Ezystay Systems Pty Ltd v Link 2 Pty Ltd

Judgment 1By notice of motion filed 4 September 2013 the defendants seek to set aside orders made by Justice Pembroke on 18 July 2013, namely the search order, and the order for confidentiality in respect of each of the affidavits of David James Ritchie sworn 17 July 2013, and of Jon Davis sworn 16 July 2013. 2It is noted that orders 2 and 3 of the terms of the judgments/order as entered refer to the affidavit of John Hilton Garrett sworn 17 July 2013, but not to the affidavit of Jon Davis sworn 16 July 2013. The transcript shows (T, p 4, l 13) that his Honour ordered that the affidavits of Mr Ritchie and Mr Davis be confidential, but made no such order in respect of the affidavit of Mr Garrett. It appears that the inclusion of the affidavit of Mr Garrett in orders 2 and 3 may be mistaken. On the present application the parties proceeded on the basis that the orders applied to the affidavit of Mr Davis. 3The plaintiffs have developed, and operate, a student accommodation business in Ultimo known as Ezystay, and associated bed, assets, and booking management systems. 4The defendants are related entities, to each other. The first defendant (Link 2) was incorporated on 6 June 2012. The third defendant (Mr Riches) is its sole director and secretary. Since about 16 July 2012 Link 2 has operated a student accommodation business through the website www.link2.com.au. During the period from about 1 September 2005 until 15 August 2012 Mr Riches was employed by the plaintiffs variously as an employee, contractor, and director responsible for developing and managing their business operations, and their intellectual property. His engagement with the plaintiffs terminated pursuant to the terms of a deed of settlement made on 13 August 2012 (the Deed). 5On 18 July 2013 the plaintiffs successfully moved the Court, ex parte, for search orders against all defendants in respect of intellectual property which included an operations procedures manual, a systems manual, booking management systems and software, all of which it claimed to be confidential. It was also ordered that the affidavits of Messrs Davis and Ritchie be marked as confidential affidavits. 6The defendants challenged the orders on the grounds that the plaintiffs did not discharge their obligations to the Court in making the application for the search order. They contended that the plaintiffs failed to bring the following material matters to the attention of the Court: (1)The terms of the Deed did not preclude the defendants from establishing a business in competition with the plaintiffs' business, and the defendants were entitled to do so. It was also claimed that the plaintiffs portrayed the defendants' conduct as underhanded and without justification, resulting in a misleading impression of their conduct; (2)Some of the material claimed to be confidential had been disclosed to third parties in circumstances such that the quality of confidentiality had been lost, and thus it was arguable that the conduct as alleged against the defendants would not be in breach of any obligation of confidence owed by them. 7It was also contended that the search order should not have been made as there was no evidence of either a threat of destruction, or of urgency, in the circumstances. 8With respect to the claim to set aside the confidentiality order in respect of the affidavits, the defendants contended that the information therein lacked the necessary quality of confidentiality. 9A search order is ordinarily made by the Court in the exercise of its discretion under Uniform Civil Procedure Rules 2005 (NSW), Part 25, r 25.19 for the purpose of securing or preserving evidence, and requiring a respondent to permit the entry of premises for the purposes of securing the preservation of evidence which may be relevant to an issue in the proceeding. The requirement of an applicant on an ex parte application to make full and frank disclosure to the Court of all relevant facts is well established. In Walter Rau Neusser Oel Und Fett AG v Cross Pacific Trading Ltd [2005] FCA 955 Allsop J (as he then was) said: [38] In an ex parte hearing, it is the obligation of the party seeking orders, through its representatives, to take the place of the absent party to the extent of bringing forward all the material facts which that party would have brought forward in defence of the application: Thomas A Edison Ltd v Bullock (1912) 15 CLR 678 at 681-82 per Isaacs J. That does not mean stating matters obliquely, including documents in voluminous exhibits, and merely not mis-stating the position. It means squarely putting the other side's case, if there is one, by coherently expressing the known facts in a way such that the Court can understand, in the urgent context in which the application is brought forward, what might be said against the making of the orders. It is not for the Court to search out, organise and bring together what can be said on the respondents' behalf. That is the responsibility of the applicant, through its representatives. ... [47] The high standard of candour and the heavy responsibility on those who seek ex parte orders is especially the case where (as it was here, and as will often be the case) a discretion is involved. The judge must be given the opportunity of analysing the facts from the perspective of any available case which can be put, or anticipated to be put, by the absent party. 10Although the obligation upon an applicant for ex parte relief "does not extend to disclosure of material facts of which he or she has no knowledge", it extends to disclosure of "that which being known, is, objectively, material to the exercise of the discretion, whether the materiality is appreciated or not": Hayden v Teplitzky (1997) 74 FCR 7 at 12 per Lindgren J. 11The factors for consideration as to whether there has been relevant non-disclosure were referred to in Brink's Mat Limited v Elcombe [1988] 1 WLR 1350 by Ralph Gibson LJ where, relevantly, his Lordship said at 1356G-1357H: ...(2) The material facts are those which it is material for the judge to know in dealing with the application as made: materiality is to be decided by the court and not by the assessment of the applicant or his legal advisers ... (4) The extent of the inquiries which will be held to be proper, and therefore necessary, must depend on all the circumstances of the case including (a) the nature of the case which the applicant is making when he makes the application; and (b) the order for which application is made and the probable effect of the order on the defendant ... (6) Whether the fact not disclosed is of sufficient materiality to justify or require immediate discharge of the order without examination of the merits depends upon the importance of the fact to the issues which were to be decided by the judge on the application... 12I turn first to matters disclosed to the Court when the application was made. The proceedings were commenced as a matter of urgency. The transcript discloses the information put before the Court. The draft statement of claim was received as an aide-memoire to assist in the understanding of the nature of the case. It was in the same terms as the pleading filed on 1 August 2013. 13The search orders were in aid of final orders for an injunction to restrain the defendants from using the plaintiffs' intellectual property comprised of the business manual, the elevator take, the systems manual, the trade dress, the software, and the software manual as defined, and to deliver up hard copies of documents recording the confidential business manual information, the confidential software information, and the confidential software manual information, and to destroy electronic copies thereof. 14At the outset, Senior Counsel pointed out that the "high point" of the case was the breach of an express covenant in the Deed for the return of intellectual property. His Honour then read the draft statement of claim and confirmed that the cause of action was for breach of covenant. His Honour read sequentially the affidavits of Jon Davis sworn 16 July 2013, John Hilton Garrett sworn 17 July 2013, David James Ritchie sworn 17 July 2013, Michael Garvin sworn 18 July 2013, Thomas Howard sworn 16 July 2013, and David James Ritchie sworn 17 July 2013. He proceeded to mark the affidavit of Mr Davis and one affidavit of Mr Ritchie as confidential. The exhibits were then tendered. 15The confidential affidavit of Mr Davis disclosed that he designed and developed the software over a period of many months. He said that in December 2011 he declined Mr Riches' request to develop a copy for him. He detailed his observations of the bed booking system on the websites and , and the similarities between it and the software he had developed for Ezystay. His opinion was that the design, or the design code, of the Ezystay software had been copied, and he stated the grounds for his opinion. 16The affidavit of Mr Garrett disclosed a history of Mr Riches' involvement with the plaintiffs. He gave an account of negotiations with Mr Justin Aitken of Bar Broadway between March and November 2011 in which he and Mr Riches participated. He said that Mr Riches prepared a presentation of the Ezystay student accommodation model proposed for Bar Broadway, which was presented in November 2011. He said that, during November 2011, Mr Riches and Mr Aitken exchanged versions of a Facilities Management Agreement (the FMA) which was a confidential document. He referred to a conversation in January 2012 in which Mr Riches indicated that he might move with his family to a ski lodge in Jindabyne after leaving the Ezystay Group. He said that during the week of 4 March 2013 he became aware that Mr Riches and Link 2 were operating a student accommodation business using the confidential information and intellectual property of the plaintiffs. It appeared to him to be a business exactly the same as, and modelled on, the plaintiffs' business. His affidavit included the factual basis upon which it appeared to him that Mr Riches had used the plaintiffs' confidential information to make an arrangement between Link 2 and Bar Broadway for the provision of student accommodation at the Bar Broadway premises. 17Mr Ritchie's confidential affidavit disclosed the bases on which the claims for confidentiality were made in respect of the operations procedures manual, the Ezystay systems model, the elevator take, and the FMA. He said that a number of drafts of the FMA were exchanged between Messrs Riches and Aitken for Ezystay to manage the accommodation facilities at Bar Broadway. 18Mr Ritchie's non-confidential affidavit set out a history of the development of the intellectual property and confidential information, and the involvement of Mr Riches in that process. At paras [42]-[51] inclusive, he referred to discussions with Mr Aitken concerning the provision of accommodation using the Ezystay model. He referred to the fact that Mr Riches had told him that he had organised for the Sydney College of English Language (ELC) to inspect Bar Broadway as it had expressed interest in placing its students there if the Ezystay model were replicated at those premises. He said that at a meeting on about 14 December 2011 Mr Riches informed him that Bar Broadway was not interested in proceeding with the proposal at that time, but would perhaps do so later. 19His Honour was then taken to the Deed and, in particular, to the following clauses: (1)(d) Confidential Information means all information, trade secrets, ideas, knowledge, concepts, and processes whether in writing or otherwise, which is confidential and which: (i) Relates in any way to the Group or its affairs, business, Intellectual Property, procedures, methodology, or systems, or its sales, marketing, business or promotional plans or information, or its personnel, products, services, partners, associates, suppliers, service providers, contractors, principals, agents, or Customers; or (ii) Includes all information or knowledge acquired by any of the Riches Parties or their Related Entities as a result of the Group permitting any of the Riches Parties to have access to any of its Confidential Information. ... (4)(c) The Riches Parties shall: (i) Return all property of the Group, and all hard copies of the Group's Confidential Information and Books, Records, Materials and Documentation, including all documents relating to 423 - 427 and 617; (ii) Cause all electronic copies of the Group's Confidential Information and Books, Records, Materials and Documentation, including all documents relating to 423 - 427 and 617, in the possession of the Riches Parties or their Related Entities to be deleted after a copy has been provided to David; ... (8) The Riches Parties shall treat Confidential Information as subject to a duty of confidence, and must not, and must ensure that their Related Entities do not, directly or indirectly, without the Group's prior written consent, disclose it to anyone, or use, copy or reproduce it for any purpose (including competing against the Group or acting on behalf of any person competing against the Group), save as required by law. ... (9) The Riches Parties warrant and agree that: (a) All Intellectual Property created or developed by, in relation to or in connection with the Group, belongs to and vests in the Group exclusively; 20Mr Garvin's affidavit disclosed that he was the plaintiffs' solicitor, and provided evidence of the several matters specified in Practice Note SC Gen 13. In particular, it included the following: 13. I am instructed by the Plaintiffs' director, David James Ritchie, and their consultant, John Hilton Garrett, who had the dealings with Mr & Mrs Riches, that: (a) Mr Riches currently works from home; (b) Mr & Mrs Riches worked from home while they were contracted with the Plaintiffs, using desktop, laptop and/or tablet computers, and a mobile telephone, emails and online storage facilities including "ShareFile", Google and Drop Box; (c) Mr Riches did not return the Plaintiffs' Confidential Information, property, Books, Records, Materials and Documentation as he was required to under the Deed of Settlement he executed with the Plaintiffs; (d) it is likely evidence of that retention will be found on the Respondents' computers and online storage and email accounts; and (e) there is a real risk that such evidence will be destroyed or removed once these proceedings are made known to the Defendants. 21Mr Howard was, for the purposes of the application, the independent solicitor. It is unnecessary to refer to his affidavit. 22The draft statement of claim referred to a number of clauses in the Deed. In para 21, clauses 4(c)(i) and 4(c)(ii) were referred to as the "Property Return Covenant", and in para 22, clause 8 was referred to as the "Confidentiality Covenant", and in para 23, clause 9 was referred to as the "IP Covenant". The allegations of breach of these covenants were pleaded in paras 56-60. Senior Counsel confirmed that these were the covenants claimed to have been breached. 23Senior Counsel put that the purpose of the search order was to secure and preserve the material for the purpose of the proceedings, and to preserve its confidentiality, and to prevent its further use. In conclusion, his Honour stated that on the basis of the affidavits and identified exhibits he was prepared to make the orders. 24The first ground of challenge was the plaintiffs' failure to disclose that the defendants were entitled to operate a business in competition with their business. It was put that the evidence of Mr Riches' association with Bar Broadway, and the submission that Mr Riches was setting about establishing a relationship with a potential customer of the plaintiffs whilst using their intellectual property, software, and trade dress was likely to generate the misleading impression that the defendants engaged in conduct which was underhanded and in breach of the Deed. It was put that these circumstances prompted his Honour to ask (T, p 5, l 22) "You say that is a smokescreen or something?". 25It was put that in this context the plaintiffs were bound to disclose the terms of clause 7 of the Deed which, relevantly, provides: (7) The Riches Parties shall not, without David's written consent, directly or indirectly, in any capacity: (a) Solicit or seek custom from, or enter into any agreement or business relationship with, any Customer; ... within 12 months of the date of Completion, or if a Court of competent jurisdiction determines that period to be unreasonable, within the maximum period that the Court determines is reasonable. and also the definition of "Customer" in clause 1(e) which provides: Customer means any person or entity with whom any of the entities within the Group contracted, or had a business relationship, from which contract or business relationship the Group derived any revenue within the 12 months preceding the Time of Completion. 26It was put that these provisions demonstrate that the defendants were under no restriction from commencing business in competition with the plaintiffs and, in particular, that Bar Broadway was not a customer within the meaning of clause 7(a). Accordingly, it was put, the defendants' association with Bar Broadway was not conduct in breach of the Deed and these were matters that should have been disclosed to the Court on the application. 27In my opinion, the challenge should not be upheld. As was made plain, the claims of the plaintiffs were based on the alleged breaches of clauses 4(c)(i), 4(c)(ii), 8 and 9 upon the failure to return their property, and the misuse by the defendants of their confidential information and intellectual property. These claims founded the application as made. Considerations concerning the scope and application of clause 7(a) were irrelevant to the issues under the causes of action adumbrated before the Court. It follows that, in my opinion, the existence or effect of clause 7(a) and that there was no contractual restraint upon the defendants doing business with Bar Broadway were not material matters for disclosure by the plaintiff. 28Furthermore, it is improbable that Senior Counsel's acceptance of his Honour's suggestion that Mr Riches' assertion that he intended to move to a ski lodge was a "smoke screen or something", and the related submissions, were capable of generating a misleading impression. His Honour's remark was triggered by the evidence of what Mr Riches said to Mr Garrett. When considered in context, the submission to the effect that Mr Riches proceeded to set up his own business using the intellectual property and software of the plaintiffs instead of moving to a ski lodge was plainly open. However else it may be described, I fail to see how the conduct complained of amounts to a failure to disclose a matter material to the application. In my opinion the defendants' criticism is unwarranted. 29The next ground of challenge was the plaintiffs' failure to disclose the fact that material claimed to be confidential had been disclosed to third parties in the course of the plaintiffs' business. It was put that the effect of clause 8 of the Deed restrained the use of information without consent to confidential information as defined in clause 1(d). The information claimed to be confidential was specified in para [25] of the draft statement of claim as the business manual, elevator take, and systems manual. It was put that as this material had been disclosed to third parties it was arguable that its quality of confidentiality had been lost. Thus it was put that these matters were relevant to whether the claim for confidentiality could have been maintained and, accordingly, were material matters which should have been disclosed to the Court when considering whether to make a search and preservation order. 30The defendants relied upon the provision of documents to Mr Aitken of Bar Broadway and to Mr David Scott, the Director of ELC, who were potential customers of the plaintiffs. 31As to Mr Aitken, his evidence was that he was a director of the company which owned the Bar Broadway hotel. From about 2010 he had discussions on a number of occasions with Mr Riches concerning the provision of student accommodation at Bar Broadway, in the course of which he received documents including a draft FMA relating to the plaintiffs' systems. The draft FMA included clause 3.1(e) which prevented disclosure, and required keeping confidential these documents. In cross-examination Mr Aitken said that his understanding with Mr Riches was that all business dealings and discussions were confidential, and he was concerned to maintain confidentiality. The agreement to maintain confidentiality during negotiations was evidenced by the email correspondence of 3 March 2011 (Ex 2). 32Mr Ritchie's affidavit referred to discussions with Mr Aitken for the provision of accommodation at Bar Broadway, including revision of the draft FMA. 33The evidence establishes that the negotiations concerning the provision of services for Bar Broadway and the finalisation of an FMA were conducted on a confidential basis. Disclosure of information did not go beyond Mr Aitken. The circumstances in which the documents were provided to Mr Aitken were before the Court in Mr Ritchie's affidavit. On this evidence it could not be said that their confidentiality had been lost (Franchi v Franchi [1967] RPC 149; G v Day [1982] 1 NSWLR 24). In my opinion there was no matter relevant to the dealings with Mr Aitken about which the plaintiffs were in breach of their duty to make disclosure. The defendants' challenge on this ground is rejected. 34As to ELC, Mr Ritchie's evidence was that Mr Riches' duties involved managing relationships with ELC which housed some of its students at premises in Ultimo. He said the premises were fully occupied under an FMA between the first plaintiff and ELC, described as confidential, which had been arranged by Mr Riches. He said, in effect, that the accommodation services were in accordance with the Ezystay model as described. 35Mr David Peter Rydon, the defendants' solicitor, deposed in his affidavit of 3 September 2013 to a conversation with Mr David Scott in which he was told that ELC had signed an FMA with the first plaintiff which had been seen by several employees of ELC. Mr Rydon said he later inspected the FMA at ELC's offices, and noted it was in terms substantially similar to the FMA which Mr Ritchie in his affidavit had described as confidential. 36The defendants argued that, contrary to their duty to do so, the plaintiffs failed to disclose the fact that ELC had received a large body of information claimed to be confidential in circumstances where arguably the plaintiffs had not treated it as being confidential. 37In my opinion the challenge on this ground should also be rejected. The evidence of the provision of services to ELC under an FMA was before the Court. The Document was described as confidential. The evidence overall demonstrated ample support for the claim that it was. It may safely be expected that Mr Ritchie's evidence as to the provision of services under the FMA gave to his Honour the understanding that, necessarily, employees of ELC knew of the information in some or all of the relevant documents. There was no evidence of disclosure to persons other than employees. In my opinion there was no evidentiary support for the proposition that the plaintiffs failed to discharge any obligation of disclosure concerning ELC. 38For these reasons I propose to refuse the application to set aside the search orders made on 18 July 2013. 39In so deciding I have not overlooked the defendants' submissions that there was no, or no sufficient, evidence of either a threat to destroy the information, or of urgency, which justified the making of the orders. For present purposes it is unnecessary to canvass the submissions in greater detail than the following. 40Relevant to the issue of whether there was a real possibility of threat to the property, Practice Note SC Gen 13 para 8(c) requires that affidavits in support of an application for a search order should include information as to why the order is sought, "...including why there is a real possibility that the things to be searched for will be destroyed or otherwise made unavailable for use in evidence before the Court unless the order is made". 41The defendants contended that the only evidence on this issue was the assertion in Mr Garvin's affidavit of 13 July para 13 (e) "...there is a real risk that such evidence will be destroyed or removed once these proceedings are made known to the Defendants". 42On the issue of urgency, the Defendants pointed out that Mr Garrett (affidavit 17 July 2013, para [34]) disclosed that since about 4 March 2013 the plaintiffs had been aware that the defendants' operations appeared to involve the use of the plaintiffs' confidential information and intellectual property. Reference was also made to Mr Rydon's evidence that Mr Garvin had told him that he had been working on the matter since March 2013. It was put that the delay in making the application indicated no reasonable basis for fearing destruction so as to necessitate orders for search and preservation. 43The application may not be treated as a de facto appeal. The Court was satisfied on the evidence, and with the answer as to the purpose given by Senior Counsel, that, in the exercise of judicial discretion, the orders should be made. The want of evidence points provide no basis for disturbing these orders. 44I now turn to the defendants' application to set aside or vary the orders as to confidentiality of the affidavits of Mr Davis and Mr Ritchie. In particular, relief was sought in respect of paras 13, 14, 15, 16, 17, 19, 33, and 54, and confidential "Exhibit DJR 2" of the affidavit of Mr Ritchie, and in respect of paras 5, 6, 9, 12, 24 and Annexure D of the affidavit of Mr Davis. 45I am unpersuaded that, at the present stage of the proceedings, the interests of justice require any interference with the orders otherwise than by consent. Although interlocutory, the orders appear to have been intended to remain in force until the final determination of the proceedings. Such orders are ones which a court would not usually vary unless there has been a material change in circumstances, which is not the present case. It was not put that continuation of the orders will operate to impede the defendants in the preparation and management of their case. In any event, by letter of 7 August 2103 to the plaintiffs' solicitors, Mr Riches was allowed access to the confidential documents, including the information specified, for the purpose of the proceedings, provided he gave an appropriate undertaking. 46Should a demonstrable need arise to vary or set aside these orders prior to the final hearing it will be open to the defendants to seek appropriate relief. Accordingly, the application to set aside the confidentiality orders for the affidavits of Mr Davis and Mr Ritchie is refused.