NINTENDO CO LTD v. LIK SANG INTERNATIONAL LTD AND OTHERS

HCA3584/2002

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO.3584 OF 2002

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REASONS FOR JUDGMENT

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1. At the conclusion of this summary judgment application I made the order that summary judgment be entered in favour of the plaintiffs against all four defendants and I also made an order for interim payment. I indicated that I will hand down the reasons of my judgment later. I now give my reasons for entering summary judgment.

2. The plaintiffs are well-known manufacturers and developers and sellers of an extremely popular series of games called Game Boy. The name Nintendo is identified all over the world as being the maker of the popular Game Boy games. The Game Boy games are to be played on the Game Boy consoles manufactured and sold by the plaintiffs. The Game Boy games and the playing of these games are shown, at the hearing, in a video played to me which I found to be of enormous assistance. What the video shows is the playing first of the plaintiffs' games, namely the Game Boy games played with the plaintiffs' Game Boy console by means of the plaintiffs' Game Boy cartridge inserted into the Game Boy console. The video also shows the defendants product which they called Flash Linker, Flash Card and Flash disc which together enable the defendants to uplift the games contained in the cartridges of the Game Boy, copy them onto the computer and then reproduce the games into the defendants' Flash Card. The device of the Flash Linker and Flash Card are ingenious and the selling by the defendants of their Flash product turned out to be extremely successful and very large sums of money had been made by the defendants just in the years 2001 and 2002 which is the operative year that we have been looking at the hearing of the summary judgment application.

3. There are three large issues which need to be resolved at the hearing of the summary judgment application. First, on liability whether the 1st and 2nd defendants, i.e. the companies, have any arguable defence; secondly, whether the directors, that is the personal defendants, have any arguable defence; thirdly, if there is to be summary judgment on liability whether interim payment should be ordered in the circumstances or whether the court should leave the whole question of damages to be assessed. I will deal with each of these alleged defences in turn.

4. First, on liability of the companies. The basis of the liability of the defendants turns on section 273 of the Copyright Ordinance. Section 273 is enacted to prevent people selling machines knowing that such machine will enable unlawful copying to be made where the software was copy protected. Section 273 was directed therefore not at the person who made unlawful copy but person who furnish the means to enable unlawful copying to take place. By analogy with drugs, it is not aimed at the drug addict but at the drug trafficker. Section 273 is not therefore in my view to be given a narrow meaning or read restrictively. Section 273 reads as follows :

"(1) This section applies where-

(a) copies of a copyright work are issued or made available to the public; or

(b) an unfixed performance is made available to the public or copies of a fixation of a performance are issued or made available to the public,

by or with the licence of the copyright owner, the performer or the person having fixation rights in relation to the performance, as may be appropriate, in any form which is copy-protected.

(2) The person issuing or making available the copies or the unfixed performance to the public has the same rights and remedies against a person who, knowing or having reason to believe that it will be used to make infringing copies or infringing fixations-

(a) makes, imports, exports, sells or lets for hire, offers or exposes for sale or hire, advertises for sale or hire, or possesses for the purpose of, in the course of, or in connection with, any trade or business, any device or means specifically designed or adapted to circumvent the form of copy-protection employed;

...

(4) References in this section to copy-protection include any device or means specifically intended to prevent or restrict copying of a work ..."

5. The two hotly contested points by the defendants in relation to the alleged breach under section 273 of the Ordinance are, one that the copyright of the Game Boy games of the plaintiffs are not copy-protected in the sense that they are not issued in a form with device or means specifically intended to prevent or restrict copying of a work within the meaning of section 273(4). The second specific dispute is that the product of the defendants are not device or means specifically designed or adapted to circumvent the form of copy-protection employed, that is to say under section 273(2)(a) of the Ordinance.

6. It would be seen therefore that two hotly contested points of the defendants are firstly to look at the nature of the Game Boy product as a whole and to say whether it can arguably be said that the plaintiffs' product in question were not in a form specifically intended to restrict copying. The second point looks at the nature and quality of the product of the defendants to see whether it could arguably be said that they were not devices or means specifically designed or adapted to circumvent the copy-protection.

7. On the first point, the argument of the defendants is that there was nothing special or unique in the Game Boy Cartridge which houses within it the Game Boy games software so as to rank it as copy-protected within the meaning of section 273(4) of the Ordinance.

8. The Game Boy software product however must not be looked at in isolation. The whole Game Boy product must be looked at, namely the Game Boy console, the way the console is made, the way that console's terminal allow the terminals of the Game Boy cartridge which is of unique manufacture to slot into it with a complete fit, so that when the power of the console is turned on with the a boot code embedded in both the console as well as in the software in the cartridge, recognition is made and a game then can be played by the console taking up from the software in the cartridge and thereby allowing the game be played. The Game Boy game is intended to be played only, and for many years can be played only, by slotting the cartridge of the Game Boy into the console of the Game Boy. The software of the Game Boy game was embedded in a special Rom i.e. a chip fixed into the Game Boy cartridge so as to make the whole Game Boy product i.e. the software embedded in the chip embedded in the unique housing of the special Game Boy cartridge difficult of access and that was of course something that was designed a few years back when technology perhaps was less advance than today. Ordinary people without specialist tools would not be able even now to access the Game Boy software thus stored in the Game Boy cartridge. It does not matter that specialist with skills can gain access. What is important is whether the product is issued in a form with devices and means specifically intended to restrict copy. I must say, speaking for myself as a layman and having handled and played the game on the actual Game Boy console and Game Boy cartridge supplied to me, as well as having watched the video film displaying the way that Game Boy product works, I have no doubt that the Game Boy software housed in the Cartridge is copy-protected within the meaning of Section 273 of the Ordinance. The video film shows how the defendants' clever Flash product managed to overcome and circumvent the copy protection but this only goes to show that nothing is totally safety proof. I have no doubt that the plaintiffs by their elaborate means taken with the Game Boy product intended to restrict copying. The attack was made on some of the affidavits of the plaintiffs in relation to the specific intention of prevention and restriction of copying. The attack was specifically made as to the narrow way Mr Shirk of the plaintiffs described the design of the product. However, one must not look at only a partial picture of the plaintiffs' evidence, Mr Hayward, for example, in his affidavit covers a much wider scope. Looking at the product and the overall evidence of the plaintiffs, I can have no doubt whatsoever that these Game Boy products were specifically designed and intended by the plaintiffs to prevent or restrict copying. In the example I gave at the hearing of a burglar alarm, the question is not whether the burglar alarm is a hundred percent efficient, namely is guaranteed to exclude all burglars no matter how sophisticated or professional the skills of the burglar. Some burglars are extremely inventive and creative and, notwithstanding good burglar alarms, can manage to get in and steal just as in this case the defendants as clever copyright burglars managed to steal the copyright from the plaintiffs. The fact that they have high level skills and succeeded in stealing does not, in any way, detract from the product being specifically intended to restrict copying or to use the expression of the burglar alarm to prevent the entry by burglars. I therefore come to the conclusion on the first major point of dispute that there is no serious prospect at the trial that the defendants will be able to satisfy the court that the Game Boy products of the plaintiffs are not copy-protected and therefore falls outside the protection of section 273.

9. The second point of contention of the defendants that the Flash product of theirs are not specifically designed to circumvent the copy-protection has even less merit. The argument is that these Flash products can be put to innocent uses and that therefore they are not specially designed to overcome the copy-protection. I think the question that should be asked is "what is the substantial purpose of these Flash products of the defendants and what made them such successful products which sell like hotcakes?" And I have no doubt that the reason they sell like hotcakes is because they delivered the means whereby a person would be to able to steal the games of the plaintiffs housed inside the Game Boy cartridge of the plaintiffs and then illegally put the stolen games into the defendants' Flash Card. The plaintiffs sell their Game Boy games at US$50 a game. The blank Flash Cards sell for a fraction of that. I have no doubt whatsoever that although they may be sometimes innocent usage that the product can be put to, the predominant usage of the Flash product of the defendants is to enable protected software of the plaintiffs to be stolen. The defendants' own manual, as well as the defendants internet advertisement, all point to the ability of the Flash products, the Flash Linker, the Flash Card to take advantage of the Game Boy product and specifically designed for the Game Boy product. What is fatal to the innocent user argument is the upstream ability of the Flash product namely the specially designed Flash Linker which is tailor made to enable the Game Boy cartridge to be inserted into it so as to enable the software inside the Game Boy cartridge to be extracted/copied onto the computer. That upstream design has no other legitimate objective except to circumvent the copy protection and to steal the copyright.

10. I have therefore little doubt that notwithstanding all that had been urged upon me by both the counsel for the first three defendants as well as by Mr Kampl himself as the 4th defendant that there is no defence to the claim based on the dispute under section 273(2) that the Flash product of the defendants are not devices and means specifically designed or adapted to circumvent the form of copy-protection employed. I think there is no serious prospect that any judge or jury would hold at a trial that the product of the defendants are not specifically designed to circumvent the copy-protection. In fact as I see it the circumvention of the copy-protection is the very reason for their existence and for their popularity and lays at the foundation of the large profits which the defendants have been making from the selling of these products.

11. I therefore conclude on the first major issue in favour of the plaintiffs, that is to say I hold that the corporate defendants, the 1st and 2nd defendants, have no viable defence in respect of section 273 breach.

12. On the second major issue as to the liability of the personal defendants (3rd and 4th defendants), it had been said that because they are merely directors therefore they do not take on any personal liability. It is also said they are not reckless because they thought the company was not in anyway breaking the law. The summary in table form (handed up to Court) of the personal defendant's involvement in the business of these Flash products and their knowledge of capabilities of the Flash product to do the upstream stealing of the plaintiff's Game Boy games together with the video tape convincingly shows that these two persons deep involvement in this unlawful business of the Flash products. The 3rd and 4th defendants are the real owners of these two defendants - they are the alter ego of the companies and every act done by these companies is really an act of these two persons through the instrument of these companies. These two persons have the expertise, they have the knowledge and they stand to make the large profits. I do not think there is any doubt that they knew what they are doing.

13. It is said that the 3rd and 4th defendants should not be held liable or at least arguably should not be held liable on a summary judgment application because they took legal advice and there was the letter of Bird & Bird referred to and that their acts could not be said to be reckless. In my view, the Bird & Bird letter does not help the 3rd and 4th defendants because it is not a letter setting out the advice given to the defendants by Bird and Bird that they are not liable. It merely contains the assertion of no breach by the companies. There was the history of complaint by the plaintiffs. But notwithstanding that and notwithstanding the 3rd and 4th defendants knowing the strong objections of the plaintiff and the undertaking by the companies not to engage in the objected activities, the 3rd and 4th defendants caused the companies to continue, reckless as to the tort being committed against the plaintiffs. These two persons were reckless because there was large profit to be made. I accept the submission made to be by Mr Clark and in particular what he said in paragraphs 44-48 of his Skeleton Argument. I have no doubt that there is no prospect at the trial that it might be established that the defendants have no personal liability to the plaintiffs. In my view, they are also tortfeasors together with the 1st and 2nd defendants and they all stand to profit and they have profited largely by what they had done. So on the second issue of the personal liability of the 3rd and 4th defendants the defence fails.

14. On the final issue of the interim payment, it is not contested that the plaintiffs sell their product for US$50 a game. The loss of revenue as result of games lost was given at some US$20 million. But what is the sort of likely loss of the plaintiffs which can be established on assessment of damages. The court on assessment will obviously look at very carefully the profit margin of the plaintiffs and other matters to see what is their real loss. But there can be no doubt that it will be very substantial. As an indication of the profit that had been lost by the plaintiffs is the amount of profit that had been generated by the defendants in the one year selling these Flash products. The figures set out in the table submitted to the court during the one year period show a gross profit of something like $17 million. Some of the figures in the tables are disputed. But no matter how one disputes or how one would say that gross profit figure of $17 million must be scaled down, I have no doubt that at the trial of the action on the assessment of damages, a figure very much in excess of $5 million would be shown. I suspect the figure is likely to be much higher than $5 million. So conservatively, I believe quite comfortably this court can hold that $5 million would be the minimum figure that would be proved by the plaintiffs at the end of the day. Interim payment of $5 million therefore is a reasonable order to make and I so order.

15. It follows therefore on the three main issues that had been contested, I hold all of them in favour of the plaintiffs. The detail order that will be drawn up will fairly reflect the judgment that I have given.