Commentary on Stewart v Franmara Inc [2012] NZHC 548

A recent interim judgment by Toogood J in the Auckland High Court presents a useful case study for Intellectual Property lawyers in New Zealand, from a commercialisation and litigation perspective.  

It also provides an example of what inventors should do when looking for investors and demonstrates some of the limits of New Zealand law in cases of blatant breach of intellectual property rights.  

The plaintiff was the inventor of a Champagne bottle opener able to remove the cork together with the wire restraint and the foil wrapping in one movement.  

The basic facts are common; the inventor signed a confidentiality agreement with potential investors before entering into discussions that eventually failed.  

The defendant then went ahead on its own and distributed openers based on the plaintiff’s design that it had made in China.  

In the mean time the plaintiff was granted a patent in New Zealand and in the United States.  

The plaintiff claimed:

  1. breach of the confidentiality agreement;
  2. infringement of his New Zealand patent;
  3. infringement of his US Patent; and
  4. breach of section 17200 of the Business and Professions Code of California on unfair competition.  

Whilst Toogood J reserved his judgment on the court’s entitlement to adjudicate (c) and (d), he found there was breach of the confidentiality agreement and of the New Zealand Patent.  

This was a relatively straightforward case. The defendant was duly served but took no steps to defend the claims. The facts were thus not disputed and the judge was satisfied that the invention was covered by the confidentiality agreement. The defendant was found to have:

  • failed to receive and maintain the confidential information in confidence;
  • used it to develop, manufacture and market its own competing product;
  • used it in its own business;
  • disclosed it to third-party; and
  • copied and/or reproduced it, and/or recorded it on its website.  

The plaintiff was awarded damages for loss of:

  • revenue or other income from sales achieved by the defendant; and
  • potential revenue or other income from sales which he had not been able to achieve in markets in which the defendant was selling its bottle opener.  

The judge was also satisfied that the New Zealand Patent had been infringed, and found that marketing the product in New Zealand via the Internet constituted a use of the plaintiff’s invention in New Zealand.  

This entitled the plaintiff to damages of US$133,000 per annum plus interest in light of the circumstances giving rise to the claim. In total the damages awarded were about US$1,000,000, along with costs (amounting to about $30,000).  

The case was clear; there was a well drafted confidentiality agreement protecting the inventor, the defendant did not defend the claims, the facts were not disputed and the breach of the agreement and the patent were blatant.  

Compensation was calculated by reference to a “reasonable royalty”, which was what a person desiring to manufacture and sell a patented article as a business proposition would be willing to pay as a royalty and yet be able to make and sell the patented article in the market at a reasonable profit.  

Generally, damages are calculated so as to put the plaintiff in the position he would have occupied had the defendant’s wrong not been committed.  

Here that meant to put the parties in the position they would have been in had they agreed to commercialise the plaintiff’s invention. Interest was included and thus brought the total order for damages to an amount marginally higher than the loss of revenue.  

Although an account of profit is a legitimate alternative here, damages should give an option to “go further”; by claiming interest and some measure for the blatant and intentional wrong.  The interest was effectively the only element which could be said to “punish” the infringer (even though not intended or designed to so punish).   

So in one view, the loss has been compensated but there is little or no deterrent to such behaviour.  

Should exemplary damages be more commonly awarded in cases of wilful infringement? Such damages are currently very rare and difficult to obtain, and there is a strong argument for making the order of exemplary damages more readily available in such situations. Many infringers rely on the costs of legal action to decrease the risk of being “caught” and pursued. One cannot help but wonder if a punitive element (such as the “treble damages” available in the United States for wilful infringement) would be a useful incentive for plaintiffs to seek redress as well as a deterrent to infringers in New Zealand also.  Cost awards in New Zealand typically only cover a small portion of the actual cost involved in pursuing litigation.  

Plaintiffs will often be out of pocket unless a high amount of damages is awarded.  Greater access to exemplary damages would make litigation more realistic for many would be plaintiffs.  

New Zealand case law seems to devalue the regulatory role that the law can play in deterring illegal commercial behaviour.  This is a typical case of business-to-society and business-to-business costs externalising.  Thousands of dollars in taxpayers’ money and legal costs were spent to correct a wrong.  The wrongdoer has yet to pay compensation for that, or at least part of it.  The author suggests easier access to exemplary or “additional” damages should be considered in New Zealand.