Final Appeal No 6/2013 (Civil)

IpsofactoJ.com: International Cases [2014] Part 2 Case 11 [CFA]


COURT OF FINAL APPEAL, HKSAR

Coram

MGA Entertainment Inc

(formerly, ABC International Traders Inc

doing business as MGA Entertainment)

- vs -

Toys & Trends (H.K.) Ltd

CHIEF JUSTICE GEOFFREY MA

JUSTICE R.A.V. RIBEIRO PJ

JUSTICE JOSEPH FOK PJ

JUSTICE PATRICK CHAN NPJ

LORD CLARKE OF STONE-CUM-EBONY NPJ

5 FEBRUARY 2014


Judgment

Chief Justice Geoffrey Ma

  1. I agree with the judgment of Lord Clarke of Stone-cum-Ebony NPJ.

    Justice R.A.V. Ribeiro

  2. I agree with the judgment of Lord Clarke of Stone-cum-Ebony NPJ.

    Justice Joseph Fok

  3. I agree with the judgment of Lord Clarke of Stone-cum-Ebony NPJ.

    Justice Patrick Chan

  4. I agree with the judgment of Lord Clarke of Stone-cum-Ebony NPJ.

    Lord Clarke of Stone-cum-Ebony

    Introduction

  5. This appeal arises out of an inquiry into loss sustained by the defendants in an action for breach of copyright in which the plaintiff (“MGA”) had obtained an interlocutory injunction and, some years later, very shortly before the trial, discontinued the action, with the consequence that it became potentially liable to pay compensation under what has traditionally been called a cross-undertaking in damages. It was at one time thought that the appeal raised a question of law of general public importance, although in the event the issues between the parties have raised almost exclusively questions of fact.

  6. Somewhat curiously, the order or orders granting the injunction did not include an express undertaking but it was common ground between the parties that the plaintiff must be treated as giving such an undertaking. No precise wording of the undertaking was agreed but at the outset of the appeal in this court the Chief Justice drew attention to the fact that the 2014 edition of Hong Kong Civil Procedure described the usual undertaking as being in these terms:

  7. If the court later finds that the order has caused loss to the defendant or any other party and decides that the defendant or that other party should be compensated for that loss, the plaintiff will comply with any order the court may make.

  8. It was accepted by the parties that the undertaking should be treated as being in those terms and that it followed that the question for decision at the inquiry was what loss the defendants had suffered as a result of the injunction. That question was tried by Deputy High Court Judge Seagroatt (“the judge”) for five days from 5 May 2011. On 19 May 2011 he handed down a judgment in which he assessed the defendants’ loss at US$7,250,000. MGA appealed to the Court of Appeal but, save as to interest and costs, by a majority (Tang VP and Lunn JA), the appeal was dismissed on 8 August 2012. Cheung JA dissented. He would have allowed the appeal and ordered a new trial. MGA appeals to this court with the leave of this court.

    Background to the Inquiry

  9. This is a case about dolls. On 5 June 2002 MGA issued a writ against the defendants for alleged breach of copyright on the ground that the first and second defendants had unlawfully reproduced a substantial part of a number of design drawings of various fashion drawings made between 1998 and 2000. In short it was alleged that, in procuring the manufacture and marketing of fashion dolls known as Funky Tweenz, the defendants unlawfully infringed MGA’s copyright in the dolls. MGA was (and is) a substantial enterprise carrying on business in the design, manufacture, marketing and selling of toys, including in particular fashion dolls known as Bratz dolls. It claimed damages and injunctive relief, both against the first and second defendants, who manufactured and marketed the dolls, and against the third defendant, who was alleged to be liable on the basis that he directed and controlled and was personally involved in those activities.

  10. On 18 June 2002 MGA applied for an interim injunction against all three defendants. On 5 July 2002 Deputy High Court Judge Woolley granted an injunction until the hearing of a summons or further order in wide terms restraining the defendants from authorising the reproduction and/or reproducing, exporting, and/or distributing “reproductions of or reproductions of a substantial part of the types of dolls known as Funky Tweenz”, samples of which were exhibited to the order, and/or from counselling, procuring or aiding and abetting others to do so. The injunction was endorsed with a penal notice. That order was confirmed in a consent order dated 11 November 2002, which contained a wide ranging further order that the first and second defendants deliver up a series of articles including moulds for the Funky Tweenz dolls. In addition it contained an order for an affidavit or affirmation identifying sales and attempted sales of the dolls and the names of customers or potential customers. It is not in dispute that the effect of those orders was to prevent the defendants from taking any further steps to manufacture or sell the Funky Tweenz dolls.

  11. MGA did not press ahead with the action with any speed. For whatever reason, it was not until March 2007 that MGA applied for a trial date. In May 2007 the trial was fixed for 3 March 2008. In late February 2008 MGA applied for the trial date to be vacated but the application was refused by Deputy High Court Judge Gill, who was to be the trial judge for a trial which was to begin on 3 March. Shortly thereafter and before the trial began, MGA applied to discontinue the action and for the injunction to be discharged. The judge set out a short extract from the transcript. It shows that counsel for MGA asked for the injunction to be discharged and for an order for the return of the moulds and other materials which had been handed over pursuant to the injunction. Counsel also expressly recognized on behalf of MGA that it would have to pay the defendants’ costs of the action and that the defendants would be at liberty to embark on, as he put it, “an inquiry as to damages”. In the event, for reasons which were never very clearly explained, MGA failed to return the moulds.

    The Parties

  12. I take these facts from the findings of the judge. The judge correctly recognized that, although the defendants were small fish compared with MGA and although it had at one time been in financial difficulties, by the time of the events relevant to this dispute, MGA had achieved such success as to mount a significant challenge to Mattel Inc (“Mattel”), which since 1959 have been the producers of what the judge described as the well-known and iconic Barbie range of dolls. There were other competitors but MGA was some way ahead of them. MGA sought to cater for a later stage of childhood than the Barbie doll and in June 2001 its Bratz dolls and accessories entered the scene. An indication of MGA’s success is that in the years 2000 and 2001 its revenue exceeded US$93 million and US$98 million respectively and that for the year 2001, the sale of the Bratz dolls, accessories and income from licence fees relating to the Bratz dolls accounted for 22 per cent of that figure. The success of the Bratz dolls was in part due to the expenditure of substantial sums in their continued development.

  13. By comparison with MGA the defendants were a very much smaller enterprise. The first and second defendants were incorporated in 1994 and 1993 respectively. The third defendant, Mr Kesselring and Mr Wilson Lam were their only directors and shareholders. Their driving force was Mr Kesselring, who, as the judge put it in his paragraph 3, had a quarter of a century’s experience in the toy trade at varying but increasing levels. Before the advent of the Funky Tweenz dolls, the defendants were not profitable. For the financial year ended 2001, the second defendant made a net loss of HK$239,250 and each defendant spent only HK$3,425 on advertising and promotion. It is not in dispute that the defendants were other than in a small way of business and that they were not comparable with MGA in terms of having the resources, expertise and network to launch and market a successful doll.

  14. However, as appears below, the defendants had some success with the Funky Tweenz dolls. This was largely thanks to Mr Kesselring who, with artistic help, conceived the idea of what became the Funky Tweenz dolls, which the defendants began to market at the Nurnberg and Tokyo toy fairs in early 2002. Although they had copies of the Bratz dolls in their possession, the defendants’ case was that they had developed their dolls independently and that any similarities to MGA’s dolls were coincidental. The effect of the discontinuance of the action was that the question whether the defendants were in breach of copyright was not tried but, as I see it, was also that, for the purposes of the assessment of compensation, the defendants must be treated as not having infringed MGA’s copyright.

    The legal issues

  15. It was submitted to the judge on behalf of MGA that the court should not enforce the cross-undertaking. Unsurprisingly, this argument was summarily rejected by the judge and was not renewed in the Court of Appeal or before this court.

  16. The sole issue before the judge which is relevant in this appeal is what loss the defendants sustained as a result of the injunction. There was some consideration of a number of decided cases in the courts below and in the parties’ written cases as to the principles applicable to the resolution of this question but, in the event, there was, as I see it, no issue of principle which requires decision by this court. So, for example, there has been some discussion in the authorities as to whether a claim to recover loss pursuant to a cross-undertaking is a claim for damages, which is the traditional view, as explained by Lord Diplock (I think obiter) in the House of Lords in Hoffmann-La Roche & Co AG v Secretary of State for Trade and Industry [1975] AC 295 at 361, or whether it is a claim for equitable compensation, which is perhaps a more modern view, as explained by Arnold J in Lilly Icos LLC v 8PM Chemists Ltd [2009] EWHC 1905 (Ch), [2010] FSR 95 at paragraphs 12 to 43, where he also discussed the role of causation by reference to the well known decision of the High Court of Australia in Air Express Ltd v Ansett Transport Industries (1979-1981) 146 CLR 249.

  17. As Arnold J explained, there are potential differences between damages and equitable compensation, notably the role, if any, of remoteness, foreseeability, the date of assessment and mitigation. However, there is no need to discuss those differences here because, save perhaps as to date of assessment, no such issues arise and the issue is essentially one of causation. As to date of assessment, no-one suggested that the date of assessment was not the date of the inquiry. That said, it is I think of some assistance to consider the context in which the issue of causation arises.

  18. At paragraph 21 of Lilly Icos Arnold J identified what he described as two separate points made by Norris J in Les Laboratoires Servier v Apotex Inc [2008] EWHC 2347 (Ch), [2009] FSR 3 at paragraph 9, which seem to me to be of assistance here. Norris J said this:

  19. Third, whilst it is for Apotex to establish its loss by adducing the relevant evidence, I do not think I should be over eager in my scrutiny of that evidence or too ready to subject Apotex’ methodology to minute criticism. That is so for two reasons, quite apart from an acceptance of the proposition that the very nature of the exercise renders precision impossible.

    (a)

    Whilst, in order to obtain interlocutory relief, Servier will not have had to persuade Mann J. that it was easy to calculate Apotex’ loss in the event of the injunction being wrongly granted, it will have had to persuade him that that task was easier than the calculation of its own loss in the event that the injunction was withheld. The passages I have cited from its skeleton argument and evidence show that it did so. Having obtained the injunction on that footing it does not now lie in Servier’s mouth to say that the task is one of extreme complexity and that the court should adopt a cautious approach. Having emphasised at the interlocutory stage the relative ease of the process, it should not at the final stage emphasise the difficulty.

    (b)

    In the analogous context of the assessment of damages for patent infringement, in General Tire and Rubber Co v Firestone Tyre and Rubber Co Ltd (No.2) [1976] R.P.C. 197 at 212 Lord Wilberforce said:

    There are two essential principles in valuing the claim: first, that the plaintiffs have the burden of proving their loss; second, that the defendants being wrongdoers, damages should be liberally assessed but that the object is to compensate the plaintiffs and not to punish the defendants.

    The principle of ‘liberal assessment’ seems to me equally applicable in the present context. Although a party who is granted interim relief but fails to establish it at trial is not strictly a ‘wrongdoer’, but rather one who has obtained an advantage upon consideration of a necessarily incomplete picture, he is to be treated as if he had made a promise not to prevent that which the injunction in fact prevents. There should as a matter of principle be a degree of symmetry between the process by which he obtained his relief (an approximate answer involving a limited consideration of the detailed merits) and that by which he compensates the subject of the injunction for having done so without legal right (especially where, as here, the paying party has declined to provide the fullest details of the sales and profits which it made during the period for which the injunction was in force).

  20. The liberal approach referred to by Lord Wilberforce does not of course mean that, in relation to causation, the court is free to decide what it likes without reference to the evidence or to the burden of proof. As I see it, the court should approach the issue in a broad commonsense way, as suggested by Saville J in Financiera Avenida SA v Shiblaq, The Times November 21 1988. In this regard I agree with the approach of Arnold J in Lilly Icos at paragraphs 34 to 37, where he concluded at paragraph 37 that the claimant does not need to show that the injunction was the exclusive cause of the loss. It must be an effective cause of the loss.

  21. In Lilly IcosArnold J discussed causation at paragraphs 22 to 37 with particular reference to the Air Express case, especially per Gibbs J at pages 312-313 and Stephen J at pages 319-320. In both cases it was held, in my opinion correctly, that the claimant must prove that the loss was caused by the injunction and not by the existence of the litigation. Thus the loss must be such that it would not have been sustained but for the injunction but the injunction need not be the sole cause of the loss. In the Air Express case the majority of the High Court upheld the decision of the judge that, on the facts, the loss was caused by the underlying litigation and not the injunction. This is important on the facts of the instant case because MGA says that much of the alleged loss was caused, not by the injunction, but by what are known as “cease and desist” letters sent to potential customers for the Funky Tweenz dolls, to which I return below.

  22. The remaining principle which is potentially relevant is that relevant to claims for loss of a chance. It was accepted on behalf of both parties that the defendants’ claim was a claim for the loss of a chance, namely the loss of the chance of earning profits from the Funky Tweenz dolls which it was deprived of by the injunction. As Cheung JA put it in the Court of Appeal at paragraph 87, the chance is predicated on two conditions: first the acts of third parties, that is of the customers to place orders and, secondly, the ability of the defendants to fulfil the orders.

  23. In a well-known passage in Allied Maples Group v Simmons & Simmons [1995] 1 WLR 1602 Stuart-Smith LJ put the principle thus at 1614:

  24. .... the plaintiff must prove as a matter of causation that he has a real or substantial chance as opposed to a speculative one. If he succeeds in doing so, the evaluation of the chance is part of the assessment of the quantum of damage, the range lying somewhere between something that just qualifies as real or substantial on the one hand and near certainty on the other. I do not think that it is helpful to lay down in percentage terms what the lower and upper ends of the bracket should be.

    As Cheung JA pointed out at paragraph 89, in that case (at pages 1631 and 1621) the Court of Appeal applied this principle stated by Lord Reid in Davies v Taylor [1974] AC 207 at 213:

    You can prove that a past event happened, but you cannot prove that a future event will happen and I do not think that the law is so foolish as to suppose that you can. All that you can do is evaluate the chance. Sometimes it is virtually 100 per cent: sometimes virtually nil. But often it is somewhere in between.

    The replacement doll

  25. As already stated, the immediate effect of the injunction was that the defendants could no longer develop their Funky Tweenz dolls. They attempted to develop a replacement doll which would not infringe the injunction. At paragraph 17 the judge noted that this showed that, in venturing forth with an alternative, Mr Kesselring must have had considerable confidence in the potential market for this alternative doll given the interest in the original doll. The fact that the sales of the new doll were effected by a new company incorporated in July 2002 after the withdrawal of the dolls complained of, with the wives of the two directors as the directors and shareholders does not seem to me to be relevant to the issues in this appeal.

  26. The new venture initially had some limited success but sales tailed off. The judge found at paragraph 18 that the new style dolls sold over 73,758 dolls in less than half a year in 2002, nearly 163,000 in 2003 and almost 45,000 in 2004. Thereafter sales tailed off markedly until by the end of 2007 less than 3,500 found a market. As the judge put it, by no stretch of the imagination was the new style Funky Tweenz doll a competitor of MGA’s Bratz doll in the market. As the judge observed at paragraph 54, Mr Kesselring conceded that the new Funky Tweenz doll was not as attractive as the original and that, after a reasonable start, it was not viable. The judge held that it was not surprising that, given the injunction, the subsequent delay and the failure to return the moulds, the defendants did not recover the position they would otherwise have been in.

  27. Although the judge stressed the delay in the case, I am not persuaded that the delay is of direct relevance to the amount of the defendants’ loss of profit caused by the injunction. Equally, MGA placed reliance upon events in the United States said to have been orchestrated by the defendants. Again, I am not persuaded that those events are relevant. The question is simply whether the judge’s reliance upon the evidence of loss can be supported.

    The conclusions of the judge

  28. The judgment of the judge that the defendants were entitled to recover US$7,250,000 was based on his conclusion that, in the absence of the injunction, they would have made a net profit of that amount. In arriving at that conclusion he relied essentially upon the evidence of Mr Kesselring and of Mr Poole, who is an experienced forensic accountant but who is not himself an expert in the toy doll market. The critical question in this appeal is to my mind whether the judge’s conclusion that the injunction caused loss over a period of ten years can be sustained.

  29. The judge’s principal conclusions can be summarized in this way. Mr Kesselring’s experience over many years led him to think that he could be “on to a winner”. In general a doll’s life could be expected to be two years but the market life for the basic product could be extended to keep pace with the expectations of the consumer by what witnesses other than Mr Kesselring described as ‘refreshing’ the products. Thus, as the Barbie and Bratz ranges showed, a doll’s life could be extended by careful application and updating. As I read the judgment at paragraph 50, the judge accepted Mr Kesselring’s evidence that “If we got it right it [ie the Funky Tweenz doll] could grow with other products on the markets”. If demand increased, which Mr Kesselring thought likely, they could duplicate moulds and get a second factory to increase production. He was encouraged by the initial demand.

  30. After the injunction, they were unable to carry on with the original product. The website was not developed because of the interim injunction. The judge held that the criticism of the viability of the Funky Tweenz brand on the basis that the defendants did not have a sophisticated market policy was misplaced. He accepted that television marketing was beyond the defendants economically but noted that they were prepared to be associated with others. There then followed the problem that the moulds were not returned when the injunction was lifted.

  31. The judge noted at paragraph 56 that counsel for MGA agreed with him that over the years the same Bratz dolls were produced

  32. but with varying themes and co-ordinates and make up and hair styles to reflect fashions and tastes, demonstrating that to hold the appeal in the market something new and updated was required.

    The judge made that observation in connection with a submission on behalf of MGA that the commercial life of the original Funky Tweenz doll would have been short and that sales and profits would not have been sustained over the period 2002 to 2008, let alone 2011. That was, as I see it, a reference back to the broad agreement that in general the market life of the basic doll without ‘refreshment’ would be of the order of two years. The judge noted that counsel for MGA agreed that the description of the position in the above quotation was “a pretty fair summary”. He concluded that, although the Funky Tweenz doll may never have rivalled Bratz in terms of popularity and turnover, the initial reactions of the market to the brand were strong indicators of its potential as a player. He concluded that there was no reason to think that the defendants could not apply the same formula as MGA and Mattel in refreshing their brand.

  33. The judge then considered at paragraphs 57 to 62 the evidence of MGA’s research director Mrs Heather Polk which for the most part he found of no real relevance or assistance. It is important to remember that this is an appeal and that it is not for an appellate court to retry the action. The judge was in my opinion entitled largely to disregard the evidence of Mrs Polk.

  34. The same is true of the judge’s approach (at paragraph 63) to the evidence of Mr Lee Chun Ming Edward, who was the managing director of MGA in Hong Kong. In particular, the judge was critical of Mr Lee’s point that the defendants had no marketing or promotion plan to advance Funky Tweenz in the market. The judge said that such a plan would have been a premature step for the defendants. He noted that they had used at least two fairs to promote their brand, as well as catalogues, before MGA’s action “nipped it in the bud”. It would not have made commercial sense to spend such large sums of money on forms of advertising as Mattel and MGA did so early in the career of the Funky Tweenz dolls, when distributors in different countries were prepared at the right time to use such marketing methods or techniques as were available to them.

  35. The judge then turned to the expert evidence which was a critical part of the evidence before him. He made some reference to potential evidence from a Mr Byrne at paragraphs 64 to 66, none of which is relevant to this appeal because the parties had been restricted to one expert witness on each side. They were Mr Tang, who is a chartered accountant, for MGA and Mr Poole for the defendants. The judge found Mr Tang’s evidence, as he put it at paragraph 68, seriously flawed and lacking in objectivity. The judge gave his reasons for that conclusion at paragraphs 69 to 72. He criticized Mr Tang’s evidence in a number of respects. In particular he was critical of the fact that Mr Tang used the replacement Funky Tweenz dolls as a yardstick. Mr Tang suggested that any growth potential in the original Funky Tweenz brand would have been reflected in the replacements. The judge held at paragraph 70 that that approach was flawed because the new style dolls were different, having been introduced to remove them from any possible challenge by MGA on the ground that they infringed the injunction. In short the judge concluded that, as he put it at paragraph 71, Mr Tang’s approach smacked of pleading MGA’s cause. The judge was in my opinion entitled to reach those conclusions and to focus on the evidence of Mr Poole.

  36. The judge’s conclusions depended in part upon the evidence of Mr Kesselring but, more importantly I think, on the evidence of Mr Poole, which he said (at paragraph 73) was both rational and objective in its approach. He accepted Mr Poole’s own view that his approach was conservative, which the judge said was the most that could be expected of an expert applying objectivity within known parameters. He recognized that there was a paucity of documentary evidence because the Funky Tweenz dolls were traded for so short a period. It followed that there was an element of guesswork in surmising what the future picture would have been. The judge concluded at the end of paragraph 73 that, where no direct comparisons can be made, it is reasonable to look at other businesses within (as he put it) the same sort of trade to see how they fared, even if they were, in terms of size, reputation and history, in a league altogether superior to the business under review.

  37. There was some argument in the course of the appeal as to whether the defendants in their pleaded case, namely the statement of damages, and Mr Poole in his evidence relied exclusively on expressions of interest before the injunction was imposed. To my mind it is clear that the defendants and Mr Poole were relying both on expressions of interest and on the actual sales in that period. It would make no sense to rely upon one to the exclusion of the other. It is in my opinion plain from the judgment at paragraphs 74 and 75 that that was how the judge understood the position.

  38. Thus in paragraph 74 the judge recognized that expressions of interest might not necessarily be translated into actual orders and therefore profits. However, he refused to dismiss them as mere unreliable and exaggerated encouragement to the manufacturer or the supplier and as having no commercial reality. He noted that in some cases they were backed up by an effort to negotiate a lower price and obtain an exclusivity agreement. He then referred to actual orders to which I return below. He concluded that it lay ill in the mouth of MGA to be dismissive of the expressions of interest when it was their own action which prevented a more accurate determination of the values of expressions of interest by keeping the original Funky Tweenz dolls out of the market for some six years.

  39. The judge summarized his conclusions in this regard in paragraphs 74 and 75 broadly as follows. At least 27 distributors worldwide ordered the original dolls and those who cancelled or returned the dolls did so as a result of threats from MGA and its agents. Nobody complained about the quality, style or finish of the dolls. In just over three months over 90,000 were ordered before the build up to the peak season of Christmas.

  40. In paragraph 75 the judge said that Mr Poole underlined the fact that he had only actual orders and expressions of interest to use as the basis of his approach and as an accountant he was being asked to project a situation from that, which was a difficult exercise. He therefore had to look outside at how businesses in the same trade prospered or otherwise. It was reasonable and natural enough to look at the market leaders one of whom was the very company which put a stop to the original ‘Funky Tweenz’ brand: MGA. The judge recognized that the defendants would probably not have reached the same scale of achievement as MGA and that Mr Poole did not seek to say or show that it could. The judge added that, although Mr Kesselring thought that he could have been onto a winner, that would remain unknown. He also added that Mr Poole’s conservative approach precluded him from finding that the defendants could have reached or rubbed shoulders with the likes of Mattel and MGA.

  41. The judge then concluded in paragraph 76 that it may well be that Mr Poole took a very low base in expressing an annual figure for 2002 of 450,000 dolls bearing in mind that orders for the three months were over 170,000 (reduced to over 90,000 only by cancellations and returns). Expressions of interest, some subject to exclusivity agreements, were at least 500,000 units, even excluding Toys R Us. Given the uncertainties, he held that Mr Poole was right to be conservative and he accepted his first figure of 450,000 for the three quarters of 2002. I will return to these figures below. They are important because they form the basis for much of Mr Poole’s approach.

  42. The judge then turned to consider for how long the defendants would continue to make losses as a result of the injunction. It is really only paragraph 77 which forms the basis for his conclusion that the losses should be recoverable in respect of the ten years from 2002 to 2011 inclusive. It is in these terms:

  43. Thereafter, given the policy of refreshing the brand, and adding to it, the yearly estimates are reasonable. Mr Poole was able to extrapolate from some market research figures for Mattel and MGA which help to put the picture assessed for the defendants into some context. The sales of units for Mattel in December 2001 (peak quarter) were 14,422 million, and in May 2002 they dropped to 1,243 million. The comparable figures for MGA were 12,561 million and 1,041 million. Set against Mr Poole’s assessment of 450,000 for the defendants’ first period (three quarters of a year), MGA’s turnover of units for May 2002 was over 2,300 times that of the defendants’. Whilst in some respects that comparison or ratio is meaningless, the picture remains inevitably difficult since the plaintiff has not sought to set against it any figures from any comparable business for any period. Nor have they produced any figures for their own business to challenge Mr Poole’s assumption as to growth or decline over the latter years. His calculations of the life-cycle are similarly unchallenged by hard evidence and Mr Tang himself did not consider either aspect, as assessed by Mr Poole, to be unreasonable. The same applied to the percentage adopted in relation to the accessories linked to the various doll themes. Mr Tang in the text of his report at paragraph 4.5 opined that since the injunction related to the dolls specified in the order, ‘any claims for losses on the sales of accessories or other related products .... would appear to be irrelevant.’ This statement is quite illogical. If the dolls are out of the market the accessories and related products have nothing to be accessories to or to be related to.

  44. It was in these circumstances that the judge held at paragraph 78 that he did not regard it as necessary to enter into a detailed analysis of Mr Poole’s calculations. In short it was because he accepted Mr Poole’s basic premise that he adopted a conservative approach.

  45. In the result the judge arrived at his total figure for net loss of profits, which was the sum awarded of US$7,250,000 as explained in his paragraph 80. He took Mr Poole’s starting point of US$8,150,000. He deducted US$943,000 which represented the actual sales of both the original and the replacement dolls to give a net figure of US$7,207,000. He then added the costs involved in launching the replacement dolls, namely US$15,000, and the costs of replacing the moulds and other items which were not returned when the injunction was discharged, namely US$28,000. Finally he added the total of those figures, namely US$43,000 to US$7,207,000 and arrived at US$7,250,000.

    Discussion

  46. As already stated, the decision of the judge depends upon the reliability of the evidence of Mr Poole because it formed the basis for his conclusions, although he expressly stated in paragraph 78 that he did not regard it as necessary to enter into a detailed consideration of Mr Poole’s calculations since he accepted Mr Poole’s basic premise that he had adopted a conservative approach. As a result the judge does not explain how the figure of US$8,150,000 is arrived at, although it formed the basis for the figure ultimately awarded and is central to the conclusion that the defendants were entitled to ten years loss of profit in respect of the ten years from 2002 to 2011 inclusive.

  47. The defendants’ case can be seen from the figures pleaded in their statement of damages, which is based on the report of Mr Poole and gives particulars of a claim for US$7,245,044, which is essentially the amount awarded by the judge. The table is set out in paragraph 2 of the pleading as follows:

     

    Matter

    Amount (US$)

    (1)

    Expressions of Interest for up to 675,000 dolls (units)

     

    (2)

    Estimated loss of profits based on sales for 2002, 2003 & 2004 at annual growth rates of 30% to 35% made up as follows:
    (a) 2002: units projected to be sold 450,000
    (b) 2003: units projected to be sold 600,000
    (c) 2004: units projected to be sold 800,000

    2,964,833

    (3)

    Estimated loss of profits based on sales of 800,000 units in 2005 (sales remaining constant)

    1,325,574

    (4)

    Estimated loss of profits based on sales of 800,000 units in 2006 (sales remaining constant)

    1,324,291

    (5)

    Estimated loss of profits based on sales between 2007 and 2011 (with annual decline in sales at the rate of 20% to 40%) made up as follows:
    (a) 2007: units sold 600,000
    (b) 2008: units sold 500,000
    (c) 2009: units sold 300,000
    (d) 2010: units sold 200,000

    2,261,732

    (6)

    Estimated loss of profits based on sales of 200,000 units (0% rate of decline) in 2011

    274,820

    (7)

    Actual profits from sales between 2002 and 2007

    (949,125)

    (8)

    Costs in connection with the launch of a new doll post the interlocutory injunction

    14,909

    (9)

    Replacement cost of lost moulds by Plaintiffs

    28,010

  48. The pleading then described the purpose and method of calculation of the loss as follows. The underlying premise in the calculation is to estimate with as much accuracy as possible the likely sales of the dolls the subject of the interlocutory injunction had the injunction not been imposed. The defendants’ claim is that, on the balance of probabilities, the projected sales figures set out in the box are as accurate as may reasonably be obtained by reference to other dolls that are sold as ‘fashion items’, that is to say, items where sales will continue to grow at the beginning but not continually, will not remain stable for too long and will subsequently decline over a period of time. The calculation is based on the defendants’ estimate of doll sales based on expressions of interest received from potential customers, some of whom subsequently purchased or placed orders for the dolls prior to the interlocutory injunction being imposed. The defendants’ calculation gives credit for all realised profits from sales over the period of the claim.

  49. In addition, the defendants asserted that their estimates of growth (both positive and negative) were determined by reference to comparable products available on the market and on publicly available statistics. They specifically relied upon

    1. a research report published by United Marketing called ‘The Doll Report 2002: The Market, The Competitors, The Trend’;

    2. published growth figures for MGA’s Bratz dolls; and

    3. continuing sales of Mattel’s Barbie dolls.

    Finally they asserted that they could not immediately re-enter the market after the injunction was lifted because of the time that would be taken to re-establish commercial links severed as a result of the imposition of the injunction.

  50. MGA’s pleaded answer as amended was in short that the claim for US$7,245,044 was speculative and unjustified and, if awarded, would provide the defendants with an unjust windfall, the calculations based on expressions of interest were misconceived and without any credible basis in the evidence and the defendants were small time traders whose Funky Tweenz dolls could not be compared in terms of potential growth with the growth of the Bratz or Barbie dolls because the defendants did not have the financial ability, marketing strength and distribution networks of MGA or Mattel and the Doll Report focused on the US market, whereas the defendants’ main market was Europe and made no sales of the original doll in the United States. Further, and to my mind importantly, MGA relied upon the defendants’ case as expressed in Mr Poole’s report, that the average life cycle for each individual product line was 16 to 24 months. The defendants’ pleaded response essentially amounted to a joinder of issue.

  51. In my judgment, there are two particular aspects of the case in respect of which the judge’s approach cannot be supported, one of which is more important than the other. The first is the way the judge dealt with the cease and desist letters and the second, and much more important, is his justification for taking a period of ten years over which to assess the defendants’ loss. I will discuss them briefly in turn.

    The cease and desist letters

  52. The judge correctly held at paragraph 46 that in the last week of May 2002 MGA and/or its agents (who included lawyers) wrote to distributors or potential distributors whom they had identified in various ways what are known as cease and desist letters. He further correctly held that the purpose of such letters was to persuade, by threats of legal action, those distributors from marketing the Funky Tweenz dolls. He added, as was the case, that they covered a wide area, notably Canada, Spain, the United Kingdom, Finland, Holland and Florida. He noted that some of the distributors considered resisting the threats if they could obtain an indemnity from the defendants but, as he realistically said, such an indemnity was not likely to be forthcoming. The judge further held in paragraph 47 that, although the letters were couched in general terms intimating likely claims for damage, cost and an account, the real purpose was to restrain the recipients from selling the goods. He noted that two of the solicitors threatened claims for injunctive relief and in Finland they covered the full ambit of the injunction claimed by MGA in Hong Kong. However, he correctly recognised that most of the letters did not refer to injunctive relief and that the purpose of all the letters was to restrain any trade in Funky Tweenz dolls.

  53. The judge then said this in paragraph 48:

  54. Then one must look at the defendants’ reaction to the actions of MGA. It was not the litigation per se which caused them to cease marketing and production and hand over all the equipment to MGA (or its agents); it was the injunction. The market outlets had been stopped up and MGA wanted the source equally inhibited. It succeeded. The defendants lost what they had achieved and what appeared to them to be promising. It may be artificial in the circumstances of this case to draw a distinction between the effect of the litigation and threatened litigation, and that of the interlocutory injunction. I have no doubt that the overwhelming factor was the injunction and that loss directly flowed from it.

  55. It was submitted on behalf of MGA that in that paragraph the judge was considering the wrong question. He was considering the defendants’ reaction to the actions of MGA, whereas he should have been considering the reaction of potential customers. I agree. As the cases referred to above, notably Air Express and Lilly Icos show, the question is what loss was caused by the injunction, not what loss was caused by the litigation. As Cheung JA pointed out in his dissenting judgment in the Court of Appeal at paragraph 92, there might be other causes of action available in cases of this kind but here the sole question is that posed by the cross-undertaking, namely whether the order of the court has caused loss to the defendants. That is the only question for decision.

  56. In these circumstances the judge was, in my judgment, wrong to say that it may be artificial to draw a distinction between the effect of the litigation and threatened litigation on the one hand and the effect of the interlocutory injunction on the other. Moreover he was wrong to say that the overwhelming factor was the injunction, if he meant by that that the reaction of potential customers to the letters must in some way be treated as flowing directly from the injunction. The evidence shows that in a number of the cases it could not have been the injunction that put customers off.

  57. For example, the expressions of interest for the 675,000 units of the Funky Tweenz dolls which formed the original starting point of the calculation of the figure of US$7,250,000 were said to have come from six customers or potential customers as follows:

    • Toys R US Canada Ltd (“Toys R US Canada”) 30,000 units,

    • Kiddy Fun AG (“Kiddy Fun”) 350,000 units,

    • Bizak SA (“Bizak”) 50,000 units,

    • Trade Crown Holdings Ltd, the buying agent for Levy UK (“Levy”) 80,000 units,

    • David Halsall International Ltd (“Halsall”) 150,000 units and

    • Concentra-Productos Para Criancas SA (“Concentra”) 15,000 units.

    It was the defendants’ evidence that Toys R US Canada, Bizak, Levy and Halsall were among the recipients of the cease and desist letters who cancelled their orders or did not place orders because they did not wish to be sued in their respective jurisdictions. In the case of Kiddy Fun, who had expressed an interest in some 350,000 units, by a letter dated 2 May 2002 it sought exclusivity in respect of the supply of dolls to Switzerland, Germany and Austria. However, the defendants’ evidence was that they did not reply to Kiddy Fun. They were already supplying to Quelle AG and Karstadt of Germany.

  58. It is I think important in this regard to note that Mr Kesselring recognized the effect of the letters independently of any injunction. For example in paragraph 30 of his first affidavit he said this:

  59. The legal action started by MGA has had a negative impact on our customers in Europe and Canada right from the beginning (without even having been served yet with the injunction). The reason behind this negative impact lies in the fact that lawyers acting for MGA or their agents such as Bandai had sent out letters to customers of ours even before anybody knew that an injunction would be issued.

    He said much the same in the course of his oral evidence. He said in cross-examination (at p 81 E to F):

    I also was of the strong belief that thanks to your client’s threatening letters to all of my customers, they did a runner; ‘Funky Tweenz, I don’t want to know. Just get me in trouble.’

  60. The majority of the Court of Appeal held at paragraphs 51 and 52 that the cease and desist letters carried “the important statement that MGA was “presently in process of taking [litigation] against (the first and second defendants) in Hong Kong and China” and that, but for that statement, they would have been perceived as empty threats. The difficulty with that conclusion, which was not based on a submission made by the defendants, is that only one of the letters included the statement referred to and, as appears above, the defendants’ evidence was that the letters were taken seriously.

  61. However, it does not follow from these conclusions that loss did not flow from the injunction. Some loss plainly did. Indeed, it seems to me to be a striking feature of the facts that MGA was not willing to rely solely upon the cease and desist letters. It went to considerable trouble and expense to obtain an interim injunction. The only possible purpose for taking that action was concern that, if it did not, notwithstanding the cease and desist letters the defendants would continue to market their Funky Tweenz doll and that it might obtain a foothold in the market to the detriment of MGA. It seems to me that this is a significant factor in considering the defendants’ chances of success in the market in the absence of an injunction. Moreover, it may well be that, if MGA had not sought an injunction or an application for an injunction had been refused, potential customers would have taken a different view. Why else did MGA seek the injunction?

  62. In my opinion, the significance of MGA’s complaint about this part of the judge’s approach should not be overstated. It relates to the question what inferences can be drawn from the expressions of interest, which (as appears in para (1) of the box set out above) were pleaded as relating to up to 675,000 dolls. It is not easy to draw inferences from that figure which help to identify sales lost as a result of the injunction. The safest course is simply to say that the expressions of interest were significant and support the conclusion that the Funky Tweenz dolls had a real place in the market without trying to quantify that loss on the basis of expressions of interest. In fact, as paragraph (2) of the box shows (and as was submitted on behalf of the defendants) Mr Poole did not use the figure of 675,000 in his figure for units projected to be sold in 2002, which was 450,000. In these circumstances, although the judge was in my opinion in error with the regard to the cease and desist letters, it was an error which played a comparatively small part in the overall picture.

    Is ten years of loss justified?

  63. The critical question is whether Mr Poole’s conclusion that the loss caused by the injunction would have lasted ten years is justified. In agreement with Cheung JA in the Court of Appeal, I have reached the clear conclusion that it is not.

  64. The calculations produced by Mr Poole and set out in paragraphs (2) to (4) of the box are instructive. They show a kind of bell curve. The question is upon what primary evidence those figures are based because Mr Poole himself does not have the relevant expertise. The inclusion of the figures in Mr Poole’s report must have depended upon what he was told by Mr Kesselring and his co-director Mr Wilson Lam, who comprised what Mr Poole described as the Cityworld management. Mr Poole made it clear in his report that he relied upon the defendants for the underlying facts. So, for example, he said at paragraph 81 that the damages claimed were based on Cityworld management’s estimated annual sales for the Funky Tweenz brand since its launch on 31 January 2002, which in turn were based on the initial success of the doll supported by the expressions of interest discussed above. He added that the initial interest began rapidly to translate into sales orders and completed sales, with the first shipment in March 2002. He then referred in paragraph 82 to expressions of interest for up to 675,000 dolls and noted that within the first four months customers placed orders for 170,964 units, 94,548 of which were shipped by 10 July 2002, 3,828 were returned and 48,708 which were cancelled due (Cityworld said) to the threats of litigation by MGA against its customers and 27,708 ordered units were replaced by new style dolls, although (as stated above) they were less appealing than the originals.

  65. The figures in paragraphs (2) to (6) of the box were derived by Mr Poole from what he describes in his paragraph 83 as management estimates. As the box shows, they increase (excluding accessories) from 450,000 a year in 2002 to 800,000 between 2004 and 2006, thereafter declining until they level out at 200,000 in 2010 and 2011. Management also estimated that 10 per cent of total sales would be accounted for by accessories and another 10 per cent by other Funky Tweenz branded products. Mr Poole then set out in some detail the assumptions that he made, again based on information from management. They included sales information relating to Bratz and Barbie dolls and noted that the world market for dolls, which is cyclical, was buoyant. In paragraph 94, based on the information he had been given as to the first four months of 2002, Mr Poole regarded a growth target of 30 to 40 per cent in the first three years as reasonable.

  66. Mr Poole then considered what he described as the product life cycle and said at paragraph 95 that the product life cycle of the Funky Tweenz brand of dolls and accessories was expected to last a minimum of ten years. This information appears to have come from Mr Kesselring. He added at paragraph 96 that Cityworld management considered that the product life cycle could be extended beyond ten years “with successful innovation and re-creation of the brand”. He gave examples of both Barbie dolls and Bratz dolls changing with the times. He added that his calculation assumed that a minimum of four new lines of Funky Tweenz dolls would be introduced every twelve months on a weighted basis. He then said at paragraph 99 that it had been suggested, presumably by management, that the average product cycle within any one brand in the fashion doll segment was considered to be 16 to 24 months and that the claim assumed a product life cycle of 15 months for each product line of doll.

  67. Mr Poole then set out his calculation in paragraphs 104 to 106 and his annexure 13. His starting point was the figure of US$8,151,000, which he described as loss of profit on estimated sales of old style dolls plus sale of accessories over the period 2002 to 2011 net of additional incremental costs that would have been required to achieve the targeted sales volumes. Full details of Mr Poole’s calculations are contained in annexure 13 to his report, which is reproduced as Annexure A to this judgment. However, in paragraphs 104 and 106 he described the basic position. He described the loss as comprising

    1. loss of profit based on estimated sales of the old style doll,

    2. loss of profit based on estimated sales of associated and related products with the old style doll and

    3. additional incremental costs that would have been required to achieve the targeted sale volumes.

  68. The loss under (a) was based on annual projected sales for what he described as the old style doll (which is of course the doll with which this appeal is concerned) at an average selling price of US$4.10 per doll and an average gross profit of 33 per cent. The figure of US$4.10 was based on correspondence with customers during the expression of interest phase and both parties have accepted it for the purposes of calculation. In any event, it seems to me to be reasonable to do so. Gross profit was calculated upon the basis of sales less the cost of sales, which was the invoiced price paid by the defendants to the manufacturer. All sales were on an FOB basis so that no other cost items were included. In his report Mr Poole explained the basis for (b) and (c) but it is not necessary to repeat it here. Mr Poole arrived at a total loss for the period 2002 to 2007 of US$7,251,000 by deducting the actual profits on the old and new dolls over that period which amounted to US$943,000 and adding back the costs incurred in connection with the launch of the new style dolls, namely US$15,000, and the replacement cost of the lost moulds, namely US$28,000. Mr Poole noted that he did not include sales for the period 2008 to 2011 because the numbers were minimal. Sales of all Funky Tweenz dolls in 2007 totalled 3,480 units.

  69. In my opinion there are two principal problems with Mr Poole’s approach, or more accurately with the material upon which it was based. The first is that it depends upon the conclusion that the dolls would have a ten year life span and the second is that it depends upon treating the Bratz and Barbie dolls as realistic comparators when trying to arrive at a fair figure for the defendants’ loss caused by the injunction.

  70. There was evidence from both parties that a particular doll would have a life span of no more than about two years. That was the clear evidence of the MGA witnesses who gave evidence. They said that in order to survive beyond a period of that order the particular brand of doll would require refreshing, which would involve more than just changing the facial decoration. It would involve considerable expenditure, including expenditure on marketing and development. Moreover, as stated above, Mr Poole was told by the defendants that the average product cycle within any one brand in the fashion doll segment was considered to be 16 to 24 months and that the claim assumed a product life cycle of 15 months for each product line of doll.

  71. Mr Kesselring’s evidence did not fully bear out what he or his co-director had told Mr Poole. When it was put to him in examination in chief that it was a common understanding in the industry that a toy normally had a life span of approximately two years and he was asked what he would say to that, he said: “I totally don’t agree with it.” He said that there were brands which had been around for more than 50 years. He gave examples which included Lego and also included Barbie from Mattel. He also referred to Bratz in the same context. In cross-examination he was asked how long, in his experience, would the life span of a doll be with one facial decoration. His answer was that “we know of Barbies that were around without too many changes for about ten years. We know of Steffi doll of Simba in Germany, who has the same facial expression and the same face for almost twenty years without changing, and they are both 11½ inch fashion dolls”. He was asked whether he had any evidence as to that and he said that he could find it. Counsel said that it would be helpful if he could but he never did, or at least no such evidence was put before the court.

  72. In paragraph 27 of his first affidavit dated December 2008, having compared his Funky Tweenz dolls and MGA’s Bratz dolls, Mr Kesselring referred to Mr Poole’s analysis of the figures to which I have referred which suggested that sales could climb from 450,000 pieces in 2002 up to 600,000 in the second year (2003) and 800,000 pieces if not more in the third year (2004) and thereafter. He said that, if the sales performance of Bratz is anything to judge by, the market life of the original style Funky Tweenz should still be in its prime up to the present and could be expected to last for ten years or so since its launching in 2002.

  73. As I read Mr Kesselring’s evidence he was not saying that the Funky Tweenz dolls would survive for, say, ten years or more if they were refreshed in the sense used by other witnesses but that, if market conditions were good, as they were, there was no reason why the original Funky Tweenz doll could not last for ten years or more, no doubt with appropriate marketing and the like but without significant changes.

  74. This is I think clear from paragraph 16 of his first affidavit, where he said this:

  75. 16.

    The importance of getting the right face for a line of dressing dolls cannot be exaggerated, as the success stories of the Barbie dolls and the Bratz dolls has indicated, once a toy company has got the right face for its doll it is most reluctant to change it. Bratz dolls have been using basically the same face since it was launched. Barbie dolls have been using their current face for over a decade now. Such conservative attitude in maintaining the facial features came from a good understanding of the market demand, a slight change to the face can make the doll much less appealing, and thus, less competitive, in the market. Moreover, once the end customers associate their good impression for an appealing face of a dressing dolls with one's particular brand, it will be quite safe to experiment with the accessories of the brand whilst refreshing its market appeal with variants in the same line of products. That has been the case in the Barbie or the Bratz. There is no reason why we could not have done it with the original face of the Funky Tweenz. The face of a doll is therefore of fundamental importance when considering the market value of the doll.

    It is plain from the reference to the Bratz dolls using the same face since they were launched and to the Barbie dolls using the same face for a decade that Mr Kesselring was not contemplating refreshing the dolls during the first ten years.

  76. In paragraph 59 above, I set out Mr Poole’s understanding of the prospects of the Funky Tweenz dolls lasting up to ten years or more. He does not explain very clearly precisely what he had in mind, either within the ten years or thereafter. He was not however an expert on this part of the case. The validity of his evidence depends entirely upon input from management, and in particular Mr Kesselring. For the reason I have given, I do not think that Mr Kesselring was contemplating the kind of refreshment referred to by the MGA witnesses. Unfortunately the judge simply accepted Mr Poole’s evidence at face value without an analysis of the underlying evidence of Mr Kesselring and others.

  77. I agree with Cheung JA in the Court of Appeal that in failing to do so the judge fell into error. In particular I agree with him that it was wrong in principle for the judge simply to accept Mr Poole’s opinions without such an analysis. Moreover, absent such an analysis I do not think that it was appropriate for the majority of the Court of Appeal to say that there was no reason to interfere with the judge’s decision. On the contrary, I have reached the conclusion that the judge was wrong to accept Mr Poole’s opinion that the injunction caused the defendants ten years’ loss.

  78. I have set out paragraph 77 of the judgment in paragraph 38 above. I am not persuaded by the reasoning contained in it. In the first sentence the judge says that, given the policy of refreshing the brand, and adding to it, the yearly estimates are reasonable. However, for the reasons I have given I conclude that the defendants did not have a policy of refreshing the brand in the sense used by MGA. Although they would have done their best and may well have had a policy of adding to the brand at some time in the future, there is in my opinion no basis for concluding that the yearly estimates are reasonable based on a policy of refreshing the brand, On the contrary, as Mr Kesselring’s evidence quoted at paragraph 67 above shows, he intended to use the same face on the Funky Tweenz dolls for a decade, which he could not have done because of the evidence that a doll lasts no more than about two years in the market without refreshment.

  79. The judge was also wrong in my opinion to have regard to the Bratz and Barbie dolls as comparators in the way that he did. It is true that, as stated for example in paragraph 32 above, he several times observed that the defendants were in a different league from MGA and Mattel and, as stated in paragraph 36, he noted that Mr Poole’s conservative approach precluded him from finding that the defendants could have reached or rubbed shoulders with the likes of them. However, in paragraph 77 of his judgment he seems to me to have placed considerable reliance upon MGA and Mattel as comparators. Although he does recognize in that paragraph the considerable disparity between the defendants and MGA (and Mattel) and expressly says that in some respects the comparison and ratio between them is meaningless, he nevertheless uses the comparison as some justification for the defendants’ case. Such a comparison is in my opinion of very doubtful value.

  80. In particular, there is no convincing evidence that the defendants could have spent anything remotely approaching the amounts spent by MGA in developing, marketing and refreshing their dolls. For example, there is undisputed evidence that, in connection with the launch of the Bratz dolls in 2001 and 2002, MGA spent US$7,500,000 in the United States. This is in sharp contrast with the limited promotional efforts of the defendants and the promotional and advertising costs of some US$14,000 per annum postulated by Mr Poole (and shown in annexure A). Moreover, there is evidence that in a period of eight years MGA made between 150 and 170 spray masks for new facial decorations of the Bratz dolls. Further, although the defendants would no doubt have done their best, the evidence does not establish a realistic prospect of the defendants matching that or anything like it. The most that can be said on behalf of the defendants is that the Bratz evidence shows that the underlying market for dolls was buoyant at the time and that there was no reason why, absent an injunction, the defendants would not have made such efforts as they reasonably could to exploit the market.

  81. Finally in connection with paragraph 77, the judge several time refers to the fact that MGA did not provide any figures for their own business which might have been used to test Mr Poole’s evidence. That is true in part and perhaps has some forensic force but it is difficult to see how it helps to arrive at a fair figure for the loss sustained by the defendants.

  82. For these reasons I have reached the conclusion that the judge’s figure for loss, based as it is on loss of profit over ten years is wrong in principle. I would therefore set aside his order in that respect. I do so for largely the same reasons as Cheung JA gave in the Court of Appeal. In particular, I agree with him (at paragraph 91) that the problem with Mr Poole’s report, which was based on figures provided by the defendants, appeared more like a business plan with a rosy projection of future growth than an analytical examination of the loss sustained by the defendants. I further agree with him that to accept the report uncritically is to provide the defendants with a windfall which is not supported by the evidence.

  83. The question then arises what should happen next. Cheung JA said that he would have ordered a retrial. However in this court, unsurprisingly, neither party was enthusiastic about a retrial and both parties made submissions on the basis that the court would assess the loss for itself. The court agrees that it should do its best to assess the appropriate compensation in order to avoid the expense and delay which would inevitably be involved in a retrial. I therefore turn to that question.

    What sum should be awarded to the defendants?

  84. As the discussion (and differences of opinion) so far have shown, this is not an easy exercise, partly because the effect of the injunction was that the defendants had to stop trading in the Funky Tweenz dolls, with the result that the only sales took place before July 2002, when the injunction was granted. However, it is appropriate to apply the broad test identified by Lord Wilberforce, namely that, although the burden of proof is on the claimants (here the defendants) and the object is to compensate the defendants and not to punish the plaintiff, compensation should be liberally assessed. Moreover, the assessment should be carried out in a broad commonsense way. There are a number of factors which suggest that there was a good chance that, absent the injunction, the defendants would have made significant profits.

  85. They include the following considerations.

    1. As soon as the defendants put their new Funky Tweenz dolls on the market, there was considerable interest in them.

    2. Although some customers were deterred by the cease and desist letters, a significant number of sales were made.

    3. The market in dolls was buoyant for a considerable time from 2002 onwards and, although the defendants were not able to operate on anything like the scale of MGA or Mattel, there is no reason why they should not be able to benefit from favourable market conditions.

    4. MGA plainly regarded the defendants as a threat in the market because they did not simply rely upon the effect of the cease and desist letters but took much trouble and must have incurred no little expense in obtaining an interim injunction against the defendants. In seeking the injunction MGA asserted that damages were not an adequate remedy. So far as I can see, it could only have advanced such a case on the basis that the defendants would be a significant threat to them in the market and there would only be a serious threat if there was a real chance that the defendants would make an impact in the market by selling its Funky Tweenz dolls together with various accessories.

  86. A total of 171,000 dolls were sold in the first few months of 2002 of which 48,000 (or 28 per cent) were cancelled, probably because of the cease and desist letters. MGA relied upon the evidence that in the doll market the first few months of the year were the most important. That is true but we must surely bear in mind that the defendants had only just started up and it would inevitably have taken them some time to build up a customer base. For this reason I would expect growth in 2003. One approach would be to take 171,000 dolls for the second half of 2002 and a total of rather more in 2003, by which time, but for the injunction, the defendants would have been trading for a year and have had time to increase their customer base.

  87. In the course of Mr Yan’s oral reply submissions on behalf MGA, he submitted that the dolls would have had a life of two years and that total sales in each of the two years would equal 342,000 (ie twice 171,000), so that the total lost sales would have been 171,000 for the second half of 2002 and 342,000 for 2003, making a total of 513,000 units. At a price of US$4.10 per unit and a gross profit margin of 33 percent, the gross profit on the dolls would be US$694,089. To that he added the following on the basis of figures which appeared in Mr Poole’s report (especially Annexure 13) and were generally accepted for present purposes:

    1. per cent x 513,000 x US$2.35 x 43 per cent loss of profit on sales of accessories, which amounted US$51,839;

    2. per cent x 513,000 x US$6.59 x 43 per cent, which amounted to US$145,369;

    3. costs of US$14,909 in connection with the new dolls post injunction;

    4. replacement costs of the lost moulds of US$28,010.

    He then deducted actual profits for 2002 and 2003, namely US$248,615 and US$422,368 respectively and two further figures for costs in those years of US$18,500 and US29,654. That calculation yielded a net profit of US$215,079. Since the end of the oral argument MGA has produced a further calculation which is the same as that set out above save that the figure of US$248,615 has been reduced by US$132,152 in order to reflect the actual sales in 2002. According to the latest schedule that gives a net projected loss of US$332,322.

  88. After that schedule was produced the defendants were given an opportunity of commenting upon it. One of the points made on their behalf was that, although the dolls were shown at fairs in January and February, as Mr Poole showed in his annexure 3, Funky Tweenz dolls were first shipped only in March 2002 and then in small quantities. On that basis it was correctly submitted that there was a maximum of four months’ pre-injunction sales on which to base the future trajectory of Funky Tweenz dolls. It follows that the figures produced by MGA (which were produced during its reply and thereafter) significantly understated the position.

  89. It follows that to limit the recoverable loss to the figure of US$332,322 would not in my opinion be just. The defendants make a further submission which seems to me to have considerable force. It is that it is artificial to conclude that at the end of the life cycle of, say, two years, sales would be switched off like a tap. While, as I observed at paragraph 64, Mr Kesselring did not provide any evidence in support of his general assertion, it appears to me to be common sense that in a good market which was buoyant for the sale of dolls, some allowance must be made for sales after the end of the two years. Moreover, it is plain that Mr Kesselring was full of ideas for the future, as shown by his development of the Funky Tweenz dolls.

  90. It was submitted that the court should accept the estimate given by Mr Poole that the growth rate should be estimated generally at 30 per cent per annum. I would not accept that figure because it depended upon the assertion of Mr Kesselring and was not supported by independent evidence. It seems to have depended upon growth of comparators. However, the difficulty with it is that stated earlier, namely that the principal comparators were MGA and Barbie, which for the reasons given above were not appropriate comparators because of their very different sizes and resource.

  91. The underlying question is what, if any, chance the defendant had of making more profits than the figures in the schedules produced on behalf of MGA suggest. In my opinion they did have such a chance, for two reasons. The figures are too low because they assume six months of sales before the injunction was granted, whereas there were four and the first few months were likely to produce significantly less sales than would have been produced once they were in full swing. The market was good. The defendants would not have sat back and done nothing when the two years expired but would have done their best in the market and, as MGA no doubt feared when they sought the injunction (notwithstanding the cease and desist letters), would have had good prospects of being a real player in the market, albeit on a very much smaller scale than MGA itself.

  92. It is not easy to arrive at a figure because the loss of a chance is not easy to assess. Standing back from the latest figure produced by the MGA and, taking all the circumstances into account as well as I can I would award a sum of US$450,000 as fair compensation for the defendants’ loss together with interest at the rate ordered by the Court of Appeal the rate of 1 per cent above the prime lending rate for a period to be agreed or determined. It appears to me that, if one stands back and considers how much net profit the defendants will have made since the injunction (and because of it), which of course involves taking account not only this award but also the net profit derived from the new dolls which the schedules correctly take into account, the overall sum is reasonable.

    CONCLUSION

  93. For the reasons given above, I would allow the appeal, set aside the order of the judge and the Court of Appeal, assess the defendants’ net unrecovered loss at US$450,000 and substitute that figure for the figure ordered by the judge. I would award interest on that sum at 1 per cent above the prime lending rate for a period to be agreed or determined. As to the costs and the period for which interest should run, I would direct that any submissions be made in writing, and exchanged and lodged with the Court within 14 days of the handing down of this judgment, with liberty to the parties to exchange and lodge written submissions in reply within 14 days thereafter.

  94. Chief Justice Geoffrey Ma

  95. The appeal is unanimously allowed. The Court also makes the orders set out in paragraph 85 above.

    Annexure A

17 MARCH 2014


Judgment

Justice Joseph Fok

  1. By its Judgment dated 5 February 2014, the Court unanimously allowed the plaintiff’s appeal against the assessment on the inquiry into the loss sustained by the defendants as a result of the interlocutory injunction granted to the plaintiff. In substitution for the Judge’s assessment of that loss in the amount of US$7,250,000, which a majority of the Court of Appeal upheld, this Court assessed that loss at US$450,000 with interest.

  2. As directed by the Court, the parties have now filed submissions in writing on costs and the period for which interest should run.

  3. The parties have agreed interest in the sum of US$271,567.50 and so the remaining dispute between the parties relates only to the question of costs.

  4. This is the judgment of the Court as to those costs.

  5. The plaintiff’s stance is that the defendants made a grossly exaggerated claim of US$7,245,044 at the inquiry into damages before the Judge and, on the footing that they should only have recovered US$450,000 plus what would at the time of the inquiry have been a relatively modest amount of interest, the plaintiff submits the real winner is the plaintiff so that the entirety of the costs of the inquiry as well as both appeals should be awarded in its favour.

  6. The defendants for their part take a diametrically opposite position to that of the plaintiff and contend that all the costs of the inquiry and the costs of the appeals to the Court of Appeal and this Court should be awarded to it. Their submission is that the inquiry was inevitable because the plaintiff was not prepared to submit to an award of damages greater than the amount of a sanctioned payment in the sum of US$231,612.80, which was substantially less than the amount to which they have been adjudged to be entitled.

  7. Despite the citation by the parties of various Rules of the High Court and authorities on costs, the resolution of the issue of costs in this case boils down to a pure exercise of discretion and no question of principle is raised.

  8. So far as the costs of the inquiry are concerned, it is clear that the defendants had to proceed to a hearing of that inquiry in order to recover more than the assessment proffered by the plaintiff’s expert in the sum of US$171,788. As events have shown, that assessment was only about one-third of what the defendants have in fact been awarded. In addition, although the plaintiff made a sanctioned offer of US$180,000 (exclusive of interest) or US$200,000 (inclusive of interest) and then a sanctioned payment equivalent to US$231,612.80 before the hearing of the inquiry, the amounts of the sanctioned offers and payment were insufficient to compensate the defendants for their losses caused by the injunction. On the other hand, the defendants’ reliance on the testimony of their expert in order to seek to recover US$7,245,044 was unjustified for the reasons explained in this Court’s Judgment of 5 February 2014. It is clear that considerable time was spent at the inquiry on the challenges to the evidence of the defendants’ expert in particular his assessment on the basis of ten years’ loss of profits.

  9. A proper exercise of discretion on the question of costs of the inquiry would lead to an award of costs in favour of the defendants but discounted to reflect the inflated claim, which was not reasonably arguable and led to a considerable amount of time wasted.

  10. So far as the appeal costs are concerned, the plaintiff was obliged to pursue the appeal to the Court of Appeal in the light of the excessive award of damages entered by the Judge. Similarly, the plaintiff correctly pursued its appeal to this Court in the light of the Court of Appeal’s dismissal of the appeal from the Judge.

  11. In terms of the result, in place of the order to pay the defendants damages in the sum of US$7,250,000 plus interest, the plaintiff has now been ordered to pay the significantly reduced sum of US$450,000 plus interest. Even taking the interest into account, the damages assessed by this Court represents less than 10% of the loss claimed by the defendants. The plaintiff is therefore properly to be regarded as the real winner of the litigation on the appeals.

  12. In the circumstances:

    1. The plaintiff shall pay 75% of the defendants’ costs of the inquiry, to be taxed on a party and party basis, if not agreed;

    2. The defendants shall pay the plaintiff’s costs of the appeal in CACV 104/2011 to be taxed on a party and party basis, if not agreed; and

    3. The defendants shall pay the plaintiff’s costs of this appeal to be taxed on a party and party basis, if not agreed.


Representations

John M Y Yan SC and Colin A Shipp (instructed by William W L Fan & Co) for the Appellant.

Paul Stephenson (instructed by Danny K H Yu & Co) for the Respondents.


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