FREY WILLE GmbH & Co, KG AND ANOTHER v. COMPLEX INDUSTRIAL CO LTD AND ANOTHER

CACV 2/2012

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 2 OF 2012

(ON APPEAL FROM HCA NO. 378 OF 2011)

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REASONS FOR JUDGMENT

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Hon Fok JA:

Introduction

1. By his judgment handed down on 5 December 2011, Deputy High Court Judge Carlson entered summary judgment in favour of the plaintiffs against the 1^st defendant for final injunctive relief in respect of the plaintiffs’ claim for breach of copyright.

2. At the conclusion of the hearing of this appeal by the 1^st defendant, save for various aspects of the judgment on which the parties were agreed the Judge’s order should be varied (see below), we dismissed the appeal, indicating that we would give our reasons later.  We then heard argument on costs and reserved our judgment. This judgment sets out our reasons for dismissing the 1^st defendant’s appeal and our judgment on costs.

Background

3. The 1^st plaintiff is an Austrian company which produces various items of jewellery adorned with fine decorative art, including bracelets.  It sells a range of jewellery through agents in different parts of the world, including Hong Kong where the 2^nd plaintiff, its HK subsidiary, has two retail outlets.

4. The 1^st defendant is a manufacturer and retailer of jewellery and fashion accessories.  Through a related company, the 1^st defendant has a large factory in Dongguan where it manufactures various jewellery and fashion items.  The 2^nd defendant is one of 1^st defendant’s directors and its principal shareholder.

5. By this action, the plaintiffs claimed that the defendants have infringed their copyright in seven bracelets manufactured from original designs prepared by the 1^st plaintiff’s employees.  They also claimed that the defendants have been guilty of passing off their products.  The prayer to the Amended Statement of Claim seeks injunctive relief, damages, various disclosure orders and other ancillary relief.

6. By summons under Order 14, the plaintiffs sought summary judgment for a final injunction to restrain the defendants from infringing their copyright in respect of five of the seven bracelets.

7. The plaintiffs subsequently indicated in an affidavit sworn in support of the Order 14 summons that, if the court were minded to grant summary judgment in respect of the copyright infringement claims, the plaintiffs would abandon their claims for passing off, the remaining copyright infringement claims for two of the seven bracelets and the additional claims against the 2^nd defendant in respect of his acts of controlling, directing, procuring or authorising the 1^st defendant’s infringing activities (2^nd affidavit of Dr Gertraude Kopf §15).

8. At the hearing of the Order 14 summons before the Judge on 1 December 2011, the plaintiffs abandoned their claim for damages for copyright infringement and accepted that the defendants were able to raise a triable issue as to the question of knowledge of the plaintiffs’ copyright in the bracelets prior to 5 May 2010.  This is what the Judge recorded in his judgment handed down on 5 December 2011:

“5. In briefly setting out the relevant aspects of the facts, it is important to bear in mind, and this has only developed as the argument before me proceeded, that the Plaintiffs now accept that the Defendants are able to raise a triable issue as to the question of knowledge of the Plaintiffs’ copyright in the designs and other artistic works for the objects in question prior to 5 May 2010. The significance of this date is that it is the date of the “cease and desist” letter sent by the Plaintiffs’ solicitors to the 1st Defendant. It is the Defendants’ reaction to this letter and their failure to offer any undertaking to cease and desist which underpins the application for this injunction. Mr Hughes, who appears for the Plaintiffs, submits that when one considers the whole history of the matter and the Defendants’ conduct, particularly after receipt [of] the letter of 5 May 2010, that the Plaintiffs are amply justified in making this application.”

9. In short, the plaintiffs accepted that, if an injunction were granted on the summary judgment application, the action would come to an end.  (Mr Sebastian Hughes, counsel for the plaintiffs, confirmed that this would remain the position if the judgment that had been entered were upheld on appeal by this court.)

10. The Judge acceded to the plaintiffs’ application for summary judgment.  He considered the plaintiffs had “an unanswerable case” in respect of breach of copyright (Judgment §22).  Since the defendants declined to offer any undertaking in lieu of an injunction, the Judge entered judgment against the 1^st defendant in terms of the amended Order 14 summons on the basis that the plaintiffs had shown a “watertight” case (Judgment §11) on the existence of the plaintiffs’ copyright in the artistic drawings of the bracelets and that the defendants’ bracelets were:

“… a plain reproduction, save as to size, of the Plaintiffs’ bracelets, which can only have been based on the original drawings and artistic works of the 1st Plaintiff’s design staff. There is simply no other interpretation that is reasonably open to me. The notion that any original thought has gone into what the Defendants did in terms of their own designs prior to production of their bracelets cannot begin to get off the ground.” (Judgment §21)

Respects in which the parties were agreed the judgment should be varied

11. It was accepted by the plaintiffs that the order following from the Judge’s judgment had to be varied in certain respects in any event:

(1)  First, judgment should not have been entered in favour of the 2^nd plaintiff (including for costs) since it is not the owner of the copyright in the bracelets concerned; and

(2)  Secondly, judgment should not have been entered in respect of the “Endless Love” bracelet since that was a product for which the application for summary judgment was abandoned.

The plaintiffs’ case as to copyright infringement

12. The first basis on which the plaintiffs sought to uphold the injunction granted by the Judge was that it had established secondary infringement under section 31 of the Copyright Ordinance (Cap. 528).

13. In the Amended Statement of Claim, the plaintiffs’ pleaded case as to the relevant infringing acts is as follows:

“15. The Defendants have, since a date prior to the issue of the Writ in this action, infringed the Copyright Works of the 1^st Plaintiff’s by reproducing the Copyright Works and/or causing the Copyright Works to be reproduced and/or copyright of the 1^st Plaintiff by importing, exporting, issuing to the public possessing exhibiting in public and distributing for the purpose of or in the course of trade or business, offering for sale or supply and selling or supplying infringing copies of the Copyright Works. The Plaintiffs will rely, pending discovery and/or interrogatories, upon the following facts and matters.

PARTICULARS OF COPYRIGHT INFRINGEMENT

(a) Since about 2009 (from a date which is not presently known to the 1^st Plaintiff) the 1^st Defendant supplied, offered to supply promoted, marketed and/or advertised on webpages controlled by the 1^st Defendant jewellery products which reproduce or reproduce substantial parts of the Copyright Works, namely –

(i) Bracelet of model no. D9314A/Z (“D9314A/Z”);

(ii) Bracelet of model no. D9315A/Z (“D9315A/Z”).

(b) On or about 9 July 2009, the investigators of the Plaintiffs were invited to visit the showroom of the 1^st Defendant at Unit F&G, 20/F, Gold King Industrial Building, 34-51 Tai Lin Pai Road, Kwai Chung, Hong Kong (the “Registered Office”) whereby D9314A/Z and D9315A/Z were issued and imported into Hong Kong, displayed, offered for sale to the investigators of the Plaintiffs.

(c) On or about 24 July 2009, an email was received by the investigators of the Plaintiffs from a staff or representative of the 1^st Defendant containing many models of bracelets, inter alia, D9314A/Z and D9315A/Z.

(d) On or about 22 January 2010, the 1^st Defendant by issuing, importing into Hong Kong, possessing and dealing for the purpose of trade, selling, offering for sale, and/or authorization of the foregoing acts, of the 1^st Defendant’s bracelets by the 1^st Defendant to the Plaintiffs’ investigators at the Registered Office, namely:-

(i) Bracelet of model no. D9314A/Z;

(ii) Bracelet of model no. D9315A/Z;

(iii) Bracelet of model no. D9317A/Z (“D9317A/Z”);

(iv) Bracelet of model no. D9318A/Z (“D9318A/Z”);

(v) Bracelet of model no. D9348A (“D9348A”);

(vi) Bracelet of model no. D9349A (“D9349A”);

(vii) Bracelet of model no. D9350A (“D9350A”) (collectively “Infringing Bracelets”);

(viii)  The export of the Infringing Bracelets to overseas other than for private and domestic use at times presently unknown to the Plaintiffs.”

14. In order to establish secondary infringement, a claimant must prove a relevant infringing act committed with the requisite knowledge: see Toy Major Trading Co Ltd v Hang Shun Plastic Toys Ltd [2007] 3 HKLRD 345 at §3.

15. As noted above, the plaintiffs accepted before the Judge that there was a triable issue as to knowledge prior to the “cease and desist” letter dated 5 May 2010.  However, they contended, for the purposes of the Order 14 application, that the defendants were fixed with the requisite knowledge as from the date of that letter.

16. It will be apparent from the pleaded particulars of copyright infringement set out above that the plaintiffs did not rely upon any relevant act of copyright infringement after the defendants were fixed with knowledge of the plaintiffs’ copyright by reason of the “cease and desist” letter.  It follows that there is no basis on which summary judgment could be granted on the ground that a relevant act of secondary infringement was proved.

17. Mr Hughes sought to overcome this difficulty by arguing that the plea in paragraph (d) of the particulars of copyright infringement was an ongoing act which lasted beyond the date of the “cease and desist” letter.  I do not accept that is a fair or proper reading of the plaintiffs’ pleaded case.  In short, there is no post-5 May 2010 infringing act pleaded.

18. Mr Hughes also sought to contend that the plaintiffs’ pleading in paragraphs 22 and 23 of the Amended Statement of Claim claiming loss and damage amounted to a catch-all pleading which entitled the plaintiffs to rely on additional acts of copyright infringement.  I do not accept that argument either.  The plea in paragraph 22 is limited to the “the aforesaid acts” (i.e. the acts particularised) and the plea in paragraph 23 is a disavowal of knowledge of any other unlawful acts on the part of the defendants but a reservation of a right to claim relief for any and all such acts.  These pleas cannot entitle the plaintiffs to rely on non-particularised facts as acts of secondary infringement supporting a summary judgment application.

19. Finally, Mr Hughes sought to rely on the statements in paragraph 3 of the affirmation of the 2^nd defendant dated 29 December 2011 to suggest that it was to be inferred, from the 2^nd defendant’s failure expressly to deny dealing in the bracelets, that the defendants had so dealt in them.  However, in my view, that submission cannot be sustained since the language of paragraph 3 follows strictly the language of paragraph 4 of the order entered following the Judge’s judgment below, in pursuance of which the affirmation was filed and the inference sought to be drawn by the plaintiffs is therefore not warranted.

20. If this had been the only basis of the plaintiffs’ application for injunctive relief, I would have had no hesitation in allowing the appeal against the judgment.  However, the plaintiffs also put their case on an alternative basis.

Plaintiffs’ alternative basis for summary judgment

21. The alternative basis on which the plaintiffs put their case was as follows.  The plaintiffs’ copyright in the bracelets was established.  Although the acts of copyright infringement prior to the “cease and desist” letter could not be shown to be infringements because the plaintiffs could not establish the relevant knowledge on the part of the defendants, once the defendants were fixed with knowledge of the plaintiffs’ copyright, as from or shortly after the date of that letter, the defendants’ conduct thereafter, in the face of having committed the prior acts, justified the grant of a permanent injunction to protect the plaintiffs and vindicate their rights.

22. In support of this alternative basis for upholding the grant of the injunction, Mr Hughes relied on the case of Linpac Mouldings Limited v Eagleton Direct Export Limited & Anor [1994] FSR 545.  In that case, the English Court of Appeal upheld the grant of injunctive relief where the defendants’ conduct, after the writ was issued, was sufficient to signify an intention to continue infringement after the defendants had reason to believe that their products had infringed the 1^st plaintiff’s copyright.

23. Hirst LJ held (at p. 551):

“… I am satisfied that the test which [the judge] propounded, namely that there must be a real threat of future infringement by continued trading, was too stringent and wrong in principle. In my judgment the defendants’ conduct, after the writ was issued, in relation to these proceedings, which Dillon L.J. has already described, was quite sufficient to signify an intention to continue infringement after they had reason to believe that their cups were infringing copies justifying the plaintiffs’ claim for a quia timet injunction.”

(Emphasis added)

24. In Hirst LJ’s view (see p. 552), the same principle applied as was laid down by Nourse and Staughton LJJ in LA Gear Inc. v Hi-Tec Sports Ltd [1992] FSR 121 at 139.

25. Thus, in the present case, Mr Hughes prayed in aid the fact that as from or shortly after the “cease and desist” letter on 5 May 2010, the defendants were fixed with knowledge of the plaintiffs’ copyright in the bracelets.  Given the prior acts (which, had they been accompanied by the requisite knowledge would have constituted clear and proven acts of copyright infringement), the defendants’ conduct subsequent to the “cease and desist” letter was sufficient to justify the grant of the injunction.

26. Mr Hughes relied on the defendants’ silence after the “cease and desist” letter and consequent failure to acknowledge the plaintiffs’ copyright as demonstrating that the defendants had not evinced an intention not to deal in infringing bracelets (the prior acts clearly being dealings in such bracelets).

27. For his part, Mr Douglas Clark, counsel for the defendants, argued, in support of the appeal, that no such inference was warranted and that, on the contrary, the lengthy time from the initial investigations of the plaintiffs in March 2009, June 2009 and January 2010 before the “cease and desist” letter and the inactivity on the part of the plaintiffs from the date of that letter in May 2010 until the issue of the writ in March 2011, demonstrated that there was no real apprehension on the part of the plaintiffs in respect of any copyright infringement.

28. I have no hesitation in rejecting that argument.  The time taken in the initial investigations was not, in my view, unreasonable and I do not regard the period from January 2010 to the issue of the “cease and desist” letter as constituting delay or a period from which to draw the inference Mr Clark urged upon us.  Nor do I regard the period from May 2010 until the issue of the writ in March 2011 as constituting delay or a period from which to draw that inference.

29. Further, Mr Hughes relied on two letters from the defendants’ solicitors to the plaintiffs’ solicitors after the writ was issued (on 8 March 2011) to demonstrate that the defendants had dealt in infringing bracelets after the “cease and desist” letter.  As to those letters:

(1)  The first letter, dated 20 April 2011, stated:

“… our clients are prepared to forthwith cease dealing in the Bracelets in return for your clients’ withdrawal of the action …”.

(2)  The second letter, dated 5 May 2011, stated:

“… our clients also agree to cease dealing in the Bracelets and have already withdrawn them from display at the HK office and the Dongguan factory’s sample room.”

(3)  Although they were both marked “without prejudice as to costs”, Mr Clark confirmed that the defendants had waived privilege in respect of those letters.  A review of the transcript below also shows that they were referred to by Mr Clark before the Judge rose to give the defendants time to consider whether to offer any undertaking in lieu of an injunction (Judgment §26).  It is therefore open to this court to have regard to their contents in determining the substantive appeal.

30. Mr Clark argued that the statements in the letters in question were merely statements as to the future intention of the defendants and did not constitute evidence of an acknowledgment of what had actually taken place in the period up to the dates of those letters.

31. However, in my opinion, the statements in those two letters amount to a clear acknowledgment that the defendants had in fact dealt in the bracelets until the time of those letters.  As a matter of plain language, one cannot forthwith cease to deal with a thing if one is not in fact currently dealing with it.  The letters were written by solicitors at a time when litigation was on foot and it is reasonable to regard the wording as having been deliberately and carefully chosen.  They should be given the plain meaning they bear on their face which is that, as at their date, the defendants were still dealing in the bracelets and, hence, they offered “to forthwith cease” doing so.

32. In addition to the above matters, it is also relevant to have regard to the fact that in the Defence filed in June 2011, the defendants pleaded (in §10(d)(ii)) that during the creation and development process of the 1^st defendant’s bracelets (i.e. the samples produced by the defendants which the Judge held were a plain reproduction, save as to size, of the plaintiffs’ bracelets (Judgment §21)), the relevant designer employed by the defendants created the designs and pleaded (in §11) that the 1^st defendant’s bracelets were designed by the defendants’ factory.  This was a plea, in substance, to the right to continue the acts of infringement complained of.

33. As Millett LJ said in Linpac (at p. 552):

“Had the plaintiffs sought summary judgment for injunctive relief alone at the outset they were, in my view, plainly entitled to it. An innocent infringer must make up his mind whether to claim the right to continue the act of infringement or to offer an undertaking not to do so. On the other hand, a plaintiff must make up his mind whether to claim damages, shouldering the burden of establishing knowledge, or be content to treat the defendant as an innocent infringer and seek injunctive relief alone.”

He continued (at p. 553):

“The defendants had served a defence in which they denied the plaintiffs’ claim, offered no undertakings, and denied that they had infringed the plaintiffs’ copyright or that they knew or had any reason to believe that the articles in question were infringing copies of the plaintiffs’ work. In those circumstances it seems plain to me that they were claiming the right to continue the acts of infringement of which they were charged.”

34. In my view, the position here is no different in substance and, in the circumstances, I reject the 1^st defendant’s submissions to the effect that there was no proper basis for the Judge to grant the injunction.  On the contrary, as the matters I have identified show, there was plainly a proper basis for the Judge to do so.  Nor does the grant of the injunction amount, as Mr Clark submitted, to granting summary judgment on a case that was not pleaded or verified on affidavit.  Nor, further, does it amount, as he contended it did, to creating retrospective liability for copyright infringement.

35. Finally, I would add, agreeing with the Judge (Judgment §§9 to 11) that I do not consider there is any merit in Mr Clark’s contentions that the evidence filed by the plaintiffs was not sufficient to satisfy the requirements of s. 121 of the Copyright Ordinance.  Since this point was not pursued by Mr Clark on this appeal with any vigour, I do not propose to address it at any greater length.  The particulars set out in the plaintiffs’ affidavits appear to me to contain all the information required under s. 121(1).

Costs

36. Upon the dismissal of the appeal, there is no basis on which the 1^st defendant can resist an order that it should pay the costs of the appeal to the plaintiffs, to be taxed if not agreed, and Mr Clark did not suggest that there was.  Accordingly, we make an order that the 1^st plaintiff’s costs of the appeal be paid by the 1^st defendant, to be taxed if not agreed.

37. The argument before us on costs concerned the costs of the action as a whole and the costs of the Order 14 summons.  Mr Clark submitted that the plaintiffs should only recover a portion of their costs of the action and none of the costs of the Order 14 hearing before the Judge.

38. I consider that the 1^st plaintiff’s costs of the action as a whole should be borne by the 1^st defendant.  The following factors lead me to that conclusion. First, the defendants were silent in the period from the “cease and desist” letter until the issue of the writ.  There was no acknowledgment of the plaintiffs’ copyright at all or that the defendants’ bracelets were copies of the plaintiffs’ designs, albeit innocently executed.  Secondly, on the contrary, in a “without prejudice save as to costs” letter dated 14 April 2011 following the writ, the defendants asserted through their solicitors that the defendants’ bracelets were “independently designed and created by the in-house designers” of the 1^st defendant. Thirdly, although in the letters of 20 April 2011 and 5 May 2011 the defendants undertook to cease dealing in the bracelets, they then filed a Defence on 7 June 2011 in which they repeated the claim that their bracelets were independently designed.  Fourthly, at no stage was there an acknowledgment that any of the acts complained of as copyright infringement were merely innocent acts of infringement.  In short, the defendants’ stance here was in substance no different to that of the defendants in Linpac as described by Millett LJ at p. 553 (see above).  Fifthly, as the result of this appeal shows, the plaintiffs were entitled to injunctive relief to vindicate their rights.

39. Mr Clark submitted to us, as he had to the Judge below, that the defendants had acted reasonably in the face of an unreasonable demand for out of pocket legal expenses in the sum of Euro 60,000 and for compensation of a further Euro 10,000.  However, this was a figure proposed by the plaintiffs’ solicitors at a time when the matter was under negotiation.  No counter-figure was proposed by the defendants.  Furthermore, it was a figure proposed by the plaintiffs at a time when the defendants were proposing to resolve the action by way of execution of a statutory declaration in substitution for an acknowledgment of the plaintiffs’ proprietary rights in the bracelets by way of judgment in this action.

40. In the circumstances, I therefore do not consider that there is a proper basis for depriving the 1^st plaintiff of its costs of pursuing the action beyond May 2011 and issuing the Order 14 summons in July 2011.

41. However, as to costs of Order 14 summons itself, it seems to me that the plaintiffs’ change of stance at the outset of the hearing of the summary judgment application is relevant.  The plaintiffs’ late decision to concede there was a triable issue as to knowledge prior to the “cease and desist” letter and to abandon their damages claims and confine the claim to one for an injunction must, in my view, have led to some wastage of costs in respect of preparation of evidence.  Applying a necessarily broad brush view to this question, I would be inclined to vary the Judge’s order by allowing the 1^st plaintiff only 50% of the costs of the Order 14 summons and the hearing before the Judge below.  I note that this was the result reached in the Linpac case.

Conclusion

42. Save for the respects noted above in which the order under appeal is to be varied, the appeal is dismissed for the reasons set out.

43. The 1^st plaintiff will have the costs of the action and 50% of the costs of the Order 14 summons and hearing before the Judge below, such costs to be taxed if not agreed.

44. The costs of the appeal will be paid by the 1^st defendant to the 1^st plaintiff, to be taxed if not agreed.

Hon Lunn JA:

45. I agree with the reasons articulated in the judgment of Fok JA for dismissing the 1^st defendant’s appeal and with the proposed orders as to costs.