Unilin Beeher BV v Huili Building Materials Pty Ltd

Federal Court of Australia|2007-10-24|Before: Allsop J

The applicant's claim for an account of profits 67 The hearing took place on 4 July. Mr Sun said that he appeared not only for himself but also for the first, fourth and sixth respondents. He was given leave to appear for these corporate respondents. On this occasion (being the first time he had done so) he eschewed any capacity as appearing for the third respondent. 68 The applicant elected for an account of profits by those who infringed. In my judgment of 29 November 2006 ([2006] FCA 1634), I found that the first, second, third, fourth and sixth respondents had infringed the patent in suit. The infringement of the second and third respondents involved conduct in their own right as well as participation in inducing, directing and procuring the infringements of the first, fourth and sixth respondents. 69 The interlocutory directions that I made were intended to procure full co-operation from the respondents in the production of all relevant documents. It is clear from the evidence of the accountant called by the applicant, Mr Dunstan, and from the evidence of Mr Ryan (the applicant's solicitor) that the applicant has not been supplied with documents of all sales and with documents revealing all relevant activity of the respondents. This is a factor to be considered when making choices about approaches to assessment of the profits and the assessment of any contingencies in respect thereof. For instance, though I accept that an attempt has been made to do so, it has not been easy for Mr Dunstan or the applicant to distinguish between the various entities. Mr Dunstan's report indicated that there was no apparent consistency in the recognition of income and the incurring of costs between the various respondents. This led to one approach being adopted by Mr Dunstan as treating all the "Huili respondents" as one entity. For the reasons which I set out later, I do not propose to follow this approach, but the reasons for Mr Dunstan expressing it reveal the lack of completeness of the information, which can only come from the respondents themselves.

Applicable principles 70 An account of profits is an alternative remedy to damages: see Patents Act 1990, s 122(1). Its purpose is not to compensate the patentee, nor to punish the infringer, but rather to prevent the unjust enrichment of the infringer at the expense of the patentee: Dart Industries Inc v Décor Corporation Pty Ltd (1993) 179 CLR 101 at 110-111. By reference to the judgment in Dart v Décor 179 CLR 101 and the cases there cited, I have approached the calculation of the account of profits in this case on the following basis. 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. The account of profits is a discretionary remedy and the Court may decline to grant the remedy in respect of profits made by the infringer during the period in which it was unaware of the applicant's rights. In this latter respect, see in particular Colbeam Palmer v Stock Affiliates Pty Ltd (1968) 122 CLR 25 at 33-36 and the Patents Act 1990, s 123 which is in the following terms: (1) A court may refuse to award damages, or to make an order for an account of profits, in respect of an infringement of a patent if the defendant satisfies the court that, at the date of the infringement, the defendant was not aware, and had no reason to believe, that a patent for the invention existed.

(2) If patented products, marked so as to indicate that they are patented in Australia, were sold or used in the patent area to a substantial extent before the date of the infringement, the defendant is to be taken to have been aware of the existence of the patent unless the contrary is established.

(3) Nothing in this section affects a court's power to grant relief by way of an injunction.

Profits made by the respondents 71 I accept the unchallenged evidence of Mr Dunstan generally. He said that the total amount of profits made by the first, second, third, fourth and sixth respondents (to whom I will refer as the "Huili respondents") by reason of the infringements was $254,114. This figure was based on total infringing sales revenue of $852,531 and total costs of $598,417. The costs were made up of $476,686 for purchases, $106,587 for customs duty and $15,144 for direct costs comprising freight and advertising. 72 Mr Dunstan made no allowance for general overheads. He had no documentation and information which would be necessary to enable such a calculation to be made. In this respect, it is to be noted that the directions made in April required a draft of Mr Dunstan's report to be given to the Huili respondents. This was done. No attempt was made by any of the Huili respondents to identify and quantify a relevant general overhead. Such a straightforward business concept can be taken to have been well understood by them. In the absence of any attempt whatsoever by the Huili respondents to attribute a general overhead to this product, I do not propose to take any general overhead into account. In this respect, there was evidence that the sale of the infringing floor panels appeared to represent only part of the business conducted by the Huili respondents, which extended to the sale of several types of flooring as well as an electrical business. 73 Also relevant to a decision not to attribute anything to overheads is the state of documentation provided by the Huili respondents. I accept from the evidence that it is, on its face, incomplete. The documents that have been produced reveal inconsistencies and anomalies. In the circumstances, I accept the submission of the applicant that there is no cause for confidence that the infringements revealed in the documents represent all the infringements which have in fact occurred. There has been no accounting for cash sales, though there was some evidence of a trap sale for cash. There has been no delivery up of infringing products in accordance with the orders that I made on 29 November 2006. The figures regarding sales and imports were not able to be reconciled by Mr Dunstan. There was also evidence to suggest that other sales of infringing panels may have been made by entities associated with the Huili respondents. In all the circumstances, and taking all these matters into account, and weighing them in relation to the calculation of profit, I am not prepared to make a calculation and a discount for general overheads in these circumstances and where the onus lies upon the respondents to identify and quantify such overheads.

The question of apportionment 74 On the findings that I have made, the second and third respondents should be held liable for all the infringements committed by the three corporate Huili respondents as well as the infringements committed by themselves. The question then becomes one of apportionment of the profits between the other companies. As I indicated earlier, Mr Dunstan's opinion was that the Huili respondents were best treated as a single entity from an accounting perspective. I am not prepared to approach the matter on that basis. I do not see it as a question for accounting policy. Each company should be liable for such profits as can be reasonably attributable to it. 75 One starts with the evidence of timing. The evidence discloses that the second and third respondents were responsible for sales invoices from September 2003 to February 2005; that from February 2005 to March 2005 the fourth respondent was responsible for the sales; that thereafter the first respondent was responsible from April 2005 to November 2005; and that the sixth respondent was responsible for sales in June 2006. Mr Dunstan was asked to attempt to apportion the profits as between the Huili respondents. His calculations were included in a schedule to his supplementary report and produced what were, in effect, anomalous results. In particular, two of the corporate respondents (the fourth and sixth) were recorded as having made a net loss and the other (the first) had made a very great profit. These calculations can be seen to be due to the inconsistency of recognition of income and incurring of costs that was referred to by Mr Dunstan and/or the lack of documentation provided as to transactions. I am not prepared to accept these conclusions as the most appropriate attribution of profit to the relevant companies. 76 Given the lack of proper documentation, I propose to adopt a method whereby the profit is attributed to the respective corporate respondents by reference to the sales each made, and then to apportion costs proportionally according to those sales. This would make the fourth, first and sixth respondents responsible for attributed sales of $125,221, $278,757 and $182, respectively and for apportioned profits of $37,325, $83,089 and $54, respectively. In addition to this, the second and third respondents individually were liable for attributed sales of $448,371 and apportioned profits of $133,646 (although the second and third respondents were liable for the total as I have earlier identified). 77 Thus, subject to any further possible basis for of reduction, the second and third respondents would be jointly and severally liable for the sum of $254,114, the fourth respondent would be liable for the sum of $37,325, the first respondent would be liable for the sum of $83,089 and the sixth respondent would be liable for $54. Each would be liable for interest. 78 There are two possible reasons why these money sums should be varied. The first is one recognised by Colbeam v Palmer 122 CLR 25and the Patents Act, s 123. The applicant's solicitors first wrote to the respondents on 23 February 2005, informing them of the patent and requiring undertakings. If one took 23 February 2005 as the date from which to calculate the profits, there would be no claim against the second and third respondents, the claim against the fourth respondent would be $25,051, the claim against the first respondent would be the same $83,089 and the claim against the sixth respondent would be the same $54. 79 It is important to note that in Colbeam v Palmer 122 CLR 25, it was stated that it was for the moving party to prove the unconscionability of the profits, and therefore for the moving party that the defendant knew of the moving party's rights. The Patents Act 1990, s 123 clearly involves discretion as to the question of refusing or discounting the award for the matters there identified. Also, s 123(2) makes plain that the defendant is to be taken to have been aware of the existence of the patent unless the contrary is shown, if patented products marked so as to indicate they are patented in Australia were sold or used in the patent area to a substantial extent before the date of the infringement. 80 The evidence discloses that the applicant's floor materials embodying the invention the subject of the patent had been distributed in Australia since late 1997. The evidence discloses that the introduction of those panels revolutionised the trade in laminated flooring and greatly expanded the market for such flooring. The evidence discloses that by 2003, when the relevant infringements commenced, the applicant's floor panels, or imitations of them, commanded over 75% of the Australian market for laminated panels. The evidence discloses that in 2003, the applicant's Australian agent and distributor sold about 312,000 packs of the floor panels, amounting to over 560,000 square metres of flooring. The evidence discloses that the panels were described as the "industry standard" in the October 2004 issue of a publication called "Flooring Australia and New Zealand". The evidence discloses that the packs of the applicant's panels were, and have been since prior to 2003, clearly marked with the words "patented technology", with the individual panels bearing the number of the applicant's European and United States patents. The evidence discloses that since the grant of the Australian patent on 23 November 2003, the relevant promotional material has also carried the number of the Australian patent. The evidence discloses that the fact that the applicant's floor panels are patented has always been a prominent and important feature of promotions of the panels through sales representatives, exhibitions and distribution of catalogues and brochures. The evidence discloses that the website of the applicant's Australian agent and distributor has promoted the applicant's relevant patent rights since at least early 2003. 81 The Huili respondents have not adduced any evidence in respect of the above matters. They have not established that they were not aware of the applicant's rights prior to the receipt of the letter of demand of 23 February 2005. A general assertion was made in a letter in March 2005, sent in response to the letter of demand, but that statement has not been supported in these proceedings by any direct evidence. Further, the first to fourth respondents did not plead any such lack of knowledge in their defence, which was prepared when they were represented in the proceeding by solicitors and, for a time, by experienced patent counsel. This was to be contrasted with the defence of the fifth respondent, which was prepared earlier and which was available to the first to fourth respondents and which did raise the issue. 82 In all the above circumstances, I am satisfied that under s 123 I should not make any discount by reason of innocent infringement. Indeed, if the matter were to be judged by Colbeam v Palmer 122 CLR 25, I would be prepared to conclude, based on inferences from all the above matters, that the first to fourth and sixth respondents were aware of the patent of the applicant during the course of infringement. My willingness to draw these inferences is in part based on the lack of any evidence brought forward on behalf of any of the first to fourth and sixth respondents of their ignorance prior to February 2005. 83 Also, given the state of the documentation provided by the respondents to which I have earlier referred, to the extent that there is a discretion within s 123 to deal with innocent infringement and to reduce the account of profits by the reason thereby, I am not able to be confident that the respondents have so approached the conduct of this case that they should be entitled to any discount under s 123. This last consideration is a separate consideration from the matters of proof and evidence to which I have earlier referred. 84 The second possible basis for reduction of the profits is the claim made by Mr Sun that the fifth respondent owes him or the first respondent sums of money as reflected in the cross-claim. During the course of the hearing, Mr Sun made no attempt to contest any aspect of the report of Mr Dunstan. He concentrated his submissions on what he said was the injustice of being held liable for an account of profits in circumstances where he has not been paid for a significant amount of the supplies which he or his associated entities gave to the fifth respondent. In this respect, Mr Sun made reference to the detailed material and identified a series of invoices totalling $138,901. They were as follows: Invoice Amount (ex GST) S134 $20,505 S136 $23,275 S163 $22,959 S166 $25,362 4094 $23,396 S190 $23,404 TOTAL $138,901

85 This total differs from the $158,000 referred to by Mr Sun in the hearing and also differs from the sum alleged in the cross claim. 86 The Huili respondents are liable to account for the profits made at the wholesale level of sales. The fifth respondent was liable to account for its profit at the next level of sale, retail sale. The fifth respondent has accounted for those profits in the order which it submitted to by consent on 22 March 2007. There is no reason in principle why the applicant should not be entitled to both the wholesale profit and the retail profit if attributable, as they are, to the infringement. 87 Mr Sun argued that the unpaid invoices should be attributed to a reduction in profit to which the applicant is entitled. I do not agree. If that were the case, the applicant would pay for the liability of the fifth respondent. That would leave the fifth respondent having accounted for a profit (based on a cost not in fact paid), and not paying the wholesaler and thereby reducing the wholesaler's profit. By not paying its debt, the fifth respondent would reduce the entitlement of the applicant. That cannot be right. 88 Mr Sun, or the relevant respondent (in fact it is the first respondent who claims under the cross-claim), should seek, as he or it does, to recover moneys lawfully due to it. The fifth respondent in its defence seeks to set off the sums that it has paid to the applicant. Indeed it presently has an order to that effect in the orders made on 29 November 2006. As the chronology makes clear, this order was made in the absence of the Huili respondents. 89 As a matter of principle, the fifth respondent cannot necessarily expect the Huili respondents to give up their purchase price of the goods. The fifth respondent has had to account for its profits. That does not mean that it should not account to the Huili respondents for its costs of sales, so that the Huili respondents can properly fund the account of profits to the applicant at the wholesale level. However, if the Huili respondents in all the circumstances have, as I have found, engaged in misleading or deceptive conduct and led the fifth respondent to believe that it was free to sell these products, it may be that the fifth respondent has suffered damage in that it has lost an opportunity to sell product which it would otherwise have sold in which it would have been legally entitled to trade. In these circumstances, the sums, including legal costs, that the fifth respondent has had to pay the applicant may be seen as damages caused by the misleading or deceptive conduct of the Huili respondents. As I have said, the conclusions that I have already reached about this were made in the absence of the first to fourth respondents. 90 It may well be that these issues have to be resolved between the Huili respondents and the fifth respondent in any residual hearing on the cross-claim. I will put the matter in the list for directions to ascertain whether the parties still wish to agitate these matters. 91 As to the rights of the applicant, in my view, the applicant is entitled to judgment for the sums that I have identified, together with interest. That interest should be calculated at the rate of 10.5%, being the prescribed rate in relation to judgment debts pursuant to Order 35 r 8 of the Federal Court Rules. Subject to the applicant providing me with alternative calculations on a more sophisticated basis, I propose to make a calculation for interest attributable to the full amount for which I have found each respondent liable from the last date of that liability. Hence, I have concluded that interest on the second and third respondents' liability should be for $133,646 from 28 February 2005, $37,325 from 30 March 2005, $83,089 from 30 November 2005 and $54 from 30 June 2006; for the fourth respondent $37,325 from 30 March 2005; for the first respondent $83,089 from 30 November 2005; and for the sixth respondent, $54 from 30 June 2006. 92 Making those calculations involves the following sub-calcualtions: Second & Third Respondent: $133,646 + $36,836.18 = $170,482.18 $37,325 + $9,954.58 = $47,279.58 $83,089 + $16,358.15 = $99,477.15 $54 + $7.31 = $61.31 $317,270.22 Fourth Respondent: $47,279.58 First Respondent: $99,447.15 Sixth Respondent: $61.31

93 Therefore, the orders against the Huili respondents will be that there be judgment be for the applicant: (a) against the second and third respondents in the sum of $317,270.22 including interest pursuant to s 51A of the Federal Court of Australia Act; (b) against the fourth respondent in the sum of $47,279.58 including interest pursuant to s 51A of the Federal Court of Australia Act; (c) against the first respondent in the sum of $99,447.15 including interest pursuant to s 51A of the Federal Court of Australia Act; (d) against the sixth respondent in the sum of $61.31 including interest pursuant to s 51A of the Federal Court of Australia Act; 94 In my view, all the respondents should be jointly and severally liable for the costs of the applicant. I include the sixth respondent in this, notwithstanding the small amount involved. It has not paid money into Court. It is not assisted with the conduct of the litigation as it should have in relation to discovery. It has equally put the applicant to proof and should pay for that. 95 I have set the matter down for directions on 2 November 2007. On that day, any of the Huili respondents or the fifth respondent who have an application in relation to the further conduct of this matter may raise what steps they wish to take. I certify that the preceding ninety-five (95) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Allsop.

Associate: Dated: 24 October 2007 Counsel for the Applicant: Mr C Dimitriadis

Solicitor for the Applicant: Davies Collison Cave

The Second Respondent appeared in person for himself, and with leave for the First, Fourth and Sixth Respondents

Date of Hearing: 4 July 2007

Date of Judgment: 24 October 2007

Patents Act 1990(Cth)s 122, s

Trade Practices Act 1974(Cth)

24 By 15 August 2006, no affidavits or submissions had been filed on behalf of the first to fourth respondents. On that day, Mr Dimitriadis appeared for the applicant, Mr Zhang for the first to fourth respondents and Ms Champion for the fifth respondent. The matter was adjourned to 29 August 2006. 25 On 15 August 2006, the Shun Li proceeding were also mentioned. The respondent appeared by counsel, Ms Chrysanthou. Consent orders were made in favour of the applicant on liability, and the hearing for pecuniary relief was stood over to 1 December 2006, with interlocutory steps to be undertaken in the meantime. At around this time, the solicitor for the respondent in the Shun Li proceeding ceased to act. 26 The proceeding (and the Shun Li proceeding) came before me on 29 August 2006. Mr Dimitriadis appeared for the applicant, Mr H Wang for the first to fourth respondents, and Ms Champion for the fifth respondent. On this day, leave was granted to the applicant to join the sixth respondent. By this time (29 August 2006), the applicant had filed some, but not all, of its evidence. I then made further directions for service on the sixth respondent, for the filing of evidence, for further directions and for the referral of the matter to mediation. I also set the matter down for hearing on liability on 29 November 2006. 27 On 15 September 2006, the applicant filed a number of affidavits in support of the anticipated hearing. 28 On 29 September 2006, an affidavit of Mr Bill Gremos, the managing director of the fifth respondent, was filed on behalf of the fifth respondent in support of its cross-claim. 29 Meanwhile, pursuant to the orders made on 29 August 2006, a directions hearing was called on on 3 October 2006for the applicant and the sixth respondent only. This had been scheduled to bring the sixth respondent into the trial preparation. The first to fifth respondents had been excused from attendance. There was no appearance for the sixth respondent. Mr Dimitriadis appeared for the applicant and filed in court and read an affidavit of service upon the sixth respondent of the amended application, amended statement of claim, amended statement of particulars of patent infringement, the short minutes of order of 29 August 2006, and a letter of the applicant's solicitors stating (conformably with the earlier short minutes) that the matter was listed for directions on 3 October 2006. I then made the following orders: Noting the absence of the 6th respondent and noting the affidavit of service on 30 August 2006 of Alan Raynor Cole the Court: 1. Orders that the 6th respondent file and serve its defence on or before 16 October 2006. 2. Orders that the 6th respondent file and serve a verified list of documents on or before 13 November 2006. 3. Confirms the directions hearing on 24 October 2006 and the orders for mediation made in prior orders, both to include the 6th respondent. 4. Orders that the applicant to inform the 6th respondent of these orders. 5. Orders that there be liberty to apply on 3 days' notice. 30 On 3 October 2006, an affidavit of the third respondent was filed. It was filed by Zhang Shijing Lawyers, on behalf of the first to fourth respondents. The affidavit set out some settlement negotiations and asserted, in entirely inadmissible form, the lack of validity of the claim. The affidavit annexed an otherwise confidential and privileged report of Shelston IP, dated 21 February 2006. The view was expressed that some of the claims of the patent may have been infringed and the balance were not. 31 A mediation took place on 17 October 2006: legal representatives of all parties attended before a Deputy District Registrar for 7 hours. The mediation was unsuccessful. 32 Shortly prior to the directions hearing on 24 October 2006, it became apparent to the solicitors for the applicant that no one was likely to appear on behalf of the sixth respondent. Also, on 23 October 2006, Zhang Shijing Lawyers wrote to the applicant's solicitors refusing access to certain documents relevant to primary relief and stating that they did not have instructions to appear on the following day, 24 October 2006. 33 On 24 October 2006, the directions hearing was called. Ms Howard appeared for the applicant and Ms Champion for the fifth respondent. There was no appearance for the first to fourth or sixth respondents. On that day, I made the following orders: 1. Leave be granted to the applicant and the 5th respondent as cross-claimant to file notices of motion seeking orders in default of appearance or default of orders of the Court and if thought appropriate for summary judgment, returnable before Justice Allsop for hearing at 2.15 pm on Friday, 3 November 2006. 2. Such notices of motion, together with affidavits in support, be filed and served on or before Thursday 26 October 2006. 3. The notice of motion against the 6th respondent filed in Court on 24 October 2006 be stood over to Friday 3 November 2006 at 2.15 pm for hearing. 4. Matter 2329 of 2005 and matters dealt with today are stood over to 2.15 pm on Friday, 3 November 2006. 34 The notice of motion that was filed in Court on 24 October 2006 by the applicant against the sixth respondent sought declarations, injunctive relief, an order for delivering up and directions for a further hearing on pecuniary relief. 35 On 27 October 2006, the applicant filed a notice of motion seeking the same kind of relief as claimed in the notice of motion filed in Court on 24 October 2006 against all respondents, including the fifth respondent, under Order 35A r 3(2) or Order 20 r 1 of the Federal Court Rules or s 31A of the Federal Court of Australia Act 1976 (Cth). 36 On 26 October 2006, the fifth respondent filed a notice of motion seeking, in effect, judgment and orders on the cross-claim under Order 35A r 3(2)(c) and (d) of the Federal Court Rules. 37 On 25 and 26 October 2006, the fifth respondent filed affidavits in respect of its motion to be heard on 3 November 2006. That evidence included an affidavit of Mr Soulos, proving that orders made by the Court on 29 August 2006 had not been complied with. 38 On 27 October 2006, the applicant filed an affidavit of service proving the service of affidavits sworn on 13 and 15 September 2006 on Zhang Shijing Lawyers, on behalf of the first to fourth respondents, on the fifth respondents' solicitors and on the sixth respondent. It should be noted at this point that there is no evidence that Zhang Shijing Lawyers had ceased to act for the first to fourth respondents. On the same day, 27 October 2006, the applicant filed an affidavit of Mr Ryan, the principal solicitor for the applicant, proving the history of the proceedings and various defaults of the respondent, and attached the Shelston IP report referred to above, annexed to the third respondent's affidavit filed on 3 October 2006. 39 On 3 November 2006, the various motions were heard. The fifth respondent sought to file an amended cross-claim in court. It widened the relief sought but did not amend the substantive allegations. Having heard the evidence led by both the applicant and the fifth respondent, I made orders for the service of the first to fourth respondents (as cross-respondents) of the Amended cross-claim, as follows: 1. Subject to the matter being listed pursuant to order 2 below, the hearing of the motion brought by the fifth respondent as cross-claimant filed 26 October 2006 against the first to fourth respondents as cross-respondents be adjourned to a date to be fixed for judgment. 2. The fifth respondent as cross-claimant serve on Mr Wang at the firm on the record for the first to fourth respondents a letter doing the following: i. serving the amended cross-claim; ii. informing the first to fourth respondents that the hearing of the motion for relief has been heard; iii. informing the first to fourth respondents that the amended cross-claim has been filed in Court; iv. informing the first to fourth respondents of the evidence led on the motion; v. stating that the judge has indicated that given that the amended cross-claim had not been served, the first to fourth cross-respondents have an opportunity on Friday 17 November 2006 to contest the notice of motion; vi. if they are to contest the notice of motion, a letter to that effect should be sent to the solicitor for the fifth respondent cross-claimant and the associate of Justice Allsop, in which case the matter will be listed. If that does not occur then the matter will not be listed on the 17th. 40 It is to be noted that I used the expression "the firm on the record". Zhang Shijing Lawyers had at all times, at least until October 2006, acted for the first to fourth respondents. No notice of appearance had been filed. I had overlooked that. There was no evidence, however, that Zhang Shijing had ceased to act, though it was apparent that they were not present to represent the first to fourth respondents. 41 At the hearing on 3 November 2006, affidavits were read on behalf of the applicant and the fifth respondent/cross-claimant proving service of the notice of motion and evidence led on 3 November 2006. 42 On 29 November 2006, I delivered judgment on the notices of motion brought by the applicant against the first to sixth respondents and by the fifth respondent (as cross-claimant) against the first to fourth respondents (as cross-respondents): see [2006] FCA 1634. 43 The orders made on that day were as follows: ON THE APPLICATION AND STATEMENT OF CLAIM THE COURT:

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