LENNOX HEARTH PRODUCTS LIMITED V BURLEY APPLIANCES LIMITED CA CA702/2007

LENNOX HEARTH PRODUCTS LIMITED V BURLEY APPLIANCES LIMITED CA CA702/2007 20 May 2009IN THE COURT OF APPEAL OF NEW ZEALAND CA702/2007 [2009] NZCA 191BETWEEN LENNOX HEARTH PRODUCTS LIMITED Appellant AND BURLEY APPLIANCES LIMITED Respondent Hearing: 31 March 2009 Court: Glazebrook, Arnold and Ellen France JJ Counsel: A C Sorrell for Appellant A H Brown QC and D K Wilson for Respondent Judgment: 20 May 2009 at 3.00 pmJUDGMENT OF THE COURT A The appeal is dismissed. B The appellant must pay to the respondent costs for a standard appeal on a Band A basis and usual disbursements.____________________________________________________________________REASONS OF THE COURT(Given by Glazebrook J)Table of ContentsPara NoIntroduction [1]Background [2]The 1997 Agreement [6]The operation of the 1997 Agreement [15]Subsequent events [18]Submissions [19]Our interpretation of the 1997 Agreement [25]Application to this case [29]Result and costs [37]Introduction[1] The issue in this appeal is what royalties, if any, remain payable by Burley Appliances Limited (Burley) to Lennox Hearth Products Limited (Lennox) under a licensing agreement dated 6 January 1997. In the judgment of Lennox Hearth Products Inc v Burley Appliances Ltd HC AK CIV 2001-404-002020 23 November 2007, Keane J held that there was no such liability. Lennox appeals against that decision.Background[2] Burley is an English manufacturer and distributor of electric and gas heaters. By 1993, it had become one of Britain's largest manufacturers of decorative electric fires. At that time it had no gas heating appliance business. However, in 1995, Burley made a flued gas appliance which won an award at the 1995 UK Hearth and Home Show. [3] In 1994, after discussions which had begun in 1993, Burley appointed Mr Fleming as its distributor in New Zealand for Burley electric fires. In late 1994, Mr Fleming offered Burley the opportunity to sell in Europe two models of gas fires that one of his companies manufactured: the G4000 (flueless) and G9000 (flued). The G4000 flueless gas fire was based on the design of Burley's model 216 electric fire.[4] On 6 October 1995, a licensing agreement was signed between Mr Fleming's company and Burley to allow Burley to distribute Fleming products in Europe (the 1995 Agreement). On 1 November 1996, Mr Fleming assigned his company's interest as a licensor to the Queenstown Trust. Approaches to the official gas approvals authority, Gastech, to allow the sale of the G4000 flueless heater in Europe had commenced in October 1995 in Holland, but the approval process was not completed until August 1997. As a result, no G4000 products were manufactured or sold by Burley under the 1995 Agreement because of the lack of Gastech approval. [5] A new licensing agreement, being the agreement in issue in this appeal, was entered into between the Queenstown Trust and Burley on 6 January 1997 (the 1997 Agreement). This superseded the 1995 Agreement. In June 1999, the Queenstown Trust assigned its interest in the 1997 Agreement to a United States corporation and Lennox acquired that corporation's rights under the licence in December 2000.The 1997 Agreement[6] The grant of licence is in cl 3.1:Grant of Licence – During the term of this Agreement and subject to its terms and conditions, the licensor grants to the licensee the exclusive right to manufacture, market and distribute the Products in the Territory.[7] The duration of the licence is specified in cl 2.1. The term commenced on the date of execution (6 January 1997) and ran until 1 January 1999. During the term of the agreement, the licence was exclusive. [8] The "products" are defined in cl 1.1. They are (unless the context otherwise requires):[G]as heating appliances or parts thereof incorporating any and all aspects of the designs and/or inventions embodied in the G2000, G4000, G9000 and G10,000 models of the licensor.[9] There are two levels of royalty in the licence. The first is in cl 5.1 and provides:The [l]icensee shall pay to the [l]icensor a royalty at the rate of 10% of the United Kingdom list price less 34%, less 20% for the products sold within the territory [defined as the European continent and such other areas as the parties agreed to].[10] The second way in which Burley became liable to pay royalties was in accordance with cl 5.2, which says:In the event that the [l]icensee sells a product comprising a burner assembly, catalytic technology and control element in accordance with the products and housings and other portions of the appliance solely of the design for the [l]icensee, the [l]icensee shall pay to the [l]icensor a royalty at the rate of 5% of the United Kingdom list price for the entire product less 34%, less 20%[11] Liability under cl 5.2 survived the termination of the licence. Clause 11.3, so far as it is relevant, provides:Upon termination of this Agreement the licensor shall revoke any licence to manufacture or sell the products and the licensee shall refrain from such manufacture and sale with the exception of an ongoing non-exclusive licence for products as defined in [c]lause 5.2 in return for royalties and payment as provided for in [c]lauses 5.2 and [s]ection 6 of this Agreement.[12] Another relevant clause is cl 8.1 by which the licensor warranted that:[T]o his knowledge and to the best of his belief that he is the owner of all Intellectual Property Rights in the inventions and the designs.[13] The definition of "intellectual property rights" in cl 1.2 was as follows:Intellectual Property Rights means all inventions (subject to letters patent, pending applications or otherwise), designs (whether or not subject to a design application or registered design) or any copyright vesting in any works relating to the G2000, G4000, G9000 and G10000 models of the licensor.[14] In terms of intellectual property rights, in October 1996 Mr Fleming had advised Burley that he had a German utility patent, a UK patent application in progress, a European application in progress on the CO sensor and the ODS (Oxygen Depletion System) arrangements. He also advised of an European application in progress on the "opening catalytic technology". Copies of the patents were supplied to Burley in November 1996.The operation of the 1997 Agreement[15] While the definition of products in cl 1.1 of the 1997 Agreement referred to four models of gas fire, the only one of relevance to this appeal is the G4000. Of the models referred to, Burley says that it never had any drawings for the G2000 and G10000 models and did not ever manufacture these products. As to the G9000, Burley had sample and design drawings and tried to get approval from Gastech to allow these to be sold, but efforts had to be abandoned because of problems with the product. At no stage did Burley ever sell any G9000 models. [16] Burley manufactured and sold only 40 of the G4000 products under the 1997 Agreement. Its evidence was that every G4000 which was sold by Burley had to be returned, repaired or reworked or that refunds had to be given. Burley's outside engineer and technical expert, Mr Duncan Spokes, provided the High Court with a catalogue of the deficiencies and problems encountered with the G4000. Evidence called by Burley from the Australian distributor of the G4000 showed similar problems in Australia, particularly with Mr Fleming's circuit-board. [17] Mr Fleming's evidence was that these criticisms of the G4000 were unfounded. He said that any teething problems were natural given the novel nature of the technology and that they could have been resolved, had Burley persisted.Subsequent events[18] In 1998, because of the issues it had with the Fleming products, Burley engaged Mr Spokes to come up with his own designs for gas heaters. These were then produced and distributed by Burley. The issue is whether royalties are payable to Lennox with regard to the new Burley products under cl 5.2 of the 1997 Agreement.Submissions[19] Mr Sorrell, on behalf of Lennox, points out that Burley, when discussions began between the parties in 1993, had no gas heating appliance business. In 1998, Burley's turnover in relevant gas appliances was zero. In the year ended 1 September 2005, it was £2m. Further, he submits that, when the 1997 Agreement was signed, flueless gas fires were known to be unproved. The marketing advantage Mr Fleming offered Burley lay in the G4000. Essentially, Mr Fleming offered Burley a novel process using conventional technology, whereby the three interrelated elements set out in cl 5.2 enabled complete combustion without the need for a flue. [20] Two of the elements enumerated in cl 5.2 and contained in the G4000 were to Mr Fleming's own design: the burner and the control element. Central to the latter was a circuit board with a carbon monoxide sensor able to shut off the fire if need be. Both of these elements included some proprietary components. The third element, the catalyst, was a third party (Corning) proprietary product. Mr Sorrell submits, however, that such a catalyst had not before been used in the way it was used in the G4000. [21] In Mr Sorrell's submission, because the particular combination of the three conventional components was novel, any use by Burley in any of its products of the combination of a burner assembly, catalytic technology and a control element in a flueless gas heater entitles Lennox to royalty payments under cl 5.2 of the 1997 Agreement. He submits that this clause does not require reproduction or direct evolution from the detail of the Fleming products into Burley products before royalties are payable. Any product manufactured by Burley with some version of each of a burner assembly, catalytic technology and control element arranged so as to work as a decorative flueless gas heater attracts a royalty under cl 5.2. [22] Mr Brown QC, for Burley, submits that the terms "burner assembly", "catalytic technology" and "control element" are well established generic terms that cover a wide range of different design and technical options. These terms have been used in respect of both flued and flueless gas heaters for years. The terms "burner" and "catalysing agent/catalytic apron/catalytic material" are, for example, found inthe 1930 Kline patents produced in the High Court. The Kline patents were granted in the United States in 1928 and 1930 for an attachment to a gas heater and for a gas heater, each embodying the process for complete combustion for which Mr Fleming claims credit. [23] It is Mr Brown's submission that, when properly analysed in the factual matrix, the terms "burner assembly", "catalytic technology" and "control element" do not mean any such element by that name. They must mean the actual elements by that name that are "in accordance with the products", being the specific products which were part of the technology transfer as found in the G4000. Further, on a proper interpretation, all of the three named elements must be "in accordance with the products" as cl 5.2 specifically names the elements conjunctively. Mr Brown submits that Lennox's interpretation of cl 5.2 in effect ignores the words "in accordance with the products" and gives them no meaning and effect. [24] Mr Brown notes that Keane J found that the Burley products in their critical respects are neither identical to the Fleming products nor substantially similar and that they do not derive from the licensed products except to the extent that they use the same or similar third party proprietary components. On those findings, Mr Brown submits that the Judge was correct to hold that the Burley products do not attract the royalty in cl 5.2.Our interpretation of the 1997 Agreement[25] The triggering event for the payment of a royalty under cl 5.2 is the sale by Burley of a product comprising a burner assembly, catalytic technology and control element "in accordance with the products" and "[h]ousings and other portions of the appliance solely of the design [of] the licensee". As Burley submits, the term "product", as first used in cl 5.2, refers to a composite product comprising elements of Burley design as well as the three named elements. In order for a product to attract the cl 5.2 royalty, however, these three named elements have to be "in accordance with the products". According to the definition of products in cl 1.1, this means that the three named elements must "accord" with the "designs and/orinventions" embodied in any of the named models. Like Keane J, we would interpret "accord" as meaning the same or substantially similar. [26] The terms "inventions [and] designs" also appear in cl 8.1. That clause contemplates that there will be intellectual property rights (as defined in cl 1.2) in those designs and inventions. It is unlikely that the terms "inventions [and] designs" are intended to be used in a different manner in the definition of products in cl 1.1. Those terms, as used in cl 1.1, thus appear to contemplate designs or inventions that could attract intellectual property rights. [27] We do not accept Burley's submission that all three named elements must accord with those in the products defined in cl 1.1. If any of the Burley products substantially incorporate any of the designs and inventions incorporated in the models identified in the definition of products in cl 1.1, either singly or in combination, then the cl 5.2 royalty is payable. [28] It is certainly true that cl 5.2 could have been more happily drafted. It is also true that the difference between cl 5.1 and cl 5.2 could have been made clearer. Although it is not necessary for the purposes of this appeal to come to a definitive view on this issue, the way to make sense of the two clauses, which fits most easily with the language used in the clauses, is that cl 5.1 refers to actual models of the licensor and cl 5.2 to composite models of the licensee. Such composite models would embody Burley elements as well as the named elements. The named elements must of course accord, either singly or as a composite whole, with those found in the Fleming products.Application to this case[29] We consider first whether any of the three named elements in the Burley models were the same as or substantially similar to those in the Fleming models (in practice, the G4000). [30] Mr Spokes' evidence was that the principle on which the burner in the Burley models operates differs from that in the G4000 burner. In the Burley burner, gas andair mix over a venturi tube. Such a device is not present in the G4000. That gas-air mixture then leaves the burner box through burner ports which are meshed to prevent back lighting. In the G4000 the gas air mixture leaves through chopped glued ceramic fibre. Keane J accepted this evidence and found that the Burley burner operated on different principles to that in the G4000. It is thus not the same or substantially similar to the burner contained in the Fleming products. [31] As to the catalyst, Keane J held that the Burley catalyst is a third party proprietary product which is indistinguishable from that used in the G4000. However, the third party (Corning) proprietary catalyst used in the G4000 cannot be seen as a design or invention of Mr Fleming, as required by the definition of products in cl 1.1 – see at [26] above. It thus cannot attract a royalty in terms of cl 5.2. [32] As to control elements, the Judge found that the Burley models and the G4000 each rely on a pilot light and gas valve which are industry standard components. The pilot lights used in the products, however, differ and the Burley models do not have a control circuit board to govern the thermocouple and electro- magnetic valve that regulate gas supply, or an audible alarm or carbon monoxide sensor, all of which are present in the G4000. Thus, the control elements in the G4000 are not the same as or substantially similar to those in the Burley models. [33] None of the Judge's factual findings set out above have been challenged by Lennox. Indeed, at trial Lennox did not conduct a comparison of the post-1999 Burley gas heaters to identify what aspects of the design and/or invention embodied in the G4000 were present in Burley's appliances. Keane J noted that "their focus is on whether the Burley products incorporated Mr Fleming's inventive concept, not on any more detailed comparison." On the basis of Keane J's findings, the named elements in the Burley models do not accord with those in the G4000. [34] There remains the issue of whether the combination of the three named elements was a "design and/or invention" in terms of the definition of products in cl 1.1 and whether those three elements in the Burley products accord with the combination of the three named elements in the G4000.[35] Mr Sorrell submits that the mere combination of the three named elements was novel and thus that the combination was a design or invention. This submission does not accord with the evidence. Importantly, it does not seem to be the basis of the claims in the relevant patent applications of Mr Fleming. Further, the Kline patents would appear to rule out the mere presence of the three elements as being novel (although there was evidence that the copper catalyst in the Kline patents would produce dioxins). [36] Although Mr Fleming, in evidence-in-chief, did claim that his "invention" was the mere placement of the three named elements in cl 5.2 in a flueless gas heater, he modified that stance in cross-examination, saying that it was the arrangement of those three named items that was novel. This could conceivably amount to a claim of a design or invention but one would have expected more detailed evidence on this point. More importantly, however, there was nothing in evidence showing the arrangement of the three named elements in the G4000 as compared to the Burley models. Thus, there is nothing to show that the arrangement of the three named elements in the Burley models was the same or substantially similar to that in the Fleming models. The Lennox claim in this regard thus must also fail.Result and costs[37] The appeal is dismissed. [38] The appellant must pay the respondent costs for a standard appeal on a Band A basis and usual disbursements.Solicitors: Macky Robertson, Auckland for Appellant Raymond S Walker, Solicitor, Auckland for Respondent