Canon Kabushi Ki Kaisha v. Green Cartridge Co (Hong Kong) Ltd and Another

1993 No. A7844

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

BETWEEN

Coram : The Hon. Mr. Justice Rogers in Court

Dates of Hearing : 15th and 16th June 1995

Date of Delivery of Decision : 22nd June 1995

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DECISION ON MATTERS RELATING TO THE FORM OF JUDGMENT

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1. This Action was heard last year. At the end of March this year when I handed down my judgment I said that I would hear the parties as to the Order I would make.  In May of this year the Plaintiff restored the matter before me and prepared a draft Order. Although much of the Order was non-contentious the Defendants made it clear that they would be applying for a stay of injunction pending appeal.  I gave directions for the filing of evidence and the matter came on for argument last week.

2. There are a number of matters on the Order and I will take them in Order.

3. In the first place the Plaintiff has drawn up the Injunction in standard form to restrain infringement of the privileges and rights conferred in respect of the patents by the certificates of registration. Since those privileges and rights only extend within Hong Kong I see no purpose in adding any further words limiting the territorial scope of the injunction since that is certain in any event.

4. The copyright injunction is framed rather differently. That is in 3 different parts or more accurately 3 different injunctions. Only the last of the 3 has a limitation to infringement of copyright.  The first 2 injunctions restrain the commission of specific acts of manufacture and so forth although they do refer to the continuance of copyright.  In my view it would be right to insert a geographical limitation in respect the prohibited acts identified in sub-paragraphs 1 (d) and (e) of the Order.  That I propose to do by the insertion of the words in Hong Kong immediately before the word and in the first line of sub-paragraph 1 (d).

5. The same words should also be inserted at the beginning of sub-paragraph 1 (e) of the Order.

6. When I come to the injunction in respect of conversion, I am first of all satisfied that the Plaintiff is entitled to an injunction in that respect.  The terms of Section 18 of the Copyright Act 1956 are clear.  The Defendants however maintain that the injunction should be limited to Hong Kong.  I do not agree. The position with regard to such items as moulds which having been made to manufacture infringing parts have been exported was considered by Browne-Wilkinson V.C. in Rubycliff Limited v Plastic Engineers Ltd. [1986] R.P.C. 573. In a passage at page 582 line 12 he said:

"Will (the damages) include damages consisting of loss of profits on sales in the future flowing from the use of the moulds in the USA over which, on the assumption made the plaintiffs have the right of ownership?  In my judgment they will. The claim under section 18(1) is a claim as owner of the moulds ….. The claim is for the use of the mould which, under section 18(1), has been and is to be treated as being in the ownership of the plaintiffs since the time when the mould was made."

7. So here if the moulds have been in Hong Kong for the use of manufacturing infringing parts they are regarded as infringements and belonging, because of the provisions of Section 18, to the Plaintiff.  That right of ownership is not defeated by the fact that the moulds may have been removed from Hong Kong.  It is not a question of infringement of copyright taking place outside Hong Kong - it is simply a question of the right of ownership in the moulds. I can envisage circumstances where there may be difficulties in enforcing a claim to ownership but that does not mean that the Plaintiff does not have a prima facie right to an injunction to restrict conversion of what the law says is the Plaintiff's property.

Exceptions for the British Leyland Defence

8. The next matter for consideration turns on the wording of the injunction in so far as it relates to the exception from infringement of copyright in relation to the dealing in spare parts intended for repair. The Defendants object to the fact that the Plaintiff has limited the draft order to an exception which permits the dealing in 3 parts only. They say that quite apart from the toner seal cover, the assembly pin and the C blade any other part in the cartridge could break or become defective and they are entitled to replace it or supply it to others for the purposes of repair. Mr. Kitchen Q.C. for the Plaintiff has analysed 3 criteria which he says are necessary for the application of the repair doctrine in respect of the parts for the EPS and the cartridges. First, the parts must be necessary and required for repair; secondly, the person supplying the parts must be supplying a market where the parts are used or to be used for repair and thirdly, the parts dealt with must be used solely and exclusively for repair.     

9. Clearly on the Defendants' evidence grave questions arise.  It is one thing for the Defendants now to say that they wish to supply the repair market.  The evidence, as I indicated in my judgment, was clear that when the toner in a cartridge was exhausted, the bulk of the parts were in working order.  In most cases it could be expected that out of the 108 parts 95 were usable.  Indeed Mr. Buice who gave evidence for the Plaintiff was cross- examined to the effect that for the vast majority of cartridges and for most of the components there is no need to make the parts as they are totally recycled.[1]  The Second Defendant on the other hand gave evidence at the trial that he neither knew what the Defendants' customers did with the parts nor did he take any trouble to inquire[2] That situation cannot continue any longer.  If the Defendants wish to supply parts for the Plaintiffs' cartridges they must know that the parts are being used to service existing cartridges made or licensed by the Plaintiff.  They can no longer distance themselves from their customers' intentions and acts.

10. I would be prepared to proceed on the basis that the Defendants wish to supply refillers and servicers of cartridges who are carrying on business in much the same way as the Defendants envisaged in their business plan.  This is despite the fact that the Defendants find their original concept, which still remains reflected as part of their name and in a vestigal form in their business activities, unattractive now as a business proposition.  There was an indication in the evidence and in particular some of the documents in the bundles that there was something of a refilling industry particularly abroad.  I think that it is reasonable to assume that people involved in that industry would wish to acquire spare parts for the purposes of refurbishing and servicing.  What I am far more skeptical about is what parts would be needed. The metal parts in the cartridges, for example, look to me to be very robust.  I can hardly imagine that anything but a freak occurrence could necessitate the replacement of the metal core of a roller.

11. I have given some thought to the manner of ensuring that the parts sold by the Defendants are used only for repairing the Plaintiffs cartridges or those made under the Plaintiffs licence. I am by no means sure that I have reached a conclusion that will cater for all eventualities. What I have in mind however is this. First of all the Defendants should establish what parts are required to service cartridges. This they can do by affidavit demonstrating an identified demand for the particular part or parts. Then the Defendants must make clear on their catalogues, order forms, invoices and receipts that the parts supplied are for the repair of cartridges manufactured or licensed by the Plaintiff.  The form of wording was put forward by Mr. Kotewall Q.C. on behalf of the Defendants in the course of his address. I have modified it very slightly. That should appear in a typeface which is no smaller nor less prominent than any other typeface on the documents.

12. That on its own, however, is in my view not sufficient.  The Second Defendant's evidence was that he did not know and did not inquire what the Defendants' customers did with the parts. There should be a safeguard to ensure that there is no turning of any blind eye, wittingly or unwittingly, to what the customer may do with the parts. The exception is after all to permit the Defendants to do acts which otherwise would be an infringement of the Plaintiff's rights.  It is clear that the Defendants have prior to the trial taken the approach that what the customers did with the parts was none of the Defendants' business.  It is a reasonable conclusion from all the evidence that large numbers of the parts supplied by the Defendants were ultimately used in the manufacture of new cartridges.  From now on, the Defendants must satisfy themselves and be prepared to show that what they are doing does indeed come within the exception.  For this reason it is appropriate that the leave to deal in the parts be limited to those parts in respect of which the Defendants have established that they are to be supplied for repair of cartridges only.

13. I consider that the Order should specifically make provision for the Defendants to apply to supplement the parts which the Defendants may manufacture and use for servicing or supply to repairers and servicers but that is likely to be subject to conditions as to ratios of some parts to others and total quantities of parts which may be supplied in any one period to one customer (or related customers) without the identity of the customer being disclosed.  As I have indicated on the face of it the metal parts are so robust that no-one would imagine that more than a very small number of those parts would ever be needed for repair and refurbishment.  As I indicated in my judgment even the plastics parts are strong and only likely to be broken if at all in the transport of used cartridges.  If some entity is using significant quantities of these parts I consider that the identity of that purchaser should be disclosed so that the necessary investigations can be made. The actual terms and conditions that are to be attached to any extension should be considered at the time. 

14. As to the delivery up, I consider that in view of the potential legitimate use that could be made of the parts and moulds, the Defendants should identify the same in an affidavit and permit inspection.

15. On this basis I consider that the Defendants should be permitted to retain the articles and moulds which they have made until after the conclusion of any appeal subject to proper identification of those items and conditions as to their use.  This will give the Defendants adequate time to apply for an extension of paragraph 1 (e) of the Order.  I note that I am by such an Order permitting the Defendants to retain the items despite the fact that on my findings in the judgment the moulds have been used for making infringing parts.  Hence they all constitute infringing copies and plates within the meaning of section 18 of the Copyright Act.

16. Even for those moulds which the Defendants will be able to retain, they should all have to remain not only in Hong Kong so that they stay within the Court's jurisdiction, but in the Defendants' possession. In the second place, the Defendants should only be permitted to use the moulds to manufacture parts for use and supply which it can be demonstrated are indisputably to be used to service existing legitimate cartridges.

17. The combination of paragraphs 1 to 4 of the Order is in my view complicated but I have decided to work on the basis of the draft since there was some measure of agreement between the parties on the wording.

Discovery 

18. The Plaintiff seeks the usual order for discovery relating to infringement. The right to relief follows the finding in Norwich Pharmacal Co. v. Commissioners for Customs and Excise [1974] AC 133.  This is resisted by the Defendants on whose behalf it is said that although the Plaintiff's right to discovery is not disputed, the matter is at present premature.  The contention on behalf of the Defendants is that the discovery real1y relates to the accounts and enquiries. In the course of argument it was put that the Plaintiff would be liable to approach those with whom the Defendants had done business and that any consequent damage could not be undone either by a reversal of the finding of infringement after appeal or by an award of damages against the Plaintiff on a cross-undertaking as to damages which the Plaintiff is prepared to give.

19. My view of the matter is that the Plaintiff is, prima facie, entitled to discovery. Having succeeded at trial, it should be put in a position of being able to take whatever steps it can to rectify any infringement that has taken place. To delay that relief until after an appeal, particularly given the length of time that the Defendants wish to wait until the appeal is heard, will be to deprive the Plaintiff of an important part of that remedy. In view of the cross undertaking that the Plaintiff is prepared to give I consider it right that discovery should be given. I also bear in mind that the Defendants have indicated their intention not to appeal the findings in respect of the '454 patent. In those circumstances, there can be no justification for not giving the discovery in respect of infringement of those rights straight away. Once that has happened there is little point in deferring any other discovery.

Discovery Before election as to damages or profits

20. It has hitherto been the standard practice that a successful Plaintiff has had to elect at the time judgment is entered as to whether it wishes to have an account of profits or an enquiry as to damages.  The Plaintiff argues that it is unfair that it should have to make that choice blind and without access to the relevant documents. The case of Minnesota Mining & Manufacturing v Jeffries [1993] FSR has been drawn to my attention which lends some support to the notion that the Plaintiff should be given a chance to make an informed choice.  Conceptually I can see that in principle there is force in the Plaintiff's contention.  In this instance, however, I consider that the Plaintiff is being rather pedantic and unnecessarily complicating matters. Given the fact that on my judgment the Plaintiff is entitled to conversion damages which on the present state of affairs looks unlikely to be met, I doubt that any further monetary award is of much relevance.  Even more to the point, on the state of the Defendants' accounts as they have been presented at the hearing, it takes more than some imagination to conceive that there would be any merit in pursuing an account of profits.  I consider that the Defendants could be put to considerable extra trouble and expense in providing discovery beyond the accounts which the Plaintiff already has and the discovery which the Defendants are required to give.  I do not consider it is right in the circumstances of this case to put them to that.  Hence without in any way saying that it would not be appropriate in future cases to allow the Plaintiff to see any further documents prior to election, I am not prepared to order that here.  The Plaintiff must therefore elect within 14 days of the ''Norwich Pharmacal" discovery affidavit being filed whether they wish to have an enquiry as to damages or an account of profits in relation to infringement of patent.

Reasonable skill and knowledge

21. The Defendants have requested an opportunity to challenge whether the '261 patent was drafted with reasonable skill and knowledge.  On my indication that I would have adjourned that matter and the whole question of costs, the Plaintiff has abandoned this aspect.

Costs

22. The parties are agreed on 2 matters in relation to costs. In the first place, there must be some form of apportionment as to costs; and secondly, the simplest way of accomplishing that is for me to give the Plaintiff a percentage of its costs making allowance for that part of the Defendants' costs to which they would otherwise be entitled.

23. Having given this matter the best consideration I can, making due allowance for those issues in respect of which the Defendants were successful and the matters unnecessarily raised and what I regard as the prolix nature of some of the witness statements I estimate that the fair apportionment would be that the Defendants pay the Plaintiff 73 % of the Plaintiff's costs of the Action.

Stay of the relevant parts of the Order pending appeal

24. Finally, but highly importantly, I come to the question of stay pending appeal.

25. The Defendants contend that there should be a stay of the injunction and the enquiries and taxation of costs pending appeal.

26. As a starting point to my consideration I take the principles as set out by Buckley L.J. in Minnesota Mining & Manufacturing v Johnson & Johnson [1976] RPC 671 @ 676, lines 7 to 37.  I do not feel it necessary to set the passage out here as it has been adopted in, it would appear, all subsequent cases and is well known.  I simply reiterate the sentence that "The object, where it can be fairly achieved, must surely be so to arrange matters that, when the appeal comes to be heard, the appellate court may be able to do justice between the parties, whatever the outcome of the appeal may be."

27. Before listing the matters which I consider are to be taken into account in determining this issue, I should make one or 2 preliminary observations about the state of the evidence.

28. It is the Defendants primary case that the imposition of an injunction and the refusal of a stay will in effect mean that the Defendants' business will have to close and the First Defendant will have to be put into liquidation.  The Second Defendant may be forced into bankruptcy.  That will have the further effect that approximately 140 employees of the First Defendant will be put out of work.  That is a mater which causes me grave concern particularly as unemployment has recently risen in Hong Kong. However, for reasons which I will elaborate below, the primary responsibility for the present situation must lie with the Defendants and their backers. The Plaintiff made known its claim 2 years ago and in the face of the claims which gave rise to this Action, the management of the Defendants knew that if those claims were successful and the 1st Defendant's business were to be developed along the lines it has been, the employees would have to be made redundant, that is a matter which the Court has to bear in mind.

29. I should also comment on the state of the 1st Defendant's accounts as they have been presented.  They show without a doubt a company whose finances are on any footing in a parlous state. Until the year ended 31st March 1994 the 1st Defendant made losses.  As a company with only a paid up capital of $1,000.00 it has been kept afloat by shareholders' loans. It thus owes a considerable amount of money.  In the most recent period for which accounts have been provided, the 1st Defendant reverted to making a loss.

30. As at 31st March 1992, there was a bank overdraft of $8,292,718.00.  In addition, the 1st Defendant owed $1.8 million to its holding company and $1.2 million to the shareholders of its ultimate holding company.

31. As at 31 March 1993, there was a bank overdraft of $8,585,131.00.  There were also shareholders' loans of $7,817,185.00

32. As at 31st March 1994, the bank overdraft was $8,491,414.00.  The accounts contain a notation that the shareholder's loan was from a shareholder of the holding company and was funded by a bank overdraft obtained by the shareholder.  Accordingly, interest was payable at the relevant bank rate.  The shareholder loan was unsecured and repayable on demand.  Prior to balance sheet date, the shareholder loan was assigned to the holding company.

33. The profit and loss account for 9 months to 31st December 1995 has also been exhibited and shows a loss, even excluding the legal fees relating to this Action, of nearly $702,215.00 and in the 3 months to 31st December of $1,353,915.00.

34. One can only take these figures on their face value and if one takes the figures and ignores the sums spent on this litigation, the 1st Defendant made a profit in the first 6 months of the financial year of$651,700.00 and loss of $1,353,915.00 in the final 3 months.  A very serious swing, it seems to me, in respect of a company which has yet to show any real prospect of making a sustained profit  One then adds to that $7 ½ million spent on this  litigation and the picture looks bleak.

35. The net effect is that apart from any liability as to costs or damages in these proceedings, the 1st Defendant owes some $21 million and is making a continuing loss. Moreover the first 2 sets of accounts exhibited to Mr. 0 'Brien' s affidavit were qualified to the extent that the value of the assets were said to be accepted by the auditors on the basis of a continuing business. It is said in those accounts that if the business had to be wound up, there would have to be a significant reduction in the estimated value of the assets to put them on the basis of their recoverable value. It would also be necessary to provide for any further liabilities and to reclassify fixed assets as current assets.

36. It is true that the same qualification does not appear in the latest set of audited accounts, but I cannot ignore the fact that it is common sense that on any liquidation the inability of the liquidator to sell an undertaking as a going concern undoubtedly reduces the value of the assets. There is thus no reasonable prospect on the face of the financial evidence that the Defendants have put forward that the Plaintiff would ever receive anything by way of costs or damages should ultimately they be held to be entitled to any.

37. Nor is there any prospect that unless there is a radical change in the 1st Defendants' business that it would be in a position to trade itself out of the difficulties which it is facing. The 1st Defendant has been kept afloat by the financing provided by the 1st Defendant's backers. They have neither come forward to verify that they will continue that backing nor have they given any indemnity or undertaking to pay any liability as to damages or costs on behalf of the 1st Defendant. The Plaintiff's criticism of the 1st Defendant's financial affairs extended further on the basis that it was only at the very final moments in the preparation for this hearing that the 1st Defendant's accounts were made available.        

38. The 1st Defendant offered to pay into a joint account a sum equivalent to 25% of the price of the articles which it made should there be a stay of the injunction. That offer was only forthcoming during Mr. Kotewall's address. It was a plea ad misericordiam.  The offer excluded what might be a very important part of the Defendants' business. Namely the 2nd Defendant in his affidavit estimated that approximately 50% of the 1st Defendant's business related to manufacturing sub-assemblies for a company by the name of Lexmark Inc.  Lexmark has apparently relevant patent licences from the Plaintiff.  Exactly what the 1st Defendant manufactures and intends to manufacture for Lexmark was not made clear.  Hence it would be impossible on the present state of things to know whether the 1st Defendant would be covered by the Lexmark licence.  This seems to me to be no mere forensic point as the Lexmark licence covers patents but does not apparently cover copyright. The 1st Defendant's offer therefore to pay a royalty into a joint account does not appear to me at present to cover everything to which the Plaintiff might be entitled.  I take into account that the Plaintiff's case is that the amount offered would not satisfy the claim as to conversion damages. This may be true but I regard it as of secondary importance having regard to my views as to the inequitable nature of such damages.  The following matters appear to me to be relevant in the determination of whether there should be a stay of the injunction; without putting them necessarily in order of importance they are :-

1. The Plaintiff has offered a cross-undertaking as to any damages which the Defendants may suffer as a result of a refusal of a stay of any part of the Order. There is no challenge that the Plaintiff is in a position to pay any damages. Hence in so far as any damage can be compensated in monetary terms that is secured.

2. There is no offer or undertaking on behalf of the Defendants that the full damages of the Plaintiff subsequent to judgment let alone costs and damages prior to judgment will be paid.

3. On the face of the financial evidence the 1st Defendant could cease to exist at any time its backers ceased to be prepared to allow what they are owed or are liable for to remain outstanding and ceased to support the 1st Defendant by fresh injections of capital.

4. On the evidence at the hearing, the conclusion must be that if the 1st Defendant continued to trade its financial condition would only get worse.

5. When I asked Mr. Kotewall where the 25% would come from, he could only surmise that the 1st Defendant would have to put up their prices. What effect that would have on sales could only be the subject of speculation.

6. The Plaintiff has succeeded after a trial on the merits and on more than one cause of action.  

7. The action has been a comparatively costly one.  From the indications on both sides it seems that it has costed each side US$1 million, possibly the Plaintiff's rather more.      

8. The employees that stand in danger of being put out of work weigh heavily upon me.  I do take into account however that the Defendants may have taken many of them on at a time after the Plaintiff's claim was first made.  It seems from the 1st Defendant's accounts that the Defendants did not take the Plaintiff's claim as any threat. That might have been bravado but it is primarily the Defendants' miscalculation that has caused the present situation.

9. Whether the 1st Defendant has to be wound up and whether their workers lose their jobs will depend primarily on the 1^st Defendant's backers.  They have kept the company afloat up until now.  They have supplied at least $21 million in finance and backing and I have been shown nothing to suggest that they could not carry the 1st Defendant until after the appeal.

10.  In this respect I note that although the Court of Appeal might be able to hear an appeal next term the Defendants wish to defer any appeal until at least next year when the Counsel who appeared at the trial will be available.  Whilst that might be something which they desire that is not of course imperative.  The Plaintiff has of course lost its trial counsel.

11. There must be a real risk that if the 1st Defendant were to be permitted to continue to trade it would carry on building up a business and trade connections, which in the event of an unsuccessful appeal could be made use of by manufacture and sale from outside Hong Kong. In this respect I should mention that it is clear that there is linkage of the Defendant to at least one and possibly other companies outside Hong Kong.  It is owned by a BVI company. There is at least a possibility that there are other companies which are linked. The 1st Defendant's latest brochure shows pictures of what it calls its factories in China, albeit I accept they are probably sub-contractors.  If the 1st Defendant is permitted to carry on, the Defendants' backers would undoubtedly have used the period up until the appeal to foster the business. As the Plaintiff fears it is a short step then to use the period as a bridgehead to transfer the goodwill of the business built up in infringement to a company or even the 1st Defendant's parent company outside the jurisdiction. The Plaintiff stands to be left with an empty judgment.

12. On the state of the present evidence, there is no prospect of the Plaintiff receiving anything more than a minuscule amount in respect of past costs and damages. The damages estimated by the Plaintiff are enormous even given a heavy reduction to the Plaintiff's estimate.

13. I have taken into account that a draft Notice of Appeal has been shown to me; although the merits of the appeal have not been the subject of argument, I have taken them into account.

39. I consider that I am driven to the conclusion that it would wholly wrong to stay the effect of an injunction in the case of the Defendants.

40. I do not consider that in view of the Plaintiff's cross-undertaking as to damages, it would be right to stay the enquiry as to damages or the taxation of costs.  Many of the considerations I have referred to above apply in this respect as well.  The enquiries and taxation could in themselves be lengthy and the Defendants as 1 have indicated are only prepared to expedite the appeal in so far as it suits them.

Mr. David Kitchin Q.C. & Mr. Paul Shieh inst'd by Messrs Deacons for the Plaintiff.

Mr. Robert Kotewall Q.C. & Mr. Stewart Wong inst'd by Messrs Robin Bridge & John Liu for both Defendants.

[1] Day 10 page 64. 

[2] See Day 13 page 114 to 117 line 14