Lunkenheimer Company Inc v Carson

[2002] VSC 253

IN THE SUPREME COURT OF VICTORIA Not Restricted

AT MELBOURNE

COMMERCIAL AND EQUITY DIVISION

No. 5828 of 2002

THE LUNKENHEIMER COMPANY INC	Plaintiff
v
IAN MENZIES CARSON and CRAIG DAVID CROSBIE (IN THEIR CAPACITY AS ADMINISTRATORS OF JOHN VALVES PTY LTD (ACN 005 061 674) and OTHERS	Defendants

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JUDGE:	Byrne J
WHERE HELD:	Melbourne
DATE OF HEARING:	21 June 2002
DATE OF JUDGMENT:	28 June 2002
CASE MAY BE CITED AS:	Lunkenheimer Company Inc v Carson
MEDIUM NEUTRAL CITATION:	[2002] VSC 253

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Practice and procedure – interlocutory injunction – breach of confidential information – security for undertaking as to damages.

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APPEARANCES:	Counsel	Solicitors
For the Plaintiff	Mr T. Hale SC with Mr M.S. Goldblatt	MD Nikolaides & Co
For the Defendant	Mr D.N. Caine with Ms H. Rofe	Gadens Lawyers

HIS HONOUR:

1. This litigation arises out of the determination of a longstanding licence arrangement between the plaintiff, The Lunkenheimer Company Inc (“Lunkenheimer”), and the fourthnamed defendant, John Valves Pty Ltd (in liquidation) (“John Valves”).  Under the then current licence agreement dated 7 April 1994, Lunkenheimer granted to John Valves the exclusive worldwide right to use “Lunkenheimer’s techniques, know-how, trade secrets, designs and specification along with any technical information received from Lunkenheimer hereunder in the sale of slurry valves worldwide and the manufacture of slurry valves at Licensee’s facilities in Ballarat, Australia”.  Slurry valves are a particular kind of valve used in the alumina industry.  These valves were part only of the products handled by each of the parties.  The 1994 licence agreement was for 10 years with automatic five years extensions subject to written notice by either party not to extend.  In late 2001 John Valves found itself in financial difficulties;  external administrators were appointed on 19 December 2001 and on 7 May 2002 the company went into liquidation.  It is common ground that on 5 April 2002, if not earlier, the 1994 licence was terminated. 

1. The administrators and later, the liquidator, have offered the assets of John Valves for sale.  Part of the subject matter of this sale are certain plans and designs and certain patterns and moulds which have been used by John Valves in the manufacture of Lunkenheimer slurry valves.  The relationship between the two companies dated from 1964 when the first licence agreement was granted by Lunkenheimer for an exclusive licence within Australia.  This Australia-wide licence was renewed in 1969 and, again, on a worldwide basis, in 1994.

1. Before the Court is an application brought by Lunkenheimer by summons filed on 31 May 2002 seeking interlocutory orders restraining the liquidators and John Valves from selling or otherwise disposing of certain assets in respect of which Lunkenheimer asserts rights.  In argument before me these assets fell into three broad descriptions:

(1)       plans, specifications and the like provided to John Valves by Lunkenheimer;

(2)plans, specifications and the like prepared by John Valves in the process of manufacturing the slurry valves in accordance with its customers’ requirements.  It seems that these documents record designs of Lunkenheimer slurry valves as modified by John Valves.  I shall refer to them as “the design documentation”;

(3)patterns, core boxes and other tooling manufactured by John Valves for use in making the Lunkenheimer slurry valves as modified.  I shall refer to them as “the tools”.

1. The first category causes no present difficulty.  John Valves has, on 31 May 2002, made them available to Lunkenheimer for inspection and collection.  It asserts no rights adverse to Lunkenheimer in respect of these. 

1. With respect to the second and third categories, Lunkenheimer asserts, and the defendants deny, rights in respect of them arising in contract, in equity for the protection of confidential information, in copyright and for an apprehended breach of the Trade Practices Act 1974, ss. 52 and 53. Even for the limited purposes of an application of this kind, I put to one side the two last-mentioned bases. There is no evidence that John Valves threatens to engage in misleading or deceptive conduct in connection with Lunkenheimer valves or the Lunkenheimer name. There is no evidence that Lunkenheimer owns copyright in the disputed things.

1. A large quantity of affidavit evidence has been presented for and against the Lunkenheimer application.  No deponent was cross-examined.  In many important respects there is direct conflict between the evidence of the various witnesses.  I was invited by counsel for John Valves, for various reasons, to prefer the evidence of its witnesses, or at least to acknowledge that this evidence was of greater weight than that of the Lunkenheimer witnesses so that I should conclude that the Lunkenheimer case was very weak.  It is no part of my function to undertake the former task and I do not do so.  I acknowledge that these conflicts exist and that they may be resolved at trial.  My task is to determine whether there is a serious issue to be tried that Lunkenheimer is entitled to the rights which it asserts. 

1. I am satisfied that there is a serious triable issue that the modifications made by John Valves to the Lunkenheimer designs which it received from Lunkenheimer in 1964 or thereafter were modifications which were submitted to Lunkenheimer pursuant to cl. 7.1 of the licence agreement and approved by it.  I am satisfied to the same standard that the design documentation and the tools represent a depiction of and the product of information which came into the possession of John Valves pursuant to or as a result of or in the performance of the licence agreement and is, therefore, to be kept confidential in accordance with cl. 13.3.  I am also satisfied to the same standard that this design documentation and tools contain or are the product of confidential information which John Valves acquired from Lunkenheimer or itself developed using such information and that their threatened sale is unauthorised and may be detrimental to Lunkenheimer.  Accordingly, there is a serious issue to be tried that the sale by John Valves would amount to an actionable breach of confidence.

1. It was submitted that, even so, the Court should not interfere with the proposed disposal by John Valves of the design documentation and the tools on the ground that the information was no longer confidential.  There was evidence that a competent engineer or pattern-maker could reverse engineer the design from Lunkenheimer slurry valves which John Valves had sold to its customers.  In a sense, therefore, the information was in the public domain.  The design, I should add, did not, on the evidence before me, enjoy the protection of the law relating to patents or registered designs.  I was referred to authorities in this regard including British Franco Electric Pty Ltd v Dowling Plastics Pty Ltd[1].  It is, however, clear that his Honour was there concerned with final orders rather than interlocutory restraint such as here.  The law, as his Honour observed, will act to prevent a competitor getting an unfair start over the person entitled to the information.  Let it be assumed that a person such as the likely purchaser of the John Valves assets could, if they were so minded, reverse engineer the Lunkenheimer slurry valves or the John Valves’ modified Lunkenheimer slurry valves.  Let it be assumed also, without my expressing any view on this, that such a person might lawfully do so and might use the product in competition with Lunkenheimer.  This would involve delay, cost and, perhaps, even the risk of failure if the tolerances were not correct.  Those disbenefits might be avoided if the purchaser had the design documentation and the tools.  Doubtless it is for this reason that the purchasers are apparently willing to pay substantial sums to John Valves for them.  The law should not, on an interlocutory basis at least, permit a purchaser to obtain this benefit in circumstances such as the present.  I conclude that there is a serious issue to be tried as to the rights of Lunkenheimer in the design documentation and the tools.

   [1][1981] 1 NSWLR 448 at 450-1, per Wootten J.

1. On the balance of convenience, it was put on behalf of Lunkenheimer that, if the design documentation and the tools were made available to a competitor, this would cause it significant irreversible detriment.  The competitor would be in a favoured position in bidding for contracts.  If it should hereafter appear that Lunkenheimer is entitled to final injunctive relief against the defendants, this relief would be rendered ineffective by the irrevocable disclosure which would have occurred.  Against this, it was put that John Valves would suffer loss if it could not now include the design documentation and the tools in its sale, for the price would thereby be diminished.  Accepting this to be the case, in the event that Lunkenheimer should fail at trial, this loss to John Valves is compensable by the activation of an effective indemnity as to damages to be given by Lunkenheimer.  Counsel for the defendants further pointed out that, on the evidence, it does not appear that the refusal of relief would prejudice Lunkenheimer in bidding, by itself or with another company, for any specific contract.  To my mind this is not fatal to the Lunkenheimer application.  What is here in issue is the impact, in the period until trial, on Lunkenheimer’s worldwide commercial activities with respect to its slurry valves.  I conclude that the balance of convenience favours Lunkenheimer. 

1. Next, it was put that the orders sought were too wide inasmuch as they went further than was necessary or appropriate to protect the rights which Lunkenheimer hopes to establish at trial.  The relief sought in the summons has been modified in the light of this criticism so that it now reads:

“2.Until the trial determination of this proceeding or further order, each of the defendants, whether by themselves or by their employees, agents, attorneys or otherwise, be restrained:

(a)from selling, transferring, dealing with or encumbering, parting with possession or otherwise disseminating any of the drawings, plans, specifications, bills of materials, design specifications, material specifications, valve test procedure records whether in hard copy or electronic format relating to Lunkenheimer valves produced or manufactured by the fourth defendant;

(b)from selling, transferring, dealing with, encumbering, parting with possession or otherwise disseminating any of the casting patterns, core boxes used for the manufacture of Lunkenheimer slurry valves or valve components identical to or substantially similar thereto and including all tooling used solely for the manufacture of Lunkenheimer valves or Lunkenheimer valve components or valves or components identical or substantially similar thereto;

(c)from producing, manufacturing, constructing, assembling, selling or offering to sell any valve, valve components, spare parts of Lunkenheimer valves or any valves produced from Lunkenheimer drawings, plans or specifications;

(d)from servicing, re-engineering or repairing any Lunkenheimer valves or Lunkenheimer valve products.”

1. It was accepted in argument that John Valves might continue to fulfil existing orders for providing to its customers Lunkenheimer valves and for servicing and maintaining these valves.

1. Further mandatory orders were sought to compel John Valves to disclose the identity of persons to whom it had released details of the design documentation.

1. Subject to argument as to detail and subject to the matters which follow, I am satisfied that this relief might be granted.

1. This leaves the final point of which counsel for the defendants made much.  It was that Lunkenheimer is a foreign company with no assets within the reach of this Court and perhaps no tangible assets at all.  This means that the usual undertaking as to damages is, for practical purposes, ineffective.  Counsel for Lunkenheimer sought to meet this by proffering a similar undertaking by its ultimate holding company, Star-Let Corporation Ltd which has real estate in the United States with a current market value of US$17.5M.  This, however, does not overcome the legitimate concern of the defendants.  This company is not a party to this litigation and is not present within the jurisdiction nor are its assets available within the jurisdiction.

1. I will, therefore, make the orders sought by Lunkenheimer but only if sufficient available security is forthcoming.  Whether this be by bank guarantee or otherwise is not for me to say.  It must be accessible in the event that the usual undertaking as to damages is called upon and sufficient to cover the diminution in the price or other loss for which the defendants might reasonably expect to obtain an order in terms of that undertaking. 

1. I will hear counsel further as to this matter and, if it be satisfactorily resolved, as to the precise terms of the orders required to give effect to these conclusions.

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