Breakout Barrier Release Systems Pty Ltd v Breakout Barrier Release Systems Australasia Pty Ltd

Technical Aspects 25The Barrier Release Lock, the Breakout Locks and the Sanctum Locks are all devices in which the latch or bolt is moved to a closed (or locked) position by reason of pneumatic pressure, and opened, at least principally, by pneumatic pressure or the absence of such pressure. I have added the qualification "principally" in respect of opening because some of the embodiments have a means of manually opening the lock either when no pneumatic pressure is available or even when it is. The devices all have a latch actuation device and a barrier latch which may cause the barrier to be retained and the Patent Application, the Standard Patent and the Sanctum Application can be operated manually where pressure fails. Counsel for the plaintiff prepared a schedule which summarises the similarity and differences between the various products. I have had that document marked as MFI 4. 26The Barrier Release Lock is a fail safe product. The Breakout Locks is, in two variants, fail safe and the Sanctum Lock in two of the embodiments is fail secure. Whether the third embodiment of the Sanctum Lock is fail safe is a matter of dispute between the parties. 27A sample of the Breakout Locks is in evidence as Exhibit 1. Its operation using a bicycle pump as a source of air, was demonstrated in Court. When the switch on the product was flicked the bolt extended from the lock and when the switch was moved to the reverse position the bolt retracted back into its recess. The product was made by Mr Watmough on behalf of the first defendant. 28A sample of the Sanctum Lock is in evidence as Exhibit 2. It is not complete and was not shown in operation in Court. To operate it would need a source of air, switch and electronic chip (see T232 per Mr Shoolman) and Mr Watmough claims that when Exhibit 2 operates it is not fail safe. Exhibit 2, is even to mere casual lay observance, far more sophisticated than Exhibit 1. Although not obvious visually, it contains a "blocking member" above the latch or pin which, when in closed position, prevents the bolt from retracting. It is moved into and out of the blocking position by means of a pneumatically operated device as can be seen in Fig 2B at p 142, Exhibit A. 29Mr David Shoolman is a patent attorney retained by the plaintiff since 2005 in connection with the Patent Application and also as its expert in this case and Mr Adam Hyland is a patent attorney who is retained by the defendants as their expert. Their reports and affidavits were relied on by their clients. Neither Mr Hyland nor Mr Shoolman have seen Exhibit 2 (or any Sanctum Lock prototype) in operation. 30Shortly before the hearing fixed for July, Mr Shoolman and Mr Hyland met and compiled a Joint Report: see Exhibit B. At the hearing in July, Mr McVay foreshadowed a change of opinion by Mr Hyland and subsequently (see Mr Hyland's affidavit of 12 July 2013 and 18 July 2013 in Exhibit D) Mr Hyland provided his explanation for his altered views on most of the issues on which he and Mr Shoolman in their Joint Report had previously agreed. The hearing in July was interrupted by reason of the defendant's assertion that the proceedings had been settled. That contention was abandoned on the fourth day of the hearing and the case could not proceed in the allotted time due to Mr Shoolman's unavailability. The balance of the hearing was later fixed for October. 31The change of opinion of Mr Hyland appears to have arisen solely because of what he had been told by Mr Watmough and more specifically as to how Exhibit 2 operated. Mr Shoolman agrees with Mr Hyland that if Mr Watmough's explanation as to how Exhibit 2 would operate if attached to the appropriate pneumatic and electronic sources then Exhibit 2 is not a fail safe product but rather a fail secure product. 32It seemed to me, and Mr Hyland agreed with this, that if Exhibit 2 operates in the way that Mr Watmough describes and is not fail safe it is not the third embodiment of the Sanctum Lock (T411-412). Mr Shoolman expressed the view that the third embodiment described at p 129-30 of Exhibit A is fail safe. The brochure undoubtedly claims that the Sanctum Lock is available in a fail safe configuration which is consistent with Mr Shoolman's reading of the Sanctum Application. Mr Hyland in his affidavit of 12 July 2013 says that Exhibit 2 is not fail safe but he also says that the third embodiment in the Sanctum Application is not fail safe either: see para 21A(ii). It would seem that Mr Hyland's agreement that Exhibit 2 is not the third embodiment entails the concession that the third embodiment is a fail safe configuration but I shall treat the question as open nevertheless.

Construction of the Agreement 33Before addressing the construction issues raised I should note that the PLA is a commercial agreement, and in construing commercial agreements the Court is required to take the following principles of construction into account: (1)A commercial contract should be given a business-like interpretation. (2)The nature and extent of the commercial aims and purposes of the agreement are part of the essential background circumstances. (3)Words should be given a construction that avoids making commercial nonsense or to produce a commercially inconvenient result. (4)The terms should be read fairly and broadly without the court being too astute or subtle in finding defects. (5)The courts should eschew detailed semantic and syntactical analysis to lead to a construction contrary to business commonsense as objectively ascertained. (6)The process does not however involve judicial rewriting of the agreement. see Franklins Pty Ltd v Metcash Trading Ltd [2009] NSWCA 407 per Allsop P (as his Honour was then) [19] - [23], with Giles JA at [63] agreeing, and Campbell JA at [361] - [362] with Giles JA at [42] - [43] agreeing, in Western Export Services Inc and Others v Jireh International Pty Ltd [2011] HCA 45, and for a recent application of this Dogrow Pty Ltd v Teakdale Pty Ltd [2013] NSWSC 726, Sydney Attractions Group Pty Ltd v Frederick Schulman [2013] NSWSC 858 per Sackar J at [34]-[37] and Cordon Investments Pty Ltd v Lesdor Properties Pty Ltd [2012] NSWCA 184, [52] per Bathurst CJ (with whom Macfarlan and Meagher JJA agreed). 34Mr McVay sought to rely on a letter of 13 August 2003 from Cordato Partners to Mr Manny, Mr Freud and Mr Watmough. The letter (Exhibit A, pp 53-53A) contained the following summary of the draft PLA: The License is given in respect of the Patent, the subject of the Patent Application, and all improvements upon the Patent. Cordato Partners were acting for the plaintiff and the first defendant in relation to the PLA. 35Initially Mr McVay sought to rely on the letter as an extrinsic material objectively known to both parties relevant to the construction of the PLA in the case of ambiguity, but he abandoned this contention in closing submissions and asserted that the letter, having been admitted into evidence, was "in for all purposes" and was an admission as to what the PLA meant: see T458-460. 36There are a number of difficulties with the submission: (1)The letter was written in August 2003 some 10 months before the PLA was executed. (2)All the letter does is describe the content of a draft which it is clear is not the draft actually used - a subsequent letter of 22 March 2004 enclosed a further draft stating: The revised agreement contains amendments in answer to the points clarified, and also contains a number of other amendments which have been made by way of clarification on my further view of the agreement. (Exhibit A, p 66). Mr McVay does not rely on that later letter or the draft enclosed. (3)The letter of 13 August 2003 does not appear to support Mr McVay's contention that the subject matter of the patent was only the Standard Patent (i.e. the Patent as issued). (4)I am uncertain as to by whom the "admission" is said have been made. It is a statement by the solicitor for all the parties of what he believed the clauses drafted contained. The argument, although not presented as such really seems to be one based on extrinsic material. The inclusion of a document in the Court bundle, which inclusion was requested by the defendants, does not in my view render that document admissible on the construction of a written contract in circumstances where the letter would not, on the authority of the High Court, be admissible. The PLA is not, in my view, ambiguous at all and, in accordance with Codelfa Constructions Pty Ltd v State Rail Authority (1982) 149 CLR 337, 352 (and see Western Export Services Inc v Jireh International Pty Ltd [2011] HCA 45 and Schwartz v Hadid [2013] NSWCA 89)), the letter is not relevant to construing the PLA.

The Condition Precedent Issue 37The defendant claims that the PLA only operated when the Standard Patent was issued, however there is nothing in the PLA which suggests that it was not to have immediate operative effect. The parties obviously contemplated that it might take some time to obtain a Standard Patent but they clearly contemplated that the first defendant would commence work on developing and selling the Barrier Release Lock before the Standard Patent was granted (as para 57 of Mr Watmough's first affidavit recognised), and they sought to regulate their relations from the date of execution of the PLA. Clause 2(1) provides that the licensor "hereby grants a license", and clause 3(2) requires the first royalty payment to be made on 30 June 2004. Clause 5(2) (see [15] above) is entirely inconsistent with the defendant's claimed interpretation as is clause 10(1). Clause 12 contains no temporal limitation. The definition of "term" makes it clear that the license commenced on the date of the agreement and was to end on the later of two dates one of which is not dependant on the patent having been granted. 38Recital A described the plaintiff "as the holder of the patent described in Schedule 1". "Patent" means the patent described in schedule 1 and all present and future patents and applications filed including, but not limited to, licensor's improvements and licensing improvement, and "products" means the items and goods "produced pursuant to the patent described in Schedule 1". 39Mr McVay, in his submissions, contends that the patent must mean the Standard Patent. Not only is it against a fair reading of the clause, it is inconsistent with Recitals A and B since as at the date of the PLA the plaintiff was not the holder of any patent. Since no Standard Patent had been issued as at the date of the Agreement, as all parties were aware, and having regard to the definition, I cannot accept that "patent" is confined only to the Standard Patent. 40This conclusion undermines Mr McVey's contention that the grant of the Standard Parent was a precondition to the operation of the Agreement. I do not accept that there is any uncommerciality about the plaintiff and first defendant agreeing that the first defendant would commence developing manufacturing and selling the product, the subject of the Application and paying a royalty on sales even though a Standard Patent had not been issued. As between the plaintiff and the first defendant the question is not whether the plaintiff could enforce rights against third parties whilst it did not have a Standard Patent, but what the plaintiff and first defendant agreed between themselves. As Mr Clay reiterated on a number of occasions this case, whilst it concerns an agreement whose subject matter was a product for which a patent had been sought, is not a patent case. 41Mr McVay drew attention to the respects in which the protection given to the first defendant was deficient until a Standard Patent was issued but that does not preclude the clear effect of the terms of the agreement. I agree that the "patent in Schedule 1" includes the Standard Patent whenever granted but I reject the proposition that it is limited to that. I see no commercial unreality in a party paying a royalty for the right to manufacture and sell a product even if it has not yet obtained the protection of a patent. The point is only strengthened by the fact that the royalty was 5% of the net sale price of the products. As Mr Clay pointed out, lack of a patent is no impediment to manufacture and sale of locks - the first defendant makes and sells DC and Cobalt locks that Mr Watmough says cannot be the subject of patent protection. 42The Patent Agreement is one clearly designed to ensure that the subject matter of the Application is developed as a product for sale and distribution and as a product which the parties anticipate will be accorded the protection of a patent for the mutual benefit of the plaintiff and first defendant.

The Suspension of Obligation Issue 43The claim that the agreement operation was "suspended" until the grant of the Standard Patent is also baseless and for the same reasons that I have given in respect of the Condition Precedent contention.

Was the PLA terminated in 2009 by virtue of the plaintiff's notice of determination 44In closing submissions, Mr McVay expressly abandoned any reliance on this issue. It was agreed that the PLA had been terminated on 19 June 2009.

Comparing the Breakout and Sanctum Locks to the Barrier Release Lock 45This issue seemed to revolve around first the issue of what is the "patent" with which the PLA is concerned and secondly an assertion by the defendants that the plaintiff itself made no products so that there is no product that is the subject of the PLA to which comparison can be made. Since the PLA clearly envisaged that it was the first defendant that was to develop and manufacture the Barrier Release Lock, the products must mean, at least, the products that would be created if the specifications in the Patent Application, the PTC and or the Standard Patent, when issued, were followed. The first defendant cannot rely on its own failure to produce the Barrier Release Lock, in breach of the PLA, to assert that there is no product that can be compared to the Breakout Lock and the Sanctum Lock produced by the first defendant. 46The defendants contend that "the patent" described in Schedule 1 is to be read as the Standard Patent, since without that having been granted it was said, the Patent Agreement has no commercial purpose. The schedule is not limited to the Standard Patent and as I have explained I do not accept that there is no commercial purpose to the first defendant agreeing to pay royalties to the plaintiff on all products sold before the Standard Patent is issued. The patent described in the PLA is the product described in the Provisional Patent application, the PCT and the Standard Patent. 47I have in [8] referred to the difference in wording between a latch actuation device which is "separate from and operable independently of the barrier latch" and a latch actuation device "coupled to the barrier latch". The experts disagree on the extent of difference between the two - Mr Shoolman expressing the view that the actuation device can be coupled but yet be separate in the sense of being distinct or individual with respect to the latch (see Mr Shoolman's affidavit of 9 September 2013 at paras 23.2-4) and Mr Hyland expressing the view a latch actuation device coupled to a barrier latch cannot be separate from or operate independently of a barrier latch (see 22A, 22B of Mr Hyland's affidavit dated 12 July 2013) 48The argument, it seems, was advanced by the defendants in the context of their assertion that the PLA covered only the Standard Patent and that the PCT patent was different to the Standard Patent. I have already concluded that the PLA was not confined to the Standard Patent and covered also the Provisional Patent and the PCT, and in my view any difference between how the claim was framed in the Provisional Patent and PCT on the one hand and the Standard Patent does not assist the defendants.

Are the Breakout Locks covered by the PLA (apart from clause 12)? 49Mr Watmough during the hearing conceded that all of the Breakout Locks, made by him for the first defendant, of which Exhibit 1 is but one example made by him for the first defendant, were made under the licence which was granted to the first defendant (see T374.21-34, T377.15-21 and T432-40, T435.10-31). 50This part of the dispute, it became clear in closing submissions, is confined to: (1)Whether anything was caught by the PLA prior to the grant of the Standard Patent (2)Whether the remedy of account is appropriate 51In relation to the first issue, I have already dealt with the defendant's contentions and rejected them. The Breakout Locks manufactured and sold by the first defendant are Barrier Release Locks that are covered by the PLA. In relation to the second area of dispute that is best dealt with under the heading of relief.

Are the Sanctum Locks covered by the PLA (apart from clause 12)? 52I have already dealt with the contentions that there are no "products" with which comparison can be made and the contention that the only product covered by the PLA is a lock within the Standard Patent. 53The plaintiff accepted that embodiments 1 and 2 of the Sanctum Lock Application were fail secure embodiments and were not covered by the Patent Application. The plaintiff contended, and the defendants disputed, that embodiment 3 in the Sanctum Lock Application was a fail safe embodiment and caught by the PLA as a product. 54A further argument centres around the meaning of "licenses or improvements". 55In relation to the issue the third embodiment of the Sanctum Lock the evidence of Mr Shoolman, Mr Hyland and Mr Watmough assumes some importance. I shall deal with the credibility issue first.

Credibility: Mr Manny, Mr Shoolman, Mr Hyland and Mr Watmough 56I have no reason to doubt the credibility of Mr Manny and none was suggested. 57An attack was launched by Mr McVay on Mr Shoolman's credibility in submissions which focused upon: (1)The fact that Mr Shoolman has been involved in the plaintiff's Patent Application first as an employee of Hodgkinson McInnes and then acting essentially on his own behalf through his firm Ascot Martin and therefore ought be seen as "in the pocket" of the plaintiff. (2)That Mr Shoolman did not, in his reports, make reference to some words contained in the Watmough Patent Application which contradict his approach to how that application should be read and show him to be partisan (see pp 130-131 of Exhibit A and cross examination of Mr Shoolman on this topic is found at T233-272). 58In my view Mr Shoolman's credibility as an expert was not undermined by the cross examination. He seemed to me to be measured and careful in his response and to make appropriate concessions. 59It was not put to Mr Shoolman in cross examination that his views had been influenced by reason of his general retainer by the plaintiff and in the absence of such cross examination I do not think it is open for Mr McVay to make the submissions which he has made, but in any event I did not gain the impression that Mr Shoolman's evidence was tailored to suit his client's benefit or that the fact that he is retained by the plaintiff coloured his views. I agree that it is preferable for an expert to have no connection with the party by whom he is retained but no criticism was made of the use of Mr Shoolman until the first day of the hearing in July, long after export reports had been exchanged and indeed the experts had met and produced joint report in which many matters were agreed. 60In relation to the words in the Sanctum Application I thought Mr Shoolman's answers sufficiently explained the approach he had taken and provided a proper basis for his conclusion. The fact that there might be some degree of friction between the blocking member and some other part does not I think lead to the conclusion that "free to move" meant that the blocking member would not move on loss of pressure or that he should have so read the patent application. I am not persuaded that the cross examination undermined his credibility or Mr Shoolman's conclusion that the Sanctum Lock in its third embodiment was a fail safe product. 61An attack was made by the plaintiff on the reliability of Mr Hyland's evidence. The starting point in a sense is the fact that Mr Hyland agreed in the Joint report that: (1)the Sanctum lock in its third embodiment was a licensee improvement (see para 7.9 and 7.10 of Exhibit B), (2)that the Sanctum lock in its third embodiment is of a similar description to the Barrier Release Lock "(in that document described as "the Breakout Lock" (see para 9 of Exhibit B), (3)that all of devices including the Sanctum lock perform the same basic function as the Barrier Release Lock (see para 10, Exhibit B), (4)that the Sanctum Lock in its third embodiment is made pursuant to the intellectual property relating to the Barrier Release Lock (see 4.4, 4.6, 4.7 and 5.4 of Exhibit B) but that he subsequently, after conferring with Mr Watmough, resiled from the concessions he had made in the report. Mr Hyland deposed to having one meeting with Mr Watmough but in cross examination he agreed that he had three meetings (and one of them was also attended by Mr McVay) (T407.15). Mr Hyland kept no notes of the conversations and none were produced by Mr Watmough or Mr McVay (or the defendants' solicitor). One of the meetings went for "a couple of hours". Mr Hyland has not made explicit all of the information that was conveyed to him by Mr Watmough. In a sense the problem is compounded because Mr Hyland speaks of Mr Watmough's "instructions". The method by which Mr Hyland's views were changed is most unusual. What should have occurred is that Mr Watmough should have set out in an affidavit all the matters that he wished to have put before Mr Hyland and upon which Mr Hyland could then express a view. The "instructions" given by Mr Watmough were sufficient to cause Mr Hyland to change his mind but the process is not transparent and it is unclear as to the extent to which Mr Hyland's change of view is based on Mr Watmough's "instructions" and how much is Mr Hyland's view of those instructions, save that it is clear that Mr Watmough's description of how Exhibit 2 is supposed to operate would make it a fail secure product. 62Mr Hyland has not really explained why he expressed the view in para 21A(ii) his of later report that the Sanctum Application is not fail safe unless what he meant was that Exhibit 2 is not fail safe (see [32] above). If that is what he meant I think it is clear enough that the description which Mr Watmough gave in Court, if accepted, is sufficient. 63If, however, Mr Hyland is to be taken as saying more than that then I prefer the evidence of Mr Shoolman notwithstanding that Mr Shoolman is the plaintiff's patent attorney. It is consistent with what is contained in the brochure which Mr Watmough conceded was correct and it accords with the words on page 130 and 134 of the Sanctum Application which I do not think are nullified by what is on page 131. 64In relation to Mr Watmough, an attack on his credibility was mounted by the plaintiff. There are a number of matters which lead me to doubt the veracity of Mr Watmough: (1)Until the hearing in October Mr Watmough had never asserted on behalf of the first defendant that the PLA was subject to a condition precedent or that the first defendant's obligations were suspended. Paragraph 57 of his first affidavit dated 19 July 2012 is inconsistent with such a case (and see para 29). (2)He had told Mr Manny that an investor (in the first defendant) was concerned about the restriction imposed by clause 12 of the PLA and wished to change it (see Exhibit A, p 198) but asserted that he had only sought to clarify what clause 12 meant (see T377-378). (3)He had claimed that he was open about his (and the first defendant's) activities when it was clear he was not. He was forced to agree that he did not inform Mr Manny (or Mr Freund) of his work on the Sanctum Lock (T377 and T382.26-29). He claimed that when asked specifically to produce all documentation in relation to the Breakout Locks and the Sanctum Locks he did so yet there is no evidence of him having done so - the documents he mentioned in paragraph 76 of his affidavit found at p 225 and p 229 Exhibit A do not establish that he did so, and Mr Manny's evidence is that he did not. Mr Watmough also did not inform the plaintiff that the first defendant was producing two other pneumatic locks, the DC Lock and the Cobalt lock at any time prior to his cross examination in this case. (4)His evidence was that he was the person primarily responsible for the Brochure (T350.10 and see T354.10 and T356) but his evidence about the accuracy of what was in the brochure was very confusing (T357-358, T398.1-T399.9). (5)He said that the reference in the Brochure to the fail safe option for the Sanctum Locks had a different meaning to the meaning of fail safe in connection with the Breakout Locks (T358). That distinction or difference was not adequately explained and does not appear to have been provided to Mr Hyland. (6)There were a number of occasions when Mr Watmough did not answer the question asked of him preferring to provide a statement that was not sought (e.g. T358.3-5, T364.6-10, T395.6-16) (7)He initially attempted to say that he did not recall whether he had taken steps in relation to the Sanctum Lock beyond lodging the Sanctum Application but was forced to admit that he had not and it is most unlikely that he was not fully aware from the start of the cross examination that he had not taken any further steps to progress the Sanctum Patent. 65I approach Mr Watmough's evidence with caution and I accept Mr Manny's evidence where it is in conflict with Mr Watmough's evidence.

Sanctum Lock Application 66I set out the following paragraphs of the Sanctum Lock patent application from Exhibit A, pp 130-131: The embodiment shown in Fig4A and 4B represents a "fail safe" configuration, wherein [page cut off] the lock 10 is biased into an unlocked configuration upon disconnection or failure of the first and/or third pressure supplies. In this embodiment, the blocking member 20 takes the form of a flat plate having an aperture 29 therein. A tension spring 26 is connected between the blocking member and the body 12 to bias the blocking member 20 into the first position, as shown in Fig 4A. If the pin 14 is extended and pressure supply from the third pressure source is disconnected, or fails, the pneumatic actuator 24 exerts no force on the blocking member 20 and the tension spring 26 biases the blocking member 20 into the first position, as shown in Fig4A. In this position, the pin 14 is aligned with the aperture 29 and is thereby free to move into its retracted position under the bias of the pneumatic spring (or supplementary compression spring - not shown). To move the blocking member 20 into the second position, as shown in Fig 4B, the pin 14 must first be moved into its extended position and the pneumatic actuator 24 actuated to override the bias of the tension spring 26 and drive the blocking member 20 into alignment with the pin 14. For embodiments having a blocking member configured as shown in Figs 2A, and 2B or Figs 4A and 4B, a manually actuable cam assembly 30 is engageable with the blocking member 20 for moving the blocking member 20 out of engagement with the pin 14. The cam assembly 30 is biased, by a pneumatic cylinder 31 connected to the third pressure source (the pressure source connected to the pneumatic actuator 24), away from engagement with the blocking member 20. However, a third biasing apparatus, in the form of compression spring 32, biases the cam assembly 30 toward engagement with the blocking member 20. The compression spring 32 applies a force to the cam assembly 30 that is less than the force applied by the third pressure source under normal operating conditions such that the cam assembly 30 is normally disengaged from the blocking member 20, as shown in Fig 5, thereby rendering it inoperative. However, upon pressure from the third pressure source falling below a predetermined level or upon disconnection of the third pressure source, the compression spring 32 biases the cam assembly 30 into operative engagement with the blocking member 20, as shown in Figs 6, 7 and 8. and page 134: the lock 10 can be configured "fail safe" by using the blocking member 20 of Figs 4A and 4B, where disengagement of the blocking member 20 from the pin 14 frees the pin 14 for retraction if pneumatic pressure supply to the pneumatic actuator 24 is disrupted.

The Brochure 67I set out the relevant portions of the Brochure in which Breakout Locks and Sanctum Locks were described as part of the pneu-lock range: Breakout locks, based on a "pressure retentive" technology create "intrinsically safe" locking, and are produced in a variety or locking styles Bolt-locks rotating tongue or arm locks, and swing arm lock All Breakout locks require a constant pressure being applied to engage the lock and to maintain its engagement The locks inbuilt spring bias automatically produces a powerful disengagement when pressure is released and the Sanctum Locks: ● Reliable disengagement. Locks have a combination of high disengagement loads and a 'fail-safe' configuration. (This is a standard feature with Breakout locks and optional on the Sanctum range. ● "Intrinsically safe". While providing both fail-safe and fail-secure configuration options from the electronic control systems, the underlying pneumatic controls maintain a failsafe bias to ensure the locks will always open in an emergency. ● Powerful lock disengagement loads, to overcome friction, are available from 7kg to 200kg. .... An extensive locking solution · Pneu-Locks are an extensive and versatile range of locks that satisfy many commercial and domestic applications-doors, windows, screens, gates, and so forth. A single solution for the whole building 'and its surrounds. .... Substantially more products to be developed from Pneu-Locks two new core technologies As mentioned earlier, the core technologies (pressure retentive, and interlocking) upon which the Breakout and Sanctum lock ranges have been developed are new technologies, and provide new bases from which considerably more products and applications will be developed. Also as mentioned earlier we have progressed with the development of a range of Pneu-lock door & window (hinged & sliding) operating solutions for future availability More controllable locking power and engagement speed ● More power to operate both small and large locks ● Controllable engagement and disengagement speeds, enabling either an instantaneous engagement or a delayed engagement where a delay is required to allow a door to reach the optimum locking position ● Progressive engagement loads. This improves self alignment and enables partial latching ○ The ability to vary the air pressure to operate the locks allows you to apply and maintain much greater forces in a pneumatically operated lock than in a lock operated by an electric solenoid. Unlike a solenoid, pneumatic control also applies the force to the locking pin in a fully controllable and progressive manner. The pneumatic lock has the ability to overcome misalignment

Is the Sanctum Lock a Licensee's Improvement? 68In their joint report the experts agreed that the definition of "licensees' improvements" was not clear and they could not conclude with certainty as to what is properly encompassed by "licensees' improvements". They struggled to attribute meaning to the definition and concluded that "improvements" should be given its normal English meaning requiring determination of whether the Sanctum Lock is an improvement of the Breakout Lock relative to a starting point. Both experts agreed that if the product described in the Patent Application is the starting point and if the objective is to make a better fail safe mechanism the Sanctum mechanism was not an improvement because it involves a more technically complex manner of achieving the fail safe objective. They were also agreed that if the Patent Application was the starting point and if the objective was to make a device that can serve both as a fail safe and a fail secure mechanism then the Sanctum mechanism could be regarded as an improvement since it was a more versatile product. They were also agreed that if the Patent Application is regarded as the starting point but only to the extent that is discloses a pneumatically operated locking system (i.e. in the general sense regardless of the fail safe objective) the Sanctum mechanism is not an improvement "but is simply a useful alternative" (para 7.11 of Exhibit B). 69The experts differed on whether the appropriate objective was making a device which could serve both as fail safe and fail secure lock. The Patent Application did not contain any reference to fail secure and I do not think the objective can be taken to have been the making of a device that could serve both as a fail safe and fail secure. I therefore agree with Mr Hyland's approach namely that the Sanctum Locks is not an improvement of the Breakout Lock but rather a useful alternative. The Sanctum Lock was less suited to fail safe because it requires two pneumatic failures - i.e. both of bolt and locking member for the lock to revert to the open position with the prospect of the blocking member being jammed, which is not a concern in the Breakout Lock as it does not have a blocking member. In other words the blocking member is added to improve the fail secure aspect of the product not the fail safe aspect of it. 70I therefore conclude that the Sanctum lock was not, in any of its embodiments, an improvement within the terms of the PLA definition.

Is the Sanctum Lock a fail safe product, is it a competing good of the same description as the Barrier Release Lock or does it perform the same function as the Barrier Release Lock 71The extensive cross examination of Mr Shoolman endeavoured to establish that the Sanctum Application did not involve a fail safe mechanism even in its third embodiment. The cross examination was consistent with Mr Watmough's initial attempts to assert that the Sanctum Lock was not fail safe at all. When tasked with the statements made in the brochure, Mr Watmough seemed to wish to distance himself but finally at T398 he was forced to concede that what had been stated in the Brochure about the Sanctum Locks namely: Intrinsically safe, while providing both fail-safe and fail secure configuration options from the electronic control systems. The underlying pneumatic controls maintain a fail-safe bias to ensure that the locks will always open in an emergency. was "correct". At T389.18-T390.19 Mr Watmough implicitly conceded that the third embodiment was fail safe and that he would need to, and would, amend his Patent Application. 72Mr McVay, I should note, attacked the questions answered in the joint report as involving the wrong questions. The questions reflect the matters that were agreed by the parties'51 legal representatives as requiring determination. Those questions did not include any question about whether the goods were competing goods. In any event, it seems that the principal reason that Mr McVay asserts that the experts were being asked the wrong question is that he claims that the provisional patent and PCT are not a "product", a matter with which I have already dealt. 73I accept Mr Shoolman's evidence that the Sanctum Lock third embodiment is a fail safe product and therefore that if it is manufactured it will be a product which competes with the Breakout Release product, the subject of the Standard Patent, or will perform the same functions even though it is not of the same description. In my view, to form a view about whether a product "competes" with the Barrier Release Lock it is not necessary to have expert evidence - it is sufficient to note that the third embodiment is a pneumatic lock with a fail safe bias that is offered by the first defendant in its brochure as part of the product line (including the Breakout Lock) which it stated it intended to make available to customers. I accept what was the experts' joint view, and remains Mr Shoolman's view, that the Sanctum Lock is its third embodiment is made pursuant to the intellectual property relating to the Barrier Release Lock. It should be noted however that there is no evidence of sales of the Sanctum Locks by the first defendant and the first defendant, in contrast to Mr Watmough, has not applied for a patent in respect of the Sanctum Lock.

Has the first defendant failed to pay royalties on the Breakout Locks 74The first defendant admitted that it has failed to pay royalties on any of the Breakout Locks sold.

Fiduciary Duties 75The plaintiff's case is that Mr Watmough as a director of the plaintiff company owed fiduciary duties to it which duties he has breached. The relevant duties owed by directors are those helpfully encapsulated in the following passage in Austin, Ford & Ramsay, Company Directors: Principles of Law and Corporate Governance (2005), LexisNexis Butterworths at p 313, [8.5]: 1. the conflict of interest rule: the director/officer must not, in any matter falling within the scope of his or her office, have an interest that conflicts or may possibly conflict with his or her duty to the company, except with the company's fully informed consent; 2. the conflict of duties rule: the director/officer must not, in any matter falling within the scope of his or her office, have an inconsistent engagement with a third party, except with the company's fully informed consent; 3. the misappropriation rule: the director/officer must not misappropriate the company's property for personal or a third party's benefit; 4. the profit rule: the director/officer must not misuse his or her position for personal or a third party's possible advantage, except with the company's fully informed consent and, therefore, he or she must account to the company for any gain made in connection with the fiduciary office; 5. the business opportunity rule: the director/officer (at least if engaged full time in the service of the company) must not divert any profit-making opportunity, in the same line of business as the company's present or prospective business, to himself or herself or to some other person, except with the company's fully informed consent. 76Mr McVay referred to Royal Brunei Airlines Sdn Bhd v Tan Kok Ming [1995] 2 AC 378, Breen v Williams (Medical Records Access case) [1996] HCA 57, [14] Coomber v Coomber [1911] 1 Ch 174, Hospital Products v United States Surgical Corporation (1984) 156 CLR 41 and submitted in para 124 of DCS that: fiduciary obligations do not arise in the second defendant in favour of the plaintiff just because the second defendant is a director of the plaintiff. There must be an analysis of the relationship between the second defendant and the plaintiff. That is mandatory on the above authorities. I do not accept that approach to the authorities. In my view, there can be no doubt that a director of a corporation owes a fiduciary duty to the company of which he is a director (see Re City Equitable Fire Insurance Co [1925] Ch 407 at 426 per Romer J and Mills v Mills (1938) 60 CLR 150 at 185 per Dixon J and Hospital Products Ltd v United States Surgical Corp (1984) 156 CLR 41 at 96-97, 55 ALR 417 per Mason J (and see also s 181(1) of the Corporations Act 2001 for the statutory imposition of a similar duty)). What is in question here is not whether the director owes a fiduciary duty to the plaintiff but the scope of the duty. 77Mr McVay also submitted that in effect, the entry by the plaintiff company into the PLA with the first defendant erased any duties or obligations of Mr Watmough to the plaintiff company. The plaintiff was, he submitted, clearly on notice that Mr Watmough was a director and shareholder of the defendant company and his only duties and obligations were to that company not the plaintiff. 78In one sense, I think it is correct to say that entry by the plaintiff into the PLA affected the duties and obligations of the Mr Watmough to the plaintiff. I am not, however, able to accept that his fiduciary obligations were erased or nullified. In part, the point is one of fully informed consent. I accept that the plaintiff could not complain that Mr Watmough was a director and shareholder of the first defendant and in this regard there was an explicit and fully informed consent. It does not follow that Mr Watmough ceased to have obligations to the plaintiff in matters and areas in which the plaintiff had not been given information and had not consented. In some respects the contention that the ambit of the PLA did not extend to the Sanctum Locks highlights the difficulty for the defendant. If the Sanctum Lock was not in contemplation of the parties, the plaintiff did not give fully informed consent to Mr Watmough embarking on manufacture and sale of the pneumatically operated locks that were fail secure. 79In Chan v Zacharia (1984) 154 CLR 178 Deane J at 433 said: The variations between more precise formulations of the principle governing the liability to account are largely the result of the fact that what is conveniently regarded as the one "fundamental rule" embodies two themes. The first is that which appropriates for the benefit of the person to whom the fiduciary duty is owed any benefit or gain obtained or received by the fiduciary in circumstances where there existed a conflict of personal interest and fiduciary duty or a significant possibility of such conflict: the objective is to preclude the fiduciary from being swayed by considerations of personal interest. The second is that which requires the fiduciary to account for any benefit or gain obtained or received by reason of or by use of his fiduciary position or of opportunity or knowledge resulting from it: the objective is to preclude the fiduciary from actually misusing his position for his personal advantage. Notwithstanding authoritative statements to the effect that the "use of fiduciary position" doctrine is but an illustration or part of a wider "conflict of interest and duty" doctrine (see, eg Phipps v Boardman [[1967] 2 AC, 123]; NZ Netherlands Society "Oranje" Inc v Kuys [[1973] 1 WLR, 129]), the two themes, while overlapping, are distinct. Neither theme fully comprehends the other and a formulation of the principle by reference to one only of them will be incomplete. Stated comprehensively in terms of the liability to account, the principle of equity is that a person who is under a fiduciary obligation must account to the person to whom the obligation is owed for any benefit or gain (i) which has been obtained or received in circumstances where a conflict or significant possibility of conflict existed between his fiduciary duty and his personal interest in the pursuit or possible receipt of such a benefit or gain or (ii) which was obtained or received by use or by reason of his fiduciary position or of opportunity or knowledge resulting from it. Any such benefit or gain is held by the fiduciary as constructive trustee: see Keith Henry & Co Pty Ltd v Stuart Walker & Co Pty Ltd [(1958) 100 CLR 342 at 350]. That constructive trust arises from the fact that a personal benefit or gain has been so obtained or received and it is immaterial that there was no absence of good faith or damage to the person to whom the fiduciary obligation was owed. The rules were discussed in detail in Streeter v Western Area Exploration Pty Ltd (No 2) (2011) 278 ALR 291 at [64]-[70] per McLure P (with whom Buss JA agreed) and [364]-[444] per Murphy JA in the context of a company director and in Barescape Pty Ltd v Bacchus Holdings Pty Ltd as trustee for Bacchus Holdings Trust (No 9) [2012] NSWSC 984 per Black J in the context of a partner. In Birtchnell v Equity Trustees, Executors & Agency Co Ltd (1929) 42 CLR 384 at 408 per Dixon J, with whom Rich J agreed, described one of the duties as "that which forbids a partner from withholding from the firm any opportunity of advantage which falls within the scope of its undertakings, and from using for his own exclusive benefit, information, knowledge or resources to which the firm is entitled". 80I think that the conflict of interest and duty "theme" is the more significant here and I will focus on that. 81I accept that by entering into business ventures or having the first defendant enter into ventures, Mr Watmough did not, solely by reason thereof, breach a fiduciary duty owed to the plaintiff. For him to apply for a patent in respect of an item completely unconnected with locks, for example a water pond pump, would not involve any conflict. The question which I think needs to be addressed is, was the item for which he sought a patent and for which he arranged the first defendant to manufacture and market and, in due course, which he intends to sell, of a nature or type that was in competition with the Barrier Release Locks/Breakout Lock and its improvements or something which the plaintiff company might want to develop and sell. 82In Barescape Black J regarded it as necessary in order to determine whether there had been a breach of fiduciary duty, to examine the scope of the relevant partnership business and the competitive business. His Honour reviewed a number of cases in this area such as Glassington v Thwaites (1823) 1 Sim & St 124, Gibson v Tyree (1900) 20 NZLR 278 and Birtchnell v Equity Trustee (1929) 42 CLR 384 and then concluded that the extent of overlap between the partnership business and the competing business was such as to lead him to conclude that they were of the same nature as, and competing with, each other. I take his Honour to be addressing the question posed in Birtchnell of whether the fiduciary has withheld from the principal (or partner) "any opportunity or advantage which falls within the scope of its undertaking". 83Applying the approach in Birtchnell and Barescape, in my view, the Sanctum Locks, even assuming them not to involve an infringement of the plaintiff's patent and not to be caught by the PLA are products which can fairly be described as in the same line as that of the Barrier Release Lock and hence within the scope of the plaintiff's undertaking. I say this because: (1)They and the Breakout Locks are locks (2)The bolts of which are opened and closed principally by use of pneumatic pressure (3)They involve, on loss of pressure, a bias to one or other of an open or closed position (4)They are described in the first defendant's brochure as, together with the Breakout Locks: (5)Based on the same "Pneu-lock" core technologies (pressure retentive and interlocking) (6)They can be manually opened on loss of pressure. (7)They are both, in one embodiment of the Sanctum Lock, fail safe. 84I think there was a sufficient proximity between the Barrier Release Lock/Breakout Lock and the Sanctum Lock to require Mr Watmough to have brought the Sanctum Lock concept to the plaintiff and give it the opportunity to exploit it. Mr Watmough admitted at T377 he did not tell his co-directors about the Sanctum Lock. 85If the Sanctum Lock is in fact covered by the PLA, as I have held, Mr Watmough's attempt to obtain a patent for that product in his own right, a fortiori, involves a breach of his fiduciary duty. 86I therefore conclude that the application by Mr Watmough for the Sanctum Patent was a breach of his fiduciary duty owed to the plaintiff. 87The plaintiff's claim against Mr Watmough for breach of fiduciary duty goes beyond his involvement in the Sanctum Application. Insofar as it is claimed that Mr Watmough assisted the first defendant to breach the PLA, I think that claim has difficulties largely because, as I have said Mr Watmough's involvement in the first defendant was disclosed and accepted by his co-directors/shareholders and it seems somewhat artificial to hold that he owed a duty to the plaintiff to make sure that the first defendant did not breach its duties to the plaintiff.

Relief 88The first defendant has breached the PLA by selling Breakout Release Lock and not accounting for royalties up to 19 June 2009 or thereafter. From 20 June the first defendant was not permitted to make sales of Breakout Locks as the license had been terminated. If that is so it would, on first examination, lead to the conclusion that the defendant must account for all sales of the product after 19 June 2009 and not just the 5% as on products sold up to 19 June 2009. I will hear the parties briefly on that topic. 89It seems from the evidence before the Court that the sales of Breakout Locks have been quite slender. I have considerable doubt as to whether there is much purpose to be served in ordering an account given the evidence that not more then 32 Breakout Locks have been sold and a figure for a sale of $80 per lock was mentioned. Mr McVay at one point argued that the plaintiff had to establish that a profit was made by the first defendant but abandoned (see T434.5) and it is in any event clearly incorrect - the 5% payable is 5% of the net sales price of the product: see clause 3 of the PLA. The plaintiff has expressed reluctance to accept what Mr Watmough says is the position as to the number of sales (see T38), which is understandable, but I propose to require the parties to: (1)Confer on the figures for sales and what they each say is the most expeditious and cost effective way of determining the extent of sales. (2)Endeavour to reach agreement on the amount to be paid by the first defendant. 90The plaintiff is entitled to the return of any material relating to the design, manufacture and sale of the Breakout Locks. 91In relation to the Sanctum Lock I think the appropriate remedy to deal with the breach of fiduciary duty is to require the defendants to produce any material relating to the design and manufacture of the Sanctum lock held by them to the plaintiff and to order that Mr Watmough assign the Sanctum Lock application and any intellectual property rights therein to the plaintiff.

Form of Orders and Costs 92I will hear the parties on the appropriate form of orders to reflect these conclusions and on the issue of costs.

DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 06 December 2013