User pays but who gets paid? The vexed question of damages for copyright infringement
Published on 17 Jan, 2017
The long running litigation in New Zealand between Oraka Technologies and Geostel/Napier Tool & Die over copyright in an asparagus grading machine hit the Court of Appeal again late last year on the question of whether a $4.1 million damages award should be set aside, because the company which suffered the damage was not the owner or exclusive licensee of the copyright. The Court of Appeal has set aside the award on this basis (Napier Tool & Die Ltd v Oraka Technologies Ltd  NZCA 554), but remitted the case back to the High Court for quantum of damages to be determined on the basis of a notional licence fee payable for the infringing use. While the majority of the Court felt it appropriate to allow the Oraka parties the opportunity to essentially re-claim damages on a different basis, the case is a salutary reminder of the need to align IP ownership, or at least written licensing arrangements, with the commercial relevance of the intellectual property, and consideration of all possible heads of damage where that is not possible.
- A fundamental principle in the law of damages is that compensation for loss can only be awarded to those who suffered the loss. This principle is to be departed from only in exceptional circumstances.
- In this case, the copyright owner (Oraka Technologies) had not suffered any loss as it was not selling the copyrighted machinery. The loss of the opportunity to cause another company (Oraka Graders) to enter into contracts that would have generated income was not a loss which could give rise to a damages claim. Oraka Graders could not claim such loss because it was not the copyright owner or an exclusive licensee.
- However it was undisputed that damages on the basis of a notional licence fee under the user principle could be available. A majority of the Court held that in the circumstances it was appropriate to remit the matter back to the High Court to determine damages on that basis.
During the 1980s Mr Michael Schwarz developed a machine for the automatic grading of asparagus spears, which included a cup assembly (the Schwarz cup assembly) in which individual asparagus spears were held as they were graded. Napier Tool assisted in preparing drawings and tooling for the cup assembly and subsequently manufactured the cup assembly for Mr Schwarz, who commercialized this machine through a group of companies including Oraka Technologies Ltd and subsequently Oraka Holdings Ltd, and then Oraka Graders Ltd, the latter owned by his adult children.
In around 2001 Napier Tool worked with a Mr Armstrong, and subsequently a company called Geostel, to develop a competing cup assembly which could be used with the Oraka grader (the Geostel cup assembly). Geostel was formed by a former consultant to the Oraka group. It was clear that the Geostel cup assembly had been based on the Schwarz cup assembly with modifications, although Napier Tool had received advice that the two assemblies were sufficiently different to avoid copyright infringement.
In 2008, Oraka Technologies, Oraka Graders and Mr Schwarz sued Napier Tool and Geostel for copyright infringement.
The appropriate parties and damages claims
The case was plagued from near the outset with questions over the appropriate parties to the proceeding and their ability to claim losses. Geostel and Napier Tool initially argued that copyright in the Schwarz cup assembly had passed to Oraka Holdings, which was not a party to the proceeding. That argument was finally determined in the Court of Appeal, and Oraka Technologies was found to indeed own the relevant copyright.
Following a finding of infringement (also necessitating a trip to the Court of Appeal), the matter returned to the High Court for an inquiry into damages. As that proceeding transpired, it became apparent that the plaintiffs sought to adopt a “loss of business” as opposed to a “loss of sales” approach to damages. The loss of business was characterised as the loss of Oraka Technologies’ ability to cause the creation of a business (of Oraka Graders) having the value it would have had if the infringement had not taken place. The High Court accepted this approach as an exception to the general rule that compensation for loss can only be awarded to those who suffered the loss, largely applying the Australian Full Federal Court case of Insight SRC IP Holdings Pty Ltd v Australian Council for Education Research Ltd  FCAFC 62.
In Insight, the developer of a questionnaire (Dr Hart) informally licensed it to a company of which he was the major shareholder (Insight). The Full Court held that Mr Hart could recover damages arising from an infringement of copyright in the questionnaire on the basis that Dr Hart had lost the ability to cause Insight to generate a profit based on the copyright work. In a similar vein, the High Court in Oraka accepted that Oraka Technologies was effectively exploiting its copyright through Oraka Graders and had therefore lost an opportunity to cause Oraka Graders to make a profit. The loss to Oraka Technologies was accepted to be the loss of profit of Oraka Graders. Judgment for $4.1 million was therefore entered.
The Court of Appeal judgment
The Court of Appeal disagreed and set aside the judgment. In dealing with the Insight case, the Court of Appeal considered there were a number of aspects which rendered it of “little persuasive authority” in the case. It considered that the only principled basis on which Dr Hart would have been entitled to damages in his personal capacity was on the basis that his shareholding in Insight had reduced in value. However this was not the basis for the damages calculation in that case, or by the High Court in the present case. Further, since Oraka Technologies was not a shareholder of Oraka Graders, that approach could not be applied here. Whilst the Court of Appeal was sympathetic to the trial judge’s concern to provide a remedy, the Court considered that the judgment in this case was a step too far and created an illogical and unprincipled exception to the general prohibition of recovery of third party losses.
Interestingly, however the Court could not agree on whether that should be an end to the matter. In particular the Court went on to consider whether the matter should be remitted back to the High Court again to consider damages on the basis of the ‘user principle’, that is a notional licence fee for the use made by the defendants of the copyright work. Harrison J considered that Oraka Technologies should not be afforded such opportunity given that it made a conscious election not to seek this head of damages originally. However the majority, whilst recognizing that it was a discretion to be exercised very sparingly, considered that the circumstances of the case justified such a remittal. Instrumental in this decision appeared to be the fact that there was a plain infringement of the copyright which deserved “not only denunciation but also a remedy”. This was apparently a reference to the fact that the defendants had taken the Schwarz cup assembly as a starting point for their design, and should bear the consequences of that.
In an interesting twist on the contrast between the Australian and New Zealand positions, the Insight case can be seen in the context of the earlier Full Federal Court decision in Aristocrat Technologies Australia Pty Ltd v DAP Services (Kempsey) Pty Ltd (2007) 157 FCR 564;  FCAFC 40. In that case the Full Court refused to apply the user principle to allow recovery of damages in a copyright case where it was clear that the copyright owner would not have been prepared to grant a licence to the infringer. It may be that in the absence of ability to draw on the user principle, the Full Court was more sympathetic to the damages claim as framed in lnsight. In Oraka the defendants apparently have acknowledged that Oraka Technologies would be entitled to a licence fee under the user principle under New Zealand law, indicating a potential disparity in Australian and New Zealand law in this respect also (although Yates J declined to apply the Aristocrat limitation to the application of the user principle in a passing off case in the more recent Winnebago Industries Inc v Knott Investments Pty Ltd (No. 4)  FCA 1327). Of course in Australia, the Oraka copyright case would likely in any event have never got off the ground due to the “copyright/design overlap” limitation, which essentially prevents the bringing of a copyright claim in respect of an industrial product design.
In any event, it is clear from both the Insight and Oraka cases that the locus of intellectual property ownership, particularly within a closely held corporate group, can be critical to the ability to obtain a financial remedy in the event of infringement. In such circumstances, copyright is commonly not transferred from its human author to the corporate group and licensing arrangements exist only at an informal, and often implied, level. These cases show the potential value in dollar terms of structuring IP ownership appropriately at the outset, with an eye to an future infringement claim.