Talk of the Town Pty Ltd v Hagstrom

[1990] FCA 522

Re: TALK OF THE TOWN PTY LTD
And: LLOYD HAGSTROM and MARCO EXTRUSIONS PTY. LTD.
No. G107 of 1990
FED No. 522
Copyright - Trade (Residual Matters) - Injunction
99 ALR 130/19 IPR 649

COURT

IN THE FEDERAL COURT OF AUSTRALIA

QUEENSLAND DISTRICT REGISTRY
GENERAL DIVISION
Pincus J.(1)

CATCHWORDS

Copyright - allegation that drawings and dies copied - meaning of "engraving" - whether copyright in purely functional objects.

Trade (Residual Matters) - restraint of trade clause - whether can construe validity in - sale of goodwill and property - effect of clause to prevent obstruction of purchaser's full and beneficial enjoyment of property.

Injunction - interlocutory - whether Court should decide legal questions or merely if serious question to be tried.

Copyright Act 1968 ss.10 and 71

HEARING

BRISBANE

#DATE 21:9:1990

Counsel for the applicant : Mr. R.W. Gotterson QC

and Mr. P.D.T. Applegarth

Solicitors for the applicant : Rogers Matheson Clark

Counsel for the first respondent : Mr. P.R. Dutney

Solicitors for the first respondent: Hopgood and Ganim

Counsel for the second respondent : Mr. G.J. Gibson QC

and Mr. B.D. O'Donnell

Solicitors for the second respondent: McCullough Robertson

ORDER

On the second respondent's undertaking, contained in Exhibit 2, the application for interlocutory relief be dismissed.

The costs of and incidental to this application be costs in the proceedings.

NOTE: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

JUDGE1

This is a motion for interlocutory relief based principally on allegations of breach of copyright and of contract. On 5 October 1988, the first respondent (Mr. Hagstrom) and others sold to the applicant two businesses known as "Pacific Plastics (Qld)" and "Queensland Compounders", together with land and other assets associated with those businesses, for a price of $3 million. Of that sum, the contract apportioned nearly $2 million to goodwill. The assets sold included, to put it simply, the vendors' intellectual property.

1. The proceedings before the Court relate only to the business known as Pacific Plastics (Qld) which makes extruded PVC (i.e. polyvinyl chloride) sections for use in the building industry, in making aluminium windows and aluminium-framed glass doors.

2. The contract of sale was duly settled and the business has, since the sale, been in the control of the applicant.

3. Recently, Mr. Hagstrom and the second respondent (a company in which he has a half interest) have set up business in direct competition with the applicant, making the same products for the same purpose. It is common ground that the new business has copied, either precisely or substantially, the sections used by the applicant's business and has, in selling them, used the same product numbers as the applicant applies to its sections. Having been a vendor in the sale of the business with a substantial component for goodwill, Mr. Hagstrom has taken part in the establishment of a new business which competes directly with the business sold and has thereby affected the value of the purchaser's goodwill.

4. The applicant's case is substantially based upon the two causes of action I have mentioned, namely breach of copyright and contract. As to the former, it is said that the respondents have copied the applicant's dies and have made plastic extrusions of the same cross-section as those made by the applicant. It is further alleged that there is a breach of copyright in respect of the use of the product numbers and also that drawings of the applicant have been copied. As to the claim in contract, the allegation is that Mr. Hagstrom has breached provisions in the contract of sale designed to restrain him from this sort of activity and that he was induced to do so by the second respondent.

5. Apart from these two principal causes of action, it is suggested that Mr. Hagstrom's actions have breached an equitable duty of confidentiality and that the second respondent has taken such part in that breach as to be also liable in equity. Although this claim was by no means abandoned, the extent to which confidential information was used by the respondents is quite unclear and would, I think, need to be investigated more fully; counsel for the applicant did not, in the end, press for interlocutory relief against use of confidential information, so that the only causes of action requiring to be considered are contract and copyright.

6. The applicant's case is that the products it produces are superior to those of its competitors and it attributes that superiority to the use of equipment and techniques developed over many years; the respondents' evidence, however, directly denies these allegations. The applicant says, and the respondents admit, that most of the applicant's sales come from six major customers. The sections in question are produced by extrusion through dies. According to the applicant's case, the dies were evolved with a great deal of trouble and experimentation; again, the respondents' evidence disputes that. It is my opinion that not even a prima facie view can be formed as to the parties' respective chances of success on these factual disputes; further, the circumstances are such that I would not grant interlocutory relief on the basis that such disputes exist. That is so because the relief sought would, if granted, require the second respondent substantially to alter its mode of doing business pending the trial and, indeed, would require an interruption of uncertain length in the conduct of that business. As to the exercise of discretion where relief of the present kind is sought, I was referred to Hornsby Building Information Centre Pty. Ltd. v. Sydney Building Information Centre Pty. Ltd. (1978) 140 CLR 216 at 221.

7. It should be added that one of the applicant's directors, Mr. Keith Lloyd, has given evidence that two of the four vendors under the contract mentioned above, Mr. Hagstrom and a Mr. Herd, informed him in the course of discussions leading up to the sale that they were "getting out of the plastic extrusions business altogether and that they would not be involved in setting up business of the same kind again". Although this statement, which is not denied, may be said to bear on the merits in a broad sense, it is not urged by Mr. Gotterson QC, who led Mr. Applegarth for the applicant, that it is capable of affecting the outcome of this application.
   Contract

8. The applicant relied upon provisions of the contract of sale binding Mr. Hagstrom.

9. Clause 11(a) reads in part as follows:
   

"The vendors agree that they will not exercise or carry on or be in any manner whatsoever either directly or indirectly as principal or agent concerned or interested either by themselves or in partnership or as a manager, servant, agent of any person or company in the trade or business of plastics manufacture or extrusion or in any trade or business similar to or in competition to that business during the period of ..."

1. There follows a list of five periods of time and of three geographical areas which are, under clause 11(b), to be construed as creating all possible combinations - i.e. fifteen different combinations of time and area, all severable from one another.

2. It is unnecessary to go into the time and area limits, for the point taken against the validity of the clause depends on the part which has been quoted. Mr. Dutney, for the first respondent, argued that it is plainly invalid to restrain the vendors in respect of the "trade or business of plastics manufacture or extrusion" because there are many spheres of such activity which are very different from the type of business sold. While not disputing the latter part of the proposition, Mr. Gotterson contended that the words just quoted should be read down so as to confine them to a business of the kind sold. In my opinion, if the restraint is to be read literally and without implicit qualification, it cannot stand, for it would then prevent business activities of many varieties, some of which could not possibly be regarded as competing with that sold. Examples are the manufacture of hoses, pipes, electrical cable housing and parts of motor vehicles such as bumper bars.

3. The second part of the definition of the kind of business caught is, I think, entirely dependent on the first. The expression "that business", although loose, must refer back to the "trade or business" just referred to. It does not mean "the said business", an expression consistently (in this contract) used as referring to the business sold.

4. The question as to validity then becomes whether, as a matter of construction, the words "trade or business of plastics manufacture or extrusion" should be read down in such a fashion as suggested by Mr. Gotterson. This appears to be merely a legal point and Mr. Gibson QC, who led Mr. O'Donnell for the second respondent, argued that in a case of this sort, the Court not only may but should decide such points and not confine itself to determining whether there is a serious question to be tried. Mr. Gibson relied upon, amongst other cases, O.D. Transport Pty. Ltd. v. Western Australian Government Railways Commission (1986) 13 FCR 270 at 274.

5. I agree with that contention. Where the point is merely a short question of construction, I see no reason why the Court should not decide it, although the proceedings be but interlocutory. One advantage of doing so is that deciding the construction point may help to resolve the whole dispute. Ideally, all such points would be decided in the context of a full trial, but the expense of litigation is so great as to make it desirable, in some instances, to enable the parties to find a more summary means of obtaining the Court's views.

6. A problem of construction of a similar kind arose in Butt v. Long (1953) 88 CLR 476, where a restraint clause in an agreement for dissolution of a partnership had no geographical limitation; the partnership business was one of transhipping between rail systems and was carried on at Wallangarra on the New South Wales/Queensland border. The Court declined to read the provision down so as to confine it to that area and it was held to be invalid.

7. As Mr. Gotterson pointed out, another question which was decided was whether the words "business of a transhipping agent" in the restraint clause should be read down so as to exclude transhipping other than from trucks of one railway system to those of another. The Court held reading down to that extent to be permissible. Fullagar J. justified that course as follows:
   

"To do so is merely to refer to surrounding circumstances in order to ascertain the meaning of an expression which the parties have actually used, and this is always permissible and often necessary". (490)

1. But as to the other question, His Honour said:
   

"The locality of the business in fact carried on can warrant no further inference than that, if the parties had thought of the matter, they would or might have imposed some local limitation on the prohibition". (490, 491)

1. It was possible to believe that, as to the nature of the activities restrained, the parties had simply omitted to state what they regarded as obvious - but the absence of a restraint as to location could not be so explained.

2. The question is on which side of the line, drawn in such cases as Butt v. Long, the present question falls. I have explained that the business consisted in manufacturing extruded sections for use in the glazing industry, but extruded sections of a similar kind may be put to other uses. An example mentioned in evidence was a horse-racing harness, recently manufactured by the second respondent. If one looks at what might reasonably be regarded as implied, it does not appear to me obvious that the parties would have agreed (had the question been raised at the time) to confine the restraint's operation to extrusion of plastic shapes for use in the glazing industry. Further, the words "manufacture or extrusion" create a difficulty. On the evidence, the business sold consisted in the making of extrusions from plastics bought in; the expression "manufacture or extrusion" was presumably used so as to cover manufacture other than by the means, viz. extrusion, used at the date of sale.

3. In Butt v. Long (above), Dixon C.J. said, speaking of the possibility of implying a territorial limitation:
   

"The reputation of the firm was such that if the successor in title had set up such a business at Clapham Junction or at Albury he would have found in that reputation some advantage. It is, of course, the fact that the actual place where the parties had been conducting business was that chiefly in mind but that is no sufficient reason for construing the words they used as applying exclusively to that place". (488)

1. So here: the applicant as purchaser under the contract might well have thought that, if the vendors had immediately recommenced business, making plastic shapes for a variety of uses other than in making windows and doors, they might in doing so have taken some advantage of the goodwill which the applicant had bought. Further, in doing so they might have established positions in markets into which the applicant, in developing the business purchased, might later have wished to move.

2. It should be added that quite a different approach to questions of interpretation of the present kind was taken in Littlewoods Organisation Ltd. v. Harris (1977), 1 WLR 1472; the views expressed at pp 1492, 1493 in the dissenting judgment of Browne L.J. are consistent with Butt v. Long, but those of the majority are not.

3. Looking at the matter broadly, it is difficult to accept that in using the expressions "the trade or business of plastics manufacture or extrusion or in any trade or business similar to or in competition to that business", the parties had in mind, but omitted to mention, the important limitation now suggested. It is not a case in which one could feel any confidence that it was truly intended to limit the restraint to a business of the kind being carried on, that is, manufacturing and selling extended lengths of plastic for use in making windows and glass doors.

4. For these reasons, I have formed the opinion, and I hold, that clause 11(a) is too wide and it is therefore unenforceable. This may seem an unsatisfactory outcome. Perhaps the law should be that a Court may insert limitations to achieve validity; but to do so would be, in my opinion, in conflict with Butt v. Long (above, p 487.4).

5. The second question which arises with respect to the contract is the interpretation of clause 10(b), repeated in clause 10(e).

6. The clause reads as follows:
   

"The vendors agree that they will not do any act or use any means to hinder or obstruct the purchaser from the full and beneficial enjoyment of the property hereby sold".

1. Mr. Dutney suggested that this clause should be construed in accordance with the judgment of Lord Macnaghten in Trego v. Hunt (1896) AC 7 at pp 24 and 25. But the judge there merely set out what the vendor of goodwill might do, independently of special contract. I have found no authority providing guidance as to the proper effect of clause 10(b). The Encyclopaedia of Forms and Precedents, (4th Edition, Volume 9) has a clause numbered 6 at p 631 which somewhat resembles the provision with which I am concerned. It may be that the operation of such a clause should be confined to matters concerned with the transfer of the property (including goodwill) which has been sold and that it should not be read as imposing any obligations on the vendors once the purchaser is securely placed in possession and control of that property. However, there is no express limitation to that effect. The clause may be capable, if read literally, of permanently protecting the purchaser from obstructions to enjoyment of the goodwill - for example, by persuading customers of the business sold not to deal with the new owner. That would seem to fall within the clause, but the lack of any limitation as to time may create a problem.

2. Little argument was addressed to this aspect of the case, no doubt because counsel could find no aid to construction of the clause. I hold that it gives rise to a serious question to be tried but it would seem to me inappropriate, in the circumstances, to base an interlocutory injunction upon it.
   Copyright

3. Counsel for the applicant said that there has been a breach of copyright in respect of product numbers. Mr. Gibson offered an undertaking which is set out below, and argued that his having done so made it unnecessary further to consider the claim for breach of copyright in the product numbers. Mr. Gotterson suggested that the second respondent might still so act as to breach copyright in the numbers. It appears to me, however, that the form of undertaking offered may well prove to be reasonably satisfactory; if there is any evasion of the spirit of the undertaking, that is likely to come to the knowledge of the applicant, and it may then apply for further relief under that head.

4. The remaining questions as to copyright which have been raised are whether the respondents have breached copyright in the dies and whether they have breached copyright in drawings.

5. As to the first point, the evidence is clear that the dies have been copied. It is not suggested that there have been such imperfections in the copying as to bring into play the principle that infringement will be less readily found "when the subject matter of the work in which copyright subsists and its representation are of a simple and straightforward nature" (Dixon Investments Pty. Ltd. v. Hall, Full Court, unreported, 3 September 1990 pp 14 to 15). In short, there can be no doubt about infringement, if there is an "artistic work" within the definition in s.10(1) of the Copyright Act 1968.

6. It is clear that making a three-dimensional object may infringe the copyright in an artistic work that is in two dimensions: s.71 of the Copyright Act. This sort of infringement was considered by the House of Lords in British Leyland Motor Corporation Ltd. v. Armstrong Patents Co. Ltd. (1986) AC 577, and of course, in earlier authorities. Lord Griffiths described as "bizarre", and entirely rejected, the view that artistic copyright could "protect the shapes of various types of purely functional objects" (648). But the contrary view was accepted by the other judges, although without noticeable enthusiasm. More importantly, the idea that there may be protection of the design of a purely functional object in this way was accepted in the High Court in S.W. Hart and Co. Pty. Ltd. v. Edwards Hot Water Systems (1985) 159 CLR 466.

7. Mr. Gotterson contended that the dies themselves are the subject of copyright as "engravings" within the definition of "artistic work". The word "engraving" is defined as follows in s.10 of the Act:
   

" 'Engraving' includes an etching, lithograph, product of photogravure, woodcut, print or similar work, not being a photograph;".

1. I was asked by Mr. Gotterson to hold that there is a serious question to be tried on this issue, on the basis of the decision of the New Zealand Court of Appeal in Lincoln Industries Ltd. v. Wham-O Manufacturing Co. (1983-1985) 3 IPR 115. I discussed that decision in Greenfield Products Pty. Ltd. v. Rover-Scott Bonnar Ltd. (unreported, 11 April 1990) and declined to apply the view accepted by the New Zealand Court of Appeal that frisbee moulds are "engravings". Having reread the discussion, I adhere to what I then said, with the exception that the suggestion that engraving is typically work on a flat surface is overstated.

2. The question is whether, confronted with the New Zealand decision, I should grant an injunction on the basis that it may ultimately be applied when this case is tried, perhaps by another judge. I remain unconvinced that a reader of the definition of "engraving", set out above, would think it to be intended to cover a mould or die of the ordinary kind; I can see that arguments might arise at the margin, such as with respect to a mould for making artistic works in low relief. But the idea that a mould or die used for making a frisbee is an "engraving" within the definition, as is the frisbee itself, appears to me (with the greatest respect) to be difficult to reconcile with the ordinary meaning of the language actually used in the definition. I note further that the word "plate" is defined in the Act as including a mould, but neither "engraving" nor "artistic work" includes "plate" as defined; the word "plate" is used in s.116(1) of the Act.

1. To revert to the point discussed above, it appears to me that the question whether the dies are "engravings" is one of law and that I should decide it. I hold that the dies are not engravings, nor are the plastic extrusions, produced by use of the dies, engravings.

2. The remaining question, then, as to breach of copyright, is whether drawings have been indirectly copied. The evidence shows that the applicant's dies were not made by direct use of drawings. There is an affidavit of Mr. Leonard Peers, sworn on 7 September 1990, which explains that a sketch of the extruded product desired to be made is prepared and, from that, a working drawing for a die is made. The die prepared from that working drawing, however, is not the final version. It is tried and recut until the desired result is achieved. In these circumstances, there is plainly no case of breach of copyright based on drawings, nor in the end was any advanced.
   Summary
   1. The restraint of trade provision principally relied on (clause 11(a) of the contract of sale) is, on its proper construction, too wide and therefore unenforceable.
   2. The more general contractual provision relied on, clause 10(b) which is repeated in 10(e), gives rise to a serious question to be tried.
   3. There is no serious question to be tried with respect to breach of copyright, other than as to product numbers.
   4. An undertaking is offered with respect to product numbers and that will be accepted.
   5. As a matter of discretion, I do not propose to grant an interlocutory injunction based upon the contractual provision, i.e. 10(b) and 10(e).

3. On the second respondent's undertaking, contained in Exhibit 2, the application for interlocutory relief will be dismissed, but the costs will be costs in the proceedings.