The Baby Hammock Co Limited (‘BHC’) first sought advice from New Zealand’s largest intellectual property law firm, AJ Park, after one of its principals, Mrs Sarah Hannah, got to chatting with her neighbour on a flight from Wellington to Auckland, who happened to be an employee of the firm.This was back in August of 2004.
That chance meeting led, in the end, to a number of days in the New Zealand High Court in February and March this year, with BHC accusing AJ Park of negligence and breach of fiduciary duty, and claiming damages for loss of profits in the astonishing amount of $53,105,743, as well as additional exemplary damages.
On 13 July 2011, Justice Rodney Hansen in the Auckland Registry of the High Court issued his judgment, finding that:
- AJ Park was not negligent in any advice that they provided to BHC;
- even if they had been negligent, any such negligence would not have been causative of the lack of success in business of BHC;
- while AJ Park owed a fiduciary duty both to BHC, and to another client, Hushamok, which was a competitor to BHC, it was at no time in breach of its duty to BHC;
- the fact that there may be a potential for future conflict between clients is not, in itself, sufficient to establish a breach of fiduciary duty;
- even if there had been a breach of fiduciary duty, BHC could not have demonstrated any loss that had occurred as a result of the breach;
- BHC’s calculations of lost profits were fanciful, being based on flawed assumptions, inconsistent with the historical performance of the market for BHC’s products, and in any event BHC had no capacity to access the market because, at the relevant time, the company was chronically under-capitalised and technically insolvent; and
- exemplary damages would not have been awarded because, even if AJ Park had been in breach of its fiduciary duty to BHC, its conduct would have, at worst, involved an error of judgment, whereas exemplary damages are only appropriate in cases of outrageous conduct.
BACKGROUND
BHC developed and marketed a baby hammock which could be suspended from a ceiling or doorway or from a stand that was sold separately. In the early stages of development BHC’s directors, Gregory and Sarah Hannah, sought advice on intellectual property issues from AJ Park. BHC’s first complaint was that AJ Park was negligent in advising them that two components they had developed for use with the baby hammock – a stand and a flexible spreader bar – could not be protected by patent, registered design or otherwise.Several years later, AJ Park acted for another New Zealand manufacturer of baby hammocks, Hushamok Limited, for whom they registered designs of a baby hammock and stand. BHC’s second complaint was that its interests and Hushamok’s interests conflicted and, in acting for Hushamok, AJ Park breached fiduciary duties owed to BHC.
BHC claims that as a result of the negligence it was unable to raise finance to fund its operations and to exploit opportunities to expand its business, from which damages for loss of profits arise. As noted above, BHC assessed the quantum of these damages at $53,105,743.
The court found that the evidence painted a somewhat different picture of BHC’s position. AJ Park provided initial general advice on intellectual property matters, and assisted BHC with registration of trade marks. However, BHC’s initial designs were not new or original, and had in fact been acquired from a Mr Bennett, and the Bennett stand had been exhibited at a trade show two years previously. AJ Park’s initial advice that these designs were not protectable by patent or registered design was therefore absolutely correct.
AJ Park did advise BHC of the potential for protection of any new developments, recommending that these be kept secret until AJ Park had the opportunity to review them and provide further advice on options for protection.
The court appears to have considered the evidence of potential financing opportunities to be of a dubious character. In considering a collection of email printouts said to be evidence of a failed attempt to secure investment in BHC, Justice Hansen (at paragraph [47] of the decision) concluded: ‘I do not believe the emails … were generated at the time. I can only speculate on the circumstances in which they came into existence.’
In the meantime, AJ Park had indeed agreed to act for Hushamok. Initially this work involved searching an advice on the freedom of Hushamok to manufacture and sell a baby hammock in the United States. Subsequently the work extended to registration of a design for a hammock and three stand designs, which had been developed independently by designers at two companies, one in New Zealand, the other in the United States. A patent application was also filed for a combination of a flexible spreader bar and hammock, but was abandoned following objections by an examiner.
OBSERVATIONS
Australia and New Zealand are relatively small markets for intellectual property advisory services. Across both countries, the number of registered individual patent attorneys counts only in the hundreds. The number of distinct firms offered these services is, of course, significantly smaller.Clients need to have realistic expectations of the role that registered intellectual property rights might play in their businesses, and of the nature and scope of services provided by their IP advisors. Of course, the major responsibility for educating clients – particularly those who are inexperienced with IP – and in managing expectations, lies with the advisors.
Clients, for their part, need to take notice of the advice they are given and, if they do not fully understand it, ask suitable questions. Good client-attorney relationships – indeed, partnerships – are built on mutual trust and respect.
A number of points pertinent to the above comments come out of Justice Hansen’s decision.
- Professional advice is prepared on the basis of information provided by the client, on the assumption that it is accurate and complete. In this case, AJ Park could not have provided advice on protection of new developments that they had not seen, and the advice that they gave based on what they did know was correct. Thus they were not negligent.
- Failure of a business venture is rarely due to a single cause, and an attempt to lay the complete blame at the feet of a single professional advisor is unlikely to be credible. Here the judge had opportunity to look at evidence of what went on the in BHC business, and in the market for baby hammocks generally, and concluded that the problems encountered by BHC in overseas markets had little or nothing to do with the lack of intellectual property protection, but instead arose from structural and operational issues intrinsic to the BHC business.
- Some clients have an expectation that their IP advisors will not act for anybody else with whom they compete in the marketplace, and that to do so is automatically a conflict of interest, and breach of fiduciary duty. In practice, it is inevitable that IP firms in Australia and New Zealand will act for competing entities from time-to-time. This does not necessarily result in a conflict, nor does it mean that firms do not take potential conflicts seriously.
- A conflict does not arise merely because two clients are competitors in a particular market. This is sometimes termed a ‘commercial conflict’, and attorneys may choose to avoid such conflicts, or to manage them carefully. As the judge stated in this decision (at [106]): ‘…the mere risk of future conflict is insufficient to found a breach of duty and sets the bar too high.’
- A conflict arises when a duty owed by the attorney to one client is incompatible with a duty owned to another. For example, an attorney owes each client a duty of disclosure, i.e. to ensure that the client is aware of all relevant information known to the attorney. The attorney also owes each client a duty of confidentiality, which precludes the use of information received in confidence. These duties conflict when knowledge of confidential information pertaining to one client’s matter is pertinent to the position of another client.
- The duty owed to one client does not extend so far as to prevent an attorney from doing something that might, at some future date, result in ‘disadvantage’ to another client. The disadvantage must be specific, and not generic or hypothetical. As the judge stated (at [108]): ‘…registration of a patent or design is undertaken for the purpose of securing rights as a part of a strategy to acquire or protect a competitive edge. In that sense, registration will disadvantage any competitor in the field. That cannot be sufficient. Mere commercial disadvantage which would be experienced by all competitors is not enough. There needs to be disadvantage of a kind which impacts on the intellectual property rights of another client.’
Disputes between clients and attorneys arise more commonly out of misunderstandings, or failures of communication, than out of any actual negligence or breach of duties.
In Australia, the first port-of-call for a client with a complaint regarding a patent attorney is the Professional Standards Board. The regulatory regime in Australia enables complaints to be resolved – including discipline of an attorney, if justified – without the need to take the dispute to a court. New Zealand currently has no equivalent system – although one is proposed, and legislation has been drafted – which means that these types of complaints are more likely to lead to court action. This is rarely a good outcome for either party.
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