Mushroom Distribution Services Pty Ltd v Murphy

[1999] NSWSC 374

CITATION:	Mushroom Distribution Services Pty Ltd v Murphy [1999] NSWSC 374
CURRENT JURISDICTION:	Equity Division
FILE NUMBER(S):	1764/99
HEARING DATE(S):	07/04/99
JUDGMENT DATE:	7 April 1999
PARTIES :	Mushroom Distribution Services Pty Ltd (P1) Mushroom Records Pty Ltd (P2) Scott Bruce Murphy (D1) Zomba Records Australia Pty Ltd (D2) Zomba Records Ltd (D3)
JUDGMENT OF:	Young J

COUNSEL :	Plaintiffs: N C Hutley SC and M Dicker 1st Defendants: N Magee QC and M McDonald 2nd & 3rd Defendants: A J L Bannon SC and D B Studdy
SOLICITORS:	Plaintiffs: Allen Allen & Hemsley 1st Defendant: Phillips Fox 2nd & 3rd Defendants: Freehill Hollingdale & Page
CATCHWORDS:	Equity [363]; Injunction; Confidential information; Information belonging to associated company of employer; Employee seeking to abstract majority of associated company's business to competitor; Springboard; Interim injunction granted
DECISION:	See paras 43, 44 and 47

THE SUPREME COURT
OF NEW SOUTH WALES
EQUITY DIVISION

YOUNG, J

WEDNESDAY 7 APRIL 1999

1764/99 - MUSHROOM DISTRIBUTION SERVICES PTY LTD & ANOR v SCOTT BRUCE MURPHY & ORS

JUDGMENT
1 HIS HONOUR : This is an application for an interim injunction in a case where it is really impossible for the court to do absolute justice between the various parties. Under such circumstances the court just has to do the best it can and to do what the High Court in Bridgewater v Leahy (1998) 72 ALJR 1525 called "practical equity".
2 The first defendant was employed by the first plaintiff from about 28 June 1984 until 15 February 1999. From about 1987 it would seem he had the title “managing director”, although he was not always a member of the board of directors.
3 The second plaintiff, Mushroom Records Pty Ltd, was associated with the first plaintiff. The first plaintiff was, according to the draft statement of claim, in the business of importation, manufacture and distribution of records, compact discs and audio tapes in Australia. The second plaintiff conducted the business of arranging for the distribution and recording of music, the entry into distribution licence agreements with other record companies in Australia and overseas, and distributing such products. The first defendant was never at any stage employed by the second plaintiff.
4 The third defendant is a company that has an address in London and I assume was incorporated in England. The second defendant is an Australian corporation, which I assume, seeing it was represented by the same counsel as the third defendant, is its Australian offshoot.
5 It would appear that in 1998 the beneficial ownership of the shares in the first plaintiff changed and the first defendant thought that his position would not in future be as pleasant as it theretofore had been.
6 According to the documents which are in Exhibit PX04, from about the middle of November 1998 the first defendant made it clear to the third defendant or its associates, that it would be mutually beneficial for the third defendant to terminate its relations with the first plaintiff and for a new arrangement to be entered into, whereby the third defendant would conduct its own operation in Australia, and that that operation in Australia would employ the first defendant and his colleagues.
7 The arrangements were made between mid November 1998 and mid February 1999 and were made at a time, it would appear on the material before me, when the first defendant was still the “managing director” of the first plaintiff and without the knowledge of the first or second plaintiffs. It was indeed only after notices to produce were served and after collection of material from the hard disk of the computer used by the first defendant was technologically examined that the extent of the first defendant's activities whilst an employee of the first plaintiff were revealed.
8 The first defendant put the sales pitch to the third defendant that he was able to deliver up to ninety per cent of business, which would in the future in the ordinary course of things flow to the second plaintiff, into the hands of the third defendant and its associates.
9 All that I have said before comes from the documents in PX04 and other evidence that I have at the moment. Of course, it has been untested. It is put before me merely to demonstrate the strength of the plaintiffs' case to see whether the plaintiffs have a prima facie case, as it is sometimes put an arguable case, for the grant of an injunction.
10 It may well be that when all the documents and all the evidence is before the court a court may come to a different view. However, at present there is, to use a broad brush approach, sufficient to show that the first defendant, whilst an employee of the first plaintiff, and owing the first plaintiff a fiduciary duty to be faithful, was, to use the vernacular, feathering his own nest by making representations that he could deliver the plaintiffs' business into the defendants' hands. In the due course of time the first defendant put an end to the contract that it had with the first plaintiff and it would seem that that contractual arrangement will cease on 26 April 1999.
11 On 15 February 1999, the first defendant resigned from the first plaintiff's employment. There was a conversation that as he was joining a competitor there was no desire for him to work out his notice, and it has been put that the probable legal analysis of that was that the contract of employment effectively terminated by mutual consent on 15 February 1999. I am prepared to accept that analysis for present purposes. There is no allegation of any breach of fiduciary duty by the first defendant after the termination.
12 As from, I think, 1 March 1999 the first defendant has been working with the second defendant to set up a competitive business. The defendants hope that that business will get into operation fairly soon.
13 On 19 March 1999 the plaintiffs sought interim relief in this Court by summons filed on that day. The matter came into the list on 24, 25 and 26 March and was stood over to today for the interlocutory hearing.
14 In the meantime, the defendants filed motions to have the proceedings cross-vested to the Supreme Court of Victoria. Those motions came before me on 31 March and, for the reasons I then gave, I declined to make orders at that stage, but stood the motion over until after the interlocutory hearing. I was informed, however, during that hearing that if the Supreme Court of Victoria considered that the matter was one which should be expedited that the final hearing could take place within three months.
15 I have approached the present application on the basis that the matter will be transferred to the Supreme Court of Victoria and that it probably will be heard within three months.
16 If the matter were to be retained here then, depending on a series of factors, it could be heard in the last week of April or the first week of May, but that depends on when the parties can be prepared, the length of the hearing and a series of other factors. However, I will proceed on the basis that the matter will go to Victoria and that it can be heard there within three months, even though it may be that when the final decision is given on the notice of motion some other decision is reached.
17 When working out whether to grant an interlocutory injunction the court looks at three matters; (a) whether there is an arguable case; (b) whether damages are an adequate remedy; and (c) where the balance of convenience lies.
18 Dealing with each of those three matters, as to (a), Mr Hutley SC and Mr Dicker, who appeared for the plaintiffs, say that when one looks through the material in PX04 one can see plainly that the first defendant had specialised knowledge of the relationship between the plaintiffs and their various clients, who are under certain contracts with the second plaintiff as set out in PX02 and PX03; the first defendant went out of his way to contact the third defendant, using, in some cases, the letterhead of the first or second plaintiff to get his message across; and that he deliberately broke his duty of fidelity and undermined the plaintiffs' business by delivering it into the hands of the second and third defendants.
19 Mr Magee QC, who appeared with Mr Michael McDonald for the first defendant, said that one cannot look at this case in a broad brush way. First one has to be very careful to distinguish between the first plaintiff and the second plaintiff. There was no contract of employment with the second plaintiff, the fiduciary duties as pleaded were duties which arose out of the contract, and are duties which were owed to the first plaintiff; the alleged breach and real damage is going to happen to the second plaintiff, and on it's case, as pleaded in the statement of claim, that is as far as one need go to show that there is no arguable case.
20 As to that, at least on an interlocutory basis, the short answer is Lord Cottenham's golden rule in Wallworth v Holt (1841) 4 My & Cr 619; 41 ER 238, that is, that the Court of Equity makes sure that in changing ways of doing business the essential nature of fiduciary relationships remains the same. Although in Wallworth v Holt the problem was the change over from a partnership structure to company structure under deeds of settlement, the same principle applies where one changes from a simple corporate structure to a corporate structure with divisions. A Court of Equity is never thwarted by the intervention of separate corporate vehicles to arrange people's affairs.
21 Also as far as the contract is concerned, whilst privity is a doctrine of Common Law, there are cases in Equity where in that sort of situation a fiduciary duty can arise between "A" and "C" even though the contract is between "A" and "B". Whilst fiduciary duties may arise from contract, that is not their only service. I would not have considered that on an interlocutory basis the point as to who was the actual employer is one which shows that the plaintiffs do not have an arguable case.
22 Mr Magee QC then says that one has to look at this case analytically. The plaintiffs put it forward as a springboard case, that is a case where because of the alleged unconscionable conduct of the defendants if a court of Equity does not grant an injunction the defendants will obtain a commercial advantage unconscionably. The way in which the court prevents such unconscionable conduct is to grant an injunction for a time, so that the advantage of stealing a march on the opposition is nullified.
23 Mr Magee QC asks what real springboard effect is there by what has happened in this particular case? It is alleged, Mr Magee QC says, that the second and third defendants have obtained benefits, but he questions what the benefits really are because there are contracts made by the plaintiffs with the people named in the schedule to the summons; there is no attempt to interfere with those particular contracts, and if there was any attempt it would be clear that an injunction would lie, or that damages would follow.
24 Then he says, as far as the personnel that are employed by either of the plaintiffs, whom it is alleged the defendants are poaching, what are the rights that the plaintiffs have to retain the benefit of their services? They can be offered better employment and there is no right in the plaintiffs that is being infringed. The plaintiffs have no particular benefit in the custom of the people who have made contracts with them over and above the benefit that is guaranteed to them under the contracts. How can it therefore be a case where there is any springboard effect at all?
25 With great respect, I believe that that is putting the matter too technically. When one looks to the real commercial heart of this matter Mr Murphy, the first defendant, was of the view that his future did not lie with the plaintiffs after the change of ownership. He knew commercially he had something to sell. He considered that he would be able to convince someone else in the same line of commerce that he could attract the business to that someone else. He approached the second and third defendants. The second and third defendants also lived in the real world and knew that that would be a commercial benefit to them, and even though at first they were not attracted to do a deal with the first defendant, they soon saw where the commercial benefits lay and performed the marriage.
26 It seems to me that by taking advantage of the infidelity of the first defendant the second and third defendants got themselves into a position in the Australian market where they could exploit the artists and repertoire available here in a way that they would not have been able to do if the arrangement had not been made with Mr Murphy while he was still owing a fiduciary duty to the plaintiffs.
27 This undermining, to use the words of Mr Hutley SC, took place from about the middle of November 1998 through to February 1999. If it had not occurred the defendants would have started three months further back in time than they are in fact. This would seem to me to indicate that there is an arguable case of at least three months for the springboard effect to be neutralised.
28 I say at least three months because although my current thinking on the present material is that mid November to 15 February is three months, nothing could have been done to prevent any activity of Mr Murphy after 15 February. It may be argued on the final hearing that it is too topical a view to equate those three months with the period of the springboard, but at the moment I think that the three months is probably the period, and although it would be up to this Court, or some other court if the matter cannot be heard by 15 May, to extend the period, it is only necessary for me at the moment to decide whether there is an arguable case for the next month or so.
29 As to this, Mr Bannon SC and Mr Studdy, who appeared for the second and third defendants, say that Equity never worries about very short periods. The word "never" in that submission overstates the position though generally speaking it is right. Equity has its guidelines, but each case must be considered in its context as to whether the court will give relief or not. At the moment it seems to me that there is an arguable case for an injunction up until and including 15 May 1999.
30 I then pass to consideration (b), whether damages are an adequate remedy. I thought for quite a while that they were. The reason is that if one looks at the evidence the plaintiffs can work out fairly well what is the quantum of their trade and they can work out from the sales of records and associated products just which contracts bring in which profits. If the defendants have the benefit of a three or six or nine or twelve months springboard and the defendants keep proper accounts then it should be within the competence of any reasonably proficient judicial officer to work out the damages.
31 However, Mr Hutley SC convinced me that this was not the case. He pointed to the fact that the contracts and the relationships in the present case are rather special. The importance was the relationship, and it may very well be the case that something that happened within the three month period might not bear fruit for quite some time into the future.
32 Accordingly, it would be very difficult indeed to work out what damages occurred as a result of the breach of fiduciary duty. As to that Mr Magee QC said, "So what? It is often difficult for plaintiffs to prove what damages flow, but why should that mean that the plaintiffs get an advantage over the defendants by getting an injunction?" The reply to that is, of course, that it is the prima facie wrongdoing of the defendants that has brought all this about, so why should the plaintiffs suffer by having a case where they may very well not be able to prove the full amount of their damages, yet they will be commercially prejudiced.
33 Mr Bannon SC then said the injunction that is being sought is one which is not really able to be policed and is in such broad terms as would virtually paralyse the defendants from doing anything. In particular, the injunction sought in para 1 of the amended summons prevents contact with various people "for the purpose of entering into a Proscribed Contract" (the words “Proscribed Contract" are defined in the amended summons).
34 Although this point mainly falls within category (c), it is also relevant here because if the plaintiffs succeed at the trial and if a valuable contract comes about as a result of an advantage which the defendants have got for themselves, it will be very difficult to work out what damages follow.
35 Thus, after initially being of a different view, it does seem to me that Mr Hutley SC is right and damages could not be properly calculated and are not an adequate remedy.
36 Accordingly, the case must stand or fall under heading (c), balance of convenience.
37 On the one hand, the plaintiffs are in the situation where they have an arguable case and they could suffer irreparable damage if, as the first defendant boasted, seventy to ninety percent of their business could be abstracted. However, it must be remembered that after 15 February, because there was no restraint of trade clause in the contract, that unless some other arguments of the plaintiffs' in their statement of claim succeed at the trial, the first defendant could have done that anyhow after 15 February and that it was only his activities before that date that can ground an injunction.
38 Secondly, the first defendant is in a position where he is earning considerable moneys with the second and third defendants; he has been in the record industry for many years; he knows no other trade, and his position may be in jeopardy if an injunction is granted.
39 Thirdly, the situation is that I am really only considering an injunction up to 15 May, and that is a fairly short period. It is doubtful whether the defendants can do much damage in that time anyhow and the court leans against granting an injunction for a short period of time.
40 Fourthly, it is difficult to police this sort of injunction, especially when an injunction, such as order 1, is put in such general terms.
41 I have taken all these matters into account, plus all the incidental matters put in submissions. I am troubled to an extent with the generality of the orders, but I am reminded in this sort of case that often the court grants a complete blanket ban on employees from competing for a limited period just because it is difficult to restrain any particular activity, and there are so many avenues for people outflanking injunctions granted in a very strict form.
42 I said at the beginning of these reasons that it is very difficult to do complete justice in this case and it is necessary for me to do the very best I can.
43 The very best I can, after hearing all the arguments, is upon the plaintiffs by their counsel giving to the court the usual undertaking as to damages I make order 1 in the amended summons omitting the words "for the purpose of entering into a Proscribed Contract", and I make orders 2 and 3 up to and including 15 May 1999.
44 The costs of the application are costs in the cause.
COUNSEL ADDRESSED ON THE APPLICATION TO CROSS-VEST
45 My view is that the balance of justice favours this matter going to the Supreme Court of Victoria essentially because the witnesses and the documents are in Melbourne; the case has little connection with Sydney and whilst I am of the view that either this Court or the Supreme Court of Victoria would probably reach the same conclusion, and probably deal with the case with equal efficiency, those factors mean this should go to Melbourne, rather than stay in Sydney.
46 The thing that does concern me a little, but I am glad to say Mr Bannon SC is not concerned about it to any material extent, is that if any further interlocutory application has to be made in the next few weeks it would be difficult for a judge in Melbourne to have a full set of the papers, but as that does not concern the defendants I suppose it should not overly concern anybody else.
47 I order that the matter be transferred to the Supreme Court of Victoria.
oOo.

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