SONY COMPUTER ENTERTAINMENT INC AND ANOTHER v. LIK SANG INTERNATIONAL LTD AND OTHERS

HCA 3583/2002

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 3583 OF 2002

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J U D G M E N T

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1. The Plaintiffs are applying for summary judgment against the Defendants in respect of their claims relating to infringement of copyright and trademark.

Undisputed facts

2. The Plaintiffs manufacture and sell video games on CD-Roms and DVD format discs ("the Playstation discs").

3. The Plaintiffs also manufacture and sell consoles ("the consoles") known as Playstation and Playstation 2 ("PS2") upon which the Playstation discs are played.

4. The Plaintiffs own the copyright and trademark in respect of the Playstation discs and the consoles.

5. The 1st Plaintiff owns the following copyright works:-

(a) PS Device Code, PS Device (3 Dimensional) and Library Programs for Playstation found in Playstation games; and

(b) Library Programs for Playstation 2 found in PS2 games.

6. The 1st Plaintiff is the registered proprietor of the following Hong Kong trademark registrations:-

(a) "PlayStation" No.B13675 of 1999 in Class 9 in respect of computers and peripheral equipment for computers, computer hardware and software.

(b) "PlayStation" No.B05365 of 1997 in Class 9 in respect of computer game software and hardware.

(c) PS Device (3 Dimensional) No.07345 of 2000 in respect of computers and peripheral equipment for computers, computer hardware and software.

(d) PS Device (3 Dimensional) No.04973 of 1996 in respect of computer game software and hardware.

7. The Playstation discs incorporate a copy protection code which must be read by the consoles to enable them to play the Playstation discs. This secures the protection of the Plaintiffs' copyright and prevents the playing of game software other than the Playstation discs on the consoles. The code is also used as a regional identifier.

8. The 2nd and 3rd Defendants are the only directors and shareholders of the 1st Defendant and are actively involved in its business.

9. The 1st Defendant supplied and/or dealt in a variety of products which are capable of modifying the use of the Plaintiffs' products:-

(a) Computer chips which can be used inter alia to modify the computer game hardware in the consoles thereby enabling unauthorized copies of the Playstation discs to be played on the consoles ("mod chips").

(b) Mod chips which can be installed into the consoles without the Plaintiffs' authority thereby inter alia enabling unauthorized copies of the Playstation discs to be played on the modified consoles ("modified consoles").

(c) Hardware accessories being a console stand, console shell and adaptor bearing and/or sold under or by reference to the Plaintiffs' registered trademarks in respect of the consoles.

10. The Defendants have via the internet sold a variety of mod chips and modified consoles to others including investigators employed by the Plaintiffs.

11. Mod chips and modified consoles sold by the Defendants allow the playing of unauthorized copies of the Plaintiffs' game software.

12. Consoles which have not been installed with mod chips cannot play unauthorized game software.

Plaintiff's case

13. The mod chips and the modified consoles are each in breach of:-

(a) Section 273 of the Copyright Ordinance as devices designed to circumvent copy-protection; and

(b) Section 32 of the Copyright Ordinance as a means to make a copy of Library Programs for Playstation 2.

14. The sale of the modified consoles and the hardware accessories constitute an infringement under Sections 27(1)(b) and 28 of the Trade Marks Ordinance, Cap. 43.

15. The PlayStation and PlayStation 2 games are in a form that is copy protected under Section 273(4) of the Copyright Ordinance. The copy protection code restricts the copying of these games by preventing them being played except on genuine Playstation discs. The playing involves copying both in the RAM and on-screen.
Sony Computer Entertainment Inc. v. Paul Owen & Others Ch. Div. Case No. HC01CO 5235 per Jacob J.

16. Mod chips and modified consoles are specifically designed or adapted to circumvent the Plaintiffs' copy protection system by enabling the consoles to play unauthorized copies of the Playstation discs. Consoles without a mod chip are unable to play such unauthorized copies.

17. Mod chips and/or modified consoles facilitate the making of infringing copies in terms of Section 23(2) of the Copyright Ordinance.

(a) When unauthorized copies of the Playstation discs are played on a modified console a portion of the game codes in the game disc is entered into and reproduced in the RAM of the console.

(i) Even a minor portion of a game code copied into the RAM of a console is enough to generate the whole or a substantial part of the game code into the RAM.

(ii) Copying of the game codes means reproduction in a material form in accordance with Section 23(2) of the Copyright Ordinance which includes storage in any medium by electronic means either directly or indirectly.

(b) The game codes reproduced in the RAM of the console are then reproduced on the screen.

(i) The temporary nature of the copying into the RAM satisfies Section 23(6) of the Copyright Ordinance which covers copies that are transient or incidental to some other use of the work.

(ii) The reproduction on screen satisfies the criteria for reproduction of a video game

Galaxy Electronics Pty. Ltd v. Sega Enterprises Ltd 37 IPR 462

Nintendo Co. Ltd v. Golden China TV-Game Centre and Others 28 IPR 313

(c) The Plaintiffs have not authorized the reproduction of the game codes from counterfeit PlayStation discs into the RAM of the console and onto the screen by the mod chips and modified consoles. These are therefore infringing copies.

18. The Defendants know or have reason to believe that the mod chips or modified consoles will be used to make infringing copies of the Playstation games as required by Section 273(2) of the Copyright Ordinance.

(a) The Defendants knew that modified consoles installed with mod chips could be used to play counterfeit discs from the 2nd Defendant's admission on affidavit, information given by the 2nd and 3rd Defendants to the Plaintiffs' investigators, emails by the 3rd Defendant to third parties and information on the Defendants' website.

(b) Knowledge in the industry that mod chips enable consoles to play counterfeit discs, both for the Plaintiffs' products and those of other manufacturers.

19. The Defendants have sold copying devices in breach of Section 32 of the Copyright Ordinance.

(a) The section covers devices specifically designed or adapted to copy specific works, knowing or having reason to believe that they are to be used to make infringing copies.

(b) The Plaintiffs Playstation discs bear copyright notices.

(c) The Plaintiffs published in the Government Gazette notice of the copyright and their ownership of the same.

(d) The Defendants have admitted knowledge that the mod chips could be used to play infringing games.

20. The Defendants have sold modified goods bearing the trademarks of which the 1st Plaintiff is the registered proprietor without the Plaintiffs' consent in breach of Section 27(1)(b) of the Trade Marks Ordinance.

(a) The modified consoles sold by the Defendants bear the trade marks of the 1st Plaintiff.

(b) The Plaintiffs have not approved or authorised the modification of the consoles.

(c) The modified consoles infringe the Plaintiff's exclusive right to the trade mark

British Northrop Ltd v. Texteam Blackburn Ltd 1974 RPC 57

Rolls Royce Motors Ltd v. Zanelli and Others 1979 RPC 148

21. The Defendants possessed sample hardware accessories bearing the Plaintiffs's trade marks one of which was sold to the Plaintiffs' investigators in breach of Sections 27 and 28 of the Copyright Ordinance.
Orfevnerie Christofle SA v. Coway Investment Ltd HCA No. A2517/92

22. The 2nd and 3rd Defendants are personally liable as directors and shareholders of the 1st Defendant.

(a) Directors are personally liable for a company's tortuous acts when the director directs the act to be performed knowing it is likely to be tortuous

Canon Kabushiki Kaisha v. Green Cartridge Company (Hong Kong) Limited 1996 1 HKLR 69

(b) The 2nd and 3rd Defendants were actively involved in the acts and business of the 1st Defendant.

(c) The 2nd and 3rd Defendants each knew that the 1st Defendant was dealing in illegitimate products that infringe the Plaintiffs' rights.

Defendants' case

23. Mod chips and modified consoles enable legitimate uses to be made e.g. the playing of multi-region games and DVD movies, self-written games, lawful back-up.

24. The prime purposes of the Plaintiffs' code are as a regional identifier and as playing protection rather than copying protection.

25. Whilst the Plaintiffs code protection prevents the playing of counterfeit discs, it cannot prevent all copying because copying can be achieved by other means e.g. by a computer.

26. Modified consoles may not be necessary to play counterfeit discs because a Japanese magazine has reported a "trick" whereby counterfeit discs can be played on genuine PS2 consoles.

27. The statutory requirement for copying is not shown by the Plaintiffs to be satisfied.

(a) RAM copying is temporary.

(b) Copying from the RAM to the console screen, which process has not been proved by expert evidence, is not copying in a material form to satisfy Section 23(2) of the Copyright Ordinance.

(c) The copying is not in a material form because

(i) only a portion of the game code is copied;

(ii) the copy is only temporary;

(iii) copying in a material form requires the copy to be a hard copy and cannot be an electronic copy.

(d) The copying must be of a substantial amount which is a matter of degree and quantity, not of quality.

(e) The intention of the legislation is only to prohibit the copying of silvers.

(f) The passage of copying from disc to the RAM to the screen must be proved specifically by expert evidence.

28. The Plaintiffs have failed to prove their case under the Trade Marks Ordinance in that:

(a) Mod chips are only an accessory to the Plaintiffs' consoles.

(b) Purchasers of modified consoles are fully aware that they are purchasing a genuine console with separate mod chips for which the Defendants provide the installation service.

29. The Court should follow the interpretation adopted in Kabushiki Kaisha Sony Computer Entertainment v. Stevens 2002 FCA 906 because the Australian legislative provisions on copyright are very similar to those in Hong Kong.

30. The Plaintiffs' claims in respect of the hardware has been settled in that the Defendants offered terms which the Plaintiffs have not specifically rejected.

31. The 2nd and 3rd Defendants have no personal liability because they have not acted knowingly or recklessly:

(a) they did not proceed knowing their actions were illegal;

(b) they sought legal advice and negotiated with the Plaintiffs through their lawyers;

(c) they have complied with all undertakings that they have given.

The test for summary judgment

32. The Court must look at the whole situation and ask itself whether the Defendants have satisfied the Court that there is a fair or reasonable possibility of the Defendants having a real or bona fide defence.

33. There is relatively little in dispute on the facts, and the Plaintiffs invite the Court to accept the Defendants' account of the facts in the event of any differences between the parties.

The issues

34. Is the Plaintiffs copy-protection system designed to or capable of preventing counterfeit discs from being played on the Plaintiffs consoles.

35. Are the mod chips and modified consoles devices designed to circumvent copy-protection under Section 273 of the Copyright Ordinance.

36. Did the Defendants provide the means to make infringing copies under Section 32 of the Copyright Ordinance.

37. Do the Defendants' devices infringe the Plaintiffs' copyright by copying pursuant to Section 23 of the Copyright Ordinance.

38. Does the copying infringe the Plaintiffs' copyright under Section 22 of the Copyright Ordinance.

39. Do the Defendants' actions constitute infringement of the Plaintiffs' trade marks under Section 27(1)(b) of the Trade Marks Ordinance.

40. Did the Defendants' actions infringe the Plaintiffs trade marks by deceiving or causing confusion or indicating a connexion to the Plaintiffs' goods under Section 28(2) of the Trade Marks Ordinance.

Findings

41. It is not in dispute that the Plaintiffs products contain a copy-protection code - see paragraph 7 above. The Defendants argue that the code operates also as a play-protection cover and that the protection against copying is not a total safeguard against copying which can be achieved on most computers. It is clear that the Plaintiffs' code is a device within the meaning of Section 273(4).

42. The Defendants' devices (mod chips and modified consoles) come within the ambit of a "device or means specifically designed or adapted to circumvent the form of copy-protection employed" by the Plaintiffs under Section 273(2)(a). It is no defence that the devices may also have other innocent functions e.g. as playing protection. It is not a matter of degree and the devices offend under the Ordinance so long as at least one of their uses are infringing Sony Computer Entertainment Inc. v. Paul Owen (supra).

43. The Defendants admit that the devices are capable of performing an infringing function i.e. circumventing the copy-protection code. Their defence is that because the devices have other legitimate uses, they are outside the definition in Section 273(2)(a) of being specifically designed or adapted for circumvention purposes. But there is nothing in the Ordinance that requires the use to be exclusive, and in the Paul Owen case Jacob J. makes exactly that point. That is also accepted in the Australian case of Kabushiki Kaisha Sony Computer Entertainment v. Stevens (supra) upon which the Defendants rely heavily.

44. It is clear from the evidence of the 2nd and 3rd Defendants that they are aware that the mod chips and modified consoles are capable of circumventing the Plaintiffs copy-protection code. This is evident from the 2nd Defendant's 4th Affidavit, the 3rd Defendant's admission to the Plaintiffs' investigators, information posted on their website by the Defendants, and can be inferred from the 3rd Defendant's email communications to Tim Smith and Paul Owen. This is knowledge sufficient to satisfy the requirements of Section 273(2)(a).

45. The parties are in dispute as to whether the Defendants' devices are capable of being used to make infringing copies under Sections 23 and 273(2).

46. The parties agree that a two stage process ensues when counterfeit discs are played on modified consoles:

(a) A portion of the game codes in the disc is reproduced in the RAM of the console; and

(b) The codes reproduced in the RAM are then in turn reproduced onto the console screen.

47. The Plaintiffs say that the copying into the RAM is reproduction in a material form and rely upon Sections 22 and 23 of the Copyright Ordinance, Section 17 of the Copyright Designs and Patents Act 1988 ("the UK Act") and The Modern Law of Copyright and Designs, 2nd Edn. ("the textbook").

(a) Section 23(2) defines copying as -

"reproducing the work in any material from and makes clear that -

includes storing the work in any medium by electronic means"

(b) Section 23(6) provides that copying -

"includes the making of copies which are transient or are incidental to some other use of the work"

(c) Section 22(3) provides the ambit of infringement as -

"(a) in relation to the work as a whole or any substantial part of it; and

(b) either directly or indirectly."

(d) Section 17 of the UK Act is in virtually identical form to Section 23.

(e) Material form and electronic storage in Section 17 of the UK Act are explained in Paragraph 2.117 of the textbook as -

"evidently intended to cover ....... Storing matter in a computer memory such as a disk"

and that

"it could be a volatile memory eg dynamic RAM where the information perishes when the machine is switched off."

(f) The measure of whether a copy is a substantial part is relative more to quality than to quantity - paragraph 2.101-102 of the textbook.

(g) The Plaintiffs have not consented to the copying either into the RAM or onto the console screen.

48. The Defendants argue that the copying from the disc into the RAM is not in material form as required by the Ordinance in that:

(a) Only a portion of the game code is copied.

(b) The copy is only temporary.

(c) The copy must be in hard copy and not electronic.

(d) Substantiality is a matter of degree and quantity, not quality.

(e) The intention of the legislation is only to prohibit the copying of silvers.

(f) The copying from the disc to the RAM and then from the RAM to the screen must be proved step by step by expert evidence.

I will deal with these seriatim.

(i) Only a portion is copied

Section 22(3) provides that copying can be of the whole or a substantial part.

Substantiality is measured more by quality than quantity - paragraph 2.101-102 of the textbook.

Tests conducted by the Plaintiffs' agents demonstrate that when a counterfeit disc is played for only a brief time, that is sufficient for a substantial amount of the material to be recorded in the RAM and from there to be reproduced only the screen.

The Defendants also rely strongly on the Australian case of Stevens supra as to the interpretation of material form. They submit that the relevant provisions of the Australian Copyright Act closely resemble the Hong Kong legislation and that this Court should therefore follow the Stevens case rather than the rationale in Paul Owen. That submission, however, ignores one important factor. Section 31(1)(a) of the Australian Act defines material form as being a form where storage of which can be further reproduced. This requirement is not present in the Hong Kong legislation. This difference is fundamental to the rationale for the decision in Stevens and makes it clear that the authority cannot be relied upon in Hong Kong in relation to the interpretation of material form.

(ii) The copy is only temporary

Section 23(6) includes copying that is transient or incidental to some other use.

(iii) Hard copy and not electronic copy

Section 23(2) defines material form to include "storing the work in any medium by electronic means."

Paragraph 2.117 of the textbook makes clear that electronic copies are included.

(iv) Substantiality

As per (i) above

(v) Prohibition of copying of silvers only

This has been covered under paragraphs 41-43 above.

(vi) Every step must be proved by expert evidence

The Plaintiffs' agents have adduced uncontroverted evidence as to the recording into the RAM and the reproduction on the screen.

Galaxy Electronics Pty. Ltd v. Sega (supra)

Greyhound Services Ltd v. Wilf Gilbert 1994 FRS 723

49. The Defendants have admitted the requisite knowledge under Sections 273 and 32 of the Copyright Ordinance - see paragraphs 18 and 19 above. The evidence of the Plaintiffs of the other factual elements to be proved under those sections has not been denied.

50. The main issue of whether the Plaintiffs' trade marks have been infringed under Sections 27 and 28 of the Trade Marks Ordinance turns on whether the use of the mark is likely to cause confusion under Sections 27 and 28 of the Trade Marks Ordinance.

51. The modified consoles offered and sold by the Defendants each bear the Plaintiffs registered trade marks. To that extent, the Plaintiffs' exclusive use of the mark has been infringed because the goods clearly carry and are intended to convey a connexion to the Plaintiffs. Such usage is an infringement of the Plaintiffs' rights under Section 27(1).

52. Even if purchasers are aware of the unauthorized modification by the Defendants (which the Defendants say, and I accept, would be known to customers whom they would alert as to loss of warranty), the fact that the item continues to bear the Plaintiffs' mark is an infringement under Section 28.
Rolls Royce Moters Ltd v. Zanelli 1979 RPC 148

53. The samples in the Defendants' possession, one of which was sold to the Plaintiffs' investigator, bear the Plaintiffs' mark. The offer for sale by sample carrying the mark is a clear use of the mark in the course of trade and is an infringement under Sections 27 and 28.

54. There is no substance in the Defendants' assertion that the Plaintiffs are estopped from proceeding against them in respect of the hardware accessories. It is not in dispute that the parties entered into negotiations in relation to the accessories. It is not in dispute that the Defendants made an offer of acceptance which the Plaintiffs did not respond to. It cannot follow that because the Plaintiffs, having considered the offer, chose to ignore it that somehow their failure to actually accept or reject the offer could or should be somehow inferred to be an acceptance.

55. The 2nd and 3rd Defendant held controlling managerial positions in the 1st Defendant and were knowingly and directly involved in important aspects of the activities the subject of these proceedings. They are therefore personally liable both for their own activities and for the relevant acts of the 1st Defendant.
Canon Kabushiki Kaisha v. Green Cartridge (supra).

56. The Defendants have not raised any arguable or credible case and have failed to show a bona fide defence to the Plaintiffs' claims. There are no issues of fact between the parties, the Plaintiffs having urged the Court to accept the Defendants' case on the factual issues. It is therefore a case where summary judgment should be entered in favour of the Plaintiffs with damages to be assessed.

Interim payment

57. The Plaintiffs seek interim payment of HK$8 million on account of damages to be assessed following judgment under Order 29 rule 10.

58. The only factual evidence as to quantum comes from the Plaintiffs' evidence of the quantity of goods seized in the Defendants' premises and the Defendants' evidence as to their sales turnover. There is at present no evidence as to actual net profit from the Defendants' sales of the infringing products. The Plaintiffs have tried to rationalize a figure based upon their potential loss of profit.

59. The Defendants say that interim payment should not be ordered until assessment of damages has been carried out. But that would negate the purpose and use of interim payment because final damages would then be known. Order 29 rule 10 makes it clear that interim payment can be sought at any time after the writ has been served.

60. Order 29 rule 11(1) provides that any sum of interim payment should be just and in reasonable proportion to the likely damages recoverable.

61. The Plaintiffs submit that their estimated loss of gross sales calculated upon the Defendants' stock of infringing goods amounts to about HK$192 million. But they provide no figures for gross or net profit that would have been derived therefrom. There is therefore no evidence from either side as to the actual loss suffered by either.

62. Any amount of interim payment is, to an extent, an educated guess which, if wrong, can be corrected by adjustment at the assessment stage. However the amount should be sufficient to provide some interim relief to the Plaintiffs whilst not being so high as to cripple or ruin the Defendants financially. It is to be remembered that the Defendants are engaged also in business other than dealing in the infringing goods.

63. The Plaintiffs have not demonstrated any identifiable significance between the figure of HK$8 million which they seek and the loss of sales that has been deposed to. They say simply that their figure is not unreasonable. The Defendants say that the sum of HK$8 million is too high and would ruin them financially.

64. In the circumstances of this case, an interim payment by the Defendants would be appropriate. But in my view an amount of HK$5 million would adequately meet the situation.

Order

65. There will be an order in terms of paragraphs 1-9 and 11 of the Plaintiffs's summons issued on 10 October 2002.

66. The Defendants shall make to the Plaintiffs an interim payment of HK$5 million on account of damages.

Dated this 31st day of March 2003.