Maitre D Marketing Pty Ltd v Patties Food Ltd
[2016] VCC 1782
•28 November 2016
| IN THE COUNTY COURT OF VICTORIA | Revised Not Restricted Suitable for Publication |
AT MELBOURNE
COMMERCIAL DIVISON
GENERAL LIST
Case No. CI-16-03054
| MAITRE D MARKETING PTY LTD | Plaintiff |
| v. | |
| PATTIES FOOD LTD | Defendant |
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JUDGE: | His Honour Judge Anderson | |
WHERE HELD: | Melbourne | |
DATE OF HEARING: | 24 November 2016 | |
DATE OF JUDGMENT: | 28 November 2016 | |
CASE MAY BE CITED AS: | Maitre D Marketing Pty Ltd v. Patties Food Ltd | |
MEDIUM NEUTRAL CITATION: | [2016] VCC 1782 | |
REASONS FOR DECISION
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Catchwords: Practice and procedure – Application for security of costs – Complex litigation relating to misuse of “trade secrets” – Statement of claim contained imprecise allegations with limited particularisation – Discretionary factors otherwise favoured an order for limited security whilst permitting the plaintiff to pursue its claim – Offer by directors of the plaintiff to pay any costs order in favour of the defendant up to the sum of $100,000 – Security ordered limited to $100,000 to be either secured over the directors’ family home or provided by four instalments prior to trial.
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APPEARANCES: | Counsel | Solicitors |
| For the Plaintiff | Mr W. Smith of Counsel | Fernandez & Johnson Lawyers |
| For the Defendant | Mr M. McKillop of Counsel | Minter Ellison |
HIS HONOUR:
1Richard Grant and Rhonda Fawcett have pursued their commercial interest in gluten-free baking since the 1980’s. Maitre D Marketing Pty Ltd (“Maitre D”) has since 1985 been the vehicle for their commercial pursuits. It acts as trustee for a family trust and Mr Grant and Ms Fawcett are the sole directors and shareholders.
2Patties Food Ltd (“Patties”) is a very substantial, established manufacturer and supplier of foodstuffs, particularly pastry products, to supermarkets and other retailers. In about 2006 it became interested in Maitre D’s gluten-free recipes.
3In November 2007, Maitre D and Patties entered into a licencing agreement for the manufacture and sale of gluten-free products. In October 2011, the licencing arrangement between the parties expired. During the course of the relationship, Maitre D had supplied information to Patties in the nature of recipes, baking techniques and processes which were considered “trade secrets”.
4Maitre D alleges that after the expiry of the licencing agreement, Patties continued to use Maitre D’s recipes and other trade secrets and to supply the same or similar products to retailers. Maitre D commenced an action by writ dated 13 July 2016, with an attached statement of claim, and sought an account of profits and damages.
5A defence was filed on 29 August 2016 which denied that, after the expiry of the licencing agreement, Patties has used Maitre D’s recipes or other trade secrets. Patties said that it had been experiencing continuing problems with the Maitre D recipes which caused it to conduct its own investigations and research and to develop new recipes which were not derived from those of Maitre D.
6By summons dated 27 September 2016, Patties sought security for its costs of the proceeding. On 3 November 2016, at the request and with the consent of both parties, His Honour Judge Smith ordered that –
“1. The plaintiff give security for the costs of the defendant in defending the proceeding in the amount of $100,000 to be provided by a joint and several personal undertaking from Mr Richard Grant and Ms Rhonda Fawcett, to be secured by a charge on the property known as 88 Georges Road Beaconsfield Upper, in the State of Victoria, more particularly identified in certificate of title volume 9916 folio 737, in a form acceptable to the defendant.
2.The proceeding is stayed until such time as the undertaking and charge is provided by the plaintiff in accordance with order 1”.
7Since that time, the parties have exchanged drafts of a “charge” in accordance with the order. They failed to reach agreement on the form of the security and returned to court. I indicated to the parties that I was not prepared to adjudicate upon what was an appropriate security document in circumstances where the parties had themselves proposed the order and without any deliberation by the court.
8In the material filed, and from the limited submissions made by counsel on the application, it appears that the contentions of the parties on this issue were:
a.by Patties, that the security offered by Maitre D was not in an acceptable form as it did not allow Patties to file the security document over the title to the property, which it was said was necessary to protect it from future argument about the priority of security interests which were only notified by the lodging of a caveat. Further, without an express power of sale, in the event of default by Maitre D, Patties would incur further expense in order for it to seek recovery on the basis of the security document;
b.by Maitre D, that:
i.the Court should enforce a consent order, like any other order, by giving an “objective” construction to the terms of the order;
ii.Patties could only not find the security document “acceptable”, if the issue was one of “form” and not a matter of “substance”;
iii.Patties were seeking to maintain that a “mortgage”, and not simply a “charge”, was the only form of security acceptable to it;
iv.there was a “lack of trust” between the parties.
9In the event, I heard the application for security and determined that security should be provided in the total sum of $100,000 to be provided by Mr Grant and Ms Fawcett, as they had given an undertaking that they would do. I did provide, however, that Maitre D could chose whether to provide the security for costs either in the form of the security document which Patties considered was acceptable to it, or by four payments of $25,000 at different times prior to the commencement of the trial.
10I considered that the course of setting aside the consent order and rehearing the application was appropriate for the following reasons:
a.the order made had proved almost immediately to be unworkable; the parties who had drafted the order contending for different meanings of the words “charge”, “security”, “form” and “acceptable”;
b.it appeared that the court was being asked to settle the appropriate terms of a security document;
c.to determine the issue the parties raised was likely to take as long, and perhaps be more problematic, than hearing the initial application;
d.the parties had not demonstrated the level of cooperation which the Civil Procedure Act demanded of them;
e.the reasons advanced by Maitre D’s counsel for wanting the determination on the “substance” of the security document, did not seem compelling, particularly the reference to “lack of trust” between the parties;
f.no prejudice to either party would seem to result from the court returning the parties to the position they had been on 3 November when the consent orders were sought, and by requiring the application to be argued.
11Upon the hearing of the application, there was no issue of the jurisdictional requirements for the application. Maitre D opposed the order on the basis that there were discretionary matters which meant that no order for security should be made. Further, it was said that the quantum of the security sought was excessive.
12I considered a number of discretionary matters which counsel articulated on behalf of their respective clients in comprehensive written and oral submissions. At the conclusion of argument, I made orders for the provision of security and, with further assistance from counsel, directions to advance the proceeding towards a trial. I now provide reasons for my decision.
Discretionary Matters
13I propose to deal briefly with the discretionary matters raised in counsel’s submissions. Many matters were relevant including:
a.the strength of Maitre D’s claim;
b.whether its claim would be stultified or frustrated by an order for security;
c.Patties had voluntarily dealt with Maitre D with full knowledge of its financial position;
d.whether Patties had used the application oppressively;
e.the relevance of Patties’ corporate size and position;
f.the personal undertaking offered by Mr Grant and Ms Fawcett;
g.whether Maitre D’s impecuniosity was caused by Patties.
14The strength of the claim: I found this asect a very difficult matter to consider. The statement of claim attached to the writ is essentially a “bare bones” pleading. The critical allegations of terms of the agreement relied upon, breach of the terms and the damages alleged to flow from the breaches are pleaded with little precision or detail.
15Two terms are pleaded, an express term of “non-disclosure” of “trade secrets” arising from a clause in the written licence agreement. A second term that Patties was “restrained from using the trade secrets other than under licence” is alleged to arise by implication from the need to give business efficacy to the agreement. This allegation is denied.
16In the course of argument Patties’ counsel, Mr Smith, submitted that the alleged breach arising from the “sale” of products by Patties after the expiry of the licence agreement, was a breach of a provision of the agreement which prevented Patties, after the agreement expired, selling products manufactured in accordance with the agreement,. This provision is not presently pleaded and it is not clear whether it is said to arise expressly or by implication.
17I specifically raise these matters, not because I consider the pleading, or lack of pleading of the last matter, affects the strength of the plaintiff’s case, but rather to indicate that further consideration needs to be given to this aspect of the pleading.
18The pleading of the “breach” of agreement is more critical. Paragraph 13 alleges that Patties “disclosed the trade secrets to employees for the purpose of developing new recipes without the authorisation of [Maitre D]”. “Trade secrets” had earlier been defined as including “recipes”, “formulations” and “processes and methodologies”.
19It is alleged that Patties both continued to sell the gluten-free products which used Maitre D recipes, and developed other products for sale which involved a “modification” of, or were “derived from” or were “developed using” Maitre D’s trade secrets. There are at least three significant issues which arise from these allegations:
a.Specifically, what “trade secrets” of Maitre D were used;
b.how were those “trade secrets” reflected in the offending products sold by Patties;
c.how the breach was discovered by Maitre D and the investigations that were undertaken at that time and which might now be required in preparation of the case for trial.
20Mr Smith submitted that the matter might be easily established by simply comparing the Maitre D recipes used by Patties to develop the products it sold during the period of the licencing agreement with the new recipes developed by Patties for the products which were later sold. I suspect that this issue will not be so easily resolved.
21Both Mr Grant and Ms Fawcett have sworn affidavits in opposition to the application for security for costs. Mr Grant’s affidavit provides the following evidence of his observations after the expiry of the licence agreement:
“35. After the end of the licence period on 31 October 2011, until about July 2012, I observed that Patties were selling the exact same gluten-free products at supermarkets with the same packaging.
36.After about July 2012, I observed that Patties were selling extremely similar gluten-free products at supermarkets with slight changes to the packaging. They were selling the exact same six products: meat pies, sausage rolls, veggie rolls, pizza rolls, white bread, Lamingtons. There were no new products. They were a little bit different in taste but they were the same product.
37.I observed these products for sale in supermarkets until about October 2014”.
22It is not clear, however, what was the extent of Mr Grant’s observations during this period and whether investigations were carried out by Maitre D, or on its behalf, other than the “tasting” of some “new” product by Mr Grant. I was informed by its counsel that Patties no longer manufactures gluten-free products. It is not clear when production ceased but it may be, as suggested by Mr Grant’s affidavit, that it was in about October 2014.
23If this be the case, it is likely that there will be a significant dispute in the case concerning the nature of the “new” products developed by Patties in and after 2011 particularly as compared with the Maitre D products. It is unlikely that any of the older products are presently in existence, which is likely to make comparisons difficult.
24The issues raised by Patties by its defence as the reasons why it did not continue with the Maitre D products but developed new products, related to:
a.the “labour-intensive” nature of the production of the Maitre D products;
b.the “wastage” from manufacturing those products;
c.the degradation of the product when frozen for storage;
d.the stability of the product and the maintenance of its appearance and quality;
e.the taste and texture of the product.
25These matters will require substantial refinement in the pleadings. At present, the issues are barely articulated. As a consequence, it is almost impossible at present to make any real assessment of the strength of Maitre D’s case or of Patties’ defence.
26Similar considerations apply in relation to the losses claimed by Maitre D. It seeks an “account of profits” of the sales by Patties of products manufactured using Maitre D’s trade secrets. Other losses are referred to in the defence, but are not reflected in the payer for relief except by an unspecified claim for damages.
27In Mr Grant’s affidavit, he suggests Maitre D’s claim “is about $4.5 million”. This is based on a profit margin of 33% on estimated sales of the relevant gluten-free products by Patties of $4 to $5 million per year between October 2011 and October 2014. An alternative calculation based on estimated sales of the separate products showed “an annual profit of $4,477,200 per year”, and much higher figures “over three years”.
28The nature of these estimates indicate that much further work needs to be done before the financial parameters of the claim can be assessed. Patties’ counsel, Mr McKillop, submitted that regard would need to be had to the provisions in the licence agreements relating to the calculation of Maitre D’s royalty entitlements from relevant sales, which were limited to between 3.75% and 4.75%.
29Notwithstanding these specific comments about the present state of the pleadings, and having regard to the general allegations made by Maitre D (continued production of similar products after the termination of the parties’ relationship), I consider that Maitre D should not be prevented from at least having the opportunity of proceeding with its claim to the stage where it can be determined whether it has been able to articulate an appropriately particularised claim.
30The claim will be stultified: The fact that orders were made by consent on 3 November 2016, and I have made orders with options open to Maitre D to provide security, indicates that this is not a significant issue.
31Mr McKillop did not seek security in a sum greater than $100,000, notwithstanding the cost consultant’s estimate of Patties’ recoverable costs as $224,488.22. Under the orders I have made, Maitre D can provide security for costs in the form of the security document which Patties found “acceptable”. I have referred to Maitre D’s objections to that option. In the absence of more specific concerns, I consider that it is an option which would allow the action to proceed, without compromising the continued occupation by Mr Grant and Ms Fawcett of their family home.
32Alternatively, the sum of $100,000 can be paid over the next 10 or 11 months with one installment of $25,000 early next year and further payments at significant stages in the litigation; after completion of preliminary discovery and the filing of an amended statement of claim, after the completion of a mediation and shortly prior to the trial commencing.
33I consider that limiting the recoverable costs by Patties from Mr Grant and Ms Fawcett to $100,000 will, hopefully, ensure that the proceeding is conducted expeditiously and not oppressively by Patties. If the estimate of $224,488.22 by the costs consultant is accurate, and I consider it is not unduly excessive despite what Mr Smith suggested, then it is likely that Patties’ actual costs will be substantially more than the estimate on a standard basis. Its potential recovery, if successful in the litigation, is likely to be limited to the sum of $100,000.
34Patties voluntarily contracted with Maitre D: There is evidence from the company’s accountant and from Mr Grant that Patties were always aware of the status of Maitre D as a trustee and the nature of its financial position, with virtually no assets. Patties chose to deal with the company and should not be able to complain that it now must fund its own costs of litigation brought against it for its own alleged breaches of the licence agreement.
35In addition, the evidence of Mr Grant is that, as a condition of Maitre D entering into the licence agreement, Patties required Maitre D to effect the closure of two franchises – in Mount Waverley and Greensborough – and as a consequence its bakery in Berwick. This resulted in a loss of income of $158,000 per annum from the closure of the two franchises and $139,000 per annum from the bakery. This meant that the financial position of Maitre D and of Mr Grant and Ms Fawcett was “then reliant on the success of the venture with Patties”.
36Whilst I consider that this matter is of particular importance in this case, I do not consider it should be decisive in determining whether any security should be offered towards Patties’ costs of the proceeding. I would balance this matter with the comments I have made in relation to the assessment of the strength of Maitre D’s claim.
37Patties acting oppressively: Mr Grant has given evidence of a threat by Patties CEO, prior to the termination of the licence agreement, that if Maitre D brought legal proceedings, Patties had “the money to keep [the action] going for as long as it takes, and then we will go for costs”.
38I do not consider, however, that this matter has much significance in the determination of the application. Patties will probably be limited in the amount they can recover as costs to the sum offered by Mr Grant and Ms Fawcett. The obligations of Patties and their lawyers in the conduct of the litigation will be governed more by the requirements of the Civil Procedure Act and the lawyers’ professional standards that any statement that may have been made by Patties’ most senior executive.
39Patties is a large corporation: Similarly, this matter will be a minor factor, provided Maitre D has a reasonable opportunity to pursue its claim.
40Personal undertaking: The personal undertaking offered by Mr Grant and Ms Fawcett is a critical factor in my determination of the application. It means that the persons behind Maitre D, and the ultimate beneficiaries of successful litigation are providing the basic promise of security for Patties’ costs of the proceeding. What the orders I have made do, as the previous consent orders had anticipated, is to provide security that a fund will be available to Patties, if a costs order is made in its favour.
41Impecuniosity of Maitre D caused by Patties: I have previously discussed the factual basis of this matter. Mr Grant and Ms Fawcett were deprived of their previous income sources by the conditions imposed by Patties as the basis upon which it would enter into a licence agreement. It is not presently clear whether their present financial position results from the termination of that agreement or by the misuse of Maitre D’s trade secrets.
42The statement of claim alleges that the losses of Maitre D has suffered as a result of the misuse of its trade secrets are:
“a. the inability to market and sell its own gluten-free products to the retailers with whom the defendant continued [to] deal in breach of the licences; and
b.the diminution in value and attractiveness of any licence it was in a position to offer to other food manufacturers”.
It is presently not clear whether or how Maitre D will pursue these aspects of its claim. In the circumstances, this matter has only limited relevance in my determination.
Quantum
43In view of the undertaking offered by Mr Grant and Ms Fawcett to pay costs ordered in favour of Patties to a limit of $100,000, the quantification of the costs has far less importance than if security in a different sum were to be ordered. I do consider, however, that the present litigation is complex and will probably require extensive discovery and expert evidence on issues relating to both liability and quantum.
Conclusion
44The analysis the Court has been required to undertake to determine the security for costs application has assisted in focusing the parties’ attention on the steps that will be required of them before the matter would be likely to resolved by a negotiated settlement, or before there can be a trial of the proceeding.
45It is very important that the parties continue to cooperate in working through the interlocutory steps as quickly and cost-effectively as they can.
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Certificate
I certify that these 9 pages are a true copy of the reasons for decision of His Honour Judge Anderson delivered on 28 November 2016.
Dated: 28 November 2016
Carla Cianfaglione
Associate to His Honour Judge Anderson
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