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The Final Note – appeal decision on damages handed down in the Fairlight saga

7 minute read

The Full Federal Court recently handed down the fourth decision in the long-running saga between PKT Technologies Pty Ltd (Fairlight) and Peter Vogel Instruments Pty Ltd (PVI): [2019] FCAFC 216. The appeal related to a 2018 decision of Nicholas J which awarded:

  • PVI damages for Fairlight’s repudiation of the Agreement between the parties; and
  • Fairlight an account of profits for PVI’s infringement of Fairlight’s FAIRLIGHT trade mark in relation to PVI’s use of the mark in relation to apps for iPhones and iPads.

The dispute

We previously reported on the relevant background here and Nicholas J’s decision here.

In 1979, Peter Vogel, the co-founder of PVI, developed the world’s first music synthesiser capable of sampling instrumental sounds, which was called the “Fairlight Computer Musical Instrument” (or the “Fairlight CMI”). It was used in iconic songs including Michael Jackson’s “Beat It”.

In 2009, Mr Vogel wanted to develop a 30th anniversary commemorative edition of the synthesiser called the “Fairlight CMI-30A”. However, by that time, the Appellant (Fairlight) had acquired an Australian trade mark registration for the FAIRLIGHT trade mark which covered computer musical instruments, electronic musical production tools, and related computer hardware and software.

In 2010, PVI entered into a “Development and Licensing Agreement” (Agreement) with Fairlight, pursuant to which, amongst other matters:

  • Fairlight granted PVI a licence to use the FAIRLIGHT “name and brand” in relation to the Fairlight CMI-30A and a PC-compatible version (CMI Products) and for “marketing purposes” for the CMI Products; and
  • Fairlight agreed to develop customised software and hardware for the Fairlight CMI-30A and to assign the copyright in the software to PVI. PVI agreed to license-back the copyright to Fairlight. (Fairlight was ordered pay PVI $53,000 in compensatory and additional damages for infringing PVI’s copyright but this was not the focus on appeal).

In 2012, Fairlight withdrew permission for PVI to use the trade mark and purported to terminate the Agreement as a whole on the basis that PVI had breached the terms of the licence by developing and selling apps under the FAIRLIGHT trade mark via Apple’s iTunes. PVI established that Fairlight had repudiated the Agreement.

Nicholas J awarded:

  • PVI $330,956 in reliance damages and compensation for mitigation costs in respect of Fairlight’s repudiation; and
  • Fairlight an account of profits for PVI’s sales of the apps to Australian consumers.

Damages for Fairlight’s repudiation of the Agreement

  • PVI was awarded $294,390 in reliance damages, being 30% of the “wasted expenditure” PVI incurred in reliance on Fairlight performing the Agreement (Nicholas J was not satisfied PVI would have recouped all of those expenses had Fairlight performed).
  • The balance of the damages award covered the costs PVI incurred in connection with a failed attempt to modify the Fairlight CMI-30A software to work without components Fairlight had refused to supply.

On appeal:

  • Fairlight argued PVI was not entitled to reliance damages because it had not first established that it was not entitled to expectation (or “loss of profit”) damages due to the conduct of Fairlight. The Full Court rejected this argument. There is no bar or precondition to claiming reliance damages. PVI was entitled to claim reliance damages in the alternative to expectation damages.
  • Fairlight also attempted to challenge the accuracy and reliability of PVI’s evidence but this was also rejected. The Full Court held Fairlight made a forensic election at an earlier stage to not challenge the evidence and it could not do so now. The evidence was admissible and there was no error in Nicholas J relying on it.

The Full Court did, however, accept part of Fairlight’s appeal on this point, holding that some mitigation costs could not be recovered because they did not relate to the CMI Products and they had been incurred before the date of repudiation.

Account of profits for PVI’s trade mark infringement

PVI made $137,485 from selling the apps around the world, including $9,808 from sales to Australian consumers.

The key trade mark issue on appeal was whether Fairlight was entitled to all of PVI’s profits or only its profits from its sales to Australian consumers.

Nicholas J held that Fairlight was not entitled to PVI’s profits from its overseas sales because the evidence did not establish that those sales arose from offers made by PVI in Australia or PVI’s advertising and promotional activities in Australia. Nicholas J awarded Fairlight an account of profits in respect of PVI’s sales to Australian consumers only.

On appeal, Fairlight argued it was entitled to all of PVI’s profits. The Full Court was split.

The primary reason for the split was because the minority judge, Stewart J, applied s 228 of the Trade Marks Act to resolve the appeal in Fairlight’s favour.

Section 228 essentially deems that any use of a trade mark in relation to goods to be exported from Australia constitutes a use of the trade mark in relation to those goods in Australia.

Nicholas J did not consider s 228 in his decision and the majority disagreed with Stewart J’s approach, holding that it was not appropriate for the Full Court to consider s 228, either.

The majority formed that view because they considered Fairlight had not directly relied on the section before Nicholas J, it had not been the subject of clear argument below and the Court did not have the benefit of fully developed submissions in relation to its scope and operation.

The majority cautioned that “experience shows that what might appear clear without the benefit of full submissions and the citation of relevant authorities may well, at the least, be much less so after that is done.”

In contrast, Stewart J (in dissent) was satisfied that Fairlight relied on s 228 before Nicholas J “albeit not as clearly as it might have”. His Honour held that whilst “undoubtedly the Court would have been assisted by fuller and more targeted submissions on the issue, but it having been raised squarely enough and there being no procedural prejudice or surprise to PVI, the Court should decide it.”

Stewart J considered that s 228 was applicable because the case was similar to a traditional export case, in that it involved the sale abroad of apps developed in and supplied from Australia.

According to Stewart J, PVI’s use in relation to the overseas sales occurred “in the course of trade” within Australia within the meaning of s 228, and on that basis, the sales were connected with PVI’s infringing use in Australia, with the result being that Fairlight was entitled to all of PVI’s profits.

Stewart J considered that Nicholas J had wrongly applied a test which required Fairlight to establish a sale or offer to sell in Australia by PVI, neither of which are required by s 228. His Honour pointed to the only two earlier authorities which have considered s 228, both of which concluded that the application of a trade mark to goods in Australia for export constituted use of the trade mark in Australia. In one of these decisions, Southcorp Brands v Australian Rush Rich Winery, Beach J awarded Southcorp Brands an account for all profits derived from the sale of wine bottles in China where the relevant Penfolds marks were applied to the wine bottles in Australia.

Final observations

After nearly five years of litigation and four hearings, with no application for special leave to appeal to the High Court lodged by either party, and with all outstanding matters resolved by the courts, it appears that this decision marks the end of this protracted dispute.

Perhaps the most interesting aspect of the appeal was Stewart J’s dissent in relation to s 228. The section has not been widely litigated. Due to the majority’s decision to not consider the section, its potential application to cases involving online sales by Australian businesses to overseas consumers of digital products developed in and supplied from Australia, arguably remains unclear, and worthy of further consideration.