Facts:

In 2016 the High Court (Duffy J) delivered a judgment finding that the first plaintiff was successful in its claim against ESR Group (NZ) Limited (ESR) for infringement of copyright in respect of the importation and sale of items of furniture.  The High Court further found that a border enforcement notice issued under s 136 Copyright Act 1994 was valid and that (pursuant to the notice) furniture imported by ESR comprised pirated goods and had lawfully been detained by Customs under s 140.

On appeal the Court of Appeal upheld some of the High Court’s findings but found that the second and the third plaintiffs were properly the copyright owners and entitled to enforce the copyright.  The Court of Appeal upheld the High Court’s findings that ESR was liable for secondary infringement as well as its findings as to validity of the border enforcement notice and the Customs detention of the furniture.

Duffy J came to consider the costs to be awarded in the High Court.  Of particular importance was the sum of $196,297.00 which (under an indemnity given to New Zealand Customs) the plaintiffs had been obliged to pay for the storage of five container loads of furniture held in a Customs controlled area pending the outcome of the trial and appeal.

A key issue was whether the storage costs were recoverable either as costs or disbursements in the proceeding.  ESR asserted that the storage costs could only be recovered as special damages.  ESR further claimed that, as the plaintiffs had not pleaded recovery of storage costs as special damages and had elected an account of profits as the remedy, the storage costs were irrecoverable.  The court noted [7] that if ESR was correct, then other copyright claimants that utilised the border protection measures, but elected an account of profits as their remedy, would have to bear the storage costs that flowed from enforcing their rights.

In the parties’ submissions they identified three mutually exclusive possibilities for characterising the storage costs:

(a)       special damages;

(b)       as being in the nature of costs of or incidental to the proceeding; and

(c)        as being a disbursement.

The judgment is reported only on the issue of storage costs.

Held:

(1)      The statutory border enforcement measures in Part 7 of the Copyright Act provide an effective and efficient procedure to ensure copyright ownership is protected.  All an owner need do is to give notice to Customs and once a s 136 notice is accepted, Customs provide the necessary surveillance and detention to ensure pirated items do not enter the New Zealand market to the detriment of the copyright owner.  Further, once legal proceedings are brought under Part 7, copyright owners’ rights are protected until final disposition through exhaustion of all appeal rights.  The regime operates to ensure that the local and international copyright owners have an efficient means of protecting and enforcing their copyright and New Zealand thereby discharges its international obligations as a signatory of the TRIPS Agreement [21].

(2)      However neither Part 7 nor the Regulations provided a mechanism for the recovery of storage costs incurred under the indemnity required by New Zealand Customs in reg 6 Copyright (Border Enforcement) Regulations 1994 [25].

Could storage costs be recoverable as special damages?

(3)      While the Courts have been alive to the difficulties of assessing the measure of loss in copyright infringement cases, the standard approach has been the compensatory measure employed in tort.  General law principles regarding recoverability of loss require the loss to flow directly and naturally from the infringement, and not be too remote [36].

Claydon Architectural Metalwork Limited v DJ Higgins & Sons Limited [1997] FSR 475 (HC); A-ONE Accessory Imports Pty Limited v Off Road Imports Pty Limited (No 2) (1996) 34 IPR 332 (FCA) referred to.

(4)      On this analysis a plaintiff’s storage costs as in this case did not fit squarely with the types of loss recognised as recoverable in damages for copyright infringement [37].

(5)      In the present case the plaintiffs would not have taken the steps under Part 7 of the Copyright Act but for a general concern that others might attempt to import pirated versions of their copyright works into New Zealand.  Here the part played by ESR in importing the pirated copies was too remote.  The more proximate cause of the loss was the plaintiffs’ decision to implement the statutory scheme which required the giving of an indemnity for costs to New Zealand Customs [40].

(6)      If ESR’s infringement were to be understood as a cause of the storage costs, then equally it could be claimed that legal costs would not have been incurred but for ESR’s infringement.  However, there was no suggestion that legal costs could be recovered as special damages [41].  Storage costs were too remote to be recoverable as special damages [44].  While the greatest portion of storage costs flowed directly from the plaintiffs’ decision to bring proceedings, the storage costs continue to accrue for the duration of the proceedings and on appeal.  The storage costs were therefore directly linked to the proceeding rather than to the costs caused by the infringement [45] – [46].

Boswell v Millar [2014] NZCA 314 at [50] applied; McElroy Milne v Commercial Electronics Limited (1993) 1 NZLR 39 CA referred to.

(7)      Storage costs do not resemble costs that are recoverable as special damages because they are known costs.  The requirement to expressly plead special damages reflects the principle that the losses are unexpected and unknown.  ESR knew storage costs would be likely to be incurred.  It knew its goods were being detained and knew it could seek release of the goods. (It had indeed taken that step early on but had been unsuccessful).  Storage costs resulting from an indemnity given under reg 6 can never be recoverable as special damages [48]; [50].

(8)      It is available to an importer to forfeit goods to the Crown under s 141A as a means of reducing the risk of facing a claim for reimbursement of an expensive storage bill.  This process had not been used [49].

Could storage costs be recoverable as costs?

(9)      The jurisdiction to award costs is found in s 51G Judicature Act 1908 [51].  Costs are in the discretion of the court under r 14.1 High Court Rules.  The word “costs” is not defined in the statute nor in the rules [52].  The costs regime indicates that the purpose of costs is to ensure the losing party makes a payment towards the winning party’s legal expenses [55].

High Court Rules 14.2(1)(a) and 14.2.(1)(f) referred to.

(10)   The phrase “costs incidental to a proceeding” in r 14.1(1) does not allow recovery of something other than costs arising from legal professional services [58].  The plain meaning of “costs” in r 14.1, even with the inclusion of the phrase “incidental to a proceeding” cannot be read to encompass non-legal costs like the storage costs.  To do so would entail a major departure from how the word “costs” is understood elsewhere in rr 14.1 and 14.2 [60].  Further, to read costs in r 14.1 purposively would be inconsistent with the scheme and purpose of the costs regime and do violence to the common understanding of costs in r 14 [61].

Could storage costs be recoverable as disbursements

(11)   The better prospect for a purposive reading lay with the meaning of “disbursements” in r 14.12.  Disbursements encompass non-legal expenses incurred out-of-pocket and/or incidental to the litigation process.  Seen in this way, disbursements are expenses associated with the costs of litigation but exclusive of the fees paid to the legal professionals. [64].  The categories of disbursements are not closed.  Here the largest portion of the storage costs were incurred because the plaintiffs chose to bring this proceeding.  Accordingly the storage costs were a direct result of the plaintiffs bringing this proceeding.  Without the proceeding there would be no detention, and therefore no storage costs in the sum now sought.  The court was satisfied that on the plain reading of “disbursements” the largest portion of the storage costs were a disbursement.  [65].

(12)   Had storage costs not qualified as a disbursement on a plain reading of the word, the court would have adopted a purposive reading that enabled storage costs to be claimed under this head.  To find otherwise would significantly reduce the effectiveness of the border protection measures in Part 7 [66].

(13)   The plaintiffs were entitled to recover the costs of indemnifying Customs for the storage costs less pre-litigation storage costs of ten days which should be subtracted from the sum sought [67], [97].