Cavalier Corporation Limited v Pebblemill Limited

[2022] NZHC 419

IN THE HIGH COURT OF NEW ZEALAND CHRISTCHURCH REGISTRY

I TE KŌTI MATUA O AOTEAROA ŌTAUTAHI ROHE

CIV-2019-409-000604

[2022] NZHC 419

BETWEEN

CAVALIER CORPORATION LIMITED

Plaintiff

AND

PEBBLEMILL LIMITED

First Defendant

AND

EDWARD CHARLTON RADFORD

Second Defendant

Hearing:

7 March 2022

Appearances:

J Edwards and Y Dong for Plaintiff

J C L Dixon QC and T D Mahood for Defendants

Judgment:

10 March 2022

JUDGMENT OF ASSOCIATE JUDGE PAULSEN

This judgment was delivered by me on 10 March 2022 at 3.00 pm pursuant to Rule 11.5 of the High Court Rules

Registrar/Deputy Registrar Date:

CAVALIER CORPORATION LTD v PEBBLEMILL LTD [2022] NZHC 419 [10 March 2022]

[1]    The plaintiff (Bremworth) manufactures a range of wool carpets and rugs, including product lines manufactured using felted yarn. The first defendant (Pebblemill) is also a felted yarn manufacturer. The second defendant is the director of Pebblemill (Mr Radford).

[2]    Bremworth alleges the defendants have misused their confidential information relating to the manufacture of felted yarn. The defendants deny that allegation.

[3]    Bremworth applies for an order for inspection of Pebblemill’s machines and manufacturing processes under r 9.34 of the High Court Rules 2016.

[4]    The defendants do not oppose the making of an inspection order, but do oppose the terms upon which it is sought in one important respect. The objection relates to whether one of Bremworth’s senior employees participates in the inspection. The defendants say that is not appropriate in circumstances where the employee will observe property and processes that are commercially sensitive.

Background

[5]    Around 1992, Mr Radford founded Homestead Yarns Ltd, which developed technology to manufacture felted yarns for carpets.

[6]    Homestead Yarns Ltd was subsequently called Radford Yarn Technologies Ltd until it was renamed Connaught Textiles Ltd in April 2011, in anticipation of the acquisition of a 75 per cent share in the company by Bremworth, through its subsidiary, Curlicue Ltd.

[7]    In April 2011, Curlicue changed its name to Radford Yarn Technologies Ltd (RYT) and, in December 2012, Bremworth acquired the remaining 25 per cent share of the company.

[8]    Bremworth says the key asset it purchased as part of the acquisition of RYT was its intellectual property.

[9]    From 2011 to 2017, Mr Radford was employed by RYT as a Product Development Manager, and then by Bremworth as RYT’s International Sales Manager. However, Mr Radford had also incorporated Pebblemill with Bremworth’s knowledge in March 2011, and, while he was employed by Bremworth, Pebblemill manufactured (and continues to do so) felted yarn using an IWS Periloc felting machine Mr Radford had retained. Mr Radford was also granted a licence to use RYT’s intellectual property.

[10]   From around June 2017, Bremworth had concerns Mr Radford was continuing to use its intellectual property without authorisation. On 1 June 2017, Bremworth’s lawyers proposed that an independent expert be appointed to “review the intellectual property of Mr Radford to independently determine if it is the same Intellectual Property of our client”. The defendants agreed to the appointment of an independent expert with some conditions, but no appointment was made.

[11]   In November 2019, Bremworth brought this proceeding alleging breach of confidence in relation to modifications made to the IWS Periloc machine and associated manufacturing processes used to manufacture felted yarns for carpets. Bremworth believes it owns the felting technology that has been used by the defendants. The defendants deny the use of Bremworth’s confidential information, claiming that Mr Radford has used his intrinsic and residual know-how and knowledge, as well as information in the public domain, to produce felted yarns.

[12]   The proceeding is well-advanced. The case is to be heard in August 2022 and Bremworth’s briefs of evidence are due to be exchanged by 22 April 2022. For that reason, this application, which was only filed in late January 2022, has been given urgency.

The application and the issue

[13]   Bremworth has drawn the inference the defendants have made unlawful use of its confidential information from the following:

(a)Bremworth understands it took Mr Radford decades to develop the felting technology and processes it acquired, yet he claims to have been able to replicate the ability to manufacture felted yarns, as well as develop new processes, in just five years since he left Bremworth’s employment;1 and

(b)the ability to manufacture felted yarns with the consistency required for high-end broadloom carpets has not been replicated by competitors other than the defendants.

[14]Counsel are agreed that key issues in the proceeding are:

(a)what aspects (if any) of Bremworth’s machines and manufacturing processes for producing felted yarns are Bremworth’s confidential information; and

(b)whether the defendants have misused that confidential information.

[15]   It is also not in dispute that the determination of these issues will involve a comparison of the parties’ respective felting machines and manufacturing processes. Accordingly, the defendants realistically do not oppose the Court ordering inspection and observation of their machines and manufacturing processes by an independent expert and by counsel, provided appropriate restrictions are imposed to protect their confidential information.

[16]   Where the parties have not been able to agree, and the reason for this application, is Bremworth’s contention that it’s Technical Manager, Mark Hussey, be allowed to inspect the defendants’ manufacturing processes and machines. Bremworth says it is critical Mr Hussey participate in the inspection because this case involves a highly technical subject matter, upon which there are no relevant experts as knowledgeable as Mr Hussey and Mr Radford available to give evidence.

1      I understand Bremworth considers that in regard to any processes the defendants have developed, they have obtained a springboard advantage. See Aquaculture Corporation v New Zealand Green Mussel Co Ltd (1985) 5 IPR 353 (HC) at 384-385.

[17]   The defendants say, however, there are independent experts available and it is not appropriate that Mr Hussey undertake the inspection as that will inevitably reveal highly commercially sensitive trade secrets of Pebblemill to its competitor, Bremworth.

[18]Mr Radford has filed a substantive affidavit in which he says:

(a)much of what Bremworth claims to be confidential information is not confidential in any relevant sense, as it has been around since the 1970s, is in the public domain, and is used by other yarn manufacturers throughout the world;

(b)though he made specific enhancements to the technology while employed by RYT, Pebblemill does not use those enhancements in its operations; and

(c)since leaving Bremworth’s employment, he has continued to develop felting technology and processes and made significant improvements that he regards as being commercially sensitive and valuable to Pebblemill’s business.2

Rule 9.34(1)

[19]Rule 9.34(1) of the High Court Rules provides:

Order for inspection, etc

(1)The court may, for the purpose of enabling the proper determination of any matter in question in a proceeding, make orders, on terms, for -

(a)the inspection of any property:

(b)the taking of samples of any property:

(c)the observation of any property:

(d)the measuring, weighing, or photographing of any property:

(e)the conduct of an experiment on or with any property:

(f)the observation of a process.

2      The details have been set out in a confidential affidavit of Mr Radford dated 21 February 2022.

[20]   The power to make an order for inspection under this rule is discretionary. The applicant must satisfy the Court that the order is required for the purpose of enabling the proper determination of any matter in question in the proceeding. Once that has been established, the exercise of discretion in favour of an order is likely.3 Where there is doubt as to whether the orders sought should be made, the Court must balance the probable evidential benefit of the information obtainable against the detriment and expense involved to persons who are subject to the order.4

[21]   Bremworth submits it is not unprecedented to allow an inspection to be undertaken by an employee of a party to litigation when that employee has technical knowledge or skill.5 The defendants submit, correctly in my view, the usual and appropriate approach is that in circumstances where an inspection might result in the disclosure of commercially sensitive information, the Court permits only independent experts and counsel to participate in the inspection.6

Mr Hussey and Bremworth’s submissions

[22]   Mr Edwards submits the facts of this case are unique, and decisions in other cases of limited relevance, because:

(a)there is a very limited pool of experts to give evidence on the matters in issue;

(b)the evidence that Mr Hussey will give is critical to Bremworth’s claim; and

(c)few of the previous decisions of the Court deal with the circumstance of an employee of a party requiring inspection rights.

3      Wheelans v Hayes (No 2) (1986) 3 NZCLC 99,787.

4      A C Beck and others McGechan on Procedure (online ed, Thomson Reuters) at [HR9.34.04].

5      Sealegs International Ltd v Zhang [2017] NZHC 741.

6      PAE (New Zealand) Ltd v Brosnahan HC Wellington CIV-2005-485-943, 3 September 2007 at [32]; Ecostore Co Ltd v Worth [2017] NZHC 2943 at [40]; Transpacific All Brite Ltd v MPC Traders Ltd HC Napier CIV-2011-441-169, 24 November 2011 at [66]; Cogle v IAG New Zealand Ltd [2019] NZHC 793 at [40].

[23]   Mr Hussey began working at RYT in 1995, and has remained in the employment of RYT/Bremworth ever since. Mr Hussey became RYT’s factory manager before 2011 and managed the felted yarn operations at RYT until 2016. When those operations moved to Bremworth’s plant in Wanganui, Mr Hussey relocated there and became Bremworth’s Technical Manager.

[24]   Mr Hussey worked with Mr Radford  at  both  RYT  and  Bremworth  until Mr Radford’s employment ended on 31 May 2017. Given the endurance of his employment, Bremworth argues Mr Hussey (and Mr Radford) is the most knowledgeable person on the Periloc machines and manufacturing processes to produce felted yarns for commercial uses in the southern hemisphere, and perhaps beyond that. It is said Mr Hussey understands how the felting technology has developed over that period and he is best placed to identify similarities or differences between the parties’ respective machines and manufacturing processes.

[25]   There is no dispute Mr Hussey is an experienced senior employee of Bremworth. Bremworth says there can be no question as to his experience, integrity or reliability. He will agree to give his evidence as an expert in compliance with the code of conduct for expert witnesses.7 It is submitted that any concerns the Court may have as to Mr Hussey’s independence goes to the weight, not the admissibility, of his evidence, and is a matter for trial.

[26]   Bremworth rejects a suggestion made by Mr Radford that any competent industrial engineer would be a suitable expert. It says that to form a proper view about the similarities and/or differences between the parties’ respective machines and processes, the expert needs in-depth knowledge of both machines and the whole yarn- making process (not only parts of the process). Bremworth’s Chief Financial Officer, Mr Tan, says Bremworth has not been able to find such an expert.

[27]   Mr Edwards said that, despite the references in various documents to Bremworth having engaged an independent expert from AgResearch, it has not in fact engaged such an expert. Furthermore, he contends, even if such an expert had been engaged, Bremworth would still require Mr Hussey to give evidence.

7      High Court Rules 2016, sch 4.

[28]   Bremworth submits it has offered adequate protections to avoid any harm to the defendants from disclosure of their commercially sensitive information. These include the giving of undertakings that any information obtained from inspection would not be disclosed to other Bremworth employees and as to the payment of damages should the defendants’ intellectual property rights be infringed. Bremworth will also agree to an inspection of its felting machines and manufacturing processes, on an annual basis, to confirm there has been no infringement of the defendants’ intellectual property rights.

[29]   Bremworth rejects Mr Radford’s evidence that, on an occasion prior to Bremworth acquiring RYT, an employee had breached confidentiality obligations owed to RYT, noting the absence of detail to support the allegation.

[30]   Bremworth also submits I must balance the risk of harm to the defendants through a breach of their intellectual property rights, following an inspection, against the disadvantage it will suffer if Mr Hussey is unable to participate in the inspection. It says there is no credible basis for concern the defendants will suffer any harm, whereas Bremworth will be placed at a significant disadvantage because it will lack the opportunity to properly prepare for the hearing and produce evidence it requires to prove this claim.

My assessment

[31]   Mr Dixon QC submits, and I agree, that Bremworth’s application is premised on two propositions:

(a)that Mr Hussey is the only person available with the necessary expertise to give evidence for Bremworth on the issues; and

(b)that Bremworth has offered terms that are sufficient protection from any harm the defendants may suffer from disclosure arising from the inspection of their commercially sensitive information to Bremworth.

[32]   I do not accept that Mr Hussey is the only person available with sufficient experience and expertise to give evidence on Bremworth’s behalf. There are several reasons for this.

[33]   When first raising its concern that Mr Radford was misusing its confidential information in 2017, Bremworth suggested the appointment of an expert to independently determine the issue. While no expert was appointed at the time, the proposal must clearly have been premised upon a belief that such an independent expert was available.

[34]   Similarly, since this proceeding was filed, there have been references in correspondence and documents filed with the Court, to Bremworth’s independent expert. As a result, Mr Dixon understandably expressed surprise at Mr Edward’s advice to the Court that Bremworth has not in fact engaged an expert.

[35]   Mr Dixon referred me to Bremworth’s application which, in its schedule, refers to “an independent expert who will be giving evidence for Bremworth can be present during the inspection”. He referred also to discussions between counsel, reflected in Mr Tan’s second affidavit, that Bremworth’s independent expert “is employed by AgResearch”.8 Attached to that affidavit is a letter from Bremworth’s solicitors, Russell McVeagh, to the defendants’ solicitors, Hudson Gavin Martin, in which Russell McVeagh state:

Our client has engaged an independent expert to attend an inspection of the defendants’ machines and manufacturing processes and provide expert evidence. The expert is employed by AgResearch and their expertise is in the area of carpet and carpet yarn product development.

[36]   I understand the independent expert Bremworth had identified is Andrew Cooper from AgResearch. There is some evidence of Mr Cooper’s experience and expertise. Whilst this is only in the form of a Linked-In profile and must be treated with caution, Mr Cooper’s qualifications and experience appear impressive and he identifies specific areas of expertise which are directly engaged in this proceeding. On

8      At paragraph 11 of the further affidavit of Victor Thien Soo Tan dated 3 March 2022.

the face of it, Mr Cooper would appear to be amply qualified to give expert evidence on behalf of Bremworth.

[37]   Bremworth’s evidence in support of its application is contained in two affidavits of Mr Tan. While he says Bremworth has not found an expert with the in- depth knowledge of machines and the whole yarn-making process required in this case, he does not appear to have any relevant qualifications or experience to make such an assessment. Importantly, there is no evidence from any person, with qualifications or technical skills in the area of carpet/yarn manufacturing, to explain what it is about this case that is so unique that the field of suitable witnesses is limited to just Mr Hussey and Mr Radford.

[38]   Another unsatisfactory feature of Mr Tan’s evidence is the lack of any detail as to enquiries Bremworth has made to identify suitable witnesses, whether here or overseas, and the responses received to those enquiries.

[39]   Bremworth’s submissions make several references to there being no expert available that is as knowledgeable on the subject matter as Mr Hussey. Bremworth has not satisfied me that is the case, but even if it were, it is not the appropriate standard to be applied. I agree with Mr Dixon that the issue I am concerned with is whether there are persons available who have specialised knowledge or skill, based on training, study, or experience, from whom the Court would obtain substantial help in determining the proceeding.9

[40]   Finally, on this issue, Mr Dixon’s written submissions noted that as Bremworth had failed to plead to positive allegations in the statement of defence, most of the processes that Bremworth wishes to inspect are irrelevant on the pleadings. In response, on the last working day before the hearing, Bremworth filed a statement of reply to those positive allegations in which it pleads it has insufficient knowledge of a range of technical matters. Mr Dixon makes the point that if, as can be assumed to be the case, Bremworth has had the assistance of Mr Hussey in the preparation of its case,

9      Evidence Act 2006, s 25(1).

he would appear to be in no better position than an independent engineer to offer opinions on the matters in issue.

[41]   I accept that in a case like this, the Court must balance the probable evidential benefit of the information that may be obtained from an inspection against the detriment and expense involved to persons who are subject to the order. The defendants’ position, supported by the affidavit of Mr Radford, is that while the enhancements he has developed in the felting process have provided significant efficiency and quality gains, they are quite simple in nature, and both the equipment, processes and the underlying principles would be readily apparent upon inspection by Bremworth staff. While I do not accept his assertion that an employee of Bremworth has on a previous occasion misused confidential information (due to the lack of detail supporting the allegation), Mr Radford makes a strong point that Mr Hussey cannot unknow information once he has obtained it.  I accept  it  is  unrealistic to  expect  Mr Hussey could compartmentalise that knowledge.

[42]   What must be borne in mind is that, here, there is no objection to an inspection being undertaken, only to Mr Hussey’s involvement in it. Had I been accepting of Bremworth’s position that Mr Hussey is the only suitable expert witness available, I may well have been satisfied the protections offered were satisfactory in the circumstances. However, that is not the position. In a case where Bremworth has not satisfied me that there are not alternative expert witnesses available, any additional evidential benefit resulting from allowing Mr Hussey to participate in the inspection would appear to be slight.

[43]   Related to this, I accept the submission for the defendants that any evidence Mr Hussey gives at trial as an expert may well be given little weight because he plainly lacks independence. The defendants submit Mr Hussey is irretrievably biased given his longstanding position as a technical manager for Bremworth and his evidence cannot be substantially helpful. I was referred to Commissioner of Inland Revenue v BNZ Investments Ltd, where the Court recognised in some circumstances it may be appropriate to rule out expert evidence before trial as follows: 10

10     Commissioner of Inland Revenue v BNZ Investments Ltd [2009] NZCA 47, (2009) 19 PRNZ 533 at [22].

[22] In the New Zealand context, the question for decision is whether the proposed expert evidence will meet the tests set out in ss 7 and 25 of the Evidence Act. To the extent the Simcock/McLeod evidence is evidence of fact, it must be relevant, and to the extent it is expression of an opinion, it must be substantially helpful to the fact finder. We accept that there may be cases in which the position of the proposed expert is so lacking in independence as to make it obvious that an opinion he or she expresses in evidence will not be able to be substantially helpful, and in those circumstances it may be appropriate to rule out the evidence at the pre-trial stage in order to avoid the costs which may otherwise be incurred in responding to it.

Result

[44]   There will be an order under r 9.34 High Court Rules allowing Bremworth to inspect all machines of the defendants that are or have been used by them to produce felted yarns, as well as the manufacturing processes used by the defendants to produce felted yarns. Such inspection shall be carried out on the terms set out in the attached schedule to this judgment.

[45]   I reserve leave for the parties to apply for further directions in respect of any issues that arise in the implementation of the inspection order, including the date of the inspection and the terms of any confidentiality undertakings to be provided.

[46]   The defendants are entitled to the costs of this application as they have been substantially successful. I expect counsel will therefore be able to agree on costs but may file written memoranda within 14 days if there are disputes as to quantum.

O G Paulsen Associate Judge

Solicitors:

Russell McVeagh, Auckland Hudson Gavin Martin, Auckland

SCHEDULE

1.Mr Radford will be present during the inspection.

2.Counsel for the parties can be present during the inspection.

3.Any Independent Expert who will be giving evidence for Bremworth can be present during the inspection (“Independent Expert”).

4.Prior to attending the inspection, counsel for Bremworth and any Independent Expert must provide signed confidentiality undertakings. Such undertakings shall be agreed as between the parties or, if they require, in a form acceptable to the Court and include that:

(a)any information from the inspection will not be disclosed to any other Bremworth personnel or used other than to give evidence in these proceedings; and

(b)Bremworth will be responsible for any damages that may be sustained to the defendants’ property as a direct result of the inspection.

5.The scope of the inspection, including any reports or materials created with any information from the inspection, will be limited to what is relevant to these proceedings.

6.The inspection is to take place before 21 March 2022, at a time to be agreed or such other date as the Court determines. If the inspection is unable to take place due to Government COVID-19 requirements, the parties will agree on an alternate date for the inspection to take place, as soon as possible thereafter.

7.The duration of the inspection will be limited to a day. Should an extension be required, the parties will agree on a further date.

8.The inspection can be photographed and/or filmed by counsel for Bremworth and any Independent Expert. Copies of photographs or video footage obtained during the inspection will be provided to counsel for the defendants. Any disclosure or use of such photographs or video footage will be subject to the signed confidentiality undertakings provided by counsel for Bremworth and any Independent Expert.

9.Any photographs and/or video footage obtained during the inspection which is not relevant to these proceedings will immediately be destroyed, along with all copies of such photographs or video footage.

10.Counsel for the defendants and any Independent Expert who will be giving evidence for the defendants, are permitted to a reciprocal inspection of the machines and manufacturing process used by Bremworth to produce felted yarns, on substantially similar terms to those set out above.