SAN-X CO. LTD. v. TAI PAN BREAD & CAKES CO. LTD. AND ANOTHER

HCA78/2002

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO.78 OF 2002

--------------

--------------

-------------------------

J U D G M E N T

------------------------

1. There are two Summonses before me. By a Summons dated 8 February 2002 the plaintiff applies for an interim injunction against the 1st defendant in respect of alleged acts of copyright infringement and passing off. More specifically, the plaintiff wishes to restrain the 1st defendant from dealing in products bearing any of a number of fictional "bread" characters. By a Summons dated 28 March 2002 the 1st and 2nd defendants seek security in the amount of $520,000 to cover their costs in this action up to and including discovery.

THE INTERLOCUTORY INJUNCTION APPLICATION

Background

1. The plaintiff is a Japanese company which invents, owns and exploits rights in cartoon characters. The cartoons involved in this action are "bread" or "bun" figures known as "the Kogepan characters". These characters take their name from the cartoon figure "Kogepan" first drawn by Ms Takahashi Miki ("Ms Takahashi"), an employee of the plaintiff's, in mid-1999. The word "Kogepan" is Japanese for "over-baked bun".

2. There are four principal Kogepan characters. They are Kogepan (the original character with a roundish head); Over-baked Kogepan (a character with an irregularly shaped head which is also called "Kogepan" by the plaintiff but has been given the description "Over-baked" in this action to distinguish it from the first Kogepan); Kireipan (meaning "cream bun" in Japanese); and Ichigopan (meaning "strawberry bun" in Japanese). Since August 2000 the plaintiff has published five Kogepan story books in Japan showing the characters in numerous different poses. The original drawings for these books were done by Ms Takahashi. Kogepan, Over-baked Kogepan and Kireipan initially appeared in the 1st book, Ichigopan in the 3rd.

3. The plaintiff has licensed selected manufacturers to use the characters in a range of merchandise. In Japan, sales of licensed products have amounted to about $481 million as at December 2001 with some $1,500,000 spent on promoting the products. In Hong Kong, the plaintiff through its Hong Kong agent, RM Enterprises Limited ("RM"), has licensed six companies to use the Kogepan characters in their merchandise, although one licence was terminated at the end of 2001. Each licensee is subject to quality control provisions enforced by RM. A wide variety of licensed goods to a value of over $67 million has been sold here since March 2000 with about $3 million spent on the promotion.

4. The 1st defendant is an established Hong Kong bakery company. The 2nd defendant is the 1st defendant's general manager. In 2001 the 1st defendant applied for a licence to use the Kogepan characters on its bakery products. Negotiations advanced to the point where RM provided to the 1st defendant a number of Kogepan materials ("the Kogepan materials"), including Kogepan story books, computer disks containing different art-poses of the Kogepan characters, Kogepan character plush toys and Kogepan products catalogues. The 1st defendant also submitted draft packaging for bakery products bearing representations of Kogepan to the plaintiff. But the negotiations broke down at the end of July 2001. No licence was granted.

5. The 1st defendant returned the computer disks and story books to the plaintiff in about mid-August 2001. Other Kogepan materials remained with the 1st defendant. These were handed over to the defendants' solicitors in December 2001.

6. The 1st defendant is now making use of five "bread" characters (known as "麵包小豆丁" in Chinese or "Bread Buddies" in English) to promote a range of cookies. The Bread Buddies are respectively called Almond, Sesame, Honey, Croissant and Baguette. The 1st defendant says that the Bread Buddies were created by Mr Lo Ping Shu ("Mr Lo"), Senior Graphic Designer of the 1st defendant's group of companies.

7. Mr Lo joined the 1st defendant's group on 26 June 2001. He says that he was instructed by the 1st defendant's Senior Customer Relations Officer to design cartoon characters for decoration of the 1st defendant's booth at Food Expo 2001, which took place at the Hong Kong Convention and Exhibition Centre in August 2001. In designing the Bread Buddies, Mr Lo deposes that he referred to a photograph of the 1st defendant's breakfast roll and to pictures of different breads in Modern Bread Encyclopedia. He states that the drawings for the Bread Buddies were completed on 5 August 2001 and have since been widely used by the 1st defendant. Mr Lo denies making any reference to drawings of the Kogepan characters in the course of designing the Bread Buddies.

8. The plaintiff says that it first became aware of the use of the Bread Buddies by the 1st defendant in December 2001 when RM saw a gift coupon (no longer in circulation) for the opening of a retail outlet of the 1st defendant. At around the same time RM also found posters promoting the 1st defendant's Christmas and New Year catering services. In January 2002 RM discovered that the 1st defendant was offering cookies for sale in a four-tiered metal tin bearing the Bread Buddies characters. The characters were printed on the packaging, the metal tin, and the individual packets of cookies within each tier.

Discussion

9. The principles for granting an interlocutory injunction are set out in American Cyanamid Co. v. Ethicon [1975] AC 396. At the outset, the Court must be satisfied that there is a serious question to be tried. If a plaintiff meets that threshold requirement, the Court proceeds to assess whether damages would be a sufficient remedy. It begins by asking whether, if the plaintiff succeeds at trial, he would be adequately compensated by damages for loss caused by refusal of an injunction. If yes and if the defendant can pay such damages, an injunction will normally be refused. If no, the Court asks whether the defendant would be adequately compensated for loss caused by an injunction. If yes and the plaintiff can pay such damages, an injunction will usually be granted. Where there is doubt as to either party being sufficiently compensated by damages, the Court considers the balance of convenience, including special factors favouring or disfavouring an injunction. Everything being equal, the Court will usually act to preserve the status quo. Where the arguments for and against an injunction are finely balanced, it may be appropriate for the Court to consider the relative strengths of each party's case. See generally Hong Kong Civil Procedure 2002 Notes 29/1/9 - 29/1/17 (pp.477-9).

Whether serious question to be tried

10. There does not seem to be any dispute between the parties that the plaintiff owns copyright in the original drawings of the Kogepan characters. The Kogepan characters are artistic works made by Ms Takahashi in the course of employment with the plaintiff and the plaintiff as her employer is entitled to such copyright. See Copyright Ordinance (Cap.528), sections 2(1)(a), 5 and 14. What Mr Pao (who appears for the defendants) challenges is the plaintiff's claim that its copyright in the Kogepan drawings has been infringed by the 1st defendant's Bread Buddies. Mr Pao goes so far as to say that the plaintiff has no arguable case on copyright infringement.

11. In assessing whether or not there is a serious case of copyright infringement, it is helpful to bear in mind the following passage from Lord Millett's judgment in Designers Guild Ltd v. Russell Williams (Textiles) Ltd [2001] FSR 113 (HL), at 124-5 (paragraphs 39-41) :

"The first step in an action for infringement of artistic copyright is to identify those features of the defendant's design which the plaintiff alleges have been copied from the copyright work. The court undertakes a visual comparison of the two designs, noting the similarities and the differences. The purpose of the examination is not to see whether the overall appearance of the two designs is similar, but to judge whether the particular similarities relied on are sufficiently close, numerous or extensive to be more likely to be the result of copying than of coincidence. It is at this stage that similarities may be disregarded because they are commonplace, unoriginal or consist of general ideas. If the plaintiff demonstrates sufficient similarity, not in the work as a whole but in the features which he alleges have been copied, and establishes that the defendant had prior access to the copyright work, the burden passes to the defendant to satisfy the judge that, despite the similarities, they did not result from copying.

Even at this stage, therefore, the inquiry is directed to the similarities rather than the differences. This is not to say that the differences are unimportant. They may indicate an independent source and rebut any inference of copying, but differences in the overall appearance of the two works due to the presence of features of the defendant's work about which no complaint is made are not material....

Once the judge has found that the defendants' design incorporates features taken from the copyright work, the question is whether what has been taken constitutes all or a substantial part of the copyright work. This is a matter of impression, for whether the part taken is substantial must be determined by its quality rather than its quantity. It depends upon its importance to the copyright work. It does not depend upon its importance to the defendants' work, as I have already pointed out. The pirated part is considered on its own (see Ladbroke (Football) Ltd v. William Hill (Football) Ltd [1964] 1 WLR 273 at 293 per Lord Pearce) and its importance to the copyright work assessed. There is no need to look at the infringing work for this purpose."

12. The plaintiff puts its case on the existence of a serious case on infringement as follows :

(1) There are the following points of similarity between the Kogepan characters and the Bread Buddies :

(a) All the Bread Buddies have similar unnatural proportions to those found in the Kogepan characters, namely :

(i) a disproportionately large head compared to the body and limbs;

(ii) a short, stubby body;

(iii) short, stubby limbs.

(b) The shape and proportions of the Almond and Sesame characters are similar to the Kogepan and Kireipan.

(c) The Honey and Croissant characters have irregularly shaped heads similar to those of Over-baked Kogepan and Ichigopan.

(d) The Honey character is pink like Ichigopan even though honey is not pink.

(e) The Honey and Croissant characters have round white eyes with black surrounds similar to those found in Kogepan and Over-baked Kogepan.

(f) The Honey character has largely the same facial expression as Ichigopan.

(2) These visual elements constitute a substantial part of the features of the Kogepan characters. It may be that the plaintiff cannot identify a specific drawing of the Kogepan characters which the 1st defendant has copied. But that should not affect the issue of infringement. See Copinger and Skone James on Copyright (14th edn, 1st Supplement), paragraph 7-77 :

"Where a claimant's works consist of a large number of similar drawings as in the case of characters created for a cartoon series, a defendant may well not have copied any one particular drawing but rather an amalgam of the distinguishing features of a character. In such cases, a defendant will not escape by arguing that the claimant cannot identify the particular wok copied...."

(3) On access to the plaintiff's work, Mr Lo's evidence should be viewed with scepticism. The 1st defendant had the Kogepan materials when Mr Lo says he was designing the Bread Buddies. As Senior Designer, Mr Lo must have known about the licence negotiations between the parties which did not break down until a month after he joined the 1st defendant's group. Mr Lo must also have known about the draft Kogepan packaging which the 1st defendant provided to the plaintiff in July 2001.

13. The 1st defendant contends as follows :

(1) The Kogepan character drawings are of limited originality. The characters are little more than dots, lines and curves which Ms Takahashi put together while doodling. For such simple drawings, the law is that there can be no infringement unless there is an almost exact reproduction of a drawing. It is readily apparent that there is no such exact reproduction here. See Kenrick & Co. v. Lawrence & Co. (1890) 25 QBD 99, at 102; Politechnika Ipari Szovetkezet and others v. Dallas Print Transfers Ltd [1982] FSR 529, at 542.

(2) Having been independently designed by its employee Mr Lo, the Bread Buddies are the 1st defendant's own creation.

(3) The plaintiff's allegation of infringement lacks particularity. Paragraph 20 of the Statement of Claim merely alleges that the Bread Buddies are infringements of each and every one of hundreds of Kogepan drawings.

14. In my view the plaintiffs have raised a serious case on the question of infringement.

15. Extreme cases such as a straight line or a circle apart, what is "simple" and what is "complex" must be matters of fact for the trial judge to determine. For instance, I agree with Mr Garland (who appears for the plaintiff) that, from one standpoint, "Snoopy" of "Peanuts" fame is little more than a conglomeration of dots, curves and black splodges, but it would be a brave judge in an interlocutory hearing who, without full evidence, is prepared to hazard the opinion that "Snoopy" is nothing but a "simple" design of limited originality.

16. A visual comparison of the Kogepan characters and the Bread Buddies indicates to me that the features identified by Mr Garland are arguably present in both and that such features could constitute a substantial aspect of the Kogepan characters. That is enough to overcome the threshold test of a serious question to be tried. It would be unwise for a Court to go further at this stage.

17. As for access, I think that there are bound to be questions in anyone's mind arising from the overlap between the genesis of the Bread Buddies and the 1st defendant's abortive negotiations for a licence to use the Kogepan characters. Mr Lo may or may not have designed the Bread Buddies without reference to the Kogepan characters. That is an issue which needs to be tested by cross-examination and is not something which I can decide today.

18. There being a serious question in my view on copyright infringement, it is strictly unnecessary for me to consider whether there is additionally a serious question to be tried on passing off. In deference to the submissions made by both counsel, I will briefly state my view on the matter.

19. My impression was that Mr Garland was relying on copyright infringement as his primary line of attack with passing off only providing a fallback position. Relying on Mirage Studios and others v. Counter-feat Clothing Company Limited [1991] FSR 145, Mr Garland put his argument thus :

(1) Consumers are apt to be misled by the similarities between the Kogepan characters and the Bread Buddies into believing that the 1st defendant's use of the Bread Buddies resulted from a licence granted by the plaintiff. This constituted misrepresentation.

(2) The plaintiff's passing off claim was in the nature of a quia timet application. The 1st defendant's products having only been commercially available since January 2002 in unspecified quantities, it has not been possible to gauge empirically whether the public have been misled by the similar appearances of the Kogepan characters and the Bread Buddies.

(3) Insofar as passing off requires proof of damage to the plaintiff's business and goodwill as a result of a misrepresentation, the plaintiff's licensing programme was at risk. Not only is the plaintiff losing royalties from the 1st defendant, but potential licensees would be deterred from applying to use the Kogepan characters. This is because the 1st defendant's continued use of the Bread Buddies would have the effect of diluting or trivialising the plaintiff's exclusivity in Kogepan's identity. The plaintiff will additionally lose the ability to control the types or quality of products on which the Kogepan characters are used. The resultant loss would be unquantifiable and incapable of being adequately compensated in damages.

20. Mr Pao submitted that the plaintiff had no arguable case on passing off. Relying on Tot Toys Ltd v. Mitchell (t/a Stanton Manufacturing) (1992) 25 IPR 337 (High Ct. NZ), Mr Pao's case had three limbs :

(1) The plaintiff could not have any right to exact a fee for the merchandising of the Kogepan characters because the figures were simple and of little originality.

(2) There is no misrepresentation. Assume that the Bread Buddies are similar to the Kogepan characters. The 1st defendant would not be passing of his products as those of someone else. Instead the 1st defendant would be attempting to identify his product with positive qualities which Kogepan or Kogepan-like characters might be thought by the public to possess: e.g., cuteness, cuddability, lovableness. The consumer is not misled into thinking that he is buying something other than the 1st defendant's product. Nor could he be deceived, as the 1st defendant's packaging prominently displays the 1st defendant's logo.

(3) The question of damages in character merchandising cases is problematic. Fisher J in Tot Toys (at 377-8) explains the difficulty thus :

"The plaintiff has a right to exact a fee for character merchandising only if he has an enforceable right to prevent others from using his image without his permission. In the present context he has a right to prevent others only if he can sue them in passing off. He can sue them in passing off only if he can show a loss. The only loss he can point to is the loss of the right to insist upon a fee for the character merchandising. So the argument is circular. Unless there is some damage other than loss of potential character merchandising rights, one might think that the action would fail on that ground.... In short, it may be difficult to establish all the ingredients necessary for a passing off cause of action if on the subject of damage the plaintiff can point to nothing more than the loss of anticipated licence fees."

21. In my judgment there is equally a serious question to be tried on passing off.

22. Again on casual visual inspection I do not think that the possibility of the Bread Buddies being mistaken for the Kogepan characters can be precluded. The two sets of cartoon are arguably similar. I have already dealt with Mr Pao's point on simplicity and complexity.

23. The question posed by Tot Toys as to whether there can be an action for passing off in character merchandising cases where the only damage complained of is loss of anticipated licensing fees, while possibly an interesting legal question, is not something that I can consider in an interlocutory hearing. As Tot Toys itself points out (at 378-9), there are jurisdictions which have found that "in this extended passing off field it is ... enough ... to show loss in the sense that the applicant has lost the chance of getting a fee from the respondent". See, for example, in Australia the case of Hogan v. Koala Dundee Pty Ltd (1988) 12 IPR 508. In an interlocutory injunction application in England, Browne-Wilkinson VC accepted that the loss of royalties and the reduction of the value of the licensing right to the Teenage Mutant Ninja Turtle characters could constitute damage for the purposes of a passing off action. See Mirage Studios (at 156). Wadlow, The Law of Passing-Off (2nd edn), 5.41 (also cited by Mr Pao) is critical of the Mirage Studios decision. The debate only highlights the fact that the use of passing off actions to protect character merchandising is (to borrow Lord Hoffmann's expression in Designers Guild at 122 (paragraph 26)) a hedgehog of a question, over which subtle foxes are bound to hold many views. It is far from a straightforward legal question of the type that one might sometimes be prepared to resolve even in an interlocutory hearing.

24. Accordingly, I am satisfied that on both copyright infringement and passing off the plaintiff has hurdled the threshold of showing a serious question to be tried.

Whether damages an adequate remedy

25. I have referred to Mr Garland's submission on the damages resulting from the 1st defendant's activities. Mr Pao suggests that the alleged impossibility of quantification was greatly exaggerated. The damages can be quantified (Mr Pao says) even though it may be difficult to do so. For example, Mr Pao thought the plaintiff could have projections of the number of licence applications expected in the future and these might be used establish a baseline for fees foregone or lost through the 1st defendant's use of the Bread Buddies.

26. In contrast Mr Pao submitted that the 1st defendant stood to lose irreparable damage by any interim injunction. If the 1st defendant were restrained, then :

"with hygiene and health related problems in the food supply to the public breaking out far more frequently than before, the sudden withdrawal of a line of [the 1st defendant's] product could well be viewed by the purchasing public as die to similarly related problems" (see Affirmation of Tang Kwok Lay, paragraph 26).

This would result in damage to the 1st defendant's goodwill and business.

27. When it was pointed out to Mr Pao that the plaintiff was not seeking to restrain the sale of any products of the 1st defendant's bakery products, but only to enjoin the use of the Bread Buddies to promote such products, Mr Pao asserted that, as far as the public was concerned, a change in packaging of the 1st defendant's products would signal that something may be wrong with the products themselves. Re-packaging would not help the sale of the 1st defendant's cookies which had come to be associated with the Bread Buddies since August 2001.

28. Further, although acknowledging that there was no affidavit evidence on this point, Mr Pao argued that, trial being a likely two years down the road, even if the defendants prevailed at the end, it would be a pointless victory. Commercially, the Bread Buddies having been out of circulation for so long in consequence of any interim injunction, there would be no reason for the 1st defendant to revert to such characters for future promotions. The public would have forgotten the Bread Buddies and their popularity would be irretrievably lost. Thus, Mr Pao submitted, the grant of an interim injunction now would dispose of the substantive dispute in practice.

29. I am not persuaded by Mr Pao's submission. Without evidence that a change of packaging would of itself turn consumers away from the 1st defendant's products, I cannot accept that the dire consequences predicted by Mr Pao would ensue from an injunction. Business ventures often change their packaging over time. It seems unlikely that a mere package revision will be enough to destroy any consumer loyalty which has built up around a particular food product. Similarly, on the effect of a two-year wait to trial, there is as Mr Pao concedes, just no evidence on this before the Court. There is no factual material on which I can assess the likelihood or otherwise of what Mr Pao forecasts.

30. On the other hand, I agree with Mr Garland that damages resulting from the 1st defendant's activities, if wrongful, may not be adequately compensated should the plaintiff win at the end of the day.

31. Similar heads of loss as those argued by Mr Garland were pressed in Mirage Studios on the Vice-Chancellor who at 152 said this :

"The loss likely to be suffered by the plaintiffs is of two kinds ... First, they will lose royalties in the sense that goods which would be or might be manufactured under licence from them will go elsewhere and also the amount of royalties that they can seek to get from those who do take licences from them is likely to be reduced since the market will not be an exclusive one. The second type of damage they will suffer will, it is said, be loss of control over the quality of the garments on which reproductions of the Ninja Turtles and related pictures are used. The evidence is (and I think is uncontroverted) that the value of a name or characters such as these is linked to maintaining the quality of the goods to which it is attached. If the goods go down-market or are poorly made, that rubs off on the value of the copyright in the character and thereby reduces its value. The loss of royalties head of damage, though possibly difficult to quantify, is certainly capable of quantification. The loss of reputation through bad quality is more difficult. Certainly, I have been shown products which do not indicate that the Turtle characters licensed by the defendants are always being applied to very high class products. It is difficult to know how one would set about at the trial quantifying that."

The Vice-Chancellor clearly thought it was possible (although potentially difficult) to calculate both the loss of royalty for which the 1st defendant would be liable in the event of infringement and the loss of exclusivity and deterrence of potential licensees. But, while I agree that the loss of any royalty payable by the 1st defendant would be capable of quantification, I respectfully disagree on the possibility of calculating damages resulting from loss of exclusivity and deterrence of licensees. One may produce a "projection" as Mr Pao suggests, but there are likely to be so many variables involved in the exercise (e.g., merchandise type, market sector, economic conditions, etc.) that any such exercise would be little more than guesswork. One would have little confidence that a projection corresponded with reality to a significant degree.

32. The potential loss that the plaintiff faces could be great and I am doubtful that such loss can adequately be compensated for or quantified. I therefore conclude that, on damages, the American Cyanamid test points to the grant of an injunction.

Balance of convenience

33. Stepping back to consider the overall balance, it seems to me that the 1st defendant has a point that, if an interlocutory injunction is to be granted, the plaintiff albeit a substantial Japanese company has no apparent assets in Hong Kong and I should order fortification.

34. There was some discussion in Court over the amount of any fortification I might be minded to order. Mr Garland offered $200,000, commenting that without any evidence from the 1st defendant the exercise of deriving a figure was akin to "plucking a number from the air". I invited Mr Pao to comment on the $200,000 figure. But he declined to give any counter-figure, since (he explained) the plaintiff had not previously made any offer of fortification and the 1st defendant had thus not addressed its mind on a quantum. There being no other figure on the table, I propose to order that an interlocutory injunction be granted subject to the plaintiff providing suitable fortification in the amount of $200,000.

Security for costs

35. Mr Garland did not dispute the defendants' entitlement to security. The parties only differed over amount and were content to leave it to me to determine quantum after hearing only a minimum of submission. Mr Pao asked for $520,000. Mr Garland contended for $350,000. Mr Pao noted that some $200,000 on a solicitor-client basis (about $120,000 on a party and party basis) had already been incurred by the defendants. He also told me that the figure of $520,000 was calculated on a party-and-party basis.

36. Having perused the Skeleton Bill of Costs exhibited as "PPK-2" to the Affirmation of Pang Pui Ki, I believe that the times and amounts incurred or estimated by the defendants are generally reasonable. I therefore propose to order security in the amount of $500,000 (rounding down slightly from the figure sought by the defendants) to cover the defendants' costs up to and including discovery.

Consequential matters

37. I shall now hear counsel on the appropriate form of orders for an interim injunction, fortification and security for costs. I also invite submissions on the costs of both Summonses.