FEDERAL COURT OF AUSTRALIA

Liquideng Farm Supplies Pty Ltd v Liquid Engineering 2003 Pty Ltd [2009] FCAFC 7

INTELLECTUAL PROPERTY – trade marks – infringement of trade marks - determining an account of profits – meaning of good faith for the purpose of s 92(4) of the Trade Marks Act 1995 (Cth) – some sales not in breach – insufficient evidence - whether an infringing party can claim remuneration or director’s fees for carrying on the infringing activities – whether there was a failure to take into account evidence as to the proportion of infringing and non-infringing goods

TRADE PRACTICES – tort – misleading and deceptive conduct – passing off – whether a claim with respect to non-infringing sales arising from a prior relationship is made out

Trade Marks Act 1995 (Cth) ss 27, 88, 92, 92(4)

Fair Trading Act 1999 (Vic) s 9

Trade Practices Act 1974 (Cth)

Edwards v Liquid Engineering 2003 Pty Ltd [2008] FCA 970

Décor Corporation Pty Ltd v Dart Industries Inc (1991) 33 FCR 397

Warman International Ltd v Dwyer (1995) 182 CLR 544

General Tyre & Rubber Co v Firestone Tyre & Rubber Co Ltd [1975] 1 WLR 819

Le Plastrier & Co v Armstrong Holland (1926) 26 SR (NSW) 585

Dart Industries Inc v Décor Corporation Pty Ltd (1993) 179 CLR 101

Unilin Beeher BV v Huili Building Materials Pty Ltd (No 2) (2007) 74 IPR 345

Tenderwatch v Reed Business Information Pty Ltd [2008] FCA 931

Woolly Bull Enterprises Pty Ltd v Reynolds [2001] 107 FCR 166

Electrolux Ltd v Electrix Ltd & Anor (1953) 70 RPC 127

Johnson & Johnson Australia Pty Ltd v Stirling Pharmaceuticals Pty Ltd (1991) 30 FCR 326

E & J Gallo Winery v Lion Nathan Australia Pty Ltd [2008] 77 IPR 69

Henderson v Radio Corporation Pty Ltd (1960) 60 SR (NSW) 519

LIQUIDENG FARM SUPPLIES PTY LTD (ACN 108 994 109) and WILLIAM MICHAEL EDWARDS v LIQUID ENGINEERING 2003 PTY LTD (ACN 104 341 657), WILLIAM MICHAEL EDWARDS, LIQUIDENG FARM SUPPLIES PTY LTD (ACN 108 944 109) and S.K. RURAL SUPPLIES PTY LTD (ACN 108 066 397)

VID 549 of 2008

TAMBERLIN, SUNDBERG AND BESANKO JJ

13 FEBRUARY 2009

MELBOURNE

THE COURT ORDERS THAT:

1.                  The appeal be dismissed with costs.

2.                  The cross-appeal be allowed in part.

3.                  Orders 4 and 5 made by Gordon J be set aside and in lieu thereof it is ordered that:

(a)        The first and second cross-respondents pay the cross-appellant $240,000 within 28 days, with liability for such payment to be joint and several.

(b)        The third cross-respondent pay the cross-appellant $90,000 within 28 days.

4.                  The appellants pay the respondent’s costs of the appeal.

5.                  The cross-respondents pay the cross-appellant’s costs of the cross-appeal.

Note:    Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.
The text of entered orders can be located using eSearch on the Court’s website.

REASONS FOR JUDGMENT

1                                             These reasons concern an appeal by Mr Edwards and Liquideng Farm Supplies (LFS) and a cross-appeal by Liquid Engineering 2003 (LE2003) from a judgment of a judge of the Court. The main issue on the appeal is whether her Honour erred in determining an account of profits to be paid in respect of infringements of trade marks and passing off found to have been committed by the appellants Edwards and LFS.

2                                             The Notice of Appeal first alleges that her Honour erred in calculating the profits lost by reference to the appellant’s gross sales which wrongly included sales that were not in breach of the respondent’s marks, and that her Honour failed to take into account a relevant consideration, namely that not all of the goods sold by the appellants were sold in breach of the respondent’s trade mark.

3                                             The first ground of the cross-appeal by LE2003 alleges that in making the costs finding, her Honour erred in stating that “good faith” for the purpose of s 92(4) of the Trade Marks Act 1995 (Cth) requires no more than a genuine intent to use a mark for commercial purposes, and does not involve any element of honesty or subjective good intentions. The second ground of the cross-appeal is that her Honour erred in rejecting the cross-appellant’s claim against Mr Edwards for passing off in contravention of s 9 of the Fair Trading Act 1999 (Vic) and the Trade Practices Act 1974 (Cth) in respect of items sold by Edwards and LFS not falling within the class of goods covered by the trade marks, such as hammers and duct tape. The third ground of cross-appeal is that her Honour erred in calculating that the costs of $21,000 per month be deducted from gross sales by the cross-respondents when determining an account of profits. A fourth ground is that her Honour erred in allowing the third cross-respondent, S.K. Rural Supplies (SKR), to deduct 90% of costs from gross sales when taking an account of profits. A fifth ground is that her Honour erred in declining to order that LFS remove the word “Liquideng” from its corporate name. Finally, the cross-appeal alleges that the trial judge erred in not awarding costs against the three cross-respondents on an indemnity basis after 6 November 2007, and also in calculating interest.

factual background

4                                             In around 1989-1990 Mr Paul Andrews established a business called “Liquid Engineering” which sold, amongst other goods, products under the marks “Exit Rust” and “Fuel Set”.  In 1998 Mr Bill Edwards was first employed in the business.  In November 2001 Liquid Engineering became a public company and changed its name to “Liquid Engineering Ltd” (LEL), and on 3 February 2003 Mr Edwards, while still employed by LEL, lodged applications for registration of “Exit Rust” and “Fuel Set” as trade marks under s 27 of the Trade Marks Act 1995 (Cth) (“the Act”).

5                                             On 5 February 2003 a receiver was appointed to LEL, which had entered voluntary administration on 24 September 2001. In March 2003 Mr Edwards, whilst still employed by LEL, commenced trading as “Liquideng Farm Supplies”. Mr Edwards remained as National Sales Manager of LEL to assist liquidators until 8 April 2003 and on 8 April 2003 the assets of LEL were sold to the respondent, LE2003.  On that day Mr Edwards ceased employment with LEL.

6                                             On 9 May 2003 the solicitors for LE2003 sent Mr Edwards a letter requesting that he cease using the name “Liquideng Farm Supplies”. On 24 September 2003 the solicitors for LE2003 by further letter demanded that Mr Edwards give an undertaking to refrain from using that name. On 4 December 2003 Mr Edwards’ application for registration of “Exit Rust” and “Fuel Set” as trade marks under the Act was accepted without opposition from LE2003.

7                                             On 8 December 2003 the solicitors for LE2003 again demanded by letter that Mr Edwards give an undertaking to refrain from using the name “Liquid Engineering.” On 4 May 2004 Liquideng Farm Supplies Pty Ltd was incorporated with Mr Edwards and his wife as directors.

8                                             On 4 February 2005 LE2003 filed an application for removal of Mr Edwards’ trade marks from the Register pursuant to s 92(4) of the Act.  On 30 July 2005 S.K. Rural, the third cross-respondent, commenced sales of products under the names “Exit Rust” and “Fuel Set”. In April 2006 Mr Edwards ceased trading as “Liquideng Farm Supplies” and on 31 July 2006 a delegate of the Register of Trade Marks upheld LE2003’s application for removal of the trade marks of Mr Edwards from the Register, pursuant to s 92(4) of the Act. Mr Edwards appealed from this decision of the delegate of the Registrar of Trade Marks on 18 August 2006. On 1 July 2007 S.K. Rural ceased using the names “Exit Rust” and “Fuel Set” on the advice of counsel.

The judgment below

9                                             The appeal before her Honour first came on for hearing on 3 May 2007. Her Honour noted that the principal question then presented in those proceedings was whether evidence of a bona fide intention to use a mark for trading purposes was sufficient to demonstrate good faith within the meaning of s 92(4) of the Act, even when the applicant for registration gained knowledge of the mark as an employee of the owner of the unregistered mark, in circumstances tending to suggest a breach of fiduciary duty. Her Honour stated that, having considered the evidence, she would have upheld the appeal on the basis that, contrary to the submissions of the respondent, “good faith” for the purposes of s 92(4) required no more than a genuine intent to use the mark for commercial purposes as opposed to a token use or use for an ulterior purpose, and did not involve any element of honesty or subjective good intention. See Edwards v Liquid Engineering 2003 Pty Ltd [2008] FCA 970 at [8].

10                                          However, her Honour formed the view, after some discussion, that LE2003 should have applied more promptly, and at an earlier stage, to expunge the registration by Mr Edwards under s 88 of the Act on the basis that he was not the owner of the unregistered marks. Her Honour refrained from giving judgment on the s 92(4) application so that a new application could be brought and the issue resolved in a more appropriate way. Her Honour granted leave to LE2003 to issue a s 88 application, and adjourned the s 92(4) application.

11                                          On 24 September 2007 the application presently under appeal was brought under s 88 of the Act, on the grounds set out in an Amended Statement of Claim of 22 October 2007. The infringement claim in respect of the “Liquid Engineering” mark was added, and claims were made in respect of passing off and for misrepresentation.

12                                          The s 88 claim came before her Honour for hearing on 21 April 2008 and was heard over four days. Her Honour decided that LE2003 was entitled to relief under s 88 of the Act,and that there had been infringement of the marks in question. Her Honour ordered the rectification of the Register of Trade Marks by removing Mr Edwards’ name as owner of the marks “Fuel Set” and “Exit Rust,” and substituting LE2003 as owner of each of those marks. Her Honour noted that the s 92(4) application by Mr Edwards had been rendered moot by the institution of the new proceeding under s 88, and considered that even if that application was successful, the Court would not have granted the relief sought. In her Honour’s view, the application by LE2003 to the Registrar for removal of the trade mark under s 92(4) was not appropriate, and LE2003 should have brought its s 88 application in the first place. Accordingly, her Honour dismissed the application under s 92(4), but ordered the respondents to pay the costs of Mr Edwards of those proceedings on the basis that the application would have been successful on its merits.

13                                          Her Honour found that Mr Edwards held each of the Australian Trade Mark applications and registrations for “Exit Rust” and “Fuel Set” on constructive trust for LEL from 3 February to 8 April 2003 and for LE2003 since 8 April 2003.  Her Honour also found that the claim by LE2003 alleging liability for trade mark infringements against Mr Edwards and LFS had been made out. Her Honour therefore held at [22] that LE2003’s claim for infringement of the “Liquid Engineering” mark was made out.

14                                          At [5] her Honour found undisputed evidence that LFS was essentially a one-man operation which involved Mr Edwards driving around in a truck loaded with goods, making sales for the most part by making cold-calls at individual farms and businesses, and also at local fairs and on market days. Mr Edwards agreed he had complete control over the business and that there were no other employees save his wife who occasionally assisted with paperwork. Her Honour was satisfied that there was no relevant distinction to be drawn between the liability of Mr Edwards and that of LFS because the latter was effectively the alter ego of Mr Edwards. Her Honour also noted that the case had been conducted by both sides on the basis that, to the extent that either or both of Mr Edwards and LFS were found liable, each should be held jointly and separately liable.

15                                          In relation to the quantum issue which is at the centre of the present hearing, her Honour records that on a directions hearing in November 2007 counsel for LE2003 acceded to the request that the trial be not split between liability and issues of quantum.

16                                          On the trial before her Honour the hearing was not split between liability issues and issues of quantum.

17                                          Her Honour found that Mr Edwards traded as LFS from March 2003 until April 2006. In referring to the evidence of costs, her Honour noted that Mr Edwards had given evidence that he had written down some rough notes as to monthly costs during the period over which he traded as LFS, and using those notes he testified that his costs consisted of transportation costs (including car repayments, fuel, tyres, registration, insurance and general servicing) together with food and accommodation costs; office overhead costs including mobile and office phones, stationery and accounting fees and other matters; storage fees for the goods; wages paid to himself for sales efforts in the order of $1,000 per week; and costs of purchasing goods to be sold which was in the order of $12,000 per month. Her Honour noted that the total sum of these costs was said to be approximately $22,000 per month but Mr Edwards agreed that without looking at the books the evidence could not be precise.  Mr Edwards before giving oral evidence had written some figures on a piece of paper, but that paper was not tendered in evidence.

18                                          Her Honour noted that Mr Edwards had given evidence that his total gross sales for the period from April 2003 to June 2005 totalled $635,010 – this came to a monthly average of approximately $23,500 over 38 months. Her Honour was not satisfied of the accuracy of this evidence, and also noted that there was no direct evidence of any kind of the gross sales or costs of LFS from July 2005 to April 2006.

19                                          Her Honour also noted the submission by the cross-appellant that it was open to the Court to infer that LFS had a profit margin of 60 of gross sales, and that it sought 10 of the gross sales of items not falling within the class of goods covered by the trade marks, such as hammers and duct tape. Her Honour, however, rejected this submission and accepted evidence that since the acquisition of the company in April 2003 by LE2003 it had more or less been breaking even, or making only a slight profit.

20                                          Her Honour accepted evidence that in the period just prior to acquisition the company had been running at an $800,000 loss, and rejected the submission that an offer of 50% commission referred to in evidence supported an inference that Mr Edwards or LFS had expected a net profit margin at or above 50%.

21                                          The evidence of Mr Fels, managing director of LE2003, regarding the small or negative profitability was seen as consistent with evidence given by Mr Edwards that profits were not much above break even. Her Honour emphasised several times that the evidence of profits and costs in respect of LFS was incomplete and unsatisfactory, and took into account the submission by LE2003 that it was for Mr Edwards and LFS to establish their costs, and that they had substantially failed to do so. She observed that it would have been open to simply award the full amount of the 70% claim, but did not do so.

22                                          Her Honour declined to grant an adjournment of the proceedings to enable a detailed examination of the invoices on the basis that it was impracticable, having regard to an estimate of 80 days to go through invoices and exchange schedules as to dates and amounts of individual sales in an attempt to reach agreement. Her Honour referred to authorities which indicated that her task in estimating profits in the circumstances was to do the best possible on the inadequate evidence before her. Her Honour considered that quantification in this case involved a substantial degree of speculation and guess work.

23                                          Adopting that approach her Honour, rounding out the exact figures, found that LFS had gross sales from March 2003 to April 2006 of $23,000 per month with average costs of $21,000 per month, yielding a net profit of $2,000 per month, or a percentage in round figures of costs to revenue of approximately 90%. The figure of $23,000 for gross sales is a reduction of $500 per month from the calculated figure of $23,500 derived from the evidence of Mr Edwards. Her Honour then multiplied the $2,000 monthly figure by 38 months, being the period from March 2003 to April 2006, giving a profit of $76,000. Her Honour noted evidence that the business had not been making large profits.

24                                          In relation to the profits with respect to SK Rural for infringing sales of “Exit Rust” and “Fuel Set”, her Honour accepted that the relevant period was 30 June 2005 to 1 July 2007 for trading, and that SKR had gross sales over that period with respect to “Fuel Set” of $278,967.47 and gross sales in respect of “Exit Rust” products of $22,789.61 making a total of $301,757.08. Her Honour observed that there was no evidence as to the costs of SKR in relation to infringing sales and considered it was open to the Court to apply the same 10% margin of profit that had been estimated with respect to LFS. Accordingly, taking 10% of $301,757.08, her Honour arrived at a loss of profit of $30,175.71 with respect to SKR for infringing sales.

25                                          Her Honour declined to grant injunctive relief in relation to the trade marks because she considered there was no continuing threat of infringement in view of the voluntary cessation from engaging in infringing conduct since July 2007. Her Honour also declined to order removal of the word “Liquideng” from the corporate name of the second cross-respondent because LE2003 did not have general ownership with respect to the Liquideng mark and she considered that its rights were limited to the particular classes of goods specified. Her Honour noted that LE2003, for example, would not be entitled to prevent Liquideng Farm Supplies from trading in different goods under that mark, and that there was therefore no entitlement to prohibit the use of the expression Liquideng generally.

reasoning on appeal

26                                          The appellants submit that in calculating the profits her Honour failed to take account of her earlier finding that a portion of the gross sales came from the sale of “hardware” or goods which were not infringing and which had not been passed off. The appellants further submit that the weight of the evidence was that these non-infringing products accounted for about 50% of the sales by Mr Edwards and that if her Honour had intended to take account of these products she should have said so and given reasons.  However, in the judgment at [18] her Honour said, after referring to the four classes of goods covered by the marks in question:

Save for a few goods which I will come to in relation to the issue of quantum, there is no dispute that all of the goods in relation to which Edwards used the allegedly infringing mark were goods falling into the four classes of goods in respect of which the “Liquid Engineering” mark is registered.  (Emphasis added)

27                                          The respondent says that this paragraph of the reasons indicates that in her Honour’s view, after having considered all the evidence, there were only a limited class of goods sold that were not infringing.

28                                          At [81] her Honour identified goods not covered by marks as including hardware such as hammers and duct tape.  Her Honour said:

In contrast to the break-even position suggested by Edward’s evidence, LE2003

submitted that it was open to the Court to infer LFS had a profit margin of some 60

70% of gross sales (it also sought 10-20% of the gross sales of items not falling

within the class of goods covered by trademarks, such as hammers and duct tape.)

29                                          Mr Edwards gave evidence that the costs per month in respect of all goods averaged $23,500 per month.

30                                          After taking into account the lack of direct evidence and the gaps in the evidence, at [87], her Honour made a finding that it was reasonable on the evidence to find that the average gross sales from March 2003 through April 2006 were $23,000 per month which was $500 less than the monthly revenue stated by Mr Edwards, with average costs of $21,000 per month.  Accordingly, her Honour found the monthly profit was $2,000 per month which she rounded off to a 10% profit.

31                                          Counsel for the respondents submits that from this $500 discount in sales figures, considered together with the reference in par [18] to “a few goods”, it should be inferred that the discount in gross sales adopted by her Honour was referable to and took into account those sales of non-infringing goods.

32                                          The appellants claim that this inference is not open because there was evidence from Mr Edwards of some non-infringing hardware and non-liquid sales averaging from 68% to 32% of the goods sold during a period such as to justify the adoption of an average of 50% for non-infringing goods according to Mr Edwards. The appellants say this evidence of Mr Edwards was overlooked or not dealt with by her Honour.

33                                          The figure of 50% in respect of non-infringing goods was arrived at by selecting some invoices and analysing the split of sales between infringing and non-infringing goods.  This evidence as submitted was unsatisfactory in the circumstances. There is no doubt that her Honour was aware of the existence of goods outside the classes covered by the trademarks as can be seen from the transcript, the addresses, and the references in her judgment, and it is evident that her Honour did not accept 50% as an appropriate figure, although it is true that there is no specific reference to this evidence in her reasons for judgment.

34                                          Given the extremely unsatisfactory and sparse nature of the evidence placed before her Honour in relation to the proportion of non-infringing goods which were sold by the appellants, together with the fact that her Honour adverted to the fact that, save for “a few goods,” the goods sold fell within the four classes in respect of which the Liquid Engineering mark is registered, we are not persuaded that her Honour failed to take into account the evidence of Mr Edwards as to the proportions of infringing goods.  The evaluation of his evidence after cross-examination and in the light of other findings by her Honour involved a question of the weight to be given to the evidence on this point, which was generalised and selective, and was essentially a matter for her Honour. Her Honour undertook this task, and we are not satisfied that her Honour has been shown to have erred in her consideration of the lost profits on this ground advanced by the appellants.

account of profits – principles of calculation

35                                          An account of profits is designed to compensate the party whose rights have been infringed for the loss incurred by depriving the infringing party of profits improperly made by wrongful acts committed in breach of the plaintiff’s rights in order to transfer such profits to the plaintiffs. Mathematical exactness is not required “but only a reasonable approximation”: see Décor Corporation Pty Ltd v Dart Industries Inc (1991) 33 FCR 397 at [400]-[401].

36                                          In Warman International Ltd v Dwyer (1995)182 CLR 544 at 567 the High Court observed that the basis on which an account of profits is to be taken is often extremely difficult to apply in practice and that what is required is essentially “a judicial estimation of the available indications”: (see General Tyre & Rubber Co v Firestone Tyre and Rubber Co Ltd [1975] 1 WLR 819 at 826).  The reference to “available indications” confirms that the Court must do the best it can on the whole of the material before it.  While it is generally not appropriate to “speculate” or “guess” without foundation, the exercise calls for allowance to be made for lack of precision where, as in the present case, the available material is incomplete, inexact and generalised.

37                                          In this case her Honour in our view correctly decided to adopt a pragmatic approach and took into account the evidence as providing indicators from the limited material as to a proper figure, rather than simply taking an open-ended approach and settling on gross sales. In our view, her Honour has taken the appropriate approach.

38                                          In Le Plastrier & Co Ltd v Armstrong Holland (1926) 26 SR (NSW) 585 at 593-4, Harvey CJ in Eq said that in taking an account of profits the onus is on the defendant to establish that any particular item of costs has been incurred in regard to the manufacture of individual infringing items. His Honour did not consider it appropriate to simply consider the overall revenue derived from the business of the infringer as constituting the loss. That decision has been consistently applied since.

39                                          In Dart Industries Inc v Décor Corporation Pty Ltd (1993) 179 CLR 101 at 118 the High Court referred to the principle that the onus is on the defendant to establish that any particular item of cost was incurred in relation to manufacture of infringing items at least insofar as it requires a defendant to establish that particular overhead costs are attributable to the manufacture and sale of the infringing products.  They took into account the consideration that the relevant facts as to costs were likely to be within the peculiar knowledge of the defendant.

40                                          Counsel for the cross-respondents submits that there is no general onus on an infringer to establish costs once sales revenue is established. He submits that the authorities as to the onus being on the infringer extend only to issues of allocation of overheads.  However, Allsop J in Unilin Beeher BV v Huili Building Materials Pty Ltd (No 2) (2007)74 IPR 345 after reviewing the authorities, said at [70]:

            The infringers should account for the actual profit they have gained from the infringement.  In calculating those profits it is appropriate to deduct costs directly attributable to selling and delivering infringing articles from the revenue made from such sales and deliveries.  It may be appropriate to deduct a proportion of general overhead costs such as plant equipment and managerial costs.  The deduction of such costs depends on this being shown to have been attributable to the sales, the onus for which demonstration is upon the infringers. (Emphasis added)

41                                          In Unilin his Honour (at [73]) took into account the fact that the evidence provided by the respondents was incomplete on its face and that many documents produced revealed inconsistencies and anomalies.  Given this, his Honour was not prepared to give a discount for overhead costs in circumstances where the onus lay on the respondents to identify and quantify such overheads.  Notwithstanding the lack of proper documentation, however, his Honour decided to attempt an estimate for the apportionment of overheads.

42                                          In the present case, in the light of these authorities, where the evidence gives some indications as to an appropriate figure, the proper approach was for the Court to proceed and do the best it could on the basis of the evidence produced. Where it is not possible to calculate a figure the Court should give the benefit of the doubt to LE2003 particularly as LFS had the knowledge of the precise costs and LE2003 did not.  However, to simply award the gross revenue as profits with an arbitrary discount would be contrary to the evidence, albeit inexact and incomplete, before the Court.

43                                          In this case her Honour in assessing quantum (at [77]-[92]) did not approach the question on the basis that because the evidence was unsatisfactory she should simply conclude that sales revenue and profits were the same.  Her Honour took into account the figures in evidence and made the best estimate she could whilst clearly conscious of the inexactitude of the result.

REASONING ON CROSS APPEAL BY LE2003

44                                          LE2003 submits that her Honour erred on taking an account of lost profits in assessing deductible costs of the respondents from gross sales by Edwards and LE2003 at 90% of those sales. There was no dispute between the parties as to the gross sales figures. It was also submitted by LE2003 that SKR had failed to provide any reliable evidence as to its costs.

45                                          In relation to the LFS claim, LE2003 says that her Honour erred in accepting unsatisfactory oral evidence from Mr Edwards as to the LFS costs.  However, there was an estimate made by Mr Edwards giving a total cost figure of $20,750 per month in respect of sales of $23,500 per month.

46                                          LE2003 also submits that it was incorrect for her Honour to include Edwards’ claimed wages of $1000 per week to be deducted from the account of profits. When calculating the monthly costs in respect of the 38 months in question her Honour accepted and included claimed wages to Mr Edwards of $4,333 per month.  This amount in our view was wrongly included. It is well-settled law that an infringing party cannot claim remuneration or director’s fees for carrying on the infringing activities: see Le Plastrier & Co Ltd v Armstrong Holland (1926) 26 SR (NSW) 585 at [593]; Tenderwatch v Reed Business Information Pty Ltd [2008] FCA 931 at [17]-[19].  In reaching her conclusion as to profits her Honour took into account evidence that at earlier stages of the business LFS was not making large profits.

47                                          In general, apart from the matter of wages, we consider that the approach taken by her Honour was correct. However, an adjustment needs to be made in consequence of the incorrect deduction of wages. In respect of the LFS sales, taking into account the inclusion by her Honour of Mr Edwards’ wages, and adopting the approach and figures accepted by her Honour, we consider that the account of profits should be for an amount of $240,000.  Considering that the amount of wages wrongly included was in the order of $4,300 per month in rounded off terms, over a period of 38 months, the loss of profits in respect of the LFS claim should be increased by $163,400 which, together with the $76,000 determined by her Honour, amounts to about $240,000, when rounded up. This gives a profit margin in the order of 30%.

48                                          In relation to the amount of profit made on the SKR sales, it was common ground that SKR had gross sales of $301,757.08. Her Honour decided not to award SKR’s gross revenue as profits but rather applied the same profit margin she had applied for the LFS sales and awarded an account of profits of $30,175.71 in respect of the SKR sales. On the assumption, which we think it reasonable to make, that her Honour wrongly included a wages component in SKR’s costs, SKR’s profit figure of 10% should be adjusted to the same extent as LFS’ (i.e. 30%), so that the resulting account of profit in respect of SKR is $90,000 in rounded terms.

Costs – GOOD FAITH

49                                          LE2003 was the respondent to this appeal and it was ordered to pay Mr Edwards’ costs before her Honour notwithstanding that her Honour dismissed the application under s 92(4) of the Act. In making this decision her Honour said that the principal question on that application was whether evidence of a genuine intention to use a mark under s 92(4) for trading purposes would be sufficient to demonstrate good faith even where the applicant for registration had acquired knowledge of the mark whilst an employee of the owner of the unregistered mark.  Her Honour having considered the evidence and submissions decided she would have answered that question in the affirmative. However, because a substituted application was made by LE2003 under s 88 of the Act, following discussion between her Honour and the LE2003, it was not necessary to decide that question and it became moot. Her Honour considered that LE2003 should have brought proceedings to expunge the registration under s 88 much more promptly, and because it did not do so the costs incurred by Mr Edwards’ were thrown away. The court has a broad discretion as to costs and we are not persuaded that it was misconceived in relation to the s 92(4) application.

50                                          LE2003 submits that, on accepted principles, it should have been awarded the costs of the s 92(4) proceeding because the application had been dismissed as moot and was considered inappropriate to resolve the real questions between the parties. LE2003 submits that her Honour erred on her construction of s 92(4) of the Act because the use of the trade marks in question was “not in good faith”, since those words are wide enough to cover the present circumstances in which Mr Edwards intended to appropriate the marks of LE2003 by using them in relation to the same goods in order to take advantage of the positive association between those goods and LEL, and where the activity began while Mr Edwards was still employed by LEL.

51                                          Dr Dean, on behalf of LFS and Mr Edwards, submitted that s 92(4) of the Act is concerned with non-use of a trade mark and that provided there was a genuine use of a mark, that was sufficient to constitute a use in good faith as opposed, for example, to a token use in order to prevent or hinder use by another person or entity.  He referred to the fact that s 92 appears in Part 9 of the Act dealing with removal of trade marks for “non-use”.  He submitted that s 92(4) requires a lack of intention in good faith to use the trade mark at the time of registration, and that the emphasis is on the intention to make use of the mark and not on the circumstances surrounding the application for use, and this had not been satisfied. The removal of a trade mark may be achieved under Part 8 by way of cancellation or amendment of the register and the emphasis is primarily on the time of application or entry of the mark on the grounds existing at the time of registration. Part 9 of the Act on the other hand is concerned with events that occur after registration, relating to the manner and reasons for which the mark has been or is being used. It is concerned with a different time period and a different set of circumstances post-entry. This context supports the conclusion that the main concern of Part 9, s 92(4) is with genuineness of actual use as opposed to motives or conduct leading to or concerning that use.

52                                          There are a number of authorities which bear on this question. In Woolly Bull Enterprises Pty Ltd v Reynolds [2001] 107 FCR 166 at [153]-[154] Drummond J observed that the expression “use in good faith” has a well understood meaning in terms of s 92 of the Act, namely “real” as opposed to token use in a commercial sense.

53                                          In the case of Electrolux Ltd v Electrix Ltd & Anor (1953) 70 RPC 127, Lloyd-Jacob J rejected a submission that the use in question could not be bona fide if commenced with knowledge that the product “Electrix” was in the market and that there may be deception. On appeal Lord Evershed MR (1954) 71 RPC 23 said at [36]:

[T]he use here shown does not seem to me in any real sense capable of being described as a pretended use. There is…no evidence which would justify the conclusion that the use was merely spasmodic or temporary. Commercially speaking, it is not shown that the use made by the Plaintiffs of this mark was not an ordinary and genuine use, and it certainly was substantial. If that is so, then it seems to me that the use is not disqualified…

54                                          Gummow J considered the meaning of the expression “use in good faith” as a criterion for infringement in Johnson & Johnson Australia Pty Ltd v Stirling Pharmaceuticals Pty Ltd (1991) 30 FCR 326 at 354, pointing out that:

There is, in relation to the comparable provisions in the British Act of 1938, authority to the effect that in order to qualify as such use there must be a real or genuine use in a commercial sense, rather than colourable activity and “token” use designed to lead trade rivals to think that the registered proprietor was using its mark in a way which gave it the protection of the legislation.

See also E & J Gallo Winery v Lion Nathan Australia Pty Ltd [2008] 77 IPR 69 at [99]-[707] and the authorities there referred to.

55                                          We were directed to several other authorities which took a broader view of the expression but insofar as they conflict with the above authorities we do not consider they were correct.

56                                          In the present case having regard to the above authorities, we do not consider that her Honour erred when she observed at [8] of her reasons that s 92(4) of the Act requires no more than a genuine intent to use the mark for commercial purposes, and that the reference to bona fide intention to use is not sufficiently wide to encompass the circumstances of the present case.

57                                          In our view the conclusion of her Honour on this issue was correct. Furthermore, we are not persuaded that her Honour erred in any way in relation to the costs of the later proceeding under s 88 of the Act.

Passing off claim

58                                          LE2003 submits that her Honour erred in par [81] of her reasons when she dismissed the passing off claim relating to sales of items by LFS of items not falling within the class of goods covered by trade marks, such as hammers and duct tape. Her Honour considered the basis of this claim was that Mr Edwards’ misrepresentation that he was associated with Liquid Engineering assisted him in making sales. Her Honour rejected this submission on the basis that a claim with respect to non-infringing sales aided by a prior relationship can only be made out if Edwards were subject to a non-compete agreement that was a reasonable restraint of trade, and that there was no such agreement in the present case. LE2003 says that the passing off claim should have been upheld notwithstanding that goods were sold falling outside the class covered by the trade marks. It contended that in order to establish passing off, it is sufficient that an applicant establish a representation by the respondent that his business is connected with that of the applicant. So long as there is some likelihood of confusion caused by the suggested connection, it is irrelevant that the respondent’s activity is not in the same field as that of the applicant. In this connection reliance was placed on Henderson v Radio Corporation Pty Ltd (1960) 60 SR (NSW) 519.

59                                          The short answer to this submission is that her Honour notes at [36] that in opening submissions LE2003 makes the passing off claim on the basis that it intended to seek exemplary damages which were not available in trade mark actions. Nevertheless in closing submissions only incidental reference was made to the passing off claim and no reference at all to exemplary damages. Her Honour considered on that basis alone that even if not formally abandoned, the claim was not pressed. Her Honour records that counsel conceded in final submissions that the misleading conduct claims added nothing to its case and that no additional or independent relief was sought.

Removal of Liquideng name from the corporate name of liquid fuel supplies

60                                          Her Honour refused to make an order that Mr Edwards and LFS take all necessary steps to remove the “Liquideng” name from their corporate name because no basis had been established for making such an order. Since LE2003 did not own rights at large with respect to the Liquid Engineering mark, and since its rights were limited to the particular classes of goods specified, it was not entitled to prevent LFS from trading in different types of goods, the consequence being that this relief travelled beyond what was necessary. We can see no reason for disturbing her Honour’s judgment on this ground.

61                                          We are not persuaded that there has been any error in relation to her Honour’s reasoning on this aspect.

Costs

62                                          Because the appeal has been dismissed it is appropriate that the appellants should pay the costs of the respondent.

63                                          In relation to the cross-appeal, since the cross-appellant has been successful in obtaining a significant increase in the account of profits the cross-respondents should pay its costs.

Associate:

Dated:         13 February 2009