Heeling Sports Ltd v Youngsters Ltd.

This is an application by the Claimants for an interim injunction to restrain what they say is the infringement of their patent, pending the trial of the action. The patent under consideration is a registered patent number 1175160, which relates to a shoe, containing a wheel in its heel. This product is essentially a sports shoe, but one which enables the wearer, if he chooses to do so, to stand back on his heels and skate. The product has apparently enjoyed a considerable amount of popularity and commercial success in the last 12 months or so.

The product is also the subject of a registered community trademark for the name, Heelies, in class 28, but the present proceedings concentrate, and are based solely on an allegation of patent infringement, and I am not therefore concerned with the question of trademark infringement or indeed, with any issues of passing off.

The Claimant companies are respectively, the patentee, which is the first named Claimant, a Texan corporation, and Shiner Limited, which is an English company and which has the benefit of an exclusive licence granted in April of this year, the result of which is to give it title under s.67 of the Patents Act to bring these proceedings as a co-Claimant. The second Claimant pursuant to that licence operates as a distributor, and services a number of well known sports shops and other similar shops on a wholesale basis in respect of the product.

The Defendant companies comprise a group, the holding company of which is the first Defendant, Youngsters Limited. According to the evidence this remained until 2001, what is described as a buying group when it took a majority holding in Toys Own Limited, a retail operation which focused mainly on outlet centres. The retail element of the first Defendant’s trade was increased in 2005 when it acquired the Toy World group. The current position appears to be that Youngsters operates as a wholesaler to approximately 213 independent toy stores, together with a number of stores operated either by it, or by one of its subsidiaries effectively buying goods on their behalf and then enabling them to enjoy the buying power that would otherwise be available to larger chains of toy stores.

The group structure of the Defendant’s business is that the first named Defendant owns 75 per cent of the shares in Toys Own Holdings Limited, which in turn has Toys Own Limited as a wholly owned subsidiary. Toys Own Limited owns and operates 13 retail stores. Toys Own Stores Limited, which is also a wholly owned subsidiary of Youngsters, and which commenced trading only recently, has six stores formerly owned and operated by Toy World Group Limited, which in March this year was placed into administration and the assets of which have been re-acquired by the Youngsters Group from the administrators.

The proceedings have been brought about by the Defendants beginning to trade in a range of shoes, which they describe for their purposes as, flying shoes, similar to the Claimant’s patented product. Those shoes are said to be an infringement of the Claimant’s patent, and on that basis an injunction is sought preventing any further sales of the infringing products.

A defence and counter claim has been filed and served, under which the allegations of infringement are denied and a counter claim has been made partly in reliance on admissions alleging the invalidity of the patent. However, for today’s purposes it is common ground between the parties that there are serious issues to be tried, both in relation to the allegations of infringement and in relation to the allegations of invalidity. I have not been called upon to consider either of those issues for the purpose of deciding whether or not there should be interim relief between now and the trial of the action. I therefore approach the matter on the basis that I am solely concerned with applying the Cyanamid principles in order to determine first of all, whether damages would be an adequate remedy to either of the respective parties and depending on the answer to that question, where the balance of convenience lies.

There is also a further and potentially overriding issue of discretion based on an allegation of delay, which I will say more about later in this judgment. The Cyanamid test is too well known to require it to be set out by me as part of this judgment, and I propose therefore, to turn to the first of Lord Diplock’s stages, which is the question of whether damages would be an adequate remedy for the Claimants. As indicated in his speech, if damages in the measure recoverable at common law would be adequate and the Defendants would be in a financial position to pay them, then no interlocutory injunction should normally be granted however strong the Plaintiff’s claim might appear at this stage.

The damages payable for the infringement of a patent are either the loss of profit suffered by the patentee or its licensee as a result of the acts of infringement, or alternatively, if greater, the profits secured by the Defendant as a result of the acts of infringement, comprised in this case in the sales of its flying shoes. Much of the evidence and indeed, a not inconsiderable part of the argument addressed to me on behalf of the Claimants has emphasised that the potential and indeed, in recent times actually lucrative market in this type of product has been created by the second Claimant as distributor at its own expense through the medium of advertising and other promotional activities. It is said that on the basis of that it has developed, and I am prepared to accept it has established considerable good will in the product, the benefit of which would be diminished or lost if the Defendant or indeed, any other similar competitors are allowed to trade in a similar infringing product without the intervention of the court.

Whilst I am sympathetic to that argument in general terms, it does not seem to me to assist in relation to the question of whether or not damages would be an adequate remedy. It is clear from the test that I have mentioned set out in Lord Diplock’s speech, that the question of whether damages would be an adequate remedy has to be determined by reference to what damages would be recoverable at common law for the infringement of the patent rights. This is not, as I have already indicated, an action alleging trademark infringement or passing off, and in those circumstances it seems to me that questions of good will and reputation are referable only to a calculation of what level of custom the Claimants would have enjoyed, but for the competing product. They are not matters which can be compensated for in themselves by way of damages.

On that basis there seems to be a measure of agreement based on the sales figures during the last year, that between now and a speedy trial, hopefully some time in November this year, the Defendants are likely to sell something in the region of 30,000 pairs of these shoes. On the basis that the net profit will be not less than £10 per pair, one is looking, in broad terms at least, at a loss of profits somewhere in the region of £300,000. That is, of course, very much a rough and ready calculation and the actual figure may be more or less than that, depending on how the market operates between now and November this year.

It is accepted by the Claimant in answer to my questions, that although the Claimant feels a sense of grievance that the good will and reputation I have referred to is being, as it sees it, abused by the Defendant companies, it is ultimately entitled only to damages in respect of lost sales and these can readily be calculated by reference to what the Defendants have, in fact, sold between now and the date of the trial. There may be an issue as to how many of those sales, had they been presented as a result of an injunction, would have been translated into purchases from the Claimants. But the figures do at least provide a maximum figure for the purposes of the damages calculation.

If that were the only issue, it is accepted by the Claimants that damages would be an adequate remedy to compensate them for their recoverable losses between now and the trial. However, they take issue with the Defendant’s ability to pay those damages following a judgment made at the conclusion of the trial. As to that, the position appears to be, from the latest set of accounts for the year ended 31^st January 2007, that in terms of trading the group made an overall loss before taxation of something in the region of £2.5m. However, on a balance sheet basis taking into account net current liabilities and net assets and fixed and intangible assets, including shareholders’ funds, there remains a credit balance of approximately £2m.

The question of whether or not a judgment would be satisfied has, in my judgment, to be considered not merely by reference to the trading position, which is essentially a cash flow position, but also by reference to what the position would be on a balance sheet basis, if necessary, following the liquidation of the Defendant companies.

Assuming that the damages for the interim period between now and November are in the region of £300,000, together with what the Claimants estimate the damages prior to this application are, which is a further £400,000, one would be looking at potential liabilities in the region of £700,000. Mr Moody-Stuart, I think, accepts that even with the bank support referred to in his client’s witness statements that might well occasion the group to cease to trade. But notwithstanding that there would, he says, remain more than sufficient assets, that is to say, some £2m worth of assets on the latest accounts, from which to satisfy the Claimant’s judgment.

Now I need to mention two points which arise out of the accounts and on which I sought clarification during the course of this hearing. First of all, I need to mention that the figures that I have just referred to in this judgment are derived from the consolidated profit and loss account and balance sheet of the group, which has been prepared taking into account post-year-end events, including the administration of the second named Defendant and the subsequent purchase of its assets from the administrators. It is apparent from the Chairman’s report that those events resulted in a write-down in the consolidated assets and good will, of some £1.25m, but that is taken into account in calculating the balances that I have referred to.

The second point on which there is currently no actual evidence, but on which the Defendants, at my request, have taken instructions, is what is the up-to-date position in respect of the bank borrowings? Although the group appears to have the benefit of a facility from Barclays Bank in the figure of some £3.7m as at 31^st January 2007, some £2m of that hasd already been drawn down, leaving the remaining £1.7m to support its trading over the next year or so of the company’s trade. Clearly, if there has been a significant downturn in the group’s financial position, either in terms of an increase in its borrowings or a diminution in its recoverable debts that needs to be factored into a calculation of its ability to meet the potential judgment in this case. Mr Moody-Stuart has told me on instructions that overall, the group’s financial position has not changed materially from what is stated in the accounts that I have already referred to. If that is right then it seems to me that there is evidence before the court which demonstrates, so far as one can looking into the future, that the group of Defendants is likely to be able to meet an award of damages in the sums contemplated.

I propose to direct that a witness statement be filed and served confirming what I have been told and exhibiting any accounts, bank statements or other relevant documents necessary to support that. If, for any reason, it turns out on examination of that evidence that the position is other than I have been told then, of course, the Claimant is at liberty to make any further applications to the court which it thinks fit. But as things stand this afternoon, there appears to be currently some £2m worth of free assets available to meet the judgment.

It seems to me therefore, on that basis, applying the Diplock test, that damages will be an adequate remedy for the Claimants to cover the position between now and the trial of the action and there are no factors in this case which, in my judgment, entitle me to depart from the consequences of that test, which is that I should, in those circumstances, refuse the injunction.

I should, however, for completeness, say something very briefly about the other points that have been argued. First of all, had I been of a different view in relation to the position of the Claimant vis-à-vis, damages being an adequate remedy, it would then have been necessary for me to have gone on and considered whether damages would have been an adequate remedy for the Defendants. There is no doubt from the evidence, that the Claimant companies are good for any potential award of damages based on loss of sales by the Defendants were an injunction to be granted between now and the trial and then subsequently discharged.

Mr Moody-Stuart says that those damages would be more than simply the lost profit on the sales of shoes in the interim. For the same reasons that I have indicated in relation to the position of the Claimants on the question of damages, I reject that submission. The position of both parties, it seems to me, are all but identical on this point. The damages would be the loss of profits through not being able to sell what is, I think, clearly on the evidence, a competing product. There are the figures for the previous months and the previous year in relation to the same months, and from that material it ought, in my judgment, to be possible, were I to have granted an injunction, for the Defendants to have made a sufficiently accurate calculation of their loss for damages to be an adequate remedy for them. In those circumstances it would not have been necessary for me to consider the balance of convenience and I would in those circumstances have been likely to have granted the injunction.

In these circumstances it does not, I think, serve any real useful purpose for me to attempt, on a hypothetical basis, to examine the sort of factors that might have influenced my mind on the balance of convenience. Clearly, whether an injunction is granted or whether it is refused, one or other party will suffer some loss. That necessitates a speedy trial of the issues between the parties, but the only matter which I ought perhaps to say something about is the question of delay. As I have already indicated, the exclusive licence was not granted until April of this year to the second named Claimant, but the patentee itself has always been in the position to sue. There is no very clear explanation as to why it has waited until the grant of the exclusive licence, although one can see a number of reasons why it was thought more prudent to grant the licence and to conduct the infringement proceedings through the medium of its licensee.

Overall, I am not satisfied that the delay in this case, had it been a relevant issue to the exercise of my discretion, would have been a reason for not granting the injunction. It seems to me that delay is never of itself a bar to an injunction, but it becomes a relevant factor if, during the period of delay, the inactivity of the Claimant has led the Defendant to alter its position financially or in another way, which would make it inconvenient and unjust for it to be required to abandon those arrangements pending the trial of the action and the determination of what in this particular case are accepted to be serious issues on both sides. In this particular case there really is very little evidence of that kind. True it is, that money has doubtless been spent in advertising the Defendant’s products, but I have been shown nothing on the scale which indicates that the Defendant’s trading arrangements have been significantly altered to accommodate the sale of this product so as to make that in itself a reason for not granting an injunction if one were otherwise justified.

I therefore come back to the first point mentioned in this judgment, which is whether or not damages are an adequate remedy for the Claimant. For the reasons which I have given, in my judgment, as things stand they are not and therefore, the injunction will be refused, but on the basis that the Defendants will provide the additional evidence and there will be directions to ensure a speedy trial of this action at the earliest possible opportunity.