Ezystay Systems Pty Ltd v Link 2 Pty Ltd (No 2)

These reasons relate to the form of final relief to be granted and costs orders to be made consequent upon the delivery of judgment in this matter on 10 August 2015: Ezystay Systems Pty Ltd v Link 2 Pty Ltd [2015] NSWSC 1105. That judgment should be read with these reasons.

The plaintiffs succeeded in their claims against the defendants (J [78]-[95]) but for the claim in respect of Trade Dress (J [246]). The parties were unable to reach agreement on the form of final orders and on 7 September 2015 consent orders were made for the filing of the proposed form of orders by 18 September 2015; the filing and service of any evidence by 9 October 2015; the filing and service of written submissions by 16 October 2015; and the listing of the matter for further hearing on 21 October 2015. Although there was some delay in compliance with some of those orders, the further hearing proceeded on 21 October 2015 when Mr JC Kelly SC appeared for the plaintiffs and Mr JE Lazarus, leading Mr SJ Lipp, of counsel, appeared for the defendants.

The first issue relates to the terms of the injunction as sought in prayer 1 of the Second Further Amended Statement of Claim filed on 6 May 2015. There is no issue between the parties that an injunction should be granted prohibiting the defendants from directly or indirectly using and/or copying the plaintiffs’ Business Manual, Elevator Take, Systems Manual and Software Manual and any copy thereof or document derived therefrom including without limitation the “Books, Records, Materials and Documentation” listed in a document identified as Schedule A to the pleading. The parties are at issue in respect of the definition of “Software” and whether the use of the Software should be restrained by the injunction.

The second issue is whether orders should be made for delivery up of the plaintiffs’ documents and/or the deletion of the plaintiffs’ electronic files retained by the defendants and whether that process should be supervised.

The final issue between the parties is the question of costs. The plaintiffs seek indemnity costs of the proceedings. The defendants contend that there should be no order for indemnity costs and that the plaintiffs’ costs should be reduced by a particular percentage, having regard to various matters referred to below.

At the further hearing on 21 October 2015 the plaintiffs relied upon three affidavits of their solicitor, Michael Garvin, sworn on 9 October 2015, 15 October 2015 and 21 October 2015. Mr Garvin was not cross-examined.

Mr Garvin’s first affidavit recounted some of the history of the proceedings and in particular annexed the report of Thomas Howard, the independent solicitor, who attended upon the defendants when the search order referred to in the Judgment (J [75]-[77]) was executed on 23 July 2013. Also present at the search were the independent computer experts, Mr Ghorbani and Mr Solomon of Klein & Co. Mr Howard’s report refers to the procedures that were adopted and the discussions that were held at the time of the search. There were three computers in the boot of a car that were seized for the purpose of the taking of images at the offices of Klein & Co. There were six email accounts identified for which the passwords were provided to Mr Howard. Additional email accounts were subsequently identified by the independent computer experts and the passwords to those accounts were also supplied.

Mr Garvin’s first affidavit also referred to the application to set aside the search order and the proposed (and later abandoned) appeal against the order dismissing that application. He also referred to some settlement offers.

Mr Garvin’s second affidavit annexed the report of Klein & Co dated 25 July 2013. That report listed three computers: (1) an HP Laptop (K473101A) located in the boot of a vehicle; (2) an Apple MacBook (K473104A) also located in the boot of the vehicle; and (3) an Apple iMac (K473105A) also located in the boot of the vehicle, each of which was imaged at the offices of Klein & Co. The report also listed five USB storage devices and eight email accounts, six from which data had been acquired at the date of the report.

Mr Garvin’s third affidavit responds to the affidavits relied upon by the defendants and I will refer to it later.

The defendants relied upon the affidavits of Mr Riches affirmed on 12 October 2015 and 19 October 2015. They also relied upon the affidavits of their solicitor, David Rydon, affirmed on 13 October 2015 and 19 October 2015. Neither Mr Riches nor Mr Rydon were cross-examined

Mr Rydon’s affidavits dealt with the communications between the parties in respect of settlement and the contention that the plaintiffs abandoned their claim for damages and/or an account of profits during the trial. Mr Rydon also gave evidence of his assessment of the time taken in the proceedings in respect of the plaintiffs’ unsuccessful Trade Dress claim.

The more controversial evidence is that contained in Mr Riches’ affidavit evidence. At this point it is appropriate to refer back to some of the history of the proceedings.

There is an issue between the parties in respect of whether the plaintiffs’ claim (referred to as the “retention claim”) was only introduced in the Further Amended Statement of Claim (FASOC) filed on 30 April 2015. The defendants contended that it was only in this pleading that the retention claim was made for the first time. It was contended that prior to this pleading there was no claim that the defendants had breached any obligations by retaining the plaintiffs’ documents that were not confidential; rather the only retention claim was in respect of the plaintiffs’ documents containing confidential information. I am not satisfied that this is correct. Although the FASOC included amendments extending what was originally within the pleading it is clear that the plaintiffs had claimed that the Business Manual, the Elevator Take, the Systems Manual, the Software and the Software Manual were “Books, Records, Material and Documentation” within the meaning of the Deed to which the “Property Return Covenant applied” (see pars [31], [42] and [49] of the FASOC). It is also clear that the plaintiffs had alleged that the defendants had breached the Property Return Covenant in that they had refused to return the documents in accordance with their obligations under the Deed (see pars 56e, 57c, 58e and 60e of the FASOC).

In any event, the defendants contended that once the pleading was amended, an admission was made that the documents had been retained albeit “inadvertently” (J [96]). The defendants also relied upon the Undertaking that was proffered to the Court on 30 April 2015 that became an Exhibit (Ex B) (J [96]). The defendants undertook to the Court, without admission, that: (1) they would delete any and all electronic copies of the documents referred to in Schedule A within 21 days of 30 April 2015; (2) (without admission that the documents existed) they would return any hard copies of any of the documents referred to in Schedule A within 21 days of 30 April 2015; (3) (without admission that any such copies existed) they would delete any copies of the plaintiffs’ Confidential Information and Books, Records, Materials and Documentation (as defined in the Deed) within 21 days of 30 April 2015; (4) (without admission that any such copies existed) they would return any hard copies of the Group’s Confidential Information and Books, Records, Materials and Documentation within 21 days of 30 April 2015; and (5) within 24 days of 30 April 2015 they would confirm in writing by their solicitor to the solicitor for the plaintiffs that they had complied with undertakings (1) to (4). The Undertaking included the condition that the solicitor and counsel for the defendants retained such of the documents that were in their possession and were required to be kept for the “proper record of the proceedings” (J [96]).

In cross-examination during the trial Mr Riches was asked about the Undertaking (tr 206):

The plaintiffs’ final written submissions at trial included the following (at par [35]):

In final oral submissions the plaintiffs submitted that the Undertaking did not assist in any way because it did not deal with the Software and was conditioned on various non-admissions. It was noted that the Undertaking did not even admit that the documents existed and contained no undertaking not to use the documents (tr 402).

The defendants responded in their written submissions relevantly as follows:

In final oral submissions the defendants submitted that it should not matter that the Undertaking was without admissions and contended that the plaintiffs were “getting what they are entitled to on their case” under the Deed. It was submitted that the Undertaking was “a complete answer to a claim for relief” in this regard (tr 408).

Judgment was reserved on 14 May 2015 after a seven day trial. Judgment was delivered on 10 August 2015 without further communication from the parties in the interim. It was held that the Undertaking did not obviate the need to deal with the various issues between the parties and the claims made by the plaintiffs (J [105]-[111]).

Mr Riches affidavit of 12 October 2015 included evidence in which he referred to the Undertaking and also to his evidence that he gave under cross-examination wherein he claimed he “made clear that the undertaking applied to any documents which I understand includes the so-called ‘hybrid documents’”. He then gave the following extraordinary affidavit evidence about his conduct in the two weeks following the conclusion of the trial:

Mr Riches’ affidavit of 19 October 2015 included evidence that various of the email accounts in respect of which the plaintiffs seek an order for supervised delivery up “never held” and do not hold any of the plaintiffs’ copied material. Mr Riches also gave evidence that the HP Laptop had never held any of the plaintiffs’ information or copied material and was only recently purchased before the “raid” and only held Link 2 financial material.

Mr Garvin’s third affidavit of 21 October 2015 responded to Mr Riches’ evidence by reference to the report produced by the independent computer experts. This affidavit included evidence (in contrast to Mr Riches’ evidence) that the HP Laptop did include material belonging to the plaintiffs or material copied from the plaintiffs’ documents.

As the affidavit of Mr Garvin had only been served on 21 October 2015 (Mr Riches’ affidavit of 19 October 2015 being served late) leave was granted for counsel for the defendants to make a submission in response to this evidence by no later than 5.00pm on 23 October 2015. That leave was not taken up. However a form of submission was received on 26 October 2015.

The defendants sought to characterise the destruction of the computers and the relegation of their remains together with 3 USB sticks to the rubbish bin as compliance with the Undertaking. The plaintiffs described Mr Riches’ conduct as “bizarre” (tr 32).

Mr Riches knew that the plaintiffs were seeking findings against the defendants that they retained, copied and used the plaintiffs’ Books, Records, Materials and Documentation as defined in the Deed and identified in Schedule A. He and the defendants knew that the plaintiffs were seeking relief that included an order for the delivery up of the documents in Schedule A.

Schedule A lists 121 items, 60 of which were located on the Apple MacBook, 3 of which were located on the Apple iMac and 9 of which were located on the HP Laptop. The remainder were located on USBs or in email accounts. Some of the items listed in Schedule A found on the Apple MacBook and the HP Laptop are described as being located in a “Dropbox”. It would appear that the defendants accept that such documents still exist notwithstanding the destruction of the computer hardware.

Mr Riches’ conduct in destroying items the subject of the search order without notice to the plaintiffs (and it would appear his own solicitors) or the Court at a time when the issue of the Undertaking was live for consideration in a reserved judgment was most inappropriate. This does not seem to have been appreciated by the defendants or their lawyers at the hearing on 21 October 2015 having regard to the submission that such conduct was in compliance with the Undertaking.

Even assuming that the defendants somehow thought that they were to act on the Undertaking before the proceedings were concluded, their conduct was far from in accordance with it. There was nothing in the Undertaking about the physical destruction of the computers. There was no notification to the plaintiffs’ solicitors in accordance with the Undertaking. The conduct remained undisclosed until Mr Riches’ affidavit of 12 October 2015 was served.

It is understandable that this conduct is relied upon by the plaintiffs in support of the contention that it is necessary to make an order for delivery up and that the process should be supervised.

The order proposed by the plaintiffs in respect of the injunction is as follows:

As I have said above the defendants do not oppose an injunction in this form so long as the “Software” is not included within it.

The form of the orders proposed by the plaintiffs includes the following definition:

The defendants object to this definition. The Software was defined in the pleading as “an original software programme developed to specifications directed by the Ezystay Group, with a password protected interface to enable persons with access credentials to book student accommodation and store information” (par [36]).

The defendants contend that it is essential that they understand precisely the nature and effect of the orders sought by the plaintiffs. There is no issue that in order to be enforceable an injunction must be so expressed that the defendants know what they are required to do or refrain from doing: Athens v Randwick City Council (2005) 64 NSWLR 58 per Hodgson JA at [31]. It was submitted that if Software is to be included in the order and the definition for which the plaintiffs contend in their proposed order were to be accepted, the defendants would be uncertain as to what they are required to do or refrain from doing. The defendants also contend that the proposed definition of Software in the order does not have the limiting phrase “as at 1 July 2012”. It was contended that the pleading had this limitation. However it did not. Rather it was held that Mr Riches copied the plaintiffs’ Software when he instructed Mr Singh in late May 2012 and in June 2012.

The complexity of the plaintiffs’ case in respect of the copying of the Software is referred to in the judgment (J [233]). Notwithstanding those complexities the finding was made that the plaintiffs’ Software contained the plaintiffs’ confidential information and that Mr Riches copied and used the plaintiffs’ Software (J [235]). The finding was also made that from sometime after 16 July 2012 Link 2 employed an accommodation and booking software and system which was the same or substantially the same as the Ezystay Software and that described in the Software Manual (J [236]).

The defendants submitted that any injunction must be limited to those aspects of the “interface” or “visual output”. This submission is based upon the following portion of the judgment:

The defendants submitted that the lack of precision in the proposed injunction in respect of the Software may be contrasted with the precise nature of the orders made in Dynamic Supplies Pty Ltd v Tonnex International Pty Ltd (No 2) [2011] FCA 675. In that case Yates J made orders which specified the electronic files which were required to be deleted and the hard copies that had to be destroyed. In that case the respondent continued to publish contravening representations after the trial judge delivered his reasons. His Honour was satisfied that an injunction should be granted but for certain undertakings that were provided personally on behalf of the respondent. A distinguishing feature in that case was that the respondent did not at that time use the compatibility charts which were found to infringe the applicant's copyright. In the present case the defendants are using software based on the copying of the plaintiffs’ Software. In Dynamic Supplies the applicant also submitted that the respondent’s conduct was deliberate and could not be explained away by inadvertence (at [16]). In the present case Mr Riches’ evidence that his conduct in retaining the plaintiffs’ documents was inadvertent is in my view highly unreliable. Having regard to his conduct in destroying the computers the subject of the search order and the subject of an issue to be decided in the reserved judgment leads to the conclusion that he has little understanding of the need to permit the Court process to be concluded before taking matters into his own hands.

The defendants submitted that if the injunction sought by the plaintiffs were to be granted it would deny the defendants the ability to conduct any form of student accommodation business based upon an online booking system. It was contended that this would be a clear restraint of trade: Maggbury Pty Ltd v Hafele Australia Pty Ltd (2001) 210 CLR 181 at [50]-[54]. The defendants also submitted that the onus is on the plaintiffs to demonstrate that the restraint is reasonable: McHugh v Australian Jockey Club (2014) 314 ALR 20 at [4].

Putting to one side for the moment the alleged lack of precision in the plaintiffs’ proposed order regarding the Software, I am not satisfied that such an order would be in restraint of trade. The defendants would be free to establish an online booking system for their student accommodation business independently of any use of the plaintiffs’ Software

Injunctions restraining breaches of confidentiality afford plaintiffs the opportunity to “nip in the bud” such breaches and their consequences: GE Dal Pont, Law of Confidentiality, (1st ed 2015, LexisNexis Butterworths) at [15.1]. In this regard injunctions are often sought on an urgent interlocutory basis to prevent the offender from obtaining a springboard effect (or head start) in setting up a new business using the plaintiffs’ confidential information.

In the present case a search order (Anton Piller KG v Manufacturing Processes Ltd [1976] 2 WLR 162) was obtained and executed in July 2013 but the plaintiffs did not seek an interlocutory injunction restraining the defendants from using the Software. The plaintiffs filed their Statement of Claim in August 2013 in which they sought a permanent injunction, delivery up of documents and/or destruction of electronic copies of documents, damages, and/or equitable compensation, an account of profits and/or compensation under s 1317H of the Corporations Act 2001 (Cth). This was the form of relief upon which the case was prepared from 2013 and fought until the second day of the trial, 1 May 2015, when Mr Kelly advised that the claim for an account of profits “may well be barren by reason of the organisation of the fruits of the venture through a network of trusts and other corporate entities” which “indeed demonstrates that damages would not be an appropriate remedy”. Mr Kelly also advised that the “primary relief sought is the permanent injunction including the order for return” (tr 138).

On 6 May 2015 Mr Kelly advised that if all that was sought to be delivered up in prayer 2 of the pleading was delivered up and the plaintiffs were protected against further breach “that is the end of the matter” (tr 340). It therefore appeared that although the claims for damages, an account of profits and compensation were still in the pleading, they were no longer to be pressed if those conditions were satisfied. The plaintiffs’ outline of closing submissions (dated 13 May 2015) referred only to the relief sought by way of permanent injunction and delivery up and contended that the final form of any relief should abide the delivery of judgment (J [247]).

The defendants have been operating their businesses utilising their software since September 2012 when the Link 2 website went “live” (J [190]). There was no restraint on the defendants (or Mr Riches) in setting up the same type of business in competition with the plaintiffs. They were free to do so constrained only (relevantly) by the terms of the Deed in which they agreed not to copy and or use the plaintiffs’ Confidential Information. They copied and used the Confidential Information in setting up a pivotal part of the defendants’ business – the software containing the booking system. That has been in place for the last three years and it has been modified over that time.

The extent to which and the timeframe during which the defendants obtained any springboard or advantage has long since passed and the plaintiffs abandoned any claim for damages or compensation.

An injunction is not unreasonable merely because it is permanent: Curtiss-Wright Corporation v Edel-Brown Tool & Die Co (1980) 407 NE 2d 319 at 326. However any unfair advantage must still exist at the time that the injunction is sought. Injunctions are issued to protect against and to prevent future and further losses. It is important to avoid a result that would simply punish the defendants for their conduct or past breaches of contract: Franke v Wiltshek (1953) 209 F 2d 493 at 503; Universal Thermosensors Ltd v Hibben & Ors [1992] 1 WLR 840 at 855; UBS Wealth Management (UK) Ltd v Vestra Wealth LLP [2008] EWHC 1974 (QB) at [4].

The definition of “Software” in the proposed injunction would leave the defendants in uncertainty as to whether they are to stop using their own software altogether or only those parts of it that have not been modified over the years. There is also the question of the consequence and effect of the modifications and the status of the software once modified. There is also the important question of proportionality: Tang Siew Choy v Certact Pte Ltd [1993] 1 SLR(R) 835. There was no attempt by the plaintiffs to prove any loss of their business to the defendants by reason of the copying of the Software. The advantage the defendants obtained was the capacity to set up their business more quickly than if they had established their software ‘from scratch’. Even then the timeframe was probably short because Mr Riches was well-versed in the creation of software for a student accommodation business, he having instructed Mr Davis.

Even if it be assumed that the proposed injunction would restrain the defendants from using their software altogether and require them to create new software for the operation of their booking system, I am satisfied that this would be out of all proportion to any advantage secured by the defendants by their breach.

I am not satisfied that the injunction should include the “Software”.

As I have said Mr Riches’ extraordinary conduct referred to earlier establishes that the Court could have little confidence in the veracity of his claims. I am satisfied that the orders sought by the plaintiffs for delivery up of the materials pursuant to the Deed should be made and that there should be supervision of that process by the lawyers for the respective parties. I am not satisfied that it is necessary to impose a regime in which Klein & Co are once again involved.

There are two aspects of the proceedings on which the defendants rely to submit that the plaintiffs should not have the total costs of the proceedings. The first is the failure of the Trade Dress claim. The second is the abandonment of any claim for damages and/or compensation and/or an account of profits. Although there was no evidence called on this aspect of the matter the plaintiffs submitted that the so-called “abandonment” was as a result of the financial statements of the defendants being produced to show there was no profit made so that the claim was of no utility. The plaintiffs accept that they failed in the Trade Dress claim but submitted that this was a small part of their overall claims.

I am satisfied that the plaintiffs failure to make out the Trade Dress claim and their abandonment of the claims for damages, compensation and an account of profits should be reflected in any costs award. I am satisfied that the just and equitable outcome is to reduce the plaintiffs’ costs by 15%. Accordingly the plaintiffs will have a costs order in their favour for 85% of the costs of the proceedings.

The next question is whether the plaintiffs should have their costs on an indemnity basis. Although much has been said about the communications between the parties and the stances they took prior to the trial, I am not satisfied that such communications impact significantly on the determination of this aspect of the case.

The plaintiffs submitted that had Mr Riches and the defendants filed an affidavit on 31 July 2013 that was candid, admitting the retention of the plaintiffs’ documents, much of the proceedings or indeed the whole of the proceedings may have been avoided. There is no doubt that the affidavit lacked candour. It was obvious that the defendants retained many of the plaintiffs’ documents inconsistently with their obligations. It is also clear that they must have known that they had plagiarised the plaintiffs’ documents and used them in the business development of Link 2. This was kept secret until the latter part of the trial when the forensic decision to call Mrs Riches brought much of Mr Riches’ evidence about inadvertent retention of the plaintiffs’ documents and lack of use of the hybrid documents undone. In this regard the plaintiffs relied upon McBride v Christie’s Australia Pty Limited (No 2) [2015] NSWSC 754 in which an indemnity costs order was made against Christie’s on the basis that its conduct in not informing the plaintiff of its serious concern about the genuineness of the Painting (which if provided may have avoided the whole of the proceedings) was unreasonable (at [60]).

As unsatisfactory as the defendants’ conduct has been I am not satisfied that it warrants an order for indemnity costs. One of the reasons the defendants propounded and maintained their defences was an arguable case that the material that they had retained, copied and used was not confidential. There was also a respectable argument in respect of the construction of the Deed. In all the circumstances I am not satisfied that the plaintiffs should have an award of indemnity costs.

The Orders are as follows: