FACTUAL BACKGROUND
49 It is appropriate to now address the salient facts.
50 Nelson was the inventor of various bicycle seat patents. Fazio Richards, formerly Nelson Seating Pty Ltd, was incorporated to own and exploit the bicycle seat patents, although formal assignments by Nelson of the bicycle seat patents to Fazio Richards were not completed until 2011.
51 Prior to 2011, Fazio Richards entered into various commercialisation ventures in respect of the bicycle seat patents. However, such ventures were largely unsuccessful. Moreover, by late 2010, most of the bicycle seat patents had lapsed. Further, Fazio Richards was without funds to engage in significant commercialisation or to defend the patents by infringement proceedings.
52 In early 2011, Nelson invited Strover to enter into arrangements to fund the commercialisation of the bicycle seat patents with Fazio Richards.
53 That invitation resulted in Fazio Richards, Ibis Way (a company owned and controlled by Strover) and Nelson entering into a Heads of Agreement dated 19 September 2011 (the Joint Venture Heads of Agreement) to formalise a joint venture between them.
54 Notwithstanding the assertions of Fazio Richards and Nelson to the contrary, which assertions I will deal with later, the Joint Venture Heads of Agreement has been the sole and governing agreement made by the parties in connection with the commercial exploitation of the bicycle seat patents. However, prior to the entry into of the Joint Venture Heads of Agreement, the Strover interests funded the reinstatement of the lapsed patents.
55 The Joint Venture Heads of Agreement provided that there should be a company to be used as the joint venture vehicle to undertake the venture. The company to be used was Icon-IP. Subject to one matter concerning the issue of a single "V" class share, which I will also discuss later, the shares in Icon-IP were held equally by Fazio Richards and Ibis Way. The directors of Icon-IP have been and are Gary Richards and Tony Fazio, who have also been directors of Fazio Richards.
56 In summary, the Joint Venture Heads of Agreement provided (see [94] to [99] below) that:
(a) Ibis Way was to be primarily responsible for the commercialisation activities, whilst Nelson was to be primarily responsible for research and development concerning the patents;
(b) Ibis Way would advance a line of credit to Icon-IP for use in the commercialisation of the bicycle seat patents;
(c) Ibis Way would also fund on an "as needs" basis the repayment of certain creditors of Fazio Richards, and pay an allowance to Fazio Richards of $2,000 per month;
(d) funds received by Icon-IP from the commercialisation of the bicycle seat patents would be applied in a particular order and within specified proportions, generally as follows:
(i) first, payment of any contingency fee to a third party;
(ii) second, repayment to Ibis Way of advances to Fazio Richards (other than the line of credit);
(iii) third, as to 60% of the remainder, retention by Icon-IP as working capital for further commercialisation activities;
(iv) fourth, as to 40% of the remainder, to the repayment of line of credit advances made by Ibis Way, then to Fazio Richards in the amount stipulated and then to Ibis Way and Fazio Richards in equal proportions, subject to adjustment; and
(e) if there was a deadlock in decision making, the issue would be referred to Stephen Stern, a partner in Corrs Chambers Westgarth, or a third party lawyer nominated by him, whose decision would constitute a "casting vote".
57 From September 2011, Icon-IP undertook commercialisation activities and infringement proceedings concerning the bicycle seat patents in China, Italy and the United States. I will elaborate on the US activities at this point and discuss the Italian litigation in a separate section of these reasons ([194] to [221]) when I discuss Icon-IP's amended cross-claim.
58 There were various third parties engaging in conduct that infringed the bicycle seat patents. In the United States, Icon-IP issued a proceeding in California against Specialized, a large bicycle manufacturer, seeking relief against it for the unauthorised sale by Specialized of products which infringed the bicycle seat patents (US proceeding). For this purpose, on 14 May 2012 Icon-IP retained Niro on a contingency fee arrangement. Icon-IP issued proceedings against Specialized in the United States because it was perceived that a successful result against Specialized would provide a strong foundation for commercial recovery from other infringing entities in the United States and elsewhere.
59 In relation to the US proceeding, Niro requested that one person be appointed to give instructions to Niro on behalf of Icon-IP concerning its conduct. On 2 August 2012, Strover was appointed as the attorney of Icon-IP for, inter alia, the purpose of giving such instructions. Although the relevant instrument was headed "Specific Power of Attorney", its form was a general power of attorney.
60 Icon-IP was successful in two interlocutory hearings in the US proceeding against Specialized. The first was a "Markman" hearing in April 2014 which concerned questions of construction. The concept of a "Markman" hearing derives from the description of the process endorsed by the US Supreme Court in Markman v Westview Instruments Inc 517 US 368 (1996) where questions of construction of the claims of a patent, including terms of art, which underpin both infringement and validity issues are dealt with by a judge alone rather than a jury in accordance with the Seventh Amendment guarantee. The second was an application by Specialized for summary judgment. Icon-IP was successful in both applications, with the result that its infringement proceeding was permitted to go to trial.
61 The US proceeding was listed for trial on 26 May 2015 but was settled subsequent to a mediation which occurred on 25 April 2015 in Maui, Hawaii, before Antonio Piazza, a mediator with substantial expertise and experience in US patent law. Niro and Strover represented Icon-IP at the mediation, the latter in accordance with the power of attorney. There is no question as to the competence and expertise of Niro to act on Icon-IP's behalf at the mediation or the quality of the mediator. I have no reason at all to doubt that the outcome achieved for Icon-IP was reasonable and commercial, indeed the best that could be extracted from Specialized at that time. Moreover, it was supported by both Niro and Mr Stephen Stern, a leading expert in IP litigation with decades of hard fought practical experience in such matters.
62 The present proceeding commenced by Fazio Richards and Nelson has been principally concerned with the conduct of the US proceeding and its settlement. In essence, the applicants contend that the settlement with Specialized was at an undervalue and that in making the settlement, Strover, Ibis Way and Icon-IP breached equitable and other duties said to be owed to Nelson and Fazio Richards. Let me elaborate further on some of the factual matrix at this point.
63 In early 2015, Nelson apparently formed the view that Strover was seeking to arrange a settlement of the US proceeding at what Nelson considered to be an undervalue. At that time, Nelson was not a director of Fazio Richards. Let me say at this point that Nelson in my view always took an overly optimistic view of the value of the bicycle seat patents and what could be realistically recovered from patent infringement proceedings, whether in the US or otherwise. His view no doubt was coloured by the fact that he was the inventor of the patents. It is also relevant to note that he is likely to have puffed up the value and potential recoveries from such infringement proceedings as part of his strategy to entice and wheedle support from third party investors in Fazio Richards. I do not need to elaborate further on that latter dimension. It should also be noted that Nelson had no expertise to opine on what could realistically be recovered in patent infringement litigation in the US or elsewhere. As far as I know he has no legal training, indeed no background in any academic discipline that might give him some authority to opine on such matters. Indeed, his attempt to second guess Niro and Mr Stern demonstrated an inflated view of the value of his own opinions. I will comment on his lack of reliability as a witness in more detail later.
64 In early 2015 an extraordinary general meeting of the shareholders of Fazio Richards was called. It was chaired by Gary Richards. At the EGM, Strover gave an update of the progress of the US proceeding. A resolution was then passed that Nelson be appointed as governing director, a position which under the Constitution of Fazio Richards gave him general authority in relation to the affairs of Fazio Richards. Apparently, as a governing director, he could exercise such authority and control without consultation with the other directors, namely, Gary Richards and Tony Fazio.
65 Shortly after his appointment as governing director, Nelson caused Fazio Richards to issue the present proceedings.
66 Before the commencement of the mediation of the US proceedings, Nelson and Strover apparently reached a joint position to be put at the mediation that settlement of the US proceeding should involve a payment of at least US$7.5 million by Specialized.
67 It is appropriate to set out some of the chronology:
(a) On 25 April 2015 Fazio Richards wrote to the respondents and put forward a proposal for the mediation (the "minimum terms" document). It was couched in terms "I put forward the following terms for Peter Strover to be authorized to accept as minimum terms at mediation …". There was reference to a minimum upfront lump sum payment of US$7.5 million to be made by Specialized.
(b) It would appear that as at 9.19pm on 25 April 2015 this was the position that the parties agreed would be put at the mediation (see for example Strover's email to Nelson and copied to others at that time).
(c) The mediation occurred in Maui on 25 April 2015 (Maui time). Settlement did not occur at this time. At this mediation, in attendance for Icon-IP was Strover and a Niro representative. In the evening of 26 April 2015 (Melbourne time), Mr Stern called Nelson and told him of the then unsuccessful mediation. Later that evening Strover spoke with Nelson and told him that further attempts would be made to settle.
(d) At 3.24pm on 27 April 2015, Melbourne time, Strover sent Nelson a draft "term sheet". It did not conform to the "minimum terms" document. It made reference to Specialized paying Icon-IP US$2 million. It provided in accordance with the Joint Venture Heads of Agreement for:
(i) US$720,000 to be paid to Niro;
(ii) US$1.28 million to be paid to Icon-IP.
(e) In response, Nelson forwarded (indirectly) a modified version of the "term sheet" back to Strover. It did not alter the US$2 million figure. One can infer from this that at this time Nelson did not take issue with the proposition that that was an acceptable sum for Specialized to pay. In other words Nelson was prepared to accept the reasonableness of the settlement figure vis-à-vis the third party. But importantly, Nelson's draft had a different proposal for distribution. He provided for:
(i) US$700,000 to be paid to Niro;
(ii) US$650,000 to be paid to Icon-IP; and
(iii) US$650,000 to be paid to Fazio Richards.
(f) Nelson's distribution proposal was not in accordance with the Joint Venture Heads of Agreement. There is a further point to be made. Whatever be the position of the "minimum terms" document prior to and at the formal mediation, which initially failed, these later dealings superseded the earlier "agreed" position, which only had force as the stance to be taken by Icon-IP for the mediation.
(g) The Nelson proposal was rejected by Strover. This was communicated to Nelson by Mr Stern by email on 28 April 2015 at 2.05pm. Mr Stern said that there was a deadlock that he would resolve. By email at 2.44pm on 28 April 2015 forwarded by Nelson to Mr Stern and Strover, Nelson attempted to revive the "minimum terms" document and to assert that only an agreement could be entered with Specialized on those terms and that if it was to be varied it needed his consent. The attempt was futile if not disingenuous. In a further email at 3.15pm on 28 April 2015 sent to Mr Stern and Strover, Nelson also asserted that there was no deadlock. By yet a further email at 3.52pm on 28 April 2015 Nelson requested further detail of the deadlock; he also made other unsubstantiated assertions.
(h) In response to this flurry of emails, Mr Stern forwarded an email at 5.06pm on 28 April 2015 to Nelson and others in the following terms:
Hi Paul
Thanks for your email. For the reasons below, I believe that there is a deadlock. I am proceeding to act on that basis.
You and Peter reached an agreement over the weekend but that agreement is no longer relevant as it was dealing with a hoped-for deal that was never even contemplated by Specialised.
There is now the possibility of another deal, albeit considerably worse, on the table. If this deal was offered as a possibility without a trial being due in 3 or so weeks, I would counsel against it. However, you are both facing a trial in 3 weeks where your lawyer has now informed you that he is likely not to be able to represent you at the trial. Secondly, in a patent enforcement program, avoiding a trial is very important, especially early on. Whilst a win at a trial would make a program against third parties easy, a loss in the first action and in the USA would totally kill the program.
In addition, the mediator, apparently a respected patent litigator, formed a very negative view of your chances in the case against Specialised. Further, Ray Niro is also concerned about the "story" that Specialised's founder could tell about a local boy made good. That does not mean that your legal case is weak, but as trials in the USA are before juries, this is an important factor.
Thus in my view, a trial against Specialised is risking everything. As for timing, informed of a likely deadlock about 6 hours ago. I should add that I do not agree with your statement that: "Accordingly, should Peter wish to vary those Agreed Terms, he may only do so with our consent." This shows that there is a dispute. and deadlock.
Peter has informed me that there is a possibility of a deal with Specialised that is similar to the deal that he sent to you yesterday in writing, but the figure to be paid by Specialised would be a final figure with no top up. This sum is likely to be about US$2 million. The deal would include a variation to the Heads of Agreement so that there would be a payment to your company of the first 15% of Icon's receipts after Niro has received its 35%. That amount would, in Peter's proposal, be held by Icon until the threatened and existing litigation commenced by you against Peter has been resolved. Peter would be recouped from further deals.
One of the keys to the proposed deal is that Specialised would not be allowed to disclose what payment it made to Icon and Icon would specifically be allowed to inform third parties that Specialised signed a settlement deal and took a licence and paid a fee.
This deal is infinitely preferable to risking everything in a trial and gives you a chance to gain momentum with third parties and gives you a chance to gain the top 15% of receipts.
On that basis, amongst others, I agree with the modified proposals by Peter.
Kind regards
Steve
(i) The content of Mr Stern's email, as best as I can ascertain, accorded precisely with what had transpired and the characterisation to be given to the relevant events. It also contained expert and, if I may say so, sage advice on the appropriateness of a settlement at around US$2 million. I also note that the risks of litigation were previously advised to Nelson and Strover (see for example the email from Frederick Laney of Niro dated 27 February 2015 at 9.29am).
(j) Thereafter, a signed settlement was reached between Icon-IP and Specialized. A term sheet was executed by 1 May 2015 and a more formal settlement agreement executed shortly thereafter.
68 In summary, notwithstanding the parties' prior position and optimistic expectations as to what could be achieved in terms of a negotiated outcome at the mediation on 25 April 2015, it became apparent that such a settlement could not be reached involving a payment by Specialized of US$7.5 million. It simply would not agree to pay such an amount. Niro then devised an alternative proposal to put to Specialized which involved settlement at a lower amount. Strover consulted Nelson in this regard to see if he would agree. Nelson responded by proposing modified terms of settlement with Specialized at about the figures advanced by Niro, but with some modifications. But as part of Nelson's response, he made it a condition of his proposal (not involving Specialized) that the Joint Venture Heads of Agreement be rewritten to change its distribution protocols in favour of Fazio Richards. Strover declined this proposal. Mr Stern then considered that there was a deadlock as to how the negotiations in Maui should continue. He then exercised his role as the deadlock breaker. I should say that Mr Stern was not called as a witness in the trial before me; no useful inference could be drawn against the respondents for their failure to call him.
69 I should say at this point that Nelson's conduct was less than impressive. He sought to use the opportunity of the mediation to obtain a collateral benefit for Fazio Richards (and ultimately himself) in terms of amendments to the distribution protocols of the Joint Venture Heads of Agreement. But what is also significant for present purposes is that he and Fazio Richards were prepared to accept the lower figure that Specialized was prepared to offer subsequent to the mediation, even though they now claim without any evidence or reasoned basis that such a figure was unreasonably low and that the settlement agreement entered into was somehow in breach of fiduciary duty by the respondents.
70 As I say, settlement occurred with Specialized and involved detailed terms.
71 The formal settlement agreement principally provided as follows:
(a) Specialized agreed to pay Icon-IP the sum of US$2,050,000, with US$750,000 to be paid to Niro and US$1,300,000 to be paid to Icon-IP (clause 2).
(b) Appropriate releases were given by Icon-IP in favour of Specialized and its affiliates and appropriate entities (clause 5.1). During the running of the case, Nelson raised in my view a false issue as to the scope of the release. He asserted that it went well beyond what could have been legitimately sought by releasing non-Specialized entities in relation to infringement activities concerning non-Specialized products outside the US. But his assertion failed to have regard to the last sentence of clause 5.1 and the definitions in clauses 1.5 and 1.6. If the release operated beyond Specialized to other persons, then it only operated in relation to Specialized products. That was an obvious and necessary limitation. Otherwise, Icon-IP could sue a non-Specialized entity for infringement concerning a Specialized product who could then in turn sue Specialized for breach of warranty etc. It was legitimate for Specialized to seek such a release and for Icon-IP to give it. Moreover, and generally, by reason of clause 1.6, the releases did not apply to non-Specialized products. Further, despite the applicants' assertions, Niro clearly had the authority of Icon-IP to negotiate such a release.
72 There were a number of considerations relevant to the settlement of the US proceeding that were the subject of evidence filed by the respondents. Nelson was undoubtedly an important witness in the US proceeding. Between February and March 2015, Niro sought the assistance of Nelson in relation to preparation for the trial of the US proceeding which was listed on 26 May 2015. But Nelson declined to fully co-operate. Moreover, he inappropriately sought to make his co-operation conditional upon the resolution in his favour of certain disputes with Strover (see for example the email chain ending with Nelson's email to Niro of 17 March 2015 at 12:51:29pm (CB482 to 486), the letter of J A Fillmore & Co dated 2 April 2015 to Clemens Haskin and Clemens Haskin's response of 7 April 2015). It is true that in evidence there were some emails from Niro suggesting that at times there had been some level of co-operation by Nelson (see Niro's email to Nelson of 1 April 2015 at 1:27am). But it would appear that the co-operation was not satisfactory (see Niro's email to Strover of 16 April 2015 at 10:12am (CB 705 and 706)). Moreover, it would appear that such emails were couched in language of politeness and expectation in an attempt to encourage further assistance from Nelson. But Niro was clearly concerned. Niro also advised Strover and, on at least one occasion, Nelson, that a failure by Nelson to co-operate in the trial preparation including the preparation of necessary evidence would be a serious risk to the success of the US proceeding if it proceeded to trial. At the mediation, this position was reiterated by Niro. Further, it was also said by the mediator that the patents were not strong. Further, prior to the mediation, Niro advised Icon-IP, which advice was also communicated to Nelson, of the risks of the litigation.
73 In summary, the settlement ultimately reached was for a lesser sum than that considered by Nelson and Strover prior to the mediation, but the amount of the settlement was consistent with the alternative proposal that Nelson had put to Strover (see [67(e)] above).