Liberty Financial Pty Ltd v Scott [2004] VSC 490

Supreme Court of Victoria|2004-11-30|Before: HARPER J

PLEADING - Application to further amend statement of claim - Confidential information - Allegation former employee misappropriated confidential information - Necessity to identify precisely the relevant information.

Liberty Financial Pty Ltd, ("Liberty") the first plaintiff in this proceeding, is a money lender. It claims to be the first financier in Australia to serve a specialised market: borrowers who, because they are not sufficiently credit worthy, are not of much interest to conservative lenders such as banks. Lending in this market has its risks; but if you have carefully identified these, and are astute enough, and if your lending policies are sufficiently sophisticated and flexible, there is money to be made. Indeed, Liberty claims to have developed, through skill and hard work, all the attributes necessary to exploit the market to the full. It wishes to preserve its position in it. But its very success is a reason why the competition is now fierce.

Bluestone Group Pty Ltd ("Bluestone"), the second defendant, is one of those competitors. One of its employees is the first defendant, Mr Trevor Scott. He formerly worked for Liberty in a senior managerial position. In December 1999, however, he resigned. He subsequently worked for a time with an association of finance brokers known as Australian Finance Group (Victoria) Pty Ltd; but this ended in July 2000 or thereabouts, when he commenced employment with Bluestone. He there held, as he had with Liberty, a senior managerial position. He continues to be one of Bluestone's executives.

Liberty blames Mr Scott for giving Bluestone a springboard into a market which before then belonged to Liberty alone. Guided by its managing director (the second plaintiff, Mr Sherman Ma) Liberty (as it claims) pioneered sophisticated techniques not only for the introduction of potential borrowers but also for the assessment of the risk each presented and the terms most likely to be acceptable to them and profitable to the lender. Liberty therefore answered a need that had been in part created by the very difficulty of meeting that need, and which could be met only by overcoming those inherent problems. Having done the hard work, Liberty wished to reap the rewards. Then Bluestone entered the scene. It required a springboard if it was to challenge Liberty's dominance. According to Liberty, it was Mr Scott who provided it. He did so by handing to Bluestone information about Liberty that the latter regarded as confidential. This was information that Mr Scott obtained through his employment with Liberty. Mr Scott knew of its great value. He also knew that it was confidential. Liberty and Mr Ma wish to put a stop to Mr Scott's, and Bluestone's, use of it.

The plaintiffs, by their current pleading, allege that Mr Scott has infringed Liberty's copyright in the literary works identified in paragraph 3 of that pleading. He is also, the plaintiffs allege, in breach of a confidentiality agreement into which he entered with Liberty on 15 May 1997. According to the plaintiffs he is similarly in breach of an employment agreement into which he and Liberty entered on 2 December 1998. Each of these agreements contained a clause which restricted Mr Scott in his ability to compete with Liberty, or work for a competitor, after his employment with the first plaintiff ceased. It is also pleaded that "an implied term of the employment of Scott by Liberty" precluded his use or disclosure of "any of Liberty's confidential information". It is not, as I read the amended statement of claim, pleaded that either defendant is in breach of a duty of confidence imposed by equity.

The plaintiffs invoke the aid of the Court in enforcing the contractual prohibition. First, they claim that the "confidential information" which they are entitled to protect covers Liberty's "products", its "assessment criteria", its "funding arrangements" and its "strategies". If this is so, then not much that could be known about the first plaintiff would not be protected. Secondly, each plaintiff seeks an injunction, both interlocutory and permanent, restraining the defendants from "exploiting, publishing, communicating or in any way disclosing, or causing, procuring, permitting or suffering the exploitation, publication, communication or disclosure to any person of the confidential information".[1] There is thus a direct link between the injunctive relief sought by the plaintiffs and the "confidential information" covered by that expression as employed in the amended statement of claim.

I now have before me a summons issued by the plaintiffs in which they seek leave to file and serve a second amended statement of claim. In the form it took at the time the summons was issued on 11 November 2004, the proposed pleading was exhibited to an affidavit of Shaun Sven Steffensen. It has been through several refinements since that date. The current version is the plaintiffs' presently extant attempt to allege that, properly defined, Liberty's confidential information covers as wide a field as that to which I referred above: in other words, Liberty's "originator list", its "loan products", its "assessment criteria", its "funding arrangements" and its "strategies".[2]

Particulars are given. The originator list is said to consist of information identifying "originators" (that is, "financial brokers, loan brokers, financial planners, accountants and solicitors who arrange loans on behalf of their clients, and who were accredited by Liberty to introduce potential customers to [it]"). The names and other particulars of the originators are said to be "contained" in a number of specified exhibits to an affidavit of Suresh Kanapathippillai sworn on 10 December 2001, and in certain emails and other specifically identified documents.

I have at present no particular difficulty with this aspect of the pleading, although I have not checked those documents in which, as the plaintiffs allege, its "originators" list is to be found. The other heads subsumed in the plaintiffs' definition of "confidential information" are, however, much more problematic. The "Liberty loan products", for example, are alleged to "comprise information identifying and describing each and all of the loan products of Liberty and includes [sic] each and every characteristic of each loan, the prevailing rates of interest, the attributes of a [borrower] which Liberty regards as appropriate for each product, the maximum loan-to-value ratio, [and] the maximum and minimum terms of loans." The particulars under paragraph 19 then specify a number of documents in which all this information is allegedly to be found.

The plaintiffs submit that, in describing Liberty's "loan products" in this way, and in similarly describing in terms of like generality the other heads of "confidential information", they have fulfilled all the relevant requirements of the Rules of the Supreme Court. These provide that every pleading shall contain in a summary form a statement of all material facts on which the party relies.[3] Such facts, however, must be distinguished from the evidence; for the Rules also require that a pleading not contain the evidence by which those material facts are to be proved.[4] Moreover, the effect of any document shall be pleaded as briefly as possible.[5] The precise words shall not be pleaded unless they are themselves material.[6]

The plaintiffs submit that what they have done is in entire accordance with the rules. To go further would be to descend into the evidence. It would also be to incorporate into the statement of claim not the briefest possible reference to the effect of the relevant documents but impermissibly to include large portions of the documents themselves.

The defendants take a completely different approach. They submit that the expression "Liberty Loan Products" suffers from the same lack of particularity as the other heads of "confidential information". They further argue that the additional material included under the heading "Particulars" to paragraph 19 of the proposed second amended statement of claim does nothing to remedy the deficiency. To tell the reader, for example, that the "Liberty Loan Products", information about which is confidential, "comprise information identifying and describing each and all of the loan products of Liberty" is to say nothing at all about what that information actually is.

The defendants rely upon a number of authorities in support. The first of these is a passage from the judgment of Brightman J in Amway Corporation v Eurway International Ltd,[7] a case in which the plaintiff claimed confidentiality in relation to certain business information contained in documents given to the defendant. But the plaintiff did not identify particular portions of the documents as being subject to a claim of confidentiality. Rather, it submitted that a cloak of confidence covered the whole. In a passage which Mason J reproduced in his judgment in the High Court case of O'Brien v Komesaroff,[8] his Lordship said:

"I asked the plaintiffs' counsel if he could point in his literature to some particular piece of information which he said was confidential and which he claimed the defendants were wrongly using. He told me that he pointed to nothing in issue here but to the entirety of the plaintiffs' documentary material which is in evidence. It seems to me that a claim for abuse of confidential information cannot really be dealt with in that way. If I made an order restraining the defendants from using for their own purposes any of the documentary material contained in the plaintiffs' business literature, but did not identify the particular information that the defendants are not to impart, they would be placed in a most embarrassing situation. I do not know how they could decide what business methods, literature and paper work to avoid using in order to keep clear of contempt of court; and I think that that is an insuperable difficulty in the plaintiffs' claim under this head. It is really another facet of the same point that the court cannot protect know-how of this type - cannot restrain defendants from making use of this type of information which they have acquired. I am not satisfied that the plaintiffs' literature ever came into the hands of defendants under any confidential badge; but, even if it had, it seems to me that it is merely know-how which the plaintiffs cannot keep exclusively to themselves. It is know-how which the law does not protect, and it is quite impracticable for this court to grant an injunction in the sort of wide general terms that the plaintiffs seek."

Another judgment upon which Mr Scott relied was that of Marks J in Independent Management Resources Pty Ltd v Brown[9]. His Honour there said:

"While the principles of law concerning the employee's duty not to disclose confidential information may now be stated with reasonable clarity, their application is often difficult. But it is made more difficult in the absence of clear identification of the information said to be confidential ... It is a corollary of this approach that the more general the description of the information which a plaintiff seeks to protect, the more difficult it is for the court to satisfy itself that information so described was imparted or received or retained by a defendant in circumstances which give rise to an obligation of confidence ..."

In Secton Pty Ltd v Delawood Pty Ltd[10] King J considered (among other things) the sufficiency of a set of particulars furnished by the plaintiffs. It contained 16 items each said to be a trade secret. Three columns were employed in respect of each item. The first contained what his Honour described as "more or less general concepts rather than detailed information".[11] The second column gave "details of the ways in which the said concepts were communicated to the individual defendants while they were in the plaintiffs' employ."[12] These, however, were not - and were not relied upon - "as trade secrets which have been disclosed or used by the defendants."[13] His Honour continued (at 155):

"I have been informed by Mr Merkel that before trial the defendants insisted on clear particulars of the trade secrets which they are alleged to have improperly disclosed or used, as distinct from the particulars of documents initially supplied by the plaintiffs as repositories of the said trade secrets. The defendants are entitled to such particulars."

In my opinion, the description in the proposed second amended statement of claim of the expression "Liberty Loan Products" fails to meet the requirements to which the above authorities refer. That this is so may be readily appreciated if one asks whether one of Liberty's competitors such as Bluestone would have been able to use the information in the form in which it appears in the proposed pleading. Suppose Mr Scott had told Bluestone no more than that the "Liberty loan products comprise information identifying and describing each and all of the loan products of Liberty and includes each and every characteristic of each loan, the prevailing rates of interest, the attributes of a [borrower] which Liberty regards as appropriate for each product, the maximum loan-to-value ratio, [and] the maximum and minimum terms of loans". Given that description, Bluestone would undoubtedly have told its informant that if that was the best he could do then he could not tell them anything of any use. Even were Mr Scott to supplement this information by reference to the documents to which the proposed amended pleading refers, Bluestone may well have required further assistance before being in a position to make any meaningful use of Mr Scott's proffered assistance; and Bluestone would certainly not have been able to conclude with confidence what it was in those documents that Liberty itself classified as being commercially confidential. It follows that Bluestone is not by this pleading placed in a position of knowing the case it has to meet. Moreover, neither Mr Scott, nor Bluestone should be confronted with the risk of contempt proceedings for failure to comply with the terms of an injunction that does not make plain what it is that they must not do.

The answer to the plaintiffs' points about the effect of the Rules of the Supreme Court on the form of the pleading is I think straightforward. The detail which in my opinion is required is not properly classified for these purposes as "evidence". On the contrary, it falls squarely within what under the Rules is "material fact". The plaintiffs' complaint is that Liberty's confidential information has been misused. It is therefore central to the plaintiffs' cause of action that the subject of the misuse was both confidential and information. It necessarily follows, in my opinion, that the statement of claim must specify and identify, with particularity, what information is the subject of complaint, and how it properly attracts the attributes of confidentiality.[14]

There is another reason why it is important that the pleading disclose precisely what it is that is said to be confidential information. While the law protects trade secrets, it is also astute to ensure that employees who acquire with one employer knowledge and expertise are not unduly prevented from exploiting those attributes to their own advantage as well as to the advantage of another employer of that employee, and thus the community as a whole. Non-trivial information which would otherwise be protected will not be so if, by reason of the nature of the information and the employee's or ex-employee's exposure to it, that information has become part of his or her general background knowledge; has become, in other words, inseparably incorporated in the form of his or her skill and experience. Thus in Stenhouse Australia Ltd v Phillips[15] Lord Wilberforce said:

"The accepted proposition that an employer is not entitled to protection from mere competition by a former employee means that the employee is entitled to use to the full any personal skill or experience even if this has been acquired in the service of his employer: it is this freedom to use to the full a man's improving ability and talents which lies at the root of the policy of the law regarding this type of restraint. Leaving aside the case of misuse of trade secrets or confidential information ... the employer's claim for protection must be based upon the identification of some advantage or asset inherent in the business which can properly be regarded as, in a general sense, his property, and which it would be unjust to allow the employee to appropriate for his own purposes, even though he, the employee, may have contributed to its creation. For a while it may be true that an employee is entitled - and is to be encouraged - to build up his own qualities of skill and experience, it is equally his duty to develop and improve his employer's business for the benefit of his employer. These two obligations interlock during his employment: after its termination they diverge and mark the boundary between what the employee may take with him and what he may legitimately be asked to leave behind to his employers."

This boundary is therefore important. It will be impossible to discern unless the statement of claim describes not in general terms but with specificity the confidential information which is the subject of the claim. Indeed, it seems to me that in this case the need for that specificity is acute. A reading of the proposed second amended statement of claim, together with a reading of some of the material upon which the plaintiffs, as at present advised, will seek to rely at trial, gives one reason to think that here the plaintiffs wish to assert that a blanket of confidentiality covers every item of commercial information in existence about Liberty. There appears to be no attempt to discriminate between (on the one hand) information "which can properly be regarded as, in a general sense, [Liberty's] property, and which it would be unjust to allow [Mr Scott] to appropriate for his own purposes" and (on the other) information which forms part of Mr Scott's own endowments of skill and experience. Yet that is a distinction which, by the nature of this litigation, the Court will be required to make. The Court cannot do its duty to the law and the parties if the pleadings preclude it from giving effect to that aspect of its function.

The plaintiffs in their submissions in support of their proposed second amended statement of claim protested that, were they compelled to include in that pleading full particulars of all the information they claim to have been both confidential and misused by the defendants, the document would (I advert to the effect rather than to the actual words of the submissions) grow to gargantuan proportions. This may be so. But if it is so, the problem may lie in the overreaching ambit of the plaintiffs' claim. They should, in my opinion, carefully consider what information they are entitled to protect and what Mr Scott is entitled - indeed, in the nature of things compelled - to take with him. In any event, as was made plain by Laddie J in Ocular Sciences Ltd v Aspect Vision Care Ltd[16]:

"The requirement of particularity may impose a heavy burden on the plaintiff. In a case where the plaintiff has a large quantity of confidential information and much of it has been taken by the defendant, the obligation to identify all of it might involve a great deal of time ... The normal approach of the court is that if a plaintiff wishes to seek relief against a defendant for misuse of confidential information it is his duty to ensure that the defendant knows what information is in issue."

It is for these reasons in my opinion necessary for the plaintiffs to replead so much of their claim as is based upon an allegation of the misuse of confidential information. Given the prevailing circumstances, it seems to me that this can best be done by giving the plaintiffs leave to replead in accordance with this ruling. I will grant that leave, and hear the parties on appropriate consequential orders.

[1] Proposed second amended statement of claim, prayer for relief, clause 1(b).

[3] Chapter 1 of the Rules of the Supreme Court, r.13.02(1)(a)

[14] Corrs Pavey Whiting & Byrne v Collector of Customs (Vic) (1987) 14 FCR434 at 443; Dart Industries Inc v David Bryar & Associates Pty Ltd [1997] FCA 481; (1997) 38 IPR 389 at 406.

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