REEBOK INTERNATIONAL LTD. AND OTHERS v. LAWS FASHION KNITTERS LTD. AND OTHERS

1989, No. A1056

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

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J U D G M E N T

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1. The Plaintiffs have taken out 2 summonses whereby they seek to restrain the Defendants from infringing their copyright together with consequential relief.

2. The first summons seeks relief in respect of drawings, cutting patterns and standard shell patterns of what is described as the "uppers" of sports shoes. In simple terms that embraces the part of the shoes above the sole. There are 5 models of sports shoes where it is complained that the Defendants have infringed the Plainiffs' copyright in such drawings

3. The second summons relates to the patterns of two soles of sports shoes which are referred toy as "outsoles". The reason for the separate summonses is that the alleged infringements only came to the knowledge of the Plaintiffs after the commencement of the proceedings.

4. The 1st and 2nd Defendants also issued a summons seeking an order that the claim against them be struck out pursuant to the provisions contained in Order 18 Rule 19 of the Rules of the Supreme Court.

5. With the agreement of the parties I heard all these summonses together.

6. For the sake of the convenience of this judgment I propose dealing with the strike out summons first.

7. The main complaint made by the 1st and 2nd Defendants is that the Plaintiffs have chosen to refer to all the Defendant compendiously. They say it is quite wrong for the Plaintiffs to attribute liability to the 1st and 2nd Defendants simply on the basis that they hold a controlling interest in the other Defendant companies and that there are Directors in common in all the companies.

8. To obtain a clear picture of the relationship between all the Defendant companies I do not think that I can do better than to incorporate into this judgment by way of a schedule the table of companies and details of the inter-relationship of them which was provided to me with the papers. I append this as a schedule.

9. Mr. Andrew Liao for the Plaintiffs submitted that it was obviously the reality of situation that the Directors of the 1st and 2nd Defendants exercised effective control over the other Defendant companies. In support of this he referred to various articles which had appeared in newspapers where comments had been made to the effect that the Laws Group of Companies had decided to extend their activities into the sports shoes business and to do so under the Bossini name. In particular reference was made to statements made by Mr. Raymond Law and Mr. Coulson Yau where it was evident that they took a personal interest in expanding into this field.

10. It is evident from a perusal of the amended Statement of Claim that what the Plaintiffs are alleging is that the 1st and 2nd Defendant do in fact exercise effective control over the other Defendant companies. This allegation is also contained in some of the affidavit evidence which was placed before me.

11. Mr. Dennis Chang for the 1st and 2nd Defendant argued that the amount of control which was alleged fell far short of establishing any liability on the part of the 1st and 2nd Defendants. He referred to affidavits sworn by Mr. Tong, an Assistant to the Directors of the 1st Defendant and Mr. Lui, a partner in the Ernst & Winney the Group Auditors where they stated that each company in the group did operate as a separate and distinct financial entity.

12. The principle propounded in Saloman v. Saloman 1897 AC 22 is very basic and fundamental. This was recently and conveniently referred to by Roskill L.J. in The Albazero 1977 AC 774 at page 807:

"Thus the defendants seek to escape liability for (on the assumptions made) breach of the time charter upon the technical ground that the wrong company in a group of companies has been named as plaintiffs and that it is now too late to join what on the defendants' case regarding passing of property and the right to possession, would be the right company in the group to join as the proper plaintiffs in an action upon the bill of lading. Since it is common ground that the present claim is brought for the benefit of cargo underwriters who were at risk under the open policy once declaration was made, irrespective of the technical question of title or right to possession as between the different companies in the group, it might be thought harsh that success or failure of the exercise of cargo underwriters' right of subrogation should depend upon such technical considerations. But such defences are able to be advanced because of two fundamental principles of English law long established and now unchallengeable by judicial decision, at least in this court, first, that an underwriter who pays a claim to an assured must exercise his rights of subrogation in the name of his assured, having no greater rights than his assured possessed, and cannot exercise those rights in his own name, and secondly, that each company in a group of companies (a relatively modern concept) is a separate legal entity possessed of separate legal rights and liabilities so that the rights of one company in a group cannot be exercised by another company in that group even though the ultimate beneift of the exercise of those rights would enure beneficially to the same person or corporate body irrespective of the person or body in whom those rights were vested in law. It is perhaps permissible under modern commercial conditions to regret the existence of these principles. But it is impossible to deny, ignore or disobey them."

13. I have no doubt that this is a correct statement of the law.

14. The next matter which has to be considered is whether on the material available it is conceivably possible that either the 1st or 2nd Defendant could be deemed to be joint tortfeasors.

15. Here assistance can be derived from a passage in the speech of Lord Templeman in C.B.S. Songs Ltd. v. Amstrad Plc. 1988 1AC at page 1056:

"In the Koursk [1924] P. 140 where the question was whether the navigators of two ships had committed two separate torts or one tort in which they were both tortfeasors, Scrutton L.J., at p.156, adopted the passage in Clerk & Lindsell on Torts, 7th ed. (1921), P.59, to the effect that:

'Persons are said to be joint tortfeasors when their respective shares in the commission of the tort are done in furtherance of a common design.'

In the present case there is no common design between Amstrad and anybody else to infringe copyright.

In Rotocrop International Ltd. v. Genbourne Ltd. [1982] F.S.R. 241, Graham J. held, perhaps surprisingly, that there was novelty in a patent for a compost bin with removable panels and, less surprisingly, that a rival manufacturer who made and sold infringing bins in parts with asssembly instructions was a joint tortfeasor with his customers. In that case, as in Innes v. Short and Beal, 15 R.P.C. 449, the vendor and the purchaser had a common design to carry out an infringing act.

In Belegging-en

Exploitatiemaatschappij Lavender B.V. v. Witten Industrial Diamonds Ltd. [1979] F.S.R 59, the defendants were alleged to have sold diamond grit for the sole purpose of making grinding tools in which it was to be embedded in a resin bond as part of a grinding material patented by the plaintiffs. Buckley L.J. held, at p. 66, that the defendants could not be infringers unless they

'sold the grits in circumstances which in some way made them participants in their subsequent embodiment in resin bonded grinding wheels, or that they induced someone so to embody them ...'

My Lords, joint infringers are two or more persons who act in concert with one another pursuant to a common design in the infringement. In the present case there was no common design. Amstrad sold a machine and the purchaser or the operator of the machine decided the purpose for which the machine should from time to time be used. The machine was capable of being used for lawful or unlawful purposes. All recording machines and many other machines are capable of being used for unlawful purposes but manufacturers and retailers are not joint infringers if purchasers choose to break the law. Since Amstrad did not make or authorise other persons to make a record embodying a recording in which copyright subsisted, Amstrad did not entrench upon the exclusive rights granted by the Act of 1956 to copyright owners and Amstrad were not in breach of the duties imposed by the Act."

16. The evidence in this case falls far short of showing sufficient knowledge on the part of the Directors of the 1st or 2nd Defendants to bring them within the scope of being joint tortfeasors as above indicated. Indeed I am satisfied that the 1st and 2nd Defendants are able to meet the stringent requirements of Order 18 Rule 19 and that it is right that I should strike the Plaintiffs' claims out against them in accordance with the relief sought in the summons before me.

17. I will now consider the Plaintiffs 2 summonses.

18. The Plaintiffs are an outstandingly successful group of companies. I was told that at the present time they sell more sports shoes than any other company in the world. They produce a variety of different models. It is also clear from the affidavit evidence filed that a considerable amount of thought and work is put into the design of each model. I was taken through the various steps in the design process which include an original concept drawing, preparation of cutting patterns and then the construction of a standard shell pattern.

19. It is also clear from the affidavit evidence that a great deal of effort is expended upon the marketing of the shoes. Included in this effort is a large amount of advertising. I have no doubt whatever that this is a highly competitve field and that a lot of skill and expertise is required for success. Also I am satisfied that the design of the shoes being sold is an important ingredient in the success of the venture.

20. It is apparent that it was only comparatively recently that the Plaintiffs have established their predominant position in the market both worldwide and in Hong Kong. The success in Hong Kong has largely coincided with the establishment of the 3rd Plaintiff to assume marketing responsibilities here.

21. It would appear that a decision was made in the summer of 1988 to undertake an expensive advertising campaign. In large measure this has been successful as sales of the Plaintiffs' shoes have increased substantially over the ensuing months.

22. In July 1988 the 6th Defendant who was a Sales Manager of the 3rd Plaintiff left their employment. Shortly after this he joined the Defendants. In December 1988 the Defendants announced their intention of expanding into the sports shoes business. Previously they had mainly been concerned with the manufacture and sale of fashion garments. They sold a large volume of such garments under the trade name "Bossini".

23. There was evidence that sales of clothes were mainly targetted towards the middle classes. It would appear that it was the intention of the Defendants to aim at a similar market in respect of sports shoes.

24. At the time of the announcement of the decision to go into the sports shoes market the Defendants also commenced a highly visible and expensive advertising campaign. This included advertising on television.

25. The Plaintiffs took particular exception to the television advertisements. Their complaint was that the Defendants had to a large extent copied the Plaintiffs' advertisement and had attempted to denigrate the Plaintiffs' reputation.

26. During the course of the hearing before me was shown a video of both the advertisements and I have to say that I can see some grounds for these complaints. This however is a somewhat peripheral issue to the matters I have to weigh and consider on these summonses.

27. What is clear is that as soon as the Defendants' activities became known to the Plaintiffs they took immediate action in an endeavour to protect their interests. They commenced the present litigation as soon as it was practicable for them for do so and they issued the summonses which are now before me.

28. Mr. Andrew Liao took me through all the various steps which are taken in the production of the sports shoes. He did so by reference to each of the 5 models and the 2 outsoles where it is alleged that there have been infringements of the Plaintiffs' copyright. He also drew my attention in great detail to the 5 allegedly infringing models of the Defendants and demonstrated the features of the Defendants' models which constituted the infringements.

29. I have no doubt whatever that the Plaintiffs have demonstrated that there is a serious question to be tried on the infringement of their copyright in respect of all of the uppers. I have some doubts as to whether this has been demonstrated for the 2 outsoles. However for the reasons I will be giving subsequently this is not a matter which will create any difficulties at this stage.

30. The main issue I have to consider on the summonses is whether having regard to all the circumstances of this case it would be right for me to grant the injunction which is sought.

31. One of the most important factors for me to consider is whether damages are likely to be an adequate remedy. Lord Diplock put it this way at p. 323 of his speech in American Cyanamid 1975 2WLR 216:

"'As to that, the governing principle is (and he was here stating what he wished to be regarded as a governing principle) 'that the court should first consider whether, if the plaintiff were to succeed at the trial in establishing his right to a permanent injunction, he would be adequately compensated by an award of damages for the loss he would have sustained as a result of the defendants' continuing to do what was sought to be enjoined between the time of the application and the time of the trial. If damages in the measure recoverable at common law would be an adequate remedy and the defendant would be in a financial position to pay them, no interlocutory injunction should normally be granted, however strong the plaintiff's claim appeared to be at that stage."

32. The Plaintiffs argue that the Defendants have by virtue of infringing their rights been able to compete unfairly with them. Mr. Andrew Liao submitted that it was clear from all the evidence that the design of sports shoes was a critical factor in determining the success of the product. It was essential that the shoes should appear to be attractive and fashionable. What made the competition particularly unfair was that the Defendants deliberately priced the competing shoes at a cheaper price sometimes by more than $100. In effect a potential purchaser of Reebok shoes would see virtually identical shoes being sold alongside the original ones but priced significantly lower. The only different feature of the shoes was the name appearing on the side.

33. One important factor which had to be borne in mind was the damage occurring to the exclusivity of the product. The Plaintiffs' shoes were amongst the more expensive shoes. The Bossini shoes which for all material purposes looked similar would have the effect of diminishing the exclusivity of the Plaintiffs' products. It was difficult to calculate the damage which would flow from this.

34. Mr. Andrew Liao then went on to argue that no great harm would be caused to the Plaintiffs if they were to be restrained from selling infringing shoes. It was evident from the latest sales data received that the Defendants had introduced further lines of sports shoes which did not infringe the Plaintiffs' rights. It would be possible for the Defendants to concentrate their efforts on these lines and it may be the case that they would not incur great losses if an injunction was to be granted.

35. I do not find any of these arguments to be wholly persuasive.

36. In the first place I am by no means convinced that the Plaintiffs' exclusivity will be detrimentally affected if no injunction is granted. If this was a case of passing off I would be much more sympathetically disposed towards this argument. No potential purchaser of the Plaintiffs' shoes could conceivably be under the impression that he was buying the Plaintiffs' goods. The name "Bossini" is marked prominently on all of the shoes. I do not for a moment think there would be any possibility of market disruption if I decline to grant an injunction.

37. Perhaps equally important it would appear from the evidence before me that sales of the 5 models the subject of this application do not amount to more than 15% of the Plaintiffs' sales of sports shoes. The remaining balance of 85% of the sales would not be affected in any way at all.

38. Once one has disposed of the problem of exclusivity it seems to me that it becomes clear that the Plaintiffs will suffer no irreparable damage if no injunction is granted.

39. Subject to a satisfactory form of undertaking being given to the effect that the 3rd, 4th and 5th Defendants will be treated as one financial entity for the purpose of meeting any award of damages which may be ordered at the trial, I do not consider that any great difficulty would be encountered in either assessing damages or in enforcing any award that may be made.

40. The Plaintiffs could accordingly be adequately compensated in damages if no injunction is granted.

41. I will now shortly consider other outstanding matters.

42. I accept that in the context of this case that the status quo was the position which existed at the date of the issue of the writ in this action, that is the 27th of February 1989. The authority for this is the passage appearing at page 148 in the speech of Lord Diplock in Garden Cottage Foods Ltd. v. Milk Marketing Board 1983 3WLR at page 143:

"The status quo is the existing state of affairs but since states of affairs do not remain static this raises the query: existing when? In any opinion, the relevant status quo to which reference was made in American Cyanamid is the state of affairs existing during the period immediately preceding the issue of the writ claiming the permanent injunction or, if there be unreasonable delay between the issue of the writ and the motion for an interlocutory injunction, not I may say the case here, the period immediately preceding the motion."

43. At that time only approximately 15% of the Plaintiffs' products were subject to the complaint of infringement of copyright. Also at the same time approximately 50% of the Defendants' sports shoes were the subject of the complaint. If the injunction was ordered this would have much more serious consequences for the Defendants than it would for the Plaintiffs.

44. I have also borne in mind the very great difficulties which would be encountered if an injunction were to be granted. If at the end of the day the Plaintiffs are unable to sustain their claims, it would be extremely difficult to quantify in any meaningful way the amount of damage they would have suffered as a result of an injunction having been wrongly granted. This is certainly a factor which should be borne in mind.

45. Even if I had not been satisfied that the Plaintiffs can be adequately compensated by damages I would have been inclined to find that the balance of convenience as a whole weighed in favour of my not granting an injunction.

46. In this connection I found the passage in the judgment of Buckley L.J. at page 122 of Mondaress Ltd. v. Bourne & Hollingsworth 1981 F.S.R. 118 to helpful:

"In my opinion, the learned judge was right to regard section 17 (3) as matter proper to be taken into account in assessing the balance of convenience, but in treating it, as he did, as "a very material factor" I think, with deference, that he placed undue emphasis upon it, for it seems to me that he did not really appreciate the difference in quality which, in my view, exists between the kind of risk to which the plaintiffs will be subject if an injunction is refused and that to which the defendants will be subject if an injunction is granted.

It is rather like comparing a man who is exposed to the risk of contracting a dire disease, which will probably disable him to some extent for life and may prove fatal, with a man who is exposed to the risk of contracting a disease which is likely to incapacitate him to some extent for a while but from which it is probable that he will recover. Which of these two is more deserving of protection? Surely the first, because the risk to which he is exposed is more dreadful and its consequences more lasting and more irreparable. So in the present case the probable effects on the plaintiffs of refusing interlocutory relief seem to me likely to be more drastic than the effect on the defendants of granting the injunction until the trial or further order meanwhile. In reaching this conclusion I am not attempting to strike a pecuniary balance. To do so would, at the present stage, be almost impossible because of the difficulty in quantifying the damage which either side may sustain. I reach my conclusion upon the relative gravity to that party of the risk which each party may sustain. What is very grave to Lazarus sitting at the gate may be much less so to Dives in his mansion. But the real distinction in the present case seems to me to be that the risk to which the plaintiffs are exposed if the injunction is withheld may be irreparable, whereas the risk to which the granting of the injunction may subject the defendants, although perhaps difficult to quantify, is not likely to be of a kind which is irreparable by pecuniary compensation. It is not inconceivable that the plaintiffs' business might be destroyed if their reputation for genuine exclusivity of design were compromised, and it is not improbable that their goodwill might be severely and indefinitely impaired by the continued sale of the defendants' allegedly infringing dress. Such damage would be incalculable and irreparable. On the other hand, the defendants may lose some valuable business and the extent of their loss may be difficult to quantify, but the effect, I think, is likely to be transient and of a kind which, so far as it can be quantified, can be compensated by a pecuniary award. What they would be likely to suffer would be loss of turnover, not loss of reputation. There is no suggestion that either party would be unable to meet any foreseeable award of damages."

47. On almost any analysis of the facts of this case I am persuaded that I should not grant the injunction which has been sought.

48. It follows from this that I should not order the discovery which is sought or the preservation order. I will hear the parties on costs.

DIRECTORS OF THE "LAWS GROUP OF COMPANIES"

S C H E D U L E