ONE PRICE TRADING CO. LTD. v. LEUNG CHUI MUI t/a JADE FOUNTAIN TRADING CO.

HCA 2327 of 1997

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 2327 OF 1997

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ASSESSMENT OF DAMAGES

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Background

1. The plaintiff was the registered proprietor of trade mark No. 6846 of 1996 for a "Pony Head device". The plaintiff manufactured leather goods such as handbags, wallets, and luggage bearing a pony or "pony head device" on them. On 27 March 1998 the plaintiff obtained judgment and a permanent injunction against the defendant from passing off and from infringing the plaintiff's trademark. Under paragraph 5 of the judgment the plaintiff is entitled to :-

" 5. An enquiry as to damages be held or, at the plaintiff's option, an account of profits in respect of the defendant's acts of trade mark infringement and passing off together with an Order for payment of all sums found due upon taking such enquiry or account."

Evidence

2. Ms Mandy So, a director of the plaintiff gave evidence at the hearing of the assessment. Ms So told the court that the plaintiff had been manufacturing leather goods with a pony head or the pony head device since about 1990. The plaintiff sold its goods in large numbers in Hong Kong and other south East Asian countries, in particular the Philippines.

3. Ms So said that the defendant Ms Leung began to purchase the plaintiff's goods in about October 1992. Ms Leung bought in bulk and paid the plaintiff in cash, so the defendant was given a 15% discount. Up to 8 October 1993, the sales to the defendant amounted to $7,549,666.40. Discounted by 15%, those sales came to $6,417,216.40. After such a pattern of trading for a year, the plaintiff opened a separate account for recording the sales made by the plaintiff to the defendant from October 1993 onwards. Copies of accounts of the sales to the defendant were exhibited to Ms So's affirmation as "MS-8".

4. In the records the defendant is referred to as " (捷運來)".

5. The general sales of the plaintiff increased steadily from 1993 onwards. Total sales in 1993 came to $40,877,000. Ms So produced the plaintiff's audited Profit and Loss accounts for the years 1994 to 1998. Using those accounts the plaintiff argued that a steady annual increase in percentage of sales could be shown.

6. Around 1995, Ms So heard rumours that the defendant was engaging in acts of infringement of the plaintiff's goods.

7. Ms So said that in contrast to sales to others which increased upwards steadily to 1996, sales to the defendant decreased from the end of 1995.

8. In 1993 sales to the defendant amounted to 41% of the plaintiff's total sales. In about June 1996 the sales to the defendant ceased altogether. In that year, the plaintiff's sales to others suffered a drop. In the following year, 1997, the plaintiff's sales only increased a mere 22.5%, which was significantly less than in the years leading up to 1996.

9. Ms So told the court she believed that the defendant stopped buying from the plaintiff because she had passed off her products as and for the products of the plaintiff, and had infringed the plaintiff's trade mark.

Consideration of the Evidence

10. The defendant was absent, so there was no challenge to the evidence adduced by the plaintiff. In these circumstances the court is duty bound to put the plaintiff to strict proof of its claims.

11. Ms So gave her evidence in a straightforward and natural manner. The case that she put forward was a reasonable one, supported by a considerable amount of documentary evidence. I had no reason to doubt that the defendant had purchased goods from the plaintiff as she had described. Given that the defendant had purchased goods from the plaintiff in great volume in 1993, 1994 and 1995, it was odd that the defendant suddenly stopped buying from the plaintiff in about June 1996.

12. The defendant had purchased $9,386,208.29 worth of goods from the plaintiff in 1993. During 1994 the defendant purchased $9,952,610.50 worth of goods from the plaintiff. In 1995, the amount of sales came to $2,165,208. The sales for the first part of 1996 came to a mere $44,103, thereafter the defendant did not buy anything from the plaintiff at all.

13. I noted that in the application for an injunction, there was evidence that a considerable of infringing goods bearing the plaintiff's trade mark had been found in the defendant's premises in about January and February of 1997.

14. In Tam Wing Lun Alan & Ors v Tam Kwok Hung [1991 2HKC 384, a decision of Master Patrick Chan (as he then was), it was observed that

"The basis of a passing off claim is that the defendant has sold or put on the market, goods which are calculated to deceive or mislead the public. The wrong lies in the defendant's get-up and description of his goods which constitutes a false representation to the public and this is sufficient to find (sic) a claim in passing-off."

15. The only reasonable inference to be drawn in the circumstances of the evidence presented is that the defendant continued to sell leather goods with the pony or pony head device after June 1996. Since the defendant did not obtain the leather goods with the pony or pony head device from the plaintiff after June 1996, the defendant must have been selling goods in that period that were passed-off as the plaintiff's goods, and/or goods that infringed the plaintiff's trade mark.

16. Even if I am wrong in drawing the conclusions in the preceding paragraph, the law makes certain presumptions in favour of the plaintiff. See paragraph 1947 of McGregor on Damages 16th Edn which states:-

"The law assumes, or presumes, that, if the goodwill of a man's business has been interfered with by the passing off of goods, damage results therefrom. He need not wait to show that damage has resulted. He can bring his action as soon as he can prove the passing off, because it is one of the class of cases in which the law presumes that the plaintiff has suffered damage....."

Measure of Damages for Passing Off

As to the measure of damages, McGregor has this to say at paragraph 1948 :-

" Little attention has been given to the assessment of damages despite the many cases of passing off in the reports. Spalding v Gamage and Draper v Trist are the only cases of importance. The principle head of damage is the loss of business profits caused by the diversion of the plaintiff's customers to the defendant as a result of the defendant's misrepresentation; beyond this, damages may be awarded for any loss of business goodwill and reputation resulting from the passing off. Damages under both these heads were held to be properly awarded in Spalding v Gamage, a result which has never since been doubted."

17. The main head of damage is therefore measured by the loss of business profits caused by the diversion of the plaintiff's customers to the defendant.

18. The principle above is easy to state, but is difficult to apply as the plaintiff will not normally have access to details of how much business had been diverted by the defendant.

Damages for Infringement of Trade Marks

19. It appears that the damages for infringement of a trade mark follow the same lines as damages for passing off.

20. See McGregor at paragraph 1952, which explained that :-

" Thus the principal head of damage is the loss of business profits caused by the diversion of the plaintiff's customers to the defendant as a result of the defendant's misrepresentation. Although it was laid down in Leather Cloth Co v Hirshfield that it could not merely be assumed that the goods sold by the defendant through infringement of the trade mark would otherwise have been sold by the plaintiff, this may be a proper inference on the particular facts, and damages calculated on such a basis were awarded in Alexander v Henry."

Assessment in Hong Kong

21. In the Alan Tam case cited above, it was observed at 387 that "this is an area of the law of damages in which we do not have the benefit of too many cases for reference with regard to quantum." Unfortunately the situation remains the same. Despite searching long and hard, the only other case I found was the Guangdong Mijiu case referred to below.

22. In the Alan Tam case, the plaintiff had to abandon his claim for loss of profits because the evidence adduced in that respect was described as "scanty".

The plaintiff's submission on calculation

The plaintiff urged the court to calculate damages in this way : "average monthly purchases by the defendant x no. of months between the cessation of business and the judgment date (i.e. 9 May 1996 to 27 March 1998 x the plaintiff's profit rate (i.e. 15% of account value), that is

HK$22,813,365.90	x 22 months x 15%
44 months		= HK$1,711,000

I am not persuaded that this is the proper way to calculate the damages. It should be recalled that McGregor stated that the calculation should be "the loss of business profits caused by the diversion of the plaintiff's customers to the defendant as a result of the defendant's misrepresentation." Here the plaintiff is asking the court to base the calculation on the volume of the defendant's purchases from the plaintiff, and treat those figures as if they represented the loss of business profits caused by the diversion of the plaintiff's customers to the defendant. I appreciate that it is difficult for the plaintiff to adduce any direct evidence on what volume of business has been diverted by the defendant, but paucity of evidence does not provide an excuse to depart from the authorities.

23. Even though I am satisfied that the defendant's goods in the marketplace must have had adverse effect on the plaintiff's sales, there was insufficient evidence on the volume of business that had been diverted by the defendant. Having considered all the available material, I have come reluctantly to the conclusion that I cannot make any award for loss of profit.

Assessment of Damages to Reputation

In the Alan Tam case above, Master Patrick Chan said :-

" In assessing the award for damage to reputation, the authorities clearly establish that the court must consider all the circumstances of the case and try its best to arrive at a fair and temperate sum for the injury (see Draper v Trist which was applied in the Hong Kong case of Xiang Si Hua v Bailey Record Co Ltd). In this respect, it is, as Goddard LJ in Draper v Trist said, similar to an action for libel. In my view, in making an assessment, the court is entitled to take into consideration the following circumstances : the plaintiff's reputation or goodwill; the conduct of the defendant, whether, for example, the passing-off is fraudulent or deliberate; the circulation of the passing-off items or goods; the publicity given by the defendant to his items or goods; the fact that the defendant has made a gain out of the passing-off; and the effect on the plaintiff or loss to him."

24. The plaintiff's sales records showed that it had a thriving business. In 1993 alone, the plaintiff s sold over $9 million worth of goods to the defendant. The plaintiff's overall sales for that year amounted to the not inconsiderable sum of $40,944,000. Although there was insufficient evidence to quantify a claim for loss of profit, there was clear evidence that the plaintiff's sales had decreased.

25. The defendant had bought vast quantities of the plaintiff's goods in the years before 1996. The defendant must have found it profitable to trade in goods bearing the pony device, otherwise the defendant would not have bought in such large quantities from the plaintiff.

26. There was evidence that the goods bearing the pony device in the possession of the defendant were of inferior workmanship and quality. The sale of large amounts of shoddily made goods must have had a negative effect on the plaintiff's business, and damaged the plaintiff's reputation and goodwill.

27. The defendant knew that the plaintiff owned the trade mark in question. For several years the defendant had purchased the plaintiff's goods in bulk, therefore in these circumstances the passing-off could not have been anything other than deliberate.

28. I have made a finding ante that I was satisfied that the defendant's goods in the marketplace must have had adverse effect on the plaintiff's sales.

29. I find that the passing-off must have been perpetrated since about the middle of 1996, when the defendant suddenly stopped buying any goods from the plaintiff.

30. It is not an easy task to settle on the appropriate sum for the damage to the plaintiff's reputation. In Xiang Si Hua, the court awarded $75,000 for damage to the reputation of a musician who specialized in performing on a Chinese instrument called the "Zheng".

31. In the Alan Tam case, a sum of $125,000 was awarded to the famous singer.

32. In the case of Guangdong Foodstuffs Import & Export (Group) Corporation & Anor v Tung Fook Chinese Wine (1982) Co Ltd & Anor (HCA Nos 7759,9547 and 11061 of 1995) Master Cannon had to assess the damages in relation to the passing-off and breach of copyright of bottles of rice wine. There the former staff manufactured rice wine in competition with the plaintiff, prompting the Master to comment that "the plaintiff's own people turned their back on them and made the products".

33. After considering all the relevant factors, Master Cannon awarded damages for loss of business profits in the region of HK$5 million.

34. Although the acts of this defendant cannot be compared to the acts of the defendants in the rice wine case, the investigator discovered that this defendant had set up in direct competition with the plaintiff.

35. In support of the application for an injunction, there was evidence adduced that a whole array of leather goods bearing the pony device was kept by the defendant for trading purposes.

36. In my view the circumstances in this case were more serious than the other local cases on damage to reputation.

37. I applied all the factors listed by Master Chan in the Alan Tam case to the present facts. I noted in particular that in the audited reports of the plaintiff, the turnover of the plaintiff for the year ending 31.3.96 was $94,335,345; and the turnover for the year ending 31.3.97 amounted to over HK$115,847,885. It must be accepted that with a business turnover of that magnitude, the plaintiff's reputation and goodwill was at risk, and indeed on the facts, the law recognizes that the plaintiff did suffer damage. Furthermore the defendant's acts were deliberate. Having built up a market for goods bearing the plaintiff's trade mark, the defendant set up her own supply of handbags and leather goods with the pony device. To add insult to injury, the goods sold by the defendant in competition with the plaintiff were of inferior materials and workmanship. With all those factors in mind, the court must arrive at a fair and temperate sum to be awarded for the injury done to the plaintiff's reputation. This exercise is made more difficult by the paucity of cases in this area. Therefore doing the best I can in the circumstances, I find that a figure representing one to two percent of the plaintiff's turnover at the time the defendant ceased buying from the plaintiff to be a fair and temperate sum for the injury. This was the time that the defendant must have set up the supply of shoddy leather goods for sale in competition with the plaintiff. One or two percent of the plaintiff's turnover is a very modest figure in the circumstances. Moreover it is in line with the approach taken in the few cases previously decided on the assessment of damages for breach of intellectual property rights.

38. Taking into consideration all the above, I find that an appropriate sum to be awarded for damage to the plaintiff's reputation is HK$1,500,000.

39. Interest shall be paid on the sum awarded at judgment rate from the date of judgment until payment.

40. The costs of the assessment to the plaintiff, to be taxed if not agreed.