Clarkel Holdings Pty Ltd (in liq) v Kelly

Federal Court of Australia|1999-09-09|Before: Sackville J

Notice of Motion 1 The second, sixth and seventh respondents (the "Novogen companies"), by notice of motion filed on 4 August 1999, seek an order pursuant to Federal Court Rules ("FCR"), Order 29, r 2 that "any questions raised in paragraphs 34, 35, 36, 37, 58, 59 (to the extent paragraph 59 alleges [the Novogen companies] knew of the matters pleaded in paragraphs 34, 35, 36, 37 and 58), 60 and 61 of the Further Amended Statement of Claim, be heard and decided separately from and after the trial in the proceedings." 2 The Novogen companies also seek an order that any question as to damages or an account of profits be decided separately from and after all other issues in the proceedings. The parties are in agreement that this course should be adopted. I propose to make an order to the effect sought and I have asked the parties to prepare an appropriate form of order.

The Proceedings 3 The applicant ("Clarkel") pleads its case in a further amended statement of claim. Clarkel alleges that the first respondent ("Dr Kelly"), who was the director and chairman of Clarkel from September 1988 to August 1992, misappropriated certain intellectual property belonging to Clarkel. The intellectual property is referred to as "the Isoflavone R & D" and relates to methods of treating disease using Isoflavones, a phyto-oestrogen substance which is found in certain legumes. Clarkel claims that the Isoflavone R & D was the result of work undertaken by Dr Kelly on behalf of Clarkel, as part of his responsibilities as director and chairman of that company. It is also said that Dr Kelly acquired information confidential to Clarkel in the course of his work. 4 Clarkel further alleges that, in 1992, Dr Kelly lodged a provisional patent application in his own name and without Clarkel's knowledge for the invention in relation to Isoflavones. The patent application was published as an accepted application in 1997, and it is alleged that Dr Kelly has made corresponding applications in other countries. Paragraph 17 of the statement of claim pleads that the subject of the various applications corresponded to the Isoflavone R & D and made use of the confidential information (referred to in the pleading as "the Information"). 5 It is further alleged that Dr Kelly falsely represented to the late Mr Clark, a director of Clarkel, that Clarkel had no entitlement to or any interest in the Isoflavone R & D or the Information and that they were of no value to Clarkel. It is then said that Dr Kelly procured, in essence by deception, an acknowledgment by Clarkel that it had no interest in Isoflavones and a release by it of Dr Kelly and companies associated with him in respect of any rights that Clarkel might have had in any product developed by Dr Kelly. 6 So far as the second respondent ("Novogen Ltd") is concerned, the statement of claim (par 31) alleges that it made misrepresentations in its prospectus. These were, so it is said, to the effect that it had developed an innovative method of extraction of phyto-oestrogens and that it had rights in relation to the patent application. The representations are said to have been misleading because the technology utilised depended upon the intellectual property vested in Clarkel. 7 Paragraph 34 of the statement of claim alleges that Novogen Ltd and/or the seventh respondent ("Novogen Laboratories") manufactured, sold and promoted to consumers certain identified products made in accordance with the patent application or the Isoflavone R & D or the Information. Paragraph 35 alleges that each of these products "(a) is manufactured in accordance with the Information, [and] the information disclosed in the [patent applications]; (b) is a product comprising Isoflavone phyto-oestrogens; (c) is a pharmaceutical composition comprising active Isoflavones; (d) is otherwise a product corresponding to the Isoflavone R & D". 8 Clarkel then alleges that the promotion and sale of each of the products constitute conduct in trade or commerce representing, inter alia, that Novogen Ltd was entitled to sell and otherwise exploit the products (par 36). These representations are alleged to have been misleading or deceptive (par 37). 9 Clarkel says that the Novogen companies hold on constructive trust for it that part of their business which encompasses the exploitation of the invention which is the subject of the patent application and the use of the Isoflavone R & D and the Information. The constructive trust is said to attach also to that part of the business which exploits the products identified in par 34 of the statement of claim and any profits derived from those products.

Submissions 10 Mr Blackburn, who appeared for the Novogen companies, contended that the pleaded case, relevantly, could be divided into two largely discrete components. The first (pleaded in pars 1-33) requires consideration of the nature of the research and development carried out by Dr Kelly; the ownership of such research and development and whether the patent applications corresponded to it; and the knowledge, if any, of the Novogen companies of any breaches of fiduciary duty by Dr Kelly. 11 The remaining issues (pleaded especially in pars 34-37) were said to be in the nature of a patent infringement claim, although pleaded as a claim under the Trade Practices Act 1974 (Cth). According to Mr Blackburn, principal issues raised by this aspect of the case are whether the products manufactured and sold by the Novogen companies were manufactured in accordance with the claims in the patent application or in the Information. 12 Mr Blackburn relied on evidence given by Ms Padbury, a solicitor experienced in patent litigation. Ms Padbury expressed the view that the claims raised in pars 34-37 of the statement of claim were very similar to those involved in a patent infringement case. She also expressed the view that the determination of those issues would be likely to add two to three weeks to the length of a hearing on liability. She did not, however, analyse in depth the relationship between the first segment of the case (as identified by Mr Blackburn) and the second. 13 Mr Blackburn also relied on evidence given by Mr Erratt, the Company Secretary of Novogen Ltd. His evidence was to the effect that the discovery required in relation to the issues raised by pars 34-37 of the statement of claim would be very substantial indeed. 14 Mr Blackburn submitted that, if the Novogen companies and Dr Kelly succeeded on the first set of issues, the parties would be able to avoid an extended trial and the extensive discovery required in relation to the allegations in pars 34-37 of the statement of claim.

Legal Principles 15 There is no dispute as to the principles that should be applied when considering whether to make orders for separate decisions on questions arising in the course of trial. The principles have recently been conveniently summarised by Branson J in Reading Australia Pty Ltd v Australian Mutual Provident Society [1999] FCA 718. Her Honour summarised the principles as follows (at [8]): "(a) the term "question" in O 29 r 1 includes any question or issue of fact or law in a proceeding. The distinction in the rule between an "issue" and a "question" is the distinction between that which, when resolved, will result in an adjudication in favour of one party or the other, being an "issue", and less decisive matters of dispute being "questions" (Landsal Pty Ltd (in liq) v REI Building Society (1993) 113 ALR 643 at 647); (b) a question can be the subject of an order for a separate decision under O 29 r 2 even though a decision on such a question will not determine any of the parties' rights (Landsal Pty Ltd (in liq) v REI Building Society at 647); (c) however, the judicial determination of a question under O 29 r 2 must involve a conclusive or final decision based on concrete and established or agreed facts for the purpose of quelling a controversy between the parties (Bass v Permanent Trustee Co Ltd [1999] HCA 9 at para 45); (d) where the preliminary question is one of mixed fact and law, it is necessary that the question can be precisely formulated and that all of the facts that are on any fairly arguable view relevant to the determination of the question are ascertainable either as facts assumed to be correct for the purposes of the preliminary determination, or as agreed facts or as facts to be judicially determined (Jacobson v Ross [1995] 1 VR 337 at 341, referring to Nissan v Attorney-General [1970] AC 179 at 242-243 per Lord Pearson; Bass v Permanent Trustee at para 53); (e) care must be taken in utilising the procedure provided for in O 29 r 1 to avoid the determination of issues not "ripe" for separate and preliminary determination. An issue may not be "ripe" for separate and preliminary determination in this sense where it is simply one of two or more alternative ways in which an applicant frames its case and determination of the issue would leave significant other issues unresolved (CBS Productions Pty Ltd v O'Neill per Kirby P at 606); (f) factors which tend to support the making of an order under O 29 r 2 include that the separate determination of the question may - (i) contribute to the saving of time and cost by substantially narrowing the issues for trial, or even lead to disposal of the action; or (ii) contribute to the settlement of the litigation (CBS Productions Pty Ltd v O'Neill (1985) 1 NSWLR 601 per Kirby P at 607); (g) factors which tell against the making of an order under O 29 r 2 include that the separate determination of the question may - (i) give rise to significant contested factual issues both at the time of the hearing of the preliminary question and at the time of trial (GMB Research & Development Pty Ltd v The Commonwealth [1997] FCA 934); (ii) result in significant overlap between the evidence adduced on the hearing of the separate question and at trial - possibly involving the calling of the same witnesses at both stages of the hearing of the proceeding (GMB Research & Development Pty Ltd v The Commonwealth; Arnold v Attorney-General for Victoria [1995] FCA 727). This factor will be of particular significance if the Court may be required to form a view as to the credibility of witnesses who may give evidence at both stages of the hearing of the proceeding; or (iii) prolong rather than shorten the litigation (GMB Research & Development Pty Ltd v The Commonwealth)."

Reasoning 16 If I thought that Mr Blackburn's proposal were likely to contribute to the saving of time and cost, without any significant countervailing disadvantages, I would be disposed to make the order the Novogen companies seek. However, it seems to me that there are significant difficulties in the path of the proposal. In particular, it is far from clear that the proceedings can be divided into discrete categories in the manner suggested by Mr Blackburn, or that savings of time and expense are likely to follow if the proposal is adopted. 17 Ms Padbury, in her affidavit, acknowledged that considerable expert evidence would be adduced on the question of whether Dr Kelly had used the Information in breach of his fiduciary duties so as to lodge the various patent applications. There is nothing in the evidence to negate the obvious possibility that expert evidence of a similar character will be required to ascertain whether the products produced and marketed by the Novogen companies corresponded to the Isoflavone R & D and were manufactured in accordance with information disclosed in the various patent applications. This creates a genuine risk of significant overlap between the evidence adduced at the first stage of the proceedings and at the second stage. 18 This risk is compounded by the possibility that Dr Kelly will be required to give evidence at each stage of the proceedings. It is obviously likely that Dr Kelly's credit will be in issue in relation to Clarkel's claim that he breached his fiduciary duties by misusing confidential information. Although it is not entirely clear what role Dr Kelly's evidence might play in the second stage of the proceedings (as envisaged by Mr Blackburn), there is a significant chance, if not a likelihood, that his credit would again be an issue. As Branson J explained in Reading v AMP, this might create difficulties for the Court. 19 Whatever the role played by Dr Kelly in the two segments of the proceedings contemplated by the Novogen companies, it is abundantly clear that there will be vigorously disputed factual issues in both segments. This is a significant factor telling against an order under FCR, O 29, r 2. 20 A further difficulty is that Mr Blackburn's proposal would necessarily involve a substantial delay between the first and second segment of the proceedings, assuming that a second segment proves necessary. The proposal contemplates that discovery concerning the relationship between the products and the patent applications be postponed until after the first segment of the proceedings is concluded. Since discovery will take some considerable time, the result will be a substantial gap between the first and second stages of the proceedings. Moreover, the parties will inevitably face the heavy expense involved in working up a complex case afresh after a lapse of some months. It follows that there is a prospect that the proposal will actually prolong the proceedings, depending on the outcome of the first segment of the case. 21 I accept that the Novogen companies have put forward the proposal for determination of separate questions in a genuine endeavour to shorten the proceedings. I also accept that there is a possibility that the proposal could result in a saving of time and money, depending on the outcome of the first stage of the proceedings. However, I think there is a real risk not merely of overlapping evidence, but of the proceedings being prolonged and rendered even more expensive should it ultimately prove necessary to address the issues raised by pars 34-37 of the statement of claim. 22 In these circumstances, I do not think it appropriate to make the orders sought by the Novogen companies. I shall stand the proceedings over for the making of formal orders. Subject to an order in agreed form providing for any question of damages or account of profits to be decided separately from and after all other issues in the proceedings, the motion will be dismissed. I think it appropriate that the costs of the motion be costs in the cause. I certify that the preceding twenty-two (22) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Sackville.

Counsel for the Applicant: Ms S J Goddard

Solicitor for the Applicant: Michell Sillar

Counsel for the First, Third and Fourth Respondents: Mr D M Yates with Ms A J Silink

Solicitor for the First, Third and Fourth Respondents: Barker Gosling Counsel for the Second, Sixth and Seventh Respondents: Mr T D Blackburn Solicitor for the Second, Sixth and Seventh Respondents:

Blake Dawson Waldron Date of Hearing: 9 September 1999

Date of Judgment: 9 September 1999

Date of Published Reasons: 13 September 1999

Trade Practices Act 1974(Cth)

At a glance

Court

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Before

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Judgment (12 paragraphs)

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Legislation Cited (1)

Cases Cited (6)

Cited By (3)