Between Andre Luke McBride Linton First Applicant and Andre Luke McBride Linton and Molly Ann Linton as trustees of the Andrew and Molly Linton Family Trust Second Applicant and Natural Health Clinics 1987 Limited
[2023] NZHC 3761
•18 December 2023
IN THE HIGH COURT OF NEW ZEALAND CHRISTCHURCH REGISTRY
I TE KŌTI MATUA O AOTEAROA ŌTAUTAHI ROHE
CIV-2023-409-379
[2023] NZHC 3761
BETWEEN ANDRE LUKE MCBRIDE LINTON
First Applicant
AND
ANDRE LUKE MCBRIDE LINTON and
MOLLY ANN LINTON as trustees of the Andrew and Molly Linton Family Trust Second Applicant
AND
NATURAL HEALTH CLINICS 1987 LIMITED
Third Applicant
AND
CLIFFORD FALCONER BELLANEY
First Respondent
AND
FLEX FX LIMITED
Second Respondent
AND
CLIFFORD FALCONER BELLANEY and KATHLEEN MARY FRANCIS GRAHAM
and JAW TRUSTEES LIMITED as trustees of the Skye Trust
Third Respondent
Hearing: 11 December 2023 Counsel:
G A Cooper and E L Pearce for the Applicants
C R Johnstone and J Watson for the Respondents
Judgment:
18 December 2023
JUDGMENT OF HARLAND J
LINTON v BELLANEY [2023] NZHC 3761 [18 December 2023]
Introduction
[1] As part of its Koru Nutrition business, Natural Health Clinics 1987 Ltd (NHC) manufactures, markets and supplies, among other things, two natural health products under the brand Koru FX, online and through outlets. Each product is described as a topical cream/lotion which is applied to the skin to provide what is referred to as “joint and muscle support” for human use. Mr Linton is a director and shareholder of NHC and one of the trustees of the Andre and Molly Linton Family Trust (A & M Linton Family Trust). This Trust is the shareholder of Andre and Molly Holdings Ltd which purchased the shares in NHC in November 2021.
[2] Flex FX Ltd (Flex FX) manufactures, markets and supplies as an online retailer three natural health products designed to be dispensed and applied to the skin by way of massage for the treatment of joint pain and tendon support. Although the formula for these products was initially developed for use in the equine industry, since July 2023, Flex FX has marketed the products based on a further developed but similar formula for human use, for a similar purpose. Mr Bellaney is the sole director and shareholder of Flex FX.
[3] Mr Bellaney and the Skye Trust sold their shares in NHC to A & M Linton Family Trust in September 2021. Part of the agreement for the sale and purchase of the shares in NHC was that, thereafter, Mr Bellaney and the Skye Trust would have no right or entitlement to any of the company’s intellectual property. There was also a restraint of trade clause for a period of 10 years that applied to Mr Bellaney and Mr Linton in their personal capacities.
[4] The applicants claim, by manufacturing, marketing and supplying the Flex FX products, the respondents:
(a) have breached the intellectual property provisions and restraints in an agreement for sale and purchase of shares dated 24 September 2021 (Share Sale Agreement);
(b) have passed off Flex FX products as Koru FX products; and
(c) are in breach of ss 9, 10 and 13 of the Fair Trading Act 1986 as they are engaging in misleading and deceptive conduct by marketing and supplying the Flex FX products.
[5] The applicants seek an interim injunction preventing the respondents from continuing to manufacture, market and supply Flex FX products until the substantive determination of their claims. Depending on how quickly the parties can progress the procedural matters in relation to the claims, the trial of the substantive proceeding is unlikely to be scheduled until towards the end of 2024 (if it requires a trial of three days or less) or 2025 (if it requires a trial of five days or more). The availability of a trial date is indicative only at this early stage of the proceedings and would also depend on other demands on the Court time.
[6]The respondents oppose the application.
[7] I have decided to dismiss the application but to require the respondents to provide two written undertakings they have offered to provide, the details of which are outlined later in this judgment. This judgment sets out the reasons for these decisions.
The factual background
[8] Mr Bellaney has been part of the New Zealand natural health product industry for more than 40 years. He started by developing deer antler velvet supplements in 1982. He continues, through the Bioceuticals brand, to design, develop and manufacture health supplements with deer antler velvet and other deer-sourced products. Other products manufactured by his interests include hand and surface sanitising products, including some that were offered to the market during the recent COVID-19 pandemic.
[9] Mr Bellaney was the leader of the scientific team that developed the original Koru Nutrition products, including Relief FX branded products which ultimately became Koru FX branded products. From mid-2017, this occurred under NZ Health Club Ltd, a subsidiary of Koru Health Corporation Ltd. Mr Bellaney was a director in both.
[10] Through their company Enverton Ltd, Mr Linton was contracted by Koru Health Corporation to develop and operate its online business under the brand name Koru Nutrition.
Heads of Agreement
[11] After a period of time, Mr Bellaney and Mr Linton agreed to combine the expertise and intellectual property of Enverton and NZ Health to grow the Koru Nutrition business. A written Heads of Agreement was entered into on 24 December 2018 whereby, among other things, it was agreed that the Koru Nutrition business would be transferred to a new entity, NHC. The Heads of Agreement set out what assets, goodwill and intellectual property would be transferred into NHC and it specified that by including, but not excluding, what comprised the business. Among other things, this application is relevant to Koru Nutrition’s Relief FX recipe and brand, trademark, branding graphics and all other intellectual property related to its brand were included.
[12] The Heads of Agreement specifically excluded deer antler velvet and manuka honey products which Mr Bellaney, through his business interests, wished to retain.
[13] The Heads of Agreement outlined that Mr Linton would manage the Koru Nutrition brand and operation from 1 January 2019.
[14] All parties to the Heads of Agreement, being Koru Health Corporation, NZ Health Club and NHC, agreed not to own or operate, either themselves or through a proxy, competing products, business or brands without the other’s written permission.
[15] Mr Bellaney signed the Heads of Agreement on behalf of Koru Health Corporation, NZ Health Club and NHC, and Mr Linton signed it on behalf of Enverton.
Share Sale Agreement
[16] On 24 September 2021, after a period of NHC trading, the parties entered into a Share Sale Agreement. The specific parties to this agreement were Mr Bellaney, Ms
Graham and JAW Trustees Ltd as trustees of the Skye Trust and Mr Bellaney in his personal capacity as vendors, and the trustees of the A & M Linton Family Trust as purchaser. Mr Linton and NHC are also referred to in the agreement. Mr Linton signed the agreement in his personal capacity and as a trustee of the A & M Linton Family Trust, and Mr Bellaney signed it on behalf of NHC, in his personal capacity and as a trustee of the Skye Trust.1
[17] The relevant clause in the Share Sale Agreement dealing with intellectual property matters is cl 13, which provides:
13INTELLECTUAL PROPERTY
13.1The Parties acknowledge that all intellectual property relating to the Company and its business which has been acquired or developed by the Company as at the date of this Agreement is the property of the Company and that the Vendor has no right or entitlement relating to any of the Company’s intellectual property. For avoidance of doubt this includes but is not limited to formulas for the Company’s products, a list of the clients of the Company, and the Company’s trading names, brand names, logos, trademarks, websites (including domain name(s)), social media accounts, business email addresses, fax numbers, telephone numbers, and mobile phone numbers.
13.2At settlement Andre must confirm to the Vendor that he has returned all intellectual property in his possession relating to Kahatec and Safer to the Vendor, including all records, confidential information, website details, and product formulations to the Vendor, and that these have also been removed from his possession.
13.3At settlement the Vendor must confirm to the Purchaser that they have returned all intellectual property in their possession relating to the Company, including all records, confidential information, website details, product formulations to the Purchaser, and that these have also been removed from the Vendor’s possession.
[18] In consideration for payment of the share purchase price, the parties agreed to include a restraint clause in the Share Sale Agreement. Clause 15.1 is particularly pertinent to the arguments advanced before me. It provides for restraints of trade against Mr Bellaney or any business interests related to him as follows:
15RESTRAINT
15.1In consideration of the payment of the Share Purchase Price the Vendor, and for avoidance of doubt Cliff specifically agree that they will not for
1 The other trustees of the two trusts also signed the Share Sale Agreement.
a period of ten (10) years from the Settlement Date within New Zealand or internationally:
15.1.1Directly or indirectly carry on or be interested, engaged or concerned in, whether alone or in partnership with or as a manager, agent, director, shareholder or employee or beneficiary under a trust or in any other capacity in any other business venture or other activity that is in the business of manufacturing or supplying products of the following kind:
·Topical creams, gels, or lotions for human use (but excluding hand sanitisers); and
·Joint support supplements for human use (but excluding deer velvet).
15.1.2Directly solicit or approach and entice or endeavour to entice away any of the customers, clients, partners or employees (existing or former), officers or consultants of the Company, its customers, any of its subsidiaries or any related company.
15.1.3Produce, create, or market a product for human use that uses fifty percent (50%) or more of a formula created or developed or otherwise belonging to the Company at the time of the Settlement Date.
(emphasis added)
[19] The purchase price for the shares comprised a cash payment and the transfer of Mr Linton’s shares in two companies, Kahatec NZ Ltd and SafermeansSafer NZ Ltd.
[20] Clause 15.2 of the Share Sale Agreement provided a restraint against Mr Linton “for a period of ten (10) years from the Settlement Date … whether alone or in partnership with or as a manager, agent, director, shareholder, or employee or beneficiary under a trust or in any other capacity in any other business venture or other activity” associated with surface, hand or body sanitisers or any antiseptic or rub that contained a specified compound.
[21] The restraints placed on the parties, referred to as restrictive covenants, were acknowledged in cl 15.3, which provides:
15.3The parties acknowledge that:
15.3.1The restrictive covenants contained in clause 15.1 and 15.2 are reasonable and necessary and have been given to protect and
maintain the proprietary interests of the Company and the value of the Shares being paid for as a part of this Agreement; and
15.3.2The parties would not have entered into this Agreement and the Purchaser would not have invested (further) in the Company unless these restrictive covenants were included.
[22] Shortly before settlement, the A & M Linton Family Trust nominated Andre and Molly Holdings Ltd as purchaser. The shareholders of this company are the trustees of the A & M Linton Family Trust.
[23] Upon settlement, Mr Bellaney recorded that he had complied with cl 13.3 of the Share Sale Agreement in an email dated 5 November 2021. Mr Bellaney attached the various documents relating to what were described as the “current Koru products” and he confirmed that he did not have in his possession any intellectual property relating to NHC and that all records had been removed. There were 36 attachments to the email, including product formulae for Koru FX products.
Flex FX
[24] Mr Bellaney’s plan was to continue his other businesses interests in Bioceuticals and in relation to the hand and surface sanitising products. He was also considering developing products using natural and essential oils, with particular application for the horse racing industry. He led the development of an equine therapeutic massage oil for treatment of horse joints, tendons and muscles. He registered the Flex FX company and registered a trademark for Flex FX as the vehicle for this product. Following the settlement of the Share Sale Agreement, Mr Bellaney developed, manufactured and supplied Flex FX through the second respondent Flex FX Ltd. This was not in breach of the Share Sale Agreement as the products were not for human use.
[25] It was explained to me that the development of formulae for products such as the Koru FX and Flex FX products is ongoing in the sense that changes can be made to formulae, both as to the ingredients and the percentages of the ingredients used in them. This occurs as various products develop and are marketed.
[26] The Flex FX product provided to the equine industry was successful. Its original purpose for the equine industry was as a topically applied product to relieve, among other things, joint pain designed to be applied via massage. Interest was shown in the product being available for human use. Mr Bellaney set about adjusting the Flex FX product for human use.
[27] The respondents describe the Flex FX products for human use as soft balm products. The difference, if any, between a soft balm product and a topical cream, gel or lotion, as it is referred to in cl 15.1.1 of the Share Sale Agreement, is important in this case.
[28] The claims the applicants make against the respondents relate to the respondents manufacturing and supplying Flex FX for human use.
Legal principles
[29] Rule 5.73 of the High Court Rules 2016 (HCR) provides the jurisdiction for an application for an interlocutory injunction to be made before or after the commencement of the hearing of a proceeding. The application in this case was filed as an interlocutory application without notice seeking an urgent interim injunction before the notice of proceeding and statement of claim were filed. For various reasons, including the need for confidential information to be provided to the Court about the Koru FX and Flex FX products, the hearing did not proceed until 11 December 2023. In the meantime, the statement of claim has been filed, as has a statement of defence and a statement in reply to the statement of defence.
[30] There are three stages to the consideration of an application for an interlocutory injunction. These three stages were summarised by the Court of Appeal in NZ Tax Refunds Ltd v Brooks Homes Ltd and affirmed in Intellihub v Genesis Energy Ltd:2
(a) an applicant must establish that there is a serious question to be tried or, put another way, that the claim is not frivolous or vexatious;
2 NZ Tax Refunds Ltd v Brooks Homes Ltd [2013] NZCA 90, (2013) 13 TCLR 531 at [12]; and affirmed in Intellihub v Genesis Energy Ltd [2020] NZCA 344 at [23]. The threshold test originated in American Cyanamid Co v Ethicon Ltd [1975] AC 3 96, [1975] 1 All ER 504 (HL) and Eng Mee Yong v Letchumanan [1980] AC 3 11 (PC).
(b) next, the balance of convenience must be considered, which requires consideration of the impact on the parties of the granting of, and the refusal to grant, an order; and
(c) finally, an assessment of the overall justice of the position is required as a check.
[31] In Commerce Commission v Viagogo AG, the Court of Appeal described the purpose of an interim injunction as to improve the chance of the Court being able to do justice after a determination of the merits at trial.3
[32]I now assess each of the relevant factors as they relate to the facts of this case.
Is there a serious question to be tried?
[33]As outlined above, there are three causes of action.
[34] During the hearing, the applicants focused on the first cause of action alleging a breach of the Share Sale Agreement, particularly cls 15.1.1 and 15.1.3. Counsel for the respondents accepted that there is a case to be answered in relation to the alleged breach of cl 15.1.1 but they did not go so far as to concede that there is a seriously arguable case in respect of it. In relation to cl 15.1.3, the respondents contend that there is less of an arguable case. The applicants contend there has also been a breach of cl 15.1.2, which the respondents deny.
[35] Although the applicants relied on the Heads of Agreement as providing context to the Share Sale Agreement (particularly cls 2(a) and (b) of the Heads of Agreement), I am not persuaded that, for the purposes of this application, I need to consider it in detail apart from to provide the context I have outlined above.
Alleged breach of Share Sale Agreement – cls 15.1.1 and 15.1.3
[36] Whether there is a serious question to be tried in relation to the alleged breaches of cls 15.1.1 and 15.1.3 of the Share Sale Agreement depends on how they are properly
3 Commerce Commission v Viagogo AG [2019] NZCA 472, [2019] 3 NZLR 559 at [31].
interpreted. To a certain extent, the factual background and context is important to both.
[37] In respect of cl 15.1.1, the focus is on whether the Flex FX products referred to as “soft balms” are in fact “topical creams, gels or lotions”. In other words, is the distinction a matter of semantics (the applicants’ case) or is there a factual distinction between the two (the respondents’ case)?
[38] The resolution of this issue will be the subject of expert evidence at trial. For the purposes of this application, reports from two experts were annexed to the affidavits of Mr Linton and Mr Bellaney. As well, there were two affidavits filed by each addressing this topic, which are confidential. Submissions about the material included in the confidential affidavits was also provided by counsel by way of confidential submissions. However, in the affidavits filed by both Mr Linton and Mr Bellaney that did not attract confidentiality, the general proposition advanced by both in support of their claims was articulated. It was agreed that, in this judgment, I could refer to them and resolve the first issue on this basis. To be clear however, I record I have read the confidential affidavits and submissions, and that these have informed the conclusion I reach about the general arguments, which I now address.
[39] None of the product descriptions in cl 15.1.1 are defined within the agreement, nor do they have specific or customary definitions in the health supplement and cosmetic industries. So, at this stage of the proceeding, there is no help to be gained from the agreement or common industry definitions.
[40] However, the evidence before me outlined that Koru FX products are marketed as creams which typically are either oil in water emulsions or water in oil emulsions, and the Flex FX products are marketed as soft balms that are most commonly anhydrous mixtures of oils and waxes with lipophilic components.
[41] Both products are topical, given that they are externally applied to the skin surface and not ingested, injected or inserted beyond the skin layer. However, the respondents contend that the product specifications and formulations of the Flex FX products are different from the Koru FX products and other products from other
manufacturers available in the market because they are designed for a specific massage application for the treatment of joint, tendon and muscular dysfunction and pain. The argument by the respondents is that the soft balm description reflects those distinctions, makes it best suited for massage application and, being anhydrous, does not contain any introduced preservatives or alcohols to prevent deterioration or mould infection.
[42] In relation to the ingredients in both products, cl 15.1.3 provides a restraint limited to:
(a) a product for human use;
(b) that uses 50 per cent or more of a formula created or developed or otherwise belonging to NHC at the time of the settlement date.
[43] It is accepted that the Flex FX products have been produced and marketed for human use, but it is not accepted that they use 50 per cent or more of a formula created or developed by NHC at the date of settlement.
[44] The difference between the parties about this issue centres on whether the 50 per cent or more of the formula relates to the number of ingredients used (the applicants’ case) or whether, because of reference to “a formula”, the percentage of the ingredients used must be taken into account (the respondents’ case).
[45] The applicants argue that the word “formula” means “ingredients” and, considering the descriptions of both products on the Koru and Flex FX websites, the 50 per cent requirement has been met because 11 of the Flex FX ingredients form part of the 22 ingredients present in the Koru FX products. I note the number of ingredients and whether they comprise 11 or fewer was disputed. For the purposes of this judgment, I am prepared to adopt 50 per cent, noting that I have taken into account the further confidential evidence submitted to me by memoranda after the hearing.
[46] The respondents highlight the reference in cl 15.1.3 to the formula being “created or developed or otherwise belonging to the company at the time of the settlement date”. Because of the fact that formulae do not necessarily remain constant,
Mr Johnstone submitted that the applicants cannot, even on an interlocutory basis, establish this, which is the relevant time for comparison of the formulae for both products. Mr Bellaney’s email of 5 November 2021 (see [23] above) was referred to. He also deposes that he no longer holds or has access to the Koru FX cream formula or, as it was originally named, Relief FX. Nor, he says, does he have access to any other Koru Nutrition products with similar names, including the letters FX, such as Joint FX, Skin FX and Sleep FX, as the product information was surrendered or destroyed in November 2021.
[47] I am only required to assess whether the applicants have established there is a seriously arguable case for the respondents to answer in relation to the alleged breaches of cls 15.1.1 and 15.1.3. I am mindful that the determination of this issue largely involves the interpretation of the agreement. Nonetheless, the factual differences presented by each party’s submissions means this is not a straightforward exercise. I accept that the evidence before me (including the confidential evidence) requires the facts to inform the interpretation proffered by each party. I am satisfied that, because of this, the applicants have raised serious questions to be tried in relation to, more especially, the interpretation of cl 15.1.1 and, to a lesser extent, the interpretation of cl 15.1.3.
Alleged breaches of Share Sale Agreement — cl 15.1.2 Passing off and Fair Trading Act 1986
[48] The evidence in relation to the alleged breaches of cl 15.1.2 of the Share Sale Agreement, the second cause of action alleging passing off and the third cause of action alleging breaches of Fair Trading Act is similar and overlaps. I deal with them together.
[49] The applicants claim there is goodwill in the name of Koru Nutrition and Koru FX which has been established for over six years. The applicants allege that Koru Nutrition and Koru FX have a significant online presence through Facebook and Instagram, the products are stocked in pharmacies across the country and NHC has substantial client lists indicating to whom Koru Nutrition products, specifically Koru FX, are marketed and supplied.
[50] The applicants’ claim is that the respondents have specifically targeted Koru Nutrition products, including Koru FX, by not only manufacturing and selling Flex FX but by unfairly and falsely claiming in their online marketing material that Koru FX contains “nasty preservatives”, that it is diluted and less effective, and by claiming that Koru FX gave rise to Flex FX suggesting by this that Flex FX is “the next best thing” so, by inference, Koru FX is inferior. As well, the applicants claim the reference to the use of the FX element of NHC’s trademark in relation to the Flex FX products for the treatment of joint pain is not only misleading and confusing but is an attempt to link the products and/or entice customers away from Koru FX.
[51] The applicants submit that the above representations are false and misleading or are likely to mislead or deceive the public. This is because the first respondent originally developed Koru Nutrition and the Koru FX formulae, his name is synonymous with Koru Nutrition and the Koru FX brand and his comments, they contend, will influence consumers because Mr Bellaney’s reputation and those of his related entities in the marketplace for joint pain relief are well known. Therefore, the applicants claim that Mr Bellaney’s involvement with and comments about Flex FX are likely to mislead and confuse consumers. The applicants referred to an email from a pharmacy on 20 July 2023 enquiring as to whether the Flex FX product was a product by Koru or a different wholesaler.
[52] Overall, the submission is made that the respondents are passing off their products as arising from Koru FX as the next best thing and that they are seeking to divert Koru Nutrition and Koru FX customers to Flex FX.
[53] The Fair Trading Act cause of action is related to the passing off claim. The applicants submit there is a real risk that consumers will be mislead or deceived by the respondents’ conduct.
Use of “FX”
[54] Mr Linton referred to the use of “FX” by the respondents to market their products. He explained that he had suggested this addition to the Koru Nutrition products, now marketed as Koru FX, before the Share Sale Agreement was entered into by the parties to it.
[55] On the face of it, there is evidence to support the respondents’ claim that the “FX” part of NHC’s products is not unique to Koru FX. The respondents pointed to other products in the natural health and cosmetics market which use “FX”, including Aurora NZ Ltd which manufactures oils, balms and creams under the product name Pure FX. It is also the case that, prior to the Share Sale Agreement, other products marketed by Koru Nutrition, such as Joint FX, Skin FX and Sleep FX, were also used.
[56] The respondents also claim the use of “FX” is generic, essentially a phonetic spelling of the word “effects” which is commonly used in the film industry (special FX or visual FX), other products (Body FX) and even jet skis (Yamaha FX). As Mr Johnstone highlighted, it is even recognised in the Collins Dictionary.4
[57] I accept that the use of “FX” is only part of the evidence the applicants rely on because there are many evidential strands that contribute to its arguments in relation to the second and third causes of action and the alleged breach by the respondents of cl 15.1.2. For the purposes of this application, I treat this evidence accordingly; it is not compelling on its own but it is part of a picture to be taken into account.
Marketing campaign – cl 15.1.2
[58] The applicants contend there is a breach of cl 15.1.2 of the Share Sale Agreement. They maintain that, despite having said he had returned all customer lists, Mr Bellaney has directly solicited or approached and enticed or endeavoured to entice customers, clients, partners or employees (existing or former), officers of consultants of NHC away from it.
Former employees
[59] It is contended that two former employees, Ms Annah Kernick and/or Mr Tom King, were enticed by the second respondents to work for it.
[60] Mr Garbett, the administration manager employed by Bioceuticals Ltd, filed an affidavit in support of the respondents’ notice of opposition. Bioceuticals Ltd manufactures and packages Flex FX products under contracts for Flex FX Ltd. It also
4 Collins Dictionary:Dictionary.com (online 2023).
manufactures health supplements and similar products for other entities. Mr Garbett’s affidavit sought to clarify the circumstances surrounding Bioceuticals employing Ms Kernick and Mr King. In his first affidavit, Mr Linton deposed that Mr Bellaney had employed Ms Kernick and Mr King who he said were former employees/consultants of Koru Nutrition/NHC.
[61] Mr Garbett outlined in his affidavit that Ms Kernick was not an employee of NHC or any company connected with Koru FX products at the time she became an employee of the second respondent. Mr Garbett’s evidence was that Ms Kernick contacted him by phone on 23 November 2021 looking for employment opportunities in a sales role. Mr Garbett had not met Ms Kernick before and suggested they talk further, which occurred later that day. Mr Garbett deposed that Ms Kernick explained she had a part-time role but was looking for a full-time sales position. He said she mentioned she had a small child so needed flexible hours of work. At that time, no suitable role was available, but Mr Garbett indicated to Ms Kernick that he would keep her in mind if something developed. He said he considered she would be an ideal employee if an opportunity arose.
[62] In the latter part of January 2022, an opportunity did arise for Bioceuticals to market RAT kits resale. Bioceuticals did not have anyone in their team able to fulfil this role and so Mr Garbett said he spoke to Mr Bellaney about Ms Kernick and recommended her as suitable. As Mr Bellaney agreed with this, Mr Garbett arranged to meet Ms Kernick again and offered her the opportunity to work with Bioceuticals to market and sell RAT kits on a commission basis. Ms Kernick became an independent contractor to Bioceuticals, starting on 1 February 2022. When the RAT kits were made available to the public without cost through pharmacies and other retailers, Ms Kernick pursued other lines of work as a contractor.
[63] Sometime in mid-2023, another opportunity arose with Flex FX products and Ms Kernick was offered an employee position as brand manager for Flex FX, which she accepted. Mr Garbett deposed that Ms Kernick was not an employee of NHC or any company related to the manufacture, marketing and selling of Koru FX cream or other Koru FX products at the date she was offered and took the position as brand manager with Flex FX.
[64] In relation to Mr King, the respondents’ evidence is that he is not, nor has he ever been, an employee of the second respondent or Bioceuticals or any company within the Bellaney group. Rather, he is an independent contractor assisting Bioceuticals with website development.
[65] Because of these matters, the respondents submit no breach of cl 15.1.2 has been or can be made out.
[66] In response, Mr Linton’s reply affidavit outlines that, because of the nature of Ms Kernick’s work when she was employed with Koru Nutrition, she did not have any contact with Mr Garbett, but Mr Linton contends that Mr Bellaney has not provided sufficient information about whether he met or spoke with Ms Kernick prior to her meeting with Mr Garbett, nor does he identify whether he passed on Mr Garbett’s contact details to Ms Kernick.
[67] In relation to Mr King, Mr Linton deposed that Mr Bellaney’s assertion that Mr King was not involved directly or indirectly with Flex FX or its products is untrue as Mr King registered the URL flexfx.co.nz for Mr Bellaney on or about 28 March 2022.
[68] It is not possible to resolve this factual dispute on an interlocutory application such as this. Cross-examination at trial of Mr Bellaney would establish whether the contentions put forward by Mr Linton are correct or not. As well, Ms Kernick and Mr King may well be witnesses for the applicants and/or maybe summonsed by the respondents. For the purposes of this application, I accept that Ms Kernick and Mr King’s involvement in Flex FX is a factor to be considered as part of the evidential strands put forward to establish an arguable case in relation to the alleged breach of cl
15.1.2 and the second and third causes of action.
Bulk email send out
[69] The applicants have produced, through Mrs Linton’s affidavit, evidence that NHC was contacted via a bulk email send-out advertising Flex FX products. The customer concerned had previously ordered a product from NHC in October 2018 but had ordered it directly from Mrs Linton as he did not have an email address. As the
Shopify NHC fulfilment platform required an email address, Mrs Linton completed it by placing her own email address in the space provided so that the order could be fulfilled.
[70] It was Mrs Linton who received the bulk promotional email from Flex FX on 24 July 2023, which had been intended for this former customer. Mrs Linton deposed that there was no other way that Flex FX could have received the customer’s contact details without using Koru Nutrition and/or by NHC’s client mail lists. Mrs Linton inferred from this that Mr Bellaney did not delete Koru Nutrition and NHC’s client email lists, as required under the Share Sale Agreement, despite notifying Mr Linton on 5 November 2021 that he had done so.
[71] I agree that the circumstances surrounding Mrs Linton receiving this email are concerning. However, the respondents’ do not accept that Mr Bellaney retained a copy of the client list. They suggest that a mailout list may have been retained by the independent contractor Bioceuticals employs to market the Flex FX products, likely Shopify.
[72] It is not possible to resolve this factual dispute in an interlocutory application of this kind. However, a satisfactory explanation has at least been put forward by the respondents as to why it may not be as the applicants contend.
Online marketing material
[73] The evidence provided in support of the application also referred to Flex FX’s online marketing material. The material contains the following statements:
(a) “from the founder of Koru Nutrition and Koru FX comes the latest innovation in joint health”;
(b) “whilst there are many products on the market, many are full of steroids, nasty preservatives, and fillers which adds to the toxic load within your body”; and
(c) a column entitled “what makes Flex FX different?” There is a comparison made with creams, lotions and gels which are said to be emulsions made
from water and, because of this, preservatives and “nasties” are added to “extend the shelf-life of the product and … dilute the active ingredients”. By way of comparison and in relation to Flex FX, it is said “we ONLY use active ingredients”. And, in relation to what is referred to as “the best part”, there is then reference to no “water, preservatives, fillers, steroids, hidden ingredients, nasties”.
[74] The references to Mr Bellaney’s former links to Koru Nutrition and Koru FX have since been removed from any online marketing material for Flex FX. In relation to the other claim, the respondents say that there is no specific reference to Koru FX products in their comparisons and, further, the matters to which they refer are an accurate comparison which could relate to many other similar products, not just associated with Koru FX. The respondents deny that this is misleading or deceptive but, as outlined, in any event, they say they have removed any references whatsoever in their marketing campaign to Koru Nutrition and Koru FX.
Conclusion
[75]On balance, I am satisfied that, although relevant to the alleged breach of cl
15.1.2 of the Share Sale Agreement, there is a serious question to be tried but, in relation to the second and third causes of action, although the claims are certainly arguable, in my view, they do not meet the threshold.
Summary
[76] I conclude that the applicants have established a serious question to be tried in respect of the first cause of action but not in relation to the second and third causes of action. I am mindful of the objections made by counsel for the respondents to the admissibility of parts of Mr Linton’s affidavits. These are outlined in para 43 of counsel’s submissions and are well made. I have taken this into account in reaching my conclusion on this factor. I note that this finding does not preclude a different view being taken by a Judge on any of the causes of action during the substantive hearing as, at that point, the Judge will have the benefit of evidence which will be tested through questioning.
Where does the balance of convenience lie?
[77] As Katz J outlined in Intellihub Ltd v Genesis Energy Ltd,5 the balance of convenience considerations refer to a range of factors that are directed to which course will carry the least risk of doing a permanent injustice to either party.6 Typically, this includes considering what is needed to preserve the status quo, assessing whether damages will be an adequate remedy, considering the impact on any third parties, and the public interest.
[78] The applicants submit the balance of convenience weighs heavily in their favour because the respondents are in breach of the Share Sale Agreement and, while the Flex FX business has not yet taken off, sales are being made and these are likely to increase.
[79] The respondents outline that the Flex FX products were only launched in July 2023 and, as its business model is online sales with no direct marketing to Koru Nutrition customers, the balance of convenience favours them being able to continue.
[80] In relation to the online sales and, while accepting that the two emails referred to above, sent out in July and August, were to Koru Nutrition customers, the respondents say that situation has been remedied by them ceasing to undertake any bulk promotional email mailouts and by them deleting from their marketing material any reference at all to Mr Bellaney’s former role as the developer of Koru FX.
[81] Mr Johnstone highlighted the extensive relief sought by the applicants which includes that the respondents:
(a) cease manufacturing, marketing and supplying the Flex FX soft balm products (as outlined below);
(b) deregister Flex FX from the Companies Office;
(c) deregister Flex FX as a trademark;
5 Intellihub Ltd v Genesis Energy Ltd [2020] NZHC 807 at [61].
6 Auckland International Airport Ltd v Air New Zealand Ltd (2006) 3 NZCCLR 382, (2006) 9 NZCLC 264,179 (HC).
(d) remove the Flex FX website and domain name from the internet;
(e) remove all social media and other online forums relating to the Flex FX products;
(f) remove all advertisements for the Flex FX products, both online and otherwise;
(g) destroy all customer lists which belong to the Applicants, which are being used to market the Flex FX products;
(h) cease sending bulk emails, or other correspondence relating to the Flex FX products, for marketing or sale related purposes;
(i) account to the applicants for all orders received for the Flex FX products;
(j) not fulfil any unfulfilled orders received for the Flex FX products; and
(k) cease entering any brand enhancement deals relating to the Flex FX products and cancel any existing ones.
[82] Mr Cooper, for the applicants, submitted that the main relief sought was that which appears in (a), (d), (e) and (f). The applicants accept that the relief sought in
(c) and (d) is not appropriate at this stage of the proceedings and, in relation to (g) and (h), they contend orders should be made to ensure what Mr Bellaney says has occurred is indeed required to occur. It is also accepted that the relief sought in (i) is more properly a matter for the substantive hearing but that the orders sought in (j) and (k) are covered by the orders sought in (a).
[83] Mr Johnstone, for the respondents, submitted that, in reality, what the applicants are seeking is to completely close down Flex FX’s business by requiring all Flex FX products to be withdrawn from the market. He submitted that would undoubtedly inflict substantial financial loss on the respondents, which is completely unwarranted, and would not be compensable by an award of damages if the respondents are successful at trial.
[84] On the other hand, the respondents submit that damages would be an adequate remedy should the applicants be ultimately successfully. This is because they contend the levels of online sales and returns from those sales of Flex FX products will be easily able to be identified and reported. It was submitted these sales will represent a relatively small part of the wider market for natural health products and cosmetics.
[85] As part of their argument, the respondents also submitted that the applicants’ undertaking as to damages is inadequate. This issue is related to the applicants’ application to amend the parties that are currently named as the trustees of the second applicant. I now address this issue.
Should the applicants be permitted to amend the pleadings?
[86] The applicants apply under rr 4.54 and 4.56 of the High Court Rules 2016 to amend the second applicant by adding H P Hanna and Co (2017) Ltd (H P Hanna) to correctly record the trustees of the A & M Linton Family Trust. It appears that, for whatever reason, when the application and original pleadings were filed, H P Hanna was mistakenly not included as a trustee, when in fact it is, as is revealed by the fact that H P Hanna is listed in the Share Sale Agreement as a trustee.
[87] Further, the affidavit of Gregory Russell Hay explains that H P Hanna is a trustee, and he confirms that H P Hanna had knowledge of and agreed to the plaintiff/applicants filing this proceeding. Mr Hay noted that H P Hanna is named as a party to the substantive proceedings but not the injunction proceedings, however it was intended to be a named party to both. Mr Hay’s affidavit confirmed that, in H P Hanna’s capacity as trustee of the second applicant, it also undertakes to comply with any orders the Court may make for the payment of damages that the respondents may sustain if the interim injunction is granted. He also notes that H P Hanna’s liability is limited to the assets of the A & M Linton Family Trust. No information is provided about the assets and liabilities of this trust.
[88]The further undertaking, dated 10 December 2023, named the correct trustees.
[89] The application to amend is opposed by the respondents. Mr Johnstone submitted that the omission or misidentification is integral to the application for
interim injunction supporting the affidavit evidence and the undertakings as to damages. He also submitted that, as shown by the Share Sale Agreement, the trustees included in the application were not a party to the Share Sale Agreement and did not purchase the shares of NHC. Mr Johnstone submits these flaws are fundamental and undermine Mr Linton’s first affidavit, which cannot therefore support the granting of any interim relief.
[90] Mr Johnstone also highlighted that Mr Hay’s affidavit does not refer to any resolution that the directors of H P Hanna may have made confirming that it is authorised to provide the latest undertaking as to damages or had knowledge of and agreed to the proceeding being taken. He further submitted that there is no confirmation that the giving of the undertaking as to damages is within the trustees’ power under the Trust Deed or the Trusts Act 2019.
[91] While not condoning the importance of these fundamental and basic errors, I accept that the omission of H P Hanna as a trustee of the second applicant was simply a mistake. A similar mistake has not been made in relation to the substantive proceedings.
[92] I am not persuaded there is any prejudice to the respondents by allowing the amendment and I propose to do so.
[93] A more compelling argument for the respondents however related to the quality of the undertaking as to damages provided. Best practice requires some evidence of the financial position of an applicant so that the worth of the undertaking can be assessed. Nothing has been provided. Rather, I am asked to infer that, because NHC was purchased for some hundreds of thousands of dollars and also included the transfer of shares, this establishes the worth of the applicants to a sufficient degree. I am not persuaded by this argument. NHC was purchased some two years ago. A lot may have changed in the interim and a purchase price then, without any understanding of the Trust’s current assets and liabilities, does not establish value now. In addition, no information is provided about the value of the undertaking as it relates to the first and third applicants.
[94] As against this, the evidence establishes that Flex FX is a very new business, but I note that no indication of its worth is provided either.
[95] It is the responsibility of the applicants to provide a satisfactory undertaking as to damages. I am not persuaded that they have. Given the competing interests however, this would not necessarily be fatal as it could be remedied by the provision of further information, which I would have been inclined to have allowed but for the fact that I am persuaded damages are likely to be an effective remedy should the applicants succeed in their substantive claim. This is not to say that an application for a permanent injunction would not be part of the relief granted if the applicants succeed at trial and apply for one. It is simply to say that, on the information I have before me, given the size of the business Flex FX have in relation to the products in issue and the steps taken by the respondents to limit the kind of marketing they will undertake pending the outcome of the substantive trial, damages seem to me to be the more likely remedy.
[96] On this point, the respondents have offered to provide an undertaking confirming what they say is already the case, namely, that they will undertake no bulk marketing in relation to the products in issue until the substantive proceedings have been finally resolved and that they will not refer in their marketing material to Koru FX or Mr Bellaney’s prior role in it for the same reason. The applicants request that the Court make an order, essentially injunctive relief, to that effect.
[97] I also consider that the applicants and respondents have provided evidence to support their particular contentions. In other words, their respective positions are both properly arguable and there is an evidential basis for the various points each have raised. This means, in my view, that the balance of convenience favours the status quo, which is that both parties continue to be able to market their products subject to the requirement that Flex FX’s marketing material is limited in the way outlined at [96].
[98] I am not persuaded that the balance of convenience favours the applicants, but I am persuaded to require an undertaking from the respondents in relation to the two matters I have referred to above.
What is the overall justice of the case?
[99] No limit is provided to the factors the Court considers relevant to this stage of its enquiry. The overall justice of the case is essentially a matter of judicial discretion.
To a large extent, I have already covered the matters I consider relevant in my assessment as to where the balance of convenience lies and my assessment of the strength of each party’s case. I am satisfied that the overall justice favours the status quo which, in my view, is that an injunction should not be granted in favour of the applicants. The relief sought would effectively end the respondents Flex FX business as it relates to the products concerned.
[100] I have made this assessment based on the material placed in front of me. This is not to say that the claim will not succeed or that the Judge hearing the substantive claim will reach a different conclusion about the causes of action pleaded than I have on the limited untested evidence presented to me. Nor would it prevent the applicants from revisiting the issue of an interlocutory injunction prior to trial should there be any suggestion in further marketing material prepared by or on behalf of the respondents to the applicants’ products, directly or indirectly, namely by inference.
Result
[101] The application for an interim injunction by the applicants against the respondents is dismissed. However, I require an undertaking from the respondents in relation to the matters I have referred to at [96] of this judgment.7
Costs
[102] Costs should follow the event. If the respondents wish to apply for costs, they are directed to file and serve a memorandum in relation to the costs they seek by 26 January 2024. The applicants are to file a memorandum in reply by 9 February 2024. The respondents can file a memorandum in reply to the applicants’ memorandum by 16 February 2024. Costs will be dealt with on the papers.
Harland J
Solicitors:
Cavell Leitch, Christchurch
Richard Johnstone, Barrister, Christchurch.
7 An undertaking has been received from the first respondent dated 19 December 2023.
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