Sealegs International Ltd v Zhang
[2016] NZHC 3143
•19 December 2016
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
CIV 2016-404-2256 [2016] NZHC 3143
BETWEEN SEALEGS INTERNATIONAL LIMITED
Plaintiff
AND
YUN ZHANG First Defendant
ORION LIMITED and ORION MARINE LIMITED
Second Defendants
SMUGGLER MARINE LIMITED Third Defendant
Continued over
Hearing: 28 October 2016 Appearances:
B P Henry for Plaintiff
G C Williams and PDM Johns for First, Second, Third, Fourth and Sixth Defendants
No appearance for Fifth, Seventh, Eighth and Ninth Defendants
Judgment:
19 December 2016
JUDGMENT OF PETERS J
This judgment was delivered by Justice Peters on 19 December 2016 at 4.30 pm pursuant to r 11.5 of the High Court Rules
Registrar/Deputy Registrar
Date: ...................................
Solicitors: Woodroffe Law Partnership, Auckland
Baldwins Law Limited, Auckland
Counsel: B P Henry, Auckland
G C Williams, Auckland
SEALEGS INTERNATIONAL LTD v ZHANG [2016] NZHC 3143 [19 December 2016]
ANDDARREN LEYBOURNE Fourth Defendant
GORDON LEE Fifth Defendant
VLADAN ZUBCIC Sixth Defendant
WARREN FARR Seventh Defendant
PAUL HOOD Eighth Defendant
DAVID PRINGLE and PAULINE PRINGLE
Ninth Defendants
[1] The Plaintiff (“Sealegs”) manufactures and sells amphibious boats and systems, in New Zealand and overseas. It has commenced proceedings to restrain what it contends is the defendants’ infringement of its intellectual property rights. A four week trial of the proceedings has been allocated commencing 25 September
2017.
[2] This judgment determines Sealegs’ application for an interim injunction to restrain the defendants from, in summary, manufacturing, selling and marketing the “S25-3WD” (“Orion system”) developed by the Second Defendants, Orion Limited and Orion Marine Limited (together “Orion”).1
[3] The application reflects three of the causes of action in Sealegs’ amended statement of claim: breach of copyright; breach of rights conferred by registration of a design under the Designs Act 1953; and the unlawful use of Sealegs’ confidential information.
[4] I am satisfied that there is a serious issue to be tried as to infringement of copyright. Given that, I do not address matters relevant to Sealegs’ claims as to breach of registered design or to the alleged unlawful use of its confidential information.
[5] I am also satisfied that the balance of convenience is in Sealegs’ favour. Accordingly, and pending further order of the Court, I propose to make orders largely in accordance with those that Sealegs has sought.
Defendants
[6] Orion are designers and manufacturers of, amongst other things, amphibious systems. Orion Marine Limited was incorporated in September 2012. Orion Limited was incorporated in February 2016. Mr Yun Zhang, the First Defendant, is
the sole director and shareholder of each Orion company.
1 Although Sealegs seeks relief against all defendants, at the time of hearing the Fifth, Eight and
Ninth Defendants had not been served.
[7] The Fourth to Eighth Defendants are employees of Orion. All were previously employed by Sealegs. Of these defendants, Mr Leybourne and Mr Zubcic have been central to events.
[8] The Third Defendant (“Smuggler”) is a boat building company of which Pauline and David Pringle, cited as the Ninth Defendants, are the directors and shareholders. I say “cited” because Sealegs has applied to join them to the proceedings. Such an application may not be required but I put that to one side at present.
Auckland On Water Boat Show
[9] Sealegs commenced proceedings in early September 2016, and it made this application at the same time. The defendants required time to respond and a hearing at the end of October 2016 was allocated.
[10] At the time the proceedings were filed, the annual “Auckland On Water Boat Show” was to be held in three weeks, commencing 29 September 2016. Orion, Smuggler, Mr Leybourne and Mr Zubcic (or some of them) proposed to exhibit the Orion system at that event and because of that Faire J heard Sealegs’ application to restrain those defendants from any steps until the hearing in October.
[11] The Judge was satisfied that Sealegs had a serious issue to be tried as to infringement of copyright but considered that the balance of convenience for the intervening period from the end of September 2016 to the end of October 2016 lay with the defendants, given that the boat show was more a marketing opportunity than a place to make sales. Accordingly, the Judge declined to make any orders pending
28 October 2016, subject to terms that required the defendants to keep and disclose details of: expressions of interest in the Orion system or any boat to which the system was to be fitted; of any contracts for sale; and of any offers made by Orion and Smuggler to supply the Orion system or a boat in respect of which the system
was to be fitted.2
[12] Since then, Sealegs has amended its statement of claim to allege, amongst other things, an infringement of copyright in a greater number of drawings or works than was the case before Faire J. Sealegs now alleges an infringement of copyright in 68 drawings (“works”) of components and the assemblies of the bow, port rear and starboard rear wheels and their steering and lifting mechanisms; drawings for Sealegs’ “hydraulic lift” systems for 6.1, 7.1 and 9 metre RIBs (that is, Rigid Inflatable Boats); and drawings for what is referred to as Project 100.
Background
[13] Sealegs has its beginnings in an amphibious craft that Mr Maurice Bryham built in about 2000. Mr Bryham is one of the founders of Sealegs and is presently its chief technology officer.
[14] Sealegs registered a “design” (as defined in the Designs Act 1953) of its system in late 2002 and sold its first amphibious boat in 2004.3 It has patents in some or all of the components of its system, although these are not relevant to its application for interim relief. Sealegs has now been trading for 15 or 16 years, and its parent company, Sealegs Corporation Limited, is listed on the New Zealand Stock Exchange.
[15] Originally Sealegs designed, produced and sold its own amphibious craft. These original boats were two wheel drive. Subsequently, between 2007 and 2009
Sealegs developed a three, or all, wheel drive version (“AWD”). Then, in 2009, Sealegs commenced working with boat builders to provide a “kitset” unit that could be fitted to hulls manufactured or supplied by those builders. Smuggler was one such builder, entering into an agreement with Sealegs in 2012. In a further development, Sealegs developed a kitset unit for a heavier boat, that being Project 100. The Sealegs system that is relevant to this application is AWD, with three retractable wheels, one at the front and two at the rear. Likewise the Orion system.
[16] As former employees of Sealegs, the Fourth to Eighth Defendants have intimate knowledge of the Sealegs system and drawings in which Sealegs claims copyright.
[17] Mr Leybourne was contracted to work for Sealegs in or before 2002. He was then employed by Sealegs as a hydraulic/design engineer from June 2004 to November 2011. Sealegs’ evidence is that Mr Leybourne left Sealegs with the express intention of developing an amphibious craft, modelled on the Sealegs system, for sale in China where Sealegs’ intellectual property rights would not “bite”.
[18] Mr Zubcic was employed by Sealegs as a “CAD/CAM” (computer-aided design and computer-aided manufacturing) engineer from February 2008 to February
2013. Likewise Mr Lee from September 2007 to August 2013. Mr Farr was employed by Sealegs as a fabricator from May 2008 to January 2015. Mr Hood was employed as an engineer in Sealegs’ research and development department from January to July 2011.
[19] Although Sealegs has known for some time that Orion has been selling amphibious craft in China, this proceeding has arisen from its discovery that Orion intended to sell in New Zealand. This led to discussions between Mr Bryham, Mr McKee-Wright (Sealegs’ CEO and another founder of the company), Mr Leybourne and others, and to an email from Mr Leybourne to Mr McKee-Wright and Mr Bryham dated 3 May 2016.
[20] At the hearing before me, Sealegs emphasised this email as an admission of copying, a construction of the email which was denied by the defendants. Like Faire J, I am not satisfied that the email constitutes an admission of copying, although the trial Judge may take a different view. However, the email made it clear that Orion did intend to enter the New Zealand market and that it realised Sealegs might commence legal proceedings to prevent it from doing so. Orion also offered to pay what it referred to as a “no fight” fee of $5,000 per unit sold.
[21] No resolution was agreed. Sealegs then engaged Mr Peter Allen, an engineer, to make enquiries on its behalf. During a visit to Smuggler in early September 2016, Mr Pringle (according to Mr Allen and it is not denied) said that Smuggler has “its own gear now”, showed Mr Allen a picture of the same, and said that the cowling over the front wheel in the Orion system was there to “get around the Sealegs’ patent”. Sealegs’ proceedings followed shortly thereafter.
Serious issue to be tried
[22] It is common ground that, to succeed in an action for breach of copyright, Sealegs must establish that:
(a) there is a work in which copyright can subsist; (b) copyright does subsist in the work;
(c) Sealegs owns the copyright;
(d) the copyright has been infringed.
[23] The only issue I am required to determine at present is whether there is a serious question to be tried that Sealegs’ copyright in the works is infringed by the Orion system. Infringement requires:4
(a) an objective similarity between the works and the Orion system;
(b)a causal connection between the works and the infringing work. The works must be the source of the infringing work;
(c) reproduction of all the works or of a substantial part of them.
[24] Faire J determined that there was a serious issue to be tried but in respect of a smaller number of works than those now relied upon. Accordingly, I must consider
the matter afresh.
4 Wham-O MFG Co v Lincoln Industries Ltd [1984] 1 NZLR 641 (CA); and Oraka Technologies
[25] Sealegs submits that substantial elements of the assemblies and component parts of its system and Orion’s system are objectively similarly and, in short, that the copying is blatant.
[26] For instance, in his third affidavit, Mr Bryham referred to similarities between the parties’ hydraulic lift cylinders, the “yoke” that sits above the front wheel in each system, the single sided fork on which the front and rear wheels are mounted, the location of the motor for the wheels at the base of the fork, the “hose retaining” clips situated on the forks, and other smaller items.
[27] For the defendants, Mr Williams submitted that the necessary objective similarity between the works and the Orion system does not exist. This similarity or lack of it is assessed by comparing the works to photographs or images of the Orion system. As Hillyer J said in Thornton Hall Manufacturing Ltd v Shanton Appeal Ltd (No 2) “a copy is a copy if it looks like a copy”.5
[28] Mr Williams submitted that there is no equivalent part in the Orion system for several parts of the Sealegs system. For instance, the Sealegs system uses a “trunnion cylinder, glands and pins”. Orion does not use such a cylinder and so has no need for similar glands or pins. Sealegs uses a bracket and sub-components to mount its wheel assemblies to the hull. The bracket is affixed to the exterior of the hull, and the yoke and lifting cylinder are affixed to the bracket. In contrast, Orion’s yoke and lifting cylinders are affixed directly to the hull with an “internal mounting block”.
[29] To the extent that the two systems have similar functioning components, Mr Williams submitted that the Orion components were of different design. I accept that there are differences in some corresponding elements, as Mr Williams submitted. For instance, the “yoke” above the front wheel is shaped differently. On the Orion system the motor for the front wheel is housed in the hub of the wheel, the
housing itself is a square shape and it one cast piece. Sealegs’ motor is adjacent to
5 Thornton Hall Manufacturing Ltd v Shanton Apparel Ltd (No 2) [1989] 1 NZLR 239 (HC) at
the wheel and the housing is round in appearance and not a single piece. The lifting
cylinder on the rear wheels are “pinned” in different locations on each system.
[30] The evidence before me is necessarily limited. I have all 68 works and I have photographs and images of parts of the Orion system. I have made a visual comparison between the two (as Mr Williams submitted was required) and I am satisfied that there is a serious issue to be tried as to [23](a) which, as Mr Williams acknowledged in his submissions, constitutes “a relatively low” threshold. In particular, as Mr Bryham states, the forks for the front wheels of both systems are similar in shape and in each case the housing for the motor is located at the base of the fork. The components and assembly of the steering mechanisms on each system are visually similar, to my eye at least, as are the component parts and lifting mechanisms for all legs. These similar elements comprise a substantial part of each system as a whole and accordingly I am also satisfied that there is a serious issue to be tried as to the matter referred to in [23](c).
[31] As to the requirement of a “causal connection”, Mr Zubcic’s evidence is that the Orion system is the product of independent design. As yet, however, the defendants have not disclosed the contemporaneous documents that would bear out that evidence. The similarities to which I have referred and the intimate knowledge that the Fourth to Eighth Defendants have as regards the Sealegs system are sufficient to establish a serious issue as to [23](b) above.
Balance of convenience
[32] I have taken the following into account in determining where the balance of convenience lies.
[33] First, there will be a trial in nine months.
[34] Secondly, Orion’s system is not presently being sold in the market. That is the status quo.
[35] Thirdly, Sealegs is seeking a permanent injunction if it succeeds at trial. It wishes to preserve the status quo for what is a relatively short period, so that the relief it seeks is fully open to the Court at trial.
[36] For their part, the defendants wish to manufacture and sell the Orion system in the intervening period. Their evidence may be summarised as follows.
[37] Orion has geared up considerably to manufacture its system. It has recently purchased machinery at a cost of more than $190,000 (including GST) for the purposes of manufacturing. It appears, however, that machinery may have been ordered after May 2016 when, as I have said, Orion anticipated that litigation might ensue, as it has. Orion has also relocated to larger premises and reached purchasing arrangements with suppliers. Mr Leybourne says that Orion may also need to reduce its staff by up to one third, if it is not able to find other suitable work for them pending trial.
[38] Smuggler also wishes to sell the Orion system, and an injunction will mean the loss of a marketing opportunity (given the launch of the product at the boat show) and loss of the opportunity to sell amphibious craft pending trial. Mr Pringle says that Smuggler has put “time and money” into getting the new system to the market and that it has had a hull mould created for the technology. (Smuggler has declined Sealegs’ offer to supply in the intervening period.)
[39] It may be that Orion and Smuggler would lose sales between now and trial. However, I suspect the number of sales they might make would be limited. That is because deponents on both sides state that third parties are delaying purchasing decisions as a result of the litigation. I am also concerned that third parties who might purchase the Orion system prior to trial (whether boat builders or members of the public) would be affected if a permanent injunction is granted after trial.
[40] I have also considered whether Sealegs might be protected by an award of damages, if the interim injunction is refused but Sealegs succeeds at trial. Such damages would comprise Sealegs’ losses, such as profit on lost sales and any reputational damage it could establish.
[41] I doubt there would be difficulty in quantifying damages but an award of damages is only an adequate remedy if it can be paid. There is no evidence as to whether Orion, Mr Zhang, Mr Leybourne or Mr Zubcic could meet an award of damages against them. Mr Pringle has stated that Smuggler could meet a damages award. However, Mr William Black, an independent accountant and expert insolvency specialist engaged by Sealegs, has considered Mr Pringle’s evidence on this point, including Smuggler’s financial statements for 2015 and 2016. These financial statements are neither audited nor signed by a director. Mr Black’s view is that Smuggler is in a “constrained working capital position” and that its (modest) net equity position will be further eroded by tax. Mr Black’s opinion is that Smuggler is “most unlikely” to be capable of meeting a damages claim of more than $1 million. Accordingly, I cannot be satisfied that any defendant would be able to meet an award of damages to Sealegs.
[42] I am satisfied, however, that Sealegs could meet any award of damages that may be made against it if Sealegs does not succeed at trial and the defendants have suffered loss as a result of their being delayed in entering the market.
[43] The defendants submit that the Orion system is superior to Sealegs’ and that Sealegs is seeking to stifle legitimate competition. Sealegs submits that the Orion system is a “cheap knock-off” or words to that effect and that Orion’s competition is not in the least legitimate. These are not matters that can be assessed on an application of this nature, even if relevant to the determination of the issues at trial.
[44] Taking into account all of the considerations to which I have referred, I conclude that the balance of convenience lies with Sealegs. In my view, a “standstill” for the relatively short period to trial is the most prudent course, and the course best designed to do justice to all concerned.
Orders
[45] At the hearing Mr Williams made submissions on the orders that Sealegs sought. These submissions led me to ask counsel to attempt to agree on a form of orders, without prejudice to their respective positions. They have not been able to agree and have since filed separate memoranda.
[46] Having considered those memoranda, I shall make the order below, restraining the defendants (or those served) from acts to which an owner of copyright has the exclusive right pursuant to the Copyright Act 1994. It may be that amendment is required, particularly as to the parties subject to the order. A particular issue has been raised as regards Mr and Mrs Pringle’s use of their personal boat, which is fitted with the Orion system. However, as Mr and Mrs Pringle have not been served, I do not make any orders binding them at present. I shall issue a separate minute on these matters for subsequent consultation with counsel. I am not able to specify the particular component parts subject to the injunction, as the defendants have recently asked. That is neither appropriate nor possible on an application for interim relief when an assessment must be made on affidavit evidence.
Result
[47] Pending further order of the Court, the First to Fourth and Sixth Defendants by themselves, their servants, agents or otherwise howsoever, are restrained from copying, issuing (whether by sale or otherwise), showing to the public or adapting the works numbered 1 to 68 inclusive annexed to the amended statement of claim dated 30 September 2016 and, in particular, from issuing (whether by sale or otherwise), showing to the public or adapting the product referred to herein as the S25-3WD or any similar product.
Cost
[48] Costs on the hearing before Faire J were reserved pending my decision. The defendants are to have costs on a 2B basis, and disbursements, for that hearing, and Sealegs’ for the hearing before me. The costs are likely to “net off” but the parties may submit brief memoranda on any particular point on which they disagree.
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Peters J
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