Creative Brands Pty Ltd v Franklin [2001] VSC 338

Supreme Court of Victoria|2001-09-11|Before: Warren J

CONFIDENTIAL INFORMATION - claim of disclosure - former employee - need for specific allegations in pleadings. O.23.02, CHAPTER I, RULES OF THE SUPREME COURT - striking out statement of claim for failing to show a cause of action. DISCOVERY - further and better discovery of confidential documents. COMMERCIAL LIST PRACTICE - discouragement of requests for particulars.

The plaintiff brings these proceedings alleging against the defendants' disclosure of confidential information, breach of employment agreements and breach of duties owed under the Corporations Act.

The first to third defendants were previously a director or employees of the plaintiff ("Creative Brands"). In 2000 they left the employ of Creative Brands and established their own business, the fourth defendant ("Heat"). The proceeding was commenced on 14 May 2001 in the Commercial List of this Court. I have before me the return of three applications. First, an application on summons by the defendants to strike out parts of the plaintiff's statement of claim. Second, an application on summons seeking further and better discovery of documents by the defendants. Third, an application by the plaintiff for further and better particulars of the defendants' defence. I deal with each application in turn. Before doing so, it is appropriate to set out the relevant background facts as known to the Court at this time.

The general relevant facts of the proceeding are described. In an affidavit sworn by one Graham Joseph Smorgan on 19 July 2001.

Creative Brands is engaged in the business of marketing and distributing cosmetics and other similar products throughout Australia. It is said that the market is very competitive. Heat has established itself in very recent times as a strong competitor of Creative Brands.

The first defendant, Gillian Anne Franklin, was employed by Creative Brands in about September 1992 as general manager. In mid 1995 Franklin was appointed as managing director. She resigned her employment with Creative Brands on 22 December 1999. During her employment Franklin executed two deeds of confidentiality. On 2 September 1992 Franklin executed a deed of confidentiality in relation to the then predecessor of Creative Brands, Australis Marketing Corporation Int. Pty Ltd. This was the first of such deeds. The first deed defined "confidential information" as meaning -

"Any confidential information belonging or relating to (whether directly or indirectly) Australis and/or any associate of Australis and includes (without limitation) information of a commercial or technical nature relating to trade secrets, confidential operations, processes or dealings, inventions, formulae, plans, devices, products, knowhow, technology, marketing information, evaluations, project planning, research and any information concerning the organisation, business, finances, transactions or affairs (whether private or otherwise of Australis and/or any associate of Australis) including accounting, statistical or financial data, surveys, customer lists, details of trading relationships of Australis and/or any associate of Australis, manufacturing processes, supplier lists, whether tangible or intangible and whether stored on any records or otherwise."

Under clause 3.1.1 of the first confidentiality deed Franklin covenanted and agreed that she would -

"not, except as authorised by Australis, and then only in the proper course of his [her] duties as an employee of Australis reveal, disclose, divulge, sell or otherwise communicate or disseminate to any person, company, firm or any other entity any part of the Intellectual Property which may come to the Employee's knowledge during the term of or in the course of his [her] employment with Australis or otherwise."

Under the first deed the expression "Intellectual Property" was attributed a meaning as including the "Confidential Information". Under clause 3.2 of the first deed Franklin covenanted and agreed that the covenants and agreements described in sub-clause 3.1 would bind her both during and after the termination or determination of her employment with Australis.

On 7 August 1997 Franklin entered into a second confidentiality deed with Creative Brands. This was the second deed. It defined "Confidential Information" in virtually identical terms to the definition contained in the first deed relating to Australis. Under clause 3 of the second deed of confidentiality Franklin covenanted that during her employment with Creative Brands and for so long as the "Confidential Information" remained confidential after the termination of her employment she would:

"Not at any time, either directly or indirectly, disclose, divulge, sell or communicate to any person any Confidential Information which may come to his [her] knowledge during or in the course of his [her] employment with Creative Brands and/or any associate of Creative Brands, unless expressly authorised by Creative Brands or required by law or court order."

The second defendant, Fiona Jane Sharkie, was employed by Creative Brands from January 1993 until some time about May 2000. The third defendant, Beverley Ann Craig, was employed by Creative Brands from July 1996 until some time in 2000. Both Sharkie and Craig executed confidentiality agreements in similar terms to the first and second deeds of confidentiality executed by Franklin.

In about May 2000 Franklin and others incorporated Heat and it seems proceeded to compete for business with Creative Brands. An indication was given to the Court by Mr Bick QC who appeared with Mr D. Farrands for the plaintiff that within a short period of time, approximately 12 months, Heat developed a business with a turnover that went from nil to $50,000,000 per annum. These matters were described in an affidavit sworn by one Graham Joseph Smorgon a director of Creative Brands.

In essence, in the statement of claim Creative Brands alleges that each of Franklin, Sharkie and Craig took information that constituted "confidential information" for the purposes of their respective confidentiality deeds and disclosed, divulged and communicated that information to Heat and other directors and employees of Heat and used the confidential information to assist Heat to compete with Creative Brands and to gain a market advantage for Heat.

In paragraph 18 of the statement of claim Creative Brands alleged that in breach of the terms of the first and second confidentiality deeds, an employment agreement and a duty owed pursuant to s.183 of the Corporations Act:

"(a) Franklin disclosed, divulged and communicated the confidential information to Heat and other directors and employees of Heat;

(b) Franklin in her capacity as director of Heat used the confidential information to assist Heat to compete with the plaintiff and to procure staff members of the plaintiff to leave their employment with the plaintiff and to commence work with Heat;

(c) Franklin used the confidential information to gain an advantage for Heat and for herself as a director of and shareholder in Heat and for Sharkie and Craig as employees of and shareholders in Heat and for the other shareholders in Heat and to cause detriment to the plaintiff."

In paragraph 33 of the statement of claim Creative Brands alleged that Sharkie and Craig breached their respective confidentiality agreements, employment agreements and duties owed pursuant to s.183 of the Corporations Law in terms almost identical to those alleged against Franklin.

In paragraph 36 of the statement of claim Creative Brands alleged that Heat breached an equitable obligation to treat the relevant confidential information as confidential to Creative Brands and used that information knowingly and to its benefit. The paragraph alleged:

"36. Wrongfully and in breach of its equitable obligation to treat the confidential information of the plaintiff as confidential to the plaintiff, Heat has used the confidential information as alleged in paragraphs 18 and 33 hereof and/or has knowingly benefited from the use thereof as alleged."

The defendants seek orders under Order 23.02 of Chapter 1 of the Rules that paragraphs 18(a) and (c), 33 and 36 of the statement of claim be struck out on the ground of not disclosing a cause of action or otherwise constituting an abuse of process.

It is appropriate to identify the relevant principles with respect to the pleading of confidential information and competition cases. First, as a general proposition the courts are reluctant to permit a previous employer to use a generally worded claim to stifle the right of an employee to use the skill and experience of that employee sometimes called "know-how" as distinct from an ex-employer's "secrets". Second, confidential information and competition cases call for specificity in the pleading of material facts to overcome the bringing of actions that are speculative in character. The latter view was expressed by Templeman J in John Zinc & Co Limited v Lloyds Bank Limited (1975) RPC 385; also, by Whitford J in Reinforced Plastics Applications (Swansea) Limited v Swanswea Plastics & Engineering Co Limited (1979) FSR 182; and by Mummery J in Ixora Trading Incorporated and anor v Jones and anor (1990) FSR 251.

In Ixora Trading Mummery J cited the remarks of Whitford J in Reinforced Plastics. The remarks of Whitford J are instructive:

"It is, I think, a matter of great concern in relation to confidential information cases that actions should not be brought which are no more than speculative in character. It is altogether too easy when employees leave and are employed by a rival firm to harass that rival firm upon the basis that the employees who have left the plaintiffs and joined them have taken away trade secrets of great value, and to bring an action which may involve the expenditure of an enormous amount of time and money and include disclosure of information which is going to be alleged to be confidential on either side with consequent troubles and worries. It is not really to be contemplated that proceedings of this kind should be allowed to go forward on nothing more than a speculative basis; and, unless the plaintiff can show that he has some basis for a reasonable believe in his assertion that the defendants are making use of his confidential information, then the action can only be characterised as speculative and fishing, and ought not, in my judgment, to be allowed to proceed. There must be something more than a mere assertion."

In Balstone Limited v Headline Filters Limited (1987) FSR 330 Scott J at 351 made general comments about actions against former employees. In that case there were allegations both of breach of confidence after termination of employment and breach of duty of good faith whilst still in employment. Scott J observed:

"This case is, in my view, yet another example of an attempt by an employer to use the doctrine of confidential information to place fetters on the ability of ex-employees to compete. Technologically based industries abound. All have what they regard as secrets. Employees, particularly those employed on the scientific or technical side of the manufacturing business, necessarily acquire knowledge of the relevant technology They become associated with technological advances and innovations. Their experience, built up during their years of employment, naturally equips them to be dangerous competitors if and when their employment ceases. The use of confidential information restrictions in order to fetter the ability of these employees to use their skills and experience after determination of their employment to compete with their ex-employer is, in my view, potentially harmful. It would be capable of imposing a new form of servitude or serfdom, to use Cumming-Bruce LJ's words, on technologically qualified employees. It would render them unable to practice to leave their employment for want of an ability to use their skills and experience after leaving. Employers who want to impose fetters of this sort on their employees ought in my view to be expected to do so by express covenant. The reasonableness of the covenant can then be subjected to the rigorous attention to which all employee covenants in restraint of trade are subject. In the absence of an express covenant, the ability of an ex-employee to compete can be restricted by means of an implied term against use of disclosure of trade secrets. But the case must, in my view, be a clear one. An employee does not have the chance to reject an implied term. It is formulated and imposed on him subsequently to his initial entry into employment. To fetter his freedom to compete by means of an implied term can only be justified, in my view, by a very clear case. The present is, to my mind, a long way from that."

It is almost trite to be reminded that the primary function of a statement of claim is to inform a defendant of the claim to be met: see Gould v Mount Oxide Mines Limited (in liq) [1916] HCA 81; (1916) 22 CLR 490, 517; Banque Commerciale SA (in liq) v Akhil Holdings Limited [1990] HCA 11; (1990) 169 CLR 279, 286-7; Multigroup Distribution Services Pty Ltd v TNT Australia Pty Ltd [1996] FCA 1758; (1996) ATPR 41-522. Indeed, it is instructive to recall from time to time the requirements of Order 13.02 of Chapter 1 of the Rules. It provides:

(1) Every pleading shall -

(a) contain in a summary form a statement of all the material facts on which the party relies, but not the evidence by which those facts are to be proved;

(b) where any claim, defence or answer of the party arises by or under any Act, identify the specific provision relied on;

(c) state specifically any relief or remedy claimed.

(2) A party may by his pleading -

(a) raise a point of law;

(b) plead a conclusion of law if the material facts supporting the conclusion are pleaded."

It follows from the requirements of Rule 13.02 that a party must state in a pleading the material facts: see Bruce v Odhams Press Limited (1936) 1 KB 697, 712. With these matters of principle and requirement as to form in mind I turn to consider the specific attack by the defendants in the present proceeding on paragraphs 18(a) and (c), 33 and 36 of the statement of claim.

In each of the three paragraphs under attack the plaintiff has not pleaded material facts such that the defendants know the case they are to meet. One is reminded of the observations of the Full Court of this Court, although with respect to the ultimate trial of a proceeding as distinct from an interlocutory strike out application, in Pioneer Concrete Services Limited and anor v Galli and anor [1985] VicRp 68; (1985) VR 675 where the court observed (at 711):

"What is important in the present case, as in all other cases of this kind, is that the court should be able, both, to define the precise nature of the confidential information which it is sought to protect and to identify with some particularity the disclosure or use which is alleged against the defendants."

In my view the subject paragraphs of the statement of claim suffer from the vice that the nature of the confidential information that is the subject of the dispute is not defined at all or certainly not with sufficient specificity. Further, and most importantly, there is a further vice in that the allegation against the defendants with respect to disclosure or use of the subject confidential information is so vague and uncertain that the defendants would not know what case they had to meet. In essence, the claim by the plaintiff against the defendants appears to be one that is tantamount to a complaint that the defendants left their former employer, established their own business and are now competing in a market place against their former employer. That is not sufficient to make out even an arguable case of disclosure of confidential information. I consider that the same defect applies with respect to each of paragraphs 18(a) and (c), 33 and 36 of the statement of claim. It is a matter that should be the subject of further attempt at pleading by the plaintiff. In this respect I am again reminded of the observations of the Full Court in Pioneer Concrete (at 715) where the court observed that use of accumulated experience and knowledge in a particular industry and its methods was not sufficient. The court held:

"There must be shown an identifiable use of specific confidential information or at least circumstances shown from which an inference could properly be drawn as to the use of particular information."

In the course of argument Mr P. Bick QC asserted that the plaintiff was entitled to rely upon the particulars provided with respect to the subject paragraphs in the statement of claim. On their face the particulars are very broad and do not alleviate the criticisms made against the substantive paragraphs in the statement of claim. It is not the function of particulars to make up for deficiencies or gaps in the statement of claim from which material facts have been omitted or not alleged. Furthermore, the general approach adopted by the courts is not to permit a litigant to rectify a deficiency in pleadings by way of the provision of new or additional particulars: see Bruce v Odhams Press Limited, supra; Rubenstein v Truth & Sportsman Limited [1960] VR 769; Mitanis v Pioneer Concrete (Vic) Pty Ltd [1997] FCA 1040; (1997) ATPR 41-591; Southern Cross Exploration NL v All Risks Insurance Co Limited (1985) 2 NSWLR 340. The general approach has been that particulars cannot cure a bad pleading: Bank of Melbourne Limited v FAI General Insurance Co Limited (No. 1), unreported judgment of Hedigan J delivered 7 March 1994.

It follows that paragraphs 18(a) and (c), 33 and 36 of the statement of claim will be struck out and the plaintiff ordered to re-plead those paragraphs.

The plaintiff complained that the strike out application should be refused on the ground of delay. I observe that the proceeding is one within the Commercial List and has been on foot for some 13 weeks. Pleadings are closed and discovery is largely completed in accordance with the Court ordered timetable. There have been a number of adjournments to facilitate the completion of interlocutory processes by the parties. I observe, also, that at the first directions hearing some weeks ago I raised, of the Court's own motion, the adequacy of the pleading by the plaintiff. It is unfortunate that the application was not brought on earlier. Of course, it behoves an applicant to bring on such an application promptly: see Gent v Harrison (1893) 69 LT 307. However, in the context of this proceeding the strike out application is not too late. A court will usually be reluctant to allow a defective pleading to stand. In this matter, a trial date has not been fixed. It seems to me that, on balance, the better approach is to allow the strike out application for the reasons stated but to take account of the defendants' delay in relation to any order for costs that may be made.

Application by the Plaintiff for Further Discovery

Initially the plaintiff sought further and better discovery of 13 categories of documents from the defendants. Ultimately, the categories were reduced to five separate groups or categories. I shall deal with each category separately.

The plaintiff pursued the defendants for all of their employment and personnel files. Affidavits filed by the plaintiff in support of the application disclosed that the defendants had discovered letters of employment but no other documents relating to such matters as recruitment, employment or remuneration. The nub of the complaint was that the defendants had recruited nine of 15 employees of Creative Brands to the employment of Heat. This formed a substantial part of the claim of Creative Brands against the defendants. Franklin, in an affidavit sworn 14 August 2001 deposed that the full employment/personnel files of the defendants had been discovered. In other words, it was the defendants' position that there are no other documents. At present, I am satisfied that there is no further obligation for discovery upon the defendants with respect to this category of documents. Whilst it is open to the plaintiff to bring an application for specific discovery under Rule 29, in my view as matters stand, there is no proper foundation for such application. It follows that the plaintiff has failed to make out its complaint with respect to further discovery in relation to the employment and personnel files of the defendant.

(2) Home, Work and Mobile Telephone Accounts of the First, Second and Third Defendants

The plaintiff sought discovery of all telephone accounts of Franklin, Sharkie and Craig being their home, mobile and work telephone accounts. I was informed by Mr Bick that the purpose of the discovery was to ascertain whether during the period December 1999 to April 2001 the three defendants had contacted employees of Creative Brands as part of a recruitment drive whereby nine employees of Creative Brands were recruited to Heat. I observe that there is no allegation anywhere in the pleadings of a particular conversation or dispute as to whether a specific telephone call was made and if so by whom and to which then employee of Creative Brands. In some cases it can be readily contemplated that telephone records may well be relevant. As matters stand I consider that the pursuit of further discovery by the plaintiff constitutes no more than a fishing expedition. Further, the magnitude of such discovery can be readily contemplated in any event. Mr Bick said that his client would be satisfied with production of telephone records for the period December 1999 to April 2001, a period of some 18 months. In my view such discovery would in any event be oppressive. It follows that the application by the plaintiff for further and better discovery of the telephone records of the first, second and third defendants fails.

Franklin disclosed in her affidavit that Heat has a customer list. Objection was taken to production of the customer list to Creative Brands on the basis that it would necessarily involve disclosure of commercially sensitive information belonging to Heat to a competitor. Further, it was argued by Mr Glick who appeared for the defendants that there was no disclosure in the pleadings as to how the customer and supplier lists of Heat could be relevant. I was informed and there was no dispute between the parties that the defendants had discovered all documents in relation to suppliers of the plaintiff whom the plaintiff complained the defendants had approached. That of itself may well have been generous. Be that as it may the question of relevance stands. I am not satisfied that the request for further and better discovery constitutes any more than a fishing expedition. I have concerns as to the relevance of the documents as the pleading stands. It may be that the plaintiff will wish to re-visit pursuit of the customer lists of the defendants when it re-pleads paragraphs 18(a) and (c), 33 and 36 of the statement of claim. Nevertheless, at present the plaintiff has not made out its application for further discovery with respect to customer and supplier lists.

(4) Documents Pertaining to the Formation and Business of Heat

Creative Brands sought discovery of documents relating to the creation of Heat and its business and senior management and board level documents relating to the operation of the business of Heat on an ongoing basis. The defendants objected to discovery on the grounds that it was too wide, constituted fishing and was oppressive. There was also concern that discovery may give rise to inspection of documents that were commercially sensitive. Having considered very carefully these submissions on both sides I am satisfied that the discovery of documents relating to the formation and business of Heat are clearly relevant to the claim by the plaintiff against the defendants. I observe that no complaint was made by the defendants against paragraph 18(b) of the statement of claim. On that basis alone the pleading provides sufficient nexus to establish the necessary relevance between the pleading and the documents as pursued. There is the question as to whether the category is too wide, constitutes fishing or is oppressive. For the reasons already stated with respect to relevance I am not satisfied that such discovery is too wide. For the same reasons I am satisfied that it does not constitute fishing. There is the remaining matter of whether the discovery would be oppressive. In the course of argument it was suggested that the expanse of documents would be large. However, nothing specific was placed before the court on affidavit to support that assertion. As presently informed I do not consider that the discovery would constitute oppression. In any event I would be disposed to order discovery of documents concerning the formation and business of Heat on the basis of a confined period. It seems in all likelihood that the relevant period should be December 1999 to April 2001 being the period of apparent recruitment of staff and the establishment of Heat, subject to any further submissions by the parties. In so far as such documents may be commercially sensitive I would be disposed to order that further lists of discoverable documents in this category be treated as confidential and disclosed only to the mutual legal representatives of the parties subject to further order.

(5) The Nature of Documents Relating to Communications and/or Dealings between the Defendants and Customers or Suppliers of the Plaintiff

The documents pursued by the plaintiff are self-evident from the description given. The defendants complained that the discovery sought was too wide, constituted fishing and oppression. In my view for the reasons stated with respect to the third category concerned with customer and supplier lists I am of the view that the defendants' objection is made out. Accordingly, the application by the plaintiff in this category fails.

Further and Better Particulars Sought by the Plaintiff of the Defence

The plaintiff complained that there should be further and better particulars provided by the defendants of paragraph 13(b) of the defence. In that paragraph the defendants pleaded that if Franklin used certain information then such information was not confidential information of the plaintiff. I have considered carefully the complaints made by the plaintiff. I do not consider that particulars are warranted. In any event I make an additional observation. This proceeding was issued by the plaintiff in the Commercial List. At the first directions hearing I expressed concern as to the potential staleness of the allegations in the statement of claim and also the general vagueness of the matters alleged in the pleadings. When a party issues a proceeding in the Commercial List it behoves that party to subject itself to an expeditious timetable. I observe that in this matter the plaintiff has adopted an approach that could only be described meandering as the parties move through the usual interlocutory phases. I observe that to date there have been four adjournments that do not seem to have achieved much advancement of the matter. As I have said already, I do not consider that further particulars are warranted. In so far as this is a matter in the Commercial List I observe that from time to time parties use the tactic of requesting further and better particulars and disputing particulars when provided as a way of delaying or postponing the fixing of the proceeding for trial. In my view, requests for particulars are not to be encouraged in the Commercial List, particularly when it is borne in mind that the parties have the mutual benefit of the exchange of witness statements and court books in advance of trial.

It follows that no further particulars will be ordered against the defendant with respect to their defence.

In summary, the defendant has succeeded on its strike out application and the plaintiff has failed on all but one category of further discovery of documents and failed on its pursuit of further and better particulars. Orders will be made accordingly.

At a glance

Court

Decision date

Before

Source

Judgment (53 paragraphs)

Parties

Cases Cited (3)