England and Wales Patents County Court

IN THE PATENTS COUNTY COURT

		St. Dunstan's House 133-137 Fetter Lane London EC4A 1HD
		29/07/2011

His Honour Judge Birss QC :

1. The claimant ("Temple Island") supplies gift and souvenir items. It contends that it is the owner of copyright which subsists in an original artistic work, namely a stylised photograph of a red Routemaster bus depicted on a greyscale image of Westminster Bridge, before the Houses of Parliament. It was created in about August/September 2005 and has been used on various items of merchandising from about late 2005, including souvenir items such as posters, mugs and key rings. At the CMC the claimant described the image as iconic. The work was created by the claimant's founder and managing director Mr Fielder. This work can be referred to as the "2005 Work".
2. The first defendant ("New English Teas") sells tea. The second defendant ("Mr Houghton") is the sole director of New English Teas. On one of the defendants' boxes of tea is an image of a red bus depicted on a greyscale image of Westminster Bridge, before the Houses of Parliament (the "Tea Box Image"). The claimant contended that image infringed its copyright in the 2005 Work. That copyright claim was settled in correspondence starting from a Part 36 offer in March 2010.
3. However in October 2010 the claimant discovered that the defendants were using a second image of a red bus depicted on a greyscale image of Westminster Bridge, before the Houses of Parliament. The second image appears (at least) on a tin for tea bags (the "Tea Bag Tin Image"). The claimant's case is that this also infringes its copyright.
4. By December 2010 there were some outstanding disputes concerning the settlement agreement but the main dispute was about the Tea Bag Tin Image. The claimant commenced proceedings in the High Court on 15^th December 2010. The Defence was filed in January 2011 and the case was transferred to the Patents County Court afterwards.
5. Accordingly the procedural scheme in the Patents County Court in place since October 2010 applies to this case.
6. The case management conference came before me on 15^th June 2011 (see Temple Island v New English Teas [2011] EWPCC 019). In the course of reviewing the issues, it became clear that the disputes relating to the settlement agreement were self contained and capable of being safely hived off and dealt with on paper. One dispute was quantum, first as to an amount of royalty, it being fairly clear that the sum on any view will be modest; and second as to the cost of drawing up a licence, the rival figures being £500 and £2,000. The other dispute was as to whether or not the settlement included a term requiring New English Teas to enter into a formal licence and if so whether that licence should include an 'open book' term. That depended only on analysing correspondence. So the settlement issues were hived off to be determined on paper with the parties filing written submissions on a tight timetable and page limits on the material to be filed.
7. The parties filed the written submissions required and this judgment has been arrived at on paper by considering those submissions. The relevant claim has therefore been determined on paper - see CPR Part 63 r 63.23(3): "The court may determine the claim on the papers where all parties consent".

Context of the dispute

8. The context in which these points arise is the correspondence which passed between the parties (and their representatives) as follows. On 16^th March 2010 McDaniel & Co for Temple Island wrote to Steeles Law then acting for New English Teas making a Part 36 Offer to comprise the copyright infringement claim relating to the 2005 Work. This letter included the following terms of the offer:

"1. Your client agrees to pay our client a 5% royalty from the trade sale price of all past and pending sales of the Infringing Work.

2. Your client will enter into a suitable undertaking not to order and/or produce any further stock of, and no longer use, the Infringing Work. However your clients will be allowed a 1 month sell off period to fulfil pending orders and get rid of existing stock.

3. Your client will enter into a licence agreement (which will be drafted by this firm at your client's cost) which will allow your client to use the Work (the Red Bus image) of our client on its products on an ongoing basis in return for a 5% royalty on the trade sale price."

9. The letter also stated that:

"In terms of the licence agreement, whilst the core will be the 5% royalty, other terms will of course need to be formalised. Our client will however insist on an "open book" policy relating to the royalty payment which in any event, as you will be aware, is standard in such licences."

10. On 1^st April 2010 Steeles Law replied, stating that their client was prepared to agree as follows:

"1. Agreed.

2. Agreed, although the period allowed for the sell off of our client's goods will need to be extended by agreement. We suggest that this will be in the interest of your client as it will lead to an increased payment being received.

3. Agreed. Our client has suggested that a meeting take place between Nick Houghton and Justin Fielder of our respective clients to discuss the appropriate terms for the licence in order to avoid unnecessary costs being incurred through solicitor's correspondence.

Costs

Our client agrees to pay your client's reasonable legal costs in drafting the agreement and dealing with this matter up to the date of this letter, such costs to be assessed if not agreed."

11. In response McDaniel naturally took the view that in principle their offer had been accepted and they responded to the queries raised. For the sell-off period 3 months was suggested. As for the meeting, McDaniel proposed sending a draft licence first and then if necessary the parties could meet. McDaniel ended by stating that their costs to date were £1750 + VAT. In response (16^th April) Steeles accepted both of McDaniel's suggestions but did not accept the figure on costs.
12. As I understand it the parties exchanged further correspondence about the draft licence. I have not been shown that correspondence.
13. On 23^rd July 2010 Steeles Law wrote following consideration of an amended draft licence then passing between the parties. They made it clear that their client agreed to pay the 5% royalty, to undertake (in effect) to stop using the allegedly infringing work with a run off period, to enter into a licence agreement by which they would pay 5% on future use of the 2005 Work and pay costs. However they were concerned about the draft licence then on the table since it included a term (clause 5) about future adaptations (which they said was not envisaged as part of the agreement to enter into the licence). Also they stated as follows:

"7. Further, we are advised that our client no longer proposes to use the allegedly infringing works on its products, preferring to source images elsewhere."

14. They proposed in paragraphs 9 and 10 that New English Teas would pay the 5% royalty and pay legal costs of £1,000, In paragraph 11 of the letter they stated that their client would not rule out doing business with the claimant in future subject to prior contact beforehand and an agreement being reached about royalty charges and licensing should the need arise.
15. McDaniel replied on 9 August 2010:

"Prior to receipt of your letter we had been informed by our client that your client had informed our client that it no longer wished to proceed with the licence but would broadly be prepared to proceed as outlined in paragraph 9 to 11 of your letter.

The first point is that, strictly speaking, an agreement was reached between our respective clients whereby a licence would be entered into. Our client could of course, if it wished, seek specific performance of that agreement however our client does acknowledge that under the terms of the licence your client is under no obligation to actually use the Red Bus image."

16. They continued, stating that Temple Island did require the undertaking (not to use the allegedly infringing work) and payment of the royalty on past sales and asked for figures in that respect. As regards costs they looked forward to receiving the £1,000 towards costs of the proceedings but reiterated the point as regards the costs of drafting the licence. They pointed out the defendant had agreed to pay them and stated that they were £2,000 plus VAT but stated that the client would not been seeking VAT.
17. An exchange of emails took place, starting out between Nick Houghton and Justin Fielder. The debate was about the costs of the licence. Nick Houghton's position was that because they were not proceeding with the licence, the defendants should not have to pay the costs of it. The claimant's position was that the licence had been drafted and costs incurred before the defendants unilaterally pulled out. Mr Houghton replied that one reason he pulled out was clause 5 (which I assume means the clause about adaptations). He also doubted a fee of £2,000 for two drafts of a standard licence. The last email from McDaniel in this exchange (13 October 2010) referred again to specific performance, stated that they would not oblige the defendants to actually use the image and as regards costs pointed out that the agreement to meet the costs of preparation was not conditional on the licence being entered into. Sensibly it made the point that the dispute was in danger of leading to satellite litigation the costs of which would dwarf the sum in issue. Mr Houghton's final response was to offer £500 for the work done.
18. In October 2010 New English Teas produced the second allegedly infringing work which is the subject of the main proceedings. Temple Island sued in December 2010. As well as the claim for copyright infringement in relation to the defendants' second work – which will go to a full trial – the claim included a claim for the unpaid 5% royalty as well as a claim for specific performance, requiring the first defendant to enter into a formal licence agreement in relation to the 2005 Work. There was also a claim that the formal licence agreement would include an "open book" term giving the licensor the right to have disclosure of the licensees' sales so as to verify the royalties. In its defence New English Teas accepted that the claim for the tea Box Image had settled and produced a table setting out the 5% royalty calculation. They admitted that an agreement to enter a formal licence had been made but contended that the agreement had been varied so as not to require a licence to be entered into because the first defendant no longer wished to use the first allegedly infringing work. They denied that the open book term had been agreed.
19. Following the directions given at the CMC, the parties filed their written submissions as required and this judgment is the judgment on those issues. The issues are:

i) Calculation of the sum due to be paid (including the royalty due and the costs associated with the licence);

ii) The claim for specific performance;

iii) Resolution of the open book point.

Calculation of the sum due to be paid by way of royalty

20. The table annexed to the defence is:

Product	Volume cases	Units/ case	volume	sales value	Av MSP/ tin	%Red Bus	5%	corrected
HR19	939	16	15024	31016	2.06	100%	1551	1551
HC05	991	16	15848	24952	1.57	33%	412	383	7% reduction
HC06	961	16	15376	24572	1.6	33%	405	377	7% reduction
HC01	257	24	6166	3249	0.53	100%	162	151	7% reduction
MT16	163	16	2612	2139	0.82	100%	107	107
MT16A	22	48	1056	612	0.58	100%	31	31
MT20	1810	24	43430	93960	2.16	33%	1550	1550
MT21	1169	24	28050	62537	2.23	33%	1032	1032
Total				243036.69			£5,250	£5,182

21. I note that some of the numbers in the volume column are the product of the numbers in the Volume cases and Units/case columns and some are not. The claimant produced a revised table in which these discrepancies were corrected but it was not clear whether the defendants accepted them or not. When the judgment is handed down I will permit the parties to make brief written submissions on this point in order to draw up the appropriate order.
22. Subject to the previous point, the basic data in the table is not in dispute. Thus the first defendant has dealt in some 6312 cases of product with cases including 16, 24 or 48 units in them. The figure of 6312 is the total of the volume cases column. The first defendant accepts that it owes a 5% royalty on the "sales value" column subject to two points. It says that in some cases the tin with the infringing image was only one of three tins in a multipack and so it should only pay the 5% royalty on a third of the sales value of the multipack (hence the 33% figures in the "%Red Bus" column). Also in some cases there is a discrepancy in its figures such that in fact 7% fewer products were sold on than is accounted for in these numbers. The relevant figures are shown as with a 7% reduction.
23. The claimant's case is that there is no basis for the 33% reduction nor the 7% reduction. I can deal with the 7% reduction shortly. The claimant does not accept that there is proper evidence to support it. The defendants' stance is that the figures are verified by a statement of truth, the discrepancy was apparently explained in further information given on 13^th June 2011. However they observe that the point is worth £68 and further submissions would be disproportionate. The claimant contends the defendants' position is "implausible" and "suspicious". There is no evidence to support that. The figures are verified by a statement of truth and in my judgment I have no reason not to accept what the defendants say about their figures. They are in the best position to know what they have sold. Accordingly the 7% deduction will be permitted.
24. The points on the 33% figure are as follows. The claimant contends that there is no basis to reduce the figure by two thirds just because the tin carrying the infringing image was one of three tins in a multi pack. They point out that the agreement was to pay 5% on trade price and not retail price, an arrangement inherently favourable to the licensee/infringer in the first place so no further reduction is fair. They contend that no reduction was agreed for the case in which the allegedly infringing work formed part only of the sale in question. In the case of the tin of tea, in fact it carries four reproductions of the allegedly infringing work but the royalty did not increase four fold. So if the product of commerce is a multipack, it is the price of that item which should be used. Moreover they submit there is no basis for a pro-rata reduction of one third just because the pack had three tins. It takes no account of whether a purchaser could have made the decision to buy the pack based on the inclusion of the allegedly infringing work. They submit that it is legitimate to consider the work as more than one third's importance to the overall design. Temple Island's work is famous and if people bought a multipack of tea it is likely that the reproduction complained of caused the purchaser to buy the tea.
25. The defendants responded pointing out that the exercise is one of construction of the agreement (that is common ground), they submit that the agreement was to pay 5% "of the trade sale price of all past and pending sales of the infringing work" and point out that is not tied to a product sold at all. They submit the natural interpretation was to pay royalty on boxes/tins of tea which included the allegedly infringing work, whether sold alone or in a multipack. They say otherwise in extremis were the defendants to produce a set of licensed images of 20 buses from around the world the royalty would be 100% which would be absurd.
26. They also explain that the purchaser could split the packs and sell the tins individually if they wished, each tin having its own bar code, best before date and being fully wrapped. The tins in the multipack are identical to tins sold individually. The list price of the multipack is always 3 times the selling price of an individual pack. No discount was offered. The prices in the table vary because individual customers were charged individual prices.
27. They concluded by submitting that the trade price was what was agreed and should be stuck to, the retailer's mark up is irrelevant nor is it relevant how many faces on the box carry the image. They submit there is no evidence the allegedly "famous" image causes purchasers to buy the multipack.
28. In response the claimant submits that no doubt the "20 buses of the world" would be commercially absurd but that has nothing to do with the construction of the agreement. It submits that the logic of the defendants' argument about paying on the infringing work, which is only part of the multipack, would mean that the royalty should have been calculated on the price of the tin box not including the tea, but it was not. Commercial common sense points to using the price of the multipack. As for the explanation about purchaser's splitting packs, they contend there is no evidence in support of that.

Decision on 33%

29. The claimant complains that there is no evidence to support the defendants' submissions about the purchasers splitting packs, the pricing of multipacks and the lack of discounts. In my judgment that is not a fair criticism since both sides supported the approach of deciding this issue in this fashion. There is nothing inherently improbable about what is being put forward here. I accept what the defendants say on these issues.
30. As for the "20 buses of the world", it seems to me that the defendants' argument does not assist. The fact that it is possible to envisage a different set of facts in which a royalty of the kind agreed would lead to a commercially silly outcome if the first defendant chose to act in a certain way does not help.
31. Plainly the issue is the correct construction of the agreement to pay 5% royalty on the trade price. Since the first defendant sells tins of tea and not drawings, the price is obviously the price of what the first defendant was selling. I agree with the claimant that the logic of part of the defendants' argument would mean that the royalty should have been paid on boxes absent the contents of tea, but it clearly was not. In my judgment the sum is due on the price of the things the first defendant was actually selling which incorporated the image in question. I do not have to decide positively whether in fact customers would be moved to buy the multipack of tea if they saw the allegedly infringing image as opposed to one of the other two images. It seems to me that from the point of view of working out what the royalty was to be paid on, it is enough to see that the multipack itself was being sold the first defendant's customers as a single thing – albeit a pack they could open if they wished but could leave as a pack of three. It allowed the retailer to sell the multipack as a single thing and made it possible for that multipack to be sold as a result of the pack catching the eye of a member of the public as a result of the allegedly infringing image. In such a case it would be unfair not to pay the royalty on the whole multipack.
32. The parties did not invent a complex mechanism to decide that the royalty only had to be paid on unsplit multipacks, or even on unsplit multipacks that attracted the customer by means of the allegedly infringing work. That is a testament to their pragmatism. The agreement was simple and in my judgment it means that the 5% royalty was due on the price of the things sold in the form they were sold by the first defendant. Thus for multipacks including a representation of the infringing work the price includes the whole multipack. I reject the case of a payment of only 33% of that price.
33. I should note that the defendants' evidence that I accepted, concerning the act that packs could be split, multipack pricing and so on is irrelevant. Selling a multipack unit facilitates the sale of that multipack, which incorporates the allegedly infringing work, by the retailer. The fact that the retailer can split packs if they wish does not alter what is being sold by the first defendant. The royalty is calculated on what the first defendant sold, not what the retailer sold.
34. The sum to be paid will be a little over double the sum submitted by the first defendant (approximately £12,000). The parties should submit a corrected table taking my findings into account and producing the accurate sum.

Costs of licence

35. It is common ground that the reasonable costs of drawing up the licence agreement should be paid by the first defendant to the claimant. The issue is quantum.
36. The claimant contends for £2,000. This is on the basis that the correct range is £2,000 – £2,500 on the following basis. McDaniel's standard charging regime is to charge £1,500 for the use of a standard licence and then time on top to adapt it to the parties' needs. In this case the time accounts for some £1271 based on 4.3 hours of Mr Head-Rapson at £217 per hour and 2.1 hours of Mr Lee at £161 per hour. This gives £2771. Thus £2,000 is entirely reasonable.
37. The defendants contend for £500. This is three hours of senior solicitor time which is more than adequate. They contend that there is no evidence to support the submission about McDaniel's standard charging regime and note that the draft included many terms which the first defendant did not agree to. They also raise a point that the licence provided to their client in correspondence seemed to derive from a different firm - Ward Hadaway. That point is answered by the claimant in that Mr Head-Rapson used to work at Ward Hadaway. He drafted the precedent.
38. In reply (in addition to the Ward Hadaway point) the claimant submits that McDaniel's terms and conditions can be read on their website (and give the url), that the point is a red herring since the issue is reasonableness judged by the normal legal criteria (conduct of the parties, amount involved, importance of matter to parties, skill effort and need for specialised knowledge, time spent, place and circumstances in which the work was done). They point out that an approach based on time spent alone does not correctly value the work, especially the pre-existing work. The claimant cites an observation of Donaldson J in Treasury Solicitor v Regester [1978] 2 All ER 920 QBD that "the magnetic attraction of time should be sternly resisted" when other factors dwarf its significance and on this they rely on the value of the transaction.
39. The issue is to determine what the reasonable costs are. It seems to me that I can and should approach this issue on the same basis as a summary assessment of costs. I have the same sort of information to go on. I agree that time is not the only factor. The value is relevant too as is the fact that a copyright licence is a specialised agreement. On the other hand the licence required was the simplest sort of copyright licence and I note that the first defendant was raising the point in correspondence that the licence contained terms that were not agreed (clause 5). It seems to me that £500 as contended for by the defendants is too low and £2,000 to £2,500 too high. Bearing in mind what was at stake in this case I assess a reasonable level of costs for drawing up a licence here to be £1,500. That will have to be added to the sum due from the first defendant.

Specific performance

40. I can deal with this point shortly. It seems to me that, as the defendants contend, the parties did agree to vary the terms such that no actual licence had to be drawn up. The claimant submitted that the fact that McDaniel's 9^th August response expressly referred to specific performance in the paragraph quoted above, meant that the underlying agreement was not varied. However taking the correspondence as a whole, it seems to me that once it became plain – as the first defendant represented – that no licence was needed because the 2005 Work was not going to be exploited in future, the claimant accepted that position. That is why the debate shifted to focus on the costs already incurred in drawing up the agreement. That is what was meant by the claimant being broadly prepared to proceed as outlined in paragraph 9 to 11 of the first defendant's letter, it is why the reference to specific performance was in a paragraph including the words "strictly speaking". Moreover the sentence reads "Our client could of course, if it wished, seek specific performance of that agreement however our client does acknowledge that…". That seems to me to be an acceptance (albeit maybe reluctant) that specific performance was not going to be sought, in other words the claimant was not going to demand the defendant enter into the licence. Of course whether in fact specific performance was available begs the question to some extent but in my judgment even if it were available prior to that letter, the claimant's letter accepts that entry into the licence would not be demanded.
41. Accordingly I reject the claim for specific performance. Of course the costs of the licence still have to be paid.

Open Book term

42. It seems to me that the argument whether the licence includes an open book term does not arise since no licence has to be entered into. I will say only this, such a term is of course very common in intellectual property licences for precisely the reason the claimant wants it here. They allow the claimant to ensure it has been properly paid.

Conclusion

43. The sum to be paid should not include the deduction of two thirds for certain cases, can include the 7% deduction and ought to include £1,500 by way of costs for drafting the licence agreement. By 1^st September 2011, the parties should submit either an agreed draft order including the sum due on the basis of these findings or their rival submissions if the matter cannot be agreed.