Hanfstaengl v W H Smith

BACKGROUND On 24 July 1998 I dismissed the patent infringement claim, upheld the copyright infringement claim, and invited the parties to make written submissions as to · the relief that should be granted on the copyright claim, in particular as to how damages, if any, should be assessed · the appropriate orders to be made on the revocation cross‑claim · costs. Written submissions on those topics were filed and exchanged. These reasons deal with those submissions. COMPENSATORY DAMAGES Australian market In its written submissions MJA claimed compensatory damages on two bases. The first was for the loss resulting from SCJ's early entry into the Australian market. The second was for loss of the opportunity to exploit the United States market. As to the local market, it was said that SCJ's deliberate copying of MJA's literary work gave it an early entry through image registration. Had SCJ not obtained early entry, MJA would have had the total market to itself for longer than it had. MJA claimed that but for the copying SCJ would not have been able to enter the market until the 1996/1997 season. On a total market size of 215,500 units in 1995, 119,700 in 1996 and 77,800 in 1997, MJA said it would have had the benefit of all those units in the first two years, and 67.8 per cent of the 1997 units (a market share of 32.2 per cent being attributed to SCJ in the 1996/997 season, the share it had when it first entered the market). MJA's actual sales in the three years were 146,000 units (1995), 59,400 units (1996) and 38,600 units (1997). The lost sales were thus 143,950 units overall. Since MJA's gross margin was 64 cents per unit, its loss of gross margin due to loss of sales was $92,128. A comparable calculation was done assuming that SCJ had "legitimately" entered the market in time for the 1995/1996 season. This produced a loss of $58,406. An alternative case was based on an assumed market size of 215,500 units in each of the three years. Assuming SCJ had not entered the market until the 1996/1997 season, this produced claimed MJA sales of 577,109 units and a loss of $213,190. Assuming it had entered in time for the 1995/1996 season, claimed sales were 361,609 units and the loss $99,974. The trial commenced on 5 May 1998. On 30 April 1998 MJA's Outline of Submissions was filed and served on SCJ. In it MJA claimed compensatory damages for copyright infringement of $3,309,704. This was the figure that appeared in the report attached to Mr O'Dwyer's affidavit of 6 June 1997. The amount was made up of loss of the Australian market ($1,583,704), American market loss ($1,473,000) and other loss ($253,000). These figures were amended in the course of Mr O'Dwyer's evidence at the trial, but nothing turns on that. I have described Mr O'Dwyer's reasoning in my earlier judgment. The basis of his assessment of the Australian loss was the complete loss of market over time. MJA expanded its submission on compensatory damages in the Outline of Argument handed up when the trial began. It still claimed $3,309,704. The argument in the Outlines can be summarized as follows: · In assessing damages it would be wrong to regard the market as having peaked when SCJ entered in September 1994. It was a developing market. · It was therefore inappropriate to adopt actual sales figures as a measure of MJA's loss. One should extrapolate the trend established before SCJ entered the market and assume that the MJA market was maintainable at a level of at least 230,000 units per annum. It was therefore appropriate to calculate the future cash flow in Australia on the basis that the future maintainable earnings represented a reliable income stream. · It was reasonable to assume that $1.35 per unit was a reasonable gross profit. · SCJ's approach took no account of the likelihood that SCJ's conduct was designed to drive MJA out of the market. The April and May Outlines thus reflected Mr O'Dwyer's loss of market thesis. His calculation of $1,583,704 is based on 230,000 units per year and a gross profit per unit of $1.35. The report containing this calculation and the details supporting it had been in SCJ's hands for nearly a year before the trial. SCJ's own evidence was led in response to Mr O'Dwyer's evidence. Its cross‑examination was designed to impugn his total loss of market thesis. Mr O'Dwyer's evidence was discredited in cross‑examination, as I have explained in my earlier reasons. Even after this cross‑examination, in closing submissions MJA still sought compensatory damages as calculated by Mr O'Dwyer and based on the copyright infringement having destroyed the market. The case now put forward by MJA is no longer the total loss of market over time, but loss caused to MJA by SCJ's early entry into the market. Mr O'Dwyer has of necessity been put aside and a fresh claim made for damages ranging from $58,406 though $92,128 and $99,974 to $213,190. This was not the case SCJ was called upon to meet. The assumptions on which the new claim is constructed, and the calculations and projections supporting it, would have been the subject of relevant expert evidence had it been propounded before and at the trial. MJA's evidence would have been the subject of cross‑examination. The significance of the cross‑examination of experts in the present case is shown by the way in which Mr O'Dwyer's evidence was discredited. To allow a claim based on evidence that was not tested, because it was not relevant to the way the case was mounted, would be unjust to SCJ. Had I allowed MJA's fresh claim to be pursued, I would have rejected it. In order to explain why, it is necessary to describe the image registration process. When preparing for the launch of a new insecticide product, approval for the packaging copy must be obtained from the National Registration Authority ("NRA"). Without that approval the product cannot be sold in Australia. The NRA is established by the Agricultural and Veterinary Chemicals (Administration) Act 1992 (Cth). The NRA administers the Agvet Code which, as appears from my earlier reasons, is a schedule to the Agricultural and Veterinary Chemicals Code Act 1994 (Cth). Howard Barton was an insecticide category manager responsible for developing SCJ's Raid Roach mat packaging. He gave evidence that it can take up to nine months to obtain NRA approval. This makes it difficult to meet key production and trade deadlines. Supermarket chains have strict requirements as to when new products must be available. Insecticide products must be available by the end of August or early September or they will not be included in the chain's range of products during the critical summer period. Mr Barton said that in 1994, when SCJ was dealing with the NRA in relation to its mat packaging, approval was more rapidly obtained if pack copy was substantially similar to that of already registered products, which are called "referenced products". The process is known as registering by imaging. If NRA approval is required urgently, imaging is undertaken to obtain the approval as soon as possible. Chapter II‑10 of the NRA's Interim Requirements for the Registration of Agricultural and Veterinary Chemical Products (June 1993) dealt with "Image Products". An image product was defined as an end‑use product whose formulation is closely similar to that of an agricultural or veterinary chemical product currently registered in Australia (the referenced product). The proposed product must closely match the composition and functional features of the referenced product in the following ways: · active constituent(s) should be the same, be in the same concentration(s), and have the same isomer, sub‑unit or polymorph ratio (where applicable); · composition of non‑active constituents (or their comparable equivalents) should be in similar proportions, or should have similar formulation and toxicological characteristics; · control/efficacy claims and patterns of use, or part thereof; · dose rates/use levels and methods of application or administration; · other directions for use and safety precautions; · label limitations. The text went on to say that an image product could differ from the referenced product only in the following ways: · making fewer control/efficacy claims; · the manufacturing sources of the active constituents may differ, provided the proposed sources have either been approved, or meet approved compendial standards; · the concentration of the active constituent(s) may vary within ±5% of those used in the referenced product. Steven Jansen, a category manager with SCJ, gave evidence about the time taken to obtain NRA registration. So long as the active ingredients of the product for which registration is sought are the same as those of a product currently in the market, and the manufacturer makes no performance claims wider than those of the image product, the average time for approval of an image registration is three months. Where the active ingredients of the new product are the same as the image product, but more expansive claims are made, the average time is five months. Where the mix of active ingredients in the new product differs from those in the image product the average time is eight months. Where a totally new active ingredient is used in the new product, the average time is fifteen months. Mr Jansen also said that apart from mandatory health warnings and disposal requirements, the directions for use of a new product are up to the applicant for registration. The fact that the applicant's directions for use are different from those of the image product is not an impediment to image registration. Mr Barton said that in his experience of handling approximately ten new product (non‑image) applications and ten image applications, the average time for the former was about nine months and for the latter between one and two months. Image registration is common. In the period 1995 to 1997 approximately a third of all applications were image applications. MJA's argument was that but for copyright infringement SCJ would not have obtained NRA registration in less than sixteen to eighteen months. On the evidence of Mr Jansen and Mr Barton I would have found that SCJ's use of MJA's directions had no significant bearing on the time at which SCJ would have obtained image registration and lawfully entered the market. The only time saved by not formulating its own directions (or further modifying MJA's) was the time it would have taken to do that. On Mr Jansen's evidence, which I accept, it would have taken a day for someone to write new directions that were not a substantial reproduction of MJA's directions. MJA's submissions misunderstand the NRA registration process. The evidence was that an image application took between one and three months (Mr Barton between one and two and Mr Jansen about three). According to MJA a non‑image application would have taken between sixteen and eighteen months, and according to SCJ between nine months (Mr Barton) and fifteen months (Mr Jansen). The difference is of no moment, because SCJ would not have had to make, and would not have made, a non‑image application if it had had to invent its own directions for use. For those reasons I would have dismissed MJA's claim for damages for loss caused by SCJ's early entry into the Australian market. American market MJA's case under this head is that in 1994 it was in the process of addressing the potential of the US market. It had to desist because SCJ diminished the value of MJA's copyright rights in the US by its conduct in Australia. MJA had to defend its existing market, and thus was unable to compete in the US market. Had MJA obtained NRA approval for registration "in circumstances other than by image registration", MJA would have had the opportunity to exploit the US market. As a result of SCJ's early entry into the Australian market, MJA lost a valuable commercial opportunity to licence its copyright rights in the US. Reference was made to The Commonwealth v Amann Aviation Pty Ltd (1991) 174 CLR 64. MJA asserts that it could have obtained a royalty of 2.5 per cent for the licence of "the MJA product, including the mats and the copyright". MJA's valuation of the chance it lost to exploit its copyright "as a separate right to the licence of the technology" appears in the following table of possibilities. Total Market Probability of Success Market for Royalty Royalty Rate Lost Market Proportion Income $84M 7% 50% $2.94M 1.50% $44,100 $84M 7% 50% $2.94M 1.00% $29,400 $84M 7% 50% $2.94M 0.75% $22,050 $84M 7% 30% $1.76M 1.50% $26,400 $84M 7% 30% $1.76M 1.00% $17,600 $84M 7% 30% $1.76M 0.75% $13,200 $84M 7% 20% $1.18M 1.50% $17,640 $84M 7% 20% $1.18M 1.00% $11,800 $84M 7% 20% $1.18M 0.75% $ 8,850