MORN CREATIONS LTD v. GAP LTD

HCA 1882/2014

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1882 OF 2014

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JUDGMENT

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1. The plaintiff (“MCL”) seeks default judgment against the defendant (“Gap”) for copyright infringement in respect of an owl‑shaped backpack.

2. MCL’s solicitors issued a cease and desist letter to Gap’s parent company on 6 August 2014. ‌Gap’s lawyers’ reply dated 18 September 2014 denied that Gap was infringing MCL’s rights, and stated that Gap would vigorously defend MCL’s claims.

3. MCL issued a writ on 23 September 2014, and filed its statement of claim on 6 November 2014.

4. Gap filed a defence on 5 March 2015. ‌However, on 5 October 2015, it gave notice of withdrawal of its defence. ‌By a letter of 6 October 2015 from MCL’s solicitors to Gap’s solicitors, Gap expressly acknowledged that MCL was at liberty to enter judgment in default of defence, but sought to reserve its rights to contest applications for specific orders including injunctive relief, damages and costs.

5. On 18 November 2015, MCL issued a summons for default judgment (“the Summons”), supported by the 1^st affirmation of Tsai Yung Chieh David of MCL’s solicitors (“Mr Tsai”).

6. On the first return date of the Summons on 24 November 2015, Deputy High Court Judge Cooney SC gave directions for evidence.

7. Gap filed an affirmation of Julie Gruber, general counsel of Gap (“Ms Gruber”) dated 31 December 2015 which exhibited a Letter of Undertaking dated 21 December 2015 (not apparently provided earlier to MCL) which is addressed further below.

8. MCL filed the 2^nd affirmation of Mr Tsai in reply on 21 March 2016.

9. The Summons now comes before me.

10. The orders sought by MCL, as stated in the Statement of Claim and set out in the Summons are (in general terms):

(a) a permanent injunction from infringing the Copyright Works; (“the General Injunction”).

(b) without prejudice to such injunction, a permanent injunction to restrain Gap from manufacturing, issuing to the public, selling, offering or exposing for sale of, possessing or exhibiting or distributing in the course of trade, or importing into Hong Kong or exporting from Hong Kong Gap’s product “Owl Backpack” (“Gap’s Product”) (“the Specific Injunction”).

(c) delivery up of Gap’s Product and all goods, documents, materials (inter alia) for the making and/or printing thereof (“the Infringing Items”) (“the Delivery‑Up Order”).

(d) evidence of compliance with the Delivery‑Up Order (“Evidence Order”).

(e) disclosure on affidavit or affirmation of:

(i) the names and addresses of actual and potential suppliers and customers of Gap’s Product together with specified information and supporting documentation (I note that Mr Clark in oral submissions limited the information sought to actual and potential suppliers only);

(ii) Gap’s costs in manufacturing, importing, marketing and selling Gap’s Product with supporting documents (“the Disclosure Orders”).

(f) MCL be at liberty to elect between an enquiry as to damages and an account of profits within a reasonable time after Gap has fully complied with the Disclosure Orders (“Liberty to Elect Order”).

(g) Gap to pay MCL all sums found to be due upon the taking of the enquiry or account (“Payment Order”).

(h) MCL be at liberty to use the evidence, documents, articles, materials or information obtained as a result of the order as required for the protection or better protection of MCL‘s rights (“Permitted Use Order”).

(i) Gap to pay MCL’s costs forthwith to be taxed if not agreed (“Costs Order”).

11. Mr Hui for Gap clarified Gap’s stance in respect of the orders sought:

(a) Objection to the General Injunction and Specific Injunction on the grounds that Gap had offered the same in its Letter of Undertaking.

(b) No objection to the Delivery‑Up and Evidence Orders.

(c) Objection to the Disclosure Orders on the basis that adequate information had been provided by Gap as to the limited and innocent role of Gap’s supplier.

(d) Limited objection to the Liberty to Elect Order on the basis that it should also permit an election of damages simpliciter without an inquiry.

(e) No objection to the Payment Order.

(f) No objection to the Permitted Use Order.

(g) Objection to the Costs Order on the basis that the matter should have been brought in the District Court.

The Evidence

12. Mr Tsai’s evidence in support of the Summons is relatively straightforward:

(a) He gives evidence as to the authorship of the Copyright Works by two people, one of whom was an employee of MCL, and another who was commissioned by MCL and provided an assignment of his rights to MCL.

(b) He deposes to the discovery of Gap’s owl back pack product in one of Gap’s Hong Kong stores, and to its being offered for sale on Gap’s website.

(c) He deposes to the request to Gap to stop infringing its Copyright Works and Gap’s refusal to do so leading to the issue of the Writ.

13. Ms Gruber’s affirmation sets out Gap’s position as follows:

(a) Gap opposes a permanent injunction on the basis that it asserts it has repeatedly offered undertakings to refrain from infringing “the alleged copyright” in the Copyright Works and further dealing in Gap’s Product, so that there was no risk of future infringement.

(b) Gap opposes a discovery order to disclose the identity of the supplier of Gap’s Product, on the basis that the product was designed in‑house and manufactured to the order of Gap by a supplier who is “an innocent party to this action”.

14. The content of Ms Gruber’s affirmation is unsatisfactory in several ways:

(a) It contains assertions which would only be appropriate if Gap was seeking to defend the claim eg as to whether there has indeed been a copyright infringement.

(b) It contains assertions as to Gap’s internal reasoning for withdrawing its defence (with which I am not concerned).

(c) Ms Gruber’s evidence as to the “repeatedly offered undertakings” consists primarily of a list and description of the contents of “without prejudice” letters, without exhibiting the same.  (I note that Mr Tsai’s 2^nd affirmation also asserts that Ms Gruber’s description of the negotiations was incomplete and inaccurate.)  Mr Hui (in oral submissions on behalf of Gap) in fact accepted such correspondence to have been “without prejudice”.  It is therefore privileged and inadmissible.  I have no regard to such negotiations in any event.  (Indeed Mr Hui in his submissions only sought to rely on the Letter of Undertaking  .)

15. Insofar as the balance of Ms Gruber’s affirmation addresses Gap’s opposition to the making of (1) permanent injunction orders and (2) discovery orders, it contains material assertions as to relevant matters such as the quantity of Gap’s Product produced for Gap and sold by Gap, and the amount of profits made by Gap, and the involvement of Gap’s supplier/manufacturer. However, the assertions made by Ms Gruber are bare assertions which are entirely unsupported by any documentation.

16. The only document produced by Ms Gruber is the Letter of Undertaking, addressed at paragraph 27 below.

Legal Principles

17. It was undisputed that the consequence of a lack of defence is that a defendant is taken to admit the facts pleaded in the statement of claim: see Order 18, rule 13(1) of the Rules of the High Court (“RHC”); Hong Kong Civil Procedure 2016, para 19/2/1; Nintendo Co Ltd v Lik Sang International Ltd, HCA 3584/2002 (unreported), DHCJ Muttrie, 21 January 2005, paras 7–8, 11.

18. There appeared from the skeleton arguments lodged to be a dispute as to the applicable legal principles in respect of the approach to be taken by the court in determining whether to grant a permanent future injunction as a remedy for an infringement of copyright works.

19. MCL had taken the straightforward approach that the general rule was that a person whose copyright was infringed was entitled to an injunction, even if the infringer had made an offer before action that he promised not to do it again and would pay such damages as might be agreed upon.  MCL relied on EW Savory Ltd v The World of Golf Ltd [1914] Ch 566 at 571; Colgate Palmolive Ltd v Markwell Finance Ltd [1990] RPC 197 at 200.

20. Mr Hui on behalf of Gap submitted that:

(a) an injunction in an intellectual property case is discretionary and not as of right (citing Copinger and Skone James on Copyright (17^th ed) at para 21-230);

(b) if the infringement is finished, the claimant must positively show that the defendant is likely to continue his infringement (citing Copinger at para 21-233);

(c) it is inappropriate to grant an injunction if it is unnecessary for a preventative purpose (citing Stretchline Intellectual Properties Ltd v H&M Hennes & Mauritz UK Ltd [2016] EWHC 162 (Pat), 21 January 2016, Carr J);

(d) it is generally inappropriate in principle to grant an injunction where the infringer had offered a clear and unequivocal undertaking before the action to refrain from taking the action which the injunction would have prohibited; however, in more complex cases, the court may consider it appropriate for the assurances to be backed by court sanction eg where the infringer had previously acted in breach of contractual undertakings or there is a dispute over the scope of the undertakings given (citing Cantor Gaming Ltd v Game Account Global Ltd [2007] EWHC 1914 at paras 105 – 110, 113);

(e) the court may refuse an injunction where the interference with a claimant’s rights is trivial eg where the violation is so insubstantial that the plaintiff can have no ground in conscience to complain of it (citing Cantor Gaming, supra, at paras 111, 113);

(f) the court may take proportionality into account in granting or refusing injunctive relief (citing Cantor Gaming, supra, at para 113).

21. In response, Mr Clark made the following points:

(a) As was made clear in the summary of principles at Cantor Gaming at para 113:

“There are certain kinds of case, of which intellectual property cases are examples, in which an injunction will normally be grantedif a claimant has established infringement of its rights and there is a threat to continue (or at least no clear and unequivocal undertaking not to continue).”

(b) Contrary to the H&M case cited by Mr Hui, Cantor Gaming at para 125 stated that there was no principle that an injunction should only be granted if necessary for preventative purposes.  These were conflicting first instance decisions.  However, the point was authoritatively determined by the Hong Kong Court of Appeal’s decision in Frey Wille GmbH & Co KG v Complex Industrial Co Ltd [2012] 4 HKLRD 814 at paragraphs 22 – 24.  The Court of Appeal there applied the English Court of Appeal decision in Linpac Mouldings Ltd v Eagleton Direct Export Ltd [1994] FSR 545 at 551, 552 where Hirst LJ stated (Millett LJ agreeing) that the test propounded by the judge below that there must be a real threat of future infringement by continued trading was wrong in principle, as a defendant’s conduct could signify an intention to continue infringement where it indicated a failure to acknowledge the claimant’s rights after having reason to believe that its own product was an infringing copy.

22. In light of these authorities, it seems to me that the proper approach to be taken by the court in deciding whether or not to grant an injunction in respect of a copyright infringement is as follows:

(a) If there has been an infringement of copyright, the court has a discretion as to the relief to be ordered but the prima facie position is that the copyright owner is entitled to an injunction to restrain further infringement.

(b) The court should take into account all the circumstances in order to decide whether an injunction is the most appropriate relief.

(c) If a clear and unequivocal undertaking to refrain from infringing activity has been provided promptly after the infringer became aware of his infringement, and/or before the action is commenced, then that may militate against granting an injunction.

(d) If the infringer’s conduct is such as to make his assurances unreliable, that may militate in favour of making an injunction  . 

(e) If the court is in a position to assess whether the infringement is trivial or important, then that will also be a factor to be taken into account.

23. Mr Hui accepted that the Norwich Pharmacal jurisdiction could be used to order disclosure of information relating to a copyright infringement.  Mr Hui further referred to Copinger at para 21-213 to the following effect:

(a) The jurisdiction to order disclosure exists if three conditions are satisfied:

(i) The third party has become mixed up in the transactions of which disclosure is required;

(ii) Disclosure is sought for a legitimate purpose;

(iii) The disclosure must be a necessary and proportionate response in all the circumstances.

(b) The essential purpose of the remedy is to do justice. It involves the exercise of discretion by a fair and careful weighing of the relevant factors, including any deterrent effect of the order, and whether innocent persons might suffer any harm as a result of the order.

MCL’s Copyright and Gap’s infringement

24. As a consequence of Gap’s failure to file a defence, there is an implied admission of the facts in the Statement of Claim.

25. I therefore find that MCL owns the Copyright Works as defined in the Statement of Claim, and that Gap’s sale of its owl backpack product was an infringement.

26. The issue on this Summons is what relief should be ordered in consequence.

Letter of Undertaking instead of Injunctions

27. Gap relies on a “Letter of Undertaking” dated 21 December 2015 as being sufficient so that no injunction was necessary. ‌I accordingly set out its contents so far as material:

“[Recital A as to the identity of Gap]

[Recital B as to the identity of Morn Creations]

C. On 23 September 2014, Morn Creations filed High Court Action No. 1882 of 2014 against Gap for the alleged infringement of the copyright subsisting in the Copyright Works (the “Copyright Works”)  (a photo of the Copyright Works is exhibited in Schedule A) by selling, offering or exposing for sale the “Owl Backpack” (hereinafter referred to as “the Product”) (a photo of the Product is exhibited in Schedule B) in Hong Kong.

D. Without prejudice to the foregoing and without admission of liability, and solely for the purpose of settling and resolving the disputes between the parties, Gap is providing an Undertakingto refrain from infringing the alleged copyright subsisting in the Copyright Works and further dealing in or with the Product in Hong Kong to Morn Creations as set fortherein.  [underlining added]

GAP HEREBY UNDERTAKES:

1. whether acting by itself, its directors … to refrain from infringing the alleged copyright in Morn Creations’ Copyright Works in Hong Kong, and/or from directing, procuring, instigating, causing, enabling or assisting other [sic] to do so; and

2. whether acting by itself, its directors … to cease manufacturing, issuing to the public, selling, offering or exposing for sale of,possessing or exhibiting or distributing in the course of trade the Product in Hong Kong, or importing into Hong Kong or exporting from Hong Kong the Product, and/or from directing, procuring, instigating, causing, enabling or assisting other [sic] to do so.”

28. Gap submits that the Letter of Undertaking offered everything which MCL sought by way of injunction, namely the General Injunction and the Specific Injunction.

29. Mr Clark for MCL responded that this was not so because:

(a) The Letter of Undertaking did not accept MCL as owning the Copyright Works, by use of the word “alleged” and the lack of admission of liability.

(b) If there was a breach of the Letter of Undertaking, MCL would have to return to court and would have to establish its copyright in order to seek relief.

(c) Although Gap was at all material times legally represented, and the Letter of Undertaking must have been drafted by its lawyers, it was drafted in words which gave rise to argument as to whether there was acceptance of copyright or infringement, no doubt calculated to create potential argument if MCL had to enforce it.  It was not drafted in terms which MCL could comfortably accept.

30. It seems to me that the Letter of Undertaking was to be provided in lieu of the injunctions sought, but it was likely to be in parallel with a court order dealing with an election of damages or an account of profits (inter alia) ie a court order that recognised MCL’s copyright and Gap’s infringement.  If that were so, then MCL ought to have little difficulty establishing that Gap had, by not opposing the court order, acknowledged MCL’s copyright and Gap’s infringement. ‌However, that much was never expressed by Gap at the time of offering the Letter of Undertaking (nor indeed advanced by Mr Hui in his submissions). ‌Indeed, it would be entirely inconsistent with the express non‑admissions of liability in the Letter of Undertaking itself.  I agree that the document appears to have been intentionally drafted in order to reserve such arguments. 

31. I am satisfied that the Letter of Undertaking, containing Recitals C and D, did not amount to a clear and unequivocal offer, nor a bona fide offer, to refrain from the activity described in the injunctions sought.

32. The Letter of Undertaking was not only too little, but it was too late.  It was provided only in response to MCL’s default judgment application, 16 months after the cease and desist letter, and 15 months after the issue of the Writ.  In particular I note that:

(a) Whereas the cease and desist letter, coupled with supplementary information provided by letter dated 8 October 2014 (in response to Gap’s request) set out the information which ought to have caused Gap to acknowledge MCL’s claim, Gap’s solicitors instead wrote a letter dated 15 October 2014 stating that Gap would stop selling Gap’s Product once its current inventory was sold.

(b) After the service of the Statement of Claim on 6 November 2014, Gap served a defence dated 5 March 2015 which (1) did not admit MCL’s copyright and (2) denied Gap’s infringement.

(c) Gap has not provided any evidence, nor suggested, that MCL provided any new information after 8 October 2014, or after the Statement of Claim, that led Gap to reconsider its position and withdraw its defence.

(d) On 5 October 2015, Gap withdrew its defence; and by letter dated 6 October 2015 expressly stated that it would reserve its rights to challenge the relief sought by MCL including injunctive relief. ‌However, Gap did not offer any undertaking in lieu of an injunction to refrain from infringing activity.

(e) On 18 November 2015, MCL applied for summary judgment. 

(f) Only on 21 or 31 December 2015 did Gap offer the Letter of Undertaking.

33. I note that in similar (or less strong) factual circumstances in Linpac Mouldings (supra) and Frey Wille (supra), the court found that where the defendant prevaricated in acknowledging the copyright owner’s title and/or claimed the right to continue the infringements after they would reasonably have been aware of the copyright owner’s title, then there was a proper basis for granting an injunction.

34. Gap asserted that its infringement is trivial. This is on the basis of Ms Gruber’s (unsubstantiated) evidence that Gap only sold around 120 infringing products at HK$229 per unit with gross margins of about HK$12,400.

35. If the assertions had been substantiated, it might have tended to show the profits from the infringement to be small in amount from Gap’s point of view.  However, there was no such substantiation.

36. In the absence of any information as to who is the manufacturer/‌‌supplier of Gap’s product so as to enable MCL to investigate whether there has been any other infringements of its copyright, it is also not possible to assess whether the damage/loss to MCL is significant.

37. I am not in a position, on the basis of Ms Gruber’s evidence, to find that the infringements were insignificant, and therefore this cannot be a factor in deciding whether or not to grant an injunction.

38. For the above reasons, I will make the two Injunction Orders sought.

Disclosure Orders

39. It is in my view entirely legitimate for MCL to wish to check that Gap’s evidence as to the extent of its orders to the third party supplier is accurate, and to check whether Gap’s act in commissioning its third party supplier to produce infringing products has led to any further infringements or loss to MCL. The third party supplier, whether innocent or not, has become mixed up in the infringement of MCL’s copyright.

40. Gap focuses on submitting that it is disproportionate and unnecessary to order disclosure of the third party supplier’s information. However, the position is that it is as a result of Gap’s refusal to identify the supplier voluntarily that MCL has been put to the trouble and expense of applying for the Disclosure Orders. ‌It may well turn out that the information involved produces nothing of significance, but MCL clearly has to investigate in order to find out what loss it has suffered, or profits gained by others, as a result of Gap’s infringements.

41. Other than the disclosure of the identity of the supplier, there has been no objection taken by Gap in respect of the other aspects of the Disclosure Orders.  I will make the Disclosure Orders sought.

Form of the Liberty to Elect Order

42. As to the Liberty to Elect Order, Mr Hui referred me to Copinger at para 21-276 to the effect that a successful claimant is usually entitled to an inquiry as to damages, or, at his election, an account of profits, but not both.

43. There is nothing in that principle which supports his submission that the order should also contain an option to elect damages simpliciter.

44. Once Gap has given disclosure of the requested information, and MCL is in a position to make an election, then if it is possible to agree upon a damages figure without the need for an inquiry, I have no doubt that MCL can proceed to elect damages without pursuing an inquiry. ‌If MCL were to unreasonably pursue an inquiry where, for example, the damages involved were nominal, then Gap could no doubt ask the court to intervene (see Colgate Palmolive, supra, at 200). ‌At this stage, prior to compliance with the Disclosure Orders, it is too early to tell.

Costs order

45. Mr Hui on behalf of Gap submits that as, in its opinion, the value of the dispute is less than HK$1 million, then the action should have been brought in the District Court, and costs arguments should be reserved. 

46. I reject that submission for the following reasons:

(a) Gap’s evidence as provided by Ms Gruber is so thin, and unsubstantiated, that I am far from satisfied that I can rely on their assertion of the value of their profits.

(b) Prior to compliance with the Disclosure Orders, the value of the dispute will not be clear.

(c) Gap at no time sought to have the action transferred to the District Court.

(d) It is not clear to me why costs arguments should be reserved where the only issue raised is as to the appropriate forum for the action.

47. I will make the Costs Order as sought.

48. Since the hearing, I have been provided with a revised draft order, and informed by Benny Kong & Tsai that Gap has no objection to the draft save for paragraph 5(a) thereof.  I note that the prayer in the Statement of Claim sought disclosure in wide, general terms; however, the Summons sought specific disclosure orders which did not include the order (or at least all of the order) now sought at paragraph 5(a).  MCL is effectively seeking an informal amendment of its Summons after the hearing.  If MCL wants additional relief, it should apply properly.  A letter dated 27 September 2016 from Deacons clarifies Gap’s position and that it is willing to agree to paragraph 5(a) so far as it refers to sales, which was covered by the Summons.  I make an order in terms of the revised draft order provided under cover of Benny Kong & Tsai’s letter dated 27 September 2006, subject to removal from paragraph 5(a) of the words “or exported from Hong Kong” and “or exportation”.  I do not agree to the addition of wording “(if and to the extent available)” as suggested by Deacons, as Gap is required by paragraph 5, in light of its infringement, to provide the specified information.  If it is unable to do so, its reasons must be given on oath.