Watson v Kriticos

Brief Background 6 Mr Kriticos is the inventor of two devices, the 'Wave Machine' and the 'Surf Machine', which are associated with the generation of waves in large bodies of water such as wave pools for recreational purposes. Mr Watson is a patent attorney. He alleges that between 1999 and 2013 he provided his services as such to Mr Kriticos and prepared a number of patent applications relating to the two devices in several jurisdictions. Each of these applications named Mr Kriticos as the inventor. 7 Mr Watson alleges that on 21 June 2013 he reached an agreement with Mr Kriticos known as the 'Patent Share Agreement'. This agreement was to govern Mr Watson's entitlement to remuneration in respect of his work on the Surf Machine invention as well as any other of Mr Kriticos' inventions which Mr Watson worked on without payment for his fees. The 5FASOC refers to this collection of inventions and patents as the 'Covered Inventions' and the 'Covered Patents and Applications'. These expressions are intended to convey, as I understand it, that the inventions and the patents and applications described are ones which are subject to the arrangement embodied in the Patent Share Agreement. 8 The formation of the agreement is alleged by Mr Watson to have been reached with Mr Kriticos in the course of several telephone calls between 11 January and 21 June 2013, and to be evidenced in writing by a number of emails sent on 21 June 2013 and on other days too. Mr Watson alleges that it was agreed that he would do patent attorney work for Mr Kriticos (including lodging patent applications) and that in return, he would be entitled to percentage shares of revenues relating to the exploitation of the Covered Inventions and the Covered Patents and Applications. He also says that it was agreed that he would have a 12.5% ownership interest in the Covered Inventions and the Covered Patents and Applications. 9 On 11 November 2014, Mr Kriticos sold his business insofar as it was outside of Australia and New Zealand to Whitewater. This business related to the manufacture and installation of surf rides. He also sold to Whitewater the technology and the intellectual property outside of Australia and New Zealand for wave forming and surfing devices. This included some of the inventions the subject of the Patent Share Agreement. The sale price for the intellectual property was $950,000 CAD. Whitewater agreed to use its best endeavours to commercialise the intellectual property throughout the world (apart from in Australia and New Zealand). Mr Kriticos agreed not to compete with Whitewater outside of Australia and New Zealand in return for which Whitewater agreed to pay him a restraint fee related to the number of units sold. It was prohibited from dealing with the intellectual property in any way which might diminish this fee. In addition, Whitewater agreed to pay Mr Kriticos a consultancy fee of $100,000 per annum. 10 So far as the intellectual property was concerned, Mr Kriticos kept the right, but not the obligation, to manage the patents. Whitewater could elect to take over the management of the patents. If it did, it was to pay any outstanding fees due to Mr Watson. Until such time as it did, Mr Kriticos was to pay these fees out of the restraint payment. 11 Mr Watson says that he did a great deal of work on the patents and that Mr Kriticos has not remunerated him appropriately. The detail of this work is set out in Section F of the 5FASOC and runs from ss25-118. Part of the commercial problem giving rise to this litigation arises from the fact that Mr Kriticos' entitlement to be paid a restraint fee by Whitewater and an annual consultancy fee of $100,000 may, on one view, not be revenue or capital sums flowing from the exploitation of the Covered Inventions and the Covered Patents and Applications. This aspect of the matter is, however, contested. 12 At Section G of the 5FASOC, Mr Watson alleges a separate case against Mr Kriticos in relation to an invention known as the 'Recycling Invention'. The events with which it is concerned took place after Mr Kriticos had sold his business to Whitewater and had begun working with or for it (there is a debate about this). Mr Kriticos asked Mr Watson to do work as a patent attorney on the Recycling Invention which Mr Watson says that he did. Mr Watson alleges as against Mr Kriticos that the Recycling Invention is one of the Covered Inventions subject to the arrangement embodied in the Patent Share Agreement. 13 However, Mr Watson also advances a case that Mr Kriticos was working for Whitewater at the time that he was asked to do the patent attorney work on the Recycling Invention. Mr Watson now alleges that Mr Kriticos told him that he would be remunerated in relation to the Recycling Invention by Whitewater on the terms of Patent Share Agreement. Mr Watson alleges that the effect of this was to bring into existence a new contract between him and Whitewater. This is because he alleges that Mr Kriticos had the authority of Whitewater to make the statement and because the statement was a contractual offer which he accepted. He therefore seeks not only remuneration from Mr Kriticos under the Patent Share Agreement, but also from Whitewater under this fresh contract.

Issues for resolution 14 The present debate is between Mr Watson and Whitewater and does not involve Mr Kriticos. At this stage, Mr Kriticos has made no application in relation to the 5FASOC. He took no active part in the argument although he was represented by his counsel, Mr Ananian-Cooper. The four broad issues which arise are: (1) The Equitable Interest Issue: Mr Watson says that the terms of the Patent Share Agreement gave him a 12.5% ownership interest in the Covered Inventions and Covered Patents and Applications (s12(f)) so that he had a 12.5% equitable interest in them (s13(a)). He alleges that Whitewater took an assignment of the Covered Inventions and the Covered Patents and Applications with notice of that equitable interest (s23) so that it now holds that property on constructive trust for Mr Watson (s24(b)). Whitewater submits that this allegation is untenable in light of the terms which Mr Watson alleges the Patent Share Agreement had. It says that as pleaded, the Patent Share Agreement expressly authorised Mr Kriticos to dispose of the Covered Inventions and the Covered Patents and Applications, and therefore that the asserted equitable interest is incompatible with the existence of that right. Whitewater also says that a review of the currently available documentary record suggests that such a case can have no reasonable prospects of success. Principally, the reason for this is that it is said to be clear that Mr Kriticos always reserved to himself the right to deal as he saw fit with the Covered Inventions and Covered Patents and Applications, and that the asserted equitable interest is therefore inconsistent with the available evidence. Accordingly, Whitewater submits that the pleading (ss23 and 24) should be struck out and that it should have summary judgment on the claim. (2) The Knowing Receipt Issue: Although Mr Watson says that he had a 12.5% ownership interest in the Covered Inventions and the Covered Patents and Applications (s12(f)) and that this gave him a 12.5% equitable interest in them (s23(b)), he also says that Mr Kriticos held the Covered Inventions and Covered Patents and Applications for him on a constructive trust (s13(b)) as to 12.5%. In another part of the 5FASOC, however, he alleges that Whitewater knew that Mr Kriticos was breaching his fiduciary duties (presumably as trustee) and that Whitewater was a knowing recipient of trust property from a defaulting trustee (s157). Confronted with this, Whitewater now submits that the pleading of the knowing receipt count is also inconsistent with entitlement of Mr Kriticos under the Patent Share Agreement to dispose of the Covered Inventions and Covered Patents and Applications. Whitewater does not directly attack the allegation that Mr Kriticos held the property on a constructive trust for Mr Watson. (3) The Recycling Invention Issue: Mr Watson claims that Whitewater entered into an agreement with him on identical terms to the Patent Share Agreement he had previously had with Mr Kriticos (s130). This agreement covered the Recycling Invention. In the event that the Court concludes at trial that this agreement is not established, Mr Watson says that Whitewater is estopped from denying its existence because Whitewater told him that there was such an agreement and he relied upon that statement to his detriment (ss136-137). Whitewater submits the evidence relied upon by Mr Watson to make good the representation establishes no such statement. It submits that the pleading is liable to be struck out and that a review of the available material suggests that such a case has no reasonable prospects regardless of how it might be pleaded. (4) The Misleading and Deceptive Conduct Issue: Mr Watson alleges that Mr Kriticos misled him by procuring his services in relation to the Recycling Invention by telling him that Whitewater would remunerate him on the same basis as the Patent Share Agreement (ss152-153). Mr Watson says he was led to believe that Mr Kriticos was acting with the authority of Whitewater in making those statements. If it transpires that there is no such agreement, then Mr Watson says that both Whitewater and Mr Kriticos have engaged in misleading and deceptive conduct by suggesting that there was. Mr Watson also alleges that Whitewater has an ancillary liability for Mr Kriticos' conduct. Whitewater says, inter alia, that the representation case against it must fail since the particulars provided for the allegation, which reference affidavit evidence of Mr Kriticos, establish no such representation. In relation to its ancillary liability, it submits that the pleading is deficient.

Strike Out 15 Mr Watson alleges that on entry into the Patent Share Agreement, Mr Kriticos held his interest in the Covered Inventions and the Covered Patents and Applications on constructive trust as to 12.5% for Mr Watson. He also alleges that he had an equitable interest in the property (s23) and that Whitewater took the property with notice of that interest (s24). 16 There is an element of conceptual confusion about the relationship between the trust claims and the equitable interest claims. The constructive trust is alleged at s13(b) and is said to arise from the terms of the Patent Share Agreement. Five terms of the Patent Share Agreement are said to give rise to the constructive trust. These are: (i) A term that Mr Watson would receive a 12.5% share in the ownership of the Covered Inventions and the Covered Patents and Applications (s12(f)); (ii) A term that Mr Watson would receive 2.5% of the sale price of any devices based on any of the Covered Inventions and the Covered Patents and Applications (s12(h)); (iii) A term that Mr Watson would receive 12.5% of any licence fee if Mr Kriticos granted a licence in relation to such an invention (which I will treat as being a reference to a Covered Invention or a Covered Patent and Application) (s12(i)); (iv) A term that if Mr Kriticos sold the rights to the Covered Inventions and Covered Patents and Applications to an 'entire market' and: (i) the sale price was 'a lot more than the estimated licence fee for the exploitation of the market such that it also accounted for anticipated royalties'; and (ii) the sale was a sale of the market 'outright', then Mr Watson would be entitled to receive 12.5% of the sale price (s12(k)); (v) A term that Mr Kriticos would negotiate with third parties in relation to the exploitation of the Covered Inventions and the Covered Patents and Applications on behalf of both Mr Watson and Mr Kriticos (s12(l)). 17 It is unclear whether the equitable interest pleaded at s23 is the equitable interest arising from the term pleaded at s12(f) or Mr Watson's interest as the beneficiary of the constructive trust pleaded at s13. Since the pleading at s13 is premised on all five of the terms, (i)-(v) above, it would appear likely, although it is not altogether clear, that the trust interest is a different interest to the equitable interest claimed at s23. The suggestion that the equitable interest by itself gives rise to a trust, as Mr Campbell submitted, is problematic. This equitable interest is derived from the terms of the Patent Share Agreement. Whilst there are examples in which a vendor under a contract for the sale of land has been described as a trustee (see for example Chang v Registrar of Titles (1976) 137 CLR 177) the same case cautions against the use of the this terminology in circumstances where the rights of the parties are essentially contractual: see Jacobs J at 190. In Kern Corporation Ltd v Walker Reid Trading Pty Ltd (1987) 163 CLR 164, Deane J expressed a similar sentiment (at 192), challenging that the vendor/purchaser relationship ought be properly characterised in this fashion. In any event, it is not necessary to reach a concluded view on this issue. 18 Whitewater submitted that the terms of the Patent Share Agreement alleged by Mr Kriticos are inconsistent with the idea that Mr Kriticos could not dispose of the property. For example, the term alleged at s12(k) contemplated in terms that Mr Kriticos could sell the rights to the Covered Inventions and the Covered Patents and Applications to an 'entire market'. 19 If the equitable interest involved is that which derives from the 12.5% ownership term pleaded at s12(f) then I do not accept this argument. I do not see any legal inconsistency between property being encumbered by an equitable interest and the party subject to that interest being at liberty under the contract to dispose of it. No doubt, the party with the benefit of the equitable interest would, by definition, have an entitlement to obtain injunctive relief to prevent the disposal of the property so as to protect the equitable interest. But the fact that the property may, at law, be subject to subsequent disposition does not negative the existence of the equitable interest. For example, the standard contract for the sale of land in New South Wales does not contain a covenant by the vendor not to sell the property to another person. But this does not mean that the purchaser does not have an equitable interest in the property on the exchange of contracts, only that it may lodge a caveat to protect that interest. 20 If, on the other hand, the equitable interest alleged at ss23 and 24 is Mr Watson's interest as the beneficiary of the constructive trust, then the pleading of the constructive trust is defective. Whilst I detect no inconsistency between Mr Kriticos' entitlement to dispose of the Covered Inventions and the Covered Patents and Applications (s12(k)) and the equitable interest derived from s12(f), I think that there is an inconsistency between that disposal right and the imposition of a constructive trust. The imposition of a constructive trust would transform Mr Kriticos into a fiduciary and subject therefore to the negative obligations as such to avoid conflicts of interest and duty and conflicts of interest and interest. Whilst an assignment of the Covered Inventions and the Covered Patents and Applications to a third party might well favour Mr Kriticos' interests over those of Mr Watson (as in this case Mr Watson alleges), the imposition of a constructive trust on that property would be inconsistent with the unfettered contractual right that Mr Kriticos appears to have had under the terms alleged for the Patent Share Agreement to dispose of the property. 21 As it is currently pleaded, I do not think therefore that the constructive trust alleged at s13 can arise. Since, however, Whitewater did not apply to strike out s13 this issue need not be pursued save as to note one matter. It is apparent from the pleading of s12(l)(ii) that the pleader had in mind alleging that there could be no dealing with the property without Mr Watson's consent. As it is presently framed, this allegation is defective since it appears inside a particular. An allegation as to the existence of a term of the Patent Share Agreement is an allegation of material fact which cannot be made by way of particular. Were that problem to be repaired it would appear to me, at that stage, that the constructive trust pleading would be functional. If the Patent Share Agreement did not permit Mr Kriticos to dispose of the property without Mr Watson's consent, the problem identified in the previous paragraph would not arise. 22 In those circumstances, I decline to strike out ss23 and 24.

Summary Judgment 23 Mr Bedrossian, for Whitewater, in his careful and succinct submissions, contended that when one examined the documentary material which was available it could be seen that Mr Kriticos had insisted that he was to have the right to deal with his inventions however he saw fit even where there was a co-owner. This material relates to the unsuccessful efforts which Mr Watson and Mr Kriticos made to reduce their agreement to writing in the period after which Mr Watson alleges the Patent Share Agreement was formed. It would appear that during this process Mr Kriticos insisted that a clause which required Mr Watson's consent should be deleted and that Mr Watson acceded to this request. Whilst I can see that Mr Watson will be taxed about this under cross-examination, I do not think that I can presently conclude on the basis of it that Mr Watson's claims based on the asserted equitable interest have no reasonable prospects of success. The question of the terms of the undocumented Patent Share Agreement are disputed. It is not clear to me whether the subsequent and unsuccessful negotiations over a written agreement should be seen as an effort to reduce to writing what had already been agreed (as in Masters v Cameron (1954) 91 CLR 353) or whether what was taking place was a continuing negotiation of what might have been (but ultimately was not) a fresh agreement. I do not therefore think that I can assess at this stage of the proceedings with any confidence what the status of the material to which Mr Bedrossian points actually is. Without knowing that, I do not think that I should accept the submission that these events show that Mr Watson has no reasonable prospects of prosecuting his claim based on the equitable interest. I therefore decline to enter summary judgment against him on this basis.

Strike Out 24 At s157 of the 5FASOC it is alleged as follows: The Second Respondent is a knowing recipient of benefits in breach of fiduciary duties 157. The Second Respondent is a knowing recipient of benefits received in breach of fiduciary duty. The Second Respondent's knowledge in that regard is: (a) actual knowledge of the Trust, or existence of the Fiduciary Duties, and of the misapplication of Trust property, or transfer of property in breach of the Fiduciary Duties; or (b) willfully shutting one's eyes to those things; or (c) abstaining in a calculated way from making such inquires, as an honest and reasonable person would make, about the Trust and the application of the Trust property, or the Fiduciary Duties and the property transferred in breach of the Fiduciary Duties; or (d) knowledge of facts which to an honest and reasonable person would indicate the existence of the Trust and the fact of misapplication, or the existence of the Fiduciary Duties and a transfer of property in breach of the Fiduciary Duties. Particulars The Second Respondent had knowledge of the Patent Share Agreement and its terms. The Applicant refers to and repeats the particulars to paragraph 23 above. As a result, the Second Respondent had knowledge of the Trust and equitable obligations pleaded in paragraphs 13 to 15 above. Further, the Second Respondent knew that the Applicant had a right to an income stream from the Covered Inventions, the Covered Patents and Applications as it negotiated and agreed a reduction of the royalties and license fees which would be payable to the First Respondent if Second Respondent took on the obligation to pay the amount owing to the Applicant. The agreement is recording in clause 4.6 of the Commercialisation and Restrain Agreement. The Second Respondent has received benefits as a consequence of the breach of fiduciary duty. These include the legal and a beneficial interest in and to the Covered Inventions, the Covered Patents and Applications, and the rights attaching to and benefits derived therefrom. Further particulars will be provided following discovery and inspection. 25 There is an allegation that Mr Kriticos was a fiduciary at s15 and it is said that he had a number of identified fiduciary duties: (a) a duty to act in good faith and honestly towards the Applicant; (b) a duty to act in the joint interests of the Applicant and the First Respondent in relation to the exploitation of the Covered Inventions and the Covered Patents and Applications; (c) a duty to avoid conflict, or a real and sensible possibility of a conflict, between his personal interests and the joint interests of the Applicant and the First Respondent; (d) a duty not to use his position to his own or a third party's advantage; (e) a duty to disclose to the Applicant information and opportunities which came into the First Respondent's possession or knowledge in relation to the exploitation of the Covered Inventions and the Covered Patents and Applications; (f) a duty to pursue the exploitation of the Covered Inventions and the Covered Patents and Applications only for the benefit of the Patent Partnership 26 At s17 it is alleged that the sale by Mr Kriticos to Whitewater of his business was a breach of the Patent Share Agreement. It is not alleged that it was a breach of fiduciary duty. The pleading at s157 is defective at least because it does not identify the breach of fiduciary duty of which it is alleged that Whitewater had knowledge. Further, although s157(a)-(d) identifies different standards of knowledge it does not identify which of these Whitewater is alleged to have had. Leaving aside the point that these are not matters which remotely have any place in particulars, the particulars provided do not come close to identifying what needs to be identified. It is unclear why Whitewater is alleged to have known of the terms of the Patent Share Agreement; it is not explained how Whitewater had knowledge of the constructive trust alleged at s134; it is not explained who at Whitewater had this knowledge; and it is not explained what kind of knowledge existed in terms of which element of the claim (in terms of taxonomy assumed at s157(a)-(d)). This last element is itself a symptom of the already mentioned failure of the pleader to identify the breach of fiduciary duty. For example, the case could be that a director of Whitewater had actual knowledge of the terms of the Patent Share Agreement because of some fact. Was this something that Mr Kriticos told people at Whitewater? Or did they find out another way? It might be alleged that this director abstained from making inquiries about the position of Mr Kriticos (i.e. s157(c)) or it might be that Mr Watson alleges that the circumstances (none of which are identified) justify the invocation of the kind of standard at 157(d)). 27 The pleading is inadequate and will be struck out.

Summary Judgment 28 Although I have my doubts about the trust claim as it is presently articulated, the allegation that Mr Kriticos was a fiduciary does not rest on the trust claim alone but also on an allegation of partnership and the presence of a joint venture (s14). Whilst the pleading at s157 is unacceptable, this does not mean that such an allegation, if properly pleaded, might not be sustainable. The evidence that Mr Kriticos would not have agreed to any fetter on his right to deal with the property does not persuade me, at the requisite level on an application such as the present, that summary judgment would be appropriate.

Strike Out 29 At s130 Mr Watson pleads that Mr Kriticos had, in various ways, the authority of Whitewater in instructing Mr Watson to perform patent attorney services in respect of the Recycling Invention. At s130(d) it is alleged that: 130. In instructing the Applicant to provide patent attorney services in relation to the Recycling Patents, the First Respondent: … (d) further, or alternatively, represented to the Applicant that the Applicant would be compensated for his services by the Second Respondent in accordance with and under a new agreement between the Applicant and the Second Respondent with the same terms as the Patent Share Agreement with the Second Respondent in the place of the First Respondent as a party to that agreement. 30 It may be assumed for present purposes that the allegation is that Mr Kriticos had Whitewater's authority to make the alleged representation. At s135 it is alleged that the representation was a contractual offer which was accepted by Mr Watson. It is therefore alleged in the same paragraph that a new contract between Mr Watson and Whitewater came into existence. At ss136-137 the representation is repurposed for the purposes of alleging an estoppel against Whitewater, preventing it from denying the existence of such a contract. 31 At s130 are accompanying particulars. The particulars at (i) and (ii) do not contain any material supporting the existence of the representation. They do suggest, however, that Mr Kriticos was working for Whitewater in some capacity. As such, it is clear that these particulars do not relate to the representation pleaded at s130(d). A particular (iv) is, however, provided for s130(d) in these terms: (iv) The First Respondent made the representations in the meeting with the Applicant on 30 September 2015 at the First Respondent's offices in Manly NSW: Watson affidavit [152]. 32 Mr Watson's affidavit at s152 is in these terms: 152. On 30 September 2015, I met SK at 10.30am at his offices in Manly, NSW, and we had a conversation with words to the following effect: SK: "This is the model of the recycling invention that I invented, that Whitewater are going to file a patent for under my agreement with them." Me: "Wow, the model is amazing! You've done a lot of work on it." We then talked about the features of the invention, which was a further development on the International Patent Application (Recycling Invention). SK: "The patents are important because we get ten percent, double, if they are patented. If the patents don't go through it halves our income, so the patents are very important. I need the patent specification for this invention drafted." Me: "OK, but we need to formalise our agreement." SK: "Yes we should, and I will." 33 This provides no evidence which supports the allegation that Mr Kriticos made the representation referred to in s130(d). Consequently, I accept that s130(d) should be struck out. It follows also that the contract and estoppel claims in s135-137 must also be struck out. Mr Bedrossian indicated that he wished to be heard on the question of repleading.

Summary Judgment 34 Mr Campbell did not submit that the reference to s152 of Mr Watson's affidavit was erroneous or that some other part of Mr Watson's evidence could assist in buttressing s130(d). Nor was it foreshadowed that more evidence from Mr Kriticos might be called up in aid of that endeavour. Whilst I have the impression that the amendments to s130, which were made in the 5FASOC after cracks opened up in the 4FASOC, may have been done on the run and in a hurry, Mr Watson has had several months to make this case work. As it presently stands there is no evidence to support the representation. This evidentiary vacuum occurs against a backdrop which includes the fact that Whitewater was at all times seeking summary judgment. If there was material which was available it may be reasonably inferred that it would have been brought forward. Mr Watson was on notice from 31 January 2022 that Whitewater was going to submit that s152 did not support s130(d). In those circumstances, I infer that there is no evidence available to Mr Watson which could support s130(d). In that circumstance, I conclude that this part of the case has no reasonable prospects of succeeding. Whitewater is entitled to summary judgment on this aspect of the matter. 35 For completeness, once s130(d) is removed from the picture, the allegations in s130(a)-(c) that Mr Kriticos had Whitewater's authority for dealing with Mr Watson no longer serve any purpose as against Whitewater. Whitewater alleged that they had their own difficulties. It is not necessary to deal with those submissions. I will strike the balance of s130 as against Whitewater (although not Mr Kriticos).

The Misleading and Deceptive Conduct Issue 36 At ss152-153, Mr Watson alleges that if the agreement he alleges came into existence between himself and Whitewater did not, in fact, come into existence, then Mr Kriticos engaged in misleading and deceptive conduct by: (a) suggesting that he was Whitewater's employee; and (b) by making the representation in s130(d). It is then said at s154 that Whitewater aided, abetted, counselled or procured that conduct or was knowingly concerned in it and that, presumably by reason of Mr Kriticos' actions as its alleged employee, that it itself engaged in misleading and deceptive conduct. 37 It matters not whether Mr Kriticos told Mr Watson he was employed by Whitewater if he did not also tell him that he would be retained by Whitewater in relation to the Recycling Invention on the same terms as the Patent Share Agreement, i.e. the allegation in s130(d). With that allegation now removed from the pleading, this case is not viable. Consequently, s154 will be struck out. For the same reasons as given in the preceding section, Whitewater is entitled to summary judgment on this aspect of the claim against it.

Conclusions 38 The knowing receipt claims will be struck out as against Whitewater. There will be summary judgment in favour of Whitewater on the contract, estoppel and misleading and deceptive conduct claims in relation to the Recycling Invention. I will hear the parties further, as they request, on the issues of repleading and costs. In the meantime, they are to bring a short minute of order giving effect to these reasons. I certify that the preceding thirty-eight (38) numbered paragraphs are a true copy of the Reasons for Judgment of the Honourable Justice Perram.