the probability or possibility of sirtex resolving the matter with uwa
55 I now turn to the second issue. As noted above, Sirtex contends that there is considerable certainty - and that no discount in fact should be provided in respect of this probability assessment - that an agreement would have been reached between Sirtex and UWA concerning the use of the intellectual property such that Sirtex would have avoided any of the costs and expenses it now seeks to recover from Dr Gray. At this time, Sirtex was about 12 months away from a public listing.
56 On the other hand, Dr Gray contends that it is highly probable that had Sirtex attempted to resolve its dispute with UWA in 2000, no agreement would have been reached between them. Alternatively, any agreement would have required Sirtex to pay UWA royalties the amount of which would have exceeded the damages now claimed.
57 In Sellars, the High Court dealt with the question of damages for deprivation of a commercial opportunity, whether the deprivation occurred by reason of breach of contract, tort or contravention of the TPA. In the joint judgment of Mason CJ and Dawson, Toohey and Gaudron JJ, at 355, their Honours observed that such damages should be ascertained by reference to the Court's assessment of the "prospects of success of that opportunity had it been pursued". Their Honours went on to explain that in the case before them the applicant had shown "some" loss or damage was sustained by demonstrating that the contravening conduct caused the loss of a commercial opportunity which had "some" value (not being a negligible value), the value being ascertained by reference to the "degree of probabilities or possibilities".
58 Their Honours in the joint judgment made these statements of principle by reference to the principle earlier recognised in Malec. Their Honours observed, at 355, that the principle recognised in Malec was based on a consideration of the peculiar difficulties associated with the proof and evaluation of future possibilities and past hypothetical fact situations, as contrasted with proof of historical facts. In Malec, in the joint judgment of Deane, Gaudron and McHugh JJ, their Honours observed, at 643, in respect of events which have or have not occurred, damages are assessed on an "all or nothing" approach. But in the case of an event which it is alleged would or would not have occurred, or might or might not yet occur, the approach of the court is different:
The future may be predicted and the hypothetical may be conjectured. But questions as to the future or hypothetical effect of physical injury or degeneration are not commonly susceptible of scientific demonstration or proof. If the law is to take account of future or hypothetical events in assessing damages, it can only do so in terms of the degree of probability of those events occurring. The probability may be very high - 99.9 per cent - or very low - 0.1 per cent. But unless the chance is so low as to be regarded as speculative - say less than 1 per cent - or so high as to be practically certain - say over 99 per cent - the court will take that chance into account in assessing the damages. Where proof is necessarily unattainable, it would be unfair to treat as certain a prediction which has a 51 per cent probability of occurring, but to ignore altogether a prediction which has a 49 per cent probability of occurring. Thus, the court assesses the degree of probability that an event would have occurred, or might occur, and adjusts its award of damages to reflect the degree of probability. The adjustment may increase or decrease the amount of damages otherwise to be awarded.
This approach was endorsed in the joint judgment referred to in Sellars, at 350.
59 Ultimately, in this case, once I have assessed the relevance and quantum of the costs claimed as damages, and made any further deductions that may be shown as appropriate on account of achieving a hypothetical settlement of the matter (for example by taking legal or other advice in relation to the proposed settlement), the question arises whether that sum should be discounted wholly or partially by reason of the probability or possibility of no settlement, or a settlement of the matter with UWA for no consideration, or a settlement on the basis of a share issue with no cash component, or a settlement with a royalty - these being a range of possibilities identified by the parties.
60 Accordingly, if the Court were to make a finding that the probability of a settlement for no consideration or for a share issue with no cash component or royalty was 100%, there would be no discount. However, if the Court did not rate the probability of such a settlement at 100% then the Court would need to ascribe some percentage of probability and discount the damages assessed accordingly. By contrast, if the Court were to find the probability was 100% that there would have been no settlement at all, then the lost opportunity would have a nil value. If there is a possibility that there may have been no settlement at all, that possibility must also be taken into account in assessing the extent of the probability of a settlement where the probabilities are that a settlement for no consideration or for a share issue with no cash component or royalty would have been achieved.
61 I should note at the outset of this exercise, that French J, at [1612], left quite open the possibilities, following an inquiry of UWA by Sirtex, of Sirtex being notified of a claim or of achieving a resolution of the matter. However, his Honour made many findings and observations that materially bear on the assessment of probabilities and possibilities I must now undertake.
62 In the primary judgment, French J provided a summary of his findings about implementation of the intellectual property policy and regulations of UWA in the period 1985 - 2006, at [246]. It is unnecessary for me to repeat that summary in full here, but items 26 - 36 might be noted:
26. In February 1994 Professor Michael Barber was appointed to the new position of Pro Vice-Chancellor (Research). His duties included maintaining and ensuring adherence to intellectual property policies.
27. Professor Barber was never appointed to a Patents Committee and knew nothing of the existence of such a committee.
28. UWA adopted an Intellectual Property Policy together with IP Regulations and established an Intellectual Property Committee in 1996.
29. The Intellectual Property Committee first met in December 1996.
30. The IP Regulations came into effect no earlier than 30 November 1997.
31. Neither Professor Barber nor UWA put in place any procedures for the enforcement of notification obligations under the Patents Regulations or the IP Regulations.
32. Professor Barber had power under the IP Regulations to deal with inventions on behalf of UWA including any assignment or waiver of UWA's rights in relation to them.
33. UWA legal officers were involved in issues relating to commercialisation of intellectual property projects.
34. In January 2001 UWA established an Office of Industry and Innovation. One of its functions was to train researchers in relation to intellectual property processes and its regulations in relation to intellectual property. Dr Andrew Sierakowski was appointed as its director. He reported to Professor Barber.
35. In November 2001 Mr Kim Heitman was appointed as an intellectual property lawyer in the Legal Services Office of UWA. In November 2002 he became Director of Legal Services.
36. Professor Barber resigned from UWA late in 2002.
63 On 22 January 1997, Professor Barber replied to a letter from Mr Gorn, chairman of CRI, of about 17 January 1997. The full text of Mr Gorn's letter is set out in the primary judgment at [947]. That letter attached a proposed draft letter. Professor Barber was invited, if that draft letter was acceptable to the University, to prepare the letter and forward it to CRI. The draft was in the following terms:
I confirm that the University of WA has no interest financially or otherwise in the technology or intellectual property described in your letter and referred to as:
- The use of small ceramic particles to treat patients;
- The use of a new matrix for transport of an anti‑cancer drug;
- The use of targeted hyperthermia in the treatment of patients.
64 In his reply to that letter, as set out in the primary judgment, at [956], Professor Barber stated:
I confirm that, on the basis of the facts in your letter, the University has no interest financially or otherwise in the CRI funded technology (or intellectual property in it) described in your letter and referred to as:
(a) the use of small ceramic particles to treat patients;
(b) the use of new matrix for transport of an anti-cancer drug;
(c) the use of targeted hyperthermia in the treatment of patients.
65 In the primary judgment, at [957] and [958], French J refers to communications between Professor Barber and Dr Gray the day following the sending of this letter concerning the use of the letterhead and whether Mr Gorn was signing as chairman of CRI or chairman of CACS. He asked Dr Gray to liaise with CRI so its letterhead could be better adjusted to reflect the real situation.
66 At [959], French J noted, concerning Professor Barber's letter, that Professor Barber was aware from the Gorn letter that the letter he had been asked to provide was sought for the purpose of CRI's negotiations with a third party financier. He also noted two limitations in the letter where the release was confirmed "on the basis of the facts in your letter" and that the technology was "CRI funded". There was no suggestion that the truth of the facts was assumed as distinct from known, nor was there any suggestion that CRI funding was limited to any particular aspect of the technology concerned.
67 At [960], French J accepted the Sirtex contention that an independent third party reading the letter would properly infer that UWA was not making a conditional release but a release based upon its own inquiries or satisfaction. At the same time, French J said that he accepted "that Professor Barber was prepared to sign his letter in reliance upon that provided by Mr Gorn. His less than rigorous approach in this respect was consistent with his less than hard line attitude to the enforcement of what he and others thought were UWA's intellectual property rights".
68 French J, however, at [960], said he would not go so far as to conclude that Professor Barber's letter reflected an informed consent by UWA to Dr Gray or CRI or anyone else exploiting what it believed to be its intellectual property rights in relation to the three technologies.
69 Nonetheless it is important to note the finding by French J that Professor Barber in this dealing adopted a "less than rigorous approach" which was "consistent with his less than hardline attitude" to the enforcement of what he and others thought were UWA's intellectual property rights.
70 Professor Barber's approach is important to note in assessing the probabilities and possibilities of issues surrounding the ownership of the intellectual property in late 1999/early 2000, because Professor Barber was the representative of UWA with a responsibility for ensuring adherence to policies on intellectual property. The evidence elsewhere suggests that it is highly probable that Sirtex would have acted on the advice to make further inquiries of UWA and would have approached Professor Barber either directly or have been referred to him by the Vice-Chancellor Professor Schreuder. I will return to that observation later.
71 Between 1 January 1993 and 4 February 2004, Professor Robson held the position of Deputy Vice-Chancellor and Provost of UWA. He gave evidence that as from 1993, with reference to reg 4(1)(ii) of the Patent Regulations 1971 of UWA, it was contemplated that UWA may well abandon its interests in relation to any intellectual property that it had taken some interest in previously (transcript 522 (20 - 22)). It should also be noted at this point that Dr Gray had a strong antipathy towards Professor Robson and considered Professor Robson to be behind UWA's resistance to his actions at material times.
72 Professor Robson's understanding was that the University's 1996 Intellectual Property Regulations gave Professor Barber as Pro Vice-Chancellor (Research) the power to deal with inventions on behalf of UWA, including any assignment or waiver of UWA's rights in relation to the inventions: affidavit of Professor Robson, sworn 6 December 2006, at [50].
73 Professor Robson accepted that from 1993 through to 1999, if UWA was told the prospects of the invention becoming commercially exploitable were either non-existent or remote, it would have made a decision based on the probabilities of the invention being profitable. That is to say, it would not have been interested in the invention (transcript 521 (31‑38)). Similarly, if Professor Robson had been informed in 1993 through to 1999 that the prospects of commercially exploiting the DOX-Spheres patent were either non‑existent or remote, it would not have been interested in securing the protection for that intellectual property (transcript 521 (40 - 46)).
74 Professor Barber gave evidence confirming that, as from 1996, UWA could vest the intellectual property in the funding body (transcript 741 (12) - 742 (14)). UWA was prepared to contemplate arrangements in which an external party wished to develop its intellectual property and UWA would vest its intellectual property rights back into the funding body and that there were examples of that (transcripts 742 (10 - 14)).
75 Professor Barber said that from around 1996 and through to at least 1999, the philosophy that underpinned UWA's approach to intellectual property and commercialisation was not commercially focused. Rather, it was focused on such matters as gaining research funding, supporting PhD students and, above all, gaining reputation from academic publication in peer reviewed journals: affidavit of Professor Barber sworn 5 December 2006, at [48] and transcript 793 (24 - 37); see also the primary judgment at [230].
76 Professor Barber said that if the University had been commercially focussed, this would have entailed being more proactive in the commercial exploitation of intellectual property (transcript 793 (40-43)). Professor Barber said that commercialisation of intellectual property was a by‑product, and there were only a few examples of any substantial commercialisation during this period: see primary judgment at [230].
77 Professor Barber said that, in all cases, UWA was reactive rather than proactive. The driver of any commercialisation of intellectual property was the researcher and/or his or her external contacts. If a proposal was put forward then he would consider it as the relevant UWA officer under the Intellectual Property Regulations: Professor Barber's affidavit sworn 5 December 2006 at [53]. If a researcher approached Professor Barber suggesting research could have commercial value and he or she wished to speak to third parties, UWA would generally work with them to follow this through. An example was the commercialisation of the production of nanopowders through Advanced Powder Technology Pty Ltd between 1999 and 2000: see primary judgment at [231].
78 It seems fair to conclude UWA took the information supplied at face value and would work with external parties to facilitate their activities. If a proposal was brought forward, UWA would try to make it happen. Professor Barber relied on the people who came to him with propositions to bring all the relevant information. UWA was not proactive: see primary judgment at [231].
79 Professor Barber also said that the position either under UWA's 1971 Patent Regulations or UWA's 1996 Intellectual Property Regulations was that if UWA intended to take an interest by way of ownership of intellectual property, it had to assume some responsibility for the costs of doing so, with the qualification that there would be an issue about the process by which the necessary resources were to be raised (transcript 810 (28 - 35)).
80 Professor Barber considered in relation to costs that the general view would have been that UWA would not be prepared to bear them directly and they would be matters in respect of which UWA would negotiate in good faith to establish the position it would have in relation to the intellectual property thereafter (transcript 810 (37 - 47)).
81 If between 1997-1999 someone had said to Professor Barber that UWA was entitled to ownership of certain inventions by reason of either patents, or regulations, but also told him it was going to take several million dollars to develop inventions and there were no guarantees UWA would receive any return on investment, as Pro Vice-Chancellor (Research) he would have been extremely careful in committing UWA funds. He would have been reluctant to commit funds but not unwilling to contemplate doing so (transcript 793 - 794).
82 All of this evidence provides good grounds for considering, at first blush, that UWA would not have been instinctively opposed to Sirtex's use of the intellectual property here in question had Sirtex made an inquiry of UWA in late 1999/early 2000.
83 In the primary judgment, at [702] - [711], French J dealt with evidence concerning Dr Gray's meeting with Professor Barber on 11 May 1994, and Dr Gray and Mr Shervington's meeting with Professor Barber on 15 August 1994. At [711], French J found that the probability was that Dr Gray did raise and discuss with Professor Barber his intention of establishing a commercial vehicle to raise venture capital for the exploitation of the technology.
84 At [821], French J found as to Professor Barber's knowledge of Dr Gray and Sirtex in late 1995, as follows:
Professor Barber's recollection was that he had been aware of Dr Gray's directorship of Paragon Medical when Linda Key brought it to his attention in or about December 1995. He agreed that he was aware from that time that Dr Gray was a director of Paragon Medical and that the company would be working in conjunction with the Institute. He was aware that Paragon Medical was interested in the commercialisation of research. He said he would have discussed the matter with Professor Gale. They tended to discuss such things at the executive team meetings on Friday mornings.
85 At [901] - [909], French J made findings as to the letter from Dr Gray to Professor Barber, dated 26 July 1996 concerning the "first proposal". At [908], French J noted that Professor Barber did not regard the statement that CRI controlled the intellectual property as unusual. It was consistent with the position in other Category B Centres where parties other than UWA owned the intellectual property used in CACS. He accepted the statement at face value.
86 At [909], French J took account of the evidence that, after receiving the letter, Professor Barber had a company search carried out in relation to Paragon Medical which revealed that Dr Gray was one of its directors. Professor Barber became concerned about the potential for a conflict of interest which could affect students detrimentally. This had happened previously in unrelated circumstances. He had discussions with another university person over the next few months. They also had discussions about the structures necessary to give effect to the proposed funding and research arrangements between CACS, CRI and Paragon Medical.
87 Significantly, in my view, Professor Barber also gave evidence that, as of January 1997, he would have baulked at the idea of spending half a million dollars of UWA's limited discretionary funds on the intellectual property in Gray's proposal as there was no proof or certainty that the invention would work (transcript 808 (38 - 42)).
88 Professor Barber said that, as at 15 January 1997, he considered that the $500,000 in Mr Lennon's memo in this regard was only an estimate. In his experience, such estimates are usually exceeded, so he considered the "build cost" would be greater than that: affidavit of Professor Barber sworn 5 December 2006, at [77].
89 I have already made some reference to the letters passing between Professor Barber and Mr Gorn in January 1997. The details of these letters is dealt with in the primary judgment under the heading "The Gorn and Barber Letters - January 1997" between [944]‑[960]. I have referred to some of the content, particularly Professor Barber's reply above.
90 Professor Barber gave evidence that as of January 1997 his normal practice involving legal issues and intellectual property, such as in responding to Mr Gorn's letter, was to discuss such matters with Mr Lennon and have him prepare a draft letter for his (Professor Barber's) signature: affidavit of Professor Barber, 5 December 2006, at [107].
91 As of 20 January 1997, Professor Barber accepted and agreed with the proposition from both Mr Lennon's memo and Mr Gorn's letter that it was important to clarify matters in relation to ownership of intellectual property in order to move forward with capital funding from other sources. However, he saw no reason to instruct CRI in this regard: affidavit of Professor Barber, 5 December 2006, at [113]. As at 20 January 1997, he appreciated that it was quite critical for the University to understand its position before third party investors became involved (transcript 797 (1-3)).
92 In the primary judgment, at [994] and [995], French J dealt with evidence dealing with the topic "Barber/Gray re Paragon Medical directorship - February/March 1997". Here, French J noted Professor Barber's concern about a conflict of interest if Dr Gray were to engage in research/commercial activities and also meet his teaching obligations at the University.
93 To this point nothing in these findings and this evidence suggests Professor Barber was likely to adopt a strong position against a proposal from Paragon Medical (Sirtex) for a release in respect of the intellectual property, but it does suggest Professor Barber would have taken a considered approach.
94 Consistent with this observation, in my view, in the primary judgment, at [1110], French J dealt with UWA's knowledge in November 1999, in the following terms:
By November 1999 Professors Schreuder and Robson and Ms Key were aware of the following matters:
1. That Dr Gray told the ACC that the microsphere technology being used by Sirtex had been developed by him in Melbourne and Perth.
2. Dr Gray had been employed by UWA from the time he came to Perth about 1999.
3. There were grounds for suspecting that some of the work done in the development of the microspheres technology might have been done in the course of Dr Gray's employment.
4. Paragon Medical had lodged applications for certain patents and had been granted the patents.
5. There were grounds for suspecting that the patents applied for by Paragon Medical might not be covered by the Barber letter of January 1997.
6. UWA did not regard itself as having assigned any of its interests in the intellectual property.
7. Paragon Medical was conducting its business on the basis that it owned the microsphere technology being used.
8. Dr Gray regarded UWA as having no interest in the intellectual property being used by Paragon Medical.
Professor Schreuder was not called to give evidence. I infer that he knew of the information contained in his letters to Dr Gray and took no action upon Dr Gray's defiance of his demand for information.
95 Noting that Professor Robson was Acting Vice-Chancellor, in lieu of Professor Schreuder, from 5 November 1999, until 11 November 1999, including at the time of Professor Schreuder's letter to Dr Gray of 9 November 1999, the findings of French J at [1199] - [1204], concerning UWA's decision not to take action against Sirtex in light of its prospectus in July 2000 are also important to note:
Barber declines to act on Sirtex prospectus - July 2000
1199 Professor Barber first saw the Sirtex prospectus in 2000 when Linda Key brought it to his attention. They had some earlier discussion about the question of intellectual property held by Paragon and Sirtex. He said some such discussion had occurred between October 1999 and August 2000.
1200 In the context of Sirtex's initial public offering Ms Key told Professor Barber in July 2000, that, in her opinion, UWA had an interest in the intellectual property. When he saw the prospectus Professor Barber thought that if UWA were to make a claim in respect of the intellectual property it could affect the share offer and expose UWA to a counterclaim for damages. He agreed in cross-examination that he could have asked Linda Key to seek advice from external lawyers which was common UWA practice at the time. However he did not do so. Nor did he conduct any investigation at the time or ask Linda Key to assemble a file of records and information. He accepted that there was nothing to stop him making inquiries of the auditors or independent accountants named in the prospectus about matters contained in. He could have inquired of Mr Lennon who had recently left UWA and he could have contacted other staff members and Dr Gray. He could have written to Sirtex. He did none of these things.
1201 Professor Barber was cross-examined on the prospectus. He accepted that it appeared from the prospectus that the continued services of Dr Gray and Dr Stephen Jones were vital to the ongoing welfare of Sirtex. He also recalled reading a statement in the document that the directors could not exclude the possibility that someone might in the future might claim an ownership interest in the technology. He understood when he read that statement that it meant that the directors were not aware of any claim and that potential investors would have understood that the directors did not believe the claims had been made. Professor Barber also said that the prospectus indicated that the investment would be highly speculative and that large sums of money would have to be expended in a short time. The directors of Sirtex were giving no assurance about the prospects of the business.
1202 Professor Barber said in his affidavit evidence that any investigations into whether UWA had an interest in the intellectual property would be difficult because of the "messy lineage" of the work carried out in the first eleven months of the operation of CACS. It would have been relevant to a decision to commence action against Sirtex that the company had suffered a loss in every trading period for that year. In light of the negative factors, Professor Barber did not think there was a real prospect of an investigation turning anything up. He told either Linda Key or Professor Landau that he harboured the hope that if Dr Gray made a lot of money out of the float he might donate a "Gray Chair of Surgery" to UWA. He concluded that the risks of legal action were not outweighed by the likely benefits. He did not remember raising the matter with Professor Robson but would probably have mentioned it to him.
1203 At this time Ms Key and Ms Frodsham were preparing to prosecute an intellectual property case against Dr Gray. I accept the Sirtex submission that Professor Barber, acting on behalf of UWA, and in consultation with its legal officers, considered making a claim but decided not to do so because of the cost to UWA and the risk of a counterclaim. I also accept, as was the case, that Professor Barber had already shown a reluctance to invest money on behalf of UWA in what would have been an expensive development process including the possible outlay of some $500,000 for equipment for the hyperthermia hysteresis project.
1204 Professor Barber's knowledge may be taken to be that of UWA for all material purposes in these proceedings. I also find that it is probable, as he said, that he told Professor Robson of his discussions about the prospectus with Ms Key.
96 In my view these findings - in respect of a period soon after the material period of non‑disclosure by Dr Gray in late 1999/early 2000 - lend strong support the view that in all probability UWA would not have pursued a claim against Sirtex in late 1999 and early 2000. In turn, this supports a finding that it was highly probable that any approach by Sirtex to UWA to deal with a release for the intellectual property case would then have been successful. As to the basis of such a settlement I will return.
97 It is also important to note, as Sirtex submit, what French J found at [1174] of the primary judgment in assessing the conduct of Dr Gray in not disclosing the possibility of a claim:
In my opinion, despite this knowledge, he [Dr Gray] decided not to disclose the possibility to Sirtex. In all likelihood that was because he took the view that there was not much chance that the University would follow through. He had convinced himself that the Schreuder correspondence was part of a tactic by Professor Robson to bring about his resignation. He had resigned and therefore there would be little or no purpose in UWA pursuing him. He took a calculated risk in not disclosing the correspondence to Sirtex.
This tends to support the view that Dr Gray himself had reason to believe that UWA would capitulate "when push came to shove" over a release.
98 A contrast in UWA's attitude in the period after 2003 is evident, however, when compared with the earlier period just outlined. French J made findings in this regard as to the renewed interest in Dr Gray and Sirtex in 2003 by UWA's new director of Office and Industry and Innovation, Dr Sierakowski and Mr Heitman (UWA's internal solicitor), at [1252] - [1258]. To emphasise the point, Sirtex point out that at the hearing on 15 August 2008, regarding Sirtex's cross‑claim, in the context of what approach UWA would have taken to any settlement with Sirtex in 2000, French J put to Dr Gray's former counsel the following (transcript 33 (12 - 14), 15 August 2008):
You would have to accept, wouldn't you, that there was a considerable contrast between the approach taken in 2003, driven by Heitman and Sierakowski and that taken in 2000?
Dr Gray's counsel accepted that proposition "entirely" (transcript 33 (16)).
99 French J then further noted:
We can't judge, if you like, the hardness of the university's response when approached in 2000 by reference to what was happening later on, because it really had shifted. The best person you could deal with was Professor Barber, in a sense, because he had, as it were, fobbed off the Frodsham Key plan to actually bring action against Dr Gray, hadn't he?
Dr Gray's counsel agreed in the following terms:
He had evaluated it and determined not to do it, I think. More than fobbed off, he had said no.
100 I adopt the observations of French J and take them into account as my own, supported as they are by his Honour's own findings and the evidence recounted in the primary judgment.
101 Sirtex's general approach to resolving commercial issues relating to ownership of the intellectual property in question must also be noted. At [893], French J found that in regard to Sirtex's financial position in July 1996:
893 At that time Paragon Medical had little money. It needed additional capital to continue to function. Indeed as Mr Karlson put it, by the time Nomura/JAFCO approached Dr Gray Paragon Medical was desperate for capital and had not been able to attract any other interest.
102 At [910] - [918], French J found as follows as to Sirtex's efforts in 1996 to resolve any potential claims against its intellectual property:
Intellectual property clearances pursued - September/October 1996
910 Dr Gray and Dr Panaccio met at CRI on 2 September 1996 where presentations were given on the relevant science and technology. Dr Panaccio asked Dr Gray what other parties were involved in the development of the relevant intellectual property or could potentially claim ownership in some or all of it. He asked whether UWA or RPH owned any of the underlying technology or patient data. Dr Gray told him that CRI had funded all the research and the underlying ownership of the intellectual property had been transferred to CRI sometime ago. Clinical trials for patients had taken place at the Prince of Wales Hospital in Hong Kong, but neither the hospital nor the Chinese University of Hong Kong Medical School, with which it was affiliated, claimed any ownership over the relevant intellectual property. Dr Gray also told Dr Panaccio that Monash University had assisted in developing the ceramic microspheres but did not own anything because it was only contract research.
911 Dr Panaccio asked Dr Gray to inform each of the parties of the proposed investment and to obtain written confirmation from them that they would not claim any interest in the technologies. The purpose of his request was to obtain security from Nomura/JAFCO before implementing the proposal.
Gray and Panaccio - September/October 1996
912 In September and October 1996 Dr Panaccio again asked Dr Gray to get third party clearances on intellectual property associated with the technologies. About this time, Ms Goh of the Evaluation Department of Nomura/JAFCO visited CRI and Dr Gray with a view to preparing an evaluation report in relation to the proposed investment by Nomura/JAFCO.
913 Dr Gray wrote to Dr Panaccio on 16 September 1996. He reported that he had met with ARI to discuss securing approval for the SIR-Spheres from the TGA and that meetings with the TGA would follow. He was also finalising an agreement between Paragon Medical and ARI about the production marketing and distribution of the SIR-Spheres. He had had discussions about regulatory requirements to allow the use of the product in Asia. He was proposing to sell it initially in Australia and New Zealand under a TGA Special Access Scheme, get TGA approval and then apply to regulatory authorities in Asia. He anticipated that approval by the Federal Drugs Administration in the United States and by European regulators would be facilitated by TGA approval.
914 The Paragon Medical board met on 25 September 1996. Dr Gray reported on his visit to ARI. Under their proposed arrangement ARI would neutron activate, package, market and distribute Yttrium microspheres on behalf of the company. The majority of the profit on sales would come back to Paragon Medical. The minutes also recorded that Dr Panaccio had recommended to Nomura/JAFCO that it fund Paragon Medical. A business consultant would come from Nomura/JAFCO in the next two weeks. This was a reference to Ms Goh.
915 On 14 October 1996 Dr Panaccio and Dr Gray met with ANSTO and TGA representatives in Canberra. Dr Panaccio remembered being told by Professor Li at about this time, that neither the Prince of Wales Hospital nor the Chinese University of Hong Kong claimed any the ownership in the intellectual property of the technologies. On 15 October 1996 Dr Panaccio met with Professor Mary Gani at Monash University. She told him that Monash University did not make any claim to the intellectual property for the ceramic microspheres. At some time prior to 21 October 1996, according to Dr Panaccio, he had a conversation with Dr Gray about seeking confirmation that the relevant parties had no interest in the intellectual property. Dr Gray later had told him he had obtained verbal assurance but nothing in writing.
916 On 21 October 1996 Ms Goh met with Dr Gray, Mr Karlson, Mr Peter Jones, Dane Gorn the chairman of CRI, Dr Stephen Jones and Jillean Winter of CRI. The meeting lasted all day with presentations about hyperthermia and ceramic microspheres.
917 On 26 November 1996 Professor Peter Darvall, Deputy Vice-Chancellor at Monash University, sent a letter to Dr Gray at Paragon Medical about the project involving plasma processing of microspheres. This was a reference to the ill-fated hollow Yttrium microspheres project. He confirmed that Monash University recognised that the intellectual property associated with microspheres had been brought to the project by Dr Gray. The University would not in future "have any claim on the technology for using Yttrium microspheres in cancer treatment". Dr Panaccio sent a copy of the letter to Nomura/JAFCO's legal department.
918 In November 1996 there was an exchange between Mr Karlson and Dr Gray in relation to the shareholding of Paragon Medical. Dr Gray had set out a proposed shareholding based inter alia on "pre-investment" and "post investment" contributions by himself, CRI, Hong Kong University, Mr Karlson, Mr Peter Jones and Pine Ridge Holdings Pty Ltd. Under the proposal Mr Karlson and Mr Jones would get 15,000 shares each, valued at $30,000, in recognition of their respective contributions of $10,000. Mr Karlson, in a handwritten response, asked who Pine Ridge Holdings was. He also asked "where is Steve Jones?" He did not agree that the $30,000 worth of shares allocated to him and Peter Jones was enough given the directors' hours they had contributed in addition to their cash inputs.
103 French J found as follows, at [930] - [932], as to the basis upon which Dr Panaccio and Nomura/JAFCO were prepared to invest in Sirtex which focussed on securing all intellectual property ownership and obtaining a public listing within five years:
The Nomura/JAFCO offer - 13 January 1997
930 On 13 January 1997 Dr Panaccio sent to Dr Gray a copy of the term sheet representing Nomura/JAFCO's offer. It was an "indicative primary term sheet". It was not intended to be legally binding. It was subject to "satisfactory legal and financial due diligence". As summarised by Dr Panaccio in his affidavit the investment proposal in the term sheet included:
1. A staggered transfer of $3,000,000 by Nomura/JAFCO upon the achievement by Paragon Medical of certain milestones over two years in consideration of three share tranches at each instalment.
2. The execution of a subscription and shareholding agreement.
3. An employee option scheme.
4. Conditions precedent including satisfactory due diligence, satisfactory transfer of all intellectual property and documented representations and warranties.
Under the proposed shareholders agreement the Fund would have the right to appoint two directors to the Board. Dr Gray would undertake to remain an employee and director of the company and maintain a minimum shareholding, agree to non-competitive clauses and that the company activities would be his main business focus. These undertakings would apply for three years after the initial public offering.
931 It was proposed in the term sheet that the current shareholders of Paragon Medical and the Fund would use their best endeavours to achieve a listing of the company within five years on the stock market (clause 16). Conditions precedent to the offer included satisfactory completion of legal due diligence and:
. Satisfactory transfer of all intellectual property to Paragon Medical.
. Satisfactory documentation of the proposed investment including representations and warranties.
932 The term sheet reflected Dr Panaccio's key objective which was to secure the technology and the ongoing involvement of those who had contributed to its development. He had determined that Dr Gray and certain CRI staff such as Dr Stephen Jones were contributors to the technology and should remain involved. Dr Jones had been introduced to him by Dr Gray as an employee of CRI. Dr Panaccio had been told by Dr Gray that Dr Gray was funding all or part of Dr Jones' salary. He said that prior to the commencement of the present proceedings he was not aware that Dr Jones was employed by UWA. Dr Gray counter-signed the terms sheet on 14 January 1997.
104 French J also found as follows, at [969] - [970], as to the approval of these terms by Sirtex's other directors and the ongoing involvement of those directors:
Paragon board meets - 22 January 1997
969 The Paragon Medical Board met on 22 January 1997. Dr Gray, Mr Karlson and Mr Peter Jones were present. Professor Li was an apology.
970 The minutes recorded that Dr Gray outlined the heads of agreement reached with Nomura/JAFCO. The Board unanimously agreed to accept the proposed arrangements subject to a final document to be discussed at the next board meeting. It was expected that the final document would be available within three weeks. At the same meeting it was agreed that there should be a minimum of five directors. The current directors Messrs Karlson, Gray, Jones and Li were reaffirmed. Dr Panaccio and a further nominee of Nomura/JAFCO were accepted as additional directors to be appointed following the first investment from Nomura/JAFCO. Dr Gray was appointed managing director.
105 Other evidence, including Dr Gray's sworn evidence that he took comfort that Mr Karlson and Peter Jones were on the board of Sirtex as he felt they brought expertise and had been brought onto the board to drive the commercialisation process (affidavit of Dr Gray, sworn 15 January 2007, at [32] - [34]) is also relevant to assessing the probabilities of Sirtex resolving the matter with UWA at material times. Mr Karlson also gave evidence that he saw his role in the venture as to providing advice to Dr Gray in relation to the best possible way in which he could obtain a listing for a float of Paragon Medical (transcript 4206).
106 Further, Dr Panaccio gave evidence that, as at 1 March 1997, six weeks before the transaction between Sirtex and Nomura/JAFCO was entered into, "if the lights had been switched on", he would have had no reservation in offering shares to UWA (transcript 3916 (35 - 38)).
107 Dr Panaccio said that if he had been told before May 1997 that Monash or UWA claimed an interest in the technology, he would have made it clear that Nomura/JAFCO would not have proceeded with the investment unless everybody had agreed to transfer their rights to the technology to the new company and that it was not dilutive of Nomura's position (transcript 3669). If he had anticipated an interest claimed by Monash or UWA, he would have had negotiations with them (transcript 3669 (46 - 48)). This is important, direct evidence bearing on the probabilities of how Sirtex would have proceeded.
108 Mr Karlson also accepted that from late 1998 through to 1999, he was anticipating a cash flow crisis and a shortage of cash for Sirtex (transcript 4196 (42 - 43) in cross‑examination by Dr Gray's counsel).
109 Other evidence led, including the Sirtex Annual Report 1999 which showed Sirtex had a total operating loss of $1,355,047 in 1999 and $1,132,907 in 2000, also confirms the clear view that Sirtex had very little cash and needed a secure income stream.
110 French J found, at [1125], that in a meeting of Sirtex's due diligence committee, Dr Gray discussed the issuing of shares or options to the researcher Dr Burton as follows:
1125 Dr Gray said that shares or options could be issued to other persons including Dr Burton and a new managing director at some time prior to or at the initial public offering. The company had not determined how many options would be issued or their terms. He and Dr Panaccio were to prepare a list of proposed option holders, the numbers of options proposed to be issued and a description of their terms.
The point here is, which I accept, that French J found that the company "had not determined how many options would be issued or their terms".
111 French J, at [1140], found as follows as to Dr Gray's explanation to the Sirtex due diligence committee in early 2000 of Dr Burton's potential claim for Sirtex's intellectual property and Sirtex's proposal to offer him shares or options:
1140 Dr Gray explained that Dr Burton had been involved at CRI in the development of the resin microspheres during the 1980s and had developed a technique of fixing Yttrium to such microspheres. Patent protection had not been sought because of want of novelty. Dr Gray said he would write to Dr Burton to seek confirmation that he would make no claim in relation to ceramic microspheres used by the company. The company might offer shares or options in exchange for that confirmation. In cross-examination Dr Gray said that Dr Burton had not had much to do with ceramic microspheres but more with the resin microspheres. The reference to ceramic microspheres in the minutes could have been a mistake. I accept that it was intended to be a reference to resin microspheres. The committee resolved that Mr Mellos would discuss the intellectual property issues with Mr Cherry and report to the committee at the following meeting.
The point to note here is that Dr Gray said that he would write to Dr Burton to seek confirmation that he would make no claim and that the company might offer shares or options in exchange.
112 The Sirtex prospectus (exhibit 36A at 58) also deals with the question of shares or options being issued as part of the IPO.
113 At [1612], in light of all this evidence and these findings, French J found, as noted at the outset of this judgment, that if Sirtex had been made aware of the Schreuder correspondence, Sirtex would have been advised to make an inquiry of UWA.
114 Whilst the possibility existed (and cannot entirely be discounted) that UWA might then have rejected any inquiry and simply notified a claim, the findings and evidence I have noted support the view that there was a distinct possibility that not only would Sirtex's inquiry of UWA not have been rejected out of hand, but that an accommodation would have been found through the provision by Sirtex of some consideration.
115 In determining whether UWA and Sirtex would have negotiated a settlement at material times in 1999/2000, it is relevant to recall exactly the point to which the Schreuder correspondence had developed as of the end of November 1999. That correspondence is included in the primary judgment at [1102] - [1108], and the background to it precedes those paragraphs. In the Schreuder/Gray letter of 17 June 1999, at [1102] of the primary judgment, Professor Schreuder challenged Dr Gray in the following terms:
Would you explain the origin of the intellectual property rights in the microsphere technology, now allegedly owned by Paragon Medical Limited and provide particulars of any purported transfer of intellectual property rights to that company. If you allege that the intellectual property was created outside your employment by the University please indicate where the work was conducted and at what time.
116 In the Gray/Schreuder letter of 28 September 1999, at [1103], Dr Gray dealt the intellectual property question as follows:
With regard to the company Paragon Medical Limited, the intellectual property resident in that company relating to yttrium microspheres has been derived exclusively from a program of research undertaken by the Cancer Research Institute Inc.
Dr Gray also said in his letter:
You should be aware that Professor Barber sits as your representative on the Advisory Committee of the Centre for Applied Cancer Studies together with myself and the Chairman of the Cancer Research Institute Inc. Intellectual property issues relating to the Institutes and the University have been discussed openly at those meetings on several occasions.
Dr Gray also denied having any conflicts of interest.
117 There was subsequent correspondence including the Schreuder/Gray letter of 11 October 1999 and the Gray/Schreuder letter on 17 November 1999. In the letter of 17 November, Dr Gray asked Professor Schreuder to clarify "the facts upon which it is suggested that the University might be legal owner of the intellectual property …". In what might be considered a "stone-walling" tactic, he said that:
When this information is provided I may be in a better position to assist you and clarify the misunderstandings that you may have.
He concluded in the letter:
In the meantime, I confirm that I am no longer employed by the University of WA.
118 This reply in effect threw down the gauntlet to UWA. Would UWA take up the challenge? There was no reply by UWA to the letter from Dr Gray. Professor Robson did not remember why UWA did not respond. Professor Schreuder was not called to give evidence. At [1110], French J inferred that Professor Schreuder knew of the information contained in the letters to Dr Gray and took no action upon Dr Gray's defiance of his demand for information.
119 While Sirtex had no knowledge of the Gray/UWA 1999 correspondence at material times what French J found at [1111] - [1115] is also relevant to the issue I must now determine:
Sirtex's knowledge of Gray/UWA 1999 correspondence
1111 Dr Panaccio said that prior to the present proceedings he was not aware of the existence of the correspondence between Professor Schreuder and Dr Gray between June and October 1999. Had he been aware of those letters he would have recommended to Nomura/JAFCO not to advance the final amount of $1 million until the issue with UWA had been resolved. He said he would have also recommended to Nomura/JAFCO to instruct solicitors to advise on any possible breaches of warranties or representations by Dr Gray, CRI and Sirtex.
1112 Mr Karlson had not seen the correspondence prior to the current proceedings. He would have expected Dr Gray to inform the Board of it and, in particular, each and every time an allegation was being made against him by UWA. He said that had he been shown the correspondence or been made aware of its subject matter he would have been concerned because UWA was asserting an interest in the intellectual property of Sirtex which was contrary to his understanding of the position. This would have raised a number of issues for investigation. He did not see how the company could have proceeded with its planned float, which was intended to take place in 2000, unless the issues raised by UWA were resolved.
1113 Dane Gorn gave similar evidence. He added that he had participated in regular meetings of the CACS Advisory Board and that representatives of UWA were members of the Board. He recalled an Advisory Board meeting on 9 September 1999 which was attended by Professor Landau. The discussion did not include, to the best of his recollection, any discussions about UWA's assertions against Dr Gray at that time. He did not recall Professor Landau raising the matter with him at the meeting or at any other time that UWA considered it had an interest in the intellectual property of the technology being developed by Paragon Medical. As far as Mr Gorn was aware, UWA had no interest in the intellectual property of the business of Paragon Medical/Sirtex and there was no issue in that regard. He was very surprised when he first became aware that litigation had been commenced between Sirtex and CRI. Mr Boyce also gave evidence that prior to the litigation he was not aware of the existence of the correspondence between UWA and Dr Gray in 1999.
1114 The evidence of Dr Panaccio, Mr Karlson, Mr Gorn and Mr Boyce that Dr Gray did not disclose the correspondence between himself and UWA in 1999 was not challenged. I find that it was not disclosed. Dr Gray was asked in cross-examination whether he thought, with the benefit of hindsight, he ought to have drawn Professor Schreuder's letter to the attention of the board of Paragon Medical. With the benefit of hindsight he said he was sorry he didn't because it would have obviated some of the problems that had arisen as a result. He said however that he believed then and still believed that he was right to take legal advice and to raise the matter with the Due Diligence Committee. The latter was a reference to the Due Diligence Committee set up in connection with the IPO of Sirtex shares in 2000. He said that he raised the correspondence with Mr Cherry of Freehills who was working with the committee. For reasons given below, I find that he did not raise that correspondence with Mr Cherry or the Due Diligence Committee.
1115 Had Dr Gray disclosed the 1999 correspondence to the board, particularly the letter of October 1999 from Professor Schreuder, the board would have been put upon inquiry as to the security of the intellectual property upon which it was to rely the following year in proceeding to a public float. I also accept that Nomura/JAFCO would have been put upon inquiry in the way indicated by Dr Panaccio. Dr Panaccio was not the kind of person to gloss over that kind of issue when his primary's money was at stake.
120 What clearly comes out of these findings of French J, as Sirtex submits and I accept, are the following points:
· Nomura/JAFCO on Dr Pannacio's advice would not have advanced the final amount of $1 million due as a third tranche payment until the issue with UWA had resolved - and they would have investigated possible breaches of warranties or representations by Dr Gray, CRI and Sirtex.
· Mr Karlson could not see how the company could have proceeded with its planned float, unless the issues raised by UWA were resolved.
· Mr Gorn's position was similar to these two positions.
· Dr Gray, with the benefit of hindsight, was sorry he had not brought Professor Schreuder's correspondence to the attention of the Board of Paragon Medical (Sirtex) "because it would have obviated some of the problems that had arisen as a result".
121 It was in these circumstances that French J ultimately found, at [1612], that had Sirtex been aware of the correspondence:
it would, in all probability, have been advised to make further inquiries of UWA. It would either have been notified of a potential claim or would have negotiated a release for some consideration, perhaps by way of a share issue.
122 It is important to note that French J did not here find that a commercial settlement of some sort would have been achieved, only that Sirtex would have been advised to make further inquiries of UWA. Nonetheless it is relevant to note that, having regard to his findings, French J immediately listed a share issue as a possible means of a resolution.
123 Nonetheless, Dr Gray contends that although a failure to resolve a dispute with UWA at that time would have meant that the listing of Sirtex was unable to proceed later in 2000 as scheduled, the probabilities are that Sirtex would have sought legal advice as to the strength of UWA's claim and consistently with a position that Sirtex subsequently took in defending these proceedings (no doubt on the basis of legal advice) Sirtex would have come to the view that it had good prospects of defeating UWA's claim. In those circumstances, Sirtex is unlikely to have settled with UWA. Rather, those with a stake in Sirtex would have protected their valuable interests by ensuring that Sirtex did not capitulate to UWA. Litigation would then have ensued and the costs and expenses now sought would have been incurred in any event.
124 Dr Gray contends that this view should be adopted with regard to these considerations:
· There is no evidence from Sirtex or UWA to the effect that, had Dr Gray disclosed the 1999 correspondence, it is likely that the ensuing negotiations between Sirtex and UWA would have resulted in a binding agreement, which finally resolved their dispute without litigation.
· When the 1999 correspondence and UWA's claim did become known to Sirtex, far from negotiating a consensual resolution, Sirtex and UWA litigated their dispute over some three and a half years, including a trial that lasted some 50 days. That is not consistent with a proposal that they would have reached a commercial settlement in 2000. There is no evidence that they ever came close to resolving their dispute. The Court could not be satisfied that things would have been materially different in 2000.
· The evidence as to what settlement offers were in fact exchanged between Sirtex and UWA reveals that when fully informed and having had the benefit of legal advice, Sirtex and UWA each held quite different views as to what would be an acceptable resolution of their dispute: see letter from Jackson MacDonald, dated 5 September 2006, exhibit 243A; letter from Jackson MacDonald dated 10 March 2007 - affidavit of Mr T Price dated 12 May 2008, exhibit TRP1; letter from DLA Philips Fox, dated 14 March 2007 and attached deed, affidavit of Mr T Price, 12 May 2003, exhibit TRP2.
· As the primary judgment demonstrates, UWA did not have a particularly strong (let alone unanswerable) claim against Sirtex (see for example, the primary judgement at [9] - [15]). This means that Sirtex would not have done a deal with UWA at any cost and is more likely to have taken a hard line in any negotiations.
· Although UWA was not pressing its claims against Sirtex in 1999 and 2000, a passive attitude was adopted in circumstances where Sirtex was not seeking to negotiate and UWA were instead faced with the prospect of commencing expensive and risky legal proceedings (French J at [1200], [1202], [1203]). French J indeed found that UWA "considered making a claim (in 2000) but decided not to do so because of the cost to UWA and the risk of a counter‑claim": [1203]. By contrast, the present claim is premised on the notion that Sirtex would have entered into negotiations with UWA. There is no reason to think that UWA would have meekly accepted what was offered to it in those negotiations. UWA's later conduct indicates that despite its initial reluctance to commence proceedings against Sirtex, it was quite prepared to stand its ground and to vindicate its perceived rights via litigation if necessary.
125 Dr Gray further submits that in the event that an agreement was reached for consideration payable by Sirtex to UWA it would most likely have taken the form of a royalty and in that regard Dr Gray contends:
· A lump sum payment is unlikely to have been a viable option for Sirtex in the period prior to the listing (unless it were nominal), given Sirtex's financial position at the time. Sirtex concedes as much in its submissions of 12 August 2008 at [9.4]. However, it is possible that the parties would have agreed upon a lump sum to be paid after the listing. It is known that later several documents from both parties included a lump sum payment (being payments of $1.25m and $1.5m respectively): see letter from Jackson MacDonald, dated 10 March 2007 - affidavit of Mr T Price 12 May 2008, exhibit TRP1; letter from DLA Philips Fox, dated 14 March 2007 and attached deed - affidavit of Mr T Price 12 May 2008, exhibit TRP2. Some allowance should therefore be made for the possibility that the agreed consideration would have taken the form of or included a lump sum payment by Sirtex by UWA, but payable after the listing.
· An allotment of new (additional) Sirtex shares to UWA can be ruled out. The evidence of Dr Panaccio is that Nomura/JAFCO would not have agreed to any allocation of shares to UWA which had the effect of diminishing Nomura/JAFCO's shareholding interest in Sirtex (Dr Panaccio's affidavit of 18 December 2006 at [60], [108.3.2]). The directors and remaining shareholders of Sirtex were not empowered to procure an increase in Sirtex's share capital over the object of Nomura/JAFCO and/or Dr Gray (articles 2.1, 2.3, 4, 12.1 - 12.5 and 14.8 of Sirtex's Articles of Association and cl 3.1 - 3.5, 8.1 and 8.2 of the Subscription and Shareholders Agreement).
· An allotment to UWA of some of the Sirtex shares that would otherwise have been issued to Nomura/JAFCO can likewise be ruled out. Again, Dr Panaccio says that Nomura/JAFCO would not have agreed to diminish its own shareholding interest in Sirtex: see Dr Panaccio's affidavit dated 18 December 2006 at [60], [108.3.2]; transcript 3449 (31-41); transcript 3708 (24-27), 3714 (6), 3830 (43), 3831 (7). The directors and remaining shareholders of Sirtex were not empowered to procure such an arrangement over the objection of Nomura/JAFCO (articles 2.1, 2.3, 4, 12.1‑12.5 and 14.8 of Sirtex's Articles of Association; and cl 3.1‑3.5, 8.1 and 8.2 of the Subscription and Shareholders' Agreement).
· Similarly, an allotment to UWA of some of the Sirtex shares that would otherwise have been issued to Dr Gray could not have been effected without the consent of Dr Gray. The same provisions of the Articles of Association of Sirtex and Subscription and Shareholders' Agreement as last referred to are here relied on. It is submitted that it must be remembered that Dr Gray was a "critical component [of the Sirtex business] going forward" (transcript 3708 (30) - Dr Panaccio) and Dr Panaccio said (transcript 3708 (34)) "if Bruce wasn't involved, we probably wouldn't have invested". Nor is Dr Gray alone in being averse to any arrangement whereby UWA would acquire a shareholding and a say in the affairs of Sirtex. The Chief Executive Officer of Sirtex, Mr Wong, gave evidence in his affidavit of 21 December 2006 at [21];
Given the significant hostility that exists between Professor Robson [of UWA] and Dr Gray, it would be detrimental to Sirtex and its business if any relief were granted in these proceedings relating to Sirtex which resulted in both UWA and Dr Gray holding a significant shareholding in Sirtex which may (or is likely to) result in both UWA and Dr Gray having representation on the board of Sirtex.
Sirtex has referred to the "ease with which shares or options could be issued as part of the IPO" (Sirtex's submissions 12 August 2008 at [9.2]). However, that submission ignores the fact that those shares and options were issued pursuant to an agreement between all of the shareholders of Sirtex (see Supplemental Subscriptions and Shareholders Deed). Mr Wong's evidence suggests that Sirtex would have had similar reservations about inviting UWA on to its share register.
· An allotment to UWA of some of the Sirtex shares that would otherwise have been issued to CRI could also not have been effected without the consent of CRI and Dr Gray (articles 2.1, 2.3, 4, 12.1‑12.5 and 14.8 Sirtex's Articles of Association; cl 3.1‑3.5, 8.1 and 8.2 of the Subscription Shareholders Agreement).
· On the other hand, an agreement with UWA for the payment of a royalty based on net sales:
(a) would not have required Sirtex to pay any amount to UWA unless and until it was earning sales revenue in excess of its costs of sale;
(b) would not have diluted the shareholding of any party; and
(c) would not involve inviting UWA on to the Sirtex share register or give UWA a say in the affairs of Sirtex.
· It is also likely to have been acceptable to Nomura/JAFCO. In that regard:
(a) The deal which Nomura/JAFCO had struck with its co‑shareholders in Sirtex had an inbuilt "ratchet" mechanism, whereby the number of Ordinary Shares which Nomura/JAFCO was entitled to receive upon a sale or listing of Sirtex was calculated by reference to the IRR (compounding annualised internal rate of return) which Nomura/JAFCO earned on its investment in Sirtex shares (see article 13.1 of Sirtex's Articles of Association and definition of "relevant number" and "IRR" in article 1.1. See also transcript 370 (35), per Dr Panaccio). To the extent that a royalty might have affected the price or value of Sirtex shares at the time of listing, then depending on the IRR (after the royalty) that ratchet mechanism may well have protected Nomura/JAFCO's return on investment.
(b) It is apparent from Resolution 7 in Schedule 3 to the Supplemental Subscription and Shareholders' Agreement that there were 450,000 Deferred Shares in existence at the time of the Listing. Under the Articles of Association, Deferred Shares were only to come into existence if the "relevant number" of A Preference Shares (held by Nomura/JAFCO) which converted to Ordinary Shares upon listing was less then 1,499,999 (articles 13.1(e) and (f)). At the time of the listing therefore, Nomura/JAFCO received 1,049,999 Ordinary Shares in place of its A Preference Shares (i.e. 1,499,999 less 450,000). This is the number prior to the conversion dealt with in Resolution 8 in Schedule 3 of the Supplemental Subscription Shareholders' Agreement whereby each Ordinary Share was converted into 11.225646 Ordinary Shares. Thus Nomura/JAFCO's 1,499,999 A Preference Shares and one C Preference Shares became 11,786,928 Ordinary Shares: see Prospectus at 58. Further, since the "relevant number" of A Preference Shares which converted to Ordinary Shares upon listing was 450,000 less than 1,499,999, the IRR must have been 70 or more (see the definition of "relevant number" in article 1.1 and page 7 of the Term Sheet which Dr Panaccio sent to Dr Gray on 13 January 1997, exhibit BMG‑7 to the affidavit of Dr Gray, made 22 September 2009). This means that any reduction in the IRR that was caused by a royalty agreement with UWA would have resulted in Nomura/JAFCO receiving more Ordinary Shares (i.e. up to 450,000 more) upon listing than it in fact received.
(c) This protection, which the ratchet mechanism afforded to Nomura/JAFCO, makes it unlikely that Nomura/JAFCO would have objected to a royalty arrangement with UWA and insisted that there be an allocation of shares to UWA.
(d) Although Dr Panaccio gave evidence that Nomura/JAFCO's position was that parties claiming an interest in the intellectual property were to be offered shares in Sirtex, (see his affidavit 18 December 2006 at [60], [108.3.2] and transcript 3030 (43), 3031 (7)) that evidence was given in a context where the present damages issue had been excised from the hearing before French J. Not surprisingly therefore, Dr Panaccio was not cross‑examined as to how he would have reacted to a settlement proposal which involved the payment of royalties to UWA. Nor was he questioned as to the significance which the ratchet mechanism would have played in his decision‑making process when presented with such a proposal.
(e) Nomura/JAFCO was a venture capital investor whose modus operandi was to make investments and then exit those investments at a profit: see Dr Panaccio's affidavit of 18 December 2006 at [10] - [12].
· It is also likely that UWA would have accepted a royalty arrangement, given:
(a) Professor Barber (UWA) said that the Sirtex Prospectus indicated that an investment in Sirtex shares would be highly speculative: see primary judgment at [1201].
(b) The Sirtex Prospectus has stated that the directors "are unable to provide potential investors with reliable revenue or profit projections or forecasts" (page 25 thereof).
(c) The evidence of Professor Barber, Pro Vice-Chancellor (Research) UWA, in his affidavit of 5 December 2006 at [48] was that:
The philosophy that underpins UWA's approach to intellectual property and commercialisation… through to at least 1999 … was not commercially focussed. It was focussed on matters such as gaining research funding, the support of PhD students and, above all, kudos and reputation from academic publication …
A royalty arrangement which provided a regular income stream to fund research and to fund PhD students would have been consistent with that philosophy, whereas a speculative shareholding does not sit well with the approach outlined by Professor Barber.
(d) There is also evidence that, at least in 1987, UWA's Deputy Vice-Chancellor (Finance) took the view generally that UWA "should not be involved as shareholders" and that "royalties etc seems a better way: any share‑dealing in this area could leave the University with public disfavour if funds raised using our name are subsequently lost": see exhibit 615, page 2.
(e) The central element of the settlement offer which UWA made to Sirtex in September 2006 was a licensing arrangement whereby Sirtex would pay UWA 4% of the Net Price of sales for relevant products: letter from Jackson McDonald, dated 5 September 2006, exhibit 243A.
(f) UWA proposed final orders in these proceedings which made reference to a royalty arrangement that would have obliged Sirtex to pay UWA 4% of the Net Price on sales of relevant products: affidavit of Mr T Price 12 May 2008 at 29 and 39.
126 In the event, I have little doubt, having regard to the evidence and findings recounted, that Sirtex firstly would have acted on advice to make further inquiries of UWA. The probability of that happening, in my view, is sufficiently great not to discount that probability in any respect. The parties do not contend otherwise; it is assumed Sirtex would have made the inquiries. From Dr Panaccio's point of view as noted, if he had been aware of the Gray/UWA correspondence, he would have halted the fund payment due from Nomura/JAFCO and undertaken investigations. I have no doubt that he would have caused inquiries to have been made of UWA to explore and resolve the question of a release for the use of the intellectual property. He had already evinced in 1997 a willingness to deal with organisations such as Monash or UWA who might have expressed some entitlement to intellectual property. The proposed float was 12 months away. Dr Gray had expressed strong views about his entitlement to the intellectual property concerned and there was no follow up to the Schreuder correspondence to suggest that UWA had assumed either a clear, let alone an implacable position on the ownership of the intellectual property.
127 It may also be reliably assumed that if an initial inquiry had been made of Vice‑Chancellor Schreuder in the material period in late 1999/early 2000 that in all probability Sirtex's representative(s) would have been referred to Professor Barber. Justice French, in the course of his exchange with counsel on 15 August 2008 on this point noted above, suggested as much. Professor Barber at those relevant times was UWA's representative with a responsibility for ensuring adherence to its policies on intellectual property. I rate this probability at the highest level.
128 I consider it highly probable that in an exploration of the issues apparently raised in the correspondence passing between Dr Gray and UWA, Sirtex's representative(s) would have approached the matter with a concern to receive from UWA a formal release, consistent with what Sirtex (and Dr Gray) had previously understood to be the position, namely, that UWA did not claim ownership of the intellectual property concerned. Professor Barber no doubt would have been reminded of the letter he provided to Mr Gorn in January 1997 in which he confirmed that, on the basis of the facts in Mr Gorn's letter, "the University has no interest financially or otherwise in the CRI funded technology (or the intellectual property in it)".
129 I find that Professor Barber's views would have been of considerable influence to the outcome of UWA deliberations at all material times when Sirtex made its inquiries of UWA and endeavoured to obtain a formal release to obviate the difficulties suggested by the correspondence that Dr Gray had received. As noted, he had been involved in intellectual property issues for some time for the University. Professor Robson had noted his power as Pro Vice-Chancellor (Research) to deal with inventions and assign or waive UWA's rights. Others, such as Vice‑Chancellor Schreuder, would have accorded great weight to his advice.
130 The probable attitude of Professor Barber then becomes important. In this he was "wisely alive to the hazards of litigation", as French J put it during exchanges with counsel on 15 August 2008. This observation is borne out by French J's findings in the primary judgment, including:
· Professor Barber took a less than hard line attitude to the enforcement of what he and others thought were UWA's intellectual property rights: see [960].
· Professor Barber was fully informed of UWA's rights in 2000 and chose to do nothing: see [1199] - [1204].
· Professor Barber was harbouring a hope that the matter might be resolved on such an amicable basis as Dr Gray deciding to donate a "Gray Chair of Surgery" to UWA: see [1202].
131 It is also clear enough that the board of Sirtex would have been very keen to resolve the matter - there was simply too much swinging financially on the ownership of the intellectual property to ignore the issues the correspondence raised and not resolve it. Within commercial reason, Sirtex would have accommodated UWA's claims.
132 In my view, then, it is highly probable that when Sirtex made its inquiries of UWA, it would have been prepared, within commercial reason having regard to its cash flow position and the apparent strength of its case (albeit based on Dr Gray's claims and assertions) concerning the ownership of the intellectual property, to do what was necessary to get UWA over the line to provide a release.
133 Consequently, I do not accept the contention of Dr Gray that UWA may be expected to have played hardball, at least not after a short period of negotiation. While UWA took an intransigent position later, following 2003, I do not consider that what happened later is a good guide to what probably would have happened if these issues had been raised in late 1999/early 2000. At this point, UWA had raised some issues concerning the issue of ownership of the intellectual property but had not taken firm positions. Rather, as the flow of correspondence in late 1999 between Dr Gray and UWA is concerned, when Dr Gray effectively stonewalled the request for information contained in Professor Schreuder's letter of 11 October 1999, by stating that when the facts upon which it was suggested that the University might be the legal owner of the intellectual property were provided, he "may be in a better position to assist you and clarify the misunderstandings that you may have", there was no reply from UWA.
134 Having regard to the knowledge UWA then had, as detailed in the primary judgment at [1110] and while one cannot discount the possibility that UWA would then have notified a claim in the face of an inquiry from Sirtex, in the event I consider it most probable that UWA would ultimately have provided a release for any consideration. Despite the University's in‑house lawyer, Linda Key, having pressed the University's case for claiming ownership of the intellectual property concerned, UWA had shown a marked reluctance to do so. An approach from Sirtex may have emboldened it in late 1999, but only, in my view, having regard to the probabilities, to the extent of requiring some consideration for a release. If one thing is clear up to this point, and soon after in relation to the prospectus, UWA had exhibited a clear disinclination to take the litigation path. This historic approach strongly supports the probability that UWA, if offered a reasonable commercial opportunity, would have been prepared to provide a release for consideration.
135 I do not accept Dr Gray's contention that because UWA may be said not to have had a particularly strong (let alone unanswerable) claim against Sirtex at this point would have meant that Sirtex would not have done a deal with UWA at any cost and Sirtex was more likely to have taken a hard line in the negotiations. Sirtex, as I have indicated, based on Dr Gray's claims and assertions, would have held the clear view that UWA did not have a strong claim. But Sirtex would, in light of Dr Panaccio's evidence as to the position of Nomura/JAFCO, have been very keen to resolve commercially any possible difficulties relating to the ownership of intellectual property to permit the float to occur on time.
136 What Sirtex would not have been prepared to offer in all probability was any lump sum payment or other payment of significance. Due to Sirtex's cashflow position both parties accept a lump sum payment of significance was not at all a realistic option and I discount it completely. I consider the most obvious consideration Sirtex would have been prepared to offer was a "share issue", as immediately suggested by French J in his ultimate finding at [1612]. So far as a share issue was concerned, Sirtex had countenanced it in the past to resolve commercial demands. The due diligence committee of Sirtex (including Dr Panaccio and Dr Gray) had earlier considered such possibilities in relation to such persons as Dr Burton. The evidence that Mr Karlson was, from late 1998 through to 1999, anticipating a cash flow crisis for Sirtex supports this assessment. By contrast, the issue of shares is a relatively painless exercise. As a matter of law the issue of shares by a company in such circumstances would not represent a loss to the company see Pilmar v Duke Group (2001) 207 CLR 165; [2001] HCA 31, at [64]. The question however would have been - from whose existing allocation of any shares was a share allocation to UWA to come?
137 So far as an argument is concerned that the issue of shares or options to UWA would have increased Sirtex's costs of capital or caused some other loss, I accept Sirtex's contention that the Court can infer that any shares would have been issued from the proportions allocated to Dr Gray and/or CRI and this would have had no appreciable impact on Sirtex's costs of capital. I consider, given the attitude of Nomura/JAFCO through Dr Panaccio, that if any settlement had to be achieved with UWA at the relevant period, in advance of the float of Sirtex and in light of the fact that the issue concerned Dr Gray's ownership of the intellectual property, in all probability the share allocation would have come from the proportions allocated to Dr Gray and/or CRI. I do not accept the submission of Dr Gray that his consent to an allocation of shares to UWA out of his allocation would in all probability have been resisted by him. Similarly, I do not accept the submission that any allocation from the allotment to CRI would have been resisted by Dr Gray. Commercial reason demands the conclusion that in all probability the allocation of shares to UWA would have to come from those that would otherwise have been allotted to Dr Gray and CRI. Nomura/JAFCO would have pointed to the financial support they had provided and were yet to provide by way of the third tranche payment to make the float a success. They would not be the one to take a reduction of equity. Dr Gray and CRI would have had no commercial leverage in this argument. They would also not have wished to stand in the way of the realisation of Dr Gray's lifetime of work to see the commercialisation of the microsphere technology, not to mention the significant personal financial gain each stood to make on a float. No party suggests there would have been a new allotment of additional shares in the company to UWA and I completely discount this possibility.
138 Dr Gray further contends, however, that if there were consideration to be given for a resolution of the matter with UWA it is more probable that a royalty based on net sales would have been the cost of the resolution rather than a share issue. He says the commercial attractiveness of this form of settlement would have been that:
· It would not have required Sirtex to pay any amount to UWA unless and until it was earning sales revenue in excess of its costs of sale.
· It would not have diluted the shareholding of any party.
· It would not have involved inviting UWA onto the Sirtex share register, giving UWA a say in the affairs of Sirtex.
139 In support of this contention, Dr Gray makes the points that:
· Professor Barber had disclosed an unwillingness to assume highly speculative investments, where as a royalty stream, if it were to come about, would in effect be prohibitive in nature.
· Generally, UWA preferred not to be involved with share holders.
· Dr Gray would have been strongly opposed to UWA being on the share register and having any influence over the affairs of the company due to his poor personal relationship with Dr Schreuder and others at UWA.
140 So far as a royalty payment is concerned, counsel for Dr Gray referred to the annual reports of Sirtex and also handed up a document called "Royalty Payments" for the purposes of argument. By reference to this document, senior counsel submitted that, over time from 2000 a payment of 1% would have generated to date, $1.5 million. Thus a rate of 6% would have produced a payment of $9 million.
141 Senior counsel for Sirtex submitted that the "Royalty Payments" document was a fiction, on two levels. First, the document itself lacked logic. What it sought to do was rely on the net sales revenue figures from the annual reports of the company from 2000 to 2009. While the University would take royalties, no adjustment was made to the net sale revenue for the following year. Accordingly the net sales revenue figures used for 2001, 2002, 2003 and so on until 2009 used the wrong number, which should be reduced, and which would have a corresponding reduction in relation to the royalty paid. Secondly, it contemplates Dr Gray, in concert with Sirtex, would have agreed to a 6% royalty.
142 There is in my view very little evidence to suggest that, in the hypothetical circumstances the Court is required to consider, Sirtex would have agreed to a settlement with UWA on the basis of a royalty stream over time, although the possibility cannot be entirely discounted. The first thing that the parties would have been obliged to do on this basis is identify the likely value of the royalty payments. Some regard in 2000 terms to a net present value would have been called for. Sirtex would have been most unlikely to agree to any substantial sum. This would have been for the same reason I consider it highly unlikely that any significant lump sum would have been offered by Sirtex to UWA - because the company was then suffering a cash flow crisis and would have been most unlikely to have given up any future cash flow stream. By contrast, a share issue is, as I have said, a relatively painless solution, particularly from the viewpoint of the controlling shareholder Nomura/JAFCO.
143 In the circumstances I consider it highly probable that not only would an inquiry from Sirtex to UWA have resulted in negotiations concerning the release from UWA of any claim of ownership to the relevant intellectual property, but that an accommodation would have been arrived at, comprising a release given in consideration of a share allotment in Sirtex in favour of UWA in the forthcoming float of the company. For the reasons I have expressed above, I consider it highly probable that that share allotment would have come out of either the allotments earmarked for Dr Gray and/or CRI. Nomura/JAFCO would have held all the commercial leverage in such a commercial setting. Dr Gray and CRI would not have had a commercial leg to stand on in the face of these demands. Moreover, the financial harvest each individually stood to reap was dependant on the continued financial support of Nomura/JAFCO. Given Dr Panaccio's evidence that, had he seen the correspondence between Dr Gray and UWA he would have investigated the possibility of breaches of his duties by Dr Gray, it can be said with confidence that in all probability Nomura/JAFCO would have exploited its commercial position at the expense of Dr Gray and/or CRI and that the incentives for Dr Gray and CRI to accept its proposals would have been irresistible.
144 In these circumstances, I rate as improbable the likelihood that Sirtex would have taken the commercial chance of calling the bluff of UWA (as Dr Gray apparently was prepared to do by ignoring its requests for information) and to have refused to entertain any proposed reasonable settlement. I find it highly probable that Sirtex and UWA would have entered negotiations and UWA would have provided a release following negotiations, based upon a share allocation in Sirtex in the pending float.
145 While I find that it is highly probable that UWA would have provided a release to Sirtex in return for the allotment of shares in the float of the company taken from Dr Gray's and/or CRI's allotments, a question is raised about the degree of probability of this happening. The exercise I am required to undertake is entirely hypothetical. I do not consider that one can say that the probability I have identified is a 100% probability, as Sirtex contends it is. It is a high probability. It is not a probability that is merely a little more likely than not to have happened. In other words, it is much, much more than a 50/50 possibility. But it is not a probability without reservation. There were a range of possible alternatives to such a settlement. While the attitude of Professor Barber suggests a very high probability of resolution on the basis of a share allocation to UWA out of Dr Gray's and/or CRI's allocation, a settlement on other forms of consideration cannot be considered entirely improbable. In light of the dealings between UWA and Dr Gray up to this point and the tone of Professor Schreuder's demands of Dr Gray, if given the commercial opportunity UWA may well have been prepared to drive for a harder bargain than a share allocation. For that reason, I consider a discount of the certainty of such a share issue resolution out of Dr Gray's and/or CRI's allotment in the range of 10% - 15% to be appropriate. I would settle this discount at mid‑range, or 12.5%. I would then determine the probability of such a share settlement at 87.5%. Because I also consider one cannot entirely discount the possibility that an inquiry of UWA by Sirtex might have come to nought - given the ambivalent attitude of UWA to this point and the tone of Professor Schreuder's demands - and that Sirtex may have been notified of a claim, that possibility must consciously be factored into the probability assessment. As a result, I would further discount the 87.5% probability of the share settlement as described by around 2%, reducing it to 86% (2% x 87.5 = 1.74; rounded off to 1.5. 87.5 - 1.5 = 86%). Consequently, I finally determine that there was an 86% probability of a settlement on the basis of a share issue as described.
146 In the result, then, Sirtex is entitled to 86% of those costs and disbursements that have an appropriate causal connection to Dr Gray's impugned conduct.