Kennedy v Gearhart United Pty Ltd - [2008] SADC 37

DISTRICT COURT OF SOUTH AUSTRALIA
(Civil: Appeal Against a Master's Decision)
KENNEDY & ANOR v GEARHART UNITED PTY LTD
[2008] SADC 37
Judgment of His Honour Judge Rice
11 April 2008
PROCEDURE
Appeal/review from the decision of a Master - refusal of an interlocutory application by defendants that paragraph 29 of the Amended Statement of Claim be dismissed or permanently stayed - defendants argued that the relief sought arose under the Patents Act 1990 (Cth) and was therefore governed by that Act such that it should be dealt with in the Federal Court.
Held: plaintiff's claims arose under the general law and the District Court was properly seized of it - appeal and application refused.
District Court Act 1991 s 43(2); District Court Rules R 3.01 and R 25.04; Patents Act 1990 (Cth) ss 15(1), 154 and 155, Schedule 1; Judiciary Act 1903 s 39B(1A)(c), referred to.
General Steel Industries Inc v Commissioner for Railways (1964) 112 CLR 125; Tringali v Stewardson Stubbs & Collett Ltd (1966) 66 SR (NSW) 335 at 344; Fancourt and Another v Mercantile Credits Limited (1983) 154 CLR 87; Kadeh v Gill & Ors (2000) 211 LSJS 88; Royal Australia Finance Ltd v Xenophou Corporation Pty Ltd SC (SA), Olsson J, Judgment No S3526, 22 July, 1992, unreported; Speedy Gantry Hire Pty Ltd v Preston Erection Pty Ltd & Anor (1998) 40 IPR 543 at 553; University of British Columbia and Another v Conor Medsystems, Inc (2006) 155 FCR 391; Headland Securities Pty Ltd and Anor v MacArthur and Anor Unreported NSWSC, 3726/96, delivered 10 April, 1997, BC9701131; Mallory Technologies Pty Ltd v 3D Global Ltd Unreported NSWSC, 4378/02, delivered 31 October, 2002, BC200206560; Aim Maintenance Ltd v Brunt SCWA, CIV 1102 of 2004, delivered 26 March, 2004, BC200401330; ACP Magazines Pty Ltd v Southdown Publications Pty Ltd SCNSW, 50130 of 2002, delivered 19 November, 2002, BC200206952, considered.

KENNEDY & ANOR v GEARHART UNITED PTY LTD
[2008] SADC 37
Introduction

This is an appeal against the decision of a Master made on 18 September, 2007. The appeal is brought pursuant to s 43(2) of the District Court Act 1991 and is by way of rehearing: 6R 292. For that reason, the parties are described as they are in the pleadings.
By Notice for Specific Directions dated 2 May, 2007, the defendants sought an order that the plaintiff’s claim in paragraph 29 of the Amended Statement of Claim that it is the owner of and entitled to the right, title and interest in all inventions, conceived or made prior to 28 October, 2002 by Mr Kennedy, including the Extreme Machining Roller Reamer (“the plaintiff’s claim”), be dismissed or permanently stayed. The defendants’ application was dismissed.
It should be noted at this stage that the defendants did not seek such an order with so much of the plaintiff’s claim as related to an alleged breach of contract, breach of fiduciary duty and/or breach of confidence.
Background
By way of a brief background, the plaintiff’s Amended Statement of Claim (“ASOC”) alleges that, in or about July, 1998, Mr J.F. Kennedy (deceased) entered into a written Invention and Confidential Information Agreement (“ICI Agreement”) in favour of the plaintiff. By an assignment clause in the ICI Agreement, the plaintiff asserts that Mr Kennedy agreed to assign to the plaintiff or its successors, the right, title and interest in an invention described as the “Extreme Machining Roller Reamer” (“EMRR”). In short, the agreement to assign related to any invention created by him throughout his employment by the plaintiff and for a period of six months after the termination of his employment. Mr Kennedy allegedly began developing an invention during this period, namely, the EMRR, and applied for patent protection. As mentioned, the plaintiff seeks a declaration or order that it is the owner of and entitled to the right, title or interest in the EMRR.
At the time of the institution of the proceedings Mr Kennedy was a defendant but, following his death in May, 2006, an order was made substituting the present first defendant.
Arguments of the parties
In seeking to have the plaintiff’s claim for a declaration dismissed or permanently stayed, the defendants argue that the proceedings and relief sought, properly characterised, are proceedings “arising under”, and are therefore governed by, the Patents Act 1990 (Cth) (“the Act”), and should be heard in the Federal Court.
The defendants argue that the concept of an “invention” derives from the Act and that the plaintiff alleges that the EMRR is an invention and is here the subject of a patent application (but not yet granted), pursuant to the Act. Further, it being a claim “arising under” the Act, it must be heard in a prescribed Court (the Act, ss 154 and 155, Schedule 1). The District Court of South Australia is not a prescribed Court. The Federal Court has jurisdiction with respect to matters “arising under” the Act (s 154). Prescribed Courts (other than the Federal Court) have a more limited jurisdiction with respect to matters “arising under” the Act (s 155).
The arguments of the defendants are examined in detail below, but in essence it is submitted that the claim should be dismissed or stayed because the District Court does not have jurisdiction to determine a claim “arising under” the Act.
By way of summary, the plaintiff argues that the defendants have incorrectly characterised the plaintiff’s claim, as well as ignoring other aspects of the alleged factual circumstances that the defendants put forward that are unaffected by any patent claim. The main point made by the plaintiff is that the plaintiff’s assignment claim does not “arise under” the Act because the Act is not a code and does not govern every treaty relating to an invention.
In essence it says that the assertions in the ASOC give rise to issues antecedent to the application of the Act that can quite properly be dealt with by the District Court of this State.
Legal principles applicable to the application of the defendants
The substance of the application of the defendants is brought pursuant to R 3.01 and R 25.04 of the District Court Rules. Relevantly those Rules provide as follows:
3.01   The Court may at any time dismiss proceedings which disclose no cause of action known to the law or can not by amendment be made to disclose such a cause of action, or which are frivolous, vexatious or an abuse of the process of the Court and may at any time grant a stay of proceedings where the justice of the case so requires.
25.04   (1)   Where a defendant wishes to obtain summary judgment in an action or for any part thereof he shall:
(a)     file his defence or affidavit in answer to the plaintiff’s affidavit;
(b)     make an application for summary judgment in the action;
(c)     file an affidavit showing why the plaintiff’s claim cannot succeed or cannot succeed in this Court as the case may be on any possible view of the facts or the law.
(2)     On the hearing of the application the Court may if it is satisfied that the defendant’s contentions are correct enter judgment for the defendant, stay the action or make any other order which the justice of the case may require or treat the application as an application for directions.
The scope and operation of these Rules was important to the resolution of the initial application and is important to the decision on the appeal or re-hearing.
The powers of the Court to dismiss or stay proceedings are obviously very far-reaching. The power to dismiss should only be used with great caution and in clear and obvious cases: General Steel Industries Inc v Commissioner for Railways (1964) 112 CLR 125.
The power of the Court to stay proceedings should not be imposed lightly: Tringali v Stewardson Stubbs & Collett Ltd (1966) 66 SR (NSW) 335 at 344.
Similarly, the power to order summary judgment pursuant to R 25.04 needs to be approached with caution. There are a number of authorities that refer to the relevant principles. In Fancourt and Another v Mercantile Credits Limited (1983) 154 CLR 87, the High Court said this (at 99):
The power to order summary or final judgment is one that should be exercised with great care and should never be exercised unless it is clear that there is no real question to be tried: see Clarke v Union Bank of Australia Ltd (1917) 23 CLR 5; Jones v Stone [1894] AC 122; Jacobs v Booth’s Distillery Co (1901) 85 LT 262. In our view, it is not possible to say without doubt, on the whole of the material, that there is no real question to be tried....
In Kadeh v Gill & Ors (2000) 211 LSJS 88, Doyle CJ (Williams and Wicks JJ concurring) explained the test in these words (at paras 27-29):
In South Australia a defendant as well as a plaintiff can apply for summary judgment; see R 25.04 of the District Court Rules 1992 (SA). But whether the application for summary judgment is made by a plaintiff or by a defendant, the power to enter summary judgment “should be exercised with great care and should never be exercised unless it is clear that there is no real question to be tried”: Fancourt & Anor v Mercantile Credits Ltd (1983-1984) 154 CLR 87 at 99. Whether the questions to be decided are questions of law or questions of fact, the applicant must demonstrate that the “action should not be permitted to go to trial in the ordinary way because it was apparent that it must fail”: Webster & Anor v Lampard (1992-1993) 177 CLR 598 at 602 Mason CJ, Deane & Dawson JJ.
The test has also been expressed in this fashion, namely, that the defendants must show that the plaintiff’s claim cannot succeed on any possible view of the facts on the law, that is, there is no real question to be tried: Royal Australia Finance Ltd v Xenophou Corporation Pty Ltd (SC (SA), Olsson J, Judgment No S3526, 22 July, 1992, unreported).
Characterisation of the plaintiff’s claim
More needs to be said about the plaintiff’s claim against additional pertinent and background facts.
Referring to the ASOC, the plaintiff carries on the business of manufacturing and supplying oilfield parts and, in particular, roller reamers, to customers in the resources industry both nationally and internationally. Referring to an affidavit in support of the application, a rotary roller reamer is a piece of equipment used above a drill bit for reaming, and thereby stabilising, the side walls of a bore hole.
Mr J.F. Kennedy, now deceased, (“Kennedy”) was a director and later both a director and employee of the plaintiff. Kennedy was also the sole director of Extreme Machining Pty Ltd (“Extreme Machining”).
The plaintiff’s principal product is a roller reamer marketed as the “Redback Roller Reamer”. The plaintiff is the proprietor of a patent in respect of that roller reamer and Kennedy is listed as the sole inventor
The plaintiff is and was, at all material times, a fully owned subsidiary of Gearhart Australia Ltd. In or about July, 1998, control of Gearhart Australia Ltd passed to Scientific Services Ltd (“SSL”). On 1 January, 2002, control of SSL passed to SGS Australia Pty Ltd. In early 1997, Kennedy had entered into an employment contract with Gearhart Australia Ltd and thereby the plaintiff.
Upon the change of control effected by SSL’s takeover of Gearhart Australia Ltd in July, 1998, and in consideration of Gearhart continuing his employment, Kennedy entered into the ICI Agreement to which reference has previously been made. Relevantly that agreement assigned to the plaintiff the right, title and interest in the inventions which related to, or arose out of, any developments, services or products of, or pertaining to, the business of the plaintiff for a period of six months after termination of his employment.
On 8 April, 2002, Kennedy resigned from his employment with the plaintiff, with that resignation effective on 28 April, 2002. Pursuant to the ICI Agreement, Kennedy assigned to the plaintiff the right, title and interest in any inventions made or conceived up to 28 October, 2002.
On 4 January, 2002, Extreme Machining was incorporated. As mentioned, Kennedy was the sole director.
From about mid-2003, Extreme Machining commenced the manufacture of its own brand of roller reamer known as the Extreme Machine Roller Reamer (“EMRR”).
Extreme Machining has lodged various Patent Applications in relation to the EMRR on 7 November, 2002 and 13 February, 2003, particularly an International Patent Application with J.F. Kennedy, a M.J. Kennedy and a M.D. Slattery as inventors (in that order).
In essence, the plaintiff alleges that the EMRR was an invention made or conceived by Kennedy during his employment with the plaintiff or made or conceived prior to 28 October, 2002 and falls within the ICI Agreement.
Consequent upon those factual assertions, the plaintiff says that it is the owner of, and entitled to, the right, title and interest in the EMRR. Further, the plaintiff alleges a breach of contract by Kennedy, plus breach of confidence and breach of fiduciary duty, and claims damages.
Importantly, the plaintiff seeks a declaration that the ownership right, title and interest in all inventions, conceived or made prior to 28 October, 2002 by Kennedy, including the EMRR, are vested in it.
Quite apart from the defendants’ argument under the Act, they also assert that the ICI Agreement only applied for six months after the takeover of the plaintiff by SSL; that the EMRR was not an invention within the ICI Agreement; and that the ICI Agreement is void and/or unenforceable as an unreasonable restraint of trade or penalty.
Is the plaintiff’s assignment claim a matter “arising under” the Act?
Bearing in mind the claim for relief sought by the plaintiff, the defendants submit that it is a claim arising under the Act and is only able to be dealt with by a prescribed Court within the meaning of that Act. Such a Court does not include the District Court. Much depends upon the characterisation of the various aspects of the claim and the scope of the Act.
Section 15(1) of the Act provides as follows:
15 Who may be granted a patent?
(1)Subject to this Act, a patent for an invention may only be granted to a person who:
(a)is the inventor; or
(b)would, on the grant of a patent for the invention, be entitled to have the patent assigned to the person; or
(c)derives title to the invention from the inventor or a person mentioned in paragraph (b); or
(d)is the legal representative of a deceased person mentioned in paragraph (a), (b) or (c).
Schedule 1 refers to an eligible person as a person to whom a patent for an invention may be granted under section 15. Any person may apply for a patent (s 29(1)), but only an eligible person can receive a grant.
It was submitted that the jurisdiction of the Federal Court derived from the Judiciary Act 1903, s 39B(1A)(c) being a “matter...arising under any laws made by the Parliament”. Here the defendants point to the plaintiff’s allegation that the EMRR is an invention and, because inventions that may be the subject of a patent application (as here) depend upon the Act, this is necessarily a matter arising under the Act: Speedy Gantry Hire Pty Ltd v Preston Erection Pty Ltd & Anor (1998) 40 IPR 543 at 553.
The defendants also placed reliance upon another authority for that proposition, namely, University of British Columbia and Another v Conor Medsystems, Inc (2006) 155 FCR 391. The decision of the majority, however, (Emmett and Stone JJ at para 38) supports the plaintiff’s approach that its claim can be proved under the general law without reference to the Act:
There may be doubt as to whether an invention is itself a species of property. However, whether it is properly to be characterised as property or not is irrelevant. Section 15(1)(b) clearly contemplates the possibility of some juridical act relating to the grant of a patent prior to the grant, which has the consequence that, upon grant, a person would be entitled to an assignment of the patent. Section 15(1) also assumes that, under the general law, a person may demonstrate title to an invention and that that title is capable of disposition or alienation by the inventor to another person, such that that other person can be said to derive title to the invention from the inventor. That suggests that an invention is to be regarded as a form of property capable of assignment, alienation or disposition. (My emphasis.)
This is not the only authority that supports such an approach. In Headland Securities Pty Ltd and Anor v MacArthur and Anor (unreported NSWSC, 3726/96, delivered 10 April, 1997, BC9701131), Hodgson J, sitting in the Equity Division, considered a claim by the plaintiffs to be entitled to a percentage interest in a filed patent application in relation to an invention known as a contra-rotating propeller unit. Mr MacArthur, the first defendant, claimed to be entitled to a percentage interest in the patent application.
By their claim, the plaintiffs sought orders restraining Mr MacArthur from representing that he was authorised to negotiate for the exploitation of the invention and from actually undertaking any such negotiations. Further, the plaintiffs also sought a declaration that Mr McArthur held any interest in the patent application on trust for the second defendant.
By a cross-claim, Mr MacArthur claimed to a percentage interest in the invention and rectification of a document that was internally inconsistent whereby the second defendant executed an assignment, for consideration, of an interest in the subject patent application and patent.
The Supreme Court proceeded to hear the matter and made findings and determinations relating to interests in the patent application.
In Mallory Technologies Pty Ltd v 3D Global Ltd (unreported NSWSC, 4378/02, delivered 31 October, 2002, BC200206560), Palmer J was concerned with a case where the plaintiff sought declarations that the first defendant was estopped from appointing the second defendant as receiver of certain patents owned by the plaintiff in purported exercise of a power conferred on the first defendant by a Deed of Charge.
The plaintiff had bought certain patents from the first defendant pursuant to a Patent Sale Agreement. The purchase price was payable by quarterly instalments. The payment of the purchase price was secured by a Deed of Charge whereby the plaintiff charges the patents themselves as security. The charge provided that, if the plaintiff failed to pay any of the purchase price instalments under the agreement when they were due, then, at the first defendant’s option, without notice, all of the balance of the purchase price became payable.
On the facts as found, Palmer J found that the plaintiff had established an entitlement to the relief sought. His Honour found that the first defendant had granted an extension of time for payment of one of the instalments and was therefore estopped from exercising its rights under the Patent Sale Agreement and Deed of Charge, until the extended time for payment had expired.
I refer to two other cases in slightly different contexts: Aim Maintenance Ltd v Brunt (SCWA, CIV 1102 of 2004, delivered 26 March, 2004, BC200401330) and ACP Magazines Pty Ltd v Southdown Publications Pty Ltd (SCNSW, 50130 of 2002, delivered 19 November, 2002, BC200206952). I accept the plaintiff’s submission in this regard that these cases, particularly the first two, show that intellectual property rights have been determined solely by reference to applicable common law and/or equitable principles and without reference to any statutory framework.
At this juncture it is important to reflect on what it is that the plaintiff claims and the basis for it.

The plaintiff claims to be entitled to the declaration to which previous reference has been made, based upon issues it would seek to prove at trial. First, that there was an ICI Agreement which purported to assign the right, title and interest in any inventions made or conceived by Kennedy within six months after termination of his employment.
The defendants answer that portion of the claim by asserting that Kennedy’s employment was terminated by reason of the takeover of the plaintiff by SSL in about July, 1998 and that the ICI Agreement applied for the next six months. The existence and dates of operation of the ICI Agreement are unrelated to the Act.
Secondly, whether the EMRR is within the terms of the ICI Agreement depends upon the terms of the agreement and not the Act.
Thirdly, whether the ICI Agreement is void and/or unenforceable as an unreasonable restraint of trade or penalty, involves consideration of its terms in the circumstances.
Obviously the facts involve an invention and a patent application has been lodged (but not granted), but the factual foundation that provides the basis of the declaration sought is a precursor to the application of the Act. If the plaintiff were to fail on those points, the claim would fail, without any application of the provisions of the Act. The involvement of a possible invention and patent are incidental to the rights sought to be enforced. Those rights do not depend upon the Act for their existence.
In short, this is not a claim “arising under” the Patents Act. This is not one of those cases where the granting of rights and privileges depends entirely upon the statute (the Patents Act) such that the special tribunal should be allowed to operate. I accept the plaintiff’s submission that the Act is not a code. The Act does not govern every treaty, however incidental, relating to an invention. On the pleadings, an assertion (giving rise to a declaration if accepted) that the plaintiff is the owner and entitled to the right, title and interest in the EMRR is a contractual claim and dependent upon the ICI Agreement. As discussed above, the entitlement to a declaration arises under the general law without reference to the Act. There is no doubt in my mind that the plaintiff’s claim is properly justiciable in the District Court.
Discretionary considerations
Despite the view expressed, it would be open to this Court to stay the proceedings where the justice of the case required it. The power to so order is a wide power which is not “confined to closed categories of cases...it is a power which is exercisable in any situation where the requirement of justice demands it. It should not be granted lightly”: Tringali v Stewardson Stubbs & Collett Ltd (supra).
To my mind the District Court is properly seized of all aspects of the plaintiff’s claim because they are clearly within jurisdiction. As observed above, this is not one of those cases where the granting of rights and privileges is dependent entirely upon the Patents Act. These are rights independent of the Act.
I decline to stay the proceedings.
Summary dismissal/judgment
The principles to be applied are discussed above. Applying those principles, there is no proper basis upon which it could be said that the plaintiff’s claim cannot succeed on any possible view of the facts or law. At this interlocutory stage, there is clearly a real question to be tried. Even if para 29 was struck out, other aspects of the plaintiff’s claim would remain.
Order
The appeal is dismissed. To the extent that the matter is a re-hearing, I dismiss the application.
I will hear the parties on the question of costs.