Aristocrat Technologies Australia Pty Limited (ACN 001 660715) v D.A.P. Services (Kempsey) Pty Limited (in liquidation)(ACN 055 803 542) [2007] FCAFC 40 (29 March 2007)

Aristocrat Technologies Australia Pty Limited (ACN 001 660 715) v D.A.P. Services (Kempsey) Pty Limited (in liquidation) (ACN 055 803 542)

INTELLECTUAL PROPERTY – copyright – assessment of damages – election for compensatory damages – assessment of damages on the basis of a royalty inappropriate – whether loss of sales by the copyright owner could be inferred merely from the fact of sales of infringing product – requirement for evidence of lost sales and value of such sales – additional damages – purpose of awarding additional damages – assessment of additional damages

Copyright Act 1968 (Cth) s 115(2), s 115(4)

Autodesk Australia Pty Limited v Cheung (1990) 94 ALR 472 followed
Autodesk Inc v Yee (1996) 68 FCR 391 followed
Bailey v Namol Pty Limited [1994] FCA 1401; (1994) 53 FCR 102 applied
Columbia Pictures Industries Inc v Luckins (1996) 34 IPR 504 followed
Dr Martens Australia Pty Limited v Bata Shoe Co of Australia Limited (1997) 75 FCR 230 cited
Enzed Holdings Limited v Wynthea Pty Limited (1984) 57 ALR 167 considered
General Tire and Rubber Co v Firestone Tyre and Rubber Co Limited [1976] RPC 197 applied
Interfirm Comparison (Aust) Pty Limited v Law Society of New South Wales (1975) 6 ALR 445 applied
Lamb v Cotongo [1987] HCA 47; (1987) 164 CLR 1 applied
Microsoft Corporation v Goodview (2000) 49 IPR 578 followed
Microsoft Corporation v PC Club of Aust Pty Limited [2005] FCA 1522; (2005) 148 FCR 310 followed
Mills v Stanway Coaches Ltd [1940] 2 KB 334 discussed
Paramount Pictures Corporation v Hasluck (2006) IRP 293 followed
Placer (Granny Smith) Pty Limited v Theiss Contractors Pty Limited [2003] HCA 10; (2003) 196 ALR 257 discussed
Polygram Pty Limited v Golden Editions Pty Limited (1997) 76 FCR 565 followed
Raben Footwear v Polygram Records Inc (1997) 75 FCR 88 followed
The Commonwealth v Amann Aviation Pty Limited [1991] HCA 54; (1991) 174 CLR 64 cited
Watson, Laidlaw & Co Ltd v Pott, Cassell and Williamson (1914) 31 RPC 104 discussed

ARISTOCRAT TECHNOLOGIES AUSTRALIA PTY LIMITED (ACN 001 660 715) AND ANOR v D.A.P. SERVICES (KEMPSEY PTY LIMITED (IN LIQUIDATION) (ACN 055 803 542) AND ORS
NSD 712 OF 2006

BLACK CJ, JACOBSON AND RARES JJ
29 MARCH 2007
SYDNEY

IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY	NSD 712 of 2006

BETWEEN:	ARISTOCRAT TECHNOLOGIES AUSTRALIA PTY LIMITED (ACN 001 660 715) First Appellant/First Cross-respondent ARISTOCRAT INTERNATIONAL PTY LIMITED (ACN 000 148 58) Second Appellant/Second Cross-respondent
AND:	D.A.P SERVICES (KEMPSEY) PTY LIMITED (IN LIQUIDATION) (ACN 055 803 542) First Respondent DAVID ALLAN PARRY Second Respondent/First Cross-appellant RHONDA DENISE PARRY Third Respondent/First Cross-appellant

JUDGES:	BLACK CJ, JACOBSON AND RARES JJ
DATE OF ORDER:	29 MARCH 2007
WHERE MADE:	SYDNEY

5. Costs be reserved for determination after further argument.

Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY	NSD 712 of 2006

BETWEEN:	ARISTOCRAT TECHNOLOGIES AUSTRALIA PTY LIMITED (ACN 001 660 715) First Appellant/First Cross-respondent ARISTOCRAT INTERNATIONAL PTY LIMITED (ACN 000 148 58) Second Appellant/Second Cross-respondent
AND:	D.A.P SERVICES (KEMPSEY) PTY LIMITED (IN LIQUIDATION) (ACN 055 803 542) First Respondent DAVID ALLAN PARRY Second Respondent/First Cross-appellant RHONDA DENISE PARRY Third Respondent/Second Cross-appellant

JUDGES:	BLACK CJ, JACOBSON AND RARES JJ
DATE:	29 MARCH 2007
PLACE:	SYDNEY

1 The essential issue raised on this appeal is what degree of certainty is required for an applicant to prove its loss in a claim for damages for infringement of copyright.

2 It is almost trite to say that, in such a case, an applicant bears the onus of proof. But as Bowen LJ said over a century ago, as much certainty is required as is reasonable, having regard to all the circumstances; to require more "would be the vainest pedantry"; Ratcliffe v Evans [1892] 2 QB 524 at 532-533; see also Placer (Granny Smith) Pty Limited v Theiss Contractors Pty Limited [2003] HCA 10; (2003) 196 ALR 257 at [37].

3 This appeal does not arise because of any pedantry on the part of the respondents. Rather, it arises because the primary judge found, in our view correctly, that he lacked the evidence necessary for him to calculate the value of lost sales, if any; see Aristocrat Technologies Australia Pty Ltd v Vidtech Gaming Services Pty Ltd (2006) 68 IPR 229 at [118]. His Honour then said that the "only feasible course" was to calculate damages on an accounting for profit approach. He proceeded on that basis to award $80,000 damages against Vidtech, Mr Parry and Mrs Parry and $40,000 (ie 50%) additional damages against Vidtech and Mr Parry. Both sides agree that his Honour was in error in adopting this approach because the applicants had elected to claim damages rather than an account of profits.

4 Error having been conceded by the personal respondents (they being the only respondents to appear on the hearing of the appeal), and it appearing that the concession was correctly made and that the appeal should be allowed, ordinarily we might have remitted the case to the primary judge. However, since his Honour has now retired from the Court we should, as the parties accept, determine for ourselves the appropriate measure of loss under s 115(2) of the Copyright Act 1968 (Cth).

5 This course requires us to consider afresh the quantification of additional damages under s 115(4) of the Act.

6 We also have before us a cross-appeal in which Mr and Mrs Parry seek to challenge two factual findings made by the primary judge. These are that:

7 It was agreed between the parties that the first appellant, Aristocrat, was the owner of the copyright in two species of intellectual property in components of its electronic gaming machines. These were, first, artistic works comprising illustrations of the games to be played on the machines and, second, the literary works comprising the computer software that operated the machines (contained within ‘EPROMs’); see [7].

8 The artistic works comprised perspex artwork panels displayed on the gaming machines. Upon the basis of documents made available to Aristocrat, it was agreed between the parties that 615 artwork panels were produced by a contractor on behalf of Vidtech. The parties also agreed that 615 panels would have supplied the artwork for about 400 gaming machines; [11].

9 The artwork was commissioned by Mr or Mrs Parry. Mr Parry conceded that he knew by January 2005 that the artwork infringed Aristocrat’s copyright. Despite Mr Parry’s assertions to the contrary, his Honour found that Mr Parry knew "from the outset" that the artwork infringed copyright. Mrs Parry did not give evidence but his Honour inferred that she also knew of the copyright infringement; [57], [60], [68], [70].

10 Mr Parry vigorously denied extensive copying of the software but his Honour rejected that evidence. He considered that, whilst the evidence was sparse, he was satisfied that Vidtech copied Aristocrat’s software whenever it needed to do so in order to make up an item known as a "conversion kit" to change one type of game to another, or to provide appropriate software to a refurbished machine that was being converted from one game to another; [86].

11 The evidence to which his Honour referred to support that finding is summarised in the judgment of Rares J at [67] – [78]. The evidence included Vidtech’s extensive software library and emails which indicated Vidtech’s willingness and ability to engage in copying on a very large scale.

12 His Honour’s finding also took into account the evidence of a trap purchase in which Mr Parry made statements which demonstrated that Vidtech and Mr Parry knowingly engaged in large scale copying. His Honour observed at [82]:

13 Aristocrat’s claim for damages was supported by evidence from its Group Financial Controller and an expert’s report from a chartered accountant.

14 The accountant’s report calculated a loss of over $6 million based upon an assumption that Vidtech sold 2,375 infringing machines. That figure included losses to Aristocrat’s subsidiaries, which the trial judge rightly excluded because the subsidiaries were not applicants; see [104]. At the trial, senior counsel for Aristocrat conceded that not all sales of Aristocrat machines by Vidtech were infringing but submitted that the accountant’s report should be treated as a "ready reckoner" for the purpose of assessing compensatory damages by reference to the number of infringing machines sold by Vidtech; see [113].

15 The accountant’s quantification of the loss on each infringing sale was based upon the Group Financial Controller’s tables which attempted to show average revenues obtained by Aristocrat companies for each "unit". This word was apparently used to describe, interchangeably, a "game kit" used in a new machine or a conversion kit for a used machine; see [105] – [106].

16 His Honour rejected the accountant’s calculation because he said it was based upon an incorrect assumption that each Vidtech infringing sale cost Aristocrat the sale of a new machine. His Honour observed that the sale price of a new machine was in the order of
$12,000 (AUD) whereas the sale price of Vidtech’s refurbished machines was slightly in excess of $2,000 (US); see [111].

17 His Honour considered, but rejected, the possibility of calculating loss on the basis of the price paid in Australia for conversion kits. The Financial Controller’s evidence was that the price range for conversion kits in Australia was $3,000 - $4,000. His Honour observed, however, that since Vidtech sold mainly to overseas customers, overseas prices were more relevant. He pointed out that there was no evidence of the prices charged to overseas customers for Aristocrat conversion kits, or of the volume of such sales; see [116] – [117].

18 The primary judge then turned to a calculation of the profits made by Vidtech on the infringing materials. He did not assess a figure for the perspex panels and the software separately, although he noted the submission by counsel for Mr and Mrs Parry that the limit of Aristocrat’s loss was to be calculated at $50 average profit per panel, which yielded a figure of $30,750; [119].

19 Instead, his Honour calculated the profit made by Vidtech on its quoted price for conversion kits, ie artwork panels and software, less the cost of production. This gave a profit of $200 on each conversion kit comprising the 400 infringing sets of artwork and software.

20 Thus his Honour assessed total compensatory damages as $80,000 plus interest; [124] – [125].
The primary judge’s calculation of additional damages

21 His Honour accepted submissions made by Aristocrat that additional damages should be awarded by reason of the flagrancy of the copyright infringement on the part of Vidtech and Mr Parry. He referred to steps taken by Mr Parry to try to hide Vidtech’s infringement and he also referred to Mr Parry’s offers to supply infringing material even after he was informed of an allegation of infringement. He also took into account the benefits received by Vidtech, namely that the provision of infringing materials assisted in the sale of second hand gaming machines; [128] – [131].

22 The trial judge calculated additional damages under s 115(4) by adding 50% to the calculation of compensatory damages. Thus, he awarded $40,000 against Vidtech and Mr Parry. He did not order additional damages against Mrs Parry.
Damages under s 115(2)

23 The remedies that may be granted to a copyright owner in an action for infringement include an injunction and either damages or an account of profits; s 115(2).

24 The authorities are clear that an applicant cannot claim both damages and an account; an election must be made before judgment; Dr Martens Australia Pty Limited v Bata Shoe Co of Australia Limited (1997) 75 FCR 230 (Goldberg J). It would be inconsistent with this principle, and contrary to the notions of fairness upon which it is founded, to proceed contrary to the election. Here, Aristocrat elected to claim damages, perhaps because additional damages under s 115(4) do not lie where an account of profits is claimed; McGregor on Damages, 17^th ed [40,039].

25 The purpose of an award of damages for breach of copyright "is to compensate the plaintiff for the loss which he has suffered as a result of the defendant’s breach"; see Interfirm Comparison (Aust) Pty Limited v Law Society of New South Wales (1975) 6 ALR 445 at 446 (Bowen CJ); Bailey v Namol Pty Limited [1994] FCA 1401; (1994) 53 FCR 102 at 111 (Burchett, Gummow and O’Loughlin JJ).

26 In some cases, a royalty may provide the appropriate measure of damages; Interfirm at 446; Bailey at 111 – 112. Aristocrat argued that damages could be assessed on that basis as an alternative to its primary claim for loss of the value of sales.

27 However, a royalty does not provide the appropriate measure of damages where the copyright owner would not have granted a licence; Columbia Pictures Industries Inc v Luckins (1996) 34 IPR 504 at 509 (Tamberlin J); Autodesk Australia Pty Limited v Cheung (1990) 94 ALR 472 at 476 – 477 (Wilcox J); Microsoft Corporation v Goodview (2000) 49 IPR 578 at [55].

28 In the present case, Aristocrat did not seek to establish that it would have granted a licence to Vidtech. The plain inference was that it would not have been prepared to do so. A royalty does not therefore provide an appropriate measure of damages.

29 In any event, Aristocrat did not lead evidence that licences were granted to users at any particular rate of royalty, let alone that which was claimed as a royalty in the present case. In those circumstances, where the quantification of royalties charged by a copyright owner is entirely within its own knowledge, a court should not speculate as to what royalty might have been foregone; Paramount Pictures Corporation v Hasluck (2006) 70 IPR 293; cf Microsoft Corporation v Ezy Loans Pty Limited (2005) 63 IPR 54 at [88].

30 The gravamen of Aristocrat’s claim for substantial damages was that the chartered accountant’s report provided a clear "ready reckoner" for the computation of the value of its lost sales. Senior Counsel submitted that the report "stripped out" the intellectual property value of the units referred to by the Financial Controller, ie the initial game kits and the conversion kits.

31 The difficulty with this approach is that it rests upon assumptions that were not established. There was nothing to suggest that initial game kits were sold independently of the sale of new machines. Indeed, it would appear that they are part of each new machine. Thus, the position in respect of initial game kits is no different from the argument rejected by the primary judge. His Honour found, correctly in our view, that it could not be assumed, and was not established, that each sale by Vidtech was at the expense of a new Aristocrat machine.

32 His Honour found that there was no evidence of the price or volume of sales of conversion kits made to overseas customers. Moreover, during the hearing of the appeal, counsel for Mr and Mrs Parry pointed out that evidence had also been given at trial, during cross-examination, that Aristocrat itself sold second-hand machines. No evidence of their price or the volume of sales of second-hand machines by Aristocrat was led, and those figures were excluded from the information that the accountant used to estimate Aristocrat’s loss. In our view, the accountant’s "intellectual property value" does not fill this evidentiary hole in Aristocrat’s case.

33 In short, the suggested intellectual property value of each "unit" cannot provide a basis for a finding that Aristocrat lost a sale of each item of intellectual property for each sale of an infringing copy made by Vidtech.

34 That is not to say that Aristocrat could not have discharged the onus of proving its loss. As Vidtech and Mr and Mrs Parry were found to be wrongdoers damages should be liberally assessed, in the sense that inferences will be more readily drawn against them, but the object remains to compensate Aristocrat, not to punish the respondents; Bailey at 110 – 111; General Tire and Rubber Co v Firestone Tyre and Rubber Co Limited [1976] RPC 197 at 212 (Lord Wilberforce).

35 If a court finds that damage has occurred it must do its best to quantify the loss, even if some degree of speculation and guess work is involved; Enzed Holdings Limited v Wynthea Pty Limited (1984) 57 ALR 167 at 183 (Sheppard, Morling & Wilcox JJ). But, as their Honours emphasised, this principle applies only where a court finds that loss or damage has occurred; it is not enough merely to show wrongful conduct by a defendant. See also the observations of Mason CJ and Dawson J in The Commonwealth v Amann Aviation Pty Limited [1991] HCA 54; (1991) 174 CLR 64 at 83.

36 In Placer at [37] – [38] Hayne J pointed to the stricter approach taken by the courts in assessing damages where a plaintiff has not adduced evidence that was apparently available to prove the loss. Rares J has set out the relevant passages from Placer at [101] of his reasons for judgment. We agree with Rares J that it was open to Aristocrat to prove the volume and prices of sales in overseas markets. We also agree that it was artificial to suggest that Aristocrat lost the value of a sale for each of the 400 infringing sales by Vidtech.

37 Nevertheless, it may have been open to Aristocrat to contend that it lost some proportion of the sales made by Vidtech which would otherwise have been made by Aristocrat or a relevant member of the Aristocrat Group. This approach was adopted by Emmett J in Sony Computer Entertainment Aust Pty Limited v Stirling [2001] FCA 1852 at [8]. His Honour did so notwithstanding that the respondent in that case sold counterfeit games for $15 whereas the sale price for the genuine article was $45 – $50.

38 But the difficulty in adopting that approach here is that it was not adopted by Aristocrat. Its case was founded solely on the proposition that it lost the value of 400 sales and that proposition cannot be sustained.

39 It follows in our view that only nominal damages should be awarded. Such an award can be made, even though Aristocrat has not proved loss, because damages are not the gist of the action. The cause of action for infringement is conferred by s 115(1). Damages are merely one form of relief that the Court may order under s 115(2).
Additional damages under s 115(4)

40 Where an infringement of copyright is established the Court may, in assessing damages, award additional damages if it is satisfied that it is proper to do so having regard to the flagrancy of the infringement and the other matters referred to in s 115(4)(b).

41 Flagrancy is not an essential prerequisite for an award of additional damages. It is sufficient if the Court is satisfied that any one or more of the circumstances set out in s 115(4)(b) is established; Raben Footwear v Polygram Records Inc (1997) 75 FCR 88 at 93 (Burchett J), 103 (Tamberlin J), 104 (Lehane J); see also Polygram Pty Limited v Golden Editions Pty Limited (1997) 76 FCR 565 at 575 (Lockhart J); Sony Entertainment (Australia) Limited v Smith [2005] FCA 228; (2005) 215 ALR 788 at [158].

42 Additional damages under s 115(4) may be awarded on principles that correspond to those governing awards of aggravated and exemplary damages at common law; Autodesk Inc v Yee (1996) 68 FCR 391 at 394 (Burchett J). The principle stated in Lamb v Cotongo [1987] HCA 47; (1987) 164 CLR 1 at 9 – 10, cited by Rares J at [114] is therefore applicable.

43 The objectives of an award of additional damages include deterrence; s 115(4)(b)(ia). An element of penalty is an accepted factor in the remedy; Autodesk v Yee at 384.

44 One of the factors referred to in s 115(4)(b) is any benefit shown to have accrued to a defendant by reason of the infringement; see 115(4)(b)(iii). In construing the English equivalent provision, Brightman J said that "benefit" implies that the defendant has reaped a pecuniary benefit in excess of the damages otherwise payable; Ravenscroft v Herbert [1980] RPC 193 at 208. It is possible, however, that the benefit need not be confined to a pecuniary one; Polygram v Golden Editions at 576.

45 There need not be any proportionality between the amount of compensatory damages awarded under s 115(2) and the amount of additional damages ordered under s 115(4); Raben at 93, 103, 104; see also Microsoft Corporation v PC Club of Aust Pty Limited [2005] FCA 1522; (2005) 148 FCR 310 at 409 – 410 (Conti J).

46 In the present case the infringements were flagrant and Mr Parry sought to cover up his involvement and that of Vidtech. He was undeterred by the threat of legal proceedings.

47 The primary judge determined that Vidtech had obtained a pecuniary benefit of at least $80,000. His Honour found at [113] that there were significant unexplained cash transactions and that money had been directed to places such as the Isle of Man where tracing was difficult. He also found that money had been muddled between Vidtech’s corporate accounts and personal accounts of Mr and Mrs Parry. It would therefore seem likely that Mr and Mrs Parry received substantial pecuniary benefits.

48 One of the purposes of an award of additional damages must be to strip the infringer of all pecuniary benefits received from the infringement but that is not the limit of the statutory objective which, as we have said, includes an element of penalty.

49 The primary judge assessed the pecuniary benefit received from the infringement as $80,000 profits received, to which he added a sum of interest, taking his assessment to approximately $100,000; see at [125]. We can see no error in the approach taken by the primary judge to the assessment of the value of the benefit received by Vidtech. As Rares J has pointed out, a further year has elapsed so that the total value of the benefit received, with interest, is approximately $105,000, based on the primary judge’s findings, and we consider it to be appropriate to take this as the starting point for calculation of the amount of additional damages in the present case.

50 A higher figure was urged upon us by Aristocrat based upon an email from Mr Parry to Mr O’Reilly in Peru. This document indicated that three EPROMs had been sold for an amount in excess of $200, the sum used by the primary judge in determining the profit of $80,000.

51 However, his Honour recognised at [124] that there were factors which justified both a higher and a lower amount than the $200 figure which he used. Nevertheless, he considered that the figure of $200 per infringement, as an overall average figure, fairly reflected the evidence. We see no reason to adopt any different approach.

52 The assessment of the amount to be awarded is, of necessity, a somewhat imprecise exercise; Bailey at 114. We reject the submission that we are confined by the manner in which the primary judge approached that calculation; see Federal Court of Australia Act 1976 (Cth), s 28(1)(b). The very nature of ‘additional’ damages and the considerations enumerated in s 115(4)(b) of the Copyright Act suggest that the amount awarded may depend on the sufficiency or otherwise of the compensatory damages awarded under s 115(2). The setting aside of the judge’s award of compensatory damages is a ‘relevant matter’; s 115(4)(b)(iv). The Court is also to have regard, amongst other things, to the flagrancy of the infringement and the need to mark the Court’s disapproval of the conduct; Bailey at 113 – 114; Polygram v Golden Editions at 577.

53 We agree with Rares J that the evidence before the primary judge demonstrated a cynical and flagrant exploitation of Aristocrat’s copyright by Vidtech and Mr Parry. We also agree with Rares J that $40,000, the amount awarded by the primary judge as additional damages, is not an appropriate figure to reflect the flagrancy of the infringements, the need to deter similar infringements and the need to mark the Court’s disapproval of the conduct. The starting point, to reflect in a broad way the benefit obtained is, as we have said, $105,000. There should be added to this sum a substantial amount for the other factors we have identified. We should also take into account the fact that Vidtech failed to keep adequate records of its financial dealings so as to make proof of loss more difficult. We consider that a further amount of $95,000 should be added to the sum of $105,000 so as to arrive at $200,000 by way of additional damages against Vidtech and Mr Parry.

54 The fact that we have awarded only nominal damages under s 115(2) does not preclude a substantial award of additional damages, where, as here, the circumstances call for such an award. As Conti J said in Microsoft v PC Club, in an appropriate case, the quantification may well exceed the amount of compensatory damages under s 115(2). His Honour listed a series of instances where this had occurred.

55 There was no appeal against his Honour’s finding that the evidence did not establish flagrancy by Mrs Parry. Nor did Aristocrat seek an award of additional damages against Mrs Parry on the appeal.

56 It follows from our findings in relation to the appellants’ claim for compensatory damages under s 115(2) that the attack on his Honour’s costs order, which excluded the costs of the expert’s report, fails.
Cross-Appeal

57 In our view the finding made by the primary judge that Vidtech routinely infringed copyright was amply supported by the evidence to which we have referred. There is no basis for interfering with his Honour’s finding which was based in part upon his rejection of Mr Parry as a witness of truth.

58 Mrs Parry did not give evidence. There is no basis for setting aside his Honour’s finding that she was aware of the infringements.
Orders

59 We would allow the appeal and set aside his Honour’s Order No 2 made on 22 March 2006. We would order in lieu thereof that Vidtech and Mr and Mrs Parry pay damages under s 115(2) of $1 and that Vidtech and Mr Parry pay additional damages under s 115(4) of $200,000.

I certify that the preceding sixty (60) numbered paragraphs are a true copy of the Reasons for Judgement herein of the Honourable Chief Justice Black and the Honourable Justice Jacobson.

IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY	NSD 712 OF 2006

BETWEEN:	ARISTOCRAT TECHNOLOGIES AUSTRALIA PTY LIMITED (ACN 001 660 715) First Appellant/First Cross-respondent ARISTOCRAT INTERNATIONAL PTY LIMITED (ACN 000 148 58) Second Appellant/Second Cross-respondent
AND:	D.A.P. SERVICES (KEMPSEY) PTY LIMITED (IN LIQUIDATION) (ACN 055 803 542) First Respondent DAVID ALLAN PARRY Second Respondent/First Cross-appellant RHONDA DENISE PARRY Third Respondent/Second Cross-appellant

JUDGES:	BLACK CJ, JACOBSON AND RARES JJ
DATE:	29 MARCH 2007
PLACE:	SYDNEY

61 Aristocrat Technologies Australia Pty Limited is a designer and manufacturer of electronic gaming machines. As associated company of Aristocrat, Aristocrat International Pty Ltd is a distributor of those electronic gaming machines. Both companies are fully owned subsidiaries of Aristocrat Leisure Limited, which has other subsidiaries involved in international electronic gaming machine trade. Vidtech Gaming Services Pty Limited and its two directors, Mr and Mrs Parry, were found by the judge to have infringed Aristocrat’s copyright in literary and artistic works incorporated into its electronic gaming machines and literary works in the form of computer programs, known as ‘EPROMs’, that operate Aristocrat’s electronic gaming machines.

62 Until it went into liquidation in June 2005, Vidtech carried on the business of purchasing and reconditioning used electronic gaming machines and reselling them, apparently always outside Australia, as the trial judge found. Both Mr and Mrs Parry actively participated in the conduct of that business. Vidtech changed its name shortly before it went into liquidation to D.A.P. Services (Kempsey) Pty Limited.

63 The trial judge found that the artwork for 400 gaming machines had been produced by Vidtech, with Mr and Mrs Parry’s participation, in breach of Aristocrat’s copyright. That level of infringement was common ground. It consisted of the substantial copying of the artwork used in the visible display on two types of gaming machines. Each involved the use of perspex panels to display symbols and diagrams together with winning combinations of symbols produced by computer software programs known as ‘EPROMs’. On some machines, known as ‘lowboys’, only one perspex panel was used for this purpose. On other machines, known as ‘highboys’, there were two perspex panels.

64 The issue in the appeal and cross-appeal is the quantification of damages. The judge awarded $80,000, plus $19,200 interest, together with $40,000 additional damages awarded against only Vidtech and Mr Parry. Both parties agree that the judge proceeded on a wrong principle because he rejected the claim for compensatory damages and adopted an accounting for profit approach, even though Aristocrat and Aristocrat International had elected for damages. In this context, predictably, the Aristocrat parties say that the damages were too little while Mr and Mrs Parry, who were the only active respondents, say that the damages were too much. The judge found that damages for the infringement of copyright in relation to the 615 perspex panels proved to have been manufactured with the involvement of Mr and Mrs Parry by a contractor engaged by Vidtech for use on what was agreed to be estimated 400 machines, was a sum of about $30,750. He increased this to $80,000 having found that the EPROMs needed for 400 machines were also copied and sold by Vidtech.

65 The real contest arises as to whether Aristocrat proved any loss on two bases:

66 Both sides also contest his Honour’s assessment of additional damages under s 115(4) of the Copyright Act 1968 (Cth).

67 His Honour made careful and detailed findings of fact as to the circumstances in which the infringements occurred. These can be summarised briefly. Aristocrat became aware of Vidtech’s activity in August 2004, when a Macau customer of Aristocrat referred to ‘Cleopatra’ electronic gaming machines in conversation with Aristocrat’s Mr Jolly. Mr Jolly went to Macau and found that perspex panels in the machine in question substantially copied the artwork used in Aristocrat’s ‘Queen of the Nile’ electronic gaming machine. The EPROMs in both the Cleopatra and the Queen of the Nile machines used identical software. While there are some differences in the detail of the artwork, there is no challenge to his Honour’s finding that the Cleopatra artwork was a substantial infringement of Aristocrat’s copyright in the Queen of the Nile artwork.

68 The Macau customer gave Aristocrat information that led to Aristocrat causing its Belgian attorneys in November 2004 to institute a pre-trial raid against one of Vidtech’s major customers, Belgian Gaming Technology (‘BGT’) which was based in Ghent, Belgium. Vidtech’s other major customer was Happy Games, based in Lima, Peru, whose principal was Mr Tim O’Reilly.

69 The Belgian pre-trial raid occurred in early January 2005 and resulted in the discovery of a substantial number of infringing copies of Aristocrat’s artwork reproduced on perspex panels. It also revealed an invoice of June 2003 from Vidtech to BGT for 64 Aristocrat machines, some artwork for machines and conversion kits. A conversion kit usually contains the artwork and EPROMs that are necessary to convert one electronic gaming machine from operating with its then installed game to another. Thus, if a conversion kit were supplied to convert a machine from a ‘Dolphin Treasure’ game to a ‘Queen of the Nile’ game the kit would consist of the perspex panels to be substituted on the machine together with the necessary EPROMs to make the computer display of symbols co-ordinate with the new perspex panels and new legends for the buttons used to play the game. Both the panels and the EPROMs are necessary parts of a conversion kit.

70 The Belgian raid also discovered an email from Mr Parry to BGT’s Johan Temmerman dated 13 January 2005 in which Mr Parry said that he was buying some machines and would let him know how many Aristocrats were available. The email continued:

71 At about the end of January 2005 Mr Parry learnt of the pre-trial raid from Mr Temmerman and assumed that Vidtech would be implicated in a copyright infringement case. He discussed the matter with his wife and then sent an email to Mr O’Reilly and Happy Games in Peru. The email contained admissions that Mr Parry had been implicated in infringements of Aristocrat copyright with respect to artwork. It continued:

72 Next, Aristocrat engaged private investigators to investigate Vidtech. In early March 2005 two investigators, Mr Papas and Ms Chai, visited Vidtech’s premises at Moorebank. Mr Parry told them:

Then Mr Parry identified that he had Queen of the Nile artwork but called it ‘Cleopatra’. Mr Parry quoted a price for a conversion kit of USD 200 and then said:

73 Mr Parry showed Mr Papas and Ms Chai a polystyrene sheet containing a large number of EPROMs with white stickers which had the names of Aristocrat games on them. That sheet became an exhibit in the proceedings before his Honour. It had a sign ‘ Master’ on it and contained genuine Aristocrat EPROMs, which his Honour found were copied by Vidtech and sold with the corresponding artwork. Mr Papas was shown a demonstration of the copying or ‘burning’ of one of the EPROMs taken from the polystyrene sheet onto a blank EPROM. He offered to do installations in Hong Kong and noted that he had done so in Macau, Singapore and South America. Later that afternoon Mr Parry faxed to Mr Papas a quotation form offering the supply of 75 refurbished Aristocrat machines and 24 conversion kits for a total cost of USD 169,800. Significantly, the conversion kit price was USD 200 per conversion for 4 of Aristocrat’s most popular games. One of the conversion kits was described as ‘Queen of the Nile’, as opposed to ‘Cleopatra’.

74 Ultimately the transaction was never consummated despite Mr Papas’ attempts to have something happen. Mr Parry apparently became suspicious and ceased to participate in negotiations. At the end of March 2005 Aristocrat obtained a search order and executed it at Vidtech’s Moorebank premises. That disclosed several polystyrene trays and other boards containing many EPROMs, a number of perspex panels and various documents.

75 The judge found that both Mr and Mrs Parry knowingly infringed Aristocrat’s artwork copyright and, as they were acting on behalf of Vidtech, it did too. There was no direct evidence that Mrs Parry knew of the infringement of Aristocrat’s copyright in the Perspex panels. She did not give evidence. But his Honour drew the inference of knowing infringement or suspicion of infringement against Mrs Parry on the basis that she worked together with her husband in the business apparently full time. They shared a small office and the work that needed to be done. Mr Parry was aware that there was a copyright problem in relation to the reproduction of the artwork contained on manufacturers’ electronic gaming machines, and he was also aware that reproduction of the pay tables, which were part of the artwork, was enough to constitute infringement. His Honour found that it was improbable that Mr Parry failed to discuss these important matters with his wife.

76 Mr Parry asserted that he copied Aristocrat’s EPROMs only rarely and when it was necessary for him to replace damaged or defective EPROMs. The judge found that Vidtech held an extensive EPROM library both at the time of the ‘trap purchase’ visit and the date of the execution of the search order. He found that the size and careful organisation of the EPROM library at Vidtech naturally created a suspicion of extensive EPROM copying. While Mr Parry vigorously denied extensive copying his Honour carefully assessed his evidence and rejected it.

77 In particular, the judge noted that Mr Parry had given evidence limiting his copying of Aristocrat EPROMs to occasional instances where there were EPROMs in the machines to be reconditioned or sold by Vidtech which needed replacement for one reason or another. However, there were emails which suggested that not only was Vidtech prepared to supply infringing artwork, but also the software that was compatible with that artwork. Thus, the email dated 13 January 2005 from Mr Parry to Mr Temmerman of BGT referred to above noted that Vidtech had developed the artwork for Queen of the Nile/Cleopatra ‘so we could make as many as you want’. This suggested that the offer was to supply not just artwork, but machines or conversion kits which contained the software to match the panels. His Honour also referred to an email of 7 February 2005 sent to a person in Bosnia in response to an inquiry seeking to purchase, inter alia, Aristocrat Queen of the Nile machines to which Mr Parry responded ‘What Aristocrats do you want?’ and listed the relevant types.

78 His Honour also relied on Mr Papas’ evidence that Mr Parry had told him that he had software programmers who could do ten games at a time. The judge concluded, not unreasonably, that such a rate of production would be unnecessary if copying was done only to replace the odd damaged or defective EPROM. And, this was reinforced by the fact that Mr Parry had spoken about upgrading machines ‘to just about the latest game that comes out the door’. As the judge found, that was something that could only be done with a package which included the relevant EPROMs. And, when Ms Chai had enquired about the delivery time for games, Mr Parry had said ‘The EPROMs are copied here but the screen printing is done elsewhere’.

79 Ultimately, the judge rejected Mr Parry’s attempts to explain away the circumstantial case that there had been substantial copying not only of the perspex panels, but also of the EPROMs that went with them. He recognised that although the evidence was sparse, it was enough to satisfy him that Vidtech copied Aristocrat’s EPROMs whenever it needed to do so in order to make up a conversion kit to change one game to another or to provide appropriate software to a machine being converted from one game to another. The judge drew the inference that Vidtech and Mr and Mrs Parry routinely infringed Aristocrat’s software copyright by copying software to make blank EPROMs for use in refurbished electronic gaming machines.

80 He then drew the inference that it was inconceivable that Mrs Parry did not know what was going on even though there was no evidence that she had copied EPROMs herself. It was obvious that Mr Parry was involved in the copying of EPROMs and his Honour so found. He noted again that they both worked in the one office that contained numerous EPROMs and that, unlike the situation in relation to artwork, the copying of EPROMs was not a matter of degree. The whole of the material on an EPROM had to be copied. Indeed, for each row of symbols displayed on the electronic gaming machine there was a separate EPROM. Thus if there were five rows of symbols (such as in a poker game) there would be five EPROMs to make the game play. The judge found that if Mrs Parry burnt an EPROM or saw someone else do it she must have realised that it was an infringement of copyright.

81 In Australian Performing Rights Association Limited v Jain (1990) 18 IPR 663 at 667 Sheppard, Foster and Hill JJ said that ‘authorise’ in s 36 of the Act could also mean ‘permit’. They said that express or formal permission or sanction, or active conduct indicating approval was not necessary to constitute an authorisation. Inactivity or ‘inactivity or indifference, by acts of commission or omission, may reach a degree from which an authorisation or permission may be inferred’ (Adelaide Corporation v Australian Performing Right Association Limited [1928] HCA 10; (1928) 40 CLR 481 at 504). However, the Full Court continued by saying that the word ‘authorise’ connoted a mental element and it could not be inferred that a person had, by mere inactivity, authorised something to be done if he or she neither knew nor had reason to suspect that the act might be done. Here, Mrs Parry was found by his Honour to have at least had reason to suspect that the act of infringement might be done. His Honour was entitled, on the evidence, to draw that inference.

82 Importantly, his Honour accepted that Vidtech’s business activity did not wholly consist in infringements of copyright. In essence, Vidtech had a principal business of acquiring, refurbishing and reselling used electronic gaming machines. The Australian market was relatively closed in the sense that in some States and Territories, such as New South Wales, legislation limited the number of machines that could be used within the State at any one time. Thus, when a machine became old or damaged, it had to be replaced with a further machine. Vidtech was able to acquire from Australian vendors used machines, recondition them and sell them overseas. It was quite possible for Vidtech to acquire a substantial number of machines, cannibalise them for parts, including perspex panels and EPROMs, and renovate one machine with parts from a number. None of this activity was alleged to involve any form of contravention of Aristocrat’s copyrights. What was, however, at issue, was the activity on which his Honour based the findings summarised above.

83 As his Honour noted, the evidence did not permit him to find how many Aristocrat EPROMs had been copied by Vidtech. He found that the parties’ agreement about the approximate number of machines upon which infringing artwork had been installed, 400, suggested that was the likely upper limit of the number of machines and conversion kits for which EPROMs were copied. But, he recognised that the figure of 400 was unlikely to be precisely correct. There were probably occasions upon which it was not necessary for Vidtech to supply copied EPROMs as Mr Parry had explained to his Honour in the context set out earlier in these reasons. And, there would have been occasions upon which EPROMs had been copied in order to replace damaged or defective EPROMs in otherwise non-infringing machines. But his Honour found that there was some evidence of the large scale supply of EPROMs by Vidtech, separately from the supply of either electronic gaming machines or conversion kits. He concluded that it would do no injustice to the respondents to proceed upon the basis that Vidtech had copied EPROMs necessary to service 400 electronic gaming machines.

84 Although Mr and Mrs Parry challenged the latter finding, the challenge was only faintly pressed. Having regard to his Honour’s advantage of seeing and hearing the witnesses and being present as the evidence unfolded, and given that there had been some deficiency in the way in which Vidtech’s records had been kept, there is no reason to interfere with his Honour’s assessment on this point.

85 But it is here that the problem arises which is at the heart of the appeal. The way in which Aristocrat sought to prove its damages was through the evidence of Mr Ward, its group financial controller, and of an expert accountant, Mr Robertson. As the judge noted, Mr Ward gave evidence that Aristocrat sold both new machines and refurbished used machines but the data supplied by him to Mr Robertson excluded used machines. However, Aristocrat argued that Mr Ward’s evidence had segregated from the price of the new machine the value, as a discrete item, of the intellectual property in the artwork and the EPROMs. That value was the net sum derived from the imputed sale value of each of those species of property and the cost of producing them.

86 Aristocrat argued that his Honour had mistakenly found that there was no evidence of the value of this intellectual property because Aristocrat had only proved sales of machines. That latter proposition it contested. Having had the benefit of submissions by counsel from both sides and being taken to the evidence, one could forgive his Honour for not understanding with any clarity what the evidence was supposed to show or how anyone could derive a calculation of loss. The judge found that the bulk of the loss calculated by Mr Robertson, using Mr Ward’s figures, stemmed from assumed loss of electronic gaming machine sales as distinct from lost sales of conversion kits.

87 His Honour noted that Mr Robertson had been asked to assume the average revenue received by Aristocrat, Aristocrat International and the latter’s subsidiaries for sales of conversion kits and initial game components of electronic gaming machines in each year and the average marginal costs incurred by each company for the conversion kit and initial game kit component of the electronic gaming machines. The initial game kit component of an electronic gaming machine consisted of those parts of the machine that would be replaced were a conversion kit used to convert the machine to another game.

88 Mr Robertson’s calculation was made on instructions to assume that the value of lost sales resulting from Vidtech’s infringing conduct was to be arrived at on the basis of the total revenue less marginal costs per unit. Mr Robertson also said that he had been instructed that Aristocrat electronic gaming machines had a higher selling price and margin than Aristocrat conversion kits and the initial game components of the electronic gaming machines. On that basis he concluded that it was a conservative approach to use the conversion kit margin as the basis of the calculation because it did not include any profit margin lost from the sale of the whole machine.

89 But as his Honour noted, only conversion kits had been separately sold. There was no separate sale of the ‘initial game kit component of an electronic gaming machine’. He said that in order to relate a lost electronic gaming machine sale to Aristocrat’s claim, it was necessary to assess what proportion of the machine’s sale value was attributable to the ‘game kit’ it contained. He found that the critical assumptions by Mr Robertson were unsupportable and in particular the assumption that each Vidtech sale was of a product that included infringing material, artwork or EPROMs and had been made at the expense of a sale by an Aristocrat company that serviced the relevant geographical area. Before us, Aristocrat abandoned any reliance upon any sales in Mr Robertson’s report by Aristocrat companies other than the two parties to the proceedings. That was, of course, realistic. Aristocrat said that this had been its approach at the trial. Using Mr Robertson’s calculation, over $6 million dollars was claimed to have been lost on the basis of the Aristocrat group’s loss of sales.

90 However, Aristocrat pressed before his Honour and before us only a smaller loss attributable to what was said to be Mr Robertson’s calculations based on Aristocrat’s and Aristocrat International’s lost sales. The data that had been supplied to Mr Robertson had claimed a total of 2,375 lost sales over the relevant period. But, his Honour was only prepared to find that there had been 400 sales of infringing machines. As the judge pointed out, with justification, that did not equate to a lost sale by Aristocrat for each of the 400 infringing sales.

91 There were other problems with the way in which Aristocrat sought to have damages assessed. His Honour found that while Aristocrat sold conversion kits to enable customers to convert one Aristocrat game to another containing the necessary artwork and EPROMs, Mr Ward’s evidence was that the price for that kit varied between markets and from customer to customer. He said that the price range in Australia would be between $3,000-$4,000. As his Honour found, that seemed a high figure and well above the cost of purchasing a refurbished used machine from a company like Vidtech without any suggestion of infringement. But his Honour went on to say that there was no evidence of the volume of sales of conversion kits in Australia and overseas.

92 However, Mr Ward gave evidence that he had prepared revenue and cost schedules extracting the net revenue to each of Aristocrat and Aristocrat International and their subsidiaries derived from external customers for Aristocrat conversion kits and initial game components of Aristocrat electronic gaming machines for the period 1 April 1999 to 31 March 2005.

93 Mr Ward isolated, in a somewhat confusing way, but nevertheless on a close reading of his affidavit distinctly, the components of Aristocrat electronic gaming machines and Aristocrat conversion kits. He identified, for the purposes of the exercise for which he was engaged, what he described as ‘Aristocrat game materials’. These consisted of the artistic works involved in the perspex panels, the computer software burnt onto EPROMs, and button inserts (which are pressed by users of the electronic gaming machine). Those materials can be used either as a conversion kit or as part of the components of any electronic gaming machine sold by Aristocrat itself. Confusion arose in Mr Ward’s affidavit from his attempt to treat separately those materials as being ‘the initial game kit’ and ‘conversion kits’ and then discussing each of these as ‘units’. Mr Ward isolated the revenue and cost to produce of those materials in his affidavit. However, Mr Ward’s exercise did not isolate the revenues for conversion kits themselves. What he produced was a net result which included Australian sales.

94 As his Honour said there was no evidence of the price which Aristocrat charged overseas customers for conversion kits. Vidtech’s main area of sales was to overseas customers. Thus, his Honour said it would be unfair to the respondents and incorrect to use the Australian conversion kit prices as a basis for the calculation of compensatory damages. And he said that he lacked the evidence necessary to calculate the value of Aristocrat’s lost overseas sales, if any, of conversion kits and used electronic gaming machines. For that reason he concluded that it was not possible to compute damages by reference to Aristocrat’s loss. One can have considerable sympathy with his Honour in this predicament. He turned to the basis, rejected by both parties, of attempting an accounting for profit approach to assess compensatory damages by estimating the amount of Vidtech’s gain from its infringing conduct. However, that approach cannot be supported, Aristocrat having elected to seek damages and not an account.

95 The onus of proving damages was on Aristocrat. It had to prove a loss. It argued that it was legitimate for it to have used Mr Ward’s evidence because Vidtech’s infringing activities took place in Australia even though its sales may have taken place outside Australia. Aristocrat fell back then to arguing that his Honour should have used Mr Ward’s evidence to calculate, in effect, a royalty. It relied on the speech of Lord Shaw of Dunfermline in Watson, Laidlaw & Co Ltd v Pott, Cassell and Williamson (1914) 31 RPC 104 at 119-120. His Lordship had said that part of the principle of awarding damages for infringement of intellectual property rights was to take account of the value of the price, or hire, of the right. He said that whenever an abstraction or invasion of property had occurred, then unless that abstraction or invasion were to be sanctioned by law, the law ought to yield a recompense under the category or principle of price or hire. He gave an example:

Lord Shaw described this method of awarding compensation as a (notional) royalty for the unauthorised sale or use of every infringement made by the infringer. He regarded the use of the concept of a royalty as ‘an excellent key to unlock the difficulty’ (31 RPC at 120).

96 But the difficulty with this approach in the present case is that the primary basis upon which one could assess a royalty was not laid before the judge or us. Instead Mr Ward put forward an undifferentiated table which included sales for the Australian market, in which Vidtech did not operate in any substantial way. Counsel for Aristocrat complained that Mr Ward could have been cross-examined about these matters. But it was not for the alleged infringers to make the case against themselves. That was the onus cast on Aristocrat if it wanted to recover compensation by way of damages. The only basis on which Aristocrat relied before us was Aristocrat’s average per unit revenue and average per unit cost for sales to external customers within Australia and to Aristocrat International for on-sale to external customers in Asia Pacific countries.

97 Since sales to Australian customers, in his Honour’s findings, were largely irrelevant, sales to Asia Pacific customers could be a part of the basis upon which damages could be assessed on Lord Shaw’s basis. However, there was no evidence of differentiation between Asia Pacific customers and customers operating in other parts of the world where Aristocrat machines were sold, including, as Mr Ward’s evidence made clear, in Europe and South America. There was evidence that Vidtech had potentially engaged in infringing sales in Europe and South America through its dealings with BGT and Mr O’Reilly. This again begged the question as to what amount could be used as a basis for compensating Aristocrat by way of damages.

98 Aristocrat argued that Mr Ward had segregated the costs of producing the components for perspex panels, EPROMs and buttons from the revenues. But this had only been done for Australian sales and Asia Pacific sales in respect of Aristocrat’s on-sales to its subsidiary, Aristocrat International. His Honour was left to speculate about just how the value might be calculated. Because of the deficiencies in Aristocrat’s proof, the Court has been left in the position once described by Goddard LJ in Mills v Stanway Coaches Ltd [1940] 2 KB 334 at 349 (cited by Windeyer J in Australian Iron and Steel Ltd v Greenwood [1962] HCA 42; (1962) 107 CLR 308 at 326):

99 His Lordship was speaking of what juries had to do. Of course, like juries, judges must do the best they can in such situations. Assessment of damages can, sometimes, of necessity involve what is guesswork rather than estimation. Where precise evidence is not available the Court must do the best it can and uncertainty as to the profits to be derived from a business by reason of contingencies is not a reason for refusing to assess damages: The Commonwealth v Amann Aviation Pty Limited [1991] HCA 54; (1991) 174 CLR 64 at 83 per Mason CJ and Dawson J, 119 per Deane J, 138 per Toohey J.

100 Here, the amount for which conversion kits could be sold or revenues could be gained by Aristocrat from sales overseas was something peculiarly within Aristocrat’s own knowledge. This is not a case like Placer (Granny Smith) Pty Limited v Theiss Contractors Pty Limited [2003] HCA 10; (2003) 77 ALJR 768; 196 ALR 257 where the party in breach of contract had peculiarly within its own knowledge the basis upon which the amount of damages for which it was liable could be calculated. Here, having proved to his Honour’s satisfaction that 400 infringing works had been sold of both artwork and EPROMs, it was for Aristocrat to satisfy his Honour what damage it suffered from those sales. It would be otherwise had Aristocrat elected to seek an account of profits from Vidtech or Mr and Mrs Parry.

101 As Hayne J said in Placer 196 ALR 257at 266 [37]-[38] (with Gleeson CJ, McHugh and Kirby JJ agreeing):

102 Aristocrat’s damages case fell within the second class of case to which Hayne J referred. That is, Aristocrat was able to prove the value of lost sales in the relevant markets in Europe, South America and elsewhere. It could have proved the volume of its sales and the fact that it may have suffered damage by reason of Vidtech’s infringing conduct. But it did not adduce that evidence. Nonetheless, it asked his Honour and us to resort to guesswork or estimation about what loss it had suffered through Vidtech’s conduct. It is artificial to suggest that Aristocrat lost the value of an Australian sale for each of the 400 infringing sales by Vidtech. The damage which Aristocrat suffered through Vidtech’s conduct was the loss of whatever profit it or Aristocrat International would have made from sales to the relevant markets, principally, on the evidence, outside Australia, in which Vidtech sold the infringing copies. Such a case Aristocrat never attempted to prove. The Court on appeal, like his Honour, is unable to make that assessment on the evidence.

103 It follows that Aristocrat has failed to prove its loss. It is entitled to nominal compensatory damages assessed against each respondent. I agree with the reasons given by the Chief Justice and Jacobson J for this conclusion.

104 His Honour took the view that there was no evidence sufficient to establish flagrancy on the part of Mrs Parry and therefore he would not award additional damages against her. There has been no appeal against that finding and no award of additional damages has been sought against Mrs Parry. However, his Honour considered that he should add an additional 50% to his calculation of compensatory damages in respect of an award of additional damages of $40,000 against Vidtech and Mr Parry. Clearly, this basis of assessment cannot stand having regard to the finding that Aristocrat has established an entitlement to nominal damages only.

105 One of the purposes of an award of additional damages under s 115(4)(b)(ia) of the Act is to deter similar infringements of copyright. In assessing additional damages, the Court may have regard to any benefit shown to have accrued to the defendant by reason of the infringement (s 115(4)(b)(iii)). In this case it is clear that Vidtech and Mr Parry obtained considerable benefit from the infringing conduct and sales activity which his Honour found had occurred.

106 While an accounting for profit approach, which was adopted by his Honour, was inappropriate for the award of compensatory damages, the methodology which his Honour adopted for the calculation is apposite in considering an award of additional damages.

107 Aristocrat and Mr Parry agreed that the accounting for profit approach used by his Honour was a permissible way to assess any benefit shown to have accrued to the respondents by reason of the infringement for the purposes of s 115(4)(b)(iii) of the Act. Mr Parry accepted his Honour’s figure of $80,000 as a reasonable assessment and a fair reflection of what was proven. Aristocrat took the same approach, although it said that his Honour had used too small a net profit of AUD 200 for each of the 400 sales which were admitted.

108 Aristocrat argued that the sale price of USD 200 from which his Honour derived a net profit of AUD 200 was taken from the unsuccessful negotiations with Mr Papas. No sale occurred. His Honour concluded that at the time of the offer to Mr Papas, USD 200 would have amounted to approximately AUD 275. He found that the cost of the production of conversion kits, including the non copyright items, would probably not have exceeded AUD 75, leaving a minimum profit of about AUD 200 on that sale which was ascribable predominantly to the inclusion of infringing material.

109 Aristocrat pointed to an email sent by Mr Parry to his Peruvian customer, Mr O’Reilly, claiming that he was owed USD 400 each for 3 Aristocrat programmes. His Honour referred to this email as indicating that USD 200 was not necessarily a maximum price obtainable for conversion kits and found that some may have been sold at prices above that. Before us, the parties agreed that this referred to an actual sale of conversion kits at USD 400 which had occurred in August 2004. Aristocrat also submitted the 400 sales that were agreed left undetected other infringements.

110 However, his Honour found that it was likely that some artwork panels were sold by Vidtech separately from EPROMs. Therefore he held that the agreement of the parties about artwork for 400 machines did not necessarily mean that as many as 400 complete conversion kits or 400 sets of EPROMs were sold by Vidtech in infringement of Aristocrat’s copyright. Here, again, Aristocrat failed to prove how many EPROMs were sold. And so, his Honour observed that while there were factors suggesting both higher and lower figures than AUD 200 as the profit derived by Vidtech from the sale of each unit, no precise calculation was possible on the evidence. He found that that figure would fairly reflect the evidence as the overall average figure of the profit to be used for each infringing game kit, making allowances for variations in the components and their prices. Like the Chief Justice and Jacobson J, I am of opinion that no error has been shown in his Honour’s assessment of $80,000 profit (being AUD 200 x 400 kits). This allows for some sales which did not include EPROMs, others which were undetected and for variations in price, costs and profit.

111 His Honour also added an allowance for interest. He noted that the infringing conduct took place over a 4 year period from some time in 2001 to about April 2005. He took the mid point of that period (2003) and allowed interest for 3 years at 8% per annum. About a further year has passed since his Honour gave judgment. Accordingly, using that methodology, interest for 4 years at 8% per annum totals approximately $25,000. It follows that the total amount of additional damages in respect of benefit shown to have accrued to the respondents by reason of the infringement is $105,000.

112 His Honour awarded 50% of the profit of $80,000, pre interest, as additional damages against Vidtech and Mr Parry, in addition to the amount of compensatory damages he had found, to arrive at an appropriate overall award. The evidence demonstrated, as his Honour found, that Vidtech and Mr Parry had engaged in a cynical and flagrant exploitation of Aristocrat’s copyright.

113 Flagrancy is only one of a number of considerations the existence of any of which s 115(4) contemplates may warrant an award of additional damages. Mr Parry benefited through the unlawful exploitation of Aristocrat’s copyright and through the revenue and profit which it generated in his corporate vehicle, Vidtech. The level of infringement proved was substantial. The benefit received by those respondents calculated on an accounting for profit basis was also substantial. The principles applicable to an award of additional damages under s 115(4) are akin to those that apply to an award of exemplary damages at common law.

114 In Lamb v Cotogno [1987] HCA 47; (1987) 164 CLR 1 at 9, Mason CJ, Brennan, Deane, Dawson and Gaudron JJ said that the object, or at least the effect, of exemplary damages is not wholly punishment and that the deterrence which is intended extends beyond the actual wrongdoer and the exact nature of the wrongdoing. And they said:

115 While Aristocrat did not prove a loss, the evidence established that, in comparison to Vidtech, as the lawful owner of the copyright it could and did command substantially greater prices, and profits, when it sold conversion kits, EPROMs and artwork. Vidtech’s business was to sell these more cheaply and to make them look like Aristocrat’s products. It may be that all or some of Vidtech’s customers would not have been in the same market as that to which Aristocrat sold.

116 There is a need to deter and punish those who act or seek to act as Vidtech and Mr Parry were proved to have done. I am of opinion that a further $40,000 or 50% of the profit they made was too small a figure to reflect an appropriate sum to award under s 115(4)(b). One of the important purposes served by the power to award additional damages granted in s 115(4)(b) is that market practices of the kind engaged in by Vidtech and Mr Parry can be firmly discouraged. In a case like the present where precision of assessment of damage or profit is impossible but substantial, deliberate and flagrant infringement has been proved, a substantial sum of additional damages should be awarded. I am of opinion that having regard to the whole of the evidence, the $80,000 profit and interest already quantified, the flagrancy of Vidtech and Mr Parry and the need to deter similar conduct, additional damages should be awarded against them in a lump sum amount of $200,000.

117 For these reasons I agree with the orders proposed by the Chief Justice and Jacobson J.

I certify that the preceding fifty-seven (57) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Rares.

Federal Court of Australia - Full Court Decisions

Aristocrat Technologies Australia Pty Limited (ACN 001 660715) v D.A.P. Services (Kempsey) Pty Limited (in liquidation)(ACN 055 803 542) [2007] FCAFC 40 (29 March 2007)