MICROSOFT CORPORATION v. LEE YUK SANG, THOMAS AND OTHERS

HCA5257/2001

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO.5257 OF 2001

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REASONS FOR JUDGMENT

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1. The plaintiff applied for summary judgment against the 2nd, 3rd and 12th defendants for all the claims in the Statement of Claim. At the hearing, I ordered unconditional leave to defend for the 2nd, 3rd and 12th defendants and I now give my reasons.

2. The plaintiff is a well known computer software manufacturer under the trademark Microsoft ("MS"). In the Statement of Claim, it sued 14 defendants in respect of the MS products listed in the Schedule, and the following relief were claimed :

(a) injunction against all 14 defendants from infringing the plaintiff's copyright and trademark;

(b) order of delivery up of the infringing copies and the articles designed or adapted for making the MS products;

(c) forfeiture of the infringing copies and articles delivered up;

(d) inquiry as to damages for conspiracy and/or copyright infringement and/or trade mark infringement or at the plaintiff's option an account of profit;

(e) declaration that the defendants hold on trust for the plaintiff all sums received by them as a result of their manufacture and sale of counterfeit MS products; and

(f) all necessary accounts and enquiries and payment of the sums found due.

3. The 1st to 7th defendants are natural persons and the 8th to 14th defendants are corporations. The plaintiff alleged that all the acts complained of in the proceedings were committed pursuant to a common design between all the defendants to carry out such acts and each defendant is jointly and severally liable as a joint tortfeasor. The particulars of the joint tortfeasance was described as the conspiracy.

4. The conspiracy consisted of the following acts :

(a) From mid-1996 to early 1997, the 1st defendant (through the 9th defendant) set up a clandestine stamper production facility in Hong Kong.

(b) From early 1997 to December 2000, the 1st defendant in concert with the other defendants controlled the operation of the stamper production facility.

(c) From October to December 1998, the 2nd, 3rd, 4th, 8th and 12th defendants made arrangement for the 14th defendant to operate as an optical replication facility in Belize.

(d) From December 1998 to May 2001, the 1st, 2nd, 3rd, 4th, 6th, 7th, 8th, 9th and 12th defendants controlled the operation of the 14th defendant.

(e) From a date unknown before the issue of the writ, the stamper production facility produced counterfeit stampers for producing MS software optical discs and the stampers were sold by the 1st and 5th defendants (through the 9th and 10th defendants) to the 14th defendant and the 14th defendant used them to produce large number of MS products.

(f) On 2 December 2000, the 2nd and 3rd defendants were arrested by the ICAC.

(g) On 3 December 2000, the 1st defendant was arrested by the ICAC.

(h) In December 2000, the officers of the 1st defendant and other corporate defendants associated with him and the stamper production facility were searched and counterfeit MS stampers and optical discs were found.

(i) In June 2001, the factory of the 14th defendant in Belize was searched and it was found vacated. Two containers shipped by the 14th defendant to Canada were intercepted and it was found to contain optical disc production facilities and a crusher machine with shredded counterfeit MS optical discs.

5. The claims for copyright and trade mark infringement relied on the same particulars as the conspiracy.

6. Default judgment has been obtained against the 14th defendant.

7. For the purpose of this summary judgment application, subsistence of copyright and registration of trademark are not disputed. The lack of authority or licence is also not disputed.

8. The following evidence are relied on by the plaintiff and are not in dispute :

(a) The 2nd and 3rd defendants are shareholders and directors of the 12th defendant.

(b) The 2nd defendant is a 35% shareholder and director of the 14th defendant and is owed HK$5,116,253.20 by the 14th defendant.

(c) The 3rd defendant was a director and shareholder of the 14th defendant at least until August 1999 and is owed HK$240,866.00 by the 14th defendant.

(d) Between October and December 1998, the 3rd defendant visited Belize and arrangement for the set up of a optical disc replication facility of the 14th defendant and the machineries and household facilities were shipped by the 12th defendant to the 14th defendant.

(e) In August 1998, the 3rd defendant paid $219,698.80 for parts and materials for the 14th defendant.

(f) The 2nd and 3rd defendants' travelling expenses to Belize in 1998 were paid for by the 14th defendant.

(g) In October 1998, the wife of the 2nd defendant paid HK$30,000.00 to the 7th defendant and the 7th defendant's salary appears to be HK$30,000.00 per month.

(h) In December 1998, the 3rd defendant was paid $38,000.00 by the 14th defendant.

(i) In January, the 3rd defendant was paid BZ$80,000.00 by the 14th defendant.

(j) From January to March 1999, the 3rd defendant has taken part in the management of the 14th defendant.

(k) In March 1999, the 12th defendant paid for the gas bill of the 14th defendant.

(l) From January to April 2000, the 2nd defendant has countersigned on invoices and debit notes issued by the 9th or 10th defendants to the 14th defendant in respect of shipments of stampers.

(m) The 1st defendant provided technical consultancy to the 14th defendant through the 7th and 8th defendants, and the 7th defendant later became the General Manager of the 14th defendant.

9. The plaintiff relied on a statement dated 12 September 2001 given by Ms Elizabeth Heusner to the Belize police. Ms Heusner stated that she was a secretary of the 14th defendant from February 1999 to June 2000. The 14th defendant was owned by the 2nd, 3rd and 4th defendants. At some stage the 3rd defendant sold his shares to the 1st defendant and was replaced by the 1st defendant. The 7th defendant was in charge of the 14th defendant. She saw Window 98-99 and 2000 software produced by the 14th defendant in large quantities for export. She asked the 6th defendant about it and was told not to bother.

10. In respect of the 2nd defendant, the plaintiff also relied on the following evidence :

(a) The 2nd defendant has countersigned on three invoices dated 31 January 2000, 29 February 2000 and 30 April 2000 issued by the 9th or 10th defendants to the 14th defendant and the list of stampers included alphanumeric codes identified as references to MS products.

(b) In a letter dated 3 April 2000 on the 14th defendant's letterhead, the 2nd defendant authorised the 6th defendant to act on his behalf in respect of all matters of the 14th defendant.

(c) The authorities in Belize searched the premises of Helbern Trading Co., Ltd ("Helbern"), a company owned by the 2nd and 4th defendants and found two MS software optical discs. According to a sales clerk of the 14th defendant, Helbern was holding the two discs for the 14th defendant.

11. As to the 3rd defendant, the plaintiff has produced documents of the 14th defendant and a copy of the Register of Directors and Managers under the Companies Act, Belize, showing the 3rd defendant has resigned on 24 August 1999. However, the plaintiff invited the court to ignore such documents and infer that the 3rd defendant was still a director of the 14th defendant after 24 August 1999 because :

(a) The name of the 3rd defendant appeared in the unsigned minutes of the board meeting of the 14th defendant dated 15 May 2000 appointing the 7th defendant as the General Manager of the 14th defendant and authorising him to investigate the termination of the operation of the 14th defendant.

(b) The 3rd defendant has admitted to such minutes in his Defence.

(c) In a unsigned draft statement of the 4th defendant dated 2000, it was stated that the 4th defendant was not aware of the resignation of the 3rd defendant and the meeting of 15 May 2000, and in June 2000, the 4th defendant had instructed her solicitors to write to the 2nd and 3rd defendants for an explanation.

12. The 2nd defendant's defence is that he was a mere investor in the 14th defendant and not involved in its daily operation which was in the hand of the 7th defendant, who was an employee of the 1st defendant and was stationed in Belize since the 14th defendant was set up. In mid-1999, the 1st defendant purchased the shares of the 3rd defendant and took over the management and control of the 14th defendant.

13. The 2nd defendant said the 1st defendant would produce the stampers for delivery to the 14th defendant. When the 1st defendant was in Hong Kong, the 1st defendant would do it himself. When the 1st defendant was not in Hong Kong, he would forward them to the 14th defendant and he countersigned on the invoices of the 9th defendant as told by the 1st defendant.

14. The 2nd defendant said he held on to the shares in the 14th defendant because he had lost over HK$5 million on it and the 1st defendant said he could make the 14th defendant profitable.

15. The 3rd defendant said he sold his shares to the 1st defendant at nominal value in mid-1999 and had resigned as director. The board meeting on 15 May 2000 was of no concern to him.

16. The legal test at this stage is not whether the defendants are to be believed, but whether they are so incredible as to be unbelievable. As a matter of principle, there is no objection that the plaintiff's case shall lie in a matter of inference. However, the inference must be so strong that there is no reasonable excuse against drawing it. The court will not conduct a mini-trial, weighing up the evidence on both sides in order to see whether the inference should or should not be drawn.

17. The case against the 3rd defendant can be dealt with shortly. Notwithstanding the admission of the board minutes of 15 May 2000 in his Defence, on the documentary evidence produced by the plaintiff, there is a factual dispute as to whether the 3rd defendant has resigned on 24 August 1999. The plaintiff's pleaded case is that the counterfeit production by the 14th defendant started on a date unknown. There is no evidence that such operation has started before 24 August 1999. The statement of Ms Heusner is unclear as to whether the counterfeit production was before or after the 3rd defendant was replaced by the 1st defendant. It will be unfair to assume it in favour of the plaintiff without the opportunity of cross-examination by the 3rd defendant. Even so, a director is not per se liable for the acts of the company. There must be knowledge and adoption of the acts. Further, although it was pleaded that the 3rd defendant was also a member of the conspiracy involved with the stamper production facility in Hong Kong, the evidence at this stage failed to conclusively establish that. Hence, the 3rd defendant must be entitled to unconditional leave to defend.

18. The case against the 2nd defendant is much stronger, and prima facie, his countersignature on the three invoices containing reference to MS products directly links him up with the counterfeit production. However, there remains the following problems :

(a) The documentary evidence shows that apart form the counterfeit production by the 14th defendant, there are also other production which has not been shown to be illegal.

(b) The MS code on the stamper does not by itself refer to a MS product and the stamper itself also does not show any MS reference.

19. Mr Chain for the 2nd 3rd and 12th defendants submitted that there are also problems with the seizure of the two discs from Helbern :

(a) The plaintiff relied on the hearsay evidence of an unidentified employee of the 14th defendant.

(b) The 4th defendant is also a shareholder and director of Helbern.

20. As an ancillary point, Mr Chain submitted that the evidence linking the seizure at the stamper production facility and in Belize came from Mr Donal Keating, an employee of the plaintiff. It is not known whether by "forensic examination" he meant scientifically aided examination or whether it was also based on his opinion. If the latter were also included, his evidence may be objectionable by reason of him being the employee of the plaintiff (see Liverpool Archdiocesan Trust v. Goldberg [2001] LLR(PN) 823).

21. Mr Chain also submitted that the 2nd defendant's countersignature on the three invoices does not, without more, link him to the stamper production facility as part of the conspiracy. No summary judgment application has been taken out against the 1st defendant. If there is to be a trial involving the other defendants, or against the 2nd defendant on the wider conspiracy, the attraction and justification of attempting to dispose of the claim against the 2nd defendant are greatly reduced (see Green v. Hancocks [2001] LLR (PN) 212, per Chadwick at p.219). Further, based on the pleadings in the Statement of Claim, it is difficult to extrapolate part of the claim to enter partial judgment against the 2nd defendant. It is submitted that there is some other reason to be a trial under the second limb of Order 14, rule 3(1).

22. The 2nd defendant's explanation was that he did not know that the three invoices were for counterfeit MS stampers when he signed them. After considering all the evidence, I cannot say that he is unbelievable.

23. In the premises, I granted unconditional leave to defend for the 2nd, 3rd and 12th defendants.

24. I have ordered the costs of this application to be costs in the cause. The reason is that the Defence filed amounted to no more that bare denial, and the defence was disclosed by affidavits. Further, the 3rd defendant has admitted in his Defence the board minutes of 15 May 2000 which he now seeks to deny in affidavit. For the same reason, leave to appeal on costs was refused.