GUESS ?, INC. AND OTHERS v. LEE SECK MON AND OTHERS

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JUDGMENT

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Cons, V.-P. delivered the judgment of the Court:

1. This is an appeal against the decision of His Honour Judge Downey sitting as a Deputy Judge of this Court who, on the 30th April this year either granted afresh or continued an interlocutory injunction granted originally by His Honour Judge O'Dea, also sitting as a Deputy Judge of this Court. The injunction enjoined the 7th Defendant and others with whom we are no longer concerned from -

The schedule at that time contained 17 styles. It was amended on the 10th July, following an amendment to the Statement of Claim, to some 10 styles.

2. The 7th Defendant, Jordache International (HK) Ltd., is a company registered in Hong Kong being the wholly owned subsidiary of an American company, "Jordache Enterprises Inc.". It is the commercial vehicle for the activities in the garment trade of the Brothers Nakashe. There are three brothers, Ralph, Joe and Avi, and they set up the company in America in 1978. They took as their logo the horse's head, 1978 being the Year of the Horse in the Chinese calendar.

3. The 1st to the 6th Defendants may be conveniently referred to as "The Lees". They consist of a Mr. and Mrs. Lee and the firm and companies which are carried on by them. They are garment manufacturers and produce almost, but not quite, exclusively for the Nakashes.

4. The effective Plaintiffs are the Brothers Marciano, i.e. Georges, Maurice, Armand and Paul. They are also in the garment trade and set up their company, Guess ? Inc." the 1st Plaintiff, in 1980. They produce and sell their garments under the "Guess" label. They also run a second line, "Gasoline", which sells copies or "knock-offs' of their own originals. Apparently that is common custom in the United States. Gasoline was at first carried on as a separate division of Guess ? Inc..

5. In July 1983 the Marcianos sold 51% of their company to the Nakashes. The proportion was subsequently varied to 50%. The Nakashes assumed responsibility for the Gasoline division, which of course gave them ultimate access to the cutting patterns and markers which are now the subject of the injunction. Frustrated by the inability of the California manufacturing facilities to keep pace with demand, the Natashes soon diverted manufacture of at least the more important Gasoline styles to their own suppliers in Hong Kong. In this way the cutting patterns and markers may, perhaps, have been transferred to the Lees.

6. In March 1984 the Gasoline division of Guess was formed into a separate company incorporated in Delaware - Gasoline Limited. The shareholding and directorships were split equally between the two sets of brothers.

7. However even before then, friction had arisen and the Marcianos turned to litigation. The first action in California was soon settled, but mistrust continued and two further actions were initiated, one in Delaware, which has since been stayed, and the other in California which continues. It was urged strongly on the judge below, and again in this Court, that the real motive behind the Hong Kong proceedings was not to protect the. interests of the Marcianos here, but solely to obtain evidence for use in the action in California.

8. It is convenient now to set out what has happened in this jurisdiction.

9. An ex parte application was made to Judge O'Dea on the 30th January. It was supported by draft affidavits from Georges Marciano and the solicitor acting for the Plaintiffs.

10. The judge made extensive orders for disclosure and delivery up. He granted an interlocutory injunction in the terms we have already mentioned. He granted also an Anton Piller order in the usual form. That order was executed the following day. The search took many hours and continued until early the next morning. It was however not completed. We understand there was a safe or cabinet to which the Plaintiffs' solicitor was unable to obtain access.

11. The inter partes hearing had been set for the 6th February. However on the 3rd February the Defendants applied to Bewley J. There was one matter that disturbed them, that is that some documents had already been telecopied to New York and others despatched by more normal mail. As a result of the application, undertakings were given not to send further copies out of the jurisdiction. Then on the 6th February the inter partes summons was adjourned. Not surprisingly both parties felt that they needed more time to prepare for the hearing.

12. Eventually the summons came on on the 7th April. At the same time there was an informal application to discharge the Anton Piller order. We understand that it was agreed by everyone present that the sensible course was to deal with that application first.

13. The hearing took many days. It was not concluded until the 26th April, when the judge below discharged the order of Judge O'Dea. He found that there was substantial and serious non-disclosure of relevant facts, and furthermore, that the evidence did not support the inference of a real possibility that documents or things would be destroyed. We understand that he then adjourned the remainder of the proceedings to the 29th of the same month, although the formal order, subsequently drawn up, is a little confusing.

14. When proceedings resumed on the 29th, Counsel for the Plaintiffs applied for a fresh Anton Piller order and for a further interlocutory injunction. Submissions were heard and on the following day, i.e. the 30th, the judge rejected the application for the Anton Piller order. Even with the further evidence he was still not satisfied that there was a real possibility of documents being destroyed or concealed from other parties or from the Court. But he granted the injunction.

15. For the sake of completeness we should mention two further matters. Firstly, on the 2nd May the judge made a further order dealing with the safekeeping of the documents discovered under the Anton Piller order. On its face that order may give the impression that it was made at the request of and upon undertakings offered by the Plaintiffs. We understand however, that that was not the case. Secondly, the 1st to the 6th Defendants, i.e. the Lees, who originally also lodged notice of appeal against the order for the interlocutory injunction have consented to a dismissal of their appeals upon a modification to the injunction  so that it now prohibits them from manufacturing etc. garments "using the 1st Plaintiff's cutting patterns and markers and specifications" relating to the scheduled styles instead of "in accordance with" those styles. Counsel for the Plaintiffs has indicated that the Plaintiffs would be content with similar modifications to the injunctions the subject of this appeal.

16. We return to the proceedings below. Both on the 26th and on the 30th April the judge gave extempore the reasons for his decisions, They were recorded at the time and have since been reduced to writing and supplied to the parties. We however have not been provided with the transcripts. Instead we have been given a single document, dated the 30th April but clearly prepared sometime later than that, in which the judge indicates that he has incorporated "the reasons, both spoken and unspoken, for all' my decisions."

17. There is, of course, no objection to a judge's revising the transcript of an extempore judgment. He may wish to rephrase it in terms more concise or perhaps more elegant than he was able to formulate on the spur of the moment. And there is Order 42 rule 5B which provides a suitable procedure if a judge thinks it appropriate to give his decision immediately, but would like to take time to consider how best to express his reasons. And Section 60 of the District Court Ordinance, Cap. 336, provides that a District Judge who gives his reasons orally may record them in writing at any time within 30 days thereafter. But we are not aware of justification anywhere for the course adopted by the judge below. For ourselves we would not encourage it. We see no advantage to be gained and where in addition it seeks to combine two judgments into one it is likely, as it did in the present instant, to lead to confusion.

18. The allegations made in the Statement of Claim are wide ranging, but we think they may be fairly summarised as firstly, conversion and breach of copyright and/or confidence by the misuse of cutting patterns and markers supplied for the benefit of Guess and Gasoline; and secondly, fraud by the use of false exchange rates, double invoicing and the over pricing and manipulation of quotas.

19. The affidavit evidence was voluminous. It took four days alone for the various affidavits to be read. The bulk of them reflect and include what was discovered by the execution of the ex parte order, what for convenience has been referred to throughout these proceedings as "the yield". The initial question which we have to decide is whether, having regard to the discharge of the Anton Piller order, it was right, upon a consideration of the application for the interlocutory injunction, to take the yield into that consideration.

20. The judge took the view that it was. He said -

21. With every respect to him, we do not think that to be a correct approach to the control of what the judge, adopting phraseology first introduced by Donaldson J., as he then was, in Bank Nellat v. NikPour⁽¹⁾, frequently referred to as "a nuclear weapon" of the law. In our view it is a matter of real substance. The basic safeguards of equity must be strictly enforced to ensure that the terrible power of such a weapon is never improperly unleashed.

22. The basic safeguard in the present circumstances was said by Donaldson J., in the same case, at page 90 to have great antiquity, but we may take it, as he then did, from a dictum in R. v. Kensington Income Tax Commissioners ⁽²⁾ where Warrington L.J. said -

23. Mr. Clarke, who appears for the 7th Defendant, puts it in more simple form. He says -

24. Mr. Aldous, who appears for the Plaintiffs, does not dispute the principle. It is in the application of the principle that the difference is to be found.

25. Mr. Clarke submits that it is a matter which is within the discretion of the Court, and may be relaxed if the interests of justice so require.

26. Mr. Aldous, as we understand the effect of his position, takes a stricter view, for if he is correct the principle can never be relaxed, although it may in some circumstances become unenforceable. He submits that the breach of faith occasioned by the non-disclosure is fully met by the aggrieved party's right to object to the subsequent reading in Court of the evidence so obtained. Thus if objection is taken in time the evidence will be excluded, but that otherwise the judge is bound to give it its natural weight, without reference to the manner in which it was obtained.

27. Considered as a matter of principle we think that to be too inflexible and rigid an approach.The non-disclosure will not be equally serious on every occasion. There may be cases where iniquity of the very greatest depth is revealed by the order that should not have been granted.It may be necessary to balance one against the other in order to see where the interests of justice truly lie. To do that it is necessary to leave a discretion with the judge.

28. Moreover with respect we find it difficult to reconcile the suggestion that the question is subject to an overriding public interest that the truth should be ascertained - the basis of Mr. Aldous' proposition - with the concession that the truth can be suppressed, at least for the time being, by an insurmountable objection from the aggrieved party.

29. Turning then to the authorities to which we have been referred, we find in them nothing which militates against the conclusion we would reach in principle. Indeed some authorities may perhaps give some small measure of support. In Bank Mellat v. Nikpour^(1a), although dealing with the setting aside of a Mareva for non-disclosure, Lord Denning said -

30. And in Yardley v. Higson⁽³⁾, on a fresh application for an injunction an inadequately explained non-disclosure was overlooked in favour of a balance of convenience said to be "wholly on the side of the Plaintiff". We accept, of course, that neither of these authorities deals directly with the use of information obtained by proceedings tainted with nondisclosure.

31. There are two instances, Heliwell v. Pigott Sims ⁽⁴⁾ and we a Records Ltd. v. Visions Channel 4 Ltd.⁽⁵⁾ where the court has specifically refused to ignore the yield. In the latter Sir John Donaldson remarked that he would regard it as "wholly absurd" to do so. But both cases may be distinguished on two grounds: 1. In neither was there an immediate application to discharge the order.There was one subsequently in W.E.A. records, but not until some three weeks after the order had been complied with; and 2. more importantly, neither was concerned with an order obtained by non-disclosure. Dunn L.J. was careful to point that out in the Wea Recordo⁽⁵⁾.

32. To be fair to Mr. Aldous he does not press these authorities. He relies heavily instead upon the decision of Warner J. in ITC Film Distributors Ltd. v. Video Exchange Ltd.⁽⁶⁾. The judge was not there concerned with an Anton Piller order, but with documents obtained by a trick, a trick indeed perpetrated within the confines of his own court, conduct which might be thought considerably more reprehensible than failing to make full disclosure.

33. The proceedings before the judge were somewhat complicated and we need say no more than that when the offender sought to exhibit the documents thus obtained, the judge refused them, except for, - and this is the crucial feature of the case, - those which had already been placed before him in the course of an earlier application and upon which there had been some cross-examination of a witness. As to those the judge said this -

34. The learned judge does not say why he thought it impossible to exclude the documents that had already been looked at, unless it was, perhaps, that they were inseparably intertwined with the oral evidence of Mr. Browne. But if that be so, we have no similar situation here, and with respect, we do not find that aspect of the case to be of any assistance.

35. The judge below accepted the matter as one within his own discretion. In deciding to exercise it in favour of the Plaintiffs, i.e. to take the yield into account, he was moved by two further considerations -

36. With respect to him the practical difficulties he envisaged in his second consideration could easily have been provided for. And the first is but a variant of Mr. Aldous' main proposition. Once it is accepted that exclusion is a matter of discretion, the judge has to know at least the substance of what he is dealing with.

37. We accept of course that an aggrieved party may for his own part not take any objection. He may perhaps hope to use the material in question to his own advantage. But that is not what happened here. It must have been obvious to everyone that, should the Defendants succeed in having the Anton Piller order discharged, they would ask the judge, as indeed they did, to lay aside all the evidence that had been obtained thereby.

38. The judge made no finding that the non-disclosure by the Plaintiffs was deliberate in the sense that it was done for improper motives, what Mr. Aldous has characterised as "wilful non-disclosure". And certainly there is no suggestion that those whom the Plaintiffs had instructed were parties to any such conduct. But even though the rights of an absent party have been innocently infringed by reason of nondisclosure the courts must not lightly allow another to keep the benefit thereof. And where the non-disclosure has been, as in this instance, both serious and substantial, the court should allow it only if there are good and compelling reasons. With respect to the judge, the reasons on which he relied fall far short of that standard, and we ourselves are unable to find others. In our view the yield ought not to have been taken into his consideration.

39. When that evidence is removed, then, with respect, the case for an injunction collapses, simply because, quite regardless of whether the Plaintiffs can show the subsistance and ownership of any particular copyright or confidential information, they cannot show that the 7th Defendant has committed any infringement. What have been called the "black pants", said at first to have been based on a Guess style the original of which could not be found, were purchased at the Jordache Store in Nathan Road. Despite the similarity of name that store is not owned or operated by the Nakashes or the 7th Defendant, but by the Lees. Mr. Lee's explanation of how those pants came to be on sale there has been criticised, but even so, and assuming for the moment that they do constitute a breach of copyright, it does not follow that the 7th Defendant was in any way responsible.

40. Then there is the suggestion of a secret shipment of Gasoline garments to a customer in Panama, a customer owned and operated by cousins of the Nakashes but which does not figure in Gasoline Ltd's register of customers. There is also a suggestion of sales to Canada, based on unexplained inconsistencies in statements made by one of the Nakashes' lawyers. However, whatever else may be read into these two transactions, we are unable to read breach of copyright or confidence. Nowhere do we find any indication that the responsibilities given to the Nakashes for the day-to-day running, first of the Gasoline division of Guess ? Inc., and then of Gasoline Ltd., was confined to outlets in the United States of America.

41. Our conclusions thus far are sufficient in themselves to dispose of the appeal, but in deference to the immense efforts of counsel, and we should think also of those instructing counsel, we should set out briefly the views we would have taken upon the evidence considered as a whole.

42. It is pertinent to note at this moment that since the ex parte application was made, there has been a change at least of emphasis in the Plaintiffs' case. Georges Marciano referred to sketches and designs. The Statement of Claim now relies upon cutting patterns and markers. There has also been, as we mentioned earlier, a reduction in the number of those patterns in which copyright or confidence is claimed.

43. Turning to the evidence as a whole we may at once observe two significant absences. Firstly, there is no direct evidence that the relevant cutting patterns and markers were ever sent to Hong Kong. One would have thought that that could easily have been established from the records kept by Guess ? Inc. Secondly, despite the suggestion of massive exploitation by the Nakashes, apart from the black pants not one single infringing garment has been produced. If the convictions of the Marcianos are well founded there should be no difficulty in finding them almost anywhere in America. Such garments, if necessary stripped down to their basic elements, could have been compared with the original markers or the genuine garments. Indeed the unexplained failure to do this with the black pants did cause some concern to the judge below.

44. Instead of proceeding in the conventional manner the Plaintiffs have set out to establish the existence of a substantial issue to be tried principally by reference to the innumerable panafaxes which passed between on the one hand the Nakashes and their staff or agents, and on the other the Lees and their staff. In particular they rely on panafaxes which use expressions such as "fit should be as", "silhouette and fit as" or "for fit please use", all in relation to some particular Guess or Gasoline style number. "Fit" is urged as the most important and unique ingredient in the Guess range, and upon which their reputation has to a large extent. been made. It is, so it is suggested, directly related to the cutting pattern. That would seem a logical relationship, at least to a layman, but the exercise through which Mr. Clarke took us yesterday afternoon, with regard to the Further and Better Particulars and the antecedent materials, has persuaded us that there may not always be such a direct relationship when those words are used in the panafaxes that we have seen.

45. With regard to five of the ten styles that are now injuncted there is nothing in the panafaxes to suggest that they have been used by the Nakashes for their own purposes. Of the rest, Style No. 1015 is mentioned. only with reference to the use of zip-fastenings at the foot. Only "with the picture of style 1714" are the Lees asked to make a sample. Style 1540, which despite a confused origin, appears to relate to the black pants, is covered by a panafax which refers to the Jordache prototype as "front panel Gasoline Combo". Another panafax asks for the same prototype to be as "Gasoline specification in size 7". We are not prepared to equate specifications with the cutting pattern, any more than we do the "constructon and detailed guide" from the' Gasoline line which the Lees were asked to use in relation to-Style Z2001. Both that style and the remaining 1002 are covered by panafaxes which include phrases relating to "fit" or "silhouette". These we have already mentioned. The only phrase which might refer directly to a cutting pattern appears in a panafax of the 7th December 1983 in which the Lees say they have used the relevant Guess pattern "as block".

46. On the other hand there are indications that the rights of Gasoline Ltd. might not have been carefully observed in what have been called the "foreign sales". For example on the 16th March 1984 Singapore reminded the Lees to "use Jordache U.S.A. labels in all our orders as discussed", while on the 10th January Canada had decided to have certain styles "back with the Jordache label". On the 6th March Mr. Lee commented that Hong Kong interests "plan to sell some Gasoline styles in Jordache labels".

47. The judge does not appear to have related the panafaxes to the particular style numbers in issue. He speaks generally of messages to use Gasoline styles to produce garments for Jordache and was influenced by the use of what appeared to be code names in several instances. He took into account as well the unco-operative attitude of the Lees to the Anton Piller order and their failure to produce the original cutting patterns and possibly markers "which they had received in confidence from the Plaintiffs". This he thought to be a substantial ground for believing that there had been infringement sufficient to justify an injunction. We have already commented on the lack of direct evidence that such patterns or markers had been delivered to Hong Kong, but in any event that is conduct which has no reference to the 7th Defendant. With respect to the learned judge we would not have thought that the evidence, as now presented, sufficiently establishes that with regard to these ten particular styles there is a serious issue to be tried.

48. We would have agreed with him that delay by itself was no bar. But in our view it was a matter of great significance with regard to the adequacy of damages. We find it hard to accept that, with the readiness to litigate that the Marcianos have shown, they would have held their hand so long had they really believed they were suffering damage for which they could never be adequately compensated. Nor do we think that if they genuinely felt they were being defrauded by the Lees and the Nakashes together as they suggest, they would have approached Mr. Lee as late as December 1984 with a view to conducting business directly. The judge suggested that this matter may have been simply overlooked by the Plaintiffs in the course of the proceedings before him. For ourselves we see no reason why that should have been so.

49. The judge below based his conclusion that the Plaintiffs could not be adequately compensated by damages upon loss of goodwill, but we doubt whether much goodwill could be built up in actual garments, as opposed to. the labels hung upon them, in a market where it appears that blatant copying is the general order of the day.

50. It has been suggested to us that, even if successful in the end, the Plaintiffs might nevertheless be unable to recover what is then found to be due. However, there was no suggestion below that the 7th Defendant might not be good for its money, and we do not think the evidence sufficient to support the inference that the Nakashes or Lees would fail to keep proper records or might resort to secret manufacturer elsewhere.

51. Nevertheless the adequacy of damages is very much a matter within the discretion of a judge, and we think that, despite our own views, we would not have been inclined to interfere with his decision in that respect, or with his refusal to accept the argument of "unclean hands".

52. There remain only the questions of the various frauds alleged against the Nakashes, and whether the Marcianos were activated principally by an ulterior motive. It is impossible to come to a firm conclusion on these questions without the benefit of oral examination of those involved. As they are questions which undoubtedly will be raised again in one or more jurisdictions where that examination may be available, we think, in the circumstances, it is better to express no opinion.

53. The nature of this appeal has demanded a great deal of time in the detailed examination of a myriad of documents, documents that were not always too easy to understand at first glance. We are grateful to counsel for relieving the tedium involved as much as they could by the thorough preparation and pleasant presentation of their submissions.

54. For the reasons we have given the appeal is allowed and the amended order, dated the 30th April is set aside.

(1) [1985] F.S.R. 87 at 92
(1a) at p.90
(2) [1917] 1 K.B. 486 at 509
(3) [1984] F.S.R. 304
(4) [1980] F.S.R. 356
(5) [1983] 1 W.L.R. 721
(6) [1982] 1 Ch. 431