Bremworth Limited (Formerly Cavalier Corporation Limited) v Pebblemill Limited
[2023] NZHC 1059
•5 May 2023
REDACTED JUDGMENT IN THE HIGH COURT OF NEW ZEALAND CHRISTCHURCH REGISTRY
I TE KŌTI MATUA O AOTEAROA ŌTAUTAHI ROHE
CIV-2019-409-604
[2023] NZHC 1059
BETWEEN BREMWORTH LIMITED (FORMERLY CAVALIER CORPORATION LIMITED)
Plaintiff
AND
RADFORD YARN TECHNOLOGIES LIMITED
Second Plaintiff
AND
PEBBLEMILL LIMITED
Defendant
AND
EDWARD CHARLTON RADFORD
Second Defendant
Hearing: 29–31 August, 1–8, 13, 15–16 September 2022 Appearances:
J Edwards and Y Dong for Plaintiff
G C Williams, T D Mahood and J M Hattingh for Defendants
Judgment:
5 May 2023
JUDGMENT OF DUNNINGHAM J
This judgment was delivered by me on 5 May 2023 at 2 pm, pursuant to r 11.5 of the High Court Rules
Registrar/Deputy Registrar Date:
BREMWORTH LIMITED (FORMERLY CAVALIER CORPORATION LIMITED) v RADFORD YARN TECHNOLOGIES LIMITED [2023] NZHC 1059 [5 May 2023]
Contents
Glossary.....................................................................................................................
Introduction.......................................................................................................... [1]
The development of the Periloc felting process................................................. [7]
The history of Radford Yarns.......................................................................... [24]
The sale of Radford Yarns................................................................................ [43]
The sale and purchase agreement and related documents............................. [55]
The purchase of the remaining 25 per cent of RYT shares........................... [69]
The establishment of Pebblemill....................................................................... [76]
Development of the PF2 and the 2015 WIRL research agreement............... [83]
Attempts to formalise the ongoing relationship.............................................. [94]
Events after May 2017..................................................................................... [102]
Breach of confidence in equity........................................................................ [108]
Who has standing to bring the claim for alleged misuse of confidential
information? [109]
What is the IP claimed to be confidential information?............................... [117]
The legal principles applying to breach of confidence in equity................. [124]
Does the information have the necessary quality of confidence? [128]
The plaintiffs’ submissions [128]
The defendants’ submissions [131]
Discussion [135]
Sliver feed and delivery systems, [redacted] [146]
The modified felting liquor [150]
Liquor delivery system [154]
The yarn feed and delivery systems [160]
The tube tensioning system [168]
The tube technology [171]
Development of and modifications to the rotors [176] Development and modifications to a cabinet/batch drying system [180] Unique felted yarn specifications [185]
If the information was confidential, is it now in the public domain? [187]
Was the IP imparted in circumstances importing an obligation of confidence?
........................................................................................................................... [195]
Are the defendants using the confidential information?.............................. [200]
Affirmative defences........................................................................................ [227]
The defendants’ submissions [230]
The plaintiffs’ submissions [250]
Can the defendants establish the defence of estoppel?................................. [266]
Was there the creation or encouragement of a belief or expectation by the plaintiffs? [273]
Was there reliance by the defendants? [292]
Will there be detriment to the defendants? [297]
Is it unconscionable to revoke the expectation that the defendants can use the Confidential Information? [298]
The other defences........................................................................................... [300]
Breach of contract............................................................................................ [301]
Clause 25 of the 2011 SPA [302]
Clause 4 of the IP Deed [309]
Clause 12 of the 25% SPA [314]
Breach of restraint of trade............................................................................ [318]
The terms of the restraint of trade [318]
The alleged breach [322]
What are the geographical limits of the restraint? [328]
Was there a breach? [340]
Was the restraint of trade superseded by the employment agreement? [347]
Relief................................................................................................................. [349] Orders........................................................................................................................... [358]
Costs.................................................................................................................. [359]
Suppression...................................................................................................... [360]
Glossary
BF1 The 20-end Signaal Periloc felting machine acquired by Homestead Yarns from Feltex in late 1992. This was upgraded [redacted] in 2010. This machine is now owned by Cavalier. BF2
The 40-end Signaal Periloc felting machine acquired by Homestead Yarns in 1995. This machine is now owned by Cavalier.
BF4
The 10-end Signaal Periloc felting machine acquired by Homestead Yarns in 1995. It was upgraded [redacted] in 2010. This machine is now owned by Cavalier.
Cavalier Spinners
Cavalier Spinners Ltd, the company RYT transferred its assets and business to on 31 August 2016.
Curlicue
Curlicue Ltd, a wholly-owned subsidiary of Cavalier that purchased Radford Yarns’ assets under the 2011 SPA. It was later renamed to RYT.
Homestead Yarns
Homestead Yarns Ltd, a company producing felted hand knitting yarns, set up by Mr Radford and Joseph Radford in 1990. It changed its name to Radford Yarns in 1996.
Nick Radford Rugs
Nick Radford Rugs Ltd, a rug and carpet manufacturer owned and operated by Mr Radford’s son, Nick Radford.
Signaal
Hollandse Signaalapparaten BV, a Dutch manufacturing firm.
US 129 patent
A United States patent granted on 21 September 1976 for the Periloc machine.
US 592 patent
A United States patent granted on 12 March 1985 for the modified tensioning system used on the Signaal Periloc machines.
Pebblemill
Pebblemill Ltd, a yarn manufacturer owned and operated by Mr Radford, incorporated in March 2011.
PF1
The IWS commercial prototype Periloc machine acquired by Homestead Yarns in 1992. It is now owned by Pebblemill.
PF2
The Periloc machine developed by Pebblemill and Tasman using receiving a research grant from WIRL in 2015. This machine is owned by Pebblemill.
PF3 The Periloc machine designed by Pebblemill and Tasman to be a [redacted]. This is owned by Pebblemill and still being
developed.
Introduction
[1] Felting is the process by which wool or other animal fibres are agitated in a suitable fluid medium causing the fibres to entangle and create a strong and stable textile product. It has been used for centuries to make garments and rugs.
[2] While the basic elements of the felting process have long been understood, in the 1970s and 1980s, the International Wool Secretariat (IWS) developed a novel process to manufacture felted wool yarn. This was done using a machine which came to be named the Periloc. The Periloc process was promoted by the IWS in a wide range of countries, with the hope it would be adopted by wool processors. The IWS continued to develop the Periloc machines and associated processes until the early 1990s, when the IWS abandoned the Periloc development programme.
[3] An enterprising New Zealander, Edward Radford, acquired some early IWS Periloc prototype machines and then other commercially–made Periloc machines. Starting out on his rural property near Christchurch, he worked on the machines and the associated systems until he had a viable business creating felted yarn products of reliable quality with interesting designs. That business was then sold to a subsidiary of Cavalier Corporation Ltd (Cavalier) in early 2011.1 The agreement for sale and purchase expressly recorded that the intellectual property (IP) of Mr Radford’s business was transferred to the Cavalier subsidiary. A related agreement licensed the use of the IP back to Mr Radford for approximately three years to make products which did not compete with Cavalier. Mr Radford also agreed to restraints of trade. However, once that IP deed expired, the parties operated under arrangements and understandings which were not formally documented and which departed from the terms of that IP deed.
[4] The parties are now in dispute over the extent of the IP rights which were sold to Cavalier’s subsidiary in 2011. They also dispute whether Mr Radford’s new business, Pebblemill Ltd (Pebblemill), can now compete with Cavalier by supplying
1 The company changed its name to Bremworth Ltd on 30 August 2021, but at all material times it was known as Cavalier Corporation Ltd, so I refer to it as Cavalier, although in evidence it was usually referred to as Bremworth.
felted yarn to other carpet and rug manufacturers, using Periloc technology which he has developed even further in the interim.
[5] The issues which arise are numerous and complex. They require a detailed understanding of the factual background. That background includes:
(a)how the Periloc technology was developed;
(b)the extent to which this technology was in the public domain at the time Mr Radford acquired the Periloc machines;
(c)the contractual arrangements entered into at the time of the sale of Mr Radford’s business to Cavalier’s subsidiary; and
(d)what occurred in the subsequent years, when Mr Radford was, for much of the time, both an employee of the Cavalier subsidiary and undertaking commission work for that company through his new business, Pebblemill, which continued to produce felted yarn.
[6] That background is necessary to determine the key issues in this case which are:
(a)What IP was sold to Cavalier’s subsidiary in 2011?
(b)Was any of that IP confidential information?
(c)If so, are the defendants using that confidential information (including further developments of it) in breach of their obligations in either contract or equity?
(d)If the defendants are using that confidential information, have the plaintiffs acquiesced in that use, or are they otherwise estopped from bringing their claims?
(e)In respect of the restraint of trade entered into in 2012, is it enforceable, and if so, has it been breached?
The development of the Periloc felting process
[7] When Mr Radford’s brother, Jack Radford,2 gave evidence he observed that “[t]he wool industry in [New Zealand] is very small, and it is quite collaborative”. I would go further. During the period in which the Periloc technology was developed, the wool industry internationally was closely connected and collaborative. Indeed, one of the unusual features of the case was that all of the witnesses giving expert evidence knew some or all of the parties in this litigation and had worked alongside them at some point in their careers.
[8] This theme of collaboration to promote the use of wool and to develop new wool products was reflected in the work of various organisations in New Zealand and overseas in the 1970s and 1980s. One of these organisations was the New Zealand Wool Board, a woolgrower funded organisation established to promote New Zealand wool and wool products to the global market. Another organisation was the Wool Research Organisation of New Zealand Inc (WRONZ) which undertakes research into new wool products and uses. It has a wholly-owned subsidiary, Wool Industry Research Ltd (WIRL), which undertakes research into innovative uses of wool fibre products with a view to improving the prices for New Zealand strong wool.
[9] The IWS was established in 1937 as a partnership of the Wool Boards of Australia, New Zealand and South Africa, to promote the sale of wool on behalf of member countries. The IWS opened a technical centre in Ilkley, Yorkshire, in 1968. At that centre, it undertook research on a range of wool technologies, and shared the results of that research with its member organisations. At its peak, the IWS had 40 branches worldwide and employed more than 1,000 staff, a large proportion of which were wool textile technologists.
2 Mr Radford’s brother is Joseph Radford but was commonly referred to as Jack Radford.
[10] Mr Radford began working for the New Zealand Wool Board in 1970 and was seconded to the IWS from 1974 to 1976. It was during this period that he worked with Dr John Pitts, who was working on a process for felting wool yarns on a commercial scale, particularly for use in carpets. Dr Pitts explained that felted wool was well suited to carpet use. It did not shed fibre readily and was more resistant to compression, which meant a felted yarn carpet would wear better than a carpet made of non-felted yarn.
[11] While there were existing processes for felting wool yarn in batches, this was laborious and costly, and the results were often poor. Furthermore, as the yarns were not separated during the felting process, yarn-to-yarn entanglement could occur. To address this, an engineer in the Netherlands came up with the idea of passing individual yarns through an agitated tube to achieve felting of continuous lengths of yarn.
[12] Mr Briaire, another engineer in the Netherlands, created a machine to test this concept. Dr Pitts then took on the task of developing Mr Briaire’s machine at the IWS Technical Centre. He led a specially formed task group which worked on this project over 12 years. The goal was to improve the process and machinery so it could be used for the commercial manufacture of felted yarns for wool carpets.
[13]Dr Pitts described the process he developed as follows:
(a)Yarn is fed, tensionless, through heated felting liquor to a flexible tube.
(b)The flexible tube is mechanically agitated by six (or more) equally-spaced rotating arms or rotors.
(c)The flexing and partial compression of the tube by the rotors resembles the action of a peristaltic pump causing the yarn to rapidly move forward through the tube.
(d)The felting liquid is drawn into and pumped through the tube, and the yarn progressively changes in length and diameter based on the available space in the tube.
(e)Towards the output end of the tube, the yarn is subjected to the greatest mechanical agitation and felting occurs.
(f)The felted yarn is then physically withdrawn through squeeze rollers.
(g)The degree of felting is determined by the throughput speed of the yarn and the level of mechanical agitation caused by the rotor speed.
(h)Production capacity is determined by the number of ends of yarn per machine and yarn throughput speed.
[14] Dr Pitts created the name “Periloc” to describe the process as it combined the concepts of “peristalsis” (being the movement of successive compression waves) and the apparent “locking” of the fibres through the Periloc process. The diagram which follows was incorporated in an article produced by Dr Pitts in the 1970s shows key features of the original prototype machine developed by the IWS.
[15] On 2 May 1975, the IWS or Mr Briaire applied to patent Mr Briaire’s novel method and the Periloc machine. A United States patent was granted on 21 September 1976 for the Periloc machine (the US 129 patent).
[16] In the early 1980s, the IWS manufactured at least five commercial prototype Periloc felting machines under the US 129 patent. The IWS prototypes included some design developments which differed from the US 129 patent. First, instead of a six-bar rotor design, a 12-bar rotor design was introduced with six inner bars and six outer bars. This enabled significantly higher rotor speeds and productivity. Second, the IWS prototype tensioned the felting tubes individually using pneumatic cylinders, rather than collectively. This ensured that all ends of the felting tubes were under the same tension regardless of any differences in the lengths of the tubes, which could be caused by the tubes stretching as they were used. Third, the initial Periloc machine used silicone tubes, but these were not very durable. The IWS trialled different materials including natural rubbers as well as synthetic materials. They found that polyurethane felting tubes were more durable.
[17] The IWS prototypes were disclosed to a number of yarn manufacturers for commercial evaluation and development. The outcomes of those trials were reported back to the IWS so that they could understand what issues arose.
[18] Following the commercial evaluation of the IWS prototypes, the IWS wanted to build industrial scale versions of the Periloc machine. It engaged Hollandse Signaalapparaten BV (Signaal) in the Netherlands to manufacture industrial scale machines based on the principal IWS prototype. Between 1982 and 1987, Signaal produced around 32 Periloc machines.
[19] Dr Pitts explained the Signaal Periloc machine was a much improved felting machine from the IWS prototypes, with sophisticated input and output creels.3 The key changes they incorporated following the trials in commercial mills were:
(a)the felting tubes were tensioned collectively with a lever and counterweight system;
(b)a proper automatic input creel was included which would draw the yarn from yarn packages or slub/slivers from cans, and provide a tensionless feed to the felting tube; and
(c)microwave drying tubes were used so the yarns could be passed through and delivered dry to be put into packages.
[20] On 29 December 1982, Signaal applied to patent its modified tensioning system for its yarn felting machines. A United States patent was granted on 12 March 1985 (the US 592 patent).
[21] The Signaal Periloc machines were sold to wool processors in various parts of the world.
3 Being frames for delivering the yarn from large bobbins into the machine and then for guiding them out of the machine once felted and into cans or other containers for dying.
[22] On Mr Radford’s return to New Zealand in 1976, he continued working for the New Zealand Wool Board. During this time he maintained his interest in the Periloc system and kept up his association with Dr Pitts and his work when they met at overseas conferences.
[23] In 1981, on Mr Radford’s recommendation, the New Zealand Wool Board purchased a 15-end IWS-designed and manufactured Periloc prototype machine as a demonstration model. The term “end” refers to the number of strands of yarn that could be processed through the machine at one time. The New Zealand Wool Board encouraged members of the New Zealand textile industry to access the machine at WRONZ or to borrow it for commercial product development and performance evaluation. Mr Radford says both Feltex Carpets Ltd and Cavalier purchased one of the first commercial machines produced by Signaal around 1983–1984. While it does not appear that Feltex Carpets produced a carpet using Periloc felted yarn, Cavalier produced at least two felted broadloom products in the mid-to-late 1980s using their Signaal Periloc felted yarn.
The history of Radford Yarns
[24] In 1989, after 20 years with the New Zealand Wool Board, Mr Radford says he was looking for a change and decided to pursue his interest in the Periloc felting process. Through his contacts at the IWS, including Dr Pitts, he arranged to purchase some of the IWS’s older equipment. Specifically, he acquired three four-end felting rotor boxes from the IWS. Using the knowledge he had acquired during his time at the IWS and the New Zealand Wool Board, and working with a local engineer, he built a simple felting machine from two of these rotor boxes.
[25]He explains that the felting machine included the following features:
(a)an infeed roller, with a variable speed drive;
(b)a squeeze roller set with variable speed drive;
(c)two rotor boxes, with a single six-bar rotor in each box;
(d)a weir overflow system;
(e)a heated tank;
(f)a circulating pump;
(g)flowdown; and
(h)simple input and output creels.
[26] He also explains that this machine used an individual tube tensioning system similar to that the IWS had been using before it was superseded by newer developments. This system worked on a counterweight system where weights were attached to nylon cables which were attached directly to the individual tube holders.
[27] Using this felting technology, Mr Radford and Jack Radford founded Homestead Yarns Ltd (Homestead Yarns) in 1990, although it was not formally incorporated until 1992. It used the felted yarn technology to produce hand knitting yarns.
[28] The business proved to be successful and, in due course, Homestead Yarns purchased or built additional plant to ramp up production. This included acquiring three Mackie gilling machines4 and, a Saco-Lowell roving frame5 and building a cabinet drying room. Although still based at Mr Radford’s rural property, the business grew and, in order to increase production capacity, the IWS commercial prototype machine was acquired from the New Zealand Wool Board. This machine is referred to in these proceedings as PF1. In late 1992, the business relocated to industrial premises in Hornby. The business then acquired a 20-end Signaal Periloc felting machine from Feltex Carpets.
[29] In 1995, Homestead Yarns had the opportunity to purchase the 40-end Signaal Periloc machine that Dr Pitts had been using for production trials and development
4 Gilling is a process that straightens and aligns wool fibres.
5 Roving is a process that draws out a gilled sliver of wool fibres and twists it into a yarn or “roving”.
work at IWS, along with a 10-end Signaal Periloc machine. At the same time, Mr Radford acquired IWS’s considerable stock of felting tubes, tube components and other accessories. In addition, because Dr Pitts was retiring, he gave Mr Radford a range of documents and technical reports relating to the development of the IWS Periloc technology, as he wanted to ensure his work continued to be used.
[30] The Signaal 40-end machine was installed at Homestead Yarns in 1995 and was operational by 1996. In 1966, Homestead Yarns changed its name to Radford Yarn Technologies Ltd (Radford Yarns).
[31] Up until this point, much of Radford Yarns’ business had been producing yarns for handknitting. However, sales of handknitting yarns fell dramatically in the mid-1990s and Mr Radford realised he had to diversify quickly in order to survive, which included making felted yarn for carpets and rugs. Although considerable effort went into promoting his company’s felted yarn, buyers were not willing to pay the price premium for felted yarns over spun yarns. This led Mr Radford to decide that Radford Yarns would need to differentiate its products and develop more interesting yarn constructions which would give carpets and rugs a point of difference that would appeal to customers.
[32] By the late 1990s, Radford Yarns considered its felting process was well enough developed to carry its yarn construction into broadloom yarns,6 and it began to focus on producing unique yarn styles that could be sold at a premium. The aim was to consistently produce new and exciting yarn constructions, primarily with slub and two-colour effects. Slub yarn is a type of yarn that has random variations in thickness along each strand of yarn. The thick part is the “slub”. This required development or modification of the yarn spinning systems, primarily the roving machine. Another innovation was a “space-dyed” pinstripe yarn, being a yarn which is dyed in two or more colours along its length to create colour patterns.
[33] The slub yarn developed by Radford Yarns was well received but, as Mr Radford explains, the [redacted] system [redacted] they developed in 1995 had
6 That is, yarn suitable for broadloom carpets, being carpets which are woven in wide widths suitable for wall-to-wall carpeting.
some inherent control issues. These issues meant the slub yarn was occasionally being formed inconsistently, with “rogue” slubs and excessively thin places between the slubs. It was these production issues that led Radford Yarns to develop what Mr Radford described as the [redacted] system in 2001. It used [redacted]. It also had [redacted] which allowed Mr Radford and his staff to easily change the [redacted] settings to produce different yarns. The combination [redacted] enabled Radford Yarns to produce a much more consistent product and to make slubs of different sizes, shapes, lengths and colour.
[34] Around 1997, Radford Yarns began doing some product development work for Cavalier. One of the first products Cavalier showed interest in was a single-colour slub yarn. However, Radford Yarns was also attracting interest from other carpet manufacturers. For example, in 1999, Woolshire Carpets in the United States launched a felted broadloom product called “Slubs n Nubs” which was based on Radford Yarns’ felted slub yarn. Mr Radford says this product put Radford Yarns “on the map”. Unique Carpets Ltd, another United States manufacturer, asked Radford Yarns to produce a relatively simple felted yarn for a broadloom range in 2000. This led to other felted yarns being developed for its carpet ranges. Further overseas customers came on board in the early 2000s.
[35] During this period, Radford Yarns was also producing more felted yarns for Cavalier using colour and slub effects. These included “Kashi” (a simple single coloured slub) and “Dupion” (which had [redacted]). Given the company’s ongoing growth, it moved to larger premises in 2006. While sales were affected by the Global Financial Crisis in 2008, Radford Yarns continued to develop innovative yarn products, with the company winning the best technical yarn category with a variegated wool felt yarn in the 2009 New Zealand Wool Awards.
[36] During this period, there were yet further modifications made to the Periloc machines, and Radford Yarns worked with contractors in the engineering and technology fields to implement some of these improvements. For example, Radford Yarns engaged Tasman Textiles Technologies Ltd (Tasman) which was run by Kees van Luijk, a former research scientist from WRONZ. Tasman was involved in enhancing the capability of the [redacted] machine. Tasman also produced [redacted].
[37] In 2003, there was a significant electrical fire at Radford Yarns. It damaged the 40-end Signaal felting machine that had been purchased from IWS. Again, Tasman was contacted to help recommission it. Mr van Luijk suggested the machine not just be repaired, but upgraded, [redacted]. Tasman undertook this work [redacted] as part of the rebuild of the machine.
[38] In 2005, Radford Yarns employed Ian Craw as a development engineer. He had an existing contracting business, Rain Ltd (Rain). While Mr Craw was employed by Radford Yarns, Mr Radford says that when there was engineering work, it was done under contract with Rain as Rain owned the specialised engineering equipment which was required to undertake such work.7
[39] Mr Craw was involved in replacing the collective tensioning system on Radford Yarns’ Signaal Periloc felting machines [redacted].
[40] While Mr Radford says the idea of [redacted], the actual tube tensioning system was designed, developed and manufactured by Mr Craw. It included the following features:
[redacted]
[41] This system was trialled on a three-end felting machine before implementing it on the 40-end machine in 2006. Because it was successful, it was also installed on the 20-end Signaal machine in 2008 and, in 2010, to the 10-end Signaal machine, which was also upgraded [redacted] at the same time.
[42] In 2006, Radford Yarns entered into an agreement with Cavalier for the provision of felted yarn, in particular, for its Dupion and Tussore carpets. In 2009, Cavalier sought to enlarge its high-end woollen carpet range and differentiate its products by using unique yarn systems. Mr Victor Tan, Cavalier’s chief financial officer and company secretary, recounts that Mr Colin McKenzie, who was then Cavalier’s chief operating officer, put forward a proposal to take a 50 per cent stake in
7 Although Cavalier contests that the work was done by Rain as opposed to Mr Craw as an employee.
Radford Yarns. From Cavalier’s perspective, it saw a risk that Radford Yarns would supply the broader carpet market if exclusivity was not secured. This is because Radford Yarns was the only commercial supplier of felted yarns for broadloom carpets and its felted yarns were unique and not commercially available from other yarn suppliers. Acquisition of Radford Yarns would meet Cavalier’s strategic goal of “exclusively secur[ing] technology that is truly unique, cannot be replicated, has consumer appeal and fits with our marketing philosophy and brands”.
The sale of Radford Yarns
[43] On 4 December 2009, Radford Yarns sent a letter to Mr McKenzie. It proposed a process by which the parties could investigate the purchase of Radford Yarns by Cavalier. This involved Cavalier buying either the entire shareholding in the company or a majority shareholding with Radford Yarns’ senior management retaining a minority shareholding. It also proposed key Radford Yarns’ staff (being Mr Radford and Michael Ingram) remaining as employees of the company to “ensure continuity”. The proposal also anticipated that an acknowledgement would be given “that the intellectual property associated with felted yarns supplied to Cavalier is owned by [Radford Yarns]”.
[44] During 2010, discussions continued over how the purchase would proceed. By April, the proposal involved a purchase of assets which included “fixed assets, stocks, IP, trade secrets, [and] customer lists” of the company rather than the shares. The parties proceeded with due diligence on this basis. Various documents were exchanged which referred to Radford Yarns’ IP. For example, in May 2010, a bundle of documents described as “business information” was forwarded to Cavalier by email. It included statements that Radford Yarns had purchased IWS technology and “[e]nhanced [it] to the commercialization stage over 15 years” so they were now recognised as “world leaders in yarn felting science and technology”.
[45] Discussions regarding the acquisition of Radford Yarns by Cavalier became more focused in late 2010. These discussions were conducted for Cavalier by Mr Wayne Chung, Cavalier’s chief executive, Mr Tan and Mr McKenzie. On Radford Yarns’ side, the negotiations were conducted by Mr Radford and Jack Radford, who
was a former chartered accountant and director of Radford Yarns. Mr Radford says his brother ran the financial side of the discussions, while he dealt with the technical and operational aspects.
[46] As the due diligence process progressed, Cavalier produced lists of questions which it sought responses to. Some of these focused on the IP which it was acquiring should it purchase the assets of Radford Yarns. In a 31-page document sent 17 September 2010, Radford Yarns responded to a number of Cavalier’s questions including on IP. The document outlined the “enhancements” Radford Yarns had made to the yarn felting technology since commencing operations. Specifically, it said “the business has made an enormous commitment to R & D, both process development and product development”. It explained that Radford Yarns had been able to “optimize felting conditions and to develop appropriate controls to ensure we had a commercially viable industrial process”. Radford Yarns also said it had developed “a felting tube capable of delivering 500+ hours of consistent performance”. It said it had modified the original rotor “to maximize productivity, and improve yarn quality”. It had also developed “a felting medium and management system that enhanced felting performance and ensured the production of consistent, contaminant free yarns”. It also pointed to the development of “specialized spinning technology” and of “felted yarn constructions”.
[47]On 14 October 2010, Jack Radford emailed Mr Tan stating:
One thing that you may want to consider is the fact that the felting technology is “ locked in in house”. Over the past 12 months we have worked with EFI Engineering Ltd to develop a reproducible engineering model that we own [and] we have demonstrated the implementation with F4. We own this technology.
[48] The following day, Mr Tan emailed Jack Radford. He confirmed the Cavalier Board was supportive of the proposal to acquire the assets of Radford Yarns but sought clarification of, among other things, “the position with regards to the Radford Yarn intellectual property”. On 8 November 2010, following a meeting in October, Cavalier sent a checklist of matters to be addressed by Radford Yarns before a sale and purchase agreement (and related agreements) could be drafted.
[49]In terms of IP, Cavalier sought the following information:
- [Radford Yarns] to confirm what it actually acquired from the IWS back in 1995 and to provide the documentation to support that acquisition so that [Cavalier] can satisfy itself as to [Radford Yarns’] title to the intellectual property and that there is no risk/likelihood of this being contested here or anywhere else in the world in future
- Intellectual property to be defined in the widest possible sense to capture all present intellectual and industrial property rights conferred by law and whether owned by [Radford Yarns] or the shareholders of [Radford Yarns], including, but not limited to:
o patents, designs, copyright, rights in circuit layouts, trademarks, know how, business names, brand names, trade names, domain names, inventions, product names, trade secrets, moral rights, the right to have confidential information kept confidential and other results of intellectual effort in the scientific, technological, bio- technological, industrial and commercial fields, whether or not registered or capable of registration;
o any application or right to apply for registration of any of those rights; and
o all renewals and extensions of these rights.
- [Radford Yarns] to review and add to the definition of intellectual property where required
- [Radford Yarns] to confirm whether the sale and purchase agreement will be conditional on [Radford Yarns] (1) assigning to Newco of the confidential agreements that are currently being negotiated by [Radford Yarns] with key suppliers or (2) procuring these key suppliers enter into confidentiality agreements direct with Newco[.]
[50] On 18 November 2010, Radford Yarns responded to the checklist. In it, Radford Yarns assured Cavalier that:
… the current state of Radford Yarn felting technology is vastly superior and fundamentally different to that reflected in both patent applications. … Over the past ten years Radford yarn have invested significant resources into developing an understanding of the process of felting and this has resulted in the development of technology and systems to now claim it as [a robust] industrial process. … Radford Yarn experimented and abandoned [the patented tube tensioning system] a number of years ago and developed a sophisticated [redacted] tensioning system. This system is unique to Radford Yarn.
[51] The response went on to say that the company had had approaches from a number of European manufacturers to share or sell aspects of Radford Yarns’ technology to them, but it had refused. It also said there was “no risk or likelihood of
the intellectual property ever being contested” because Radford Yarns had extensively modified the technology to “the stage that it differs significantly and materially from earlier versions”.
[52]In the response, Radford Yarns described the IP as including:
(a)a physical library of “approved master samples”;
(b)a database of production specifications to which access was “controlled” and noting in addition, that “[a] good knowledge of Radford Yarn’s modified machinery and in house knowledge and training is required to produce felted products that meet the customer approved master samples”;
(c)“production know how” based on product and production knowledge and engineering knowledge acquired over the years;
(d)a database of all product developments to which access was restricted; and
(e)an in-house quality system for its processes.
[53] Radford Yarns’ also provided the following assurances as to the protection of the IP:
We have identified all of [sic] external contractors who have been involved in the development of the felted yarn technology over the past 2 years. Prior to this all development work was undertaken in house by company employees and the provisions of the employment contracts regarding confidentiality applied.
The external contractors that have been involved include:
• EFI Engineering Ltd
• Bartlett Electrical Ltd
• Swarm Intelligence Ltd
• Jag Engineering Ltd
• Tasman Textiles Ltd
Revised confidentiality agreements, that are assignable to Newco, have been prepared for each and these will be executed over the next week. A copy of a [sic] agreement is attached.
[54] The same document also outlined a proposal that had been discussed regarding Mr Radford’s continuing use of the felting technology. The document recorded that Mr Radford would retain an old felting machine at his home address in Prebbleton, as a “hobby/retirement project”. It said it would be used for the production of “apparel/novelty/exotic yarns”. The key elements of the proposed agreement were:
(a)Mr Radford would acknowledge that the purchasing entity owned the felting technology and associated IP;
(b)the purchasing entity would license the use of the felting technology to Mr Radford “in areas [that] do and will not compete with [the purchasing entity]”;
(c)the licence would be for a period of three years and renewable entirely at the purchasing entity’s discretion; and
(d)if the licence was not renewed, then Mr Radford would cease all felted yarn manufacturing using the purchasing entity’s felting technology.
The sale and purchase agreement and related documents
[55] The sale and purchase agreement was executed on 18 February 2011 (“the 2011 SPA”). The parties to the agreement were Radford Yarns as vendor, Curlicue Ltd (Curlicue), a wholly-owned subsidiary of Cavalier, as purchaser, and Mr Radford and Jack Radford as minority shareholders and guarantors.
[56] The 2011 SPA provided for Curlicue to acquire the assets and the business of Radford Yarns, for the purchase price of $6,505,000 plus GST. The assets of the business were defined to include “the Intellectual Property Rights”.
[57] The term “Intellectual Property Rights” was defined in the 2011 SPA as follows:
… all present intellectual and industrial property rights conferred by law, including:
(a)patents, designs, copyright, rights in circuit layouts, trademarks (whether registered, pending registration or unregistered), know how, business names, brand names, trade names, domain names including the Domain Names, inventions, product names, trade secrets, moral rights, the right to have confidential information kept confidential and other results of intellectual effort in the scientific, technological, bio-technological, industrial and commercial fields, whether or not registered or capable of registration;
(b)any application or right to apply for registration of any of those rights; and
(c)all renewals and extensions of these rights.
[58] As part of the 2011 SPA, Radford Yarns provided a warranty confirming that, to the best of its knowledge, it owned, or had or would have, enforceable licences or other contractual rights to use all of the IP used in the business. In particular, it provided the following warranty in relation to what were described as “Significant Intellectual Property Rights”:
All Intellectual Property Rights of significance to the Business (including, but not limited to the Felting Process, the know-how, processes and formula (whether acquired or developed by it) that are used in the felting of wool and other fibres howsoever developed and whether embedded in products or in machinery and equipment) are owned by the Vendor and form part of the Assets.
[59]“Felting process” was defined in the 2011 SPA as:
… the felting process involving a machine comprising flexible guide tubes which perform such an oscillating motion that axial forces act on the slivers of yarn or yarns supplied to the separate guide tubes to achieve the felting of the slivers or yarns. Such a machine was known from the Dutch patent application No. 74,06622 (now expired) and U.S. Patent No. 3,981,129 (now expired). The process includes all technical improvements by the Vendor and specifically includes tube tensioning systems, slivery delivery systems, tube technology and related systems, liquor management systems, and related control systems.
[60] In an associated transaction to the 2011 SPA, the Radford brothers and Mr Ingram, the general manager of Radford Yarns, acquired a 25 per cent shareholding in Curlicue.
[61] The 2011 SPA set out a number of conditions precedent to completion. These included that Mr Radford would be employed by the purchaser and Jack Radford would have a consultancy contract. There was also a condition that at least 85 per cent of the employees of the business would accept employment with the purchaser. In practical terms this meant that Curlicue would become Radford Yarns, and as part of the agreement, Radford Yarns agreed to relinquish that name. In April 2011, Curlicue was renamed Radford Yarn Technologies Ltd (RYT).
[62] At the same time as the 2011 SPA was being negotiated, an IP deed was being negotiated, to allow Mr Radford to continue to develop, manufacture and sell apparel novelty exotic yarns using the IP which had been transferred under the terms of the 2011 SPA.
[63] A draft IP deed was prepared by Mr Radford’s lawyer and provided to Cavalier on 18 January 2011. Over the ensuing month the draft agreement was exchanged between the parties with minor comments and changes being made to it each time. While Cavalier expressed concerns about Mr Radford continuing to use the IP, in the end, given the provisions of the agreement and the trust between the parties, the terms of the deed were settled.
[64] The deed was signed by Mr Radford on 18 February 2011 (the IP Deed). Under the IP Deed it was explained that Mr Radford had:
… developed commercial applications for the purpose of manufacturing apparel yarns and other novel and exotic yarns for non-floor covering applications … using the intellectual property, know-how and technology relating to felting which [RYT] has agreed to acquire from [Radford Yarns].
[65] The IP Deed granted Mr Radford a licence on terms and conditions, including that he confirmed, acknowledged and warranted that he would only use the IP for:
(a)the production of apparel, novelty and exotic yarns, using a combination of wool and other fibres, provided that these yarns cannot
also be used in floor covering products, including without limitation, carpets and rugs;
(b)the development of know-how and methods which may lead to improvements to [RYT’s] IP to assist [RYT] in the production of new products.
[66] Under the IP Deed, Mr Radford agreed to “keep the [RYT] IP confidential and not to disclose any part of the know-how or intellectual property rights relating to the [RYT] IP to any other person”.
[67] The IP Deed also provided that any improvements which Mr Radford developed to the RYT IP “shall be the property of [RYT] and shall become part of the [RYT’s] IP”.
[68] The IP Deed was specified to terminate on 31 December 2013. It signalled the possibility of an extension at RYT’s “absolute discretion”. It also stated the Deed could be terminated if Mr Radford ceased to be an employee, consultant or shareholder of RYT.
The purchase of the remaining 25 per cent of RYT shares
[69] Following the purchase of Radford Yarns’ assets in February 2011, Mr Radford was employed as RYT’s product development manager. However, the acquisition of Radford Yarns coincided with a challenging period for the woollen and carpet industry. Carpets made from synthetic fibres came to dominate market share. As Mr Tan explains, wool’s estimated share of the carpet market in New Zealand fell from more than 70 per cent to 15 per cent. Because of this, Cavalier began investigating options for consolidating its yarn manufacturing operations.
[70] On 7 December 2012, Cavalier entered into an agreement to purchase the balance of the RYT shares from the Radford brothers and Mr Ingram (the 25% SPA). Mr Tan understands that the purchase of the remaining RYT shares was prompted by the plans to shift and consolidate its yarn manufacturing operation, even though these plans did not eventuate until much later. Jack Radford says, however, that the share purchase was motivated by the fact that Cavalier was no longer treating RYT as an independent business within the Cavalier group, but was treating it “as simply a piece
of the larger, vertically integrated [Cavalier] supply-chain”. This led to disagreement between the Mr Ingram and Cavalier staff, particularly around pricing strategies, as Jack Radford considers prices were being set on what would give the wider Cavalier group the best profit margins rather than on what would enhance RYT’s profitability, and this greatly reduced its value to the minority shareholders who did not have a stake in the wider Cavalier group. I accept Jack Radford’s explanation as most likely the primary driver.
[71]Whatever the reason, the remaining shares in RYT were sold to Cavalier for
$530,000, a considerable drop on the price of $850,000 paid for the shares as part of the suite of transactions entered into at the time of 2011 SPA.
[72] The 25% SPA included restraints of trade. Mr Radford entered into a six-year restraint of trade, while his brother Jack, and Mr Ingram agreed to four-year restraints. Pursuant to the restraints, they undertook to not:
(a)engage in a business or an activity that is:
(i)the same or substantially similar to the Business or any material part of the Business; and
(ii)in competition with the Business or any material part of the Business;
(b)solicit, canvass, approach or accept an approach from a person who was at any time during the 12 months ending on the Completion Date, a customer of [RYT] with a view to obtaining their custom in a business that is the same or similar to the Business and is in competition with the Business;
(c)interfere with the relationship between [Cavalier and its subsidiaries] and their customers, employees or suppliers; or
(d)induce or help to induce an employee of [Cavalier and its subsidiaries] to leave their employment.
[73] Clause 10.4 stated that the restraint would “apply only if the activity … occurs within New Zealand or Australia”.
[74] The 25% SPA provided a specific exception to the restraint for Mr Radford, stating at cl 10.5(c) that it did not restrict him from:
… manufacturing apparel and exotic yarns that do not compete with the Company’s products for such period as the Company shall, in its sole discretion, determine and otherwise in accordance with the terms of the intellectual property agreement between Edward Charlton Radford and the Company.
[75] Following the completion of the 25% SPA, Mr Radford was appointed to the position of RYT international sales manager, commencing on 1 January 2013.
The establishment of Pebblemill
[76] On 3 March 2011, following the sale of Radford Yarns’ assets to Cavalier’s subsidiary Curlicue, Mr Radford incorporated a new company, Pebblemill. Through Pebblemill, Mr Radford continued to develop new felted yarn constructions and supply them to apparel and craft markets, and to rug manufacturers, particularly to his son, Nick Radford, for his rug business, Nick Radford Rugs Ltd (Nick Radford Rugs).
[77] Before Pebblemill’s incorporation, and while the IP Deed was still being negotiated, work had started on getting the original IWS prototype machine (PF1) out of storage and functional, presumably in anticipation of the IP Deed being concluded. Mr Radford turned to Mr van Luijk, from Tasman, to help him recommission the PF1. They upgraded the mechanical variable speed drives to electronic variable speed motors (VSDs) [redacted]. They also reduced the number of the ends on the machine from 27 to 20 to match the ends on a 20-end hank reel Mr Radford had acquired. The PF1 still had the Signaal collective tensioning system which they decided to retain. Mr Radford explains that Mr van Luijk sourced the components they needed, including [redacted] and the VSDs. Tasman also upgraded the squeeze rollers [redacted]. The PF1 was ready for use by late 2010.
[78] Mr Radford also kept in touch with Mr Craw from Rain. Mr Radford had seen that [redacted]. In 2012, he had Rain modify the PF1 by installing an equivalent [redacted] tube tensioning system to the one he had developed for Radford Yarns, but using [redacted]. He says the tensioning system Rain installed on the Pebblemill machine proved quite successful in reducing friction issues and he passed the information regarding [redacted] on to RYT.
[79] It is clear there was a great deal of trust and confidence between the parties during this period. Cavalier respected Mr Radford’s deep expertise in yarn felting technology. A symbiotic relationship developed between Cavalier and Pebblemill whereby, even when the IP Deed terminated in 2013, Cavalier continued to commission Pebblemill to produced felted yarn and also facilitated Pebblemill supplying some of Cavalier’s customers directly.
[80] The symbiotic relationship between RYT and Pebblemill was illustrated by the fact that RYT permitted its facilities to be used to dispatch Pebblemill’s knitting yarns. RYT also assisted Pebblemill to move to Pebblemill’s new premises in 2016, only charging Pebblemill for third party costs of the move. RYT staff, including Ms Venessa Cooper, the administration manager, and Mr Mark Hussey, the felting technical manager, facilitated commission work being directed to Pebblemill and were aware of at least some of the developments at Pebblemill that occurred in order to better undertake this work.
[81] Mr Hussey acknowledged in evidence that there was “quite a synergy” between RYT and Pebblemill during this period. It was clear to me there was an amicable and informal relationship between the staff at RYT and Mr Radford (who was known to all as “Woody”) at the time. For example, when Mr Hussey was questioned about how often he would liaise with Mr Radford about Pebblemill’s production capacity and its ability to undertake commission orders, Mr Hussey said:
It’s quite a difficult question to answer and the reason I’ll say that is because Woody, we all worked in the same office as well. … we would … at the end of the day … have a sit around and have a bottle of wine together and talk about things…
[82] A further connection between the parties was that Mr Radford’s son’s business, Nick Radford Rugs, was located in the same premises as RYT. Mr Hussey acknowledged that everyone at RYT knew Nick Radford. RYT sold raw materials to Nick Radford Rugs and Mr Radford said this was in the knowledge that it would be made into felted yarn by Pebblemill. Mr Radford also says that the fact Pebblemill was supplying its own customers, including the customers listed in sch 1 to the statement of claim, was known to Mr McKenzie, who became chief executive officer of Cavalier in February 2012.
Development of the PF2 and the 2015 WIRL research agreement
[83] After Pebblemill was established, including after the IP Deed had expired, Mr Radford was continuing to look for ways to develop and improve the Periloc felting machines. Mr Radford says that in late 2014 he began discussing ideas he had for improving the output of felted handknitting yarn with Mr Van Luijk. [redacted].
[84][redacted].
[85] Mr Radford and Mr van Luijk wanted to get some external funding to assist with developing this project. They submitted an application for funding to WIRL in late 2014 and the project was approved.
[86]In its 2015 research agreement with WIRL, the “background IP” included:
• Tube technology: This encompasses the particular recipe for the tube material, wall thickness, extrusion parameters, hole dimensions and placing, and method of hole forming.
• Tube tensioning system: A reliable, accurate and repeatable tube tensioning system is of the utmost importance in guaranteeing repeatable results between and within batches. The current Pebblemill felter fulfils these criteria.
• Liquor additives to promote felting. Again the current recipe has been fine-tuned over a long period of time to ensure optimal felting, scouring and productivity.
• Expertise in choosing optimal combination of tube diameter, tube tension, rotor rpm, liquor temperature and delivery speed to produce desired felting effect on a specific yarn.
[87] With funding approved in early 2015, Mr Radford and Mr van Luijk built a prototype [redacted] and conducted yarn production trials for approximately a year. During this time they made a number of changes to the prototype and refinements to the process, including to the:
(a)[redacted];
(b)[redacted];
(c)tube tensioning arrangements;
(d)tube threading arrangements;
(e)location of felting tube pressure release holes;
(f)temperature of the bath and liquor;
(g)methods of heating;
(h)liquor composition;
(i)[redacted];
(j)[redacted]; and
(k)optimal production rates.
[88] Using the lessons they learned from their extensive trials on the initial prototype machine, they developed a stage two prototype which was a more sophisticated four-end prototype. They trialled the stage two prototype through early to mid-2017 with a wide range of yarns and ran some small scale commercial jobs through it, up to a maximum of 100 kg. Those trials were ultimately successful but showed them they needed to refine the prototype even more.
[89] They then prepared a stage three prototype with 10 ends, which took it to a commercial prototype status. They used new [redacted]. This machine is the machine which is now referred to as the PF2. Mr Radford says this machine has been producing commercial quantities of yarn with good results.
[90] By mid-2019, Mr Radford considered [redacted] proof of concept and prototypes had been fully validated. He then began designing a [redacted] machine which is currently nearing completion. This is the machine which was referred to in the proceedings as PF3. He says this machine is still a work in progress and they are still [redacted].
[91] Pebblemill has also acquired and commissioned other pieces of equipment that it uses in its processes to produce felted yarn. These include:
(a)two gilling machines from Chargeurs which produce slivers for roving or other processing;
(b)a semi-worsted spinning frame from WRONZ to produce handknitting yarn for sale;
(c)two Ingolstadt apron finishers from RYT in 2011, [redacted]; and
(d)a flyer roving machine purchased in 2015. It was manufactured in 1975 in France and is unmodified.
[92] Pebblemill has also developed a six-colour machine which it commenced work on in 2016. It is based on an existing Caipo machine which was developed in the 1980s. However, this machine has taken Pebblemill around two years to develop, in conjunction with Mr van Luijk from Tasman. [redacted].
[93][redacted].
Attempts to formalise the ongoing relationship
[94] Mr Radford says that while Mr McKenzie was chief operating officer, Cavalier was not concerned with Pebblemill supplying yarn to apparel and craft customers or even to rug manufacturers. The two of them discussed this, including after the IP Deed expired, without any concerns being expressed. From Mr Radford’s perspective, Cavalier’s “red line was clear, it just didn’t want Pebblemill to copy its yarn constructions (Dupion, Tussore etc) or supply felted yarns to its competitors, for example Godfrey Hirst, who could then make and supply broadloom carpet into Australasia”.
[95] Pebblemill moved to new premises in mid-June 2016 as it had outgrown its existing premises, being the shed on Mr Radford’s property. This was around the time that Cavalier advised it was locating the RYT business to Whanganui. Indeed, RYT
subsequently transferred its assets to another Cavalier subsidiary, Cavalier Spinners Ltd, on 31 August 2016, and RYT became a dormant company from that point forward.
[96] In its new premises, Pebblemill set up its existing plant, plus new plant which had been purchased from Palmerston North. It employed three RYT staff who had taken early redundancy. Mr Radford and his team began development work to upscale their production, including building an input creel for the Periloc felting machine, plus an output creel to enable them to drop yarn into cans rather than putting it into hanks. They also installed the liquor tank and began developing and building a cabinet dryer as they were aware that RYT would be dismantling theirs, leaving Pebblemill without the ability to dry yarn. Without such a drying facility Pebblemill would not have been able to process the commissioning work it was getting from Cavalier. Mr Radford said he regularly discussed progress of Pebblemill’s move with Mr Hussey and Ms Cooper from RYT.
[97] In around December 2016, Mr Radford understood that his position at RYT was to be disestablished, although Cavalier’s view was not consistent with that. Instead, Cavalier understood that Mr Radford was retiring. Around March 2017, representatives of Cavalier met with Mr Radford where they say his impending retirement was discussed. However, there was clearly some misunderstanding between the parties about whether Mr Radford was being made redundant or was retiring. On 14 May 2017, Mr Radford wrote to Cavalier saying he had not received any written communication regarding the terms of his redundancy, nor the date when it would take effect. Mr Paul Alston replied the next day saying he was “surprised by this email”, saying it was Cavalier’s “collective understanding” that he was going to retire. While Cavalier understood this was to be in April, this was subsequently extended to the end of May, as Mr Alston said:
There were some items that we needed to close off (eg: the license (sic) agreement, the handover of customers and any that you would continue to supply with your own business – we are still waiting for your feedback on these items).
[98] It seems this miscommunication between the parties over the reason for Mr Radford’s departure from Cavalier contributed to the tensions which emerged between them.
[99] Mr Radford left RYT on 31 May 2017. Mr Tan says that after Mr Radford advised his plans to leave, “we agreed that he could continue to use [Cavalier’s] IP in the manner contemplated in the IP Deed” except the licence would be extended to include:
(a)specific yarns that may be required by his son Nick Radford;
(b)specific yarns that were produced by Cavalier at that time for specific overseas customers, but which it wished to relinquish because of the small quantities involved; and
(c)any other yarns as approved by Cavalier in writing from time to time.
[100] On 8 May 2017, Cavalier sent Mr Radford a list of customers that RYT had supplied in the previous year. It set out five customers that Cavalier would continue to supply and asked Mr Radford to advise which of the remaining customers Pebblemill would like to supply going forward. The following day, a draft licence agreement was sent to Mr Radford which reflected Mr Tan’s proposed agreement set out above, but imposed a three-year term on the licence.
[101] On 19 May 2017, Mr Radford responded to the draft agreement saying it was “too all-encompassing”. He said “[n]early all of the IP you are trying to protect is already in the public domain, and has been since IWS developed Periloc felting in the 1980’s”. Cavalier replied to Mr Radford saying the new draft agreement was almost identical to the original IP Deed, but with more flexibility in his favour. The matter was still not resolved by 1 June 2017 when Mr Radford’s employment ended, although Cavalier was still saying it was “keen to get something that works for both parties” but protected Cavalier.
Events after May 2017
[102] In the end, no new licence agreement was entered into and, on 1 June 2017, Russell McVeagh, acting on behalf of Cavalier and its subsidiaries, wrote to Mr Radford’s lawyer raising Cavalier’s concerns that Mr Radford was using Cavalier’s IP to produce felted yarns without authorisation.
[103] Mr Radford’s lawyer responded on 22 June 2017. The letter asserted that the only IP which was included in the 2011 SPA and which was not already in the public domain was:
(a)methods for creating unique and exclusive end products from felted yarn in which the “point of differen[ce] (or IP) was created at the yarn formation stage”; and
(b)a formulation for the felting liquor.
[104] The letter also asserted that Pebblemill had, at Cavalier’s request, produced carpet yarn for Cavalier’s customers and, more recently, had suggested Pebblemill supply those customers directly. The letter said Cavalier had therefore waived any rights it had under the restraint of trade. Finally, it gave an assurance that Mr Radford:
… has no intention of going into large scale manufacturing of carpet yarns to supply customers who your client wishes to service. My client has no intention of competing with your client or copying any of the exclusive products made by your client and it has always restricted its activities to short runs of yarns which your client does not wish to supply to customers. It has also supplied short runs of yarns for rug manufacturing because your client has stated that it does not wish to produce yarn for this particular market.
[105] In or around July 2017 Mr Alston and Mr Tan from Cavalier met with Mr Radford. Mr Tan says that Cavalier proposed allowing Mr Radford to service smaller customers it did not want to retain, subject to Mr Radford agreeing to a licence agreement. Mr Alston reported to the Cavalier Board that Mr Radford had “not been working with NZ yarns and Colin Mckenzie and has no interest in doing so”, saying that Mr Radford “is fully aware of our intellectual property rights”. While Mr Radford denies they had such a meeting, I am satisfied the three did have a discussion to this effect as the content of it is recorded in a contemporaneous report to Cavalier’s Board. This was well before the litigation and I have no reason to doubt it was an accurate summary of what the three discussed.
[106] Cavalier continued to ask Pebblemill to process felted yarn on commission until late 2017, and in September 2017 Cavalier was emailing smaller customers to say it would no longer supply them with felted yarns. Cavalier also was considering
whether to refer some of these unwanted customers to Pebblemill in late 2017, which was after Mr Radford had said he would not sign a new IP Deed.
[107] However, in early 2019, Cavalier’s sales representative said that Nick Radford Rugs appeared to be producing broadloom carpets from felted yarn which looked identical to Cavalier’s products. Cavalier also became aware that Mr Radford had visited two of their customers in the United States, being Dixie Group Inc and Unique Carpets. On 12 March 2019, Russell McVeagh wrote a cease and desist letter to Mr Radford’s lawyer requiring Mr Radford to cease all supply, manufacture and use of products that used Cavalier’s intellectual property and technology. The parties engaged in correspondence but made no headway and ultimately these proceedings were issued.
Breach of confidence in equity
[108] The plaintiffs’ core claim is for a breach of confidence in equity. While the plaintiffs rely on aspects of the contractual arrangements as supporting the existence of an obligation of confidence on the defendants in respect of certain IP acquired by RYT, they advance their claim primarily in equity. They assert that Cavalier owns confidential information which the defendants were obliged not to use or disclose except as authorised and which the defendants have used in breach of that obligation.
Who has standing to bring the claim for alleged misuse of confidential information?
[109] The claim for breach of confidence in equity was initially brought by Cavalier alone. However, in opening submissions, the defendants signalled, for the first time, that Cavalier could not bring this claim as the confidential information was owned by RYT under the terms of the 2011 SPA.
[110] As a consequence, Cavalier sought leave to join RYT as plaintiffs, but it still maintains that Cavalier was the proper plaintiff as it acquired the relevant IP which is claimed to be confidential information when RYT ceased operation in 2016.
[111] I granted leave to Cavalier to join RYT in a decision issued on 14 September 2022.8
[112] While Cavalier sought and obtained consent to add RYT as a plaintiff, Cavalier maintains it is the correct plaintiff and it owns the confidential information which is the subject of these proceedings. In support of this assertion, it relies on the evidence of Mr Smith who is the sole director of RYT and the chief executive of Cavalier. He asserts that the confidential information is owned by Cavalier. A similar assertion was made by Mr Tan in his affidavit dated 20 January 2022.
[113] Furthermore, the plaintiffs say the defendants have acknowledged that Cavalier now owns the relevant confidential information, noting that the defendants admitted in their statement of defence dated 8 May 2020, that as part of Cavalier’s acquisition of RYT, what was described as the Cavalier IP (which included the relevant confidential information) was legally and beneficially assigned from the vendor and Mr Radford to Cavalier. Similarly, in the pleadings exchanged prior to hearing, the defendants admitted that Cavalier acquired the relevant IP (which included the confidential information). In any event, as the primary claim is brought as a breach of confidence in equity, the plaintiffs say such obligations may arise outside contract, and here the allegation is that the defendants are using Cavalier’s confidential information without its authorisation.9
[114] The plaintiffs say that it is not surprising there is no formal evidence that Cavalier owns the IP other than the evidence of Mr Tan, given the late stage at which this assertion was made. Thus, Cavalier’s position is that it took over ownership of the IP following the cessation of business by its subsidiary RYT and this is confirmed in Mr Smith’s affidavit.
[115] In the circumstances, given the evidence by Cavalier that it now owns the relevant confidential information following the cessation of RYT’s business, and in the absence of evidence to contradict this, I am satisfied that Cavalier can bring this claim.
8 Bremworth Ltd (formerly Cavalier Corp Ltd) v Pebblemill Ltd [2022] NZHC 2352.
9 AB Consolidated Ltd v Europe Strength Food Co Pty Ltd [1978] 2 NZLR 515 (CA) 520–521.
[116] Even if I was wrong in that conclusion, then it is clear that RYT has, since terminating operation in 2016, granted Cavalier a broad implied exclusive licence to use the claimed confidential information. Cavalier would consequently have standing to prevent the misuse of that confidential information if such can be established.
What is the IP claimed to be confidential information?
[117] Cavalier and RYT plead that as part of the 2011 SPA, Cavalier purchased all of Radford Yarn’s IP including “techniques, trade secrets, know-how, processes, formulae, technical data, programmes, software, opinions, statements, and any information generated from any of the aforesaid in relation to the manufacture of unique felted yarns”.
[118] The statement of claim then identifies in detail what the plaintiffs allege to be confidential information, including:
(a)know-how around a method of manufacturing unique and exclusive felted yarns comprising a number of elements that individually and together constitute Confidential Information, including:
(i)the development of, and modifications to, sliver feed and delivery systems […] to produce slub yarns and colour effects;
(ii)the use of a modified “liquor” … in the felting machine where liquor describes the liquid that fills the top tank and felting tubes;
(iii)the development of, and modifications to, a liquor management system … to achieve streak-free results and avoid excessive foaming from the felting process;
(iv)modification to a Periloc machine … to enable the production of consistent felted yarns on a commercial scale for use in carpets and rugs;
(v)the development of, and modifications to, a cabinet/batch drying system …; [and]
(vi)the development of unique felted yarn specifications for [Cavalier] and export yarn customers, including know-how around the production of consistent slub yarns, Tussore-type slub yarns, core yarns, pin stripe yarns and other custom products[.]
The subsequent subparagraphs of the statement of claim elaborate on the various elements claimed to constitute the confidential information, and I refer to this collectively as the Claimed Confidential Information in the balance of the judgment.
[119] Importantly, the plaintiffs do not assert that the Claimed Confidential Information includes:
(a)the technology that was embodied in the IWS or Signaal Periloc machines purchased by Radford Yarns; nor
(b)anything set out in the expired patents.
[120] The plaintiffs say the acquisition of the Claimed Confidential Information was the primary reason for Cavalier acquiring the assets of Radford Yarns. It formed part of the goodwill for which $2,362,657 plus GST was paid as part of the overall purchase price of $6,505,000 plus GST.
[121] The plaintiffs say the defendants have breached the duty of confidence owed to Cavalier by having used, and continuing to use, the Claimed Confidential Information by manufacturing and selling felted yarns without Cavalier’s or RYT’s authority.
[122]The plaintiffs seek injunctive relief requiring the defendants not to:
(a)further disclose the Claimed Confidential Information to any person or entity;
(b)use the Claimed Confidential Information; and
(c)supply or sell, or make offers to supply or sell, yarn that is manufactured using the Claimed Confidential Information to any person or entity.
[123] They also seek an order requiring the defendants to provide “a full account of any conduct they have already engaged in” that would have breached such orders had they been operative when the conduct occurred, along with an inquiry into damages.
The legal principles applying to breach of confidence in equity
[124] The three traditional elements required to support an action for breach of confidence were identified by Megarry J in Coco v A N Clark (Engineers) Ltd.10 First, the information must have the necessary quality of confidence about it, second it must have been imparted in circumstances importing an obligation of confidence and, third, there must have been an unauthorised use of that information to the detriment of the party communicating it.
[125] In respect of the first element, the relevant indicia of confidentiality were comprehensively described by the Court of Appeal in Skids Programme Management Ltd v McNeill as follows:11
[80] Information will have the requisite characteristic of confidence if it is the product of thought and work. The nature of the allegedly confidential material must be considered. There can be various indications of confidentiality. The degree of thought and work expended to produce the material is to be considered. If the material is unique or a trade secret this may indicate that it has the quality of confidentiality. If the material has commercial value that will be an indication that it has the necessary quality of confidence. The fact that the person who has used the material would otherwise need to have done a lot of work to create it, and that work has been avoided, can be relevant. So too is the extent to which the owner has itself considered the material confidential and taken steps to preserve and guard its secrecy, if any, taken by the user if they indicate a perception that the work is confidential.
[126] The second requirement, which is for the information to be communicated by the plaintiff to the defendant in circumstances importing an obligation of confidence, has been expanded over time as it does not readily fit all circumstances where a claim for breach of confidence is advanced. Indeed, in this case, Mr Radford always had access to the Claimed Confidential Information as he is said to have created it. What is at issue here is whether, following the sale to RYT, he could still use it to the extent that he has. Thus, the second element is perhaps better expressed more broadly as requiring the information to have come to the knowledge of the defendant in circumstances where the defendant has notice, or is held to have agreed, that the
10 Coco v A N Clark (Engineers) Ltd [1969] RPC 41 (Ch) at 47.
11 Skids Programme Management Ltd v McNeill [2012] NZCA 314, [2013] 1 NZLR 1.
information is confidential, and where it would be just in all the circumstances that the defendant be precluded from using or disclosing the information.12
[127] Those core elements have also been supplemented in case law by further requirements. In particular, there is a requirement that the plaintiff be able to identify with specificity, and not merely in global terms, that which is said to be the confidential information in question.13 Where the information is a mixture of confidential information and unprotectable know-how, the plaintiff must separate out one from the other.14
Does the information have the necessary quality of confidence?
The plaintiffs’ submissions
[128] The plaintiffs say that the Claimed Confidential Information has always been treated as confidential by the parties. This is demonstrated by:
(a)the description of the information provided by Radford Yarns through the due diligence process;
(b)the terms of the 2011 SPA and the fact the IP was a key part of the assets being acquired from Radford Yarns; and
(c)Cavalier’s requirement that Mr Radford and Radford Yarns take steps to obtain confidentiality deeds from the third parties they had used to develop the yarn felting system as part of concluding the 2011 SPA.
[129] In respect of (c) above, one confidentiality deed between Radford Yarns and a third party contractor acknowledged that Radford Yarns developed “know-how, processes and formula that are used in the felting of wool and other fibres” and that information is confidential and not to be used by the contractor for their commercial benefit. Under another confidentiality deed the contractor agreed that:
12 Attorney-General v Observer Ltd [1990] 1 AC 109 (HL) [Spycatcher] at 281.
13 Corrs Pavey Whiting & Byrne v Collector of Customs (Vic) (1987) 14 FCR 434 at 443.
14 Highley Ltd v Vodafone NZ Ltd HC Auckland CIV-2006-404-2870, 9 Mach 2007 at [10] citing J Katz Laws of New Zealand Intellectual Property: Confidential Information at [79].
(a)all intellectual property in the Felting Machines and components including the designs, drawings, method of construction and operational methods used in connection with those machines and components (the Radford IP) are the property of Radford Yarns and [the contractor] will not directly or indirectly claim any rights to any of the Radford IP or use for the benefit of [the contractor] the Radford In particular,;
(b)[The contractor] will not manufacture or cause any other person to manufacture, either directly or indirectly, felting machines and components using any of the Radford In particular[.]
[130] The plaintiffs also deny that the Claimed Confidential Information is, either in part, or in combination, in the public domain. They say that no person other than Cavalier, RYT, Pebblemill or Mr Radford has the knowledge or expertise to manufacture felted yarns using the Claimed Confidential Information.
The defendants’ submissions
[131] The only information which the defendants concede is confidential is the felted yarn specifications which Mr Radford developed for Cavalier, and which Mr Radford has neither used nor disclosed.
[132] The defendants, otherwise deny that the Claimed Confidential Information possesses the necessary quality of confidence to attract protection. They say information that is public knowledge is not confidential.15 Further, the defendants deny that this is a case where information has been collated with skill and labour from discrete sources and adapted into a novel process.16 Instead, the defendants say that:
(a)the Claimed Confidential Information is readily locatable in publicly available documents which were disseminated by organisations such as the IWS and WRONZ;
(b)the know-how and associated processes and equipment for achieving wool felting using the Periloc technology was disclosed in the publicly available documents;
15 Saltman Engineering Co Ltd v Campbell Engineering Co Ltd [1963] 3 All ER 413 (CA) at 415.
16 As was the case in AB Consolidated Ltd v Europe Strength Food Co Pty Ltd, above n 9, at 522.
(c)Mr Radford and Pebblemill’s use of the felting technology reflects the process described in the public documents, and the machine which they are using is an original IWS Periloc prototype machine; and
(d)Pebblemill’s [redacted] machines (the PF2 and PF3) have been developed over seven years using the publicly available information as the starting point for their development.
[133]Accordingly, the defendants say:
(a)there is no resultant novel process;
(b)there is no collocation of information from disparate sources but, rather, there is the use of known technology which would usually be found together;
(c)the Periloc felting technology is used by other parties around the world, such as Danspin, which produces felted yarns using the same process; and
(d)various witnesses in this proceeding including Mr Ingram, Mr McKenzie and Mr Cuthbertson were independently familiar with the process and not just isolated parts of it, and anyone sufficiently interested could obtain information about the process from the publicly available source material.
[134] The defendants say that, in reality, the Claimed Confidential Information is really a “bundle of unspecific know-how” and a lack of any specific discrete process, or formula, or innovation shows there is nothing that can readily be held to be novel and therefore protectable.
[311] However, leaving aside the question of whether the duty of confidentiality contained in cl 4 survived the expiry of the IP Deed in 2013, the clause is limited to preventing Mr Radford from disclosing confidential information including the Claimed Confidential Information. It did not prevent him from using any confidential information contemplated by the IP Deed whether in his personal capacity or, given Cavalier’s knowledge of and acquiescence to it, through Pebblemill. That said, I consider it is implicit in the IP Deed that the use of the information is only permitted to the extent described in cl 3.
[312] Accordingly, because there is no evidence that Mr Radford has disclosed the Confidential Information, except to Pebblemill which Cavalier clearly was aware of and condoned as consistent with Mr Radford exercising his rights under the IP Deed, the claim of breach of cl 4 of the IP Deed must fail.
[313] The more relevant question, albeit not pleaded, is whether there has been a breach of cl 5(a) by which Mr Radford agreed that, on termination of the agreement, he would “cease the manufacture of felted yarns which uses either directly or indirectly any of the [RYT] IP, including improvements thereto pursuant to clause 6”. However, that is an issue which engages the pleaded defences of acquiescence and estoppel which I have already addressed. I have held that Cavalier and RYT are estopped from withdrawing permission for Mr Radford and Pebblemill to use the Confidential Information for the purposes set out in [298] above.
Clause 12 of the 25% SPA
[314] The last contractual document that the plaintiffs’ pleadings rely upon in support of their allegations of misuse of confidential information is the 25% SPA. The plaintiffs did not address this aspect of the claim in closing submissions. However, the relevant clause, cl 12.12, is found in the “Miscellaneous” section of the 25% SPA and provides:
A party must not use or disclose confidential information of the other party (which for the avoidance of doubt shall include the potential restructuring of the Company referred to in this agreement), and must keep the terms and existence of this agreement and the confidential information of the other party confidential except where:
(a)the information is public knowledge (but not because of a breach of this agreement) or the party has independently created the information;
(b)disclosure is required by law or a regulatory body (including NZX Limited) and, in the case of the Purchaser [Cavalier], the Purchaser [Cavalier] considers it reasonable or necessary to disclose the existence of this agreement to the stock exchange on which it is listed;
(c)use or disclosure is made for the purposes of this agreement (and disclosure is made on the basis that the person keeps the information confidential); or
(d)the other party agrees in writing to the disclosure of its confidential information.
[315] As Mr Radford point out, the relevant parties to the agreement are Cavalier and Mr Radford and this limits the scope of the confidential information which is protected by the clause. The clause does not govern confidential information which is owned by RYT, which is not a party to this contract, and therefore cannot bring this claim.
[316] As a result, I accept Mr Radford’s submissions that a plain and natural reading of this clause limits the obligations of confidence placed upon Mr Radford to the following:
(a)Cavalier’s confidential information (which at the time the 25% SPA was executed did not include the IP owned by RYT);
(b)RYT’s confidential information relating to its potential restructure; and
(c)the existence and terms of the 25% SPA.
[317] Accordingly, cl 12.12 of the 25% SPA is irrelevant to the plaintiffs’ claim for breach of confidential information and the claim for breach of this clause fails.
Breach of restraint of trade
The terms of the restraint of trade
[318] Cavalier seeks to enforce the restraint of trade found at cl 10.2 of the 25% SPA. Under the restraint, Mr Radford undertook that for six years from 14 December 2012, he would not:
(a)engage in a business or an activity that is:
(i)the same or substantially similar to the Business or any material part of the Business; and
(ii)in competition with the Business or any material part of the Business;
(b)solicit, canvass, approach or accept an approach from a person who was at any time during the 12 months ending on the Completion Date, a customer of [RYT] with a view to obtaining their custom in a business that is the same or similar to the Business and is in competition with the Business;
(c)interfere with the relationship between the [Cavalier Group of Companies] and their customers, employees or suppliers; or
(d)induce or help to induce an employee of the [Cavalier Group] to leave their employment.
The “Business” was defined as “the yarn manufacturing and yarn sales business carried on by [RYT] and all associated activities or processes including, but not limited to, the research into and development of the underlying yarn systems”.
[319] Clause 10.4 of the 25% SPA provides “The undertakings in this clause 10 apply only if the activity prohibited by clause 10.2 occurs within New Zealand or Australia.”
[320]Clause 10.5 provided exceptions to the restraint. Those included the following:
(c) in the case of Edward Charlton Radford, manufacturing apparel and exotic yarns that do not compete with the [RYT’s] products for such period as the [RYT] shall, in its sole discretion, determine and otherwise in accordance with the terms of the intellectual property agreement between Edward Charlton Radford and [RYT].
[321] At cl 10.6(a), Mr Radford acknowledged that “all the prohibitions and restrictions in this clause 10 are reasonable in the circumstances and necessary to protect the goodwill of the Business”.
The alleged breach
[322]Cavalier claims that Mr Radford breached the restraint of trade by:
(a)accepting an approach from a person who was a customer of Cavalier at any time in the 12 months prior to 14 December 2012, with a view to obtaining their business in competition with Cavalier, through the supply of felted yarns, in breach of cl 10.2(b) of the 25% SPA; and
(b)interfering with Cavalier’s relationship with certain customers of Cavalier in breach of cl 10.2(c) of the 25% SPA.
[323]As a consequence, Cavalier seeks:
(a)a declaration that Mr Radford breached the restraint of trade clause;
(b)an order that Mr Radford provide a full account of any conduct he is engaged in in breach of the restraint of trade clause; and
(c)an inquiry into damages as a result of his breach of the restraint of trade clause.
[324] Mr Radford, however, resists these claims, starting by citing the proposition that a restraint is prima facie void and unenforceable unless it can be demonstrated to be reasonable by the party seeking to enforce the restraint.44
[325] In resisting enforcement of the restraint against competing with RYT Mr Radford says:
(a)any supplies which were not for broadloom carpet did not compete;
(b)the six year duration of the restraint was unreasonable;
(c)the geographical restriction did not restrict manufacture in New Zealand but rather the supply of such products to customers in New Zealand and Australia;
(d)neither Cavalier nor RYT attempted to enforce the restraint against supply to parties outside of New Zealand; and
(e)RYT has not been in business since 31 August 2016 and so there is no RYT business which Mr Radford could have competed with since that date.
[326] Mr Radford also says there has been no breach of the undertaking at cl 10.2(c) not to interfere with the relationship between the Cavalier group of companies and their customers, employees or suppliers. This is because:
(a)the customers which Cavalier alleges were supplied, as listed in sch 2 to the statement of claim, were based outside New Zealand and Australia;
44 Brown v Brown [1980] 1 NZLR 484 at 491.
(b)the arrangement with Mr McKenzie permitted the supply of felted yarn to the customers in sch 2;
(c)Cavalier or RYT had in most cases decided not to supply the relevant party, so there could be no relationship to interfere with; and
(d)to the extent the customers in sch 2 remained customers after 31 August 2016, they were Cavalier Spinner’s customers, not RYT’s.
[327] Finally, Mr Radford says that his employment agreement, which concluded on 21 December 2012 and contained a one year restraint of trade following termination of employment, superseded all other agreements with Cavalier, including the 25% SPA. That agreement stated that it “will supersede all previous negotiations, commitments, representations, agreements and communications, either written or oral, between you and [Cavalier]” and so only that restraint of trade could be argued to apply.
What are the geographical limits of the restraint?
[328] The first issue to determine, as a matter of interpretation, is where the restraint of trade in the 25% SPA applied. Cavalier argues that cl 10.4, which says the undertakings only applied if the activity prohibited by cl 10.2 “occurs within New Zealand or Australia”, is not limited to the supply of customers based in New Zealand and Australia, but applies to the supply to customers anywhere in the world if the supply emanates from New Zealand or Australia. Cavalier says to restrict the restraint to supply to New Zealand and Australia would not serve the purpose of protecting the goodwill of RYT’s business given many of its customers in the 12 months prior to the completion date of the 25% SPA and all but one of the customers listed in sch 2 of the statement of claim were based outside of New Zealand and Australia.
[329] Cavalier also says that Mr Radford acknowledges in cross-examination that the restraint applied outside New Zealand and Australia when he gave the following responses:
Q.So you accept that the restraint in relation to [Cavalier] applied to customers overseas?
A. The restraint as it applied to [Cavalier]?
Q.Yeah, so the restraint on Pebblemill to supply [Cavalier] customers applied to customers overseas?
A. Yes, because –
Q. Outside Australia and New Zealand.
A. Because the rest of the world was part of [Cavalier’s] playground.
Q. Right.
A. Or they were planning that that would be the case.
[330] However, Mr Radford says the restraint was not intended to restrain Mr Radford from producing competing yarns within New Zealand and Australia, but rather, to restrict him supplying such products to customers in New Zealand and Australia. They say this must have been the case given that:
(a)At the time the 25% SPA was entered into, Mr Radford was in the business of manufacturing apparel and exotic yarns in Christchurch. The Pebblemill manufacturing business was plainly permitted under the IP Deed and was specifically allowed under the restraint in the 25% SPA.
(b)The parties knew that Mr Radford, through Pebblemill, was manufacturing yarn from his premises in Christchurch and Cavalier commissioned him to do this.
(c)Mr Radford was an RYT employee and was to continue being a Cavalier employee based in Christchurch.
(d)Mr McKenzie also confirms he was aware Mr Radford intended to continue to produce felted yarn using the original IWS Periloc felting machine.
Mr Radford says, adopting the approach of the Supreme Court to contractual interpretation, a reasonable person appraised of all these background facts would not consider the geographic limitation related to the place of manufacture, but to the place of supply.45
[331] Irrespective of the parties’ intent, Mr Radford says it would be plainly unreasonable to enforce any alleged geographic limitation on the manufacture of competing yarns from New Zealand and Australia in the circumstances of this case because:
(a)it would undermine the economy in Pebblemill’s business because it would require Pebblemill to relocate its operation to a location outside New Zealand and Australia;
(b)the ability of Pebblemill’s business to produce yarn to its full capacity is in the interests of the public generally and a restriction would therefore impinge the rights of the public; and
(c)it was unnecessary for the protection of Cavalier and RYT’s legitimate interests to prevent Mr Radford (through Pebblemill) from manufacturing products in Christchurch.
[332] I accept the correct interpretation of cl 10.4 of the restraint is that it only applied to the supply to customers based in New Zealand and Australia and did not apply to the supply from New Zealand or Australia to customers based outside those countries.
[333] The purpose of the restraint of trade in cl 10.2(a) is to protect the goodwill of RYT’s business by preventing competition with the business or any material part of the business. That clause is two-pronged. Under it, the vendors are restrained from engaging in a business which is:
(a)the same or substantially similar to Cavalier’s yarn manufacturing and supply business; and
45 Bathurst Resources Ltd v L & M Coal Holdings Ltd [2021] NZSC 85, [2021] 1 NZLR 696.
(b)which is in competition with that business.
[334] In order to give cl 10.4 of the restraint some purpose, it must restrict the geographical location of where activities which compete with Cavalier’s business or any material part of it can occur.
[335] The act of manufacturing yarn on its own, does not meet these conjunctive requirements. It is the supply of the yarn to businesses which Cavalier would otherwise be supplying which is sought to be prevented. Manufacturing yarn to supply to a business outside New Zealand or Australia is not in breach of the restraint of trade. To suggest that it applies to yarn manufactured in New Zealand no matter where it was supplied to would be to render the geographical restrictions in cl 10.4 redundant. While Cavalier had aspirations to supply its felted yarn products worldwide, those aspirations cannot override the clear wording of the restraint which governed competition within the New Zealand and Australian market. The fact that this market was selected was consistent with Mr McKenzie’s view that “the redline for [Cavalier] was that we wouldn’t let [Pebblemill] or [Mr Radford] supply felted yarn within Australasia for the broadloom carpet market”.
[336] All bar one of the companies listed in sch 2 to the statement of claim were based outside New Zealand or Australia. Accordingly, the approaches to those companies were not in breach of the restraint of trade. Consequently, I only need to consider the other arguments raised by Mr Radford in relation to the enforceability of the restraint of trade in respect of Artoz Rugs, an Australian rug manufacturer.46
[337] I consider there was a reasonable interest to protect at the time the restraint of trade was entered into. As Cavalier submits, the purchaser of the goodwill of a business has a legitimate interest in seeking protection for that goodwill by obtaining a covenant which reasonably restricts the vendor from competing in a similar type of business.47 While Mr Radford emphasises the public interest in facilitating competition, I accept there is also a public interest in upholding such restraints to encourage entities with the necessary capital and expertise to acquire and undertake
46 Albeit the yarn was supplied to Thailand where Artoz manufactures its carpets.
47 Brown v Brown, above n 44, at 499.
commercial exploitation of a vendor’s technology without the risk that the vendor could compete.48
[338] While the duration of the restraint is long and, in practical terms, extended the four year restraint entered into at the time of the 2011 SPA, that was explicable in the circumstances of the case. While Mr Radford and the two other minority shareholders continued to hold shares in RYT, they had a vested interest in maintaining its viability as a business. That situation changed on the sale of the remaining shares, and it was legitimate for Cavalier to seek a fresh restraint of trade. Importantly, in this case, the restraint of trade had both the significant geographical limitation discussed above and it contained the exception which allowed Mr Radford to operate his own yarn products business, which, at that time, was pursuant to the IP Deed. Those were material exceptions to the restraint which enabled Mr Radford to carry on business while protecting the plaintiffs’ right to exploit the technology and IP they had acquired from him.
[339] In light of those significant exceptions to the coverage of the restraint, I am not prepared to find the duration and extent of the restraint were unreasonable.
Was there a breach?
[340] As noted above, Artoz Rugs was an Australian rug manufacturer, and was a customer of RYT in the 12 months prior to the 25% SPA being effected. The restraint therefore covered this customer. The evidence showed that from June to September 2015 emails were exchanged between Mr Radford and Mr Steve Clayton of Artoz Rugs. On 26 June 2015, Mr Radford gave a price per kilogram for 500 kg of what is described, in the subject line as “2400texSlub”. Mr Clayton then sent a further email on 13 September 2019 advising he now only needs 400 kg and enquires about how long the order would take and who the purchase order should be sent to. Mr Radford replied telling him to email the purchase order to him at Pebblemill. The last email exchange refines the details of how much is to be ordered and reiterates the earlier quoted price of AUD 18.60/kg.
48 Fletcher Aluminium Ltd v O’Sullivan [2001] 2 NZLR 731 (CA) at [39].
[341] The next email exchange is in May 2017, where Mr Clayton emailed Mr Radford saying “[y]ou were going to send me current yarn price for 2200 Tex Felted Slub Yarn”. Mr Radford replied saying they can “produce 130kg bail of 2040 Slub for you” and gave various price options for freighting it to Artoz’s manufacturing facility in Thailand. It is clear from the 2017 emails that a supply did occur as a consequence of the 2015 emails because Mr Radford says “the price will be higher than for the 400kgs we delivered to Bangkok in Jan 2016”. There is, therefore, evidence of Mr Radford approaching or accepting an approach from a person who was at any time during the 12 months ending on the completion date, a customer of RYT with a view to obtaining their custom in a business that is the same or similar to the RYT business and is in competition with RYT.
[342] If the exchanges described above occurred without RYT’s knowledge or authority, then on their face, there would appear to be a breach of the restraint at cl 10.2(b). However, there was evidence that RYT knew about the supply to Artoz and did not object. Specifically, Mr Hussey says he knew that Cavalier was supplying Pebblemill with raw materials to produce felted yarn for rugs and carpets, and he was “aware for one of the jobs that was done for Artoz that we carted some material and sent it down to him.” In my view, this is clear evidence that the supply to Artoz was authorised by Cavalier or, at the very least, acquiesced to by Cavalier and, for this reason, cannot be shown to be an actionable breach of the restraint of trade.
[343] Given this conclusion, strictly speaking I do not need to address Mr Radford’s last argument which is that as RYT sold its yarn manufacturing business to Cavalier Spinners Ltd in mid-to-late 2016, there is no business with which Mr Radford could compete. However, in the interests of completeness, I do.
[344] Mr Radford points out the restraint in cl 10.2 prohibits him from engaging in a business or activity that is “in competition with the Business or any material part of the Business” or from approaching or accepting an approach from a person who was a customer of RYT at the time of the 25% SPA with “a view to obtaining their custom in a business that is the same or similar to the Business and is in competition with the Business”. In each case “the Business” is defined as the business “carried on by the Company”, that is, RYT.
[345] In my view, the restraint of trade is drafted in the expectation that it is competition with RYT which must be protected against. This is because the term “Business” is expressly defined as the business “carried on” by RYT. That is in contrast to references to “the Purchaser Group” in other clauses (and in particular 10.2(c) and (d)) which is defined as being “the Purchaser [Cavalier] and each of its subsidiaries”. The “Business” is not defined as the business being carried on by any member of the Purchaser Group. I do not consider the fact that restructure of Cavalier was being contemplated assists Cavalier. If that was known, there was even more reason to describe the “Business” more generally and not confine it to the activities of RYT.
[346] In light of those observations, if the felted yarn manufacturing business is transferred to another entity, there can no longer be any risk of competition with RYT’s business. This would preclude the exchange with Artoz Rugs which took place in 2017 from being a breach of the restraint of trade under cl 10.2(b). While it could be an interference with the Purchaser Group and their customers under cl 10.2(c), I did not hear argument on that possibility, and do not consider it further. In any event, acquiescence would be a potential defence given RYT’s previous knowledge of, and assistance given to Pebblemill, when Pebblemill supplied Artoz with felted yarn.
Was the restraint of trade superseded by the employment agreement?
[347] An unsatisfactory aspect of this case was that, after filing its claim, Cavalier was obliged to withdraw aspects of the claim insofar as they related to alleged breaches of Mr Radford’s duty of confidence arising pursuant to his employment agreements as a result of the Supreme Court’s decision in FMV v TZB.49 That decision held that, under s 161(1) of the Employment Relations Act 2000, the exclusive jurisdiction of the Employment Relations Authority extended to all issues that arise “during the course of the employment relationship and in a work context”.50
[348] I accept this bars me from enquiring into allegations of use of any further developments to the Confidential Information after Mr Radford’s employment started.
49 FMV v TZB, above n 17.
50 At [93].
It also bars me from considering and deciding on the effect of the restraint of trade contained in the 21 December 2012 employment agreement. I can only consider the restraints associated with the purchase of the Radford Yarns’ business and the balance of the RYT shares. If, as Mr Radford claims, those are superseded by the employment agreement, that it is something which must be taken up in the Employment Relations Authority, although it strikes me as unsatisfactory that such interconnected issues must be dealt with in different jurisdictions.
Relief
[349] I have made findings which tread a midline between the respective positions of the parties. The plaintiffs have had some success on their claim for breach of confidence. I have found that they acquired confidential information under the 25% SPA, and yarn was supplied by the defendants to carpet and rug manufacturers outside the terms of any agreement with the plaintiffs, or under any other form of authorisation by the plaintiffs. For example, the transactions referred to in [255] above occurred without the plaintiffs’ knowledge, and therefore fell outside the terms of any arrangement authorised or encouraged by the plaintiffs.
[350] However, I have made findings as to the extent of what is the plaintiffs’ confidential information as set out at [200] above, which are more confined than was claimed by the plaintiffs. I have also held that the plaintiffs are now estopped from prohibiting the use of the Confidential Information as long as it continues to be used for the purposes that the defendants were led to believe were authorised.
[351] As a consequence, the relief which the plaintiffs seek under their primary cause of action for breach of confidence in equity is not entirely appropriate. The relief sought is as follows:
(a)an order to the effect that the defendants may not:
(i)further disclose the Confidential Information to any person or entity;
(ii)use the Confidential Information; nor
(iii)supply or sell or make offers to supply or sell, yarn that is manufactured using the Confidential Information to any person or entity;
(b)an order that the defendants must within 30 days of any order to the above effect, provide a full account of any conduct they have already engaged in that would have breached the above orders had they been operative when the conduct occurred; and
(c)an inquiry into damages as a result of the defendants’ breaches of duty of confidence.
[352] In light of my findings, I consider it is appropriate to make more confined orders regarding the defendants’ right to use or disclose the Confidential Information. These orders will encapsulate the terms which I consider the plaintiffs led the defendants to believe applied through the work they encouraged or authorised the defendants to undertake. I consider this includes supplying felted yarn to Nick Radford Rugs and to other rug and carpet manufacturers which Cavalier agreed may be supplied or which it advised in its email of 8 May 2017 could be supplied by the defendants.
[353] While the defendants may feel this is unduly restrictive, this is the logical consequence of the commercial agreements they entered into in 2011. The defendants are free to otherwise compete with Cavalier as long as they do not use the Confidential Information.
[354] I have considered whether it is necessary to make the order proposed in [351](b) above, requiring further disclosure, given disclosure of such transactions with customers or potential customers was required as part of the discovery process for these proceedings. While there is no reason to think that those disclosure requirements have not been complied with, such disclosure only related to the position up to the time of hearing. It is possible that there is further evidence of use or disclosure of the Confidential Information, including supplying yarn that is manufactured using the
Confidential Information, outside what was authorised or encouraged by Cavalier. Accordingly, I will make this order out of an abundance of caution.
[355] The plaintiffs have sought an inquiry into damages as a result of the defendants’ breaches of duty of confidence. I will make an order to this effect, although the evidence shows that supplies to rug and carpet manufacturers without the plaintiffs’ knowledge are limited and relate largely to supplying samples to customers of Cavalier with a view to supplying them in the future. It is difficult to see what damage arises as a consequence of a supply of samples, as opposed to supplying a production order. Furthermore, some of these customers (for example, ASA) are customers which Cavalier had stopped supplying, or was planning to stop supplying in any event and I also consider it unlikely that damage arises to Cavalier in those circumstances. The question of damages (if any) would, in my view, be a matter which is best resolved by negotiation between the parties.
[356] The plaintiffs have failed in their claim for breaches of the restraint of trade in the 25% SPA and for breach of cl 4 of the IP Deed and cl 12 of the 25% SPA, so the relief sought in respect of those claims is declined.
[357] Finally, there is the issue of costs. This is less straightforward than might normally be the case given the limited success the plaintiffs have had, and the success that the defendants have had in defending many elements of the plaintiffs’ claim. My initial view is that this is a case where costs should lie where they fall, although I am prepared to receive submissions on this issue, should the parties be unable to agree.
Orders
[358]Accordingly, I make the following orders:
(a)the plaintiffs own the Confidential Information described at [200];
(b)the defendants may not use or disclose the Confidential Information in any way except for the following purposes:
(i)for the production of apparel, novelty and exotic yarns using a combination of wool and other fibres, provided that these yarns cannot also be used in floor covering products, including without limitation, carpets and rugs, except as provided in (ii) and (iii) below;
(ii)for the production of yarns that may be required by Nick Radford Rugs Limited;
(iii)for the production of any other yarns, including for manufacturers of floor covering products, as approved by Cavalier in writing from time to time, and for those customers which Cavalier advised Mr Radford in its email dated 8 May 2017 that it would no longer be supplying;
(c)an order that the defendants must within 30 days of any order to the above effect, provide a full account of any conduct they have already engaged in that would have breached the above orders had they been operative when the conduct occurred; and
(d)an inquiry into damages as a result of the defendants’ breaches of duty of confidence.
Costs
[359]Costs are reserved. If costs cannot be agreed:
(a)any application for costs is to be filed and served within 30 working days of the date of this decision;
(b)any submissions in response are to be filed and served within a further 10 working days; and
(c)any submissions in reply are to be filed and served within a further five working days.
Suppression
[360] The defendants seek suppression in respect of aspects of the defendants’ evidence because it describes developments they have made to the Periloc yarn felting process which they consider constitute confidential information. The plaintiffs also wish to maintain confidentiality in the IP they acquired from Radford Yarns where that is appropriate. The scope of the suppression orders required is unclear at this stage.
[361] Accordingly, in the interim, the entire judgment is suppressed and may only be released to counsel. Counsel may discuss the judgment with their clients but counsel for the plaintiffs must not disclose information that the defendants have claimed is confidential.
[362] Counsel are to consult and within 30 working days are to advise the Court, preferably by way of joint memorandum, what redactions are required to prevent publication of information which is claimed to be commercially confidential:
(a)in the version of the judgment to be released to the plaintiffs; and
(b)in the version of the judgment to be made publicly available.
Solicitors:
Russell McVeagh, Auckland Hudson Gavin Martin, Auckland
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