EPP v Levy

22 THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION

WEDNESDAY 6 JUNE 2001 2749/01 - EPP NATIONAL BUYING GROUP PTY LTD & ANOR v JULIE MICHELE LEVY AND OTHERS JUDGMENT HIS HONOUR: 1 The plaintiff operates a business which involves introducing small businesses in need of goods and services to suppliers who, no doubt because of the economies of scale, are prepared to do business with those parties on terms more favourable to the buyers than could be obtained through other channels. Small business owners who, through the plaintiff's systems, obtain privileged access to suppliers enter into an a contractual relationship with the plaintiff which causes them to be termed "members" in relation to the plaintiff. 2 There are two levels of suppliers. First, members have access to national suppliers such as Telstra, St George Bank, American Express, Shell and Caltex. Second, members can access what is called the member to member segment of the programme under which certain of the members themselves supply discounted goods and services to other members. Mr Wyke, managing director of the plaintiff, described this as an unique feature which sets his marketing concept apart from other buying groups. Not all members participate in the member to member segment in the sense of agreeing to provide goods and services to other members at discounted rates. According to Mr Wyke, only about 20 per cent participate in that way. 3 Members pay a membership fee to the plaintiff in return for the privilege of access to the favoured buyer arrangements. The plaintiff sells memberships through agents, with each agent assigned to a geographic area. Agents are remunerated by way of an amount per member introduced. 4 The defendants became agents in July 1999, assigned to an area on the Central Coast. In that connection each of them entered into an agent's contract and a confidentiality deed, all dated 1 July 1999. Mr Wyke deposes that the defendants became very successful agents. 5 The defendants were terminated as agents in October 2000. Both before and after the termination the defendants had approached certain suppliers with whom the plaintiff had supply arrangements, notably, St George Bank, Insurance Australia Brokers and Caltex. The approaches were, in effect, attempts to obtain from those suppliers arrangements for the defendants' personal interests corresponding with those which the plaintiff had with the suppliers. 6 After the termination the defendants also began approaching members of the plaintiff with proposals that those members do business with the defendants or their interests. This was after members in the area previously serviced by the defendants had been notified by the plaintiff of their new agent for that area. 7 The plaintiff commenced proceedings in the District Court at Coffs Harbour alleging breach of contract and seeking damages. Certain interlocutory orders were made by the District Court to prevent the defendants approaching suppliers and members of the plaintiff. The District Court proceedings were afterwards transferred to this Court where interim orders were made extending the orders of the District Court. 8 The matter came before me on 30 May 2001 and proceeded on an agreed basis under which the plaintiff sought new and more limited interlocutory injunctions in place of those which had originated in the District Court. The defendants opposed the grant of those injunctions. They also argued that any undertaking as to damages given by the plaintiff would be unsatisfactory because of the allegedly unhealthy financial state of the plaintiff. The same considerations prompted the defendants to seek an order for security for costs. In addition, the plaintiff sought leave to amend its statement of claim. 9 I heard these applications for several hours on 30 May and between 9.30 and 10am on 31 May. Because of the volume of paper with which I had been presented and the fact that I had another hearing commencing at 10 o'clock on 31 May, I reserved my decision and indicated that I would give judgment today. 10 I begin with the plaintiff's application for leave to amend its Statement of Claim. It is virtually self-evident that at this stage of the proceedings that application must succeed. While the Expedition Judge has now fixed a fairly tight pre-trial timetable, it is obviously beyond any conceivable argument that the defendants will not suffer prejudice by being required to deal with an Amended Statement of Claim in the form which they have now had for over a week. I therefore grant leave to the plaintiff to amend its Statement of Claim to accord with the form which was handed up on 30 May. 11 Turning to the injunctions now sought, I note that the plaintiff seeks them solely by reference to alleged breaches of contract, pointing to the confidentiality deeds of 1 July 1999, one with the first defendant and the other with the second defendant. The plaintiff does not seek to rely upon any equitable obligation of confidence over and above the expressly contracted obligations. 12 Both confidentiality deeds are in the same form. The central provision is clause 5. It binds the so called recipient party, that is, each defendant, to keep confidential the confidential information as defined, unless and until the parties agree that the confidential information is in the public domain otherwise than by breach of the deed. That takes one to the definition of confidential information which includes all information relating to the subject matter, another defined term, which is not in the public domain. The subject matter is the business of the plaintiff, including but not limited to the operations of Edge Power Promotions and EPP and any matter related to it which is not in the public domain, the operations manual and franchise agreement of the plaintiff and any information supplied to the defendants in relation thereto. Clause 5 is thus a restriction on disclosure. Clause 6.1.2 imposes a restriction on use. It says that the recipient party must not and will ensure that its employees do not use any of the confidential information otherwise than for the specified purpose, which is a defined term, defined to mean the purpose of promoting enhancing and establishing interest in the plaintiff's business and building, developing and realising that business. Clause 7.1 creates an exception by saying that the obligation to keep confidential does not apply once information comes to be in the public domain, otherwise than through a breach of the deed. Clause 8 is in the familiar form of an acknowledgment by the defendants, for what it is worth, that damages would be an inadequate remedy and that the plaintiff is entitled to injunction and specific performance. 13 The plaintiff points to the approaches made by the defendants to both suppliers of the plaintiff and members of the plaintiff as involving breach of the confidentiality deeds, specifically, I think, the provisions restricting use of information rather than its disclosure. The plaintiff makes an even wider case by saying that there is also a breach on restriction on use by setting up a rival business based on know-how and concepts of the plaintiff, including the training they receive from the plaintiff. 14 The defendants' case is, in essence, that most, if not all, of the material the plaintiff seeks to bring within the contractual restraint is in the public domain and therefore is not caught by that restraint. Mr Jacobs, counsel for the defendants, tendered numerous extracts from the internet in support of these contentions. It is appropriate to look at three species of material concerned: the membership information, the supply of information and the methodology information. 15 It is true that the names and contact details of a number of members are available on the internet. In fact, participants in the member to member segment of the programme, that is, members who use the programme not only as an advantageous buying tool but also as a selling and promotional mechanism targeting other members, receive, as part of their membership, inclusion in the EPP website with an online listing of their own business. Clearly, therefore, the particulars those members place on the website become available throughout the world to anyone with internet access. Rather than being kept confidential in any way, those particulars are subjected to processes intended to give them very wide publicity. The particulars, needless to say, identify by name and location the businesses of particular members. 16 Significantly, as I have said, Mr Wyke gave evidence that only about 20 per cent of members are listed in such a way that their particulars are accessible on the internet. The identities and addresses of the other 80 per cent are, he said, not publicly available. Significantly also, the membership renewal dates of 100 per cent of the membership are not publicly available. Annual renewal date information is something to which the plaintiff attaches particular importance, no doubt because each member is most vulnerable to being persuaded to desert the plaintiff, whether or not in favour of taking up some competing opportunity, when the annual renewal approaches. The first defendant admitted in cross-examination that the defendants do have, by virtue of their previous relationship with the plaintiff, details of the renewal dates of the plaintiff's members on the Central Coast used to be serviced by the defendants. 17 Turning next to the information about suppliers, it can be said at once that the identities, businesses and products of the national supplies with which the plaintiff has discount arrangements are widely known in the community. But the plaintiff points to an aspect of each such supplier which it does regard as not in the public domain, namely, the identity of the particular officer within the supplier organisation who needs to be contacted by someone wishing to negotiate favourable buying arrangements of the kind involved in the activities of the plaintiff and those the defendants seek to pursue. The plaintiff also points to the fact that when the defendants made an approach to one national supplier, and specifically to the relevant person within that supplier, they did so in terms which suggested they regarded the circumstances as confidential. 18 The third aspect concerns the more amorphous element of the plaintiff's know-how and concept. Counsel for the plaintiff says that the defendants were taught parts of this in the course of training and that they have absorbed other parts through working with the plaintiff. He further says that the plaintiff has special and valuable knowledge as to the pricing of supplier's products (or, more precisely, how one can so pitch pricing as to persuade someone to leave a current supplier in favour of one of the plaintiff's suppliers) which is not in the public domain. 19 The issue I have to consider in relation to each of these three areas is whether there is a serious question to be tried. Because the plaintiff expressly disavowed any intention of relying on equitable obligations of confidence, that issue resolves itself entirely into the question of breach of contract, in other words whether the defendants' activities involve use of information relating to the businesses of the plaintiff which is not in the public domain. 20 It must be said at the outset that part of the information that the defendants have used is in the public domain. I regard everything which is accessible through resort to the internet as being in the public domain. It is true that someone can obtain that information only if they have access to a computer which has a modem which connects to an internet service provider who, for a fee, provides a connection to the internet. But those barriers are, in my view, no more challenging or significant in today's Australia complete with internet cafes, than those involved in access to a newspaper or television content, both of which should, according to precedent, be seen as involving the public domain: See Duchess of Argyle v Duke of Argyle [1967] Ch 302 and G v Day [1982] 1 NSWLR 24. 21 I should also say that because this is a contract construction case, not a case about any equitable obligation of confidence, the question of serious question to be tried is not really concerned with inherent quality of the information concerned. So long as the information bears such a connection with the plaintiff as to bring it within the contractual description and is not within the exception related to the public domain, use of that information by the defendants will involve a breach of contract. Any breach of contract is enough for the purposes of the serious question part of the present enquiry. 22 That being so, I clearly must conclude that there is a serious question of breach of contract to be tried in relation to all three areas under review: the member area, the supplier area and the know-how or methodology area. In each case the plain fact is that the defendants gained information from the plaintiff in the course of their engagement as agents, which is not in the public domain. That excludes, I emphasise, information about suppliers and about members whose connection with the defendants appears on the internet, but only, of course, to the extent of the information so appearing. There is, therefore, no serious question to be tried in relation to the identities of the national suppliers or the identities of the members who also participated as potential sellers through the member to member programme and whose details appear on the internet. 23 It follows that, regardless of what I conclude about the balance of convenience, I will not make order 1(a) as sought or any other order retraining the defendants from approaching suppliers to any business competing with that of the plaintiff nor, I might say, would I make any order restraining approaches to named persons within such suppliers even if any such orders were sought, which they are not. The information that Telstra is a supplier of telecommunication services or Caltex is a supplier of petrol is in the public domain as, in my view, is the information that such companies have a hierarchy of staff prepared to entertain approaches from persons seeking to do business with those companies. 24 For the same public domain reasons I would not, regardless of the balance of convenience, make orders restraining approaches by the defendants to members of the plaintiff whose membership of the plaintiff are available for anyone to see on a website of the member or a website of the plaintiff. Again, the public domain exception makes the contractual restriction irrelevant. 25 It is necessary next to consider the balance of convenience. In doing so I put to one side, for the moment, the question whether the plaintiff's financial position is such as to call in question the value of an undertaking as to damages given by it. I shall come back to that. 26 In considering the balance of convenience, I must look at the hardship the defendants will suffer if the injunctions sought are granted. I must also, as I said, not impose upon the defendants restrictions and disabilities going beyond the contractual restrictions they have accepted. This is not a case involving a non-complete covenant nor a case involving the direct protection of a goodwill of a business. It is a case about a contract not to use or disclose certain information. 27 To my mind the balance of convenience favours the plaintiff as regards orders 1(c), 2 and 3 which are concerned with information about the plaintiff's know-how, concepts and business methods required by the defendants as a result of their connection with the plaintiff and the information about member renewal dates. The defendants will not be subjected to undue hardship pending final determination of the proceedings if they have to avoid those areas in their own business endeavours. 28 In relation to orders 1(a) and 1(b) I have already said that I do not regard them as warranted even on the view most favourable to the plaintiff on the issue of serious question to be tried, except to the extent that order 1(b) covers members whose memberships are not notified on any web page. As to those remaining members, I do not think that the balance of convenience operates to deny the plaintiff relief of the kind sought in order 1(b). The Central Coast is a large and populous area and, of course, the defendants can operate their own businesses as far as they like beyond the Central Coast. To be denied, pending a final hearing, access to members of the plaintiff other than those notified on the internet is not a major set back to them in their business endeavours. 29 The remaining orders, orders 4 and 5, are of a somewhat mechanical kind which do not raise particular issues of balance of convenience. 30 Let me turn now to the overarching balance of convenience issue to which I have already referred briefly and of which Mr Jacobs, counsel for the defendants, made a great deal, even to the extent of calling expert evidence from an accountant. That issue is the financial strength of the plaintiff or, more precisely, a suggestion that the plaintiff may not be able to perform the undertaking as to damages to be given as the price of an interlocutory injunction. 31 The relevance of this to the balance of convenience is clear. Reference may be made to the decisions of Hodgson J in Wentworth v Wentworth, unreported, 12 June 1997 and French v Chapple [2000] NSWSC 1240. In the former case his Honour said, "As regards the undertaking as to damages question, it is clear in my opinion that the inability of a plaintiff to give a valuable undertaking as to damages does not necessarily preclude the granting of relief. However, where one is balancing monetary disadvantages as between a plaintiff and a defendant, the inability of a plaintiff to give a valuable undertaking as to damages is a factor which can be taken into account in assessing the balance of convenience and may even be decisive." 32 I must therefore look at the evidence about the plaintiff's financial position beginning with the balance sheet as at 25 May 2001 which is in evidence as an annexure to Mr Wyke's affidavit of 30 May 2001 in which he emphasises that the balance sheet was prepared by the plaintiff's accountant only for internal use and is in the nature of management accounts. 33 The balance sheet was the subject of submissions by both parties. Mr Jacobs said it painted an excessively rosy picture for two main reasons. First, the current asset "Debtors" of $700,000 is admitted to include an expected but as yet a non existent receivable of $600,000 in respect of a franchise sale for which no contract has yet been concluded; and, second, the item "Shareholders Loans" of some $400,000 shown as part of shareholders' equity is in reality a debt owing to Mr Wyke's family trust. If these two items were adjusted so as more accurately to reflect their true nature, Mr Jacobs says, the position would be a reduction in assets by $600,000, an increase in liabilities of $400,000, thereby eliminating the net assets of $371,000 and creating a deficit. 34 Mr Marshall, counsel for the plaintiff, also submitted that the position presented in the balance sheet needs adjustment. He drew particular attention to the non current liability of $2 million described as "St George Convertible Notes" and the same $400,000 "Shareholders Loans" item to which Mr Jacobs had referred. 35 Mr Marshall drew particular attention to the effects produced in relation to those items by a convertible note subscription agreement dated as recently as 11 April 2001, made between the plaintiff, St George Bank, Mr Wyke's family trustee company and Mr and Mrs Wyke. That document is in evidence and is the source of two important pieces of information. First, the $2 million shown in the balance sheet in relation to St George Bank as a non current liability can only become repayable in certain narrowly defined events relating to insolvency and winding up of the plaintiff, and in all other events will be converted into shares with the result that it is appropriately viewed as quasi equity. Second, the shareholders loans of $400,000 are, by the convertible notes subscription agreement, subordinated so that they too can be called up only in narrowly defined circumstances with emphasis being in solvency and the like. 36 My assessment of the balance sheet is that there must be reservations about the current assets item to the extent of $600,000, that the shareholders loans of $400,000 are more appropriately positioned as shareholders funds or shareholders equity, given their subordinated character, and that the St George convertible notes item, shown as a liability, is also very much more in the nature of quasi equity. The overall result, therefore, is that the balance sheet is considerably stronger than it appears. 37 Most significantly, for present purposes, the balance sheet shows cash at bank of some $1.6 million. 38 The main issue in relation to the worth of an undertaking as to damages is concentrated more on cashflow and future earnings than on balance sheet strength. There are in evidence further elements of management accounts, including a six months income and expenditure statement covering the period May to November 2001 - necessarily, therefore, an income and expenditure projection or forecast with all the uncertainties that that entails. This shows a decreasing monthly cash surplus to a point where some $11,000 remains from a starting balance of some $1.3 million. But the projections are subject, of necessity, to a myriad of assumptions which are neither stated nor implied. It is virtually certain that if some financial necessity arose, expenditures could be rearranged and rescheduled. That is an entirely normal part of business life and financial management. There is also the very important point that the convertible note subscription agreement provides for the making of further advances by St George. That document in fact foreshadows the possibility that the plaintiff may, in due course, come to be a subsidiary of St George, from which I infer that the plaintiff is, in a sense, a satellite of St George and that financial support may be forthcoming from that quarter in circumstances of need. 39 To sum up on this, the plain fact is that the plaintiff has substantial cash reserves. There is currently more than $1.5 million cash at bank. Cash will be both generated and expended in the coming months and it may be that the balance will reduce, although no one can predict by exactly how much. There exists, however, a well disposed bank which, within the last two months, has extended credit facilities of $2 million to the plaintiff with every prospect of more. Furthermore, that bank intends that in the ordinary course the debt owed to it will be converted into equity, perhaps even to the extent that the plaintiff thereby becomes a subsidiary of the bank. 40 In these circumstances the picture of impending financial uncertainty and stress - even doom - which Mr Jacobs sought so strenuously to paint simply does not emerge. There is no basis on which I can or should conclude that an undertaking as to damages given by the plaintiff will be questionable in any way going to the balance of convenience. 41 My conclusion, therefore, is that the balance of convenience favours the grant of relief to the plaintiff, albeit in the modified form I have already indicated. 42 That leaves Mr Jacobs' application for security for costs. Because of the somewhat disjointed nature of the hearing, Mr Jacobs did not have an opportunity to explain the foundation of his application; that is, whether it was made on the basis of s.1335 of the Corporations Law or under Pt 53 of the Supreme Court Rules - not, however, that it really makes any difference. For reasons already explained at some length in relation to the undertaking as to damages, I do not regard the plaintiff's financial position and capacity to pay as beset by doubts which would justify any order for security for costs. 43 The result in relation to the various matters ventilated on 30 and 31 May is therefore as follows. 44 First, as already stated, the plaintiff has leave to amend its statement of claim to accord with the form which was handed up on 30 May and which I now initial and date. In fact, what I have before me is an executed and verified form of the amended statement of claim and I give leave for it now to be filed in Court. 45 Second, in relation to the confidentiality deeds, I will make orders which depart in some respects from those in the short minutes, for reasons I have already outlined. Specifically, order 1(a) is not made and 1(b) is qualified so as not to apply in relation to members and former members whose identities and status as members and former members are generally available on the internet. I will hand down now a copy of the orders in the short minutes marked to show the departures that I am making and another document headed "Orders made on 6 June 2001" which is a clean copy of the orders I now make without the revisions shown. 46 Thirdly, the defendants' application for security for costs is dismissed. 47 Finally, I will hear counsel on costs, although I might say that my inclination is to think that the appropriate outcome is that the plaintiff pays the costs of the defendants occasioned by the amendment of the statement of claim and any costs thrown away and that otherwise the defendants pay the plaintiff's costs of the applications before me. SUBMISSIONS ON COSTS

48 I will make orders for costs in the terms I have foreshadowed, namely, that the plaintiff is to pay the costs of the defendants occasioned by the amendment of the statement of claim and costs thrown away and otherwise the defendants are to pay the plaintiff's costs of the applications before me

EPP AUSTRALIA PTY LIMITED v LEVY & ORS NO 2749 OF 2001 ORDERS MADE 6 JUNE 2001 Upon the plaintiff through its counsel, giving to the Court the usual undertaking as to damages, the Court orders

1. that, until further order, the defendants by themselves, their servants or agents be restrained from: (a) approaching members or former members of the plaintiff whose names are or were obtained by or became known to the defendants from records of or information obtained from the records of the plaintiff or during the course of being agents of the plaintiff (not being members or former members whose identities and status as members or former members are generally available on the internet) for the purpose of seeking to offer those persons services in competition to the services offered by the business of the plaintiff; (b) using the knowhow, concepts and/or business methods of the plaintiff learned or acquired by the defendants as a result of their dealings with the plaintiff for the purpose of promoting, enhancing or establishing the business of any person other than the plaintiff.
2. that, until further order, the defendants by themselves, their servants or agents be restrained from using in any way any information in their knowledge or possession with respect to the renewal dates for members of the plaintiff.
3. that, until further order, the defendants deliver to the Court all records held by them which contain or record information about the renewal dates for members of the plaintiff.
4. that, until further order, the defendants by themselves, their servants or agents be restrained from using, copying or showing to any person any confidential information as defined in the Confidentiality Agreements dated 1 July 1999.
5. that the defendants preserve the original and all copies of any document as defined in the Dictionary to the Evidence Act containing or referring to the names of members or suppliers of the plaintiff.

Last Modified: 06/12/2001 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.