KONSTAR INDUSTRIES LTD AND ANOTHER v. HUNG SANG METAL PLASTIC FACTORY LTD AND OTHERS

HCA 1187/1998

IN THE HIGH COURT OF THE

HONG KONG ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 1187 OF 1998

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ASSESSMENT OF DAMAGES

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Introduction

1. The 1^st plaintiff, a company incorporated in Hong Kong for the business of design, manufacturer and sale of household products and its shareholder and director, the 2^nd plaintiff brought suit against the defendants for copyright infringement.  On 6 January 2003, the 1^st and 2^nd defendants consented to judgment with costs of the action, such costs to encompass the plaintiffs’ costs against the 3^rd, 4^th and 5^th defendants, being entered against them by Sakhrani J for, inter alia, permanent injunctions to restrain each of them from further infringing the plaintiffs’ copyright subsisting in three kitchen utensils.  The three products and the packaging copied were the Multi-Mixer (Model no. KS 2008), the Quick Chopper (Model no. 3003) and the 5-in-1 Grater (Model no. 3007).  The action was discontinued against the remaining defendants.

2. Pursuant to the consent judgment of Sakhrani J, the plaintiffs were entitled to apply for an inquiry as to damages, such to include additional damages, in respect of the infringement of copyright by the defendants.  The defendants were also ordered to pay all damages found to be due with interest.

3. The plaintiffs now seek damages to be quantified under the following heads, namely, loss of profits, price reduction, damage to reputation and additional damages under the Copyright Ordinance, Cap. 528.

The evidence

4. The 2^nd plaintiff Mr. Wong Yan Kwong (Mr. Wong), the sole live witness in these proceedings was extensively cross-examined.  Although clearly exasperated at times by the experience and deeply frustrated by the blatant piracy of the defendants and its impact upon his business, he nonetheless came across as a truthful and reliable witness not given to exaggeration in any way.  His four affirmations, adopted as his evidence in chief and expanded upon in evidence, provided the factual matrix of the case.  He was taken through copious documents some of which he explained or elaborated upon in considerable detail.  I had no difficulty accepting his evidence and acting thereon.  I also accepted as truthful and reliable the affirmation evidence of Tsang Yau Choo and Mui Ho Chow Eddie filed on the plaintiffs’ behalf for present purposes.

5. The defence essentially relied on the affirmed evidence of Wong Kai On, a production manager employed by the 1^st defendant and on a number of documentary exhibits (D1a-d and D2a-p) adduced during the cross-examination of Mr. Wong.  It is patent from the evidence of Wong Kai On that despite having agreed to judgment, the defendants maintained denial that their three products, namely the Manual Food Processor model no. 2888 first offered for sale in Hong Kong in about November 1992, the Manual Food Processor model no. 4888 first available for purchase in October 1997 and the revamped 6-in-1 Kitchen Grater model no. 2112 were copies of the plaintiffs’ products.  Instead, they were said to be of original designs albeit with input from similar products generally available in the market.  Such assertion, however, runs contrary to the body of evidence.  That the 3 offending products and their packaging designs bore more than striking similarity to the plaintiffs’ goods is obvious even from a cursory visual comparison.  That they were deliberately manufactured and packaged to look alike and offered for sale demonstrated, in my considered view, a manifest intention to compete unfairly in the same market place.

6.  Mr. Wong’s evidence disclosed that the 1^st plaintiff, a company incorporated in Hong Kong in March 1993 has been carrying on the business of design, manufacture and sale of household appliances.  Mr. Wong was principally concerned with designing and creating new products, a task for which he was suitably qualified.  Being intimately involved in the running of the business, he was well placed to speak to the financial consequences of the defendants’ infringement.  The 3 infringed products were among the company’s best sellers, contributing significantly to business turnovers in the years after incorporation to about 1997.  Business increased exponentially according to the unaudited accounts from a little over $12 million in 1994 to nearly $40 million by September 1997.  The 1^st plaintiff’s products were widely advertised in the print and television media and were successfully marketed and sold in the Americas, Europe, Australia, Japan and the Middle East.  Quality designs, multi-functions, safety and other value-added features distinguished the 3 products in question from other knock-offs or appliances sold with generally similar functions.

7. In early October 1995, the plaintiffs discovered that the 2^nd defendant Hung Sang Metal Plastic Factory Ltd., (Hung Sang) had offered for sale by catalogue food processors that were almost identical to the plaintiffs’ Quick Chopper.  A warning letter via solicitors dated 16 October 1995 was sent to Hung Sang in these terms:

8. It has come to our clients’ attention that the catalogue of one of your company’s food processors advertising the classic model No. 4888 now for sale or offered for sale is substantially similar and/or identical to our clients’ food processor protected under the abovementioned Patents for Design and Registered Design, thereby constitutes an act of infringement and has caused substantial damage to our client’s interests.

9. Our clients take a serious view on this matter and would not tolerate any further infringements of their registered and patented design by you.  In the circumstances, we are instructed to give you warning notice that unless you undertake not to sell or offer for sale the said model forthwith and execute an undertaking letter in our clients’ favour and agree to reimburse our clients’ legal costs within fourteen days (14 days) from the date hereof, legal proceedings shall be instituted against you without any further notice.

10. This elicited a written response from Hung Sang’s lawyers.  The letter dated 26 October 1995 stated:

11. We refer to our letter of today and advise that we are instructed by our client to inform you that one of its customers brought a sample as advertised in our client’s model No. 4888.  As our client liked the said sample, so our client placed it in our client’s said catalogue.

12. We are further instructed that our client had never reproduced or commenced work on the said model.

13. Notwithstanding our client does not know what your client’s Design is, our client agrees not to reproduce the said food processor, however, it is not prepared to pay your costs.

14. The plaintiffs took no further action at the time.

15. With the benefit of hindsight, it is plain on the evidence that the assurance was not worth the paper it was written on.  Wong Kai On admitted that the defendants had photographed and advertised the food processor in question in the trade journal Hong Kong Enterprise ostensibly to test the market.  Albeit the evidence was silent on the public response, it must have been sufficiently encouraging to the defendants for them to have eventually proceeded to manufacture and market their model no. 4888, an illegal copy of the plaintiffs’ Quick Chopper.  They said that only occurred in October 1997, two years after the exchange of solicitors’ letters.

16. Mr. Chow, counsel for the defence submitted that the trade advertisement was no more than an invitation to treat.  As a matter of contract law that must be right.  Even though the evidence did not prove that infringement had begun from about October 1995 nor was it the plaintiffs’ case on their pleadings that it had, it demonstrated a cavalier attitude towards and a lack of respect for the intellectual property rights of the plaintiffs on the part of the defendants.

17. Unusually hard bargaining by an Italian customer in October 1997 soon alerted the plaintiffs to the defendants’ infringement.  The buyer had rejected out of hand the plaintiffs’ quoted price for the Multi-Mixer citing the availability of a much cheaper similar product from Central World, a customer of the plaintiffs.  Discussions with Central World ensued and it was eventually discovered that the supply source was none other than the defendants.  Legal advice was obtained and Fact Finders Ltd was engaged in early November 1997 to conduct an enquiry into the activities of the defendants and of others suspected to have been offering products infringing the plaintiffs’ copyright.  This exercise resulted in probative proof of the defendants’ flagrant abuse for profit of the plaintiff’s intellectual property rights in the three kitchen gadgets, the subject of the ensuing proceedings.

18. The execution of an Anton Piller order in January 1998 resulted in the seizure of a plethora of documentation detailing the defendants’ piracy of the plaintiffs’ 3 products.  The evidence retrieved included Sales Invoices, Purchase Orders by the defendants’ customers, Vouchers, Contract Book, etc.  Such material offered compelling evidence of the defendants’ systematic and profitable exploitation of the plaintiffs’ intellectual property.  It was, therefore, no surprise that the assessment exercise drew heavily from this material.

19. I turn then to address the various heads of claim.

Loss Of Profits

20. It is trite law that the burden of proof rests entirely on the plaintiffs to establish their claim under all heads of damages pursued even where, as here, the defence has made no attempt to put forward a contrary case on quantum.  The defendants led no evidence on the issue and was content simply to challenge the case put forward on quantum.  Even as to this, much of the evidence adduced by the plaintiffs remained unquestioned.

21. To begin, it is in order to visit the legal principles touching on quantification under this head of damage.

22. As to loss of profitable sales, reference is made to The Modern Law of Copyright and Designs, 3^rd ed. para 39.40.  It reads:

23. A successful claimant in an infringement action is entitled to compensation for any harm caused to him which flows directly and naturally from the tortious act.  In order for any particular head of damage to be recoverable, it must be shown that the infringement is the effective cause of the loss. This has to be decided by the application of the court’s common sense.  Although the onus is upon the claimant to show what damage has been suffered, it is not necessary to prove any particular damage in order to succeed since the court will normally assume that the defendant’s wrongful acts have caused harm and if the quantification of it is difficult, or not susceptible of mathematical accuracy, a fair figure for compensation will be awarded.  In a case where the claimant is in the business of reproducing and selling articles protected by the right he will obtain compensation for the profits he would have made on any of the defendant’s sales which would otherwise have been made by him.

24. Damages for infringement are to be liberally assessed as is apparent from the observation of Litton PJ in Oriental Press Group Ltd & Anr v Apple Daily Ltd [1998] 2 HKLRD 976, 980:

25. Damages under this head are compensatory: the award is intended to put the injured party in the same position as if the wrong had not occurred.  Copyright gives to the owner the exclusive right to control and exploit the subject matter, and use by the tortfeasor without licence represents an invasion of those rights.  Where such invasion is by a rival in business – one who competes in the same market -- (the plaintiffs have so labeled the defendants in the instant case) the consequences are obviously more serious and damages should, as a matter of common sense, be liberally assessed. (parenthesis mine)

26. The matter was further expanded upon by Lord Cooke of Thorndon at p.987E of the judgment.  He remarked:

27. (T)he copyright owner is entitled to damages representing the harm done by the invasion of his right, it does not in itself provide much guidance as to how to go about the task of assessment.  The aim is, as confirmed by Lord Wilberforce in the leading case of General Tire and Rubber Co v Firestone Tyre and Rubber Co Ltd (1976) RPC 197 at p. 212, to find the sum of money which will put the injured party in the same position as he would have been if he had not sustained the wrong.  That was a patent case, but the principle applied in it are equally applicable in copyright cases, subject only to any question of additional damages and any problem that may arise in cases where the statutory right to conversion damages still applies.

28. In Meters Ltd v Metropolitan Ltd (1911) RPC 157 (a patent case), Fletcher Moulton LJ stated at p. 164:

29. In the assessment of damages every instrument that is manufactured or sold, which infringes the rights of the patentee, is a wrong to him and I do not think that there is any case, nor do I think that there is any rule of law which says that the patentee is not entitled to recover in respect of each one of those wrongs.  The mode of assessing damages, which I admit is sometimes very convenient, whereby you calculate how many of the orders the plaintiff probably would have got, and then take the full manufacturing profit on each article, and multiply the two together, does not contradict what I have said.  You may estimate the damage by taking the whole of the infringing articles, and making an allowance in respect of each one, or you may consider how many he would have sold, and make a full allowance in regard to those.  They are both, in proper cases, reasonable methods of ascertaining what he has lost.  The latter is certainly only a rough practical method which, in some cases, may be efficient.  It rests on no theoretical basis, because in the eye of the law each article is a wrong.

30. The defendants have contended that it would neither be fair nor just to calculate damages simply by equating the defendants’ sales of infringing articles with the plaintiffs’ loss.  I am sympathetic with this position as not all sales made by the defendants would or must necessarily have been achievable by the plaintiffs.  It is a question of evidence and inference, common sense, and above-all, supply and demand.

31. I wholly accept that the 3 kitchen utensils were an important and lucrative part of the plaintiffs’ sales inventory.  They were new products generating significant income for the plaintiffs even when discounts had been offered.  They were described as best sellers.  The impact of the defendants’ infringing products on the plaintiffs’ business was monumental as Mr. Wong described.  The infringement deleteriously affected pricing, discount and annual business turnovers.  Mr. Wong described Hung Sang as a key player, competitor and latterly leading infringer in the same market.  Whilst it is obvious that there had been cheaper products in the market for a number of years prior to the malfeasance of the defendants with the consequential pressure on the plaintiffs to offer some discounting on sales, these products were generally similar only in respect of functions.  The products displayed in the Trade Development Council catalogues produced by the defence fall within such description.  They are by and large inexpensive common garden-variety kitchen utensils, hardly products that can be viewed as serious contenders for the plaintiffs’ high-end quality goods.  If any serious comparison is to be undertaken, it is only right that like be compared with like.

32. The defendants had taken great pains to market products bearing striking resemblance to the plaintiffs’ products in functions, designs and packaging.  A compelling inference must be that they were obviously targeting the same consumers.  They were after the same piece of pie.  Were it otherwise, why one may ask did they bother to copy the packaging designs as well?

33. In attempting to minimize damage, the defendants drew attention to suits brought by the plaintiffs against other infringers.  This is a material consideration and will be taken on board.  However, the fact that there were other infringers before, during and after the defendants’ tort in no way lessens the gravity of their conduct.  It of course bears upon the issue whether all sales made by them should be attributed to the plaintiffs as loss of profit.

34. Mr. Sakhrani, counsel for the plaintiffs provided very helpful submissions and calculations at the closing stage of the proceedings.  I have checked his figures by reference to the relevant exhibits and they are found to be correct.

35. Mr. Wong was painstakingly taken through the defendants’ Pro Forma Invoices, Purchase Orders, Debit Notes and Contract Book from which a tabulated summary of the defendants’ infringement was compiled.  The tables exhibited in affirmation as WYK-56 and produced at Bundle 1 page 335 details the sales made by the defendants and the profit loss suffered in consequence by the plaintiffs.  The plaintiffs’ calculation was based on all invoices exhibited and can safely be relied upon.

36. Mr. Chow submitted that not all entries in the Contract Book should be equated with actual sales by the defendants.  I do not agree.  Where a transaction has been cancelled, the document would say so as much.  The Contract Book as indeed the documents taken following the execution of the Anton Piller order are primary evidence of the extent of the defendants’ tortious acts.  They speak for themselves and may be qualified, explained or even challenged by other evidence which the defence chose not to lead.

37. Mr. Wong clearly explained the mechanics employed by the plaintiffs to establish Unit Price, Actual Selling Price, Discounting, Profit Margin, Gross Profit Margin and Annual Turnovers.  There was nothing vague about his evidence in this regard.  I wholly accept his evidence.

38. Premised upon the tables, it was submitted that the plaintiffs’ loss of profits amounted to $2,543,312.19.  The defence produced their own calculations which are wholly understated in my view and does not sit squarely with the evidence.

39. Realistically, it will be impossible to conclude that the plaintiffs would have sold the same number of products but for the tort practised by the defendants.  The plaintiffs offered a 10% reduction.  The defence argued that there was no evidence of an unsatisfied demand for the plaintiffs’ genuine articles.  Perhaps this is strictly true.  But it must be a matter of inference.  The mere fact that the defendants were copying and selling near identical products must give rise to an inference that there must have been a lucrative market for the plaintiffs’ goods.  The defendants took the risk because it must have been perceived to be profitable.  No one in his right mind would have done otherwise, seasoned businessmen particularly.  

40. Bearing in mind the presence of other infringers (see exh. D1) and the fact that the plaintiffs was able to continue sales of the 3 utensils at a time when the defendants were busily selling copies, I consider that a discount in the region of 30% would be fair and proper.

41. Accordingly, for loss of profits, I award $2,543,312.19 less 30% or $1,780,318.53.

Price Reduction

42. Where a plaintiff has been forced to lower prices in the face of infringement, he is entitled to be suitably compensated: per Cozens Hardy MR in the Meters case, supra.

43. Price discounting is a normal feature of commercial trade with competition being one of the most salient causes.  Mr. Wong accepted that customers have on occasions requested a lowering of price.  He would accede to or reject the requests as circumstances dictated.  It would be the result of a commercial decision being taken.  It is quite another matter where he felt there was little option to do otherwise in the face of unwarranted and unfair competition as he described.  To stay in business and hopefully to profit at the same time, prices were in fact reduced on account of the defendants’ breach of copyright.  Hung Sang had plainly made business most difficult for the plaintiffs on the evidence which I have accepted.  At one stage, Mr. Wong testified that the very survival of the business was at stake.  It was his evidence that a minimum profit margin of 25% was needed to see any profit at all.  Creating, designing and testing new products were time consuming and costly.

44. The defendants contended that in the presence of other infringers and the absence of any evidence of their impact upon the plaintiffs, they should not be held accountable for any price reduction suffered.  Alternately, damages should be considerably reduced as per their tables submitted in final submissions.  However, one must not lose sight of the fact that they represented a most significant threat to the plaintiffs, having chosen to target the same market for quality kitchenwares.

45. The plaintiffs took as a starting point the unit prices of the 3 infringed products for 1997 to demonstrate the effect of pricing over that year and 1998.  A one-year timeline was adopted with which the defence took issue.  It is thoroughly unrealistic to suggest that price reduction would end immediately upon cessation of infringement following the issue of the permanent injunctions.  The consequence and effect of the defendants’ illegal activities do not end overnight.  Prices need time to recover.

46. A most detailed tabulated summary for the 3 products was handed up at the close of proceedings.  It was helpfully explained.  I am satisfied that the summary properly reflected the evidence on price reduction for the period in question.

47. Under this head of damages, the plaintiffs granted a discount of 50% which seems fair and justified in all the circumstances.  The net amount claimed is $1,863,200.53.  This is the amount I shall award under this section.

Damage To Reputation

48. The plaintiffs’ turnovers for the three products for 1997 and 1998 after conversion to Hong Kong Dollars at the rate of HK$ 7.8 to the US Dollar came to $24, 951,943.06 and $34,253,316.86.  When these two figures are averaged, the average turnover for the two years was $29,602,629.96.

49. One Price Trading Co Ltd v Leung Chui Mui (unrep., HCA 2327 of 1997), a decision of Master B. Kwan is illustrative of the proper approach to assessment under this head of claim.  The learned Master had this to say in relation to the guiding principles:

50. In assessing the award for damage to reputation, the authorities clearly establish that the court must consider all the circumstances of the case and try its best to arrive at a fair and temperate sum for the injury (see Draper v Trist which was applied in the Hong Kong case of Xiang Si Hu v Bailey Record Co Ltd).  In this respect, it is, as Goddard LJ in Draper v Trist said, similar to an action for libel.  In my view, in making an assessment, the court is entitled to take into consideration the following circumstances: Plaintiff’s reputation or goodwill; the conduct of the defendant, whether, for example, the passing-off is fraudulent or deliberate; the circulation of the passing-off items or goods; the publicity given by the defendant to his items or goods; the fact that the defendant has made a gain out of the passing-off; and the effect on the plaintiff or loss to him…

51. (Having reviewed the evidence before her, the master concluded)

52. …I find that a figure representing one to two percent of the plaintiff’s turnover at the time the defendant ceased buying from the plaintiff to be a fair and temperate sum for the injury…

53. In the instant case, there was undoubtedly a deliberate and fraudulent interference with the plaintiffs’ copyright and for good profit.  The infringing goods were on close examination of poorer quality and construction.  The materials used to fashion them were of a lower standard.  The Plaintiffs have over a considerable number of years at much cost and time painstakingly built up a local and international reputation for quality products that were safe to use and of impeccable designs.  The defendants’ by coming along with cheap imitations have assailed that reputation in my view.  An award under this head is clearly called for.

54. A temperate and fair sum on the plaintiffs’ calculations of $444,039.45 being an average of between 1% and 2% of the average turnover for the period seems the right recompense.  I award this sum as well.

Additional Damages

55. This claim is premised on s. 17(3) of the Copyright Act 1956 and s. 108(2) of the Copyright Ordinance, Cap 528.

56. Where appropriate, the court is permitted to award such additional damages as the justice of the case warrants.  In considering whether or not to exercise such jurisdiction, the following matters need to be examined.  They are the flagrancy of the infringement (which is only too obvious in this case as the defendants must have been aware of the rights of the plaintiffs at all material times), any benefit accruing to the defendant by reason of the infringement (the defendants have made considerable gain by selling the knock-offs without any costs incurred for design), and the completeness, accuracy and reliability of the defendant’s business accounts and records (this factor obtains in the present litigation).

57. I was invited to make an award representing 10% of the assessed damages on the authority of Microsoft Corp v Able System Development Ltd [2002] 3 HKLRD 515.  The request is eminently justified on the evidence and I shall do so accordingly.

58. Previously assessed damages under the different heads aggregate at $4,087,558.51.  10% thereof comes to $408,755.85.  This sum is awarded as additional damages.

Conclusion

59. Damages given to the plaintiffs are:

1.	Loss of Profits	$1,780,318.53
2.	Price Reduction	$1,863,200.53
3.	Damage to Reputation	$444,039.45
4.	Additional Damages	$408,755.85
	Total award	$4,496,314.36

60. There shall be interests at judgment rate on the quantum awarded to the plaintiffs from the date of the consent judgment until payment.  Additionally, the plaintiffs shall have their costs of the assessment  including the cost of the adjournment occasioned by my having become indisposed during the hearing with certificate for counsel.  Such costs are to be taxed failing agreement.  The order is nisi in the first instance with liberty to apply within 14 days hereof.