Solicitors:
Webb Henderson (first and second plaintiffs)
File Number(s): 2019/298748
[2]
Judgment
The plaintiffs, Cyclopharm Ltd and Cyclomedica Australia Pty Ltd, commenced these proceedings by summons filed in the Duty List on 24 September 2019. It will be convenient to refer to the plaintiffs collectively as Cyclopharm.
The defendants were Nabil Morcos, HZM Pty Limited (HZM), Charles Francis Buttigieg, Richard Frank Gotch and Michael Jian Guo. The four personal defendants were former employees of Cyclopharm. HZM is a company whose shares were, at the time the proceedings were commenced, owned by Prof Morcos and his wife. Professor Morcos was the sole director of HZM.
By their summons, Cyclopharm sought relief against the defendants for misuse of Cyclopharm's confidential information, and breaches of contractual, fiduciary and statutory duties. Cyclopharm sought injunctions, equitable compensation and damages.
On 24 September 2019, Pembroke J, as Duty Judge, issued search orders in the conventional form against the defendants, other than Mr Guo.
In due course, each of the search orders was executed and documents found to be in the possession of the defendants were secured by the independent solicitor and ultimately provided to Cyclopharm. As HZM's registered office was at the residence of Prof Morcos, the search orders issued against those two defendants were executed in a manner that had the result that the documents within the search orders were secured by the independent solicitor collectively without differentiation as to the defendant who was in possession of the documents.
In due course, on 29 April 2020, Cyclopharm filed a statement of claim. The statement of claim added six further defendants as parties to the proceedings, being in turn David Thomas Rundell, Landauer Australasia Pty Ltd, Landauer Radiopharmaceuticals Pty Ltd (collectively the Landauer companies), Björn Altmann, Almedis Altmann GmbH (Almedis) and Vent-Medis GmbH (Vent-Medis). Mr Rundell is a former employee of Cyclopharm. The two Landauer companies are companies incorporated in the United States of America and Australia respectively. It will not be necessary to refer further to the first three additional defendants.
Mr Altmann was employed by Cyclomedica Germany GmbH (Cyclomedica Germany), a subsidiary of Cyclopharm, and was the managing director or general manager for Europe at relevant times. Mr Altmann is the sole shareholder and managing director of Almedis, and Vent-Medis is alleged to have been associated with the other defendants. Almedis and Vent-Medis are companies incorporated in Germany.
It will be convenient to call Mr Altmann, Almedis and Vent-Medis, who are the defendants most relevant to the present application, the German defendants.
Cyclopharm commenced these proceedings because information had come to their attention that suggested that the initial individual defendants had breached the duties that they owed to Cyclopharm, while employees, to establish a business in competition with Cyclopharm, by a conspiracy that involved the misuse of Cyclopharm's confidential information and the diversion of commercial opportunities that were available to Cyclopharm. On the basis of the further information gained by Cyclopharm, as a result of the execution of the search orders, Cyclopharm learned of the conduct of the additional defendants that has led Cyclopharm to join those defendants in the proceedings by means of the statement of claim, on the basis that the additional defendants were part of the conspiracy alleged against the initial defendants.
In response to the statement of claim, Prof Morcos and HZM, Mr Buttigieg, Mr Rundell and the two Landauer companies, as well as the German defendants have filed defences. Consequently, the German defendants have submitted to the jurisdiction of this Court. Mr Gotch, who was served with the statement of claim, has not filed an appearance. Mr Guo has submitted to the order of the Court.
Mr Altmann's employment contracts with Cyclomedica Germany have been governed by German law, and contained a term giving exclusive jurisdiction over disputes arising out of the contracts to the courts of Germany.
For this, and other practical reasons, Cyclopharm wishes to explore the availability of rights of action against the German defendants that it or its European subsidiaries may be able to prosecute in the courts of Germany.
Schedule B of each of the search orders contains the following standard undertaking given to the Court by Cyclopharm (the Undertaking):
2. The applicant will not, without the leave of the Court, use any information, document or thing obtained as a result of the execution of this order for the purpose of any civil or criminal proceeding, either within or outside Australia, other than this proceeding.
This express undertaking to the Court has an equivalent effect to the substantive restriction on the ability of Cyclopharm to use the information in the documents obtained as a result of the execution of the search orders for any purpose other than use in these proceedings, that is usually described as the 'implied undertaking' that arises from the decision of the House of Lords in Harman v Secretary of State for the Home Office [1983] 1 AC 280 (the Harman undertaking). Although in its submissions in these proceedings, Cyclopharm has tended to refer to the Harman undertaking, strictly the applicable undertaking is the express one given to the Court at the time of the issue of the search orders. The distinction is, however, in my view immaterial.
The undertakings that Cyclopharm have given have the effect that Cyclopharm is prohibited, without the leave of the Court, from supplying the information obtained from documents secured by the execution of the search orders to their German subsidiaries or their German lawyers for the purpose of obtaining advice as to whether relevant causes of action arise against the German defendants under the law of Germany, or as to the prospects of success of such causes of action, or for the purpose of prosecuting available claims in the appropriate German court: see Hearne v Street (2008) 235 CLR 125; [2008] HCA 36 at [96], approving Cobra Golf Inc v Rata [1998] Ch 109 (Cobra Golf) per Rimer J.
Consequently, by notice of motion filed on 23 April 2021, Cyclopharm seek orders from the Court varying the effect of the Undertaking. The notice of motion was heard on 6 August 2021. The notice of motion seeks the following orders:
1. The plaintiffs be permitted to disclose the documents listed in Annexure AJC-21 to the affidavit of Andrew John Christopher sworn 22 April 2021 (the Documents), being documents obtained in these proceedings pursuant to orders of the Court or containing information derived from such documents, to [Rickert Law (Cyclopharm's German lawyers)] or any other legal advisors retained by them in Germany, for the following purposes:
i. obtaining legal advice in relation to possible civil claims in Germany against [the German defendants], and/or any former employee of [Cyclomedica Germany]; and
ii. commencing and conducting legal proceedings in Germany against [the German defendants], or any former employee of [Cyclomedica Germany].
2. The plaintiffs be permitted to disclose the Documents, to each of [Cyclomedica Germany], Cyclomedica Europe Limited and Cyclomedica Ireland Limited, each a subsidiary of the first plaintiff, for the purposes of each of those entities:
i. obtaining legal advice in relation to possible civil claims in Germany against [the German defendants], and/or any former employee of [Cyclomedica Germany]; and
ii. commencing and conducting legal proceedings in Germany against [the German defendants], or any former employee of [Cyclomedica Germany].
As explained in par 60 of Cyclopharm's written submissions in support of its application, the effect of the orders sought being made will be that Cyclopharm will be released from the Undertaking in relation to: (a) the statement of claim; (b) the affidavit of its CEO, James Steven McBrayer, sworn in December 2020, which contains Cyclopharm's evidence in chief in this proceeding; (c) 1,143 documents exhibited to Mr McBrayer's affidavit, obtained from the execution of the search orders; and (d) two affidavits served by Mr Gotch pursuant to the search orders.
It is clear that the orders sought by Cyclopharm are sufficiently specific as to the identification of the information that would be the subject of the variation of the Undertaking, and it is not necessary for the Court to consider this issue further, particularly given that the active defendants have neither consented to nor opposed the making of the orders.
It will be convenient at this point to add that the Court, on an application such as the present, is not required to conduct a 'mini trial' about the likely relevance and admissibility of the documents in any proceedings in a German court: see State Street Global Advisors Trust Company v Maurice Blackburn Pty Ltd [2019] FCA 1464, per Beach J at [84]. In any event, the present occasion for such a consideration would be premature, as the initial use to which the documents will be put is in obtaining advice from German lawyers.
Cyclopharm's application has faced the complication that, after the defence of Prof Morcos and HZM was filed, Prof Morcos passed away. The Court has been informed that Prof Morcos' wife was named as executor in Prof Morcos' will, but that the wife has informed Cyclopharm's legal representatives that she does not intend to apply for probate of the will. Prof Morcos was the sole director of HZM. Prof Morcos and his wife were both shareholders in HZM. Professor Morcos' wife has not taken any step to cause a new director to be appointed for HZM. HZM's former solicitors have filed a notice of ceasing to act. HZM remains unrepresented. Cyclopharm has served its notice of motion and supporting affidavits on HZM. There has been no formal response. It may be that Prof Morcos' wife became aware of the application in the notice of motion because HZM was served at her residential address. However, Prof Morcos' wife does not, at present, have any role in these proceedings.
Cyclopharm has not yet taken any step to cause Prof Morcos' estate to be represented, for the purpose of the continuation of these proceedings against the estate. I have considered in Bayside Council v Estate of Goodman [2019] NSW'SC 530, the difficulties that plaintiffs may face when a defendant dies, the action against the defendant does not abate under the rules of court, but no person entitled to do so is prepared to obtain a grant of probate or letters of administration, or even the appointment of an administrator ad litem for the purpose of conducting the defence of the deceased defendant. Cyclopharm is at present struggling with this conundrum and has not yet decided what course of action to take.
After discussion with counsel appearing for Cyclopharm at the hearing, I directed that the following expedient be adopted. As Prof Morcos was the subject of a search order that had the effect of compelling him to allow the independent solicitor to collect documents falling within the description of the documents in the search order, Prof Morcos would, if he had remained alive, have had a right to make submissions in opposition to Cyclopharm's present claim for an order partially releasing them from the Undertaking. However, this application is not made by Cyclopharm for the purpose of prosecuting the existing claim in the statement of claim against Prof Morcos or his estate. Cyclopharm's application is necessitated by the terms of the Undertaking, but it relates to the possibility that new proceedings will be commenced against the German defendants by European subsidiaries of Cyclopharm. Consequently, it should not strictly be necessary for Cyclopharm to cause some person to be appointed as the representative of Prof Morcos, before Cyclopharm is entitled to make the application in its notice of motion. The appointment of a representative of Prof Morcos' estate would probably need to be done under Uniform Civil Procedure Rules 2005 (NSW) r 7.10(2), if no person with the right to do so made an application to be appointed as administrator ad litem.
I formed the view that, as Prof Morcos' right, when alive, to contest the application now made by Cyclopharm was a personal right that is separate from his entitlement to defend the existing proceedings against him, it would be sufficient for the Court to do justice to Prof Morcos' estate for steps to be taken to ensure that Prof Morcos' wife was given proper notice of the application. That is, if Prof Morcos' wife is in fact the nominated executor under his will, then she is the most appropriate person to decide whether there is good reason for Prof Morcos' estate to contest the present application made by Cyclopharm. I have required that Prof Morcos' wife be served with the notice of motion and associated documents, with an explanation that, if she wishes to do so, she may file a notice of motion seeking to be heard. In the meantime, I have decided that the most expedient course is for the Court to hear and determine the application. Any orders made will be contingent on Prof Morcos' wife not seeking to contest Cyclopharm's application. By that course, Prof Morcos' wife would be enabled, if she so wished, to put submissions to the Court on behalf of her late husband, without being put to the expense of obtaining a grant of probate or an appointment as administrator ad litem. Cyclopharm agreed to the Court taking this course.
There is no impediment to Cyclopharm prosecuting its application in respect of HZM, as HZM has been properly served with the notice of motion. Equally, no concern arises in respect of the defendants who have not entered an appearance, or who have submitted to the order of the Court.
All of the other defendants informed the Court, by emails addressed to my Associate, that they neither consented to nor opposed the orders sought by Cyclopharm in its notice of motion, and they sought my leave to be excused from appearing at the hearing. Those emails were admitted as an exhibit on the application. At my request, my Associate informed those defendants that they were excused from appearing.
The consequence is that none of the active defendants have opposed the orders sought by Cyclopharm. That includes the German defendants, who have the greatest interest in doing so.
The effect of a respondent to a notice of motion informing the Court that it neither consents to nor opposes the orders sought by the applicant is that the Court must decide the application on its merits, having regard to the relevant principles and the evidence tendered by the applicant. However, the course taken by the respondent will not necessarily be neutral in effect. If it be relevant to the determination of the application that the orders sought may have a prejudicial effect on the interests of the respondent, the Court is entitled to proceed upon the basis that there are no prejudicial effects that the Court should take into consideration, if the respondent does not avail itself of the opportunity to establish the prejudicial effects at the hearing of the application. Where such an application is determined in circumstances where the respondent has had no opportunity to appear, the Court may be required to consider for itself whether some prejudice will arise from the making of the orders sought, which should be considered in the balance when determining the application. However, in cases where the respondent is fully aware of the nature of the application, and chooses to adopt the position that it neither opposes nor consents to the application, there is no reason or justification for the Court to speculate about the possible existence of prejudice.
It does not follow that the orders sought by Cyclopharm should be made summarily, on the basis that there has been no opposition to the orders being made by any of the active defendants. The Court must still consider whether Cyclopharm has established an entitlement to the partial release of the Undertaking, having regard to the fact that there is a public interest in the Court holding parties to their undertakings, unless there is good cause to release them.
As was submitted by counsel for Cyclopharm, it is a matter of common experience that employers, from time to time, discover that existing or former employees appear to have breached their obligations to the employers, including by misuse of confidential information or the establishment of competing businesses. That information will often be incomplete, and the evidence available to the employer might not be sufficient to enable the employer to prove its case. That is the reason why the employer must commence proceedings on the basis of incomplete information, and it is the reason why employers seek, and are granted by the Court, search orders aimed at ensuring that the information that may be in the hands of the employees relating to apparent breaches of their duties is preserved. It will often happen that, on the basis of the information obtained by the employer, as a result of the execution of the search order, the employer will be able to refine the basis of its claims against the particular employee the subject of the search order, and often at times, discover that other employees, or former employees, have been engaged in associated wrongful conduct with the employee the subject of the search order. Consequently, it may be appropriate for the employer to expand its case, either against the existing defendant employee, or by joining additional employees as defendants.
That is in effect what has happened in the present case by means of the statement of claim served by Cyclopharm.
There may be an issue of principle of some importance in this context as to what is meant by the wording of the Undertaking "for the purpose of any civil or criminal proceeding, either within or outside Australia, other than this proceeding". At the time the Undertaking was given, the proceeding was as formulated in the summons, and it was supported by the evidence in the substantive affidavits filed with the summons. Counsel submitted that the expression "this proceeding" had a wider meaning, so that it encompassed whatever claims were made in any pleading filed within the proceedings in this Court that have its specific file number. If that is correct, it would have the effect that the plaintiff could use the information in the documents seized as a result of the execution of the search order to make any claim, by way of amendment of its summons or the filing of a statement of claim, both against an existing defendant and any new defendants, that the plaintiff wished to sue. The plaintiff could take that step without being required to seek a partial release of the Undertaking from the Court. Counsel submitted, as I understood him, that this was a course usually taken by plaintiffs in the position of Cyclopharm.
I consider that the proposition advanced by counsel is contestable, as the Court will have been persuaded to issue the search order on the basis of its understanding of the claims made in the initiating summons and the evidence filed in support of that summons. It does not seem to me to be correct that the plaintiff is not constrained by the undertaking given in the form of the Undertaking, and is free to expand its claim, whether against the existing defendants or by adding new defendants, subject only to the constraints arising out of the rules of court governing the causes of action that can be included in a single proceeding.
However, it is not necessary for the Court to address this issue on the present application. Cyclopharm has filed its statement of claim, and all active defendants have filed defences, without there being any suggestion that there was any impediment to Cyclopharm using the information that it gleaned from the execution of the search orders for the purpose of formulating its statement of claim.
A consideration of the relief initially sought by a plaintiff in its summons, as explained in the affidavits filed in support, will often be a useful source of information to the Court in deciding whether it is a proper case to vary the Undertaking. A plaintiff seeking search orders is required to file a summons setting out the final relief sought, as the Court's procedure does not permit the making of interlocutory orders except in support of some claim for final relief. In cases such as the present, the plaintiff may not have sufficient information when the proceedings are commenced to formulate its claim for final relief with certainty. There will often be some uncertainty about the content of the proceeding, because of the inherent lack of specificity of the process. The proceeding is commenced, and the search orders issued, in contemplation that the execution of the search orders may disclose causes of action available to the plaintiff against existing and additional defendants that are not known to the plaintiff when the summons is filed. The Court and the plaintiff are justified, in cases of this nature, in entertaining a liberal view of the meaning of "this proceeding" in the Undertaking, which extends at least to permitting the plaintiff to specify and enlarge its claim against existing and additional defendants, within the broad ambit of the apparent claims known to the plaintiff from the limited information that is available when the proceeding is commenced.
These considerations are reinforced in the present case because the affidavits filed by Cyclopharm in support of the summons included evidence that suggested that the German defendants were involved in a conspiracy with the initial defendants to cause harm to Cyclopharm's interests through the breaches by the initial defendants of the duties that they owed to Cyclopharm: see the affidavit of James Steven McBrayer sworn 24 September 2019 at pars 95-102, 171-175 and 193(o); and the affidavit of Mathew Farag sworn 23 September 2019 at pars 6-11. Although, at the time the summons was filed, Cyclopharm did not consider that it had enough evidence to join the German defendants to the proceeding; there is a good argument, in my view, that the claims against the German defendants that were later formulated in the statement of claim were within this proceeding in substance. On the basis of the evidence filed at the time the search orders were made, it was clearly in the contemplation of the Court that the execution of the search orders might disclose information that justified Cyclopharm in widening its claim in this proceeding to include claims against the German defendants. That would not involve a departure by Cyclopharm from the Undertaking.
These considerations are relevant to the issue of whether the Court should now make the orders sought by Cyclopharm in their notice of motion.
It is clear that Cyclopharm has been required to make the application because, whatever flexibility should be given to the expression "this proceeding" in the Undertaking, it does not extend to the contemplated proceedings in a court in Germany commenced by plaintiffs other than Cyclopharm. It is possible that, were it not for the exclusive jurisdiction term in Mr Altmann's contract of employment, Cyclopharm's European subsidiaries could be joined in this proceeding for the purpose of making available claims against the German defendants. However, Cyclopharm would still face the need for a variation of the Undertaking to enable it to advise its European subsidiaries of the potential claims against the German defendants, and to obtain legal advice from their German lawyers concerning the availability of claims under German law.
The fact that Cyclopharm and its European subsidiaries may have been entitled to prosecute claims arising under German law against the German defendants in this proceeding, but for the jurisdictional bar and considerations of practical efficiency, is a consideration that supports the Court varying the Undertaking in the way sought by Cyclopharm. In Cobra Golf, Rimer J at 167 referred to the speech of Lord Oliver in Crest Homes Plc v Marks [1987] AC 829 at 860-861, where his Lordship gave, as a good reason for varying the Harman undertaking, that "Crest's claim has been prosecuted by the issue of two writs instead of one", when in substance the two actions were "a single set of proceedings". The present proceeding is not quite the same as that considered by his Lordship, as there is a need for two separate proceedings, even though the two proceedings would be closely related, and would substantially arise out of the same wrongful collusion, if not conspiracy, between former employees of Cyclopharm and its subsidiaries, and would have been within the broad contemplation of the Court when it issued the search orders.
In my view, it is clear in this case that the needs of justice are served by varying the Undertaking in the manner sought in Cyclopharm's notice of motion, applying the approach of Campbell J (as his Honour then was) in Wellness Pty Ltd v Hamilton-Bond [2002] NSWSC 1259 at [8]. To the extent that 'special circumstances' must be established before the Court will vary the Undertaking, I am satisfied that those circumstances clearly exist in the present case. It is not necessary for the purpose of these reasons to canvass all of the authorities that have considered the circumstances where an undertaking in the form of the Undertaking in this case, or the Harman undertaking, should be varied or released.
As the active defendants have not put before the Court the possibility that they would suffer any prejudice or injustice if the orders sought by Cyclopharm were made, notwithstanding having been given full opportunity to do so, the Court has been given no countervailing grounds to the grounds that support the making of the orders that I have considered above. Lest there be doubt, I am not aware of any reason that would make it unjust for the orders sought by Cyclopharm to be made.
Accordingly, the precise orders of the Court, in accordance with the draft short minutes of order provided by Cyclopharm, are that:
1. the plaintiffs be permitted to disclose the documents listed in Annexure AJC-21 to the affidavit of Andrew John Christopher sworn 22 April 2021 (the Documents), being documents obtained in these proceedings pursuant to orders of the Court or containing information derived from such documents, to Rickert Rechtsanwaltsgesellschaft mbH (Rickert Law) or any other legal advisers retained by them in Germany, for the following purposes
1. obtaining legal advice in relation to possible civil claims in Germany against the ninth, tenth and/or eleventh defendants, and/or any former employee of Cyclomedica Germany GmbH Ust. IdNr DE814433262 (Cyclomedica Germany); and
2. commencing and conducting legal proceedings in Germany against the ninth to eleventh defendants, or any former employee of Cyclomedica Germany.
1. the plaintiffs be permitted to disclose the Documents, to each of Cyclomedica Germany, Cyclomedica Europe Limited and Cyclomedica Ireland Limited, each a subsidiary of the first plaintiff, for the purposes of each of those entities:
1. obtaining legal advice in relation to possible civil claims in Germany against the ninth, tenth and/or eleventh defendants, and/or any former employee of Cyclomedica Germany; and
2. commencing and conducting legal proceedings in Germany against the ninth to eleventh defendants, or any former employee of Cyclomedica German.
1. orders 1 and 2 be stayed for a period of 21 days following service of the following documents on the widow of the first defendant, Hasmik Morcos, to allow her time to file and serve any notice of motion seeking leave to be heard in respect of the plaintiffs' notice of motion filed 23 April 2021 (Plaintiffs' Motion):
1. the Plaintiffs' Motion;
2. the evidence relied on by the plaintiffs in support of the Plaintiffs' Motion, other than any document subject to confidentiality orders made by Robb J on 6 August 2021;
3. the Search Orders made by Pembroke J against the first and second defendants on 24 September 2019;
4. the Statement of Claim filed on 29 April 2020; and
5. the First and Second Defendants' Defence filed 29 May 2020.
1. for the purposes of Order 4, the documents may be served on Hasmik Morcos by personal service, or alternatively by sending the documents by post to the following address: 177 Ewos Parade, Cronulla NSW 2230 and by email to the following addresses: mickimorcos5@gmail.com and mickimorcos@optushome.com.au.
[3]
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Decision last updated: 12 August 2021