Intellectual Property Enterprise Court

IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
INTELLECTUAL PROPERTY ENTERPRISE COURT

		Royal Courts of Justice, Rolls Building Fetter Lane, London, EC4A 1NL
		09/12/2014

Judge Hacon :

Introduction

1. This is an inquiry as to damages. In her judgment of 30 July 2013 Miss Recorder Michaels found that the Defendant ("Mr Ball") had infringed a UK registered design and UK unregistered design rights in relation to a metal frame. The frame supports a leather sling used for bondage sexual activities. The rights were originally owned by the First Defendant ("UWUG") but on 18 July 2012 they were assigned to the Second Defendant ("Mr Haiss"), along with the right to sue for past infringements. Mr Haiss was sole director of UWUG from August 2011. UWUG went into voluntary liquidation on 19 February 2012 and was liquidated on 27 February 2013. It played no direct part in that trial or this inquiry.

Background facts

2. In about October 2009 UWUG orally commissioned Mr Ball to design a frame to accommodate slings made by UWUG. Mr Ball created a prototype. On 11 December 2009 UWUG ordered a first batch of 45 frames. They were delivered on 3 March 2010. Although it had been agreed that Mr Ball would be paid on delivery, UWUG was unable to do so and paid instead in instalments, the final payment being made on 15 April 2010.
3. Meanwhile either in March or April 2010 UWUG made a verbal order for a second batch of 45 frames, invoiced by Mr Ball on 5 June 2010. The invoice states that the total price was £9,729 including VAT and the terms of payment were that funds should be cleared before delivery. Mr Ball took out a loan to enable him to manufacture the frames and at the end of June 2010 he said he was ready to deliver. On 24 July 2010 there was a meeting between Mr Haiss acting for UWUG and Mr Ball. A letter dated 25 July 2010 from Mr Haiss to Mr Ball records what was said. Both of those individuals accepted that the letter is accurate. Among the matters recorded in the letter is that sales of the frames were below both parties' expectations. Mr Haiss also stated

"You have taken out a bank loan for manufacturing, that is now due for repayment and UWUG is currently not in a position to pay your invoice pro-forma."

Mr Haiss's letter was co-operative in tone and at the end suggested that he and Mr Ball take a couple of days to work out a solution to their respective difficulties.

4. I should add that much later, in Mr Haiss's Points in Response dated 3 April 2014, it was pleaded that a principal reason for UWUG not paying for the second batch of frames was a concern about the quality of the frames. If Mr Haiss had any such concern at the meeting on 24 July 2010 he did not mention it in his letter of the following day. Mr Ball denied that Mr Haiss had any criticism of the quality of the frames.
5. Returning to the chronology, on 26 July 2010 there was a further conversation between Mr Haiss and Mr Ball. A summary was recorded in writing by Mr Haiss on or about 28 July 2010. This summary too is accepted as being accurate by Mr Ball. It records that Mr Ball stated that he intended to travel around the country and sell the frames himself in order to rescue his business. By way of counter-proposal, Mr Haiss suggested that Mr Ball should market the frames as agent of UWUG, selling in addition other products in the UWUG range. Mr Haiss indicated that he would send a draft proposal. The summary also records this:

"The last 8 frames of [the first] batch have been rectified and are still to be sold. For the second batch of 45 frames [Mr Ball] changed the payment terms from 50% on delivery and 50% on 30 days to payment upfront. This batch is invoiced and ready for delivery. UWUG LTD is currently not able to pay for the whole batch up-front. In addition the approach of the summer months means that business is getting low and most buyers are on holiday."

6. On 28 July 2010 Mr Haiss sent an email to Mr Ball suggesting that Mr Ball should receive a commission on his sales, all of which would be formally sales by UWUG. The rate would be 20% of sales price on Mr Ball's initial sales and 10% for subsequent sales.
7. Mr Ball responded in an email dated 2 August 2010. He said nothing about Mr Haiss's proposal that he should act as an agent of UWUG or about sales of other products in UWUG's range. Referring only to the frames, he said that he would offer them to UWUG at a discount. It is clear from the email that Mr Ball intended to sell frames himself and to that extent potentially would compete with UWUG.
8. Mr Haiss did not respond to Mr Ball, but there is an email dated 3 August 2010 from Mr Haiss to Philip Dunn which indicates his view at that time. Mr Dunn has known Mr Haiss for some 20 years and has assisted him in the past with business ventures, in particular by providing funds. Mr Dunn was a director of UWUG. He plays a further role in this inquiry to which I will return. The email of 3 August 2010 indicates that Mr Haiss believed that Mr Ball was trying to take advantage of him and needed to be stopped. Mr Haiss attached a draft agreement for Mr Dunn to consider according to which Mr Ball would be permitted to sell the frames to third parties on stated terms. The document does not expressly state that UWUG held rights in relation to the frame but in cross-examination Mr Haiss said that was his belief and it is consistent with the terms of the draft which implicitly assume that Mr Ball was not free to make sales to third parties without the need to reach accommodation with UWUG. As it later turned out, Mr Haiss was right about this. The draft agreement included the following:

"The manufacturer [Mr Ball], unable to hold the goods for a further month, declared he wants to take on the distribution of the frame for himself. The distributor [UWUG] offered to engage him as an agent to increase sales. The manufacturer declined. Other agreements could not be reached.

Both parties agree, however, that for the sake of the continuation of the frame, an agreement needs to be signed that allows the manufacturer to market the frame and the distributor to get reimbursed for his efforts in developing and marketing the frame."

The proposed terms included the following:

• Mr Ball would supply UWUG for onward sale to retailers at a price of £160 per frame.

• UWUG would not sell frames directly to other retailers.

• Sales of frames by Mr Ball which were not related to direct efforts by UWUG would incur a royalty of 10% of Mr Ball's sales price payable to UWUG.

• Mr Ball could sell other UWUG products subject to a commission of 15% of sales price.

9. Mr Dunn responded on 3 August 2010 suggesting that UWUG should not work with Mr Ball in the future since he could not be trusted. Mr Haiss's proposed agreement set out in the draft of 3 August 2010 never reached Mr Ball.
10. On 5 August 2010 Mr Ball sent an email to Mr Haiss stating that any agreement between Mr Ball and UWUG was at an end because UWUG was in default of payment. This was the last contact between Mr Ball and Mr Haiss for some months.
11. By 12 August 2010 UWUG was looking elsewhere for a manfucturer of frames. On that date UWUG entered into a written non-disclosure agreement with Paternus Edelzerspanung GmbH ("Paternus") in the course of negotiations for Paternus to become a new supplier of frames.
12. Despite Mr Ball's indication at the end of July and the start of August 2010 that he intended to sell the second batch of frames to third parties, he did not start doing so until February 2011.
13. In the first communication between Mr Ball and Mr Haiss since 5 August 2010 Mr Ball sent an email to Mr Haiss on 9 March 2011 stating that his frame had been "redesigned to allow simple easy one man assembly and dismantling." Mr Ball stated that the frame was on offer to any retailer in the EU and asked Mr Haiss if he wanted to be one of them.
14. Mr Haiss did not reply. The next communication between the parties was a letter before action from UWUG's solicitors to Mr Ball dated 27 June 2011.

Heads of claim

15. Mr Haiss claims damages under the following heads:

(1) Loss of profit from sales of frames that UWUG would have made had Mr Ball not supplied third parties with infringing frames.

(2) Loss of profit from sales of convoyed goods that would have accompanied such sales of frames by UWUG.

(3) To the extent that Mr Ball made sales of infringing frames which did not affect UWUG's sales, damages on the 'user principle'.

(4) Damages from UWUG's loss of opportunity to make sales of frames in the future.

Whether Mr Ball's infringing sales affected UWUG's sales of frames

16. Mr Haiss's claim under the first head is not the usual one, i.e. that potential sales by the claimant were in effect stolen by the defendant's sales of infringing products. Instead Mr Haiss argues that if Mr Ball had not sold to third parties and thus committed acts of infringement, Mr Ball would have sold the relevant frames to UWUG. UWUG would have sold them on and made a profit. That lost profit is the first claimed head of damage. A curiosity about this is that although Mr Ball was contractually obliged to sell to the second batch of frames UWUG and UWUG was obliged to buy them, neither party brought an action for breach of contract. That said, in relation to the second batch of frames Mr Haiss's claim under this head, now standing in UWUG's shoes, is equivalent to a claim by UWUG for profits lost due to Mr Ball's contractual failure to supply UWUG with the frames.
17. This first head requires Mr Haiss to prove that (a) UWUG was in a financial position from February 2011 onwards (when infringing sales started) such that it could afford to buy the frames from Mr Ball and (b) it was willing to do so.
18. I was shown published accounts as at 31 July 2010 which indicate that UWUG had net assets of around £22,000, the assets including around £10,000 in cash. This was only a week after the meeting of 24 July 2010 at which Mr Haiss had said that UWUG did not have the funds to pay for the second batch of frames (i.e. £9,729). In cross-examination Mr Haiss admitted that UWUG's inability to pay was caused by cash flow problems. "Cash flow is king" was how he put it. The discrepancy between this statement and the published accounts was not put to Mr Haiss but it seems that cash flow was not literally the reason for UWUG's failure to pay Mr Ball. Seven days after the meeting (if not before) there was enough in UWUG's cash account to cover payment. It does not follow that Mr Haiss was being untruthful in the broader sense that UWUG could not afford to pay Mr Ball – there may have been other more urgent financial commitments which had to be met.
19. The next financial snapshot is the balance sheet dated August 2011. By then UWUG had net liabilities of around £10,000 and cash at a level of only about £1,650. It is not possible to say what financial state the company was in as of February 2011. However it seems that the finances deteriorated between July 2010 and August 2011. Also, if Mr Haiss is to be believed, the published accounts of 31 July 2010 did not reflect UWUG's ability to pay Mr Ball around £10,000 even at that time. The evidence suggests to me, and I find, that Mr Haiss accurately informed Mr Ball in late June 2010 that UWUG was not able to pay him for the second batch of frames and that its ability to pay had, if anything, deteriorated by February 2011.
20. Infringing sales by Mr Ball continued until 2013. I have seen monthly balance sheets for UWUG up to October 2012. I have no reason to think that it was in a better position to pay Mr Ball at any time up to its liquidation in February 2013.
21. Mr Haiss's response to this was to say that funds were available from Mr Dunn. In his witness statement Mr Dunn said that he had been prepared to invest up to £40,000 in UWUG so that if Mr Haiss had needed £10,000 to buy the second batch of frames from Mr Ball he would have loaned UWUG that amount. Mr Dunn did not specify dates but I will assume he means that he was willing to loan the £10,000 in the period from July 2010 to February 2011. This evidence is surprising in light of Mr Dunn's email of 3 August 2010 advising Mr Haiss not to work with Mr Ball because he could not be trusted. However it is not impossible that Mr Dunn would have been willing to lend the money against his better judgment had Mr Haiss asked for it. In fact neither Mr Dunn nor Mr Haiss said that Mr Haiss had requested money from Mr Dunn to pay for the second batch of frames. Mr Dunn ceased being a director of UWUG in August 2011. He said that by then the company was on its feet and no longer needed his guidance.
22. Why, if Mr Haiss wanted to buy frames from Mr Ball – and on the assumption that the money was available from Mr Dunn to do so – did Mr Haiss not at any time ask Mr Ball for the second batch of frames to be delivered? Mr Haiss said that his reasons were those set out in paragraph 5 of the pleaded Points in Response of 3 April 2014. In summary they are:

(i) UWUG had concerns about the quality of the frames.

(ii) Mr Ball had not made the frames (presumably this means by July 2010).

(iii) Alternatively Mr Haiss believed that Mr Ball had not made the frames or obtained the bags for them.

(iv) Had UWUG paid for the frames, they would not have been delivered.

(v) The relationship between UWUG and Mr Haiss on the one hand, and Mr Ball on the other, had broken down such that Mr Haiss no longer wished to do business with Mr Ball if alternative sources of frames were available.

Paragraph 5 also pleads that retail sales by UWUG were not disappointing.

23. This last mentioned assertion is contrary to what Mr Haiss recorded in his letter to Mr Ball on 25 July 2010. None of the items I have listed as (i) to (iv) were mentioned either in that letter, or in Mr Haiss's written summary of his conversation with Mr Ball on 26 July 2010, or in the background set out in Mr Haiss's draft proposed agreement with Mr Ball which he sent to Mr Dunn on 3 August 2010. With regard to item (ii), Mr Haiss's strongest point was that Mr Ball's delay of 6 months or so in first marketing the second batch of frames in February 2011 could only be explained, he argued, by the fact that Mr Ball had not made them by July 2010 and could never have delivered them; alternatively the bags in which they were contained had not been made. Mr Ball denied this in cross-examination and said that during the relevant 6 months he was still hoping that Mr Haiss would buy the frames from him. I accept that evidence.
24. I find that none of the alleged reasons for UWUG's failure to attempt to buy the frames in reality played any significant part in Mr Haiss's decision not to have UWUG take delivery of any frames after the first batch. By contrast the reason I have listed as (v) is entirely consistent with the contemporaneous documents. Mr Haiss and Mr Ball might have found a modus vivendi in early August 2010 for the supply of frames to UWUG but Mr Dunn advised Mr Haiss against it and Mr Haiss accepted that advice. Thereafter Mr Haiss made no attempt on behalf of UWUG to buy any frames from Mr Ball. The relationship had indeed broken down, mostly on Mr Haiss's side. Unsurprisingly, a factor was Mr Haiss's expectation that UWUG could source its frames from Paternus even though in the end this came to nothing.
25. I find that whether for financial reasons or otherwise neither UWUG nor later Mr Haiss was prepared to buy frames from Mr Ball after the first batch had been delivered.
26. It follows that UWUG's lack of supply of frames by Mr Ball after the first batch, and thus its loss of profit from sales of such frames, was not caused by Mr Ball. Likewise there was no loss of sales of convoyed goods caused by Mr Ball.

Loss of profit on the 'user principle'

27. The hypothesis on which this head of loss is based is that in February 2011 Mr Haiss and Mr Ball entered into negotiations for a licence to be granted by the former to the latter to enable Mr Ball lawfully to sell the relevant frames to third parties. Each would have been sufficiently willing to agree terms such that a licence would have eventuated.
28. Mr Haiss relied on Mr Ball's email to him dated 2 August 2010. In that, Mr Ball indicated that his retail guide price was £510 and his wholesale price would be £343. There is then an offer which is not entirely clear;

"As a founding retailer I think it fair to give you 30% discount for all your retail sales and 10% commission on sale agreements you have already made to date but I will need to agree each one on an individual basis depending on terms agreed."

29. Mr Haiss focussed on the first part of the offer. He said that a 30% discount on the wholesale price was £102.90. That, in effect, is what Mr Ball was prepared to pay UWUG for each sale by UWUG and so that should be the royalty payable on the user principle.
30. I think there are two problems with this. The first is that this was about sales by UWUG and thus the cost of those sales would have been borne by UWUG. It does not follow that in relation to sales by Mr Ball, Mr Ball would have been prepared to pay UWUG the same amount by way of a royalty. The second is that the meaning and impact of the second part of Mr Ball's offer, in relation to sale agreements already made by UWUG, was neither explored at trial nor made clear.
31. For his part Mr Ball relied on the draft agreement prepared by Mr Haiss as sent to Mr Dunn. Mr Ball never saw it in advance of this litigation but his case was that in early August 2010 the document represented what Mr Haiss thought was a fair offer. Mr Dunn advised Mr Haiss against making this offer but not on the ground that it was unduly generous; Mr Dunn's reservation was that Mr Ball was untrustworthy. The key feature of this draft was the proposal that UWUG would be paid a royalty of 10% of Mr Ball's sales price on all sales of frames by Mr Ball that were not related to any efforts by UWUG.
32. I have reached the conclusion that this draft, even though it was never part of any negotiating process between Mr Haiss and Mr Ball, is the best guide I have to the sort of figure that the parties would have settled on had the hypothetical negotiations taken place in February 2011. It is of course possible that Mr Ball would have treated this as an opening offer and negotiated a lower figure. I also recognise that it formed one part of a larger draft proposal from Mr Haiss. Taking all that into account I find that the damages payable to Mr Haiss on the user principle are the equivalent of 10% of Mr Ball's sales price for the infringing frames.

Loss of profits on future sales

33. Mr Haiss's fourth claimed head of loss is difficult to follow. In a more conventional case, where the claimant argues that his potential sales were stolen by the defendant's infringing sales, it is sometimes argued that the diminished size of the claimant's business caused by the infringement led to the claimant suffering reduced sales after the infringing sales came to a halt. This may be difficult to prove, but it is nonetheless an argument available to a successful claimant in an IP case where the facts support it.
34. Mr Haiss's argument is necessarily different. It appears to be based on the assumption that had Mr Ball sold the frames to UWUG (and thus not infringed) UWUG would have built up a business which would have continued to be profitable after 2013. The further assumption is presumably that in such circumstances Mr Ball would have continued to supply UWUG from 2013 onwards or alternatively that UWUG would have sourced the frames from elsewhere. On the findings I have made, the failure of UWUG to build up a frame business during the period of infringement was not caused by Mr Ball. In addition there is no evidence of an alternative source of frames waiting to take over as supplier. I reject Mr Haiss's claim under this head.

Conclusion

35. Mr Haiss is entitled to damages equivalent to 10% of Mr Ball's selling price on each infringing frame sold by Mr Ball to a third party. I leave the parties to calculate the sum due and will hear argument on interest.