RHT LTD v. HOUSELY INDUSTRIES LTD

HCA982/2006

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

HIGH COURT ACTION NO. 982 OF 2006

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J U D G M E N T

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1. This is an assessment of damages following the entry of judgment by Carlson DHCJ on 14 February 2008 in favour of the plaintiff against the defendant.  There was an order previously made for a split trial so that liability and quantification of any damages that may have been sustained by the plaintiff and pursuable by them against the defendant be assessed at a subsequent hearing.  That hearing has now come before me. 

2. As was the case before the deputy judge in February of this year, the defendant did not appear today.  The court is therefore left solely with the case as advanced by the plaintiff's single witness, PW1, Mr Rudi Chan Chi-keung, for the purpose of assessment.  There being no contrary evidence to contradict the testimony and documentation of PW1, I have therefore no difficulty in accepting, in total, the evidence adduced on behalf of the plaintiff.  I find the following matters established.

3. The plaintiff is a company registered in Hong Kong.  As described by the deputy judge, the plaintiff is essentially a trader in patents.  Pursuant to an agreement dated 30 April 2004, Akron International Technology Limited ("Akron"), granted to the plaintiff an exclusive licence of, inter alia, the right to use Akron's technology and/or technical information known as nano-confined catalytic oxidiser (NCCO).  The plaintiff was also given the right to manufacture, sell, or otherwise deal with products by applying and exploiting the NCCO technology.  The technology was registered under the patent co-operation treaty ("PCT") under application No. PCT/CNO2/00303 in the name of Akron.  

4. As a matter of background, air-purifiers had been developed by Akron using the NCCO technology before the licensing of the technology by Akron to the plaintiff.  It is  clear that the plaintiff was desirous of exploiting this technology and was looking for a partner - to that end.  In the process, that partner turned out to be the defendant. 

5. By a written agreement in Chinese entered into on 3 September 2004, the plaintiff granted the rights to exploit the NCCO technology and to manufacture and sell air-purifiers and vacuum cleaners using such technology to the defendant.  It was, in essence, a co-operation agreement under which the plaintiff would benefit from a percentage of the sale of products to be made under the agreement by the defendant.  It was agreed that a minimum of 100,000 units would be built and sold by the defendant and the plaintiff would reap a profit of 10 per cent of the gross sale price. In addition in return for granting the exclusive rights to exploit the technology and distribute the ensuing products, the plaintiff would also receive royalties. 

6. The contract between the plaintiff and the defendant entered into on 3 September 2004 was for a period of three years expiring on 2 September 2007.  I should set out in some detail the main terms. 

(1)     Under the agreement, the plaintiff assigned to the defendant exclusive rights of distribution of air-purifiers and vacuum cleaners in Europe.  That is under clause 1(1) of the agreement.

(2)     The plaintiff has also assigned to the defendant the   right of manufacturing all air-purifiers and vacuum cleaners to be sold in Europe under clause 1(1).

(3)     The defendant, in return, shall pay a royalty fee to the plaintiff for the sale of all such products as mentioned during the term of three years which the parties agreed to be 10 per cent of the sale price pursuant to clause 2(1) of the agreement. 

(4)     The defendant shall also pay the product registration fee for the sale and production of the air-purifiers and vacuum cleaners in the Patent Region as specified in clause 2(3). 

(5)     Additionally, the defendant shall pay the royalty fee to the plaintiff within one month of the sale of the products under clause 5(3). 

(6)     And finally - and this is a particularly important clause for the assessment of damages - the defendant shall complete the development, manufacturing and sale of at least 100,000 units each of air-purifiers and vacuum cleaners within 36 months after the date on which the contract took effect which is 3 December 2004. 

7. Subsequent to the contractual arrangement between the plaintiff and the defendant, Akron assigned all the intellectual rights of the NCCO to the plaintiff and so the plaintiff, as of 28 November 2004, became effectively the legal proprietor of such technology.  No products were produced, made or sold during the contractual period and the parties eventually fell out.  Co-operation which might have taken place at the commencement of the contractual period quickly ceased. On 21 September 2005, the defendant wrongfully and unilaterally terminated the contract. The plaintiff accepted the repudiation and now sue for damages. 

8. I shall now deal first with the first head of claim, namely, loss of royalty fees for the air-purifiers.  This is quite succinctly set out on page 3 of PW1's supplemental witness statement.  Following the breach of contract by the defendant, the plaintiff eventually found another partner to co-operate in the exploitation of the NCCO technology in Philips.  A contract with Philips was entered into in or about June 2007.  The terms of that agreement are not particularly crucial or need to be stated herein.  Suffice it to say that Philips has applied the NCCO technology in the production and sale in the Hong Kong market after June 2007 of air-purifiers at a unit price of $2,688.00. 

9. The plaintiff proposes to use that unit price as a comparable in calculating damages.  The plaintiff would have earned 10 per cent on the gross sale price of 100,000 of such units had the defendant abided by their side of the bargain.  That comparable is certainly appropriate for calculation for present purposes, there being no other evidence of what unit price would have been achievable had the defendant completed the contract as envisaged and proceeded to develop, manufacture and sell air-purifiers. 

10. The contract between the parties clearly anticipated and required the defendant to produce a minimum of 100,000 of such units.  The plaintiff seeks damages upon the basis of 100,000 of such units at the cost of the comparable which is $2,688.00 and then taking 10 per cent to represent the royalty on those sales.  The calculation urged is this:  HK$2,688.00 X 100,000 pieces X 10 per cent to produce a loss of royalty for air-purifiers of $26,880,000.00.  That figure I accept to be the damages that the plaintiff has sustained through the default of the defendant under the contract. 

Loss of royalty  for vacuum cleaners

11. The approach suggested by the plaintiff is founded on comparables of vacuum cleaners that are commonly available from companies such as Miele Aquarius, Oreck DutchTech, Sebo and Bosch.  In Mr Rudi Chan's statement which he adopted as his evidence, there is a table at the top of page 4 of his witness statement (page 48 of the trial bundle) detailing the price of comparable vacuum cleaners.  They are:

Brand Name	Model Number	Price
Miele Aquarius	S5580, Bagged Canister Vacuum	US$650-$949
Oreck DutchTech	DTX1400AD Bagged Canister Vacuum	US$699
Sebo	K3 Premium Bagged Canister Vacuum	US$759
Bosch	BSG81396UC Premium Prestige Bagged Canister Vacuum	US$874-$1,300

12. The plaintiff proposes to use these comparables and average out the unit price of the vacuum cleaners at US$836.00.  That, of course, has to be converted to Hong Kong dollars at the accepted rate of HK$7.80 to the US dollar.  The calculation suggested appears at (iv) on page 4 of the statement of this witness. 

13. Damages accordingly is claimed in respect of the vacuum cleaners in the amount of $65,220,000.00 being the average unit price of the vacuum cleaners converted to Hong Kong dollars of $6,522.00 X 100,000 pieces which the defendant should have produced and then taking 10 per cent of that gross sale as representing the loss of royalty fee for the vacuum cleaners.  That amount I would also allow to the plaintiff as claimed. 

14. In addition, of course, there is a further head of damage and that is in respect of the patent registration fee of the technology.  A figure of $464,500.00 is claimed for the patent registration fees.  This is supported by the letter from Victor Chu, Tsang & Partners, patent lawyers, instructed originally by Akron to effect the application of the patent in the United States, in China and in the European Union.  Under the original contract between Akron and the plaintiff, the liability for funding the patent application fell on the plaintiff.  This sum of money, the plaintiff clearly has paid and, pursuant to the contract between the plaintiff and the defendant, that sum was, in effect, to be paid for and on behalf of the defendant and is therefore also recoverable from the defendant. 

15. So in gist, the damages which the plaintiff has suffered for breach of contract are as follows: 

Patent Registration Fee            HK$464,500.00

Loss of Profit from 

Royalty Fees                         HK$ 92,100,000.00

16. The $92,100,000.00 is made up of the plaintiff's profits loss in respect of the non-production of both air-purifiers and vacuum cleaners which I have previously referred to.  Total foreseeable damages claimed is therefore $92,564,500.00.

17. I have raised the issue of mitigation with counsel, that is, mitigation of damages by the plaintiff.  The agreement between the parties was for co-operation and exploitation of the technology for three years.  It failed within the three-year period but before the contractual period  would have expired, the plaintiff did succeed in finding another partner in Philips.  The defendant has not raised nor adduced any evidence and, in fact, has not appeared at today's hearing to argue that the plaintiff has failed to mitigate their loss.  It is incumbent on the individual who raises failure to mitigate damages to adduce evidence sufficiently for the plaintiff to meet it.  This has not taken place. 

18. Having heard counsel on this matter briefly, I agree with counsel that damages should be awarded to the plaintiff as claimed which, for clarity, is $92,564,500.00.  There will also be costs of the assessment to the plaintiff against the defendant, taxed if not agreed, with certificate for counsel.