Specialized Bicycle Components, Inc v Sheppard Industries Limited HC Auckland CIV 2010-404-5068
[2010] NZHC 1849
•8 October 2010
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
CIV-2010-404-5068
UNDER the Copyright Act 1994
IN THE MATTER OF Copyright infringement and breach of contract
BETWEEN SPECIALIZED BICYCLE COMPONENTS, INC Plaintiff
ANDSHEPPARD INDUSTRIES LIMITED First Defendant
ANDAVANTI BICYCLE COMPANY LIMITED
Second Defendant
Hearing: 29 and 30 September 2010
Counsel: T J Walker and E C Gray for plaintiff
B D Gray QC and G R Arthur for defendants
Judgment: 8 October 2010 at 4.45pm
RESERVED JUDGMENT OF DOBSON J
This judgment was delivered by me on 8 October 2010 at 4.45pm pursuant to Rule 11.5 of the High Court Rules.
Registrar/Deputy Registrar
Date……………
Solicitors:
Simpson Grierson, Private Bag 92518, Auckland for plaintiff
Grove Darlow & Partners, PO Box 2282, Auckland for defendants
SPECIALIZED BICYCLE COMPONENTS, INC V SHEPPARD INDUSTRIES LIMITED AND ANOR HC AK CIV-2010-404-5068 8 October 2010
Contents
The dispute ......................................................................................................................................... [1] The claim in copyright..................................................................................................................... [16] The law.......................................................................................................................................... [16] The pleading point ........................................................................................................................ [21] Sufficient originality?.................................................................................................................... [23] Copying of the original work? ...................................................................................................... [30] The claim in contract ....................................................................................................................... [59] Agreement still enforceable? ........................................................................................................ [61] Scope of constraint........................................................................................................................ [65] Copying, contrary to the Agreement? ........................................................................................... [74] Balance of convenience .................................................................................................................... [77] Preserving the status quo? .............................................................................................................. [97] Standing back................................................................................................................................. [101] Outcome.......................................................................................................................................... [106]
The dispute
[1] These proceedings involve a dispute over the extent to which the plaintiff (Specialized) can constrain the defendants from manufacturing or distributing bicycles claimed to be substantial copies of a particular model manufactured by Specialized. Specialized’s bicycles were hitherto distributed in Australia and New Zealand by the defendants.
[2] Specialized is based in California, USA, but claims to have a global business. It was founded in 1974 and remains privately owned. It employs over 500 people and has an annual turnover of US$500,000,000. It sells several hundred thousand bicycles per year, focusing on the “high end” more expensive and higher quality bicycles and bicycle components.
[3] The first defendant is a privately owned New Zealand company, claiming to be the second largest bicycle and bicycle parts distributor in Australasia. It has a turnover in excess of NZ$70,000,000 and employs over 120 staff. The second defendant is a subsidiary of the first, and the companies have jointly developed the “Avanti” brand for bicycles in New Zealand and in export markets. I will refer to both defendants simply as “Sheppard”.
[4] The present application was for interlocutory injunctions sought in relatively wide terms to restrain Sheppard, plus employees, servants or agents, from copying the whole or any substantial part of Specialized’s drawings for one particular model of its bicycle, or from selling or distributing particular Avanti models alleged to be reproductions of the whole or a substantial part of Specialized’s copyright works, or any other products having the same characteristics. The Specialized model claimed to be the subject of copying is the 2008-2009 Stumpjumper mountain bike (Stumpjumper 08). The Avanti models claimed to be substantial copies are the Vapour and Torrent (the Avanti bicycles).
[5] Specialized asserts copyright in the original elements of the two dimensional drawings from which the Stumpjumper 08 is derived, as well as copyright in the three dimensional manifestation of those drawings represented by the bicycle itself.
[6] Specialized also claims that production of the Avanti bicycles by Sheppard breaches a commitment assumed in a settlement deed completed between the parties in August 2009 (the Agreement). The Agreement was negotiated in the context of concerns by Specialized at other copying of Specialized products allegedly undertaken without authority by Sheppard. The Agreement provided for a staged termination of an existing distributorship agreement between the parties for Sheppard to distribute Specialized products in New Zealand and Australia. The Agreement was drafted as a variation to the distributorship agreement, which had been concluded in 1999, and extended twice since then. The particular clause relied
upon is as follows:[1]
[1] At clause 2.2(i).
Waiver and Release: the Distributor [Sheppard] and Avanti jointly and severally acknowledge and confirm that they have ceased producing, and will not in the future produce, and each will ensure that none of their respective contractors, agents, employees or Related Companies will produce, products which copy Specialized products or a substantial part thereof. Subject to the Distributor and Avanti’s continued compliance with all of their respective obligations under the Distributorship Agreement (as amended by this deed and including their obligations in this deed) Specialized waives and releases all claims against the Distributor and Avanti in respect of the copying or substantial copying of the Specialized technology identified in the Engineering Report annexed to this deed as Schedule 2, in the production of the 2009 and any 2010 model year Avanti Quantum and 2009 and any 2010 model year Avanti Cadent manufactured
prior to 20 February 2009 (which claims the Distributor denies), and for the avoidance of doubt, the Distributor (and Avanti) may sell in the Territory any such 2009 and/or 2010 model year Avanti Quantum and Avanti Cadent manufactured prior to 20 February 2009 incorporating the technology identified in the said Engineering Report.
[7] These proceedings were commenced on 4 August 2010. A hearing of Specialized’s interim injunction application was delayed for the parties to attempt a mediated settlement, but that has not occurred. A sample of the Avanti bicycles to be produced by Sheppard were available on a pre-production basis to a magazine called “Australia Mountain Bike Magazine”, described by one of Specialized’s deponents as the biggest and most influential publication in Australasia for this segment of the bicycle market. That review of the Avanti Torrent in the magazine’s September 2010 edition included the following:
We won’t beat around the bush. The Torrent looks a lot like a Specialized. There, we’ve said it. But given our ongoing love affair with Specialized’s latest bikes, can that really be a bad thing? It’s like suddenly discovering your girlfriend has an equally attractive cousin. It’s always good to have options. Plus it makes a lot of sense to incorporate ideas that you know work damn well.
That’s why Avanti has adopted a proven four bar linkage to handle rear suspension duties; there are few, if any, suspension platforms which have garnered more accolades over the years.
[8] After the proceedings had been commenced, Specialized’s Auckland solicitors sent a solicitor employed by them to a function at an Albany store that retails Avanti bicycles. The new Avanti bicycles were prominently displayed and that solicitor deposed to a conversation with a salesperson in the following terms:[2]
I asked Mr Clark about the new Torrent and Vapour Avanti bicycle on display. Mr Clark gave me a sales pitch for the bicycles. One of the key selling features that he talked about was the 4-Bar suspension system. Mr Clark told me that this was the 4-Bar suspension system used by Specialized. He told me that Specialized’s 4-Bar suspension system was patented but had “come out of patent in 2010” so Avanti had used it on these new bicycles. Mr Clark gave me the impression that the 4-Bar suspension system on the Avanti bicycles was exactly the same as the 4-Bar suspension system on the Specialized bicycles.
[2] J P Kevany affidavit, 8 September 2010, paragraph 6.
[9] Retailers of Avanti bicycles are independently owned and counsel for
Specialized did not seek to attribute those comments to Sheppard during the
argument. The relevance of this interaction between a retail salesperson and potential customer is the relative closeness of the link drawn between the new Avanti bicycles and Specialized bicycles, and the promotional advantage implicitly available to Avanti retailers by making connections of that type with bicycles produced by Specialized.
[10] Unless restrained, Sheppard intend marketing the Avanti bicycles with the network of independently owned retailers that stock their products in the very near future. I was told at the conclusion of the hearing that an undertaking by Sheppard to desist from such activity will expire on 11 October 2010. Within hours before release of the judgment, I was advised of a conditional extension to the undertaking. However, working to the original deadline and my other commitments have precluded a refinement of my reasoning. I am nonetheless entirely comfortable with the conclusions I have reached.
[11] This dispute arises in one part of the mountain bike sector that is apparently an increasingly important part of the overall bicycle market. Whilst mountain bikes have generally had some form of front suspension, a more recent trend is also to provide suspension for the rear wheel as well, this category of bicycle having become known as “fully suspended”. A variety of systems have been designed to achieve this end.
[12] For the hearing, some 13 variants on such full suspension (FSR) models were displayed in Court. In formal terms, they were produced as exhibits to an affidavit from Mr Alward, one of the deponents for Sheppard. Counsel for Specialized urged that I should treat the selection of examples as influenced by Sheppard’s wish to emphasise similarities appearing throughout this sector of the market, and I have been mindful that the examples in Court may not be entirely representative of the whole market. The range of similarities claimed, and differences emphasised, were commented on by counsel referring to the various bicycles in the course of their submissions, and I separately inspected the bicycles produced.
[13] A series of photographs were also provided by counsel for Sheppard. In an endeavour to aid an understanding of the comparison of bicycles that I need to
undertake, I am having a selection of those images annexed to this judgment. Annexure A1 shows the Stumpjumper 08 and annexures A2 and A3 show the Avanti bicycles.
[14] The conventional sequence of considerations on such interim injunction applications is whether the plaintiff can show that there is a serious question to be tried on its claims, then where the balance of convenience lies, and, as a “standing back” exercise, where the overall justice lies.[3]
[3] Klissers Farmhouse Bakeries Ltd v Harvest Bakeries Ltd [1985] 2 NZLR 129 (CA), adopting the approach of the House of Lords in American Cyanamid Co v Ethicon Ltd [1975] AC 396.
[15] For Sheppard, Mr Gray QC accepted that the threshold for a plaintiff to establish that there is a serious question to be tried is a relatively low one. Notwithstanding that, Sheppard argued that there is not the requisite serious question to be tried on either the claim in copyright, or for breach of contract. Accordingly, it is necessary to review the prospects on both causes of action to determine whether, for the purposes of the present argument, the standard of a serious question to be tried has been made out on behalf of Specialized.
The claim in copyright
The law
[16] Both parties referred to the Supreme Court decision in Henkel for the majority of the basic propositions they respectively advanced on the relevant aspects of copyright law.[4] Specialized claims that the drawings created in the course of designing its Stumpjumper 08 constitute artistic works for the purposes of the Copyright Act 1994 (the Act). The Statement of Claim annexed a small number of drawings said to represent the original work. Then, in the course of argument, counsel for Specialized acknowledged that the annexed drawings did not represent all of the drawings required to produce the Stumpjumper 08, so that amendment to
the Statement of Claim to expand the number of drawings claimed to be original artistic works would be necessary. It is accepted that computer generated drawings, including those intended to produce a three dimensional representation of the subject of the design, are capable of recognition under the Act as artistic works.
[4] Henkel KGAA v Holdfast New Zealand Ltd [2006] NZSC 102; [2007] 1 NZLR 577.
[17] Specialized does not claim that all elements of the drawings are original and to do so would most likely be unrealistic in an area where enhancement in the technology of a device like an FSR mountain bike is inevitably an iterative process. Instead, the requisite originality required for the drawings to be recognised as an artistic work for the purposes of the Act is said to arise by virtue of the unique combination of a range of design features reflected in the drawings.
[18] The Supreme Court decision in Henkel was decided against the plaintiff in that case on a pleading issue. Accordingly, the observations of the Court, delivered by Tipping J, on the substantive requirements for a copyright claim are strictly obiter dicta. Nevertheless, those observations are an appropriate source of the current approach in New Zealand law to the elements that have to be established in a case such as the present.
[19] As to cases in which the requisite original work is claimed to have occurred in the collocation of features which are not in themselves all original, the Supreme Court referred back to Tipping J’s own decision in the High Court in Bonz Group (Pty) Ltd v Cooke.[5] That decision had emphasised that it is incorrect to subdivide a plaintiff’s work into its component parts and ask whether copyright might attach to the individual parts. Rather, if copyright exists at all, then it exists in relation to the
work as a whole. In cases where copyright is recognised on this basis, then a claimed infringement would involve a defendant using the same or a substantially similar collocation of numerous individual features. It follows that if a defendant had copied the individual features but had made his own arrangement of them, that will not represent an infringement.[6] In this context, the Supreme Court confirmed that if the level of originality in the copyright arrangement is low, then the amount of
originality required to qualify another arrangement of the same elements as original is also likely to be low.[7] This is in the context where the threshold for establishing originality is itself a low one.[8]
[5] Bonz Group (Pty) Ltd v Cooke [1994] 3 NZLR 216 (HC).
[6] Bonz at 219-220.
[7] Henkel at [41].
[8] At [38].
[20] Where the owner of copyright in artistic works such as drawings has applied the product of that original work in producing products and then complains that the products have been copied, that is indirect copying of the graphic work on which the product is based and can constitute infringement.[9] In Henkel, the case was ultimately decided against the plaintiff because it had claimed copyright in the drawings for one form of packaging for one of its products, and had then proceeded to claim against the defendant for allegedly copying the packaging of a separate product. Although that packaging apparently reflected material similarities to the
packaging of the product derived from the drawings in which the copyright was claimed, the allegedly copied packaging did not reflect a three dimensional manifestation of the original drawings.
The pleading point
[9] Henkel at [42].
[21] Mr Gray QC criticised Specialized’s pleading in its present Statement of Claim as inadequate in a similar respect. He argued that Sheppard was entitled to particulars of the respects in which the particular drawings annexed to the Statement of Claim, and in which copyright was claimed, were said to have been indirectly copied by the alleged three dimensional representation of them in the Avanti bicycles in issue. At the level of generality of the present pleading, he complained it was impossible for Sheppard to respond by analysing the extent, if any, to which its bicycles constituted three dimensional copies of those drawings.
[22] Whilst the point was determinative in Henkel after trial and a first appeal, such criticism of the lack of particularity in the pleading cannot avail Sheppard at this interlocutory stage to refute the existence of a serious question to be tried. At this stage at least, Specialized’s ownership of the relevant drawings relied upon to
manufacture the Stumpjumper 08 is not in dispute. Sheppard may well be entitled to greater particularity of the respects in which the requisite drawings are said to be copied in the Avanti bicycles. Counsel for Specialized accepted that the Statement of Claim needs to be amplified to make reference to more of the “100 or so” drawings that its deponent, Mr Chamberlain, has referred to as contributing to the design subsequently produced as Stumpjumper 08. At this stage, Sheppard can do no more than flag a lack of necessary particularity. Reliance on the point may add to its other arguments as to the relative weakness of the copyright claim by suggesting difficulties that Specialized is likely to have in making out the specific respects in which the Avanti bicycles constitute copies of the drawings for the design of the Stumpjumper 08. However, it cannot be dispositive of the existence of a serious question to be tried.
Sufficient originality?
[23] Specialized’s claims of originality were advanced in relation to three aspects claimed in submissions to be “unique and completely different”, namely the shock position (ie the relative positioning of the shock absorber), tube shapes and tubing configuration. In addition, Specialized claims that the visual appeal of the combination of tube shapes and frame design was particularly distinctive to an extent that the design has been given design patent protection in the United States.
[24] The component parts of the rear suspension system include what are called Horst links. That is a discrete patented combination of pivots relative to the back axle of a bicycle that permit movement in ways intended to enhance the shock absorbing characteristics of the back of the bicycle. That particular relationship of pivot positions was patented in the United States by a Mr Horst Leitner and Specialized have subsequently acquired the rights to those patents from Mr Leitner. There is no patent protection for the Horst link outside the United States. The design drawings for the Stumpjumper 08 incorporate a Horst link as a part of the rear suspension and those are also reflected in the Avanti bicycles.
[25] It is sensible that new designs seek to optimise the improvement in functional use of the model in question. However, Mr Chamberlain of Specialized deposed to
features of the overall design of the Stumpjumper 08 that he described as dictated by purely aesthetic considerations. The components of the bicycle frame cited as examples of this included a sloping top tube, a generally S-shaped bottom tube, a relatively larger bottom tube than is present on other bicycles (or by comparison with the top tube), a trapezoidal cross-section of both top and bottom tubes, and a gusset connecting the top tube and the seat tube. Each of these features is shown in the photograph of the Stumpjumper 08 in silhouette, annexed as A1 to this judgment.
[26] When Mr Chamberlain attributed aesthetic influences to the choice of these features, I take him not to be suggesting that aesthetics have dictated the presence of those components in the first place, but rather the particular form in which those components of the bicycle frame actually appear. Certainly, from a non-expert’s perspective, there do appear to be sound functional reasons for the bicycle’s design to include at least the majority of these features. Once their inclusion is a given, however, there is clearly scope to vary the final form in which they are included in the bicycle’s design, with aesthetic considerations sensibly influencing that final form.
[27] Mr Chamberlain also claimed that the design was intended to distinguish the overall appearance of the Stumpjumper from its competitors. In testing these claims by reference to the range of bicycles in Court, I was not able to accurately rank the bicycles chronologically, in terms of identifying when a particular manufacturer has adopted a particular feature. I also acknowledge that merely because a feature claimed by Specialized to be distinctive of its Stumpjumper 08 appears on another bicycle, does not necessarily mean that the other bicycle has not derived from a measure of copying of the Stumpjumper 08.
[28] In assessing originality, I undertook a visual comparison that excludes the allegedly copied Avanti bicycles. For the preliminary purposes relevant to the interim injunction hearing, I have made the following observations in relation to the degree of originality apparent in the Stumpjumper 08 as the three dimensional manifestation of the drawings from which it derives:
a) If Specialized treat their design of the Stumpjumper 08 as sufficiently distinctive to distinguish it from other non-infringing competitors, then the claimed distinctiveness of appearance is not apparent to me as a matter of overall impression. If at all, the Stumpjumper 08 is distinguishable when comparison is undertaken at a relatively minute level of detail, that being a level at which the majority of the features said to be distinctive are in fact shared by a number of the competitors’ bicycles.
b)Of the 10 remaining bicycles (ie excluding the Avanti bicycles but including Specialized’s 010 model), only four did not have the Horst link location of the pivot points on its rear suspension design.
c) Of those 10 bicycles, only three were without a gusset of some sort between the back end of the top tube and the seat tube.
d)All of the bicycles had a degree of downward slope on their top tube from the front to the seat tube.
e) All but three had some degree of S-shape in the shape of their bottom tube.
f) With only one apparent exception, there was some differentiation between the size of the tubing in the top and bottom tubes, with the bottom tubes generally being of a substantially larger cross-section than the top tube. The cross-section of the bottom tubes seems rarely to be of a standard circular construction, and a range of roughly oval or rounded angular shapes have been used.
g) The majority of the bicycles (the minority including Specialized’s 010 model) have their shock absorbers mounted vertically from a point a little in front of the crank point at the middle of the pedals, to a pivot attached to the frame in front of the seat tube. The minority have the shock running horizontally from a point in front of the seat tube, to a
point securing the “top” of the shock underneath a point on the top tube.
[29] The provisional view I take is that, viewing the product of the drawings as a whole as the law requires, the contribution of Specialized’s particular collocation has sufficient originality about it to enable Specialized to assert copyright in those drawings. This depends on its particular combination of features, most of which are present in a majority of the bicycles, but are manifested in somewhat different forms.
Copying of the original work?
[30] Turning to a comparison of the Stumpjumper 08 and the Avanti bicycles, when their overall silhouette is viewed side-on, they are undoubtedly similar. Indeed, the silhouettes, viewed from some distance away, are probably more similar than when such a comparison is undertaken between the Stumpjumper 08 and any of the other bicycles in Court, or of which there were photographs produced. However, the claim in copyright depends on establishing that the Avanti bicycles are substantial copies of the original Stumpjumper 08 drawings. That issue cannot be addressed at this level of abstraction.
[31] In a reply affidavit, Specialized’s design engineer, Mr Chamberlain, deposes that about 80 per cent of the design details in the Avanti bicycles are copied from the Stumpjumper 08 design, with the remaining 20 per cent able to be traced to other Specialized designs. For instance, the asymmetrical chain stays on the Avanti bicycles that I describe at [36] below are claimed to be a copy of a 2006
Stumpjumper 08.[10] Mr Schlatter, a patent attorney in private practice who does
work for Specialized, appears equally convinced that some 15 design features he lists were copied in the Avanti bicycles from the Stumpjumper 08.[11] The rejoinders for Sheppard are a mixture of denials as to originality, and denials of copying.
[10] Chamberlain affidavit, 13 September 2010, paragraph 17.
[11] Schlatter affidavit, 8 September 2010, paragraph 16.
[32] In a relatively cluttered market, any distinctiveness that a top end manufacturer such as Specialized might strive for will depend on relatively arcane
points of difference. A consequence of doing so is that any comparison must acknowledge a lack of copying in relatively minor points of difference. That is consistent with the approach the law adopts in requiring relatively little originality from an alleged infringer, to make out an absence of copying of a collocation.
[33] As to the construction details, Specialized’s gusset slopes upwards from a point towards the back of the top tube to the seat tube, whereas the Avanti bicycles have a curved top bar from the underneath of which is welded the gusset, the other end of which is welded to the seat tube below the back end of the top tube.
[34] Focusing on the rear sub-frame, this comprises the triangular construction of stays, the lower ones running from where the crank is housed for pedalling, back to the axle of the back wheel (the chain stays), and an upper set of stays running from a point near the top of the seat tube back to the axle of the back wheel (the seat stays). This configuration of bars is distinctive on FSRs because whereas on conventional bicycles they are rigidly secured to each other and the rest of the frame, on FSR models the movement providing suspension for the rear of the bicycle is facilitated by pivots enabling each set of stays to move, thereby absorbing some of the impact of bumping over undulating ground.
[35] In comparing the detailed design of these parts of the Stumpjumper 08 and the Avanti bicycles, there are what may only be superficial differences, for instance the tubing in the Specialized is either round or oval, whereas the Avanti bicycles’ stays are clearly defined rectangular tubing. Because the back part of the rocker pivot (the front of which is secured to the top of the shock in front of the seat tube) is materially longer on the Avanti bicycles than on the Stumpjumper 08, the pivot point at the top of the seat stays appears materially further behind the seat tube than on the Stumpjumper 08 (see annexures B1 and B2 to this judgment). The Stumpjumper 08’s shorter rocker pivot means that the top of the seat stays are secured to the back of the rocker pivot materially closer to the back of the seat tube.
[36] On the Stumpjumper 08, the chain stays are at the same height on both sides of the rear wheel. In contrast, on the Avanti bicycles, the chain stays are attached at the equivalent point asymmetrically, so that the bar on the rider’s right side where it
is adjacent to the chain and front de railleur is dropped down at a lower point than on the rider’s left side.
[37] On the Stumpjumper 08, the seat tube is of conventional circular construction and rises vertically from the point at which it is secured above the crank case for about a quarter to a third of its length (see annexure B1 to this judgment). It then bends away from the handle bars by about 15 degrees and has a gusset welded to the front from a point just above the bend, to the bottom of the top tube at the point where the top tube is welded higher up the seat tube. That gusset provides the location for the central pivot of the rocker pivot.
[38] In comparison, the seat tube on the Avanti bicycles has its bottom point welded to the top of the crank case at about a 10 degree tilt back from the vertical. After about a quarter of its length, it has two bends creating a kink in which a short part of the seat tube rises vertically and then the balance of it is again tilted back at approximately a 15 degree angle, with slightly more tilt back from the vertical than the bottom part of the seat tube. It does not have any gusset welded to the front of the tube because the central pivot of the rocker pivot is secured through the seat tube itself.
[39] The shape and attachment of the rocker pivot is somewhat different on the respective bicycles (see annexure B2 to this judgment). On the Stumpjumper 08, the central pivot is secured to a gusset welded to the front of the seat tube. On the Avanti bicycles, it is secured through the seat tube. The Stumpjumper’s rocker is shorter than Avanti’s.
[40] As to use of the Horst link layout for the location of the pivot points, there is some suggestion in the evidence that in the United States, where Specialized enjoys patent protection, it has been prepared to licence other manufacturers to adopt that design feature, for a relatively modest royalty per bicycle using it. For Sheppard, Mr Alward claimed that it has used the Horst link layout since early dual suspension
models in 1996 and 1997.[12]
[12] Alward affidavit, 11 August 2010, paragraph 21.
[41] Specialized claimed that Avanti’s rocker pivot was manufactured with the same extent of thickness removed from the internal parts of the material. Comparing the extent to which the rocker pivots on various other bicycles were sculptured in this way revealed a range of extents to which the material in the rocker pivot did not simply have a flat side, but rather sculptured out indents between the perimeters of the irregularly shaped material. In some, there were complete holes in the middle. As a discrete component in Specialized’s claimed collocation, this is hardly a compelling indication of copying. Data filed with photographs produced on behalf of Sheppard claimed that its rocker permitted 135mm in movement of the rear wheel, compared with 120mm for the Stumpjumper 08. If accurate, this may be a factor of Sheppard’s rocker pivot being materially longer than Specialized’s.
[42] Intuitively, the combination of subtle differences in the shape of the bottom part of the respective seat tubes, the location and dimension of the rocker pivot and the different proprietary shock absorbers used on the respective bicycles suggests to me that those designing for Sheppard appreciated the attributes of the Stumpjumper 08, and considered that they could improve on that by the combination of the changes that I have identified. It will be a matter for trial as to whether, if that suggestion is justified, the combination of differences, in an area where the level of originality for copyright purposes is low, is sufficient to take the product produced by Sheppard outside the category of what would be treated as infringing copying.
[43] Specialized claim originality in the use of trapezoidal shaped sectional construction of the top and bottom tubes. Assessment of this feature on the various other bicycles in Court would suggest that regular circular or even oval construction is not adopted for these components in this sector of the market.
[44] The sectional shape of the Avanti tubes is certainly irregular, but Mr Gray QC disputed that either of its tubes were accurately described as trapezoidal and rather described the bottom tube as having a shield shape in section. This feature is an example of the different answers available, depending on the level of detail or abstraction at which one undertakes the comparison. Certainly, both the Stumpjumper 08 and the Avanti bicycles utilise irregular shapes and are “the same” to that extent. However, it would be difficult for Specialized to sustain a claim to
originality, or even distinctiveness, simply on the basis that its tubes are of irregular sectional construction. That would seem to be, if not the norm, then at least regularly adopted by a range of manufacturers.
[45] If it is the particular form of irregularity of shape for which Specialized claims originality (and that detail is included in its drawings) then the claim of copying appears not to be sustainable. There were no drawings of the sectional construction of the top and bottom tubes of the Avanti bicycles, but from a physical comparison, they appeared to be different from the sectional shape used for the Stumpjumper 08.
[46] Specialized claimed that the form of some components of the Stumpjumper 08 design was dictated by aesthetics. This was intended to pre-empt an argument for Sheppard to the effect that the form of its bicycles was dictated by the function for which they were intended. Mr Gray QC indeed made that argument, supporting it by reference to the core similarities of the features of all the bicycles in Court. As with other comparisons, the same differences of view arise, depending on the level of abstraction at which the comparison is undertaken. The fact that a sloping top tube is included in the design cannot be solely aesthetic because, given the terrain where the mountain bikes are ridden and the likelihood of riders having to come forward off the seat as a matter of urgency, a downward slope on the top tube to better enable the rider’s feet to be placed on the ground without contact between the bar and a rider’s groin is a relatively basic practical consideration. Within that functional consideration, which was the norm among the examples viewed, the particular way that the slope is drawn could involve a design judgement as to relatively how much a particular shape would contribute to the overall aesthetic appearance of the bicycle.
[47] The same applies to the rationale for, and decision on final form of, the bottom tube. A concave shape of the length of the tube is functional because it creates a larger gap between the front wheel and the bottom tube, given that the distance between those two parts will fluctuate when the suspension on the front forks moves up and down.
[48] To the extent that Specialized claims some superior aesthetic cache for their bicycles (hardly a matter capable of empirical proof), then in silhouette, the Avanti bicycles would have similar aesthetic appeal because the combination of shapes is very similar.
[49] The similarity of their silhouettes was the dominant feature urged for Specialized in the assessment of the bicycles overall. Counsel for Specialized urged that objective similarity is largely a matter of impression for the Court. It was argued that something is a copy if it brings to mind the original:[13]
[13] Thornton Hall Manufacturing Ltd v Shanton Apparel Ltd (No 2) [1989] 1 NZLR 239 (HC) at 246.
In other words, a copy is a copy if it looks like a copy.
Reference was also made to the Supreme Court’s observation in Henkel:[14]
What amounts to a substantial part in an artistic work case depends more on qualitative visual impression rather than on quantitative analysis.
[14] Henkel at [44].
[50] In addition to the published observation as to similarity in an Australian magazine, a deponent for Specialized annexed excerpts from a blog for those interested in mountain bikes, which included various comments to somewhat similar effect. In the end, it is a matter of impression for the Court applying an inexpert eye to compare matters where those interested in acquiring the items will apply a far more expert eye to such comparisons.
[51] It was argued for Specialized that the comparison of the substantial similarities between the Stumpjumper 08 and the Avanti bicycles was sufficient to give rise to a strong inference of copying, to an extent where the onus shifts to Sheppard to establish that such substantially similar bicycles had been produced without copying.[15] The other element required before such a shift in onus occurs, namely the opportunity for the defendant to copy, was clearly present because of the thorough familiarity that Sheppard personnel have with Stumpjumper 08. This has
been acquired in distributing it, monitoring its marketing by the independent retailers in New Zealand, and the inclusion of Sheppard personnel in Specialized programmes
conducted to educate those distributing and marketing the bicycles as to their attributes.
[15] Bonz at 227.
[52] For Sheppard, its bicycle product manager, Mr Alward, deposed to the process of design and development that had been undertaken to produce the Avanti bicycles. There was also evidence from an independent industrial designer who was contracted to transform drawings into more detailed instructions for manufacture. On the basis of that evidence, Mr Alward denied that there had been any copying and instead, asserted an independent course of design for the bicycles, reflecting research undertaken as to what the market wanted.
[53] The materials annexed to Mr Alward’s affidavit included a series of slides for the design brief. The slides were dated April 2009, and a comment near the beginning suggests an intention to complement, not compete with, “our SBC range” (ie Specialized). After identifying the features they wanted for the new bicycles, the slides included an evaluation of three market leaders, including Specialized, with slides listing Sheppard’s likes and dislikes of the current offering from each of those market leaders. The slide commenting on Specialized’s 2009 bicycles observed as an issue:
Avanti design must not look like inspired or copied from Specialized.
[54] Another slide setting out “Design Constraints” included the following:
• Develop alternative approaches to seat tube gusset
◦ This area must look different to Specialized
[55] A further slide commented on Specialized’s 2010 models. These bicycles had moved to a shock mounted horizontally rather than vertically (see annexure A4). The commentary included as an issue:
Avanti not able to customise shock for horizontal mounting to top tube. Will need to market low COG and stiffness benefits of vertical shock.
[56] As to the first of these comments, it is somewhat ironic that the design achieved has indeed caused at least some knowledgeable in the area to link the design to the Specialized models. As to the last comment, there is thus far no
evidence as to why Sheppard could not develop a shock with horizontal mounting. Mr Gray QC suggested from the Bar that Sheppard could not adopt a horizontally mounted shock because they had already designed a frame shape which precluded that. Another possible inference is that those responsible for design at Sheppard were more sensitive to the similarities of appearance between a new Avanti model and the current Specialized model than to what would, by then, be the superseded Stumpjumper 08.
[57] These and other aspects of the explanations offered in support of Sheppard’s claim that there was not copying cannot be resolved until tested at trial. On the preliminary assessment undertaken at this stage, I acknowledge the inference of copying that arises from the respects in which the Stumpjumper 08 and Avanti bicycles are materially similar, and the prospect that the inference of copying may be rebutted by an expansion on the evidence provided thus far, to the effect that an independent design process was undertaken.
[58] In summary, I have adopted the approach of the Supreme Court in Henkel to the relative extent of originality, and the closeness of the copying of all the elements that would be needed to constitute copying of a collocation. My provisional view is that the claim that Sheppard has copied a substantial part of the collocation of distinctive features in the Stumpjumper drawings does raise a serious question to be tried. However, it is an aspect of the case that could face substantial difficulties.
The claim in contract
[59] Sheppard raised a number of preliminary arguments opposing the enforceability of the commitment in clause 2.2(i) not to copy Specialized products.[16]
The first was that the effect of the Agreement had come to an end. This argument had only been foreshadowed very shortly before the hearing, but counsel on both sides were able to address relatively extensive arguments in favour of and against the ongoing enforceability of the relevant constraint.
[16] Set out in [6] above.
[60] Sheppard next argued that the constraint could not extend beyond confirmation of the statutory copyright protection as it applied in New Zealand, and extending that same extent of protection to Australia where the law would not otherwise provide for it. In arguing against any broader scope of constraint, Mr Gray QC argued that the language of the clause was uncertain, both as to the period intended to be covered by “in the future” and the scope of activity sought to be constrained by the simple concept requiring Sheppard not to “copy Specialized products or a substantial part thereof”. Mr Gray QC argued that to make out the claim now pleaded in contract, Specialized would have to prevail on what he characterised as unreasonably broad interpretations of both these notions, and that it was not tenable to interpret the clause so widely.
Agreement still enforceable?
[61] As to the first of these challenges, it was argued for Sheppard that the Agreement, drafted as a deed of settlement, did not stand on its own, but rather was concluded as an agreement to vary the terms of the written distribution agreement originally concluded between the parties in 1999. The distribution agreement provided for termination in a range of circumstances and it did not have any provision that its terms would have ongoing effect following termination. Nor does the Agreement have any provision to that effect.
[62] If this approach were correct, the scope of this constraint where it bans producing “...in the future” would only have applied until termination of the distribution agreement at the end of August 2010.
[63] Predictably, Ms Walker rejected this approach and argued that, in its context and on its own terms, the Agreement implicitly contemplated that the relevant provisions will continue to have contractual effect. She instanced specific provisions enabling the “sell through” of unsold products to continue until dates after the end of August 2010, as well as provisions such as an ongoing obligation of confidentiality that would make no sense if the parties were immediately free of the commitment made, once the date of termination of the distribution agreement arrived.
[64] Without full evidence on the context in which the Agreement was concluded, a final view on this argument is inappropriate. That context is likely to reflect two separate concerns that had been raised on behalf of Specialized, of copying by Sheppard. They related first to two earlier models of Avanti bicycles, and secondly to bicycle gloves. Claims that Specialized might have pursued in relation to those allegations of unauthorised copying were being compromised on terms that Specialized presumably intended to require Sheppard not to do anything of the same type again. The dispute in relation to gloves may or may not still be pursued in
separate proceedings that have been filed in this Court.[17] From Specialized’s
perspective, it seems likely that at least in respect of earlier copying of bicycle designs, it was forgoing pursuit of such claims for the sake of achieving a clean break on clear terms, so that it would not need to be concerned in the future about marketing of its products in Australasia being detrimentally affected by Sheppard piggy-backing on its intimate knowledge of Specialized products. From Sheppard’s perspective, the Agreement recorded its denial of any liability for previous copying, so it is likely to take a different view of the context in which the Agreement was concluded. However, I am easily satisfied for present purposes that the Agreement should be treated as currently enforceable.
Scope of constraint
[17] Mr Gray QC sought to argue that because Ms Walker had indicated in argument that further breaches of previously settled disputes over copying could lead to Specialized’s claims being pursued further, that amounted to a repudiation of the Agreement. Such an argument cannot mount a credible challenge to the present enforceability of the Agreement.
[65] Next, a range of arguments were advanced for Sheppard criticising the wording of clause 2.2(i). First, Mr Gray QC argued that if it did not come to an end on termination of the distribution agreement, then its reference to the period of constraint simply as “in the future” was either too uncertain to be enforceable, or if taken literally, unreasonable in its extent.
[66] In reply submissions for Specialized, Mr E Gray supported the literal meaning of “in the future” as constituting a ban in perpetuity on Sheppard copying
Specialized products. However, he suggested that the practical effect of the clause would dissipate over time, as Sheppard’s business continued without any favoured access to Specialized’s products as its distributor here, and Sheppard developed a full line of products independently of Specialized.
[67] That pragmatic approach may well be supplemented by others at trial, and is potentially more appealing in the first year after termination, than it would be if the clause was relied on in 10 years’ time.
[68] The other aspect of uncertainty argued for Sheppard was the scope of the obligation allegedly assumed to not produce products “...which copy Specialized products or a substantial part thereof”. The first part of Mr Gray QC’s argument on this was that because of the uncertainty, it could not reasonably be interpreted as going beyond the statutory constraint available under New Zealand copyright law. He suggested that the phrase “or a substantial part” reflected the language of s 29 of the Act and that that was an indication that the draftsperson had in mind replicating, for the avoidance of doubt in New Zealand and to make it co-extensive in Australia, the constraints imposed by the Act. Without more to suggest this link, I would not attribute that connection to the draftsperson. If the parties were addressing a ban on copying by a party that had had intimate knowledge of Specialized products, a sensible precaution would be to extend the ban on copying from entire items, to substantial parts of such items. There is no particular magic in the form of words used in s 29.
[69] Mr Gray QC also argued that to constitute copying, the copier would have to be reproducing something which was original to Specialized’s product, otherwise the clause would impose a constraint on Sheppard which unfairly prevented it producing products that had elements that had been produced by third parties, before being produced by Specialized. Further, the qualification of “substantial part thereof” was so uncertain as to leave Sheppard vulnerable to restraint for, for instance, producing any bicycle, generic parts of which such as handle bars, seats and gears could not avoid being labelled as a “substantial part” of a Specialized product.
[70] A further point of interpretation affecting the scope of the contractual constraint is the sense in which the word “copy” is used in clause 2.2(1). Does it require the act of copying to involve a conscious replication of the original work of someone else (here the designers of the Stumpjumper 08)? Or, does it extend to any item bearing the appropriate extent of sameness or similarity to the original, irrespective of the process by which it was produced or the intention of its producer?
[71] The narrower interpretation favoured by Sheppard would treat any “copy” of a Specialized product as necessarily involving a conscious decision on Sheppard’s part to produce a product that replicated an original Specialized product. Accordingly, consistent with its opposition to the claim for breach of copyright, Sheppard relies on its evidence describing its own design process, as contradicting any allegation that there was a conscious copying by Sheppard of the Stumpjumper 08.
[72] The approach urged by Specialized is that the contractual constraint does not require it to prove that there was deliberate copying. Rather, if the outcome of Sheppard’s work is a product that, on objective comparison, constitutes a copy of a Specialized product or a substantial part thereof, then copying contrary to the contractual constraint has occurred irrespective of the process Sheppard claims was involved in its production.
[73] No doubt, many nuances not aired in the course of the interim hearing would influence the final outcome on this cause of action. Nonetheless, on the basis of the argument thus far, I am satisfied that there is a serious question to be tried that the scope of the constraint does apply for an undefined period into the future, and that it applies to a broader scope of copying than the protection provided for the designer of original works under the Act. It is tenable for Specialized to invoke the contract to prevent copying the distinctive essence of a Specialized product.
Copying, contrary to the Agreement?
[74] What then are the prospects of Specialized making out, on the broader approach to each of the elements of interpretation of the clause that I have reviewed,
that the Avanti bicycles constitute copies of the essence of the Stumpjumper 08? This would involve a comparison on a different basis from that which I have outlined in relation to the copyright cause of action.
[75] Certainly, the distinctive similarity when looked at in silhouette is likely to be more important in determining such a broader inquiry on copying than the relevance I have suggested for that on the copyright analysis. Similarly, the use of the same combination of pivot points for the rear suspension, including the Horst link, and the basic similarity in the way the shock absorber is positioned, would be likely to take Specialized closer to establishing copying of the essence of the Stumpjumper 08 than the analysis required in considering collocations of features, some original and others not, within the overall design of the bicycles.
[76] On the test as I have provisionally suggested it, I consider that Specialized has a credible, moderately strong prospect of making out that Sheppard has produced a copy of a Specialized product. That claim does not presently appear to be overwhelmingly strong, and it depends on the interpretation of all contested elements of the scope of the constraint most favourable to Specialized when, on full argument in light of evidence of the more detailed context of the Agreement, one or more of those propositions might not be made out in its favour.
Balance of convenience
[77] This consideration has been described as weighing whether “the risk of injustice to an ultimately successful, but temporarily unassisted, plaintiff is greater than the risk of injustice to a temporarily restrained, but ultimately successful, defendant”.[18] This stage of the inquiry was also described by the English Court of Appeal as balancing the “risk of doing an injustice”.[19]
[18] Telecom New Zealand Ltd v Clear Communications Ltd (1997) 6 NZBLC 102,325 at 102,335.
[19] Cayne v Global Natural Resources plc [1984] 1 All ER 225 (CA) at 237 per May LJ.
[78] This is not a case in which it is claimed that pot Cayne v Global Natural Resources plc [1984] 1 All ER 225 (CA) at 237 per May LJ.ential purchasers will be confused into thinking that the Avanti bicycles are in fact made by Specialized. The potential market for such bicycles appears to consist of purchasers who have a high
level of knowledge about the various components, and the performance attributes claimed for them. Mr Gray QC urged that the thoroughly researched purchase decisions typical in the sector would not be made before potential purchasers have trialled a range of bicycles and that ultimate purchase decisions were likely to be made on individual preferences for the performance attributes discerned in the course of trialling a number of bicycles. Whilst that may in fact be the pattern, I am more comfortable undertaking the evaluation of competing concerns about unascertainable losses from the perspective of both parties, on the premise that sales are likely to be substantially influenced by a knowledgeable assessment in the showroom context.
[79] Specialized’s concerns include the unquantifiable harm to its reputation from illegitimate piggy-backing by Sheppard on Specialized’s strong reputation, to market the Avanti bicycles on the basis that they replicate important features of the Specialized products. The concern for Specialized is that it will not subsequently be able to establish how many potential purchasers of its bicycles were diverted to the Avanti bicycles because the Avanti bicycles exhibit features the knowledgeable buyer will associate with Specialized’s strong reputation.
[80] There was no evidence before me on price comparisons, but it was inferred that the Avanti bicycles will sell for less than comparable Specialized models. Specialized’s concern is that Sheppard can “piggy-back” by incorporating desirable features without incurring the same extent of research and development expenditure, and that knowledgeable buyers will appreciate that point and reason that they would get better value for money by buying the copy rather than the original item. There is some support for that concern in the evidence of Specialized’s Mr Herdrich that tracked the Australasian sales experience for the Specialized models that were claimed to have been the subject of earlier copying by Sheppard. The relevant Specialized models therefore had to compete against those less expensive “copies”. The drop in Specialized sales were compared with the sales experience in other
jurisdictions, both before and after introduction of the “copies”.[20]
[20] Herdrich affidavit, 9 September 2010, paragraph 14.
[81] A separate concern for Specialized is that material harm to Specialized’s reputation is likely from purchasers who associate the Avanti bicycles with Specialized technology, but then have an unsatisfactory experience with the Avanti bicycle that the purchaser attributes to Specialized’s technology. Ms Walker argued that because of Sheppard’s long and close association with Specialized, knowledgeable purchasers would expect Sheppard to accurately copy the Specialized technology. She relied on the experience of a Simpson Grierson solicitor when dealing with an Avanti salesperson as discussed in [8] above.
[82] The Stumpjumper 08 model, which is the foundation for all its relevant claims of copying, has now been superseded. I understand that Sheppard do not hold any more of the Stumpjumper 08 model, and that a modest number remaining with any of its independent dealers are likely to be sold in the relatively near future. That is material to the prospect of unascertainable losses that might be suffered by Specialized if no injunction is ordered
[83] The Avanti bicycles, if marketed this summer, will compete against Specialized’s 2010/11 model. The differences between the 08 and 2011 models, together with the prominence given to the separate branding in the way in which the bicycles are presented to purchasers, are relevant in two respects. First, it reinforces the absence of any material risk of confusion, and indeed Ms Walker accepted that that is the case. The difference also reduces the risk of harm to Specialized’s reputation from purchasers of the Avanti bicycles who bought in the belief that they were getting a less expensive but reliable copy of Specialized technology and are thereafter disappointed. The point is that the innovator (assuming such persons would see Specialized in that light) has moved on. It has, for example, moved from a vertically mounted shock to one mounted horizontally. Also, the rocker pivot is a different shape, and alignment of the seat stay is with the line of the shock, rather than the back of the top tube (compare annexures A1 and A4). There may well be other innovations and it is predictable that those selling the Specialized 2010/11 models will emphasise these as justifying a preference for that model. Given the level of discernment attributed to potential buyers in the sector, the risk of harm of the type described must be lessened by an appreciation that copying, if it had occurred, was of a superseded model. Accordingly, I do not accept Ms Walker’s
submission that this risk of harm to Specialized’s goodwill and reputation was
“exceptionally high”.
[84] Another form of harm claimed for Specialized was that its good reputation is bolstered because dealers who carry its products do so on the basis of an exclusive arrangement. It claimed that Sheppard has benefitted from this reputation in the past and that by eroding Specialized’s reputation and damaging the exclusivity aspect of such dealer arrangements with Specialized, Sheppard’s marketing of the Avanti bicycles reduces the appeal of exclusive arrangements for other dealers who might take them up. With respect, however, that is more a consequence of terminating the arrangement with Sheppard than of any copying of Specialized’s Stumpjumper 08 by Sheppard in the Avanti bicycles marketed after the distributorship arrangement came to an end. Specialized has no claim to prevent Sheppard marketing mountain bikes. It can only restrain Sheppard’s production and marketing of mountain bikes that copy the Stumpjumper 08 in breach of either copyright or the contractual commitment not to copy. Others considering taking up a dealership for Specialized products will know of the well-established network of independent Avanti retailers, and would realistically anticipate that Avanti models would compete across all sectors of the bicycle market, including FSR mountain bikes.
[85] The major harm to Specialized’s intellectual property, if either of its claims is made out, will include its dilution by the sale of the Avanti bicycles. That can be addressed on an account of profits and is readily calculable. The losses suffered because of sales not made of Specialized bicycles on account of competition it ought not to have faced from the Avanti bicycles may be difficult to establish with precision, but is not entirely incalculable.
[86] The heads of loss Sheppard could realistically claim if it is restrained from marketing the Avanti bicycles until trial, and is then found not to have breached either Specialized’s copyright entitlements or the terms of the Agreement, include the following:
• Profit on the Avanti bicycles manufactured thus far;
• Losses on further production of those models that might be sold before the substantive determination of the proceedings;
• Losses on the parts and accessories that would reasonably be expected to be sold with or after sales of those models;
• Loss of business reputation caused because its model range would have an important gap in it between termination of the distributorship for Specialized bicycles and resolution of these proceedings. In addition, its network of independent dealers would be disadvantaged by this gap in the model range in a form likely to harm its business relationship with them.
[87] I consider that the first three of these categories of potential loss are, to varying degrees, capable of being projected sufficiently to enable a calculation of damages. Certainly, the extent of profits likely to be made on the bicycles already manufactured is the type of accounting calculation with which the courts are familiar. To make it out, Sheppard would have to establish that there is more likely than not to have been a market for the volume of bicycles already manufactured. I was told that number and it is not in the thousands. Relative to the size of the market, and depending on how attractively the bicycles are priced relative to their competitors, an evaluation of the prospect of sales for that volume of bicycles is hardly incalculable.
[88] Similarly, although it would be a hypothetical reconstruction, the prospects of successfully manufacturing and marketing additional bicycles in the period between now and final determination of the proceedings might be made out. The extent of sales of parts and accessories that would follow is also a damages projection that could be undertaken. I do not downplay the additional difficulties in doing so, and it may be that Sheppard would have to resort to damages claimed on a loss of a chance basis. I therefore treat these three categories as being difficult of calculation, but by no means impossible.
[89] As to the fourth category, quantifying the ongoing harm that would be suffered by Sheppard’s Avanti brand because of an important gap in the model range
it is able to offer for, say, two or three seasons is extremely difficult to calculate. Conceptually, it is a realistic concern for Sheppard. It is virtually impossible to reconstruct how successful its business would have been at the point at which the substantive proceedings were resolved and, in the medium term thereafter, by comparison between the position that its brands do occupy, and the counterfactual of the position they would have been likely to have enjoyed had they been able to market a full range of bicycles throughout the entire period.
[90] At around the same time as relinquishing the distributorship of Specialized bicycles, Sheppard has taken over the distributorship in Australia and New Zealand of another brand of up-market bicycles, produced by another United States company, Scott. Accordingly, Specialized challenged the claims for Sheppard that a restraint on the Avanti bicycles would keep them out of the relevant sector of the market because Sheppard will have the Scott models to market to the Avanti retailers. The rejoinder to this is that the Scott models do not cover the same part of the market as the models previously sourced from Specialized, or the Avanti bicycles.
[91] In its research when considering the development of its own FSR mountain bikes, the papers produced on behalf of Sheppard included the outcome of a 2008 reader survey by the New Zealand Mountain Biker magazine. The survey showed that Specialized was the second most popular brand of bicycle owned by those who responded to the survey at some 20.6 per cent, whereas Scott bikes were sixth at some 7.2 per cent. The same questionnaire sought indications of brands that those responding would consider purchasing with similar results in terms of the grading, so that Specialized was the second most likely bicycle to be considered for purchase and Scott the sixth equal most likely brand. It is impossible to determine how accurate or representative those responses were, but they do provide some support for Sheppard’s rejoinder that the Scott range does not constitute an adequate replacement for the Specialized bicycles. It follows that there is likely to be a meaningful gap in the model range if the Avanti bicycles are unable to be marketed, leading to the prospect of an incalculable head of damage reflecting the resulting loss in reputation to the brand and to Sheppard’s business.
[92] Sheppard adduced evidence intended to demonstrate the approximate scale of damages likely to be incurred. With respect to Mr Gary McLoughlin, the expert retained for that task, I am concerned that there is too much conjecture in the projected heads of loss for them to be reliable. Indeed, the relevant point here is that there are credible bases for identifying the types of loss that would occur, but an inadequate factual basis at this time from which to build any accounting calculation of what the extent of such losses would be.
[93] This is not a case in which there is a stark contrast between the difficulties in calculating the losses for one party or the other, depending on the interim position until trial. If anything, the risk of injustice because of subsequent difficulties in calculating losses is slightly higher if Sheppard is now restrained, but subsequently establishes that it ought not to have been. The difference between the position of the two parties in that scenario is, however, hardly decisive.
[94] I note that Mr McLoughlin’s projections include a range of sums which he projects would be losses suffered by the network of independent Avanti dealers that are supplied by Sheppard. Again, the numbers calculated by Mr McLoughlin do not have great credibility, but the prospect of that type of loss arising is tolerably clear. I note that the attempts by solicitors for Specialized to challenge Mr McLoughlin’s calculations were frustrated by a refusal to give them access to the raw data on which he worked. That concern on the part of Specialized reinforces the unease I have about the relative unreliability of such projections of loss at this stage, in the circumstances of a market such as that involved in these proceedings.
[95] The impact of the present decision on third parties is also hardly decisive. I accept that the established network of Avanti dealers will suffer losses beyond the profit forgone on the Avanti bicycles, if Sheppard is now restrained. The gap in their model range is likely to deter some potential purchasers, and that is a dent in their goodwill that might last longer than the restraint.
[96] However, from Specialized’s perspective, it will have concluded arrangements with a new series of retailers of its bicycles in New Zealand and Australia who would reasonably have assumed that their marketing of Specialized
bicycles would not be subjected to competition from Avanti models likely to be treated by potential purchasers as piggy-backing on the technology for which Specialized has an established positive reputation. That disruption to the new commercial arrangements between Specialized and such dealers is likely to cause some measure of loss to those third party retailers. Accordingly, there is also not a stark difference in the impact on third parties, depending on whether restraint is ordered or not.
Preserving the status quo?
[97] The parties contended for very different formulations of what constitutes the status quo. There are often difficulties in providing a consistent and objective mode of ascertaining what constitutes the status quo before a plaintiff seeks interim relief. In addition, preservation of the status quo can be an aim inconsistent with an overall assessment of the justice of the situation. Nonetheless, it can serve as a useful measure of whether intervention is warranted.[21]
[21] See, generally, Andrew Beck and others McGechan on Procedure (online looseleaf ed, Brookers) at [HR7.53.11], and a specific example in Wellington International Airport Ltd v Air New Zealand Ltd HC Wellington CIV-2007-485-1756, 30 July 2008 at [10].
[98] Here, it was argued for Specialized that the status quo represented Specialized marketing its bicycles in Australasia independently of Sheppard, and Sheppard having its own range of bicycles without FSR mountain bikes, but supplemented by its new distributorship for Scott bicycles. On this analysis, the introduction of Avanti brand FSR mountain bikes is a new initiative and preservation of the status quo would be achieved by keeping them out of the market.
[99] Mr Gray QC was inclined to suggest that because the parties were in a period of transition, there was no reliable status quo deserving recognition for the purposes of its preservation. He criticised the expectation suggested for Specialized, by pointing out that neither Specialized’s entitlement to assert copyright, nor the contractual constraint it had negotiated with Sheppard, entitled it to assume that the Avanti range of bicycles, post-termination of the distributorship with Specialized would necessarily exclude FSR mountain bikes. Specialized could expect no more
than that Sheppard would not produce an FSR mountain bike that infringed whatever copyright Specialized could assert, or which constituted a “copy” of a Specialized product.
[100] This is not a situation in which I consider that preservation of the status quo is a factor that can help in determining the outcome on interim relief.
Standing back
[101] Having reached this stage in the analysis of considerations for interim relief, the final stage is, as directed by the Court of Appeal, to “stand back” and ask where the overall balance of justice lies. Although this label is well-known and well understood, it is appropriate to set out the context in which the observation by the
Court of Appeal was made:[22]
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 NWL[23] 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 the 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.
[22] Klissers Farmhouse Bakeries Ltd v Harvest Bakeries Ltd [1985] 2 NZLR 129 (CA) at 142.
[23] NWL Ltd v Woods [1979] 1 WLR 1294, [1979] 3 All ER 614.
[102] This is indeed a case where I find the balance of convenience to be relatively evenly poised. The parties are both relatively substantial entities, about to become competitors in Australia and New Zealand, whereas there has previously been a co-operative and mutually beneficial arrangement between them. The boundaries of Specialized’s rights to constrain competitive behaviour will always be tested by the acknowledgement that constraints on competition have to be legitimate and be justified. Specialized denies that it is seeking any anti-competitive advantage, and
argues that restraining Sheppard from producing and marketing the Avanti bicycles until the dispute is substantively resolved is justified because of the relative strength of its claims and the difficulties in calculating the extent of damage it will suffer if Sheppard is not restrained.
[103] I have found that there is a serious question to be tried on both causes of action. My view at this interim stage is that its claim in contract is a viable but not compelling one. I have identified a number of material doubts about the prospects of success on the claim for breach of copyright. Had Specialized’s case been materially stronger, then that is likely to have tipped the scales in favour of interim relief.
[104] I am not persuaded that the balance of convenience is overwhelmingly one way or the other, but I find it marginally in favour of Sheppard. In an overall evaluation of the competing positions, I consider the risk of injustice is greater if Sheppard is now restrained than if Specialized is left to its substantive rights. That means that Specialized will have to make out all heads of loss that it claims as flowing from the marketing of the Avanti bicycles between now and the substantive determination. Sheppard is clearly on notice that it remains vulnerable to these claims, and that if Specialized prevails at trial, substantial damages are likely to be awarded. It proceeds with the conduct complained of in the meantime, at its own risk.
[105] This is a case in which this final balancing consideration appropriately dictates the outcome. Had I come to the view that the greater risk of injustice went the other way, then I would not have been dissuaded from granting orders by Specialized not having assets in the jurisdiction to support its undertaking as to damages. A substantial overseas firm selling into New Zealand as Specialized does is entitled to participate in litigation in this country on an even footing. I would have treated a bank bond for an appropriate sum in a range between, say, $1.5 and
$2.5 million as appropriate support for the undertaking as to damages that has been given in the usual way. I apprehend that a company such as Specialized could obtain a bond of the type suggested for a relatively modest sum, by reference to the amounts at issue here.
Outcome
[106] Accordingly, the application for interim injunctions is dismissed. The defendants are entitled to costs on a 2B basis.
Dobson J
Annexure A1
2008/2009 Specialized Stumpjumper
SPECIALIZED BICYCLE COMPONENTS, INC V SHEPPARD INDUSTRIES LIMITED AND ANOR HC AK CIV-2010-404-
5068 8 October 2010
2010 Specialized Stumpjumper
Avanti Stumpjumper
Avanti Stumpjumper
0