Copyright infringement and the innocent infringement defence: The Dempsey Group Pty Ltd v Spotlight Pty Ltd [2018] FCA 2016

The recent Federal Court decision in The Dempsey Group Pty Ltd v Spotlight Pty Ltd [2018] FCA 2016 provides further guidance on what constitutes reproduction of a substantial part of a copyright work, innocent infringement and the circumstances relevant to assessing damages, including additional damages.

Background

Dempsey Group operates the Bed Bath N’ Table stores and designs, manufactures and sells bed linen under the Morgan & Finch brand. Spotlight manufactures and sells bed linen products under the Spotlight brand.

In 2017, Dempsey Group commenced court proceedings against Spotlight for copyright infringement of three artistic works, the “Bosphorus”, “Rimona” and “Constantinople”, which it applied to quilt cover and pillow sets (Dempsey Works). It alleged that Spotlight’s “KOO Remy”, “KOO Jarvis” and “KOO Taj” quilt cover and pillow sets (Spotlight Products) were a substantial reproduction of the Dempsey Works, as depicted below.

Both parties used the same company in China, Yantai Pacific Home Fashions (Yantai), to manufacture the products. Dempsey Group alleged that Spotlight instructed Yantai to make new products based on the Dempsey Works after seeing them in the Yantai showroom, despite Yantai telling the Spotlight buyer that Dempsey Group owned the copyright.

Spotlight denied the allegation, arguing that the infringement resulted from Yantai’s careless or opportunistic conduct, rather than any wrongdoing on Spotlight’s behalf.

Justice Davies preferred Spotlight’s account for reasons which included Spotlight’s past conduct in cancelling orders where copyright concerns had been raised. Her Honour concluded that Spotlight did not know the Spotlight Products were based on the Dempsey Works until it was put on notice by Dempsey Group on 29 November 2016.

Did the Spotlight Products reproduce a substantial part of the Dempsey Works?

In considering whether the Spotlight Products reproduced a substantial part of the Dempsey Works within the meaning of section 14(1) of the Copyright Act 1968 (Cth) (Copyright Act), Dempsey Group relied on case law including Seafolly Pty Ltd v Fewstone Pty Ltd [2014] FCA 321. It argued that where elements contribute to the “look and feel” of an artistic work, this may be a protectable type of expression.^[1] Spotlight argued that Dempsey Group did not focus sufficiently on the precise form of artistic expression and that it was wrong to focus on the products conveying a similar feel to the Dempsey Works. The effect of this argument was to “stretch” the definition of copyright to protect the idea of the works, instead of the particular form of expression.

Justice Davies found the Spotlight Products were a substantial reproduction of the Dempsey Works. Referring to Seafolly Pty Ltd v Fewstone Pty Ltd at [345], Justice Davies said:

“…it is unnecessary that the two works bear an overall resemblance to each other nor is it appropriate to dissect the copyright work piecemeal and focus on the differences. The similarities are identified, the question is the qualitative significance of such similarities. Reproduction does not strictly require a complete and accurate correspondence to a ‘substantial part’ of the work”.

Knowledge of copyright infringement

In order to make out a claim for copyright infringement under sections 37 and 38 of the Copyright Act, the alleged infringer must know, or ought reasonably to have known, that actions such as importing or selling the products, would have constituted a copyright infringement. The question of constructive knowledge is assessed objectively, focusing on the reasonableness of the conduct of the alleged infringer, and whether, acting reasonably, the alleged infringer should have made further inquiries that would have resulted in them acquiring the requisite knowledge.

The Court found Spotlight did not have knowledge of Dempsey Group’s ownership of the copyright in the Dempsey Works until 2 December 2016, when Dempsey Group provided evidence of copyright ownership to Spotlight. Prior to 2 December 2016, Justice Davies said Spotlight was entitled to rely on Yantai to notify it if there was a copyright concern.

However, after 2 December 2016, Spotlight’s sales of the products were infringing, as it was on notice of Dempsey Group’s ownership of copyright in the Dempsey Works.

Innocent infringement

Section 115(3) of the Copyright Act provides a defence to a claim for damages, if, at the time of infringement, the defendant was not aware or had no reasonable grounds for suspecting that the act constituted copyright infringement. If this ground is made out, the plaintiff is only entitled to an account of profits with respect to the infringement.

The Court found that Spotlight satisfied both limbs of the test for the innocent infringement defence until 2 December 2016, namely, it had an active subjective lack of awareness that the act constituting the infringement was an infringement of copyright and objectively considered, it had no reasonable grounds for suspecting that the act constituted an infringement.^[2] The defence did not apply, however, to sales of the Spotlight Products after 2 December 2016.

Damages sought by Dempsey Group

Dempsey Group sought an award of damages amounting to over $900,000, under sections 115(2) and 115(4) of the Copyright Act, comprising damages for:

1. loss of profits – $261,531;
2. damage to reputation – $100,000;
3. devaluation of the artistic works – $30,000 – $45,000; and
4. additional damages – $350,000 – $500,000.

Loss of profits

Justice Davies found Dempsey Group was only entitled to damages for loss of profits for sales occurring after 2 December 2016. Dempsey Group applied the standard test to calculate the loss, applying a 20% reduction on the basis that not all sales by Spotlight would be Dempsey Group sales.^[3]

Justice Davies rejected this figure, finding an 80% reduction was appropriate in circumstances where:

• Spotlight was not a main competitor, the market perception on Dempsey Group’s own evidence was that Bed Bath N’ Table was “upmarket” and Spotlight was “discount”. It followed that the companies operated in different markets;
• Dempsey Group’s products were twice as expensive and this was a relevant consideration for consumers;
• Dempsey Group did not provide any evidence that sales of the Spotlight Products impacted its sales; and
• Dempsey Group failed to provide a satisfactory gross profit calculation.

Damage to reputation

Justice Davies accepted that some damage to reputation was suffered by the Bed Bath N’ Table business and the Morgan & Finch brand, particularly as there was a loss of exclusivity in the designs once they appeared in the inferior quality Spotlight Products. However, her Honour considered the claim for $100,000 to be inflated and unsubstantiated, awarding $10,000 for damage to reputation instead.

Devaluation of the artistic works

Dempsey Group sought to be reimbursed for the cost of creating each of the Dempsey Works, including the costs of the original artworks, the cost of employing Dempsey Group’s designers to create the work and an amount relating to the loss of exclusivity of the artistic works.

Justice Davies rejected the claim, as there was no evidence of a decrease in the popularity or value of the ranges incorporating the Dempsey Works. Her Honour also criticised the evidence purporting to estimate the cost of designing the Dempsey Works.

Additional damages

Dempsey Group argued that Spotlight’s conduct in copying the Dempsey Works and its conduct after being notified of the infringement claim warranted an award of additional damages. The conduct included continued sale of the Spotlight Products, selling the products at a discount and ineffective recalls.

Justice Davies dismissed Dempsey Group’s claim as “fanciful and farfetched”. In addition to the finding that Spotlight did not knowingly copy the Dempsey Works, her Honour found Spotlight’s conduct in investigating the claim (such as seeking further proof of copyright ownership and seeking external legal advice) and the active steps it took during the recall process was appropriate action and timely in the circumstances.

Key takeaways

• It is not unusual for retailers to engage the services of third party designers. It is important to ensure expectations around copyright ownership are very clear and that the design history of the work is well understood prior to purchase. All agreements should be supported by warranties and indemnities in favour of the purchaser/retailer around intellectual property ownership and protection.
• When an infringement allegation is made, it is important for the alleged infringer to move quickly to understand the basis of the allegations and to take appropriate action, including notifying lawyers, considering the removal of the product from sale while the allegations are investigated and ensuring any removal or recall is effective in removing the product.

[1] Elwood Clothing Pty Ltd v Cotton On Clothing Pty Ltd [2008] FCAFC 197 at [76]-[78]; Seafolly Pty Ltd v Fewstone Pty Ltd [2014] FCA 321 at [294]-[295].
[2] Milwell Pty Ltd v Olympic Amusements Pty Ltd (1999) 85 FCR 436 at [52]; Golden Editions Pty Ltd v Polygram Pty Ltd (1996) 61 FCR 479 at 480.
[3] Elwood Clothing Pty Ltd v Cotton On Clothing Pty Ltd [2008] FCAFC 197; Norm Engineering Pty Ltd v Digga Australia Pty Ltd [2007] FCA 761 at [266]-[271].

Authored by:
Kerry Awerbuch, Partner
Madeleine McMaster, Lawyer