Facts

This was a judgment on causation and quantum. In these proceedings, the plaintiffs (all part of the ABB Group) had sued the defendant for losses sustained as a result of the defendant’s distribution of a miniature circuit breaker (mcb) sold under the brand name BM. 

Until 2004, the New Zealand market for mcbs was dominated by the plaintiffs’ mcb product, the S91, which was designed by the third plaintiff and manufactured by the second plaintiff.  Prior to January 2004, the defendant, NZI, had distributed the plaintiffs’ S91 product.  However, the first plaintiff, ABB NZ, wished to increase sales of its other low voltage products and believed that, if it took over the distribution rights for the S91 with effect from 1 January 2004, it could achieve this aim.  The defendant, which had made a sizeable profit from the S91 during the 14 years it had been distributor, was not about to give up its market without a fight.  It engaged a Chinese manufacturer to produce a copy of the S91, branded it BM and began distributing it from 1 January 2004.

In an initial judgment on liability, the judge found that:

(a)    First cause of action under Fair Trading Act

The appearance of the BM coupled with the manner in which it was distributed amounted to a misrepresentation as to the commercial origin of the product and a breach of ss 9 and 10 of the Fair Trading Act;

(b)    Second cause of action under Fair Trading Act

In both the labelling and in communications with its customers, the defendant had misrepresented that the BM was the equivalent to the S91 in terms of safety and suitability for use in New Zealand and in terms of its short-circuit capacity, when it was not.

(c)    Copyright Infringement

In copying the S91, NZI had breached the third plaintiff’s copyright in three technical drawings which depicted modifications to the S91.

Separately, in the liability judgment, the Court found that the plaintiffs could not succeed in a passing off action because goodwill in the S91 was owned by the defendant (by dint of the way in which the S91 had been labelled and presented to the market in the period up to 2004). 

In this hearing, issues arose as to the calculation of damages under the Fair Trading Act causes of action.  The issues which arose were:

1. Had the plaintiffs shown that their losses were caused by the defendants’ contravening conduct?
2. In determining the causative influence of the defendant’s contravening conduct should the breaches found in relation to each of the Fair Trading Act causes of action be considered cumulatively or separately?
3. Should damages under the Fair Trading Act reflect the hypothetical possibility that the defendant could have come into the market with a legitimate product?
4. Should the plaintiffs be entitled to recover in respect of misrepresentations arising from the appearance of the BM when they did not own the goodwill in the S91?
5. Were the losses claimed by the plaintiffs in respect of non-S91 sales a foreseeable consequence of the defendant’s breach?
6. Was it appropriate for the plaintiffs, as a rival trader, to receive a large monetary award which might have the effect of stifling competition under legislation designed primarily to promote the interests of consumers?

In the separate copyright cause of action, the third plaintiff had made an election for an account of profits.  The issues which arose in respect of the breach of copyright claim were:

1. Should the defendant be required to account for all of the profits it made from the BM or only part of them, on the basis that the copyright infringement related to only a small number of the components making up the BM?
2. If the profit were to be apportioned, what was the proper method of determining the extent to which the defendant should account for its profit?
3. How could the risk of a double recovery by the third plaintiff, as a result of the damages awarded under the Fair Trading Act, be avoided?
4. Should the account be undertaken by the Court or by an accountant acting in accordance with the directions from the Court?

Held:

Fair Trading Act: Generally

(1)    S43 Fair Trading Act 1986 confers on the Court the power to order a person guilty of contravening conduct to pay the amount of loss or damage that the plaintiff has suffered “by” the contravening conduct.  There must be a causal link between the loss claimed and the contravening conduct.  In considering the loss caused, the Court will look at the all the causative factors impacting on the loss.

Cox & Coxon Limited v Leipst [1999] 2 NZLR 15 followed.  Foseco New Zealand Limited v Cumberworld Contracting Limited (1997) 6 NZBLC 102, 033 referred to.

(2)    The plaintiffs had asserted two distinct types of contravening conduct and the Court’s findings were directed to the cumulative effect of relevant acts pleaded in respect of each.  That being the basis of the liability finding, it was necessary to make a broad assessment of the causative influence of the two types of conduct.

(3)    The inquiry into what the plaintiffs’ position would have been but for the breach may require consideration of what the outcome would have been had the defendant acted lawfully (the so called “counterfactual”). 

Cadbury Schweppes v FBI Foods [1991] 1 SCR 142; The United Horse-shoe and Nail Company Limited v Stewart & Company Limited(1888) 5 RPC 260; Gallagher Electronics Limited v Donaghys Electronics Limited (1991) 3 NZBLC 102,210 referred to.

(4)    There were two alternative counterfactuals.  One was for the defendant to rebrand the BM and offer it for sale in a form that did not breach the Fair Trading Act.  The other was for the defendant to re-enter the market with another legal product (the GE product).  On either scenario the defendant would not have been in a position to sell the BM until late 2004/early 2005 - a date which the Court fixed at 1 January 2005.  Had the defendant not breached the FTA, the plaintiffs’ S91 would have dominated the market throughout 2004 but would have faced competition from a product distributed by the defendant from early 2005.  The defendant would have faced some difficulty in recapturing its previous customers but the figure it would have achieved would be 60%. 

First Fair Trading Act cause of action: Misrepresentation as to commercial origin

(5)    The Court was not constrained by the limitations imposed on a plaintiff in a passing off action when assessing the loss caused by misleading and deceptive conduct under the Fair Trading Act. Goodwill is not required in order to prove a breach of the Fair Trading Act and it would be illogical if the absence of goodwill were to be a barrier to proving causation and loss.  If sales had been lost because potential customers believed erroneously that they were purchasing the product (the BM) that they had been accustomed to purchasing (the S91) because of similarity in appearance and packaging, then the requisite causal nexus will have been proven.  Because of the widespread recognition of the S91 in terms of its appearance (both labelling and packaging) it was undeniable that the plaintiffs would have benefited from having the sole right of distribution to the product had its marketing been unaffected by the presence of the misleadingly similar BM. 

Second Fair Trading Act cause of action: misrepresentation as to suitability for purpose

(6)    As to the claim that relevant sections of the public were not concerned about whether the BM was rated 3kA and would have bought the BM even if they had been labelled 1.5kA: the Court’s liability finding was that not only could the BM not be relied on to interrupt a 3kA current but also was unreliable even at much lower currents including 500A and 1.5kA. Further the representations were not made solely on the label.  However, having regard to the evidence overall a reduction of 10% would be a reasonable allowance for the fact that some people might have purchased the BM anyway out of preference for dealing with the defendant. 

(7)    The plaintiffs would be awarded:

(a)    The full amount of their claimed loss for the 12 month period 1 January 2004 - 1 January 2005

(b)    50% of their loss for the period 1 January 2005 to 1 January 2006 to reflect the amount of time it would have taken the defendant to recapture the market share lost through being out of the market;

(c)    40% of their loss for the period 1 January 2006 to 20 September 2006 (judgment) to reflect that eventually the defendant’s better distribution network would have resulted in a slightly greater market share.

Non S91 losses

(8)    Any losses that the plaintiff sustained for lost sales of other non-S91 low-voltage products were not a foreseeable consequence of the defendant’s conduct.  There was no evidence on which the Court could conclude that the plaintiffs would have had a better chance of expanding their low-voltage product if the S91 had not faced competition from the BM. 

Gerber Garment Technology Inc v Lectra Systems Limited [1995] RPC 383; [1997] RPC 443 (CA) distinguished.

Is the effect on competition in a market a consideration disqualifying relief?

(9)    As to the suggestion that in granting relief under the Fair Trading Act, the potential effect on competition in a market should be a consideration, these sentiments did not appear to have been adopted in any subsequent case. They were inconsistent with the plain wording of s43 Fair Trading Act which clearly allows for loss sustained by one trader at the hands of another to be compensated.  While the Fair Trading Act is unquestionably consumer-oriented legislation and injunctive relief under s41 is probably the most commonly sought relief in “rival trader” cases, if Parliament had wished to limit monetary compensation being paid to a competitor, s43 would have given that indication.  Further, compensating for such loss is ultimately likely to be benefit consumers by providing a financial disincentive for unethical traders to act in a misleading and deceptive manner. 

Dissenting comments of Thomas J in Neumegen v Neumegen & Co.[1998] 3 NZLR 310, 323-324 not followed.

Defence of illegality

(10)    The defence of illegality (based on the maxim ex turpi causa non oritur actio) does not depend on any element of causation. It is a policy response to unworthy conduct by a plaintiff whose loss would otherwise be compensated.  There was no reason  that the defence ought not be available to a claim under the Fair Trading Act.  The public policy concerns raised through unworthy conduct by a plaintiff claiming under the Fair Trading Act were no less than those raised in a claim to a claim for breach  of contract or tort. 

Brown v Dunsmuir [1994] 3 NZLR 485; Euro-Diam Limited v Bathhurst[1990] 1 QB 1 (CA) referred to.

(11)    The claim now used to sustain the defence (i.e. that the plaintiff’s S91 had been in the market unlawfully since January 2004) was not raised on the pleadings.  It was not put to any of the plaintiff’s witnesses in cross-examination.  Further, because this was not an issue the Court had not made any relevant finding [85].  There was insufficient evidence on which to properly determine the seriousness of any breach by ABB. There was insufficient evidence in which to determine the defence of the illegality.  The defendant would therefore not be allowed to raise the defence now.

 Copyright cause of action

(12)    Where both infringing and non-infringing parts play an essential part in the function of the product in question and, where an account of profits is sought, apportionment is appropriate (provided that there is some evidence on which to make an assessment of the relative contributions of the infringing and non-infringing parts of the product).  In this case an equitable result required apportionment and there was evidence on which the Court could make an assessment of what apportionment shall be made. 

Colbeam Palmer Limited v Stock Affiliates Pty Limited (1968) 122 CLR 25; Peter Pan Manufacturing Corporation v Corsets Silhouette Limited[1963] 3 All ER 402; Dart Industries Inc v Décor Corporation Pty Limited (1993) 26 IPR 193; The United Horse-shoe and Nail Company Limited v Stewart & Company Limited (1886) 3 RPC 139; Sheldon v Metro Goldwyn Pictures Corp (1940) 309 US 390; Celanese International Corp v BP Chemicals Limited [1999] RPC 203; Imperial Oil v Lubrizol [1996] 71 CPR (3d) 26 referred to. 

(13)    Where, as in this case, the product comprised many components none of which was especially expensive and all of which operated in unison, the relevant parts were best viewed on the basis that the value of the infringed parts lay in co-operation and interaction with the other parts.  The Court must assess the value of the infringed drawings in terms of their functionality in the context of all the other components that made up the S91 i.e. the other modifications that were not the subject of copyright and the unmodified parts of the S91.  While the modified drawings (infringed) were highly significant) without them the S91 would not comply with the international standard and could not be manufactured in its current form, the components that remained the same (not covered by copyright) also needed to be taken into account. Overall the significant modifications (the infringed portion) comprised about 15% of the overall components.  Accordingly that was the proportion of the profit that the defendant was liable to account for over the relevant period. 

Double recovery

(14)    The apportionment the Court had made as to account of profits due from the defendant, meant that the defendant retained most of the profit made from the BM.  In comparison, the damages awarded under the Fair Trading Act had only been slightly reduced to recognise the likelihood that the plaintiffs would have faced legitimate competition from the defendant.  This meant that rather than the possibility of double recovery by the third plaintiff, the risk was one of unjust enrichment of the defendant.  Counsel should have the opportunity to consider this issue before the Court provided directions as to the basis in which the account was to be taken.

House of Spring Gardens Limited v Point Blank Limited [1985] FSR 327. 

The taking of the account

(15)    In this case it was neither necessary or appropriate that the Court take the account.  Provided the Court gave adequate directions as to what approach was to be taken, the actual account was best taken by an accountant.