Dracco Netherlands B. v. V. Simba Toys Gmbh & Co. Kg

HCA 304/2014

[2025] HKCFI 5108

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 304 OF 2014

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BETWEEN

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J U D G M E N T

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I. INTRODUCTION

1.By a Licensing Agreement, Dracco licensed Simba to manufacture and distribute “Filly” toys from 1 January 2011 to 31 December 2013 in the Pan-Europe market. The Licensing Agreement provided for the payment of royalties by Simba to Dracco. The arrangement did not end happily.  Disputes arose as to the calculation of royalties with the result that each party purported to terminate the Licensing Agreement on account of the other’s alleged material or repudiatory breach. Dracco now seeks an audit or account of the products sold and the royalties paid by Simba. Dracco contends that there has been a substantial under-declaration by Simba of the royalties payable. Simba denies any under-declaration and says that the time for any audit or account is long past. Each party complains that the actions taken by the other, following the wrongful repudiation of the Licensing Agreement, have significantly harmed its business.

II.  DISCUSSION

2.The parties have helpfully identified a List of Issues for the court to consider as means of resolving their disputes. I therefore propose to structure this Discussion section around those issues. 

A.  Issue 1: Has there been a mis-categorisation of Filly products by Simba in the calculation of royalties?

3.Clause 1f)  of the Licensing Agreement establishes different royalty rates for three categories of goods (respectively Category A, Category B and Category C). For Category A, the royalty rates are 11% for goods sold wholesale and 13% for goods sold FOB.  For Category B, the royalty rates are 18% for goods sold wholesale and 20% for goods sold FOB. Category B goods thus command a higher royalty than Category A goods.  There is a dispute between the parties on whether certain products fall within Category A or Category B.

4.Exhibit A to the Licensing Agreement defined the three categories of products.  Category A comprised: “Toys, except all kind of figurines + accessories and playsets for such”. The description of Category A added:  “A more detailed product list to be finalized”. But no detailed product list ever materialised. Category B comprised: ”Playsets for figurines including houses, palaces, carriages, etc., except all kind of figurines and such products where the figurines are the main content (incl. collection cases/tins, advent calendars, blister sets with figures etc)”. Category C comprised only two products: “Filly Tower and Palace as per below reference photos (outlook may vary)”. Exhibit A included photographs of the two Category C products and the evidence before me was that the parties determined whether a product came within Category C solely by reference to such photographs. Finally, Exhibit A included the following notes:

•   Figurines for all products will be supplied by Licensor.

•   Licensor may still offer playsets to the Licensee, which Licensee may at sole discre[t]ion accept or refuse to purchase.

•   All products to be approved by Dracco. Certain creative playsets may cross over in stationery line.

5.Simba submits that Category B covers figurines supplied by Dracco, while toys (including figurines not supplied by Dracco)  come with Category A.  Dracco’s position is that all playsets with figurines (whether or not supplied by Dracco)  should be classified as Category B. There is no dispute between the parties that plush toys (described in the evidence as “cuddly” toys)  come within Category A.  The question is whether figurines (in particular, vinyl figurines)  not supplied by Dracco but developed by Simba fall within Category A or B. 

6.In my view, the reference in Exhibit A to figurines for all products being supplied by Dracco as licensor, plainly means that to come within Category B a figurine must have been supplied by Dracco. Accordingly, a figurine not supplied by Dracco, but developed by Simba, would fall within Category A.

7.On the evidence, the parties developed the idea of a Filly vinyl horse (later called Filly Beauty Queen)  in July 2010 when royalties were only paid on the basis of a single category.  This single category found its way to the parties’ Deal Memo signed in October 2010.  This single category eventually became Category A in the Licensing Agreement with new Categories B and C being added.  The implication of this history is that products that were in the single category of the Deal Memo before the Licensing Agreement did not change in their classification, but instead continued as Category A products under the Licensing Agreement.

8.A minor dispute between the parties on categorisation is whether the Filly Unicorn Rainbow Tower and the Filly Unicorn Fantasy Castle constitute Category C products as Dracco contends.  Simba now accepts that Dracco is correct in this respect.

B.  Issue 2: How was the TV promotion discount in the Licensing Agreement to be applied?

9.Under Clause 1f)  of the Licensing Agreement, Simba was entitled to deduct 3% from licence fees “for sales turnover generated for a specific product in Category B related to a TV-promotion for this product, and invoiced before the start of such TV-promotion”.  Thus, to qualify for the 3% deduction, a product had to come within Category B and had to be invoiced before the start of a relevant TV promotion.  The dispute between the parties is whether the deduction is country-specific. In particular, would a TV promotion in one European country enable the sale of the same product in a different European country to qualify for a discount?

10.The Licensing Agreement has no express provision on whether the deduction is country-specific. But, according to Simba, read in context, the 3% deduction was not intended to be European-country specific. This (Simba argues)  is because (1)  the most important markets for toys in Europe are Germany, Austria and Switzerland, (2)  the three countries are German-speaking, and (3)  TV promotions in one European country will be readily accessible in other European countries. I am unable to agree.  However important Germany, Austria and Switzerland may be as toy markets, there are many more countries in Pan Europe and there are many more languages spoken in Pan Europe than German. In those circumstances, in the absence of clear expression, it would be odd to treat the parties as having intended that a TV promotion of a toy in a German-speaking country would enable the equivalent toy sold in a non-German European market to qualify for the 3% deduction.

C.  Issue 3: Was there a discrepancy between figurines supplied and playsets sold?

11.Dracco identifies a substantial gap between the 2,075,540 figurines which it supplied to Simba through Draco Macau and the 1,425,038 units of playsets sold by Simba as gleaned from Simba’s royalty reports. Dracco says that the difference of 650,502 figurines over the number of playsets calls out for an audit. 

12.Simba contends that Dracco failed to include stock held by Simba as of 31 December 2013 and did not take account of stock destroyed by Simba. Much of Simba’s inventory and records were stored with Whole Kind Industries Ltd in Mainland China. Whole Kind was wound up in 2013 and Simba lost the products and records kept by Whole Kind.  Simba initially estimated that 333,866 figurines were lost thereby. Subsequently, Simba reduced its estimate to 145,134 figurines. According to Mr. Andreas Jürgen Schmitt of Simba, the reduction:

was due to two things. First, it [that is, the larger estimate] included stock in our warehouses and those of our subsidiaries. Second, it included the fact that some customer special items included multiple figurines. We overlooked these two things due to time pressure we were under when preparing the defence. To Simba, the second set of estimates and calculations was the correct one.

13.The problem is that, even if I accept Mr. Schmitt’s evidence on the reduced estimate in relation to Whole Kind, a significant portion of the gap identified by Dracco remains unexplained.  It therefore seems to me that some sort of accounting or auditing exercise needs to be carried out in respect of the discrepancy. See further the discussion in section O below.

D.  Issue 4: Did Simba adopt incorrect royalty rates?

14.Dracco observes that Simba has not been consistent in its classification of figurines, sometimes treating them as within Category A, while at other times classifying them as belonging to Category B.  In some cases, Simba treated Category C as Category B products. What emerged from the evidence at trial, however, was that the parties had reached a tentative agreement to treat as Category B products, figurines previously classified by Simba as Category A goods and to do away with Category C altogether.  In anticipation of the agreement being signed, Simba prepared royalty statements using the tentatively agreed categorisation.  However, the agreement was never signed or finally agreed, accordingly Simba then issued debit notes adjusting the higher royalties paid on the relevant products downwards to the applicable Category A or Category C levels. 

E.  Issue 5: Has Simba failed to pay licence fees for the 1^st quarter of 2014?

15.Dracco estimates licence fees of €655,969.60 to be due from Simba for the 1^st quarter of 2014.  No explanation has been given as to the derivation of that amount.  I therefore am unable to accept the same.

16.Simba did not send an official royalty statement for that period. But Simba eventually produced a report showing licence fees of €188,703.78 to be due.  However, Simba has not paid the latter amount, arguing that the same is extinguished by its counterclaims in these proceedings.  See further section P below.

F.  Issue 6: Was there a fixed royalty rate for Category C products or was the royalty rate based on a ratio between the Suggested Retail Price (SRP)  and the unit rate at which the products were sold?

17.On 14 April 2011, Mr. Henrik Andersen of Dracco emailed Mr. Thomas Röttenbacher of Simba in relation to Category C products: “As agreed previously the licence fee is made considering the agreed retail pricing, so if this changes, it would only be fair that it also changes the license, so we suggest to keep the existing wording.” Mr. Röttenbacher emailed back: “Understand your point and agree as well, but as you know, we are legally not allowed to speak about Retailprices, so that's why we need to keep this out of the contract.” 

18.On the basis of the foregoing exchange, Dracco maintains that there was an agreement or “package deal” to charge a variable royalty rate for Category C items, based on the SRP for such items.  Dracco says that there has therefore been an underpayment of royalties due on Category C products.

19.However, Mr. Röttenbacher is adamant that, far from agreeing rate, he was insisting that the proposal of a variable rate could not and should not form part of the contract (“we need to keep this out of the contract”).  Mr. Röttenbacher accepts that, English not being his first language, he may have expressed himself badly.  But, as far as he was concerned, it would have been illegal under EU law to tie the royalty rate for Category C goods to the SRP for the same.

20.I am not persuaded that there was an agreement to charge royalties for Category C products in line with the SRP for the same.

21.Although the Licensing Agreement refers to the document having been entered into on 10 February 2011, in actuality the document was not signed by the parties until May 2011. The 14 April 2011 email exchange thus took place while the terms of the Licensing Agreement were still being negotiated and had yet to be finalised. This fact is apparent from Mr. Henrik Andersen’s 14 April 2011 email which comments on what the wording should be in specific provisions of the Licensing Agreement. Thereafter, as executed in May 2011, the Licensing Agreement included an “Entire Agreement/Amendment” term in its Clause 16:

This Agreement constitutes the entire agreement between the Parties with reference to this matter, and supersedes all prior agreements written or oral. This Agreement cannot be amended except by written instrument signed by both Parties.

It seems to me that the entire agreement clause should be taken at face value as meaning what it says.  Assume (which I doubt)  there was some sort of prior agreement or “package deal” reached between Mr. Henrik Andersen and Mr. Thomas Röttenbacher on 14 April 2014 which tied the royalty rate for Category C with the SRP for the relevant goods.  Such agreement would have been superseded and excluded from having effect by (1)  Clause 16 and (2)  the flat royalty rate for Category C products agreed in the Licensing Agreement as finally signed in May 2011.

22.For completeness, I note that, in any case, I have not seen any evidence that there was a change in the SRP of Category C products at any material time.

G.  Issue 7: Were incorrect price discounts and deductions applied in calculating licence fees?

23.Under Clause 1f)  of the Licensing Agreement, royalties are payable as a percentage of:

all sales turnover, which the Licensee generates for Products sold, before any deduction whatsoever (Including, but not limited to, any discounts, commission, bonus arrangements, administration/ distribution fees etc, return products or any other costs relating to the Licensee sales and distribution of the Products).

24.Clause 10a)  on “License Fee; Guaranteed Amount” further stipulated:

In consideration of the License granted hereunder, the Licensee shall pay the License Fee as defined under Sec.1.f)  of this Agreement to the Licensor. The net income Invoiced shall be the price at which the Products are sold to wholesale and retail traders, less the statutory value-added tax. No further deductions (including, but not limited to, any discounts, commission, bonus arrangements, administration/ distribution fees etc, return products or any other costs relating to the Licensee sales and distribution of the Products)  shall be permissible. The License Fee calculated on the basis of this computation shall be payable plus the statutory value-added tax, If VAT is applicable.

25.From these provisions, it seems clear that royalty is payable based on the invoiced amount of products sold.  Dracco’s complaint is that, from a comparison of some Simba royalty reports, it appears that certain goods were sold below list price.  However, this is an insufficient basis for inferring that Simba paid royalties on the basis of discounted invoice prices.  It is more likely that, depending on the market, Simba was sometimes able to sell goods at list price, while on other occasions Simba had to sell goods at less than the list price.  I do not think that the differences identified by Draco mean that Simba was calculating royalties on the basis of invoice values less some discount.

H.  Issue 8: Did Simba sell to its Hungarian customer at prices greater than what it stated in its royalty reports?

26.Dracco secured copies of two invoices issued by Simba and its Hungarian subsidiary to a toy distributor, M-Agnes Bt, in Hungary. One invoice issued in November 2013 billed M-Agnes Bt for 60 pieces of Filly Witchy Magic Castle at €48.72 whereas the royalty report for 4^th quarter of 2013 reported a sale price of €43.85. The other invoice for 24 pieces of Filly Witchy Plus Abra, 25cm billed M-Agnes Bt for €7.15 in comparison to a sale price of €5.95 in the corresponding royalty report. Dracco says that this is evidence that Simba was under-declaring royalties due to Dracco on goods sold in the Hungarian market.

27.In response, Simba complains that Dracco only raised this matter in closing submissions.  Until then, Simba had understood Dracco’s case to be as pleaded in Dracco’s further and better particulars. That case was to the effect that, by reference to Simba’s German price list, Simba was under-declaring the prices at which it was selling products in Hungary and therefore accounting for lower royalties in the Hungarian market than should have been the case.

28.In my view, as a matter of fairness, I should hold Dracco to its pleadings and not permit it to spring a new case based on the two Hungarian invoices belatedly in closing.  Clearly, the list price for the German market is not an appropriate measure of whether there has been under-declaration of royalties in the Hungarian market.  Thus, Dracco fails on this issue.

29.In any event, there was no cross-examination of Simba’s witnesses in respect of the two Hungarian invoices.  I would it find it difficult to make adverse findings against Simba on the slim basis of two invoices in the absence of cross-examination.  For instance, one of the invoices was denominated in Hungarian florins, rather than euros. There was discussion before me during closing submission as to what the appropriate exchange rate between florins and euros would have been on which date.  None of that was explored with any Simba witness in cross-examination.

I.  Issue 9: Where returned goods are re-sold, was Simba required to pay royalty twice for such goods?

30.Clause 11f)  of the Licensing Agreement states: “If any Products are returned to the Licensee for which accounts have already been settled with the Licensor and for which License Fees have been paid, the Licensee shall not be entitled to any reimbursement.”  Thus, if a product is returned and Simba has paid royalty to Dracco in respect of the same, Simba would not be entitled to a refund of the royalty from Dracco.  But Clause 11f)  does not deal with the situation where the returned product is resold to another customer.  Common sense suggests that, the same product having been resold, Simba should not have to pay royalty again.

J.  Issue 10: Has there been a failure to provide a royalty report for the 1^st quarter of 2014?

31.See section E above.

K.  Issue 11: Was the Licensing Agreement validly terminated by one or other party or did the Licensing Agreement expire by the effluxion of time?

32.By its Clause 1, the Licensing Agreement was to run from 1 January 2011 to 31 December 2013.  It could run for a further year, unless terminated by a party giving three months’ notice before 31 December 2023. 

33.Clause 14 of the Licensing Agreement on the “Extraordinary Termination of the Agreement” provided:

a)  Both Parties agree that the Licensor has the right to terminate this Agreement extraordinarily for a good cause with immediate effect, if at least one of the following alternative requirements is fulfilled:

....

--  The Licensee materially breaches any other term or obligation as outlined in this Agreement or as can reasonably be expected to be a material part of the obligations of the Licensee.

Full minimum guarantee shall be payable upon such termination. The right to claim compensation for further losses Is reserved in favour of the Licensor.

b)  The extraordinary termination of this Agreement shall be effective retroactively, taking effect from the time when the good cause first occurred. The termination shall not affect any other claims, e.g. tb damages or recourse. In addition to all other claims, In the event of termination of the Agreement, immediate payment of the entire remuneration agreed between the Parties, wherever such remuneration has been agreed, Is due.

c)  In the event of termination or upon expiry of the Agreement, all rights transferred to the Licensee hereunder shall revert to the Licensor automatically and without the need for any further declarations and deadlines.

34.On 26 September 2013 Dracco served a notice terminating the Licensing Agreement with effect from 31 December 2013.

35.On 19 November 2013 Simba claimed deductions from the royalty amounts due to Dracco. One such deduction (under an Invoice No. 13810)  concerned a “TV Contribution Zombie Zity” of €75,000.  It later transpired that the deduction was made in error, a mistake, as the €75,000 was owed by Draco Macau not Dracco.

36.On 28 November 2013 Dracco’s solicitors wrote back:

“As our client has stated in its letter to you dated 28 November 2013, this alleged invoice no: 13810 has nothing to do with our client and does not fall within the “Products” defined as those listed and specified in EXHIBIT A of the Agreement. In short, Zombie Zity has nothing to do with our client and therefore, your unilaterally deduction of the same from DN 010-10-13 for the sum of EUR327,536.03 without our client’s consent and/or agreement is in wrongful breach of your obligation to pay the License Fee under the Agreement.

We note that despite the deadline of Thursday, 5 December 2013 (at the latest)  imposed in our client’s letter of 28 November 2013 to you, you have still failed and/or refused and/or neglected to pay our client the outstanding sum of EUR75,000.

Accordingly, we are instructed to re-iterate that your continued failure to comply with our client’s request hereunder despite the deadline imposed would amount to a material breach of the Agreement and would forthwith entitle our client to terminate the Agreement forthwith under Clause 14 of the Agreement.

We are instructed that if our client does not receive payment within the next 3 days from the date hereof, they will commence proceedings against you for the recovery of the said amount including interest and costs.

Last but not least, we reserve our client’s rights to hold you liable for all loss and damages suffered by our client as a result of your material breach of the Agreement including interest and legal costs.

Regarding Invoice nos: 13811 and 13812, we are instructed that our client is still missing the updated reports for the relevant accounting periods. The summary attached to these two invoices is not transparent and is not accepted by our client. Please send the revised reports on the basis of our client’s royalty template (which is already with you and which you used previously for all royalty reports)  within the next 7 days from the date hereof.”

37.On 7 January 2014 Simba’s solicitors reverted on the matter of the €75,000: “We are still taking instructions as to one aspect of this issue. We will revert to you, separately, as to this issue, when we are able to.”

38.On 15 January 2014 Dracco’s solicitors replied:

“Again, on the 17 December 2013, our firm wrote to your client pressing for payment and expressly stating that if our client does not receive payment within the next 3 days from the date of that letter, i.e. on or before 20 December 2013, our client would hold you liable for all loss and damages suffered by our client as a result of your client’s material breach of the Agreement including interest and costs.

On the 7 January 2013, your firm replied on behalf of your client that “We are still taking instructions as to one aspect of this issue. We will revert to you, separately as to this issue, when we are able to.”

We are instructed that our client has already given your client sufficient notice to pay the sum of EUR 75,000.00 in arrears. However, as at the date hereof, your client has still failed and/or neglected and / or refused to pay our client the sum of EUR 75,000.00.

As a result of your client’s failure to make payment of the sum of the sum of EUR 75,000.00 in arrears, your client is in material breach of the Agreement and our client has been left with no choice but to hereby terminate the Agreement with immediate effect.

As such, we are instructed that our client shall forthwith notify all its partners that your client is no longer entitled to distribute, sell or offer any of the Products still in its stock. Within the next 3 days from the date hereof, your client is demanded to account for all Licensee Fees payable for the sales of Products during the Sell-Off Period prior to today’s termination.

In addition, Clause 7c)  of the Agreement requires your client to destroy any Products still in its stock. Prior to the destruction of the Products aforesaid, your client is required to provide our client with an inventory of all of the Products still in its stock within the next 3 days from the date hereof.

Last but not least, we hereby reserve our client’s rights to claim loss, damages, interest and costs against you as a result of your client’s material breach of the Agreement.”

39.On 16 January 2014 Simba’s solicitors wrote:

“Your client has purported to terminate the Agreement on the basis of the deduction of EUR 75,000.

Your client’s purported termination is baseless.

On 13 January (two days before your purported termination)  our client emailed to yours a credit note, showing the reimbursement of the EUR 75,000. Please check on the position, urgently.”

40.On 17 January 2014 Dracco’s solicitors reverted:

“We are instructed that our client has in fact, terminated the Agreement because of non-payment of the sum of EUR75,000.00.

First of all, your purported credit note is in fact, a debit note to Dracco Macau (Macau Commercial Offshore)  from Simba-Toys (Hong Kong)  Ltd and is completely irrelevant to the non-payment of the sum of EUR75,000.00.

Secondly, our client has instructed us that they have received the payment for the aforesaid sum of EUR75,000.00 but they only received it after the termination letter was issued to your firm on the 15 January 2014. This, however, does not change our client’s position that the Agreement has been lawfully terminated.

However, interest on the aforesaid sum of EUR75,000.00 under Clause 11e)  of the Agreement still remains unpaid.”

41.On the same day, Simba’s solicitors responded:

“It appears to us that you misunderstand both the factual-position and the law.

Your client threatened to terminate the Agreement because of non-payment of certain monies. Our client does not accept that its payments and set-offs were in any way a breach of the Agreement. Nonetheless, as we noted yesterday, on 13 January our client made it clear that it would not maintain the set-off. It was only several days later that your client purported to terminate the Agreement. However, by that stage the purported basis of the termination no longer existed.

We attach our client’s email of 13 January' and the credit note.

Please confirm, by close of business tomorrow, that your client has withdrawn the purported notice of termination.”

Notwithstanding the correspondence from Simba’s solicitors, Dracco insisted that the Licensing Agreement had been extraordinarily terminated on 15 January.

42.On 18 February 2024, Simba’s solicitors emailed Dracco’s solicitors:

“As you know, until now Simba's position has been that the Agreement has not been terminated. However, Simba’s new position is:-

(a)  if the Agreement was not terminated on 15 January, as Dracco has suggested, Dracco’s persistent refusal to comply with its obligations under the Agreement and Dracco’s notification to Simba's customers that Simba had no right to sell the Products constituted a repudiation of the Agreement. Simba hereby accepts that repudiation, terminating the Agreement;

(b)  alternatively, if the Agreement was terminated on 15 January, Simba had a reasonable period within which dispose of the Products it had on hand at the time of termination. We have explained the basis of this view. Dracco’s notification to Simba’s customers that Simba had no right to sell the Products constituted a breach of that implied term of the Agreement. This breach has caused Simba significant damage, as to dispose of the balance of the Products, it has had to sell them at prices below cost.”

43.Simba argues that, notice to terminate the Licensing Agreement having been given in September 2013, the Licensing Agreement was terminated, and it was no longer possible to terminate the same again extraordinarily or at common law. I do not think that this is right.  For instance, certain provisions (such as that relating to the sell-off period after termination (see section L below))  would still have been applicable after the September 2013 notice. Such provision could conceivably later be terminated extraordinarily or at common law.  The real question is therefore whether the Licensing Agreement was extraordinarily terminated or terminated at common law by Dracco on 15 January 2014 or by Simba on 18 February 2014.  Dracco’s position is that Simba’s failure to pay €75,000 constituted a material breach under Clause 14 of the Licensing Agreement. Simba’s case is that by (1)  purporting to terminate the Licensing Agreement on 15 January 2014, (2)  ordering Simba to stop selling licensed products during the 90-day sell-off period allowed by the Licensing Agreement following a termination, (3)  seeking an injunction to restrain Simba in Germany from selling licensed products, and (4)  demanding inventory reports, production plans and handover as though the Licensing Agreement was validly terminated on 15 January 2014, Dracco was in repudiatory breach of the Licensing Agreement. This means that was Simba entitled to put an end to the contract on 18 February 2014.

44.I am unable to regard Dracco’s purported termination on 15 January 2014 as extraordinarily ending the Licensing Agreement under Clause 14 or even as putting an end to the Licensing Agreement with immediate effect as a matter of common law.  It seems to me that there could not have been a “material breach” when, prior to Dracco’s 15 January 2014 notice, Simba acknowledged that €75,000 had wrongly been debited to Dracco and was taking steps to Dracco’s knowledge to correct the matter.

45.I am, however, likewise unable to accept Simba’s email of 18 February 2014 as unequivocally accepting a repudiatory breach by Dracco and putting the Licensing Agreement to an immediate end.  Simba’s email is equivocal because it puts forward alternatives, namely that the agreement may or may not have been successfully terminated on 15 January. It is far from clear that Simba was saying in its email that Dracco has been in repudiatory breach of an ongoing contract and Simba is accepting such breach and thereby putting the Licensing Agreement to a definitive end as a result.  Simba’s email instead blows hot and cold.

46.In those circumstances, in my view neither party put an end to the contract, whether extraordinarily under Clause 14 or at common law for repudiatory breach.  Accordingly, the Licensing Agreement expired due to the effluxion of time, at the end of the 90-day sell-off period on 31 March 2014.

L.  Issue 12: Was Simba entitled to a sell-off period under clause 1k)  and (if so)  did Simba sell in excess of its 10% entitlement during the sell-off period?

47.Clause 1k)  of the Licensing Agreement on “Sell-Off Period” stipulates:

The “Sell-Off Period” as referred to in this Agreement shall be a period of up to 90 days after the expiry of the Agreement.

48.Clause 7 of the Licensing Agreement on “Terms of the Agreement” states

(a)  The Term of The Agreement shall be as defined under Sec. 1.e)  of the Agreement.

(b)  Upon termination or expiration of this Agreement, all rights granted in this Agreement from Licensor to Licensee shall revert to the Licensor.

(c)  The Licensee shall be entitled to distribute any Products he still has in stock for the Sell-off Period, however this may not exceed 10% of the total number of each such specific Product sold during the term of the Agreement. The Licensor may require the Licensee to destroy any Products which are not sold either during the Term of The Agreement during the Sell-Off Period. Upon request, the Licensee shall submit evidence to the Licensor of their destruction.

(d)  ....

49.It follows from my conclusion on Issue 3 that there was no extraordinary termination of the Licensing Agreement and Simba was entitled to a selling-off period of 90 days (that is, until 31 March 2014)  following the Licensing Agreement’s termination on 31 December 2014.

50.A Simba inventory dated 31 December 2013 lists 691,705 Filly products. In an affidavit in this action dated 5 March 2014, Mr. Schmitt deposes that, as a result of Dracco writing to Simba’s customers that Simba had no right to sell Filly products, Simba was:

“forced to sell [its] remaining stock to the wholesaler according to the purchase agreement not at regular prices anymore but at stock lot prices far below our cost price. With one exception, we did so by selling the balance to the wholesaler. However, there was one piece left over. We destroyed that piece on that same day.”

Dracco infers from the foregoing that Simba sold of all but one of its Filly inventory during the sell-off period and thereby exceeded the 10% limitation in Clause 17c)  of the Licensing Agreement.

51.I am unable to draw the inference for which Draco contends.  The evidence is that Simba arranged for the destruction of excess inventory in February 2014. I accept that, due to limitations of space, the company which Simba engaged to dispose of the excess inventory, needed to split the leftover products into two lots for pickup and destruction. The first lot of products was collected for destruction between 10 and 26 February 2014. The second lot was not picked up by the destruction company until 7 April 2014, that is, one week after the 31 March 2014 expiry of the sell-off period. Nevertheless, Simba having arranged and paid for the destruction of stock in February 2014, I am unable to treat this delay of one week in the collection and destruction of the stock as significant.

52.There is accordingly no compelling evidence that, during the sell-off period, Simba sold more than its 10% entitlement.

M.  Issue 13: Did Simba sell unauthorised Filly products in the Russian or any other market after the expiry of the Licensing Agreement causing damage to the image, reputation and goodwill of the Filly brand and (if so)  what was the damage caused?

53.Dracco argues that Super Toys sold the Products into the Russian market and says that Super Toys was Simba’s distributor or agent. I am not persuaded by this.  Super Toys and Simba entered into a stock-lot agreement around 13 December 2013, before the expiry of the Licensing Agreement.  The evidence is that Super Toys is an independent entity.  It acted throughout as Simba’s customer, rather than as Simba’s agent or distributor. It is true that Simba had a line of what it called “SuperToys” [without a space between “Super” and Toys”].  But that appears to have been purely coincidental.

54.Draco says that Super Toys sold large volumes of Filly products in Russia after the Licensing Agreement was terminated. P relies on the stock-lot agreement and on an overview of various bills of lading and customs documents, as showing that shipments of Filly products were routed from China to Russia via Germany. According to Dracco, Super Toys was used as a front to enable Simba to continue sales beyond the sell-off period. I am unable to regard the overview, which was simply downloaded from the web and is of unknown provenance, as any evidence at all.  The overview mentions the involvement of a Sun Luen Shing Toy Manufactory in China and it is true that Simba did some business with Sun Luen.  But that business is only related to dolls which are not the subject of these proceedings.

55.Dracco further complains that a large stock of Filly products was shipped to Saks Toys in Russia, which ran commercials to sell the toys. Despite this, Simba’s royalty reports omitted the Russian sales.

56.There is no evidence supporting Dracco’s contentions. Once Simba had sold the Filly products to Super Toys as an independent body, Super Toys was entitled to on-sell the same at such prices as it saw fit. The sale to Super Toys was recorded in Simba’s royalty reports. But beyond that, it was matter for Super Toys to decide how to on-sell the Filly products, with Simba having no control over the matter.

57.The same lack of evidence holds true of Saks Toys. There is no evidence of any connection between Simba and Saks Toys.

58.It is possible that Super Toys or Saks Toys dumped Filly products into the Russian market, by selling the same at substantially reduced prices. But Simba cannot be held responsible for such conduct, if dumping occurred. Simba had no obligation to require its customers to sell Filly products at some minimum retail price. Indeed, there was discussion during the trial that, as far as Simba was concerned, such conduct may be regarded as anti-competitive under EU law.  Consequently, it is hard to see how any dumping by Super Toys or Saks Toys can be characterised as Simba causing damage or loss to Dracco or the Filly brand image.

N.  Issue 14: Did Simba breach the Licensing Agreement and cause damage to the image, reputation and goodwill of the Filly brand by:

(a)  manufacturing, selling and using the Filly Products without the prior written approval of the Plaintiff during the term of the Licensing Agreement, or whether such activity was done by Simba Noris and Simba Dickie pursuant to separate oral agreements with Dracco,

(b)  failing to return drafts, models, samples etc created in the process of arranging and designing the Filly products upon Dracco’s request, and

(c)  wrongly asserting copyright in the designs of Filly products.

59.Dracco no longer pursues Issue 14(a).

60.On Issue 14(b), Dracco intended Universal Trends to take over from Simba as licensee upon the expiry of the Licensing Agreement.

61.Clause 13c)  of the Licensing Agreement on “Adaptations etc of the Property” provides:

All drafts, models, samples, etc. created In the process of arranging and designing the Products shall become the property of the Licensor, free of charge, as soon as they are produced. The Licensee shall hold them In custody for the Licensor. The Licensee undertakes to hand over said material to the Licensor at the latter’s request, post-paid and free of charges.

62.On 12 November 2013, Dracco wrote to Simba demanding the handover of a long list of items, “including but not limited to of all information, data, documents and materials created in the process of arranging and designing the Products during the term of the agreement(s). Among the items particularised for handover were “all prototypes, production and pre-production moulds, and any work product related to the creation of all Filly Products to include but not limited to for example digital mechanicals, die lines, soft good patterns, design drawing, plush sewing patterns and models, all soft and hard toys moulds etc”.

63.On 19 November 2013, Simba replied:

“We will not handover or provide any of the mentioned things. All items have been developed and produced by the company Simba Toys GmbH & Co. KG. All tools have been paid 100% by Simba Toys GmbH & Co. KG and are 100% property of Simba Toys GmbH & Co. KG.

The license solely referred to the use of the name ’’Filly". We reserve the right to keep the articles in our product range after the Sell-Off Period as non-licensed articles, eventually modified and adapted to current trends. At this point please be informed that should you use the same or similar articles it would infringe our copyrights and would implicate legal action from our side. To avoid any mis-understanding you should confirm shortly that you will not infringe any of our rights.

We do confirm that with the termination of the Agreement we will not use the name "Filly" anymore. We will remove "Filly" from all articles as well as all remove drawings or parts from existing articles carrying the name "Filly" and destroy all remaining packaging and parts with the name "Filly” properly and will confirm destruction of the articles.

We will not transfer any websites or other social media platforms to you. Effective from 31^st December 2013 we will block the website, forward the traffic to Simba and remove “Filly” as well as everything indicating "Filly”.

According to point 2 of the existing Agreement we will send the TV-commercials. All other media data or other advertising material will not be handed over. We do confirm that we stop the use with termination of the Agreement and if allowed in terms of fiscal or commercial law will destroy the material immediately. In this case we will confirm the destruction. If destruction is not allowed immediately for fiscal or commercial law reasons, we will destroy the material right after the statutory retention period.”

64.Dracco effectively complains that, in refusing to “handover or provide any of the mentioned things” in Dracco’s letter of 12 November 2013, Simba acted in breach of Clause 13c)  of the Licensing Agreement.  Simba’s contention is that the items demanded by Dracco belonged to Simba and, subject to Simba re-tooling the same, so as not to breach Dracco’s intellectual property rights, Simba was entitled to re-use such items.  For instance, Simba could either modify the production moulds in its possession or turn them into scrap.

65.It seems to me that, although Dracco’s list of items for handover was long, sprawling and all-encompassing, in many cases beyond what Dracco could ask from Simba under Clause 13c), Dracco was at least entitled to some of the items demanded for handover.  Thus, for instance, Simba may have been entitled to retain production moulds, suitably altered to obviate any intellectual property claims.  But plainly from Clause 13c), Dracco was entitled to the delivery up of any design drawings in Simba’s possession which were “created in the process of arranging and designing the Products”. 

66.The question is whether any items (such as design drawings)  wrongly withheld by Simba caused Dracco loss or damage.  On this, I do not find the evidence to be compelling. 

67.Mr. Henrik Andersen attributes the damage done to Dracco (including its brand image)  to the following factors:

(1)  dumping huge quantities of unauthorised Filly licensed products into the German and other European markets and claiming to the toy trade that such products were legitimate,

(2)  shipping huge quantities of unauthorized Filly licensed products into Russia and claiming to the Russian toy trade that such products were legitimate,

(3)  shipping huge quantities of unauthorized Filly licensed products from China,

(4)  taking legal action against the newly appointed Filly toy partner in Germany and Austria, based on Dracco’s intellectual property rights to which Simba had no legitimate claim, and

(5)  stating Simba would return materials belonging to Dracco, and crucial to Dracco’s ability to continue business, but ultimately failing to do so.

Factors (1), (2)  and (3)  have not been established.  See the discussion in sections L and M above.  On factor (4), see [71] to [73] below.

68.On factor (5), Dracco asserts that the supply of Filly products was interrupted because of Simba’s refusal to hand over the items demanded.  Production of Filly products by Universal Trends was then allegedly delayed with the consequential loss of shelf-space among retailers for such goods.  As a result, the Filly brand is said to have been lost and Dracco had to develop new Filly products, as opposed to re-launching previous Filly products. 

69.My difficulty is that, assertions apart, there is no evidence to support Dracco’s allegations. There was (for instance)  no evidence from a Universal Trends representative as to precisely what Universal Trends’ plans for supplying Filly products were supposed to be upon taking over as licensee from Simba and how those plans were set back (if at all)  by a lack of access to design drawings or other particular items.  There was discussion at trial as to Dracco already having samples of Filly goods produced by Simba, so that Dracco would not have required design drawings of those products in any case.  In those circumstances, Universal Trends could conceivably have started production based on the samples and materials in Dracco’s possession. 

70.Inevitably, when a licensor changes licensee, the former must expect disruption in the production cycle of its goods.  It is unclear why any production delays experienced by Dracco and Universal Trends was beyond what would normally be expected to happen on a change of licensee. No expert evidence was adduced in this respect.  I am thus unconvinced that any decision by Dracco to create a new line of Filly products was other than an independent commercial decision, unrelated to Simba’s withholding of any design drawings or other items in breach of Clause 13c).

71.On issue 14(c), I am unable to read Simba’s reply of 19 November 2013 as an assertion of copyright in Filly designs.  If anything, Simba makes it clear in its letter that it will only use moulds and other materials in ways that will not infringe Dracco’s intellectual property rights.

72.On 4 December 2013 Simba wrote to Universal Trends as follows (in translation from the German original):

1.  At the VIP Show at the Nuremberg Exhibition Centre on 18/19 November 2013, you distributed advertising material for Filly Ponies as their future general distributor.

a)  On the "Filly Butterfly Collectible Horses" page, a product package is shown on the far right, clearly displaying our client's logo.

Our client's logo enjoys almost 100% recognition among the relevant target group, namely retailers. Our client enjoys ninefold protection for the logo and the word mark "Simba", including

a.  by German trademark 30.2012.036.421, an extract from the register of which is attached.

However, the product as such does not originate from our client. In your capacity as general distributor, you have not distributed any of our client's products since 1 January 2014. For this reason alone, there is a trademark infringement.

b)  In addition, the advertising material distributed by you contains advertisements for, among other things, a dream house, a water castle and a boat. These products were developed by our client through one of its employees. The corresponding rights, in particular the industrial property rights and the right to an unregistered Community design, are therefore exclusively vested in our client.

It should be added that the licence agreement between our client and Dracco Netherlands BV does not contradict this. A copy of this licence agreement is attached. In particular, paragraph 13b of the licence agreement is not relevant.

The three designs mentioned above are not part of the "property" within the meaning of Section 13b. The term "property" is defined in Section 1a and, according to this definition, only includes designs made available by Dracco Netherlands BV. Accordingly, the rights to an unregistered trademark may belong to Dracco Netherlands BV, even if such an unregistered trademark may have been created by our client through business transactions. However, Section 13b does not contain any provisions regarding detachable accessories, such as the products mentioned above.

Apart from that, the provisions in Section 13b can only apply to items that have been placed on the market by our client in connection with the licence agreement with Dracco Netherlands BV. This is not the case with the three designs mentioned above.

2.   Our client is therefore entitled to assert claims against you pursuant to Section 14 et seq. of the Trademark Act, Section 97 et seq. of the Copyright Act, Article 89 of the Community Trade Mark Regulation and Sections 42 et seq. of the German Trade Mark Act. Our client would therefore have to take legal action against you if you do not provide us with do not submit a sufficient, legally binding declaration of non-use together with an undertaking to provide information, pay damages, recall, destroy and reimburse warning costs. A draft of such a declaration is enclosed.

Thereafter, in January 2014, Simba brought proceedings against Universal Trends before the Nuremberg Fürth Regional Court.

73.I am unable to regard Simba’s dispute and subsequent action against Universal Trends as signifying an attempt to deny Dracco’s intellectual property rights.  Simba construed its rights under the Licensing Agreement in a particular manner. Simba drew attention to the Licensing Agreement and to its understanding of its rights thereunder in its letter to Universal Trends.  Simba may be right or wrong in such understanding.  I express no view on the matter.  But I am unable to treat the mere expression of Simba’s understanding and the mounting of proceedings in the German court pursuant to such understanding as, without more, a denial or refusal of Dracco’s intellectual property rights.

O.  Issue 15: Should there be an audit or account?

74.Clause 11d)  of the Licensing Agreement stipulates:

The Licensor or Licensor's Agent shall be entitled at any time to have the Licensee's business records and documents relating to the Products inspected by an auditor who Is under an obligation of secrecy. The cost of said inspection shall be borne by the Licensee if an accounting error to the Licensor's disadvantage Is discovered, pursuant to which the amount actually due to Licensor exceed the amount actually paid to licensor by more than 5% of this latter amount. Moreover Licensor may at all times request an Inventory report showing current inventory of Products.

75.There is a dispute among the parties about whether the Licensor’s right to an audit came to an end upon the termination of the Licensing Agreement.  On one reading, Dracco as Licensor should be “entitled at any time” to an independent and impartial inspection of Simba’s business records and documents by an auditor.  In the first instance Dracco would then bear the cost of such auditor. If the audit shows that Simba owes Dracco more than (say)  5% of the royalty paid by Simba to Dracco, then Simba will be responsible for the cost of audit. Clause 11d)  is an effect an expert determination clause for the resolution of disagreements between the parties on royalty payments.  By its nature as a dispute resolution clause, Clause 11d)  would arguably not cease to have effect upon termination of the agreement.

76.Simba, however, submits that it is now too late to invoke Clause 11d). 

77.Dracco applied for an audit in interlocutory proceedings in this action before Chung J in February and March 2014.  In his Decision of 28 March 2014, Chung J refused to order an audit by way of interlocutory relief.  He stated:

“14. It is important to put clause 11d, the 2011 agreement in its proper context:

(1)  clause 10a of the 2011 agreement stipulated that the defendant shall pay licence fee to the plaintiff;

(2)  the amount payable was defined principally by clauses 1f, 10a and 10b thereof;

(3)  further, clause 11a thereof mandated the licence fee to be accounted for quarterly and clause 11b specified the deadline for licence fee payment;

(4)  finally, clause 11c provided that the defendant shall submit accounting statements regarding the sales effected.

15. So understood, it is clear the inspection right conferred by clause 11d was intended for ascertaining the amount of licence fee payable (and not for other purposes (the plaintiff did not contend it was for other purposes either)).

16. Upon the termination of the 2011 agreement, any monetary sum which was contractually payable but which remains unpaid becomes the subject-matter of a claim for damages. See, for example, Chitty on Contracts (2012)  31^st Ed, Vol 1, para 24-049 to 24-050 and 24-052 and 24- 053. In other words, licence fee payable thereunder (if any), and which is still unpaid, should be recovered by way of damages (as the plaintiff has done in its indorsement of claim)  (see para 2(a)  above).

17. It is thus doubtful if clause 11d was a contractual term which was intended to “survive” the termination of the 2011 agreement. But even assuming (in the plaintiff’s favour)  that the clause did “survive” it, the balance of convenience is against the grant of an interlocutory injunction.

18. First, it is not contended that the inspection should be “onsite” (it is here noted that, in any event, the plaintiff is only seeking a domestic injunction, whereas the defendant is out of the jurisdiction). Secondly, the plaintiff has not adduced evidence to show (nor has it argued)  that there was an urgent need for inspection (and that it would suffer irreparable damage if such inspection was denied at this stage).

19. Such being the case, there is no valid reason why an interlocutory injunction should be granted when inspection of documents could be available in the normal course of this action pursuant to RHC Ord 24 (discovery of documents). Despite the plaintiff’s attempt to argue otherwise, there is no reason to think that the ambit of discovery of documents will be any less comprehensive than the inspection provided for by clause 11d. See, for example, Hong Kong Civil Procedure 2014, Vol 1, para 24/2/10 (referring to the well-known Peruvian Guano test, which the learned editors said “… Hong Kong courts have accepted as the appropriate test to determine relevance … ” (p 543)).

20.   Finally, as the defendant correctly pointed out, to grant an interlocutory injunction now would in effect be to give the plaintiff part of final relief sought in this action (para 2(d)  above).”

78.In October 2024 Dracco applied for a trial of a preliminary issue in these proceedings. The proposed preliminary issue was essentially whether there should be an audit pursuant to Clause 11d).  Deputy High Court Judge Phoebe Man rejected the application on 28 November 2024, citing Chung J’s Decision in support.  She observed (at [15(4)] of her Decision):  “I do not see how an order for preliminary issues can improve the quality of discovery by compelling [Simba] to provide what it has sworn on oath to be complete disclosures.”

79.There was no appeal from the decisions of Chung J or DHCJ Man. In light of those decisions, although there is a need to assess what may be due or owing from Simba to Dracco in connection with issues 2 and 3, I do not think it is open to me to order an audit under Clause 11d)  in connection with those issues.  The only practical course open to me is to order that Simba account to Dracco in respect of (1)  deductions claimed in relation to TV promotions and (2)  the discrepancy between figurines supplied and playsets sold. 

80.The account will be ordered as a form of relief which this court can grant when circumstances warrant.  In the course of closing submissions, Simba’s counsel indicated that Simba would not be averse to the taking of an account on specified issues.  I will hear the parties on directions for such account.  

P.  Issue 16: Did Dracco breach an implied quiet enjoyment term under the Licensing Agreement by disturbing Simba’s ability to sell Filly products and thereby leading to lower revenue for Simba?

81.This issue arises out of Simba’s counterclaims. Simba says Dracco acted wilfully and intentionally to disturb the market, specifically sending letters by itself and through Universal Trends to Simba’s customers in Germany and Russia denying Simba’s right to sell Filly products. Simba says that it would have sold more Filly products in the 4^th quarter of 2013 had it not been for Dracco’s conduct. Dracco counters that the letters were written in February 2014 and denies that such letters could have affected Simba’s sales prior to 31 December 2013. Dracco further contends that any loss of revenue by Simba was a consequence of Simba’s breach leading to Dracco seek an extraordinary termination of the Licensing Agreement

82.Mr. Manfred Duschl of Simba calculates the resulting loss and damage to Simba as follows:

“9. I was responsible for preparing the forecast sales of products under the Agreement...

c)  on 5 and 6 December 2012, during the Simba Dickie group’s annual strategy meetings for subsidiaries, meetings with Dracco were arranged to discuss Filly products in the countries of our subsidiaries.... Target sales of Filly products was discussed during the meetings. In 2012, the sales of Filly products were €18,200,000. The target was to increase the sales of Filly products by 16% in 2013 i.e. to over €21,000,000.

d)  .... €9,200,000 was achieved in the first 3 quarters of 2013. Accordingly, we expected sales of €12,000,000 with the sales of Filly products in the 4^th quarter of 2013.

e)  considering Simba’s margin for sales under the Agreement was 50%, Simba’s reasonable forecast profit for the 4^th quarter of 2013 was €2,000,000. However, ... the actual sales in this period was €8,000,000. That was €4,000,000 less than our reasonable forecast.

f)  on 12 December 2013, Simba entered into an agreement with Super Toys, a wholesaler, to sell the products during the sell-off period of the Agreement (the “Stock-lot Agreement”).... The Stock-lot Agreement specified an agreed sales price, of which Simba’s margin would be 37.5%. However, because of market disturbance, the products eventually were sold at a reduced sales price to Super Toys....

g)  as a result, Simba’s suffered a gross margin loss of 12.5% in the 4^th quarter of 2013, that is Simba’s reasonable forecast profit for the 4^th quarter of 2013 (at a margin of 50%)  less profit which Simba would have obtained had it sold the products at the agreed sales price under the Stock-lot Agreement (at a margin of 37.5%). The gross margin loss of 12.5% amounted to €500,000.

10.  Simba also suffered loss of profit under the Stock-lot Agreement. But for the market disturbance, Simba would have made a turnover of €2,762,124.64 under the Stock-lot Agreement. After the reduction of sales price, Simba actually made a profit of €671,629.39. The loss of profit under the Stock-lot Agreement was therefore €2,090,495.25.”

83.Following the purported extraordinary termination of the Licensing Agreement, Dracco sent letters to Simba customers denying Simba’s right to sell Filly products.  I have found that there was no basis for the extraordinary termination. Assume consequently in Simba’s favour that Dracco sending out such letters interfered with Simba’s rights of quiet enjoyment of its rights under the Licensing Agreement.  Does it follow that Simba is entitled to its counterclaims for €500,000 and €2,090,495.25? I am unable so to conclude. I do not think that the evidence (largely Mr. Duschl’s assertion)  supports Simba’s counterclaims.

84.Mr. Duschl refers to market disturbance and to sales not meeting expectations.  But there is little or no analysis of the “market disturbance”.  There is merely an assumption that the same was attributable to Dracco’s conduct, rather than (for instance)  to (1)  a general economic downturn or (2)  market rumours of infighting between Dracco and Simba as manifested in Simba’s own actions (including court proceedings against Universal Trends).  Further, in the absence of careful expert analysis, I cannot take it for granted that the letters sent out by Dracco in the 1^st quarter of 2014 led to lower sales for Simba in the 4^th quarter of 2013.

85.In those premises, Simba’s counterclaims are dismissed.

III.  CONCLUSION

86.The implications of my determinations on issues 2, 3, 5 and 10 need to be dealt with. I will hear the parties on consequential directions arising from those issues.  I will also consider any other outstanding matters (including costs). This strikes me as a case where mediation could have brought about a speedy resolution of the parties’ differences.  It therefore seems to me that Practice Direction 31 is relevant to the incidence and assessment of costs in this matter. 

87.It will not have escaped notice that this action has been before the court for over a decade.  That is not acceptable. As a safeguard against similar situations arising in the future, I respectfully suggest that, in every commercial case, a procedural timetable is worked out with the court at the earliest opportunity, with regular reviews being scheduled thereafter before a master or judge, to ensure compliance with the timetable.

Mr Neville Sarony SC KC and Mr C C Ho, instructed by Cheng & Ng for the plaintiff

Mr C W Ling, instructed by CMS Hong Kong LLP, for the defendant