Geostel Vision Ltd v Paul Daynes and The Estate of Gordon Robertson

• Jurisdiction: New Zealand
• Judge: Ellis J
• Judgment Date: 25 June 2020
• Neutral Citation: [2020] NZCA 256
• Court: Court of Appeal
• Docket Number: CA254/2018
• Date: 25 June 2020

Between

Geostel Vision Limited

First Appellant

Paul Daynes and The Estate of Gordon Robertson

Second Appellant

and

Oraka Technologies Limited

First Respondent

Oraka Graders Limited

Second Respondent

Michael William Schwarz

Third Respondent

Between

Napier Tool & Die Limited

Appellant

and

Oraka Technologies Limited

First Respondent

Oraka Graders Limited

Second Respondent

Michael William Schwarz

Third Respondent

[2020] NZCA 256

Court:

Courtney, Ellis and Brewer JJ

CA254/2018

CA261/2018

IN THE COURT OF APPEAL OF NEW ZEALAND

I TE KŌTI PĪRA O AOTEAROA

Intellectual Property, Tort — appeal against a damages award for copyright infringement — damages based on the “user principle” — correct approach to determining an appeal from a judgment fixing the quantum of damages — Copyright Act 1994

Counsel:

K T Glover and P R Casey for Appellants in CA254/2018

P G Skelton QC and C D Herbert for Appellants in CA261/2018

B P Henry and A R Kenwright for Respondents

• A The appeal is allowed. The High Court's damages award of $510,000 is quashed and we substitute damages in the sum of $47,000.

• B The costs award in Technologies' favour in relation to the 2017 High Court hearing is set aside, with the issue of costs for that hearing remitted back to the High Court to be reassessed in light of this Court's judgment.

• C The appellants are entitled to costs in this Court for a standard appeal on a band A basis plus any disbursements.

JUDGMENT OF THE COURT

	Para No.
BACKGROUND
Facts	[6]
Background to the infringement	[11]
Procedural history	[20]
THE USER PRINCIPLE	[21]
THE SECOND DAMAGES HEARING	[23]
The plaintiffs' evidence	[24]
Mr Schwarz	[25]
Mr Black	[26]
Mr Davies	[30]
The defendants' evidence	[35]
Mr Beach	[36]
Mr Yorke	[43]
Mr Hussey	[55]
THE HIGH COURT DECISION	[63]
Approach	[64]
Factual findings	[66]
The damages calculation	[67]
Interest and costs	[75]
THE ISSUES ON APPEAL	[76]
APPROPRIATE APPROACH ON APPEAL	[78]
WAS THE HIGH COURT WRONG TO FIND THAT THE REASONABLE LICENCE FEE WAS $6.00 PER CUP ASSEMBLY?
Was Napier the appropriate notional licensee?	[84]
Discussion	[92]
Exclusivity	[103]
Discussion	[106]
Weight given to the relative bargaining power of the notional licensor and licensee	[109]
Alternatives available to the parties	[110]
Competition in the market for asparagus grading machines	[124]
The summary judgment against Technologies and its state of insolvency	[132]
The level of originality in the cup assembly design and its overall importance to the grading machine	[136]
What is the reasonable licence fee payable in respect of each infringing use?	[138]
Preliminary observation	[141]
Disregarding evidence about comparable licence fees	[145]
Calculations based on Geostel's anticipated — rather than actual — profits	[148]
Rejection of the 25 per cent rule	[150]
Conclusions	[153]
Result	[157]

REASONS OF THE COURT

(Given by Ellis J)

1 Following appeals to this Court in 2010 and again in 2013, Napier Tool & Die Limited (Napier), Geostel Vision Limited (Geostel) and Geostel's owners (Mr Paul Daynes and Mr Gordon Robertson 1) were found to have infringed the copyright in the designs for a cup assembly used in a machine which sorts and grades asparagus. 2 Put simply, the infringing cup assemblies based on the designs had been made by Napier for Geostel.

2 The protected designs were authored by Mr Michael Schwarz, who had also designed the grading machine in which the cup assemblies were first used (the Oraka Grader). At the time of infringement, the copyright in the designs for the cup assemblies belonged to Mr Schwarz's company, Oraka Technologies Ltd (Technologies). At that time, however, the business relating to the Oraka Graders and the cup assemblies was conducted by another company run (but not owned) by Mr Schwarz, Oraka Graders Limited (Graders).

3 Following its finding of liability in 2013, this Court referred the matter back to the High Court for an inquiry into damages. In 2016 the High Court awarded Technologies $4.1 million in damages (including interest). 3 That amount constituted the loss of profits suffered by Graders as a result of the copyright infringement.

4 But on a further appeal to this Court in 2016 it was held that damages suffered by a third party could not be awarded for a copyright breach. 4 Instead, they were to be measured on the basis of a notional licence fee — the amount that the parties would have agreed should be paid in return for permission to use the designs if they had negotiated at the time of the first breach. The matter was once more referred back to the High Court so that damages could be determined on the basis of this “user principle”. In so doing, the Court noted counsel's acceptance that the task was not a major one and that the relevant principles were well settled. 5

5 Hinton J's application of the user principle yielded a notional licence fee of $6.00 for each infringing cup assembly sold, giving a total damages award of $510,000. 6 As a result of the earlier liability finding, Napier, Geostel and Messrs Daynes and Robertson are jointly and severally liable to Technologies for that sum. In this further appeal they challenge the amount of this award. 7

BACKGROUND

Facts

6 We take our factual narrative largely from the earlier decisions of this Court, and the 2013 decision in particular. It is useful to begin with the Court's description of the Oraka Grader itself: 8

[7] The Oraka grader is essentially a conveyor belt with a specialised cup assembly. For the conveyer belt the grader uses a standard, commercially

available, chain made by Flextrak Enterprises Ltd (Flextrak). The cups each receive an individual asparagus spear and carry it under a camera/illumination station at the rate of about 12 spears per second.

[8] The image of the individual spear is captured by a camera, processed by a computer and each spear is graded according to its length, colour and quality, depending on the demands of the market for which the crop is destined. When the asparagus spear reaches the designated collection chute for its grade, the cup assembly is electronically tripped to tip the cup. The spear falls into a collection chute where it is packaged with other spears of the programmed weight of spears into a chute specific to the grade.

[9] At the beginning of the grading process, a small header belt pushes the asparagus spear lengthwise into the cup. The tip of the spear faces away from the chute so that when the cup trips and inclines and the spear slides out, the butt end of the spear impacts on the chute door. When the computer registers that the right number of spears are in the chute, the chute door opens and an asparagus bunch slides down to the bottom half of the chute ready for bundling.

7 Mr Schwarz's evidence was that he had worked on developing an asparagus grading machine since the early 1980s. After a long development period, a grader was up and running by early 1993. It was at this stage he approached Napier to have a mould for the cup assembly made.

8 Napier prepared preliminary drawings in February 1993 which Mr Schwarz approved. Napier then prepared tooling drawings based which it used to make a mould and, so, to begin manufacturing what has been termed the “Schwarz” cup assembly for Technologies. It is the February 1993 preliminary drawings that are the relevant copyright works.

9 By 1996, Technologies had run into financial difficulties. Mr Schwarz then formed a new company, Oraka Technologies Holdings Ltd (Holdings). Holdings was, from that point until 2001, used as the vehicle for any commercial activity associated with the Oraka Grader and the associated cup assemblies.

10 In 2001, Graders was incorporated by Mr Schwarz's son and daughter. Graders (run by Mr Schwarz) took over the business previously run by Holdings. Today, Graders remains the entity responsible for any commercial activity associated with the Oraka Grader.

Background to the infringement

11 At around the time of Graders' incorporation, Napier was approached by a Mr Andrew Armstrong, about the possibility of designing a competing cup assembly. 9 Mr Armstrong was associated with the Flextrak company which, as noted in the quotation at [6] above, was the manufacturer of the belt mechanism used in the Oraka grader.

12 Flextrak had an arrangement with Mr Schwarz whereby Flextrak supplied Oraka Grader customers directly with replacement Schwarz cup assemblies for their grading machines. As the cups were subject to wear over time, there was an ongoing market for the provision of replacements. To facilitate supply of these, Mr Schwarz had given Mr Armstrong a customer list.

13 Mr Armstrong's evidence was that he made the approach to Napier because he saw an opening in the market for a more robust cup assembly. He also had concerns about the financial position of Mr Schwarz's companies and said there had been a number of complaints from customers regarding the after-market service they had received.

14 On 5 April 2001, Mr Armstrong and Napier's Mr Witham met to discuss the details of the proposal. There were several pages of drawings made by Mr Armstrong and Mr Witham at the meeting. The High Court subsequently found that certain aspects of these drawings replicated aspects of the Schwarz cup assembly in sketch form, and that they contained references to the actual dimensions of the Schwarz cup. 10

15 After Napier had completed the design work for the competing cup, it referred Mr Armstrong to Mr Daynes who had recently severed his own business ties with Mr Schwarz. Mr Daynes' company, Kamber Electronics Ltd...