Sealegs International Ltd v Zhang
[2016] NZHC 2274
•26 September 2016
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
CIV-2016-404-2256 [2016] NZHC 2274
BETWEEN SEALEGS INTERNATIONAL LIMITED
Plaintiff
AND
YUN ZHANG First Defendant
ORION LIMITED and ORION MARINE LIMITED
Second Defendants
SMUGGLER MARINE LIMITED Third Defendant
DARREN LEYBOURNE Fourth Defendant
GORDON LEE Fifth Defendant
VLADAN ZUBCIC Sixth Defendant
WARREN FARR Seventh Defendant
PAUL HOOD Eighth Defendant
Hearing: 23 September 2016 Counsel:
BP Henry for plaintiff
G Williams and SP Rosanowski for second, third, fourth and sixth defendants
Judgment:
26 September 2016
JUDGMENT OF FAIRE J
Sealegs International Limited v Zhang [2016] NZHC 2274 [26 September 2016]
Contents
Introduction ............................................................................................................[1] Inter-parties application........................................................................................[10] Without notice application ................................................................................... [11] The application .....................................................................................................[13] Matters not in issue in this hearing ......................................................................[14] Grounds of opposition ..........................................................................................[15] Preliminary issue ..................................................................................................[16] Injunction – the Court’s approach ........................................................................[19]
Serious question to be tried ..................................................................................[20] The view [39] Conclusion on serious question to be tried [46]
The balance of convenience .......................................................................................
The adequacy of damages [51] Preservation of the status quo – when and to what extent should this apply? [52] Balance of convenience analysed [53] The Auckland On Water Boat Show [54] Ability to pay – including order as to confidentiality of affidavits [58] Possible price differential [63] The plaintiff ’s position on adequacy of damages [64] The defendants’ position on balance of convenience [67] The status quo conclusion [78] Balance of convenience conclusion [79]
Further directions for hearing on 28 October 2016..............................................[80] Costs .....................................................................................................................[82]
Introduction
[1] The plaintiff, Sealegs International Limited (“Sealegs”), is part of the Sealegs group and is a wholly owned subsidiary of Sealegs Corporation Limited. It has been trading in New Zealand for nearly fifteen years. It has spent in excess of
$16,000,000 in research and development in developing its system of retractable legs for marine craft. That has involved the employment of a number of highly skilled engineers to assist one of the company’s founders, Mr Bryham, in that development. It carries on business as an amphibious boat systems manufacturer and an Original Equipment Manufacturing supplier to boat builders.
[2] The plaintiff alleges breach of copyright. The subject matter of this proceeding is summarised by counsel for the plaintiff as “…working drawings for the three retractable wheel amphibious boat with all-wheel drive with the front wheel drive assembly attached…”
[3] There are eight defendants. The first defendant, Mr Yun Zhang, is the owner and director of the second defendants, Orion Limited and Orion Marine Limited. The second defendants are New Zealand companies carrying on business as amphibious boat system designers. The third defendant, Smuggler Marine Limited (“Smuggler”), is a boat building company. The fourth to eighth defendants are ex-employees of the plaintiff.
[4] Originally, the plaintiff designed and produced its own boats. More recently, it developed a strategy of working with boat builders and providing the retractable wheels to be fitted onto other boats. One of these boat builders was the third defendant. It entered into a license agreement with the plaintiff. The most recent agreement between the third defendant and the plaintiff expired in July 2016 and was not renewed.
[5] Mr David Pringle, a director and principal shareholder of the third defendant (Smuggler), deposes that he purchased the Sealegs product from 2012 until earlier this year. He deposes that he asked Orion Marine to develop a new three wheel system (which resulted in the S25-3WD system) because of ongoing problems he faced dealing with Sealegs and their product.
[6] Darren Leybourne, the fourth defendant, deposes that he is responsible for the day to day operations of Orion Marine and also has responsibility for contributing to
Orion Marine’s products and provides senior leadership regarding the direction of the business.
[7] Vladan Zubcic, the sixth defendant, is also employed by the second defendant. He has worked for Orion Marine since 2013. Prior to that, he worked for Sealegs from 2008 to 2013. His role at Orion Marine was originally to develop an amphibious system product. He deposes that he developed a concept, designed parts, produced CNC codes and that he physically produces the parts on a machine. He deposes that his first task at Orion Marine was to make a concept design of an amphibious system for a six metre amphibious rescue craft. After load displacement analysis, it was found that the craft required a four wheel system to avoid too much ground pressure. He says that the first thing to be designed was the rim. Mr Zubcic deposes that he made an original concept drawing for a rim. He deposes that last year, Mr Pringle approached the second defendants and found that the S25-4W was not appropriate for his boat and asked if the second defendants could develop a three wheeled system. Mr Zubcic deposes that the starting point for the design was the rim. He deposed:
Our design clearly began from a different starting point to Sealegs. All of the components were developed based on different engineering principles and has resulted in a completely different design.
[8] The plaintiff says that it was not until 7 September 2016 that the plaintiff had actual evidence of the defendants’ intention to breach the plaintiff’s copyright. Peter Allan deposes that on 7 September he visited the site of the third defendant and in the course of a sales pitch the third defendant’s management disclosed their plans to launch their product at the Auckland On Water Boat Show (“the Boat Show”) commencing on 29 September. Mr Allan deposes that the person describing himself as the owner of third defendant showed him a picture of their new boat and explained that the front cowling over the front wheel was there to get around the Sealegs patent as the wheel could not be considered a bumper. Mr Allan also says that the man ‘proudly claimed’ that the new gear was designed by one of the ‘head designers’ from Sealegs.
[9] The plaintiff filed a statement of claim on 9 September 2016. In that statement of claim, the plaintiff seeks an order restraining the defendants from
displaying, offering for sale, or selling copies of the plaintiff’s copyright works as particularised, or the product known as “S25-3WD” and “OS25”. It also seeks an order for the destruction of all products manufactured in breach of the plaintiff’s copyright, an enquiry as to damages or an account for profit, and costs.
Inter-parties application
[10] On 9 September 2016, the plaintiff filed an inter-parties application for an interim injunction restraining the defendants from breaching the copyright. That application came before Lang J for first call on 15 September 2016. At that time, the plaintiff sought an urgent fixture in order that the application be determined prior to the Boat Show due to commence on 29 September 2016. The second defendants, who were represented by counsel, opposed the allocation of an early fixture and sought time to file documents in opposition. They acknowledged that they may not be able to fulfil any orders that they receive at the Boat Show if the Court ultimately granted the injunction. Lang J considered that it was appropriate to allow the defendants a reasonable opportunity to file documents in opposition. Accordingly, he set the application down to be heard on 28 October 2016 and made timetabling orders in respect of that fixture.
Without notice application
[11] The plaintiff applied by way of a without notice application on Friday,
16 September 2016. This application was made on a Pickwick basis. The matter came before Downs J who declined to decide the application that day as the plaintiff sought, as there was nothing on the face of the pleadings requiring the matter to be dealt with that day. He directed that it be listed before Lang J on Monday,
19 September 2016.
[12] The matter came before Lang J on 19 September 2016 in the duty judge list. He set down the without notice application “to the extent only that it deals with the defendants’ ability to exhibit at the Auckland Boat Show commencing 29 September, to be heard on Friday 23 September”. He gave directions for the filing and service of opposition documents and for the filing and service of submissions, a casebook
and authorities in support and in opposition. He directed that the without notice application be heard by me at 9 am on 23 September.
The application
[13] In the course of the hearing, Mr Henry confirmed that the application could be limited to an order that the second, third, fourth and sixth defendants be restrained by themselves, their servants or agents from exporting, displaying to the public, offering for sale, selling or completing the sale of their products known as S25-3WD and OS25 or similar products with a different identifier in New Zealand including at the New Zealand Boat Show commencing at Auckland on 29 September 2016, pending determination of an inter-parties injunction application by judgment, to be heard on 28 October 2016.
Matters not in issue in this hearing
[14] Mr Williams confirmed that the issue of delay by the plaintiff in bringing proceedings was not pursued for the purposes of this application. I proceed accordingly. Mr Henry confirmed that the allegation of breach of confidence by the defendants, likewise, would not be pursued for the purposes of this hearing. Again, I proceed on that basis.
Grounds of opposition
[15] The grounds of opposition were refined having regard to the concessions that
I have referred to above and can be summarised in the following way:
a) The defendants say there is no serious question to be tried because there is no copyright infringement because the second defendants, products and their component parts are not substantial reproductions of or objectively similar to any of the drawings in which the plaintiff claims copyright and that the product at issue, and its components, were independently designed;
b) The plaintiff will not suffer irreparable damage between now and
28 October 2016 when the inter-parties interim injunction will be
heard, if an interim injunction does not issue and the second defendants are not prevented from displaying their product at the Auckland On Water Boat Show;
c) Damages would be an adequate remedy for the plaintiff if an interim injunction was not issued covering the period from now until
28 October 2016;
d)If an interim injunction were to issue that would prevent the second defendants from displaying their product at the Boat Show the second defendants would suffer irreparable damage that could not be compensated by way of damages and legitimate and lawful competition would by stifled; and
e) The balance of convenience and overall justice of the situation militates against the granting of the interim injunction for the period requested.
Preliminary issue
[16] Before considering the merits of the application for an interim injunction, it is first necessary to consider whether the plaintiff is barred from bringing this application pursuant to r 7.52. Rule 7.52 provides:
(1) A party who fails on an interlocutory application must not apply again for the same or a similar order without first obtaining the leave of a Judge.
(2) A Judge may grant leave only in special circumstances.
[17] That rule is designed to give effect to the principle that “[w]hile interlocutory rulings will not ordinarily give rise to issue estoppel, it is generally undesirable for an issue decided by an interlocutory ruling to be relitigated in the same proceeding.”1
[18] I do not consider that r 7.52 is engaged in this case. The first interlocutory application, the on notice application, has not yet been heard. What the plaintiff was
1 Stephenson v Jones [2014] NZHC 1604 at [7]
unsuccessful in, was obtaining a favourable timetable for that application to be heard. The plaintiff has not failed on the first interlocutory application. It is still to be heard. On that basis, r 7.52 does not apply
Injunction – the Court’s approach
[19] The matters to be considered on an interim injunction are well settled. The leading authority on interim injunctions in New Zealand is Klissers Farmhouse Bakeries Ltd v Harvest Bakeries Ltd in which the Court of Appeal stated:2
Whether there is a serious question to be tried and the balance of convenience are two broad questions providing an accepted framework for approaching these applications. As the N.W.L. speeches bring out, the balance of convenience can have a very wide ambit. In any event the two heads are not exhaustive. Marshalling considerations under them is an aid to determining, as regards the grant or refusal of an interim injunction, where overall justice lies. In every case the Judge has finally to stand back and ask himself that question. At this final stage, if he has found the balance of convenience overwhelmingly or very clearly one way - as cue Chief Justice did here - it will usually be right to be guided accordingly. But if the other rival considerations are still fairly evenly poised, regard to the relative strengths of the cases of the parties will usually be appropriate. We use the word “usually” deliberately and do not attempt any more precise formula: an interlocutory decision of this kind is essentially discretionary and its solution cannot be governed and is not much simplified by generalities.
Serious question to be tried
[20] I now consider whether the plaintiff has established that there is a serious question to be tried. Hardie Boys J in Shotover Gorge Jetboat Ltd v Marine Enterprises Ltd said:3
… it is nonetheless my view that where a plaintiff has established that he has a serious question to be tried, the relative merits of the parties' cases ought not to assume prominence in a consideration of where the balance of convenience lies, as otherwise the Court runs the risk of, in effect, trying the substantive action on the usually incomplete material available for it on what is often an urgent application for an interlocutory order. That does not mean to say, of course, that in determining whether or not there is a serious question to be tried the Court should not consider carefully the merits of the plaintiff's claim, both in fact and in law, and if necessary embark on a full examination of the legal issues involved; because it is obvious that if, on the facts presented, the law can give the plaintiff no remedy, then he cannot obtain interim relief…
2 Klissers Farmhouse Bakeries Ltd v Harvest Bakeries Ltd [1985] 2 NZLR 129 (CA).
3 Shotover Gorge Jetboat Ltd v Marine Enterprises Ltd [1984] 2 NZLR 154 (HC) at 157.
[21] The application for an interim injunction alleges a breach of copyright. To succeed in such an application, the plaintiff must establish:4
(a) That there is a work in which copyright can subsist. (b) That copyright does subsist in such a work.
(c) That the plaintiff owns such copyright; and
(d) That such copyright has been infringed.
[22] The plaintiff in its submissions focused on the fourth criteria, presumably on the basis that the first three criteria would be accepted, however, this is not so. The defendants submit that as the statement of claim states that drawings A6, A7, A19, B2 and B3 were generated from the previous drawings, no copyright resides in them. That may be the case. Section 14(2) of the Copyright Act 1994 provides:
14 Copyright in original works
…
(2) A work is not original if—
(a) it is, or to the extent that it is, a copy of another work; or
(b) it infringes the copyright in, or to the extent that it infringes the copyright in, another work.
[23] I am not convinced that the possible lack of copyright in drawings A6, A7, A19, B2 and B3 is fatal to the interim injunction application. The drawings are effectively compilations of the previous drawings and so little, if anything, is lost from the plaintiff’s case if they are removed from consideration. Mr Bryham, the plaintiff’s technology officer, has been with the plaintiff from the outset of the development of the Sealegs amphibious boat systems. He describes what the plaintiff has done. He refers to the fact that the design team spent many hours perfecting the design drawings that are annexed to the statement of claim. That is sufficient at this stage, in my view, to prove ownership in the drawings.
[24] The defendants also submit that the Court should take into account that the plaintiff has failed to properly particularise its ownership of the copyright in the
4 P S Johnson & Associates Ltd v Bucko Enterprises Ltd [1975] 1 NZLR 311 (SC) at 315.
relevant drawings. It submits that there is no evidence of who authored them or which indicates that the authors were, at the time the drawings were created, Sealegs employees. The defendants cite AG & S Building Systems Pty Ltd v G & J Holdings Ltd:5
The Court should not be left to speculate on such matters. It might well be that the plaintiffs are able to adduce evidence sufficient to support a claim to copyright infringement and to amend their pleadings accordingly, but they have not done so before me.
[25] In that case the Court stated:6
The presumptions in ss 126 and 127 of the Act do not assist the plaintiffs in the present case. For the purposes of this judgment I am prepared to assume that the four pages of designs and drawings attached to Mr Black's report and affidavit are the copyright works claimed to be owned by the plaintiffs. That being so, the drawings nevertheless do not purport to identify the author. Appendix A incorporates a notation signifying that copyright (but not necessarily authorship) is claimed by A G & S Distributors. The status of that entity is unknown. It appears not to be a party to the proceeding. Appendices B and C contain notations indicating that copyright is claimed by the second plaintiff Appendix D contains a similar notation, indicating that copyright is claimed by the first plaintiff However, each plan bears an endorsement which suggests that the author of the work concerned may well be Mr Andrew Matiukevitch, who appears to be associated with, or be a partner of, AB Consulting Engineers. He is noted in each case as being a “practising structural engineer”. It may be a proper inference to draw that he is the author of each of the works concerned. That being so, it would be necessary as a matter of proof for the plaintiffs to establish a documentary title commencing from Mr Matiukevitch, in order to establish their right to sue for infringement: see Copinger and Skone James on Copyright (14th ed para 22.110).
[26] Section 126, referred to in that passage, provides:
126 Presumptions relevant to literary, dramatic, musical, or artistic works
(1)The presumptions set out in subsections (2) to (5) of this section apply in proceedings brought under this Act with respect to a literary, dramatic, musical, or artistic work.
(2)Where a name purporting to be that of the author appeared on copies of a literary, dramatic, or musical work as published or on an artistic work when it was made, the person whose name appeared shall be presumed, until the contrary is proved,—
5 A G & S Building Systems Pty Ltd v G & J Holdings Ltd HC Auckland CIV-2004-404-2565,
8 October 2004, at [83].
6 At [73].
(a) To be the author of the work; and
(b)To have made the work in circumstances not falling within subsections (2) and (3) of section 21, or section
26, or section 28 of this Act. [27] Section 5 defines ‘author’:
(1) For the purposes of this Act, the author of a work is the person who creates it.
(2) For the purposes of subsection (1), the person who creates a work shall be taken to be,—
(a) in the case of a literary, dramatic, musical, or artistic work that is computer-generated, the person by whom the arrangements necessary for the creation of the work are undertaken:
(b) in the case of a sound recording or film, the person by whom the arrangements necessary for the making of the recording or film are undertaken:
(c) in the case of a communication work, the person who makes the communication work:
(d) in the case of a typographical arrangement of a published edition, the publisher.
(e) [Repealed]
(3) The author of a work of any of the descriptions referred to in subsection (2) may be a natural person or a body corporate.
[28] First ownership of copyright is determined pursuant to s 21 which provides:
21 First ownership of copyright
(1) Subject to the provisions of this section, the person who is the author of a work is the first owner of any copyright in the work.
(2) Where an employee makes, in the course of his or her employment, a literary, dramatic, musical, or artistic work, that person's employer is the first owner of any copyright in the work.
(3) Where—
(a) A person commissions, and pays or agrees to pay for, the taking of a photograph or the making of a computer program, painting, drawing, diagram, map, chart, plan, engraving, model, sculpture, film, or sound recording; and
(b) The work is made in pursuance of that commission,—
that person is the first owner of any copyright in the work.
(4) Subsections (2) and (3) of this section apply subject to any agreement to the contrary.
(5) Subsections (1) to (4) of this section apply subject to sections 26 and 28 of this Act
[29] In this case, each of the drawings, (except A6, A7, A19, B2 and B3) contains a small footer which has the Sealegs logo and contact details and boxes for other details of the drawing to be inserted. A1, A2, A14, A15 and A16 have in the “drawn by” box the name “Craig C”. The “drawn by” boxes on A3 and A8 are blank. A4, A5, A10, and A12 are drawn by “Andrew”. A9 is drawn by “V Zubcic”. The words in the “drawn by” box on A11, A13 and A18 are very small and pixelated but appear to read “Sean W”. A17 is drawn by “Sean W”. B1 has the footer with the Sealegs logo but no “drawn by” box.
[30] It is arguable for the plaintiff that those drawings which bear only the name “Sealegs” are presumed to be authored by Sealegs pursuant to s 126. It is also able to be inferred that “V Zubcic” is the sixth defendant who presumably authored the drawing in the course of his employment; however, this is not pleaded.
[31] It is not clear on the information provided to the Court who “Andrew”, “Craig C’, or “Sean W” are nor is it clear how the copyright in those drawings came to pass to the plaintiff, if indeed it did.
[32] Taking the path set out by Allan J in A G & S Building Systems Pty Ltd v G & J Holdings Ltd I consider that it is open to the Court to consider the claim only as it relates to infringement of the copyright in drawings A3, A8 and B1.
[33] In Oraka Technologies Ltd v Geostel Vision Ltd the Court of Appeal confirmed that the leading test for infringement by copying is that established in
Wham-O MFG Co v Lincoln Industries Ltd, stating:7
7 Oraka Technologies Ltd v Geostel Vision Ltd [2013] NZCA 111; citing Wham-O MFG Co v
Lincoln Industries Ltd [1984] 1 NZLR 641; [1985] RPC 127 (CA).
[85] …The leading test for infringement by copying was established in Wham-O MFG Co v Lincoln Industries Ltd. In that case, this Court set out three main elements:
(a) Substantiality: The reproduction must be either of the entire work or of a substantial part.
(b) Objective similarity: There must be sufficient objective similarity between the infringing work and the copyright work, or a substantial part thereof.
(c) Causal connection: There must be some causal connection between the copyright work and the infringing work. The copyright must be the source from which the infringing work is derived.
[86] The Court in Wham-O was not, however, mandating the order in which the factors were to be considered in all cases. It seems to us that the most logical ordering will usually be first to examine whether there is objective similarity before turning to the question of causation and finally substantiality.
[87] The “substantiality” test can be regarded in part as a practical threshold designed to limit claims of infringement to those that are real and substantial. The appropriate place to apply a practical test such as this is at the end, once the act of copying has been established. It also means that the issue of substantiality is decided on the basis of what is actually found to have been copied rather than on what may be wider allegations of copying. The High Court was incorrect to apply the substantiality test to the appellants' allegations, rather than to what was actually copied.
[88] Evidence that there are functional constraints on a design can be evidence supporting an inference of an independent design path (and therefore no causation). It can also be important in assessing whether a substantial part has been copied as discussed below.
…
[113] Where a claimant's and a defendant's works are objectively similar, there are four possible explanations: the defendant copied the claimant's work; the claimant copied the defendant's work; both arose from a common source; or the similarities occurred though mere chance or coincidence. It is only in the first case that an infringement of the claimant's work has occurred. No infringement occurs by an act of independent creation.
[114] In most cases, copying can only be deduced by inference from all the surrounding circumstances. It is unusual for there to be evidence of actual copying from someone observing the person making his or her work. In Henkel KGaA v Holdfast New Zealand Ltd the Supreme Court remarked that causality is the “ultimate issue” in a copyright case. The Court said that the degree of similarity between two works has evidentiary significance and is of assistance in satisfying
causality: the greater the similarity between the two works, the stronger the inference is likely to be that the one was copied from the other. The Court went on to say that, if an alleged infringer has had access to, and therefore an opportunity to copy, the copyright work, and the similarity between the works supports an inference of copying, it may well be appropriate for the court to conclude that there was copying. This, however, is subject always to the evaluation of any evidence there may be that no copying actually took place.
[115] Evidence of independent design will assist in rebutting any inference of copying. The fact that a defendant fails to give evidence to indicate how the alleged infringing work was produced can be taken into account.
[34] The plaintiff submits that there is a serious question to be tried. It says that the plaintiff has full working drawings of the 3D object and that the defendants are in part, as employees of the plaintiff, the authors of these drawings. The plaintiff also says that the fourth defendant left to expressly develop copies of the plaintiff’s design in China where the law could not prevent his behaviour. Further, the plaintiff says that the defendants have stated that they planned to ‘adjust the design’ which means that they accept that their work commenced from the plaintiff’s design and is a second iteration of their design.
[35] On 3 May 2016, Mr Leybourne emailed Mr Wright and Mr Bryham, copying in Mr Yun. In this email Mr Leybourne says that the second defendants have considered the offer of a closer business relationship. He says that the second defendants are in advanced stages of commitment with a number of parties which it is not possible to stop or unwind. He then says that the second defendants are happy to consider a “No Fight Fee” compromise in which the second defendants would pay
$5,000 to Sealegs for every system used in patent protected markets. Other possible terms of the No Fight Fee compromise are listed. Mr Leybourne then says:
Again, I understand if Sealegs reject the concept of a NFF. But in deciding to reject (and presumably going legal) please consider all or at least some of the following:
· We believe avoiding patent infringement is obtained by using our
“Core” technology
· Should patent infringement be a possibility we simply adjust the design
– we have this flexibility with Core technology
· If an interim injunction is seeked [sic] (which we would contest) and granted, Sealegs will need to have a strong belief in winning the longer game
· If Sealegs lose the long game the Collective will claim costs against Sealegs. The big number claimed will not be the legal costs, but the cost of lost business
· The longer the game the larger the costs of lost business
[36] The defendants submit that the plaintiff’s spin on the 3 May email is disingenuous. To a certain extent, I tend to agree. I do not believe that the email above can be taken as an admission by the defendants that their work commenced from the plaintiff’s design. The reference to adjusting the design, when read in context makes more sense. I believe a logical reading of the email is that Mr Leybourne is stating that while they do not believe that they are infringing on the plaintiff’s ownership, should it become apparent to them that they are (such as through a finding of this Court) they have the flexibility to make further adjustments on their core technology to alter the design. Overall, I believe that this email and its implications are borderline; while it appears damning to the defendants at first glance, a closer read reveals that it is not as bad for the defendants as the plaintiff makes out.
[37] The plaintiff relies on, in particular, paragraphs [113] to [115] of the Oraka decision above. It submits that the defendants’ work has its commencement in the plaintiff’s designs. It is obvious from the photographs of the two products, and both parties agree, that they are not identical. The plaintiff submits that the differences are a result of the defendants ‘adjusting’ the plaintiff ’s design; whereas, the defendants submit that the differences are the result of a different starting point.
[38] To prove a copyright infringement the onus is on the plaintiff to establish:8
a) There is objective similarity between the infringed work and the copyright work;
b) The reproduction is of the entire work, or a substantial part; and
c) There is a causal connection linking the defendants’ infringing copy to the plaintiff’s original work.
8 P S Johnson & Associates Ltd v Bucko Enterprise Ltd above, n4.
The view
[39] In the course of the hearing I inquired of counsel whether a view of the plaintiff’s Sealeg boat and the boat on which the front wheel assembly of the second defendants was set up on one of the third defendant’s boats could be arranged. Counsel agreed that it was possible and accordingly arrangements were made for counsel and representatives of the parties, my Registrar and myself to travel to a site in Kumeu where both boats were available to be inspected.
[40] The exercise was not entirely satisfactory. The aim had been to:
a) See both boats side-by-side standing on their three wheels;
b)Observe the lowering of the bow of each boat by lifting the front wheel assembly so that the bottom of the boat rested on the ground; and
c) When the wheel was in the ‘down’ position, observe the front wheel being turned to the left and right as the boat moved along the ground on its three wheels.
[41] The above practical tests were possible with the plaintiff’s boat. They were not possible with the boat owned by the third defendant, which had the second defendants’ front wheel assembly fitted, because the boat was on a trailer and I was told it was not possible to have it removed from the trailer.
[42] There seemed to be an added reason for this, namely a desire not to allow representatives of the plaintiff to have a close view of the boat. The defendants were prepared to have the plaintiff’s counsel and an engineer join me to inspect this boat. That position seemed ironic to me because this particular boat will be on show, unless an interim injunction is granted, at the forthcoming Boat Show. One would have expected that it would have been displayed on its three wheels so that its mechanisms could be displayed, in particular the raising and lowering of the legs on which the boat can drive on land. In addition, I would have expected it to be
displayed showing its ability to turn to the left or right, by the operation of the front wheel assembly.
[43] I acknowledge that there may have been a practical difficulty in moving the road trailer on which this boat sat out of the warehouse because of the need to move other stock, which was in the building. However, I express my disappointment that my ability to observe the three activities just mentioned was thwarted.
[44] My purpose in advising counsel that a view would be beneficial was to look at the operation and to observe whether there was any appreciable difference which would be something that a party interested in the system would be able to observe for themselves. The size of the two boats being compared also concerned me. The plaintiff’s boat appeared to be a six metre craft. The third defendant’s boat appeared to be approximately eight metres in length and may have had a greater overall length because the side pontoons extended beyond the solid hull section in the bow area of that boa and passed over the top of the wheel when it was in its raised position. That extension of the pontoon appeared to increase the overall length of the boat by approximately a metre beyond the solid hull section. I mention this because I anticipate that the weight of the two boats inspected might well be considerably different which, in turn, may well have had some bearing on the size of the componentry used in both boats’ front wheel assembly arrangement.
[45] However, having inspected the boats myself visually, including climbing into the third defendant’s boat and inspecting the fixing points in the forward section of that boat for the forward wheel assembly arrangement, my conclusion was that counsel for the defendants’ description that the two systems were “completely different” was not justified.
Conclusion on serious question to be tried
[46] It is not appropriate, in this application, to go in detail into the minute technical similarities and differences between the designs. Such findings would likely require expert evidence, especially as those findings involve findings as to whether the differences are substantial. Those findings are best determined at a full hearing; however, some preliminary observations can be made. To the untrained eye,
it does not appear that drawing A8 has been substantially copied in the defendants’ product, whereas A3, although not exactly replicated, does appear similar in the defendants’ product. Having said that, I agree with Mr Bryham that there are seven key parts to both systems. I really can do no better than adopt his description of them as follows:
1) A 12” alloy RIM with a balloon tyre with aggressive overlapping
V type tread;
2)A direct drive hydraulic wheel motor with a custom wheel flange and marine sealing unit
3) A single sided, inverted “L” shaped alloy fork
4)A forward pivoting alloy yoke with provision for a lift cylinder attachment
5)A rear yoke mounted, alloy steering cylinder with through rod and single end steering attachment
6) A cast “L” shaped steering link arm
7)A front lift cylinder attaching to the hull and yoke to raise the wheel towards the bow.
[47] As I have said, that coincides with my visual observation. I am not in a position, because I was not able to observe the systems in operation, to evaluate if established, that any change would cause the viewer to think that the systems are different. What is important to note is that all seven components are connected and placed in the same arrangement and all are external to the hull of the boat on both the second defendants’ assembly, which is attached to the third defendant’s boat and the plaintiff’s boat.
[48] I do not overlook Mr Leybourne’s evidence. He is the person responsible for
the day to day operations of the second defendants. He provided a video depicting
the operation of Brian Bellingham’s amphibious vehicle on Youtube in which he noted and summarised key parts that were featured in that amphibious craft as follows:
(a) A RIM and balloon tyre;
(b) A wheel flange and marine sealing unit; (c) A single sided, inverted “L" shaped fork;
(d)What looks like a forward pivoting yoke with provision for a lift cylinder attachment;
(e) A steel cylinder;
(f) There would need to be a steering link arm or similar; and
(g) A bow lifting cylinder attached into the hull.
[49] That related to a boat produced in the late 1980s and 1990s. The significant difference, as the Youtube depiction disclosed, was that the driving force for the amphibious craft is a large aeroplane type propeller, which is mounted on top of the boat and provides the forward thrust for the boat both on and off the water. Because of that, there is no need and no evidence that the wheels on the legs of this boat were motorised. The balloon tyres appear to perform a passive function and not a driving function and, therefore, do not require the aggressive overlapping V type tread referred to by Mr Bryham. There are, therefore, significant differences.
[50] The introduction of this evidence caused Mr Henry to register an objection to it. His objection was on the grounds of relevance. That is because there is no evidence to suggest that the plaintiff’s drawings and the 3D depiction of them had any connection to the Bellingham boat which appeared in the Youtube depiction. Mr Henry is right. The material is not relevant and there would appear to be no justification for it having regard to s 7 of the Evidence Act 2006. Even if I was
wrong on that ruling, there is not any sufficient similarity between that craft’s leg
fittings and the two that are under consideration in this judgment.
The balance of convenience
The adequacy of damages
[51] When considering whether to grant an interim injunction, the Court should first consider whether damages would be an adequate remedy. Lord Diplock expressed the governing principle as follows:9
As to that, the governing principle is that the court should first consider whether, if the plaintiff were to succeed at the trial in establishing his right to a permanent injunction, he would be adequately compensated by an award of damages for the loss he would have sustained as a result of the defendant's continuing to do what was sought to be en joined between the time of the application and the time of the trial. If damages in the measure recoverable at common law would be adequate remedy and the defendant would be in a financial position to pay them, no interlocutory injunction should normally be granted, however strong the plaintiff's claim appeared to be at that stage. If, on the other hand, damages would not provide an adequate remedy for the plaintiff in the event of his succeeding at the trial, the court should then consider whether, on the contrary hypothesis that the defendant were to succeed at the trial in establishing his right to do that which was sought to be enjoined, he would be adequately compensated under the plaintiff's undertaking as to damages for the loss he would have sustained by being prevented from doing so between the time of the application and the time of the trial. If damages in the measure recoverable under such an undertaking would be an adequate remedy and the plaintiff would be in a financial position to pay them, there would be no reason upon this ground to refuse an interlocutory injunction.
Preservation of the status quo – when and to what extent should this apply?
[52] The justification for preserving the status quo is when all factors appear to be evenly balanced. Lord Denning expressed the position as follows:10
If the defendant is enjoined temporarily from doing something that he has not done before, the only effect of the interlocutory injunction in the event of his succeeding at the trial is to postpone the date at which he is able to embark upon a course of action which he has not previously found it necessary to undertake; whereas to interrupt him in the conduct of an established enterprise would cause much greater inconvenience to him since he would have to start again to establish it in the event of his succeeding at the trial.
9 American Cyanamid Co v Ethicon Ltd [1975] AC 396 (HL) at 408.
10 American Cyanamid Co v Ethicon Ltd, above n 9, at 408.
Balance of convenience analysed
[53] The inquiry at this stage is limited by the direction made by Lang J that this application and this judgment is to deal with the defendants’ ability to exhibit at the Auckland Boat Show, and therefore covers the period of the show and up to and including the hearing on 28 October. For reasons which I will shortly set out, the issue really is confined to the ability to market a product because there will, for practical reasons, be no supply in the period under review.
The Auckland On Water Boat Show
[54] The reason for this application at this time is the forthcoming Boat Show, which opens its doors at the Auckland Viaduct Harbour Convention Centre and Viaduct Harbour on 29 September 2016. It is widely publicised. An extra from an article in Boating New Zealand gives an account of its significance:11
AOWBS has traditionally been the event where boat builders and importers launch new products. This year is no exception, with new models from manufacturers like Sealine and Axopar, Rayglass, Maritimo, Riviera, Extreme, Roger Hill Design/Pachoud Motor Yachts/Kingfisher Boats, Bill Upfold/Lloyd Stevenson Boatbuilders, Grand Soleil, DuFour, Ocean Super Sports, Beneteau, Jeanneau, Whittley, Takacat, OC Tenders, Ultimate Boats, Motayak, Smuggler Marine, Stabicraft and more.
Equipment, services and marine electronics suppliers also take the opportunity to introduce new products and announce new agencies.
With over 180 exhibitors, the show encompasses a huge range of yachts, launches, powerboats, dinghies, tenders, jet-skis, paddle boards, kayaks and other watercraft, as well as offering marine services, marina sales, marine engines and electronics, and diverse chandlery and fishing products.
[55] The article then adds “Here’s a taste of what show visitors can look forward to”. The article in fact contains the published press release referred to by Mr Pringle, the director of the third defendant, in his affidavit and which provided as follows:
New RIBS and a game changer revealed
Smuggle Marine will have several exciting new RIBs on display at the
AOWBS.
On the water the brand-new Smuggler 1100 Fast Rescue Tender, built for
Coastguard Whangaroa, is the newest addition to the Coastguard fleet. An
11 Boating New Zealand, (Auckland ,September 2016, Issue 361) at 72.
11m RIB powered by two Volvo D4 260hp diesel sterndrives, it is designed to travel up Northland’s east coast as far as the Three Kings Islands in any conditions.
On Smuggler’s hardstand outside the Viaduct Events Centre, show visitors can catch the new Smuggler Strata 800 Cabin RIB. This particular boat comes with a hardtop and twin Yamaha 150hp engines and is an outstanding performer. It gives owners the ability to overnight, while still retaining the incredible sea keeping capabilities the27° Smuggler hull is known for.
In addition, Smuggler Marine will unveil a very special craft at the show, a boat it says is destined to be a game changer.
Smuggler Marine will also be showing eight other models from its range.
[56] Mr Leybourne, of the second defendants, in his affidavit and referring to potential for sales of S25-3WD at the Boat Show, said that he expected to get only a few actual orders with deposits. He put that at four or five. He observed that people do not tend to make orders for products on the spot. They usually want to do some research and think about it. That is so, particularly if it is a new product, before they commit to buy it. He went on to say, however, that the Boat Show is an invariable marketing opportunity to get the public interested in his company’s new product and provide leads for future orders. He referred to the fact that it is expected that some
17,000 people, who are directly interested in boats and marine goods, are his target market and will be at the Boat Show. He noted that the Boat Show is only on once a year. He indicated that the Boat Show is about launching products and getting inquiries. He further noted that if orders were made, they would not be able to be manufactured and delivered before the hearing on 28 October.
[57] Mr Pringle, of the third defendant, in his affidavit described it is extremely important to the third defendant to be able to show one of his company’s boats fitted with the S25-3WD. The Boat Show, he said, is a massive part of his company’s marketing plan. He noted that his company had three new products coming to the Boat Show and that the S25-3WD fitted to one of his boats was just one of them. He said that he had already taken three orders for boats to be fitted with the S25-3WD. One client, however, has requested a refund following a press release concerning the current dispute. He advised from the Bar that funds had been placed in a stakeholder’s account to await further developments. Mr Pringle questioned whether
damages at the end of any proceedings could replace showing a boat to 17,000 visitors to the Boat Show.
Ability to pay – including order as to confidentiality of affidavits
[58] The plaintiff is a publicly listed company. No challenge was advanced as to its ability to pay damages in the event that an interim injunction was granted.
[59] Counsel for both parties advanced two affidavits dealing with the financial analysis. They invited me to order, pursuant to r 3.9 that the content of the affidavits were to be confidential and would not be released by the Registrar to any person wishing to inspect the Court file.
[60] I make such an order.
[61] The first affidavit was from Mr Pringle. He exhibited a statement dated
20 September 2016, which, in fact was a computer print out. It is not clear to me whether a withdrawal of $143,715 made on 20 September 2016 was, in fact, taken into account in the statement produced. Without a banking statement showing each transaction with a resulting balance, it is not possible to determine the cash liquidity of the third defendant based on this material.
[62] The second affidavit led on this topic was from Mr WG Black, a chartered accountant and partner in McGrathNicol. He was one of the founding partners of that firm and is an accredited insolvency practitioner and member of the Restructuring Insolvency and Turnaround Association of New Zealand. He analysed the material provided by Mr Pringle and concluded that:
(a) It was not possible to positively confirm the solvency of Smuggler
Marine Ltd from the material supplied;
(b) Banking statements did not provide the name of the customer of
Westpac in respect of whom the statements were given;
(c) One would normally expect to have financial statements, including both a balance sheet and profit and loss account, if a question of solvency was to be examined, and that was not made available in this case. He added that it would also be necessary to understand whether or not the company had any contingent liabilities;
(d)His response to Mr Pringle’s claim that the third defendant does not have any debts, was that a search of the Personal Property Securities Register indicated sixteen security interests currently registered against the third defendant, including two registrations in favour of financiers, one being Westpac New Zealand Ltd and the other Wells Fargo Ltd. He acknowledged that until one knew precisely what the position was in respect of these matters, he was not able to independently verify whether the company has debts. He added, that as a trading company, he would expect it to have some level of debt; and
(e) Finally, he said that the material provided does not provide a sufficient basis for the conclusion that the third defendant could meet a significant damages claim if one was ordered against it.
Possible price differential
[63] He then looked at another issue – the price differential which is referred to in the affidavits. One of the unfortunate things about the parties attending at very short notice is that they do not have sufficient time to give a full account of each important issue that may arise. I am not satisfied on the material that was placed before me that I could conclude more than there is likely to be some price differential between the product supplied by the plaintiff and those that would be marketed on behalf of the second defendants, or as attachments to the third defendant’s boats. That, regrettably, is as far as I am able to take that issue.
The plaintiff ’s position on adequacy of damages
[64] The plaintiff essentially makes two submissions as to why damages would not be an adequate remedy if the injunction was not granted. First, it says that intellectual property such as patents and copyright provide a period of statutory protection from the copyright or patent being infringed. These periods are set as finite times and the Court, where there has been a breach, cannot extend the copyright or in other ways enhance the protection period and thus the benefit is irretrievably lost.
[65] Second, the plaintiff submits that damages cannot replace market position especially where the infringer undercuts the market price. By providing a cheaper engineered product, that does not meet the high standards of the original design; the reputation of the original inventor within the market is damaged.
[66] The plaintiff says that if the interim injunction is granted but the plaintiff is not ultimately successful, it is capable of making a damages award to the defendants as it is a substantial company and a wholly owned subsidiary of a listed company.
The defendants’ position on balance of convenience
[67] The situation in this case is relatively unique. The Boat Show begins on
29 September. Both the plaintiff and the second and third defendants will be present. Mr Leybourne anticipates that the second defendants’ expect to get only a few orders with deposits for the S25-3WD at the Boat Show. He anticipates four or five orders. It is not clear whether second defendants will be getting any orders from the Boat Show directly, or whether these orders would come through the third defendant. Those orders will not be able to be manufactured and delivered until after the hearing of the interim injunction on notice application on 28 October.
[68] Counsel for the defendants informed me that all orders which the defendants propose to take in this 35-day period, that is commencing from the hearing date of this application to the hearing date of the on notice application, would be subject to the following conditions:
(a) There could be no supply before determination of the 28 October
2016 hearing; and
(b)The orders would be subject to a condition that should an injunction be ordered, the orders would be cancelled and the deposit and any other part-payment made would be refunded.
[69] The evidence led did not give a precise calculation of the lead time from placement of an order to delivery. There would appear to be two separate possibilities. The first is the supply of the front wheel arrangement only, presumably to a boat owner or a boat manufacturer. The boat, which I inspected at the view, I understand is to be exhibited by the third defendant at the Boat Show, if in fact an injunction at this stage is refused.
[70] When I observed that boat, I noticed that it had what I call a pram dinghy type construction at the solid bow as it approached the gunwale or the place where the pontoon is fitted. That, of course, can be contrasted with a conventional bow position, where the pointed section of the bow proceeds all the way up to the gunwale or where the pontoon is fitted to the solid section of the hull. The reason that a pram or flat section is created in the boat is to enable firstly, the lifting leg to be fitted to the hull and, second, to allow above it, the fitting of the hydraulic cylinder, which is used to lift the leg.
[71] There is no evidence before me of the potential size of the market for those who might wish to retrofit the unit to an existing boat. I imagine an immediate commitment at the Boat Show is unlikely in this example. That is because a boat owner would need to take some time to ascertain whether the front wheel system could be retrofitted to an existing boat. That position was confirmed by Mr Leybourne.
[72] The second possibility is the sale of a package, that is, the unit fitted to a new boat purpose built to take the second defendants’ unit. At the moment, there is only one such boat, I was told, namely the boat which is intended to be on display at the Boat Show.
[73] Accordingly, I conclude for the purposes of this hearing, that the effect of an injunction whether granted or not, at this stage and for the applicable period relates to the receipt of orders and not to the actual supply of product.
[74] I consider that the risks to the plaintiff are overstated so far as they concern a cheap product sold by the defendant. The plaintiff attempted to paint a picture of a cheap, overseas made, knock-off product. As Mr Leybourne deposes, the components which are the subject of the plaintiff’s claim are made in New Zealand. The relative similarity in quality between the plaintiff’s and the defendants’ products (as far as can be judged by photographs) is especially apparent when compared to the photograph of a true “cheap copy” of the system sold by another company in China, which is attached to Mr Leybourne’s affidavit.
[75] I am inclined to agree with the defendants that while the Court cannot extend the protection period on copyright, this can be compensated for by an award of damages or an account for profits.
[76] I further consider that any loss of market position to the plaintiff is likely to be minimal given its reputation and prominence in the market. Further, given the very short period of the interim injunction, if the injunction is not granted at this point but the plaintiff is successful on the on notice application, the harm done to its market position long term will be minimal. That is because of the safeguard proposed by the defendants that in the event of the injunction being granted following the 28 October hearing, the contract of supply would be cancelled and deposits and part-payments refunded. I will return specifically to the question of the terms of the contract.
[77] In contrast, I consider that the loss to the defendants will not be adequately remedied by damages. Should the injunction be granted, the defendants will not only lose sales from the Boat Show but will be prevented from using the Boat Show as their launch space to reveal the new product. This will have a negative impact on the marketing of the product beyond the October hearing, given that the event is annual.
The status quo conclusion
[78] I now comment briefly on the status quo issue. As I have analysed the position for the period that is covered by this application, I do not believe that all factors appear to be evenly balanced. The exercise that will have to be considered by the Court on 28 October is a different one to that which I am now considering because it will directly cover the actual supply of product.
Balance of convenience conclusion
[79] I conclude, therefore, that the balance of convenience favours a refusal of the injunction at this stage and for the period under review, that is the 35 days from the date of hearing including the commencement of the Auckland On Water Boat Show and the hearing on 28 October 2016. Accordingly, the present application is dismissed. Having said that, it is important that I now give specific additional directions which are to apply in respect of the hearing which is due to commence on
28 October. These reflect the assurances that I was given by counsel for the defendants. I would expect that the Court at the hearing on 28 October will consider whether continuation of the anonymisation of names of interested parties, or parties to contracts or orders, is to continue. If not, the plaintiff’s ability to approach potential interested parties will be significantly increased.
Further directions for hearing on 28 October 2016
[80] The current directions are set out in Lang J’s minute of 15 September and for completeness’ sake I now set them out:
[4] I direct that the application for an interim injunction is to be heard on
28 October 2016. In anticipation of that fixture, I direct:
(a) Documents in opposition to the application are to be filed and served no later than 3 October 2016.
(b) Affidavits in reply (if any) are to be filed and served no later than
10 October 2016.
(c) Submissions in support of the application are to be filed and served no later than 14 October 2016.
(d) Submissions in opposition are to be filed and served no later than
21 October 2016.
[81] I direct that, in respect of the 28 October hearing the following additional directions shall apply:
(a) The defendant shall provide the Court and the plaintiff:
(i)With details (except the name, address and any other identifying evidence) of all expressions of interest received at the Auckland On Water Boat Show and following it in respect of the second defendants’ S25-3WD unit or in respect of boats to which that unit is to be fitted by 5 pm on 3 October 2016; and shall provide the Court and the plaintiff with a further update of this material as at 5 pm on 27 October 2016;
(ii)copies of any contract (except the name, address and other identifying evidence) which provide for the supply of the second defendants’ S25-3WD unit or in respect of boats to which that unit is to be fitted by 5 pm on 3 October 2016; and shall provide the Court and the plaintiff with a further update of this material as at 5 pm on 27 October 2016;
(iii)copies of any offers made by the second and third defendants for the supply of the second defendants S25-3WD unit or in respect of boats to which that unit is to be fitted by 5 pm on
3 October 2016; and shall provide the Court and the plaintiff with a further update of this material as at 5 pm on 27 October
2016;
(b)any amendment to the statement of claim, which is to be considered at the hearing on 28 October 2016, shall be filed and served no later than
3 pm on 30 September 2016 so that the Court has available the pleading that the plaintiff intends to rely upon for the purpose of the hearing on 28 October 2016;
(c) counsel shall provide the Executive Judge with a revised estimate of hearing time required for the hearing of the on notice application no later than 14 October 2016 should counsel anticipate that more than one day for the hearing is required; and
(d)leave is reserved to the parties to seek a telephone conference concerning further directions for the hearing of the application on
28 October 2016.
Costs
[82] At the conclusion of the hearing on 23 September, counsel confirmed to me that for the purposes of this hearing Category 2 Band B as specified in Part 14 of the High Court Rules was appropriate. An initial position was accepted by both parties that the normal rule that the successful party was entitled to costs on this application should apply.
[83] On a further consideration of this case, it is clear to me that the submissions and the analysis which I was required to carry out for the purpose of the without notice application provides considerable assistance to the material that should be placed before the Court for the hearing on 28 October.
[84] In short, the position is analogous to that which applies in a plaintiff’s summary judgment application and which was referred to in NZI Bank Ltd v Philpott.12 For that reason, apart from recording how quantum of costs for this hearing is to be calculated, I reserve costs on the basis that costs are likely to follow the conclusion reached at the 28 October hearing or as assessed in the overall by the
Judge concluding that hearing.
12 NZI Bank Ltd v Philpott [1990] 2 NZLR 403 (CA).
[85] Therefore costs are reserved on the basis that I have just set out.
JA Faire J
Solicitors: Colin Woodroffe, Auckland
Baldwins, Auckland
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