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High Court of New Zealand Decisions |
IN THE HIGH COURT OF NEW ZEALAND
AUCKLAND REGISTRY
CIV 2009-404-5464
BETWEEN CHRIS ALEXANDER SANSON
Plaintiff
AND DEMON DRINKS LIMITED AND
ENERGY PRODUCTS LIMITED
Defendants
Hearing: 2 September
2009
Appearances: G Dewar for plaintiff
W Akel and R Anema for defendant
Judgment: 15 September 2009
JUDGMENT OF ALLAN J
In accordance with r 11.5 I direct that the Registrar endorse this judgment
with
the delivery time of 11.30 am on Tuesday 15 September 2009
Solicitors:
Thomas Dewar Sziranyi Letts, PO Box 31-240, Lower Hutt
Simpson Grierson, Private Bag 92518, Auckland rob.anema@simpsongrierson.com
SANSON V DEMON DRINKS LIMITED AND ENERGY PRODUCTS
LIMITED HC AK CIV 2009-404-5464
15 September 2009
[1] The plaintiff carries on business in the New Zealand market for energy
drinks. The defendants are his competitors in that market. The plaintiff contends
that certain of the defendants' products infringe
the provisions of The Australian and
New Zealand Food Standards Code (FSC) and that accordingly the sale of those
products is illegal.
In his statement of claim he pleads breach of statutory duty,
breach of the Fair Trading Act and public nuisance. In his prayer for
relief he seeks:
A. A permanent injunction, pursuant to s 41 of the Fair Trading Act
1986 or the inherent
jurisdiction of the Court, prohibiting the
Defendants and their distributors, wholesalers, agents, assigns and
associated companies from manufacturing, distributing, selling or
dealing in the Products, or any other
product that does not comply
with standard 2.6.4 of The Australia and New Zealand Food
Standards Code.
B. An order that all of the Products currently held by the Defendants,
their distributors, wholesalers,
agents, assigns or associated
companies be destroyed along with any other product that does not
comply
with standard 2.6.4 of The Australia and New Zealand Food
Standards Code.
C. An order prohibiting the
sale of the Products, along with any other
product that does not comply with standard 2.6.4 of The Australia
and New Zealand Food Standards Code.
D. Damages for the loss of business and other effects that the
defendants' actions have had on the plaintiff in an amount to be
quantified at trial.
E. A direction
to the Food Standards Authority that it consider and take
appropriate action in respect of the Products and any other
such
products that it is aware of.
F. The costs of and incidental to this proceeding.
G.
Such further or other order as this Court deems just.
[2] Pending resolution of the substantive proceeding, the plaintiff now
seeks an
interim injunction pursuant to s 41 of the Fair Trading Act 1986 or the inherent
jurisdiction of the Court:
...
prohibiting the Defendants and their distributors, wholesalers, agents,
assigns and associated companies from manufacturing,
distributing, selling
or dealing in the Products, as defined in the attached statement of claim, or
any other product
that does not comply with standard 2.6.4 of the Australia
and New Zealand Food Standards Code.
[3] The interim injunction
application was initially filed as a without notice
application, although counsel evidently envisaged that notice would be given
to the
defendants' solicitors under the Pickwick procedure. But in a minute dated
26 August 2009 Heath J directed that the application be made on notice and allocated
an urgent fixture.
Factual background
[4] The plaintiff has been involved in the manufacturing and marketing of energy
drinks in New Zealand
and Australia for more than ten years. For the past eight
years he has owned and operated his own energy drinks business. He says
that he
brings the proceeding both as a manufacturer of energy drinks and as a consumer.
[5] Demon Drinks Ltd, the first named
defendant, manufactures energy drinks,
carbonated soft drinks and liquid dietary supplements. The company has been
operating in these
markets for about two years. Energy Products Ltd, the second
named defendant, owns the intellectual property, including trademarks,
relevant to
the business carried on by Demon Drinks.
[6] Mr Sanson says that the defendants' relevant products are energy drinks,
also
known as formulated caffeinated beverages (FCBs). Mr Shaw, a director of the
defendants, denies that claim. He says that the
products in question are not energy
drinks, but are dietary supplements in the form of a liquid energy supplement.
Accordingly, he
contends, the products are governed by the Dietary Supplements
Regulations 1985 (SR1985/208) and not by the Standard upon which the
plaintiff
relies for his allegation of illegality.
[7] The plaintiff is concerned with three of the defendants' products. First,
there
is a 500 millilitre canned drink bearing the "NOS" brand, which contains 400mg of
caffeine per litre, or 240mg per can. Then
there is a 60 ml (shot) NOS drink which
contains 4,166.67mg of caffeine per litre (or 250mg per "shot"). Finally there is the
"Demon
Energy Shot" which is again a 60 ml "shot" drink, which contains 3,333.33
mg of caffeine per litre (or 200 mg per "shot"). Each of
these products is labelled as
a "dietary supplement".
[8] At the heart of the plaintiff's claim is his contention that the defendants'
products are covered by Food Standard 2.6.4, and that they do not comply with it.
The defendants' argument is that the standard does
not apply to the products at all.
Rather, they are governed by the Regulations. On the defendants' approach, the
plaintiff's argument
for illegality is misconceived.
[9] It is common ground that the defendants' products, like those of the plaintiff
and other
competitors, are widely sold at retail from such outlets as dairies and
service stations.
Injunction principles
[10] The principles
relating to the grant of an interlocutory injunction are well
established. The normal approach is to consider whether there is a
serious question
to be tried, and if there is, then to determine where the balance of convenience lies.
Finally, the Court must have
regard to the overall justice of the case: Klissers
Farmhouse Bakeries Ltd v Harvest Bakeries Ltd [1985] 2 NZLR 129, 140 (CA).
Certain allied considerations must be borne in mind. If damages would be an
adequate remedy and the defendant
can pay them, then ordinarily no interlocutory
injunction should be granted: American Cyanamid Co v Ethicon Ltd [1975] UKHL 1; [1975] AC 396,
408.
[11] But if damages would not be sufficient or appropriate compensation for a
plaintiff, then the Court will consider the
position of a defendant were it to succeed
at trial. If damages pursuant to a plaintiff's undertaking would be sufficient to
compensate
the defendant for loss suffered as the result of being under a restraint
pending trial then, provided that the plaintiff is in a
position to meet its undertaking,
an injunction will often be thought appropriate.
[12] It has been said that the balance of
convenience will sometimes turn on a
consideration of whether the granting of an injunction, or its refusal is the course
which,
after the action itself has been tried and the issues between the parties
determined, would best allow the adjustment of the rights
of the parties in a way that
accords with fairness and justice: Somers J in Congoleum Corporation v Poly-Flor
Products (NZ) Ltd
[1979] 2 NZLR 560, 571 (CA). Other considerations which will
sometimes be relevant include the position of third parties, the desirability of
preserving
the status quo where other factors are evenly balanced, and the prior
conduct of the parties.
Serious question
[13] Mr Dewar
places primary reliance on the cause of action founded upon an
alleged breach of statutory duty. He points out that a breach of Food
Standard 2.6.4
constitutes an offence by virtue of s 11O of the Food Act 1981. There is, Mr Dewar
contends, a clear duty on the defendants
to comply with the applicable standard,
which exists in order to protect the general public. Moreover, he argues, a breach of
statutory
duty is actionable at the suit of his client, although the duty is owed to the
public at large: Dominion Airlines Ltd v Strand
[1933] NZLR 1; Phillips v
Britannia Laundry Co Ltd [1923] 2 KB 832; MacEachern v Pukekohe Borough
[1965] NZLR 330 at 334; and Harder v NZ Tramways Employees [1977] 2 NZLR
162. Mr Dewar maintains that there can be no question about the plaintiff's standing
to sue because, as a competitor of the defendants,
he is liable to suffer particular
damage by reason of the business enjoyed by the defendants illegally, some of which
would inevitably
have flowed to the plaintiff, whose activities are lawful, had not the
defendants enjoyed an improper advantage.
[14] All of
this depends upon the proposition that the defendants' products are
caught by the applicable standard, and that they are non-compliant.
It is accordingly
necessary to consider both the regulations and the standard itself.
[15] The Dietary Supplements Regulations
1985 govern the content, labelling and
packaging of dietary supplements, which are defined in reg 2 to mean:
... any amino
acids, edible substances, foodstuffs, herbs, minerals, synthetic
nutrients, and vitamins sold singly or in mixtures in controlled
dosage forms
as cachets, capsules, liquids, lozenges, pastilles, powders, or tablets, which
are intended to supplement
the intake of those substances normally derived
from food.
[16] Mr Akel says that these regulations apply to all of the
products which are of
concern in this proceeding. Mr Shaw has given evidence to that effect.
[17] In his statement of claim Mr
Sanson pleads:
10. The Products are not dietary supplements under the Dietary
Supplements Regulations
1985 because:
10.1. They do not contain amino acids, edible substances,
foodstuffs, herbs,
minerals, synthetic nutrients, and/or
vitamins for the purpose of supplementing the ordinary
intake of those substances.
10.2. The purpose of the Products is to provide significant
amounts of caffeine to the consumer. Caffeine is not a
dietary supplement.
10.3.
The Products' ingredients otherwise breach regulations 2-20
of the Dietary Supplement Regulations 1985.
[18] However, Mr Shaw has given unchallenged evidence as to the contents of the
products, which does tend to suggest that they
fall within the regulations. Moreover,
the defendants produced to the Court an e-mail communication sent by an authorised
officer
of the Food Standards Authority (the body responsible for policing the FSC)
confirming that the view of the Authority was that the
products did fall within the
regulations. That seems also to be the view of Red Bull and Frucor, major
competitors of the parties,
each of which has recently commenced marketing
products which, if the plaintiff is right, are equally in breach of the applicable
standard.
[19] It is necessary therefore to examine the circumstances in which the standard
came into existence, and in particular
its relationship to the regulations. Regrettably,
the Court has only limited information on the topic.
[20] It is common ground
that the standard had its genesis in an application made
on 13 May 1999 by Red Bull GmbH, to amend the Australian Food Standards
Code.
In a decision given on 8 August 2001, the Australia New Zealand Food Authority
recommended the adoption of Standard 2.6.4,
which was subsequently gazetted.
[21] The standard applies to FCBs which are defined in relation to standard 2.6.4
as meaning:
... a non-alcoholic water-based flavoured beverage which contains caffeine
and may contain carbohydrates, amino acids,
vitamins and other substances,
including other foods, for the purpose of enhancing mental performance.
[22] Such beverages
are required by the standard to contain no less than 145 mg/L
and no more than 320 mg/L of caffeine. The Authority gave these reasons
for its
recommendations in its written decision:
1. The proposed Standard protects public health and safety by controlling
the maximum level of caffeine and other substances used in product
formulation, and by requiring several label statements that advise
maximum consumption,
but also to advise against consumption by
children, pregnant and lactating women and caffeine sensitive people. A
general advisory statement is also required that health authorities
recommend limiting caffeine intake.
2.
The proposed standard requires detailed compositional information to be
given on the label to enable informed choice by
consumers.
3. An Australia New Zealand food standard reduces the current
manufacturing and trade inequities between
the two countries resulting
from operation of the New Zealand Dietary Supplements Regulations
1985 (under which
FCBs are permitted in New Zealand), and operation
of the Trans Tasman Mutual Recognition Arrangement that permits
unilateral trade in these beverages into Australia. Complete equity will
be achieved when FCBs are no longer regulated
in accordance with the
New Zealand Dietary Supplement Regulations.
4. ANZFA refers the issue of restriction of
availability of FCBs to children
to the jurisdictions for consideration.
[23] The Authority also said:
It is
recommended that the commencement date of the proposed Standard be
the date of gazettal. This would permit Australian manufacturers
to enter the
market without delay. As it is expected that the New Zealand Dietary
Supplement Regulations will continue
to provide permission for FCBs
produced or imported into New Zealand, until probably next year, there
should be adequate
time for those manufacturers to make necessary label
and/or compositional adjustments.
[24] The plaintiff's position is
that the standard applies to the exclusion of the
regulations. Mr Dewar points out that the statement of reasons by the Authority
commences with an explanation that Red Bull applied to amend the Australian Food
Standards Code to include appropriate regulatory
provisions "for `energy drinks'
viz non-alcoholic, water-based carbonated beverages containing caffeine, complex
vitamins and
other substances, now referred to as Formulated Caffeinated Beverages
(FCBs)".
[25] Mr Dewar further argues that all of the relevant
products of the defendants
meet the test because all are manufactured for the purpose of enhancing mental
performance, as is evident
from the claims made for the products to the effect that
they will significantly increase energy.
[26] Mr Akel does not accept
that the products are marketed as energy drinks. He
points out that they are labelled in accordance with the regulations and are
marketed
as dietary supplements. Accordingly, he contends, the products do not amount to
"energy drinks" as that term is used in
the FSC. Mr Shaw has given evidence of
certain of the contents of the products which, Mr Akel contends, bring the products
within
the definition of "dietary supplement" in regulation 2 of the regulations. He
says that food (which includes liquids) is either labelled,
marketed and sold as a food
under the FSC (including the standard), or as a dietary supplement under the
regulations. If, as the
defendants claim here, the regulations apply, then Mr Akel
argues that Standard 2.6.4 does not.
[27] Although the plaintiff has
pleaded that the regulations do not apply,
Mr Dewar accepts that the defendants may be able to show that the relevant products
are
governed by the regulations. However, he says there is nothing to prevent the
defendants' products from being subject both to the
regulations and to the standard.
Accordingly, he argues, the products are not saved from illegality under the standard
by a finding
that the regulations also apply.
[28] Assessment of the strength of the plaintiff's claim, based upon alleged breach
of statutory
duty, presents problems. The statement of reasons of the Australia New
Zealand Food Authority plainly contemplates the day when the regulations will no
longer apply to FCBs,
while at the same time confirming that at least as at the date of
the reasons themselves, the regulations did so apply. In a passage
set out above, the
Authority indicated that the regulations would continue to provide permission for
FCBs produced or imported into
New Zealand " ... until probably next year".
Mr Dewar contends that time estimate simply refers to the period prior to the
gazetting
of the recommended standard. On the other hand, Mr Akel contends that
the Australia New Zealand Food Authority was thereby anticipating
changes to the
regulations to prevent products continuing to be sold as caffeinated beverages under
the regulations. But, as
he says, those changes have not occurred. The
harmonisation process, expected to have been relatively rapidly accomplished,
has
never been finalised. More recently a deliberate decision has been made by the New
Zealand government to defer the amendment.
[29] It is in my view reasonably plain that the regulations apply to the defendants'
products, but it does not follow that the
standard does not. There is no suggestion on
the face of the standard that it does not apply where a product is covered by the
regulations;
the exemption for which Mr Akel contends is identifiable only by
implication and by a reading of the Authority's reasons, which,
it must be said, are
not transparently articulated.
[30] It should be noted that the plaintiff has complained to both the Commerce
Commission and the Food Standards Authority. The former body has formally
declined to investigate his complaint. The Authority has
not yet responded. There
seems nothing to suggest that these Authorities are concerned at the defendants'
activities.
[31] In
my view, there is nevertheless a serious question to be tried, although the
matter is by no means as clear as Mr Dewar claims. In
passing I note that if the
defendants' products infringe the standard, so, it appears, do certain products of the
two major market
participants, Red Bull and Frucor.
[32] The plaintiff's claim under the Fair Trading Act falls into two parts; first it is
argued
that the specific representations that appear on the defendants' products give
the general impression that the products are legally
authorised for sale as dietary
supplements, when they are in fact in breach of the applicable standard. Here, the
plaintiff relies
upon an observation by Tipping J in Penny Farthing Holdings Ltd v
Cycle Warehouse Ltd HC CHCH CP44/89 17 February 1989 to the effect
that he
would have been inclined, if required, to rule that a serious question had been raised
by the contention that a person
who illegally opens his shop on a Sunday was
impliedly representing that in doing so he was acting lawfully. However,
the
observation appears in an obiter dictum and the view is expressed " ... with a
considerable degree of hesitation". I do not regard
this aspect of the plaintiff's claim
as adding anything of significance to the claim for breach of statutory duty.
[33] A second
argument under the Fair Trading Act is based upon the fact that the
expression "R16" appears on the NOS products. Two
separate arguments are
mounted under this head:
a) that teenagers may be misled or deceived into thinking the drink
is
restricted to those 16 years or older, so increasing the risk that those
under 16 years would be
induced to purchase the product because the
R16 label represents a challenge to do so;
b) that the R16
statement is a representation that the product has in fact
received approval or endorsement for sale to those 16 years
or over.
[34] In my view, the plaintiff has not raised a serious question under the Fair
Trading Act. I accept Mr Akel's submission
that the R16 label is simply a guide to
retailers and consumers as to the category of persons who are most appropriate as
consumers of the products. These
claims do not add anything of significance to the
plaintiff's argument in respect of the existence of a serious question.
[35]
Finally there is the cause of action in which the plaintiff pleads public
nuisance. It is common ground that at trial the plaintiff
would need to prove a
potential public health risk from the sale of the products, and also particular damage
sustained by him over
and above that suffered by members of the public at large. On
the latter point the plaintiff points to his status as a competitor
of the defendants, and
says that that is sufficient to bring him within the requirements of the cause of action.
[36] It is difficult
to see how Mr Sanson's mere status as a competitor would be
sufficient, except perhaps on the basis that if the defendants' products
did indeed
present a public health risk, then the products of the plaintiff and other participants in
the market might become reputationally
tainted as well. But the real problem for the
plaintiff on this cause of action, at least for present purposes, is that there is
no
evidence before the Court of a potential public health risk. Mr Sanson has given
evidence of one occasion upon which he purchased
one of the defendants' products
and suffered an adverse reaction. There is also in evidence a newspaper report of a
16 year old school
pupil in Wellington who seems to have developed symptoms after
drinking the defendants' products, but there is no detail, and in
particular the
quantities consumed and the circumstances in which that occurred are unknown. The
evidence falls short of establishing
a serious question in respect of a potential public
health risk, especially where there is evidence that the two main market participants
are now selling products containing caffeine at levels well above those authorised by
the standard.
[37] In my view, the strength
of the plaintiff's claim, such as it is, lies in the first
cause of action, namely that based upon alleged breach of statutory duty.
Balance of convenience
[38] The Court must consider the consequences of both granting and refusing the
injunction and make
an assessment of the detriment likely to be suffered by the
unsuccessful party in respect of the present application. As Mr Dewar
points out, the
balance is relatively easy to strike where the conduct of which complaint is made is
clearly illegal: Harder at p
171. But in my view the conduct is not plainly illegal.
There is a tenable argument that the defendants are infringing the standard,
but,
unlike Harder, there is in this case a respectable argument to the contrary.
[39] I accept also that the plaintiff may be
able to show at trial that he has suffered
a loss arising from the tainting effect discussed earlier, and that such damages are
inherently
difficult to quantify: Shotover Gorge Jetboats Ltd v Marine Enterprises
Ltd [1984] 2 NZLR 154 at 161; Esanda Ltd v Esanda Finance Ltd [1984] 2 NZLR
748; Sutton v The House of Running Ltd [1979] 2 NZLR 750 at 755, and Klissers at
139.
[40] On the other hand there are several significant factors that suggest it would
not be appropriate
to grant an injunction. Demon Drinks dietary supplement
products constitute around 55% of the company' total business turnover.
Projected
revenue for such products for the period September-November 2009 is likely to be of
the order of $1.7 million. Of course
the likelihood is that, even with some degree of
priority, this proceeding is unlikely to go to trial this year. Further, there is
evidence
that the defendants have stockholdings and future packaging and ingredient
commitments of almost $250,000 and there is an
urgent need to place orders for
further significant supplies. The defendants fear that the grant of an interim
injunction would
result in about six of their 23 staff being made redundant, and
importantly they would be out of the market for these products for
a period, at least
until such time as was needed to alter the composition of their products. There
would also be consequential packaging
and labelling alterations.
[41] Of course an injunction would place the defendants at an enormous
disadvantage as against powerful
competitors such as Red Bull and Frucor, who
would be free to conduct their business free of competition from the defendants.
[42]
The plaintiff does not suggest that the defendants are acting in bad faith. He
simply argues that they have misunderstood the state
of the regulatory legislation and
must, as a necessary consequence, suffer the inevitable outcome.
[43] There is a further difficulty
for the plaintiff when the balance of convenience
comes to be assessed. Although he filed the necessary undertaking as to damages,
he
has failed to provide the Court with the usual evidence as to his ability to meet any
award of damages which the Court might make
in the event that an interim
injunction is granted, but the defendants ultimately succeed at trial. That is a grave
omission. I raised
it with Mr Dewar in the course of argument. He indicated he had
become involved in the matter as counsel only in the last day or
two, but I note that
his name appears on the statement of claim as the solicitor dealing with the
proceeding.
[44] During the
course of the hearing Mr Dewar took instructions from
Mr Sanson, and advised the Court that the plaintiff was willing to provide
a bank
bond in the sum of $100,000. The offer was however qualified by an indication that
this sum would be intended to cover security
for costs as well as providing security
for the amount of any ultimate award of damages.
[45] Mr Akel was unhappy at the prospect
of being asked to content himself with
an offer such as that. I am not surprised. For one thing, the sum concerned appears
to fall
well short of any likely award of damages if the defendants are successful at
trial. For another, the defendants are entitled to
reasonably detailed information
from Mr Sanson as to his financial position so that they, and the Court, might judge
the strength
of any undertaking given. If an interim injunction is refused, Mr Sanson
will not suffer any immediate personal disadvantage. No
doubt he will carry on his
business as before, facing competition from other major competitors as well as the
defendants. If he is
able to show he has suffered loss between now and any trial, he
will be in a position to mount a claim for damages in terms of his
prayer for relief. It
is not contended that the defendants would be financially unable to meet any award
of damages.
Balancing
[46] Ultimately, the Court must stand back and consider the overall justice of the
case. Having done so I am satisfied it
is not appropriate to grant an interim
injunction. There is a serious question, but not of such strength as to over-ride
balance
of convenience considerations. In other words, the plaintiff has not satisfied
me that the defendants' actions are plainly illegal.
[47] Balance of convenience factors favour the defendants. There would be grave
consequences for their business if they were prohibited from carrying on the greater
part of their business operations, especially where other major competitors would be
free to market their products in precisely the
manner to which the plaintiff takes
objection. There is no evidence that the products as presently marketed are likely to
be detrimental
to the health of the general public.
[48] Finally, and importantly, there is an absence of satisfactory evidence as to the
ability of the plaintiff to meet an award of damages should an interim injunction be
granted and the plaintiff later fails at trial.
[49] In my view it would not be proper to grant the application. The proper
course for the plaintiff to follow is to prosecute
the proceeding with diligence, in
order to obtain an early hearing. By that time, I envisage that the Court would have
the advantage
of a great deal more evidence on the important topic of the
circumstances in which the relevant standard came into force, than is
currently
available.
Result
[50] The plaintiff's application for an interim injunction is declined. The
defendants
are entitled to costs. Counsel may file memoranda if they are unable to
agree. The Registrar is asked to refer the file to an
Associate Judge for case
management purposes.
C J Allan J
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