EST-OUEST AUCTIONS CO LTD AND ANOTHER v. NEW ART EST-OUEST AUCTIONS COMPANY LTD formerly known as NEW ART EST-OUEST AUCTIONS COMPANY LTD

HCIP 45/2023

[2024] HKCFI 2619

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

INTELLECTUAL PROPERTY PROCEEDINGS NO. 45 OF 2023

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JUDGMENT

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1.  In this action, the Plaintiffs claim against the Defendant for passing-off and trade marks infringement.

Background and procedural history

2.  The 2^nd Plaintiff, Mr Takashi Seki (“Seki”), is a Japanese national and a resident in Hong Kong.

3.  In or about 1984, Seki founded a company in Japan with the English name of “Est-Ouest Auctions Co Ltd” ("EOJP”) to commence a business of trading and auction of fine arts, with the ambition of establishing the first international auction house based in Japan.   EOJP conducted its first auction in Tokyo, Japan on or about 15 March 1984 and has regularly conducted auctions of fine arts in Japan since then.

4.  For the establishment and operation of EOJP, Seki came up and devised the brand "Est-Ouest Auctions" (“the Brand”) for the auctions held by EOJP, consisting of:

(i)    the word "Est-Ouest", which is a transliteration of "East-West" in French;

(ii)   the word "Auctions", which refers to the principal business, products and services that EOJP offered.

5.  Prior to the sale of the shares of EOJP as mentioned below:

(i)    Seki was the registered holder of 4,365 shares in EOJP (“EOJP Shares”), which constituted 51.5653% of the entire issued share capital of EOJP; and

(ii)   another company incorporated in Japan with the English name of “Florial Co. Ltd” (“Florial”), which was wholly owned by Seki’s wife, was the registered holder of 4,100 EOJP Shares, which constituted 48.4347% of the entire issued share capital of EOJP.

6.  On or about 27th August 2008, with a view to enter the Hong Kong auctions market as the first Japanese auction house to conduct auction business in the like of EOJP, Seki incorporated the 1^st Plaintiff, Est-Ouest Auctions Co Ltd (“EOHK”), in Hong Kong conducting auctions in the name of the Brand.  EOHK held its first auction in Hong Kong on or about 24^th November 2008 and has regularly conducted auctions of fine arts in Hong Kong since then.

7.  In addition to the use of the Brand, Seki adopted the Chinese name “伊斯特” to conduct Est-Ouest’s auctioneering business in Hong Kong.  In promoting the auctions in Hong Kong, Seki had also used the various marks as stated in Schedule A of this Judgment (“the Marks”) to market the auctions held by EOHK.

8.  There were also auctions in Hong Kong which were co-organised by EOJP and EOHK.  Occasionally, they held auctions using the Brand in other Asian cities in particular Singapore.

9.  The Defendant, New Art Est-Ouest Auctions Co Ltd (“HK New Art Est-Ouest”), was and still is a wholly owned subsidiary of Hong Kong New Art Limited (“HK New Art”) which is a limited company incorporated in Hong Kong.   HK New Art was and still is a wholly-owned subsidiary of a company incorporated in Japan with the English name of New Art Holdings Co Ltd which engages in the business of, inter alia, trading of fine art pieces.

10.  During the COVID pandemic, Seki considered selling his auctioneering business.  On or about 24^th June 2021, Seki and Florial as vendors (“the Vendors") and New Art Holdings as purchaser entered into an undated Sale and Purchase Agreement (“the SPA”).  By the SPA, the Vendors agreed to sell their respective shareholdings in EOJP, which constituted 70.0039% of the issued share capital of EOJP, to New Art Holdings.  The consideration for the sale was Japanese Yen (“JPY”) 420 million.  Under the non-competition provision in Clause 13 of the SPA (“the Non-Competition Clause”), Seki and Florial agreed not to compete with EOJP for a period of 3 years.

11.  The parties were contemplating some sort of cooperation after the making of the SPA, and they also made a shareholders’ agreement to such effect which contained the following provisions:

(i)    Florial and Seki’s wife would cooperate to carry on the operations of EOJP for its further development.[1]

(ii)   Seki, Seki’s wife and Ms Dong Xiaohang (“Dong”), who was a senior staff and the main auctioneer by then working for EOJP and EOHK, would remain as the 3 existing directors and they would continue to receive directors' fees and salaries as employees whilst New Art Holdings would nominate 2 new directors to the Board of Directors of EOJP.[2]

(iii)  There was a buy-out mechanism for the sale of the remaining 30% EOJP Shares by Florial and Seki’s wife to New Art Holdings at a price of JPY 180 million.[3]

12.  The transfer of 70% EOJP Shares was completed pursuant to the terms of the SPA.

13.  In the meantime, the parties were discussing the agreement for the “sale” and the transfer of the shares in EOHK (“EOHK Shares”).  Following the discussion, Seki and Mr Yukio Shiraishi (“Shiraishi”), who is the President of New Art Holdings, signed a written agreement titled “Basic Agreement” (“the Basic Agreement”) which contains the following terms:

(i)    Seki would transfer 70% of the issued shares of EOHK to Shiraishi[4].

(ii)   The transfer consideration of the shares shall be discussed based on HK$140,000 which was 70% of the capital of EOHK.[5]

(iii)  The parties shall discuss and decide the transfer consideration of the shares and method of payment of the consideration upon studying the legal and tax matters before concluding the share transfer agreement.[6]

(iv)  The parties shall discuss and conclude the share transfer agreement if reaching an agreement for various conditions such as transfer consideration of the shares, the payment method and the transfer date.[7]

(v)   The parties confirm that the other clauses of the Basic Agreement, which mainly concern due diligence and confidentiality, are binding whereas the clauses mentioned in the preceding sub-paragraphs shall have no binding force of law.[8]

14.  Pursuant to the cooperation arrangement agreed by the parties, they worked together to hold the first auction in Haneda Airport in Tokyo in October 2021.  Unfortunately, there were differences between the parties as to whether New Art Holdings should be allowed to put its art pieces for auction in the “Est-Ouest” auctions.  According to Seki, it is unethical for an auction house to put its own goods (i.e. the art pieces of New Art Holdings) for auction in its own auction platform.  Seki and Dong submitted their resignations on 15 November 2021.

15.  On or about 16 November 2021, Shiraishi sent a cheque in the sum of HK$140,000 to Seki purportedly for the transfer of the EOHK Shares under the Basic Agreement.  Seki, taking the view that there was no binding agreement for the sale of such shares, returned the said cheque to Shiraishi.

16.  On or about 8 December 2021, Seki made an application to register the Marks in the Trade Marks Registry of Hong Kong to cover goods and services in Classes 14, 16, 21, 33, 36, 41 and 42.[9]  Quite surprisingly, the application did not cover auctioneering service, which is the main service provided by EOHK and should fall within Class 35.  The application was subsequently granted on 3 May 2022.

17.  There is serious dispute between the parties about the effect of the SPA.  Seki and his related parties including EOHK and Florial (collectively referred to as “the Seki Camp”) contend that the SPA only covers the sale of their respective shareholdings in EOJP.  The SPA does not cover the transfer of the EOHK Shares.  Furthermore, the goodwill associated with the Brand and the Marks in Hong Kong (“the HK Goodwill”) belongs to EOHK, and so only EOHK has the exclusive right to use the Brand and the Marks in Hong Kong.  On the other hand, it is the case of the New Art Holdings and its related parties including HK New Art and HK New Art Est-Ouest (collectively referred to as “the New Art Camp”) that the HK Goodwill belongs to EOJP.  Further, they argue that, by the making of the SPA, the Seki Camp had indeed agreed to sell the whole auctioneering business of Seki to New Art Holdings, and so the written SPA only formed part of the overall transaction which covered the sale of the EOHK Shares as well. In either case, the New Art Camp have the exclusive right to use the Brand and the Marks in Hong Kong.

18.  After the making of the SPA, HK New Art Est-Ouest was incorporated by the New Art group of companies (“the New Art Group”) on 29 December 2021 to conduct auctions business in Hong Kong.  HK New Art Est-Ouest used the name “New Est-Ouest” to hold an auction in May 2023.  In the course of promoting the auction, HK New Art Est-Ouest used a series of marks as stated in Schedule B of this Judgment which included the words “New Art Est-Ouest” and “Since 1984”.  It planned to hold another auction in late 2023.

19.  On 11 July 2023, EOHK and Seki commenced the present action against HK New Art Est-Ouest for trade marks infringement and passing-off.  By a summons of the same date, the Plaintiffs applied for an interlocutory injunction to restrain HK New Art Est-Ouest from holding auctions in Hong Kong using the Brand or the Marks.  The summons came before me for the first time on 18 August 2023.  Instead of wasting resources in arguing whether the court should grant an interlocutory injunction, the parties were contended for the court to fix an early date for the trial, whilst the parties agreed not to hold any further auctions using the name “Est-Ouest” pending the adjudication of the claim.  Indeed, if the dispute between the parties cannot be resolved in a speedy manner, the delay and the uncertainty arising from the litigation may destroy the Brand and the Marks.  If an auction house does not hold auctions using the Brand or the Marks for a significant period of time, it would simply dilute the reputation associated with the Brand and the Marks resulting in irreparable and significant damage to the owner of the Brand and the Marks.

20.  The trial dates were then fixed in August 2024 with a reserved time of 11 days.

21.  After this action, New Art Holdings, New Art Est-Ouest Auctions Co Ltd (formerly EOJP) and HK New Art Est-Ouest commenced HCA 325/2024 (“the HC Action”) against EOHK, Seki, Seki’s wife and Dong (who holds 10% of the EOHK Shares) to compel them to perform their alleged obligation under the SPA (or more exactly the agreement for the transfer of Seki’s whole auctioneering business) in transferring the EOHK Shares to HK New Art Est-Ouest. By the summonses dated 11 March 2024 taken out by the parties in the New Art Camp in both actions (“the Heard-together Summonses”), the said parties applied for an order that both the HC Action and the present action be heard together at the same time before the same judge.

22.  The Heard-together Summonses came before me on 19 April 2024. Whilst I agreed that there are common issues between the two actions, a “heard-together” order would certainly de-rail the trial in August 2024 and defeat the purpose of an early trial.  Apart from the fact that the pre-trial proceedings had yet been completed in the HC Action, there may be other issues in the HC Action which may prolong the trial.  On the other hand, whether HK New Art Est-Ouest is guilty of trade marks infringement or passing-off depends on the court’s findings relating to the SPA which is the main subject matter in the HC Action.  Separate trials may result in inconsistent findings and duplication of unnecessary costs or efforts.  Hence, whatever findings made by the court in the present action relating to the effect of the SPA should be binding on the parties to avoid repeated litigations.

23.  Having considered these matters, I suggested to the parties to keep separate trials in both actions.  But in order to avoid unnecessary costs and litigations, the parties should be bound by the findings made by the court in this action.  I therefore invited the other parties in the HC Action to make an undertaking to the court that they would be bound by the findings and decisions of the court in this action and that they would not, for the purpose of determining the application of issue estoppel in the HC Action, raise any argument to the effect that they are not parties in this action.  The legal representatives are the same for both camps in both actions.  Appreciating the advantages of the proposal, all the parties were prepared to make such undertaking to the court.  Hence, upon the making of such undertaking, I declined to make the “heard-together” order and proceeded with the trial of this action.

24.  Since issue estoppel may be a material issue in the HC Action after the trial in this action, the framing of issues in the present case becomes most important.  In the following PTR hearings, I framed the issues in this action which are included in Schedule C of this Judgment.  I will therefore proceed to determine this case in accordance with the framed List of Issues (“the List”).

25.  Despite the various issues in the List, the core issues in the present case are:

(i)    Who is the owner of the HK Goodwill? (“the 1^st Core Issue”)

(ii)   Whether the registration of the Marks by Seki in Hong Kong should be invalidated? (“the 2^nd Core Issue”)

(iii)  Did the parties make a binding agreement for the sale of the EOHK Shares? (“the 3^rd Core Issue”)

26.  Before I answer these questions, I first address the oral testimony given at the trial.

Evidence at the trial

27.  The following witnesses testified at the trial: Seki, Dong, Ms So Hin Yee (“So”) and Ms Wong Chui Shan (“Wong”), the latter two were staff members working for EOHK at the material time, in support of the case of the Seki Camp; Shiraishi, Mr Akira Yoshimori (“Yoshimori”) who is member of the senior management of the New Art Group responsible for negotiating the SPA and the Basic Agreement with Seki, and Mr Tsuneo Kamio (“Kamio”) who is a staff working for the New Art Group, in support of the case of the New Art Camp.

28.  Seki told the court about the auctioneering business he set up in Japan in about 1984.  Later he saw the potential of the auctioneering business in Hong Kong focusing on Chinese investors who were interested in Chinese contemporary fine art pieces, and he came to Hong Kong in around 2008 to set up EOHK to conduct auctions in Hong Kong.  The focus of the fine art pieces auctioned in Japan and Hong Kong was different, with Japan auctions focusing on western fine art pieces whereas Hong Kong auctions focusing on Chinese contemporary fine art pieces.  Despite that, there were common customers for the auctions in the two places.  He also told the court the reason why he wanted to sell his auctioneering business, but he maintained that the SPA only covered the auctioneering business in Japan.  As specified in the Basic Agreement, there was no binding agreement made for the sale of the EOHK Shares.  The consideration of HK$140,000 stated in the Basic Agreement was only a reference for the further negotiation of the purchase price.  By that time, the parties were contemplating that there might be prospect for future listing of EOHK, which might affect the ultimate purchase price for the transfer of the EOHK Shares.  Further, he provided the court with the background leading to the breakdown of the relationship between the New Art Group and him.

29.  Quite to my surprise, Mr Wong, counsel for the Seki Camp in this action, informed the court on the second day of Seki’s oral testimony that Seki needed to leave Hong Kong the following day for an important medical consultation in Japan.  Mr Wong told me that he only learnt about this a short while ago, and as a result the court had to make urgent arrangement for Seki to give his remaining oral testimony through video-link facility.  Fortunately, such arrangement could be made and there was no serious disruption to the trial.  However, the delay in relaying such important piece of information to the court is quite inexcusable.

30.  Dong also testified at the trial.  She was the General Manager (Asia) of EOJP and Chief Executive Officer and Director of EOHK since August 2012.  Prior to her resignation on 15 November 2021, she was also the main auctioneer for the auctions held by both companies.  She told the court about the promotion and the marketing of the Brand and the Marks in Japan and Hong Kong, the operation of the auctions and the contact details provided by her to her customers.

31.  So and Wong told the court about their works at EOHK. According to all the witnesses for the Seki Camp, EOHK was the company that was holding “Est-Ouest” auctions in Hong Kong.  EOHK was the contracting party and the invoices were issued in the name of EOHK.

32.  Shiraishi is the President of the New Art Holdings and the New Art Group.  He is a fine arts collector himself and he also runs an art gallery trading in these items.  He had known Seki for some time who expressed his intention of selling his auctioneering business.  Shiraishi was involved in the initial general discussion with Seki, but it was his subordinate Yoshimori who was responsible for negotiating the details of the deal with Seki.  Upon the report of the negotiation by Yoshimori, he was the one who made the final decision.  He was not involed in the detailed operation of his business.

33.  Yoshimori was the person who was responsible for the negotiation of the SPA or indeed the sale of Seki’s auctioneering business. According to him, New Art Holdings had engaged one Bridge Consulting Group Inc (“Bridge”) to conduct a valuation of Seki’s auctioneering business both in Japan and Hong Kong.  After receiving the advice from Bridge, Shiraishi was prepared to accept a valuation of Seki’s auctioneering business at JPY 600 million (“the New Art Valuation”), which consisted of: (i) JPY 400 million for EOJP; (ii) JPY 100 million for EOHK (for its net cash assets); and (iii) JPY 100 million as premium for Seki and his staff to remain involved in the management of the auctioneering business for at least 3 years.  Yoshimori maintained that the New Art Valuation of the Est-Ouest group of companies (“the Est-Oueest Group”) was agreed to by Seki as evidenced in a contemporaneous email sent to Bridge and Daiichi Chuo Law Offices (New Art Holdings’ lawyer) following a meeting between Seki and him on 26 May 2021.

34.  According to Yoshimori, although the transaction was always understood by both parties to be for the Est-Ouest Group as a whole, due to the fact that EOHK was not a subsidiary of EOJP but rather a sister company in a different jurisdiction, two separate share transfers would be required.   Furthermore, since New Art Holdings (being a public company in Japan) was going to buy EOHK (a Hong Kong private company) partly in cash and partly with shares, as well as the EOJP Shares through the same mechanism, obtaining approvals from the Kanto Finance Bureau as well as from New Art Holdings’ shareholders would have been more complicated and taken longer than if just the Japanese company EOJP was involved, and this would have delayed the completion of the whole transaction.

35.  In order to resolve this issue, New Art Holdings decided that it would be simpler and faster to obtain approvals for the transaction if a Hong Kong subsidiary of New Art Holdings (HK New Art) was to purchase the EOHK Shares instead, so there would be no mention of the EOHK Shares in the formal SPA and the approvals from the shareholders and the Kanto Finance Bureau could be obtained more easily.  The transaction was therefore structured in a way with two separate transfers, but it had been understood by the parties that the sum of HK$140,000 for the transfer of the EOHK Shares was only nominal sum to be paid as part of the overall transaction, which according to Yoshimori covered the sale of the whole Est-Ouest Group.

36.  Kamio was a sub-ordinate of Yoshimori.  He told the court about the due diligence work carried out by New Art Holdings about the purchase of Seki’s auctioneering business and how New Art Holdings came up with a valuation of JPY 600 million for such business.

37.  Unlike many other cases, I actually find all the factual witnesses here to be honest witnesses.  All of them were frank in their oral testimonies, even on some issues which may not be favourable to their case.  In particular:

(i)    Seki was frank in his evidence when he said that he had not thought about the goodwill of the Brand and its ownership when they negotiated for the SPA.  All they talked about was the sale of the shares of the different companies.

(ii)   Seki thought that both the businesses in Japan and Hong Kong belonged to him prior to the making of the SPA, and the customers would associate the auctions in Japan and Hong Kong as originating from one single auction business.  In other words, Seki agreed that there should not be split goodwill between the auctioneering businesses in Japan and Hong Kong.

(iii)  Dong was frank when she admitted that, in promoting the auctions held in Hong Kong, EOHK had, in the brochures and other promotion and advertising materials, deliberately created an impression that the Hong Kong auctions were related to the auctioneering business established in Japan since 1984 and that the auctioneering business in Hong Kong originated from the same business in Japan.

38.  On the other hand, Yoshimori was also frank when he admitted that the parties did not touch upon the ownership of goodwill in their negotiation.  The parties only focused on the acquisition of the shares of the different corporate entities.

39.  To me, the main witnesses in this case are Seki, Yoshimori and to a certain extent Dong.  The evidence of Shiraishi is of limited assistance as he frankly admitted that he delegated the actual negotiation for the sale agreement to Yoshimori.  The same also applies to the oral testimonies of the other witnesses, as So, Wong and Kamio did not take any significant part in the negotiation for the sale of Seki’s auctioneering business.

40.  As I see it, the main factual dispute between the parties is whether they did discuss and agree on the New Art Valuation in the negotiation.  According to Yoshimori, Seki agreed to such valuation, whereas Seki disputed that the parties had come to a consensus on such issue.  However, I do not think that the result of this case turns on the difference in the oral testimonies.  As I will further elaborate in the latter part of this Judgment, it is clear from the more objective evidence, in particular the terms of the Basic Agreement and the subsequent discussion between the parties about the terms for the transfer of the EOHK Shares in September 2021, that the agreement for the sale of the EOHK Shares had yet been made and there is no binding agreement for the sale of such shares.

41.  Since the SPA is governed by Japanese law, the parties have obtained leave to adduce expert evidence on Japanese law on the construction of the terms in the SPA.  However, after reading their expert reports, in particular their common reference to “the Supreme Court of Japan’s Standards of Interpretation of Contractual Clauses” in their joint report, I find that there is little if no difference in the principles for the construction of contract between Japanese law and common law, a matter which is not disputed by the parties.

42.  The role of the experts is to assist the court to determine whether there is any difference in the legal approach under Japanese law in construing the terms in the SPA.  Instead of performing such role, what the experts were doing in their reports was to argue the cases for the respective parties. They made their own conclusions using various facts in the case to support their arguments.  But this is not the job for the experts.  As the experts agree on the legal principles for construction of contract, which I find that there is no material difference from the common law approach, I see no point for the experts to fly to Hong Kong to give oral testimony in court.  I therefore disallowed their oral testimony in the trial.

The 1^st Core Issue: ownership of the HK Goodwill

43.  I then deal with the 1^st Core Issue about the ownership of the HK Goodwill.  In my judgment, the evidence is overwhelming that EOJP owns the HK goodwill.  Further, the HK Goodwill and the goodwill associated with the Brand and the Marks in Japan (“the Japan Goodwill”) belong to one single entity with no split goodwill between the auctioneering businesses in Japan and Hong Kong.  In other words, all such goodwill originated from the auctioneering business operated by EOJP in Japan since 1984.

44.  Goodwill is an intangible asset generated by the use of a particular brand, trade name or trade mark.  Through the use, promotion and marketing of a particular brand, name or mark, the public and the consumers would associate them as indicating the origin of the goods or services concerned, which the public would perceive as the one responsible for their character or quality.  The value of the goodwill depends on the potential in attracting consumers to buy or use the goods or services on the strength of the relevant brand, name or mark.

45.  The issue in this case is the ownership of the HK Goodwill.  There is no dispute that EOHK was legally the party conducting the auctions in Hong Kong.  However, would the public perceive EOHK or EOJP as the origin of the auctioneering business in Hong Kong and the one responsible for the character or quality of the “Est-Ouest Auctions” in Hong Kong?

46.  In modern world when there is easy flow of information, it is common for the local public to know the foreign origin of a particular brand, name or mark.  Indeed, in trying to establish the credibility of a brand, name or mark in a new market, it is common marketing strategy to promote the same by referring to and relying on the reputation of the business established in its place of origin.  In such case, there is no split of local goodwill and the local goodwill still belongs to the owner of the goodwill in the place of origin.

47.  It is possible that what began as a mark of a foreign manufacturer or service provider may become exclusively associated with a local distributor or entity, but only if there was a clear dissociation form the foreign manufacturer: “at least there must be a clear dissociation from the initial significance of the mark so as to warrant the conclusion that the mark has become exclusively indicative”^[10] of the actual local user of the mark.  This is particularly likely where the foreign origin was concealed and the local entity held out as the ultimate source of the relevant goods or services.[11] This is certainly not the case here.

48.  Since the first auction held by EOHK in Hong Kong, EOHK and Seki had been using the terms “Est-Ouest Auctions”, “Since 1984 Est-Ouest Auctions” or “Since 1984 Est-Ouest 伊斯特” in promoting the auctions in Hong Kong.  As a result, the public would inevitably have the impression that the auctioneering business (even with the use of the Chinese name “伊斯特” or the different focus of the fine art pieces auctioned in the two places) originated from the business operated by EOJP in Japan and that EOHK and EOJP were one and the same business:

(i)    In the auctions held on 25-26 November 2009 titled “2009 Autumn Sale Hong Kong”, the words “Since 1984” began to be used in the brochures in Hong Kong.  The words “Since 1984” are strong indicia that the auction referred to EOJP and thus would give the public the impression that the auctioneering business originated from EOJP.

(ii)   The brochure for “2011 Spring Sale Hong Kong” auctions held on 27-28 May 2011 used the brand consisting of “Since 1984 EST-OUEST AUCTIONS” and the Chinese words “日本伊斯特拍賣” for promotion. The Chinese words mean Japan Est-Ouest Auctions and thus referred to EOJP.

(iii)  The Brand consisting of “Since 1984 EST-OUEST AUCTIONS” and “日本伊斯特拍賣” were printed on the bags distributed to the customers in both Hong Kong and Japan auctions.

(iv)  Between 2011 and 2016, the Brand consisting of “Since 1984 Est-Ouest Auctions” and Est-Ouest’s Chinese company name were used in the brochures.  Indeed, the brochures for auctions held between 2011 and 2015 contained pages showing the contact information of EOJP and EOHK and the website and email of EOJP for enquiry.

(v)   From 2017 to 2019, the Brand “Since 1984 Est-Ouest 伊斯特” had been used in the brochures for auctions in Hong Kong.  These materials promoted the Brand for EOJP.  In particular, in the sponsored features in South China Morning Post for each of the auctions held in Spring and Autumn between 2017 and 2019, the title “The Oldest Auction House in Japan” was used to convey to the readers the message that the auctions originated from EOJP. Some Chinese newspapers or magazine articles would use the title “Japan first auction company” or refer the readers to EOJP’s website or emails for enquiry.

49.  Under such circumstances, the public would inevitably have perceived that EOJP and EOHK were operating as one and the same business.  Both companies shared the same name.  In their daily operations, they shared the same website (under the domain of EOJP) and customer database. The staff of EOHK used email addresses under the domain of EOJP for communication.  Further, the cards of the staff members of EOHK bore the brand of “Since 1984 EST-OUEST AUCTIONS”, showed the website of EOJP and the email addresses under the domain of EOJP and the addresses of both companies.  It simply gave the impression to the public and the customers that both companies were involved in one single business.  Despite the fact that EOHK appeared as the organizer in the auction rules and the invoices to customers and that the title “Hong Kong 10^th Anniversary Auction” was used to describe the auction held in 2018 which was the 10^th anniversary of EOHK, the public and the customer would have regarded EOHK as an extension of the EOJP’s business in Hong Kong.

50.  Furthermore, the fact that EOHK would also enable customers in Hong Kong to bid for the items in auctions held by EOJP in Japan suggests that EOHK was promoting its auctions as the business of EOJP, and that they were one single business and EOHK never had any dissociation from EOJP.

51.  In addition to Hong Kong, the Brand consisting of “Since 1984”, “Est-Ouest”, “Est-Ouest Auctions” or “伊斯特” were also used to promote EOHK through itself or EOJP in the auctions outside Hong Kong. A list of the auctions held outside Hong Kong between 11 October 2008 and 10 July 2011 has been exhibited as evidence in the trial.  According to such list, the Chinese words “伊斯特拍賣” or “伊斯特” had been used since “the First Singapore Sale” held on 25-26 January 2013.

52.  Indeed, the auctioneering business under the Brand “Est-Ouest” has a certain international dimension.  The target bidders are usually sophisticated art collectors who would not just focus on the auctions in one particular place.  Seki admitted that, before 2008, a certain portion of the customers of EOJP (10% to 20%) were overseas customers.  In the circumstances, the customers must have perceived all the auctions, whether they were held in Japan, Hong Kong or other Asian cities, originated from EOJP and that EOHK was an extension of the business of EOJP, and not separate therefrom given all the factors mentioned above and especially the use of the words “Since 1984 Est-Ouest” in most if not all the brochures.

53.  Both parties have referred me to the case of Guangdong Foodstuffs Import & Expert (Group) Corp v. Tung Fook Chinese Wine (1982) Co Ltd[12], in which the court applied the public perception test and the control test in deciding whether the relevant plaintiff therein was the owner of the goodwill for the purpose of maintaining a claim for passing-off against the defendants.

54.  However, the facts of that case are quite different from those in the present case.  In Guangdong Foodstuffs, the actual manufacturer of the relevant goods might not be the alleged owner of the goodwill, and so the court need to assess whether alleged goodwill owner had control over the actual production of the goods.  In the present case, there is overwhelming evidence under the perception test to show that EOJP is the owner of the HK Goodwill.  The further application of the control test cannot lead to a contrary result.  Indeed, based on the various factors mentioned above, in particular the constant reminders to the customers that the Hong Kong business is originating from the Japan business, the common website under the domain of EOJP, the contact e-mails of the Hong Kong staff members using the domain of EOJP, the customers would have perceived that it was one common business and EOJP, being the origin of the auctioneering business, would be the one responsible for the character and the quality of the auctioneering business in Hong Kong.

55.  At the trial, Seki frankly admitted that he had not given a lot of thought about the ownership of goodwill.  When he was asked about such issue, he gave an answer that he considered himself owning both the HK Goodwill and the Japan Goodwill.  To a layman, this is perhaps a most natural answer, as he considered himself as the founder setting up the auctioneering businesses in both places.  However, this is not a finding open to the court. Firstly, the Seki Camp do not run this argument in their pleadings.  Secondly, it is common ground that New Art Holdings would have the exclusive right to use the Brand and the Marks in Japan.  If Seki were to own the goodwill associated with the businesses in both places, one would expect that Seki would have assigned his ownership of the Japan Goodwill to New Art Holdings.  The fact that he had not done so must mean that EOJP owned the Japan Goodwill.  As the Hong Kong business was promoted as part of the auctioneering business originating from Japan, the only conclusion is that there is no separate ownership of local goodwill and the HK Goodwill belonged to EOJP when the SPA was made in 2021.

56.  I have also considered the question: even if the HK Goodwill belongs to EOJP, whether the parties have, by agreeing to the separate arrangement for the sale of the EOJP Shares and the EOHK Shares, somewhat acknowledged that there was a split of goodwill for the businesses between Japan and Hong Kong and EOHK was entitled to operate its business in Hong Kong using the Brand and the Marks?

57.  Again this is not a finding open to the court. Even according to the evidence, the parties had not considered the ownership of goodwill when they negotiated the deal for the transfer of Seki’s auctioneering business.  All they talked about was the transfer of the shares of the two entities EOJP and EOHK.  On the one hand, Seki believed the deal only covered the sale of the EOJP Shares.  Unless the parties made a binding agreement for the sale of the EOHK Shares, EOHK could continue to use the Brand and the Marks in Hong Kong.  On the other hand, Yoshimori believed that: (i) the deal covered the sale of the whole auctioneering business; and (ii) all the goodwill associated with the Brand and Marks, whether it was the goodwill in Japan or Hong Kong, belonged to EOJP.  In the absence of a common intention, the court cannot make a finding that there was some kind of implied agreement or acknowledgment for separate ownership of goodwill.

58.  On the 1^st Core Issue, I therefore find that the HK Goodwill is and was owned by EOJP at all material times.

The 2^nd Core Issue: the validity of the registration of the Marks

59.  The first two core issues are closely related. The question under the 2^nd Core Issue is whether the registration of the Marks by Seki should be declared invalid in view of the findings made under the 1^st Core Issue.

60.  In the counterclaim, HK New Art Est-Ouest challenges the validity of the registration of the Marks on the following grounds:

(i)    The application for use of the Marks by Seki was prohibited by the Non-Competition Clause under the SPA.

(ii)   The Marks are not capable of distinguishing the goods and services of one undertaking from those of other undertakings and accordingly are not trade marks as required under s 3(1) of the Trade Marks Ordinance, Cap 559 (“the TMO”).

(iii)  The Marks are likely to deceive the public about the origin of the services contrary to s 11(4)(b) of the TMO.

(iv)  The use by Seki or EOHK of the Marks is against the law of passing-off contrary to s 11(5)(a) of the TMO.

(v)   The application for registration of the Marks was made in bad faith:

(a)  the HK Goodwill was acquired by New Art Holdings under the SPA;

(b)  Seki was prohibited by the Non-Competition Clause in the SPA to make the application;

(c)  by juxtaposing the words "Since 1984" in the Marks, the Marks mislead the public into thinking that: EOHK has been established or has carried on business since 1984; the trade origin of the goods or services is EOJP; and EOHK is somewhat connected or associated with EOJP, each of the matters is not correct according to Seki’s own case which formed the basis of the application;

(d)  after the making of the SPA, the use of the Marks by EOHK or Seki in Hong Kong amounts to passing-off; and

(e)  by making the application, EOHK and Seki intended or attempted to obstruct the legitimate business of New Art Holdings and EOJP in Hong Kong for ulterior purpose, thereby amounting to an abuse of process.

61.  The New Art Camp do not ask for a transfer of the registration of the Marks or a rectification of the registration, and so validity of the registration is the only issue in the present case.  Further, the Seki Camp do not seek to argue that, because the goods or services covered by the registration of the Marks are different from auctioneering service, Seki should somehow be allowed to retain the registration of the Marks for these other goods and services.  Neither do the Seki Camp advance the argument that, because auctioneering service is different from the goods and services covered by the registration, there is no likelihood of confusion by the use of the Marks on the other goods or services.

62.  Based on the findings made by the court in respect of the 1^st Core Issue, the HK Goodwill belongs and belonged to EOJP at all material time.  Under such circumstances, unless with the consent of EOJP, any use of the Marks by other parties in respect of auctioneering service or related goods or services would amount to passing-off, as the public would be deceived and confused about the origin of the auctioneering business or the related goods or services, the goodwill of which belongs to EOJP.  The application for registration of the Marks after the completion of the sale under the SPA was, therefore, made contrary to ss 11(4) and 11(5)(a) of the TMO.  This would have been sufficient to invalidate the registration of the Marks.

63.  Though Seki genuinely believed that EOHK owns the HK Goodwill, the test for bad faith is an objective one.  The issue is whether the applicant was involved in some dealings which fall short of the standards of acceptable commercial behaviour observed by reasonable and experienced men in the particular area being examined.^[13] As EOJP at all times owns and owned the goodwill associated with the Marks both in Japan and Hong Kong and Seki was no longer the majority shareholder of EOJP after the completion of the sale of the EOJP Shares, the application for registration of the Marks in Seki’s own name certainly falls below the the standards of acceptable commercial behaviour as mentioned above.  Hence, the registration of the Marks should also be invalidated on the bad faith ground.

64.  For these reasons, I make an order invalidating the registration of the Marks on the grounds mentioned above.  I therefore do not need to consider the other grounds for invalidation, including the academic question as to whether the making of the application was also in breach of the Non-Competition Clause in the SPA.

65.  The effect of the findings on the 1^st and 2^nd Core Issues means that EOHK and Seki cannot maintain a claim of passing-off or trade marks infringement against HK New Art Est-Ouest or indeed any other parties of the New Art Camp.  As they are not the owners of the HK Goodwill, they have no locus to make any claim for passing-off against the New Art Camp in Hong Kong.  Further, as the registration of the Marks by Seki is invalidated for the reasons given above, the claim for trade marks infringement must also fail.  I therefore make an order dismissing the claims by EOHK and Seki.

The 3^rd Core Issue: whether there was a binding agreement for the sale of the EOHK Shares?

66.  The answers to the 1^st and 2^nd Core Issues would provide HK New Art Est-Ouest with a complete defence to the claim for trade marks infringement and passing-off.  Mr Wright, counsel for the New Art Camp in this action, submits that the court should not deal with the 3^rd Core Issue, i.e. whether there was a binding agreement for the sale of the EOHK Shares, in the present case.  As the court can dispose of the claim based on the rulings on the 1^st and 2^nd Core Issues, whatever view expressed by the court on the 3^rd Core Issue would only be obiter.

67.  I disagree.  The 3^rd Core Issue is in fact a live issue in contention in the present litigation.  Since the court had heard all the relevant evidence on the 3^rd Core Issue, there is no reason why the court should not decide on such issue as well.   As to whether the parties in the HC Action are bound by my findings on the 3^rd Core Issue by reason of issue estoppel, I would leave it for future argument in the HC Action.  But as I have mentioned in the earlier part of this Judgment, it would be a waste of costs and resources if the parties would have to re-litigate the same issue again.

68.  In my judgment, the answer to the 3^rd Core Issue is also clear: there was no binding agreement for the sale of the EOHK Shares.

69.  Seki and Yoshimori were the only persons involved in actual negotiation for the sale of Seki’s auctioneering business. Yoshimori maintained that Seki agreed to the New Art Valuation, which formed the basis of a binding agreement for the sale of both the EOJP and EOHK Shares.  Seki denied this.  Despite the difference in their oral testimonies, it would be more appropriate for the court to rely on the more objective evidence to determine this particular issue.

70.  To me, the terms of the Basic Agreement are clear.  It specified that there was no binding agreement for the sale of the EOHK Shares.  Even given the reasons put forward by Yoshimori as to why there should be two separate transfers[14], I cannot understand why the parties would have had to execute a formal written agreement to confirm that there was no binding agreement for the sale of the EOHK Shares.  The New Art Camp cannot provide a satisfactory explanation even up to this stage.  Given the scale of the transaction, the parties must have intended to give weight to the formal written document executed by them, and that the formal agreement has stipulated clearly that there was no such binding agreement.  Indeed, there was negotiation between the parties even in September 2021 about the final terms for the transfer agreement relating to the EOHK Shares.

71.  In trying to establish that Seki had agreed to the New Art Valuation, the New Art Camp seek to rely on the correspondence between New Art Holdings and its lawyer and financial consultant.  In particular in the email dated 26 May 2021, Yoshimori mentioned to the lawyer that Seki had already agreed for the New Art Valuation to be the basis for the sale of Seki’s auctioneering business.  However, such correspondence only reflects the subjective “wishful thinking” of Yoshimori by that time.  In determining whether there was a binding agreement, the court should rely on the more objective document which was executed by the parties by that time, ie. the Basic Agreement, and the negotiation between the parties about the final terms for the transfer of the EOHK Shares in September 2021.  Hence, I do not find that such self-serving correspondence can take the case of the New Art Group any further.

72.  In a further attempt to persuade the court to make a finding of a binding agreement, Mr Wright submits that there is evidence to support that the New Art Valuation did take into account the financial position of EOHK.  Further, given the cash reserve of EOHK by that time, Seki could not have agreed for such a low consideration for the transfer, i.e. HK$140,000, unless such transfer price was only a nominal sum which had already been agreed as part of the overall transaction.

73.  I disagree.  The fact remains that, despite how New Art Holdings came to work out the New Art Valuation, the parties expressly signed a formal agreement confirming that there was no binding agreement for the sale of the EOHK Shares.  Further, as Seki had explained in his testimony, the parties were contemplating future listing of EOHK, and so it is perfectly reasonable for Seki to have accepted a lower reference price for negotiation, with the ultimate price depending on the parties’ future discussion about the arrangement in the case of such listing.  Hence, none of these submissions can disturb my finding that there was no binding agreement for the sale of the EOHK Shares.

The answers to the various issues in the List and the consequential order

74.  For the sake of completeness, I will give the specific answers to the various issues in the List.

75.  For Issues 1 and 2, I find that there was a binding agreement for the sale of the EOJP Shares but no binding agreement for the sale of the EOHK Shares.

76.  By reason of my findings under the 3^rd Core Issue, the answers to Issues 3, 4 and 5 are in the negative.

77.  As I have invalidated the registration of the Marks on the other grounds as mentioned above, I do not answer Issues 6 to 8.

78.  By reason of my findings on the 1^st Core Issue, the answers to Issues 9 and 10 are in the affirmative.

79.  For Issue 11, I find that EOJP has all along been the owner of the HK Goodwill.  For the reasons given above, I do not need to answer the latter part of the question relating to the Non-Competition Clause.

80.  Issue 12 is about the question as to whether the registration of the Marks should be declared invalid for the various grounds stated therein.  I have answered this question in above section on the 2^nd Core Issue.

81.  For Issue 13, I find that there was no infringement of the Marks by HK New Art Est-Ouest.

82.  For Issue 14, since the HK Goodwill belongs to EOJP and the public associated the same with EOJP for the reasons mentioned above, any use of the Brand or the Marks by EOHK or Seki would amount to passing-off.

83.  The Defendant succeeds in its defence and counterclaim.  Yet the court did spend time to deal with the 3^rd Core Issue the finding of which is unfavourable to the Defendant.  I therefore make a costs order nisi that the Plaintiffs do pay to the Defendant 80% of its costs of the action, which shall be made absolute 14 days after the date of the handing down of this Judgement.

Schedule A

Schedule B

Schedule C

1.  Did New Art Holdings and Seki agree in 2021 that Seki would sell a majority of his shares of EOJP and a majority of his shares in EOHK to New Art Holdings and/or its nominee?

2.  If New Art Holdings and Seki did enter into an agreement in 2021 for the sale by Seki of a majority of his shares in EOJP and a majority of the shares in EOHK:

(i)    Did the agreed price of JPY 600 million (together with the additional HK$140,000) include (1) the purchase price of the shares in EOHK and (2) the premium of JPY 100 million?

(ii)   Was it an implied term of the agreement that Seki would cause Both Companies (EOJP and EOHK) to continue operate as a group i.e. the Target Group carrying out the entire business for and on behalf of New Art Holdings?

(iii)  Was it an implied term of the agreement that New Art Holdings and/or its agents would be entitled to use and exploit the new company name of EOJP for the business of EOJP in Hong Kong?

(iv)  Did New Art Holdings acquire the rights to use and exploit the Trade Names, the Brands, the Unregistered Trade Marks and/or logos of EOJP or the group of EOJP and EOHK in Hong Kong under the agreement aforesaid?

3.  Did Seki enter into a binding agreement to transfer 70% of the shares in EOHK to New Art Holdings or its nominee?

4.  Did Seki act in breach of his contractual obligation to transfer 70% of his shareholding in EOHK to New Art Holdings or its nominee?

5.  Does Seki hold 70% of the shares in the EOHK on trust for New Art Holdings and/or its nominee?

6.  Did Seki cause EOHK break off from the group of EOJP and EOHK?

7.  If so, did Seki act in breach of the Non-Competition Clause contained in Clause 13 of the SPA?

8.  By his actions in applying for and registering the Marks, did Seki act in breach of the Non-Competition Clause contained in Clause 13 of the SPA?

9.  Did the goodwill and reputation of the auctioneering services provided by EOHK and/or Seki in Hong Kong emanate from EOJP?

10.  Did the Brands, Trade Names and Unregistered Trade Marks, through which such goodwill and reputation was acquired, belong to EOJP?

11.  Further, does the goodwill and reputation acquired through the use of the Brands, Trade Names and Unregistered Trade Marks in Hong Kong belong to EOJP? Alternatively, does such goodwill and reputation belong to EOHK and/or Seki?

(i)    If the goodwill and reputation in the Brands, Trade Marks and Unregistered Trade Marks belong to EOHK and/or Seki, had the goodwill and reputation ceased to subsist at any time?

(ii)   Alternatively, was the use of the Marks by Seki and/or EOHK prevented by the Non-Competition Clause for 3 years, as a result EOHK having no goods and services to trade until the expiry of the 3 year period?

12.  Was the registration of Marks by Seki on or about 3 May 2021 invalid and/or should be revoked on some or all of the following grounds:

(i)    Seki's trade mark application for and/or Seki's and/or EOHK's use of the Marks was prohibited by the Non-Competition Clause?

(ii)   The Marks are not capable of distinguishing the goods and services of EOHK from those of other undertakings i.e. EOJP?

(iii)  The Marks are likely to deceive the public and/or are liable to mislead the public?

(iv)  The use of the Marks by the EOHK and Seki is prohibited by the law of passing-off against EOJP?

(v)   The application for registration of the Marks was made in bad faith?

13.  Did the company and business names and/or the new brands of HK New Art Est-Ouest infringe the Trade Marks?

14.  Did the EOHK and Seki pass off themselves as EOJP? Alternatively, did HK New Art Est-Ouest pass off EOHK?

(i)    Do EOHK and/or Seki have any goodwill and reputation in the Brands and/or the Marks as alleged or at all?

(ii)   Are the Brands and/or the Marks well known, distinctive of [EOHK] as alleged or at all?