Oraka Technologies Ltd v Geostel Vision Ltd
[2015] NZHC 991
•12 May 2015
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
CIV-2005-419-809 [2015] NZHC 991
BETWEEN ORAKA TECHNOLOGIES LIMITED
First Plaintiff
AND
ORAKA GRADERS LIMITED Second Plaintiff
AND
M SCHWARZ Third Plaintiff
AND
GEOSTEL VISION LIMITED First Defendant
AND
P DAYNES AND G ROBERTSON Second Defendants
AND
NAPIER TOOL & DIE CO LIMITED Third Defendants
Hearing: 2 March 2015 Appearances:
AE McDonald for Plaintiffs
KJ Crossland for DefendantsJudgment:
12 May 2015
JUDGMENT OF TOOGOOD J
This judgment was delivered by me on 12 May 2015 at 11:00 am
Pursuant to Rule 11.5 High Court Rules
Registrar/Deputy Registrar
ORAKA TECHNOLOGIES LIMITED v ORAKA GRADERS LIMITED [2015] NZHC 991 [12 May 2015]
Background
[1] This is a breach of copyright case which was commenced in 2005. It has a tortuous history which includes two substantial judgments in this Court and the Court of Appeal, and an unsuccessful application by the third defendant for leave to appeal to the Supreme Court. The present state of play is that the Court of Appeal has entered judgment for the first plaintiff for copyright infringement and directed this Court to conduct an inquiry into damages.1
[2] After further interlocutory proceedings, and a revised close of pleadings date of 13 June 2014, the plaintiffs now seek leave under r 7.7 of the High Court Rules to file an amended statement of claim. The third defendant opposes the application.
The parties
[3] There are three plaintiffs in this dispute. Collectively, they make up a small, family operated enterprise:
(a) Mr Schwarz is the third plaintiff. He is the inventor of the Oraka asparagus grader. It is a machine that sorts asparagus into bunches for retail sale. The subject matter of the dispute is the copyright in the grader’s cup assembly, a component which is critical to the operation of the grader.
(b)Oraka Technologies Ltd (“Technologies”) is the first plaintiff. It was the original corporate entity used from 1993 by Mr Schwarz and his wife to commercialise the asparagus grader. Technologies owns the copyright in the grader’s cup assembly.
(c) Oraka Graders Ltd (“Graders”) is the second plaintiff. It is the
subsequent corporate entity which Mr Schwarz established to manufacture and sell the grader from 2001 onwards. Graders uses the
1 Oraka Technologies Limited v Geostel Vision Limited [2013] NZCA 111.
copyright in the grader’s cup assembly under an oral licence from
Technologies.
[4] The third defendant, Napier Tool & Die Co Ltd (“Napier Tool”), opposes the application for leave. Napier Tool is a small provincial tool making business founded and formerly owned by Mr Bob Witham. Mr Witham sold the business many years ago to a larger company, TruTest Ltd.
The nature of the proceedings
[5] In 2001, Mr Witham, at the request of an existing customer, Mr Armstrong, designed a tip cup assembly for use as an aftermarket replacement part for asparagus grading machines sold by Graders. Geostel Vision Ltd (Geostel), a competitor of Technologies founded by a former business partner of Mr Schwarz, acquired Mr Armstrong’s project. Geostel had Napier Tool manufacture the part for use in Geostel’s own asparagus grading machine.
[6] Before manufacturing, Napier Tool took advice from a patent attorney that while the tip cup assembly was functionally equivalent to Technologies’s cup assembly, it was differently expressed and therefore did not breach copyright. Napier Tool believed that it was not breaching Technologies’ copyright when it manufactured the Geostel tip cup.
[7] Technologies, Graders and Mr Schwarz brought proceedings against Geostel, its owners and Napier Tool for copyright infringement. After a lengthy litigation history, the Court of Appeal found that Technologies owned the copyright in the cup assembly and that the defendants had infringed Technologies’s copyright in manufacturing the Geostel tip cup. The Court sent the proceedings back to the High Court for an inquiry into damages; it is the damages inquiry to which this application relates.
[8] In its amended statement of claim, the plaintiffs want the Court to consider the following issues in relation to the calculation of damages:
(a) Is Technologies entitled to adopt a “loss of a business” as opposed to a
“lost sales” based methodology for calculating the damages sought?
(b)Is Technologies entitled to characterise its loss as loss of its ability to cause the creation of a business having the value which without the defendants’ infringement it otherwise would have had as opposed to a “lost sales” basis?
[9] The methodology used by the plaintiffs in arriving at the figures contained in the proposed amended statement of claim rests on determining the capital value of the business lost based on making an expected revenue prediction for Graders in the period 2002 – 2013 from the trading results of the Oraka group of companies up until 2002 when the infringing activity began, and comparing the expected revenue with the actual reported revenue of the company in that period.
The procedural history
[10] The proceedings began in 2008. In Oraka Technologies & Ors v Geostel Vision Ltd & Ors (No 1), delivered on 18 February 2009, Allan J held that the plaintiffs did not own the copyright in the cup assembly, and did not think it necessary to consider the issue of infringement.2 But the plaintiffs successfully appealed to the Court of Appeal. It found that Technologies owned the copyright in the cup assembly and sent the matter back to the High Court to determine liability for infringement.3
[11] In Oraka Technologies & Ors v Geostel Vision Ltd & Ors (No 2), delivered on 7 April 2011, Allan J found that the defendants had not infringed the plaintiffs’ copyright in the cup assembly.4 Again, the plaintiffs appealed to the Court of Appeal, which, in a judgment dated 18 April 2013, found in their favour and entered
judgment for Technologies.5 In its second judgment, the Court of Appeal remitted
2 Oraka Technologies Ltd v Geostel Vision Ltd HC Hamilton CIV-2005-419-809, 18 February
2009.
3 Oraka Technologies Ltd v Geostel Vision Ltd [2010] NZCA 232.
4 Oraka Technologies Ltd v Geostel Vision Ltd (No 2) HC Hamilton CIV-2005-419-809, 7 April
2011.
5 Oraka Technologies Limited v Geostel Vision Limited, above n 1.
the matter back to the High Court to inquire into the damages that should be awarded.
[12] On 5 November 2013 the plaintiffs filed an issues memorandum to the High Court. This document did not claim the two species of loss sought in the proposed amended claim. In response, Napier Tool filed a memorandum dated 3 December
2013 that was largely content with the issues identified in the plaintiff’s
memorandum.
[13] Associate Judge Doogue then issued directions on 1 April 2014. A six-day trial fixture commencing on 1 December 2014 was subsequently allocated. 13 June
2014 was nominated as the close of proceedings date.
[14] On 13 May 2014, the plaintiffs served copies of lengthy briefs of evidence on the defendants on a without prejudice basis. On 20 May 2014 the plaintiffs served particulars of damage adopting a “loss of business methodology” instead of a “loss of sales” methodology. The particulars characterised the losses as “loss suffered by all three plaintiffs”. On 22 May 2014, Faire J scheduled a judicial settlement conference to take place on 1 August 2014.
[15] On 6 June 2014 Napier Tool filed an application for particulars of lost sales, to which the plaintiffs filed a notice of opposition on 13 June 2014. The application was scheduled for hearing before Faire J. In a Minute dated 24 July 2014, Faire J said that it was apparent to him from the judgments of Allan J on 7 April 2011 and the Court of Appeal of 18 April 2013 that Technologies is the only plaintiff to the damages claim. He vacated the judicial settlement conference and trial dates, as well as the hearing of the application for particulars. The Judge made no formal orders, however, and the plaintiffs have recorded their view that Graders and Mr Schwarz remain parties to the proceeding and entitled to argue that they have suffered losses as a result of breaches of the first plaintiff’s copyright. The proposed amendment to the pleadings is intended to support a damages claim by all three plaintiffs.
Principles applicable to amendments
[16] The plaintiffs’ application to file an amended statement of claim is governed
by r 7.77 of the High Court Rules. It provides:
7.77 Filing of amended pleading
(1) A party may before trial file an amended pleading and serve a copy of it on the other party or parties.
(2) An amended pleading may introduce, as an alternative or otherwise,—
(a) relief in respect of a fresh cause of action, which is not statute barred; or
(b) a fresh ground of defence.
(3) An amended pleading may introduce a fresh cause of action whether or not that cause of action has arisen since the filing of the statement of claim.
(4) If a cause of action has arisen since the filing of the statement of claim, it may be added only by leave of the court. If leave is granted, the amended pleading must be treated, for the purposes of the law of limitation defences, as having been filed on the date of the filing of the application for leave to introduce that cause of action.
(5) Subclause (4) overrides subclause (1).
(6) If an amended pleading introduces a fresh cause of action, the other party must file and serve that party’s defence to it within 10 working days after the day on which the amended pleading is actually served on the other party.
(7) When an amended pleading does not introduce a fresh cause of action, the other party may, within 5 working days after the day on which the amended pleading is served on that other party, file and serve an amended defence to it.
(8) If an amended pleading has been filed under this rule, the party filing the amended pleading must bear all the costs of and occasioned by the original pleading and any application for amendment, unless the court otherwise orders.
(9) This rule does not limit the powers conferred on the court by rule
1.9.
(10) This rule is subject to rule 7.7 (which prohibits steps after the close of pleadings date without leave).
[17] Counsel agree that the relevant principles relating to the application of r 7.7 in relation to amendment after the close of pleadings date can be found in the High Court decision of Body Corporate 325261 v McDonough.6 They may be summarised as follows:
(a) The paramount consideration is that the parties should have every opportunity to ensure that the real controversy goes to trial so as to secure the just determination of the proceeding.7
(b)Due regard must also be had to whether the proposed amendment will cause significant delay or prejudice another party.8
(c) Even where serious prejudice and significant delay will arise, an amended pleading may nevertheless be permitted if the proposed claim has substantial merit and will not cause injustice to the defendants.9
(d)The Court should consider the merit, or absence thereof, in a proposed amended pleading.10
Overview of issues
[18] Napier Tool opposes the application to amend the statement of claim for three principal reasons:
(a) The amendment would cause Napier Tool delay and undue prejudice.
(b)The amendment attempts to add issues to the proceedings which have no merit.
6 [2014] NZHC 1821.
7 See Thornton Hall Manufacturing Ltd v Shanton Apparel Ltd [1989] 3 NZLR 304 (CA) at 309;
Chilcott v Goss [1995] 1 NZLR 263 (CA) at 272-273; Marr v Arabco Traders Ltd (No 8) HC Auckland A1195/77, 12 March 1987 affirmed on appeal in Elders Pastoral Ltd v Marr (1987) 2
PRNZ 383 (CA).
8 Elders Pastoral Ltd v Marr (1987) 2 PRNZ 383 (CA).
9 Body Corporate 177519 v Auckland City Council HC Auckland CIV-2005-404-5563, 24 May
2011.
10 Fordham v Xcentrix Communications Ltd (1996) 9 PRNZ 682 (HC) at 683.
(c) The amendment amounts to the creation of a new cause of action.
Will the amendment would cause Napier Tool undue delay and prejudice?
[19] Mr Crossland argues for Napier Tool that the proposed amendment comes late and arose only as a consequence of the defendant seeking particulars of the existing pleadings upon which the trial had been set down. The two appeals and the leave application to the Supreme Court were based on many days of evidence and detailed preparation at trial including cross examination. Mr Crossland submits the inquiry that the plaintiffs ask the Court to engage in involves not just number crunching but an inquiry into a new species of pleaded loss. That will involve a different factual substratum based on new evidence, requiring the defendant to expend more time and money in its defence. Counsel says the plaintiffs did not plead these issues before trial and their approach to costs is completely different to the case they ran throughout the proceedings. It is submitted that allowing the amendment is likely to cause a delay of 12 months and that this is unfair in the light of the fact that the case started in 2004.
Discussion
[20] The plaintiffs’ proposal to amend the pleadings has already delayed the damages hearing, but a substantial fixture is the inevitable consequence of the decision of the Court of Appeal to remit the matter for a third, damages-related hearing in this Court, whatever the basis on which the plaintiffs seek to quantify their loss. Before the plaintiff sought to amend its pleading, the parties anticipated a six- day hearing on the damages issue. Napier Tool has known that the plaintiffs intended to seek this species of loss since May 2014; the plaintiffs have already obtained extensive expert evidence to support the pleaded loss and Napier Tool has prepared and served a lengthy report from its own accounting expert in response. I am not persuaded that the delay caused by an amendment to the pleadings will unduly prejudice the defendant.
Does the amendment attempt to add unmeritorious issues to the proceedings?
The plaintiffs’ submissions
[21] The plaintiffs submit that damages are to be assessed liberally. They rely on what they say is a clear line of authority that where a successful plaintiff has not sold or licensed the work, the Court may give what amount it thinks right as if it were a jury.11 Such a liberal approach is illustrated, in the plaintiffs’ submission, by Insight SRC IP Holdings Pty Ltd v Australian Council for Education Research Ltd,12 a decision of the Federal Court of Australia.
[22] In that case, the plaintiff, Dr Hart, owned the copyright in a school health questionnaire. He incorporated two companies, Insight and Insight Holdings, of which he was the director and used these companies to exploit the copyright. Dr Hart gave Insight a bare licence to use the questionnaire at the time the copyright in it was breached by the defendant, ACER, who profited from the use of the questionnaire as part of the project with Independent Schools of Victoria Incorporated. In 2009 Dr Hart, unaware of the breaches, assigned the ownership in the copyright to Insight Holding who limited it to Insight. In 2011, Dr Hart assigned the right to the causes of actions against the Australian Council for Education Research Ltd to Insight Holdings who allowed Insight to act under them.
[23] For the plaintiffs, Ms McDonald highlights the two following paragraphs of the judgment:
[23] Dr Hart had allowed Insight to exploit his copyright in its business activities for the whole period of ACER’s infringement. There is no reason to suppose that he would have acted differently in respect of any dealing with ISV in respect of the project, had ISV dealt with Insight rather than ACER. For that reason, it is safe to infer that Dr Hart’s damage was the value of the loss of his ability to cause Insight to enter into a contract with ISV that would have generated the profit of $130,000 for Insight as found by the primary judge. Neither party at the trial asked his Honour to assess, as an alternative, the value of the loss of a chance to make such a contract.
11 Watson, Laidlaw & Co Ltd v Pott, Cassels & Williamson (1914) 31 RPC 104 (HL) at 118; Blayney t/a Aardvark Jewellery v Clogau St David’s Gold Mines Ltd [2002] EWCA Civ 1007 at [15]-[21]; Flashback Holdings Pty Ltd v Showtime DVD Holdings Pty Ltd [2010] FCA 694 at [24]-[25].
12 Insight SRC IP Holdings Pty Ltd v Australian Council for Education Research Ltd [2013] FCAFC 62.
[24] An important component of this identification of what Insight’s damage would have been, is that Dr Hart wanted Insight to benefit by receipt of the profit. That is different to the characterisation urged by ACER that his damage was what might be received by him after Insight, Insight Holdings and the interposed trusts had received and made sequential distributions. Dr Hart used his efforts in exploiting the copyright to benefit Insight.
[24] Ms McDonald argues that this situation is an analogous case and that the Court should apply the Insight approach to the present situation; namely, that the defendants’ actions deprived Mr Schwarz and Graders from entering into valuable contracts. Mr Schwarz fully controlled the activities of both Technologies and Graders – he was calling the shots and running the show. Counsel submits that Napier Tool’s opposition is a deliberate, calculated bid to prevent the plaintiffs from presenting their case to the trial judge. The plaintiffs argue that Napier Tool’s opposition is premised on the argument that because Graders was the trading operation which lost sales from which Technologies is precluded from claiming damage. Ms McDonald submits that that approach neglects the well-established approach of the courts in copyright infringement cases which begins with the position that it is the reprehensible conduct of the infringer which attracts the
application of the remedy, not the legal category out of which compensation arises.13
Napier Tool’s submissions
[25] Napier Tool submits that the amended claim has no merit because Graders has no judgment against it. The defendant argues that Technologies is attempting to claim the lost revenue that Graders says it would have earned; that claim requires the piercing of the corporate veil to treat both companies as one economic unit because the loss in the proposed pleading is not the loss of the copyright owner, Technologies, but the loss of Graders and Mr Schwarz. The defendant says those plaintiffs did not have the benefit of a judgment on the breach of copyright cause of action against the defendants. The enquiry remedy granted is exercisable by Technologies alone, and that company has not suffered any loss.
[26] Mr Crossland argues that it is established on the evidence that Technologies ceased trading in 1995 due to a tax problem and other problems arising with five
13 See, for example, Flashback Holdings Pty Ltd v Showtime DVD Holdings Pty Ltd, above n 11, at
[24].
machines it had exported to Mexico which rendered it insolvent. This predates the breach of copyright by seven years. Further, it is submitted that Technologies never transferred the copyright to Graders; Graders operated under an oral licence only and Graders never paid or agreed to pay Technologies a licence fee or royalties. Counsel adds that it cannot be said that Technologies has missed out on anything but for Napier Tool’s breach of copyright: it was never going to have a business; it never expected to receive a payment from Graders and any payment would have been gratuitous. It is argued that Mr Schwarz is neither a director nor a shareholder of Graders; he was merely an employee who has no cause of action let alone judgment against Napier Tool. The defendant submits there is no logical or juristic reason why or how Mr Schwarz, as an employee, can bring an alleged reflected loss claim against Napier Tool for damage to Technologies, his employer.
[27] Counsel further identifies a number of factors which, he says, distinguish
Insight from the present situation:
(a) In Insight Dr Hart was the owner and was entitled to claim damages under the Australian Copyright Act. Here, Mr Schwarz did not own the copyright at the time of infringement and he cannot seek relief under the equivalent New Zealand legislation.
(b)In Insight Dr Hart’s successful claim rested on his proximity to the business of the licensee. He was engaged in exploiting commercial activities relating to the copyright work through his interests in Insight Holdings and Insight. For similar facts to exist here there would have to be the active pursuit of contracts by Technologies on behalf of Graders. But Technologies was a shell and did nothing. In fact, the copyright had been shifted from Technologies because Technologies was being pursued by creditors.
(c) Insight did not involve a situation where the copyright judgment was in favour of only one of the plaintiffs.
Discussion
[28] I am not persuaded that the plaintiffs’ claims are untenable.
[29] Despite the differences between Insight and the present proceedings identified by Mr Crossland, there are sufficient similarities in the two proceedings for it to be open to the Court to conclude that an approach similar to that adopted in Insight should be available in New Zealand. Any factual differences between Insight and the present case should be determined by the trial judge; it is at least open to argument that Mr Schwarz was in effective control of the companies and could have caused Technologies to enter into a contract to sell or lease any of the rights in the tip cup.
[30] It was inevitable, given the Court of Appeal’s view that the copyright was held by Technologies, that judgment upholding the allegation of infringement would be entered in favour of the copyright holder. But the other plaintiffs seek to argue that they have suffered recoverable losses founded on the breaches. I respectfully differ from the view of Faire J that it is clear that Graders and Mr Schwarz are precluded from pursuing an inquiry into their claims to recover losses flowing from the breaches. That may be the correct view, but I do not think it is possible to finally determine the point without further investigation.
[31] Accordingly, I do not agree that the amended statement of claim should be rejected now on the basis that it lacks merit.
Does the proposed amendment amount to the creation of a new cause of action?
[32] Rule 7.77 of the High Court Rules permits the addition of a fresh cause of action or a fresh ground of defence, whether or not as an alternative, provided only that it is not statute-barred. Napier Tool opposes the application on the basis that the amendment amounts to a new cause of action and that action is statute barred.
[33] The principles for determining whether amended pleadings raise a fresh cause of action were summarised in Transpower New Zealand Ltd v Todd Energy Ltd:14
(a) A cause of action is a factual situation the existence of which entitles one person to obtain a legal remedy against another (Letang v Cooper [1965] 1 QB 232 at 242— 243 (CA) per Diplock LJ);
(b) Only material facts are taken into account and the selection of those facts “is made at the highest level of abstraction” (Paragon Finance plc v D B Thakerar & Co (a firm) [1999] 1 All ER 400 at 405(CA) per Millett LJ);
(c) The test of whether an amended pleading is “fresh” is whether it is something “essentially different” (Chilcott v Goss [1995] 1 NZLR
263 at 273(CA) citing Smith v Wilkins & Davies Construction Co
Ltd [1958] NZLR 958 at 961(SC) per McCarthy J). Whether there is such a change is a question of degree. The change in character could be brought about by alterations in matters of law, or of fact, or both; and
(d) A plaintiff will not be permitted, after the period of limitations has run, to set up a new case “varying so substantially” from the previous pleadings that it would involve investigation of factual or legal matters, or both, “different from what have already been raised and of which no fair warning has been given” (Chilcott at 273 noting that this test from Harris v Raggatt [1965] VR 779 at 785(SC) per Sholl J was adopted in Gabites v Australasian T & G Mutual Life Assurance Society Ltd [1968] NZLR 1145 at 1151(CA)).
[34] Napier Tool submits that even if the alleged reflected losses of Graders and Mr Schwarz could be vicariously recovered by Technologies, the heads of loss now sought are so radically different from that originally pleaded that they constitute fresh causes of action. Mr Crossland argues that, for a decade, the plaintiffs have pleaded that the head of claim that the defendants faced was either an account of profits they earned or, in the alternative, damages for lost sales. Now, he says, the plaintiffs want to launch two different and novel heads of damage giving rise to new considerations and a new factual inquiry. Counsel submits that the ability of the defendants to confidently recover, on discovery from the plaintiff, information relevant to these new heads of damage is compromised. More forcefully, it is submitted that if the new causes of action exist, they expired in or around 2008. Consequently, because of the passage of time, they are barred under the Limitation
Act 1950.
14 Transpower New Zealand Ltd v Todd Energy Ltd [2007] NZCA 302 at [61].
[35] In response, Ms McDonald argues for the plaintiffs that the starting point for the application is that liability has been established and copyright infringement has occurred, on the basis of the pleadings considered at trial and in the two appeals, and that the Court of Appeal has ruled that plaintiffs are entitled to a damages inquiry. Counsel submits that the plaintiffs do not rely upon a new cause of action; what the plaintiffs now seek to do is re-cast their argument about how the losses arising from the breaches found by the Court of Appeal should be quantified. Ms McDonald submits that the approach to copyright infringement damage assessments differs from the approach to damages in tort and contract because it starts with the principle that a wrong has been established and the Court needs to craft a fair remedy to address the situation.
Discussion
[36] The plaintiff has always sought an inquiry into damages and Allan J’s approach in his first judgment meant it was inevitable that the proceeding would involve separate consideration of the issues of liability and quantum. Any residual issues concerning the adequacy of discovery can be addressed in interlocutory proceedings.
[37] Given the history of this litigation, it is unsurprising that the parties may be required by the remission of the claims to this Court by the Court of Appeal to address the quantification of damages on a basis which is different from that contemplated initially. The plaintiffs had argued that the copyright was assigned to Oraka Technologies Holdings Limited but the Court of Appeal held otherwise; it is implicit in the remission of the matter to this Court for a damages inquiry that the Court of Appeal also held that a remedy should be awarded if appropriate. The plaintiffs’ proposed revised pleading is intended to address the consequences of those findings.
[38] That does not mean that the plaintiffs are now relying on a new cause of action; the issues of liability have been determined on the existing pleadings and all that the Court is left to do is assess which, if any, of the plaintiffs have suffered recoverable loss. The trial judge will be required to determine the relevance of the
evidence on which the parties wish to rely in the context of the findings of the Court of Appeal as to ownership of the copyright and the nature of the defendants’ breaches, and to determine what, if any, further evidence should be admitted.
[39] The plaintiff has succeeded on appeal, twice, and the Court of Appeal has directed this Court to inquire into the plaintiff’s losses. I am not persuaded that it would be unfair to the defendant to allow the plaintiffs to argue their case for the assessment of damages, even though they now wish to do so on an alternative basis which differs from those contained in its initial pleadings.
Result
[40] The plaintiffs shall have leave to file the proposed amended statement of claim after the close of pleadings.
Costs issue
[41] There is an ancillary issue in relation to costs. The plaintiffs seek departure from the position under r 7.77(8) which is that the costs referable to the original pleading are to be borne by the party amending.
[42] I reserve the issue of costs for further argument. The plaintiffs’ shall have until 30 May 2015 to file and serve a memorandum as to costs. The defendants shall have until 19 June 2015 to file and serve a memorandum in reply. Costs shall then be determined on the papers unless the Court directs otherwise.
………………………………
Toogood J
Oraka Technologies Ltd v Geostel Vision Ltd [2015] NZHC 991
0
0
1