HEALTH HOMES (HONG KONG) LTD v. CHAN WAI MEI AND OTHERS

HCA2067/2004

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 2067 OF 2004

D E C I S I O N

1.  This is an application for summary judgment.  The plaintiff is and was at all material times the sole distributor of a Rainbow brand of vacuum cleaners.  The cleaners are made in the USA by Rexair Inc.  There is another brand of vacuum cleaners called Delphin.  They are made in Germany.  These two types of cleaners are competitors of the same market.

2.  The 1st defendant is the wife of the 2nd defendant.  They used to be the plaintiff’s dealers in selling the Rainbow cleaners.  They have joined the plaintiff in 1994 and 1996 respectively.  On 5 June 2001, they have each signed a dealer agreement with the plaintiff which prohibited them from engaging or being interested in any business of the same nature as Rainbow’s or of similar or comparable products.  At that time, both the 1st and 2nd defendants had been made area distributors of the plaintiff.  In such positions, they had to supervise other dealers in their efforts to promote and sell Rainbow cleaners.  These dealers are called downliners. 

3.  The 1st and 2nd defendants as area distributors were entitled to overriding commissions on the sales effected by their downliners.  The 1st defendant said in her affirmation that the overriding commission ranged between $30,000 to $80,000 per month.

4.  In early 2003, the 1st and 2nd defendants acquired the 3rd defendant and caused it to enter into a sub-distributorship agreement with the plaintiff on 1 March 2003.  They pleaded in their defence that upon the 3rd defendant entering into the sub-distributorship agreement, the dealer agreements of the 1st and 2nd defendants were terminated.  As a result of the termination of the two dealer agreements and the making of the sub-distributorship agreement, the 1st and 2nd defendants ceased to be dealers and stopped receiving any more overriding commission from their downliners.  Their downliners also ceased to be under them and had become the plaintiff’s direct downliners without the interposition of the 1st or 2nd defendant.

5.  The defendants pleaded that, by the new arrangement, the plaintiff also cut down its office and operation overheads as the 3rd defendant, as a sub-distributor, had to provide the same for its own running.  They also pleaded that the plaintiff had saved its inventory expenses as the 3rd defendant had to pay for its own stock though with a 60-day credit period given by the plaintiff.

6.  I would hasten to add that it is the plaintiff’s case that despite the making of the sub-distributorship agreement with the 3rd defendant, the dealer agreements with the 1st and 2nd defendants continued to exist and were only terminated at the end of January 2004 when the 3rd defendant’s sub-distributorship agreement was terminated.

7.  It is the plaintiff’s case that on about 27 January 2004, the 1st and 2nd defendants orally terminated their dealer agreements, and by a fax of 27 January 2004, terminated the 3rd defendant’s sub-distributorship agreement.  The plaintiff then discovered that the 1st and 2nd defendants had, before termination of the dealer agreements, committed acts in breach of these agreements.  The plaintiff pleaded that the 1st and 2nd defendants had persuaded the plaintiff’s customers to buy Delphin cleaners instead of Rainbow cleaners and also persuaded these customers to trade in their old Rainbow cleaners for new Delphin cleaners at a discounted price.  The plaintiff also discovered that the 1st defendant had sent a letter dated January 2004 to the plaintiff’s customers which contained misleading information about Rainbow products.  The 4th defendant had also published a card for distribution to the plaintiff’s customers which again contained misleading information about Rainbow cleaners and a pamphlet purportedly analysing and comparing the design and performance of the two types of cleaners.

8.  Regarding the 4th defendant, it has four shareholders and directors.  The 1st and 2nd defendants are two of the shareholders and directors.  The 4th defendant appears to be related to one Delphin Families Company Limited (“Delphin Families”) which is and was at all material times the sole distributor of the Delphin cleaners.

9.  The plaintiff then started this action on 6 September 2004.  The 1st, 2nd and 4th defendants filed their joint defence on 23 October 2004 before judgment was entered against the 3rd defendant on 18 November 2004.  The plaintiff then issued a summons on 24 March 2005 for summary judgment against the 1st, 2nd and 4th defendants for the following relief:

(1)	interlocutory judgment against the 1st defendant for damages for breach of her dealer agreement;
(2)	interlocutory judgment against the 2nd defendant for damages for breach of his dealer agreement;
(3)	an injunction restraining the 1st and/or 2nd and/or 4th defendants, whether by herself, himself, itself or her/his/its agents, and in the case of the 4th defendant, also by its officers or servants from doing any of the following acts, that is to say:-
	(a)	passing-off the Delphin Products as Rainbow products;
	(b)	publishing or cause to be published, orally or in writing or otherwise, howsoever any words or representations to the effect that:
		(i)	company distributing the Rainbow products had merged with company distributing the Delphin products;
		(ii)	the Delphin products are related to the Rainbow products and in particular the Delphin vacuum cleaner is a new model of Rainbow vacuum cleaner; and
		(iii)	the Delphin vacuum cleaner is a superior and better product than the Rainbow vacuum cleaner or any words similarly disparaging the Rainbow vacuum cleaner;
(4)	an inquiry as to damages or, at the plaintiff’s option, an account of profits; and
(5)	an order for payment of all sums found due as a result of the passing-off of the Delphin products as the Rainbow products and further or alternatively, interlocutory judgment for damages for injurious falsehood, and interest and costs.

10.  In the course of the hearing, Mr. Li, counsel for the plaintiff said that he would not be seeking an injunction in terms of paragraph 3(a).  

11.  As I have said above, the 1st and 2nd defendants have already pleaded that their dealer agreements had ceased on about 1 March 2003.  The plaintiff relies on the following evidence to show that the defendants’ case on this is unbelievable and unarguable.  The first piece of evidence is a fax of 10 February 2004 by which the plaintiff asked the 1st defendant for order forms for January 2004.  A “monthly demo and sales report for January 2004” was then submitted by the 3rd defendant.  The report contained various names who were described as dealers.  The 1st and 2nd defendants were described as area distributors.

12.  The plaintiff relied heavily on this report to say that if the dealer agreements had been terminated, the 1st and 2nd defendants would not have so described themselves.  The plaintiff also relied on two undated letters issued by it to its customers, saying that its salesperson, the 1st defendant, had resigned from it and was no longer its representative, and that the 2nd defendant’s service had been terminated on 27 January 2004.  The first letter is not entirely correct as the 1st defendant was only an independent contractor and not a member of the staff of the plaintiff.

13.  Mr Li, counsel for the plaintiff, submitted that these letters showed that the plaintiff had understood that the dealer agreements of the two defendants were only terminated on 27 January 2004.  However, there was no similar letter by the plaintiff to its customers announcing the severance of relationship with the 3rd defendant.  I think the two letters about cessation of service of the 1st and 2nd defendants could have been issued by the plaintiff for other reasons though I am not here to conclude on any one.

14.  One possible reason is that the plaintiff thought that the 3rd defendant operated through the 1st and 2nd defendants and thus regarded it important to announce the severance of relationship with the 1st and 2nd defendants.  Furthermore, if the understanding at the material time is important, it appears that it was the understanding of the 1st and 2nd defendants that their dealer agreements were no longer subsisting at that time.  Thus, their fax of 27 January 2004 only sought to terminate the sub-distributorship agreement and not their individual dealer agreements.

15.  Regarding the description of dealers in “the demo and sales report” from the 3rd defendant to the plaintiff for January 2004, such description could have referred to dealers of the 3rd defendant as there is no dispute that the 3rd defendant had its own dealers to promote the Rainbow cleaners for it.

16.  I note that the defendants have not commented on this report in their affirmation in opposition.  However, that is not conclusive on the description of capacities in this report.  The most important point in this issue is in fact the payment of commission by the plaintiff to the 1st and 2nd defendants.  The 1st defendant in her affirmation made it abundantly clear that once the 3rd defendant had entered into the sub-distributorship agreement, the 1st and 2nd defendants ceased to receive overriding commission as their dealer agreements had also ceased and their downliners had become direct dealers of the plaintiff. 

17.  This point was firstly made in the defence and elaborated with emphasis by the 1st defendant in her affirmation in opposition.  However, not a word about such commission had been said by Mr Toh of the plaintiff in his supporting and reply affirmations.  He has also failed to produce any evidence of payment of commission to the 1st or 2nd defendant, whether in respect of their own sales or as overriding commission in respect of sales conducted by their downliners.

18.  In the premises, I think the 1st and 2nd defendants have shown an arguable case that their dealer agreements had already been terminated in March 2003, and I will not give interlocutory judgment against them for alleged breaches of these agreements.  In fact, they have already made out an arguable case on this point in their defence.

19.  On the injunction, the plaintiff relies on a number of things.  Firstly, there are three invoices issued by the 1st defendant on behalf of the 3rd defendant to the 3rd defendant’s customers.  They all say that they were for sale of Rainbow cleaners.  However, the cleaners as delivered were all of the Delphin brand.  The plaintiff also produced customers’ reports saying that the 1st defendant had deceived the customers by telling them that Delphin was a new product of the Rainbow brand. 

20.  There is no dispute that the 1st defendant had issued the three invoices in question purportedly selling Rainbow cleaners, but she had actually procured the delivery of Delphin cleaners.  Her explanation was that she had used old pre-typed order forms of the 3rd defendant and did not spot that the product pre-typed was Rainbow and not Delphin.  However, she said she had invariably explained verbally to the customers that she was selling them Delphin cleaners rather than Rainbow cleaners.  This defence sounds lame.

21.  The plaintiff has produced two investigation reports by its staff with one report signed by a customer confirming that the 1st defendant had misled the customers to think that the Delphin cleaner was a new product of the Rainbow brand.  The customer of the third invoice in fact made an affirmation detailing the 1st defendant’s deceit.  All such evidence, when read together with the 1st defendant’s lame defence, have convinced me that the 1st defendant has no arguable defence for this claim, and her explanation is simply unbelievable.

22.  There is also evidence in many investigation reports saying that the 1st defendant had told the plaintiff’s customers that the company selling Rainbow cleaners had merged with another company, and the customers could trade in their old Rainbow cleaners for new Delphin cleaners at a discounted price.  This is indeed an act of passing-off.  I refer to paragraph 5-5 of the Law of Passing-off by Christopher Wadlow, 3rd edition which reads:

“The misrepresentation need not relate to goods, but may be to the effect that the businesses of the claimant and the defendant are the same, or have merged, or that one is a branch, agency or subsidiary of the other; or, more generally, that the defendant has any connection with the claimant that is likely to cause damage.  It may therefore be actionable to misrepresent oneself as the licensee of another business, although this is an area where the English courts have been reluctant to conclude that damage will result.  Misrepresentations as to business connections are especially relevant to businesses supplying services, but the same principles apply where one or both businesses deal in goods (of the same or different kinds) whether or not that is also passing-off of the goods themselves.”

23.  And I note that there is evidence that some customers had indeed traded in their old Rainbow cleaners for new Delphin cleaners at a discounted price and this is evidence of loss suffered by the plaintiff.

24.  I also refer to the letter dated January 2004 issued by the 1st defendant in the letterhead of the 3rd defendant which suggests that the 3rd defendant had merged with Delphin Families into the 4th defendant, the 3rd defendant as a sub-distributor of Rainbow cleaners would continue to provide quality service, and the merged entity would be a distributor of Delphin products.

25.  All these show that the 1st defendant has committed acts of passing-off against Rainbow products.  I would grant an injunction against the 1st defendant in terms of paragraph 3(b)(i)(ii) of the plaintiff’s summons.

26.  On the case against the 4th defendant, it has published a card which has been distributed to the plaintiff’s customers.  The card says that the 3rd defendant as a Rainbow sub-distributor and Delphin Families as the sole distributor of Delphin products have merged.  This information is false as the 3rd defendant was no longer a distributor of Rainbow products.  The inside of the card also referred to the trade-in scheme for customers to trade in old Rainbow cleaners in return for new Delphin cleaners at a discounted price.  This is no doubt an act of passing-off, and I grant the same injunction in the same terms against the 4th defendant.

27.  In fact, the injunctions can also be justified by acts of injurious falsehood.  The three elements for injurious falsehood as identified by Glidewell LJ in the English Court of Appeal in Kaye v Robertson [1991] FSR 62 are:

“The essentials of this tort are that the defendant has published about the plaintiff words which are false, that they were published maliciously, and that special damage has followed as the direct and natural result of their publication.  As to special damage, the effect of section 3(1) of the Defamation Act 1952 is that it is sufficient if the words published in writing are calculated to cause pecuniary damage to the plaintiff.  Malice will be inferred if it be proved that the words were calculated to produce damage and that the defendant knew when he published the words that they were false or was reckless as to whether they were false or not.”

28.  As I have said, there is evidence that some customers had traded in their old Rainbow cleaners for new Delphin cleaners at a discounted price.  This is no doubt special damage suffered by the plaintiff.  And I also note that the contents of the card published by the 4th defendant are calculated to cause pecuniary damage to the plaintiff.  The contents of the card thus fit into these three elements just as the conduct of the 1st defendant and both warrant the grant of the same injunctions granted above.

29.  Finally, the plaintiff says that the pamphlet published by the defendant also constituted an act of injurious falsehood.  I have referred Mr Li to the case of De Beers Abrasive Products Limited & Others v International General Electric Company of New York Limited & Another [1975] FSR 323 where Walton J said:

“Where, however, the situation is not that the trader is puffing his own goods, but turns to denigrate those of his rival, then, in my opinion, the situation is not so clear-cut.  Obviously, the statement: ‘My goods are better than X’s’ is only a more dramatic presentation of what is implicit in the statement: ‘My goods are the best in the world’.  Accordingly, I do not think such a statement would be actionable.  At the other end of the scale, if what is said is: ‘My goods are better than X’s, because X’s are absolute rubbish’, then it is established by dicta by Lord Shand in the House of Lords in White v Mellin [1895] AC 154 at 171 which were accepted by counsel for the defendants as stating the law, the statement would be actionable.

Between these two kinds of statements there is obviously still an extremely wide field; and it appears to me that, in order to draw the line, one must apply this test, namely, whether a reasonable man would take the claim being made as being a serious claim or not.”

30.  Having looked at the analytical questions posed in the pamphlet on the design and performance of the two brands of cleaners, I am of the view that the 4th defendant is making a serious claim and is not merely puffing the Delphin cleaners, but then the 4th defendant should be given the chance to substantiate the statements it has made in the pamphlet. 

31.  In the premises, I would not grant any injunction in terms of paragraph 3(c)(iii) of the plaintiff’s summons. 

32.  On the application for injunction against the 2nd defendant, there is simply no evidence against him.  Mr Li submitted that he was the directing or controlling mind behind the 4th defendant and should likewise be enjoined.  There is, however, no evidence that directly implicates the 2nd defendant for any of these misrepresentations.  The plaintiff has not pleaded in the statement of claim that the 2nd defendant should be held liable because he was the directing or controlling mind of the 4th defendant.  The pleading merely says that he either by himself or in conjunction with the 1st, 3rd and 4th defendants committed the acts of passing-off and injurious falsehood.  Since there is no evidence that he had done any act the subject of the plaintiff’s complaint, I do not think it right to give summary judgment against him by granting any injunction.

33.  Since I have given summary judgment against the 1st and 4th defendants by granting the injunctions aforesaid, I also give interlocutory judgment against them for an inquiry as to damages or, at the plaintiff’s option, an account of profits for their acts of passing-off and injurious falsehood.

34.  I now deal with costs.  Since the 2nd defendant has succeeded completely in this application, I therefore make an order nisi that the plaintiff should pay the 2nd defendant the costs of this application.  As the 4th defendant has lost the bulk of the claim made against it, I make an order nisi that the 4th defendant to pay the plaintiff 70% of the costs of this application.  Regarding the 1st defendant, she is successful in opposing the breach of agreement claim but has lost part of the injunction and damages claim.  I therefore make no order as to costs for the application relating to her.