FEDERAL COURT OF AUSTRALIA

Facton Ltd (formerly known as G-Star Raw Denim KFT) v Seo [2011] FCA 344

THE COURT ORDERS THAT:

1.    The parties bring in orders to give effect to these reasons for decision by 4:00pm on 21 April 2011.

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 Federal Law Search on the Court’s website.

REASONS FOR JUDGMENT

1    The Appellants, Facton Ltd (formerly known as G-Star Raw Denim KFT) (Facton), G-Star Australia Pty Ltd and G-Star International BV (collectively the G-Star Companies) design, manufacture, advertise and sell G-Star branded products worldwide and wholesale and distribute the G-Star branded products in Australia to franchise stores and over 40 independent retailers. Facton owns the trademarks, G-Star International BV is licensed to use the trademarks and created the copyright works and G-Star Australia Pty Ltd actually does the selling in Australia.

2    At the trial of the proceedings, Federal Magistrate Burchardt held that the Respondent (Mr Seo):

1.    infringed the G-Star Trade Marks (as defined in para 5 of the Amended Statement of Claim) in breach of s 120 of the Trade Marks Act 1995 (Cth) (the Trade Marks Act). The G-Star Trade Marks comprised 12 Australian trade marks registered in the name of Facton;

2.    infringed or authorised the infringement of the Copyright Works (as defined in para 6 of the Amended Statement of Claim) in relation to the G-Star brand. The “Copyright Works” were two G-Star “G” logos used by the G-Star Companies;

3.    contravened ss 42 and 44 of the Fair Trading Act 1987 (NSW) (the Fair Trading Act);

4.    contravened ss 52 and 53 of the Trade Practices Act 1974 (Cth) (the TPA); and

5.    engaged in conduct which constituted the tort of passing off,

Facton Ltd & Ors v Chung Lim Sports Cap Pty Ltd & Ors [2010] FMCA 584.

3    On 10 September 2010, Federal Magistrate Burchardt ordered Mr Seo to pay to the Appellants:

1.    $500 as compensatory damages;

2.    $15,000 for damages to reputation;

3.    $15,000 additional damages pursuant to s 115 of the Copyright Act 1968 (Cth) (the Copyright Act); and

4.    their costs until 5 May 2010, to be taxed pursuant to the Federal Magistrates Court Rules 2001 (Cth) in default of agreement,

Facton Ltd & Ors v Chung Lim Sports Cap Pty Ltd & Ors (No 2) [2010] FMCA 735 (the Costs Decision). In the Costs Decision, the Appellant was also ordered to pay Mr Seo’s costs from 6 May 2010, such costs to be taxed pursuant to the Federal Magistrates Court Rules 2001 (Cth) in default of agreement. Finally, each party was ordered to bear their own costs of hearings on 19 August 2009, 4 November 2009, 23 December 2009, 19 March 2010, 1 April 2010 and 13 April 2010.

APPEAL AND CROSS-APPEAL

4    There is an appeal and a cross-appeal.

5    By the appeal, the G-Star Companies appeal against the Federal Magistrate’s assessment of damages and some aspects of his Honour’s costs orders. The grounds raised in the Notice of Appeal fall under three headings – damages, reserved costs and costs related to an “offer of compromise”.

6    Under the first heading – damages – there are six grounds of appeal. The first three grounds are concerned with the number of infringing items. The G-Star Companies contend that the Federal Magistrate erred:

1.    in assessing general damages and damages to reputation, in finding that there were only five infringing products (Appeal Ground 1). This ground of appeal was partly resolved at the hearing. Mr Seo conceded that, on any view, the number of infringing items was not less than eight;

2.    in assessing general damages, in finding there was no or no sufficient basis for the Federal Magistrate to proceed on the basis that Mr Musulin (a witness called by the G-Star Companies who investigated the alleged infringing products) had accepted that stall 265 to which he referred in his affidavit was not the stall of Mr Seo and that Mr Musulin agreed that it was no more likely than otherwise that he saw 10 infringing G-Star jackets at a stall other than Mr Seo’s stall (Appeal Ground 2); and

3.    in assessing general damages, damages to reputation and additional damages the Federal Magistrate ought to have found that at least 40 counterfeit G-Star products had been sold by Mr Seo (Appeal Ground 3).

7    Appeal Grounds 4 and 5 are directed at the manner in which the Federal Magistrate assessed damages. The G-Star Companies contend that the Federal Magistrate erred in finding that Mr Musulin’s evidence was that he thought the infringing products “were very bad copies” and erred in assessing the garments and not the logos and works on those garments for the purposes of determining whether the infringing works were close copies of the Copyright Works (Appeal Ground 4). In addition, the G-Star Companies contend that in assessing additional damages and damages to reputation, the Federal Magistrate ought to have found that the infringing works were close copies of the Copyright Works (Appeal Ground 5).

8    The third ground under the damages heading, Ground 6, is a complaint by the G-Star Companies that, in assessing additional damages, the Federal Magistrate failed to take into account, sufficiently or at all, the conduct of Mr Seo prior to 23 December 2009 (when he commenced to participate in the proceedings) and Mr Seo’s failure to discover documents relating to the purchase and sale of the infringing products, in contravention of Court orders (Appeal Ground 6).

9    Under the second heading – reserved costs – there are two appeal grounds. The G-Star Companies contend that in the exercise of his discretion in relation to reserved costs, the Federal Magistrate, first, erred in making a number of factual findings (Appeal Ground 7) and, secondly, failed to take into account, sufficiently or at all, other relevant considerations (Appeal Ground 8). Finally, under the third heading – costs related to an offer of compromise – appeal grounds 9 to 12 all relate to a purported offer of compromise recorded in a letter dated 20 April 2010 from Mr Seo’s solicitor (the Offer Letter). The G-Star companies contend that the Federal Magistrate erred in taking the Offer Letter into account in determining costs on the basis that the G-Star Companies should have accepted the offer.

10    That leaves the cross-appeal. Mr Seo’s cross-appeal lists 13 grounds. They also fall into three categories – liability (grounds 1 to 8), damages (grounds 9, 10 and 11) and costs (grounds 12 and 13).

11    I will first address the questions affecting liability raised by the cross-appeal, then turn to consider the appeal and cross-appeal concerning damages and, finally, to consider the appeal and cross-appeal concerning costs.

CROSS – APPEAL ON LIABILITY

12    The eight grounds of cross-appeal on liability raise the following issues:

1.    Did the Federal Magistrate err in finding that G-Star International BV had a licence agreement with G-Star Australia Pty Ltd which gave G-Star Australia Pty Ltd the right to maintain proceedings in respect of infringement of copyright and to have a particular reputation in the product (Cross-Appeal Ground 1);

2.    Did the Federal Magistrate err by depriving Mr Seo of a fair trial by failing to make rulings on objections to evidence including objections to evidence sought to be adduced pursuant to s 79 of the Evidence Act 1995 (Cth) (the Evidence Act) (Cross-Appeal Ground 2);

3.    Did the Federal Magistrate err by allowing Mr Musulin to give evidence for the G-Star Companies as to whether or not a particular product was counterfeit when there was no basis of specialised knowledge or expertise established under s 79 of the Evidence Act for him to give that evidence (Cross-Appeal Ground 3) or err by allowing Mr Musulin to give evidence under s 79 of the Evidence Act in re-examination on a different basis to that which had been sought in chief evidence (Cross-Appeal Ground 4);

4.    Did the Federal Magistrate err by failing to draw or consider a Jones v Dunkel inference from the failure of the G-Star Companies to adduce any evidence about the material returned to their solicitors prior to trial by Mr Seo (Cross-Appeal Ground 5) or err by finding that, as a matter of inference, it was far more probable than not that material returned by Mr Seo were counterfeit when no evidence was adduced that they were (Cross-Appeal Ground 6);

5.    Did the Federal Magistrate err by finding that it beggared common sense to consider that items purchased in an unorthodox way at a market might not be counterfeit (Cross-Appeal Ground 7); and

6.    Did the Federal Magistrate err by treating the evidence of Mr Musulin that he placed a receipt for a product with the bag in which the item was purchased as evidence of a system which could be relied upon as indicating that a particular item has been purchased from Mr Seo when in fact the document inside the bag was not the original receipt (Cross-Appeal Ground 8).

I will deal with each in turn.

Cross-Appeal Ground 1 – Error in finding that G-Star International BV had a licence agreement with G-Star Australia Pty Ltd which entitled it to maintain proceedings for infringement of copyright and to have a particular reputation in the product

13    The G-Star Companies accepted that, contrary to its pleaded case at para 4 of the Amended Statement of Claim, there was no evidence to support the finding by the Federal Magistrate that G-Star Australia Pty Ltd was the exclusive wholesale distributor of G-Star Products in Australia pursuant to an exclusive licence agreement with G-Star International BV (emphasis added). However, the G-Star Companies did not accept that there was any error in the Federal Magistrate’s finding that G-Star Australia Pty Ltd was the exclusive wholesale distributor of G-Star Products in Australia.

14    At the hearing before the Federal Magistrate, an affidavit sworn by Christian de Bil on 2 December 2009 went into evidence without the deponent being cross examined. Mr de Bil was the General Counsel of G-Star International BV and had worked for that company since February 2000. Part of his role as General Counsel was to manage an anti-counterfeiting program throughout the world.

15    Under the heading “The Applicants’ Reputation”, Mr de Bil’s sworn affidavit evidence was that:

G-Star International [BV] designs, manufactures, distributes and sells “G-Star” branded clothing and accessories (G-Star Products) throughout the world. [Facton] licenses (sic) the use of the G-Star Trade Marks … to G-Star International [BV] for use on the G-Star Products on an exclusive basis. [G-Star Australia Pty Ltd] is the exclusive wholesaler and distributor of the G-Star Products in Australia.

(Emphasis added.)

As the Federal Magistrate recorded in his reasons for decision, that evidence was not challenged.

16    In addition to that direct evidence, Mr de Bil also gave the following unchallenged evidence:

1.    G-Star International BV and its predecessors have advertised and promoted the “G-Star” brand and the G-Star Products since 1989;

2.    Facton own and operate a website from the domain name www.g-star.com. Print outs of pages from the web site were exhibited to the affidavit;

3.    G-Star International BV sold the G-Star Products through “G-Star” branded stores and independent retailers in 40 countries and, in addition, operates 73 showrooms around the world with over 4,600 retail points of sale;

4.    G-Star Australia Pty Ltd sold the G-Star Products to its franchisee who owns and operates 10 concept / flagship “G-Star” stores throughout Australia and to over 40 independent retailers throughout Australia (including Myer and David Jones);

5.    G-Star Australia Pty Ltd spent a substantial amount of money on advertising and promoting the G-Star brand in Australia in a number of ways including billboards, signage on public transport, in-store advertisements and editorials and advertisements in magazines; and

6.    through its marketing and promotional activities, G-Star Australia Pty Ltd had generated and cultivated a reputation as being an innovative brand with cutting edge style that appealed to a wide range of customers. In particular, the “rough, rudimentary and raw characteristics of the G-Star Products [gave] them a distinct, urban and unorthodox style”. Based on these facets, G-Star Australia had built up a substantial reputation in the “G-Star” brand in Australia.

17    It must be recalled that G-Star Australia Pty Ltd did not bring a claim in relation to the copyright or the trademark infringement. Those claims were brought by the owners – Facton in relation to the Trade Marks and G-Star International BV in relation to the Copyright Works. G-Star Australia Pty Ltd’s claims were under the Fair Trading Act, under the TPA and for the tort of passing off.

18    In light of the unchallenged evidence summarised above, there was a factual basis for the finding by the Federal Magistrate that G-Star Australia Pty Ltd was the exclusive Australian wholesale distributor of G-Star Products and had established a reputation which entitled it to maintain its claim for passing off.

19    This ground of appeal fails.

Cross-Appeal Grounds 2, 3 and 4 – Basis of Mr Musulin’s evidence

20    These appeal grounds can be dealt with together. They concern the evidence of Mr Stevan Musulin, an account manager with G-Star Australia Pty Ltd. In short, Mr Seo’s complaints are that the Federal Magistrate erred on two bases:

1.    by depriving Mr Seo of a fair trial by failing to make rulings on objections to evidence including objections to evidence sought to be adduced pursuant to s 79 of the Evidence Act (Cross-Appeal Ground 2);

2.    by allowing Mr Musulin to give evidence for the G-Star Companies as to whether or not a particular product was counterfeit when there was no basis of specialised knowledge or expertise established under s 79 of the Evidence Act for him to give that evidence (Cross-Appeal Ground 3) or by allowing Mr Musulin to give evidence under s 79 of the Evidence Act in re-examination on a different basis to that which had been sought in chief evidence (Cross-Appeal Ground 4).

21    It is necessary to look at Mr Musulin’s evidence. He filed an affidavit and was subject to cross examination and re-examination.

22    Mr Musulin’s sworn affidavit evidence was that as the account manager, he was familiar with all items distributed and sold by G-Star Australia Pty Ltd in Australia. During cross examination, he explained that, in that role, he dealt with the G-Star Products for at least eight hours a day.

23    Mr Musulin’s evidence was that he regularly visited stalls and retail outlets throughout Australia to identify sellers of counterfeit “G-Star” branded clothing and accessories. One of those visits, a visit to Sydney’s Paddy Markets at Haymarket on 6 March 2009, is at the centre of this appeal. Mr Musulin’s evidence was he visited “Stall number 265” and noted on display approximately 50 units of “G-Star” branded items including approximately 20 units of “G-Star” branded jeans in two different styles, approximately 20 units of “G-Star” branded t-shirts in two styles and approximately 10 units of “G-Star” branded jackets in one style. He explained that he purchased one white “G-Star” t-shirt for $20.00 and one pair of blue “Elwood” denim jeans for $50.00 (defined in the affidavit as the Gas Fashion Products). I will adopt the same terminology. Mr Musulin exhibited the Gas Fashion Products and a copy of the receipt provided to him when he made the purchase. The receipt bears the name “Gas Fashion”, the date 6 March 2009 and records purchases totally $70.00. The words “Stall 265” are handwritten onto the receipt.

24    Mr Musulin’s identification of the Gas Fashion Products as counterfeit goods is a core issue on the cross-appeal. Mr Musulin’s evidence was that he looked at the Gas Fashion Products and confirmed that they were counterfeit “as the various markings and labels on the Gas Fashion Products are not the markings and labels which are used on genuine “G-Star” Products”. During cross examination, Mr Musulin said that he formed the opinion that the Gas Fashion Products were counterfeit on 6 March 2009. Mr Musulin explained further his practice of attending a market to look for counterfeit products, identifying a stall where there was counterfeit products, purchasing the product and, if a receipt was offered, putting the receipt into the bag with the purchased products and then noting the number of the stall on his mobile phone.

25    During re-examination, Counsel for the G-Star Companies asked Mr Musulin to explain the basis upon which he determined that the Gas Fashion Products were counterfeit. His evidence in relation to the jeans was that:

Generally the most obvious thing is the actual tags themselves are not G-Star style tags. We never use a metal style whatever you want to call that key chainy thing. The cardboard is a different colour. The style codes don’t exist on there that we would generally use. Internally the tags are completely different to … how we would tag and brand our product. And then the size of certain things and the colour and font is incorrect. And the general appearance is something that I [have] never seen or sold before in the four and a half years that I have worked at the company. That has never been an item that we have ever put into the market as such.

And in relation to the t-shirt, he said:

The same again. The tags are incorrect. This one, rather than using the metal key chain, uses the plastic hole punchy type thing which again we never use. We always use the same type of thing. The tags are the wrong colour. We would never use that type of tag, to begin with. And the tags internally are not the type of tag we would use. And the washing and care instructions don’t normally exist in the freight products as well as we would have them. They would normally be several different ones on there that identify where it came from and style codes for that item and a name for the actual item as well.

26    Mr Seo appeals against the way the Federal Magistrate dealt with Mr Musulin’s evidence. As noted earlier, he asserts that the Federal Magistrate deprived Mr Seo of a fair trial by failing to make rulings on objections to evidence including objections to evidence sought to be adduced pursuant to s 79 of the Evidence Act and, further, erred by allowing Mr Musulin to give evidence:

1.    for the G-Star Companies as to whether or not a particular product was counterfeit when there was no basis of specialised knowledge or expertise established under s 79 of the Evidence Act for him to give that evidence; and

2.    under s 79 of the Evidence Act in re-examination, on a different basis to that which had been sought in evidence in chief.

27    These grounds of appeal fail.

28    First, the Federal Magistrate ruled on Mr Seo’s objection in relation to the admissibility of Mr Musulin’s evidence under s 79 of the Evidence Act. He rejected Mr Seo’s submission that Mr Musulin did not satisfy the requirements of s 79 of the Evidence Act: see the reasons for decision at paras [57] – [69], particularly, at [69].

29    Secondly, and in any event, I can identify no error in the reasoning of the Federal Magistrate. The Federal Magistrate recorded, as was the fact, that Mr Musulin had not been trained in recognising counterfeit products. However, he accepted that consistent with the views expressed by Emmett J in Pan Pharmaceuticals Limited (in liq) v Selim [2008] FCA 416 at [30] – [37], it was possible that special knowledge or expertise might be the subject of experience especially in the case of managers. It was on this basis that the Federal Magistrate accepted Mr Musulin’s evidence. I agree. Mr Musulin was an account manager with G-Star Australia Pty Ltd. He had been with G-Star Australia for four and a half years. He dealt with G-Star Products each working day for eight hours a day and, in the course of that work, compared G-Star Products with counterfeit products. I reject Mr Seo’s contention that there was no basis of specialised knowledge or expertise established under s 79 of the Evidence Act for Mr Musulin to give evidence about the counterfeit nature of the Gas Fashion Products. Mr Musulin had the necessary specialised knowledge or expertise. He gained the necessary specialised knowledge or expertise by experience.

30    That leaves the third aspect of Mr Seo’s complaint – that the Federal Magistrate permitted Mr Musulin to be re-examined on a different basis to that which had been sought in chief (Cross-Appeal Ground 4). Again I reject this ground of appeal. The re-examination arose directly from Mr Musulin being challenged during cross examination about his experience and expertise in assessing counterfeit goods. During cross examination, Mr Musulin was asked what training he underwent in relation to identifying counterfeit product. His response was as follows:

Generally, I deal with the product for at least eight hours a day in my day-to-day job and can usually form a – well, I can always form an opinion that I can tell the difference between a counterfeit product and the real product based on the actual article never having existed or been produced or sold by us.

31    Unsurprisingly, during re-examination, Counsel for the G-Star Companies asked Mr Musulin to explain the basis upon which he determined that the Gas Fashion Products were counterfeit. It was in response to that question that Mr Musulin gave the evidence set out at [25] above. That was a permissible course. Moreover, Mr Musulin’s evidence was directly relevant to two issues then in dispute – whether Mr Musulin satisfied s 79 of the Evidence Act and whether the Gas Fashion Products were counterfeit.

32    One final matter should be noted. In Mr Seo’s written submissions he submitted that Mr Musulin’s evidence should have been given no weight. No separate ground of cross-appeal raised this issue directly. To the extent that it sought to raise a new ground of cross-appeal, I reject it. If Mr Seo intended to submit that if the Court was of the view that, for the purposes of s 79 of the Evidence Act, Mr Musulin had gained the necessary specialised knowledge or expertise through his experience but that the evidence should be given little or no weight (see by way of example Selim at [34]), I also reject that submission. Unlike the position in Selim, it cannot be said that Mr Musulin was assessing matters going to ordinary experience. Determining whether the Gas Fashion Products were counterfeit required specialised knowledge or expertise about the G-Star Products which Mr Musulin possessed.

33    These grounds of appeal fail.

Cross-Appeal Grounds 5 and 6 – The material returned prior to trial by Mr Seo

34    The facts are not in dispute.

35    On 25 May 2009, G-Star’s solicitors sent a letter to Mr Seo entitled “G-Star Counterfeit Stock”. After setting out the G-Star Trade Marks and describing the G-Star Copyright Works, the letter stated:

A representative of our clients visited your stall at Paddy’s Haymarket on 6 March 2009 and purchased a t-shirt and pair of jeans featuring reproductions of the Trade Marks and/or the Copyright Works (the Infringing Garments). We are instructed that in addition to having the Infringing Garments on display you also had substantial quantities of other garments featuring reproductions o (sic) the Trade Mark and the Copyright Works in display. The sample of the Infringing Garments together with the receipt can be inspected at our offices by prior appointment.

We are instructed that the Trade Marks and/or the Copyright Works were not affixed to the Infringing Garments with the authority or consent of G-Star. The Infringing Garments do not emanate from G-Star and we confirm the Trade Marks and/or the Copyright Works were not applied to the Infringing Garments with the authority of the owner of the Trade Marks and/or the Copyright Works, being G-Star. …

…

In the circumstances, we are instructed to require that you meet the following demands by 4pm on Monday 8 June 2009:

1.    Deliver up to Middletons any other “G-Star” branded products or any other products which feature the Trade Marks and/or the Copyright Works which have not been affixed with the approval of G-Star in your possession, custody or control;

2.    Provide written undertakings that:

[Mr] Seo, whether by yourself, your servants, agents or employees or any of them will immediately cease and forever refrain from manufacturing, importing, marketing, promoting, advertising, exhibiting in public, offering for sale, selling or supplying the Infringing Garments or any other products which bear the Trade Marks and/or the Copyright Works, unless those goods were manufactured, sold or supplied by G-Star or with the approval of G-Star;

3.    Provide us with a statutory declaration detailing the number of items of any products which bear the “G-Star” name or any of the Trade Marks and/or the Copyright Works which were not affixed with the authority of G-Star, that you have:

(a)    manufactured, imported or purchased to date;

(b)    sold to date including full details of the sale price of all items; and

(c)    remaining in stock.

4.    Provide the full contact details … of the supplier and/or manufacturer from whom you purchased the Infringing Garments.

5.    If you have sold the Infringing Garment or other products which bear the “G-Star” name or any other Trade Mark and/or the Copyright Works which were not affixed with the authority of G-Star to other retailers, that you immediately provide the full details including the names and addresses of all retailers to whom these products have been sold, including what quantities, and undertake a retailer recall providing us with copies of all correspondence to retailers.

…

(Emphasis added.)

36    On 2 June 2009, Mr Seo responded in writing to the solicitors for the G-Star Companies as follows:

Re: Gas Fashion Paddy’s Market Store 470-472

To whom this may concern

I am writing this letter on behalf of GAS Fashion regarding a letter received last week. We were notified to seize all purchase and selling of G-Star stocks (sic). Since that date, we have seized all our G-Star stocks and with this letter I have posted the remaining stocks which include 2 pairs of jeans and 5 t-shirts to the Middletons office. However I do not have the information of the person who had sold it to me as it was a one-off purchase. He came into our shop in February with few items which were 5 pairs of jeans and 12 t-shirts. Since then no further G-Star stock purchases were made nor were they offered to us. I apologise for selling G-Star stock and will no longer purchase any G-Star stock if offered to us. Had I known that G-Star was registered to your company, this would have not happened. Once again I apologise and we will make sure we are no longer related to any G-Star tradings. (sic)

37    Mr Seo’s response provided direct answers to the questions raised by G-Star’s solicitors on 25 May 2009. Mr Seo, on behalf of Gas Fashion, admitted purchasing and on-selling “G-Star” branded products. He did not suggest that the G-Star products he purchased and sold were affixed with the Trade Marks and / or the Copyright Works with the approval of G-Star. Instead, he goes further and says that had he known that G-Star “was registered to your company”, he would not have sold G-Star branded products. In relation to the source of the goods, Mr Seo describes the purchase as a “one-off” which came about because a person came into his shop offering him five pairs of jeans and 12 t-shirts. At the same time as the letter, Mr Seo delivered up his remaining stock of two pairs of “G-Star” jeans and five “G-Star” t-shirts.

38    Finally, it should be noted that Mr Seo, in an affidavit sworn on 23 March 2010, admitted he was the proprietor of Gas Fashion and that the receipt issued to Mr Musulin for the G-Star Products that he purchased was from Gas Fashion, goods which were counterfeit: see [20] to [33] above.

39    I reject Mr Seo’s submission that the Federal Magistrate “barely considered the significance of these returned products and the absence of evidence from the [G-Star Companies] in relation to them”. The Federal Magistrate noted that there was no “direct evidence” about the returned items. But the evidence did not stop there. Unsurprisingly, the G-Star Companies proceeded at trial on the basis of the admissions by Mr Seo (see [38] above) together with the evidence from Mr Musulin: Jones v Dunkel (1959) 101 CLR 298 at 305 per Dixon CJ. In light of those facts, the Federal Magistrate found that the products returned by Mr Seo in his letter of 2 June 2009 were counterfeit and contained the Infringing Marks. In my view, no other conclusion was open.

40    These grounds of appeal fail. In light of these findings, cross-appeal ground 9 also fails. The Federal Magistrate did not err in finding that the G-Star Companies were entitled to damages in respect of items which were in their possession and in respect of which they had adduced no evidence. The other appeal grounds and grounds of cross-appeal relating to damages will be considered later in these reasons for decision.

Cross-Appeal Ground 7 – Federal Magistrate’s finding that it beggared commonsense to consider that items purchased in an unorthodox way at a market might not be counterfeit

41    The Federal Magistrate stated (at [71]):

Nonetheless, it is far more probable than otherwise as a matter of inference that the materials sent back to Middletons were counterfeit. They were all part of a batch bought at the same time in the same unorthodox and underhand way. It is open to me to infer, despite the evident lack of hard evidence, that all the items that were bought by [Mr Seo] from the unnamed Chinese vendor were indeed counterfeit. It beggars commonsense in all the circumstances to suggest otherwise.

42    In light of my earlier conclusions in relation to grounds 5 and 6 of the cross-appeal, this ground of cross-appeal also fails. As noted earlier (see [37]), Mr Seo, on behalf of Gas Fashion, admitted purchasing and on selling “G-Star” branded products. Mr Seo did not suggest that the G-Star products he purchased and sold were affixed with the Trade Marks and / or the Copyright Works with the approval of G-Star. Instead, he goes further and says that had he known that G-Star “was registered to your company”, he would not have sold “G-Star” branded products. In relation to the source of the goods, Mr Seo described the purchase as a “one-off” which came about because a person came into his shop offering him five pairs of jeans and 12 t-shirts.

43    Whether the purchase by Mr Seo could or should be described as “unorthodox” (see [41] above) may be put to one side. The finding by the Federal Magistrate that the products returned by Mr Seo in his letter of 2 June 2009 were counterfeit and contained the Infringing Marks was not only open, but the only conclusion open on the facts.

Cross-Appeal Ground 8 – Receipt from Gas Fashion not original

44    Mr Seo’s complaint was that the receipt for the goods purchased from Gas Fashion (Exhibit SM-2 to Mr Musulin’s affidavit of 1 December 2009) was a copy and not the original receipt that Mr Musulin placed in the bag at the time he purchased the goods from Gas Fashion. This ground of cross-appeal has no substance.

45    As noted earlier (see [38]), Mr Seo filed an affidavit in these proceedings in which he responded directly to Mr Musulin’s affidavit of 1 December 2009. In paragraph [4] of that affidavit, Mr Seo stated “I can confirm that the Exhibit SM-2 is from Gas Fashion, however I do not recognise the handwriting of “STALL 265”. It is not my writing nor any of employee’s (sic) of Gas Fashion”. The handwriting may be put to one side. Mr Musulin gave evidence that it was his handwriting.

46    Put simply, the receipt bore the words “Gas Fashion” and Mr Seo admitted that the receipt came from Gas Fashion. There was no challenge to the authenticity of the document.

47    This ground of cross-appeal fails.

APPEAL AND BALANCE OF THE CROSS-APPEAL

48    As noted earlier, the appeal concerns three subject matters – damages, reserved costs and the effect of the Offer Letter. I will deal with each in turn.

Offer Letter – Appeal

49    Appeal Grounds 9 to 12 all relate the Offer Letter: see [9] above.

50    The central issue is whether the Offer Letter could properly be taken into account in determining the issue of costs. The Federal Magistrate, in the Costs Decision, found the Offer Letter:

1.    was not an offer of compromise made pursuant to O 23 of the Federal Court Rules 1979 (Cth) (the Rules): at [18];

2.    was not certain: at [22]; and

3.    left reserved costs at large and contemplated further argument on costs (at [22] and [23]).

51    Notwithstanding those findings, the Federal Magistrate treated the Offer Letter as an offer of settlement that could properly be taken into account in determining the issue of costs. The G-Star Companies appealed against that finding.

52    The Offer Letter relevantly provided:

This offer of compromise is made under order 23 of the Federal Court Rules, applied to the Federal Magistrates Court pursuant to rule 1.05 and schedule 3 Part 2 of the Federal Magistrates Court Rules 2001.

[Mr Seo] offers to compromise all claims in these proceedings of [the G-Star Companies] as follows:

1.    By [Mr Seo] consenting to the orders sought against him by the [G-Star Companies] in paragraphs 1, 2 and 3 of the Amended Application.

2.    In respect of [Facton], [Mr Seo] offers to compromise the proceedings:

(a)    by making payment of $15,800.00; and

(b)    in addition to (a), by paying cost (sic) of [Facton] in accordance with the Federal Magistrates Court Rules, other than costs reserved by The Court on 19 March 2010, 31 March 2010 and 13 April 2010 (the reserved costs);

(c)    in respect of the [reserved] costs, [Mr Seo] will abide the decision of the Court. (sic)

2A.    In relation to the sum of $15,800.00 in 2(c) (sic) above such sum is inclusive of interest in an amount of $1,800.00 calculated on $14,000.00 at the rate of 10.25% (based upon section 2(1) of the Penalty Interest Rate Act 1983 (Vic) from 6 March 2009).

53    The next paragraphs of the Offer Letter contained similar offers in relation to the other G-Star Companies. Each offer was open for acceptance for 14 days.

54    The Offer Letter states that it is made under O 23 of the Rules. If it was made under O 23 of the Rules, it does not comply with O 41 of the Rules: O 23 r 3(2)(a). Notwithstanding those issues of form, is the Offer Letter to be taken into account in determining the issue of costs? The Federal Magistrate said it was. The G-Star Companies contend that the Federal Magistrate erred in that finding.

55    What then are the relevant principles?

1.    the Court’s power to award costs is contained in s 43 of the Federal Court of Australia Act 1976 (Cth). The Court has a wide discretion in the award of costs. It is, of course, a discretion which must be exercised judicially and in accordance with well established principles: Alpine Hardwoods (Aust) Pty Ltd v Hardys Pty Ltd (No 2) (2002) 190 ALR 121 at [8] – [10];

2.    the usual course is to order costs on a party and party basis: Colgate-Palmolive Company v Cussons Pty Limited (1993) 46 FCR 225 at 233 per Sheppard J;

3.    indemnity costs can properly be awarded where the circumstances of the case warrant the Court departing from the usual course of ordering costs on a party and party basis. Those circumstances have been variously described as “some special or unusual feature” and include “an imprudent refusal of an offer to compromise”: Alpine Hardwoods at [11] and the authorities cited;

4.    Order 23 of the Rules headed “Offer of Compromise and Payment into Court” provides a structure which encourages parties to make and consider fair and reasonable offers to settle proceedings: Alpine Hardwoods at [12] and the authorities cited. It is not however a code: Alpine Hardwoods at [18] and [19]. Parties are also able to rely upon the common law principles in relation to Calderbank letters: Calderbank v Calderbank [1975] 3 All ER 333. A Calderbank letter can be considered by the Court in deciding whether to make an order displacing the usual costs order even if O 23 of the Rules has not been followed: Alpine Hardwoods at [18] and the authorities cited;

5.    refusal of an offer which satisfies the requirements of a Calderbank letter does not itself warrant an order for indemnity costs: Alpine Hardwoods at [20], [21], [27] and [28]; Black v Lipovac (by his next friend Lipovac) (1998) 217 ALR 386 at [217]. The onus is on the offer or to show that the conduct of the offeree was unreasonable: Alpine Hardwoods at [21], [27] and [28]. The reasonableness of the conduct is viewed in light of the circumstances which existed at the time the offer was rejected;

6.    if, however, the central requirements of a Calderbank letter (that it is clear, precise and certain: Perry v Comcare (2006) 150 FCR 319 at [55] – [57]) are not met, it does not mean that the offer cannot be considered by the Court in the exercise of its general costs discretion. Courts will be prepared to pay some regard to an offer of compromise which purports to be in accordance with the Rules but which for some reason is technically deficient if the terms of the offer are such as to leave the offeree in no reasonable doubt as to the nature and extent of what is being offered: Grbavac v Hart [1997] 1 VR 154 at 155. The offer must be certain: Duncan & Weller Pty Ltd v Mendelson [1989] VR 386 at 401 and Grbavac at 155 and 160. It must be capable of acceptance which, if accepted, would have brought the dispute between the parties to an end: Grbavac at 164; and

7.    in determining whether an offer should have been rejected, a Court looks at the “reasonableness of the conduct of the offeree, [when] viewed in the light of the circumstances which existed when the offer was rejected”: Black at [218]. It has also been described as whether the rejection of the offer was “imprudent” or “unreasonable” (Black at [52] and [216]) or “imprudent, reckless or unreasonable”: United Salvage Pty Ltd v Louis Dreyfus Armateurs SNC [2006] FCA 1611 at [18].

56    In the present case, the Federal Magistrate made findings that the Offer Letter was not certain because the G-Star Companies “had to evaluate their chances of success in a further proceeding, the outcome of which was uncertain” and Mr Seo had asserted an entitlement to reserved costs which would make further proceedings inevitable: see Costs Decision at [22] and [23].

57    Notwithstanding those findings, should the Offer Letter and, in particular, the fact that it was rejected by the G-Star Companies, be considered by the Court in the exercise of its general costs discretion?

58    The G-Star Companies submitted that no circumstances existed which justified the departure from the ordinary rule that the successful party should be entitled to its costs. They relied upon a number of facts and matters. That the Offer Letter was bad. It was uncertain. It contemplated further proceedings. If accepted it would not have brought the proceedings to an end. And there was a counter offer – an offer which accepted the payment of the damages amounts offered by Mr Seo if he agreed to pay their taxed costs. It was dated 13 May 2010. The counter offer included the following:

Our clients are willing to accept the damages amounts as set out in the Offer, being a total of $37,300. However, our clients will only settle this matter if your client agrees to pay our clients’ taxed legal costs including any reserved cost orders made in this proceeding.

We have calculated that out clients’ tax (sic) costs are approximately $33,000 which comprise our fees calculated on the Federal Magistrates Court scale and disbursements including counsel fees, the issuing fee and any hearing fees. Therefore we calculate that the total amount for damages and costs payable by [Mr Seo] to our client is approximately $70,000.

However, our clients are willing to settle their claim for costs and damages for a total sum of $67,500 payable by your client within 14 days of accepting this offer. This is not an invitation to further negotiate a lesser sum. … If not accepted further costs will be incurred and it goes without saying that any acceptable settlement offer will be higher.

This offer remains open until 4pm on 20 May 2010.

59    By letter dated 19 May 2010, Mr Seo requested the G-Star Companies to keep the offer open until 24 May 2010. On 25 May 2010, Mr Seo rejected the counter offer in the following terms:

1.    Your client may accept the sums offered by [Mr Seo] for damages and adopt either of the causes listed herein;

(a)    Your client may agree to have a hearing in relation to costs limited to the issue of reserved costs except to (sic) in relation to the reserved costs and the costs already paid our client will pay the cost of the proceedings,

(b)    As the reserved costs are much greater than any costs which your client could realistically obtain, and because our client is almost certain to be awarded the reserved costs, whether at the first instance or on appeal, your client may pay the sum of $7,500 on balance of costs. If this is accepted our client will pay your client an inclusive amount of $30,000.00.

2.    We are confident that the [G-Star Companies] could not reasonably be awarded sums higher than the settlement sums offered by our client. There is no evidence of lost sales, loss of reputation or anything giving rise to additional damages.

…

On 1 June 2010, the G-Star Companies rejected the 25 May offer.

60    As noted earlier, the Federal Magistrate found that the Offer Letter did not comply with the Rules, it was not certain and it left reserved costs at large. Moreover, in the Offer Letter Mr Seo asserted an entitlement to reserved costs. So much is not in dispute. What then follows is in dispute. His Honour stated:

… In the ultimate, I think the outcome is this: first, it is clear that the [G-Star Companies] should have taken the offer, the offer was $37,300 and they achieved a result of $30,500, leaving aside for the moment the question of interest; second, however, the offer was not sufficiently certain of outcome, in my view, to ground indemnity costs.

I note, additionally, that the conduct of both parties has in part been undesirable. … First, [Mr Seo] failed properly to participate in the proceeding for a considerable time. Secondly, the [G-Star Companies] wrote to my associate on 3 March 2010 in terms that were inappropriate. Third, the tenor of [Mr Seo’s] solicitor’s correspondence was in my view generally overstated and unduly aggressive. Fourth, the [G-Star Companies’] behaviour about the notice of motion to which I have referred was totally inappropriate. Fifth, [Mr Seo] said he would require all the [G-Star Companies’] witnesses for cross-examination but ultimately did not require Mr de Bil and Mr La Fontaine to attend.

In all the circumstances, I think the [G-Star Companies] should have costs on a party / party basis until the offer of compromise, in other words, 5 May 2010, noting that the offer of compromise says it was made on 21 April 2010 and open for fourteen days thereafter. After 5 May, [Mr Seo] should have costs on a party / party basis. Each side is to bear their own costs of the proceedings on 19 August 2009, 4 November 2009, 23 December 2009, 19 March 2010, 1 April 2010, 13 April 2010, and of their written submissions that have given rise to today’s proceeding.

61    Costs involves an exercise of a discretion: see [55] above. In order to succeed, the  G-Star Companies must show that the primary judge made an error of the type identified in House v The King (1936) 55 CLR 499 at 505. It is not enough that the appellate Court considers that if it had been in the position of the primary judge it would have taken a different course: House v The King at 504-5.

62    In this case, the Federal Magistrate’s discretion did not miscarry. The Federal Magistrate did not act on the wrong principle. He did not allow extraneous or irrelevant matters to guide or affect him and he did not mistake the facts. At its highest, it might be said that the Federal Magistrate failed to refer to the fact that the parties had made counter offers: see [58] and [59]. In the end, though, the letters of offer and counter offer were just some of the considerations relevant to the Federal Magistrate. No less importantly, the manner in which the parties conducted the litigation were matters of significance to the Federal Magistrate in the exercise of his discretion: see [60].

63    First, Appeal Ground 9. Contrary to the submissions of the G-Star Companies, the Federal Magistrate did not find that the Offer Letter could properly be taken into account in determining costs on the basis of the principles in Calderbank and Messiter v Hutchinson (1987) 10 NSWLR 525. The Federal Magistrate found that the Offer Letter was not an offer of compromise and proceeded to consider the Offer Letter in the exercise of the discretion as to costs. Appeal Ground 9 fails. It proceeds on a false premise.

64    For similar, reasons, Appeal Ground 10 fails. It proceeds on the erroneous assumption that the Federal Magistrate failed to find that the Offer Letter was not an offer in accordance with the principles in Calderbank. That was in fact his finding. The second aspect to Appeal Ground 10 was the submission that the Federal Magistrate should have awarded costs to the G-Star Companies in the normal course. As just explained, I do not consider that the Federal Magistrate’s discretion in relation to costs did miscarry: see [61] to [62] above.

65    Grounds 11 and 12 also fail. For the reasons given earlier, I do not consider that the Federal Magistrate’s discretion in relation to costs did miscarry: see [61] to [62] above. The circumstances identified by the Federal Magistrate were relevant considerations and, if it matters (and it does not) clearly justified departure from the ordinary rule that the successful party should be entitled to its costs.

Damages – Appeal and Cross-Appeal

66    There are six appeal grounds and three grounds of cross-appeal relating to damages. First, I will deal with appeal grounds 1 – 3 (which relate to the number of infringing items) and then turn to consider additional damages and reputational damages.

Appeal Grounds 1 – 3: number of products

67    The first three grounds are concerned with the number of infringing items. In assessing damages, the Court must do its best to quantify the loss even if some degree of speculation and guess work is involved: Aristocrat Technologies Australia Pty Ltd v DAP Services (Kempsey) Pty Ltd (in liq) (2007) 157 FCR 564 at [35]; Placer (Granny Smith) Pty Ltd v Theiss Contractors Pty Ltd (2003) 196 ALR 257 at [38] and Enzed Holdings Limited v Wynthea Pty Limited (1984) 57 ALR 167 at 183.

68    Section 115(2) of the Copyright Act provides for the award of damages for the wrong done. The general principles are well established:

Damages under s 115(2) are compensatory in nature. Any award of damages should reflect the deprecation to the value of the applicant’s copyright as a chose in action that resulted from the respondent’s infringing conduct: see Sutherland Publishing Co Ltd v Caxton Publishing Co Ltd [1936] Ch 323 at 336; [1936] 1 ER 177 at 180-1; Interfirm Comparison (Australia) Pty Ltd v Law Society of New South Wales (1975) 6 ALR 445 at 446 and Bailey v Namol Pty Ltd (1994) 53 FCR 102 at 110-11; 125 ALR 228 at 237; 30 IPR 147 at 155 (Bailey). The damages are to compensate for the loss suffered as a result of the infringement, not to punish the respondent (Bailey at FCR 110-11; ALR 237; IPR 155; Norm Engineering Pty Ltd v Digga Australia Pty Ltd (2007) 162 FCR 1; 72 IPR 332; [2007] FCA 761 at [264] (Norm Engineering) (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 at FCR 111; ALR 237; IPR 155).

See Elwood Clothing Pty Ltd (ACN 079 393 696) v Cotton On Clothing Pty Ltd (ACN 052 130 462) [2009] 81 IPR 378 at [5] – [7].

69    The G-Star Companies submitted that the Federal Magistrate erred in assessing general damages and damages to reputation, in finding that there were only five infringing products (Appeal Ground 1). This ground of appeal was partly resolved at the hearing. Mr Seo conceded that, on any view, the number of infringing items was not less than eight.

70    Next, the G-Star Companies submitted that the Federal Magistrate erred in assessing general damages, in finding there was no or no sufficient basis for the Federal Magistrate to proceed on the basis that Mr Musulin had accepted that stall 265 to which he referred in his affidavit was not the stall of Mr Seo and that Mr Musulin agreed that it was no more likely than otherwise that he saw 10 infringing G-Star jackets at a stall other than Mr Seo’s stall (Appeal Ground 2). Finally, in assessing general damages, damages to reputation and additional damages, the G-Star Companies submitted that the Federal Magistrate ought to have found that at least 40 counterfeit G-Star products had been sold by Mr Seo (Appeal Ground 3): see [6] above.

71    The real issue on appeal was whether there were 17 or approximately 50 G-Star branded products on sale at the stall operated by Mr Seo. The G-Star Companies submitted that there were at least 40 and more probably 50. What is not in dispute is that:

1.    Mr Seo admitted to purchasing 17 items: see [36] above;

2.    Mr Musulin purchased two of those items: see [23] above; and

3.    Mr Seo returned seven of the items to Middletons: see [36] above.

Accordingly, as noted before, the number of items to be taken into account in assessing general damages was at least eight, being those of the 17 items not purchased by Mr Musulin and not returned by Mr Seo.

72    However, the G-Star Companies submitted that on the balance of probabilities additional counterfeit items could be proved or inferred from proven facts. What were the facts and matters relied upon by the G-Star Companies to contend that the number of items should have been 40 or 50 and not eight?

73    First, Mr Seo purchased the items in February but did not return the seven items until June of that year. As a result, the G-Star Companies submitted that because the products were returned to Middletons (the G-Star Companies’ solicitors) months after the purchase by Mr Musulin, there were probably other counterfeit products sold by Mr Seo.

74    Secondly, Mr Muslin gave sworn evidence that he noted a number of “G-Star” branded items (approximately 50 in all) on display at stall 265. Stall 265 was not Mr Seo’s stall. During cross examination, Mr Musulin gave evidence that although he was certain that the receipt and products he purchased were from Gas Fashion he could not be certain that the items he observed were at stall 265. When challenged about the amount of product on sale at Gas Fashion, Mr Musulin said:

I guess there is a possibility, because it’s generally an approximate amount. That’s why I say approximately. When I go in there, I don’t count every item one by one and spend several minutes in a stall making myself fairly obvious that I’m counting something. It’s more an approximation of what I saw at the time.

75    The Federal Magistrate concluded that he had no doubt concerning Mr Musulin’s evidence about the purchase of the counterfeit products from Gas Fashion. However, given the clear error in relation to stall 265, he concluded that Mr Musulin was somewhat confused on 6 March 2009 when he purchased the items from Gas Fashion. That is not surprising. The Federal Magistrate also found that Mr Musulin bought offending products at stall 265, the stall not owned by Mr Seo: at [53].

76    The Federal Magistrate then made a finding that he could not be satisfied that it was more probable than not that the 50 or so items that Mr Musulin deposed to being on sale at Gas Fashion were indeed seen by him there. Next, he made a finding that it was more probable than not there were other G-Star Products on sale at Gas Fashion but that it was not possible to say how much product there in fact was at Gas Fashion’s stall: at [55] and [56].

77    In my view, in assessing general damages, the Federal Magistrate made an error in relation to the number of items. Although the Federal Magistrate was not satisfied that it was more probable than not that 50 or so items were on sale at Gas Fashion on 6 March 2009, he was satisfied that it was not less than seven and that it was more probable than not there were other G-Star Products on sale at Gas Fashion: see [55] and [56]. In addition, it must be recalled that Mr Seo failed to discover any records of purchases or supply and gave evidence at trial that contradicted his earlier admissions that he had sold “G-Star” branded products: see [36] above.

78    In the circumstances, I would assess general damages on the basis that the number of infringing items (excluding those purchased by Mr Musulin and those returned by Mr Seo) was not less than 20. There was no basis for concluding that the number was 40. The Federal Magistrate calculated the loss at $100 per item: [78]. There was no challenge to that finding. Accordingly, I would assess general damages at $2,000.

Appeal Grounds 4 to 6 and Grounds 10 and 11 of the Cross-Appeal – Additional damages and reputational damages

79    These grounds are directed at the manner in which the Federal Magistrate assessed additional damages and reputational damages. The Federal Magistrate dealt with these heads of damage as follows:

[79].    So far as compensation for damages to reputation is concerned, I accept for the reasons I have given that [the G-Star Companies] have the capacity to recover damages, although they cannot each recover in respect of the same loss. The [G-Star Companies] represent a group of companies and in a very real sense, there is only one damage to reputation. I have been referred to the decision of O’Dwyer FM in G-Star Royal Denim KFT v Urban Culture Pty Ltd [2009] FMCA 1317 (“Urban Culture)” (sic) in which his Honour awarded $35,000 in this regard.

[80].    Nonetheless, the facts of this case are far different in terms of scale to those in that case and in my view, under this heading, given the relatively small amount of items involved, a proper resolution of this issue is to make an award of $15,000.

[81].    [The G-Star Companies] also claim … an award of $50,000 additional damages under s 115(4) of the Copyright Act 1968.

[82].    I have had regard to the authorities to which I have been referred, which show that there is a tendency for courts to make substantial awards in respect of additional damages under this heading. Nonetheless, each case turns on its own facts and one must approach with caution any suggestion that very substantial awards of damages are appropriate in every case.

[83].    The award made by Jessup J in Review Australia Pty Ltd v Innovative Lifestyle Investments Proprietary Limited (2008) 75 IPR 289 of $10,000 reflected different and, arguably, more serious circumstances.

[84].    Counsel for the [G-Star Companies] laid particular stress upon the judgment of O’Dwyer FM in Urban Culture in which his Honour made an award under this section of $50,000.

[85].    With respect, I would adopt his Honour’s observations at [22] to this effect:

“There needs to be a general deterrent to prevent similar infringements of copyright, a deterrent that is known and understood in the marketplace. It is important to protect copyright owners in the marketplace from the destructive conduct of those who seek to pass off counterfeit goods as being those of the rightful copyright owner. The conduct seriously jeopardises the physical wellbeing of not only the copyright owners in the first instance, who have, I am satisfied, invested a great deal in establishing the copyright works, but also those aligned industries that are dependent upon the subsistence of protection of copyright works to provide a viable market, leading to wealth creation and employment.”

[86].    His Honour’s findings in that case that the counterfeit garments were very good copies of G-Star product are not repeated in this case. Mr Musulin thought they were very bad copies.

[87].    Likewise, [Mr Seo] did not gain a very significant commercial advantage selling the products bearing G-Star because, as I have indicated earlier, he sold only a few of them.

[88].    I have had regard to the matters set out in section 115(4) of the Copyright Act.

[89].    Here:

(a)    The flagrancy of the infringement was, in my view, significant. [Mr Seo] either knew or should certainly reasonably have known that the product was counterfeit from the unusual circumstances in which he bought it, if for no other reason.

(b)    It is necessary to deter similar infringements of copyright.

(c)    [Mr Seo’s] conduct, after being informed of his infringing conduct, was entirely appropriate. He readily cooperated and apologised, as is shown by his letter to Middletons.

(d)    The benefits that one can say accrued to [Mr Seo] from his conduct were relatively limited.

[90].    In all the circumstances, I think an award of additional damages of $15,000 should be made under this heading and that it should stand concurrently as an award for exemplary damages for passing-off.

Additional damages

80    The learned Federal Magistrate awarded the G-Star Companies $15,000 in additional damages under s 115(4) of the Copyright Act. Both the G-Star Companies and Mr Seo appeal against that award of damages: Appeal Grounds 4, 5 and 6 and Cross-Appeal Ground 11.

81    Section 115(4) of the Copyright Act relevantly provides:

Where, in an action under this section:

(a)    an infringement of copyright is established; and

(b)    the court is satisfied that it is proper to do so, having regard to:

(i)    the flagrancy of the infringement; and

(ia)    the need to deter similar infringements of copyright; and

(ib)    the conduct of the defendant after the act constituting the infringement or, if relevant, after the defendant was informed that the defendant had allegedly infringed the plaintiff’s copyright; and

…

(iii)    any benefit shown to have accrued to the defendant by reason of the infringement; and

(iv)    all other relevant matters;

the court may, in assessing damages for the infringement, award such additional damages as it considers appropriate in the circumstances.

82    In Futuretronics.com.au Pty Ltd v Graphix Labels Pty Ltd (No 2) (2008) 76 IPR 763, Besanko J said at [17]:

… 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, Island Records Ltd & A & M Records Inc v Golden Editions Pty Ltd, Hoghton Hughes (No 2) (1997) 76 FCR 565 at 576; 148 ALR 4 at 13–14; 38 IPR 451 at 459–61 (Polygram) per Lockhart J; MJA Scientifics [International Pty Ltd v SC Johnson & 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; [2003] FCA 1067 at [31]-[34] 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 at FCR 113–114; ALR 238; IPR 156.

83    For the reasons given earlier (see [71] to [78]), I proceed to consider additional damages on the basis that the number of items was not less than 20.

84    The G-Star Companies have a number of complaints. They contend that the Federal Magistrate erred in finding that Mr Musulin’s evidence was that he thought the infringing products “were very bad copies” and erred in assessing the garments and not the logos and works on those garments for the purposes of determining whether the infringing works were close copies of the Copyright Works (Appeal Ground 4). In addition, the G-Star Companies contend that in assessing additional damages and damages to reputation, the Federal Magistrate ought to have found that the infringing works were close copies of the Copyright Works (Appeal Ground 5). The third and final aspect of these grounds of appeal is a complaint by the G-Star Companies that, in assessing additional damages, the Federal Magistrate failed to take into account, sufficiently or at all, the conduct of Mr Seo prior to 23 December 2009 (when he commenced to participate in the proceedings) and Mr Seo’s failure to discover documents relating to the purchase and sale of the infringing products, in contravention of Court orders (Appeal Ground 6). The G-Star Companies submitted that the substitution of an award of $50,000 additional damages would be appropriate in the circumstances given the flagrancy of the breach, Mr Seo’s conduct at the commencement of the proceeding, the inconsistent evidence by Mr Seo and the need for deterrence.

85    The G-Star Companies submitted, and I accept, that having found infringement and awarded general damages, the Federal Magistrate was required to have regard to the flagrancy of the infringement: Futuretronics at [17]; Elwood at [38]. He did have regard to flagrancy: see [79] above. Next, the G-Star Companies submitted the Federal Magistrate was required to take into account the conduct of Mr Seo prior to 23 December 2009. That conduct was relevant (s 115(4)(b)(ib) of the Copyright Act) and was at least to some extent taken into account by the Federal Magistrate: see [79] above. It is true that the Federal Magistrate did not refer to the fact that Mr Seo failed to appeal at the directions hearings listed on 19 August 2009 and 4 November 2009 and, in breach of Court orders, failed to file a defence and failed to provide discovery. These facts were said to support an inference that there was “a very strong possibility that the extent of the infringement [was] underestimated”: cf Review Australia Pty Ltd (ACN 122 295 836) v New Cover Group Pty Ltd (ACN 111 991 596) (2008) 79 IPR 236 at [54] – [62]; Aristocrat Technologies at [53] and [116] and the Supplementary Explanatory Memorandum, Copyright Amendment (Parallel Importation) Act 2003 (Cth), para 4 which introduced s 115(4)(ib) of the Copyright Act.

86    By way of cross-appeal, Mr Seo contends that an award of $15,000 was excessive in the circumstances: Cross-Appeal Ground 11.

87    These grounds of appeal and cross-appeal can be dealt with together. In my view, they fail.

88    An award of damages will not be set aside on appeal merely because the Court would have awarded some other figure. As is now well established, an appellate Court will only interfere if it is shown that the primary judge erred in principle, gave improper or insufficient emphasis to a fact or was mistaken as to a relevant fact: Planet Fisheries Pty Ltd v La Rosa (1968) 119 CLR 118 at 124 as cited in Futuretronics.com.au Pty Ltd (ACN 006 327 386) v Graphix Labels Pty Ltd (ACN 005 771 773) (2009) 81 IPR 1 at [50]. In the present appeal, although I accept that the Federal Magistrate erred when he made a finding that Mr Musulin thought the counterfeit products sold by Gas Fashion “were very bad copies”, I am not satisfied that the Federal Magistrate was mistaken as to a relevant fact. In awarding additional damages of $15,000, each of the matters listed in s 115(4) of the Copyright Act was considered by the Federal Magistrate and, even if the number of counterfeit items was not less than 20, I do not consider that there is any basis to increase the award of additional damages by the Federal Magistrate.

89    Next, the G-Star Companies’ submitted that in addition to (and it would seem separate from) flagrancy, the Federal Magistrate was required to compare the Infringing Works with the Copyright Works and that he failed to undertake that task. The G-Star Companies’ submission was based on the fact that s 115(4)(b)(i) of the Copyright Act focuses on the word “infringement” which required a comparison of the works. I reject that submission to the extent that it suggests that the Federal Magistrate is required to undertake two separate tasks – flagrancy and infringement. As noted above, the Federal Magistrate considered each of the matters listed in s 115(4), including flagrancy.

90    After the hearing, Mr Seo drew the Court’s attention to the recent decision in Facton Ltd v Rifai Fashions Pty Ltd [2011] FCA 290. In that case, the trial judge awarded $11,000 in additional damages in respect of copyright infringement as his Honour determined that there was a need to strip the respondents of the pecuniary benefit obtained from their infringing conduct and to punish and deter. The facts of each case must be considered separately. The facts in Rifai are distinguishable. As a result, the trial judge’s consideration of the facts and circumstances in that case are of limited utility in the resolution of this appeal and, in particular, do not lead to any conclusion contrary to that previously expressed above. For those reasons, these grounds of appeal fail.

Reputational Damages

91    This heading of damage was raised in Appeal Grounds 1, 3 and 5 and Cross-Appeal Ground 10.

92    The Federal Magistrate awarded the G-Star Companies $15,000 for damages to reputation: see [79] above. His Honour’s analysis is short. Both the G-Star Companies and Mr Seo challenge quantum of the award. As stated in Elwood at [32]:

… an award of general damages is to be that sum which will put the [appellant] 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 damages to reputation, caused by the infringement is recoverable [TS & B Retail Systems Pty Ltd v 3 Fold Resources Pty Ltd (No 3) (2007) 158 FCR 444 at [207]-[208]].

93    Was there loss to reputation? Was it reasonably foreseeable that infringement of G-Star International BV’s copyright would cause a loss of reputation in terms of brand-name recognition? Did G-Star International BV adduce evidence of the damage allegedly suffered to reputation by reason of the infringement of copyright? Where reputational damages are sought, evidence is 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 Aristocrat Technologies at [2], [34] – [35] and [39]; Paramount Pictures Corporation v Hasluck (2006) 70 IPR 293 at [55]; New Cover at [44] – [46] and Innovative at [29] – [31].

94    In relation to Appeal Grounds 1 and 3, for the reasons given earlier (see [71] to [78]), I proceed to consider reputational damages on the basis that the number of items was not less than 20. In relation to Appeal Ground 5, it fails for the reasons set out in [89] above.

95    That leaves the Cross-Appeal. Mr Seo submitted that the award was excessive (Cross-Appeal Ground 10). In support of that contention, Mr Seo referred to the decision in Elwood. In my view, that case does not assist Mr Seo. As the G-Star Companies submitted, the present case is entirely different. In Elwood, the respondent did not sell counterfeit products. The respondent’s products did not bear the Elwood name or any of Elwood’s trademarks. Instead, the respondent took a substantial part of a well known design from an Elwood t-shirt in which copyright subsisted and used it therefore infringing copyright. Here, Mr Seo sold “G-Star” branded products which were counterfeit. As the G-Star Companies submitted, the Courts have not used an exact science in calculating the amount that should be awarded for damages to reputation.

96    Mr Seo submitted that in the absence of evidence about loss of reputation, there was no basis on which the Federal Magistrate could award damages for loss of reputation. I disagree. In Adidas-Salomon AG v Turner (2003) 58 IPR 66, Goldberg J considered the devaluation of trade marked products: see Paramount at [49]. His Honour found that the respondent had offered infringing items for sale over the internet. Their availability for sale was made apparent to the public and to persons who visited the respondent’s website. Goldberg J found it unlikely that the purchasers of the items or persons looking at the website would reasonably have believed that the items were genuine Adidas items. He said (at 68 [7]):

… I am prepared to draw an inference that, in general terms, a buyer would be satisfied that in order to obtain a genuine Adidas garment, one would need to buy it through more official channels and that it would have been apparent by reference to price that these were not genuine Adidas items. I am satisfied that the fact that infringing items were available in the circumstances in which the respondent was offering them for sale tended to diminish the reputation of the genuine product sold by Adidas and tended to devalue the products that Adidas offers for sale.

97    In my view, the position here is analogous. I would infer that a buyer would be satisfied that in order to obtain a “G-Star” branded product, one would need to buy it through more official channels and that it would be apparent from the price, that the items were not genuine. The fact that infringing items were available at Mr Seo’s stall at Paddy’s market tended to diminish the reputation of the G-Star Products and tended to devalue the products that the G-Star Companies offer for sale. Given the extent of the conduct and the nature of the damage, it is unsurprising that the G-Star Companies did not adduce evidence of loss to reputation. Where, as here, a Court is satisfied that damage has occurred, it must do its best to quantify the loss even if some degree of speculation and guess work is involved: see Adidas at [5] – [8] and the authorities cited. It is very difficult to place a specific figure on the loss that would have been suffered by the G-Star Companies by way of reputational damage caused by Mr Seo’s conduct. In the circumstances, those damages would not be nominal. For those reasons, these grounds of appeal fail.

98    Finally, it is necessary to consider the recent decision in Facton Ltd v Rifai Fashions Pty Ltd in relation to reputational damages. In that case, although the trial judge accepted “that some degree of speculation and guess work may be appropriate in assessing the diminution of an asset by reason of infringing conduct”, the trial judge refused to awards damages for loss of reputation on the basis that the applicants failed to adduce evidence to demonstrate the value of their goodwill or reputation. For example, the trial judge found that the applicants could have adduced, but failed to adduce, evidence to demonstrate the value of each of their goodwill or reputation. In my view, that kind of analysis (even if possible) is of limited assistance in a case such as the present. Here, damage was found. That finding was not the subject of any ground of appeal. Calculating that damage given the extent and nature of the conduct would be and remains very difficult. The award of damages reflects those facts. Of course, if the extent and nature of the conduct was of a different magnitude, then the exercise to which the trial judge referred in Rifai may be necessary if the applicants were to seek a substantial award of reputational damages.

Reserved Costs – Appeal (Grounds 7 and 8) and Cross-Appeal (Ground 13)

99    The Federal Magistrate ordered each party to bear their own costs of 19 March, 1 April and 13 April 2010.

100    The G-Star Companies contend that in the exercise of his discretion in relation to reserved costs, the Federal Magistrate erred in making a number of factual findings (Appeal Ground 7) and failed to take into account, sufficiently or at all, other relevant considerations (Appeal Ground 8): House v The King. Cross-Appeal Ground 13 contends that the Federal Magistrate erred in finding that each party should bear their own costs of 19 March, 1 April and 13 April 2010.

101    The G-Star Companies submissions fell into two categories. First, they submitted that the ordinary rule is that reserved costs follow the event: r 21.04 of the Federal Magistrates Court Rules. So much may be assumed. But that is only part of the enquiry. The Federal Magistrate did not apply the ordinary rule.

102    In relation to 19 March 2010, the Federal Magistrate attributed responsibility for the failed hearing on that day to the G-Star Companies. They submitted that was an error. I have read the transcript of the hearing on 19 March. I can identify no error of fact. Mr Seo appeared by Counsel to answer a summary judgment application which was ultimately not pursued on 19 March but abandoned. I accept that the balance of the hearing was taken up with procedural questions for a trial that was then to be held on 1 April. However, those matters could and should have been addressed without the need for Mr Seo and his Counsel to travel from Sydney to Melbourne.

103    The next date was 31 March 2010. There is no transcript of that day’s hearing. It was a telephone mention. The Federal Magistrate made a finding that the adjournment was occasioned by problems with the G-Star Witnesses. In an affidavit sworn by the solicitor for the G-Star Companies he deposes to the events 31 March as follows:

By email dated 29 March 2010 from his Honour’s associate, the parties were advised that Federal Magistrate Burchardt listed this proceeding for a telephone mention on 31 March 2010. His Honour advised the parties that due to the inability of the Court to provide videolink facilities, so that the overseas and interstate witnesses of the [G-Star Companies] could give their evidence, that the trial of this matter could not proceed on 1 April 2010. His Honour ordered by consent that the trial of this matter be adjourned to 13 April 2010 and that the costs of this hearing be reserved.

104    The G-Star Companies submitted that the trial could not proceed on 1 April 2010 because Mr Seo required the overseas witnesses of the G-Star Companies to attend for cross examination. The evidence before this Court did not disclose when that request was made. The Federal Magistrate may well have been aware of those matters. In the circumstances, I am not satisfied that the discretion miscarried.

105    The final date in issue is 13 April 2010. Counsel for Mr Seo submitted that the day’s hearing was required because the G-Star Companies sought to amend their pleadings. On 7 April 2010, Mr Seo informed the G-Star Companies he would not consent to the amended application and the amended statement of claim. On 13 April 2010, the Federal Magistrate allowed the amendments but found that the Court did not have jurisdiction to hear the matter. The matter was referred instanter to the Federal Court and then remitted back to the Federal Magistrates’ Court to enable the matter to proceed. The Federal Magistrate found that responsibility for the costs of 13 April 2010 was roughly equal: the G-Star Companies’ application for leave to amend was very late and Mr Seo should not have opposed the amendments (at [16]). Again, in the circumstances, I am not satisfied that the discretion of the Federal Magistrate miscarried.

106    The G-Star Companies raised three additional factual findings they submitted infected the exercise of the costs discretion in relation to reserved costs – (1) that Facton was not the owner of the Trade Marks, (2) that the Federal Magistrates Court did not have jurisdiction to hear a trade marks matter and (3) the Federal Magistrate failed to consider the conduct of Mr Seo prior to 23 December 2009. Some of the matters are simply wrong. For example, the second matter is not referred to in the costs judgment. Even if they were referred to, I do not consider that any of these matters infected the exercise by the Federal Magistrate of the costs discretion in relation to reserved costs. His Honour’s reasons for decision on the question of costs should be read as a whole. It is inappropriate to “select” a sentence or two from the costs judgment (or the substantive judgment in the case of (2)) and then suggest that the Federal Magistrate erred.

107    I would dismiss these grounds of appeal and the ground of cross-appeal.

Costs – Cross-Appeal (Ground 12)

108    Mr Seo submitted that the Federal Magistrate erred in failing to award indemnity costs to Mr Seo from 5 May 2010. Costs are in the exercise of the Court’s discretion. In order to succeed, Mr Seo must show that the Federal Magistrate made an error of the type identified in House v The King at 505. No such error was identified by Mr Seo. This ground of cross-appeal is dismissed.

CONCLUSIONS

109    This appeal and cross-appeal provide a good example of how litigation should not be conducted. The costs of the appeal (let alone the costs of the proceedings) substantially exceed the value of the claim. The parties are jointly to blame. Each party should bear its own costs of the appeal and the cross-appeal. I will direct the parties to bring in orders to give effect to these reasons for decision by 4:00pm on 21 April 2011.

Associate:

Dated:    12 April 2011