Balmit Management Pty Limited (In Liq) v Global Gaming Industries Pty Limited [2002] FCA 1193

FEDERAL COURT OF AUSTRALIA

Balmit Management Pty Limited (In Liq) v Global Gaming Industries Pty Limited [2002] FCA 1193 COPYRIGHT – Infringement action – Copying of prize scales on amusement machines – Assessment of damages. BALMIT MANAGEMENT PTY LIMITED (IN LIQUIDATION) (formerly Olympic Amusements Pty Limited) v GLOBAL GAMING INDUSTRIES PTY LIMITED (formerly Milwell Pty Limited) NG 720 of 1995 WILCOX J 27 SEPTEMBER 2002 SYDNEY

IN THE FEDERAL COURT OF AUSTRALIA

NEW SOUTH WALES DISTRICT REGISTRY NG720 of 1995

BETWEEN: BALMIT MANAGEMENT PTY LIMITED (In Liquidation) (formerly Olympic Amusements Pty Limited)

APPLICANT

AND: GLOBAL GAMING INDUSTRIES PTY LIMITED (formerly Milwell Pty Limited)

RESPONDENT

JUDGE: WILCOX J

DATE OF ORDER: 27 SEPTEMBER 2002

WHERE MADE: SYDNEY

THE COURT ORDERS THAT: 1. Judgment be entered in favour of the applicant, Balmit Management Pty Limited (In Liquidation) (formerly Olympic Amusements Pty Limited), against the respondent, Global Gaming Industries Pty Limited (formerly Milwell Pty Limited), in the sum of one million and forty-six thousand, one hundred and fifty-two dollars ($1,046,152). 2. The costs of the hearing on damages be reserved. 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 NG720 of 1995

BETWEEN: BALMIT MANAGEMENT PTY LIMITED (In Liquidation) (formerly Olympic Amusements Pty Limited)

APPLICANT

AND: GLOBAL GAMING INDUSTRIES PTY LIMITED (formerly Milwell Pty Limited)

RESPONDENT

JUDGE: WILCOX J

DATE: 27 SEPTEMBER 2002

PLACE: SYDNEY

REASONS FOR JUDGMENT WILCOX J: 1 On 3 March 1998 I made findings that the respondent, then known as Milwell Pty Limited ("Milwell"), had infringed the copyright of the applicant, then known as Olympic Amusements Pty Limited ("Olympic"), in respect of certain prize scales used on amusement machines. Both Milwell and Olympic's machines were of the "53 card poker" variety. It seems the games offered by each of the machines were virtually identical. 2 On 7 April 1998 I made formal orders. They included order 5, which declared that: "(a) at the time of any act by the respondent prior to 18 March 1994 constituting an infringement of the applicant's copyright in the Prize Scales or any act by the respondent prior to 18 March 1994 in respect of any infringing copy of the Prize Scales, the respondent was not aware and had no reasonable grounds for suspecting that copyrights subsisted in the Prize Scales or that any such act was an infringement of copyright; (b) the applicant is not entitled to damages under section 115 or 116 of the Copyright Act 1968 in respect of any act referred to in (a) above; (c) the applicant is entitled to an account of profits in respect of any act referred to in paragraph (a) above." 3 By order 8 I reserved for further determination an account of profits, in respect of acts prior to 18 March 1994, and damages, or an account of profits, in respect of any act after 18 March 1994. 4 My reason for excluding damages, in relation to infringements before 18 March 1994, was that I was persuaded by the totality of the evidence that, prior to 18 March 1994, Milwell was not aware, and had no reasonable grounds for suspecting, that its actions constituted infringements of copyright. Accordingly, damages would not be available in respect of those actions, although the applicant would be entitled to an account of profits in relation to them: see Copyright Act 1968 s 115(3). 5 Milwell appealed against my findings on infringement. Olympic cross-appealed, contending I erred in finding that the infringements fell within s 115(3) of the Copyright Act. The appeal failed but the Full Court (Lee, von Doussa and Heerey JJ) upheld the cross-appeal. The members of the Full Court reasoned that s 115(3) was not available in a case where the infringer denied copying. They set aside my orders 5 and 8 and instead made the following orders: "12.1 Declare that the Cross Appellant is entitled to, upon its election, an account of any profits made by the appellant or an award of damages (including additional or conversion damages) pursuant to ss 115 and 116 of the Copyright Act 1968 in respect of the infringement of the Cross Appellants' [sic] copyright. 12.2 Reserve for further determination the question of damages (including any additional or conversion damages) or an account of profits (at the Cross Appellant's election) in respect of the acts of the Cross Respondent constituting infringement of the Cross Appellant's copyright." 6 The Full Court's judgment was delivered on 16 February 1999. Thereafter, there were protracted discussions between the parties with a view to resolving the issue of damages or account of profits. But the parties were unable to reach an agreement and I was asked to give directions for a hearing on these issues. The hearing proceeded on 9, 10 and 11 September 2002. 7 Since the Full Court hearing both parties have changed their names. Olympic is now known as Balmit Management Pty Limited (In Liquidation) and Milwell as Global Gaming Industries Pty Limited. On 24 September 2002 I made orders amending the record so as to substitute these names. However, it is convenient to continue to describe the parties as "Olympic" and "Milwell". 8 Olympic was entitled to elect whether to seek an award of damages or an account of profits. It elected to claim damages. It did so on a "lost sales" basis, the underlying premise of which was that each sale of an infringing machine that was made by Milwell was a sale lost by Olympic. 9 Although both parties called additional evidence at the damages hearing, they agreed about several matters. One important agreement concerned the number of infringing sales by Milwell after the date (18 September 1989) that was six years before the commencement of the proceeding. The parties agreed that Milwell sold 561 new infringing machines after that date and, in addition, converted a total of 91 used machines to an infringing prize scale. 10 David Goodman, a consultant chartered accountant, prepared a number of analyses. One of them examined the net profit lost by Olympic in respect of new machines. He made the assumption that, but for the infringement, Olympic would have sold to the particular purchaser a new Wildcard machine rather than Milwell making a sale of an infringing machine. As mentioned, 561 new infringing machines were sold. 11 Mr Goodman took Olympic's costs from its available accounting records. He added a pre-sales tax mark-up of 20%, and then sales tax. The resultant "deemed cost" increased from $2,443 in 1989 to $3,027 in 1997. 12 Mr Goodman obtained the unit sales values for particular years by reference to the meagre sales information now held by Olympic. Much information has been lost, but the disadvantage of the loss lies with Olympic. Where there was no information about a particular year, Mr Goodman used the average sales value of the most recent year for which there was information, despite the fact that prices rose steadily throughout the whole period. 13 Adopting this approach, Mr Goodman came up with the following totals: Lost sales value $2,374,043 Less sales tax 310,660 Net sales to Olympic 2,063,383 Less cost of manufacturing 828,788 Gross profit from Milwell sales 1,234,595 Less selling costs 89,051 Net loss of profit 1,145,544 Plus simple interest 858,588 $2,004,132 14 The figure of $1,145,544 divided by 561 suggests an average profit per Olympic machine of $2,042. 15 Despite questions raised by Nicholas Shannon, a consultant chartered accountant who gave evidence on behalf of Milwell, I am satisfied that Mr Goodman took proper account of Olympic's fixed costs. He took a conservative approach to the calculation of Olympic's lost sales value. There was no criticism of his sales tax figures, nor of his allowance for interest. Mr Goodman allowed interest only in respect of financial years following the year of the particular lost sales, and by using the interest rates laid down from time to time by the Supreme Court of New South Wales. If it was reasonable to assess damages on a "lost sales" basis, and to assume each Milwell sale cost Olympic a sale it would otherwise have made, I would be prepared to adopt Mr Goodman's calculation. 16 Mr Shannon propounded two alternative assessments of Olympic's loss. The first of these depended upon the assumption of a notional licence by Olympic in favour of Milwell. Mr Shannon said he had "sought to determine a commercial value for the right to use the prize scale developed by Olympic the subject of copyright". Mr Shannon said no record could be found in respect of 43 of the 91 conversions to infringing prize scales; of the remaining 48 conversions, 34 were effected free of charge and the remaining 14 conversions were at prices between $300 and $1,190 and averaging $687.86. From the figure of $687.86, Mr Shannon deducted sales tax ($65.28), conversion production costs ($170), selling costs and freight ($170) to yield a net profit per unit of $282.58. Multiplied by 652 (the total of 561 and 91), this figure yields a net profit of $184,240. Mr Shannon suggested a licence fee ranging from 10% of the total conversion figure ($18,424) to 50% ($92,121). 17 Mr Shannon's alternative assessment followed Mr Goodman in adopting a lost sales method. However, he assumed Mr Goodman had understated some production costs and he deducted a 40% allowance for sales to Milwell exclusive customers and a 25% deduction from the remainder to allow for sales that, for other reasons, would not be sales at Olympic's expense. This left 253 lost sales. His calculation of lost profit was $325,753. He conceded that interest should be added to that figure. 18 In support of the argument that not all his client's sales were at Olympic's expense, Mr R Cobden, counsel for Milwell, read affidavits made by seven people who were involved in relevant years in the purchase of hotel amusement machines. Most of these people were cross-examined. Their evidence was of variable quality but it had the overall effect of persuading me that a significant factor in a hotelier's choice of machine was the quality of the after-sale service provided by the supplier. As one witness remarked, when a machine is "down" it is not earning any money. A hotelier has an obvious interest in speedy and effective rectification of any operational problem. The evidence suggested that Milwell had a good reputation in relation to service, at least in the geographic area from which most of these witnesses came, Sydney's southern suburbs and the Illawarra region. 19 There was also evidence that Milwell marketed a computer system known as the Milwell Central Credit Unit. Although this system could be linked to non-Milwell machines, it may have bolstered customer loyalty. 20 Most of the hotelier witnesses disclaimed any knowledge of, or concern about, the prize scales offered by various machines. Mr Cobden was thus able to contend that purchasers were typically not influenced in their choice of machine by the matter (the copying of the prize scales) that constituted Milwell's infringement of Olympic's copyright. However, this approach is disingenuous. 21 The hoteliers may not have known much about the figures displayed on the various machines but they were concerned about two matters that were directly linked to those figures. First, they wanted the total payout to be as little over the mandatory 85% as possible; every dollar above that percentage was a dollar off the hotelier's profit. Second, they needed the machine to be popular with the punters, and therefore to have a high turnover. I accept that the popularity of a particular machine might be affected by factors other than its prize scale; for example its design, and/or graphics and sound effects, and its location in the hotel. However, commonsense suggests the prize scale was important. The machines did not disclose the total payout percentage. Few punters would have the information or mathematical ability needed to calculate this for themselves. Most of them would be unable to tell whether one machine paid out more than another. However, human nature being what it is, it is likely that most of them had a perception - probably a strong opinion - about that matter. From a hotelier's point of view, a good prize scale was one that created a perception of generosity to the punter but which, in fact, offered little more than the statutory minimum. The infringed prize scales were compiled with those requirements in mind and they were highly successful in the marketplace. That must have been because they fulfilled the two requirements. No doubt this is why they were copied. 22 Notwithstanding the comment just made, I cannot accept that each Milwell sale represented a loss to Olympic. The evidence suggests that Milwell had some customers who would always purchase a Milwell machine, in preference to any other machine of a comparable price. Their loyalty may have partly developed out of infringing sales. But I am satisfied that Milwell had some loyal following before commencing its infringing actions. Some loyalty was based on other factors. 23 Although I accept Mr Goodman's methodology and unit costs, I think his analysis exaggerates Olympic's loss. The figure of 561 new sales should be significantly discounted. 24 I reject Mr Shannon's licence fee approach, as a basis for compensating Olympic in respect of the loss of sales of new machines. The evidence establishes there was no example, in the industry, of a manufacturer licensing a competitor to use its pay scale or scales. That is not surprising, given the importance of pay scales in the minds of the punters. Having regard to that circumstance, it may confidently be asserted that no manufacturer would accept a unit licence fee in the range ($28.26 to $141.29) suggested by Mr Shannon. These are paltry sums by comparison with the value of a new machine ($4,000 - $5,000) and the profit available to a manufacturer/distributor on its sale (approximately $2,000). 25 I am of the opinion that the assessment of damages should comprise two elements. First, a "lost sales" calculation should be made, this being based upon a proportion of the 561 new sales made by Milwell. Second, there should be a "share of the profit" calculation in relation to the 91 conversions. Each calculation involves the adoption of figures whose correctness I cannot demonstrate. Their selection necessarily requires exercises of judgment. In making those judgments, I have tried to take into account the whole of the relevant evidence, whether given at the hearing on liability or the more recent hearing on damages. 26 I accept Mr Goodman's assessment of the average unit profit ($2,042) in respect of the 561 new machines. I also accept Mr Shannon's view that the figure of 561 must be significantly discounted in determining the proportion of the Milwell sales that were made at Olympic's expense. 27 The fact that Milwell copied Olympic's prize scale on two separate occasions, taking both the Wildcard 5 and Wildcard 14 prize scales, demonstrates that Milwell's directors thought these prize scales were valuable selling aids. Milwell's directors were experienced in, and knowledgeable about, the amusement machine industry. That the prize scales were in fact copied is a point in favour of inferring that many Milwell sales were at Olympic's expense. The only other significant supplier in the market was Aristocrat, but it commanded a relatively small market share. 28 As against this, Olympic allowed a period of over eight years to elapse between the date of Milwell's first infringement, of Olympic's Wildcard 5 prize scale, and the commencement of this proceeding. The delay tends to suggest that Olympic was not conscious of the infringement biting very deeply, in terms of lost sales. And, as I have noted, there is evidence to suggest that not all Milwell sales would have been at Olympic's expense. 29 Mr Shannon's figure of 252 lost sales represents 44.9% of the 561 Milwell sales. This figure is a product of judgment, not calculation. I cannot demonstrate it is incorrect. However, it seems to me a little low, having regard to the significance to punters, and therefore to hoteliers, of an attractive prize scale. I prefer to take the view that 50% of the Milwell sales were made at the cost of a sale to Olympic. On that basis, I assess the loss of profits in relation to sales of new units as being one half Mr Goodman's figure of $1,145,544; that is $572,772. 30 The assessment of a figure in relation to conversions is also problematic. Mr Shannon's profit figure of $282.58 disregards the many conversions for which Milwell made no charge, but which were no doubt important in maintaining customer loyalty. These conversions would have breathed new life into otherwise obsolescent or decreasingly attractive machines. Their value should not be ignored. 31 Peter McGuire, who had a long sales connection with Olympic, thought the typical conversion charge made by that company was about $1,000. If one deducts sales tax of about $100 and the conversion expenses estimated by Mr Shannon ($340), the net profit per conversion seems to be about $560. I think I should assume about 50% of Milwell's conversions to infringing prize scales would otherwise have been made by Olympic. If I round out the figure at 45 lost conversions and multiply by $560 I reach the figure of $25,200. I add this to the figure of $575,772 in order to reach total damages, before interest, of $597,972. 32 Mr Goodman's calculation of interest was not contentious, so I will adopt his ratio of interest to net loss; that is 74.95%. Applied to $597,972 this equals $448,180, making a grand total of $1,046,152. I assess Olympic's damages at this amount. Disposition 33 I propose to enter judgment in favour of Olympic in the sum of $1,046,152. In deference to a request from counsel, I reserve the matter of costs. No doubt the parties will reach an agreement about costs, having regard to my assessment of damages. If so, they should prepare an appropriate consent order for execution by me. I certify that the preceding thirty-three (33) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Wilcox.