KING FUNG VACUUM LTD. AND ANOTHER v.TOTO TOYS LTD. AND ANOTHER

cacv 305/2005

in the high court of the

hong kong special administrative region

court of appeal

civil appeal no. 305 of 2005

(on appeal from HCA NOS. 188/2004 & 4715/2003 (CONSOLIDATED))

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HCA 188/2004

in the high court of the

hong kong special administrative region

court of FIRST INSTANCE

action no. 188 of 2004

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HCA 4715/2003

in the high court of the

hong kong special administrative region

court of FIRST INSTANCE

action no. 4715 of 2003

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J U D G M E N T

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Hon Rogers VP:

1.  This is an appeal against what was intended to be an interlocutory injunction and we are told that all the parties and the court thought it was an interlocutory injunction but it was framed as a final injunction; I will come to that later.  The application eventually came before the judge in August 2005 and he gave judgment on 19 August.

2.  The background to the matter is that the parties are related: the 2nd plaintiff is apparently an uncle or other close relative of the 2nd defendant and originally they worked together.  The 2nd plaintiff appears to have been the senior partner in the arrangement and he appears to have owned 60 per cent of the companies and the 2nd defendant owned, or he and his family owned, 40 per cent of the 1st plaintiff company.

3.  This company was engaged in a number of different businesses, it would appear, straddling Hong Kong and China but at the end of 2002 and beginning of 2003 the parties came to an agreement that they would split and they would go their separate ways.  There is no purpose to be served in this application for considering why they split.  The parties have provided different explanations for that.

4.  What is clear, however, is that there was a series of written agreements following the oral agreement and the one which is relevant for this case is headed “The Product Series Distribution Agreement”, and that sets out that there were

“	4 toy series in total having moulds 326(+/-) sets [list of moulds attached], including series property rights and species registration rights, the estimated value is HK$12 million, the distribution is as follows:-”

And under that it set out that the ‘Screw Series’ and the ‘Space Series’ belong to the 2nd defendant and the ‘Marble Series’ and the ‘Miscellaneous Products’ belong to the 2nd plaintiff.

5.  The defendant’s understanding of that appears to be similar to my own because paragraph 16(c)(ix) of the defence and counterclaim sets out that:

“	The existing moulds, the existing toy products and component parts, the design registration rights of the Marble Series and the Miscellaneous Products and the right to manufacture toy products and component parts from said moulds would be owned by the 1st plaintiff….”

6.  Irrespective of the other matters in that pleading, which appear to me to be rather convoluted and in parts contradictory, it is quite clear that the 2nd plaintiff was to have the rights, inter alia, in what was called the ‘Marble Series’.  This is a series of toys, as I understand, made out of plastics, which contain marbles and they are shown in some of the pamphlets which are exhibited in the case.  There were other arrangements between the parties and in particular the defendants were going to be entitled to sell the ‘Marble Series’ for a period of a year provided they bought them from the 1st plaintiff.

7.  Unfortunately the parties continued to fall apart and matters became worse.  There have been, on my calculation, at least four actions which have been started between the parties.  One was in the District Court in respect of what seems to have been Mainland design rights; that action has been discontinued.  Another action was in the High Court against a former employee of the companies who had joined the 1st plaintiff and it was in confidential information.  Eventually, an interlocutory injunction was granted in a very restricted form.  The effect of that or the purpose of that seems to me to be rather limited considering that the products have been divided up between the parties.

8.  Then there was an action which was started in 2003 by the 1st defendant and that was in respect of a registered trademark, which the defendants say they were entitled to have transferred to them from the 1st plaintiff and that had not been done.  The defence to that action is that there were conditions precedent which had to be complied with but they have not been complied with and therefore there had been no transfer of that trademark.  On the other hand, the plaintiff started an action for infringement of copyright based upon the defendant’s continuing manufacturing of products which the plaintiffs said they were not entitled to do.  Those two last actions were eventually consolidated and hence the defence and counterclaim, to which I have already made reference, was filed on 3 January 2005.

9.  The application for this interlocutory injunction was made on 24 January 2005 and it was returnable on 28 January of that year.  The matter was adjourned on 28 January for evidence to be filed by the plaintiff who was the defendant to the application, and reply evidence by the defendant.  However, the reply evidence was late in coming.  There was an application on 25 April before a deputy judge for an extension of time to file that evidence.  That was granted, but in doing so the deputy judge indicated that the plaintiffs may well ask for an adjournment of the forthcoming hearing of the interlocutory injunction application which was due to take place shortly afterwards.  That happened, the matter was adjourned and eventually the matter was heard in August.  This court did not enquire any further into the reason for such a lengthy delay in the matter coming on for hearing.  It should be said that delays of this length in hearing interlocutory injunctions are most undesirable.  The earliest return dates should normally be fixed without reference to the convenience of the counsel involved.

10.  The injunction which was granted was, as I have indicated, in the form of a final injunction although that appears to have been an error which has been overlooked.  It prevented the 1st plaintiff, whether acting by itself, the 2nd plaintiff, its directors, officers, employees, servants or agents, or any of them or otherwise howsoever from doing any of the following acts, that is:-

“	Publishing or causing to be published, or uttering the words particularised in paragraphs 45(a) and 45(f) of the amended consolidated defence and counterclaim of the 1st and 2nd defendants filed on 12 January 2005 or similar words to the 1st defendant’s customers or potential customers, defamatory of the 1st defendant in order to induce the 1st defendant’s customers to transfer their business with the 1st defendant to the 1st plaintiff or the 1st defendant’s potential customers not to do business with the 1st defendant, but to do business with the 1st plaintiff;
	and
	Publishing or causing to be published or uttering the words particularised in paragraphs 45(a) and 45(f) of the amended consolidated defence and counterclaim of the 1st and 2nd defendants filed herein on 12 January 2005 or similar words to the 1st defendant’s customers or potential customers disparaging of the 1st defendant’s products, in particular the ‘Space Series’ (   ) and ‘Screw Series’ (   ) as referred to in schedule A of the amended consolidated defence and counterclaim of the 1st and 2nd defendants, in order to induce the 1st defendant’s customers to transfer their business with the 1st defendant to the 1st plaintiff or the 1st defendant’s potential customers not to do business with the 1st defendant, but to do business with the 1st plaintiff.”

For that, one has to have reference, of course, to paragraphs 45(a) and 45(f) of the amended consolidated defence and counterclaim.

11.  The matters referred to in those paragraphs are twofold.  In the first place they relate to two letters; one of which was dated 19 December 2003 and the other which was dated 21 January 2004, addressed to customers, one in Hong Kong and one in Singapore.  The letters read the same and they read as follows:

“	Dear Sir,
	Re: Toto Toys Limited
	King Fung Vacuum Ltd., established in 1988, was the parent company of Toto Toys Ltd. until January 2003.  Enclosed is a copy of registration indicating King Fung registered the trademark of Toto Toys in 1989.
	In January 2003, there was a restructure of the companies King Fung Vacuum Ltd and Toto Toys Ltd. whereby the major shareholder of both companies has acquired all the stakes of the parent company King Fung Vacuum Ltd. and taken over the entire manufacturing operation.  The marketing arm of Toto Toys Ltd. was sold to the other partner.  Along with this company change is also the product split whereby each company respectively hold the ownership, intellectual property rights and all aspects of the product lines that are allocated and agreed by both parties on the separation.
	As a marketing arrangement, King Fung has granted Toto to act as their agent in selling their line of products for the year 2003.  As of 1 January 2004 all customers can buy direct from King Fung.
	Nonetheless, it is discovered in recent episodes that Toto Toys Ltd. has copied moulds of King Fung, withheld orders on and manufactured these products for themselves thereby breaching agreements on both intellectual property rights and principal-agent relationships.  Legal proceedings have already been instigated against Toto Toys Limited and the companies involved for buying infringing products.
	Customers are hereby advised to ascertain that no infringement of intellectual property rights will involve when placing orders with Toto Toys Ltd., especially with items like marble run games, roller construction sets, puzzles and premiums.
	Kindly be informed that King Fung Vacuum Ltd. now markets its products through Neu Kreation Limited, website www.neukreation.com
	Please feel free to contact us for further clarification that you may need.”

12.  The other matter that was referred to and specified in paragraph 45(f) of the amended consolidated defence and counterclaim, was the contents of an email.  That email was an email addressed to a potential Australian customer of the 1st plaintiff’s marble series.  It was dated 20 December 2004.  But to understand that email properly, one has to understand the context in which it arose.  It arose because starting in September 2004, the Australian company had approached Neu Kreation and had asked for a quotation on the marble race product.  That quotation was provided.  It was provided for a 55 piece item, the price would be US$5.90 per piece.  Eventually the correspondence went on, the price dropped and on 17 December the price had dropped to a 52 piece item at US$4.79 per piece.  That was on a Friday.  The following Monday Neu Kreation received an email saying:

“	Dear Kimmy,
	To let you know, I have been able to find a 52 piece set, with 10 marbles for $3.00 USD.
	Thank you for you quotes.”

That must have come as a nasty shock to Neu Kreation and no doubt the plaintiffs, because here they were with a product to which they considered they had the rights under the agreement with the defendant.  They originally quoted $5.90 per piece and here was a quotation for effectively the same item at $3.00 per piece.  No doubt a devastating effect on their marketing.  It is not surprising that the same day they sent this email:

“	Your last mail is well received.
	The price you get for the product have 2 possibilities:
	1.	A source where quality is not the priority of their production.
	2.	If you are getting the product from a company called, Toto Toys Ltd.  Then, may we advise you that we are currently suing them for product infringement and breach of contract.  Parties knowingly purchase from them constitute secondary infringement too.
	We hope it’s not the #2 scenario that you are in.  If you are, we gladly furnish you with more details of the lawsuit.
	Meanwhile, it is our desire to co-operate with you and as we have advised you in the meeting, we are probably the best in what we do in terms of variety and quality.  Hence, if it is a must that you look for US$3.00 for 52 pieces, we can try to come up with a configuration especially for you.  You then can have both price and quality.
	Looking forward to hearing from you.
	Best regards.”

Later that day they do, indeed, come up with a product with 50 pieces and 12 marbles at US$3.00 per set.  So that is the effect.

13.  When the matter came before the judge the application was put on the basis that this correspondence should be stopped and that the defendant would suffer irreparable damage if matters were allowed to continue.  The first point that has to be made is in respect of this email.  It seems to me that this email was totally justified.  The 1st plaintiff, if indeed it was the 1st plaintiff, was perfectly entitled to inform its potential customers that it owned the rights to the marble racer products.  This email related to the ‘Marble Series’ and nothing else and there was nothing wrong in them sending this email.

14.  The effect which the counter offers from other parties had had upon the 1st plaintiff’s marketing can be clearly demonstrated.  The 1st plaintiff’s price had been devastated, even when they were close to sealing a deal at over $4.00, they were beaten down 25 per cent at the last minute.  It is unlikely, of course, that owners of copyright would sue their clients, but they can only be in a position to sue a secondary infringer if a secondary infringer has knowledge.  Hence a copyright owner is perfectly entitled to put a potential secondary infringer on notice of its copyright rights and that is what was happening in this case.

15.  Turning then to the letters.  In his judgment the judge appears to have taken a sentence by sentence analysis of the two letters which were sent a year prior to the application for the interlocutory injunction.  That analysis appears to me to be unwarranted.  For example, in the opening words when they were saying that the 1st plaintiff was the parent company, they were not using the terms of the Companies Ordinance.  They were saying that this business had originally sprung from the 1st plaintiff, and that is perfectly right.  They pointed out that the trademark had been applied for and was originally owned by the 1st plaintiff and that was right.  But the letter goes on to say that there was a product split between the two companies.

16.  The letter, when fairly read, shows that Toto Toys has the right to some products and that the plaintiff has the right to other products and really it is simply putting the customers on notice.  It may well be that it oversteps the mark in saying that customers have already been sued, because they had not been sued, but that is something of a minor point.

17.  What is clear, however, is that this form of correspondence had been indulged in by both parties since 2003.  The correspondence exhibited shows that not only the plaintiff had been writing similar letters, or letters to similar effect from 2003, but the 1st defendant had also been writing similar circular letters to customers.  They had even written letters about the District Court action, which had to be withdrawn, to their customers and that was in July 2004.

18.  The difficulty, however, with regard to the defendant’s application, appears to me that they have allowed this to go on and no complaint had been made.  When the 2nd defendant produced the two letters of December 2003 and January 2004, he said in his affirmation that it had “recently” come to his notice.  In their evidence in answer the plaintiffs raised the question of delay.  They said specifically that the two letters to Baby Boom Shop and Twinkle Thinkers Private Limited had been issued a year earlier, or more than a year earlier, and that there had been a long delay.

19.  This was not answered at all.  There was no attempt made by the defendants to answer that, despite the fact that the defendants were late with their evidence and had been given ample time to provide it and had to ask for extensions and that caused the interlocutory injunction hearing to go off.  They made no effort to answer that.  It seems to me that the reason they made no effort to answer that emerges when looking at the copy of the letter of 21 January 2004, which has been exhibited.  That shows that it was faxed from Twinkle Thinkers on 24 March 2004.  It was faxed again on 25 March from “Colliman” and the same copy was then faxed from Edu-Toto on 25 March 2004.  Edu-Toto is apparently the marketing arm in South East Asia for the educational products of the 1st defendant.  It clearly calls for an explanation, if the 1st defendant is going to claim that they were not aware of this letter on that date.  That explanation has not been provided and one can only reach the conclusion that they were well aware of this letter and this correspondence almost a year before they applied for the injunction, let alone 16 months before the injunction was actually granted.

20.  There has traditionally been a strong requirement when interlocutory injunctions have been sought, that the plaintiff must show that it has acted promptly and without delay.  Promptly in the circumstances of interlocutory injunctions has been commonly understood to be a period of six weeks or so of unexplained delay and three months with an explanation given for the delay in making application for an injunction.  Since the American Cyanamid decision the importance of irreparable damage in an application for an interlocutory injunction is paramount.  If there is no irreparable damage demonstrated then the need for an interlocutory injunction has not been shown.  This is important because of the approach that the courts take to interlocutory injunctions.  They are not the trial of the action and the court is concerned with whether irreparable damage will occur before a trial can take place.  It stands to reason that if a party is prepared to allow matters to proceed and takes no action with respect to matters which have been extant for lengthy periods, it lies ill in their mouth to say that there is likely to be irreparable damage and that is the case here.

21.  The defendants have come along a year or so after they had become aware of the facts of which they now complain, and say, “Oh, well, there is likely to be irreparable damage”.  But that is not established simply by so saying.  I would add that they had been doing precisely the same things themselves, for example, their letter of 29 November 2003 addressed to Win Toys Far East Company, that seems to me to be of very similar effect to the letters of which they now complain.  There is also a circular letter of 15 July 2004, evidently sent out by the 1st defendant.

22.  When this matter was put to Mr Coleman, who appears on behalf of the defendants, he placed great stress on a letter sent by his instructing solicitors on 10 January 2005, which he says was putting forward very sensible proposals for the conduct of the parties to stop what might be termed unnecessary slanging between the parties and unnecessary ventilation of their grievances to their clients, which would be damaging to both parties.  But one cannot establish the need for an interlocutory injunction on the basis that there is urgency in the matter simply by writing a letter long after becoming aware of the matters complained of, let alone indulging in similar conduct oneself.

23.  The judge in his judgment appears to have totally overlooked the fact of the delay and its effect on the allegation of irreparable damage.  Simply because the plaintiff was not, after the parties had both been writing letters to clients for well over a year, prepared to come to some accommodation prior to trial does not generate the need for an interlocutory injunction at this stage.  In my view, the judgment has to be set aside, the injunction has to go.

24.  Before concluding this matter there are a number of matters which I have to mention.  The first is that the order made did not contain a cross-undertaking as to damages.  It is perhaps possible that an interlocutory injunction can be granted without a cross-undertaking as to damages.  The books may reveal one such instance but, in my view, it has to be very special circumstances for that to happen.  It was evidently not the intention of the court to grant an injunction without a cross- undertaking as to damages, but unfortunately when the matter was drawn to the court’s attention, when the matter of costs was raised again following the order nisi, the judge considered that that was a matter between the parties.

25.  A cross-undertaking as to damages is not a matter between the parties, it is a matter between the court and the party giving the undertaking.  It is an undertaking which is given to the court and not to the other party, and the importance of that is that the injunction is an injunction granted by the court.  If the cross-undertaking were a matter between the parties the interlocutory injunction would be a matter of contract and would not be susceptible to contempt proceedings, which of course it is.

26.  The next matter is that unfortunately the injunction was framed, as I have already indicated, in terms of a final injunction and that was clearly wrong: it should never have been so.

27.  The final matter is the matter of costs.  The judge made an immediate order as to costs and there was an application to set that aside.  By reason of the judgment which I have already given, that order, of course, has gone.  But I will say this as to the question of costs.  The traditional order on interlocutory injunctions has been that the successful party in any application for an interlocutory injunction would have his costs in the cause.  Following the American Cynamid decision, the practice has frequently been to make both parties costs, costs in the cause.  There is no justification if one applies American Cynamid principles for giving the successful party his costs in any event, or worse still an immediate order as to costs, unless of course, that party has acted improperly or is in some way to be penalised.  It could be, for example, that if a plaintiff seeks an interlocutory injunction and the application is totally baseless and does not even establish, for example, that there is a matter fit to be tried, that the court would then consider that such an order might be made.  But those would be very special circumstances.  Normally an order of either costs in the cause, or perhaps the successful party’s costs in the cause would be appropriate.

28.  I would therefore set aside the order below, allow this appeal and hear the parties as to costs.

Hon Le Pichon JA:

29.  I agree.