Native Extracts Pty Ltd v Plant Extracts Pty Ltd (No 2)

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FEDERAL COURT OF AUSTRALIA

Native Extracts Pty Ltd v Plant Extracts Pty Ltd (No 2) [2024] FCA 106

File number(s): QUD 215 of 2020
Judgment of: DOWNES J
Date of judgment: 23 February 2024
Catchwords:

INTELLECTUAL PROPERTY – whether information about extraction machine was confidential information owned by company where second respondent was former director – where machine had been identified by directors as suitable for proposed business prior to incorporation of company – where second respondent was informed about machine by third party on unrestricted basis – where evidence insufficient to establish that information was confidential information owned by company

CONTRACTS – construction – scope of confidentiality clause – whether extended to information about commercially available product – where contract contained restraint of trade clause which permitted return to industry after 12 months

INTELLECTUAL PROPERTY – account of profits sought against company which operated business using confidential information – where damages for loss of profits sought against other respondents in alternative – no objection taken to split election between remedies

DAMAGES – assessment of quantum of lost profits from sales which would have otherwise been made – discussion of factors to be considered in calculation of damages

CORPORATIONS ACT – claim that person was involved in contravention of s 183 of the Corporations Act 2001 (Cth) – claim for knowing assistance in breach of equitable and fiduciary duties – evidence insufficient to establish pleaded case – case advanced in closing submissions different to pleaded case – claim dismissed

COPYRIGHT – flagrant infringement of copyright – award of additional damages

Legislation:

Competition and Consumer Act 2010 (Cth) Sch 2 (Australian Consumer Law) ss 18, 29

Copyright Act 1968 (Cth) s 115(4)

Corporations Act 2001 (Cth) ss 79, 183

Federal Court Rules 2011 (Cth) r 16.43
Cases cited:

Ancient Order of Foresters in Victoria Friendly Society Ltd v Lifeplan Australia Friendly Society Ltd (2018) 265 CLR 1; [2018] HCA 43

Antaios Compania Naviera SA v Salen Rederierna AB [1985] AC 191

Australian Medic-Care Co Ltd v Hamilton Pharmaceuticals Pty Ltd (2009) 261 ALR 501; [2009] FCA 1220

AustralianSecurities and Investments Commission v ActiveSuper Pty Ltd (in liq) (2015) 235 FCR 181; [2015] FCA 342

Australian Securities and Investments Commission v Australian Investors Forum Pty Ltd (No 2) (2005) 53 ACSR 305; [2005] NSWSC 267

Barnes v Addy (1874) LR 9 Ch App 244

Briginshaw v Briginshaw (1938) 60 CLR 336

Del Casale v Artedomus (Aust) Pty Ltd (2007) 73 IPR 326; [2007] NSWCA 172

Digital Cinema Network Pty Ltd v Omnilab Media Pty Ltd (No 2) [2011] FCA 509

Dynamic Supplies Pty Ltd v Tonnex International Pty Ltd (No 3) (2014) 107 IPR 548; [2014] FCA 909

Facton Ltd and Others v Rifai Fashions Pty Ltd (2012) 199 FCR 569; [2012] FCAFC 9

Farah Constructions Pty Limited v Say-Dee Pty Limited (2007) 230 CLR 89; [2007] HCA 22

Futuretronics.com.au Pty Ltd v Graphix Labels Pty Ltd (No 2) (2008) 76 IPR 763

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Details
Case
[2024] FCA 106
Decision Date

CaseChat Overview and Summary

Native Extracts Pty Ltd v Plant Extracts Pty Ltd (No 2) is an intellectual property dispute involving claims of breach of confidence, copyright infringement, and misappropriation of trade secrets. The primary issues addressed by the court were whether certain information about an extraction machine was confidential and owned by Native Extracts, whether there were breaches of confidentiality and fiduciary duties, and the appropriate remedies for the alleged breaches. The court found that the information about the extraction machine was not confidential as claimed, and there was insufficient evidence to establish that Mr Jordan Macdougald knowingly assisted in any breach of fiduciary duties by Mr Ross Macdougald. The court also addressed the issue of copyright infringement by Plant Extracts, awarding additional damages for flagrant infringement of copyright.

The court's reasoning hinged on the nature of the information concerning the extraction machine. It was established that the information was not provided on a confidential basis and was not unique or proprietary. The court found that Mr Jordan Macdougald did not have the requisite knowledge that the information was confidential or proprietary, and there was no evidence that he assisted in any breach of fiduciary duties by Mr Ross Macdougald. Consequently, the claims against Mr Jordan Macdougald were dismissed. Regarding copyright infringement, the court accepted that Plant Extracts had flagrantly infringed Native Extracts' copyright by reproducing the Southern Cross University Certificates without permission, and awarded additional damages of $157,198 to Native Extracts.

The final orders of the court include dismissing the claim against the Fifth Respondent, ordering the First Respondent to pay additional damages of $157,198 to the First Applicant, and directing the parties to confer on the remaining orders, including costs. If the parties cannot agree on the form of orders, they are to file their proposed orders and submissions by 28 February 2024, with a case management hearing scheduled for 1 March 2024 to resolve any disagreements.

Orders

Orders of the court

1. The claim against the Fifth Respondent be dismissed;

2. Pursuant to section 115(4) of the Copyright Act 1968 (Cth), the First Respondent pay to the First Applicant the sum of $157,198 as additional damages;

3. The parties are to confer on the form of the remaining orders to be made to give effect to these reasons, including on the question of costs;

4. By 4.00 pm on 28 February 2024:

(a) if the parties can agree on the form of orders to be made, including, if agreement can be reached, on the question of costs, they are to provide to the Associate to Downes J draft orders to be made in chambers; or

(b) if the parties cannot agree on the form of orders to be made:

(i) each party is to provide to the Associate to Downes J their proposed draft orders marked up so as to show the areas of disagreement, including on the question of costs, along with any submissions limited to five pages, and also file and serve any affidavit relevant to the question of costs;

(ii) the proceeding be listed for case management hearing on 1 March 2024 at 10.15 am AEST to resolve the form of orders to be made.

Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

Background

Background to the litigation

Native Extracts submits that an award of at least $157,198 for additional damages is appropriate because it represents the amount of profit that the experts agree that Plant Extracts made from sales of extracts relating to the infringing copyright material. Plant Extracts accepts that Native Extracts is entitled to additional damages but disputes the amount that is claimed.7.1 The key facts The key facts concerning the copyright infringements are set out below and were either admitted or not challenged by Plant Extracts at trial. As part of the business of Native Extracts, it provided technical documents to customers and potential customers for each of its botanical plant extracts. Those technical documents included parts of Southern Cross University “Certificates of Analysis” (SCU Certificates) which consist of an independent analysis of the composition of each of its botanical plant extracts. From about 2015, Southern Cross University sent SCU Certificates for nine different types of botanical plant extracts to Native Extracts (referred to as the Original SCU Certificates). Copyright in these certificates was assigned to Native Extracts. By at least 2018, Plant Extracts began to send existing and potential customers what it described as Datapacks relating to each of the botanical plant extracts which it produced (which correspond to the nine types of extracts referred to above). Those Datapacks included certificates purporting to be from the Southern Cross University. Each of those certificates reproduced in a material form the whole, or a substantial part, of the Original SCU Certificate relating to the relevant extract. Each certificate also modified the Original SCU Certificate by removing the date, customer details, customer reference number, laboratory reference number and job number. Plant Extracts did not have any licence or authority to reproduce the Original SCU Certificates. On 16 June 2020, Ms Carroll caused a letter of demand to be sent to Mr Ross Macdougald and the entities controlled by him, advising him that they were (among other things) infringing the copyright of Native Extracts by modifying and sending the Original SCU Certificates to existing and potential customers of Plant Extracts. By the Defence, Plant Extracts admitted that it had infringed Native Extracts’ copyright in each of the Original SCU Certificates. It also admitted that, since on or about 8 July 2016, it has continued, and threatens to continue, to engage in these acts of copyright infringement in the course of promoting its business. It was also admitted by Mr Ross Macdougald that he had authorised, and continues to authorise, the conduct by Plant Extracts. As a consequence, I made the following declarations and orders in Native Extracts (No 1):THE COURT DECLARES BY CONSENT BETWEEN THE APPLICANTS AND THE RESPONDENTS (OTHER THAN THE FIFTH RESPONDENT) THAT:…2.The First Applicant is the owner of the copyright subsisting in the Original SCU Certificates, and the First Respondent has infringed that copyright by reproducing in a material form the whole or a substantial part of those works.…THE COURT ORDERS BY CONSENT BETWEEN THE APPLICANTS AND THE RESPONDENTS (OTHER THAN THE FIFTH RESPONDENT) THAT: …15.Pursuant to section 115(2) of the Copyright Act 1968 (Cth) (Copyright Act), the First Respondent, whether by itself, its directors, officers, employees, agents or otherwise, is permanently restrained from:(a)infringing the First Applicant’s copyright in the Original SCU Certificates; and(b)in particular, reproducing in a material form the whole or a substantial part of the Original SCU Certificates.…18.Pursuant to section 115(2) of the Copyright Act, the Second Respondent is permanently restrained from authorising the First Respondent or any other person to do acts that infringe the copyright of the First Applicant in the Original SCU Certificates, in particular by reproducing in a material form the whole or a substantial part of those works.…27.Pursuant to section 115(2) of the Copyright Act, the First Respondent pay to the First Applicant the sum of $168,053 as compensatory damages.(Emphasis original.)

Evidence

Evidence Before The Court

The RM respondents and Biologi did not lead any lay evidence at trial. 3.2 Expert evidence The applicants adduced the following expert evidence: (1)the scientific report of Professor Melissa Fitzgerald dated 13 December 2021;(2)the affidavit of Professor Fitzgerald affirmed 15 June 2022;(3)the affidavit of Ms Rita Sellars affirmed 27 June 2022;(4)the forensic accounting report of Mr David Stephens dated 24 June 2022; and(5)the supplementary report of Mr Stephens dated 7 June 2023. The RM respondents relied on a forensic accounting report prepared by Mr Elia Lytras dated 10 May 2023, which responded to the evidence contained in Mr Stephens’ first report. On 14 September 2023, the forensic accounting experts, Mr Stephens and Mr Lytras, produced a joint expert report pursuant to Orders made by the Court (JER).4. THE EXTRACTION MACHINE4.1 Relevant facts The applicants’ pleaded case is that the Confidential Information owned by Native Extracts includes the pleaded information concerning the extraction machine. The key facts relating to the extraction machine will now be addressed in more detail than appears above. During 2012, Mr Ross Macdougald told Ms Carroll that “he had found out about a machine in Italy manufactured by Atlas Filtri, from his Italian oil supplier, Mr Parodi. Mr Parodi knew the engineer and patentee... The machine [was] designed to extract soluble substances in a liquid solid material from a product and suspend it in liquid. The process seemed to be established in Italy in the beverage sector, used to produce limoncello”. There is no suggestion that Mr Parodi supplied this information on a confidential basis, or that he has not informed others about this machine (either before or after 2012). On 23 June 2012, Ms Carroll and Mr Ross Macdougald travelled to Italy, and on about 28 June 2012, they received training on how to operate the machine. Ms Carroll deposed that they received hands-on training on how to perform cold liquid extractions using the machine on dry eucalyptus leaves. There is no suggestion that the training was conducted on a confidential basis. Neither Ms Carroll nor Mr Ross Macdougald had experience performing plant extraction processes prior to travelling to Italy, and after doing so, they “reached out to various sources for information, including [Mr] Hughes” in order to learn about botanical extracts. While information about certain extraction solvents and solvent ratios had been provided in their training, Mr Hughes later provided detailed suggestions on extraction mediums and preservatives to consider as well as general advice on the extraction process. As to the extraction machine itself, Ms Carroll deposed that:The [machine] is built and supplied by a manufacturer's representative in Italy, Atlas Filtri.The solid (botanical plant matter) is placed in a filter bag, in a suitable container (the extractor) and is covered with extraction liquid. The patent indicates that this can be performed at a variety of temperatures including zero degrees Celsius.Another way to describe the process utilised by the … machine would be a system using cold liquids within a closed system.

Decision

Reasons for decision

For these reasons, Mr Ross Macdougald did not breach his duty under s 183(1) of the Corporations Act as alleged.4.6 Conclusion For these reasons, the breach of confidence claims, insofar as they relate to “the brand, model number and technical features of the machine used by [Native Extracts] to manufacture its botanical plant extracts in circumstances where that machine was not ordinarily used for the purpose of manufacturing botanical plant extracts”, must fail.5. ACCESSORIAL LIABILITY OF MR JORDAN MACDOUGALD5.1 The key allegations The following is a summary of the key allegations in the case brought against Mr Jordan Macdougald as they appear in the SOC. Shortly after the exit of Mr Ross Macdougald from Native Extracts, Mr Jordan Macdougald incorporated Plant Extracts and commenced the following conduct (which I will call the pleaded conduct):(1)manufacturing and selling botanical plant extracts in competition with Native Extracts;(2)undertaking research and development in the botanical plant extract industry;(3)supplying water soluble botanical extracts;(4)contacting Native Extracts’ growers to source raw materials to manufacture botanical plant extracts; and(5)contacting Native Extracts’ customers to sell its botanical plant extracts. From its incorporation and during the restraint period, Plant Extracts engaged Mr Ross Macdougald to assist in carrying out the pleaded conduct. Further or alternatively to the above, prior to the incorporation of Plant Extracts, there was an understanding reached between Mr Ross Macdougald, Mr Jordan Macdougald and Mr Ashley Moore (a solicitor) that:(1)during the restraint period, Mr Ross Macdougald would assist Plant Extracts and Mr Jordan Macdougald in carrying out the pleaded conduct;(2)Mr Jordan Macdougald and Mr Moore would act in accordance with the wishes and instructions of Mr Ross Macdougald in carrying out the pleaded conduct; and(3)after the restraint period ended, Mr Jordan Macdougald and Mr Moore would resign as directors of Plant Extracts and its holding company HGWIT Pty Ltd, transfer their shares in HGWIT Pty Ltd to Mr Ross Macdougald, and Mr Ross Macdougald would become the sole director of Plant Extracts and legal owner of all share capital issued in HGWIT Pty Ltd. From its incorporation, Plant Extracts, Mr Jordan Macdougald and Mr Moore gave effect to that understanding. By reason of this, Mr Ross Macdougald acted as a de facto director and shadow director of Plant Extracts, and Plant Extracts was therefore under his control. By reason of the above matters, Mr Ross Macdougald disclosed the Confidential Information to (inter alia) Plant Extracts and Mr Jordan Macdougald or alternatively there was disclosure of the Confidential Information to Mr Jordan Macdougald by Phytoverse and FPI. By no later than August 2016, Plant Extracts had commenced using the Confidential Information in its business to (inter alia) manufacture, supply and sell botanical plant extracts. The Confidential Information (as defined) in the SOC is, apart from the pleaded information concerning the extraction machine:(1)the Extract Log / Formula Book;(2)Grower’s Matrix;(3)List of Suppliers and Customers.

Ratio Decidendi

Legal Principle Established

In Briginshaw, Dixon J (as his Honour then was) said at pages 361–362:Fortunately, however, at common law no third standard of persuasion was definitely developed. Except upon criminal issues to be proved by the prosecution, it is enough that the affirmative of an allegation is made out to the reasonable satisfaction of the tribunal. But reasonable satisfaction is not a state of mind that is attained or established independently of the nature and consequence of the fact or facts to be proved. The seriousness of an allegation made, the inherent unlikelihood of an occurrence of a given description, or the gravity of the consequences flowing from a particular finding are considerations which must affect the answer to the question whether the issue has been proved to the reasonable satisfaction of the tribunal. In such matters “reasonable satisfaction” should not be produced by inexact proofs, indefinite testimony, or indirect inferences.5.3 Consideration5.3.1 Overarching submissions by applicants The applicants submit that the following facts support an inference that “[Mr] Jordan Macdougald [was] involved in Ross Macdougald’s breach of his Statutory Duty of Confidence and knowingly assisted in a dishonest and fraudulent design involving Ross Macdougald’s breach of his Fiduciary Duty (Confidence), his Fiduciary Duty (Trustee) and/or his Equitable Duty of Confidence” (which are defined terms in the SOC) (the relevant inference). The extraction machines: the first fact relied upon in the applicants’ submissions in support of the relevant inference is that Plant Extracts purchased and uses the exact same 2 litre and 40 litre extraction machines used by Native Extracts. However, for the reasons already given, the pleaded information concerning the extraction machines is not Confidential Information within the meaning of the SOC and the mere fact of the purchase and use by Plant Extracts of the same machines in its business did not constitute a breach of any duty by Mr Ross Macdougald. In any event, there was no evidence that Mr Jordan Macdougald had actual or the requisite degree of knowledge that information about the brand, model number and technical features of the extraction machines constituted information which was not in the public domain (as the applicants allege in the SOC) or that it was confidential information owned by Native Extracts or the Trust. Nor did the applicants establish that Mr Jordan Macdougald had actual or the requisite degree of knowledge that the extraction machines were not ordinarily used for the purpose of manufacturing botanical plant extracts, and that this information was confidential information. To the contrary, under cross-examination, Mr Jordan Macdougald gave this evidence:Now, we then come to paragraph 44 of your affidavit, where you’re referring to some extraction machines arriving. Now, you know, don’t you, that these machines were ordered and paid for by Phytoverse?‑‑‑The – the two machines outlined in the – my affidavit?Yes?‑‑‑I didn’t at the time. I – I didn’t know at the time who actually paid for them.But you know that now?‑‑‑I do know that now. Yes.[sic] and, again, that was something that – the choosing of those machines wasn’t something that you were involved in?‑‑‑Well, it’s pretty logical to get the same machines that I had working knowledge of.Pretty logical. So did you discuss that with your father?‑‑‑No.So the machines just turned up?‑‑‑Essentially, yes.And were you surprised that they were exactly the same as the ones that you had seen at Native Extracts and ‑‑‑?‑‑‑No.‑‑‑you say you has [sic] used before?‑‑‑I – I – I – I wasn’t surprised. No.You knew, didn’t you, that the reason that they were exactly the same was because the information about what machine to be using and what machine to be ordering was something that Ross had – your father had from his time at Native Extracts?‑‑‑Well, I just knew you could just go buy the machines. There wasn’t a barrier to entry. It wasn’t – they were, like, an off-the-shelf kind of thing. If you had the contact, then you could buy them.And you say you know – you knew all about that at the time?---Yes.But it wasn’t you having any involvement in choosing these machines?‑‑‑No. But I – yes, I did know that – know that at the time.But you also knew too, didn’t you, that these were machines that others hadn’t been using for botanical extracts‑‑‑?‑‑‑I didn’t know ‑‑‑ ‑‑‑ other than Native Extracts?‑‑‑I didn’t know if anyone else was using them or not.(Emphasis added.)