Alfa Laval companies
15 It was not seriously in contest that the ultimate holding company of the Alfa Laval group of companies, in 1984 was Alfa‑Laval AB, a company registered in Sweden ('Alfa Laval Sweden'). In 1984 Mr Smith entered into negotiations with Alfa Laval Hamilton Pty Ltd of Australia ('Alfa Laval Hamilton'), a subsidiary of Alfa Laval Sweden, with a view to commercialisation of the DSI Cooker which he had developed.
16 Mr Smith dealt with persons representing several different companies in the Alfa Laval group during the negotiation process, some of which companies were based in Australia and others in Europe. In Australia, Mr Smith primarily dealt with Mr John Farmer, a manager of an Australian subsidiary, Alfa-Laval Pty Ltd (this company became Alfa-Laval Australia Pty Ltd in 1987 and is referred to hereafter as 'Alfa Laval Australia'). In Europe Mr Peter Holmskov appears to have been Mr Smith's main contact. Mr Holmskov was a director of several European companies in the Alfa Laval group of companies, including a Danish company called Danish Membranefiltration and International Dairy-Engineering A/S ('Danish Membranefiltration'), a company registered in the United Kingdom called Alfa-Laval Cheese Systems Limited ('ALCS'), Alfa Laval Dairy Systems in Sweden and Alfa-Laval Filtration Systems, also Danish. It is worth noting here that the various Alfa Laval representatives agreed at the start of the negotiations not to make use of the material and ideas Mr Smith had provided without Mr Smith's permission.
17 After numerous discussions, it was agreed 'in principle' that Alfa Laval would co-operate with Mr Smith on the proposed commercialisation. On the strength of this oral agreement, even though a formal written agreement had not yet been entered into, ALCS filed patent applications for the DSI Cooker in the United Kingdom, the United States of America and Canada using the Original Drawings. Mr Smith was named as the inventor of the DSI Cooker on each of the patent applications.
18 On 18 September 1985, Mr Paul Pritchard of ALCS sent a draft consultancy agreement to Smith to formalise the relationship between Mr Smith and ALCS. The agreement with ALCS does not appear to have been finalised at that time.
19 It was not until 29 April 1986 that Mr Smith executed a consultancy agreement (the 'Consultancy Agreement') with Danish Membranefiltration. Mr Holmskov signed the Consultancy Agreement on behalf of Danish Membranefiltration. It is relevant to note that Danish Membranefiltration is defined as 'ALCS' in the Consultancy Agreement and subsequent correspondence refers to Alfa-Laval, ALCS and Danish Membranefiltration interchangeably; it appears from this that Danish Membranefiltration used the same trading name used by the United Kingdom company which was a party to the draft consultancy agreement referred to above, i.e. Alfa-Laval Cheese Systems.
20 Mr Smith was described in the Consultancy Agreement as having 'designed various processes and developed prototype equipment associated with food packaging'. Under the terms of the Consultancy Agreement Mr Smith assigned to Danish Membranefiltration all rights, title and interest in the following:
'3.1.1 all equipment, machinery, designs, drawings, information, machinery and any other relevant documents which may relate to the development of the Concepts;
3.1.2 all Prototypes, either wholly or partly completed;
3.1.3 all other ownership rights, including but not limited to patents, the right to apply for patents, copyright, registered designs and legal and beneficial ownership, in relation to the Concepts or in relation to any similar processes, inventions or equipment which he may develop or acquire in the course of providing Services during the duration of this Agreement or for six months after the termination of this Agreement.'
21 The 'Concepts' were defined in Schedule 1 of the Consultancy Agreement to include the processed cheese cooker, and other products, which Mr Smith had developed.
22 Mr Christopher Fenton, a director of some of the Australian subsidiaries which were members of the Alfa Laval group, Alfa Laval Hamilton and Alfa-Laval Engineering Pty Ltd ('Alfa Laval Engineering'), gave evidence that these companies were provided with a licence from Danish Membranefiltration to use the intellectual property rights assigned by Mr Smith in the Consultancy Agreement to commercialise the cooker in Australia. This licence was based on a discussion Mr Fenton had with Mr Holmskov sometime in 1986, during which Mr Holmskov indicated that if the Australian subsidiaries of the Alfa Laval group of companies wished to develop and sell the DSI Cooker in Australia, they had permission to do so. I find that the Australian companies were authorised by the Danish Membranefiltration to take the steps they did.
23 Danish Membranefiltration never proceeded to the commercial manufacture of the DSI Cooker. Shortly after entering into the Consultancy Agreement, Mr Holmskov informed Mr Smith by letter dated 3 September 1986 under the name of Alfa Laval Filtration Systems that 'due to a change in priorities they would not be proceeding with the commercialisation of the DSI Cooker'. The letter also referred to the patent applications, which had already been filed. It stated that the United Kingdom patent applications would belong to Mr Smith, but that the other pending patent applications would be maintained by Alfa Laval and that it would keep the patents on Mr Smith's behalf at no further cost to Mr Smith. However, in the event that Mr Smith chose to transfer those patents to someone else, then Alfa Laval would require Mr Smith to reimburse the group for any costs incurred by it in connection with those patents. Mr Holmskov also suggested that Mr Smith continue discussions with Mr Farmer, regarding the possibility of the Australian subsidiaries of Alfa Laval proceeding with the development and sale of the DSI Cooker for the Australian market.
24 Mr Smith took Mr Holmskov's advice and on 30 September 1986, Mr Farmer under the aegis of Alfa Laval wrote to Mr Smith on behalf of Alfa Laval Australia, setting out in writing the details of the discussions between that company and Smith regarding the commercialisation of the DSI Cooker. The letter indicates that although Alfa Laval was 'unable to commit to proceeding with this project internationally' the Australian subsidiaries 'would be more than willing to pursue the development of at least the (DSI Cooker), as set down in the agreement we will include in our pricing calculations the royalty payable to you on each sale'. It appears that the 'agreement' referred to in this letter was the Consultancy Agreement Mr Smith had entered into with Danish Membranefiltration. There is no evidence that a separate written agreement was entered into between Alfa Laval Australia and Mr Smith. Significantly for the present proceeding, Mr Smith continued to correspond directly with Mr Holmskov in Sweden regarding the future progress of the DSI Cooker.
25 Alfa Laval Australia, and its related companies Alfa Laval Hamilton and Alfa Laval Engineering, commenced the development of the engineering drawings for use in the commercial manufacture of the DSI Cooker in 1986. Neither party disputes that Mr Paul Watson, who was an employee of Alfa Laval Engineering, authored and produced most of the drawings for use in the manufacture of the DSI Cooker. These drawings are collectively referred to as 'the Alfa Laval Drawings'. The applicant submits that Mr Smith also contributed to the development and design of the DSI Cooker as depicted in the Alfa Laval Drawings by providing technical assistance to Mr Watson and because Alfa Laval Engineering used the original drawings and confidential information, which had been assigned by Mr Smith to Danish Membranefiltration which had in turn licensed or authorised Alfa Laval Engineering to use them.
26 In terms of the process used to produce the Alfa Laval Drawings, Mr Watson's evidence was that he was given copies of Mr Smith's Original Drawings at the start of the project. Mr Watson stated in affidavit evidence that the final version of the Alfa Laval Drawings was produced in 'constant consultation with Bob Smith discussing operational issues.' Mr Watson also gave evidence of the design features particular to the DSI Cookers. Mr Watson attributed the following design features to Mr Smith:
· The decision to have a vertical or upright cooking column as opposed to a horizontal cooking column;
· The design of the rotor was based on Mr Smith's experience with the 'Murray Goulburn' prototype discussed below; and
· The number of steam injectors and the decision whether to put steam injectors down both sides of the cooking column was a collaborative effort between Alfa Laval Engineering employees and Mr Smith.
27 According to Mr Watson's evidence, Teflon was the obvious choice of material for the steam injector nozzle, which was designed as the interface between the steam and the product as it did not produce 'burn on' of food products during the cooking process. The frame of the Alfa Laval cooker supporting the motor and cooking column was hinged to allow the entire cooking system to be tilted to facilitate cleaning and maintenance. Mr Watson's evidence was that the dimensions of the cooking column and the number of steam injectors were designed to be modified according to the volume and type of produce to be processed.
28 In 1987, Alfa Laval Engineering advised Mr Smith that it had commissioned the first respondent to manufacture the DSI Cooker. According to Mr Smith's evidence he met with Mr John Miller and Mr Janis Zakis, the directors of the first respondent at that time on numerous occasions during the development stages of the DSI Cooker. This is not disputed. Mr Watson also gave evidence that he told the first respondent that all changes to the design specification of the DSI Cooker were to be approved by Mr Smith. Mr Watson's evidence in relation to Mr Zakis was that during the drawing and design phase of the DSI Cooker Mr Zakis provided some input into the ultimate design of the DSI Cooker and the drawings, which were created by Mr Watson. Mr Watson said that Mr Zakis's input'was particularly concerned with matters which might simplify the manufacture of the machine . . . was quite standard input provided by a manufacturer to a designer to assist in the ease of manufacture'. Mr Watson also gave evidence that, unless specifically agreed, it was not the practice of Alfa Laval Engineering to pay 'companies for any advice, gratuitous or otherwise which may have been provided to assist in the manufacture of its equipment.'
29 A prototype DSI Cooker was developed and installed at the Murray Goulburn Cooperative Co Limited ('Murray Goulburn') processing plant in Cobram. Following the successful trial of the prototype DSI Cooker at Murray Goulburn, a commercial unit was later installed at that plant. Smith was paid $10,000 pursuant to the terms of the Consultancy Agreement and a further $2,330 in royalties, being 5% of the fee received by Alfa Laval Australia following the successful sale of the Murray Goulburn DSI Cooker.
30 During 1988, Mr Smith continued to correspond directly with Mr Holmskov in Europe and with Mr Farmer in Australia, seeking a commitment for the future manufacture of the DSI Cooker. It appears that Mr Smith was also seeking a form of joint venture with the Alfa Laval group of companies. Mr Farmer wrote to Mr Smith on 5 August 1988 to advise that without support from ALCS in Europe Alfa Laval Engineering would not be able to undertake a joint venture with Mr Smith.
31 In or about 1989, the first respondent manufactured a second DSI Cooker on behalf of Alfa Laval Engineering, for installation at the premises of Bonlac Foods Limited ('Bonlac'). Mr Smith was paid $400 per day to commission the Bonlac cooker. Mr Watson gave evidence that he prepared the drawings necessary for the manufacture of the DSI Cooker installed at the Bonlac processing plant, using the Murray Goulburn drawings as a base. Mr Watson further stated that he supplied those drawings, complete with manufacturing specifications, to the first respondent for use in the manufacture of the DSI Cooker. None of this is disputed. Mr Miller, a principal of the respondent at the time and until 1997, gave evidence that:
'The copyright notice on the drawings relating to the manufacture of the DSI Cookers manufactured by Kovan for Alfa-Laval made it clear that Alfa‑Laval was the copyright owner in the drawings and I cannot recall any suggestion from anybody that Alfa‑Laval was not the owner of the copyright in the drawings. As far as I am concerned Kovan did not and would not have sought to claim any copyright rights in relation to any drawing that Kovan created for the cookers it manufactured for Alfa‑Laval.'
32 It appears that the relationship between Alfa Laval and Mr Smith began to deteriorate in or about June 1989. Mr Smith gave evidence that he was disappointed that Alfa Laval could not make a decision about whether to proceed the commercialisation of the DSI Cooker. On 1 December 1989, Mr Smith wrote to Mr Dennis Hurran, who had replaced Mr Farmer at Alfa Laval Australia, to advise that he wished to terminate the Consultancy Agreement. In that letter Mr Smith stated that:
'I would like to recover my assets both intellectual and physical from your organization (sic) and I think we should meet to see how this can best be executed.'
33 On 8 May 1990, Mr Smith wrote to Mr Trevor Clarke of ALCS to press his claimed entitlement to the intellectual property rights in the DSI Cooker and acquired know-how. Mr Smith advised Mr Clarke that he was proceeding through his company, the applicant, with the commercial manufacture of the DSI Cooker and that he needed assurance from Alfa Laval that it would not seek to enforce the Consultancy Agreement or make any claims to rights in the DSI Cooker.
34 On 14 September 1990, Mr Clarke wrote to advise Mr Smith that under the terms of the Consultancy Agreement Alfa Laval retained the sole right for commercial exploitation of the DSI Cooker. However, Mr Clarke also informed Mr Smith that 'Alfa Laval would be willing to procure a re-assignment to [Mr Smith] by [Danish Membranefiltration] of all rights in the DSI Cheese Cooker.' Such an assignment would be subject to payment by Mr Smith of all costs incurred by the relevant Alfa Laval entity in respect of the patent applications.
35 A further exchange of letters occurred on 25 September 1990 and 19 October 1990 in relation to the reassignment of the intellectual property rights in the DSI Cooker. It is significant that on 19 October 1990, Mr Clarke of ALCS forwarded a facsimile to Mr Smith stating that:
'There is only one agreement with binding terms signed between both parties, this was dated 29th April 1986. To waiver the assignment rights of this agreement, we are asking for compensation in respect of patent application costs.'
36 Mr Smith was also informed, by letter dated 30 May 1991, that the original Alfa Laval entity, which had entered into the Consultancy Agreement, Danish Membranefiltration, had amalgamated with another division and all correspondence would therefore be signed by Alfa Laval Dairy Systems. On the evidence before the court all subsequent correspondence with European companies in Alfa Laval was signed on behalf of either Alfa-Laval Food Engineering AB or Alfa Laval Dairy Systems. Ultimately Mr Smith wrote to Mr Holmskov on 11 February 1992, confirming the agreement to terminate the Consultancy Agreement was to be effective from 1 June 1991. This letter was counter-signed by Mr Holmskov on behalf of Alfa-Laval Dairy Systems on 2 March 1992. It stated in terms that Alfa Laval Dairy Systems was the 'parent company of the relevant division of Alfa Laval (of which Danish Membranefiltration was a member) and that the parent company would take full responsibility for the proper fulfilment of all terms.'
37 It appears that the patent applications were allowed to lapse and consequently there were no patent rights existing at the time of reassignment, with the exception of a United States of America patent granted in respect of the casting line (US Patent No. 4735817). This begs the question as to what rights, if any, were reassigned to Mr Smith upon cessation of the Consultancy Agreement. Mr Smith claims that the consent to the letter of 11 February 1992 reassigned to him the Original Drawings and transferred to him the legal ownership of the Alfa Laval Drawings and any associated know-how acquired by Alfa Laval in developing the DSI Cooker (the 'Assigned Rights'). While the respondents do not challenge the facts they do challenge the validity of this assignment. The respondents also claim that the effect of the letter of 11 February 1992 was simply to terminate the Consultancy Agreement and submitted it does not have the effect of vesting any copyright in the Alfa Laval Drawings in Mr Smith and/or the applicant.
38 Mr Smith lacked the financial capacity to proceed directly to commercial manufacture of the DSI Cooker without Alfa Laval's support. Consequently Mr Smith, in his capacity as director of the applicant, approached Mr Miller and Mr Zakis of the first respondent with a view to the first respondent continuing to manufacture the DSI Cooker for sale by the applicant. As already explained, the first respondent had been engaged by Alfa Laval Engineering to manufacture the Murray Goulburn and Bonlac DSI Cookers.
39 Mr Smith commenced discussions with Mr Miller and Mr Zakis in or about 1990. Mr Smith claims that he advised Mr Miller that he wished the first respondent to manufacture the DSI Cooker as he was intending, through the applicant, 'to develop, market and sell the Smith DSI Cooker in the market place'. Mr Miller's evidence was that he made it clear to Mr Smith that the first respondent would not enter into any sort of manufacturing arrangement with Mr Smith concerning the DSI Cooker unless Mr Smith was able to obtain a clear assignment of rights to him from Alfa Laval. It is a point of contention between the parties in this proceeding as to whether further discussions between the parties were stalled pending the finalisation of the applicant's relationship with Alfa Laval.
40 The parties have given conflicting evidence as to the premise upon which the initial discussions took place. Mr Zakis claims that Mr Smith approached him on behalf of the applicant and asked whether the first respondent 'would be prepared to work with him in the development of a direct steam injector cooker system'. On 22 May 1990 Mr Zakis furnished the applicant with a quote on behalf of the first respondent estimating the price for the manufacture of the DSI Cooker. Mr Zakis attached some preliminary calculations indicating that the first respondent proposed to charge a 30% margin on direct labour and material costs for the manufacture of a Cooker on the applicant's order.
41 Although the precise terms of the arrangement between the parties is a contested issue, there is no doubt that an accord was reached whereby the first respondent would manufacture DSI Cookers on order from the applicant and the applicant would be responsible for the sale and marketing of each of the DSI Cookers, always provided Mr Smith was able to obtain back such rights as he had assigned to Alfa Laval.
42 According to Mr Smith's evidence, between 1990 and 1992, Mr Smith had numerous discussions with Mr Miller and Mr Zakis concerning the arrangements between the applicant and the first respondent for the future manufacture of the DSI Cooker. Most of those discussions took place at the first respondent's offices. In or about 1991, Mr Smith commenced discussions with a Dutch company called Vonk Foods concerning purchase of a DSI Cooker on an approval basis. On the strength of those discussions, the applicant obtained an initial quote from the first respondent on 19 November 1990 in which the first respondent stipulated that it would charge 20% on top of the direct costs of labour and materials of the DSI Cookers it manufactured on order from the applicant. The first respondent prepared additional quotes throughout 1991 in response to further queries from the applicant in relation to the DSI Cooker for sale to Vonk Foods. During this period there is also evidence that further drawings of the DSI Cooker were made in preparation for the future manufacture of the cooking machine.
43 The designs and drawings produced between 1990 and 1992 were ultimately used in the manufacture of the Vonk Foods DSI Cooker and are collectively referred to as the 'Vonk Drawings'. There is conflicting evidence between the parties as to the input each party had in the process of producing those drawings. The applicant claims that both Mr Smith and Mr Zakis undertook further drafting and design drawing work to make modifications to the DSI Cooker using the rights assigned by Alfa Laval. The respondents claim that Mr Zakis contributed the technical know‑how necessary to make the modifications and that Mr Smith did not contribute to the development phase of the DSI Cooker for Vonk, or any of the subsequent DSI Cookers manufactured by the first respondent.
44 One of the terms of the contract between the applicant and Vonk Foods was that in the event that the Vonk Foods DSI Cooker did not perform to the specifications, the applicant would refund the deposit monies to Vonk Foods. Mr Smith claims, and the respondents do not deny, that the applicant would have no recourse to the first respondent in that event. It is part of the applicant's submission that this was consistent with the course of dealings between the applicant and the first respondent between 1992 and 2002.
45 The applicant placed an initial order with the first respondent for a DSI Cooker for supply to Vonk Foods on 13 February 1992. According to the purchase order form, the first respondent was to 'construct and supply' a DSI Cooker and Vacuum Vessel with Control panel for export with delivery by the first week in June of that year. In response to the Vonk Foods order, on 3 March 1992 the first respondent supplied a revised version of the initial quote provided on 19 November 1990 to the applicant. That quote identified the items that the first respondent would manufacture, the labour costs, costs of material and services that allowed a margin for overheads and other expenses and a total price with a mark-up of 40%. The total price quoted was approximately $7,000 less than the actual price including margins, however, Mr Zakis maintained, in cross-examination during the hearing, that the lower price quoted represented a discount. Significantly for this case, any costs incurred by the first respondent for design and drawing work are not itemised in the quote. The applicant sent a final purchase order for the Vonk Foods DSI Cooker to the first respondent on 5 March 1992.
46 Between 1992 and 2002 the first respondent manufactured a total of 26 DSI Cookers. From about 1997 those DSI Cookers were marketed under the name RotaTherm, a trade mark owned and registered by the applicant (so that cookers called DSI Cookers until 1997 were called RotaTherm Cookers after 1997). Insofar as any manufacturing drawings produced relate to the DSI Cookers, whether sold under the RotaTherm mark or earlier, they are collectively referred to by the applicant as the 'RotaTherm Drawings'.
47 Although the precise details of the arrangement between the parties during the 10 years they worked together is a contested issue, it is evident that each of the DSI Cookers was manufactured under an arrangement similar to that employed with respect to the Vonk Cooker. Each of the DSI Cookers manufactured by the first respondent during this period was manufactured to the applicant's order and installed at the premises of each customer pursuant to orders placed by the customer with the applicant. The respondents acknowledge that the applicant has paid the first respondent for the supply of the DSI Cooker systems in accordance with the quotes provided by the first respondent to the applicant. However, it is the applicant's submission that the price paid for each of the DSI Cookers included an amount for the tooling, development, drawing, design, consulting, advisory and drafting services provided by the first respondent's employees in respect of the DSI Cookers. The respondents disclaim the existence of any agreement between the parties with respect to the copyright, confidential information or any other intellectual property rights relating to the DSI Cooker and cooker system. The terms upon which the parties agreed to conduct their dealings over the course of over 10 years, is a central issue in this case. In particular, it was a contested issue whether the applicant was entitled to claim any intellectual property rights in the Vonk Drawings and the RotaTherm Drawings. By the end of the hearing, the first respondent had conceded the applicant was entitled to all RotaTherm Drawings containing a title block naming the applicant. Essentially this covered the Vonk drawings.