferred to IMI.

F.       The underlying science and technology

[47]     An outline of the science and technology that underlies the strips is relevant in a number of respects including the following: an understanding of the next section of the judgment, section G, which outlines the research and development undertaken by  Unipath;  whether  the  design  of  strips  is  in  some  way  constrained  by  the underlying science and technology; and whether other pregnancy testing products in the  market  at  relevant  times,  and  with  which  comparisons  might  be  made  to determine questions of originality, used similar science or technology.

[48]     The devices work by using two processes – an immunoassay and what was described as “lateral flow technology”.

[49]     An immunoassay is one type of assay.  A different type of assay, noted in the evidence, is an enzyme assay.   The Oxford English dictionary defines an immunoassay as the use of antibodies for the detection of and measurement of bio- chemical substances.  Antibodies are also referred to as reagents.  The bio-chemical substance sought to be detected or measured, or both, is the analyte.  The analyte in the pregnancy testing devices is the hCG molecules, produced during pregnancy (and which I will simply refer to as hCG).

[50]     There are two types of immunoassay; a competitive assay and a sandwich assay.  The devices in this case use a sandwich assay, so called because the analyte, if present, is sandwiched between two antibodies.  I will call these antibodies A and B.

[51]     The immunoassay and the associated lateral flow occur in and on the strips. In simplest terms, lateral flow involves the movement of urine from one end (the proximal end) of the strip to the other end (the distal end).   The strip comprises substances which result in the urine flowing from one end to the other.  Antibodies A and B are put on the strips at different points, with A closer to the proximal end than B.   As a result, when urine flows along the strip it will meet antibody A before antibody B.

[52]     Antibody A is put on the strip in a manner that results in its being mobilised when wetted and this occurs when the urine reaches antibody A.  Labels are used in immunoassays to assist in indicating whether the analyte (hCG) is present.   The devices in this case use coloured particles or markers.  Antibody A, at the proximal end, is tagged with the label.  When wetted by the urine the colour becomes visible to the naked eye.  As the urine moves along the strip it takes the coloured antibody A with it.  If hCG is present in the urine the coloured antibody A will bind to it.  The compound consisting of the coloured antibody A and hCG then moves along the strip towards antibody B.

[53]     Antibody B is put on the strip in such a way that it does not move when wetted by the urine.  If hCG is present in the urine, the compound of the coloured antibody A and hCG will, in effect, be captured by antibody B and the hCG is sandwiched by the two antibodies at this point.   The entire compound (hCG, antibodies A and B and the colourant or label) becomes fixed at that point (although some urine may continue to flow beyond the point at which antibody B is fixed, into a “sink”).

[54]     The  movement  along  the  strip  occurs  chromatographically  by  capillary action.  This process, as developed and applied to the strips, was described as “lateral flow technology” by Unipath.

[55]     A more detailed description of the chemistry, and terminology, is contained in a judgment of the Federal Court of Australia on a patent infringement claim brought by IMS against MDS, Dr Appanna and an associated Australian company.[4]

G.      Unipath copyright works and products

[4] Inverness Medical Switzerland Gmbh v MDS Diagnostics Pty Limited [2010] FCA 108. The patents at issue in that case are briefly noted in this judgment as the May and Davis patents. In the Australian decision there were findings of infringement in respect of aspects of the May patent, findings of invalidity in respect of aspects of the May patent and the Davis patent, and Dr Appanna was held to be personally liable as a joint tortfeasor and for authorising infringement.

[56]     Unipath was established by Unilever in 1984 to develop medical diagnostic devices related to women’s reproductive health.   Its first pregnancy testing device was put into the market in 1985 under the brand name “Clearblue”.  I will refer to this first product as “Clearblue original”.  The first device directly relevant to this proceeding was launched in June 1988.  I will refer to this as “Clearblue mark 1”. Clearblue original is relevant as indicative of the changes achieved with Clearblue mark 1, and the work that went into producing Clearblue mark 1.   In simplest outline, Clearblue original took about 30 minutes for the test to be completed and required a series of tests to be taken over that time.  Clearblue mark 1 was a one-step process producing a result in five minutes.  There were other differences, but it is unnecessary to go into this.

[57]     The launch of Clearblue mark 1, a midstream device, in June 1988, followed that year by a card device, was the result of a decision made at Unipath in February

1986 to develop a new product which would, in essence, be quick and easy to use. This was what I will call stage 1 of four stages of development through to 2002.  I will  outline  the  four  stages  and  record  my  conclusions  on  the  subsistence  of copyright.

Stage 1 : 1986-1988

[58]     The  principal  evidence  for  the  plaintiffs  relating to  the  work  undertaken between February 1986 and the launch of Clearblue mark 1 in June 1988 came from Mr Michael Prior.  Mr Prior began working for Unilever in 1965.  He transferred to Unipath when it was established in 1984.   He started work in the field of immunochemistry in 1986.  Mr Prior was directly and closely involved in all of the relevant work undertaken by Unipath both over the period from February 1986 to June 1988, with the launch of Clearblue mark 1, and in the further developments by Unipath through to 2002.   I am satisfied from Mr Prior’s evidence, and further evidence from another Unipath employee, Mr Balbir Raj, that the Unipath copyright works made to enable the production of Clearblue mark 1 in June 1988, and further copyright works created in subsequent years to enable production of new strips and cases, were the result of the input of a great amount of skill and work.  This was a great amount of skill and work in respect of design, resulting in copyright works, as well as research into and development of the science and technology, and with design significantly influencing technical aspects as well as technical aspects influencing design.

[59]     In relation to scientific innovation, Mr Prior said, after outlining the features sought to be achieved, and the range of ideas that were explored:[5]

Our major breakthrough came when we found that we could not only track antibodies bound to large coloured particles along a very thin two- dimensional membrane, but under the correct conditions, we could also dry these particles in the strip and get them to come back into suspension when a urine sample was wicked up the strip.

[5] Mr Prior’s brief of evidence, para 13(e).

[60]     Following this, Mr Prior set out in considerable detail the steps taken by Unipath not only to refine their ideas but also how best to express them in drawings, proceeding from broadly conceptual drawings through to those required for production of the two products.   This evidence also explained the way in which design, translated to copyright works, influenced aspects of science and technology, such as the positions on the strips where results might be indicated, as well as the influence of the science and technology on design.

[61]     Mr Prior said:[6]

[6] Mr Prior’s brief of evidence, para 63.

When the test strip was first patented in 1987, it was the first of its type in the world.  This was the first test to use “lateral flow” technology involving immunochemical-based reactions and insoluble coloured markers.   Instead of multiple step procedures involving accurate manipulation and timing, the Unipath test involved a single step with a result in 5 minutes and in doing so, revolutionised the rapid home and professional testing markets.

And:[7]

[7] Mr Prior’s bundle of documents, para 48.

When Unipath launched its new Clearblue Onestep product, a true quantum leap was made in immunoassay design.   On launch, Clearblue Onestep received rave reviews in both the popular and scientific press.  As early as

1989, we were presented with a prestigious British Design Award by the

Duke of Edinburgh and around this time our competitors began copying both the  strip  and  casework  design.    Even  today  the  design  has  not  been

superseded but only copied.

I accept this evidence, which was supported by other witnesses for the plaintiffs, and in particular Mr Raj.

[62]     Mr Prior was cross-examined about other devices which  may have been designed at around the same time, or even earlier.  That evidence does not leave me with relevant doubt in respect of Mr Prior’s positive evidence because I accept his evidence in cross-examination.   This was to the essential effect that relevant comparisons could not be made because of substantial differences, including the way in which other devices operated compared with those of Unipath.   There was no defence witness with any expertise to challenge Mr Prior’s evidence.  Some further evidence was produced through Dr Appanna, or other witnesses, in the form of

publicly available documents relating to products of other manufacturers.  There was a substantial amount of evidence in this broad category, but it does not assist the defendants’ case.  I discuss this further at [231] and following.

[63]    What leads from the evidence, which I have simply touched on, is my conclusion that there was a high degree of originality in the Unipath copyright works at issue in this case.   I am here referring not only to the stage 1 copyright works leading to the launch of the midstream Clearblue mark 1 in June 1988, and Unipath’s card device later that year, but also to further and substantial design modifications in stages 2 to 4.  I am also of this opinion notwithstanding arguments for the defendants that a number of the drawings relied on are rudimentary or simple.  I will come to the particular works relied on, which are annexed.   At this point I record my finding, implicit in what I have already said, to the effect that in this case apparent simplicity in some drawings is not indicative of a modest amount of skill and labour in producing the drawings.  Before coming to the works relied on I will continue the narrative in respect of Unipath’s stage 2 development.

Stage 2 : 1988-1990

[64]     Once Unipath was confident that the midstream and card devices launched in

1988 had become well established in the market, it proceeded with further development.   This resulted in the design of a strip consisting of two parts – nitrocellulose, as before, together with what was generally described as a “conjugate pad”.

[65]     The technical objective which resulted in the addition of this pad was to seek to increase the sensitivity of the test.  To begin with, this was directed to a device intended to indicate ovulation, rather than pregnancy, because greater sensitivity was required for the detection of the hormone relevant for indicating ovulation.  Mr Prior said:[8]

[8]Mr Prior’s brief of evidence, paras 61 and 62.

No matter what optimisation in reagent position and concentrations we performed, this sensitivity level could not be achieved with the single piece test strip design.  Careful examination and experimentation led us to think

that not enough of the sample was coming into contact with the colour- labelled first antibody before this hormone-antibody complex was released from the location of the first antibody and moved up the strip.   However, experiments  where  the  particles  were  pre-mixed  with  the  sample  before being run up the strip, gave us more than the required sensitivity.

From this experimental work, it was decided that we needed to design a

‘mixing chamber’ into the strip that allowed the antibody labelled coloured particles to come into contact with a larger amount of urine sample before

migrating  up  the  strip.    This  ‘mixing  chamber’  effect  was  achieved  by

adding a thin macroporous pad containing the coloured particles to the upstream portion of the test.  A full description of this design is contained within the Davis patent.

[66]     The first product with the additional pad – the “mixing chamber” – was an ovulation  testing  device  launched  in  1990.     Midstream  and  card  devices  for pregnancy testing, with these modifications, were also put into the market in 1990. As indicated in Mr Prior’s evidence, the main features were the additional conjugate pad and the fact that this conjugate pad contained the tagged antibody A.   The conjugate pad was saturated with the tagged antibody and then dried.   With the midstream and card products, the time for the completion of the test was also enhanced, from five minutes to three.

Copyright works for stages 1 and 2 : 1986-1990

[67]     Annexed  to  this judgment,  as  annexures  1  to 8  are  the  copyright  works produced by the plaintiffs for the period up to 1990.  The annexures are largely, but not entirely, chronological.  There is one document (in annexure 4), not relied on as a copyright work in this case, but with some relevance, as I will explain.  Most of the annexures have reproductions of two copyright works, with some of the individual works also containing more than one drawing in some cases.  Where there are two works on a page, this is indicated by the words “top” and “bottom”.

[68]     Annexures  1,  2  and  3 top  are  a  series  of  drawings  showing progressive refinements of design for the strip in stage 1.  Annexure 1 top shows design at an early stage.   The left hand drawing in annexure 1 top also illustrates, in a simple form,  the  lateral  flow  technology with  urine  being  applied,  as  indicated  in  this drawing, at one end and moving first to the “free antibody” and then to the bound antibody.  Design refinements shown in the following drawings include dimensions

of the strip overall, together with the relationship of the parts of it.  Relationships include that of the “mobile band”, which I earlier described as the area containing antibody A, and the “immobile band”, which I earlier referred to as containing antibody B.

[69]     The second drawing in this group, in annexure 1 bottom is, as recorded on it, a reproduction by Mr Prior, “from memory”, of “original sketches made by him during invention of lateral flow technology”.  He estimated the date of production of this drawing at around May/June 1987.   This drawing is the first to add a control zone, a further feature which found its way into the strips that were manufactured for the market in 1988.

[70]     There are no final production drawings for the strips manufactured in 1988. There are production drawings for strips manufactured at subsequent stages.  I do not consider that the absence of production drawings is relevant.  I accept that there will have been a reasonably substantial number of drawings at various stages.   As indicated by Mr Prior’s notation on his reproduction of the 1987 drawing, numbers of drawings can no longer be located.  That does not create problems of proof if the evidence as a whole enables an inference to be drawn as to the existence of other drawings from which the physical product must have been made.   I readily draw those inferences where necessary, and in respect of Acon works as well as those of Unipath.

[71]     The plaintiffs emphasised a range of features in respect of the design of the strips said to give rise to copyright.  These included the particular dimensions and the relationship of one feature to another, such as the position of antibody A, the position of antibody B being the point at which a result might be indicated, and the position of a control zone.  The plaintiffs also gave emphasis to the use of lines for the test and control indicators.

[72]     The positioning of the lines, as well as the overall dimensions of the strips, flowed through to the design of cases for the midstream and card devices.  Annexure

3 bottom shows an early drawing for a device containing the strip.   This records

basic dimensions, but it also shows what is effectively a cover with a single window for viewing the result of a test.

[73]     Annexure 4 was not relied on as a copyright work, but it was put in evidence, with other drawings, or illustrations of prototypes, to indicate the extent of the design activities at Unipath.

[74]     The drawings in annexure 4A, labelled Fig. 1 to Fig. 5, are numbers of drawings contained in a patent filed by Unilever with the Australian Patent Office on

2 December 1988.   It has priority dates of 27 April and 30 October 1987 and an international filing date  of  26  April  1988.[9]      This  patent  was  referred  to  in  the evidence as the “May patent” after the first-named inventor.  There are three named inventors, one of whom is Mr Prior.

[9] This is one of the patents dealt with in the Australian Federal Court proceeding by Inverness against

MDS and others; see n 4 above.

[75]     It appeared, at least initially, that the defendants were questioning whether the plaintiffs are entitled to rely on drawings contained in a patent as copyright drawings.   I am satisfied that publication of the drawings in the patent does not prevent the plaintiffs  from relying on  them as  copyright drawings provided the requirements for subsistence of copyright are present.

[76]     The May patent also contains drawings for midstream and card devices (as well as other possible embodiments).  These are reproduced as annexures 5 top and 6 top.  The bottom drawings in annexures 5 and 6 are drawings produced during stage

2, resulting in the addition of the conjugate pad and other changes.  These drawings are contained in what was called the “Davis patent”, which I will discuss shortly, following a description of the drawings in the earlier May patent for the midstream and card, including the strips in them.

[77]     I refer first to annexure 5 top, a drawing of a midstream device (Fig. 8) and a cross-section (Fig. 9).  The portion labelled 503 is a cap.  The remainder is the part held in the hand by the user.  The wick is labelled “506”.  When used, the cap is removed and the urine is applied to the wick.   The apertures labelled “508” and

“509” are holes in the plastic case through which the test and control lines can be seen.

[78]     In the cross-section, Fig. 9, the thin, hatched section labelled 510 is the strip, consisting of nitrocellulose only.  As will be seen it is contained entirely within the plastic casing and is connected to the wick (506) with an overlap.  The number 511 points to another feature, which may not be readily apparent from the reproduction. This is a plastic backing to the nitrocellulose which, in the drawing, is in fact on top of the nitrocellulose.  The “backing” is transparent.  This means that results, from the coloured antibody, can be viewed through the apertures.   The design relationship between the case and the lines for the test and control indicators will be apparent from these drawings.

[79]     Annexure 6 top, in Fig. 10, has an enlarged cross-section view of the strip and the wick in the midstream.  This shows more clearly the transparent backing to the nitrocellulose – item 511.  The positions for test and control zones are labelled

517 and 518.  The wick, as before, is 506.  A portion of the test strip (opposite the backing strip 511 and adjacent to the wick 506) carries a glaze (510) on which is deposited a layer (520) of specific binding antibody.   (The thickness of these two layers has been exaggerated for the purpose of illustration.)  The arrows in Fig. 10 indicate the direction of flow of urine, commencing at the wick.

[80]     Annexure 6 top has drawings for a case, in Fig. 11 and Fig. 12.  The apertures in the middle of the case, (603) and (604), shown in both drawings, have the same functions as those just referred to in the midstream.   Aperture 601 is the aperture through which the sample of urine is applied using a pipette or similar device.  In this card, the urine is first received by a porous substance (605), serving a function broadly similar to the wick in the midstream.

[81]     The further work undertaken by Unipath between 1998 and 1990, in stage 2, is illustrated in part by the drawings in the Davis patent which are in annexure 5 bottom (midstream) and annexure 6 bottom (card).  Again, Mr Prior was one of the named inventors on this patent.   The priority date in the patent, from the United Kingdom, is 17 February 1989.   The application date in Australia is 16 February

1990.   The drawings follow the same pattern as those in the May patent because these were drawings for a patent rather than for production, but I am satisfied that nothing turns on that adverse to the plaintiffs’ case.   The drawing of particular relevance, to illustrate embodiment in a drawing of the further work undertaken by Unipath in stage 2, is Fig. 3 in annexure 6 bottom.  This is, in format, similar to Fig.

10 in the same annexure (annexure 6 top) taken from the earlier May patent.  The prominent additional feature in the later drawing is labelled 113.   This is the “conjugate pad” which now contained the tagged antibody A.   The conjugate pad (113) is also illustrated in the Davis patent full cross-section of the midstream in annexure 5 bottom, Fig. 2.

[82]     Annexures 7 and 8 are the final manufacturing drawings for the upper and lower halves of the case for a card.   These indicate, amongst other things, the positioning of the strip in the case and the relationship of the relevant parts of the strip to the apertures in the case.  As will be apparent from the drawings themselves, they contain fine measurements and refinements of the card cases, developed from the drawings in the May and Davis patents.   The detail does not require further elaboration.   The text in the lower right hand corner of each drawing (landscape view) states that the original drawings were made in August 1988.  These particular drawings include modifications made in November 1989 and February 1990 with those modifications recorded as: “strip locations modified, four places”; “two lugs added both ends”; “two ribs added”; and “surface finish changed was charm ‘12’”. The original drawings were, therefore, made shortly before the launch of Unipath’s first card, at the end of stage 1, in 1988.  The modifications were made around the time of the launch of the modified strip, at the end of stage 2.  The drawings were made by a Mr Bekkers of a Dutch company called Technoplast.  I am satisfied that copyright  in  the  drawings  was  nevertheless  owned  by  Unipath,  or  its  parent, Unilever, the distinction between Unipath and Unilever not being material.

Stage 3 : 1994-2002 : “SOAPSUD”

[83]     What  I call  stage 3  was  a  further  development  stage  which  commenced around 1994, with the project name “SOAPSUD”.   Mr Prior led the SOAPSUD

project.  He produced in evidence a copy of his report on the project.  This detailed report, excluding appendices, is 113 pages long.  It sets out design developments as well as scientific research and development.

[84]     Mr Prior explained that a number of market factors were taken into account in SOAPSUD.   These included the fact that the market had become flooded with home and clinical tests largely copied from Unipath designs; the “off the shelf” availability of materials and machinery required to set up lateral flow technology; the prevalence of cheap far-Eastern imitation and manufacture; the acceptance of home pregnancy diagnosis; the growing speed and sensitivity of tests; and the transformation of home diagnostics from being under-the-counter products to being products akin to fashion accessories, and accordingly, the need for redesigning to take this into account.

[85]     Mr  Prior’s  evidence  of  changes  made  to  the  design  of  the  strip  was  as follows:[10]

[10] Mr Prior’s brief of evidence, para 75.

Important changes were also made to the design of the strip.   The one- minute run time (in and of itself a very significant improvement) and some of the savings in manufacturing costs came from the re-design of the test strip.   Shortening the read time was achieved as a result of a series of specific changes:

(a)The test and control lines were both moved 8mm upstream so that the mobile coloured marker reached them sooner.  This also resulted in us gaining an extra 8mm of sink and as this was not required we found we could remove 10 mm from the total nitrocellulose length. This gave us a 20% cost reduction in one of our most expensive raw materials.

(b)The test reagents were deposited onto the test strip in higher concentrations and improved formulations as the immunochemical reactions had to be faster to achieve the faster run time/sensitivity constraints.

(c)A different macroporous particle-carrying pad was used in the test strip with the particles sprayed onto the surface of the pad as a discrete band rather than the pad being saturated with antibody solution as described in the Davis patent on page 5 at lines 31-33 that was used in the existing Clearblue Onestep device.   This improved test strip construction gave the particle release dynamics required to achieve the one minute to result time constraint. Combination  of  this  new  reelable  pad  material  along  with  a

continuous   deposition   process   gave   us   significant   savings   in manufacturing costs.

(d)We designed the test strip so that as you move from component to component up the strip, the pore size and flow rate decreases.  The wick takes up and wants to release the urine to the next component so  quickly  that  you  often  get  some  flooding  right  next  to  the pad/wick interface.  Therefore, if the label was placed right next to this interface, the sample might flood over the top of it and leave it behind, thus ruining the test.  Therefore, we designed the inclusion of  an  additional  length  of the  macroporous  pad  which  remained blank before the location of application of labelled reagent to the pad.  This interface gap was not required in the second generation test, because the pad material chosen had a greater liquid handling capacity and  could absorb the sample  as fast  as  the  wick could deliver it.

[86]     The redesigned strip was put into the market in 1996.  The copyright works relating directly to this redesigned strip are in annexures 9 to 13.  These drawings are described in the following paragraphs.

[87]     Annexures 9 and 10 come from Mr Prior’s report for the SOAPSUD project. Annexure 9, entitled “RELAUNCH v SOAPSUD: Dimensions”, compares the SOAPSUD strip with an earlier modification given the project name “Relaunch”. The drawings illustrate, amongst other things, the significance in design of various dimensions as well as the changes in that respect between Relaunch and SOAPSUD. Both are strips for the Unipath midstream product (Clearblue).

[88]     Annexure 10 has drawings for construction of the SOAPSUD strip (called a “chip” in these drawings).   These drawings, amongst other things, illustrate the relationship of various features to each other in terms of the overall design; in effect, drawings for a collage.

[89]     Annexures 11 and 12 are highly detailed drawings for manufacture of strips. Annexure 11 has an original date of 2 May 1995, with drawing modifications recorded from 26 April 1996 to September 2002.   The title of the drawing is “Evolution/SOAPSUD OTC chipband” indicating that it was first used for SOAPSUD  and  then  used  in  what  I call  stage  4,  which  had  the  project  name Evolution, noted below.  The central part of the drawing, being a long rectangle with

40 transverse lines, shows a lengthy strip of nitrocellulose from which 39 individual

pieces of nitrocellulose are cut for manufacture of individual strips.  The black dots, which are “visible detection marks”, are at the distal end of the strip.  A notation, related to an individual piece of nitrocellulose to be cut from this long piece, records: “typical strip width 8+/-0.05 when cut on Mikron assembly machine”.   This, and similar notations, records allowable manufacturing tolerances.

[90]     Annexure 12 has an original date of 22 February 1996, with modification dates of 22 February 1998 and 12 January 2007.   The legend includes the descriptions: “used on SOAPSUD (Clearblue)” and the title “Antibody lines: nitrocellulose band”.  This records the positions of the two antibody lines, placed in production on the long piece of nitrocellulose before cutting into individual pieces. There are precise measurements, with acceptable tolerances, for the lines themselves and for their relative positions.  There is an enlarged view which is a cross-section of two pieces of material combined at this stage of manufacture.   These are the nitrocellulose and a polyester backing.

Stage 4 : 1999-2002 : “Evolution”

[91]     The  further  development  project,  “Evolution”,  commenced  in  1999.    It resulted in further modifications to the Unipath midstream (Clearblue).   This was launched on 1 November 2002.   Modifications to the strip do not have present relevance.   One modification which is relevant, when compared with an MDS midstream, is that the wick was considerably wider than the wick in earlier versions. This is shown in a further Unipath copyright work, annexure 14.  This drawing is dated March 2002.  As indicated on the drawing, it was to be read in conjunction with another drawing (as is the case with other manufacturing drawings I have referred to).

[92]     The final Unipath copyright work put in evidence by the plaintiffs is a stage 4 (Evolution) redesign of the case for the midstream.  This is reproduced as annexure

15.  It is dated 20 February 2002.  The plaintiffs do not allege infringement in respect of this drawing.  The alleged infringement of copyright works for a midstream case is in respect of Acon works.   What this drawing serves to illustrate is that the significant  skill  and  work  that  went  into  design  of  Unipath’s  original  product,

launched in 1988, continued with substantial redesign of products through to 2002 when IMI acquired copyright in all of these works.   This drawing also assists in determining whether the MDS midstream case was copied from the Acon case, by way of contrast.

H.      Acon copyright works and products

1995-1999

[93]     Acon  designed  and  manufactured  all  three  devices;  that  is  to  say,  a midstream, a case and a dipstick.  Much of the design and manufacturing work was undertaken by an associated company operating in Hangzhou, China, and some work was contracted out by that company.  These distinctions are not relevant and I will simply refer to Acon as including the associated companies.

[94]   There is not much evidence relating to Acon’s design work from its incorporation in 1995 until around 1998-1999.  More particularly, there are no extant copyright works prior to 2000.  The plaintiffs say there is good reason for the lack of copyright drawings prior to 2000.   The evidence came mainly from Mr Qingning Xiang.   Mr Xiang is the in-house patent counsel for the company in China which now manufactures the products acquired by the plaintiffs from Acon.   Mr Xiang

said:[11]

[11] Mr Xiang’s brief of evidence, paras 15 and 16.

I have tried very hard but have not been able to locate many documents in Aconlabs because many original documents have been lost due to three moves of the factory over the last few years as we have grown.  Some of the documents may still be at ACON but as it is a separate company, it is difficult to know for sure. …

He then described three moves between 1997 and 2006 and continued:

To find the original designers for these test strips is not easy because much of the useful information and evidence from Acon’s Hangzhou site, to state when  and  who  designed  the  test  strips  or  the  casings,  has  been  lost. However, after much investigation and having spoken to at least 30 people, the names of which I provided in my Affidavit dated 25 August 2007 in paragraph 11 I have found some documents.   I have spoken with Zhumin

Guan, Fei (Soar) Goa, Lijian Gou, Dengfen (Dennis) Xiong and Huikang (Jerry)  Chen  on  the  design  of  the  test  strip.    All  of  these  people  are employees of either ACON or Abon.  ...  To the best of my knowledge and belief, Mr Guan went to the United States in late 1995 or 1996 and brought back from Arista Biologicals (“Arista”) information and know-how relating to the test strip.

[95]     I am satisfied from the evidence that in the period from its inception in 1995 to 1999 Acon expended a considerable amount of time, effort and skill, as well as money, in developing and designing its own dipstick, card and midstream products. This may be seen from an outline of the evidence, with relevant findings of fact, for the earlier period.

[96]     In late 1995 or 1996 the founder of Acon, Dr Jixun Lin, “learned the lateral flow technology”, as Mr Xiang put it, from an American company called Arista Biologicals, Inc (Arista).   Another Acon employee, Zhumin Guan, also went to Arista in 1996 “to find out how to make the test strips and packaging”.[12]     The defendants contended that the evidence established that Acon had simply copied the strips from Arista.  I do not agree.  I am satisfied that what Acon got from Arista was

technology – how to make strips.  What Acon then did was explained by Mr Xiang as follows:[13]

… I believe that when the multi-component strip technology was transferred from  Arista  the  design  and  manufacturing  teams  at  ACON  produced different prototypes with different dimensions and materials to be used for the strip that they wanted the company to manufacture.

[12] Mr Gao’s brief of evidence, para 3.

[13] Mr Xiang’s brief of evidence, para 17.

[97]     Mr  Xiang  then  referred  to  documents  in  the  agreed  bundle.     These documents, however, are all dated 2001.  Notwithstanding this, I accept the thrust of Mr Xiang’s evidence to the effect that reasonably significant amounts of work and skill were applied by Acon in designing its own strips and cases once the technology had been understood following the visits to Arista.  Mr Xiang was not challenged in any material way on this aspect of his evidence.  It is supported by other evidence and inferences I readily draw, as to what had gone before, from a design review commenced at Acon in 1999.   This was a review of existing products.   There is further evidence I will touch on.

[98]     Mr Xiang said, based on his investigations and records of the company, that Acon sold the products in China, and other countries other than the United States, in the period 1996 to 1998.  In cross-examination he said that all three products were sold.   He was obviously referring to the three devices at issue in this case, the midstream, the case and the dipstick.  Additionally, there was the following evidence

from another witness, Mr Fei Gao:[14]

From  1996  onwards,  ACON  developed  three  products.    These  became known as the dipstick or strip product (FHC-101), the device or cassette product (FHC-102) and the midstream device (FHC-103).  The test strip we developed was able to be used in two basic formats – the dipstick and the device [i.e. card] format.  The first format was just a single strip which was stand-alone and the second format was a strip to be used in a casing.  The strip was for home use, while the cassette was mainly for use in professional situations like in hospitals.

[14] Mr Gao’s second brief of evidence, para 4.

[99]     Another Acon witness, Mr Jielin Dai, said that, in the course of his design work for Acon in 2001, he saw documents and drawings relating to design of a strip in about 1996 for use in a midstream device.[15]

[15] Mr Dai’s brief of evidence, para 14.

[100]   In 1997 and 1998 Acon gave what are known as 510(k) notifications to the United States Food and Drug Administration (FDA).  This is notification required to be made of intent to market a medical device.  There was notification given on 25

November 1997 for a product with the brand name “AimStick”, a device intended for professional use.   On 23 February 1998 notification was given in respect of Acon’s dipstick.  Also in 1998, although the precise date does not appear to be in evidence, Acon gave notification in respect of its midstream product.  The earliest date  in  evidence  relating to  this  510(k)  application  is  November  1998,  being  a response from Acon to review comments from the FDA.  Mr Gao said that Acon’s midstream was Acon’s first product to appear in the United States market.

[101]   On 1 December 1999 Acon made application in China to register a design. The rights associated with this were transferred to IMI.  A copy of the application is in evidence.   This consists principally of two photographs of a midstream device. These are not relied on by the plaintiffs as copyright works, but they are relevant to

the plaintiffs’ claims in respect of Acon copyright works for the case for Acon’s midstream.

Acon design review from 1999

[102]   In 1999 Acon commenced a design review of its products.  It appears from the review that the process began on 29 November 1999.  The design review, at least with some of the products, extended through to early 2002.  In respect of the review, Mr Xiang said:[16]

[16] Mr Xiang’s brief of evidence, paras 29 and 30.

This review document is set out in the standard form used at ACON.   At page 3 it confirms that the “proposed project is to take the existing ACON hCG products and strengthen their market appeal and lot-to-lot consistency by implementing” certain changes “according to the ACON product development design control document SOP01-001”.   This design control document is part of our ISO requirements.

The report also  states  that  “the  entire  ACON  hCG  product  line  will  be modified.  All of these hCG products use the same chemistry, but differ only in platform i.e., the strip is essentially the same whether assembled as a device, midstream or dipstick product”.

[103]   Mr Xiang gave further detailed evidence relating to the design processes at Acon in respect of this review, which went through three phases.  There was further evidence from Mr Gao and Mr Dai.  Mr Dai was responsible for, in particular, design of the inside of the case for the midstream.    Mr Dai  liaised with the designer contracted to Acon for the case exterior, Ms Ying Yang (noted earlier, at [42], in respect of the ownership issue).

The Acon copyright works

[104]   The plaintiffs claim that a considerable number of drawings, or other forms of artistic work, produced over the review period from 1999 are copyright works and works in respect of which the defendants have infringed copyright.  I do not intend to annex copies of all of them and it will not be necessary to refer to all of them.  In

respect of the copies that are annexed it is convenient to list them under headings relating to each product.

Midstream copyright works

[105]   Summary descriptions of the midstream copyright works in the annexures are as follows.  These all relate to an Acon midstream product variously described as the “CVS” or “Rexall” or “CVS Rexall”.

a)       Annexure  16:  Exterior  of  the  case.     These  are  images  from  a computer.   This is the design done by Ms Yang, using computer software.

b)Annexure 17: The upper half of the case, inside and outside, and a cross-section.

c)       Annexure 18: The lower half of the case, inside and outside, and a cross-section.

d)       Annexure 19: The cap, top and bottom, and a cross-section.

e)       Annexure 20: Two drawings of the complete product.   One has the cap removed and shows a wide wick which was introduced with this revision.

f)        Annexure 21: Drawings with dimensions and some specifications for the strip in the midstream (known by the product code FHC-103).

[106]   The plaintiffs contended that there was infringement of 22 other copyright works for an Acon midstream product closely related to the CVS Rexall, known as Perrigo.  Copies of those are not annexed.  I am not satisfied that copyright in these drawings was infringed.  This is because a product made from the drawings was not put  into  the  market  and  there  is  no  evidence  that  MDS,  or  its  manufacturer Phamatech, had access to the product or to the drawings.  The nature of the drawings

nevertheless supports the conclusion that there was substantial originality in the copyright works created by Acon for its pregnancy testing products.   I am also satisfied that there is evidence of a coherent design path of Acon for its midstream product.  This starts with the registered design, referred to above at [101], then the Perrigo, which was designed but not put into the market, and on to CVS Rexall, which was put into the market in 2002 as explained shortly.

[107]   Some additional copyright works for the CVS Rexall midstream product have also been omitted.   These are duplicates of drawings already referred to, but containing various handwritten workings and modifications indicative of further design skill and effort.

Card copyright works

[108]   Descriptions of the works for the Acon card are as follows:

a)       Annexure 22: There is a descriptive box at the top of the page, under the heading which commences “hCG Urine test device …”.   The descriptions in the box may be related to the diagram of the strip at the bottom.  The strip consists of four main parts: a sample pad, which receives the urine; a “label pad” containing the mobile antibody with a label, which in Acon’s case is red colloidal gold; the “immunoreaction area”, which is the nitrocellulose portion where the immunoassay occurs; and, at the distal end, an “absorbent pad”, also described as a sink.   The sink is designed to absorb any excess urine.   The label attached to the mobile antibodies produces a red colour, compared with the Unipath label producing a blue colour.  The upper diagram is a representation of the exterior of a case, viewed from above.

b)Annexure 23: These are drawings with dimensions and some specifications for the strip in the card (known by the product code FHC-102).

Dipstick copyright works

[109]   Following  is  a  summary  description  of  Acon’s  copyright  works  for  its dipstick.

a)       Annexure 24: The descriptive box at the top and the drawing of the strip at the bottom follow the format in annexure 22 for the card.  The upper drawing, with the letters “hCG” at the right hand end (the distal end) and arrows at the left is a simplified drawing of the exterior of the strip looking at the face of the strip the user will look at.

b)Annexure 25: These are drawings with dimensions and some specifications for the dipstick strip (known by the product code FHC-

101).

c)       Annexure 26: These are drawings of the dipstick indicating how to read the device for a positive or negative result or an invalid test.

Completion of Acon’s revised midstream drawings : Acon-MDS agreement

[110]   A distribution agreement was entered into between Acon and MDS on or about 27 February 2002.  In the event, MDS did not distribute any Acon products, but it is relevant that this agreement, and disclosures made by Acon pursuant to it, coincided with the completion of Acon’s revised midstream drawings, both for the Perrigo and the slightly different CVS Rexall midstream products.

[111]   Dr Appanna contacted Acon in 2001 to discuss the possibility of purchasing Acon’s products as a back-up to, or alternative to, the products MDS was at that time getting from Phamatech.  This led to the agreement made between MDS and Acon in February 2002.

[112]   It is clear that the redesign of the Acon midstream devices was completed by the beginning of 2002, certainly in the case of the Perrigo design.   The Perrigo design was approved for manufacture by the client, Perrigo, on 7 February 2002.

The plaintiffs, in their statement of claim, said that this product range “was not ultimately pursued” and this was confirmed by Mr Xiang.  The plaintiffs argued, in closing, that in fact the product may have been put into the market, but I am satisfied that this was not so.   However, in March 2002 Acon sent to MDS what were described as “registration files” for each of Acon’s products; that is to say, the midstream,  the  card  and  the  dipstick.    These  are  detailed  files  for  each  of  the products.  The timing of the provision of this information is relevant, as discussed later.

[314]   The first point, involving different dates for a case and for the strip in the case, may be considered by principles determining whether there should be apportionment.   On the facts of this case the issue arises only in respect of the Unipath card case, which was industrially applied, on the plaintiffs’ contention, in

1990, and in 1988 on the defendants’ contention.   My finding is that the relevant works of Unipath were industrially applied in 1990.  The result is that, if the case is considered in isolation, what I call the copyright expiry date for the case was 1 April

2006.  This could have some bearing on the calculation of damages.  However, for reasons discussed in section P, dealing with damages, I have concluded that it is not appropriate to apportion damages in respect of the case.

[315] The second area of potential complication is with different expiry dates for Unipath and Acon strips. The conclusion I reached on copying is that individual MDS strips copy substantial parts from both Acon and Unipath works, with these substantial parts in effect merged into an MDS strip. This feature of copying from Unipath and Acon is illustrated, in some of the relevant respects, by the table at [198]. The chart indicates, and I concluded, that all but two of the dimensions recorded in that chart were copied from Unipath’s strip put into the market in 1996 (the SOAPSUD strip). Another feature copied from Unipath was the wide wick introduced in 2002. The test line position appears to have been copied from Acon. The same general point is illustrated by the table relating to the strips in the three cards, at [208] above.

[316]  The dates on which the relevant Unipath and Acon strips were applied industrially are relatively easily established and are in large measure agreed.  They are different dates.  If the law requires these different dates to be taken into account in assessing damages and granting an injunction, both exercises would be likely to be complicated and an effective injunction difficult to construct.  In my opinion, it is not necessary to go down this path.  This is for two reasons.  One is that, as with the case, apportionment is not appropriate.   The second is contained in the principles relating to copyright infringement claims by a plaintiff whose works are in part derived from copyright works owned by a third party.   The principle is stated in Copinger, at paragraph 3-263, as follows:

Works infringing other works

Today it is clear that copyright can subsist in a work which itself infringes copyright in an earlier work,[96] and the issue is whether the court will enforce such copyright. As to this, a work which itself is an infringement of an earlier work, but which otherwise satisfies the requirements for copyright to subsist in the work,[97]  will normally be entitled to protection, subject to the right of the owner of the earlier copyright work to receive a share of any sum recovered.[98]

[96] Redwood Music Ltd v Chappell & Co Ltd [1982] RPC 109 at 120 per Goff J, applying Wood v Boosey (1866) LR 2 QB 340; (1967) LR 3 QB 223 at 229 (arrangement of a score of an opera held to be subject of copyright, notwithstanding that its publication without the authority of the composer of the original opera would be an infringement).

[97] As to whether such a work qualifies as original, see Copinger [3-141].  In some of the older cases, relief was refused on the ground that the work was infringing: see eg Cary v Faden (1799) 5 Ves 23; Sailendra Nath De v Chayanika Chire Mandir (1950) 55 CalWN 713; Gouindan v Gopalakrishna Kone [1955] MadWN 369. 

[98] ZYX Music GmbH v King [1995] FSR 566; [1995] 3 All ER 1 at 9h to 11b, per Lightman J.

[317]   In my judgment, and supported by some evidence from Mr Prior, the design of the Acon strips is, in part, derived from the Unipath strips.  However, as earlier discussed, I am also satisfied that Acon’s works otherwise satisfy the requirements for copyright to subsist in them.  Any obligation for Acon to account to Unipath does not arise in the unusual circumstances of this case; the interests of those two companies, in this respect, have now merged following the successive acquisitions by IMI.

[318]   Based on this analysis I accept the plaintiffs’ calculations for expiry dates, which are as follows (reproducing, with minor amendments, the table contained in

the plaintiffs’ closing submissions in reply).

PRODUCT	DATE MADE & SOLD	EXPIRY DATE
Dipstick
ACON dipstick test strip (FHC-101)	1996	2012
Modified design with anti-LH scavenger antibody added to test strip and blank half of conjugate pad	2000	2016
Card
Unipath case	1990	2006
Unipath stage 2 test strip including conjugate pad	1990	2006
ACON test strip in Quik-Check (FHC- 102)	1996	2012
Modified ACON test strip (FHC-101) design with anti-LH scavenger antibody added to test strip and blank half of conjugate pad	2000	2016
Midstream
Acon Rexall case	2002	2016
ACON test strip in midstream (FHC- 103)	1996	2012
Modified ACON test strip (FHC-103) design with anti-LH scavenger antibody added to test strip and blank half of conjugate pad	2000	2016

P.       Damages

[319]   The plaintiffs elected to seek damages rather than an account of profits. There are different ways in which damages for infringement of copyright may be assessed.   It is unnecessary to consider principles established by the cases as to which method should be selected.   This is because, by the time of closing submissions, there was broad acceptance that damages could be assessed and should be assessed by applying a royalty to the infringing products sold by MDS.   Both expert  accounting  witnesses,  Mr  John  Hagen  for  the  plaintiffs  and  Mr  Murray

Lazelle for the defendants, provided evidence for calculation of damages based on a royalty.  I am satisfied that this is an appropriate basis for assessment of damages.

[320]   The principal issue that arises is the appropriate royalty rate.  Mr Hagen made calculations based on rates of 10% and 15%.   In cross-examination, Mr Hagen explained that he had used the 15% figure because Mr Veldhuis, of Inverness, had informed him that a 15% royalty rate had been adopted in settlement of another infringement claim.  Mr Hagen accepted that this royalty rate might well be higher

than that normally adopted in an arm’s length commercial negotiation.[99]

[99] Notes of evidence p 254, lines 21-27 and 33-35.

[321]   Mr Veldhuis had earlier given evidence of the 15% rate as, in effect, a figure agreed between Inverness and another party, unnamed, in settlement of proceedings issued by Inverness.  There was no other evidence for the plaintiffs in respect of an appropriate royalty rate.  This was notwithstanding evidence that Inverness had sold its products in New Zealand through other companies and on a royalty basis.

[322]   Mr Veldhuis’ evidence does not provide a principled basis for assessing the rate.  In saying that I am not intending to criticise Mr Veldhuis.  He has simply given evidence of a particular rate arrived at in particular circumstances.  The point is that the circumstances are not those applicable to the exercise I am concerned with.  The rate must be one arrived at on the basis of a notional arm’s length transaction between MDS and Inverness, Unipath or Acon, taking account of relevant market

considerations and relevant considerations for each of MDS and Inverness.[100]   Mr

Veldhuis’ evidence does have some relevance for this purpose, but not to the effect contended for the plaintiffs.  Mr Veldhuis’ 15%, obtained from a party being sued and as part of the consideration for settlement, is at the least strongly suggestive of a rate above the rate that would be arrived at following an arm’s length, commercial negotiation in the market.

[100] Aktiengesellchaft fűr Autogene Aluminium Schweissung v London Aluminium Co Ltd (No. 2)

(1923) 40 RPC 107 at 113-114; Ludlow Music Inc v Williams (No. 2) [2002] FSR 57.

[323]   The  defendants  adduced  some  evidence  indicative  of  commercial  market rates for pharmaceutical products.   This came from a World Health Organisation (WHO) report entitled “Remuneration guidelines for non-voluntary use of a patent on  medical  technologies”.    The  report  was  published  in  2005.    The  opening statement,  in  the  executive  summary  to  the  report,  refers  to  the  obligation  on members  of  WHO  to  “implement  intellectual  property  laws  in  a  manner  that promotes access to medicines for all”.   It refers to royalty rates imposed by governments.  However, for the purposes of discussing the primary topic of “non- voluntary” remuneration, there is reference to commercially negotiated royalty rates in the pharmaceutical industry.  The executive summary says:

There is some conflicting evidence on cross-industry licensing averages, but there seems to be agreement in reports from the pharmaceutical industry and others that licensing fees for the pharmaceutical industry congregate at 4-

5%.

There is an expanded discussion in one section of the report which supports this summary.

[324]   I consider that the market indication of 4-5% for a royalty is the rate to be applied in this case.   This is for the following reasons, which in large measure summarises what I have already referred to: both parties accept a royalty calculation as the appropriate means of assessing damages; the rates of 10% and 15% used by Mr Hagen are not appropriate because they are not based on evidence of   rates reached at arm’s length; the plaintiffs have not adduced any other evidence of market rates; there is evidence from the WHO report which I am prepared to accept in the absence of other evidence of greater weight; and the plaintiffs did not, as such, challenge the accuracy of the WHO report, beyond arguing that the range of 10% to

15% should apply.  The only point raised by the plaintiffs in respect of the report was to the essential effect that the average rate of 4-5% was in some way related to compulsory licensing.  That submission is not borne out by a reading of the report.

[325]   Mr  Lazelle  made  a  calculation  of  damages  based  on  a  royalty  of  4%. Assuming infringement by all of the MDS products, the total calculated by Mr Lazelle is $259,998.  There were separate calculations for the cases for the cards and the midstreams, and for the strips in the cards and the midstreams.   The separate

calculations  were  made  to  allow  for  the  possibility  of  a  finding  that  the  strip infringed and the case did not, and vice versa.  That distinction is not relevant given my earlier findings.

[326]   There was also a separate calculation for the case of the Unipath card, with royalty damages calculated up to 1 April 2004, but not beyond that date.  This was on the basis that the Unipath card case was industrially applied in 1988 and there could therefore be no infringement by MDS from 1 April 2004.[101]    The plaintiffs contended that the Unipath card  case was industrially applied in 1990.   I have already held in favour of the plaintiffs on that point, but the issue remains because the copyright expiry date, which is then 1 April 2006, has passed.  This comes back to the question whether damages should be apportioned.

[101] An issue of this sort does not arise in respect of the Acon card case.   The plaintiffs’ claim, in relation to a card case, is in respect of Unipath works only.

[327]   As earlier indicated, I do not consider that there should be an apportionment between the case for the MDS card and the strip, with the calculation of damages for the case going to April 2006 only.  Sometimes apportionment may be necessary, or at least appropriate.[102]    But there is no rule that, where part only of the defendants’ product infringes, there should always be some apportionment.  The broad principle was stated by Windeyer J in the High Court of Australia in Colbeam Palmer Ltd v Stock Affiliates Pty Ltd:[103]

[102] See ABB Ltd v New Zealand Insulators Ltd (2007) 11 TCLR 978 (HC) at [90] ff, and the cases there cited.

[103] (1998) 122 CLR 25 at 42. See also Dart Industries Inc v Décor Corp Pty Ltd (1993) 26 IPR 193 at 202-203 (HCA).

The true rule, I consider, is that a person who wrongly uses another man’s industrial property – patent, copyright, trade mark – is accountable for any profits which he makes which are attributable to his use of the property which was not his …

If one man makes profits by the use or sale of something, and that whole thing came into existence by reason of his wrongful use of another man’s property in a patent, design or copyright, the difficulty disappears and the case is then, generally speaking, simple.  In such a case the infringer must account for all the profits which he thus made.

[328]   Although Windeyer J was there considering an account of profits, in my opinion the principle is equally applicable to an assessment of damages and, as in this case, an assessment using a royalty calculation.

[329]   Applying the broad principles to this case, I am satisfied that there should be no apportionment as contended for by the defendants.   The practical effect of the apportionment would be to exclude a royalty for a period in relation to the case for the card.   The case, in the present context, is not significant.   The product, as a whole, simply could not have been sold without the strip.

[330]   If there is no apportionment, Mr Lazelle’s total of $259,998 increases to

$305,938.  I consider that that is the appropriate figure for damages calculated to 31

March 2009 if the royalty is fixed at 4%.  However, there is a further issue whether it should be 4% or 5%.

[331]   I consider that the percentage should be 5%.   The defendants relied on the evidence that the figure is between 4-5%.  In view of the fact that I have found the defendants  to  have  infringed  the  plaintiffs’  rights,  it  is  not  appropriate  in  my judgment to pick the lower figure.  Further, the evidence from Mr Veldhuis as to the

15% rate agreed in settlement of the litigation at least lends some support to using the 5% rate.   The result on this basis is to increase the figure from $305,938 to

$382,422.    This  sum  is  broadly similar  to  the  figure  arrived  at  if  Mr  Hagen’s calculations at 10% and 15% are adjusted to a 5% rate.

[332]   I accordingly fix the damages calculated to 31 March 2009 at $382,422.

[333]   An adjustment needs to be made for royalties after 31 March 2009.   The royalty rate of 5% should be applied, to all products without any apportionment, up to the date of this judgment.  I do not have the information to make the calculation.  I will therefore reserve leave to the parties to apply for further directions if agreement cannot be reached.

[334]   The plaintiffs claimed additional damages said to result “from the flagrancy of the infringement and any commercial benefits accruing to” MDS by reason of the

infringement.  I am not persuaded that a claim for additional damages has been made out.

Q.      Injunction

[335]   The plaintiffs seek an injunction restraining the defendants from continuing infringement.   The plaintiffs are entitled to an injunction, the terms of which are recorded at the conclusion of this judgment.

R.      Plaintiffs’ further claims

[336]   There were two further claims by both plaintiffs against both defendants. The first alleges breach of contract, in respect of contractual obligations of confidentiality.   The second alleges misuse of confidential information arising in circumstances requiring the defendants to maintain confidentiality.  It is unnecessary to explain the nature of these claims in any further detail.  They were, in effect, not pursued by the plaintiffs.   In closing submissions, the following submission was responsibly made by Mr Elliott (at para 320):

In terms of affirmative proof that either MDS or Dr Appanna breached the plaintiffs’ confidences and passed on confidential information belonging to ACON to Phamatech or to other competitors or potential competitors, this cannot be pointed to.

[337]   There  are  other  important  elements  of  the  claim  lacking  proof.     In consequence, these claims are dismissed.

S.       MDS counterclaims

[338]   MDS has three counterclaims.   The first is that Inverness “instituted this proceeding and in particular the claims for infringement of copyright without proper justification or cause”.   The second is as follows: “The actions of the plaintiffs in sending letters to the defendants and their solicitors and patent attorneys and in bringing and prosecuting this proceeding amount to misleading and deceptive conduct”.   The letters referred to are the cease and desist letters and subsequent

correspondence.  Because of the conclusions I have reached on the plaintiffs’ claims, neither of these claims can succeed and they are dismissed.

[339]   The third counterclaim is that IMI is in breach of the agreement entered into by MDS and Acon in 2002.  It is alleged that IMI, in breach of the contract, failed or refused to supply documents required by MDS to comply with medical regulations in New Zealand and Australia for registration of pregnancy testing devices.   It is alleged that the failure or refusal by IMI occurred “on various occasions in 2006”. MDS pleaded that, as a result, MDS was “unable to obtain regulatory approval in New  Zealand  and  Australia  for  pregnancy  testing  kits  as  supplied  by  the  first plaintiff thereby causing to the first defendant loss”.  This claim cannot succeed.

[340]   It was not established that the 2002 agreement between Acon and MDS is in some way binding on IMI.  Nor was it established that IMI procured breach of the agreement by Acon.   In my judgment it is also clear that the 2002 agreement had lapsed long before IMI entered into the Acon acquisition agreement, which was on

24 February 2006.  There is no evidence that IMI would have been in a position to influence Acon in any material way much before that date, which is also long after the date on which the 2002 agreement lapsed.

[341]   The relevant terms of the 2002 agreement were earlier noted.  The intention of the parties was that MDS might become a distributor of Acon products in New Zealand.   This never happened.   That of itself does not mean that the agreement lapsed, but it is the essential background.  I am satisfied from the evidence that the

2002 agreement was treated as being at an  end, although possibly for different reasons, by Dr Appanna and by Acon.  There is no evidence of any relevant contact, let alone dealings, between MDS and Acon from around March 2002, when Acon sent its registration files to MDS, until February 2005 when Dr Appanna contacted Mr Joel Heidecker, who had been Acon’s international sales manager in 2002.  Dr Appanna’s initial inquiry was whether Acon was interested in acting as a manufacturer for MDS.  There was no suggestion that there was an existing, binding contract.  Discussions proceeded during 2005.  On Acon’s side these were conducted by Acon’s new international sales manager, Mr Smith.  These discussions proceeded on the clear basis that the parties were exploring the possibility of a new contract for

Acon to become a manufacturer for and supplier to MDS.  This is the conclusion I

reach based not only on Mr Smith’s evidence but also on Dr Appanna’s evidence.

[342]   The matter is really put beyond doubt by an e-mail of 11 September 2005 from Dr Appanna to Mr Smith, responding to an e-mail from Mr Smith.   (It also provides a single illustration of the extent of Dr Appanna’s control of MDS activities and, to an extent, his technical knowledge.)  Dr Appanna’s e-mail is as follows:

Thanks Steven.

I have been searching through my files and found the original agreement we had with Acon, which I believe was never signed.  I have attached this as a starting point for us to work from.  We will need to replace the price list with the latest version and update the products to be included in the agreement.

I am quite keen to proceed immediately with the Prostate Test kit.  What is the lead time from order to delivery?

By the way, any progress on the validation of the chlamydiae test on female urine?

Regards

Prakash

[343]   Dr Appanna subsequently found a signed copy of the 2002 agreement, but that does not have any bearing on the present issue.  Dr Appanna earlier referred to the 2002 agreement as an agreement that had been binding, whether or not there was a signed agreement.   With Dr Appanna and Acon then having express knowledge that the 2002 agreement had been signed, each side continued negotiations on the basis, known to the other side, that they were not bound by any existing agreement; any contractual obligations would require a new agreement to be entered into.

[344]   After Dr Appanna sent Mr Smith a copy of the signed agreement, Acon and MDS, through Dr Appanna, continued negotiations towards a new agreement.   Dr Appanna’s evidence for this period was on that basis – that a new agreement was required.   But it went beyond this, to a point that cannot be reconciled with the counterclaim.   Dr Appanna expressly contended that a contract was entered into between MDS and Acon in January 2006.   Mr Smith’s evidence supports Dr Appanna’s evidence to the effect that both parties were proceeding on the basis that a

new agreement was needed.  They diverged on the question whether an agreement was in fact made.

[345]   In case there is some basis upon which the defendants could maintain a counterclaim based on the agreement said to have been entered into in January 2006, I record my conclusion that an agreement was not made in January 2006.  It is clear that the parties did not intend to be bound in the absence of a written agreement signed by both parties.  That did not happen.

[346]   In the final submissions for MDS on this counterclaim the argument was directed back to the proposition that IMI has liability under the 2002 agreement.  For the reasons I have outlined, I am satisfied that there was no agreement binding on Acon at any time when IMI was in a position to influence Acon.  Because there was no binding agreement when IMI entered into the acquisition agreement with Acon, that cannot provide a route for liability for IMI.  This further MDS counterclaim is also dismissed.

T.       Result

[347]   There is judgment for the plaintiffs.

[348]   There is an order by way of injunction in favour of both plaintiffs prohibiting the defendants, and the defendants’ employees, servants, agents and distributors, from reproducing, importing, distributing, selling, offering for sale and marketing the pregnancy testing devices currently sold by the defendants under the names MDS QuickStream, MDS QuickStick and MDS QuickCard, and any other pregnancy test products or parts of such products that are copied or substantially copied from the plaintiffs’ copyright works.

[349]   Without  prejudice  to  the  immediate  effect  of  the  preceding  order  of injunction the parties have leave to apply for further orders as to the duration of the injunction and any further definition of its scope.

[350]   The defendants are to pay damages to the second plaintiff as follows:

a)        In a sum of $382,422 for damages calculated to 31 March 2009.

b)Further damages from 1 April 2009 to the date of this judgment to be calculated on a royalty basis on the same terms as the calculation leading to the award of $382,344, with leave to apply if the parties cannot agree on the sum.

c)        The liability of the defendants is joint and several. [351]   The plaintiffs’ further claims are dismissed.

[352]   The defendants’ counterclaims are dismissed.

U.       Costs

[353]   The plaintiffs are entitled to costs.  If the parties cannot agree on quantum the plaintiffs should file a memorandum in support of their claim within six weeks and

the defendants should reply within a further three weeks.

Peter Woodhouse J

[For annexures please refer to PDF version]