Fairlight.AU Pty Ltd v Peter Vogel Instruments Pty Ltd - [2015] FCA 1422 - FCA 2015 case summary — Zoe

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Fairlight.AU Pty Ltd v Peter Vogel Instruments Pty Ltd

[2015] FCA 1422

Federal Court of Australia|2015-12-17|Before: Edmonds J

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Source facts

Court

Federal Court of Australia

Decision date

2015-12-17

Before

Edmonds J

Source

Original judgment source is linked above.

Judgment (30 paragraphs)

[1]

The Applicant validly terminated the Development and Licensing Agreement dated 15 August 2010 between the Applicant and the First Respondent (the "Agreement") by notice given to the Respondents by letter dated 30 May 2012.
From 1 June 2012, by reason of the termination of the Agreement, the First Respondent did not have and does not have any right, licence or authority to use the FAIRLIGHT trade mark with respect to "CMI Products" as defined in the Agreement (except for those already supplied under the Agreement) or any other products or services or otherwise in the course of business.
The First Respondent contravened s 120 of the Trade Marks Act 1995 (Cth) using the FAIRLIGHT trade mark in the course of trade without the licence or authority of the Applicant: (a) from about 23 October 2010 to about 5 August 2012, as part of its corporate business name and by reference to that business name; and (b) from about March 2011, with respect to applications for use with or in respect of the iPad and iPhone or similar products and in marketing and selling such applications.

[2]

The Respondents and each of them, whether by themselves, their servants or agents or howsoever otherwise, are restrained from: (a) representing in the course of the First Respondent's business and in connection with the supply or possible supply of the First Respondent's goods or services that any such goods or services have the sponsorship or approval of the Applicant and/or from representing that the First Respondent has the sponsorship or approval of or is affiliated with the Applicant in the supply of the First Respondent's goods or services; (b) manufacturing, distributing, offering for sale, supplying, selling or causing to be manufactured, distributed, offered for sale, supplied or sold in Australia any goods or services for which the FAIRLIGHT trade mark is registered unless authorised by the Applicant; and (c) using, in the course of trade and commerce, the FAIRLIGHT trade mark without the authority or consent of the Applicant.

[6]

Introduction 1 On 15 August 2010, the applicant ("Fairlight") and the first respondent ("PVI") entered into an agreement called "Development and Licensing Agreement" ("Agreement") which provided for a registered trade mark ("Fairlight mark") owned by Fairlight to be used by PVI on a worldwide basis in connection with the development, manufacture and marketing by PVI of two computer musical instruments (referred to in the Agreement as "CMI Products"). The Agreement further provided for Fairlight to supply PVI with customised hardware components and software applications for inclusion in the keyboard and CMI box to be developed by PVI. The Agreement called for PVI to pay Fairlight $200,000 (plus GST) by way of four payments, each of $50,000 (plus GST) against Fairlight's demonstrated meeting of milestones as agreed between the parties before the commencement of the development project. PVI made payments totalling $200,000 (plus GST) over the period between February 2011 and April 2012. 2 Fairlight claims that the Agreement was terminated by letter dated 30 May 2012 from Mr Steve Kepper, General Manager, KFT Investments Pty Ltd ("KFT"), Fairlight's parent company, to Mr Peter Vogel of PVI for alleged breaches of the Agreement by PVI, particulars of which are set out in the letter. This was the catalyst for the ensuing disputation, although its sources are to be found in the anterior circumstances referred to below. As of the date of the letter, Mr Kepper was of the view that PVI had not paid in full the consideration PVI was required to pay to Fairlight pursuant to the Agreement, one of the alleged breaches, but this allegation was subsequently withdrawn as was the threat of recovery action for the alleged shortfall. 3 The Agreement and its poorly drafted terms, in particular the lack of specificity of the rights and obligations respectively conferred and imposed on the parties, along with the apparent unwillingness or apathy of the parties to properly and timely press and observe such of their respective rights and obligations under the Agreement as were sufficiently defined, are the principal sources of the disputation that has arisen. Fairlight's commencement of this proceeding and the difficulties encountered in bringing the proceedings to a state of readiness for hearing, responsibility for which must rest with both parties albeit in different ways, has made for a more toxic relationship; one which has effectively impeded every endeavour at mediating the dispute. 4 Having case managed this proceeding from the time it was transferred from the Victorian registry in April 2013 (see [13] below) including a number of interlocutory disputes, and having heard the trial of the substantive issues over six days, including the submissions of the parties, I have formed the firm view that Fairlight decided to terminate the Agreement when it did because: (1) Mr Steve Kepper had recently been brought on board as a "trouble shooter" to "sort out" the financial difficulties that Fairlight had been confronting from the time it entered into the Agreement with PVI; (2) Mr Steve Kepper quickly realised that going forward, there was nothing left in the Agreement, as then constituted, for Fairlight. Indeed, there was only further trouble ahead. Mr Fibaek, Fairlight's Chief Technical Officer, was having continuing difficulty in supplying PVI with the hardware and software which Fairlight contracted to supply under the Agreement in the quantities, to the standards and within the times required by PVI and this had resulted in ongoing disruption to the relationship; all the instalments of $200,000 (plus GST) payable by PVI to Fairlight under the Agreement had been paid and nothing further was payable by PVI to Fairlight other than for the purchase of product and software applications under the Agreement; the "financial prop" in the form of the PVI payments, which had enabled, or at least greatly assisted, Fairlight to survive over the previous 12 to 18 months, was gone; absent the Agreement, there would be no obligation on Fairlight to develop and manufacture the product and applications for the CMI Products and the difficulties in meeting PVI's quantity, quality and time requirements would cease to be the "running sore" they had been; a distraction which Mr Steve Kepper could well do without in his attempt to "turn the ship around". (3) The affidavit evidence of Mr Steve Kepper was not read and no explanation was offered as to why not; after all, he was the person who purported to terminate the Agreement for the alleged breaches of it by PVI, and he had only "just come on board". The only inference one can draw is that he was "clearing the decks" and did not want to be cross-examined on why the "clearing of the decks" included termination of the Agreement. In short, while there may have been a legal basis for the termination of the Agreement, a matter with which I deal below, I am of the firm view that it was not the alleged breaches of the Agreement by PVI which drove Mr Steve Kepper to terminate the Agreement, but his business judgment that there was nothing left in the Agreement for Fairlight which warranted it being kept on foot; only trouble lay ahead.

[8]

The Procedural History 9 The proceeding was commenced in the Victorian Registry of the Court in October 2012 in the usual way by originating application and statement of claim. By that process Fairlight sought declaratory relief of various kinds, injunctive relief restraining the respondents and each of them in various ways, damages or an account of profits, statutory damages and various forms of ancillary relief. 10 The grounds upon which the various forms of relief were sought were set out in the statement of claim and it is not necessary, in the face of the way in which the proceeding has evolved, both procedurally and in argument during the course of the hearing, to recount them. 11 On 2 November 2012, Middleton J made orders under Practice Note CM8, known as the "Fast Track Directions", for this proceeding to be managed in accordance with those directions. In response to, and in accordance with, those orders, Fairlight filed a fast track statement on 26 November 2012 and PVI and Mr Vogel filed a fast track response on 20 December 2012. On the same date, PVI filed a fast track cross-claim against Fairlight and on 1 February 2013 Fairlight filed a fast track response to the cross-claim. 12 The relief sought by Fairlight in its fast-track statement filed on 26 November 2012, as well as the grounds upon which that relief was sought, largely mirrored the relief sought in the originating application and the grounds of that relief in the statement of claim. 13 On 12 April 2013, Middleton J ordered that the proceeding be transferred to the New South Wales registry pursuant to s 48 of the Federal Court of Australia Act 1976 (Cth). 14 On the occasion of delivering judgment in Fairlight.AU Pty Ltd v Peter Vogel Instruments Pty Ltd [2013] FCA 1280 ("Fairlight v PVI (No 1"), but not without some doubt on my part, I granted PVI leave to amend its cross-claim and ordered that KFT be joined as a second cross-respondent. 15 At that time, I said this: [7] Since that time [12 April 2013], and despite the provisions of Pt 7 of the Fast Track Directions, the proceeding has become "bogged down" with issues of discovery; doubtful claims for the non-production of documents required for inspection and, at least from my perceptive, a general reluctance by the parties to progress the proceeding on a fast track basis. In my view, principal responsibility for this lies with Fairlight and its solicitors, but Mr Vogel must bear some responsibility for the delays that have been encountered because they are due to in part his lack of qualifications and expertise in representing himself and, with the leave of the Court, PVI. [8] To date, no order has been made that this proceeding no longer be conducted in accordance with the Fast Track Directions (see para 2.5 of the Fast Track Directions). If this proceeding ever warranted being managed under the Fast Track Directions, it no longer does. Fairlight, in particular, has invariably sought to avoid or resist the discovery or production of documents relevant to the proceeding at every opportunity. 16 On 9 December 2013, in response to, and in accordance with, the orders made in Fairlight v PVI (No 1), PVI filed an amended fast track cross-claim against Fairlight and KFT and on 13 January 2014 Fairlight and KFT filed a response. 17 On 26 September 2014, PVI filed a further amended fast track cross-claim against Fairlight and KFT.

[9]

The Respective Fast Track Claims and Grounds 18 By Fairlight's fast track statement filed 26 November 2012, Fairlight claims that from about March 2011, PVI breached the Agreement (among other things) by using the Fairlight mark in connection with the supply, marketing and sale of applications for iPhones and iPads ("Apps"). By the 30 May 2012 letter, Mr Steve Kepper wrote that Fairlight withdrew the use of the Fairlight mark and terminated the Agreement. 19 By the respondents' fast track response filed 20 December 2012, PVI disputes the validity of that termination and says that it was entitled to use the Fairlight mark for Apps by virtue of the terms of the Agreement, agreements on 15 November 2010, 9 March 2011 and/or Fairlight's acquiescence in PVI using the Fairlight mark from about 15 November 2010, as a consequence of which it is said that Fairlight is estopped from suing for breach of the Agreement or infringement of the Fairlight mark. PVI also says that it enjoyed a perpetual right to use the Fairlight mark pursuant to cl 19 of the Agreement. 20 Fairlight seeks declaratory relief to the effect that the Agreement was validly terminated on 30 May 2012 and, as a consequence, PVI has had no right to use the Fairlight mark since. 21 Fairlight also seeks restraints, declaratory and other relief, including damages or an account of profits, against PVI for trade mark infringement, misleading and deceptive conduct and passing off. Fairlight's claim for trade mark infringement by PVI, in contravention of the Trade Marks Act 1955 (Cth), is the primary claim. As a consequence, Fairlight does not press its claims for misleading and deceptive conduct or passing off and the Court need not consider those parts of Fairlight's claim. Fairlight makes an election to seek an account of profits, rather than damages, in respect of PVI's trade mark infringement and the Court need not consider Fairlight's claim for damages. 22 As against Mr Vogel personally, Fairlight also seeks restraints, declaratory and other relief, including an account of profits, for his involvement in the trade mark infringement. 23 By PVI's further amended fast track cross-claim filed on 26 September 2014, PVI claims that Fairlight breached the Agreement in a number of respects, including by failing to provide software and hardware to PVI to the requisite standard, as a consequence of which it has suffered loss and damage. 24 PVI also claims that it is the owner of the literary work constituted by the software developed by Fairlight for the purposes of the Agreement and says that Fairlight infringed its copyright, causing it loss and damage. 25 PVI further claims against KFT, as a de-facto director of Fairlight, for authorising the copyright infringement, and says that both Fairlight and KFT have engaged in unconscionable conduct. 26 PVI seeks declarations to the effect that it has a licence to use the Fairlight mark perpetually, by virtue of cl 19 of the Agreement, an order that the Agreement be specifically performed, a declaration that it is the owner of the copyright in all software developed by Fairlight pursuant to the Agreement, a declaration that a product known as "Sound Design Software" ("SDS") comprises software owned by PVI, as well as other relief, including damages, against both Fairlight and KFT. 27 By the cross-respondents' response to amended fast track cross-claim filed 13 January 2014, Fairlight and KFT deny that Fairlight breached its contractual obligations to PVI, and say that the suitability of the software and hardware provided to PVI by Fairlight is evident from the sale of fully functional CMI-30As and payment by PVI in respect of the four milestones contemplated by the Agreement. Fairlight also denies that PVI owns the copyright in the SDS and denies that Fairlight has infringed PVI's copyright.

[11]

The Agreement 29 To fully understand the analysis which follows, it is necessary to set out the terms of the Agreement in full: This Agreement is made on 15th August 2010 between: Fairlight Instruments Pty Ltd (ACN 140 173 397) of 10 Whitney Street Mona Vale, New South Wales, 2103, Australia ("FI"); and Fairlight.au Pty Ltd (ACN 104 307 888) of Unit 3/15 Rodborough Road, Frenchs Forest, New South Wales, 2086, Australia ("F.au"). Background 1. FI is a corporation established by Peter Vogel to develop and commercialise electronic musical instruments and related products. 2. F.au is a developer of technology for the audio and film industry. 3. FI wish to produce: • a 30 Year anniversary model of the Fairlight CMI referred to as the "CMI-30A" and • a PC compatible version known as the "Series IV", referred to collectively as the "CMI Products". 4. F.au will provide FI with: • certain hardware and technologies including customised software development for the CMI Products • a license for the use of the name "Fairlight" for the CMI Products during the term of this agreement; and • supply of core components including sound library, on the terms contained in this agreement. 5. FI will raise the required development funds, manufacture, market and distribute the CMI Products internationally. FI warrants that it has sufficient capital to commit to contract F.au to carry out the development contemplated therein. Operative provisions Obligations of FI 6. FI will pay F.au a total of $200,000 (plus GST) for: • the development of the Fairlight CMI Software; and • worldwide use of the "Fairlight" name and brand for marketing purposes for the CMI Products developed and/or marketed by FI pursuant to and during the term of this agreement. • Use of Fairlight name and brand cannot be sold or transferred to any other party without written agreement by F.au. • F.au reserves the right to withdraw the right for FI to use the Fairlight name and brand, should the name and brand be used in any way which F.au deem to be damaging to the Fairlight Brand reputation. 7. FI will make the payment to F.au required by clause 6 by way of four payments, each of $50,000 (plus GST) (total of $200,000) against F.au's demonstrated meeting of milestones as agreed between the parties before commencement of the development project. 8. Based around the hardware and software provided to FI by F.au as described herein, FI will package, develop, manufacture and market Fairlight branded musical instruments. 9. FI will package, develop, manufacture and market Fairlight branded musical instruments at its own cost, pay F.AU a one-off fee for development of the software as specified below, and purchase F.au custom components including Crystal Core and SX-x devices. 10. FI will develop the necessary components of the CMI Products including the retro keyboard and CMI box ready to accept the F.au boards and software. FI will also undertake all aspects of the marketing of the CMI Products, including but not limited to: • direct sales; • sales channel management; and • promotional activities. 11. FI will market and sell the CMI Series IV in a "sound-module" form, ie without a keyboard, but as CC-1 and Fairlight CMI software only. 12. FI will assist in the specification and testing process, and in gathering market feedback. Obligations of F.au 13. F.au agrees to produce a software application emulating the sounds and user interface of the Fairlight CMI running on a PC using a CC-1 card. 14. In addition to hardware and software provided by F.au to FI, F.au will include a licensed version of the Fairlight CMI sound libraries. 15. F.au will supply the following products and technology to FI for the CMI Products: • "Fairlight CMI Software" application; • CC-1 card; and • SX-8 or similar input/output device. 16. A detailed specification for the final CMI-30A product will be produced by the parties prior to commencement or development. 17. F.au agrees to complete the necessary CMI Hardware and Software within four months from order. 'Order' being defined as: signed agreement, signed specification of product, signed list of monthly milestones, signed definition of transferred IP, and receipt of first $50K. 18. F.au reserves the right to extend the 4 month delivery period should FI not make its stage payment in a timely manner. 19. F.au agrees that in the event that it is unable to supply hardware or software as contracted within a commercially reasonable time, or if an administrator or receiver is appointed to F.au, FI is automatically granted an immediate perpetual royalty-free licence to use anything belonging to or controlled by F.au necessary for FI to complete the development or manufacturing contemplated by this agreement. This is provided that full payment for any work completed up to that point has been provided by FI to F.au. Intellectual property rights 20. Upon receipt of the final payment-from FI, F.au agrees that the software and its source components developed by F.au pursuant to this agreement will transfer to FI. The exact definition of IP to be transferred will be defined in a separate document. 21. F.au does not own any of the FI business that commercialises the CMI Products and related products and technology. 22. FI will own the Fairlight CMI Software application and all its specific source code including elements of the Crystal Core source code. There are no other IP implications. Sale of CMI Products 23. By default, a CC-1 card sold for use in a CMI system cannot run Dream II software without additional licensing. Likewise, a CC-1 card sold for use in a Dream II system cannot run CMI software without additional licensing. 24. All licensing will be handled through F.au, with appropriate and timely reporting to FI. 25. F.au will have the opportunity to purchase Fairlight CMI Software licenses to sell with existing and future F.au products at a price to be negotiated in the order of AUD $1,500.00 per license. 26. The Parties agree the following cost of components for the CMI-IV, subject to negotiation and based on exchange rates and discount for product volumes: • Package 1 (CC-1, SX-8) AUD $2,542.00 • Package 2 (CC-1, SX-20) AUD $3,977.00 27. FI is licensed to offer CMI-30A customers an upgrade path to full Dream II capability, through purchasing a license from F.au at a price to be negotiated, in line with the prevailing list price. 26. F.au will also be able to market the CMI Products through its distribution channel. General. 29. This agreement is governed by the laws of New South Wales, Australia. 30. All references to "$" are to Australian dollars. 31. This agreement binds the parties and their successors. Term 32. After one year from signing, this agreement can be terminated on three months written notice by F.au if FI fails to purchase from F.au products to a minimum value of $50,000 per annum (calculated annually in arrears, commencing from the date of completion of the development contract contemplated herein). 33. This agreement can be terminated by FI by giving three months written notice. 34. Otherwise the agreement is ongoing unless terminated by agreement between the parties. 30 Interestingly, and not without relevance to the respondents' defence to Fairlight's claim, the Agreement was signed on behalf of Fairlight by Mr Tino Fibaek, Fairlight's Chief Technical Officer, and general manager from September 2009 to about January 2011, which seems to fly in the face of Mr Fibaek's evidence in cross-examination that he did not have authority to authorise anyone to use the Fairlight mark: T, day 1, p 76, lines 6-29. Mr Fibaek's evidence was not that he had authority to sign the Agreement on behalf of Fairlight but thereafter his authority lapsed, nor that his authority to sign was specific to the Agreement. Moreover, Mr Fibaek having signed the Agreement on behalf of Fairlight, it is not surprising that Mr Vogel was left with the impression and understanding that Mr Fibaek had authority to vary it. I have to say that, contrary to the submission that was put on behalf of Fairlight, I was far from impressed with Mr Fibaek as a witness. His answers to questions put to him in cross-examination appeared to be slow and hesitant, rather than considered and measured, as if he was seeking to recollect what he had been told or rehearsed to say. Indeed, his recollection of relatively recent events was very poor; I suspect deliberately evasive. I would not attach any great weight to the testimony he gave in cross-examination. The failure to read Mr Steve Kepper's affidavit, and so avoid cross-examination, reinforces these conclusions.

[12]

Did the Agreement extend to the use of the Fairlight mark by PVI for iPhone/iPad Apps? 31 Clause 3 provides that the two products PVI wishes to produce, namely the "CMI-30A and the "Series IV", are collectively referred to as the "CMI Products". 32 Clause 4 provides that Fairlight will provide PVI with, inter alia, "a licence for the use of the name 'Fairlight' for the CMI Products during the term of this agreement. 33 Clause 6, the first of the operative provisions of the Agreement, provides that PVI will pay Fairlight "a total of $200,000 (plus GST) for: - … - worldwide use of the "Fairlight" name and brand for marketing purposes for the CMI Products developed and/or manufactured by [PVI] pursuant to and during the terms of this agreement. 34 In my view, it is quite clear that, by these provisions, PVI was granted a licence to use the Fairlight mark worldwide but only in relation to the marketing of "CMI Products", namely, the "CMI-30A" and the "Series IV". The Agreement is a commercial contract and such a construction is: "The meaning … a reasonable business person would have understood those terms to mean": Electricity Generation Corporation v Woodside Energy Ltd (2014) 251 CLR 640 per French CJ, Hayne, Crennan and Kiefel JJ at [35]; Stratton Finance Pty Ltd v Webb (2014) 314 ALR 166 at [39]. 35 Mr Vogel acknowledged as much in his letter of 20 June 2012 to Mr Steve Kepper in response to Mr Kepper's letter of 30 May 2012. In response to Mr Kepper's statement (second last paragraph on p 2 of his letter): In relation to the iPad/iPhone App., the Agreement provides a licence to use the Fairlight name and brand for the CMI Products. We note that this does not refer to or cover the iPad/iPhone App. That is a breach of the Agreement. Mr Vogel wrote (at para 13 on p 5 of his letter): The agreement does not mention the App. Any claim you may have in relation to the App is unrelated to obligations under the agreement. The app is subject to a separate agreement, made verbally with Tino but the written agreement was never signed off due to F.au's unresponsiveness. 36 During his cross-examination Mr Vogel suggested that the use of the App was a marketing tool only and therefore fell within the terms of cl 6 of the Agreement: "And the use of the brand in the App was a use for marketing purposes of the CMI Product" (T 276, lines 3 and 4). 37 I can accept that the App may have had a marketing utility for the CMI Products developed and/or manufactured by PVI pursuant to the Agreement, although there was no evidence of this, but if it did, then it was only incidental to its character as a stand-alone product developed and/or manufactured for sale by PVI. The contemporaneous evidence is overwhelming in this regard. The Information Memorandum dated 7 March 2011 to raise $500,000 of capital for PVI contains the following statement on p 6: Apple iOS Application Fairlight Instruments has now completed development a Fairlight app for iPhone and iPad. Due for release in March 2011, this app was previewed at the 2011 NAMM show, where it generated enormous excitement. The app is intended to introduce a new generation of musicians to the famous and mythical Fairlight, while potentially generating significant revenue in its own right. A promotional video has recently been posted on YouTube: http://tinyurl.com/6fx3c3d An Android version will be developed, subject to the commercial results of the iOS release. Software applications for Macintosh and PC platforms are also planned. … It is anticipated that the Fairlight App, CMI-30A, and Naked-30A will sustain the business for at least the first year. (Emphasis added.) This is diagrammatically represented on the "Product Road Map" that appears on p 9 of the Information Memorandum. 38 The idea that a person would commit resources into the development of an app that replicates significant features of the product which the app is supposed to be marketing, in circumstances where the product is a limited release anniversary edition of computer musical instrument is inherently unlikely. There were only 100 CMI-30As to be sold and the inference from the evidence is that the target market might be older music producers who would have some nostalgia for an industry defining product launched in the 1970s. 39 Evidence was led by PVI that other brands employ apps as a marketing tool. Ex A1 was an app developed by Ferrari S.p.A which manufactures and markets the Ferrari brand of luxury motor vehicles. The essence of the respondent's evidence was that just as Ferrari S.p.A used an app which was priced at a tiny fraction of the sales price of a Ferrari to market Ferrari branded motor vehicles, PVI used an app priced at a fraction of the sales price of a CMI-30A to market the CMI-30A (Ex A2). I can accept that Ferrari S.p.A used a cheap app to market an expensive motor vehicle, but I cannot accept the submission which follows that therefore the App was a marketing tool for the CMI-30A. There is a false analogy between the app developed by Ferrari S.p.A and the App developed by PVI. The analogy is false because the App is a product which replicates essential function of the CMI-30A but the app developed by Ferrari S.p.A quite clearly does not replicate the function of the motor vehicles the sales of which it is designed to promote. 40 When the primary purpose of putting something into production is to derive revenue from its sales, it becomes more likely that the product is not primarily a marketing tool. The weight of evidence does not persuade me to finding that the App was a marketing tool. To the contrary, the weight of evidence leads me to find that the App was a product in itself. A product in respect of which the Agreement did not authorise PVI to brand with the Fairlight mark.

[13]

Did Fairlight and PVI enter into any binding agreement on 15 November 2010 or 9 March 2011 entitling PVI to use the Fairlight mark of iPhone/iPad Apps? 41 It is common ground that the evidence discloses that for some eighteen months after entering into the Agreement, PVI, through Mr Vogel, sought to obtain Fairlight's agreement to vary the Agreement or to enter into a new agreement which would allow PVI to use the Fairlight mark in connection with the Apps, in addition to the CMI Products. That, in itself, leads me to infer that Mr Vogel was well aware and accepted that the licence to use the Fairlight mark under the Agreement was confined to the two products, the CMI-30A and the Series IV, collectively referred to as the "CMI Products" in the Agreement. 42 But PVI contends that Fairlight, through Mr Fibaek, agreed to so vary the Agreement, or entered into a new agreement, on or about 15 November 2010 or, if not then, on or about 9 March 2011. In my view, there is no evidence to support this contention; indeed, the evidence is to the contrary. 43 PVI's contention that there was an agreement on 15 November 2010 appears to be based on the following affidavit evidence of Mr Vogel: (1) On 14 November 2010 (5:58 pm), Mr Vogel sent Mr Fibaek an email: Subject: Meeting tomorrow Tino, would like to introduce you to Thomas Bisshop, who's writing the iPhone app, before meeting the journo tomorrow (say 10am?) Ex E, p 1,449. (2) On 15 November 2010, Mr Vogel, with Mr Bisshop met with Mr Fibaek, they showed him the App and they had a conversation: Mr Vogel: The app is a marketing gimmick for the CMI-30A, but we will be selling it, so how about we give you a royalty on sales, say one percent? Mr Fibaek: That sounds good. Ex E, p 1,370, para 74. 44 Mr Fibaek's affidavit evidence in relation to the meeting on 15 November 2010 referred to in [43(2)] above is that Mr Vogel demonstrated the Apps to him, but Mr Fibaek did not agree that Fairlight would accept a royalty fee of 1% on gross revenues in return for the right to use the Fairlight mark in relation to the Apps: Ex 3, p 51, para 142. 45 The conversation that Mr Vogel alleges, and Mr Fibaek denies on 15 November 2010, as set out in [43(2)] above, was not even put to Mr Fibaek in cross-examination: see T, day 4, p 272, lines 15-28. 46 Even on Mr Vogel's own evidence (as to the conversation he alleges on 15 November 2010), Fairlight submitted that a number of the elements necessary to establish a binding agreement are wholly absent, for example: (1) offer and acceptance: as there is no evidence that any conduct by Fairlight was "referable only to an acceptance" of PVI's offer: See Laidlaw v Hillier Hewitt Elsley Pty Ltd [2009] NSWCA 44 at [5]-[9]; referring to Empirnall Holdings Pty Ltd v Machon Paull Partners Pty Ltd (1988) 14 NSWLR 523 at 535 F-G; (2) certainty of terms: given that the conversations deposed to by Mr Vogel was cursory, at best, in relation to the proposed terms of the alleged agreement, and did not clarify or specify whether the reference to "royalty on sales" meant gross or net sales; (3) authority of Mr Fibaek to enter into an agreement on behalf of Fairlight to licence its intellectual property without board approval, in circumstances where there is no evidence that Mr Fibaek had the actual authority of Fairlight to enter into the alleged agreement to licence Fairlight's intellectual property (and he confirmed that he did not during cross-examination: see T, day 1, p 76, lines 13-23). The Court cannot assume that a manager, (even a general manager), or a Chief Technical Officer, has the authority of the company to effectively bind the company to pledge its assets: Vero Insurance Ltd v Kassem [2010] NSWSC 838 at [73]. Further, there is no evidence of any conduct by the directors of Fairlight from which apparent authority of Mr Fibaek to licence Fairlight's intellectual property can be presumed. Authority to perform specific acts is not general authority to bind the company: Armagas Ltd v Mundogas S.A. [1986] AC 717 at 728-736 and Essington Investments Pty Ltd v Regency Property Pty Ltd (2004) NSWCA 375. 47 As to this last element, the issue of Mr Fibaek's authority is far from clear. As noted in [30] above, he signed the Agreement on behalf of Fairlight so presumably he was authorised to do that. There is no evidence as to how Mr Fibaek was authorised to do that: by specific authorisation from the Fairlight board or whether he acted under some general delegated authority from the Fairlight board; and he was not at that time, or at any other time, a director of Fairlight, apart from being someone's alternate for meeting purposes. He was not cross-examined on this subject at all. Had he been cross-examined, it may have emerged how he had authority to sign the Agreement on behalf of Fairlight but no authority to vary the Agreement or enter into a further agreement covering the Apps. Be that as it may, I agree there is no basis for the Court to find that Fairlight entered into an agreement on 15 November 2010 entitling PVI to use the Fairlight mark for the Apps, or at all. 48 Alternatively, PVI claims that Fairlight entered into an agreement on 9 March 2011 entitling PVI to use the Fairlight mark for Apps. The evidence does not support that assertion. 49 In seeking to establish an agreement on 9 March 2011, PVI relies on a conversation between Mr Vogel and Mr Fibaek as follows: Mr Vogel: Why haven't you responded to my proposed change of plan? Mr Fibaek: Your flat annual fee proposal is no good, what about this, you could use the trademark for CMI products and pay 1% royalty? Mr Vogel: That sounds like a good plan. Mr Fibaek: Good. Put something to that effect to me in writing. Ex E, pp 1,368, 1,369, para 60. 50 Mr Fibaek's affidavit evidence is that he denies any verbal agreement with Mr Vogel to vary the Agreement to the effect that PVI could use the Fairlight mark on any products (other than CMI Products) and that PVI would pay Fairlight a 1% royalty on gross revenue in return for any such right (see Ex 3, para 143). 51 The conversation that Mr Vogel alleges, and Mr Fibaek denies on 9 March 2011, as set out above, was again not put to Mr Fibaek in cross-examination (see T, day 4, p 272, lines 15-28). 52 On Mr Vogel's own evidence, Fairlight submitted that at least the following elements necessary for the formation of a binding agreement were absent in respect of the alleged 9 March 2011 agreement: (1) Offer and acceptance: as there is no evidence that any conduct by Fairlight was "referable only to an acceptance" of PVI's offer: see Laidlaw v Hillier Hewitt Elsley at [5]-[9]; referring to Empirnall Holdings at 535F-G; (2) an intention to create legal relations: particularly given that, on Mr Vogel's own evidence Mr Fibaek asked Mr Vogel to "put something to him in writing" at the conclusion of the conversation on 9 March 2011, which Mr Vogel subsequently did on 15 March 2011 when he wrote an email to Mr Fibaek, to which a document styled "Development and licensing Agreement Amendment" was attached, in the following terms: Subject: Royalty Agreement G'day Tino, As discussed last week, I attach a proposal to vary the agreement between our companies to encompass products which Fairlight Instruments many sell which are not CMI-30A related and hence not covered by the previous agreement. The first of these is about to hit the market - the Fairlight app. So I'd like to get this agreed as soon as possible. I think it's a very simple addition to the original plan, simply picking up some opportunities we had overlooked. I have based royalty on gross, to avoid the complexities of having to define the deductions etc. Let me know what you think; Ex 3 pp 72-76. (3) certainty of terms: given that the conversations deposed to by Mr Vogel were cursory at best in relation to the proposed terms of the alleged agreement and did not clarify or specify whether the reference to "royalty on sales" meant gross or net sales; (4) authority of Mr Fibaek to enter into an agreement on behalf of Fairlight to licence its intellectual property without board approval, for the same reasons set out at [46(3)] above in relation to the alleged 15 November 2010 agreement. 53 In OXS Pty Ltd v Sydney Harbour Foreshore Authority and Minister for Planning and Environment [2014] NSWSC 1174, Black J recently observed: [51] The first matter raised by this claim is whether the February 2011 letter and OXS's response gave rise to an immediately binding contract. In Australian Broadcasting Corporation v XIVth Commonwealth Games Ltd (1988) 18 NSWLR 540 at 548, Gleeson CJ (with whom Hope and Mahoney JJA agreed) observed that the question in a case of this kind involves the intention of the parties to make a concluded bargain, which is related to but not the same as the question whether the parties have reached agreement upon such terms as are legally necessary to constitute a contract. His Honour also noted that: ... in the ordinary case, as a matter of fact and common sense, other things being equal, the more numerous and significant the areas in respect of which the parties have failed to reach agreement, the slower a Court will be to conclude that they had the requisite contractual intention. The court may have regard to the parties' communications after the formation of an allegedly binding agreement in order to determine, objectively, whether or not they intended to form such an agreement: Australian Broadcasting Corp v XIVth Commonwealth Games Ltd above at 547-548; Geebung Investments Pty Ltd v Varga Group Investments (No 8) Pty Ltd (1995) 7 BPR 14,551 at [14,562]. 54 PVI's claim that there was a binding agreement on 9 March 2011 is itself an admission that it did not consider that it had a binding agreement on 15 November 2010: see also, for example, Ex E, pp 1,461-1,463. PVI's conduct after the alleged contract was formed on 15 November 2010 is admissible as to whether a contract was formed on 15 November 2010, for the reasons set out in OXS (and the cases cited in Australian Broadcasting Corp at 547-548). The attempt to enter into an agreement on 9 March 2011, in relation to matters that were allegedly the subject of a binding agreement on 15 November 2010, suggests that there was no binding agreement on 15 November 2010. 55 Further, Mr Vogel's own evidence, and the email that he sent on 15 March 2011 for the reasons set out in OXS, suggest that there was no agreement entered into on 9 March 2011. 56 Apparently by way of further admission that there was no such agreement, in January 2012 (even afterwards: see [66] below), PVI was still seeking Fairlight's agreement to use of the Fairlight mark for Apps. That conduct is also admissible as to whether there was an agreement on 9 March 2011 or not, for the reasons set out in OXS. On 19 January 2012, Mr Vogel sent an email to Mr Anvari (with a copy to Mr Ross), attaching the same proposed amendment to the Agreement that Mr Vogel sent to Mr Fibaek on 15 March 2011: Ex E, pp 1,473-1,474, as follows: Subject: Proposed royalty agreement Dear Farrow, As discussed, I am attaching the original development agreement and the variation I proposed about a year ago now (that's when I first became alarmed about the shoddy way the development was being managed). The gist of the variation is that we wish to develop products without Fairlight.au's involvement but still use the Fairlight brand. For this right we propose to pay a 1% royalty calculated on our gross. This is much easier to administer and audit than a royalty based on nett etc. Given that the relationship with F.au has become unworkable in its present form, I think this is a good compromise as it will let us continue to develop musical instruments and F.au can receive some income without any drain on their resources. I think our activities in the market also have significant intangible value to F.au as it indirectly raises awareness of the Fairlight brand; for example Graeme is in Los Angeles now as we have been nominated for a TEC award (announcement of winners tomorrow night) ... Also 80s star Thomas Dolby will be doing a promotional performance on the CMI30A in Sydney next month. much anticipated by the industry press .... Please consider the proposed agreement variation, I'm keen to get it locked down finally. 57 Fairlight submitted that it is plain that the parties did not intend there to be a binding agreement on 15 November 2010 or 9 March 2011; that it would be curious in the extreme that Fairlight would enter into a licensing agreement in writing and then allow a considerable amendment to it to take place verbally and without any amendment to the written agreement. I agree with that submission and find that there was no agreement between Fairlight and PVI by which Fairlight agreed that PVI could use the Fairlight mark for Apps.

[14]

Was Fairlight entitled to withdraw PVI's right to use the Fairlight mark by reason of PVI's unauthorised use of the Fairlight mark in relation to the iPhone/iPad Apps? 58 Before addressing this particular issue, it may assist the reader to be provided with some factual context, both immediately before and shortly after Mr Steve Kepper, as General Manager of KFT, sent his letter of 30 May 2012 to Mr Vogel of PVI. 59 That letter relevantly provided: ... Your letter and the actions of FI in relation to a number of issues clearly show that FI is in breach of the agreement as well as having infringed a number of F.Au's intellectual and other property rights. In relation to the ipad/iphone App, the Agreement provides a licence to use the Fairlight name and brand for the CMI Products. We note that this does not refer to or cover the iPad/iPhone App. That is a breach of the agreement. The use of the sound library is a blatant and flagrant breach of the agreement. Your argument is not only self serving but without any merit whatsoever. The use of the sound library is a breach of not only the agreement but also F.Au's intellectual property rights. The app contains neither hardware or software of F.Au and cannot therefore be marketed as a Fairlight product. F.Au reserves its rights to a full accounting of all monies or other benefits derived by FI in relation to the use of the sound libraries. You have offered a royalty to "remove any uncertainty". Respectfully this is a disingenuous response to what you clearly appreciate to be a breach of the agreement. The reason we did not respond is because it was not acceptable. That F.Au did not respond to your offer does not mean F.Au acquiesced. It did not. In this regard, we also note that this application and use of the Fairlight name and brand damages the Fairlight brand and reputation and is otherwise also misleading and deceptive conduct and is a misrepresentation under the Competition and Consumer Act as it suggests an association and endorsement by F.Au which does not exist. It also amounts to passing off. This is a breach of the agreement. Further, other than for product currently provided, by reason of the clear breaches on the part of FI of the Agreement, you are to undertake to immediately cease using the Fairlight name in any way. For the sake of clarity this means you must not: (a) Use the Fairlight name or any derivation of it in relation to any products or services provided by FI other than those products already manufactured or to be sold; (b) Continue to use the Fairlight name or any derivation of it in relation to the business of FI (c) Continue to use the Fairlight name or any derivation of it in relation to the iPad app (d) Continue to use the Fairlight name or any derivation of it in the name of FI i.e., you must change the name of Fairlight Instruments Pty Ltd (e) Continue to use the Fairlight name or any derivation of it in or on any printed or other media including web site, Facebook pages, Twitter accounts or other wise If you fail to provide this undertaking by the close of business 1 June, 2012 action will be taken to prevent FI from doing so without further notice. FAu otherwise reserves all of its rights. 60 Mr Kepper's letter of 30 May 2012 was sent in response to Mr Vogel's letter of 22 May 2012 which relevantly provided: This letter is further to our telephone conversation this afternoon in which you asked me to put the issues down in writing. BREACH OF DEVELOPMENT AND LICENSING AGREEMENT DATED 15 AUGUST 2010 (copy attached) We have paid the consideration specified in this contract ($200,000) in full. Fairlight.au is obliged under the contract (specifically Clause 15) to supply Fairlight Instruments with the application software, CC-1 card and SX12 cards. You confirmed today that you have instructed staff not to supply us any goods until further notice. I presume this extends to software bug fixes as well. By refusing to supply Fairlight Instruments, Fairlight has breached the contract. There have been other breaches by Fairlight.au, including, amongst other things, failure to deliver software of a merchantable quality and failure to supply documentation of the software. The contract initially anticipated that the sound engine CMI code would be implemented firmware on the CC1. This has not happened, with the result that polyphony is limited to 96 as opposed to "least 200" as initially promised and performance is compromised in other ways as well. Although we have so far been amenable to accepting this as a variation to the contract, we reserve the right to insist that the original intention be performed. We also hereby give notice that Fairlight.au has failed to deliver software and hardware in commercially reasonable time and we reserve our right to exercise our rights under clause 19. USE OF FAIRLIGHT SOUND LIBRARIES IN APPS You mentioned today your concern about our use of the Fairlight sound libraries in our IOS apps. First, we would argue that the licensing Agreement extends to use of the sound library, the app being a promotional gimmick for the CMI-30A. In addition, when we brought out the app in March 2011 we wished to remove any uncertainty there may be about the scope of the licence and we put to Fairlight.au a proposed amendment to that contract, as attached. Our proposal was that for avoidance of doubt, we would pay Fairlight.au a royalty on sales of any intellectual property which Fairlight claims to own. Unfortunately, in spite of several requests over the next year, we did not receive a reply to that offer. Under the circumstances, if challenged. we would argue that the app falls within the scope of the CMI-30A contract, a view which is reinforced by Fairlight.au's acquiescence for more than a year. Should we be required to defend our position, we would also challenge that Fairlight.au owns copyright to the sound libraries. Although not relevant to the question of ownership, please note that we did not obtain the sound libraries from Fairlight.au (there being multiple other sources from which these are freely available). … DEMAND We sincerely hope that this dispute can be resolved amicably, but unless you remedy the situation as follows we will have no choice but to enforce our rights: 1. Payment of monies owed, within 7 days, 2. Replacement of 3x CC-1 cards loaned, within 7 days. 3. Supply of 5 x CC-1/SX12 for the usual price, within 7 days. 4. Correction of software bugs as reported to date, work to commence immediately and to be completed progressively over 30 days. 5. Supply of professional standard documentation for software already delivered, existing documentation to be delivered immediately and to be completed progressively over 30 days. 6. A response to the aforementioned request for variation of the licensing agreement to permit use of the Fairlight name for all our musical instruments in return for a royalty, within 7 days. Unless this matter is resolved expeditiously, we will enforce our rights under the contract and otherwise. As well as seeking a refund of the money paid, we will seek damages for loss of profits due to Fairlight.au's breaches. 61 Mr Kepper swore an affidavit in these proceedings on 22 May 2014, but it was not read on the hearing. It was, however, tendered by Mr Vogel during his cross-examination of Mr Fibaek, and taken into evidence (Ex 8). Mr Kepper only became involved with KFT, as general manager, and with Fairlight's business operations, in early March 2012, less than two months before these events occurred. 62 On 1 June 2012, Mr Vogel responded to Mr Kepper's letter of 30 May 2015 in the following terms: Before we start duelling with lawyers at 20 paces, I thought it would be constructive for us to take a step back and simply restate our needs in terms of our relationship with Failight.AU in the hopes of being able to establish some common ground for further negotiation. • We would like to keep using the brand and sound libraries. This is obviously beneficial to us since all our products already carry the brand and contain the libraries, but also serves to promote Fairlight.AU and its products. • We would like to keep buying your hardware. This is obvious since we can't fill orders without hardware and it is financially beneficial for Fairlight.AU. • We would like to have Fairlight.AU continue with software development. We need to do this to keep our customers happy and once again, it is financially beneficial for Fairlight.AU. • We would like Fairlight.AU to continue to use our CMI code in their SDS products. This is also mutually beneficial. We feel that the best solution for all concerned would be to formalise a license agreement to use the brand and the sound libraries for any musical instruments, in return for a royalty payment. Continuing on our current trajectory would achieve nothing but damage to both parties, which is the exact opposite of what we are trying to achieve. I look forward to your response as soon as possible, but at the latest C.O.B. Wed 6th June 2012. 63 To which Mr Kepper respondent by email on 3 June 2015 as follows: Hi Peter, in principal [sic], I do not have an issue doing business with you. However, to move forward, we need to clean up the past and a new supply and licensing agreement will need to be entered into before proceeding further. If you are in general agreement I will have a new agreement outlined and sent to you for consideration and comment. And Mr Vogel responded the same day: Sounds good. I suggest you first send me the bullet pints [sic] of what you would want in the new agreement before spending a lot of time and money on lawyers. 64 On 5 June 2012 Mr Vogel sent an email to Mr Kepper and Mr Fibaek as follows: We have produced the attached summary of all invoices and payments between the two companies, which shows the current position to be as follows 1. Fairlight Australia owes Fairlight Instruments $25,692.82 2. Fairlight.au has delivered a total of 13 CC1 and 14 SX12 3. FI has paid for: CC1=18 SX12=21 4. Therefore F.au owes F.I. another 5 CC1 and 7 SX12. In addition to this Fairlight.au needs to pay the Fedex bills that they ran up on our account, and account to us for the software licence for the SDS systems they have sold. I trust this helps clarify the situation and I look forward to your proposal. As you know, our business is being severely impacted by lack of components we have paid for but not received. 65 On 15 June 2012, Mr Kepper responded by mail in the following terms: Good morning Peter. My apologies for the delay's [sic] in getting back to you. There have been some issues regarding Fairlight that required our attention before we could reasonably respond. As I have stated to you previously, in principal I have no issue with FAU supplying FI product. Without prejudice and without going into detail, following are what I see as the key elements of a new trading agreement: • Concise technical, mechanical and software specifications drawn up and signed off by both parties • Software and IP licences will be specific to the product only and not for any other purpose • Costs agreed and fixed for agreed specification with annual reviews • Trading terms & agreed delivery schedules strictly adhered to • Any additional development work to be clearly specified, costed and agreed by both parties prior to commencement • Any desired changes to agreed spec once work has commenced to be agreed by both parties • Fairlight brand usage is to be limited strictly to the CMI30A product, nothing outside this will be accepted • No variations to the agreement will be accepted unless approved by Fairlights [sic] CEO • As far as the past is concerned, including all issues with the previous agreement, DR, VR, FI, all accounting issues are wiped. I understand there is a reconciliation of CC1 cards is being undertaken today and this should be clarified by early next time. Lets [sic] discuss and see how we move forward from here. 66 On 17 June 2012, Mr Vogel responded: Thanks Steve, This looks like a good start except it does not address the App. If you modified this term: • Fairlight brand usage is to be limited strictly to the CMI30A and apps … we would consider the proposal. Otherwise the way I see it is we are being asked to write off debt for nothing in return. Cheers Peter 67 On 18 June 2012, Mr Vogel sent an email to Mr Kepper and others which read: I expect that tomorrow (Tuesday) you will receive a Statutory Demand for payment of outstanding monies. Fairlight.au has had over 2 weeks to consider the reconciliation spreadsheet we provided. The fact that there has NOT BEEN ONE question since then shows that either you agree with the figures or no attempt at reconciliation has been made. Being told last Friday by Keith that Tino was checking the reconciliation, and then Tino telling me that he knows nothing about it was yet another illustration of the shabby treatment we continue to receive from Fairlight.au. We have taken deposits for good[s] we have not been able to deliver because of your unjustified embargo against us. The statutory demand is to ensure this will not drag on more than another 21 days. I sincerely hope that we can come to some mutually satisfactory agreement before then. 68 This was followed by a long letter dated 20 June 2012 from Mr Vogel to Mr Kepper comprehensively responding to Mr Kepper's letter of 30 May 2012: We refer to your letter of 30 May 2012 and address the many points raised as follows. 1. FI has not paid the consideration specified in the Agreement. We provided a detailed reconciliation of amounts owing on 5th June 2012. We have not received any comment on this in spite of our constant prompting. Accordingly we assume you do not dispute the figures we claim. 2. Accordingly, an amount of $161,404 remains outstanding and has been for some time. If there were money owed by us, why have we not been notified? Your calculation is completely wrong. As you saw from our spreadsheet, you owe us $43,993.11. 3. FAu is not required to deliver product to FI when FI is in breach. We dispute that we are in breach. We dispute that you can refuse to deliver product paid for even if we were in breach. Furthermore, we have never been notified of any alleged breach. 4. In relation to your allegation that software that has been delivered is not of merchantable quality, I note that you have failed to particularise this in any way. In any event, that is simply not true. The software is not documented to a professionally acceptable standard. Tino has conceded this and promised to provide documentation after the NAB show (some months ago now). There are also certain parts of the software which do not work at all, for example MIDI and MADI outputs. There is also a buglist which needs to be attended to. A copy of FAU's buglist is attached. There are many other failings which we can particularise if required. 5. Further, FI has made some payments on milestone which included software and accordingly, has accepted that software. In the event that you are able to provide any further detail on this allegation, please do so. The reason payments were made before the milestone was met was that F.au was unable to pay its suppliers and could not supply us parts we needed. We therefore agreed to pay in advance of completion of the milestone. Software features which were agreed to but not supplied were moved by Tino into a collection of bugs called, "backlog". There are currently 42 entries in "CMI MS4 Backlog". In any case, there was no suggestion that payment for a milestone was acceptance that the software was complete. It was well understood that there were bugs and missing features to be supplied in due course. I also point you to payments made in good faith by FI to F.au suppliers and contractors/staff on the request of Tino when F.au did not have any money. Specifically, payments for FPGA chips for CC-1 boards and personal expenses for Ken Barnsley, F.au's Sales Director at the time. 6. In relation to the allegation that there has been a failure to supply documentation, I presume you are referring to Clause 17 of the Agreement. As there has never been a signed definition of transferred IP for the product agreed, there is no obligation or ability to supply this. You are mistaken. The documentation referred to is the documentation which makes the software intelligible to a programmer other than the one who wrote the code. This is referred to, for example, in the specification for milestone 1 "Software source for the above, documented sufficiently that a competent C++ programmer could work on it". Tino promised that this documentation would be supplied as soon as the rush for NAB 2012 was over. 7. The allegation that "the contract initially anticipated that the sound engine CMI code would be implemented in firmware on the CC1" is not reflected in the Agreement. That is nonsense. Quoting from the contract: "F.au agrees to produce a software application emulating the sounds and user interface of the Fairlight CMI running on a PC using a CC-1 card". (Cl 13) "FI will own the Fairlight CMI Software application and all its specific source code including elements of the Crystal Core source code". (Cl 22) Furthermore, it would be nonsensical to suggest that there was no expectation that the CMI code would be implemented on the CC-1, as this was the whole objective of using the CC-1. If that was not the intention, then F.au has misled us and the public. It was always the intention that the software would be prototyped using the main computer's processor and when the software was finalised, the sound engine would be ported to the CC-1. I had many discussions about this with Tino, in the presence of several other people who can vouch for the facts. But of course it would be a preposterous argument to say that there was no intention to utilise the CC-1 for the CMI-30A as that was widely promoted as the breakthrough technology which made it all possible. 8. Equally, your claims regarding polyphony are without any foundation. Exact polyphony is not specified in the contract. In any event, polyphony is adequate and well beyond that of the CMIII. The intention was that once the CMI sound engine code was ported to the CC-1, performance would be greatly improved, including polyphony. Tino advised verbally that polyphony of "at least 200 channels will be possible as we get more than that with the mixer". 9. Your purported notice to exercise of rights under clause 19 is misconceived. It also in itself constitutes a breach of the Agreement. Please explain. 10. You do not have the right to provide, let alone any trigger for this "notice". The threat to do so is a breach of the agreement. Please explain. 11. There is no way to assess, reasonably or otherwise, what a commercially reasonable time is because there was never an agreed final specification or listed monthly milestones in place prior to the commencement of development as required by clause 16. That is not true. There were final specification and milestones, although not before commencement of development. Once a milestone and specification was accepted, there was a timeframe quoted and on many occasions these were exceeded by large multiples of time. There is a paper trail for this, although it is long and complex. In any case, failure to provide hardware ordered and paid for resulting in our failure to fill orders is not commercially reasonable. We can argue about the finer points, but I doubt any court would have difficulty agreeing that the delays we have endured (such as the 5 months lateness of the last order of cards) is commercially unreasonable. 12. In any event, FAu has delivered what is agreed within the time agreed from time to time as orders were placed and development undertaken. F.au has NEVER delivered what was agreed within the time agreed. This dates back to the very start of the project, in 2010, when we had a fixed deadline for launch at the 2011 NAMM show. The prototype software promised for this show was not ready in time and we were forced to create a mockup of the software, at a cost of $80,000. Look at any of the YouTube videos of the CMI-30A at NAMM 2011 and you will see that the software being demonstrated was not written by Fairlight.au. E.g. http://www.youtube.com/watch?v=dPiBWfNAriA This photo shows the prototype CMI-30A up against a wall at the show, in disgrace, waiting for software to be completed. The cost incurred due to F.au's failure to deliver on time will form part of the damages we will claim should this matter go to court . … 13. In relation to the iPad/iPhone App, the Agreement provides a licence to use the Fairlight name and brand for the CMI Products. We note that this does not refer to or cover the iPad/iPhone App. That is a breach of the agreement. The agreement does not mention the App. Any claim you may have in relation to the App is unrelated to obligations under the agreement. The app is subject to a separate agreement, made verbally with Tino but the written agreement was never signed off due to F.au's unresponsiveness. 14. The licence also is limited to CMI products. FI has gone well beyond what is permitted. We note that you have used it in your business name and are using it for purposes beyond applying it to products. This is a breach of the Agreement. You can hardly be surprised that we used the word Fairlight in our business name as given that the party with whom you made the agreement is called Fairlight Instruments Pty Ltd. Give me a break. 15. The use of the sound libraries is a blatant and flagrant breach of the agreement. Your argument is not only self-serving but without any merit whatsoever. The use of the sound libraries is a breach of not only the agreement but also FAu's intellectual property rights. The app contains neither hardware nor software of FAu and cannot therefore be marketed as a Fairlight product. Please demonstrate that F.au has any intellectual property rights in the sound libraries. These are a collection of samples which belong to a variety of people, most of who were Fairlight Instruments' customers in the 80s. To the best of my knowledge, copyright in these was never assigned by the owners. Perhaps you can prove otherwise, however in the meantime we did not wish to question their provenance as it is both F.au and F.I's interests that this fiction not be exposed. Incidentally, you will note that the agreement requires F.au to supply F.I. with the sound library. This did not in fact happen. As it transpired, F.au was unable to provide this to use and we ended up buying them from elsewhere and supplying the files back to F.au. Again, we can produce a solid paper trail should you choose to open that can of worms. 16. FAu reserves its rights to a full accounting of all monies or other benefits derived by FI in relation to the use of the sound libraries. For the reasons already given, we challenge your ownership of the sound libraries. For the avoidance of dispute, we were prepared to pay a royalty in spite of our doubts. 17. You have offered a royalty to "remove any uncertainty". Respectfully, this is a disingenuous response to what you clearly appreciate to be a breach of the agreement. As explained above the use of the sound libraries in the App is a separate issue from the Agreement. We offered to pay a royalty as a goodwill gesture. 18. The reason we did not respond is because it was not acceptable. That FAu did not respond to your offer does not mean FAu acquiesced. It did not. I disagree. The fact that you did not communicate non-acceptance for over 15 months after the in-principle acceptance by your General Manager is strong evidence of acquiescence. The fact that F.au gave permission to Laconic Sounds (http://bitley.laconicsounds.net/refills/platinum/) to use the sound libraries without royalty further encouraged us. 19. In this regard, we also note that this application and use of the Fairlight name and brand damages the Fairlight brand and reputation. Please explain how this is so. We would say the truth is quite to the contrary, our app enhances the Fairlight brand and reputation. It has received rave reviews and drawn more positive attention to the Fairlight brand than anything F.au has done in years. 20. [Use of the Fairlight name for the App] is otherwise also misleading and deceptive conduct and a misrepresentation under the Competition and Consumer Act as it suggests an association and endorsement by FAu which does not exist. It also amounts to passing off. This is a breach of the Agreement. Our website's home page includes a statement "Looking for Fairlight.au Pty Ltd (professional audio products)?" and a link to the F.au home page. The "About" page of our website makes it clear that we are not F.au. In any case, please explain how you see this as a breach of the agreement. 21. To compound FI's breaches, you now go so far to asset copyright. Please explain what copyright you assert we assert. 22. We note your assertion that there is no contra deal. We agree with your assertion and reiterate that on that basis, it is clear that FI is significantly indebted to FAu to the value of $161,404 Please provide evidence of this. 23. We also note that FAu otherwise has no liability to FI for the consultancy services provided to FAu by Vogel Ross and Duncan Ross. Please explain what you mean by "otherwise". 24. As to the performance of Vogel Ross and Mr Ross himself, that will be addressed in separate correspondence. For present purposes, it is safe to say that Vogel Ross and Mr Ross have caused significant impairment to the value of FAu's business and by his own admission, Mr Ross has effectively engaged in conduct that puts him in breach of his duties to FAu in contract as well as at law. This is a serious defamatory allegation. Please provide particulars and evidence. 25. The sales pipeline and net asset position of FAu deteriorated whilst Mr Ross was an officer of FAu. Please provide particulars and evidence. 26. The CC1 cards have been returned. If that were the case, why has Tino been reassuring us continuously for months that they will be replaced "soon"? He has told four of F.I.'s employees this from time to time. At no time has he or anyone else said "we've returned them" when asked when they will be returned. This is particularly galling since we went out of our way to help out F.au when they could not supply their customers consoles due to lack of CC1s. Fairlight staff even visited the premises of one of our subcontractors (Alan Galt) and removed one of our CC1 cards from a CMI he was building. Mr Gault has been trying to get that CC1 card back ever since. Tino can verify this, as will Mr Galt. 27. 5 CC1 cards delivered by FAu have not been paid for. This is a breach of the Agreement. Please provide evidence. 28. As FI has not provided sales orders accompanied by payment of deposits. there is no obligation to supply in any event. As you can see from the reconciliation we provided, this is also untrue. 29. We do not know what you mean by software bugs as you have not in your letter provided particulars of these. Further, some of the bugs allegedly advised to FAu amount to feature requests and are not in fact bugs. We have provided two lists; one of bugs which need to be fixed under warranty and and [sic] one of features we would like implemented at our expense. These are in F.au's bugtrack system and Graeme Renaud went through them in detail in person with Tino. Tino did not express any disagreement with our split between bugs and feature requests. 30. The provision of documentation was not part of the Agreement. It is expected that documentation is supplied as part of software developed. It is the industry norm and hence need not be spelled out in the contract. As noted above, documentation was explicitly identified as an element of the deliverables in the detailed specifications. 31. In response to your request for permission to use the Fairlight name in all FI's musical instruments, the answer is no. Noted. 32. Further, other than for product currently provided, by reason of the clear breaches on the part of FI of the Agreement, you are to undertake to immediately cease using the Fairlight name in any way. We reject the assertion of breaches on part of F.I. You have no grounds for terminating the agreement. In any case, you cannot prevent us from using the Fairlight name except in cases where such use may infringe your rights. 33. For the sake of clarity this means you must not: (a) Use the Fairlight name or any derivation of it in relation to any products or services provided by FI We do not agree. You have no right to terminate the agreement. (b) Continue to use the Fairlight name or any derivation of it in relation to the business of FI We have the right to use the name Fairlight Instruments so long as we do not pass ourselves off. (c) Continue to use the Fairlight name or any derivation of it in relation to the iPad app We are considering this request, although it baffles us why you would want to cut off the free publicity F.au gets from the app. (d) Continue to use the Fairlight name or any derivation of it in the name of FI i.e., you must change the name of Fairlight Instruments Pty Ltd We dispute that there is any obstacle to us calling the company Fairlight Instruments. If you have any ground on which you feel you can make this demand, please advise. (e) Continue to use the Fairlight name or any derivation of it in or on any printed or other media including web sites, Facebook pages, Twitter accounts or otherwise. Please explain the grounds on which you make this demand So long as we are not passing off, what obstacle is there to us calling ourselves Fairlight Instruments? 34. Please understand that unless you immediately pay to FAu the sum of $161,404 recovery action will be instituted without further notice. We have provided reconciliation of the amounts paid. Please demonstrate where these calculations are in error to the tune of $200,000? FAIRLIGHT.AU'S OUTSTANDING OBLIGATIONS 35. F.au owes us $43,993.11 as per reconciliation supplied previously. 36. In addition, F.au owes us royalties for the CMI software it has sold as part of its consoles. Please provide a statement of all such sales. 37. F.au must correct software bugs as reported to date, work to commence immediately and to be completed progressively over 30 days. 38. CMI sound engine software to be ported to the CC1 card as originally contracted 39. MADI inputs/outputs to be made to work and MIDI outputs to be made to work 40. F.au must supply professional standard documentation for software already delivered, existing documentation to be delivered immediately and to be completed progressively over 30 days. 41. F.au must supply us CC1/SX12 cards on the agreed commercial terms . YOUR DEMAND TODAY 42. We have received your email today in which you say: "Further, in relation to the previous agreement that existed between Fairlight.Au Pty Ltd and Fairlight Instruments Pty Ltd relating to the CMI30A, we confirm that this has been terminated by our client by reason of various breaches on the part of Fairlight Instruments Pty Ltd of that agreement. We do not accept that the agreement has been terminated. Please particularise the breaches and why you believe these entitle you to terminate the agreement. Accordingly, we are within our rights to continue to use the Fairlight brand and intend to do so. CONCLUSION If each party insists on pursuing what it sees as its rights, there is going to be a lot of money flowing to lawyers and little else will be achieved. F.au will lose our business, the positive spinoff of the good publicity arising from sale of our products, and quite possibly suffer significant damage of reputation when the public sees that the app and the CMI30A have been pulled off the market by F.au. If the relationship comes to an end, F.au will also not be able to sell our software in its consoles. F.I. will suffer significant losses as we have invested over $500,000 in the design of products which we will no longer be able to sell, and will be forced to recover what we can by suing for breach of contract as well as money owing. I have no idea why you have decided to pursue this internecine crusade, but if there is any commercial sense at play at all I suggest you pay us what we're owed (in cash or goods) and let us continue to trade and bring cash and other benefits to F.au. If you're that concerned about the musical instrument market, you could also consider buying the CMI30A and app from us and we'll go our separate ways. We invite you to meet with us in person to discuss these issues in a sincere desire to understand and settle them ahead of more serious escalation of legal action. Please let me know when you'll be in Sydney next. Sincerely, [Signature] Peter Vogel Director 69 This was followed by a letter dated 21 June 2012 from Mr Vogel to Mr Kepper under cover of which he sent Mr Kepper a new statutory demand correcting errors in the statutory demand previously sent. 70 On the same day, Mr Kepper sent Mr Vogel the following email: Good morning Peter, It appears there is some confusion on the part of FI as to the current state of play. For the purpose of clarity this is the current situation: • Fairlight Instruments breached the CMI30A agreement by among things using the brand name well beyond the terms of the agreement. • Based on that and other breaches that agreement was terminated • I offered you a way forward by proposing a new agreement that would enable you to continue purchasing product from FAU • Your response to that offer was a statutory demand for what you consider to be owed to FI • You have ignored FAU's request to stop using its brand name. These actions would indicate you have no real interest in pursuing a new agreement. I have instructed my team to finalise our reconciliation of accounts which will be sent to you within 7 days. Sven Burchartz, KFT's lawyer will be in touch regarding your on-going use of the Fairlight Brand and other issues. You are clearly at liberty to continue manufacturing what ever [sic] products you so desire, however, any attempt to use the Fairlight brand or any proprietary property of Fairlight AU will be met with immediate action. If you still feel there is reason for us to meet and discuss the above I will be in Sydney next week. 71 Fairlight submitted that, by the 30 May letter, Fairlight, as a matter of substance, exercised its rights under cl 6 of the Agreement and withdrew the use of the Fairlight mark, on (at least) the basis that Fairlight deemed the use of the Fairlight mark for Apps to be damaging to the Fairlight Brand reputation. According to Fairlight, it mattered not that the use of the Fairlight mark was for a non-contractual purpose. The right to withdraw the license arose if the Fairlight mark was used "in any way". According to Fairlight, it would be perverse if cl 6 allowed the Fairlight mark to be withdrawn for an authorised use but not for an unauthorised one. That must be right. 72 Fairlight further submitted that the substantive effect of Fairlight having validly withdrawn the use of the Fairlight mark from PVI on 30 May 2012 was that the Agreement was terminated. According to Fairlight, that is because, in circumstances where the use of the Fairlight mark had been withdrawn from PVI, the Agreement had no more "work" to do. The argument proceeded along the following lines. All of the obligations set out in the Agreement hinged upon the licence to use the Fairlight mark for Fairlight branded instruments. The Agreement was fundamentally based around Fairlight licensing the use of the Fairlight mark to PVI for the purpose of marketing the CMI Products. Once the licence to use the Fairlight mark was withdrawn, there was no continuing obligation on PVI to purchase Fairlight custom components, principally because PVI would no longer be packaging, developing manufacturing and marketing Fairlight branded musical instruments. When the right to use the Fairlight mark was withdrawn the obligation on PVI to sell Fairlight branded products also evaporated. Without the licence, the Agreement came to an end. 73 Mr Kepper expressed the view in the 30 May 2012 letter that he thought the use of the Fairlight mark for Apps was damaging its brand. Fairlight submitted that whether Mr Kepper was correct or incorrect in that view is of no moment. Fairlight was entitled by cl 6 of the Agreement to withdraw the licence to use the Fairlight mark in the event that it deemed its use by PVI to be damaging its brand. Provided there were reasonable grounds for Fairlight's view, I would not disagree. 74 Fairlight further submitted that the 30 May letter was a contemporaneous business record. That is not in dispute. Fairlight points out that, to the extent it is relevant, that view was also shared by Mr Fibaek, as is evident from his cross-examination, although, for reasons already mentioned, I attach little weight to Mr Fibaek's evidence. It was also the view that was held by Mr Kathriner, a witness called by Fairlight with experience in marketing. Mr Kathriner testified as to the market to which Fairlight wished to project its image and reputation and considered that an app that disseminated that reputation and branding into a different market was damaging to the market perception of Fairlight's target market, namely, audio engineers and businesses engaged in high-end post-production audio. 75 Fairlight also pointed out that, even though Mr Heberden's view is no substitute for Fairlight's right to form its own view, Mr Heberden's expert evidence suggests that there was a proper basis for the view Mr Kepper expressed in the 30 May letter. 76 The Court was invited to find that, on 30 May 2012, Fairlight validly withdrew the use of the Fairlight mark from PVI pursuant to cl 6 of the Agreement and that the Agreement was, as a consequence, terminated. I accept that invitation and make that finding.

[15]

PVI's Defence to Fairlight's claim 77 At its highest, PVI's defence appears to be that as Fairlight did not take any immediate action to prevent PVI using the trade mark for Apps, it was somehow unfair for Fairlight to insist on its rights as it did on 30 May 2012. However, there is no evidence of any words or conduct by Fairlight which conveyed to PVI that Fairlight would not insist on its strict legal rights, nor that PVI altered its position in reliance on a belief that Fairlight would not do so. On the contrary, the evidence reveals that, as late as January 2012, PVI was still seeking Fairlight's formal approval to use the Apps: see [56] above. PVI only benefitted by its breach of the Agreement, under which Fairlight expressly reserved its rights - rather than relied to its detriment on any representation or conduct. 78 PVI's reliance on acquiescence by Fairlight in PVI's breach of the Agreement or infringement seems to be based on the contention that Fairlight became aware of PVI's intention to use the Fairlight mark for an App on 15 November 2010 during the conversation set out in [43] above, which Fairlight did not prevent at the time, and is therefore estopped from claiming breach of the Agreement or trade mark infringement. 79 I agree with Fairlight's submission that there is no factual basis for such reliance on acquiescence or estoppel. First, there is no evidence that PVI relied to its detriment on any conduct by Fairlight on 15 November 2010. On the contrary, the evidence reveals that PVI profited from developing and selling the Apps: see T Day 5 291.34-293.9 and The Product Road Map referred to thereat. Second, there is no evidence that PVI relied on any conduct by Fairlight on 15 November 2010. During the meeting on 15 November 2010, Mr Vogel demonstrated an App to Mr Fibaek, however, Mr Fibaek says that he did not agree that PVI could pay Fairlight a royalty fee of 1% on gross revenues in return for the right to use the Fairlight logo in relation to the App. Mr Vogel's evidence is that he sought to come to a commercial arrangement allowing him to use the trade mark for Apps. He also made numerous attempts to later negotiate an amendment to the Agreement that would allow him to use the trade mark for Apps, to which Fairlight did not agree. PVI did not rely on Fairlight's conduct as constituting permission to use the trade mark for Apps. Instead, PVI continued to try to enter into a commercial arrangement that would allow it to do so: see Mr Vogel's email to Mr Fibaek of 15 March 2011. Third, there is no evidence that, but for any conduct of Fairlight, PVI would not have used the trade mark for the Apps. Fourth, even if Mr Fibaek's knowledge were attributable to Fairlight, there is no basis to suggest that assent to the conduct could be inferred from Mr Fibaek's mere knowledge. 80 There is no proper basis for the suggestion by PVI that Fairlight elected to affirm the continued use by PVI of the trade mark for Apps, particularly in circumstances where PVI repeatedly requested, and Fairlight did not agree, to vary the Agreement such that PVI could use the trade mark for Apps. 81 In circumstances where Fairlight expressly reserved its right to withdraw the use of the licence at any time under cl 6 of the Agreement, and did not agree to vary the Agreement despite PVI's requests, there is no evidential basis to find that Fairlight acquiesced, elected to affirm or is estopped from alleging breach by PVI of the Agreement or trademark infringement. 82 It follows, in my view, that PVI's defence to Fairlight's claim, must fail.

[16]

Was PVI entitled to a Clause 19 perpetual licence? 83 PVI also makes a claim for what is described as a "perpetual licence". 84 Clause 19 of the Agreement provides as follows: F.au agrees that in the event that it is unable to supply hardware or software as contracted within in a "commercially reasonable time", or if an administrator or receiver is appointed to F.au, Fl is automatically granted an immediate perpetual, royalty-free licence to use anything belonging to or controlled by F.au necessary for Fl to complete the development or manufacturing contemplated by this agreement. This is provided that full payment for any work completed up to that point has been provided by Fl to F.au. 85 PVI asserts, at para 28 of its cross-claim, that it "enjoys perpetual, royalty-free licence to use anything belonging to or controlled by Fairlight necessary for PVI to complete the development or manufacture contemplated by the agreement, including without limitation any trademarks or other intellectual property of Fairlight." 86 The words "including without limitation any trademarks or other intellectual property of Fairlight" do not form part of cl 19. Other difficulties with this cause of action identified by Fairlight are as follows: (1) the clause is poorly drafted, but this much appears clear: the licence is only granted to anything that assists in the completion of the development or manufacturing portion of the agreement. It is not concerned with anything to do with the sale of the product or the use of the Fairlight mark for "marketing purposes" which is the purpose for which the licence, in cl 6, was granted; (2) there is no evidence that, in the circumstance, Fairlight was unable to supply hardware or software "within a commercially reasonable time" whatever this means; (3) the cl 19 licence, even if it was enlivened, which is denied, would only continue so long as the Agreement continued as its purpose was to enable completion of the development or manufacturing "contemplated by this agreement". If the agreement came to an end this licence does not survive such termination as the development or manufacturing contemplated by the Agreement also comes to an end. At that point, cl 19 serves no purpose; (4) if cl 19 extends to and includes intellectual property rights, which it specifically does not address, it is inconsistent with the terms of cl 6, and particularly the right of Fairlight to withdraw PVI's entitlement to use the Fairlight mark. 87 In short, there is no basis for PVI's contention that it was entitled to a perpetual licence to use the trade mark by virtue of clause 19 of the Agreement. 88 It follows that paras 27 and 28 of PVI's cross-claim fail, paras 42-45 of the PVI's legal grounds for relief cannot be accepted and there is no basis for the relief sought by PVI at para 35(b) of the cross-claim. It further follows that Fairlight is entitled to the relief sought at paras 63, 65 and 71 of its claim.

[17]

Has PVI infringed the Fairlight mark in contravention of the Trade Marks Act? 89 Section 20 of the Trade Marks Act relevantly provides: (1) If a trade mark is registered, the registered owner of the trade mark has, subject to this Part, the exclusive rights: (a) to use the trade mark; and (b) to authorise other persons to use the trade mark; in relation to the goods and/or services in respect of which the trade mark is registered. … (2) The registered owner of a trade mark has also the right to obtain relief under this Act if the trade mark has been infringed. 90 Section 120 of the Act relevantly provides: (1) A person infringes a registered trade mark if the person uses as a trade mark a sign that is substantially identical with, or deceptively similar to, the trade mark in relation to goods and services in respect of which the trade mark is registered. … (2) A person infringes a registered trade mark if the person uses as a trade mark a sign that is substantially identical with, or deceptively similar to, the trade mark in relation to: (a) goods of the same description as that of goods (registered goods) in respect of which the trade mark is registered; 91 Section 126 of the Act relevantly provides: (1) The relief that a court may grant in an action for an infringement of a registered trade mark includes: (a) an injunction, which may be granted subject to any condition that the court thinks fit; and (b) at the option of the plaintiff but subject to section 127, damages or an account of profits. … 92 In Bugatti GmbH v Shine Forever Men Pty Ltd (No 2) (2014) 105 IPR 413, Tracey J said: [13] An account of profits is a remedy available to the applicant under s 126(b) of the Act. Such an account is intended to prevent the unjust enrichment of an infringer by reason of its contravention of the Act: cf Dart Industries Inc v Decor Corporation Pty Ltd (1993) 179 CLR 101 at 110-1. The question of present concern is how that account should, on the evidence, be calculated. [14] The applicable principles were summarised by Allsop J in Unilin Beeher BV v Huili Building Materials Pty Ltd (No 2) (2007) 74 IPR 345 at 366 as follows: The infringers should account for the actual profit that they have gained from the infringement. In calculating those profits, it is appropriate to deduct costs directly attributable to selling and delivering infringing articles from the revenue made from such sales and deliveries. It may be appropriate to deduct a proportion of general overhead costs such as plant, equipment and managerial costs. The deduction of such costs depends upon their being shown to have been attributable to the sales, the onus for which demonstration is upon the infringers. 93 Given that the Agreement did not extend the use of the Fairlight mark to Apps (and Fairlight did not enter into any other agreement in relation to the Apps), by using the Fairlight mark for Apps from about 22 March 2011, PVI contravened s 120 of the Trade Marks Act. Consequently, Fairlight is entitled to the relief sought at paras 64, 70, 71, 73 and 74 of its claim. 94 There is expert evidence of Fairlight's damages for breach of its trade mark, which is in the nature of loss of an opportunity by Fairlight to charge for the use of its trade mark in Apps in the amount of $112,000, in the expert opinion of Mr Heberden: Ex 2. Fairlight submitted that that evidence is not contradicted and ought be accepted. 95 However, the evidence as to how much profit PVI made by its misuse of the Fairlight mark in selling the Apps is unclear. PVI's evidence in this respect has been contradictory. Accepting the correctness of Mr Vogel's evidence, the accounting exercise seems straightforward: Mr Vogel says that revenue earned from selling the Apps under the Fairlight name was $132,421, less the cost to develop the Apps of $31,088, totalling $101,333 in net profits made by PVI from its misuse of the Fairlight mark. 96 In the circumstances, Fairlight elected for an account of profits in respect of the infringement by PVI of the Fairlight mark, rather than claiming damages. 97 The Court was invited to conclude that Mr Vogel should be personally liable for the Fairlight mark infringement on the premise that he was the controlling mind and will of PVI, but I am not prepared to make that finding.

[18]

Fairlight's Contentions on the Cross-claim 98 Fairlight contended that the resolution of the cross-claim proceedings was simple. Its arguments can be distilled as follows: (1) the trade mark licence was either conditional or terminable at will. Either way, cl 6 of the Agreement entitled Fairlight to "withdraw" the licence at will if Fairlight considered that PVI was using the Fairlight mark in a way which damaged the "Fairlight Brand reputation"; (2) the trade mark licence did not extend, on any interpretation of the Agreement, to the use of the Fairlight mark in iPhone and iPad apps; (3) Fairlight considered that the use of the Fairlight mark in this unauthorised way damaged Fairlight's brand reputation; (4) Clause 6 conferred a unilateral exercise of discretion upon Fairlight which was exercised properly; (5) in accordance with the express entitlement to withdraw PVI's entitlement to use of the name, in cl 6, Fairlight withdrew the licence and terminated the Agreement by letter dated 30 May 2012; (6) without the entitlement to use the Fairlight mark from 30 May 2012 the utility of the Agreement was eviscerated; (7) Fairlight terminated the Agreement on 30 May 2012 on the basis that PVI's unauthorised use of the trade mark enlivened Fairlight's common law right to do so; (8) even if Fairlight did not validly terminate the contract - which is denied - PVI cannot simultaneously claim both reliance loss and expectation loss flowing from the alleged unlawful termination. It is restricted to claiming expectation losses; (9) in any event, PVI does not satisfy its evidential burden in establishing causal loss. 99 The Agreement hinged upon the operation of the licence. Even though cl 8 of the Agreement noted that PVI would "package, develop, manufacture and market Fairlight branded musical instruments" that entitlement, of course, was wholly dependent upon the licence continuing so that the instruments could be sold with the Fairlight branding. The parties agreed, however, in cl 6 to an express power for Fairlight to withdraw unilaterally the licence on the basis of Fairlight's self-assessment of the effect of PVI's use of that trade mark. That occurred on 30 May 2012. The withdrawal of that licence effectively brought the Agreement to an end. Of course, it did not prevent PVI from continuing to sell computer musical instrument products. It merely prevented PVI from selling them under the Fairlight mark. 100 The termination of the Agreement, which coincided with the withdrawal of the use of the licence, brought to an end Fairlight's future obligations to provide certain components. The gravamen of PVI's complaints, however, focus upon the termination of the Agreement and a range of other allegations. If the Court finds that Fairlight was entitled to withdraw use of the licence, as provided in cl 6, almost all of the cross-claim becomes otiose. 101 Fairlight was given the express entitlement to do so and exercised that right. It has acted lawfully and within its rights. It is difficult to see how PVI can maintain a loss of opportunity to sell products, branded as Fairlight products, when the opportunity to do so was lawfully withdrawn.

[19]

Credit of PVI's witnesses 102 To the extent PVI's cross-claim is based on Mr Vogel's evidence, Fairlight contended that the Court ought not find that Mr Vogel is a witness of truth. It was said that Mr Vogel clearly demonstrated himself to be a person willing to say anything to advance his claim; a number of examples were given. It was said that his evidence is coloured not only by self-interest, but he had convinced himself of matters not supported by the documents or any independent evidence. Again, a number of examples were given. A more serious criticism was that he was incapable of being truthful, for example, in relation to the sound libraries. The issue here was the incorporation by PVI in the Apps that were created of the sound libraries maintained and owned by Fairlight. PVI had no entitlement to use those sound libraries. There was no permission given in the terms of the Agreement or any other agreement to which Mr Vogel could point. Rather, Mr Vogel decided to use the sound libraries as if they were his own plaything. When Mr Vogel was confronted in cross-examination about this he tried to wriggle around the proposition that the sound libraries were obtained from Fairlight. What he told the Court about this was a bare-faced lie. His correspondence, to which he was taken to in cross-examination, put paid to this lie. This was another illustration of Mr Vogel's conduct which demonstrated an unjustified sense of entitlement. 103 A number of other matters were highlighted by Fairlight as reasons why the Court should treat Mr Vogel's evidence with an element of circumspection. He was unable to explain how or why no real orders were placed for most of 2011 and 2012, in circumstances where any of the defaults or deficiencies alleged against Fairlight had no impact upon anyone's ability to order products. Another matter referred to by Fairlight was that Mr Vogel presided over the Information Memorandum being disseminated to the public in an attempt to raise capital for this company. That document actively sought to mislead people into investing into the company. It highlighted Mr Vogel's strategy of capitalising on the exploitation of the Fairlight mark as was evident from the Product Road Map but Mr Vogel well knew at the date he published that document that PVI did not have the right to exploit the very thing that was critical (according to the Information Memorandum) to the future success of the venture. Mr Vogel knew this because one month before, in an email to Mr Fibaek, Mr Vogel conceded this. During cross-examination, Mr Vogel had no sensible answer as to why he made representations that were not true at the time they were made. He testified that he made the presentations based upon expectations that the use of the trademark would be provided but he had no rational, or other, foundation, upon which to base this expectation. According to Fairlight, the better view is that Mr Vogel is and was a person who did not allow issues pertaining to intellectual property and legalities stand in the way of his lofty ambitions. It demonstrates him to be a person who is, at best, recklessly indifferent and, at worst, dishonest. 104 Mr Ross' evidence as a witness was also criticised although not to the same extent. 105 I agree with many of these criticisms but in saying this, the credit of Mr Vogel and Mr Ross is not critical to the outcome of many of the issues raised by PVI's cross-claim. Of far greater importance on analysis of the pleadings as against the facts proved by the evidence, is the lack of the latter to prove the former.

[23]

First Alleged Contractual Default: Deficient Software 111 PVI asserts two main contractual defaults by Fairlight the main being the provision of deficient software including the failure to provide documentation and functions contained in the Agreement. I agree with Fairlight's submission that this part of PVI's cross-claim confronts a number of insurmountable hurdles. (1) the Agreement did not impose the obligations asserted by PVI; (2) there is no evidence which establishes that the software that was developed was deficient; (3) the evidence of what occurred between PVI and its customers speaks loudly about the quality of the product sold by PVI (incorporating the software developed by Fairlight); (4) PVI's payment of the $200,000 to Fairlight is inexplicable if the product being supplied was deficient. 112 Dealing with these matters in order, firstly, the Agreement did not impose the obligations asserted by PVI. PVI has, in its particulars of contractual breaches, asserted "Particulars of Deficiencies". Those "deficiencies" are almost entirely baseless as summarised in the following table: Cross-Claim Assertion Fairlight's answer 16(b) The software requires each copy to be individually licensed by Fairlight, contrary to requirement The Agreement contains no such "requirement". 16(c) The polyphony of the system is limited to 96 whereas the promised performance was at least 200. There was no "promised performance". The contract is silent on this issue. The expression "polyphony" does not appear in the Agreement. 16(d) By convention of the industry, it is an implied term of the development agreement that the software source code should be documented to the usual professional standard. This claim is based on an implied term that is not supported by the evidence. 16(h) The software did not include the required firmware for the CC-1 hardware. There is no express term requiring this. The claim is also based on an implied term that is not supported by the evidence. 16(i) The software did not include functions to make the MADI input and output part of the supplied software function. The Agreement contains no obligation to provide any such function. 16(j) The software did not include functions to make the MIDI output part of the supplied software function. The Agreement contains no obligation to provide any such function.

[24]

113 These claims, as the evidence demonstrates, are based on PVI's belief that the contract should have, or was intended to contain, these requirements. It does not. 114 Secondly, there was no independent evidence that established that the software developed by Fairlight was deficient. PVI does not rely on any expert evidence as to the state of the software developed by Fairlight. Instead, the claim is based solely on opinions and assertions by Mr Vogel which is not borne out by the documentary evidence created contemporaneously. In the absence of an independent expert having proffered to the Court an opinion, the Court has no alternative but to reject Mr Vogel's assertions as to deficiency. 115 Thirdly, PVI sold 14 CMI-30A instruments. PVI seeks to approbate and reprobate. On the one hand the software was good enough to sell the products to third parties yet so deficient as to constitute a breach of contract. PVI's position in this regard is even more difficult to accept by virtue of the fact that there is no evidence at all of any complaint by a customer of PVI, after having purchased a CMI-30A from PVI, as the exchange I had with Mr Vogel reveals: T Day 4, 277, 278. During cross-examination, Mr Vogel attempted to suggest to the Court that he was cognisant of his corporate responsibilities yet told the Court in the same breath that he sold over a dozen CMI-30A's to customers believing they were deficient. I reject this evidence. Mr Vogel would never have shipped deficient product in January 2012. He shipped the product because he considered it was of sufficient quality as to comply with PVI's contractual obligations and has not had a single complaint from the company's customers. 116 Fourthly, and perhaps most significantly of all, is that fact that PVI paid to Fairlight the four payments of $50,000, totalling $200,000, even though he now says that the software was markedly deficient (although PVI was content with it, and delivery of the source code by at least 13 March 2013). No sensible explanation has been given by Mr Vogel as to why this occurred if, as he now contends, what he received was thoroughly deficient. Whatever ex post facto explanation Mr Vogel now advances, most likely from the Bar table rather than by way of evidence (as there is no evidence which satisfactorily answers this point), cannot outflank the facts. PVI paid all the money under the contract. It did so and did not complain about having to do so. It did not pay under protest. It did not pay whilst seeking to reserve its rights. 117 The only available explanation is that the payments were made in exchange for software that PVI was content to pay for. This conduct is also consistent with other contemporaneous events: (1) PVI shipped over a dozen completed CMI-30A's to customers. It would not have done so if the product was deficient; (2) Mr Vogel emailed with Mr Fibaek in March 2012 noting that the project was almost complete save for some source code which was noted by Mr Vogel, in a follow up email, to have been provided; (3) there are no documents where Mr Vogel says that his company would not be making a payment because a particular milestone had not been completed. 118 Fairlight submits that these allegations of deficient product ought be treated as a recent invention advanced to raise a damages claim to counteract the damages/account of profits suit instituted by Fairlight. Whether that is correct or not, PVI's allegations of deficient product have not been made good.

[25]

Second Alleged Contractual Default: Delay 119 Fairlight submits that the allegations of delay were misguided: they proceeded on the basis that the Agreement required Fairlight to deliver to PVI the computer software within four months from the date of execution of the contract pursuant to cl 17. But Mr Vogel conceded in cross-examination - and it was not a fact in contention - that all but one of the documents that needed to be signed by the parties prior to the development of the CMI Software had not been executed by the parties. Mr Fibaek testified that this lack of project specification was the cause of the delay. Neither Mr Vogel nor Mr Ross could gainsay this proposition as hard as they tried. 120 PVI did not comply with the contractual requirements from the get-go in terms of bedding down a specification prior to the project commencing. The documentary and oral evidence establishes that Mr Vogel's sole point of focus was the NAMM Show in Los Angeles in January 2011 yet the First Milestone was only the subject of resolution in November 2010. That Mr Vogel complains that the project was delayed through the fault of Fairlight, and breached by Fairlight's delay, is not established. 121 The true situation was that the First Milestone was agreed three months after the Agreement was executed. It then proceeded in a haphazard and ad hoc fashion as characterised by the following evidence: the emails from Mr Renaud to Mr Fibaek dated 1 May 2012 and 11 May 2012; and the email from Mr Vogel to Mr Bell dated 4 January 2011. 122 PVI cannot establish that the development process occurred in breach of any term of the Agreement. To the extent that as late as May 2012 Graeme Renaud was still requesting changes to the software such as the addition of a MADI input demonstrates that the process of software development was fluid, ongoing and haphazard - which was contrary to the intention manifested in cl 16 of the Agreement. I accept that the party largely responsible for this was Mr Vogel. He was ordering a product from Fairlight. It was his judgement call as to what specifications that product would have. Fairlight was not a company of mind readers. They could only build what the customer wanted and until the requirements and specifications were made clear this process was always going to be shambolic. Mr Fibaek expressed his apparent frustration with this as recorded in the minutes of the Tokyo meeting where the following was recorded: Tino advised it was a mess because the project was badly designed initially and proper development processes were not followed. Tino trying to contain the situation as best he could but project still overshot the budget for time. 123 There is no evidence that establishes that Fairlight was in breach. There is no evidence that Fairlight did not deliver the product within the open ended terms of cl 17 of the Agreement. 124 The claims that Fairlight breached the Agreement or the Sale of Goods Act 1923 (NSW) must fail. Paragraphs 9-22 of the cross-claim fall away, as do the legal grounds for relief set out in paras 36-41 and 47-48 and there is no basis for the relief sought in para 35(d) of the cross-claim.

[26]

Has Fairlight infringed PVI's copyright? 125 PVI's claim that Fairlight has infringed its copyright is difficult to follow, and not supported by any evidence. 126 The claim, as set out in paras 23-26D of the cross-claim is that, since April 2012, when PVI made the final payment due under the Agreement, it became the owner of the copyright in the literary work constituted by the software developed by Fairlight for the purposes of the Agreement. PVI claims that, to the extent Fairlight has sold Sound Design Sampler (SDS) software since April 2012, and has copied it, it has infringed PVI''s copyright in that work, as a consequence of which PVI has suffered loss and damages, which it seeks from Fairlight. 127 In order make a claim for copyright infringement, PVI must first establish that it has the ownership of an original work. The "original" work of which PVI says it is the owner is not clear, apart from the fact that PVI alleges Fairlight has sold SDS software that became owned by PVI after it paid the final milestone payment in April 2012. There is no expert evidence as to what the SDS software is, what it comprises or where it is to be found. 128 To the extent PVI relies on cll 20 and 22 of the Agreement, those clauses seem to contemplate some intellectual property relating to the software transferring to PVI upon payment, but that intellectual property was to be "defined in a separate document". There being no such document, and in particular no such document defining SDS software as the relevant intellectual property, there is no basis for PVI to claim ownership of any intellectual property by virtue of those provisions of the Agreement. 129 PVI has not established that it was the author of the SDS software, or any software the subject of the Agreement. As noted by Yates J in Dynamic Supplies Pty Ltd v Tonnex International Pty Ltd (2011) 91 IPR 488: [47] The relevant legal principles are not in doubt. It is sufficient for me to merely note the following matters of particular relevance to the present case. [48] First, original works emanate from authors. The test for originality is whether the work originated from the author in the sense that it was not copied by the author: Robinson v Sands & McDougall Pty Ltd (1916) 22 CLR 124 at 132-3; Sands & McDougall Pty Ltd v Robinson (1917) 23 CLR 49 at 52; Ladbroke (Football) Ltd v William Hill (Football) Ltd [1964] 1 WLR 273 at 291; Bookmakers' Afternoon Greyhound Services Ltd v Wilf Gilbert (Staffordshire) Ltd [1994] FSR 723 at 731. That question is directed to the thing to which it is said the legislation attributes copyright protection: Desktop Marketing Systems Pty Ltd v Telstra Corporation Ltd (2002) 119 FCR 491 at [92]. In the present case that is the March 2008 CSV file. [49] Secondly, the particular work must be the product of human intellectual endeavour. It must have required some independent intellectual effort or the exercise of sufficient effort of a literary nature for its creation. However, neither literary merit nor novelty or inventiveness as understood in patent law is required in that regard: IceTV Pty Ltd v Nine Network Australia Pty Ltd (2009) 239 CLR 458 at [33] and [48]; [99]. [50] Thirdly, although compilations expressed in words, figures or symbols are plainly literary works in which copyright can subsist, copyright does not protect mere facts, ideas or information contained in a compilation. Copyright protects the particular form of expression that Is the compilation itself: IceTV at [26], [28], [40] and [102]. Thus it is important when assessing the originality of a work for copyright purposes to have regard to the whole of the identified work, rather than to a particular aspect or particular aspects of it viewed in isolation. In particular, one should not confuse the arrangement of a work in a particular form with the individual elements that go to make up that form: Milwell Pty Ltd v Olympic Amusements Pty Ltd (1999) 85 FCR 436 at [19]-[20]; Ladbroke at 277, 285, 290 and 291. [51] Fourthly, a compilation (as with other works of a copyright nature) may be brought into existence by the efforts of more than one individual. In IceTV Gummow, Hayne and Heydon JJ (at [99]) said: Where a literary work is brought into such existence by the efforts of more than one individual, it will be a question of fact and degree which one or more of them have expended sufficient effort of a literary nature to be considered an author of that work within the meaning of the Act. If the work be protected as a "compilation", the author or authors will be those who gather or organise the collection of material and who select, order or arrange its fixation in material form ... 130 If anyone was the "author" of the software developed for PVI pursuant to the Agreement, it was Fairlight, or its employees. One fundamental purpose of the Agreement was for Fairlight to develop software to be used in the CMI-30A. There is no evidence that PVI engaged in original work as the 'author' of any software, let alone the SDS. There is also no evidence as to what the "particular form of expression" of the SDS is (although that is not to suggest that source code cannot be a "literary work"). Consequently, PVI has not established the primary element of a claim for copyright infringement - i.e. that it was the author of an original work in which it can claim copyright. Even if PVI were able to establish that, its claim that Fairlight infringed its copyright would fail. 131 The principles relevant to a claim for copyright infringement were summarised recently by Wigney J in Sports Data Pty Ltd v Prozone Sports Australia Pty Ltd (2014) 316 ALR 475 as follows: Has copyright been infringed? [79] A copyright work is infringed if a person, without the licence of the owner, does or authorises the doing of any act comprised in the copyright: s 36 of the Act. Copyright in relation to a work includes, relevantly, the exclusive right to reproduce the work in a material form: s 31(1)(a)(i) of the Act. Section 14(1) of the Act provides that a reference to reproduction of a work is to be read as including the reproduction of a substantial part of the work. [80] For the purposes of copyright law, the notion of reproduction involves two elements: first, a sufficient degree of objective similarity between the two works; and second, some causal connection between the form of the infringing work and the form of the copyright work: SW Hart & Co Pty Ltd v Edwards Hot Water Systems (1985) 159 CLR 466 at 472. [81] In Ladbroke (Football) Ltd v William Hill (Football) Ltd [1964] 1 All ER 465 at 469, Lord Reid described the elements in the following terms: Broadly, reproduction means copying, and does not include cases where an author or complier produces a substantially similar result by independent work without copying. If he does copy, the question whether he has copied a substantial part depends much more on the quality than on the quantity of what he has taken. [82] The question whether a substantial part of a work has been copied is a question of fact and degree: IceTV [32]. It is necessary to consider not only the extent of what has been copied; the quality of what is copied is critical: IceTV at [30]. Moreover, a fact that is critical to the assessment of the quality of what is copied is the originality of the part which is copied: IceTV at [32]. 132 There is no evidence that Fairlight, without the licence of PVI, reproduced a "substantial part" of any work owned by PVI. 133 Mr Vogel asserted in opening that Fairlight's "EVO" product infringed his copyright - apparently by virtue of the fact that the product had a keyboard in the middle of it. He stated: As we saw in April 2012 the very time at which I was threatening to sue Fairlight because they hadn't finished the project, Fairlight is launching its own product called the EVO which has a keyboard in the middle of it and which I looked at and I said, "Keyboard: musical instrument. Where did you get that software?" Naturally, I suspected that it was using at least some of the software which at that time belonged to me because I had paid for it. I suggested that this was the case . 134 There is no evidence to suggest that the "EVO" product included any software owned by PVI. Despite having pursued numerous remedies to try to obtain information in order to support Mr Vogel's 'conspiracy theories' in these proceedings (to no avail), Mr Vogel has not sought to have an expert inspect the 'EVO' with a view to determining what software it includes. Mr Vogel's assumption that the 'EVO' contains software, which he purports to own, simply from his observation that the 'EVO' had a keyboard is another example of the problems with PVI's case. 135 The claim that Fairlight infringed PVI's copyright in the software developed by Fairlight under the Agreement is devoid of substance. PVI appears to allege that, simply by virtue of the payment of money to Fairlight under the Agreement, it became the owner of the copyright in the 'literary work' constituted by the software developed by Fairlight pursuant to the Agreement. It is well established that a person who reduces a work to a tangible form is the author of the work. There is no evidence of PVI reducing any work to a tangible form such that it is the author of any literary work constituted by the software, nor is there any evidence of Fairlight infringing PVI's copyright in any such work. 136 Further, PVI has elected to claim damages under s 115(2) of the Copyright Act 1968 (Cth) "in respect of such sales and copying", without having put on any evidence of sales or copying by Fairlight, and without having put on any evidence that would allow the Court to award damages suffered by PVI as a consequence of the alleged infringement. 137 The claim against Fairlight for breach of PVI's copyright must fail.

Fairlight.AU Pty Ltd v Peter Vogel Instruments Pty Ltd

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Judgment (30 paragraphs)

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Legislation Cited (6)

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