Moda Systems NZ Limited v McLaren Smart Processing Limited
[2022] NZHC 96
•4 February 2022
IN THE HIGH COURT OF NEW ZEALAND NAPIER REGISTRY
I TE KŌTI MATUA O AOTEAROA AHURIRI ROHE
CIV-2021-441-96
[2022] NZHC 96
UNDER the Copyright Act 1994
the Fair Trading Act 1986
the Trans-Tasman Proceedings Act 2010BETWEEN
MODA SYSTEMS NZ LIMITED
First Plaintiff
MODA IP LIMITED
Second Plaintiff
R G NEWCOMBE
Third Plaintiff
AND
MCLAREN SMART PROCESSING LIMITED
First Defendant
A R MCLAREN
Second Defendant
MULTIVAC AUSTRALIA PTY LTD
Third Defendant
Hearing: 3 February 2022 Appearances:
E C Gray and J E M Lethbridge for the Plaintiffs
K M Quinn and S A Rankin for the First and Second Defendants
Judgment:
4 February 2022
JUDGMENT OF COOKE J
(Interim injunction)
[1] By application dated 16 December 2021 the plaintiffs seek an interim injunction preventing the first and second defendants from producing and distributing certain rotary vacuum packaging machines together with associated orders.
MODA SYSTEMS NZ LIMITED v MCLAREN SMART PROCESSING LIMITED [2022] NZHC 96
[4 February 2022]
[2] The application was first called before me as Duty Judge at a telephone conference on 17 December 2021. Counsel for the first and second defendants, and for the third defendant were able to attend at this conference. I timetabled the defendants’ opposition to the application for an injunction and directed it be called in the Judge’s Chambers List on 25 January 2022.
[3] At the call in the Judge’s Chambers List the third defendant did not oppose orders being made against it. This was without admission of liability, or it accepting the Court jurisdiction, and it also opposed any orders as to costs. I made orders against the third defendant on that basis, and reserved the question of costs. I also altered the timetable on the application of the first and second defendants.
[4] The application has now been argued before me. It is supported by an affidavit of the third plaintiff, who is also the sole director of the first and second plaintiffs (together “Moda”). The opposition of the first and second defendants (together “McLaren”) is supported by an affidavit of the second defendant who is the managing director of the first defendant, and from Jed Graham a mechanical design engineer employed by the first defendant. Affidavits in reply were also filed by the third plaintiff and Alexsandr Sornikov, a design director employed by the first plaintiff.
Background
[5] Both Moda and McLaren are involved in producing and selling vacuum packaging machines. These machines used at factories, particularly meat processing plants, to vacuum pack produce for distribution. The produce proceeds along the equivalent of a conveyor belt with the vacuuming and sealing process occurring within the machine with the assistance of an operator. They are referred to as rotary vacuum machines as the product goes around in a circle within the machine during this packaging process. Such machines are important as vacuum packing significantly adds to the product’s shelf life. They are utilised in virtually all meat processing facilities globally and there are other forms of produce where such machines can be used.
[6] The largest operator in the market is a publicly listed company based in the United States of America (USA). Moda and McLaren are very small players on the
international market. They each have different business focusses. Moda designs, markets and installs such machines but it does not manufacture them. McLaren is primarily a manufacturer, but is also involved in design and marketing for sale. The market for such machines is both international and domestic.
[7] Vacuum packing machines have been in existence in the industry from around 1975 at least in linear form, and have developed into rotary machines which are more efficient in terms of the space needed to house them. McLaren started developing its own version of a rotary machine in 2012 called the iVac. Between 2013 and 2017 it sold six machines mainly to customers in the USA.
[8] In April 2015 Moda and McLaren began working together to develop and sell such machines. A Confidentiality Deed was signed on 12 May 2015 between the parties. This was focussed on a separate flow wrapping product, but its terms generally contemplate that all information provided by Moda to McLaren, and all information generated by McLaren for Moda is confidential except for the information developed separately by McLaren, or which is public knowledge. A memorandum of understanding was subsequently signed in August 2018 under which McLaren would manufacture and supply vacuum packing machines to Moda. On 11 December 2018 a Confidentiality Deed was signed specifically directed to confidential information concerning the rotary vacuum packing machines, and requires McLaren to maintain confidentiality of the information provided to it as part of the arrangement between the parties. In addition by Deed dated 11 December 2018 the parties signed a Statement of Intellectual Property Ownership which specifies that Moda’s intellectual property encompassed seven elements. During the relationship between the parties, and commencing from late 2016, Moda had suggested changes to the components of the machine. These changes were implements by McLaren. It is those changes that are said to be subject to seven elements.
[9] In his evidence Mr Newcombe said that over 15 machines were successfully produced and installed. The sale price of these machines is approximately $950,000 each. The relationship between Moda and McLaren, and the relationship between Mr Newcombe and Mr McLaren stated to break down in 2019 and worsened in 2020, however. Moda says that McLaren failed to meet deadlines and McLaren says that
Moda introduced unreasonable requirements and failed to pay promptly. The relationship was brought to an end in or around December 2020.
[10] In late 2020 McLaren also started to develop its own new machine. Mr McLaren explains that he gave instructions to his team to design a new machine from scratch using the original iVac machine as a starting point. There does not appear to be any dispute that the new machine that has been developed by McLaren is different from both the original iVac machine and the machine that Moda and McLaren jointly worked on. That is particularly so in two key aspects. First, the conveyor belt leaving the machine with the packaged product has been rotated by 90 degrees which is an improvement from an ergonomic point of view for the operator. Secondly, the capacity of the machine has increased. It has increased the number of vacuum packing chambers and associated equipment from six to eight allowing the machine to vacuum pack more product. McLaren describes its new machine as a next generation machine. I did not understand Moda to contend that it did not have significant differences from its machine. Moda has made developments to its own machines, particularly in relation to the packaging, which also makes its present machine different from that subject to the joint period. So Moda and McLaren each now produce machines that have distinct different aspects which each emphasise in the market.
[11] Whilst it appears to be accepted that McLaren’s machine is a newly developed and different machine from either the original McLaren machine, or Moda’s machine, Moda contends that elements that comprised the improvements to the machine developed during the course of the relationship between the parties have been incorporated into McLaren’s new machine, and that this is in breach of Moda’s intellectual property rights.
[12] McLaren has now been selling its new machine internationally and domestically. It entered a distribution agreement with the third defendant for distribution in Australia. That has now been halted as a consequence of the orders that the third defendant did not oppose. It has manufactured and sold two such machines, one directly to a customer in Australia in March 2021 and one through the third defendant later in 2021. A third machine intended for the third defendant’s showroom is partly constructed and will not now be delivered given the orders made by the Court. There are an additional two orders placed to it that are currently on hold.
Test for interim relief
[13] The test for interim relief was described in the Court of Appeal in NZ Tax Refunds Ltd v Brooks Homes Ltd in the following way:1
The approach to an application for an interim injunction is well established. The applicant must first establish that there is a serious question to be tried or, put another way, that the claim is not vexatious or frivolous. Next, the balance of convenience must be considered. This requires consideration of the impact on the parties of the granting of, and the refusal to grant, an order. Finally, an assessment of the overall justice of the position is required as a check.
[14] This largely involved a continuation of the approach set out by the Court of Appeal in Harvest Bakeries Ltd v Klissers Farmhouse Bakers Ltd.2 I approach the application on that basis.
Serious issue to be tried
[15] Whether there is a serious question to be tried is not a high threshold. In addressing whether there is such a question I focus primarily on Moda’s claims that McLaren has infringed its intellectual property by breaching the confidentiality obligations set out in the written agreements between the parties. Under these agreements McLaren promised to keep information provided to it during their arrangements confidential, and to only use it for those arrangements. Moda also has claims for breach of equitable duties of confidence as well as breach of copyright and other causes of action. But it seems to me that the other claims do not materially advance its arguments at this stage. The contracts give Moda rights into the concepts or ideas that were then incorporated into the machine that both parties worked on. It is possible that claims for breach of copyright might also arise in relation to the manifestation of those ideas, but I doubt whether those allegations materially assist the analysis at this point. I will also not address the copyright claims in relation to the online brochure which are peripheral.
[16] An important feature of the present case is that it is not suggested that the basic design of the rotary vacuum machines, including the original machine manufactured by McLaren, is protected by intellectual property rights owned by McLaren or
1 NZ Tax Refunds Ltd v Brooks Homes Ltd [2013] NZCA 90, (2013) 13 TCLR 531 at [12] (Footnote omitted).
2 Harvest Bakeries Ltd v Klissers Farmhouse Bakers Ltd [1985] 2 NZLR 129.
anybody else. It is said to be a generally available concept and design in the market. Moreover there does not appear to be any dispute that McLaren’s new machine has involved material developments, and that any rights in the improvements in the new version are vested in McLaren.
[17] What Moda alleges, however, is that there are components or elements of McLaren’s new design that incorporate the improvements that were made during the course of the joint relationship between the parties, and which became part of Moda’s intellectual property duly protected under the contractual provisions. These elements were described in the affidavit of Mr Sornikov. He went through each of them by reference to exhibits which illustrated the original McLaren machine, the Moda/McLaren developed machine, and McLaren’s new machine to show that changes had been made to the original machine to address particular problems, and that these changes have also been adopted in McLaren’s new machine.
[18] The parties disagree over the significance of these changes. McLaren described these changes as minor, and as tweaks to the original design only. Mr McLaren and Mr Graham say in their affidavits that their new machine was developed from scratch, and that it involves a significantly different concept, and that they deliberately avoided any copying of the Moda machine. They say they designed the new machine using the original iVac machine as a starting point. By contrast Mr Sornikov and Mr Newcombe describe the changes as significant.
[19] Mr Sornikov’s evidence addresses these elements in some detail. His affidavit was only filed in reply, and McLaren has not had an opportunity to address his evidence other than by way of submission. That has arisen, at least in part, because until Moda was able to consider the evidence filed by McLaren it was unaware of the details of McLaren’s new machine. It was only when seeing those details that Moda says it was able to particularise its claim that their intellectual property has been utilised in that new machine. Due to the delay in compliance to the timetable reply evidence was only filed the day before the hearing.
[20] Notwithstanding those limitations, and the limitations that inherently arise from the Court assessing the evidence on the basis of affidavits filed at the interlocutory stage, and recognising the comparatively low hurdle that is required to
demonstrate a serious question to be tried, I am satisfied that Moda has met that burden. The evidence at this stage is sufficient to show that Moda has an arguable case that the elements that it has relied upon involve material design improvements adopted during the course of the parties working together which were made to address problems with the original machine, including those arising from wear and tear or breakage. That evidence also shows, at least on a prima facie basis, that those improvements are also present in McLaren’s new machine.
[21] For example, and without providing a detailed description in a judgment that will become public in a way that may disclose what Moda says is its confidential information, one of the elements of the overall machine is called a “lifting post”. This is a post with a wheel at its base that runs along a track which has the function of lifting the vacuum chamber where the vacuum packing takes place. The lifting post lifts up the vacuum chamber assembly before it comes down over the product for vacuum packing. Mr Sornikov describes design problems with the original post that caused damage to the machine’s componentry during operation. He explains that during the period of joint development there were innovations made to the lifting arm, including through the introduction of lubrication but also in at least one other respect, to address these problems. He was able to demonstrate how those features of the design were not present in the original McLaren machine, were present in the joint design, and that they appear to be apparent in the new McLaren design.
[22] I am satisfied on the basis of his evidence that there is accordingly a serious question to be tried that use of this developmental information has taken place. Having said that, the potential limits of Moda’s claims are also demonstrated by the evidence filed in relation to this element. The lifting arm is part of a series of interrelated components including the vacuum chamber, the chamber arm and other connected parts. My assessment of the interrelated series of components in the original McLaren design, the joint Moda/McLaren design, and McLaren’s new design suggests that McLaren has engaged in what appears to be a redesign of this integrated set of components. The new overall assembly appears materially different. So at this stage not only do Moda’s claims not extend to the vacuum packing machine overall, but also key components of the machine appear to have been separately designed by McLaren in a manner consistent with its evidence that its design was started afresh from scratch. But Moda is still able to show particular elements of the components may have
included the improvements made during the course of the joint operation which are subject to Moda’s intellectual property rights.
[23] A similar analysis could be conducted for each of the elements that are presently subject to Moda’s claims. But I do not do so for each element for the purposes of considering the application for an interim injunction. I am more generally satisfied there is a serious question to be tried. Indeed although Mr Quinn did not concede the point, in his submissions he recognised the Court may well get to the position on the evidence filed to date that the low threshold was met.
[24] I accept that there will likely be more detailed issues at trial to address. For example, Mr Quinn argued that any improvements made during the period when the parties worked together were minor and that the exceptions in the Confidentiality Deed of December 2018 would apply. For example the definition of confidential information in that Deed excludes information available, or subsequently becoming available to or known by the public. It may well be the type of improvements in question would be readily apparent to any engineer with knowledge of such machines simply by inspecting a machine operating in any meat producing plant, or demonstrated at a trade show. So it may be that any intellectual property in the innovation is lost once the machine is available in the market. It is not possible to make an assessment whether that is so at this interim injunction stage. For these reasons I accept that Moda has met the threshold, but I also accept that there are likely to be more detailed matters that will need to be addressed at trial.
[25] I also note Moda contends that there may well be other elements of McLaren’s machine that breach its claimed intellectual property rights. At the present stage it has largely been informed on the details of McLaren’s machine through the evidence that has been filed for the injunction. It may be if and when it learns more about the machine other elements may be subject to its allegations.
Balance of convenience and overall justice
[26] On the facts of the present case I will consider the question of balance of convenience and overall justice together as it seems to me that they are inherently interrelated.
[27] Mr Quinn referred to the list of factors set out by Dunningham J in Greenfields Internet Ltd v Rural Networks South Island Ltd.3 That seems to me to be a very helpful set of factors to take into account. But it is not a closed list. As Cooke J said in Harvest Bakeries Ltd v Klissers Farmhouse Bakers Ltd:4
Whether there is a serious question and the balance of convenience are two broad questions providing an accepted framework for approaching these applications. As the [N.W.L. Ltd v Woods [1979] 3 All ER 614] speeches bring out, the balance of convenience can have a very wide ambit. In any event the two heads are not exhaustive. Marshalling considerations under them is an aid to determining, as regard to the grant or refusal of an interim injunction, where overall justice lies. In every case the Judge has finally to stand back and ask … that question. …
[28] In the present case there are a series of important matters relevant to the balance of convenience, and the overall justice.
[29] First, the third defendant has not opposed orders being made against it and these have been made. The main line of business to be furthered by McLaren using its new machine in Australia is accordingly now subject to interim orders. This already gives Moda a substantial degree of protection.
[30] Secondly, the case concerns the manufacture of machines which are limited in number. McLaren has distributed two, a third is in its premises unfinished, and it has two orders which it has not accepted pending this injunction application. This is not a case where there is a significant market distribution of something that is said to infringe Moda’s intellectual property. Realistically the numbers that might be distributed before a trial later this year will likely be limited — perhaps the two on order and maybe one or two more.
[31] The next factor is that McLaren has offered an undertaking, as recorded in paragraph [65] of Mr McLaren’s affidavit, to set aside 20 per cent of all revenue received from the manufacture and sale of its machines from this point forward, with these monies held in its solicitor’s trust account and not to be released or distributed without written agreement of the plaintiffs or by order of the Court. That offer includes
3 Greenfields Internet Ltd v Rural Networks South Island Ltd [2019] NZHC 504.
4 Harvest Bakeries Ltd v Klissers Farmhouse Bakers Ltd, above n 2 at 142.
a proposal to provide monthly or bi-monthly reports to update the plaintiffs on the payments received and the funds transferred into the account.
[32] Against that background it seems to me that an important consideration is the relative impact of granting or not granting an interim injunction on the business of Moda and McLaren. That is not expressly referred to in the list of considerations referred to in Greenfields Internet Ltd v Rural Networks South Island Ltd,5 but in the present case it seems to me to be of significance.
Moda’s position
[33] Looking first at Moda’s position, if an interim injunction is not granted I am satisfied the Court will nevertheless be able to grant it effective relief if it succeeds at trial, and without significant prejudice to Moda. That is so for a series of related reasons.
[34] First, it is not contended that Moda and McLaren are in direct competition for customers. Each of their machines has different qualities, and the international market is a large one. It is not suggested by Moda that allowing McLaren to sell its machines will likely involve any loss of sales for Moda.
[35] Secondly, this is not a case where there is any confusion between the Moda machine and the McLaren machine. So continued sales of the limited number of McLaren machines through to trial will not cause reputational damage, or damage to the goodwill of Moda.
[36] Seen in those terms, allowing McLaren to continue to distribute its machine until trial will not cause Moda any actual financial loss. Mr Gray argued that there would be potential harm in two specific ways. First, the sale of machines which included Moda’s intellectual property would allow third parties to reverse engineer the improvements that had been the subject of the joint work, and the protected intellectual property would otherwise make its way into the hands of third parties, including because of the arrangements with the third defendant the extent of which was not presently known. The fact that sales would be made overseas was emphasised in this
5 Greenfields Internet Ltd v Rural Networks South Island Ltd, above n 3.
context. Secondly, Moda’s developments had reputational benefits, including in relation to product hygiene, and to allow McLaren to continue selling would cause harm to Moda’s ability to contend it had made significant developments in these areas.
[37] I am not persuaded by either of these considerations. They seem to me to be speculative. Once it is accepted that Moda and McLaren are selling to separate customers, and they have machines with different core attributes emphasised by each, I conclude that it is unlikely that any loss or reputational harm will be occasioned to Moda by virtue of a limited number of sales that will likely take place before trial. Neither do I see any risk that there will be meaningful disclosure of confidential information through such sales. If it is apparent from inspection of the machine what the improvements are, then that may simply demonstrate there is little to protect by way of confidential information once the machines are available to the market.
[38] Given that Moda does not seem to me to be likely to incur financial loss from any sales before trial, and given that its claim is simply to a breach of intellectual property in certain elements of the overall machine, it may be that the appropriate remedies following trial should it succeed would be an injunction preventing any further manufacture and distribution of machines which include the elements of Moda’s intellectual property, and then an order requiring McLaren to pay damages in the nature of a user charge, or deemed licence fee, for selling machines incorporating an infringement of its intellectual property rights. Awarding damages on such a user principle has been recognised in copyright cases such as New Zealand National Party v Eight Mile Style, LLC and Dodson Motorsport Ltd v Logiical Performance Ltd.6 I proceed on the basis that such an award is available for a breach of confidence action as well as a copyright action.
[39] On that basis, if Moda was awarded a final injunction and damages in relation to sales prior to that injunction on a deemed licence fee basis, it seems to me that it would be made whole. There will be no other loss or damage occasioned by it that has not been addressed. Put another way there is no loss or prejudice that Moda requires to be addressed by way of an interim injunction that cannot be addressed by the final remedies granted by the Court.
6 New Zealand National Party v Eight Mile Style, LLC [2018] NZCA 596, [2019] 2 NZLR 352;
Dodson Motorsport Ltd v Logiical Performance Ltd [2019] NZHC 918.
McLaren’s position
[40] The position is different for McLaren. An injunction will cause it significant loss. It has one order for a machine that has now been put on hold with the machine only partially completed, and it has two prospective orders which are not being progressed pending determination of the injunction proceedings. Mr McLaren says in his affidavit that approximately $2.5 million of revenue will be lost if the injunction application is granted. McLaren’s turnover for the 2021 year was $9 million, and it is anticipated to be of a similar magnitude this year. So this will remove a quarter or half of its revenue assuming the injunction lasts for a period of one year. That will have a significant impact on it.
[41] I accept that Moda has provided an undertaking as to damages that would mitigate such factors, and that this is meaningful. Both sides seek to call into question the relative value of the undertaking, and in the case of McLaren its ability to meet a damages award. But it seems to me that both sides will likely be able to meet any amounts awarded by the Court, particularly bearing in mind that Mr Newcombe and Mr McLaren are both personally parties to the proceeding.
[42] But a loss will still be incurred in the meantime, and it will be significant. It may even require McLaren to make redundancies.
Conclusion
[43] Whilst the parties addressed other factors relevant to the balance of convenience and the interests of justice in their submissions, the above appear to me to be the key factors. It seems to me that the impact of granting an interim injunction on McLaren, compared to the impact of not granting the injunction on Moda, is the decisive factor in this case given that Moda’s claims are limited to elements of a broader machine where it is not alleged that the broader machine itself involves an infringement of the plaintiffs’ intellectual property. This factor distinguishes this case from that of Sealegs International Ltd v Zang relied upon by Mr Gray.7
7 Sealegs International Ltd v Zang [2016] NZHC 3143.
[44] When these considerations are added to the fact that Moda has the protection of the orders made against the third defendant, and the protection arising from the undertaking that McLaren has offered, I am satisfied that the overall justice of the case means that an interim injunction should not be granted even though Moda has established there is a serious question to be tried.
[45] That determination is reached on the basis that the parties will proceed to a prompt trial. Indeed one of the considerations I have taken into account is that this decision incentivises both Moda and McLaren to promptly proceed to trial to determine the disputes between them. Both will be incentivised to so proceed to trial
— Moda so that its claims can be heard and determined by the Court, and McLaren because the restrictions on its ability to market its product, including the orders made in relation to the third defendant, can be removed.
[46] I discussed with counsel in a preliminary way the time for the trial. Having done so I think it is likely that a trial would require five days for the openings and evidence, plus an additional two days in a following week for closing submissions.
[47] For these reasons the application for an interim injunction is dismissed. The question of costs is reserved. I direct that a further telephone conference be scheduled before me next Wednesday 16 February at a time set by the Registrar convenient to counsel. At that stage I expect the parties to have consulted on both the directions that should be given for the progress of the proceeding from this point through to a potential trial later in the year. Some urgency should be accommodated for this trial. The timing of the reporting referred to in McLaren’s undertaking can also be clarified at this telephone conference.
Cooke J
Solicitors:
Martelli McKegg, Auckland for the Plaintiffs
Sainsbury Logan & Williams, Napier for the First and Second Defendants Simpson Grierson for the Third Defendant
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