Electroquip Limited v Craigco Limited (No. 2)
High Court Auckland
Rodney Hansen J
29 April 2010
This case deals with a number of important damages issues in copyright. At a liability hearing, the first and second defendants were held to have infringed the plaintiffs’ copyright in an automatic sheep jetter. The Court made a declaration as to infringement and granted a permanent injunction.
A further hearing was convened to determine damages. The plaintiffs sought compensatory damages and additional damages under s121(2) of the Copyright Act, having regard to the flagrancy of the infringement. The defendants opposed the additional damages claim and contended that compensatory damages should be reduced because:
(a) The defendants did not know and had no reason to believe that copyright existed in the works; and
(b) Only parts of the defendants’ jetter infringed copyright.
The first head of compensatory damages was for lost sales. The defendants had been selling the infringing electronic sheep jetter for a period of four years and had sold a total of 154 units. The plaintiffs claimed that they would have sold 154 units, had the defendants not infringed.
Rodney Hansen J held that the relevant inquiry was in fact how many of the 154 units sold by the defendants were sales the plaintiffs would have made had their copyright works not been copied. While some of the defendants’ sales were substitutions for the plaintiffs’ sales, a substantial number would have been additional sales by the defendant - many of them substituting for the defendant’s mechanical jetter.  The Court concluded that the plaintiffs lost a total of 40 sales - being a value of $216,432. [19-21]
The plaintiffs also claimed a royalty of 10% on all of the defendants’ infringing units which had not resulted in lost sales to Electroquip i.e. outside the lost sales claim above.  The Court was initially concerned that this head of claim was not readily reconcilable with the principle of compensatory damages - i.e. it was not required in order to restore the plaintiffs to the position they would have been in had infringement not occurred.
While there was no New Zealand case on point, the Court noted Blayney v Clogau St David’s Gold Mines Limited  FSR 19 where the first instance judge had awarded damages based on profits from sales the claimant would have made but for infringement and a royalty for infringing sales by the defendant which the claimant could not show he would have made. Applying that case (and comments by Lord Nicholls in Attorney General v Blake  1 AC 268), Rodney Hansen J indicated the New Zealand Court’s preparedness to grant both types of damages. 
Limitation of damages: s121 Copyright Act
The defendants submitted that s121(1) of the Copyright Act operated so as to postpone the date from which damages could start to run. The provision states that:
“Where, in proceedings for infringement of copyright, it is proved, or admitted that at the time of the infringement, the defendant did not know, and had no reason to believe, that copyright existed in the work to which the proceedings relate, the plaintiff is not entitled to damages but, without prejudice to the award of any other remedy, is entitled to an account of profits.”
The defendants claimed that they did not know or have reason to believe that copyright existed until full and final disclosure had been made of the artistic works relied on i.e. 10 February 2008. 
Rodney Hansen J contrasted the inquiry under the secondary infringement provisions (i.e. whether the importer/seller knew or had reason to believe the object was an infringing copy) with s121. In the latter case, the inquiry is whether the defendant knew or had reason to believe that copyright existed in the work to which the proceedings relate. [35-6]
The court held that the test is not the knowledge of a reasonable person but what inferences might be drawn from all the circumstances. The Court found that a reasonable person in the second defendant’s position would have believed that at least some of the features he copied would have been the subject of artistic works in the forms of drawings and prototypes. The fact that he was not aware that these would confer legal rights on the plaintiffs did not assist him. The second defendant’s actions in checking to see whether there was patent protection and keeping the existence of the machine concealed was consistent with the belief on his part that the plaintiffs were or might have been in a position to assert legal rights in their product.
Apportionment of damages
The defendants submitted that damages should be reduced to take account of the fact that only parts of the defendants’ jetter - not the whole machine - infringed the plaintiffs’ copyright.
As to compensatory damages, the Court held  that apportionment was at odds of the purpose of compensatory damages and should not apply to that head of claim. Further all the cases, with one exception, where apportionment had arisen involved accounts of profits or damages for conversion. The one case which provided support for apportionment was the Australian decision Norm Engineering v Digga Australia (2007) FCA 761. Rodney Hansen J held that the reasoning of that decision was flawed and that in compensatory damages it is erroneous to introduce a consideration which is appropriate only if conversion damages are sought.
However, in the case of royalty damages, the argument for apportionment had quite different implications. These were intended to compensate the copyright owner for the benefit derived by the defendant from the use of the copyright. In the absence of precise information enabling an accurate assessment (the Court having found earlier that the defendants’ machine infringed copyright in five features) the damages based on royalty were reduced by 50%. 
The court held that flagrancy (for additional damages) goes beyond mere awareness. It was not persuaded that on those facts there was the requisite combination of knowledge and intent.