FEDERAL COURT OF AUSTRALIA

CPL Notting Hill Pty Ltd v Microsoft Corporation (No 2) [2019] FCA 223

ORDERS

THE COURT ORDERS THAT:

1.    The appeal be allowed.

2.    The orders made by the primary judge on 29 August 2018 be set aside.

3.    The matter be remitted to the Federal Circuit Court of Australia for re-hearing by a judge other than the primary judge.

4.    Subject to any order of any Court that hears any retrial, the costs of the first trial be costs in the second trial.

5.    The respondents pay the appellants’ costs of the appeal, including the costs reserved on 26 September 2018.

6.    The respondents pay to the fourth appellant within one business day the amounts in the respondents’ solicitor’s trust account, plus accrued interest on that amount, into an account to be advised by the solicitor for the fourth appellant.

Note:    Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

REASONS FOR JUDGMENT

O’CALLAGHAN J:

Introduction

1    I heard this appeal on 4 and 5 February 2019.

2    On the afternoon of 5 February 2019, senior counsel for the respondents conceded that it was appropriate in all the circumstances that I make an order allowing the appeal, setting aside the orders of the primary judge and remitting the matter to the Federal Circuit Court for rehearing by a judge other than the primary judge.

3    I accordingly made the orders set out above.

4    The concession by senior counsel for the respondents was properly made. There were, with respect to the primary judge, myriad reasons why the appeal was bound to be allowed and the matter remitted to be reheard by another judge.

5    The first respondent (Microsoft) is a corporation incorporated in the United States. It is the owner of the copyright in Microsoft computer programs known as “Windows 7 Professional” and “Windows 7 Home Premium” (the software). Since 17 August 2014, it has been the exclusive licensor of the software for distribution in Australia. Prior to that date another entity, Microsoft Licensing, GP, not a party to this proceeding, was the licensor.

6    There are two other respondents, but they played no part in the issues that arose on the appeal, or at the trial, so far as I can tell.

7    The first appellant (CPL Notting Hill) builds and sells, among other things, new computers pre-installed with Microsoft Windows operating systems, including the software. The second appellant (Ms Li) is the sole director of CPL Notting Hill.

8    The third appellant (CPL Distribution) purchases computer hardware and software from third parties, including the software, and sells it to CPL Notting Hill. The fourth appellant (Mr Wang) is the sole director of CPL Distribution.

9    Microsoft brought a proceeding in the Federal Circuit Court making various allegations against the respondents concerning the reproduction of the software on new computers sold by CPL Notting Hill. It brought claims for infringement of copyright, misleading and deceptive conduct and infringement of registered trade marks. The claims against Ms Li and Mr Wang were based upon allegations that they were the sole directors of each of the corporate appellants, respectively, and were, among other things, involved in their day to day management.

10    On 29 August 2018, on the third day of trial, immediately upon completion of oral closing submissions by counsel, the primary judge delivered ex tempore reasons and made orders that the respondents pay damages in various amounts totalling more than $2.5m, plus interest, and granted related declaratory relief. Written reasons, comprising 108 paragraphs in 34 pages, were published on 27 September 2018 (Reasons).

11    The appellants submitted that the primary judge erred in finding the appellants liable in respect of the claims and in ordering and assessing the damages payable by each of them. They argued that there was a fundamental miscarriage of justice in the manner in which the trial judge dealt with the proceeding, for the following general reasons.

12    First, the trial judge did not properly address the claims pleaded against each of the appellants (nor the defences raised in response to those claims) with the result that the appellants were wrongly found liable and ordered to pay damages in respect of claims not made against them.

13    Secondly, the trial judge made adverse findings against the appellants upon matters not raised on the pleadings and, in some cases, not put in cross-examination to the appellants’ only witness, Ms Li. They contend that the case was run on the pleadings, nothing else, and that they were only required to meet the cases pleaded against them.

14    Thirdly, the reasons of the primary judge were deficient because the central controversies put up for resolution by the parties were not dealt with; the competing evidence was not analysed; no explanation was given as to what evidence was relied upon that lead to the ultimate conclusions; no analysis was made of the competing evidence; and inferences drawn on critical matters of credit were the product of mere speculation.

15    Each of those contentions is, regrettably, correct.

16    The trial judge found that each appellant infringed Microsoft's copyright “in the Microsoft Certificates of Authenticity” (COAs).

17    The insuperable difficulty with that finding is that Microsoft did not make any claim for copyright infringement in respect of the COAs.

18    The trial judge also found that each appellant was liable for damages, including additional damages, on the basis that CPL Notting Hill infringed Microsoft's copyright on 1,617 occasions (Reasons at [35], [36], [44]) and that Ms Li, CPL Distribution and Mr Wang authorised that primary infringement.

19    The difficulty in that regard is that Microsoft made no claim against CPL Notting Hill that it infringed Microsoft's copyright on 1,617 occasions or that Ms Li, CPL Distribution and Mr Wang authorised such infringement.

20    The primary case advanced by Microsoft was that CPL Notting Hill infringed Microsoft's copyright by pre-installing the software on the data storage (hard drive) of 39 computers without a licence.

21    By the end of the trial, Microsoft’s case was that the affixation by CPL Notting Hill of loose COAs (created solely for use by authorised refurbishers) onto the computers on which it had pre-installed the software was in breach of something called the “System Builder Licence” which applied to CPL Notting Hill and that, by reason of this breach, the pre-installation of the software was unlicensed.

22    The primary judge seems to have found in favour of that submission. See Reasons at [10], [11]. But there is, as the appellants submitted, a difficulty with doing so because, quite apart from anything else, the “System Builder Licence” which was alleged to have been breached was not in force after 17 August 2014, and was something in respect of which Microsoft was not a party.

23    The primary judge also found that CPL Notting Hill infringed Microsoft's copyright by selling 30 computers on which they had pre-installed the software to which the loose COA labels were affixed.

24    That finding was made under s 38 of the Copyright Act 1968 (Cth) (the Copyright Act), which provides that copyright is infringed if a person without the licence of the owner sells an article if he or she “knew, or ought reasonably to have known, that the making of the article constituted an infringement of the copyright”.

25    The pleaded case was that that the affixation of the loose COAs to computers on which the software had been pre-installed was a breach of the System Builder's License such that pre-installation of the software was unlicensed.

26    The primary judge, however, found that CPL Notting Hill (via Ms Li) knew of the terms of the System Builder's License and that it was infringing Microsoft's copyright in pre-installing the software upon computers to which the loose COAs were subsequently affixed. See Reasons at [12], [13], [24], [25].

27    The appellants contended, correctly, that those findings were made without adequate reasons. But in any event, the finding strayed beyond the pleaded case, and as best as I can tell, in the absence of evidence.

28    Microsoft also alleged that CPL Notting Hill infringed its copyright in the software by “authorising” the purchasers of the alleged 39 computers to which the loose COAs were affixed to reproduce Microsoft Windows 7 Professional “from data storage to RAM”. The statement of claim (SOC) alleged that CPL Notting Hill “authorised the reproduction in a material form [of] the whole or a substantial part of one or more of the Microsoft Programs” ([26]).

29    In his reasons, the primary judge recorded Microsoft’s case in that regard as follows: “The applicants contend that respondents (sic) infringed their copyright by the sale of the computers on which the software had been downloaded with the COA Labels annexed, providing the product key for activation, and an infringement by reason of authorising, or purporting to authorise, end users to activate the software” (Reasons at [8]).

30    The primary judge seems to have upheld the claim (Reasons at [15]) but he provided no reasons for doing so. The relevant finding is thus unsustainable.

31    The trial judge found that Ms Li authorised 1,617 copyright infringements by CPL Notting Hill. See Reasons at [36], [44].

32    But there was no case pleaded that CPL Notting Hill infringed Microsoft's copyright on 1,617 occasions and no claim was advanced that Ms Li authorised 1,617 infringements. The only claims pleaded against Ms Li were that she: (i) authorised the pre-installation of the software on computers by CPL Notting Hill on 39 occasions; and (ii) authorised the subsequent reproduction of that software by the purchasers of those computers. See SOC [27] and [28].

33    In the face of the pleaded case, the primary judge made findings (by way of “inference”) implicating Ms Li in the 1,617 acts of infringement, finding, for example, that she was involved “in the acquisition of and sale of the software being the loose COA Labels and the computer to which they were affixed” (Reasons at [41]) and had the “requisite knowledge of the acts of infringement of the applicants' copyright” (Reasons at [44]). As the appellants correctly contended, those findings (and other like findings) were not open, having regard to the limited case pleaded against Ms Li. The appellants also contended that the findings were not supported by the evidence. The findings against Ms Li were not findings that Microsoft asked the judge to make. Further, they were not supported by reasons and not supported by the evidence.

34    Microsoft alleged that CPL Distribution authorised 1,467 copyright infringements. At trial, its case was that CPL Distribution in fact authorised 1,617 infringements. The trial judge proceeded upon that basis and upheld the authorisation case against CPL Distribution: See Reasons at [44].

35    Microsoft sought to prove only one aspect of the pleaded authorisation case, namely, the acquisition by CPL Distribution of 1,617 loose COAs from LDS International. As to this allegation, the trial judge instead found that CPL Notting Hill purchased the loose COAs “from [a] fraudster” (Reasons at [33]), not CPL Distribution.

36    That finding was not open to the primary judge, because the only case pleaded by Microsoft was that CPL Distribution acquired the COAs from LDS International, and Microsoft did not plead that CPL Distribution acquired loose COAs from “the fraudster”. Further, no case was pleaded that any of the appellants were complicit in a fraud.

37    The claim against Mr Wang, who did not give evidence, was that he authorised CPL Distribution's infringement of copyright in supplying CPL Notting Hill with 1,617 labels.

38    The trial judge stated (Reasons at [85]): “The fourth respondent, Mr Jin Wang did not give evidence. In those circumstances, it is appropriate to draw any adverse inference that is open on the evidence before the Court in respect of Mr Jin Wang's authorisation in respect of the infringements that is open on the evidence”. His Honour continued: “The Court infers that Mr Jin Wang was aware of the primary acts of infringement, was aware of the acquisition of the loose COA Labels for cash, was aware the loose COA Labels were for the refurbisher program, was aware of the merger of the stock codes, was aware of the destruction of records, was aware of the sale of computers to end users to which the COA Labels had been affixed without licence and on which the software had been downloaded without licence and that the respondents purported to authorise the end users to use the COA Labels and software without licence”.

39    As the appellants correctly submitted, those inferences were not open on the case pleaded against Mr Wang. It was simply not permissible for the primary judge to draw those inferences by reason of Mr Wang's failure to give evidence.

40    Presumably, the primary judge had in mind the decision of the High Court in Jones v Dunkel (1959) 101 CLR 298 at 320-321. The so called rule in Jones v Dunkel is that the unexplained failure by a party to give evidence as to a matter within his knowledge may, in appropriate circumstances, support an inference that his evidence would not have assisted his case in respect of that matter. The rule enables a court more readily to draw an inference against a party which is otherwise open on the evidence if the party is able to give evidence on the relevant matter, but does not do so without explanation. The rule does not permit a Court to fill in the gaps or draw adverse inferences merely because of the failure of the party to give evidence. The rule does not supplant the usual principles governing the onus and standard of proof.

41    Here, there was, as the appellants submitted, no allegation (or evidence adduced) by Microsoft that Mr Wang was involved in the acquisition or supply of 1,617 loose COAs by CPL Distribution or that he had knowledge of those matters. There was no evidence that Mr Wang was required to explain or contradict. It was thus not open for the primary judge to make the findings he made.

42    Microsoft's pleaded case was that CPL Notting Hill and CPL Distribution were separate entities carrying on separate businesses and that Ms Li was the sole director and engaged in the day to day management of CPL Notting Hill and Mr Wang was the sole director and engaged in the day to day management of CPL Distribution.

43    Microsoft did not plead that CPL Notting Hill and CPL Distribution carried on business together. As the appellants correctly submitted, the finding by the primary judge (Reasons at [3]) that the two corporate entities carried on business together was therefore not open having regard to the pleaded case.

44    Additionally, no case was pleaded in respect of the alleged copyright infringements that Ms Li acted on behalf of or was engaged in the management of CPL Distribution or that Mr Wang acted on behalf of or was engaged in the management of CPL Notting Hill.

45    The trial judge found that Ms Li was the corporate mind of CPL Notting Hill and Mr Wang the corporate mind of CPL Distribution. See Reasons at [3].

46    Accordingly, it was, again as the appellants correctly submitted, not open to the primary judge to address the copyright claims as if the knowledge and acts of Ms Li could be attributed to CPL Distribution and the knowledge and acts of Mr Wang could be attributed to CPL Notting Hill.

47    The trial judge awarded compensatory damages against the appellants for infringement of copyright under s 115(2) of the Copyright Act. As the appellants submitted, however, he should not have done so, and it was never open for him to have done so in the case of the individual appellants, because, among other reasons, Microsoft did not seek such damages.

48    Further, the primary judge awarded the same amount of compensatory damages against each of the appellants notwithstanding that the claims against them differed. In particular, the claims against CPL Notting Hill and Ms Li were confined to 39 alleged copyright infringements. But the judge assessed both appellants as being liable for 1,617 infringements, the number of copyright infringements pleaded only as against the third and fourth appellants.

49    Because no damages were sought against Ms Li and Mr Wang under s 115(2), it was also not open to the primary judge to award additional damages against them under s 115(4) of the Act. Section 115(4) relevantly provides that where an infringement of copyright is established, “the court may, in assessing damages for the infringement, award such additional damages as it considers appropriate”, if it is satisfied that it is appropriate to do so having regard to the particular matters specified. Thus, it is apparent that “additional damages” are awarded as part of the court's task “in assessing damages” which must mean damages under s 115(2). If no claim for damages is made under s 115(2), the Court is not engaged in the process of “assessing damages” under s 115(2) and therefore the power to award “additional damages” under s 115(4) is not enlivened.

50    Further, the discretion to award “additional damages” under s 115(4) is by its terms undertaken in the context of the damages assessed and awarded under s 115(2). That is why damages under s 115(4) are described as “additional”; they are “additional” to damages assessed and awarded under s 115(2). See Aristocrat Technologies Australia Pty Ltd v DAP Services (Kempsey) Pty Ltd (2007) 157 FCR 564 and Facton Ltd v Rifai Fashions Pty Ltd (2012) 199 FCR 569 at 577.

51    The primary judge also erred in that he awarded additional damages for infringement of copyright against each of the appellants by reference to infringements that were not alleged against them. First, the primary judge wrongly found that each appellant had infringed Microsoft's copyright “in the Microsoft Certificates of Authenticity”. But no claim for copyright infringement in respect of the COAs was advanced by Microsoft.

52    Secondly, the primary judge found that each appellant was liable for damages including additional damages on the basis that CPL Notting Hill infringed Microsoft's copyright on 1,617 occasions and Ms Li, CPL Distribution and Mr Wang authorised that primary infringement. No claim was pleaded against CPL Notting Hill that it infringed Microsoft's copyright on 1,617 occasions or that Ms Li, CPL Distribution and Mr Wang authorised such infringement.

53    Thirdly, the primary judge awarded additional damages against CPL Notting Hill and Ms Li on the basis that they had committed 1,617 infringements, when the only claims against them were that they had committed 39 infringements.

54    Given that the primary judge erred in finding the appellants liable for infringements that were not alleged against them, he necessarily erred in quantifying the additional damages against each of the appellants. In particular, CPL Notting Hill and Ms Li, on Microsoft's case, could only have been liable for damages in respect of 39 infringements (being, at its highest, $6,500).

55    The primary judge also found (Reasons at [93]) that CPL was liable to Microsoft pursuant to s 236 of the ACL for engaging in misleading and deceptive conduct in contravention of s 18 of the ACL and that Ms Li, CPL Distribution and Mr Wang were knowingly involved in that contravention. He did so without providing any reasons.

56    Microsoft alleged that CPL Notting Hill infringed its registered trade marks (the words “Microsoft” and “Windows” and the Windows logo) (SOC at [40]) by using them in relation to the software in two ways - first, by pre-installing the software onto computers such that the trade marks were displayed on the computer screen and secondly, by applying the COA labels to computers on which the software was pre-installed.

57    The primary judge found that all of the appellants infringed the trade marks by downloading the software onto computers which were then sold, by “displaying the Software” on those computers and by displaying the trade marks on those computers: See Reasons at [98] and [102].

58    As the appellants submitted, the primary judge was wrong to find that CPL Distribution was liable for trade mark infringement, and to order $25,000 in compensatory damages and $75,000 in additional damages against it, because Microsoft did not plead any claim in relation to registered trade marks and no relief for trade mark infringement was sought.

59    The primary judge was also wrong to find (Reasons at [98]) that Ms Li and Mr Wang infringed the trade marks under s 120(1) of the Trade Marks Act 1995 (Cth), because Microsoft did not allege that Ms Li or Mr Wang had downloaded the software onto computers or affixed COA labels.

60    The primary judge was also wrong to award $25,000 in compensatory damages against each of the appellants when Microsoft:

(1)    did not, at any time articulate any basis on which damages for any trade mark infringement might be assessed; and

(2)    in closing submissions, submitted to the trial judge that it did not seek any award of compensatory damages, but only sought nominal damages.

61    Further, and more generally, the reasons of the primary judge in this case do not reveal a path of reasoning. Conclusions are asserted, not explained. The evidence is not set out in any detail at all – rather, when evidence is touched upon the reasons seem to assume that the reader is already familiar with the material that the judge is assumed to have in mind. That is obviously impermissible. See, by way of example only, Waterways Authority v Fitzgibbon (2005) 79 ALJR 1816, 1835 [129]-[130], per Hayne J (McHugh and Gummow JJ agreeing).

62    I have not in these reasons dealt with all the reasons advanced by the appellants in support of their case that the matter must be reheard. There are, as I have explained, myriad reasons why the judgment and the orders and declarations made by the primary judge cannot stand, and, in light of the conclusion made by Senior Counsel for Microsoft that the appeal must be allowed, it is unnecessary to deal further with the submissions advanced by the appellants.

63    Much of the material produced by way of written submission on both sides was directed to the merits of the causes of action and to the appellants’ contention that the court should order that the claims brought by Microsoft below be dismissed. It is a regrettable fact that the decision and reasons of the primary judge are “wholly unsatisfactory” and that they justify the appellants asserting that the matter must be tried again: cf Mifsud v Campbell (1991) 21 NSWLR 725 at 728-9. The simple, and obvious, fact is that, as in Mifsud v Campbell (1991) 21 NSWLR 725 at 728F, there has been “a failure to do what the nature of the [judicial] office requires”.

64    Where an appellate court concludes that the primary judge has failed to give adequate reasons, it has a discretion as to whether a new trial should be ordered. See Pollard v RRR Corp Pty Ltd [2009] NSWCA 110. But in a case such as this it is not appropriate for an appellate court to embark upon what would, on the alternative case that the appellants seek to advance, be a retrial of the proceeding. That is especially so because the primary judge’s findings of fact (unsatisfactory though they are for the reasons described above) were purportedly based in significant part upon his assessment of the credibility of Ms Li; cf Waterways Authority v Fitzgibbon (2005) 79 ALJR 1816 at [17], per Gleeson CJ, with whom McHugh, Gummow and Hayne JJ agreed. (The position might be different where there is no credit issue. Then an appeal court may be in as good a position to decide the matter as the trial judge. See Hunter v Transport Accident Commission (2005) 43 MVR 130 at [37] per Nettle JA.)

65    The quality and detail of the submissions on the hearing of this appeal also did rather serve to highlight the deficiencies in the reasons of the primary judge. The case that the parties describe in those submissions is not a case that one would recognise from the judge’s reasons.

66    This was not a case in which the judge should ever had contemplated giving ex tempore reasons. In that regard, I refer to what Heydon JA said in Hadid v Redpath (2001) 35 MVR 152 at [45]-[52]. For the reasons there discussed, there are some occasions when the delivery of ex tempore reasons may be necessary or desirable. This was not one of them.

67    It was for those reasons that I made orders allowing the appeal, and remitting the matter for rehearing by a judge other than the primary judge.

Associate:

Dated:    26 February 2019

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