MENFOND ELECTRONIC ART & COMPUTER DESIGN CO., LTD v. WONG WANG TAT VICTOR AND ANOTHER

CACV 18/2013

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 18 OF 2013

(ON APPEAL FROM HCA NO. 293 OF 2011)

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BETWEEN

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Hon Lam VP:

1.  I agree with the Reasons for Judgment of Kwan JA.

Hon Kwan JA:

2.  This is an appeal from the summary judgment entered by Deputy High Court Judge Lisa Wong, SC on 3 January 2013 in respect of those parts of the plaintiff’s claim relating to its domain name and website.  The judge made a declaration of beneficial ownership of the domain name and website in favour of the plaintiff and granted various reliefs in respect of the claim for passing-off.

3.  Two broad issues are raised in this appeal.  The first is whether the fraud exception in Order 14 rule 1(2)(b) of the Rules of the High Court, which prevents summary judgment from being entered in “an action which includes a claim by the plaintiff based on an allegation of fraud”, applies in the present case.  The second is whether there is any triable issue relating to the claim in passing-off, specifically, whether the judge’s finding relating to misrepresentation should stand.

4.  At the conclusion of the hearing, we dismissed the appeal with costs to the plaintiff with reasons to be handed down.  These are the reasons for judgment.

The background

5.  The background facts are set out in the judgment below at §§2 to 12.  For present purpose, they may be briefly stated as follows.

6.  The plaintiff was incorporated in 1989 under another name.  It was founded by two brothers, Victor and Eddy Wong with the backing of their parents.  After the two brothers acquired the company, they caused it to change its name to Menfond Electronic Art & Computer Design Co Ltd (萬寬電腦藝術設計有限公司).  Since early 1990, the plaintiff has been providing digital animation and computer generated image (“CGI”) services in Hong Kong to clients from the film and television industry on films and television projects, advertising agencies on advertising projects and corporate clients on video clips for their internal use or for use as marketing and promotional material.  From 2003, shareholders outside the Wong family held just under 25% of the shares in the plaintiff.

7.  In 2010, a rift developed between the plaintiff’s shareholders dividing them into two camps, with Victor, his parents and a company known as Menfond Company Limited on one side, and Eddy and the outside shareholders on the other side.

8.  In February 2001, Victor created the domain name (“menfond.com”) and website (www.menfond.com”) of the plaintiff and registered them in his own name.  Since their registration, the domain name and the website have been used actively and continuously (until 25 October 2010) only by and for the plaintiff’s business.  The judge rejected the allegation of the defendants that the name “Menfond” and “萬寬” was owned by the father of the Wong brothers.  There is no appeal against this finding or the holding of the judge that the plaintiff is the beneficial owner of the domain name and website.

9.  In April 2001, a company called 佛山市南海區里水萬寬電腦藝術設計有限公司 (“Li Shui Menfond”) was established in the PRC in the names of two PRC citizens.  They held 48% of the shares in this entity as nominees for Victor and Eddy.  It is the plaintiff’s case that Li Shui Menfond was intended to act as a production house for the plaintiff and to develop the PRC market and channel business back to the plaintiff.  However, Li Shui Menfond was a failure and had to rely on financial support of the plaintiff, in return for which it agreed to charge the plaintiff for production work at cost.

10.  In January 2007, the plaintiff set up a wholly owned subsidiary in Suzhou in the PRC, known as 萬寬數碼動漫 (蘇州) 有限公司 (“Suzhou Menfond”).  It was intended that orders from the plaintiff’s customers who wished to contract with a PRC company would be transferred to Suzhou Menfond instead of Li Shui Menfond.

11.  Notwithstanding the incorporation of Suzhou Menfond, orders from the plaintiff’s customers continued to be transferred to Li Shui Menfond.  In 2007, the other shareholders of Li Shui Menfond who are not members of the Wong family were bought out by the parents of the Wong brothers.  Eddy and the outsider shareholders of the plaintiff were allegedly not informed about this.

12.  On 25 October 2010, Victor was dismissed from his position as executive director of the plaintiff forthwith.  In April 2011, he was removed as a director of the plaintiff.

13.  The second defendant, Menfond Digital Pictures Limited (萬寬數碼影畫 (國際) 有限公司) was incorporated on 7 October 2010.  The brother’s mother was one of the two directors.  Alchemist Agency Limited (“Alchemist”) was incorporated on 15 October 2010 with the same registered address of the 2^nd defendant.  Victor is a founding member, one-third shareholder and director of Alchemist.  It is the plaintiff’s case that the 2^nd defendant provides digital animation and CGI services directly in competition with the plaintiff and Alchemist acts as an agent providing digital animation and CGI services directly in competition with the plaintiff.  The judge rejected the contention of the defendants that the 2^nd defendant merely acts as a payment collection agent for Li Shu Menfond and found this “inherently implausible”.  She held that the only reasonable inference is that the 2^nd defendant must have some production capacity and therefore competes with the plaintiff directly.  There is no appeal against this finding.

14.  Between 25 October 2010 and 3 January 2011, Victor caused the website of the plaintiff to display the 2^nd defendant’s name followed by the word “updating” and providing the Hong Kong and Mainland China telephone numbers and email address of one Cons Li, with the title “senior producer”, as the person to contact for inquiry.  Cons Li used to be the senior producer employed by the plaintiff but had resigned and last reported duty to the plaintiff on 8 November 2010.

15.  From 4 January 2011, Victor caused the website to display a statement of his father stating that he created the names “Menfond” and “萬寬” and reserves his rights to the same.

16.  The plaintiff claims that the listing of the 2^nd defendant’s name and contact details on the plaintiff’s website and the use of “Menfond” and “萬寬” by the 2^nd defendant in its corporate name amount to acts of passing-off.

The jurisdiction issue

17.  In this action, the plaintiff also claims against Victor for breaches of fiduciary duties as a director and breaches of contractual duties under a service agreement.  They are pleaded in the statement of claim at §20 and have been summarized by the judge as follows:

(1) continuing to cause orders from the plaintiff’s customers to be transferred to Li Shui Menfond even after the establishment of Suzhou Menfond;

(2) not disclosing to the plaintiff the acquisition of the shares in Li Shui Menfond held by shareholders who are not members of the Wong family;

(3) not providing any accounts or records of Li Shui Menfond to the plaintiff since December 2009; and

(4) misrepresenting on various occasions to the plaintiff’s customers that Li Shui Menfond was a wholly owned subsidiary of the plaintiff in an attempt to take unfair advantage of the plaintiff’s goodwill and reputation for the benefit of Li Shui Menfond.

18.  The defendants contended before the judge that the above allegations of misconduct of Victor are allegations of fraud which would invoke the exception in Order 14 rule 1(2)(b) which prevents summary judgment from being entered in respect of other claims in this action.

19.  The judge considered in some detail the relevant cases decided in England before a similar provision in the Rules of the Supreme Court was abrogated in June 1992 and cases decided in Hong Kong including these more recent decisions of the Court of Appeal – Pacific Electric Wire & Cable Co Ltd v Harmutty Ltd [2009] 3 HKLRD 94; A-1 Business Limited v Chau Cham Wong Patrick [2009] 5 HKLRD 579; and Borri SpA v Tralco Technology Limited, CACV 207/2009, 29 January 2010.

20.  At §52 of the judgment, the judge summarized the legal principles as follows:

(1) An allegation of deliberate dishonesty, not of the type in Derry v Peek (1889) 14 App Cas 337 at 374, also constitutes an allegation of fraud under Order 14 rule 1(2)(b).

(2) The fraud alleged must be fraud against the plaintiff.

(3) In considering whether an action includes a claim in respect of which an underlying allegation constitutes an allegation of fraud, the court should have regard not only to the statement of claim, but also to the pleadings as a whole.

21.  Miss Winnie Chan, who appeared for the defendants here and below, did not challenge the legal principles stated by the judge.  Her contention was that the judge failed to apply the legal principles correctly.  She submitted before us, as she did before the judge, that the implication of the matters pleaded in §20 of the statement of claim is that Victor was making secret profit from allowing Li Shui Menfond to benefit from the plaintiff’s goodwill and was motivated by deliberate dishonesty.  Hence the underlying allegation of deliberate dishonesty is present and the fraud exception to Order 14 should apply.

22.  The judge had dealt with these submissions in the judgment at §§54 to 59, adopting the approach in §53, namely, that the court should not infer the making of an allegation of deliberate dishonesty too liberally, it should not put a spin of deliberate dishonesty on an allegation of an act or omission simply because the plaintiff says it is wrongful on his version of events.  And in the absence of an express attribution of dishonesty, a party should not be held to have made an allegation of deliberate dishonesty unless the act or omission complained of is by its very nature inherently or implicitly dishonest.

23.  I find the judge’s approach and reasoning impeccable.  There is nothing in the language of the allegations against Victor that could be construed as deliberate dishonesty.  The acts and omissions pleaded against him are not by their nature inherently or implicitly dishonest.  I agree with the judge’s analysis that the dispute between the parties over Li Shui Menfond is about the agreement and understanding how this company was to be operated in relation to the plaintiff.

24.  I reject the contention that the plaintiff is precluded from seeking summary judgment on the jurisdiction issue.

Passing-off and misrepresentation

25.  The applicable legal principles are again not in dispute, see the three elements of goodwill/reputation, misrepresentation and damage for passing-off in the authoritative statements of Lord Oliver in Reckitt & Coleman Products Ltd v Borden Inc [1991] 1 WLR 491 at 499D to H.

26.  The judge has held it is indisputable that the plaintiff has established a goodwill or reputation as a digital animation and CGI studio under the name of “Menfond” and “萬寬” since 1990.  That finding was not the subject of challenge in the Notice of Appeal.  When Miss Chan made her submissions, she sought to argue that the goodwill or reputation of the plaintiff is “tied up” with the goodwill or reputation of Victor and Eddy.  If her argument is that the plaintiff has no goodwill or reputation separate and distinct from that of Victor and Eddy, I reject it without hesitation as contrary to the holding of the judge.

27.  The question on appeal advanced strenuously by Miss Chan is whether the judge should have held there is a triable issue whether the defendants have made a misrepresentation to prospective or ultimate customers leading or likely to lead to the belief that the services offered by the 2^nd defendant were the services of the plaintiff or associated with the plaintiff.

28.  Miss Chan submitted that on the available evidence, the series of acts and publications of the defendants did not represent the 2^nd defendant as providing the services of the plaintiff or that there was connection between the plaintiff and the 2^nd defendant.  The acts only attracted people who “wondered” what was going on with the plaintiff, rather than people who “assumed” or “believed” that by engaging the contact of the 2^nd defendant posted on the plaintiff’s website, they would get the services of the plaintiff.  In other words, mere confusion was generated by the 2^nd defendant’s corporate name or the posting of its contact detail on the plaintiff’s website.  There was no misrepresentation as there was no deception or reasonable probability of deception.  Counsel emphasized that the plaintiff’s business involved creative work, it operated in a small circle of customers who would be discerning and not likely to be labouring under deception, there was high demand on creative talents in the trade so that reputation was normally attached to the persons (namely, Victor and Eddy) rather than to the company employer and the feud of the brothers was made public since November 2010.  She drew our attention to the fact that the 2^nd defendant’s logo is different from the plaintiff.  All this called for examination of the habit and characteristics of the potential customers to determine whether any deception by the defendants would have operated on them.  She submitted there was no sufficient evidence of likely deception and it cannot be safely concluded there was no triable issue that the defendants had made a misrepresentation.

29.  Miss Chan relied heavily on the case of HFC Bank plc v Midland Bank plc [2000] FSR 176 to make the point that mere confusion between two traders’ products does not provide the basis for a passing-off action.  Lloyd J in that case examined the evidence not just to see whether the claimant HFC had established some goodwill in general terms but whether it had goodwill as regards a particular person at a particular time to see if the use of the brand name HSBC by the defendant would be misunderstood by someone in respect of whom HFC did enjoy goodwill, otherwise relevant misrepresentation would not be established.  It was held on the facts that persons as respects whom HFC did not have goodwill, because they had no established brand recognition, had been confused as between HFC and HSBC, but that was not enough to make out a case of passing-off because even if in some sense it might be regarded as a misrepresentation, it was not made to the relevant people.  As stated by the judge at 201, misapprehensions of this kind “do not show that there has been any false representation by anyone.  What they show is that people make assumptions, jump to unjustified conclusions, and put two and two together to make five.”

30.  The above case was decided on the special facts that much of the confusion that arose from the use of HSBC as a brand was due to the relatively low level of brand recognition which HFC enjoyed for its name.  So it was a case of non-actionable confusion and did not involve a relevant misrepresentation.  As stated in Phones 4U Ltd v Phone 4U.co.uk.internet Ltd [2007] 5 RPC 83 at §20, the case of HFC was one on its facts, it decided no question of principle.  HFC is very different from the present case, in which the judge found on the evidence that the plaintiff has established a goodwill or reputation under the name of “Menfond” and “萬寬” for over 20 years.

31.  The distinction between “mere confusion” and deception which amounted to misrepresentation is a question of degree (Phones 4U, §17).  The proper approach in deciding whether there was a misrepresentation carrying a likelihood of deception is that the court has to consider the evidence adduced and use its common sense and its own opinion as to the likelihood of deception. It is overall a ‘jury’ assessment involving a combination of all these factors (Neutrogena Corporation v Golden Ltd [1996] RPC 473 at 482).

32.  The matters raised by Miss Chan in an attempt to play down the risk of confusion or deception have all been considered and dealt with by the judge in §§83, 86 and 87 of the judgment, which I do not propose to repeat.  The judge was entitled to take into account the matters which found favour with her in §85 of the judgment in her assessment of a reasonable probability of deception. It is entirely a common sense approach, given the unique and distinct character of the name “Menfond” and “萬寬”, that no one but the plaintiff and its subsidiaries and associated company have been using the name for quite some time, that the 2^nd defendant used the name “Menfond” and “萬寬” in its corporate name with the words “Digital Pictures” and “數碼影畫” which are descriptive of one type of service provided by the plaintiff, and that the 2^nd defendant put out an advertisement with the word “updating” and listing the 2^nd defendant’s name with a former production staff of the plaintiff as the person to contact on the plaintiff’s website which was used exclusively by the plaintiff to promote and market its business for ten years up to October 2010.

33.  This is a far cry from the situation mentioned by Lord Jauncey in Reckitt & Coleman Products Ltd v Borden Inc at 510E to F:

“… if a customer asks for a tin of black shoe polish without specifying any brand and is offered the product of A which he mistakenly believes to be that of B, he may be confused as to what he has got but has not been deceived into getting it. Misrepresentation has played no part in his purchase.”

34.  I can discern no error in the judge’s assessment of all the relevant matters.  I agree entirely with the judge there is no triable issue as to whether the 2^nd defendant has made a misrepresentation.

35.  The appeal is wholly without merit.  We have therefore dismissed the appeal with costs to the plaintiff.

Hon Mimmie Chan J:

36.  I agree with the Reasons given by Kwan JA.  On the passing-off claim, there being no appeal against the judge’s finding that the plaintiff owns the goodwill in the business carried on by the plaintiff under the name “Menford” and “萬寬”, I fail to see how the judge’s findings on misrepresentation and the likelihood of deception can be faulted in any way.