NEW ZEALAND INSULATORS LIMITED V ABB LIMITED AND ORS CA CA215/06

NEW ZEALAND INSULATORS LIMITED V ABB LIMITED AND ORS CA CA215/06 4 December 2006IN THE COURT OF APPEAL OF NEW ZEALAND CA215/06BETWEEN NEW ZEALAND INSULATORS LIMITED Appellant AND ABB LIMITED First Respondent AND ABB INDUSTRY PTE LIMITED Second Respondent AND ABB STOTZ-KONTAKT GMBH Third Respondent Hearing: 13 November 2006 Court: Glazebrook, Robertson and Ellen France JJ Counsel: J E Hodder and N S Wood for Appellant A H Brown QC and A C Paterson for Respondents Judgment: 4 December 2006 at 4 pmJUDGMENT OF THE COURT A The appeal is allowed. B There will be a stay of all relief until the disposal of the pending appeal in this Court on the conditions set out in [56]. C Costs of $6,000 are awarded to the appellant, together with usual disbursements.____________________________________________________________________REASONS OF THE COURT(Given by Robertson J)Introduction[1] This is an application for a stay of a judgment of Courtney J delivered in the High Court at Auckland CIV-2004-404-4829 on 20 September 2006 and varied on 27 October 2006, pending determination of a substantive appeal, which is unlikely to be heard until the middle of 2007.Background[2] There was a month-long hearing before Courtney J at the end of 2005 about miniature circuit breakers (mcbs) which have been used in New Zealand since the 1970's to replace rewireable fuses in switchboxes. Until early 2004, the New Zealand market was dominated by a product known as the S91 (which can loosely be described as an ABB product), a product designed and manufactured by the three respondents. [3] The appellant (NZI) was involved in the distribution, but at the end of 2003 their licence to do so was terminated. NZI decided to source its own mcbs and compete. It produced a copy of the S91 under its own brandname - Basemount (BM). BM products dominated the mcbs market until NZI's ability to trade in the product was curtailed by the High Court. [4] The respondents alleged that, by manufacturing and marketing the BM mcbs, the appellant breached the Fair Trading Act 1986 and breached copyright. [5] The Judge concluded that NZI was liable under ss 9 and 10 of the Fair Trading Act 1986 for misrepresentations as to the commercial origin of the BM mcbs. A passing off claim failed. Courtney J found liability under the Fair Trading Act 1986 on the basis of a representation that the BM mcb was equivalent to S91when in fact it did not comply with reg 69 of the Electricity Regulations 1997. She also found infringements in copyright. [6] The Judge ordered injunctive relief which after variation now provides: (a) NZI shall cease having manufactured and cease importing, distributing and selling any miniature circuit breakers that: (i) bear labelling that is deceptively or misleadingly similar to the labelling that the S91 bore before 1 January 2004 and that are packaged in blister wrapping or boxes that are deceptively or misleadingly similar to the blister wrapping or boxes in which the S91 was packaged before 1 January 2004; (ii) incorporate any of the three components shown in ABB's drawing GH S090 4501, GH 2090 4526 or GH S090 7801 until 12 May 2010; (iii) Bear any labelling representing that they have a short circuit rated capacity of 3kA; (b) NZI shall deliver up to the respondents all the BM mcb units in its power, possession or control; (c) NZI shall deliver up to the respondents a list of all third parties to whom it has sold the BM mcbs between the period 1 January 2004 and 20 September 2006; (d) NZI shall deliver up to the respondents all advertising and promotional material containing illustrations of or references to the BM mcbs together with all designs and specifications of any of the infringing components within its power, possession or control; (e) NZI shall remove from its website any reference to the BM mcbs that bear labelling deceptively or misleadingly similar to the labelling thatthe S91 bore prior to 1 January 2004 or blister packing or boxes that are deceptively or misleadingly similar to the blister packaging or boxes in which the S91 was packaged prior to 1 January 2004; and (f) NZI shall deliver up to the respondents any of the tooling and moulds used to make any of the infringing components that are in its power, possession or control. [7] The question of damages awaits a further hearing. [8] On 7 October 2006, Courtney J heard an application for a stay pending appeal. In a reserved judgment of 27 October 2006, she refused relief. The appeal before this Court challenges not only the substantive High Court decision, but three interlocutory rulings made during and after trial. [9] NZI seeks a stay of the injunctive relief on the basis that the right of appeal otherwise will be rendered nugatory because: (a) being unable to sell its BM product in the interim effectively means it is forced to give up its substantial goodwill both in the BM mcb product specifically and generally for the sale of plug-in mcbs; (b) that goodwill and associated custom will not readily be regained from wholesalers after (and in the event of) a successful appeal, because customers will by then have developed relationships with alternative suppliers – principally the respondents – for similar products; (c) unless an undertaking is required of the respondents (which the High Court did not order when refusing a stay), there is no legal basis upon which NZI could recover from the respondents (or anyone else) the substantial losses that it will suffer if it has been wrongfully restrained from selling the BM mcb product; and (d) even if there were an undertaking as to damages from the respondents, it is notoriously difficult to quantify damages for loss of goodwill andnear impossible to prove that NZI's loss of custom was attributable to being wrongfully restrained rather than to legitimate competition or changed conditions in a dynamic market.The applicable law[10] As was the case in the High Court, the principles applicable to a stay are not seriously in dispute. [11] The principles were conveniently summarised by Hammond J in Dymocks Franchise Systems (NSW) Pty Limited v Bilgola Enterprises Ltd (1999) 13 PRNZ 48 at [9] (HC) and this Court accepted them as reflecting the relevant factors. [12] Mr Hodder also referred to intellectual property cases in comparable jurisdictions including Powerflex Services Pty Ltd & Ors v Data Access Corporation(1996) 137 ALR 498 where a Full Bench of the Federal Court of Australia confirmed that there was no need to demonstrate "special" circumstances before granting a stay, but that it was: "sufficient that the applicant for the stay demonstrates a reason or an appropriate case to warrant the exercise of discretion in his favour": at 499. [13] To like effect is Minnesota Mining & Manufacturing Co v Johnson & Johnson Ltd [1976] RPC 671 (CA) where Buckley LJ noted at 676:On what principles ought such a discretion to be exercised? The object, where it can be fairly achieved, must surely be so to arrange matters that, when the appeal comes to be heard, the appellate court may be able to do justice between the parties, whatever the outcome of the appeal may be. Where an injunction is an appropriate form of remedy for a successful plaintiff, the plaintiff, if he succeeds at first instance in establishing his right to relief, is entitled to that remedy upon the basis of the trial judge's findings of fact and his application of the law. This is, however, subject to the defendant's right of appeal. If the defendant in good faith proposes to appeal, challenging either the trial judge's findings or his law, and has a genuine chance of success on his appeal, the plaintiff's entitlement to his remedy cannot be regarded as certain until the appeal has been disposed of.[14] Undertakings may be appropriate (from either side) to maintain a sensible and just balance pending ultimate determination.Stay factors in this case[15] Courtney J found the main factors in determining whether to grant a stay in this case were: (a) Will NZI's right of appeal be rendered nugatory if the judgment is not stayed? (b) Is NZI bona fide in bringing an appeal? (c) Is the BM mcb safe? (d) The effect of a stay on the respondents. (e) The effect of a stay on NZI's staff. [16] There is no sustained argument against the conclusion that this is the sort of case in which the right of appeal will probably be rendered nugatory by the failure to grant a stay. Mr Brown did not argue to the contrary, but contended that other factors were to be given priority. Courtney J accepted that approach and placed overwhelming emphasis on issues of safety. [17] Nor is it in dispute that this is a bona fide case with substantive issues which are properly arguable on appeal. [18] As well as Fair Trading Act issues, the appeal raises questions as to the interpretation of the Copyright Act 1994 and whether the High Court was correct not to apply the Privy Council decision of Interlego AG v Tyco Industries Inc [1989] 1 AC 217. [19] The proper starting point for the exercise was enunciated by Cotton LJ inPolini v Gray (1879) 12 Ch D 438 at 446 (CA) when he said: when there is an appeal about to be prosecuted the litigation is to be considered as not at an end, and that being so, if there is a reasonable ground of appeal, and if not making the order to stay the execution of the decree orthe distribution of the fund would make the appeal nugatory, that is to say, would deprive the Appellant, if successful, of the results of the appeal, then it is the duty of the Court to interfere and suspend the right of a party who, so far as the litigation has gone, has established his rights.[20] There has been no deviation from that fundamental principle in subsequent cases over the years. [21] The appropriate position with regard to the appeal being rendered nugatory and the fact that the appeal is bona fide was encapsulated by Buckley LJ inMinnesota Mining at 678 when he said: where there appears to be a genuinely arguable case, the odds in favour of the one party or the other should not, in my opinion, weigh much, if at all, in the scales. The court should not at this stage embark upon a premature determination of the appeal.The balancing exercise[22] Accepting that the appeal would probably be rendered nugatory, and that NZI are bona fide in bringing the appeal, the three other factors identified by Courtney J require consideration. [23] Before undertaking this balancing exercise, it is necessary to outline further background facts. [24] Prior to the end of 2003, there was a collaborative arrangement between the appellant on the one side and the respondents on the other. The respondents (as they were entitled to) decided that they would go it alone and attend to their own distribution of their mcbs. [25] Thinking there were no copyright issues, NZI arranged to have an identical product copied in China which it then introduced into the New Zealand market. [26] Because of its pre-existing relationships (the appellant had contacts with the warehouses and other likely purchasers of the BM mcbs), the appellant captured the lion's share of the market.Safety considerations[27] In the course of the hearing before us, the matter which loomed largest was a question of public safety which Mr Brown QC summarised as:In this case this onus to demonstrate a proper basis that will be fair to all parties must also extend to the public because of the electrical safety issues raised by the judgment.[28] A substantial part of the merits judgment relates to findings made by the Judge about the safety of the BM mcbs and whether they should be in the market at all. Safety was the predominant feature of the High Court stay judgment. [29] The argument surrounding the safety of the BM mcbs needs to be assessed within the context of a commercial battle between these parties. In June 2004, ABB referred the safety of the BM mcbs to Energy Safety Services (ESS), a government agency operating as part of the Ministry of Economic Development. ESS is responsible for safety issues relating to gas and electricity appliances and installations and oversees the safety requirements of the Electricity Act 1992. ESS has power to investigate possible breaches of the Act as they relate to safety issues. ESS took no action. It has not done so to the present time. We are advised that it has been kept informed of the progress of this litigation and the judgments which have been delivered. [30] It is neither appropriate nor necessary for us to go into the details of Courtney J's findings about safety. In the substantive appeal (as it relates to this aspect of the case) it will be argued that the Judge was fundamentally in error in her assessment of the evidence. It is contended that she conflated issues of "safety" and "quality" in the conclusions which she reached. [31] There are statutory provisions in the Fair Trading Act, the Electricity Act and its Regulations, and the Building Act 2004, which enable relevant public authorities to unilaterally and if necessary, summarily, intervene to protect the public from a product which is not safe. It is not without significance that such action has not occurred despite relevant authorities having been apprised of the position. In assessing the balance relating to a stay, that reality must not be overlooked.[32] The question before us is what arrangement should there be which does best justice between the parties pending the hearing of the appeal. We are satisfied we should apply normal principles for an intellectual property dispute between trade competitors. Safety considerations ought not to have been a critical factor in determining the stay application in this case. [33] Excluding from the weighing equation issues relating to safety is neutral. We make no finding as to whether the product is safe or not safe. There are no impediments to anyone with statutory responsibility for safety making whatever investigation, assessment or consequential action which, in their discretion, is considered to be necessary. [34] A vigorously challenged finding of this nature should not become virtually determinative of the stay. That is especially so when the respondents, who place so much reliance upon it, are unwilling to give an undertaking in respect of damage which might accrue to NZI if it is excluded from the market pending the hearing of the appeal. [35] If the appellant is successful in challenging the High Court judgment on the safety and other conclusions, and the justification for preventing the appellant competing with the respondents is not sustained, the appellant will unquestionably suffer serious damage for which it will have no redress. The respondents before us adopted the high moral ground that they were anxious about matters of public safety and argued that they should effectively determine the outcome of the stay proceeding. However, they were quite unwilling to accept the normal commercial consequences of holding such relief if, on appeal, it is found to be unjustified. [36] Putting to one side the safety component, the question comes down to identifying the regime to apply between these parties during the months until there can be an appeal hearing which will permit the full exercise of appellate rights. Both parties now want an early hearing and thus we can assume that they will co-operate to expedite the grant of a hearing date so the period is as limited as it can be.[37] The competitive situation between them has existed since 1 January 2004. There was no suggestion of a need for injunctive intervention when the initial proceedings were commenced, nor during the nine months between the conclusion of the hearing and the issue of the substantive judgment. [38] We are dealing with substantial commercial entities in respect of which there will be proper records concerning all their business activities. If the respondents maintain the liability finding they achieved in the High Court, there will be no greater difficulty in assessing damages for the losses they have sustained as a result of the appellant's illegal activity in the extra period until the appeal is heard than there will be assessing it for the period since the competition commenced.The respondents' position[39] The two parties have competed now for almost three years. Mr Brown's most substantive concern about the ability of the appellant to pay damages arises from the position of the appellant company within a larger group – the Tiri Group – which we discuss later. [40] Mr Brown argued that the undertakings offered were insufficient to safeguard the respondents' position because of the inter-relationship between NZI and other independent companies in the unincorporated Tiri Group. Counsel contended that the proposed obligation to advise of an alteration in the debt ratio, although it would alert the respondents, would not protect them. He submitted that there should in any event be security in the form of a bank guarantee for $320,000 plus a further $3,600 per day until the appeal. [41] We are not persuaded that such an arrangement is necessary or appropriate. The thrust of the undertakings offered by the appellant is clear and unequivocal. The foreboding of the respondents appears to be unduly pessimistic.NZI employees[42] Mr Hodder submitted that it was very likely that, as a result of the stay, there would be redundancy of some 15 employees at NZI's Ashburton factory. BM mcbs represent a large portion of NZI's current business and the evidence suggests it is more likely than not that the employment of a number of people will be terminated if there is not a stay. [43] This is a further situation where damages can properly compensate the respondents if, following the appeal, their position is vindicated, but the damage to the appellant could not be remedied in any meaningful way.Stay conditions[44] Mr Hodder accepted that any stay should be on conditions of the type which have been imposed in similar cases. His suggestions include: (a) NZI will take all steps to expedite the hearing of its appeal; (b) NZI will maintain proper records of all sales of the BM mcbs; (c) NZI will not destroy any relevant records in relation to its business; (d) NZI will not dispose of or encumber any assets otherwise than in the ordinary course of business; (e) NZI will not make any distributions to shareholders without providing ten working days' notice to the plaintiffs; (f) NZI will notify an independent expert nominated by ABB if, at any time before NZI's appeal is determined, the ratio of total assets to secured debt of the Tiri Group falls below 2:1 according to the Tiri Group's unaudited monthly financial statements;(g) NZI will notify an independent expert nominated by ABB if, at any time before NZI's appeal is determined, the secured lender to the Tiri Group of Companies gives any notice that there is or may be a breach of the terms of the security; and (h) NZI will implement new packaging for the current BM mcb bearing its new logo and including a prominent orange stripe, and a new style of labelling for its BM mcb along the lines set out in design option 5 in exhibit "RSH-7" to the affidavit of Robin Stewart Heron sworn on 26 September 2006 except as to the short circuit rated current of 1.5kA or 1500A. [45] These conditions, some of which emerged in this form in a post-hearing memorandum filed by Mr Hodder, were criticised by Mr Brown in a reply memorandum. He submitted that these conditions were less protective than had been the position discussed in the stay hearings in both the High Court and the Court of Appeal, and in documentation which had been filed for them. [46] Mr Brown in particular submitted that there should be a condition requiring the appellant to obtain a report from an independent expert as to the BM mcbs complying with AS/NAS 60898.1:2004. Mr Hodder resisted that requirement on the basis that compliance with that standard is not required under New Zealand law and that the standard itself does not in any event require independent testing. [47] We do not consider it appropriate to attach a condition on independent testing. If the general law requires a particular approach or standard, nothing this Court requires as conditions for a stay diminishes or dilutes the obligations which otherwise apply. Conditions cover matters which will not be dealt with generally, but do need to be repetitive of existing requirements in statute or regulation. [48] Mr Brown also argued for a specific requirement that the appellant provide undertakings to pay damages up to the date of this Court's judgment. Mr Hodder in reply submitted that the conditions were either superfluous (in that the appellant would be required to pay any legally claimable damages) or objectionable (to theextent that they purported to require an undertaking to pay damages that were not legally claimable). We accept Mr Hodder's submission. [49] As discussed in [40] to [42], we do not accept a condition that a bank bond be created is justified. The factual circumstances in this case are quite different from those in Westaflex (Aust) Pty Ltd v Wood [1990] 181 PR 168 upon which Mr Brown placed reliance. There a practice of declaring dividends and then lending them back created competition between judgment creditors and shareholders. The case is not of assistance in our assessment. [50] The final substantive concern raised by Mr Brown arises from the position of the appellant company within a larger grouping – the Tiri Group – and the lack of undertakings from the wider group and the financier of the group. [51] The evidence produced in the High Court is that NZI has $9 million of assets. The respondents' real concern is with a group financing arrangement and the effect that might have on the appellant. There is a security interest in favour of Westpac Banking Corporation to secure a loan of about $20 million. The security is over the assets of various trading companies including the appellant and its immediate parent company, SMIC 84 worth approximately $60 million. There is, in the group, a debt ratio of about 2:1. Mr Brown's submission that the security holder could recover its position solely against this company appears to be extreme and issues of contribution within the group must inevitably arise. [52] We are not unmindful of the fact the current financial position of the appellant is closely related to its marketing of mcbs. That has been the position since the beginning of 2004. If the appeal process is to be a significant and meaningful part of litigation, that cannot of itself be a determinative factor on the granting of a stay. Mr Brown's submission that the conditions offered by the appellant will only warn but not entirely protect the respondents is properly made, but viewing the matter objectively and in the round, an accommodation has to be achieved. There is equal force in Mr Hodder's submission that undertakings cannot be expected from the third party financier and that it is not without significance that the respondents are unwilling to offer any cross-undertakings.[53] On the basis of the information currently available, the damages claim appears somewhat inflated and the ability to meet an eventual award could be less critical than is being suggested. [54] Mr Brown advanced some wording changes to some of the conditions to make them tighter and we have substantially adopted his suggested wording changes in the conditions we impose. [55] Finally Mr Brown questioned whether an ability to reconsider any aspect of the stay should be vested in the High Court. The stay will be an order of the Court of Appeal and any variation or challenge to it should occur here.Conclusion[56] We are satisfied that the interests of justice require intervention. A stay of all relief provided in the decisions of Courtney J of 20 September and 27 October 2006 is granted until the disposal of the pending appeal in this Court on the following conditions: (a) The appellant taking all steps necessary to expedite the hearing of the appeal including filing the case on appeal by 1 March 2007. (b) The appellant repackaging and relabelling all the BM mcbs it distributes, along the lines set out in Design Option 5 in Exhibit RSH 7 to the affidavit of Robin Stewart Heron sworn in these proceedings on 26 September 2006. (c) The appellant relabelling its current BM mcbs to refer to a short rated circuit content of not more than 1.5kA or 1500A. (d) The appellant maintaining full and proper records in connection with its marketing of the BM mcbs.(e) The appellant not disposing of any relevant records in relation to its business operation. (f) The appellant not entering into any transactions (as defined in s 292(1) of the Companies Act 1993) other than in the ordinary course of business without the consent of the respondents or the leave of the Court. (g) The appellant not making any distribution to its shareholders without the leave of the Court. (h) The appellant immediately notifying an independent expert nominated by the respondents if at any time: (i) the ratio of total assets to secured debts of the Tiri Group falls below 2-1 according to the Tiri Group's unaudited monthly financial statements, or (ii) the secured lender to the Tiri Group gives notice that there is, or may be, a breach of the terms of its security. [57] Leave is reserved to any party to apply for a variation of the conditions or additional conditions if a significant change of circumstances so requires.Result[58] A stay is granted on the terms and conditions outlined in [56]. [59] Costs of $6,000 are awarded to the appellant, together with usual disbursements.Solicitors: Chapman Tripp, Wellington, for Appellant Markit Law, Auckland, for Respondents