FEDERAL COURT OF AUSTRALIA
Australian Medic-Care Company Ltd v Hamilton Pharmaceutical Pty Limited
(ACN 008 204 635) [2009] FCA 1220CONTRACT – long term exclusive distributorship between Australian supplier and Hong Kong distributor – parties’ written agreement not adequately expressing the true character of all aspects of their relationship – contract terminated by supplier – allegation of repudiation by distributor.
CONTRACT – claim that contract was partially oral and partially written – principles to be applied in deciding this question – contract found to be written only.
CONTRACT – construction of terms dealing with extension and termination of the agreement – negotiations over an extended period – principles of construction of such a contract – extent to which evidence of pre-contractual negotiations admissible.
CONTRACT – exclusive distributorship – allegations of parallel importation into Hong Kong – both supplier and distributor subject to a “best efforts” clause to prevent the sale of the supplier’s products in Hong Kong by persons other than the distributor – construction of “best efforts” clauses and the “standard of endeavour” required – the parties’ obligations found to be reciprocal and interdependent – supplier found in breach of the clause by not taking all reasonable steps to prevent its product being sold into Hong Kong – distributor also in breach for failing to notify supplier of the parallel importation – failure by distributor to mitigate loss.
CONTRACT – alleged refusal to supply in accordance with the agreement – offer of supply unreasonably rejected by distributor – failure to mitigate – nominal damages.
INTELLECTUAL PROPERTY – distributor selling to Chinese reading market using Chinese character trade mark and Chinese language product indications – claims by supplier to the trade marks under s 87 of the Trade Practices Act 1974 (Cth) on account of alleged misleading or deceptive conduct by Distributor – claim by distributor to copyright in Chinese character product indications and get up.
COPYRIGHT – Chinese language product indications found to be original literary works – claim they were or were represented to be direct translations of English language product indications rejected – distributor not trustee of copyright works for supplier.
COPYRIGHT – breach of copyright by supplier alleged arising out of parallel importation – alleged unauthorised reproductions by supplier – whether reproduction authorised – additional statutory conversion claim under s 116 of the Copyright Act 1968 rejected.
PASSING OFF – sale and resale of product bearing distributor’s trade mark and copyright work – alleged misrepresentation calculated to deceive customers and end users – claim rejected – sales made in Australia – no evidence that distributor or Chinese language marks had any reputation at all in Australia.
BREACH OF CONFIDENCE – after termination distributor provided third party manufacturer with supplier’s production formula and manufacturing formula – similar product manufactured and sold using production formula – claim for breach of confidence – account of profits sought – awarded for a limited period – claim against Director of distributor for profits rejected.
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Robertson, “Force Majeure Clauses”, (2009) 25 JCL 62AUSTRALIAN MEDIC-CARE COMPANY LTD (A COMPANY INCORPORATED IN HONG KONG) v HAMILTON PHARMACEUTICAL PTY LTD (ACN 008 204 635); HAMILTON PHARMACEUTICAL PTY LTD ACN 008 204 635 v AUSTRALIAN MEDIC-CARE COMPANY LTD and KENNETH KIN WAH KEUNG
SAD 17 of 2007
FINN J
30 OCTOBER 2009
ADELAIDE
IN THE FEDERAL COURT OF AUSTRALIA
SOUTH AUSTRALIA DISTRICT REGISTRY
GENERAL DIVISION
SAD 17 of 2007
BETWEEN: AUSTRALIAN MEDIC-CARE COMPANY LTD (A COMPANY INCORPORATED IN HONG KONG)
Applicant/First Cross-RespondentAND: HAMILTON PHARMACEUTICAL PTY LTD
(ACN 008 204 635)
First Respondent/Cross-ClaimantKENNETH KIN WAH KEUNG
Second Cross-Respondent
JUDGE:
FINN J
DATE OF ORDER:
30 OCTOBER 2009
WHERE MADE:
ADELAIDE
THE COURT ORDERS THAT:
1.The parties bring in Agreed Minutes of Order to give effect to these reasons on or before 13 November 2009 and in default of agreement the applicant to file Proposed Minutes of Order within that time.
2.The applicant and respondent file and serve any submissions on costs or before 13 November 2009.
Note:Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.
The text of entered orders can be located using eSearch on the Court’s website.
IN THE FEDERAL COURT OF AUSTRALIA
SOUTH AUSTRALIA DISTRICT REGISTRY
GENERAL DIVISION
SAD 17 of 2007
BETWEEN: AUSTRALIAN MEDIC-CARE COMPANY LTD (A COMPANY INCORPORATED IN HONG KONG)
Applicant/First Cross-RespondentAND: HAMILTON PHARMACEUTICAL PTY LTD
ACN 008 204 635
First Respondent/Cross-ClaimantKENNETH KIN WAH KEUNG
Second Cross-Respondent
JUDGE:
FINN J
DATE:
30 OCTOBER 2009
PLACE:
ADELAIDE
TABLE OF CONTENTS
OVERVIEW OF CLAIMS........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ .... [7] The parties’ relationship........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ....... [8] The contract claims........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ...... [14] AMC’s intellectual property rights........ ........ ........ ........ ........ ........ ........ ........ ........ ...... [17] Misleading or deceptive conduct........ ........ ........ ........ ........ ........ ........ ........ ........ ........ . [24] MATTERS OF MEMORY, SELF-SERVING RECONSTRUCTION, TEMPERAMENT AND CREDIT........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ....... [26] A GENERAL CHRONOLOGY........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ .... [35] (a) Background........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ . [36] (b) Initial dealings with Hamilton ........ ........ ........ ........ ........ ........ ........ ........ ........ ... [41] (c) The distributorship commences........ ........ ........ ........ ........ ........ ........ ........ ........ .. [47] A. THE CONTRACT CLAIMS........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ....... [112] Applicable principles ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ .. [114] (i) A partly oral and partly written agreement?........ ........ ........ ........ ........ ........ ....... [115] (ii) Interpretation........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ....... [116] BREACH/REPUDIATION OR VALID TERMINATION........ ........ ........ ........ ........ ........ .. [122] 1. Relevant Written Terms of the Signed Distribution Agreement........ ........ ........ ........ . [123] Background and factual setting........ ........ ........ ........ ........ ........ ........ ........ ........ ........ .... [133] (a) Dr Keung........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ .... [139] (b) Dr Ovcharenko........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ .... [151] (c) Additional matters........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ...... [158] (d) Additional material on “the rolling 5 year term”........ ........ ........ ........ ........ ........ [167] 2. The Terms of the Agreement........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ....... [172] (a) AMC’s contentions........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ..... [178] (b) Hamilton’s contentions........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ....... [184] Consideration........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ....... [185] Oral terms?........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ... [185] (a) Clause 8.1........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ .... [186] (b) Clause 41.1.6........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ....... [195] Conclusion........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ .... [217] 3. Construction........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ .. [219] (a) Clause 41.1.6........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ...... [220] (b) Clause 8.1........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ... [236] 4. The Termination of the Licence........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ... [245] (a) Additional factual material........ ........ ........ ........ ........ ........ ........ ........ ........ ........ . [249] Consideration........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ....... [254] Conclusion........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ .... [260] PARALLEL IMPORTATION........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ...... [262] The Contractual Setting and “Best Efforts” Clauses........ ........ ........ ........ ........ ........ .... [267] Factual Setting........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ...... [272] (a) Hamilton’s concessions........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ....... [273] (b) Sales to Pharmalines........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ... [276] (c) Sales to Crafers........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ .... [281] (d) AMC and parallel importation........ ........ ........ ........ ........ ........ ........ ........ ........ .... [302] Consideration........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ....... [326] Hamilton’s defence to breach of cl 6.2........ ........ ........ ........ ........ ........ ........ ........ ........ [350] (a) Fact Findings........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ....... [352] (b) Was AMC in Breach of cl 6.2........ ........ ........ ........ ........ ........ ........ ........ ........ ..... [353] (c) The defences........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ....... [359] Damages for breach of cl 6.2........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ....... [369] Background Material........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ .... [374] (a) Dr Jorgensen’s first report........ ........ ........ ........ ........ ........ ........ ........ ........ ........ .. [374] (b) The Market and the Products........ ........ ........ ........ ........ ........ ........ ........ ........ ...... [383] (c) Dr Keung’s perception of the market for Urederm........ ........ ........ ........ ........ .... [389] (d) The Products sold to Crafers........ ........ ........ ........ ........ ........ ........ ........ ........ ...... [395] Consideration........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ....... [399] (i) The “lost opportunity”........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ [399] (ii) Consequential loss of profits because of run down in sales........ ........ ........ ....... [411] CONCLUSION........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ...... [414] REFUSAL TO SUPPLY........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ....... [416] The contractual setting........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ . [418] The construction of cll 11.1 and 13.1........ ........ ........ ........ ........ ........ ........ ........ ........ ... [425] Factual Setting........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ...... [432] Consideration........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ....... [443] (i) Clause 42 and damages........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ...... [452] (ii) Mitigation of damages........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ [454] CONCLUSION ON THE CONTRACT CLAIMS........ ........ ........ ........ ........ ........ ........ ....... [459] 6. MISLEADING OR DECEPTIVE CONDUCT: CLAIMS 1 AND 2........ ........ ........ . [460] B. THE INTELLECTUAL PROPERTY RIGHTS CLAIMS AND CROSS-CLAIM.... [462] HAMILTON’S CROSS-CLAIM TO THE TRADEMARKS........ ........ ........ ........ ..... [465] The contractual setting........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ . [465] Hamilton’s cross-claim........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ [467] Applicable Principles........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ... [471] Factual Setting........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ...... [472] (a) The negotiations........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ .. [482] (b) Registering the Chinese character marks........ ........ ........ ........ ........ ........ ........ .... [504] (c) A 2002 postscript........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ [506] Consideration........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ....... [511] AMC’S COPYRIGHT CLAIMS........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ... [544] The Claims........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ... [549] Factual Background........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ..... [551] Copyright ownership........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ .... [558] Applicable principles........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ... [566] Consideration........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ....... [567] BREACH OF COPYRIGHT........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ . [576] Consideration........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ....... [582] CONVERSION: SECTION 116 OF THE COPYRIGHT ACT........ ........ ........ ........ ........ ... [587] MISLEADING OR DECEPTIVE CONDUCT: CLAIMS 3 AND 4........ ........ ........ ........ ... [591] PASSING OFF........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ...... [606] THE REMAINING CROSS-CLAIMS........ ........ ........ ........ ........ ........ ........ ........ ........ ........ .. [618] (i) The Unpaid Invoice........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ..... [620] (ii) The Product Registrations........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ... [622] BREACH OF CONFIDENCE........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ....... [626] Applicable Principles........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ..... [629] The factual setting........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ .. [639] The Distribution Agreement........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ .. [658] Consideration........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ....... [660] Conclusion........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ .... [683] REASONS FOR A RULING ON EVIDENCE........ ........ ........ ........ ........ ........ ........ ........ ..... [687] CONCLUSION........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ...... [692]
REASONS FOR JUDGMENT
This proceeding requires, in substance, the winding up of a business relationship between an Australian supplier of certain pharmaceutical products, Hamilton Laboratories Pty Ltd, and its sole distributor in Hong Kong, Australian Medic-Care Co Ltd (“AMC”). Viewed superficially, their formal relationship was that of supplier and exclusive distributor. Their relationship over time, though, was considerably more complex than that. It contained elements that could loosely be described as those of a joint venture. There was little reflected in the contract which, for the purpose of this matter, purportedly defined their relationship.
AMC (or its precursor) first began dealings with Hamilton in 1988. By the early 2000s, their business relationship began to fray. For practical purposes, it came to an end in 2006. What is now perfectly clear is that there was by then a total failure of mutual trust and confidence between the principals of the two companies.
If the business form they had chosen had been a company or a partnership, the unravelling of their relationship could have occurred reasonably expeditiously using well known and well worn statutory procedures which can be availed of when mutual trust and confidence have been destroyed: for companies, see Corporations Act 2001 (Cth), s 461(k); for partnerships, Partnership Act 1891 (SA), s 35(d). Here the parties left it to the law of contract to define their relationship. Unlike in some other legal systems, ours does not have well developed default rules and procedures governing the termination of long term contracts for cause (including irreparable breakdown of mutual trust and confidence where such is essential for the functioning of the contractual relationship): see eg German BGB §314 (in translation see
And so began a long and complex litigation which has traversed in detail much of the history of the parties’ relationship. Their respective allegations and recriminations have found legal expression in a significant number of causes of action and in about 1,000 pages of final submissions. The best that can be said about the matter is that it again demonstrates how inadequately our contract law can serve parties in long term business relationships which falter for whatever reason. It is not a reasonable response to say that they should have made better provision for their rights, etc into the future in the terms of their agreement. Contract law in its default rules should serve as well those who are not gifted with an all encompassing foresight.
In the result, while each party has secured victories of sorts, they each have sustained reverses. It could hardly have been otherwise despite their hopes, given the nature of their relationship and their manner of dealing.
To assist in the reading of what regrettably have to be lengthy reasons I have annexed two tables, the one being of the principal persons and companies referred to in these reasons; the other, of trade marks and pharmaceutical products.
OVERVIEW OF CLAIMS
By way of background I need to refer to two matters. The first relates to the evolution of the parties’ relationship; the second, to AMC’s intellectual property rights in aspects of the packaging and get up of the two principal Hamilton products distributed by AMC.
The parties’ relationship
The first and tentative dealings between Dr Keung (a director of AMC when it was later formed in Hong Kong in December 1990) and Hamilton began in 1988. Dr Keung’s purpose was to investigate the importation of one of Hamilton’s products into Hong Kong, China and Macau for sale principally to the Chinese speaking population of those localities. That product, Urederm was a 10% urea cream. An analgesic balm, it was used as a skin moisturiser.
The dealings of the parties progressed to the point that on 29 March 1990, Hamilton appointed the predecessor of AMC to be its sole distributor of a range of Hamilton products in Hong Kong and Macau. Those products included Urederm and, relevantly for present purposes, Rubesal (a topical analgesic balm used to treat muscle and joint pain). The letter of appointment, which contained only five clauses, provided (inter alia):
3. PERIOD
This Agreement shall commence from 31-03-90 and remain in force for a period of 5 years. At the completion of the initial 5 year period, this agreement may be extended for a further 5 years subject to review at the end of each year with respect to satisfactory sales performance. Thereafter, it shall be subject to the conditions set out in Clause 4(b).
4.SALES
(a)The Distributor will use its best endeavour to promote the sale of the Product in the Territory and to procure orders for the Product and will provide such information from time to time as may be required by HAMILTON to increase sales of, and promote new or existing products.
(b)If sales of the Product are insufficient to meet the agreed minimum sales as defined in Schedule B (as amended from time to time) to meet the demand for the Product in the territory, HAMILTON may terminate the Distributorship by giving not less than three month’s notice to the Sole Distributor of the intention of HAMILTON to do so. HAMILTON may then offer the Product to others.
Schedule B provided for escalating, annual sales figures for Urederm over the five year term of the contract. Clause 4(b) contained the only express reference to termination in the document.
On 11 May 1995 a further five year term was agreed in relevantly identical terms save that the agreement now extended to Taiwan and that the minimum sales figures (which now encompassed both Urederm and Rubesal in various package sizes) were to be notified annually.
Between 1990 and 1998 (and excepting Mr Blake (Hamilton’s managing director)), Dr Keung’s dealings with Hamilton’s personnel were with Mr Koerner, a director (until 1996) and International Sales Manager, and with Mr Lock, Hamilton’s then export manager. In 1998 Dr Ovcharenko took over the functions in relation to AMC previously performed by Koerner and Lock. This change, as I will later indicate, is of considerable significance. It appeared to increase Mr Blake’s direct involvement in Hamilton’s dealing with AMC.
For reasons to which I will later refer, by late 1998, Mr Blake wished to formalise Hamilton’s relationship with AMC. During 1999 negotiations were conducted between Dr Ovcharenko and Mr Keung for a distribution agreement, a draft of which had been proposed by Hamilton. It will be necessary to outline those negotiations in some detail when considering the “Contract claims” below. A final form of the agreement was executed in March 2000 (but back dated to 1 July 1999) although it is AMC’s case that the parties’ contract was, in the circumstances, partly written and partly oral. The four clause, two page letter of appointment (with short annexures) of 1995 had become a twelve page, fifty clause agreement with five schedules in 2000.
The Distribution Agreement, for present purposes, contained provisions dealing (i) with extending the term of the “Distribution Agreement”: cl 8.1; and termination of the “Licence” to resell given under the agreement: cll 4 and 41; (ii) with the reciprocal duties of the parties to use best efforts to prevent the sale of Hamilton’s products in the geographic area covered by the agreement by persons other than AMC or a sub-distributor: cll 6.2 and 9.1; and (iii) with the supply to, and purchase by, AMC under the agreement: cll 11 and 13.
The contract claims
The three classes of contract claims made by AMC relate respectively to these three groups of provisions. The first, alleges premature and unlawful termination, of the distribution agreement, by letters of 13 July 2006 and 23 March 2007. The wrongs alleged turn upon the construction propounded by AMC of what it describes as the provision for a “rolling 5 year term” and of the cl 41 termination provision. Needless to say the contract claims made here are twinned with alleged contraventions of s 52 of the Trade Practices Act 1974 (Cth). The second class of claims allege a failure by Hamilton to use its best efforts to prevent sales of its product in the area of the agreement otherwise than by AMC and its sub-distributors. AMC alleges that Hamilton allowed the parallel importation of its products by others into the Hong Kong market between 2000 and 2002, although AMC concedes it can only prove comparatively small amounts of parallel importation occurred in 2001-2002. The third class of claim relates to Hamilton’s wrongful cessation of supply of products to AMC and in particular, Hamilton’s failure to fulfil four orders immediately prior to the termination of the agreement. These claims raise questions of construction which turn on the alleged structure of the Distribution Agreement itself. The one matter I would emphasise about the claims made is that, notwithstanding the parties have been in sequential long term contractual relationships, AMC – and for that matter Hamilton – has not made any claim founded upon an alleged breach of an implied duty of good faith and fair dealing: on which duty see generally Cheshire and Fifoot’s Law of Contract 10.43-10.46 (9th Aust ed).
By way of relief, AMC seeks damages, a declaration that Hamilton’s purported terminations of the agreement were unlawful and ineffective, and rectification of the contract’s terms so as to embody the “rolling five year” term.
Hamilton has a number of layered defences to the contract claim. It is asserted that the Distribution Agreement was wholly in writing and was validly terminated on the giving of 60 days notice on 13 July 2006 as provided by cl 41.1.6 of the agreement. It is asserted additionally that, if that notice was invalid, the agreement was validly terminated by notice of 2 March 2007, in reliance upon some number of breaches of contract which were relied upon for that purpose or which could have been so relied upon.
AMC’s intellectual property rights
The following, which includes contentious subject matter, is included for expository purposes and to facilitate understanding of how AMC’s claims allegedly arise. It is not meant to represent findings.
Hamilton’s products were required by Dr Keung for sale, principally, to Chinese reading markets. The initial product containers and packaging were English language only. The uncontroverted evidence is that the words “Urederm” and “Rubesal” as such would be practically incomprehensible to Chinese readers and a transliteration of them would mean nothing to the Chinese reader. To obviate this difficulty Dr Keung developed Chinese character names for Rubesal (in 1988) and Urederm (in 1988). Representations of these appear later in these reasons. The transliteration of the Urederm characters was “Fuyunhon”; for Rubesal, “Tuotoning”. Neither of the names has any linguistic, phonetic or transliterative relationship with the words “Urederm” and “Rubesal” respectively. As will be seen, they have quite distinctive meanings. The “Fuyunhon” name was used from 1990 for thirteen other Hamilton products apart from Urederm.
I would note in passing that, on 31 December 1996, AMC changed its Chinese character name. In translation it then became “Australian Fuyunhon Pharmaceutical Co Ltd”.
Both Fuyunhon and Tuotoning were later registered as trademarks in Hong Kong. Transliterated, the words were “Australian Fuyunhon” and “Australian Tuotoning”. Their priority dates were, respectively, 11 August 1999 and 8 October 2002.
Hong Kong pharmaceutical legislation apparently required that all pharmaceutical products sold in Hong Kong which made therapeutic claims had to have product indications written in Chinese characters. Each such product had also to be registered with a government authority and was required to show its registration number on the packaging. Dr Keung undertook such part of the design and redesign of the packaging for Urederm and Rubesal as embodied the Chinese character marks, the product indications (in Chinese and in English) and the Hong Kong permit number. It is Dr Keung’s evidence, which I accept, that he regarded the product indications and instructions for use as important tools for attracting the buying public to a particular pharmaceutical product. That part of the packaging design for which Dr Keung so assumed responsibility has been referred to in the proceedings and in the pleading: FASC [25]; as the “Hong Kong packaging”. Put shortly, AMC claims copyright in that packaging (including the English language product indications).
Initially, the Hong Kong packaging was attached to Hamilton’s English language packages with stick-on labels. Later the packages were manufactured by Hamilton using Hong Kong packaging designs supplied by AMC. AMC’s claim is that when it supplied the Hong Kong packaging to Hamilton, it authorised Hamilton to reproduce it for the purpose of packaging products for supply to AMC. It should be added that Dr Keung did not seek to remove the English language product names from the packaging. Indeed the packaging for all Hamilton products remained predominantly that of Hamilton.
AMC alleges that Hamilton sold infringing product to an Australian company, Crafers Trading Services Pty Ltd, and that these had been on-sold into Hong Kong. In so doing it is said Hamilton (i) breached AMC’s copyright in the Hong Kong packaging as also its copyright in the English language product indications for Urederm: FASC [28A]-[32], [57]-[61], [61A]-[61C] and [62]; (ii) passed off its products as Fuyunhon and Tuotoning as if they were products being manufactured for, and distributed by, AMC: FASC [49]-[56]; and (iii) converted the products so sold by depriving AMC its right to possession of the infringing products: FASC [63]-[69]. The relief sought is damages for infringement of copyright, passing off and conversion.
Misleading or deceptive conduct
Four claims are parasitic on the conduct informing the contract and intellectual property claims. Based on s 52 of the Trade Practices Act 1974 (Cth) and s 56 of the Fair Trading Act 1987 (SA), they allege misleading or deceptive conduct. Two of those counts relate to representations allegedly made by Dr Ovcharenko to Dr Keung during the negotiations for the 1999 distribution agreement. They related to the term of the agreement (the “rolling five year term”) and to the meaning of the termination provisions (cl 41): FASC [84A]-[84B]. The remaining claims relate to Hamilton’s unauthorised use of AMC’s intellectual property: FASC [45]-[47]. The relief sought is damages under s 82 of the TP Act/s 84a of the FT Act and corrective orders under s 87, TP Act/s 85 FT Act including orders to vary the distribution agreement to reflect the representations as to terms made by Dr Ovcharenko.
I will refer separately below to Hamilton’s defences to the non-contractual claims and to what remains of its cross-claims.
MATTERS OF MEMORY, SELF-SERVING RECONSTRUCTION, TEMPERAMENT AND CREDIT
The accounts of their dealings given by the parties respectively differ sharply in a number of quite material respects. Those differences have necessarily put in issue the memories and the veracity of the principal witnesses on each side. The course of evidence has in turn raised assertions of self-serving reconstruction from documents – and there are many – and of evidence being given strategically. There are clear instances of both of these phenomena and from both sides. While the case itself has become in substance a documents case given, as I will indicate, the unreliability of much of the oral evidence, the documents themselves pose quite some difficulties as does the absence of documentary evidence in circumstances where it could be expected to be produced to resolve evidentiary inconsistencies and uncertainties. It is clear that some of the documentary evidence lacks candour or has been prepared for strategic purposes.
What is obvious from the oral evidence of Dr Keung and Mr Blake and from their later correspondence is a palpable mutual dislike. This, I am satisfied has infected aspects of their evidence and on occasion their objectivity.
The evidence relates to events spanning the period 1988 to 2007. For some periods it is quite sparse, though not uncontroversial for that reason. In others, it is detailed but confusing. Largely because of the difficulties I have foreshadowed above, some number of the evidentiary controversies and allegations made must be left unresolved.
Before expressing views on the principal witnesses individually, I should make the following general comments.
First, to put the matter somewhat inexactly, the evidence relates to four relatively discrete phases or periods. The first, from 1988 to 1997, covers that from the earliest dealings between AMC and Hamilton to the genesis of the circumstances giving rise to the long form Distribution Agreement. In this period I accept in the main Dr Keung’s evidence on matters of importance. It is supported by documentary evidence. In the main I reject Mr Blake’s. It was the product of an understandably fallible memory. The second period, from 1998 to 2000, covers the period of negotiation and signing of the Distribution Agreement. The evidence from this period discloses many of the vices I referred to above. What I would wish to emphasise is that the principal, commonly shared vice in the evidence of the witnesses is selective reconstruction from documents. Dr Keung and Mr Blake admittedly have read a significant body of documents in preparing both their affidavits and for this proceeding. Dr Keung’s memory of them was much the better. I have considerable reserve about a deal of his evidence. It involved, on occasion, inadequately accounted for inconsistencies; reconstruction; and evasion. This will become apparent later in these reasons. Some of his answers in cross-examination were clearly unresponsive but often, in my view, because he misapprehended the burden of some of the questions asked of him. Others were, variously, obstructive, strategic in character, and on occasion quite unbelievable. Mr Blake’s evidence for this period suffers significantly from a reconstructed extrapolation from documents often in a fashion advantageous to his company’s interests. It also revealed the beginning of his lack of candour and fair dealing with Dr Keung.
The third period, from 2001 to 2005 marks a market weakening for Hamilton products in Hong Kong and the failure to establish a presence in China, the decline and collapse of the parties relationship and the growth in animosity between Dr Keung and Mr Blake. The principal catalyst to this rupture in business relations was the issue of parallel importation of Hamilton products into Hong Kong and then the parties’ dispute over the Chinese trade marks. The reliability of documentary exchanges suffered in this process. Exaggeration, deception, lack of candour for whatever reason and, particularly from AMC, inflammatory accusations were commonplace in communications. The final period from 2005 to 2007 involved the process of termination of the relationship. It was in this period that, as I have found, Hamilton lawfully terminated the Distribution Agreement and AMC misappropriated and used a confidential product formulation for Hamilton’s 10% urea cream.
I have been asked by Hamilton to conclude that Dr Keung lied consistently and persistently both in and out of the witness box. This, it is said, not only discredited him, it also undermined AMC’s affirmative case and its defence to Hamilton’s cross-claim. Dr Keung was on occasion guilty of egregious untruth. Nonetheless, I have not as of course discounted his information in the ways Hamilton has suggested. In certain periods and in certain matters I have accepted his evidence. I have, though, treated much of his evidence with circumspection and some disbelief. This will become apparent in the ensuing pages. I would say additionally of Dr Keung that he clearly regarded deception as an appropriate instrument to be used self-interestedly in the give and take of an ongoing business relationship. Perhaps paradoxically, he also understood the significance of, and need for trust, as the cement of such a relationship.
I have found much of Mr Blake’s evidence unreliable, essentially for the reasons I have given. I acquit him, though, of being consciously untruthful. The one matter I would emphasise is that he, no less than Dr Keung, played a part in the collapse of their mutual trust and confidence. He was insensitive to the impact that Hamilton’s actions in relation to Crafers had on that collapse and, in particular, to the causes of AMC’s distrust of Hamilton.
Dr Ovcharenko was not an impressive witnesses. Inconsistency, improvised explanation and argumentation marked a deal of his evidence. His answers often were entirely unresponsive or else a lengthy statement of his reasoning. I have treated his evidence guardedly.
A GENERAL CHRONOLOGY
The following is intended to provide a brief sketch of the course of the parties relationship from 1988 until 2007. The specific factual material relevant to AMC’s individual claims will be referred to when those claims are separately considered below.
(a) Background
After the United Kingdom announced in 1987 that Hong Kong would be transferred to the People’s Republic of China in 1997 on cessation of its lease, Dr Keung, a medical practitioner, determined to move to Australia. He settled in Sydney but returned to Hong Kong after three months to recommence his medical career and to explore business opportunities. His family remains in Sydney and he regularly visits them.
While in Australia Dr Keung investigated the potential for commercialising various therapeutic products for on-sale into Hong Kong. He concluded there was a potential market for 10% urea cream in Hong Kong. It was at the time underutilised by the medical profession but presented an available treatment for a range of less serious dermatological conditions and symptoms which commonly affect the general population, such as mild or “housewife” dermatitis, dryness of the skin and winter chapping of the hands. It was not, in his view, difficult to manufacture and there were no particular regulatory conditions about its manufacture. In 1988 there were at least eight brands of 10% urea cream available in the over the counter market (“OTC”) in Hong Kong.
Dr Keung considered that, because there was nothing distinctive in the product itself, his market success in Hong Kong would be very much affected by the extent and success of the brand under which it was sold. With his target market being Chinese reading people he considered the cream had to be marketed under a brand name consumers would find appealing and the ailments for which it could be used to treat had to be described in terms which lay consumers could understand. Dr Keung put his views into effect. As already noted he evolved distinctive Chinese brand names for the Hamilton products he sold; he addressed product indications to the lay reader; and he engaged in extensive promotion and advertising of Hamilton’s products.
Being of the view that potential customers in the medical profession and pharmaceutical industries had a great deal of respect for the quality of Australian products, he decided that sourcing the product from Australia for importation into Hong Kong, China and Macau would be more profitable than sourcing it from elsewhere.
As his business experience at the time was not substantial, Dr Keung sought assistance from a business acquaintance (now deceased), Mak Chu Keung. Mak was a Hong Kong based import-export merchant who traded under the registered business name “Medic-care (Far East) Company”. Mak assisted Dr Keung in the early years of the business, particularly as Dr Keung had little time to devote to it because of his commitments as a medical practitioner. The business was conducted from Mak’s premises and in Mak’s business name. The arrangement continued in this way until AMC was incorporated in December 1990.
(b) Initial dealings with Hamilton
The first contact with Hamilton was made by Mak through Hamilton’s then Hong Kong agent. Between April 1988 and September 1989 Hamilton supplied a quantity of 10% urea cream in the order of several hundred 100g tubes. They were used to test the market. At about the same time Hamilton also provided Dr Keung with test quantities of its Rubesal cream, a topical analgesic balm used to treat muscle and joint pain. There were many brands of such balm available in Hong Kong.
The first Chinese character product name used by Dr Keung for the Hamilton products (which was attached to the products and packaging with a stick-on label) was, as transliterated, “Kui Loon Mei”. Loosely translated this meant “attractive, young and beautiful”. The label was used in 1988 and into 1989, although as earlier noted, Dr Keung coined the Tuotoning brand name in 1988 and the Fuyunhon name in 1988. From 1989 the latter two names alone were in use.
The initial response to the 10% cream from doctors and retailers was positive. Dr Keung now sought to order the urea cream in 50g tubes. To do this, Hamilton required orders of 10,000 or more tubes because these were to be provided specifically for the Hong Kong market. An order for 10,000 tubes was placed in August or September of 1989.
In January 1990 Dr Keung appointed YC Woo & Co Ltd as the Hong Kong sub-distributor for Hong Kong for Hamilton’s 10% urea cream. YC Woo continued in this role until 1997.
From early 1990, promotion in Hong Kong of Hamilton products, particularly 10% urea cream, was initiated through a program directed at both doctors and consumers. Advertisements appeared in newspapers. Leaflets were dropped at aged-care homes, distributors and doctors’ surgeries. Although no examples of the leaflets remain, it is Dr Keung’s evidence which I accept that they referred to the skin conditions in the lay terms “housewife dermatitis, winter itch and winter chapping”. The leaflets advocated the use of the 10% urea cream as an every day treatment of these conditions. The leaflets were supplemented by advertising in the Chinese language media. The advertising was successful in Dr Keung’s view, to the point where supplies were exhausted in the early part of 1990. A further 10,000 tubes of 50g 10% urea cream was ordered urgently to meet the demand. When it arrived, it sold quickly.
Having concluded that the Fuyunhon branded 10% urea cream was likely to prove to be a successful and profitable product, Dr Keung now wished to explore the possibility of a long term relationship with Hamilton. In early 1990 he arranged to travel to Adelaide to meet Hamilton representatives at its business premises.
(c) The distributorship commences
On 29 March 1990 Dr Keung met with Mr Blake and Mr Lock at Hamilton’s. At this meeting Dr Keung (for Medic-Care (Far East) Co) and Mr Blake (for Hamilton) signed the Letter of Appointment, the principal terms of which have been set out above. The minutes of the meeting are in evidence. Aspects of this meeting are controversial particularly as they relate (i) to such “licence” as was given to Dr Keung to develop bilingual packaging and to arrange the artwork; and (ii) to the extent of the disclosure (if at all) of the Fuyunhon and Tuotoning names. These are matters which are considered in detail in the context of the copyright claims below. Suffice it to say for present purposes that I am satisfied Dr Keung showed Mr Blake and Mr Lock illustrations of his Chinese language advertising and promotional catalogues for both the urea cream and the analgesic balm and that he explained that the two brand names he used had their own particular meanings.
On 21 December 1990 AMC was incorporated in Hong Kong. It had five directors, one of whom was Dr Keung. The evidence in this proceeding is that he alone of the directors and shareholders positively participated in the company’s affairs. There were 10,000 issued shares. Dr Keung held 6,000. The four other shareholders each held 1,000. In April 2002 Dr Keung transferred his shares to Wing Tak Investment (HK) Ltd. There is a question in this matter which I do not need to resolve whether that transfer without Hamilton’s consent brought the distribution agreement to an end pursuant to the provisions of cl 41.1.5 of the agreement.
A further meeting was held in Adelaide on 26 February 1991 with Mr Koerner and Mr Lock. The minutes recorded that a new letter of appointment was signed (to accommodate the incorporation of AMC); Dr Keung provided, or would provide, copies of the advertising; sales of Urederm for the 12 months were “excellent”; and sales of Rubesal, unlike Urederm, did not vary with advertising. The last of these is unsurprising as 95% of sales of Rubesal were to government bodies (mainly hospitals).
The next meeting with Mr Blake, Mr Koerner and Mr Lock on 11 March 1992 opened with a review on the previous twelve months. Results were excellent and far exceeded forecasts. Dr Keung presented a thirty second advertising video for Urederm. Dr Keung observed (not for the first time) that while sales could be maintained when the product was advertised, the costs of advertising were not recoverable from sales. It was at this meeting that Dr Keung was asked if he would “like Taiwan included in his territory”. I would note in passing that Mr Blake had no independent recollection of this meeting.
By the beginning of 1993 Hamilton had begun to comment on what it saw as a significant drop in the volume of Urederm being purchased by AMC. At the 1993 annual meeting in Adelaide Dr Keung explained that there was now significant competition in Hong Kong.
During 1993 preparations were being made to appoint Zuellig Pharma Inc, a multinational pharmaceutical distributor, as AMC’s sub-distributor in Taiwan with AMC remaining totally in charge of marketing and distributing Hamilton products. Preparations were likewise in train for AMC to appoint a sub-distributor in Canada where again the packaging would be bilingual.
Mr Koerner visited AMC in Hong Kong in September 1993. In his report of the visit he spoke glowingly of Dr Keung: “we have found a real marketer”; and he noted he was advertising heavily in Hong Kong newspapers during peak seasons and Urederm was currently being advertised on TV at peak viewing times. I would note in passing that the tenor of communications between Dr Keung and Mr Koerner betrayed personal regard and warmth.
By March 1994 Dr Keung was conceding to Mr Koerner his disappointment with the markedly reduced sales of Urederm as similar products appear on the market. The review of sales he prepared for the 20 April 1994 meeting at Hamilton’s acknowledged a loss of market share to new entrants. His view was that Urederm had reached the top in the locality of Hong Kong. In order to increase its sales “we have to introduce the product to other places, such as Taiwan and Mainland China”.
A distribution and marketing agreement was entered into between AMC and Zuellig on 6 February 1995. It appointed Zuellig AMC’s exclusive distributor in Taiwan for four products including Urederm and Rubesal. AMC’s letter of appointment was, in turn, extended to include Taiwan on 11 May 1995. On 22 May 1995, Mr Koerner signed a “To Whom It May Concern” document confirming that Zuellig had been appointed AMC’s exclusive distributor in Taiwan for 3 years. Zuellig was unsuccessful in obtaining a pharmaceutical licence for 10% urea cream in Taiwan. It advised there were already a number of existing creams on the Taiwan market. Having produced no significant results, Taiwan was not included in the 1999 distribution agreement.
By the 1995 annual meeting Urederm forecasts for China were agreed and the Chinese artwork had been settled but Dr Keung was experiencing difficulties with appointing a local distributor in China. This had been, and was to continue to be, the subject of correspondence between himself and Mr Koerner for over a year. AMC had not by the end of 1995 been able to obtain a licence to import Urederm into China as a pharmaceutical product. It was reduced to importing it as a cosmetic product. This had punitive tax consequences.
In October 1995 a Letter of Appointment was signed between AMC and Health Medic-Care (Canada). AMC (Canada) was appointed AMC’s sole distributor for 3 years. To anticipate matters, the Canadian venture yielded little. The Canadian company was related to Health Medic-Care (Hong Kong) Ltd (“HMC”). Albert Chung was a director of both companies. As will be seen, he came to play a not insignificant part in destabilising AMC’s relationship with Hamilton.
In January 1996 AMC won a tender to supply the Hong Kong Department of Health with Rubesal in 25g tubes. The minimum requirement was anticipated to be 100,000 units per annum. Dr Keung was responsible for preparing the artwork and Chinese characters. On 3 February AMC and HMC signed an “agency agreement” (it was a limited sole distributorship) under which HMC was appointed sole agent in respect of the marketing, sale and distribution of Rubesal in Hong Kong and Macau to all “HA hospitals and clinics”, government hospitals and clinics, private hospitals, private medical clinics, elderly homes and pharmaceuticals retailing drug stores/dispensaries except the two retailing chains (Watsons-The Chemist and Manning Dispensaries).
On 23 April 1996 AMC’s own Letter of Appointment was further extended to include China.
In its report prepared for the annual Adelaide meeting with Hamilton on 16 July 1996 Dr Keung indicated that Urederm sales were stable in Hong Kong at about 80,000 to 90,000 a year, but could not be increased “since more and more competitors are coming into the market”.
As earlier noted, in January 1997 AMC changed its Chinese language name to incorporate the “Fuyunhon” characters. On 9 January it obtained a permit to import cosmetics into China. This included Urederm but not Rubesal. It later failed to get a pharmaceutical licence for Urederm. During 1997 AMC unsuccessfully sought a distributor in China with nation-wide distribution. Dr Keung was, as he indicated in his market review for the June 1997 Hamilton meeting, “negotiating with the giant distributors in China that are supplying their products to more than 1,000 provincial hospitals”.
In the context of seeking a future distributor in China, Dr Keung wrote to Mr Blake on 14 May 1997 describing the guarantees that the “giant distributors” required. These included:
… they need a notification of at least five years in advance if their agreement with us is going to be terminated so that they can have sufficient time to re-frame their planning.
Mr Blake made a handwritten notation beside this paragraph: “TOO LONG”. In cross-examination he said, it was a reasonable assumption that he was in consequence asking for at least 5 years notice to AMC before Hamilton terminated its agreement. He added: “It is not a position that we would have agreed to at that time frame.”
In 1998, the recurrent issues in the AMC-Hamilton relationship were Hamilton’s insistence upon introducing discipline and regularity into the manner in which product orders were made and delivered to AMC; the profitability to both parties of prevailing pricing arrangements and the economic downturn in Asia; and the lack of success in securing both a Chinese pharmaceutical licence for Urederm and Rubesal in China, and a distributor and distribution network in China.
On 4 February 1998 Mr Koerner sent a facsimile to Dr Keung which included the following:
Due to recent deferment of items, we are concerned that we may be left with stock on our hands which we have manufactured for you as per your forecast, particularly in view of the current marketing situation in Hong Kong and other Asian countries. Company Policy requires that we introduce a forward ordering system whereby orders are committed by firm orders four months in advance, which already applies to our other distributors world-wide. This could be done in three ways:
1.For Australian Medic-Care to place irrevocable, firm orders four months in advance and up-dated each month on a continuing basis.
2.For Hamilton to provide an order schedule based on your forecasts each month, showing your requirements four months in advance which
3.Australian Medic-Care will confirm with order numbers which will be binding – four months ahead.
Our new Company Policy now is that manufacturing components for products will in future only be purchased against firm orders – or we will not be able to supply goods when requested.
I hope you understand our position but the recent decline in the economic situation in Asia has caused a certain shadow of uncertainty in some quarters, plus the recent slump in foreign exchange of Asian currencies is being received with some concern in Australia which is the reason behind these measures.
As your current forecast for this financial year ends in June and we are now in February and so this is just four months away we need further forecast figures from you for July and beyond to prevent a repetition of the stock supply problem which occurred last year at the change from the old financial year to the new when no forecast figures were available until June.
Dr Keung’s facsimile reply the following day said (in part):
Thank you for your fax yesterday. I am a bit bewildered when I read your fax because so far Medic-care has not refused to take the goods put down in the forecast although the dates of their delivery have been delayed at times. In fact we have tried hard to keep our promise even though a lot of goods cannot be sold by the expiry date because we do not want Hamilton to suffer any loss from our wrong forecast. Apart from those expired goods in China we have about ten thousand units of Urederm 50gm tubes (China pack) that are near expiry in Hong Kong and about 8000 units of Heads Shampoo that have got expired in July 1997. We are still waiting for the extension of the expiry of Urederm from Hamilton. We are willing to bear the loss of the lot of Urederm that are going to expire because we know that the products we are going to sell have keen competition in China and the market there is very erratic since a lot of factors are new to us. In fact Hamilton should have some responsibility to help Medic-care develop the market in China by keeping some more stock in case the need suddenly arises after advertising instead of discouraging Medic-care by the enforcement of the rule of placing our orders four months in advance. In my fax Ref. 48/97 I have made it clear that we shall order Hong Kong pack for China so that we do not have to let our goods get expired if we cannot sell the estimated quantities. We have appointed Edward Kellter to distribute our products in China but they do not want to launch new products in the coming months because of the recent economic turmoil in Asia. Anyway the extra 30000 units of Urederm already manufactured can be sold in Hong Kong in the coming winter. They can be sent here in August. I guarantee that Hamilton will not suffer any loss except the delay in delivery.
Mr Koerner’s response to the exchange was to reiterate to Dr Keung his view that “it was urgent that we meet for talks next time you visit Australia so that we can resolve these sensitive issues”.
I refer to these two facsimiles in detail as they herald changes in the parties relationship that were soon to be accentuated as Dr Ovcharenko took over the responsibilities of Mr Koerner and Mr Lock. Dr Ovcharenko commenced employment with Hamilton on 14 January 1998. He reported to Mr Blake.
The April 1998 meeting in Adelaide included Dr Ovcharenko for the first time. The matters discussed reflected the recurrent issues for that year noted above. A foreshadowed substantial price increase for Rubesal led to significant correspondence in the ensuing months and resulted in opening up direct communication between Mr Chung’s HMC and Hamilton. Between April and September 1998, a new pricing structure for Rubesal was agreed, as was a four month advance ordering system.
On 23 November 1998, Mr Chung wrote Mr Blake a letter which included the following:
… we are being priced out by our competition as a result of the repeated price increases demanded by your sole agent in Hong Kong who is only acted as a middleman without contribution to market development.
In view of the competitive environment, it is vital that we can develop direct distributorship with your company without a middleman in between so that we can continue to drive the business. I believe this will mutually benefit your company as well as ours.
Mr Blake’s response of 11 December 1998 explained the reason for Hamilton’s price increases. He proposed a meeting between Mr Chung and Dr Ovcharenko in Hong Kong when Dr Ovcharenko made a visit planned for February 1999. A meeting was later arranged for, and occurred on, 27 February 1999. It was attended by Dr Ovcharenko, Mr Chung and Mr Peter Yeun, another director of HMC. HMC produced a “Business Review” at the meeting which set out the market and industry background in Hong Kong. Much of the information in it was adopted by Dr Ovcharenko in his March 1999 report to Mr Blake. The Business Review complained that indirect sourcing (ie via AMC) “results in non-competitive pricing” and there was a “frequent out-of-stock situation” and “lack of support from sole agent”. The strategy HMC sought was securing “direct sourcing from supplier”.
Dr Ovcharenko’s 27 February meeting with HMC was followed on the same day with a meeting arranged by HMC with the Hong Kong Chief Pharmacist, Mr Lee Jark-pui. At that meeting, according to Dr Ovcharenko’s report to Mr Blake, Mr Lee “strongly suggested” Hamilton should sign a long term agreement with HMC for the supply of Rubesal. Mr Chung then commented he was willing to sign a full distributor’s contract. Dr Ovcharenko reported his reply as:
I informed Mr Albert that I cannot make a decision at the moment due to the fact that our negotiations with Dr Keung will be continued in April 1999 in Adelaide.
To back-track slightly, on 10 February 1999, Dr Ovcharenko raised the issue of a new distribution agreement with Dr Keung:
We have been conducting business with your Company for many years but are still working without there being an official Agreement between Hamilton Pharmaceutical Pty. Ltd and Australian Medic-Care Co. Ltd.
All the other Distributors with whom we do business in various countries operate with us through a Distribution Agreement and we would be glad if you would be prepared to discuss this type of arrangement.
We enclose herewith for your attention a copy of our official Distribution Agreement and also a shorter, simplified version Distribution Terms.
When I visit you in Hong Kong we will be able to discuss these together with matters of mutual interest, and explore the possibilities of further developing our business relationship.
The second of the above quoted paragraphs was quite misleading.
That meeting was held on 1 and 2 March 1999. The detail of the meeting will be referred to, as will the course of subsequent negotiations, when the “Contract Claims” are considered below. For present purposes it is sufficient to note several matters referred to in Dr Ovcharenko’s report of it. In anticipation of the meeting he collected information about the Hong Kong pharmaceutical market as a whole, as well as “confidential information concerning the commercial channels and chain politics of [AMC]” and he held a number of “preliminary confidential meetings”. This, he said allowed him to establish “a clear and arguable position for the negotiations”. He characterised his and Dr Keung’s respective positions in the following way:
During the negotiations with Dr Keung, I was in a very difficult position. On one hand, I couldn’t suggest that Dr Keung was not telling the truth, for reasons of ethics and on the other hand, Dr Keung undoubtedly felt that I knew much more than I actually said, but he was not aware of the degree of completeness of my information. Also, he was undoubtedly surprised that I knew all his sales prices, having just arrived from Australia.
It should be pointed out, though, that Dr Keung conducted himself perfectly, he knows the strategies and tactics of discussion well. Having been demoralised by the logic of numbers and arguments at the beginning of our meeting, he later, understood that his position was weak, and quickly attempted to focus the discussion on subjects where my position could not be strong – on the subject of agreements that were signed a few years ago.
In his report Dr Ovcharenko noted:
Our products are in stock of most pharmacies, however they are not well known by their English names, as the Chinese names are totally different both in pronunciation and meaning, and are based on play-on-words well received by the Chinese population.
I note in passing that during 1999, AMC lodged a trade mark application in Hong Kong for the registration of the Chinese character name for Australian Fuyunhon. On 16 May 2000 the registration was sealed by the Trade Mark Office and a priority date of 11 August 1999 was given the mark.
On 11 June 1999, Hamilton, through Dr Ovcharenko, gave instructions to its patent attorneys to register Rubesal as a trade mark in both its English and Chinese character forms. A copy of a Rubesal carton was provided for the purpose. The attorneys wrote to Dr Ovcharenko indicating that the Examiner had rejected the application on the ground that the mark was directly descriptive of the goods in question.
After protracted, although reasonably narrowly focussed negotiations, Dr Keung signed the Distribution Agreement for the first time. Finalising the agreement proved to be more difficult (there was only one copy signed in February). On 9 March 2000 the agreement was again executed.
On 30 April 2000, Pharmalines, a company based in the United Arab Emirates requested a quotation from Hamilton for Urederm cream. Dr Ovcharenko replied on 1 May 2000, his facsimile saying (in part):
I wish to advise you that this product is manufactured in tubes and presented in cartons. On the tubes we have the Chinese name, but on the cartons we have directions and indications in both English and Chinese, together with our Hong Kong distributors contact details in Chinese lettering. For your information I attach photocopies of both.
For these reasons I do not think this packaging would be suitable for U.A.E., but it would certainly be possible for just the tube to be used in your country.
Pharmalines were content to have the tubes as offered, but required English language packaging. The export to the UAE of Urederm tubes began on 5 June 2000.
In his first affidavit Dr Keung states that he was informed by certain retailers and distributors of AMC products in Hong Kong that Hamilton’s 10% urea cream was available in the market from sources other than AMC. He said he assumed these alternative supplies were “counterfeit products”. He said in cross-examination that by October 2001 he was unsure whether he was facing competition from counterfeit products or from parallel imported Hamilton products. By December 2001, he knew there was parallel importation from batch numbers of which he was aware. I will deal later in detail with how Dr Keung communicated his concerns about parallel importation to Hamilton. Suffice it to say here that his approach was that of “hinting” and “polite advice” so as to avoid damaging the business relationship. He would not make an allegation without direct proof. Mr Blake in contrast subsequently regarded Dr Keung as deliberately withholding knowledge of it.
By March 2001 the Australian dollar had again fallen and Hamilton relied upon this to justify an increase in prices. So began a short and argumentative exchange of emails between Dr Keung and Dr Ovcharenko. The following is indicative of their tone:
I have no objection to the price increase but I wish to know if the Hong Kong dollar devalues in future or the Aussie dollar becomes stronger will Hamilton be responsible for part of the devaluation and reduce the price then? I have not got your answer yet.
If we have to bear the brunt of the falling Australian dollar for Hamilton but are deserted when it rises then Medic-care has to suffer double losses. This situation happened two years ago when I asked Hamilton to reduce the price increases after I had increased the price of Rubesal spontaneously due to the falling dollar six months before the last price increase was put forward.
Keung to Ovcharenko: email of 3 April 2001.
On 1 April 2001 AMC employed Dr Calvin Lam. He was instructed to trace the source of what Dr Keung says he thought were counterfeit products and to devise strategies to stop their being sold in Hong Kong. The evidence concerning this is detailed in “Parallel Importation” below.
Hamilton entered into an exclusive distribution agreement with Pharmalines on 1 February 2001. The “Territory” within the agreement encompassed the UAE, several of the Gulf States, and some Middle Eastern Countries (including Iran). That Territory was extended by an amendment in June 2005 to additional Middle Eastern States.
On 20 October 2001 Dr Keung wrote to Hamilton requesting that a $2000 deduction be made from an invoice sent him “as arranged with Dimitri [Ovcharenko] in the Agreement”. This is a reference to Schedule 5 of the agreement and, apparently, reflected his understanding of what was agreed. Hamilton responded indicating that the agreement provided differently for rebates, a matter returned to at Dr Keung’s meeting with Mr Blake and Ms Carpenilli on 24 October 2001. Dr Ovcharenko was not present. The minutes of the meeting noted:
7.Rebate of AUD6,000
The Distribution Agreement clearly states that this rebate was only agreed for the 1999/2000 financial year. DO to discuss with Dr Keung. Also, according to the DA, the rebate of AUD2,000, related to the Urederm, should be paid at the end of the financial year because it is related to the volume of sales of Urederm during the whole year.
The minutes also noted:
8.Renewal of the DA
Dr Keung needs a clarification regarding the current period of the DA. RSB said that DO is able to send him a letter upon his request to guarantee the continuity of the DA for a certain date, as reflected by the Agreement. RSB to provide DO with the full explanation regarding this matter.
On 13 November 2001 Hamilton made a cash sale of 6,048 units of Urederm 50g in Hong Kong packaging to Crafers Trading Services Pty Ltd, a Queensland based company. The detail of Hamilton’s dealings with Crafers is set out in section on “Parallel Importation” below.
The rebate issue was taken up by Dr Keung in an email to Dr Ovcharenko of 4 December 2001. It is notable for the allegations and accusations it makes.
During our discussion about the price of Rubesal 25gm tube prior to the signing of the Agreement on 9 March 2000 Hamilton agreed to return bonus products to the value of $6000 to Medic-care every year to compensate for my voluntary price increase to Hamilton in 1998 due to the sudden drop in the value of the Australian dollar. However, in the version signed on 9 March 2000 you added that this only applied to the year 1999-2000. I wonder if you had mentioned this point before you sent me the actual agreement for signature.
Again in the version you sent me for signature the part concerning the deduction of $2000 from each lot of 28000 units of Urederm 50gm tube ordered you had added conditions (c) and (d) without prior discussion in our communication regarding this part. I only noticed this when I asked for the deduction of $2000 from each lot ordered during my last visit to Hamilton [ie on 24 October 2001].
The practice of the “secret” addition of clauses or conditions to certain topics on the documents for signature without clear notification in advance should not be used. This will severely jeopardize my faith in you or Hamilton. I formally ask Hamilton to withdraw and review these two clauses and discuss Schedule 5 or the whole Agreement again.
I signed the Agreement on the assumption that no changes to the content had been made prior to the signature on 9 March 2001. In the past, Hamilton and I have always conducted our business dealings in the most direct and honest fashion, whereby any proposed changes to our contract were preceded by direct discussion. Only after such a discussion, be it in writing or in the verbal form, would documentation of the changes then be made.
I believed that the trust on which our business partnership has always thrived would have allowed me, as it has always done so in the past, to assume no changes to the terms of the contract been made on this occasion. Had changes been made, I trusted that I would have been notified directly for discussion, and an agreement on both sides reached, before the process of official changes to the document would be allowed to proceed.
I thus feel, on this particular occasion, that I have been deliberately misled in that I signed an agreement to the contract without the knowledge of the changes, and am thus very disappointed with what has occurred. I would like to discuss further with Mr Blake and you my objection to the validity of my signing of the Agreement, and hope that we will come to an agreement which will not allow the misunderstanding on this occasion to hinder or jeopardize our business relationship in the future.
While Dr Ovcharenko did not reply directly to this email, he dealt with its substance in an email of 23 January 2002. It is of some importance in this proceeding. Omitting formal parts, and the opening paragraph, it said:
In the past, during the many years of our association, communications between our two companies have been, for the main part, undertaken through personal verbal negotiations.
However, with the increased size of sales, it is now apparent that for the success of our business future we must use more formal documentation in place of our previous more casual approach.
For this reason we recently decided to sign comprehensive Distribution Agreements with our partners which cover all details of our association and is a form of protection for both parties. You were one of the first of our partners with whom we signed the full version of this new Distribution Agreement.
Your attention is specifically drawn to items 50.1 and 50.2
50.1All negotiations and correspondence between the parties that have taken place prior to the signing of this Agreement shall be considered null and void as from the day of its signing.
50.2Any amendments and/or supplements to this Agreement shall be valid only if they are made in writing in Schedule 5 and signed by duly authorised representatives of both parties.
With reference to Schedule 5 I understand there are some issues that you wish to discuss. In the first version of our agreement, only one point was added, regarding the payment of a bonus rate of $6,000 in the 1999/2000 year. However it was not specified for which product and under which circumstance this would occur. You separately signed this point in that agreement (copy attached).
Following this, you requested an extra point be included relating to bonuses for Urederm 50g, which we subsequently included in the agreement and which was again signed separately by you (copy attached). This last point was the subject of much discussion between Richard Blake and our company secretary Geoff Pritchard and many discussions also took place regarding all aspects of this point with you prior to your signing.
We are aware of the extreme importance of schedules attaching to Distribution Agreements and for this reason are careful to ensure that all parties examine and discuss these points fully prior to signature.
I agree with you that it is sometimes difficult to notice small substitutions in one of the numerous points of a Distribution Agreement, and for this reason I have always notified you about any changes. However, in this case, point 2 of Schedule 5 was a new point and I was under the belief that you had been fully aware of its content.
Unfortunately, this misunderstanding is an example of how good partners can have different views and perspectives on identical cases. With this in mind, Richard Blake and I have closely read your claims and are ready to discuss them with a view to introducing mutually acceptable changes and additions in Schedule 5, should you consider this to be necessary.
This produced a further set of exchanges which it is unnecessary to recount here other than to note that in them Dr Keung reiterated that the parties prior dealings had been on the bases of loyalty to, and faith in, each other.
It was at this time that Dr Keung informed Dr Ovcharenko that Dr Lam had been appointed to AMC to do the importation, distribution and promotion of Hamilton products.
On 30 July 2002 Dr Keung sent his first unequivocal communication to Hamilton concerning parallel importation. I will when dealing with parallel importation refer to earlier emails and particularly that of 30 January 2002 to Dr Ovcharenko which Dr Keung asserts put Hamilton on notice of the problem. The 30 July facsimile stated:
In the past year the sales of Urederm 50gm tube has dropped sharply (from 90000 to 60000 units) despite the fact that we spent 2.2 million HK dollars for advertising on Hamilton products. Originally I put the blame on the weak economy at the present moment. In the past three months two wholesalers refused to get Hamilton products from Medicare. However, they have Hamilton goods to sell to the retailers at prices that are somewhat lower than our selling prices to the wholesalers. This makes me feel that there should be imitated goods or parallel imports of Urederm 50gm tube getting into the Hong Kong market. If Hamilton has not sold any products bearing the HK packing with our Chinese company name and logo “FUYUNHON” to other places or countries leading to possibility of parallel imports I am certain that these two wholesalers have got imitated goods from somewhere and we shall inform the bureau of commercial crime and take appropriate legal action against them for compensation.
I hope you can give me the answer at your earliest convenience so that we can prevent further losses due to copied goods and protect our brand names.
Mr Blake replied briefly on 5 August indicating he was very concerned about the matter and was giving it priority. The ensuing correspondence is dealt with later in these reasons. I should note, though, that in the course of it Dr Keung reiterated AMC’s claim to the Chinese language packaging, and trade marks. On 27 August Mr Blake wrote to Mr Keung on that subject:
When you requested that Chinese sections be added to the labelling of a Hamilton product you did not advise that the marking “Fuyunhon” was the trade mark of your company. In fact, after discussions I had with you on this issue it was my understanding it was a general description of the goods and related to the Hamilton product name on the label. It has certainly been the understanding of all at Hamilton that there were no restrictions on the use of these words. Had you advised at any time it was the trade mark of your Company I would not have accepted that it be included on Hamilton packaging. In asking these characters to be added to the labelling of our product you have conveyed to us that this is acceptable for Hamilton to use for Chinese speaking communities, not only in Hong Kong.
We have noted on the translation of the Urederm pack “General agent: Australian Urederm Pharmaceutical Industry Co., Ltd”. Please advise why this company name is on our packaging, who does this company belong to and an explanation as to why it was included without our prior approval.
Furthermore we have now had the Rubesal label translated and advise the translators have informed Hamilton that the characters we understood are translated as “Tuoningtong”. It is our understanding that these characters express an interpretation of our brand name Rubesal. Please advise if this is otherwise. Again, if you claim this to be the trade mark of your company I must advise that this is not acceptable to Hamilton.
Clause 28 of the Agreement provides:
28. Confidential Information
During and after the Term, Distributor may not use or disclose confidential information (including the contents of this agreement) about:
28.1Supplier;
28.2the business of the Supplier;
28.3the Products;
except as required by law or this agreement.
While cl 28 has contractual effect it does so only to the extent that information falling within the three stipulated species is itself confidential information under the general law. If any of the information communicated to AMC in February 1996 then had that character and had retained it when AMC disclosed it to Sphere on 27 October 2006 that disclosure would have been in breach of the clause, the relevant information being information about “the Products”.
Consideration
I will first consider the claims against AMC. I have already foreshadowed my findings in relation to two of the three documents sent by Hamilton to AMC. I am satisfied that Dr Keung disclosed the manufacturing method document to Sphere in his 27 October 2006 email. That document was forwarded to Mr Wait who made no use of it either at the time of giving his quote or in conducting his trials, for the reasons he gave. I accept he probably forgot he ever received it. Accordingly while both cl 28 and the equitable duty of confidence were breached by the disclosure made, no loss (other than nominal damages for breach of contract) was suffered by it, nor was any profit made using it.
As to the 6 page product specification, I am not satisfied any unauthorised disclosure or use of it was made by AMC.
This leaves the production formula. Was it confidential information when disclosed by Hamilton in 1996? Was it still confidential information when disclosed by AMC in 2006? The ingredients used in the manufacture of the Urederm cream when that formula was used by Hamilton were in the public domain. They were listed on the packaging. What was not known was the ratios or proportions of the ingredients.
I am satisfied that (a) there was a reasonable level of general understanding in the pharmaceutical industry about the manufacture of creams of the type used by Hamilton as the “carrier vehicle” (to use Mr Wait’s term) for the active ingredient, urea; (b) information about the available ingredients was widely known; and (c) there was significant industry knowledge about reliable combinations of ingredients and the use of those combinations would ordain in some degree the appropriate ratios of the ingredients to be used in the manufacture of a product such as a 10% urea cream.
This said, I equally am satisfied that there remained an area, albeit a circumscribed one, in which through experimentation and choice – through “the application of the skill and ingenuity of the human brain”: Coco, at 47 – a product formula could be devised for the production of a 10% urea cream having distinctive, desired properties and that knowledge of that ratio would give a “head start” to use Mr Blake’s description, to a person later seeking to produce a cream with such or similar properties.
The same, I would add, could be said of a method of manufacture devised for a product with such an ingredient ratio, though this is not presently relevant.
It could well be said, as Mr Wait did, “that there didn’t appear to be any great intellectual property associated with [Hamilton’s] formulation”, or, to adapt Lord Denning’s formulation in Seager v Copydex Ltd (No 2) [1969] 2 All ER 718 at 719, it bordered on there being “nothing very special about it”. Nonetheless, tested by the indicia of confidentiality to which I earlier referred, the ingredient ratios were not, on the evidence, in the public domain in 1996, or, for that matter, in 2006; they were valuable to Hamilton when used by it and, in 2006, they were valuable to AMC who was by then a prospective competitor; the formula resulted from Hamilton’s research and experimentation and, as the evidence here indicated, for another person to acquire the same information would require it to go through a like process of experimentation; and the urea cream product was not, on the evidence, easily reverse engineered. While it was suggested to Mr Blake that it could be reverse engineered in a short time – a suggestion with which he did not agree– AMC did not adduce positive evidence to that effect. It had the opportunity to do so. Mr Wait was its witness.
While the Distribution Agreement clearly contemplated that there could be confidential information associated with the Products, what is surprising is that Hamilton appears not to have taken positive steps to preserve the secrecy of the formula in the hands of third parties to whom it was supplied. This said, it cannot properly be asserted that Hamilton so conducted itself in relation to AMC as reasonably to create the impression that it was making a fairly open invitation to AMC to make use of it: Amway Corporation v Eurway International Ltd [1974] RPC 82 at 87.
This brings me to the second matter. I am satisfied the production formula was confidential information for equitable and contractual purposes, but was it imparted in circumstances importing a duty of confidence? Again I think so.
Notwithstanding that there was no express reference to confidentiality when the three documents were provided to AMC in 1996 and that the documents on their face made no claim to confidentiality, I am satisfied that Dr Keung would at the time have appreciated the sensitive character of the documents and that they were being supplied to him for a particular purpose and no other and that he could only use them for that purpose. Equally, the circumstances were such that any reasonable man standing in Dr Keung’s shoes in 1996 would have realised upon reasonable grounds, as his Vietnamese sub-distributor anticipated, that the information was being given to him in confidence: Coco, at 48. Whichever test is applied, the conclusion is inevitable that the production formula was received by AMC in confidence.
In the event that I made such findings, AMC has conceded that (i) the information was provided to Sphere/Tabco by AMC; (ii) Mr Wait used the formula (only in part) to provide a quotation for the manufacture of a 10% urea cream; and (iii) he used the formula (only in part) as a basis for manufacturing a 10% urea cream. It is said, as well, that in the trials and production of commercial batches, there were differences in the ingredients and ratios used. My only comment on the concession is that I consider it rather underplays the use made of the formula by Mr Wait. He was at Dr Keung’s insistence keeping close to the formula, though some adjustments were made before commercial quantities were produced. I do not accept AMC’s submission that Sphere did no more than use the formula as a reference point for manufacturing a 10% urea cream.
This brings me to the contentious subject of remedy. That sought is an account of the profit made on the sale of the Sphere manufactured products containing urea cream. Damages have been disclaimed.
Hamilton has quite accurately characterised AMC’s conduct in the relation to the breach of confidence in its oral submission:
Dr Keung had on his hands, prior to our termination of the distribution agreement, a product that he’d been selling, with, more or less, success in Hong Kong, and that’s what he wanted. He wanted continuity. He wanted not only continuity in packaging, but he wanted continuity in feel, and texture, and all sorts of other things. So, your Honour, it wasn’t a case where any other cream would do. It had to be a specific cream with specific texture and specific qualities.
Dr Keung had no reason at all to expect after the termination of the Distribution Agreement, that Hamilton would licence AMC to use its production formula. So it was he sought simply to misappropriate it. In the event he was not wholly successful and he had produced a product for which, as Mr Wait said, Sphere’s manufacturing team constantly got different results leaving Dr Keung’s distributors not very happy with the results. Nonetheless, the product was sold seemingly at a profit and it is the gain so made that Hamilton claims.
The grant of this form of relief in breach of confidence cases is in the end a matter for the Court, notwithstanding a party’s election for an account: see e.g. Seager v Copydex Ltd (No 1) [1967] RPC 349; see also Conveyor Co of Australia Pty Ltd v Cameron Bros Engineering Co Ltd [1973] 2 NZLR 38 at 44. An apparent reason for this is that, given the variable character of confidential information, its misuse even in a profit making activity may not realistically be able to be said to result in any profit being attributable to it, the misuse merely effecting what was in effect a saving of time and trouble: see Dean [8-320].
While Mr Wait may over time have been able to devise an acceptable production formula for Dr Keung, I do not consider the present to be a case in which it properly should be said that the only appropriate remedy in the circumstances would be damages for the saving of “time and trouble”: Seager (No 1), at 368. Dr Keung, in my view, designedly was trying to replicate a product for which he had previously established product goodwill. An account is in the circumstances an appropriate form of relief: AMC should not be “permitted to gain from [its] wrongdoing”: Attorney-General v Guardian Newspapers Ltd (No 2) [1990] 1 AC 109 at 262.
I am satisfied that the period for which the account should be taken ought commence when AMC began to sell products manufactured in breach of confidence. It should end when sales of those products ceased in 2008 when AMC adopted the alternative formulation incorporating lactic acid. By that point the advantage gained for its misappropriation of the formula was practically spent. It had been overtaken by Sphere’s independent endeavours to produce an acceptable product. Hamilton should not be given the benefit of those endeavours. If there was some residue of advantage remaining with AMC from the misuse of the formula, it is inappropriate to attempt to make some apportionment of profits in recognition of it. To attempt that would inevitably be burdensome and unrewarding. Significantly, Hamilton has, because of the product change, abandoned its claim for a permanent injunction.
While the accounting remedy is not without its known difficulties (see Dean [8.325]), I do not have material before me – nor have I had considered submissions – which would suggest that such might emerge here. That in any event is a matter for Hamilton. It can have obvious costs implications: cf Nokia Corporation v Liu [2009] FCAFC 138. If an account is to be taken I will direct it be before the District Registrar of the Court and I will give liberty to apply for directions in relation to the taking of the account.
Hamilton also seeks an order that AMC deliver up the originals and copies of two of the three documents it “holds”. No such order is sought against Sphere in respect of the two documents it received. AMC converted the hard copy versions of the documents into electronic form for sending to Sphere. I have not been addressed on the “delivery up” or “destruction” of the electronic versions. I will invite further submissions on this matter: see also Prime Creative Media Pty Ltd v Vranjkovic [2009] FCA 1030 at [17].
Insofar as concerns the claim for breaches of cl 28 of the Distribution Agreement, I am satisfied such breaches have been established. No claims for damages have been advanced. In light of the considered dictum of the Full Court of this Court in Hospitality Group Pty Ltd v Australian Rugby Union Ltd (2001) 110 FCR 157 at [155]-[159], I ought not entertain consideration of whether the contractual breach of confidence could itself be remedied by an account of profits: cf Attorney-General v Blake [2001] 1 AC 268; and see generally Cheshire and Fifoot, [23.2] and esp fn 5 (9th Aust ed).
Turning to the claims against Dr Keung, it is asserted in the alternative that he owed a duty of confidence directly to Hamilton in virtue of the disclosure actually being made to him and breached that duty by the disclosure he made, or that he knowingly participated in AMC’s breach of confidence in that he directed or procured AMC’s breach and was liable therefore. I am prepared, for present purposes, to assume that Dr Keung owed a duty of confidence directly to Hamilton. He was the actual recipient of information which he had reason to know was to be kept confidential, albeit he received it for AMC which in turn owed a duty of confidence directly to Hamilton. If, for example, he used such information for his own private purposes which resulted in a gain for him or a loss to Hamilton, he would have been liable therefore at the suit of Hamilton: see Saltman Engineering Co Ltd v Campbell Engineering Co Ltd, at 213; and without the need for any circularity of action by joining AMC as a party. I need not consider AMC’s liability in such a case for present purposes: cf Coulthard v South Australia (1995) 63 SASR 531 at 535. Equally, I am prepared to assume that he would be liable to Hamilton on an accessorial liability basis for his intentional procurement of AMC’s breach of confidence to Hamilton. In this I recognise that there is a significant body of discordant case law across the common law world on the question of the liability of directors who are participants in the wrongs of their company, whether that wrong be a breach of contract, a tort, or an equitable wrong: see the helpful discussion of this in relation to tortious liability in Anderson, “The theory of the corporation and its relevance to directors’ tortious liability to creditors” (2004) 16 Aust Jo Corp Law 73; on the small company problem for directors, see Finn, “Opening Remarks” (1999) 27 Fed L Rev 171 at 177-180; see the discussion in Root Quality Pty Ltd v Root Control Technologies Pty Ltd (2000) 177 ALR 231 at [113]-[147]; and see Mortimore QC Company Directors Ch 27 (2009 OUP).
I have already indicated the only claim made against Dr Keung is for an account of profits. The evidence before me is that to the extent that confidential information has been misused to generate profit, that has been done by and for the benefit of AMC. If profit has been made, it was AMC’s profit. No form of proprietary relief has been sought against Dr Keung or AMC in respect of the breach of confidence. There is no evidence of Dr Keung, as distinct from AMC, deriving profits which are attributable to the information misused. I can see no basis at common law or in equity for an order requiring Dr Keung to account for profit he has not made. I do not consider that Dr Keung’s position in this matter can properly be analogised to that of a director of a company diverting a profit making opportunity to his own company such as would render him liable to account for profits derived by that company from the exploitation of that opportunity: cf CMS Dolphin Ltd v Simonet [2001] 2 BCLC 704; Premium Real Estate Ltd v Stevens [2009] 1 NZLR 148 at [89]-[91].
I will dismiss this claim.
Conclusion
Having found AMC to have breached its equitable duty of confidence to Hamilton in disclosing the production formula and the manufacturing method to Sphere and having had the former used in the manufacture of 10% urea cream which it then sold, I will order an account of the profits made by AMC in selling that cream from when it commenced so doing in 2007 until it ceased so doing in 2008 when it adopted a different formula. I will order that the account be taken by the District Registrar and I give liberty to apply for directions in respect of the account.
While I have found AMC to be in breach of cl 28 of the Distribution Agreement no claim for damages has been made.
I dismiss the claims made against Dr Keung for an account of profits.
I invite further submissions on the orders for delivery up having regard to the fact that, on the evidence, the documentation containing the confidential information has been converted into an electronic form by AMC.
REASONS FOR A RULING ON EVIDENCE
On 4 September 2008 I ruled inadmissible the report of Derek Wong, which was being put forward by AMC as an expert’s report. In substance, the report was just over two pages in length and consisted of 19 answers to two sets of questions provided to Mr Wong in two letters of instruction. It traversed a range of subjects which could be described, flatteringly, as general evidence about the structure and nature of the pharmaceutical industry in Hong Kong as Asia; methods of advertising of pharmaceutical products within the industry; the effect of parallel importation; Australia’s certification of pharmaceuticals etc; and sales growth rates within Hong Kong and China. The answers were in the main ex cathedra statements, often essentially factual in character. To the extent that opinions were expressed they were generally devoid of factual foundation or of any declared process of reasoning. While Mr Wong had over twenty years experience in the pharmaceutical industry primarily in the sales, marketing and production of pharmaceuticals, his curriculum vitae provides no significant basis for inferring that he was possessed of specialised knowledge based on his training, study or experience, that would qualify him to give opinion evidence on the various topics I have mentioned: see Evidence Act 1995 (Cth), s 79. On the contrary, his opinions on parallel importation, for example, and his references to it in his C.V., suggest reliance on anecdotes and speculative generalisation.
Mr Wong’s report was due originally in January 2008. Extensions were given and it was provided to Hamilton in April. The substance of the objections made to it – which related to the central elements of the report and in particular to parallel importation, the 10% urea cream market and sales rates of growth – were notified on 30 May 2008.
Confronted with well taken objections to the report, AMC sought either to put on a further report to remedy the deficiencies of the present document or to have an oral report given.
I ruled that I would not permit an oral report to be given. It would be inherently unfair given the agreed basis upon which the trial had been conducted in relation to expert evidence – ie of a written expert’s report that could be considered and responsed to by the opposing party. As to permitting a supplementary report to be prepared, I was not prepared to allow this given the point already reached in the trial. What would have been required was an elaboration of virtually each and every paragraph but in circumstances where I entertain considerable doubts as to Mr Wong’s expertise to venture the opinions that would be necessary to rescue the report.
In these circumstances, and as the report as it stood was not one upon which AMC could properly be asked to conduct a cross-examination, I ruled it inadmissible.
CONCLUSION
As I foreshadowed at the outset, both AMC and Hamilton have enjoyed varying levels of success and reverses. I will give directions for the parties to bring in Agreed Minutes of Order to give effect to these reasons within 14 days of the date of publication of these reasons. If they cannot so agree, I direct the applicant to file Proposed Minutes of Order within that time.
While Hamilton alone has secured orders for other than nominal pecuniary relief, I do not consider that this matter is one in which it is appropriate to make an apportionment of the costs on an issue by issue basis. While I will give the parties the opportunity to put on submissions on costs, I should indicate my present inclination is to make no order as to costs. The submissions on costs are to be filed within 14 days of the publication of these reasons.
I certify that the preceding six hundred and ninety-three (693) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Finn.
Associate:
Dated: 30 October 2009
Counsel for the Applicant/Cross-Respondents: Mr I Robertson SC with Ms A Barnett Solicitor for the Applicant/Cross-Respondents: Piper Alderman Counsel for the First Respondent/Cross-Claimant: Mr P McNamara QC with Mr T Cox Solicitor for the First Respondent/Cross-Claimant: Crawford Legal Date of Hearing: 7-11 July 2008, 14-18 July 2008, 21-23 July 2008, 28 July – 1 August 2008, 2-5 September 2008, 8-12 September 2008, 18 December 2008, 11-13 February 2009 Date of Judgment: 30 October 2009 Annexure 1
A. TABLE OF PERSONS AND COMPANIES
Person
Abbreviation
Description
Australian Medic-Care Company Ltd
AMC
Applicant and First Cross-Respondent
Richard Blake
Previous Managing Director and current Chairman of the Respondent
Faten Carpinelli
2IC in the Export Department of the Respondent
Reya Chartres
An employee of Crafers
Keith Cheng
A clerk at AMC, resident in Hong Kong
Albert Chung
A director of HMC
Crafers Trading Services Pty Ltd
Crafers
Purchaser of product from the Respondent in 2001-2002, including products in Hong Kong Packaging
“Forward Company”
Forward Co
See Hong Kong Tung Tak Tong Ltd
Hamilton Pharmaceutical Pty Ltd
Hamilton
Respondent and Cross-Claimant
Health Medic-Care (Hong Kong) Ltd
HMC
Sub-distributor of AMC for Rubesal in Hong Kong from 1996
Hong Kong Tung Tak Tong Limited t/a “Forward Company”
Forward Co
Hong Kong Distributor that purchased the respondent’s products from Teemlink Ltd for resale in the Hong Kong retail market
Kenneth Keung (Keung Kin Wah)
A Director and shareholder of the Applicant and Second Cross-Respondent
Alfred (Fred) Koerner
Previous International Sales Manager and director of the Respondent
Kopurlo Pty Ltd
Kopurlo
Related company to Crafers
Calvin Lam
Former employee of the Applicant. He Supervised the investigation into parallel importation
Mark Lanham
Queensland Sales Manager of the Respondent
Brian Lock
Previous Export Manager/Consultant of the Respondent (deceased)
Mak Chu Keung
The proprietor of Far East Co (deceased)
Medic-care (Far East) Company
Far East Co
An unincorporated company, used by Dr Keung as his agent to enter the Hong Kong Market
Dimitri Ovcharenko
Current Export Sales Manager of the Respondent
Pharmalines
Pharmalines
A distributor for Hamilton in the United Arab Emirates
Geoff Pritchard
Financial Manager and Company Secretary of the Respondent
Graham Sedunary
National Sales Manager of the Respondent in 2001
Richard Stafford
Director of the Respondent from 23 August 2001 and its Technical Director
Teemlink Limited
Teemlink
Hong Kong importer that purchased the Respondent’s products from Crafers and/or Kopurlo
Wing Keung Medicine Company Ltd
WKM
Hong Kong distributor that purchased the Respondent’s products from Forward Company for resale in the Hong Kong OTC market
Y C Woo & Co Ltd
YC Woo
First sub-distributor of AMC in Hong Kong appointed in 1990
Zuellig Pharma
Zuellig
Sole sub-distributor appointed in 1995 for Taiwan
B. TABLE OF PRODUCTS AND TRADEMARKS
Product
Abbreviation
Description
STINGOSE
Product manufactured by the Respondent; trade marked, inter alia, in Hong Kong
FUYUNHON
Fuyunhon
Hong Kong trade mark of the Applicant used, inter alia, to sell Urederm
RUBESAL
Rubesal (or R25, R50 or R100, depending on the size of the tube)
Analgesic balm manufactured by the Respondent; trade marked, inter alia in Hong Kong
TUOTONING
Tuotoning
Hong Kong trade mark of the Applicant used, inter alia, to sell Rubesal
UREDERM
Urederm (or U100, U50, U25, depending on the size of the tube)
10% urea cream manufactured by the Respondent; trade marked, inter alia, in Hong Kong
- AGLC
- Australian Medic-Care Co Ltd v Hamilton Pharmaceutical Pty Ltd [2009] FCA 1220
- Case
- [2009] FCA 1220
- Decision Date
CaseChat Overview and Summary
The court examined whether the information disclosed by AMC was indeed confidential and if it retained its confidential nature when it was shared with Sphere. It was determined that while the ingredients used in the urea cream were publicly known, the specific ratios or proportions of these ingredients were not. These ratios, which were part of the production formula, were considered valuable as they provided a competitive advantage and were not easily reverse-engineered. The court held that AMC breached its equitable duty of confidence by disclosing the production formula to Sphere. It also found that the disclosure of the production formula to Sphere constituted a breach of clause 28 of the Distribution Agreement, though no claim for damages was made in relation to this breach.
The court ordered an account of the profits made by AMC from the sale of 10% urea cream using the disclosed production formula, from the time AMC started selling the cream in 2007 until it stopped doing so in 2008 when it adopted a different formula. The court also dismissed the claims made against Dr Keung for an account of profits. The court further ruled that an expert report submitted by AMC was inadmissible due to the lack of foundational expertise and reasoned opinions.
Orders
Orders of the court
1. The parties bring in Agreed Minutes of Order to give effect to these reasons on or before 13 November 2009 and in default of agreement the applicant to file Proposed Minutes of Order within that time.
2. The applicant and respondent file and serve any submissions on costs or before 13 November 2009.
Note:
Background
Background to the litigation
Evidence
Evidence Before The Court
Decision
Reasons for decision
Ratio Decidendi
Legal Principle Established
Established by: FINN J
While cl 28 has contractual effect it does so only to the extent that information falling within the three stipulated species is itself confidential information under the general law. If any of the information communicated to AMC in February 1996 then had that character and had retained it when AMC disclosed it to Sphere on 27 October 2006 that disclosure would have been in breach of the clause, the relevant information being information about “the Products”. Consideration I will first consider the claims against AMC. I have already foreshadowed my findings in relation to two of the three documents sent by Hamilton to AMC. I am satisfied that Dr Keung disclosed the manufacturing method document to Sphere in his 27 October 2006 email. That document was forwarded to Mr Wait who made no use of it either at the time of giving his quote or in conducting his trials, for the reasons he gave. I accept he probably forgot he ever received it. Accordingly while both cl 28 and the equitable duty of confidence were breached by the disclosure made, no loss (other than nominal damages for breach of contract) was suffered by it, nor was any profit made using it. As to the 6 page product specification, I am not satisfied any unauthorised disclosure or use of it was made by AMC. This leaves the production formula. Was it confidential information when disclosed by Hamilton in 1996? Was it still confidential information when disclosed by AMC in 2006? The ingredients used in the manufacture of the Urederm cream when that formula was used by Hamilton were in the public domain. They were listed on the packaging. What was not known was the ratios or proportions of the ingredients. I am satisfied that (a) there was a reasonable level of general understanding in the pharmaceutical industry about the manufacture of creams of the type used by Hamilton as the “carrier vehicle” (to use Mr Wait’s term) for the active ingredient, urea; (b) information about the available ingredients was widely known; and (c) there was significant industry knowledge about reliable combinations of ingredients and the use of those combinations would ordain in some degree the appropriate ratios of the ingredients to be used in the manufacture of a product such as a 10% urea cream. This said, I equally am satisfied that there remained an area, albeit a circumscribed one, in which through experimentation and choice – through “the application of the skill and ingenuity of the human brain”: Coco, at 47 – a product formula could be devised for the production of a 10% urea cream having distinctive, desired properties and that knowledge of that ratio would give a “head start” to use Mr Blake’s description, to a person later seeking to produce a cream with such or similar properties. The same, I would add, could be said of a method of manufacture devised for a product with such an ingredient ratio, though this is not presently relevant. It could well be said, as Mr Wait did, “that there didn’t appear to be any great intellectual property associated with [Hamilton’s] formulation”, or, to adapt Lord Denning’s formulation in Seager v Copydex Ltd (No 2) [1969] 2 All ER 718 at 719, it bordered on there being “nothing very special about it”. Nonetheless, tested by the indicia of confidentiality to which I earlier referred, the ingredient ratios were not, on the evidence, in the public domain in 1996, or, for that matter, in 2006; they were valuable to Hamilton when used by it and, in 2006, they were valuable to AMC who was by then a prospective competitor; the formula resulted from Hamilton’s research and experimentation and, as the evidence here indicated, for another person to acquire the same information would require it to go through a like process of experimentation; and the urea cream product was not, on the evidence, easily reverse engineered. While it was suggested to Mr Blake that it could be reverse engineered in a short time – a suggestion with which he did not agree– AMC did not adduce positive evidence to that effect. It had the opportunity to do so. Mr Wait was its witness.