ORAKA TECHNOLOGIES LIMITED & ORS v GEOSTEL VISION LIMITED & ORS

High Court of New Zealand, Auckland, Hinton J

10 – 14 July 2017, 1 August 2017, 23 April 2018, [2018] NZHC 769

Copyright – damages – user principle – factors relevant to user principle – determining the proper licensee – licence fee set as if exclusive licence – Copyright Act 1994 (NZ)

Facts:

This decision arises out of a long-running copyright infringement action which has twice been to the Court of Appeal.  The question to be determined was the quantum of damages payable to the first plaintiff as copyright owner for infringing use by the defendants based on a notional fee or royalty (often known as the “user principle”).

During the 1980s Schwarz invented an asparagus grading machine (the Oraka Grader) with a unique cup assembly.  In 1993 he assigned copyright in the cup assembly to the first plaintiff Oraka Technologies (“Technologies”).  The defendants infringed copyright in the cup assembly from mid 2001 – March 2009 when copyright expired.[1]  The individual defendants incorporated the first defendant Geostel and through that vehicle started manufacturing and selling a grading machine (the Geostel Grader) in competition with the Oraka Grader. 

The Geostel grader incorporated a cup assembly that was a copy of a substantial part of Oraka’s cup assembly.  The infringing cup assembly was manufactured and sold to Geostel by the third defendant tool-maker and manufacturer, Napier. 

During the infringement period from mid 2001 – March 2009 the first plaintiff Technologies no longer manufactured and sold the plaintiff’s Oraka Grader.  It stopped trading in 1996 and instead from 1996 – 2001 the Oraka Grader was manufactured and sold by another company (Holdings) which was not party to the proceedings.  In early 2001 before the defendants infringing conduct commenced, Holdings itself ceased trading and the business of manufacturing and selling the Oraka Grader was carried on by the second plaintiff’, Graders.  Mr Schwarz was neither a shareholder nor director of Graders. 

Technologies granted an informal exclusive licence to Holdings then Graders but did not claim nor receive royalty payments.

Proceedings for copyright infringement were issued in 2005.  The net effect of a series of High Court and two Court of Appeal decisions was that in 2013 the Court of Appeal entered a liability judgment against all defendants in favour of Technologies as copyright owner.  The High Court then entered judgment against the defendants for $4.1million.  In a subsequent judgment the Court of Appeal by a 2-1 majority upheld an appeal against that decision and remitted the case back to the High Court to determine the quantum of damages payable on the basis of a notional licence fee for each infringing use from mid 2001 to March 2009 when copyright expired.

Held:

  1.    The user principle of damages operates as compensation by awarding to a successful plaintiff the benefit of a negotiated licence which the plaintiff lost when the defendant infringed its intellectual property [18].

General Tire and Rubber Co v Firestone Tyre and Rubber Co Ltd [1975] 1 WLR 819 followed; Gallagher Electronics Ltd v Donaghys Electronics Ltd (1991) 4 TCLR 344 (HC); Electroquip Ltd v Craigco Ltd (No 2) HC Auckland, CIV-2006-404-6719, 29 April 2010 referred to.

  1.    The relevant factors to this case distilled from the case law were [33]:

(a)       The hypothetical negotiation is a construct to identify a reasonable price that the defendant would pay for the use of the plaintiff's property.

(b)       The task is to identify the fee that would have been agreed, not what ought to be imposed.

(c)       The notional licensee should be the party who is the main beneficiary of the breach.

(d)       The parties are assumed to be willing, regardless of whether they would in fact have ever agreed to grant or take a licence.

(e)       The parties are assumed to have their actual characteristics, but they must make reasonable use of their respective bargaining positions.

(f)        The date of assessment is the date of commencement of infringement.

(g)       The fact that the licensor would not have wished to assist a potential new competitor is relevant.

(h)       Alternatives are relevant at least to the extent they were known at the time and are available on the facts before the Court.

(i)         Events after the relevant date are irrelevant except to the extent they are the best reflection of what the parties would have known or thought at the relevant time.  It is useful to look at the eventual outcome and consider whether or not that is a useful guide to what the parties would have thought at the time of their hypothetical bargain.

Force India Formula 1 Team Limited v 1 Malaysia Racing Team Sdn Bhd [2012] EWHC 616 (Ch); 32Red Plc v WHG (International) Ltd [2013] EWHC 815 (Ch) followed.

  1.    A three step process is required in order to assess the licence fee [34]:

(a)       To assess the total number of infringements – here the total number of cup assemblies manufactured by Napier for Geostel;

(b)       To estimate the notional licence fee to be applied to each item;

(c)       To fix loss by multiplying the number of infringing items by the notional licence fee.

  1.    The notional licensor was Technologies [53].  The proper licensee was Geostel, even though Napier was the manufacturer of the infringing cup assembly.  It was in effect a middle man.  On this basis Napier’s profits or           otherwise were not relevant and the question was what would Geostel reasonably pay [55]. 

Force India Formula 1 Team Limited v 1 Malaysia Racing Team Sdn Bhd [2012] EWHC 616 (Ch) referred to.

  1.     The date of assessment was mid 2001 when infringement commenced [57]; [102].
  2.     The notional negotiation would be on the basis of an exclusive licence [64].
  3.     Alternatives for licensor: As to the first plaintiff’s claim that Grader’s lost profits should be, if not the basis for the user claim, then the justification for it, the notional “negotiation” was between the copyright owner                Technologies and Geostel, not Graders and Geostel.  Technologies was not trading [72].
  4.     Alternatives for licensor: The defendants were neither in a high stress position nor had strongly viable alternatives as at mid 2001, although the ability to design an alternative cup placed some curb on the licence fee            that would be agreed by Geostel [88].
  5.     The overall weight of the evidence was that the cup assembly was a valuable part of the machine and in extensive use, including replacement parts [92].  The licence fee would not be a simple matter of a small                    percentage of the cup assembly profit [95].
  6.     The quantum of the licence fee was not limited by the actual very modest final operating profit made by Geostel from its infringing activity overall.  The court would proceed on the basis that, as at mid 2001, Geostel            would have considered there was ample room for a fee on the cups that was high, relative to the value of the cup.  A licence fee would have seemed relatively inconsequential as a line item.
  7.     An argument for apportionment to reflect that parts of the cup did not infringe, was not relevant.  This was not a case of assessing a royalty for a machine and then looking at the part for which there is copyright but            rather the reverse [116].  The cup assembly was an important part and there should not be apportionment [125] – [126].
  8.     A reasonable licence fee was $6.00 per cup assembly making (for a total of 85,000 infringing cup assemblies) a damages figure of $510,000 [129] and [132].

 

[1]           S 75 Copyright Act 1994 provides 16 years from first industrial application anywhere in the world.

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