MaxRelief USA Inc v 365 Health Australia Pty Limited ACN 151 146 997

By summons filed on 24 April 2024, the plaintiff (MaxRelief) sought an ex parte freezing order against the first defendant (365 Health) together with orders to the effect that the second and third defendants pay into Court monies it would otherwise have paid to 365 Health.

On 29 April 2024 in the Duty List, I made an ex parte freezing order against 365 Health but declined to make any orders against the second and third defendants. A copy of the orders made is annexed to these reasons. These are my reasons for making those orders.

MaxRelief relied upon two affidavits sworn by its managing director, Peter Alexander Spoto affirmed 23 April 2024 and 29 April 2024. An extensive exhibit to Mr Spoto’s first affidavit was also tendered and written and oral submissions were made on behalf of MaxRelief by its counsel.

To understand why I made the ex parte freezing order, the relevant facts can be briefly stated as follows.

MaxRelief is a corporation incorporated in the State of Delaware in the United States of America. It is a manufacturer and distributor of topical pain relief products in the United States.

365 Health was previously known as PainAway Australia Pty Ltd. It also sells topical pain relief products.

There is a history of litigation between MaxRelief and 365 Health in the United States. Relevantly for present purposes, in July 2015, 365 Health filed a lawsuit in the United States District Court for the Northern District of California against a defendant purportedly called “Natures Investments Holdings Pty Ltd d/b/a MaxRelief USA” (Natures Investments Holdings) (California Lawsuit). 365 Health alleged that Natures Investments Holdings was violating a piece of United States legislation known as the Lanham Act by advertising a “MaxRelief” brand of spray as “Australia’s #1 pain relief spray”.

MaxRelief alleges that Natures Investments Holdings does not exist and has never existed.

There was no appearance for the defendant in the California Lawsuit. 365 Health applied for default judgment which was denied without prejudice. 365 Health then voluntarily dismissed the California Lawsuit.

In July 2016, 365 Health filed a second lawsuit against Natures Investments Holdings this time in the Eastern District of Pennsylvania. Default judgment was granted on this occasion and the Court included in the default judgment an injunction against Natures Investment Holdings prohibiting it from advertising and promoting MaxRelief as “Australia’s #1 pain relief spray” in the United States.

In October 2017, 365 Health began sending cease-and-desist letters to certain customers of MaxRelief. These customers were listed on MaxRelief’s website. The letters notified customers of the injunction and demanded that they stop selling or advertising products from Natures Investments Holdings as “Australia’s #1 pain relief spray”.

MaxRelief was not a party to any action up to this point, was never served with the first or second proceedings, nor was the injunction 365 Health obtained issued against it.

In September 2018, 365 Health filed a further third Lanham Act lawsuit, this time naming MaxRelief as defendant. MaxRelief defended the proceedings and issued a cross-claim. These proceedings are in the United States District Court for the Eastern District of Pennsylvania.

The cross-claim is based on, amongst other things, 365 Health’s sending of the cease-and-desist letters to customers of MaxRelief, and purporting to notifying them of the injunction against MaxRelief when it had not in fact obtained one.

On 30 March 2022, Judge Tucker of the US District Court in the Eastern District of Pennsylvania granted MaxRelief’s motion for summary judgment and dismissed 365 Health’s Lanham Act claim in its entirety. From this point forward, 365 Health no longer had a case to prosecute against MaxRelief in the United States.

On 6 July 2022, 365 Health filed a motion for summary judgment as to MaxRelief’s cross-claim, effectively alleging that it should be summarily dismissed.

On 24 May 2023, Judge Goldberg, of the US District Court in the Eastern District of Pennsylvania, granted in part and denied in part the motion. The Court permitted certain of MaxRelief’s claims in relation to the sending of the letters to MaxRelief’s customers to continue.

On 19 February 2024, MaxRelief notified 365 Health of the damages claimed on the cross-claim. The amount of the damages claimed is USD$5,158,661. The matter is now proceeding to trial and it is anticipated that a hearing date will take place in late 2025.

In about March 2024, Mr Spoto became aware, somewhat serendipitously, of 365 Health’s sale to the second defendant (Wellnex) and the third defendant (BSPSPA) (related to the Wellnex) of at least certain parts of 365 Health’s assets and businesses. Prior to that time, on the evidence before me, MaxRelief had no knowledge of any sale of any of 365 Health’s assets.

It would appear from what is now known that on 25 May 2023 (the day after Judge Goldberg dealt with 365 Health’s motion for summary judgment on the cross claim) Wellnex made its first ASX announcement in relation to the acquisition of “leading Australian pain relief brand PainAway”. That announcement was to the effect that a binding agreement had by then been entered into. Given the nature of the transaction whereby aspects of 365 Health’s business were agreed to be sold to Wellnex in a binding manner, it is unlikely that there is any link between the determination of the summary judgment application and the sale of the assets.

In around December 2023 or January 2024, Wellnex filed an announcement with the ASX entitled “Notice of Initial Substantial Shareholder” which attached to it a copy of the Business Sale Agreement between the defendants which is dated 5 October 2023 (Sale Agreement).

According to the Sale Agreement, the “Business” is being sold and is defined as ‘“the business involving the supply and sale of pain relief therapy products for humans and dogs, including topical analgesics, tablets, bath salts and heat patches [365 Health] as at the date of this agreement including the business operated under the “PainAway” brand, but excluding the “Athelite business”” (Business).

The “Athelite business” means the business involving the supply and sale of the “Athelite assets”, and the “Athelite” branded products conducted by 365 Health.

The purchase price appears to include at least an advance payment of $2.2 million, a Completion Payment of $13,950,000, and two deferred payments each of $2,925,000, the first being payable 12 months after the completion date and the second being payable 18 months after the completion date. Twenty million shares also formed part of the consideration, although these shares are escrowed until 31 May 2024.

There is also some evidence that $40,000 is being paid on a monthly basis to 365 Health.

The Sale Agreement also includes a warranty to the effect that none of the selling parties (including 365 Health) is engaged (whether as defendant or plaintiff) in any litigation or arbitration or other legal proceedings in connection with the Business and assets and there are no current claims in respect of the Business or the assets including in respect of any government agency. It is unclear at the moment whether this means that Wellnex and BSPSPA were not notified of the existence of the US proceedings because the warranty is subject to any matters disclosed in the disclosure material which was not in evidence before me.

There was no evidence before me as to whether 365 Health still owns the Athelite business or otherwise what its financial position is.

No undertaking was sought by MaxRelief from 365 Relief not to dissipate its assets.

It is against this background that MaxRelief sought the freezing orders and other relief sought in the summons. In substance, as against 365 Health, MaxRelief sought a freezing order preventing 365 Health from reducing its assets below AUD $8 million, being the Australian dollar equivalent of the estimate of its damages in the US proceedings. The relief also sought orders requiring Wellnex and BSPSPA to pay into Court amounts which either company are required to pay to 365 Health under the Sale Agreement.

The principles relevant to whether a freezing order should be made are well understood.

The power to make a freezing order is within the inherent jurisdiction of this Court “to make such orders as that Court may determine to be appropriate ‘to prevent the abuse or frustration of its process in relation to matters coming within its jurisdiction’”: see PT Bayan Resources TBK v BCBC Singapore Pte Ltd (2015) 258 CLR 1 at 18.

Rule 25.11 of the Uniform Civil Procedure Rules 2005 (NSW) (UCPR) is a further source of the Court’s jurisdiction to make freezing orders. That rule provides:

Whether drawing on the Court’s inherent jurisdiction or statutory power, the primary objective of a freezing order is the same: that is, as was explained by a majority of the High Court in PT Bayan Resources TBK v BCBC Singapore Pte Ltd at 19 [46], to protect “a prospective enforcement process”. French CJ, Kiefel, Bell, Gageler and Gordon JJ quoted Lord Nicholls of Birkenhead in Mercedes Benz AG v Leiduck [1996] AC 284 at 306, where his Lordship said:

The matters that must be established by a party seeking a freezing order are as stated by Gleeson CJ in Patterson v BTR Engineering (Aust) Ltd (1989) 18 NSWLR 319 at 321-2 (Meagher JA and Rogers AJA agreeing at 326 and 327 respectively):

These factors are, to a large extent, mirrored in UCPR r 25.14, although UCPR r 25.14(1)(b) refers to an applicant having a “good arguable case”.

In relation to the first of these matters, satisfaction of a prima facie or good arguable case does not require that the plaintiff show on the interlocutory evidence that the plaintiff’s case will more probably than not succeed at a final hearing. The threshold for establishing the first requirement is relatively low. See, for example, Samimi v Seyedabadi [2013] NSWCA 279 at [69] per McColl JA.

In relation to the second issue – the risk of dissipation – there must be facts from which a prudent, sensible, commercial person can properly infer a danger of default if assets are removed from the jurisdiction: see generally Severstal Export GMVH v Bhusan Steel Limited (2013) 84 NSWLR 141; [2013] NSWCA 102 at [57] – [59] per Bathurst CJ with whom Beazley P and Barrett JA agreed.

It is also clear that a Court should not lightly grant a freezing order given the serious impact that it might have on the affairs of the defendant: see Cardile v LED Builders Pty Limited (1999) 198 CLR 380 at 403; [1999] HCA 18 at [51].

On the material before me, I was satisfied that it was appropriate to grant a freezing order against 365 Health.

As to the first requirement, counsel for MaxRelief identified two potential causes of action.

The first cause of action identified was a potential cause of action under s 37A of the Conveyancing Act 1919 (NSW) to the effect that the sale of the assets the subject of the Sale Agreement was a transaction intended to defeat creditors. The second cause of action was registration and enforcement in Australia of any judgment obtained in the extant United States proceedings against 365 Health.

For present purposes, I proceed on the basis that the second of these causes of action satisfies the necessary prima facie case. The cross-claim proceedings in the United States have survived a summary judgment application and are proceeding to trial. The damages claimed in those proceedings are in the order of USD$5,158,661.

The second requirement is a little more difficult. On the one hand, and most significantly, there is the sale of what appears to be the, or one of the principal businesses conducted by 365 Health in circumstances where, at least on the material before me, the purchaser does not appear to be aware of the litigation in the US.

What was once an ongoing business has now been converted to cash and some shares. A significant part of the total consideration for the sale has already been paid, but there are still significant payments to be made and the consideration shares come out of escrow in late May 2024.

On the other hand, it may be that any non-disclosure of the existence of the US proceedings to Wellnex and BSPSPA is due to the fact that only the assets used in the business have been purchased and not the company 365 Health. This is in circumstances where the claim in the United States against 365 Health appears to be a monetary claim in relation to past conduct rather than a claim containing any allegations which could impact the future conduct of the business previously conducted by 365 Health, and which could have otherwise affected the sale to Wellnex and BSPSPA.

Further, there is the fact that under the Sale Agreement, not all of the businesses conducted by 365 Health were sold. At least the Athelite business was not sold to Wellnex. It is not clear, however, whether 365 Health continues to operate this business or whether it has been sold to another purchaser. The present assets of 365 Health are also not clear. It is to be remembered that 365 Health is a Proprietary Limited company and thus it would not likely be expected that any transactions it enters into would be made public, unless, as was the case with the Sale Agreement, the purchaser is a listed entity with disclosure obligations.

Associated with this last point is the fact that there was nothing clandestine on the part of 365 Health in relation to the sale of the business. It was sold to a listed entity in entity in circumstances where it must have known that the purchaser would have market disclosure obligations, as in fact occurred.

Whilst the first public announcement of the sale was in late May 2023 – almost twelve months ago – I was satisfied that MaxRelief did not become aware of the sale until March 2024 and has moved relatively promptly since then to obtain the freezing orders.

On balance, given the sale of what appears to be the, or at least a principal asset, of 365 Health, I was satisfied on the evidence that there was sufficient risk to warrant a freezing order being made. I was also satisfied that it was appropriate to make ancillary disclosure orders.

I was concerned, however, to ensure that any impact 365 Health from making a freezing order was minimised to such extent as is possible.

First, the relief claimed initially sought to only provide fairly modest allowances on account of ordinary expenses and legal expenses. I was concerned about this given that it is at least possible that 365 Health continues to own and operate the Athelite business. Ultimately MaxRelief accepted that the appropriate order, between now and 2 May 2024, when the proceedings are to return before me, was to allow 365 Health to continue to incur expenses in the ordinary course, subject to a requirement that notice be given to MaxRelief of any expense which, individually, exceeds more than $10,000.

Second, I was concerned to ensure that the proceedings return before the Court as soon as practicable. In circumstances where the urgent freezing order was not granted until the early afternoon on 29 April 2024 and the proceedings are not required to be served until 6 pm on 29 April 2024, it seemed to me to be appropriate to make the proceedings returnable on 2 May 2024.

The final matter that was addressed in the form of the freezing order against 365 Health concerned whether MaxRelief should be required to provide security for any compensation which may be required to be ordered as a result of the making of the freezing order. MaxRelief, as set out at the outset of this judgment, is incorporated in Delaware in the United States. It was accepted that it did not have any assets in the jurisdiction. The managing director of MaxRelief, Mr Spoto, has ties to Australia, including owning real property in the Northern Beaches of New South Wales in which he has significant equity. He offered a personal undertaking in addition to the corporate undertaking from MaxRelief. In the circumstances, given the short time period between now and when the proceedings will return to Court, it seemed to me that this was appropriate security in the circumstances.

I was not satisfied that it was appropriate to make any orders against Wellnex and BSPSPA at this stage. The position of MaxRelief is adequately protected in the short term, by the making of the freezing order. Whilst it is true that there is a monthly sum of $40,000 that is apparently being paid by Wellnex and BSPSPA to 365 Health, the significant payments are not due to be paid under the Sale Agreement until the end of 2024 and mid-2025. The consideration shares do not come out of escrow until 31 May 2024.

The preferable course in my view, was not to make any orders against Wellnex and BSPSPA at this stage, but to reserve to MaxRelief the right to seek relief against Wellnex and/or BSPSPA should they be so advised, once they have an understanding of the financial position of 365 Health.