GUANGZHOU GREEN-ENHAN BIO-ENGINEERING CO LTD AND ANOTHER v. GREEN POWER HEALTH PRODUCTS INTERNATIONAL CO LTD AND OTHERS

HCA 4651/2002
HCA 2802/2003
HCMP 74/2004

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 4651 OF 2002, 2802 OF 2003 and

MISCELLANEOUS PROCEEDINGS NO. 74 OF 2004

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(The Consolidated Action)

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RULING  ON  COSTS

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1.  In my judgment of 8 April 2005, I made a costs order nisi that the 1^st and 2^nd Defendant pay ¼ of the Plaintiffs’ costs with certificate for three counsel and there be no order as to costs between the 3^rd Defendant and the Plaintiffs.  The Defendants applied to vary that costs order and I heard submissions from the parties.

2.  There is no application in respect of the second part of the order, viz as between the 3^rd Defendant and the Plaintiffs.  That order has therefore become absolute.

3.  As regards the first part of the order, the Defendants submitted that instead of the 1^st and 2^nd Defendants paying the costs of the Plaintiffs, the correct order should be that the Plaintiffs shall pay ¼ of the costs of the 1^st and 2^nd Defendant on an indemnity basis.  In the alternative, the Defendants submitted that there shall be no order as to costs.

4.  The Defendants reminded this court as to previous costs orders made in favour of the Plaintiff during the course of trial.  Those orders shall stand notwithstanding the order for costs of the action.

(a)	On 22 July 2004, I ordered the Defendants to pay the Plaintiffs’ costs arising out of several interlocutory applications made by the Defendants in the course of trial and fixed the same at $510,000 pursuant to Order 62 Rule 9(4)(b).  I was told that that sum had been paid.
(b)	On 12 July 2004, I ordered the Defendants to pay the Plaintiffs’ costs of the afternoon of 9 July and the morning of 12 July in any event regarding another interlocutory application.
(c)	On 21 August 2004, I ordered the Defendants to pay the Plaintiffs’ costs in any event regarding the exclusion of expert evidence on PRC law.
(d)	On 16 September 2004, I ordered the Defendants to pay the Plaintiffs’ costs in any event regarding the application for leave to amend the Defence.
(e)	On 23 September 2004, I ordered the Defendants to pay the Plaintiffs’ costs in any event regarding the application to adduce additional evidence from Tong Siu Kun.

5.  I ordered certain evidence be expunged from the record on 28 October 2004.  The costs regarding the submissions on that have not been dealt with by any order made in the course of trial.  They form part of the costs of the trial and I bear this in mind in the overall decision on the costs of the action.

Costs of the interlocutory hearings

6.  Parties also asked this court to deal with the costs reserved regarding the interlocutory hearings before me between 14 and 16 January 2004 and the hearing before Stone J on 29 August 2003.

7.  Stone J in fact made a costs order on 29 August 2003.  Ms Tam submitted that the Plaintiffs proceeded unreasonably in moving for interlocutory injunction before Stone J on Summons Day.  That point should have been canvassed before Stone J.  If Stone J took the view that the Plaintiffs’ conduct of the summons were so unreasonable that they should be penalized in term of costs, His Lordship would have made a costs order reflecting the same.  The order of His Lordship was that the costs of 29 August 2003 be in the cause of the Plaintiffs’ summons of 27 August 2003.  There was no appeal against that order.  I have no jurisdiction to disturb that order.

8.  As regards the interlocutory hearings between 14 and 16 January 2004, the matter was resolved by the Plaintiffs accepting speedy trial as opposed to pushing ahead for interlocutory injunctions.  That course was adopted against the background that it was quite apparent that the hearing for interlocutory injunctions could not have been completed within the time available and due to the state of the court’s diary, it would be quite some time before the parties could come back to court to continue with the application.   On 16 January 2004, I reserved the costs of the application for interlocutory injunction with certificate for two counsel.

9.  Ms Tam relied on Kickers International v Paul Kettle [1990] FSR 436 to argue that since the Plaintiffs did not proceed with the application, they should bear the costs of the application for interlocutory injunction.  In that case, the plaintiff did not proceed with the application in view of the evidence of the defendant.  As mentioned, the reason for the Plaintiffs abandoning the application for interlocutory injunction in January 2004 was very different.

10.  Ms Tam argued that given the delay in lodging the application, the Plaintiffs’ application for interlocutory injunction was doomed to fail and the Defendants should have the costs.  On the other hand, Mr Liao SC referred to matters which account for the lapse of time between discovery of the wrongful acts of the Defendants and the issue of the summons for interlocutory injunction.

11.  At the interlocutory stage, the court has a number of options in dealing with costs, including but not limiting to the following.

(a) costs in favour of one party either payable in any event or in an appropriate case, payable forthwith;

(b) costs of one party be costs in the cause;

(c) costs of both parties be costs in the cause;

(d) costs reserved.

These options give the court some flexibility in dealing with costs of interlocutory application to meet the justice of the case.  If an application is so devoid of merit that the court considers that it should not have been made at all, the court could exercise its discretion by an order under option (a).  On the other hand, if the court is of the view that even if the application fails, the justice of the case demands that the question of costs be decided by reference to the ultimate merits of the case, the court may go for options (b), (c) or (d).

12.  In the present case, the application for interlocutory injunction was not proceeded with in circumstances mentioned above.  That was not due to the fault on the part of any party and the court had not adjudicated on the merits of the application.  It is against such background that this court ordered costs reserved notwithstanding no interlocutory injunction was granted pursuant to the Plaintiffs’ summons.

13.  Given that background, in determining the costs of an interlocutory application after trial, I think this court is, as submitted by Mr Liao, entitled to take into account that the Plaintiffs ultimately succeeded in obtaining permanent injunction.  The necessary implication from the ultimate result is that but for the waiting time in having the case tried and judgment given by the court, the Defendants would not have been allowed to carry on the activities restrained during the interim period.  One advantage of ordering costs reserved at the interlocutory stage is that the court will not face with the uncertainty as to the right and wrong between the parties when it decides on the question of costs.

14.  However, I agree with Ms Tam that there are cases where the court could properly exercise its discretion in awarding costs of an interlocutory application against the Plaintiffs even if the Plaintiffs succeeded at the trial.  But I do not think there is any rule of law or practice to the effect that the Defendants must get the costs of the application for interlocutory injunction if the Plaintiffs were not successful in getting the injunction at interlocutory stage.  There could be many reasons why an application for interlocutory injunction fails and it would not be right to generalize.  How the discretion on costs should be exercised must depend on the circumstances of each case.  An important factor is the reasonableness of the Plaintiffs in taking out the application for interlocutory injunction.

15.  In the present case, I am of the view that the Plaintiffs did not act unreasonably in making the application for interlocutory injunction in August 2003 and the Plaintiffs’ application was not doomed to fail for the following reasons,

(a)	I do not think the Plaintiffs’ delay in making application for interlocutory injunction in the present case was so serious that this factor alone defeats the application for interlocutory injunction in limine.  The relevant time lapse is between December 2002 and August 2003.  Although negotiation broke down in September 2002, the Plaintiffs only discovered sale of infringing articles by the Defendants in late November 2002.  There cannot be any suggestion that the Defendants were lulled into a false sense of security during that period because the Writ in High Court Action No.4651 of 2002 was issued on 12 December 2002 and served soon thereafter.  From then on, the Plaintiffs had engaged the Defendants on various fronts and tried to stop infringing activities by means other than interlocutory injunction.  The Plaintiffs retained SGS to test the products of the 1st Defendant.  Based on the reports of 27 December 2002 and 17 January 2003, the Plaintiffs lodged complaints with the Department of Justice and Department of Health.  The Plaintiffs commenced actions in mainland China suing the 1st Defendant on 25 January and 3 March 2003.  Private investigators were engaged by the Plaintiffs to locate the factories producing for the 1st Defendant.  A factory was located in April 2003 and a complaint was filed by the Plaintiffs with AIC in Guangzhou leading to a successful raid on 21 April 2003.  The Plaintiffs successfully resisted a challenge by the 1st Defendant to the decision of the AIC in May 2003.  Upon learning that the 1st Defendant was still able to obtain products from other factories, the Plaintiffs instructed lawyers to apply for interlocutory injunction in Hong Kong.  Given the complexity of the case, I do not think there is any unreasonable delay on the part of the Plaintiffs.  In the context of the present circumstances, I do not consider it fatal to the application for interlocutory injunction that the Plaintiffs did not issue summons for interlocutory injunction in parallel with other steps taken to stop the infringing activities of the 1st Defendant.
(b)	Due to the limited duration of the restrictive covenants under the Distribution Agreements, the Plaintiffs were justified in seeking interim relief lest that the trial might not come on prior to the expiry of the covenants.  It was only in the course of the hearing in January 2004 that parties agreed upon directions for speedy trial.
(c)	Given my conclusions in my judgment of 8 April 2005, there must be serious questions to be tried.  As regards the balance of convenience, whilst the 1st Defendant had been selling the products for quite some time and the Plaintiffs had decided prior to August 2003 to use the name Lingzhimaster in place of ENHANVOL, I do not consider such factors tilting the balance so much in favour of the Defendants that the application for interlocutory injunction must fail.  After all, the 1st Defendant continued with such sales with full knowledge of the objection from the Plaintiffs and, for reasons set out in Paragraph 303 of my judgment of 8 April 2005, the Plaintiffs still had a legitimate ground to seek an injunction, even on an interlocutory basis, on the Defendants’ use of the name ENHANVOL.
(d)	The application had a real prospect of success if sufficient time were available for Mr Liao to expand and develop his argument based on the Distributor Agreement and the judgment of the Intermediate Court given on 1 January 2004.

16.  In the light of these, I think it would be fair to treat the costs of the application for interlocutory injunction in the same way as other costs of the action.  In other words, if I were required to make a separate order for costs regarding that application, I will order the same to be costs in the cause.

Costs of the action

17.  Coming then to the costs of the action, I should mention that Mr Liao fairly conceded that each party should bear its own costs pertaining to the preparation and filing of expert evidence.  The Defendants sought to recover such costs from the Plaintiffs.  I do not see any justification for suggesting that such costs were incurred solely due to the fault of the Plaintiffs.  The Defendants were advised by their own lawyers to obtain their expert evidence despite, as explained in my Reasons for Ruling of 16 September 2004, some of the issues in dispute were actually factual dispute that needed not be dealt with by way of expert evidence and as far as issues on the law of mainland China were concerned, the judgment of the Intermediate Court is the best evidence available.  The Defendants’ lawyers were in as good a position as the Plaintiffs’ lawyers in analyzing the admissibility and relevance of expert evidence.  I will order each party to bear his own costs regarding the preparation and filing of expert evidence.

Parties’ submissions

18.  Turning to the costs of the action in general, the Defendants’ submissions can be broadly summarized as follows.  It was said that most of the time was spent at the trial on the passing off and copyright claims.  The passing off claim was only successful on a basis which does not engage much of the time spent.  On the creation of the packaging designs and the coining of the names, the Plaintiffs’ evidence were disbelieved and findings were made that documents relied upon by the Plaintiffs were fabricated.  The costs on the passing off claim were escalated accordingly.  The Defendants contended that as far as the copyright claims are concerned, they should be entitled to costs on indemnity basis.

19.  The Defendants were also successful in resisting the registered trade mark claim and in establishing their counterclaim as to the invalidity of registration of the mark.  Although those claims basically turned on arguments by way of legal submissions, parties spent substantial efforts thereon in the preparation of the same.

20.  Regarding the late production of evidence and late discovery, the Defendants submitted that the costs implications arising from the same due to the fault of the Defendants have been dealt with by penalising the Defendants by the orders for costs already made against them.  The late disclosure by Chan Chin Hung was not the fault of the Defendants because he was an independent witness and he did not have any intention to conceal the truth.  It does not lie in the Plaintiffs’ mouth to say that they would not pursue the false claim had the documents been disclosed earlier because they persisted with their claims after the disclosure.

21.  On behalf of the Plaintiffs, Mr Liao contended that the costs order nisi should be affirmed.  He submitted that the costs of the various causes of action are intertwined and given substantial costs having been incurred at the pre-trial stage, it is incorrect to simply apportion costs based on what happened at the trial.  The accuracy of the Defendants’ estimation on time spent on different causes of action was challenged.  As a general rule, a successful party is entitled to his costs and he should not be asked to bear part of the costs because he failed to establish his case to its fullest extent.

22.  Mr Liao also reminded this court that the Plaintiffs succeeded in malicious falsehood and breach of agreement as well as establishing personal liability of the 2^nd Defendant.

23.  Mr Liao further submitted that the late production of documents by Chan Chin Hung did prolong the trial and there was no reason why such documents could not be obtained earlier had proper preparation been made by the Defendants and those advising them.

24.  Mr Liao fairly accepted that the costs order should reflect the court’s finding that the Plaintiffs had misled the court in terms of testimony and documents put forward as evidence.  He submitted that the costs order nisi has adequately reflected the same.

25.  Mr Liao also took the point that costs would not be awarded for written submissions unless specifically ordered.  He seems to suggest that the lengthy submissions in respect of the trade mark claim has no bearing on costs.  With respect, I cannot agree with that submission.  The true analysis should be that unless specifically ordered, the costs for written submissions are deemed to be included in the Brief.  Hence, costs were in fact incurred in relation to the trade mark claim even though there is no separate award for written submissions.

My analysis

26.  In my judgment, I should take into account the following factors in the exercise of my discretion.

(a)	The Plaintiffs succeeded in passing off, breach of agreements, malicious falsehood, rectification of registration of ENHANVOL whilst the Defendants succeeded in resisting the copyright claims (except an insignificant part of the claims relating to photograph) and the registered trade mark claims.
(b)	The starting point is costs generally follow event, viz. each side should be entitled to costs regarding the claims which they succeeded.
(c)	In the present case, the evidence of the claims are intertwined and there is force in Mr Liao’s submission that it would be too simplistic to decide costs by reference to what happened at the trial.
(d)	Yet it cannot be denied that a substantial portion of costs incurred at the trial, at least as far as the hearing of evidence is concerned, related to the question of package design and coining of the names.
(e)	Even though the general rule is that the court will not deprive a successful party of costs though he did not succeed to the fullest extent, it is quite obvious that the present case falls within an exception by reason of my findings regarding the package design and the coining of names and the manner in which the Plaintiffs ran their case on those issues at the trial.
(f)	Hence, even in the context of the passing off claim, I think there should be a substantial discount on costs awarded in favour of the Plaintiffs even though the Plaintiffs were successful.
(g)	Regarding the copyright claim, it should be apparent from what I said in Paragraph 213 of my judgment that I am not happy about how the case on copyright had been prepared on behalf of the Defendants.  Although the Defendants were penalized by costs orders mentioned above, I do not think such costs orders fully redressed the prejudice suffered by the Plaintiffs on account of costs.  I accept the submission of Mr Liao that the Defendants should have prepared their case with more diligence.  Even though Chan Chin Hung was an independent witness, Tong had been able to contact him and in fact got some drawings from him.  The extraction of documents from the MO and the explanation as to the genesis of the designs should have been fully set out in his witness statement.  As it happened, these details only came to light in the course of his testimony.  Further, those advising the Defendants should not be in a worse position than Mr Yan in probing Chan Chin Hung to see if there were other documents which could be relevant.  I agree with Mr Liao that the Defendants should bear responsibility for prolongation of the trial due to the manner in which new documents were put forward in the course of the trial.  I should also bear in mind that the Plaintiffs succeeded in respect of the copyright claim concerning a photograph.
(h)	Hence, although the Defendants were successful on the copyright claim, there should be a discount on costs payable to them.  The discount will not be as big as that for the Plaintiffs’ costs in the passing off claim.  I also reject the suggestion that costs should be awarded to the Defendants on indemnity basis.
(i)	The Plaintiffs should be entitled to costs on the breach of agreement claims whilst the Defendants should be entitled to costs on the registered trade mark claims.  It is difficult to be very precise, but even disregarding the costs of the expert evidence, I think the costs of the former should be more than the costs of the latter.
(j)	In addition, the Plaintiffs should be entitled to costs on the malicious falsehood claim and the rectification of ENHANVOL registration.  The costs on the latter claim should be relatively insignificant in the overall scale.
(k)	The Plaintiffs also succeeded against the 2nd Defendant although the costs incurred on account of that part of the claim is mainly attributable to legal arguments in written submissions that were covered by the Brief.

27.  As suggested by Mr Chan, I would take a bird’s eye view and adopt a global approach.  In my judgment, after taking into account the respective discounts for reasons already canvassed, the costs which the Plaintiff should get (viz. on passing off, breach of agreement, malicious falsehood, rectification of registration of ENHANVOL, the personal liability of the 2^nd Defendant) would roughly set off by the costs the Defendants could get on copyright and, registered trade mark claims.

28.  I will therefore vary my costs order nisi and substitute it with a costs order that subject to costs orders already made, each party shall bear his own costs in the action.  The Defendants were successful in the application to vary the costs order nisi.  However, the Defendants were unsuccessful regarding their attempt to get the costs of the interlocutory injunction application which was the focus of the argument at the hearing on 11 May 2005.  I will therefore make no order as to costs regarding the application for variation.

29.  For the avoidance of doubt, this costs order does not encompass costs to be incurred in the future with regard to proceedings pursuant to my final order dated 26 May 2005.

HCA 4651/2002
HCA 2802/2003
HCMP 74/2004

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 4651 OF 2002, 2802 OF 2003 and

MISCELLANEIOUS PROCEEDINGS NO. 74 OF 2004

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(The Consolidated Action)

Before: Hon Lam J in Chambers

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REASONS FOR RULING

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1.  Judgment in this case was handed down on 8 April 2005.  On 13 April 2005, the Defendants applied ex parte on notice for stay of execution.  At the hearing in that late afternoon, I indicated to the parties that as the order has yet to be finalized, it was premature to deal with any application for stay.

2.  Mr Wong SC then applied for a gagging order in the interim.  The relief sought, as subsequently set out in a draft order placed before the court on 14 April 2005, was in the following terms,

“1.	Subject to paragraph 2 below, the Plaintiffs be restrained from making and/or publishing any representation to the effect that the First Defendant’s products sold under or by reference to the names or marks ENHANVOL and/or 盈康活are
	(1)	not genuine goods or 正貨; and/or
	(2)	liable to endanger public health
		until the determination of the intended application for a stay of the execution of the order to be drawn up in accordance with the Judgment of the Hon Lam J dated 8 April 2005.
2.	Nothing in paragraph 1 shall restrain the Plaintiffs from making or publishing an accurate report or representation of any part of the said Judgment.”

3.  The relief was sought against the background that after 8 April 2005, there were reports in several newspapers about the judgment.  On 11 April 2005, the 1^st Defendant made a public announcement in the Oriental Daily that it intends to lodge an appeal and the litigation only concerned the product name and had nothing to do with the quality of the same.  The 1^st Defendant indicated it would continue to sell high quality lingzhi products to the public and further announcement would be made later.

4.  On 13 April 2005, two advertisements appeared in the newspaper.  The first one is in the nature of a public announcement by the Plaintiffs about the result of the litigation.  Mr Wong criticized it as being partisan as it only touched upon aspects of my judgment which is favourable to the Plaintiffs.  The second one is an advertisement placed by Care and Health Limited, the current distributor for the Plaintiffs’ products.  It urged consumers to buy LingzhiMaster products by claiming that those were “正貨” and announced a programme for giving 50% discount to buyers who bought LingzhiMaster products with an empty ENHANVOL or ENHANOID bottle.  Counsel suggested these advertisements could form the basis of a new claim by the 1^st and 2^nd Defendants for defamation or malicious falsehood.

5.  Mr Liao SC offered certain undertakings on 13 April 2005 and the matter was adjourned to 14 April 2005 when the court had more time to deal with the application.

6.  At the hearings on 13 and 14 April 2005, I enquired with Mr Wong as to the juridical basis for seeking relief on ex parte basis.  Having heard submissions, I was not satisfied that there is sufficient justification for proceeding on such basis.  I therefore directed that the matter be adjourned to 25 April 2005 for inter parte hearing.  I also gave direction for the filing of evidence and skeleton submissions.  The final order will also be settled at that hearing and the question of stay of execution will be addressed.  I now give reasons why I declined to entertain the application on ex parte basis.

7.  The advertisements on 13 April 2005 formed the basis of the Defendants’ application.  Although counsel contended that the advertisements gave rise to new causes of action by the Defendants against the Plaintiffs, the Defendants did not issue a new writ and the application was not argued before me as an application for interlocutory injunction in the context of a new action.  In such circumstances, it is not appropriate for the court to consider the viability of the Defendants’ claims based on defamation or malicious falsehood nor should it be influenced by considerations solely relevant to such new claims that have yet to be advanced.  As I have said in Kabushiki Kaisha Yakult Honsha v Yakudo Group Holdings Ltd (No.3) [2003] 1 HKLRD 391 at Paras.19 and 27, if a plaintiff does not deem it appropriate to pursue the matter by way of a new claim, the court should be vigilant in guarding against considerations solely relevant to a potential new claim being slipped in by the backdoor.  

8.  On 14 April 2005, Mr Wong submitted that immediate relief as prayed for is necessary in order to prevent the frustration of the intended application for stay of execution.  He argued that the stay application and the appeal would be rendered nugatory if the Plaintiffs were permitted to place advertisements similar to the 13 April 2005 advertisements in the meantime.  The argument hinges on the contention that without immediate relief, the goodwill stemming from the names ENHANVOL and/or 盈康活 would be completely destroyed, thus leaving it pointless for the Defendants to pursue with the appeal.  This was the justification put forward for urgent hearing.

9.  With respect, I have great difficulties with the basic premise in that argument.  We are only talking about the interim period between 14 and 25 April.  The goodwill pertaining to the names ENHANVOL and/or 盈康活has been built up by activities over the years.  I do not see how it could be said that such a goodwill would be completely wiped away in a week’s time by advertisements placed by the Plaintiffs in the form similar to the 13 April advertisements.  Whether such advertisements could properly be characterized as acts destroying the goodwill in question as opposed to actions for reclaiming what, according to what I found in my Judgment, should have been the Plaintiffs’ in the first place is a matter to be debated.  I expect further submissions on this point and I would not express any final view on that.  In any event, the Defendants could place their own advertisements to counter the effect of the Plaintiffs’ advertisements.  In fact, the Defendants had tried to counter the effect of newspaper reports of my judgment by placing public announcements in newspapers.  The submission that without any ex parte relief, the intended application for stay and intended appeal would be rendered nugatory seems to me to be unreal.  I do not think the Defendants would suffer any loss or harm that could not be adequately compensated by an award of damages if no immediate relief is granted.  Hence, I do not think justice demands the court to act on ex parte basis in this instance.

10.  Ex parte applications should be the exception rather than the rule.  For recent expositions on the relevant principles, see the judgment of Rogers VP in L v C [2004] 2 HKC 387 at Paras. 6 to 8 and the judgment of Ma J (as he then was) in Brand Farrar Buxbaum LLP v Samuel-Rozenbaum Diamond Limited HCA No.A5191 of 1998, 8 May 2002 at Paras. 24 to 29.

11.  Another unsatisfactory aspect of the application is that the Defendants have not included in their evidence the financial statements of the 1^st Defendant and the financial position of the 2^nd Defendant.  This court therefore has no means to assess whether the Defendants would be good for any undertakings as to damages if my judgment on ownership of goodwill is upheld by the Court of Appeal.

12.  Whilst the Defendants have taken the precaution of giving notice to the Plaintiffs of their ex parte application, I am not satisfied that the matter is so urgent that immediate relief have to be granted pending the inter parte hearing on 25 April 2005.  I therefore gave directions accordingly on 14 April 2005.

13.  Lastly, I would hand down the Reasons for Ruling in open court.  This would enable either party to make reference to my judgment without further leave in case of perceived misrepresentation of my ruling in whatever form.  I do not see any good reason why the content of the Reasons for Ruling should be withheld from the public domain. 

HCA 4651/2002
HCA 2802/2003
HCMP 74/2004

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 4651 OF 2002, 2802 OF 2003 and

MISCELLANEIOUS PROCEEDINGS NO. 74 OF 2004

____________

____________

(The Consolidated Action)

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J U D G M E N T

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Background

1.  The 2^nd Plaintiff in this consolidated action is a university in Guangzhou and has been incorporated since 1924. In 1991, it set up a Food Engineering Research Centre [“FERC”].  In 1995, the State Ministry of Education of the People’s Republic of China issued a document 教技 [1995] 27 号 (at Trial Bundle C81) converting the centre into an institute called “國家教委食品工程研究中心” (Food Engineering Research Centre of State Education Ministry) and appointing Liu Xin [“Liu”] as the head of the centre.  The effect of that document is a subject matter of dispute between the parties.  The 2^nd Plaintiff said the centre remained part of the 2^nd Plaintiff.  The Defendants said it became a new legal entity.

2.  The works of FERC consisted mainly of advanced scientific and technological research in life science and food science.  There is a booklet at Trial Bundle C89 introducing FERC and the fruits of its research and their practical applications.  A landmark achievement of FERC was a technology called “germination activated ganoderma lucidum spore and fully sporoderm broken technology” (萌動激活赤灵芝孢子及孢壁全破壁碎裂技術).  Since this judgment is not intended to be a paper on scientific research, I think it is not necessary for me to set out the theory and details in respect of this technology despite Liu had spent some time in his evidence explaining what this is about.  Suffice to say in layman’s term, the technology would enhance the health and healing effect of lingzhi.  “萌動激活” and “全破壁” were expressions subsequently used in the commercial products sold by the 1^st Plaintiff.

3.  In order to facilitate commercial exploitation of the fruits of the research of FERC, the University set up the 1^st Plaintiff in 1993.  Its shareholders were the 2^nd Plaintiff (62.99%), Science and Technology Development Centre of the State Ministry of Education of the People’s Republic of China (21.92%) and Liu (15.09%).  The 1^st Plaintiff has an exclusive licence from the 2^nd Plaintiff regarding the latter’s intellectual property rights and has the exclusive right to manufacture and market products incorporating the 2^nd Plaintiff’s inventions.

4.  One of the products of the 1^st Plaintiff was lingzhi spore powder (靈芝孢子粉) capsule.  Since it is a health supplement product, a permit was required before the capsule could be produced and marketed for public consumption.  The permit for the capsule was issued by the health authority in Guangdong Province, 廣東省衞生廳 in 1997.  The permit was produced as exhibit P-14, 粤衛食健字[1997] 209 号.  At the beginning, the capsules were marketed under the brand names 故乡牌, Hometown and Hometown Food.

5.  The spore powder was first sold in Hong Kong under the brand name Hometown Food through a trader called Lam Po Sing who procured the same to be sold at various China Resource Limited (華潤) retail outlets.  There were also earlier sales in small quantities through a Japanese in Cheung Chau.  The Plaintiffs were keen to develop other sales network.  Liu had discussions with a number of potential traders who might be interested in the product.  In particular, several tests on the products had been done at the request of a Mr Cheng.  At one stage Liu was optimistic that Cheng would make a substantial investment into the product and the 1^st Plaintiff had therefore done a lot works on the same. Unfortunately, the discussion with Mr Cheng fell through at the second half of 1998. Liu therefore needed to find another interested investor.      

6.  The 2^nd Defendant is an orthodontist by profession.  He came to know about Liu and FERC through the introduction of Wu Xiao-Lan, the wife of a vice mayor of Shenzhen.  There are disputes between the parties as to the circumstances and timing under which they were introduced to each other.  The Plaintiffs said that happened in the end of 1998 whilst the Defendants said it occurred in the Chinese New Year of 1998.  It is not disputed that there were active negotiations between the parties in January and February 1999.  By an agreement concluded in February 1999 the 1^st Defendant agreed to act as distributor of the lingzhi spore powder produced by the 1^st Plaintiff.  The 1^st Defendant was a company acquired by the 2^nd Defendant and his associates in July 1998 (as shown by the annual return filed in July1999).  Apart from the 2^nd Defendant and his wife Tong Siu Kan [“Tong”], the other persons involved included the cousin of the 2^nd Defendant, Cheung Kwok Keung, and his friend Cheung Yin Fung [“CYF”] and one Lam Ky Quang.  Tong was only officially registered as director and shareholder in April 1999.  According to the annual return of 2003, the shareholders of the 1^st Defendant as at 8 June 2003 were the 2^nd Defendant, Tong, CYF and a BVI company called River Silk Development Ltd.             

7.  The agreement was executed in writing between FERC and the 1^st Defendant.  The 1^st Plaintiff also executed the agreement as the manufacturer.  There is a dispute as to whether the 2^nd Plaintiff could enforce the agreement.  The product was referred to in the agreement as “天維牌包装銷售純灵芝孢子粉膠囊”.  The agreement was for a duration of three years, from 1 February 1999 to 31 January 2002.  Subsequently, two more agreements were executed with adjustments in the price structuring.

8.  The 1^st Defendant marketed the lingzhi spore powder in Hong Kong under the brand names ENHANVOL 盈康活.  Later on, the parties extended their business to a lingzhi tea product sold under the brand names ENHANTEA 盈康茶.  The terms of distributorship were set out in another Chinese agreement dated 10 May 1999.  Like the case of ENHANVOL, two agreements were executed subsequently adjusting the price structuring.

9.  There was also another agreement dated 13 February 1999 between FERC, the 1^st Plaintiff and the 1^st Defendant.  I will adopt the nomenclature of the Plaintiffs in the pleadings and call this the Collaboration Agreement.  It is common ground that this was not executed on 13 February 1999 but there is dispute as to the date of its actual execution.  More precisely, the dispute is as to the sequence in which this agreement was executed as compared with the distributorship agreements mentioned above.  The Plaintiffs said the Collaboration Agreement was executed before the ENHANTEA distributorship agreement, the Defendants said it was executed after the same.

10.  In the second half of 2001, a new product of the 1^st Plaintiff was launched in Hong Kong by the 1^st Defendant.  The product was lingzhi lipid in capsule.  It was marketed by the name ENHANOID.  As regards the Chinese name, it was initially called 盈康力.  Subsequently, it was changed to 盈康孢子油.  There is dispute as to whether the name 盈康力 had ever been used for marketing in Hong Kong.

11.  In parallel with the sale of these products by the 1^st Defendant in Hong Kong, the 1^st Plaintiff marketed the same in mainland China under different packaging.  Various brand names were used on lingzhi spore powder capsules by the 1^st Plaintiff including Hometown, 故鄉牌, Guru, 學者.  The English name ENHANVOL had also been used together with the Chinese name學者灵芝.  However, the name盈康活 was not used for products sold in mainland China.  As regards盈康茶 and ENHANTEA, the evidence before me is not clear as to whether the tea had been sold under these names in mainland China.  As regards ENHANOID and盈康孢子油, in the manual (Bundle V, p.94) contained inside the mainland packing, the product was also referred to as 學者牌灵芝孢子脂質精華膠丸.  That manual referred to the tea product as故鄉牌灵芝茶 (at V97).

12.  After the expiration of the distributorship agreements, the parties could not reach agreement on the renewal.  The relationship between the parties worsened and the Plaintiffs claimed that the 1^st Defendant had been in substantial arrears in payment for goods supplied by the 1^st Plaintiff.  As shown in exhibit P4-A, the last batch of spore powder was delivered by the 1^st Plaintiff to the 1^st Defendant on 29 June 2002 whilst the last batch of lingzhi lipid was supplied by the 1^st Plaintiff to the 1^st Defendant on 18 September 2002.

13.  By a letter dated 5 October 2002 [Bundle S, p.63], the 1^st Plaintiff reminded the 1^st Defendant that upon termination of the relationship between the parties, without the consent of the 1^st Plaintiff, the 1^st Defendant had no right to use the trade names and trade marks of the 1^st Plaintiff including ENHANVOL, ENHANOID and 盈康活.  The 1^st Defendant continued to sell products under those names after that letter.  Since there was outstanding stock previously supplied by the 1^st Plaintiff, the 1^st Defendant did not consider the clearance of such stock to be objectionable.

14.  In about late November 2002, the 1^st Defendant marketed products manufactured by other suppliers under those names.  The 1^st Plaintiff and FERC published a public declaration in several Chinese newspapers on 4 December 2002 announcing that it had been the sole manufacturer of the lingzhi products under those brand names.  It also stated that it was the owner of these trade names and trademarks.  It declared that it had ceased supply to the 1^st Defendant and starting from 1 December 2002, Care & Health Limited was appointed as the exclusive distributor of these products in Hong Kong, Shanghai, Taiwan, Macau and in the international market.  The spore powder and lipid were depicted in that announcement in a new packing under the name Lingzhimaster 學者灵芝similar to exhibit LX-70.  The 1^st Plaintiff and FERC also indicated that it would take legal action against any passing off and imitation of their products.

15.  On the same day, viz. 4 December 2002, the 1^st Defendant placed advertisement in two Chinese newspapers announcing the transfer of the production of lingzhi products from FERC to another factory with a higher standard having a GMP certification.  It also asked the consumers to note certain features of its products in order to avoid purchasing counterfeit products.  This advertisement is the subject matter of the Plaintiffs’ claim of malicious falsehood.  The same advertisement was placed on 5 December 2002.  I shall call this “the GMP Advertisement”.

16.  On 5 December 2002, the 1^st Defendant made another public announcement in Chinese newspaper asserting that the 1^st Plaintiff’s announcement of 4 December 2002 was misleading.  In a nutshell, the 1^st Defendant claimed to the owner of the brand names and package designs of ENHANVOL 盈康活, ENHANOID 盈康孢子油 and ENHANTEA 盈康茶.  It reiterated the transfer of production to a factory with GMP certification and the new products were said to be of a better quality.

17.  On 12 December 2002, the 1^st Defendant held a press conference with an array of experts and celebrities promoting the ENHANVOL and ENHANOID sold by it.  There were further newspaper and other mass media advertisement by the 1^st Defendant with reference to ENHANVOL and ENHANOID.

18.  At the same time, the Plaintiffs were collecting evidence. ENHANVOL marketed in Hong Kong were bought from sales outlets including Watsons, Mannings, Yue Hwa Chinese Products Emporium and Health Plus.  Investigation was also made as to the new factory producing the lingzhi products for the Defendants.  Tests were conducted to examine the level of impurity and heavy metal in the 1^st Defendant’s products.

19.  On 12 December 2002, the Plaintiffs issued the writ in High Court Action No.4651 of 2002 against the 1^st and 2^nd Defendants.  The claims included passing off, infringement of copyright, breach of restrictive covenants in distributorship agreements.  A claim of malicious falsehood was added later.

20.  On 29 July 2003, the Plaintiffs commenced a new action in High Court Action No.2802 of 2003 against all three defendants for infringement of registered trademark and passing off by reference to “萌動激活”.  That had been registered by the 1^st Plaintiff as a trademark under No.B09183 of 2003.  Based on the certificate of registration, the application was made on 24 December 2002 and the certificate was issued on 21 July 2003.  The 3^rd Defendant is a company that was described as a joint researcher of ENHANVOL products sold by the 1^st Defendant after the break-up with the Plaintiffs.  The 2^nd Defendant and his wife are the shareholders and directors of the 3^rd Defendant. 

21.  On 10 January 2004, the Plaintiffs issued an Originating Motion against the 1^st Defendant seeking rectification of the Register of Trade Mark in respect of the mark ENHANVOL which had been registered by the 1^st Defendant under its name.  That registration was applied on 10 August 2001 without any prior notification or consent from the Plaintiffs.  There was also an application for registration for盈康活 but it had been withdrawn.

22.  There was an application for interlocutory injunction.  Due to the lack of sufficient time to fully dispose of that application at the hearing in January 2004, the parties agreed to deal with the matter by way of speedy trial with the three actions consolidated.  Directions for speedy trial were given on 16 January 2004.

23.  In the Re-amended Consolidated Statement of Claim, the Plaintiffs pleaded several causes of action,

(a)	passing off;
(b)	breach of restrictive covenant in the distributorship agreements;
(c)	infringement of registered trade mark萌動激活;
(d)	malicious falsehood;
(e)	infringement of copyright;
(f)	breach of the Anti-Unfair Competition Law of the People’s Republic of China based on actionability of foreign tort under the rule of Boys v Chaplin;
(g)	rectification of the Register of Trade Mark regarding the mark “ENHANVOL” registered by the 1st Defendant.

24.  In the Re-amended Consolidated Defence and Counterclaim, the Defendants counterclaimed for a declaration that the registration of 萌動激活 is invalid under Section 53 of the Trade Marks Ordinance.

Issues

25.  Different issues call for determination in respect of different causes of action.  For passing off, the main dispute in this case is who is the owner of the goodwill in Hong Kong attached to the following names or marks ENHANVOL, 盈康活, 萌動激活, ENHANOID, 盈康孢子油, ENHANTEA, 盈康茶 and the get-ups of these products marketed during the subsistence of the distributorship agreements or arrangements.  In this connection, there is not much dispute of facts as to how these marks or names had been used in Hong Kong and the get-ups of the products.  There are factual disputes as to how these names were coined except萌動激活.  As for that expression, it is accepted by the Defendants that it was coined by Plaintiffs and the dispute on that focused on whether any goodwill attached to it.  There are also factual disputes as to who designed the get-ups.  These overlapped with the issues in the copyright claims.

26.  Apart from the names, marks and get-ups, the Plaintiffs also advanced the claim of passing off based on other modes of alleged misrepresentation.  In Paragraph 41 of the Re-Amended Statement of Claim, specific reference was made to the newspaper advertisements dated 4, 5 and 12 December 2002, statements made at the press conference on 12 December 2002 and the contents of a website of the 3^rd Defendant.  The Plaintiffs contended that there were separate misrepresentations in these publications that could constitute passing off even if it is held that goodwill of names, marks and get-ups belonged to the Defendants.  I shall refer to these heads of claim as the “free standing passing off claims”.

27.  For the breach of contract claims, the main issue is who was the party to the contracts.  More specifically, the defence contended that FERC is not part of the 2^nd Plaintiff and the contracts were therefore null and void.  The defence also challenged the scope of the relevant restrictive covenants.  It is contended that the subject matters of the contracts were 天維牌 lingzhi spore powder and lingzhi tea as opposed to ENHANVOL, 盈康活 and ENHANTEA, 盈康茶.  The Defendants averred that the latter products were not covered by the scope of the agreements as they were differently priced and not in天維牌packaging.  There is a factual dispute as to the sequence under which these agreements were signed.  The Defendants asserted that the subsequent agreements (viz. Agreements B, C, E and F) were made “for the benefit of PRC custom authorities”.  It is also pleaded that the restrictive covenants in the agreements were null and void for contravening the PRC law, in particular 反不正當競爭法 Articles 3(7) and 12 and  民法通則 Articles 4, 55, 58 and 108.

28.  For malicious falsehood, the question of falsehood hinges upon whether the advertisements of 4 and 5 December 2002 implicated that the Plaintiffs’ products were counterfeit.  The defence denied that the advertisements made any reference to the Plaintiffs’ products.  It is said the advertisement was in fact aiming at other counterfeit products in the market.  For that reason, malice is also disputed.  By reason of Section 24 of the Defamation Ordinance, it is not necessary to prove special damage in respect of words published in writing calculated (meaning likely) to cause pecuniary damage to the plaintiff.  The Plaintiffs relied on this provision.

29.  The copyright claim is more complicated.  Initially, the claim was made in respect of artistic as well as literary works relating to the packaging of the products.  At the beginning of the trial, Mr Liao SC wisely cut down the scope to the claim.  For the purpose of this action, the Plaintiffs confined the copyright claim to the following,

Plaintiffs’ copyright works & infringement

30.  The principal line of defence is pleaded in Paragraph 64A, 65A and 65B of the Re-Amended Consolidated Defence and Counterclaim.  For most of these items, the main dispute is as to authorship.  Each side claimed their designer(s) to be the author(s) of the relevant artistic work and alleged the other side of copying.  It is primarily a question of fact that depends substantially on credibility of the witnesses.

31.  However, two items require separate consideration.  In respect of item (i), the Defence alleged in the pleadings that the relevant pictures at V162 and V221 were derived from an original design by Chan Chin Hung produced at E730.  A careful comparison between E730 on the one hand and V162, V221 on the other reveals that the cracks on the two spores are different.  The cracks appearing at V162 and V221 are clearly identical to the one appearing in the works relied upon by the Plaintiffs.

32.  In respect of the photo referred to as item (ix), the use thereof was admitted by the Defendants in Paragraph 64 of the Re-amended Consolidated Defence and Counterclaim.

33.  For these two items, the issues are therefore different and they have to be considered separately.

34.  For the claim based on foreign tort, the Plaintiffs relied on the manufacturing and exporting from mainland China lingzhi products in packaging or get-ups identical or similar to those of the Plaintiffs’ products and using the disputed trade marks.  On the evidence, there is no dispute that after the cessation of distributorship, the 1^st Defendant contracted with other factories in mainland China to produce ENHANVOL and ENHANOID lingzhi products.

35.  If the double actionability rule applies, the Plaintiffs have to establish that those acts would constitute an actionable tort in Hong Kong as well as in mainland China before they could succeed on this head of claim.  Hence, the defence in respect of the passing off claim is equally applicable to this cause of action.  In addition, there is an issue as to whether the Plaintiffs had any goodwill in respect of any of the disputed trade marks in mainland China and whether the acts infringed the Anti-Unfair Competition Law of the People’s Republic of China.

36.  Due to the nature of the restrictive covenants in the contracts, for practical purposes, if the Plaintiffs succeed on the breach of contract claim, it would cover most of the injunctive relief sought under the other causes of action (with the exception of malicious falsehood) in the near future.  However, there are three qualifications,

(a)	the restrictive covenants expire in 2005;
(b)	the covenants do not extend to ENHANOID and 盈康孢子油;
(c)	the 2nd and 3rd Defendants were not parties to the contract (though they might be bound as servants or agents of the 1st Defendant having knowledge of the covenants).

Credibility of the witnesses

37.  Although on ultimate analysis, the outcome of this case in respect of most causes of action (except the copyright claim) does not simply hinge on the resolution of the factual issues, it is fair to say that there are serious disputes on the factual matrix.  Whilst I do not find it necessary to resolve each and every single factual dispute, I would like to make some general observations as to credibility of the witnesses since their evidence has taken up much time in the course of this trial and counsel have made extensive submissions on the topic.  

38.  The Plaintiffs called three witnesses at the trial: Liu, Wang Jianghai (the vice-president of the 1^st Plaintiff) and a designer called Chan Hon Chung陳漢聰.  For reasons that I shall discuss in the context of the copyright and passing off claims, I do not accept Liu and Chan Hon Chung’s evidence on authorship in respect of the relevant drawings and design.  Further, I reject their evidence as to the coining of the names ENHANVOL and盈康活.  Given the nature of their evidence, once I reject their claims of authorship, I am driven to the conclusion that both of them put forward false evidence and drawings that were put together deliberately with a view to mislead this court.  I appreciate that this is a serious allegation and I should not reach this conclusion without cogent evidence.  But I am unable to see any other possible explanation that could absolve these gentlemen.  I regret that I have to say so in respect of Liu who is apparently a well-respected figure in the academic world.

39.  Moreover, Liu was not a satisfactory witness in many other aspects.  The more important points are as follows. 

(a)	On many occasions, he simply did not give an answer to the question of counsel.  Instead he talked about other matters to his own liking.  Despite repeated explanations by the court as to the proper role of a witness, Liu continued to respond to cross-examination in such a manner, especially when he was faced with questions that might expose the weakness in the Plaintiffs’ case.  This led me to conclude that Liu is a witness who resorted to prevarication to avoid answering questions to his prejudice.
(b)	He produced his diary to corroborate his evidence.  However, as pointed out by Mr Chan, the entries in his diary do not tally well with his avowed purpose of keeping such entries as reminder of future important appointments.  Many entries relied on by Liu were relatively trivial occurrence recorded after the events and it is difficult to understand why he would bother to record those at that time given the very good relationship between the parties.  Good examples could be found in Annex B to the Closing Submissions of Mr Liao.  As a matter of common sense, those are simply not matters one would record in one’s diary.  When cross-examined upon these, Liu explained that it was due to his intuition.  On the other hand, more important matters like the decision to adopt a specific package design was not recorded.  I must say I am not impressed by Liu’s evidence about these entries and I do not accept his evidence that these were contemporaneous records.  I attach no weight to such entries.
(c)	Liu gave evidence about an agreement dated 8 December 1997 made between Chan Hon Chung and the 1st Plaintiff.  The recital referred to the design by Chan Hon Chung based on Liu’s idea.  It was rather odd as little purpose could be served by such a recital in the context of the agreement.  Further, given the evidence about the tactical motive behind the action commenced by Chan Hon Chung against the Plaintiffs in mainland China discussed below, I have serious doubt if this agreement was something made up in 2004 in order to achieve a tactical advantage.  In this connection, I agree with Mr Chan that the Plaintiffs had not satisfactorily explained why it was considered in December 1997 that this agreement was necessary given that it was not even decided at that time the design would be used in the package of Plaintiffs’ products.  There was no reference to the 1997 agreement in witness statements filed on behalf of the Plaintiffs or in the copyright transfer agreement dated 8 March 2004.
(d)	In March 2004, at the instigation of Wang, Chan Hon Chung commenced actions against the Plaintiffs in Guangzhou.  The whole proceedings were a farce.  The writs and supporting statements were drafted by Wang, a director of the 1st Plaintiff.  Chan Hon Chung admitted that the allegations contained in those documents were not true.  Wang justified those legal proceedings as tactical moves.  For my part, if such proceedings were commenced in Hong Kong, in view of the Plaintiffs’ case as to the oral agreement in 2001 and the copyright transfer agreement dated 8 March 2004, I would have no hesitation in characterising them as abuse of process. Liu tried to distance himself from the decision to launch such proceedings.  He said it was a decision by the legal affairs committee.  He was however forced to admit that he did receive report from Wang about the legal proceedings.  He was also present when the legal expert in the 2nd Plaintiff was consulted.
(e)	Given that Wang and Liu should be aware of the oral agreement in 2001 and the copyright transfer agreement dated 8 March 2004, it is to say the least misleading when proceedings were commenced by Chan Hon Chung in Guangzhou without reference to these agreements.  I cannot help from pondering if these people deemed it appropriate to mislead the court in Guangzhou in order to serve their purposes, isn’t there every possibility that they would do the same in Hong Kong.
(f)	Liu is obviously a very egoistic, impulsive and vindictive person.  In the course of his evidence, I had to remind him many times the proper role of a witness and adjourn the case to enable him to calm down from his tantrum.  He seized on every opportunity to belittle the 2nd Defendant and Tong and was at times behaving improperly towards counsel.  Whilst I understand that he might feel angry and aggrieved about the activities of the Defendants, I must say I have problem with his reliability as a witness.

40.  By reason of their involvement in the Guangzhou proceedings, the credibility of Wang and Chan Hon Chung is also impugned.  I find Chan Hon Chung to be evasive.  He tried to exonerate himself by saying these were legal matters that he could not understand as a layman.  I do not accept that for one moment.  I am singularly unimpressed by his evidence about how the Plaintiffs’ designs for the subject matters of the copyright claims came into existence.  I shall elaborate on that in my discussion on those claims.  Wang’s evidence on the coining of the names conflicted with those of Dr Chow.  Wang said he discussed with Liu in the conception of the name ENHANVOL whilst Dr Chow testified that the name was conceived in a telephone discussion with the 2^nd Defendant.  I preferred the evidence of Dr Chow and I rejected Wang’s version.  Apart from the fact that Dr Chow impressed me as a more truthful witness, it is noteworthy that Wang was not an impartial witness.  He is the vice president of the 1^st Plaintiff and his part in the Guangzhou proceedings is a testimony to his partiality.    

41.  At the same time, I do not feel able to accept the entirety of the evidence adduced by the Defendants.  I have reservations about certain aspects of the evidence of Tong and CYF, some of which I will mention in other parts of this judgment.  In addition, I find Tong’s evidence about the telegraphic transfer of $360,000 unsatisfactory.  The Plaintiffs alleged the document at S66 to be a forgery.  There are features which obviously raise suspicion: the absence of any time chop evidencing the time when the application form was received by the bank, the striking resemblance between the bank’s chop at S66 and that at S67.  The 2^nd Defendant gave a rather strange response when questioned by袁建平 about the telegraphic transfer.  He described it as a joke and said it was not a legal document.  When pressed further, he said it was very difficult to explain it over phone.  Despite the express invitation by the Plaintiffs’ solicitors, the Defendants declined to obtain the relevant documents from the bank to verify the authenticity of that telegraphic transfer.  Neither did the Defendants call the staff in the 1^st Defendant who handled the application to give evidence.  

42.  Tong testified that she had instructed a staff of the 1^st Defendant to bring the application form to the bank and the staff subsequently reported to her that it had been done.  She only discovered later that the transfer was not made due to insufficient fund in the relevant bank account.  I note that she did not mention these in her witness statement or affirmations.  I find it incredible if the transfer was not processed due to insufficient fund, Tong was not informed about it on the same day.  Further, she could not explain about the suspicious features mentioned above.  Nor is there any explanation why no step had been taken to obtain documents from the bank to corroborate her story.

43.  Mr Liao invited this court to infer that Tong knew the document was a forgery and the explanation given by her in the witness box was false.  I would not go that far.  Suffice to say that I am not satisfied that Tong had told me whole truth about this document and I will bear this in mind in assessing the credibility of the other parts of her evidence.

44.  As regards CYF, I also have reservations about his reliability.  He was adamant about the cessation of delivery of goods to the Quarry Bay office of the 1^st Defendant before Chinese New Year in 1999.  However, when cross-examined about the Quarry Bay address being used by him on an import licence declaration dated 24 February 1999 at F962, he gave several answers which did not make sense to me.  At first, he said the document was prepared well before that date.  Then he corrected himself and said the goods had been shipped to Hong Kong without an import declaration and the document was prepared after the goods had been detained by the Custom authority.  He said he still put down the Quarry Bay address because the goods were shipped earlier.  When it was shown to him that the goods were shipped on 20 February 1999, viz. after the Chinese New Year, he explained that he put down that address because they had just moved and the incident occurred during the transitional period.  Yet he maintained they had already moved their office by that time.  When pressed further, he gave a further explanation by reference to his lack of knowledge as to whether the address of the 1^st Defendant in the Business Registry had been changed.

45.  CYF testified initially that he had not seen LX-26 before the 1^st Defendant came up with the design of LX-28.  He had to change his position when confronted with the fact that ENHANOID packed in LX-26 had been delivered to the 1^st Defendant on several occasions before LX-28 was designed and the newspaper advertisement at D334 must have been seen by him.

46.  I also find his evidence about what material he had referred to in the conception of the design of LX-28 unsatisfactory.  On 12 November 2004, he said he was not told about the identity of the manufacturer of ENHANOID.  Then on 15 November, he changed his position and said it had been mentioned although he was not sure whether it was the 2^nd Plaintiff.  He said he had to refer to some leaflets of ENHANVOL that had mentioned about ganoderma spore lipids in order to learn about the effect of the product.  He did not specify what leaflets he was referring to.  As far as the leaflets of ENHANVOL that have been produced as evidence is concerned, there was not much reference to the lipids.  ENHANOID was 100% lipids and therefore more effective than ENHANVOL.  In that sense, it was an improved product.  Hence, it was rather strange that Cheung chose to refer to old leaflets of ENHANVOL to find out the effect of ENHANOID.  Further, the most convenient and direct reference about the effect of ENHANOID available at that time was LX-26.  Yet, Cheung somehow seems reluctant to mention that in his evidence.           

47.  On the whole, like the case of Tong, I am not satisfied that CYF had told me the whole truth and I will bear this in mind in assessing his evidence.

48.  I find the other defence witnesses to be honest and truthful.  Having considered their evidence in the light of the other witnesses, I do not think my reservations about the credibility of Tong and CYF tainted the reliability of these other witnesses.  I shall discuss the relevant part of their evidence in the context of each head of claim.

Passing off claims: ownership of the goodwill in Hong Kong

49.  At the start of the relationship between the parties, neither party had any goodwill in Hong Kong in terms of the names or marks ENHANVOL, 盈康活, ENHANOID, 盈康孢子油, ENHANTEA, 盈康茶.  Although the Plaintiffs had sold lingzhi products under other brand names like Hometown Food and 故鄉牌, I have no concrete evidence as to the sale volumes prior to 1999.  In any event, it is not the Plaintiffs’ case that the goodwill of ENHANVOL was in any way built upon the pre-existing reputation of Hometown Food or故鄉牌lingzhi products in Hong Kong.

50.  Mr Liao stressed the consumers’ confidence in the reputation of the 2^nd Plaintiff in the promotion of the product as one backed up by its scientific research.  That is a matter relevant to the determination of ownership of the goodwill generated from the sale of ENHANVOL, 盈康活, ENHANOID, 盈康孢子油, ENHANTEA, 盈康茶 and their advertisement.  However, it does not follow that before ENHANVOL was launched in Hong Kong 1999, the Plaintiffs already had a goodwill in that name waiting to be tapped.  The goodwill had to be built up through sales and advertisement.     

51.  As regards the 1^st Defendant, it was a newly formed company without any track record in 1999.  The 2^nd Defendant had not been engaged in the trading of health product before and he could not claim to be an expert in lingzhi in those days.

52.  In respect of dispute as to ownership of local goodwill between a foreign manufacturer and local distributor, the Court of Appeal observed in Scandecor Development v Scandecor Marketing [1999] FSR 26 at p.39,

“The legal response is that this problem, if not resolved by agreement, is ultimately soluble only by a factual inquiry with all the disadvantages of the length of is duration, the costs of its conduct and uncertainty of its outcome.  There are no quick, cheap or easy answers to be found in hard and fast legal rules, in binding precedents or in clear cut factual and legal presumptions.” (my emphasis)

53.  Various tests have been suggested for the resolution of this dispute.  Professor Wadlow put forward four criteria in The Law of Passing-off, 3^rd Edn.Para.3-108 that had been applied by Cheung J (as he then was) in Guangdong Foodstuffs Import & Export (Group) Corp & Anor. v. Tung Fook Wine (1982) Co. Ltd. & Anor. [1999] 3 HKLRD 545, 586-590),

“To expand, the following questions are relevant as to who owns the goodwill in respect of a particular line of goods…:
1.	Are the goods bought on the strength of the reputation of an identifiable trader?
2.	Who does the public perceive as responsible for the character or quality of the goods?  Who would be blamed if they were unsatisfactory?
3.	Who is most responsible in fact for the character or quality of the goods?
4.	What circumstances support or contradict the claim of any particular trader to be the owner of the goodwill?”

54.  But these enquires would not be necessary if there is a binding agreement between the parties as to ownership of the relevant goodwill, see Wadlow, The Law of Passing-off, 3^rd Edn.Paras.3-104, 3-106, 3-110, 3-119 to 3-121.  At Para.3-106, the learned professor put forward the following legal analysis as to the ownership of goodwill,

“…[I]dentifying the owner of goodwill is really a two-stage process because of the dual character of goodwill as a reflection of a public state of mind on the one hand, and as legal property on the other.  It is in its latter capacity that any agreement or special relationship between the parties becomes relevant.  The two aspects are easily reconciled by saying that the initial vesting of goodwill in one trader or another is always a matter of fact; but that having vested there on its creation it may be transferred to another trader by prior or subsequent agreement, or by operation of the general law, always provided that the transfer does not offend against the rule prohibiting assignments in gross.” (my emphasis)

Then, at Para.3-110,

“…[A] properly drawn agreement could and should have made it clear who was entitled to the relevant goodwill during the currency of the relationship and afterwards, and unless the agreement offended the rule against transactions in gross, its terms would have been given effect.”

“… the terms of a voluntary agreement deserve to be given effect in full when it serves to reinforce what would have occurred at common law or when ownership at common law would be uncertain.  There are many situations in which, in the absence of agreement, the goodwill could almost equally well be said to belong to one party or the other, and to give effect to the choice of the parties avoids a difficult, pointless and unreliable enquiry.  If so, it follows that the party agreed to own the goodwill is the only proper claimant in a passing-off action during the course of the agreement, that he alone is entitled to use the names or marks with which the goodwill is associated, and that on termination of the agreement it is he who immediately has the right to sue third parties, or even his former colleague, for passing-off.”

55.  In Growmax v Don & Low [1999] RPC 367, Lindsay J expressed certain reservations about a general proposition as to the prevalence of the terms of a licence agreement on ownership of goodwill at p.388,

“Whilst I recognize that the Courts would not wish to undermine the utility of distributorship agreements (and exclusive distributorship agreements would be the most vulnerable) I am loath in this area, which is to some extent one of fact and degree, to endorse a proposition which is, as framed, so inflexible, so free of regard to the terms of the particular licence, to the state of affairs when the licence was made and to whether the licensee has, for example, promoted the name in ways beyond such as may have been incidental to his obligations under the agreement or beyond preservation or enhancement of such interests as he acquires under the agreement.  I would, however, be content for present purposes with a proposition which stated that subject to special circumstances being proved to the contrary and to the terms of the particular licence, as between licensor and licensee as competitors for the ownership of the goodwill at the termination of a licence, the position of the licensor should not be taken to be weakened nor that of the licensee enhanced by such activity on the licensee’s part or such his contractual position during the currency of the licence as was respectively either required of him or conferred upon him by the licence or, as to activity of his known to the licensor, was such as could be fairly regarded by the licensor as no more than reasonably incidental to the maintenance or promotion of such commercial interest in the name as the licence had conferred upon the licensee.”

56.  Professor Wadlow responded to these remarks in Paras.3-121.  He clarified that the proposition was not meant to be applied to a simple distributorship agreement that is silent as to whether the trade mark was being licensed at all.  He identified the inherent characteristic of a licence agreement as the rationale behind the ownership of the goodwill by the licensor.  It was suggested that any other consequence would destroy the licensor-licensee relationship as inevitably as allowing a tenant under a lease to claim adverse possession against his landlord.  In the context of the present case, the scenario where there is no pre-existing goodwill is more relevant.  The professor commented,

“… by identifying themselves respectively as licensor and licensee the parties have specified which of them is actually to own the goodwill generated in performance of the agreement, and which is to enjoy it on terms, and their decision should be given effect. …If the distributorship agreement … had identified one party as the licensor of the name and the other as the licensee … then at the very least there would have been an estoppel by convention as to which party owned the goodwill in the name.”

57.  It is quite clear that Professor Wadlow was commenting with regard to both a real licence situation as well as an agreement dealing with a goodwill yet to be acquired.  His view was that the law should give effect to the agreement of the parties in both cases.

58.  The first question to ask is therefore what was the contractual arrangement between the parties.  For reasons given later in the section dealing with the contractual claims, I find that FERC was part of the 2^nd Plaintiff instead of being a separate legal entity and the Distributorship Agreements A to G and the Collaboration Agreement were made between the Plaintiffs and the 1^st Defendant.  I further find that they are valid and binding both as a matter of PRC law and Hong Kong law.  Although the Distributorship Agreements did not refer to the names or marks ENHANVOL, 盈康活, ENHANTEA, 盈康茶and their get-ups explicitly, I find that it was intended by the parties that they fall within the scope of these agreements.  In other words, these names and marks were encompassed in the references to《天維牌》包裝and 本合同書産品及産品名稱 under those agreements. ENHANOID, 盈康孢子油 are however outside the scope of the agreements.

59.  The Distributorship Agreements did not expressly provided that the 2^nd Plaintiff as “licensor” granted a “licence” to use these names or marks to the 1^st Defendant as “licensee”.  We are obviously talking about goodwill to be acquired in the future, hence the use of the expressions “licensor”, “licensee” and “licence” cannot be accurate in their strict legal sense.  A more accurate formulation of the issue is whether the agreement provided for the ownership of the expected goodwill pertaining to these names or marks.  The material clause is Clause 3 (I choose the clause from Agreement A by way of example, the clauses in the other agreements are essentially the same),

“3.  許可採用“天維牌”包裝銷售純灵芝孢子粉膠囊產品期限
1）	甲方同意乙方採用“天維牌”包裝銷售純灵芝孢子粉膠囊產品期限為3年（自1999年2月1日至2002年1月31日止）。未獲得對方同意，甲方雙方在本合同書許可期限內均不得與第三方合作採用“天維牌”包裝銷售純灵芝孢子粉膠囊產品。純灵芝孢子粉膠囊產品的技術所有權和生產所有權為甲方所有。
2）	本合同書生效後一個月內，乙方向甲方提供100萬港幣作為本項目合作保證金。若乙方在獲得許可採用“天維牌”包裝銷售純灵芝孢子粉膠囊產品的期限內提前放棄或自動放棄銷售權利，甲方在6個月後退還乙方提供的保證金的50%，另外的50%作為乙方給予甲方的經濟補償。乙方的訂貨不得少于本合同書雙方約定的每季度提貨數量的30%以上。
3）	應乙方要求需要在原有裝材料或宣傳物加印專用內容（如進口玻璃瓶、專用膠囊及外包裝盒商標、名稱、宣傳資料等）以及推廣產品印發的產品宣傳資料，費用由乙方承擔。
4）	為提高產品的國際知名度及更好地保護產品的知識產權，進一步推進產品在國際市場的銷售業績及保護乙方利益，乙方提出願意對產品技術所涉及的國際發明專利提供一切申請費用，甲乙雙方同意以劉昕（Xin Liu）、鍾志强（Peter Chee-keung Chung）為所申請的國際發明專利的共同發明人及共同申請人。
5）	為保證在國際市場能完成本合同書計劃的市場拓展規模，乙方在獲得許可採用“天維牌”包裝銷售純灵芝孢子粉膠囊產品之後，應建立多方面宣傳廣告綱絡及其它有效形式拓展產品市場，包括建立連鎖店、廣告牌、燈箱廣告、霓虹燈廣告、報紙廣告、電視台、電台及各種雜誌等傳媒網絡進行宣傳廣告，費用由乙方承擔。乙方保證投入宣傳廣告費用在本合同書生效後半年內的實際投入不得少于150萬港幣。
6）	為促進產品在國內的銷售業績，提高產品市場競爭和佔有優勢，若應乙方要求對甲方產品進行臨床試驗或其他保健功能試驗和產品測試以及對外宣傳發布會等，有關費用由乙方提供。
7）	在本合同書許可期限內及銷售權利終止後三年內，乙方均不得生產或代理或經銷其他廠家生產的相同或相近似產品以及仿冒或影射本合同書產品及產品名稱、外觀包裝設計相同或相近似的產品或系列產品。若有違約行為乙方願向甲方賠償500萬港幣。乙方凡涉及國家教育部食品工程研究中心及中山大學或廣州綠色食品工程公司的文字資料或對外宣傳資料，必須先送甲方審核，經同意方得使用。”

60.  In both Clause 3(1) and the preamble, it was stated that “甲方同意乙方采用《天維牌》包裝銷售纯灵芝孢子粉膠囊”.  This could be read as the grant of a licence to use to the names, marks and get-ups encompassed by the expression 《天維牌》包裝 by the 2^nd Plaintiff to the 1^st Defendant, viz. by implication providing for ownership of the goodwill by the 2^nd Plaintiff.  To identify the true intent of the parties, it is necessary to determine the common intention of the parties by reference to other features in the agreements.

61.  There are features in the agreements that point strongly in favour of the existence of an implied agreement that the goodwill arising from the sale of the goods in 《天維牌》包裝 would be vested in the 2^nd Plaintiff,

(a)	Clause 2(1) refers to both parties acting together in opening up an international market for capsules sold in such packaging (“共同開拓采用《天維牌》包裝銷售纯灵芝孢子粉膠囊產品國際市場”).  Clause 3(4) and (7) and 5(5) refers to actions and role played by the 2nd Plaintiff in the market promotion regarding the international goodwill of the product.  Hence it was envisaged that the 2nd Plaintiff at least had some part in the promotion of the goodwill relating to such packaging.
(b)	The heading of Clause 3 refers to the terms and conditions for the permission to use such packaging (“許可采用《天維牌》包裝銷售纯灵芝孢子粉膠囊產品的條件及期限”).  In Clause 3(5) and Clause 5(2) and (3), there are references to the 1st Defendant obtaining the permission to use such packaging (“乙方在獲得許可采用《天維牌》包裝銷售纯灵芝孢子粉膠囊”).  The word “許可” implies that the 1st Defendant was not at liberty to use 《天維牌》包裝 to sell lingzhi powders without permission from the 2nd Plaintiff.
(c)	Clause 5(4) provides for the renewal of such permission upon expiry of the agreement,
	“乙方在獲得許可采用《天維牌》包裝銷售纯灵芝孢子粉膠囊產品期滿時，享有优先申請继續采用《天維牌》包裝銷售纯灵芝孢子粉膠囊產品的优先權，并應在期滿前3個月前提出申請，經甲方同意，訂立新的授權合同書。”
	This is a highly indicative provision.  If no permission were required from the 2nd Plaintiff as to the continued use of the names and marks after the termination of the agreements, this clause would be otiose.
(d)	Clause 3(7) prohibits the use of names and marks or its imitations by the 1st Defendant within 3 years after the termination of the agreements.  This shows the parties intended that the 2nd Plaintiff had a proprietary interest in those names and marks.

62.  This conclusion is reinforced by the provisions in the Collaboration Agreement.  It was recited in that agreement that the Plaintiffs consented to the use by the 1^st Defendant of, inter alias, ENHANVOL, 盈康活, ENHANTEA, 盈康茶 to sell lingzhi products.  The tenor of that agreement was a co-operation between the three parties in opening up the international market for these products.  The arrangement between the parties was obviously much more than a series of sale of goods transaction.

63.  Mr Chan argued that Clause 3(7) actually pointed towards the other direction.  He submitted that if the goodwill was vested in the Plaintiffs, it made no sense to confine the limitation to 3 years.  Hence, he contended that by implication the goodwill must be vested in the 1^st Defendant.  I do not think this is correct.  To start with, as pointed out by Mr Liao, Clause 3(7) is drafted in wide terms and covered aspects other than use of similar names or marks.  Secondly, there is no reason why an owner of goodwill should not secure double protection by way of restrictive covenant.  An action on restrictive covenant obviates the need to prove goodwill.  I reject the submission that Clause 3(7) is repugnant to ownership of goodwill by the Plaintiffs.

64.  In this connection, I attach no weight the evidence of Tong and CYF that there was an agreement that the new brand name was to be a brand name belonged to the 1^st Defendant.  No doubt there was an agreement for new brand names or trade marks to be used.  But it does not mean that it was agreed that those new names or marks belonged to the 1^st Defendant.  Tong and CYF were not privy to the negotiation for the terms of the distributorship agreements.  The only person who had taken part on behalf of the 1^st Defendant in the negotiations leading to the execution of the distributorship agreements was the 2^nd Defendant.  He chose not to give evidence.  Whatever might have been said or discussed at meetings prior to the negotiation for the terms of the written agreements, they must be regarded as being overridden by the latter.

65.  Moreover, I find it unbelievable that the 2^nd Defendant had not shown a copy of the written agreements to Tong or CYF or informed them about the terms thereof.  Tong was his wife and CYF was his business partner.  If there were any prior oral agreement that the brand names would belong to the 1^st Defendant, I believe they would have requested for this to be set out in the written agreements and protested about some of the terms which appeared in the agreements.  Instead, the Defendants had done nothing to challenge the agreements until after the parties broke apart.   

66.  Although the 1^st Defendant had to pay for the costs of promotion of 《天維牌》包裝 under the terms of the agreements, this could be regarded as the price that it had to pay for getting the distributorship.  I do not think this factor could negate the common intention reflected in the other provisions set out above.  I conclude that as a matter of construction, the parties had provided under Clause 3(1) that the 2^nd Plaintiff would grant a licence to the 1^st Defendant to use the names, marks and get-up encompassed by the expression 《天維牌》包裝.  Further, Clauses and 3(7) and 5(4) implicitly governs the ownership of the goodwill pertaining to those names, marks and get-ups upon termination of the agreements.  By necessary implication from those clauses, the parties agreed that the 2^nd Plaintiff owned such goodwill and the 1^st Defendant was not free to exploit the same without the consent of the 2^nd Plaintiff.

67.  Mr Chan submitted that the terms of a contract which purports to set out the rights and obligations of the parties in the supply of goods for export before any goodwill has been established through trading is of little or no assistance in determining the question and there is no presumption of ownership of goodwill in favour of a manufacturer who sells goods to an exclusive distributor for distribution in a foreign territory.  He derived these propositions from the fundamental premises that goodwill is the attractive force that operates on the mind of the purchasing public and it is generated through trading by a business.

68.  In the light of the detail provisions in the agreements governing the rights and obligations of the parties in the development of the market associated with the brand names and the use of the same, it is too simplistic to describe the arrangements as mere sale of goods transactions.

69.  Further, I do not think the propositions of Mr Chan follow from those fundamental premises.  Whilst I accept that goodwill must attach to a business, it does not necessarily attach to the local trader dealing in the goods of a foreign manufacturer.  As Professor Wadlow put it in Para.3-125,

“A foreign business may have a goodwill in the jurisdiction even though it may not trade here in its own right …  It is sufficient that customers for its goods are to be found here, whether or not the foreign business is in direct contractual relations with them.  In particular, if the foreign business is represented by a legally distinct person of whatever capacity then the goodwill will in general belong to the foreign business rather than its local representative provided that the foreign business is recognized as the ultimate source of the goods.” 

70.  Hence, the relevant question is as between the foreign manufacturer and the local trader, who owns the goodwill.  I do not think it is particularly helpful to discuss whether there is a presumption in favour of a foreign manufacturer if it is known to the consuming public as the ultimate source of the goods.  It is always a question of fact to be decided on the evidence before the court.  But in my judgment, the authorities clearly show that the agreement between the parties is relevant and if there are contractual terms governing the ownership of goodwill, the court will give effect to it.  Apart from those authorities mentioned above, one can deduce this proposition from the following passage in the judgment of the Court of Appeal in Scandecor at p.38-39,

“The effects of the expansion of international trade, the globalization of markets and the growth of multi-national corporate conglomerates, are all reflected in this and similar disputes.  A company incorporated outside the United Kingdom and carrying on business in a number of other countries may expand into the U.K. market in a number of different ways.  It may establish a branch or form a subsidiary company to manufacture or to trade in its products or services in the United Kingdom; or it may appoint an unconnected company to act as the sole or exclusive distributor of its products or the supplier of services in that local territory for a fixed term, or until terminated on notice or other specified events; or it may enter into an agreement with a local company to make and sell its products under licence.  The local company may use the same marks in the territory as the foreign company uses in other territories both in its corporate name and in relation to its products and services.  No problems are likely to occur while the local subsidiary, distributor, agent or licensee company is a member of the same group or is bound by a contractual arrangement containing provisions governing the use of the mark.  Difficulties, like those in the present case, are likely to arise when the corporate or the contractual connection is severed and there are no express post-termination contractual provisions designed specifically to regulate the future use of the mark in the local territory.” (my emphasis)

71.  One of the criticisms leveled by the Court of Appeal against the judge in Scandecor was the under-estimation as to the significance of the division of territories on the break-up of the parties in 1979 and its impact on the entitlement to goodwill in the subsequent phases (see p.42).  The Court of Appeal regarded it as critical that under the break-up arrangement, the United Kingdom market was allocated to the ultimate owner of the defendants (see p.44). Hence, the Court of Appeal emphasized that the parties’ agreement as to the distribution of goodwill should be recognized and legal effect should be given to the same in determining ownership of goodwill. 

72.  In the supplemental submissions filed by Mr Chan on 24 February 2005, he emphasized that we are dealing with a case where there was no pre-existing goodwill in either 天維牌 or other names or packaging to be designed.  He said it was therefore unsound to talk about licensing as there was nothing to license in the first place.  He referred to the judgment of the Court of Appeal in Scandecor in holding that the goodwill in question belonged to S Ltd even though there was a subsequent licence agreement from SIAB to S Ltd.  The rationale was that SIAB had no pre-existing goodwill in the UK which it could license to S Ltd whilst S Ltd was already entitled to that goodwill.

73.  It has to be remembered that Scandecor was actually a case where the court found on the special facts of that case that the relevant goodwill was in substance a retailer goodwill as opposed to a manufacturer goodwill.  All along, it was S Ltd that provided the relevant services to generate the goodwill and that had already been so by the time of the licence agreement between SIAB and S Ltd. The situation is materially different from the one we are dealing with.  Whilst admittedly we are talking about future goodwill as far as the state of affairs at the time of the Distributorship Agreement is concerned, the 1^st Defendant cannot in any way be regarded as owner of any goodwill at that time.  The situation in the present case was that the parties had agreed (albeit impliedly according to my above analysis) upon the ownership of a goodwill to be generated by activities involving both of them in the future.  Is there any reason the law should not give effect to such agreement?  In my judgment, the answer is no.  It may not be a licensing agreement in the strict sense, it is still an agreement concerning ownership of goodwill that could be enforceable in the eyes of the law.  

74.  In the competition between a foreign manufacturer and a local distributor regarding the ownership of a goodwill built up during the course of a long term contractual relationship, I respectfully agree with Professor Wadlow that the ultimate determination as to legal ownership is a two-stage process.  In most cases, both parties would have contributed to the establishment and promotion of the goodwill.  On the facts of the present case, although the costs of the promotion of ENHANVOL, ENHANTEA and ENHANOID in Hong Kong were paid by the 1^st Defendant, I do not think it is fair to suggest that the Plaintiffs did not play any part at all in such promotion.  Whatever one may say as to the other aspects as to evidence of Liu, it cannot be denied that the products were the result of research under his leadership and the name of the 2^nd Plaintiff was used repeatedly in various advertising material.  The quality of the products depends on the quality control exercised by the Plaintiffs.  Bearing in mind that this is a health product for human consumption, the standard of quality must have some significance in establishing and maintaining the goodwill.

75.  In fact, from the introduction of the products at the side panels of the packaging for ENHANVOL and ENHANOID (e.g. exhibits LX-22 and LX-28), it is quite obvious that at least one of the selling points deployed in the marketing of the products was the advanced technology and research utilized in the production.  This is also reflected in the advertisement of the products in Hong Kong.  There was a reference to the technology of 萌動激活 in most, if not all, advertisements.  Further, there were references to the technology being researched by the FERC in many of these advertisements.

76.  In so saying, I am not going so far as suggesting that a manufacturer must have some legitimate claim to the ownership of the goodwill irrespective of the facts of the case.  What I said is confined to the facts of the present case.  Given the nature of the product (a health product with a number of competitors already in the market), the manner in which the products had been marketed here, the fact that when it was launched the Defendants were, if I may so without any disrespect, nobody in the field, and the undeniable assistance provided by the Plaintiffs in the promotion of the products in Hong Kong (the evidence clearly showed that in 1999, those in the 1^st Defendant involved in the business did not have much knowledge about lingzhi and they had to be educated by Liu), the inevitable conclusion is that the Plaintiffs had played a part in the building up of the goodwill here.

77.  It is primarily up to the commercial decision of the parties as regards how the fruits of their co-operation would be distributed.  Goodwill is a legal property generated from the joint efforts of the parties and I see no reason why the parties could not agree on its ownership upon the termination of their relationship.  Once it is concluded that the parties have agreed on the same, it is not for the court to say that such agreement should be upset unless the agreement is in breach of the rule of assignment or licence in gross (as in the case of Oertli v Bowman [1959] RPC 1).

78.  In the context of the present case, it cannot be suggested that such rule had been breached.  Nor do I understand Mr Chan to be arguing along that line.  In fact, this is not a case where the consuming public had no idea that the Plaintiffs were the origin of the products. Mr Liao helpfully summarized the references to the Plaintiffs in the packaging of ENHAVOL, ENHANOID and ENHANTEA under Paragraph 5.9 of his Closing Submissions and similar references in advertising material under Paragraph 5.10.  I have also examined to the advertisements alluded to by the defence in the table attached to their Closing Submissions.  One should of course focus on the promotional material prior to December 2002, viz. before the parties fell out with each other.  Mr Chan stressed that in the early advertisements, there was no reference to any company other than the 1^st Defendant.  In my view, that cannot be too weighty given the fact that in all the packaging for ENHANVOL, there was reference to FERC of the 2^nd Plaintiff as the research unit of the product and the 1^st Plaintiff as a joint manufacturer.  There was also advertisement in 1999 referring to the works of FERC as assurance for the quality of the products, e.g. an article in the Hong Kong Standard on 13 August 1999 (E607).  There were also numerous newspaper and magazine advertisements referring to the Plaintiffs as the product of research from FERC and the 1^st Plaintiff.  The insert contained in the package also made reference to the Plaintiffs.

79.  Mr Chan submitted that the names of the Plaintiffs, whenever they appeared in the promotional material, were given the same prominence as the other names in a long list.  Even so, it does not detract from the fact that the consuming public was informed that the Plaintiffs played their parts in the production and research of the products.  Further, it can be seen from the inserts contained in the package that more emphasis was placed on the technology and research of the FERC than the other institutes in the list.  There were also advertisements giving notable prominence to the association of the products with the Plaintiffs, e.g. D334-337, exhibit D1.  In the light of these, I think the Plaintiffs had legitimate claim to the goodwill associated with the marks or names ENHANVOL, 盈康活, ENHANOID, 盈康孢子油, ENHANTEA, 盈康茶.  I see no good reason why the ownership of such goodwill should not be governed by the agreement concluded between the parties.  Of course, as pointed out above, the distributorship agreements did not cover ENHANOID and 盈康孢子油.  I will have to deal with those names and marks on the basis that there was no specific agreement as to the ownership of the goodwill pertaining to the same upon the termination of the distributorship.  But it is quite plain that all these products were marketed as a series of products, i.e. they were different products in the same family.   

80.  I cannot find anything inconsistent with my above analysis in the cases cited by Mr Chan. In Medgen Inc v Passion for Life Products Ltd. [2001] FSR 496 and Frankau v Pflueger (1910) 28 RPC 130, the court was not considering a situation where the parties had provided for the ownership of the goodwill upon termination of their relationship.  In Diehl [1970] RPC 435, the court only concerned with the validity of a registered trade mark which was found by the court to be an importer’s mark as opposed to a manufacturer’s mark.  There was no evidence before the court that the registered owner of the mark intended to sell products not manufactured by the applicant (who challenged the validity of the registration), see p.446.  The implication of the relevant clause (clause 8) in the distributorship agreement was to be considered in another set of proceedings, see p.437, 445 and 447.        

81.  I therefore hold that as far as the goodwill associated with the names or marks ENHANVOL, 盈康活, ENHANTEA, 盈康茶 and their get-ups is concerned, the ownership should be governed by the agreements between the parties.  In other words, the 2^nd Plaintiff is the owner of such goodwill and the Defendants are not at liberty to exploit the same without the consent of the 2^nd Plaintiff.

82.  As regards ENHANOID and 盈康孢子油, they were not covered by the distributorship agreements.  As pointed out by the Court of Appeal in Scandecor, in the absence of any agreement between the parties governing the ownership of the goodwill, the matter has to be resolved by way of a factual inquiry and there are no hard and fast legal rules in binding precedents or in factual or legal presumptions.  Although quite a number of authorities had been cited by counsel, they serve no more than as illustrations of how the court might conduct the factual inquiry on the facts of a particular case.  In Reckitt & Colman Properties Ltd v Borden Inc [1990] 1 WLR 491 at 499C, Lord Oliver observed that in this branch of the law, reference to other cases is generally not of any real assistance except analogically.  Therefore, I do not find it necessary to discuss all the authorities at length.

83.  It is common ground that the relevant date on which the factual inquiry should focus is around December 2002.

84.  In Guangdong Foodstuffs Import & Export (Group) Corp v. Tung Fook Wine (1982) Co. Ltd. [1999] 3 HKLRD 545, Cheung J (as he then was) referred to several authorities and broadly approached the matter by reference to two tests: the public perception test and the control test.  The former examines the public perception regarding who was responsible for the products whilst the latter focuses on asking who was in fact responsible for the character, quality control and production of the products.  Both Mr Liao and Mr Chan made submissions based on these tests although they seem to have different understandings on their proper application.

85.  Whilst these two tests could be adopted as useful starting points for the factual inquiry, I do not think they should be regarded as the exclusive tests to be applied.  Recent cases show that the court should examine all the relevant circumstances in the case instead of focusing on these two aspects, see the Court of Appeal’s decision in Scandecor at p.43-45; Medgen Inc v Passion for Life Products Ltd. [2001] FSR 496 at p.512; Growmax v Don & Low [1999] RPC 367 at p.389-390.

86.  Turning to the facts of the present case, it is in my view beyond dispute that the Plaintiffs were most responsible for the character and quality of ENHANOID as a matter of fact.  The product was the result of the research of FERC of the 2^nd Plaintiff and it was manufactured and subject to quality control by the 1^st Plaintiff.  I reject Mr Chan’s submission that in the application of the actual control test, one should ask who was responsible towards the consumers and examine the following,

(a)	who took charge of devising the market image of the product;
(b)	who had the ultimate say on what the trade dress should look like;
(c)	who made the decisions on how to market the goods;
(d)	who would be the one to face customers complaints and enquiries on quality.

In my judgment, those questions are pertinent to the public perception test but not the actual control test.

87.  Turning then to public perception, ENHANOID was first introduced into the Hong Kong market in mid 2001.  I find exhibits P-4A to P-4C, the records of sale by the 1^st Plaintiff to the 1^st Defendant (confirmed by the 2^nd Defendant who signed on the same) to be a reliable records of the transactions between the parties at the material time.  According to P-4B, the first lot consisting 100 bottles of ENHANOID was supplied to the 1^st Defendant on 26 July 2001.  84 bottles were subsequently returned.  Then on 10 August 2001, another 100 bottles were delivered, followed by 100 bottles on 19 September 2001.  Further quantities were sold in November and December 2001 as well as in 2002.  It would appear that the product was quite popular as the 1^st Defendant kept ordering the same from the 1^st Plaintiff right up to the end of their relationship.  The last batch was an order for 300 bottles on 18 September 2002.  By then, the 1^st Plaintiff refused to sell the products to the 1^st Defendant on credit.  The 1^st Defendant was so eager to have the goods that it sent a staff to bring a cashier order to the 1^st Plaintiff in exchange for the goods. 

88.  In the course of Tong’s evidence by way of re-examination, some sales invoices of ENHANOID by the 1^st Defendant were produced.  They were not formally marked as an exhibit during the course of evidence as the Plaintiffs did not require the originals to be produced.  At the trial, this court directed parties to insert the documents into the trial bundles but somehow it was not done.  For the sake of identification and record, I marked the same as Exhibit D-25 after consultation with the parties by correspondence.  Those records showed that between 30 August and 30 November 2001, 40 bottles of ENHANOID were sold to some individual customers. Further, on 29 November 2001, 60 bottles of ENHANOID were sold to Watsons.  In December 2001, 37 bottles were sold.

89.  Tong testified that the products were sold by the 1^st Plaintiff to the 1^st Defendant in the packing of LX-26.  She said she did not like that packing and at the initial stage, when the 1^st Defendant sold ENHANOID by way of soft launching to individual customers, it was sold without any packing.  She said the 1^st Defendant also removed the label on the bottle before sale.  By the time the products were sold to Watsons, the 1^st Defendant had already repacked ENHANOID in their own packing LX-28.  The invoices in D-25 showed that the first sales to Watsons were on 29 November 2001.

90.  Wong Yan Yan and CYF gave evidence for the Defendants regarding the design of the 1^st Defendant’s packing for ENHANOID.  I shall discuss their evidence further in dealing with the copyright claims.  Suffice for me to state at this juncture my conclusion is that the design for LX-28 came into existence in the manner deposed to by Wong Yan Yan and LX-27 was produced afterwards with reference to LX-28. 

91.  On the other hand, there are certain aspects of the evidence of Tong pertaining to the packaging and advertisement for ENHANOID in Hong Kong that I do not accept.  First, I do not accept her evidence that the advertisements at D334 and D-1 were made by the 1^st Defendant at the request of Liu purely for the purpose of FERC at the trade fair in the mainland.  Judging from the fact that the 1^st Defendant had by then already ordered a substantial quantity of ENHANOID from the 1^st Plaintiff and had in fact been selling those to individual customers since 30 August 2001, the 1^st Defendant was clearly planning to promote ENHANOID in Hong Kong.  When Tong was cross-examined about this aspect, I found her to be less than forthcoming.  She gave me an impression that she wished to downplay the fact that there had been sale of ENHANOID in Hong Kong by the 1^st Defendant before that advertisement.  It is obvious to me the 1^st Defendant was utilizing the opportunity of the trade fair to promote ENHANOID.  The reason why they used LX-26 as product shot was that it was the only package available at that time. In the light of D-1, I accept that by early October 2001, the 1^st Defendant was planning to have a different package for ENHANOID in Hong Kong.  However, that does not mean that D334 and D-1 were not advertisements for the 1^st Defendant’s promotion of ENHANOID.  Insofar as Tong gave evidence to the contrary, I do not believe her.

92.  Second, Tong said the 1^st Defendant had removed the package and bottle label of LX-26 when they sold ENHANOID to individual customers before LX-28 was available.  I find that difficult to believe.  The evidence shows that the 1^st Defendant was not giving away ENHANOID free of charge.  They were sold at a substantial price although discounts at different rates were given.  Some of the invoices in D-25 showed that they were sold at a price as high as $3,595.50 per bottle.  Even taking into account of the prospect of changing the package, there was no absolute need to discard all the packages.  Contrary to the evidence of Tong, I do not find the bottle label at LX-26 to be easily removable.  It would in fact be quite cumbersome to remove that label and I do not believe this had been done when the 1^st Defendant sold ENHANOID to its individual customers prior to the launch of LX-28.  However, according to D-25, the number of bottles sold in such packaging is limited.           

93.  My relevant findings on the packaging of ENHANOID marketed in Hong Kong are as follows.  For a brief period, it had been sold in LX-26 but the quantity was small.  It had never been sold in Hong Kong in LX-27 packaging.  Since about the end of November 2001, it was sold in LX-28 packaging.  For the purpose of determining the ownership of goodwill, I should pay more regard to the LX-28 packaging than LX-26.  In considering the LX-28 packaging, I would ignore the insert and the bottle label as I am not satisfied that those were part of the original packing.

94.  The following features at LX-28 are relevant for determination of ownership of the goodwill attached to ENHANOID and  盈康孢子油,

(a)	The names of the 1st Plaintiff and 1st Defendant appeared at the package box at the side panel.  The 1st Plaintiff was referred to as a joint manufacturer of the goods (in joint effort with a Swedish company associated with the 1st Defendant);
(b)	The 1st Defendant was referred to as the wholesale distributor of the products on the package;
(c)	ENHANOID was introduced at the side panel as a product developed by FERC and it was associated with ENHANVOL but was more effective.  To an extent, the introduction tried to cash on the goodwill of ENHANVOL for promoting ENHANOID;
(d)	The most prominent selling point of the product, as shown on its packaging, was its derivation from the biotechnological research of the FERC;
(e)	There was a hologram label bearing the logo of the 1st Defendant.

95.  As far as the ENHANOID advertisements in the promotional material are concerned, I shall focus on the advertisements between October 2001 and early December 2002.  The earliest advertisements were D334 and D-1.  Those advertisements laid emphasis on ENHANOID as the result of a breakthrough in the research of FERC.  The 1^st Plaintiff, FERC and 1^st Defendant were introduced as the joint manufacturers of ENHANOID.  The association with ENHANVOL was apparent by the reference to the technology of 萌動激活 and ENHANOID was introduced as a product of 盈康系列.

96.  I have already mentioned the dispute between the parties as to the purpose of the advertisement.  In my judgment, the motive behind the advertisement is of little moment.  What is significant is the message conveyed to the consumers by the advertisement. 

97.  In later advertisements at D335 to D337, although the 1^st Plaintiff’s name did not appear, there were still prominent statements (although not of the same size as in D334) that ENHANOID was the result of the research of FERC.  Comparison with ENHANVOL was made expressly in D336 and D337.     

98.  The promotion of ENHANOID as coming from the same family as ENHANVOL is also evidenced by LX-41a.  That exhibit consisted of various items sold at Watsons on 29 November 2002 in one set.  By that stage, the parties had fell off with each other.  The ENHANVOL in that set was in fact a version allegedly originated from Shanghai Second Medical University as opposed to that of FERC or the 1^st Plaintiff.  However, amongst the set, there was a small traveller’s pack identified as LX-41a(5). Inside that pack, there were several leaflets, including a leaflet for ENHANOID.  There is no dispute by the Defendants that this was a leaflet of the 1^st Defendant.  I can therefore properly infer that it was a typical example of how ENHANOID had been marketed by the 1^st Defendant before the termination of the relationship between the parties.  The content of that leaflet speaks for itself.  The association of ENHANOID with ENHANVOL was made and the major selling point of the product was the research of the FERC.

99.  The importance of the technological research backing to the marketability of the products was, in my judgment, well demonstrated by the manner in which the 1^st Defendant announced the breakup with the 1^st Plaintiff and the FERC in newspaper on 4^th and 5^th December 2002 (at D414 and D415).  Those advertisements, apart from the notice to the public to watch out for counterfeit products, emphasized that the production of ENHANVOL had been switched to a factory with GMP certification and the research partner had been switched to Shanghai Second Medical University as opposed to the FERC.  This shows that the quality control for production and the technological research backing were two important selling points of the product.  Although that was an advertisement for ENHANVOL, I can readily infer that the same can be said for ENHANOID.

100.  This accords with common sense.  We are talking about health products, more particularly lingzhi products.  The primary concern of consumers purchasing these products must be the quality and effect of the products.  Technological research backing and quality control in production are crucial.  I can see the difference in the appeal to an average informed consumer between a lingzhi product manufactured by an unknown factory in Shenzhen and a lingzhi product manufactured by the 1^st Plaintiff with the backing of the research by the 2^nd Plaintiff.

101.  By comparison, the after-sale services provided by 1^st Defendant as a local distributor is relatively less important.  Although Mr Chan highlighted the fact that it was the 1^st Defendant who dealt with complaints from local customers, I do not think one can attach as much significance to the services by the 1^st Defendant as that of a local dealer for electrical appliances who provides repair services or that of the defendant in Scandecor.   

102.  Moreover, at the beginning of the distributorship, the 1^st Defendant was not known in the market and had no knowledge or expertise in respect of lingzhi products.  It is not a case where a well-known trading firm sourced a product from an unknown supplier and then marketed the products in its own packaging without reference to the name of the manufacturer.  Hence, to start with, the selling points must have been the quality assurance backed up by research from the FERC.

103.  In contrast, although the 1^st Plaintiff and FERC did not carry out any direct sales activities in Hong Kong, their products had been sold here under the brand name Hometown Food and to that extent had some exposure to local consumers of lingzhi products.  Further, whilst the 2^nd Plaintiff might not be, in the eyes of the general public in Hong Kong, on par with top class universities in the world, the research of FERC definitely provided some quality assurance to the products.  Lingzhi is a traditional Chinese medicinal product and it is natural that consumers in Hong Kong attach importance to research by reputable institution in mainland China on the topic.  I have no difficulty in appreciating the difference in marketability in Hong Kong between a lingzhi product not backed up by any research of the 2^nd Plaintiff and one with such backing.  On Tong’s evidence, after first rejected by Liu (when he was still hoping Mr Cheng would take up the distributorship), the 2^nd Defendant was still keen on distributing the lingzhi products of the Plaintiffs.  This shows that they recognized the market potential of the Plaintiffs’ products in Hong Kong.       

104.  In Shanahan, Australian Law of Trade Marks and Passing Off, 2^nd Edition, p.42-43, a distinction was drawn between two classes of trade marks.  The first class is manufacturer’s marks, which the learned author described as follows:

“A manufacturer who has applied a mark to goods to indicate that he or she is the “origin” of the goods is most unlikely to be denied proprietorship because of the activities of some dealer in those goods.  The evidence in these cases will generally show that in the hands of the dealer, the mark has retained its initial significance as an indication of the manufacturing source of the product.  The dealer does not establish proprietorship by showing only that purchasers look to the dealer as the sole supplier of the goods; they might well do that in recognition of the dealer’s exclusive selling right, while aware all the while that the mark denotes some manufacturing origin.  This is particularly likely where the manufacturer is actually identified by the labels or the goods are clearly of foreign origin.”

105.  The second class is dealer’s mark.

“…[T]here is a class of case in which the mark is clearly that of the distributor or importer.  Here the dealer has “selected” the goods.  They have been made to the dealer’s specifications (to the dealer’s “special order”) by a manufacturer (or several manufacturers) who have applied the mark to the goods at the dealer’s instigation to indicate that the dealer is connected in the course of trade with those goods.  In such cases the dealer will usually have nominated the mark to be used; however, the dealer’s proprietorship is not based essentially on that circumstance (though it may well be relevant to the implication of some agreement affecting proprietorship) but on what the mark symbolises, namely, that the goods have been issued under the “aegis” of the dealer.”

106.  Without losing sight of what I said earlier that the ownership of goodwill associated with a trade mark is ultimately a question of fact and no single test or factor could be regarded as conclusive, I find these passages from Shanahan illuminating.  In the present context, bearing in mind how the names had been used (with significant references to the research of FERC as the selling point of the products), the relationship between the parties as reflected in the agreements (in the case of ENHANVOL and ENHANTEA) and other matters I have alluded to, I consider that it is more likely that the consumer public regarded the names as a manufacturer’s mark than a dealer’s mark.

107.  Although the Defendants did specify the number of capsules in one box and the quantity of ENHANVOL in one capsule, I think it is going too far to suggest that these specifications indicated that the products were supplied under the aegis of the Defendants as opposed to being manufactured by the Plaintiffs.  Indeed, the evidence shows that the 2^nd Defendant was not the first trader with whom the Plaintiffs negotiated distributorship.  It was only after negotiation with Mr Cheng had failed that the 2^nd Defendant entered into serious negotiations with Liu for the distribution of ENHANVOL.  Further, under Clause 3(1) of the Distributor Agreement, the 1^st Defendant could only obtain supply of ENHANVOL from FERC.  It is not a case where a trader selected a manufacturer or several manufacturers for a product conceived by the former.

108.  In this connection, although Tong and CYF gave evidence about how the 1^st Defendant wished to have its own brand names for the products in the course of negotiation and the 1^st Defendant was to become the owner of such names, this wish was not reflected by the terms of the distributorship agreements.  Given my reservations as to their credibility generally and the fact that the negotiation for the terms of the agreement was conducted between Liu and the 2^nd Defendant (who chose not to give evidence), I do not attach much weight to the evidence of Tong and CYF in this regard.

109.  Further, I accept the submissions of Mr Liao in Paragraph 5.11 of his written closing submissions that insofar as Tong and CYF gave evidence to the effect that the backing of the FERC was insignificant in the promotion of the products, such evidence should be rejected.  I do not think I need to set out at length the arguments of Mr Liao on this point.  Suffice to say that based on what I have already said above and the other matters alluded to by Mr Liao, it is quite obvious to me that Tong and CYF were biased in this regard and I do not believe them. If what they said were true, I believe the packaging, promotional material and inserts in the products would not be the same as they actually were.  At least, less emphasis would have been placed on the research by FERC.

110.  In some advertisements, certain celebrities or movie stars were engaged to promote the products. I do not think that is of much significance in determining who owned the goodwill.  Surely it cannot be suggested that the goodwill belonged to the celebrities and I do not understand Mr Chan to be suggesting the same.

111.  It has become fashionable in some trades to engage a celebrity as a product spokesman or spokeswoman.  It is just a marketing technique and from a legal point of view, there is no distinction between that and the design of a get-up or a plot for promotional audio or video footage.  For the purpose of ascertaining ownership of goodwill, in particular the competition for ownership between the parties in this action, it is not a significant factor.  Nowadays, an average consumer in Hong Kong can readily appreciate that the endorsement or promotion of a product by a celebrity does not mean that he or she is the trader supplying the goods in question.  Nor does it imply that the person who arranged for such endorsement must be the owner of the goodwill.  These are all basically commercial arrangements with regard to the marketing of the products.  An analogy can also be drawn with an advertising agent engaged by a local distributor for the promotion of an imported product.  Even if he paid all the fees of the advertising agency, it would be wrong to suggest that by reason of that the local distributor must be the owner of the goodwill.

112.  Counsel submitted that the packaging of a product could be regarded as the clothes for the product.  In my view, these endorsements by celebrities are likewise measures adopted for enhancement of the product image.  Although the person who determined and procured the design of the packaging and the manner in which the products would be advertised are not necessarily the owner of the goodwill generated therefrom, in most of the cases the owner of the goodwill would be interested and exercised control over such matters.  Hence, depending on the facts of a case, it may be possible for the court to draw an inference in an appropriate case that such a person is more likely to be the owner of the goodwill.  However, it must be stressed that all the circumstances have to be considered and there could be cases where a foreign owner of the goodwill is quite content to leave it to the local agent to decide these matters for him.  The same applies as to the coining of the product names.  Hence, whether such an inference would be drawn depends a lot on how the parties have dealt with each other.    

113.  Whilst there is no dispute that it was the 1^st Defendant who paid for the advertising expenses in Hong Kong, it was an obligation undertaken by the 1^st Defendant under Clauses 2(2) and 3(5) of the Distributorship Agreements.  In the latter provision, the 1^st Defendant agreed to incur not less than $1.5 million for the promotion of the products within the first six months after the making of the agreement.  In short, it is a price that the 1^st Defendant agreed to pay in order to get the distributorship.  Against such background, in determining the ownership of the goodwill, little significance could be attached to the payment of advertising expenses and the arrangement for advertisement and promotion of the products (including the engagement of celebrities to endorse the products) by the 1^st Defendant.

114.  As regards the designs for the packaging of all the products that we are dealing with, for reasons given above and in my discussion on the copyright claims, my finding is that they were procured by the 1^st Defendant as opposed to the Plaintiffs.  As regards the coining of the names, subject to the question as to the timing, I accept the evidence of Dr Chow about the telephone conversation and reject the evidence of the Plaintiffs’ witnesses on the genesis of the name ENHANVOL.  There cannot be any doubt as to the integrity of Dr Chow.  He is a respectable person, being the associate dean of the Faculty of Dentistry at the University of Hong Kong.  He has no interest in the Defendants’ businesses.  He answered questions directly and he was frank about matters he could not recollect.  Mr Liao fairly accepted that Dr Chow is an honest and truthful witness.

115.  On the timing of the conversation between Dr Chow and the 2^nd Defendant about the suffix for ENHANVOL, I think the doctor was mistaken.  He said it happened around the end of 1998 and although possible, it was unlikely to be in January 1999.  But he had no specific reason to capture the recollection as to the date of that conversation at the time of the event and he could not pinpoint any matter to assist him on that except that it happened after an examination.  On the other hand, there are events that show objectively the conversation probably took place later. 

(a)	In a letter dated 17 January 1999 from the 2nd Defendant to Liu, the 2nd Defendant said the name of the product was still being considered.
(b)	As evidenced by the contemporaneous notes made by the assistant to Chan Chin Hung at Bundle Z, p.B2 and B15, the 1st Defendant did not give the name of the product to the designer at the initial stage in January 1999 when he was engaged.

116.  But the mistake of Dr Chow in that regard does not matter much.  The real significance of Dr Chow’s evidence lies in the fact that when the 2^nd Defendant approached him, the English name was not yet completely coined and it was Dr Chow himself who contributed the finishing touch to the name by suggesting the suffix “vol”.  Despite his mistake as to the timing of the conversation, I find the other aspects his evidence reliable and I accept the same.  As Mr Chan submitted, once I made a finding that the suffix “vol” was contributed by Dr Chow, I could not accept Liu’s version as to the genesis of the name ENHANVOL.  I have already alluded to the lack of credibility on the part of the Plaintiffs’ witnesses and I do not need to say more on the topic.

117.  On the other hand, I also have misgivings about Tong’s evidence as to the coining of the name 盈康活.  From the material produced by Chan Chin Hung, it was quite obvious that the 1^st Defendant was aware of the name 盈活 used on a product sold by another trader.  CYF testified that, some time in 1998, he had approached that trader to see whether the 1^st Defendant could distribute their products.  He said he had reported the same to the 2^nd Defendant.  Although it was said Tong was not involved in the business at that stage, I cannot believe that she was not aware of the name 盈活 when she was trying to get a new name for this product.  I therefore find that she had not told this court the whole truth about the genesis of the name 盈康活.

118.  Hence, whilst I reject the Plaintiffs’ case as to the coining of the product name, I cannot accept the Defendants’ case in its entirety.  Even so, on the balance of probability, I find that the coining of the names ENHANVOL and 盈康活 was by the Defendants.

119.  Having said so, it does not mean the Plaintiffs had no part to play with regard to these names.  Since the products had to be promoted with the support of the Plaintiffs (as references had to be made to FERC’s research in advertisements and packages), the Defendants could not simply adopt such names without the consent of the Plaintiffs.  Hence, the 2^nd Defendant indicated in the letter of 17 January 1999 that he would inform Liu as to the name of the product when the 1^st Defendant had decided on it and the name of FERC would be used in promotional material.  This was subsequently expressly provided for under Clause 3(7) of the Distributorship Agreement.  In view of that, I do not think too much weight could be attached to the fact that the names were coined by the Defendants in assessing the ownership of the goodwill.   

120.  Tong’s evidence was to the effect that on the coining the names, and also on the design of the packaging, the Defendants could decide on their own without consulting the Plaintiffs or Liu.  Although I reject the Plaintiffs’ evidence that the names and designs were the brainchild of Liu, I do not accept that Liu was prepared to go along without being consulted on these matters.  Given the character of Liu, I find it to be inherently most unlikely that he would just leave everything to the Defendants.  As I said, the agreements provided for a right to veto on the part of FERC.  It is rather unimaginable that Liu would permit the products to be sold in Hong Kong under a name or in a package which he found to be objectionable.  In fact, Tong herself testified that at some stage, Liu objected to the lack of reference to the Plaintiffs in the advertisements and the Defendants took heed of that subsequently.  On Tong’s case, the advertisement at D334 was made at the instigation of the Plaintiffs.  In my judgment, the Plaintiffs clearly had some say on these matters. 

121.  Mr Chan tried to downplay the significance of that provision by contending that it was confined to literature or promotional material relating to FERC and its aim was to protect FERC in respect of what was said about it instead of the products.  I think that submission fails to take into account of the underlying factual matrix.  As I said, at that point in time, the most important selling point in the marketing of the products is the backing provided by the research of FERC.  As a matter of fact, virtually all the promotional material and packaging contained references to FERC or its technology.  The few advertisements without such references (Bundle T1, p.21 and 22) were not typical advertisements about the products.  Against such background, and also having regard to the other terms in the agreement which envisaged the 2^nd Plaintiff to be the owner of the goodwill attached to the names, my conclusion is that the agreements did in effect give the 2^nd Plaintiff the right to veto on the names and designs of the products to be sold in Hong Kong.  It may be that Liu did not deem it necessary to exercise that right with regard to the names and designs actually adopted.  But this does not detract from the position that the Plaintiffs did have some control over the matter.    

122.  It seems that neither party continues to use the names ENHANTEA盈康茶 and I would not therefore lengthen this judgment by analysing this part of the case in great details.  The Distributorship Agreements for ENHANTEA盈康茶 contained similar provisions with regard to the Plaintiffs’ approval for promotional items.  The promotional material and the packaging for ENHANTEA盈康茶 and its insert also adopted the research of FERC as a selling point.  In view of that, it cannot be disputed that the Plaintiffs did have some say in the brand names of the products irrespective of the initial authorship of the names and the design for packaging.

123.  There is a conflict of evidence between Tong and Liu on the question of authorship.  Tong claimed it to be her idea whilst Liu said it was his.  The evidence on the topic primarily revolved around a document produced as exhibit P-8.  The defence case as specifically put to Liu in cross-examination was that the names were decided at a meeting on 3 May 1999 when P-8 was written.  Liu said the names had already been decided well before that meeting as it was referred to in the Collaboration Agreement which was executed prior to 3 May 1999.  Although Tong adhered to the case put to Liu in her examination in chief, she accepted in cross-examination that the names had been communicated and understood between the parties prior to that meeting.  

124.  Given the general observations about Liu’s credibility and my reservations as to Tong’s credibility and the inconsistency in the defence case mentioned above, I do not feel confident to act upon the evidence of either of them on this issue.  By reason of my conclusions as to the effect of the agreements and the Plaintiffs’ ultimate control over the names irrespective of authorship and the discontinuance of use of the names, I do not think it is absolutely necessary to resolve the dispute on authorship of ENHANTEA and 盈康茶.

125.  Turning to ENHANOID and盈康孢子油, there is no dispute that initially the Chinese name was盈康力 (see LX-26 and D334).  Whilst I find the Plaintiffs’ witnesses to be unreliable, I do not derive much help from the evidence of the Defendants as to the coining of these names.  The 2^nd Defendant was said to be the author but he chose not to give evidence.  Tong’s evidence was ambivalent (based on what she was allegedly told by the 2^nd Defendant) in this regard and for reasons already canvassed, I do not feel confident to act on her evidence alone.  On such state of evidence, I simply cannot reach a conclusion as to the authorship of the names ENHANOID and盈康孢子油.

126.  On the facts of the present case, for reasons already given, I do not think it is of vital importance to identify the author of the names ENHANOID and盈康孢子油.  Even assuming that the names were coined by the Defendants, this is but one factor to be taken into account in deciding ownership of the goodwill attached to them.  Taking other factors into account, I am able to conclude that the Plaintiffs are the owners even if the names were coined by the Defendants. 

127.  I consider it is important that ENHANOID was marketed as a product in the same family as ENHANVOL.  It is unsatisfactory and most unlikely that the public would perceive the owner of the goodwill of one as different from that of the other.

128.  Once it is concluded that the goodwill belonged to the Plaintiffs, the elements of misrepresentation (by the continued use of ENHANVOL, 盈康活, ENHANOID, 盈康孢子油 after the break-up of the relationship) and damages are self-evident.  Therefore, I hold that the Plaintiffs succeed in their passing off claims in respect of these names.  As regards ENHANTEA and 盈康茶, the evidence of Liu himself shows that by 5 December 2002, the Defendants had changed the name to “Mr Tea 灵芝孢子茶” (see Paragraph 84(vi) of his Affirmation of 23 August 2003 at B81).  This was confirmed by Tong in her evidence.  There is no evidence of continued use of the names ENHANTEA and 盈康茶 by the Defendants.  The claims in respect of those could not be sustained.

129.  Turning to the claims in respect of get-up, there is no evidence that the packages of ENHANVOL, 盈康活, ENHANOID, 盈康孢子油 or any other elements of their get-ups were, apart from their brand names, so distinctive that consumers identified the products by the get-ups.  Having regard to these get-ups and the way they were advertised, I am not satisfied that the get-ups are so distinctive of the products that other trader using similar get-ups but different brand names would be successful in misappropriating the Plaintiffs’ goodwill.  As far as I could see, the get-ups were not exceptionally eye-catching and basically consisted of ordinary features for get-ups of similar kinds of products.  I therefore dismiss the passing off claims based on get-up.

130.  On the passing off claim in respect of萌動激活, for reasons given under the section dealing with the registered trade mark claim, I hold that the expression did not perform the function of a trade mark as indicating the origin or distinguishing the identity of the source of the goods.  Hence, the claim also fails.

131.  Lastly, as regards the free standing passing off claims, neither party spent much time on that in the closing submissions.  The newspaper advertisements dated 4, 5 and 12 December 2002 and statements made at the press conference on 12 December 2002 did contain misrepresentations to the effect that the production of lingzhi products properly bearing the name ENHANVOL had been shifted from FERC to other factories with the benefit of the same technology.  Since I conclude that the name ENHANVOL indicated to the consumers that products bearing the name were manufactured and supervised by the Plaintiffs, it is a misrepresentation to suggest the production had been shifted to other factories.  However, this element of misrepresentation stemmed solely from the use of the marks ENHANVOL盈康活.

132.  In substance, I do not think the free standing passing off claims add anything to the passing off claim based on the marks or names ENHANVOL盈康活.  I see no need to grant separate relief in connection with the passing off claim based on the advertisements or statements made by the Defendants in early December 2002.  

133.  As regards the alleged statement on the website, on the evidence available I am not satisfied that the website had been launched.  Only Liu gave evidence on behalf of the Plaintiffs in respect of the webpage.  He had not explained how he found out about the website and when was the webpage downloaded.  On the other hand, Tong denied that the website had been launched.  The burden of proof is on the Plaintiffs and in view of my assessment of credibility, I consider the Plaintiffs failed to discharge that burden.  I therefore dismiss that head of claim as well.      

134.  Mr Liao submitted that on the facts of the present case, if the passing off claims succeeded, judgment should be entered in favour of both Plaintiffs.  Mr Chan did not advance any submission on this aspect.  Having regard to the matters alluded to in Paragraph 3 of Mr Liao’s supplemental submissions of 24 February 2005, I agree with his analysis that the goodwill is jointly owned by the Plaintiffs. 

135.  Hence, the Plaintiffs are entitled to relief in respect of passing off pertaining to the names or marks ENHANVOL, 盈康活, ENHANOID and 盈康孢子油.  There will be usual injunction as well as consequential relief including inquiry of damages or, at the option of the Plaintiffs, account of profits.  The rest of the claims under the head of passing off are dismissed.

Breach of distributorship agreements

136.  The first question is the identity of the parties to the contracts or more specifically, whether FERC is part of the 2^nd Plaintiff.  As I said in my Reasons for Ruling of 16 September 2004, it is primarily a question of fact.  Notwithstanding the determination of the issue by the Intermediate People’s Court in Guangzhou, I should resolve the question by reference to the evidence before me.

137.  According to a document issued by the 2^nd Plaintiff on 25 June 1993, a 中山大學食品工程研究中心was set up by the 2^nd Plaintiff on 8 July 1991. In 1993, there was an application for converting that into FERC.  That application was approved in principle by the Ministry of Education in 1993 and subsequently further endorsed on 7 June 1995.

138.  The question is whether such conversion established FERC as a separate legal entity with independent legal status on its own right.  In a document 教技函 [2003] 59 號 dated 5 December 2003, the Ministry of Education confirmed that notwithstanding the conversion, FERC was still attached to the 2^nd Plaintiff and the 2^nd Plaintiff was the legal entity responsible for its affairs and undertook legal liabilities and obligations for the activities of FERC.  There was a reorganization in 2000 which is not material for present purposes as the agreements were made in 1999.

139.  The conversion in 1993 was made pursuant to 國家工程研究中心管理辦法 promulgated on 26 November 1992.  Having examined the provisions therein, I do not think there is any provision therein inconsistent with the view of the Ministry of Education.  Although the regulation provided for the independent finance and administration of a 工程研究中心, it does not confer a status of separate legal entity on the same.  On the contrary, Article 20 stipulated that it would be attached to or entrusted with the organization setting up the centre (“工程研究中心是依托于建設單位”).

140.  Insofar as it is still suggested that FERC is a different entity from 中山大學食品工程研究中心, I reject the same as the evidence before me did not provide any factual foundation for such suggestion. 

141.  The Intermediate People’s Court in Guangzhou concluded that FERC was part of the 2^nd Plaintiff and the 2^nd Plaintiff could therefore sue or be sued on the distributorship agreements.  I respectfully share the same view.

142.  The second question is the subject matters of these agreements. There was no reference to ENHANVOL, 盈康活, ENHANTEA, 盈康茶 in the Distributorship agreements (apart from the Collaboration Agreement). Instead they referred to《天維牌》包裝lingzhi spore powder and lingzhi tea.  The only person who had given evidence before me who had personal knowledge about the negotiations and execution of these agreements was Liu.  Although allegations were made by the 2^nd Defendant, he did not give evidence.  The other defence witnesses could not shed much light about the negotiations and execution of the agreements. 

143.  Liu testified that the first agreement about spore powder was made in February and the first agreement about lingzhi tea was made on 9 May 1999.  He also said the Collaboration Agreement was made in March 1999 although on its face, the date was 13 February 1999.  His evidence was based on entries in his diary.  I have already explained why I do not attach any weight to those entries.  Instead, I find the notations (which apparently is a shorthand of the dates) at the top left hand corner of the first page of each agreement to be more reliable.  On that basis, I find that the agreements were executed on or about these dates,

Agreement A	19 February 1999
Agreement B	17 June 1999
Agreement C	17 June 1999
Agreement D	8 May 1999
Agreement E	17 June 1999
Agreement F	17 June 1999

I would not say the same for the date of execution of the Collaboration Agreement.  The notation in my copy in the trial bundle is “99 20302-2”.  I am not sure whether the blank is due to photocopying or otherwise.  The Collaboration Agreement could not have been made on 3 February 1999.  It is not essential for me to make any finding as to the actual date of execution of the Collaboration Agreement and I do not find able to do so on the evidence before me.

144.  By reason of the following, I have no difficulty in concluding that the expression《天維牌》包裝 in the agreements were intended by the parties to refer to the lingzhi spore powder and lingzhi tea supplied by the Plaintiffs to the 1^st Defendant subsequently under the names ENHANVOL, 盈康活, ENHANTEA, 盈康茶,

(a)	The evidence shows that all along parties never negotiated 《天維牌》包裝as a separate product or products from ENHANVOL, 盈康活 or ENHANTEA, 盈康茶.  The parties had been considering new brand names for the lingzhi spore powder and lingzhi tea.  It had never been envisaged that there would be two separate lines of similar products supplied by the Plaintiffs to the 1st Defendant, one under the name天維牌 and the other under ENHANVOL, 盈康活 or ENHANTEA, 盈康茶.  In the course of negotiation, the name 天維丹 was considered and rejected.  Against such background, it is difficult to see what the parties sought to achieve by entering into these series of agreements (some of which were executed after the names ENHANVOL, 盈康活 or ENHANTEA, 盈康茶 had been adopted, like Agreements B and C, Agreements E and F) if they were not dealing with ENHANVOL, 盈康活 or ENHANTEA, 盈康茶.
(b)	In respect of the ENHANVOL capsules, there was a mark GP printed on them.  GP stands for Green Power, the English name of 1st Defendant. In Chinese, the name is 天維.  Hence, there was an association between ENHANVOL and天維 albeit that it was not actually called 天維牌.
(c)	In the case of ENHANTEA, the logo in the label was derived from GP.  By the same token, it was associated with 天維.
(d)	The 1st Defendant paid a deposit in the sum of HK$1 million for each product in accordance with Clause 3(2) of the respective agreements (see S62 and P-4D).

145.  Mr Chan submitted that there is no claim for rectification of these agreements nor pleas based on variation of the agreements.  In my judgment, the issue as to the scope or subject matters of these agreements had been adequately raised in the pleadings and evidence (see Paragraph 32 of the Re-Amended Consolidated Statement of Claim, Paragraph 42 of the Re-Amended Consolidated Defence and Counterclaim, Paragraph 27 of the Re-amended Consolidated Reply).  It is not a case of rectification or variation.  It is merely a question of what the parties intended to refer to when they described the subject matters of the agreements by reference to 《天維牌》包裝.  Based on the evidence before me (and it is significant that the 2^nd Defendant chose not to give evidence, and the court is therefore deprived of the benefit of hearing evidence from the only person in the 1^st Defendant who was privy to the negotiation for the terms of distributorship), I conclude that it was the common intention of the parties that 《天維牌》包裝 encompassed the names ENHANVOL, 盈康活, ENHANTEA, 盈康茶 and had dealt with each other accordingly between 1999 and 2002. 

146.  Turning then to the legality of these agreements under PRC law, I have addressed the issue in the context of admissibility of expert opinion in my Reasons for Ruling of 16 September 2004 Paras.12 to 14.  Up to the date when I write this judgment, the appeal court in Guangzhou has not yet delivered its judgment.  I therefore see no reason to depart from my analysis in my said Ruling.  I hold that the agreements were valid and enforceable under PRC law.

147.  In the course of trial, Mr Liao indicated to this court that the Plaintiffs’ claim based on the agreements is confined to enforcing the part of Clause 3(7) relating to products which were an imitation of or passed off as the products of FERC under the agreements and products bearing product names or packaging designs similar to those under the agreements (see my Ruling of 16 September 2004 on the application for leave to amend).

148.  The prohibition under Clause 3(7) runs up to 3 years after the termination of the right of the 1^st Defendant to sell the products.  Mr Liao submitted that the three years period should run from September 2002 when the parties formally terminated their relationship.  The respective durations of distributorship provided for under the agreements were,

ENHANVOL	1 February 1999 to 31 January 2002
ENHANTEA	10 May 1999 to 9 April 2002 (there is an ambiguity here on whether the 3 years should run up to 9 May 2002)

149.  According to sales record at P-4-A, the last sale of spore powder by the 1^st Plaintiff to the 1^st Defendant was on 29 June 2002 whereas the last sale of lingzhi tea was on 16 April 2002.

150.  However, in a letter dated 5 October 2002, the 1^st Plaintiff pointed out that the agreement for ENHANVOL had expired on 31 January 2002.  The second paragraph of that letter alluded to the restriction under Clause 3(7) although there was no express reference to the clause.

151.  For reasons already given in the section dealing with passing off, I do not think there is evidence of breach in respect of ENHANTEA  盈康茶.  The claim in respect thereof should therefore be dismissed.

152.  As regards ENHANVOL, 盈康活, Mr Liao cited no authority to support an automatic extension of the period of restriction if parties continued to trade with each other after the contractual period.  It is a matter of construction of Clause 3(7).  In Para.16-096 of Chitty on Contracts, 29^th Edn., it is said that covenants in restraint of trade must be clear and definite.  Bearing in mind that the contract was drafted by the Plaintiffs, the expression “銷售權利終止” should be construed narrowly and taken to mean the end of right to sell under Clause 3(1).  There is also no evidence that the parties intended such automatic extension.  Hence, it ended on 31 January 2002 and this was how the matter was put by the 1^st Plaintiff in the letter of 5 October 2002.  The continued sale of products supplied by the 1^st Plaintiff after 31 January 2002 conferred implied licence on the Defendants to sell the goods so supplied but did not extend the 3 years post distributorship restriction.  Therefore the covenant lapsed on 31 January 2005.

153.  I would therefore refuse injunctive relief under this head of claim.  This might be academic in view of my judgment in respect of the passing off claim.

154.  However, the Plaintiffs are entitled to damages for breach of contract in respect of the breach of Clause 3(7) for the 1^st Defendant’s use of  ENHANVOL, 盈康活 marks and packages.  Clause 3(7) provided for liquidated damages.  But the Re-amended Consolidated Statement of Claim did not ask for that.  The Plaintiffs are confined to general damages.

155.  Mr Chan submitted that the Plaintiffs did not any adduce any evidence on damages and at the most should only be awarded nominal damages.  He relied on a number of cases: Born Chief v Tsai George [1996] 2 HKC 282, Excel Wood Limited v Charmed Investment Ltd HCMP 4130 of 1997, Century Crown Ltd v Ho Wing Chun HCMP 2147 of 1998.  Mr Liao contended that this is primarily a case involving intellectual property disputes and this court should follow the usual Chancery practice of ordering inquiry as to damages or alternatively, at the option of the Plaintiffs, account of profits.  The following cases supporting such a course were cited: Auto Treasure v Noble Diamond [1992] 1 HKC 117 and Full Range Electronics v General Tech Industrial Ltd [1997] 1 HKC 541.

156.  In the present instance, given the nature of the claims, the damages for breach of contract must overlap with that for passing off.  Since the Plaintiffs have yet to elect whether to seek inquiry of damages or account of profits under passing off, it would be inappropriate to deal with damages for breach of contract at this stage.  I agree with Mr Liao that the Chancery practice should be followed in this case.

Copyright claims

157.  Liu claimed to be the author of several freehand sketches produced as exhibits P-1(A) to (J) and these were said to be the original drawings based on which the packages design for ENHANVOL at LX-19, LX-20 and LX-22 were created. P-1(A) is a pencil drawing of two spores, one cracked and the other broken with a droplet of oil spilling out.  It was drawn on a piece of paper under the letterhead of the 1^st Plaintiff.  It was marked with “97.8” which purported to show that the drawing was made in August 1997. P-1(B) to P-1(D) were photocopies of P-1(A) with different colours added on it. 

158.  Liu testified that he drew P-1(A) to P1(E) in August 1997 based on what he observed under microscope and some drawings in other Chinese books about lingzhi.  At first he drew the picture as a matter of interest to tell the story of lingzhi without any plan for it being used as a package design or other commercial purposes.  It was only in early 1998 that the drawing was used and incorporated into a package design.  When he drew P-1(A), he intended to show it to his colleagues, his patients and those admired him.

159.  For reasons which would become apparent later on, it is significant to note that Liu testified categorically that he did not have the benefit of photographs taken by electron microscope when he drew P-1(A).  Although he had photographs taken by ordinary microscope, he said they were of no assistance.  He explained to this court the difference between photographs taken by electron microscope and ordinary microscope.  The details shown by the former are, according to Liu, many times finer than an ordinary microscope.  Ms Tam suggested to Liu that photographs taken by ordinary microscope could not show the tiny little holes on the surface of a spore.  Liu said only very experienced expert could see such tiny little holes by means of ordinary microscope.

160.  According to the evidence of Liu, he only took photographs together with Professor Ng Yuk Yin (吳育賢) by means of electron microscope in December 1998.  Those were the photographs found on the side panel of the package design LX-20.  Further photographs of lingzhi spores were taken by electron microscope in Japan in 2000 (“LX-13”).

161.  The Plaintiffs did not produce all the photographs taken by electron microscope in respect of lingzhi spores used in the packaging boxes.  Liu testified that he failed to retrieve some negatives.  However, the evidence showed that the Plaintiffs did use some electron microscope photographs other than P-11 and LX-13 for its packaging and leaflets.  For present purposes, I would identify the following photographs which had bearings on my assessment of the evidence,

(a)	four photographs at Q48: they were apparently selected from photographs taken in Japan in 2000, viz. LX-13, with the exception of the one at the lower right hand corner.  The one at the top left hand corner of Q48 corresponds with C159, the one at top right hand corner corresponds with C160, the one at the lower left hand corner corresponds with C162 (see also V81).  The one at the lower right hand corner of Q48 is apparently C165 with another picture superimposed on it.  The picture superimposed on it was a picture of a broken spore with an oil-like droplet spilling out from it.  With colours added on it, that picture can be seen at the bottom of Q48 although the position of the droplet was slightly different.  That broken spore picture was used as the central theme in LX-20 (with a cracked spore and some broken pieces added by its side);
(b)	it is quite plain to me that the picture of broken spore with an oil-like droplet [“the LX-20 broken spore”] was created by working on another photograph of broken spore.  That photograph was not included in LX-13 nor P-11.  It could however be found on the leaflets, e.g. at V12 (or its original in LX-19).  Although it was a very small copy of the photograph, I have no difficulty in identifying the broken spore in the photograph on the right at V12 as the one used to produce the LX-20 broken spore.  It is also quite apparent that it was a picture taken by electron microscope;
(c)	by the side of the broken spore in LX-20, there are some broken pieces.  Again they appears to be adapted from another picture taken by electron microscope and that had been used in other designs (see LX-19, J47,Q21(f), Q45, Q46, V49, G1172, 1174-78, 1181 and 1186).  That photograph had not been produced but it is clear to me that these drawings or designs were reproduced from another photograph taken by electron microscope.

162.  In his evidence in chief on 2 September 2004 (p.30N), Chan Hon Chung testified that photographs of lingzhi spores were supplied by Liu and he added the oil like droplet to the photograph at Q48.  The four photographs were later used on the side panel of LX-26.  As regards the LX-20 broken spore, Chan Hon Chung’s evidence was that it was created by reference to the sketches by Liu (P-1(A) to (J)) and some material supplied by Liu, including some photographs, see p.28T to 29O.  He admitted that the cracked spore was designed by using a photograph of a cracked spore.  Although he did not quite spelt out what materials were used for creating the LX-20 broken spore, having regard to the photograph at V12, I come to the firm conclusion that the photograph was processed by Chan Hon Chung to come up with the graphic design for LX-20.

163.  Liu testified that no electron microscope photograph has been taken by the Plaintiffs regarding lingzhi spore prior to December 1998.  Although he did not give specific evidence about the photograph at V12 and the photograph of the broken pieces, I can safely infer that those photographs could not have been taken prior to December 1998.  In other words, Liu could not have those photographs when he allegedly drew P-1(A) in August 1997.  Nor could those photographs be used to create the designs by the Plaintiffs at any time prior to December 1998.

164.  Liu mentioned about seeing photographs of spores from a Japanese magazine.  But that was after he drew P-1(A) (X: 419R to U).  A comparison between P-1(A), the LX-20 broken spore and the photograph on the right at V12 shows similarities between them.  Having regard to all the electron microscope photographs placed before me, I am of the view such similarities could not be explained by mere co-incidence.  As far as the evidence shows, the shape and configuration of each broken spore is quite distinct.  Further, as Liu put it in Paragraph 34 of his First Affirmation filed in HCA 4651 of 2002 (B37), it is very rare to get photograph of broken lingzhi spore with its wall not completely crushed into pieces.  It is most unlikely that Chan Hon Chung incidentally came across the photograph at V12 and found it matching with the design of Liu perfectly when he was asked to make a computer graphic based on P-1(A) and extracted that part of the photograph for such purpose.  The more likely scenario, in my judgment, is that P-1(A) was drawn with reference to the photograph at V12 either directly or indirectly.  In Paragraph 49 (b) and (c) of his first affirmation (B50 and 52), Liu admitted that the sketch drawings were made with reference to some photographs.

165.  Given the earliest point in time the Plaintiffs could have obtained the photograph at V12 was December 1998, it follows from my above observations that P-1(A) to P-1(E) could not have been drawn in mid 1997 as suggested by Liu.  Likewise, the package boxes produced by the Plaintiffs bearing designs derived from photographic images of spores taken by electron microscope could not exist prior to December 1998. 

166.  If the sketches were drawn in mid 1997 for leisure as claimed by Liu, it is difficult to understand why he would photocopy his own drawing and put different colours on the same in P-1(B) to (D).  It is also difficult to see the purpose of drawing P-1(E) showing only the LX-20 broken spore.   

167.  Liu claimed that P-1(F) to (I) were drawn in January 1999 (X452 J to L, though in his evidence in chief, he claimed that P-1(I) was drawn in February 1999, see X15M). These were drawings of packaging boxes bearing the names ENHANVOL and 盈康活 (P-1(G) was a drawing of the word ENHANVOL in different styles).  For reasons given above, my finding is that the names ENHANVOL and 盈康活were coined by the Defendants instead of Liu.  The letter of 17 January 1999 showed that Liu was not told of those names by the time of the letter.  Yet Liu’s evidence based on his diary entries at P-3 was that he had prepared the package drawings on 12 January and had given a set of those to the 2^nd Defendant on 16 January 1999.  That cannot be true.

168.  Liu claimed that P-1(J) was created in February 1999 and was handed to the 2^nd Defendant around the same time.  If that were true, it is inherently unlikely that in March 1999 the 1^st Defendant adopted the package design of cracked spore at D-21 even though Tong was not fully satisfied with it as it did not depict the idea of a fully broken spore (全破璧), a selling point which Tong wished to emphasize.  The defence’s case is that the design of a fully broken spore similar to P-1(J) came into existence subsequently and the packaging box had to be changed accordingly in July 1999 to LX-22.  A change of packaging within such a short time was not conducive to the promotion of the products.  If a copy of P-1(J) had been given to the 2^nd Defendant in February 1999, I believe that the 1^st Defendant would have adopted it instead of using the D-21 design in March 1999.  

169.  Liu actually had difficulties in making up his mind as to his evidence on the dates when these sketches were made.  Mr Chan referred to the wavering stance of Liu regarding the date of creation of P-1(E) in Paragraph 3.14 of his closing submissions by reference to the evidence of Liu in his various affirmations, witness statement and his testimony in witness box.  I think the criticism is a fair one.  In addition, Liu also had problem with the date of creation of P-1(J).  On its face, it was marked “99.2” suggesting it was drawn in February 1999.  However, in exhibit LX-23 (C280), a further date was put down at the bottom, “1997.6”.  No satisfactory explanation had been forthcoming from the Plaintiffs’ evidence as to how this came about.  Liu merely said “1997.6” was not in the original and he had no idea who added it.  In cross-examination, he said he had drawn a similar picture in the summer of 1997 for artistic purpose.  P-1(J) was, according to Liu, drawn in February 1999 specifically for the use of the 2^nd Defendant.  Yet quite inexplicably, the 1^st Defendant did not adopt it until July 1999 and used D-21 instead in March 1999.

170.  Liu also gave different dates as to when the package drawings were given to the 2^nd Defendant.  As mentioned, his diary entries suggested they were supplied on 16 January 1999.  In the copy of the freehand sketches produced as exhibit LX-23 to Liu’s First Affirmation [C282-283], someone put down a notation “1999.2” seemingly suggesting that they were created in February 1999 although such notations could not be found in the original produced as P-1(H) and (I).  Liu confirmed those dates in Paragraph 42 of his Second Affirmation filed in HCA No.A4651 of 2002 [B186].  On 23 July 2004, he testified in the witness box that C282 to 284, viz. copies of P-1(F), (H) and (I) were given to the 2^nd Defendant in early February 1999 (X460).  In my view, it is unlikely that those drawings were made in January 1999.  These were all drawings of package boxes bearing the name ENHANVOL.  On the Plaintiffs’ evidence, that name could not have been coined earlier than February 1999.  Paragraph 46 of the Second Affirmation of Liu filed on 23 December 2003 suggested that at least up to the date of the Agreement A, parties were still discussing about using 天維丹 as the product name.  On the face of that document, it was signed on 13 February 1999.  Liu also said so in his testimony on 22 July 2004 (X 372F).  But the notation at the top right hand corner suggested that it was executed on 19 February 1999.  I preferred the latter and adopted that as my finding of fact.  Liu did not have any credible explanation as to why Agreement A did not refer to the names ENHANVOL and 盈康活 if they were decided prior to 13 or 19 February 1999.  I do not accept Liu’s account that the lack of reference to these names in Agreement A was due to the request of the 2^nd Defendant because he intended to export ENHANVOL to other countries and it would be too cumbersome if names in foreign languages had to be added later.  For me, such an explanation was just too unreal to be credible.

171.  As explained in the context of my discussion on passing off, my finding is that the name was coined by the Defendants.  The letter dated 17 January 1999 from the 2^nd Defendant showed that the name had yet to be determined on 17 January.  The diary entry could not be correct.  Having regard to the date of Agreement A and the fact that the agreement still referred to天維丹 as opposed to ENHANVOL or 盈康活, I find on balance of probabilities that Liu was not told about the names ENHANVOL and 盈康活 until some time after 19 February 1999.

172.  In making such a finding, I have taken into account of the evidence of Tong that her recollection was that Liu had been told about the names prior to the signing of Agreement A.  I do not consider the evidence of Tong to be reliable in that respect.  She was not involved in the negotiation and signing of Agreement A.  Her recollection of the dates is not supported by any contemporaneous records.  Just like Dr Chow, she was probably mistaken.  In this respect, I regard what I could infer from Agreement A to be more likely to be the truth.  

173.  Another instance of Liu embellishing his case as he went along is his evidence as to how the materials were supplied to the 2^nd Defendant and BBRD.  In Paragraph 42 of his Second Affirmation in HCA No.A4651 of 2002 [B186], he said the design drawings had been supplied to BBRD directly by him as well as indirectly through the 2^nd Defendant.  He was quite specific in identifying the materials supplied by reference to LX-23, LX-27A, LX-95 and LX-96.  He said quite specifically in Paragraph 43 that BBRD prepared the artworks by reproduction from the said design documents and instructions with slight modifications.  Neither LX-20 nor J48 were included in those exhibits.  He did not mention about giving any materials to the Defendants or BBRD stored in a MO.  

174.  In his witness statement of 1 April 2004, Liu added more documents to support his claim of authorship by way of LX-102 and LX-103.  It is not clear whether he said all these were supplied to the 2^nd Defendant or BBRD.

175.  When Liu gave evidence in the witness box, he said for the first time that all the materials had been given to the 2^nd Defendant and soft copies contained in MO were given as well.  Under cross-examination, Liu admitted that he did not send material to BBRD directly.  It is difficult to see why Liu was reticence about sending materials to the 2^nd Defendant by MO in his written evidence.  

176.  The confusions in the dates of creation of these sketch drawings and the manner in which they were given to the Defendants or BBRD highlight the lack of veracity on Liu’s version of events.

177.  The Plaintiffs adduced several pieces of evidence to corroborate the case of Liu that his sketch drawings were created prior to the design of D-21 by Chan Chin Hung.  Firstly, some of the packaging boxes allegedly used by the Plaintiffs prior to March 1999 bearing designs in the sketch drawings were relied upon.  These boxes included LX-19, LX-20, J47 and J48.  The manufacturing dates of LX-20, J47 and J48 as printed on the exhibits were 19 February 1999, 3 October 1998 and 5 March 1999 respectively.  LX-19 itself bears a manufacturing date of 19 June 2001 but Liu testified that the design was first used in the second half of 1998.

178.  Regarding the design allegedly used in 1998 (J47 and LX-19), they both had images reproduced from photographs taken from electron microscope at the top of the package boxes.  The images were described respectively as “Germination activating ganoderma spore (magnified by electron microscope)” and “The ganoderma spore flakes after sporoderm micro-breaking with enzyme engineering (magnified by electron microscope)”.  Also the design of these two boxes incorporated the LX-20 broken spore design.  As explained, the Plaintiffs did not have photographs taken by electron microscope prior to December 1998.  Even if allowance is given to the suggestion that the image of the spore used in the cracked spore picture came from the Japanese magazine, the other features in the design derived from electron microscope photographs could not have been available prior to December 1998.  Therefore, insofar as it is suggested that J47 and LX-19 had been printed and used in 1998, I reject the same.  It is noteworthy that Liu testified that the dates printed on the boxes referred to the dates of the products instead of the dates of the boxes.  Hence, it is possible that products manufactured on a date earlier than the boxes came into existence were packed into such boxes and the manufacturing date could be earlier than the date the boxes actually came into existence.  If that were so, the dates printed on these boxes had no relevance to the question of authorship.  I also find that Chan Hon Chung’s evidence in Paragraph 7 of his first witness statement (Q28) as corrected by his testimony in the witness box that the computer drawings for LX-19 at V2-7 were completed in December 1997 simply cannot be true.

179.  Regarding LX-20 and J48, the integrity of those dates printed on the boxes is again doubtful.  Both boxes specified that the product had a preservation period of 28 months.  However, in 1999, the Plaintiffs only had licence to sell the product in mainland China with a preservation period of 24 months under粤衛食健字[1997] 209 号.  It was only on 11 August 2000 by another licence粤衛食健字[2000] 393 号 that the preservation period was extended to 28 months.  I have no hesitation in rejecting Liu’s explanation that since he was the top expert in the field and he was on the panel of experts consulted for this sort of applications, the Plaintiffs could stipulate a preservation period of 28 months even prior to the extension in 2000.  If that were correct, I fail to see why a preservation period of 24 months was specified in LX-21.

180.  In addition, LX-20 as well as J48 are designs bearing the name ENHANVOL.  As explained earlier, Liu was not informed about this name until some time after 19 February 1999.  It is therefore unlikely that LX-20 could have been produced on the date shown on the box, viz. 19 February 1999.

181.  Moreover, it is simply inherently unlikely that the Plaintiffs adopted so many designs for its product packages under the same brand name 學者灵芝 around the same period.  If the Plaintiffs’ case were accepted, it would mean that it was using LX-19, LX-20, J-48 and LX-21 in early 1999.  This wholly defies common sense as such a practice would cause confusion in the market and diffuse the goodwill attached to the product.  I do not accept Liu’s explanation that this was done as he liked to make new designs.

182.  Mr Yan made a powerful submission to defend the integrity of the dates printed on these packages based on the conduct of the parties in the litigation.  In essence, his point is that in view of the state of evidence disclosed by the defence, there was no point for these dates to be printed on the packages boxes if they were fabricated. LX-20 and J-48 should bear earlier dates in order to serve the interest of the Plaintiffs. 

183.  LX-20 was produced by Liu in his first affirmation of 23 August 2003.  At that stage, the Defence in HCA No.A4651 of 2002 only contained a general averment in Paragraph 30 that the artworks were designed and created by BBRD in or about 1999.  LX-20 bore a manufacturing date of 19 February 1999.  J48 was produced as LX-2 to the Second Affirmation of Liu filed on 6 January 2004 in HCA No.A2802 of 2003.  By that stage, the defence had filed an Affirmation of Law Fu Ming on 27 October 2003 in HCA No.A4651 of 2002.  J48 bore a manufacturing date of 5 March 1999 In that affirmation, Law said BBRD was engaged by the 1^st Defendant to design the package in or about January 1999.  Mr Yan submitted that if the dates were fabricated, earlier dates would be selected.

184.  In the affirmation of 27 October 2003, Law did not actually specify the date when the design used in D-21 (viz. first generation ENHANVOL packaging in Hong Kong) was created. He only said BBRD was engaged in about January 1999 and the first set of layouts (which were rejected) were shown to Tong about 10 days later.  Moreover, J48 used the name ENHANVOL.  As explained above, on the Plaintiffs’ own evidence filed up to January 2004 when J48 was produced, that name could not have been coined prior to mid February 1999.  Due to such constraints, J48 could not have been designed (not to mentioned produced) much earlier than March 1999.

185.  Further, one must not assume that the Plaintiffs’ only source of information as to the date of creation of the design of D-21 was from the pleadings and evidence filed by the Defendants.  The Plaintiffs were in possession of P-10, a fax dated 26 March 1999 allegedly sent to Liu for his approval on the design.

186.  Therefore, I do not think the ingenious argument by Mr Yan advances the Plaintiffs’ case as to the integrity of the dates these package boxes insofar as they are taken as the dates when the boxes were used.

187.  Another problem about J48 is that if it had ever been designed and used by the Plaintiffs as alleged by Liu and Chan Hon Chung, it should have been in the forefront of the Plaintiffs’ claim for copyright infringement as far as ENHANVOL packaging is concerned.  A comparison between J48 and D-21 would make this apparent.  The designs of the two are basically the same with some very minor differences (e.g. the crack on the spore, the Chinese name).  Yet surprisingly, it was not even pleaded in the copyright claims nor was it mentioned in the Plaintiffs’ evidence on copyright.  In the witness statements, it was not included in the material alleged to have been supplied to the 2^nd Defendant and Chan Hong Chung’s witness statement omitted any reference to J48.  It was only produced in the context of the use of the expression “萌動激活” in Paragraph 4 of the Second Affirmation of Liu filed in HCA No.A2802 of 2003. Even Plaintiffs’ counsel were taken aback by Liu’s reference to it when cross-examined by Ms Tam.

188.  In view of the fact that J48 had been disclosed as part of LX-2 in January 2004, could it be just an oversight on the part of the lawyers in omitting to refer to it in respect of the copyright claims?  In my judgment, I do not think such omission can be so easily brushed aside.  The correlation between J48 and D-21 is so clear that it could not have escaped the attention of Liu and Chan Hon Chung.  Although I can understand that pleadings, affirmations and witness statements were drafted by lawyers, the instructions must have come from the clients.  It did not take a lawyer to appreciate the significance of J48 in respect of the copyright claims. If J48 had been used by the Plaintiffs as alleged by Liu and Chan Hon Chung and if a copy of it had been supplied by Liu to the 2^nd Defendant, I am sure that the first thing they would have done was to refer to it as the source of the design for D-21.  It would have been one of the first things that they told their lawyers and they would have made sure that there was no room for any mistake or omission.  They would have ensured that the point was made in their affirmations or witness statements.  Even if the lawyers neglected to refer to the same in the context of copyright, they would have corrected the mistake.  All along, the Plaintiffs were represented by a team of very experienced and competent lawyers and there must have been a lot of occasions where Liu or Chan Hon Chung could have brought up the omission. 

189.  Instead of having J48 put in the forefront of their case, Liu and Chan Hon Chung were silent about it in their affirmations and witness statements in the context of copyrights.  In his First Affirmation filed in August 2003, Liu said in Paragraph 49 that the Plaintiffs’ lingzhi spore powders were marketed in mainland China initially in the packaging as per LX-19 and later on as per LX-20.  He further said it was exported to Hong Kong as per LX-21 and repackaged into LX-22.  He described how he designed LX-22. No reference whatsoever was made to J48.

190.  There was an application by the Defendants for production of the artworks of the Plaintiffs.  Liu referred to that in Paragraph 14 of his Second Affirmation filed in HCA No.A4651 of 2002 [B167-8].  In Paragraphs 42 and 43 of that affirmation, Liu described how he created the designs and how they were supplied to BBRD both directly and through the Defendants.  That was a golden opportunity for J48 to be mentioned. Yet he failed to do so.  Liu was painstakingly explaining how his sketches in “LX-23” and “LX-27A” were reproduced by BBRD and then generated into artworks by computer.  One may ask rhetorically if J48 had been given to BBRD for reference, why would Liu forget to mention J48 as the link between D-21 and his designs in those paragraphs.     

191.  Liu made a witness statement on 1 April 2004.  He referred to the materials he relied upon for the copyright claims. J48 was not amongst the drawings identified and there was no computer artwork for J48 in LX-103.  The same applies to the witness statement of Chan Hon Chung made on the same date.  

192.  In his evidence in chief, Liu made no reference to J48.  It was only raised by Liu in cross-examination.  Chan Hon Chung made the correction in his examination in chief.  However, he was unable to give a satisfactory account as to why he omitted to refer to J48 in his witness statement.  He said he had remembered about it prior to July 2004 but the lawyers told him to supplement that in the witness box.  He had made a Second Witness Statement on 10 August 2004 but there was still no reference to J48.  I have no hesitation in rejecting the explanation by Chan Hon Chung.  If he had raised the omission with the lawyers prior to July 2004, I am sure Mr Liao would mention the same in his opening and the particulars in respect of the copyright claims submitted to this court in the opening would also make reference to J48. 

193.  Another piece of evidence relied on by the Plaintiffs to establish priority of Liu’s sketch drawings is P-5A.  Liu said that was a document produced by him at a discussion with the 2^nd Defendant and CYF on 6 February 1999.  He said it was supposed to be instructions to BBRD, the design firm engaged by the 1^st Defendant, for the design of the package for ENHANVOL.  Prior to the meeting, some designs had been produced by BBRD but they could not meet the requirements of Liu despite, according to Liu, the sketches and computer drawings produced by the Plaintiffs had been supplied to them.  Hence, Liu felt that he needed to impress upon BBRD how the package should be designed and he made out P-5A on the spot for the 2^nd Defendant to pass on to BBRD.

194.  The first point to note about this document P-5A is that there was a reference to the name盈康活 in the first paragraph at the top of the document.  On my finding as to the timing when Liu was told about the name as set out above, this document could not have been written on 6 February 1999 as alleged by Liu.

195.  The manner in which P-5A or its copies were produced by the Plaintiffs draws adverse comments from Mr Chan.  A copy was first produced as part of LX-27A in the First Affirmation of Liu dated 23 August 2003.  It was described as one of the drawings created by Liu by reference to the photographs exhibited as LX-13. LX-13 is the Japanese electron microscope photographs taken in 2000.  Liu subsequently corrected himself in his witness statement of 12 April 2004 that the photographs should be those taken in December 1998, viz. P-11 instead of LX-13.  Although he made the correction by reference to LX-23 instead of LX-27A, I am prepared to regard that it was a mere slip that no reference was made to LX-27A in that correction.  The copy of the document produced in LX-27A does not bear the chop of the 1^st Defendant.  In that affirmation, Liu did not explain the circumstances under which P-5A came into existence.

196.  None of the figures in P-5A bears any resemblance to the photographs in P-11.  In fact, Liu’s testimony in the witness box did not support his assertion in the affirmation that P-5A was created by reference to P-11.  However, he did not explain why he said so in his affirmation.

197.  In his witness statement of 1 April 2004, Liu made a brief reference to the meeting of 6 February 1999 [Q7].  However, notably, he made no reference to P-5A in that statement.  Instead, he said in the witness statement that the drawings handed to the 2^nd Defendant at that meeting were LX-23, viz. P-1(E), (F), (H), (I) and (J).  There is no explanation by Liu as to why there was such a discrepancy.

198.  Liu only revealed how P-5A came to be drawn by him in his evidence in chief and produced a copy of the document bearing the chop of the 1^st Defendant (P-5).  He explained that the chop was redacted by his colleague when copy was supplied to the lawyers for preparation of the affirmation in 2003.  He said that was out of the ill-conceived belief that the chop of the 1^st Defendant would somehow suggest that the designs were those of the 1^st Defendant.  However, that colleague Tong Chin Kau was not called to give evidence.

199.  LX-27A is an exhibit to the First Affirmation of Liu.  Liu should bear the primary responsibility in ensuring proper document was exhibited by him.  He should have noted that the chop was missing and corrected the mistake before he made the affirmation.  He did not do so and it is not excusable for him to say it was due to the mistake of his colleague.  In my judgment, Liu had not satisfactorily explained about why he permitted the copy of P-5A in LX-27A to be produced to the court when he should be aware of its tampering.  He also did not explain satisfactorily why he failed to correct the record until he gave his evidence in chief.  On the whole, I do not accept that he was ignorant of the tampering, if there was any.

200.  It is a serious matter to tamper with a document intended to be used for the purposes of legal proceedings.  Putting forward a tampered document as evidence coupled with an intent that the tampering would place a party in better light than he otherwise would be is a grave misconduct which could lead to criminal sanction.  As I said, Tong Chin Kau was not called as a witness and the Defendants did not have any chance to cross-examine him about the copy of P-5A in LX-27A.  Given my misgivings on Liu’s credibility, I am not prepared to find that Tong committed such a serious misconduct on Liu’s words alone.

201.  It was rather unusual for a Hong Kong company to place its chop on a document of this nature.  It served no useful purpose. BBRD would probably accept the document as instructions from the 1^st Defendant if it was given to them by Tong or the 2^nd Defendant.  Liu testified that the chop was put down at his request.  But why would the Defendants oblige Liu on such a meaningless request?

202.  The end result is that I am faced with a discrepancy between P-5A and the copy in LX-27A and there is no credible explanation for it.  On the evidence, I am not satisfied that the chop was there when LX-27A was exhibited.  It is equally possible that the chop was added later by someone who thought that with the 1^st Defendant’s chop placed on the document, the Plaintiffs’ case would be improved.  I do not think I need to make a finding as to what had actually happened.  On either scenario, Liu’s credibility is seriously dented.

203.  Liu put forward P-5A as his message to BBRD about how the package box was to be designed.  I agree with Mr Chan that it was a very awkward way to achieve that objective bearing in mind that according the Liu, by that time the design drawings and packages had been supplied to the Defendants (and through them to BBRD) by means of MO and hardcopies.  It would be much more direct and effective for Liu to pinpoint a particular box of the Plaintiffs (e.g. J48) for reference.  In any event, there was no need to draw so many figures.  If one were to examine P-5A, it is difficult to tell how BBRD was supposed to select one out of the many figures in that document as the theme of the design.

204.  In the paragraph at the bottom of P-5A, Liu was apparently telling BBRD to emphasize the oil droplet filling up a broken spore.  That idea was not adopted by BBRD in D-21.  Yet Liu did not appear to have complained.

205.  According to Liu, instead of giving the document to BBRD, Liu asked the 2^nd Defendant to return the original of P-5A to him the next day.  Since he had got all the original design drawings (the computer drawings by Chan Hon Chung as well as his free hand sketches), there was simply no point for Liu to keep P-5A.  I am totally unimpressed by Liu’s explanation that his sixth sense told him the 2^nd Defendant was unreliable and dispute might arise in the future. Liu’s evidence was that he kept the original and has been keeping it since 7 February 1999 and had only showed it once to Chan Hon Chung in the interim for the design of ENHANVOID.  All these are, in my judgment, bizarre.

206.  I therefore place no weight on P-5A except the discredit to Liu’s credibility occasioned by its production.

207.  In respect of Chan Hon Chung, for the reasons given above regarding the time constraints as to the earliest possible use of the electron microscope photographs and the name ENHANVOL in the designs, I must reject his evidence as to the circumstances and dates of creation of the package boxes.  I have also highlighted some other aspects as to his lack of credibility.

208.  After Wong Yan Yan and Chan Chin Hung had produced their computer drawings with dates of creation, Chan Hon Chung was challenged to produce his working drawings of similar nature.  He did not do so and chose to hide behind the pretext that the dates could be adjusted and such drawings were of no probative value.  He however said he had not adjusted the dates in his computer.

209.  I shall deal with the design in respect of ENHANOID later.  As regards ENHANVOL, Chan Chin Hung’s produced drawings showing the different steps during the process of creation.  At Y22 (which was copied from an earlier file he worked on), the layers for different colouring or shading of the cracked spore used on D-21 were shown.  He also accounted for the genesis of the design of the grid by reference to Design D of the five initial lay-outs shown to Tong.  For the exploding spore used in the second generation ENHANVOL design, Chan Chin Hung explained the different layering at R95 to 97.  In contrast, Chan Hon Chung had not produced anything of a comparable nature.  He could not even produce the artwork for J48.  I do not accept the evidence of Liu and Chan Hon Chung that the Plaintiffs had lost many design drawings and gaps were therefore inevitable in proving their process of creation.  Chan Hon Chung and his colleagues were working on computers and even if hard copies might have been misplaced, there must be drawings that could be retrieved from the computer.  Unlike Chan Chin Hung’s company, the Plaintiffs had not ceased business and there is no suggestion of storage device being damaged.  It is hard to believe that the only drawings available were those produced if the Plaintiffs actually designed the packaging as their witnesses testified.

210.  Chan Hon Chung is obviously a biased witness who is prepared to do whatever Liu or the 1^st Plaintiff told him to do.  One example is his role in the Guangzhou proceedings.  Another example is his execution of the assignment in favour of the 1^st Plaintiff without even checking what drawings were to be included in the assignment.  As it turned out, the drawings were not attached at the time of execution and he did not seem to care.

211.  I agree with Mr Chan in his submissions that Chan Hon Chung’s evidence about the 8 December 1997 agreement and the 1 December 2001 conference is extremely unsatisfactory and dubious.  I am not satisfied that Chan Hon Chung told me the truth with regard to those events.  In addition to the inherent improbability of his version, the manner in which he gave evidence about those events did not impress me as that of a credible witness.  He was selective in his memory and at times evasive in answering questions under cross-examination.  

212.  On the whole, I find Liu and Chan Hon Chung unreliable and I reject their evidence on the copyright claims in respect of ENHANVOL.

213.  Having reached that conclusion, I would only deal with the Defendants’ evidence on the copyright of the ENHANVOL packaging briefly.  I agree with Mr Liao that the Defendants’ evidence had been skeletal and cagey right up to the commencement of the trial.  One only has to look at the first witness statement of Chan Chin Hung to see the point.  During the course of trial, the evidence of the defence on copyright had been substantially expanded.  Supplemental witness statements were filed in respect of the evidence of Chan Chin Hung and Wong Yan Yan.  Two additional bundles of documents were added in the course of Chan Chin Hung’s testimony.  All these would have a bearing on the question of costs.

214.  I am however satisfied that despite that deficiencies in the preparation for trial, the Plaintiffs did not suffer any prejudice that could not be compensated by costs as a result of such late production of documents.  I am also satisfied that such late disclosure was not due to any intention to conceal the truth by Chan Chin Hung.  Having heard his evidence and assessed it in the light of all the materials before me, I find Chan Chin Hung to be an honest and reliable witness and I accept his evidence as to the genesis of the design for D-21 and LX-22.

215.  He was so keen in letting the truth be revealed that he voluntarily produced the documents in Bundle Z which the parties had no means of knowing their existence.  No-one could criticize him for not producing those documents in view of the fact that he was only involved with the design of ENHANVOL in 1999 and the 1^st Defendant did not engage his firm thereafter.  His firm Link Communication Limited had ceased business for quite some time.  Yet he was able to retrieve these documents after his recollection as to some records being kept was triggered by Mr Yan’s cross-examination on a related topic.  Amongst the documents he produced voluntarily, there were in fact some documents which discredited his earlier testimony, e.g. the package of the Hometown Food at Bundle Z.  Instead of disclosing documents selectively, he readily produced the whole stack of documents for inspection by counsel.  During cross-examination, when faced with questions which he could not give satisfactory explanations by way of answer, he did not hesitate to say so instead of prevaricating or engaging in a debate with counsel.  I regard these as indicia of his truthfulness.  

216.  Mr Liao criticized Chan Chin Hung in his closing submissions about his failure to account for certain matters in his evidence.  Having regard to the fact that the scanning and collecting of raw materials were not done by him alone, I do not find it surprising that he was unable to account for the Hometown Food packaging and leaflet, the use of Guru packaging material in Design E and the source of the spore photograph on which he worked out the cracked spore design.  Since my ruling of 22 July 2004, the conduct of the evidence had subsequently been developed in a such manner that Mr Liao no had objection to evidence being led from Tong that Liu had given a Japanese magazine to the 1^st Defendant which contained two spore photographs.  Liu himself gave evidence to that effect.  It is now common ground that the raw material for the cracked spore design in D-21 was a photograph from the Japanese magazine.  I do not think Chan Chin Hung’s failure to account for the origins of these materials should lead this court to the conclusion that he must have copied those from the MO or other drawings allegedly supplied by Liu.

217.  The apparent replacement of photographs in the design process had been explained by him in re-examination and given the lapse of time it is not remarkable that he might not be able to recall the exact details.  The other points made by Mr Liao and Mr Yan in closing submissions about his credibility are peripheral and having considered those, I do not think they have any material impact on Chan Chin Hung’s credibility.    

218.  The essence of Chan Chin Hung’s evidence is that he conceived the design for D-21 and LX-22 on his own without any reference to the drawings by Liu or the Plaintiffs and he had not seen P-5A, LX-19, LX-20, J47, J48 in his process of creation.  I have already stated how he had explained to this court these designs were conceived and corroborated his evidence by the computer drawings.  It is notable that had he been simply copying from materials from the Plaintiffs like J48 and LX-20 (both soft and hard copies were said to have been supplied), those steps would not be necessary and drawings like Y22, R95-7 would not exist.  There is no merit in Mr Yan’s submission that Chan Chin Hung could not explain how the designs were conceived.  This also answers his speculation that although initially Chan Chin Hung did produce some designs of his own for the 1^st Defendant, they were all unsatisfactory and in the end, the 1^st Defendant and its designers were forced to copy from the materials of the Plaintiffs.  

219.  Chan Chin Hung is an independent witness.  He was only engaged by BBRD on behalf of the 1^st Defendant for this job and had no further engagements from the 1^st Defendant since 1999.  Whilst he understandably felt the need to defend his reputation as a designer when he learnt of the allegations of the Plaintiffs, he did not have any financial, economic or commercial interest in the outcome of this trial.

220.  I accept the evidence of Chan Chin Hung and find accordingly that D-21 and LX-22 were designed by him without reference to the alleged copyright materials of the Plaintiffs.  On the contrary, given the similarities and in the absence of credible explanation from the Plaintiffs’ witnesses, I am driven to conclude that LX-20 and J48 were produced by reference to D-21.  In other words, my finding is that they were produced after Liu had seen and obtained a copy of the D-21 packaging. P-1(J) was drawn by Liu by reference to LX-22 instead of the other way round.   

221.  I should mention that Tong and Law also gave evidence relevant to the ENHANVOL packaging and I took them into account.  I would not give them as much weight as the evidence of Chan Chin Hung since they were not the designer and they gave evidence before Bundles Y and Z were produced.  Their evidence as to the timing of certain events may not be that accurate.  On the whole, insofar as there are discrepancies between their versions and that of Chan Chin Hung, I prefer the evidence of Chan Chin Hung.

222.  Turning to the design of the packages for ENHANOID, Liu and Chan gave evidence for the Plaintiffs to the effect that LX-27 was designed by them earlier than LX-28.  On the other hand, the defence case is that LX-28 was designed by the in-house designer Wong Yan Yan without any reference to LX-27.  The defence said that the design of LX-27 came into existence much later than LX-28.

223.  According to Wong Yan Yan’s evidence, the design for LX-28 could not have been finalized before 5 November 2001.  Her evidence was that the design for what I shall call the spheroid device at the front panel of the box did not come into existence until 5 November 2001 (Para.5 of her Second Witness Statement dated 29 July 2004, adopted as evidence in chief).  This was corroborated by the computer drawing at R66. Wong Yan Yan’s evidence was that the design process started in October 2001.  The first computer drawing produced by her was dated 11 October 2001 (R57).  Although CYF produced an invoice dated 2 November 2001 issued by R & C Company to the 1^st Defendant in respect of the production of these boxes (Exhibit D-18), he testified that the invoice could have been issued prior to the finalization of the design of the box.  The full payment of the invoice was only made on 20 December 2001.

224.  There is a dispute as to whether the 1^st Plaintiff had sold ENHANOID to the 1^st Defendant in package LX-27 prior to the design of its own package LX-28.  The Plaintiffs’ case was that it had done so whilst the Defendants’ case was that LX-27 only came into being in 2002.  A comparison between LX-27 and LX-28 shows that the two packages were substantially similar although there is a variation in the ring at the spheroid device.  Liu testified that the 1^st Plaintiff re-designed the package for ENHANOID and came up with LX-27 in August 2001 (transcript of 15 July 2004 p.274F; Bundle X-1, p.66T, 30 August 2004).  They started using package LX-27 for products sold in the end of October or early November 2001 (Bundle X-1 p.67 E to I).  Since November 2001, the 1^st Plaintiff sold ENHANOID to 1^st Defendant in LX-27 packing (Bundle X-1, p.71S).  Liu further said he first saw the LX-28 package in January 2002 (Bundle X-1 p.74M).

225.  For reasons given in the other parts of this judgment, I do not find the Plaintiffs’ witnesses to be credible or reliable and I cannot give weight to their evidence.  On LX-27, I find the story of Liu inherently improbable.  He testified that these designs were intended for Hong Kong market, hence the Chinese characters were in the form prevailed in Hong Kong (繁體).  If that were so, I fail to see why LX-27 would have the 學者牌Guru logo at the side panel. Liu said in his own affirmation the Defendants repackaged the same after the goods were brought here.  I can understand that in respect of LX-26 because of Tong’s objection to the name 盈康力 in LX-26.  But I have difficulty in accepting that in respect of LX-27.  If the 1^st Plaintiff had actually supplied ENHANOID in LX-27 since November 2001, I do not think the Defendants would do any repacking.

226.  According to Liu, LX-27 was designed about one month after LX-26 because he found LX-26 unsatisfactory.  Yet the 1^st Plaintiff continued to supply ENHANOID in LX-26 packing (LX-26 itself bears a manufacturing date of 18 January 2002) despite the alleged launch of LX-27.  I have no hesitation in rejecting Liu’s feeble explanation that this was to maintain the goodwill of ENHANOID associated with LX-26.  Given the alleged short time lapse between the marketing of ENHANOID in LX-26 and LX-27, there was simply no commercial justification for such concern.  In fact, given that at that stage, the main market for ENHANOID was in Hong Kong (the permit for public sale of ENHANOID in mainland had yet to be issued) and the repacking in Hong Kong, I fail to see why the 1^st Plaintiff could not switch to LX-27 completely after November 2001 if LX-27 had actually been designed and used for packing ENHANOID by November 2001.

227.  The Plaintiffs relied on a certificate dated 27 February 2004 (S37) and two delivery notes dated 6 October 2001 (S38) issued by a printing company in Shenzhen to support their case that package bearing same design as LX-27 were produced in early October 2001.  The document was produced by way of hearsay evidence.  The makers had not been called to give evidence at the trial.  I was not told why the makers could not be called.  I shall assume in favour of the Plaintiffs that they were in Shenzhen.  But that by itself is not a good reason for not calling them.  As a matter of fact, all the witnesses called by the Plaintiffs were not based in Hong Kong.  I have reminded myself as to the various matters set out in Section 49 of the Evidence Ordinance in assessing the weight to be attached to these documents.  I would also assume in favour of the Plaintiffs that the omission to call those makers was not a deliberate attempt to prevent cross-examination of them by the defence.

228.  The Plaintiffs submitted that S38 was unchallenged evidence and it conclusively resolved the priority of LX-27 over LX-28.  I do not accept this submission.  Whilst it is correct that the Plaintiffs’ witnesses were not specifically cross-examined in respect of S38 and the Defendants had not issued any notice disputing the authenticity of S38 pursuant to Order 27 Rule 4, I do not think this renders the contents of S38 as conclusive evidence.  S38 was item 127 in the Plaintiffs’ List of Documents filed on 12 March 2004.  It was described as “copy of 送貨單 issued by 深圳市佳信達印務有限公司”.  The effect of Order 27 Rule 4, in the absence of a notice disputing authenticity, in respect of a copy document is set out under Rule 4(1)(b).  The Defendants are deemed to admit that the copy is a true copy.

229.  It is not clear whether the Plaintiffs could pray in aid of Rule 4(1)(a) which on its face only applies when a document is described in the list as an original document.  Counsel have not addressed me on the point and I do find it necessary to decide it.  Assuming Rule 4(1)(a) is applicable, there is still a distinction between an admission as to the authenticity of a document and admission as to its contents (see Style & Hollander, Documentary Evidence, 6^th Edn (1997) p.334).  At the most, the Defendants must be taken to have admitted that a delivery note as per S38 had been issued on 6 October 2001 by this company.  As regards whether the goods were actually delivered and whether those were the packages for LX-27, there is no admission.  The weight to be attached to such a delivery note is still a matter for this court to decide in the light of all the evidence.

230.  As regards the omission to cross-examine Liu specifically about S38 and his evidence that it related to LX-27, I respectfully adopt the approach of the Court of Appeal in Tam Ka v Lam Hung Kwong CACV 75 of 1999, 6 July 1999 and Deputy Judge Reyes (as he then was) in Kaiifull Investments Limited v Commissioner of Inland Revenue HCIA 8 of 2001, 4 April 2002.  In the present context, it is quite plain that the Defendants advanced the case that the design for LX-27 came after LX-28 had launched into the market.  By necessary implication, the Defendants did not accept Liu’s evidence that S38 relates to LX-27.  This should have been clear to everybody at the latest by the filing of the Re-amended Defence on 7 July 2004.  Liu did not refer to S38 in his affirmations or witness statements.  He only adverted to it in his examination in chief on 8 July 2004.       

231.  In view of the preponderance of the other evidence adduced before me, I am unable to attach much weight to S37 and S38.  Even though S38 appeared to be a contemporaneous document, I am not satisfied that it relates to LX-27.  Only Liu and Chan Hon Chung gave direct evidence in this respect and for reasons given elsewhere, I do not find them to be credible witnesses.  Mr Liao also highlighted the description of the goods in S38 as “盈康孢子油包裝盒”, hence more likely to be LX-27 than LX-26.  I have taken this into account but in the end I do not find this to be irrefutable evidence that S38 must relate to LX-27.  I would not speculate the circumstances under which S38 was issued by the printing company.  All I need to do is to take this piece of evidence into account in the overall assessment of the factual materials.  Having done so, I reach a firm conclusion that on balance of probabilities the defence case as to the design of LX-28 is more likely to be the truth.    

232.  Another matter which the Plaintiffs urged this court to bear in mind in determining the priority of LX-28 and LX-27 is the insert and bottle label of LX-28.  Obviously, the insert and bottle label bore the front panel design of LX-27 as opposed to that of LX-28.  If this court accepts that the ENHANOID first sold by the 1^st Defendant in the package box of LX-28 on 30 November 2001 were sold with such insert and bottle label, this would go a long way in establishing the priority of LX-27. 

233.  In my Reasons for Ruling of 23 September 2004, I held that due to manner in which the Defendants had conducted the case, they should not be permitted to adduce additional evidence to impinge upon LX-28.  However, I also held that the Defendants should be allowed to make submissions about the insert and bottle label on existing evidence.  In addition to the points mentioned in Paragraph 15 of my said Reasons for Ruling, Mr Chan referred to the reproduction of an article in Cancer Letters at p.14 and 15 of the insert.  The date of that article, as stated in the insert, was 28 August 2002.  These points are unanswerable and it is quite plain to me that the insert and the bottle label used in LX-28 could not have been part of the ENHANOID sold by the 1^st Defendant on 30 November 2001 in their own packaging.  This is also apparent from the bottle shown in the advertisement at D335.  Hence, the insert and bottle label could not advance the Plaintiffs’ case as to the priority of LX-27. 

234.  Chan Hon Chung also gave evidence about LX-27.  In addition to the reasons set out in other parts of this judgment, I do not find him to be a reliable witness because I find his story as to how the spheroid device at LX-27 was derived from the design drawings at Q49 and Q 50 to be incredible.

235.  His evidence was that he created those design drawings in the first half of 2001 with reference to the document at C293 (viz. P-5A).  He said Liu showed him that document in 1999 with the instruction to produce some computer drawing by reference to it.  Then Liu took the document away.  However, he did not consider it to be a task he needed to complete in a hurry and he did not produce Q49 and Q 50 until the first part of 2001.  Liu did not talk to him about this task in between 1999 and 2001.  When Liu mentioned the task in 2001, PW3 said he could recall the document without the need of seeing the same again.  He said apart from the document at C293, the design was produced by reference to the logo of a television company (exhibit P-15) and a photo of lingzhi spore taken under electron microscope.

236.  I wish to make several points about his evidence on this topic.  It is simply incredible that he could have a recollection of the relevant drawing at C293 after a couple of years.  There are a number of drawings on C293 and only the one at the bottom left hand corner was relevant for the design at Q49 and Q50.  In fact, as far as I can see, only two features of that drawing at C293 bear some vague resemblance to the design at Q49 and Q50, namely the ring shaped feature and the swirling element within the ring.  These are not the most striking features of that drawing.

237.  Until he gave evidence in the witness box, he did not mention making reference to C293 in the course of designing Q49 and Q50 and LX-27.  He did not mention this in his witness statements.  I do not accept his explanation that he omitted to mention it because he could not locate C293 when he made the witness statements.  He could easily have asked Liu for it and I believe that he would have naturally done so if what he testified in the witness box was the truth.

238.  Further, if Q49 and Q50 were already produced in the first part of 2001, I did not understand why they were not used in LX-26.  Liu and those responsible for changing the package to LX-26 to LX-27 must have found the spheroid device in LX-27 more appealing than the broken spore with oil droplet device in LX-26.  Otherwise they would not change it.  Hence, if Q49 and Q50 were the preliminary design drawings for the spheroid device in LX-27, there was no reason why they were not adopted in the first version of the 1^st Plaintiff’s package for ENHANOID.    

239.  I have carefully compared Q49, Q50 with the spheroid device in LX-27.  I cannot accept that the latter were derived from the formers.  In my judgment, there is a quantum leap between the two and the evidence of the Plaintiffs had not accounted for the same satisfactorily.  Some of the drawings attached to the witness statement of Liu concerning the spheroid design in LX-27 (e.g. Q21(k), Q21(l), Q21(m)) were not attached to the witness statement of Chan Hon Chung.  In his examination in chief, Chan Hon Chung said they were drawings created by his colleague Cheung Hiu Jet (張曉喆). She was however not called as a witness during the trial.  Although there is a confirmatory assignment P-16, I do not find that self-serving document to be a reliable piece of evidence with regard to authorship as to those drawings.  In any event, those drawings could not account for the quantum leap mentioned earlier.  It is difficult to see how Q21(k) and 21(l) were derived from Q49 or Q50.     

240.  On the other hand, the similarities between the spheroid device in LX-28 and that in LX-27 inevitably lead to the conclusion that one was derived from the other.  The only question is which one was the original and which one was copy.  I find Wong Yan Yan’s explanation as to how she came up with the design for that device by using the Japanese material at R26 much more convincing than Chan Hon Chung’s evidence.  The similarities between the device in LX-28 and the ball shape device identified by Wong Yan Yan in D-17 (viz.R26) speak for themselves.  Notwithstanding the criticism leveled against Wong Yan Yan in the Plaintiffs’ written submissions, I find her to be a credible witness and I accept her evidence as to the design for LX-28.  Given the derivation of LX-27 from LX-28, it is not surprising that there were common features between the two.  On the other hand, I do not find any significant similarity between the layout of LX-26 and LX-28 such that I could draw an inference of LX-28 being copied from LX-26.

241.  There is no doubt in my mind who was telling the truth here.  I have no hesitation in rejecting the evidence of Chan Hon Chung as to the conception of the design of LX-27.  I find on the balance of probabilities LX-28 was designed in the manner as explained by Wong Yan Yan in early November 2001.  The device in LX-27 came afterwards and it was derived from LX-28 with a modification at the ring.

242.  Turning to the copyright claim under item (i) in the particulars supplied during the opening based on the cracked spore of the Plaintiffs, the subject matter of the claim is the drawings at S247-251, the freehand sketches by Liu.  Although it is said to have been used in LX-19 and LX-21, the case as pleaded does not rely on the copyright subsisting in the computer drawings for the cracked spore as opposed to that subsisting in the freehand sketches.

243.  It is quite obvious that the computer artwork for the cracked spore design of the Plaintiffs was based on the processing of a spore photograph from the Japanese magazine.  This is also the evidence of Chan Hon Chung.  There is no claim for copyright infringement in respect of the spore photograph.  The cracks in the freehand sketches are different from those in the computer drawings and the final products appearing in LX-19 and LX-21.

244.  I have found in earlier part of this judgment that LX-20 and J48 were produced by reference to D-21.  Hence, insofar as the idea involved in the creation of the cracked spore design is concerned, it was taken from D-21 instead of Liu’s freehand sketches.  With D-21 available for reference, there was no need for the Plaintiffs’ designers (whether it was Chan Hon Chung or someone else) to refer to any freehand sketches to create the Plaintiffs’ version of cracked spore.  On the evidence, I am not satisfied that the computer artworks of the Plaintiffs’ cracked spore were derived from the freehand sketches.  It may well be the other way round. In any event, the mere copying of the idea does not constitute infringement.

245.  There was therefore no infringement of the copyright in the drawings at S247 to 251 even though the cracked spores found in the Defendants’ leaflet did appear to be substantially similar to the one found in LX-19 and LX-21.

246.  The last item in the copyright claims is in respect of P-11.  Mr Chan did not dispute ownership.  He contended injunctive relief should not be granted as the use of the photographs in the leaflet was, based on Tong’s evidence, probably a mistake and it would be disproportionate to order inquiry as to damages.

247.  I am not prepared to accept that the use of the leaflet was a mistake based on Tong’s evidence alone.  She was not personally involved in the packing process and no corroborative evidence had been called on behalf of the Defendants.  I do not understand why the Defendants still kept the old leaflets after they switched to new suppliers.  Having said that, I am willing to infer on the available evidence that the continued use of the leaflet was limited.  The Plaintiffs have continued to monitor the activities of the Defendants in the market and did not produce more substantial evidence of the photographs being used.

248.  In the absence of any undertaking offered by the Defendants, I will grant an injunction in respect of P-11.  I will also order delivery up.  However, I agree that it is disproportionate to order an inquiry of damages.  There is no evidence to suggest that the Plaintiffs suffered any loss of profits as a result of the use of photographs by the Defendants after the termination of the distributorship.  Having regard to the extent the photographs had been used in the past and the limited scale of infringement, the depreciation caused by the infringement to the value of the right as a chose in action is insignificant.  I will therefore award nominal damage in the sum of $1,000 in favour of the 2^nd Plaintiff.     

249.  Apart from the claim arising from P-11, all the other copyright claims of the Plaintiffs are dismissed.

Infringement of registered trade mark萌動激活

250.  I now deal with the claim based on the registered trade mark 萌動激活.  The main defence is that the mark is invalid because it should not have been registered.  Section 11 of the Trade Marks Ordinance [“TMO”] Cap.559 is relied upon.  In the Particulars of Objection filed on 18 February 2004, the Defendants submitted that “萌動激活” was wrongly registered because,

(1)	it was not a “trade mark” within the meaning of TMO section 3(1), that is to say, a sign which is capable of distinguishing the goods from one undertaking from those of other undertakings: section 11(1)(a);
(2)	it was devoid of any distinctive character in breach of section 11(1)(b);
(3)	it consisted exclusively of words which may serve, in trade or business, to designate the kind, quality or other characteristics of the goods, in this case, the process whereby the goods were made (germination activation): section 11(1)(c).

251.  Another ground was raised in the Particulars of Objection (see Para.4 of that document).  It was not pursued in the closing submissions of the defence.  Therefore I need not consider it.

252.  The application for the registration of the mark was made by the 1^st Plaintiff on 24 December 2002.  It is common ground that that is the relevant date for considering the various objections.

253.  Counsel referred this court to several authorities on the proper construction of various limbs under Section 11.  The English equivalent of Section 11 is Section 3 of the Trade Marks Act 1994.  In Procter & Gamble Ltd’s Trade Mark Application [1999] RPC 673, Robert Walker LJ (as he then was) traced the legislative history of the section and in the light of legislative changes in 1994 and European Community origin thereof, cautioned against following old cases decided under the 1938 Act without having regard to background.  The following opinion of Advocate General Cosmas in Windsurfing Chiemsee v Huber, Windsurfing Chiemsee v Attenberger ECJ Cases C-108 and 109/97 was cited by His Lordship at p.678-9 as a useful guidance as to the general legislative purpose behind the new trade mark law.

“	27	The main purpose of the system adopted by the Community legislature is to safeguard and protect the essential function of the trade mark.  That function, as set out particularly in the seventh recital in the preamble and in Articles 2, 3(1)(b) and 3(3), 5(5) and 10(2)(a) of the Directive is, first, to identify an undertaking's goods and to distinguish them from other similar products (distinguishing function of the trade mark) and, secondly, to establish a link between them and a particular undertaking (guarantee of origin).  As the Court has pointed out on more than one occasion, the essential function of the trade mark is to guarantee to the consumer or end user the identity of the trade-marked product's origin by enabling him to distinguish it without any risk of confusion from products of different origin.
	28	In my view, it is in the light of precisely that function of trade marks that Article 3(1) of the Directive makes lack of distinctive character an independent ground for refusal or invalidity of a mark (paragraph (b)) but also provides for a more specific ground for invalidity or refusal in respect of marks which consist exclusively of descriptive indications (paragraph (c)) or which have become customary in the current language or in the trade (paragraph (d)).
	29	Although in the text of the Directive, paragraphs (c) and (d) are, strictly speaking, distinct from paragraph (b), in essence they describe more particular or more specific or simply more typical instances of lack of distinctive character in a mark which explain and clarify the general concept of lack of distinctive character but do not introduce new or fundamentally different ideas.  The same conclusion follows if Article 3(1) is interpreted alongside Article 3(3), under which a trade mark is not to be refused registration or declared invalid under paragraphs (b), (c) or (d) of Article 3(1) if it has subsequently acquired a distinctive character by reason of the use which has been made of it.  In other words, in the circumstances set out in those paragraphs, which are dealt with together in Article 3(3), the trade mark subsequently acquires the quality which it initially lacked and the absence of which prevented it from being registered or enabled it to be struck off the register - namely distinctive character.  Accordingly, it may be assumed that those cases which are not specifically mentioned in paragraphs (c) or (d) of Article 3(1) fall within paragraph (b).”
	(The extract I quoted above is taken from [1999] ECR 1-2779.  The translation is slightly different from that cited by Robert Walker LJ).

254.  Robert Walker LJ held in Procter & Gamble at p.679 that Section 3(1)(b) of the 1994 Act (equivalent of Section 11(1)(b) of our TMO) performs a residual or sweeping-up function, backing up paragraphs (c) and (d).  On the meaning of “devoid of any distinctive character” under our Section 11(1)(b), His Lordship referred to the dicta of Jacob J in British Sugar v James Robertson [1996] RPC 281 at 306,and again I can do no better than quoting the same,

“… I think the phrase requires consideration of the mark on its own, assuming no use.  Is it the sort of word (or other sign) which cannot do the job of distinguishing without first educating the public that it is a trade mark?  A meaningless word or a word inappropriate for the goods concerned (‘North Pole’ for bananas) can clearly do.  But a common laudatory word such as ‘Treat’ is, absent use and recognition as a trade mark in itself … devoid of any inherently distinctive character.”

As emphasized by Robert Walker LJ, the expression “inherently distinctive” was used here in a non-technical sense.

255.  That was said in respect of Section 11(1)(b).  In Bach & Bach Flower Remedies TM [2000] RPC 513, the EnglishCourt of Appeal considered the other limbs in that section.  In essence, the court held that in dealing with an objection under our Section 11, the first question to ask is the one posed under Section 11(a): whether the sign satisfies the test for a trade mark set out in the definition section, viz. Section 3(1).  Hence, it has to be a sign “capable of distinguishing goods or services from one undertaking from those of other undertakings”.

256.  It was further held that in deciding that first question, prior use can be taken into account in ascertaining the meaning of a word alleged to be used as a mark.  The court gave the following guidance in applying the test to a word mark,

(a)	the meaning of a word could depend on its usage and it was both permissible and necessary to determine the meaning of a word as used at the time of the application for registration;
(b)	it was impossible to reach a proper conclusion under the proviso to Section 11(2) or under Section 53(4) of TMO without first identifying what the meaning of the word was, and deciding whether (having acquired that meaning) the words were any longer capable (if they once were) of having a distinctive character or of acquiring a distinctive character by further use after that date --- whether before or after registration;
(c)	a word could acquire distinctive character through use, likewise it could acquire a descriptive character through use (in other words, the mark could lose its original distinctive character through use);
(d)	the usage in question was by those engaged in the relevant trade or activity and normally this would be the average consumer of the goods in question.  The task of the court was to inform itself, by evidence, of matters which a reasonably well informed, reasonably observant and circumspect consumer of the products would know, and then treating itself as competent to evaluate the effect which those matters would have on the mind of such a person with the knowledge, ask the question: would he say that the word or words identified, for him, the goods originating from a particular undertaking;
(e)	in the application of Section 11(2), it was not necessary for a mark to be universally recognized as distinctive.  What was necessary was that the word or mark “should distinguish the goods or services of one undertaking from those of other undertakings” to a significant proportion of the relevant class of persons;
(f)	if a significant proportion of the average consumers (who are reasonably well informed and reasonably observant and circumspect) would regard the words or word as generically descriptive; so that they would find it impossible to say that the words or word identify, for them, the goods as originating from a particular undertaking, the test under Section 3(1) cannot be satisfied;
(g)	use of a mark does not prove that the mark is distinctive. Increased use, of itself, does not do so either.  The use and increased use must be in a distinctive sense to have materiality.

257.  In Jeryl Lynn TM [1999] FSR 491, the court stressed that there is a distinction under Section 3(1) between sign indicating the origin of a product and sign telling the customer what a product is in the context of a trader who enjoys de facto monopoly on the product (see discussion at p.497).  The point was illustrated by Jacob J in British Sugar v James Robertson [1996] RPC 281 at 302,

“Now it is all too easy to be beguiled by [evidence of use].  There is an unspoken and illogical assumption that “use equals distinctiveness”.  The illogicality can be seen from an example: no matter how much use a manufacturer made of the word “Soap” as a purported trade mark for soap the word would not be distinctive of his goods.”

In Jeryl Lynn TM, at p.504, Laddie J made the same point,

“The word “banana” could not be a trade mark even if all sources of the fruit were controlled by a single company.” 

258.  Laddie J discussed the distinctive character of a specifically coined word or name for a new product in Jeryl Lynn TM, at Paragraphs 12 and 14.  By reason of the principle set out in preceding paragraph, His Lordship held at Para.12,

“So, coining a new word or name for a new product and then marketing that product extensively under the name does not mean that the name automatically functions as a trade mark indicating origin.  Words are man-made vehicles for conveying information.  When created they are malleable and capable of taking on one or more meaning.  There is nothing inherent in the string of letters which makes up a word which renders the word more or less suitable to take on a particular meaning.  It is the way the word (or similar words) has been used in the past or is proposed to be used in the future which moulds the information conveyed by it.”

259.  At Para.14, Laddie J identified several factors in considering whether a word that had been used for some time before the application to register has the capacity to distinguish,

(a)	What is the product to which the word has been applied?
(b)	Has the word been used exclusively in relation to that product?
(c)	Has it been used exclusively on the product by the proprietor as a designation of origin?
(d)	Has it come to be recognized as a designation of origin rather than an indication of type by the relevant public?

260.  Jeryl Lynn TM was decided on the equivalent of Section 11(1)(a).  There is a recent case on mark made up of invented words decided on the equivalent of Section 11(1)(c).  In Doublemint [2004] RPC 18, the European Court of Justice held at Paras.31 and 32 that the subsection protects a public interest in that descriptive signs or indications relating to characteristics of goods or services should be freely used by all.  No trader should secure the monopolistic use of such a sign by registration.  Therefore, it is not necessary that the relevant sign was actually being used in a way that was descriptive of the goods at the time of application for registration before registration is refused.  It is sufficient that such sign could be used for such purposes.  The court held that registration must be refused if at least one of the possible meanings of a sign or word designates a characteristic of the goods concerned.

261.  In the Opinion of the Advocate General Jacobs in Doublemint at p.338 to 339, the point was made about the distinction between terms which may be used to designate products or their characteristics and those which are merely suggestive of such characteristics.  The latter is registrable but not the former.  The Advocate General then alluded to the approach in making such distinction at p.338 to 339,

“It seems obvious that there is no clear-cut distinction between indications which designate a characteristic and those which merely allude suggestively to it.  There is no precise point at which a term suddenly switches from one category to the other, but rather a sliding scale between two extremes and an element of subjective judgment will often be required in order to determine to which extreme a term is closer.”

262.  The Advocate General then suggested at p.339 three points of view by which a mark could be assessed under the equivalent of Section 11(1)(c) in the light of existing practice and case law,

(a)	The way in which a term relates to a product or one of its characteristics;
(b)	The way in which a term is perceived: how immediately is the message conveyed?
(c)	The significance of the characteristics in relation to the product, in particular in the consumer’s mind.

He stressed that the list was neither final nor exhaustive.  He also pinpointed the importance of an overall assessment,

“Once a proposed trade mark has been assessed separately from each of the three proposed points of view, a final decision must be taken.  It is impossible to lay down absolute rules, but in general it would seem plausible that a mark should be refused registration under Art.7(1)(c) if, overall, it appears to be nearer the “non-registrable” end of the scale taking the three points of view into account or if, from even one point of view, it is particularly near that end of the scale.”

In the footnote to that passage, the Advocate General reminded that this approach must be tempered with common sense.

(See also the factors referred to in Paras.49 to 51 of the judgment of the European Court of Justice in Windsurfing Chiemsee v Huber [2000] Ch 523 at p.555.) 

263.  The relationship between the different limbs under Section 11(1) was explained in a clear and admirable manner by Chadwick LJ in Bach & Bach Flower Remedies TM at p.533 to 534 and Geoffrey Hobbs QC in AD 2000 TM [1997] RPC 168. In the latter case, at p.175, the Appointed Person said,

“For the purposes of [the English equivalent of Section 11(1)] a sign possesses a distinctive character if and when it is endowed by nature and/or nurture with the capacity to communicate the fact that the goods or services with reference to which it is used recurrently are those of one and the same undertaking.”

264.  These cases provided helpful guidance to the approach that a court could adopt in resolving questions relating to validity of a registration.  However, ultimately these involves question of facts, see Morritt LJ in Bach & Bach Flower Remedies TM [2000] RPC 513 at p.528 Para.41; Laddie J in Jeryl Lynn TM [1999] FSR 491 at p.498 Paras.13 and 14. To an extent, it could at the end be a matter of impression, see Robert Walker LJ in Procter & Gamble at p.681.

265.  So much for the law on the topic.  In the present context, I have to examine the following questions in deciding on the validity of the registration for “萌動激活”,

(a)	what was the meaning of the expression at the time of application for registration, viz. 24 December 2002;
(b)	under Section 11(1)(a) TMO, I need to ask if the sign made up of those words satisfied the definition of trade mark under Section 3(1) TMO, viz. whether those words were capable of distinguishing the goods of the 1st Plaintiff from those of the others;
(c)	under Section 11(1)(b) TMO, I need to ask if the sign, absent of use, was devoid of any distinctive character;
(d)	under Section 11(1)(c) TMO, I need to ask if the sign consisted exclusively of signs which may serve to designate the characteristics of the goods;
(e)	if I conclude that it is a case falling within Section 11(1)(b) or (c), I need to consider the rider under Section 11(2), viz. whether the words have in fact acquired a distinctive character as a result of the use made of it prior to the application for registration.

266.  Parties made no reference to Section 53(4) TMO in their closing submissions.  Due to the paucity of evidence on the use of the words “萌動激活” after registration, in the absence of pleadings and submissions on the point, I take it that the 1^st Plaintiff accepts it could not rely on that sub-section to resist a declaration of invalidity. 

267.  On the meaning of the expression “萌動激活”, the Defendants produced evidence as to the dictionary meaning of the two Chinese words that made up this expression: “萌動” and “激活”.  Broadly speaking, they mean “germination” and “activation” respectively.  Hence, in the English version of the packaging and inserts contained in the box, the expression was translated as “germination activation”.  It was not an expression commonly used in Hong Kong prior to the sale of the Plaintiffs’ product here.

268.  The application for registration was made in December 2002.  By then the expression had been used in respect of the Plaintiffs’ products.  As stated in the cases mentioned above, such usage might have a bearing on the meaning of the expression.  In this connection, the Defendants made the following submission.  Based on the use of the expression in the advertising material and packaging box up to 24 December 2002, an average consumer (who were reasonably well informed and reasonably observant and circumspect) of lingzhi products would understand the expression as designating or identifying the process whereby the pollens are “activated” through or by means of “germination”.  It was further submitted that even the Plaintiffs themselves had used the term in a descriptive sense in all their packaging boxes (some of which were available in the Hong Kong market), commercial and academic literature to refer to a theory or the technology of which they claim to be the author or inventor.   

269.  The Defendants cited the following dicta of Laddie J in Jeryl Lynn TM [1999] FSR 491, Para.21 at p.501-2,

“Although it is not determinative, a factor which can be taken into account in deciding whether or not a sign denotes trade origin other than type is the action taken by the proprietor to teach the public that that is what the sign is meant to convey... If he does not suggest that the sign is a designation of origin, why should the customer think it is?”

270.  On the other hand, the Plaintiffs argued that the evidence shows that the expression had been used as a trade mark.  They relied on the fact that the Plaintiffs were the first one to use the term "萌動激活" as a whole to refer to their products.  Liu gave evidence that the term "萌動激活" had all along been used by Plaintiffs as their trademark and people understood "萌動激活" as referring to 學者靈芝.  It was contended that if "萌動激活" had not been used as a trade mark, the Defendants would not have insisted on putting the English version of the term, i.e. "Germination Activation" on the packaging after being sued for trademark infringement.

271.  With respect, I find most of the arguments of the Plaintiffs in this respect to be self-serving and circuitous. Liu’s evidence, apart from the problems as to his overall credibility, is bare assertion on his part and cannot stand in the light of the overwhelming evidence as to the actual use of the expression in packaging and advertising material.  For the same reason, I attach little weight to the fact that the Defendants put “Germination Activation” in their packages after infringement action was launched by the Plaintiffs.  The fact that the Plaintiffs were the first persons to use the expression in relation to lingzhi products is neither here nor there.  As pointed out by Jacob J and Laddie J, evidence of use cannot be equated with evidence of distinctiveness.     

272.  In my judgment, the evidence clearly shows that the expression “萌動激活” had been used in the packaging and advertising material (both produced by the Plaintiffs and the Defendants) as description of the technological process which enhanced the extraction of bio-active substance from lingzhi spore.  A typical example is the insert in ENHANOID at Bundle V 116.  It contained an explanation of the process of  “萌動激活”.  Another example is the reference to this expression at the side panel of the package box LX-22 for ENHANVOL.  It introduced the product as follows,

“《盈康活》是透過世界首創的《萌動激活》的生物工程科學技術 … 提取的超高活性的全破璧純靈芝孢子精華 …”

An English translation to the same effect can be found in the side panel of the package box for ENHAHOID,

“ENHANOID is the essence of Ganoderma lucidum spores.  The scientists of the Food Engineering Research Centre of the State Ministry of Education at Zhongshan University have developed the proprietary bio-technology, “Germination Activation” [the English rendering of the expression “萌動激活”] on ganoderma spores, which leads to a large quantity of highly bio-active substances producing within the spores….”

In this connection, I find the observations of Laddie J in Jeryl Lynn TM [1999] FSR 491, Para.21 (cited above) particularly apposite.

273.  The brand names of the products were clearly ENHANVOL and ENHANOID.  On the other hand, “萌動激活” was used in these materials to refer to one of the process by which the goods were produced.  In my view, the expression “萌動激活” did not serve as a guarantee to the consumer or end user the identity of the product's origin.  I see no basis for suggesting that it had more significance in distinguishing the Plaintiffs’ product from other similar products as compared with the other descriptive expressions like “全破璧” or  “純靈芝孢子精華”. 

274.  I put myself in the shoe of an average Hong Kong consumer and ask the question what did the expression  “萌動激活” indicate as at 24 December 2002.  As I said, it was not an expression commonly used in Hong Kong although one might have some vague idea that literally it had something to do with germination and activation.  Considering the actual use of the expression in connection with lingzhi products prior to 24 December 2002, I find that the average consumer would understand the expression to mean the technological process by which highly bio-active substances were extracted from lingzhi spore.

275.  Based on such finding as to the meaning of the expression as at 24 December 2002, the next question is whether those words were capable of distinguishing the goods of the 1^st Plaintiff from those of the others.  In my judgment, the expression “萌動激活” was initially capable of distinguishing the goods of a trader when first used in Hong Kong due to its novelty.  However, by 24 December 2002, due to its continuous use in the manner mentioned above, in the context of lingzhi products, to a significant proportion of the average consumers, it came to be known as a generic description of a technological process by which lingzhi spore products were manufactured.  As such, they would find it impossible to say that the expression identify for them the goods as originating from a particular undertaking.  The sign therefore came within the same category as Jeryl Lynn and Bach Flower Remedies and was not registrable by reason of Section 11(1)(a).  

276.  Given that conclusion, there is no need to consider the objection under the other limbs of Section 11(1).  However, for the sake of completeness, I would mention that even if the expression were somehow capable of distinguishing the goods of the 1^st Plaintiff, I would find the objection under Section 11(1)(b) and (c) established by reason of the descriptive nature of the expression.  The evidence of actual use of the expression does not indicate that it had acquired a distinctive character.  Hence, Section 11(2) could not be relied upon to resist the challenge from the Defendants.

277.  The 1^st Plaintiff’s claim based on infringement of trade mark therefore fails and the Defendants succeeds in their counterclaim for a declaration under Section 53(1) of TMO.

Malicious falsehood

278.  Broadly speaking, a plaintiff has to prove three elements before liability for malicious falsehood is established,

(a)	falsehood;
(b)	malice;
(c)	damages.

See Kaye v Robertson [1991] FSR 62; Hong Kong Wing On Travel Service v Hong Thai Citizens Travel Services [2001] 2 HKLRD 481.

279.  On the element of falsehood, the sting of the GMP advertisements as pleaded in Paragraph 43 of the Consolidated Re-amended Statement of Claim was the statements to the effect that,

(a)	the capsules and the hologram label of the genuine ENHANVOL would bear the mark ENHANVOL;
(b)	the genuine ENHANVOL has not been sold in mainland China.

280.  It is not disputed that statements to such effect were made in the GMP advertisements.  Having read those advertisements, I think the alleged sting is a fair summary of certain parts of the advertisements by reference to the following features therein,

(a)	in the middle of the advertisement, there are two enlarged photos highlighting the words ENHANVOL printed on the capsules and the hologram label;
(b)	the advertisement urged consumers to check these by saying at the left hand side in the middle part, “購買時,請驗明: 1. 膠囊上印有ENHANVOL 字樣; 2. 驗明鐳射標籤,提防假冒…”;
(c)	the advertisement further stated on the right hand side of the two large enlarged photos, “驗明正貨,提防假冒 … 請認明膠囊上均印有ENHANVOL 字樣及外盒上均貼有鐳射標籤始為正貨。”;
(d)	in the same paragraph, the advertisement continued to say, “此外，本産品並未在中國大陸境内銷售。”

281.  The background to that advertisement was that when the 1^st Defendant procured supply of lingzhi spore powder from another source, it slightly modified the package in terms of the capsules and hologram.  When it ordered the same from the Plaintiffs, the capsules and the hologram bore the marks “GP”, “天維”, “天維健康產品”.  When it shifted to new supplier(s), the mark on the capsules and hologram changed to ENHANVOL.  To put it neutrally, such a change on the part of the 1^st Defendant, in my judgment, must have aimed at distinguishing the goods supplied by the 1^st Plaintiff from those supplied by the new supplier(s).

282.  Further, the 1^st Plaintiff had been selling ENHANVOL in mainland China although the Chinese brand name used was “學者灵芝” instead of  “盈康活” (see “LX-20”).  Tong admitted that the Defendants were aware of that before the GMP advertisements were placed.

283.  The combined effect of the statements was that the Plaintiffs’ products could be viewed as counterfeit by virtue of having different capsules or holograms and having been sold in Mainland China.

284.  When she gave evidence, Tong tried to explain that the GMP advertisement were not targeted against the Plaintiffs.  In her examination in chief, she testified that the 1^st Defendant was taking the opportunity of changing certain aspects of the packaging to place the advertisements to remind customers to watch out for counterfeit products as they had learnt about such products in mid 2002.  Upon cross-examination, she accepted that they had taken into account of the Plaintiffs but she still maintained that the 1^st Defendant was also dealing with counterfeits.  She denied that they targeted against the Plaintiffs.  She said the advertisements were placed to address the concern of the retailers about the change in packaging.

285.  She further testified that at that time, she worried that some people might purchase the old version of ENHANVOL at a lower price in Hong Kong and sell the same in mainland China for resale back to Hong Kong.  Tong was trying to account for the statement that the genuine products had not been sold in mainland China.  But that seems to me to be a contrived and tenuous explanation.  I had difficulties in seeing why someone intending to sell the old products had to be so convoluted.  On being questioned further, Tong accepted that the 1^st Defendant should not have any worry about such sale, if any.

286.  I find Tong’s explanation about the purpose of GMP advertisement disingenuous and I do not believe her.  I am driven by the objective circumstances surrounding the advertisements to conclude that they were specifically designed to guard against competition from the Plaintiffs using the name ENHANVOL.  First of all, the timing of the advertisements is telling.  It was shortly after the break-up between the Plaintiffs and the Defendants and more importantly after the Plaintiffs had taken serious steps to object the Defendants’ use of the names ENHANVOL in Hong Kong, including the letter dated 5 October 2002 and the declarations published in newspaper on 4 December 2002.  The Plaintiffs had also recently appointed Care & Health Limited as sole distributor in Hong Kong on 1 December 2002.  I do not think it coincidence that the 1^st Defendant published the GMP advertisements around the same time. Judging from what happened during that part of December 2002, the parties were in substance undertaking media campaign against each other.

287.  Secondly, the GMP advertisement themselves made it abundantly clear that the 1^st Defendant wished to convey a clear message to the public that FERC ceased to have any role in relation to ENHANVOL.  Bearing in mind the two changes in packaging highlighted by the advertisements were the distinctions between the old version supplied by the 1^st Plaintiff and the new version sold by the 1^st Defendant, I cannot help inferring that the imputation as to counterfeit was intended by the 1^st Defendant to be cast against any future sale of ENHANVOL by the 1^st Plaintiff or its distributor.  It is noteworthy that even on Tong’s evidence, the 1^st Defendant did not obtain actual proof of any other counterfeit products at that time and she therefore had no way to tell whether the capsule and hologram were distinguishing features from such other counterfeit.      

288.  Thirdly, if the 1^st Defendant merely sought to inform the consumers about its change of packaging, the objective could be achieved by stating that the capsule and hologram had been changed as from a particular date instead of urging the consumers to watch out for counterfeit.  This also answers the submission of Mr Chan that the advertisements were only about the 1^st Defendant’s own goods as opposed to casting imputation on the goods of the 1^st Plaintiff.

289.  Fourthly, there is no satisfactory explanation about the statement to the effect that genuine ENHANVOL products had not been sold in mainland China.  I mentioned about Tong’s attempt in that regard and I have rejected her evidence.  In my view, that was clearly intended to be a reference to the goods of the Plaintiffs’.  

290.  I therefore find that the GMP advertisements implicated that if the Plaintiffs were to sell ENHANVOL, they would be counterfeit.

291.  In the light of the Plaintiffs’ connection with ENHANVOL in the past and my conclusion as to ownership of the Hong Kong goodwill pertaining to ENHANVOL, the implications were false.

292.  I now move on to deal with malice.  As summarized by Chu J in Hong Kong Wing On Travel Service v Hong Thai Citizens Travel Services [2001] 2 HKLRD 481 at p.491, there are two alternative limbs by which malice can be proved.  A defendant would be taken as acting maliciously if,

(a)	he knew when he published the words that they were false or he was reckless as to whether they were true of not; or
(b)	he did so for the purpose not of advancing his own interest but of injuring the plaintiff.

It is important to note that dominant motive to injure is required for the second limb but not for the first limb (see Wilts United Diaries v Thomas Robinson & Sons [1957] RPC 220 at 237; Hong Kong Wing On Travel Service v Hong Thai Citizens Travel Services [2001] 2 HKLRD 481 at p.407D and Oriental Machinery v Choi Kin On [2003] 3 HKC 398 at p.416 Para.48).

293.  In the present context, Tong testified that at the time when the GMP advertisements were placed, she believed the 1^st Defendant to be the owner of the goodwill pertaining to the names ENHANVOL and 盈康活.  In other words, she believed the 1^st Defendant was the only person who was entitled to use these names in Hong Kong and the use of the names on other products would tantamount to counterfeit.  This clearly has a bearing on the question of malice under the first limb.

294.  The burden of proof is on the Plaintiffs to establish malice.  If they are relying on the first limb, they bear the burden of proving knowledge or recklessness on the part of the 1^st Defendant.  Have they succeeded in the light of the evidence of Tong?  In my judgment, on the totality of the evidence before me, the 1^st Defendant had the requisite knowledge of falsity in publishing the statements.  Firstly, under the Distributorship Agreements, the 1^st Defendant was prohibited from using these names within three years after the end of the agreements.  Although the 1^st Defendant disputed the scope of the agreements, I do not think it is a bona fide dispute in view of what I said above in the discussion on breach of those agreements, particularly my inference that the parties had been acting on the basis that ENHANVOL and盈康活 were part of the 《天維牌》包裝.  The 2^nd Defendant did not give evidence and therefore there is no explanation as to how he could honestly reckon in December 2002 that the 1^st Defendant had the right to use those names in Hong Kong and to call the Plaintiffs’ goods counterfeit despite the terms of the agreements.

295.  Secondly, the 1^st Defendant had been warned by the letter dated 5 October 2002 that there would be objections from the Plaintiffs as to the 1^st Defendant continued use of the names ENHANVOL and 盈康活.  At the very least, the 1^st Defendant knew the Plaintiffs claimed to have the right to use the names.

296.  Thirdly, there was simply no justification for stating that ENHANVOL had never been sold in mainland China.  Even on Tong’s own evidence, she knew that the 1^st Plaintiff sold ENHANVOL in mainland China.  The implications that those goods sold by the 1^st Plaintiff were counterfeit had no basis whatsoever.

297.  Fourthly, in view of my misgivings about Tong’s evidence mentioned in other parts of this judgment, I cannot accept her testimony about her belief as to ownership of goodwill in December 2002.  In any event, she was not the only director of the 1^st Defendant.  The 2^nd Defendant was also a director and he did not give evidence as to his belief in this regard.  I shall discuss later his role in the 1^st Defendant in dealing with his personal liability.      

298.  It is therefore not necessary to consider malice under the second limb.  I note that in Guangdong Foodstuffs Import & Export (Group) Corp v. Tung Fook Wine (1982) Co. Ltd. [1999] 3 HKLRD 545 at p.644I, Cheung J (as he then was) found dominant purpose established in a situation similar to the present one.  His Lordship said,

“It is clear that Shiwan Brewery had overstepped the line of simply protecting its own interest.  The announcement that Zu Miao Brand wines were the genuine articles and the reference to prevention of imitation is clearly for the purpose of harming GDF in respect of wine produced under the Pearl River Bridge trade mark.”

The same can easily be said with regard to the GMP advertisements given my conclusion that they were targeted against the Plaintiffs.

299.  I therefore hold that the element of malice was established.

300.  Turning to damages, the Plaintiffs relied on section 24(1)(a) of the Defamation Ordinance.  The GMP advertisements were in writing and the question is whether they were calculated to cause pecuniary damages in the sense that it would be a likely result.  If the answer is yes, there is no need to prove special damages.

301.  Given the nature of the sting in the GMP advertisements, I can readily see that they were likely to cause pecuniary damages to the Plaintiffs in the normal course of trade if the Plaintiffs planned to sell its products under the names ENHANVOL or 盈康活 in Hong Kong.

302.  However, the situation is complicated by the fact that for practical reasons outlined in Paragraph 118 of first affirmation of Liu filed in HCA 4651 of 2002 (affirmed on 23 August 2003), the Plaintiffs had changed the packaging of products sold in Hong Kong to LX-70.  The new packaging used the names Lingzhimaster and 學者灵芝.  It was said by Liu,

“Because the Defendants are and having been using a packaging or get-up that is identical or substantially identical to that of the Plaintiffs to deceive and/or mislead the public into thinking that the Defendants’ said lingzhi products were the genuine products, the Plaintiffs have recently changed the packaging of their said lingzhi products at the request of their new distributor, C & H, so as to distinguish the Plaintiffs’ said lingzhi products from the Defendants’ counterfeit products.”

303.  I do not think this complication could change the result.  To start with, the change of packaging on the part of the Plaintiffs did not take place until sometime close to August 2003.  Moreover, even with the change of packaging, the Plaintiffs suffered pecuniary damages in terms of being deprived from tapping the goodwill associated with the names ENHANVOL or 盈康活 whereas the 1^st Defendant continued to do so.  It has to be remembered that the 1^st Defendant and the Plaintiffs (through its new distributor) are now competitors in the market.  The 1^st Defendant had thereby gained an unjustifiable head start in the competition.

304.  I therefore hold that damage is established.  The Plaintiffs therefore succeed in the claim for malicious falsehood.  Although Mr Chan submitted that there is no evidence that the wrong would be repeated once a determination is made by this court on the rights of the parties, no undertaking has been offered.  I agree with Mr Liao that an injunction should be granted in such circumstances.  There shall also be inquiry as to damages.

First Defendant’s registration of ENHANVOL as a trademark

305.  Given my conclusion on ownership of the goodwill, the registration should be rectified to reflect the fact that the Plaintiffs are the owner of the mark.  I will make an order accordingly.

Double actionability

306.  In his final submissions, Mr Liao indicated in Para. 11.3 that if the Plaintiffs are successful in the passing off claims, it would not be necessary for them to rely on this cause of action.

307.  There are conflicting authorities in England as to whether the rule of double actionability is applicable in respect of intellectual property rights, see Tyburn Productions Ltd v Conan Doyle [1991] Ch 75 and Pearce v Ove Arup Partnership Ltd [2000] Ch 403.  Counsel have not addressed me on these cases.

308.  In the circumstances, I prefer not to express a view on this cause of action since it does not add much to the Plaintiffs’ claims.  I would however say that in view of my reservations on her credibility, I am not prepared to accept Tong’s evidence that all the packaging boxes of the 1^st Defendant were printed in Hong Kong and there was repackaging after the goods wee transported to Hong Kong in the absence of corroborating evidence. 

Liabilities of the 2^nd and 3^rd Defendants

309.  Notwithstanding the case pleaded, by the time of closing submissions, the case against the 3^rd Defendant is confined to the website.  There is no evidence as to the involvement of the 3^rd Defendant in the other tortious activities of the 1^st Defendant.  I have dealt with the claim in respect of the website.  I shall therefore dismiss the claim against the 3^rd Defendant.

310.  As regards the 2^nd Defendant, I have examined the law on the personal liability of a director in respect of the torts committed by his company in Kabushiki Kaisha Yakult Honsha v Yakudo Group Holdings Ltd [2004] 2 HKLRD 587.  Counsel are content with my statement of law therein.  In essence, my conclusion is that the law in Hong Kong is the same as those stated by Chadwick LJ in MCA Records Inc v Charly Records Ltd (No 5) [2003] 1 BCLC 93.  Those principles have been applied in England and a recent illustration in the context of intellectual properties claims is Koninklijke Philips Electronics NV v Princo Digital Disc GmbH [2004] 2 BCLC 50. 

311.  For ease of reference, I respectfully set out the summary of law by Chadwick LJ below,

“[47] In Mentmore Manufacturing Co Ltd v National Merchandising Manufacturing Co Inc (1978) 89 DLR (3d) 195 the Federal Court of Appeal of Canada described the question whether, and if so in what circumstances, a director should be liable with the company as a joint tortfeasor as "a very difficult question of policy". Le Dain J, delivering the judgment of the court, said this (at 202): "On the one hand, there is the principle that an incorporated company is separate and distinct in law from its shareholders, directors and officers, and it is in the interests of the commercial purposes served by the incorporated enterprise that they should as a general rule enjoy the benefit of limited liability afforded by incorporation.  On the other hand, there is the principle that everyone should be answerable for his tortious acts." Plainly, it is necessary, in the individual case, to achieve a balance between those two considerations.  Equally plainly, the judge appreciated that.  As he put it in his judgment (at para [15]): "inquiries into the matter will or may involve an 'elusive question' turning on the particular facts of the case, and whose resolution may in turn involve the making of a policy decision as to the side of the line on which the case ought to fall."

[48] It is because there is a balance to be struck on the facts of each case that it is dangerous for an appellate court to appear to attempt a formulation of the principles which may come to be regarded as prescriptive.  But I think it can be said with some confidence that the following propositions are supported by the authorities to which I have referred.

[49] First, a director will not be treated as liable with the company as a joint tortfeasor if he does no more than carry out his constitutional role in the governance of the company - that is to say, by voting at board meetings.  That, I think, is what policy requires if a proper recognition is to be given to the identity of the company as a separate legal person.  Nor, as it seems to me, will it be right to hold a controlling shareholder liable as a joint tortfeasor if he does no more than exercise his power of control through the constitutional organs of the company - for example by voting at general meetings and by exercising the powers to appoint directors.  Aldous LJ suggested in Standard Chartered Bank v Pakistan National Shipping Corp (No 2) [2000] 1 Lloyd's Rep 218 at 235 - in a passage to which I have referred - that there are good reasons to conclude that the carrying out of the duties of a director would never be sufficient to make a director liable.  For my part, I would hesitate to use the word "never" in this field; but I would accept that, if all that a director is doing is carrying out the duties entrusted to him as such by the company under its constitution, the circumstances in which it would be right to hold him liable as a joint tortfeasor with the company would be rare indeed.  That is not to say, of course, that he might not be liable for his own separate tort, as Aldous LJ recognised at paras [16] and [17] of his judgment in the Pakistan National Shipping case.

[50] Second, there is no reason why a person who happens to be a director or controlling shareholder of a company should not be liable with the company as a joint tortfeasor if he is not exercising control through the constitutional organs of the company and the circumstances are such that he would be so liable if he were not a director or controlling shareholder.  In other words, if, in relation to the wrongful acts which are the subject of complaint, the liability of the individual as a joint tortfeasor with the company arises from his participation or involvement in ways which go beyond the exercise of constitutional control, then there is no reason why the individual should escape liability because he could have procured those same acts through the exercise of constitutional control.  As I have said, it seems to me that this is the point made by Aldous J (as he then was) in PLG Research Ltd v Ardon International Ltd [1993] FSR 197.

[51] Third, the question whether the individual is liable with the company as a joint tortfeasor - at least in the field of intellectual property - is to be determined under principles identified in CBS Songs Ltd v Amstrad Consumer Electronics plc [1988] 2 All ER 484, [1988] AC 1013 and Unilever plc v Gillette (UK) Ltd [1989] RPC 583.  In particular, liability as a joint tortfeasor may arise where, in the words of Lord Templeman in CBS Songs v Amstrad [1988] 2 All ER 484 at 496, [1988] AC 1013 at 1058 to which I have already referred, the individual "intends and procures and shares a common design that the infringement takes place".

[52] Fourth, whether or not there is a separate tort of procuring an infringement of a statutory right, actionable at common law, an individual who does "intend, procure and share a common design" that the infringement should take place may be liable as a joint tortfeasor.  As Mustill LJ pointed out in Unilever v Gillette, procurement may lead to a common design and so give rise to liability under both heads.

[53] In the light of the authorities which I have reviewed I am satisfied that no criticism can be made of the test which the judge applied.  But, in my view, the test can, perhaps, be expressed more accurately in these terms: in order to hold Mr Young liable as a joint tortfeasor for acts of copying, and of issuing to the public, in respect of which CRL was the primary infringer and in circumstances in which he was not himself a person who committed or participated directly in those acts, it was necessary and sufficient to find that he procured or induced those acts to be done by CRL or that, in some other way, he and CRL joined together in concerted action to secure that those acts were done.”

312.  The liability of the 2^nd Defendant has to be determined by reference to his role in each of the tortious acts of the 1^st Defendant.  Although the 2^nd Defendant chose not to give evidence, there is evidence before me as to his role in the operation of the 1^st Defendant generally and also specifically in relation to the media campaign in December 2002.  Further, the 2^nd Defendant had filed substantial witness statements and affirmations and he was present at least during the initial part of the trial.  His decision not to give evidence was only made known on 17 November 2004 and obviously took Mr Liao by surprise.  I note that in the cross-examination of Tong, Mr Liao had proceeded on the basis he could have the chance to question the 2^nd Defendant at a later stage about the organization and the affairs of the 1^st Defendant.  Given these circumstances, the court can legitimately draw inference against the 2^nd Defendant that even if he were to give evidence, he could not displace certain conclusions that the court can derive from evidence already placed before it (see Ip Man Shan Henry v Ching Hing Construction Co Ltd (No 2) [2003] 1 HKC 256 at Paras.155-6; upheld on appeal in CACV 183 of 2003, 4 Feb 2005 at Para.30).    

313.  As regards the passing off claims, the relevant acts were the sale and promotion of lingzhi products not manufactured by the Plaintiffs under the names ENHANVOL, 盈康活, ENHANOID and 盈康孢子油.  Even on Tong’s evidence, the 2^nd Defendant played a key part in engaging the factories in mainland China.  He also took part in deciding to continue to use these names after breaking up with the Plaintiffs.  Further, the 2^nd Defendant’s personal involvement in the promotion of the products supplied by the new factories is evidenced by his participation in the press conference of 12 December 2002.  Not only did the 2^nd Defendant personally took part in that conference as chairman of the 1^st Defendant, it is also a reasonable inference that as the only person in 1^st Defendant who had some medical background, the 2^nd Defendant marshalled support from a number of medical experts from the mainland and procured their attendance at the press conference.  On the evidence available, I have no difficulty in concluding that the 2^nd Defendant is personally liable as a joint tortfeasor in respect of the promotion of lingzhi products supplied by other suppliers under the names ENHANVOL, 盈康活, ENHANOID and 盈康孢子油 at that press conference.        

314.  The Plaintiffs’ passing off claims of course go beyond what happened at the press conference of 12 December 2002.  There were other promotion activities of the 1^st Defendant which the 2^nd Defendant might or might not participate personally.  Also there is no evidence to show that the 2^nd Defendant directly involved himself in the sales activities of the 1^st Defendant although he was definitely involved in procuring supply from factories in the mainland.  On promotion of the products, it is the defence’s own evidence that some consumers identified the products sold by the 1^st Defendant as products of “新城鍾醫生”.  In the absence of any explanation from the 2^nd Defendant, I infer that he must have been quite involved in the advertisement and promotion of the 1^st Defendant’s products to generate such a response from the consumers.  The 2^nd Defendant also took part in deciding the change from “萌動激活” to “Germination activation” in the packaging of the 1^st Defendant’s products.

315.  I agree with Mr Liao that Tong obviously tried to downplay the involvement of the 2^nd Defendant in her evidence.  Tong was cross-examined by Mr Liao about the applications for registration of certain marks associated with ENHANVOL in September 2002 by a person called Sun Kin trading as Yue Kok Company.  Sun Kin is a sister of the sister-in-law of the 2^nd Defendant.  Tong said Sun did so without any prior consultation or consent from the 1^st and 2^nd Defendant or herself.  I find this incredible.  Those applications were clearly conceived as some sort of pre-emptive strikes on the part of the Defendants in their anticipated battle with the Plaintiffs.  One of the applications was in respect of ENHANOID and 盈康孢子油.  Neither Sun Kin nor the sister-in-law had any interest in the 1^st Defendant and it is reasonable to infer that the 2^nd Defendant must have been involved in procuring such applications. 

316.  Another instance where relatives of the 2^nd Defendant was involved regarding the activities of the 1^st Defendant was the registration of certain trademarks used by the 1^st Defendant under the name of a company called ENHANVOL International Limited.  A brother of the 2^nd Defendant was the director of that company whilst the 2^nd Defendant and his wife were not.  When Mr Liao cross-examined Tong about these affairs, she said she was not clear as they were handled by the 2^nd Defendant.

317.  At all material times, the 2^nd Defendant was aware of the objection from the Plaintiffs in respect of the use of the names ENHANVOL, 盈康活, ENHANOID and 盈康孢子油 by the Defendants after the termination of the distributorship.  The letter of 5 October 2002 from the 1^st Plaintiff to the 2^nd Defendant could not have escaped his attention.  Up to December 2002, the 2^nd Defendant directly dealt with Liu in finalizing the accounts between the parties as evidenced by P-4(A) to (D).  The Plaintiffs issued the writ in HCA No.4651 of 2002 on 12 December 2002 and the 2^nd Defendant was party to the action.  He pursued litigation with the Plaintiffs in mainland China and one of the actions was an application to expunge the 1^st Plaintiff’s registration of 盈康活 in the mainland (see P-6).  He lobbied the staff of the 1^st Plaintiff in early January 2003 as evidenced by the telephone record produced by Yuen Kin Ping.  It is plain to me that the 2^nd Defendant was much more than a mere inactive player in the affairs of the 1^st Defendant who only interested in research as Tong would want this court to believe.

318.  The right to use the names is one of the major disputes between the parties after the breaking down of their relationship.  The media campaign in early December 2002 is clearly one of the early skirmishes in the battle.  As illustrated by his part in the press conference, the 2^nd Defendant was very much engaged in the manoeuvre of the 1^st Defendant.  Although he might not be the actual person who instructed the salesperson or the staff in the warehouse, he certainly played an important part in the crucial decision that the 1^st Defendant would continue to use these names on products not supplied by the Plaintiffs.

319.  In my judgment, on the available evidence, the 2^nd Defendant was acting more than exercising his constitutional function as a director of the 1^st Defendant.  It was a conscious decision on his part to procure supply from other factories and apply the names ENHANVOL, 盈康活, ENHANOID and 盈康孢子油to these products with his eyes open as to the objections from the Plaintiffs.  He can properly be regarded as having procured the 1^st Defendant to promote and sell products not supplied by the Plaintiffs under the names ENHANVOL, 盈康活, ENHANOID and 盈康孢子油 and therefore liable for those acts as a joint tortfeasor.

320.  In respect of malicious falsehood, the relevant acts are the publication of the GMP advertisements.  Those advertisements were part of the media campaign.  For reasons given above, I find on the balance of probabilities that the 2^nd Defendant was very much involved in the battle against the Plaintiffs in December 2002.  The change of the marks printed on the capsules must have been a strategy approved by him as he dealt with the factories on behalf of the 1^st Defendant.  The GMP advertisements highlighted this and the improved standard of the factories involved in production and their GMP certification.  It also referred to co-operation with Shanghai No.2 Medical University.  These were again matters most likely to be handled by the 2^nd Defendant.  I do not believe that the 2^nd Defendant played no part in commissioning the GMP advertisements.  It was again one of the skirmishes and I infer that the 2^nd Defendant had personally endorsed the same to be published.  He is also liable as a joint tortfeasor by procuring the same.

321.  In respect of the infringement of the copyright of P-11, on the evidence available, it was a relatively minor matter which could be part of the day-to-day operation of the 1^st Defendant.  I would not infer any direct involvement or procurement by the 2^nd Defendant in this instance.  Hence, he is not liable for copyright infringement.

Results

322.  To sum up, the Plaintiffs succeed against the 1^st and 2^nd Defendants in the passing off claim regarding the names ENHANVOL, 盈康活, ENHANOID and 盈康孢子油 and the claim for malicious falsehood.  The Plaintiffs succeed against the 1^st Defendant in respect of the breach of Agreement A but the remedy is confined to damages.  The 2^nd Plaintiff also succeeds against the 1^st Defendant in respect of the copyright claim for infringement of the copyright of P-11.  There would also be an order for the rectification of the trademark registration in respect of ENHANVOL in favour of the Plaintiffs as indicated.

323.  For reasons given, this court makes no order regarding the double actionability claim.

324.  Save as above, the Plaintiffs’ claims are dismissed.

325.  The Defendants’ counterclaim regarding the trademark registration for 萌動激活 also succeed and there shall be a declaration of invalidity.

326.  Counsel should be able to settle a draft order in the light of this judgment.  I direct an agreed draft order be submitted to this court for approval within 14 days.  If parties cannot reach agreement, parties should submit their respective draft within 14 days together with written submissions.  Unless parties ask for a hearing on the matter, I will make the order within 7 days thereafter after considering the parties’ written submissions and drafts.

327.  As regards costs, the Plaintiffs succeed in some causes of action but fail in others.  The Defendants succeed in the counterclaim.  There are unusual features in the case.  It is fair to say a lot of evidence led in the trial was about the copyright claims.  The late disclosure of the defence case and late production of evidence on the part of the Defendants must have an impact on costs.  Likewise I should take into account that on my findings, the Plaintiffs have tried to mislead this court not only in the testimony of their witnesses but also in the documents produced.  If the case were confined to the passing off, registered trademarks and malicious falsehood claims, it might have been completed in last summer within the time originally allocated.  But that is of course said with the benefit of hindsight.  Another unusual features in the present case is the number of interlocutory applications that I have to deal with at the trial.  I have made cost orders in respect of some applications but not all.  Taking all the circumstances into account, I will make a costs order nisi that the 1^st and 2^nd Defendants shall pay ¼ of the Plaintiffs’ costs with certificate for three counsel.

328.  As between the 3^rd Defendant and the Plaintiffs, I will make an order nisi that there be no order as to costs.  The 3^rd Defendant has been represented by the same team of lawyers as the 1^st and 2^nd Defendants and not much additional costs should have been incurred as a result of the claim against the 3^rd Defendant. 

329.  Last but not the least, I wish to thank counsel for their assistance in this complicated piece of litigation.

HCA 4651/2002
HCA 2802/2003
HCMP 74/2004

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 4651 OF 2002, 2802 OF 2003 and

MISCELLANEOUS PROCEEDINGS NO. 74 OF 2004

____________

____________

(The Consolidated Action)

___________

R U L I N G

___________

1.  In my Reasons for Ruling of 23 September 2004, I invited submissions from parties as to whether any evidence elicited from DW2 in the afternoon of 10 September 2004 should be expunged from the record as being inconsistent with my ruling that morning.

2.  On 4 October 2004, the Plaintiffs filed submissions asking this court to expunge the following evidence,

(a)    evidence at p.41 of the unofficial transcript dated 9 September 2004;

(b)    evidence at p.38 to 39 of the unofficial transcript dated 10 September 2004.

3.  Submissions were filed on behalf of the Defendants on 4 October 2004. Further submissions by both parties were filed on 7 October 2004.

4.  Mr Ling submitted that my ruling did not debar the Defendants from leading evidence on how repackaging took place although he acknowledged that my ruling precluded them from leading evidence challenging the authenticity of LX-28. With respect, as far as I can discern from the submissions of Ms Tam before I made my ruling on 10 September 2004, the only relevance of the evidence as to how repackaging took place is to challenge LX-28 as a true representation of the product sold in the market by the Defendants. Plainly, it constitutes additional evidence challenging LX-28 which, for reasons given by me on 23 September 2004, should not be led.

5.  Mr Ling argued that the objection came too late because some questions had been asked and answered. I have no hesitation in rejecting that submission. As I said in Paragraph 27 of my Reasons for Ruling, since I made my rulings for reasons to be given later, parties might not be as well aware of the implications of my ruling as if reasons had been given at the same time. That was why I said I believed Ms Tam did not tread upon the forbidden territory deliberately. Once the effect of the series of questions became apparent, Mr Liao and Mr Yan raised objection. I do not consider the objections to have been raised too late. This court has inherent jurisdiction to expunge evidence that should not have been admitted. To hold otherwise would have serious undesirable effect on the conduct of trial. Mr Liao might then feel obliged to raise objections more often than he did. The course of evidence would then be unnecessarily interrupted by arguments on admissibility of evidence from counsel. Since this is not a trial before jury, as professional judge I could and should disregard evidence that should have been excluded.

6.  I do not accept that any prejudice is caused to the Defendants by the expunging of such evidence. That evidence should not have been admitted in the first place. I fail to see how such evidence could be led in a manner that would be unobjectionable. However, if the Defendants felt that they could lead such evidence by another means, they could make an application to ask further questions from DW2 before Mr Liao continued with his cross-examination.

7.  The evidence at p. 38 to 39 of the unofficial transcript dated 10 September 2004 is therefore expunged from the record on the ground that they should not be admitted in view of my Ruling of 10 September 2004.

8.  As regards the evidence on 9 September 2004, Mr Ling argued that it does not come within the scope of Paragraph 27 of my Reasons for Ruling. In his submissions of 7 October 2004, Mr Ling reserved the right to argue the point.

9.  The material part of the evidence of 9 September 2004 (viz. at p.41 of the unofficial transcript) covered two areas,

(a)    hologram;

(b)    expiry date.

10.  Ms Tam had already indicated to this court that the Defendants would not rely on the evidence regarding hologram (see Paragraph 16 of my Reasons for Ruling of 23 September 2004).

11.  As regards the evidence on expiry date, I shall not comment on it in the light of the stance of Mr Ling. I would however encourage the parties to discuss the matter before the trial is resumed in November. I have every confidence that given the helpful and sensible attitude on the part of counsel, the matter could be resolved between the parties. Failing which, I shall hear arguments on the point when the trial resumes.

HCA 4651/2002

HCA 2802/2003

HCMP 74/2004

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 4651 OF 2002, 2802 OF 2003 and

MISCELLANEIOUS PROCEEDINGS NO. 74 OF 2004

____________

BETWEEN

____________

(The Consolidated Action)

Dates of Hearing: 9 & 10 September 2004

_____________________________

R E A S O N S  F O R  R U L I N G

_____________________________

1.  On 10 September 2004 the Defendants made yet another application by summons for leave to adduce evidence not set out in the witness statements filed before the trial.  By that time, the Plaintiffs had closed their evidence (subject to a reservation about evidence necessitated by a possible amendment pending the decision by this court on leave to amend, the details of which were set out in my Ruling dated 16 September 2004).

2.  The application arose in this way.  On 9 September 2004, the Defendants were leading evidence from their second witness Tong Siu Kun.  In addition to adopting her affirmations already filed before the court as her evidence in chief, Ms Tam took her through some matters by way of clarification or amplification.  In the course of so doing, Ms Tam wished to lead evidence from this witness as to the authenticity of Exhibit LX-28 as a sample of ENHANOID sold by the 1^st Defendant.  In particular, Ms Tam proposed to ask the witness to testify whether the insert and the label on the bottle in LX-28 had ever been used by the 1^st Defendant in ENHANOID sold by it in the market.

3.  Mr Liao SC objected to such evidence being led on the basis that such new evidence took the Plaintiffs by surprise.  He submitted that parties had all along conducted the case on the basis that LX-28 was a sample of ENHANOID sold by the 1^st Defendant and there was nothing in pleadings or witness statements suggesting otherwise.  He took this court through the transcript of this trial in respect of Ms Tam’s cross-examination of PW1 with a view to demonstrate that the defence had changed their position in this regard.

4.  The significance of the contents inside the package of LX-28 came about in the following circumstances.  In the cross-examination of PW1, Ms Tam highlighted some differences between the package box in LX-28 and the Plaintiffs’ package in LX-27.  In particular, she referred to the lack of the two purple stripes at the top and the bottom of the box in LX-28.  As a result, Mr Liao referred the witness to the contents of LX-28 in re-examination.  The insert and the label on the bottle in LX-28 did have two purple stripes similar to the box in LX-27.  At that time, this court indicated to Mr Liao that this court was in as good a position to observe and examine LX-28 and its content as the witness.  Mr Liao therefore did not ask further question in that regard.  That took place on 31 August 2004.

5.  The defence did not indicate at that stage that LX-28 was not a true sample of ENHANOID sold by the 1^st Defendant in Hong Kong. As far as this court is aware, they did not inform the Plaintiffs as to their challenge to the authenticity of LX-28 until Ms Tam attempted to adduce such evidence from DW2 on 9 September 2004.  Had the defence side adopted all along the stance that the insert and bottle in LX-28 were not a true representation of the products sold by them in the market, given their reticence in this regard in their affirmations and witness statements, this court expects them at least to mention this at that stage or shortly thereafter because that this would put everyone on guard that Mr Liao’s reference to such insert and bottle in re-examination was made on a potentially false premise.  Unfortunately, the point was not mentioned until Mr Tam’s attempt to lead evidence from her witness. 

6.  I should mention Ms Tam informed this court that the defence did not intend to suggest that someone in the Plaintiffs had tampered with LX-28 and deliberately produced a misleading sample as exhibit.  She said it could be a genuine mistake.  However, she submitted that justice demanded that the Defendants be given opportunity to challenge LX-28 to counter-balance the effect of reference to LX-28 in re-examination.

7.  Having heard some submissions from the parties in the afternoon of 9 September 2004, I took the view that the intended additional evidence from DW2 were not disclosed in any of her affirmations or witness statement (this is not disputed by Ms Tam) and for the sake of good order and record, the Defendants should make a proper application for additional evidence to be adduced setting out clearly the proposed additional evidence to enable the Plaintiffs to deal with the application.

8.  On 10 September 2004, the Defendants issued a summons seeking leave to file and serve a witness statement of DW2 setting out her evidence as to the challenge to LX-28.  She also proposed to produce what she said to be a sample of ENHANOID sold by the 1^st Defendant at the end of 2001.  The application was supported by a Fourth Affirmation of the solicitor acting for the Defendants.  After hearing submissions on 10 September 2004, I dismissed the application.  I now give reasons for that decision.

9.  In the said Fourth Affirmation, the solicitor explained that at an inspection of exhibits that took place on 10 January 2004, he noted that the insert and the label over the bottle in LX-28 were different from the package box.  He said however the focus at that time was the design of the box and the trade marks.  It further appeared to him that the bottle and the insert were clearly and obviously inserted by mistake.  However, nothing was done by the defence side about that.  It was only when reference was made to the insert and the bottle in LX-28 in re-examination of PW1 on 31 August 2004 (wrongly stated in the affirmation to be 1 September 2004) that the solicitor sought instructions from the Defendants to see if they could get an intact sample of ENHANOID sold by the 1^st Defendant at the relevant time.  Only one sample (“TSK-1”) was located and it was sent to the solicitor on 2 September 2004.  No explanation was offered as to why nothing was said about this until 9 September 2004.

10.  There is no indication in the Fourth Affirmation as to whether the Defendants were aware of the alleged discrepancies between the contents of LX-28 and the actual product sold prior to 31 August 2004.  Mr Yan SC (who addressed this court on behalf of the Plaintiffs to oppose the application on 10 September 2004) submitted by reference to a chronology that there had been several inspections of exhibits including an inspection on 29 September 2003 by DW2 herself with the solicitor and photocopies of the contents of LX-28 including the insert were supplied on 8 October 2003 to the Defendants’ solicitors at their request.  The inspection on 10 January 2004 was also attended by counsel together with DW2.  Counsel submitted that it could not have escaped the Defendants’ attention that the contents of LX-28 included the insert and bottle with labels similar to those in LX-27.  

11.  PW1 produced LX-28 in his first affirmation of 23 August 2003 by saying the following,

“In Hong Kong, the said product was repackaged by the Plaintiffs’ distributor (namely, the 1^st Defendant) in another pink box, which also bore the trade marks and/or legends “ENHANOID” … With the approval of the Plaintiffs, the Defendants applied a hologram bearing the words “Green Power 天維健康產品”.  There is now produced and shown to me marked “LX-28” a sample of the Plaintiffs’ re-packaged lingzhi lipid in a pink packaging.  At the request of the Defendants, it was stated on the said re-packaging that the said product was jointly produced by the 1^st Plaintiff and Green Power Sweden…”

This was adopted by PW1 as his evidence-in-chief.

12.  There is a dispute between the parties as to whether such evidence tantamount to an assertion that LX-28 was a sample of the product sold by the Defendants in Hong Kong.  Ms Tam contended that the evidence did not have such effect whilst Mr Yan contended otherwise.  On this point, I accepted the contention of Mr Yan.  That paragraph in the Affirmation of PW1 was part of Paragraph 49 which started by saying the following,

“The Plaintiffs first launched lingzhi products incorporating the Inventions in Mainland China and subsequently in Hong Kong.  The Plaintiffs’ lingzhi products have been marketed in packaging and under and by reference to trade marks and/or legends as follows:-

[amongst other products] (c) The Plaintiff’s lingzhi or ganoderma spore lipids in capsules …”

The evidence quoted in the paragraph above is part and partial of this sub-paragraph (c).  Therefore, quite plainly, the witness was describing the product sold in the market and LX-28 was said to be a repackaged version sold by the Defendant in the Hong Kong market.    

13.  That affirmation was filed, in support of an application for interlocutory injunction.  There was no challenge to the authenticity of LX-28 as a sample of ENHANOID sold by the Defendants in the evidence filed in opposition.  In fact, nothing had been said in the defence affirmations concerning the design of LX-28.  Ms Tam accounted for that by reference to the scope of the interlocutory injunction application.  She said the application at that stage did not touch on the copyright aspects.

14.  However, the outcome of the application for interlocutory injunction was directions for speedy trial given by this court.  The trial, as reflected in the pleadings, included trial of copyright claims.  Pursuant to those directions, parties were given leave to file witness statements supplemental to the affirmation evidence already filed.  There was still no challenge to the authenticity of LX-28 in the supplemental statements filed on behalf of the Defendants.

15.  Ms Tam ultimately accepted that it was an oversight on the part of the lawyers but she said the Defendants should not be penalized about that.  She submitted that only minimal prejudice would be caused to the Plaintiffs if such evidence were admitted and the Plaintiffs could recall their witnesses if necessary.  She emphasized that the insert clearly referred to the Plaintiffs’ product sold in mainland instead of those sold by the 1^st Defendant in Hong Kong since it was an insert for 學者牌靈芝孢子脂質精華膠丸 and that brand name and description of product were not used by the 1^st Defendant in Hong Kong.  The picture of the product in the insert was that of LX-27 instead of LX-28.  Further, the advertisement at Trial Bundle D335 placed by the 1^st Defendant used a bottle different from that in LX-28.  There was no reference to the 1^st Defendant in the insert in LX-28. Counsel said these discrepancies cried out for explanation and it would be unjust if the Defendants were not allowed to adduce evidence to challenge LX-28.    

16.  Although DW2 gave some evidence about the hologram not supposed to be attached to that version of the product sold by the Defendants, Ms Tam conceded that the defence would not rely on that in view of the Plaintiffs’ submissions in opposition on 9 September 2004 and the specific reference to the hologram in the affirmation of PW1 as quoted in Paragraph 11 above.

17.  But the hologram could, in my view, be important if the Defendants wished to challenge the authenticity of LX-28.  It is at least indicative that LX-28 was repacked by the 1^st Defendant in the absence of any evidence or suggestion of tampering.

18.  Mr Yan submitted that the Plaintiffs would suffer massive prejudice if the Defendants were allowed to adduce the additional evidence at this late stage.  He said the prejudice could not be remedied by giving leave to the Plaintiffs to recall PW1.  He stressed that it is the Plaintiffs’ case that LX-28, including its contents, was a sample of the product sold by the Defendants in Hong Kong albeit only for a brief period of time.  The Defendants had been changing their packaging of the lipid products for several times.  If the Defendants were given leave to adduce the additional evidence, Mr Yan contended justice demanded that the Plaintiffs be given a reasonable opportunity to trace the chain of exhibit LX-28.  Mr Yan told this court PW1 would not be the only witness who is involved.  He submitted it would be easier for that to be done way back in August 2003 when the affirmation was filed.  In addition, the Plaintiffs would also like to procure evidence from other sources to prove the Defendants did at one time sell lipid product in the same manner as LX-28.  That would take considerable time and again it would have been easier way back in August 2003.

19.  Further, although this case would go part-heard in any event, it was possible to have the trial resume for another 15 days in November.  If the additional evidence were introduced, that 15 days time slot would not be sufficient and the trial would again be further delayed.  Given the rationale behind the directions for speedy trial, Mr Yan submitted that this would cause prejudice to the Plaintiffs that cannot be compensated by costs.

20.  As regards the additional evidence, the sample TSK-1 proposed to be produced by DW2 was, according to the witness statement of DW2 placed before me on 10 September 2004, manufactured around 6 May 2002.  It was not around the same date where lipid products were first introduced into the Hong Kong market by the Defendants.  On their own case, the products were introduced in the end of 2001.  Mr Yan also quite rightly observed that there was difference in the colouring between the boxes in LX-28 and TSK-1 indicating that they were not from the same batch of goods. Given the changes in packaging from time to time, I am of the view that TSK-1 could not offer much assistance in the resolution of the dispute as to how the lipid product marketed by the Defendant in the end of 2001 looks like.

21.  In paragraph 2 of the witness statement, DW2 asserted that the label on the bottle and the leaflet did not come from the 1^st Defendant.  It is not clear whether she was asserting that the label and leaflet had never been used by the 1^st Defendant.  Based on what Ms Tam told me in the afternoon of 9 September 2004, I take it that the purpose of this paragraph and paragraph 3 was to challenge the label and leaflet in LX-28 as a true representation of the product that had been sold by the 1^st Defendant.

22.  Whilst it is correct, as highlighted by Ms Tam in Paragraph 15 above, that there are some matters already in evidence that the defence might be able to rely upon to comment on LX-28, I think it is not the same as saying that by reason thereof, the Defendants should be given a licence to call whatever additional evidence as they wish to deal with the same point irrespective of their omission to file witness statement on the topic.

23.  It may well be that the Plaintiffs are quite content with dealing with such comments on the existing state of evidence.  However, if additional evidence is adduced from DW2 specifically on the same subject, the evidential position would be rather different and the points raised by Mr Yan as to prejudice become pertinent.

24.  From what had been said earlier, it is apparent that I am not happy with the explanation of the Defendants as to their omission to file positive evidence to challenge LX-28 in accordance with my directions for speedy trial.  Whether it is due to lawyers’ fault or that of the clients, it does not matter in the present context.  I accept Mr Yan’s submission on prejudice.  I do not need to recite what I have said, perhaps more than once, in previous rulings delivered in this case as to the serious prejudice that would cause to the Plaintiffs if the trial were delayed by a violation of the integrity of my directions for speedy trial.  

25.  In my judgment, the defence could still make the points mentioned by Ms Tam in Paragraph 15 above in their closing submissions.  However, it would not be right for this court to allow them to put in additional evidence to bolster their challenge to LX-28 when they had chosen not to do so earlier without adequate and satisfactory explanation bearing in mind the prejudice that might cause to the Plaintiffs if this court were to hold otherwise.

26.  For these reasons, I dismissed the application.

27.  By way of postscript, after I announced my decision in the morning of 10 September 2004, Ms Tam did ask some questions which were apparently inconsistent with this ruling when she resumed with her examination in chief of DW2.  I do not think she did so deliberately as I did not give reasons for my ruling there and then.  However, I think I should hear parties on whether any evidence should be expunged from the record after this Reasons for Ruling has been handed down.  For that purpose, I direct that written submissions be filed by both parties by 30 September and submissions in reply be filed by 7 October.  Unless parties wish to have a hearing, I will deal with the matter on paper prior to the resumption of the trial on 8 November 2004.      

HCA 4651/2002
HCA 2802/2003
HCMP 74/2004

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 4651 OF 2002, 2802 OF 2003 and

MISCELLANEIOUS PROCEEDINGS NO. 74 OF 2004

____________

BETWEEN

____________

(The Consolidated Action)

_____________________________

REASONS  FOR  RULING

_____________________________

1.  On 21 August 2004, after hearing submissions from the parties, I ruled that in the light of the decision by the Intermediate People’s Court in Guangzhou (廣州中级人民法院) [“the Intermediate Court”] on 1 January 2004 [“the Judgment”] in case No.95 of 2003 (穗中法民三初字第95号) [“Case No.95”] and having regard to the permissible scope and purpose of expert evidence, certain parts of the expert evidence on PRC law are inadmissible.  I now give reasons for that ruling.

2.  Mr Liao SC advanced the following propositions on expert evidence as to foreign law which are not disputed by Mr Ling,

(a)     the function of an expert witness on foreign law is as follows,

i       to inform the court of the relevant contents of the foreign law; identifying statutes or other legislation and explaining where necessary the foreign court’s approach to their construction;

ii      to identify judgments or other authorities, explaining what status they have as sources of the foreign law; and

iii     where there is no authority directly in point, to assist the judge in making a finding as to what the foreign court’s ruling would be if the issue was to arise for decision there.

See MCC Proceeds Inc v Bishopgate Investment Trust [1999] CLC 417 at 424.

(b)    When there is authority directly in point, there is no room for experts to give evidence to determine the likely outcome of the foreign court applying the foreign law, see National Bank of Egypt International Ltd v Oman Housing Bank SAOC [2003] 1 All ER (Comm) 246.

(c)     In Hong Kong, the court accepts the judgment of the courts in the mainland as evidence of the law in the mainland, see First Laser Ltd v Fujian Enterprises (Holdings) HCA 4414 of 2001, 12 December 2002, Para.56; Shenzhen Development Bank v New Century International (Holdings) Ltd HCA 2976 of 2001, 31 July 2002 at Paras. 33 to 36.

(d)    Although there is no specific reference to a particular point in a foreign judgment, so long as the court is satisfied that the point could not have escaped the attention of the foreign court or the parties, the foreign court should be regarded to have decided that point as well, see Shenzhen Development Bank v New Century International (Holdings) Ltd HCA 2976 of 2001, 31 July 2002 at Para.35. 

3.  Subject to a rider which is not material in the present case, I accept these propositions as correct.  The rider is in respect of proposition (b).  In a case where there are conflicting decisions in the foreign court or where it is clear that a piece of relevant legislation had not been considered, I think there might still be scope of expert evidence.  Having considered the expert reports in the present case, I do not think the case falls within any of these exceptions.

4.  In addition, it is not the role of an expert to act as advocate for those engaging him nor should he be asked to give evidence on the construction of certain documents (see Rogers JA (as he then was) in Chen Paul v Lord Energy Ltd [1998] 1 HKC 702).  The same principle applies even if the documents that the court has to construe were issued by government agencies.  Opinions from an expert should be confined to matters which the court requires the assistance of his expertise in order to adjudicate the disputes between the parties properly (see Hong Kong Civil Procedure 2004 Vol. 2 Para.L1/58/8).

5.  In the several statements of the Defendants’ expert 姜同光, he dealt with, inter alias, the following matters,

(a)     the status of the FER Centre and its relationship with the 2^nd Plaintiff;

(b)    ratification of the contracts made by FER Centre by the 2^nd Plaintiff;

(c)     the capacity of the 2^nd Plaintiff to sue on the contracts made by the 2^nd Plaintiff;

(d)    whether the non-competition clause in the distribution agreements contravened the PRC unfair competition legislations including Section 12 of 反不正當競争法 and Section 4 of 民法通則;

(e)     lack of performance of the obligations by the FER Centre under the distribution agreements.   

6.  The 1^st Defendant was the plaintiff in Case No.95.  The 2^nd Defendant was its director and its designated representative in that action.  Originally, it sued the FER Centre as the defendant. On 26 March 2003, the Intermediate Court held that the FER Centre was not a legal entity and it could not be sued.  On 20 July 2003, the plaintiff in that case amended the writ to sue the 2^nd Plaintiff as the defendant in that action.  The Intermediate Court also directed on 25 July 2003 to add the 1^st Plaintiff as co-defendant to that action.

7.  The plaintiff’s (viz. the 1^st Defendant in the present action) claims in Case No.95 revolved around the validity of the distributorship agreement of 13 February 1999 and Clause 3(7) thereunder.  The relief sought were for declarations that the said agreement and the said clause were invalid and/or unenforceable (see p.3 of the Judgment at Trial Bundle U p.125).

8.  In the Judgment, the Intermediate Court held and found as follows,

(a)     the FER Centre was part of the 2^nd Plaintiff and the 2^nd Plaintiff could validly ratify the contracts signed by the FER Centre;

(b)    the ratification letter issued by the 2^nd Plaintiff dated 10 December 2002 was a valid exercise of the power of ratification.  By reason of that the 2^nd Plaintiff became a party to the contract;

(c)     the contract had been performed by the 2^nd Plaintiff with the full knowledge of the 1^st Defendant and the 1^st Defendant had never raised objection;

(d)    the submission by the 1^st Defendant in Case No.95 that the contract had not been performed was rejected;

(e)     the contract was valid and enforceable under PRC law. 

9.  Hence, all the matters alluded to in Paragraph 5 above have been decided by the Intermediate Court in the Judgment.  But we are not dealing with question of issue estoppel as this is not the basis on which the Plaintiffs invited this court to exclude the evidence.

10.  The issue before me is whether there is any scope for admission of the expert evidence on those matters in the light of the Judgment and the principles set out in the beginning of this Reasons for Ruling. In my judgment, insofar as those issues touch upon factual matters, in the present circumstances, expert opinion is of no assistance for the reasons set out in Paragraph 4 above.  It seems to me issues (a), (b) and (e) in Paragraph 5 are primarily issues of facts.  I note that the Defendants’ expert in giving his opinion on issues referred to certain administrative decrees and directives.  I doubt whether those could be regarded as real issues of law.  It seems to me this court is in as good a position as the experts to resolve the matters after examining all relevant documents and factual evidence.  In any event, insofar as they raise any issues of law, that had been decided by the Intermediate Court. 

11.  In respect of issue (c), once relevant findings are made in respect of issues (a) and (b), there is no separate issue of law involved.  The Defendants’ expert did not challenge the 2^nd Defendant’s legal capacity to commence legal proceedings as such.  His opinion was basically that the 2^nd Defendant could not sue on these contracts because it was not a party thereto and the FER Centre was not part of the 2^nd Defendant.

12.  Issue (d) does raise some question of law.  Mr Ling submitted that this had not been dealt with in the Judgment.  He adverted to the lack of reference of Section 12 of 反不正當競争法 and Section 4 of 民法通則 in the Judgment.  I have considered the terms of these two pieces of legislation.  It is plain to me that the Intermediate Court did consider the question of legality of the contract by reference to them.  The said Section 4 reads,

“民事活動應當遵循自願、公平、等价有償、誠實信用的原則。”

The said Section 12 reads,

“經营者銷售商品，不得違背購買者的意願，搭售商品或者附加其他不合理的條件。”

13.  At p.13 of the Judgment (Bundle U p.135), the Intermediate Court addressed the attack on the validity of the contract and its enforceability by referring to the criteria set out in these legislations,

“《關於許可採用“天維牌”包裝銷售純靈芝孢子粉膠囊產品合同書》是簽約三方當事人的真實意思表示，內容合法，而且已經實際履行。該合同第3條第（7）項是當事人自愿約定的，該約定的目的在於保護原告已經開拓的產品銷售渠道、保證其商品的信譽，而且這也是原告成為本案合同產品代理經銷商的對價條件。如原告認為該約定對其不公平，應當在法定期限內提出解除。原告在上述《關於許可採用“天維牌”包裝銷售純芝孢子粉膠囊產品合同書》履行期限屆滿後要求確認上述合同無效的主張，沒有事實和法律依據，本院不予支持。”

14.  Although there is no express reference to the legislation, I am of the clear view that the issue had been addressed by the Intermediate Court.  But for that, the judgment could have stopped immediately before the passage quoted.  Hence, there is no room for admission of expert evidence on issue (d).

15.  Another point relied upon by Mr Ling to resist the application is that the Judgment is subject to an appeal by the 1^st Defendant.  I was told that the appeal had been heard on 20 August 2004 and the High People’s Court in Guangzhou廣州高级人民法院reserved its judgment in the appeal.  On that basis, Mr Ling submitted that our case is different from National Bank of Egypt International Ltd v Oman Housing Bank SAOC [2003] 1 All ER (Comm) 246.  He also referred this court to Article 141 of the Code of Civil Litigation (民事訴訟法) and contended that the effect of that article is that under PRC law, the following judgments are the only ones that have legal effects: (1) judgments of the Supreme People’s Court; or (2) judgments of other courts which are not appealable or not appealed within the prescribed time.

16.  I doubt very much if Article 141 has such effect.  But I do not have to determine that question because I am not deciding the effect of the Judgment in the mainland in terms of PRC law.  What I have to decide is in view of a judgment by the Intermediate Court, whether as a matter of Hong Kong law this court should permit expert evidence on PRC law on issues that had been decided by that court to be adduced.

17.  Further, I accept the submission of Mr Liao that the fact that there is an appeal does not provide any justification for admitting expert evidence on PRC law on the issues decided in the Judgment.  As I said in the course of submissions, if the appellate court delivered its judgment prior to the end of this trial, this court expects the parties to produce that judgment before this court as soon as possible.  There is simply no need nor room for the experts to rehash the submissions that were put before the High People’s Court in Guangzhou in that appeal before this court in the context of this trial.  If the points set out in the expert reports were not advanced in the appeal, given that they are points on PRC law that should have been addressed in the appeal before a PRC court, there is no reason why this court should entertain the same.  Otherwise, it would tantamount to the arrogation of this court into a court of appeal from the Intermediate Court.  It would be presumptuous for this court to hear such evidence and to pre-empt whatever decision the High People’s Court may reach in that appeal.  That would be wholly inappropriate and against international judicial comity.         

18.  For these reasons, I excluded the expert evidence set out in my order of 21 August 2004.  

HCA 4651/2002

HCA 2802/2003

HCMP 74/2004

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 4651 OF 2002, 2802 OF 2003 and

MISCELLANEIOUS PROCEEDINGS NO. 74 OF 2004

____________

____________

(The Consolidated Action)

__________

R U L I N G

__________

1.  By a summons dated 25 August 2004, the Defendants applied for leave to amend their Consolidated Defence and Counterclaim by adding the following paragraph,

“53A.   Further or alternatively, as a matter of Hong Kong law, Clause 3(7) of Agreements A, B and C and Clause 3(6) of Agreements D, E and F are void, invalid and/or unenforceable as being in unreasonable restraint of trade in that their scope in respect of territorial ambit and/or activities retrained is wider than is reasonably necessary for the protection of the Plaintiffs’ interests.”

I shall call the clauses (which are basically identical in terms) “the restrictive covenants”.

2.  The application was opposed by the Plaintiffs.  Submissions on the application were heard by this court on the 19^th day of this trial (which was originally scheduled for 15 days).  A number of cases were cited by leading counsel and the submissions took up the most of that day.  Since the point seems to be one of great significance and this court needs time to read the cases that were only given to the court in the course of submissions, ruling was reserved.  It was agreed between the parties that the trial could continue with the rest of the evidence in the meantime.

3.  I now give my ruling on the application.

4.  No doubt mindful of my ruling in respect of the earlier applications for leave to amend and to adduce additional evidence by the Defendants on 22 July 2004 (as to which see my Reasons for Ruling on 21 August 2004), Mr Chan SC (who was brought into this case by the defence shortly before the trial resumed on 30 August 2004) explained why this application was made at this late stage.

5.  Before this proposed amendment, the Defendants only challenged the legality of the restrictive covenants under PRC law, see Paragraph 53 of the Re-Amended Consolidated Defence and Counterclaim.  The challenge was by reference to反不正當競争法 and民法通則.  Expert evidence on PRC law were prepared by each side on that issue.  There was no plea whatsoever in respect of the illegality of these restrictive covenants under Hong Kong law due to restraint of trade.

6.  On 21 August 2004, I held that such expert evidence on PRC law was inadmissible due to the fact that the issue had been decided by the Intermediate People’s Court of Guangzhou [“the Intermediate Court”] (see my Reasons for Ruling on that application).

7.  Mr Chan said that the ruling of 21 August 2004 caused the defence to reflect on their position and after due consideration, it was decided that the application for leave to amend should be made to enable them to challenge the restrictive covenants under Hong Kong law.

8.  Mr Chan also told this court that the Defendants had previously been content with confining to a challenge against the restrictive covenants based on PRC law as both parties had prepared expert evidence in that regard.  He said the ruling of 21 August 2004 came as a surprise blow to the Defendants and they harboured some grievance with regard to that result as the court apparently shut out their challenge to the restrictive covenants.

9.  With respect, that is not an accurate analysis of the situation.  To start with, a challenge against the restrictive covenants based on PRC law could have been pleaded in parallel with a challenge under Hong Kong law.  They are not mutually exclusive.  It is a matter for the Defendants to decide as to the basis and extent to which they wish to challenge the restrictive covenants.  In the present case, they had the benefit of the advice of very able lawyers from the very beginning.  With such benefit, they decided to confine their challenge to one based on PRC law.  It has nothing to do with the stance taken by the Plaintiffs nor any decision or ruling emanated from this court.

10.  It must be noted that the challenge under PRC law in Paragraph 53 was first advanced in the Consolidated Defence and Counterclaim filed on 18 February 2004 and amended on 15 June 2004 by pleading the specific statutes relied upon.  It was not pleaded in the original Defence filed by the Defendants in High Court Action No.4651 of 2002 on 6 May 2003 nor was this issue raised anywhere in the affirmations filed on behalf of the defence to resist the application for interlocutory injunction.  This is significant because the Intermediate Court had already delivered its judgment on 1 January 2004.  The Defendants therefore made their decision as to the basis and extent to which they challenged the restrictive covenants with the full knowledge that the court in the PRC had upheld the validity of these restrictive covenants.  Despite that, they chose to confine their challenge by reference to PRC law.

11.  I appreciated that the Defendants had lodged an appeal against the decision of the Intermediate Court. However, for reasons already set out in my Reasons for Ruling on the exclusion of expert evidence, that does not give them any legitimate expectation that this court would prepare to consider the issues by hearing expert evidence.

12.  Mr Chan alluded to the lack of any plea of issue estoppel on the part of the Plaintiffs.  As explained in my Reasons for Ruling, the basis on which I made my order on 21 August 2004 was not issue estoppel.  The Defendants were given ample notice of the basis of the application as Mr Liao SC had filed his skeleton submissions on 12 July 2004 and the hearing did not take place until 21 August 2004.  If the Defendants felt that there were material pertinent to that application which might assist them, including the pleadings filed in the PRC action leading to the judgment of the Intermediate Court (Mr Chan faintly suggested that the Defendants were prejudiced in that regard), there were ample time for the Defendants to do so before the hearing.  Yet the Defendants did not file any evidence to resist that application.

13.  In any event, if the Defendants have any justifiable grievance in respect of my ruling on 21 August 2004, the proper course is rectify that by an appeal against that ruling after the trial had been completed.

14.  In the premises, I do not think my ruling on 21 August 2004 provided any excuse to the Defendants for this late application.

15.  Further, I am of the clear view that the proposed amendment is unarguable.  The restrictive covenant reads as follows,

“7)     在本合同書許可期限內及銷售權利終止后三年內，乙方均不得生產或代理或經銷其他廠家生產的相同或相近似產品以及仿冒或影射本合同書產品及產品名稱、外觀包裝設計相同或相近似的產品或系列產品。若有違約行為乙方愿向甲方賠償500萬港幣。”

16.  Mr Chan’s attack on the restrictive covenants was mainly directed towards the first part of the covenant that prohibit the 1^st Defendant from manufacturing, distributing or offering for sale similar products manufactured by other factories within a period of three years.  He submitted that it was clearly wider than what was necessary for the protection of the Plaintiffs’ legitimate interest.  I accept that is arguable.  Mr Chan did not advance any submission to suggest that the other parts of the covenants were wider than necessary for the protection of the legitimate interest of the Plaintiffs. 

17.  However, Mr Liao referred to Paragraph 41 of the Re-amended Consolidated Statement of Claim and submitted that the Plaintiffs did not need to rely on that part of the restrictive covenant.  Although prayer (2) seems to be wider, Mr Liao confirmed to this court that the Plaintiffs were prepared to narrow down their prayer to exclude the offensive part of the covenant from the scope of the injunction they sought.

18.  Hence, the key issue is whether the allegedly offensive part of the covenants could be severed from the rest in order to render them enforceable irrespective of the legality of the first part.

19.  Mr Chan relied mainly onthree authorities and argued that severance should not be permitted in the present case.  In Scully UK Ltd v Lee [1998] IRLR 259 at p.264 Para.31, Aldous LJ said,

“Severance of part of a covenant is only permissible in cases where the obligation to be severed is truly a separate obligation to that to be enforced. If the obligations are in any way interdependent as a matter of wording or meaning then severance will not be permitted.”

20.  I have no quarrel with that principle. The same principle has been stated in Treitel, The Law of Contract, 11^th Edn., p.507-509 and Chitty on Contracts, 29^th Edn., Paras.16-190 to 16-192.  It is clear that the blue pencil test is not conclusive in that even if a clause can be “blue pencilled” the court may still refuse to effect a severance.

21.  The question is applying that principle whether the clause in the present case is severable. In the consideration of this question, I bear in mind Mr Chan’s indication to this court that the Defendants proposed to call no additional evidence even if the amendment were allowed.  He said it is basically a point of law and whatever evidence the Plaintiffs chose to adduce on the amendment, he would probably find it unnecessary to challenge such evidence.  From the way Mr Chan argued the point, it seems to me that the Defendants regarded it as basically a question of construction to be resolved by reference to the wordings of the clause and the contract itself.

22.  Mr Chan further submitted that severance should only be permitted if the part to be severed is only of trivial importance, or merely technical.  He went on to submit that the first part of the restrictive covenants could not be regarded as trivial.  The parties had put it as the first part of the clause and, according to Mr Chan, that indicated the significance that the parties attached to the same. In this regard, Mr Chan relied on a dicta of Lord Moulton in Mason v Providential Clothing & Supply Co Ltd [1913] AC 724 at p.745 (cited by Aldous LJ in Para.31 of the judgment in Scully v Lee).  He also prayed in aid of Attwood v Lamont [1920] 3 KB 571.

23.  With the greatest respect, I do not think the obiter of Lord Molton establishedany additional requirement for severance over and above those set out in Paragraphs 19 and 20 above. In paragraph 32 of his judgment in Scully v Lee, Aldous LJ referred to the judgment in Lucas v Mitchell [1974] 1 Ch 129 where the English Court of Appealclearly rejected such additional requirement even in the context of employment contract.  In that case, Russell LJ reviewed previous decisions including the dicta of Lord Moulton, Attwood v Lamont and Scorer v Seymour Jones [1966] 1 WLR 1419 andexplained at length at p.135 to 137 why there is no additional requirement. Professor Treitelalso adopted the same analysis at p.508-9 in his textbook.  

24.  In my judgment, that must be correct.  None of the other law lords in Mason v Providential Clothing & Supply Co Ltd mentioned this additional requirement.  Although reference was made to Mason in Attwood v Lamont, none of the judges referred to such additional requirement as averted to by Mr Chan.  The relevant criteria applied in Attwood can be found in the following dictum,

“I think, therefore, that it is still the law that a contract can be severed if the severed parts are independent of one another and can be severed without the severance affecting the meaning of the part remaining.” (per Lord Sterndale MR at p.577)

“I think it clear that if the severance of a part of the agreement gives it a meaning and object different in kind and not only in extent, the different parts of it cannot be said to be independent.” (per Lord Sterndale MR at p.578)

“The doctrine of severance has not, I think, gone further than to make it permissible in a case where the covenant is not really a single covenant but is in effect a combination of several distinct covenants.  In that case and where severance can be carried out without the addition or alteration of a word, it is permissible.  But in that case only.” (per Younger LJ at p.593)

These are the same as the principle set out in the judgment of Aldous LJ set out in Paragraph 19 above.

25.  Coming back to the clause in question, Mr Chan laid emphasis on the conjunctive expressions “以及” and “及” and contended that the whole clause constituted one covenant and one package or scheme to prevent the 1^st Defendants from competing with the Plaintiffs after the end of the distributorship.  He submitted that permitting severance in such circumstances would tantamount to rewriting the contract for the parties.

26.  On the other hand, Mr Liao submitted that the clause contained separate obligations which are not interdependent.  He contended that severance could easily be effected by deleting the allegedly offending part.

27.  On proper construction, the clause prohibited the 1^st Defendant from producing or distributing or offering for sale three different kinds of products,

(a)     the same or similar type of products produced by other manufacturers;

(b)    products which were an imitation of or passed off as the products of the FER Centre under the contract;

(c)     products bearing product names or packaging designs similar to those of the FER Centre under the contract. 

This is the construction Mr Chan contended for by reference to an analysis produced by Ms Tam.

28.  The three kinds of products were not interdependent on each other. The allegedly offending element is prohibition (a).  Deleting (a) from the clause would not affect the meaning or operation of (b) and (c).  It cannot be the parties’ intention that (b) and (c) must read together with (a) in construing what was being prohibited.

29.  Attwood v Lamont was a decision on the special facts of that case.  The Court of Appeal was of the view that on those facts, the covenant the court had to consider was a single covenant.  In the present case, given the stance taken by Mr Chan as set out in Paragraph 21 above, at least from the defence point of view, I am in as good a position to approach the question of construction as I would be after hearing all the evidence.  I consider the clause in issue is, in wordings and in substance, a clause containing a combination of different covenants.  I am therefore of the view that the criteria for severance can be satisfied.

30.  Mr Liao also referred to the prejudice that the Plaintiffs might suffer if the amendment is allowed.  He contended that the case would be further delay as the Plaintiffs would need to adduce substantial additional evidence to justify the first part of the clause given the nature of the defence case on severance.  Mr Chan said no amount of evidence could justify the first part of that clause.  I do not think it is appropriate for me to pre-empt the Plaintiffs from adducing additional evidence to meet the proposed amendment at this stage.  It would not be fair to the Plaintiffs if they were not given any reasonable opportunity to adduce whatever evidence that they think to be of assistance to their case on dealing with the new plea if the amendment were allowed.  The practical result is that the trial would be further delayed.  That delay, for reasons already given in my Reasons for Ruling of 21 August 2004, would cause prejudice to the Plaintiffs that could not be compensated by costs.

31.  Hence, applying the approach in dealing with late application for amendment set out in my Reasons for Ruling dated 21 August 2004, my conclusion is that the court should exercise its discretion by dismissing the application and I order accordingly.  There shall also be a cost order nisi that the Defendants shall bear the Plaintiffs’ costs on this application in any event. 

HCA 4651/2002
HCA 2802/2003
HCMP 74/2004

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 4651 OF 2002, 2802 OF 2003 and

MISCELLANEOUS PROCEEDINGS NO. 74 OF 2004

____________

____________

(The Consolidated Action)

_____________________________

REASONS FOR RULING

_____________________________

1. On 22 July 2004, I disposed of several applications made by the Defendants in the course of the trial as follows,

(a) I dismissed the application for leave to re-re-amend the Defence by adding new paragraphs putting forward positive pleas to challenge the originality of some of the works of the Plaintiffs;

(b) I dismissed the application for leave to adduce evidence in this trial as set out in the third supplemental witness statement of Dr Chung Chee Keung, the 2nd Defendant and the witness statement of Tong Siu Kan, both dated 16 July 2004;

(c) I dismissed the application for leave to adduce evidence in this trial the evidence relating to a Japanese magazine set out in Paragraphs 7 to 10 of the third affirmation of Tong Siu Kan of 19 July 2004;

(d) I granted leave to the Defendants to adduce evidence from Chan Chin Hung and Wong Yan Yan in respect of the drawings exhibited as "TSK-2" and "TSK-3" respectively on condition that such evidence shall be set out in supplemental witness statements from these witnesses to be filed and served within 7 days.

I now give reasons for these rulings.

2. Mr Liao SC described these applications came at the 13th hour. They came about in the following circumstances. On 19 July 2004, the trial has proceeded to its 11th day. PW1, the key witness for the Plaintiffs, was in the middle of being cross-examined. Ms Tam informed the court on that morning that the Defendants proposed to put in some new evidence. She said the new witness statements had been faxed to solicitors for the Plaintiffs on Friday, 16 July 2004. That was the day when the court had to adjourned early due to typhoon signal No.8 being hoisted around 11:45am. That signal was not lowered until the close of business hours on Friday. Hence, it is not reasonable to expect the fax would come to the attention of those acting for the Plaintiffs earlier than Saturday. Apart from the new witness statements, a bundle of new documents were also sent.

3. Understandably, Mr Liao took objection to the new evidence at such late stage. However, when Ms Tam made the application concerning the new witness statements, there was no affirmation to account for such late application. Mr Liao submitted that the application should not be entertained in the absence of proper explanation by way of affirmation given the substantive nature of the new material, the serious impact they might have on the trial and the lack of explanation for the delay. In the wake of that objection, Ms Tam asked for the case to be stood down to the afternoon of 19 July 2004 to have the affirmations in support of the applications in place.

4. The affirmation evidence was ready at about 3:30 pm on 19 July 2004. They included the sixth affirmation of Dr Chung, third affirmation of Tong Siu Kan and third affirmation of Lam Sek Kong. Mr Liao needed time to digest these affirmations and he was also considering the possibility of cross-examining these deponents. The case was therefore adjourned to 20 July 2004.

5. On 20 July 2004, Mr Liao informed the court that he would not apply for cross-examination of these deponents. Submissions were made by the parties in respect of the admission of the new witness statements and documents as evidence in this trial. In the course of his submission in the afternoon of 20 July 2004 (Ms Tam took up the whole morning for her submission), Mr Liao commented on several defects in the evidence of Dr Chung accounting for the delay.

6. In the morning of 21 July 2004, Ms Tam attempted to put in a 7th Affirmation of Dr Chung to deal with those defects. For reasons already given orally, I refused leave to Defendants to rely on the 7th Affirmation. Ms Tam continued with her submissions in reply and in the afternoon, she decided to apply for leave to re-re-amend the Defence to add the following pleas,

"64B Further or alternatively, the First Defendant's designer created the depiction of the cracked spore referred to above [V162, 221, E 731] by reference to the photograph referred to in Paragraph 65BA below.

65BA Further or alternatively, the depiction of a cracked spore appearing or contained in the alleged artistic works referred to in paragraphs 51(b)(i) [Q12-15], (iii) [Q19] and (iv) [Q20] is not original in that it was derived or substantially derived from the photograph of a complete lingzhi spore appearing in a Japanese magazine entitled "靈芝健康読本 1" published in January 1997.

65BB Further or alternatively, the artwork referred to in paragraph 51(b)(vii) [Q21(t), 21(u)] is not original in that it was derived or substantially derived from a packaging for "ENHANVOL" spore powder capsules designed by or on behalf of Gunze Sangyo Inc. for the Japanese market in late 2000."

7. For reasons set out below, several aspects of these applications, if allowed, will bring in new dimensions to the action which the Plaintiffs had not been given any opportunity to deal with so far. The applications were made at a very late stage, so late such that the length and progress of the trial will be seriously prolonged and disrupted. I have set out the approach that the court should adopt in dealing with late applications of similar nature in Hong Lok School Ltd v Chow Sai Yiu HCA 17139 of 1999, 7 July 2003 and Man Fong Hang v Man Ping Nam HCA 7935 of 1998, 21 July 2003. Ultimately, it is a balancing exercise.

8. Given my directions for speedy trial which were accepted by the Plaintiffs as an alternative for continuing with their application for interlocutory injunction, they would suffer prejudice if the trial had to be adjourned for a lengthy period before it could be resumed. It has to be borne in mind that one of the claims of the Plaintiffs was based on a non-competition clause in the agreements allegedly made between the 2nd Plaintiff and the 1st Defendant and that clause expired in a few months' time. Although by 21 July it is quite apparent that the trial could not be completed by 23 July 2004 (the last day allocated for this case) and an adjournment is inevitable, I am of the view that without the new material, it would be possible to fix an early date for the resumption of the trial readily. The situation would be quite different if the Plaintiffs have to deal with the new dimensions as well. The final resolution of the dispute would certainly be further delayed. It therefore requires very strong and powerful factors to balance against the prejudice likely to be suffered by the Plaintiffs.

9. The reason why Ms Tam made the application for leave to amend is that on the existing state of pleadings, although the Defence denied the originality of the Plaintiffs' works (Paragraph 65(2) of the Re-amended Defence), the only positive case pleaded in that regard is Paragraph 65B alleging that the Plaintiffs' works were derived from those of the Defendants' designers pleaded in Paragraph 64A. The net effect of the proposed amendments were: (i) to add an additional challenge to originality of the Plaintiffs' works by referring to other original sources, viz. the Japanese magazine pleaded in Paragraph 65BA and the Japanese packaging pleaded in Paragraph 65BB; (ii) to add a new original source for the Defendants' creation to account for some of the similarities with the Plaintiffs' works.

10. In my judgment, those amendments were necessary before the Defendants could be allowed to put in the evidence relating to the Japanese magazine and the Japanese packaging. In my view, the adducing of such evidence goes beyond passively challenging the Plaintiffs' case on originality. They amount to a positive case put forward by the Defendants. Even though the Defendants were not in a position to establish each and every element regarding the copyrights of the Japanese magazine and the Japanese packaging, at least one of the purposes of the Defendants in putting forward these documents were to invite this court to draw an inference from the alleged similarities between them and the Plaintiffs' works and the proof of access of the Plaintiffs to the Japanese material that the Plaintiffs' designers copied from them. The establishment of a case by inference is no less a positive case than the proof of a case by direct evidence.

11. In principle, there are sound reasons why these matters should be pleaded. They are material elements in the defence and in the absence of pleadings, the attention of the Plaintiffs would not be directed towards such lines of attack to their originality. Once these are pleaded, the Plaintiffs would have to consider the preparation of evidence necessary to meet the challenge including a detail comparison between the Japanese works and the Plaintiffs' works, examining the evidence as to the dates of creation of the Japanese works, the evidence as to access and if necessary, evidence pertaining to a case of originality stemming from material alteration or modification of another work. These are just examples of steps that those advising the Plaintiffs could take. But they could not do so unless their attention was drawn to such issues in the pleadings.

12. I do not think authorities are needed for this analysis. Mr Liao referred to Copinger & Skone James on Copyright 14th Edn., Para.22-106 and Laddie, Prescott & Vitoria The Modern Law of Copyright and Designs, 3rd Edn. Para.39.76 and drew an analogy with the need to plead particulars of prior art in the defence to claims based on design right. I also derive some support from the precedent in Para.66-Q10 of Bullen & Leake & Jacob's Precedents of Pleadings.

13. It follows that without such pleas, the issues were not properly raised and the court should not allow them to be canvassed, see Poon Hau Kei v Hsin Chong Construction Co Ltd [2004] 2 HKLRD 442.

14. The next question is whether amendments should be allowed. Whilst generally the court could allow an amendment to enable the real issue in dispute to be canvassed no matter how late it is applied for, the modern approach is that lateness and explanation for the delay in making the application are relevant factors to be taken into account in the exercise of discretion by the court. Other factors include the importance of the amendments to the party applying for leave and the prejudice the amendments would cause to the other side and whether that could be remedied by costs or adjournment. There could be other relevant factors depending on the facts of the case. It is a balancing exercise and the ultimate consideration is fairness (procedural as well as substantive) to the parties in all the circumstances. In the present context, what was said by Lord Griffiths in Ketteman v. Hansel Properties [1987] 1 AC 189, 220 is pertinent,

".... There is a clear difference between allowing amendments to clarify the issues in dispute and those that permit a distinct defence to be raised for the first time.

Whether an amendment should be granted is a matter for the discretion of the trial judge and he should be guided in the exercise of the discretion by his assessment of where justice lies. Many and diverse factors will bear upon the exercise of this discretion. I do not think it possible to enumerate them all or wise to attempt to do so. But justice cannot always be measured in terms of money and in my view a judge is entitled to weigh in the balance the strain the litigation imposes on litigants, particularly if they are personal litigants rather than business corporations, the anxieties occasioned by facing new issues, the raising of false hopes, and the legitimate expectation that the trial will determine the issues one way or the other. Furthermore to allow an amendment before a trial begins is quite different from allowing it at the end of the trial to give an apparently unsuccessful defendant an opportunity to renew the fight on an entirely different defence.

Another factor that a judge must weigh in the balance is the pressure on the courts caused by the great increase in litigation and the consequent necessity that, in the interests of the whole community, legal business should be conducted efficiently. We can no longer afford to show the same indulgence towards the negligent conduct of litigation as was perhaps possible in a more leisured age. There will be cases in which justice will be better served by allowing the consequences of the negligence of the lawyers to fall upon their own heads rather than by allowing an amendment at a very late stage of the proceedings."

15. This is not a case where the need for amendments is technical in the sense that the evidence concerning the new points was already raised in the witness statements or documents disclosed well in advance before trial. As mentioned, the new points were first brought up in the form of new witness statements and documents sent to the solicitors for the Plaintiffs on 16 July 2004. By that stage, the trial had already lasted for 10 days with the key Plaintiffs' witness having been cross-examined by Ms Tam for several days.

16. Explanations for the lateness of the applications were unsatisfactory. As regards the Japanese packaging, Dr Chung said he had given that to his solicitors near the end of 2003. This was confirmed by the solicitor in his Third Affirmation. Although Dr Chung said in Paragraph 2 of his sixth affirmation that the packaging was furnished in the context of the application for interlocutory injunction that had nothing to do with the copyright claims, one cannot lose sight of the fact that by that stage, the copyright action had been commenced. As demonstrated by Mr Liao, the packaging for ENHANOID had always been one of the subject matters in the copyright claims. It was pleaded in the original Statement of Claim in High Court Action No.4651 of 2002 filed on 25 February 2003.

17. Ms Tam said the focus of the Defendants and their lawyers had been placed on the spore device used in the packaging for ENHANOID and thus they did not address their minds to the packaging generally. The Japanese packaging was only relevant to the latter but not the former. Hence its significance escaped their attention. She said it was only after Mr Liao had identified the copyright works relied upon by the Plaintiffs clearly in his opening the defence lawyers appreciated that the general layout of the ENHANOID packaging also formed part of the Plaintiffs' claims. It was also suggested that the memory of Dr Chung regarding the Japanese packaging was jogged by PW1's reference to pearly white colour packing in his evidence.

18. Having considered the pleadings and the evidence filed by the Plaintiffs by way of witness statements, I do not see any justification for the alleged assumption on the part of the defendants and those advising them that the Plaintiffs' copyright claim on ENHANOID packaging was confined to the spore device. The witness statements filed on behalf of the Plaintiffs in April 2004 and documents exhibited thereto clearly referred to the whole packaging.

19. Further, if the Defendants' solicitors thought that the Japanese packaging was not relevant to any issue in the action, why did they keep it instead of returning the same to the Defendants? In my view, there is no satisfactory explanation before me as to the purpose for which Dr Chung produced that Japanese packaging to his solicitors and the retention of that by the solicitors afterwards. As Ms Tam said, that packaging had no relevance in the context of the interlocutory injunction application.

20. As regards the Japanese magazine, the explanation of the defence was that it was discovered by chance on 9 July 2004, a few days after the trial began. That was a magazine published in January 1997 and the Defendants had kept a photocopy thereof. It was alleged by Tong Siu Kan in her Third Affirmation that this photocopy was made by her in January or February 1999 when the original magazine was given to her by Professor Liu for reference. She said she had shown the magazine to the design consultant engaged by the Defendants for the creation of the packaging of the ENVANOL spore powder marketed in Hong Kong. She also said she had forgotten about it prior to the recent chanced discovery of the document.

21. Even though there had not been any cross-examination of Tong on her Third Affirmation, I do not find her assertion that this document was recently discovered by chance to be credible. The Defendants had not condescended upon particulars as to how the chance discovery came about. They did not provide this court with any information as to how the document had been kept and why it was not noticed by the defendants when list of documents were prepared despite due diligence. They did not explain why all of a sudden, Dr Chung "discovered" it on 9 July 2004. I do not need to speculate the reasons why this document was not disclosed before 16 July 2004. It is however clear to me that this document in the form of photocopy was in the Defendants' possession all along and if the Defendants wished to rely on it in this trial, there was no good reason why they had not disclosed the same much earlier.

22. Having compared the Japanese packaging and the pictures in the Japanese magazine with the copyright works relied on by the Plaintiffs and the alleged infringed items of the Defendants, I am of the view that the relevance of these pleas in this action are marginal. As regards the packaging, the Japanese packaging was alleged by the Defendants to bear some resemblance to the Plaintiffs' packaging exhibited as LX-26. However, based on the alleged infringement pleaded by the Plaintiffs, the more relevant layout should be that of LX-27 (compared with the Defendants' packaging). Ms Tam argued that these packaging were a series of works and LX-27 was derived from LX-26. In the overall scheme of the designs, having compared all these packaging, I am of the view that Ms Tam had placed undue weight on the significance of LX-26.

23. As regards the pictures of the spore in the Japanese magazine, whilst there are similarities in the image and shape of the spore between the pictures and the Plaintiffs' graphic representation of a cracked spore, these are by no means conclusive as to the subsistence of copyrights in the Plaintiffs' works. The cracks in the Plaintiffs' works were not found in the picture.

24. On the whole, it is at best speculative whether these new pleas and new evidence would afford a good defence to the Defendants to the copyright claims. Of course, at the stage of amendments, the Defendants only need to satisfy the court that amendments were arguable and I am prepared to assume that they are arguable. However, the strength of the amended case can be taken into account in the balancing exercise when the amendments came so late that it would cause prejudice to the other side that cannot be compensated by costs.

25. This is not a case where the defence would crumple without the amendments. The defence raised other grounds to resist the Plaintiffs' copyrights claims and they could (and I believe they would) still pursue those contentions in the trial. The effect of the refusal of leave to amend and to adduce new material in evidence is merely to bar the Defendants from running one aspect of their case which they failed to fairly forewarn the Plaintiffs that they intended to run in accordance with the rules of pleadings and the directions for speedy trial.

26. On balance, I take the view that it would be unfair to the Plaintiffs to allow the Defendants to raise these new points and put in the new evidence at this late stage and I ruled accordingly.

27. I turn to the witness statement of Tong Siu Kan dated 16 July 2004. The purpose of that statement was to give evidence in relation to,

(a) the Japanese packaging;

(b) two newspaper advertisements in October 2001;

(c) other counterfeit products on the market in 2003.

28. I have dealt with the evidence relating to the Japanese packaging. In the course of her submissions, Ms Tam abandoned the application in relation to other counterfeit products. The remaining part is the new evidence relating to the two newspaper advertisements. The first newspaper advertisement was the one dated 9 October 2001. It was produced by the Plaintiffs as part of exhibit LX-36 as evidence of acknowledgment by the Defendants that the 2nd Plaintiff was the inventor of the technology essential to the production of ENHANOID. A packaging of the products sold in mainland China bearing the name 盈康力 also appeared in that advertisement. There is no dispute that the advertisement was placed by the 1st Defendant. The witness statements and affirmations filed by the defence prior to this latest application did not deal with this advertisement at all.

29. Ms Tam suggested in cross-examination of Professor Liu that it was an advertisement placed by the 1st Defendant at his request for the promotion of the 2nd Plaintiff at a trade fair in Shenzhen. Professor Liu denied that. Part of the new evidence of Tong was to substantiate that allegation put by Ms Tam to Professor Liu.

30. The second advertisement was an advertisement dated 12 October 2001. According to Ms Tam, the purpose of adducing the second advertisement as additional evidence was to demonstrate that the Defendants did not intend to market ENHANOID in Hong Kong with the same packaging as that in mainland China and they did not like the name 盈康力. Ms Tam further submitted that the second advertisement could discredit the evidence of Professor Liu that 盈康力 had been sold in Hong Kong.

31. Tong's explanation for not putting in the evidence relating to these advertisements earlier was that it had not occurred to the Defendants that they were relevant prior to Liu's answers given in cross-examination.

32. I find it difficult to accept such explanation. The Defendants must have given instructions to Ms Tam about the circumstances leading to the first advertisement prior to the cross-examination of Professor Liu. Otherwise counsel could not put forward such a case to the witness. Hence, the significance of these matters should have been known to the defence well before the answers given by the witness in cross-examination.

33. As regards the second advertisement, it has always been the Plaintiffs' case that the product sold in Hong Kong was repackaged and it was named 盈康孢子油 instead of 盈康力. Mr Liao also confirmed to this court that the Plaintiffs are not relying on the first advertisement to assert that products in mainland China packaging had been sold in Hong Kong. Regarding the evidence of Liu, Mr Liao contended that his evidence should be understood as referring to planned sale of the same products in Hong Kong with repackaging.

34. Since the cross-examination of Professor Liu has not been completed and Mr Liao has yet to re-examine him, it is undesirable for the court to express a view on his evidence at this stage if it is not necessary to do so. I would only say that there is a certain element of ambiguity when he testified about the sale of 盈康力 in Hong Kong.

35. In general, an answer given by a witness to a question put to him in cross-examination concerning collateral matters must be treated as final. Evidence to contradict such answer cannot be led (see Cross & Tapper on Evidence, 9th Edn., p.297-9; Phipson on Evidence, 15th Edn., Paras.11-37 and 11-38). In my judgment, the additional evidence regarding the two advertisements relates only to collateral matters. I do not find such evidence to be of direct relevance to the issues between the parties. In this context, the main issue is who owned the goodwill pertaining to the names ENHANOID and盈康孢子油. The Plaintiffs did not suggest that by the first advertisement the Defendants accepted the Plaintiffs to be the owners of that goodwill. It seems to me to be a matter of little moment whether the first advertisement was placed at the request of Professor Liu for promotion at the trade fair. Likewise, whether the Defendants had any objection to the use of the name盈康力 in Hong Kong had no direct bearing on that main issue. Whilst the question as to who had the final say on the product name to be used in Hong Kong may be relevant to the main issue, I do not find the new evidence relating to the advertisements to be of much assistance in the resolution of that question. The advertisements did not show that the Defendants had final say on the choice of product name in Hong Kong.

36. Permitting the Defendants to adduce such new evidence on collateral issues would, in my view, unjustifiably confuse the matters that the court must decide in this trial. Further, if such evidence were admitted, the Plaintiffs would need to deal with it and this would prolong the trial unnecessarily.

37. For these reasons, I think this court should exercise its discretion in refusing leave to allow the new evidence relating to the advertisements to be adduced.

38. The drawings exhibited as "TSK-2" and "TSK-3" are different. They are directly relevant to the copyright claims. The makers, Chan Chin Hung and Wong Yan Yan, have already filed witness statements and they would be subject to cross-examination. These drawings were stored in computers and it appears that they were printed out at the suggestion of counsel in early July 2004. The production of these drawings was to complete the picture in respect of evidence already set out in the existing witness statements. The material does not raise a new dimension to the trial. Although the drawings should have been disclosed earlier, I do not think the Defendants would suffer serious prejudice if leave were granted for such evidence to be adduced. I have therefore ruled accordingly.

Representation:

Mr Andrew Liao, SC, Mr John Yan, SC and Mr Philips Wong, instructed by Messrs Sit, Fung, Kwong & Shum, for Plaintiff

Miss Winnie Tam and Mr C W Ling, instructed by Messrs S K Lam, Alfred Chan & Co., for 1st & 2nd Defendants

HCA  4651/2002
HCA 2802/2003
HCMP 74/2004

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 4651 OF 2002, 2802 OF 2003 and

MISCELLANEOUS PROCEEDINGS NO. 74 OF 2004

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BETWEEN

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(The Consolidated Action)

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REASONS FOR DECISION

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1.  The trial of this action commenced on 5 July 2004.  After PW1 Professor Liu Xin completed his evidence in chief, but before his cross-examination, Ms Tam applied on the 5^th day of trial for an order seeking the production of a 1999 diary of the professor [“the Diary”] for inspection.  The application was made orally without any summons or motion.  Nor was it supported by any affidavit or affirmation.  In the skeleton submission placed before the court, Ms Tam identified the application to be one seeking production under Order 24 Rule 10 and the scope of inspection was the part of the Diary for the period from January to June 1999.  Ms Tam further confined the application as follows,

“For the time being and subject to further application (if need be), for the eyes of the Defendant’s legal advisors (counsel and solicitors) only.”

2.  Parties were given some time to prepare for the application and the matter was argued before me in the afternoon of 9 July and the morning of 12 July 2004.  On 12 July 2004, I ruled that upon the undertaking given by the Plaintiffs to this court to allow the Defendants’ solicitors and counsel to inspect those parts of the Diary containing the entries referred to by Professor Liu in Paragraph 15 of his witness statement dated 1 April 2004, the application be dismissed.  I now give reasons for this decision.

3.  Both Ms Tam and Mr Ling (who appeared as junior counsel for the Defendants and addressed this court in reply to the submissions of Mr Yan on this application) categorically stated that this application was made solely pursuant to Order 24 Rule 10 and they disavowed any intention to seek discovery or inspection under other rules.  Their contention was that reference was made to the Diary in the witness statements of Professor Liu and therefore the Defendants were entitled to seek inspection.

4.  Although Ms Tam referred to two different paragraphs in the statements of Professor Liu in support of the application, the second reference (viz. Paragraph 10 of the statement of 21 April 2004) was essentially a cross-reference to what was said in the first statement.  Paragraph 15 of the first statement stated as follows (the statement was in Chinese and no translation had been prepared),

“本人參照本人的護照及筆記簿記錄，列出本人與鍾志強在1999年初之會面記錄大約如下:

[Then a chronology between early January and 22 May 1999 was set out.]”

The 筆記簿 mentioned in that paragraph was actually the Diary.

5.  My reading of that paragraph in the statement of Professor Liu was that the witness had made reference to the Diary and his passport in order to compile the chronology in that paragraph.  In the course of his evidence in chief, Professor Liu had corrected himself in respect of an entry in the chronology.  In the chronology in the witness statement, Agreements B and C were said to be signed in the afternoonof 13 April 1999.  In the witness box, Professor Liu said after subsequent checking, it was found out that these agreements should be signed in June 1999.  But there was no amendment to the witness statement and the application under Order 24 rule 10 had to be decided by reference to the witness statement as it is.

6.  The Defendants also understood that the reference to the Diary was by way of corroborative evidence.  Hence, in Paragraph 17 of their skeleton submissions of 9 July 2004, Ms Tam and Mr Ling said the entries in the Diary were prayed in aid by Professor Liu “as corroborating evidence for his version of events”.

7.  It is important to bear in mind that the present application was grounded upon Order 24 Rule 10 although the court’s power to order inspection stems from Order 24 Rule 11.  It was held by the majority in the Court of Appeal in Shun Kai Finance Co Ltd v Japan Leasing (HK) Ltd (No. 2) [2001] 1 HKC 636 that there are fundamental differences between inspection under Order 24 Rule 10 and other forms of discovery.  In that case, the majority (Rogers VP and Le Pichon JA) followed the approach adopted in England as laid down in the following cases: Derby v Weldon (No. 2) (The Times, 20 October 1988, unreported); Prudential Assurance Co Ltd v Fountain Page Ltd [1991] 1 WLR 756 and Eagle Star Insurance Co Ltd v Arab Bank plc 25 February 1991, unreported.  It was held that documents disclosed pursuant to Order 24 Rule 10 do not attract the protection of any implied undertaking restricting the use of the documents for the purposes of the litigation.  The rationale was that the documents were disclosed voluntarily instead of being disclosed under compulsion of law.  Le Pichon JA explained at p. 643 to 644 why documents ordered  to be produced in an Order 24 Rule 10 situation do not fall within the “compulsion exception” and Her Ladyship cited the following dicta of Hobhouse J in Prudential Assurance,

“The compulsion exception is confined to documents and information which a party is compelled, without any choice, to disclose.  Where a party has a right to choose the extent to which he will adduce evidence or deploy other material, then there is no compulsion even though a consequence of such choice is that he will have to disclose material to other parties.”

The emphasis is on the right of the party to choose the extent to which he will adduce evidence or deploy other material.

8.  In Eagle Star Insurance Co Ltd v Arab Bank plc (a transcript of the judgment was supplied to me), Hobhouse J (as he then was) explained the difference between Order 24 Rule 10 inspection and the other types of inspection under Order 24.  After referring to Quilter v Heatly (1883) 23 Ch D 42, Hobhouse J said the following regarding Order 24 Rule 10,

“It is essentially a matter of enabling the opposite party to understand fully what is in the other side’s pleading and, in effect, to have it fully particularized.  If a document is just referred to without the document being conclusively identified, and its full terms identified, then the opposite side does not have the full particularity of the other side’s pleading to which he is entitled.  The machinery by which he obtains that particularity is to entitle him to have produced to him the document which is referred to in the pleading.  The same type of reasoning applies, as is set out in [Quilter v Heatly], to affidavits as well.  If you choose to refer to a document in an affidavit, whether or not you exhibit it, you can be required, in order to enable the other side, so as to identify the full terms of the statement on oath of the other side, to see that document.  It may be, in that category, that it is viewed not so much as a matter of particulars but as a matter of the application of the best evidence rule; in other words, if you are going to refer to a document in your evidence, you must produce it.

It will be appreciated from this that, although on a number of occasions this machinery has been referred to as an exercise of discovery … it is not, in essence, a discovery exercise.  Its history is different, its function is different.” (My emphasis)

9.  Hobhouse J agreed with the reasoning of the Vice-Chancellor in Derby v Weldon (No. 2) that the party who chose to refer to a document in pleadings or affirmations destroyed the privacy of the document.  Hence, it was held that there was no compulsion to support the existence of implied undertaking.

10.  Hoffmann J (as he then was) highlighted the voluntary nature as to what were to be included in a witness statement in Comfort Hotels Ltd v Wembley Stadium Ltd  [1988] 1 WLR 872 at 877-8,

“Anything which he does not wish to disclose he may still keep to himself.  It is only if he wants to disclose the information by way of evidence at the trial that he may now be required as a precondition to disclose it in written form in advance.  What the rule therefore does is to advance the moment at which a party must examine the information he has gathered for thepurposes of the trial and decide what he is going to use and what he is going to withhold.”

11.  The question that calls for determination in the present case is this.  Given this rationale for an inspection under Order 24 Rule 10, should the Plaintiffs be permitted to seal off or cover up entries in the Diary which were not alluded to in the chronology under Paragraph 15 of the witness statement?    

12.  Even in the context of usual discovery, it is permissible to blanked out irrelevant parts of a documents disclosed, see GE Capital Corporate Finance Group v Bankers Trust [1995] 1 WLR 172.  In the context of an inspection under Order 24 Rule 10, in Quilter v Heatly (1883) 23 Ch D 42 at p. 49, the Master of the Rolls gave the disclosing party “the usual liberty to seal up such parts of [the documents] as do not contain the entries referred to by [that party in his pleadings]”.  This approach was applied by Peter Gibson J (as he then was) in Savings Bank v Gasco BV [1984] 1 WLR 271 at p. 286.

13.  In my judgment, having regard to the underlying purpose of inspection under Order 24 Rule 10 as identified in these authorities and the fundamental differences between this sort of inspection and that by way of discovery, the requirement under Rule 10 is satisfied by a production of the document with the parts not containing the entries referred to in the pleadings, affidavits or witness statements sealed up.  That was the extent to which the party filing the pleadings, affidavit or witness statement can fairly be said to have chosen to put forward that document voluntarily whilst the rest of the document were being withheld. 

14.  That does not mean that the other side could not have access to the whole document at all.  They can still apply for normal discovery in respect of the same document if they can satisfy Order 24 rule 11(2) and demonstrate the relevance and need for it.  If discovery and inspection is ordered as a result of such application, the document would be protected by the implied undertaking.

15.  In view of this conclusion, it is not necessary for me to consider whether the test under Order 24 Rule 13 has been satisfied.  It was accepted by Mr Ling that the burden still rests on the Defendants to show that inspection was necessary either for disposing fairly of the cause or matter or for saving costs.  I have some doubts if the Defendants succeed in so doing as I cannot see how the other entries could assist in resolving the various matters set out in Paragraphs 17 and 18 of the skeleton submissions of the Defendants dated 9 July 2004 bearing in mind that discovery on credibility should generally be disallowed.

16.  Further, I would in any event be disinclined to exercise my discretion to order inspection at this very late stage of the action.  Directions for speedy trial were given in this case because the court considered that the disputes between the parties should be resolved as early as possible.  A tight timetable had been prescribed and every effort had been made by all concerned (including this court by way of case management in dealing with various interlocutory applications) in the past few months to ensure that the trial would not be derailed.  The witness statement in question had been filed on 1 April 2004 but nothing had been done on the part of the Defendants to seek inspection of the Diary until 30 June 2004, less than a week before the trial.  This is wholly unacceptable and Mr Ling had not been able to offer any satisfactory explanation for such delay.

17.  The argument of this application took up one and a half days of the 15 days allocated to this trial.  If inspection of the Diary as requested by Ms Tam is ordered, there is a risk that the trial will further be prolonged or even postponed since I was told by Mr Liao that because the Diary was a private document kept by Professor Liu instead of the property of the Plaintiffs, those acting for the Plaintiffs had not had full opportunity to consider all the entries (some of which were said to be recording private matters and secrets relating to inventions and business dealings that the professor did not wish to disclose to others).  If all the pages up to end of June 1999 were to be shown to the defence lawyers, it is natural that those advising the Plaintiffs would need to go through all those pages at length.  They are disadvantaged in that exercise due to their inability to take instructions from the professor at this stage because he has commenced his evidence.  I was also told by Mr Yan that the professor was unwilling to show the other parts of the Diary to others and if an order is made, the Plaintiffs might not be able to comply with it.  This is certainly a factor I should take into account (see Rafidain Bank v Agom Universal Sugar Trading Co Ltd [1987] 1 WLR 1606 at p. 1611B to G).  The professor might also wish to be heard given the lack of protection of implied undertaking in the event that the Diary is ordered to be produced under Order 24 Rule 10.  Further, Ms Tam reserved the right to make further application regarding the showing of the Diary to her clients for taking instructions.  All these would take more time than that is available within the 15 days allocated for the trial.

18.  Moreover, since the witness statement had been adopted in evidence-in-chief, the Plaintiffs were deprived of the option of excising the reference to the Diary from the witness statement instead of giving inspection (see Quilter v Heatly).  This is a prejudice that could not be compensated by costs.

19.  Given the marginal relevance (if any) of the other entries in the Diary, I think the balance is against the exercise of the discretion to order inspection even if I were wrong in the analysis as to the sealing up of irrelevant parts.

20.  In all the circumstances, the application was dismissed for these reasons.