Additional damages: Setting the record straight

Intellectual Property Barrister

Alex McDonald, Intellectual Property Barrister, Auckland

Section 121(2) of the Copyright Act 1994 gives the Court in copyright infringement cases the ability to award additional damages over and above compensatory damages (known as additional damages) having regard to the surrounding circumstances and in particular to:

  • the flagrancy of the infringement;
  • any benefit to the infringer resulting from the infringement

A recent decision of the Court of Appeal sets the record straight about the surrounding circumstances that can be taken into account and appears to rely on Australian authority to signal that significant copyright infringement additional damages can be warranted in the right circumstances.

Background facts in Skids v McNeill

Skids is a New Zealand franchisor for after school care businesses. It has around 60 franchises throughout New Zealand.

Skids franchisees operate on the basis of a policy and procedures manual. Skids owns the copyright in the documentation. This standard documentation is used in applications to CYFS for approval for the conduct of child care operations.

In 2004 Mrs Barbara McNeill entered a master franchise agreement with Skids for the northern half of the North Shore of Auckland. In 2009 Skids decided not to renew Mrs McNeill’s master franchise agreement. It considered her performance as a master franchisor to have been inadequate. The upshot of Skids decisions not to renew Mrs McNeill’s franchise agreement was that Mrs McNeill and her daughter incorporated a new company, Kids Choice Limited, which began running a new after school care program based at Murrays Bay Intermediate School. Murrays Bay Intermediate School fell within the area previously franchised to Mrs McNeill.

Mrs McNeill wrote a letter to Skids giving assurances that none of the Skids documents, systems or policies would be used by her at Murrays Bay Intermediate School. She also sent an email to the appellant’s solicitor stating that Kids Choice Limited would not use any intellectual property belonging to Skids. It was subsequently held that at about this time or shortly thereafter Mrs McNeill actually copied line for line approximately 50 pages of material belonging to Skids.

Skids applied for an interim injunction on the basis of breach of the restraint of trade clause in the master franchise agreement. Issues of misuse of confidential material were also raised in that application.

At the interim injunction stage Mrs McNeill denied copying the documentation. She also swore an affidavit in which she asserted she had carried out a diligent search of the paperwork but that it had either been shredded or returned and that no copies were kept. She stated she did not use the copyright material.

The High Court decision

The case went to a four-day trial before Justice Woodhouse at the end of 2010. Skids relied on causes of action for breach of restraint of trade, breach of confidence and copyright infringement.

Mrs McNeill was cross examined and it was put to her that she had copied the Skids’ manuals. Under oath she denied doing so.

In closing submissions Mrs McNeill’s counsel conceded there had indeed been copying of the manuals, that claim having been fully borne out by the documentary evidence as tabulated in schedules produced to the Court on behalf of Skids.

In the judgment of Woodhouse J, (Skids Program Management Ltd v McNeill CIV 2010-404-1696, Auckland High Court, 20 April 2011) the claims for breach of restraint of trade and breach of confidence failed. Kids Choice Limited was held to be liable for copyright infringement. His Honour determined that the only evidence of a quantified sum which had any bearing on the measure of damages for copyright infringement was the evidence that Skids charged new franchisees $2,000 for the documents. Compensatory damages were accordingly assessed for breach of copyright at $2,000.

Woodhouse J agreed that Mrs McNeill’s breach of copyright was flagrant. His Honour awarded an additional $1,000.00 against Skids as copyright infringement additional damages making for damages of $3000 in total.

The Court of Appeal decision

Skids appealed the damages awarded. The Court of Appeal (Skids Programme Management v McNeill [2012] NZCA 314 (Ellen France J, Venning J, Asher J) declined to interfere with the damages award of $2,000.00 against Mrs McNeill and Kids Choice Limited for breach of copyright.

The Court then considered its approach to the assessment of copyright infringement additional damages for breach of copyright.

The Court cited the view of Somers and Grieg JJ in Wellington Newspapers Limited v Dealers Guide Ltd [1984] 2 NZLR 66 (CA) that the similar words of the predecessor to s 121(2) were so broad as to indicate that damages were at large and could include elements of compensation for aggravation and of punishment.

The Court referred to the consideration of the history of the section given by the Supreme Court in Tiny Intelligence Limited v Resport Limited [2009] 2 NZLR 581 including the Whitford Committee Report that led to the 1998 United Kingdom Act. The Supreme Court quoted the recommendation in that report that the Court should be given a discretionary power to impose something equivalent to exemplary damages in cases where the existing remedies give inadequate relief. The Court cited with approval an approach which applies exemplary damages concepts to copyright infringement additional damages taken in Australia in Aristocrat Technologies Australia Pty Ltd v DAP Services (Kempsey) Pty Ltd (in liq) [2007] FCA 40. In that case the Federal Court of Australia awarded copyright infringement additional damages of AU$200,000 after awarding nominal damages of only AU$1.00. Nominal damages were awarded because the plaintiff’s evidence of loss was founded on the basis that it had lost the total value of 400 machines and that proposition could not be sustained.

The Court of Appeal concluded that section 121(2) gives the Court the power to award copyright infringement additional damages that are not linked to a compensation award. The Court held that in the process of assessing whether additional damages are warranted, the broad wording of the section indicates that the flagrancy of the actual act of infringement itself is only one of the relevant factors and all the conduct of the parties up to the time of the judgment can be considered. On that basis the Court determined that it would artificial to split Mrs McNeill’s attempts to conceal and deny the copying between the periods before and after issue of proceedings, holding that aggravating or mitigating conduct prior to and following the breach of copyright can be relevant in relation to the increase or reduction of such damages.

Using in part the factors cited by Lord Devlin in Rookes v Barnard [1964] AC 1194 (HL) at 1227-1228 the Court took into account the following considerations:

  • The nature of the infringement. The copying was extensive and deliberate.
  • The means of the parties. In this case the modest nature of the enterprise of Kids Choice Ltd.
  • The conduct of the parties up to the date of judgment. The Court regarded the initial denial and the repeated denials of copying through the interim injunction process, up to trial, and through the trial to be significant aggravating factors.
  • The availability of other penalties. In particular that the only penalty that Mrs McNeill would suffer for her flagrant copying and aggravating actions would be the award of damages.
  • The amount of the awards in s 121 in other cases referred to including the amounts awarded for exemplary damages, as summarised in McDermott v Wallace [2005] 3 NZLR 661 (CA) at [102].

Having regard to these factors the Court awarded $20,000.00 for copyright infringement additional damages which it described as a moderate but distinct award to mark what the Court considered to be outrageous behaviour. The Court reserved the question of costs for further submissions, costs of $55,610 having been awarded to Mrs McNeill and Kids Choice Limited in the High Court. Commentary The case is notable for the Court’s finding that the broad wording of s 121(2) indicates that the flagrancy of the actual act of infringement itself is only one of the relevant factors, and all conduct of the parties up to the time of judgment can be considered. This should serve as a warning for defendants making strenuous denials in cases where clear infringement has taken place.

Also of note is the Court’s statement that the power to award additional damages is not linked to a compensation award.

The Court’s reliance on Australian authority where additional damages were generously assessed might also signal a more liberal approach to the calculation of additional damages. However despite the fact that in Skids v McNeill additional damages 10 times the award of compensatory damages were held by the Court to be warranted, the quantum of additional damages awards thus far in New Zealand is relatively modest. $20,000 appears to represent the high watermark of what the courts are prepared to award. It seems to matter not whether the compensatory damages are nominal, small or significant sums.

In World TV Ltd v Best TV Ltd (Williams J., HC Auckland, CIV-2005-404-1239, 6 September 2006) compensatory damages of several hundred thousand dollars were awarded for 5 unauthorised broadcasts of Chinese TV. The Court awarded additional damages of $15,000 for flagrancy. By contrast inWellington Newspapers Limited v Dealers Guide Ltd [1984] 2 NZLR 66 (CA) the benefit accompanying the infringement was not measurable by way of compensatory damages. The High Court awarded exemplary damages of $7500 (roughly $20,000 in today’s terms). While the Court of Appeal regarded that sum as high it was not prepared to interfere with it.

In Australia, it seems everything is bigger. The $200,000 copyright infringement additional damages granted in Aristocrat Technologies Australia Pty Ltd v DAP Services (Kempsey) Pty Ltd (in liq) is not without precedent in that country. In Microsoft Corporation v Ezy Loans Pty Ltd (2004) 63 IPR 54 (FCA) the Court awarded $240,625 in compensatory damages on the basis of a standard license fee rate for Microsoft’s software. The Court awarded $350,000 in additional damages because the conduct was deliberate and deceitful and the defendants had profited considerably from their activities.

It is yet to be shown in New Zealand that s 121(2) has real teeth. Perhaps an after-school kids program at Murray’s Bay Intermediate School was not the right place for the Court of Appeal to exercise its muscle. It will be interesting to see whether in future cases involving more substantial enterprises the Courts are prepared to take up the challenge to follow the Australian example, not just to compensate copyright holders, but to punish blatant infringement.

Alex McDonald – Copyright Lawyer, Auckland