Maniotis v J H Lever & Co Pty Ltd ACN 008 220 666

Federal Court of Australia (Full Court)|2006-02-17|Before: Bennett JJ

REASONS FOR JUDGMENT 1 This appeal is against two of the costs orders made by the primary judge when dismissing proceedings brought by the respondent, J H Lever & Co Pty Ltd ('Lever Co'). The dismissal was a consequence of Lever Co's election not to tender evidence and of his Honour's refusal of leave to discontinue because discontinuance would not have permitted him to make the costs orders now in issue. The order that Lever Co pay the appellants' costs until 17 September 2004 is not in issue. One of those orders required the first to third appellants to pay Lever Co's costs for a period prior to the order to dismiss (18 September 2004 until 1 February 2005); the other denied costs to the first to the third appellants for the period immediately prior to the dismissal hearing (2 February 2005 until 7 March 2005). We would emphasise at the outset that the circumstances giving rise to the orders in question were quite distinctive. 2 The proceedings between Lever Co and the four appellants originated in an application for preliminary discovery under O 15A rr 3, 6 and 12 of the Federal Court Rules. Put shortly, the circumstances giving rise to that application were as follows. Lever Co was a manufacturer and wholesaler of fragrances, the recipes for which were confidential. The first appellant, Con Maniotis, had had access to those recipes when an employee of Lever Co. Shortly after leaving that employment he was engaged by the second appellant, Taste Master Pty Ltd ('Taste Master'). Taste Master commenced to manufacture and sell certain fragrances which Lever Co considered had very similar, if not identical, names and characteristics to certain of its own fragrances. Lever Co suspected that Mr Maniotis had improperly taken the confidential recipes when leaving its employ and had made them available to Taste Master. The third appellant, Andrew Fotheringham, is a senior employee of Taste Master whom Lever Co suspected was participating in the copying of its fragrances. 3 To anticipate matters, it is possible to "reverse engineer" or "match" recipes for fragrances by chemical analysis of them through a process utilising a Gas Chromatograph/Mass Spectrometer ('GCMS'). This, apparently, is a relatively common industry practice. As the primary judge noted, such matching produces a documentary or computer trail, the GCMS data containing amongst other things chromatographic or "trace" reports (which are a graphical representation of the chemical analysis of fragrances) and peak reports (which are computer generated presentations of the individual components of fragrances by listing the elution time and amount of the chemicals present in the fragrance). Taste Master's computer records, which were seized at the initiation of the preliminary discovery process pursuant to an Anton Piller order, showed the matching of 27 of the 32 recipes allegedly taken by Mr Maniotis. The appellants were to contend that the remaining 5 of the 32 were produced from recipes acquired lawfully from an interstate fragrance manufacturer.

THE PROCEEDINGS AT FIRST INSTANCE 4 The first order made by the primary judge in the preliminary discovery proceedings was in the nature of an Anton Piller order under O 15A r 12. That order was made ex parte, a fact which may itself have coloured subsequent dealings with the parties. The order provided for the seizure and inspection of specified documents, for the interrogation of computers or hardware to that end and for the inspection, interrogation and analysis to be undertaken by two independent experts nominated by Lever Co, Ms Perrin (a patent attorney and qualified chemist) and Mr Brett Lodge (a computer engineer). The experts were to provide reports to the Court. 5 In the application for interlocutory relief filed on 13 October 2003, Lever Co sought inspection of the computers by Mr Brett Lodge and orders to facilitate such inspection. The orders for discovery relating to GCMS were not limited to traces and extended to 'all or any working notes or papers purportedly created while producing a fragrance recipe from such reports'. 6 On 17 October 2003 the primary judge made orders enabling Ms Perrin and Mr Brett Lodge to execute the Anton Piller orders, which included orders for access to the appellants' computers. The orders gave Mr Lodge access to the data and the ability to copy or obtain the data on the computers. 7 When seeking ex parte orders on 24 March 2004, counsel for Lever Co said that Ms Perrin would be able to use computer files to make direct comparisons between the recipes. The primary judge was told that 'fairly soon after this process is undertaken' Lever Co would know whether to proceed. 8 The matter to be provided to Ms Perrin included: 'Identification of and access to any gas chromograph/mass spectrometer ('GCMS') and all computers that operate programs described as 'Pastel', 'Formulate', 'AAP', 'Lotus Notes' software or any derivation or software storing data relating to recipes or any other customers of the same in order that Ms Perrin may direct Mr Brett Lodge to the said GCMS and computers.' Importantly for present purposes, because the documents and materials to be seized and preserved were likely to contain confidential information of Mr Maniotis and Taste Master, the orders made included steps to secure that material from Lever Co and its directors. Subsequent orders reinforced the quarantining of those documents and materials such that it was only on 6 December 2004 that the hard drive containing GCMS data, copies of which were held by Mr Lodge, was discovered and made available to Lever Co's solicitors and it was not until 23 December that it could be inspected by Lever Co's directors. 9 Ms Perrin provided two reports to the Court on 26 and 30 March 2004. These were made available initially to the parties' legal representatives and then later, by order, to Lever Co's directors, Hermina and Roland Lever. 10 In Ms Perrin's first report she acknowledged that she had no particular background or expertise in relation to the creation or comparison of perfume formulations; the second report disclosed she had no specific experience of fragrance analysis by GCMS. Though Ms Perrin found nothing in the seized materials that was attributed to Lever Co, she compared the Taste Master recipes with the Lever Co recipes and this provided a sufficient basis for her to find that 'the fragrance recipes now in use by [Taste Master] have not all been the result of their own diligent efforts and that the similarity to [32 of] the Lever recipes indicates that these recipes have been used in the development of the Taste Master fragrance business'. 11 On 3 April 2004, Lever Co's solicitors, Lancione Partners ('Lancione') wrote a letter to the solicitors for the appellants, Rosey Batt & Associates ('Batt') which included the following: 'I have been instructed that during the meeting between our respective clients on 2 April 2004 that Mr Fotheringham told my client that he could produce GC evidence for traces or records indicating development of all the fragrances that J H Lever & Co are claiming infringement of.' (emphasis added) This seemed to be in the context of concern that Mr Fotheringham had seen Ms Perrin's report. An explanation was sought. The statement attributed to Mr Fotheringham appears to have influenced the further discovery sought by Lever Co on 1 June 2005. On that date, as part of the preliminary discovery application, an order was made for further discovery relating to the 32 recipes. It included the following categories of documents:

'(c) Records of Gas Chromatograph/Mass Spectrometer ("GCMS") traces that evidence traces done for any recipe or part thereof of any fragrance made and all or any working notes or papers purportedly created while producing a fragrance recipe from such reports … (d) Records of GCMS traces and all or any working notes or papers purportedly created while producing a fragrance from such reports that evidence any recipe or workings for any recipe for any fragrance referred to in the reports of Ms Perrin …' (emphasis added) The particulars refer to working papers, whether handwritten or computer generated, in the preparation, creation and/or development of the fragrances. 12 On 29 June 2004 the appellants filed and served a list of documents in response to, and to comply with, that order. An amended verified list of documents was provided on 22 October by which time ten peak reports had been discovered. 13 At a directions hearing on 8 July 2004, counsel for Lever Co commented on the absence in the discovered documents of working papers and, based upon Ms Perrin's report, on the expectation of more than one trace for each fragrance. He said that it was necessary to go to the originals of the documents inspected for the purpose of seeing whether they contained "notations". He sought inspection of the set of the documents that had been produced in hard copy, which were on computer discs provided by Mr Lodge. The discs themselves had not been discovered. The information was in a number of CD's which were not subject to inspection because they also contained information confidential to the appellants. The primary judge said that inspection should take place within a month. 14 On 13 September 2004, the primary judge put to counsel for the appellants that if further documents were produced or could have been discovered which illustrated that the appellants were the author of the recipes and Lever Co says that, had they known of them, they would have decided not to proceed, it would follow that the appellants would pay the costs. That proposition was acceded to by counsel or at least he acknowledged that it would be a likely outcome. His Honour then said: 'I'm mindful of the nature of the present application under order 15A. I think the time has come and the information provided should now be sufficient for the applicant to determine whether to bring proceedings or not. I am fortified by the acknowledgment by counsel for the respondents, qualified in the way in which it was, that it would be hard to argue that if discovery of the respondents were inadequate and further discovery disclosed the process of creation of recipes which are suspected of being copied, or if it emerged from documents which have not presently been made available to the applicant as distinct from its solicitors, that recipes which are alleged to have been copied were not copied, but came from a third party, that costs of the proceedings, if they were then not pursued, would be visited upon the respondents. In those circumstances, I do not propose to make further orders for discovery at this point.' 15 On the same occasion counsel for the appellants indicated that it was necessary for his clients to have access to the hard drive of their computer as copied by Mr Lodge. It was said that this was necessary in order for the appellants to verify those CD's as part of discovery. 16 There was correspondence between the solicitors about the verification of the computer records held and copied by Mr Brett Lodge. On 17 September 2004 Lancione wrote an open letter to Batt in, inter alia, the following terms: 'On Monday 13 September 2004, your counsel invited Mr Rochow to point out in the transcript, or anywhere else, as to the propositions put to the court by him, namely that in open court we have sought exculpation [sic] as to why all of the suspicious circumstances are not as they appear. On 11 May 2004, our client's counsel, at page 11 of the transcript, said: "We have formed a view that it would not be appropriate to issue proceedings on the current level of material because of the potential that exculpatory material may exist within that discovery we are seeking." In order to put the matter beyond doubt, my client is of the view that if there were an exculpatory explanation that showed that your clients are innocent of any wrongdoing whatsoever, that such an explanation would have been forthcoming either by way of a letter from your firm or by way of a document or documents. To date, there has been no explanation in any form. To avoid costs and further proceedings, I consider it important that a clear opportunity be given to provide such an explanation. You are therefore invited, now, prior to the final decision being made by my client for the institution for principal proceedings, whether any such explanation can, on your instructions be given, and, if so, what that explanation is. … I also ask that you confirm that all documents comprised in GCMS peak reports and GCMS traces for the development of fragrances, fragrance compounds and fragrance sub-compounds said by your client to evidence the legitimate sources of fragrances produced and supplied by your client, as referred to in your letter of 3 April 2004, have now been discovered by your client pursuant to the orders made by the court. If there are further documents to be discovered, please identify the same. … I invite direct and fulsome responses in relation to the above within 7 days of the date of this letter.' 17 Batt sought an extension of time in which to respond. Lancione said that an extension was 'unacceptable'. A subsequent letter from Batt, dated 27 September 2004 denied that Lever Co's counsel had invited an explanation in open court and foreshadowed a further response. 18 On 28 September 2004 Batt again wrote to Lancione. Batt said that it was 'inappropriate' to have to provide an explanation until Lancione identified what was alleged. It was said that 'no precise or particular claim has been made against our clients in relation to any particular act or omissions'. The allegations made were characterized as being, at the highest, in the nature of unstated suspicions. It was also stated that a list of documents had been filed by the appellants pursuant to the order for discovery and 'on the basis of categories of documents identified by you'. Batt confirmed that they were waiting on a verified copy of the hard drives copied by Brett Lodge and, once 'our clients have had an opportunity to consider the material we will respond to the request relating to the GCMS peak reports'. 19 By order dated 29 September 2004, the primary judge ordered that there be no access to the hard drives of the materials seized to Lever Co or its solicitors. By order dated 15 October 2004, Lever Co was permitted to inspect the affidavit of Mr Brett Lodge and the verified hard drive copy of the appellants' hard drives. 20 On 18 October 2004, Lancione wrote to Batt pointing out that, if there were an innocent explanation, they would have expected, by that time, the production of documents, the filing of an affidavit, the writing of a letter or other communication explaining why 'the conclusion of iniquity should not be drawn'. The warning was given: 'your clients' continued silence will sound in costs, whatever the outcome of the proceedings'. In that letter, Lancione set out the causes of action it alleged against the respondents. They were set out in general terms, without particulars or details. For example, against Mr Maniotis, they were said to be 'Breaches of copyright; breaches of contract; breaches of confidence; breaches of fiduciary duties; participation in contraventions of the Trade Practices Act within the meaning of s 75B; and contraventions of the Corporations Act'. Allegations against the other appellants were similarly framed. It was said that declarations would be sought in terms of breaches as above, as would orders to give effect to the declarations including an account, equitable compensation and damages. 21 Again Batt replied that before any explanation could be provided, it was necessary for Lancione 'to identify precisely what it is that your client alleges against our clients'. 22 On 26 October 2004 an ex parte hearing was held to convert the preliminary discovery proceeding into a substantive application. An amended application and an amended statement of claim were filed on that day. The amended application indicated that summary judgment was sought by way of interlocutory relief against Mr Maniotis and also the fourth appellant, Mr Brett Copping, a former employee of Lever Co but then employed by Taste Master, for breaches of their respective contracts of employment and for breaches of confidence. Mr Copping was only joined on that day. 23 A further affidavit of Mr Lever was filed and served on 26 October 2004. In a glossary in that affidavit, Mr Lever defined GCMS as the instrument or machine use to analyse materials by gas chromatography and mass spectrometry techniques. He defined gas chromatography as the method of chemical analysis or separation which relies on different rates that components of a mixture carried in a gas, pass through a sorbent medium. Interestingly, he defined: 'GCMS analysis refers to the graph recording the GCMS results. GCMS peak report refers to the identification by percentage volume of components from a sample analysed by GCMS.' He also said that matching requires 'some form of chemical analysis such as a GCMS analysis or trace'. 24 This showed that Mr Lever distinguished between the graph (or trace) recording the GCMS results and the peak report. He appreciated that the peak report was separate from the trace obtained from the GCMS machine. He referred in the affidavit to the usual practice in the industry for matching a fragrance from a target sample: 'the target sample being run through the GCMS to produce a GCMS graph or trace and a GCMS peak report (As the data files for the GCMS analysis being the graph or trace and peak report are the same there should always be a corresponding GCMS peak report and graph). The target sample GCMS peak report is used as the basis for developing the initial formulation…' 25 The affidavit contained Mr Lever's own analysis of the discovered documentation. He observed that no peak reports were supplied in respect of 15 of the 32 recipes. A number of GCMS graphs were discovered but that discovery did not lead Mr Lever to the conclusion of matching. Mr Lever expressed his own view on the provenance of the 32 fragrances in light of his analysis of such documents as had been discovered. He expressed the conclusion that 31 of the 32 recipes were so close to Lever Co's recipes that the only conclusion to be drawn was that they were prepared by using Lever Co's recipes modified in some way. 26 On 4 November 2004, the following exchange occurred at a directions hearing: "MR FRAYNE: In essence, so there's no misunderstanding about it, we say we have matched samples provided to us by people seeking our services. HIS HONOUR: So you've created these recipes that are the subject of the proceeding yourselves? MR FRAYNE: That's the general thrust of the position, your Honour, but it needs - - - HIS HONOUR: And at a practical level - - - MR FRAYNE: It needs to be addressed in detail though. HIS HONOUR: Yes, at a practical level that involves your clients asserting it. MR FRAYNE: Yes. HIS HONOUR: And then without any evidentiary onus on them, but a practical onus of saying how they came to create them. MR FRAYNE: Yes, it does, and it requires - - - HIS HONOUR: And showing that they were created not by pinching somebody else's. MR FRAYNE: Yes. HIS HONOUR: That's about what the case is about, isn't it? MR FRAYNE: At a very refined level, yes, your Honour, and there is a quantity of material that needs to be marshalled into an appropriate form for that to be established. HIS HONOUR: But the discovery as to that has already been given. MR FRAYNE: The discovery - - - HIS HONOUR: Your clients have already given discovery in respect of any documents showing how they come to create those recipes. MR FRAYNE: The material that has been provided, on my instructions, is in accordance with the request that was made by the applicants for discovery and the list of documents has been prepared accordingly. HIS HONOUR: Well, let's not hedge around the bush. Have your clients discovered the documents which show how they came to create those recipes? MR FRAYNE: Your Honour, I believe that a substantial quantity of the material is contained in the list of documents. I do not know at this stage whether it is all of those documents. HIS HONOUR: Well, it would certainly be my intention that they would. MR FRAYNE: Well, your Honour, that may be. My instructions are that what has been addressed is the orders that were made at the request of the applicants for the documents. Those are the documents which have been discovered in the list and those are the documents which have been verified on oath. The documents which are in computer form exist on the hard drive. The applicants - they've frozen in time, as it were, on the hard drive. HIS HONOUR: Yes. So the answer to my question is they all should have been discovered. MR FRAYNE: Your Honour, I can't indicate other than what I've indicated, that my instructions are that the terms of the orders which have been made have been complied with. HIS HONOUR: Is there any ambiguity in the orders about that? MR FRAYNE: Your Honour, I don't - I haven't considered them for the purpose of considering whether there's any ambiguity. I can only indicate - - - HIS HONOUR: I wouldn't be too happy if your clients were playing games about discovery, Mr Frayne. MR FRAYNE: I agree, your Honour, and I don't know that they are or they're not. All I'm indicating is that that's the state of my instructions…' (emphasis added). 27 At the 4 November 2004 directions hearing counsel for the appellants clearly indicated that their defence was that their recipes were their own creation. At that hearing his Honour indicated a preparedness to entertain the application for summary judgment which led counsel for the appellants to indicate the difficulties in which the appellants would be put in light of the detail of Mr Lever's analysis. 28 On 10 November 2004 Mr Maniotis filed his first affidavit. That was the first communication that could be regarded as an explicit exculpatory statement He indicated that, because he was required to prepare it "as soon as possible", his affidavit did not address all the matters raised in Mr Lever's affidavit. He nonetheless denied the allegations in Mr Lever's affidavit and stated: 'The 32 recipes that it is alleged by the applicant that I had and did not return or that I copied were either created or matched by me on the request of customers or supplied to Taste Master by Mr Keith de Vries of Sensate Pty Ltd the specific details of which are contained in this affidavit … I say that I have a good defence to the claims made against me.' 29 Mr Maniotis gave a detailed description of the methodology of matching and of the analytical experience and knowledge of chemical properties involved. Upon receipt of the affidavit, Lever Co could have been in no doubt that Mr Maniotis denied the allegations of copying and use of confidential information. In that affidavit, Mr Maniotis said, by reference to the documents on the Brett Lodge hard drive, that for all of the fragrances that were matched, there was GCMS data available 'and that it is possible to print peak reports and a number of other reports from Taste Master's GCMS data if required. A copy of the GCMS data was seized in accordance with the Anton Piller order made on 17 October 2003 and would be available on the Brett Lodge hard drive'. 30 On 12 November 2004 there was discussion at a further directions hearing about the discovery of the hard drive in the possession of Mr Lodge. That contained all of the material at that time which was on the computer records of Taste Master. On that occasion, the hearing was fixed for 7 March 2005. His Honour again indicated that he found it hard to understand that there could be ongoing issues about discovery and commented 'it has been pretty clear what I expect to be discovered'. 31 A further order for discovery was made on 12 November 2004. The primary judge ordered that, by 3 December 2004, the appellants give discovery of any documents referred to in any affidavit filed and served up to 12 November 2004. That gave Lever Co access to the documents referred to in the first Maniotis affidavit. 32 On 6 December 2004, in response to that order, the appellants formally discovered the hard drive containing the GCMS data although access to it was confined to the solicitors. The appellants' list of documents filed 6 December 2004 included 'original and inspection copy of the second [appellant's] GCMS data files for flavours and fragrances, essential oils and materials'. This included peak reports. That information was inspected shortly after 6 December by the solicitors for Lever Co. 33 In the defence dated 8 December 2004, Mr Maniotis denied the relevant allegations and said that he had "matched" certain fragrances of Lever Co by reverse engineering, using techniques of "matching" perfected by Taste Master through the use of GCMS. 34 On 23 December 2004, access to previously confidential documents produced on discovery was granted to Mr and Mrs Lever and Ms Hemmerling. That gave Lever Co access to the verified list of documents which included documents on the Brett Lodge hard drives that had previously been treated as confidential. 35 On 28 January 2005 a detailed report of Ms Kendrick, an expert retained by the appellants, was made available to Lever Co. Ms Kendrick had extensive familiarity with the process of matching a fragrance sample using GCMS. She gave a detailed description of the use of GCMS. She made it clear that the computer produces a chromatogram, recording the peaks as the compound elutes from the machine and that the chromatogram can be displayed on the computer attached to the GCMS. She then said: 'Peak Reports are computer generated and can have an automatic MS library search of the ingredients known to that library…. The computer is able to produce many different reports. The most useful and often used is a peak report which lists the peaks with their retention time and peak area.' 36 Ms Kendrick made it clear that a chromatogram, a mass spectrum and a peak report are different sets of data produced in the course of a GCMS analysis of a fragrance sample. She described each. She also explained that an automatic library search may not give the most commonly used name for a chemical and that the analyst may have to probe manually to detect very small peaks. Ms Kendrick then analysed the information for a number of different fragrances, although in many cases the information was not complete. She did not agree with Mr Lever that the fragrances had been copied. She found that the evidence was consistent with the fragrance having been matched by using GCMS or copied from a source other than Lever Co. 37 In a letter dated 21 January 2005, Lancione acknowledged that, on 5 January 2005, the appellants had discovered and produced the recipes provided to Taste Master by Sensate Pty Ltd. 38 In a second and more detailed affidavit sworn 1 February 2005, Mr Maniotis described the GMCS matching process in greater detail and described in detail the matching of individual fragrances. He also said that the reason why Taste Master had not discovered print outs of peak reports, flavour creation worksheets or other working documents was because, at the time of giving discovery in June 2004, 'in many cases, there were no hard copies of these documents in existence'. Mr Maniotis said that he printed a copy of a peak report with an automatic library search for each of the 32 fragrances for the purpose of this affidavit. In some instances, the original GCMS peak report had been kept as a hard copy, with his handwritten notes thereon. Failure to discover these and other copies of handwritten notes (the originals having been seized on execution of the Anton Piller order) was 'due to my inadvertence'. It was only in 'recent weeks' that he realized that he had the copies. For those fragrances that were made to a recipe provided by Sensate, there were no GCMS data as they were not developed by the matching process. 39 At a directions hearing on 11 February 2005, counsel for Lever Co again complained of the inadequacy of discovery and said that, if Mr Maniotis were going to refer to GCMS reports in the hard drive, 'the hard drive now needs to be the subject of proper discovery'. An explanation was proferred on behalf of Mr Maniotis. In part, it was that papers and original working notes had been seized and, when the list of documents was prepared, the appellants' focus was upon computer records 'for the most part'. 40 On 11 February his Honour noted that Lever Co's solicitors and counsel were to be given access to, and the right to inspect, the Brett Lodge computer records. The note was to the effect that Lever Co by its solicitors and counsel only, and in the presence of legal advisers of Taste Master and, to the extent necessary, an officer of Taste Master, will 'attend as soon as possible at the premises of Mr Brett Lodge to inspect as they may be advised any records or files held on the computer records, held by him and apparently relating to the issues in this proceeding'. This appears to have been the first instance upon which there was full access to the records contained in the hard drive that was seized on 13 October 2003. 41 The precise date upon which Lever Co had access to the content of the Brett Lodge hard drives is not clear. 42 On 25 February 2005 orders were made that permitted Lever Co and its solicitors and counsel to disclose and discuss confidential material with any person agreed to by the appellants who signed a confidentiality undertaking. Mr Lever, in his affidavit of 7 March 2005, and Ms Hemmerling, in her affidavit of 7 March 2005, say that inspection of the hard drive in accordance with his Honour's notation of 11 February was first permitted by the appellants on 18 February 2005. 43 On 6 March 2005, Lancione advised the Court that Lever Co intended to apply for leave to discontinue. 44 On the following day affidavits of Ms Hemmerling and Mr Lever were filed. 45 Of the two affidavits filed by Mr Lever on 7 March 2005 one stated, inter alia, as follows: 'The Company's decision to apply to discontinue the proceedings was made on the basis that to continue the action is uneconomical for the Company. I have formed this view as to the evidence necessary to investigate the issues raised in paragraph 20 of the affidavit of Ms Hemmerling sworn on 7 March 2005. There is no current explanation as to the differences between the files provided to Ms Kendrick and the files found on the Brett Lodge hard drives by my solicitors and the investigation into the authenticity of the GCMS data that was discovered after the respondents' verified list of documents on 22 October 2004. Inspection of the hard drive was first permitted on 18 February 2005. Explanations were sought soon thereafter on 23 February 2005. Annexed and marked "RJL1" is a letter dated 23 February 2005, written on my instructions, to which there has been no response. Had the documents contained in the report of Ms Kendrick dated 17 January 2005 and exhibited to the affidavit of Konstandinos Maniotis sworn on 1 February 2005, been discovered as part of the respondents' verified list of documents, I would not have, on behalf of the Company, taken the economic risk of issuing principal proceedings.' 46 In a separate affidavit sworn the same day, Mr Lever deposed to unsuccessful negotiations that had taken place between 21 February and 5 March 2005. He said that it was not until negotiations had broken down irretrievably on Saturday 6 March 2005 that he issued instructions to make the application to discontinue. 47 Ms Hemmerling's affidavit stated, inter alia, at [20]: 'On 18 February 2005 the applicant's solicitors were first permitted by the respondents to inspect the Brett Lodge hard drives, in accordance with the notation made on the order dated 11 February 2005. The inspection suggests that some of the files upon which Ms Kendrick was instructed and upon which Mr Maniotis relies are in fact different from those imaged on the Brett Lodge hard drives during execution of the order made on 17 October 2003.' 48 Ms Hemmerling also said that costs were incurred 'by reason, inter alia, that the [appellants] or some of them made inadequate discovery'. She gave as the basis for the application for costs: '3.1 The inconsistent assertions made by Mr Maniotis regarding possession and destruction of the applicant's recipes and confidential information; 3.2 The deficient and delayed discovery by the respondents. 3.3 The failure of the respondents to provide an alternative explanation for the alleged misuse of the applicant's confidential information despite being given the opportunity to do so on several occasions, before, during and after the applicant issued its application for preliminary discovery on 17 October 2003 and its principal proceedings on 26 October 2004.' She confirmed that on 6 December 2004, the appellants provided an explanation for five of the 32 recipes, those received from Sensate. She also conceded that, had the assertion of Mr Maniotis in the first affidavit that he had destroyed his duplicate set of Lever Co's recipes been made in response to letters before action, 'proceedings may not have been issued'. 49 The appellants responded to Ms Hemmerling's affidavit by asserting that the peak reports were not referred to in the order for discovery, as "traces" is a term to describe chromatograms. Detail was then provided in a summary form of the reason for the non-provision of peak reports. Basically it was said either that a paper copy of the peak report was not in existence at the time of discovery or that the original had been seized and the copy in Taste Master's possession had been overlooked. The failure to discover certain chromatograms was said to be because of "inadvertence".

consideration 50 The contentions before the primary judge were, first, that the appellants failed to comply with orders for discovery which, if complied with, would have disclosed to Lever Co an absence of a significant prospect of success. Secondly, it was alleged that the essence of the defence was not disclosed until belatedly and that Lever Co had proceeded when it would not have done so. 51 The key dates are: · 17 September 2004: letter sent from Batt seeking explanation · 22 October 2004: verified discovery given by the appellants · 26 October 2004: the preliminary discovery process ended and Lever Co indicated its intention to proceed against the appellants. Pleadings and evidence were filed by Lever Co. · 10 November 2004: Mr Maniotis' first affidavit in answer to an application for further interlocutory relief · 12 November 2004: Lever Co presses for trial · 6 December 2004: access granted to the Brett Lodge hard drive to Lever Co's solicitors · 23 December 2004: Mr Lever permitted to inspect confidential documents · 28 January 2005: Lever Co provided with Kendrick report · 1 February 2005: Mr Maniotis' further affidavit · 8 February 2005: Lever Co granted access to Brett Lodge hard drives · 6 March 2005: Lever Co advises that it is not to proceed · 7 March 2005: hearing to commence

The Brett Lodge hard drives 52 The appellants' hard drives were seized in October 2003 and copied by Mr Brett Lodge. It was not until mid 2004 that Lever Co first sought access to the Brett Lodge hard drives. No complaint is made about the time taken for the grant of access to that material on 6 December to the solicitors and on 8 February to Lever Co. Much of the time was taken by concerns of confidentiality. It is not suggested that the appellants acted with any impropriety in relation to this delay.

The peak reports and discovery 53 Lever Co asserts that the peak reports for the fragrances were not discovered. The traces and the peak reports each represent part of the GCMS data file that would exist if matching had taken place. 54 In the categories for pre-trial discovery, Lever Co did not specify peak reports but did specify traces. The traces were discovered. It was accepted that Lever Co received trace reports for 27 of the fragrances. Trace reports do not encompass peak reports. They are different. They were not asked for in the extensive list of material sought by Lever Co. The position of the appellants, therefore, was that they had complied with the orders. However, the question is whether that was sufficient in the circumstances of this case. 55 Lever Co maintains that the appellants were well aware that, by using the term 'trace', reference was being made to both trace and peak reports and that both were sought. They point out that, where the hard copy was in existence, some peak reports were discovered by the appellants. It was made clear to the appellants that the primary judge and Lever Co expected discovery of documentation beyond the traces. The primary judge made it clear that he expected discovery of any and all documentation in the possession of the appellants that would support their defence. 56 Although the directions hearings took place in the context of pre-action discovery under Order 15A of the Federal Court Rules, the comments by his Honour were reasonable and appropriate in advancing the efficiency of the litigation. The repeated avowal by counsel for the appellants that they had given discovery of the documents sought, without more, did not absolve the appellants from the consequences of the lack an explicit explanation of the course they had taken. The statements of counsel may have been strictly correct but they were, in context and without further explanation, somewhat misleading of the Court and of Lever Co. Counsel for the appellants must have appreciated as much. So much is clear from the transcripts. The conclusion of the primary judge, who had conducted the various directions hearings, was that the appellants' conduct was disingenuous. There is a good basis for that characterisation. 57 The primary judge criticised the appellants for not discovering the peak reports. His Honour considered that the appellants should have known that Lever Co would want them. Lever Co contended that the appellants themselves accepted that peak report was understood as included in the term 'trace'. However, the appellants consistently drew a distinction between traces and peak reports. While the appellants discovered hard copies of peak reports that were in existence, that does not amount to a concession, when the totality of the evidence is considered, that traces included peak reports. 58 In essence, Lever Co received the traces from the GCMS. Some peak reports were in existence and they were discovered. Others had not been generated but could be derived from data. They were generated for the purpose of the appellants' evidence and annexed to Mr Maniotis' second affidavit. In order to generate the peak reports, access to the computer was necessary. Also in the computer was the information of the relevant standards to analyse the peaks on the traces, and the library and the software necessary to conduct a full analysis.

The consequences of the failure to discover the peak reports 59 The appellants say that, irrespective of the existence of the peak reports, the existence of the GCMS traces alone, as stage 1 of a matching process, should have demonstrated to Lever Co that a process of matching had been undertaken. The appellants submit that, with appropriate expertise, Lever Co should have realized that the fragrances the subject of the traces had been matched. Relying on Ms Kendrick's affidavit, the appellants say that an experienced person would be able to look at the traces and, without going to the library in the computer, be able to recognize the components from the peaks in the traces. They submitted that the primary judge misunderstood Ms Kendrick's affidavit and thought that she had had access to the electronic data to produce peak reports to enable her to make conclusions, rather than by engaging in manual probing of the traces. 60 In any event, the importance of the peak reports may have been overestimated. Lever Co did in fact receive a number of peak reports before receiving Mr Maniotis' February affidavit. By 22 October 2004, ten peak reports had been discovered. Lever Co still proceeded with the action. Lever Co claimed that it was reasonable to do so in the absence of peak reports for each recipe. When pressed as to the fact that Lever Co had ten peak reports and still persisted with the action, Lever Co pointed to other deficiencies in the material supporting a conclusion of matching. Lever Co asserted that it was reasonable to proceed, in the absence of peak reports, working papers and 'the types of things that a person who is making a perfume would normally produce in the case of each recipe there would be no suspicion aroused'. That, however, is a far cry from the basis for his Honour's decision. It was not the fault of the appellants that Lever Co chose to proceed. It was not appropriate to place on the appellants the onus of allaying each and every suspicion in the mind of Lever Co for each and every fragrance.

The explanation by Mr Maniotis 61 Lever Co relies upon the letter of 17 September 2004, in which it sought an exculpatory statement from Mr Maniotis and asserts that it did not receive that explanation until the second Maniotis affidavit of 10 February 2005. 62 The appellants submit that they first gave Lever Co an explanation in April 2004, after the Anton Piller order, when Mr Fotheringham said that the appellants could produce traces to demonstrate reverse engineering. However, that was insufficient for Lever Co. 63 On 17 September 2004, Lever Co sought a full explanation and details of the defence from the appellants within seven days. No such response was made in correspondence. At that time, there was no detail of Lever Co's allegations. No statement of claim had been filed. The action was still at the stage of pre-trial discovery. 64 The first indication of the nature of the defence after that letter was in Mr Maniotis' affidavit of 10 November 2004. That affidavit clearly asserted that the 32 recipes were either created or matched by him. Detail was given of the process of matching and detail of the matching of some of the fragrances provided. By this time, Lever Co knew that Mr Maniotis's explanation was that he had matched the fragrances and that he said that he had not used confidential information. Lever Co had GCMS traces that should have indicated that a matching process had occurred. As the primary Judge said at [14], Lever Co did not perceive that the discovered material revealed matching of the fragrances rather than copying of Lever Co's recipes. 65 If his Honour's concern was that the appellants declined to provide an explanation to Lever Co in response to the 17 September 2004 letter, the Maniotis affidavit of 10 November 2004 should have been considered a response.

The time by which Lever Co had the information it needed to determine whether to continue the proceedings 66 By the time that Lever Co had the Maniotis affidavit of 10 November 2004, it also had ten peak reports. Lever Co says that was insufficient because that affidavit did not itself annex any documents. While the affidavit was filed in the context of a summary judgment application, Lever Co complains that it did not answer each assertion made in the affidavit of Mr Lever filed in support of summary judgment. However, there has been no explanation why Lever Co chose to continue the proceeding after receiving the Maniotis affidavit of 10 November 2004 and the ten peak reports. That is difficult to reconcile with the assertion that its decision only needed a letter of explanation from Mr Maniotis and peak reports to demonstrate and support his explanation.

Whether the appellants should be deprived of an order for costs 67 The appellants point to the primary Judge's consideration of whether the appellants should be deprived of their costs in the context of an application by Lever Co to discontinue the proceeding. They submit that different principles are applicable to dismissal of proceedings. It is said that the primary judge erred in not considering the question of costs in accordance with those principles, once he had decided to dismiss the proceeding. The appellants submit that the primary judge misapprehended certain facts, failed to give sufficient weight to relevant considerations and that his Honour's discretion miscarried. 68 It is not in dispute that the usual order for costs on discontinuance or dismissal, especially where the applicant elects to offer no evidence, is that the applicant pay the respondent's costs. It is also not in dispute that a departure from the usual rule may be justified for good cause. 69 The appellants submit that requiring them to provide sufficient evidence to persuade Lever Co not to pursue the proceeding was imposing an unreasonable burden and a reversal of the requisite onus. Further, they say that, at the stage at which Lever Co was demanding an exculpatory statement, it had the GCMS traces and knew or ought to have known that the appellants had engaged in matching. That information explained why they had not used confidential information in formulating the fragrances. The appellants point to a letter of 22 October 2004, in which the appellants again pressed for details of the claim before providing further explanation. They say that, by that date, Lever Co already knew that the denial was based on matching and that the appellants asserted that they had used confidential information obtained from Lever Co. 70 The primary judge chose 17 September 2004 as the point at which the appellants ceased to be entitled to costs. That was the date by which his Honour held the explanation sought by Lever Co should have been given. The appellants contend that the primary judge wrongly dealt with the time frame of 17 September 2004 until 1 February 2005 as a single unit. His Honour ordered the appellants to pay was the costs for that period that. The appellants say that his Honour made insufficient reference to the 10 November 2004 affidavit of Mr Maniotis and, in this context, to the statement of Mr Fotheringham in April 2004 that the fragrances had been matched. They say that, even accepting his Honour's view of the conduct of the appellants with respect to discovery and explanation, the relevant time period concluded on 10 November 2004 with Mr Maniotis' affidavit. They also submit that there should have been an allowance for a reply for two to three weeks after the letter of 17 September 2004, before the costs should be borne by the appellants. 71 His Honour set out the principles to be applied on an application for leave to discontinue. It is not suggested that those principles are inapplicable. The primary Judge was entitled to take into account, in the exercise of his discretion, all of the relevant matters, including the nature of the litigation and the conduct of the parties in the litigation. The question in the appeal is whether the undoubted discretion miscarried. 72 In the efficient and proper conduct of civil litigation, even civil litigation hard fought between parties, it should always be recognised that, in the propounding of issues for trial, the parties should take steps to ensure that all relevant parties to the dispute are cognisant of what the issues are. Quietly leaving footprints in correspondence or directions hearings to be uncovered some time later in an attempt to reveal that a matter was always in issue is a practice that must be firmly discouraged. Where it is evident, or indeed suspected, that the other side is proceeding on the basis of a misconception or has not appreciated something, common sense will, as a general rule, mandate that a party ensure that the other is not proceeding on a misconception or that the other does appreciate something that has been said. No one's interests are advanced by litigation proceeding on assumptions which are seen or suspected to be false. The only consequence of keeping issues hidden or not clearly identifying them is to disrupt the business of the court leading to the waste of valuable public resources and to lead to the incurring of unnecessary costs by the parties, costs which ultimately have to be borne by someone: see White v Overland [2001] FCA 1333 at [4]. 73 The appellants rely upon the fact that substantive proceedings had not been instituted and that they were the object of an ex parte Anton Piller order. They submitted that the onus should not be on a respondent to satisfy an applicant in detail of its defence on each issue when the claims themselves had not been articulated by the commencement of proceedings or otherwise. That, they say, is 'manifestly unfair and contrary to the principles of justice' in the adversarial system. 74 There is no absolute rule with respect to the exercise of the power to award costs that, in the absence of disentitling conduct, a successful party is to be compensated by the unsuccessful party: Oshlack v Richmond River Council (1998) 193 CLR 72 at [40]. A successful party may be ordered to bear the costs of the unsuccessful party. There may be prima facie rules that a successful party is entitled to costs or that a successful party should receive its costs unless good reason is shown to the contrary (at [35]) but that is subject to the 'myriad circumstances' in the institution and conduct of litigation. Usually the circumstances in which a successful party is denied all or part of its costs have to do with the conduct of proceedings (Ruddock v Vadarlis (No 2) (2001) 115 FCR 229 at [15]). 75 The appellants submit that this was not a strong and exceptional case warranting the costs order imposed by the primary judge. They submit that Lever Co was largely responsible for the manner in which the litigation was conducted and its conduct was the result of its own ignorance. 76 Lever Co did not appreciate the information in the trace reports. It may be, as the primary judge observed at [15], that Lever Co proceeded upon the understanding that the appellants' material did not disclose peak reports, which would tend to indicate a matching process had taken place, whereas such documents did exist. However, the appellants point to, inter alia, the fact that Lever Co chose not to inspect the Brett Lodge hard drives containing the information necessary to generate the peak reports until 18 February 2005, although its solicitors could have done so from 23 December 2004. That may have been explicable but it was not the fault of the appellants. Further, it should have been apparent to Lever Co, from the GCMS traces of 27 of 32 fragrances, that matching had occurred. 77 In determining the impact of the appellants' conduct on Lever Co's decision to continue, it is helpful to consider the events before and after the first Maniotis affidavit. Lever Co pursued the course of litigation after receipt of Mr Maniotis' 10 November 2004 affidavit. It pursued the litigation after the receipt of the detailed report of Ms Kendrick on 28 January 2005. That report made very clear the defence and the basis for the assertion of matching. Lever Co pursued the litigation despite the receipt of ten peak reports, in circumstances where it submits that the provision of peak reports would have made a difference to its decision. Clearly, provision of some peak reports did not. The assertion by Lever Co that it was entitled to wait until each and every peak report for each and every fragrance was produced as part of the O 15A proceedings, and before a statement of claim was filed before it appreciated the appellants' defence, is not reasonable. 78 Mr Lever's evidence is that there were economic reasons for discontinuing the litigation. His Honour, at [35], accepted that the decision not to proceed was for economic reasons. His Honour also accepted at [36] that, had Lever Co had available to it and had it considered the documentary material upon which the Kendrick report was based, it would not have continued with the proceeding. 79 There were attempts to settle the matter by mediation after the receipt by Lever Co of all of the evidence, including the very detailed affidavit by Mr Maniotis of 1 February 2005. Clearly enough, Lever Co chose to persist with the litigation even after receipt of the second Maniotis affidavit, in the hope of achieving a favourable outcome. That delay does not, however, sound in costs against the appellants. 80 In view of the clear discussions at the various directions hearings and the reasonableness of the request by Lever Co for some explanation in order to determine whether it should commence proceedings, we would not disturb his Honour's costs order for the period from 18 September 2004 until the provision of the 10 November 2004 affidavit of Mr Maniotis. We appreciate the submission of the appellants that a reasonable time should be allowed before that costs order takes effect, to allow for a response to the letter but the fact is that no response was provided in correspondence. The response was the Maniotis affidavit. There is no need to allow for a response that did not occur. 81 His Honour's decision on this aspect of the costs (until 10 November) is in accordance with the principles expressed above. Those principles are applicable to the present case. In the context of the numerous discussions at directions hearings, on the question of what was sufficient discovery and the consequences of a failure to discover the requested documentation, that part of the costs order was appropriate. We do not see any error on the part of the primary judge in making the costs order upon a dismissal rather than on discontinuance, nor a problem for that reason with the orders that we propose. The fact that the appellants had strictly complied with the discovery sought by Lever Co is no answer. His Honour made it perfectly plain that he expected sufficient discovery or explanation to be given and that failure to do so would sound in costs. There is no doubt that the appellants' counsel was aware of this. 82 If no explanation and no evidence had been forthcoming until 1 February 2005 (the date up until which Lever Co's costs were paid), we would not interfere with the costs orders. The question then is when the appellants provided an explanation and sufficient supporting documentation to indicate that matching had been carried out. 83 The request for traces did not cover peak reports. Each trace was a chromatogram from the GCMS machine and formed part of a data file. Each peak report was a computer generated analysis of the trace. They also formed a part of the data file. However, the existence of the traces, a part of GCMS data, was itself indicative of a process of matching. The provision of some of the peak reports, supporting the existence of a matching process for at least ten of the fragrances, did not deter Lever Co from continuing the proceeding. By 10 November 2004, Lever Co had access to the traces and to the first affidavit of Mr Maniotis. 84 While that did not address each and every aspect of the defence for each and every fragrance in question, it should have been apparent to Lever Co that the appellants were contending that there had been matching of the fragrances. It may not have assisted Mr Lever or indicated as much to him but it did do so to an expert in the art. The first Maniotis affidavit, together with the discovery that had taken place, disclosed the essence of the defence. The existence of a GCMS analysis, evidenced by a trace, was a very strong indicator that matching had occurred. The fact that Mr Lever and Ms Perrin did not appreciate the relevance of the traces and remained unconvinced of the matching process, despite the assertions of Mr Manioitis and the available supporting material, is not the fault of the appellants. It was not the fault of the appellants if Lever Co could not evaluate the traces because of lack of expertise. 85 From 10 November 2004, the ability to obtain information lay with Lever Co subject to access to the Brett Lodge hard drives. It had sufficient information to determine whether to pursue its causes of action. It certainly had ample information after the receipt of the Kendrick report and then the second Maniotis affidavit of 1 February 2005. The pleadings and evidence of Lever Co were only filed on 26 October 2004 and the appellants' evidence was, in partial answer to that case, to be completed by the Maniotis affidavit of 1 February 2005. The fact that Lever Co did not even then notify an intention to discontinue demonstrates that it was not the lack of provision of information by the appellants that determined that decision. The conclusion of the primary judge at [36], that, had Lever Co had the documentary material upon which Ms Kendrick expressed her opinions, it would not have proceeded with the principal proceeding, is not supported by the evidence. By 10 November 2004, Lever Co had the knowledge that its suspicions were ill founded (c.f. the conclusion of the primary judge at [43]). That knowledge was subsequently enhanced and reinforced and still Lever Co persisted. 86 The primary judge did not consider the consequences of the Maniotis affidavit of November 2004 or his own finding at [36] that the explanation that should have been made by 17 September 2004 was made and documents provided, at least in part, in that affidavit. His Honour did not consider the consequences of the receipt of the Kendrick report on the asserted lack of explanation by the appellants. 87 The first Maniotis affidavit was of key importance where Lever Co's application for costs was based upon the lack of explanation and documentation. His Honour found that it was the documentary material upon which Ms Kendrick relied in her report (supplied in full in the 1 February 2005 affidavit) that ultimately gave sufficient information to Lever Co. However, Lever Co already knew of: (a) the GCMS traces, which indicated matching; (b) the repeated denials of Mr Maniotis; (c) the statement of the appellants' counsel in Court on 4 November 2004: 'in essence, so there's no misunderstanding about it, we say we have matched samples provided to us by people seeking our services'; and (d) the detailed information in the Maniotis affidavit of November. 88 The evidence revealed matching of a significant proportion, if not all, of the fragrance recipes and the sourcing of five of them. Still Lever Co persisted with the litigation. It was on the basis of a lack of explanation and discovery of documentary material revealing that matching had occurred that his Honour at [37] denied to the appellants the costs that he would otherwise awarded to them by reason of Lever Co's proposed discontinuance. By 10 November 2004, the failure to respond to the 17 September 2004 letter had been remedied. 89 His Honour appears to have misapprehended the relevant facts. Those facts cast a very different light on the conduct of the appellants and of Lever Co. The appellants should not be deprived of their costs for this period or ordered to pay Lever Co's costs. Lever Co should pay the appellants' costs for the period 10 November 2004 until the hearing date of 7 March 2005.

CONCLUSION 90 No sufficient reason has been established to interfere with the costs orders related to the discovery that should have been given by the appellants. We would not interfere with the order that the appellants pay Lever Co's costs from 18 September 2004 until 10 November 2004. 91 By 10 November 2004, Lever Co had sufficient explanation and documentation from the appellants. If the decision to discontinue were based on those factors alone, notice of discontinuance should then have been given. The fact that the decision was not made by Lever Co until 6 March 2005 is not the fault of the appellants. The appellants should not be deprived of the costs to which they would normally be entitled for the period following 10 November 2004. From that date, Lever Co should pay the appellants' costs. I certify that the preceding ninety-one (91) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justices Finn, Emmett and Bennett.

Associate: Dated: 17 February 2006 Counsel for the Appellants: Mr B Hayes QC with Mr H Hassan

Solicitor for the Appellants: Rosey Batt & Associates

Counsel for the Respondent: Mr N Rochow with Mr M Burnett

At a glance

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Decision date

Before

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Judgment (14 paragraphs)

Parties

Cases Cited (3)

Cited By (11)