Meridian Vat Reclaim Australia Pty Ltd v Agius
[2006] VSC 503
•21 December 2006
disd
| IN THE SUPREME COURT OF VICTORIA | Not Restricted |
AT MELBOURNE
COMMERCIAL AND EQUITY DIVISION
No. 5398 of 2003
| MERIDIAN VAT RECLAIM AUSTRALIA PTY LTD & OTHERS | Plaintiffs |
| v | |
| EDWARD AGIUS & ORS | Defendants |
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JUDGE: | HARPER J | |
WHERE HELD: | MELBOURNE | |
DATE OF HEARING: | 24 OCTOBER 2006 | |
DATE OF JUDGMENT: | 21 DECEMBER 2006 | |
CASE MAY BE CITED AS: | MERIDIAN VAT RECLAIM AUST P/L v EDWARD AGIUS & ORS | |
MEDIUM NEUTRAL CITATION: | [2006] VSC 503 | |
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PRACTICE AND PROCEDURE – Pleading – Claims against former employees and their new employers, including claims for misuse of confidential information – Pleading rules and requirements affecting such claims – Whether statement of claim complies with these – Whether pleading likely to prejudice, embarrass or delay the fair trial of the proceeding.
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APPEARANCES: | Counsel | Solicitors |
| For the Plaintiffs | Mr P.J.Bick QC with Ms M. Loughan | Baker & McKenzie |
| For the Defendants | Mr M.F.Wheelahan SC with Mr T. Donaghey | Arnold Bloch Leibler |
HIS HONOUR:
This is an appeal, instituted by a notice of appeal dated 23 May 2006, from the dismissal by a Master on 18 May this year of the defendants’ application dated 28 February 2006 to strike out the whole, or alternatively nominated paragraphs, of the statement of claim. The application before the Master sought, in the alternative, an order that those nominated paragraphs of the statement of claim be amended. It also sought an order that the plaintiffs have leave to re-plead.
In dismissing the application, the Master ordered that the plaintiffs file a consolidated statement of claim containing those further particulars which, on several occasions since the filing of the original statement of claim on 3 November 2004, had been separately provided by the plaintiffs. The consolidated statement of claim (to which I shall refer as “the statement of claim”) has since been filed and served.
As I understand it, the first plaintiff is based in Victoria, the second in Ireland, and the third in Hong Kong. According to paragraph 14 of the statement of claim, “[t]he plaintiffs are engaged in the specialised business of claiming refunds for the value added tax ("VAT") which is incurred by entities when:
(a)employees of or representatives on behalf of those entities incur expenses when travelling on business to Europe or Canada; and/or
(b) … enterprises expend money in Europe or Canada on their business."
The statement of claim then alleges that the second plaintiff enters into contractual arrangements with its clients to process, for a fee, their VAT refunds.[1] The other two plaintiffs, each of which is a subsidiary of the second plaintiff, are that plaintiff’s sales agents. At the material times, the first plaintiff was responsible for Australia, New Zealand and South-East Asia; the third, for China (including, of course, Hong Kong) and Taiwan.
[1]Statement of claim, para. 15.
The defendants make no admissions of relevance about any of this. They do, however, admit that the first defendant (Mr Edward Agius) commenced employment with the first plaintiff on or about 8 June 1993, and resigned with effect from 14 March 2003. At the time of his resignation, he was the first plaintiff’s marketing manager: the plaintiffs allege, but the defendants do not admit, that he had held that position since about 2001. It is admitted that, on or about 17 March 2003, some three days after his resignation as the first plaintiff’s marketing manager, he became the chief executive officer of the fourth defendant. It is also admitted that, on 14 May 2003, he became one of its two directors, and its secretary. The defence, which is dated 3 December 2004, asserts that these offices were held until about 7 September 2004.
The proceeding commenced on 15 April 2003, with the issue of a generally endorsed writ. This was followed by a burst of activity; then hibernation. On 15 April 2003, the plaintiffs issued a summons returnable the following day. On that day, Bongiorno, J made ex parte orders enjoining the defendants until 29 April 2003 from canvassing, soliciting or accepting orders from any known client (or recent former client) of the plaintiffs. At the same time, and more importantly for our purposes, his Honour, by paragraph 1(a) of the orders he then pronounced, also enjoined the defendants from “using or disseminating all or any part of the confidential information”. This was then defined in paragraph 2 of the orders as not including information which was known to the defendants before it was provided by any of the plaintiffs to either the first or the second defendant, or both, or which - through no fault of the defendants - was already in the public domain. The expression “confidential information” was, however, also defined to include the following eight categories of information:
"(a) the business names of any of the plaintiffs’ clients;
(b) the addresses and telephone numbers for each such client;
(c) contact names for personnel within each such client;
(d) details of the fee structures used with each such client;
(e)the services required by each such client from any of the plaintiffs;
(f)details of when the last invoices were received from each such client, when the invoices were paid by the relevant VAT authorities and what amounts were reclaimed;
(g) the fee budgets of each such client;
(h)the contractual arrangements between any of the plaintiffs and each such client."
The ex parte orders made on 16 April were replicated in all relevant respects on 2 May 2003, when the matter came on before Smith, J. On this occasion, the defendants were represented by senior and junior counsel. Nevertheless, the orders were declared to have effect only until 7 May, the date to which the further hearing of the plaintiffs’ summons was adjourned. As with the orders made by Bongiorno J, those made by Smith J set out, in paragraph 2, the eight categories of information that fell within the definition of “confidential information”.
It was on the latter date, 7 May, that this round of interlocutory sparring came to an end, with orders being made by consent. They encompassed the information which had been the subject of the two sets of earlier orders made on, respectively, 16 April and 2 May. Their effect was to restrain the defendants from using or disseminating any document from, or belonging to, any of the plaintiffs which contained any part of the confidential information, and which came into the possession of any of the defendants on or before 6 May 2003. Unlike the two earlier sets of orders, there was no specific reference to canvassing.
It was not until 3 November 2004 that any definition of “confidential information” appeared in any pleading. The statement of claim, consisting of 165 paragraphs, was issued on that day. Paragraph 17 states that certain information is, and at all material times was, confidential to the plaintiffs. Then follow 12 sub-paragraphs, each describing in broad terms a category of information allegedly confidential in this sense. The first eight categories are based upon the corresponding eight as these are described in the three sets of interlocutory orders to which I have referred. But the orders described only eight; not 12, as does the statement of claim. The final four in the latter document come each with its own set of particulars. They have been criticised by the defendants on a number of bases, to which I shall return. For the present it is, I think, appropriate to say that in my opinion they are open to criticism because they lack clarity.
Pleadings are not required in every case. When they are, it is because they are important. They are especially important in particular classes of case. For reasons to which I shall return, a claim for abuse of confidential information is one of them. It is sufficient for the present to observe that a statement of claim should always inform both the defendant and the court of the case that the plaintiff intends to prove. It should do so clearly and concisely. If those who drew this statement of claim had these as their goals, they failed to reach them. Its effect is not to reveal, but to disguise.
Paragraph 17 embraces the eight categories identified in the orders of, respectively, Bongiorno J and Smith J - but I have arranged them here in an order that is for present purposes more appropriate, as follows: (a) any business names[2] and (b) addresses, telephone numbers and (g) fee budgets, of each client of the plaintiffs; (c) the contact details of relevant personnel (adding, in the statement of claim but not in the earlier orders, the dates on which such personnel were last contacted); (d) the details of fee structures applicable to, and (f) the last invoices received from, those clients; (e) the services required by them; and (h) the contractual arrangements between them and the second plaintiff.
[2]I have here adopted the reference lettering of paragraph 17 of the statement of claim.
I digress to observe at this point that, if the other two plaintiffs had entered into contractual arrangements of the kind referred to in (h) above, it would appear from the reference to the second plaintiff that such arrangements are irrelevant to these proceedings. Consistently with this, it is to be noted that, by paragraph 15 of the statement of claim, the plaintiffs allege that it is the second plaintiff which “enters into contractual arrangements with clients to process their VAT refunds for a fee agreed between the second plaintiff and the client.” Elsewhere, however, the statement of claim posits that the first and third plaintiffs themselves had clients. This creates a degree of undesirable uncertainty. It is a topic to which I shall return.
The statement of claim goes on to include, for the first time as confidential information, four new categories: (i) details of the plaintiffs’ internal operating structures; (j) details of staffing arrangements within the first and third plaintiffs “including arrangements with respect to the planned termination of employees”; (k) details of the plaintiffs’ business strategies; and, finally, (l) internal communications between the plaintiffs’ employees.
The first of the four new categories of confidential information is “details of the plaintiffs’ internal operating structures”. These are defined in the relevant particulars to be “procedures followed by the plaintiff to service clients and process VAT reclaims for clients by which clients were divided into ‘key accounts’ and ‘enterprise accounts’ and which provided that enterprise accounts would be serviced by the second plaintiff from Dublin rather than being serviced locally by the first or third plaintiffs.”[3]
[3]Statement of claim, particulars under para. 17(i)
This may mean no more than that the confidential “internal operating structures” are limited to the information that the plaintiffs had two classes of clients (“key accounts” and “enterprise accounts”) and that the latter are serviced by the second defendant (which operates from Dublin) while some of the former are serviced locally by the first plaintiff (which operates, it seems, out of Melbourne and Sydney), with the balance being serviced locally by the third plaintiff (which operates from Hong Kong). If it does mean no more than that, it should say no more than that. It should not refer, certainly not in the way that it does, to the more general “internal operating structures [being] procedures followed by the plaintiffs to service clients and process VAT reclaims for clients”.
The second additional category of confidential information concerns details of staffing arrangements with the first and third plaintiffs, including the planned termination of employees. Again, these are general words which might import very little. Or they might import a lot. The reader – and, in particular, the court and the party to whom the pleading is directed - ought by resort to the particulars to be able to determine the issue. But, in this case, the particulars fail to enlighten. On the contrary, they compound the problem. On the one hand, the particulars under the relevant subparagraph of the statement of claim – paragraph 17 (j) - refer in their opening words to plans made “in or around October 2002, to restructure staffing in place at the plaintiffs’ offices in Sydney, Melbourne and Hong Kong”. This suggests more, perhaps much more, than the “planned termination of employment” of a mere two members of staff. Yet, in the balance of the particulars, it is asserted that the “restructure” is “comprised of” nothing more than “the planned termination of employment of the second defendant … and the planned termination of employment of Francis Chu … [both] in or about January 2003”. Not only is this difficult to reconcile with “details of staffing arrangements … including arrangements with respect to the planned termination of employees”[4], or with a staffing “restructure” at three locations, but neither of the two identified members of staff (Messrs Farrow and Chu) have to this point been mentioned in the statement of claim. The result, therefore, is confusion. Neither the defendants nor the court should be burdened with the task of clarifying that which the plaintiffs have obscured.
[4]My emphasis.
The third additional category of confidential information comprises “details of the plaintiffs’ business strategies”. But when one goes to the particulars, one finds that these “strategies” were “of the plaintiffs’ plans to … register clients attending the German Trade Show for VAT”. Once more, there is no correlation – certainly no correlation that is readily discernable – between the generality of the substantive pleading, and the narrow compass of the particulars. Any attempt by the reader to understand what it is that the plaintiffs are seeking to allege is further confounded by paragraph 39(I)(F). The defendants and the court are here told that, far from having confidential “strategies” consisting of “plans to … register clients attending the German Trade Show for VAT”, “the plaintiffs would not be in a position to register clients attending the German Trade Show for VAT”; and the wrong committed by the first defendant was not in that he revealed the plaintiffs’ confidential “strategies” or “plans”, but rather that he informed the third and fourth defendants of “a weak point in the business of the first and second plaintiffs.” As far as one can tell (although this is an inference which, I think, must be drawn from the statement of claim in its present form) not only were no plans in existence, but the plaintiffs would not in any event have been in a position to act even if plans had been prepared.
The final additional category of confidential information is described in subparagraph 17(l) of the statement of claim as “internal communications between personnel of the first, second and third plaintiffs”. The particulars then simultaneously (a) confine those internal communications further, by limiting them to communications about specified subjects; and (b) broaden the entire concept of confidential information by including, among those specified subjects, categories of information that go beyond those covered elsewhere in paragraph 17.
The particulars under subparagraph 17(l) encompass “internal communications … relating to (i) clients of the plaintiffs or containing any of the details relating to clients referred to in paragraph 17(a) to (h) above”; or (ii) “budgets of the plaintiffs”; or (iii) “plans made by the plaintiffs in or around October 2002 to downsize staff in the plaintiffs’ offices”; or (iv) “salary increases and bonuses paid to employees of the plaintiffs”; or, finally, (v) “the plaintiffs’ policies in relation to the return of VAT invoices to clients”.
If this means what it says, the categories of information to which it refers and which it includes as “confidential information” for the purposes of this proceeding are only relevant to the extent to which they are to be found in internal communications. On the other hand, “budgets of the plaintiffs”, “salary increases and bonuses paid to employees of the plaintiffs” and “the plaintiffs’ policies in relation to the return of VAT invoices to clients” are for the first time (provided, however, that they are included in internal communications) to be encompassed by the definition of “confidential information” for the purposes of the plaintiffs’ claims.
One of the reasons why paragraph 17 of the statement of claim gives rise to doubt about its meaning is that it contains much by way of general description and little by way of specific identification of that which the plaintiffs claim is confidential. Into the latter category (of specific identification) fall some four items of specifically identified information: first, the division of clients (of the second plaintiff, as we must assume) into “key accounts” and “enterprise accounts”; secondly, the fact that the latter would henceforth be serviced from Dublin, while the former would be serviced by one or other of the first or third plaintiffs; thirdly, the planned termination of the employment of the second defendant (Mr Kenneth Farrow) and Mr Chu in January 2003; and, fourthly, the fact that the plaintiffs had plans “to offer a service to register clients attending the German Trade Show for VAT”. Otherwise, the paragraph defines “confidential information” in general terms. The actual information said to be confidential is not specified. Thus the paragraph refers not to the actual business names of clients, or to their actual fee structures, or to the actual services required by them. It refers to these simply as categories of information: that is, clients’ business names, or their fee structures, or the services they require.
This is one of the sources of what in my opinion is a defect in the statement of claim. It would not arise if the plaintiffs were to set out with greater specificity that which they allege is confidential information. Were they to do that, and were the information so identified not introduced (as it is in this statement of claim) by words of such generality as to deprive that which is specific of its usefulness as such, the statement would be much easier to understand. An allegation that the plaintiffs planned to sack Messrs Farrow and Chu in January 2003 is straightforward and comprehensible. An accompanying allegation that the plans in question were confidential has the same qualities. But when those allegations are introduced by the substantive pleading (namely, that they are merely particulars of a category of confidential information – the “staffing arrangements within the first and third plaintiffs”)[5] then one is necessarily left to wonder whether it is the substantive pleading on the one hand, or the particulars on the other, that constitute the governing allegation. Good pleadings do not leave the reader in a dilemma such as this.
[5]Statement of claim, para. 17(j).
In my opinion, the defect must be rectified before the defendants can be required to deliver their defences. It may be that, at trial, the plaintiffs intend to prove only the specific, and not the general, allegations. If that is their position, then defects in the statement of claim are not so serious as otherwise they would be. If, however, they intend to call evidence about details of (for example) internal operating structures other than the division of clients into “key accounts” and “enterprise accounts”, and the city from which those are to be serviced, then the defect in the statement of claim is stark. The same is true of any intention they may have to call evidence about details of staffing arrangements other than the planned termination of the employment of Messrs Farrow and Chu; and so too if they intend to call evidence about details of the plaintiffs’ business strategies. Indeed, the trial judge would in my opinion need carefully to consider whether, in the absence of appropriate amendments to the statement of claim, the plaintiffs ought to be allowed to go beyond the specifics of sub-paragraphs (I), (j) and (k) of paragraph 17.
Even if the plaintiffs intend to limit themselves to those specifics, the statement of claim is defective. It ought to be amended by the deletion of those general assertions which, ex hypothesi, are irrelevant.
The defendants attack paragraph 17 from another but related angle. They submit that a plaintiff in a breach of confidence case, of which this is an example, must not only identify with specificity - and not merely in global terms - the information that is alleged to be confidential; such a plaintiff must also show that the information in question has the necessary quality of confidentiality.
Paragraph 17 addresses this latter issue in the fifth and last set of particulars under that paragraph. It is there alleged that “[t]he confidential information was confidential to the first, second and third plaintiffs by reason of the following:
(i)The confidential information was not disclosed to persons outside of the first, second and third plaintiffs.
(ii)The confidential information was only disclosed to persons within the first, second or third plaintiffs who had a legitimate business reason to know the information.
(iii)The confidential information is of a sensitive nature and fundamental to the business of the plaintiffs.
(iv)It was well known within the plaintiffs that if a competitor became aware of the confidential information it would allow the competitor to enter the VAT reclaim market without spending the time and resources necessary to obtain such information
(v)The confidential information was imparted in an employment context.
(vi)Access to the 'Q&A' electronic database containing client information was and is password protected and the password is changed from time to time.
(vii)New employees of the first and third plaintiffs are required to enter into express confidentiality covenants.
(viii)If a competitor of the plaintiffs became aware of the confidential information it would provide the competitor with selling points which it could use to obtain the business or clients of the plaintiffs.
(ix)The confidential information set out in paragraph 17(j) … was sensitive information relating to the plaintiffs' ongoing employment of key employees which was not known to those employees.
(x)If a competitor of the plaintiffs became aware of the confidential information set out in paragraph 17(j) … it would place the competitor in a position of advantage in order to entice the plaintiffs' employees to leave the employment of the plaintiffs and commence employment with the competitor."
One may query whether all of these points are accurate indicators of the existence of the quality of confidence in particular items of information. For present purposes, however, I am prepared to accept them as unexceptional – as far as they go. But they do not cater for a situation that commonly arises in proceedings for breach of confidence. Such proceedings are frequently brought, as is this one, by a former employer against a former employee; and it very often, if not invariably, happens that the employee’s duty of confidence changes when the relationship of employer and employee comes to an end.
That especial aspect of the duty which relates to trade secrets and related or like information (to which it is convenient to refer compendiously as “trade secrets”) is an exception. The quality of confidentiality which encompasses such secrets survives the employment relationship. They fall within a special class of information: they constitute “a separate part of the employee’s stock of knowledge (whether it be identifiable as ‘particular’ or ‘detailed’ or ‘special’) which [someone] of ordinary intelligence and honesty would regard as the property of the former employer” [6] and therefore not the property, or available for the benefit, of the former employee. Such information is protected both during employment and thereafter.
[6]Ansell Rubber Co Pty Ltd v Allied Rubber Industries Pty Ltd [1967] VR 37 at 40.
Other classes of information are not. Some information, “because of its trivial character or its easy accessibility from public sources of information, cannot be regarded … as confidential at all.”[7] So its dissemination is unrestricted. This is to be contrasted with that information which is properly seen as part of the employee’s skill and experience, inseparable from his or her general knowledge, and which is conveniently referred to as “know-how”. It is protected during the period of employment, on the basis that an employee who disclosed it to a competitor (or used it to his or her own advantage to the disadvantage of the employer) would necessarily be in breach of the employee’s fiduciary duty to the employer. Once employment ceases, however, know-how cannot – in the absence of a valid restraint of trade clause by which the ex-employee continues to be bound - be protected.
[7]Faccenda Chicken Ltd v Fowler [1984] ICR 589 at 598 as quoted on appeal in [1987] Ch 117 at 133.
All of which brings me back to the proposition that the employee’s duty of confidence generally changes when the relationship of employer and employee comes to an end. As was said by Gowans J in Ansell Rubber[8]:
“In this field a distinction has to be maintained between information and knowledge acquired in confidence by an employee during his employment which he uses or discloses for his own advantage while he is still an employee, and information and knowledge so acquired which he uses for his own advantage after his employment is finished. A further distinction has to be drawn between information which forms part of the employee's stock of general knowledge, skill and experience, and that which should fairly be regarded as a separate part of the employee's stock of knowledge (whether it be identifiable as 'particular' or 'detail' or 'special') which a man of ordinary intelligence and honesty would regard as the property of the former employer."
[8]Ansell Rubber Co Pty Ltd v Allied Rubber Industries Pty Ltd [1967] VR 37 at 40.
Where the old skills are part of the new job, it would be pointless to try to protect “the employee's stock of general knowledge, skill and experience”, since know-how is of its nature so much a part of the individual in question that he or she cannot be divorced from it. To adapt the words of Dr Robert Dean, it would be impractical to say to an ex-employee in a new job, with duties similar to those of the old: “pretend you don’t know what is a component of your skill, experience and general knowledge.”[9]
[9](2006) 80.12 LIJ 36 at 38.
Dr Dean goes on to use the salesman’s knowledge of customer lists as illustrative of these points. In an article entitled “Off the Rails – When Employees Bolt with Your Business”[10] he writes:
"If the lists are highly specific and detailed or voluminous they may be classified as trade secrets because they are not part of the ex-salesman's skill and experience and he or she would have to have taken a list or deliberately copied a list before leaving. But this is the exception.
It is far more likely that they will be classified as 'know-how'. Of course, any attempt by an employee to copy any information before leaving his or her employment for the purpose of using it after the termination of that employment, whether know-how, trade secret or otherwise, will be a breach of fiduciary duty."
[10]Ibid.
There is no allegation in this statement of claim that the business names of clients, or any other of the categories of information set out in paragraph 17, are collected in lists of any kind, let alone lists that are (to employ the phrases used by Gowans J and Dr Dean) “particular” or “detailed” or “special” or “highly specific” or “voluminous”. It follows that, even if it were accurate to classify the information in question as “confidential”, nevertheless its status as a trade secret on the one hand, or know-how on the other – and the wider question of the right of the defendants to deal with it - will depend on facts which are not touched upon in the particulars under paragraph 17 in which “by reason of the following” the “confidential information” described in the statement of claim is said to be confidential. Those particulars, if true, establish that the information is not of such trivial character or easy accessibility as not to be confidential at all. They do not assist the reader to make the crucial post-employment distinction between trade secrets and know-how.
A properly drawn statement of claim will reflect this distinction by either confining its allegations to the period of employment or, if the claims include an assertion that the duty of confidence survived the employer/employee relationship, include allegations of fact pleaded in such a way as to enable the reader to appreciate how that survival is to be established – as, for example, by pleading facts that if proved would put the information into the category of a trade secret; or by pleading a contractual term that covers the case.
Paragraph 17 of the present statement of claim does not differentiate between, on the one hand, the period of the first defendant’s employment and, on the other, that following his resignation. Rather, it classifies the information with which it is concerned as being confidential “at all material times”.
Although in many cases there is no difficulty in identifying the period thus covered, in the present context the use of the expression “at all material times” is unhelpful. It might at one point in the statement of claim include only the period during which the first plaintiff employed the first defendant; or it might be restricted to the period after employment ceased; or it might - and at most, but not all, points of the statement of claim probably does - cover both. But, if the latter, then the pleading must not leave the reader in doubt about the effect of the cessation of employment on the confidentiality of the information. The statement of claim must be drawn so as to clarify, not obfuscate; and, as an equally important aspect of this, the use of the phrase “at all material times” should not mean one thing in one paragraph of the pleading and another in another.
This statement of claim fails the test. It describes the position held by, and the role of, the first defendant during the last year or so of his employment with the first plaintiff.[11] It then avers that, “[as] a result … the first defendant owed the following duties”, being either fiduciary or statutory, which it proceeds to define.[12] In the next paragraph it alleges that, while he owed those duties, the first defendant assisted in the establishment and operation of a competing business. Some of the specified assistance was rendered between November 2002 and March 2003; and some “from November 2002 to date”[13] The significance of the reference to March 2003 is that, according to the statement of claim, the first defendant’s resignation then took effect.[14] That being so, the expression “at all material times” must cover the period after the first defendant ceased to be in the employ of the first plaintiff; and some of the assistance which (as the plaintiffs allege) was rendered by the first defendant, must likewise have continued into that period.
[11]Statement of claim, paras. 19 and 20.
[12]Ibid, para. 26.
[13]Ibid, para.27.
[14]Ibid, para. 18.
The position as put by the statement of claim is, therefore, that even after his employment ceased, the first defendant disclosed - or continued to disclose - to the third and fourth defendants information about the plaintiffs’ clients;[15] and that information was of the kind which is described in general terms in paragraph 17 of the statement of claim. The problem is that, once the first defendant was no longer an employee of the first plaintiff, he was – on the basis of the contractual relationship as that relationship is pleaded in the statement of claim - perfectly entitled to reveal clients’ business names, addresses, telephone numbers, other contact details and the like to whomever he wished, provided that he did not before his employment was terminated deliberately memorise them, or make lists of them, or take with him lists compiled by his employer. But the statement of claim contains no allegation of any such misfeasance.
[15]The reference to “the clients of the first, second and third plaintiffs” in such places as para.27(b)(i)(B) is itself problematic, since elsewhere the plaintiffs’ imply – as in para.17(h) - that only the second plaintiff entered into contractual relations with clients. This ambiguity should be removed.
As I understand the defendants’ submissions, it is considerations of this kind that lie behind their argument that “the particular documents or other media containing the information alleged to be confidential must be identified.”[16] Pending such identification, or the adoption of some other means of ascertaining whether the confidentiality of the information could survive the ending of the employment, the statement of claim fails in its necessary purpose. It fails to provide the defendants with allegations which are so clearly set out that the defendants will have a fair opportunity to meet them. More particularly, it fails in the primary duty of any statement of claim – which is to plead, with clarity, all the material facts. So, for example, to allege only that, post employment, the first defendant, in breach of his fiduciary duty to his former employer, disclosed to his new employer the business names of the clients of his former employer, is not to allege a complete cause of action in relation to the post-employment period. This is so because the mere post-employment disclosure of such names does not of itself constitute a breach of fiduciary duty. The additional fact or facts that establish a breach of this kind must accordingly also be pleaded.
[16]Outline of submissions for the defendants, 6 October 2006, para. 24.
The defendants also contend that “the content of the confidential information must be identified.”[17] So it must, although the precision required in the identification will depend upon the circumstances. In my opinion, however, the courts as a general principle should in determining where to draw the line in any particular case lean towards more rather than less specificity.
[17]Ibid, para. 32.
There are several reasons for this approach. Before turning to them however, it is necessary to emphasise another principle: that businesses have a right to the lawful protection of sensitive commercial information. Not all employees are prepared to recognise that right. When they do not, the employer is entitled to look to the courts to uphold it. Nothing that follows is intended to devalue that proposition.
Indeed, there is no inconsistency between the two principles with which I am presently concerned: first, that those claiming relief from the misuse of confidential information must in pleading their claim identify with specificity the information said to have been (a) confidential and (b) misused; and, secondly, that the courts must protect the confidentiality of confidential information.
One reason why a greater rather than a lesser degree of specificity must generally be required is the need to protect the courts against abuses of their process, and to ensure that litigation is not used as an instrument of oppression. As Laddie J observed in Ocular Science Ltd & Anor. v Aspect Vision Care Ltd & Ors.:[18]
"A claim based even in part on wide and unsupportable claims of confidentiality can be used as an instrument of oppression or harassment against a defendant. It can be used to destroy an ex-employee's ability to obtain employment or a competitor's ability to compete. The wider the claims, the longer and more expensive the litigation. The defendant is likely to feel that he has no alternative but to challenge the confidentiality of everything, even though he believes that much or most of the technology pleaded cannot reasonably be thought of as secret. Furthermore a defendant faced with a narrow claim may decide that the commercial realities point towards a tactical withdrawal. He may be able to relinquish use of the contested information yet stay in business. The possibility of doing this reduces as the width of the plaintiff's claims increases. The defendant is left no alternative but to fight on in heavy litigation, spending money on lawyers which he would much prefer to spend on building up what may be a new business. The attractions of this to a plaintiff bent on harming a competitor's business are obvious. Furthermore, the more technology put before the court, the easier it may be to obscure the issues. A competitor or ex-employee is entitled to copy non confidential material, but if the plaintiff mixes a large amount of technology together, some of which has been copied by the defendant, there is a risk that the court will jump to the conclusion that some of what was copied must have been confidential."
[18][1997] RPC 289 at 360.
The same point was made by Whitford J in Reinforced Plastics Applications (Swansea) v Swansea Plastics & Engineering Co Ltd[19]:
"It is, I think, a matter of great concern in relation to confidential information cases that actions should not be brought which are no more than speculative in character. It is altogether too easy when employees leave and are employed by a rival firm to harass that rival firm upon the basis that the employees who have left the plaintiffs and joined them have taken away trade secrets of great value, and to bring an action which may involve the expenditure of an enormous amount of time and money and include disclosure of information which is going to be alleged to be confidential on either side with consequent troubles and worries. It is not really to be contemplated that proceedings of this kind should be allowed to go forward on nothing more than a speculative basis; and unless the plaintiff can show that he has some basis for a reasonable belief in his assertion that the defendants are making use of his confidential information, then the action can only be characterised as speculative and fishing, and ought not, in my judgment, to be allowed to proceed. There must be something more than a mere assertion."
[19](1979) FSR 182 at 182 [sic]
The best means of ensuring that the proceeding is not going forward on a speculative basis is to require a plaintiff who alleges misuse of confidential information to specify with particularity the information which is alleged to (a) be confidential, and (b) have been used in breach of some duty. Sooner or later, this will have to be done in any event. The plaintiff bears the burden of proof. Sooner or later, it will have to prove, on the balance of probabilities, the existence of particular, identifiable, information that, it contends, meets these criteria. If this has to be done at trial – as it does - on pain of having the claim dismissed if it is not, then (in general at least) it must be possible, given a viable cause of action, to do it before trial. The plaintiff either has a case or it does not. If the former, its possession of a good cause of action should be made plain as soon as may be. If it does not, it ought not to commence litigation; but, if it does institute proceedings, its deficiencies ought to be exposed as early as possible. The litmus test will often be the plaintiff’s ability to identify in its statement of claim - not by general, but by particular, words - the information about which complaint is made.
There will be instances where the plaintiff’s claim is based on inferences. In such cases it may be more difficult than in those in which direct evidence is relied upon to specify before discovery (or otherwise before trial) the precise information that has been misused. The plaintiff seeking to rely on an inference or inferences should in those circumstances plead (or, which will more often be appropriate, insert in particulars) the facts upon which it is alleged the inference is to be drawn. The statement of claim would then allege that it is in the circumstances not possible to be more precise than the inference allows. This statement of claim contains no plea of the relevant kind.
A plaintiff who complains that confidential information has been misused will frequently also complain that it cannot supply particulars, or otherwise identify with the required degree of specificity the information said to have been misused, until discovery is complete. Depending upon the circumstances, there may be merit in this point. Whether there is or not will depend upon the strength of the case at the time the complaint comes on for adjudication by the court. In Computershare Ltd v Perpetual Registrars Ltd and Others,[20] the plaintiff’s case was strong because it had through its managing director deposed to the facts upon which it relied in support of a summons seeking an interlocutory injunction restraining the defendants from having access to, disclosing, or using, certain confidential information. Not only was it inherently likely that the defendants had the means of obtaining this information, and unjustifiably took advantage of the situation to do so, but they served no answering material. Warren J was satisfied that the plaintiff had demonstrated a pre-existing relationship between it and the first and second defendants; and that the plaintiff had a strong and unrebutted suspicion about the use of information which it regarded as confidential. In those circumstances, her Honour held that the plaintiff was entitled to an order for discovery pursuant to r.29.07 of the Rules of the Supreme Court. This rule provides (in effect) that where a proceeding has been commenced by writ and the pleadings have not been closed, the Court may nevertheless require a party to make discovery to any other party. Her Honour was satisfied that the plaintiff was entitled to information exclusively within the defendant's knowledge, such information being necessary to enable the plaintiff both to plead further, and to provide proper particulars.
[20][2001] 1VR 626.
In my opinion, the Computershare case can be distinguished from that presently before me. A more relevant authority is that of Creative Brands Pty Ltd v Franklin.[21] There, the first to third defendants had been employed by the plaintiff. One was its managing director at the time of her resignation on 22 December 1999. In the following year, she and two other former employees of the plaintiff, each of whom had executed confidentiality agreements in similar terms, joined in establishing a company which immediately engaged in the plaintiff's business of marketing and distributing cosmetics and other similar products.
[21][2001] VSC 338 (unreported, 11 September 2001).
The plaintiff issued proceedings alleging breaches of the confidentiality agreements. In these, the expression "confidential information" had been defined as any confidential information belonging or relating to the plaintiff, whether directly or indirectly. It included (without limitation) information of a commercial or technical nature relating to trade secrets, confidential operations, processes or dealings, inventions, formulae, plans, devices, products, know-how, technology, marketing information, evaluations, project planning, research and any information concerning the organisation, business, finances, transactions or affairs of the plaintiff or any associate of it including accounting, statistical or financial data, surveys, customer lists, details of trading relationships, manufacturing processes, and supplier lists. The statement of claim adopted the same definition without further specificity.
The trial judge was, again, Warren J. At paragraph [16] of her judgment, her Honour said:
"It is appropriate to identify the relevant principles with respect to the pleading of confidential information and competition cases. First, as a general proposition the courts are reluctant to permit a previous employer to use a generally worded claim to stifle the right of an employee to use the skill and experience of that employee sometimes called 'know how' as distinct from an ex-employer's 'secrets'. Second, confidential information and competition cases call for specificity in the pleading of material facts to overcome the bringing of actions that are speculative in character."
In her Honour's view, the impugned paragraphs of the relevant statement of claim suffered from the same vice that is of present concern to me: the nature of the confidential information that was there the subject of the dispute was, it was submitted by the defendants, not defined with sufficient specificity. In accepting this submission, Warren J repeated the following passage from a judgment of Scott J in Balstone Ltd v Headline Filters Ltd[22]:
"This case is, in my view, yet another example of an attempt by an employer to use the doctrine of confidential information to place fetters on the ability of ex-employees to compete … Their experience, built up during their years of employment, naturally equips them to be dangerous competitors if and when their employment ceases. The use of confidential information restrictions in order to fetter the ability of these employees to use their skills and experience after termination of their employment to compete with their ex-employer is, in my view, potentially harmful. It would be capable of imposing a new form of servitude or serfdom … on … employees. It would render them unable in practice to leave their employment for want of an ability to use their skills and experience after leaving. Employers who want to impose fetters of this sort on their employees ought in my view to be expected to do so by express covenant. The reasonableness of the covenant can then be subjected to the rigorous attention to which all employee covenants in restraint of trade are subject."
[22](1987) FSR 330 at 331.
Warren J concluded that, in each of the three paragraphs of the statement of claim subjected to attack by the defendants, the plaintiff had failed to plead those material facts without the knowledge of which the defendants could not know the case they had to meet. In her Honour's view, the subject paragraphs suffered from the vice that the nature of the confidential information that was the subject of the dispute was not defined at all; or, certainly, not with sufficient specificity.
There is another reason why the courts insist upon an appropriate degree of particularity in describing, in a statement of claim, the confidential information said to have been misused. It is that a good defence will necessarily rest upon one or other or perhaps each of three negative propositions: that the information was not confidential, or that it was not misused, or that it was neither confidential nor misused. The defendant, of course, bears no burden of proof; but if the plaintiff calls sufficient evidence to establish a prima facie case, an evidentiary burden will shift from the plaintiff to the defendant. In these circumstances, fairness will ordinarily dictate that the plaintiff be required to provide in the statement of claim such information as is necessary if the defendant is to know the extent and content of that burden.
The plaintiffs claim that the business names of clients are confidential to them. Nowhere does the statement of claim identify those clients. It does allege that, “[f]rom November 2002 to date, the first defendant retained and/or copied information about clients of the … plaintiffs, including business names, contact details, previous contacts made, fee structures and previous VAT reclaims made” and “disclosed to the third and fourth defendants details of the clients of the … plaintiffs.”[23] All this in the context of an allegation that the first defendant “disclosed and used confidential information”, an expression which, one must suppose, is at this point defined as it is elsewhere in the statement of claim: that is, in paragraph 17. But that paragraph includes neither “previous contacts made” nor “fee structures” within its definition. Here is another example of unsatisfactory pleading.
[23]Statement of claim, para.27(b). My emphasis.
That defect, however, is a diversion. A different observation is more important. It may be put as follows: to say that the first defendant disclosed to the third and fourth defendants details of the clients of the plaintiffs is not to say very much. If that is the best the plaintiffs can do at trial, they will not get very far. The evidence only becomes credible when it becomes specific.[24] If, however, it first becomes specific at the trial, the defendants might have every reason to complain that justice was not being done. They may, for example, have evidence that none of those alleged to have been clients were ever clients at all; but if the identity of the “clients” is delayed until the trial, the defendants may be unable, given the short notice, to produce that evidence to the court.
[24]See, for example, Carindale Country Club Estate v Astill (1993) 42 FCR 307 at 314.
It must here be remembered that r.13.10 requires particulars to be given if (among other things) they are necessary to avoid surprise at trial. The statement of claim upon which the plaintiffs rely in this litigation would very likely generate, rather than avoid, surprise. In my opinion, the plaintiffs should in the statement of claim identify either the clients in question, or the medium or media through which their identities were said to be revealed by the first defendant, or some other repository of the relevant business names. This applies also to the other “details of the clients … identified in paragraph 17(a) – (h)”[25]. In saying this, however, I make two qualifications. First, the danger of surprise may vary with the category of information. Thus, a defendant confronted for the first time at trial with the name of an alleged client may be more vulnerable to surprise than he or she would were the information to be limited to the addresses and telephone numbers of clients.
[25]Statement of claim, para.27(b)(i)(B).
The second qualification is that “details of the contractual arrangements entered into by the second plaintiff with … clients”[26] are said in paragraph 27(b)(i)(C) to be found in an email dated 13 February 2003 from the first defendant to Daniel Goldstein (almost certainly a mistake – the reference should have been to Daniel Ginsburg). So, the medium of transfer of the information having in this instance been identified, the defendants - on going to the email in question – would be able to discover what it said about those contractual arrangements. If the pleading is accurate, then the specific information will, on inspection of the email, be made known.
[26]Statement of claim, para.17(h).
It is not in paragraph 17 of the statement of claim that the plaintiffs describe what information is alleged to have been misused. That comes in paragraph 27(b). And it is at that point that the issue of specificity becomes acute. There is, it seems to me, no problem with a general description of information alleged by a plaintiff to be confidential, so long as sufficient particulars are given of that portion of it which, it is claimed, has been misused. In this case, therefore, the generality of paragraph 17 would be of no concern were it neutralised by the particularity of paragraph 27.
Unfortunately, it is not – or, rather, not entirely. Save for its reference to the email of 19 February 2003, paragraph 27(b) is no more particular in its description of the first eight categories of “confidential information” than was paragraph 17. It then turns to the ninth category – “details of the plaintiffs’ internal operating structures”. At this point, it diverges from its predecessor, which described these as “procedures followed by the plaintiff to service clients and process VAT reclaims for clients by which clients were divided into ‘key accounts’ and ‘enterprise accounts’ and which provided that enterprise accounts would be serviced by the second plaintiff from Dublin rather than being serviced locally by the first or third plaintiffs.” The description to be found in paragraph 27(b) is different. “From November 2002 to date”, it asserts, the first defendant “disclosed to the third and fourth defendants and used details of a planned internal restructure … by which the plaintiffs:
(1)planned to have clients with smaller 'enterprise accounts' deal directly with the second plaintiff's processing centre in Dublin; and
(2)planned to terminate the employment of the second defendant and Francis Chu as referred in particular (ii) of 17(j) above."
There is here introduced, for the first time, a separate category of "smaller" enterprise accounts. It is also here first alleged, for the first time, that the plaintiff's plans to terminate the employment of Messrs Farrow and Chu might fall within that category of confidential information otherwise referred to as "the plaintiff's internal operating structures" rather than that referred to as "details of staffing arrangements". This is probably no more than the result of careless draftsmanship; but one cannot be sure. Whether careless or not, it is bad pleading.
The respective references to the German Trade Show also diverge as between paragraph 17 and paragraph 27(b). In the former, it is alleged that “details of the plaintiffs’ business strategies” were confidential; and in the particulars under that allegation it is said that those “business strategies’ were (i) “the plaintiffs’ plans to … register clients attending the German Trade Show for VAT” and (ii) the division of the accounts into “key” and “enterprise” accounts, together with the location from which these would be serviced. In paragraph 27(b), the allegation is that “[f]rom November 2002 to date” the first defendant:
"… disclosed to the third and fourth defendants a perceived weak point in the business of the first and second plaintiffs in relation to the German Trade Show registration, and made plans with the third and fourth defendants to exploit that perceived weak point. The perceived weak point was the fact that the plaintiffs would not be in a position to register clients attending the German Trade Show for VAT."
Then there is the issue of the internal communications. In paragraph 17 they are said to relate to (among other things) “clients of the plaintiffs or containing any of the details relating to clients referred to in paragraph 17 (a) to (h) above”. In paragraph 27(b), this becomes, as set out in particular (i)(F), part of an allegation that the first defendant “[f]rom November 2002 to date:
… disclosed to the third and fourth defendants and used internal communications between personnel of the plaintiffs which:
(1)contained the business name of and details of the contractual arrangements between the second plaintiff and the Malaysian Tourism Promotion Board."
Here is a specific allegation of the unauthorised disclosure of details that fall within the general words of part (a) of the definition of “confidential information” in paragraph 17. Again, the problem of the relevance of the general words comes to the fore. The reader is left to wonder whether the specific reference, in paragraph 27(b), to a clearly identified business name is the only such instance upon which the plaintiffs will, at the trial, rely. It is the only specific reference of that kind to be found in the statement of claim. But if more are to be made at the trial, why are they not also specifically alleged in the pleading?
An ex-employee who, after the employment relationship ceased, told his or her new employer that the Malaysian Tourism Promotion Board was a former client would in the normal course, and without more, commit no wrong. To the extent that this statement of claim accuses the first defendant (as it does) of passing on that information at that time, it does not plead a good cause of action. The difficulty for the reader is that it is at present impossible to say whether or not the statement of claim adds enough to this allegation to make it, in point of pleading, good.
Paragraphs 17 and 27 of the statement of claim are central to the plaintiffs’ case as it is now pleaded. Many other paragraphs stand or fall with them. In my opinion, they contain the faults that I have attempted to describe. It seems to me that, with those faults, the statement of claim is likely to prejudice, embarrass or delay the fair trial of the proceeding. In these circumstances, the appropriate course is to strike it out, but reserving to the plaintiffs the right to re-plead.
I have not examined many of the individual allegations, made in particular paragraphs of the statement of claim, which the defendants attack as being improperly pleaded. This is in part because the argument during the hearing before me concentrated upon paragraph 17 (and to a lesser extent paragraph 27) rather than those individual allegations. One difficulty for a judge in my position is that I cannot stand in the plaintiffs’ shoes and re-draw the statement of claim myself. The lines between being merely helpful, being overly interventionist, and being minatory, are not always easy to discern.
I should nevertheless refer before concluding this judgment to one of the arguments put strongly by the plaintiffs. They pointed to the orders, made (inter-partes) by Bongiorno J and (by consent) by Smith J, which described the relevant “confidential information” in terms similar - to the point of being, in essence, identical - to those found by me to be unsatisfactory. But the litigation was then at a very different stage. If the defendants had, as they claim, done nothing wrong, they would not necessarily be then concerned to know precisely what information it was that the plaintiffs alleged to be both confidential and misused. Even if they had acted wrongfully, the identification of the misused information would not then be of particular consequence, provided the defendants were satisfied that, whatever the proper definition, they would be in a position to obey the orders of the Court. Now, however, it is necessary to look towards trial. Now, the defendants must seek to anticipate the evidence that will be called by the plaintiffs and that they will have to answer – if they can. The existence of a cause or causes of action for misuse of confidential information is not in doubt. The statement of claim cannot, therefore, be successfully attacked as not disclosing a cause of action. But it must nevertheless provide a sufficient basis upon which the trial can proceed to deal with the real issues between the parties. In my opinion, the statement of claim as presently drawn fails at that level. Although, as I accept, the strike-out application is made after considerable delay, it is better that the defects I have identified be remedied before trial than that the trial be dogged with difficulties which can by present action be avoided.
I will, for these reasons, allow the appeal. I further order that the consolidated statement of claim be struck out pursuant to r.23.02 of the Rules of the Supreme Court. The plaintiffs will have leave to re-plead.
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