Foot Science International Limited v Xu

[2014] NZHC 645

IN THE HIGH COURT OF NEW ZEALAND CHRISTCHURCH REGISTRY

CIV-2013-409-001573 [2014] NZHC 645

BETWEEN  FOOT SCIENCE INTERNATIONAL LIMITED

Plaintiff

AND  JIN XU

First Defendant

ANDGAIT TECHNOLOGY INTERNATIONAL LIMITED Second Defendant

Hearing:                   27 March 2014

Appearances:           S M Dwight and P J van Keulen for the Plaintiff

J A Hazel and S Aymeric for the Defendants

Judgment:                2 April 2014

JUDGMENT OF PANCKHURST J

An interim injunction application

[1]      Foot Science International Limited (Foot Science) is a Christchurch company which manufactures orthotics for international distribution.   It seeks an interim injunction to restrain the manufacture, marketing and distribution of an orthotic said to be a direct replica of its product line.  It also seeks to restrain the manufacture, distribution and use of a heating machine used to mould orthotics to the shape of a user’s foot.  Foot Science’s case is that the defendants developed the replica orthotic, and  the heating machine,  using its  confidential  information.    Foot  Science  also claims copyright in relation to specification data and computer programmes used in

the manufacture of its orthotics.

FOOT SCIENCE INTERNATIONAL LIMITED v XU [2014] NZHC 645 [2 April 2014]

[2]      The first defendant, Mr Xu, is a former employee of Foot Science.   He worked for the company for over six years until January 2011.   Subsequently, in China  Mr Xu developed  and  manufactured  orthotics,  and  a heating machine, in competition to those sold by the plaintiff.   Mr Xu has also incorporated Gait Technology International Limited (Gait) in New Zealand as a distribution company for his products.  He is the sole director of, and shareholder in, Gait.

Factual context

[3]      Foot Science has been in business for about 30 years. The company produces a range of orthotics for medical and retail sales.  The main brand it manufactures is called Formthotics.  Formthotics are made for supply to medical professionals who deal with foot and leg deformities or injuries, and also to retailers who sell orthotics for use predominantly in sports footwear.  Foot Science has conducted a research and development programme and considers that its Formthotics are a unique and superior product.

[4]      Foot   Science’s   key   markets   are   in  Australia,   the   United   Kingdom, Scandinavia, Eastern Europe, Russia, Austria and Germany.   It has distributors in each of these markets, but in New Zealand Formthotics are supplied directly to retailers and medical professionals.

[5]      In April 2005 Mr Xu was employed by Foot Science initially as a machine operator, but subsequently as a research and development co-ordinator.  On assuming that position he signed an employment agreement dated 6 July 2009, clause 15 of which is a confidentiality provision.   Any information acquired in the course of Mr Xu’s employment, unless “already publicly known”, was deemed confidential. This included strategies, processes, materials, costs or trade secrets relating to the business, customers, or any associates of Foot Science.

[6]      While  in  the  search  and  development  role  Mr  Xu  developed  a  heating machine used to heat Formthotics within a shoe to a defined temperature.  On putting the shoes on the orthotic is formed to the shape of the wearer’s feet.  The machine is used by trained personnel, typically medical clinicians.

[7]      In January 2011 Mr Xu left Foot Science.   In March 2013 he incorporated Gait, a $100 company.   Its registered office is at Mr Xu’s street address in Christchurch.

[8]      In  about  September  2013  Mr  Xu  sent  standard  letters  to  Foot  Science’s overseas distributors announcing his entry into the orthotics market.   The letters began:

Please allow me to introduce myself at first.  My name is Jin Xu and I used to work for Foot Science International Limited from 2004 to 2011.   For a couple of years I worked at the manufacturing department, then I was doing research and development jobs with Dr Charlie Baycroft directly.  So I have accumulated rich experience in both manufacturing and developing orthotic products during the time.   I left FSI mainly because I didn’t identify with their strategies and I felt no future.   And now I started my own orthotic business and hopefully we could do it better.

We have set up our own manufacturing facility at this stage.  We are making “OrthoGait” brand medical orthoses and related devices.   Our orthoses included  three  different  single  density  and  another  three  dual  density products which cover for both adult and children.   The devices includes heating machine and PodoScope.   We are using top quality foam material and making equal or even better orthoses as Formthotics.   We define ourselves as a medical supplier and we only focus on medical customers.

[9]      The balance of the letter stated that some European clients were already using OrthoGait products and good feedback had been received.  Samples were enclosed under cover of the letter, together with particulars of the OrthoGait website.

[10]     Mr David Boyd, the managing director of Foot Science, was in Denmark in September 2013.  Foot Science’s Denmark distributor showed Mr Xu’s letter and the sample orthotics sent under cover of it to Mr Boyd.  He examined the samples and regarded them as copies of his company’s Formthotic products.

[11]     Upon his return to New Zealand Mr Boyd contacted all of Foot Science’s distributors and found that they had received similar letters.  Some of the distributors also received an invoice which referred to the shipper being Mr Xu’s company, Gait, although at an address in China rather than its registered office in New Zealand. After undertaking some further enquiries, including into the properties and manufacture of the OrthoGait products, Foot Science filed this proceeding in late September 2013.  It also applied for an interim injunction.

[12]     Following service of the proceedings a statement of defence and notice of opposition to the application for an interim injunction were filed.   The injunction application  was  scheduled  for  hearing  in  late  February  2014.    However,  after Foot Science’s submissions had been filed, Mr Xu swore and filed an affidavit in opposition a short time before the hearing date.  This led to an adjournment of the injunction hearing to enable Foot Science to respond to the late evidence.

Foot Science’s claims

[13]     The statement of claim asserts six causes of action.  Four are against Mr Xu being  a  breach  of  his  employment  contract  (in  using  confidential  information), breach of an equitable duty of confidence (in using the same confidential information), a further breach of the employment contract (by manufacturing/distributing a heating machine) and breach of copyright in relation to various elements of the Formthotic manufacturing process.  There are two causes of action against Gait, namely for alleged breach of confidence and copyright as a secondary party.

[14]     In the present interlocutory context I need not dwell upon the causes of action against Gait.  Mr Xu and his company are effectively one and the same, at least for present purposes.  If there is a serious question to be tried and the other discretionary factors favour the grant  of an injunction against him, Gait will be in a similar situation.

[15]     To  my  mind  there  was  a  marked  difference  between  the  approaches  of counsel in supporting, and resisting, the application for injunctive relief.  Ms Dwight placed most emphasis upon the causes of action founded upon misuse of confidential information, whereas Mr Hazel emphasised suggested inadequacies in the copyright claims, including that inadequate particulars had been supplied so that Mr Xu was embarrassed in responding to Foot Science’s claims.

The affidavit evidence

Foot Science witnesses

[16]     Three deponents swore affidavits in support of Foot Science’s case, while Mr Xu has sworn the main affidavit in opposition.   Inevitably, the evidence is in conflict, and I cannot resolve such conflict in the present context.   However, it is necessary to determine whether Foot Science has established a serious question to be tried.

[17]    Mr Boyd’s affidavit refers to each step in the manufacturing process of Formthotics and asserts that materials or techniques used by Foot Science are unique to the product.  A proprietary polyethylene foam has been developed in co-operation with the company’s supplier and this is “exclusive to Foot Science”.1    The foam is available in single density (one layer) and dual density (two layers), the latter providing a softer top layer.  A variety of densities (hardness) is also available and when two layer foam is used lamination is effected without the use of an adhesive. This is said to enhance the flexibility of the foam.2

[18]     Formthotics also feature distinctive colour patterns, with a different colour to the underside as compared to the upper side which contacts with the wearer’s foot. Mr Boyd considers that to replicate the colours used by Foot Science knowledge of the foam specifications is required.

[19]     Turning to the process of manufacture, Foot Science maintains that a number of unique steps are entailed.  Firstly, its foam supplier provides foam blocks already cut to a particular profile.   This is achieved by the use of rollers developed and owned  by  Foot  Science.     The  specifications  for  the  rollers  are  confidential

information, as access to the specifications would enable the rollers to be replicated.3

[20]     The foam is milled (cut) into a three-dimensional shape on the underside using a computer numerically controlled router.   The CNC router responds to a

computer programme in milling the underside of the foam to the desired shape.

1 Boyd affidavit, 17 October 2013 at para 12.

2 Para 13.

3 Paras 18-19.

Three cutting tools are used by the router to produce the final shape.   Both the specifications for the cutting tools, and the computer programme for the router, are considered to be commercially sensitive.4

[21]     The next step is called thermoforming, whereby the milled orthotic is further shaped to fit the footwear in which it will be used.   This is done by heating the milled orthotic to a specific temperature and “forming it between a metal mould and rubber   diaphragm”.5      Thereby,   Foot   Science   maintains   that   the   required three-dimensional under surface of the Formthotics is formed.

[22]     Finally, there is a fitting process.  This involves the use of a heating machine, the current version of which was developed by Mr Xu.  The Formthotic is placed in the customer’s shoes and heated to a specific temperature for a set period of time. The customer then puts the shoes on and the upper surface of the Formthotic is moulded to the shape of the customer’s feet.6

[23]     Supporting affidavits were sworn by business  associates of Foot Science. Mr Morris Keats is the general manager of the company which supplies foam blocks to Foot Science.  His first affidavit contains this:

The foam that we produce for Foot Science is, in my view, a proprietary product.  That is, it is owned by Foot Science – it is made from a particular process and recipe, using equipment specifically designed for manufacturing this foam.   We also supply the foam used by Foot Science in a particular profile which it then mills into the required orthotic shape.7

[24]     Mr Keats was asked to examine samples of the OrthoGait products.  Having done so, he stated:

It  is  my  conclusion  that  the  foam,  colours,  profiling  and  design  of  the Foot Science orthotics could not have been replicated to the degree that the OrthoGait orthotics have achieved without knowledge of the Foot Science specifications and manufacturing process.8

4 Paras 20-21.

5 Para 22.
6 Para 24.
7 Keats affidavit, 13 October 2013, paras 11-12.

8 Para 20.

[25]     Mr  Paul   Morrison   is   the  manager  of   an   engineering  company  that manufactures medical devices and shares premises with Foot Science.  Mr Morrison has assisted Foot Science in the development of its manufacturing process for Formthotics.  His affidavit contains this:

The Foot Science process of manufacturing an orthotic out of pre-profiled block of foam is a very complex and costly way to produce an orthotic.  I believe the Foot Science process … is unique in the industry.  Most orthotics (or any similar product made out of foam) are made by moulding the product in  shape  (either  injection  moulding  or  compression  moulding). Manufacturing orthotics through a moulding process is cheaper, easier and quicker.

The milling part of the Foot Science manufacturing process is done by a CNC machine (a computer numerical control machine).  At its simplest this is a machine with a cutting tool (or tools) that is directed by a computer programme.  This programme makes the cutting tool follow a path or map (known as the tool path). …

This programme is very precise and contains a number of variables from the size of the cutting tool, the direction of the cutting tool, the rotation speed, the angle, the depth et cetera.9

[26]     Mr  Morrison  also  examined  samples  of  the  OrthoGait  products  and concluded that they were an exact replica of Formthotics.   He concluded that the characteristics of the foam used and the milling process mirrored the method of manufacture developed by Foot Science over many years.

Mr Xu

[27]     Upon leaving Foot Science in early 2011 Mr Xu returned to China and later that year, and in 2012, began development of his own orthotics.  This resulted in the OrthoGait product line in 2013.

[28]     Mr Xu maintains that OrthoGait is not a copied replica of Formthotics.  He considers  that  the  manufacture  of  orthotics  involves  a  relatively straightforward process  and  that  all  orthotics  have common  elements  on  account  of the design limitations imposed by the need to fit an insole, moulded to the human foot, into some  type  of  footwear.    He  expressly  denies  using  Foot  Science’s  intellectual property in the development and manufacture of OrthoGait products.

[29]     While the general process of manufacture may be similar, Mr Xu maintains there are differences between the two products, including:

(a)      The foam used is not a proprietary product, being a polyurethane foam obtainable from many factories throughout Asia.

(b)Although the foam used in OrthoGait products is of variable hardness, it is commonplace for orthotic manufacturers to provide such a selection.   The actual density, or hardness, of the OrthoGait and Formthotic product ranges is significantly different.

(c)      OrthoGait orthotics have two layers of foam,  but this is common practice throughout the industry.  However, Foot Science uses a heat laminating process, whereas Mr Xu’s products are a glued dual layer foam.

(d)      The cutting of foam into shape is done by the supplier and, hence, the

specifications for the rollers are not within Mr Xu’s knowledge.

(e)      Mr Xu designed his own moulding process based on a very common technique using vacuum pressure, as opposed to hydraulic pressure. In his view there is nothing special or secret about the foot moulding process.

(f)      Mr  Xu  has   developed   a  heating  machine   of  similar  external appearance to the Foot Science model, but his machine has a number of important differences.   These include more complicated controls and  a  more  complex  internal  electrical  design.     An  electronic technician     designed     the    machine,    without     reliance     upon

Foot Science’s version.10

[30]     Mr Xu considers that there are obvious differences between the Formthotics and the OrthoGait product lines.                  In September 2013 Foot Science wrote to its

international distributors alleging that Mr Xu, and Gait, had misused Foot Science’s

intellectual property:

Gait Technologies claim that their products are manufactured from polyethylene foam, but from what we have seen so far we believe it is an inferior quality material and we are carrying out laboratory tests to confirm that  belief.    We  are  also  investigating  legal  action  against  Jin  Xu  and Gait Technology …

Hence, in his affidavit Mr Xu raised the question, “How can we be the same yet

‘inferior’?”11

Reply evidence

[31]     The Foot Science deponents swore affidavits in reply.  Mr Boyd stressed that Formthotic products are all milled, whereas other orthotic manufacturers predominantly use moulding to shape their products.  The OrthoGait product line is milled.  Annexed to the affidavit are representative examples of specifications for foam blocks and rollers, and also design materials relating to Mr Xu’s development of the heating machine. There are also screenshots taken from the hard drive used by Mr Xu at Foot Science.   These shots show that Mr Xu had computer access to Foot Science’s  intellectual  property.    Mr  Boyd  also  pointed  out  that  Mr  Xu’s employment as a machine operator ensured that he was familiar with foam block specifications and profiles, since an aspect of the role was checking the blocks supplied against the specifications.

[32]     Mr  Keats  disputed  Mr  Xu’s  evidence  that  the  foam  used  in  OrthoGait

products was an “off the shelf” product.  He deposed:

I find this hard to believe and do not think it is possible.  The foam used by Foot Science is, in my view, unique in terms of hardness, density and colour, and is not a standard product.  Because of its particular properties and use (application) it must be made to order and that must be done with knowledge of those properties.   This foam is different to any other foam when manufactured.12

[33]     Mr  Morrison  deposed  that  he  doubted  that  Mr  Xu  had  developed  the

OrthoGait products by measuring and scanning other product lines.  He states:

… Mr Xu asserts that he was able to create the CAD programme to cut the orthotic from measurements taken by hand.  I do not accept this is possible. Just measuring a  Formthotic orthotic in its finished state  without inside process knowledge will not give sufficient information to enable a person to determine  the  programme  to  direct  the  CNC  machine  in  the  process  of milling to the degree of replication that Mr Xu has demonstrated.   These basic measurements will not provide the necessary information so that a person can analyse and determine all of the many variables in the milling process such as where the milling commences, the angle at which the foam block is held in comparison to the angle of the cutting tool, the speed at which the cutting tool rotates, whether the tool rotates clockwise or anticlockwise, or most importantly the specific path the cutting tool takes (whether it reverses, lifts, stops and starts, or does any number or combinations of such functions).13

[34]     Generally, Mr Morrison expressed the view that the degree of replication revealed in relation to the OrthoGait products required knowledge of the foam characteristics, the foam block profile, the milling process including the cutting process, the cutting tool specifications and the moulding process.  He did not accept that information of this precise nature could be ascertained by taking hand measurements and a 3D scan of Formthotic products.

Is there a serious question to be tried?

Breach of confidence

[35]     The   respective   cases   involve   an   assertion   that   the   defendants   used Foot Science’s confidential information to develop the OrthoGait product line on the one hand, and a counter assertion that Mr Xu employed reverse engineering from products in the public arena to develop OrthoGait on the other.  Foot Science must prove three elements to establish a breach, namely that the information in question was indeed confidential and not publicly known; the information was imparted, or made available, to Mr Xu in circumstances of confidence; and, thirdly, that Mr Xu

made unauthorised use of the information to the detriment of its owner.14

[36]     I am satisfied there is a serious question to be tried.   At this interlocutory stage factual findings cannot be made.   It is sufficient  to say that the affidavit evidence discloses a seriously arguable case.  I regard the letter written by Mr Xu to Foot  Science’s  international  distributors  as  a  significant  starting  point;  and  the

evidence of Messrs Boyd, Morrison and Keats as persuasive, at least at this preliminary stage.

Breach of copyright

[37]     I propose to base this decision on the breach of confidence causes of action, rather than the alleged breaches of copyright.   In submissions, Ms Dwight was candid in accepting that the plaintiff’s case had not been fully advanced in relation to the copyright elements.

[38]     The reply evidence included exhibited materials which may well support breach of copyright findings; but to this point which parts of the drawings, data, specifications and programmes are said to comprise the creative work, and which substantial parts of that work are alleged to have been copied so as to infringe copyright, has not been articulated.  In these circumstances I do not rest the decision upon the copyright claims.

The balance of considerations (convenience)

[39]     A number of factors were raised in this context.  Ms Dwight submitted that the Formthotic product line had been developed over a considerable period and was now put at risk by a replica product, that proof of loss was likely to be difficult so that  damages  are  not  an  adequate  remedy,  and  that  in  any event  there  was  no evidence to show that the defendants had the means to pay damages.  Counsel also argued that the distributors’ concern about the manufacture of a replica product was a third party concern requiring consideration. Assessing the overall justice of the case, Ms Dwight argued that relief by way of an interim injunction was therefore appropriate.

[40]     Mr Hazel, however, contended damages would be an adequate remedy, that the two product lines were readily distinguishable, therefore the plaintiff’s reputation was not at risk and that the plaintiff should not enjoy a de facto licensing regime based on unsubstantiated intellectual property rights.  Put another way, granting an injunction in the circumstances of this case was said to be tantamount to conferring “constructive patent rights” absent a registered patent.  Mr Hazel considered that the

overall justice of the case favoured the defendants when all factors, including the strength of the claims, were weighed in the balance.

Assessment

[41]     I  am  in  broad  agreement  with  the  submissions  made  by  Ms  Dwight. Damages are unlikely to be an adequate remedy.   Their calculation will be problematic, but in addition evidence to show the ability to meet an award is absent, whereas the plaintiff has provided an undertaking as to damages.  Standing back, I consider that the circumstances of the prior relationship between the parties, the nature of Mr Xu’s approach to the plaintiff’s distributors and the evidence directed to the allegation of misuse of confidential information is such as to justify relief.

Relief

The relief sought

[42]     Foot Science seeks wide-ranging relief as follows:

(1)An  interim  injunction  restraining  the  first  defendant  and  second defendant from manufacturing orthotics:

(a)      which are a copy of any of the Formthotic orthotics;

(b)which have the same properties of foam density, hardness, thickness or colour; or the same shape, profile or dimensions as any Formthotic orthotic;

(c)      using the same manufacturing process as the plaintiff uses for manufacturing Formthotic orthotics;

(d)      using any part of the manufacturing process that the plaintiff uses for manufacturing Formthotic orthotics including: milling blocks of foam to the same profile as the blocks used by the plaintiff; using rollers of the same specification as those used by the plaintiff to mill the blocks of foam; using a CNC machine to mill the blocks of foam

to the same shape as the Formthotic orthotics; using the plaintiff’s CAD and CAM files or computer programme for the CNC machine’s tool path; using tools for any CNC machine which have the same specifications as the first defendant’s tools; using a thermo forming process   with   moulds   and   a   rubber   diaphragm   of   the   same specifications as the plaintiff uses.

(2)An  interim  injunction  restraining  the  first  defendant  and  second defendant from marketing or distributing (directly or indirectly) orthotics:

(Particulars as in (1) (a) to (d))

(3)An  interim  injunction  restraining  the  first  defendant  and  second defendant from producing, or distributing (directly or indirectly) for use by clinicians, the OrthoGait heating machine or any heating machine which has the same specifications as the Formthotic heating machine.

(4)An injunction requiring the first and second defendants to return to the plaintiff any information (in any form) in their possession which is confidential to the plaintiff.

[43]     The  notice  of  application  seeks  a  fifth  order,  namely  a  discovery  order requiring the defendants to disclose by way of a list within 30 days all documents in their possession relating to the manufacture, marketing and distribution of orthotics by them.  I regard this as an order in the substantive proceeding, rather than as an order in the context of interim relief.

[44]     Mr Hazel advanced forceful submissions in opposition to the breadth of the relief claimed.   Given Mr Xu’s evidence that the product line is manufactured in China, counsel questioned whether orders purporting to have extra-territorial effect were appropriate, particularly when enforcement of the orders was doubtful given significant differences in the applicable law in other countries.  The expression of the

orders was questioned on the basis they were unclear and would expose the defendants to the undue risk of a contempt finding.  Further, Mr Hazel submitted that making orders as sought would be futile on account of the need for enforcement in foreign jurisdictions, when this was most unlikely.

[45]     Ms  Dwight  retorted  that  enforcement  of  the  orders  was  the  plaintiff’s problem.  Given that Gait is a New Zealand company, and Mr Xu is a New Zealand citizen and has a residential address here, orders were appropriate.

Conclusion

[46]     I consider the relief claimed is generally appropriate.   However, orders (1) and (2) should be combined to refer to manufacturing, marketing or distributing (directly or indirectly) orthotics having the characteristics in (a) to (d).  Otherwise, I make orders as moved.

[47]     There will also be a discovery order in the terms sought.

[48]     Costs must follow the event, including in relation to the adjournment granted in  February 2014.    I  consider  2B  costs  are  appropriate  in  relation  to  both  the adjournment and the hearing.  If their calculation cannot be agreed, memoranda may be filed within 10 working days, with five working days for reply.

Solicitors:

Cavell Leitch, Christchurch

James & Wells Solicitors, Auckland