Redwood Anti-Ageing Pty Limited v Knowles

[2013] NSWSC 508

Supreme Court

New South Wales

Medium Neutral Citation:	Redwood Anti-Ageing Pty Limited & Anor v Knowles & Ors [2013] NSWSC 508
Hearing dates:	17-21; 24-27 September 2012; 29 October 2012
Decision date:	10 May 2013
Jurisdiction:	Equity Division
Before:	White J
Decision:	Refer to paras [171] and [175] of judgment.
Catchwords:	CONTRACTS - general contractual principles - illegal and void contracts - whether contract in breach of s 25(1) of the Pharmacy Act 1964 is void for illegality - whether claim for restitution available if contract void for illegality CONTRACTS - general contractual principles - construction and interpretation of contracts - whether breach of contractual term preventing solicitation, inducement or encouragement of employees to leave INTELLECTUAL PROPERTY - copyright - original works in which copyright subsists - whether reproduced material is a "substantial part" of a work pursuant to s 14(1) of the Copyright Act 1968 (Cth)
Legislation Cited:	Pharmacy Act 1964 (NSW) Corporations Act 2001 (Cth) Crimes (Sentencing Procedure) Act 1999 Criminal Procedure Act 1986 Pharmacy Act 1897 Copyright Act 1968 (Cth)
Cases Cited:	Grimaldi v Chameleon Mining NL (No. 2) (2012) 200 FCR 296 Chappuis v Filo (1990) 19 NSWLR 490 White v District Court of NSW (1998) 45 NSWLR 313 Pham v Doan [2005] NSWSC 201; (2005) 63 NSWLR 370 Attorney-General for New South Wales v Now.com.au Pty Ltd [2008] NSWSC 276 Yango Pastoral Co Pty Ltd v First Chicago Australia Ltd (1978) 139 CLR 410 Nelson v Nelson (1995) 184 CLR 538 Miller v Miller (2011) 242 CLR 446 Equuscorp Pty Ltd v Haxton [2012] HCA 7 Industrial Development Consultants Ltd v Cooley [1972] 2 All ER 162 Ladbroke (Football) Ltd v William Hill (Football) Ltd [1964] 1 WLR 273; [1964] 1 All ER 465 Autodesk Inc v Dyason (No. 2) (1993) 176 CLR 300 Barrett v Ecco Personnel Pty Ltd [1998] NSWCA 30 Stacks/Taree Pty Ltd v Marshall (No. 2) [2010] NSWSC 77
Category:	Principal judgment
Parties:	Redwood Anti-Ageing Pty Limited (1st Plaintiff) Pharmaceutical Marketing Corporation Pty Limited (2nd Plaintiff) Daryll Knowles (1st Defendant) Nxgen Wholesaling Pty Ltd (formerly known as ASA Pharmaceuticals) (2nd Defendant) John Boyd (3rd Defendant)
Representation:	Counsel: C Botsman (Plaintiffs) R Angyal SC with A Davis (Defendants) Solicitors: Walker Hedges & Co (Defendants)
File Number(s):	2007/254735

Judgment

1. HIS HONOUR: These proceedings concern arrangements made in February 2002 that terminated on 27 October 2006 for the marketing, preparation and sale of pharmaceutical products. Section 25 of the Pharmacy Act 1964 (NSW) (since repealed) is central to the way the parties failed to document their arrangements and to the way in which they set up their business structures. That section prohibited a person, including a company, other than a pharmacist from having a direct or indirect pecuniary interest in the business of a pharmacist carried on in a pharmacy.

1. The first plaintiff, Redwood Anti-Ageing Pty Ltd ("Redwood"), was in the business of marketing natural hormones. The company was established by Mr Brian Sher who was the co-author of a book called "The Anti-Ageing Diet". A central theme of the book was that there were benefits in taking natural hormones. Such hormones have to be prescribed by a doctor and dispensed by a registered pharmacist. When people contacted Redwood to obtain hormones, they were referred by Redwood to a doctor to obtain the necessary prescription and then to a compounding pharmacist to fill the prescription. The second plaintiff, Redwood Nutraceuticals Pty Ltd, ("Redwood Nutraceuticals") was established in late 2001 for the purpose of promoting pharmaceutical products as distinct from non-pharmaceutical products, with the latter to be handled by Redwood.

1. At all material times the first defendant, Daryll Knowles, was a registered pharmacist. He conducted the business of a compounding pharmacist. That involves the mixing and preparation of the raw products to create the drug that has been prescribed by a medical practitioner. In February 2002, Mr Knowles signed an agreement called a "Consultancy Agreement" with Redwood Nutraceuticals for the provision of what were called Consultancy Services and were described in the agreement as "Compounding Pharmacy Services". It is common ground that not all of the terms agreed on between Mr Sher and Mr Knowles were contained in that agreement.

1. Redwood and Redwood Nutraceuticals allege that in February 2002 Redwood entered into an oral agreement with Mr Knowles that it would refer all prescriptions it generated exclusively to Mr Knowles and would be entitled to charge marketing fees equal to 100 per cent of the profit derived from prescriptions that Mr Knowles caused to be filled that were generated through Redwood's marketing efforts. The plaintiffs allege that it was an express term of that agreement that the arrangements could not be terminated by Mr Knowles until such time as the Redwood business was sold. This alleged agreement is denied, but Mr Knowles does not deny that Redwood or Redwood Nutraceuticals would refer all of the orders for the products it promoted to Mr Knowles exclusively. He accepted that for three years from February 2002 "from the revenue generated by the compounding work referred by RN [Redwood Nutraceuticals], all relevant expenses were deducted (such as materials, labour costs and overheads) and then the net pre-tax profits continued to be paid to RN as marketing fees." This provision for Redwood's (or Redwood Nutraceuticals') remuneration was not documented.

1. The third defendant, Mr John Boyd, was employed in February 2004 by Redwood as its operations manager. The plaintiffs allege that Mr Boyd became the general manager of the "Redwood Group". The plaintiffs allege that the "Redwood Group" was established in about June 2004 because Mr Knowles was concerned that the quantum of marketing fees being paid to Redwood was so large that it might attract the interest of the Pharmacy Board which might form the view that Redwood had a pecuniary interest in Mr Knowles' pharmacy business. Three companies were established: the second defendant, ASA Pharmaceuticals Pty Ltd was incorporated on 26 July 2004. Mr Boyd was the sole director and initially the sole shareholder. It was established to be a wholesale supplier to Mr Knowles (who carried on his business through the name Australian Custom Pharmaceuticals ("ACP")). Another company formed at the same time was Pharmaceutical Marketing Corporation Pty Ltd ("PMC"). It was a subsidiary of Redwood and Mr Sher was its sole director. It managed the call centre which fielded inquiries about and handled orders for products marketed by Redwood. The plaintiffs allege that a third company, Camchemicals Pty Ltd, was established at the same time to provide other products to ACP needed in the running of the pharmacy business, but that company never got going. The plaintiffs allege that the purpose of the establishment of those companies was to reduce the marketing fees being paid directly to Redwood as well as to structure the business model to allow for future growth. The plaintiffs allege that it was agreed between all of Redwood, Mr Knowles and Mr Boyd that under the new Redwood Group structure, all profits generated by ACP from work generated by Redwood and all profits generated from the new companies would ultimately flow to Redwood. The plaintiffs allege that Redwood would be entitled to charge marketing fees equal to the profits of the companies. Mr Knowles and Mr Boyd denied any such agreement, but no final submissions were made in support of that denial. Senior counsel for the defendants conceded that there was "a great deal of documentary evidence" suggesting that such an agreement existed.

1. Substantial profits were generated between 2002 and 2006. Relationships between Mr Sher, Mr Knowles and Mr Boyd deteriorated in 2006. On 27 October 2006, a Mr Douglas George, who described himself as a consultant to ACP, Mr Knowles and ASA Pharmaceuticals Pty Ltd ("ASA") advised that any relationship or arrangement of any kind between ACP, Mr Knowles or ASA and Redwood was terminated immediately.

1. Redwood says that as the result of the termination notices of 27 October 2006 and steps taken immediately thereafter by Mr Knowles and Mr Boyd, it lost its business. It contends that Mr Knowles and Mr Boyd arranged for a new company, NxGen Australia Pty Ltd ("NxGen Australia"), to take over Redwood's role by persuading Redwood's and PMC's staff to take up new employment, by using Redwood's database of doctors who had prescribed or shown interest in prescribing Redwood's products as the basis for NxGen Australia's marketing, by transferring a telephone number used by Redwood and printed on its order form, to ACP, by ACP's publishing and distributing to medical practitioners in the database a publication called the "Australian Custom Pharmaceutical Guides to Compounding" (the "ACP Guide") to replace a similar publication that had been published by Redwood that covered natural hormones as appropriate treatments for various medical conditions, and by Mr Knowles funding NxGen Australia through the payment of marketing fees. The plaintiffs say that Mr Knowles and Mr Boyd had a financial interest in NxGen Australia and in association with NxGen Australia they continued to exploit the business generated by Redwood's marketing efforts, its confidential database of doctors, and its intellectual property in its order form and the Redwood Guide.

1. The plaintiffs claim that:

a) Mr Knowles owes Redwood $335,975.37 plus interest for unpaid marketing fees.

b) ASA owes Redwood $133,500 plus interest for unpaid marketing fees.

c) Mr Knowles owes Redwood $42,500 plus interest pursuant to a loan agreement made on 2 March 2005. Ultimately, I understood Mr Knowles' defence to this claim to be that he was entitled to set off the debt against part of a dividend to which he was entitled from Redwood that he said had been unpaid, although no defence of set-off was pleaded and no claim was made for an unpaid dividend.

d) ASA was liable to pay $220,000 plus interest pursuant to a loan agreement made on or about 2 March 2005 between Redwood and ASA. ASA says that the loan was repaid.

e) Mr Knowles breached the agreements with Redwood, or with Redwood and Redwood Nutraceuticals, for the compounding of pharmaceuticals marketed by Redwood and payment of remuneration to Redwood by purportedly terminating the relationship and is liable to damages for Redwood's loss of profits arising from the termination of that relationship.

f) ASA is liable for damages for repudiating the agreement that from the start-up of ASA, PMC and Camchemicals Pty Ltd funded by Redwood, those companies would pay marketing fees equal to their profits and is liable for damages accordingly.

g) Mr Boyd breached fiduciary obligations he owed to Redwood and the Redwood Group by agreeing with Mr Knowles that they would terminate their relationships with Redwood and by thereafter exploiting the business generated by Redwood's marketing efforts for their own benefit to the exclusion of Redwood, procuring offers of employment to the call centre staff and other employees engaged in the business of the Redwood Group, terminating his relationship with Redwood and ceasing to perform his functions as general manager in order to exploit for himself or others the benefit of Redwood's marketing efforts together with Redwood's confidential information and intellectual property, allowing ACP to fill orders received from patients which had been generated by Redwood's marketing efforts, and by himself or Mr Knowles taking steps to transfer a telephone number printed on Redwood's order form to ACP.

h) Mr Knowles and Mr Boyd breached Redwood's copyright in its order form and the Redwood Guide (this claim was not expressly pleaded, but was litigated).

i) Mr Knowles and Mr Boyd used Redwood's confidential information in its database of medical practitioners by disclosing the information to NxGen.

j) Mr Knowles knowingly assisted Mr Boyd to breach his fiduciary duties.

k) Mr Boyd induced Mr Knowles to breach his agreements with the plaintiffs.

l) that Mr Knowles breached provisions of the Consultancy Agreement that during the period of two years after the termination of that agreement he would not:

i) take part in any business or activity which was the same or similar to Redwoods;

ii) solicit, canvass, induce or encourage any person, employee or agent of Redwood to leave the employment or agency of Redwood;

iii) solicit, canvass, approach or accept any approach from any person who was a customer of Redwood with a view to obtaining the custom of that person in a business similar to that of Redwood's;

iv) interfere with the relationship between Redwood and its clients, employees or suppliers;

v) hold any office, possess any property or undertake any obligations which create or might create duties or interests which might conflict with his duties or interests under the Consultancy Agreement without Redwood's prior knowledge and agreement and notify Redwood in writing immediately if he became aware of a potential or existing conflict.

Negotiations for an agreement in February 2002: Could arrangements be terminated prior to sale of Redwood?

1. Negotiations between Mr Sher and Mr Knowles took place over a dinner at a restaurant in Bondi on 16 February 2002. Mr Knowles disputed that there was discussion to the level of detail to which Mr Sher deposed, but it appears from an exchange of emails between them on Sunday, 17 February 2002 that the principal terms of a heads of agreement had been agreed. In his email of 17 February 2002, Mr Sher set out what he described as the summary of their discussions. He wrote:

"Thanks for joining me for dinner last night. It was nice to meet both you and Zena and learn a little more about you.

As discussed below is a summary of our discussions and will form the basis of our agreement to be finalised this week.

Caringbah Parmacy [sic] (CP) (or other nominee) will:-

- become the exclusive supplier to Redwood Nutraceuticals (RN)

- own 100% of the physical pharmacy and equipment

- be responsible for compliance and pharmacy statutory issues

- be responsible for adequate staff recruitment and training to keep up with demand

- will produce products ordered within 24hrs of the order received

- will be prepared to expand CP to handle up to 600 scripts per day

- agrees not to compete with RN during term of agreement and for 2 years after termination

- agrees not to approach doctors directy [sic] for anti-ageing products

- will handle production, issuing customer receipts and dispatch

- will seek innovation, improvements and cost savings in product development, delivery, packaging, and technology.

- will seek to deliver the product as [sic] the lowest possible manufacturing cost, by seeking economies of scales [sic], and effective production techniques.

- will remain within the statutory guidelines

- will be required from time to time at planning sessions and doctors['] conferences.

- will be available to answer doctors['] questions and give doctors advice

The agreement will be for a period of 3 years with a 3 year renewable option by RN.

RN will -

- will take orders from doctors and patients as the agent of CP

- will process orders and payments

- provide all orders to CP in a timely professional manner

- will reimburse Cp monthly for cost of raw materials, labour and contribution to overhead, within 7 days of the month[']s end

- will need to approve all such expenses initially and any alteration to these expenses, if not contained in the business plan

- to follow the signing of the agreement

- will provide CP with share options on a 3 year prorate basis to acquire up to 10% of RN at a nominal price of $1 per allocation.

- shares will be issued in 3 tranches on the 12 month anniversary of the agreement commencement date

- will meet with Darryl Knowles Tuesday 9.30am to view laboratory and cover issues to be included in the agreement

- will provide legal draft of agreement by 4pm Tuesday 19th Feb 2002

- will begin directing orders to CP on Tuesday or Wednesday of same week.

CP will seek legal council [sic] and provide comments and changes required by 4pm Thursday 21st Feb 2002

Changes will be finalised for agreement signing by Friday 22nd at 4pm, for partnership to be formalised.

It is our intention to grow RN and CP as big as possible to turnover in excess of $5 million within 12 months and within 3 years to double or triple this and sell RN and CP as part of a group sale either IPO or trade sale to maximise a capital gain for the owners and stakeholders.

Darryl Knowles will be consulted and invited to any all [sic] discussion changes concerning RN and it's [sic] future direction. - formally or informally."

1. In his affidavit, Mr Sher deposed that during the discussion on 16 February 2002, he said words to the effect:

"The game plan would be to grow the business with a view to selling it for a multiple of earnings down the track. You would pay the profits from the compounding to Redwood as marketing fees. This would increase the profitability of Redwood and increase the eventual sale price. I envisage that you would earn 10 per cent of the shares in Redwood over the initial three years of our agreement, receiving one-third of them at the end of each year. We could look at the arrangement again at the end of that time. Eventually we would sell Redwood Nutraceuticals as part of a group sale, perhaps through an initial public offering, to maximise capital gain for the owners and stakeholders."

1. Neither Mr Sher's email, nor his affidavit setting out what he contends was the substance of his discussions with Mr Knowles, supports the plaintiff's allegation that it was an express term of the agreement made with Mr Knowles in February 2002 that the arrangements could not be terminated by Mr Knowles until such time as the Redwood business was sold.

1. It can also be inferred that Mr Sher did not instruct the lawyer whom he engaged to prepare documents to give effect to what had been agreed with Mr Knowles that there was such a term. Mr Sher instructed a Mr Selby of Selby Kent Levitt, solicitors, to prepare an agreement that Mr Sher proposed be signed by Friday 22 February. The solicitors prepared two agreements: one called a Consultancy Agreement, and the other called a Marketing Agreement. Clauses 2.1 and 2.2 of the Consultancy Agreement provided that:

"2.1 Appointment

Redwood [Redwood Nutraceuticals] appoints DK to provide the Consultancy Services during the Term and DK accepts that appointment on the terms and conditions of this agreement.

2.2 Term

The appointment of DK commences on the Commencement Date [20 February 2002] and will continue for three years plus a three-year option unless terminated under clause 10. This option is to be granted by DK and exercised by Redwood on mutually agreed terms. Should Redwood be sold or enter a public float, DK will be entitled to negotiate a market value fee for providing this ongoing service to the new shareholders and management."

1. Mr Knowles signed the Consultancy Agreement. The terms of the Marketing Agreement were never finalised. Clause 2.2 of the draft Marketing Agreement provided:

"2.2 Term

This agreement shall commence on Commencement Date [the date of signing] and will continue for three years plus offer multiple three-year renewable options unless earlier terminated in accordance with the terms of this agreement."

1. Clause 9.3 provided that the agreement would terminate on the expiry of the Term (being the term specified in clause 2.2) unless options were exercised by Redwood.

1. It can be inferred that Mr Sher did not instruct his lawyer that the agreement could not be terminated by Mr Knowles until such time as the Redwood business was sold. No such term is included in either document.

1. In cross-examination Mr Sher maintained that Mr Knowles agreed to an arrangement by which he would pay Redwood all his profits from compounding scripts into the indefinite future until the point at which Redwood was sold (T100). I do not accept that evidence. It is clear that no binding agreement was made on the evening of 16 February 2002, although certain terms were discussed and an agreement on some terms was reached (although not at that time an agreement to be bound by those terms). Mr Sher's evidence of the discussions on that night does not establish the term, and the subsequent email correspondence and drafts of documentation are inconsistent with it.

1. At no time did Redwood purport to exercise an option to extend the term of the agreement with Mr Knowles. The arrangements evolved over time and continued until October 2006. The plaintiffs did not allege that it was an implied term of the parties' agreement that it could be terminated only on reasonable notice.

Financial Terms

1. In his email of 17 February 2002 Mr Sher described the proposed financial relationship between the parties as follows:

"RN will take orders from doctors and patients as the agent of CP - will process orders and payments - ... - will reimburse CP monthly for cost of raw materials, labour and contribution to overhead, within seven days of the month's end ... - will provide CP with share options on a three-year pro-rata basis to acquire up to 10 per cent of RN at a nominal price of $1 per allocation - shares will be issued in three tranches on the 12-month anniversary of the agreement commencement date."

1. Mr Knowles responded on the evening of 17 February 2002 as follows:

"RN (a fully owned subsidiary of Redwood Antiaging [sic] P/L (?)) would be handling all cash flow as agent to CP therefore as part of my responsibility to expand CP I feel the extra cashflow should be made available from time to time for the express purposes of expansion of the lab and it's [sic] facilities, staff recruitment and incentives to further the interests of RN. The actual basis of computation of labour costs? That is, what do you EXPECT me to charge you? as the lab will be by definition dedicated to the servicing of RN orders I feel overheads of the lab will be predominantly the responsibility of RN. You will however upon visiting on Tuesday realise the small magnitude of these overheads.

The structure of RN collecting all monies and paying only a wholesale price and thus collecting the profit margin would indicate I feel to the statutory bodies a pecuniary interest on RN's behalf in CP. This is if CP increases turnover so does the profit of RN as a direct result. Have you put this to the Pharmacy Board of NSW? Would you like me to do so, as under the heads of agreement it would be my responsibility to comply with these regulations? I offer as an alternative. RN proceeds as in your model collecting all funds then as a paper trail only, pays the gross amount less management fee, equal to RN's over heads, to the pharmacy. A running balance account would thus be created giving transparency to the whole process if any investigation should arise of our business practices. And believe me Brian they will. This would distance RN from CP and give the correct impression of true agent/client relationship to outsiders. I would also like a monthly statement of position for my records. ... In your framework it would appear all cash profits remain with RN. CP and Redwood Antiaging [sic] would receive script only on an annual basis. Doctors receiving script only as well on an annual basis. This is not unacceptable but I would expect a reasonable degree of accountability and some involvement in management of these consolidated funds (that is proper investment of excess cash equity)."

1. Both Mr Sher and Mr Knowles were conscious of the statutory prohibition of a non-pharmacist having a pecuniary interest in a pharmacy business. I am satisfied that it was for this reason that both Mr Sher and Mr Knowles referred to Redwood Nutraceuticals as taking payments as agent of Caringbah Pharmacy. However, it is clear that the parties' intention was that Redwood Nutraceuticals would be entitled to the revenues from which it would pay the pharmacy's expenses, including labour costs and overheads referable to the work being done for Redwood Nutraceuticals so that the profits would remain with Redwood Nutraceuticals. Although both Mr Sher and Mr Knowles asserted that they understood that the arrangements they implemented were lawful, I do not believe them. Mr Knowles proposed creating a "paper trail only" whereby Redwood Nutraceuticals would collect the funds and then pay the funds collected to the pharmacy after deducting a management fee equal to Redwood Nutraceuticals' overheads. This would have been contrary to the parties' intention as to how profits from the business would be dealt with. Mr Knowles proposed it only as a "paper trail" to give what he called "transparency" to the process if there were an investigation. The word "transparency" and the statement that this would "give the correct impression of true agent/client relationship to outsiders" is double-speak. The fact that Mr Knowles proposed it must have made clear to Mr Sher if it was not clear already, that the proposed arrangements would give Redwood Nutraceuticals an unlawful pecuniary interest in Mr Knowles' pharmacy business.

1. The Consultancy Agreement was the only formal agreement entered into, but did not cover the whole of the parties' relationship. The Consultancy Agreement provided for Mr Knowles' remuneration for the provision of consultancy services to be in the form of the issue of shares amounting to 10 per cent of Redwood Nutraceuticals over three years at a nominal price. It did not contain a provision entitling Redwood Nutraceuticals or Redwood to revenue or profits from the compounding pharmacy business.

1. The draft Marketing Agreement included the following provision:

"5. FEES AND COMMISSIONS

Redwood will receive a commission from the pharmacy which it will deduct from the gross monies collected - to cover its overhead and business related cost, plus a profit margin. The quantum of these costs will be calculated on the commencement of trading and agreed - on discovery with the pharmacy."

1. This draft term would suggest that the parties had yet to reach agreement on remuneration arrangements. The draft marketing agreement provided that the "Caringbah Pharmacy" (which was described as a party, although it was only a trading name used by Mr Knowles) granted to Redwood (Redwood Anti-Ageing Pty Ltd) the exclusive right to advertise, promote and market the "Redwood" health products using a database of customers developed and owned by Redwood, advertising and marketing material developed by Redwood, trademarks and Redwood's intellectual property. The agreement provided that in consideration of Redwood's advertising and marketing the Products, the Pharmacist (viz. Caringbah Pharmacy) was required to manufacture and package each product in accordance with Specifications and Directives and to undertake ancillary tasks.

1. Mr Sher sent Mr Knowles a copy of the two agreements on 19 February 2002. In his covering email, Mr Sher said:

"I wanted to cut these down a bit, but the lawyer has told me we need a lot of this stuff to ensure we avoid the pecuniary interest trap. Hence the need for goodwill ownership and confidentiality etc."

1. On the evening of 19 February 2002 Mr Knowles provided his comments in relation to the draft agreements. Mr Sher then responded to those comments. One of Mr Knowles' comments was to the effect that at the meeting at the restaurant on Saturday, 16 February, Mr Sher proposed a profit arrangement whereby the profit to the compounding pharmacist would be shared equally. This was not provided for in the Consultancy Agreement. Mr Sher responded with an example. He noted that schedule 3 to the Consultancy Agreement gave Mr Knowles 10 per cent ownership in Redwood Nutraceuticals. He said if it achieved 600 scripts a day, it would make an annual profit of $1.8 million and that Mr Knowles' dividend would be $180,000 per year plus Mr Knowles would enjoy a capital gain (presumably in the value of the shares) of approximately $1.8 million over three years. The basis for this latter projection is unclear. It assumes that the shares could be sold at a price earnings multiple of 10. Mr Sher said that in the example given, Mr Knowles would earn $2.34 million from the project over three years. By contrast, he said that if the profits were split 50/50 Mr Knowles would receive $900,000 per year, but without a capital gain as he could not sell the pharmacy business without Redwood as a customer. He said that if there were a 50/50 profit split, Mr Knowles would need to fund his own expansion and would require more personal capital as Redwood Nutraceuticals was taking responsibility for such expansion. Mr Sher was cross-examined to suggest that the reason Mr Sher had not referred to the proposed split of profits equally in his email to Mr Knowles and the reason there was no such term in the documents prepared by Mr Sher's lawyer was that Mr Sher was conscious that to include such a term would demonstrate that the pecuniary interest prohibition was infringed. Mr Sher denied that this was a reason for not making a reference to an equal profit sharing. I accept his evidence that the pecuniary interest prohibition was not the reason for his not referring to the earlier discussion about sharing profits of the compounding pharmacy equally. The omission of that term was not an attempt to disguise the contravention of s 25 of the Pharmacy Act. It was due to the fact that Mr Sher was proposing something different, namely that Redwood or Redwood Nutraceuticals would receive all of the profits generated by the pharmacy in dispensing Redwood products in the form of a marketing fee, and that in return, Mr Knowles would receive up to 10 per cent of the shares. He and Mr Knowles did not end up agreeing on a 50/50 profit split. Instead, they agreed that Mr Knowles would have 10 per cent ownership in Redwood and that the profits from the dispensing of the Redwood products would flow to Redwood.

1. In his oral evidence, Mr Sher confirmed that the arrangement was that Redwood's profit margin referred to in clause 5 of the draft of the Marketing Agreement would be a margin that equated to the profit being derived by Mr Knowles from dispensing Redwood generated scripts (T694-695). He could give no explanation as to why the draft document did not so provide. Despite his denial (T696), I am satisfied that the reason the Marketing Agreement was never concluded was that it was impossible for Mr Sher and Mr Knowles formally to document their true agreement without making it clear that Redwood had a pecuniary interest in the pharmacy.

1. Mr Sher said that Mr Knowles was advising him as to the legalities and that he trusted and believed Mr Knowles when Mr Knowles told him that what was being done was lawful. He said no-one advised him otherwise. Mr Knowles accepted that he provided advice to Mr Sher on the pecuniary prohibition in the Pharmacy Act (T236). He said it was an issue on which he provided constant advice throughout their relationship. Mr Knowles gave evidence to the effect that he understood the relationship to be lawful. He said that he did not sign the draft Marketing Agreement because it did not comply with the pharmacy legislation at the time. He understood that the draft Marketing Agreement, if signed, would be illegal (T246). One of the reasons for that, he said, was "Pecuniary interest and the way the agreement was set up". He identified other illegalities in relation to the supply of controlled substances and the handling of prescriptions and the access of non-authorised people to medications. He said that Mr Sher agreed to proceed with "a normal pharmacy supply arrangement". According to Mr Knowles, such a normal pharmacy supply arrangement could involve the payment of the net profits of the business to a non-pharmacist. According to Mr Knowles, he was told by the assistant registrar to the Pharmacy Board that the payment of all of the profits from dispensing Redwood referred prescriptions to Redwood was not illegal, irrespective of what marketing was done, or the cost of it. I do not accept that evidence. There was no corroboration of it and it is inherently improbable.

1. Mr Knowles commenced compounding prescriptions referred through Redwood in the week ended 22 February 2002.

1. Mr Knowles deposed that the discussions with Mr Knowles fell into two parts. The first part was for him to provide the services of a compounding pharmacist and prepare medications in accordance with scripts that had been written by an authorised medical practitioner. The source of the scripts was from doctors who attended Redwood Nutraceuticals seminars. He understood that Redwood Nutraceuticals would be suggesting to doctors that the scripts could be referred to him as a pharmacist capable of fulfilling them. In return, the Caringbah Pharmacy would pay Redwood Nutraceuticals an amount for the purposes of marketing calculated as the net profit of the compounding business of those scripts that were referred to him by Redwood Nutraceuticals. Mr Knowles said that there was a separate but related agreement that to assist with the marketing of the products, Redwood Nutraceuticals would retain him personally as a consultant. This arrangement was separate from the business of dispensing of scripts by the pharmacy. In return for the provision of his personal consulting services over three years, he was to be provided with a 10 per cent share of Redwood Nutraceuticals. According to Mr Knowles, the arrangement for his dispensing scripts referred by Redwood Nutraceuticals in return for Redwood Nutraceuticals being paid a marketing fee calculated as the net profit of that business was to last only for a period of three years after which he would retain the profits or he and Mr Sher would come to a different agreement. He was aware that it was not legal for Redwood Nutraceuticals or for Mr Sher to obtain an interest in a pharmacy. He deposed that the Marketing Agreement would have breached the pecuniary interest provisions under the Pharmacy Act.

1. On 30 March 2002, Mr Knowles sent an email to Mr Sher advising that "the Pharmacy Board has no immediate issues with us under the Pharmacy [Act] but want to put the arrangements in front of the Full Board on the 10th April." He then set out some of the concerns expressed which related to the method of dispensing prescriptions. Mr Knowles also advised that his solicitor had written to him outlining parts of the Pharmacy Act with which the solicitor felt they were not presently complying.

1. Mr Knowles deposed that in about April 2002 the Pharmacy Board attended on the compounding premises at the Caringbah South Pharmacy as the result of which it determined that he would require a further licence in order for the compounding lab operation to be carried out. He said that at the relevant time a pharmacist was limited to holding three licences in relation to pharmacies. In addition to the Caringbah South Pharmacy, he had licences in respect of two other pharmacies and held the maximum number permitted. Because the Board considered that the compounding pharmacy had to be operated under a separate licence, he said that he was unable to obtain a further licence because of the licences which he held, namely the licence for the retail pharmacy at Caringbah South and the two other pharmacies. Mr Knowles said that as a result he terminated his supply arrangement with Redwood Nutraceuticals in April 2002.

1. I do not accept that Mr Knowles in any material way terminated his relationship with Redwood Nutraceuticals (or Redwood) in April 2002 for the dispensing of scripts referred by Redwood. According to Mr Knowles, from April 2002 another registered pharmacist, Mr Lance Peters, started filling prescriptions for patients of doctors who were prescribing medications promoted by Redwood Nutraceuticals and he ceased to have any involvement, except in a consultancy role. He said he merely advised Mr Sher as to whether things were being done correctly or not. This understates Mr Knowles' involvement from April 2002, but ultimately nothing turns on that question, except so far as it concerns Mr Knowles' credit. In relation to Mr Knowles' credit, his email correspondence of 1 May and 15 July 2002 shows that he had a continued managerial responsibility.

1. In an email of 22 July 2002 Mr Knowles advised Mr Sher that:

"Be aware as part of their ongoing investigation the NSW Health Department has felt compelled to tell the Pharmacy Board that they feel a pecuniary interest issue arises here with Redwood collecting the money and 'paying the bills'. My thoughts on this is to go ahead immediately and register the business name 'Redwood Compounding Centre' in my name (a registered pharmacist) and thus allowing me to open a bank account in the same name. Money in here, pecuniary interest concern extinguished. Would it impact on the greater scheme of things to allow 10 per cent profit to waylay other concerns of the pharmacy doing it for no profit? You then bill me for your costs." (Exhibit E, pp 23-24.)

1. Mr Sher replied to this issue by saying:

"To date we have not received anything other than some verbal thoughts on what we might be doing is breaching some regulation. As you know we always want to do things legally, however, the problem I am having is trying to get clear on what this is and what this means as all I hear is rumours, and until somebody makes it clear all we currently have is a job to streamline our administration and systems. I don't want to change things then change them again as this is very disruptive. ..."

1. Nonetheless, Mr Knowles' proposal was implemented. In July or August 2002 a bank account was opened by Westpac for Mr Knowles as its customer using the account name of "Knowles trading as Redwood Compounding Centre". The account was opened on 20 August 2002. Redwood collected the revenue from patients for the dispensing of the medications. The business was a mail order business. The moneys collected by Redwood were paid into the account. Mr Knowles said that the reason the account was not put in the name of Redwood Nutraceuticals was that that would have contravened the legislation and that the Pharmacy Board required that he own the account into which the moneys went. However, Mr Knowles did not consider that the moneys paid into the account were his. I am satisfied that the account was established with Mr Knowles as the purported account holder in order to deflect any further investigation by the Pharmacy Board as to the legality of the arrangements. The account must have been established with Mr Sher's acquiescence because he operated on the account. The establishment of the account corroborates the conclusion to which I would otherwise come that both Mr Knowles and Mr Sher understood that their arrangements were illegal, notwithstanding their protestations that they wished always to comply with the law.

1. In cross-examination, Mr Sher denied that at all times after 17 February 2002 he knew that his arrangements with Mr Knowles were illegal because Redwood had a pecuniary interest in Mr Knowles' business as a pharmacist. However, he conceded that he "took every possible step to ensure that it was not obvious to the Pharmacy Board that your company was sharing profit with Mr Knowles". He said that in doing so he was following Mr Knowles' advice. But had he truly believed that his arrangements were legal, there would have been no need to take steps to disguise the fact that Redwood was deriving profits from Mr Knowles' pharmacy business.

Restraint of trade provision

1. Clauses 11 and 12 of the Consultancy Agreement relevantly provided as follows:

"11. CONFLICTS OF INTEREST

11.1 General Prohibition

DK or it officers, must not hold any office, possess any property or undertake any obligations (under a contract or otherwise) which creates or might create (directly or indirectly) duties or interests which might conflict with DK's, duties or interests under this agreement, without redwoods prior knowledge and agreement. [sic]

DK must notify Redwood in writing immediately if DK becomes aware of a potential or existing conflict.

12. RESTRICTIVE COVENANT

12.1 Definitions

In this clause 12, 'engage in' means to participate, assist or otherwise be directly or indirectly involved as a member, shareholder, unitholder, director, consultant, adviser, contractor, principal, agent, manager, employee, beneficiary, partner, associate, trustee or financier.

12.2 Restrictions

DK undertakes to Redwood that it will not, and will procure that each of its Related Entities will not for the period of 2 years after the date of termination of this agreement within Australia:

(a) engage in any business or activity which is the same or similar to the Business or any material part of it;

(b) solicit, canvass, induce or encourage any person who was at any time during the six month period ending on the, [sic] employee or agent of Redwood to leave the employment or agency or Redwood;

(c) solicit, canvass, approach or accept any approach from any person who was at any time during the six month period ending on the date this agreement is terminated was a customer of Redwood with a view to obtaining the custom of any such person in a business which is the same or similar to the Business; or

(d) interfere with the relationship between Redwood and its clients, employees or suppliers."

1. In clause 12 "Redwood" meant "Redwood Nutraceuticals". "Business" meant "Redwoods [sic] Business"

Events to February 2005

1. From about October 2002 a Dr Jim Rowe or his wife both of whom are registered pharmacists dispensed prescriptions referred through Redwood following a falling out between Mr Sher and Mr Peters. At that time Mr Knowles was still precluded from carrying on the business of the compounding pharmacist because he held his three retail pharmacies. Mr Knowles told Mr Sher that he had invested in Dr Rowe's company (TCS) at Rockdale which had the necessary licence. Mr Sher agreed to this on the basis that it would not affect his agreement with Mr Knowles. Mr Knowles accepted this. Mr Sher agreed that Redwood would fund the set up of the new premises at Rockdale.

1. In March or April 2003, Mr Knowles sold a pharmacy at Revesby North. This enabled him to start a new compounding business. He established a new pharmacy in the name of Australian Custom Pharmaceuticals (ACP) at Taren Point.

1. Mr Knowles deposed that the various pharmacies that provided services to Redwood Nutraceuticals after his pharmacy at Caringbah North ceased in 2002 continued to provide services to Redwood Nutraceuticals on a similar basis to that on which he had carried out the work, namely that from the revenue generated by the compounding work referred by Redwood, all relevant expenses were deducted and then the net pre-tax profits were paid to Redwood as marketing fees. He deposed that he continued that arrangement once he established his new pharmacy at Taren Point from which he then recommenced a compounding business for Redwood Nutraceuticals.

1. At some point Redwood Nutraceuticals dropped out of the picture. It is not clear when this happened, but it is clear that at some point Mr Knowles' arrangements for dispensing scripts and payment of profits through marketing fees came to be with Redwood rather than with Redwood Nutraceuticals. The Consultancy Agreement provided that he would be issued with shares in Redwood Nutraceuticals. Instead, he was issued shares in Redwood. Mr Knowles said that from October 2003 he dispensed pharmaceutical products for Redwood and that the marketing fees were paid to Redwood and as a practical matter the agreement had evolved so that payments were made to Redwood. This was because Redwood Nutraceuticals no longer traded. Mr Knowles said that from October 2003 the revenue from patients who sent in scripts to be filled was collected into ACP's account from which marketing fees were paid to Redwood. (The account referred to in para [35] above of Mr Knowles trading as Redwood Compounding Centre was closed on 15 October 2003.)

1. Mr Knowles was issued with shares in Redwood by January 2004. He acquired an 8.831 per cent shareholding.

Engagement of Mr Boyd

1. Mr Boyd was appointed to the position of "Operations Manager" or "Facility Manager" on or about 24 February 2004. In his offer of employment his job description was described as his having full responsibility for "the adequate/optimal staffing, motivation, control of our production facility, financial control of budgets and expenditures, control of operations covering all aspects of customer service including the correct dispatch of product, and general growth of the business and to contribute as much as possible from what you have learnt along the way." He was engaged by Mr Sher, not by Mr Knowles. On 26 February 2004 he reported to Mr Sher on a visit to Mr Knowles' compounding pharmacy at Taren Point. He offered comments on the motivation of staff, customer service, and the adequacy of computer systems. Mr Boyd gave evidence to the effect that his role was to assist both Redwood and ACP under the direction of Mr Sher and Mr Knowles. He said that Redwood and ACP conducted two separate businesses that worked together to complement each other. Redwood's business was in education, marketing and advertising of anti-ageing products. ACP's business was that of a dispensing pharmacy. It is clear from Mr Boyd's emails to Mr Sher that both Mr Sher and Mr Boyd directed their efforts to reducing the costs of dispensing, controlling the rate of production of scripts, and enhancing quality control to reduce customer complaints.

1. Mr Boyd denied that he was sent the offer of the contract of employment that described his role as that of Facility Manager because he said he never had that position. But he accepted that the job description set out in the letter accurately described the job which he accepted (T379-380). I do not accept his denial that he received the document. None of Mr Sher, Mr Knowles or Mr Boyd was a satisfactory witness, but Mr Boyd was particularly unimpressive.

1. Mr Boyd's appointment as a consultant was as "consulting general manager for the group" (Exhibit E p 148). Mr Boyd said that he understood the reference to "The Group" to be a reference only to Redwood, although he said he understood that he would be helping both Redwood and ACP. This was a subtle shift of emphasis to suggest that Mr Boyd's only role was to act for Redwood, albeit that he provided assistance to other entities. He said that his role was the day-to-day operational running of Redwood (T390).

1. On 21 July 2004, Mr Boyd and Mr Sher agreed that Mr Boyd would become a consultant to the "group of companies". He would be paid as a consultant rather than as an employee and was offered shares in Redwood if Redwood's net assets achieved certain targets. Whilst his legal relationship to Redwood changed from employee to consultant, his role did not. He described himself as general manager of ACP (exhibit E, p 156).

1. Although Mr Boyd referred to himself as "GM ACP", in cross-examination he denied that he referred to himself as general manager, although he was unable to identify anything else to which those initials would refer (T391-392). This is an example of Mr Boyd's obfuscation.

1. It is clear from Mr Boyd's correspondence with Mr Sher that they both exercised managerial roles in relation to the ACP pharmacy that was dispensing Redwood products. Thus, Mr Sher gave instructions to Mr Boyd as to the conditions upon which Mr Knowles could enter into a lease of adjoining premises (exhibit E, p 157).

1. On 15 September 2004, a Mr Kaiser Khan accepted the position of accountant with "Redwood/ACP". He was employed by Mr Boyd.

1. By September 2004 Mr Boyd had proposed to Mr Sher that a new company be formed to act as a pharmaceutical raw ingredient wholesaler to supply products to ACP. Mr Boyd believed that he could procure the raw ingredients for the products that ACP would dispense for Redwood at a cheaper price than could be achieved using ACP's existing supplier. Mr Knowles agreed and ultimately so did Mr Sher. Mr Boyd became the sole shareholder and director of ASA. Mr Sher deposed that in mid to late 2004, Mr Knowles said to him that due to the success of the business he was concerned about the amount of the marketing fees that were being paid to Redwood as this would send a red flag to the Pharmacy Board. This was because ACP was making no profits and the Pharmacy Board would see that Redwood had a pecuniary interest in ACP. Mr Knowles suggested that the payments be split so that they went through different entities. Mr Knowles denied this, but I accept Mr Sher's evidence that such a conversation occurred. On 15 July 2004, Mr Knowles sent an email to Mr Sher in which he stated:

"I feel to move on, that each of the individuals actually controlling an entity (on paper) should take their profit from that entity. That is, I should not receive income (profit) from Redwood (dividends), wholesaling operation (except maybe in the form of rebates on purchases), the holding company or from the mesotherapy institute (?). Nor should my name be associated by way of directorship, employee or direct shareholder with these entities. John [Boyd] should receive his remuneration as profit from the wholesaler from sale of goods to the other three entities. You should receive income from Redwood, mesotherapy etc.

The obvious problem now is in Feb 2005. How do I treat my Redwood shares? I feel it would be better that I don't have any shareholding in the company that is organising a lot of work for my pharmacy. And as much as I would love to be a shareholder in mesotherapy int I feel it would be better that I receive income from profit of sale of goods to it. This would achieve an independent status for me and deflect any pecuniary interest problems with the Pharmacy Board as the three other entities would simply be independently run customers and suppliers. We would all be bound by agreement to maintain the status quo and the daily operation of 'The Company' would be unaltered ..."

1. Mr Knowles denied the authenticity of this email. The basis for that denial was that the email contained an email address that Mr Knowles said he had never used. He asserted that he would never have made the statements contained in the email. I do not accept Mr Knowles' denial. There was other evidence that the email address was an address that had been used by Mr Knowles in emails whose authenticity he did not dispute and the sentiments in the email reflect the reality of his relationship with Mr Sher.

1. Mr Boyd deposed that ASA was not a part of a "Redwood Group" in the sense of a combined group of companies. According to Mr Boyd there was a number of separate businesses working together with a common goal. ASA's business involved its obtaining raw product at a lower price which could be sold to ACP, thus reducing the purchasing cost of ACP's pharmaceutical raw ingredients. The arrangement was akin to a group of traders with a similar interest banding together to everybody's mutual advantage. ASA did not only supply ACP. It supplied other compounding pharmacists in Australia. According to Mr Boyd, the profits derived by ASA "from this operation" (viz. the supply of ingredients to other pharmacists) were not distributable to anybody other than himself. Mr Boyd asserted that ASA, ACP and Redwood conducted individual businesses. He denied Mr Sher's evidence that the businesses were established in order to disguise the fact that the profits from ACP's pharmacy were to be directed to Redwood. The accounts show that profits derived from the supply of ingredients to ACP were distributable to others. In the accounts of each entity this was achieved by the payment of marketing or consultancy fees to other entities in the group.

1. Mr Boyd was responsible for producing "group accounts", that is, internal management accounts for the group comprising Redwood, ACP and ASA. In these management accounts, Mr Boyd described himself as general manager of "the Redwood Group". Mr Boyd denied that he so described himself and said that the documents he wrote had been altered by the inclusion of that description. I reject that evidence. The management report for the "Redwood Group" contained no intercompany payments for marketing fees to Redwood as appear in the formal year end accounts of ACP and ASA. They aggregate the revenue and the expenses of each of the three entities of the group to show the monthly profits.

1. A clear demonstration of the structure of the group and of the falsity of Mr Boyd's evidence is contained in an email exchange between Mr Sher and Mr Boyd on 5 September 2006. Mr Boyd forwarded the July 2006 "financials". Mr Sher replied by saying:

"I see on the individual profit and losses ACP is showing a profit of $15K. Can you please make an adjustment as this is not meant to show any profit. If there has been any accumulated profits from previous months then can you please adjust this as well as re-send these to me."

1. Mr Boyd replied:

"We all agreed over 12 months ago that ACP needed to show a slight profit each month. This was to bring it in line with all the money that was going out, it needed to make something otherwise people would start raising eyebrows asking why. Hence we've been leaving about $5K in profitability each month. Last month was an exception as we had a larger than normal marketing adjustment fee from ACP to Redwood so I left a little more in ACP than normal. ACP's BAS statements are done monthly and we can't just go back and adjust them all, they have already been lodged and have already gone to the ATO for end of FY." (Exhibit E, p 266)

1. Mr Boyd could provide no explanation for this email. It is unsurprising that the defendants' counsel did not seek to support the evidence given by Mr Knowles and Mr Boyd to the effect that ACP and ASA operated as separate business entities from Redwood, and that Redwood had no right to the profits derived by ACP and by ASA from the business they did for Redwood.

1. I accept the submission of Mr Botsman, counsel for Redwood, that notwithstanding that Mr Boyd was retained from July 2004 as a consultant to Redwood, he owed fiduciary duties to it (Grimaldi v Chameleon Mining NL (No. 2) (2012) 200 FCR 296). I do not accept that Mr Boyd was a director or officer of Redwood and subject to the statutory duties in ss 181, 182 and 183 of the Corporations Act 2001 (Cth). He was not appointed as a director and was not a de facto director. Mr Sher made all the major decisions. Mr Boyd did not make decisions that affected the whole or a substantial part of the business of Redwood, nor did he have the capacity to affect significantly its financial standing. Nor was Mr Sher accustomed to act on his instructions or wishes. Mr Sher retained control. Mr Boyd acted on Mr Sher's instructions, but reported to him. He was a fiduciary, but not an "officer" within the meaning of the Corporations Act.

Redwood's arrangement with Mr Knowles from February 2005

1. Shares representing 8.831 per cent of Redwood were issued to Mr Knowles in February 2005. On 7 January 2005, Mr Knowles wrote to Mr Sher proposing that he received remuneration of $150,000 per annum and noting that the group's profits were over $1 million per annum. Mr Knowles denied the authenticity of the email containing this proposal, but I do not accept Mr Knowles' contention that the document was fabricated (presumably by Mr Sher). Whilst I do not consider Mr Sher's evidence to be reliable in important respects, Mr Knowles was even less reliable. Mr Knowles deposed that he did not agree to accept a sum of $150,000 per year in lieu of receiving further shares as part of the continuation of the Consultancy Agreement. He deposed that he had a conversation with Mr Sher where he said words to the following effect:

"The arrangement that we have been working under for the last several months where I pay you all the profits must come to an end. I am going to start taking drawings of $150,000 per annum. I would like to pay a flat rate to you for marketing fees with a monthly reconciliation if there are any shortfalls. I think the appropriate amount is $25,000 per month."

1. According to Mr Knowles, Mr Sher reluctantly acquiesced. Mr Knowles contended that from February 2005 the Consultancy Agreement had expired and marketing fees paid thereafter to Redwood were fixed with the only potential for variation of the marketing fees being according to changes in expenses, but he thereafter did not agree that all the profits of the business would be spent on marketing.

1. I accept that the Consultancy Agreement came to an end on or about 22 February 2005. Clause 10.3 of the Consultancy Agreement provided that it would terminate on the expiry of the Term, being three years, although Redwood Nutraceuticals would have the right to extend the term of the agreement for a further three years, but only if there were new mutually agreed terms for the exercise of the "option" for extension. Such an agreement would have required specific consideration being given to the extension of the term of the Consultancy Agreement. There was no agreement for the term of the Consultancy Agreement to be extended. Such an extension would have extended the period of the restraints in clause 12.

1. Notwithstanding that there was no formal extension or renewal of the Consultancy Agreement, Mr Knowles offered to continue to make himself available for conferences and seminars and to deal with regulatory issues with the Pharmacy Board or the health department. But no new terms were negotiated or agreed on for the extension of the Consultancy Agreement for any particular period, or at all. Rather, the parties simply proceeded with their business as they had done up to that time.

1. I do not accept Mr Knowles' evidence that from February 2005 the business arrangements changed so that the marketing fee could only vary according to changes in expenses, as distinct from changes of overall profit.

1. Mr Knowles produced a spreadsheet setting out what he said were the marketing fees paid. Whilst his spreadsheet contained regular payments of $25,000, often twice monthly rather than monthly, it also included sums of $480,800 between July 2005 and April 2006 which were said to be "adjustments". In total his schedule of marketing fees paid in the 12 months from July 2005 to June 2006 totalled $425,000 (which he described as "retainer") and $480,800 (which he described as "adjustment"). I do not accept the accuracy of Mr Knowles' figures. They are not in accordance with the financial records. But even if his figures were accurate, they do not corroborate his evidence that there was a change in the arrangements in relation to payment of profits to Redwood in February 2005.

1. The email from Mr Boyd to Mr Sher of 5 September 2006 referred to at para [56] above reveals the true position. The position taken by Mr Sher and Mr Knowles in relation to a "drawing" of $40,000 from ACP's Westpac account referred to below, also shows that the parties proceeded on the basis that Redwood was entitled to ACP's net profits. As appears below, Mr Knowles considered that he was obliged to explain to Mr Sher why he was drawing $40,000 from ACP's account. Mr Knowles justified the drawing as a payment of a dividend to which he was entitled on his Redwood shares.

1. Moreover, ACP paid Redwood substantially more than $25,000 per month as marketing fees and there was no evidence to corroborate Mr Knowles' assertion (which I do not accept) that the additional payments were referable to the reimbursement of expenses incurred by Redwood in staging conferences or seminars. According to a profit and loss statement for Redwood for the period July 2005 to June 2006, it received marketing fee income of $1,412,200. The profit and loss statement for ACP for the same period records a payment of "marketing fees" of $905,182 and "telemarketing expenses" of $307,272.68. The profit and loss statement for ASA and PMC record marketing expenses of $462,273 in the case of ASA and $63,636 in the case of PMC. The financial statements for those entities corroborate the plaintiff's allegation that all the profits generated by ACP from work generated by Redwood were to flow to Redwood and that Redwood would charge PMC and ASA marketing fees equal to those companies' profits. As previously noted in these reasons, counsel for the defendants did not make any final submissions to the contrary.

1. Further corroboration lies in the fact that after February 2005 Mr Boyd produced the internal management reports for the group which eliminated the inter-business transfers to show the monthly profitability of the group. This was inconsistent with Mr Knowles' and Mr Boyd's contentions that from February 2005, each entity, ACP, ASA, PMC and Redwood, operated as stand alone businesses, each entitled to its own profits.

Redwood loan to Mr Knowles

1. On 14 April 2004, Mr Sher and Mr Knowles agreed that Mr Knowles would borrow $42,500 for a term of 12 months at an interest rate of 5.5 per cent per annum paid monthly in advance. $42,305, being the principal less the first month's interest, was paid to Mr Knowles on 26 April 2004 according to a note on a copy of an email signed by Mr Knowles. Whilst it is not clear from what account the payment was made, there is no dispute that the loan was advanced, nor that it was a personal loan separate from the parties' other business dealings.

1. According to Mr Knowles, he was entitled to a dividend from Redwood for the year ended 30 June 2005 of $53,697, but was paid only $11,197 with the difference having been deducted by Mr Sher as repayment of the loan. According to Mr Knowles, he later had a conversation with Mr Sher in which he told Mr Sher that he needed to re-borrow the amount and that Mr Sher then agreed to start a new loan. Mr Knowles deposed that funds for the new loan were to be provided to him and he commenced paying interest at an agreed rate. Interest payments were made monthly and were credited to Redwood's account. Mr Knowles said that he had no record of receiving the funds representing the second loan.

1. It is unnecessary to pursue the dispute in relation to payment of the 2005 dividend because Redwood paid Mr Knowles $42,500 on 12 September 2005. This was either payment of the June 2005 dividend, or a fresh loan. As appears below, at relevant times in 2006 Mr Knowles acted in a way that is only explicable by the loan being then outstanding.

1. Mr Knowles was entitled to a dividend of $40,273.14 from Redwood for the year ended 30 June 2006. He deposed that the dividend payable to him for that year was $42,287. He deposed that that dividend was unpaid and he assumed that his entitlement to the dividend had been applied to repay the loan as it had been on the prior occasion. He deposed that if the loan had not been redrawn, then he was still owed the dividend payment.

1. On 28 July 2006, Mr Boyd sent an email to Mr Knowles and to the accountant, Mr Khan, querying a deduction of $40,000 that had been made from ACP's Westpac bank account on that day. Mr Knowles responded by saying:

"The deduction was my dividend for the 2006 year. Brian and I had a discussion about the outstanding debt and whether this dividend would pay it off. Unfortunately I am in exactly the same position as last year and after discussions with my family law solicitor I have no alternative but to take the dividend and spend it so it does not show as an asset. Any other option was going to cost me 45% of my dividend before tax! The reason I took it now was I had the perfect place to spend it ... and show nothing for it. Also Brian and I talked about increasing the interest rate for the loan so the Redwood Share holders wouldn't be disadvantaged by me receiving a preferential rate. We didn't actually come to a rate but I thought 0.25% above what Redwood is getting on the ING account would be agreeable."

1. At the time Mr Knowles was involved in divorce proceedings with his wife. If the debt for the dividend had remained outstanding she would have been entitled to 45 per cent of the debt payable to Mr Knowles. The amount withdrawn from the ACP account was $40,273.14. This was the same amount as the dividend payable by Redwood. Mr Knowles' position at the time was that he paid himself the dividend he was entitled to from Redwood by drawing the moneys from ACP.

1. Mr Boyd responded to Mr Knowles by saying that it had been his understanding that Mr Knowles' loan was to be repaid with the dividend. Mr Sher had written, but not dated nor signed a cheque payable to Mr Knowles for $40,273.14. The cheque was to be drawn on Redwood's account. According to Mr Sher, he had left the cheque with Mr Boyd who had the power to sign it (exhibit E, p 250M).

1. Mr Sher had proposed that the dividend cheque not be deposited and that the loan be left on the books. He demanded the return of the money taken by Mr Knowles from ACP. Mr Knowles' response was that Mr Sher's suggested loan scheme would not work, but would result in his losing 45 per cent of the dividend to his wife. His position was that he had to take the dividend and spend it, otherwise it would be designated as an asset to which his wife would be entitled to a share.

1. Mr Sher was not appeased. He said that he and Mr Knowles had agreed that the dividend would be offset against the loan, but instead Mr Knowles took the money from ACP as his dividend without Mr Sher's agreement. In his response of 31 July 2006, Mr Knowles said:

"I too don't take a cent of funds that is not owed to me. As the owner of ACP I am allowed to take a drawing quite legally. John should have simply been able to deposit my dividend cheque into the ACP account end of story."

Mr Knowles did not resile from his earlier statements that the payment drawn from ACP was payment of the dividend to which he was entitled from Redwood. Consistently with this, Mr Knowles accepted that the loan was still outstanding. This was so notwithstanding that the cheque drawn on Redwood's account for the amount of the dividend remained unsigned and unpresented.

1. This episode is inconsistent with Mr Knowles' testimony that from February 2005 he was to be entitled to ACP's profits. He treated ACP's moneys as if they were Redwood's. If at the time Mr Knowles had taken the position which he maintained in the litigation, he would have contended that he was entitled to take the drawing from ACP because ACP's business belonged to him and that he was also entitled to his dividend from Redwood. He would not have treated his drawing of moneys from ACP as payment of the dividend to which he was entitled from Redwood. Either he would have maintained that he was entitled to the dividend payment from Redwood, or he would have demanded that the unpaid dividend be set off against his liability to repay the loan from Redwood. He did neither. Instead, he treated the drawing from ACP as a payment of the Redwood dividend and acknowledged his continued indebtedness for the loan.

1. On 31 July 2006 Mr Knowles agreed to pay interest at the rate of 7.5 per cent and said he would repay principal on the settlement of his divorce which would be the time when funds were available to him which was anticipated to be February 2007. Mr Sher said that the loan would be for six months. On 1 August Mr Knowles agreed to a six-month loan period with interest at 7.5 per cent. The next month's interest was due on 28 August 2006. Mr Knowles made the interest payment in the increased amount of $265.62 (rather than $198.40) to reflect the agreed change in the interest rate. He made a further interest payment of $265.62 on 26 September 2006. That was the last payment he made. On 27 October 2006, Mr George, writing on behalf of Mr Knowles, purportedly terminated any relationship or arrangement of any kind between Mr Knowles and Redwood.

1. The result is that the loan of $42,500 remains outstanding. Simple interest at the rate of 7.5 per cent per annum is payable from 27 September 2006.

1. The loan agreement is not affected by the illegality attending the agreement for distribution of ACP's profits to Redwood. It was a separate transaction from the arrangement under which Redwood had a pecuniary interest in Mr Knowles' pharmacy business.

Loan from Redwood to ASA

1. On or about 2 March 2005 ASA borrowed $220,000 from Redwood with interest of 10 per cent per annum. It is impliedly admitted on the pleadings that the loan was for a term of three years. ASA contends that the loan was repaid in full by 31 October 2005.

1. ASA's balance sheet as of April 2005 records a liability to Redwood for a loan of $220,000. Its balance sheet as of March 2006 and June 2006 record no such liability. Redwood's balance sheet as of April 2005 showed as an asset the loan to ASA of $220,000. As of June 2005 it showed that the loan had been reduced to $120,000. Its balance sheet as of June 2006 showed the loan still to be outstanding. However, a balance sheet as of March 2006 showed no such asset. Redwood's general ledger summary for the period from 1 November 2005 to 19 November 2008 showed a nil balance for the whole of that period in respect of the account named "Loan to ASA pha".

1. These financial records were prepared by Mr Boyd and Mr Khan. On 19 September 2006 Mr Sher sent an email to Mr Boyd with a copy to Mr Tom Loewy, the external accountant for the group. ASA's profit and loss statement for the 12 months to 30 June 2006 showed a net profit of $345,057.84 (after "marketing expenses" of $462,272.72). Mr Sher wrote:

"I have now studied the end of year 06 financial reports and I am concerned that Kaiser has not carried out my instructions according to our agreement with you and Daryll and that is all profits are to be reported in redwood as this is where all the shareholders are and where all the value sits. Right now a very large profit is showing in asa I am not sure why as we never agreed to asa making any profit and there is more than I agreed still sitting in acp. Please can you make these adjustments. ...

Further Ramon harpaz is still sitting on redwoods balance sheet and asa as a debtor is not? Asa was loaned money to buy redwood shares to the tune of 200k, and money paid so far by asa to redwood has been reported and accounted for as a loan repayment?? where it should have been what it was and that was sales income. This needs to be corrected. ..."

1. (The reference to Ramon Harpaz still sitting on Redwood's balance sheet was to a loan to Raman Harper of $15,000 that was recorded as an asset of Redwood on its balance sheet as of June 2005 and June 2006.)

1. It appears from Mr Sher's email that the balance sheet for Redwood he was sent contained no asset being a loan to ASA. The Redwood balance sheet that was tendered recorded as an asset a loan to ASA of $120,000 which was the same amount as shown as an asset on Redwood's balance sheet as of June 2005. Redwood's general ledger summary for 1 July 2004 to 30 June 2005 records a debit of $220,000 to reflect the asset of the loan to ASA and a credit in that period of $100,000 giving an end balance of $120,000. A general ledger summary for the period from 1 July 2005 to 31 October 2005 was not produced. As noted above, the general ledger summary from 1 November 2005 to 19 November 2008 shows a nil balance for this asset for that entire period, which is inconsistent with the amount of $120,000 shown on the Redwood balance sheet.

1. Notwithstanding the Redwood balance sheet as at 30 June 2006, I infer that the loan of $220,000 was repaid. Mr Sher's complaint was that it had been repaid by ASA treating payments made to Redwood as repayment of the loan rather than as "sales income". ASA's bank register from 1 July 2005 contains an entry described as "repayment of Redwood loan" of $50,000 on 29 August 2005, $25,000 on 23 September 2005, $25,000 on 24 October 2005 and an item called "Redwood share purchase" of $29,000 on 27 November 2005. This was in addition to other payments to Redwood of $10,000 on 8 July 2005, $50,000 on 25 August 2005, $50,000 on 23 September 2005, $25,000 on 24 October 2005, $25,000 on 21 February 2005, $25,000 on 24 January 2006, $12,500 on each of 10 February, 13 February and 24 February 2006, $12,500 on 24 March 2006, $25,000 on 11 April 2006, $12,500 on 26 April 2006, $12,500 on each of 15 May and 16 May 2006, $12,500 on each of 5 June and 19 June 2006, and $35,000 on 30 June 2006. As the loan balance had been reduced to $120,000 by 1 July 2006, it is clear that ASA appropriated some of the payments as identified above to repayment of the loan. Even if that was in breach of the informal agreement between Mr Sher and Mr Boyd as to how profits of the "group" should be distributed back to Redwood, it was nonetheless a repayment of the loan debt.

Events leading up to termination of 27 October 2006: Repudiation by Redwood

1. Relations between Mr Sher and Mr Knowles had deteriorated by the end of July 2006 when there was acrimonious correspondence in relation to Mr Knowles' $42,500 loan and his drawing money from ACP's account to pay the Redwood dividend. In the course of that debate Mr Knowles complained that Mr Sher had initially agreed to a 50/50 partnership in a business to be Redwood Nutraceuticals. He complained that although the venture proceeded and was folded into Redwood Anti-Ageing, somehow he came to have only an 8.83 per cent shareholding, whereas Mr Sher had a 52 per cent shareholding. There was further acrimony in August over who was liable to pay a legal bill for $2,806.32. Mr Knowles wrote:

"After your appalling treatment of me last week over the loan repayment are you actually surprised I am not paying for Redwood's court costs as well?"

1. On 1 September 2006, Mr Sher wrote to Mr Knowles stating that he wished to pursue a program (that he said had been agreed on the previous year) of buying three to five compounders and creating one super compounder. He said this would allow Mr Knowles to have greater control and participation in compounding and would give both parties the opportunity of going their separate ways. Mr Sher wrote:

"Can you please let me know if you want to be involved in this as I am happy to give you the first right of refusal on being the pharmacist and pharmacy to lead this. If you do not want to be involved then I have no choice but to take this program to other compounders who might be interested in playing the lead in this and extracting the value I have created in down this avenue [sic]."

1. Whatever might be entailed in Mr Knowles taking the lead in the proposal for the acquisition of additional compounding pharmacies, Mr Sher's proposal was that Mr Knowles would no longer be the exclusive dispenser of scripts generated by Redwood's marketing.

1. Mr Knowles responded by saying he would rather not be involved in a super compounder concept. He was happy to continue with the current arrangement until Mr Sher found another pharmacist at which point he would assume that their relationship was officially over. Mr Sher's response was to accuse Mr Knowles of threatening to break their agreement. He said:

"I am not certain, but I don't think you can afford to break our agreement as your professional and financial future depends on working in harmony with me and fulfilling our agreement which includes selling our business, at which time we would satisfactorily and mutually end our partnership. ... I will be proceeding as normal unless I am impeded by you in my attempts to maximise the value of our business for shareholders."

1. Mr Knowles responded by reaffirming that he was happy to continue with the existing arrangement, but that if Mr Sher found another pharmacist that would result in the dissolution of their "handshake" agreement. Mr Knowles said:

"Our original Consulting Agreement finished in Feb 2005. The current supply agreement is in place until your actions demonstrate otherwise."

Mr Knowles said that he would like his shares to be bought out.

1. Mr Knowles pleaded in his defence that on 5 September 2006 Mr Sher demanded that Mr Knowles enter into a written agreement with the plaintiffs on the terms of the agreements pleaded in the statement of claim, failing which the plaintiffs would cease to perform the agreements. This was said to be a repudiation. The demand referred to was said to be contained in an email from Mr Sher to Mr Knowles of 5 September 2006 at 12.38am. In that email Mr Sher wrote as follows:

"Further if you truly want to have any chance of achieving your desire below you will need to accept that any buyer of redwood will want to see a legal agreement. Reflecting an arrangement ongoing between acp asa and redwood and with you refusing to sign one leaves me without the option of doing this and looking only at the other options previously discussed. So you need to realise the commerciality here of [your] position and whether this is best serving you and figure out which way you want to go? You cannot have it both ways as it just does not work that way whether that please[s] you or not. Right now if you want to retain acp and build this for sale to coles in the future, it may be best for you to buy the group and look for some new partners if you can't afford this on your own as it is certainly time to look at all options."

1. That email does not contain the demand alleged in Mr Knowles' defence in express terms. It barely contains any intelligible message, except a grievance that Mr Knowles would not sign an agreement.

1. The defendants allege that on 11 September 2006 Mr Sher demanded that Mr Knowles participate in a "super compounder" program, or enter into a written agreement with Redwood on the terms the plaintiffs assert Mr Knowles was bound by, failing which Redwood would cease to perform its agreement and would cause Mr Knowles to be ruined professionally and financially. No-one gave evidence of a conversation in precisely these terms, but Mr Sher did threaten to ruin Mr Knowles professionally and financially. Mr Boyd made a contemporaneous reference to that threat in an email of 12 September 2006. The context of the threat was that Mr Sher demanded Mr Knowles' agreement to his proposal of creating "one super compounder" by buying three to five compounders and he demanded that an agreement be documented so that a buyer of Redwood could see that there was a "legal agreement" in place. The threat to ruin Mr Knowles professionally and financially was the result of Mr Knowles' refusal to do anything except continue the current arrangement. Whilst Mr Sher did not expressly say that if Mr Knowles maintained that position, Redwood would not continue to perform the current arrangement that was necessarily implicit in the threat. I accept the submission of counsel for Mr Knowles that Mr Sher evinced the intention only to continue to work with Mr Knowles if Mr Knowles agreed to Mr Sher's demands.

1. If the parties had agreed that the arrangement between Redwood and Mr Knowles would continue until Redwood was sold, then Redwood, through Mr Sher, repudiated that agreement by his correspondence and conversations between 1 and 11 September 2006 referred to above. Mr Sher's conduct evinced an intention that Redwood would no longer be bound by the terms originally agreed to. Mr Knowles was entitled to accept the repudiation and terminate the agreement as he did, even if the parties had agreed to continue the arrangements until Redwood was sold.

1. Mr Knowles alleged that Redwood also repudiated their agreement by secretly transferring a 1300 telephone number that was supplied to patients wishing to order Redwood products from Mr Knowles to Redwood. On 12 September 2006 Mr Sher complained that Mr Knowles had instructed Mr Boyd and "Rebecca" not to pass on to Mr Sher any information relating to ACP, except for the "Redwood figures". Mr Sher complained that Mr Knowles had arbitrarily decided not to divulge some of the sales "we make". Mr Knowles responded by saying that his decision was simply a response to Mr Sher's action in "secretly trying to transfer my customer service 1300 numbers to Redwood ownership". The 1300 number was a customer service line that appeared on Redwood's marketing material and which had been used by Mr Knowles. The bills had originally been sent to Redwood. In about September 2006 Mr Sher ascertained that the number that had originally been on Redwood's phone bill was no longer there. He made inquiries of the company that provided the telephone service and ascertained that Mr Boyd had arranged for the number to be transferred to Mr Knowles' account. He transferred it back into Redwood's name. His conduct in doing so was not a further act of repudiation of the parties' agreement.

1. The plaintiffs alleged that in about July 2004, Redwood agreed with ACP to secure a supply agreement between the Menopause Institute of Australia Pty Ltd and ACP with its being agreed that all profit generated from the agreement between the Menopause Institute and ACP would be paid to Redwood by way of marketing fees. It was said that in August 2004 Redwood secured for ACP an exclusive supply agreement with the Menopause Institute for 30 months commencing on 1 August 2004. There was only passing reference in the evidence to arrangements with the Menopause Institute. If the arrangements as alleged were made, such an arrangement contravened s 25 for the reasons given.

1. Redwood made an alternative claim in restitution. It pleaded that Mr Knowles, Mr Boyd and ASA were unjustly enriched at its expense by reason of the allegedly unlawful termination of the "Knowles Pharmacy Agreement" and the "Knowles Consultancy Agreement". It said that by reason of the unlawful termination of those agreements, Mr Knowles, Mr Boyd and ASA were incontrovertibly benefited by the value of Redwood's contribution to the group of companies, including the value of an agreement with the Menopause Institute, and by being saved the expense of establishing a business to replace the services formerly provided by Redwood.

1. I do not accept the claim in restitution. Redwood made millions of dollars between 2002 and 2006 as a result of its arrangement with Mr Knowles. Any claim in restitution could not be for any amount greater than the value of any marketing or other services Redwood provided. There is no evidence that it did not receive fair remuneration for the services it provided or that Mr Knowles, Mr Boyd or ASA were unjustly enriched by the services it provided. In any event, the legislative purpose of s 25 would be negated if a claim for marketing fees were allowed either as a contractual claim or in restitution (Miller v Miller (2011) 242 CLR 446 at [27]; Equuscorp Pty Ltd v Haxton [2012] HCA 7 at [34], [45], [103], [111]).

Claims arising from events after termination

1. By about early 2005 Mr Sher had returned to the United States. Mr Boyd, as general manager of the Redwood Group, had day to day managerial control of Redwood's business in Australia. On 23 December 2004 Mr Boyd reported to Mr Sher (and Mr Knowles) that he had employed a Mr Michael Tattersall as a new operations manager who would work with ACP. He did not have a background in marketing (T609).

1. Redwood alleges that following the service of the notices of 27 October 2006, a company formed by Mr Boyd, Mr Knowles and Mr Tattersall changed its name to NxGen Australia Pty Ltd and started to market the same natural hormone products to be compounded by ACP as Redwood had marketed, using the same people and materials. It alleges:

(a) that NxGen Australia (and implicitly Mr Boyd and Mr Knowles) solicited former employees of Redwood and PMC to take up employment with NxGen Australia;

(b) Mr Boyd and/or Mr Knowles or people on their direction used Redwood's confidential database containing names and contact details of doctors who had previously responded to Redwood's marketing efforts to market the products compounded by Mr Knowles that were now being marketed by NxGen Australia;

(c) ACP (i.e. Mr Knowles) or people on his direction copied substantial parts of a publication produced by Redwood known as the Redwood Guide in producing similar publications for NxGen Australia and copied Redwood's order form; and

(d) Mr Knowles paid marketing fees to NxGen Australia to enable it to establish an carry on the same kind of business as Redwood had carried on.

1. Redwood contends that by this conduct:

(a) Mr Boyd breached his fiduciary duty to Redwood and Mr Knowles participated with knowledge in that breach;

(b) Mr Boyd and Mr Knowles used Redwood's confidential information to its loss and their profit;

(c) Mr Knowles or persons on his direction breached Redwood's copyright in the Redwood Guide and its order form; and

(d) Mr Knowles breached the "restrictive covenant" in clause 12.2 of the Consultancy Agreement.

1. NxGen Australia was incorporated on 17 January 2006. It was then called JDM Analytical Pty Ltd. The initials "JDM" were used as the initials of the first names of Mr Boyd, Mr Knowles and Mr Tattersall. On 27 October 2006, the company changed its name to NxGen Australia Pty Ltd. According to the company search, Mr Boyd and Mr Tattersall were both directors of the company from 17 January 2006. According to the search, Mr Boyd ceased to be a director on 30 November 2006. He and Mr Tattersall were the original shareholders. Subsequently, the sole shareholder became NxGen Pharmaceuticals Pty Ltd. The sole shareholder of NxGen Pharmaceuticals is Jehega Pty Ltd. A company of which Mr Knowles is the sole shareholder and director (P2U Nominees Pty Ltd) holds 20 per cent of the shares in Jehega Pty Ltd.

1. NxGen Australia was not joined as a defendant.

1. It can be inferred that prior to the sending of the notices of termination of 27 October 2006, Mr Knowles and Mr Boyd intended that NxGen Australia would carry on a business of marketing natural hormone products compounded by ACP similarly to the way Redwood had marketed natural hormone products to be compounded by ACP.

1. I have concluded that although retained as a consultant and not as an employee, Mr Boyd owed a fiduciary duty to Redwood whilst he was employed in the role of general manager of the Redwood Group. Whilst he was so employed he owed a duty of loyalty to Redwood. But that duty ceased after he gave notice of termination of his relationship with Redwood. Just as if he were an employee, Mr Boyd was free to establish himself in competition to Redwood once his consultancy was terminated, provided he did not misuse his position to take a springboard advantage (c.f. Industrial Development Consultants Ltd v Cooley [1972] 2 All ER 162). There is no evidence that he did so. I infer that Mr Boyd participated in the incorporation and change of name of NxGen Australia for the purpose of NxGen Australia's taking over Redwood's role. But there is no evidence that he took any other step to establish NxGen Australia's business whilst he was a consultant to Redwood. There is no evidence that the incorporation and change of name of NxGen Australia was itself productive of loss to Redwood.

1. In any event, Redwood could not recover equitable compensation if it were able to establish that it suffered loss as the result of a breach of fiduciary duty by Mr Boyd because its loss was a loss of profits that it could not lawfully earn. Nor has it been shown that Mr Boyd derived any profit for which he could be required to account as the result of any actions taken in breach of fiduciary duty.

Solicitation of Redwood's and ACP's employees

1. There is no evidence that Mr Boyd or Mr Knowles approached employees of Redwood or PMC to solicit them to take up employment with NxGen Australia. By October 2006, Mr Sher had returned to the United States. But the fact that Mr Knowles and Mr Boyd terminated their relationship with Redwood did not preclude Redwood from continuing its business of marketing natural hormones using other compounders (if it could lawfully do so). Mr Sher had proposed to Mr Knowles the use of other compounders. He had no monopoly in the products being marketed. He could have employed a manager to replace Mr Boyd and used a different pharmacist or pharmacists in place of Mr Knowles. He did neither. The result was that Redwood's employees sought employment elsewhere. Redwood called no evidence from any of its employees, or from any employee of PMC, of such an employee being solicited to start work for NxGen Australia.

1. In October 2006 Mr Matthew Chalmers was in charge of Redwood's marketing activities. He reported to Mr Sher or to Mr Boyd. He deposed that in October 2006 he saw a fax come into the offices of Redwood that was in effect a termination by ACP of services from Redwood. On the next day, he telephoned Mr Sher to ask what was going on. Mr Sher was in the United States. Mr Sher said that he was going to sue. Mr Chalmers' response was that although that was well and good, it could take years and ACP was Redwood's only client. According to Mr Chalmers, Mr Sher offered to guarantee his mortgage for one year if Mr Chalmers remained with Mr Sher. Mr Chalmers said he would think about it. This conversation took place on a Saturday morning. On the following Monday, according to Mr Chalmers, he telephoned Mr Knowles and offered his services as a marketer. Mr Knowles told him to talk to Mr Tattersall at NxGen Australia. He did so and sought a position of employment with NxGen Australia. He was offered a job as business development manager. Having obtained employment at NxGen Australia, Mr Chalmers gave notice of his resignation to Mr Sher.

1. Mr Sher sent an email to Mr Chalmers on Monday, 30 October 2006 referring to Mr Chalmers' resignation. In that email Mr Sher asserted that he understood from his conversation with Mr Chalmers that Mr Chalmers had been offered a position by either Mr Knowles or Mr Boyd and had accepted the position and resigned from Redwood as a result of their attempts to damage Redwood and force its closure. Mr Sher asserted that Mr Chalmers had a key relationship with Redwood doctors and other referral sources and said that he had no doubt that that was why Mr Knowles and Mr Boyd were quick to offer him a job.

1. Mr Chalmers did not respond to that email, but there was no particular reason why he should have done so. He denied its contents. Mr Chalmers was not shaken in cross-examination on this evidence. Whilst Mr Knowles put him in touch with Mr Tattersall at NxGen Australia, this was a result of Mr Chalmers approaching Mr Knowles, rather than Mr Knowles or Mr Boyd soliciting Mr Chalmers.

1. Mr Alexander Vlassov was employed by Redwood from February 2006 as a graphic designer. He deposed that in the latter part of 2006 he was told by Mr Sher that, "The company is probably going to split. Are you going to stay with me?" He was told that there might be a job available for him in the United States. Mr Vlassov deposed that there came a point where there was really no management at Redwood at all. Mr Sher was not present; Mr Chalmers told him that he, Mr Chalmers, was leaving. He found himself in a situation where it seemed as though the business was going down. Because of this he contacted Mr Knowles to ask whether Mr Knowles had any jobs for him. Mr Knowles told him that, "We have just opened a new company called NxGen and we are looking for a graphic designer. Come and see for me [sic] and if you want you can apply for the job." He did so. He was offered a job by Mr Knowles as a graphic designer for NxGen. I infer this conversation took place after 27 October 2006. I accept that evidence.

1. Redwood has not shown that Mr Boyd or Mr Knowles solicited Redwood's or PMC's employees to join NxGen Australia as distinct from those employees having sought employment from Mr Knowles and being directed to NxGen Australia. In any event, there is no reason other than possibly the restraints in Mr Knowles' Consultancy Agreement which had not then expired, which would have precluded either of them from soliciting the employees after Mr Boyd's consultancy and Mr Knowles' agreement with Redwood was terminated.

Database of doctors

1. The development of a database of doctors was an important element in Redwood's marketing efforts. Mr Sher said that doctors on the database were ones who had been educated and brought to seminars as a result of which they would apply that knowledge to their patients, and this would generate scripts which would end up back at Redwood and then be directed to the pharmacy (T184). Redwood organised seminars and promoted the seminars to doctors and provided doctors with written materials. Mr Sher said that Redwood used a desk reference guide and would write to doctors making them an offer of the Redwood Guide which was of substantial value to them because of the information it contained. Doctors would request that book and as a consequence their name would be placed onto the database. Redwood would answer any questions that doctors had about the book or about the information, so that communication was open between the doctors and Redwood. Redwood would send out to the doctors order forms so that the doctors could attach prescriptions to the order forms. Redwood sent out to doctors other information such as research on the ingredients. Every three months Redwood would organise a series of seminars around the country and engage doctors who were already in the practice of prescribing hormones. On a weekly basis Redwood wrote a newsletter which was sent out to the doctors which became incorporated in the Redwood Guide (T184-185).

1. Mr Chalmers deposed that when he started his employment with NxGen Australia, it was apparent to him that its marketing activities would be benefited by having access to a database of medical practitioners. Mr Chalmers denied that he used Redwood's database. Instead, he went to the "Australian Medical Publishing Company" which, he said, maintained a complete list of doctors in Australia. Mr Chalmers leased the list and made an offer to the doctors who were on the list to provide a free CD of a lecture. If a doctor responded affirmatively, his or her name and details were incorporated into a new database. To obtain access to the list, NxGen Australia paid a fee to the Australian Medical Publishing Company. A third party mailing house was used to send out the material to doctors on the list, and it was only when a positive response was obtained from a doctor that the doctor's identity and contact details were incorporated on the database. Mr Chalmers said that the first mailout occurred in March 2007 from which there were about 2,000 responses. This formed the basis for the establishment of NxGen Australia's database. In addition, there were doctors who were existing prescribers to ACP. Those doctors' names and details would have appeared on Redwood's database, but ACP had a separate record of them.

1. There was no contrary evidence.

1. I accept that the Redwood database was confidential information that NxGen Australia was not entitled to use. I do not accept Redwood's submission that Mr Knowles and Mr Boyd caused the Redwood database to be used for the benefit of NxGen Australia and ACP and for themselves. There is no evidence that the database was so used. Redwood submitted that it should be inferred that the Redwood database was used because the ACP bank register records the receipt by ACP of payments between 28 October 2006 and 1 April 2007 from 70 doctors whose details appear on the Redwood database. But that does not indicate that NxGen Australia or Mr Boyd or Mr Knowles had themselves used the Redwood database. Many of the doctors who made payments to ACP between 28 October 2006 and 1 April 2007 had also made payments in earlier periods, and thus had an established relationship with ACP. Moreover, ACP continued to be the beneficiary of Redwood's earlier marketing efforts. Doctors had already been supplied with what was called the "Redwood Order Form" which provided for scripts to be posted to a post office box at Taren Point that was used by ACP. No inference can be drawn from the fact that ACP continued to receive orders from doctors who were on Redwood's database that NxGen Australia or Mr Knowles or Mr Boyd used Redwood's database for their own purposes.

Breach of copyright

1. Redwood did not adequately plead a claim for breach of copyright. It pleaded that in 2002 Redwood published the Redwood Guide and an order form and that copyright in the Redwood Guide and the order form was vested in Redwood. (It also pleaded that it had copyright in the database containing the list of names and addresses of medical practitioners.) Redwood pleaded that ACP published and distributed to medical practitioners in the database the "Australian Custom Pharmaceuticals Guide to Compounding" (the "ACP Guide") to replace the Redwood Guide. It also pleaded that ACP reproduced the order form which was a substantial reproduction of Redwood's order form. It pleaded that this conduct was an "infringement of Redwood's intellectual property". Mr Botsman had frankly acknowledged that there were deficiencies in the pleading of a claim for breach of copyright. That was one of the grounds upon which Redwood had sought to vacate the hearing date. That application was unsuccessful. However, the copyright issues were fully litigated. Redwood is not debarred from pursuing them by reason of the inadequacies of the pleading.

1. However, Redwood failed to call evidence to establish that the Redwood Guide was an original literary work. This was significant because although the Redwood Guide is a substantial book running into hundreds of pages, only ten passages of text in the book were said to have been copied in the ACP Guide. The first such reference is to a passage in the Redwood Guide that read:

"Warts are caused by the human papillomavirus (HPV). Among the most common are plantar warts, which appear over pressure areas on the soles of the feet such as the heel and the ball of the foot. Plantar warts are caused through direct contact with HPV that enters the skin through small cuts and abrasions."

1. The same passage appears in the ACP Guide. The ACP Guide was prepared by Ms Melissa Meeve. She gave evidence, which I accept, that she copied that passage not from the Redwood Guide, but from a work called the "College Pharmacy Compounding Specialist Guide" published by an organisation called the "College Pharmacy" in Colorado. That publication also promoted and described natural hormone treatments. It contained exactly the same sentences.

1. The ACP Guide was prepared substantially by Ms Meeve. She commenced work for NxGen Australia in December 2007. When she first started she assisted Mr Chalmers in preparation for seminars and organising marketing material. Mr Chalmers gave her the booklet that had been produced by College Pharmacy and asked her to make a version to hand out to doctors to give them an idea of the type of compounded medications that ACP could make. Mr Vlassov attended to the layout of the document; Ms Meeve was responsible for its content. Ms Meeve deposed that she looked into what were the major hormones that ACP sold to identify what should be included in the book she was to prepare and then researched widely on the internet to prepare the book. Initially when taken to the passage referred to at para [139] above, Ms Meeve said she could not remember where each piece of information came from. In re-examination she stated that she obtained the information from the College Pharmacy Guide.

1. The ACP Guide has a number of similar passages which are identical to passages appearing in the Redwood Guide. Mr Botsman submitted that the defendants had not identified any other respect in which the text appearing in both the Redwood Guide and ACP Guide were said to be based on the College Pharmacy Compounding Specialist Guide. That is true, but it does not overcome the absence of evidence as to who was the author of the Redwood Guide and to what extent, if at all, the Redwood Guide is an original work. The only evidence given about authorship was Mr Sher's statement that as part of the marketing efforts of Redwood and Redwood Nutraceuticals "the staff produced a definitive industry guide called 'Physician Desk Reference Guide to Prescribing Natural Hormones'."

1. No argument was advanced for the defendants that Redwood had not established Australian copyright in the registered guide because it did not prove whether the author or authors was or were Australian residents or Australian citizens, or that the guide was first published in Australia. No argument was addressed to the question as to whether Redwood might be entitled to protection if the Redwood Guide was a foreign work pursuant to the Copyright (International Protection) Regulations 1969 (Cth). However the lack of proof of originality was one of the issues fought at the trial.

1. Redwood submitted that parts of the Redwood Guide had been copied in the ACP Guide. This comprised the passage quoted at para [139] above, two sentences on page 75 of the Redwood Guide, a graph on page 184, four sentences on page 198, three sentences on page 212, three sentences on page 213, two sentences on page 218, a graph on page 218, a paragraph on page 228, a graph on page 242, two sentences on page 75, and a graph of steroid pathways on page 126.

1. If Redwood had copyright in relation to the Redwood Guide under the Copyright Act 1968 (Cth), it had the exclusive right to reproduce the work in a material form or to make an adaptation of it (s 31(1)). The reference to reproducing or adapting the work includes reproducing or adapting a substantial part of the work (s 14(1)). But it would not be a breach of copyright for ACP or NxGen Australia to reproduce or adapt a part of the Redwood Guide that was not a substantial part. The infringements alleged in final submissions were infringements by way of reproduction rather than adaptation. Ms Meeve had regard to a wide variety of sources in preparing the ACP Guide. She acknowledged that she may have referred to the Redwood Guide as it was a resource that was available for her to use, although she did not recall actually using it (T515). She said that she "hadn't really looked at it much" (T516). I do not infer from the similarities relied on that Ms Meeve copied the passages relied on from the Redwood Guide, as distinct from both the Redwood Guide and Ms Meeve having lifted the passages from some other source.

1. But if the passages in question were copied from the Redwood Guide, the issue remains whether the parts copied were a "substantial part" of the Redwood Guide. Whether a part is substantial depends more on the quality than on the quantity of that which is taken (Ladbroke (Football) Ltd v William Hill (Football) Ltd [1964] 1 WLR 273 at 276; [1964] 1 All ER 465 at 469). This directs attention to the importance of the part in question to the work as a whole and whether it is an essential or material part of the work (Autodesk Inc v Dyason (No. 2) (1993) 176 CLR 300 at 305).

1. The parts of the Redwood Guide which, for the purposes of the present issue, I assume were reproduced in the ACP Guide included a section dealing with pain management that stated (at page 75):

"Growing use of cutaneous procedures, such as pediatric vaccines, mesotherapy and cosmetic laser surgery, has increased the demand for topical anesthetics. These preparations offer effective in relief [sic] with the advantages of reversible interruption of nerve conduction without nerve fiber damage, sensory paralysis, and easy application."

1. This was an introductory passage promoting the use of topical analgesics. The work went on to describe the particular topical creams that were available for this purpose, appropriate dosages, the strength of the ingredients, methods of application and popular uses.

1. The same is true of four sentences dealing with testosterone on page 198. The sentences said to have been reproduced give a general description of how testosterone is synthesised, a statement that ageing is primarily due to tissue breakdown which is a catabolic process, and a statement that evidence suggests that testosterone can slow the process. Again, the passages said to have been reproduced are introductory observations which precede the more detailed description of the conditions for which testosterone could be beneficially prescribed, the particular products that might be prescribed, dosages, methods of administration and so forth.

1. The same is true of the explanation of a steroid called pregnenolone. The part said to have been reproduced describes the functions of pregnenolone and their naturally occurring levels.

1. The same is true of the description of a hormone known as melatonin at page 218 of the guide. The passage said to have been reproduced is an introductory statement describing how melatonin is produced by the pineal gland or, in very small quantities, in the retina and gastrointestinal tract.

1. The same is true of a description of Cushing's Syndrome at page 228.

1. The other parts of the Redwood Guide said to have been reproduced are a number of graphs. On page 126 there is a table illustrating pathways for steroids, being an attempt (to a layman, not a very clear attempt) to describe which steroids are most closely related in their chemical composition to other steroids. A graph on page 184 shows how levels of DHEA (Dehydroepiandrosterone) decline rapidly after birth, but then increase during puberty and decline steadily from age 25 to 30.

1. A graph on page 219 shows how melatonin levels peak around the time of puberty and then decrease with age.

1. The parts of the Redwood Guide which are said to have been reproduced are not the essential or the key parts of the Guide, particularly for their intended audience. Doctors who are considering prescribing the natural hormones could be expected to already have an understanding of the role and functions of the hormones described. The key parts of the Guide could be expected to be the description of the specific conditions for which specific hormones could be prescribed and the specific detail as to the active ingredients of the pharmaceuticals that could be supplied, the dosages, the side effects and the methods of application.

1. The parts said to have been copied form quantitatively only a small part of the publication.

1. Whether considered qualitatively or quantitatively, I do not consider that there was a reproduction of a substantial part of the Redwood Guide, even assuming that the passages in question were in fact copied from the Redwood Guide and were not lifted from some other source.

1. For these reasons I do not consider that Redwood has established a claim for breach of copyright in relation to the publication of the ACP Guide.

1. ACP's order form was designed by Mr Vlassov. Whilst it bore many similarities to Redwood's order form, Mr Vlassov denied that he had used the Redwood order form as a template for the preparation of the ACP order form. No final submissions were made for Redwood that ACP breached Redwood's copyright in reproducing or adapting substantial parts of the Redwood order form.

1. For these reasons, I reject the claim for breach of copyright.

Breach of Consultancy Agreement

1. Redwood submitted that Mr Knowles breached clause 11 of the Consultancy Agreement. That clause prohibited him from holding any office, possessing any property or undertaking any obligations which created or might have created duties or interests which conflicted with his duties or interests under the Consultancy Agreement without Redwood Nutraceutical's prior knowledge and agreement.

1. Clause 11 applied only during the currency of the Consultancy Agreement. That agreement expired in February 2005. None of the alleged conduct said to have constituted a breach of the Consultancy Agreement occurred prior to February 2005.

1. The restrictions in clause 12.2 continued for a period of two years after the date of termination of the Consultancy Agreement. Clause 12.2 was still operative when Mr Knowles terminated his relationship with Redwood.

1. By clause 12.2(a) Mr Knowles undertook not to engage in any business or activity which was the same as or similar to Redwood Nutraceutical's business or any material part of it. Redwood Nutraceuticals had ceased to trade by October 2006. I infer that Mr Knowles encouraged NxGen Australia to engage in marketing activities that were similar to Redwood's business. He provided NxGen Australia with funds in the form of payment of marketing fees which enabled NxGen Australia to engage in that business. He referred some of Redwood's employees to NxGen Australia. Such steps did not amount to his engaging in a business or activity that was the same or similar to Redwood's business.

1. In any event, the fact that Redwood Nutraceuticals ceased to trade and Mr Knowles' other arrangements came to be with Redwood does not mean that the Consulting Agreement was novated so that the references to Redwood Nutraceuticals can be read as references to Redwood. Novation can be implied, but for the Consultancy Agreement to have been novated there must have been an intention on the part of each of Mr Knowles and Mr Sher (for both Redwood and Redwood Nutraceuticals) for the discharge of the Consultancy Agreement and the making of a new agreement between Mr Knowles and Redwood. There is no evidence that Mr Knowles and Mr Sher turned their attention to whether the Consultancy Agreement was to be discharged and a new agreement made with Redwood as the contracting party in place of Redwood Nutraceuticals. The Consultancy Agreement was only part of the parties' arrangements. The fact that shares were issued in Redwood does not mean that Redwood replaced Redwood Nutraceuticals as the contracting party, particularly as the shares issued were 8.831 per cent of Redwood's capital, not 10 per cent, and the consideration for the issue of the shares was not Mr Knowles' performance of the Consultancy Agreement but his performance as a dispensing chemist and payment of profits to Redwood.

1. By clause 12.2(b) Mr Knowles undertook not to solicit, induce or encourage any employee to leave Redwood Nutraceuticals' employment.

1. The restriction in clause 12.2(b) is not confined to a restriction on Mr Knowles' approaching an employee to solicit his or her leaving Redwood Nutraceuticals' employment (Barrett v Ecco Personnel Pty Ltd [1998] NSWCA 30 at [30]; Stacks/Taree Pty Ltd v Marshall (No. 2) [2010] NSWSC 77 at [122]). The restriction includes encouraging any person to leave Redwood Nutraceuticals' employment. In my view, Mr Knowles encouraged Mr Chalmers and Mr Vlassov to leave Redwood's employment by responding positively to their approaches and referring them to Mr Tattersall. But they were not employees of Redwood Nutraceuticals. In any event, even if Redwood replaced Redwood Nutraceuticals as the contracting party, Redwood did not suffer any damages as a result of that breach. Those employees would have resigned their employment with or without Mr Knowles' encouragement. Indeed as Redwood took no steps to continue in business after Mr Knowles terminated his relationship, there was no opportunity for their continued employment by Redwood.

1. By clause 12.2(c) Mr Knowles undertook not to approach or accept any approach from a person who had been a customer of Redwood Nutraceuticals with a view to obtaining that person's custom in a business which was the same or similar to Redwood Nutraceuticals' business. Even if Redwood replaced Redwood Nutraceuticals as the contracting party, Redwood's only customers were Mr Knowles himself and ASA. The doctors to whom Redwood sent its Guide and newsletters and for whom it provided seminars were not its customers. Nor were the patients who ordered products that required a prescription that were marketed by Redwood, Redwood's customers. Not being a pharmacist, Redwood was prohibited from supplying such persons. Redwood's only lawful business could be that of providing marketing services. The customer to whom it provided marketing was Mr Knowles himself (or possibly ASA). I do not consider that Mr Knowles breached clause 12.2(c), even if the agreement were novated. But if either the patients or doctors with whom Mr Knowles dealt were Redwood's customers, the only damages that Redwood suffered as a result of a breach of clause 12.2(c) (assuming the agreement had been novated) was the loss of the profits that was generated through its illegal arrangements with Mr Knowles. It made no steps to attempt to carry on a lawful business. It would not be entitled to more than nominal damages for breach of clause 12.2(c) even if Mr Knowles had been in breach of that clause.

1. By clause 12.2(d) Mr Knowles undertook not to interfere with the relationship between Redwood Nutraceuticals and its clients, employees and suppliers. Redwood Nutraceuticals had none. Even if the agreement had been novated, Redwood did not have "clients", except Mr Knowles (or possibly ASA). Mr Knowles did not interfere with the relationship between Redwood and its employees. The employees were minded to leave Redwood's employment in any event. I do not know who were Redwood's suppliers. The ingredients for the products dispensed by Mr Knowles were supplied by ASA, but ASA was not Redwood's supplier. In any event, Mr Knowles did not interfere with the relationship between Redwood and ASA.

1. For these reasons, even if the Consultancy Agreement had been novated, I conclude that Redwood would be entitled only to nominal damages from Mr Knowles for breach of clause 12.2(b), and would not otherwise be entitled to relief for the alleged breaches of the Consultancy Agreement. But the Consultancy Agreement was not novated and it was not breached.

Conclusion

1. For these reasons, I conclude that Redwood is entitled to judgment against Mr Knowles for the sum of $42,500 plus interest at 7.5 per cent per annum from 27 September 2006. All the plaintiffs' other claims should be dismissed.

1. I will hear the parties on costs. Matters that may be relevant to a decision as to costs include the fact that the plaintiffs had earlier sought the separate determination of the question whether the arrangements they alleged contravened s 25 of the Pharmacy Act and the effect of such a contravention. That application was opposed by the defendants who, at that time, had raised no issue of illegality. The application was unsuccessful. Mr Botsman rightly considered that the question of illegality would be raised by the Court and made opening submissions on that issue. It was not until the end of the hearing that the defendants sought and were granted leave to amend their defences to raise the issue of illegality.

1. Another matter that will be relevant to the question of costs is that the hearing was extended by Mr Knowles and Mr Boyd giving what I have found to be untruthful evidence as to their relationship with Redwood. They asserted a position that was effectively abandoned in final submissions.

1. Of course, if any offer of compromise or Calderbank offer was made, that could also be relevant to the question of costs.

1. I will direct the Registrar to provide a copy of these reasons to the Pharmacy Council of NSW.

Decision last updated: 10 May 2013