User principle confirmed for assessing damages in passing-off cases

In Winnebago Industries Inc v Knott Investments Pty Ltd (No 4) ([2015] FCA 1327, December 2 2015), Yates J of the Federal Court of Australia has handed down its decision regarding damages in the long-running dispute between Winnebago Industries Inc (Winnebago US) and Knott Investments Pty Ltd.

By way of background, in the first instance proceedings in 2010, the Federal Court found that Knott Investments had engaged in passing off (and also acted in contravention of the Australian Consumer Law) by using the WINNEBAGO marks (ie, the Winnebago name, a stylised logo of the name and stylised W) in the business of the manufacture and sale of recreational vehicles in Australia. Knott Investments was restrained from further use of the WINNEBAGO marks.

Knott Investments appealed to the Full Federal Court in 2013. While the court upheld the finding of passing off and breaches of the Australian Consumer Law, it overturned the order restraining use of the WINNEBAGO marks because of the lengthy delay by Winnebago US in bringing action against Knott Investments. However, in the interests of consumer protection, the court held that any continued use of the marks by Winnebago Australia would be subject to a disclaimer in notices on vehicles and related documents saying that that there is no association with Winnebago US. The Full Court remitted back the claim for damages, which was to be limited to the period from October 14 2004 (six years before the proceedings commenced) to October 17 2013 (when final injunctive relief was granted). The court refused to remit Winnebago US’ claim to an account of profits on discretionary grounds due to the abovementioned delay and the difficulties in calculating the award.

Winnebago US sought damages based on the user principle – that is, on the basis of a reasonable royalty or licence fee in respect of Knott Investments’ use of the WINNEBAGO marks in the relevant period. In assessing damages under the user principle, the court did not look at the benefit derived by Knott Investments from the wrongful use of the marks, or the damaged suffered by Winnebago US. Rather, it considered what would be a reasonable allowance for the use of the trademarks if Knott Investments had taken the proper steps in the first place to obtain a licence from Winnebago US.

Counsel for Winnebago US argued that the user principle did not apply in the assessment of damages for passing off. In particular, they relied on the decision in Aristocrat Technologies Australia Pty Ltd v DAP Services (Kempsey) Pty Ltd ([2007] FCAFC 40), where Black CJ and Jacobson J said that damages, assessed on the basis of a reasonable royalty, are not available where it is established that a licence would not have been granted. Yates J rejected this submission on the basis that the earlier decision related to a copyright infringement claim and was not binding in the determination of the issue in a passing-off case.

Yates J conducted an extensive review of the case law relating to the application of the user principle in awarding damages for trespass, tortious interference with chattels, patent, copyright and trademark infringement, as well as passing off. Although there was no evidence of any Australian cases in which damages for passing off have been awarded under the principle, Yates J found that there was a principled and established basis for awarding damages on this basis in IP cases, and he could see no reason why the user principle should not apply in the present case.

In assessing the quantum of damages for the unauthorised use by Knott Investments of Winnebago US’ reputation in the WINNEBAGO marks in the relevant period, his Honour considered the evidence of lay and expert witnesses regarding the appropriate licence fee payable in the event that the parties had entered into a licence agreement on October 14 2004.

In providing his opinion, the expert for Knott Investments referred to an Australian licence entered into between Winnebago US and Winnebago RV Pty Ltd (a company unrelated to Winnebago Australia) on July 25 2014. In his opinion, an appropriate royalty rate was 1% of the sale price of the recreational vehicles with a reduction to reflect the reputation that Knott Investments had developed over time using the WINNEBAGO marks (there was no use by Winnebago US in Australia over the long period of time that Knott Investments used the marks, although rights had earlier been reserved in correspondence between the parties). On the other hand, the expert for Winnebago US proceeded on the basis of analysing US licences to arrive at a rate of between 4% to 5% of the sale price of the vehicles. Yates J preferred to use the Australian licence as the best basis for determining the royalty rate and considered that an appropriate rate was 1% with no deduction given the fact that Knott Investments was allowed to use the WINNEBAGO marks with a suitable disclaimer.

Yates J also considered whether damages for passing off would be payable by the Australian dealers as well as Knott Investments. His Honour followed relevant Australian authorities and confirmed that the US company would have to establish fraud in the relevant sense in order to succeed in its claims against the dealers. In this regard, his Honour found that the dealers were on notice of the rights of Winnebago US as at October 14 2014, the date of commencement of the proceedings, and their continued use of the WINNEBAGO marks after this date amounted to fraud in the relevant sense. Damages were therefore awarded to Winnebago US against all but two dealers at a rate of 1% on all sales of recreational vehicles.

This case confirms that the user principle applies to the assessment of damages in Australian passing-off cases. While encouraging for trademark owners given the lengthy delay, it still serves as a timely reminder that they should be vigilant in protecting and enforcing their trademark rights in a timely manner in order to avoid them being lost or restricted.

This article by Shelston IP Principal, Sean McManis and Associate, Kathy Mytton, first appeared in World Trademark Review, 7  January 2016.