Microsoft Corporation v. Able System Development Ltd. t/a Able Computer Centre

HCA 17892/1998

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 17892 OF 1998

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ASSESSMENT OF DAMAGES

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1. Consent judgment was entered in favour of the plaintiff on 18 December 1998 for injunction to be granted to restrain the defendant from infringing the plaintiff's copyright and trademark. The orders made include, inter alia, the following: -

(i) delivery of all infringing copies of computer software programmes;

(ii) filing of an affidavit by the defendant disclosing the names and addresses of all entities to whom the defendant has supplied or offered to supply unlicensed copies of the plaintiff's computer software programmes; and

(iii) damages of the plaintiff to be assessed, including additional damages pursuant to s.108(2) of the Copyright Ordinance, or at the option of the plaintiff an account of the defendant's profits, relating to its acts of copyright and trade mark infringement and passing off.

The Plaintiff and its operation

2. The plaintiff is a company incorporated in the United States of America in accordance with the Washington State laws. The plaintiff developed a wide range of software programmes including operating systems and application programmes to perform computer functions such as word processing, statistic presentation and document artwork. The plaintiff owns copyright in a wide range computer software programmes. For the purpose of the present assessment, the relevant software programmes are: -

(i) Office 95 Standard (English Edition);

(ii) Office 95 Standard (Traditional Chinese Language Edition);

(iii) Office 97 Professional (Traditional Chinese Language Edition);

(iv) Windows 95 (ENG OEM); and

(v) Windows 95 (Traditional Chinese Language Edition) (OEM).

3. By registration the plaintiff acquired the trademark in relation to the use of the words "Microsoft", "Windows" and "Window NT" in the computer software industry.

4. According to the plaintiff, use of the Microsoft products are available to the market generally through one of the 3 modes:-

(i) The acquisition of the "Full Packaged Product" through ordinary retail businesses where the user is supplied with a boxed version of the product. Owner of a full packaged product is permitted to use the supplied products on one computer only;

(ii) the purchase of a volume licence agreement which enables multiple copies of the software to be installed onto multiple central processing units (CPUs) within an organization; and

(iii) the acquisition of a CPU from the original equipment manufacturers ("OEM") in which the software is pre-loaded onto the CPU for the purchaser. "OEM" products are delivered in shrink-wrapped "OEM Packages" to the customers along with the CPU they purchase. An OEM package consists of (a) a copy of the Microsoft programme on a magnetic disc or on a CD-ROM; (b) instruction and reference manuals; (c) a certificate of authenticity, a licence agreement, a registration card; and (d) other supporting materials.

5. The only authorized "OEM" products distributors of the plaintiff in Hong Kong are ACA Pacific Technology (H.K.) Ltd and Tech Pacific (H.K.) Ltd. The authorized distributors reported regularly to Microsoft Hong Kong Ltd, a subsidiary company of the plaintiff.

6. In 1996 Microsoft H.K. Limited developed a "Microsoft Authorized Retailer" programme (called "MAR" for short) for the purpose of supplying promotional items to valued system builders. To become a member the system builder has to meet a minimum sales target within a year. In return the plaintiff would recommend their consumers to buy from these programme members. The programme members are listed on the plaintiff's web page for consumers' reference. The "MAR" programme was subsequently renamed " Microsoft OEM System Builder Partner" (called "MOSP" for short).

The Defendant

7. The defendant was incorporated in Hong Kong in January 1987. It became a member of the former "MAR" in about July 1996 and remained a member of the current "MOSP".

8. The defendant company has 4 retail outlet shops located respectively in Shamshuipo, Mongkok and Wanchai.

The Infringing Activities

9. In July 1998 the plaintiff carried out random dealer test purchases and discovered that the defendant was selling computers pre-loaded with free copies of Microsoft programmes. The promotional leaflets distributed by the defendant stated that Pentium II 300 units would be sold at HK$8,380 together with other facilities and 2 complimentary software programmes: (i) Microsoft Window 95 (Chinese version); and (ii) Office 97 including Word 97, Excel 97 and Power Point 97 self learning manual and CD.

10. Investigators engaged by the plaintiff were sent to the outlet shops of the defendant on the following visits:-

(i) On 3 August 1998 a Mr. Ross visited one of the defendant's outlet at Shop 171, UG/F, 298 Computer Zone at 298 Hennessy Road, Wanchai, Hong Kong and bought a Pentium II 266 megahertz computer for the price of HK$6770. He took delivery of the computer from the shop on 10 August 1988 and was given a shrink-wrapped software package for Window 95 together with an operation manual and CD-ROM for Office 97 (Word 97 Excel 97 Powerpoint 97).

Ms. Poh, staff of the plaintiff, subsequently examined the computer and found Microsoft Window 95 (English Edition) and Microsoft Office for Window 95 Standard Software (English Edition) to have been installed onto the hard disc of the computer.

Ms. Poh was of the opinion that the pre-installed Microsoft Window 95 (English Edition) was a licensed version as the purchaser was supplied with a proper OEM package and the Product Identification Code ("PIC" for short) on the certificate of authenticity of OEM package received by Mr. Ross corresponded with the PIC code displayed on the computer monitor.

According to Ms. Poh the pre-installed Microsoft Office for window 95 standard software (English Edition) in the computer acquired by Mr. Ross was an unlicensed version of the plaintiff's software programme since Microsoft Office for Window 95 was only available as a full packaged product which should be contained in a packaged box of materials containing a certificate of authenticity, an end user license agreement and a registration card. The Microsoft Office for Window 95 was not available as an OEM product. Further the retail price of the full packaged Office 95 was HK$3,199 and the basic costs of the computer hardware was about HK$6000 in 1998. Hence a computer pre-loaded with a Microsoft Office 95 programme could not possibly be sold for HK$6770. The Office programme manual supplied to Mr. Ross was an Able Computer handbook for use of the Office 97 programme.

(ii) On 4 August 1998 a Mr. Ip visited the defendant's 2nd outlet shop at Shop 121, 1/F, Mongkok Computer Centre, 8 Nelson Street, Kowloon and bought a Pentium II 300 megahertz computer for HK$6,500. He took delivery of the computer from the shop on 6 August 1998 and was given a shrink-wrapped Window 95 (Traditional Chinese) software package.

Ms. Doris Yuen examined the computer and found it to have been pre-loaded with Microsoft Window 95 (Traditional Chinese Edition) and Microsoft Office 97 Professional (Traditional Chinese Edition) and the PIC code of 58920-467-0023324-55135.

Ms. Yuen found the Microsoft Window 95 (Traditional Chinese Edition) installed in the computer to be a licensed version of software as the "PIC" code 09698-OEM-0031235-65082 on the certificate of authenticity of the OEM package supplied to Mr. Ip matched the "PIC" code displayed on the screen of the computer.

Ms. Yuen formed the view that Microsoft Office 97 Professional (Traditional Chinese Edition) installed on the computer hard disc was unlicensed as Microsoft Office 97 Professional was only available as a full packaged product as opposed to an "OEM" product. Further the "PIC" code for the Microsoft Office 97 Professional (Traditional Chinese Edition) displayed on the screen was 58920-467-0023324-55135 which was exactly the same as the "PIC" code found on the other computers acquired by the investigators in the Golden Computer Centre shop and the Golden Centre shop of the defendant.

There was a slight discrepancy of the affidavit evidence of Mr. Ip and Ms Yuen. Ip made no mention of the supply of Able operation manual and the CD-ROM for Office 97 while Ms. Yuen sworn to the fact that she had been supplied with the Able operation manual and a CD-ROM for Office 97 by Mr. Ip. According to Ms. Yuen the manual and the CD-ROM were subsequently misplaced by the plaintiff and could not made available for inspection in court.

(iii) On 14 August 1998 the same Mr. Ip visited the 3rd outlet shop of the defendant at Shop 109, 1/F, Golden Shopping Centre, 94-A Yen Chow Street, Shamshuipo, Kowloon and bought a Pentium II 300 megahertz computer for HK$7,250. Mr. Ip took delivery of the computer on 19 August at Shop 1 & 2, 1/F, Golden Centre at 94 Yen Chow Street, Shamshuipo and was provided with a shrink-wrapped window 95 software package.

The computer was examined by Ms. Poh who found the computer to have been pre-loaded with Microsoft Windows 95 (Traditional Chinese Edition) and Microsoft Office 97 Professional (Traditional Chinese Edition).

Ms. Poh found the PIC number of the certificate of authenticity, 06998-OEM-0030641-30594, of the Microsoft Window 95 OEM package received by Mr. Ip differed from PIC number 31097-OEM-002661-37119 displayed on the screen of the monitor.

In relation to the Microsoft Office 97 Professional software Ms. Poh was of the opinion that the software installed on the computer was unlicensed. She formed her opinion on the basis that Microsoft Office 97 professional programme was only available as a full packaged product. Further the PIC code 58920-467-0023324-55135 found on the screen was the same as the PIC codes found on the computers bought in the Mongkok Computer Centre shop and the Golden Centre shop of the defendant.

(iv) On 14 August 1998 a Ms. Wong visited the defendant's 4th shop at Shop 1 & 2 at 1/F of Golden Centre at 94 Yen Chow Street, Shamshipo, Kowloon bought a Pentium II 300 megahertz computer for HK$6,770. Ms. Wong took delivery of the computer on 19 August and was given an operation manual and a CD-ROM for Office 97 (Word 97 Excel 97 Powerpoint 97).

The computer was examined by Ms. Poh who found the hard disc of the computer to have been pre-loaded with Microsoft Windows 95 (Traditional Chinese Edition) and Microsoft Office 97 Professional (Traditional Chinese Edition).

As Ms. Wong was not supplied with an OEM package in respect of the use of the Microsoft Window 95 programme, Ms. Poh believed the Microsoft Window 95 programme installed in the computer was possibly an unlicensed copy of software.

In relation to the Microsoft Office 97 Professional software, Ms. Poh was of the opinion that it was an unlicensed software as the Office 97 programme was only available as a full package product as opposed to an OEM product. Besides, the computer showed the PIC code of the software programme to be 58920-467-0023324-55135 which was the same as the computers bought by the investigation agent Mr. Ip in the other shops of the defendant.

Evidence from Former employees of the Defendant

11. Ms. Chiu, the marketing manager of the defendant company between February 1994 and July 1998, testified on a subpoena taken out against her by the plaintiff. She confirmed the majority of the computers sold by the defendant were pre-loaded with unlicensed software programmes of the plaintiff. In her estimate only 10% or less of the computers sold by the defendant were installed with licensed software programmes. The sale of the unauthorized software lasted throughout Ms Chiu's employment with the defendant. In Ms. Chiu's recollection the defendant sold about 1,500 - 2,000 computers per year for retail business and roughly double the volume for wholesale business. In Ms. Chiu's estimate about 80% - 90% of those computers were sold with unlicensed software.

12. Mr. Tsui, another former employee of the defendant also confirmed the defendant to have sold computers with pre-installed unlicensed software programmes.

Damages

13. There are few misgivings about the evidence collected by the investigators such as the missing manual. The fact that a purchaser has been supplied with an OEM package with a PIC code different from the pre-installed programme in the computer could not rule out the possibility of packaging mistake. The supply of a computer software without an accompanying OEM package is again opened to interpretations. Despite of the misgivings, by and large, with the evidence available from the investigators and the ex-employees of the defendant, the inevitable conclusion to draw was the defendant did pre-load its computers with unlicensed copies of software programmes to cut costs and to reduce the sale price so as to entice its customers for a greater retailer business.

14. The major difficulty faced by this court in assessing the damages sustained by the plaintiff is the scarcity of original materials to delineate the scope of infringement with precision. Hence the present assessment is a rough estimation arrived at by weighing the available information on a balance of probability.

15. The plaintiff does not seek to quantify its trademark infringement damages beyond what would be reflected in its copyright infringement compensation. The present assessment only deals with the copyright infringement compensation.

Damages for copyright infringement

16. The plaintiff is seeking s.107 damages as well as additional damages under s.108(2) of the Copyright Ordinance Cap 528.

The Law

17. In dealing with the assessment of copyright infringement, Mr. Justice Litton, P.J. said in Oriental Press Group [1998] 2 HKLRD 976 at page 980: -

"Damages under this head are compensatory: the award is intended to put the injured party in the same position as if the wrong had not occurred. Copyright gives to the owner the exclusive right to control and exploit the subject-matter, and use by the tortfeasor without licence represents an invasion of those rights"

18. In the same case at page 987 Lord Cooke cited Lord Wright in Sutherland Publishing [1936] Ch 323 at 337 with approval and accepted that infringement damages is the depreciation caused by the infringement to the value of the copyright as a chose in action. In adopting Lord Wilberforce's approach in General Tire [1976] RPC 197 Lord Cooke approved the various yardsticks in ascertaining damages for copyright infringement, in line with patent cases: (1) the loss of profitable sales by a manufacturing patentee; (2) the loss of royalties by a patentee where there is an established royalty rate; or (3) the loss of notional royalties where there is no such established rate; i.e. what would have been agreed between a willing licensor and a willing licensee, in other words, the fair market value.

19. In Australia the matter was viewed with diversified opinions. In Autodesk Australia Pty Ltd (1990) 94 ALR 472 Wilcox J refused to apply the loss of licence fees approach on the ground that had the licence fees been charged for all the products sold, the sale volume was unlikely to reach the same level were the users required to pay the full licence fees. Further in Mr. Justice Wilcox's view the unauthorized reproduction might increase the residual value of a copyright since the greater use of the product by the public would enhance the ultimate demand.

20. On the other hand in the subsequent decision of Microsoft Corporation (1997) 38 IPR 643 the Federal Court of Sydney accepted the license fees approach as the proper approach for the calculation of compensatory damages.

21. The defendant in the present proceeding was a MOSP member of the plaintiff. In the MOSP agreement, the defendant agrees " not to stock or sell any pirated, counterfeit, parallel imported or unbundled products at any time" and would "only sell legitimate products purchased from distributors authorized by Microsoft to distribute in Hong Kong". To honour the terms of the MOSP agreement the defendant should pay the plaintiff the licence fees for all the software programmes he re-sold to the consumers. Though the arguments accepted by Mr. Justice Wilcox still have great influence over the need of caution to award damages purely on the loss of licence fees calculation, yet in the present fact situation, falling short of evidence to show the extent of drop in demand when licensed products were sold, I accept the licence fees approach to be the appropriate measure for assessment.

Damages for the period from April 1997 to October 1998

22. Pursuant to the court's order for discovery, the defendant provided the plaintiff with 56,000 invoices for a period of 19 months between April 1997 and October 1998 for the plaintiff's inspection. The invoices showed the licence acquired by the defendant from the plaintiff and the number of CPUs sold by the defendant. During the inspection, the plaintiff caused a summary to be prepared in respect of the invoices produced by the defendant for the period from April 1997 to October 1998. The summary was as follows:-

Summary of Invoices between April 97 and Oct 98

23. I accept, on account of the evidence of Mr. Roberston and Ms. Poh on behalf of the plaintiff, that a computer cannot be operated without the installation of at least one operating system and one application programme. From the sample computers bought by the investigating agents, all of the computers supplied were pre-installed with unlicensed version of the Microsoft Office software. A user is unable to use the Microsoft Office unless the computer has been loaded with an operating system such as the Microsoft Window.

24. According to the invoices examined by the plaintiff, the defendant sold 5,084 sets of computer (151 + 42 + 638 + 5 + 4 + 4244) from April 1997 to October 1998. In the accounting books of the plaintiff the defendant has bought a total of 1960 sets of Window 95 programmes (i.e. 158 sets of English Window 95 and 1,802 sets of Chinese Window 95). According to the defendant's invoices the defendant has bought 160 sets of other Microsoft operating systems including 151 sets of Dos-6.22, 5 sets of Windows 3.11 and 4 sets of Window NT. The number of computers sold by the defendant, on the face of the invoices, not supported by any operating systems are 2964 sets (i.e., 5,084 - 1,960 - 160). I accept it is highly likely that all the computers sold were pre-loaded with the operating programme Window 95. Each unit of Window 95 cost HK$690 in 1997/1998. The licence fees the plaintiff would be entitled to receive from the defendant would be HK$2,045,160 (HK$690 x 2,964) in respect of the supply of the Window 95 programme.

25. The defendant has pre-loaded all the 4 sample sales with Microsoft Office programme. Its promotional pamphlets stated that Microsoft Office would be supplied free of charge. Coupled with the defendant's ex-employee's verbal testimony to confirm extensive unlicensed pre-loading, it is reasonable to accept the defendant to have installed all its computers with the Microsoft Office programmes before effecting retail sale. Of the 5,084 computers only 160 of them were installed with an operating system other than Window 95. Records from the OEM distributors of the plaintiff showed that the defendant has only bought 26 units of the Office software during the said period. Hence the computer units being installed with Microsoft Office 95 or 97 would be 4,898 (5,084 - 160 - 26). The unit price of the Microsoft Office 95 was HK$3,199 while the unit price for Microsoft Office 97 was HK$ 4,699. Adopting the mean purchase price of Office 95 and Office 97 for calculation, the loss of licence fees for the unlicensed supply of the Microsoft Office programme would be HK$19,342,202 [1/2 (HK$ 3,199 + HK$4,699) $ x 4,898].

Damages for the period from April 1996 to March 1997

26. There was no direct information about the volume of sales of the defendant nor the scope of its infringing activities, save and except the evidence of Madam Chiu who testified that the defendant's infringing merchandise was about 80% - 90% of the defendant's trade volume.

27. The balance sheets of the defendant showed the trading volume of the defendant to be HK$189,613,242 in the year of 1996, HK$186,483,855 in the year of 1997, and HK$167,476,457 in the year of 1998. From the financial statements of the defendant, it could be seen that the trading volume of the defendant maintained at roughly the same range for the years of 1996, 1997 and 1998.

28. From the records of the OEM distributors, the operating system software units acquired by the defendant were 1,354 in 1995; 1,344 in 1996 and 1,491 in 1997. Hence the number of purchase of the plaintiff's operating systems by the defendant maintained at roughly the same level for all 3 years from 1995 to 1997.

29. I make calculation of the plaintiff's damages for the period of April 1996 to March 1997 by reference to the same trading pattern of the defendant reflected in the invoices disclosed for period between April 1997 and October 1998.

30. Hence the plaintiff's loss of licence fees in respect of the unauthorized installation of Window 95 for April 1996 to March 1997 would be HK$1,291,680 [(2,964 computers x 12 months/19 months) x HK$690]. Correspondingly the plaintiff's loss of licence fees in respect of the unauthorized installation of Office 95 for the period between April 1996 and March 1997 would be HK$9,896,022 [(4,898 computers x 12 months/19 months) x HK$3,199].

Damages for the period from April 1995 to March 1996

31. As there were no financial statements to show the volume of sales of the defendant, I do not propose to form an assessment in respect of the plaintiff's likely damage for this period.

Additional damage

32. S.108(2) Copyright Ordinance provides that the court may award additional damages in case of copyright infringement having regard to the flagrancy of the infringement, benefits accrued to the defendant by reason of the infringement, completeness and accuracy of the defendant's business accounts and records.

The Law

33. In Ravenscroft v Herbert [1980] R.P.C. 193 (Ch) at page 208 Mr. Justice Brightman said:-

" ...... The plaintiff claims to be entitled to additional damages under section 17(3) of the Act of 1956. That is a matter which I am entitled to leave to the enquiry, but for the convenience of the parties I intend to decide the point now. To entitle the plaintiff to such additional damages it must be established that effective relief would not otherwise be available to the plaintiff giving regard to the flagrancy of the infringement, any benefit shown to have accrued to the defendants by reason of the infringement, and other material considerations. Flagrancy in my view implies the existence of scandalous conduct, deceit and such like; it includes deliberate and calculated copyright infringements. There is some guidance to be obtained from the Concise Oxford English Dictionary, Nichols Advanced Vehicle Systems v Rees [1979] R.P.C. 127, and also from a New Zealand case, International Credit Control Limited v Axelton [1974] 1 NZLR 695 at 705."

34. In the New Zealand Court of Appeal decision of Wellington Newspapers v Dealers Guide (1984) 4 IPR 417 at pages 421 & 422: McMullin J said,

"...... The ordinary dictionary meaning of flagrant is 'glaring, scandalous, or outrageous". Flagrancy was described by Brightman J in Ravenscroft v Herbert [1980] RPC 193 at 208 as 'Flagrancy in my view implies the existence of scandalous conduct, deceit and such like; it includes deliberate and calculated copyright infringement.'

What is flagrant must of course be a question of fact and degree to be decided against the background of relevant facts.

......

The additional damages referred to in s.24(3) are to be awarded where the court is satisfied that the remedies otherwise provided by the section for an action brought under it do not provide effective relief. This would suggest that there may be some damage or loss suffered by a plaintiff which compensatory damages, injunction, the taking of accounts or other remedy would not assuage. It is difficult to see what is contemplated by the additional damage unless it is something in the nature of punishment to the defendant for the hurt done to the plaintiff which the conventional remedies would not provide. How otherwise would the flagrancy of the infringement be relevant? This is indeed how the equivalent English subsection has been interpreted. In Ravenscroft v Herbert Brightman, J said at p.208 'To entitle the plaintiff to such additional damages it must be established that effective relief would not otherwise be available to the plaintiff giving regard to the flagrancy of the infringement, any benefit shown to have accrued to the defendant by reason of the infringement, and other material considerations.'

......

But while the power to award additional damages under the Act depends on the terms of s.24(3), the considerations which are relevant to an award of exemplary damages in an action in tort, are of equal application; s.24(3) expresses the same notions as are expressed by exemplary or punitive damages as discussed in Cassell v Broome [1972] AC1027 and applied by this court in Taylor v Beere [1982] 1 NZLR81; Donselaar v Donselaar [1982] 1 NZLR 97......"

35. The defendant was a member of the MOSP. It is fully aware of its obligations under the MOSP agreement to sell only licensed software programmes. The flagrancy of the defendant's breach is culminated by the following factors:-

(a) the defendant acted in blatant breach of its MOSP obligations;

(b) the infringing activities of the defendant, according to its ex-employee, has been extensive. According to Ms. Chui about 80% - 90% of the defendant's traded commodities were pre-loaded with unlicensed copies of software;

(c) the extensive infringement of the defendant was illustrated by the fact that the defendant has printed its own Able Computer Office 97 handbooks which contained substantial extracts from the plaintiff's operation manual and were distributed to the investigator buyers during the sample sales in 1997;

(d) the infringing acts were carried out over a long period of time from 1994 to 1998; and

(e) the lack of documentation which deprived the plaintiff a chance to seek an account of the profits made by the defendant in respect of its infringing activities prior to April 1996.

36. Hence it is proper for additional damages to be awarded. For the shortage of data, such as the trade volume and the extent of the breach, I am minded to grant a sum of HK$3,257,506, reflecting 10% of the assessed damages of the plaintiff [10% (2,045,160 + 19,342,202 + 1,291,680 + 9,896,022 )].

37. Hence the total damage I am prepared to award to the plaintiff in respect of the defendant's copyright infringing activities are:-

(a) April 97 - Oct 98	for Window 95	2,045,160
	for Office 95/97	19,342,202
(b) April 96 - March 97	for Window 95	1,291,680
	for Office 95	9,896,022
(c) S.108(2) compensation		3,257,506
		HK$35,832,570
		============

Judgment interest accrues from the date of judgment until payment.

38. I also grant an order nisi on costs, to be taxed if not agreed, in favour of the plaintiff against the defendant for the present assessment hearing.