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

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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Introduction

1.  This is an application of the 1^st defendant to restrain the 1^st plaintiff by interlocutory injunction from publishing certain words defamatory of the 1^st defendant or disparaging of its products, to induce its customers actual and potential to take their business from the 1^st defendant to the 1^st plaintiff.  The words in question are those contained in two letters and an email sent by the 1^st plaintiff to customers and a potential customer of the 1^st defendant, as I shall come to.

History

2.  The 2^nd plaintiff James Wong and the 2^nd defendant Piu Wong used to make toys and toy components through a factory in China and various companies in Hong Kong which they both owned as shareholders.  By this means they held intellectual property rights in certain lines of toys they were making and marketing, as well as all the usual trappings of an on-going business undertaking.

3.  There came a time, perhaps it was late 2002, when they decided to subdivide into two their interests hitherto operated as one, and go their separate ways.  This included dividing between them the copyrights and other property rights hitherto shared.  There was intended a transition period of one year during which one was to be given agency rights to deal in the other’s property.  For the purpose of the matter before me, the detail is not important.  Suffice to say that both Wongs signed three agreements written in Chinese characters and not professionally drawn, which may be the reason for things going off the rails.

4.  As is apparent from the pleadings in the proceedings that came to be filed, James Wong acquired one of the companies hitherto jointly owned being the 1^st plaintiff (King Fung) whilst Piu Wong took the other, the 1^st defendant (Toto Toys).  Where the parties have fallen out is as to how the rights in four lines of toys called ‘Space Series’, ‘Screw Series’, ‘Marble Series’ and ‘Miscellaneous Products’ were divided.  Apart from a certain vagueness in the written agreements there is said by one or other or perhaps both that there was an oral content in what was agreed and that cannot now be agreed.  To compound the difficulty some of the lines, or series, of toys have shared component parts.

5.  The parties purported to complete the split and go their separate ways by early January 2003.  But it was not long before there was trouble.  A term of the agreement was that a registered trademark of the component parts of the four series of toys under the brand name Toto, hitherto owned by King Fung, was to be assigned to Toto Toys; that did not happen.  Piu Wong and Toto Toys issued a writ in specific performance.  But James Wong himself was aggrieved when he had cause to believe and now alleges that Piu Wong was manufacturing and marketing toys that matched or closely copied those reserved to him.  He also sued, in his own right and for King Fung.

6.  In December 2004, a Master consolidated the two actions, and there are now consolidated pleadings.  It is apparent from these, and the vigour with which this interlocutory matter has been argued, that there is a major falling out, and no agreement on the way forward.

The Letters and Email

7.  This application derives from letters that were sent out by King Fung to a toy retailer in Tsuen Wan called BabyBoom Shop and another in Singapore, called Twinkle Thinkers Pte Ltd. in December 2003 and January 2004 respectively.  These are identical in content.  I reproduce that sent to BabyBoom:

“	KING FUNG VACUUM LTD.
	19th December 2003
	BabyBoom Shop
	Unit 1512, Nan Fung Centre
	264-298 Castle Peak Road, Tsuen Wan
	N.T., Hong Kong
	Dear Sir,
	Re : Toto Toys Ltd.
	King Fung Vacuum Ltd., established in 1988, was the parent company of Toto Toys Ltd. until January 2003.  Enclosed is 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 1st January 2004, all customers can buy direct from King Fung.
	Nonetheless, it is discovered in recent episodes that Toto Toys Ltd. has copied molds of King Fung, withheld orders on and manufactured these products for themselves thereby breaching agreements on both intellectual property rights and principal-agent relationship.  Legal proceeding has already been instigated against Toto Toys Ltd. 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 any clarifications that you may need.
	Sincerely,
	Annie Cheung
	Marketing Director”

The enclosure is an excerpt from the Trade Marks Registry depicting the trade mark referred to.  Annie Cheung, the signatory, is James Wong’s wife.

8.  These are the only two letters which Piu Wong knows about, they having been brought to his attention.  But what was and is of concern is that by virtue of their being identical in content, and because they were directed to customers (note ‘customers are hereby advised’) rather than to the addressee in each case, a great deal more than these may have been sent out.  It is pertinent to note that nowhere in the evidence does James Wong or anyone else on King Fung’s part suggest otherwise.

9.  The email complained of came to Piu Wong’s attention because it was cut and pasted and sent to him for comment by its recipient Peter Neville, the sales manager of an Australian company called Just Premiums International whom Piu Wong refers to as a potential customer.  What in fact he sent was a compilation of 3 emails.  The first was his, Neville’s email to Neu Kreation (a company set up and run by James Wong), the second was a reply from Annie Cheung (of which Piu Wong now complains) and the third his email enclosing those two sent to Toto Toys’ email address seeking an explanation.  This is how it was set out, and of course one reads from bottom to top:

“	From:	“Peter Neville”<peter@justpremiums.com.au>
	To:	<tototoys@netvigator.com>
	Sent:	Monday, 20 December, 2004 11:25
	Subject:	Fwd: Re: Marble Run game, nk-6122
	Hello Christina,
	Can you please explain what the position is with this email I received from Neu Kreation.
	regards
	Peter Neville
	Just Premiums.
	Dear Peter,
	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 will gladly furnish you with more details of the lawsuit.
	Looking forward to hearing from you.
	Best regards,
	Annie Cheung
	Marketing Director

----- Original Message -----

	From:	“Peter Neville”<peter@justpremiums.com.au>
	To:	“Neu Kreation” <neukreation@mail.com>
	Subject:	Re: Marble Run game, nk-6122
	Date:	Mon, 20 Dec 2004 09:01:06 +1100
	Thank 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 your quotes.”

Christina is Christina Poon, Toto Toys’ marketing manager.

10.  As it turns out the email which purportedly Neville had received had been redacted by him for reasons best known to him.  In evidence adduced by James Wong the full email that was sent is the following:

“	From:		“Neu Kreation” <neukreation@mail.com>
	To:		“Peter Neville”
	CC:
	Subject:		Re: Marble Run game, nk-6122
	Date:		Mon, 20 Dec 2004 10:57:47 +0800
	Dear Peter,
	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 law suit.
	Meanwhile, it is our desire to co-operate with you.  As we have advised you in the meeting, we are probably the best in what we do in terms of varieties 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,
	Annie Cheung
	Marketing Director”

11.  What has emerged is a series of emails exchanged between Just Premiums and Neu Kreation; it is apparent that Neville was testing James Wong’s quotation against another which may have come from Piu Wong.

12.  It is his, Piu Wong’s case that Neville thereafter suspended negotiations with Toto Toys, so that a prospective relationship never developed.

The Interlocutory Application

13.  Although the summons is so phrased as to be grounded in defamation, it is the defence’s case that the injunction is required to prevent King Fung’s unlawful interference with Toto Toys’ trade or business.  As Mr Coleman for the defendants submitted:

“	the scope of the interlocutory injunction sought is only confined to King Fung’s unlawful interference directed at Toto’s customers or potential customers. It is a genuine claim by Toto to protect its business and for the present purpose to hold the ring pending trial….
	The plaintiffs seek to portray this application as one seeking an injunction to restrain a libel. It is not.”

14.  It is the case of Toto Toys and Piu Wong that the letter sent out and circulated at least to two actual or potential customers was threatening and amounted to an unlawful inference with the business of Toto Toys.  This was because it contained false and/or misleading information, which was portrayed as fact.  And, as submitted, now that the former partners are in fact competitors in the same industry, it is apparent that there is a motive.

15.  In considering the merits of the plaintiff’s case, I begin with the premise that a copyright owner who has a claim for breach of copyright is entitled to warn a customer of the offender, who thus himself may become a secondary offender, of his intention to bring proceedings.  This is because the claim can only be enforced against someone who has knowledge of the copyright.  But the information so given must be done so in good faith; see Granby Marketing Services Ltd v. Interlego A.G. [1984] RPC 209 at p.213.

16.  So, there can be no act of wrongful interference if all that King Fung has done is to assert in good faith a legal right claimed by it and to threaten proceedings if that right is infringed.

17.  Is the letter accurate in detail, not misleading, not an underhand way of denying Toto Toys’ legitimate business and attracting that to King Fung?

18.  I come to consider that next.

The Letters

19.  I begin by noting that this is not the usual situation of a copyright owner or holder alleging what amounts to passing off, piracy or other form of illegal copying by the offender, but a dispute between two former joint owners now challenging the other’s rights.  I think that behoves a more cautious approach and the need to ensure that in notifying actual or prospective customers the full picture is presented.

20.  The letters that went out purport to paint a picture; but in my view it is not a full and complete one and there are areas which are misleading and which give rise to unfairness.

21.  These include the following:

(a)	that King Fung was Toto Toys’ parent. This is simply not true. It was incorporated by the Wongs and owned by them, not by King Fung. The use of the word parent is not only wrong but materially misleading, for it connotes seniority, perhaps superiority, especially in the context of ‘has taken over the entire manufacturing operation.” That is untrue also which I shall come to;
(b)	that King Fung registered the trade mark.  This is true and is verified by the enclosure.  It is also totally misleading, for it ignores the explicit provision in one of the agreements that as part of the split King Fung was to assign the mark to Toto Toys.  There can be no adequate reason excluding mala fides, why this should be left out;
(c)	that King Fung is now the sole manufacturer.  This is plainly not correct, given that a significant feature of the split up is that each would be responsible for its own lines.  This taken together with the third paragraph which deals with a short finite agency that was about to expire, would or at least might lead to the impression that Toto Toys had given up any manufacturing rights and was about to lose marketing as well;
(d)	the inclusion of “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”. This is fine as far as it goes, but without spelling out what the lines are it is meaningless and confusing, especially in the light of the next paragraph. Fairness demanded that the lines should have been identified;
(e)	that “legal proceeding has already been instigated against Toto Toys and the companies involved for buying infringing products.”  This was false on two grounds, and materially misleading.  As at the date of the letter (and of the later letter sent to Twinkle Thinkers) there were not in existence any proceedings against Toto Toys.  And to this day there have never been any against so-called companies involved for buying infringing products;
(f)	that customers were being warned about the risk of buying from Toto Toys.  Whilst in proper form a warning of legal consequences of buying infringing copyright works may be given, it behoves the perpetrator to define accurately those works whose copyright is allegedly being infringed.

22.  Read as a whole I am satisfied that the recipient of the letter would likely take from it that King Fung, always the dominant partner in the original format, had taken over the entire manufacturing operation leaving Toto Toys the marketing; that a short term marketing agency was about to expire; that King Fung held the trade mark of Toto; that Toto Toys was in obvious and serious breach of its agreement with King Fung and King Fung’s copyright; that as a result there were proceedings on foot against Toto Toys and those who had already purchased infringing products from it; that anybody who purchased goods from Toto Toys within a wide range were at risk; that King Fung’s toys could now be bought through Neu Kreation Limited.

23.  In my view one only has to spell out the above to note that the letter was motivated to attract by improper means customers and trade from Toto Toys.

24.  I come next to the email.

Email

25.  Reading the series of emails exchanged between Neu Kreation and Just Premiums, one notes that Neville is sounding out someone called Kimmy Chan for a competitive quote in respect of the game known as Marble Run.  He receives a quote of US$4 per unit and responds that he has been offered US$3.  The offending email follows.  But there was nothing in Neville’s email to suggest he had been dealing with Toto Toys or that the quote was from that source.

26.  In my view the response as framed was gratuitous and misleading, and designed to put a customer off from contracting with a rival by improper means.  And it was probably unnecessary; the next email in sequence, sent above Miss Cheung’s name, was to match the quote the Neville had referred to, as I set out below:-

“	From:	“Neu Kreation” <neukreation@mail.com>
	To:	“Peter Neville”<peter@justpremiums.com.au>
	CC:
	Subject:	Re: New configuration for just premiums
	Date:	Mon, 20 Dec 2004 18:16:07 +0800
	Dear Peter,
	Attached please find the new configuration we have especially for you.  It’s of total 62 pieces (50 pieces + 12 marbles) and priced at US$3.00/set FOB HK.
	Please note that we do not just include basic and simple pieces for you, but there are bigger pieces and more sophiscated ones.
	Let us know.
	Best regards.
	Annie Cheung”

The Consequences

27.  By sending out the letters and email, King Fung was threatening Toto Toys’ customers and potential customer by unlawful means.  There is, as I find, a serious question to be tried.

28.  Damages are not an adequate remedy.  Toto Toys makes and sells toys; it has (or at least there was an agreement that it has) the registered mark of a line of those toys.  Unrestrained misleading letters to its customers and potential customers if achieving the desired effect will turn away existing and new customers alike, resulting in a loss of business and goodwill beyond individual transactions.  It would in my view be impossible to quantify the resultant loss.  On the other hand, in the event that following trial it can be established that an interlocutory injunction was not after all justified, I am satisfied on what I have that Toto Toys is in a position to meet any order for damages occasioned by the injunction.

29.  I find that the letters and email designed as they were to attract business from Toto Toys to King Fung by frightening off customers amounted to unlawful interference and should be stopped.  I grant the application asked for, with costs (nisi at first instance) to the 1^st defendant taxed and paid forthwith.