CATCHWORDS

COPYRIGHT - Infringement - liability of director of corporate infringer.

COPYRIGHT - Remedies for infringement - "conversion damages" under s 116 of Copyright Act 1968 - measure of damages - value of infringing copies - allowance of deductions for expenses incurred by infringer.

Copyright Act, 1968, s 116

WEA International Inc v Hanimex Corporation Ltd (1987) 17 FCR 274 (Gummow J)

Mentmore Manufacturing Co Ltd v National Merchandising Manufacturing Co Inc (1978) 89 DLR (3d) 195

White Horse Distillers Ltd v Gregson Associates Ltd [1984] RPC 61

King v Milpurrurru (1996) 34 IPR 11

Performing Right Society Ltd v Ciryl Theatrical Syndicate Ltd [1924] 1 KB 1

Autodesk Inc v Yee (1996) AIPC 91-274

W H Brine Co v Whitton (1981) 55 FLR 440 (FCA/Fox J)

Green Cartridge Co (Hong Kong) Ltd v Canon Kabushiki Kaisha (1996) 34 IPR 614

Berger v Willowdale AMC (1983) 145 DLR (3d) 247 (Ont/CA)

Rainham Chemical Works Ltd (in liq) v Belvedere Fish Guano Company Ltd [1921] 2 AC 465

Wah Tat Bank Ltd v Chan [1975] AC 507

C Evans & Sons Ltd v Spritebrand Ltd [1985] 1 WLR 317 (CA)

Australasian Performing Right Association Ltd v Valamo Pty Ltd (1990) 18 IPR 216

Kalamazoo (Aust) Pty Ltd v Compact Business Systems Pty Ltd (1985) 84 FLR 101

Martin Engineering Co v Nicaro Holdings Pty Ltd (1991) 100 ALR 358.

Caxton Publishing Co Ltd v Sutherland Publishing Co [1939] AC 178

Infabrics Ltd v Jaytex Ltd [1982] AC 1

Wham-O Manufacturing Co v Lincoln Industries Ltd [1985] RPC 127

Fire Nymph Products Ltd v Jalco Products (WA) Pty Ltd (1983) 1 IPR 79

Lewis Trusts v Bambers Stores Ltd (1982) 8 FSR 281

MICROSOFT CORPORATION v AUSCHINA POLARIS PTY LTD & ORS

No NG 592 of 1995

Lindgren J

Sydney

6 December 1996

IN THE FEDERAL COURT OF AUSTRALIA)

NEW SOUTH WALES DISTRICT REGISTRY)         No NG 592 of 1995

GENERAL DIVISION                  )

          BETWEEN:

MICROSOFT CORPORATION

                     First Applicant

MICROSOFT PTY LIMITED

                    Second Applicant

          AND:

AUSCHINA POLARIS PTY LIMITED (ACN 007 363 859)

                    First Respondent

PALM BEACH DRIVE PTY LIMITED (ACN 065 221 525)

                   Second Respondent

STEVEN LAGOS

                    Third Respondent

CORAM:    Lindgren J

PLACE:    Sydney

DATE:     6 December 1996

                      MINUTE OF ORDERS

THE COURT ORDERS:

1.   THAT the proceeding stand over to 11 December 1996 at 9.00 am for the making of orders.

2.   THAT by 5.00 pm on 10 December 1996 the parties submit to the Associate to Lindgren J agreed form of short minutes of the orders to be made, and if agreement has not by then been reached, the forms of short minutes of the orders for which they will respectively contend, and written outlines of their submissions in support.

NOTE:     Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

IN THE FEDERAL COURT OF AUSTRALIA)

NEW SOUTH WALES DISTRICT REGISTRY)         No NG 592 of 1995

GENERAL DIVISION                  )

          BETWEEN:

MICROSOFT CORPORATION

                     First Applicant

MICROSOFT PTY LIMITED

                    Second Applicant

          AND:

AUSCHINA POLARIS PTY LIMITED (ACN 007 363 859)

                    First Respondent

PALM BEACH DRIVE PTY LIMITED (ACN 065 221 525)

                   Second Respondent

STEVEN LAGOS

                    Third Respondent

CORAM:    Lindgren J

PLACE:    Sydney

DATE:     6 December 1996

                    REASONS FOR JUDGMENT

INTRODUCTION:

The applicants seeks relief in respect of infringement of copyright and infringement of trade mark.  (They do not press claims for relief in respect of contravention of the Trade Practices Act 1974 and passing off.) 

The first applicant ("Microsoft"), is the owner of the copyright in certain original literary works, namely, 112 computer programs identified in Schedule A to its further amended application ("the Microsoft Programs").  They include "Microsoft MS-DOS" and "Microsoft Windows for Workgroups"
("the two Programs").

Microsoft is also the proprietor in Australia of the registered trade marks B371528 (9) "MICROSOFT" and B377674 (16) "MICROSOFT" ("the Microsoft Trade Marks").

The claim against the first applicant ("Auschina") was settled on 29 February 1996 when final injunctive orders were made against it in respect of the Microsoft Programs and the Microsoft Trade Marks.

Accordingly, the case has proceeded only as against the second respondent ("Palm Beach") and the third respondent ("Lagos").  Lagos is a director of Palm Beach.

Microsoft is incorporated in Delaware.  The second applicant is its Australian subsidiary.  It provides marketing and technical support on behalf of Microsoft in Australia in relation to the Microsoft Programs.  As well, it is a registered user of the Microsoft Trade Marks.  The case has been conducted on the basis of infringement of the intellectual property rights of Microsoft alone, and no attempt has been made to establish that rights of the second applicant have been infringed.

On 4 October 1995, interlocutory injunctions were ordered against Palm Beach and Lagos in respect of the Microsoft Programs and the Microsoft Trade Marks "pending the
determination of these proceedings or until further order."

MICROSOFT'S CASE

In its statement of claim, Microsoft pleads infringements of copyright of the kinds referred to in ss 37 and 38 of the Copyright Act 1968 ("the Act"). 

In relation to literary works, such as the Microsoft Programs, unless the contrary intention appears, copyright is the exclusive right to do all or any of the acts referred to in para 31 (1) (a) of the Act.  One of these is "to reproduce the work in a material form".  Neither importation nor authorisation is mentioned in para 31 (1) (a).  But both are referred to in Division 2 (ss 36-39A) of Part III of the Act.  Section 36 provides that the copyright in a literary work is infringed by a person who, not being the owner of the copyright and without the owner's licence, does in Australia, or authorises the doing in Australia of, any act comprised in the copyright.  Importation is not one of the acts mentioned in s 36, but it lies at the heart of s 37 and is referred to in s 38.  On the other hand, neither s 37 nor s 38 refers to authorisation. 

Sections 37 and 38 are, so far as relevant, as follows:

     "37.     ..., the copyright in a literary ... work is infringed by a person who, without the licence of the owner of the copyright, imports an article into Australia for the purpose of:

              (a)   selling, letting for hire, or by way of trade offering or exposing for sale or hire, the article;

              (b)   distributing the article:

                   (i)  for the purpose of trade; or

                     (ii)for any other purpose to an extent that will affect prejudicially the owner of the copyright; or

              (c)   .....................................

              if the importer knew, or ought reasonably to have known, that the making of the article would, if the article had been made in Australia by the importer, have constituted an infringement of the copyright.

      38. (1)..., the copyright in a literary ... work is infringed by a person who, in Australia, and without the licence of the owner of the copyright:

              (a)   sells, lets for hire, or by way of trade offers or exposes for sale or hire, an article; or

              (b)   ....................................;

              if the person knew, or ought reasonably to have known, that the making of the article constituted an infringement of the copyright or, in the case of an imported article, would, if the article had been made in Australia by the importer, have constituted such an infringement.

          (2)........................................."

Microsoft claims that Palm Beach infringed its copyright in the two Programs, first, by importing 1500 unlicensed reproductions of them into Australia in the circumstances referred to in s 37, and, secondly, by selling the reproductions in the circumstances referred to in s 38.  It also claims that Lagos is liable for those infringements.

At the commencement of the hearing, Microsoft announced that it had elected for damages rather than an account of profits (see sub-s 115 (2) of the Act), and that it no longer pressed a claim for additional damages under sub-s 115 (3).  As well, it seeks permanent injunctive relief.

Microsoft was able to rely on admissions made by Palm Beach and Lagos pursuant to a notice to admit facts, and on admissions made in an affidavit of Lagos sworn on 29 August 1995.  As well, Microsoft read several affidavits.  There was no cross-examination of any deponent.

As will be seen in due course, the issues argued were: (1) whether Lagos is liable; and (2) the quantum of damages to which Microsoft is entitled under sub-s 116 (1) of the Act.  There is also an issue as to whether any relief to be granted should extend beyond the two Programs to any or all of the other 110 Microsoft Programs.  Microsoft asked that I refrain from making orders upon the publication of these Reasons so that it might have an opportunity to put submissions as to the relief to be granted.  Palm Beach and Lagos consented to my following this course.  I will accede to Microsoft's request.

At the commencement of the hearing, Palm Beach announced that it would consent to the granting to Microsoft of injunctive relief against it in respect of copyright and trade mark infringement in terms of paras 10 and 11 of Microsoft's further amended application, subject to certain variations. 
Paragraphs 10 and 11 are set out below, with the variations referred to by Palm Beach indicated (in them, as in these Reasons, the expression "Microsoft Programs" is used to refer to Microsoft's 112 computer programs referred to earlier):

     "10.An order that each [for`each', Palm Beach would substitute `the Second'] Respondent, whether by its servants, agents or otherwise, be restrained from:

          (a)  reproducing or authorising the reproduction, in any material form, of the whole or a substantial part of any of the Microsoft Programs[for `any of the Microsoft Programs' Palm Beach would substitute `Microsoft MS-DOS or Microsoft Windows for Workgroups'] without the licence of the First Applicant;

          (b)  selling, offering for sale, supplying, offering to supply or distributing any infringing copy of any of the Microsoft Programs [see above];

          (c)  importing into Australia without the licence of the First Applicant any copy of any of the Microsoft Programs. [see above]

     11.  An order that each [see above] Respondent, whether by its servants, agents or otherwise be restrained from infringing the First Applicant's registered trade marks numbered B371528(9) and B377674(16) comprising the word MICROSOFT by importing, [Palm Beach would delete `importing,'] selling, offering to sell, supplying or offering to supply any computer disk, diskette, CD-ROM, computer program, computer software, computer hardware, manual or documentation under or by reference to the name MICROSOFT without the licence of the First Applicant."

Against this background, the following further facts, which were proved or admitted, may be noted.  Palm Beach imported into Australia on or about 21 June 1995, 500 copies of the Microsoft Program, MS-DOS version 6.22, and 500 copies of the Microsoft Program, Windows for Workgroups version 3.11.  On or about 24 July 1995, it imported into Australia a further 1,000 copies of the MS-DOS version 6.22 program and 1,000 copies of the Windows for Workgroups version 3.11 program.  Both importations were without Microsoft's licence.  Both were from J N S Computers of 321 Cameron Place, Glendale, California ("JNS").  Invoices issued by JNS were addressed to Palm Beach and were marked "ATT STEVE".  They bore notations "SHIP VIA: FRITZ" and "PAYMENT: COD."  The earlier one also bore a handwritten note reading "TOTAL 32 CASES" and the later one, a note reading "TOTAL 62 BOXES".  They showed that JNS invoiced Palm Beach US$26,500 for the 500 copies of the two Programs on the earlier invoice and US$51,500 for the 1,000 copies of the two Programs on the later invoice.

The affidavit of Lagos and the copy sales invoices annexed to it show that Palm Beach effected "on-sales" as follows:

Thus, Palm Beach on-sold all 1,500 copies of the two Programs for a total amount of A$142,250.  The sale prices for a copy of the two Programs can be seen to be, variously, A$90, A$95 and A$97.

As appears above, on 25 July 1995, Palm Beach sold to Auschina of 25 Dawson Court, Aspendale Gardens, Victoria 3195, 300 copies of the two Programs, and on 28 July 1995 Palm Beach sold to Auschina 200 copies of the two Programs - a total of 500 copies of the two Programs.  Affidavit evidence of the on-sales to Auschina was also given by Zhi Wang, a director of Auschina.  The 500 copies were invoiced to Auschina at a price of $95 each - a total price of $47,500.  Mr Wang said that it was Lagos who told him that Palm Beach had the two Programs available for sale and with whom he dealt.

It is convenient, although not a necessary part of Microsoft's pleaded case, to note the route subsequently followed by 100 of the 500 copies of the two Programs which Palm Beach had
sold to Auschina.  On or about 31 July 1995 Auschina sold 100 copies of the two Programs to Austone Technology Pty Limited of North Ryde, New South Wales ("Austone").  Mr Wang of Auschina dealt with Mr John Quiang of Austone. 

On or about 27 or 28 August 1995, Austone sold 100 copies of the two Programs to Edge Computer Pty Limited ("Edge").  Peter Campbell Letson ("Letson"), the General Manager (NSW) of Edge, negotiated the purchase from Austone.  Edge received from Austone seven cartons: two cartons each contained 50 separately packaged copies of the MS-DOS 6.22 program, and five cartons each contained 20 separately packaged copies of the Windows for Workgroups program, making the total of 100 copies of the two Programs.

Letson examined a copy of the MS-DOS 6.22 program and a copy of the Windows for Workgroups 3.11 program and suspected that the software may have been counterfeit.  He took from the cartons a sample copy of the MS-DOS 6.22 program and a sample copy of the Windows for Workgroups 3.11 program which became exhibits in the proceeding.

On 3 August 1995, Letson contacted Andrew Dobson ("Dobson") of the second applicant and delivered to him one carton of 50 copies of the MS-DOS 6.22 program and one carton of 20 copies of the Windows for Workgroups 3.11 programs.

Letson also gave evidence that each of the seven cartons bore
two stickers.  His evidence about them was as follows:

     " I have examined each of the cartons described above, and have observed that each has a white piece of paper with the following details marked on it:

          `To Austone Technology

          Attention John Quiang

          11 Avon Road,

          North Ryde NSW 2113

          tel: (02) 8882330

          From Auschina Polaris P/L

          13/1-7 Canterbury Road, Braeside, Victoria 3195

          tel: (03) 95808688'

     Each carton also has a Yellow and White sticker.   On the yellow part of the sticker the following words appear:

          `Fritz Companies Inc

          House Waybill label'

     On the white part of the sticker the following details appear:

          `Destination: MEL

          Fritz House Airway Bill No. 680-2799615-O

          Origin: LAX

          Pieces: 62

          Weight: 1400kg'"

One of the cartons was in evidence.  Two labels conforming generally to Letson's description are affixed to it.

There were also in evidence invoices issued by Fritz-Fliway Pty Ltd ("Fritz-Fliway") of room 132 Afcab Complex, Tullamarine Melbourne Airport to Palm Beach dated 21 June 1995 and 31 July 1995 for freight and other charges.

I infer from all this evidence and the notations "SHIP VIA: FRITZ" and "62 BOXES" on the second invoice issued by JNS to Palm Beach referred to earlier, that the carton in evidence had come from JNS in Los Angeles to Palm Beach in Melbourne via Fritz Fliway and had originally contained some of the copies of the two Programs which had been sold by JNS to Palm Beach.

On 4 August 1995, Dobson delivered the two cartons which Letson had given to him to Scott Porter ("Porter") at the second applicant's office.  On the same day, Porter delivered them to Faye Evelyn Chatillon, a legal administrator employed by Microsoft, who is responsible for the enforcement of Microsoft's intellectual property rights in Australia and New Zealand.  She has given expert evidence to the effect that the sample copies of the two programs taken from the cartons handed to her by Porter are counterfeit.  I accept her evidence.  I infer that the 500 copies of the two Programs which Palm Beach had bought from JNS and of which it had on-sold 300 to Auschina, were counterfeit copies of the two Programs, the copyright in which is owned by Microsoft, and had been imported into Australia by Palm Beach for sale in this country.

It is convenient to note here that the present proceeding was commenced against Auschina alone on 8 August 1995; that on 11 August 1995 Palm Beach was joined as second respondent; and that on 14 September 1995 Lagos was joined as third respondent.  Upon the applicants' application, an order was made on 17 August 1995 that a director of Palm Beach file an
affidavit disclosing Palm Beach's acquisitions and sales of Microsoft Programs.  It was pursuant to that order that Lagos filed his affidavit dated 29 August 1995 referred to previously.

Each of Palm Beach and Lagos admitted that it and he knew, at all material times, that if it or he, respectively, had made in Australia copies of the two Programs copies of which were imported by Palm Beach from JNS, the making of those copies would have constituted an infringement of Microsoft's copyright in the two Programs.  This admission derives its relevance from the concluding words of s 37 and sub-s 38 (1) of the Act, noted earlier, and from paras 15 and 16 of the applicants' statement of claim noted below.

I turn now to that statement of claim.  Paragraph 15 pleads Microsoft's case against Palm Beach for infringement of the kind referred to in s 38, and para 16 pleads Microsoft's case against Palm Beach for infringement of the kind referred to in s 37.  Paragraphs 15 and 16, including the particulars contained in them, are as follows:

     "15  The Second Respondent without the licence of the First Applicant has:

          (a)  sold, or by way of trade, offered or exposed for sale; and

          (b)  distributed or supplied for the purpose of trade to an extent that prejudicially effects the First Applicant,

          copies of one or more of the Microsoft Programs
where:

          (i)  the making of the copies constituted an infringement of the First Applicant's copyright in the Microsoft Programs; or  

          (ii)if the copies had been made in Australia by the importer that would have constituted an infringement of the First Applicant's copyright in the Microsoft Programs; and

          the Second Respondent knew or ought reasonably to have known the matters referred to in subparagraphs (i) and (ii) above.

                         Particulars

          15.1The Second Respondent sold copies of the computer programs Microsoft MS-DOS and Microsoft Windows on the occasions and in the quantities set out in the affidavit of Steven Lagos sworn 29 August 1995 [see earlier].

          15.2Each of the copies referred to in paragraph 15.1 was made without the licence of the First Applicant.

     16   the Second Respondent without the licence of the First Applicant has imported into Australia for the purpose of:

          (a)  sale, or by way of trade, offering or exposing for sale; and

          (b)  distributing for the purpose of trade,

          copies of one or more of the Microsoft Programs where:

          (i)  the making of the copies would, if they had been made in Australia by the Second Respondent, have constituted an infringement of the First Applicant's copyright in the Microsoft Programs; and

          (ii)the Second Respondent knew or ought reasonably to have known the matters referred to in subparagraph (i) above.

                         Particulars

          16.1On 21 June 1995 the Second Respondent imported 500 copies of the computer program Microsoft MS-DOS and 500 copies of
the computer program Microsoft Windows from JNS Computers.

          16.2On 24 July 1995 the Second Respondent imported 1000 copies of the computer program Microsoft MS-DOS and 1000 copies of the computer program Microsoft Windows from JNS Computers.

          16.3Each of the copies referred to in paragraphs 16.1 and 16.2 was made without the licence of the First Applicant."

Paragraph 18 pleads that Lagos "authorised, directed and procured" Palm Beach's acts pleaded in paras 15 and 16.  Paragraph 19 pleads that by reason of this fact, and the further facts that Lagos is and was at all material times a director of Palm Beach and at all material times controlled its day to day activities, he "has also infringed" Microsoft's copyright.  Paragraph 20 pleads that at the time he authorised, directed and procured the acts of Palm Beach pleaded in paras 15 and 16, Lagos was aware that the making of copies of the programs in Australia by Palm Beach would have constituted an infringement of Microsoft's copyright in them.  Paragraph 21 claims that by reason of the matters pleaded in paras 18 and 20, Lagos is liable to Microsoft "as a joint tortfeasor with" Palm Beach for the infringement of copyright pleaded in paras 15 and 16.

Microsoft's trade mark claims are pleaded in paras 26-35 of the statement of claim.  Paragraph 30 pleads that Palm Beach, without Microsoft's licence, used the trade mark "MICROSOFT" in the course of trade in Australia in relation to the two
Programs.  As particulars, Microsoft repeats para 15 quoted earlier; states that the copies of the two Programs supplied by Palm Beach had printed on them and on their accompanying printed matter, the trade mark "MICROSOFT"; and asserts that the trade mark was not applied to that product by or with Microsoft's licence.  Paragraph 34 pleads that Lagos "authorised, directed and procured" those acts of Palm Beach.  Paragraph 35, in terms similar to those of para 21 noted above, pleads that Lagos is liable "as a joint tortfeasor with" Palm Beach for the infringement of the Microsoft Trade Marks. 

ISSUES AND OUTLINE OF PARTIES' SUBMISSIONS

As noted earlier, the case raises two principal issues: whether Lagos is liable, and the quantum of damages to which Microsoft is entitled under sub-s 116 (1) of the Act.

(1)  Whether Lagos is liable

It was not disputed that the general law principles which determine the liability of a company director for the tortious conduct of the company govern the issue of Lagos's liability for the infringement of Microsoft's copyright for which Palm Beach is liable.  One form of infringement provided for in sub-s 36 (1) of the Act is the "authorising" of the doing in Australia of any act comprised in the copyright in a work.  But authorisation of the kind referred to in sub-s 36 (1) and the general law principles governing joint tortfeasance must both be distinguished from the general law principles to which
I have earlier referred: WEA International Inc v Hanimex Corporation Ltd (1987) 17 FCR 274 (Gummow J) ("WEA") at 283. 

I was taken to numerous cases dealing with the liability of directors for the tortious conduct of their companies (including infringements by the companies of intellectual property rights).  In brief, Lagos submits that I should follow the approach laid down by the Canadian Federal Court of Appeal in Mentmore Manufacturing Co Ltd v National Merchandising Manufacturing Co Inc (1978) 89 DLR (3d) 195 ("Mentmore") which was favoured by Nourse J in White Horse Distillers Ltd v Gregson Associates Ltd [1984] RPC 61 ("White Horse") and by Beazley J, when sitting as a member of a Full Court of this Court, in King v Milpurrurru (1996) 34 IPR 11.  Beazley J stated the test of directorial liability in the context of s 37 of the Act as follows:

     "A director will be liable if, having the requisite mental element prescribed by s 37, he commits or directs the commission of the tort, deliberately or recklessly, so as to make the tortious conduct his own." (at 35 - emphasis supplied)

Her Honour's test would apply equally to s 38.

Although this test has apparently been consistently followed in Canada, it has not received universal support in England, Australia or New Zealand.  An "alternative" and less demanding test, which is usually associated with Performing Right Society Ltd v Ciryl Theatrical Syndicate Ltd [1924] 1 KB 1
("Performing Right Society") at 13-15 (Atkin LJ), and which was, for example, accepted as correct by Lee J in King v Milpurrurru, supra, is that the director must have expressly or impliedly "directed or procured" the tortious conduct for which the company is liable.

Microsoft submits that on the facts of the present case, Lagos's conduct satisfies either test.  Lagos submits that his conduct does not satisfy the Mentmore test.

(2)  The quantum of damages to which Microsoft is entitled under sub-s 116 (1) of the Act

In relation to the second question to which I referred, Microsoft seeks to recover "conversion damages" pursuant to sub-s 116 (1) of the Act which is as follows:

      "116. (1)Subject to this Act, the owner of the copyright in a work or other subject-matter is entitled in respect of any infringing copy, or of any plate used or intended to be used for making infringing copies, to the rights and remedies, by way of an action for conversion or detention, to which he or she would be entitled if he or she were the owner of the copy or plate and had been the owner of the copy or plate since the time when it was made."

The expression "infringing copy" is defined in s 10 of the Act to mean, in relation to a work such as a computer program, "a reproduction of the work, or of an adaptation of the work, ...".

Microsoft claims to recover damages amounting to $132,750. According to a document headed "CALCULATION OF CONVERSION DAMAGES" which Microsoft handed up on the hearing, it arrives at this amount as follows:

"Date   Customer            Quantity    Second Respondent's Sale Price ($)

21/6/95MT Microtek           200                       19,400

29/6/95Suit Computers        150                       14,550

29/6/95MT Microtek           300 [sic-150]             14,550

25/7/95Auschina Polaris      300                       28,500

27/7/95Suit Computers        150                       14,250

27/7/95MT Microtek           100                       9,500

28/7/95Unitron               250                       22,500

28/7/95Auschina Polaris      200                       19,000

                                            SUB-TOTAL = 142,250

Less copies in Applicants' possession

Source                      Quantity   Second Respondent's Sale price ($)

from Second Respondent's

sale to Auschina Polaris

on 28/7/95                  100                       9,500

RESULTS IN conversion of copies to the value of $132,750 (using the Second Respondent's sale price as the market value)"

The primary submission of Palm Beach and Lagos is that in terms of sub-s 116 (1), the notional conversion occurred upon importation and the maximum amount of damages which can properly be awarded as representing the value of the infringing copies on those dates is the aggregate of the amounts of the two invoices issued by JNS to Palm Beach (US$26,500 plus US$51,500 = US$78,000).  They further submit that from this amount must be deducted the value of the 100 copies recovered by Microsoft (apparently A$9,500 referred to in Microsoft's figures set out above) and A$3,433.39 representing the total of the amounts of the two Fritz-Fliway invoices.

An alternative submission made by Palm Beach and Lagos is that if the correct approach is to treat as the value of the infringing copies, the total of the amounts for which Palm  Beach on-sold (A$142,250), not only must the sums of A$9,500 and A$3,433.39 be deducted, but so must the amounts totalling US$78,000 for which Palm Beach initially bought from JNS.

For its part, Microsoft also submits that the measure of damages is the value of the goods upon importation, but this, it says, is the price for which they could then have been sold in Australia.   The date of the arrival of the first consignment (500 units) from JNS was 21 June 1995 and on that date Palm Beach sold 200 units to MT Microtek at a price of $97 per copy of the two Programs.  The date of arrival of the second consignment (1,000 units) from JNS was 24 July 1995 and by that date Palm Beach had sold on 21 and 29 June at a price of $97 and was to sell on 25 July at a price of $95.  Microsoft submits that the market value as at 24 July should be taken to be established by this evidence.  Microsoft relies on W H Brine Co v Whitton (1981) 55 FLR 440 (FCA/Fox J) ("Brine") and, in particular, submits that Palm Beach and Lagos are not entitled to deductions for the amounts of the two JNS invoices or the two Fritz-Fliway invoices.

REASONING

(a) Liability of Lagos

The question of the liability of a company director in respect of tortious conduct for which the company is liable has been
much discussed in recent authorities.  These include two appellate judgments this year: one of the Full Court of this Court in King v Milpurrurru, supra, and the other, the decision of the Hong Kong Court of Appeal in Green Cartridge Co (Hong Kong) Ltd v Canon Kabushiki Kaisha (1996) 34 IPR 614 ("Green Cartridge").  I hope to avoid repeating unnecessarily, past discussion of the issue.

It is useful to state at the outset certain propositions which seem to be uncontroversial:

1.Infringement of copyright is treated as tortious: cf W E A, at 283.

2.Where copyright is infringed by a corporation, the question of the nature and extent of involvement on the part of a director necessary for him or her to be personally liable in respect of the infringement is not answered by principles dealing with joint tortfeasors, or by the notion of "authorisation" as it is used in copyright statutes; W E A at 283.

3.The principles governing vicarious liability of an employer for the torts of its employee do not govern the present question (W E A at 283).

4.The holding of an office in a company, such as that of director or even managing director, does not itself suffice
to render the office-holder liable.

5.It is not necessary that the director know that the conduct in question is tortious.

6.In any particular case it is necessary to assess closely the director's conduct and its relationship with the tortious conduct for which the company is liable.

In my view, it is important at the outset to note two distinctions.  The first distinction is between cases in which there have been dealings between the plaintiff and the corporate wrongdoer ("dealings cases") and cases in which there have not.  An illustration of the former is a case in which the company and the director are sued in respect of advice negligently given by the company through the director to the aggrieved party.  In cases of that kind, a most important consideration intrudes: the plaintiff has consented to deal with the company as distinct from the director.  Where the dealings are contractual, it is elementary that the outsider's rights are against the company, not the director who has represented it.  It may be that concurrently with its contractual obligations, the company has incurred commensurate or similar non-contractual obligations to the other contracting party. 

It has been said in relation to dealings cases that a director is not liable in respect of the tortious conduct of the
company unless the director has personally assumed a duty to the other party: cf Sealand of the Pacific Ltd v Robert C McHaffie Ltd (1974) 51 DLR (3d) 702 (BC/CA); Trevor Ivory Ltd v Anderson [1992] 2 NZLR 517 (NZ/CA); Livingston v Bonifant (1995) 7 NZCLC 96-658 (NZ/Doogue J).  (As a matter of language, "personal assumption of a duty" by a director may be seen to be akin to his "making the tortious act his own" (see later), but the latter formulation has not been confined to "dealings cases" and appears not to have been used to refer to a personal assumption of a duty at all.)  But references to assumption of a duty are beside the point where there has been no relevant contact between the company and the aggrieved party.  The present case is of that kind: far from dealing with a company as distinct from its director, Microsoft did not deal with either Palm Beach or Lagos.

In contractual cases, the non-liability of the director has nothing to do with the limited liability of members of the company (cf s 516 of the Corporations Law).  A director is not liable for the company's breach of contract because the company, rather than the director, is the contracting party.  It may be that a similar observation can be made in relation to a director's liability for those torts of the company which arise out of dealings between it and the aggrieved party.  But the distinction between the director and the company is irrelevant where, as in the present case, there is no question of the aggrieved party having consented to deal with the company.

The second distinction to which I referred is between cases in which the law imposes a duty on the director personally and those in which it does not.  It may be appropriate, for example, to conclude that in particular circumstances, the director owed the plaintiff a duty of care.  An illustration is found in Berger v Willowdale AMC (1983) 145 DLR (3d) 247 (Ont/CA), in which the president of a company was held liable to an employee of the company who was injured when she slipped and fell on ice and snow at her place of employment, which was in the total control of the president.  Similarly, if a director negligently drives a motor car into a fence, the director's conduct (acts, omissions and states of mind), being tortious, renders the director liable.  If he or she has been driving on company business, the company is vicariously liable.

The present case is distinct from the class of case just mentioned.  An essential element of liability under s 37 of the Act is importation and an essential element of liability under s 38 of the Act is, relevantly, selling.  It is clear that Lagos neither imported nor sold.  Therefore, his own conduct is not that described in s 37 or s 38.  If he is to be liable, it must by reason of special principles of law which render a director liable for his company's tortious conduct.

I turn now to the authorities which have addressed this question.  The task with which the courts have grappled is that of describing in a principled way the nature and extent
of the involvement of a director in the company's wrongdoing necessary and sufficient to fix him with liability for it.  Although I will refer to two "tests" by convenient labels, it must be remembered that the words used by judges are not the words of a statute and that particular sets of circumstances may satisfy both tests.

In Rainham Chemical Works Ltd (in liq) v Belvedere Fish Guano Company Ltd [1921] 2 AC 465 ("Rainham"), a company carried on the business of manufacturing explosives and was held liable in respect of damage to neighbouring property as a result of an explosion. Two of its directors were held not to have been rendered liable by reason of their holding of the office of director (they were held liable as occupiers of the premises in question, but that is another matter).  Lord Buckmaster said:

   "If the company was really trading independently on its own account, the fact that it was directed by Messrs Feldman and Partridge would not render them responsible for its tortious acts unless, indeed, they were acts expressly directed by them." (at 476)

The reference is to the general superintendence, authority and direction of a company's directors over its affairs.

Rainham was followed in Performing Right Society, an infringement of copyright case.  The individual sought to be made liable was a shareholder in, and managing director of, the company.  The judgment of Atkin LJ in the Court of Appeal
has often been cited.  After observing that "[i]nfringement of copyright is a well known tort" (at 13), and noting briefly the facts of the case, his Lordship said this:

   "Prima facie a managing director is not liable for tortious acts done by servants of the company unless he himself is privy to the acts, that is to say unless he ordered or procured the acts to be done." (at 14)

After referring to Rainham, Lord Atkin added,

   "In this case there is no suggestion that the appellant was privy to the commission of this wrongful act.  He was away at the time.  He had no idea what pieces [of music] were being performed.  He gave no instructions or directions to the band to play the works in question.  No one would think of holding a managing director responsible for all the wrongful acts committed by servants of the company in such circumstances."

and

   "To make such a servant liable he must be privy to the tortious act." (both at 15)

In both Rainham and Performing Right Society, the directors were not privy to the actual conduct giving rise to liability: to have held them answerable for it would have been to fix a director with liability for no reason other than the holding of that office and the associated general authority of directors to conduct their company's affairs.

In Wah Tat Bank Ltd v Chan [1975] AC 507, the Privy Council applied the "procured or directed" test to hold an individual who was chairman and managing director of a limited liability
company liable for conversion.

The "procured or directed" test, sometimes referred to as the "authorised, procured or directed" test, focuses attention on the relationship between the director's intention and the particular corporate conduct which the law characterises as tortious.  What seems to underlie this test is the notion that, necessarily, companies can engage in tortious conduct only through human beings, and, at least ordinarily, where a particular human being involved and responsible to an appropriate extent can be identified, he should, as a matter of policy, be liable.  After all, even if the aggrieved party did not sue him, apparently he would be liable to indemnify the company in respect of its liability to the aggrieved party.

A different and more stringent test which seems to involve an element of "personal blameworthiness" has been applied in a line of cases usually associated with Mentmore.  In some cases, including, in my view, the present one, the Performing Right Society and Mentmore formulations yield different results.

In Mentmore, an infringement of patent case, Le Dain J, delivering the judgment of the Canadian Federal Court of Appeal, held that the degree and kind of personal involvement which gives rise to personal liability in a director is "that degree and kind of personal involvement by which the director
or officer makes the tortious act his own" (at 203 - emphasis supplied).  Le Dain J elaborated on this test as follows (at 204-5):

   " ... there must be circumstances from which it is reasonable to conclude that the purpose of the director ... was not the direction of the manufacturing and selling activity of the company in the ordinary course of his relationship to it but the deliberate, wilful and knowing pursuit of a course of conduct that was likely to constitute infringement or reflected an indifference to the risk of it." (emphasis supplied)

The "making the tortious act his own" test was followed in England by Nourse J in White Horse, a passing-off case (the passage from Mentmore quoted above had earlier been applied by Whitford J in Hoover plc v George Hulme (Stockport) Ltd (1982) 8 FSR 565).  Indeed, Nourse J may have taken the test further and in any event he accepted that the Mentmore test was a higher one than that of such English authorities as Performing Right Society.  Nourse J expressed the test in these terms (at 91):

   " ... I believe that the principles embodied in the Mentmore decision can be stated as follows.  Before a director can be held personally liable for a tort committed by his company he must not only commit or direct the tortious act or conduct but he must do so deliberately or recklessly and so as to make it his own, as distinct from the act or conduct of the company.  It is unnecessary for him to know, or have the means of knowing, that the act or conduct is tortious.  It is enough if he knows or ought to know that it is likely to be tortious.  The facts of each case must be broadly considered in order to see whether, as a matter of policy requiring the balancing of the two principles of limited liability and answerability for tortious acts or conduct, they call for the director to be held personally liable."
(emphasis supplied)

Later, his Honour said (at 92):

   " ... there is, in my view, much to be said for the higher test, particularly in regard to its requirement that the director should make the act or conduct his own as distinct from that of the company.  That would seem to be an entirely rational basis for personal liability.  Conversely, it would seem to be irrational that there should be personal liability merely because the director expressly or impliedly directs or procures the commission of the tortious act or conduct.  In the extreme, but familiar, example of the one-man company, that would go near to imposing personal liability in every case.  As for deliberateness or recklessness and knowledge or means of knowledge that the act or conduct is likely to be tortious, I think that these may on examination be found to be no more than characteristic, perhaps essential, elements in the director's making the act or conduct his own."

Whitford J again applied the "making the tortious act his own" test, as now explained by Nourse J in White Horse, in Fairfax Dental Ltd v S J Filhol Ltd, unreported, 20 July 1984.

With respect, I do not find the formula, "making the tortious act his own", particularly illuminating, and, for reasons given earlier, in my opinion the reference to "limited liability" is confusing.  The reference to "deliberateness" and "recklessness" is also troublesome in view of the fact, which no-one seems to doubt, that the director need not have known that the conduct was tortious.

In C Evans & Sons Ltd v Spritebrand Ltd [1985] 1 WLR 317 (CA), an infringement of copyright case, Slade LJ with whom O'Connor and Cumming-Bruce LJJ agreed, expressed the view that in White
Horse, the principle as formulated by Nourse J was not sufficiently qualified.  The Court of Appeal refused to strike out a pleading that a director had "authorised, directed and procured" the tortious act.  The Court seems to have adhered to the test of Lord Buckmaster in Rainham and of Atkin LJ in Performing Right Society, subject to two qualifications: first the Court acknowledged that their Lordship's statements could not be regarded as "a precise and unqualified statement of the principles governing a director's personal liability for his company's torts" (at 329E) and, secondly, the Court considered that where a particular state of mind or knowledge on the part of a defendant is a necessary element of the wrong alleged, the state of mind or knowledge of the director who authorised, directed or procured the conduct constituting the remainder of the wrong must be relevant.  (As previously noted, under ss 37 and 38 of the Act the alleged infringer's state of knowledge is relevant but Lagos's admission that he had the relevant knowledge overcomes any difficulty which might otherwise exist in this respect.)

The "procured or directed" test has been applied in Australia by Davies J in Australasian Performing Right Association Ltd v Valamo Pty Ltd (1990) 18 IPR 216 (albeit while apparently approving of certain dicta in Mentmore), by Thomas J of the Supreme Court of Queensland in Kalamazoo (Aust) Pty Ltd v Compact Business Systems Pty Ltd (1985) 84 FLR 101 at 127, and by Burchett J in Martin Engineering Co v Nicaro Holdings Pty Ltd (1991) 100 ALR 358.

Green Cartridge was heard and decided by the Hong Kong Court of Appeal between the hearing and the decision in King v Milpurrurru, supra.  Litton VP suggested (at 632) that Nourse J may have put the "threshold for liability" too high in White Horse and that the words "deliberately or recklessly" should be omitted from Nourse J's formulation, but added that there must be something more than that the director gave instructions for an act that turned out to be tortious, such as that "he knew that it [was] likely to be tortious, and nevertheless directed the infringing acts to be performed, making it [sic] his own".  Mayo JA noted that at the trial it had been agreed that the law was satisfactorily stated by Slade J (with whom the other members of the Court of Appeal had agreed) in C Evans & Sons Ltd v Spritebrand Ltd, supra, at 277-279, and said:

   "From these passages it would appear that a director can be held responsible for the acts of the company by virtue of his close involvement in a tortious activity.  However, where it can be established that there is a reckless element in the acts, it is far more likely that the director will be held liable." (at 650)

The third member of the Court, Ching JA, did not address the present issue.

The authorities in England, Canada, Australia and New Zealand have been helpfully reviewed by Beazley J in King v Milpurrurru, supra.  With great respect, however, I find the "directed or procured" test more satisfactory than the "making
the tortious act his own" test.  In any event, the former test is supported by Australian authority which I should follow unless convinced that it is clearly wrong.  I am not convinced that it is clearly wrong.

I turn to consider those facts of the present case which are relevant to Lagos's liability in respect of Palm Beach's infringement of Microsoft's copyright.  According to a company extract in evidence, Palm Beach was incorporated in Victoria on 30 June 1994 as a company limited by shares, and from that date its directors have been Lagos and Susan Margaret Lagos, both of whom are shown as living at the same address.  Lagos was born on 15 August 1960 and Susan Margaret Lagos was born on 31 January 1963.  It is not far-fetched to think that they may be husband and wife.  Importantly, Palm Beach and Lagos have admitted that at all material times Lagos controlled the day-to-day activities of Palm Beach.  The two invoices issued by JNS to Palm Beach bore the annotation "ATT STEVE".  The evidence of Zhi Wang of Auschina is that he dealt with Lagos.

There is no evidence as to the identity of Palm Beach's shareholders or as to the extent of their shareholdings.  Therefore, it is not possible to say that in this respect Palm Beach is a "one man company".  However, it has not been suggested that any person other than lagos had any role to play in relation to the acquisition, importation or on-sale of the copies of the two Programs.

Lagos has admitted that he knew at all material times that if Palm Beach had made in Australia the copies of the two Programs which it imported from JNS, the making of those copies would have constituted an infringement of Microsoft's copyright in the two Programs. 

On the basis of all the foregoing evidence, I find that Lagos alone, on behalf of Palm Beach, negotiated and contracted with JNS for the purchase and importation of the goods, and negotiated and contracted with the various purchasers from Palm Beach for the on-sale of the goods to them.

Although Palm Beach rather than Lagos was the importer and seller, all the conduct constituting Palm Beach's infringement, was that of Lagos.  I infer that it was through Lagos that Palm Beach knew that the making of the copies, if they had been made in Australia by it, would have constituted an infringement of copyright.  Although the evidence does not go so far as to establish "the deliberate, wilful and knowing pursuit of a course of conduct that was likely to constitute infringement or reflected an indifference to the risk of it" (Mentmore at 204-205, per Le Dain J), in my view, the fact that Lagos alone was totally responsible for all the elements of the infringements provided for in ss 37 and 38 of the Act which rendered Palm Beach liable, suffices to render him liable for those infringements too.

It may be that a consequence of the view which I favour is
that in the case of a "one man company", in the sense of a company, all of whose relevant acts, omissions and states of mind are exclusively those of one human being, that human being will be liable for the tortious conduct of the company, at least in cases other than "dealings cases".  I find nothing in principle or authority inconsistent with this result.

(b) Quantum of damages

Palm Beach and Lagos have admitted that "on or about 21 June 1995" Palm Beach "imported" the initial 500 copies of MS-DOS and Windows for Workgroups acquired from JNS and that on 24 July 1995 it imported from that source a further 1,000 copies of each.  Lagos's affidavit is to the effect that "[o]n the 21st of June 1995" and "[o]n the 24th of July 1995" Palm Beach "acquired" the first and second batches respectively of copies of the two Programs from JNS.  The JNS invoices annexed to Lagos's affidavit show Palm Beach's "order date" as being 15 June 1995 in the first case and 18 June 1995 in the second.  The earlier of the two JNS invoices is dated 16 June and is in respect of "32 CASES", and the later one is dated 19 July and is in respect of "62 BOXES".  So far as the evidence reveals, there was no infringement by Palm Beach or Lagos of Microsoft's copyright, either in Palm Beach's placing of its orders with JNS or in JNS's issuing of the invoices or dispatching of the 1,500 copies of the two Programs, and it is difficult to imagine how there could have been. 

The date of the first relevant infringements were the dates of
importation into Australia.  The earlier of the two Fritz-Fliway invoices is dated 21 June 1995 and bears the note "MACHINE PARTS 32'.  The second of the Fritz-Fliway invoices is dated 31 July 1995 and bears a notation "COMPUTER PARTS 62".  I infer that the first batch must have been imported between 16 June and 21 June, and the second between 19 July and 31 July.  Although the admission by Palm Beach and Lagos is only that importation occurred "on or about" 21 June and 24 July, and the Lagos affidavit says only that Palm Beach "acquired" the batches on those dates, I infer that the infringing copies were imported into Australia on those two dates.

Under sub-s 116 (1), Microsoft is entitled to recover the damages to which it would be entitled in an action for conversion if it had been the owner of the infringing copies.  The parties have both submitted that the relevant times are the times of the two importations into Australia.  Sections 115 and 116 provide remedies for infringement and it would be odd if the notional conversion predicated in s 116 were to be taken to have occurred at a time other than that of the infringement.  I proceed accordingly. 

The measure of damages in conversion is generally, "the value of the thing converted [in this case, notionally, the infringing copies] at the date of conversion": Caxton Publishing Co Ltd v Sutherland Publishing Co [1939] AC 178 ("Caxton Publishing") at 203 (Lord Porter); and cf Infabrics
Ltd v Jaytex Ltd [1982] AC 1 at 18 (Lord Wilberforce); Wham-O Manufacturing Co v Lincoln Industries Ltd [1985] RPC 127 at 179-181; Fire Nymph Products Ltd v Jalco Products (WA) Pty Ltd (1983) 1 IPR 79 ("Fire Nymph") at 115-116 (Toohey J). 

Copyright is intangible property but infringing copies are tangible.  Infringing copies are derived from both the copyright and tangible property.  It has often been observed that by entitling a copyright owner to "conversion damages" in respect of infringing copies, to some extent the provision found in sub-s 116 (1) "overcompensates" the copyright owner and "penalises" the infringer, by giving damages calculated by reference, in part, to tangible property which in fact the former did not, and often the latter did, own: see the recent comprehensive discussion by Burchett J in Autodesk Inc v Yee (1996) AIPC 91-274.

The prices for which Palm Beach on-sold the copies of the two Programs represented the first wholesale prices for which they were sold in Australia.  The case does not raise any question of retail prices as distinct from wholesale prices (cf Vivian Marshall & Co Ltd v Harold Wesley Ltd [1939] MacGillivray CC 288), or of the severability of infringing copies from "innocent goods" (cf Caxton Publishing, at 185).

Questions of value and of apportionment and deductions to be allowed for in favour of an infringer have been referred to in Caxton Publishing by Lord Thankerton at 185, by Lord Roche at
194, and by Lord Porter at 205-206; in Brine by Fox J at 452; in Lewis Trusts v Bambers Stores Ltd (1982) 8 FSR 281 by Walton J at 299-301, and in Fire Nymph by Toohey J at 115-116. In Caxton Publishing, Lords Thankerton, Roche and Porter thought that there should be a deduction for proper and necessary expenditures after the notional conversion.  In Brine, Fox J held that amounts which had earlier been outlaid by an infringing importer, in particular, the importer's cost of acquiring the infringing copies and of freight, were not deductible, but that "delivery costs" were deductible because they were part of the cost of selling.  In Lewis Trusts v Bambers Stores Ltd, supra, Walton J said that "only expenses incurred after the act of conversion in perfecting the sale, for example delivery expenses, should come off ..." (at 299).  In Fire Nymph, Toohey J noted that some authorities have suggested that expenses should not be deducted at all (see, for example, John Lane The Bodley Head Ltd [1936] 1 KB 715 at 722), and seems to have accepted that those which favour deductibility do so only in respect of expenses necessarily incurred after conversion in connection with the sale of the particular infringing copies.

In my opinion, in the present case, the amounts of the two JNS invoices are clearly not deductible because they are referable to antecedent transactions. 

The position in relation to the two Fritz-Fliway invoices is less clear.  Importantly, there was no affidavit evidence as
to the circumstances preceding the issue of them.  I infer from their content, that they comprise amounts which Fritz-Fliway claimed Palm Beach was liable to pay to it for its services and to reimburse it for amounts which it had apparently outlaid.  The earlier invoice bears the date of the first importation and the later one is dated seven days after the date of the second importation.  The largest amount by far on the invoices is for "freight disbursement".  I infer that this represents the freight charge for the transport of the copies of the two Programs, from Los Angeles to Melbourne.  I do not infer that any liability of Palm Beach in respect of freight was incurred after importation into Australia.  Nor do I infer that liability for the other amounts on the invoices was incurred after importation into Australia.  Moreover, in the absence of evidence beyond the contents of the two invoices, I do not infer that the amounts of those invoices represent liabilities incurred as a necessary incident of on-sales by Palm Beach.  So far as the evidence reveals, Palm Beach would have incurred liability to Fritz-Fliway for the amounts of those invoices, even if it had not entered into the particular on-sale transactions.  So far as the evidence reveals, the amounts of the two invoices are amounts relating to steps in the progression of the goods from JNS in Los Angeles to the premises of Palm Beach in Melbourne.

In my opinion, on the evidence, the amounts of the two Fritz-Fliway invoices are not deductible in the assessment of the amount of "conversion damages" to which Microsoft is entitled
under sub-s 116 (1).

CONCLUSION

As indicated above, no orders will be made upon publication of these Reasons.  Rather, the proceeding will be listed on a future date for the purpose of the making of orders and, if necessary, the hearing of submissions as to the orders which should be made.  There will be directions accordingly.

              I certify that this and the preceding 37 pages are a true copy of the Reasons for Judgment of the Honourable Justice Lindgren.

              Associate:

              Dated:             6 December 1996

Heard:        13 November 1996

Place:        Sydney

Decision:     6 December 1996

Appearances:  Mr J H Nicholas of counsel instructed by Mallesons Stephen Jaques appeared for the applicants.

              Ms J Baird of counsel instructed by Rosendorff & Associates appeared for the second and third  respondents.