Body Corporate Administration Limited v Mehta no.2 HC Auckland CIV 2009-404-6656

[2011] NZHC 218

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

CIV 2009-404-6656

BETWEEN  BODY CORPORATE ADMINISTRATION LIMITED Plaintiff

ANDCYRUS MEHTA First Defendant

ANDSTRATA TITLE ADMINISTRATION LIMITED

Second Defendant

Hearing:         15 December 2011

Appearances: P J Wright and W Reid for plaintiff

R J Thompson for first defendant
M I S Phillipps for second defendant

Judgment:      16 March 2011

JUDGMENT No.2 OF ALLAN J

In accordance with r 11.5 I direct that the Registrar endorse this judgment with the delivery time of 4.30 pm on Wednesday 16 March 2011

Solicitors/counsel:

J Wright, Auckland  [email protected]

Madison Hardy, Auckland [email protected] Richard Thompson, Auckland  [email protected] M I S Phillipps, Auckland [email protected]

James Keat, Auckland

BODY CORPORATE ADMINISTRATION LIMITED V CYRUS MEHTA HC AK CIV 2009-404-6656 16

March 2011

[1]      As  its  principal  business,  the  plaintiff,  Body  Corporate  Administration Limited (BCA) provides secretarial services to bodies corporate.  Mr Mehta, the first defendant, was employed by BCA until 31 October 2008 when his employment was terminated  upon  the  ground  that  he  was  thought  by  BCA  management  to  be intending to set up an opposition business.

[2]      On 20 November 2008, or thereabouts, Mr Mehta commenced employment with Strata Title Administration Ltd (STA), the second defendant, a competitor of BCA.

[3]      During 2009, the management of BCA became concerned that, prior to the termination of his employment, Mr Mehta had copied confidential documents, and subsequently made them available to his new employer.   Through an independent expert, Mr Wendt-Thorne, BCA conducted a thorough search of its electronic records and was advised that Mr Mehta appeared, during the months prior to his dismissal, to have gained access to a great many BCA documents which were not within the scope of his employment.

[4]      On  12  October  2009,  the  present  proceeding  was  commenced.     On

21 October 2009, Hugh Williams J granted a search order, pursuant to r 33.2.  The order incorporated interim injunctions which, inter alia, restrained STA from dealing with any of BCA’s existing customers, pending further order of the Court.   The search order was executed on 23 October 2009 at the business premises of STA and at Mr Mehta’s home address. A number of hard copy documents were seized and the contents of various computers were cloned.  The hard copy material remains in the hands of the independent solicitor, Mr Cogswell, and the electronic material is in the custody of BCA’s forensic computer specialist, Mr B C McKenzie, although counsel and clients have had access to much of it.

[5]      On 22 April 2010, I heard an application by the defendants for an order discharging the search order (including the interim injunctions) on the ground that the plaintiff had not established its continued entitlement to the benefit of the orders. On 10 May 2010, I delivered a judgment dismissing STA’s application for an order

discharging the search order, and adjourning the application insofar as it concerned the  interim  injunctions  incorporated  in  paragraph  12  of  the  search  orders. I considered that the latter application was premature, in that the plaintiff’s analysis of the documents held in electronic form by Mr McKenzie was incomplete.

[6]      The defendants now apply afresh for an order discharging the injunctions. They contend that BCA remains unable to establish a breach of the defendants’ confidentiality obligations, and that, given the wide ranging character of the injunctions, the time has come to discharge the orders.  It is common ground that the onus of establishing that proper grounds remain for the retention of the orders rests

upon the plaintiff.[1]

[1] Automatic Parking Coupons Ltd v Time Ticket International Ltd (1996) 10 PRNZ 538 (HC) at 539.

[7]      This  judgment  is  to  be  read  in  conjunction  with  my  earlier  decision  of

10 May 2010.   I do not repeat what was said there except to the extent that is necessary to do so for present purposes.

[8]      The injunctions granted on 21 October 2009 prohibited STA and Mr Mehta from:

a.Accessing or using in any way whatsoever the applicant’s confidential information in whatever form or delivering any such information to any other person in any form;

b.approaching, soliciting or otherwise dealing with, whether directly or indirectly, any person in respect of body corporate secretary services or building management services or similar, being a person to whom the applicant provides those services at the date of this order.

[9]      The principles relevant to the determination of interim injunction applications of this type were conveniently summarised by Fisher J in Peters v Collinge:[2]

[2] Peters v Collinge [1993] 2 NZLR 554 (HC) at 556-557.

On such applications the Courts do not attempt finally to determine the parties' rights. Instead the Courts customarily traverse a series of questions in turn. The first is whether the plaintiff has established a serious question to be tried.  If  so,  the  second  is  where  the  balance  of  convenience  lies  with particular reference to the adequacy of damages to either party if ultimately successful at trial. The third is whether the result is affected by a series of discretionary considerations including the relative strengths of the parties' cases, any undue delay by the plaintiff, tentative preference for status quo

and the conduct of the parties. At the end of the exercise the Court must stand back from those details and ask where the justice of the case lies: (citations omitted).

The plaintiff ’s argument

[10]     Since the earlier judgment, Mr McKenzie has undertaken further work in respect of the analysis of the electronic documents.   In successive reports he has identified a great many STA documents, which he has divided into separate categories.  Category one comprises documents that are irrelevant to this proceeding. Category two documents (389) comprise those which may be relevant to customers of  BCA.    Category three  documents  (967)  were  later  reclassified  into  category three A   documents   (relating   to   customers   of   BCA   who   were   Mr Mehta’s responsibility) and category three B documents (relating to customers of BCA who were not the responsibility of Mr Mehta).  Documents in category three are of clear relevance to the issues in this proceeding.

[11]     At the time of my judgment of 10 May 2010, I had envisaged that further analysis would ultimately produce a number of documents which, at least arguably, could be shown to support the plaintiff’s claim that Mr Mehta, while employed, had copied and taken away documents of BCA.  At subsequent judicial conferences, I understood that further progress was being made towards that end.

[12]     However, at the hearing of the present application, Mr Wright placed only limited reliance upon the results of Mr McKenzie’s analysis.  There is no evidence that STA held in its computer any document sourced by Mr Mehta from the records of BCA.  But, through the affidavits of Mr Kwok, BCA contends that the electronic documents of STA inspected by or on behalf of BCA show that, between November

2008 and October 2009, Mr Mehta contacted at least 100 Bodies Corporate that were BCA’s customers.  Mr Wright argues that Mr Mehta could not have remembered the contact details for such a large number of those customers because:

(a)      he did not have the requisite recall;

(b)he  did  not  attend  or  chair  many  Body  Corporate  meetings  while employed by BCA, as he now contends;

(c)      the number of bodies corporate that were his immediate responsibility while at BCA was limited;

(d)his role was a narrow administrative one and his interaction with BCA’s clients was confined, so that he would not, even over time, have acquired knowledge of a great many customers or their contact details.

[13]     Accordingly, Mr Wright argues, it is a proper inference that Mr Mehta relied for his contact information on the documents allegedly printed off by him while at BCA, although none has subsequently been found.

[14]     Beyond what have become known as the “McKenzie documents”, BCA now relies on several recently identified items of evidence.  The first arose from a further search conducted by Mr Kwok of BCA’s own database.   He says that during the course of that search he was able to ascertain that Mr Mehta had printed and taken away another of BCA’s documents known as a “Schedule of Committees”.  These schedules  are  said  by  Mr  Kwok  to  identify  the  owners’ committee  personnel, together with their contact details.  He says that these are the persons within each body corporate who are likely to have the most influence over other property owners with  respect  to  decisions  to  replace  the  services  of  BCA with  those  of  STA. Possession of that information, confidential to the plaintiff, would greatly reduce the leg work required of Mr Mehta or STA to obtain contact details.

[15]     BCA’s position is that Mr Mehta used the Schedule of Committees to contact various bodies corporate.   It is relevant, however, to observe that no copy of any Schedule of Committees appears to have been found in the possession of either defendant, whether in hard copy or electronic form.  Neither does Mr Kwok explain precisely how he was able to ascertain that Mr Mehta had obtained access to and printed one or more of the Schedules of Committees when a previous thorough

analysis  of  Mr Mehta’s  activities  within  BCA had  failed  to  throw  up  such  an important item of evidence.

[16]     BCA now relies also upon a search of a document known as “Our Total Output”, said to have been found on a computerised information storage device known as a “Maxtor USB Device”, located at Mr Mehta’s residence at the time of the execution of the search order.  This file is said to record the details of a secret commission scheme referred to in my earlier judgment, involving customers of and suppliers to BCA.   It is claimed that the “Our Total Output” file records secret commissions of several thousand dollars received by Mr Mehta during the period of his employment by BCA.

[17]     Mr Mehta does not deny that a secret commission scheme was in operation, but he says that it was implemented by him at the direction of Mr Kwok, and that he (Mr Mehta)  ultimately derived  no  personal  financial  benefit  from  it.    Mr Kwok totally denies any knowledge of the scheme until BCA commenced to make its inquiries in mid 2009.

[18]     The secret commission issue is a matter for trial.  It will involve a credibility assessment which I am unable to make on the papers.  For present purposes BCA simply  maintains  that  by  reason  of  the  secret  commission  scheme,  Mr Mehta’s evidence ought to be treated with caution.

[19]     During  the  course  of  argument,  Mr Wright  placed  considerable  emphasis upon two hard copy documents uplifted during the search, and held by Mr Cogswell. Although they had been identified as early as October 2009 and inspected some considerable time ago, it appears that the plaintiff has only recently realised that the documents concerned may be of central importance.

[20]     The first of these documents is a handwritten list taken from Mr Mehta’s work  station.    It  is  dated  20  November  2008.    Mr Wright  describes  it  as  “the handwritten list”.  I will do the same.  The date may or may not be important at trial. There is an element of uncertainty over the precise date upon which Mr Mehta started work for STA.  It seems to have been either 18 or 20 November 2008, some

three weeks after his employment with BCA was terminated.  The management of STA believe that Mr Mehta may have commenced work on 18 November 2008, and not on 20 November as had earlier been understood.  If it was the earlier date, there is a greater likelihood that STA data was drawn upon in the course of compilation. For present purposes the precise date does not matter very much.  Either way, the handwritten list was apparently prepared on, or soon after, Mr Mehta’s first day at work with STA.

[21]     The handwritten list identifies 27 bodies corporate that were administered by Mr Mehta when he worked for BCA.  The case for BCA is that the list is virtually word perfect, and that it could not have been produced by Mr Mehta simply by reference to his own recollection.  However, BCA has not produced a document of its own for comparison purposes.  BCA says that Mr Mehta’s command of English was not, especially good and he would have been incapable of producing the handwritten list without reference to other material.

[22]     Moreover, Mr Wright argues, there is no evidence from STA that its database was  sufficient  to  facilitate  the  preparation  of  the  handwritten  list  from  another source.   He mentions that the proper inference is that the list was compiled from information that was confidential to BCA.

[23]     The  second  hard  copy  document  is  an  excel  spreadsheet,  upon  which Mr Mehta had written the word “ATTACK”.   It was found at Mr Mehta’s work station during the search, but has not been located in soft copy form during the forensic searches carried out by Mr McKenzie.   The ATTACK document lists 81 bodies  corporate  administered  by  BCA  during  the  time  (about  five  years)  of Mr Mehta’s employment with BCA.  The document does not appear in any of the electronic records of STA.  It appears however that a soft copy of the document was on Mr Mehta’s home computer from 19 November 2008.

[24]     Mr Kwok’s evidence is that between 20 November 2008 and 21 October

2009, Mr Mehta sent business proposals to 61 of the property owners listed on the

ATTACK document.  He says also that, while employed by BCA, Mr Mehta printed

BCA’s owner lists in relation to at least 64 of its clients, together with Schedules of

Committees for some of those clients.

[25]     Mr  Kwok  identifies  a  number  of  errors  in  the  detail  of  the  ATTACK document which replicate errors appearing in the plaintiff’s records (although as earlier noted the plaintiff’s own records have not been produced to the Court).  He says that those errors strongly suggest that Mr Mehta has used the detail of the plaintiff’s confidential information to compile his ATTACK document.   Mr Kwok also says in relation to that document, that nothing has been identified within the databases of STA that would have enabled Mr Mehta to prepare his list without reference to the BCA information.

[26]     In summary, BCA relies upon two principal factors in arguing that it has made out a serious question for trial. Those factors are:

(a)       Mr Mehta’s alleged access to, and printing of, a great many BCA

documents prior to October 2008, which he had no need to see;  and

(b)The hard copy lists referred to above, which were allegedly prepared by Mr Mehta and could not have been compiled, BCA claims, without unlawful reference to the plaintiff’s confidential information.

[27]     Mr Wright submits that, given the ATTACK document appears not to exist in soft copy form, it is an available inference that Mr Mehta holds other documents, as yet undiscovered, which contain information that is confidential to BCA.

The argument for the defendants

[28]     Mr Thompson and Mr Phillipps presented separate oral arguments.  As might be expected, they were closely complementary.  I will deal with them together.

[29]     At the outset they point out that, despite the plaintiff’s allegation of large scale printing of its records by Mr Mehta, not a single document belonging to the plaintiff has been found in the possession of either defendant, whether in hard or soft

copy.  That serves to distinguish this case from most confidential information cases, where there is normally some evidence of the finding of the plaintiff’s documents in the hands of a defendant.   Counsel are critical of the failure, to date, of BCA to provide the Court, and counsel (at least), with copies of some of the documents alleged to have been copied by Mr Mehta during his employment with BCA.

[30]     They emphasise also the apparent change of tack in the plaintiff’s case.  Until the hearing of the present application, the focus was very much upon the on-going analysis by Mr McKenzie of the documents obtained as the result of the cloning of the defendants’ computers.   As that investigation proceeded, the plaintiff’s expectation was (as I understand it), that documents establishing the defendants’ breach of duty would be identified.  Indeed, that was the basis on which I held in my judgment of 10 May 2010 that the application for discharge was premature.

[31]     It now appears that there are no such documents.  Rather, the plaintiff will be asking the Court at trial to draw inferences from what Mr Mehta is said to have done during his employment (although at the moment there is no detail of that), and rely upon the contents of the hard copy documents seized during the search which now appear to have become central to the plaintiff’s case.

[32]     Prominent within the argument of counsel for the defendants, is a defence of Mr Mehta’s experience and ability.  The plaintiff’s position is that Mr Mehta lacked certain important skills and that his experience with the plaintiff was not wide.  The phrase “desk bound” was used.  Accordingly, it is argued, Mr Mehta could not have prepared the hard copy lists unaided, or by reference to STA’s allegedly limited databases.  Rather, the plaintiff argues, he must by logical inference be taken to have relied upon the plaintiff ’s confidential material.   Moreover, the plaintiff contends, Mr Mehta was not well suited to a marketing role, and for that reason his work with BCA was largely administrative.

[33]     Counsel  for  the  defendants  have  leapt  to  Mr Mehta’s  defence.    He  was initially employed by STA in a marketing role at a time when STA had identified the need to target its competitors’ clients against a background of contraction in the apartment construction market.   STA considered Mr Mehta to be well qualified to

assist in the marketing exercise, by reason of his wide experience with BCA.   It should perhaps be noted that there is no suggestion of any contact between STA and Mr Mehta prior to his dismissal, which came without warning.

[34]     Counsel for the defendants note that, contrary to the plaintiff’s argument, Mr Mehta did in fact have a great deal of client contact;  for example he chaired a considerable number of  body corporate meetings  and  so  would  have  developed something of a network of contacts within the bodies corporate for which he had any responsibility.  Counsel refer also to the successive salary increases which Mr Mehta obtained while working for BCA, a circumstance suggesting that he was by no means the low level employee of limited ability described in the plaintiff’s affidavits.

[35]     The defendants emphasise also the limited range of information said to have been misused.  Although there is now evidence before the Court to the effect that Mr Mehta allegedly gained access, at BCA, to a great deal of financial information relating to particular bodies corporate, there is no claim that he has misused that information.  Rather, it is said against the defendants that he has made use of contact details and of information as to which owners within individual bodies corporate are most likely to have been involved in management.   In other words, say defence counsel, the information in issue is at a relatively low level, and unlike much more crucial information such as trade secrets, scientific formulae, financial information, and knowledge of corporate opportunities.

[36]     Counsel complain also that they and the defendants are severely hampered by the continuing failure of the plaintiff to adduce, in documentary form, evidence of the precise information said to have been printed out by Mr Mehta during the course of  his  employment  with  BCA.    If,  as  appears  to  be  the  case,  BCA is  able  to determine accurately which documents were printed by Mr Mehta, then it is to be expected  that  the  plaintiff  will  produce  the  documents  concerned.     That  is particularly important in the present case where the Court ordered search failed to produce a single document that could be traced back to those allegedly printed out by Mr Mehta.

Serious question

[37]     The plaintiff’s  claim  against  the defendants  is  that  they have unlawfully appropriated confidential information of the plaintiff, being client contact details and other relevant material, and that they have been and are using that material in a manner which  has  caused  the plaintiff loss.   The relevant  principles  are not  in dispute.  They were extensively discussed in cases such as Faccenda Chicken Ltd v

Fowler[3] and Peninsular Real Estate Ltd v Harris.[4]   In the latter case, which similarly

[3] Faccenda Chicken Ltd v Fowler [1987] Ch 117 (CA).

[4] Peninsular Real Estate Ltd v Harris [1992] 2 NZLR 216 (HC).

involved a departing employee said to have unlawfully photocopied the plaintiff’s records  (including  client  contact  books), Tipping  J  reviewed  the  cases  in  some detail.[5]    Of particular importance for present purposes are the following legal propositions identified by His Honour:

[5] At 218-219.

(a)      A former employer cannot prevent a former employee from contacting or even soliciting clients or customers of the former employer;

(b)An employee after ceasing his employment may not however use truly confidential information obtained in the course of that employment for the purpose of competing with his former employer, or  indeed  in  any other  way detrimental  to  his  former  employer’s interests;

(c)      What amounts to confidential information for this purpose is not susceptible of abstract definition.  It will depend on the facts of each case;

(d)A departing employee may not take with him or her customer or client lists for the purpose of using them in a competing role;

(e)     Neither may a departing employee deliberately memorise such information for that purpose.

[38]     The  principles  set  out  in  Peninsular  Real  Estate  have  been  cited  with approval in a number of recent cases.[6]

[6] See for example:  Bradford Trusts Ltd v Robeck Ltd (2006) NZELR 635 (HC);  Transnet NZ Ltd v Dulhunty Power (NZ) Ltd HC Auckland CIV-2007-404-2000, 21 May 2007; .SGS New Zealand Ltd v Nortel (1998) Ltd HC Whangarei CIV-2006-488-384, 20 December 2007.

[39]     Here, the plaintiff is unable to point to clear evidence of appropriation of its documents, as was the case in Peninsular Real Estate and indeed, is often a feature of litigation of this sort.   Rather, it will ask the Court to draw inferences from evidence (yet to be verified by the production of documents) of access by Mr Mehta to  the plaintiff’s  documents  during his  employment,  coupled  with  the  customer contact  lists  discussed  above,  and  Mr Mehta’s  sustained  marketing  activities  on behalf of STA, many of which involved approaches by him to BCA’s customers.

[40]     Mr Phillipps accepts that the case against STA is tenable enough to withstand a strike-out application.   But, he argues, it is not sufficient to meet the serious question test that applies here.  He argues that the plaintiff, having failed to recover anything of substance during the course of the search, was bound to disclose by now those of its documents which it alleges were unlawfully appropriated by Mr Mehta and later by STA;  it has not done so.

[41]     I consider that the plaintiff has established a serious question for trial, but it must be said that at present its case does not appear to be especially strong.  It is not possible to reach a more decided conclusion on the point in the absence of proof of the  documents  allegedly  unlawfully  obtained  by  Mr Mehta.    Accordingly,  it  is necessary to consider other aspects of the interim injunction test.

Balance of convenience

[42]     The effect of the present injunction upon STA is self-evidently substantial. BCA remains able to compete with STA for the business of STA’s clients.  On the other hand, STA is prevented by order of the Court from retaliating.  That state of affairs has now continued for some 18 months.  To perpetuate the present injunction

against competition would extend, for a significant period, a state of competitive

imbalance.     The  market   for  body  corporate   secretarial   services   is   fiercely competitive.   BCA and STA are respectively the second and third largest market participants.

[43]     Regrettably, little progress has been made towards trial.  There remain certain discovery issues between the parties.  As matters stand, the case will not proceed to trial until 2012, and possibly 2013.   In my view that is a significant consideration which tells against a continuation of the injunction.

[44]     Coupled  with  that  is  the  position  concerning  damages.    It  seems  to  be common ground that the likely loss arising from the transfer of a client from one body corporate secretary to another, is of the order of several thousand dollars on a capitalised basis.   It is not suggested that STA would not be good for damages assessed at that level, even if it could be shown that a sizeable number of customers had transferred to STA as the result of breaches of duty on the part of the defendants.

[45]     A further important issue is that of delay.  The injunction has now been in force for some 18 months.   Over that period the plaintiff’s legal advisers seem to have been preoccupied largely with issues related to the identification and analysis of the McKenzie documents.  More recently, there has been a focus on the hard copy documents held by Mr Cogswell.  But there has been little momentum in respect of other aspects of the case.  In particular, as mentioned above, the trial seems to be a great way off.

[46]     A  party  which  secures  an  interim  injunction  restraining  an  important competitor from competing with it for its own customers, is in my opinion under a duty to advance its case with celerity.  It cannot simply bide its time while taking the benefit of an uncompetitive business environment.

[47]     Here, the primary obligation to advance its case rested with the plaintiff.  It is now said for the plaintiff that there is sufficient material before the Court to give rise to an inference that the defendants may remain in possession of further confidential information, as yet undisclosed, which they may use to the disadvantage of the plaintiff if the injunction is discharged.

[48]     It  seems  to  me  that  there  is  nothing  before  the  Court  to  support  that contention, which I regard as unduly speculative.

[49]     There is a further consideration.  The material available to date suggests that the plaintiff has an arguable case in respect of client contact details of one sort or another,  but  little  more.    If  that  is  so,  then  the  defendants  have  enjoyed  an unwarranted advantage in that they have been saved a great deal of time and effort in compiling client contact lists of their own for customers of BCA.  I accept that in some instances such information may not be readily available to the defendants.  But the information is not at the higher end of the confidential information scale.

[50]     Moreover, with the passage of time, the client contact lists will have become somewhat dated and inaccurate, so that the value of the information in the hands of the defendants will have diminished.  No doubt the plaintiff constantly refreshes and updates its own records as bodies corporate and their owners come and go, and change their contact details.

[51]     Drawing together these threads, I consider that the time has come to bring the restraint on competition to an end. The various discretionary factors discussed above point clearly to that outcome, in circumstances where the plaintiff is able to demonstrate that there is a serious question for trial, but where the case is not obviously strong.  In much clear cut cases than this, the Court has granted interim injunctions for defined periods (on the so-called “springboard” principle) so as to give  the  plaintiff  time  to  reorganise  its  business  free  of  competition  from  an offending ex-employee and his or her new employer.  In very few cases would the period of interim restraint be as long as 18 months.

[52]     Having regard to the apparent strength of the plaintiff’s case, I consider that

the period of 18 months which has elapsed here to have been amply sufficient.

Result

[53]     For the foregoing reasons I am satisfied that it is appropriate to bring the interim injunction to an end, insofar as it precludes competition between BCA and STA for BCA’s customers.

[54]     There will accordingly be an order discharging paragraph 12(b) of the search order made on 21 October 2009.   There will however be no order in respect of paragraph 12(a) of the search order, which is directed at prohibiting STA’s use of BCA’s confidential information.  STA asserts that it has no such information.  If that is so then it suffers no detriment if the order inures until trial.

Costs

[55]     Mr Wright seeks an order fixing costs, both of the present application and of earlier applications and conferences (including in particular attendances concerning the hearing on 22 April 2010).  It seems to me that costs to date ought to be tidied up now.  I accordingly direct that the plaintiff file and serve a memorandum as to costs on or before Friday 8 April 2011, and that the defendants respond by memorandum to be filed and served on or before Friday 29 April 2011.  I will therefore deal with the question of costs on the papers, unless any party desires to present oral argument.

Other matters

[56]     I am conscious that much remains to be done in the substantive proceeding. If there are matters requiring further judicial attention at this stage, either counsel may file a memorandum seeking a telephone or face to face conference.   Such memorandum should ideally set out the issues to be covered.

C J Allan J