A real song and dance – damages awarded for repudiation and IP infringement in synthesiser saga

A real song and dance – damages awarded for repudiation and IP infringement in synthesiser saga

A real song and dance – damages awarded for repudiation and IP infringement in synthesiser saga

The Federal Court recently handed down its decision on the quantification of damages in the long-running saga of PKT Technologies Pty Ltd (formerly known as Fairlight.au Pty Ltd) v Peter Vogel Instruments Pty Ltd [2018] FCA 1587, which began in 2012.

The decision reinforces some important principles for assessing damages for repudiation of a contract, copyright infringement and trade mark infringement.

Background: FAIRLIGHT – an instrumental trade mark

As reported in more detail in our earlier case note here, Peter Vogel Instruments Pty Ltd (Vogel) planned to launch a commemorative edition of the “Fairlight” music synthesiser in 2009, which Peter Vogel had first developed in 1975.  By that date, the FAIRLIGHT trade mark had been registered by PKT Technologies Pty Ltd (Fairlight).  Vogel entered into an agreement with Fairlight under which Fairlight granted Vogel a licence to use the mark in relation to the synthesiser and “for marketing purposes”.  Under the agreement, Fairlight also agreed to develop software and hardware for the synthesiser for Vogel.

Vogel launched the synthesiser in 2011 to an underwhelming reception, selling only 14 units.  Vogel also launched an app under the mark at the same time.  

In 2012, Fairlight purported to terminate the agreement on the basis that Vogel was in breach of the trade mark licence for using the mark in relation to the app.

Litigation history: The key moments

At first instance, Edmonds J held that the entire agreement between the parties “hinged upon” the trade mark licence and when Fairlight withdrew the licence, the entire agreement was brought to an end.

On appeal, the Full Court disagreed, holding Fairlight had not validly terminated the agreement as it was not confined to the trade mark licence, but had a broader commercial purpose of facilitating the development of hardware and software by Fairlight for Vogel.  The agreement provided that Vogel owned the copyright in the software which Fairlight developed for Vogel, and for a licence-back arrangement under which Fairlight received the right to use that copyright in exchange for paying a licence fee to Vogel.

As a result, by purporting to terminate the agreement and thereafter failing to fulfil its obligations under it, Fairlight had repudiated the agreement.  The Full Court found Vogel was entitled to damages for that repudiation and remitted the matter to the Federal Court to determine the quantum of compensation payable by Fairlight. 

Damages for Fairlight’s repudiation

Vogel’s primary claim was for $9.5m in damages for loss of profit from the loss of sales and the loss of the chance to profit from further performance of the agreement.  This was primarily based on sales and cash flow projections in a March 2011 information memorandum Vogel had issued for a capital raising.  Nicholas J considered the reliability of the data was “greatly diminished” by the actual sales Vogel had achieved before the repudiation.  His Honour also found the data included sales of future products not covered by the trade mark licence and there was no basis for Vogel to have apparently assumed Fairlight would have granted Vogel the right to use the FAIRLIGHT trade mark in relation to those future products.  Ultimately, the Court was not satisfied the agreement would have been profitable for Vogel.  Vogel was accordingly not entitled to claim loss of profit damages.

In the alternative, Vogel had also claimed $1.28m in reliance damages.  Nicholas J rejected Fairlight’s submission that a party cannot claim expectation damages and, in the alternative, claim reliance damages as well. 

Vogel’s claim for reliance damages was broken up by its expert witness into “reliance damages” (or “residual non-R&D costs”) (of $508,724), “R&D costs” (of $472,575), “mitigation costs” (of $209,860) and “additional mitigation costs” (of $66,848).

Nicholas J held that it was appropriate to assess Vogel’s damages “by reference to the value that should be attributed to [Vogel’s] loss of the opportunity to recover at least some significant portion of [its] expenditure”. 

  • The main dispute between the parties in relation to Vogel’s expert evidence on this issue concerned the “R&D costs”. Nicholas J held the costs were recoverable as they had been reasonably incurred for the purposes of performing the agreement and related solely to the development of products covered by the agreement.  His Honour held that Vogel would not have incurred the expenses in the absence of the agreement or developed the relevant products without the right to use the FAIRLIGHT trade mark. 
  • Nicholas J did not award Vogel any damages for its claimed “mitigation costs”, being the costs Vogel said it incurred in developing new software to mitigate its losses from Fairlight’s repudiation. His Honour held these costs were unsubstantiated – it was unclear if they were not already part of Vogel’s claimed “residual non-R&D costs” or “R&D costs” or if any of them had actually been incurred after Fairlight’s repudiation. 
  • Vogel was awarded a portion of its claimed “additional mitigation costs” in the amount of $36,566. The claimed amount was reduced on account of R&D tax incentives Vogel received during the relevant years.  Unlike the “mitigation costs”, the “additional mitigation costs” had been substantiated and were incurred in connection with Vogel developing and modifying software and hardware to work without components Fairlight refused to supply.

Nicholas J accepted that Vogel had incurred wasted expenditure (excluding the “additional mitigation costs”) of $981,299 (being the sum of Vogel’s “residual non-R&D costs” and “R&D costs”. 

However, his Honour determined it would be unjust to award Vogel that amount in full by way of reliance damages because there were “extremely low” prospects Vogel would have recovered all of its expenditure absent Fairlight’s repudiation.  This was because his Honour thought that if the agreement had not been repudiated and Vogel had continued to sell the future products under a different mark to the FAIRLIGHT mark, the market for those products would have been much smaller than Vogel’s 2011 memorandum had anticipated.  As a result, his Honour was not satisfied that Vogel would have sold a sufficient number of those products to fully recoup all of its wasted expenditure.  

His Honour nevertheless considered that Vogel had lost an opportunity to recover at least some of that expenditure, which was “not insignificant and was nevertheless of considerable value to Vogel, given his reputation, effort and money that had already been spent on research and development” for the relevant products by the date of Fairlight’s repudiation.

Nicholas J awarded Vogel 30% of the $981,299, being $294,390.  His Honour added the $36,566 he held Vogel was entitled to recover as “additional mitigation costs”, which led to a final figure of $330,956 in reliance damages.

Damages awarded to Vogel for copyright infringement

The agreement provided that Vogel owned copyright in the software which Fairlight developed for Vogel (once Vogel had made all four milestone payments under the agreement to Fairlight).  Under the agreement, Vogel licensed the copyright back to Fairlight in exchange for a royalty of $1,500 per licence granted by Fairlight to its customers.  Fairlight infringed Vogel’s copyright by selling the software to two customers after Vogel had made the final milestone payment and the copyright had accordingly been assigned to Vogel.  

As a result, Vogel was entitled to $3,000 in compensatory damages (based on the licence fee specified in the agreement).

In addition, his Honour also awarded Vogel $50,000 in additional damages pursuant to section 115(4) of the Copyright Act for Fairlight’s “quite flagrant infringement” of Vogel’s copyright.  His Honour was satisfied that Fairlight understood or ought reasonably to have understood that the copyright in the software had been assigned to Vogel under the agreement.  Additionally, a letter which Vogel had sent to Fairlight had made it clear that Vogel believed Fairlight had no right to continue supplying the software to its customers without Vogel’s authorisation after the agreement was terminated.  Fairlight nevertheless continued doing so.  Nicholas J considered that Fairlight had continued selling the software when it knew or ought reasonably have known that it had no right to do so, thus demonstrating a “reckless if not deliberate disregard” of Vogel’s rights, or at least of Vogel’s “strong legal grounds for asserting ownership of the relevant copyright”.

Damages awarded to Fairlight for trade mark infringement

The remaining issue concerned the quantum of damages Fairlight was entitled to for Vogel’s infringing use of the FAIRLIGHT trade mark in relation to the app. Fairlight elected to seek an account of profits.

Surprisingly, Fairlight sought to recover the profits Vogel had made on sales of the app outside Australia.  Nicholas J confirmed that the Trade Marks Act 1995 (Cth) is territorially-limited to Australia.  Vogel did not infringe Fairlight’s Australian trade mark registration when the app was purchased and downloaded by customers located overseas.  The sale had to occur in Australia, or the sale had to result from an offer made in Australia, for Fairlight’s Australian trade mark registration to be infringed.  His Honour held the evidence did not establish that sales Vogel made of the app to overseas customers were the result of Vogel’s use of the trade mark in Australia.  Fairlight was only entitled to recover the profits it made as a result of Vogel’s sales to Australian customers, which amounted to an award of $9,808.

Vogel argued Fairlight had not established the profits it made on sales of the app to Australian consumers were made as a result of its use of the FAIRLIGHT trade mark.  However, Nicholas J found Vogel had used the mark “for the purpose of conveying a false representation to potential purchasers that there was a connection between the [app] and the owner of the Fairlight brand”, which was “likely to indicate to potential purchasers that [the app was] sold with the permission of the owner of the Fairlight brand”.  This was sufficient for Vogel to be required to account to Fairlight for the whole of the profits it made on sales of the app to Australian consumers.

Outcome and lessons: A final note

With all said and done, Fairlight must pay Vogel $374,148 (exclusive of interest) in damages. This is constituted by:

  • 330,956 in reliance damages for repudiation of the agreement;
  • plus $53,000 for copyright infringement (including $50,000 in additional damages);
  • less $9,808 for trade mark infringement, which Vogel is entitled to set off against the above amount.

The decision reinforces the following principles:

  • Seek legal advice before terminating an agreement, as doing so without proper grounds may amount to repudiation of the contract.
  • A contracting party may recover damages for repudiation of the agreement even when they would not have made a profit from it.
  • Additional damages for copyright infringement can greatly eclipse compensatory damages, such as where the infringement is “flagrant”. There is no requirement for there to be any proportionality between compensatory and additional damages.
  • An Australian trade mark is not infringed by sales that are made to overseas customers, unless the offer to sell is made in Australia.

This won’t be the last we hear about the Fairlight synthesiser however, as Fairlight has filed a notice of appeal against this decision. The matter continues to build to a crescendo.

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