Funtastic Limited (ACN 063 886 199) v MGA Entertainment

Federal Court of Australia|2010-04-16|Before: Gordon J

REASONS FOR JUDGMENT 1 By notice of motion filed on 1 April 2010, the applicant, Funtastic Limited (ACN 063 886 199) (Funtastic) seeks leave pursuant to O 8 r 3(2) of the Federal Court Rules to serve on the respondent (MGA), in Hong Kong by private agent in accordance with the laws of Hong Kong, the application and fast track statement filed by Funtastic in these proceedings. 2 Funtastic is an importer, distributor and wholesaler of children's toys and related products. MGA is a company incorporated under the laws of Hong Kong and is a manufacturer and exporter of children's toys and related products. 3 Before turning to the notice of motion, it is necessary to understand the factual context and procedural history of this matter. In general terms, the dispute between Funtastic and MGA concerns a distribution agreement the parties entered in January 2004 (which Funtastic alleges was amended on 2 December 2004, 1 June 2006 and 1 January 2007) (the Distribution Agreement) for the distribution of "Bratz" dolls and related products manufactured by MGA (the Products). Clause 16(d) of the Distribution Agreement provides that it is governed by the laws of the State of Victoria and that any claim, dispute or disagreement in respect of the Distribution Agreement may only be brought in the Courts of the State of Victoria or the Federal Courts within Australia, which Courts shall have exclusive jurisdiction. 4 Under the Distribution Agreement: 1. MGA appointed Funtastic, until 31 December 2011, the exclusive distributor of the Products in Australia and New Zealand: cll 1(c) and 2, as amended; 2. Funtastic paid to MGA an advance of $20,000,000.00, which was defined in the Distribution Agreement as the "Purchase Deposit" (cl 5(a), as amended), being a reflection of, and advance payment for, the estimated amount of monies expected to become payable by Funtastic to MGA for purchases of the Products in the years 2007 to 2011: cll 5(a) and (b), as amended; 3. Funtastic was required to pay quarterly fees to MGA, subject to the proportion of the Purchase Deposit referrable to each year being exceeded: cl 5(b), as amended; 4. MGA warranted that importation of the Products, and storage, distribution, promotion, advertising, marketing and sale of the Products by MGA, did not constitute an infringement of any intellectual property rights vested in any third party: cl 11(a)(i); 5. MGA warranted that it had all necessary rights, power, legal capacity and authority to enter into the Distribution Agreement, carry out its terms and perform its obligations under the Distribution Agreement: cl 11(a)(iv). 5 On 3 December 2008, the United States District Court for the Central District of California made a declaratory judgment that Mattel Inc owned all right, title and interest, including any and all copyrights, in and to the "Bratz" branded products, which includes the Products, and further declared that MGA did not have any right, title or interest in or to the works, ideas and / or concepts of the "Bratz" branded products, which includes the Products: see Bryant v Mattel, Inc. (C D Cal, Civ No 04-09059, 04-9049-SGL, 05-2727, 3 December 2008) (the Declaratory Judgment). 6 Funtastic submits that the warranties in the Distribution Agreement (see [5(4) and (5)] above) constituted representations to the effect that the Products would not infringe the intellectual property rights of a third party, and that such representations were false and / or misleading or deceptive. On or about 12 August 2009, MGA stated that it would not supply the products to Funtastic under the Distribution Agreement after 31 December 2009. On 23 October 2009, Funtastic alleges that it accepted MGA's repudiation and elected to terminate the Distribution Agreement on 31 December 2009. Funtastic further requested repayment of $8,800,000.00, being that part of the Purchase Deposit that it had paid for 2010 and 2011. MGA has not repaid to Funtastic any part of the Purchase Deposit. 7 On 29 March 2010, Funtastic filed a Fast Track Application which pleaded four causes of action. First, Funtastic alleges that the Distribution Agreement contained a number of assurances in the form of warranties as to MGA's intellectual property rights in the Products and that those warranties were misleading or deceptive in contravention of s 52 of the Trade Practices Act 1974 (Cth) (the TPA). Funtastic alleges that the misleading representations included conduct that occurred in Australia. Secondly, Funtastic alleges that MGA breached the warranties to the effect that the Products would not infringe the intellectual property rights of a third party. 8 Thirdly, Funtastic alleges that MGA repudiated the Distribution Agreement when it stated in the 12 August 2009 letter that it would not supply the Products to Funtastic after 31 December 2009. Alternatively, Funtastic alleges that as a result of the Declaratory Judgment and the application of Pt 2C of the Fair Trading Act 1999 (Vic), the Distribution Agreement has been frustrated and it seeks repayment of $20,000,000.00 made by Funtastic to MGA.

Service Outside of the Jurisdiction 9 The procedures governing service of originating processes outside of the jurisdiction are well established. Order 8 r 3 of the Federal Court Rules provides: (1) Service of an originating process on a person in a foreign country is effective for the purpose of a proceeding only if: (a) the Court has given leave under subrule (2) before the application is served; or (b) the Court confirms the service under subrule (5); or (c) the person served waives any objection to the service by entering an appearance in the proceeding. (2) The Court may give leave to a party to serve an originating process on a person in a foreign country in accordance with a convention or the law of the foreign country, on such terms and conditions as it considers appropriate, if the Court is satisfied that: (a) the Court has jurisdiction in the proceeding; and (b) the proceeding is of a kind mentioned in rule 2; and (c) the person seeking leave has a prima facie case for the relief claimed by the person in the proceeding. (3) The evidence on an application for leave under subrule (2) must include the following: (a) the name of the foreign country where the person to be served is or is likely to be; (b) the proposed method of service; (c) a statement that the proposed method of service is permitted by: (i) if a convention applies -- the convention; or (ii) in any other case -- the law of the foreign country. (4) Nothing in this rule prevents the Court from giving leave to a person to give notice, in a foreign country, of a proceeding in the Court on the basis that giving the notice takes the place of serving the originating process in the proceeding. … 10 Order 8 r 2 provides that "an originating process may be served on a person in a foreign country in a proceeding which consists of, or includes, any 1 or more of the kinds of proceeding mentioned in the following table …": Item Kind of proceeding in which originating process may be served on a person outside Australia 1 Proceeding based on a cause of action arising in Australia 2 Proceeding based on a breach of a contract in Australia 3 Proceeding in relation to a contract that: (a) is made in Australia; or (b) is made on behalf of the person to be served by or through an agent who carries on business, or is resident, in Australia; or (c) is governed by the law of the Commonwealth or of a State or Territory; in which the applicant seeks: (d) an order for the enforcement, rescission, dissolution, rectification or annulment of the contract; or (e) an order otherwise affecting the contract; or (f) an order for damages or other relief in relation to a breach of the contract … 11 Proceeding based on a breach of a provision of an Act that is committed in Australia 12 Proceeding based on a breach of a provision of an Act (wherever occurring) seeking relief in relation to damage suffered wholly or partly in Australia 13 Proceeding in relation to the construction, effect or enforcement of an Act, regulations or any other instrument having, or purporting to have, effect under an Act

APPLICATION OF LEGAL PRINCIPLES TO THE FACTS 11 Two requirements must be satisfied - that Funtastic has established a prima facie case for service of the originating process outside of the jurisdiction and, secondly, that at least one of the claims falls within one of the items in the table in O 8 r 2. 12 Funtastic filed an affidavit sworn on 1 April 2010 by its solicitor, Alexander William King, which in my view establishes a prima facie case for the service of the originating process outside of the jurisdiction: Anabelle Bits Pty Ltd v Fujitsu Ltd (No 3) [2009] FCA 1089 at [51]; WSGAL Pty Limited v Trade Practices Commission (1992) 39 FCR 472 at 476 and Merpo Montassa Limited v Conoco Specialty Products Inc (1991) 28 FCR 387. 13 Exhibited to the King affidavit was a copy of the following documents: 1. the Distribution Agreement and the amendments to that agreement; 2. the Declaratory Judgment; 3. the 12 August 2009 letter: see [6] above; and 4. the 23 October 2009 letter: see [6] above. 14 The allegations concerning the Distribution Agreement directly concern identified clauses in that agreement, the Declaratory Judgement and the correspondence listed in [13] above. The terms of those documents are before the Court and establish a prima facie case against MGA of the kinds alleged by Funtastic in its application and fast track statement: see [7] and [8] above. The evidence does more than " … disclose … in a little detail what the facts are": Merpo 28 FCR 387 at 390 quoting Sheppard J in Stanley Kerr Holdings Pty Ltd v Gibor Textile Enterprises Ltd [1978] 2 NSWLR 372. 15 In relation to the second element, in my view one or more of those claims (see [7] to [8]) falls within items mentioned in the table in O 8 r 2. The substance of those causes of action (item 1) arose in Australia: Distillers Co (Bio-chemicals) Ltd v Thompson [1971] 1 NSWLR 83 at 90; Webster Computer Systems Pty Ltd v Fujitsu Ltd [2007] FCA 825 at [13]; Anabelle [2007] FCA 1190 at [13]-[15]. 16 Further, the Distribution Agreement is governed by the laws of the State of Victoria and contains an exclusive jurisdiction clause: cl 16(d). Any claim, dispute or disagreement in respect of the Distribution Agreement may only be brought in the Courts of the State of Victoria or the federal courts within Australia. The claims in relation to the Distribution Agreement (see [7] and [8] above) would satisfy item 3 mentioned in the table in O 8 r 2 because the relief sought includes a declaration that the Distribution Agreement has been validly terminated and damages for breach of contract, as well as repayment of an advance payment of A$20,000,000.00 made by Funtastic to MGA due to frustration of the agreement. These claims may satisfy other items in the table but it is unnecessary to address those issues. Leave may be granted if any one of the causes of action falls within an item in the table to O 8 r 2: Australian Competition and Consumer Commission v April International Marketing Services Pty Ltd [2009] FCA 735 at [14]. 17 In addition, the claims under the TPA that MGA has engaged in misleading or deceptive conduct in contravention of s 52 of the TPA, and the claim for damages in respect of that conduct, satisfy item 13 in the table: see April International Marketing Services [2009] FCA 735 at [14]. Again, those claims may satisfy other items in the table but it is unnecessary to address those issues.

LOCATION OF THE RESPONDENT AND METHOD OF SERVICE 18 Service must be effected in accordance with the laws of the foreign country: see [9] above. The King Affidavit identified the location of the registered office of MGA in Hong Kong. In accordance with Practice Note CM 12 issued by the Chief Justice on 25 September 2009 entitled "Service of Documents Outside Australia", the King Affidavit also exhibited the Country Fact Sheet for Hong Kong published by the Attorney-General's Department as to the appropriate method for transmitting documents for service in Hong Kong. That Fact Sheet states, inter alia, that service of foreign court process in Hong Kong by private agent does not breach Hong Kong Special Administrative Region law and is not considered by Hong Kong Special Administrative Region to be a breach of its sovereignty.

CONCLUSION 19 For those reasons, I would make the following orders: 1. Pursuant to Order 19 rule 4 of the Federal Court Rules, the applicant be granted leave to dispense with service on the respondent of the notice of motion filed on 1 April 2010 and for hearing of that notice of motion to proceed ex parte in the absence of the respondent. 2. Pursuant to Order 8 rule 3(2) of the Federal Court Rules, the applicant be granted leave to serve on the respondent in Hong Kong by private agent in accordance with the laws of Hong Kong: (a) the application filed in this proceeding on 29 March 2010; (b) the Fast Track Statement filed in this proceeding on 29 March 2010; (c) these Reasons for Decision; (d) Practice Note CM 8 - Fast Track; and (e) a copy of these Orders. 20 Assuming service on MGA can be effected reasonably promptly, I will list the matter for a scheduling conference at 11:00am on 21 May 2010. I will reserve the costs of the notice of motion. I certify that the preceding twenty (20) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Gordon.

Fair Trading Act 1999(Vic)

Federal Court Rules Trade Practices Act 1974(Cth)

Trade Practices Act 1974(Cth)

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