PROMOTEC GMBH v. SAN-BAN INTERNATIONAL LTD

HCA 3408/2001

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 3408 OF 2001

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J U D G M E N T

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I. Introduction

1. Promotec, a German company, claims the copyright in drawings of the Jelly Watch. It seeks damages against San-Ban for breaching a licence agreement relating to the Jelly Watch and infringing its copyright.

2. Apart from minor differences over terms, San-Ban does not dispute the agreement. San-Ban instead asserts that copyright in connection with the Jelly Watch either vests in it, or in itself jointly with Promotec, or in some person other than Promotec. San-Ban consequently denies that it has infringed Promotec's copyright.

3. San-Ban further asserts that, having entered into the agreement under a fundamental mistake that copyright vested in Promotec, the agreement was void from the start and Promotec must restore all royalties which San-Ban has paid under the agreement.

4. There are then 3 main questions to determine:-

(1) In which person does copyright vest?

(2) If copyright vests in Promotec, is it entitled to damages for breach of its copyright and the agreement?

(3) If copyright does not vest in Promotec, is San-Ban entitled to restitution of royalties paid under the agreement?

II. Background

5. There are 3 models of Jelly Watch.

6. The original model (JW-01) has a one-piece strap (about 2 cm wide) with a rectangular face in the centre. The buckle apart, the lengths of the strap are parallel to each other. Both above and below the watchface, the strap bends stiffly up and down to form 3 waves. The watchface displays time digitally in a vertical liquid crystal display (LCD) format, with hours on top, a blinking lozenge to mark the seconds in the middle, and the minutes below.

7. Model JW-02 looks like JW-01, except that the strap comes in 2 pieces. One piece is attached to the top of the dial, the other to the bottom. But the attachments are carefully done to make it appear as if the strap was a single piece continuously running from above the dial face to below it.

8. Model JW-03 has a one-piece strap like the JW-01. The difference between the 2 models is that JW-3's strap is flat and lacks the wave feature of JW-01.

9. Promotec, then known as Style, started business with San-Ban in 1995 when it placed orders for Bubble Watches. These consisted of hemisphere watchcases filled with liquid in which a small object floated. Bubble Watches had 2-piece straps, one attached to the top, the other to the bottom of the watchcase. Each strap piece had 4 waves over which was placed an oval-shaped plate.

10. In late 1996 Mr. Robert Lommerzheim of Promotec wanted to move from selling Bubble Watches to marketing something new. In January 1997, Mr. Lommerzheim raised with Mr. Tang Tat Ming of San-Ban the possibility of San-Ban manufacturing a watch with a single strap and a flat-face digital time display in vertical format.

11. On 21 March 1997, with a computer, Mr. Lommerzheim produced a drawing of what he wanted the front and side views of the Jelly Watch to look like and sent the drawing to San-Ban. He later revised the shape of the buckle on the drawing to look more like that on the Bubble Watch. He sent a sketch of the buckle that he had in mind to San-Ban by e-mail dated 15 August 1997.

12. In May 1998 Promotec and San-Ban orally agreed the following terms:-

(1) Promotec held intellectual property rights in the name and design of the Jelly Watch.

(2) San-Ban would have the right to manufacture the Jelly Watch and sell the product on a non-exclusive basis to all parts of the world except Europe.

(3) San-Ban would pay Promotec a licence fee of US$0.10 per Jelly Watch sold, although for orders of more than 50,000 units the licence fee "can be negotiated".

(4) Upon Promotec's request, San-Ban would provide sales reports of the Jelly Watches sold by it to enable Promotec to calculate the licence fee due.

(5) San-Ban would pass on to Promotec all enquiries about the Jelly Watch from European customers and all orders for delivery of the product to European destinations.

13. On 8 February 1999 the oral agreement was reduced into writing and signed by San-Ban.

III. Discussion

A. In whom does copyright vest?

14. Copyright does not vest in abstract ideas. It can subsist in original artistic works, such as drawings.

15. Prior to trial, it had been Promotec's consistent position it did not hold any copyright in relation to JW-03. This was because JW-03 lacked the wavy feature which Mr Lommerzheim regarded as one of the important features of the Jelly Watch. Promotec conducted its business with San-Ban on this basis.

16. When giving oral evidence, Mr. Lommerzheim suggested that, Promotec's concession of copyright as far as JW-03 was concerned, had been made in error. But, in my view, it was far too late then for Promotec to resile from earlier clear representations to San-Ban that Promotec would not rely on such copyright as it might have in respect of JW-03. I think that Promotec thereby waived the right to insist on any strict application of copyright law with regard to JW-03. San-Ban acted upon Promotec's representations by marketing and selling versions of the JW-03 as San-Ban's own product.

17. This case should consequently focus on JW-01 and JW-02. Both Mr. Yip (for Promotec) and Mr. Hung (for San-Ban) claim that those 2 models were designed and manufactured following original drawings by their respective clients.

18. Mr. Hung submits the following:-

(1) Copyright resides exclusively in San-Ban by reason of drawings which San-Ban made both before and after Mr. Lommerzheim's March and July 1997 drawings.

(2) Alternatively, the Jelly Watch was based on drawings produced by both Promotec and San-Ban in the course of discussions in the first half of 1997, so that the authorship of and the copyright in drawings of Jelly Watch subsist in Promotec and San-Ban jointly.

(3) In the further alternative, copyright vests in neither party since none of their drawings constitute original work, but only incorporate features of existing watches.

A.1 Does copyright vest in San-Ban?

19. Mr. Hung relies on a miscellany of drawings prepared by San-Ban. They are as follows:-

(1) A drawing of front and side views of a watch with a single tapered strap, wider in the middle, narrower at either end, the upper and lower parts of the strap having 3 waves each, and the middle having a squarish face, with top hour and bottom minute LCD display separated by a colon.

(2) An undated sketch of a rectangular LCD display case and battery.

(3) An undated drawing of a watch with:-

(a) a two-piece strap, the upper strap with 4 waves topped by an oval plate, the lower also with 4 waves but without any plate; and,

(b) a watchcase wider than the width of both pieces of strap.

(4) An undated drawing similar to the previous one, but including various sketches of the watchcase (with dimensions).

(5) A set of 3 drawings, each similar to those described in sub-§(3), except that they include sketches of a larger watchcase (also wider than the width of both strap pieces) and various other parts of a watch (such as the battery and its case).

(6) A fax dated 30 April 1997 addressed to Mr. Au-yeung, showing a rectangular digital display with vertical format (with dimensions) and requesting a quotation for manufacturing such display.

(7) A computer-generated drawing dated 15 May 1997 similar to Mr. Lommerzheim's March 1997 drawing.

(8) An undated technical drawing of the front and side views of a watch (with dimensions), the front and side views similar to Mr. Lommerzheim's March 1997 drawing, except for the absence of wave features in the front view and the appearance of half-waves (peaks on one side, flat on the other) on the side view.

20. Of the drawings relied on by Mr. Hung to establish copyright, only those in sub-§§(1), (7) and (8) of the previous paragraph bear any similarity to the Jelly Watch.

21. Of those 3 drawings, that in sub-§(1), although alleged by Mr. Tang to be the first drawing of a Jelly Watch, upon closer inspection, contains none of the Jelly Watch's distinctive features. The lengths of the strap are not parallel. The face is more square and squat, than sleek and rectangular. As Mr. Lommerzheim noted in the witness box, the impression given by the drawing is of a heavy-duty, "masculine" watch, one intended for the man in action. In contrast, the Jelly Watch has a softer, more delicate feel.

22. The remaining 2 drawings, those in sub-§§(7) and (8), post-date Mr. Lommerzheim's March 1997 drawing.

23. The drawing in sub-§(7) gives a date 2 months later than March 1997. It essentially copies the front view of the Jelly Watch found in Mr. Lommerzheim's March 1997 drawing.

24. According to Mr. Tang, the drawing in sub-§(8) was produced after discussion with Mr. Lommerzheim of his requirements. In any event, regardless of when it was made, since it lacks the full wave feature, the drawing does not correspond with the actual appearance of JW-01 or JW-02.

25. I conclude then that, as far as Promotec and San-Ban are concerned, the design of the Jelly Watch stemmed from Mr. Lommerzheim's March 1997 drawing.

26. I note that, practical considerations apart, on the evidence, the parties never truly regarded the buckle as a significant aspect of the Jelly Watch. I do not think that Mr. Lommerzheim's July 1997 buckle sketch constituted more than a minor refinement of the distinctive features of the Jelly Watch already apparent in Mr. Lommerzheim's March 1997 drawing.

27. I also observe that, as far as copyright in relation to JW-02 is concerned, it is true that Mr. Lommerzheim's March 1997 drawing is not strictly apposite. That is because JW-02 uses two pieces of strap, rather than one. Nevertheless, I doubt that this feature is a significant deviation from the March 1997 drawing.

28. The evidence is that only after close examination of a JW-02 does one realise that two pieces of strap have been used in place of a single, continuous strap. This deliberate illusion that the JW-02 strap is all of one piece and thus identical to JW-01 leads me to conclude that, in essence, JW-02's design derived from the March 1997 drawing.

29. It follows that there is no basis for San-Ban to claim copyright in the Jelly Watch arising out of drawings prepared by it. On the contrary, the design of JW-01 and JW-02 came from Mr. Lommerzheim's March 1997 drawing.

A.2 Does copyright vest in Promotec jointly with San-Ban?

30. From the analysis in Section A.1, San-Ban cannot claim joint authorship with Promotec. This was not a case of San-Ban collaborating with Promotec to arrive at some mutual drawing of the Jelly Watch.

A.3 Does copyright vest in some person other than Promotec or San-Ban?

31. Mr. Hung advanced no substantial evidence on this question. For example, San-Ban did not call an expert to give evidence as to the state of the LCD watch market in about March 1997 when Mr. Lommerzheim produced his design.

32. There was correspondence in the trial bundle from the solicitors of a Japanese company complaining that the Jelly Watch infringed its copyright. But I am unable to draw any inference from assertions in solicitors' letters untested by cross-examination.

33. For the purposes of copyright, little is needed to show originality in an artistic work. In my view, the details of JW-01 set out in the Background section of this Judgment, as exemplified in Mr. Lommerzheim's March 1997 drawing, meet that low threshold.

34. Mr. Hung suggested in cross-examination of Mr. Lommerzheim that he knew that watches with vertical LCD displays were the "trend" in 1997. However, it is one thing for vertical displays to have been a "trend", whatever that word might mean. It is another thing for there to have been some LCD watch product which combined the distinctive features of the Jelly Watch. Mr. Hung did not point the Court to any such timepiece pre-dating Mr. Lommerzheim's March 1997 drawing.

35. I therefore reject Mr. Hung's submission that copyright vested in some unknown person other than Promotec.

B. If copyright vests in Promotec, is it entitled to damages?

36. Promotec claims damages under 3 broad heads:-

(1) Damages for watches sold to European buyers in breach of the agreement;

(2) Damages for watches sold to non-European buyers without payment of the agreed licence fee; and,

(3) Exemplary damages under Copyright Ordinance (Cap.528) s.108(2).

B.1 Damages on sales to European buyers

37. Mr. Hung faintly suggested that the May 1998 oral agreement did not forbid San-Ban from selling to Europe. It was only later in the February 1999 written agreement (Mr. Hung said) that the prohibition was inserted. Mr. Hung's implication was that, before February 1999, San-Ban generally refrained from selling to Europe out of deference to Promotec, rather than obligation. It should not (Mr. Hung reasoned) be held liable for damages for any sales to Europe before February 1999.

38. I do not accept the argument. Mr. Lommerzheim discovered in September 1998 that San-Ban had been selling to Equinoxe in France. He complained. Instead of asserting that it was entitled to sell to Europe, San-Ban immediately accepted that it should not have been selling to Equinoxe. To make amends, San-Ban said that it would "inform them [Equinoxe] to buy from you [Promotec] directly for the next order onwards". This conduct indicates that from the outset there had been an oral agreement that San-Ban would not sell to Europe. The later written contract accurately reflected this oral understanding.

39. San-Ban sold 5,000 units of JW-01 or JW-02 watches to European buyers as follows:-

(1) To Zudor Losadi, Spain:-

(a) under Invoice No.98/230 dated 22 April 1998: 500 units.

(b) under Invoice No.98/430 dated 8 July 1998: 900 units.

(2) To Red or Dead Ltd., UK under Invoice No.98/378 dated 16 June 1998: 600 units.

(3) To Anglo-Oriental Manufacturing Co. Ltd., UK under Invoice No.98/436 dated 11 July 1998: 3,000 units.

The 5,000 units were sold in breach of the agreement.

40. San-Ban also claims for "50,750 or 51,000 units" of JW-01 watches sold to ACMP SA, Belgium under Invoice No.G99175 dated 11 October 1999. It is unclear from the invoice whether 50,750 or 51,000 watches were sold. I shall give San-Ban the benefit of the doubt and treat it as only having sold the lower figure. The transaction was in breach of the agreement.

41. I do not accept Mr. Hung's submission based on an Invoice No.9911051 that, of the 50,750 watches sold, 30,750 were JW-03 pieces. It seems to me that the invoice relates to a different transaction.

42. San Ban further claims that 62,675 units of JW-01 and JW-02 watches were wrongly sold to European destinations. For this allegation, it relies on 11 invoices particularised in Schedule IB to its Amended Statement of Claim.

43. Of the invoices in Schedule IB, only 3 mention a European destination. Of those 3 invoices, 2 involve sales to Promotec itself. Mr. Lommerzheim accepts that sales by San-Ban to Promotec do not give rise to an obligation to pay damages or licence fees. Only Invoice No.00/286 dated 27 June 2000 to Synoco Ltd., UK for 5,000 JW-01 watches clearly concerns a relevant European destination.

44. The remaining 8 invoices in Schedule IB do not on their face disclose European destinations or buyers. There is no evidence that they directly or indirectly related to sales to Europe.

45. I find that of the Schedule IB transactions, Promotec is only entitled to damages on the sale to Synoco of 5,000 units.

46. Mr. Yip has referred me to an e-mail dated 23 May 2001 from Mr. Lommerzheim to Ms. Mandy Lai So Man, San-Ban's sales manager. The e-mail begins:-

"Mandy,

you said during iour meeting that you misunderstood the contract in a way that the Europe sales had to be reported only. This clearly means that you definitely owe me the report for the other countries for the perios JAN 2000 to including JUL 2000, that's a fact and I didn't blame you for that, it's just been a mistake...."

Mr. Yip submits that a San-Ban document itemising invoices over a period from 29 February to 22 July 2000 is the sales report for January to July 2000 mentioned in the e-mail. The invoices listed in the document are in fact the 11 Schedule IB invoices. Read in conjunction with the e-mail's opening lines, the document (Mr. Yip argues) can only be a summary of sales to European destinations.

47. I do not find Mr. Yip's argument compelling. What precisely Mr. Lommerzheim meant in the e-mail was unclear. He was not asked in examination to elucidate. Nor was there cross-examination of Ms. Lai on the alleged sales report or on what she said to Mr. Lommerzheim during the meeting alluded to in the e-mail. In the circumstances, I cannot accept that the e-mail and the document must be read together as Mr. Yip contends.

48. Finally, Promotec claims damages for the sale of 2,200 units to Equinoxe in France. This was the transaction with Equinoxe which I have previously mentioned above.

49. Mr. Hung argues that Promotec accepted licence fees for this sale and is now estopped from claiming damages additionally. I disagree. I do not see how the fact that Promotec, on discovering the transaction and initially accepting licence fees in respect of it, can be taken to have waived the right to claim further sums as damages.

50. For each unit of JW-01 or JW-02 sold in Europe Promotec would have earned net profit of US$0.90 per unit. Mr. Hung did not seriously dispute this.

51. Promotec's claim for damages under this head would then be calculated as follows:-

(1) Total number of units sold to European destinations in breach of agreement: 62,950 (that is, 5,000 + 50,750 + 5,000 + 2,200).

(2) Damages would be (62,950 x US$0.90) - (2,200 x US$0.10) or US$56,435. The deduction of (2,200 x US$0.10) takes account of the fact that Promotec previously received licence fees for the 2,200 units sold to Equinoxe.

B.2 Damages on sales to non-European buyers

52. Mr. Hung says that, where orders for JW-01 or JW-02 consisted of more than 50,000 pieces, the obligation to pay a licence fee was void for uncertainty. Mirroring the March 1998 oral agreement, the February written contract stipulated that "For larger orders than 50,000 pcs. the licence fee can be negotiated". This (Mr. Hung submits) was no more than an agreement to agree which was unenforceable.

53. I construe the term which Mr. Hung queries to mean that, unless negotiations reduce the licence fee for orders of more than 50,000 pieces, the normal licence fee of US$0.10 per unit remains payable. I do not see any ambiguity in the term. Nor do I think that, in its ordinary meaning, the term constitutes an agreement to agree. I reject Mr. Hung's point.

54. Promotec seeks unpaid fees on 18 transactions listed in Schedule II to its Amended Statement of Claim.

55. Of these 18 transactions, Mr. Hung questions 2. Invoice No.G99/181 dated 18 October 1999 concerns the sale of Jelly Watch cases and buckles, not the Jelly Watch itself. Similarly, Invoice No.00/200 (Revised.2) involves the sale of LCD modules, not watches. There was no obligation under the agreement to pay licence fees on sales of watch parts.

56. Mr. Yip has argued that, if Jelly Watch parts have been sold, the sales must be subject to the payment of licence fees. It would be too easy otherwise for San-Ban to avoid the payment of royalties by arranging for watches to be broken down into and sold as parts. The buyer could then reassemble the parts into watches at minimal expense.

57. I do not accept Mr. Yip's contention. It is pure speculation. There is no evidence to support it. In particular, Mr. Yip is unable to demonstrate that San-Ban sold matching numbers of individual components of JW-01 or JW-02 watches at around the same time to the same buyer.

58. I therefore agree that the 2 invoices attacked by Mr. Hung in Schedule II must be ignored. This means that licence fees are only due on 72,896 units under Schedule II.

59. Promotec further claims fees for consignments to New World Time International Ltd. of 2,300 watchheads, 1,510 watch straps, and 4,400 watch straps respectively. For the reasons already discussed, royalty cannot be claimed for the watchheads and strap. The sales were only of parts, not of Jelly Watches.

60. Promotec additionally claims fees for the sale of 900 Jelly Watches to Concept 3 Ltd. San-Ban accepts that licence fees are due here.

61. Finally, Promotec claims fees for 380,700 units sold to Cosmetech Mably International in the US. San-Ban's only objection here is that the quantity exceeds 50,000 and so no licence fee is payable on account of uncertainty. This argument was rejected at the beginning of this section.

62. Promotec's claim for damages under this head would then be calculated as follows:-

(1) Total number of units sold to non-European destinations without payment of licence fees: 454,496 (that is, 72,896 + 900 + 380,700).

(2) Licence fees due would be US$45,449.60 (that is, 454,496 x US$0.10).

B.3 Damages under CO s.108(2)

63. Mr. Yip asks for exemplary damages. He puts forward the evidence of Ms. Cindy Chong Lai Ling in support of his submission.

64. Ms. Chong said that, when employed by San-Ban, Mr. Tang told her "to understate the quantity of Jelly Watch sold by the Defendant by approximately 30-50% in the sales statements to be submitted to the Plaintiff". Under cross-examination Ms. Chong did not flinch from the serious implications of her testimony.

65. But I doubt that I can accord much weight to Ms. Chong's evidence. Two concerns in particular lead me to view her statement with caution:-

(1) San-Ban dismissed her from its employment. She claimed against San-Ban in the Labour Tribunal. The experience could easily have coloured her views as to the way in which San-Ban conducted business.

(2) In any event, her evidence is unparticularised. No detailed information was offered (or sought in examination-in-chief) as to the precise sales reports (in any) in which she understated watches sold as instructed by Mr. Tang.

66. On balance I consider that it is too uncertain and unsafe for me to rely on Ms. Chong's evidence. I believe that any understatement of non-European sales of Jelly Watches was more likely due to human error. I therefore decline to grant exemplary damages.

C. If copyright vests in San-Ban, is it entitled to damages?

67. Both Promotec and San-Ban accepted that the agreement assumed copyright vested in Promotec. I have found that copyright did. There was no mistake. In light of my conclusion, this issue falls away.

IV. Conclusion

68. There will be judgment in favour of Promotec for US$101,884.60 (that is, US$56,435 + US$45,449.60). Of that amount, interest will run on US$45,449.60 (representing unpaid licence fees) from date of writ until date of judgment at 1% over US$ prime rate. Interest will run on the entire judgment debt from date of judgment until payment at the judgment rate.

69. San-Ban's Counterclaim for the restitution of royalties paid under the licence agreement fails. It is dismissed.

70. I order that the $300,000 paid into Court as security by San-Ban, together with any interest accrued, be paid out to Promotec to be set-off against the judgment debt.

71. I also order that the $330,000 paid into Court as security for San-Ban's costs, together with any interest accrued, be paid back to Promotec.

72. There will be an Order Nisi that San-Ban is to pay Promotec's costs of the action, such costs to be taxed if not agreed.