UMG RECORDINGS, INC. AND OTHERS v. PROFIT CHART DEVELOPMENT LTD AND OTHERS

CACV 262/2012

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 262 OF 2012

(ON APPEAL FROM HCA NO. 472 OF 2010)

________________________

__________________________

REASONS FOR JUDGMENT

___________________________

Hon Lam JA (giving Reasons for Judgment of the Court):

1.  This is an appeal against the decisions of Chung J [“the Judge”] of 24 June and 15 July 2011. On 24 June 2011, the Judge dismissed the Plaintiffs’ application for summary judgment against the 28^th to 34^th Defendants and granted unconditional leave to defend to the other Defendants. He also refused the Plaintiffs’ application for interlocutory injunction. On 15 July 2011, the Judge dismissed the Plaintiffs’ application for interim payment and struck out the Statement of Claim against the 28^th to 34^th Defendants “unless … the Plaintiffs file and serve an amended Statement of Claim” against these Defendants by 5 August 2011. He also stayed the action generally pending the determination of the on-going Copyright Tribunal applications.

2.  In CACV 262 of 2012, the Plaintiffs appealed against the decision of 24 June 2011 and sought summary judgment.  Alternatively, the Plaintiffs sought an order that leave to defend be granted on condition that the defendants pay into court “a sum that would represent the licence fee they ought to have paid for the time they had operated without a valid karaoke server licence”.

3.  In CACV 263 of 2012, the Plaintiffs appealed against the decision of 15 July 2011 and sought an order for interim payment in the sum of $5,840,000 from the 1^st to 27^th Defendants and in the sum of $1,500,000 from the 35^th Defendant.  The Plaintiffs also sought an order that the application for stay be dismissed.

4.  By 2 summonses dated 18 January 2013, the Defendants asked for leave to adduce further evidence on the appeal.  The application was opposed by the Plaintiffs.

5.  After hearing submissions, we made the following orders,

(a)  Dismiss the appeal in CACV 262 of 2012 with costs;

(b)  Dismiss the appeal in CACV 263 of 2012 in respect of the application for interim payment with costs;

(c)  Allow the appeal in CACV 263 of 2012 in respect of the stay application and dismiss the application for stay with costs;

(d)  Dismiss the application by the Defendants to adduce further evidence with costs.

6.  Here are the reasons for our judgment.

The Order 14 and interim payment appeals

7.  In view of the manner in which evidence had been deployed and the arguments advanced before us, it is necessary to state firmly at the outset that Order 14 application is not to be conducted as if it is a platform for a mini-trial.  What had been said in 1990 by Bingham LJ in Crown House Engineering v Amec Projects Ltd [1990] 6 Const LJ 141 at p.154 remains sound advice today, notwithstanding the Civil Justice Reform,

“These cases emphasize that O.14 is for clear cases, that is, cases in which there is no serious material factual dispute and, if a legal issue, then no more than a crisp legal question as well decided summarily as otherwise. O.29 r.12 enables the court to order payment to a plaintiff to the extent that a claim, although not actually admitted, can scarcely be effectively denied. The procedure is entirely inappropriate where the plaintiff's entitlement to recover any sum is the subject of any serious dispute, whether of law or fact. This is not to say in either case that a defendant with no or no more than a partial defence can cheat a plaintiff of his just deserts by producing hefty affidavits and voluminous exhibits to create an illusion of complexity where none exists. Where the point at issue is at heart a short one the court will recognise the fact and act accordingly no matter how bulky its outer garments. But it does mean that where there are substantial issues of genuine complexity the parties should prepare for trial (perhaps, as here, with trial of preliminary issues) rather than dissipate their energy and resources on deceptively attractive short-cuts.”

8.  In essence, the present case is a dispute between the plaintiff record companies (as copyright and registered trademark owners) and the defendant karaoke establishments. The claims of the Plaintiffs were summarized by Mr Liao SC (who appeared in these appeals together with Mr Hui on behalf of the Plaintiffs) as follows in his skeleton submissions paras 2-4,

“2. The action concerns copyright infringement and trade mark infringement in karaoke establishments. The Plaintiffs are members of the Universal Group and the claim is for infringement of copyright in sound recordings and films. The relevant works are Karaoke Music Videos (KMVs) and Music Videos (MVs). The complaint is that the Defendants have been operating commercial karaoke establishments and have been copying and playing in public sound recordings and films in infringements of copyrights and registered trade marks.

3. The Plaintiffs’ applications relate to a subset of 63 (45 KMVs and 18 MVs) of 121 works in which the relevant copyrights are owned by one of the Plaintiffs. In respect of each work and trade mark there is clear and unchallenged evidence that the Defendants have reproduced on their servers and played in public KMVs, which have been manufactured by unlawful copying (the KMVs are ‘do it yourself’ or DIY KMVs), and MVs in respect of which the copyrights are owned by one of the Plaintiffs. At the material times, the Defendants were licensed by K-Net Entertainment International Ltd. The Defendants’ acts complained of fall outside the licence and constitute primary copyright infringement.

4.   In addition to infringing copyright, the Defendants have incorporated the Plaintiffs’ registered trade marks into the DIY KMVs and used them in the course of their trade.  There can be no conceivable justification for this and none has been given.”

9.  Mr Liao confirmed at the hearing before us that in the summary judgment application, the Plaintiffs confined their claims to those in respect of the DIY KMVs and MVs.  Further, counsel told the court that he had instructions to restrict his application to infringement which took place after the grant of the K-Net licence in June 2008.

10.  On the other hand, Mr Yan SC (appearing together with Mr Wong on behalf of the Defendants) summarized the defence side of the story in paras 2-6 of his skeleton submissions,

“2.   In or about 1984, the record companies in Hong Kong started to grant public performance licences (“PP Licences”) covering karaoke music videos (“KMVs”)of essentially all record companies through a collective licensing scheme operated by Phonographic Performance (South East Asia) Limited (“PPSEAL”).  At that time and for over 20 years until 2008, PP Licences were applied for and granted only through the PPSEAL licensing scheme.  It is not in dispute that PPSEAL never provided to its licensees any physical copies of KMVs or even a list of the KMVs licensed.  The licensees, upon paying for the PP Licences, were free to source from the market the KMVs which they needed to offer for the enjoyment of their customers.

3.   Indisputably, between 1984 and 2008, the Neway Group had fully paid for and obtained PP Licences covering Ps’ KMVs from PPSEAL.

4.   With the evolution in technology and the manner in which KMVs are played at karaoke establishments, in 2005, PPSEAL introduced a new licensing scheme under which karaoke server licences (“K-Server Licences”) covering the “old” or back catalogue songs of essentially all record companies (including Ps).  Again, it is not in dispute that PPSEAL never provided to its licensees any physical copies of KMVs or even a list of KMVs licensed, and the licensees, upon paying for the K-Sever Licences, were free to source (and indeed had to source) from the market the KMVs which they wished to load into their servers and to use pursuant to the licences granted under the K-Server Licences (except such KMVs which had already been previously provided as promotional copies by the record companies).  These KMVs were loaded into and stored and accumulated in the karaoke servers of the karaoke establishments.

5.   It is not disputed that between 2005 and 2008, the Neway Group had fully paid for and obtained K-Server Licences covering, inter alia, KMVs of back catalogues songs of all relevant record companies including Ps from PPSEAL.  These numbered in the thousands.  The Neway Group also sourced, loaded into and stored and accumulated in their karaoke servers different versions of KMVs including what Ps call the DIY KMVs.   Neither Ps nor PPSEAL had ever complained about the use of such KMVs by the Neway Group at the time.

6.   In fact, the practice of using different versions of KMVs sourced from the market (including the so-called DIY KMVs) was the norm in the industry at the time because none of the licensees were provided with any physical copies of KMVs by the record companies or PPSEAL.  Such prevalent market practice is clearly demonstrated by the overwhelming evidence adduced by Ds:-

(a)  The so-called DIY KMVs were found in the karaoke servers of other karaoke chains in Hong Kong, including California Red (“CR Group”) which was the other leading karaoke chain in Hong Kong in the 1990s and early 2000s, and RedMr, the other major karaoke chain in Hong Kong at present.  Both CR Group and RedMr had applied for and obtained K-Server Licences from Ps’ authorized agents.  CR Group obtained K-Server Licenses from PPSEAL and K-Net Entertainment International Limited (“K-Net International”), whilst RedMr obtained its K-Server Licence from Hong Kong Karaoke Licensing Alliance Limited (“HKKLA”) and also obtained its karaoke servers from a server provider designated by HKKLA.

(b)  The so-called DIY KMVs were found in the karaoke servers of many other pubs, clubs and restaurants which were licensees of K-Net Music Entertainment Limited (“K-Net Music”) or K-Net International (collectively “K-Net Group”) and which had obtained their karaoke servers from the  designated server providers of the K-Net Group.”

11.  Mr Yan made a forceful submission based on a defence of estoppel/acquiescence.  Counsel relied on the principle of law set out in Taylors Fashions v Liverpool Victoria Trustees [1982] 1 QB 133 at p.151-152,

“… the application of the Ramsden v Dyson principle … requires a very much broader approach which is directed rather at ascertaining whether, in particular individual circumstances, it would be unconscionable for a party to be permitted to deny that which, knowingly or unknowingly, he has allowed or encouraged another to assume to his detriment …”

12.  In a nutshell, the case of the Defendants is that over the years with the development of the new technology for using servers in the karaoke industry in place of playing physical copies of karaoke music video [“KMVs”], it has been common practice in the trade for karaoke establishments to source their own primary copies of KMVs from the market after they had obtained a Karaoke Server Licence from the agent of the record companies.  Such licences were first granted in 2005 by PPSEAL (who was then the agent for the Plaintiffs and other record companies) and the Defendants had obtained one of those.  Notwithstanding the terms of the licence, the Defendants did not obtain most of its primary copies of KMVs from PPSEAL or the record companies.  The relevant part of the evidence of Mr Suek is at para 37 of his Affirmation.

13.  In 2008, there was a change in that four major groups of record companies (including the Plaintiffs) withdrew from PPSEAL and appointed K-Net Music to operate a licensing scheme for Karaoke Server Licence [“KSL”] for their copyright works. In June 2008, the Defendants got a KSL from K-Net.  The licence fee was $5 million for one year, which was much higher than the licence fee payable under the PPSEAL licence.  The K-Net KSL was for the duration of two years and it expired in June 2010.  Due to disagreement between the parties on the terms of the new licence, no further licence had been granted by K-Net or the successive agent of the Plaintiffs HKKLA.  Instead the Defendants made applications to the Copyright Tribunal for the determination of the reasonable terms for licences under such scheme.

14.  As regards the practice after the grant of the K-Net KSL, Mr Suek gave evidence at para 69 of his Affirmation that the past practice of karaoke establishments sourcing their own primary copies from the market continued.  In support of his contention, he referred to similar copies of what the Plaintiffs now alleged to be infringing materials being found in the karaoke servers of other K-Net licensees.  He further said that after the conclusion of K-Net KSL, the agent of the Plaintiffs had only supplied KMVs of 43 songs to the Defendants notwithstanding the Defendants paying a total of $10 million for licence fees.

15.  Against such background, Mr Yan submitted that there is clearly a triable issue as to whether it would be unconscionable for the Plaintiffs to contend that the K-Net KSL only covered the use of Licensed KMVs as strictly defined in the KSL.  In terms of prejudice suffered as a result of the inaction on the part of the Plaintiffs in the past, Mr Yan submitted that due to the lack of any complaints about the use of the DIY KMVs, the Defendants continued to apply and pay for and obtain KSL and source primary copies of KMVs from the market and load them onto their servers instead of demanding the Plaintiffs to supply the same. Counsel submitted that in light of the widespread practice of sourcing of primary KMVs in the trade, it is inconceivable that the Plaintiffs or their agents had no knowledge of such practice.  He said the Plaintiffs must have led the Defendants to believe that they endorsed and/or acquiesced in the use of such DIY KMVs by continuing the grant of licences to the Defendants and accepting payment of substantial sums by way of licence fees without providing licensed copies of KMVs to the Defendants.  In such circumstances, counsel said it would be unconscionable for the Plaintiffs to enforce its strict legal rights against the Defendants without having regard to such past practice.

16.  On the other hand, Mr Liao submitted that there is no arguable defence of estoppel / acquiescence.  Counsel did not challenge the viability of the defence as a matter of law.  Rather, Mr Liao concentrated on attacking the viability of such defence as being incredible.  Counsel argued that in a summary judgment application, the court would not accept the assertions of a defendant on their face value.  It is open to the court to test the assertions against contemporaneous documents and conducts.  We accept that as a correct statement of approach, see Murjani v Bank of India [1990] 1 HKLR 586; National Westminster Bank v Daniel [1993] 1 WLR 1453; Ng Shou Chun v Hung Chun San [1994] 1 HKC 155.  But one must bear in mind that at this stage the question is not whether the defence evidence is to be believed, but whether it is believable.  Sometimes what starts off as an argument on whether the defence is believable is unwittingly developed by counsel into a full-blown submission on whether the defence is to be believed.  It is often tempting for counsel to go that extra mile and the line may often be crossed subconsciously.  But the court must be vigilant to keep the application within its legitimate bounds. Otherwise it would be encouraging what is in substance a rehearsal of the trial or a trial on affidavit evidence which is not the function of an Order 14 application.

17.  Mr Liao made a two-pronged attack on this line of defence,

(a)  It is inconsistent with the contemporaneous documents and conducts of the Defendants;

(b)  It is inherently improbable.

18.  He also submitted that this line of defence had not been raised before.  The earliest point in time that it was formulated by reference to estoppels/acquiescence was in the Respondent Notice.  However, it has to be accepted that the evidence had already been there in the form of the affirmation of Mr Suek.

19.  The relevant contemporaneous documents and conducts were set out in Mr Liao’s skeleton submissions at paras 39 to 50.  Given our conclusion that the matter should go to trial, we should not pre-empt what findings the trial judge may make by commenting on these documents and conducts in too much details.  Otherwise, we would be engaging in a mini-trial of the issues which we should not embark upon.  It suffices for us to say that we have given careful consideration to these matters.  We do not think, whether taken individually or collectively, they point so strongly against the credibility of the defence evidence that we should shut the Defendants out from this defence of estoppel/acquiescence.

20.  What we would do is to comment briefly on the main points advanced by Mr Liao in this respect without in any way usurping the function of the trial judge.

21.  The strongest point of Mr Liao was the undertaking given by Neway Music Limited in 2008. The undertaking was given on 29 December 2008. The most pertinent paragraph in that undertaking is para (e), which reads,

“The undersigned hereby undertakes that it will not … reproduce, make adaptation, store, play or cause the reproduction, adaptation, storage or playing of or in any way allow access or use by any party any Infringing Music Videos or in any way infringe UNIVERSAL’s rights in the Music Videos.”

22.  Infringing Music Videos was defined under para (b) as reproduction and adaptation of the Music Videos.  Music Videos were, in turn, defined at the beginning of the undertaking as “those musical sound/visual recordings listed in Schedule I”.  Under Schedule I, there was a list of 6 titles of musical sound/visual recordings.         

23.  Mr Yan submitted that the undertaking was given not because the Defendants accepted that DIY KMVs were infringing copies.  Instead, it was given because the Defendants accepted these titles were outside the scope of the K-Net KSL by reason of the fact that they had just been released by the Plaintiffs for less than 6 months.  Counsel referred to a letter of 5 June 2009 from the Defendants’ solicitors to support his case. That was a letter written when the Plaintiff complained about a breach of the undertaking.  In that letter, solicitors for the Defendants did put forward a case of the legitimate adaptation by using the Music Videos (after the expiry of the 6 months’ embargo) under the K-Net KSL due to the failure of the Plaintiffs to supply the KMVs of these titles.

24.  On the other hand, Mr Liao referred us to a letter of 11 June 2009 in which the Plaintiffs made it clear that such adaptation was not authorized.

25.  Mr Yan said despite the joining of issue in that regard, no action had been taken by the Plaintiff.  On the other hand, Mr Liao said the Plaintiff conducted further investigations that led to the bringing of the present action.

26.  Whilst Mr Liao can justifiably rely on the undertaking and these correspondence as evidence of Defendants’ knowledge of the Plaintiffs’ stance on DIY KMVs, we do not think this can conclusively point to the lack of bona fide in the defence of estoppels/acquiescence based on what had been going on since 2005 or even earlier.  No doubt Mr Suek would be cross-examined and perhaps cross-examined with some force by counsel with regard to the undertaking, including the truthfulness of the explanation for conceding liability as set out in the letter of 5 June 2009.  But whether he has any satisfactory explanation for that has to be a matter for trial.

27.  The other documents on which Mr Liao placed great reliance were the PSSEAL KMV Licence and the K-Net KMV Licence, in particular the provisions in those licences prohibiting editing, reverse engineering, decompiling or dissembling of KMV materials. We agree that these provisions, subject to arguments on construction as to these provisions, would be a complete answer to a defence case based on implied term.  However, it would not be a complete answer to a defence based on estoppel/acquiescence.  What lies at the heart of the doctrine relied upon by Mr Yan was the unconscionability of strict enforcement of the Plaintiffs’ legal rights, and that includes the strict legal rights under the terms of these licences.

28.  Mr Liao also took us to the pleadings filed by the Defendants in the Copyright Tribunal proceedings.  Counsel suggested that there were statements in such pleadings inconsistent with the defence case that they were not supplied with KMVs by the Plaintiffs.  With respect, we do not think much mileage can be gained by the Plaintiffs by reading too much into such pleadings.  On the evidence before us, the Defendants had only got KMVs of 43 songs from the Plaintiffs and the Plaintiffs did not put forward evidence to show otherwise notwithstanding it would not be difficult for them to do so had they wished to dispute the same.

29.  Turning to the argument based on inherent probability, Mr Liao submitted that as a large record companies group it was incredible for the Plaintiffs to authorize other persons to tamper with their copyright works. But in the present context, it has to be remembered that the starting point should not be the K-Net KSL in 2008. On the defence case, the starting point was much earlier.  Even if one takes the PPSEAL licence as the starting point, PPSEAL acted as agent not only for the Plaintiffs but also many other record companies, including those smaller ones.  The mutuality of benefits between the record companies and the karaoke establishments as explained in Suek’s evidence was not so fanciful. As Chan J observed at the hearing, what had been acquiesced before does not necessarily mean that it would be acquiesced forever.  Whether the practice adopted in the earlier days continued to have an impact on the validity of the estoppel/acquiescence defence after the changes in 2008 would be one of the main issues in this action.  At this stage, with the evidence as to similar DIY KMVs found in the servers of other licensees, we do not think the court can say that the Defendants did not have a bona fide defence at all in respect of activities after the K-Net KSL.

30.  On the Order 14 level, we agree with Mr Yan that the infringement with regard to the MVs and the registered trademarks should be treated on the same footing as the DIY KMVs. It does not mean that this would be so at the trial.  No doubt the court will have to examine the applicability of the defence of estoppel/acquiescence in relation to each head of claims at greater length and there would be more legal arguments deployed with regard to each head at the trial. Bearing in mind the commercial background of the dispute, we do not think we should refuse leave to defend on these heads of claim. 

31.  Therefore, the judge was correct in refusing to grant summary judgment.

32.  Mr Liao quite fairly accepted before us that if he could not succeed on the Order 14 appeal, he could not succeed on the appeal in respect of the application for interim payment.

The appeal against the stay

33.  The judge stayed the action pending the outcome of the proceedings in the Copyright Tribunal.

34.  In the present action, the Plaintiffs are suing for damages and other relief in respect of infringement of copyrights and trademarks. Though it is not very clear on the pleaded case so far (and as analysed in the course of the appeal, it may be due to the fact that the Plaintiffs have yet to file a Reply to the Defence) Mr Liao further informed the court the Plaintiffs’ claims in this action are confined to the Defendants’ conducts regarding,

(a)  The DIY KMVs;

(b)  The KMVs released by the Plaintiffs for home-use only;

(c)  The concert version KMVs; and

(d)  The KMVs released by the Plaintiffs for uses in other territories only.

35.  We expect this position of the Plaintiffs to be reflected in the pleadings to be filed.  In any event, the Plaintiffs are bound by the statement made by their counsel to this court.

36.  In respect of such KMVs, the Plaintiffs did not operate any licensing scheme nor did they grant any licence for permitting their uses by karaoke establishments.  Therefore they cannot be the subject matters of an application for statutory licensing under the Copyright Ordinance and the Copyright Tribunal does not have any jurisdiction to determine the terms of such licence.

37.  Once this is appreciated, as Mr Yan very properly accepted, there is no basis for staying this action pending the outcomes in the Copyright Tribunal.

38.  The appeal against the order for stay was therefore allowed.

The application for admission of fresh evidence

39.  The summonses for admission of fresh evidence were only filed on the eleventh hour of these appeals.  The appeals were heard on 31 January 2013 and the summonses were filed on 18 January 2013, one day after the Plaintiffs filed their skeleton submissions in the appeals.

40.  We have read the fresh evidence de bene esse and we do not find them to be of pivotal importance in respect of the appeals.  We are able to come to the above conclusions on the disposition of the appeals without any reference to such fresh evidence.

41.  Though it was said that the fresh evidence was not available to the Defendants at the hearing before the judge, we do not think they can be admitted on the pretext of updating the court as to pending developments. There is no good reason why the so-called recent investigation could not have been done before the hearing at the court below.  With regard to the pleadings in the Copyright Tribunal, we have already explained why the progress of such proceedings is not germane to these appeals.  The way and the timing in which the applications were made indeed smacked of an ambush on the Plaintiffs.  A late application of admission of fresh evidence often put the other parties as well as the court in a very difficult position. Substantial time and energy had to be diverted to deal with the application as well as the preparation of evidence in response to cater for the contingency of the evidence being admitted.  It is right that this court should send a clear message to the profession that the spirit of the Civil Justice Reform applies to an appeal as much as it does in respect of proceedings at the courts below. 

42.  There is no resemblance between the present situation and the one that the English Court of Appeal had to deal with in Hughes v Singh (unreported) 13 April 1989.  That case should not be read as a general licence for admission of fresh evidence on appeal on the pretext that such evidence had not yet been obtained before the hearing below.  Properly read, that decision only provides guidance as to the circumstances under which an appellate court will receive evidence on new developments on an important aspect of the case.  As explained, it has no application in the present context.              

43.  The applications for admission of fresh evidence were therefore dismissed with costs.