LEE TO NEI v. HKSAR

FACC Nos 5 and 7 of 2011

IN THE COURT OF FINAL APPEAL OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

FINAL APPEAL NOS 5 AND 7 OF 2011(CRIMINAL)

(ON APPEAL FROM HCMA NOS 403 AND 500 OF 2010)

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FACC No 5 of 2011

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J U D G M E N T

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Chief Justice Ma :

1.  I agree with the Judgment of Mr Justice Ribeiro PJ.

Mr Justice Chan PJ:

2.  I agree with the Judgment of Mr Justice Ribeiro PJ.

Mr Justice Ribeiro PJ:

A. The issues

3.  These two appeals were heard together.  The defendants were each convicted of possessing for sale goods to which forged trade marks had been applied, contrary to section 9(2) of the Trade Descriptions Ordinance (“TDO”).[1]  Their appeals each raise the same questions of law, namely:

(a) whether the defence to the section 9(2) offence provided by section 26(4) of the TDO can only be made out if a defendant discharges the persuasive burden of proving the matters specified;

(b) if so, whether that derogates from the constitutionally protected presumption of innocence; and

(c) if so, whether section 26(4) should be read down as imposing only an evidential burden, with the persuasive burden remaining throughout on the prosecution.

In the light of the answers to these questions, it would fall to be decided how the two cases should be disposed of.

B. The statutory provisions

4.  Section 9(2) provides:

“Subject to the provisions of this Ordinance, any person who sells or exposes or has in his possession for sale or for any purpose of trade or manufacture, any goods to which any forged trade mark is applied, or to which any trade mark or mark so nearly resembling a trade mark as to be calculated to deceive is falsely applied, commits an offence.”

5.  Section 26(4) is in the following terms:

“In any proceedings for an offence under section 9(2) it shall be a defence for the person charged to prove that he did not know, had no reason to suspect and could not with reasonable diligence have ascertained, that a forged trade mark had been applied to the goods or that a trade mark or mark so nearly resembling a trade mark as to be calculated to deceive had falsely been applied to the goods.”

C. The decisions below

6.  Mr David J Dufton, sitting at Kwun Tong Magistrates Court, tried both cases at first instance.  I shall in this judgment refer to the first as “the Lee Case”,[2] and the second as “the Lau Case”.[3] 

C.1 The Lee Case

7.  The appellant, Lee To-nei (“Lee”), was a shareholder in and a former director of Pacific Pharmaco Limited which operated a pharmacy in Mong Kok.  On 25 February 2009, he was present in the shop and sold to an undercover officer of the Customs and Excise Department a bottle of Chinese herbal medicine which bore the trade mark “Man Shan”[4] which was suspected of being forged.  Twenty-five other similar bottles were found in the shop.

8.  The learned magistrate found that the prosecution had duly proved that Lee was in possession of all 26 bottles, that the trade marks they bore were forged and that Lee had possessed them for sale.  He held that section 26(4) placed the persuasive burden on the defendant so that the defence would only avail him if he could prove on a balance of probabilities that he did not know, had no reason to suspect, and could not with reasonable diligence have ascertained, that the trade marks were forged. He found that Lee did not actually know and had no reason to suspect that they were false, but found that with reasonable diligence Lee could have discovered that the trade marks were forged and therefore that Lee had failed to make out the defence on a balance of probabilities.[5]  No constitutional issue was raised at the trial.

9.  Lee’s appeal against conviction and sentence came before Deputy High Court Judge E Toh.[6]  Her Ladyship upheld the magistrate’s findings and approach to the statutory provisions but was also faced with the constitutional challenge under discussion.  She considered the decisions of this Court on reverse onuses and held that in the circumstances of the present case, guidance was to be found in two English decisions, namely R v S[7] and R v Johnstone.[8]  Following those decisions, the Judge held that it was rational and proportionate for section 26(4) to impose the persuasive burden of negativing knowledge, etc, on the defendant.[9]  However, her Ladyship reduced the sentence from 6 months’ to 8 weeks’ imprisonment.

C.2 The Lau Case

10.  The 1^st appellant, Lau Hok-tung (“Lau”) and the 2^nd appellant, Wong Shu-wah, were both directors of the 3^rd appellant, Y & Fung Garment Co Ltd (“Y & Fung”).  Y & Fung operated two warehouses and eight shops which sold garments.  Customs and Excise officers raided those premises after conducting what were termed “test buys” at each shop, resulting in the defendants being charged with possessing for sale or other purposes of trade 8,337 garments to which had been applied forged trade marks.  The trade marks forged were those of Abercrombie & Fitch, Reuhl, Hollister, Lacoste, Timberland and Tommy Hilfiger.

11.  In a careful and thorough Statement of Findings, the magistrate found it proved beyond reasonable doubt that the defendants were in possession of all the goods seized for the purpose of sale or trade and, save for a relatively small number of garments, that they bore forged trade marks.  Turning to section 26(4), which he again regarded as imposing a persuasive burden on the defendants, he found that there were substantial reasons for suspecting that the trade marks were forged and also that the defendants could, using reasonable diligence, have discovered that this was so. He therefore found that the defendants had failed to make good the defence and convicted them as charged.  No constitutional issue was raised.

12.  He was upheld on appeal by McMahon J.  On the constitutional challenge, the Judge also held that the imposition by section 26(4) of a persuasive burden on the defendants was rational and proportionate, adopting the rationale of R v S[10] and R v Johnstone[11](to which I shall return).  Lau’s appeals against conviction and against his sentence of 8 months’ imprisonment were dismissed.

D. The reverse onus principles applied to section 26(4)

13.  The presumption of innocence is constitutionally protected[12] and the principles applicable when statutory reverse onus provisions encroach upon such protection are well-established.  They are laid down in a number of decisions of this Court, notably in HKSAR v Lam Kwong Wai,[13] HKSAR v Hung Chan Wa[14]and HKSAR v Ng Po On.[15]

14.  The starting point is the basic rule of the criminal law that an accused person is presumed innocent and that the prosecution bears the burden of proving his or her guilt beyond reasonable doubt.[16] However, it is clear that a statute may reverse the burden, abrogating the presumption by placing a persuasive burden on the defendant to prove specified matters on a balance of probabilities as a condition of avoiding liability.[17]

D.1   Does section 26(4) reverse the onus?

15.  The first task is therefore to construe the impugned provision to determine whether it does reverse the onus.[18] As was pointed out in Ng Po On,[19] little discussion is needed where the relevant provision expressly places the burden on the accused.  Section 26(4) is such a provision.  It says in terms that “it shall be a defence for the person charged to prove” the specified matters and so clearly does reverse the burden.

D.2   Does section 26(4) derogate from the presumption of innocence?

16.  The second task is to ascertain whether such reversal of the onus engages and derogates from the presumption of innocence. In the case of section 26(4), the answer is plainly “Yes”. 

17.  The burden placed on the prosecution by section 9(2) is relatively light.  It must first prove possession of the goods by the defendant in circumstances establishing that they are possessed for sale or other purposes of trade.  Secondly, it must prove that the trade marks applied to those goods are in fact forged.

18.  However, the statutory intent is plainly not to penalise the possession of goods bearing forged trade marks as a matter of absolute liability in respect of the falsity of the marks. Sections 9(2) and 26(4) must be read together.  The gravamen of the offence is that the accused possesses the offending goods knowing, or having reason to suspect that they bear forged trade marks or in circumstances where, using reasonable diligence, he could have ascertained that the marks are false.  I shall call these collectively “the three conditions”.

19.  The offence might of course have been drafted so as to require the prosecution to establish one of the three conditions beyond reasonable doubt.  Instead, it places the burden on the accused to negate all three.  If at the end of the day, the court is not satisfied that the accused has successfully negated all three conditions on the balance of probabilities, the defence fails and (assuming that the prosecution has proved the necessary possession) conviction follows.  This is so even if the court accepts that it may be (but not that it probably is)the case that all three conditions are absent.  Thus, conviction would follow even if a reasonable doubt exists as to whether the accused knew, had reason to suspect or could with reasonable diligence have ascertained that the marks were forged.  The possibility of a conviction in such circumstances is the hallmark of a derogation from the presumption of innocence.

D.3   Justifying derogation: the rationality test

20.  While that consequence of a reverse onus is prima facie objectionable,[20] the presumption of innocence is not absolute.  The constitutional validity of a provision like section 26(4) is capable of being upheld if it passes the rationality and proportionality tests, the burden resting on the prosecution to justify the derogation with reasons which must be compelling.[21]

21.  The rationality test involves asking: “Is the derogation rationally connected with the pursuit of a legitimate societal aim?” In the present appeal, defence counsel in both cases concede that section 26(4) passes that test. 

22.  The concession is rightly made.  The protection of trade marks against forgery is obviously a legitimate societal aim, both from the point of view of protecting the mercantile interests of the registered owner and of protecting the consumer.  With many classes of brand-name goods, including medicines, forged trade marks raise serious concerns regarding consumer health and safety.  It is self-evident that a reverse onus provision requiring persons who deal in goods bearing trade marks to demonstrate reasonable diligence to ascertain that the marks are not forgeries is rationally connected to those legitimate aims.

D.4   Justifying derogation: proportionality

23.  The key issue in this appeal concerns the proportionality test.  Since it relates to the fundamental right to be presumed innocent, a stringent standard, sometimes called the standard of “intense scrutiny” or “minimal impairment”, applies.  One must ask whether section 26(4)’s imposition of a persuasive burden on the accused instead of the prosecution is no more than necessary to achieve the legitimate aims of the legislation.

24.  As previously noted, the Judges in both cases upheld section 26(4) as a proportionate measure. In doing so, they adopted the rationale of the English Court of Appeal and the House of Lords in R v S[22] and R v Johnstone[23] respectively.  It is therefore necessary to examine those decisions more closely.

D.4a The English cases

25.  R v S was a case where the defendant was charged with selling counterfeit clothing and footwear which he said he believed was genuine.  In R v Johnstone, the defendant was charged with selling bootleg compact discs and audio cassettes claiming that, having taken advice from a reputable trade mark attorney, he believed this to be lawful.

26.  The charge in each case was brought under section 92(1) of the Trade Marks Act 1994 (“TMA”) which made it an offence (among other variants of such conduct) for a person, with a view to gain and without the consent of the proprietor, to sell or to possess with a view to sale goods which bear a sign identical to or likely to be mistaken for a registered trade mark (ie, a false or forged trade mark).  The offence-creating provision was therefore very similar to section 9(2) of the TDO.

27.  Section 92(5) of the TMA is important.  It sets out a defence to a section 92(1) charge in the following terms:

“It is a defence for a person charged with an offence under this section to show that he believed on reasonable grounds that the use of the sign in the manner in which it was used, or was to be used, was not an infringement of the registered trade mark.”

I shall return to compare this provision with our section 26(4).

28.  Their Lordships emphasised the importance of the policy objectives underlying the offence.  Davis J, giving the judgment of the Court in R v S, put this as follows:

“People commonly buy products bearing a particular trade mark just because the products bear that trade mark: as representing or connoting some or all of the characteristics of reliability, quality and fashion. It is precisely for that reason that there are those who seek to counterfeit goods bearing such marks: counterfeiting being an ever-increasing problem. Moreover there are also important considerations of public safety involved: counterfeit goods (in the form of toys or packaged foodstuffs or motor vehicle parts for example) have in numerous ways over the years proved to be highly dangerous. A degree of protection, both in the mercantile and public interest, in respect of trade marks, going beyond the civil remedies available, is plainly desirable.”[24]

29.  And in R v Johnstone, Lord Nicholls of Birkenhead (with whom the other members of the House of Lords agreed) stated:

“Counterfeiting is fraudulent trading. It is a serious contemporary problem. Counterfeiting has adverse economic effects on genuine trade. It also has adverse effects on consumers, in terms of quality of goods and, sometimes, on the health or safety of consumers. ... Protection of consumers and honest manufacturers and traders from counterfeiting is an important policy consideration. ... Those who trade in brand products are aware of the need to be on guard against counterfeit goods. They are aware of the need to deal with reputable suppliers and keep records and of the risks they take if they do not.”[25]

30.  Against that background, their Lordships held that in imposing a persuasive burden on the accused to establish a defence under section 92(5) of the TMA, the legislation was both rational and proportionate, justifying derogation from the presumption of innocence as a measure compatible with Article 6 (2) of the European Convention on Human Rights.[26] Following suit, both Judges below held that the persuasive burden imposed by section 26(4) of the TDO was likewise justified under our constitutional provisions.

D.4b The need to be specific in the proportionality analyses

31.  It should at once be acknowledged that the policy objectives mentioned above apply with equal force to section 9(2) and the defence created by section 26(4) under the TDO.  However, that does not mean that the proportionality analysis necessarily leads to the same conclusion in relation to our legislation.

32.  Every assessment of proportionality – the inquiry, in a case like the present, as to whether a particular encroachment on a constitutionally protected right is no more than is necessary to achieve the legitimate aims of the legislation – must relate to the specific statutory provision in question.  This was recognized in Ng Po On[27] where Lord Bingham of Cornhill was cited as stating:

“The justifiability of any infringement of the presumption of innocence cannot be resolved by any rule of thumb, but on examination of all the facts and circumstances of the particular provision as applied in the particular case.”[28] (Emphasis supplied)

33.  The need to focus on the relevant provision was also acknowledged in R v Johnstone itself.  Having noted that the consequence of reversing the burden is to permit a conviction in spite of the fact-finding tribunal having a reasonable doubt as to the guilt of the accused, Lord Nicholls stated:

“This consequence of a reverse burden of proof should colour one's approach when evaluating the reasons why it is said that, in the absence of a persuasive burden on the accused, the public interest will be prejudiced to an extent which justifies placing a persuasive burden on the accused. The more serious the punishment which may flow from conviction, the more compelling must be the reasons. The extent and nature of the factual matters required to be proved by the accused, and their importance relative to the matters required to be proved by the prosecution, have to be taken into account. So also does the extent to which the burden on the accused relates to facts which, if they exist, are readily provable by him as matters within his own knowledge or to which he has ready access.”[29] (Emphasis supplied)

D.4c Differences in the Hong Kong provision

34.  A comparison of section 26(4) of the TDO with section 92(5) of the TMA reveals a crucial difference between the two defences.  In the English provision, the defence is made out if the accused can show “that he believed on reasonable grounds” that the way the false mark was used or to be used involved no infringement of the registered trade mark.  The defence turns, in other words, on what the accused himself believed and the grounds for his belief.

35.  The first two conditions in section 26(4) have a similar effect.  The first relates to the defendant’s knowledge of the falsity of the marks.  It is wholly subjective.  The second has an objective element relating to the existence of facts which are said to give reason to suspect falsity but also an important subjective element concerning the defendant’s knowledge of those facts.

36.  However, the third condition makes our section qualitatively different from the English provision.  It requires the defendant to satisfy the court that he “could not with reasonable diligence have ascertained” the falsity.  This condition does not involve any inquiry into what the defendant actually knew or believed.  It is immaterial whether he thought there was or was not any likelihood of him discovering the forgeries by using reasonable diligence.  It depends on what the court finds that he could have discovered, using reasonable diligence.

37.  As Deputy Judge Toh rightly held in the Lee Case, this third condition imports an objective test.  She cited the Court of Appeal’s decision in HKSAR v Kong Hing Agency Ltd[30] in support.  That was a case involving section 12 of the TDO which contains a very similar defence in relation to the offence of importing or exporting goods to which a forged trade mark is applied.[31]  Giving the judgment of the Court, Ma CJHC (as Ma CJ then was) stated:

“All three elements must be made out before the defence is available. It is therefore not enough for an importer or exporter simply to demonstrate that there was no actual knowledge or suspicion on his or her part. It must also be shown that with the exercise of reasonable diligence, any false trade description or forgery could not have been discovered. It is this third element that often causes the most difficulty in application in practice. ... The use of the word ‘reasonable’ connotes an objective test and requires the court to examine just what could reasonably have been expected of the importer or exporter in the circumstances to find out about the description or trademark of the goods. The inquiry is therefore: what could the importer or exporter have been reasonably expected to have done in the circumstances? ... It is this objective test that is relevant rather than what an importer or exporter in any given case has actually done. Conceptually, what an importer or exporter has actually done will not assist him if he could or ought reasonably have done more; equally, even if nothing has been done, an accused may escape liability where the exercise of reasonable diligence would not have resulted in the discovery of the use of false trade descriptions or forged trademarks. The test is subjective only in that one must of course look at the particular circumstances of the accused.”[32]

38.  McMahon J in the Lau Case adopted a similar approach. He suggested assessing the accused’s conduct against what could typically be expected of a person dealing with the goods:

“In my view issues relevant to the elements of the section 26(4) defence of ‘no reason to suspect’ and ‘reasonable diligence’ may overlap and that where there are aspects of a defendants’ dealings with goods, or of the characteristics of the goods themselves which lie outside that which would be expected in a typical obtaining, possession or sale of genuine goods, then it could well follow that a greater degree of diligence will be required.”[33]

39.  His Lordship also appealed to “common sense” as a measure of what the defence of reasonable diligence may require, finding that in the case before him:

“...there were aspects of the appellants’ possession of the goods and characteristics of the goods themselves which would as a matter of common sense have required a higher degree of diligence than that which was appropriate to a more typical transaction.”[34]

D.4d The impact of the differences on proportionality

40.  The differences in the respective statutory schemes have a major impact on the proportionality inquiry.  The Court must decide whether there are compelling reasons for sustaining section 26(4)’s prima facie objectionable encroachment upon the presumption of innocence.  I should stress that this is not to question the appropriateness of the legislature fashioning an offence in which liability turns on knowledge or discoverability of the falsity of the trade mark.  That is a matter for the legislature and reference has already been made to the legitimate societal aim of the relevant provisions. Instead, the inquiry focuses on the burden: Is it proportionate for the burden of proof regarding the relevant conditions bearing on liability to be placed on the accused rather than on the prosecution? 

41.  In the English decisions, the serious difficulty which would be faced by the prosecution if it (instead of the accused) was required to prove the absence of the accused’s belief on reasonable grounds that the use of the mark involved no infringement, was a centrally important reason for concluding that derogation from the presumption of innocence was justified. 

42.  Thus, in R v S, Davis J listed as a justification the fact that “... the subject matter of subsection (5) is liable to be peculiarly within the knowledge of the accused.”  He added:

“It is true that knowledge, belief and intent can, in a sense, be said to be peculiarly within the knowledge of an accused in most criminal cases. But in this consumer protection context, in particular, the point is of considerable weight. The accused is, after all, particularly well placed to advance (and seek to show) the matters raised in subsection (5).”[35]

43.  His Lordship thought that placing the burden on the prosecution was likely to make enforcement ineffective and unworkable:

“... an effective and workable regime in this context cannot sensibly depend on proof by the prosecution in every case of a trader's absence of belief on reasonable grounds that the goods were genuine or that no registered trade mark existed; or on a rebuttal of an assertion by a trader that he was unaware of the registration or that he did not realise that he was selling counterfeit goods.”[36]

44.  Lord Nicholls took a similar view in R v Johnstone, pointing out that:

“The section 92(5) defence relates to facts within the accused person's own knowledge: his state of mind, and the reasons why he held the belief in question. His sources of supply are known to him. ... Conversely, by and large it is to be expected that those who supply traders with counterfeit products, if traceable at all by outside investigators, are unlikely to be co-operative. So, in practice, if the prosecution must prove that a trader acted dishonestly, fewer investigations will be undertaken and fewer prosecutions will take place.”[37]

45.  His Lordship concluded:

“Given the importance and difficulty of combating counterfeiting, and given the comparative ease with which an accused can raise an issue about his honesty, overall it is fair and reasonable to require a trader, should need arise, to prove on the balance of probability that he honestly and reasonably believed the goods were genuine.”[38]

46.  However, the consideration which bore so heavily on their Lordships’ decisions carries no such weight in relation to section 26(4) because of the crucial difference in its terms.

47.  The TDO’s scheme makes the avoidance of liability under section 9(2) dependent on the accused not knowing of, not having reason to suspect and not being able to discover by use of reasonable diligence, the falsity of the marks.  All three conditions must be satisfied.  If the prosecution instead of the accused were required to bear the burden of proof, it would in practice only need to surmount the lowest hurdle.  It would need merely to satisfy the court that by taking certain steps constituting reasonable diligence, the accused could have ascertained the falsity of the trade marks.  It would be no answer for the accused to say that he did not know and had no reason to suspect that the marks were genuine if, taking an objective view, the court were persuaded that in the circumstances, he could have discovered their falsity.  That indeed was the magistrate’s finding in the Lee Case even though he acquitted the defendant of knowledge and of having any reason to suspect falsity. 

48.  Requiring the prosecution to prove the third condition, even applying the usual criminal standard of proof beyond reasonable doubt, is much less exacting than requiring the prosecution in England to negate the subjective defence specified in section 92(5) of the TMA.  Accordingly, it is my view that the concerns expressed in the English cases regarding the unworkability of their statutory regime in the absence of a reverse onus do not arise here.

49.  With respect, Deputy Judge Toh fell into error when she stated:

“In this case, the Appellant relied on the fact that he did not know that the bottles of Chinese medicine had forged trade marks because they were bought from [a] reputable company. This was exactly the scenario envisaged by Lord Nicholls of Birkenhead in the Johnstone case as stated above. He had noted that those who traded in branded products should be aware of the need be on guard against counterfeit goods. Apart from being aware of the need to deal with reputable suppliers and keep records and the risks they took if they did not, the defence relies on facts ‘within the accused person’s own knowledge: his state of mind, and the reasons why he held the belief in question. His sources of supply are known to him.’ That is why the statutory defence in this case fulfill both the rationality and proportionality test, and the learned Magistrate was not wrong when he ruled that the Appellant bore the burden of proof on a balance of probabilities.”[39]

50.  The conviction in the Lee Case was not based on proving facts “within the accused person’s own knowledge: his state of mind, and the reasons why he held the belief in question”.  The magistrate clearly found against the existence of knowledge or reason to suspect on Lee’s part.[40]  The conviction rested on his objective assessment that the requirements of reasonable diligence had not been met, independent of Lee’s state of mind:

“I was satisfied that it would not have been unreasonable for the appellant to have made enquiries with Hong Kong Foci Pharmaceutical Co Ltd [the only authorised distributor of the medicine]. I was satisfied that with reasonable diligence the appellant could have found out that the 26 bottles were bottles to which a forged trade mark was applied. I found the appellant had failed on a balance of probabilities to satisfy the statutory defence.”[41]

D.5   Section 26(4) read down to an evidential burden

51.  In Hong Kong, as in the United Kingdom, combating counterfeiting is strongly in the public interest.  However, in our jurisdiction there is plainly a reasonable alternative to abrogating the presumption of innocence in the context of sections 9(2) and 26(4).  It is to place the persuasive burden on the prosecution to prove either that the accused knows, or has reason to suspect or could with reasonable diligence ascertain that the goods bear forged trade marks.  That would be achieved by reading down section 26(4) as imposing merely an evidential burden on the accused to raise as an issue the proposition that none of the three conditions apply, with the prosecution retaining the persuasive burden as to each element of liability throughout. 

52.  The accused would still have to adduce or be able to point to credible evidence indicating that he did not know, had no reason to suspect and could not, with reasonable diligence have ascertained that the trade marks were false.  As pointed out in Ng Po On,[42]such evidence would have to be sufficiently substantial to raise a reasonable doubt as to his guilt. Where such evidence exists, it would be up to the prosecution to furnish sufficient evidence to prove the accused’s guilt beyond reasonable doubt at the end of the day.   In cases where the prosecution is unable to prove that the accused did know or did have reason to suspect the falsity, it would still succeed if the evidence of what could have been done by way of reasonable diligence at the relevant time, satisfies the Court beyond reasonable doubt that the accused could have discovered the falsity by taking the appropriate steps.

53.  Such a read-down scheme would not infringe the presumption of innocence.  And there is no reason to think that it would unduly impede the effective enforcement of the law.  I can accordingly see no compelling reason for permitting derogation from the presumption of innocence in the present case.  I would therefore declare that section 26(4) must be read down as imposing merely an evidential burden on the accused, with the persuasive burden remaining throughout on the prosecution.

E. Disposal of the present appeals

54.  To what extent are the decisions reached in the two cases under appeal affected by reading down section 26(4) to impose an evidential rather than a persuasive burden on the accused?

55.  A preliminary point should be addressed.  In both cases, the magistrate approached the question of reasonable diligence on the footing that the defendants had to take positive action by making appropriate inquiries if they were to discharge their burden.  In doing so, he had regard to the approach of Stock J (as Stock VP then was) in HKSAR v Mulitex (Exports) Ltd,[43] where, in the context of reasonable diligence in section 12 of the TDO, his Lordship stated:

“Whilst reasonable diligence is not a counsel of perfection, it is 'not the doing of everything possible, but the doing of that which, under ordinary circumstances, and having regard to expense and difficulty, can reasonably be required.' (See Dear v Richards, The Europa (1863) 2 Moo PCCNS 1, 15 ER 803). As I commented in R v Chan Kim Fai (MA 982/93, unreported), what are reasonable steps, and what is reasonable diligence will vary with the facts and with the legislative context in which those words appear.”

56.  That statement was approved by the Court of Appeal in HKSAR v Kong Hing Agency Ltd[44] and I would respectfully agree that asking what could reasonably be required under ordinary circumstances, having regard to expense and difficulty, is a helpful approach to what constitutes “reasonable diligence”.  However, it is worth emphasising, as Stock J did and as Ma CJHC reiterated, that the requirements of “reasonable diligence” “vary with the facts and with the legislative context”.  It would not be right to assume simply from the absence of “positive action” on the part of the accused that there has been a failure to use reasonable diligence which would have revealed the falsity of the marks.

57.  As Ma CJHC pointed out in HKSAR v Kong Hing Agency Ltd, there may be cases where –

“... even if nothing has been done, an accused may escape liability where the exercise of reasonable diligence would not have resulted in the discovery of the use of false trade descriptions or forged trade marks.”[45]

E.1 The Lee Case applying the read-down provision

58.  As indicated above, the magistrate found that the prosecution had not established that Lee knew or had reason to suspect that the trade marks were forged.   He then approached the reasonable diligence defence on the basis that Lee bore the persuasive burden.  He noted that Lee’s case was principally that he had bought the medicine from reputable and big companies from whom many purchases had previously been made.[46] He produced invoices issued by a company called Chinese Pharmaceutical (International) Ltd and a firm called “Man Tak Pharmacy” in support. 

59.  The prosecution did not call any evidence as to the status or repute of those two entities.  Placing the persuasive burden firmly on Lee, the magistrate found that he had not established his defence since no evidence had been placed before the court that they were in fact reputable companies.[47]  He added that a prosecution witness, Mr Chai (the head of the quality control department of the registered owner of the trade mark in Lanzhou) had never heard of either entity. However, there was no evidence and no finding that Mr Chai, a quality controller working on the mainland, was in a position to know who were legitimate distributors or retailers in Hong Kong.  If the case had been approached on the footing that the prosecution bore the burden of showing that falsity was discoverable by use of reasonable diligence, absence of evidence as to the status and repute of the two entities would have inured to the benefit of the accused rather than the prosecution.

60.  A further basis for the magistrate’s decision on reasonable diligence was his finding that Lee “had taken no positive action”.  He pointed out that there was no evidence that Lee had ever checked with Hong Kong Foci Pharmaceutical Co Ltd (“Hong Kong Foci”), the only authorised distributor of Man Shan products in Hong Kong.  The magistrate found that enquiries “would have instantly revealed that Chinese Pharmaceutical (International) Ltd and Man Tak Pharmacy were not authorised to sell these products thus raising suspicion that they were counterfeit”.[48]

61.  However, there was no evidence and no finding that Lee was aware of Hong Kong Foci’s existence, nor that he knew or could with reasonable diligence have discovered that it was the only authorised distributor of Man Shan products in Hong Kong or that it was the company to which inquiries ought to have been directed.  Understandably, proceeding on the basis that the persuasive burden was on the accused, the prosecution did not think it had to adduce such evidence and the magistrate did not think such evidence necessary.  However, if an evidential rather than a persuasive burden had been applied consequent upon reading down section 26(4), the absence of such evidence could have made a material difference. 

62.  Given the potential difference in outcome if the read-down section had been applied in Lee’s case, I would allow his appeal and quash his conviction.  Since Lee has already served his eight week sentence, there is no question of any retrial.  I would also make an order nisi that Lee should have his costs here and in the courts below and direct that any submissions as to costs should be made in writing, lodged and served within 14 days of the date of this judgment, in default of which the order nisi should stand as an order absolute without further direction.

E.2 The Lau Case applying the read-down provision

63.  The position is very different in the Lau Case. The magistrate found, on ample uncontroverted evidence, that the appellants had substantial reasons for suspecting the authenticity of the trade marks in question.  As McMahon J held, in such a case there is an overlap between the reason to suspect and the reasonable diligence grounds.  Evidence which supplies a reason to suspect forgery is likely to have an important influence when considering what steps are reasonably required by way of reasonable diligence.

64.  The magistrate found that the following matters showed that the appellants had reason to suspect the falsity of the marks: the fact that certain garments bore Lacoste labels saying “made in Indonesia”; Reuhl labels saying “made in Peru”; Hollister and Levi’s labels saying “made in Hong Kong” or “made in Macau”, whereas the appellants’ evidence was that all the garments had been sourced on the mainland.[49]  He also found that the appellants knew that Abercrombie & Fitch garments were not on sale in Hong Kong.[50]  Moreover, the garments were bought at very low prices which were below the cost of the genuine item and some features on certain garments were of poor quality or involved use of inferior materials.[51]  The magistrate also pointed to the inability of the appellants to produce any invoices for the goods purchased and their evidence that certain factories had refused to provide documents or answers providing verification that they had been contracted to make the garments.

65.  Such danger signs must have been obvious to the appellants.  The magistrate was fully justified in holding that in such circumstances, reasonable diligence required them to make appropriate inquiries.  He was also entitled to take account of the fact that the trade marks were of popular and widely marketed brands in concluding that it would have been possible with little difficulty to set in motion fruitful enquiries as to potentially false marks.

66.  The magistrate summarised the appellants’ case as follows:

“In summary the defence say that having purchased the garments from big factories, who are concerned with the manufacture of export items, and with whom they have dealt with over many years and therefore have confidence in, and that the garments were in large of good quality, there was no reason to doubt the garments were .... genuine.”[52]

67.  He rejected that evidence as incredible given the abundant reasons for suspecting falsity mentioned above.  As to reasonable diligence, his conclusion was pithily expressed as follows:

“The test is reasonable diligence in the circumstances. No diligence at all was performed by the defendants.”[53]

68.  In my view, in the light of the magistrate’s findings, applying the read-down provisions to the Lau Case would have made no difference to the outcome.  The courts below would inevitably have found that there was no credible evidence to raise an issue suggesting that the three conditions were inapplicable to the appellants in the Lau Case.  On the contrary, there was copious uncontroverted evidence establishing that the appellants did have reason to suspect the falsity of the marks and that reasonable diligence would have led to them to ascertain that the marks were indeed forged. 

69.  It is established[54] that while the Magistrates Ordinance[55] contains no “proviso” equivalent to that found in section 83(1) of the Criminal Procedure Ordinance,[56] section 119 empowers the Judge to confirm, reverse or vary (etc) the magistrate’s decision as he thinks just.  By virtue of section 17 of the Court’s statute,[57] that power can be exercised by this Court.  Since my view is that the magistrate would undoubtedly have entered the same verdict if he had applied the read-down provision to the Lau Case, it is just that his decision, and that of McMahon J, should be confirmed.  I would accordingly dismiss the appeal in the Lau Case.

Mr Justice Mortimer NPJ:

70.  I agree with the Judgment of Mr Justice Ribeiro PJ.

Lord Millett NPJ:

71.  I agree with the Judgment of Mr Justice Ribeiro PJ.

Chief Justice Ma:

72.  For the above reasons, the Court unanimously:-

(1) In FACC 5 of 2011, allows the appeal and quashes the conviction of the appellant and also makes an order nisi as to costs as set out in para 62 above.

(2) In FACC 7 of 2011, dismisses the appeal.