WaikatoLink Ltd v Comvita New Zealand Ltd HC Tauranga CIV 2008-470-90
[2010] NZHC 862
•4 June 2010
IN THE HIGH COURT OF NEW ZEALAND TAURANGA REGISTRY
CIV-2008-470-90
BETWEEN WAIKATOLINK LTD Plaintiff/Counterclaim Defendant
ANDCOMVITA NEW ZEALAND LTD Defendant/Counterclaim Plaintiff
Hearing: 12, 13, 14, 15, 19, 20, 21 and 23 April 2010 (Heard at Rotorua and Hamilton)
Appearances: James MacGillivray, Kate Cornege and Amanda Iles for Plaintiff
Francis Cooke QC, Mark Beech and Lisa Jones for Defendant
Judgment: 4 June 2010
JUDGMENT OF HARRISON J
In accordance with R11.5 I direct that the Registrar endorse this judgment with the delivery time of
11:00 am on 4 June 2010
SOLICITORS
Tompkins Wake (Hamilton) for Plaintiff
Sharp Tudhope (Tauranga) for Defendant
COUNSEL
FMR Cooke QC
WAIKATOLINK LTD V COMVITA NEW ZEALAND LTD HC TAU CIV-2008-470-90 4 June 2010
Table of Contents
Introduction [1] Issues [7] Parties [10] Heads of Agreement [19] Professor Molan's Reports [28] Conduct or Representations
(1) Communications [42] (2) Meaning [55] (3) Misleading Conduct or Misrepresentation [58] (a) Professor Molan's breakthrough [60]
(b) Increased value of IP [79]
(c) Failure to disclose [82] Reliance [85] Entire Agreement Clause [112] Relief [132]
(1) Loss [135]
(2) Discretionary Factors [152] Breach of Warranty [171] Judgment [184]
Introduction
[1] This case is about honey. Or, more particularly, it is about the progress towards discovery of a compound or molecule found in manuka honey known as the Unique Manuka Factor or UMF. The compound has a unique non-peroxide antibacterial activity which is potentially applicable to various medicinal and cosmetic products. The honey industry has long viewed its identification as a matter of considerable scientific and commercial importance.
[2] The UMF's relevance in this case is found in an intellectual property agreement (the IP agreement). The two parties were WaikatoLink, a commercialisation and technology transfer company for the University of Waikato, and Comvita, which creates and sells honey-based healthcare products. Among other things, WaikatoLink agreed to sell Comvita some honey gel patents and licence Comvita to use its "Honey IP" for its wound and skin care products, including the right to use the university's existing and future knowledge about the UMF molecule.
[3] Comvita alleges that before entering into the IP agreement WaikatoLink represented that it had made a new discovery placing it on the brink of identifying the UMF molecule; that it acted in reliance upon this representation in deciding to enter into the IP agreement; that the representation was false; and that it did not obtain intellectual property having the represented value. Comvita has paid $1.5m of the agreed the price of $3.5m but refuses to pay the balance of $2m. WaikatoLink claims judgment for that amount; Comvita counterclaims to recover its part-payment of $1.5m and a declaration discharging its liability to pay the balance. While WaikatoLink initiated the proceeding, at trial Comvita was treated as the plaintiff on its counterclaim.
[4] This case continues the discordance apparent in some recent decisions between the availability of contractual and statutory rights. The parties are relatively sophisticated. They chose to regulate their commercial relationship according to a carefully structured contractual framework. An entire agreement clause disclaiming
Comvita's reliance on any representations by WaikatoLink appears to obstruct Comvita's contractual rights of recovery whether at common law or under the Contractual Remedies Act 1979 (the CRA).
[5] So, to circumvent the strictures of the contractual regime, Comvita claims alternatively that WaikatoLink was guilty of misleading or deceptive conduct within the Fair Trading Act 1986 (the FTA). Comvita's case does not raise an element of consumer protection and seems far removed from the FTA's remedial purpose. Nevertheless, Mr Francis Cooke QC for Comvita is correct: providing its claim satisfies the FTA's jurisdictional requirements, the company is entitled to rely on its provisions. The FTA is a statutory code of fair dealing which applies equally to
transactions between large and sophisticated corporations.[1] As will become
[1] Red Eagle Corporation Ltd v Ellis [2010] NZSC 20 at [26], fn 13.
apparent, however, the contractual provisions remain directly apposite to the FTA
inquiry.
[6] I add that this case will not be decided by contests of credibility or reliability of witnesses. However, the opportunity to see and hear the principal participants has enabled me to understand the human dynamics that played an increasing part in the dispute. And it has provided the context necessary to understand and interpret critical documents which if read in isolation can paint an incomplete or misleading picture. While many of the key facts are not in dispute, the meaning and effect of some written and oral communications is contested; and factual findings are necessary within the orthodox legal framework of claims for contractual misrepresentation, deceptive and misleading conduct, and breach of an express contractual warranty.
Issues
[7] The pleadings filed by both sides identify the scope of the dispute with appropriate and constructive detail. There is a measure of accord between counsel on the relevant legal principles. Where they part company is on the extent to which those principles apply to the relevant facts.
[8] Counsel are agreed that the competing claims will be decided by the answers to these five primary questions (necessarily modified or expanded since trial):
(1)Did WaikatoLink make false representations or statements of a misleading or deceptive character about the state of Professor Molan's progress?
(2)If so, did Comvita in fact rely on a representation or statement of that character in deciding to enter into the IP agreement?
(3) If so, is it fair and reasonable that the entire agreement provision in the IP agreement should be conclusive under the CRA?
(4) If (1) and (2) are answered affirmatively, what is the relief, if any, to which Comvita is entitled under either CRA or FTA?
(5)Independently, did WaikatoLink breach its contractual warranty relating to existing intellectual property?
[9] The first two questions are essentially factual and will be determined progressively within a chronological review of the evidence. The third and fourth questions are of a legal nature but the answers to each will be dictated by the factual findings on the first two. The fifth question is discrete.
Parties
[10] It is appropriate first to summarise the composition of each party and their relationship. An understanding of these features is essential to an understanding of Comvita's claim. What is particularly important is that before entering into the IP agreement the parties had enjoyed a commercial association lasting over 20 years.
[11] Comvita is publicly listed with its headquarters at Tauranga. It employs a staff of 230 principally in New Zealand but also worldwide. It has been engaged in the export of honey derived health products for more than 35 years. Comvita's annual turnover exceeds $80m; more than 80% of that revenue is derived from overseas earnings. Significantly, 45% or $36m of its total revenue is from manuka honey sold "in a pot" as a premium therapeutic functional food.
[12] Comvita is a pioneer in marketing manuka honey and other derivatives, most notably wound care and skin care products. Sales from the latter represent 11% of
total or about $8.8m turnover. The company owns more than 11 patents in this area; three of them were purchased or licensed from Waikato University. Sales of honey related products are highly competitive. At the time of these events Comvita's primary competitor was an Australian company called Medi Honey (which it has since acquired). A European wound care company, Mesitran, is also starting to sell honey based dressings.
[13] The key Comvita participants involved in negotiating the IP agreement and related events were Mr Neil Craig, its chairman and an investment consultant; its chief executive, Mr Brett Hewlett; Mr Scott Coulter, its sales and marketing manager; and Dr Ralf Schlothauer, its chief technical officer. All gave evidence.
[14] WaikatoLink is a wholly owned subsidiary of Waikato University. It was incorporated in 1993 both to maximise the economic potential of the university's intellectual property and bridge the gap between academic research and realising technology potential. Its relevant participants in this transaction were Messrs Gerald Bailey, its chairman; Mark Stuart, its chief executive officer; and Duncan Mackintosh, general manager of its commercial team. All gave evidence.
[15] The nature and state of research work undertaken by two scientists employed by the university lies at the heart of this case. Neither gave evidence at trial. But I do not draw an adverse inference from their absence. With one minor uncontested exception, neither participated in the challenged communications between the parties about the progress of their research and its consequences. This litigation is a consequence of the way others interpreted their work.
[16] Both scientists are members of Waikato University's honey research unit. One is Professor Peter Molan, a biochemist. He is recognised as a world leader in honey research and is widely published. The professor founded the university's honey research unit and has led its operations for more than 20 years. He is credited with creating the UMF measurement system which is designed to measure non- peroxide antibacterial activity in manuka honey. As Mr Cooke acknowledged, Professor Molan's identification of the medicinal qualities in manuka honey was responsible for its transition from virtual worthlessness to the world's most valuable
honey. He was plainly held in high regard if not reverence by the principal participants who portrayed him as a dominant personality at the peak of his profession.
[17] Dr Marilyn Manly-Harris is the other scientist. She is a carbohydrate chemist who is not exclusively engaged in honey research. She worked independently of Professor Molan, principally on isolating a fraction of manuka honey that would contain its bioactivity. The eventual objective of her research was to use the fractionation process to leave behind the compound or compounds responsible for UMF. She had formulated a method of extraction of bioactivity in honey for which a patent was filed in June 2004.
[18] Professor Molan and Dr Manly-Harris did not work collaboratively. Among other things, WaikatoLink treated the research of the two scientists as separate streams which were the subject of unrelated patent applications. This was despite the fact that, while the two were using slightly different approaches to try and isolate the UMF activity, the scientific process which would then follow successful isolation to identify it would be the same; the molecular weight of the compound would be characterised using mass spectrometry, an analytical technique for determining the elemental composition of a sample or molecule. This strict but unnatural division of research assumed importance in the case.
Heads of Agreement
[19] The parties entered into a heads of agreement on 19 December 2005. They agreed to form a joint venture to undertake and fund research and development in the field of therapeutic and medical application of honey including the "isolation of the non-peroxidase" activity of manuka honey. They nominated 31 March 2006 as the date for cessation of mutual obligations if they had not by then settled the terms of the joint venture.
[20] As Mr Hewlett said, the formalisation of a joint venture made commercial sense for both parties. Comvita employs 10 scientists with expertise in food technology and development. But it does not operate its own laboratory research
facility and was interested in funding research projects at Waikato University. The company perceived that the university was the world leader in research into the properties of manuka honey but understood that a lack of funding was hampering Professor Molan's progress. Comvita saw an opportunity to provide capital for the joint venture, agreed at $2.3m payable over seven years, while WaikatoLink was to contribute critical knowhow and research facilities.
[21] Discovery of the UMF molecule was seen as pivotal for further commercial development. The parties' mission statement noted that "identification of the active [UMF] component[s] will allow wider spread medical applications of manuka honey."
[22] WaikatoLink duly disclosed to Comvita the scope and extent of its research and development into the medical and therapeutic applications of honey. The work undertaken by Professor Molan and Dr Manly-Harris relating to the UMF compound was included. Subsequently, at an informal meeting in Hamilton in February 2006, Professor Molan advised Dr Schlothauer that he was on the brink of discovering the molecule which comprised the UMF compound; and that he had already been able to isolate honey samples with high concentrations of it.
[23] The parties established a joint science committee including an independent industry scientist, Dr Rex Humphrey. Professor Molan, Dr Manly-Harris and Dr Schlothauer were members. The committee met and discussed the necessary research and development work. But Professor Molan and Dr Manly-Harris did not attend together. WaikatoLink was aware that this lack of internal communication meant a lack of cohesion in research direction. The parties envisaged that the proposed joint venture may provide an avenue for resolution. Dr Manly-Harris disclosed to the committee her belief that she had isolated "peaks" of molecules related to the UMF activity.
[24] By late June 2006, as Mr Stuart explained, WaikatoLink had drafted a UMF patent in broad terms. Its purpose was to ensure that the company would be well placed to file a provisional patent if one of the university scientists isolated or identified the compound or compounds responsible for antibacterial activity in
manuka honey. WaikatoLink's practice was to file protective patent applications ahead of time wherever possible. It was desirable, the company believed, to have a patent application with the earliest possible priority date relating to any valuable discovery, to guarantee the best commercial value for the university's research work.
[25] The parameters of each patent application were necessarily broad, designed to cover the actual discovery when confirmed. Mr Stuart said that it was often a matter of attempting to define the likely characteristics of the object of their research, based on work already carried out, and then formulating a claim covering those characteristics. He understands this practice is commonplace in science and technology industries.
[26] Waikato University scientists noted in a paper prepared for WaikatoLink's consideration in July 2006 that:
Dr Manley-Harris's team has developed a fractionation methodology that produces a fraction containing non-peroxide antibacterial activity (UMF) which is free from sugars. A complete patent for this methodology as a means of UMF fortification of manuka honey has been filed (NZ Patent Application 533368). Within this strategy, this method will be used as an initial fractionation step in a fractionation process that will ultimately lead to isolation and subsequent characterisation and identification of UMF.
This patent had been filed on 8 June 2004.
[27] Negotiations about the terms and conditions of the proposed joint venture progressed well past the nominated cessation date of 31 March 2006. Whether the parties ever agreed on the essential terms of the arrangement, as Comvita alleges, is inconsequential to its claim. What is central is its allegation that sometime in early July 2006, while the parties were still negotiating, Professor Molan formed the view that he may have identified the UMF molecule. He concluded tests that identified "peaks", suggesting that the molecule had a molecular weight of 484 from which it was possible to deduce its likely molecular structure - potentially that of a tannin known as digalloyl glucose or DGG.
Professor Molan's Reports
[28] Three reports sent by Professor Molan to Mr Mackintosh on the progress of his research have assumed critical significance. The first, emailed on 15 July, materially stated as follows:
After a day and two nights of putting together on paper every conceivable combination of the molecules likely to be in manuka honey I have come up with only one combination that gives the molecular weight of 484. The brilliant news is that it is a structure that matches all of the observed features of UMF in respect of physical characteristics, and is of a class of molecules ('hydrolysable tannins' / 'gallotannins') which are known to have antibacterial activity. It also confirms my hunch that UMF is a tannin, and almost certainly will prove to confirm my thoughts that it works by binding iron.
The molecular structure I think that UMF has is:
Two molecules of 3,4,5-trihydroxybenzoic acid (gallic acid) in ester linkage to glucose.
Please consider this e-mail as formal disclosure of this to WaikatoLink.
There is further chemical work needed to confirm this composition which I will get done in the next week or so. If it is necessary to get the precise structure (i.e. which isomeric form it has) that will require NMR, which is beyond my expertise.
[29] The following Monday morning, 17 July, WaikatoLink filed a New Zealand provisional patent in broad terms for the purpose of protecting what it understood to be the nature and extent of Professor Molan's discovery. As noted, a draft was already in existence to meet this contingency.
[30] WaikatoLink's board met on 19 July. Its commercial managers made a PowerPoint presentation on the progress of Professor Molan's research, to the effect that the professor believed after 23 years of research he had identified the compound responsible for the UMF activity. The board's minutes summarised the disclosure in these terms:
The molecular structure of a compound believed to be responsible for … UMF activity of manuka honey has been identified. Features of the structure match the observed physical characteristics and antibacterial properties of UMF …
[31] The board accepted Mr Stuart's advice to withdraw from joint venture negotiations with Comvita. He was instructed to convey the board's decision to Mr Hewlett. The two men spoke in late July. I accept Mr Hewlett's evidence that Mr Stuart advised him that he was not at liberty to explain the reasons for WaikatoLink's withdrawal.
[32] At trial Mr Stuart acknowledged that he made a statement to this effect. However, he said that his conversation with Mr Hewlett evolved to what he asserted in evidence was the real reason for WaikatoLink's withdrawal. He claimed that was Comvita's intransigence about the appropriate structure to be adopted for the joint venture. He said he told Mr Hewlett that the WaikatoLink board was unhappy with a proposal which did not impose an immediate and binding obligation on Comvita to pay the agreed amount of $2.3m.
[33] It is unnecessary to traverse the nature of the difference which had admittedly emerged about the payment structure. I do not accept that it was the true reason for WaikatoLink's decision to withdraw from the joint venture negotiations. The board's minutes of its 21 June meeting briefly noted its satisfaction with progress; Comvita's consideration was agreed at $2.3m with the payment structure to be settled. There was no hint of an irreconcilable breakdown. And, in an email sent to other directors on 25 July, drafted no doubt on the basis of Mr Stuart's advice, Mr Bailey recited WaikatoLink management's conclusion that "a bald statement was all they could give [to Comvita]".
[34] Moreover, Mr Bailey himself confirmed to Comvita's representatives at a meeting on 28 September the real reason for the board's decision. He volunteered that it was the board's acceptance of management advice on 19 July that Professor Molan was on the brink of a major breakthrough with the UMF compound; and that as a result the board believed it now had a much more valuable asset for sale, with the prospect of obtaining a correspondingly better commercial deal than was presently on offer from the proposed joint venture with Comvita.
[35] It was unfortunate that Mr Stuart, who was otherwise a good witness, recreated history. His account left me with the distinct impression that he had been
evasive with Mr Hewlett, sowing unnecessarily the seeds of mistrust that began to permeate the relationship. Its subsequent deterioration, with its attendant misunderstandings, may have been avoided if, immediately following its July board meeting, WaikatoLink had dealt transparently with a party with which it was on the verge of forming a joint venture. I was not convinced by the rationalisation given by some WaikatoLink witnesses for its secretive approach; namely, that proper disclosure would have enabled Dr Schlothauer to work out the UMF compound for himself.
[36] It is fair to say that Comvita did not react favourably to the news of WaikatoLink's withdrawal. Mr Craig, an experienced businessman, had become Comvita's chairman in 2005. He was at a loss to understand WaikatoLink's sudden and unexplained decision. He had foreseen considerable benefits in developing a close working relationship with Waikato University. It was central to the company's wider plans for growing its wound care business. For that reason the board had sanctioned the joint venture proposal and Comvita's commitment of funds and resources to settling its terms, with the prospect of considerable expenditure in ensuing years on research and development. Mr Craig decided to intervene in an attempt to resurrect the relationship.
[37] To that end Mr Craig made contact with Mr Bailey. The two communicated by phone and in writing into August and September. Their contact was inconclusive. In an email dated 2 August Mr Bailey advised that the WaikatoLink board was unanimous that "the time was not right" to pursue the joint venture. Mr Craig responded by expressing Comvita's dissatisfaction in terms inconsistent with Mr Stuart's reconstruction of events. He inquired of Mr Bailey whether there was "something we are not sure of or has not been disclosed to us". Mr Bailey did not reply substantively until late September.
[38] In the meantime, on 24 July, Professor Molan had emailed his second report to Mr Mackintosh advising that:
I was checking with Stacey which fractions to give to Jonathan and which to weigh, when I noticed something that I had not spotted before - the peak of UV absorbance that we had managed to get separated from the others as a nice symmetrical peak, with the activity under it, the one that I considered
the purest sample we had achieved to date, had much higher UV absorbance than in the other runs where similar levels of activity were associated with much lower UV absorbance. This suggests that although I may be right in guessing the structure of digalloyl glucose, that may not be the active compound. The active compound could have no UV absorbance at 260 nm and be sitting under the digalloyl glucose peak. We're now trying a different column to see if we can get the activity away from the UV-absorbing peak, and will have results on Wednesday from the activity testing. I'll hold off until then getting Stacey to dry material to get its weight for seeing how long it will take to get 5 mg.
[39] Mr Stuart and the commercial managers prepared a further paper running to
39 pages for WaikatoLink's board meeting on 23 August. Its purpose was to provide an overview of the university's honey research. Its earlier mood of optimism about Professor Molan's recent work remained, despite the contents of his 24 July email. Management did not provide the board with a copy of that report or advise of its existence.
[40] By way of background, the paper stated as follows:
As reported at the July Board Meeting, Professor Peter Molan has made a breakthrough in the identification of the Unique Manuka Factor (UMF) molecule after 23 years of research. This work was funded directly by WaikatoLink.
Professor Molan has developed a novel chromatography protocol which produces a fraction containing the UMF activity. The fraction is substantively free from other contaminating compounds, although some larger molecules (probably tannins) remain in the fraction. Mass spectroscopy analysis has enabled determination of the molecular weight of the major constituent of the fraction. Based on this information and knowledge of the properties of the UMF activity, the UMF molecule is thought to be digalloyl glucose (DGG). This compound has been described previously in the literature and has known anti-bacterial activity. Section 2.2 below provides a brief summary of the known facts in respect of the compound. NOTE, however, the risk remains that DGG is not the compound responsible for the UMF activity and is in fact obscuring another compound.
A patent search undertaken by James and Wells has shown that while there are a number of patents and patent applications which deal with the treatment of certain conditions using plant extracts, it appears that no patent or patent application has been applied for in relation to the identification of the UMF fraction. Furthermore, it is possible that stereoisomeric form of the molecule is not commonly found in nature, which we will be able to patent.
Subsequent work undertaken in July has shown that an anti-bacterial fraction, with the same chromatographic profile can be obtained directly from manuka leaves. This is another highly significant finding.
The next steps in terms of the research are discussed in Section 4 of this paper.
[41] Professor Molan then travelled overseas. Following his return he emailed
Mr Mackintosh a further report on 8 September to this effect:
Stacey's work has gone very well while I have been away, so there is a large amount of material to go through re-chromatography for final purification. One thing she did while I was away was to give Jonathan a sample for MS after doing re-chromatography, and gave him both the active peak and the inactive one that the re-chromatography separated out from it. The MS showed the 484 peak most strongly in the inactive peak, but there was a small amount of it in the active peak as well. Since the chromatographic separation was good this would suggest that although 484 is not the active compound it is formed from it, or vice versa.
Just before I left there was some electrospray MS done on some fairly pure material, but I did not get a chance to look at it until last night. The 484 peak is not there, but there are other peaks. I need to check with Stacey which the samples were that were run on the MS before I can sort out things from the data.
Conduct or Representations
(1) Communications
[42] Comvita pleads that, by the time of its board meeting on 20 September, WaikatoLink had decided upon a strategy designed to induce potential contracting parties, particularly Comvita, to enter into a contract with it on extremely beneficial financial terms. The strategy's principal components are said to be:
(1)to emphasise that Professor Molan had made a very significant breakthrough in terms of identifying the UMF molecule but without specifically representing that it had been discovered;
(2)to decline to allow the potential contracting parties to see the discovery information, or to know what it was, even under confidentiality undertakings, on the basis that it was too significant even to disclose on that basis;
(3)to claim that as a result of the breakthrough its intellectual property was now extremely valuable given very significant commercial exploitation benefits; and
(4) to assert there was an intense and urgent race to be the first to contract with it in order to obtain these benefits.
[43] In opening Mr Cooke based this strategy allegation upon a lengthy WaikatoLink management paper headed "Comvita Negotiations". The document advocated a commercially naïve, nonsensical and arguably underhanded approach to future negotiations with Comvita. The paper was discovered in this proceeding. Comvita understandably construed its contents as disclosing a carefully planned overstatement of WaikatoLink's position coupled with an intention to exploit Comvita's perceived vulnerability. However, I accept Mr Stuart's evidence that he rejected the paper's recommendations as a platform for future dealing with Comvita. And Mr Cooke did not press the strategy allegation in closing. Its remnants will be discernible, however, in support of an argument to strike down the entire agreement provision in the IP contract.
[44] Nevertheless, the message given by WaikatoLink's management to its board that "Comvita understand how close we are to [discovering] the molecule …" remains noteworthy. I am satisfied that this mindset of an imminent - and inevitable
- breakthrough dominated the messages imparted by management to Mr Bailey and his fellow directors and through them to Comvita.
[45] A meeting was held at WaikatoLink's offices on 28 September. Messrs Craig and Hewlett represented Comvita; Messrs Bailey and Stuart attended for WaikatoLink. I accept Mr Hewlett's account of the relevant aspects of the meeting which was largely confirmed by Messrs Bailey and Stuart. In summary, Messrs Bailey and Stuart advised that the reason for WaikatoLink's decision to withdraw from the joint venture was that it had learned of Professor Molan's major breakthrough - described by Mr Bailey as a "eureka moment" - leaving him very close, in temporal terms, to identifying the ingredient responsible for the UMF compound.
[46] The WaikatoLink representatives explained that the company had spent the previous two months filing patent applications; that it did not want to disclose the reason for withdrawing from the joint venture until the patents were filed; but that, given completion of that step, it was interested in recommencing negotiations with Comvita on different terms. In particular, because of Professor Molan's breakthrough, WaikatoLink now required Comvita to pay $6m to $8m for a new intellectual property package instead of the originally agreed price of $2.3m. WaikatoLink refused Comvita's request to see the patents on the ground that one of its technical employees would immediately understand the basis of Professor Molan's discovery. WaikatoLink was not prepared to risk revelation of its secrets in this way, even with confidentiality undertakings.
[47] Messrs Craig and Hewlett were unhappy to learn of Professor Molan's significant discovery while the parties were working in good faith as if the joint venture was in place. They considered it was unethical for WaikatoLink to withdraw from the scheme, file patents for its discovery and then seek to extract payment for this intellectual property at a greatly increased cost.
[48] Messrs Bailey and Stuart's unequivocal statements that WaikatoLink now had a much more valuable asset for sale convinced Messrs Craig and Hewlett that Comvita had no choice but to negotiate further, and on WaikatoLink's terms. Both men acknowledged that Messrs Bailey and Stuart did not represent that Professor Molan had actually identified the molecule. But they understood from WaikatoLink's communications that its leading honey research scientist knew enough to protect his work by applying for patents, conveying that the discovery was simply a matter of time and was commercially exploitable.
[49] Messrs Craig and Bailey met again in a coffee shop at Hamilton on
3 October. Mr Bailey accepts that he described Professor Molan's discovery as akin to "the Holy Grail" of manuka honey (Mr Bailey himself emphasised that the Holy Grail would be the actual identification of the UMF). Mr Bailey stressed the need for urgency in dealing with any commercial arrangements. He feared that Professor Molan could "hop out of the shower and speak to the press" without fully appreciating the commercial implications of his words.
[50] On 5 October Mr Stuart emailed Mr Hewlett some draft documents. Included were a research agreement, described as covering the "project to find the compound", and licence agreements for honey gel and fortification. WaikatoLink proposed that Comvita make an immediate payment of $6m, with a further $4m payable upon satisfying certain identification milestones of the UMF compound with appropriate patents.
[51] Mr Hewlett emailed Mr Stuart on 11 October 2006 stating:
We have had some time to study [the 5 October documents] but are still trying to assess the real value in the IP you have presented. As mentioned to you during our meeting in Hamilton, we would like you to provide supporting information to help us understand how both Comvita and the University could best convert the IP into tangible commercially sustainable value that would justify the magnitude of the investment that you have proposed. That is not obviously apparent to either our technical or commercial teams.
[52] Mr Stuart's emailed reply on 13 October noted WaikatoLink's confidence "that the possible returns justify the asking price and the market confirms this"; and that "time is marching on and we are under pressure to decide with whom we will proceed to the next stage by close of business Monday 16th."
[53] Mr Stuart's email attached a paper entitled "Value add of WaikatoLink IP", calling it "a brief document that provides an overview of the ways in which we think a monopoly on this IP enhances the value of your company". The paper stated materially as follows:
New IP would:
• Provide product differentiation by enabling the company to increase the UMF activity (above that naturally occurring) of all current products where UMF activity drives price. This will lead to increased revenue through increased market share and margins as well as provide an unchallengeable leadership position through always having the highest UMF products. (Fraction, compound).
• Provide up to 15 new/novel products additional to the existing product line. People knowledgeable in the field will identify more. (Utilising the fraction, gel, and compound).
• Underpin growth required in the medical product category through: the new gel formulation's advantages over current products, the fortification of current products using the fraction or naturally occurring compound,
and leverage of the knowledge of the compound for regulatory compliance. (Gel, +/- fraction, +/- compound).
• Allow new product development outside of current formulation restrictions and further differentiate these products through increased activity, leading to increased revenue and market share, and market protection through use of the fraction and compound. (Fraction, compound).
• Allow conversion of low value bulk UMF to high value UMF thus mitigating supply risk and improving revenue from low margin raw product. This will be particularly important in providing assurance of supply to manufacturers and distributors in the medical product category. (Fraction).
• Provide increased market capitalisation through announcements to the market. (Fraction, compound, gel, preferred research agreement, new product launches etc).
• Secure market leadership position through a monopoly on knowledge and exclusive rights to the active compound (Compound, preferred research agreement) for current and future products and activities applicable to product categories.
• Provide an exciting platform to progress to the main board or raise further capital.
[54] WaikatoLink's paper further stated:
New University technology acquired $?million
(fraction and fortify)
Peter's products and brand (5) $?million acquisition
Licence for future compound IP $?million
Announcement of Compound exclusive $?million rights
Preferred research agreement $?million New/novel product launches $?million First Sales of fortified products $?million
Registration of medical devices $?million leveraging active compound
Increased forecasted revenues $?million
(2) Meaning
[55] On this evidence, I find WaikatoLink progressively represented to Comvita between 28 September and 13 October 2006 that:
(1)WaikatoLink had terminated its joint venture negotiations with Comvita because it learned in July of Professor Molan's breakthrough in his research into the UMF compound in manuka honey. WaikatoLink was itself satisfied that the professor's research had advanced to the stage where he was on the brink of identifying the molecule. The final step to discovery was a matter of time - a question of when, not if;
(2)Professor Molan's breakthrough was of such a magnitude as to create new intellectual property, which was protected by provisional patents. As a result, the value of his work was so greatly enhanced that WaikatoLink was justified in seeking a licence fee of $6m together with a further $4m payable on the achievement of certain milestones. This price increase represented the tangible value attributable to Professor Molan's breakthrough;
(3)The greater value arising from the breakthrough would translate into real financial benefit for Comvita, as outlined in the October "value add of WaikatoLink IP" paper.
[56] Mr James MacGillivray for WaikatoLink properly emphasises that WaikatoLink did not say anything specific about the state of Professor Molan's research; and nor did it represent that Professor Molan had made the discovery or that he knew the constitution of the molecule. Mr MacGillivray correctly says that Comvita knew before the 28 September meeting that Professor Molan's research into the UMF compound was progressing; that at the time of the joint venture negotiations the professor himself considered he was quite close to a breakthrough; that the honey gel and fortification patents were of potential commercial value; that further work would be necessary before a discovery could be confirmed; and that the
real value in discovery came not from the discovery itself but from the methods of extraction, fractionation and isolation.
[57] These factors, while relevant, are not in my judgment decisive (some will be revisited in the compensation inquiry).
(3) Misleading Conduct or Misrepresentation
[58] In terms of the FTA inquiry, which assumed a marked degree of priority in Mr Cooke's closing argument, the question is whether WaikatoLink's statements were misleading or deceptive.[2] An objective approach is to be adopted: did the statements have the capacity or tendency to mislead or deceive the hypothetical reasonable person?[3] In contract, a representation is false if it is wrong or incorrect in fact. In most cases there will be little difference between the two legal tests and they will yield the same result. But the FTA test is arguably broader because it avoids the finer distinctions inherent in the contractual test about whether a statement was one of fact or opinion, or simple puffery, or whether a duty of disclosure arose.[4]
[2] Section 9, Fair Trading Act 1986.
[3] Red Eagle Corporation Ltd v Ellis, above n 1, at [29].
[4] See discussion in Burrows, Finn & Todd: Law of Contract in New Zealand, (3rd ed, Lexis Nexus, Wellington, 2007) at para 11.3.2.
[59] On an objective analysis WaikatoLink's conduct was, I find, misleading, deceptive or false in three material respects.
(a) Professor Molan's breakthrough
[60] First, WaikatoLink's core and repeated assertions of Professor Molan's breakthrough, and that consequently he was on the brink of discovering the UMF compound, were wrong. The professor's initially positive advice was a false alarm, as he himself recognised within a fortnight. It was or should have become progressively apparent to WaikatoLink's management that Professor Molan's central hypothesis - that DGG was the compound - was wrong.
[61] The evidence of WaikatoLink's error is unanswerable. Unknown to either party, another scientist had already discovered the UMF compound. Professor Molan had himself first raised the possibility in a cryptic email sent to Comvita in January 2007. In April 2007, after Comvita had paid the first $1.5m due under the IP agreement to WaikatoLink, Dr Schlothauer carried out a Google search. He located a reference to a paper given by Professor Henle of Dresden University in Germany at a conference in Naples in late May 2006. Professor Henle had concluded from tests that they "… clearly demonstrated that the pronounced antibacterial activity of New Zealand manuka honey directly originates from MGO" [methylglyoxal]. He had discovered the UMF compound and made the breakthrough claimed two months later by WaikatoLink.
[62] Professor Molan's subsequent research, which was the subject of his July and September 2006 reports, was carried out in ignorance of Professor Henle's earlier discovery. WaikatoLink now accepts that Professor Henle's conclusion is correct. Professor Molan's DGO thesis had been affirmatively disproved before it was propounded.
[63] As Dr Schlothauer observed, Dr Manly-Harris was in fact much closer to the truth than Professor Molan at the relevant time. She had located a precursor to MGO which led her to conclude independently in mid 2007, a year after Professor Henle, that MGO was the UMF molecule. I should add, of course, that WaikatoLink's representations related specifically to the work of Professor Molan, not of Dr Manly- Harris.
[64] Professor David Greenwood, an Auckland University scientist called by Comvita, confirms the falsity of WaikatoLink's representation. In his opinion, which I accept, Professor Molan had not made a significant breakthrough in July 2006 and was not on the brink of discovering the UMF compound. In particular, Professor Greenwood said:
... there is no evidence that Professor Molan was anywhere near making this kind of progress in relation to MGO and the complexities associated with the antimicrobial activity in manuka honey. The emails that we have which report upon his work suggest the opposite. The mass spectrometry he was undertaking was in a completely different mass range than would have been
necessary to identify MGO, or any other molecules that were contributing to the UMF activity related to MGO. In this respect the 2006 Henle paper describes an entirely different kind of analysis procedure that he and his team were utilising, which involved a derivatisation process to form the corresponding quinoxalines of 3-DG and MGO and GO. This process allowed reliable HPLC separation, uv visualisation and quantitation of these components. This was crucial in enabling analytical results on 1,2- dicarbonyl compounds to be obtained in a much more robust manner than was hitherto possible. Consequently Henle was able to progress to quantifying MGO and other 1,2-discarbonyls in honeys, including manuka honey, as reported in the 2006 Henle conference abstract, producing actual values that were very similar (essentially identical) to those reported in the follow-up 2008 Henle paper. It does not appear to me that Professor Molan was using that particular or any other derivatisation procedure for detecting MGO at this time. I do not think that Professor Molan and his team were at all close to finding MGO, let alone independently establishing good analytical methods for analysing it.
[65] Dr Schlothauer was to the same effect. Like Professor Greenwood, he was an impressive witness. He is an expert in the area but, of course, interested by virtue of his employment with Comvita. Nevertheless, I accept his conclusion that Professor Molan's July 2006 thesis was incorrect. And I am satisfied that from 27 July the professor progressively came to the same realisation.
[66] Mr MacGillivray advances a detailed argument to the effect that WaikatoLink correctly represented that Professor Molan had made a breakthrough. That was because he had isolated a small and relatively pure fraction which he hoped would lead to the molecule's breakthrough. The short answer to this submission is that Professor Henle had already made the breakthrough. There was no breakthrough to be made by Professor Molan in July 2006.
[67] But even if, as Mr MacGillivray submits, Professor Molan had by 15 July
2006 reached the stage of attempting to identify the active molecule within a very small fraction, he progressively learned - as he communicated to WaikatoLink over the next two months - that his theory about the actual compound was wrong. Moreover, WaikatoLink's representations were not triggered by the professor's news of progress in the fractionation process. Instead, they were generated by his "brilliant news" that he had probably discovered the actual compound.
[68] Professor Molan's messages were lost, I am satisfied, in translation within
WaikatoLink and then in transmission to Comvita. An overreaction to his 15 July
email (see [28] above) started the chain of misunderstanding. The professor's status would have carried particular weight with Mr Mackintosh and the email's other recipients. His proclamation of "brilliant news", coupled with a brief summary of the supporting evidence, conveyed a message of informed optimism at the prospect of an imminent discovery. His "formal disclosure" added significance to the moment.
[69] The 15 July email created great excitement It was sent late on a Saturday afternoon. Mr Mackintosh then conveyed the news to Mr Stuart. He in turn phoned Mr Bailey in Taranaki about 9 pm. Mr Cooke's description of events as "Saturday Night Fever" is apt. Mr Mackintosh's construction of the email as conveying Professor Molan's view that he had isolated the active UMF compound is understandable. But a more sober or reflective evaluation may have treated the "brilliant news" as qualified or conditional. The professor had expressly noted that further scientific work was necessary, including in areas outside his expertise, and that DGG might, not did, have some novel characteristics.
[70] Management's failure to appreciate or acknowledge the true import of Professor Molan's 24 July email (see [38] above) was the next compounding step. Professor Greenwood construed the email "as a sign that the molecule[s] responsible for the biological activity was unlikely to be what [Professor Molan] thought it was". Professor Owen Young, another scientist from Auckland University, who was called by WaikatoLink, believed it was no more than Professor Molan questioning his original hypothesis about the identification of the actual compound but that "he was still making exciting progress". To the extent that it is necessary to resolve this difference, I cannot agree with Professor Young. The optimistic tone of Professor Molan's first email was now muted, even non-existent. And whether the professor was excited is not the point.
[71] What is important in the context of Comvita's claim is the message which the
24 July email would have conveyed to a careful recipient who was familiar with the first report. It was, I am satisfied, an expression of Professor Molan's second thoughts about the accuracy of his earlier work. While observing that his further tests tended to confirm his identification of the structure of DGG, he conceded that it
"may not be the active [UMF] compound". The professor had noticed "something that [he] had not spotted before". He was now in an obvious state of doubt.
[72] Professor Molan's email dated 8 September (see [41] above) is also relevant. The professor's reference to the fact that "the 484 peak is not there" dispelled his thesis, as Professor Greenwood confirmed, that the likely molecular weight for the active molecule was 484. In Professor Greenwood's opinion, while that weight remained a possibility, it was not now a likelihood.
[73] However, management reports to the WaikatoLink board through this period proceeded as if there had been no change in Professor Molan's original hypothesis. The opposite was, in fact, true. Understandably, Mr Bailey and other board members believed on the basis of what they were told - and what they were not told - that Professor Molan had made a real or significant breakthrough, placing him near to the end of the path to discovery (compared by Mr Stuart to the sprint at the finish of a marathon). The muted reference in the July board papers to a risk remaining that "DGG is not the compound responsible for the UMF activity and is in fact obscuring another compound" did not effectively qualify or counterbalance the existing message of major progress which would lead inexorably to discovery of the UMF compound.
[74] WaikatoLink's board papers illustrate this point. For example, in a report as at 19 September 2006, management said this:
Data from these latest experiments has shown that DGG may not be the active compound. It appears that another compound, which comes off the chromatography column very close to/along with DGG, is responsible for the UMF activity. It is speculated that the compound may be a derivative of DGG. These results are potentially very good for the programme, as the new UMF compound may be novel which will provide the best case scenario from both an IP protection and commercial viewpoint.
[75] Board papers consistently noted:
Technology Summary: The molecular structure of a compound believed to be responsible for the UMF activity of manuka honey has been identified. Features of the structure match the observed physical characteristics and antibacterial properties of UMF. Increased chromatographic resolution of Peter Molan's fraction resulted in the single peak being refined into two
peaks, suggesting there is more than one compound in the fraction containing the UMF activity. The patent covers the unknown compound.
[76] Without doubt, Messrs Bailey and Stuart were correctly representing to Messrs Craig and Hewlett what they had been advised by management and genuinely believed the truth of their statements. However, innocence does not afford a defence if a statement is objectively speaking misleading or deceptive. An intention to mislead or deceive is not a necessary prerequisite to liability.[5] The representations were wrong, as I have noted, because they materially overstated the true progress of Professor Molan's research.
[5] Red Eagle Corporation Ltd v Ellis, above n 1, at [28], fn 14.
[77] WaikatoLink's statement of defence pleads that the relevant representations were limited to Professor Molan's state of belief that he had made a significant breakthrough in his research and was far closer to identifying the compound than previously understood. Mr MacGillivray made the same point in closing.
[78] I do not accept that WaikatoLink's statements were qualified in this way; they were made in absolute terms, as statements of fact, of the existence of a breakthrough. The representations were not qualified by words to the effect that the speakers, or Professor Molan, had a belief to that effect. And, even if that qualification had been made, it was itself wrong because from 27 July, and certainly by 3 September, Professor Molan had changed his state of belief.
(b) Increased value of IP
[79] Second, WaikatoLink's representatives falsely or misleadingly emphasised a significant differential in value of the company's intellectual property after 15 July. Their communications with Comvita on this subject in September and October - particularly Mr Stuart's email on 13 October and his "value add" paper - were designed to carry special weight with the recipient. That is because WaikatoLink alone knew the true state of Professor Molan's progress and was uniquely placed to make an informed assessment of its potential commercial value, if any, and an accurate forecast of future profits.
[80] WaikatoLink's "value add" paper (see [53] above) was sent in response to Mr Hewlett's request for "supporting information to help us understand how [the parties] could best convert the IP into tangible commercially sustainable value" to justify a payment by Comvita of $10m (see [51] above). It represented a wide range of financial benefits available to Comvita from exclusive rights to use WaikatoLink's existing intellectual property. Its falsity must necessarily follow from a finding that the underlying factual premise was itself wrong. Comvita was to be licensed to use the three patents filed to protect WaikatoLink's intellectual property in Professor Molan's research work in July, August and September 2006. But they would have no commercial value to a licensee. WaikatoLink later allowed them to lapse.
[81] Mr MacGillivray accepts that in some cases a statement of opinion will carry an implied representation of fact.[6] This is such a case. WaikatoLink's statement of an opinion about the value of its asset implied a representation of fact. Both the opinion and the underlying fact were wrong. In any event, even if it could be labelled a statement of opinion, the statement was still misleading and deceptive.
(c) Failure to disclose
[6] New Zealand Motor Bodies Ltd v Emslie [1985] 2 NZLR 569.
[82] Third, by November 2006, a month before the IP agreement was concluded, WaikatoLink knew conclusively or ought to have known that Professor Molan's DGG-focused research had come to a dead end. On 11 November one of the professor's assistants, Jonathan Puddick, advised him that his research showed the
484 peak was not the active peak. A replacement compound had not been identified. The professor's work in isolating the UMF molecule was no further advanced than what had been disclosed to Comvita at the joint venture stage.
[83] I accept Mr Cooke's submission. Mr Puddick had cast further doubt upon the accuracy of Professor Molan's original work. Professor Molan's hypothesis that the UMF molecule had a molecular weight of 484 and was accordingly likely to be a tannin called DGG was positively disproved. The parties were then in negotiations to settle the IP agreement. In those circumstances WaikatoLink assumed an
immediate obligation to disclose Mr Puddick's advice to Comvita. WaikatoLink's failure after 11 November to correct its earlier misrepresentation amounted to an omission to mention a subsequent material change. This was a separate instance of deceptive conduct or one rendering the original representation false.[7]
[7] Smythe v Bayleys Real Estate Ltd (1993) 5 TCLR 454 at 464; Gregory v Rangitikei DistrictCouncil [1995] 2 NZLR 208 at 233.
[84] Comvita has established that WaikatoLink's statements were, viewed objectively in FTA terms, misleading or deceptive, or, in contractual terms, misrepresentations. Thus it is now necessary to consider the logically consequential and closely contested issue of reliance.
Reliance
[85] The reliance inquiry is of an intensely factual nature. In the FTA context it is the first in a two-stage assessment of causation of loss. The question is simply whether Comvita was actually misled or deceived by WaikatoLink's conduct; the reasonableness or otherwise of its reliance falls within the compensation inquiry. The second question, for determination later, is whether or not WaikatoLink's conduct caused Comvita loss. The entire agreement provision in the IP agreement
will be relevant to the FTA inquiry.[8]
[8] David v TFAC [2009] 3 NZLR 239 (CA) at [60]; PAE (New Zealand) Ltd v Brosnahan & Ors [2009] NZCA 611 at [42]-[46].
[86] In the contractual context, the question is whether WaikatoLink's misrepresentation induced Comvita to enter into the contract.[9] The event of inducement is not necessarily a singular event. Instead it occurs along the continuum of negotiating contractual terms and conditions.[10] Again there is unlikely to be any substantive difference in the two approaches.
[9] Burrows, Finn & Todd, above n 4, at para 11.2.4.
[10] Mt Pleasant Estates Co Ltd v Withell [1996] 3 NZLR 324 at 329.
[87] Some events occurring after 3 October, already discussed within the issue of misleading conduct or misrepresentation, merge into the reliance inquiry. WaikatoLink's draft contractual document sent on 5 October initiated the path to
execution of the IP agreement two months later. The steps taken along the way are relevant.
[88] Reaction within the Comvita camp to WaikatoLink's originating proposal for a $10m payment was divided. An email from Mr Craig's secretary on 6 October, reporting on Mr Hewlett and Dr Schlothauer's evaluation of WaikatoLink's contractual document, best captures their initial mood. It summarised their conclusion that there was very little commercial value for Comvita in acquiring the patent for the UMF molecule, noting:
[WaikatoLink is] only saying that [it] may have it - a long way to having anything commercially viable. The IP that [it has] is worth bugger all and it's a ridiculous price. If we said no to this and they sold it to someone else how much harm could that cause us? Conclusion is very little, it wouldn’t prevent us carrying on our work, research and progressing. Not to say there aren't advantages but they're pretty miniscule to what WL is trying to portray… Even if we are not successful, Peter Molan would be obliged to publish the information in next 6-12 months anyway. Having patent around the molecule is of very little use. [Dr Schlothauer] was so upset when he read the proposal, he was shaking, couldn't believe how naïve and arrogant they are on the value of their own IP. Not worth anything like the price.
[89] On its face, this note was an unpromising start for Comvita's case on reliance. Mr Hewlett and Dr Schlothauer did not attempt to distance themselves from the truth of its contents. Mr Hewlett volunteered that Dr Schlothauer had pointed out that it was not possible to patent a molecule; and that, even if Professor Molan had discovered the UMF compound, it did not mean that it would be commercially exploitable. However, as both men acknowledged, Dr Schlothauer was new to the company, and on reflection Mr Hewlett concluded that WaikatoLink would not have made its demand unless satisfied that Professor Molan had made a major discovery.
[90] Mr Hewlett's interest was, I accept, in the commercial benefits of Professor Molan's breakthrough. So he sent his email to Mr Stuart on 11 October (see [51] above ). He agreed with Mr McGillivray that discovery of the UMF molecule would not of itself be of specific tangible value. Its worth lay in its commercial potential; what Mr Hewlett described as developing "a process for synthesising [the] molecule". I am satisfied that his interest in WaikatoLink's proposal was driven, despite Dr Schlothauer's caution, by that prospect. Comvita is a market leader. And Mr Hewlett wanted to exploit all possibilities.
[164] Second, despite Dr Schlothauer's warning, Comvita made no attempts to satisfy itself that it was paying fair value for Professor Molan's intellectual property. I appreciate the valuation difficulties in this area. There is no market to set an objective measure. But Comvita was prepared to fly blind with express notice from Dr Schlothauer of all the risks. This approach, I am satisfied, was closely linked to its defensive anxiety to exclude competitors from access and secure a relationship with Professor Molan.
[165] Mr Hewlett was materially influenced by WaikatoLink's "value add" paper, with its projections of nine discrete financial benefits - each given a valuation range in "$?million" (see [54] above). It was supplied in answer to Mr Hewlett's request for "supporting information" to justify a substantial investment. When read objectively as a whole, the document was long on jargon and meaningless phrases, and notably short on "supporting information" or facts. Its terms were such as might
have validated Dr Schlothauer's warnings to Comvita. All the elementary questions which he had raised in early October remained unanswered.
[166] I infer from Comvita's conduct from early October that it knew throughout that it was running a risk in entering into the IP agreement but was prepared to pay a premium for what was both a speculative opportunity and a defensive position.
[167] Third, as outlined, Comvita could have protected itself by including appropriately drafted contractual provisions (see [126]-[129] above). And as Mr Cooke properly concedes, the entire agreement clause is relevant here. Comvita agreed to an allocation of risks as part of the overall package of rights and obligations negotiated at arm's length. The company disclaimed rights of recourse for non-contractual misrepresentations. Comvita is now departing from its bargain by seeking recourse under the FTA, as it is entitled. But it cannot expect to enjoy the contractual measure of recovery.
[168] These factors are causally potent. The FTA cause of action has much in common with the tort of negligent misstatement except that reasonableness of reliance does not feature in the elements of liability but in fixing compensation. Damages under the FTA are fixed according to the reliance measure adopted in tort. Where a plaintiff's conduct is in question, the law of contributory negligence provides analogous guidance, given its conformity with the discretionary nature of the s 43 jurisdiction.
[169] In my judgment Comvita's own conduct contributed materially to its loss in the form of an obligation to pay $2m under the IP agreement. Aspects of its case suggested a search for a scapegoat for what with the benefit of hindsight was a hasty and ill-conceived commercial decision. Its good judgment was, I think, unduly influenced on this occasion by an uncharacteristic degree of subjectivity following WaikatoLink's withdrawal from the joint venture. I appreciate, of course, that Comvita placed reliance on WaikatoLink's representations. But the company must accept an equal share of the blame for what transpired. Moreover, it received some, albeit intangible, benefits from the licensing component of the IP agreement.
[170] When fixing compensation, it is necessary to stand back and attempt to achieve justice between two sophisticated commercial entities which chose to regulate their relationship in contract. The FTA's policy of fair dealing must also be accommodated. In my judgment Comvita should bear at least 50% of its own loss, being its liability to pay an extra $2m under the IP agreement. That translates into compensation of $1m by way of set-off against the balance of its contractual liability to WaikatoLink.
Breach of Warranty
[171] The final question is whether Comvita breached a contractual warranty. WaikatoLink warranted (clause 5, Schedule 1) as follows:
(b) it will be on the Licence Commencement Date, and will remain for the term of the Licence, the exclusive owner of the Licensed Honey IP, subject to clause 10.2. If WaikatoLink does not assign its rights under this Licence pursuant to clause 10.2, it will ensure that the assignee agrees in writing to be bound in the terms of this Licence.
[Emphasis added]
[172] Comvita alleges that, contrary to its warranty, WaikatoLink was not the exclusive owner of "the Licensed Honey IP", given Professor Henle's preceding discovery of the UMF compound coupled with the absence of any new intellectual property developed by the compound or concentration research programmes capable of exclusive ownership.
[173] "Licensed Honey IP" was defined as:
… the Existing Honey IP and any Future Honey IP in relation to which
Comvita exercises its option pursuant to clause 3.5 of this Agreement.
[174] "Existing Honey IP" was defined as:
… the Honey IP developed prior to the Commencement Date within the Compound Research Programme or the Concentration Research Programme that is owned by WaikatoLink or the University and may have applications within Wound Care Products, or Skin Care Products or Cosmetics Products, including the Honey IP which is the subject of the patents and patent application listed in Schedule 4, but excluding the Honey-Gel Patents.
[Emphasis added]
[175] "Existing Honey IP" was further defined as:
'Honey IP' means any inventions, improvements or discoveries relating to honey or any substances or materials derived from or based on honey, together with the Intellectual Property Rights in and to such inventions, improvements or discoveries.
[176] The Compound and Concentration Research Programmes were defined as:
'Compound Research Programme' means any research and development programme undertaken by either or both of the University and WaikatoLink to identify the Compound and its application within Wound Care Products, or Skin Care Products or Cosmetic Products;
'Compound' means a compound or compounds found in manuka honey which have non-peroxide antibacterial activity as assessed by activity against methicillin-resistant Staphylococcus aureus (MRSA) and is reported in Unique Manuka Factor (UMF) units which relate to the percentage (%) weight per volume aqueous phenol solution with equivalent activity. For example, UMF25+ honey has at least the same antibacterial activity as a
25% w/v phenol solution;
'Concentration Research Programme' means any research and development programme undertaken by either or both of the University and WaikatoLink to concentrate or produce the Compound for applications within Wound Care Products, or Skin Care Products or Cosmetic Products.
[177] The patents and patent application referred to in the definition of "Existing Honey IP" were Professor Manly-Harris' isolation patents filed in June 2004 together with Professor Molan's three patents filed in 2006. It is common ground that those three patents had no value given Professor Henle's earlier discovery. As earlier noted, WaikatoLink has allowed them to lapse.
[178] Mr Cooke submits that as a matter of definition the phrase "Existing Honey IP" includes a warranty that WaikatoLink was the exclusive owner of the property involved in Professor Molan's work and in particular of the intellectual property described in the three patents. All three patent applications for Professor Molan's research work were premised, he submits, on a misconception about the intellectual property held by WaikatoLink. The applications did not describe a novel invention with utility and no "know how" was associated with the patents. There was no intellectual property capable of "exclusive ownership" associated with the patents and Professor Molan's breakthrough. Thus the warranty was breached.
[179] I agree with Mr MacGillivray to the contrary. It is unnecessary to resort to the principles of contractual interpretation recently reviewed by the Supreme Court.[22] The short answer to Comvita's claim is that WaikatoLink was the exclusive legal owner of the five patents listed in Schedule 4. That is what clause 5.1 warranted; that is its plain and natural meaning. The provision cannot be construed to imply a further representation about the status or value of the intellectual property underlying the patents.
[22] Vector Gas Ltd v Bay of Plenty Energy Ltd [2010] NZSC 5.
[180] When read in its context, clause 5.1 was simply a standard warranty as to ownership, for the obvious purpose of ensuring that no other party could claim a right to the subject assets adverse to WaikatoLink or Comvita. Consistently with this focus, the "Licensed Honey IP" was concerned with "Honey IP" which was "owned by WaikatoLink".
[181] The other warranties listed in clause 5.1 support this construction. They represented that "there are no liens, encumbrances or other charges over any of the licensed IP" (clause 5.1(a)); and that WaikatoLink will immediately notify Comvita upon becoming aware of any adverse third party intellectual property rights concerning "the licensed products". Clause 5.1 also covered the contingency of an assignment of its rights as owner, further highlighting the warranty's limited scope.
[182] I agree with two other points made by Mr MacGillivray in answer. First, in effect this is an attempt by Comvita to convert or extend WaikatoLink's warranty into an express contractual representation of the type for which it did not stipulate to the effect that Professor Molan's breakthrough had a tangible value. Second, even if the warranty was construed as Mr Cooke submits and WaikatoLink was found to be in breach, Comvita's claim for damages would have been limited to the difference between the value it would have received under the IP agreement if either Professor Molan or Dr Manly-Harris had discovered that MGO was the UMF compound after the date of the IP agreement but before Professor Henle. However, there is no evidence that Professor Henle has made a patent claim which might have restricted Comvita's potential use of his information or more particularly Dr Manly-Harris' knowledge.
[183] This cause of action must fail.
Judgment
[184] WaikatoLink initiated this proceeding by claiming judgment for $3.5m. As found, Comvita is entitled to set-off against this liability in the sum of $1m by way of compensation for its loss or damage suffered as a result of WaikatoLink's misleading or deceptive conduct. A further sum of $1.5m has already been paid in cash and by shares. The shortfall owing by Comvita is $1m. WaikatoLink is entitled to judgment for that amount.
[185] Costs might present a conceptual difficulty. Each party has enjoyed a measure of success. Thus, on a provisional assessment, costs should lie where they fall unless either one party is able to persuade me to the contrary or liability for costs is complicated by the existence of a Calderbank offer or something similar.
[186] Counsel should be able to settle costs. However, if they are unable to do so, leave is reserved to the applying party to file a memorandum of no more than eight pages in length (excluding schedules) by 21 June 2010 and for the other party to reply with a memorandum subject to a similar limitation by 12 July 2010. The issue will be decided on the memoranda unless the parties specifically request a hearing.
[187] I have enjoyed the benefit of argument of the highest standard, and I wish to compliment counsel for both parties on their singular skill, care and goodwill in presenting their respective cases.
[188] Leave is reserved to apply for any necessary further orders.
Rhys Harrison J
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