HCA2152/2002
IN THE HIGH COURT OF THE
HONG KONG SPECIAL ADMINISTRATIVE REGION
COURT OF FIRST INSTANCE
ACTION NO. 2152 OF 2002
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BETWEEN |
| | MGA ENTERTAINMENT INC. | Plaintiff |
| | formerly known as
ABC INTERNATIONAL TRADERS INC.
doing business as MGA ENTERTAINMENT | |
and |
| | TOYS & TRENDS (HONG KONG) LIMITED | 1st Defendant |
| | CITYWORLD LIMITED | 2nd Defendant |
| | JURG WILLI KESSELRING | 3rd Defendant |
| ---------------------------- |
Before : Deputy High Court Judge Seagroatt in Court
Dates of Hearing : 5-6, 9, 11-12 May 2011
Date of Judgment : 19 May 2011
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J U D G M E N T
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1. In June 2002, now almost nine years ago, the plaintiff commenced proceedings against the defendants seeking an injunction and damages in what is classically known as a breach of copyright action.
2. The plaintiff (MGA for short) a large concern, was and is engaged in the design, manufacture, marketing and sale of fashion dolls, in particular. Such has been their success with certain products that they have constituted a significant challenge to Mattel, who since 1959 have been the producers of the well-known and iconic “Barbie” doll range. They had discovered and exploited a niche in the toy market for fashion dolls for a later stage of childhood than that catered for by the “Barbie” dolls. They were however not alone in recognising the potential for that market, but appear from all the surveys and reports, to have led it, eventually being some way ahead of any competitors who recognised the same market. MGA with their “Bratz” dolls and accessories entered on the scene in June 2001. The Re-Re-Amended Statement of Claim refers to this date. The term “Bratz”, to identify the age stage of the appeal of such dolls was, it has been explained, not to suggest a naughty or wayward age group, but to reflect a more sympathetic view of a stage of childhood in which individuality comes to the fore. This would certainly distinguish it from the “Barbie” doll age appeal.
3. The defendants, by comparison with MGA, are a much smaller enterprise, but their driving force has been the 3rd defendant who had in 2002, a quarter of a century’s experience, at varying but increasing levels, in the toy trade. In early 2002 the defendants began to market at the Nurnberg and Tokyo Toy fairs a range of fashion dolls conceived by the 3rd defendant, Mr Jurg Kesselring, with artistic help, which would be seen as in competition with the plaintiff’s products. These dolls were known as the “Funky Tweenz” range. It does not require expert evidence or toy‑trade experience to realise that this is a catchy and appealing title for the market at which these dolls were aimed.
4. In short the plaintiff (MGA) claims that the defendants had, in marketing their Funky Tweenz range, copied their dolls and accessories and thereby were in breach of their copyright and competing unfairly in a specific market. For their part the defendants contended that the market niche was well-recognised, that they had developed their own products incidentally, and any similarities to the plaintiff’s products were coincidental. They do not deny that they had examples of MGA’s products at their premises, and those of other competitors for the same market. As a matter of straightforward business such participants in the market would want to know the nature of the competing items, and a recognition of the niche in the market and/or the demand for a particular type of toy was likely to lead to some similarities in the products of all competitors. Those are matters of straight-forward common sense.
5. The action itself has had a tortuous history over the intervening years without material progress.
6. The writ was issued on 5 June 2002. The plaintiff had already been active in issuing “cease and desist” letters, threatening proceedings, to distributors around the world. The Statement of Claim was served on or about 3 July 2002. The Defence was served on or about 17 July. The defendants complied with the plaintiff’s request and on 11 November 2002 Deputy High Court Judge Woolley ordered, by consent a Mareva injunction, the delivery up by the defendants of a number of items, and the identification by them of customers and orders and suppliers in the following terms: that they should file an affirmation setting forth:
“All persons firms or companies:
a) to whom the 1st and 2nd Defendants have sold and/or supplied and/or offered to sell and/or supply [dolls, etc.]
…
b) who has ordered from the 1st and 2nd Defendants’ items of the types referred to in paragraph 2 with full details of all … dates prices and quantities of each supply or order … and exhibit copies of all documents relating to such dealings.”
7. The simple purpose was to enable MGA to contact all such “persons, firms or companies” in order to send them “cease and desist” letters, or other communications threatening proceedings if they traded with the defendants, or sought to sell products obtained from them.
8. The plaintiff’s counsel in cross-examination of Mr Kesselring took him to task on the basis that he had failed to identify, in compliance with that order, any document referring to an interest expressed in placing a potential order for 30,000 items by ToysRUs of Canada. ToysRUs did in fact place initial orders. These were disclosed in that Mr Kesselring identified ToysRUs in compliance with the order and we know that MGA wrote to ToysRUs of Canada in effect “warning them off”. ToysRUs returned goods as a result of that pressure. I cannot see how one can sensibly attack Mr Kesselring on this basis. If no such document exists now, and that is another matter, it would not be surprising, and would certainly be viewed as more excusable than the plaintiff’s loss or destruction of the moulds and associated items handed by the defendants for safe keeping pending trial, in 2002. But Mr Kesselring was not required to identify simple expressions of interest. He went beyond that.
9. Much paper was generated over the years following November 2002 with little material progress. In March 2007 the plaintiff applied for a trial date and in May they were given one for 3 March 2008. Then in late February 2008 the plaintiff took out an application for the trial date to be vacated. This came on before Deputy High Court Judge Gill and he dismissed it on 29 February 2008. The trial was therefore to commence on 3 March 2008 before the same judge.
10. Out of the blue it seemed, the plaintiff’s Counsel, Mr Shipp then applied to discontinue the action and for the injunction to be discharged. Inevitably there had to be some consequential provisions and to cover these it may be helpful to quote directly from the transcript of those proceedings in the light of an application Mr Shipp sought to make, before me, on the first morning of this enquiry as to damages for the defendant.
“MR SHIPP: The plaintiff … will discontinue this action…
… I ask my Lord to discharge paragraph 1 of the injunction.
… a return of all items delivered up pursuant to paragraph 2 (moulds and any materials delivered up)
… The first nasty bit insofar as the plaintiff is concerned … is that the defendants be at liberty to embark on an inquiry as to damages as a result of the injunction granted … upon the plaintiff’s cross-undertaking on damages…
Then, … the second nasty bit … that the plaintiff do pay the defendants the costs of this action.” [P.17E to P.19C of the transcript]
11. Another three years elapsed before the commencement of this inquiry before me. That in itself is an unreasonably long interval of time.
Background factual matrix
12. As a consequence of the action commenced by the plaintiff the defendants were effectively forced to cease making and marketing their Funky Tweenz range of dolls and accessories from July 2002. At some stage there was a hint in the plaintiff’s case as argued, that it was only the dolls that were embargoed, but as a matter of commercial and common sense the accessories, whatever form they took, were not going to stand alone as viable products in the market place. Sensibly that line of argument was not pursued.
13. The defendants had sold or supplied to wholesale or retail customers over 170,000 units. Shortly, orders for a further 48,708 dolls were cancelled because of the “cease and desist” letters from MGA or its agents, and other communications threatening action against any distributor who sought to put the dolls on the market. In addition, 3,828 were returned as a result of the same action.
14. Although the formal order for an injunction was not made until November 2002, the defendants acceded to the plaintiff’s demand. That made good economic sense at least. It was influenced to a large extent, no doubt, by the fact that its distributors were cancelling orders and/or ceasing interest having understandably bowed to the plaintiff’s demands and threats. These included big outlets like ToysRUs of Canada and a leading U.K. distributor, David Halsall Ltd. It is of significance that none of those who ordered and returned dolls, and cancelled orders, did so complaining as to quality or appeal. There is no evidence at all to suggest these dolls had any such shortcomings in the views of the distributors who had ordered them.
15. However the defendants set about making alterations to the appearance of their original style doll in order to remove the design features which had excited MGA’s attention and action.
16. Wisely it would seem, at least with the benefit of hindsight, they did not seek to obtain the MGA’s agreement that they would not take any objection to the new or alternative style of Funky Tweenz doll. However the new product had limited success, perhaps not surprisingly, as the variations appear to have limited its appeal. MGA did not feel challenged by the new product, as it did not seek to extend the injunction to it. Mr Kesselring himself was not optimistic about its chances of success. Its prospects were also likely to be tainted by the attitude of distributors who had been effectively warned off the original product and may well have been apprehensive of taking on a product which remained substantially similar to the original. This was certainly the case with David Halsall Ltd of the United Kingdom who sought legal advice from its solicitor. The advice was cautious.
17. Yet Mr Kesselring, with substantial experience of the toy trade behind him, must have had confidence in the potential market for his alternative doll given the initial reaction to the interest in the original product, even to venture forth with an alternative. The new style did enjoy limited success in the early period which confirms that there must have been an opening for the original product. The sales of the new style were effected by a new company incorporated in July 2002, after the withdrawal of the original style dolls, with the wives of Mr Kesselring and his co-director and shareholder, Mr Lam, as the directors and shareholders. This was a sensible precaution.
18. Nonetheless the new style dolls sold over 73,758 odd in 2002 (less than half a year), 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. By no stretch of the imagination therefore was the new style Funky Tweenz doll a competitor of MGA’s Bratz dolls in the market.
19. In 2008 MGA discontinued its action, the injunction was lifted and an order made, inter alia¸that all the moulds and associated equipment and drawings be returned to the defendants. The moulds were not returned. A rather nebulous explanation for their loss or disappearance or unavailability—it is difficult for anyone other than the plaintiff to be sure of what actually happened—has been given to the effect that as a result of “a clerical error”, MGA’s agent’s disposed of them. Such a cavalier approach was not lessened by Mr Lee Chun Ming Edmond, the Managing Director of MGA Hong Kong, who gave evidence, and when asked about the moulds said that he did not know anything about them. MGA had not even gone to the trouble to tell him all that MGA knew concerning their disappearance.
20. Whatever the actual position is or was concerning the moulds etc., and when they were lost or disposed of is also not known, suspicions will inevitably remain. The defendants could not revert to the original design without significant work and cost. The artists may or may not be available. The fact remains that having had their business in relation to the Funky Tweenz dolls stifled, a further handicap has been imposed on them even if it made commercial sense to try and start up again.
21. Meanwhile MAG’s “Bratz” range of dolls, or brand, whatever terms one uses, progressed apace with the defendants effectively eliminated as a competitor. The Bratz range had been launched in June 2001. By 2004 it was outselling Mattel’s Barbie doll range in the United Kingdom, although it appears Mattel contended that it remained the market leader if only on the strength of the sales of accessories and ancillary items.
22. The revenue from the Bratz range was estimated at over US$22 million for the second half of 2001 and in the first quarter of 2002 it was put at over US$17 million. There were projections of its sales and income for the following years as set out in the report of the defendants’ expert Mr Neil Poole. There were other estimates in respect of the accessories such as shoe packs. In the fourth quarter of 2006 the Bratz range became the number one fashion theme doll in the United States of America. A market research report called “The Doll Report 2002: The Market, The Competitors, The Trend” noted that :
“While the doll market is following an upward trajectory due to positive demographic trends … prospects are favourable for sustained growth in the doll market through to 2010.”
Another report noted that :
“In the first six years since its launch 125 million Bratz dolls have been sold worldwide and has become the top fashion doll in the United Kingdom … [i.e. an average of 20-21 million dolls per annum] Bratz has captured 40% of the fashion doll market, compared with Barbie’s 60%.”
The plaintiff has not adduced any evidence to contradict this picture, nor to show that any of the projections by Mr Poole, are out of proportion to the doll market or their own sales and turnover.
The plaintiff’s delay and laches
23. The action did not come on for trial until March 2008, a gap of almost six years since proceedings were instituted. It is trite law to assert that a plaintiff must proceed with its action expeditiously. It is particularly appropriate that a plaintiff should proceed efficiently and swiftly where it has obtained an injunction and alleged breach of copyright and the effect of the claim is to restrain the defendant’s trade at least materially. It clearly failed to do so. The effect of such delay was to put an end to the defendants’ Funky Tweenz venture. It is a reasonable inference that this is precisely what MGA sought without having its claim tested as to merits. The fact that it discontinued its action and ceded all the points in favour of the defendants — removal of the injunction, an enquiry as to damages suffered by them, and an order for costs against MGA — indicated that, in the end, it had no confidence in the merits of its claim.
24. I do not need to consider the matter of the action in the USA involving Mattel and MGA. Deputy High Court Judge David Gill gave it short shrift and in my respectful view he was right to do so. Had the plaintiff proceeded with its action properly and timeously the defendants would have been facing an outcome within 12 to 18 months of its initiation. It is not for me to try the original action — that would be pointless and I would not have the benefit of expert evidence on that issue. However I have had the chance of comparing the competing products — the Bratz dolls and the original Funky Tweenz dolls. I find it difficult to see how the latter was seen as a copy of the former. It is significantly larger and there are variations in the features especially the facial ones. This is not surprising given the difference in scale. Of course the Funky Tweenz dolls were appealing to the same market essentially and sought to reflect the fashions and trends, interests and aspirations of the potential purchasers, although I think they were likely to appeal to a somewhat older section of the primary educational level. Their packaging was not as neat and finished as that of the Bratz dolls which I can visualise as being more of a collectible. But this is now merely of academic interest. Had this issue been decided in the defendants’ favour at the appropriate time, and the market and distribution network informed promptly, with the moulds returned promptly and intact, the defendants would have had more of a reasonable chance of regaining lost ground. Perhaps in 2008 the Doll/Toy World was more concerned with the conflict between its giants — Mattel and MGA — to be interested in an exonerated rival.
25. So the timescale and its adverse effect upon the defendants are of real importance. To what extent should I have regard to this and its effects on the matter of damages?
26. I do not propose to set out the detail of the history of the action between 2002 and 2008. It is easily culled from the papers and Mr Stephenson has set it out in the text of his written opening submissions. He also relies on Spry’s “The Principles of Equitable Remedies” (2010 edition). To some extent the current approach can be encapsulated in the questions — What effect has the plaintiff’s delay in pursuing relief had on the defendants? Or, have the plaintiff’s acts or omissions prejudiced the defendants? There was, as I have found, unreasonable delay in the prosecution of proceedings for breach of copyright. That is self-evident and I also find that the consequences of such delay in these circumstances render it just that the defendants should be granted relief, i.e., damages. There is no evidence of any act or omission on the part of the defendants to justify any argument for the plaintiff that the defendants have thereby caused or contributed to the delay and therefore should be denied all or any relief.
27. At this stage I should deal with the amendment to the plaintiff’s Answer to the Statement of Particulars of Damages. Paragraph 7 reads :
“Further and in the alternative the Plaintiff avers that it is inequitable for this Honourable Court to enforce the cross-undertaking in damages.”
It was made on 9th April 2010, just over two years after the Plaintiff’s counsel had informed the trial judge that :
“The Defendant’s be at liberty to embark on an inquiry, as to damages … upon the Plaintiff’s cross-undertaking on damages.”
28. The judge made an order to that effect. Notwithstanding this inevitable concession the plaintiff proceeded to obtain an order from the master giving them leave to amend. I would not have made such an order and can only assume that the master was not fully apprised of the circumstances or the defendants gave consent in order to avoid cost, knowing that in due course the amended contention could not be pursued. When I raised the matter with MGA’s counsel, he wisely abandoned it.
29. The circumstance of this case which distinguishes it from most of the authorities contained in Spry’s volume, and elsewhere, is that the plaintiff abandoned its claim against the defendants after nearly six years. The defendants can justifiably claim vindication. Their potential fruit has been taken from them and they have been left a desert for nearly a decade. It was entirely foreseeable that the plaintiff’s actions and delay would cause loss, perhaps even hardship to the defendants.
30. The approach to the question of damages must reflect the application of ordinary equitable principles based on such considerations as laches, unfairness and hardship.
The equitable approach to damages
31. Mr Shipp’s contention for MGA is that if the loss or damage suffered by the defendants flowed as much from the litigation as from the effect of the injunction then the defendants will not have established causation.
32. In so doing he relies upon Air Express Ltd v Ansett Transport Industries (1979-1981) 146 CLR 249, in particular the judgment of Gibbs, J. at page 311 :
“The object of requiring a plaintiff who seeks an interlocutory injunction to enter into an undertaking of this kind [i.e. to abide by any order which a court may make as to damages in case a court should be of the opinion that the defendants have sustained any, by reason of the order, which the plaintiff ought to pay] is to attempt to ensure that a defendant will receive compensation for any loss which he suffers by reason of the grant of the injunction if it appears in the event that the plaintiff was not entitled to obtain it.” (My emphasis)
For the latter part of that statement which I have underlined, read :
“… has withdrawn its claim, abandoned the injunction and concluded that the Defendant is, in accordance with undertaking, entitled to an enquiry as to damages.”
33. Gibbs, J. continued (at pp. 311 to 312) :
“… unless the Defendant has been guilty of conduct that would render it inequitable to enforce the undertaking.”
(and Mr Shipp does not make any such contention.)
“… it would seem just, speaking generally, that a Plaintiff who has failed on the merits should recompense the Defendant for the damage that he has suffered as a result of the making of the interlocutory order.”
He added :
“The generally accepted view is that the damages must be confined to loss which is the natural consequence of the injunction under the circumstances of which the party obtaining the injunction has notice.”
He went on (at p. 312) :
“In a number of authorities the court has distinguished between loss which was caused by the injunction and loss which arose from the litigation.”
34. I do not need to review those authorities. As Gibbs, J. himself said :
“There is no reason to doubt that it is correct in principle to draw such a distinction if the facts warrant it”. [My emphasis]
35. The caveat entered in effect by Gibbs, J. is an overriding one (at p. 313) :
“The court should no doubt scrutinise with care an assertion by a plaintiff that loss which has been suffered by a defendant has resulted from the litigation rather than from the making of the interlocutory order, since a plaintiff should not be allowed to evade payments of the price which he has agreed to pay for the grant of the injunction.”
36. That, I add, would be inequitable. Did the making of the order cause the loss? Of course the onus of proof must be on the defendant. Here I revert to part of the judgment of Aickin, J. in the same Australian case (p. 268) when considering the distinction between damages flowing from the injunction and from the litigation itself :
“There may not in every case be any difference between the two, but where there is a difference, it is essential that the damage flowing from the litigation should not be confused with the damage flowing from the interlocutory injunction.”
37. In Lily Icos LLC v 8PM Chemists Ltd [2009] EWHC 1905 (Ch.), Arnold, J. also considered a number of authorities and some principles of sound fairness or equity, emerge from his judgment and in the course of his consideration of a number of cases including Les Laboratoires Servier v Apotex Inc. [2008] EWHC 2347 (Ch.) .
38. At p. 109, para. 20, Arnold J said :
“ Counsel for the claimants acknowledged the force of the observations of Jacob, Warren and Norris JJ., and accepted that the law appeared to be moving away from a rigidly contractual approach to assessment. For my part, I agree with Norris J. that the remedy awarded under a cross-undertaking in damages is properly to be regarded as equitable compensation and not common law damages.”
39. Norris, J. in Les Laboratoires Servier adopted the principle of “liberal assessment”, as he termed it, from Lord Wilberforce’s speech in General Tire and Rubber Co. v Firestone Tyre and Rubber Co. Ltd (No. 2) [1976] RPC 197 at p. 212. I have transposed the parties to reflect the situation in the case before me :
“There are two essential principles in valuing the claim: first, that the defendants have the burden of proving their loss; second, that the plaintiffs being wrongdoers, damages should be liberally assessed but that the object is to compensate the defendants and not to punish the plaintiffs.”
Norris J in effect defined “wrongdoer” not as one who is granted interim relief but fails to establish it at trial, but as one who has obtained an advantage upon consideration of a necessarily incomplete picture and is to be treated as if he had made a promise not to prevent that which the injunction in fact prevents.
40. He went on to assert, and it is particularly appropriate to the case before me, that :
“… 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).”
41. Lest my reference to the case before me appears to be obscure, I have very much in mind that the plaintiff (MGA) has been peculiarly reticent about disclosing its sales and income from its Bratz range of dolls and accessories over the period in question.
42. On the question of causation a consideration of the authorities such as Arnold, J. conducted, revealed, unsurprisingly that “equity’s approach to causation, as distinct from reasonableness, is little different to that of the common law.” Gibbs, J. in Air Express Ltd (p.313) had said :
“… in almost every case in which an injunction is granted the injunction will play some part in causing the party bound by it to act in accordance with its terms.”
In his judgment in the same case (at p. 332) Mason, J. (as he then was) said :
“… Unless the circumstances indicate otherwise, when it appears that damage flows from the non-performance of an act and the performance of that act has been restrained by an interim injunction, the inference will generally be drawn that the damage has been occasioned by the injunction.”
The defendants need not show that the injunction was the sole cause of the loss. Saville J (as he then was) in Financiera Avenida S.A. v. Shiblaq (The Times, November 21, 1988) said :
“… Once a party has established a prima facie case that the damage was exclusively caused by the relevant Order, then in the absence of other material to displace that prima facie case, the Court can, and generally would, draw the inference that the damage would not have been sustained but for the order. In other words, the Court seeks to approach and deal with this question of causation in a commonsense way.”
43. Arnold J adopted Saville J’s approach and the test applied in the Air Express case and confirmed that they did not mean that the claimant had to go further and show that the injunction was the exclusive cause of the loss. The judge finally, at least for the purposes of this action, confirmed the commonsense approach to damages :
“… The defendant will usually (…) sustain the loss claimed after the date … of the injunction. Often, the loss will be a continuing one down to the date of discharge of the injunction. …”
44. I add here that it may continue after the date of the discharge of the injunction if the defendant is able to show that, despite the lifting of the injunction, he has suffered irreparable damage which continues and that an application of the principle that he is to be compensated for being prevented from carrying on his business in the way in which it would normally have been done, may, depending on facts and circumstances, involve assessment of loss well beyond the date of the lifting of the injunction.
45. Mr Shipp argued that because customers, both actual and potential, had complied with the “cease and desist” letters some months before the interim injunction was ordered on 5 July 2002, it was the threat of litigation against them, and the actual litigation against the defendants which occasioned the defendants’ loss, rather than the injunction itself.
46. In the last week of May 2002, MGA and/or its agents (who included lawyers) wrote to distributors of Funky Tweenz dolls whom they had identified in various ways, what are known as “cease and desist” letters. The object was to persuade, by threats of legal action, those distributors from marketing these dolls. The areas in the world affected were Canada, Spain, the United Kingdom, Finland, Holland, and the State of Florida. Some of them were considering resisting the threats if they could obtain indemnity from the defendants. That was not likely to be forthcoming.
47. Although these letters were couched in general terms intimating likely claims for damage, cost and an account, the real purpose was to restrain them from selling the goods. At least two of the solicitors acting for MGA in different parts of the world threatened claims for injunctive relief, inter alia, and that from the Finnish lawyer covered in effect the full ambit of the injunction claimed by MGA in its original proceedings in Hong Kong, against the defendants. Whatever question one poses concerning the object of MGA’s threats against the distributors the answer is inevitably that it was to restrain any trade in Funky Tweenz dolls.
48. 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.
The nature and quantification of the losses
49. Mr George Kesselring’s experience in the toy industry for over a quarter of a century at the time of the introduction of the “Funky Tweenz” brand, led him to consider that as a result of initial reactions in the trade especially following the Nurnberg and Tokyo Toy fairs in the first quarter of 2002, he could be “onto a winner” with this range of dolls. He was already engaged in developing new dolls with accessories to reflect changing themes, as well as such items as a toy car to fit in with a particular concept. Those were to be changed to reflect the seasons as well as fashion trends and themes.
50. Although he agreed that, in general, a toy’s life would be of the order of up to two years, the market life for the basic product could be extended by keeping pace with the expectations of the consumer and what other witnesses referred to as “refreshing” the products. An individual doll’s life could vary and be extended substantially—like Mattel’s “Barbie” doll and MGA’s “Bratz” range-by careful application and updating. “If we got it right it could grow with other products on the markets”, he said.
51. If demand increased he could duplicate moulds and get a second factory to increase production. He was encouraged by the expressions of interest and I shall deal with these in more detail when I come to Mr Poole’s evidence particularly in the light of Mr Tang’s dismissive approach to them. After the injunction he was unable to carry on with the original product.
52. The website was not developed because of the interim injunction. Any further advertising or promotion would depend on actual progress of the model and its seems to me that criticism of the viability of the “Funky Tweenz” brand on the basis that the defendants did not have a developed sophisticated market policy, is misplaced. Television advertising was beyond the defendants economically but they were prepared to be associated with any initiated by a distributor if only by making the price of the goods supplied to that distributor more attractive.
53. Antunes Enterprises Inc., a distributor from Florida, wrote in April 2008, after the withdrawal of the claim and the lifting of the injunction, that the largest manufacturer in Brazil was contemplating a “substantial TV campaign” in October 2002. It is therefore not surprising that the marketing/advertising initiative in different countries lay with the large distributors for whom Funky Tweenz was but one brand of toy amongst many others.
54. When eventually forced to try and salvage something from the effect of the injunction by applying the “Funky Tweenz” brand name to an altered doll, he conceded that it was not as attractive and the sales levels never reached those achieved by the original style in the short period of its commercial life, and certainly not the future levels spoken of by the distributors in various countries. Potential distributors had to some extent already been put off by the reactions of MGA to the original project. One must remember that MGA by reason of its expansion and success had the financial clout to force the potential market to “see things” its way, as was evidenced by the reaction of the solicitors for David Halsall Ltd to the threat of litigation from the solicitors S.J. Berwin acting for MGA.
55. When the injunction was eventually lifted the moulds were not returned and so even if the market originally open to the Funky Tweenz dolls had not passed the defendants by with the effluxion of time — and it is easy to see how six years later distributors were reluctant to revert to a 2002 concept however updated— new moulds would have to be created, production would have to be reinstituted and probably much advertising and exposure at Toy Fairs required. Mr Kesselring discounted the chances of a revival and he was not seriously challenged on that.
56. The plaintiff’s counsel sought to demonstrate that the commercial life of the original “Funky Tweenz” doll would have been short and that sales and profit would not have been sustained over the period 2002 to 2008, let alone 2011. However when I put to Mr Shipp the position achieved by the Bratz brand of MGA in t he following terms :
“— over the years the same dolls were produced 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.”
Mr Shipp agreed that that was a “pretty fair summary”. “Funky Tweenz” may never have rivalled “Bratz” in terms of popularity and turnover, but the initial reactions of the market to the brand were strong indicators in my view of its potential as a player. There is no reason to think that the defendants could not apply the same formula as MGA and Mattel in refreshing its brand.
57. The plaintiff called Mrs Heather Polk, its own Research Director, to give what might be regarded as some form of expert evidence. It transpired that Mrs Polk did not join MGA until 2009 so had no experience of the dispute in 2002 or of the launch of the “Funky Tweenz” brand on the market then. She offered much criticism of the defendants range from its packaging to the finish, and such features as eye makeup, eyebrows, the fashion finish of the clothing and its general aesthetic appeal.
58. I had some difficulty in understanding the relevance of this evidence which seemed to be directly related to the plaintiff’s argument that the defendants’ brand would never have a market appeal and was so deficient in quality and style that it offered no competition or challenge to MGA’s “Bratz” brand. The reaction of the trade distributors when the “Funky Tweenz” brand was introduced to the market is in conflict with Mrs Polk’s appraisal but then she is viewing the position from her employer’s rating as a market leader over a period of ten years. She also placed much reliance upon a consumer survey report by a Maya Levinson. This purported to be a reliable indicator of the appeal to children of relevant age groups, of a number of fashion dolls, one of which was “Funky Tweenz’s” Madison.
59. Maya Levinson, a Market Research Consultant, was instructed by MGA to carry out research estimating the appeal of “Funky Tweenz” among target age girls. The research was conducted online. Six dolls were used although only five feature in the table, ranging from 10 inches in height to 13.5 inches (Madison). Only photographs were available to the age group sampled, and these were scaled down. It is clear that no physical assessment could be made and the relevance of such a survey in these circumstances and where the comparison was made with 2009 (not 2002) competitive house brands, none of which appeared to be from the Bratz range, is highly questionable. The form which the survey took was laid down by MGA. I found the report, and the use to which MGA sought to put it, to be quite valueless.
60. Another study relied upon to illustrate the strength of the Bratz brand “within its competitive framework” was carried out in December 2006, referred to by Mrs Polk as the market survey by Gene Del Vacchio and C & R Research. Although again of no real relevance, an interesting fact emerges from the comment—“Even Germany—where Bratz has yet to be introduced—has some awareness (30%) which may aid introduction”. It was in March 2002, over four years before this report, that Helmut Kott of “Heko Trade” in Gerhardshofen, Germany was writing to Mr Kesselring about seeing “quite a large potential” of approximately 48,000 to 70,000 pieces and seeking an exclusivity arrangement, with a reduced price leaving him “some points for promotional activities”. This is of real relevance.
61. Manfred Lingg of “Kiddy Fun” in May 2002 was also seeking a exclusive arrangement for Germany (as well as Austria and Switzerland) at a reduced price having undertaken a market evaluation with forecasts of 50,000 dolls for Switzerland and 300,000 dolls for Germany/Austria, and proportional forecasts for the accessories. An initial order, subject to agreement on price and exclusivity would be 40,000 units. This then was a potential significant market in Europe which the defendants had the opportunity to develop in 2002. Mr Kesselring was in effect criticized for relying on this (as was Mr Poole) and for not sorting out the exclusivity position in the three months before MGA’s proceedings began. This was not a well founded criticism as I shall consider in due course.
62. As far as the life-cycle of a doll or even a brand was concerned Mrs Polk made it clear that with “refreshing”, updating and keeping pace with fashions and trends, it could comfortably be extended. Mattel’s “Barbie” and MGA’s “Bratz” were clear indicators of this.
63. The Managing Director of MGA in Hong Kong, Mr Lee Chun Ming Edward, had worked in the toy industry for over 20 years. When considering a number of competitive toy dolls from 2002 onwards (he joined MGA in 2000) he regarded none as a real competitor for MGA, although some enjoyed limited popularity. None again, was similar in quality to “Bratz”. He too, was very critical of the quality and appeal of the “Funky Tweenz” brand, from the packaging to the stitching of the hair. His evidence was reliable not only for the fact that it introduced nothing to add to Mrs Polk’s evidence but because he had no knowledge of what had happened to the moulds and ancillary items of which MGA had taken possession under the terms of the injunction and which they had failed to return in 2008, and had not been given any information by his parent company concerning its turnover and profits from the “Bratz” range over the intervening years. Much was made by Mr Lee of the absence of a marketing and promotion plan to advance “Funky Tweenz” in the market. But this would be a premature step for the defendants. At least two toy fairs had been used to promote their brand as well as catalogues, and then the plaintiff’s action “nipped it in the bud”. In my view this was baseless criticism. It would not have made commercial sense to spend large sums of money on forms of advertising as Mattel and MGA did and do, so early in a product’s career when, as we have seen, distributors themselves, in different countries were prepared, at the right time, to use such marketing methods or techniques as was available to them.
The expert evidence
64. Before I come to deal with the assessments of the conflicting experts, I need to consider the position of a Mr Christopher Byrne whose affidavit is in the bundles prepared by the plaintiff’s solicitors for this trial. I read that document and it is clear that it was put forward on the basis of expert evidence. Mr Byrne was not an employee of MGA and is therefore properly described as independent. However it is clear that the contents of his affidavit were not prepared properly as an expert report. Nonetheless he described himself as a “30 year veteran of the toy industry” and as a “widely recognized expert on toys, play, child development with respect to play, marketing and merchandizing”. He purported to comment on the sales projections for the “Funky Tweenz” dolls as set out in the report of Mr Neil Poole.
65. Although disclosed to the defendants, the author of this affidavit was never included in the Court order for one expert for each side. Although Mr Shipp sought to rely upon what he argued was in effect an ambivalent attitude on the part of the defendants’ solicitor and/or counsel, he could not get around the simple fact that there was no provision for it in any order and its contents had not been considered by any other expert, nor had the defendants’ regarded it as such, so as to obtain any report which considered it. Several attempts were made by Mr Shipp to obtain leave to adduce it but I declined to do so. The plaintiff’s solicitors’ own bundles had identified that there was only one expert for each side. It would have made a nonsense of case management to have made such a fundamental adjustment at this late stage.
66. At another stage the plaintiff’s solicitors sought to obtain a transcript of the first of Mr Shipp’s unsuccessful applications to introduce Mr Byrne’s evidence apparently because they wanted to inform their client of the proceeding in Court on that issue. I was not prepared to require the court staff to produce unnecessary extra paper work when the solicitors, aided by counsel’s memory, were quite capable of making a simple and intelligible record of what transpired. In addition another affirmation from a former solicitor with the plaintiff’s firm was filed containing her recollection and notes of what transpired before the master, in support of a renewed application to admit Mr Byrne’s evidence. This too was a waste of time and inappropriate. There were no new circumstances. Quite apart from the fact that Mr Byrne would have added nothing of significance to the evidence of Mr Tang (and the other witnesses for the plaintiff) it would have been unjust to the defendants to have allowed Mr Byrne to add minimal and flawed evidence into the arena.
67. I will now turn to the evidence of the two experts as provided for by the order. It will be more helpful if I consider Mr Tang’s report and evidence first.
68. Mr Tang is a Chartered Accountant with Grant Thornton now of over thirty years standing. He has been involved as an expert in many forms of dispute. Having due regard to this and with all due respect to his standing as an accountant I found his approach seriously flawed and lacking in objectivity.
69. He considered that the letters containing expressions of interest were almost valueless, and a letter from David Halsall Ltd, the well-known U.K. distributor, clearly written after the plaintiff discontinued its case, as suspicious. He thought it entirely wrong to use the success of Mattel and MGA as some guide because they were so big, and so successful that on the basis of proportionality, it would be misleading to use either or both of them as a yardstick. Yet, although he referred in the most general of terms to Hong Kong toy trade businesses not being competitive, he was unable to produce any evidence relating to a Hong Kong business marketing dolls for comparison purposes so as to indicate what might be the basis of a comparison which he regarded as relevant. He stressed that he had only ever been asked to provide a preliminary assessment and MGA, or its solicitors, had not reverted to him with more information, or asked him to consider anything else. He conceded that he had no knowledge of Mr Kesselring’s experience in the toy trade. It appeared that if the only evidence of potential growth and profits was what Mr Poole had, and ignoring the results of the New-style “Funky Tweenz” dolls, he might not have even ventured an assessment in relation to the original “Funky Tweenz” brand, and would probably have asked those instructing him for more information. At this stage it is worth stating that it is unlikely any would have been forthcoming because MGA has not produced any at this trial, nor even details of its own market position, and certainly not details of any competitor comparable to the defendants.
70. He took as his yardstick for comparison the results of the replacement “Funky Tweenz” dolls suggesting that any growth potential in the original brand would have been reflected in those. This approach is essentially flawed. The newstyle was introduced with significant variations to remove it from any possible challenge by MGA. Mr Kesselring was far from optimistic as to its prospects and the market may well have been understandably resistant to it. In fact we know from the documentation that the U.K. distributor, David Halsall Ltd, was resistant having been advised against taking the second line “Funky Tweenz dolls” and certain markets dried up after the injunction. The threats from MGA were likely to have that effect and may well have been intended so to do. Mr Tang said he did take this last factor into account though nowhere does he say so. He said however that it was “abstract”. Whilst I am not entirely sure what he meant by this he certainly gave the impression that it was of little or no significance. Nor indeed does he seem to have taken the first two factors into his consideration. When asked about this he fell back as explanation, upon his statement that he had only ever been asked for a provisional assessment.
71. Mr Tang also prayed in aid of his assessment that the Funky Tweenz brand would not have succeeded, in either the original or the new format, his own view of the defendants’ financial position. They were technically insolvent he said, so could not have funded the essentials for success in the market. This is at best a superficial view. The defendants’ brand in its original form had been cut out of the market at a very early stage. The financial position had been good enough to launch the product and the initial sales (ignoring for the moment the expressions of interest) gave rise to the expectation of success. Mr Tang’s approach smacks of pleading the plaintiff’s cause. MGA must have expected a degree of challenge to its own “Bratz” range to have taken the steps it did, both in relation to the defendants’ themselves and to the distributors in various parts of the world.
72. Mr Tang was however to concede that there was credence in Mr Poole’s approach to seasonal variations in sales and weightings, and said that he was not in a position to comment on the growth rates. I was surprised that he was so dismissive of one of the letters from a distributor in Europe, Kiddy Fun. He described it as not of relevance. Mr Tang does less than justice to himself as well as to the issues in this case in so terming the document. It is one of the few hard documents of relevance in relation to assessment of the prospects of the original Funky Tweenz brand. I regret to have to say that I regard Mr Tang’s evidence as a whole, and on material particulars, as lacking both logic in its approach and fairness in its evaluation. His criticism of Mr Kesselring to the effect that he had failed to crystallise the exclusivity point had no force.
73. By contrast I found the evidence of Mr Poole both rational and objective in its approach. Of course there is a paucity of documentary evidence relating to a product that was traded for such a short period. To some extent there must be an element of guesswork in surmising on a reasonable and fair basis what the future picture would have been. Mr Poole was well aware of these limitations and adopted a cautious approach, describing his basis as perhaps conservative. That is however what one cannot reasonably expect of an expert, applying objectivity within known parameters. Where comparisons can properly be made, the task is inevitably easier. Where no direct comparisons can be made it is reasonable to look at other businesses within the same sort of trade, to see how they fared even if they are, in terms of size, reputation and history, in a league altogether superior to the business under review.
74. Expressions of interest may not necessarily be translated into actual orders, and, thereby profits. They are however not to be dismissed as mere, unreliable, exaggerated encouragement to the manufacturer or supplier. It would be wrong to treat them as having no commercial reality. In some cases they were backed up by an effort to negotiate a lower price and obtain an exclusivity agreement. Some were lent particular credence by actual orders e.g. ToyRUs of Canada, David Halsall Ltd of the U.K., Bizak of Spain, Concentria of Portugal, Intertoys of Holland. It lies ill in the mouth of the plaintiff to be so dismissive of the status and reliability of expressions of interest when it was their own action which prevented a more accurate determination of the value of expressions of interest, and which for six years kept the original “Funky Tweenz”, which had instigated those expressions, out of the market. In fact at least 27 distributors worldwide, ordered the original dolls and those who cancelled orders or returned dolls delivered, did solely as a result of the threats from MGA and its agents. Not one complained about quality, style or finish. In just over three months over 90,000 dolls were ordered and that was before the build-up to the peak season of Christmas.
75. 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 is being asked to project a situation from that, a difficult exercise. Of necessity he has had to place reliance on limited material and as part of his projection he has had to look 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 defendants would probably not have reached the same scale of achievement as MGA and Mr Poole does not seek to say or show that it could. Mr Kesselring thought that he could have been onto a winner but that will remain an unknown. Mr Poole has taken a conservative approach as one would expect an expert to do and that precludes one from finding that the defendants could have reached or rubbed shoulders with the likes of Mattel and MGA.
76. Looking at the various expressions of interest, including that from Antunes Enterprises, 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 agreement, were at least 500,000 units, even excluding ToyRUs. Given uncertainties Mr Poole was right to be conservative and I accept his first figure of 450,000 for the three quarters of 2002.
77. 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.
78. I do not regard it as necessary to enter into a detailed consideration of Mr Poole’s calculations since I accept his basic premise and that he has adopted a conservative approach. He has, rightly in my view, deducted from the losses attributable to the injunction on the original Funky Tweenz dolls, the value of those sales of the new style or modified Funky Tweenz, on the basis that there was some compensatory product, however limited. It is not strictly a form of mitigation of loss, since it is difficult to see how there could be any obligation on the part of the defendants in these circumstances, to enter into a venture for that purpose.
79. Sensibly no argument as to remoteness of damage has been raised before me. However I should consider that, by implication, it has been raised as a consequence of Mr Tang’s flawed approach in using the substitute or new-styled Funky Tweenz dolls as the criterion for a consideration of losses, and his dismissive approach to the expressions of interest by distributors. The short answer is that MGA prevented the defendants from marketing the original doll. The undertaking as to damages clearly reflected an understanding that loss would flow. The acceptance that the defendants would be entitled to an enquiry as to damages, would flow from an abandonment of their action, even though they sought to resile from this at a late stage. A loss was clearly foreseeable. The difficulties of assessment have already been referred to. I have already referred to Arnold J’s adoption of the principle of “liberal assessment” in Lily Icos and I should adopt it similarly as part of the equitable approach.
80. The proper figure for the net loss of profit on the original Funky Tweenz dolls is US$8,150 million to date. I think it right to have a cut off figure at this point. From this is to be deducted US$943,000 representing the actual sales of the original and replacement dolls. The reduced figure is now US$7,207,000. Adding the costs involved in launching the replacement dolls, US$15,000 and the cost of replacing the moulds and other items handed over in 2002 which disappeared whilst in the custody of MGA of their agents, in the sum of US$28,000 produces a total loss of US$7,250,000. At one stage it appeared as if the plaintiff was going to argue that since the defendants had not had new moulds made with a view to reviving the original product, there was no loss. Happily, wiser counsel prevailed.
81. Accordingly there will be judgment for the defendants for US$7,250,000 with costs to be taxed if not agreed.
Conclusion
82. This was an unusual case, not solely by reason of the extraordinary lapse of time since proceedings were commenced and the injunction imposed. I have never known such a lapse of time in an action of this nature.
83. Whilst it is no part of my duty to make any comments on the merits of the MGA’s case, and its decision in March 2008 speaks for itself, I have over the course of several days made comparisons between the Bratz dolls exhibited and the original Funky Tweenz dolls, also exhibited, with my untutored and inexpert eye and some way removed from the time when daughters were at the stage of demanding that parents should buy them appealing dolls. Whilst it is perfectly true that the Funky Tweenz dolls were aimed at and were appealing to the same childhood market as the Bratz dolls, and bore similarities in decoration and make-up, their respective packaging however was entirely different and distinctive, and indicated a difference in quality (as of course the price also indicated). They did not approximate to the description afforded them by the MGA in‑house counsel (Julie More) of “a blatant knock-off.” To adopt an honoured metaphor, its action was at best the use of “a sledge hammer to crack a nut.” I see some percipient good-sense, almost sixth sense judgment, in a sentence of the letter of 2 September 2002 from the solicitors to David Halsall Ltd, one of the leading UK distributors. It was advising against Halsall taking the new-style dolls and having stated : “the old designs are now ‘dead’ commercially from Cityworld’s point of view’” —Mr Hodkinson went on :
“I also fully understand that this is very likely to be a short-term craze product and MGA are likely to want to stall proceedings to maximize competitors’ discomfort while the product remains a craze, withdrawing at a later stage when sales diminish.”
(invoking no doubt the picture of MGA’s financial power).
84. Mr Shipp has done his best to salvage what he can of this wreck of a case. MGA effectively “killed off” the defendants’ product—to adopt Mr Hodkinson’s approach—and “stalled proceedings” for six years, and delayed the final outcome further.
85. I made it clear that an award of damages should not be punitive or exemplary. I have also to have regard to the basis of the costs award to the defendants. Again there should be no punitive or exemplary element but it must reflect the reality of nine years’ litigation in the context of such a claim as this. At present I take the view that there should be an order that the defendants should have their costs taxed on a Common Fund basis. The arguments supporting this are expressed or implicit in this judgment and I do not therefore repeat them. However I will hear any argument against this on the afternoon of the day that this judgment is handed down.
| (Conrad Seagroatt)
Deputy High Court Judge
|
Mr Colin Shipp, instructed by Messrs W.L. Fan & Co., for the Plaintiff
Mr Paul Stephenson, instructed by Messrs Danny K.H. Yu & Co., for the Defendants
Plaintiff's application for to Court of First Instance for stay of execution pending appeal granted on condition of Plaintiff providing an amount as security. Please refer refer to HCA2152/2002 dated 18 October 2011