FEDERAL COURT OF AUSTRALIA

Elwood Clothing Pty Ltd (ACN 079 393 696) v Cotton On Clothing Pty Ltd (ACN 052 130 462) [2009] FCA 633

ELWOOD CLOTHING PTY LTD (ACN 079 393 696) v COTTON ON CLOTHING PTY LTD (ACN 052 130 462)

VID 800 of 2007

GORDON J

12 JUNE 2009

MELBOURNE

THE COURT ORDERS THAT:

1.         The Respondent pay the Applicant damages in the sum of $280,000.00.

2.         The Respondent pay the Applicant’s costs incurred after 8 April 2009 in seeking damages.

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                          This judgment is concerned with quantum.  The Applicant “seeks a determination on quantum as a result of the Full Federal Court of Australia’s finding that the Respondent had infringed the Applicant’s copyright rights”. 

2                          On 7 April 2008, I dismissed the Applicant’s application and the cross-claim and ordered the Applicant to pay the Respondent’s costs of the application to be taxed, in default of agreement:  Elwood Clothing Pty Ltd v Cotton On Clothing Pty Ltd (2008) 76 IPR 83.  The Applicant appealed to the Full Court of the Federal Court.  On 23 December 2008, the Full Court allowed the appeal and, after setting aside the orders made on 7 April 2008, remitted the proceeding for the “determination of any further relief to which the Applicant is entitled or should be granted”.  These reasons for judgment address that issue. 

NATURE OF RELIEF SOUGHT

3                          The Applicant seeks the following relief under the Copyright Act 1968 (Cth) (“the Act”) resulting from the Full Court’s finding that the Respondent breached the Applicant’s copyright rights in the “NewDeal” design (see Elwood Clothing (2008) 76 IPR 83 at [4]) and the “Vintage Sport Swing Tag” design drawing (see Elwood Clothing (2008) 76 IPR 83 at [5]):

1.         general damages under s 115(2) of the Act in the amount of $576,083.12 comprised of:

(a)        lost profit on sales made by the Respondent of $403,569.04 or, alternatively, the profit margin on the NewDeal garment for sales for three years of $376,083.12; and

(b)        damages to reputation of $200,000;

2.         additional damages under s 115(4) of the Act in the amount of $200,000;

3.         conversion damages under s 116 of the Act in the amount of $405,301.49.

4                          For the reasons that follow, the Applicant is entitled to general damages under s 115(2) of the Act in the sum of $130,000.00 (see [25] and [33] below) and additional damages under s 115(4) of the Act in $150,000.00 (see [41] below).  No additional amount is awarded for conversion damages under s 116 of the Act.

ANALYSIS

Section 115(2) of the Act – General Damages

5                          The Applicant has made an election for damages.  Damages under s 115(2) are compensatory in nature.  Any award of damages should reflect the depreciation to the value of the Applicant’s copyright as a chose in action that resulted from the Respondent’s infringing conduct:  see Sutherland Publishing Company Ltd v Caxton Publishing Company Ltd [1936] Ch 323, 336; Interfirm Comparison (Australia) Pty Ltd v Law Society of New South Wales (1975) 6 ALR 445, 446 and Bailey v Namol Pty Ltd (1994) 53 FCR 102, 110-111.  The damages are to compensate for the loss suffered as a result of the infringement, not to punish the respondent (Bailey v Namol Pty Ltd (1994) 53 FCR 102, 110-111; Norm Engineering Pty Ltd v Digga Australia Pty Ltd (2007) 162 FCR 1 at [264] (copyright case applying s 115(2)) and although reported cases may be of assistance, each case must be decided on its own particular facts: Bailey 53 FCR at 111. 

6                          The measure of damages, so far as is possible, is to be that sum which will put the Applicant in the same position as it would have been in if it had not suffered the wrong: Bailey 53 FCR 110-111.  The Applicant bears the onus of proving depreciation or loss.  If it fails to discharge that onus, nominal damages may be awarded:  Aristocrat Technologies Australia Pty Ltd v DAP Services (Kempsey) Pty Ltd (in liquidation) (2007) 157 FCR 564 at [2] and [38]-[39]. 

7                          Various methods of measuring damages for infringement of copyright have been described: see Futuretronics.com.au Pty Limited v Graphix Labels Pty Ltd (No 2) (2008) 76 IPR 763 at [11] and TS & B Retail Systems Pty Ltd v 3Fold Resources Pty Ltd (No 3) (2007) 158 FCR 444 at [204]-[209].

8                          In the present case, the Applicant seeks general damages for infringement of $403,569.04 (based on a “lost profits method”) or alternatively, $376,083.12 (based on a “lost sales method”).

9                          In relation to the “lost profits method”, two facts or matters were relied upon by the Applicant:  (1) the Respondent sold 31,333 garments and (2) the Applicant sold the NewDeal garment at a wholesale profit of $12.88 per unit.  The Applicant had identified a retail profit but conceded, as it had to, that the very great majority of its sales were wholesale.  The Applicant accepted that Courts have expressed concerns about the appropriateness of this method:  Review Australia Pty Ltd v New Cover Group Pty Ltd (2008) 79 IPR 236, [42]-[43].  However it submitted that such a method was appropriate in this case because the Applicant could show that it lost significant sales as a result of the Respondent’s garments being sold in the marketplace.  The Respondent disagreed.  It submitted that the Applicant’s approach should be disregarded or, if the Court was to award damages on this basis, either the amount awarded should be nominal because the Applicant had failed to satisfactorily quantify its loss (Aristocrat Technologies Australia Pty Ltd (2007) 157 FCR 564 at [2], and [38]-[39]) or at least heavily discounted.

10                        A number of issues arise for consideration.  Is the “lost profits method” identified by the Applicant the appropriate method for calculation of its damage and if not, what method should be used?  If the approach is to be adopted, what is the profit margin to be applied to the number of units sold, how many units did the Respondent in fact sell and is the Applicant entitled to assume that, in the absence of the Respondent’s infringing articles, it would have sold all of the units sold by the Respondent?

11                        Where, as here, the Applicant and the Respondent are in actual or potential competition, the appropriate measure of damage was described by Finkelstein J in TS & B 158 FCR 444at [207] as follows:

Then lost profit is usually the best measure of damage.  The plaintiff must show that he has lost sales to the defendant as a result of the infringement and quantify the loss suffered.  This requires the court to explore the counterfactual hypothesis of the contracts the plaintiff would have obtained absent the infringement and the costs associated with them.  Necessarily the process will involve a degree of speculation, but that is no bar to recovery.  The claim is not for loss of revenue but for loss of profits.  The profits to be calculated are the lost net profits.  By net profits I mean revenue less all costs including variable and indirect costs, but not including income tax.  Care must be taken to ensure that costs savings are brought to account.  If a plaintiff sells less of his products he will have less costs and that should be treated as a gain to be offset against the lost revenue which forms the basis of the computation of lost profits.  The plaintiff is also entitled to recover indirect losses (such as damage to goodwill) as long as the cause is the infringement, the loss is foreseeable and is not unduly speculative.  It will often be impossible to be precise in the calculation of lost profit.  If needs be, the calculation can be rough and ready, with the benefit of any doubt favouring the plaintiff.

(Emphasis added.)

12                        The sales history of the Applicant and the Respondent objectively establishes what occurred in relation to the number of units sold:

13            Under similar circumstances in Norm Engineering 162 FCR 1, the Court adopted the “lost profits” method for calculating damages (at [266]-[271]); namely, (1) examine the number of sales made by the Respondent; (2) assume that the Respondent was trying to capture sales from the Applicant, the market leader; (3) assume that the number of sales made by the Respondent is equal to the number of sales lost by the Applicant; (4) discount the number in (3) to reflect the fact that not all sales made by the Respondent can be considered sales lost by the Applicant; and (5) apply any further discount necessary in the circumstances of the case:  see also Axe Australasia Pty Ltd v Australume Pty Ltd (2006) 69 IPR 45 (employing a similar approach).  In Norm Engineering 162 FCR 1, the evidence disclosed, inter alia, that the Applicant was the recognised leader in the same market from whom the Respondent was actively seeking to divert sales and expert evidence was adduced calculating the sales lost by the Applicant. 

14            In the present case, the evidence establishes that the Applicant’s sales did in fact cease when the Respondent’s infringing product entered the market place.  However, as Finkelstein J noted in TS & B 158 FCR 444 (see [11] above), that finding is only part of the process in calculating damages.  As the Court acknowledged in Bailey 53 FCR at 111-112, the lost profits assessment depends upon a counterfactual and it is here that in this case the evidence of the other integers is lacking.

15            One integer – the number of units – is capable of resolution.  The Applicant’s claim for copyright infringement is limited to Australia.  The Respondent’s sales in New Zealand are not relevant.  As the table records (see [12] above), the Respondent’s sales commenced in April 2007 and it sold 28,139 units in Australia.  Another integer – the profit margin was not in dispute.  It was common ground that the appropriate basis for calculation of damage was the profit margin on wholesale sales at $12.88 per unit. 

16            It is evidence of the other integers that is missing.  There is no evidence about which entity was the market leader in t-shirts and no basis, whether from expert evidence or otherwise, to determine an appropriate discount factor, particularly given that, unlike the competitors in Norm Engineering 162 FCR 1, the Applicant and the Respondent were selling to different markets at vastly different prices (approximately $50 versus $15).  Indeed, even where the parties were selling to similar markets at similar prices in Review Australia Pty Ltd v Innovative Lifestyle Investments Pty Ltd (2008) 166 FCR 358 (fact found by Jessup J at [23]), the Court found that the Applicant had failed to put forward sufficient evidence for it to draw an inference as to whether some or all of the sales made by the Respondent could be properly characterised as sales lost by the Applicant:  see Innovative 166 FCR 358, [25]-[26].

17            The Applicant’s response is to proffer an alternative method for which it cites no authority but is a method that simply omits the more difficult integers outlined in [13] above.  That is to say, the Applicant suggests that the Court need only:  (1) examine the number of sales made by the Respondent and (2) multiply that number by the Applicant’s wholesale margin.

18            As noted earlier (see [9] above), the Respondent rejects this truncated calculation proposed by the Applicant and submits that the Applicant has failed to discharge its onus of establishing sufficient evidence of lost profits.  Alternatively, the Respondent submitted that the Applicant’s figure should be discounted because it could not be assumed that each of the Respondent’s customers would have purchased a garment from the Applicant.  The criticisms the Respondent makes of the Applicant apply equally to it:  the Respondent’s position is itself simply an assertion.  Neither party submitted any evidence (whether in the form of expert testimony, market research data, or anecdotal customer testimonials) regarding the propensity of shoppers for t-shirts to cross-shop between the Applicant and the Respondent or the propensity of shoppers who buy $15 t-shirts to also buy $50 t-shirts. 

19            The following facts and matters inevitably lead to the conclusion that in the absence of evidence of the kind just described (see [18] above) there is no sufficient reasonable basis to conclude that the Applicant’s sales would have matched the Respondent’s sales units for unit. 

20            First, there is the difference in sale price.  The retail price of the Applicant’s t-shirts was $49.95.  The retail price of the Respondent’s t-shirts was $24.95 or two for $30.00.  Secondly, there is the manner in which the parties sold their garments and the volumes of sales.  The Applicant had one retail outlet in Hawthorn, Victoria and otherwise sold its garments wholesale through a small number of distributors.  In stark contrast, during the relevant period the Respondent had between 126 and 148 retail outlets. 

21            The Applicant sold 13,535 units between August 2006 and June 2007.  It was a product it described as “iconic” and one of its best selling garments.  On the other hand, between April and October 2007, the Respondent sold nearly 30,000 units which comprised less than 0.4% of the total number of garments sold by the Respondent.  Moreover, as the Respondent submitted, it effectively doubled its sales by offering two for the price of $30.00. 

22            In the absence of positive evidence which would suggest (let alone establish) that the Applicant would have matched the Respondent’s sales (and how), I do not consider that the calculation of the Applicant’s damages should proceed on the assumption that the Applicant’s sales would have matched the Respondent’s sales units for unit. 

23            How the Court should treat this lack of evidence may be said not to be settled:  compare Axe Australasia Pty Ltd v Australume Pty Ltd (2006) 69 IPR 45 at [35] (acknowledging that relevant evidence could have been but was not provided by the Applicant, but nevertheless applying a 35% discount as a best guess); Norm Engineering 162 FCR 1, [292]-[296] (applying a 50% discount even where there was evidence that both parties operated in a similar market and that the Respondent was actively attempting to divert sales from the Applicant as market leader); and Innovative 166 FCR 358  at [28]  (effectively applying a discount of 100% by refusing to award any lost profits damages on the grounds that to do so would require excessive speculation).

24            It is true that authority suggests that the Court has the right, and even duty, to speculate in calculating compensatory damages:  Norm Engineering 162 FCR 1 at [295] (citing authority for the proposition that difficulty in estimating damages or the requirement of speculation does not relieve the Court of the responsibility of undertaking the exercise); Aristocrat Technologies Australia Pty Ltd v DAP Services (Kempsey) Pty Ltd (2007) 157 FCR 564 at [35].  However, that duty is not absolute and the Court is entitled to consider the lack of assistance provided by the Applicant (in particular that the Applicant chose not to provide proper sales data and relied solely on the proposition that sales made by the Respondent should be taken as sales lost by the Applicant), in awarding damages for lost profits:  Aristocrat 157 FCR 564 at [39].

25            In the circumstances and doing the best I can, I consider that the damages payable under this limb of s 115(2) should be assessed at $120,000.  I calculate that figure by applying a 2/3^rd discount to the total number of units sold by the Respondent multiplied by the Applicant’s wholesale profit margin and then rounding that figure ($120,810) down.  That reflects sales of 9,379 units.  That sum is in my view an appropriate assessment of the Applicant’s damages.

26            Two aspects of the Applicant’s damages claim under s 115(2) remain.  First, the alternative method of calculation proposed by the Applicant – the lost sales method – and secondly, the claim for loss of reputation.

“Lost Sales Method”

27            The Applicant’s lost sales method takes an average of the Applicant’s sales figures (see [12] above) and then assumes, in the absence of the Respondent in the market, it would have continued to sell that average number of t-shirts each month for the next three years.  I reject this method of calculation.  The objective facts do not support the contention that in the absence of the Respondent’s garments, the Applicant would have continued to sell in each quarter, for the next three years, the average number of units it had sold from quarter 3 in 2006 to the end of quarter 1 in 2007.  First, the Applicant’s own sales of the NewDeal t-shirt dramatically declined from quarter 3 in 2006 to the end of quarter 1 in 2007:  see [12] above.  If that pattern of declining sales continued, sales of the Applicant’s NewDeal garment would have ceased by no later than the end of 2007. 

28            Secondly, the NewDeal garment was in fact an update of a design first sold in retail outlets in early 2005.  The Applicant made the decision to “update” the design in early 2006.  The Applicant sold the original design for approximately 18 months.  The updated design (the NewDeal garment) first sold in retail outlets in quarter 3 of 2006:  see [12] above.  The prospective sales period of the Applicant’s NewDeal garment was not three years but, at best, something approximating 18 months. 

29            Assessing damages on this basis would result in an award of damages in the vicinity of $65,000 calculated as follows:

30            The Applicant did not seek any separate award of damages for the “Vintage Sport Swing Tag” under the “lost profits method” or the “lost sales method”.

Damage to reputation

31            The Applicant also seeks general damages in the sum of $200,000 on the basis that the sales of the Respondent’s garments affected “the reputation of the NewDeal design, its “exclusivity” in the market place and the “Elwood” brand per se”. 

32            As earlier described (see [5] and [6] above), an award of general damages is to be that sum which will put the Applicant in the same position as it would have been in if it had not suffered the wrong.  There is no dispute that, subject to issues of causation and foreseeability, any secondary loss, including damage to reputation, caused by the infringement is recoverable: TS & B 158 FCR 444 at [207]-[208].  

33            In the present case, I find that it was reasonably foreseeable that infringement of the Applicant’s copyright would cause a loss of reputation to the Applicant in terms of brand-name recognition.  However, the Applicant adduced no evidence of the damage it allegedly suffered to its reputation by reason of the infringement of its copyright.  In previous cases where damage to reputation has been quantified, evidence was usually led to establish (a) the importance of singularity, distinctiveness, quality or some other commercially valuable aspect of reputation to the victim and (b) how, and to what extent, the infringing product or conduct damaged that aspect of the victim’s reputation: see Paramount Pictures Corporation v Hasluck (2006) 70 IPR 293 at [55]; Review Australia Pty Ltd v New Cover Group Pty Ltd (2008) 79 IPR 236, [44]-[46] and Review Australia Pty Ltd v Innovative Lifestyle Investments Pty Ltd (2008) 166 FCR 358, [29]-[31]. 

34            What then is the commercially valuable aspect of the Applicant’s reputation, and how, and to what extent, was this commercially valuable aspect damaged by the conduct of the Respondent?  At its highest, it was submitted by the Applicant that the “iconic” and “exclusive” nature of the Elwood brand was “cheapened” by the production of the infringing products of the Respondent.  For the moment, I am prepared to accept that the exclusivity of the Applicant’s reputation was, on balance, adversely affected by the availability of the infringing products – as the availability of a product increases and its cost decreases, it will be viewed as less exclusive.  The problem that I am left with is how to quantify this ‘drop’ in exclusivity, being the extent of harm to the Applicant’s reputation.  The substance of the Applicant’s submission was that, after undertaking a cursory evaluation of the case law, a sort of broad formula could be adopted: X many infringing products = $Y in damages to reputation.  In other words, if a Court granted $50,000 in damages to reputation based upon 1,000 infringing products in one case, it was sufficient in another to grant $25,000 in damages to reputation where 500 infringing products were created.  That proposition has no justification in authority or logic.  Any quantifiable figure for damage to reputation, by necessity, will depend upon the particular circumstances of the case.  The starting point must be the reputation, and the harm it has suffered.  Using the number of infringing products to determine the quantum of damage to reputation reverses the process.  Nevertheless, as I mentioned earlier, on the balance it is likely that some damage to reputation was suffered.  After all, as they say, success breeds success: see Prior v Sheldon (2000) 48 IPR 301 at [87].  While the precise quantification of the Applicant’s lost goodwill is necessarily speculative for the reasons identified above, I would award it an additional sum of $10,000 in this regard.  That amount represents the best assessment I can make in the circumstances:  Review Australia Pty Ltd v New Cover Group Pty Ltd (2008) 79 IPR 236 at [46].

Section 115(4) of the Act – Additional Damages

35            I come now to the Applicant’s claim for additional damages under s 115(4) of the Act.

36            The observations made by Besanko J in Futuretronics.com.au Pty Ltd v Graphix Labels Pty Ltd (No 2) (2008) 76 IPR 763 at [17] should be repeated:

First, there is no need ... to consider if an award of additional damages can be made under s 115(4) if no damages are awarded under s 115(2) because I have awarded ... damages under s 115(2) (Polygram Pty Ltd v Golden Editions Pty Ltd (No 2) 38 IPR 451 at 459-461 per Lockhart J;  MJA Scientifics [International Pty Ltd v S C Johnson and Son Pty Ltd (1998) 43 IPR 275] at 283-284 per Sundberg J).  Second, it is not necessary that there be a proportionate relationship between the additional damages awarded under subs (4) and the damages awarded under subs (2): Flags 2000 Pty Ltd v Smith (2003) 59 IPR 191 at 198 per Goldberg J.  An award of additional damages under subs (4) is not dependent upon the adequacy or inadequacy of an award of damages under subs (2).  Third, the matters in subs (4)(b)(i)-(iv) inclusive are not preconditions to an award of additional damages.  In other words, and using the flagrancy of the infringement as an example, the court must have regard to the flagrancy of the infringement in determining whether to award additional damages, but is not the case that additional damages can be awarded only if the breach involves a particular degree of flagrancy.  Fourth, ... there is a distinction between conduct of a defendant after an infringement (or after being informed that he has allegedly infringed the plaintiff’s copyright) and relevant to the substantive allegations against him on the one hand, and the defendant’s conduct of his defence to an action for an infringement of copyright in relation to procedural matters on the other.  The former matter is within the terms of s 115(4)(b)(ib) of the [Copyright] Act, whereas ... the latter matter is a matter to be taken into account in determining the appropriate order as to costs. ... Fifth, an award under s 115(4) of the [Copyright] Act can encompass damages which at common law would be aggravated damages and exemplary damages: Bailey 53 FCR at 113-114.

37            Consistent with those observations, there are a number of facts and matters in the present case which support an award of additional damages under s 115(4) of the Act.  

38            First, the Respondent’s infringement (as found by the Full Court) was not innocent.  It was flagrant.  The Respondent had direct access to the Applicant’s work – it purchased the Applicant’s garment.  The Respondent’s employees were then told to make a garment / swing tag that was “the same but different”.  Significantly, these facts were not disclosed by the Respondent in any of its affidavits prior to trial but were exposed during cross examination. 

39            Secondly, on 31 July 2007, the Applicant put the Respondent on notice of the Applicant’s copyright rights.  Then, despite being on notice of the alleged infringing act, the Respondent continued to manufacture and sell its infringing garments until all of those garments were sold.

40            Thirdly, there is a need to deter similar infringements of copyright.  The Respondent, a large clothing manufacturer and retailer, knew that the design would be a “winner”.  Its method of “designing” garments was to employ “shoppers” who travelled the world buying garments which they then “copied”.  If the Applicant’s copyright was infringed, then there is a public interest in deterring that method of “designing”.

41            Having regard to the matters I have identified, I consider that an award of additional damages is appropriate.  In the circumstances, I find that the sum of $150,000 is appropriate. 

Section 116 of the Act – Conversion Damages

42            Section 116 of the Act provides that the owner of copyright in a work can seek conversion damages.  The provision of conversion damages under s 116 was once the subject of regular criticism: see Polygram Pty Ltd v Golden Editions Pty Ltd (1997) 76 FCR 565, 568-569; Autodesk Inc v Yee (1996) 68 FCR 391, 395-396.  The subject matter of the complaints focussed upon the ‘harshness’ and ‘perplexities’ of the law and the results that ensued: see generally Infabrics Ltd v Jaytex Ltd [1982] AC 1.  However, the section was substantially amended to its present form by the Copyright Amendment Act (No 1) 1998 (Cth) which gave effect to the recommendations of the Copyright Law Review Committee Report on Conversion Damages published in July 1990.  That report and the relevant amendments intended to deal with the identified shortcomings by providing the Court with a wide discretion when determining whether to grant such damages: Sony Entertainment (Australia) Ltd v Smith (2005) 215 ALR 788, [114]-[115]; Venus Adult Shops Pty Ltd v Fraserside Holdings Ltd (2006) 157 FCR 442 at [93]. 

43            So far as is relevant, s 116 provides:

(1)        The owner of the copyright in a work … may bring an action for conversion … in relation to:

(a)        an infringing copy; or

…

(1A)     In an action for conversion …, a court may grant to the owner of the copyright all or any of the remedies that are available in such an action as if:

(a)        the owner of the copyright had been the owner of the infringing copy since the time the copy was made; or

…

(1B)     Any relief granted by a court in an action for conversion … is in addition to any relief that the court may grant under section 115.

(1C)     A court is not to grant any relief to the owner of the copyright in an action for conversion … if the relief that the court has granted or proposes to grant under section 115 is, in the opinion of the court, a sufficient remedy.

(1D)     In deciding whether to grant relief in an action for conversion … and in assessing the amount of damages payable, the court may have regard to the following:

(a)        the expenses incurred by the defendant, being a person who marketed or otherwise dealt with the infringing copy, in manufacturing or acquiring the infringing copy;

(b)        whether the expenses were incurred before or after the infringing copy was sold or otherwise disposed of by the defendant;

(c)        any other matter that the court considers relevant.

(1E)      If the infringing copy is an article of which only part consists of material that infringes copyright, the court, in deciding whether to grant relief and in assessing the amount of damages payable, may also have regard to the following:

(a)        the importance to the market value of the article of the material that infringes the copyright;

(b)        the proportion the material that infringes copyright bears to the article;

(c)        the extent to which the material that infringes copyright may be separated from the article.

(2)        A plaintiff is not entitled by virtue of this section to any damages or to any other pecuniary remedy, other than costs, if it is established that, at the time of the conversion or detention:

(a)        the defendant was not aware, and had no reasonable grounds for suspecting, that copyright subsisted in the work … to which the action relates;

(b)        where the articles converted … were infringing copies – the defendant believed, and had reasonable grounds for believing, that they were not infringing copies; or

(c)        where an article converted … was a device used or intended to be used for making articles--the defendant believed, and had reasonable grounds for believing, that the articles so made or intended to be made were not or would not be, as the case may be, infringing copies.

44            An award of damages under s 116 of the Act requires an Applicant to bring “an action for conversion”:  s 116(1).  As French and Kiefel JJ said in Venus Adult Shops Pty Ltd v Fraserside Holdings Ltd (2006) 157 FCR 442, [86]-[94]:

1.         Section 116 does not create a fictional conversion of infringing copies.  It creates a fictional ownership in them.  

2.         Conduct constituting conversion of the infringing copies according to the common law governing that tort, must be demonstrated.  The facts said to constitute the conversion of the infringing copies should be pleaded (or in a fast track proceeding, at least identified):  see also International Writing Institute Inc v Rimila Pty Ltd (1995) 57 FCR 135 at 139. 

3.         Conduct which may constitute conversion (interference with a right of possession) is diverse and includes refusal to return, taking, receipt, disposal or deprivation of title and destruction.  Mere possession by a person of the goods of another does not necessarily constitute conversion:  Flowfill Packaging Machines Pty Ltd v Fytore Pty Ltd (1993) Aust Torts Reports, 81-244 (Young J).

4.         The mere production of infringing material by copying from an original work does not constitute a conversion under s 116 of the Act because no infringing copy comes into existence until after the reproduction has occurred:  s 116(1A).  

5.         Mere possession by a person of the goods of another does not necessarily constitute their conversion:  Flowfill Packaging Machines Pty Ltd v Fytore Pty Ltd (1993) Aust Torts Reports, 81-244 (Young J).  However, a sale of infringing copies is not necessary for an award of damages under s 116.  Conversion may be demonstrated when infringing copies are brought into existence for the purpose of sale or some other form of disposal.  The conduct must “indicate an assertion of dominion over [the goods] inconsistent with the deemed ownership of the copyright owner”.  

6.         Any award of damages for conversion is discretionary.  It is in addition to relief under s 115 of the Act:  s 116(1B) of the Act.  However, if the relief the Court has granted or proposes to grant under s 115 is sufficient, no additional award is made under s 116 of the Act:  s 116(1C) of the Act.  The “sufficiency” of the damages under s 115 will depend upon the particular circumstances of the case.  By way of example, damages have been deemed insufficient where there was no way to calculate the quantum of damage under s 115 or the process of calculation required blatantly flawed assumptions to be made: see Sony Entertainment (Australia) Ltd v Smith (2005) 215 ALR 788, at [119]-[121]; Universal Music Australia Pty Ltd v Miyamoto (aka DJ Moto) (2005) 62 IPR 605, [14]-[15].  Finally, there should be no overlap between the damages awarded under ss 115 and 116 of the Act:  International Writing Institute Inc v Rimila Pty Ltd (1995) 57 FCR 135 at 136 and Sutherland Publishing Company Ltd v Caxton Publishing Company Ltd [1936] Ch 323, 340-341 (per Romer LJ) and 342-343 (per Greene LJ).

45            In my view, the Applicant should not be awarded damages under s 116 of the Act. 

46            First, the Applicant submitted that in approaching the question of “conversion damages”, “the availability of a substantial amount which would be available to be awarded under [s 116] is a matter which should be considered in assessing the claim for general and further damages” under s 115 of the Act.  I reject that contention.  The facts relevant to each head of damage are different.  Moreover, and no less importantly, the Applicant’s contention that conversion damages “is a matter which should be considered in assessing the claim for general and further damages” under s 115 of the Act is contrary to the proper construction of the Act and, in particular, s 116 of the Act.  As a matter of statutory construction, it ignores the express words of s 115 and s 116.  In substance, it seeks to rewrite the provisions in a way that should not be permitted. 

47            The methods of assessment of damage under the two sections are different:  Sutherland Publishing Company Ltd v Caxton Publishing Company Ltd [1936] Ch 323 at 336.  They are different because they are different causes of action.  There is nothing in s 115 of the Act which requires the Court to address or consider any question of conversion and assessment of damages for conversion.  It is concerned with infringement of copyright.  Under s 116(1A) of the Act, in an action for conversion in relation to infringing copies, the Court may grant “all or any of the remedies that are available in such an action”.  As French and Kiefel JJ said in Venus Adult Shops Pty Ltd (2006) 76 IPR 517 at [95], to the extent that illegality would provide a defence to an action in conversion at common law it would also provide a defence to proceedings in conversion under s 116.  None of those matters is relevant in s 115.  The list of differences could be but need not be further extended. 

48            Next, the Act prescribes the manner and order in which a Court is to assess damages under ss 115 and 116 of the Act.  The question posed by s 116(1C) cannot be addressed until damages have been assessed under s 115: Boyapati v Rockefeller Management Corporation (No 2) (2008) 78 IPR 600 at [15].  Conversion damages under s 116 of the Act are in addition to relief under s 115 of the Act, not the other way round:  s 116(1B) of the Act.  If the relief the Court has granted or proposes to grant under s 115 is sufficient, no additional award is made under s 116 of the Act:  s 116(1C) of the Act.  Finally, there should be no overlap between the damages awarded under ss 115 and 116 of the Act:  International Writing Institute Inc v Rimila Pty Ltd (1995) 57 FCR 135 and Sutherland Publishing Company [1936] Ch 323, 340-341 (per Romer LJ) and 342-343 (per Greene LJ).

49            The Respondent submitted that damages under s 116 should not be granted.  First, because the Applicant did not separately identify the facts said to constitute the act of conversion of the infringing copies.  I reject that contention.  In its Amended Closing Submissions at trial, the Applicant contended that the “act of conversion [was] the disposal by sale of the infringing copies”.  Next, the Respondent submitted that if the act of conversion was disposal by sale of the infringing copies, then the Applicant’s calculation of the damage as the entire value of the sale of the garments ($405,301.49) should be rejected because the calculation failed to address any of the matters in ss 116(1D) and (1E) of the Act.  The matters identified by the Respondents were its manufacturing and distribution costs (s 116(1D)(a) and (b)) and, because the infringing copies were only part of the garments, the matters listed in s 116(1E). 

50            The Applicant measured damages for conversion as the total sales of the garments.  The Applicant made no allowance for the Respondent’s manufacturing and distribution costs.  It was obliged to do so.  They were costs referred to in s 116(1D)(a) and (b) of the Act. 

51            The Respondent adduced confidential evidence of its financial performance from April 2007 to October 2007.  Freight and cartage costs were separately identified.  “Manufacturing costs” were not separately identified or, more accurately, the costs attributable to manufacturing were not separately identified.  Instead, the Respondent identified cost items which, on their face, might have been attributable to “manufacturing” and a separate line item “cost of goods sold”.  The Respondent did not identify “whether the expenses were incurred before or after the infringing copy was sold or otherwise disposed of by the [Respondent]”:  s 116(1D) of the Act.  The interesting question of which party bears the onus of addressing the matters referred to in s 116(1D)(a) and (b) of the Act was not addressed: cf Fire Nymph Products Ltd v Jalco Products (WA) Pty Ltd (1983) 47 ALR 355, 393-393.  In the present case, the absence of evidence sufficient to quantify the items referred to in s 116(1D)(a) and (b) of the Act does not matter.

52            It does not matter because an award of damages for conversion is discretionary and in the present case I consider that the relief granted under s 115 of the Act is sufficient.  Damages were awarded under s 115(2) upon the basis of identifiable factors and evidence presented to the Court as summarised above in [25] and [34] (subject to some limitations which were the subject of an appropriate discount).  Further, I have granted additional damages under s 115(4) based upon the various matters identified above in [37] – [41].  The damages granted under s 115, in my view, are a sufficient remedy to provide relief to the Applicant so that no additional award is necessary under s 116 of the Act:  s 116(1C) of the Act. 

COSTS

53            The Applicant submitted that the Respondent should pay the Applicant’s costs of seeking an award of damages.  The Respondent opposes such an order.  It contends that the Applicant’s costs were resolved by agreement as recorded in terms of settlement executed on 16 April 2009 and, further or alternatively, the Applicant’s damages claims are so excessive such that it has been put to unnecessary expense and that it should be entitled to its costs thrown away. 

54            By reason of the terms of settlement, at best, the Applicant is entitled to its costs incurred after 8 April 2009 in seeking an award of damages.  That leaves the issue of whether the Respondent should pay those costs.  In my view, it should.  Although some aspects of the Applicant’s damages claims were rejected or reduced, the matter proceeded by the preparation of written submissions and the Applicant was successful in obtaining a substantial amount of damages. 

Associate:

Dated:         12 June 2009