Lush Ltd and Another v. Red Channel International Ltd and Others

HCA 2242/2012

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 2242 OF 2012

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Before: Hon Mimmie Chan J

Date of Hearing: 14 December 2012

Date of Handing Down Decision: 21 December 2012

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D E C I S I O N

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Background

1.This is a case of a long term licence arrangement terminating in sour circumstances.  The plaintiffs are the owners and exclusive licensees of the “LUSH” trademarks, registered in Hong Kong in Class 3 and Class 5, in respect of (inter alia) perfumes, toilet and cosmetic preparations, shampoos, soaps, and medicated preparations and substances for the care of skin and hair (“Products”). By a Licence Agreement dated 12 August 2002 (“Licence”) made between the 1^st plaintiff, the 1^st defendant and the 3^rd defendant, the 1^st defendant (“Licensee”) was granted the exclusive right to distribute the Products in Hong Kong and Macau under the “Lush” name, logo and trademark, through retail shops to be opened and operated by the defendants, which retail shops were to use and be operated under the plaintiffs’ business format, shop design and logo.  The Licence was for a term of 10 years from 12 August 2002 (“Initial Period”).  The Licensee has the right under the Licence to extend the Initial Period for 5 years, subject to its service of a written notice requesting renewal one year before the termination of the Initial Period, and subject to agreement being reached with the licensor prior to the end of the Initial Period. 

2.The 3^rd defendant is a director of the Licensee, and named in the Licence to undertake that the Licensee would not, during the term of the Licence, be engaged or interested in any business involving the manufacture, sale or supply of any goods in Hong Kong and Macau (“Territory”) which compete with the Products licensed to be sold.  The 3^rd defendant is a shareholder and director of the 4^th to 8^th defendants, which were companies used to enter into leases in respect of the retail shops operated under the Licence.

3.On 11 July 2012, the plaintiffs served on the 1^st and 3^rd defendants (as the parties named in the Licence) a notice of termination of the Licence, on the ground of their breach of the Licence.  It is the plaintiffs’ case that they discovered in about July 2012 that the 1^st and 3^rd defendants had been engaged in a business in the name of “Nest Beauty” (“Nest”), which business competes with that of the plaintiffs’.  The products offered by Nest include bath and skin care products, cosmetics and hair care products, which the plaintiffs claim are the core categories of their Products.  Both the plaintiffs and Nest advocate products that do not test on animals, and claim to be committed to environmentally friendly and green policies and “ethical sourcing” from suppliers.  The plaintiffs’ complaint is that the 1^st defendant was effectively operating, at its retail outlet in Windsor House, Causeway Bay, two shops: one under the “Lush” brand, and one under the “Nest Beauty” brand, selling competing products side by side and under one roof.

4.The plaintiffs claim that the defendants’ operation of the “Nest” business constitutes a breach of the terms of the Licence, which entitled them to terminate the Licence, with effect from 11 August 2012.

5.Under clause 7.1 of the Licence, the Licensee agreed that the retail shops to be opened and operated by the Licensee to sell the Products under the Licence would sell only the licensed Products, and further agreed that the Licensee would purchase all its requirements of the Products from the 1^st plaintiff as the licensor.  The Licensee also undertook by clause 7.2 of the Licence that it would not, during the term of the Licence, be directly or indirectly engaged, concerned or interested in any business involving the manufacture, sale or supply of any goods in the Territory which compete with the Products.  A similar undertaking was given by the 3^rd defendant, as director of the Licensee, under clause 21 of the Licence: that she would not be directly or indirectly engaged, concerned or interested in any business involving the manufacture, sale or supply of any goods in the Territory which compete with the Products.

6.Under clause 11 of the Licence, either party has the right to terminate the Licence forthwith, if the other party commits a breach of any of the terms and conditions, and such breach is not remedied within 30 days of receiving the written notice requiring the remedying of such breach.

7.Clause 11.4 of the Licence provides that upon the termination of the Licence, all rights of the Licensee to use the “Lush” name, business format and all other intellectual property rights will cease, and the Licensee will have to change its name to one not incorporating the word “Lush”, as well as cease use of any shop names or Products names agreed for use in the Territory.  In addition, the Licensee has to return to the licensor any documentation which contains information about the licensor, its product range and business activities.

8.After the plaintiffs’ service of the notice of termination of 11 July 2012, it is not disputed that there were negotiations between the parties concerning the extension of the defendants’ operation of their shops in Hong Kong and Macau, by the plaintiffs’ buyout and takeover of 4 shops operated by the defendants by January 2013, and the closing down of the others of the defendants’ shops by March 2013.  These negotiations were not successful, and on 22 November 2012, the plaintiffs issued a letter to the Licensee, formally terminating the negotiations and notifying the Licensee that it should cease use of the “Lush” name, and return all documents concerning the plaintiffs’ product range and business activities, with immediate effect.

9.The defendants refused to cease use of the “Lush” name and their operation of the “Lush” sales outlets.  On 30 November 2012, the plaintiffs applied ex parte, with notice to the defendants, for injunctions to restrain the 1^st to 3^rd defendants from taking delivery of, disposing of or otherwise dealing with Products which had been shipped by the plaintiffs to Hong Kong but have not yet been released to the defendants; to restrain all defendants from holding themselves out as licensees of the plaintiffs, using the “Lush” trademarks, and from using “Lush” as part of the defendants’ shop names, product names or domain names.  The ex parte application was adjourned for argument before this Court on 14 December 2012, with undertakings given by the defendants in the interim that they would not dispose of or deal with the plaintiffs’ Products until 14 December 2012.

10.By way of opposition to the plaintiffs’ claims for the injunctive relief sought, the defendants argue that there was no breach of the Licence, as the goods sold under the Nest business were not competing products.  If there was a breach, the defendants claim that the breach had been waived by the plaintiffs. The defendants claim that the plaintiffs should have known of the defendants’ alleged breach for several years before July 2012.  In any event, the defendants claim that the parties had agreed on an extension of the Licence to March 2013, or that the defendants had been allowed by the plaintiffs’ conduct to continue their sales of the Products in the interim between July 2012 until March 2013 at least. 

11.During the negotiations which were conducted between the plaintiffs and the defendants from July to November 2012, the plaintiffs had agreed at the defendants’ request to ship Products to the defendants for their sale in the Territory.  The defendants therefore argue that the plaintiffs would not suffer any irreparable damage if the defendants should continue their operation of the “Lush” or Nest outlets, and their sale of the Products after July 2012.  They further claim that by virtue of the interim extension of the Licence, or the collateral or ad hoc agreement made between the parties for the continuation of the Licence, the defendants are entitled to a reasonable period of notice before such interim arrangement can be terminated, and the plaintiffs were not entitled to require the immediate cessation of the defendants’ operations.

Legal principles

12.The plaintiffs’ application for injunctive relief has been hotly contested by the defendants, but the legal principles applicable to the determination of the matters in dispute are not in issue.

13.It is not the function of the court at this interlocutory stage to resolve conflicts of evidence on affidavit as to facts on which the claims of either party may ultimately depend.  These are matters to be dealt with at trial.

Whether there is breach of the Licence

14.After considering the materials put before the court, I am satisfied that there is a serious question to be tried in relation to the plaintiffs’ claim of the defendants’ breach of the terms of the Licence, by virtue of the defendants’ operation of a business and their sale of goods which compete with the plaintiffs’ business and Products.  Despite the defendants’ claim that the plaintiffs had knowledge, or should have been aware, of their interests in “Nest Beauty” long before July 2012, there is nothing in the evidence which comes near to showing this and the defendants’ claim remains a bare assertion.  The similarities in the lines of products offered for sale by the plaintiffs and by Nest, and their similar emphases on a “green” and environmentally friendly policy and sourcing from “ethical companies” which are against animal testing, support the plaintiffs’ claim that their Products and those of Nest compete.  This is particularly so when the Nest products are offered for sale literally in the same or adjacent premises of the “Lush” shop operated by the defendants under the Licence.  I bear in mind that the prospects of the plaintiffs’ success are to be investigated to a limited extent only, as all that has to be established at this stage is that the plaintiffs have prospects of success which, in substance and reality, exist (paragraph 29/1/10, Hong Kong Civil Procedure).  To the extent that the plaintiffs have to face a higher evidential burden in proving the merits of their case where the grant of an injunction at the interlocutory stage will finally dispose of the action in favour of the successful party to the application, I am satisfied that the plaintiffs have shown that they are very likely to succeed at trial.

15.The defendants’ right under the Licence, during its term, is to sell the Products under the “Lush” name, logo and trademark through retail shops to be opened and operated by the Licensee under the Licence.  Such retail shops are required under the Licence to use, and be operated under, the plaintiffs’ business format, shop design and logo (clause 2.6 of the Licence).  The Licensee is required to obtain the prior approval of the plaintiffs to the layout and name of the shops (clause 2.9 of the Licence).  The retail shops established and operated by the Licensee under the Licence is only to sell the Products (clause 7.1(i) of the Licence), and the Licensee agreed to ensure that the retail shops operated by the Licensee for selling the Products conform to standards, formats and other requirements of the plaintiffs.

16.The term of the Licence was in any event to expire by 11 August 2012, after the Initial Period of 10 years.  There is no claim or evidence that the defendants had, pursuant to clause 5.2 of the Licence, served written notice one year before 11 August 2012, requesting renewal of the Licence for a further term of 5 years.

17.The defendants’ operation of the Nest business and sale of Nest products during the term of the Licence constitutes breach of clause 7.2, and the plaintiffs were entitled under clause 11 of the Licence to terminate the Licence forthwith, when the defendants’ breach was not remedied within 30 days of their receipt of the notice of 11 July 2012.  After such termination, they had no further right to deal in the products bearing the “Lush” trademarks, or to operate any shop under the “Lush” name.

Whether there is ad hoc agreement

18.The defendants’ case is that there was agreement made between the parties after July 2012 for the defendants’ continuation of the operation of at least some of the retail shops until March 2013.  They rely on the e-mails and correspondence exchanged between Kenneth Yeung (“Yeung”) acting for the defendants and Karl Bygrave (“Bygrave”) of the plaintiffs between 1 August 2012 and end October 2012. 

19.The plaintiffs’ case is that the negotiations made between the parties after July 2012, and the plaintiffs’ agreement to supply Products to the defendants for sale during the interim of the negotiations, were on the basis and subject to the condition that a Heads of Agreement was to be signed by the parties.  The Heads of Agreement was never signed, and the plaintiffs accordingly terminated the negotiations and the interim arrangements.

20.Yeung claims in his affirmation that Bygrave had indicated to him during the negotiations that the plaintiffs would not seek immediate closure of the shops operated by the defendants.  However, even on Yeung’s case, the assurance he received from Bygrave was that the defendants’ shops could continue to operate “while the parties negotiated the buy-out terms”. Having reviewed the contemporaneous correspondence between the plaintiffs and the defendants, I am satisfied that there was no concluded agreement reached for the continuation of the defendants’ operation of the retail shops under the Licence until 15 March 2013.

21.The defendants place reliance on Yeung’s e-mails of 23 October 2012 and 25 October 2012, to establish the alleged collateral or interim agreement reached for the operation of the “Lush” shops until March 2013.  In his e-mail of 23 October 2012, Yeung only referred to “a summary of (their) discussion covering the major points of (their) forthcoming agreement” (emphases added), being a transfer of 4 of the defendants’ sales outlets to the plaintiffs for GBP 1,500,000, and the final termination date of 15 March 2013 when the other 7 shops of the defendants would be closed or converted to other brands.  Yeung referred in his e-mail to the plaintiffs’ agreement “in the meantime” to resume supply of the Products to the defendants under their normal trading terms.  It is clear from this that the termination date of 15 March 2013 and the transfer of the shops in question were only discussed, and not agreed, and that the agreement to supply the Products was only for the interim of the parties’ discussions, and not for any further period.

22.In Yeung’s e-mail of 24 October 2012 at 3:06 pm, he referred to the defendants’ difficulties over the Christmas period, and then continued:

“In view of the above, please consider one of the following proposals:

1) Please resume supply of goods immediately with an understanding that the terms of agreement will be signed as soon as it is drafted. Of course, the heads of agreement will be subject to contract.

2) You draft the heads of agreement before Monday and Dave and Tiffany will sign them (again subject to contract) in order that goods can be dispatched by next Monday/Tuesday.” (Emphasis added)

23.Again, it is clear from the above e-mail that what was set out in relation to the further supply of the Products was only a proposal from the defendants, as opposed to there being any concluded agreement between the parties, and further, that the proposal for the supply of the Products was on the basis that the Heads of Agreement was to be signed as soon as possible after 24 October 2012, as the plaintiffs claim.  There is no dispute that the Heads of Agreement was never signed, although the parties have put forward different reasons for such Agreement not having been signed.

24.In reply to Yeung’s e-mail, Bygrave stated in his e-mail of 24 October 2012, at 4:15 pm:

“Everything is fine except that I agreed to resume supply when we had a Heads of Agreement signed. We will brief our lawyers on Monday so that a Heads of Agreement can be drawn up as soon as possible for signature.”

25.Again, in his e-mail to Yeung of 25 October 2012 at 10:20 am, Bygrave stated :

“I would suggest that the orders are placed so that we can start preparing them for despatch and we will see if we can get the Heads of Agreement ready at the same time. I am not sure how long it will take to get an order ready for despatch but we will work on it and we should be in a position to get the order out and get something signed at the same time.”

26.The plaintiffs’ negotiations in fact started with Bygrave’s e-mail of 20 September 2012, when he referred to his conversation with Yeung on the way forward, and to the defendants’ orders for the Products.  The defendants also place reliance on this e-mail, as Bygrave referred therein to a six-month period for the winding down of the defendants’ “Lush” business in Hong Kong, until 1 March 2013.

27.It is pertinent that Bygrave’s e-mail of 20 September 2012 was expressly headed and stated to be “Without Prejudice - Holding Period”.  Objectively, this means that any proposal for a six-month winding down period, and any further supply of the Products, as referred to in the e-mail, was without prejudice to the plaintiffs’ position on the termination of the Licence on 11 July 2012.

28.The defendants seek to argue that, as evidenced by Bygrave’s e-mail of 20 September 2012, the plaintiffs had agreed to a six months’ notice of termination, of either the original Licence, or the alleged interim or collateral agreement for the continuation of the Licence until 2013.  As counsel for the plaintiffs pointed out, this ignores the fact that the defendants’ own solicitors had, by their letter of 21 September 2012 to the plaintiffs, rejected Bygrave’s e-mail of 20 September 2012 and his six months’ notice as “invalid”.  If there was any offer made in Bygrave’s e-mail, such offer had been expressly rejected by the letter dated 21 December 2012 from the defendants’ solicitors.

29.Hence, I am satisfied on the evidence that there was no concluded agreement for the continuation of the defendants’ operation of the “Lush” retail shops until March 2013.  This is in fact recognized by the 3rd defendant, when she stated in paragraph 33 of her affirmation made on 11 December 2012, that during the course of negotiations after July 2012, “many commercial terms were still outstanding and had yet to be agreed”.  I am further satisfied, on the face of the e-mail correspondence produced in evidence, that the plaintiffs’ agreement to supply, and their shipment of, the Products was only for the interim of the negotiations and on condition that a Heads of Agreement be concluded and signed, which was not achieved. 

30.Under the terms of the Licence and the conditions of sale and purchase between the plaintiffs and the defendants, title in the Products remained in the plaintiffs before full payment, and the plaintiffs do not now seek payment from the defendants.

31.Having reviewed the contents of the e-mails and letters exchanged, I do not find the plaintiffs’ correspondence or conduct to constitute unequivocal representation to the defendants, that they would not insist on or enforce their rights under the notice of termination of 11 July 2012, or in respect of the defendants’ breach of the Licence, for any waiver or estoppel to apply.

32.The question of what would constitute reasonable notice to terminate the interim or collateral agreement does not arise, since I reject the fact that there was any such agreement made.  On the evidence available, I also reject that there was any estoppel or waiver by the plaintiffs of their rights.

Whether there is irreparable damage

33.I am satisfied that if the injunctions sought by the plaintiffs are not granted, they will suffer irreparable damage.  The Products are sold under the plaintiffs’ trademarks.  Under the Licence, they are to be sold only at retail shops opened and operated by the 1st defendant in the manner approved and on the terms set out in the Licence (see paragraph 15 above).  On the evidence filed by the plaintiffs, the defendants have already, by 13 December 2012, converted 2 of the “Lush” retail shops operated by them, in Central and Admiralty, into “Nest” shops, selling “Nest” or “Fresh Line” products instead of the plaintiffs’ “Lush” Products.  This is so, notwithstanding the allegations made in the 3rd defendant’s affirmation made on 11 December 2012, as to the grave hardship that would allegedly be suffered by the defendants if they were not to be permitted to continue selling the Products at their shops, which could only be closed down or altered with the consent of the respective landlords, and that such consent would need one to two months to obtain.

34.The term of the License expired on 11 August 2012.  The defendants had not served notice to renew the Initial Period.  Leaving aside the plaintiffs’ purported termination for breach, the defendants should have known that the Licence was to lapse in August 2012, and should have co-ordinated their lease of the sales outlets accordingly.   The plaintiffs claim that they had terminated the Licence on the ground of the defendants’ breach, with effect from 11 August 2012.  Since then, the parties have not been able, despite negotiations, to agree on the conditions to extend the term of the Licence for the defendants to continue their operation of the retail shops established under the Licence.  

35.Clause 11.4 of the Licence provides that upon the termination of the Licence, all rights of the Licensee to use the “Lush” name, business format and other industrial property rights will cease and the Licensee has to change its name to one which does not incorporate the word “Lush”, and also cease to use any shop names or Product names agreed for use under the Licence.

36.If the defendants should be allowed to continue to sell the Products, they would be sold in the “Nest” shops, with the “Nest” or “Fresh Line” products, and in any event, not in “Lush” authorized outlets.  I accept that this would cause irreparable damage to the exclusivity and distinctiveness of the plaintiffs’ trademarks and the Products sold under their trademarks.

37.Under clause 11.5 of the Licence, the parties agreed that they will use all reasonable endeavours to ensure that all stocks of the Products remaining unsold are “disposed of in such a manner as to minimize any financial disadvantage to the Licensee and any adverse effect on the Industrial Property Rights”. Bearing in mind that the Products shipped after July 2012, which are the subject of the current dispute, have not been paid for by the defendants, the fact that the Licence was in any event due to lapse in August 2012, and the fact that the defendants have already successfully converted the Central shop and the Admiralty shop to “Nest” or “Fresh Line” shops with the landlords’ consent, the balance of interests and the risk of injustice lies in favor of granting the injunction sought by the plaintiffs, to restrain the release of the shipment of the Products to the defendants, and to restrain the defendants from continuing the operation of the “Lush” retail shops in Hong Kong.

38.I am satisfied from the accounts produced by the plaintiffs that they are in a financial position to pay any damages that may be suffered by the defendants as a result of the grant of the injunctions. 

39.I am also satisfied that there is no delay from July 2012, when the plaintiffs discovered the defendants’ breach and served the notice of termination, until 30 November 2012, when the plaintiffs applied for injunctive relief against the defendants.  There were continuous negotiations for the Heads of Agreement during this interim, and as soon as the negotiations failed, they were terminated by the plaintiffs on 22 November 2012, and they made application to the Court for relief.

Orders

40.For all the reasons set out above, I grant the orders sought in terms of paragraphs 1 to 6 of the Summons issued on 4 December 2012.  I will make an order nisi that the costs of the plaintiffs’ application be in the cause, with certificate for counsel. 

Mr Douglas Clark, instructed by Robin Bridge & John Liu, for the plaintiffs

Ms Priscilla Wong, instructed by Zeke Mok & Co, for the defendants