Medallion Homes Pty Ltd v Lares Homes Pty Ltd

Introduction 1 This is an application by Medallion Homes Pty Ltd ("Medallion") for an interlocutory injunction to restrain the respondents from reproducing certain floor plans for residential homes and from proceeding with the construction of a display home which Medallion alleges reproduces one of the plans in three dimensional form. The slab for the display home has been laid. Medallion alleges that the respondents have copied its plans. Medallion also seeks orders that the respondents be restrained from making certain representations on the first respondent's website and in promotional material that are alleged to be misleading or deceptive under the Australian Consumer Law ("ACL") (Schedule 2 to the Australian Competition and Consumer Act 2010 (Cth)) in relation to the floor plans. 2 Medallion is, and was at all times, a corporation incorporated under the Corporations Act 2001 (Cth). Since 1997, it has conducted a business involving the design and construction of custom-built residential homes in South Australia. It has four display homes which are known as the "Urbis", "Domo", "Coolum" and "Pavillion" homes, and floor plans bearing those names. At all material times, Mr Peter Katelanis, was the managing director, and the sole director, of Medallion. 3 The first respondent is Lares Homes Pty Ltd ("Lares") and it is a corporation which was incorporated under the Corporations Act on 1 May 2015. Lares' directors since its incorporation are the second, third, fourth and fifth respondents. 4 The second respondent is Mr Alberico Pagnozzi and he was engaged by Medallion as a contractor between 2000 and 18 September 2015 in the capacity of "Building Design Manager". Mr Pagnozzi was engaged pursuant to a contract of services that was formed orally between Mr Pagnozzi and Mr Katelanis. In consideration for Mr Pagnozzi managing the design of homes to be constructed by Medallion, it paid fees to Studio Alberico Pty Ltd ("Studio Alberico"), a company of which Mr Pagnozzi and his wife were directors and shareholders. 5 The third respondent is Mr Paul Gelios and he was engaged by Medallion as an employee between February 2003 and March 2005 in a position described as "Operations and Construction Manager". Mr Gelios was engaged as a contractor by Medallion in the same position between March 2005 and 18 September 2015. 6 Between October 2001 and 2 October 2015, Mr Rafal Zuliamis, who is the fourth respondent, was engaged by Medallion as an employee in the capacity of "Financial Controller". 7 Between around 1997 and 18 September 2015, Mr Steven Sinclair, who is the fifth respondent, was engaged by Medallion as a contractor in the capacity of "Sales and Marketing Manager".

The Allegations 8 Prior to the hearing of Medallion's application, it provided a draft Statement of Claim setting out the details of its case. It is clear from that document, and indeed from the evidence Medallion filed, that in addition to the allegations of copyright infringement and misleading or deceptive conduct in relation to Lares' website and in promotional material, Medallion makes serious allegations of breaches of various duties by the respondents in and in connection with the establishment of the business conducted by Lares. 9 A summary of these allegations is as follows. Medallion alleges that, from late 2014, the individual respondents agreed to jointly establish and participate in a business involving the design and construction of residential homes in direct competition with Medallion, and to engage in conduct that was intended to put Lares in a position to compete with Medallion immediately upon the individual respondents ceasing to work for Medallion. 10 Medallion alleges that, pursuant to the agreement, the individual respondents engaged in conduct to put Lares in a position to compete with Medallion, and this conduct, in and of itself, breached the duties owed by the individual respondents to Medallion. This conduct included taking steps to develop the competing business while being engaged by Medallion, such as incorporating the business, creating a logo and website, developing floor plans, and preparing for the construction of a display home; engaging in acts designed to divert business from Medallion, such as withholding the names and contact details of prospective customers, soliciting the custom of prospective customers, and misrepresenting to suppliers and contractors that Medallion was leaving the residential home construction industry; and engaging in acts designed to weaken the position of Medallion, such as causing Medallion to enter into contracts which resulted in an increase in overheads, and offering employment to a graduate architect employed by Medallion with the result of interfering with Medallion's succession planning. The individual respondents are also alleged by Medallion to have deliberately concealed the conduct outlined above, and to have deliberately erased the content of their Medallion email accounts and the hard drives of their computers. These allegations are serious allegations and, so far as I can see, they are denied by the respondents. 11 The allegations I have summarised may, if established, add force to Medallion's case of actual copying, but save as to that, they are not directly relevant to the present application which raises issues of copyright infringement and misleading or deceptive conduct in relation to Lares' website and in promotional material.

Causes of Action 12 Medallion relies on three causes of action in support of its claim for an interlocutory injunction. 13 First, Medallion alleges that the floor plans prepared by Lares reproduce in a material form the designs of the "Urbis", "Coolum" and "Pavillion" plans and that it has copyright in these plans. The relevant floor plans were prepared by Mr Pagnozzi on behalf of Lares and are known as the "California", "Malvern", "Avignon", and "Sorrento" plans ("the Lares plans"). 14 As a preliminary step to make out a claim of breach of copyright, it is necessary for a claimant to establish that copyright subsists in the relevant work, and that the claimant is the owner of that copyright: Copyright Act 1968 (Cth) s 35; Barrett Property Group Pty Ltd v Carlisle Homes Pty Ltd [2008] FCA 375 at [3] per Heerey J. The elements to be considered in establishing a breach of copyright were described by Gibbs CJ in SW Hart & Co Pty Ltd v Edwards Hot Water Systems (1985) 159 CLR 466 as follows (at 472): The notion of reproduction, for the purposes of copyright law, involves two elements - resemblance to, and actual use of, the copyright work, or, to adopt the words which appear in the judgment of Wilmer LJ in Francis Day & Hunter Ltd v Bron [1963] Ch 587 at 614, "a sufficient degree of objective similarity between the two works" and "some causal connection between the plaintiffs' and the defendants' work". A causal connection between the claimant's work and that of the alleged infringer may be inferred in circumstances where there is a high degree of similarity, or striking similarity between the two works, or in the absence of any adequate explanation from the alleged infringer as to how the work independently came into existence: Tamawood Ltd v Habitare Developments Pty Ltd (2015) 112 IPR 439 at [20] (Greenwood J) ("Tamawood") citing Eagle Homes Pty Ltd v Austec Homes Pty Ltd (1999) 87 FCR 415 at [84] (Lindgren J with whom Finkelstein J agreed at [111]). If a causal connection can be inferred, it must then be considered whether there is a sufficient degree of objective similarity so as to amount to a reproduction of the whole or substantial part of the work: Tamawood at [21]-[23] (Greenwood J). 15 Secondly, Medallion alleges that by virtue of a deed between it on the one hand, and Studio Alberico and Mr Pagnozzi on the other, it is the owner of the copyright in the Lares plans. 16 Thirdly, Medallion alleges that the respondents are engaging in misleading or deceptive conduct under s 18 of the ACL in relation to certain representations made on Lares' website and in promotional material regarding the Lares plans.

Principles for the Grant of an Interlocutory Injunction 17 The test for the grant of an interlocutory injunction is clear. In Australian Broadcasting Corporation v O'Neill (2006) 227 CLR 57, Gummow and Hayne JJ said that there are two main inquiries to be conducted on an application for an interlocutory injunction, and, adopting the words of the High Court in Beecham Group Ltd v Bristol Laboratories Pty Ltd (1968) 118 CLR 618, explained that: The first is whether the plaintiff has made out a prima facie case, in the sense that if the evidence remains as it is there is a probability that at the trial of the action the plaintiff will be held entitled to relief … The second inquiry is .. whether the inconvenience or injury which the plaintiff would be likely to suffer if an injunction were refused outweighs or is outweighed by the injury which the defendant would suffer if an injunction were granted. 18 Their Honours proceeded to explain that, to establish a "prima facie case", it is sufficient for the applicant to show a "sufficient likelihood of success to justify in the circumstances the preservation of the status quo pending the trial" (at [65]). This inquiry into whether the applicant has made out a "prima facie case" is also often expressed in terms of whether there is a "serious question to be tried". 19 The inquiry into whether the applicant has made out a "prima facie case", and the inquiry relating to the balance of convenience, are not considered in isolation from each other, and the likelihood of success or otherwise of the applicant's case has a bearing upon what is required by way of the balance of convenience: Bullock v The Federated Furnishing Trades Society of Australasia (No 1) (1985) 5 FCR 464 at 472. 20 In cases where the grant of an interlocutory injunction would, in effect, put an end to the action because the harm caused to the respondent would be such that any ultimate award of damages to the respondent would be unlikely to assist in restoring the respondent's position prior to the grant of the injunction, the Court should be satisfied that the applicant has good prospects of success at trial: Samsung Electronics Company Ltd v Apple Inc & Another (2011) 217 FCR 238 at [51], [71] - [74].

Breach of Copyright 21 Medallion alleges that the Urbis, Coolum and Pavillion plans are artistic works in which copyright subsists, and that it is the owner of that copyright. 22 Medallion alleges that, by creating the California, Avignon and Malvern plans, Mr Pagnozzi and Lares have reproduced in a material form a substantial part of the Urbis plan. Medallion alleges that the California plan reproduces the Urbis plan in substantial part because: • the bedroom spaces are situated to the left and the living spaces to the right with the master bedroom at the front and other bedrooms to the rear in both plans; • there is a short passageway running parallel to the front between the living room and walk-in robe leading to a master bedroom suite in both plans; • the kitchen, family, dining space, pantry and laundry are placed in similar positions; • the kitchen layout is similar; • the laundry layout is similar; and • the ensuite bathroom layout is similar. 23 Medallion alleges that the Malvern and Avignon plans are derivatives of the California plan, and, therefore, also reproduce in substantial part the Urbis plan. Lares is alleged to have infringed, and to continue to threaten to infringe, Medallion's copyright in the Urbis plan by communicating the California, Avignon and Malvern plans to the public by publishing the plans on the Lares' website, and distributing brochures depicting the plans. 24 In addition to the claim in relation to the California plan, Medallion alleges that, in creating the Sorrento plan, Mr Pagnozzi and Lares have reproduced Medallion's Pavilion plan, together with the master bedroom and ensuite module of the Coolum plan, and the back module of the Urbis plan. 25 In the case of low or medium cost housing, the originality of the design will necessarily be limited given the more restrictive functional requirements that the plan would need to accommodate: see LED Builders Pty Ltd v Masterton Homes (NSW) Pty Ltd and Others (1994) 30 IPR 447 at 218 (Davies J); Tamawood Limited v Henley Arch Pty Ltd [2004] FCAFC 78 at [56] (Wilcox and Lindgren JJ). As the authorities make plain, in the case of a simple and commonplace design, the alleged infringer must adhere to the plan more closely in order to be found liable for breach of copyright: Dixon Investments Pty Ltd v Hall (1990) 18 IPR 481 at 483 (Pincus J). 26 I have considered Medallion's Urbis floor plan and the California floor plan of the respondents. As I have said, the floor plans of the respondents for the Avignon and the Malvern houses derive from the California floor plan. I have considered the matters alleged in paragraphs 148, 151 and 152 of the draft Statement of Claim. The matters in those paragraphs are set out above (at [22]). I have considered the other floor plans produced by Mr Sinclair and exhibited to his affidavit as "SS-5". I do not find the report of the expert put forward by Medallion to be of any real assistance. Having regard to all of those matters, I think that there are substantial issues as to copyright subsistence, actual copying and objective similarity. I am not satisfied on the information presently before me that there is a strong case of copyright infringement. Of course, that may change with, for example, the provision of expert evidence or further elucidation of the designs of other builders or other evidence. However, that is my view on the information presently available and, therefore, subject to the other causes of action, I think that the balance of convenience should clearly favour the applicant before an injunction is granted. 27 There is reference in the evidence to the Sorrento plan of the respondents and an allegation, as I understand it, that this represents a combination of three designs of Medallion. The allegations with respect to the Sorrento plan did not find their way into the draft Statement of Claim. That is not fatal at this stage. The Sorrento plan and the designs it was alleged to have infringed, were not the subject of oral submissions from Medallion. It seems to me looking at the material, that the argument with respect to the Sorrento plan is weaker than the argument with respect to the California, Avignon and Malvern plans.

The Deed 28 Medallion's case in relation to the deed is as follows. In 2000, Mr Katelanis and Mr Pagnozzi entered into an oral contract of services, under which Mr Pagnozzi was to provide design services exclusively to Medallion. On 26 June 2014, Medallion and Studio Alberico and Mr Pagnozzi entered into a deed, which stipulated in recital "D": From the commencement of the provision of its services to the assignee, it has been intended and agreed by the assignor that ownership of copyright in such plans as it might create in that context would be owned by the assignee. Section 4 of the deed provided: 4. Grant of rights 4.1 The assignor affirms its intention as set out in Recital D. 4.2 The assignor assigns to the assignee all of its right, title and interest as well as any joint rights (including present and future copyright and any Moral Rights connected therewith) in and to the past works and the future works. "Future works" is defined in the deed as "any artistic works (and includes but is not necessarily limited to all literary works, art works and other copyright works) in respect of which copyright subsist created by the assignor for the assignee on or after the date of this Deed". 29 Medallion alleges that, as the floor plans were created by Mr Pagnozzi in circumstances where Mr Pagnozzi was engaged to prepare plans exclusively for Medallion, the plans were prepared for it within the meaning of the deed, and, accordingly, it is the legal owner of the copyright in the plans. Medallion alleges that Lares has infringed its copyright in the Lares plans by using the California, Malvern, Avignon and Sorrento plans. 30 In their oral submissions in response, the respondents contended that the deed would not apply to the Lares plans as the definition of "future works" relates only to artistic works created by Studio Alberico for Medallion. The argument was that, as the Lares plans were not created for Medallion, they do not fall within the definition of "future works", and copyright is therefore not assigned to Medallion. 31 It seems to me that the proper construction of the deed and the precise nature of the relationship between Medallion and Mr Pagnozzi will bear heavily on the rival contentions of the parties. There were limited submissions and there is limited evidence on these issues. I am not persuaded on what is before me at present that this contention is any stronger than Medallion's claim for copyright infringement.

Misleading or Deceptive Conduct 32 The allegation is that the respondents have misrepresented their plans as original designs when they are, in effect, copies of Medallion's plans. If the injunction is granted in relation to the Lares plans, then this aspect of the injunction becomes redundant. If the injunction in relation to the plans is refused, then this cause of action relates to their description on the Lares' website and in promotional material. In the latter event, I am not satisfied there are sufficient grounds for an interlocutory injunction in relation to the description of the Lares plans.

Balance of Convenience 33 I turn now to consider the balance of convenience. 34 If the injunction sought is granted, then Lares would need to create new house plans and build a different display home. The respondents assert that it would take one to two months to create new house plans, and five to ten months to construct a different display home. The respondents assert, and I accept, that the lack of house plans and a display home in the interim would cause loss to the respondents' business, as house plans and a display home are important marketing tools for a home design and building business. It would also be difficult to quantify the loss suffered by Lares as there is no pre-existing sales data by which to judge the quantity of sales that Lares might be expected to lose in the interim period. 35 On the other hand, if the injunction sought is refused, and the Lares plans used and the construction of the display home allowed to proceed, Medallion may experience a loss of business to Lares. Unlike Lares, Medallion has an established sales pattern for its houses to use as a basis for a claim for damages. In addition, any sales by Lares in the interim period could be used in any calculation of Medallion's damages. I will require the respondents to keep appropriate records. 36 For these reasons, I consider that the balance of convenience weighs in favour of the respondents, and that the interlocutory injunction should be refused. 37 Medallion applied to amend its interlocutory application to include an order restraining the first respondent from soliciting or in any way communicating with Medallion's client, Nicola Cheeseman, or any other person or persons of whom the respondents become aware prior to 18 September 2015 as being prospective customers of Medallion. The application to amend the orders sought was opposed by the respondents. There was no detailed argument with respect to the proposed order. I am not satisfied on the evidence and such submissions as were made that it is appropriate to make such an order. 38 In view of the above conclusions, I do not need to deal with the respondents' arguments that an injunction should be refused because of delay, and because of material non-disclosure by the applicant.

Objections to Evidence 39 The respondents raised a series of objections to passages in the affidavits relied on by the applicant. My rulings on the objections are as follows:

Affidavit of Peter Katelanis sworn on 21 December 2015 (1) Paragraph 46: all but the first part of the first sentence (down to "Senior Staff") is excluded. (2) Paragraphs 47 and 48: these paragraphs are admitted (s 75 Evidence Act 1995 (Cth)). (3) Paragraph 49: this paragraph is excluded. (4) Paragraph 67: this paragraph is admitted as is the exhibit.

Affidavit of Peter Katelanis sworn on 2 January 2016 (1) Paragraph 7, last sentence: this sentence is admitted as evidence of the deponent's belief. (2) Paragraphs 10 to 22: these paragraphs are admitted, save and except for the last sentence of paragraph 19. (3) Paragraph 26, first sentence: this sentence is not admitted.

Affidavit of Jordan Katelanis sworn on 21 December 2015 (1) Paragraphs 4 and 5: these paragraphs are admitted. (4) Paragraphs 6 to 12: these paragraphs are admitted. (5) Paragraph 33: this paragraph is not admitted. 40 If it becomes necessary to provide reasons for these rulings, then they will be provided. 41 I think the documents handed up by Medallion during the hearing should be received.

Conclusions 42 The applicant's interlocutory application dated 23 December 2015 should be dismissed. The order made by the Court on 23 December 2015 should be discharged. 43 An order should be made that the respondents keep proper records of all sales of residential homes it makes between now and the trial of the proceeding. I will hear the parties as to the form of that order. My present view is that the order should include details of the contracts entered into, the plans which are the subject of the contracts, the identity of the vendors and purchasers, and the consideration paid. 44 I will hear the parties as to costs and any other orders. I certify that the preceding forty-four (44) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Besanko.

SCHEDULE OF PARTIES SAD 453 of 2015

Respondents Fourth Respondent: RAFAL ZULIAMIS Fifth Respondent STEVEN CHARLES SINCLAIR