Tiny Intelligence Limited v Resport Limited HC Christchurch CIV 2003-409-352

[2006] NZHC 1428

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IN THE HIGH COURT OF NEW ZEALAND CHRISTCHURCH REGISTRY

CIV 2003-409-000352

BETWEEN  TINY INTELLIGENCE LIMITED Plaintiff

ANDRESPORT LIMITED Defendant

Hearing:         19 September 2006

Appearances: DJC Russ for Plaintiff

K W Clay for Defendant

Judgment:      15 November 2006 at 3pm

JUDGMENT OF JOHN HANSEN J

[1]      In my reserved judgment of 21 November 2005 I entered for judgment for liability in favour of the plaintiff.

[2]      As a consequence, a hearing of damages was needed which has now been held.  It initially had to be adjourned because the defendant filed an affidavit from an accountant, a Mr Barry Hadlee.  Because of circumstances canvassed at that hearing I recused myself as long as Mr Hadlee was a witness.  He is no longer a witness and Mr B R Irvine, of Christchurch, Accountant, from a different firm from Mr Hadlee, has now given evidence.

[3]      In relation to this hearing we have the evidence of Mr G M McEwin, of D R Phillipson and Mr Irvine.

TINY INTELLIGENCE LIMITED  V RESPORT LIMITED  HC CHCH CIV 2003-409-000352  15 November

2006

[4]      In  assessing  damages  the  Court  has  been  placed  in  a  difficult  position because neither party applied to cross-examine the witnesses, in particular the accountants.

[5]      That is because it seems to me the accountants take a fundamentally different approach to the way in which account of profits should properly be assessed in the circumstances outlined in my substantive judgment.  Mr McEwin on behalf of the plaintiff takes what could be described as an incremental costing approach.   That takes account only of the change in costs incurred by the manufacture or sale of a particular product and does not seek to apportion to the manufacture or sale of that product, any part of general overheads, such as rent, light, heating or office expenses, which cannot be identified as a direct result of producing or selling that product. That is his approach subject to some minor variations.

[6]      However, for the defendant, Mr Irvine takes what is known as the process of absorption costing.   That is where general overheads are apportioned by some appropriate means, often by sales or volumes, to the manufacture or sale of each product.  He then adapts this approach further.

[7]      The matter is further compounded by the failure of the defendant to make available  many  source  documents  that  have  necessarily  led  to  a  degree  of speculation.  (For the sake of completeness I note that Mr Phillipson, the director of the defendant, who has filed affidavits, is also an accountant.)

[8]      The starting point is ss 120 and 121 of the Copyright Act 1994 which read:

120     Infringement actionable by copyright owner

(1)    An infringement of copyright is actionable by the copyright owner.

(2)     In proceedings for infringement of copyright, all such relief by way of damages, injunctions, accounts, or otherwise is available to the plaintiff as is available in respect of the infringement of any other property right.

(3)     This section has effect subject to the following provisions of this Part of this Act.

121    Provisions as to damages in infringement proceedings

(1)      Where, in proceedings for infringement of copyright, it is proved or admitted that at the time of the infringement the defendant did not know, and had no reason to believe, that copyright existed in the work to which the proceedings relate, the plaintiff is not entitled to damages but, without prejudice to the award of any other remedy, is entitled to an account of profits.

(2)      In proceedings for infringement of copyright, the court may, having regard to all the circumstances and in particular to—

(a)    The flagrancy of the infringement; and

(b)    Any benefit accruing to the defendant by reason of the infringement,—

award such additional damages as the justice of the case may require.

(3)        In proceedings for infringement of copyright in respect of the construction of a building, no injunction or other order shall be made—

(a)     After the construction of the building has been begun, so as to prevent the building from being completed; or

(b)     So as to require the building, in so far as it has been constructed, to be demolished.

[9]      In this case the plaintiff submits  that there was knowing and intentional infringement in relation to the trumpet.   There was deliberate and reckless infringement in relation to both the sword and trumpet and that this was repeated and substantial.  Mr Russ further submitted that if the Court accepted that the sword was copied there was also knowing and intentional infringement in relation to it.

[10]     On the other hand, Mr Clay submits that the period for any award should be limited until the defendant became aware it was infringing the plaintiff’s rights.  He submitted that there was no reason for the defendant to believe there was to be a claim until notified in 2002.

[11]     With respect this seems to ignore my findings.  In relation to the trumpet, it is clear that the defendant had a member of its staff take the plaintiff's trumpet to the original manufacturer who declined on the basis the plaintiff had copyright.   The defendant then took a copy to another company and requested an identical trumpet, with only minor variations, to be produced.

[12]     In relation to the sword, the design was completed by Mr Julian Meates in

1999.  There was evidence that both swords were so similar one must have copied the other.  I infer from that that the defendant’s sword was a copy of the plaintiff’s.

[13]     The defendant, in my view, was knowing and intentional in its infringement and they were repeated and substantial.   At the very least it was deliberate and reckless infringement in that it is clear that Mr Phillipson, of the defendant, formed the view that there could be no copyright in such articles and took no steps to ascertain the correct position.

[14]     In this case the plaintiff has elected an account of profits.  It, however, argues it is also entitled to additional damages.  I will return to that.

[15]     As noted above, the substantive dispute between the accounting experts was what was the correct approach.  That requires a consideration of the decision of the High Court of Australia in Dart Industries Incorporated v The Decor Corporation Proprietary Ltd and Anor (1992-1993) 179 CLR 101.

[16]     Mr Russ submitted that there are only three areas of fixed overheads that can give rise to an allowable deduction.  These are:

1.        Where overheads are increased as a result of manufacture or sale of the infringing product.

2.Where, but for the manufacture or sale of the product, the overheads would have been reduced; and

3.Whether the overheads would have otherwise been utilised  in  the manufacture or sale of other products – the opportunity cost.

[17]     The starting point can be found at Dart, page 118, where the High Court, after referring to various American decisions, continued:

The guiding principle would seem to be that the onus is on the infringer to provide a reasonably acceptable basis for allocation (See Frank Music Corp

v Metro Goldwyn-Mayer Inc (1885) 772 F 2d 505, at p.516). This may be the basis of allocation typically used by a manufacturer in that industry.

[18]     It is therefore for Resport Limited to provide an acceptable basis for the allocation of the deductions it claims.

[19] The submissions of Mr Russ at [16] above are taken almost verbatim from the headnote of Dart at 102. That in turn relies on the passage set out in the third paragraph of page 119. This reads.

Whether Décor and Rian should succeed in their contentions depends upon whether, as a matter of fact and substance,  the overheads which they seek to have deducted are attributable to the manufacture and sale of the infringing product.  In arriving at an answer, the Court must consider such questions as whether the overheads in  any particular  category were increased  by the manufacture  or  sale  of  the  product,  whether  they  represent  costs  which would have been reduced or would have been incurred in any event, and whether they were surplus capacity or would, in the absence of the infringing product,  have  been  used  in  the  manufacture  or  sale  of  other  products. Dealing with the last of these questions may require the use of the concept of opportunity cost.  If any of the categories are to be brought into account, the proposition to be allocated to the infringing product must be determined and it is here that approximation rather than precision may be necessary.   But such an approach has long been accepted.  As was said in Colburn v Simms (18430) 2 Hare 543 at p.560 [67 E.R. 224, at p. 231]:

The Court, by the account, as the nearest approximation which it can make to justice, takes from the wrongdoer all the profits he has made by his piracy, and given them to the party who has been wronged.

[20]     It also seems to me given it is a question of fact and substance whether the overheads  sought  to  be  deducted  are  attributable  to  the  sale  of  the  infringing products, it is a wide category that should not limited to the matters set out by the High Court immediately prior to the passage cited above.

[21]     The defendant gained revenue from retail sales.  The infringed products make up a small proportion of the total sales.  The general overheads claimed in this case are a necessary part of creating the business structure required to make the retail sales.  It is of course true, as Mr Russ submitted, that even if the defendant had not been selling the infringing products they would have to pay for staff, rent, electricity and other similar overhead items.

[22]     But my understanding of the philosophy behind the total absorption method is that in fairness to the infringer those costs and overheads that make it possible for him to sell the infringing items should be properly brought to an account of profits is for the purpose of preventing unjust enrichment, not to punish.

[23]     For those reasons, I agree with the conclusions of Mr Irvine that a total cost absorption method is the appropriate approach in this case, with his caveat that it should be analysed for the individual selling venues.   I accept it would be almost impossible to attribute exact proportions from the swords and trumpet sales revenue to various standard items of expenditure required to operate a retail business.  But, in my view, to ignore them completely would be to create a windfall for the plaintiff.

[24]     Accordingly, I intend to approach the matter on the basis of Mr Irvine’s methodology.  However, I would not be prepared to allow the other items claimed by the defendant, in addition to the general expenses shown in the accounts of the defendant, because it is apparent insufficient information to verify and justify them has been supplied to either Mr McEwin or to the defendant’s own expert, Mr Irvine. Given the onus is on the defendant I disallow those in total.

[25]     The direct costs have now been established by invoice.  I adopt the figures set out in paragraphs [28] and [30] of Mr Irvine’s affidavit.

[26]     In relation to the swords it is said the appropriate figure is $10 per unit because some swords were sold early on at $10 per unit.   However, there is no evidence that they were capable of being sold at $10 or that the defendant continued to sell them for $10 other than those few at the start.   Furthermore, there was evidence from Mr Meates, that he was prepared to accept a $5 figure when he was still involved.  There is also documentary evidence to show that there was bulk sale to the Crusaders at $3.70.   Accordingly, for those swords sold at $10 that is the appropriate figure.  For those demonstrated by document to be have been sold at $5 that is the appropriate figure.   For the balance, again established by documents

$3.70.

[27]     As for the trumpets, I adopt a figure for selling of $5 per unit.

[28]     In the absence of documentation, I am not prepared to make any allowance for shrinkage.

[29]     In assessing those selling prices I am conscious I have rejected Mr McEwin’s position that trumpets and swords were sold as loss leaders.   I find Mr Irvine’s evidence more persuasive.

[30]     I do not consider that a discount should be allowed because of the right of the defendant to use the Crusaders’ logo.   Mr Irvine suggested that this would have prevented the plaintiff duplicating the sales of trumpets and swords generated by the defendant.  With respect to Mr Irvine that ignores the true basis of an account which is to prevent the unjust enrichment of the defendant.  I would not allow this nor does it seem to me appropriate to allow for taxation.

[31]     In relation to the swords given away for the purchase of three tickets, I do not fully understand Mr McEwin’s answer.   He seems to suggest that this inflates the price of $3.70 paid by the Canterbury Rugby Football Union for swords to $6.70. This is because Resport received a commission of $1 per ticket sold.  I am satisfied from Mr Phillipson’s evidence that the number of swords involved in the promotion were 1,298, and not the 16,774 relied on by Mr McEwin.   But it seems clear, regardless of how tickets were sold, Resport received the $1 commission.   The decision to give away the swords was a decision of the Canterbury Rugby Football Union for swords already purchased.  This should not be taken into account.

[32]     As  to  the  period  for  the  infringement,  for  the  reasons  given  earlier  at paragraph [11], I am satisfied that the date should commence from when the infringement began.  Accordingly, that is 1 March 2002.

[33]     Therefore, based on  the  accepted  sales  figure  shown  as  “Revenue B” at paragraph [49] of Mr Irvine’s evidence, the gross profit is one of $147,000-00.  The overheads, based on the total absorption costing are $97,000-00.  As I have noted, I would not allow the other matters, leaving a sum of $50,000-00 due by the defendant to the plaintiff.  There will be judgment for this sum.

Additional Damages

[34]     As the plaintiff has chosen to seek an account of profits by way of remedy, the question then becomes whether or not they are also entitled to seek additional damages pursuant to s121(2).

[35]     The plaintiff has sought to argue that additional damages in the nature of pecuniary or exemplary damages are available under s121(2) and that this is the case even where the principal remedy sought is that of an account of profits.  Mr Clay, by extensive reference to the United Kingdom and Australian legislation, sought to persuade me that the plaintiff was only entitled to account or damages but not both.

[36]     While the plaintiff argues that an award of additional damages under s121(2) is intended to address the justice of the case by allowing the Court to grant an additional monetary award no matter what other remedies are appropriate, in my view, s121(2) should not be read in this manner.

[37]     In  Australia,  the  Federal  Court  has  held  that  an  award  of  “additional damages” could not be given in a case where an account of profits had been sought (LED Builders Pty Ltd v Eagle Homes Pty Ltd (1999) 44 IPR 24). The equivalent Australian section is expressed somewhat differently from ours. Section 115 of the (CTH) Copyright Act 1968 provides a clear nexus between awarding damages and the jurisdiction to consider additional damages, as it states that that “the court may, in assessing damages for the infringement, award such additional damages as it considers appropriate in the circumstances". This has led the Australian courts to restrict an award of statutory “additional damages” to cases where damages, and not an account of profits is the primary remedy.

[38]     The English position is the same.  The House of Lords in Redrow Homes Ltd v Bett Bros Plc [1999] 1 AC 197 held that additional damages could not be awarded in a case where an account of profits has been elected as the remedy. Their conclusion was based on the interpretation of the counterpart to our s121, s97 of the Copyright, Designs and Patents Act 1988, which states:

97.– …………………….

(2) The court may in an action for infringement of copyright having regard to all the circumstances, and in particular to–(a) the flagrancy of the infringement, and (b) any benefit  accruing  to  the  defendant  by  reason  of  the  infringement,  award  such additional damages as the justice of the case may require.’

[39]     Apart from some minor differences in phraseology, it is virtually identical to our section 121(2).   In Redrow, the House of Lords considered that the phrase “additional damages” ought naturally to be read as being damages additional to an existing assessment of damages.  If an account of profits has been awarded, there is no award of damages for the “additional damages” to cling to.

[40]     In interpreting our own section, I think it is persuasive that the position in both Australia and England is that the statutory entitlement to “additional damages” is not available when an account is sought.  This is particularly pertinent in the case of England, where the relevant section is almost exactly the same as our own, and, in my view, carries the same meaning.  On a principled basis I can see no good reason to interpret the same words in our section any differently from those in England. Given  the  increasing  globalisation  brought  about  by  better  technology,  a  factor which is especially relevant in the intellectual property field, it is beneficial for there to  be  concurrence  between  jurisdictions  in  the  interpretation  and  application  of similar provisions.   This is particularly true when considering the availability of remedies.

[41]     There is a further consideration.  In my view, this interpretation of the section accords with the historical distinction between the remedies of damages and an account for profit.   While damages are available as of right to compensate the plaintiff for their loss, an account is an equitable remedy where the defendant’s wrongfully made profit is awarded to the plaintiff.   This distinction was noted by Mahon J in International Credit Control Ltd and Anor v Axelsen and Anor [1974] 1

NZLR 695.  At page 703 he said:

The claim for an account of profits was originally a remedy ancillary to the granting of an injunction by a Court of equity and was an alternative remedy to a claim for damages for infringement. An order for an account of profits gave to the plaintiff the gains wrongly made by the defendant as a result of infringing the plaintiff’s rights whereas a judgment for damages required the defendant to compensate the plaintiff for the depreciation caused to the copyright as a chose in action. Depending on the particular circumstances, the result of an account of profits and an enquiry as to damages would obviously be different. The effect of s 24 is therefore to preserve by

subs (1) the nature of the existing remedies of an account of profits or enquiry as to damages, and at the same time to add the right to further damages prescribed by subs (3).

[42]     Although  in  this  case  Mahon  J  seemed  to  assume  that  the  “additional damages” could be awarded even in a case where account was ordered, this interpretation  fails  to  take  into  account  the  philosophical  differences  between account and damages.  In fact, I think that this distinction is reflected in s121, as the statute has expressly restricted the remedy for an innocent infringement to account, so that there can be no element of punishment inherent in the remedy.

[43]     Mr Russ attempted to persuade me that the discussion of the Court of Appeal in Wellington Newspapers Ltd v Dealers Guide Ltd [1984] 2 NZLR 66, indicated that s121(2) should be read more widely to allow additional damages to be awarded where the remedies otherwise provided by the section do not provide effective relief. However, this case did not involve an express consideration of whether additional damages were available where the principal remedy was a taking of accounts. There was no discussion about the underlying differences between damages and account. For this reason, despite the indications in that decision that the purpose of s24 (now s121) is to allow additional relief where that is in the interests of justice, I do not think it can be determinative of the current issue.

[44]     He was also of the view that the copyright texts in the New Zealand context supported the view that there was an entitlement to additional damages in the current case.  While I accept that the position may not be entirely clear in the New Zealand texts, at 5.28.3(b) of Frankel and McLay, Intellectual Property in New Zealand (Wellington, 2002), the authors state that the usual principles apply to remedies under the Act, so that a plaintiff must elect their remedy and can not claim both damages and  an account of profits.   Later in that section,  they cite  Redrow  as establishing that as additional damages are additional to compensatory damages, they cannot be sought if an account of profits has been elected (see 5.28.3(b)(iii) at page 316).  Similarly, in LexisNexis Copyright and Design at COP121.4 the authors note  that  s121(2)  deals  with  additional  damages,  which  they state  are  damages awarded in addition to compensatory damages.  They also cite Redrow as authority

for the proposition that additional damages could not be claimed when the plaintiff had elected for an account of profits.  A similar view was taken by John Katz Q.C., in New Zealand Intellectual Property Journal August 1998, p.17.

[45]   Given the international jurisprudence on this subject and the underlying differences between damages and account, I am of the opinion that the plaintiff is unable to claim additional damages under s121(2) given its election to pursue a taking of accounts.  Given this conclusion it is unnecessary to consider the plaintiff’s submission as to additional damages in this case.

[46]     Memoranda as to costs are to be filed within 10 working days of the handing down of this decision.

Solicitors:

Shamy Russ, Christchurch, for Plaintiff

Macfarlane Dougall Stringer, Christchurch, for Defendant