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Electroquip Limited v Craigco Limited (no.2) HC Auckland CIV 2006-404-6719 [2010] NZHC 532 (29 April 2010)

Last Updated: 9 May 2010

IN THE HIGH COURT OF NEW ZEALAND

AUCKLAND REGISTRY

CIV 2006-404-006719

BETWEEN ELECTROQUIP LIMITED

First Plaintiff

AND DES CAREY LIMITED

Second Plaintiff

AND DESMOND JAMES BALFOUR CAREY

Third Plaintiff

AND MARTIN BALFOUR CAREY

Fourth Plaintiff

AND DAVID BALFOUR CAREY

Fifth Plaintiff

AND CRAIGCO LIMITED

First Defendant

AND PATRICK DAVID TUFFIN

MAUREEN JUDITH TUFFIN Second Defendants

Hearing: 21 - 23 September 2009

Counsel: BP Henry and GD Church for the Plaintiffs

BM Nathan and VA Nichols for the Defendants

Judgment: 29 April 2010 at 2.00 p.m.

JUDGMENT (NO 2) BY RODNEY HANSEN J
As to damages

This judgment was delivered by me on 29 April 2010 at 2.00 p.m.
pursuant to Rule 11.5 of the High Court Rules.

Registrar/Deputy Registrar Date: ...............................
ELECTROQUIP LIMITED AND ORS V CRAIGCO LIMITED AND ORS HC AK CIV 2006-404-006719 29 April 2010

Solicitors: Dennis Gates, P O Box 222, Whangaparaoa for Plaintiffs

White Fox and Jones, P O Box 1353, Christchurch for Defendants

[ 1 ] In my judgment of 3 September 2008, I held that the first defendant (Craigco)

and the second defendant, Patrick Tuffin, had infringed the plaintiffs’ copyright in an automatic sheep jetter which the first plaintiff (Electroquip) marketed under the trade name Electrodip. Subsequently, I made a declaration and granted the plaintiffs a permanent injunction. A further hearing was convened for the purpose of determining the damages to which the plaintiffs are entitled.

Damages

[2] By s 120(2) of the Copyright Act 1994, the plaintiffs are entitled, for breach

of copyright, to all such relief by way of damages, injunctions, accounts or otherwise as is available in respect of the infringement of any other property right. In addition to compensatory damages, the plaintiffs also seek additional damages, having regard to the flagrancy of the infringement and the benefit accruing to the defendants, as permitted under s 121(2). A claim for damages for loss of reputation was abandoned.

[3] The defendants oppose the claim for additional damages and contend that

compensatory damages should be reduced because:

  1. The defendants did not know and had no reason to believe that copyright existed in the works; and
  2. Only parts of the defendants’ jetter infringed copyright. Compensatory damages

[4] The object of damages is to compensate the plaintiffs for their loss. They are

entitled to be put in the position they would have been in had the infringements not
occurred.[1] As I will discuss in more detail later, there are two elements to this
calculation in a case such as the present. The first entitles the plaintiffs to recover

the profits they would have earned on sales of their own product lost as a result of the infringement. That requires a determination of how many sales Electroquip lost as a result of the infringement and then an assessment of the profit it would have earned on those sales.

[5] Electroquip’s position is that it would have sold an additional 154 units if Craigco and Mr Tuffin had not infringed. That is equivalent to the total number of Craigco’s sales of the machine it developed in breach of Electroquip’s copyright. Marketed as the Sensor Jet, it provided an alternative to the mechanical jetter (Hi Flo) which previously had been Craigco’s only line. Over the period 2002 – 2008, Craigco’s sales (in number of units) were:
Year
Hi Flo
Sensor Jet
Total
2002
37

2003
29

2004
28

2005
34
11
45
2006
11
59
70
2007
6
64
70
2008
5
20
25

150
154
210

[6] Electroquip’s accounting expert, Mr Kevin Gillespie, said that in basing sales on the actual sales made by Craigco, he was following the approach in Lakeland Steel Products Limited v Stevens[2] and Ultraframe (UK) Limited v Eurocell Building Plastics Limited .[3] That is not the approach taken to the calculation of compensatory damages in those cases.[4] It would be the appropriate basis for determining relief only if the plaintiffs were seeking damages for conversion or an account of profits.

Lost sales

[7] The relevant inquiry is to determine how many of the 154 sensor jets sold by

Craigco between 2005 and 2008 were sales which Electroquip would have made had their machine not been copied. An analysis of the sales patterns of both companies suggests that there is no direct correlation of the kind asserted by Electroquip. The analysis of Craigco’s sales, set out at [5], shows that sales of Hi Flo units (the mechanical jetter) fell sharply after Craigco began marketing the Sensor Jet, while the following comparison of sales of the two companies demonstrates that sales of Electrodip machines did not decline to the extent that might have been expected if all sales of the Sensor Jet were made at the cost of the Electrodip.

JETTER SALES

Hi Flo
Sensor Jet
Electrodip
Total
electronic
Total all
jetters
31/03/2000
Not available
-
94
94
31/03/2001
Not available
-
83
83
31/03/2002
37
-
93
93
130
31/03/2003
29
-
76
76
105
31/03/2004
28
-
39
39
67
31/03/2005
34
11
73
84
118
31/03/2006
11
59
69
128
139
31/03/2007
6
64
53
117
123
31/03/2008
5
20
31
51
56
TOTAL
150
154
434
765
738

[8] It can be seen that, although sales of the Electrodip declined after the Sensor

Jet was first marketed during the year ended 31 March 2005, the drop in sales in the next two years was much less than the sales of Sensor Jets for the equivalent period. The figures suggest that Craigco’s marketing of the Sensor Jet had the effect of growing the overall market for electronic jetters. Many of the additional sales were obviously at the cost of Craigco’s mechanical jetter.

[9] Mr Desmond Carey, the founder of Electroquip and the driving force behind

the development of the Electrodip, maintained that the development of the Sensor Jet first impacted on Electroquip’s sales in the 2004 year. He believes that the drop in Electrodip sales in the 2004 year (year ended 31 March 2004), was because the market was anticipating the introduction of a sensor jetter by Craigco. I cannot reconcile that with the evidence. Mr Tuffin did not begin promoting the Sensor Jet until mid-2005 and only began its development in December 2003. If Mr Carey is right, one would expect Electrodip sales to be affected even more in the 2005 year. Instead, they bounced back to the 2003 levels. I agree with Mr John Leonard, the accountant called by the defence, that the drop in sales in 2004 is more likely attributable to a combination of increased prices (Electroquip increased the price of its jetter by 12% on 1 March 2003) and external factors, including declining sheep numbers and wool prices. It is also possible that seasonal factors such as the weather and the incidence of flystrike and other infestations, may have played a part.

[10] The year ended 31 March 2008 was also a poor year for both Electroquip and Craigco. Again, this seems likely to be attributable to a combination of external factors which affected the market.

[11] If these two years (2004 and 2008) are excluded as aberrant, the figures in [7] show that the electronic jetter market increased from an average of 86.5 units for the four years ended 31 March 2003 to average sales of 109.7 units for the three years ended 31 March 2007. The average increase is 23.2 units or 26.8%. If 2005 is excluded, as marketing of the Sensor Jet had only occurred in the last quarter of that year, the average sales for the later period are 122.5 units per year, an increase of 36 units or 41.6%.

[12] On this basis, Mr Leonard hypothesised that the entry of Craigco into the sensor jet market had the effect of increasing the market for electronic jetters by between 26.8% and 41.6%. Using sales by reference to cash receipts over the period, he calculated that, if the lower figure of 26.8% is adopted, Electroquip would have lost sales of 81 units as a result of Craigco’s entry into the sensor jetter market. If the higher figure is adopted, the loss would have been 25 units.

[13] I accept that Craigco’s launch of the Sensor Jet resulted in an increased demand for electronic jetters within the range postulated by Mr Leonard. In order to determine the likely measure of sales lost by Electroquip, a more detailed examination of the way in which the two companies marketed their products is necessary. That exercise, as well as the range of possible values identified by Mr Leonard, informs the final calculation of lost sales.
[14] Electroquip marketed its jetters direct to the ultimate consumer - the farmer. 85% of its sales were to individual purchasers. In contrast, Craigco sold most of its jetters to retail outlets for on-sale to farmers. 125 of the 154 Sensor Jets it sold between 2005 and 2008 were to farm supply companies. Of these, 122 were sold to six customers. The largest, which had an exclusive agency for sales in the southern half of the South Island, was able to add a retailer’s margin of 20%. The remainder were able to add a margin of 10%. Plainly the farm supply companies had an incentive to promote sales of Craigco jetters.
[15] There were nine customers to whom both Electroquip and Craigco sold jetters over an eight-year period. They purchased a total of 52 jetters from Electroquip and 74 electronic jetters from Craigco. I accept that some of Craigco’s sales to these customers would have been substitutes for sales by Electrodip. But I am satisfied that a substantial number would have been additional sales of electronic jetters by Craigco, many of them substitutes for its Hi Flo mechanical jetter.
[16] Mr Leonard calculated that sales lost to Electrodip total 30. He assumed that sales over the period 2005 – 2008 would have averaged 74 units per year except for 2008, which he adjusted to 34, to take account of the aberrant trading conditions in that year. The 74 units are based on annual sales of 84 projected by Mrs Raewyn Carey, an accountant and a director of Electroquip. Her projection was based on average sales for 2000 – 2003. Mr Leonard argued for an average of 77 by bringing into account the year ended 31 March 2004. The lower figure of 74 was arrived at by calculating a weighted average, weighting the sales for 2004 by a factor of ten, reducing to six for 2000.

[ 17] I agree with Mr Leonard that in calculating the average, the 2004 year should be taken into account. The downturn in the market which depressed sales in that year reflected cyclical conditions which it would be unrealistic to disregard. I acknowledge the use of a weighted average is appropriate when it can reasonably be assumed that the most recent performance provides a more accurate guide of what is likely to happen in the future. However, I am not persuaded that such an assumption should be made in this case, particularly as trading conditions for the 2004 year were clearly aberrant.

[ 18] I conclude that Electroquip’s sales for the 2005 – 2007 year would have averaged 77 units. Sales for 2008, plainly, would not have reached that level. I agree with Mr Leonard’s view that the projected sales for that year should be based on the proportion which actual sales of electronic jetters for 2008 (51) bears to the average for the 2005 – 2007 period (109.7). That is 46.5% or 35.8[5] units.

[ 19] On this basis, I conclude that as a result of the entry into the market of the Sensor Jet, Electroquip lost sales of 40 units over the period 2005 2008, made up as follows:

Year
Average
Actual
Loss
2005
77
73
4
2006
77
69
8
2007
77
53
24
2008
35
31
4
Total Units

40

Profit per unit

[20] There was a large measure of agreement between the experts as to the profits per unit for each of the four years in question. Apart from a clerical error in Mr Gillespie’s calculations, which was resolved by agreement, their only difference concerned variable and semi-variable costs which Mr Leonard argued should have been taken into account. Mr Gillespie conceded that two of the major costs

categorised by Mr Leonard as variable – workshop expenses and repairs and maintenance – could properly be allowed for. He also accepted that electricity could be regarded as a semi-variable cost. The remaining differences are minor and I propose to resolve them in favour of the defendants.

[21] On that basis, the plaintiffs’ losses total $216,432 made up as follows:

Year
Units
Profit per unit
Total
2005
4
$4,834
$19,336
2006
8
$5,258
$42,064
2007
24
$5,478
$131,472
2008
4
$5,890
$23,560



$216,432

Increased prices and cost recovery

[22] Electroquip claims additional damages of $500 on each jetter it sold in the domestic market after 2005 to take account of the effect the marketing of the Sensor Jet had on its profitability. Mrs Carey maintained that if Craigco had not entered the market with the Sensor Jet, Electroquip would have been able to increase its prices by a further $250 per unit and to recover an additional return of $250 per machine on its marketing and development expenditure.
[23] Mr Leonard (whose evidence on this issue was not challenged) pointed out that Electroquip did in fact increase its prices in 2004 and 2007. He showed that the aggregate increases in price of Electroquip jetters exceeded the Consumer Price Index over the period 2001 – 2008. He went on to demonstrate that if Electroquip had increased prices to achieve the additional return it claims, its profits as a percentage of sales over the period 2005 – 2008 would have exceeded the profits it achieved in any of the years 2001 – 2004.

Even before the introduction of the Sensor Jet, Electroquip was operating in a competitive market. Its prices must have been constrained by the Craigco mechanical jetter which provided a cheaper option. I do not doubt that the introduction of the Sensor Jet provided some additional constraint on Electroquip’s ability to increase prices. I do not accept, however, that its introduction in fact prevented Electroquip from increasing its prices further had it chosen to. I infer that it did not do so because it was maintaining profitability overall and would have foreseen the likelihood that continued price increases would have impacted on sales. Electroquip has not proved loss under this head.

Royalties

[24] The defence did not contest the plaintiffs’ claim for a royalty on Sensor Jets sold by Craigco which did not result in lost sales to Electroquip. Nor was issue taken with Mr Leonard’s assessment that a royalty fee of 10% is appropriate and his calculation of the selling price of the unit in each of the years in question. However, it is not immediately obvious that Electroquip is entitled to recover royalties on the balance of machines sold by Craigco. My research indicates that there is no New Zealand case on the point and the further award is not readily reconcilable with the principle of compensatory damages; it is not required in order to restore the plaintiffs to the position they would have been in had the infringement not occurred.
[25] However, the issue has been directly addressed by the English Court of Appeal in Blayney (t/a Aardvark Jewellery) v Clogau St Davids Gold Mines Ltd.[6] In a claim for infringement of copyright, the Judge at first instance had awarded damages based on profits from sales the claimant would have made but for the infringement and a royalty for infringing sales by the defendant which the claimant could not show he would have made. It was common ground that there was no previous case on the point. There were, however, patent cases in which awards have been made both for profits foregone in respect of lost sales and by way of royalty for other infringing sales. The leading case was Watson Laidlaw & Co Ltd v Pott Cassels & Williamson (A Firm).[7] Lord Shaw said:[8]

If with regard to the general trade which was done, or would have been done by the Respondents within their ordinary range of trade, damages be assessed, these ought, of course, to enter the account and to stand. But in addition there remains that class of business which the respondents would not have done; and in such cases it appears to me that the correct and full measure is only reached by adding that a patentee is also entitled, on the principle of price or hire, to a royalty for the unauthorised sale or use of every one of the infringing machines in a market which the infringer, if left himself, might not have reached. ...

[27] After referring to the speech of Lord Shaw, Jonathan Parker VC, giving the judgment of the Court in Blayney, said:[9]

... In my view it is clear that since at least the speech of Lord Shaw in Watson, Laidlaw & Co Ltd v Pott, Cassels and Williamson (1914) 31 R.P.C. 104 at 120 damages have been recoverable in respect of all infringements whether proved to have resulted in lost sales or not. The relevance of lost sales is to enable the court to assess the damages by reference to lost profits; it is not a limitation on the recoverable loss. ...

He went on to say:

Given that that is the rule in the case of infringements of patents I can see no reason not to apply it in cases of infringements of copyright. In each case the infringement is an interference with the property rights of the owner, Copyright, Designs and Patents Act 1988, s.1(1) and Patents Act 1977, s.30(1). Thought the nature of the monopoly conferred by a patent is not the same as that conferred by copyright I see no reason why that should affect the recoverability of damages in cases where the monopoly right has been infringed. The fact that the plaintiff may not be able to prove the application of one measure of damages, namely lost sales, does not mean that he has suffered no damage at all, rather some other measure by which to assess the compensation for that interference must be sought. Whilst, no doubt, there are differences between the rights granted to a patentee and those enjoyed by the owner of the copyright they draw no distinction between the effect of an infringement of a patent rather than a copyright.

[28] An award of royalties is not required to place the plaintiffs in the position they would have been but for the breach. Damages assessed on a royalty for each infringing article is based on what Lord Shaw referred to as the principle of price or hire or what is sometimes referred to as the user principle.[10] In his wide-ranging discussion of the principles upon which damages are awarded in Attorney-General v Blake,[11] Lord Nicholls described the principle as “established and not controversial” while acknowledging the difficulty of aligning it with the basic compensatory measure of damages. [12] He went on to say:

... these awards cannot be regarded as conforming to the strictly compensatory measure of damage for the injured person’s loss unless loss is given a strained and artificial meaning. The reality is that the injured person’s rights were invaded but, in financial terms, he suffered no loss. Nevertheless the common law has found a means to award him a sensibly calculated amount of money. Such awards are probably best regarded as an exception to the general rule.

[29] Although damages for infringement of copyright in New Zealand have previously been determined by reference to the loss suffered, I see no reason to confine an award to the straitjacket of compensatory damages. An award which includes royalties on the additional infringing articles sold will ensure that the plaintiffs are fairly compensated for the use of their property as well as for the losses they have incurred.[13]
[30] There is no issue taken with Mr Leonard’s assessment that a royalty fee of 10% is appropriate or his calculation of the selling price of the unit in each of the years in question. On that basis, Electroquip would be entitled to royalties of $67,150 made up as follows:
2005
2006
2007
2008
Total
Sales by Craigco
11
59
64
20
154
Sales transferred to Electrodip
4
8
24
4
40
Royalties payable on
7
51
40
16
114
Unit Selling Price
5,681
5,681
5,950
6,500
Sales for royalties
39,767
289,731
238,000
104,000
671,498
Royalties 10.0%
3,976
28,973
23,800
10,400
67,150

1An award of this sum is, however, subject to a consideration of the issue of apportionment at [41 ] – [51 ] infra.

Limitation of damages

[31] Mr Nathan submitted that s 121 (1) of the Act applies to postpone the date on which damages could start to run until 10 February 2008. Section 121 (1) provides: Provisions as to damages in infringement proceedings

(1) Where, in proceedings for infringement of copyright, it is proved or

admitted that at the time of the infringement the defendant did not know, and had no reason to believe, that copyright existed in the work to which the proceedings relate, the plaintiff is not entitled to damages but, without prejudice to the award of any other remedy, is entitled to an account of profits.

Counsel submitted that Mr Tuffin did not know or have reason to believe that copyright existed until full and final disclosure had been made of the artistic works relied on.

[32] Mr Nathan relied on Husqvarna Forest & Garden Ltd v Bridon New Zealand Ltd, [14] which considered the same wording in the context of s 35 which provided: Importing infringing copy

Copyright in a work is infringed by a person who, other than pursuant to a copyright licence, imports into New Zealand, otherwise than for that person’s private and domestic use, an object that is, and that the person knows or has reason to believe is, an infringing copy of the work.

[33] In Hasqvarna Smellie J held that the defendant did not have reason to believe that it was infringing copyright until all the drawings were provided in the course of the trial. On what is meant by the term “reason to believe”, Smellie J adopted the test formulated in LA Gear Inc v Hi-Tec Sports Plc[15] where Morritt J said at 129:

Nevertheless, it seems to me that ‘reason to believe’ must involve the concept of knowledge of facts from which a reasonable man would arrive at the relevant belief. Facts from which a reasonable man might suspect the relevant conclusion cannot be enough. Moreover, as it seems to me, the phrase does connote the allowance of a period of time to enable the reasonable man to evaluate those facts so as to convert the facts into a reasonable belief.

Smellie J went on to note: [16]

On the other hand, it is beyond argument that lack of knowledge based on an
error of law is no excuse (see International Business Machines Corporation

v Computer Imports Ltd [ 1989] 2 NZLR 395 at pp 407, 418).

[35] Husqvarna was directed to the question of whether the importer knew or had reason to believe that the object was an infringing copy. The question raised under

s 121 is whether the defendant knew or had reason to believe that copyright existed in the work to which the proceedings relate. The relevant work comprises the design features which I found to be protected by copyright.

[36] The inquiry then is whether Mr Tuffin knew or should have known that copyright existed in the design features he copied. A consideration of the understanding of a reasonable person in his position may assist in determining his knowledge and likely state of mind. However, the test is not the knowledge of a reasonable person in his position, but what inferences should be drawn from all the circumstances.[17]
[37] The key question is whether the defendants can show that Mr Tuffin did not know or had no reason to believe that copyright existed in the features he copied before he started selling his electronic jetter. He must have known that at least some of the features – the automatic gate in particular – had taken a great deal of time and effort to develop. Indeed, I found in my judgment on liability that he had acquired the machine precisely because he was having difficulty developing his own machine independently. He was able to bypass much of the process of trial and error that Electroquip had been through as it developed its machine.
[38] In my view, a reasonable person in Mr Tuffin’s position would have believed that at least some of the features he copied would have been the subject of artistic works in the form of drawings and prototypes. The fact that he was not aware that these would confer legal rights on Electroquip does not assist him. Mr Tuffin’s actions – in checking to see whether there was patent protection and keeping the existence of the Electrodip machine concealed – is consistent with a belief on his part that Electroquip was or might have been in a position to assert legal rights in the Electrodip.

Apportionment of damages

[41 ] Mr Nathan submitted that damages should be reduced to take account of the fact that only parts of the Craigco electronic jetter, not the whole machine, infringed the plaintiffs’ copyright. The plaintiffs pleaded that seven specific features of the Sensor Jet infringed their copyright. I found the Craigco machine infringed copyright in five of those features. There was and is no suggestion that the machine as a whole infringed copyright.

[42] In such circumstances Mr Nathan argued that there is a “judicial discretion” to apportion damages for profits lost according to the extent or importance of the infringement in relation to the article as a whole. This argument has different implications for an award of damages based on royalties. I will deal with that question separately.

Compensatory damages

[43] The proposition that apportionment may occur according to the significance of the infringement seems to be at odds with the purpose of compensatory damages. The plaintiffs’ loss is not lessened because the infringements related only to some parts of the machine. And when the cases relied on by Mr Nathan are examined, it becomes clear that his argument is not supported by authority. With one exception, the cases he referred to in which compensation has been apportioned to recognise the extent of the infringement have not involved the award of compensatory damages. They have involved either a claim for an account of profits or damages for conversion.
[44] In the first category are Potton Ltd v Yorkclose Ltd[18] and LED Builders Pty Ltd v Eagle Homes Pty Ltd[19]. Both concerned the infringement of building plans and an award of damages for the proportion of the defendants’ profit that reflected the extent to which the building incorporated features of the infringed plan. In both cases, the plaintiffs had elected an account of profits.
[45] ABB Ltd v NZ Insulators Ltd (No 2),[20] also relied on by Mr Nathan, is another case in which there was an account of profits. Courtney J pointed out at [90] – [91] that the purpose of an account of profits is to prevent unjust enrichment by stripping the infringer of profits obtained through the infringement. The infringer is, however, liable to account only for profits attributable to that infringement. Where infringing and non-infringing parts play an essential part in the function of the product in question, an apportionment is appropriate provided there is an evidential basis on which to make an assessment of the relative contributions of the infringing and non-infringing parts of the product.[21]
[46] At [95] Courtney J quoted a passage from the judgment of Windeyer J in Colbeam Palmer Ltd v Stock Affiliates Pty Ltd[22] which makes it clear that an

22

apportionment is appropriate when the remedy is an account of profits rather than damages. He said[23]:

Lord Kinnear in the Court of Session in Scotland sufficiently summarised the course of earlier decisions when he said ‘and there certainly is a great deal of authority for saying that where only a part of a complex machine is protected by a patent, the infringer cannot be made liable for the aggregate profit derived from the entire machine, as if that were the profit he had made by the use of the patent’ ... And in the same case on appeal, Lord Watson said that in a patent action, if the patentee elects to have profits instead of damages, ‘it becomes material to ascertain how much of his invention was actually appropriated, in order to determine what proportion of the net profits realized by the infringer was attributable to its use. It would be unreasonable to give the patentee profits which were not earned by the use of his invention’ ... (Emphasis added.)

[47] An apportionment is also appropriate in cases where damages for conversion are awarded .[24] One of the cases in this category relied on by Mr Nathan is Alwinco Products Ltd v Crystal Glass Industries Ltd[25] where conversion damages were claimed pursuant to s 25 of the Copyright Act 1962. The Court of Appeal upheld an award of damages in relation to a window frame which reflected the extent to which the market value of the frame was properly attributable to the copyright material.
[48] In Lakeland Steel Products Ltd v Stevens, where damages were also governed by the 1962 Act, Holland J discussed the distinction between conversion damages and compensatory damages and explained why an apportionment is appropriate in the one case but not in the other. He said at 754 – 755:

Although there were some parts of the press assembly which were not attacked as being copies of the plaintiff’s work nevertheless it was the press assembly and spindle that I have held to have infringed the plaintiff’s copyright. A division of the parts which were copies and parts which were not, may be relevant to the assessment of conversion damages but it is not relevant to compensatory damages where the plaintiff has been deprived of sales, or the opportunity of sales because of the infringing works of the defendant.

23

[49] The only case which provides direct support for Mr Nathan’s argument is Norm Engineering v Digga Australia.[26] In that case the defendant had copied features of a digger bucket, the most important of which was a pivot mechanism that was central to the functioning and operation of the bucket. However, it was only a comparatively small part of the whole bucket and, weighing its relative importance to the article, the Court reduced compensatory damages by 60%. At [271 ] Greenwood J explained why an apportionment was required:

Fifthly, a further discount factor needs to be taken into account to reflect the particular circumstances of the conduct. In this case, the applicant’s 4 in 1 bucket is made up of between 30 to 40 components in all and a much smaller number of essential components. All of the components no doubt are required for the functionality of the bucket but both Dr Gilmore and Mr Gould recognised some components are more important than others. In that sense, the pivot mechanism is a major component. However, the 4 in 1 bucket is a product made up of assembled parts or components and even though the pivot mechanism is essential to functionality, the extent of its contribution to the loss suffered by the applicant needs to bear a proportionate relationship to the materiality of its contribution as component to the 4 in 1 bucket. By applying such a method, it ought to be possible to determine a reasonable analogue for the purposes of compensatory damages of the loss suffered by the applicant by reason of the respondent’s conduct.

[50] After assessing the plaintiffs’ lost profits arising from the sale of the infringing buckets, the Judge went on to say at [297] – [298]:

[297] However, that sum reflects the lost profit upon sales of the bucket rather than the loss suffered by the applicant by reason of infringement of the copyright in the drawing for the pivot mechanism itself. It seems to me that a further discount should apply to take account of that proportion of the profit which is attributable to a component forming part of an assembled article. In this case, it seems to me that the copyright owner is only entitled to damages that represent the loss attributable to the copyright material taken. Although speaking in terms of conversion damages, the principle in relation to severance was expressed this way by Lockhart J in Polygram Pty Ltd v Golden Editions Pty Ltd (1997) 76 FCR 565 at 571:

‘If the court is presented with goods that comprise infringing and non-infringing matter, it will be necessary to decide whether the goods can be severed into infringing and non-infringing components.

If the goods can be severed then the court can find that it was the making of the infringing component that constituted an infringement of the work, and therefore that the infringing copy is only comprised by that component. In such a case, the copyright owner is only entitled to damages that represent the value of the copyright material taken.

[298] ... It seems to me that the pivot mechanism is clearly such a component. Its relative importance is a matter of judgment and in determining a reasonable view of compensatory loss it seems to me that the amount at [296] ought to be further discounted by 60% resulting in an amount of $61,223.00.

[51] In my respectful view, the Judge’s reasoning is flawed. The plaintiffs’ losses were a function of the number of buckets it would have sold but for the defendants’ infringement. The extent of the infringement was irrelevant for this purpose. The Judge erred by introducing into a calculation of compensatory damages a consideration which is appropriate only if conversion damages are sought. The Court misapplied the dicta in Polygram which was concerned with the assessment of conversion damages.

Royalties

[52] The argument for apportionment has quite different implications for damages based on royalties. They are intended to compensate the owner for the use of his property. It is both logical and just that they should reflect the value of the property used and the benefit derived by the defendant from the use of the property. That is consistent with the approach taken by Cooper J in Waugh v Attorney-General.[27] It is also consistent with the “rough and ready” approach to compensation for use adopted in Blayney.[28] In Blayney, Parker VC applied the approach of Rimer J in SPE International Ltd v Profession Preparation Contractors UK Ltd[29]at [87] where Rimer J stated:

I can see no reason why I cannot and should not assess [compensation] by reference to a notional royalty payable under a notional licence agreement. The evidence leaves me short of information enabling me to make a precise calculation, and I can inevitably only adopt a somewhat rough and ready one. That may work to SPE’s disadvantage, since I also consider that I should err on the side of under-compensation. But inadequate compensation is better than none. In the circumstances of this case, I propose to take a broad axe and assess a sum of damages by reference to a notional royalty which will (a) reflect the uncertainty of the extent of the use of the infringing machines made by PPC, and (b) will also give the PPC the benefit of any doubts in the calculation.

[53] I do not have information which would enable me to make a precise calculation. The features copied comprised a significant and important part of the Sensor Jet. On the other hand, there are many features of the jetter which are either common to many jetters or unique to the Sensor Jet itself. I also propose to take a broad axe which will recognise the nature of the assessment and give the defendant the benefit of any doubts in the calculation. I propose to reduce the award of damages based on royalties by 50% to $33,575.

Additional damages

[54] The plaintiffs seek additional damages arising from the flagrancy of the infringements pursuant to s 121(2) of the Act which provides:

Provisions as to damages in infringement proceedings

(1)
...

(2) In proceedings for infringement of copyright, the court may, having regard to all the circumstances and in particular to—

award such additional damages as the justice of the case may require.

As observed in Feltex Furnishings of New Zealand v Brintons Ltd[30], damages for flagrancy are in the nature of aggravated or punitive damages, to be fixed, if at all, after compensatory damages have been determined. This permits the Court to decide whether compensatory damages are less than an effective remedy.

[55] In Feltex the Court referred to Brightman J’s description of flagrancy in
Ravenscroft v Herbert[31] as implying “the existence of scandalous conduct, deceit and

such like; it includes deliberate and calculated copyright infringements”.[32] The Court referred to the last words in this passage as drawing the lower limits of flagrancy.

[56] Flagrancy, accordingly, goes beyond mere awareness. It is not to be found simply because the defendants have been unable to prove that they did not know or had no reason to believe that copyright existed in the works.
[57] While I have concluded that Mr Tuffin could reasonably have concluded that some features of the Electrodip were protected by copyright, and could not call in aid his ignorance of copyright laws, there is nothing to suggest he knew the plaintiffs had copyright and deliberately infringed their copyright when he developed and initially produced the sensor jet. The circumstances are analogous to those in Lakeland where the defendant produced a machine, substantial parts of which were copied from the plaintiffs’ machine. Holland J was not satisfied that the defendant and its employees were aware that there was copyright protection. He said: [33]

They nevertheless copied the plaintiff’s machine in material aspects. Ignorance of the law is no excuse but it may be relevant in determining whether conduct is flagrant or not. There is no suggestion in this case, as there has been in other cases, of a letter or notice given to the defendant referring him to a claim to copyright or breach of it followed by a deliberate decision by the defendant to continue.

[58] Mr Henry submitted that, whatever the position might have been when the sensor jet was being first developed and produced, Mr Tuffin acted flagrantly in continuing to manufacture the sensor jet after being given notice that a breach of copyright was alleged. I am not persuaded that there was the requisite combination of knowledge and intent.
[59] When allegations of breach of copyright were first made, the defendants immediately sought advice from patent attorneys. When first provided in April – May 2006 with evidence of copyright infringements, their patent attorneys, in response to the plaintiffs’ letter, recorded their advice to their clients as follows:

32

33

I believe that my clients have dealt fully with all of the copyright allegations which you have raised, and I have advised my clients that I do not believe your claims of copyright infringement can be substantiated on the material you have provided to date. I advise that my clients have decided there is nothing to be gained by either party in continuing this correspondence.

Later, in November 2006, the defendants’ patent attorneys were advised (after there had been no further developments for a period of six months) that proceedings would be issued. They complained that they had not been supplied with copies of the drawings on which Electroquip’s copyright claim is based, despite having repeatedly asked for them.

[60] Between November 2006 and 10 February 2008 there was further disclosure until all of the information on which the plaintiffs relied was disclosed. In my view, even at this point, the defendants did not flagrantly infringe in continuing to manufacture the sensor jet. The issues raised in the proceeding were by no means straightforward. In my judgment, the defendants were entitled to elect not to modify their machine until they knew which, if any, features were infringing.
[61] In his closing submissions Mr Henry sought to rely on the defendants’ failure to modify one of the infringing features of the Sensor Jet to comply with my judgment on liability. What happened after the judgment was not canvassed at the hearing and has no bearing on flagrancy or any other aspect of this judgment.

Result

[62] The plaintiffs are entitled to compensatory damages of $216,432 and damages for use of their copyright of $33,575, a total of $250,007.
[63] The plaintiffs are also entitled to costs. If counsel are unable to agree, I will consider memoranda, filed by the plaintiffs within 28 days and by the defendants within a further 14 days.

[1] Feltex Furnishings of New Zealand Limited v Brintons Limited (1992) 4 NZBLC 102,913.

[2] Lakeland Steel Products Limited v Stevens [1996] 2 NZLR 749.
[3] Ultraframe (UK) Limited v Eurocell Building Plastics Limited [2006] EWHC 1344 (Pat).
[4] See 754 of Lakeland Steel and [96] – [112] of Ultraframe.

[5] I consider it appropriate to round this figure down for the purpose of calculating lost sales.

[6] Blayney (t/a Aardvark Jewellery) v Clogau St Davids Gold Mines Ltd [2002] EWCA Civ 1007; [2003] FSR 19.

[7] Watson Laidlaw & Co Ltd v Pott Cassels & Williamson (A Firm) (1914) 31 R.P.C. 104.
[8] At 120.
[9] At [19].

[10] See the discussions in Roberts v Rodney District Council [2001] 2 NZLR 402, Waugh v

Attorney-General [2006] 2 NZLR 812 and Blayney v Clogau at 370.
[11] Attorney-General v Blake [2001 ] 1 AC 268.
[12] At 279.

[13] This is consistent with the approach set out in Laddie, Prescott, Vitoria, Speck and Lane The

Modern Law of Copyright and Designs (3rd ed, Butterworths, London, 2000) Vol 2 at 49.2.

[14] Husqvarna Forest & Garden Ltd v Bridon New Zealand Ltd [1997] 3 NZLR 215.

[15] LA Gear Inc v Hi-Tec Sports plc [ 1992] FSR 121 (ChD&CA).

[16] At 226.

[17] See the discussion in LexisNexis Copyright and Design (NZ) at COP121.3.

[18] Potton Ltd v Yorkclose Ltd [1990] FSR 11.
[19] LED Builders Pty Ltd v Eagle Homes Pty Ltd [1999] FCA 584; (1999) 44 IPR 24.
[20] (2007) 11 TCLR 978
[21] Ibid at [99].
[22] Colbeam Palmer Ltd v Stock Affiliates Pty Ltd [1968] HCA 50; (1968) 122 CLR 25 (HCA).

[23] Colbeam Palmer v Stock Affiliates Pty Ltd (1886) 3 RPC 139, at 42 – 43, referring to the

decision of United Horseshoe & Nail Co Ltd v Stewart & Co.

[24] Conversion damages are no longer available under the Copyright Act: Pacific Software

Technology Ltd v Perry Group Ltd [2004] 1 NZLR 164 at [102].
[25] Alwinco Products Ltd v Crystal Glass Industries Ltd [1985] 1 NZLR 716 (CA).
[26] Norm Engineering v Digga Australia (2007) FCA 761.
[27] Waugh v Attorney-General [2006] 2 NZLR 812 at [103] – [105].
[28] At 374.

[29] SPE International Ltd v Profession Preparation Contractors UK Ltd [2002] EWHC 881(Ch).

[30] At 102,921.

[31] Ravenscroft v Herbert [1980] RPC 193 at 208.
[32] At 102,921.
[33] At 752.

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