National Surgical Pty Ltd v McPhee
[2010] FCA 972
FEDERAL COURT OF AUSTRALIA
National Surgical Pty Ltd v McPhee [2010] FCA 972
Citation: National Surgical Pty Ltd v McPhee [2010] FCA 972 Parties: NATIONAL SURGICAL PTY LTD (ACN 078 902 217) v ROBERT BRUCE MCPHEE File number: QUD 329 of 2010 Judge: COLLIER J Date of judgment: 3 September 2010 Corrigendum: 6 September 2010 Catchwords: PRACTICE AND PROCEDURE – interlocutory application for an order restraining former employee from performing work for competitor – earlier consent order restraining former employee from disclosing or making use of confidential information – principles in Australian Broadcasting Corporation v O'Neill [2006] 227 CLR 57 – question whether serious question to be tried that additional interlocutory relief necessary to protect interests of applicant – “springboard” principle in Terrapin Limited v Builders’ Supply Company (Hayes) Limited [1967] RPC 375 – no clear evidence that former employee has confidential information – not sufficient likelihood that former employee would disregard existing injunctive restraints – not sufficient likelihood that Court would order employment restraint in relation to former employee based on springboard principles – balance of convenience favours former employee Legislation: Copyright Act 1968 (Cth)
Corporations Act 2001 (Cth) ss 182, 183, 1324Cases cited: Australian Broadcasting Corporation v O’Neill (2006) 227 CLR 57 cited
Australian Insurance Holdings Pty Ltd v Chan [2010] FCA 781 cited
Lindner v Murdoch’s Garage (1950) 83 CLR 628 cited
Nordenfelt v Maxim Nordenfelt Guns & Ammunition Co Ltd [1894] AC 535 cited
Terrapin Limited v Builders’ Supply Company (Hayes) Limited [1967] RPC 375 cited
Wilson Parking Australia 1992 Pty Ltd v Rush [2008] FCA 1601 citedThe Laws of Australia (looseleaf) Thomson, “Restraint of Trade” Date of hearing: 2 September 2010 Place: Brisbane Division: GENERAL DIVISION Category: Catchwords Number of paragraphs: 63 Counsel for the Applicant: Mr M Spry Solicitor for the Applicant: Cooper Grace Ward Counsel for the Respondent: Mr ADB Fox Solicitor for the Respondent: Gilbert + Tobin FEDERAL COURT OF AUSTRALIA
National Surgical Pty Ltd v McPhee [2010] FCA 972
CORRIGENDUM
1.In the Order, delete “and paragraph B 4”.
I certify that the preceding one (1) numbered paragraph is a true copy of the Corrigendum to the Reasons for Judgment herein of the Honourable Justice Collier. Associate:
Dated: 6 September 2010
IN THE FEDERAL COURT OF AUSTRALIA
QUEENSLAND DISTRICT REGISTRY
GENERAL DIVISION
QUD 329 of 2010
BETWEEN: NATIONAL SURGICAL PTY LTD (ACN 078 902 217)
ApplicantAND: ROBERT BRUCE MCPHEE
Respondent
JUDGE:
COLLIER J
DATE OF ORDER:
3 SEPTEMBER 2010
WHERE MADE:
BRISBANE
THE COURT ORDERS THAT:
The applicant’s claim for relief in paragraph B 3 and paragraph B 4 of the application filed 12 August 2010 be dismissed.
Note:Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.
The text of entered orders can be located using Federal Law Search on the Court’s website.
IN THE FEDERAL COURT OF AUSTRALIA
QUEENSLAND DISTRICT REGISTRY
GENERAL DIVISION
QUD 329 of 2010
BETWEEN: NATIONAL SURGICAL PTY LTD (ACN 078 902 217)
ApplicantAND: ROBERT BRUCE MCPHEE
Respondent
JUDGE:
COLLIER J
DATE:
3 SEPTEMBER 2010
PLACE:
BRISBANE
REASONS FOR JUDGMENT
The applicant to these proceedings, National Surgical Pty Ltd, is a corporation engaged in the distribution of specialist surgical equipment. It seeks interlocutory and substantive relief against its former employee, the respondent Mr McPhee, on the basis that Mr McPhee is subject to a duty of confidentiality under s 183 of the Corporations Act 2001 (Cth) (“the Act”), as well as a duty of confidence in equity and obligations under his previous contract of employment with the applicant.
Yesterday the Court made a consent order restraining Mr McPhee from disclosing or using confidential information (as defined in the order) otherwise than in the course of this litigation. As a result the only aspects of interlocutory relief pressed by the applicant at the hearing yesterday related to the commencement by Mr McPhee of employment with a competitor of the applicant. The relief pressed yesterday by the applicant were:
3.An order that until the trial of this matter or further earlier order, the Respondent, by himself, his servants or agents, be restrained from and an injunction granted restraining the Respondent from performing work for:
(a)Life Health Care ACN 130 225 599;
(b)any other person or entity involved in the sale or distribution of surgical equipment to hospitals, surgeons, and other medical/health organisations in Queensland and Northern New South Wales, down to and including the city of Lismore.
4.The costs of and incidental to the interlocutory Application be reserved; and
5.Such further or other orders as this Honourable Court deems appropriate.
In Australian Broadcasting Corporation v O’Neill (2006) 227 CLR 57 at [19] Gleeson CJ and Crennan J observed that, in circumstances where an applicant seeks interlocutory relief, in summary it is necessary for the plaintiff to demonstrate that:
1.There is a serious question to be tried as to the plaintiff’s entitlement to relief; and
2.The plaintiff is likely to suffer injury for which damages will not be an adequate remedy; and
3.The balance of convenience favours the granting of an interlocutory injunction.
At the hearing Mr Fox submitted that the questions for the Court to consider were as follows:
Is there a prima facie case in equity for breach of confidence such that an order should be made on an interlocutory basis in favour of the applicant against the respondent? If so, subject to balance of convenience issues, what form should such relief take?
These questions were put to the bench by Mr Fox after I directed both Counsel to endeavour to reach common ground as to the questions for consideration by the Court in light of the consent order already made. I understand that the questions submitted by Mr Fox were accepted by Mr Spry as being questions for consideration by the Court, subject to Mr Spry’s submission that the Court is also empowered by s 1324 of the Act to give injunctive relief.
Notwithstanding Counsel’s formulation of the questions for consideration by the Court, a key issue in these proceedings is that, as I observed earlier, the Court has already made a consent order on an interlocutory basis restraining Mr McPhee disclosing confidential information. To that extent it appears already to be common ground that there is a serious question to be tried in respect of the applicant’s substantive claims to relief for breach of confidence.
During the course of the hearing yesterday however it became clear that the primary issue before the Court is whether, in light of the interlocutory relief already granted by the Court, the applicant has substantiated a case warranting the grant of further interlocutory relief in respect of Mr McPhee’s employment with competitors of the applicant. The primary case of the applicant yesterday was that Mr McPhee intends to harm the applicant by misuse of confidential information, and to that extent further interlocutory relief is necessary. Accordingly, as Mr Spry phrased a submission during the hearing, while the consent order made by the Court was not futile, nonetheless it was insufficient to protect the applicant in the circumstances of this case, such that further interlocutory relief restraining Mr McPhee from working in any capacity for a competitor of the applicant was, in the submission of the applicant, warranted.
Yesterday the parties argued their respective cases in terms of the O’Neill (2006) 227 CLR 57 principles. In my view this was appropriate as the issue whether further interlocutory relief was warranted was in dispute. However while Counsels’ formulation of the question for consideration by the Court was very helpful, the nature of the serious question to be tried by the Court is, in my view, narrower than that submitted by Counsel, and is:
Was the consent order made by the Court insufficient to protect the applicant in the circumstances of this case where the applicant contends that Mr McPhee intends to cause it harm by misuse of confidential information, such that further interlocutory relief restraining Mr McPhee from working in any capacity for a competitor of the applicant is warranted?
Before turning to this question in light of the reasoning in O’Neill (2006) 227 CLR 57 it is useful to describe the background to the current proceedings.
Background
The applicant is engaged in the distribution of specialist surgical equipment to hospitals and other medical and health organisations, and holds exclusive agencies in Queensland and northern New South Wales with a number of suppliers. Mr McPhee, was the Business Unit Manager of the applicant’s Spine Unit but tendered his resignation on 26 July 2010.
Mr McPhee commenced employment with the applicant in 2004 as a sales representative. Prior to then he worked as a sales representative with another medical devices company for two years, and as an orthotist (a designer and maker of bone bracings and scoliosis bracings) for the thirteen years prior to that. It is not in dispute that Mr McPhee’s father is a prominent orthopaedic spinal surgeon in Brisbane, and that Mr McPhee knows many of the spinal surgeons in Queensland through that family connection.
Mr McPhee tendered a letter of resignation to the applicant on 26 July 2010, substantially concurrently with four other employees of the applicant. Of those four other employees who also resigned, three were, like Mr McPhee, staff in the applicant’s Spine Unit which Mr McPhee led. It is common ground that Mr McPhee, like the other former employees of the applicant, intends to take up employment with Life Healthcare, which is a direct competitor of the applicant.
At no time during Mr McPhee’s employment did he and the applicant enter a written contract of employment. On 30 November 2009 however Mr McPhee signed a Confidentiality Contract with the applicant. This contract required Mr McPhee to, inter alia, hold all trade secrets in confidence and not discuss, communicate or make unauthorised copies of or use the trade secrets in any capacity unrelated to the applicant (cl 1.2). It appears, however, that the parties did not intend the obligations of confidentiality in the agreement to be in substitution for, or to in any way limit the duties of confidentiality which would rest with Mr McPhee (whether in equity or otherwise) if such specific obligations were not otherwise provided (cl 1.5).
It also appears that, at some time prior to the cessation of his employment with the applicant, Mr McPhee either possessed or had knowledge of an extensive volume of confidential information described as “RC confidential information” and “confidential spreadsheets”. This confidential information is exhibited to the second affidavit of the managing director of the applicant, Mr Jon Mills, sworn 13 August 2010, as JHM-15 and JHM 16. The basis upon which I draw this preliminary inference is that the terms of the consent order I made yesterday related to this confidential information, and was in the following terms:
Definitions:
In this Minute of Order, the following term has the meaning set out below:
“Confidential Information” means the following information which the Respondent either possessed (in electronic or documentary form), or had knowledge of, during the period between May 2004 and 20 August 2010 and which was not publicly available at any time during that period a) The ‘RC Confidential information’ received by the Respondent from Brian Gordon on 15 July 2010, being that which is contained in Annexure ‘JHM-15’ and the information contained in Annexure ‘JHM-16’ of the Second Affidavit of John Harvey Mills sworn 13 August 2010. IT IS ORDERED THAT:
Pending the determination of the Applicant’s claim for final relief or further order of the Court, the Respondent is hereby restrained from disclosing or using the Confidential Information, except for the purpose of instructing his legal representatives and preparing his evidence in these proceedings.
I note for completeness that, following this order, the applicant no longer pressed (for the purposes of the interlocutory proceedings) for orders of the Court, inter alia, restraining Mr McPhee from disclosing or making use of confidential information (including the information in the annexures JHM-15 and JMH-16), or for delivery up to the applicant of any copies of that confidential information.
The applicant’s case
In summary, the applicant in these proceedings claims that, notwithstanding yesterday’s consent order of the Court, the consent order is not adequate to safeguard the applicant from damage it will suffer if Mr McPhee is employed in any capacity by a competitor. This is because there remains a real threat that Mr McPhee is intending to make use of the confidential information and, accordingly, cause harm to the applicant, in order to advance his own interests. Such an inference can be drawn from the following circumstances:
·The mass resignation of the staff of the Spine Unit of the applicant, led by Mr McPhee, in circumstances where:
oMr McPhee refused to employ additional staff in the Unit in the period leading up to the resignations;
othe evidence of Mr Stan Gallo, an Associate Director of KPMG Forensic, demonstrates that Mr McPhee had been actively engaged in negotiating the employment contracts of his colleagues at the Spine Unit with Life Healthcare at a time when Mr McPhee was still employed by the applicant;
othe former staff of the Spine Unit were subsequently all employed by Life Healthcare.
·Mr McPhee’s evidence is to be viewed in circumstances which cast doubt on his credit. So, for example:
oMr McPhee had been inconsistent in his statements as to when he had actually finished his employment with the applicant. Evidence before the Court demonstrated that, on tendering his resignation, he had commenced “gardening leave” to serve out the period of his notice off site until the formal cessation of his employment on 20 August 2010. However Mr McPhee stated in his affidavit para 11 (and had clearly instructed his solicitors) that he had finished employment with the applicant on 27 July 2010 (which was actually the day following the tender of his letter of resignation);
onotwithstanding that Mr McPhee had remained an employee of the applicant until 20 August 2010, as was clear from evidence of Mr Abraham Chambers (affidavit of Abraham Johannes Chambers sworn 23 August 2010 paras 4-9) Mr McPhee had, prior to 20 August 2010, presented himself as representing Life Healthcare to clients of the applicant.
·There is evidence that Mr McPhee collated confidential material of the applicant in annexures JHM-15 and JHM-16 the subject of the restraint order. This is the type of information Mr McPhee will need to build the new business with Life Healthcare.
·Notwithstanding that Mr McPhee and Life Healthcare have signed an employment contract, Mr McPhee has never disclosed by sworn evidence when he meant to commence employment with Life Healthcare. This failure to be full and frank with the Court clearly goes to his credit, suggests that he intends to provide information to Life Healthcare, and supports the need for a further order from the Court.
·It is clear from the contract of employment signed by Mr McPhee and Life Healthcare that Mr McPhee will be required to build a new business in respect of spinal surgery equipment for Life Healthcare. The inference may be drawn that he will need to draw on confidential information to do so.
·On Mr McPhee’s own evidence, on 24 June 2010 while he was still employed by the applicant, Life Healthcare provided him with a hard drive of considerable capacity containing information concerning Life Healthcare, and Mr McPhee had connected that hard drive to the applicant’s system. Evidence from Mr Stan Gallo demonstrated that this external hard drive was accessed last on 25 July 2010, immediately before Mr McPhee resigned from his employment with the applicant. No explanation is given by Mr McPhee in his evidence as to the use he made of this external hard drive in relation to the applicant’s computer system.
·It is clear that on learning of the commencement of this application Mr McPhee sought to immediately “scrub” his home computer. Mr McPhee’s evidence is that he commenced doing so, with the assistance of a third party Mr Grant Rowan, on 16 August 2010. These actions provide strong grounds to draw an inference that he intends to harm the applicant and to then cover his tracks.
·Evidence of Mr McPhee to the effect that, if he needed information with respect to the pricing for prosthetics, he would have simply asked his father Dr McPhee for the information, is not supported by any evidence of Dr McPhee. Further, this statement indicates that Mr McPhee exhibits a tendency to ignore proper process in obtaining information, a disregard for confidentiality of information, and an interest in benefiting only himself.
The applicant submits that, in these circumstances, it has met the test of demonstrating a serious question to be tried as to the plaintiff’s entitlement to interlocutory relief.
In relation to damage the applicant would suffer from misuse of confidential information by Mr McPhee, the applicant submits it would be difficult and time-consuming to quantify that loss. Evidence of Mr Mills however is that damage to the applicant’s spine and biologics business caused by Mr McPhee’s use of the confidential information could result in losses of approximately $15 million per year in sales.
Mr McPhee’s case
In summary, Mr Fox for Mr McPhee submitted the following:
·A key question is whether the confidential information, the subject of yesterday’s consent order, can be used as a “springboard” (in the sense used in Terrapin Limited v Builders’ Supply Company (Hayes) Limited [1967] RPC 375) in Mr McPhee’s proposed new employment with Life Healthcare.
·The Court should not entertain making an additional order unless it is satisfied that there remains a risk of misuse notwithstanding the consent order made yesterday morning. While JHM-15 and JHM-16 may have been received electronically by Mr McPhee, there is no clear evidence before the Court (from Mr Gallo or otherwise) that Mr McPhee has engaged in, for example, copying or emailing those documents. That is potentially the end of the matter because in such a case there is no “springboard” for Mr McPhee.
·There is evidence before the Court that JHM-15 was provided to Mr McPhee during his employment with the applicant by a third party in response to his request for information to produce a strategic plan, that in fact JHM-15 was of no use to Mr McPhee for that purpose, and that Mr McPhee was then provided with JHM-16 for that purpose. To that extent Mr McPhee did not “collate” the material in JHM-15 and JHM-16.
·The applicant wants a carte blanche statement from the Court that the applicant cannot work in any capacity for its competitors. This can be contrasted with, for example, orders made by the Court in Wilson Parking Australia 1992 Pty Ltd v Rush [2008] FCA 1601.
·The evidence before the Court is that Mr McPhee has done what he can to rid himself of any confidential information of the applicant which he may have had in his possession, and it was for this reason that Mr McPhee organised to have his home computer “scrubbed”.
·A number of cases on which the applicant is relying arise in the contractual restraint of trade context. In the case before the Court Mr McPhee is not subject to any contractual restraint of trade.
·In substance, the applicant is seeking to prevent Mr McPhee utilising relationships he has developed with surgeons over his lifetime of family connections and employment.
·Evidence of Mr Mills is vague as to why, for example, the confidential information the subject of the consent order is “extremely valuable” or “extremely beneficial” for a competitor business and why it can act as a springboard for Mr McPhee. A question which the applicant has not answered is: what is it about this particular information, confidential though it may be, which means that additional injunctive relief is warranted.
·Evidence of Ms Kerry Lawford, a board member of the applicant, supports an inference that tension had existed between Mr Mills and Mr McPhee towards the end of Mr McPhee’s employment and the applicant was considering methods to terminate Mr McPhee’s employment with it (Affidavit in Reply of Kerry Anne Lawford sworn 26 August 2010 para 14).
·An unsigned contract of employment prepared in or around August 2009 by the applicant’s solicitors in relation to Mr McPhee proposed that the maximum enforceable restriction on Mr McPhee in relation to working for a competitor was six months after any termination of his employment with the applicant (cl 14.2 and cl 14.3 in JHM-2 to the first affidavit of Jon Harvey Mills sworn 12 August 2010). This period is at odds with the unlimited order proposed by the applicant.
·Mr Gallo’s credentials as an expert witness had not in any event been established.
·In relation to issues of Mr McPhee’s credit, the reason that Mr McPhee had not informed the Court of a commencement date with Life Healthcare was that no commencement date has yet been set in light of the application before the Court.
Serious question – relevant principles
In O’Neill (2006) 227 CLR 57, Gleeson CJ and Crennan J agreed with the explanation by Gummow and Hayne JJ in respect of the organising principles applicable to the Court’s consideration of applications for interlocutory relief. In the joint judgment of Gummow and Hayne JJ their Honours said, in summary:
·In respect of whether a serious question to be tried has been demonstrated, it is sufficient that the plaintiff show a sufficient likelihood of success to justify in the circumstances the preservation of the status quo pending the trial: at [65].
·It is not necessary that the plaintiff demonstrate more than a 50% chance of ultimate success: at [68].
·In that light the issue may be understood as whether the plaintiff has made out a prima facie case for relief: at [65], [70].
·The requisite strength of the probability of ultimate success depends upon the:
onature of the rights asserted; and
othe practical consequences likely to flow from the interlocutory order sought. Particular considerations arise where the grant or refusal of an interlocutory injunction in effect would dispose of the action finally in favour of whichever party succeeded on that application: at [72].
In this light the question for the Court is whether there is a serious question to be tried whether the consent order made by the Court yesterday was insufficient to protect the applicant where the applicant contends that Mr McPhee intends to cause it harm by misuse of confidential information, such that further interlocutory relief restraining Mr McPhee from working in any capacity for a competitor of the applicant is warranted. To that extent, an important threshold question concerns whether the confidential information, the subject of the consent order, can be used by Mr McPhee in such a way as to be a “springboard” for him into a position of advantage he would not have had but for possession of that information.
“Springboard” principle
The springboard principle appears first considered by Roxburgh J in Terrapin [1967] RPC 375. The background facts to the case are sufficiently summarised in the headnote. In Terrapin [1967] RPC 375 the defendants manufactured prefabricated portable buildings to the design of the plaintiffs. The plaintiffs had communicated to the defendants their design together with full manufacturing details, specifications, technical information and know-how, solely for the purposes of their joint venture, as well as a modification of the building. After termination of the contract, the defendants offered for sale, in competition with the plaintiffs, a prefabricated building incorporating many of the features of the plaintiff’s original design, as well as the modification. The defendants claimed that their obligation of confidence was discharged by the plaintiffs’ having sold buildings and published brochures which disclosed all the features of their buildings. Further, the works manager of the defendants also denied having employed any confidential information in evolving his design on behalf of the defendants.
Roxburgh J noted that the defendants had had access to the confidential technical information and know-how communicated by the plaintiffs for some considerable time before the arrival of the works manager on the scene. Further, although the works manager may not have had specific access to the drawings and specifications of the plaintiff’s buildings:
This might be because his staff did, but it might be that neither did because Mr Chambers knew every stage in the actual production of the Mark 24 unit, which was going on day by day under his very nose, and, accordingly, his mind must have been saturated with every detail of its design, features and methods of construction; and if his mind was so saturated from observing the work in progress on the manufacture of Mark 24 buildings, obviously that information was either directly or indirectly derived from the original confidential communications made by the plaintiffs to the first defendants. Moreover, upon what were Mr Chambers’ first efforts now directed? – to improve the floor of the Mark 24; not to make some new building unit. If, therefore, his mind was not already saturated with the Mark 24, his efforts to improve it must assuredly have completed that process. There is no better way of really understanding something than to try and improve it, and if you produce a different result, it is absurd to say that you made no use of the thing which you set out to improve.
When, therefore, Mr Chambers was instructed on behalf of the first defendants to design a new building unit – and I may say I have no doubt at all that in June or July 1958 Mr Moere was taking precautionary steps in anticipation of a breakdown of the negotiations for an extension of the contract – intended, as I am quite certain it was, to compete in the open market with the Mark 24 as about to be improved, he could not have avoided starting his dive into the future from the springboard of the confidential information acquired by the first defendants and by Mr Chambers as their servant. (at 390) (emphasis added)
In relation to “information” for the purposes of the springboard principle, Roxburgh J observes at p 390:
Therefore, in my judgment, Mr Chambers, acting for the first defendants, used the aforesaid confidential information directly or indirectly obtained from the plaintiffs without the consent, express or implied, of the plaintiffs within the meaning of the passage which I have already read. Lord Greene draws no distinction between [391] documents and other types of information, and, in my judgment, in principle there is not, though not doubt documents are often more specific than other types of information, and there may well be cases in which information may merge with general knowledge. I recognise the possibility of such cases, but this is, in my judgment, not one of them, and when I use the word “information”, I mean something that can be traced to a particular source and not something which has become so completely merged in the mind of the person informed that it is impossible to say from what precise quarter he derived the information which led to the knowledge which he is found to possess.
In relation to the defendants’ submission that their obligation to treat the design information as confidential was discharged when the plaintiffs published all the general features of the Mark 24 and Mark 36 building units in brochures and by putting the goods on the market (thereby enabling every member of the public by the elementary process of dismantling to access the confidential information), the judge observed at 391:
As I understand it, the essence of this branch of the law, whatever the origin of it may be, is that a person who has obtained information in confidence is not allowed to use it as a spring-board for activities detrimental to the person who made the confidential information, and spring-board it remains even when all the features have been published or can be ascertained by actual inspection by any members of the public. The brochures are certainly not equivalent to the publication of the plans, specifications, other technical information and know-how. The dismantling of a unit might enable a person to proceed without plans or specifications [392] or other technical information, but not, I think, without some of the know-how, and certainly not without taking the trouble to dismantle. I think it is broadly true to say that a member of the public to whom the confidential information had not been imparted would still have to prepare plans and specifications. He would probably have to construct a prototype, and he would certainly have to conduct tests. Therefore, the possessor of the confidential information still has a long start over any member of the public. The design may be as important as the features. It is, in my view, inherent in the principle upon which the Saltman case rests that the possessor of such information must be placed under a special disability in the field of competition in order to ensure that he does not get an unfair start; or, in other words, to preclude the tactics which the first defendants and the third defendants and the managing director of both of those companies employed in this case.
In the circumstances of the case the interlocutory injunction was granted.
The springboard principle is clearly of particular relevance in circumstances where a competitor gains confidential information and proposes to use that information to the disadvantage of the party from whom the information was obtained. It is less clear whether this principle is also applicable to, in effect, restrain a previous employee of a party being the owner of confidential information, from working for a competitor on the basis that the employee may misuse confidential information to which he has had access. Unfortunately the cases considering this specific issue are few.
One case on point is Wilson [2008] FCA 1601. In Wilson [2008] FCA 1601 the applicant and the third respondent were competitors in the business of the commercial operation of car parks. Mr Rush and Mr Sherriff were management level employees with the applicant. Both Mr Rush and Mr Sherriff left employment with the applicant to take up new positions with the third respondent. The applicant claimed, inter alia, that Mr Rush and Mr Sherriff took from the applicant confidential and commercially sensitive documents, data and other information, and used that material in their employment with the third respondent, to the benefit of the third respondent and to the detriment of the applicant. Accordingly – and similarly to the case presently before the Court – the applicant sued by reference to the equitable obligation of confidence, s 182 and s 183 of the Corporations Act, the Copyright Act 1968 (Cth), and to the confidentiality provisions of the contracts of employment which existed between each of Mr Rush and Mr Sherriff and the applicant. The applicant sought declarations, orders for delivery up, temporary and permanent injunctions, damages and an account of profits, as well as interlocutory orders.
The interlocutory relief sought by the applicant was, in summary:
·return of certain documents;
·destruction of electronic copies of those documents under the supervision of an independent computer expert, and evidence under oath by the respondents that they no longer have those documents when the process was completed;
·restraints on Mr Rush and Mr Sherriff until trial from using information in those documents;
·provision by each respondent of, inter alia, electronic storage devices containing Wilson documents, and evidence under oath to the effect that this was undertaken.
·restraints on Mr Rush and Mr Sherriff from working in the Melbourne car parking industry, or in the alternative from approaching or soliciting for business or providing any information to any other person in doing so, any persons owning, controlling or managing identified car parks.
So far as relevant for these proceedings, the respondents offered numerous undertakings which, in summary, required all three respondents to deliver up to the applicant relevant information, to allow an independent computer expert to remove from computers relevant information, and required the respondents not to use that information except for the purposes of the litigation.
While to a significant degree the undertakings addressed the claims of the applicant, the applicant initially continued to press para 9 of its notice of motion wherein it sought restraints on Mr Rush and Mr Sherriff from working in the Melbourne car parking industry or inter alia approaching third parties. During the hearing however, the applicant abandoned its claim in respect of Mr Rush and Mr Sherriff being restrained from working in the Melbourne car parking industry, and reformulated the alternative relief sought in respect of those respondents approaching or soliciting for business or providing information as specified in the notice of motion. Reasons for this reformulation appeared to be because documents produced as a result of a search order of the third respondent’s premises included the applicant’s internal financial details and workings for particular car parks, and terms upon which the applicant contracted with its customers at particular car parks; and because it became apparent that the interlocutory relief originally sought did not extend to the position of customers (ie motorists and corporate groups of motorists) of the applicant’s car parks under various contractual arrangements. Accordingly, in the reformulated interlocutory relief sought the applicant identified the sites where the evidence demonstrated that the third respondent had come into possession of confidential information such as customer lists, and sought to restrain Mr Rush and Mr Sherriff from approaching, or soliciting for car parking business from, customers at those sites.
Relevantly for the purposes of these proceedings, his Honour observed:
it was first submitted that the undertakings proposed by the respondents would not go far enough, since the restraint on “use” of the information in question proffered in the undertakings, though valuable so far as it went, lacked the precision necessary to give practical effect to Wilson’s objective that it should, for the interlocutory period, be unaffected by the circumstance that Messrs Rush and Sherriff had, as the court should provisionally find, taken Wilson’s confidential information. If it should transpire that, over that period, S & K secures the contract for a car park presently contracted to Wilson, the practical task of demonstrating, with the rigour required in a contempt application, that Mr Rush and/or Mr Sherriff “used” some of Wilson’s information in the relevant context would be of some difficulty, to say the least. (at [44])
In making this submission the applicant relied on the “springboard doctrine” as explained by Roxburgh J in Terrapin [1967] RPC 375. As Jessup J noted:
In the submission of Wilson, it having been established prima facie that Messrs Rush and Sherriff took confidential information, the court should go further than to impose upon them an obligation which corresponds with the general equitable duty. There needed to be an order which would exclude, as completely as may be, any prospect that Wilson’s confidential information might be used to the disadvantage of Wilson during the interlocutory period. (at [45])
Critically in respect of this submission, Jessup J held as follows:
46 I accept the broad thrust of the submissions made on behalf of Wilson in this respect. I do so because of the nature of the interlocutory evidence to which I have referred, and because of the absence of any evidence in response. It is established prima facie not only that Messrs Rush and Sherriff had access to Wilson’s confidential information, but also that they intended to use it for the specific purpose of advancing S & K’s position to the detriment of Wilson’s. I am much influenced by the evidence of Mr Varvaris in this respect. Although that evidence dealt with only a small part of the area that would be covered by the order proposed, it clearly showed the apparent disposition of Messrs Rush and Sherriff to use this confidential information in their now employment with S & K. The nature of the "comments" column in the document listing the Wilson-operated car parks fairly obviously bespeaks an intention to use the Wilson information to the detriment of Wilson, and to the advantage of S & K. Although it is not apparent who expressed that intention, no submission was made on behalf of Mr Rush or Mr Sherriff to dissociate themselves, or either of them, from this document, and I consider it reasonable provisionally to infer that the intention was theirs. Against this evidentiary setting, I am persuaded that the restraint contained in the undertakings of Messrs Rush and Sherriff would provide insufficient interlocutory protection for Wilson. I consider that the prohibition on “use” of the information, while broad, lacks the practical focus necessary in an interlocutory restraint. The scope for those being restrained to wonder whether particular conduct or activity was covered by the restraint should, in my view, be minimised. The approach embodied in Wilson’s par 9(b) as amended would be more likely to achieve that objective.
47 I also have considerable doubt whether Wilson’s position could be adequately protected by the undertakings of Messrs Rush and Sherriff not to use information derived from the documents exhibited to Mr Larkin’s affidavit. I think it would be too naïve to expect that the two men could simply put out of their minds any of Wilson’s information in the competitive environment in which they work, and to the demands of which they are apparently so keenly attuned. I say this particularly with respect to Mr Sherriff, who was only recently in the employ of Wilson; but also to an extent with respect to Mr Rush, who has been shown on the evidence to be ready to work closely with Mr Sherriff in settings relevant to sites presently operated by Wilson.
Consideration of these excerpts from his Honour’s judgment in Wilson [2008] FCA 1601 demonstrates considerable similarity between the findings of his Honour, and the contentions of the applicant in the proceedings currently before me that additional interlocutory relief is warranted. The similarity in facts between the two cases includes concessions made by former employees in respect of prospective use of confidential information (in Wilson [2008] FCA 1601, in the form of undertakings, in the case before me a joint agreement on a consent order by the Court). In particular, I note the view taken by his Honour on the facts of Wilson [2008] FCA 1601 that:
·additional interlocutory relief was warranted to protect the interests of the applicant in that case;
·the springboard principles had application in respect of the confidential information to which the former employees had access;
·the former employees had demonstrated a clear propensity to use the confidential information for the specific purpose of advancing their new employer’s position to the detriment of the applicant; and
·the former employees could not simply put out of their minds any of the applicant’s information in the competitive environment in which they worked.
There are however, significant, possibly critical, factual distinctions between the facts of Wilson [2008] FCA 1601 and those before me. In particular:
·In Wilson [2008] FCA 1601, the evidence was clear that Mr Ruff and Mr Sherriff had copies of confidential information belonging to the applicant in both hard and electronic form. On the material before me, while Mr McPhee has previously been the recipient of confidential information from the applicant in the course of his employment, there is no clear evidence before me that Mr McPhee has retained any copies of that information.
·In Wilson [2008] FCA 1601, Mr Ruff and Mr Sherriff had commenced work for their new employer and, on the evidence, had clearly provided a considerable amount of information, confidential to the applicant, to the new employer. On the material before me it appears that Mr McPhee has not commenced work for Life Healthcare because of the litigation before the Court. Further there is no evidence before the Court that he has provided copies of the applicant’s information to Life Healthcare.
·In Wilson [2008] FCA 1601, the applicant abandoned its claim for its former employees to be restrained from working for competitors. This is in stark contrast to the case before me.
·In Wilson [2008] FCA 1601, the additional interlocutory relief sought by the applicant was defined specifically in relation to particular car park sites and customer details relative to those sites. In the case before me the applicant seeks a broad restraint in respect of employment of Mr McPhee by competitors including not only Life Healthcare but any other relevant person or entity in Queensland and northern New South Wales down to and including the city of Lismore. The relief sought is not qualified by, for example, reference to particular customers of the applicant.
Is there a serious question to be tried?
In view of the submissions of the parties, the evidence before the Court and relevant case law, the issue whether there is a serious question to be tried as to the need for further interlocutory relief to protect the position of the applicant requires consideration of three sub-issues, namely:
·whether there is a sufficient likelihood that the confidential information provides a “springboard” for Mr McPhee in accordance with the principles articulated in Terrapin [1967] RPC 375;
·whether there is a sufficient likelihood that Mr McPhee would use the confidential information to his own benefit and to the detriment of the applicant; and
·the nature of the additional interlocutory relief sought by the applicant.
1. Is there a sufficient likelihood that the confidential information provides a “springboard” for Mr McPhee in accordance with the principles articulated in Terrapin?
In these proceedings it is common ground that the material in annexures JHM-15 and JHM-16 is confidential. I note that simply because material is agreed to be confidential does not automatically mean that the material constitutes a “springboard” in the terms articulated in Terrapin [1967] RPC 375.
In this case however, I consider that, assuming that Mr McPhee continues to have access to the confidential information (an issue I will consider more fully in respect of the next sub-issue) the applicant has established a sufficient likelihood that the confidential information in annexures JHM-15 and JHM-16 could be used as a springboard by Mr McPhee, either for his own benefit or for the benefit of a new employer, and to the detriment of the applicant.
The evidence before the Court demonstrates that the information in JHM-15 and JHM-16 includes sales and customer information of the applicant, monetary values of sales, and detailed commentary relevant to the sale of spinal surgical equipment by the applicant. Further, information in these annexures is extensive – one of the annexures runs to several hundred pages. It does not appear to be in dispute that Mr McPhee had access to this material during his employment. In my opinion, while Mr Fox submitted that the evidence proving that this information would be of value to a competitor (including evidence of Mr Mills) was thin, it is very likely that the information would, by its very nature, be of value to a competitor.
While I also accept that Mr McPhee has a considerable amount of personal knowledge of orthopaedic spinal surgeons and their practices in Queensland and northern New South Wales, and that he has built relationships with many of them through family and earlier employment relationships, I am not satisfied at this stage of the proceedings that he could have personal knowledge to the level of detail in the confidential information in annexures JHM-15 and JHM-16. I am satisfied that this confidential information has been accumulated in the course of the applicant’s business, and that its use by competitors in the same market would be detrimental to the applicant such as to constitute a “springboard” for Mr McPhee’s future employment activities if he continues to have access to that information.
2. Is there a sufficient likelihood that Mr McPhee would use the confidential information to his own benefit and to the detriment of the applicant notwithstanding the consent order?
On the assumption that Mr McPhee has copies of the confidential information in JHM-15 and JHM-16, in my view the evidence demonstrates a likelihood that Mr McPhee would use confidential information to his own benefit and to the detriment of the applicant. I note in particular the submissions of the applicant from which I was invited to draw an inference that Mr McPhee would act to the detriment of the applicant. While in this case the actions of Mr McPhee do not appear to be in the same league as the actions of Mr Ruff and Mr Sherriff in Wilson [2008] FCA 1601, I note that in this case the applicant commenced proceedings against Mr McPhee before he commenced employment with Life Healthcare (unlike the circumstances in Wilson [2008] FCA 1601). Further, Mr McPhee’s actions paint a picture of a person who is prepared to act in the interests of himself, his work colleagues, and a future employer, and against the interests of the applicant at a time when he was an employee of the applicant. To that extent I consider that the applicant has demonstrated a prima facie case that Mr McPhee would use confidential information of the applicant to his own benefit and to the detriment of the applicant.
There are, however, a number of important qualifications to this finding.
The first qualification is that, as Mr Fox submitted, there is no clear evidence that Mr McPhee has at any time copied the confidential information in JHM-15 and JHM-16 or emailed it to any third party including Life Healthcare, or indeed that he has it in his possession other than for the purposes of this litigation. In relation to the possibility of Mr McPhee emailing the confidential information, it appears on the face of the extensive evidence of Mr Gallo that the applicant is unable to demonstrate that Mr McPhee has emailed this information to anyone. This is a significant contrast with the events in Wilson [2008] FCA 1601, where it was clear that Mr Ruff and Mr Sherriff had made copies of extensive amounts of confidential information of their previous employer.
The fact that Mr McPhee has consented to an order restraining him from using this material is not, in itself, evidence that he actually has possession of the material in annexures JHM-15 and JHM-16.
There is evidence in the first affidavit of Mr Gallo sworn 18 August 2010 that Mr McPhee, at the premises of the applicant on the evening of 25 August 2010 (being the day before he tendered his resignation), accessed an external hard-drive supplied to him by Life Healthcare through a laptop computer of the applicant. Mr McPhee’s evidence was that the external hard-drive supplied by Life Healthcare contained information about that company. However in my view the fact that Mr McPhee accessed this hard-drive on the evening before he tendered his resignation is, in itself, insufficient for me to draw an inference that he copied confidential material from the applicant on to that hard-drive.
The evidence of Mr Gallo is that he is unable to determine what, if any, additional electronic files are located on another drive (“G” drive) to which Mr McPhee had access, although he was able to establish that an electronic file “LHC Commission breakdown 08-06010.xlsx” was on that drive and created on 8 June 2010 (second affidavit of Stan Gallo sworn 23 August 2010 para 11). This evidence, in itself, is insufficient for me to draw an inference that Mr McPhee has electronic copies of the applicant’s confidential information.
In his affidavit, Mr McPhee has denied that he has copies of any of the applicant’s confidential information. The applicant submitted that the Court should make adverse findings as to Mr McPhee’s credit because of, inter alia, the inconsistencies in his evidence as to his date of termination of employment, his deceitfulness in arranging for himself and others to leave the applicant’s employment and take up employment with Life Healthcare, the “scrubbing” of his computer after the commencement of the litigation by the applicant, and his collation of JHM-15 and JHM-16. However in my view:
·an inference may be equally drawn that Mr McPhee was careless rather than deliberately deceitful in relation to the inconsistencies in his evidence about the date of his termination of employment;
·I am not prepared to find at this stage that making arrangements for alternative employment should go to his credit;
·the evidence of Mr McPhee was that he had arranged for scrubbing of his home computer at his own expense to demonstrate to the applicant that he had taken all steps to remove their documents from that computer and in my view it is open to me on the evidence to accept this explanation; and
·Mr McPhee’s evidence was that he received JHM-15 and JHM-16 in order to produce a strategic plan during the course of his employment with the applicant. This explanation is prima facie credible.
No witnesses have, at this stage of the proceedings, been called for cross-examination so as to test credit.
While the threshold the applicant needs to meet in justifying interlocutory relief is low, in my view this does not justify the Court drawing inferences to support the applicant’s claim in the absence of supportive evidence. At this stage of the proceedings, there is no clear evidence that Mr McPhee has the confidential information the subject of the consent order. To that extent, even if I am prepared to accept that the circumstances create a potential “springboard” for Mr McPhee, or the likelihood that he would use the confidential information to his own benefit and to the detriment of the applicant, this is of no moment if I am unable to find, even at an interlocutory stage, a sufficient likelihood that Mr McPhee has the relevant confidential information.
The second qualification is that Mr McPhee is already subject to an order of this Court restraining him from disclosing or making use of, in any way, the relevant confidential information. While I am satisfied that Mr McPhee is a person who looks after his own interests, it is a very different and very serious matter to contend that he would ignore an order of this Court to his own benefit and that of Life Healthcare, particularly while a trial is pending. I am not satisfied on the material put before me that Mr McPhee would do so. More particularly, there is no evidence before the Court that he has communicated confidential information of the applicant to, for example, Life Healthcare. To that extent, I am not satisfied that interlocutory relief beyond the relief already granted is necessary to protect the interests of the applicant.
3. The nature of the additional interlocutory relief sought by the applicant
Third, and importantly, I am not satisfied at this stage of the proceedings that the applicant has demonstrated a sufficient likelihood that it would be entitled to the additional interlocutory relief it now seeks. The reason for this is three-fold.
First, it is common ground that Mr McPhee is not currently subject to a contractual restraint in respect of his previous employment with the applicant. The order the applicant is seeking from the Court is, in effect, a broad restraint on Mr McPhee working for any competitor. At the hearing yesterday I asked Mr Spry whether the proposed order would prevent Mr McPhee working for any competitor as, for example, a receptionist, to which Mr Spry replied in the affirmative (contrast in this context the approach of Greenwood J in Australian Insurance Holdings Pty Ltd v Chan [2010] FCA 781 at [116]).
Second, there is a considerable body of jurisprudence establishing that courts approach even written contractual restraints of trade cautiously, on the basis that traditionally restraints of trade were assumed to be injurious to the interests of the state or the community and are therefore contrary to public policy: Nordenfelt v Maxim Nordenfelt Guns & Ammunition Co Ltd [1894] AC 535. While in more recent years restraints of trade in the employment context have been recognised as legitimate, and indeed equity would restrain an employee from breaching his or her equitable obligations of confidentiality as appropriate, nonetheless restraints of trade in employment contracts are also interpreted more strictly than other restraints (for example, for the sale of a business). The reason for this is that, in the employment situation, the employer has no right to completely prevent the employee from competing with the employer (Lindner v Murdoch’s Garage (1950) 83 CLR 628, The Laws of Australia (looseleaf) Thomson, “Restraint of Trade” Ch 30.1, paras 30.1.140 and 30.1.420).
Third, notwithstanding the “springboard” principle upon which the applicant relies in respect of the confidential information to which it contends Mr McPhee has access, there is no authority of which I am aware where the Court has made an order tantamount to a restraint of trade, in relation to an unwritten contract of employment, in circumstances derived from the springboard principle. In Wilson [2008] FCA 1601, for example, the applicant abandoned its claim for interlocutory relief in respect of Mr Ruff and Mr Sherriff working for competitors during the course of the hearing. I am not satisfied at this interlocutory stage that the springboard principle supports an order of the type sought by the applicant.
In these circumstances, at this stage of the proceedings I am not satisfied that the applicant has demonstrated a sufficient likelihood that it would be entitled to an order imposing a blanket restraint on Mr McPhee working for all competitors of the applicant within Queensland and northern New South Wales.
In the circumstances I am not satisfied that the applicant has demonstrated a serious question to be tried as to whether the consent order made by the Court is insufficient to protect the applicant in circumstances where the applicant contends that Mr McPhee intends to cause it harm by misuse of confidential information, such that further interlocutory relief restraining Mr McPhee from working in any capacity for a competitor of the applicant is warranted.
Balance of convenience
My findings in respect of whether there is a serious question to be tried are sufficient to dispose of this matter. However as the issue of balance of convenience was also argued fully by Counsel it is appropriate to deal with it.
In summary, the factors weighing in favour of a finding that the balance of convenience favours the applicant are:
·from the applicant’s perspective it was not safe for Mr McPhee to be employed in any capacity by a competitor;
·if Mr McPhee is financially inconvenienced by being unable to work for Life Healthcare or another competitor of the applicant the reality is that he has placed himself in a position where he is so inconvenienced. In any event however there is no evidence before the Court that Mr McPhee is reliant on income from his own employment, or that he does not have income from another source.
·the applicant gives the usual undertakings as to damages;
·the applicant is prepared to undertake to pay the base salary of Mr McPhee for three months, assuming that a trial of the substantive matters can be held and determined during that time;
·the applicant would suffer considerable damage from the misuse of confidential information (according to evidence of Mr Mills, in the vicinity of $15 million per year in sales), although it would be difficult and time-consuming to quantify the loss;
·Mr McPhee would not be able to meet any judgment for improper use of the information.
In my view these are powerful factors, particularly the undertaking of the applicant to pay Mr McPhee’s base salary for three months so as to prevent him suffering financial hardship pending final resolution of this matter.
However in my view these factors are inadequate to warrant a finding in the applicant’s favour justifying an award of further interlocutory relief. I take this view because:
·As I have already found, at this stage there is no clear evidence that Mr McPhee has the confidential information in annexures JHM-15 and JHM-16.
·The applicant has not put forward any evidence about damage it has suffered or will suffer in respect of relevant events: for example there is no evidence before the Court as to whether Mr McPhee has been replaced, whether his absence has been compensated by other arrangements in the applicant, whether and how the sales of the applicant have been affected in the period since Mr McPhee left or whether the applicant had communicated with Life Healthcare.
·The order sought by the applicant is very broad, in circumstances where Mr McPhee is not subject to contractual restraint of trade, but is already subject to interlocutory injunctive restraints.
·Mr McPhee has worked in the spinal industry his entire working life, and an interlocutory order in the form sought by the applicant would prevent him from being able to utilise his skills developed over that period.
·Although the undertaking of the applicant in relation to payment of Mr McPhee’s base salary for up to three months is very reasonable, Mr Fox submitted yesterday that it would not compensate Mr McPhee for loss of his usual income including commission.
·An order restraining Mr McPhee from taking employment with any competitor of the applicant until the matter is resolved may cause Mr McPhee to lose opportunities of alternative employment, including with Life Healthcare.
In these circumstances, even if there were a serious question to be tried, I would not be prepared to make the additional interlocutory order sought by the applicant in para B 3 of its application.
Conclusion
At the hearing yesterday Mr Fox submitted that he would like to be heard as to costs. The applicant has sought an order that costs be reserved, which is a usual order in respect of interlocutory proceedings. In the circumstances however I will make no order as to costs pending the respondent being provided an opportunity to be heard.
I certify that the preceding sixty-three (63) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Collier. Associate:
Dated: 3 September 2010
0
4
0