Intellectual Property Development Corp Pty Ltd & Anor v Primary Distributors New Zealand Ltd & Ors
High Court of New Zealand
25-27 May, 9 December 2010
Until March 2005, cling film wraps and other domestic products bearing the trade mark HEFTY were sold in New Zealand by Cartigny Pty Limited (“Cartigny”). Cartigny was the owner of three New Zealand registered trade marks for HEFTY through its New Zealand subsidiary. The first defendant, Primary Distributors New Zealand (“PDNZ”) acted as agent in New Zealand and sold HEFTY products to one of the major New Zealand supermarket chains. It did not sell to the public.
In March 2005, Cartigny was placed in receivership in Australia. PDNZ entered into a trade mark licence with the receiver for a period of three months enabling it to sell through remaining stocks of HEFTY products purchased from Cartigny NZ. PDNZ agreed that on expiry of the licence it would cease all use of the trade marks and return all unsold trade marked product. On 1 April 2005, Cartigny was placed in liquidation and its assets, including the trade marks, went up for sale. PDNZ put in a bid and while it waited for an answer, decided to purchase HEFTY product from a source in Thailand.
At the end of the three month licence, PDNZ continued to sell stock acquired from Cartigny NZ (in breach of the agreement) and to import and sell stock of HEFTY branded product from Thailand (in breach of the trade mark).
In December 2005, the administrator of Cartigny sold the New Zealand trade marks to the plaintiff IPDC. During the first half of 2006, until it could arrange a new trade marked product, PDNZ continued to import and sell HEFTY labelled product. IPDC took no issue with this until July 2006 when it wrote to PDNZ requiring an undertaking and demanding financial compensation.
In February 2008, at a liability trial, IPDC relied on breach of registered trade mark, breaches of the Fair Trading Act and passing off. It was accepted during the trial by PDNZ that there had been breaches of the registered trade mark. The defendants accepted too that the plaintiffs were entitled to an account of profits but argued that PDNZ was not obliged to account beyond January 2006. That was upheld by the Court but overturned on appeal by the Court of Appeal which remitted the case back to the High Court to deal with:
- An account of profits for the extended period.
- A claim by the plaintiffs for disgorgement of profits by the directors of PDNZ.
- A claim for damages for passing off which it was said was still a live issue.
At this further trial, a series of issues relating to scope of profits, the account of profits and liability fell to be determined.
(1) The passing off cause of action had been properly pleaded and not withdrawn as a claim. The cause of action had not been waived or abandoned . It had not been addressed because of the admission as to trade mark infringement under the Trade Marks Act. There was no prejudice to the defendants  and, given the absence of any prejudice or abuse of procedure, IPDC could continue to rely on it .
(2) Cartigny had built up a significant goodwill in the HEFTY trade mark . Cartigny had assigned all its intellectual property rights and goodwill to IPDC and it was therefore open to IPDC to pursue a claim for passing off , . To establish passing off it was not necessary for a plaintiff to prove that the ultimate purchasers who were likely to be misled necessarily knew the name of the plaintiff. It was not necessary for the packaging to refer to the plaintiff’s name. All that was necessary was that the public recognise the plaintiff’s name as denoting a particular trade source .
(3) The plaintiff did not need to prove that confusion had actually occurred. If the court was of the opinion that there was a strong probability of confusion in the normal course of trade that was sufficient. PDNZ was appropriating the goodwill of the owner of that goodwill. The fact that the immediate purchaser from PDNZ (the Foodstuffs NZ supermarket chain) may not have been deceived was irrelevant. PDNZ had put goods into the market which were likely to deceive ultimate purchasers of consumers . There was therefore a misrepresentation and that was likely to cause damage to IPDC. The cause of action was proven , .
Should there be an apportionment of profits: the “Middleman” approach
(4) Apportionment is usual in trade mark cases as it follows from the restitutionary approach, but in relation to passing off, the “middleman” concept is an exception to the usual apportionment approach. The doctrine is based on pragmatism. It is not usually possible, when there has been a sale to a middleman, to prove the effect of the misrepresentation on actual sales by the middleman to retailers and to the public. The doctrine resolves this problem by anomalously, given the restitutionary nature of an account of profits, assessing profits presumptively at the time of the middleman’s sale .
(5) Despite conceptual distinctions between trade mark infringement and passing off, there was no reason not to apply the middleman doctrine to breach of trade mark. Both passing off and trade mark infringement can occur innocently. The successful plaintiff had a right to damages if the elements were proven, whatever the defendants’ state of mind. The misrepresentation did not need to be knowing or fraudulent. The problems of proof applied equally to both causes of action. Both could involve the difficulty that the passing off or infringement occurred in a supply to a wholesaler who may or may not be labouring under a misrepresentation, but who then sells to unknown members of the public who may or may not be influenced by the false mark. The pragmatic consideration that lay behind the middleman doctrine applied just as much to breach of trade mark. If the infringing mark was on the goods sold to the middleman, it would be impossible to establish exactly which end customers relied on it when they purchased. The requirement to disgorge all profits on the sale to the middleman resolved the dilemma of proof  and .
(Obiter) if apportionment were to apply, it was not possible to say with any certainty what portion of the ultimate sales would have turned on the display of the HEFTY brand for the Court to offer a clear and principled analysis leading to an end figure , , and . However, if required, the Court would have fixed the profits attributable to the brand resulting from customer reliance on it at 10% of sales actually achieved i.e. $33,274.
Were the directors jointly and severally liable for breach of trade mark and passing off
(6) Directors of a company may be liable with the company as joint tortfeasors if the actions of the directors are identified with those of the company itself as representing its mind and will. Where a director or employee exercises control over a particular operation or activity, liability will follow .
(7) The director defendants had admitted liability for a breach of trade mark and had consented to orders for them to account for profits . As to passing off, the Court was satisfied that both directors ran PDNZ and made the important decisions together. They were the sole directors and effectively operated as a partnership with shared decisions. The Court was satisfied that both were involved in the decision to market HEFTY products despite the fact that they did not have the trade mark and were not authorised to do so. Both participated in the marketing process and were jointly and severally liable with PDNZ .
Were the directors personally liable to account for the profits they made?
(8) The directors were not personally liable to account for the profits they made as a result of the infringing conduct in addition to being jointly and severally liable for the amounts payable by PDNZ. If the plaintiff were to obtain a share of the directors management fees, it would get more than PDNZ’s profits and the directors would be doubly penalised [91-2]. The management fees were not profit in the usual sense but rather a payment for services rendered. To award a payment of these would go beyond restitution and involve a punishment/profit factor [92-3]. Further, this was a new claim not advanced at trial or alluded to in pleadings .
Were PDNZ’s storage and destructions costs and overheads for the last two months a legitimate deduction?
(9) The costs of storage, destruction and the overheads incurred during the interim injunction period were not proper deductions. It was the profit on sales that constituted the profit. Losses incurred at a point later to the sale, which arose from the wrongful accumulation of product for later intended unlawful sales, were not deductible. Those losses were just an added misfortune that must be suffered by the wrongdoer. [101-2]
The quantum of overheads to be taken into account in determining the profit made by PDNZ
(10) The need to make allowance for general overheads attributable in part to the manufacture or sale of the infringing product was consistent with the general restitutionary concept behind an account of profits. 
(11) General overheads, if they were fairly attributable to the manufacture or sale of the infringing product, could be deductible even if they were not specifically referable to that manufacture or sale. The issue was whether the overhead was fairly attributable to the manufacture or sale of the infringing product [108-9].
(12) The onus was on the defendant to establish that any items of cost were incurred in relation to the sale of the HEFTY branded product .
(13) As to individual claims:
- merchandising expenses were a properly allowable overhead .
- overheads for advertising, debt recovery charge, goodwill, amortisation, interest and loss on sale should not be deducted .
- management fees of $328,100 were properly deductible. If PDNZ were not allowed to claim for management fees legitimately attributable to the sale of a HEFTY product, it was effectively being penalised. There was no basis to penalise PDNZ from recovering these expenses simply because its shareholder/directors did the work [118-9].
- the appropriate share of overheads attributable to the sale of HEFTY product was 12% leaving a net profit figure of $137,184.88 .
(14) Simple interest at 7% per annum was awarded. The Court was not satisfied that a profit equal to or greater than simple interest had been made by PDNZ on its gains from unlawfully trading HEFTY products or indeed that that had been used as working capital for any further profits.