Oraka Technologies Ltd v Geostel Vision Ltd

• Jurisdiction: New Zealand
• Judge: Hinton J
• Judgment Date: 02 June 2016
• Neutral Citation: [2016] NZHC 1188
• Docket Number: CIV-2005-419-000809
• Court: High Court
• Date: 02 June 2016

Between

Oraka Technologies Limited

First Plaintiff

Oraka Graders Limited

Second Plaintiff

Michael William Schwarz

Third Plaintiff

and

Geostel Vision Limited

First Defendant

and

P Daynes and G Robertson

Second Defendants

and

Napier Tool & Die Limited

Third Defendant

[2016] NZHC 1188

CIV-2005-419-000809

IN THE HIGH COURT OF NEW ZEALAND

AUCKLAND REGISTRY

Claim for damages of 4.1 million for breach of copyright — plaintiff was the owner of the copyright in an asparagus grader — the Court of Appeal determined that the first through third defendants had breached the plaintiffs copyright — it remitted the claim to the High Court to consider damages — during the infringement period, the grader was exclusively manufactured and sold, under an informal arrangement, by the second plaintiff (another company owned by the same family) — the second plaintiff therefore suffered the loss, but it had no cause of action for breach of copyright as it did not hold a written exclusive licence, as required by the Copyright Act 1994 — whether the second plaintiff was the agent for the first plaintiff so that the first plaintiff could recover “third party” losses — whether a party in breach was not permitted to take advantage of family arrangements (or lack of arrangements) to escape responsibility for the damage they wrongfully caused — in the alternative, whether damages could have been awarded to the first plaintiff as “additional damages” under s 121(2) CA.

Appearances:

B P Henry and A M Dunlop for the Plaintiffs

No appearance by or for First and Second Defendants

P G Skelton QC, M J Gavin and C D Herbert for the Third Defendant

JUDGMENT OF Hinton J

1 This judgment deals with a question of damages. There is only one issue, but it is a significant one: is this a case where a party can recover “third party” losses?

2 The third plaintiff, Michael Schwarz, developed the Oraka Grader, the first automatic asparagus sorter in the world.

3 The Oraka Grader has a unique tip cup assembly.

4 After many years of litigation, the Court of Appeal determined in its second judgment, 1 that copyright in the cup assembly is held by the first plaintiff, Oraka Technologies Ltd (upholding Allan J) and that copyright had been infringed by the defendants (reversing Allan J). Judgment was entered for Oraka Technologies Ltd, as the owner of the copyright, against all defendants, and the matter remitted back to this Court for an inquiry into damages.

5 However, during the infringement period, the Oraka Grader was exclusively manufactured and sold, under an informal arrangement, by the second plaintiff, Oraka Graders Ltd. Oraka Graders Ltd suffered the loss, but it had no cause of action for breach of copyright as it did not hold a written exclusive licence, required by the Copyright Act 1994.

6 Can Oraka Technologies Ltd recover losses directly suffered by Oraka Graders Ltd?

A brief history of the Oraka Grader

7 The matter has an extensive background, but the facts can be limited to those relevant to the remaining issue. 2

8 Mr Schwarz began developing the Oraka Grader in the early 1980's. He and his wife, Janet Schwarz, were growing asparagus commercially in Tirau. He became interested in mechanisation of the grading process. World-wide, asparagus was still being sorted by hand. As Mr Schwarz put it:

Sorting asparagus is one of the most difficult crops to work with in the agricultural world. It won't roll like a lot of fruit; it is reluctant to behave well in water, as many crops will; and, it is much more delicate than most other products. You can't tip it out of bins; you can't shovel it or stack it deeply. If the wind blows, it becomes bent and no two spears are ever the same shape. In addition to this, the size range between the largest and the smallest is very great. For these reasons asparagus had resisted mechanisation more than many other crops.

9 It is evident that a large amount of work was involved on the part of Mr Schwarz, including development of a number of systems which were unsuccessful. The Oraka Grader finally went into commercial production in or around 1993, after Mr Schwarz perfected the design of the cup assembly, which was the key component of the machine's successful operation.

10 Oraka Technologies Ltd (OTL) was incorporated on 12 March 1993. At all times, OTL's directors and shareholders have been Mr and Mrs Schwarz.

11 On 19 March 1993, Mr Schwarz assigned the copyright ownership to OTL by deed. Since then, OTL has remained the owner of the copyright.

12 OTL ran the business of manufacturing and selling the Oraka Grader from 1993 until 1996. OTL got into financial difficulty and stopped trading in late 1996.

13 In October 1996, at the instigation of Mr Schwarz, Oraka Technologies Holdings Ltd (OTHL) was incorporated. Mr and Mrs Schwarz were again directors and shareholders, but in addition, a Mr Kinder and a Mr Bell held a 15 per cent shareholding each. Mr Kinder and Mr Bell provided a guarantee to the bank and received their shareholding in exchange.

14 OTHL stepped into the shoes of OTL. Between late 1996 and 2001, OTHL manufactured and sold the Oraka Grader.

15 By 1999, Messrs Kinder and Bell wanted to exit OTHL and to be released from their guarantee. By March 2001, Mr and Mrs Schwarz bought them out.

16 In 2000, Mr Schwarz suffered a heart attack and was subsequently in ill-health. His two adult children came to the assistance of the business.

17 On 6 March 2001, at the instigation of Mr Schwarz, OGL was incorporated. Neither Mr Schwarz nor his wife are directors or shareholders of OGL. The directors and shareholders are their two adult children, Robert Schwarz and Anne-Maree Schwarz.

18 OGL stepped into the shoes of OTHL. Between mid-2001 and the present day, OGL has manufactured and sold the Oraka Grader.

19 Mr Daynes, one of the second defendants, provided software development services to the plaintiffs up until July 2001. Mr Robertson, the other second defendant, was a commission sales agent for Mr Schwarz in Greece until July 2001.

20 In July 2001, Mr Daynes and Mr Robertson incorporated the first defendant, Geostel Vision Ltd (Geostel). Through Geostel, they went into competition with the plaintiffs.

21 The third defendant, Napier Tool & Die Ltd (NTD) provided design, tooling and manufacturing services to OTL, OTHL, OGL and then also to Geostel.

22 As the Court of Appeal found, the three defendants copied the Oraka Grader's unique tip cup assembly. This caused serious damage to OGL's business.

23 The first and second defendants are unrepresented and apparently impecunious. The third defendant, NTD, opposes any award of damages to OTL.

The Oraka group

24 Throughout, Mr Schwarz has been the key man of the Oraka business, whichever Oraka company has been the trading entity. Although it had been contemplated that Robert Schwarz would join him once OGL was incorporated, the down-turn resulting from the competition created by the first defendant, Geostel, meant OGL could only effectively fund Mr Schwarz. Anne-Maree Schwarz worked in the Solomon Islands, as she had done before the incorporation of OGL.

25 Mr Schwarz controlled OGL, although he had no legal right to do so. His son's evidence in this regard was not challenged. In addition, it seems that any profits generated in OGL, again possibly improperly, were directed to OTL, Mr Schwarz or another of the Oraka group. The evidence in this regard of Mr Walker, one of the expert accountants called by OTL, was not successfully challenged and no evidence was called by the third defendant. Mr Walker said that OGL was a “proxy” for OTL. This seems logical given OGL had simply stepped into the shoes of OTL (via OTHL).

26 It seems, and I accept, that the plaintiffs operated as an informal group, of which OTHL was also an earlier part.

A summary of OTL's compensatory damages claim

27 The amended statement of claim dated 18 January 2016 pleads the quantum of the loss caused by the defendants' infringement at $4,453,661. This is broken down into loss of expected revenue in OGL of $3,603,027 and loss of salary for Mr Schwarz of $850,634. These figures are supported by detailed evidence from Mr Walker and Mr Beylefeld, both specialist forensic accountants of Crowe Horwath (NZ) Ltd. They speak of the loss being suffered by “Oraka”, which they define broadly. The pleading refers to the loss being directly suffered by OGL, as the trading entity, and by Mr Schwarz. In reality, it is all suffered first by OGL since it is the party notionally paying Mr Schwarz the lost salary. For convenience, I refer to the loss henceforth as a loss of OGL, which is largely how the parties, at least NTD, have characterised it. It makes no difference to the analysis.

28 The quantum is effectively unopposed. The plaintiffs' witnesses were briefly cross-examined as to various quantum issues (including liability for taxation and the financial difficulties besetting OTL prior to infringement), but NTD did not contest quantum in its closing submissions.

29 NTD's opening submissions recite the amounts in the amended statement of claim, which I have set out directly above. However, Mr Henry advised in oral submissions that the plaintiffs' experts had reduced the total claim of $4,453,661 to $4.1 million. As I understand it, this resulted from removing the effect of compounding interest from the calculations. The sum of $4.1 million is the sum with which Mr Walker concludes his brief, although it is not easy to see how he reached that lower figure.

30 In any event, in the absence of any contrary position, I am satisfied on the balance of probabilities that the loss can be taken as $4.1 million.

31 The question is, what damages, if any, can OTL recover for the...