IQnet Pty Ltd v Schleemann
[2001] WASC 236
IQNET PTY LTD -v- SCHLEEMANN & ORS [2001] WASC 236
| SUPREME COURT OF WESTERN AUSTRALIA | Citation No: | [2001] WASC 236 | |
| Case No: | CIV:2102/2001 | 16 AUGUST 2001 | |
| Coram: | ROBERTS-SMITH J | 4/09/01 | |
| 22 | Judgment Part: | 1 of 1 | |
| Result: | Injunction extended until trial | ||
| B | |||
| PDF Version |
| Parties: | IQNET PTY LTD SVEND SCHLEEMANN IQNET EAST PTY LTD OZZIENET PTY LTD SCHLEEMANN HOLDINGS PTY LTD |
Catchwords: | Practice Interlocutory injunction Extension Confidential information Distributorship and licence agreements Licensee setting up own Internet service provider and urging distributors and customers to terminate their agreements with plaintiff |
Legislation: | Nil |
Case References: | American Cyanamid Co v Ethicon Ltd [1975] AC 396 Attorney-General v Mayor of Liverpool (1835) 1 My & C 171 Bentley v Nelson [1963] WAR 89 Castlemaine Tooheys Limited v State of South Australia (1986) 161 CLR 148 Hubbard v Vosper [1972] 2 QB 84 Morris (Herbert) Ltd v Saxelby [1916] 1 AC 688 Potters-Ballotini Ltd v Weston-Baker [1977] RPC 202 Thomas A Edison Ltd v Bullock (1912) 15 CLR 679 Evans, Marshall & Co Ltd v Bertola SA [1973] 1 All ER 992 Films Rover International Ltd v Cannon Film Sales Ltd [1986] 3 All ER 772 Westminster Brymbo Coal & Coke Co v Clayton (1867) 36 LJ Ch 476 |
JURISDICTION : SUPREME COURT OF WESTERN AUSTRALIA
- IN CHAMBERS
- Plaintiff
AND
SVEND SCHLEEMANN
First Defendant
IQNET EAST PTY LTD
Second Defendant
OZZIENET PTY LTD
Third Defendant
SCHLEEMANN HOLDINGS PTY LTD
Fourth Defendant
Catchwords:
Practice - Interlocutory injunction - Extension - Confidential information - Distributorship and licence agreements - Licensee setting up own Internet service provider and urging distributors and customers to terminate their agreements with plaintiff
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Legislation:
Nil
Result:
Injunction extended until trial
Category: B
Representation:
Counsel:
Plaintiff : Mr G B Giles
First Defendant : Mr S D Pentony
Second Defendant : Mr S D Pentony
Third Defendant : Mr S D Pentony
Fourth Defendant : Mr S D Pentony
Solicitors:
Plaintiff : Taylor Smart
First Defendant : Hotchkin Hanly
Second Defendant : Hotchkin Hanly
Third Defendant : Hotchkin Hanly
Fourth Defendant : Hotchkin Hanly
Case(s) referred to in judgment(s):
American Cyanamid Co v Ethicon Ltd [1975] AC 396
Attorney-General v Mayor of Liverpool (1835) 1 My & C 171
Bentley v Nelson [1963] WAR 89
Castlemaine Tooheys Limited v State of South Australia (1986) 161 CLR 148
Hubbard v Vosper [1972] 2 QB 84
Morris (Herbert) Ltd v Saxelby [1916] 1 AC 688
Potters-Ballotini Ltd v Weston-Baker [1977] RPC 202
Thomas A Edison Ltd v Bullock (1912) 15 CLR 679
(Page 3)
Case(s) also cited:
Evans, Marshall & Co Ltd v Bertola SA [1973] 1 All ER 992
Films Rover International Ltd v Cannon Film Sales Ltd [1986] 3 All ER 772
Westminster Brymbo Coal & Coke Co v Clayton (1867) 36 LJ Ch 476
(Page 4)
1 ROBERTS-SMITH J: The plaintiff issued a generally indorsed writ of summons in this matter on 3 August 2001, claiming an injunction restraining the defendants from contacting the plaintiff's distributors, damages, such accounts and inquiries as may be necessary and such further orders as the court might think fit. On the same date the plaintiff also filed a chamber summons for an interlocutory mandatory injunction seeking an order that the defendants by themselves, their officers, their servants, agents or other corporate entity or otherwise, do immediately cease all and any contact with the plaintiff's distributors and customers. An undertaking as to damages in the usual form was filed by the plaintiff. The defendants filed a memorandum of appearance on 9 August 2001.
2 The chamber summons came before Hasluck J as a matter of urgency on 3 August and his Honour granted an interlocutory injunction giving the defendants liberty to apply on 48 hours' notice to dissolve or vary it and further ordering that the affidavits filed in support be served on the defendants forthwith and the matter otherwise be adjourned to Judge's chambers on 10 August 2001.
3 The chamber summons came before Miller J on 10 August and his Honour extended the interlocutory injunction to the hearing of a special appointment and made certain procedural directions as to the filing of further affidavits and giving the parties liberty to cross-examine on notice at the hearing on the special appointment.
4 That came on before me on 16 August 2001. At that time the evidentiary material comprised an affidavit sworn and filed on 3 August 2001 by Andrew Edmond Fitzgibbon in support of the interlocutory injunction, an affidavit of Svend Schleemann in opposition to it sworn 9 August 2001 and a further affidavit of Andrew Edmond Fitzgibbon sworn and filed 14 August 2001. Both Fitzgibbon and Schleemann were cross-examined on their affidavits.
5 The plaintiff is a corporation incorporated in Western Australia and is an Internet Service Provider. Fitzgibbon is the sole director of the corporation. IQnet distributes its products and services through independent distributors who each enter into a distribution agreement with it. Under the terms of the agreement, each distributor is required to introduce further customers and distributors to IQnet. Payment of each distributor by IQnet is calculated on the number of new introductions made by the distributor. The IQnet business plan is based on a pyramid structure. A distributor pays a $40 annual membership fee plus a fee of $39.95 per month for unlimited hours access to the Internet. IQnet
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- provides administrative and technical support. A distributor receives a commission of $10 per month for each immediate downline distributor and a further commission of $10 per year for each distributor below that. Further, with a minimum of two people introduced to the distributor's front-line, IQnet reduces the cost of the distributor's own Internet access by $15 per month and with a minimum of four people so introduced, the reduction is $40 per month effectively paying for the distributor's monthly Internet access.
6 Once the distributor has introduced a minimum of four people to IQnet, the distributor receives a commission of $10 per month for each one of them for as long as they use the service. This is described as the distributor's front-line. When two members of the distributor's front-line fill their own front-lines, the distributor receives commission on all sales from levels two to six. When each of the four "legs" has 25 full front-lines, the distributor receives additional commissions from levels seven to nine, plus a free high speed permanent connection. The concept is that the distributor should introduce four people to IQnet and encourage them to do the same and so on.
7 In May 2000 the first defendant entered into three distribution agreements with IQnet. He entered into a fourth distribution agreement in February 2001. Each of those was on behalf of the fourth defendant. Under the terms of the distribution agreements, the plaintiff agreed to abide by the plaintiff's rules ("the rules").
8 Clause 3.17 of the rules states:
"The Distributor will keep secret and confidential the Confidential Information as defined in Rule 1.1.3 and shall not, whether during his/her authorisation as an IQnet Distributor, or at any time after ceasing to be so authorised, directly or indirectly, use or attempt to use the confidential information for his/her own advantage or gain in any manner which may cause or be calculated to cause injury or loss to IQnet, or to IQnet Distributor, or disclose, divulge, make known, or in any way communicate to any person any of the Confidential Information. The Distributor shall at all times during authorisation as an IQnet Distributor and afterwards take or cause to be taken such reasonable precautions as may be necessary to maintain the confidentiality of the Confidential Information and to prevent its disclosure."
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- The definition of 'Confidential Information' at Rule 1.1.3 states:-
"all information relating to the business, Distributors, products, customers or suppliers of IQnet or its Distributors which is or might reasonably be considered by IQnet to be confidential and which is not in the public domain, including but not limited to all mailing lists and other lists of Distributors; all information relating to the identity of and relationship between IQnet Distributors whether in a Distributors line of nomination or otherwise; all information relating to the identity of IQnet customers; all unpublished information relating to IQnet's products and its marketing strategies and advertising and promotional programs; all unpublished financial records and accounts; and all information relating to the volume of a Distributor's business."
10 By cl 3 of the licence agreement, IQnet agreed to provide administration services in respect of all accounts receivable and accounts payable (in respect of commissions payable and other such disbursements as might be specifically agreed from time to time in writing).
11 Amongst other conditions, IQnet East Pty Ltd agreed by cl 8 that it would not engage in any competitive business or undertaking without the prior written consent of IQnet and by cl 9 that it would maintain strict confidentiality of all IQnet's confidential information and improvements or modifications notified to it.
12 By cl 14, IQnet was to provide agreed administration services in the first year of operation for a flat royalty or fee of 6 per cent of monthly gross income accrued on behalf of IQnet East Pty Ltd; in subsequent years the fee would rise to 8 per cent. Other obligations of IQnet under the licensing agreement were to provide access to software such as the IQnet website, customer database and user authentication and any future developments (cl 15); provide free technical support for up to 1000 IQnet East customers (cl 16); maintain strict confidentiality of all information
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- specific to the licensee's business (cl 19) and not allow any sales of its products in the exclusive territory to anyone other than the licensee without the licensee's written agreement (cl 20). Clauses 22 to 25 gave IQnet the right to summarily terminate the licensee's appointment on certain events and there was then a clause under the heading "Grant of Licence" in the following terms:
"The parties are entitled to terminate the Memorandum on the usual terms (eg insolvency of the other party or unremedied default). The Licensor is to have an option to purchase the distribution operations of the Licensee on termination (on terms to be agreed between the parties or, failing agreement, on arbitration) including the right to the interest in any contracts with buyers entered into by the Licensee prior to termination."
14 Between February and July 2001, Fitzgibbon had a number of discussions with Schleemann concerning technical requirements for the Eastern States expansion. There were also a number of matters which needed to be rectified with respect to the IQnet software. A software development company was employed by IQnet to deal with Scheemann's specific requests and requirements.
15 On 23 June 2001 Schleemann registered the Internet domain name of "ozzienet.net" in the name of the fourth defendant. The third defendant, Ozzienet Pty Ltd, was registered on 11 July 2001.
16 On 21 July 2001 Schleemann sent Fitzgibbon an e-mail in the following terms:
"Andrew Fitzgibbon
I would like to confirm our discussion today in relation to the current licence Agreement between iQnet Pty Ltd and IQNet East Pty Ltd.
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- As agreed by yourself iQnet Pty Ltd have not been able to provide the services that were originally promised as part of the licence agreement.
I therefore intend for IQNet East Pty Ltd to take over all Administrative functions for its Eastern States Distributors and Customers effective 31 July 2001 including Call centre support, Accounts receivable, and accounts payable (in respect of commissions payable).
iQnet Pty Ltd needs to provide IQNet East Pty Ltd with the following:
Commission details for Eastern States Distributors as of the close of business 31 July 2001. This information to be provided within 7 days from close of business on the 31 July 2001.
Distributor and Customer sign up fees collected during July 2001 and remit this amount less the 6% licence fee and plus or minus existing account balance within 7 days of the close of business on 31 July 2001.
I would also like you to any (sic) e-mail requests from IQNet East Pty Ltd Distributors and customers from their existing e-mail domain to their new e-mail domain for a period of three(3) months.
IQnet East Pty Ltd will cease to operate under the iQnet licence agreement and will continue its operation under a different trading name as of close of business on 31 July 2001."
17 On the same date, another e-mail was circulated by Schleemann to 251 of the plaintiff's distributors. This began "Dear iQnet East Distributor" and explained that Schleemann had been personally involved with IQnet since May 2000, initially as a distributor in Bunbury and then helping IQnet marketing in Perth and later establishing the Eastern States distributor network market and operation. He referred to a discussion between himself and Fitzgibbon about a "joint venture or licence agreement" to operate the Eastern States part of the IQnet business and then wrote:
"On the 1st December 2000 I established iQnet East Pty Ltd and signed a licence Agreement with iQnet Pty Ltd under which I would pay a licence fee for using the iQnet name and
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- intellectual properties of iQnet Pty Ltd who would in return provide Administration and Customer support for my Distributors and Customers in the Eastern States I would provide the actual internet service for Eastern States Customers as well as promote the business.
As advised in my previous e-mail I have spent the last four months rolling out our Dial up locations and establishing a growing Distributor and Customer network in the Eastern States, during this period I have had a number of administrative problems reported to me from Distributors and Customers both in the Eastern States and Western Australia.
Since my return to Western Australia three weeks ago I have had several lengthy meetings with Andrew Fitzgibbon to address these problems, however it has become apparent to me that the problems are more deep rooted than I was aware of and I do not believe that iQnet in Perth are able to remedy the situation in the near future.
I have therefore today with some regret advised Andrew Fitzgibbon that I will take over the Total administration of iQnet East's Distributors and Customers and therefore sever my relationship with iQnet."
18 He continued in the e-mail to advise the distributors that on 6 July 2001 IQnet East Pty Ltd was offered, and signed, an agreement to become a National ISP Wholesaler for Connect.Com, and in addition, of other details as to the changes and arrangements that would be in place as a result of this development. They included that:
"The existing Distributor agreements will remain you will continue to be able to sell the existing products although these will be badged as Ozzienet."
19 He also pointed out that the distributors' addresses would be changed from the IQnet to the Ozzienet domain name.
20 Under the heading "WHAT DO YOU NEED TO DO", Schleemann advised that:
"To ensure that deductions are ceased you need to notify iQnet that you wish to cancel your account and cease payments as of 31 July 2001 by e-mailing [email protected]"
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21 On 23 July 2001, Fitzgibbon received from one of IQnet's distributors an e-mail dated 22 July, which had been forwarded to the distributor by Schleemann. I set out the text of that below:
"I have had a few e-mails re my last Distributor News and thought it prudent to re-iterate the ISP service situation.
No one will loose (sic) their ISP service the ISP service in the Eastern States is being provided by me (IQNet East Pty Ltd) and paid for by me through Connect.com and will remain in place but under a new trading and Domain name of ozzienet.net as I can not use iQnet who are currently only providing authentication and e-mail servers. These two functions will be switched to Connect.com and have already been set up which can only improve the service if anything, the dial in number and ISP Service etc remains the same.
My problem at the moment is that iQnet in Perth is collecting subscription fees on my behalf and I rely on them to forward these payments to me, this will obviously now not happen.
So if you wish to keep your existing ISP service and run with Ozzienet you will need to officially notify them now to cancel you (sic) existing account as of 31 July 2001 so that they do not charge you again on the 1 August 2001.
I will shortly (by 28 July 2001) provide you all with the information on how to sign up (a very simple process) this will alleviate my staff and I having to input 500 odd Distributor and Customer details into our new database and ensure that the transition is as smooth as possible."
22 On 24 July 2001, Fitzgibbon received another e-mail from a distributor by the name of Shane Hoy which attached an e-mail sent by a Vanya Markiewicz, apparently on behalf of the first defendant. The latter e-mail purported to intend to "shed some light" onto the situation for people who may not already be aware of what was happening with IQnet and Svend Schleemann's Ozzienet. It is not necessary to detail the content of that e-mail here - suffice to say it set out a number of complaints about IQnet, asserted the advantages of Ozzienet and encouraged people to join Ozzienet on line "… before IQnet has their connection disconnected!" The e-mail asserted that IQnet had sent out an e-mail stating the distributor would be disconnected because they have no control over that and would be off-line 31 July.
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23 According to Fitzgibbon, IQnet's business is so structured that if a small number of distributors were to believe the various claims being made by Schleemann and others on his behalf and cancel their current contracts with IQnet to move to the Ozzienet service provider, that would mean the movement across of all of the distributors and customers of those distributors, which would lead to a large downturn in revenue for the plaintiff. It is said that a huge amount of time, effort, expertise and expense has been invested by Fitzgibbon in building the distributor list of the plaintiff and in developing its Internet provider service. He estimates that approximately $500,000 alone has been invested in the purchase of equipment and software development.
24 In his affidavit of 3 August 2001, Fitzgibbon deposes that he has received numerous telephone calls from distributors wanting to know the situation with respect to Schleemann taking over as Internet provider through Ozzienet. He says that initially these distributors were from the Eastern States but more recently such enquiries have been coming from distributors in Western Australia. He has received a number of e-mails from distributors cancelling their accounts and advising that they are continuing their service with Ozzienet.
25 It is put on behalf of the plaintiff that IQnet would not be sufficiently compensated in damages as, unless an injunction is granted, IQnet is likely to lose its distributor base and customers whose monthly gross income to IQnet is presently $80,000 and growing at a rate of 10 per cent per month. It is said further that IQnet has expended a vast amount of time and expertise in the development of its computer programs and distributor database and the measurement of the loss of that latter asset for the purposes of compensation would be in excess of $1.5 million.
26 In his affidavit sworn 9 August 2001, Schleemann confirms having entered into the distribution agreements with IQnet but says that when he did so he was not provided with a copy of the terms and conditions, nor was he provided with a copy of the rules. He states that all he was given was a copy of the IQnet marketing plan and a blank copy of the distribution agreement.
27 He deposes that following his appointment as a distributor, he proceeded to sign up approximately 60 further distributors all based in Western Australia, between May and September 2000. When he did so he provided each of them with a blank copy of the distribution agreement and a copy of the IQnet marketing plan. He deposes that he began marketing IQnet in the Eastern States in about October 2000 and that he
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- spent approximately $16,000 of his own money on travel and accommodation expenses and signed up approximately another 60 distributors. He asserts that he was not provided with any information by IQnet to assist him in marketing IQnet to potential distributors in the Eastern States.
28 Schleemann confirms entering into the licence agreement for and on behalf of IQnet East Pty Ltd on 1 December 2000. He states that pursuant to that, and in order to satisfy the obligations of IQnet East Pty Ltd under it, he executed an agreement with Connect.com.au Pty Ltd ("Connect.com") on 8 December 2000. The terms of that agreement specified that Connect.com was to provide IQnet East Pty Ltd with Internet access at their 72 points of presence in Australia, and IQnet East Pty Ltd would pay Connect.com $10,000 plus GST in addition to costs of approximately $130 per month per port (there currently being 223 ports - representing approximately $29,000 per month).
29 Schleemann states that the Connect.com agreement allowed IQnet East Pty Ltd to satisfy its obligations under cl 13 of the licence agreement with IQnet which specified that IQnet East Pty Ltd was to provide 300 ports over the next 12 months in the exclusive territory and that it provided IQnet East Pty Ltd with Internet access in the exclusive territory, consequently allowing it to attract further distributors.
30 After the execution of the Connect.com agreement, Schleemann decided to physically visit each of the 72 points of presence provided by Connect.com and to that end moved to the Eastern States around February 2001. During February, March, April, May and June 2001, he travelled by road through the Eastern States marketing IQnet.
31 Schleemann deposes that to facilitate marketing IQnet in the exclusive territory, the plaintiff provided him with, as and when requested, contact details of existing distributors resident in the Eastern States. He estimates that he was provided with approximately 100 contact details of such distributors during those months. He states that during IQnet East Pty Ltd's Eastern States marketing exercise, the number of IQnet distributors resident in the Eastern States increased from 100 to approximately 530.
32 According to Schleemann, by about April 2001 he had become dissatisfied with the standard of the administration services being provided by IQnet pursuant to the licence agreement. IQnet was failing to pay relevant commission cheques to IQnet East Pty Ltd and the Eastern
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- States distributors and was incorrectly debiting amounts from the distributors' credit cards and bank accounts. He complained of these things to Fitzgibbon. In response to his complaints he received an e-mail from Fitzgibbon on 18 April 2001 advising that IQnet was contracting out the management of the plaintiff. Schleemann says that despite this and other assurances provided to him by Fitzgibbon, IQnet did not contract out the administration services and the standard of service provided to IQnet East Pty Ltd continued to deteriorate.
33 Schleemann says that he returned to Perth on about 23 June 2001 and ascertained that as a result of his efforts in marketing IQnet in the Eastern States, the revenue generated from that source had increased from approximately $3000 per month prior to the execution of the licence agreement to approximately $20,000 per month at the end of June 2001.
34 He had a meeting with Fitzgibbon on about 2 July 2001. There was some discussion about combining the activities of IQnet and IQnet East Pty Ltd but Schleemann advised that he wished to concentrate on the distributors in the Eastern States.
35 On 18 July 2001, Schleemann complained to Fitzgibbon that one of IQnet's commission cheques for $148.75 had been dishonoured.
36 On 19 July he sent an e-mail to Mr John Sheridan of IQnet advising that as a result of IQnet's failure to provide an appropriate level of administration services generally, he was cancelling the distributor agreement he had personally entered into with the plaintiff.
37 At par 29 of his affidavit, Schleemann states that:
"As a result of IQnet Pty Ltd's continued failure to provide an appropriate level of administration services pursuant to clause 14 of the licence agreement, on 21 July 2001 I, on behalf of IQnet East Pty Ltd, accepted IQnet Pty Ltd's repudiation of the licence agreement in that regard and terminated the licence agreement."
38 He deposes that he conveyed that to Fitzgibbon by e-mail on 21 July 2001. I have already set out the terms of that e-mail above.
39 Schleemann acknowledges that he sent an e-mail to all distributors in the Eastern States on 21 July 2001 but states that he possessed their contact details because they had been signed up by IQnet East Pty Ltd between February and June that year. On the issue of confidentiality of
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- that information, he also asserts that in any event each Eastern States distributor had access, via the IQnet web page and their own user name, to the names and contact details of each of the distributors in their "downline" - that is to say, those distributors (and those below them) who had been signed up by the relevant distributor. He asserts that by reason of that circumstance, the contact details of the Eastern States distributors were in the public domain.
40 Schleemann says that since IQnet East Pty Ltd terminated the licence agreement on 21 July 2001, none of the defendants has contacted, nor attempted to contact any Western Australian distributors of IQnet and that none of the defendants possesses any contact details for them.
41 So far as the extension of the interim injunction is concerned, Schleemann contends that would be damaging to the defendants because if IQnet East Pty Ltd is unable to contact and/or service the Eastern States distributors, a number of them will be unable to remain connected to the Internet. He says they are only able to access the Internet as a result of IQnet East Pty Ltd having entered the Connect.com agreement and that IQnet itself does not have Internet points at present throughout the Eastern States such that it would enable it to service each of the distributors resident there. He states that as a consequence, the Eastern States distributors would cancel their distributorships and that would further impact on IQnet East Pty Ltd's distributor and customer base.
42 In his evidence before me he put the anticipated consequences of any extension of the injunction in broadly the following terms.
43 The first point was that he (that is, presumably IQnet East Pty Ltd) has a monthly commitment on a $500,000 contract with Connect.com, but would be restrained from receiving income from the Eastern States distributors and customers. He said that there are other problems also in that he has other businesses "tied into" these arrangements. He indicated the injunction impacted on some 1500 people including members of his family, close business associates and people in Bunbury with whom he would deal every day in connection with other businesses. No specific details were given of any of this.
44 Fitzgibbon's affidavit of 14 August 2001 was sworn in response to that of Schleemann.
45 As to the provision of the terms and conditions, Fitzgibbon maintained that it is the plaintiff's practice when entering into distribution agreements with new distributors to annex the terms and conditions to the
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- application form. However, from early 2001, all hard copy application forms were down-loaded by the distributors from the IQnet web page where they were also displayed.
46 As to the information provided by IQnet to Schleemann, Fitzgibbon deposes that the latter was provided with contact details for all of IQnet's distributors. Normally a distributor would have access only to the e-mail addresses of their first four distributors and direct customers, but in order to assist Schleemann with his obligations under the licensing agreement, he was provided with far more extensive detail for all distributors and customers.
47 Fitzgibbon concedes in his affidavit (as he did in evidence before me) that there were some software problems with the IQnet system which caused difficulties from time to time but which he maintains were addressed and resolved. There were instances of late or incorrect payment, but these were due to development problems with the software and were rectified.
48 Fitzgibbon denies that the information to which Schleemann has had access as distributor and upon which he has relied, is in the public domain.
Full disclosure
49 The defendants take a preliminary point in relation to the application for extension of the injunction. It is that the application must fail because the plaintiff did not make full disclosure to the court on its initial ex parte application.
50 This contention is that the plaintiff did not disclose the fact that the second defendant terminated the licence agreement on the basis the plaintiff had failed to provide adequate administrative services to the Eastern States distributors in accordance with its obligations under the terms of that agreement. It is further said that the plaintiff should have drawn the court's attention to the fact that on termination of the licence agreement the plaintiff had the right to purchase the distribution operations of the second defendant and the plaintiff has chosen not to exercise that right.
51 It is contended that these issues are matters of material substance which the plaintiff failed to draw to the attention of the court on the return of its chamber summons for the ex parte injunction and accordingly the
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- injunction should be dissolved by reason of the plaintiff's material non-disclosure.
52 The legal principle is clear: it is the duty of a party asking for an interlocutory injunction ex parte to bring before the court all facts material to the determination of their right to that injunction, and omission to bring any material facts before the court is a ground for dissolving an injunction so obtained: Thomas A Edison Ltd v Bullock (1912) 15 CLR 679. In that case Isaacs J said (681):
"Dalglish v Jarvie 2 Mac & G 231, a case of high authority, establishes that it is the duty of a party asking for an injunction ex parte to bring under the notice of the Court all facts material to the determination of his right to that injunction, and it is no excuse for him to say he was not aware of their importance. Uberrima fides is required, and the party inducing the Court to act in the absence of the other party, fails in his obligation unless he supplies the place of the absent party to the extent of bringing forward all the material facts which that party would presumably have brought forward in his defence to that application. Unless that is done, the implied condition upon which the Court acts in forming its judgment is unfulfilled and the order so obtained must almost invariably fall. I add the words 'almost' in deference to such an exceptional case as Holden v Waterlow 15 WR 139. The obligation is stated by Turner LJ in that case (15 WR 139 at p 140) to be to 'state their case fully and fairly,' and so by Sugden LC in Dease v Plunkett (Drury, 255 at p 261), where he said:- 'The plaintiff had not fully and fairly disclosed the entire facts of the case.' Lord Cottenham LC, in Brown v Newall (2 My & C, 558 at p 570), observes that the power to grant such an injunction should exist is indispensable, but, from the liability to injustice, must be exercised with caution. Then he says (2 My & C, 558, at p 571):- 'The Court can have no ground upon which it can proceed, in granting an ex parte injunction, but a faithful statement of the case.' The learned Lord Chancellor distinguishes between mis-statement, or suppression likely to influence the Court in acceding to the application, and that which is immaterial."
53 Bullock was followed in Bentley v Nelson [1963] WAR 89, a decision of the Full Court of the Supreme Court of Western Australia in which D'Arcy J also set out the following quotation by the learned Master
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- of the Rolls in Attorney-General v Mayor of Liverpool (1835) 1 My & C 171, 210:
"A very wholesome rule, it is true, has been established in this Court; that if a party comes for an ex parte injunction, and misrepresents the facts of the case, he shall not then be permitted to support the injunction by shewing another state of circumstances in which he would be entitled to it: because the jurisdiction of the Court in granting ex parte injunctions is obviously a very hazardous one, and one which, though often used to preserve property, may be often used to the injury of others; and it is right that a strict hand should be held over those who come with such applications."
The application for extension of interlocutory injunction
55 I turn now to the merits of the application itself. It is first necessary to ask whether the plaintiff has demonstrated there is a serious question to be tried. If that has been shown, the court should then consider whether damages would be an adequate remedy for the plaintiff should the plaintiff's claim eventually succeed. Where it appears that damages would be an inadequate remedy, it is necessary to consider the balance of convenience. These principles were articulated by Lord Diplock in American Cyanamid Co v Ethicon Ltd [1975] AC
56 396, 407 and are now well entrenched (see also Castlemaine Tooheys Limited v State of South Australia (1986) 161 CLR 148).
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57 At the hearing, Mr Pentony, on behalf of the defendants, conceded that there is a serious question to be tried, although he characterised it as being upon whom the obligation of confidentiality lay. I am satisfied there are serious questions to be tried including the obligations upon the first, second and fourth defendants under the distribution agreements and the obligations of confidentiality upon the first and second defendants arising under the licensing agreement, as well as related questions whether or not the conduct of the defendants amounts to breaches of any of those obligations.
58 I also accept Mr Giles' submission that in this case damages would not be an adequate remedy for the plaintiff. It seems to me self-evident that if distributors are persuaded to cancel their agreements with IQnet so as to transfer to Ozzienet, then IQnet will lose not only the revenue from those immediate distributors, but also that from their downline distributors and customers. I accept that the loss of all of the Eastern States subscribers, together with the potential loss of Western Australian subscribers, could well result in the collapse of the plaintiff's business. I also accept the submission that one consequence of the alleged conduct of the defendants would likely be a serious loss of the plaintiff's commercial reputation which would be difficult, if not impossible, to measure in damages.
59 It seems to me the real issue on this application is the consideration of the balance of convenience, and so I turn to that.
60 It is necessary to weigh the damage the defendants will suffer if the injunction is granted against that which the plaintiff may suffer if it is refused. This involves some consideration of the strengths and weaknesses of the plaintiff's case and that assessment is to be made having regard to the totality of the evidence, not just that of the plaintiff (Hubbard v Vosper [1972] 2 QB 84, 86).
61 The defendants submit that where an action involves complex questions of fact and difficult questions as to the bounds of the law of confidential information and if an interlocutory injunction (if granted) would have the effect of closing down a defendant's business (as they contend would be the case here), the injunction should be refused on the balance of convenience. They rely upon Potters-Ballotini Ltd v Weston-Baker [1977] RPC 202.
62 Ballotini are tiny glass beads. Because they reflect the light, they are used for marking white lines on roads. They have other uses including
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- cleaning the blades of jet engines. Potters-Ballotini Ltd had been the only English manufacture of ballotini. Two of the plaintiffs' key employees and an independent contractor, all of whom had been involved in the construction of the plaintiffs' factory in England, secretly established a rival plant in England for making ballotini. The plaintiffs had written contracts with the two employees by which they were bound not to divulge any secrets or other information and nor for one year after termination of their appointments to use any secrets relating to the production of ballotini. Nonetheless, the three formed a new company, obtained planning permission, employed architects and designed and built a factory. The plaintiffs did not find out about it until the factory was almost complete. They issued a writ and applied for an interlocutory injunction. The application was adjourned and in the meantime the defendants started production. The application to a single Judge for an interim injunction was refused and the plaintiff appealed. The appeal was dismissed.
63 On the question of the balance of convenience, Lord Denning MR said (207):
"But then, in considering the balance of convenience, so far as the defendants are concerned, the effect of an injunction at this stage might be disastrous, even though it was only for a limited number of months until trial. Here is a great plant (I agree that it was erected surreptitiously and secretly, as far as one can see) but it cost a quarter of a million pounds. The money has been raised on loan, on security of debentures, and men are working there now. I agree that the defendants ought not to be allowed to gain any advantage by any unlawful conduct, but even so the effect of an injunction might be disastrous.
At all events, viewing the matter perfectly broadly, on the balance of convenience it seems to me that this case comes fairly and squarely within the American Cyanamid case, and, in the circumstances, it is not a case where this court should grant an interlocutory injunction. The judge directed himself in accordance with the American Cyanamid case. He thought it was not right to grant an injunction. But both parties agree it is a case for a speedy trial, and that seems to me to be the proper solution."
64 Lord Justice Scarman agreed. He considered the risk that an interim injunction would put the defendants permanently out of business to be a
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- factor, the weight of which was not easy to assess, but which would be catastrophic should it arise (209) and concluded that it appeared upon a balance of convenience, that more would be at risk for the defendants if an injunction was to go than for the plaintiffs if they were refused interim relief. Sir John Pennycuick took a similar view, saying (211) that to the defendants an interlocutory injunction would cause interruption of the operation of their business into which they had put a very large sum of money, and that interruption might be irreparable; on the other hand the plaintiffs could at worst, by reason of the refusal of an interlocutory injunction, incur a financial loss, albeit a serious one.
65 The balance of convenience in Potters-Ballotini was, however, determined in the context of certain specific considerations. The first was that the obligations of the two employees to keep information confidential were contractually limited to 12 months after the termination of their employment - and that period would come to an end only one month after the determination of the appeal. The effect was, as Lord Denning MR explained (205):
"If either of them broke it in the past, there might be a remedy in damages, but there would not be a remedy by way of injunction for the future, seeing that they will soon be free to use it as they please."
- (see also Scarman LJ at 209 - 210):
66 Another important consideration was the difficulty in determining to what extent the information was truly confidential. There was no reliance on patent nor copyright. Their Lordships thought a great deal of the information may have been in the public domain. Apart from that there was a real question whether it was confidential to Potters-Ballotini as distinct from the defendants' own knowledge and expertise which they could not be prevented from using (Morris (Herbert) Ltd v Saxelby [1916] 1 AC 688). Finally, the terms of the injunction were too wide and uncertain. It was sought to restrain the employee defendants from using information obtained during their employments as to the working of any processes, as to know-how and the like. Of this, Lord Denning MR said (206):
"That is uncertain in the extreme. It is well established that an injunction ought to be such that the party affected can know with certainty what he is or is not allowed to do. There is no such certainty here."
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67 There was even more difficulty in the case against the contractor defendant.
68 The material presently available to me here would suggest the plaintiff has a strong case against the defendants for (expressed broadly) breach of commercial confidence and other breaches of the licensing and distributorship agreements as to (at least) engaging in competitive business. I emphasise that I make this observation only for the limited purpose of deciding this interlocutory application; it is not for me here to investigate the merits of the dispute between the parties and I do not purport to do so. This circumstance is, however, a point of distinction from Potters-Ballotini, particularly insofar as on the face of the material the defendants would be under continuing obligations not to engage in conduct of the kind complained of by the plaintiffs.
69 The evidence going to the consequences to the parties of the injunction being extended or refused, as the case may be, was only of the most general nature. There is the further difficulty that the precise contractual relationships between the parties and the Eastern States distributors and customers were not satisfactorily explained. Fitzgibbon maintains the latter are customers of IQnet; Schleemann maintains they are customers of IQnet East Pty Ltd. None of the relevant Eastern States contractual documents were in evidence. My impression is that from the date of the licence agreement, Eastern States distributors and customers contracted with IQnet but were deemed to be the customers of IQnet East Pty Ltd. I conclude this in light of Schleemann's evidence and, more pertinently, the reference in the licence agreement to the licensor's rights on termination as including the right to purchase the interest in any contracts with buyers entered into by the licensee.
70 According to Schleemann, under the licence agreement he received the total income from the Eastern States distributors and customers, less the six per cent licence fee paid to IQnet. The administrative arrangement was that the whole fee would be received directly by IQnet (by way of an on-line computer transaction), IQnet would then deduct its six per cent and credit the balance to IQnet East Pty Ltd. The direct costs of running the Eastern States operation (as distinct from computer access to IQnet programs, on-line services and administrative and technical support) were borne by IQnet East Pty Ltd. They included access to ports through the contract with Connect.com.
71 The issue of the impact upon the Eastern States distributors and customers was raised in evidence. The defendants argue they would be
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- adversely affected if the injunction is extended because IQnet has no capacity to provide Internet access to them - that was being done through Connect.com which was contracted by IQnet East Pty Ltd. Fitzgibbon refuted this in his testimony. He said the plaintiff had been able to provide Internet access in all locations which had originally been covered, although there had been some very few users who had been disconnected. There are various providers other than Connect.com who can provide port access. I accept Fitzgibbon's evidence on this.
72 The defendants have substantial continuing financial commitments to maintain their business in the Eastern States, but were the injunction extended it would not prevent them signing up new distributors and customers who were not distributors and customers of IQnet (whether doing that might later be found to put them in breach of agreement with the plaintiff is another matter). The plaintiff has made a substantial investment of capital and, as I have found, faces the potential collapse of its business. Although the material before me from both sides in this regard is far from satisfactory, I have come to the conclusion that refusal of the extension of the injunction would cause significantly greater injustice to the plaintiff than granting it would occasion to the defendants.
73 I am accordingly prepared to extend the injunction until trial.
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