ERA Polymers Pty Limited v Pacific Urethanes Pty Limited

1. [1]

   THE COURT: The applicant ERA Polymers Pty Limited (ERA) seeks leave to appeal from orders made by White J on 9 December 2014 refusing ERA leave to amend its statement of claim and summarily dismissing the proceedings it had brought against the respondent, Pacific Urethanes Pty Limited and others (collectively referred to as “Pacific”): ERA Polymers Pty Limited v Pacific Urethanes Pty Ltd [2014] NSWSC 1811. The Court directed that the summons for leave to appeal and, if leave was granted, the appeal, be heard concurrently.

2. [2]

   In its statement of claim, ERA sought a declaration that it was the sole beneficial owner of some 20 formulations being specified polyurethane systems developed, tested, manufactured and sold for particular customers (the confidential information). ERA alleged that Pacific had used the confidential information and sought orders restraining Pacific from continuing to do so. By its proposed amended statement of claim, ERA limited its claim to five formulations.

3. [3]

   After hearing argument, the Court determined that leave to appeal be refused. The Court’s reasons for doing so are as follows, expressed briefly in accordance with the convention of giving short reasons only on the refusal of leave: La La Land Byron Bay Pty Limited v The Independent Liquor and Gaming Authority [2015] NSWCA 254 at [8].

The background to the proceedings

1. [4]

   ERA purchased the business and assets of a company, Ariel Industries Pty Limited (Ariel), pursuant to a Business Sale Agreement dated 1 May 2013. The business assets included “Vendor IP”, defined as “all Intellectual Property Rights owed by, used by or licensed to the vendor in the conduct of the Business”, including “any right to have information (including confidential information) kept confidential”. “Intellectual Property Rights” were also included in the sale, defined to include “trade secrets, formulae, know-how, and … any right to have information kept confidential”.

2. [5]

   Some years prior to the sale to ERA, Ariel brought proceedings in the Federal Court of Australia against Pacific, alleging that Pacific had exploited Ariel’s confidential information and trade secrets acquired whilst two of Pacific’s principals were employed by Ariel. Those proceedings were settled in 2010 by means of a deed of settlement and release. Pursuant to the deed of settlement and release, Pacific agreed to pay Ariel a settlement sum of $250,000. In addition, pursuant to cl 2.2 of the deed of settlement and release, the parties agreed to execute contemporaneously a Toll manufacturing deed. The Toll manufacturing deed was an attachment to the deed of settlement and release and, pursuant to cl 1.2(b)(iii)(D) was included as part of the deed of settlement and release. Other relevant terms of those deeds are referred to below.

3. [6]

   ERA accepts that, as the purchaser of Ariel’s business, to the extent that Ariel released rights in equity in respect of trade secrets and confidential information, ERA has lost any continuing right to preserve the confidentiality of those trade secrets or confidential information. In short, ERA accepted that it could be in no better position than was Ariel in relation to its rights in respect of trade secrets and confidential information following entry into the deed of settlement and release and the Toll manufacturing deed.

4. [7]

   The relevant clauses in issue between the parties were cl 5 of the deed of settlement and release and cl 8 (especially subcl (d)) of the Toll manufacturing deed which provided as follows:

5. [8]

   Other provisions of the Toll manufacturing deed, including the recitals, and certain of the definitions are relevant to understanding its effect and operation, as follows:

6. [9]

   Clause 4 of the Toll manufacturing deed provided for minimum orders, including the payment by Pacific of a minimum amount, regardless of whether Ariel had been requested to manufacture any product or products of equivalent value to the minimum payment.

7. [10]

   White J, after referring at [24]-[25] to the principles governing summary dismissal, proceeded to construe cl 5 of the deed of settlement and release and cl 8 of the Toll manufacturing deed. His Honour observed, at [26], that cl 1.2(b)(iii)(D) provided that a reference to the deed of settlement and release included a reference to the Toll manufacturing deed. It followed, on his Honour’s reasoning, that the opening words of cl 5 extended to rights arising under the Toll manufacturing deed. His Honour held, at [27], that cl 8(d) of the Toll manufacturing deed did not confer any rights on Ariel. Rather, cl 8(d) qualified the extent of Ariel’s acknowledgement of Pacific’s title.

8. [11]

   ERA contended that his Honour erred in so construing cl 8(d). According to ERA, the opening words of cl 5 referred to rights taking effect by reason of the deed of release and settlement. Thus, none of the rights that arose under the Toll manufacturing deed, which were alleged to include the rights presently claimed by ERA, were affected by the release contained in cl 5.

9. [12]

   ERA then contended that pursuant to cl 8(d) of the Toll manufacturing deed, Pacific was entitled, in effect, to “a licence … to call for and have [ERA’s] products, manufactured for its use and exploitation”. Upon the expiration of the three year term, ERA’s rights, as Ariel’s assignee to the confidential information acknowledged within cl 8(d), arose free of any such licence. ERA submitted that, as provided by cl 11 of the Toll manufacturing deed, its rights to the confidential information continued in force at the expiration of the three year period specified in cl 8(d).

10. [13]

    In the Court’s opinion, the primary judge was correct in his construction of cl 5 of the deed of settlement and release and cl 8 of the Toll manufacturing deed. The Toll manufacturing deed constituted an agreement between Pacific and Ariel whereby Ariel would manufacture product for Pacific for a three year or longer period as agreed by the parties. As his Honour found, pursuant to cl 1.2(b)(iii)(D) the rights and obligations arising under the Toll manufacturing deed fell within the opening words of cl 5 of the deed of settlement and release. However, those did not include the ownership rights relied on by Pacific as these arose, if at all, prior to and independently of the Toll manufacturing deed. They were thus pre-existing rights, not ones created by that deed. Not being within the proviso contained in the opening words of the release, they were caught by the release. We note in this respect that Pacific did not argue before this Court that the operative words of the release were not wide enough to have this effect.

11. [14]

    Clause 8 did not, either expressly or by implication, create a licence of Ariel’s intellectual property in favour of Pacific. Nor did it confer any right upon Pacific to use Ariel’s confidential property for a three year period. As Pacific pointed out, ERA’s construction of cl 8 was premised upon its ownership of the confidential information. However, that was the subject of the dispute in the Federal Court which resulted in the settlement on the terms of the two deeds. Importantly, in this regard, the Toll manufacturing deed did not acknowledge or otherwise accept Ariel’s ownership of the confidential information. Rather, as his Honour held at [31], pursuant to cl 8(d), Ariel was entitled to manufacture product where it already knew the Specification, or the Specification was provided to it by a third party, without it being in breach of cl 8(d). The practical effect of cl 8(d) therefore was that, if challenged by Pacific as to its manufacture of any particular product other than for Pacific, Ariel (and ERA as its assignee) was entitled to prove that it already knew the Specification or that it was provided to it by a third party.

12. [15]

    There are various other aspects of the Toll manufacturing deed that demonstrate that ERA’s construction of cl 8(d) was untenable. For example, there was no provision for the delivery up of confidential information after the three year or longer period of the deed as might be expected if cl 8(d) was a licence provision. But more particularly, the clause, by its terms, provided that Ariel “has no right, title or interest in the Specifications”. Nothing in the deeds “saved” to Ariel any right, title or interest in confidential information.

13. [16]

    Finally, cl 11 does not assist Ariel. Clause 8(d) neither creates a right nor imposes an obligation. It is a declaration or a statement of such interest as it may have in the Specifications. By contrast, cls 8(a) and (b) do create obligations to keep the matters specified in each of those clauses confidential. Clause 8(c) confers a right to disclose the terms of the deed for the purposes therein specified.

14. [17]

    In effect, what ERA sought to vindicate in its proposed proceedings were rights that were anterior to the deed.

15. [18]

    The primary judge was correct, therefore, in accordance with principle, to summarily dismiss ERA’s proceedings. As the proposed amended statement of claim was simply directed to reducing the ambit of the claim, there was no error in his Honour’s consequential refusal to allow its amendment.

16. [19]

    The Court confirms the order made 2 September 2015: