Court of Appeal of New Zealand

Courtney J, Ellis J, Brewer J

Hearing: 2 March 2020, Judgment: 25 June 2020

[2020] NZCA 256

Intellectual property - Copyright - Infringement - Remedies – Damages – User Principle –  Features of User Principle – Licence would have been non-exclusive – Bargaining position of licensor – Relevance of licensee’s actual operating profits – Application of the 25 percent rule – Award substituted by appellate court – Principles governing appellate intervention

Facts [1]-[20]

This was the third appeal in a long running dispute concerning copyright in asparagus grading machinery.

In 2013 the appellants had been found by the Court of Appeal to have infringed the first respondent’s copyright in the designs for a cup assembly used in a machine for sorting and grading asparagus.  The infringing cup assembly was manufactured and sold to Geostel by a tool-maker and manufacturer, Napier.

The copyright designs were authored by Mr Michael Schwarz, who had also designed the asparagus grading machine in which the cup assemblies were first used. At the time of infringement, the copyright in the designs for the cup assemblies belonged to Mr Schwarz's company, Oraka Technologies Limited (‘Technologies’). At that time, however, the business relating to the Oraka asparagus grading machines and the cup assemblies was conducted by another company run (but not owned) by Mr Schwarz, Oraka Graders Limited.

In 2016, following an inquiry as to damages, the High Court awarded Technologies $4.1 million in damages (including interest).  In 2016 the Court of Appeal held that damages by a third party could not be awarded for breach of copyright.  The claim needed to be measured on the basis of a notional licence fee — being the amount that the parties would have agreed in return for permission to use the designs if they had negotiated at the time of the first breach of copyright (the “user principle”).  The matter was therefore referred back to the High Court.

In the High Court, the Judge applied the user principle and calculated a notional licence fee of $6.00 for each infringing cup assembly sold, giving a total damages award of $510,000.00. This decision was the subject of the appeal.

The issues on appeal were:

(a)      The correct approach to determining an appeal from a judgment fixing the quantum of damages

(b)      Whether the High Court erred in determining that the reasonable licence fee to use the owner’s copyright in the cup assembly was $6.00 per cup assembly, being a total of $510,000, and in particular, whether the High Court erred in:

            (i)        identifying Geostel rather than Napier as the licensee for the purpose of the notional negotiation;

          (ii)        finding that the licence fee should be assessed as if the notional licence holder was an exclusive licensee and that a premium should be assessed on that basis;

         (iii)        the weight it gave to the relative bargaining power of the notional licensor and licensee having regard to:

                          i.    alternatives available to the parties;

                        ii.     competition in the market for asparagus grading machines; and

                       iii.     the debt owed to Kamber by Technologies and

                       iv.    Technologies’ general state of insolvency at the relevant time

(c)       The reasonable licence fee payable in respect of each infringing use: and

(d)      Whether the High Court’s costs award in relation to the 2017 hearing should be set aside and reassessed by the High Court in light of the Court of Appeal's judgment.

Held allowing the appeal, quashing the High Court damages award and substituting a damages award of $47,000.

1. There were material errors in aspects of the High Court’s assessment of the evidence that warranted intervention on appeal [83]

The traditional threshold that trial judge’s assessment will only be disturbed on appeal if there has been some error of principle or the amount of the damages awarded was so high or so small as to make it, in the court’s judgment, an erroneous assessment, does not prevented appellate courts from intervening in appropriate cases.

This was an appropriate case for intervention because in the first instance the judge erred in her assessment of the evidence and this had resulted in a departure from the recognised process of judicial estimation based on the available indications [78]-[83].

General Tire and Rubber Co v Firestone Tyre and Rubber Co Ltd [1976] 93 RPC 197 at 214; New Zealand National Party v Eight Mile Style, LLC [2018] NZCA 596, [2019] 2 NZLR 352 referred to.

2. It was entirely open to the Judge to find that Geostel was the appropriate notional licensee [102],  but the Judge erred in the calculation because the notional licence would not have been exclusive [108].

Whether or not the First Appellant’s notional licence would have been an exclusive one was relevant to setting the notional fee [102], because the terms of any notional licence must reflect the actual infringement. Where the infringer enjoyed exclusivity in practice, the notional licence should accord with reality. Here there was another competing licensee in the form of Oraka Graders Limited (the second respondent) which did in fact, compete with the notional licensee throughout the notional licence period. The Judge’s failure to recognise this constituted a material error [108].

3. Oraka Graders Limited (the second respondent) would not have competed for the notional licence but, rather, have continued to operate (as it in fact did) under its implied licence at no cost [115].

Oraka Graders Limited was in fact already in possession of an implied licence, for which it was paying Technologies (the copyright owner) nothing. In any notional negotiation Geostel Vision Limited should logically have taken this status quo as its stepping-off point. This would logically diminish the price for a notional licence [115].

4. The debt owed by Technologies to Kamber was relevant and placed Technologies in a weak notional bargaining position [134];

At the time of the notional negotiation, Oraka Technologies Limited owed a debt of approximately $107,000 to Kamber Electronics Limited (‘Kamber’) (another company owned by one of Geostel’s owners, Mr Daynes). Geostel Vision Limited referred to a summary judgment obtained and said that it was relevant that, in the hypothetical negotiation, Kamber could have assigned the debt to Geostel who could have then used it to liquidate Technologies [132]. The Judge erred in finding that this would not have created substantial leverage for the notional licensee [134].

5. The licence fee should not have exceeded Geostel’s actual operating profits [149].

The High Court had used Geostel Vision Limited’s anticipated, rather than actual, profits because the Judge considered that to do otherwise would be to assess the notional licence fee with the benefit of hindsight.However, the “available profits” method used actual profits because it is assumed that the parties would have accurately predicted these profits when negotiating. Geostel Vision Limited’s overall actual operating profit (i.e. for the sales of the grading machines and the cup assemblies over the entire infringement period) was only $294,000 — considerably less than the $510,000 damages sum awarded.  While the Judge’s use of anticipated profits did not, by and of itself, involve an error of principle, it was nonetheless wrong to ignore Geostel Vision Limited’s actual profits in this case [149].

Kohler Mira Ltd v Bristan Group Ltd  (No 2) [2015] FSR 9; Ultraframe (UK) Ltd v Eurocell Building Plastics Ltd [2006] EWHC 1344 (Pat) referred to.

6. There was no obvious basis for the use of the 40 percent royalty figure and, in the absence of any other evidence, the 25 percent rule should have been used as a starting point [152].

It would in theory have been open to the Judge to regard the 25 percent rule as a starting point, rather than an upper limit, and to move upwards from there based on her assessment of the relevant factorsHowever, because the Judge had expressly rejected the use of the 25 percent rule, the choice of 40 percent award appeared to have been impressionistic and without an evidentiary basis.

Not even a generous application of the 25 percent rule could result in a licence fee that was 40 percent of either anticipated or actual sales [152]. The only evidence upon which a notional fee could be based is the evidence given by the expert witnesses, namely that the 25 percent starting point should be adjusted down to between three to five percent of Geostel Vision Limited’s projected profits or between two and 3.325 percent of sales [155]. This yielded a sum of:

(a)     between $38,250 and $63,750, if the Judge’s method of assessing gross profits was used; or

(b)     between $37,880 and $62,975 if sales were used.

Dodson Motorsport Ltd v Logiical Performance Ltd [2019] NZHC 918; (2019) 144 IPR 524 referred to.

7. Given the very limited territorial protection that the notional licence could afford (being limited only to New Zealand)  and given the finding that the licence would not have been exclusive, the Court felt unable to place the licence fee above the middle of the two ranges. A reduction in the damages award from $510,000 to $47,000 — from approximately $6.00 per cup to approximately 55 cents per cup — constituted an appropriate application of the 25 percent rule in this case.

8. The costs award in Technologies’ favour in relation to the 2017 High Court hearing was set aside, with the issue of costs for that hearing remitted back to the High Court to be reassessed in light of the Court of Appeal’s judgment.