Patents County Court rules in dispute over copyright licences for greeting cards

Practical Law UK Legal Update Case Report 9-504-9308 (Approx. 9 pages)

Patents County Court rules in dispute over copyright licences for greeting cards

by PLC IPIT & Communications

Background

Section 16 of the Copyright Designs and Patents Act 1988 (CDPA) provides that it is a primary infringement of copyright to do various acts, including copying the work or issuing copies of the work to the public, in the UK without the copyright owner's consent.

The remedies available to a copyright owner whose copyright has been infringed include damages or an account of profits, under section 96 of the CDPA.

The court may, having regard to all the circumstances, and in particular to the flagrancy of the infringement, and any benefit accruing to the defendant by reason of the infringement, award such additional damages as the justice of the case may require (section 97(2), CDPA).

A party may be liable for copyright infringement as a joint tortfeasor where he "intends and procures and shares a common design that the infringement takes place" (CBS Songs Limited v Amstrad Consumer Electronics Plc [1988] AC 1013; Unilever Plc v Gillette (UK) Limited [1989] RPC 583).

Facts

The third defendant, Sally Ann Davies, had been the majority shareholder and director of the three defendant companies: Cardrax Limited (Cardrax I), which went into dissolution on 3 January 2008, six months after the proceedings had begun; Cardrax UK Limited (Cardrax II), which was incorporated on 24 March 2006, and to which Cardrax I's assets were sold; and The Bees Knees Trading Co Limited (BK), incorporated on 18 July 2007. BK had ceased trading by July 2009.

The fifth defendant, Sonia Brock, had invested £120,000 in Cardrax II in and was a director of and 49% shareholder in that company. Ms Brock also later invested £50,000 and then another £150,000 in BK in October 2006 and was also a director of and 49% shareholder in that company. She had no hand in setting BK up.

The key facts were as follows:

Cardrax I: Ms Davies had, between around 2002 and 2007, orally commissioned the first claimant, Ms Deakin, an artist, to produce artwork used on greeting cards by Cardrax I. Ms Davies and Ms Deakin did not enter into any formal agreement regarding this. The written terms of their dealings were reflected in invoices and the rest was oral, usually conducted by telephone. Ms Deakin had provided the original artwork to Cardrax I, but about 177 of the original artworks (mainly pre-dating 2004) had not been returned, although a substantial quantity of original artwork was sent back to Ms Deakin on her request at an early stage in the litigation.
BK: BK was set up to achieve a new business venture that Ms Davies had conceived of in spring 2006, for an expanded range of cards to be sold by selling directly to selected members of the public who would act as signed-up agents and then sell on at their own initiative. This was to be a separate entity to Cardrax I. Key sales features were a BK product brochure and website. Ms Deakin agreed with Ms Davies in around May or June 2006 to produce the product brochure, card artwork and a logo (the BK logo) (shown at paragraph 179 of the judgment). The BK logo was commissioned as a separate item to the card artwork and was finalised by May 2006, being used by July 2006. It was as a result of failure to deliver the artwork under the BK contract on time that the relationship between Ms Deakin and Ms Davies deteriorated. When BK failed to pay an invoice for the artwork, since not all of it had been delivered, the claimants sent a letter (in December 2006) purporting to repudiate the contract.
Cardrax II: The claimants alleged that Cardrax had infringed copyright by selling cards bought from Cardrax I.

The total artwork in dispute concerning about five hundred items created by Ms Deakin.

The claimants (the second claimant was Ms Deakin's son, to whom she had assigned copyright in all her extant artwork in mid-2006) commenced proceedings on 29 June 2007 for:

Breaches of licences to use the artwork for cards and add-ons and certain concomitant copyright infringement allegations.
Failure of a bailee's duty of care.
Additional statutory damages under section 97 of the CDPA.
Joint tortfeasance.

BK counterclaimed for damages for breach of contract, claiming, among other things, wasted costs in advertising the launch which had to be aborted due to the delays, and lost opportunities for missing the end-of-year seasonal window in 2006.

Decision

HHJ Fysh QC rejected the claimants' claim in relation to bailment, and joint tortfeasorship (save in relation to such claims against Ms Davies as she had admitted), and rejected the claims for infringement of copyright based on failure to pay invoices which lead the claimants to purport to terminate the licences, finding that this just gave rise to a debt, not a right to terminate. However, the judge found that certain of the claimants' claims for copyright infringement were made out. He refused to award additional damages. The judge's reasoning is summarised below.

Law as to implied terms

HHJ Fysh QC made various observations as to the law regarding implied terms, including that there were three types of implied terms: terms implied in fact, terms implied by operation of law, and terms implied by custom. Among other things, he observed that a party asserting custom or trade usage as an implied term bore the burden of proving it, and that this was a heavy burden. HHJ Fysh QC noted that it had been suggested (in his view, correctly) that the test was: "invariable, certain and general as opposed to mere common practice" (paragraph 5-214, Copinger and Skone James on Copyright (Sweet & Maxwell, 15th edition, 2005)). HHJ Fysh QC said that in his view, evidence that a certain practice had taken place in a particular field of business in the recent past was not enough; evidence of widespread and historic usage in business or industry was required. Such evidence could be given by one working in the industry or by an expert.

Bailment

The claimants argued, in a claim that HHJ Fysh QC noted was "something of a novelty in the Patents County Court", that the defendants were in breach of their duty of care for the loss of the original artwork under the law of bailment. HHJ Fysh QC noted that, among other things, there were only 16 items of original artwork allegedly missing from the inventory of the only commercially relevant entity, BK.

Regarding the relevant law of bailment, HHJ Fysh QC observed that counsel for the second to fourth defendants was right when he submitted that a bailment action was in truth a common-law cause of action, sui generis. He also noted that the onus was on the bailee to show that it had complied with the duty of care.

However, HHJ Fysh QC said that the bailee was not under an absolute duty of care. Ms Deakin's work was returned to Cardax I's office after being used for printing, and consigned to a black locked cupboard, where it remained until recently requested by Ms Deakin. He considered that these steps were adequate to safeguard the original artwork. The bailee had to take reasonable care of the goods. What was reasonable had to depend, inter alia, on the nature and value of the goods and on the nature and size of the bailee's undertaking – in this case that of a small-sized card manufacturer. The issue was essentially for the court, to be answered as a sort of jury question. He said that he had no doubt that Cardrax I and BK took reasonable care of the original artwork.

Unpaid fees for copyright licences: debt or infringement?

The claimants had purported to terminate the licence agreements with Cardrax I and BK for failure to pay the licence fees in respect of:

12 designs for Cardrax I, which it had not paid the claimants for before use.
All of the artwork produced for BK. BK had used the artwork, but had paid only three-quarters of the fees.

The claimants purported to terminate the licences on the ground of repudiatory breach of an express term, that is, the time for payment. Counsel for the second to fourth defendants argued that the terminations had not been justified and that the proper course for the claimants would have been simply to sue to recover the unpaid fees.

HHJ Fysh QC said that he had been taken by counsel to authority on the subject of the propriety of terminating agreements for failure to pay - both in general and in the context of copyright licences. In context, the basic question was raised as to whether time for payment was of the essence of the contracts and thus whether the claimants were entitled to rescind. (The judge had found in relation to both the Cardrax I and BK contracts that time for payment was not of the essence.)

HHJ Fysh QC said that the problem for the claimants was well illustrated by the Australian authority, Ng v Clyde Securities Ltd [1976] 1 NSWLR 443, which concerned an architect's copyright infringement action involving an insolvent client, and that the problem and the solution appeared from Wootten J's judgment in that case. Wootten J considered whether the licence was a consent given once and for all in return for a promise of payment, or was given conditionally upon actual payment being made in terms of the contract so that it could be revoked if payment was not forthcoming or was forthcoming only in part, where there was nothing in the contract that cast any light upon the problem. Wootten J held that it would not be reasonable to imply a term that a licence, once granted and acted upon, could be revoked in the event of subsequent non-payment, particularly where a licence for the immediate use of the copyright was granted in return for promises of payments at the date of future events contingent on its use, and its withdrawal would affect not merely the licensee's future activities, but also render valueless past investment. Wootten J concluded that:

"Looking at the matter in terms of business efficacy, I find it unthinkable that an owner would agree to a licence revocable if a possibly temporary difficulty prevented him from paying his architect at the agreed time... It is more reasonable to regard him as giving the licence in return for a debt recoverable, if unpaid, by ordinary litigious processes."

HHJ Fysh QC said that he proposed to follow Ng, which meant that the notices of termination were wrongly given by the claimants and that BK's counterclaim therefore succeeded. He said that the fact that Ng concerned buildings and not cards was irrelevant.

Cardrax

Terms of the licence agreements

Applying the law to the question of the terms of the contract between Ms Deakin and Cardrax I, HHJ Fysh QC found various express terms, including that, based on what the invoices said:

There was no royalty payment, with the artwork instead being licensed to Cardrax I for a three-year period for cards for a "fee" of £175 (the invoices contained minor variants of the following: "© Sue Deakin 3 yrs UK Card rights only") and £75 for wrapping paper. (He considered that "Wrap rights" would cover both licenced wrapping paper and matching tags.)
Eventual payment of the licence fees was an express term, but the time for such payment was not.
Where "only" was used in the invoices it meant what it said, so that card designs could only be used for cards and wrapping paper designs only used for wrapping paper (and matching tags).

Regarding the implied terms, HHJ Fysh QC was prepared to imply a term that the designs were exclusive to Cardrax I for the three-year period. However, he refused to imply terms that:

Assignment or cross-licensing was permissible. HHJ Fysh QC rejected this since the possibility only arose when BK came into existence in 2006; it was not necessary to imply such a term during the early days of the relationship and Cardrax I could not now take advantage of an adventitious commercial circumstance which arose at a later time so to imply one.
Modifications were permitted only to the Deakin wrapping paper designs. The judge concluded that the implication of a term to govern the modification of the wrapping paper was not needed. In the absence of express or implied terms prohibiting alteration, the licensee could make alterations, even substantial ones (Frisby v BBC [1967] Ch 932).
Re-licencing beyond the three-year period without notice was permitted – the judge said that such a term would be commercially astonishing and certainly unnecessary.

The judge rejected Ms Deakin's arguments that, based on the custom in the trade, Ms Davies had to return the original artwork (he found that no term requiring the return of the original artwork needed to be implied), or supply Ms Deakin with samples of the licensed products.

Infringement/breach of licence

HHJ Fysh QC made various findings regarding whether Cardrax I had infringed copyright or breached the licence, although he noted that the findings might prove academic, given his other findings. Among other things, he found that Cardrax I had infringed copyright by:

Selling 3775 out of 5,577,995 cards (that is, 0.07%) outside the relevant three-year licence period. The judge accepted Ms Davies' evidence that this was simply due to an error in the procedures regarding what was done with cards that were returned by distributors (since there was no re-printing), since the relevant cards were wrongly re-sold to distributors rather than being dumped.
Using eight card designs for wrapping paper and tags.

HHJ Fysh QC rejected the claimants' claim that Cardrax I had infringed copyright in respect of the 12 designs for which the invoice remained unpaid, applying Ng (see Unpaid fees for copyright licences: debt or infringement?). He ruled that this claim was to be disposed of as an action for recovery of a debt outstanding (with interest).

Bees Knees

Terms of the licence agreements

The "basic terms" of the contract between Ms Deakin and BK included that Ms Deakin would supply 123 artworks for cards, 45 (or possibly more) free "sweeteners", and an unspecified number of wrapping repeats, in return for a licence fee of £20,000. These "basic terms" were originally oral, but were later reduced to writing by Ms Deakin. The express terms HHJ Fysh QC found included that:

Delivery of the artwork was to be in four instalments which were to occur on 13 July, 21 July, 28 July and 4 August 2006 subject to visuals being approved in time for artworks to be produced.
The £20,000 licence fee was to be paid for the card artworks in four instalments of £5000 on 31 July, 31 August, 30 September and 31 October 2006. Time was not of the essence so far as payment went.
A first BK product brochure would be produced showing fully what was to be on offer. It had to be available to give to BK's agents during early September 2006 so as to meet the end-of-year sales window. (HHJ Fysh QC said that he found Ms Deakin's evidence that she was unaware about the requirement that the first brochure had to be available for agents by early September "quite incredible".)
Late payment or non-payment of any of the artworks would deem them to be unsold and therefore returnable. Copyright could not be assigned without payment.

The judge was prepared to imply into the BK agreement that the agreement was "personal" to BK. He was also prepared to imply a term that, because the three-quarters of the payment due to Ms Deakin became due only after all the artwork had been delivered, if all the artwork was not delivered, the last tranche of £5,000 could not be due. If a lesser amount of the artwork was delivered but not all, then a pro quanto sum may due.

Logo

The BK logo was dealt with separately as it was not an item of artwork under the BK agreement. The judge said that the BK logo was stood in a place apart from the other artwork since its function was always intended to be quite different. The basic question was whether there should be an implied term that the commissioner of a copyright work shall own the copyright or, rather, was a term to be implied that the commissioner should merely have had a licence – and if so, what licence.

Ms Deakin argued that it was being used under a three-year licence which could be automatically re-licensed with her permission on payment of another licence fee. There was nothing in writing and Ms Davies disagreed. Having considered the facts, including that Ms Deakin had previously produced logos to be used outright by Ms Davies for £175, the judge concluded that Ms Deakin's £175 fee was not an indication that use of the logo was intended to be limited to a licence for a three-year period. In practical terms, whether what was intended was the possibility of an outright assignment when the logo was paid for, or for BK to have the benefit of an unlimited ongoing licence, did not really matter. The BK logo was created for BK alone for it to use for as long as it wished – assuming of course, that Ms Deakin's work was paid for. However, the logo had still not been paid for due to a dispute because the invoice for the logo fee had been sent to Cardfax I. Accordingly, the claim regarding the logo was, in the judge's view, another "unpaid invoice" claim to which the Ng approach should apply.

Other points

Among other points, the judge found that BK had allowed ten designs to be used by Cardrax I. He found that there was no agreement permitting this, since, as he had already held, the BK licence was personal to BK. Therefore, there had been a breach of the BK licence and infringement of copyright in this regard.

Delays

HHJ Fysh QC noted that out of the 123 items of artwork to be delivered under the BK contract, 12 were never delivered, and that by the latest delivery date of 4 August 2006 Ms Deakin had failed to deliver almost 50% of the promised artwork.

Regarding who was to blame for the delay, both parties blamed each other. However, HHJ Fysh QC concluded that he preferred the evidence of Ms Davies and that BK was the innocent party. Therefore, Ms Deakin was in breach of contract and thus BK prima facie had a claim for damages against her. He noted that, after the failure by Ms Deakin to deliver the artwork on time, BK did not repudiate the contract, but sought to re-schedule it, only repudiating when on BK's behalf when the claimants purported to repudiate the agreement for failure to pay the invoice. However, he considered that having elected to affirm the continued existence of the contract, BK did not thereby necessarily relinquish a claim for damages in respect of any loss sustained as a result of the initial breach (Chitty 30 Edn. Vol. 1, 24-010). Hence, BK's counterclaim. It was also incorrect that BK could not complain further and had to pay up because of this. There was an implied term that until all the artwork was delivered there was no obligation to pay all the last tranche. Moreover where, as here, there are dependent promises (in casu, a promise to deliver and a promise to pay), a party was entitled to treat himself as having been discharged from further performance by the prior breach (Chitty 24-034 to 24-037).

Conclusions on BK money claims

Regarding conclusions on the claimants' BK money claims, the judge concluded that the claims should have been framed as claims in debt (see Unpaid fees for copyright licences: debt or infringement?). He said that the Davies defendants owed the claimants for the BK logo and for certain artwork made under the contract. They had already paid £15,000 under the BK agreement and owned more pro rata for the incomplete artwork which was still not paid for.

Counterclaim

The judge said that the quantum for the items listed in BK's counterclaim should be decided at an enquiry as to damages.

Cardrax II

HHJ Fysh QC rejected the claimants' claim against Cardrax II based on its sales of all of the "Deakin" stock that it had bought from Cardrax I in July 2007. He said that if Ms Deakin was to succeed on this claim she would be "gaining quite a windfall" because the right to issue copies of a work to the public under the CDPA only covered "the act of putting into circulation in the EEA copies not previously put into circulation in the EEA by or with the consent of the copyright owner" (section 18(2)(a), CPDA), and not any subsequent distribution. The judge said that this meant that only the person at the head of the distribution chain could be liable for infringement. In this case, Cardrax I, being ahead of the chain of distribution, had the right to sell copies of the work to any of its distributors. Downstream sales should have been of no concern to Ms Deakin; her rights were exhausted.

However, he did find that there was infringement because of Cardrax II's brief use of some images of cards on a prototype website. (The images were removed when the claimants complained.)

Joint tortfeasorship

HHJ Fysh QC considered the law regarding joint tortfeasorship and noted, among other things, that it could only apply in relation to the copyright infringement claims, not breaches of contract or breach of a duty as a bailee.

Ms Davies

Ms Davies had admitted that she would be a joint tortfeasor with BK and Cardrax to the extent that they were found to be primary tortfeasors, save for out-of-licence sales by Cardrax I, which she said were caused by an error of her employee and not any authorisation or procurement by her. On the facts, HHJ Fysh QC said that he was satisfied that there was no deliberate intention on the part of any of the Davies defendants to sell out-of-licence stock. Furthermore, neither did Ms Davies allow a "couldn't care less" attitude to prevail in this regard". Ms Davies' system for identifying stock that was out of licence, which included a computer package to alert staff when the stock came out of licence, was imperfect, but it was neither non-existent nor cosmetic. HHJ Fysh QC said that the words "authorise", "procure" and "common design" all demanded some positive act on the part of an alleged joint tortfeasor so as to avail a claimant in this context at least and that the actor's state of mind was relevant. "Joint tortfeasance by omission" might be possible, but was not available against Ms Davies in this case.

Ms Brock

HHJ Fysh QC rejected the claim that Ms Brock was liable as a joint tortfeasor. Among other things, the claimants argued that without Ms Brock they would not be there and that she was the hidden hand controlling the defendants. The judge rejected this. Most of the acts of infringement complained of resulted from alleged breaches of licence agreements which sounded in damages for breach of contract, not tort. Those that did sound in tort, such as sale of out-of-licence products, were acts which Ms Brock had nothing to do with. Among other things, the evidence was that Ms Brock was not involved in the day-to-day running of the companies. Ms Davies remained firmly in the driving seat.

Additional damages

HHJ Fysh QC rejected the claim for additional damages ruling that, though he made no assessment of its magnitude, there had been no mindless infringement or massive abuse of Ms Deakin's rights such as by the extensive reproduction of works without permission. Moreover, neither Ms Davies nor her employees knowingly sold out-of-licence material and what was done did not amount to a "couldn't care less" attitude to copyright. Save as to the wrapping paper (and unlike most cases of copyright infringement) there was no question of any deliberate copying. Neither had there been evidence of an intention to obtain (or the actual obtaining of) any unusual pecuniary advantage or commercial benefit from the infringements that would not be covered by a regular award of damages.

Comment

This case illustrates the dangers of not ensuring that copyright licences are in writing. In this case, the judge was required to consider a very factually complex case and had to resolve some 60 or more issues of fact. He commented that it had been "a heavy case".

However, the case does shed light on some very interesting legal points, including the bailment argument in relation to return of original artwork, and the judge's decision on whether unpaid fees for copyright licences are a debt or should permit termination of a licence so as to give rise to a copyright infringement claim. In this regard, the judge chose to follow Ng, an Australian authority which had not previously been followed in this jurisdiction. Ng and the facts in this case, concerned whether a term should be implied that a copyright licence, once granted, could be revoked for unpaid fees, where the contract did not cast any light on this point. Therefore, a different conclusion would follow if there were express terms on the issue in the contract. However, the fact that Ng has been followed in this case is of considerable practical importance, since many copyright licences may be silent as to whether failing to pay fees entitles the copyright owner to revoke the licence.

The case is also interesting for the judge's examination of the express and implied terms in copyright licences concerning artistic copyright, and is useful as an example of the circumstances in which claims for joint tortfeasorship and additional damages for copyright infringement will not be successful.

Case

Deakin and another (t/a Faith Image Source) v Card Rax Ltd and others [2011] EWPCC 3, 1 February 2011 (HHJ Fysh QC; Michael Edenborough QC and Thomas Elias (instructed by McDaniel & Co (Newcastle-upon-Tyne)), appeared for the Claimants, Guy Tritton (instructed by Hamlins) appeared for the second to fourth Defendants and Simon Malynicz (instructed by Edwin Coe LLP) appeared for the fifth Defendant. The first Defendant was not represented).

End of Document

Also Found In

Resource ID 9-504-9308

Published on 24-Feb-2011

Resource Type Legal update: case report

Jurisdiction

United Kingdom