LEADWELL CNC MACHINES MFG, CORP. v. GLOBAL CROWN INTERNATIONAL LTD

HCA853/2005

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO.853 OF 2005

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D E C I S I O N

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1. By a summons dated 10 May 2005, the plaintiff sought an interlocutory injunction against the defendant : (a) whether in Hong Kong or elsewhere, in using, transferring, disposing or howsoever dealing in or with the “LEADWELL” trade name or 13 trademarks registered in the defendant’s name; (b) in manufacturing, selling, advertising, etc. any product and in particular computerized numerical control machines bearing the “LEADWELL” trade name or trademarks; (c) in carrying on business by reference to the “LEADWELL” trade name or trademarks; and for an order of disclosing on affidavit the customer or prospective customer or supplier or prospective supplier of products and in particular computer numerical control machines bearing the “LEADWELL” trade name or trademarks.

2. On 13 May 2005, Yam J granted an interlocutory injunction until the determination of the summons herein restraining the defendant from exploiting, disposing or howsoever dealing in or with the 13 “LEADWELL” trademarks registered in the defendant’s name.

3. The plaintiff is now seeking the continuation of the interlocutory injunction, and to enlarge the terms as prayed for in the summons.

Background

4. The plaintiff is a manufacturer of computerized numerical control (“CNC”) milling machines, lathes, planers and drilling machines under the trade name “LEADWELL” in Taiwan since 1980.  The plaintiff was previously the registered owner of 19 “LEADWELL” trademarks (including the 13 impugned trademarks) in 18 countries including the USA, EU, UK, Taiwan, the Mainland and Hong Kong.

5. In 2004, the plaintiff’s key financial indicators were as follows :

(1) capital : NT$613 million (or HK$153 million);

(2) assets : NT$1,222 million (or HK$305 million);

(3) worldwide sales : NT$1,512 million (or HK$400 million);

(4) Hong Kong sales : NT$65 million (or HK$16 million); and

(5) profits before tax : NT$91 million (or HK$23 million).

6. The plaintiff’s machines involve the cutting edge in computer and machinery technology, boasting “zero defect”.  It claimed to be Taiwan’s best in research and development and quality control.  It won many awards and achieved relevant standards internationally.  It has reputation and goodwill both in Taiwan and internationally.  There are many Hong Kong factories specifying the use of the “LEADWELL” machines on their websites.

7. According to an expert report, the current value of the “LEADWELL” trademarks worldwide is worth about NT$40 million (or HK$10 million).

8. The defendant was incorporated in Hong Kong in December 2001.  Initially, the two shareholders and directors were: Terrence Chang (51%) and Li Tat-cheung (49%).  In December 2004, Terrence Chang resigned as directors and transferred his shares to Li.  Previously, Terrance Chang was the Manager of International Sales of the plaintiff before he resigned in February 2001.

9. The plaintiff was founded by Dr Paul Chang.  Since its incorporation and until September 2000, Dr Chang was the Chairman and Chief Executive Officer of the plaintiff.  In June 2000, Dr Chang wrongfully and without consent and authority caused the plaintiff to assign to himself 14 of the 19 of the “LEADWELL” trademarks (except for Taiwan, the Mainland, Italy, Korea and Indonesia).

10. After his resignation from the plaintiff, Dr Chang founded the Leaderway Machinery Co., Ltd (“Leaderway”).  Terrence Chang joined Leaderway as the Chief Operating Officer.  The 14 registered trademarks were subsequently assigned by Dr Chang to Leaderway.

11. Dr Chang was prosecuted and convicted of the offence of breach of trust in the District Court in Taichung.  His appeal to the Supreme Court in Taipei was dismissed and he was sentenced to 18 months imprisonment.

12. In November 2001, the plaintiff obtained a prohibition order (or injunction) in Taiwan against Leaderway in dealing with the assigned trademarks.  In January 2002, Leaderway entered into an agreement to assign the 14 registered trademarks to the defendant.  In March 2002, the Taiwanese injunction was served on Leaderway.  In April 2002, Leaderway assigned the 14 registered trademarks to the defendant.  Terrence Chang executed the assignment for Leaderway, and Li for the defendant.

13. The defendant became the registered owner of 13 of the 14 assigned trademarks including in Hong Kong.  The registration in Australia was not successful by reason of the Taiwanese injunction.

Plaintiff’s claim

14. The plaintiff’s claim against the defendant is based on :

(1) restitution of property knowingly received in breach of trust by the defendant;

(2) passing-off.

Proprietary claim

15. Mr Wong for the plaintiff submitted that the Terrence Chang, being the Chief Operating Officer of Leaderway, must have known of the breach of trust by Dr Chang.  As at the assignment to the defendant, Terrence Chang was also a shareholder and director of the defendant.  The knowledge of Terrence Chang should be imputed to the defendant.

16. Further, the defendant has apparently obtained the assignment at undervalue.  The “LEADWELL” trademarks are worth about HK$10 million.  Li said that he paid US$100,000 (or HK$780,000) for the 14 trademarks.  Looking at the figures for 2001, the plaintiff’s global sales were US$28 million (or HK$223 million), and the contribution to the sales by Taiwan, the Mainland and Italy amounted to about 40%.  Rateably reduced in accordance with 2001 sales figures as well as contribution by countries, the value of the 14 assigned trademarks in 2001 should be about HK$3 million.  Hence, there is prima facie a sale at undervalue at HK$780,000.

17. Further, Li’s explanation of the setting up of the defendant and sudden withdrawal of Terrence Chang from the defendant was highly suspicious.  Li has hitherto worked for the family business of metal manufactory.  He said he met Terrence Chang who helped him to acquired the trademarks, set up the factory in Dongguan, and impart all the necessary know how of CNC technology.  Terrence Chang was given the majority shares subject to his promise to give them back to Li once the business was on the way.  Then Terrence Chang broke away completely and there was no connection with Leaderway.

18. Mr Wong submitted that CNC was at the cutting edge technology and it was unbelievable that the defendant could carry on without the technical support such as from Leaderway.  In March 2005, the plaintiff engaged private investigator to pose as prospective customer.  The visit to the defendant’s registered office revealed that it only used a desk in the office of another company for message redirection.  Later, a Mr Li returned call to the investigator, and referred the investigator to the website of Leaderway for further information.

19. Li said he used up his savings and invested HK$2 million in the defendant.  Deducting HK$780,000 on the trademarks, the balance was HK$1.2 million.  Li said he set up a production line for 10 machines per month in Dongguan.  Monthly expenditure amounted to HK$40,000.

20. Mr Kao Yu-lung, the General Manager of the plaintiff said that the setting up costs of a production line of 10 CNC machines per month would be NT$80 to 100 million (or HK$20 to 25 million).  The line would have to be operated by six technicians and 16 less skilled workers.  The monthly costs would far exceed HK$40,000.

21. Mr Wong submitted that Li’s story is simply incredible.

22. On the other hand, Mr Szeto for the defendant submitted that the defendant was a bona fide purchaser for value without notice, and Li had fallen victim to the internal dispute between the plaintiff and Dr Chang.  Mr Szeto submitted that the plaintiff has a low chance of success.

23. Mr Szeto pointed out that the plaintiff’s pleaded case is that Terrence Chang’s knowledge should be imputed to the defendant.  He submitted that where a person is a director of two companies, his knowledge of the affairs of one company is not imputed to the other company as a matter of law unless there is a duty on him to communicate it.  Mr Szeto referred to Advance Distribution Co. Ltd v. Shun Yip Ltd & ors [2003] 2 HKLRD 493, 500 A-C where Stone J cited with adoption from Nourse LJ in El Ajou v. Dollar Land Holdings Plc (No.1) [1994] 2 All ER 685 at 698 :

“It is established on the authorities that the knowledge of a person who acquires it as a director of one company will not be imputed to another company which he is also a director, unless he owes, not only a duty to the second company to receive it, but also a duty to the first to communicate it: see Re Hampshire Land Co. [1896] 2 Ch 743 and Re Fenwick Stobart & Co. Ltd, Deep Sea Fishery Co.’s Claim [1902] 1 Ch 507.”

24. Mr Szeto also submitted that where the common director was actually the trickster on the second company, it defies common sense that he would be under a duty to communicate the knowledge.  Mr Szeto referred to Arab Bank Plc v. Zurich Insurance Co. [1999] 1 Lloyd’s R 262 where Rix J held that in the insurance context, as outside it, a director’s knowledge was not to be attributed to his company whether as the knowledge of the company itself or as knowledge which in the ordinary course of business that company is to be inferred or deemed to know, to the extent that his knowledge is of his own acting in fraud of his company.

25. As to sales at under value, Mr Szeto said he could not argue with the figures.  However, there is no evidence that the defendant knew of the sales figures at the time of the assignment, and an adverse inference should not be drawn that he knowingly entered into the transaction at undervalue.

26. Mr. Wong replied that in El Ajou v. Dollar Holding Plc, knowledge was sought to be imputed on two alternative bases : (1) agency of common directorship, and (2) directing mind and will of the company.  The plaintiff there failed on (1), but succeeded on (2).  At 695 g-h, Nourse LJ referred to Viscount Haldane LC in Leonards Carrying Co. Ltd v. Asiatic Petroleum Co. Ltd [1915] 705 at 713 :

“My Lords, a corporation is an abstraction.  It has no mind of its own any more than it has a body of its own; its active and directing will must consequently be sought in the person of somebody who for some purpose may be called an agent, but who is really the directing mind and will of the corporation, the very ego and centre of the personality of the corporation.”

27. Mr Wong submitted that at the time of the assignment to the defendant, Terrence Chang was the majority shareholder and director of the defendant.  This is evidence that he was the directing will and mind of the defendant.  Therefore, his knowledge can be imputed to the defendant.

28. The objective facts that Terrence Chang was a common director of Leaderway and the defendant, and the assignment to the defendant was at undervalue form part of the factual matrix where inference as to knowledge may be drawn.  Prima facie, the allegation that Li did not know of the value of the assigned trademarks and relied totally on Terrence Chang seems to be contrary to business sense in the context of multi-million dollar business of cutting edge technology.  The evidence may even suggest that the defendant was a front and not victim of Leaderway as the investigator was referred to Leaderway’s website upon enquiry about the defendant’s business.

29. In all the circumstances, I find that there is a serious question to be tried on knowing receipt of trust property.

Passing-off

30. Mr Wong submitted that even if the plaintiff were unable to prove knowledge on the part of the defendant, the plaintiff could still succeed on the basis of passing off.

31. In Consorzio del Prociutto di Parma v. Marks & Spencer PLC & ors [1991] RPC 351, Nourse LJ referred to the classical trinity of the ingredient of the tort of passing-off at 368 line 45 :

“(1) a reputation (or goodwill) acquired by the plaintiff in his goods, name, mark etc.;

(2) a misrepresentation by the defendant leading to confusion (or deception);

(3) causing damage to the plaintiff.”

32. At 369 line 10, his Lordship referred to Reckitt & Coleman Products Ltd v. Borden Inc. [1991] 1 WLR 491 per Lord Oliver at 499 D-H :

“More specifically, it may be expressed in terms of the elements which the plaintiff in such an action has to prove in order to succeed.  These are three in number.  First, he must establish a goodwill or reputation attached to the goods or services which he supplies in the mind of the purchasing public by association with the identifying ‘get-up’ (whether it consists simply of a brand name or a trade description, or the individual features of labelling or packaging) under which his particular goods or services are offered to the public, such that the get-up is recognised by the public as distinctive specifically of the plaintiff’s goods or services.   Secondly, he must demonstrate a misrepresentation by the defendant to the public (whether or not intentional) leading or likely to lead the public to believe that goods or services offered by him are the goods or services of the plaintiff… Thirdly, he must demonstrate that he suffers or, in a quia timet action, that he is likely to suffer damage by reason of the erroneous belief engendered by the defendant’s misrepresentation that the source of the defendant’s goods or services is the same as the source of those offered by the plaintiff.”

33. Mr Wong referred to Wadlow on The Law of passing-Off (3^rd ed., 2004) at 3-155 for the following proposition :

“The most important restriction is that goodwill cannot be assigned or otherwise dealt with in gross, but must remain in the same ownership as the business to which it relates.”

34. Mr Wong submitted that the defendant’s intention that it it would acquire the goodwill of the plaintiff but ineffectually without acquiring the accompanying business is irrelevant.

35. Mr Wong submitted that the plaintiff was and still is carrying on the business under the trade name of “LEADWELL” in Taiwan and internationally including Hong Kong.  The defendant must be taken to have recognized to the goodwill attaching to the trade name “LEADWELL” as he was prepared to expend US$100,000 on the assignment, a sum not insubstantial in itself.  He must have known that the business and goodwill in Taiwan was not assigned, and the plaintiff was still exploiting the goodwill in Taiwan.  There was no evidence of any negotiation nor agreement as to any business arrangement with the plaintiff.  The defendant must have known that the machines it proposed to manufacture were not those coming from the plaintiff.  Hence, he must be passing off his own goods as those of the plaintiff.

36. Mr Szeto submitted on the basis that the defendant is a bona fide purchaser for value without notice, there is no misrepresentation for passing-off.  I take it that Mr Szeto is actually referring to the defence of ostensible authority of Dr Chang in the chain as assignments.

37. The copies of the assignments successively from the plaintiff to Dr Chang, then to Leaderway and ultimately to the defendant are subject to further discovery.  Some of the assignments stated assignment of the trademarks with the goodwill, others simply the referred to the trademarks themselves.

38. Be that as it may, I suppose that if a registered owner is willing to assign or grant permission to an assignee to append the registered trademark to whatever goods of the assignee, there is nothing untoward about it.  It is all a matter of contract and the common intention of the parties.  Assuming the defendant is seeking to bind the plaintiff to the assignment on the ostensible authority of Dr Cheng, it is still a matter of finding out the common intention of the parties as to the true purport of the bargain in the factual matrix of the case.  At the moment, apart from the assignment itself, there is scant evidence of the business arrangement reached between the defendant and the plaintiff (or whichever owner of the same mark for the unassigned markets) as to the respective use of the “LEADWELL” trademark.  Perhaps ultimately, as suggested by Mr Szeto, one still have to consider the breach of trust of Dr Cheng and whether the defendant could be affixed with knowledge of it.  Given my finding of a serious question to be tried on knowing receipt, it does not really befalls me to come to any view on passing-off at this stage.

Balance of convenience

39. Mr Wong submitted that the plaintiff has a strong case in proprietary claim.  The injunction granted by Yam J should be continued in order to preserve the subject matter of the litigation.  Otherwise, any remedy of restitution would be rendered nugatory by reason of the disposal to third parties.

40. Mr Wong submitted that the use of the “LEADWELL” trademark will cause irreparable damage to the plaintiff.  The defendant’s high end/low end argument will exactly prove the point.  Mr Wong submitted that CNC machines are at the cutting edge of technology.  There is simply no place for any low end product.  Notwithstanding the impossibility of the low setting up costs of HK$1.2 million, even if it were ever true that the defendant would produce a low end CNC machine, it is bound to be of inferior quality, and its bearing of an identical trademark over product which the plaintiff has no control over will cause irreparable damage to the reputation and goodwill of zero defect built up over 25 years.  It might even expose the plaintiff to litigation from dissatisfied customers, albeit that the plaintiff might successfully defend itself.

41. Mr Wong referred to Rolls-Royce Motors Ltd & anor v. Zanelli & ors [1979] RPC 148.  The defendant there wanted to add two doors to the Corniche and to sell it as a so-called Panache.  Browne-Wilkinson J (as he then was) granted an interlocutory injunction and said at 151 line 27 :

“When I come to consider the balance of convenience I am satisfied that the damage which may be done to the plaintiffs, if interior work is put out as being the work of Rolls-Royce, is quite incalculable and of very great financial harm to Rolls-Royce.  On this aspect of the case they are certainly in a very unusual position, in that a large part of the goodwill of Rolls-Royce does depend on their reputation for immaculate finish and engineering.  Anything which might impinge on that reputation could do incalculable harm.” 

42. Mr Wong submitted that damage to the plaintiff also comes in the form of dilution of the market of the plaintiff.

43. Mr Wong submitted that the balance of convenience comes down decided by in favour of the plaintiff.  The plaintiff has a valuable goodwill built up over 25 years.  The defendant is at a preparatory stage and with production yet to start.  There is nothing to stop the defendant to produce the machines save not to use the impugned trademark.  Even if the defendant were to succeed at trial, the plaintiff’s financial position will guarantee satisfaction of any damages to the defendant.  On the other hand, the defendant’s admitted limited resources will mean irreparable damage to the plaintiff.

44. Mr Szeto submitted that there is no evidence of damage, deception or confusion.  Li said that the defendant would be aiming at the low end market, while the plaintiff could still retain its share in the high end, and there is no competition at all.

45. Mr Wong referred to Wadlow op. cit. at 10-23 on evidence of actual deception and the general principle as stated by Millet LJ (as he the was) in Harrods v. Harrodian School [1996] RPC 697 :

“Evidence of actual confusion is always relevant and may be decisive.  Absence of such evidence may often be readily explained and is rarely decisive.  Its weight is a matter for the judge.”

46. Mr Wong pointed out that the trademarks now respectively registered in the names of the plaintiff and the defendant are identical.  The goods are either identical, where confusion will be presumed, or they are so similar, where the likelihood of confusion is bound to be found.  It will inherently lead to passing-off.

47. Mr Wong submitted that the registration in the name of the defendant would arm it with an instrument of fraud.  He referred to British Telecomunications PLC v. One In A million Ltd & ors [1999] FSR 1, per Aldous LJ at 18 :

“In my view there can be discerned from the cases a jurisdiction to grant injunctive relief where a defendant is equipped with or is intending to equip another with an instrument of fraud.  Whether any name is an instrument of fraud will depend upon all the circumstances.  A name which will, by reason of its similarity to the name of another, inherently lead to passing off is such an instrument.  If it would not inherently lead to passing off, it does not follow that it is not an instrument of fraud.  The court should consider the similarity of the names, the intention of the defendant, the type of trade and all the surrounding circumstances.  If it be the intention of the defendant to appropriate the goodwill of another or enable others to do so, I can see no reason why the court should not infer that it will happen, even if there is a possibility that such an appropriation would not take place.  If, taking all the circumstances into account the court should conclude that the name was produced to enable passing off, is adopted to be used for passing off and, if used, is likely to be fraudulently used, an injunction will be appropriate.

It follows that a court will intervene by way of injunction in passing-off cases in three types of case.  First, where there is passing off established or it is threatened.  Secondly, where the defendant is a joint tortfeasor with another in passing off either actual or threatened.  Thirdly, where the defendant has equipped himself with or intends to equip another with an instrument of fraud.  This third type is probably mere quia timet action.”

48. I find that there is sufficient evidence of threatened damage, or at least such likely damage to found a quia timet injunction.

49. The defendant has offered an undertaking :

(1) to inform the plaintiff 14 days before it intended to dispose of the subject trademarks;

(2) that the proceeds of sale from the disposal be held by the defendant’s solicitors for not less than three months;

(3) to inform the plaintiff seven days before confirmation of orders for any business concerning the subject trademarks.

50. Mr Wong submitted that the offer of an undertaking itself shows the need for an injunction, but its ineffectual terms to save the plaintiff from damage is no substitute for an injunction.

51. I find that the balance of convenience is decidedly in favour of granting the injunction.

Norwich Pharmacal order

52. The plaintiff also seek disclosure on affidavit the actual and/or prospective customer(s) and supplier(s) of the defendant insofar as they relate to goods bearing the impugned trademarks.  Li did refer to a few prospective deals concerning the machines to be produced in Dongguan.

53. An order can be made for discovery of identity of infringers of intellectual property rights (see Norwich Parmacal Co. v. Commissioners for Custom and Excise [1974] AC 133), and it extends to potential infringers (see Wellcome Foundation Ltd v. A-G [1992] 1 HKC 171).  At the interlocutor stage, there is no need to establish definitely commission of the wrongful act, nor even need to make out a strong case (see AXA China Region Insurance Co. Ltd v. Pacific Century Insurance Co. Ltd [2003] 3 HKC 1 per Deputy judge To).

54. By reason the matters stated in consideration of the injunction, I am satisfied that the plaintiff has made out a case for the discovery order.  Insofar as the order relates to goods bearing the impugned trademark, its scope is not too wide nor oppressive.

55. I make an order in terms of the summons.

(Submissions on costs)

56. I order that costs of and incidental to this application be to the plaintiff in any event.