LIAO FU PIN AND ANOTHER v. AD-MAGNETICS CO LTD AND ANOTHER

HCA 1778/2006

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 1778 OF 2006

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REASONS FOR DECISION

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1.  The 2^nd defendant appealed against the order of the Master dated 15 March 2007 in:

(1)   refusing to order the 1^st and 2^nd plaintiffs to give security for the 2^nd defendant’s costs under O.23, r.1(a), RHC upon the 2^nd defendant’s summons dated 12 January 2007;

(2)   ordering the costs of the summons up to 18 January 2007 be in the cause; and

(3)   the costs of the summons after 18 January 2007 be to the 1^st and 2^nd plaintiffs in any event with certificate for counsel.

At the hearing, I dismissed the appeal, and I now give my reasons.

Background

2.  The 1^st plaintiff is a well known Taiwanese cartoonist under the pseudonym “Ji Mi” (幾米).  The 2^nd plaintiff is a Taiwanese corporation and the exclusive licensee of the copyright of the cartoon drawings of the 1^st plaintiff.

3.  The 2^nd defendant is a well known electrical appliances chain retailer in Hong Kong.  The 1^st defendant is a local advertising agency and has been engaged by the 2^nd defendant for promotional activities for 6 to 7 years.

4.  On 12 November 2002, the 2^nd plaintiff entered into a licence agreement with the 1^st defendant whereby in consideration of US$10,000, the 1^st defendant was authorized to put the drawings of the 1^st plaintiff on specified gift premium items for the promotional activities of the 2^nd defendant’s as stipulated in the licence.  The licence was in Chinese and for the present purpose, the effect of the relevant terms are as follows:

(1)   the 1^st defendant was authorized to use 3 specified drawings in the annex (clause I-1);

(2)   the 1^st defendant was authorized to manufacture 11 items of products as listed in the annex, and might not exceed the types and/or quantities as stipulated (clause I-2);

(3)   the licence period was from 1 December 2002 to 31 May 2003, and might be extended in writing subject to separate payment of fee (clause I-3);

(4)   the 1^st defendant agreed to submit the product samples to the 2^nd plaintiff for approval before manufacture, and should follow the design as amended by the 2^nd plaintiff, if any (clause I-6);

(5)   the gift items were for the exclusive use by the 2^nd defendant during the licence period, and were not to be sold independently or used for any other profit or non-profit making purposes (clause I-7);

(6)   upon the expiry and non-renewal of the licence, the 1^st defendant should immediately stop using the remaining articles as gift items and should destroy or dispose of them in accordance with the 2^nd plaintiff’s instruction (clause I-10).

5.  The plaintiffs alleged that on 20 October and 5 November 2003 (after the expiry of the licence), the 2^nd defendant continued to possess and/or distribute:

(1)   products within description of the 11 specified items with one of the 3 drawings under the licence;

(2)   products within the description of the 11 specified items but with drawings of the 1st plaintiff other than one of the 3 drawings under the licence;

(3)   products outside the 11 specified items with one of the 3 drawings of the 1st plaintiff under the licence;

(4)   products outside the 11 specified items as well as with drawings of the 1st plaintiff other than one of the 3 drawings under the licence.

6.  Whether the products under (1) above are infringing copies or not depends on whether they are manufactured within the licence period.  There is no evidence on this point at this stage.  Hence, the plaintiffs do not rely on such items as infringing items for the present purpose.  Products under (2) to (4) above as found in October and November 2003 are called the 1^st batch of items. 

7.  On 6 November 2003, the Taiwanese lawyers for the plaintiffs, North Star Copyright Law Office, wrote to the 1^st and 2^nd defendants complaining about the infringement in the 1^st batch of items.  The letters asserted that the 1^st plaintiff was the author and copyright owner of the relevant drawings, and the 2^nd plaintiff was the worldwide exclusive agent of the 1^st plaintiff, and it set out the various alleged infringement.  The letters enclosed the licence dated 12 November 2002 with annexes.

8.  On 12 November 2002, the 1^st defendant wrote to the Taiwanese lawyers admitting it was wrong in the infringement and would shoulder the whole responsibility, and the matter had nothing to do with the 2^nd defendant.  The 1^st defendant admitted manufacturing without authorization 500 coaters and 300 carrying bags.  The coasters bore unlicensed drawings and the bags were not within 11 specified products in the licence. 

9.  On 31 December 2003, the Taiwanese lawyers sent another warning letter to the 2^nd defendant in similar terms.  This 2^nd letter referred to the infringing coasters and carrying bags and the 1^st defendant’s admission that they were infringing copies.

10.  On 8 January 2004, the solicitors for the 2^nd defendant replied that it was the 2^nd defendant’s understanding that all of its premium items were licensed products of the plaintiffs and the 1^st defendant was entitled to sell such licensed products to it for its promotional use.

11.  In December 2006, the plaintiffs further discovered that the 2^nd defendant had 5 additional products not covered by the licence.  They included assorted postcards, notebooks, girl’s mobile phone stand, girl’s watch, and place mats.  These are called the 2^nd batch of items.  Products falling within item (1) referred to in paragraph 6 above are not included for the present purpose.

12.  The plaintiffs’ claim against the 1^st defendant is in breach of the licence agreement and primary/secondary infringement of copyright.  The plaintiffs’ claim against the 2^nd defendant is in secondary infringement of copyright. 

13.  In the Defence of the 1^st defendant, in relation to the 1^st batch of items, it was pleaded that the 1^st defendant had innocently informed the 2^nd defendant and leading to the latter mistakenly exhibiting and/or distributing some of the remaining articles. 

14.  As to the 2^nd batch of items, it was pleaded that in March 2005, one Ms Elsa Lam of Wishing Well Company approached the 1^st defendant and claimed to be an agent of the 2^nd plaintiff.  In May 2005, a meeting took place between Ms Lam and one Ms Suki Chan of 亞潑貿易公司案claiming to be an agent of the 1^st defendant in Taiwan, and representatives of the 1^st defendant.  Ms Lam orally represented that the 1^st and/or 2^nd defendants could continue to distribute or sell the remaining articles on condition that the 1^st and/or 2^nd defendant ordered through or from Wishing Well some new articles with drawings of the 1^st plaintiff (“1^st representation”).  On 9 September 2005, based on the 1^st representation and not otherwise, the 1^st defendant ordered and purchased from Wishing Well the 4 additional articles of assorted postcards, notebooks, girl’s mobile phone stand, girl’s watch (except the place mat) with the 1^st plaintiff’s drawings (“the New Licensed Articles”) and the New Licensed Articles were delivered on 10 September 2005.  On 14 September 2005, the 1^st defendant asked Wishing Well to produce a written consent from the 1^st and/or 2^nd plaintiffs evidencing their consent to distribute the remaining articles.  Ms Lam said the written consent would be forthcoming and in the meantime, the 2^nd defendant could distribute the remaining articles (“2^nd representation”).  Based on the 2^nd representation, the 2^nd defendant distributed the remaining articles.  On 21 September 2005, Ms Lam informed the 1^st defendant that the 1^st and/or 2^nd plaintiffs had withdrawn its consent to distribute the remaining articles and the 1^st defendant informed the 2^nd defendant to refrain from giving away the remaining articles.

The issues

15.  There is no dispute that the plaintiffs are ordinarily residents outside the jurisdiction, and that O.23, r.1(a), RHC is engaged.  Nor is it contended by the plaintiffs that their claims will be stifled by an order for security for costs.

16.  Mr. Yee for plaintiffs opposes the application on the grounds that:

(1)   the plaintiffs’ claims against the 1^st and/or 2^nd defendants have a high degree of probability of success;

(2)   the amount of security sought is excessive and unjustifiable.

17.  Mr. Wong for the 2^nd defendant submitted that there are triable issues which are highly fact sensitive as to:

(1)   whether the 1^st defendant has obtained the 2^nd batch of items (except the place mats) from Wishing Well, an authorized agent of the 2^nd plaintiff;

(2)   whether the 2^nd defendant had knowledge or reasons to believe that the 1^st and/or 2^nd batch of items were infringing copies.

Relevant principles

18.  It is not an inflexible rule that a foreign plaintiff should provide security for costs as a matter of course and the court has a complete discretion (see Keary Developments Ltd v. Tarmac Construction Ltd [1995] All ER 534 per Gibson LJ; Wing Hing Provisions, Wine & Spirits Trading Co v. Hanjin Shipping Co Ltd [1998] 4 HKC 461 per Godfrey JA).

19.  In considering whether to order security, the court will consider all the circumstances including the plaintiff’s prospect of success.  However, the court should not go into the merits in details unless it can clearly be demonstrated that there is high degree of probability of success (see Porzelack KG v. Porzelack (UK) Ltd [1987] 1 WLR 420).

20.  The plaintiff’s prospect of success against one or other of the defendants is also a proper consideration in the exercise of the discretion (see Lauria (Susan Maria) v. Le Salon Orient (Hong Kong) Ltd & anor [1996] 2 HKLRD 37 per Le Pichon J (as she then was)).

21.  To prove secondary infringement of copyright (i.e. importing or dealing with infringing copies), the plaintiff has to prove actual knowledge or constructive knowledge (i.e. reason to believe) on the part of the defendant that the articles are infringing copies.

22.  In LA Gear Inc v. Hi-Tech Sports Plc [1992] FSR 121, Morrit J (as he then was) said at p.129:

“Nevertheless, it seems to me that ‘reason to believe’ must involve the concept of knowledge of facts from which a reasonable man would arrive at the relevant belief.  Facts from which a reasonable man might suspect the relevant conclusion cannot be enough.  Moreover, as it seems to me, the phrase does connote the allowance of a period of time to enable the reasonable man to evaluate those facts so as to convert the fact into a reasonable belief.”

Discussion

23.  Mr. Wong submitted that the 2^nd plaintiff is not an exclusive licensee within the Copyright Ordinance (Cap.528) and has no title to sue in copyright.  Under section 112(1) of the Copyright Ordinance, only an exclusive licensee has the concurrent rights and remedies of the copyright owner.  Under section 103(1), an “exclusive licence” means “a licence in writing signed by or on behalf of the copyright owner authorizing the licensee to the exclusion of all other persons, including the person granting the licence, to exercise a right which would otherwise be exercisable exclusively by the copyright owner.”  Mr. Wong submitted the relevant licence did not authorize the 2^nd plaintiff to the exclusion of the 1^st plaintiff as person granting the licence.  Hence, the 2^nd plaintiff had no right to sue the 2^nd defendant and would be liable in costs in the copyright action.

24.  Mr. Yee conceded that the licence did not contain express terms to the exclusion of the person granting the licence, but submitted that exclusivity could be implied.  Further, the 1^st and 2^nd plaintiffs are retaining the same lawyers, and overlapping legal costs are avoided. 

25.  I find that in the event that the 2^nd defendant were guilty of secondary infringement, it would be liable to either the 1^st and/or 2^nd plaintiff for costs.  As only one set of costs is to be incurred, it will most probably be attributed to the plaintiff(s) who has title to sue and won. The additional costs of the losing plaintiff, if any, is not likely to be substantial.  Hence, the relevant consideration at this stage is really merits.

26.  Mr. Wong submitted that the 1^st defendant’s admission, if any, would not be binding on the 2^nd defendant.  The plaintiffs have to prove knowledge on the part of the 2^nd defendant to succeed in secondary infringement.  

27.  As to the 2^nd defendant’s knowledge that the 1^st batch of items were infringing copies, Mr. Yee relied on the fact that the 2^nd defendant had directly paid for the licence fee of US$10,000, and would in the ordinary event be concerned with the terms of the licence as to the contents of the authorized drawings and products as they directly affected how the 2^nd defendant were allowed to use the items.  Mr. Yee referred to an e-mail dated 2 December 2002 from the 1^st defendant to the 2^nd plaintiff stating that the 2^nd defendant would remit the fund to the 2^nd plaintiff. 

28.  On the other hand, Mr. Wong referred to 2 lately discovered bank transfer slips from the 1^st defendant to the 2^nd plaintiff evidencing the remittances of US$10,000 less charges.  As such, I am not persuaded that the plaintiffs have demonstrated a high chance of success on the 2^nd defendant’s knowledge of infringement on the 1^st batch of items as inferred from payment of the licence fee.

29.  As to knowledge that the 2^nd batch of items being infringing copies, Mr. Yee submitted that these items came in the later period after the 2^nd defendant had received 2 warning letters from the plaintiffs stating that the 1^st plaintiff was the copyright owner, and the 2^nd plaintiff was the worldwide exclusive agent of the 1^st plaintiff, and that the 1^st batch of items allegedly contained infringing items. 

30.  It must be borne in mind that the plaintiffs are not relying on the remaining items under the expired licensed as part of the 2^nd batch of items as it is not known whether they are infringing copies.  Mr. Wong submitted that it was not unreasonable for the 2^nd defendant, a well known chain retailer as opposed to a street hawker, who had no direct dealing with Wishing Well, to have relied on its advertising agent that the proper consent for the 5 additional items (including the place mats), had been obtained.

31.  As to whether Wishing Well is an authorized agent of the 2^nd plaintiff, an unsigned witness statement of Lee Yusan, managing director of the 2^nd plaintiff was exhibited, which denied that Wishing Well or 亞潑貿易公司were agents of the 1^st and/or 2^nd plaintiffs.  Ms. Lee stated that the plaintiffs had not authorized the 2 alleged agent to deal with any matter relating to the subject licensing agreement or the copyright licensing of the ex-licensed and non-licensed drawings. 

32.  Mr. Wong submitted that the tenor of Ms Lee’s unsigned statement seems to refer to the 1^st batch of items instead of the 2^nd batch of items, and it dealt with the lack of authority by Wishing Well to grant further licence, but was silent on whether Wishing Well’s authority to market and sell its products with the 1^st plaintiff’s drawings.

33.  On the other hand, Mr. Yee submitted that the only documents between Wishing Well and the 1^st defendant disclosed are a few e-mail exchanges in which the 1^st defendant asked for renewal of the licence and Wishing Well said there was problem and there was no renewal.

34.  As I see it, the proposed evidence from Ms. Lee of the lack of authority to grant licence by Wishing Well dealt with the allegation that the additional articles ordered from Wishing Well were the new licensed articles as pleaded by the 1^st defendant.  There is no contrary evidence on the point as this stage.  Prima facie, the items ordered through Wishing Well are infringing articles.

35.  However, while not saying that the plaintiffs’ case on knowledge or belief of the 2^nd defendant that the 2^nd batch of items were infringing copies is weak, I am not persuaded that they have a high chance of success.  The matter has to be resolved in the trial.

36.  Be that as it may, I am persuaded that the plaintiffs do have a high chance of success against the 1^st defendant.  The 1^st defendant has virtually admitted the breach of the licence in relation to the 1^st batch of items.  The claim in breach of licence will avoid the issue of date of manufacture relating to the distribution of the remaining licensed articles after the expiry of the licence.

37.  In relation to 2^nd batch of items, apart form the items from Wishing Well, there is a singular lack of explanation as to the place mats.

38.  The security asked for is to cover costs up to discovery.  The costs properly incurred by the respective parties so far are likely to be comparable.  Even if the plaintiffs were to lose as against the 2^nd defendant, there will be a buffer from the costs likely to be recoverable from the 1^st defendant.  Hence, I refused the 2^nd defendant’s application for security for costs.

39.  I also ordered that the 2^nd defendant do pay the costs of the appeal to the plaintiffs.