Winnebago the damages or a reasonable royalty Down Under

You will remember that Winnebago (USA) successfully sued the Knotts for passing off in Australia but (in large part because of Winnebago (USA)’s delay in asserting its rights) the Knotts had developed their own reputation in Australia and so could continue using WINNEBAGO here provided it was used with an appropriate disclaimer (here and here). The damages were to be assessed.

Now we know what the damages will be:

Knott Investments, the company that built and supplied the “Australian” Winnebagoes will have to pay a royalty calculated at 1% of its sales on all sales made from 6 years before the proceedings were started until the disclaimer was put in place.

The dealers who sold the vehicles will also have to pay a royalty of 1% on their sales in addition, but only from the date proceedings were actually commenced.

Winnebago (USA) claimed damages on the basis of a reasonable royalty. The respondents resisted. It was clear that Winnebago (USA) would never have granted them a licence and, equally, they would never have taken a licence from Winnebago (USA). In those circumstances, the respondents said, the court could not impose a royalty on the basis of an assumed agreement that would never have happened:

the applicant suffered no damage by way of a lost royalty (in effect, no lost “sale”) because the applicant would not have licensed the respondents to use the Winnebago marks in the first place.

Yates J rejected that defence and held that compensation was required to be paid on what has been called “the user principle”:

Under this principle, a plaintiff is entitled to recover, by way of damages, a reasonable sum from a defendant who has wrongfully used the plaintiff’s property. The plaintiff may not have suffered actual loss from the use, and the wrongdoer may not have derived actual benefit. Nevertheless, under the principle, the defendant is obliged to pay a reasonable sum for the wrongful use. The reasonable sum is sometimes described as a reasonable rent, hiring fee, endorsement fee, licence fee or royalty (amongst other expressions), depending on the property involved and the nature of the wrongful use.

Black CJ and Jacobson J in a copyright case in the Full Court had appeared to reject the application of that principle.[1] Yates J, however, considered the principle could and should be adopted in the context of passing off (and trade mark infringement) on the basis of a long line of English and Australian cases applying the principle in the context of trespass to real property, conversion, detinue and intellectual property infringements.[2] Otherwise, the respondents would escape liability for damages as a result of the very thing that made their conduct unlawful: the lack of consent by Winnebago (USA).

The respondents also argued that no damages should be payable because, as the Full Court found, they had a concurrent reputation in WINNEBAGO in Australia. Yates J rejected this too. His Honour considered that the existence of concurrent reputations – one which did not require a disclaimer and one which did – meant there was value in being able to use the reputation without any disclaimer. Yates J arrived at the royalty of 1% on the basis that Winnebago (USA) had granted a licence to an Australian licensee at that rate and, while various other considerations were entered into, that was an appropriate round number.

Three points in relation to the dealers.

Yates J rejected their first argument: that they should not be liable for anything as the supplier, Knott Investments would already have paid a royalty. However, the dealers’ sales of vehicles in passing off were separate wrongs to those of the manufacturer and so required separate compensation.

Secondly, while Winnebago (USA) did not submit evidence about what damages the dealers’ actions caused, it claimed a royalty of 4 or 5%. Yates J considered, in the absence of evidence, that a royalty of 1% would be consistent with that imposed on the supplier.

Thirdly, the dealers (and for that matter, the Knotts) would be liable for damages for passing off only where they acted with fraud: that is, with knowledge of Winnebago (USA)’s reputation in Australia and its desire to assert those rights here. In the absence of evidence avout what the dealers knew, Yates J considered that they could only be held to have acted with fraud once proceedings were initiated:

The difficulty for the applicant is that the evidence does not address the question of what the dealers knew or thought. Even if they might have been aware of the applicant’s activities in the United States or in other overseas markets, it does not follow that they also understood that the applicant had a reputation of any significance in Australia, let alone one that was capable of legal protection, or, more importantly, that, prior to the commencement of this proceeding, the applicant was claiming that it had rights in Australia in respect of the Winnebago marks and that the commercial activities of the first respondent and its dealers constituted an infringement of those rights. However, from the time of commencement of this proceeding, when the applicant’s claims were exposed, the position of the second to twelfth respondents was different. From that time, they were on notice of the applicant’s claimed rights. Their persistence in using the Winnebago marks after this notice constitutes fraud in the relevant sense.

The need to show “fraud” is another difference between the tort of passing off and the action for misleading or deceptive conduct under the Australian Consumer Law.

Winnebago Industries Inc v Knott Investments Pty Ltd (No 4) [2015] FCA 1327

  1. Aristocrat Technologies Australia Pty Ltd v DAP Services (Kempsey) Pty Ltd (2007) 157 FCR 564; [2007] FCAFC 40 (Aristocrat) at [27]-[28].  ?
  2. One of those cases was Bunnings Group Ltd v CHEP Australia Ltd (2011) 82 NSWLR 420; [2011] NSWCA 342, in which the leading judgment was given by Allsop P, now the present Chief Judge.  ?

How long do you have to pay royalties for?

Vickery J in the Supreme Court of Victoria has had to construe how long an obligation to pay royalties under a sale of patents and technology and associated consultancy agreement lasts: ruling it is as long as the purchaser is using the “invention”.

Roberts came up with the “Roberts Differential Lock”. It enables the driver of a vehicle, such as a 4-wheel drive vehicle, to lock the “dif” from the cabin without having to get out and manually adjust the wheels. The invention could be retrofitted to existing vehicles. Roberts made a provisional patent application for his invention in 1983 and a standard application followed in 1984. Corresponding applications were made in the USA, the UK and Japan in 1985. Roberts and his wife marketed the Roberts Differential Lock though their company, Altair.

In 1987, the Roberts and Altair sold all their rights in the invention to ARB. There was a lump sum payment and royalties to be paid on products made using the invention. Roberts also entered into a Consultancy Agreement for an initial period of 6 months and thereafter until terminated on 30 days’ written notice.

There were two questions before Vickery J:

(1) did ARB have to keep paying roylaties after (presumably) the (1984/1984) patents expired; and

(2) if so, to whom – the Roberts or also Altair?

The terms of the sale agreement

 2. In consideration of the consideration set out in clause 7 of this Sale Agreement and subject to clause 20 hereof, the Vendors hereby jointly and severally sell transfer and assign absolutely to [ARB] all the right title and interest in and to the Roberts Differential Lock including (without limiting the generality of the foregoing) all patent applications, patent rights and proprietary rights relating thereto, and the business name ‘Roberts Diff-Lock’.

11(a). In further consideration of the rights granted hereunder the Company shall pay to the Roberts the following royalties calculated on the net invoice value arising from the sale, lease, hire and use (hereinafter referred collectively as a ‘sale’ or ‘sold’ as the case may be) of the Products by the company and its licensees:-

[a specified dollar amount for each unit sold]. (Those amounts were subject to increase according to increases in the CPI – All Groups Index – Melbourne.)

For this purpose, “Products” were defined to mean:

‘Products’ means the differentials as manufactured pursuant to the patents as specified in the First Schedule

and the First Schedule listed the 1984 Australian patent application and the pending applications in the USA, the UK and Japan – none of which had been granted at that time.

How long?

You will have noticed that clause 11(a) does not say anything about how long the obligation to pay royalties lasted. Vickery J held as a matter of construction the obligation did not end when the “patents”[1] expired. A number of factors led to his Honour’s conclusion.

First, when the sale agreement was executed, the patent terms in the different countries where applications were pending were different. Moreover, as is typical in such agreements, the definition of “patents” extended to divisonals, re-issues, continuations, continuations in part and the like. So, his Honour concluded, the parties contemplated that there would be potentially be different expiry dates in different countries.

Secondly, although the obligation to pay royalties was imposed on sales of Products, what was sold by clause 2 were “all rights in and to the Roberts Differential Lock including … the patents and the proprietary rights relating thereto”. Then “proprietary rights” were defined not just as rights in patents, but also included copyright, confidential information, trade secrets, data, formulae and so on. So ARB was not just buying rights to the patents it was buying all rights to all the technology. Moreover, under the Consultancy Agreement, “all inventions, techniques and improvements developed in the course of the consultancy agreement ‘shall become the sole and exclusive property of ARB …’”

Together, these arrangements indicated the “ambulatory nature” of the proprietary rights ARB obtained.

Thirdly, if ARB was right and its obligations extended only to the “patents”, it had no obligation to pay royalties until at least one of the pending applications was actually registered. However, Vickery J considered it quite clear the obligation to pay was intended to apply to all products ARB sold as soon as the sale took effect whether an application had proceeded to grant or not.


109 Further, the object and purpose of the Sale Agreement may be said to be the allocation of the risks and rewards of the patent rights and the proprietary rights to be assigned to ARB by the Vendors. The risk allocation was achieved by means of the mechanism selected for determination of the price to be paid for that assignment.

110 I accept that the Vendors’ construction is commercially sensible in that it provides for an arrangement whereby each party managed its risk as to the proper price to pay (from ARB’s perspective) and to charge (from the Vendors’ perspective) in relation to the bundle of rights sold under the Sale Agreement, which at the time of entry into the contract had a value which was difficult to calculate or even estimate. Accordingly, the Sale Agreement provided for an ambulatory consideration through the royalties regime. If the rights proved to be valuable so that commercialisation of them resulted in a higher number of total sales than anticipated, then ARB would pay a higher total purchase price to the Vendors. On the other hand, if the rights proved to be valuable so that commercialisation of them resulted in a higher number of total sales than initially expected, then ARB would pay a higher total purchase price to the Vendors.

111 I also accept that such a risk-sharing arrangement is not one that had any obvious connection to the life of the patents that might be granted on the assigned patent applications, or to whether any patents became registered at all. In this regard the following is to be noted:

(a) ARB received an immediate and continuing benefit from the sales that it made using the assigned patent rights. In other words, the benefits that ARB received were not contingent upon any patent application listed in the First Schedule of the Sale Agreement proceeding to grant; and

(b) the assigned rights included proprietary rights which did not depend upon a patent proceeding to grant or remaining registered.

Vickery J then rejected ARB’s argument that it would be faced with a perpetual obligation to pay royalties: its obligation was to pay only on products that embodied the invention described in the patents. If it didn’t use that invention, it had no obligation to pay.

Pay the royalty to whom

This is one of those odd arguments where ARB was trying to contend Altair, the Roberts’ company, had no standing to sue. While cl. 11 did say that ARB had to pay “the Roberts”, Vickery J noted that the Roberts and Altair were the “Vendors” as defined and so cl. 11 should be understood as requiring payment to all three.

The conclusions reached by Vickery J, assuming there is no successful appeal, may immediately be contrasted with Maggbury Pty Ltd v Hafele Australia Pty Ltd.[2] One obvious point of difference, is that it appears that patents did actually issue in this case. Moreover, it appears that there was, or may have been, further technology of value apart from the patents – such as copyright, confidential information and further improvements.

The conclusion may also seem at odds with the policy in s 145 of the Patents Act. Even at its strongest, however, that only gives a right to terminate and does not automatically terminate the contract. As we have recently seen, however, the operation of the provision, particularly in a multi-jurisdictional context involving many faceted technologies, is less than clear.[3] In any event, ARB did not invoke the provision and it is not clear from the judgment whether there are other patent, or for that matter other “proprietary”, rights still on foot.

Nonetheless, if ARB could terminate the contract, it is an interesting question how Vickery J’s approach would sit with Maggbury if ARB used only technology now in the public domain.

Finally, as I am sure you have already concluded, if you are acting for the payor in this type of situation this case illustrates the importance of considering very carefully and providing specifically in the agreement for the duration of the obligation to pay royalties and what it is payable on if you are drawing a clause providing for a royalty – especially when the technology comes into the public domain and others may use it royalty free.

ARB Corporation v Roberts & Ors [2014] VSC 495

Lid dip: James McDougall

  1. That is, the patent applications that were pending when the sale agreement was executed.  ?
  2. (2001) 210 CLR 181.  ?
  3. MPEG LA, L.L.C. v Regency Media Pty Ltd [2014] FCA 180  ?

How much to pay for an infringement

Over at the Fortnightly Review, Ass. Pro. David Brennan takes issue with the economists who argued that Larrikin should not have been paid any damages for the Kookaburra infringements.

The economists’ argument seems to have been that Larrikin didn’t lose any sales as a result of Men at Works’ infringements and so suffered no loss.

Damages under s 115(2) of the Copyright Act are compensatory: that is, they are calculated to compensate the copyright owner for the loss suffered as a result of the infringement. One way to measure that may be the profit the copyright owner lost on sales which typically applies where the copyright owner and the infringer are competing in the same market. One problem with this is that the figure for lost sales must be discounted to reflect infringements by the infringer which would never have been sales made by the copyright owner. So for example in Autodesk v Cheung, the infringer gave the pirate copies away for free while the copyright owner’s genuine software programs sold for hundreds of dollars.

Another measure often used is the licence fee approach, particularly applicable where the owner exploits the copyright by licensing. So, Autodesk wanted the licence fees it would have been paid as if Cheung had taken out a distribution agreement like its other distributors. Wilcox J was not prepared to order damages at a reasonable royalty level because, as is typically the case, there was no way Autodesk would have licensed Cheung or, for that matter, that Cheung would have paid for a licence from Autodesk. In that situation, Wilcox J felt that the basis for a reasonable royalty — the price a hypothetical willing (but not overly anxious) licensor and a hypothetical willing (but not overly anxious) licensee would have struck — could not apply.

While some courts at first instance have been willing to use a ‘reasonable royalty’ as a basis, Wilcox J’s concerns have been endorsed by Black CJ and Jacobson J in Aristocrat.

It is interesting to contrast this approach with the way the courts in the UK have dealt with it. Relying on some “old” patent cases (including a House of Lords decision), the Court of Appeal in Blayney (trading as Aardvark Jewellery) v Clogau St David’s Gold Mines was willing to use a “notional royalty” as the measure of the damages. The foundation of this approach was a rejection of the idea that the only loss suffered by the copyright owner was lost profits. Thus, in Watson, Laidlaw & Co Ltd v Pott, Cassels and Williamson (1914) 31 RPC 104, Lord Shaw expressed the principle:

wherever an abstraction or invasion of property has occurred, then, unless such abstraction or invasion were to be sanctioned by law, the law ought to yield a recompense under the category or principle, as I say, of price or hire. If A, being a liveryman, keeps his horse standing idle in the stable, and B, against his wish or without his knowledge, rides or drives it out, it is no answer to A for B to say: “Against what loss do you want to be restored? I restore the horse. There is no loss. The horse is none the worse; it is the better for the exercise.

and applied it in the context of patent infringement:

If with regard to the general trade which was done, or would have been done by the Respondents within their ordinary range of trade, damages be assessed, these ought, of course, to enter the account and to stand. But in addition there remains that class of business which the Respondents would not have done; and in such cases it appears to me that the correct and full measure is only reached by adding that a patentee is also entitled, on the principle of price or hire, to a royalty for the unauthorised sale or use of every one of the infringing machines in a market which the infringer, if left to himself, might not have reached. Otherwise, that property which consists in the monopoly of the patented articles granted to the patentee has been invaded, and indeed abstracted, and the law, when appealed to, would be standing by and allowing the invader or abstractor to go free. In such cases a royalty is an excellent key to unlock the difficulty, and I am in entire accord with the principle laid down by Lord Moulton in Meters Ld. v Metropolitan Gas Meters Ld. (28 R.P.C. 163). Each of the infringements was an actionable wrong, and although it may have been committed in a range of business or of territory which the patentee might not have reached, he is entitled to hire or royalty in respect of each unauthorised use of his property. Otherwise, the remedy might fall unjustly short of the wrong.

The Meters case was referred to by Wilcox J, but it does not seem that Watson, Laidlaw was cited to his Honour.

Now, of course, the 19th century considerations of a horse owner and “borrower” seem “quaint” in the age of Gogle and P2P torrents. But is the principle really so different?

It appears that the third member of the Court in Aristocrat, Rares J, may well have been willing to adopt the Watson, Laidlaw approach, but the evidence failed to provide a basis for any “judicial” estimate.