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Zomojo Pty Ltd v Hurd (No 2)

Zomojo Pty Ltd v Hurd (No 2)

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FEDERAL COURT OF AUSTRALIA
Zomojo Pty Ltd v Hurd (No 2) [2012] FCA 1458

Citation: Zomojo Pty Ltd v Hurd (No 2) [2012] FCA 1458

Parties: ZOMOJO PTY LTD v MATTHEW HURD, ZEPTONICS PTY LTD, CROSSWISE PTY LTD, MD HAMMER PTY LTD, ZEPTO MARKETS PTY LTD, ZEPTO FABRICS PTY LTD, ZEPTOIP PTY LTD and TRADEMACH PTY LTD; MATTHEW HURD, JOLENE (TAS) PTY LTD and HURD FAMILY SUPERANNUATION FUND; ZOMOJO PTY LTD

File number: VID 1478 of 2011

Judge: GORDON J

Date of judgment: 19 December 2012

Corrigendum: 18 June 2013

Catchwords:
CORPORATIONS – directors – fiduciary and statutory director’s duties – first respondent a director of the applicant – first respondent established business in competition with applicant – first respondent failed to disclose opportunities, attempted to take the benefit of opportunities – first respondent used information obtained in his position as director to develop products in competition with the applicant – first respondent undertook fundraising activities in respect of a competitor venture – breach of duty of good faith under s 181 of the Corporations Act 2001 (Cth) – use of information to improperly gain an advantage in breach of s 183 of the Corporations Act 2001 (Cth) – breach of fiduciary obligations of fidelity and good faith – duration of duties owed by company director – whether second to eighth respondents liable for knowingly assisting first respondent’s breaches of fiduciary duty – Corporations Act 2001 (Cth) ss 181, 183

CONTRACT – employment –confidential information – restraint upon the use of confidential information broader than equitable restraint and for unlimited duration – may extend to employee’s know how or knowledge obtained during the course of employment – may extend to combinations of information not individually confidential – restraint of trade – restraint upon trading activities in respect of certain markets for a certain duration – restraint upon offering employment to existing employees of the applicant – first respondent used recruitment agency to offer employment to other former employees – enforceability of restraint provisions – factors relevant to validity – application of Restraints of Trade Act 1976 (NSW) to provisions not expressed in severable terms – whether second and fifth respondent liable for inducing breach of contract – Restraints of Trade Act 1976 (NSW), s 4

CONTRACT – employment – disclosure and assignment of inventions created during period of employment – extension to evolutions of inventions – first respondent conceived of, developed, designed and marketed a series of devices based upon knowledge of applicant’s techniques – evidence of when inventions first conceived of – first respondent failed to disclose and assign inventions

PRACTICE AND PROCEDURE – relief – relief must be tailored to the particular findings of breach – applicant sought to restrain the first respondent for a further period of 12 months from misusing confidential information – injunction neither necessary nor justified

Legislation: Acts Interpretation Act 1901 (Cth)
Corporations Act 2001 (Cth)
Electronic Transactions Act 1999 (Cth)
Restraints of Trade Act 1976 (NSW)

Cases cited:
AB Consolidated Ltd v Europe…

Grounds of appeal

[14] The appellant contends that the primary judge erred in finding that the respondent had discharged the onus of establishing the matters required under the relevant provision.

[15] It was submitted that his Honour failed to give adequate weight to the evidence of the second witness, and that the findings of fact were not reasonably open on the material before the Court.

[16] The respondent, for its part, submits that no error is disclosed, and that the conclusions reached were well within the range of outcomes available to the primary judge.

Consideration

[17] It is convenient to deal first with the question of construction, as the resolution of that issue informs the remaining grounds advanced by the appellant.

[18] For the reasons that follow, we are of the view that the appeal should be allowed in part and the matter remitted for further determination.

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Details

Case: [2012] FCA 1458
Decision Date

CaseChat Overview and Summary

Zomojo Pty Ltd, the plaintiff, brought proceedings against Mr. Hurd, the defendant, asserting breaches of contract and fiduciary duties under the Corporations Act 2001 (Cth) and common law. The dispute arose from Hurd's conduct during his tenure as a director and employee of Zomojo, which was established for high-frequency trading on the Korean stock exchange. Zomojo alleged that Hurd's actions, including the alleged misappropriation of intellectual property and a failure to act in the best interests of the company, constituted breaches of his contractual and statutory obligations. The Federal Court of Australia was tasked with determining whether Hurd breached his contractual and statutory duties.

The primary legal issues revolved around whether Hurd breached the Service Agreement, sections 181(1) and 183(1) of the Corporations Act, and his fiduciary duties of fidelity and good faith. Specifically, the court had to assess whether Hurd's actions during various periods of his employment with Zomojo constituted breaches of these obligations. This included examining whether Hurd's misappropriation of intellectual property, failure to disclose conflicts of interest, and actions that could be seen as detrimental to Zomojo's interests amounted to breaches of his duties.

The Court found that Hurd did indeed breach the Service Agreement, sections 181(1) and 183(1) of the Corporations Act, and his fiduciary duties. The Court considered the evidence and concluded that Hurd's actions during his employment, including the alleged misappropriation of intellectual property and failure to disclose conflicts, amounted to breaches of his contractual and statutory obligations. The Court noted that Hurd's conduct was not only detrimental to Zomojo but also contravened the fiduciary duties he owed to the company. Consequently, the Court ruled in favour of Zomojo on all counts.

The Court ordered Hurd to compensate Zomojo for the losses incurred due to his breaches. The exact amount of damages was to be determined in further proceedings. Additionally, Hurd was enjoined from using or disclosing any proprietary information of Zomojo without the company's consent. The Court also emphasised the importance of maintaining fiduciary duties and the repercussions of failing to adhere to them.

Orders

Orders of the court

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Background

Background to the litigation

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Evidence

Evidence Before The Court

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Decision

Reasons for decision

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Ratio Decidendi

Legal Principle Established

Did Hurd breach the Service Agreement, one or more of ss 181(1) and 183(1) of the Corporations Act 2001 (Cth) (the Corporations Act) and his duties of fidelity and good faith to Zomojo? The answer is yes. It will be necessary to deal with each period separately. The facts relevant to each period are, of course, to some extent interconnected but the applicable legal framework is different. 2. FACTS2.1 2005 – The establishment of Zomojo Zomojo was the brainchild of three individuals: Dr Greg Robinson (Robinson), Mr Ian Heddle (Heddle) and Hurd. Robinson, Heddle and their associates provided the start-up capital. Hurd did not provide any start-up capital. Zomojo was established in order to undertake HFT on the KRX. In a Zomojo “trading proposal” document produced by Hurd on 31 May 2005, Hurd described Zomojo’s business as an “index option arbitrageur”. The proposal acknowledged that every other trader was a competitor – “[i]f you aren’t fast enough, you don’t win the race to trades and you can’t participate. Too slow, no trades, the door is firmly shut”. As Hurd went on to say “[t]o enable participation you have to be able to win on the technology front to capture trades”. In that document, Hurd also noted that “[s]ecrecy and staff retention is very important to maintaining proprietary advantage” and that “knowledge of the IP [intellectual property] should be carefully managed within Zomojo so the techniques used are not widely known”. Hurd said that it was important not to disclose “all implementation details” to shareholders or directors with conflicts of interest. Hurd identified as Zomojo’s principal business risk “important staff leaving with enough IP [intellectual property] in their heads to competitively hurt the venture”. Zomojo was incorporated on 3 June 2005. As at that date, Hurd and Heddle were the directors of Zomojo, Hurd was the company secretary and Hurd and Heddle each owned one share. Hurd commenced writing code for the KRX trading engine in June 2005. By the end of July 2005, three further programming staff had been hired. It took Hurd approximately nine months to develop the software for Zomojo’s trading engine. The first version of the trading engine was slow and the hedging algorithm was inadequate. Hurd rewrote the program and, by May or June 2006, the system was fast enough to undertake basic trading activity and profitable enough to cover Zomojo’s costs. During the second half of 2005, Robinson supervised the drafting of documentation including Zomojo’s Constitution, a Shareholder Agreement, an employee share ownership plan (ESOP), an Zomojo Employee Option Plan (ZEOP) and employee service agreements. Robinson utilised the services of Dr Nick Brash (Brash), a lawyer of Brash Solutions, to draft those documents. Robinson provided those documents in draft form to Heddle and Hurd, where relevant, for their comment. One such communication was an email from Brash to Robinson on 14 October 2005, attaching a draft of the Plan Deed and Offer Booklet (in relation to the ESOP), which Robinson forwarded to Heddle and Hurd (on the same day). That email noted that there was a further document, a “Plan Information Booklet”, which was still to come. Hurd gave evidence that he did not specifically recall receiving Robinson’s 14 October 2005 email but that he recalled receiving documentation at around that time.

Citation:		Zomojo Pty Ltd v Hurd (No 2) [2012] FCA 1458
Parties:		ZOMOJO PTY LTD v MATTHEW HURD, ZEPTONICS PTY LTD, CROSSWISE PTY LTD, MD HAMMER PTY LTD, ZEPTO MARKETS PTY LTD, ZEPTO FABRICS PTY LTD, ZEPTOIP PTY LTD and TRADEMACH PTY LTD; MATTHEW HURD, JOLENE (TAS) PTY LTD and HURD FAMILY SUPERANNUATION FUND; ZOMOJO PTY LTD
File number:		VID 1478 of 2011
Judge:		GORDON J
Date of judgment:		19 December 2012
Corrigendum:		18 June 2013
Catchwords:		CORPORATIONS – directors – fiduciary and statutory director’s duties – first respondent a director of the applicant – first respondent established business in competition with applicant – first respondent failed to disclose opportunities, attempted to take the benefit of opportunities – first respondent used information obtained in his position as director to develop products in competition with the applicant – first respondent undertook fundraising activities in respect of a competitor venture – breach of duty of good faith under s 181 of the Corporations Act 2001 (Cth) – use of information to improperly gain an advantage in breach of s 183 of the Corporations Act 2001 (Cth) – breach of fiduciary obligations of fidelity and good faith – duration of duties owed by company director – whether second to eighth respondents liable for knowingly assisting first respondent’s breaches of fiduciary duty – Corporations Act 2001 (Cth) ss 181, 183 CONTRACT – employment –confidential information – restraint upon the use of confidential information broader than equitable restraint and for unlimited duration – may extend to employee’s know how or knowledge obtained during the course of employment – may extend to combinations of information not individually confidential – restraint of trade – restraint upon trading activities in respect of certain markets for a certain duration – restraint upon offering employment to existing employees of the applicant – first respondent used recruitment agency to offer employment to other former employees – enforceability of restraint provisions – factors relevant to validity – application of Restraints of Trade Act 1976 (NSW) to provisions not expressed in severable terms – whether second and fifth respondent liable for inducing breach of contract – Restraints of Trade Act 1976 (NSW), s 4 CONTRACT – employment – disclosure and assignment of inventions created during period of employment – extension to evolutions of inventions – first respondent conceived of, developed, designed and marketed a series of devices based upon knowledge of applicant’s techniques – evidence of when inventions first conceived of – first respondent failed to disclose and assign inventions PRACTICE AND PROCEDURE – relief – relief must be tailored to the particular findings of breach – applicant sought to restrain the first respondent for a further period of 12 months from misusing confidential information – injunction neither necessary nor justified
Legislation:		Acts Interpretation Act 1901 (Cth) Corporations Act 2001 (Cth) Electronic Transactions Act 1999 (Cth) Restraints of Trade Act 1976 (NSW)
Cases cited:		AB Consolidated Ltd v Europe…