George Morgan Futures Pty Ltd v Lythgo
[2001] QSC 389
•17 October 2001
SUPREME COURT OF QUEENSLAND
CITATION: George Morgan Futures Pty Ltd v Lythgo & others [2001] QSC 389 PARTIES: GEORGE MORGAN FUTURES PTY LTD
(ACN 011 017 815)
(applicant/plaintiff)
v
SAMUEL CHARLES LYTHGO
(first respondent/defendant)
and
JOANNE BROWNE
(second respondent/defendant)
and
MAN FINANCIAL AUSTRALIA LIMITED
(ACN 001 622 077)
(third respondent/defendant)FILE NO: S 8497/01 DIVISION: Trial Division PROCEEDING: Application for interlocutory injunction DELIVERED ON: 17 October 2001 DELIVERED AT: Brisbane HEARING DATES: 2 and 10 October 2001
JUDGE: Wilson J ORDER: 1. Upon the undertaking of the third respondent to keep a separate record of transactions carried out by it for people who have been clients of the applicant and who have been contacted by the first or second respondent since their employment by the third respondent, the application for an interlocutory injunction is dismissed.
2. That the applicant pay the respondents’ costs of and incidental to the application to re-open, including the costs of and incidental to any further hearing of the application.
3. Otherwise, the costs of and incidental to the application should be costs in the cause.
CATCHWORDS: EQUITY – EQUITABLE REMEDIES – INJUNCTIONS – INJUNCTIONS FOR PARTICULAR PURPOSES – TO RESTRAIN BREACH OF CONFIDENCE – where plaintiff conducted business as futures broker – where first and second defendants left employ of plaintiff – where first and second defendants contacted clients of plaintiff after leaving plaintiff’s employment – whether first and second defendants deliberately memorised or copied plaintiff’s client database in breach of duty of good faith to plaintiff employer – whether identity of plaintiff’s clients was confidential information and, if it was, whether first and second defendants misused that information to the detriment of the plaintiff
Ansell Rubber Co Pty Ltd v Allied Rubber Industries Pty Ltd [1967] VR 37, considered.
Corrs Pavey Whiting & Byrne v Collector of Customs (1987) 14 FCR 434, considered.
Faccenda Chicken Ltd v Fowler [1987] Ch 117, considered.
Lock International plc v Beswick [1989] 1 WLR 1268, applied.
Metrans Pty Ltd v Courtney-Smith (1983) 1 IPR 185, considered.
Robb v Green [1895] 2 QB 315, considered.Weldon & Co Services Pty Ltd v Harbinson [2000] NSWSC 272, 7 April 2000, NSW SC No 2094 of 1999, considered.
Wright v Gasweld (1991) 22 NSWLR 317, considered.
COUNSEL: G. D. Beacham for the applicant plaintiff
P.J. Lyons QC for the respondent defendantsSOLICITORS: Macrossans Lawyers for the applicant
Hunt & Hunt for the respondents
This is an application by the plaintiff George Morgan Futures Pty Ltd for an interlocutory injunction and pre-pleading discovery in the exercise of the equitable jurisdiction of the Court. The applicant seeks to restrain the respondents’ misuse of confidential information, namely its client database.
The applicant plaintiff is a futures trader. It has been in operation for three years and presently employs four persons.
The first and second respondent defendants are former employees of the plaintiff, and the third respondent defendant is their present employer. It is a futures trader and futures fund manager, and is one of the world’s two largest futures traders.
At all material times the applicant has had approximately 1750 clients, of whom approximately 800 are current active clients. Its client information is electronically stored in the following manner –
(a)an access database which lists the name, address and contact details (phone, facsimile, email) of every client (“the client database”);
(b)an access database which lists the trading history of every client (“the allocations database”);
(c)a database which can produce a report of the current financial status of each client and particulars of commissions paid in relation the client’s trading activities (“the client financial status database”);
(d)a separate database simply providing the telephone details of every client (“the telephone list database”).
The database information is accessible to all employees. It is updated whenever an employee is made aware of any relevant change. Much of the applicant’s business is repeat business from existing clients. They are sent promotional material on a monthly basis. I accept that futures trading is highly competitive and that retaining existing clients is vital to business success.
The first and second respondents were employed by the applicant as client advisers. The first respondent was so employed between 12 February 1999 and 11 July 2001, and the second respondent between 12 October 1998 and 14 August 2001. The second respondent had previously worked with the applicant’s managing director, George David Morgan, in the futures section of Prudential Bache, a stockbroking firm. She and Mr Morgan were made redundant when another company took over Prudential Bache and closed its futures operation. They took the Prudential Bache futures client database with them and used it when the applicant set up business. This was apparently with the blessing of their former employer.
The first and second respondents’ duties included marketing, research analysis and trading on behalf of clients. The second respondent was responsible also for updating the databases from the client profile information. Most of their client contact was by telephone. New clients would become the notional clients of whoever took their first telephone call, and thereafter commissions would be credited to that employee. However, if an existing client telephoned and his or her particular adviser were not available, another employee would take the call. In this way all advisers spoke to all active clients at one time or another.
The first respondent swore that there were about 150 clients who dealt primarily with him, and the second respondent swore that she had 140 clients of her own.
As well as Mr Morgan, there were three other advisers – Terry Blaser, Peter Sprott and John Beals. Blaser resigned about twoyears before the first and second respondents and took up a position as a futures broker with the Macquarie Bank, and Sprott left on the same day as the first respondent. Mr Morgan’s step-son, Rhett Townsend, worked in the business from 1998, qualifying as an adviser the week before the first respondent left.
After he left the employ of the applicant, Blaser made contact with some of its clients. This concerned Mr Morgan, who discussed it with the remaining employees, including the first and second respondents and Townsend. According to the first and second respondents, he did not describe Blaser’s actions as wrongful, but he did speculate upon his having taken a copy of the client database.
Since taking up their new positions, the first and second respondents have contacted clients of the applicant soliciting business. There is evidence of their having contacted 33 clients. According to Peter Aardoom, the manager of the third respondent’s Brisbane office, 25 of such clients have given business to the third respondent, involving total commission of $6,957-62.
The applicant’s counsel submitted that there are serious issues to be tried –
(a)whether the first and second respondents deliberately memorised or copied the applicant’s client database in breach of their duty of good faith to the applicant (see Robb v Green [1895] 2 QB 315); and
(b)whether the identity of the applicant’s clients is itself confidential information which the first and second respondents have misused to the detriment of the applicant (see Corrs Pavey Whiting & Byrne v Collector of Customs (1987) 14 FCR 434 and Ansell Rubber Co Pty Ltd v Allied Rubber Industries Pty Ltd [1967] VR 37).
The first issue goes to the conduct of the first and second respondents while still in the employ of the applicant. The second goes to their conduct after leaving that employ.
In late August/early September 2001, Mr Morgan learnt that the first and second respondents had sent letters to 15 of the applicant’s clients advising that they had joined the third respondent and inviting them to use the services of the third respondent. Subsequently he found that similar letters had been sent to another 18 clients. According to Mr Morgan, they were not clients for whom either the first or second respondent had had principal responsibility whilst in the employ of the applicant. A large number had been clients of Peter Sprott. He described the approaches to the applicant’s clients as indiscriminate, and opined that they could not have occurred without access to information on the applicant’s database.
On 7 September 2001 the applicant’s solicitors wrote to the first and second respondents demanding immediate return of the database information, full disclosure of all clients they had contacted relying on the database information, and an undertaking not to approach other clients of the applicant in reliance on misuse of information confidential to the applicant. They wrote also to the third respondent demanding undertakings not to utilise any information from the first and second respondents which was confidential to the applicant and not to proceed with any business with clients approached by the first or second respondent in breach of their obligations to the applicant. The present application was filed on 20 September 2001.
The first and second respondents denied having copied the database. They denied targeting clients other than those who had been “their” clients (in the sense that they were the clients’ principal points of contact) and clients of Peter Sprott. The first respondent swore that he wrote names and telephone numbers on scraps of paper and also in his diary. He had a Spirax notebook in which he would jot down notes, and would then tear out the page and put it in his diary. The diary was both a personal diary and a work diary. He was never told it was confidential or the property of his employer and he was not asked to return it when he left. The second respondent also deposed to having kept a diary in which she made notes when clients telephoned as well as recording personal information. She still has the diary. She was never told that it was her employer’s and was not asked to return it when she resigned. She and the first respondent compiled the list of names to whom the letters were sent from notes in the diary, by looking up names they remembered in the internet White Pages, by recalling some names and addresses, and by telephoning some clients to obtain their addresses. On commencing her new employment, she noticed that a number of clients of the third respondent were also clients of the applicant.
The application was heard on 2 October 2001, and judgment was reserved. On the application of the applicant, it was reopened on 10 October 2001, when the applicant read an affidavit of Rhett Townsend. Townsend was cross-examined, and the respondents read further affidavits in response to his evidence.
Townsend’s evidence was that in the evening of 5 or 6 July 2001, after the market had closed, he and the first respondent were in the applicant’s dealing room. He was waiting for the night desk employee to arrive. The first respondent told Townsend he could go home. Townsend went to his desk, which was near the printer, to collect his belongings, and noticed that an extremely large document was being printed. Thinking that this was unusual, he inspected the document, which he recognised as the applicant’s client database. At the time, he thought this was somewhat strange, but did not really think about it much further. In an affidavit sworn on 8 October 2001, Mr Morgan said that Townsend told him about this on the afternoon of 2 October 2001, during a discussion with employees in the dealers room, which followed a telephone conversation between Mr Morgan and his solicitor. However, in cross-examination, Townsend said he had told him about it one night at a hotel the week the first respondent left. (He left on 11 July 2001.) If he did so, then it is strange that Mr Morgan did not remember it and that there was no evidence from Townsend when the application was first heard. Moreover, according to Townsend, in late August/early September a facsimile copy of a letter from the first and second respondents to a client, Travis Bugg, was passed around the office. Mr Morgan was then still irritated that the first and second respondents were contacting clients of the applicant, and yet he did not ask Townsend if he knew anything about it.
The first respondent stridently denied printing out a copy of the client database. He denied any recollection of being in the office on 5 or 6 July 2001 with Townsend after the market had closed.
The anomalies surrounding Townsend’s evidence, his close family, as well as employment, ties with Mr Morgan and his general demeanour in the witness box have caused me to doubt whether his evidence would be accepted at trial. However, it is not for me finally to determine credibility issues on an interlocutory application.
Townsend’s evidence is sufficient to satisfy me that there is a serious issue to be tried as to whether the first respondent copied the applicant’s database in breach of his duty of good faith to the applicant. Were it not for that evidence, I would be disinclined to conclude from the other evidence that there is a serious question to be tried as to whether either the first or second respondent copied or deliberately memorised the database.
I turn to whether there is a serious question to be tried that the identity of the applicant’s clients is itself confidential information. The applicant relied on the evidence of Mr Morgan that -
“…not only is the client information critical but also the identity of the client is critical. Clients that buy and sell in futures are relatively sophisticated and difficult to find. It is easy to be a Broker once you have the client. The hard part is getting clients in the first place. The client is an asset in themselves [sic]. They are unique in that they are highly committed. They read charts, books and papers to understand the movements of the market. It is very hard to introduce someone to the market because there is so much to understand before you even start. There is a long education process. In Australia there is only a limited number of clients. The identity is therefore very valuable because it is hard to educate the potential client to the basics of it. I would never divulge the identity of the clients outside the firm despite numerous approaches from people to do so."
The applicant relied also on the evidence of Mr Aardoom that -
“What makes futures advisers attractive to their employers is their knowledge of people and their contacts with people, who trade in the futures market.”
In Corrs Pavey Whiting & Byrne v Collector of Customs at 443 Gummow J said –
“It is now settled that in order to make out a case for protection in equity of allegedly confidential information, a plaintiff must satisfy certain criteria. The plaintiff: (i) must be able to identify with specificity, and not merely in global terms, that which is said to be the information in question; and must also be able to show that (ii) the information has the necessary quality of confidentiality (and is not, for example, common or public knowledge); (iii) the information was received by the defendant in such circumstances as to import an obligation of confidence; and (iv) there is actual or threatened misuse of that information. ………It may also be necessary …… that unauthorised use would be to the detriment of the plaintiff.”
I accept there would be a serious issue to be tried as to misuse of confidential information if there were a serious issue as to the confidential character of the identity of the clients.
Opposing counsel both made full and helpful submissions on the relevant case law. Counsel for the applicant submitted that whether information has the necessary quality of confidentiality is a question of fact, and referred to authorities such as Ansell Rubber Co Ltd. v Allied Rubber Industries Pty Ltd. Senior counsel for the respondents submitted that while an employee is not free to disclose the identity of clients during the subsistence of his or her employment, it is information which he or she may use after the termination of the employment. He relied on the underlying public policy in favour of permitting someone to pursue his or her career by changing employment, and being able to make use of the stock of knowledge acquired in previous employment. In his submission the identity of clients cannot have the necessary quality of confidentiality to be capable of protection after the termination of employment. He referred to Weldon & Co v Harbinson [2000] NSWSC 272, 7 April 2000, No 2094 of 1999, Bryson J at paras 67 –69; Wright v Gasweld (1991) 22 NSWLR 317; Metrans Pty Ltd v Courtney-Smith (1983) 1 IPR 185 (Kearney J, Supreme Court of New South Wales); and Faccenda Chicken Ltd v Fowler [1987] Ch 117.
On this interlocutory application it is not necessary for me to reach a final view upon whether a list of clients can have the requisite quality of confidentiality, although I am inclined to the view that it must ultimately be a question of fact.
I was not referred to any case in which the identity of clients was found to have that quality of confidentiality necessary for it to be capable of protection after the termination of employment. The applicant’s clients were certainly hard won, and their identity was valuable commercial information. However, on the evidence their identity could not be elevated to the level of a “trade secret”.
I turn now to the balance of convenience. The applicant proffered the usual undertaking as to damages.
Would damages be an adequate remedy - (i) if the applicant succeeds at trial; and (ii) if an injunction were granted at this stage, but ultimately the applicant’s claim were dismissed?
Both counsel submitted that his clients could not be adequately compensated in damages. I accept that on either scenario damages would be difficult to assess. In Lock International plc v Beswick [1989] 1 WLR 1268 at 1276 Hoffmann J was faced with similar arguments on an application for an interlocutory injunction to restrain the misuse of confidential information and trade secrets in relation to the manufacture of metal detectors. He said -
“Even if the plaintiff had an arguable case for more confidential information than I think it has, the balance of convenience would in my judgment be against the grant of an interlocutory injunction. Damages under the cross-undertaking will not be an adequate remedy for the defendants because (quite apart from the value of the cross-undertaking) it will be extremely difficult for them to show how many metal detectors they would have sold if the injunction had not been granted. Damages will also not be a completely adequate remedy for the plaintiff if it is right because one cannot say exactly what effect the defendants’ inability to use some piece of information would have had on their sales and subsequent customer relationships. But the plaintiff will at least be able to show how many machines the defendants have sold and what the additional costs would have been if they had not been able to use the information in question. .................”
Those remarks are apposite to the present case, where the applicant would at least be able to show what business the respondents had transacted with its clients and what commission they had made from that business.
Principally because of my reservations about the evidence of Townsend, I think that the applicant’s case, even at this interlocutory stage, is not strong. That is a relevant factor in assessing the adverse effects on the respondents if an interlocutory injunction were wrongly granted.
The third respondent is a substantial company, but there is no evidence from which I can form a view as to the capacity of the applicant, a much smaller business, to meet a liability for damages on its undertaking.
If an injunction were granted, the first respondent might lose his employment with the third respondent, and his prospects of being re-employed in the futures industry in Brisbane (which is small) would be extremely limited.
The third respondent has undertaken to keep a separate record of transactions carried out by it for people who have been clients of the applicant and who have been contacted by the first or second respondent since their employment by the third respondent, and has indicated its willingness to take such other reasonable steps as the Court thinks appropriate to enable an account to be taken of any profits it receives from transactions on behalf of such clients or former clients of the applicant.
In my view the balance of convenience is against the granting of an interlocutory injunction.
I have concluded that there is a serious question to be tried as to whether the first respondent copied the applicant’s database in breach of his duty of good faith to the applicant, but that the balance of convenience does not favour the grant of an interlocutory injunction. There is not a serious question to be tried as to whether the identity of the applicant’s clients was confidential information which the first and second respondents have misused, since their employment ceased, to the detriment of the applicant.
PRE-PLEADING DISCOVERY
Counsel for the applicant sought an order for the filing of an affidavit setting out the persons the first and second respondents have contacted and submitted that the question whether to grant an interlocutory injunction should be determined in the light of the contents of that affidavit. As I understood his submissions, that was only if I concluded that there was no serious question to be tried as to the wrongful copying of the database, but that there was a serious question as to the confidentiality of the clients’ identity.
In view of my conclusions, the issue of pre-pleading discovery does not arise.
Orders:
1. On the undertaking of the third respondent to keep a separate record of transactions carried out by it for people who have been clients of the applicant and who have been contacted by the first or second respondent since their employment with the third respondent, I dismiss the application for an interlocutory injunction.
That the applicant pay the respondents’ costs of and incidental to the application to re-open, including the costs of and incidental to any further hearing of the application.
Otherwise the costs of and incidental to the application are costs in the cause.
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