Nexdius Pty Ltd v Exposure Scientific LLC

Supreme Court of NSW|2017-11-17|Before: Stevenson J

Solicitors: Corrs Chambers Westgarth (Plaintiffs) Cordato Partners (Defendants) File Number(s): SC 2017/331497

Judgment

On 2 November 2017, as Commercial List Duty Judge, I granted the plaintiffs, Nexdius Pty Ltd and Solar D Skincare Pty Ltd, an ex parte injunction restraining the defendants, Mr Ernest Armstrong and Exposure Scientific LLC (a company incorporated in Nevada, USA), from acting on a purported notice of termination (dated 7 August 2007) of a licence agreement made between Nexdius as licensee and Mr Armstrong and Exposure Scientific as licensors (the "Licence Agreement").
The subject of the Licence Agreement was, relevantly, a trademark "Solar D".
On 17 November 2017, I heard argument as to whether the injunction should be continued and as to whether it should be dissolved on the basis that material matters were not disclosed to me on 2 November 2017 when I made the ex parte order.

Background

Mr Armstrong is the inventor of "Solar D Sunscreen"; a sunscreen that provides protection against sunburn through screening harmful ultraviolet radiation whilst permitting the transmission of wavelengths which stimulate the production of vitamin D within the skin.
Mr Armstrong is the "managing member" and majority shareholder of Exposure Scientific.
Mr Armstrong licensed the rights in respect of Solar D Sunscreen to Exposure Scientific which, in turn, granted an exclusive licence to Nexdius pursuant to two agreements. One agreement, not the subject of these proceedings, relates to countries in North America. The other, the License Agreement, relates to other parts of the world, including Australia.
Nexdius has, in turn, licensed those rights to Solar D Skincare.
The chief executive officer of Nexdius, Mr Matthew Collett, gave the following evidence in one of his affidavits: "15. Nexdius has paid for everything relating to the commercialisation of the [rights under the Licence Agreement], from concept to taking the product/formula to market, including but not limited to: a. prosecuting and protecting all intellectual property (patents and trade mark); b. all research and development costs; c. all marketing; d. all regulatory approvals for sale of products; e. all administrative costs. 16. Nexdius and some of its directors have, between them, spent approximately $5 million to do that. Exposure Scientific and Mr Armstrong have not carried out commercialisation of the [rights under the Licence Agreement] and have not paid any of the costs I have listed above. 17. Although I commenced my engagement with Nexdius in February 2014, I have only started taking a salary this year. Prior to that, I was paid intermittently and received equity in lieu of the large proportion of the monies owing to me. Mr Day and a consultant, Mr John Carey, have also received equity in Nexdius in lieu of a salary and/or to discharge loans made by them to Nexdius. 18. Over the last four years, investors, including some of the directors, have contributed over $4 million in capital, including $2.4 million in capital raised in about April 2017 which has been applied to the Solar D business. 19. Solar D Skincare causes to be manufactured, markets, offers for sale and sells skincare and sunscreen products that utilise the [rights under the Licence Agreement] that I will describe below… Solar D Skincare was incorporated for the sole purpose of carrying on those activities. It engages six people permanently (either full time, part time or as consultants) within Australia and engages the services of many service providers on a fixed-contract basis. It rents office space [in] Paddington… 20. In respect of manufacturing, Solar D Skincare has contractual relationships with third party manufacturers and causes the manufacture of the Solar D Products in Melbourne, Australia by Ensign Laboratories Pty Ltd…and in California, United States of America by Westwood Laboratories, Inc…".
On 31 March 2014, Nexdius applied for registration of a trademark for the words "Solar D". The trademark was registered as Trademark 1614503 on 13 November 2014.

Alleged breach

Clause 6.2 of the Licence Agreement provides: "Nexdius agrees to effectuate or cause to bring about any change in records to reflect the ownership of the trade marks RadianD and Solar D by Exposure [Scientific], including but not limited to, ownership recorded by all national patent and trade mark offices with pending or issued trade mark applications and all patent attorneys within 30 calendar days of signing this MOAA2".
Clause 7.2 of the Licence Agreement provided that Exposure Scientific could terminate the agreement if Nexdius: 1. failed substantially to perform its duties under the Licence Agreement and did not cure such failure within 30 days following written notice from Exposure Scientific; or 2. materially breached any provision of the Licence Agreement and did not cure such breach within 30 days of such notice.
On 15 February 2017, Exposure Scientific served on Nexdius a document entitled "Notice of Default on Agreement and Notice of Intention to Terminate" (the "Default Notice").
The Default Notice alleged three breaches of the Licence Agreement. It is common ground that the first two of those alleged breaches (which the parties called "financial defaults") have been cured to the satisfaction of Exposure Scientific.
The third breach was set out in the Default Notice as follows: "Nexdius has failed to act to make Exposure Scientific the listed owner in the respective patent and trade mark offices and patent attorneys/agencies for the trade mark on Solar D in the Territory."
For the purpose of this application only, Nexdius accepts that it was in default in this respect.
However, Nexdius contends that there is a serious question to be tried that Exposure Scientific was not entitled to terminate the Licence Agreement because: 1. Nexdius had cured that breach to the satisfaction of Mr Armstrong and Exposure Scientific; and 2. Mr Armstrong and Exposure Scientific had: 1. waived any entitlement to terminate the Licence Agreement; and 2. affirmed the Licence Agreement.

The conduct to cure the breach

On 20 February 2017, Mr Collett sent an email to Mr Armstrong stating: "We [Nexdius and Solar D Skincare]…were unaware that this was an issue you were concerned about until we received the Notice of Default, as it has not been raised in any of our numerous communications. We will work to rectify this and will keep you updated on our progress."
On 17 March 2017, Mr Titus Day, a director of Nexdius, sent Mr Armstrong a draft deed of assignment of a number of trademarks, including the Solar D trademark.
On 18 March 2017, Mr Armstrong executed a deed of assignment of those trademarks which was in a slightly different form to that proffered by Nexdius. There was no suggestion before me that that difference is material.
Mr Armstrong sent the executed deed of assignment to Nexdius under cover of a letter dated 17 March 2017 in which he stated: "In regards to the change of ownership in trade marks, Option 1 [to assign the trademarks rather than make fresh applications for the trademarks] as offered by Nathan Sinclair of Shelston IP [Nexdius's trademark attorney]…is acceptable to Exposure Scientific to cure the defaults on both Agreements provided Nexdius follows through on causing the change of ownership, and provided Shelston IP takes appropriate action forthwith in all countries and jurisdictions listed in the attached Schedule, in accordance to Mr Sinclair's Option 1. I have attached the updated and simplified version of the Deed of Assignment which was signed by me on behalf of Exposure Scientific."
Mr Armstrong also said: "It is the sole responsibility of Nexdius to sign the Deed of Assignment and provide it along with instructions immediately to cause the change in ownership of the trade marks to Shelston IP and any other of its trade mark agents, such as Marcaria. In regard to the payments to RMKB, Exposure Scientific will consider the default cured by any payment plan Nexdius deems appropriate, including but not limited to, the proposed Settlement Agreement and Mutual Release of 15 March 2017 provided: 1.) all other defaults on both Agreements have been cured to the satisfaction of Exposure Scientific…".
There was debate before me as to what Mr Armstrong meant when he said that the assignment of the trademarks was acceptable to Exposure Scientific "to cure the defaults" provided that Nexdius "follows through on causing the change of ownership".
I will return to this below.
On 20 March 2017, Mr Collett wrote to the trademark attorney referred to in Mr Armstrong's letter, Mr Nathan Sinclair, enclosing the deed of assignment (now executed by both parties) and instructing Mr Sinclair to "proceed with the change in ownership of the trademarks as requested".
Mr Sinclair replied the same day: "As instructed, we will immediately proceed by filing a request to record the assignment of these marks to Exposure Scientific. While recording the assignment of the Australian mark should be reasonably quick (usually ~ a week or so), some of the foreign offices involved (notably China and India) can take considerably longer (often several months)."
On the same day Mr Collett sent an email to Mr Armstrong: "As per your request, I confirm that Nexdius has commenced the change of ownership and Shelston [IP] as instructed, will immediately proceed by filing a request to record the assignment of these marks to Exposure Scientific. Shelston [IP] have responded and informed us that some of the trademarks should be reasonably quick (usually ~ a week or so), however some of the foreign offices involved (notably China and India) can take considerably longer. I also confirm that Nexdius has signed the Deed of Assignment which was sent to you earlier (enclosed again) and instructed Shelston [IP] to effect the change in ownership of the trademarks urgently. We will keep you updated as Shelston [IP] actions to change the ownerships of each trademark are completed. … As per your email you consider these actions to have cured the 3rd default… Can you please confirm that Exposure Scientific is satisfied that this is true which covers your below point 1.) all other defaults on both Agreements have been cured to the satisfaction of Exposure Scientific." [Emphasis in original]
There is no evidence before me that Mr Armstrong responded, in terms, to Mr Collett's request for confirmation that all defaults under the Licence Agreement "have been cured to the satisfaction of Exposure Scientific".
On 21 March 2017, Mr Armstrong sent an email to Mr Collett and Mr Day acknowledging receipt of a payment which cured one of the defaults referred to in the 15 February 2017 notice.
Mr Armstrong said: "The requirements to cure all financial defaults in both Notices of Default have now been met in full".
There was debate before me as to the significance of this statement in light of Mr Armstrong's statement in his letter of 17 March 2017 referred to at [22] above.
I will return to this below.
At around this time, Nexdius requested that Mr Armstrong sign a letter to be shown to a particular potential investor in Nexdius.
Mr Collett prepared a draft.
Evidently, Mr Armstrong was not prepared to sign a letter in accordance with that draft.
He did, however, sign a letter dated 20 March 2017, addressed "[t]o whom it may concern", which included the following statements: "This letter verifies and confirms the details of the Exposure Scientific, LLC and Nexdius Pty Ltd agreements and relationship. Exposure Scientific has licensed the Solar D Technology, which includes the patents and trademarks to Nexdius Pty Ltd through two agreements: one covers North America and one the rest of the world. The duration of these agreements is for the life of the patents, which is roughly 19 years. These are exclusive licences, which means that neither Exposure Scientific nor any third party may manufacture or sell the licensed technology without the consent of Nexdius. Without the written authorisation of Nexdius, neither Exposure Scientific nor I will manufacture or sell the Solar D technology, nor will we engaged any third party to do so. Since the agreements were made some years ago, [Mr Collett] has worked tirelessly to promote Solar D, [Mr Day] has functioned adroitly as a director, and I have worked as a scientist to research, patent, develop and assist the manufacturers to make the product line. Because of our complementary skill sets, we work well together. Because Exposure Scientific is one of the larger shareholders in Nexdius, and because the agreements require certain royalties and payments to be paid to Exposure Scientific, the shareholders in Exposure Scientific and I have a vested interest in the continued success of Nexdius." [Emphasis in original]
At this time, as Mr Armstrong knew, Nexdius was seeking to undertake a capital raising and had retained View Street Partners to assist it.
The need for the "[t]o whom it may concern" letter arose following a meeting with a potential investor, in which Mr Armstrong had evidently participated.
The "[t]o whom it may concern" letter contained no suggestion that Mr Armstrong contemplated terminating the arrangements between Exposure Scientific and Nexdius.
As part of the capital raising, View Street Partners, on behalf of Nexdius, sent an "Offer Document" to potential investors in Nexdius. Mr Armstrong received a copy of that document.
The Offer Document stated that Nexdius: "[H]as an exclusive global license of the patent and rights to ground breaking intellectual property in relation to vitamin D promoting sunscreen technology products. … The Company holds an exclusive global licence to patented technology that has been fully developed using private capital. … The Solar D patent and IP is owned by Exposure Scientific. Exposure Scientific is owned by the inventor, Ernest Armstrong (who is one of the larger shareholders of Nexdius). The Company has 2 separate exclusive license agreements (North America and Rest of the World) with Exposure Scientific and Ernest Armstrong of the patent and IP for the life of the patent, which is 19 years."
Mr Armstrong made no objection to the contents of the Offer Document nor did he seek to make any amendments to it.
Indeed, on 16 April 2017, when informed of the closing of the capital raising, Mr Armstrong wrote to Mr Collett: "Great job on the money raise - you seem to have a natural talent for that - congrats!"
54 investors subscribed $2.4 million for the issue of 15 million shares in Nexdius, which were issued on 4 May 2017. Mr Armstrong, at the time, held 5,065,000 shares in Nexdius, which were valued at some $800,000.
On the instructions of Nexdius, Shelston IP caused trademark registrations and applications in Australia, and around the world, to be transferred into the name of Exposure Scientific.
On 4 July 2017, Mr Sinclair, from Shelston IP, wrote to Mr Day attaching a notification from Shelston's International Bureau that the Solar D trademark had been updated to show Exposure Scientific as its owner.
On the same day, Mr Day sent a copy of that communication to Mr Armstrong for his information. There is no evidence that Mr Armstrong raised any issue with the pace with which the transfers were occurring or that he indicated that the default asserted in the 15 February 2017 notice remained to be cured or that a right of termination still existed.
During this period, Nexdius continued to pay to Exposure Scientific sums under the Licence Agreement. Mr Armstrong continued to require such payments.
For example, on 6 July 2017, Mr Armstrong wrote to Mr Day as follows: "I just checked the Exposure Scientific bank account and did not see any sign of the July payments that were due July 1, 2017 ($5,500 for the North America Agreement or $5,500 for the Agreement). Please remit as soon as possible."
Evidently, there was delay on the part of Nexdius in forwarding to Shelston IP documents executed by Exposure Scientific for the purpose of causing the ownership of Exposure Scientific to be recorded in trademark registers in a number of countries.
It appears Nexdius received these documents on or about 24 April 2017, but did not forward them to Shelston IP until 9 August 2017.
In that regard, Mr Armstrong gave this evidence: "I do not know why Mr Collett and Mr Day delayed the provision of these Powers of Attorney to Mr Sinclair for three and one half months between 24 April 2017 and 9 August 2017. I was not informed and did not become aware until August 2017 that Nexdius had not provided to Shelston IP the powers of attorney and other documents necessary for the correction of the registers."
However, as set out above at [46] and [47], Mr Armstrong was aware of some of the steps taken to transfer the trademark and, so far as the evidence before me reveals, raised no issue with Nexdius as to the pace in which transfers were occurring.
On 8 August 2017, and, on Nexdius's case, without warning to it, Exposure Scientific served on Nexdius the notice, referred to at [1] above, purporting to terminate the Licence Agreement.

Serious question to be tried

The conclusion to which I have come is that, on the assumption that as at 15 February 2017, Nexdius was in default under the Licence Agreement, there is a serious question to be tried that, in the events that thereafter occurred, Exposure Scientific was not entitled to terminate the Licence Agreement on 7 August 2017.
I have come to this conclusion for a number of reasons.
First, there is a question to be tried as to what Mr Armstrong meant when, in his letter of 17 March 2017, he said that the proposal to transfer the Solar D trademark from Nexdius to Exposure Scientific would cure the default asserted in the demand of 15 February "provided Nexdius follows through on causing the change of ownership" (see [21] above).
Mr Armstrong went on to say (see [22] above) that it was the "sole responsibility" of Nexdius to sign the deed of assignment (which it did) and "provide it along with instructions immediately to cause the change in ownership of the trademarks" to the trademark attorney.
On one reading of that letter, Mr Armstrong was saying that Nexdius would "[follow] through on causing the change of ownership" of the trademark if it took those steps; which it did.
Further, in the same letter, Mr Armstrong stated that he would regard one of the financial defaults as having been cured provided that "all other defaults on both Agreements have been cured to the satisfaction of Exposure Scientific" (see [22] above).
Later, on 21 March 2017, Mr Armstrong wrote that requirements "to cure all financial defaults" have "now been met in full" (see [30] above).
There is a question as to whether it is implicit in that statement, when read in the light of Mr Armstrong's 17 March 2017 statement referred to at [22], that Mr Armstrong was representing that he regarded all defaults as having by then been cured to his satisfaction.
Mr Armstrong's insistence that Nexdius make payments on the Licence Agreement (see [49] above) strongly suggest that he, and thus Exposure Scientific, were affirming the Licence Agreement (by demanding that Nexdius perform its obligations under it).
In argument before me there was debate as to whether Mr Armstrong had sufficient knowledge of the steps being taken by Nexdius and Solar D Skincare to transfer the Solar D trademark to Exposure Scientific to warrant the conclusion that he had, by demanding payment under the Licence Agreement, evinced an election by Exposure Scientific to affirm the Licence Agreement despite the default asserted in the notice of 15 February 2017 (see for example, Immer (No 145) Pty Ltd v Uniting Church in Australia Property Trust (NSW) (1993) 182 CLR 26 at 41-43 (Deane, Toohey, Gaudron and McHugh JJ)).
In that regard, consideration will have to be given to Mr Armstrong's evidence as set out at [52] and the question of what knowledge Mr Armstrong had of the steps being taken to transfer the trademark (see [46], [47] and [53] above).
These are all matters which will doubtless be explored at the hearing of these proceedings.
My conclusion, for present purposes, is that there is a serious question to be tried that Mr Armstrong had sufficient knowledge of these matters to warrant the conclusion that his conduct, in demanding payment under the Licence Agreement, amounted to an affirmation of it.
More generally, there is a serious question to be tried as to whether Mr Armstrong's statements in the "[t]o whom it may concern" letter referred to at [36] and his failure to object to the various statements made by Nexdius in the Offer Document referred to at [41] also bespeaks conduct which warrants a conclusion that Mr Armstrong, and thus Exposure Scientific, no longer asserted the existence of the defaults alleged on 15 February 2017.

Balance of convenience

The balance of convenience lies heavily in favour of Nexdius. Mr Robertson, who appeared for Exposure Scientific, made no submission to the contrary.
The evidence establishes that the market for sunscreen products is seasonal and that approximately 95 per cent of all sales of the licensed products occur in the 4 to 5 month period of late spring and summer.
The evidence also establishes that if the injunction is not continued, Nexdius and Solar D Skincare will not be able to meet their supply obligations or have sufficient supply to meet demand over the Australian summer, and will not be able to fill orders already placed by Chemist Warehouse and other customers.
In the last six months, Solar D has spent, or contracted to spend, over $500,000 on advertising, marketing and promotion of the Licensed Products in Australia, including $150,000 with Chemist Warehouse. Advertisements are currently running (and will run from 1 November 2017 to the end of January 2018).
Solar D Skincare has also entered into a number of sponsorship arrangements for the Australian summer period with "ambassadors", at a cost of over $500,000. Solar D Skincare has also expended more than $100,000 on a television program known as "Bondi Rescue" to provide its products.
These investments will be lost if the injunction is not continued.
Mr Armstrong and Exposure Scientific have offered no evidence that they have capacity to exploit the rights under the Licence Agreement if the injunction is not continued, nor of any loss they would suffer if the injunction is continued.
For those reasons, subject to the matter which I next consider, my conclusion is that the injunction should be continued until the final hearing in these proceedings (provided that Nexdius and Solar D Skincare undertake to diligently prosecute the progress of these proceedings.

Material non-disclosure

The further matter to consider is whether, as Mr Robertson submitted, Nexdius and Solar D Skincare failed to disclose on the ex parte application of 2 November 2017 material matters such as to warrant dissolution of the injunction without further ado.
The relevant principles are well known.
On an application for ex parte relief, an applicant is obliged to make full disclosure to the court of all relevant matters - including those matters within its knowledge that the respondent may have raised, if present, in opposition to the relief sought.
The party applying for ex parte relief bears a heavy onus of frankness and candour in placing material before the judge in connection with the application: Walter Rau Neusser Oel Und Fett AG v Cross Pacific Trading Ltd [2005] FCA 955 at [38] there citing Isaacs J in Thomas A Edison Ltd v Bullock (1912) 15 CLR 679 (at 681-2).
Failure to comply with the obligation will result in the ex parte injunction being dissolved, although such dissolution is without prejudice to a further application for a further interim injunction based on fresh material: Harrem Pty Ltd v Tebb & Anor [2006] NSWSC 1415 at [15]-[17] (Palmer J).
The courts have, historically, required a high standard of candour and responsibility of those who seek ex parte orders: Hilton v Lord Granville (1841) 4 Beav 130; 49 ER 288; Dalglish v Jarvie (1850) 2 Mac & G 231; 42 ER 89.
Mr Robertson submitted that the evidence adduced by Mr Collett on the ex parte application was misleading in four material respects.
First, Mr Collett deposed that, between 17 March 2017 and the purported termination on 7 August 2017, Exposure Scientific had invoiced Nexdius for service provided to Nexdius pursuant to the Licence Agreement and that Nexdius had paid for those invoices and that Exposure Scientific had accepted such payments.
Mr Robertson submitted that this was incorrect as the monies paid by Nexdius related only to the North America Agreement and not to the Licence Agreement.
There is, at least, a serious question to be tried about this. Mr Armstrong's email of 6 July 2017 (referred to at [49] above) suggests that, consistently with Mr Collett's evidence, and inconsistently with there being a material non-disclosure to me on 2 November 2017, the $11,000 payment related to both the North America Agreement and the Licence Agreement.
Second, Mr Robertson pointed out Mr Collett's affidavit read in support of the ex parte injunction did not disclose that the "[t]o whom it may concern" letter referred to at [36] above was written at Mr Collett's request and was an amended version of a letter that Mr Collett had himself drafted.
I do not regard this omission as material. Mr Collett's evidence did not suggest that that letter represented an unsolicited, spontaneous utterance by Mr Armstrong. In any event, the letter speaks for itself. It suggests that Mr Armstrong was sanguine as to the future business relationship between Exposure Scientific and Nexdius and appears inconsistent with Mr Armstrong then having the view that Nexdius remained in breach of the Licence Agreement.
The third matter was a suggestion made by Mr Collett in his affidavit that he had become aware on or about 22 September 2017 that Mr Armstrong and Exposure Scientific had "commenced commercial discussions with the largest pharmaceutical company in Brazil" about licensing certain intellectual property to it and that "these discussions had commenced prior to the issuance of the Notice of Termination".
Mr Robertson submitted that this statement was misleading as "Mr Collett had been informed of the discussions at their commencement".
However, earlier in his affidavit, Mr Collett had revealed that he knew, through email exchanges with a Dr Michael Holick in early August 2017 of a "possibility [sic] opportunity to sublicense Solar D products in Brazil". What Mr Collett said he did not know was that "Mr Armstrong at the time was negotiating directly with that Brazilian company".
These are matters which will have to be explored at the hearing. I am not in a position to now reach a conclusion that the disclosure made by Mr Collett in his affidavit on the ex parte application was misleading.
Finally, Mr Robertson submitted that Mr Collett had failed to disclose to the Court that, on its website, Nexdius was claiming that it still owned the Solar D Skincare brand trademark. I do not see that as a material non-disclosure.

Conclusion

Provided that Nexdius and Solar D Skincare are prepared to undertake to the Court to do all such things and execute all such documents as to ensure that these proceedings are prosecuted expeditiously, and to continue to give to the Court the usual undertaking as to damages, I propose to continue the injunction I granted on 2 November 2017 until the hearing.
I propose to grant Mr Armstrong and Exposure Scientific liberty to apply on short notice to dissolve the injunction if Nexdius and Solar D Skincare do not comply with that undertaking.
I invite the parties to confer and agree on the orders needed to give effect to these reasons.
I will hear the parties as to costs. My preliminary view is that the costs of the application for continuation of the interlocutory relief should be the plaintiffs' costs in the cause.

DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 24 November 2017

At a glance

Court

Decision date

Before

Catchwords

Source

Catchwords

Judgment (10 paragraphs)

Parties

Cases Cited (4)

Cited By (3)