Stunning Enterprises Pty Ltd (ACN 103 354 767) v QIE Pty Ltd

REASONS FOR JUDGMENT ON COSTS FOLLOWING CONSENT ORDERS Introduction 1 The applicants in these proceedings claim against the respondents alleging causes of action arising under the Trade Marks Act 1995 (Cth), the Trade Practices Act 1974 (Cth), the Fair Trading Act 1987 (WA) and for passing off at common law. The application did not go to a hearing as the matter has been settled. The basis of the settlement is reflected in consent orders which represent a substantial capitulation by the respondents to the claims of the applicants. The question of costs has been reserved for judgment. For the reasons that follow the respondents, in my opinion, should pay the applicants' costs of the application. Procedural History 2 On 29 March 2004, Stunning Enterprises Pty Ltd ('SEP') and Kepeng Corporation Pty Ltd ('Kepeng') commenced proceedings in this Court against QIE Pty Ltd ('QIE'), Peter Thomas McDougall and RotorWay Helicopters Victoria Pty Ltd ('RHV'). 3 In a statement of claim filed with the application the applicants alleged that, from 4 April 2002, Kepeng was the exclusive licensee for the distribution in Western Australia and the Northern Territory of RotorWay helicopters and for the use of the trade mark 'RotorWay'. The licence was said to have been granted by RotorWay International Inc. ('RotorWay International') a company incorporated in the United States which manufactures and sells RotorWay helicopters. A licence covering the whole of Australia was said to have been granted to Kepeng in August 2002. In April 2003, Kepeng gave SEP an exclusive sub-licence for the distributorship of the helicopters and the use of the trade mark throughout Australia. Kepeng and SEP say that they made extensive use of the trade mark and that they have acquired a large and valuable reputation throughout Australia as exclusive distributors of RotorWay helicopters. 4 On 26 August 2002, Kepeng granted to Mr McDougall a dealership for the sale of RotorWay helicopters in Victoria, South Australia, Tasmania and the Australian Capital Territory. On 2 March 2004, Kepeng and/or SEP terminated the agreement. They alleged that QIE and Mr McDougall purported to register the RotorWay trade mark on the Register of Trade Marks with effect from 2 March 2003. They also incorporated RHV on 20 March 2003. Moreover, and without permission from Kepeng and SEP or from Rotorway International, QIE and Mr McDougall purported to register a domain name in the name of RHV. Mr McDougall and his companies were allegedly not entitled to do any of these things. 5 According to the statement of claim, a letter of demand was sent by QIE on 16 March 2004 to the applicants asserting ownership of the trade mark and demanding that SEP and Kepeng cease its use. 6 SEP and Kepeng claimed relief under the Trade Marks Act, alleged misleading or deceptive conduct under the Trade Practices Act and/or the Fair Trading Act and passing off at common law and claimed relief accordingly. They also claimed interlocutory relief. Programming directions were given on 20 April 2004. At that time there was no appearance from the respondents. Further programming directions were made on 30 April 2004. 7 By 7 May 2004 the proceedings had been settled save as to costs and the following orders were made by consent: '1. The First, Second and Third Respondents and each of them, whether by themselves or by their directors, agents or employees: (a) are hereby restrained, after 31 May 2004, from making use of the word ROTORWAY as a trade mark in connection with any business involving the sale or servicing of helicopters without the licence of the Applicants or RotorWay International of 4140 West Mercury Way, Chandler, Arizona, USA ('RotorWay International'); (b) are hereby restrained, after 31 May 2004, from using the word ROTORWAY in such a way as to imply or represent in trade or commerce, without the prior licence or written approval of RotorWay International, that the First and/or Second and/or Third Respondents, any business carried on by any of them and/or services offered by any of them have the sponsorship, approval or affiliation of RotorWay International, or are in any way associated with the business, products or services of the First and/or Second Applicant and/or RotorWay International; (c) are hereby restrained, after 31 May 2004, from using the word ROTORWAY in such a way as to constitute a passing off of any business of the First and/or Second and/or Third Respondents as that of the First and/or Second Applicant. 2. By 31 May 2004, the First Respondent shall assign the Australian Trade Mark 945547, ROTORWAY, to RotorWay International. The Applicants shall prepare the assignment documentation and deliver the same to the First Respondent by 21 May 2004, record the assignment at IP Australia and bear all cost associated with the assignment. 3. By 31 May 2004, the Third Respondent shall take all steps necessary to change its company name to a name not including the word 'ROTORWAY'. 4. By 31 May 2004, the Third Respondent shall transfer the domain name to the Second Applicant, subject to the Second Applicant being eligible to hold the domain name in accordance with .au Domain Administration Ltd's ('auDA') eligibility and allocation rules. The Second Applicant shall prepare the necessary transfer documentation and deliver the same by 21 May 2004 to the Third Respondent for execution and shall thereafter attend to the recording of same by the Registrar of auDA, and shall bear all costs associated with the transfer. In the event that the Second Applicant is not eligible to hold the domain name in accordance with auDA's eligibility and allocation rules, the Third Respondent shall forthwith take the necessary steps to alter the domain name to one which does not include any reference to the word 'ROTORWAY'. 5. The directions hearing in these proceedings be adjourned to 1 June 2004 at 2.30pm. 6. The issue of costs be reserved to the directions hearing at which time the parties are invited to make submissions on that issue.' Evidence Relating to Costs Question 8 Affidavits and written submissions relevant to the question of costs were filed and oral argument heard on 1 June 2004. 9 Mr McDougall swore an affidavit on 27 May 2004 setting out the history of his interest in and association with RotorWay helicopters which dates back to early 1982. In that year he wrote to RotorWay International and obtained a general information pack. He purchased a full set of construction drawings for evaluation. Later that year he inquired about whether RotorWay International had an Australian agent. It did not. Over the next five years he discussed with RotorWay International's sales manager the possibility of undertaking a dealership. He did not then pursue an agency arrangement because of difficulties with the Civil Aviation Authority ('CAA'), as it was then known, in obtaining a permit to import and sell the helicopters in Australia. 10 Mr McDougall formed a group called RotorWay Helicopters Association of Australia which lobbied for the law to be changed to allow the importation of RotorWay kit helicopters. The Civil Aviation Safety Authority ('CASA'), as the CAA had become, agreed to the importation of RotorWay helicopters into Australia in 1989 in order to commence a certification process. This process was carried out by a company called Radial Aircraft Engines ('RAE') which became the first Australian agent for the helicopters. 11 Mr McDougall purchased his first Rotorway kit helicopter in November 1991 through RAE. He assembled the helicopter and in 1992 publicised it on behalf of RAE at air shows throughout Australia. He was not paid for this work but RAE supplied him with some discounted RotorWay parts and accessories and discussed the possibility that he could become an official RotorWay agent to service Southern Australia. 12 The first permit to fly a RotorWay helicopter in Australia was issued by CASA on 8 April 1993 for Mr McDougall's helicopter. He then started up an interest group called RotorWay Owners/Builders Assistance Group to bring RotorWay owners and other interested people together to support each other in their pursuit of purchasing, building, maintaining and safely flying RotorWay helicopters. 13 In May 1993, Mr McDougall said he commenced servicing and maintaining RotorWay helicopters initially for himself and other members of the Owners' Group in Victoria but later for owners in other States of Australia. He has amassed more than 600 hours flying RotorWay helicopters and has performed Australia's highest recorded RotorWay landing and climb out fully loaded in snow conditions above 5,600 feet. He was Australia's first private pilot to build and fly a RotorWay helicopter in the general aviation category and has tested and flown a number of newly built RotorWay craft. 14 In August 2002, Mr McDougall received a telephone call from the Vice President of Sales at RotorWay International, Mr Brent Marshall, informing him that Mr Kevin Lunn and his wife, Enid, had been appointed as Australian agents for RotorWay helicopters. Mr McDougall did not know anything about them. Mr Marshall, told him that the Lunns were looking to appoint dealers for various States of Australia and invited him to become a RotorWay dealer. He suggested he contact Mr Lunn to progress the matter further. Mr McDougall visited Mr Lunn in Perth in August 2002. He subsequently received an email from Mr Lunn setting out the terms of a RotorWay dealership under which he would be responsible for Victoria, South Australia, Tasmania and the ACT. The dealership was for a five-year term with an option to extend. 15 Mr McDougall said that, between August 2002 and March 2004, he invested significantly in further building and developing the RotorWay brand in Australia. He constructed a show room and workshop facility for his RotorWay operations and concentrated all his activities on developing the business at the expense of his quality inspection services business which was provided by QIE. He said: 'I was also keen to ensure that the ROTORWAY stylised mark was properly protected and decided to lodge an application to register it as a trademark. My search in early 2003 of the online Australian Trade Mark Register showed that Rotorway International or any of its agents had not registered the mark. I filed the application on 2 March 2003 in the name of QIE.' 16 He incorporated RHV on 3 March 2003 and registered the domain name on 24 April 2003. He said that during the course of his RotorWay dealership he remained on good terms with RotorWay International and received assistance, parts and advertising materials from them directly. In August 2003 he received from RotorWay International its logo which is the stylised mark 'RotorWay' for his use. 17 On 25 June 2003, Mr McDougall received an email from Kevin Lunn purporting to vary the terms of the agreement. Mr McDougall was unhappy about the email because it imposed additional obligations and restrictions on him and, in his view, sought to deprive him of the certainty of the level of income he would receive by not maintaining the margins for the initial two year period as previously agreed. He said that Mr Lunn also implied in the email that his pilot's licence was not in order. This, he said, was untrue. Mr McDougall's relationship with the Lunns deteriorated between June 2003 to March 2004 culminating, he said, in a serious dispute concerning the suitability of some rotor blades which Mr Lunn hand delivered to him in February 2003. 18 In February 2004, Mr McDougall sent a fax to RotorWay International and asked them to reconsider their business structure in Australia and to appoint him as their agent for the Eastern States. He did not get a response to that fax until 11 March 2004. In the meantime, on 1 March 2004 he received an email from Kevin Lunn purporting to terminate the agency agreement which they had entered into. He said he did not believe that Mr Lunn had the right to terminate the agreement as his appointment had been at the instigation of RotorWay International and awaited clarification from that company. However, on 11 March 2004 he received an email from Mr Marshall of RotorWay International. The email informed him that Mr Marshall had to support the Lunns. 19 On 16 March 2004, Mr McDougall sent a letter to Mr and Mrs Lunn in relation to their use of the RotorWay trade mark in Australia as he believed QIE held the rights to the trade mark. Up to that time he had not sought legal advice in relation to that assumption. On 22 March 2004, he received a letter from the solicitors acting for the Lunns. He was given one day to provide undertakings which included immediately ceasing the use of the name 'RotorWay' as a trade mark and altering his advertising and promotional materials including his website. He said it was not possible to immediately cease use of the name 'RotorWay' as it was on his business materials, including stationary, signage, business premises and website and formed part of the corporate name of RHV. He also wanted additional time to obtain legal advice in relation to the letter and his legal position concerning the use of the name 'RotorWay'. 20 Mr McDougall appointed solicitors to represent him on 23 March 2004. He said that during the period 23 March 2004 to 14 April 2004 he contacted RotorWay International directly to try to negotiate a settlement. 21 The chronology was then taken up by an affidavit sworn by Jennifer McEwan a partner in the firm Ellis King McEwan who act on behalf of Mr McDougall and his companies. According to Ms McEwan their firm received instructions from Mr McDougall and QIE on 23 March 2004. They were provided with a copy of a letter of demand from Tait & Co dated 22 March 2004 requiring undertakings by 5pm on 23 March 2004. Mr McDougall instructed his solicitors to advise Tait & Co that they were acting and that a response would be provided to their letter within seven days. That additional time was necessary to enable detailed instructions to be taken from Mr McDougall to consider his position and to provide him with legal advice. 22 The applicants filed the current proceedings on 29 March 2004, one day before the day upon which Ellis King McEwan had undertaken to provide a response to Tait & Co's letter. No other correspondence was received from the applicants' solicitors during the period 23 March to 29 March. 23 The respondents' solicitors were instructed to send a letter offering a settlement to RotorWay International on 14 April 2004 but no response was received. On 15 April, the respondents instructed their solicitors to send an offer of settlement to the applicants. A copy of an offer of settlement was sent on 15 April 2004. The parties agreed to seek an adjournment of the hearing, presumably of the interlocutory application, to enable Tait & Co to seek instructions from the applicants. By 20 April 2004 the solicitors for the applicants had not responded. However, on that day, Mr Tait informed Mr King of the respondents' solicitors that he was waiting for a reaction from RotorWay International to the offer put by the respondents. The next communication was evidently on 23 April 2004 when the respondents' solicitors received copies of affidavits filed and served by the applicants in support of their application for interlocutory relief. 24 Ms McEwan's affidavit went on to detail further exchanges leading up to the final settlement. 25 An affidavit was also sworn by Mr Tait of the solicitors for the applicants. He began his chronology on 15 April 2004 referring to the telephone call he received from Mr King. Mr King told him that he had written an open letter to RotorWay International proposing a resolution of the dispute and that he had been instructed to write in similar terms to the applicants. The proposed resolution at that stage was that the trademark 'RotorWay' be assigned to RotorWay International in return for RotorWay International granting a non-exclusive royalty fee licence to Mr McDougall. A letter was sent by fax on the same day. 26 On 23 April 2004, Mr Tait responded to Ellis King McEwan enclosing a copy of a letter from RotorWay International objecting to any present or continuing use of the RotorWay trademark by Peter McDougall and/or QIE and/or RHV. In particular, the company objected to RHV using the name 'RotorWay' as part of its corporate style and the use by it of the name 'Rotorway' as part of the internet domain name, . Again the affidavit went on to detail further exchanges of correspondence which culminated in the final settlement of the matter. The Contentions 27 In their written submissions the applicants referred to the sequence of events leading up to settlement. They pointed out that they sent their letter of demand on 22 March 2004 and that although the respondents' solicitors said they would get back to them within seven days they were never told by the solicitors for the applicants that the threatened institution of proceedings would be deferred. They pointed out that the respondents did not comply with any of their demands or provide any undertaking by close of business on 23 March 2004. They instituted the proceedings on 29 March 2004. The respondents initially defended the proceedings and allegedly continued at all times to engage in conduct contrary to the applicants' interests including continuing to undermine Kepeng's position as exclusive licensee. The first offer of settlement came on 15 April 2004 in which offer the respondents sought a non-exclusive royalty free licence from RotorWay International and the right to maintain the use of the word 'Rotorway' in the company name of RHV and in its domain name. The subsequent exchanges referred to earlier ultimately led to the consent orders set out above. The applicants argued that they were justified in instituting the proceedings as a direct result of the respondents' conduct. They were overwhelmingly successful in the action in terms of receiving the orders sought by them. The account of events set out in the statement of claim was not disputed at any stage by the respondents. The applicants submitted that there was no reason to depart from the general principle that costs should follow the event. 28 The submissions filed on behalf of the respondents pointed out that the power to order costs is discretionary. They submitted that the applicants did not act reasonably in commencing and continuing the proceedings. They referred to the short time of 24 hours given in the letter of 22 March 2004 for compliance with the applicants' demands. The respondents referred to their response on 23 March 2004 and the institution of proceedings on 29 March 2004 without any further communication from the applicants. They also referred to their ongoing negotiations with the applicants throughout April and in the first week of May 2004 in relation to the issues in dispute. 29 According to the respondents, the applicants' conduct was based upon the misconception that the matter was one of extreme urgency. The lack of urgency they said was demonstrated by: (a) the fact that the trade mark application was filed on 2 March 2003; (b) the fact that RHV was registered on 3 March 2003; (c) the fact that the domain name was registered on 24 April 2003; (d) the fact that Mr McDougall's dealership was terminated on 2 March 2004; (e) the fact that it was Mr McDougall who alerted the applicants to the existence of the registration of the trade mark in Australia and to the existence of RotorWay Helicopters Victoria Pty Ltd on 16 March 2004. In addition, according to the respondents, the applicants' conduct caused costs to be incurred unnecessarily given the genuine efforts of the respondents to negotiate settlement. Since at least 15 April 2004 the respondents had been prepared to give up the trade mark. They said that in terms of the settlement the applicants had achieved success on only four out of the ten claims for relief set out in the application. Conclusions 30 Section 43 of the Federal Court of Australia Act 1976 (Cth)provides in the relevant part: '(1) Subject to subsection (1A), the Court or a Judge has jurisdiction to award costs in all proceedings before the Court (including proceedings dismissed for want of jurisdiction) other than proceedings in respect of which any other Act provides that costs shall not be awarded. ... (2) Except as provided by any other Act, the award of costs is in the discretion of the Court or Judge.' 31 As a general rule, in the absence of special circumstances justifying some other order costs will follow the event. The general principles were discussed by the Full Court in Ruddock v Vadarlis (No 2) (2001) 115 FCR 229. When proceedings terminate before a hearing there may be no basis upon which to determine what the event would have been if the matter had proceeded. The Court cannot, in such a case, conduct an hypothetical action between the parties. If both parties have acted reasonably in commencing and defending the proceedings and the conduct of the parties continued to be reasonable until the litigation was settled, the Court will usually make no order as to the costs of the proceedings - Re Minister for Immigration and Ethnic Affairs; Ex parte Lai Qin (1997) 186 CLR 622 at 624 (McHugh J). Where, however, the proceedings have been terminated in a way that leads to one side being clearly successful then there is a basis upon which the Court can exercise its discretion in favour of the successful party. As Burchett J said in ONE.TEL Ltd v Commissioner of Taxation (2000) 101 FCR 548 at [6]: '... it is important to draw a distinction between cases in which one party, after litigating for some time, effectively surrenders to the other, and cases where some supervening event or settlement so removes or modifies the subject of the dispute that, although it could not be said that one side has simply won, no issue remains between the parties except that of costs. In the former type of case, there will commonly be lacking any basis for an exercise of the Court's discretion otherwise than by an ward of costs to the successful party.' 32 In the result in this case the respondents are restrained from the use of the word 'Rotorway' as a trade mark or so as to imply any sponsorship, affiliation or approval by RotorWay International. QIE is required to assign its registered trade mark to RotorWay International. RHV is required to change its company name to one not including the word 'RotorWay' and the domain name is to be transferred to Kepeng. 33 Although the applicants have not obtained any orders for damages they have in this case substantially achieved the most important elements of the relief which they sought. In my opinion it cannot be said that they acted unreasonably in instituting the proceedings. The orders to which the respondents have consented showed that they were justified in so doing. It may be noted that the respondents essayed a pre-emptive strike against the applicants by the letter of 16 March 2004, which does not suggest any predisposition at the time to recognise the applicants' rights. It is true that they did so after they had the benefit of legal advice but not before they offered a settlement proposal clearly not acceptable to the applicants. This is a case in which, in my opinion, there has been a clear winner and in the circumstances the costs should follow the event. I certify that the preceding thirty-three (33) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice French.