Johnson v Mortgage Processing Centre
[2003] FMCA 483
•5 November 2003
FEDERAL MAGISTRATES COURT OF AUSTRALIA
| JOHNSON v MORTGAGE PROCESSING CENTRE & ORS | [2003] FMCA 483 |
| COPYRIGHT – Ownership of copyright – where there is a dispute as to the author of the work – where there is a dispute as to arrangements made for assignment of copyright – where there is no written assignment – where it is alleged that the cross claimants are seeking to enforce the rights of a third party – whether interlocutory relief should be given. CONFIDENTIAL INFORMATION – Where party has signed agreements containing confidentiality and restraint of trade clauses – whether breaches of same can be separated from allegations concerning breaches of copyright and ownership in copyright – whether interlocutory relief can be given. CORPORATIONS – Duties of director and employee – duty of confidentiality – whether interlocutory relief should be granted to protect alleged breaches of duty of confidentiality – where respondent to application has copied source code and commenced business in competition with applicants of whom he was a director and employee. PRACTICE AND PROCEDURE – Injunctive relief – requirement for serious issue to be tried – balance of convenience – where balance of convenience in respect of copyright proceedings alone favours respondent but balance of convenience in relation to confidentiality claims favours the applicant – appropriate orders. |
Copyright Act 1968 (Cth) ss.35, 35(2) 78,
Corporations Act 2001 s.183Castlemaine Tooheys Limited v South Australia (1986) 161 CLR 148 Australian Coarse Grain Pty Limited v Barley Marketing Board of Queensland (1995) 46 ALR 398
Martin Engineering Co v Trison Holdings Pty Limited (1988) 11 IPR 611
CBS Records Australia Limited v Telmak Teleproducts (Aust) Pty Limited (1987) 8 IPR 473
Norwich Pharmacal Co v Customs and Excise Commissioners (1974) AC 133
Authors Workshop v Bileru Pty Ltd (1989) 88 ALR 211
| Applicant: | RODNEY GLENN JOHNSON |
| First Respondent: | THE MORTGAGE PROCESSING CENTRE PTY LIMITED ACN 093 078 356 |
| Second Respondent: | AUSTRALIAN WHOLESALE LENDING PTY LIMITED ACN 094 017 571 |
| Third Respondent: | INTERNATIONAL ASSET HOLDINGS PTY LIMITED ACN 095 565 138 |
| Fourth Respondent: | WILSON EDUARDO FERNANDEZ |
| Fifth Respondent: | GEORGE ZAKHER |
| Sixth Respondent: | DAMIAN CHOWN |
| File No: | SZ 1506 of 2003 |
| Delivered on: | 5 November 2003 |
| Delivered at: | Sydney |
| Hearing date: | 7 October 2003 (Last Submissions received 31 October 2003) |
| Judgment of: | Raphael FM |
REPRESENTATION
| Counsel for the Applicant: | Mr T Hall |
| Solicitors for the Applicant: | Norman Waterhouse Lawyers |
| Counsel for the Respondent: | Mr R Webb |
| Solicitors for the Respondent: | Kemp Strang Lawyers |
ORDERS
Upon the First, Second and Third Respondents jointly and severally providing the court with the written undertakings as to damages in the usual form required by the Federal Court.
An order until further order that the applicant by himself, his servants or agents be restrained from reproducing in a material form without the licence of the first and second respondents the whole or a substantial part of any of the following computer programs, namely:
(a)the computer program named Version 4.08
(b)the computer program named “LMS”;
(c)the computer programs named Version 4 and “Automator”; and
(d)the computer program named “Loan Track”
all such programs being generically referred to as “The Computer Programs” as the same existed as at 14 May 2003.
An order until further order that the applicant by himself, his servants or agents be restrained from selling or letting for hire without the licence of the first and second respondents any copy of any of the computer programs without the licence of the respondent(s).
An order that the applicant make, file and serve within fourteen days of the date of this order an affidavit in which he deposes:
(a)to the number of copies of each of the computer programs in his possession, power, custody or control at the date of this order;
(b)to the location, at the date of the order, of each copy identified pursuant to (a) above the precise location of the copy including the storage medium on which it is located including whether that storage medium is a removable storage medium or a fixed part of any computer or peripheral device;
(c)to the number of copies of each of the computer programs which at any time since 9 May 2003 have been in his possession, power, custody or control;
(d)in respect of each copy of each of the computer programs which has at any time been in his possession, power, custody or control since 9 May 2003 but which is not now in his possession, power, custody or control:
(i)the name, address, e-mail address and telephone number of the person or entity to whom the applicant by himself, his servants or agents delivered that copy;
(ii)the material form in which the copy was thus delivered and the manner in which the copy was then delivered to that person or entity;
(iii)to the best of the applicant’s knowledge and belief, full particulars of the current location of that copy.
An order until further order, that the applicant deliver up to the Court within fourteen days of the date of this order:
(a)all copies of each computer program identified in the affidavit to be made pursuant to paragraph 3 above as within his possession, power, custody or control which are contained in removable storage media; and
(b)one copy of each copy of any of the computer programs identified in the affidavit to be made pursuant to paragraph 3 above as are within his possession, power, custody or control but which is as contained in storage media fixed in any computer or peripheral device.
Orders until further orders, restraining the applicant by himself, his servants and agents from using or from imparting to any other person any details as to the structure of any of the computer programs or of the mortgage processing system embodied in them.
An order that the applicant make, file and serve within fourteen days of the date of this order an affidavit in which he:
(a)identifies each person or entity to whom he has imparted whether by himself, his servants or agents any information as to the structure of any of the computer programs or as to the mortgage processing system embodied in them;
(b)in respect of each person or entity identified pursuant to (a) above:
(i)identifies the date on which that information was thus imparted to the person or entity; and
(ii)states precisely the content of the information thus disclosed to the person or entity identified;
(iii)provides the address, e-mail address and telephone contact details for the person or entity.
(a) An order until further order that the applicant be restrained within Australia, on his own account or for any other person (whether as principal, agent, director, executive officer, employee, shareholder, partner, joint venture member, adviser, consultant or otherwise), from undertaking duties and responsibilities for any person, company or body, who the applicant on behalf of the first respondent has provided services within a period of two years immediately prior to the termination of his employment;
(b)An order until further order that the applicant be restrained from divulging or using for his own benefit or for the benefit of any person, “Confidential Information” as defined in clause 13 of the applicant’s employment agreement with the first respondent dated 4 March 2003 (which is the exhibit marked “DKC14” to the Affidavit of Damian Chown sworn on 25 August 2003 and filed in these proceedings); and
(c)An order until further order that the applicant be restrained on his own account or for any other person (whether as principal, agent, director, executive officer, employee, shareholder, partner, joint venture member, adviser, consultant or otherwise), from offering employment, or contract work to any employee of the first respondent.
| FEDERAL MAGISTRATES COURT OF AUSTRALIA AT SYDNEY |
SZ 1506 of 2003
| RODNEY GLENN JOHNSON |
Applicant
And
| THE MORTGAGE PROCESSING CENTRE PTY LIMITED ACN 093 078 356 |
First Respondent
| AUSTRALIAN WHOLESALE LENDING PTY LIMITED ACN 094 017 571 |
Second Respondent
| INTERNATIONAL ASSET HOLDINGS PTY LIMITED ACN 095 565 138 |
Third Respondent
| WILSON EDUARDO FERNANDEZ |
Fourth Respondent
| GEORGE ZAKHER |
Fifth Respondent
| DAMIAN CHOWN |
Sixth Respondent
REASONS FOR JUDGMENT
These proceedings were commenced by way of an application dated 4 August 2003 by Mr Johnson, seeking declarations pursuant to section 35 of the Copyright Act 1968 (Cth) (the “Act”) that he was the author of the source and object codes of a software program known as “Virtual Lender” or alternatively other declarations concerning the ownership of the source and object code and certain other rights. Points of Claim were filed on 16 September 2003. In those points of claim the applicant at paragraph 14 stated:
“For the avoidance of any doubt, the applicant states the issues concisely in these proceedings:
i.That he is the author of the source code and that by agreement he was to receive 20% interest in the Third Respondent for the authorship of the source code.
ii.In breach of the agreement under which the applicant was to take his interest, he was never allotted any shares.
iii.The applicant seeks the share allotment outlined in these proceedings.
iv.The applicant says that the software code developed by him as detailed in these proceedings may not be modified without his consent.”
Before these points of claims were filed the matter came before me for directions. The respondents indicated that they had very significant claims against the applicant concerning what they allege to be his breach of copyright and his breach of confidentiality as a director and/or employee of the respondents arising out of his copying of the source code to the program(s) and his setting up a business in direct competition with them. The respondents sought interim injunctions.
On 3 September 2003 I heard the directions applications and the parties agreed that rather than proceed to an interim application they would get the case ready for trial at the earliest possible date. The date appointed was 7 October and consequential directions were made.
Shortly before 7 October the matter was re-listed before me when it became obvious that the case could not be prepared in time. It appeared that the issues between the parties had become extremely complex and the amount of evidence required had grown considerably. I made it clear to the parties that I did not blame either of them for this failure to have the case ready by the appointed date. The original agreement appeared to me to be a triumph of hope over experience.
Unfortunately, the delay in bringing the matter on for hearing until 19 January 2004 meant that the respondent/cross claimant’s desire for interim relief became more pressing. I agreed to hear that application which I did on 7 October. There followed after the hearing (and again without criticism of the parties) a veritable landslide of submissions as well as the filing of additional evidence. I am now left with the difficult decision as to whether or not to grant some form of interim relief to the respondents pending a hearing that will take place and should be completed within three months.
The orders sought by the respondents are lengthy and they are reproduced as an annexure to these reasons. On 30 October 2003 Order 8(a) was amended in the form of the second document annexed.
The factual matrix from which this dispute arose appears to be this. The applicant is a systems technology consultant. In about June 2000 he met with a Mr Samuel Makhoul who is associated with the respondents. The applicant ran a business known as ITNT Network Solutions and he agreed that that business would undertake software development work for a mortgage processing business. It was intended that the software would allow mortgage brokers to interface with The Mortgage Processing Centre (“MPC”) which in turn would interface with the providers of funds. ITNT Network provided Mr Makhoul with a letter on 13 June 2000 setting out its initial proposal for the work. Shortly thereafter Mr Makhoul telephoned the applicant and told him that he thought his proposal looked fine and asked him to commence work. The applicant was to be a consultant and was to be paid $500 per day. Work commenced in July 2000 but shortly thereafter Mr Makhoul suggested that it concentrate on programs suitable for a mortgage processing centre. On 16 July 2000 the applicant provided Mr Makhoul with a further document concerning this work. The work developed into two systems. The first being known as “Virtual Lender” and described in the affidavits as a front end system which interfaced with the mortgage brokers and the second was a back end system known as “Loan Management System” which interfaced with the funds providers and undertook the back office work. The applicant contracted out the source code for the programs to J D Tech Pty Limited, a software development company. The applicant claims that he was in close contact with Mr Fussell, a director of J D Tech, relating to coding work for the programs. The first version of Virtual Lender was released about 22 September 2000.
Thereafter, the work being done for the respondents progressed. Subsequent versions of the programs were written. The arrangements between the parties changed. Staff from J D Tech were taken on and employed by the respondents as, eventually, was the applicant himself. In January 2001 the applicant was appointed a director of MPC, the first respondent and AWL, the second respondent.
There was another employee of MPC who became known to the applicant, Mr Mendez. Mr Mendez was the business development arm of the organisation.
It would appear that the programs written for MPC were successful but that Mr Makhoul thought that Mr Johnson’s management skills needed to be refined. In about November 2002 he met a Mr Chown who he describes in his affidavit as a qualified management consultant and asked him to come in at the beginning of 2003 to conduct an organisational review going forward. Part of the review was to consider arrangements whereby Mr Johnson and Mr Mendez obtained equity in MPC and AWL. Mr Chown commenced his review and in about March of 2003 suggested that Mr Mendez and Mr Johnson sign employment agreements. This they did. The applicant’s agreement is in evidence as exhibit “DKC14” and is dated 4 March 2003. Paragraph 13 is in the following form:
Protection of Confidential Information
“Confidential Information”
Means information (whether in writing or otherwise) given to or gained by you in confidence at any time, whether before, during or after your employment with THE MORTGAGE PROCESSING CENTRE, that relates to:
(a)THE MORTGAGE PROCESSING CENTRE Pty Limited, any subsidiary, any Related Body Corporate;
(b)AWL Pty Limited, any subsidiary or any Related Body Corporate;
(c)Customers, clients, or suppliers of THE MORTGAGE PROCESSING CENTRE or the AWL, its subsidiaries, any Related Body Corporate; and
(d)Includes but is not limited to the following:
·Drawings and images;
·trade secrets;
·information relating to the business affairs, accounts, marketing plans, sale plans, prospects, price information, supplier lists, research, management, financing, products, inventions, designs or processes;
·computer databases and computer software;
·data surveys, customer lists, member lists, client lists, specifications, drawings records and reports;
·private information provided to THE MORTGAGE PROCESSING CENTRE by any of its members, or clients.
“Confidentiality”
You will at all times (including after termination of your employment) keep secret and confidential any Confidential Information of any kind and will not for your own benefit, or for the benefit of any person, make use of any Confidential Information.
“Uncertainty about confidential information”
If there is any uncertainty about whether information is Confidential Information, or lawfully within the public domain, the information is taken to be Confidential Information unless you are advised by the Company in writing that the information is not Confidential Information.
The applicant and Mr Makhoul continued in negotiations for the taking by Mr Johnson of an interest in MPC. A Memorandum of Understanding (“MOU”) was issued, prepared by Mr Chown on 21 March 2003. Mr Mendez was given a similar document but he did not agree to it and resigned from the company on 17 April 2003. Mr Johnson signed the document on about 23 April 2003. The MOU is exhibited to Mr Makhoul’s affidavit as “SM18”. It states:
“The above terms and conditions are the basis for legal documentation to be entered into between the parties.”
Mr Johnson signed the MOU on 12 May 2003.
In the meantime Mr Johnson must have been having some second thoughts about the matter because on 9 May 2003 a Mr Halil deposes to having a conversation with him in which Mr Johnson requested Mr Halil to help him copy all of the source code of Virtual Lender and the LMS SQL database onto his laptop. Mr Johnson (according to Mr Halil) asked for further advice in connection with programming matters. Mr Halil says that he knew as at 9 May that Mr Johnson had the source code for a program known as Autoconverter and Loan Track on his laptop computer. I am not entirely clear from Mr Halil’s affidavit what versions of these programs were copied on to Mr Johnson’s computer as he talks in paragraphs 14 and 15 about Versions 4 and in paragraph 15 of his affidavit about Versions 5. The fact that the source code was downloaded onto Mr Johnson’s computer is not, however, in dispute.
Neither is it in dispute that on 14 May 2003 Mr Johnson left the employ of MPC and that shortly thereafter he and Mr Mendez commenced a similar business known as “Loan Services Australia Pty Limited” and were approaching the customers of MPC.
The employment agreement which Mr Johnson signed on 4 March 2003 also contained a post employment restraint clause in the following form:
In consideration of THE MORTGAGE PROCESSING CENTRE employing you, by signing this document, you agree that you will not, for a period of at least two years (2) after the termination of your employment with THE MORTGAGE PROCESSING CENTRE, within Australia, on your own account, or for any other person (whether as principal, agent, director, executive officer, employee, shareholder, partner, joint venture member, adviser, consultant or otherwise), undertake duties and responsibilities for any person, company or body, who you on behalf of THE MORTGAGE PROCESSING CENTRE have provided services within a period of two years immediately prior to the termination of your employment.
In consideration of THE MORTGAGE PROCESSING CENTRE employing you, by signing this document, you agree that you will not, for a period of at least two years after the termination of your employment with THE MORTGAGE PROCESSING CENTRE, on your own account of you any other person (sic) (whether as principal, agent, director, executive officer, employee, shareholder, partner, joint venture member, adviser, consultant or otherwise) offer employment, or contract work, to any employee of THE MORTGAGE PROCESSING CENTRE.
You acknowledge that you consider the restraints contained in clauses 14.1 and 14.2 to be reasonable. However, should restraints be held void as unreasonable for the protection of THE MORTGAGE PROCESSING CENTRE, but would be valid if part of the wording is deleted or the period of (sic) area of the restraint is reduced, you agree that the restraint should apply with the modifications necessary to make it effective.
At paragraphs 54 to 60 of his affidavit Mr Chown gives details of the effect of the actions of the applicant upon the respondent companies. I do not believe it was seriously disputed by Mr Johnson that he was in active competition with his former employee, a company of which he had been a director, and that he was using computer programs which at the very least were significantly based upon those used by the respondents.
Whilst I am grateful for the efforts of Counsel for both the applicant and the respondents to produce detailed written submissions they do appear to have accentuated the opacity of the contentions rather than to have clarified them. I am conscious that none of the evidence has been tested. I am aware that it is contended that there is a good deal of common ground. At the present time ie; before evidence has been heard, it would appear that the most contentious issues relate to the effect of what has occurred rather than what actually did occur.
The respondents claim that they have a right to the copyright in these computer programs. They also claim they have the right to enforce obligations of confidentiality upon the applicant. They accept that there was no written assignment of the copyright in the programs but they assert that all persons involved in the creation of those programs (basically Mr Johnson and people from J D Tech) accepted that the copyright in them would belong to MPC. They say this in regard to the J D Tech personnel because those people eventually became employees. With regard to Mr Johnson they say there were arrangements between him and Mr Makhoul concerning copyright pursuant to which he acknowledged that MPC would have rights in the copyright.
The applicant disputes this. He argues that the ownership of the copyright has not been proved. He believes it belongs to the writer of the source code which he claims is himself although he acknowledges some input from J D Tech. He argues in regard to J D Tech that that company has not been made a respondent and therefore MPC has no right to enforce against him rights that may belong to others.
Mr Johnson argues that he is the author of Virtual Lender Version 4 and that he assisted in the writing of all other versions of Virtual Lender. This was done with the assistance of J D Tech Pty Limited and he believes that it follows that as to each of the software versions Mr Johnson has rights either as joint author of the material, (s 78 of the Act), or as exclusive author under section 35(2) of the Act. He argues that the first respondent cannot establish that his copyright vests in it on a constructive trust basis and that, at least at this stage, it has not satisfied the onus of establishing the constructive trust or rebutting the presumptions of ownership advanced by Mr Johnson.
The respondents argue that in addition to the copyright claims they have claims in breach of confidence arising under the written agreement previously referred to in section 183 of the Corporations Act 2001. They argue that the obligation of confidence owed by Mr Johnson extends to include the structure through which the members of the group of which the cross claimant is a member provided mortgage processing services to mortgage brokers and the details of the computer software through which it provides those services including the information imbedded in the software and the form and content of the software itself. MPC submits that Mr Johnson is in error in believing (as he has submitted) that the right to restrain the use of the computer programs as the, or the embodiment of the confidential information falls away in the event that Mr Johnson in fact owns the copyright in those programs. MPC submits that the causes of action of infringement of copyright and breach of confidence are entirely distinct even though the confidential information might be embodied in the copyright work. It argues that to the extent that Mr Johnson might own any of the computer programs he is nevertheless restrained from exploiting that copyright because to do so involves breach of confidence. To use the software involves use of the confidential information in a way which breaches the legal obligations owed by Mr Johnson and which have arisen out of his various associations, particularly that of director and employee of MPC.
In making a decision as to whether I should grant any interlocutory relief to the cross claimants I have to consider two things. Firstly, I must consider whether there is a serious issue to be tried and secondly, whether the balance of convenience favours the granting of the injunction (see Castlemaine Tooheys Limited v South Australia (1986) 161 CLR 148 at 153; Australian Coarse Grain Pty Limited v Barley Marketing Board of Queensland (1995) 46 ALR 398. The court must also waive a balance of the risk of doing an injustice (see Martin Engineering Co v Trison Holdings Pty Limited (1988) 11 IPR 611 at 616 per Gummow J.
In determining whether there is a serious question to be tried the court must consider not only the issues of fact between the parties but also questions of law. (See CBS Records Australia Limited v Telmak Teleproducts (Aust) Pty Limited (1987) 8 IPR 473 at 487 per Bowen CJ. It is recognised that in some copyright applications the interlocutory decisions of the court may effectively become a final determination of the issues. The court is therefore required to consider the balance of convenience issues as they relate to the parties.
I do not believe that there can be any dispute that there is a very real issue to be tried here. I am satisfied that the evidence indicates a significant dispute about the ownership of the copyright and/or any licences to use it. There may well be issues as to whether the current programs being used by the applicant and his company are derived from the initial programs in which the parties are contesting copyright. If the matter was to be tried as a copyright issue alone I can foresee a number of possible end results ranging from the confirmation of equitable ownership in MPC with no rights to utilise or compete remaining in the applicant to joint rights in a variety of parties or even (although unlikely from the evidence at this stage) sole rights in the applicant.
In those circumstances, I would have inclined to the view that ownership of the rights were not so clear cut as to award injunctions to the respondent which may well have the effect of closing down the applicant’s business. I would take into account the fact that the trial is only three months away now and that I have had little in the way of financial evidence concerning a serious risk of failure of the respondents.
But the case is not brought in copyright alone. It is also brought in breach of confidence in the manner previously described. I accept the respondent’s submission that it can retain rights of confidentiality in a computer program for copyright in which may be vested in a potential defendant. Whilst Mr Johnson was not an employee of the company for very long he was a director for two years. Section 183 of the Corporations Act is in the following form:
Use of information – civil obligations
Use of information – directors, other officers and employees
(1) A person who obtains information because they are, or have been, a director or other officer or employee of a corporation must not improperly use the information to:
(a) gain an advantage for themselves or someone else; or (b) cause detriment to the corporation.
Note 1: This duty continues after the person stops being an officer or employee of the corporation.
Note 2: This subsection is a civil penalty provision (see section 1317E).
(2) A person who is involved in a contravention of subsection (1) contravenes this subsection.
Note 1: Section 79 defines involved .
Note 2: This subsection is a civil penalty provision (see section 1317E).
I am satisfied that copying the source code onto his own computer which was, in all probability, used for the purposes of creating his own competing programs and competing business constitutes a breach of section 183 by obtaining an advantage for himself or someone else (being Loan Services Australia Pty Limited) which has caused detriment to the corporation of which he was previously a director, namely MPC. I also believe that in acting in the manner in which he did Mr Johnson breached clause 13 of the employment agreement of 4 March 2003 which relates to information given or gained by him in confidence at any time whether before during or after his employment.
I am not quite so sanguine about a breach of clause 14. To my mind the restraint on “undertaking duties and responsibilities” would appear to be a restraint on what could be loosely termed “working for” those persons rather than providing them with the same type of services as was provided by the company to them. This interpretation of the provision does not mean that I should not grant injunctive relief but such relief should only be granted in the form of the restraint clause so that its true extent and effect can remain to be argued.
The respondent has submitted as a new clause 8(a) of his proposed Amended Short Minutes of Order seventy names being those persons it claims the applicant provided services to within two years immediately prior to the termination of his employment. No evidence about these people has been given (nor on an interlocutory basis would I wish it). I would not propose to make an order in the terms of the amended document.
The respondents submit that the orders requested for an affidavit and delivery up found in paragraphs 3, 4 and 7 of their draft short minutes are normal orders companion to interlocutory injunctions in intellectual property cases. See Norwich Pharmacal Co v Customs and Excise Commissioners (1974) AC 133 and Authors Workshop v Bileru Pty Ltd (1989) 88 ALR 211. I think the respondents are probably entitled to orders of this nature although I am prepared to give the applicant slightly more time than is suggested. The orders which I will make are set out prior to the commencement of these reasons for judgment. They are substantially the same as the draft short minutes annexed but I have made a further amendment to Order No 1 as well as giving the applicant further time to provide the affidavits ordered.
The interlocutory injunctions and orders are given on the basis that the first, second and third respondents deliver to the court a written undertaking as to damages in the usual form required by the Federal Court so that the injunctions will not come into effect until those undertakings are delivered.
The costs of the application for interlocutory relief will be reserved.
I certify that the preceding thirty-one (31) paragraphs are a true copy of the reasons for judgment of Raphael FM
Associate:
Date:
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