Hong Kong Court of Appeal, MGA Entertainment, Inc. v. Toys & Trends (Hong Kong) Ltd

A Hong Kong Court of Appeal judgment provides guidance on the assessment of damages arising from an interim injunction in a copyright infringement proceeding which is not pursued to trial. It dealt with the question whether the damages included damages caused by cease and desist letters sent to actual and potential customers of the defendant prior to the grant of the interim injunction.

MGA Entertainment, Inc. (MGA) is the copyright owner of the artistic work for "Bratz" fashion dolls first sold in mid-2001. In early 2002, Toys & Trends Ltd started to market a range of dolls under the name "Funky Tweenz" which MGA alleged infringed their copyright. Prior to commencing copyright infringement proceedings, MGA sent cease and desist letters to customers and potential customers of Toys & Trends which stated that MGA was "presently in process of taking legal action against Toys & Trends in Hong Kong and China".

In July 2002, MGA obtained an interim injunction restraining Toys & Trends from reproducing, marketing and selling Funky Tweenz dolls. Although the order did not contain an express undertaking as to damages, MGA accepted that an undertaking had been given by implication. In March 2008, on the first day of trial, MGA applied to discontinue the action and discharge the injunction. Following that, the Deputy Judge awarded damages to Toys & Trends in the amount of U.S.$7,250,000.

MGA appealed, claiming that the Deputy Judge had erred in 1) relying on Toys & Trends' expert evidence on the amount; and 2) taking into account for the assessment of damages the damages from the cease and desist letters sent to the actual and potential customers although only damages resulting from the grant of the injunction were recoverable under the undertaking.

The Hong Kong Court of Appeal however dismissed the appeal. The court held that due to the limited evidence available regarding the Funky Tweenz dolls (which were marketed for only about half a year before the injunction was in place), it was reasonable to make a comparison with other businesses in the same trade sector in order to assess the losses of Toys & Trends. It was also correct to apply the "liberal assessment" approach of Les Laboratoires Servier v. Apotex Inc.[1] which states: "[..] a party who is granted interim relief but fails to establish it at trial is [..] to be treated as if he made a promise not to prevent that which the injunction in fact prevents. There should [..] be a degree of symmetry between the process by which he obtained his relief (an approximate answer involving a limited consideration of the detailed merits) and that by which he compensates the subject of the injunction for having done so without legal right."

The court accepted the assessment of the damages by the Toys & Trends' expert in the amount of U.S.$7,250,000 who had based this on a comparable product life cycle of 10 years from 2002 to 2011 and an estimated annual sale of 450,000 units from 2002. The court said it was artificial to differentiate between the effects of a (threatened) litigation on one side, and of an interim injunction on the other side. Referring to Lilly Icos LLC v. 8PM Chemists Ltd[2], the court held it was not necessary to establish that the injunctions were the exclusive cause of the loss. Therefore, although MGA's cease and desist letters might not have been perceived as "empty threats", there was no doubt that Toys & Trends' loss directly flowed from its compliance with the injunction order.

The decision shows that the Hong Kong courts exercise greater leniency towards a defendant if the plaintiff who had obtained an interim injunction does not proceed to trial. In assessing the amount of damages, the court might not rely solely on actual losses but would also consider assumptions in favor of the defendant, e.g. a mere expression of interest in a product of the defendant might be considered for lost profits. Further, the courts are likely take a broad approach as to which damages result from an injunction. Even if the defendant had stopped the sale of a product upon the request of plaintiff prior to the grant of an injunction, those losses might still be considered as being caused by the injunction.

Therefore, when deciding whether to apply for an interim injunction in Hong Kong, potential plaintiffs should be prepared to make good their undertaking as to damages and consider their exposure to losses upon the defendant's compliance with the injunction, including losses arising from letters before action.