TS & B Retail Systems Pty Ltd v 3Fold Resources Pty Ltd (No 3)

[2007] FCA 151

FEDERAL COURT OF AUSTRALIA

TS & B Retail Systems Pty Ltd v 3Fold Resources Pty Ltd (No 3) [2007] FCA 151

CONFIDENTIAL INFORMATION – whether property – whether assignable – protection of confidentiality in hands of transferee

CONTRACT – whether contract rescinded or varied by subsequent contract – intention of parties

COPYRIGHT – ownership – whether works authored by employee or contractor – amendments by copyright owner – whether amendments create new copyright – reproduction – whether implied license to reproduce – compilations of data – whether sufficient skill, judgment and labour – whether reproduced – assignment of copyright – whether to be inferred – secondary infringement – authorization – significance of control

DAMAGES – copyright infringement – method of calculation - loss of business – secondary loss – additional damages – when awarded

EVIDENCE – license – whether implied from custom and usage – whether inferred from conduct – onus of proof

PRACTICE AND PROCEDURE – chose in action – assignment – where cause of action ancillary to right or interest in property – whether void for maintenance or champerty

TORT – accessorial liability of directors – joint tortfeasors – concerted action – procuring or inducing infringement – whether separate tort – unlawful interference with trade or business – conspiracy – unlawful purpose – unlawful means

Copyright Act 1968 (Cth), ss 35(6), 101(1A), 115, 196
Copyright Act 1911 (UK), s 2(3)
Federal Court of Australia Act 1976 (Cth), ss 5(2), 23
Trade Practices Act 1974 (Cth), ss 52, 53, 51AA

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JT Stratford & Son Ltd v Lindley [1965] AC 269
Lamb v Cotogno (1987) 164 CLR 1
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Lonrho Plc v Fayed [1992] 1 AC 448
Lumley v Gye (1853) 118 ER 749
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TS & B RETAIL SYSTEMS PTY LTD v 3FOLD RESOURCES PTY LTD, PETER VANDERZAAG, FRANCIS D'MELLO and GARY WILLIAM SMITH

VID 147 of 2003

FINKELSTEIN J
20 FEBRUARY 2007
MELBOURNE

IN THE FEDERAL COURT OF AUSTRALIA
VICTORIA DISTRICT REGISTRY	VID 147 of 2003

BETWEEN:	TS & B RETAIL SYSTEMS PTY LTD Applicant
AND:	3FOLD RESOURCES PTY LTD, PETER VANDERZAAG, FRANCIS D'MELLO and GARY WILLIAM SMITH Respondents

JUDGE:	FINKELSTEIN J
DATE:	20 FEBRUARY 2007
PLACE:	MELBOURNE

REASONS FOR JUDGMENT

Introduction

1. This case is principally a copyright infringement action.  The applicant, TS & B Retail Systems Pty Ltd (TS&B Retail), alleges that the corporate respondent, 3Fold Resources Pty Ltd (3Fold), copied 234 manufacturing drawings and 5 tables of data in which TS&B Retail holds copyright.  TS&B Retail says 3Fold used the drawings and data to manufacture, supply and install shop fittings (including interior fittings, displays, stock presentations and shelves) for retailers who would otherwise have purchased those products and services from TS&B Retail.  The main case, however, is against the individual respondents.  They are the directors of 3Fold and the only ones likely to have assets to satisfy any award of damages TS&B Retail is able to recover.  The case against them is that they procured 3Fold to breach the copyright.

2. In addition to the copyright infringement claim, there are claims for breach of confidence and subsidiary claims in misleading or deceptive conduct, misleading or false representations and unconscionable conduct in contravention respectively of ss 52, 53 and 51AA of the Trade Practices Act 1974 (Cth). The Trade Practices Act claims were not seriously pressed at trial. TS&B Retail accepts in the event it succeeds in its copyright action, the other claims will become redundant.

3. It became common ground during the course of the proceeding that the 234 drawings and the 5 tables were copied.  The action is defended on the basis that TS&B Retail does not own copyright in the drawings and that the tables are not protected by copyright.  There is an additional defence to the copyright claim in relation to the drawings, namely that 3Fold sold products manufactured from the drawings to Kmart, which 3Fold says was licensed by the copyright owner to reproduce the drawings.  In relation to the breach of confidence claim, the respondents deny that the drawings and tables were confidential and assert, if they were confidential, that any right to sue for breach of that confidence does not lie with TS&B Retail.

   Background

4. The facts, for the most part, are clear.  In 1930, Silverwood & Beck Pty Ltd (S&B) was established to design, manufacture and construct interior fittings, displays and stock presentation shelving for Coles variety stores throughout Australia.  In 1985 the plant and equipment, stock, goodwill, and “business records, documents and other information” of S&B were purchased by Trollope (Australia) Pty Ltd for $6.9 million.  The combined business (by change of name or amalgamation) was called Trollope Silverwood and Beck Pty Ltd (TS&B).  TS&B continued to design and manufacture shop fittings and related products.  Its customers were major retail outlets such as Coles Myer Ltd (including Coles supermarkets and Kmart) (CML), Big W, Optus, Dick Smith Electronics, Shell and Woolworths.  TS&B was owned and run by Barry Trollope (who had established Trollope Australia in 1969) and his son, Grant Trollope.

5. Within a few years TS&B grew to be a sizable operation.  At the height of its business TS&B had around 500 employees.  In the year ended 30 June 1999, it earned net profits of approximately $2.4m before tax.  But its success did not last.  Just two years later, TS&B’s profitability had declined so significantly that the company was finding it difficult to pay its suppliers and continue operating.  In the year ended 30 June 2001 it suffered a net loss of around $110,000.  In the following year the net loss exceeded $4m.  This was too much for the company’s creditors.  On 28 October 2002 a debenture holder, the National Australia Bank Limited, appointed John Lindholm and James Stewart, both of Ferrier Hodgson, Chartered Accountants, to be the receivers and managers of the company’s assets and undertaking.  On the same day the directors appointed Ian Carson and David Crosbie of Carson & McLellan PPB to be the administrators of the company. 

6. Despite the receivers moving in, there was talk that TS&B might be able to trade out of its financial difficulties.  It soon became apparent, however, at least to some of the employees, that the company would be wound up and their jobs would be lost.  Among those concerned for their future were the individual respondents, Peter Vanderzaag, Francis D’Mello and Gary Smith.

7. Vanderzaag was the Operations Manager for TS&B’s Business Unit.  He had been in the shop-fitting industry for more than 25 years and had been employed by TS&B in various capacities including factory manager, warehouse manager and finally Operations Manager for the retail division.  In that capacity, in which he had served for around 15 years, Vanderzaag was responsible for the delivery of services and projects to TS&B’s major customers, including Kmart.

8. D’Mello, who was the Information Technology Manager for TS&B, had been with the company for over 15 years.  He joined TS&B in 1986 to convert the company’s then manual systems to computer based systems.  Over the years D’Mello had assumed other responsibilities including the management of various computer systems upgrades and TS&B’s “year 2000” compliance program.

9. Smith, who was the Constructions Manager (Retail Projects) for TS&B, had been with the company for about 5 years following a career in the army.  He was initially responsible for reviewing the internal processes of TS&B and making recommendations to design and improve efficiencies.  As Construction Manager, Smith focused on redesigning the installation procedures for TS&B’s retail division.  This included the procedures for the preparation of quotations, labour allocation, contract management, site control procedures and safety issues.

10. In view of their age (each was in his 40s or 50s), obtaining new employment was not going to be easy for the three men, despite their experience.  Something had to be done to find work.  So they decided to set up their own business to operate in the one area they knew well, namely the provision and installation of shop-fittings to retail organisations.

11. It may be that when the idea of setting up their own business was first mooted, the individual respondents thought they would face little by way of competition for old TS&B’s clients once the TS&B business closed down.  They may also have believed, at least for a time, that with TS&B’s closure they were entitled to make use of TS&B’s designs, drawings and data or, if not entitled, at least that they could use the drawings and data with impunity.  If this is what they had in mind, they were seriously mistaken as they were soon to discover.

12. The individual respondents took little time to put their plan into action.  By the beginning of November 2002 they had prepared a submission describing the services their new business would perform and provided that submission to Kmart, TS&B’s largest client.  They then met Peter Healy, the National Store Development Manager at Kmart, to discuss the submission. 

13. It was around this time that 3Fold was incorporated.  The shares in the company were held in equal number by Vanderzaag, D’Mello and Smith, each of whom was appointed a director of the company.  The work each would perform for the company had been agreed:  Vanderzaag was to be responsible for operations and business development; D’Mello for finance, administration and systems; and Smith for logistics and resources (including managing all installation works and project management).  The idea was that 3Fold would offer shop fitting services, including project management, stock maintenance and installation and equipment supply to retail outlets.  It was not intended that 3Fold manufacture shop fittings itself; rather that it would procure fittings from other manufacturers for supply to its customers.  In effect, 3Fold’s manufacturing operation was to be outsourced.   The individual respondents hoped 3Fold would obtain business from at least Kmart and Big W.

14. 3Fold did not begin operations immediately upon its incorporation as it had yet to obtain office and warehouse premises.  It did, however, begin to seek out business.  While this was taking place the individual respondents continued to work at TS&B, the business of which was beginning to be wound down by the receivers.  As a consequence, most of TS&B’s staff were, or were in the process of, being laid off.  Among them was Smith who was told his employment would terminate on 11 December 2002.  Only key staff that were required to finalise projects, wind down the business and maintain core operations that might attract a buyer, were retained.  Vanderzaag and D’Mello were among the employees kept on.

15. As well as winding down the business the receivers were taking steps to sell TS&B’s assets.  Those assets had to be preserved in the meantime.  To this end, the receivers put TS&B’s employees on notice that when they left they should not take with them any of TS&B’s property.  For example, on 13 November 2002, Lindholm wrote to all employees reminding them of their obligations.  Relevantly, the letter stated:

    “Whilst I appreciate the difficult circumstances all employees are facing, I felt it was important to remind you of your obligations in respect of your employment at TS&B, as follows:

    ·    Copyright in all designs, drawings, calculations, models, disks, tapes, electronic data provided or prepared by you during the term of your employment remain the property of TS&B.

    ·    Upon termination you are not entitled to take material, which is the property of TS&B.  This includes any material on your computer system.

    ·    You must return to TS&B any of the company’s property and any of its documents, papers or electronic data and [stet] which may reflect, comment on, or are connected with any information which is confidential to TS&B or its clients.  You are not permitted to keep any copies of any such material.

    ·    Any property belonging to TS&B including Mobile Phones/Keys issued to you, as part of your employment must be returned to TS&B.

    You will be required to sign a statement to this effect prior to your final payments being made.”

    Lindholm said, and I accept, that he made similar comments at weekly meetings of employees.  Vanderzaag and D’Mello attended at least some of those meetings.  Two others who play important roles in this case, Graeme Butler (a contract draftsman) and Lisa Oakes (who worked in administration and was responsible for data entry) also attended.

    The Drawings

16. The assets of TS&B included a set of manufacturing drawings of each part (unit or assembly) manufactured and supplied by TS&B.  Each manufacturing drawing illustrated a unit or assembly from various perspectives (plan, elevation, end view, section).  Each drawing contained sufficient detail to allow TS&B (or another manufacturer) to manufacture the unit without having to view the unit itself.  It depicted the overall presentation of the finished unit, including the presentation of each of its individual components, all dimensions for the unit and its individual components, along with details of each unit (such as materials used to produce it, part numbers and the method of manufacture or assembly).

17. TS&B also had isometric and design drawings for parts.  Each isometric drawing depicted two sides of the part and either the top or bottom.  According to Herbert Moffatt, the former Engineering Services Manager at TS&B, with the advent of the computer it was easier for a draftsman to produce an isometric drawing by first drawing the plan and elevation views of a part and then extending these to create the isometric drawing.  Unlike a manufacturing drawing, not all aspects of the part, its individual components, dimensions or manufacturing details, are represented in an isometric drawing.  For this reason, a part could not be manufactured directly from an isometric drawing.

1. In total, TS&B had between 15,000 and 25,000 drawings (including design, isometric and manufacturing drawings) of which 8,000 to 10,000 were current.  Of these, 234 have been shown to have been copied.

   The Data

2. The data which had been used by TS&B included detailed customer and product information that had been developed over many years.  The customer and product information was stored, in electronic form, in tables within TS&B’s database management system (a licensed version of Microsoft’s SQL Server relational database management system).  The critical data for the business was stored in five master tables (“tarcustomer”, “tciaddress”, “timkitcomplist”, “timitemdescription” and “timitem”).  The data was inputted, edited and accessed using TS&B’s enterprise resource planning system, ACUITY.

3. For the most part, each fitting supplied by TS&B was made up of a number of component parts.  The fitting and its component parts were each given unique identification numbers (called kit numbers and item numbers respectively).  The timkitcomplist table stored the kit numbers for each unit, along with the item numbers of the parts which made up each unit.  The table also listed the number of parts in each unit (sequence number) and the quantity of each part required (quantity number).  The timitem table contained the item number for each part, the TS&B part number along with the cost and pricing of each part.  A long description of each part and a short description (including a reference number for the manufacturing drawing associated with each part) were stored in the timitemdescription table.  The remaining two master tables (tarcustomer and tciaddress) contained (among other things) a list of all TS&B’s customer names and addresses as well as TS&B’s suppliers.

4. The data was critical to TS&B’s business as it allowed TS&B to efficiently break down customer orders into their constituent components and to determine what parts would be needed and in what quantities, where they could be sourced from and what the prices would be.  TS&B could then use the ACUITY system to prepare a quotation or submit a tender expeditiously.

5. An example of the way in which this system worked is as follows.  A Footwear Display (Gondola) Unit was given a kit number.  This number was linked in the database with the item numbers of each of the parts used to manufacture the Footwear Display (Gondola) Unit.  The cost and sale price of each component part, along with references to manufacturing specifications and drawings used by TS&B to manufacture each part and the details of external suppliers from whom the components could be purchased, would be linked with each part.  If a customer placed an order for a Footwear Display (Gondola) Unit, TS&B could immediately break down that order and determine what parts would be needed, in what quantities, from whom they could be sourced and what the total cost and sale price of the unit would be.  

6. Orders received by TS&B were typically for the refurbishment or fit-out of an entire store, rather than for a single unit or assembly.  The process for the fit-out of an entire store or a refurbishment was similar.  First, a customer would issue a floor or merchandise plan.  The plan would identify each unit to be provided.  Each unit was identified on the plan by a merchandise unit number.  This number was determined by the customer.  Next, “quantity surveyors” from TS&B would perform a “take-off” from the plan.  This involved manually recording on a “master / take off sheet” the customer’s merchandise unit number, the corresponding TS&B master numbers and the quantity of each unit on the plan.  The master numbers and quantities were then keyed into the ACUITY system which would generate a “checking copy” that was used to verify the estimated quantity of each unit.  The system then produced a “quotation breakdown” that listed the price of equipment used to make each unit.  The next step was the production of a “quote consolidation” that listed the quantities of each component part required.  The labour charges associated with the refit were calculated separately on a Microsoft Excel spreadsheet, based on the cost of labour and transport and the complexity of the job.  All this information was used to prepare a final quotation for the fit-out which was sent to the customer.

7. If a quotation was accepted the customer would place a purchase order with TS&B.  The system would then generate a “sales order”, which was an internal document that listed each component part and the quantity that needed to be supplied to the customer for the specific job.  The sales order also identified the drawing numbers for each component and the price of each part.  If parts were to be supplied by another manufacturer the drawings would be provided to that manufacturer.  This was only necessary where the manufacturer had not previously supplied the part to TS&B.  For parts manufactured by TS&B, the system generated an inventory list which was used to check what parts were in stock.  Employees in the manufacturing area used the purchase order to determine the raw material required to manufacture the required parts.  The system would then generate a “despatch packing list” or pick list which identified the parts to be delivered for the job, the quantities required and the delivery date.  Finally a “fixers file” was generated listing the customer’s merchandise unit number, the corresponding TS&B master numbers and the component parts of each unit to be installed.  This was issued to TS&B’s on-site installers as a cross-check for the equipment delivered to the site.  Other reports, such as lists of suppliers and invoices, could also be produced using the data in the database.

8. The use of the data created an efficient operation.  TS&B could quickly and accurately gather the necessary information for it to respond to a complicated tender and, if a contract ensued, arrange for the manufacture and supply of the necessary parts.

   Confidentiality

9. Critical to the claim for breach of confidence is the assertion that the drawings and the tables were confidential.  In Ansell Rubber Co Pty Ltd v Allies Rubber Industries Pty Ltd [1967] VR 37 Gowans J identified the factors relevant to establishing confidentiality to be: the extent to which the information is known outside the business; the extent to which it is known by employees and others involved in the business; the extent of measures taken to guard the secrecy of the information; the value of the information to the employer and to his competitors; the amount of effort or money expended in developing the information and the ease or difficulty with which the information could properly be acquired or duplicated by others. I would add to this the inherent nature of the information in issue and its purpose or function.

10. Information in the public domain is not confidential.  For this reason the respondents claimed that the extent to which TS&B’s manufacturing drawings had been made available to customers and suppliers required the conclusion that they were in the public domain.  Vanderzaag said that drawings were frequently provided to some customers as a part of the design, research and development process.  He referred to a shop-fitting brochure provided to Kmart as an example.  However, the brochure contained only photographs and isometric drawings, not manufacturing drawings.   Smith gave evidence that his dealings with Kmart involved constant use of plans and drawings and that the contents of TS&B’s site document folders, which contained drawings relevant to a particular job, were shared with or provided to customers. Smith also said he was permitted to provide drawings to a client as and when required.

11. Barry Trollope denied most of these assertions.  He did, however, concede that TS&B had provided manufacturing drawings to a small number of manufacturing contractors who were engaged to manufacture parts that were not manufactured by TS&B itself.  He said the drawings were provided subject to them being kept confidential.  TS&B did not always have these drawings returned.

12. Richard Cue, the former Design Manager at TS&B, said it was not TS&B’s policy to distribute drawings “freely”.  He acknowledged that TS&B did provide isometric drawings to clients sometimes as part of a brochure, but said that TS&B did not distribute production drawings to clients.  Both Trollope and Cue said that TS&B never made its drawings register or database available to customers or suppliers.  According to Cue, the site files, which contained drawings, were not distributed to clients.  When drawings were distributed to clients, Cue said the majority, apart from the initial sketches, bore TS&B’s title block and a copyright notice.  There were some minor exceptions, such as when Cue instructed one of the draftsmen to send an electronic drawing to Kmart in response to a request for assistance from Kmart in preparing a merchandising plan. 

13. I considered the question whether TS&B issued manufacturing drawings to its customers for the purpose of an interlocutory decision: TS & B Retail Systems Pty Ltd v 3fold Resources Pty Ltd (2003) 57 IPR 530. In that decision, what persuaded me to lean in favour of TS&B Retail’s argument that TS&B did not issue manufacturing drawings to its customers was that Kmart had been subpoenaed to produce, among other documents, “product drawings or design specifications prepared, compiled or otherwise supplied by 3fold or any 3fold subordinate related to or connected in any way with the Tender [for works to fit out Kmart stores]”. In response, Kmart produced only isometric drawings that originated from TS&B. If the respondents’ account were correct, and TS&B did provide customers with manufacturing drawings, one would expect other drawings to have been produced. I am satisfied my tentative view was correct, a view that is confirmed by what Trollope and Cue have said.

14. The drawings were available to employees as and when required, although access to the electronic drawings register was restricted.  Cue said all electronic drawings (produced on AutoCAD, a computer aided drafting software package to produce drawings) were stored on a separate network and access was restricted to certain personnel, presumably those who needed to use the drawings to carry out their work.  The draftsmen had access to the drawings register.  Other personnel also had access.  A hard copy of the latest version of all drawings was kept in a library to be used for reference purposes.  Other sets were kept in the drawing office, the metals factory and the joinery factory.  Vanderzaag said there were no restrictions on who could enter the metals office; although, of course, someone might ask questions if a person entered an area they had no reason to be in.

15. There is no doubt the drawings were important to the business and would have been of some value to competitors.  Vanderzaag admitted as much.  Despite their importance to the business and their value, there is nothing inherently “secret” about the drawings; they do not contain any information that cannot readily be obtained by other means, such as by viewing the final product.  While TS&B did secure the drawings and restrict access to them, this most likely reflects the realities of any modern workplace, where personnel have access only to what they need to perform their jobs, rather than any particular desire to keep the drawings secret.  Moreover, there was a belief that the drawings were protected by copyright, so there was no particular need for them to be kept secret.  All in all, I do not think the drawings are confidential in the required sense.

16. As regards the tables, the respondents claim that TS&B’s system was an ordinary business system, the component parts of which were not kept confidential, but were known to and made available to customers and suppliers.  This was denied by Trollope and Cue.  Cue said that the complete part number database and drawings register were not made available to customers or suppliers.  Trollope said that the entire listing of part numbers was never disseminated, nor were the links between data in the tables.

17. On the other hand, there is evidence that some of the information contained in the tables was provided to customers and suppliers.  D’Mello said that part numbers and descriptions (contained in the “timitem” and “timitemdescription” tables) went “forward and backwards” between Kmart and TS&B on a regular basis.  Vanderzaag claimed that part numbers were used regularly by customers and manufacturers.  He produced a product catalogue for “Silbeck Shelving” sent to customers in December 1993 as evidence of this.  The catalogue did not contain information in exactly the same form as the “timitemdescription” table as it contained “generic descriptions” which differed from the “short description” in the table, notably because the generic description excluded any reference to the manufacturing drawing for each part.  Part numbers had been provided to customers such as Kmart in the form of stock lists.  Indeed the receivers provided Kmart with part numbers to assist them with the management of excess stock.  Cue noted that, if required, some part numbers had been made available to customers and suppliers through the request and order process.  For example, manufacturing drawings that contained references to the relevant part numbers were provided to certain suppliers.  But the dissemination of part numbers was not wide-spread.  Cue said that, with the exception of shelving orders placed by Kmart, he was not aware of any customer having referred to TS&B part numbers when issuing purchase orders for major refits.  If the dissemination was significant, the part numbers would have been used by other customers.

18. TS&B’s computer system, including the ACUITY software, was protected by passwords.  Users’ rights to access the system varied.  While all employees had access to the information in the database, they were not generally able to view the information in the 5 master tables in tabular form.  Instead, information was obtained by searching the database.  Only certain employees, such as D’Mello and Oakes, could view the database in tabular form.   

19. Oakes said that some of the information contained in the tables could readily have been obtained from other sources.  For example, the customer information in the “tarcustomer” and “tciaddress” tables, including customer name, store name and store address could easily have been obtained from a customer or from the White Pages phone directory.  Vanderzaag said that information contained in the “timitem” and “timitemdescription” tables was also readily available.

20. I accept that the tables were critical to business, that TS&B could not have operated without the information and that the company operated far more efficiently with the information compiled as it was in the tables within the database.  Use of the data would save a competitor that was looking to manage inventory, manufacture or supply products, many hours of cataloguing, organising and setting up.  With access to the information, set up costs would be lower and the competitor would be in a position to accept orders and begin manufacturing and supplying more quickly.

21. Nonetheless, it is inherently unlikely that all the information stored in the tables including all part numbers and descriptions were confidential.  Thus, the price at which TS&B offered its parts for sale is not likely to be confidential.  Conversely, information such as the cost (to TS&B of acquiring a part from another supplier) and the sale price of each part could easily be publicly available (if TS&B and its suppliers sold their parts to other customers).  Other information, such as kit numbers, item numbers, sequence numbers and quantities of parts in a unit, along with references to TS&B’s drawing numbers, was not publicly available and should be treated as confidential.

    Setting Up 3Fold

22. I mentioned previously that the individual respondents began to promote their new business in November 2002.  On 13 November 2002, the same day that the receivers wrote to employees reminding them of their obligation not to misuse TS&B property, Vanderzaag and Smith met with representatives of Big W, one of TS&B’s largest customers, to introduce their new business.  In the following week Vanderzaag approached Kmart with a proposal that 3Fold be awarded a contract to supply material for Kmart’s 2003 refurbishment program.

23. Between November 2002 and February 2003, Vanderzaag contacted various manufacturers to obtain quotes for parts that 3Fold intended to supply.  Among them were manufacturers who had previously supplied products to TS&B.  He sought from them quotes for the supply of the same products to 3Fold.  Vanderzaag also approached suppliers who had not previously produced parts for TS&B.  In their case Vanderzaag provided the supplier with the TS&B manufacturing drawing of the relevant part to enable a quotation to be prepared.  He did not obtain the receivers’ permission to use the drawings.  He simply obtained a copy of the drawing from TS&B’s office and passed it on.

24. The receivers soon discovered that Smith and Vanderzaag met with Big W.  On 22 November 2002, following a discussion with Lindholm, Trollope advised Smith that he was not required to remain with TS&B until 11 December 2002 as previously agreed but that he should leave immediately.  On the same day Lindholm sent the following email to employees:

    “I wish to advise that Gary Smith has left TS&B today.  We received advice from one of TS&B’s major clients that he had approached them to carry out work on his own behalf utilising TS&B Intellectual Property.  When confronted with the matter this morning Gary acknowledged that the events had taken place and agreed to depart TS&B.

    As you can appreciate, as the appointed Receiver, we believe that such actions severely jeopardize the TS&B business going forward and the sale of business process.  We would be grateful for your ongoing support in this matter.”

    Smith’s early departure enabled him to focus on logistics planning for 3Fold, including finding suitable office and warehouse premises from which to operate the 3Fold business.

25. When Vanderzaag was told that Smith had been dismissed he tendered his resignation.  Following a discussion with Trollope, Vanderzaag agreed to stay on until 20 December 2002.  There is disagreement about whether Vanderzaag’s resignation had been accepted by Trollope, or whether Vanderzaag in fact resigned in December 2002, but nothing turns on this.  D’Mello was made redundant on the same day Vanderzaag’s resignation took effect.

26. Late in the year the receivers realised they required more time to dispose of the assets than previously expected.  Key personnel were still needed.  Accordingly, the receivers retained (through 3Fold) Vanderzaag and D’Mello to stay on as consultants from 8 January 2003.  At the time, the receivers were aware that the individual respondents were setting up a business and for that purpose had established 3Fold.  The receivers did not, however, know that the individual respondents or, for that matter, 3Fold, were using TS&B’s documents to operate their business. 

27. Before he finally left TS&B, Vanderzaag approached other employees and offered them employment with 3Fold.  D’Mello did likewise.  One of the first TS&B employees to be recruited by D’Mello was Oakes.  She was an Office Assistant at TS&B but was offered the position of IT Manager at 3Fold with responsibility for designing and setting up 3Fold’s IT system.  She was also to be in charge of office administration.  The offer was too good to refuse.  Oakes was being offered a far more senior position than she had ever held in the past.  She quickly accepted the position.

28. In her last few days with TS&B Oakes copied the 5 master tables (tarcustomer, tciadress, timitem, timitemdescription, timkitcomplist) from TS&B’s SAGE database onto a compact disk and took the disk home.  Oakes said that she took the data to make her job easier when she got to 3Fold.  No doubt she knew that 3Fold intended to use the data in the same way it had been used at TS&B.  Most likely she was told this by D’Mello.

1. By early January, other TS&B employees had agreed to join 3Fold including Kellie Richardson, who was responsible for administration and data entry, and Joseph Morganti and David Chote, who performed takeoffs.  Vanderzaag also approached Graham Butler, a Contract Draftsman with TS&B whom Vanderzaag believed possessed a copy of all of TS&B’s manufacturing drawings.  Vanderzaag offered Butler work as a contractor with 3Fold. 

2. From early January 2003, Vanderzaag and others who were to become 3Fold employees used TS&B’s systems to generate sales quotations for work to be done by 3Fold.  By way of example, a quotation was prepared for fit-out of seven Kmart stores, namely West Lakes, Kotara, Wynnum West, Forrest Hill, Cannon Hill, Bundaberg and Burnie.  Other quotations were prepared for the refurbishment of Kmart stores that was to be undertaken as part of its 2003 Phoenix roll-out project, a project that involved the refurbishment of approximately 30 Kmart stores throughout Australia.

3. Vanderzaag initially denied using TS&B’s systems to prepare quotations but when faced with clear evidence to the contrary admitted they had been used to help establish the 3Fold business.  Specifically, Vanderzaag conceded that under his instruction Chote or Morganti had performed takeoffs for 3Fold and then Richardson or Oakes had keyed the information into TS&B’s systems to produce sales quotations for a tender relating to work resulting from the closure of a number of Holly’s Restaurants at Kmart stores (the so-called Holly’s Restaurant tender) and some of the projects on the Phoenix roll-out.

4. The respondents contend that they could have prepared the quotations without the use of the TS&B data.  In this regard, Vanderzaag referred to a practice at TS&B of preparing “speed quotes” when urgent quotations were needed to obtain an advance payment from Kmart for parts already manufactured.  According to Vanderzaag “speed quotes” were prepared without use of the TS&B system, and were always within 5% of the figure obtained when a full takeoff was performed.  On the other side, Cue said that speed quotes were generally for minor projects and were not as reliable as takeoffs.  I am inclined to agree with Cue.  If Vanderzaag was right, and it was as efficient to prepare quotations without the use of the data, it is difficult to see why TS&B would have invested so much in developing their system or why the respondents would have bothered copying it.

5. The receivers, who were winding down the TS&B business, had decided that TS&B would not take on any new work after 28 October 2002.  Nonetheless 3Fold’s actions were quickly noticed by TS&B’s management.  The receivers also discovered 3Fold had been misusing the company’s data and drawings.  The receivers’ solicitors, Mallesons Stephen Jaques, wrote to each individual respondent on 31 January 2003 detailing numerous alleged breaches by them of their contractual, equitable and statutory obligations.  The allegations included that the individual respondents violated TS&B’s intellectual property rights (in particular, copyright in numerous documents) and that the respondents had misappropriated TS&B’s intellectual property.  Specifically, the letter referred to the respondents having handed TS&B’s drawings to a representative of Big W and to suppliers of equipment.  The letter also referred to the respondents’ use of TS&B part numbers and prices in an offer provided to Healy of Kmart.  Reference was also made to the alleged “misuse of confidential information” concerning, among other things, TS&B’s clients, TS&B’s pricing and TS&B’s intellectual property (in particular, drawings).

6. Mallesons claimed that the breaches, particularly in relation to Kmart, severely compromised TS&B’s ability to trade out of its financial difficulties and jeopardised the receivers’ chance of securing a sale of TS&B’s business and assets.  Mallesons sought various undertakings from the respondents, including that the respondents immediately return to the receivers all TS&B documentation (whether hard copy or in electronic form) and that they honour their obligations as to confidentiality with respect to TS&B’s know how and trade secrets.

7. Business to Business Lawyers (B2B Lawyers), acting for the respondents, replied to the Mallesons letter on 4 February 2003.  In their reply, B2B stated that 3Fold was establishing its business by relying on the personal knowledge and expertise of its directors only.  The solicitors went on to say that there had been no misappropriation by the respondents and no use of TS&B’s intellectual property.  The respondents did, however, offer to return material in their possession if they received confirmation that no further action would be taken.  The solicitors asserted that some documentation had been received when 3Fold had been appointed consultants to TS&B.  During the trial Vanderzaag admitted that most of these statements were false.

8. On 12 February 2003, less than two weeks after Vanderzaag and D’Mello’s consultancy had come to an end, 3Fold took possession of premises at 126-134 Fairbank Road, Clayton South.  The individual respondents, along with Chote, Morganti, Oakes and Hak Seng immediately moved into the new premises.  Richardson followed shortly afterward. 

9. Oakes saved her copy of TS&B’s data onto 3Fold’s computer the day she began work at the Clayton South premises.  Oakes knew which tables to copy as they were the main tables she had used to create reports while at TS&B.  She then began creating 3Fold’s own database based on the copied tables.  This involved downloading the tables into her temporary directory and renaming them.  Oakes then removed unwanted data from the “tarcustomer” table, linked the “tarcustomer” table with the “tciaddress” table (to link the store name with the store address), combined the “timitem” and “timitemdescription” tables, modified the part numbers, combined the “timkitcomplist” table with the “timitem” table and linked the kit number to the parts that make up each kit.

10. In the early stages of this proceeding the respondents claimed that the tables were only used on Oakes’ personal computer.  This claim was abandoned when it became apparent that it could not be supported.  Still, Oakes attempted to distance her conduct from the others.  For example, she said at one point that she never specifically discussed setting up the database with D’Mello.  Later she said that she probably told Vanderzaag or D’Mello what she was doing.  I think the true position is this.  D’Mello knew that when Oakes left TS&B she took with her the disk containing the five tables.  Indeed, it is likely that he suggested that Oakes take the data so it could be used by 3Fold.  However that may be, D’Mello knew that Oakes had loaded the five tables onto the 3Fold server.  I have no doubt that Vanderzaag knew as well.  After all, he was responsible for attracting business to 3Fold and would, from the outset, have made use of the information on 3Fold’s database for the purpose of obtaining work.

11. A few weeks after moving into 3Fold’s new premises, Vanderzaag instructed Oakes to change the part numbers in the tables.  Up to this point, each part number had followed TS&B’s part numbering system in which each part number consisted of a customer code, a product code, a source code, a serial number and a finish code.  For example, a typical TS&B part number might be 1-01M412-B3.  In this case, the first digit “1” was the TS&B customer code for Kmart.  The next two digits “01” represent the category of equipment, in this case a vertical upright.  The next letter represented the material used to make the product; “M” stood for metal.  The next three digits were a random serial number to differentiate different products within the same category.  The final two digit code “B3” represents the finish, in this case a black powder coat.

12. The part numbers were not changed significantly so they could still be referable to Kmart’s part numbers.  Oakes said she changed “the first letter, the middle letter and the end – the end little bit which is the colour code”.  The 3Fold part number after the change, for the vertical upright with TS&B part number 1-01M412-B3 became K101S412-B.  That is, K was inserted into the customer code; a reference to Kmart; the letter “M” was replaced with the letter “S”; presumably a reference to steel rather than metal, the 3 was removed from the code B3.  Similar changes were made to other part numbers, for example the source code “J” (for joinery) was replaced with a “T” presumably for timber.

13. In Autocaps (Aust) Pty Ltd v Pro-Kit Pty Ltd (1999) 46 IPR 339, 350, I said:

    “A compilation is not a work of art.  It is a work that conveys information.  When one considers whether the particular information conveyed in the defendant’s work is substantially the same as the like information conveyed by the plaintiff’s work, the issue is whether the manner in which the defendant has displayed that information, or important aspects of it, is in substance the same as portrayed in the plaintiff’s work.”

    In this case the difference between the amended 3Fold part numbers and the original TS&B part numbers, namely minor alterations to the customer, source and finish codes which preserve their meaning, was not significant.  The manner of conveying the information was for practical purposes the same.  If copyright, 3Fold’s new numbering system could still be a substantial reproduction of the TS&B’s original work.

    TS&B sells assets to TS&B Retail

14. From the time of their appointment on 28 October 2002, the receivers took steps to sell the TS&B business.  They received offers from three prospective purchasers.  One offer was from 3Fold.  The offer was to purchase the “intellectual property” owned by TS&B for $50,000.  The respondents’ case is that the purpose of the offer was to determine the scope of the intellectual property and what the receivers considered it to be worth.  The respondents suggested that 3Fold did not wish to acquire the asset.  Smith said that the individual respondents did not believe the offer would be accepted.  Vanderzaag said if there was a chance of it being accepted, the offer would have been withdrawn.  D’Mello described the offer as having been made “tongue in cheek”.  None of this is plausible.  I am convinced the offer was made because the respondents believed the intellectual property (which included the drawings and data) was worth at least the amount of the offer and probably more.  Why then did they downplay the offer?  I think the reason is this.  A point regularly made by the respondents throughout the trial was that even if TS&B had copyright in the drawings and data, they were of no value to 3Fold because it had the capacity at short notice to prepare its own drawings and data and would have been able to tender for work in any event.  This does not sit well with an offer to purchase the intellectual property for $50,000.

15. The offer the receivers accepted came from TS&B Retail.  The company had been incorporated on 4 February 2003 by Trollope.  Although TS&B had failed, Trollope was of the view that the business could operate profitably provided it was conducted in a different manner.  The difference related to the manufacture of parts.  TS&B manufactured most of the parts it needed and maintained a large workforce for that purpose.  This was an expense that TS&B Retail could not afford.  The Trollopes (Barry and his son) decided that TS&B Retail would procure parts manufactured by others, including overseas manufacturers, or, if they were available, simply purchase them on the open market.

16. The terms of TS&B Retail’s offer were set out in a letter dated 19 February 2003.  The offer price was $652,250.  This was more than the auction value of the assets.  The relevant portions of the letter read:

    “TS&B Retail offers to purchase the following assets of the Business free from any encumbrances whatever as at and with effect from 3 February 2003 [the Business was defined as the business conducted by the Vendor, being TS&B]:

    (a)       [plant and equipment specified];

    (b)all intellectual property and proprietary rights (whether registered or unregistered owned by the Vendor in the following intellectual property of the Business (including documents recording the intellectual property, whether in soft or hard copy) (Intellectual Property Rights):

    (i)[including business names, trade names and trademarks]

    (ii)       [domain names used in the business]

    (iii)copyright and all other intellectual property and

    proprietary rights in all drawings regarding production and tooling;

    (iv)all customer lists, pricing and costing information and customer and production records; and

    (v)patents, drawings, discoveries, inventions, improvements, trade secrets, technical data, formulae, computer programs, databases, know-how, logos, designs, design rights, copyright and similar industrial or intellectual property rights;

    (c)all choses in action, claims and rights howsoever arising (to the fullest extent possible at law) that the Vendor may have against any entity or individual in relation to any breach, infringement, misuse or copying of the Intellectual Property Rights as at the Effective Date other than claims based upon alleged contravention of the Corporations Act (Claims);

    (d)[telephone, facsimile numbers and email addresses used in the Business];

    (e)       all rights of the Vendor in all software used by the Business.”

    The letter stated that the purchase of the assets and payment of the purchase price were subject to certain conditions including:

    “1.The Purchase Consideration will be apportioned between the Assets in such a manner as agreed and set out in the Asset Acquisition Agreement.

    2.The Purchase Consideration payable for the Assets is $652,250 plus GST to be satisfied by the payment by TS&B Retail to the Vendor on Friday 28^th February 2003.

    4.Possession of the Assets and risk in them will pass to TS & B Retail at completion of the transaction.

    8.The Vendor and TS & B Retail will if either party requires it enter into an agreement for the sale and purchase of the Assets (Asset Acquisition Agreement), to be prepared by TS & B Retail’s solicitors, which will reflect the terms and conditions of this offer.  Until such time as the parties enter into the Asset Acquisition Agreement, the terms and conditions of the agreement of the parties as set out in this offer will bind the parties, and the parties will do all things (including signing any document) reasonably required to give effect to the terms and conditions of this agreement.”

    In a section headed ‘Effect of Acceptance of the Letter’ it was stated that “Acceptance of this offer will represent a binding agreement by the Vendor to sell the Assets to TS & B Retail and for TS & B Retail to purchase the Assets from the Vendor”.

17. The letter was received by one of the receivers, Lindholm, on 19 February 2003.  He executed the letter and returned it to Trollope on the same day.  Settlement was due on 28 February 2003.  In the event, completion did not take place until 20 March 2003.

18. Before settlement, 3Fold began to enter into contracts to supply fittings.  It was awarded contracts to fit-out two stores (Kotara and Wynnum) that formed part of Kmart’s Holly’s Restaurant tender.  A contract to fit-out a third store, West Lakes, was awarded to 3Fold on 24 March 2003.  The remaining four stores under the Holly’s Restaurant tender (Forrest Hill, Cannon Hill, Bundaberg and Burnie) were awarded to TS&B Retail.

19. At about the same time, 3Fold was awarded contracts to fit-out thirteen Kmart stores (West Lakes, Kotara, Wynnum West, Morley, Castle Hill, Joondalup, Woy Woy, Gladstone, Innaloo, Goulburn and Armadale) as part of the Phoenix roll-out.  3Fold was awarded contracts to fit-out a further three stores (Mildura Launceston and Kardinya) on 24 March 2003.  Three of these projects (Innaloo, Goulburn and Armadale) ultimately did not proceed.  TS&B Retail received contracts for four stores (Dandenong, Shepparton, Traralgon and Albury) with the remaining ten stores going to Metro Products and BP Shopfitting (who were awarded nine stores and one store respectively).

20. Between February and March 2003 3Fold also received orders from Kmart to fit-out a further fifteen Kmart stores (Albany, Knoxfield, Ringwood, Cannon Hill, Figtree, Sylvania, Parramatta, Mulgrave, Minto, Warrnambool, Tooronga, Hornsby, Alexandria, Sylvania and Rowville).

21. The respondents maintain that the Phoenix contracts were awarded to 3Fold in November or December of 2002, before Vanderzaag and the others made use of TS&B’s data to prepare quotations.  That is not what Healy said.  According to Healy the Phoenix contracts were not allocated to particular shop-fitting companies until January or February 2003.  It is in my view clear that 3Fold used TS&B’s data to quote for all the Kmart projects.  Moreover, it intended to use TS&B’s manufacturing drawings to fulfil any contracts it was awarded.

22. On 20 March 2003 Barry Trollope wrote to the receivers advising that “[TS&B Retail did] not require [the execution of] a formal Asset Acquisition Agreement to proceed to completion of the sale and purchase of the Assets.”  In the letter TS&B Retail proposed that the sale be made on the terms set out in the letter along with those in the letter of 19 February 2003. In relation to the effective date of the sale, the letter stated:

    “The Sale Letter [being the letter of 19 February] stated that purchase of the Assets would take effect from an effective date of 3 February 2003.  TSB Retail believes this is an error, and that title, risk and possession in respect of the Assets will pass on Completion.”

    The letter went on to note that completion would take place at 2:00pm on 20 March 2003.  Further details of the sale were set out including that the receivers and TS&B would provide assistance to TS&B Retail in relation to claims by third parties over plant and equipment.  In relation to the intellectual property the subject of the sale the letter stated that:

    “‘For the avoidance of doubt, the ‘Intellectual Property Rights’ includes, to the extent it may be transferred or assigned at law, any right of the Vendor to have information (including, without limitation, confidential information) kept confidential, and the ‘Assets’ includes all Claims in connection with any such right other than claims based upon alleged contravention of the Corporations Act.”

    There was a definition of “Assets”.  It included

    “(a)all computers and hardware used in the conduct of the Business and listed in the appendices to the Sale Letter;

    (b)     all software installed on the Computers; and

    (c)all data and information stored or otherwise able to be retrieved, printed or transmitted from Computers.”

    Toward the end of the letter there was a statement that the acceptance of the letter would represent an agreement by the parties to proceed to completion without a formal asset acquisition agreement on the terms and conditions set out in the two letters.  This was followed by a provision that, for the avoidance of doubt, a failure by the Vendor to accept the letter would not “affect the binding agreement [to sell the assets to TS&B Retail] created [by] the acceptance by the Vendor of the Sale Letter.”

23. The letter was signed by Lindholm on the day of its receipt, 20 March 2003.  Later that day the transaction was completed by the payment by TS&B Retail of the purchase price and the delivery by the receivers of the assets. 

24. It is clear that the parties (the receivers and TS&B Retail) intended the arrangements set forth in the two letters to be binding; to constitute a contract.  There is no reason not to give effect to their intention, provided it can be given effect in law.

25. To the extent it matters (and timing may be important) I treat the letter of 19 February 2003 as an offer to purchase the assets therein described and the receivers’ signature as the acceptance of that offer, resulting in a binding contract.  It is appropriate, I think, to regard the provisions of the second letter as a variation of that contract.  At one time it was thought that the result of varying a contract was to produce a new contract:  Williams v Moss Empires Limited [1915] 3 KB 242, 247. In United Dominions Corporation (Jamaica) Ltd v Shoucair [1969] 1 AC 340, 348, Lord Devlin said the old agreement would only be destroyed if that is what was intended. In Tallerman & Co Pty Ltd v Nathan’s Merchandise (Victoria) Pty Ltd (1957) 98 CLR 93 the distinction between recision and variation was discussed. The High Court accepted that the parties to an agreement may vary some of its terms by subsequent agreement. It was also accepted that the parties may rescind the earlier agreement, and this could be done expressly or by implication. The determining factor is always the intention of the parties as disclosed by their later agreement.

1. Did the agreement (or the agreement as varied) pass copyright in the drawings and data to TS&B Retail?  Copyright is a species of property.  It is capable of being assigned at law as personal or movable property:  Copyright Act 1968 (Cth), s 196. To pass legal title the assignment must be in writing: Copyright Act, s 196(3). If the assignment is not in writing there may be an assignment in equity provided there is an express or implied agreement to assign. Here the parties accept that the receivers purported to assign TS&B’s copyright in the drawings and data to TS&B Retail. The dispute is whether copyright subsisted in respect of those works and if it did whether TS&B was the owner of the copyright.

2. A rather more difficult question is whether, as TS&B Retail asserts, it took an assignment of TS&B’s confidential information.  According to the agreement there was an attempt to assign confidential information to TS&B Retail.  The first letter records that “all intellectual property and proprietary rights … including … drawings, trade secrets, technical data formulae … databases, know-how … and similar industrial or intellectual property rights” was the contract’s subject matter.

3. In Norman v Federal Commissioner of Taxation (1963) 109 CLR 9, 26 Windeyer J said, and Dixon CJ (at 16) agreed that “[a]ssignment means the immediate transfer of an existing proprietary right, vested or contingent, from the assignor to the assignee. Anything that in the eye of law can be regarded as an existing subject of ownership, whether it be a chose in possession or a chose in action, can today be assigned, unless it be excepted from the general rule on some ground of public policy or by statute.” That is to say, the only thing capable of being assigned is property or a right in property.

4. Confidential information, however, is not property “in any normal sense”:  Boardman v Phipps [1967] 2 AC 46, 128. Indeed it is not property at all. Confidential information is protected by equity by “the notion of an obligation of conscience arising from the circumstances in or through which the information was communicated or obtained”: Moorgate Tobacco Co Limited v Philip Morris Limited (No 2) (1984) 156 CLR 414, 438. A court of equity will protect information only if it is truly confidential and the confidence is worth preserving.

5. Although confidential information is not property and hence is not capable of being assigned, it now seems to be accepted that confidential information can be passed on by one person to another, and the person to whom it has been imparted can take action to protect the information.  In Mustad & Son v Dosen [1964] 1 WLR 109 the liquidator of a company sold to the appellant the company’s business including the benefit of trade secrets. One of the former employees took up employment with a competitor, with the intention of passing on trade secrets to his new employer. The appellants obtained an injunction to restrain the disclosure. In Douglas v Hello! Ltd (No 3) [2006] QB 125, 168 it was observed that the decision in Mustad & Son “supports the proposition that a purchaser of confidential information can restrain disclosure of that information in breach of confidence, but again the picture is complicated by the fact that the benefit of [the employee’s] contractual obligation not to disclose the information was purchased by Mustad.”

6. That may be a good explanation for the decision of the Law Lords but, even if the employment contract had not been assigned, in my opinion, consistent with principle, a “purchaser” of the confidential information is entitled to the court’s protection.  In the Spycatcher case (Attorney-General v Guardian Newspapers Ltd (No 2) [1990] 1 AC 109, 281) Lord Goff said: “a duty of confidence arises when confidential information comes to the knowledge of a person (the confidant) in circumstances where he has noticed … that the information is confidential, with the effect that it would be just in all the circumstances that he should be precluded from disclosing the information to others.”

7. It follows, in my opinion, that TS&B Retail is entitled to whatever protection a court of equity will give in respect of the confidential information it obtained from the receivers.  The remedies that are available include an injunction and equitable compensation:  Seager v Copydex Ltd (No 2) [1969] RPC 250; Smith Kline & French Laboratories (Australia) Ltd v Secretary, Department of Community Services and Health (1990) 17 IPR 545; Aquaculture Corporation v New Zealand Green Mussel Co Ltd [1990] 3 NZLR 299. The Federal Court can grant this relief because it exercises equitable jurisdiction: Federal Court of Australia Act 1976 (Cth), s 5(2) and s 23.

8. The result is that TS&B Retail is entitled to maintain a cause of action for copyright infringement and breach of confidence for any alleged infringement that occurred from the time it became the owner of the copyright or entitled to share in the confidential information (as the case may be).  But what of infringements that occurred while TS&B owned the copyright and was the only person entitled to protect the confidential information?  TS&B Retail is not able to bring an action for an infringement that occurred prior to it becoming owner of the copyright and entitled to use the confidential information merely because it is the assignee:  Taypar Pty Ltd v Santic (1989) 17 IPR 146, 152-153. No doubt for this reason the agreement has the receivers purporting to assign to TS&B Retail any claim TS&B may have had for breach of copyright and breach of its confidential information.

9. I said that the receivers “purported” to assign the causes of action for there is a general rule that a personal right to litigate cannot be assigned either at law or in equity, but an impersonal right in the nature of a proprietary right can be assigned provided the circumstances warrant it.  Thus, it has been said that causes of action in tort, which are regarded as personal rights, cannot be assigned:  Poulton v Commonwealth (1953) 89 CLR 540, 571, 602. The bar on assignments of personal actions would include actions in equity that are of a personal kind: Glegg v Bromley [1912] 3 KB 474, 489-492. An action for breach of confidential information is a personal action.

10. There is in England an exception to the bar on the assignment of personal rights.  In Trendtex Trading Corporation v Credit Suisse [1982] AC 679, 703 Lord Roskill (with the concurrence of the other Law Lords) said: “In English law an assignee who can show that he has a genuine commercial interest in enforcement of the claim of another and to that extent takes a assignment of that claim to himself is entitled to enforce the assignment unless by the terms of the assignment he falls foul of our law of champerty, which, as has often been said, is a branch of our law of maintenance … The Court should look at the totality of the transaction. If the assignment is of a property right or interest and the cause of action is ancillary to that property right or interest, or, if the assignee has a genuine commercial interest in taking the assignment and in enforcing it for his own benefit, I see no reason why the assignment should be struck down as an assignment of a bear cause of action or as savouring of maintenance.”

11. In Australia there is a debate whether the Trendtex principle should be adopted.  The cases for and against (the latter all being decisions of the Federal Court) are collected in Rickard Constructions Pty Ltd v Rickard Hails Moretti Pty Ltd (2004) 220 ALR 267. It may be that the debate is now over for the High Court in Campbell’s Cash and Carry Ltd v Fostif Pty Ltd (2006) 229 ALR 58 seems to have approved Trendtex.  In any event, my own view is that the logic of Lord Roskill’s view is inescapable.  This is especially so when, as here, the cause of action is connected with, or relates to, rights or interests owned, or that will fall into the ownership, of the assignee. 

    Copyright in the Data

12. The respondents contend that the tables of data are not copyright as compilations of facts and numbers.  I do not agree.  Since the mid 1980s employees of TS&B were involved in preparing, monitoring, updating and managing the drawings and parts database.  As each new item was developed, it was assigned an individual part number, short and long description and cost and sale price.  The unique drawing number for the part was included in the short description of the part, for ease of reference.  The part number, together with the descriptions, prices and date were recorded in tables.  From 1999 these tables were located on TS&B’s ACUITY database.  Once the information was in the database it could be automatically used in the quotation, manufacturing, warehousing, inventory control, delivery, installation and invoicing processes. 

13. The evidence establishes that sufficient effort, skill and judgment was exercised in creating the tables and collecting the data to populate them to justify their protection as a literary work for the purpose of copyright:  Desktop Marketing Systems Pty Ltd v Telstra Corporation Ltd (2002) 192 ALR 433; Autocaps (Aust) Pty Ltd v Pro-Kit Pty Ltd (1999) 46 IPR 339; TR Flanagan Smash Repairs Pty Ltd v Jones [2000] FCA 625.

14. There was an argument that copyright could not subsist in the tables as they did not supply intelligible information:  Desktop Marketing Systems Pty Ltd v Telstra Corporation Ltd (2002) 119 FCR 491, 532. Alec Peterson, a certified practicing accountant with experience implementing enterprise resource planning software such as ACUITY, gave evidence that while information could be entered into the tables or viewed through enquiries or reports, the tables could not generally be viewed in tabular form. In the alternative, it was put that even if the tables did supply intelligible information they did not do so to anyone other than TS&B. There is really nothing in the argument. While the information may be more difficult to access in tabular form and is more easily understood when obtained from the database via a report that extracts only those pieces of information from the database that are relevant to a particular query, the information in the tables is intelligible. Not only that, the information is meaningful not only to TS&B employees but to others, as can be inferred from 3Fold’s copying and use of the data. In any event, even if the information was meaningful only to TS&B’s employees, that is not a reason for excluding the compilation as a work capable of copyright.

    Copyright in the Drawings

15. The manufacturing drawings for each component were created over the years by or on behalf of TS&B and earlier by or on behalf of its predecessor, S&B.  One of the main issues in the case is whether TS&B owned the copyright in the drawings.  Although the facts are messy, it has proved to be not too difficult to resolve the matter in TS&B Retail’s favour.

16. The problem concerning ownership arises in the following way.  First, TS&B “acquired” many drawings (and the copyright) from its predecessor.  It may have “acquired” some of the drawings in suit.  Second, almost all of the drawings have been revised.  Typically with manufacturing drawings, and so it is with the drawings in suit, the changes are noted, but not always in a way that makes it possible, in the absence of the original drawings, to see precisely what has been changed.  This is of particular significance.  Copyright in each drawing will belong to the original “author”, being the person who gives existence to the work:  Sands & McDougall Pty Ltd v Robinson (1917) 23 CLR 49, 55. But in the case of changes to a drawing, if the changes are non-trivial, or the author contributes something recognisably his own, there will be, for copyright purposes, a new original work, the author of which will be the person who brought about the changes: University of London Press v University Tutorial Press Ltd [1916] 2 Ch 601; H Blacklock & Co Ltd v C Arthur Pearson Ltd [1915] 2 Ch 376; Interlego AG v Tyco Industries Inc [1989] AC 217; A-One Accessory Imports Pty Ltd v Off Road Imports Pty Ltd (1996) 65 FCR 478. Third, while the author of each change is identified on the drawing, some authors were employees of TS&B and others were independent contractors. Where the drawings were prepared or significantly amended by an employee, s 35(6) of the Copyright Act provides that the employer is the owner of the copyright. In the case of a drawing prepared or significantly amended by a contractor, he would be the owner of the copyright unless it had been assigned to his principal.

17. The respondents put TS&B Retail to its proof on ownership.  It was therefore required to identify the author of each original manufacturing drawing, the extent of any amendment to the drawing, the identity of the person who made each amendment and establish that through these persons TS&B obtained or was entitled to claim ownership of the copyright.

18. TS&B Retail’s task was made difficult by the fact that the practice at TS&B was to update an original drawing with any change however insignificant, as the changes were used for manufacturing and needed to be precise.  To ensure that outdated versions of drawings were not mistakenly used in the manufacturing process, TS&B destroyed previous versions of a drawing once an amendment had been made.  Further, from some time prior to 1995, most draftsmen at TS&B used AutoCAD.  Amendments to drawings in AutoCAD were made to the current electronic copy of a drawing, in effect replacing the previous version of that drawing.  This practice made it impossible in some cases to determine the scope of amendments made to a drawing.

19. The problem of establishing ownership of copyright was compounded because many relevant documents, including employment records – necessary to determine whether the authors were employees or contractors – were either still in the possession of the receivers or had been destroyed.

20. The author and, if amended, the amending author of each manufacturing drawing is identified on the latest drawing. The identification is by noting the author or amending author’s initials.  The date of the amendment also appears.  A brief notation of the amendment is given.  In many cases, the person who authored the original drawing is the person who amended it.

21. An examination of the drawings in suit shows that in total eighteen employees and contractors were the initial authors or amending authors.  Of these, five were employees of TS&B.  The employees were Keith Edwards, Adrian Mihovolic (both CAD documentors), Dean Jordan (a project development team leader), Dorota Borthowski and Richard Dalzell.  Employment contracts were produced for Edwards, Mihovolic and Jordan.  While employment contracts were not produced for the remaining employees, other documentation indicates, and I accept, that they were employees of and not contractors to TS&B.  TS&B Retail says that another author, Les Cuccia, was also an employee, however there is insufficient evidence to say one way or the other.

22. The remaining twelve authors that could be identified, Gregor Bogdanski, Greame Butler, Sam Chen, Richard Hordejuk, Keith Gill, Benjamin Long, Shelley Li, Ignacy Roszowski, Pavel Molitoris, William Kline, Simon Minnahan and Andrew Polfreyman were retained by TS&B as independent contractors.  Bogdanski, Butler, Chen, Bentley and Roszowski entered into contracts in their trading (business) name.  Li contracted with TS&B through a company, Zulea Pty Ltd.  Bogdanski, Butler, Chen, Bentley and Roszowski were treated as employees for the purposes of payroll tax, superannuation and Workcover; Li was only treated as an employee for the purposes of payroll tax. All were paid an hourly rate for their work, did not have PAYE (income) tax deducted and were not entitled to sick leave, annual leave or long service leave.  They were paid an amount for providing their own computers.  Unsigned contracts were produced for Bogdanski, Hordejuk, Li, Roszkowski and Molitoris.  These were versions of contracts printed from a TS&B computer.  Trollope explained that TS&B Retail was unable to find executed copies of the contracts as the receivers had taken what records they considered to be relevant and the remaining documentation had been removed and destroyed when TS&B’s Clayton South premises were vacated.  No contracts were produced for Butler, Polfreyman, Kline, Minnahan, Gill or Long.

23. TS&B Retail did argue that, like the employees, those classified as contractors were under a “contract of service” rather than a “contract for services” and were employees as a matter of law.  In support of this argument it was put that TS&B exercised control over the manner in which these contractors worked, they generally worked from TS&B’s premises, they were engaged on a continuing basis, they were paid periodically, they received superannuation, their hourly rate was adjusted to account for annual and sick leave, they were unable to delegate or subcontract work and were otherwise treated the same as employees.  This was contradicted, at least in part, by evidence from Sally Baryla, a former accountant at TS&B responsible for the payroll, who said that the contractors could work for others if they had the time, and by Moffatt, the former Engineering Services Manager who said they could also work from home.  On balance, and taking into account the terms of the unexecuted contracts that were produced, I consider it probable that the draftsmen were as their contracts provide, contractors and not employees.

24. In addition to the authors who could be identified, there were seven amending authors whose identities are not known.  Their initials are “TI”, “ARV”, “DV”, “EB”, “FC”, “PHIL” and “DS”.  It is impossible to determine whether they were employees or contractors.

25. Of the 234 drawings in suit, fifty-seven were “cross-reference drawings”.  These are electronic drawings of components (such as a levelling foot) that could be incorporated into a number of different parts. When drawing a part that contained one of these components, the cross reference drawing was imported into the drawing of the part.  There are no details of the authors or amending authors of any of the cross-reference drawings. The cross-reference drawings were incorporated into twenty-seven manufacturing drawings. Whether this incorporation was sufficient to create a new work for copyright purposes will depend on the scope of each addition.  An additional forty drawings were copied from previous drawings, the original author of which is unknown.  Eleven others were either drafted by unknown authors or were copied from parts.

26. In total there are 60 drawings the authors and amending authors of which could not be identified.  It turns out they are in the main cross reference drawings.  Cue said that while a drawing and a cross-reference drawing incorporated into it could have different authors, the same group of draftsmen created both the finished drawing and cross-reference drawing.  If all draftsmen who drafted the other drawings were employees or contractors who had assigned their copyright to TS&B, it can be inferred that the authors of the cross-reference drawings fall into those categories as well.

27. There are a number of drawings in respect of which it is impossible to determine who is the author because of the absence of evidence of the extent of each amendment made to the drawings.  This category includes drawings prepared by contractors and later amended by employees, drawings prepared by employees and later amended by contractors and drawings prepared by persons unknown and later amended by contractors or employees.  There are between eighty-six and one-hundred and one drawings that fall into this category, depending on whether the incorporation of the cross reference drawings into some of the drawings is sufficient to create a new original work.

28. TS&B employees were both the original authors and amending authors of only ten or eleven drawings.  The employee owns the copyright.  Contractors were the authors and amending authors of between sixty-three and seventy-seven drawings.  These contractors owned the copyright unless it had been assigned to TS&B.  Even if all amendments by employees resulted in original works, and amendments by contractors were found not to create original works, which is unlikely, TS&B would own the copyright in less than half of the drawings in suit.  The remainder are drawings where the author is unknown or drawings were created and amended only by contractors.  This shows the importance to TS&B Retail of the need to prove that the draftsmen who were contractors had assigned their copyright to TS&B.

1. The respondents’ expert was Geoffrey Sincock from BDO Partners, Chartered Accountants.  Sincock prepared three reports.  The first report focused on the initial report prepared by Kenfield.  I will return to the substance of the first report shortly.

2. Sincock’s second report estimated the damages suffered by TS&B Retail on three bases, namely the diminution in the value of the copyright works, the fee TS&B Retail might have charged for the use of the copyright works and the loss of opportunity and potential profit.

3. As regards diminution in value of the copyright material, Sincock concluded that “on the assumption that the copyrighted works were in widespread use, there is no basis to calculate the diminution in value of the copyrighted works”.  As this conclusion is based on a false premise, namely that the copyright material was in widespread use, it is of little assistance.  This same false premise underlies Sincock’s conclusion that “there would be no basis for the applicant to charge a fee for the use of the copyrighted works”.

4. Sincock then estimated the maximum loss suffered by TS&B Retail to be $17,170 before tax.  He calculated this loss by first estimating the cost value of all parts in the copied drawings sold to Kmart between 21 January 2003 and 11 April 2003, being the period in which the respondents say the breaches were alleged to have taken place.  He obviously assumed that the infringing conduct came to an end when the interlocutory injunction was granted.  Sincock assessed the cost value of Kmart parts to be $645,649.  Assuming a profit margin of 24.79%, being the gross profit margin actually achieved by TS&B Retail for the twelve months ending 30 June 2004 (the same margin as used by Kenfield), this implied lost sales of $858,462.  The potential gross profit was estimated as follows:

   Potential gross profit = $858,462 x 24.79% = $212,813

   The estimated profit figure was then adjusted (reduced by 22.79%) as follows, to take into account the variable operating expenses TS&B Retail would likely incur if it were to take on the additional work:

   Additional expenses = $858,462 x 22.79% = $195,643

   The 22.79% was determined by reference to TS&B Retail’s operating expenses (adjusted to exclude fixed and one-off expenses) as a proportion of TS&B Retail’s total sales for the year ended 30 June 2004.  The potential lost profits were then calculated by deducting the additional expenses from the potential gross profit as follows:

   Potential lost profits = $212,813 - $195,643 = $17,170

   Sincock performed a second ‘lower range’ estimate using a gross profit margin of 7.47%, which was the gross profit margin actually achieved by TS&B Retail for the twelve months ending 30 June 2003 (the period in which the infringement was said to take place).  For this estimate, Sincock adjusted potential lost profits by 88.16% to reflect TS&B Retail’s operating expenses (adjusted to exclude fixed and one-off expenses) as a proportion TS&B Retail’s total sales for the year ended 30 June 2003.  On this basis he concluded that “if the estimate is based on the reported results for the relevant period, being the period ending 30 June 2003, after considering overhead expenses shows the potential for further losses by TS&B [Retail] for additional Kmart sales rather than potential profits”.  The extent of the losses was as follows:

   Cost value of parts:       $645,649

   Potential lost sales:        $697,773

   
   

   Potential gross profit (7.47%):             $52,124

   
   

   Additional expenses (88.16%):          -$615,157

   Potential lost profits:  ($563,033)

   In other words, TS&B Retail would have been more than $563,000 better off if it did not obtain the additional (loss making) Kmart work than if it did obtain that work.  I do not accept that the business was this unprofitable.

5. Sincock’s third report estimated what T&B Retail would recover if it had elected to take an account of profits for the breaches that occurred between 1 January 2003 and 30 June 2004 and all sales to Kmart were included not just sales of those parts attributable to the 234 drawings and 5 tables of data.  As TS&B Retail elected damages, I need not consider this report.  I note, however, that Sincock used Kenfield’s estimated total sales figures for this report.

6. Given the substantial differences in approach between Sincock and Kenfield, it is necessary to resolve a few points before determining the appropriate measure of damages.

7. First, for the purposes of his reports, Sincock assumed that all breaches took place between 21 January 2003 and 11 April 2003, when the injunction issued.  This was a reasonable assumption to make and no doubt quite a few people were surprised when it turned out to be false.  But false it was.  The respondents first breached TS&B’s confidence and infringed TS&B’s copyright in the tables of data as early as 6 January 2003, when Vanderzaag, Oakes and others used TS&B’s systems to produce sales quotes for Kmart. The use of the copied data continued from between 12 February 2003, when Oakes saved the copied data onto 3Fold’s server, until 3Fold’s part numbers were altered for the second time in August 2004.

8. The respondents infringed TS&B’s copyright in the drawings from November 2002, when Vanderzaag sent copies of TS&B’s drawings to potential suppliers.  It is not clear whether drawings were also sent to potential customers.  At any rate, from about February 2003, 3Fold used or authorised manufacturers to use (in the sense of use for manufacture) TS&B’s drawings to fulfil the refurbishment contracts awarded to it by Kmart.  The first contract (for Kmart’s Kotara store) was awarded on 10 February 2003 for delivery by 1 April 2003 with smaller contracts awarded on 4 February 2003. 

9. It may be that from 10 April 2003 no respondent copied the drawings.  However, 3Fold continued to procure a breach of the copyright by having parts manufactured by suppliers who used the drawings.  The case was conducted on the basis that this put 3Fold in breach of copyright, no distinction being drawn between primary and accessorial liability.  Parts were manufactured to the time of the hearing.  So, the relevant period of infringement of copyright is January 2003 to August 2004 in respect of data and November 2002 to at least the trial in respect of the drawings.

   Trading Losses

10. It is not sufficient to demonstrate that copyright infringement enabled 3Fold to be awarded Kmart contracts.  TS&B Retail must prove that, but for the infringements, TS&B Retail would have obtained the contracts.  This requires consideration of the counterfactual, namely the likely state of affairs had 3Fold not infringed TS&B Retail’s copyright.

11. Kenfield assumed that, absent any copyright infringement, TS&B Retail would have captured all of the business Kmart had awarded to 3Fold, in effect retaining a market share of around 80-90% of Kmart’s work.  This is unlikely for several reasons.  First, the assumption does not allow for potential competition from 3Fold.  I will discuss this shortly.  Secondly, there is clear evidence that following the collapse of TS&B, Kmart decided not to pursue exclusive arrangements with any supplier.  Instead, its strong preference was to put all work to tender.  In an email from Kmart to Trollope dated 9 January 2003 Hani Zayadi, Kmart’s Managing Director, said “we hope [TS&B Retail] succeed as we prefer not having all our eggs in one basket as in the past with [TS&B]… I [have] asked our team to expand the sourcing of our store fitouts to your competitors as well as to new overseas suppliers”.  During his evidence Healy said that Kmart had commissioned an independent study into the shopfitting industry which had concluded that it was not in Kmart’s best interests to enter into exclusive arrangements.  The review found that “if Kmart continues to rely so heavily on TS&B, then Kmart will continue to face capacity problems each time major new store or refurbishment programs are planned.  Simply trying to find ways to justify continuing the status quo would mean Kmart will never have viable alternatives”.  Healy said “we had already done a bit of an analysis into the marketplace and worked out that we needed to… start seeking other retailers in the marketplace and look at different ways of sourcing product and not having all our risks in one area”.  Healy also testified that while exclusive relationships had worked well in the past “it didn’t make sense to keep doing that, particularly with a lot of manufacturing starting to happen offshore”.  In addition to TS&B Retail, 3Fold and Metro (until June 2003) who were the main suppliers, Kmart also used Ausmart (from August 2003), BP shop-fitting and were looking for other (including overseas) suppliers.

12. As TS&B Retail would not have been awarded all the Kmart contracts that went to 3Fold, it is necessary to estimate the proportion TS&B Retail would have been awarded but for the infringement.  One consideration for the purposes of this counterfactual is whether, and if so when, 3Fold would have obtained its own drawings and data by legitimate means.  TS&B Retail claims (and Kenfield assumed) that as a result of the limited resources available to 3Fold when it commenced operations, 3Fold would have been unable to continue operating long enough to develop the necessary data and drawings to obtain or fulfil Kmart work.  While I do not doubt that the respondents have benefited from the use of the copyright material, the assumption that 3Fold would never have been able to compete with TS&B Retail without infringing copyright or breaching confidence is, in my view, an overstatement. 

13. It seems to have been common ground that drawings could have been prepared from either TS&B’s isometric drawings, actual parts (which in some cases were stored in 3Fold’s warehouse) or from photographs taken of parts in Kmart stores, without having to be drawn from scratch.  There is evidence that Kmart (and competitors of TS&B) were allowed to produce drawings of their own from the final product. Cue gave evidence that:  “If successful in a tender or quote, competitors of [TS&B Retail] would have to visit a Kmart store and obtain the crucial production information through measurements of components and/or photographs.  The competitor would then prepare their own set of component manufacturing drawings”.  Likewise, while Trollope was concerned that CML should not continue to use manufacturing drawings that were obtained from TS&B as part of the tender process, no objection was raised when CML subsequently sent out its own drawings of the same parts.

14. To reproduce the 234 drawings from isometric drawings and parts or photographs of parts, according to Vanderzaag, would have taken approximately 2 hours per drawing on average, or 468 hours in total (3 weeks for 4 draftsmen).  The cost to 3Fold would have been around $16,848.  The cost of purchasing the drawings from another supplier would have been around $28,080 (at $120 per drawing) according to Vanderzaag.  Kmart in fact hired another company, Metro Shopfitters, to prepare manufacturing drawings of products on Kmart’s behalf.  This could not have taken Metro long as the TS&B manufacturing drawings were withdrawn on 14 May 2003 and Metro ceased trading around May or June the same year.  Thus the drawings were completed in less than 2 months.  Cue also gave evidence on this topic.  He said that to prepare a drawing from scratch would take between 30 minutes and 2 days, with an average of 8 hours per drawing.  I take Cue to be referring to the time it would take to create a manufacturing drawing once a design had been approved and a prototype developed.  On this basis, it would take 4 draftsmen 12 weeks to prepare the drawings. 

15. This discussion assumes, as the parties appear to have assumed, that preparing manufacturing drawings from the finished product or from photographs of the final product is legitimate.  It is not legitimate.  It is just an alternative means of infringing copyright.  To avoid infringing copyright the respondents would need to both design and draw equivalent products and parts from scratch.

16. To the extent that estimating the time to design and prepare a manufacturing drawing for a product may involve some degree of conjecture, I am inclined to err in TS&B Retail’s favour.  While not relevant to the question of infringement, as TS&B Retail is only pressing its case in respect of the 234 drawings, there is evidence that in order to fulfil orders from Kmart 3Fold needed more than the 234 drawings in suit.  To fit out Kmart’s West Lakes, Kotara and Wynnum, for example, Cue said that 3Fold needed 213 additional drawings.  I suspect that to compete for other contracts other additional drawings would have been needed.  Some allowance must be made for this in estimating the time it would take 3Fold to be in a position to compete for Kmart work.

17. The issue is how long would it take to develop the necessary manufacturing drawings without direct or direct copying.  I consider eight to twelve months to be a reasonable estimate of the time required. 

18. The question then arises whether 3Fold would have been able to survive long enough for the drawings to be developed.  There are two reasons why I think 3Fold eventually would have produced its own drawings.  First, the drawings were critical to running the business and the individual respondents would have done everything possible to make sure the business survived:  They had little choice.  They were facing long term unemployment and they and their families depended on the business succeeding.  Secondly, Kmart’s arrangements with 3Fold, at least for 2003, would have provided the bulk of the funding it needed to keep going.  Kmart agreed to pay a 25% deposit upon receipt of the purchase order, along with payment in five equal instalments of 15% of the contract price throughout the course of each project.  This was probably designed to minimise potential cash flow shortages for 3Fold.  It may also be indicative of Kmart’s desire to support more than one viable supplier. 

19. As regards the data, Vanderzaag said that a non-infringing database could be created and populated with data in around 52 hours (less than a week for two people) at a cost of approximately $2,080.  While the true cost is probably much higher, it is unlikely to be so prohibitive as to make competition impossible.  The time taken to create the database and tables would not be significant (probably no more than a few months).

20. In light of the foregoing, for the purpose of determining the extent to which 3Fold’s infringement diverted sales from TS&B Retail, I propose to act on the following assumptions.  Had 3Fold not infringed copyright it would have competed with TS&B Retail for a small amount of the Kmart work from the outset, albeit at a competitive disadvantage.  Over time, perhaps eight to twelve months, allowing for possible cash flow constraints, 3Fold would have developed its own manufacturing drawings which it could have used to fulfil Kmart contracts.  Even if 3Fold had not itself developed the drawings by about February 2004, it is possible that Kmart would have developed its own manufacturing drawings for supply to shopfitters.  However, Kmart did not want to be restricted to using one supplier.  This is evident from a submission dated 30 January 2003 by Healy which states:

    “Kmart is currently going through the process of drawing up all shopfixturing and shopfitting equipment which will assist us with going to market for tender situations and also improve the timelines to bring on new suppliers.  It is Kmart’s intentions to keep and store its intellectual property in house in the future.  Future design updates will be paid for in order for Kmart to retain the intellectual property.”

21. On the basis of these assumptions TS&B Retail is not entitled to recover trading losses due to the acts of 3Fold that occurred after February 2004.  In my estimation by that time 3Fold would have been in a position to use its own or Kmart’s drawings to legitimately compete with TS&B Retail for work. 

22. Another factor to consider in assessing its losses is whether TS&B Retail would have been able to take on the work that had been awarded to 3Fold.  Kenfield’s calculations assumed that TS&B Retail had the capacity to take on all that work.  His assumption is supported by Trollope who said that “the [TS&B Retail] business had unlimited capacity because it was manufacturing 85 to 90 per cent of its product overseas”.   But this is unlikely to be correct.  Trollope himself said when the business started up it “had to be very, very, very skinny, evidenced by [the fact that it] didn't have any sales for three or four months”.  Moreover, by 2003, TS&B Retail was already experiencing difficulty with supplying equipment on time, which resulted in Kmart sourcing products from 3Fold and others.  The value of work provided by 3Fold in relation to TS&B Retail projects in 2003 was approximately $250,000.  Healy said there were “some instances where [TS&B Retail] couldn't supply all the equipment as per the contracted works”.  In his view “[TS&B Retail] could have supplied [the equipment] at the end, but [Kmart] didn't want to wait a month, two months, six weeks to get the equipment”.  He said “sometimes there [were] three, sometimes there [were] four, sometimes five, sometimes there [were] six week delays in some of the equipment”.  While denying that TS&B Retail lacked sufficient resources to perform the contracts awarded to it, Trollope did admit that he was aware that 3Fold had provided Kmart with some stock for jobs TS&B Retail had been awarded.  Likewise, Cue said that certain additional parts had on occasion been supplied when TS&B Retail did not have them “immediately to hand”.  He said that “because the majority of [TS&B Retail’s] supply is out-sourced from overseas suppliers … delivery lead times of 3 to 5 months are not uncommon.  This enables [TS&B Retail] to order on a job specific basis and avoid excessive costs associated with a large stock holding”.  It is worth noting also, that many Kmart jobs had delivery dates within 2 months of the date the purchase order was issued.

23. Even if I am wrong about TS&B Retail’s capacity to do the work it would still have needed additional staff to fit and install the fixtures and fittings in order to take on further Kmart contracts. The evidence suggests that between 2003 and 2004, TS&B Retail experienced difficulties with supplying contract labour to its projects.  For example, TS&B Retail had difficulty supplying the labour to several Kmart fit-out projects.  According to one Kmart document “all started well, but half way through we were experiencing one, two or three men short on the job, due to manpower shortages with other Kmart & CML projects and commitments to our competitor”.  Healy confirmed this saying TS&B Retail were “trying their men between a number of different projects, not only for Kmart but a couple of other businesses as well.”

24. Moreover, regardless of TS&B Retail’s capacity, Kmart was reluctant to provide TS&B Retail with significant amounts of work, at least initially.  For example, Minutes of a meeting of Kmart’s Contract Advisory Panel, which included Healy, of 5 March 2003 state that “Kmart will only use TS&B where there was no feasible alternative”.  TS&B Retail was awarded a substantial contract in August 2003, being 50 per cent of the contract to supply gondola and metal products to Kmart.  Following this, Kmart considered TS&B Retail to be fully committed.  When a tender for an entertainment expansion project came up in June 2004, Kmart’s Contract Advisory Panel stated that TS&B was “fully committed to Kmart’s new and Refit program” and that TS&B Retail and Ausmart were “not resourced to support any other project outside the new and refit program, and currently are experiencing resource challenges to meet their current commitments”.  Accordingly, Healy would not for a time offer the company any additional work.  When asked in re-examination who Kmart would have retained to do the work if 3Fold was not available Healy said:  “There’s no guarantee we would’ve done the full amount of work anyway, given the capacity issues that we already had some concerns about.” 

1. In determining how the contracts awarded to 3Fold would have been allocated if the infringing conduct had not taken place, it is important to note Kmart’s strategy was to “select 2-3 shopfitters who have the capacity and can service Kmart’s needs without major impacts on other CML brands” and its desire to “steer clear of another TS&B scenario where [it] placed [all its] eggs in one basket”.  Other than 3Fold, the suppliers who could have competed for the contracts were Metro Products, BP Shopfittings as well as TS&B Retail.  Metro ceased trading around June 2003.  Another shopfitter, Ausmart, began taking Kmart work around August 2003.

2. Absent copyright infringement, it is likely that, until about June 2003 when Metro ceased trading, the Kmart contracts awarded to 3Fold would have been allocated to TS&B Retail, Metro and BP Shopfittings in the same or similar proportions as under the 2003 refurbishment tender.  Under that tender, Metro Products was awarded 9 stores, BP Shopfittings was awarded 1 store (as they had done no work for Kmart in the past) and TS&B Retail was awarded 4 stores but on the basis that “Kmart [was] watching the progress of [TS&B retail] closely [and] should [they] get wind of any issues which effects TS&B [Retail’s] ability to deliver … [Kmart would] re-allot their stores between 3Fold, Metro and BP depending on each of those businesses capacity to pick up extra works”.  In other words, Metro would have been awarded around 65% of the 3Fold work, TS&B Retail would have been awarded roughly 30% of the work and the remaining 5% would have gone to BP Shopfittings.

3. From June 2003 until February 2004, when 3Fold would probably have been in a position legitimately to enter the market, the work would likely have been divided between TS&B Retail and Ausmart, as happened with the August 2003 tender for the gondola work.  Thus each might be expected to obtain 45% of the Kmart work with a small proportion, perhaps 10%, going to BP Shopfittings or other suppliers. 

4. Yet another difference between the experts is that Sincock calculates damages based on only those sales of parts included in the copied drawings, whereas Kenfield took account of all 3Fold’s sales to Kmart.  Sincock’s approach is consistent with the respondents’ argument that I should have regard only to that portion of the value of contracts that is attributable to the infringing conduct, and ignore income derived from other non-infringing sources such as installation, outsourcing and the provision of other products.  I have already explained why this argument should be rejected. 

5. In the general discussion on damages I said that the lost profit that is recoverable is the net profit.  The facts of this case highlight the reason for the rule.  Consider whether TS&B Retail is required to bring to account the additional variable and operating costs that would be incurred by taking on additional work.  In his calculations Sincock did adjust profit for operating expenses.  That is, he approached the calculation of damages on the basis of net rather than gross profit.  He did so because he considered there would likely be an incremental increase in TS&B’s expenses were it to take on a significant amount of new work.  The alternative would be to assume that TS&B Retail could take on significant extra work at no additional cost.  This is both unrealistic and inconsistent with the evidence, at least for the twelve month periods ending June 2003 and 2004, which suggests that as TS&B Retail’s operating expenses increased, albeit not proportionally, as its total sales increased.

6. In his second report, partly in recognition of the need to determine net profit, Kenfield based his assessment on what Trollope described as the “industry standard” or “target” rate of net profit being 12%.  That rate is close to the average (adjusted) net rate of profit achieved by 3Fold in the years ending 30 June 2003 and 30 June 2004.  The rate, however, is materially higher than the rate achieved by TS&B Retail during the same years (-76.61% and 0.66% respectively).  Kenfield’s calculations suggest that TS&B Retail’s net profit over the period would have risen to between 6 and 6.85% if it obtained all the Kmart business but at no additional cost.  I am inclined to use a 9% figure as the applicable rate of net profit, as this takes into account (although perhaps not fully) the reality of TS&B Retail’s operations at the time.  This is broadly comparable to 3Fold’s gross profit percentage on Kmart sales of 29.47% and the overhead factor of 20.95% proposed by Sincock based on 3Fold’s management accounts for the twelve months ending 30 June 2003.

7. A calculation of damages based on any hypothetical counterfactual cannot be precise.  A ‘best case’ scenario for the respondents would have 3Fold entering the market in June 2003, after only four months.  The applicable net profit margin might be 6%.  On this basis the loss to TS&B Retail would be around $25,500 (excluding additional damages), calculated as follows.  The total price of all Kmart purchase orders (excluding GST) between January and June 2003 was $2,255,761.  The total value of purchase orders placed before 20 March 2003, when TS&B Retail acquired the intellectual property, totalling $1,032,756, must be subtracted from this.  The reason is that TS&B Retail cannot claim losses incurred before it became the owner of the copyright.  I would add back $193,656 for purchase orders placed within two weeks of 20 March, on the basis that 3Fold would likely have ordered parts to service these contracts after TS&B Retail had acquired the drawings and data.  This leaves the total sales lost to TS&B Retail in the relevant period as being approximately $1,400,000:

   Total Kmart Sales (Jan to June 2003):           $2,255,761 -

   
   

   Less Sales pre-20 March 2003 (no loss):        $1,032,756 +

   
   

   Plus Sales between 6 and 20 March 2003:     $193,656

   Total sales in relevant period:  $1,416,661     

   Based on a net profit of 6.0%, TS&B Retail’s profit on its proportion (30%) of these sales would have been around $25,500 as below:

   Lost profit in relevant period (6.0% net):      $85,000

   
   

   TS&B Retail proportion (30%):  $25,500

8. A ‘worst case’ scenario for the respondents would have 3Fold being unable to enter the market at all.  The applicable net profit margin might be 12%.  Here the total sales lost to 3Fold between 6 March 2003 and 30 June 2005 would be around $12,600,000 of which $5,400,000 would have gone to TS&B Retail, calculated as follows:

   Sales (1 Jan 03 to 30 Jun 03 - as above):       $1,416,661     

   
   

   Sales (1 Jul 03 to 30 Jun 04):  $4,864,595

   
   

   Sales (1 Jul 04 to 30 Jun 05):  $6,322,067

   TS&B proportion of sales:

   
   

   ($1,416,661 x 30%) + ($4,864,595 x 45%) + ($6,322,067 x 45%) =

   
   

   $424,988 + $2,189,068 + $2,844,930 =        $5,458,996     

   Based on a net profit of 12.0%, TS&B Retail’s profit on its proportion of sales would have been around $655,000 as below:

   Lost profit ($5,458,996 x 12.0% net):  $655,080

9. A more realistic situation is that 3Fold would have entered the market some time between 8 to 12 months of being established.  On this basis the loss to TS&B Retail between 6 March 2003 and October 2003 or February 2004, based on an 9% net profit, would be roughly between $150,000 and $200,000, calculated as follows:

   Sales (Jan to Jun 03 - as above):  $1,416,661     

   
   

   Sales (Jul to Oct 03):  $3,112,096

   
   

   Sales (Nov 03 to Feb 04):  $921,320

   TS&B proportion of sales to October 2003:

   
   

   ($1,416,661 x 30%) + ($3,112,096 x 45%) = $1,825,442

   TS&B proportion of sales to February 2004:

   
   

   $1,825,442 + ($921,320 x 45%) = $2,240,036          

   Based on a net profit of 9%, TS&B Retail’s profit on its proportion of these sales would have been between $155,000 and $190,000 as below:

   Lost profit to October 2003 ($1,825,442 x 9% net):             $164,290  

   
   

   Lost profit to February 2004 ($2,240,036 x 9% net):            $201,603

10. I am now in a position where I can determine the damages to be awarded to TS&B Retail.  I should emphasise, if it is not already acutely obvious, that the assessment is necessarily imprecise.  The various calculations the experts have performed and I have commented on may lead the way.  But the process is not in the least a scientific one.  To be frank, the task is much like an exercise of judicial discretion.  The amount to be awarded is $200,000.

11. I will not give any damages on the assigned causes of action.  For one thing, TS&B suffered no trading loss that it could pass on to TS&B Retail because the receivers had decided to close down the business.  For another, I am not in a position to determine a deemed licence fee for there is simply no evidence upon which to base any assessment.  In any event, the deemed licence would run for only a few months so the amount involved would, on any view, be insignificant. 

    Additional Damages

12. I think they should be awarded.  This is an extraordinary case.  The respondents (other than Smith) set upon a course of using copyright and confidential material for their own gain, knowing what they were doing was wrong.  This was despite warnings by the receivers, letters of demand from TS&B’s lawyers and even an order of the court requiring them to desist.  It is hard to think of a more powerful case for additional damages.  The only point at which I hesitate, is in determining the quantum of additional damages.  I have assessed the general damages for which the respondents (other than Smith) are liable to be $200,000.  I think additional damages in the sum of $50,000 should be added to this amount. 

Costs

1. The usual rule is that costs follow the event, and that the costs are taxed on a party and party basis.  The usual rule as to the method of taxation should not, I think, be followed.  This is a case where TS&B Retail can rightly ask for its costs to be taxed on a solicitor and client basis.  On this issue I have had regard to the way in which the respondents have run their defence.  The respondents put TS&B Retail to its proof on all kinds of issues which they knew TS&B Retail would likely prove, but hoping that TS&B Retail might slip up.  As well they made several false denials; for example, they denied using the data (particularly the five tables) and copying the manufacturing drawings.  These caused TS&B Retail to incur considerable additional expense to prosecute their claim.  Indeed at every turn the respondents attempted to thwart TS&B Retail in the proof of its case.  Thus at several interlocutory hearings when discovery was in issue the respondents resisted discovery of documents relating to its dealings with Kmart after 10 April 2003, being the day on which the interlocutory injunctions were granted.  The argument which in no small measure found favour with me was that the respondents were subject to, and complying with, the restraining order so discovery of later documents was unnecessary.  We now know that to be untrue.  While a defendant cannot be prevented from engaging in tactics in an attempt to stave off a plaintiff’s claim, that approach comes at a cost.  The cost is that the unsuccessful defendant should be ordered to pay solicitor and client costs. 

   Orders

2. In addition to the awards of damages and costs, TS&B Retail may ask for additional relief.  I will hear the parties on the form of orders that should appropriately be made.

I certify that the preceding two hundred and fifty-five (255) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Finkelstein.

Associate:

Dated:            20 February 2007

Counsel for the Applicant:	Mrs S Marks Ms F Forsyth
Solicitor for the Applicant:	Hicks & Oakley
Counsel for the Respondents:	Mr P Cawthorn Mr B Fitzpatrick
Solicitor for the Respondents:	B2B Lawyers
Date of Hearing:	18, 19, 20, 21, 24, 25, 26, 27 & 28 October 2005
Date of Judgment:	20 February 2007