FEDERAL COURT OF AUSTRALIA
Zomojo Pty Ltd v Hurd (No 2) [2012] FCA 1458
FEDERAL COURT OF AUSTRALIA
Hurd v Zomojo Pty Ltd (No 2) [2012] FCA 1458
CORRIGENDUM
1. In paragraph 259 of the Reasons for Judgment, the sixth sentence reads "Indeed, Hurd himself, at one point, conceded that OptiCast was renamed ZeptoCast and that ZeptoCast was subsequently renamed OptiCast". The sixth sentence should read "Indeed, Hurd himself, at one point, conceded that OptiCast was renamed ZeptoCast and that ZeptoCast was subsequently renamed ZeptoLink".
| I certify that the preceding one (1) numbered paragraph is a true copy of the Corrigendum to the Reasons for Judgment herein of the Honourable Justice Gordon. |
Associate:
Dated: 18 June 2013
| IN THE FEDERAL COURT OF AUSTRALIA | |
| DATE OF ORDER: | |
| WHERE MADE: |
THE COURT ORDERS THAT:
1. By 4:00pm on 21 January 2013, the parties are directed to confer and to bring in orders to give effect to these reasons for judgment and orders for the future management of the proceeding. If the parties are unable to reach agreement, each party should file and serve a minute of proposed orders and a two page submission addressing the area(s) of dispute.
Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011 (Cth).
INDEX
| DESCRIPTION | PARA(S) | |
| 1 | Introduction | [1]-[7] |
| 2 | Facts | |
| 2.1 2005 – The establishment of Zomojo | [8]-[37] | |
| 2.2 2006 to 2010 – The development of Zomojo's products | [38]-[64] | |
| 2.2.1 Zomojo's Trading and Zomojo's Gateways | [38]-[45] | |
| 2.2.2 Zomojo's ATS | [46]-[59] | |
| 2.2.3 Ion | [60]-[61] | |
| 2.2.4 Zomojo's NICs | [62]-[64] | |
| 2.3 January 2010 | [65]-[66] | |
| 2.4 May 2010 | [67] | |
| 2.5 September 2010 | [68]-[78] | |
| 2.6 October 2010 | [79]-[101] | |
| 2.7 November 2010 | [102]-[109] | |
| 2.8 December 2010 | [110]-[125] | |
| 2.9 January 2011 | [126]-[142] | |
| 2.10 February 2011 onwards – staff recruitment | [143]-[154] | |
| 2.11 March 2011 onwards – Zeptonics' activities after Hurd left Zomojo | [155]-[172] | |
| 2.12 Hurd's Conduct and Hurd as a witness | [173] | |
| 3 | Legal Framework | |
| 3.1 The Service Agreement | [174] | |
| 3.2 Confidentiality and Confidential Information | [175]-[203] | |
| 3.2.1 Clause 9 of the Service Agreement | [175]-[199] | |
| 3.2.2 Springboard doctrine | [200]-[203] | |
| 3.3 Fiduciary duties | [204]-[208] | |
| 4 | Analysis | |
| 4.1 Date and effectiveness of Hurd's resignation | [210]-[223] | |
| 4.2 Period prior to 12 February 2011 | [224]-[305] | |
| 4.2.1 Diversion of the Newedge opportunity | [225]-[233] | |
| 4.2.2 Development and marketing of OptiCast | [234]-[261] | |
| 4.2.2.1 Introduction | [234]-[237] | |
| 4.2.2.2 Breaches of the Service Agreement | [238]-[251] | |
| 4.2.2.3 ZeptoLink | [252]-[261] | |
| 4.2.3 Development and fundraising of the Crosswise ATS | [262]-[276] | |
| 4.2.3.1 Introduction | [262]-[264] | |
| 4.2.3.2 Breaches of the Service Agreement | [265]-[276] | |
| 4.2.4 Development and marketing of ZeptoMUX, ZeptoNIC, ZeptoSwitch and ZeptoAccess KRX | [277]-[304] | |
| 4.2.4.1 Introduction | [277]-[286] | |
| 4.2.4.2 Evidence regarding the creation of each device | [287]-[294] | |
| 4.2.4.3 Breaches of the Service Agreement | [295]-[303] | |
| 4.2.4.4 Breach of Hurd's fiduciary duties | [304] | |
| 4.2.5 Conclusion | [305] | |
| 4.3 Period after 11 February 2011 | [308]-[351] | |
| 4.3.1 Development and marketing of OptiCast, ZeptoCast and then ZeptoLink | [308]-[309] | |
| 4.3.2 Further development and marketing of the Crosswise ATS | [310]-[311] | |
| 4.3.3 Development and marketing of ZeptoMUX, ZeptoNIC, ZeptoSwitch and ZeptoAccess KRX | [312]-[325] | |
| 4.3.3.1 ZeptoMUX | [312]-[317] | |
| 4.3.3.2 ZeptoNIC | [318]-[319] | |
| 4.3.3.3 ZeptoSwitch | [320] | |
| 4.3.3.4 ZeptoAccess KRX | [321]-[325] | |
| 4.3.4 Dealings with Newham, Snowdon and Fitzpatrick | [326]-[342] | |
| 4.3.5 Zepto Markets and SunGard and Zeptonics and Leading | [343]-[350] | |
| 4.3.6 Conclusion | [351] | |
| 4.4 Claims against Corporate Respondents | [352]-[368] | |
| 4.4.1 Knowing assistance | [353]-[361] | |
| 4.4.2 Inducing Breach of Contract | [362]-[368] | |
| 5 | Relief | |
| 5.1 Breaches of cll 3.1, 3.3, 3.4 and 3.5 of the Service Agreement, s 181(1) of the Corporations Act and Fiduciary Duties | [370]-[377] | |
| 5.2 Breaches of cl 10 of the Service Agreement | [378]-[381] | |
| 5.3 Breaches of cl 9 of the Service Agreement, s 183(1) of the Corporations Act and fiduciary duties | [382]-[399] | |
| 5.4 Breaches of cl 12.1(b) of the Service Agreement | [400]-[401] | |
| 5.5 Breaches of cl 12.1(c) of the Service Agreement | [402]-[404] | |
| 6 | Hurd's Shares | |
| 6.1 Introduction | [405]-[406] | |
| 6.2 Facts | [407]-[431] | |
| 6.3 Issues | [432]-[470] | |
| 6.3.1 Did cl 4.7(b) form part of the ESOP and bind Hurd? | [439]-[451] | |
| 6.3.2 Was Hurd a bad leaver? | [452]-[455] | |
| 6.3.3 Was cl 4.7(b) a penalty? | [456]-[461] | |
| 6.3.4 Did cl 4.79(b) apply to all of the Hurd Shares | [462]-[469] | |
| 6.3.5 Conclusion | [470] | |
| 6.4 Validity of the Resolutions of the Zomojo Board on 30 June 2011 | [471]-[478] | |
| 6.5 Alleged failures to act fairly and breach of implied terms to act in good faith | [479]-[494] | |
| 6.6 Amount to be paid for the Hurd Shares | [495]-[505] | |
| 6.7 Hurd's Oppression Claim | [506]-[512] | |
| 7 | Other Matters | |
| 7.1 Amendments to Zomojo's Pleadings | [514]-[515] | |
| 7.2 Paragraphs 92-95 of Hurd's written submissions | [516] | |
| 7.3 Future Conduct of the Trial | [517]-[519] | |
| VICTORIA DISTRICT REGISTRY | |
| GENERAL DIVISION | VID 1478 of 2011 |
| BETWEEN: | ZOMOJO PTY LTD (ACN 114 604 269) Applicant |
| AND: | MATTHEW HURD First Respondent ZEPTONICS PTY LTD (ACN 141 647 716) Second Respondent CROSSWISE PTY LTD (ACN 140 717 317) Third Respondent MD HAMMER PTY LTD (ACN 149 869 189) Fourth Respondent ZEPTO MARKETS PTY LTD (ACN 150 529 301) Fifth Respondent ZEPTO FABRICS PTY LTD (ACN 156 138 000) Sixth Respondent ZEPTOIP PTY LTD (ACN 156 133 087) Seventh Respondent TRADEMACH PTY LTD (ACN 115 683 864) Eighth Respondent |
| and between | MATTHEW HURD First Cross-Claimant JOLENE (TAS) PTY LTD (ACN 082 267 516) Second Cross-Claimant HURD FAMILY SUPERANNUATION FUND Third Cross-Claimant |
| and: | ZOMOJO PTY LTD (ACN 114 604 269) Cross-Respondent |
| JUDGE: | GORDON J |
| DATE: | 19 DECEMBER 2012 |
| PLACE: | MELBOURNE |
REASONS FOR JUDGMENT
1 The Applicant, Zomojo Pty Ltd (Zomojo), was and remains involved in high frequency trading (HFT) primarily on the Korean Stock Exchange (KRX) using proprietary technology it developed in house. HFT is a broad term encompassing various quantitatively derived, computer driven and high volume trading strategies where equities and derivatives are traded based on small perceived mis-pricings over short, intra-day periods of time.
2 Zomojo's involvement in HFT was, and remains, multifaceted. It was and remains engaged in:
1. developing, marketing and supplying low latency market gateway products and services for use by professional traders in equity and like markets (Zomojo's Gateways), principally for use on the KRX;
2. trading in equity and like markets by using and exploiting the low latency of Zomojo's Gateways and proprietary trading engine (Zomojo's Trading) again, principally on the KRX;
3. developing proprietary low latency hardware and software products, including its own firmware for third party network interface cards (NICs), and later its own NICs, called the Z1 and Z10 (Zomojo's NICs), and a communication and scheduling framework called the Ion framework (Ion); and
4. developing, marketing and supplying an alternative trading system (ATS) for equity and like markets that utilises software and hardware so as to achieve minimum latency (Zomojo's ATS).
3 Matthew John Hurd (Hurd) (the First Respondent) was a director, an officer, an employee, the company secretary and a shareholder of Zomojo from its incorporation on 3 June 2005 until early 2011. Under a Service Agreement Hurd signed with Zomojo on 2 December 2005 (the Service Agreement), Hurd was appointed as a co-managing director of Zomojo and was required, inter alia, to diligently perform specified duties, devote the whole of his time and attention during normal business hours to the performance of those duties, at all times use his best endeavours to promote Zomojo's interests and not be (directly or indirectly) involved or interested in any other business or occupation which materially interfered with the performance of those duties or competed in any respect with the business of Zomojo. Hurd was also Zomojo's key decision maker with respect to the technological direction of Zomojo and, under the Service Agreement, was required to make prompt and full disclosure to Zomojo of the evolution, discovery or invention of any invention.
4 From no later than September 2010, Hurd set out on a covert course of conduct that was nothing more than a flagrant and deplorable attempt to appropriate benefits for himself which were properly those of his employer. In Hurd's own words, his conduct from late 2010 onwards was not "flattering" and was disreputable.
5 Hurd's conduct was blatant, deliberate and done by him knowing that what he was doing was wrong. Hurd was a most unsatisfactory witness. Except for admissions against his interests, I cannot and do not accept his evidence unless, and only to the extent that, his evidence was corroborated by independent contemporaneous evidence. During the course of his evidence, he admitted on no less than 26 occasions that what he wrote or said was false, a lie or both. But that evidence itself had problems. Hurd's admission that something was false or a lie was itself, often, false. Hurd gave evidence he thought would advance his case as he saw it. Why? Because Hurd was, and remained, focussed on securing for himself an advantage over Zomojo whilst consciously disregarding his legal and ethical obligations. He "adapted" his evidence accordingly. Hurd said in evidence that he thought a description of his conduct during this period as "reprehensible" was "harsh". It was not harsh. Hurd's conduct was dishonest. He showed no remorse, just bitterness.
6 Hurd's conduct needs to be addressed by reference to two time periods:
1. up to and including 11 February 2011, when his resignation as an employee of Zomojo took effect; and
2. the period after his resignation took effect on 11 February 2011.
7 Did Hurd breach the Service Agreement, one or more of ss 181(1) and 183(1) of the Corporations Act 2001 (Cth) (the Corporations Act) and his duties of fidelity and good faith to Zomojo? The answer is yes. It will be necessary to deal with each period separately. The facts relevant to each period are, of course, to some extent interconnected but the applicable legal framework is different.
2.1 2005 – The establishment of Zomojo
8 Zomojo was the brainchild of three individuals: Dr Greg Robinson (Robinson), Mr Ian Heddle (Heddle) and Hurd. Robinson, Heddle and their associates provided the start-up capital. Hurd did not provide any start-up capital.
9 Zomojo was established in order to undertake HFT on the KRX. In a Zomojo "trading proposal" document produced by Hurd on 31 May 2005, Hurd described Zomojo's business as an "index option arbitrageur". The proposal acknowledged that every other trader was a competitor – "[i]f you aren't fast enough, you don't win the race to trades and you can't participate. Too slow, no trades, the door is firmly shut". As Hurd went on to say "[t]o enable participation you have to be able to win on the technology front to capture trades". In that document, Hurd also noted that "[s]ecrecy and staff retention is very important to maintaining proprietary advantage" and that "knowledge of the IP [intellectual property] should be carefully managed within Zomojo so the techniques used are not widely known". Hurd said that it was important not to disclose "all implementation details" to shareholders or directors with conflicts of interest. Hurd identified as Zomojo's principal business risk "important staff leaving with enough IP [intellectual property] in their heads to competitively hurt the venture".
10 Zomojo was incorporated on 3 June 2005. As at that date, Hurd and Heddle were the directors of Zomojo, Hurd was the company secretary and Hurd and Heddle each owned one share.
11 Hurd commenced writing code for the KRX trading engine in June 2005. By the end of July 2005, three further programming staff had been hired. It took Hurd approximately nine months to develop the software for Zomojo's trading engine. The first version of the trading engine was slow and the hedging algorithm was inadequate. Hurd rewrote the program and, by May or June 2006, the system was fast enough to undertake basic trading activity and profitable enough to cover Zomojo's costs.
12 During the second half of 2005, Robinson supervised the drafting of documentation including Zomojo's Constitution, a Shareholder Agreement, an employee share ownership plan (ESOP), an Zomojo Employee Option Plan (ZEOP) and employee service agreements. Robinson utilised the services of Dr Nick Brash (Brash), a lawyer of Brash Solutions, to draft those documents. Robinson provided those documents in draft form to Heddle and Hurd, where relevant, for their comment. One such communication was an email from Brash to Robinson on 14 October 2005, attaching a draft of the Plan Deed and Offer Booklet (in relation to the ESOP), which Robinson forwarded to Heddle and Hurd (on the same day). That email noted that there was a further document, a "Plan Information Booklet", which was still to come. Hurd gave evidence that he did not specifically recall receiving Robinson's 14 October 2005 email but that he recalled receiving documentation at around that time.
13 On 21 November 2005, the Board of Zomojo (consisting of Heddle and Hurd) passed resolutions which had the following effect:
1. Hurd and Heddle each transferred their one share in Zomojo to entities nominated by a Zomojo investor, Mr Bill Burdett, and Robinson;
2. 2,998 shares were issued in Zomojo to entities nominated by Mr Burdett, another investor, Mr Tim Batho and Robinson, as follows:
2.1 Mr Batho – 1,000;
2.2 Mr Burdett – 999; and
2.3 Robinson – 999; and
3. Zomojo entered into the Shareholder Agreement with the three shareholders.
14 Under the Shareholder Agreement, Robinson was appointed Chairman of the Board. On 2 December 2005, the Board of Zomojo (consisting of Robinson, Heddle and Hurd) approved:
1. the establishment of the ZEOP in accordance with the Plan Rules and the issuing of options pursuant to the ZEOP;
2. the establishment of the ESOP in accordance with the Plan Deed and, upon approval by the shareholders, the signing of the Plan Deed and the transfer or issuing of shares and the making of loans pursuant to the ESOP;
3. the entry by Zomojo into the Service Agreement with Hurd and a service agreement with Heddle; and
4. the offer by Zomojo and, upon acceptance, the issuing of, options pursuant to the ZEOP as follows:
4.1 Hurd – 400,000; and
4.2 Heddle – 100,000.
15 On 2 December 2005, the shareholders of Zomojo passed resolutions approving:
1. an amendment to Zomojo's Constitution;
2. the establishment of the ZEOP in accordance with the Plan Rules and the issuing of options pursuant to the ZEOP; and
3. the establishment of the ESOP in accordance with the Plan Deed, Zomojo entering into the Plan Deed, and the transfer or issuing of shares and the making of loans pursuant to the ESOP.
16 On the same day, Hurd was offered, and accepted, 400,000 options in Zomojo. By accepting the options, Hurd agreed "to be bound by the terms and conditions of the offer, the Plan Rules, the Constitution of Zomojo and Zomojo's Shareholder Agreement in force from time to time". Hurd's nominee also signed an accession to the Shareholder Agreement on that day.
17 It is necessary to examine the terms of several of the documents executed on 2 December 2005 in some detail.
18 First, the Service Agreement. It was between Hurd and Zomojo. Its terms governed his role as one of two co-managing directors of Zomojo. From the outset, his role "involved managing all aspects of the business including technology and developments at Zomojo".
19 Under cl 3.1(a), Hurd was required to "diligently perform the Services". "Services" was defined in cl 1 to mean the duties specified in Item 2 of Sch A to the Service Agreement and such other duties as were consistent with the position to which Hurd was appointed, subject to any modifications or additions agreed by the parties from time to time. Item 2 of Sch A defined the duties as follows:
Co-Managing Director, each having concurrent powers as Managing Director, but in practice the co-Managing Directors will each focus on complementary aspects of the business, with Matt Hurd managing technology and developments and Ian Heddle managing trading and operations.
The Shareholder Agreement defined the role of Managing Director in the same terms: see cl 15(a).
20 Consistent with cl 3.1 of the Service Agreement, other obligations were imposed on Hurd. Clause 3.3 provided:
Unless absent on leave or through illness or injury, the Managing Director shall devote the whole of his time and attention to the performance of the Services during normal business hours and at such other times as may reasonably be necessary to the business of [Zomojo], …
21 In addition, at all times Hurd was to "use his best endeavours to promote the interests of [Zomojo]": cl 3.4. Finally, cl 3.5 provided that:
The Managing Director shall not while employed by [Zomojo] (without the written consent of the Board) be directly or indirectly involved or interested in any other business or occupation which:
(a) materially interferes with the performance of the Services; or
(b) competes in any respect with the business for the time being of [Zomojo] …, however this provision shall not prohibit the Managing Director from holding:
(i) less than 10% of the issued capital in a publicly listed company; or
(ii) any interest in a business unassociated with the core businesses of [Zomojo].
22 Hurd's obligations did not end there. Zomojo was a start up company. The stakes were big. Hurd was the technological driver of Zomojo. Hurd had not contributed capital to the start up – his contribution was his computer programming expertise. Unsurprisingly, other clauses specified what Hurd had to do and what he could not do with technology whilst he was at Zomojo and if he left Zomojo.
23 Clause 10, headed "Inventions and Assignment", was in the following terms:
10.1 The Managing Director … assigns to [Zomojo]:
a. all inventions, discoveries and novel designs whether or not registrable as designs or patents throughout the world;
b. the entire copyright throughout the world in all writing (including but not limited to product designs, product sketches, computer software, source code, object code, flow charts, programmer's notes and other documentation and all adaptions, alterations or modifications of any computer software, source code or object code),
created previously while in [Zomojo's] employ, created now or created in the future as a result of or pursuant to his performance of the Services.
10.2 In addition to disclosing any inventions, discoveries, designs or copyright works referred to in the preceding clause, the Managing Director shall disclose and, if required by [Zomojo], assign to [Zomojo] any other inventions, discoveries, designs or copyright works devised or created by the Managing Director at the request of [Zomojo] during a period for which the Managing Director has been paid by [Zomojo].
10.3 The Managing Director shall both during this agreement and after the expiry or termination of this agreement do all such acts and things, and sign all such documents, as [Zomojo] may reasonably request to secure [Zomojo's] ownership or rights to inventions, discoveries, designs or copyright works referred to in clauses 10.1 and 10.2.
10.4 The Managing Director shall make prompt and full disclosure to [Zomojo] of the evolution, discovery or invention of any invention.
10.5 The Managing Director irrevocably appoints [Zomojo] as his attorney to execute all such documents and do all such things as are required to be executed or done to give effect to the provisions of this clause.
That clause survived termination of the Service Agreement: cl 17.
24 The Service Agreement also addressed what was to occur if the agreement was terminated. Clause 12.1, under the heading "Future Employment", provided:
After termination of this agreement for any reason the Managing Director shall not, except with the written consent of [Zomojo], at any time until the expiration of the Restraint Period and within the Restraint Areas specified in item 9 of Schedule A, directly or indirectly, either on his own account or jointly with or on behalf of any other person, organisation or company, whether as a director, employee, member or otherwise:
a. endeavour to entice away from [Zomojo], offer to perform services for or otherwise solicit the custom of any client or customer of [Zomojo] which was a client or customer of [Zomojo] within the last 12 months of the Managing Director's employment with [Zomojo];
b. offer employment or business opportunities to any employees of [Zomojo] or counsel, or procure or otherwise assist any person to do so; or
c. be employed by, provide services or advice, or otherwise assist any company or entity that is involved with the trading of securities on any of the exchanges listed in item 10 of Schedule A.
(Emphasis added.)
25 The "Restraint Period" was 12 months: Item 9 of Sch A. The "Restraint Areas" were:
Sydney, Seoul, Tokyo, Osaka, Singapore, Hong Kong, New York, London, Frankfurt, Boston, Chicago, Honolulu, Los Angeles, Philadelphia, San Francisco.
The "exchanges listed in item 10 of Schedule A" were extensive. Again, cl 12.1 survived termination of the Service Agreement: cl 17.
26 Two other subject matters were relevantly covered by the Service Agreement both during and after termination of the Service Agreement. They were described as "Confidential Information" and "Remuneration". Clause 9, entitled "Confidentiality", provided:
9.1 The Managing Director shall not during or after his employment by [Zomojo]:
a. use any Confidential Information for any purpose not related to the business of [Zomojo]; or
b. disclose any Confidential Information to any third party except pursuant to a confidentiality agreement approved by [Zomojo] and for the purposes of [Zomojo's] business.
9.2 The Managing Director shall use all reasonable endeavours to prevent disclosure of any Confidential Information by any third party to whom he discloses it.
(Emphasis added.)
27 "Confidential Information" was defined in cl 1 of the Service Agreement to mean:
… matters not generally known outside [Zomojo], information relating to the business of [Zomojo], including existing and future products and services, information relating to the technology, infrastructure, strategic plans, business plans, research, development, financial affairs, sales, costs, profits, organisation, customers, pricing methods, business partners …, the work (including computer programs) performed by the Managing Director pursuant to this agreement, and any other information which the Managing Director ought reasonably to be aware is confidential.
Again, cl 9.1 survived termination of the Service Agreement: cl 17. A careful reader of cl 9.1 will notice that unlike cl 12, cl 9 applied to Hurd without limitation as to period or area.
28 Finally, in the area of remuneration, cll 4 and 8 of the Service Agreement were relevant. Hurd's remuneration had four components – salary (cl 4.1), issue of options in Zomojo (cll 4.2(a) and 4.5), entitlement to a profit-share bonus and shares (cll 4.2(a) and 4.6) and, of course, Superannuation Contribution (cl 4.2(b)). Clause 4 does not refer to any of the Plan Deed, Plan Rules, Offer Booklet or Plan Information Booklet.
29 Clause 8 was entitled "Termination". It relevantly provided that:
8.1 [Zomojo] may terminate this agreement immediately by notice in writing if the Managing Director:
(a) commits any breach of the Managing Director's obligations and duties under this agreement or any agreement or arrangement with [Zomojo] which is, in the reasonable opinion of the Board, material;
(b) in the reasonable opinion of a Managing Director is guilty of conduct tending to bring the Managing Director or [Zomojo] … into disrepute;
…
8.2 Upon termination of this agreement pursuant to clause 8.1, the Managing Director shall not be entitled to any further compensation or damages other than pro rata salary and accrued annual leave to the date of termination.
…
8.9. The Managing Director may terminate this agreement by giving one month's notice and upon such termination shall be entitled to all compensation due to the Managing Director under this agreement.
…
30 The Plan Rules governed the ZEOP, while the Plan Deed (and its Schedules, the Offer Booklet and Plan Information Booklet) governed the ESOP. No provision of the Plan Rules (or cl 4.5 of the Service Agreement) specifically dealt with what was to occur if a participant in the ZEOP ceased employment with Zomojo. That is not surprising. Options could only be granted to an employee: Rule 6.2. Options could only be redeemed by an employee: Rule 7.2(a)(i). Options which had not vested lapsed upon cessation of employment: Rule 11.1(g)(i). Even if vesting had occurred, options would lapse upon cessation of employment if the employee was terminated for breach of the Service Agreement: Rule 11.1(g)(ii). Otherwise, vested options would lapse 60 days after cessation of employment: Rule 11.1(i).
31 If the options had been converted to shares, however, the position was different. Upon the exercise of options, in respect of the resulting shares, the participant agreed to be bound by the Plan Rules, Zomojo's Constitution and the Shareholder Agreement: Rule 9.6 of the Plan Rules. The participant also undertook not to take any action which would infringe the restrictions on sale of shares imposed by Rule 13: cl 9.7 of the Plan Rules. Rule 13.2 of the Plan Rules relevantly provided that:
The Participant shall be permitted or obliged to deal with Shares if the participant would be permitted or obliged to do so had the Shares been acquired pursuant to the [ESOP].
32 Finally, Rule 30.8 of the Plan Rules provided that Zomojo could buy back shares resulting from the exercise of options at a mutually agreed price.
33 Next, the Plan Deed for the ESOP. Recital 4 of the Plan Deed noted that the "terms of issue upon which employees will acquire shares are to be set out in the offer booklet containing the invitation to participate in the Plan and the information booklet, which are set out as Schedules to this Plan Deed ... and which are to be sent to eligible employees selected by the Board." Clause 1.2 of the Plan Deed stated that the "Plan Deed sets out general provisions governing how the Plan generally is to be operated, and the offer booklet and information booklet in the Schedule to this Plan Deed ... sets out the provisions to be incorporated into contracts between Zomojo and employee participants." There were, however, no Schedules to the Plan Deed as at 2 December 2005.
34 On 5 December 2005, Brash emailed the Plan Information Booklet for the ESOP to Robinson. Robinson forwarded Brash's email on the same day to Heddle and Hurd. Although Hurd, in his witness statement in reply, professed to have never received the 5 December 2005 email from Robinson (and its attachment), in his oral evidence he said he believed he would have received it and had no reason to think otherwise. Brash's email included the following explanation of how the ESOP documents fitted together:
Fitting the documents together: To remind you how these documents fit together: the ESOP is constituted by the entering into of the Plan Deed pursuant to the 'stage 2' Board minutes previously provided, and the Offer Booklet and the Plan Information Booklet constitute schedules to the Plan Deed. I have ensured the attached Plan Information Booklet is in line with the ESOP Offer Booklet, clause 4.6 of the Employment Agreements, and with section 4 of the Employee Ownership Strategy paper last sent on 8 November 2005. To open the Word version of the Offer Booklet, you will be prompted to select the attached Excel spreadsheet (it might be easier if you first save the Excel document to a location so you know where to find it when prompted to select it).
35 The Plan Information Booklet contained the following relevant terms:
4.7 Selling Your Shares on Cessation of Employment
(a) General Principles
Following cessation of employment, you are not prevented by the Plan from selling your shares, however again you would need to comply with the relevant provisions and procedures set out in Zomojo's shareholder agreement.
Zomojo has an option to procure a purchase of your shares within 30 days after your cessation of employment either for an amount equal to your loan outstanding if you are a bad leaver (see paragraph (b) below) or otherwise on the basis of a Plan valuation formula being 5 x the previous year's pre-tax profit (see paragraph (c) below).
If the company does not exercise either option to procure a purchase of your shares, then if you so request, Zomojo must use its best endeavours to assist you in finding a buyer subject to the terms of Zomojo's shareholder agreement.
Where a transfer of shares is to take place, you need to execute a transfer (or if you fail to, the Plan administrator may do so on your behalf) and Zomojo will record the change in ownership of the shares in its share register.
Unless otherwise previously determined by the Board, if your employer ceases to be a member of the Zomojo group, your employment will be deemed to have ceased at that time, unless you re-commence employment with a member of the Zomojo group within 30 days after such cessation.
(b) Special Rule 1: Bad Leavers
The only exception is if you are a bad leaver, that is if you cease employment in circumstances that entitle Zomojo to dismiss you without notice.
In this case, the Board has discretion to determine within 30 days after your cessation of employment by notice in writing to you that you must transfer your shares to Zomojo or its nominee for an amount equal to your loan outstanding. In this case, the share sale proceeds will be applied to discharge your Plan loan, and you would be entitled to a refund of any voluntary loan repayments and your deferred bonus would include the full amount of any salary and bonuses sacrificed without any offset for notional interest.
If the Board does not exercise its discretion to require you to transfer your shares as set out above, then you may keep your shares and sell them when you please subject to complying with the provisions of Zomojo's shareholder agreement. In this case, your deferred bonus would be calculated in the usual way (ie accumulated salary/bonus reduction less notional interest) and the after-tax amount of the deferred bonus will be applied to discharge your Plan loan, and if there is still an amount that remains outstanding on your loan, you are required to pay this amount to Zomojo within 30 days after you are notified of the shortfall figure.
(c) Special Rule 2: Zomojo Option
The other exception is that within 30 days after your cessation of employment, Zomojo may elect by notice in writing to you to procure a subsidiary to purchase your shares on trust for the purposes of the ESOP on the basis of a Plan valuation formula, being 5 x the previous financial year's pre-tax profit divided by the total number of shares on issue, and then multiplied by the number of shares being sold.
In that case, Zomojo may elect to pay you either:
→ in one lump sum instalment, or
→ in 3 instalments over a 2-to-3 year period from and including the year of cessation of employment, each instalment being pegged to the Plan value measured at that time.
'One Lump Sum Instalment' Scenario
In this case, the sale price would be paid to you within 3 months of cessation of your employment, or within 1 month of the relevant accounts becoming available if this turns out to be a later date. Your shares will be transferred to the purchaser only once you have received payment of the applicable sale price.
…
(Emphasis in original.)
36 The Offer Booklet contained the following relevant terms:
2.4 Zomojo ESOP
The Zomojo ESOP is a set of rules governing the provision of shares in Zomojo Pty Ltd ('Zomojo') to employees of Zomojo. The rules may be amended at any time pursuant to a Board resolution approved by a Special Majority, or by approval of a Special Majority of Zomojo shareholders, as defined in the Zomojo Shareholder Agreement. Any such amendment will bind any employees already participating in the Plan, as well as applying to any offers made after the date of the amendment.
…
● When you cease employment:
→ you will be entitled to the deferred bonus nominated in your offer or accrued under a salary sacrifice facility if applicable;
→ Zomojo will deduct PAYG tax from the deferred bonus in accordance with its statutory obligations, and on your behalf apply the after-tax amount of the deferred bonus towards repayment of any outstanding balance of your Plan loan; and
→ your loan must be repaid in full – if you are able to negotiate a sale of your shares at the time of cessation of employment (see below), Zomojo will offset the share sale proceeds against any outstanding loan amount (if this has not already been discharged fully by the above repayments), and any surplus proceeds will be paid to you, and any shortfall will be payable by you.
● Your ability to sell the shares will be governed during employment with Zomojo, and once you cease employment, by Zomojo's shareholder agreement. However:
→ [if you are a bad leaver (ie if you cease employment in circumstances that entitle Zomojo to dismiss you without notice), then at Zomojo's option you must transfer your shares to Zomojo or its nominee for an amount equal to the lower of net tangible asset backing as at the most recent 30 June or the most recent arm's length transaction price; or]
→ Zomojo may elect to procure a subsidiary to purchase your shares on the basis of a Plan valuation formula, being 5 x the previous [average three] years pre-tax profit. In that case, Zomojo may elect to pay you in one lump sum instalment, or to pay in 3 instalments over a 3-year period from and including the year of cessation of employment, each instalment being pegged to the Plan value measured at that time.
If the company does not exercise its option to procure a purchase of your shares, then at your request, Zomojo must use its best endeavours to assist you in finding a buyer subject to the terms of Zomojo's shareholder agreement.
(Emphasis in original.)
37 Hurd converted his options into shares (pursuant to the Plan Rules) and his nominee acquired shares in Zomojo (pursuant to the Plan Deed) on the following dates:
| Date | Entity | Price | Shares |
| 30 June 2007 | Jolene (Tas) Pty Ltd | $1.43 | 32,000 |
| 30 June 2007 | Jolene (Tas) Pty Ltd | - (from options) | 133,333 |
| 30 June 2008 | Jolene (Tas) Pty Ltd | $7.40 | 32,000 |
| 30 June 2008 | Jolene (Tas) Pty Ltd | - (from options) | 133,333 |
| 30 June 2009 | Jolene (Tas) Pty Ltd | $14.65 | 32,000 |
| 30 June 2009 | Jolene (Tas) Pty Ltd | - (from options) | 133,334 |
2.2 2006 to 2010 – The development of Zomojo's products
2.2.1 Zomojo's Trading and Zomojo's Gateways
38 In the beginning, Heddle and Hurd were co-managing directors of Zomojo while Robinson remained employed by his previous employer (until 2007). Hurd was primarily focused on technology and trading strategy development, including supervising the construction of Zomojo's Gateways and, later, its ATS, as well as conducting research into its continuing development and improvement. Heddle's role was complementary to Hurd's; he focused on Zomojo's trading activities and operations.
39 Hurd was initially paid a salary of $150,000 per annum. In approximately May 2009, Hurd's salary was increased to $400,000 per annum. Hurd also received bonus payments and dividends. From 2005 until February 2011, Hurd received total remuneration in excess of $3 million.
40 As mentioned at [11] above, Hurd spent half of 2005 and part of 2006 developing the software for Zomojo's trading engine. Zomojo's trading engine analyses market information and performs calculations to determine when to buy securities, how many to buy and when to sell them. A necessary corollary of the trading engine is a gateway – a connection to the particular securities exchange which receives market data and transmits orders. Both the trading engine and the gateway must be capable of extremely low latencies in order to enable the trader to realise a profit.
41 In March 2006, Zomojo commenced trading on the KRX.
42 Initially, Zomojo utilised a single broker which gave it a direct connection to the KRX. In October 2006, the KRX introduced new regulations which meant that Zomojo's broker was not permitted to offer Zomojo a faster connection to the KRX than any of its other clients. All connections to the KRX were required to be processed through a broker's front end processor (FEP), which checks orders and monitors risk. Zomojo no longer had a speed advantage and its profitability fell. The solution which Zomojo devised was to integrate its own low latency FEP into its Gateway technology and to convince its broker to use that technology. The solution worked and Zomojo returned to profitability.
43 Over time, Zomojo expanded its broker base to include five or six brokerage firms, all of whom used Zomojo's Gateways.
44 In 2007, Robinson retired from his previous employment. He came out of retirement in July 2007 to work for Zomojo on a part-time basis, focusing on business development.
45 From 2008 to the present, Zomojo has marketed Zomojo's Gateways to a variety of exchanges, brokers and vendors. Robinson gave evidence that Zomojo did not attempt to sell its Gateways outright. Rather, Zomojo attempted to enter into "technology for access" arrangements whereby Zomojo would provide its technology to brokers in exchange for no commissions or low commissions on trading conducted through those brokers. Robinson's evidence was that Zomojo has entered into a number of such arrangements with brokers in the Asian region.
46 In early 2007, Hurd conceived of the beginnings of Zomojo's ATS. Hurd gave evidence that an ATS is a term which describes an entity that conducts the same sort of function and service as a stock exchange but without being an officially sanctioned stock or futures exchange. Other countries have a similar concept but with different names. ATSs, like stock exchanges and futures exchanges, need a computing solution to operate their trade matching service (sometimes referred to as a matching engine).
47 Zomojo had already designed and exploited Zomojo's Gateways to great effect on the KRX. The brokerages which Zomojo used were inadvertently benefitting from the speed of Zomojo's Gateways. Hurd believed that the challenges that were faced by stock exchanges, whether sanctioned or otherwise, were similar to the challenges being faced by Zomojo, to which the Zomojo computer system provided an effective solution.
48 Hurd wrote a paper which proposed two models for growing Zomojo's business:
One scenario, a good one, has us remaining just an arb and stat arb player and role out around the world making hay whilst our latency and processing benefits are exploitable. Eventually, various parts of the world will catch up and we will be left with little latency advantage within the context of the jitter of an exchange and our trading will be driven more by smarter analytics rather than speed.
Another scenario has us rolling out aspects of our technological advantage as product for the benefit of others. We have already been forced into this in Korea where our tech has become an EMS for a bank and a broker for all clients so we can cut through the compliance issues that prevented us from hooking directly to the exchange.
The second paragraph recorded Zomojo's impetus for creating an ATS.
49 The idea of an ATS was essentially a reapplication of the proprietary technology which Zomojo already possessed and utilised. In Hurd's view, there was no further research or investigation to be done, merely the creation of the device which primarily involved combining hardware parts that had been identified and writing the software.
50 In July 2007, Dr Matthew Chapman (Chapman) commenced his employment at Zomojo as a research engineer.
51 During 2008, Hurd and Chapman developed a prototype of Zomojo's ATS. On 10 November 2008, Zomojo lodged a patent co-operation treaty application in respect of its ATS. Thereafter, Hurd and others at Zomojo attempted to market Zomojo's ATS to various exchanges. Robinson gave evidence regarding a number of business trips that he, Hurd and Chapman undertook during 2007 while attempting to market and sell its ATS. Those trips frequently combined marketing of both Zomojo's ATS and Zomojo's Gateways to potential customers.
52 The first business trip relevant to the ATS was to Brazil in May 2008. Robinson and Hurd met with a former colleague of Robinson's, Mr Josh Rose, who was at that time a consultant to Morgan Stanley in New York. Mr Rose told Robinson and Hurd that Morgan Stanley was investigating the possibility of launching an ATS in Brazil but that it did not yet have a technology platform on which to host the ATS. Robinson and Hurd also explored the possibility of establishing an ATS with Bovespa Exchange, a regulatory lawyer and a number of brokers. Robinson's evidence was that at the conclusion of the trip he and Hurd formed the view that it was unlikely that a new ATS could be set up in Brazil in the short term because of regulatory issues. However, they formulated the idea that Zomojo could start an ATS in North America by finding a partner to invest capital and local knowledge with Zomojo to contribute the technology.
53 In November 2008, Robinson, Chapman and Hurd travelled to Chicago and New York. At the conclusion of their time in North America, Hurd and Chapman travelled to Brazil. During the trip, Robinson, Chapman and Hurd performed technical demonstrations of the prototype ATS. Importantly, Robinson's evidence described how they used optical splitters to enable speed measurements without affecting the latency of the prototype. Robinson, Chapman and Hurd also described Zomojo's Gateways and explored technology for access agreements with the brokers that they met.
54 During July and August 2009, Robinson and Hurd travelled to New York, Toronto, Seoul and Hong Kong to market Zomojo's technology and to further explore Zomojo's trading opportunities and capabilities in the US, Canadian and Korean markets. On those roadshows, Hurd used presentation slides that said that Zomojo had "developed technology which will enable the production of the world's fastest Exchange Matching Engines". He said that low latency was achieved from an "innovative use of commercially available hardware, FPGAs [Field Programmable Gate Arrays] and comm[unication]s". He demonstrated the capabilities of Zomojo's ATS (known as Rapide), including its latency of less than 10 microseconds, its ability to handle more than 1 million orders per second, and its use of deterministic, parallel matching engines for the purposes of redundancy/fault tolerance.
55 During their time in Toronto, the pair met with the Toronto Stock Exchange (TSX) and performed a demonstration of Zomojo's ATS. The TSX was interested in the prototype ATS. After the meeting with the TSX, Zomojo signed a mutual non-disclosure agreement (NDA) with the TSX and also agreed to a period of exclusivity, the effect of which was that Zomojo agreed it would not market or sell Zomojo's ATS to any other party for use in the United States or Canada while the TSX conducted its due diligence between August and October 2009.
56 The TSX subsequently sent representatives to Australia to complete technical due diligence on Zomojo and the ATS. Robinson and Hurd then went to Toronto in mid-September 2009 to negotiate the financial agreement with the TSX. However, before the agreement could be finalised, in late January 2010, the TSX withdrew from the deal with Zomojo.
57 While in Hong Kong, Hurd and Robinson met with representatives of Goldman Sachs. They gave a presentation which outlined Zomojo's technology. Included in that presentation were several claims about Zomojo and its ATS technology, including:
1. "[p]rincipals have backgrounds in equities, derivatives, broking, funds management, technology, alternative trading systems, algos etc" and "[s]taff are exclusively developers and/or scientists/engineers – R&D culture";
2. "[s]ub 10 microsecond accept/execute";
3. "[u]tilizes a combination of hardware & software";
4. "[s]ub 10µs timing budget", showing a traversal time of less than 10 microseconds for a round trip, with wire time over 400 metres of 1.5 microseconds each way, or 3 microseconds for a round trip (Chapman gave evidence that the reference to 400 metres should be 300 metres);
5. "[e]ngine latencies" of between 3.40 and 4.11 microseconds;
6. "[d]emo layout" showing a client, monitor with Endace card, exchange and two optical taps;
7. latency distribution graphs and summaries;
8. "[q]uorum – closer view" showing the splitting of inputs using high speed links and deterministic processes;
9. "[s]cales to tens or hundreds thousands of instruments per quorum … Suitable for option exchanges"; and
10. "Final protocol – Closer to Nasdaq? Nasdaq closer to us?" and "[c]urrently supports outer session with PKI & embedded firewall".
58 During 2009 and 2010, Robinson and Hurd conducted a number of other business trips. In July and August 2010, they went to Toronto, New York, London, Mumbai, Hong Kong and Singapore. While in Toronto, Robinson and Hurd met with representatives of TD Securities. Those negotiations continued after the pair returned to Australia. In November 2009, Zomojo commenced trading on the TSX and the NASDAQ with a view to leveraging short-term gains in price differentials between the two exchanges. While that venture had not produced a profitable outcome, Robinson decided to keep the project going on the basis that Zomojo might enter into a joint venture with TD Securities. The joint venture proposal involved Zomojo contributing ATS technology and TD Securities contributing capital and trading strategy (with their staff to run the trades). It was intended that in the first stage, the joint venture would trade inter-listed arbitrage between the TSX and NASDAQ. Further stages involving US trading and client facing technology were contemplated in the draft agreement. Profits would be shared 50/50. In December 2010, Zomojo was advised that TD Securities was not prepared to proceed with the deal.
59 Throughout 2011 and 2012, including after Hurd's departure from Zomojo, Zomojo continued to market its ATS and Gateways.
60 The first iteration of Zomojo's trading engine was a "fairly conventional" design using the computer programming language known as C++. There were difficulties with the design. The foremost difficulty was that it was not "deterministic". That is, the same inputs would occasionally produce different outputs. Zomojo's software engineers encountered difficulties reproducing engine behaviour for the purpose of locating bugs.
61 The solution which Chapman devised in May 2008 was to convene a project to develop a deterministic and high-performance software design. The result was Ion. The relationship between Ion and the trading engine was not clearly explained at trial. Chapman gave evidence that Ion was a "library which is … a piece of code that's used by developers". It was not a standard library. It was a custom library developed by Zomojo with the aim of producing a deterministic engine capable of interpreting inputs from multiple sources adopting multiple protocols.
62 In late 2007, Hurd told Chapman he had had discussions with various hardware suppliers about the possibility of using FPGAs to accelerate some portion of Zomojo's trading. In February 2008, Chapman discovered that the NIC Zomojo was using in its Korean trading, a card provided by Sangoma Technologies Corp (Sangoma NIC), also contained an FPGA. The principal benefit of an FPGA is its ability to be programmed to perform in a certain way, independent of the operating system. That means that it can perform faster, since certain tasks can be performed wholly within the FPGA.
63 In March and April 2008, Chapman set about designing custom firmware for the Sangoma NIC. Chapman implemented what he called "receive FIFOs" (first-in-first-out buffers) and kernel bypass. The aim of the custom firmware was to reduce latency. It achieved that aim by performing a limited amount of processing on the NIC itself. In September 2008, Chapman adapted the custom firmware to a NIC supplied by Xilinx, Inc (Xilinx NIC). The Xilinx NIC was used to build the prototype of Zomojo's ATS: see [46]-[51] above.
64 Eventually, Chapman decided that it would be prudent for Zomojo to develop its own NIC which would be capable of performing the functions contained in Zomojo's custom firmware, as well as others. Between May and July 2009, Chapman developed the schematics for the first iteration of Zomojo's NICs, the Z1. Compared to the Xilinx NIC, the Z1 was smaller, increased the number of network ports from two to four and added a time synchronisation port and a backup power input. The first prototypes of the Z1, like the Xilinx NIC before it, were used in the prototype of Zomojo's ATS. In January 2010, Zomojo began to deploy Z1s in its systems in Korea to replace the Sangoma NICs which had previously been used. In July and December 2010, Chapman developed schematics for the second iteration of Zomojo's NIC, called the Z10.
65 Over time, Hurd became unhappy at Zomojo. He was frustrated with what he perceived to be a failure by Zomojo to commercialise its technology, in particular, Zomojo's ATS. In addition, he and Heddle had a personality clash. They did not get on.
66 Zeptonics Pty Ltd (the Second Respondent) (originally known as Metamatta Pty Ltd and then Shopkii Pty Ltd) (Zeptonics) was established by Hurd in January 2010. Hurd was not originally registered as a director of, or shareholder in, Zeptonics. The fact that Zeptonics was established is, of itself, of little interest. It is what happened over the next 14 or so months that needs to be considered in some detail.
67 In early May 2010, Hurd started to reorganise his affairs. 7,810 shares in Zomojo held in the name of Jolene (Tas) Pty Ltd (Jolene), his private company, were sold to the Hurd Family Superannuation Fund (HFSF) at $14.65 per share. Another 3,500 shares (at $14.65 per share) were sold by Jolene to Louise Heddle (as trustee of the Louise Heddle Family Trust).
68 By no later than September 2010, Hurd's position had fundamentally changed. Hurd's unhappiness at Zomojo had reached a point where he was taking definite and public steps to leave Zomojo. Hurd had new plans, his plans and ideas were concrete and he was moving to execute them. To understand the gravity of his actions it is necessary to assess them step by step. The steps cover a period of in excess of 12 months. Hurd's actions included the development of a suite of products. .Over that period of time, the names of the products changed. The relevant products were as follows:
| Product Name(s) | General Description |
| Opticast / OptiCast | 24 port or 48 port, 19″ rack mount splitter box which used an optical splitter to achieve low latency. |
| ZeptoLink / ZeptoCast | 50 port layer 1 circuit switch that can forward data in around 5 nanoseconds. |
| ZeptoNIC | 1-3µs 1G/10G/40G Ethernet card with integrated timing. |
| ZeptoSwitch (not built) | 48/64 port L3 data centre switch at 300ns. |
| ZeptoMUX | 23-to-1 multiplexing switch for latency sensitive trading. 10GbE layer 2 switch. |
| ZeptoAccess KRX / ZeptoRisk | Direct market access gateway which achieves negative latency through various programmatic techniques. |
| Crosswise ATS (including ZeptoMatch) | Alternative trading system for equity and like markets that utilises software and hardware to achieve minimum latency. |
69 Hurd took "sabbatical" leave from Zomojo in September 2010. Although Hurd was on "sabbatical" leave, he had access to his Zomojo email address. From 14 to 21 September 2010, he communicated by email with Ms Joanne Chardaloupas (Chardaloupas) of Newedge Canada Inc (Newedge) using his Zomojo email address. On 14 September 2010, Chardaloupas told Hurd that Newedge was seeking a "partner to build [Newedge] a FIX adaptor". Hurd replied saying that "[w]e have gateways that support Nasdaq UFO-like protocol for HFT orientated trading called SPUD/Poke and a FIX 4.2 to Poke converter". The "we" was a reference to Zomojo. The next day, 15 September 2010, Chardaloupas sent a reply to Hurd at his Zomojo email address stating, "I very much appreciate the response. Yes, this does sound along the right path". Hurd did not respond. On 21 September 2010, Chardaloupas sent a further email to Hurd at his Zomojo address "just following up to see if you have any available [sic] this week to discuss / re-visit this opportunity". Hurd did not reply immediately.
70 By this time, Hurd had conceived of "Opticast". Hurd's evidence was that in September 2010 he came up with the idea of splitting an optical fibre signal into multiple paths in order to replicate network traffic. Hurd explained the idea as follows:
The basic premise … was that it is faster to split an optical fibre signal than a conventional computer signal. The process of converting the optical fibre signal back into a conventional computer signal is a very past process. Thus, so the idea went, by splitting the optical fibre signal and then converting it back to a conventional computer signal, [he] could speed up a process for distributing the same signal to a large number of destinations. This became the Opticast idea.
Zomojo had already implemented the use of optical splitters in its prototype ATS to permit the measuring of speeds with no discernable effect upon latency: see [53] above. Hurd's Opticast idea and Zomojo's prior use of optical splitters were not unconnected.
71 In addition to developing Opticast, in September Hurd created, and registered in his name, the domain name "www.zeptonics.com". Hurd admitted that his reason for registering the domain name was to "see if anyone was interested" in Opticast. Hurd also started writing to people in the industry about Opticast. For example, on 23 September 2010, Hurd emailed AusOptic International Pty Ltd (AusOptic) to enquire about acquiring components for Opticast:
I'm the MD for Zomojo whom you helped out with some splitting and all earlier this year. Thanks to your advice, everything has worked swimmingly in Seoul. Your help was much appreciated.
(Emphasis added.)
So far so good. Hurd knew (as was the fact) that he was one of the managing directors at Zomojo and Hurd knew that splitting had been and remained a core part, or essential element, of Zomojo's business of HFT especially on the KRX.
I have another little enterprise, Zeptonics, that I'm looking to launch a new product for. Basically a 24 port and / or 48 port 850nm, 1310nm or 1550nm 19̎" rackmount splitter box.
Was thinking of just splitting lots with an EDFA or Raman amp but their 10-20m cable loops etal don't help when I'm trying to keep the propagation delay to a bit under 10ns in the box. It seems simply doing OEO [optical electrical optical] to clean the signals and n way optical splits internally and perhaps just using SFP+s might be best.
Would like to come by and talk to you about components etal if you have a few minutes so I can pull a design brief together to get a prototype built. …
This email is important. Hurd admitted the product referred to in the email was Opticast. Further, it was a public statement of Hurd having already established "another little enterprise, Zeptonics" and that he was looking to launch a product through Zeptonics.
73 The next day, 24 September 2010, Hurd emailed Mr Larry Tabb of Tabb Group. Tabb Group is a publicity / media company and Hurd contacted them to seek marketing and publicity advice for Opticast and, in particular, information about the potential avenues for, and costs of, marketing Opticast. The email was sent by Hurd from his "zeptonics.com" email address. The email stated:
…
I've been using optical techniques for a while to replicate data streams for prop trading. Have done more than a million index options some days in Asia with such tricks. Have a little start-up just about ready to release a product to do this publicly. Thought you'd be interested in the head line latency of <9 nanoseconds from port to port on the device ;-) Currently running in the range of 5 to 7 nanos. Bit of a scoop for you.
… Opticast, as I call it, has compelling relevance to HFTs [high frequency traders] and exchanges just because it takes packet duplication down from 700-800ns 10G switch speeds to single digit nanoseconds for market data distribution.
(Emphasis added.)
Hurd was cross-examined about this email. Hurd claimed he was lying when making these claims about Opticast being ready for release.
74 On 27 September 2012, Mr Tabb responded saying he "would love to hear" what Hurd had. Hurd responded saying he was based in Sydney but had trading racks in Toronto and New York and would look to set up a meeting next time he was in New York. Another person at Tabb Group (Kevin Parltand) also responded saying "[w]hat you explain is very intriguing. Would love to hear more". Hurd did not tell anyone at Zomojo about these communications with Tabb Group.
75 The next day, 28 September 2010, Hurd emailed Chardaloupas. Hurd had not responded to Chardaloupas' email of 21 September: see [69] above. The email was entitled "Sabbatical" and it was sent by Hurd using his Zeptonics email address, not his Zomojo email address. Hurd used his Zeptonics email address to communicate with Newedge about Zomojo business despite having access to, and the ability to use, his Zomojo email address. The email read:
Apologies for not being in contact about the FIX licensing question. I've been largely away for most of the last three weeks, working on a little personal side project and will not be back in the Zomojo office until next week and will be in contact then.
The FIX licensing question related to Chardaloupas' earlier email seeking a "partner to build [Newedge] a FIX adaptor" (see [69] above), a question directed to Hurd as one of the co-managing directors of Zomojo.
76 Chardaloupas responded: "Hope it was a fruitful sabbatical ... seems like you've been working on something new, zeptonics? Sorry I couldn't help, but check." The next day, 29 September 2010, Hurd responded to Chardaloupas and Mr Mike Gilbert (Gilbert), the Global Head of PTG and Head of Sales Asia Pacific for Newedge:
Yep busy sabbatical. Got a box doing 5-7ns packet replication which is quite difficult to measure, lots of fun. Might be a handy thing for market data distribution in a data centre but I'm not really convinced there is much of a market for it so it is just a bit of an expensive hobby for now.
Hurd admitted he was referring to the Opticast product.
77 The same day, 29 September 2010, Hurd emailed AusOptic using his Zeptonics email address. Hurd thanked "Rob" for his time and sought a quote for "SMF splitters with LC connectors 16-way, 32-way and 64-way" – an optical splitter. Hurd's email concluded:
Preannounced on www.zeptonics.com and already have a couple of interested parties ... Looks like I may actually sell a few, fingers crossed.
The next day, Hurd also asked AusOptic to quote a 64 way splitter. Hurd admitted that Zeptonics later purchased splitters from AusOptic which he used in the Opticast prototype.
78 If the clock had stopped then, Hurd was already in serious trouble. His activities were in breach of his contractual obligations and in breach of his duties as a director and employee of Zomojo.
79 On 2 October 2010, Gilbert contacted Hurd by email at his Zeptonics email address. Hurd did not discover this email. The email was produced by Newedge. As ultimately produced by Hurd, the email from Gilbert was redacted. Hurd denied deliberately redacting the email. I reject Hurd's evidence. Hurd provided no explanation, let alone a plausible explanation, of why he did not discover the email or, when produced, why it appeared as it did.
80 Gilbert's email said:
Are you around next week as I would like to have a discussion with you concerning a global pre market risk tool (API) that we could have working in conjunction with our clients accessing exchanges natively that would have say a sub 5 micro second impact. We are seeking a company to build this for Newedge on a global basis. Understand if this doesn't interest you but thought if any one can do this you can.
Zomojo would not be able to do this as it has existing commitments.
Zeptonics may be interested in this if it was a significant enough project with the right structure and support within Newedge. This is not a trivial nor inexpensive undertaking and if there is interest from yourself and Newedge I would like to understand your scope, priorities, time frame and budgetary thoughts. Based on previous experience I suspect it may be difficult to marshal and co-ordinate sufficient cross-cutting concerns within Newedge to make such a project work smoothly and I would like to understand who the stakeholders would be and the level of global support.
If I dedicated myself to this with an appropriate team, sub five micros is achievable and also remember sub one micro is usually achievable though not without considerable effort. For some exchanges I can get surprisingly close to zero. Native, common HFT oriented and FIX 4.2 protocols can be supported. Simple risk, complex correlated risk with simpler real-time distributed risk leases, client embedded or gateway based, can be done.
You would certainly end up with an unusually fast offering and be #1 in the world for broking latency, if the world stood still. However, the effort required should not be underestimated even when you've done it as many times before as I have.
Off the shelf frameworks, such as FTEN, will give you 200 to 300 microseconds. Are you sure you want to bite off the expense of going close to zero?
On 2 October 2010, Gilbert of Newedge responded saying "[w]e definitely have the interest to move this forward and as the directive came from our board with a budget attached we are serious in having this implemented".
82 Hurd did not tell anybody at Zomojo about the contact from Newedge or his response on behalf of Zeptonics. This was an opportunity being offered to Zomojo, which Hurd took, or attempted to take, for the benefit of Zeptonics. Or, at the very least, it was an opportunity which he ensured Zomojo could not take. An opportunity which Hurd conceded, in cross-examination, perhaps was a very significant project and could have potentially been a big project. Hurd's conduct continued on a downward spiral.
83 On 4 October 2010, Hurd posted to a blog on the internet called "Beowulf" about Opticast. Hurd's post on the blog read:
I'm associated with a somewhat stealthy start-up. Only teaser product with some details out so far is a type of packet replicator.
Designed 24 port ones, but settled on 16 and 46 port IRC designs as this seemed to reflect the users needs better.
This was not designed for HPC but for low-latency trading as it beats a switch in terms of speed. Primarily focussed on low-latency distribution of market data to multiple users as the port to port latency is in the range of 5–7 nanoseconds as it is pretty passive device with optical foo at the core …
(Emphasis added.)
Over the next few days, Hurd continued to post blogs and engage in a prolonged exchange on these subjects. In his oral evidence, Hurd admitted that the 'start-up' was stealthy, in the sense that he had not disclosed to Zomojo the start up of Zeptonics. However, Hurd asserted that was not what he meant by the term "stealthy start-up" at the time of writing the post. Hurd contended that he was using the term to refer to a start up company that remains "under the radar" until it launches a product and then takes the market by storm with a product that is new and innovative. The difference in meaning, if any, is irrelevant. The essential element of both is non-disclosure. And that is what occurred – non-disclosure by Hurd when he was under obligations not to engage in conduct of that nature.
84 On 7 October 2010, Hurd entered into a NDA with Cavium Networks. Hurd described Cavium Networks as a provider of highly integrated semiconductor processors that enabled intelligent networking, communications, storage, video and security applications. Hurd signed the NDA as "Managing Director" of Zeptonics even though, according to him, "the company did not exist at this time". I reject Hurd's evidence that Zeptonics Pty Ltd did not exist at this time. In the Further Amended Defence filed on behalf of Hurd, he admitted he has been a director of Zeptonics since 25 January 2010. The fact that Hurd used the word "Zeptonics" rather than "Zeptonics Pty Ltd" does not avoid the inevitable finding that he was acting for and on behalf of Zeptonics Pty Ltd. Hurd also admitted that he did not contact Cavium Networks in connection with his duties as a co-managing director of Zomojo or as an employee of Zomojo. Hurd did not tell Zomojo that he had signed the NDA with Cavium Networks. Hurd was cross-examined about the NDA. His evidence was that he entered into the NDA with Cavium Networks for two purposes: to get information about the chips it produced, to learn if they may be useful, and because the information was not publically available and, secondly, to assist him in finding something else to do outside Zomojo. One of the "things" Hurd was potentially searching around to do was use Cavium Network's chips in HFT.
85 Hurd continued to look for suppliers of components for his "new" projects. At 1:06pm on Tuesday, 12 October 2010, Hurd emailed Michael Rouh at Tresmine Pty Ltd (Tresmine) using his "zeptonics.com" email address. The email read, in part:
Beside running Zomojo, I've got a project out of my garage I've been running, www.zeptonics.com. Got some firms in the US and Europe after some product now, including a couple of big exchanges, so I'm looking at building some prototypes if you're interested in the jobs. Trying to outsource as much as possible so it doesn't interfere with my day job so there may be some additional component sourcing for you as well perhaps.
(Emphasis added.)
Hurd's evidence was that he contacted Tresmine in relation to the supply by Tresmine of printed circuit boards (PCBs) for the Opticast prototype. His email was sent during normal working hours. Mr Rouh replied thanking Hurd for considering Tresmine and stating that Tresmine was more than happy to look at it.
86 The US firm referred to in Hurd's email of 12 October (see [85] above) was, according to Hurd, Chopper Trading LLC, a market firm in Chicago (Chopper Trading). As a result of his post on the blog on 4 October (see [83] above), Hurd was contacted by Chopper Trading. Hurd's evidence was that he signed an NDA with Chopper Trading and that Chopper Trading was interested in Opticast. The evidence disclosed that the NDA between "Zeptonics" and Chopper Trading was dated 13 October 2010. Hurd signed it as "director" of "Zeptonics". Hurd did not tell Zomojo that he had entered into an NDA with Chopper Trading. Hurd agreed that the purpose of entering into the NDA was to protect Zeptonics' confidential information in respect of the Opticast product but asserted that Zeptonics as a company did not exist at that stage. I reject Hurd's evidence that Zeptonics did not exist: see [84] above.
87 The other references in Hurd's email of 12 October 2012 (see [85] above) are more difficult. Hurd's evidence was that he was lying about a European firm being interested. In relation to the reference to the exchanges, Hurd's evidence was that he had mentioned Opticast to at least one exchange, Eurex. During cross-examination, Hurd admitted that he was aware, at the time of giving evidence, that there was a conflict between his role as managing director of Zomojo and the project he was running out of his 'garage', or cottage. In addition to seeking the supply of PCBs from Tresmine, Hurd also emailed AusOptic again regarding the supply of a 64 way splitter.
88 Two days later, on 15 October 2010, Hurd was busy. First, he marketed Zeptonics' Opticast product to Chopper Trading in the following terms:
Zeptonics remains in muted mode with Opticast just being readied for launch and a few more interesting products in the lab.
The two available products are:
OCAST-A-16 Opticast 1G/10G 1->16 port $US 14,995
OCAST-A-48 Opticast 1G/10G 1->48 port $US 29,995
Note these do not include SFP+s or network cabling and are quoted FOB.
…
Hurd's stated position at that time was that he had "two available products" and "a few more interesting products in the lab".
89 In response to a direct question from Chopper Trading about the number of units that Zeptonics had in the field and the effect of failures, Hurd said:
It is a new product. We have no v1.0 units in the field. A handful of v0.X units have been used since 2008 in a few countries in the Asian region.
Critical MTBF items are the redundant PSUs. The PSUs comply with various IT, industrial and medical standards and each has an individual MTBF of 600kHrs. 2 PSUs in 16 port and 3 PSUs in 48 port to ensure 1 failure doesn't affect the load.
…
Availability schedule is currently 6 weeks for 16 port units and 7 weeks for 48 port units.
…
Would be interested to learn how you heard about us as we're only just getting ready for launch but have been a bit surprised that a few people are knocking on our email.
90 After the marketing spiel, there was a "PS" which read:
We have a bunch of products and some designs not quite ready for prime time which may be of interest to you at a later date …
Particularly focused on low latency network and time tracking issues. We're using a new type of PHY approach to get very low latency 10G connectivity on PCle NICs, only saves about 100ns over state of the art though. 48 port 1 Billion packet a second 10G Ethernet switch with <300ns latency with some 40G connectivity. 150ns Ethernet combiner for multiplexing packets on to one fiber (think multiple machines ordering to one order line or combining lines in an exchange ... a kind of strange Ethernet Sonet/SDH). Devices are planned to all support common timing signalling with a timing distribution box to co-ordinate site latencies to between 5 and 15ns of accuracy. Tracking latencies from card to switch, etc. We also have very low latency 1G NICs and 1G switches on the bench but we're pretty sure they won't get out of the lab as they seem a bit old-hat and there is probably not much of a market for the world's most expensive (even if fastest!), 1G gear ;-)
Again, these were further statements by Hurd that he had "a bunch of products" and "some designs not quite ready". Hurd negotiated a price for the Opticast product with Chopper Trading of $30,000 per unit. Hurd hoped to build Opticast by early to mid-December 2010. Hurd admitted that the products he described in the section headed "PS" were related to the very products that Zomojo was attempting to sell – gateways, ATSs and NICs.
91 A copy of the specifications sheet for Opticast was provided to Chopper Trading on 15 October 2010. The specifications sheet for Opticast is important. It bore the Zeptonics logo. It comprised a single page. The footer contained the words "commercial in confidence – not for redistribution". It identified two products, with product codes, and the minimum, typical and maximum performance standards of more than 20 separate parameters. In addition, other specifications listed included safety approvals and emissions.
92 Indeed, on 15 October 2010, Hurd and Mr Scott Newham, another Zomojo employee (Newham), discussed Opticast and the specifications sheet for Opticast using instant messages.
93 The same day, 15 October 2010, Hurd on behalf of Zeptonics emailed Ms Winnie Liu of Ascendtek Electronics, Inc (Ascendtek). Liu worked for Ascendtek in Taiwan, a distributor of Cavium Network chips in Taiwan, who described herself as "in charge of" Zeptonics' account. In response to a request from Ms Liu for project details and support needs, Hurd stated:
We're building various platforms, mainly in the exchange, broker, banking space. Focused on low latency routing, gateways, matching engines, application level NICs, etc.
We use a lot of FPGA processing but would like to replace some of it with network enabled CPU cycles …
A key metric we're interested in is just how fast we can get a packet response turned around from input to output. …
(Emphasis added.)
Hurd admitted that if the word 'Zomojo' replaced the word 'we're' in the italicised sections, the first sentence of paragraph 1 would remain 'partially true' and the first sentence of the third extracted paragraph would be true. Hurd also admitted that the second sentence of the first paragraph would be true except that Zomojo "had put the matching engines on ice for a while".
94 Hurd admitted that prior to 15 October 2010 Zomojo had:
1. built gateways;
2. built a prototype matching engine for use in an ATS;
3. built NICs; and
4. used a lot of FPGA processing.
Despite admitting that what drove Zomojo was reducing latency and that was what all Zomojo's innovations were directed at, Hurd's evidence was that at that time he "was looking to leave Zomojo and do something in that space."
95 That admission by Hurd was important. It was important because at that time he was a director, a co-managing director and an employee of Zomojo. What Hurd was doing and continued to do was in direct conflict with the duties and obligations that attached to the positions he held with Zomojo. For example, in late October 2010, Hurd was emailing Ascendtek and Cavium Networks in relation to questions Hurd had posed about the response times of Cavium chips. The reason why he had questions about latency was explained by Hurd on 22 October 2010 when he (on behalf of Zeptonics) emailed Winnie Liu at Ascendtek:
Thank you for the quick response. The main question I have remaining unanswered is regarding 1) latency which I'll expand below. …
I'm interested in the latency of response to an IP, UDP and TCP packet. For example, I can get about 500-600ns RTT out of an FPGA, or about 1.7 to 1.9µs RTT out of a linux x86 with an inhouse FPGA network accelerator. We're looking to replace this platform with all the wonderful things that a CN6XXX could do but our very basic need is to have low latency. Any guidance from the lab as to what you can do here would be much appreciated.
Or, as Hurd put it to Cavium Networks, "basically, we're just interested in learning what kind of minimum latency … we can get somehow out … of the Cavium infrastructure". The enquiries by Hurd were on behalf of Zeptonics. However, the topic of enquiry – latency – was directly relevant to Zomojo. Latency was an essential or core aspect of Zomojo's business. As Hurd admitted, Zomojo's basic need was to "have low latency".
96 About a week later, on 23 October 2010, Hurd on behalf of Zeptonics told Chopper Trading he would arrange for an Opticast evaluation unit "to be delivered for a 30 day evaluation once production … is complete". Hurd stated that a revised estimate of the time of arrival would be provided in a couple of weeks.
97 Hurd's numerous enquiries had generated interest amongst the suppliers. Hurd used the suppliers to enable him to progress his "project out of [his] garage". On Monday, 25 October 2010 at 5:30pm, Hurd on behalf of Zeptonics responded to an enquiry from Tresmine about how Hurd wanted to proceed. Hurd responded stating:
PCB designs should be ready late this week but could slip into early next. Got some orders to fulfull [sic] from the US :-)
Do you have any guys you recommend for a switch-like 1RU 19″ rackmount case design, or laser cut and stencil design? Less urgently, gotta find someone to do the cardboard packaging too if you know anyone.
On 27 October 2010, Tresmine responded and offered the names of a few designers for 19" rack mount cases.
98 During October 2010, Hurd used a contractor, Andy Kowalewski (Kowalewski) at Advantage PCB Pty Ltd (Advantage PCB), to develop the design of Opticast. Advantage PCB undertook contract PCB design work for customers. On Friday 29 October 2010, at 11:08am, Hurd using his Zeptonics email address (again during normal working hours) contacted Kowalewski and told him that he would be away the following week. Hurd asked Kowalewski if he wanted Hurd to "pop around" to discuss anything. Kowalewski responded the same day:
Do you have a Zeptonics logo? A jpg or bmp will work – I can put it in the title block of the schematics. Not essential but will look more professional. A copyright is also very important – I'll be adding that to the schematics too. For a name for this product, how about "OptiCast" – seems more emphatic?
From about this time, Opticast became known as "OptiCast".
99 During October, Hurd also took Dr David Snowdon (Snowdon), at that time the Vice President, Systems Engineering at Zomojo, into his confidence. Hurd asked Snowdon for his opinion about "minor aspects" of the layout and circuit drawings for OptiCast prepared by Kowalewski.
100 Hurd also sought advice from other staff members at Zomojo in relation to particular circuitry and power supply issues for OptiCast. The position was getting worse and was about to worsen further. In late 2010, Hurd approached Chapman and asked him about connections to a component known as an SFP (Small Form Factor Pluggable) module in OptiCast. Hurd was more covert in his dealings with Chapman: he did not tell Chapman what he was working on or that the project was not for Zomojo's benefit.
101 In late 2010, Hurd also took Newham into his confidence. Hurd told Newham that he was frustrated that Robinson and Heddle were not interested in developing the technology side of the business and that he was going to leave Zomojo. Hurd told Newham he was starting up a new venture and, in particular, told him about OptiCast, describing it as a "very fast … replication … device using an optical splitter".
102 Kowalewski continued to work on the schematics for OptiCast. During early November, Kowalewski sent schematics for OptiCast to Hurd for his consideration. On Monday 8 November 2010 at 3:26pm and on Wednesday 10 November 2010 at 3:43pm (again during normal working hours), after reviewing Kowalewski's work, Hurd emailed substantive changes to Kowalewski and raised questions for Kowalewski's consideration. Hurd's email to Kowalewski recorded that Hurd had Snowdon look at the schematics for OptiCast and provide his opinion.
103 The nature and demands of the work being undertaken by Kowalewski conflicted with the work that it was undertaking for Zomojo. On Wednesday, 10 November 2010, at 4:18pm, Kowalewski emailed Hurd and said that Advantage PCB was to meet with Zomojo to talk about Zomojo's Z10 NIC but that Advantage PCB would be "closed-mouthed" about Zeptonics' work. Hurd, using his Zeptonics email address, responded 10 minutes later:
Thanks for the discretion. Dave [Snowdon] is up to speed on my extra-curricular activity but I've just limited it to him so far. Not the end of the world if it leaks but prefer to keep things simple …
(Emphasis added.)
104 The next day, at 11:50am on Thursday 11 November, Kowalewski had more questions about the OptiCast schematics. His suggestion to Hurd:
Maybe you could have a quiet word with David [Snowdon] and see what he suggests. I can take it from there.
Half an hour later, Hurd responded by email (using his Zeptonics email address) – "No problem. Will get you a 'ruling' on running with less pull up resistors once I pin down an engineer". Three minutes later, Hurd had the answers to Kowalewski's questions. The opening line on his response read "[p]lease don't use the zomojo email for this stuff if you can, no big deal though". Hurd admitted that he told Kowalewski to keep the OptiCast project a secret from Zomojo because Hurd did not want Zomojo to know about it. Hurd also admitted he did not want any of his communications concerning Zeptonics to be passing through the Zomojo computer network as he wanted to keep the matter a secret from Zomojo.
105 Hurd was also speaking with others about his "new venture". Hurd sent an instant message to Newham on 10 November 2010 that he had a meeting the next day with "fortis" in relation to his new venture. The next day, on 11 November 2010, Hurd sent a further instant message to Newham at 9:44am stating that he had a "meeting with abn amro (nee fortis) at 10".
106 Indeed, on 10 November 2010, Hurd communicated by email with Sabine van der Poort (van der Poort) of ABN Amro. At the time, van der Poort was one of Zomojo's main prime brokers. Hurd met with ABN Amro and discussed ABN Amro being a possible financing and clearing agent service for Hurd's ATS (later known as the Crosswise ATS) and acting as a prime broker in the future for Hurd. Hurd's initial email relevantly read:
Please treat this confidentially.
As you may know, I've been involved with various large exchanges over the last couple of years but I haven't quite got a project over the line despite meeting the technical hurdles, most contractual hurdles, and demonstrating live systems with sub ten microsecond matching performance. At least have had success with various low latency risk protected gateway JVs into various exchanges.
I have had some interested [sic] expressed to myself in developing a local ASX competitor and the timing and politics of the moment seem to point to high degree of feasibility. I like the idea and could work on the project full time as I've had a garage project, www.zeptonics.com, launch some gear which is finding its way into the US and Europe which, when combined with the dividend stream from my unencumbered 24.8% stake in Zomojo, it should keep the horse and kids fed and watered.
(Emphasis added.)
The email went on to describe Zeptonics running "three parallel phases", namely Australian Securities Exchange (ASX) proprietary trading, matching engine platform development, and Australian equity ATS project initiation development. Hurd accepted that proprietary trading was the core of Zomojo's business, that matching engine platform development was what Zomojo had developed via its prototype ATS and that in relation to the third element – Australian Equity ATS project initiation development – Zomojo had developed an ATS.
107 By his involvement with "large exchanges", Hurd accepted that he was referring to his time at Zomojo. Hurd admitted that the reference to "a project" not getting over the line was a reference to Zomojo's ATS which was then in a state to be marketed and sold. The reference to "various low latency risk protected gateway JVs" Hurd admitted was a reference to Zomojo's business. Hurd also admitted that in November 2010 Zomojo would have "jumped" at the opportunity to commercialise its ATS and that he was aware that, if someone had expressed interest to him in developing a local ASX competitor at this time, that was an opportunity that belonged to Zomojo by virtue of Hurd's role as co-managing director of Zomojo. Hurd did not tell anyone at Zomojo that he was communicating and meeting with ABN Amro. Why? Hurd's reason was that this was part of his secret plan for his post-Zomojo life.
108 On 16 November 2010, Hurd had a further instant message conversation with Newham about the name for a new ATS.
109 By 23 November 2010, Kowalewski of Advantage PCB had finished the first draft of the chassis drawings for OptiCast. At 4:23pm, Kowalewski emailed the chassis drawings for "ZP916-0 Opticast + Origin chk04" to Hurd. Kowalewski's work for Zeptonics was causing problems. On Friday morning, 26 November 2010, Kowalewski emailed Hurd at Zeptonics:
Just between you and me, Matt Chapman's Z10 is slipping while I'm finishing your job. As the driver for both jobs can you give me your take on your job Vs Matt's?
Matt won't need to know why his job is slipping if you choose for me to finish yours. If I surmise the extra work from your email, there's going to be another two or so days …
Hurd admitted that there was a conflict between the task Kowalewski was doing for Zomojo and the task he was doing for Zeptonics. Hurd responded by email that morning. After addressing how to resolve a problem with the work being undertaken by Kowalewski for Zeptonics, Hurd stated "Matt's Z10 work would be a priority I guess, though the board will not probably see action till March 2011".
110 On 3 December 2010, Hurd on behalf of Zeptonics emailed Sean Nunan (Nunan) of CredX. Hurd told Nunan that he had figured out how to build a "sub micro exchange platform for a couple of thousand racks" and that he also had a design for the world's fastest 10G switch, the first to be sub-100 nanoseconds. Hurd's email stated that "a sub micro exchange platform … would make things interesting". When asked what he meant by that statement, Hurd accepted that he meant he could make money if he built a sub-micro second exchange platform in a business of his own rather than through Zomojo. The reference to the sub micro exchange platform was a reference to the Crosswise ATS, the ATS which would compete with Zomojo's ATS. Hurd did not tell Zomojo that he had conceived of the method or the design of a sub 10 microsecond exchange platform using standard equipment. Hurd did not tell anyone at Zomojo that he had contacted Nunan about his proposal to build a sub 10 microsecond exchange platform.
111 On about 6 December 2010, Hurd told Robinson of his intention to leave Zomojo. Hurd told Robinson he wanted an orderly transition. Robinson asked Hurd what he intended to do. Hurd said he "might do something in the ATS space". That statement was false. Hurd had already taken steps, significant steps, in the ATS space and in other spaces. There was, for example, a "Crosswise Conceptual Brief" entitled "Crosswise – An Alternative Trading System for Australian Equities" in existence. Unsurprisingly, Robinson told Hurd that Zomojo might have a problem with Hurd doing something in the ATS space.
112 On 9 December 2010, Hurd, without the knowledge of Zomojo, sent an email to Tom Pregastis (Pregastis), the Head of Foreign Exchange at the National Australia Bank (NAB). Hurd knew Pregastis personally. Hurd sought advice from Pregastis about whether there was a market for developing an ATS in Australia. Hurd's email attached the Crosswise Conceptual Brief. The email stated:
As mentioned, I've been juggling this one, attached FYI. ABN AMRO have pledged some degree of support to take the clearing and settlement issues on board. Have had some expressions of curiosity, working on it. Probably not a NAB opportunity at the first instance but will let you know if I get any traction.
(Emphasis added.)
113 The email is important. It is the first public acknowledgement of the fact that Hurd was intending to leave Zomojo. Hurd was seeking advice about the development of an ATS in Australia. It must be recalled that an ATS was one of the principal integers of Zomojo's business: see [2] and [46]-[59] above. Hurd admitted in cross-examination that the phrase "I've been juggling this one", meant he was wearing two hats; he was the co-managing director of Zomojo and was simultaneously designing, or "conceiving of" an ATS for Zeptonics. The email also confirmed Hurd had the Crosswise Conceptual Brief not only prepared but available for distribution to third parties. Hurd's evidence was that the Crosswise Conceptual Brief was as a tool to "excite and attract investors". The Crosswise Conceptual Brief was in evidence. It described the Crosswise ATS:
An ATS powered by innovative technology with a mutually supportive participant ownership structure.
…
Success is assisted by lower latencies …
Platform highlights:
< 10 microseconds median latency response to and from client systems
> 1,000,000 orders per second throughput
robust and secure design
…
latency and other service monitoring provided to members
…
Crosswise will deploy robust Australian developed technology with a single digit microsecond median latency from the customers' point of view. This will be the world's fastest exchange platform. Further progress to a sub-microsecond platform has been designed and will be developed in the fullness of time.
The protocol will be a familiar protocol with a choice of an efficient and simple Nasdaq-UFO-like protocol and/or an even more familiar BATS/Chi-X like FIX implementation. Market data will be a simple fixed structure UDP broadcast.
(Emphasis added.)
Hurd admitted that some of the claims made in the Crosswise Conceptual Brief regarding the Crosswise ATS were the same as, or similar to, Zomojo's presentations regarding its ATS: see [54] and [57] above. Hurd accepted that he knew that a sub 10 microsecond medium latency ATS was possible, that it could achieve throughput of more than a million orders per second, and that it could have a robust and secure design because that is what Zomojo had achieved with its ATS prototype. Hurd did not tell anyone at Zomojo that he had worked out how to design a sub microsecond platform.
114 Hurd's oral evidence was that Pregastis' response to Hurd was not positive. That evidence was, at least, a misstatement. Pregastis' said:
It's got to be a far easier task to create a trading platform in order to achieve some semblance of price transparency whilst not having to bother with listing rules etc.???
You got me wondering??
In other words, Pregastis was interested and, in particular, interested in a trading platform not caught by the ASX. Hurd replied by setting out how he envisaged that trading on the Crosswise ATS would work.
115 On 9 December 2010, Hurd also emailed the Crosswise Conceptual Brief to a number of potential investors – to Samsung, to ABN Amro, to CredX, to Optiver and to Susquehanna International Group (SIG). Hurd's contact at CredX requested, and was provided, with a word copy of the Crosswise Conceptual Brief so that he could mark it up with comments. Hurd told him "[j]ust to confirm the target audience for this – sophisticated, knowledgeable and experienced in the equity space". By this time, Hurd had conceived of the idea, had prepared a conceptual brief and was approaching investors. What he was seeking to get them excited about was a project which had a name, purpose and substance.
116 Advantage PCB finished its work on OptiCast. On Monday, 13 December 2010, it invoiced Hurd at Zeptonics. The contents of the invoice are revealing. The invoice recorded the following work:
| Item | Details | Qty | Unit | GST | Amount |
| OptiCast Project, Design and Layout work | |||||
| 1 | Initial Stage | 10.25hr | $75.00 | $76.88 | $845.63 |
| - per 18-Oct-10, Project Meeting, as required | (1.00hrs) | ||||
| - per 29-Oct-10, Evaluation, as required | (3.00hrs) | ||||
| - per 01-Nov-10, Preparation, as required | (6.25hrs) | ||||
| 2 | Schematics and related work | 6.75hrs | $75.00 | $50.63 | $556.88 |
| - per 02-Nov-10, Schematics, as required | (5.25hrs) | ||||
| - per 03-Nov-10, Schematics, as required | (1.50hrs) | ||||
| 3 | Placement and Routing stage | 13.75hrs | $75.00 | $103.13 | $1,134.38 |
| - 03-Nov-10, Placement, as required | (5.75hrs) | ||||
| - 03-Nov-10, Routing, as required | (2.75hrs) | ||||
| - 04-Nov-10, Routing, as required | (5.25hrs) | ||||
| 4 | Review Stage | 42.50hrs | $75.00 | $318.75 | $3,506.25 |
| - per 13-Nov-10 | (6.25hrs) | ||||
| - per 15-Nov-10 | (1.75hrs) | ||||
| - per 18-Nov-10 | (2.00hrs) | ||||
| - per 19-Nov-10 | (6.50hrs) | ||||
| - per 22-Nov-10 | (7.25hrs) | ||||
| - per 23-Nov-10 | (1.25hrs) | ||||
| - per 24-Nov-10 | (3.25hrs) | ||||
| - per 25-Nov-10 | (7.75hrs) | ||||
| - per 26-Nov-10 | (6.50hrs) | ||||
| Totals: | $549.38 | $6,043.13 | |||
| Total Amount (includes GST): | $6,043.13 | ||||
Hurd paid the invoice.
117 Hurd continued to seek to locate suppliers for his new products. On 14 December 2010, he engaged in email communications with Metromatics Pty Ltd (Metromatics) about the availability of silicon NICs for use in OptiCast. Metromatics requested that Hurd sign a NDA and provide it to them.
118 Hurd's attempts to attract investors for the Crosswise ATS continued unabated. On 16 December 2010, Hurd emailed the Crosswise Conceptual Brief to two potential investors – Newedge and his old employer, Mr Ted Bryce at SIG. Hurd conceded during cross-examination that when he said to Mr Bryce that he had been "involved with developing tech for a matching engine, risk gateways and the like", he meant that he had been involved, through his position at Zomojo, in doing those things. Hurd accepted that he knew that a sub-10 microsecond medium latency ATS was possible, that it could achieve throughput of more than a million orders per second, and that it could have a robust and secure design, because that is what Zomojo had achieved with its ATS prototype. Hurd denied, however, that when he said to Mr Bryce that "[t]ime may be right for an ASX competitor", he meant that the time might be right to utilise the technology that he had developed while at Zomojo in order to create an ASX competitor. Hurd concluded his email to Mr Bryce by saying that:
Barry Parker at ABN AMRO is prepared to take on the settlement and clearing, so I think the ducks are lined up to make it a nice earner with the right participants on board.
119 In his email to Newedge, Hurd told Gilbert:
Not sure if an Alternate platform for Oz equities is of interest to you, but it may be. Attached something I've been cooking up for you to have a look at. Have been watching this for a quite some time. Got some indications of support and it seems the environment and timing is just about ideal.
Gilbert responded the same day. Gilbert asked Hurd whether he would accept "a private investment for a 5% stake". Hurd responded "[p]erhaps as one out of two of the foundation investors to get the thing going if it was a trusted party". Later in the day, Gilbert emailed Hurd again and said he had "some pretty high powered guys in Soc Gen (all Ausies (sic) in HK) as well as myself who could possibly put up the $500K". Hurd responded saying "[l]et's have a chat tomorrow on [the] private front. I'd be favourably disposed to an investment if you were the interface for it and it makes things happen quicker". And that is what transpired.
120 The next day, 17 December 2010, Hurd emailed Nunan again. He attached an edited copy of the Crosswise Conceptual Brief and stated:
Got a couple of immediate bites on the Crosswise front. … One of the guys I approached wants to do it personally which perhaps is OK for one foundation investor to fund the flesh out, not sure if it doesn't send the wrong message though, but funds to enable seems like a good idea.
(Emphasis added.)
Hurd's evidence was that a "couple of … bites" was a reference to Gilbert and some of his associates/friends. At about this time, Hurd commenced drafting what was to become the Crosswise Heads of Agreement – an agreement between Hurd, Zeptonics and the investors.
121 Things had moved, and were moving, quickly. Hurd's father, John Hurd (Hurd Senior), was Zomojo's accountant. At the same time, he assisted his son to draft a version of the Crosswise Heads of Agreement. On 19 December 2010, Hurd Senior sent his son a new draft of the Crosswise Heads of Agreement. Hurd needed the draft because Gilbert was lining up the foundation investors in the Crosswise ATS (Crosswise Foundation Investors).
122 At 9:32am on 20 December 2010, Hurd emailed Gilbert a document he described as "Crosswise – heads of agreement v0.2-21.12.2010". Hurd's email to Gilbert stated "[a]ccountant advised I had the wrong authorities as it was really an agreement between three parties myself, Zeptonics and the investor to enter into an deal [sic] reconstituting Ramazza where the three parties agree to act …". Version 1 was not in evidence. Version 2 of the Crosswise Heads of Agreement was stated to be between Hurd (as project manager), Zeptonics (as the developer) and the investor. The investor was described as a "Foundation Investor" with an investment of $500,000.
123 Three days later, on 23 December 2010, SIG rejected Hurd's offer of the previous day to be a Crosswise Foundation Investor. Hurd had sent the offer to SIG and to other potential investors (including ABN Amro) by email during business hours, from Zomojo's offices, using his Zeptonics email address through a web browser. Hurd's offer to ABN Amro included a statement that he had commitment on the initial foundation funding for the Crosswise ATS and expected "to be working through the preliminary work starting in January". Hurd's intentions were clear – to continue to seek to obtain investors in the Crosswise ATS with a view to establishing the Crosswise ATS while still employed at Zomojo. As Hurd admitted, his intention was that he would hit the ground running upon the termination of his notice period from Zomojo. Hurd "was eager to get a start". Hurd did not contemplate any break between completing his duties at Zomojo and continuing his activities with Zeptonics and the Crosswise ATS.
124 On 28 December 2010, Hurd's efforts were rewarded. He received an email from Gilbert committing $800,000 to the Crosswise ATS. Gilbert had questions. Hurd responded. Gilbert's email and Hurd's response is instructive. Relevant parts are extracted below. The passages sent by Gilbert are in italics. Hurd's answers were inserted by him and are not italicised:
I have a firm 800k but cannot contact the last person who is out of reach at present but I should be able to talk with them by the end of the week. I guess as we need a version 3 of the "heads of agreement" this should be okay?
Sounds reasonable.
I have one further question which is in regards to the issue of the ownership of the technology or exclusivity to equity holders in crosswise of the technology. I was after your thoughts on this as you have pointed out previously that the value of this business is in the technology so this is quite a key point.
Perpetual source code license exclusive to Australia for equity, equity derivative products and other products reasonably similar to those traded on the ASX. Main value in the business will be the equity flow and customer base which is what a buyer of the platform would be looking for, especially if it is a Nasdaq or NYSE. Good chance they would look to migrate to their own platform, or as per Millenium [sic] and NYFIX, offload the platform and keep the customers & connectivity.
Most of the platform investors will have another reason for wanting the platform as it will make them money but you and I will be focused on how to exit at some stage in the next few years gracefully at good value. Dressing up for BATS, NYSE, Nasdaq OMX, SGX is the main thing with some other exchange guys potentially knocking on the door as well. I have a mate in the M&A part of NYSE and they are on the prowl in the region and Nasdaq's purchase of the Smart group in Sydney puts Sydney firmly in their focus. Most would look to migrate onto their own platform you'd think and they'd move away from the tech though the value in making the thing work will be the tech in the first place. Part of the reason for doing this now is that I think the tech will converge a lot over the next few years and in three years time I expect the difference in latency will be getting somewhat moot, but I thought that ten years ago and was wrong then, and now that we are counting picoseconds (28ps laser rise times in Opticast) I wonder …
Getting stock options going and making moves to work on listings if the right platform investors are on board will make it an especially attractive target. Another cute thing for stock options may be to make them either 100 shares, as per US, or like Brazil at 1 share but trading in 100 lots, to be more retail friendly and for the bigger volume number effect.
Will copyright issues on the s&p200 index but have been thinking about maybe we could license the MSCI Aust 200 for derivative trading. It was licensed to ADX back in 2000 for all of ten weeks of operation so perhaps it is not such a lucky charm.
Been busy trading. Just myself in the office yesterday and today doing Korea. Will merge the other potential shareholder comments with yours and feed back v0.3 in a few hours.
Regarding office placement: most initial contact, platform investment round, will be in the CBD I guess so probably a serviced office, perhaps Servcorp at Chifley Sq where Zomojo started, for a month or three but perhaps only a virtual presence is required in the city. Main DC will be at Bondi Junction near the current ASX co-lo. New ASX DC is in a secret location which just happens to be in North Sydney and is expected to be the live one early 2012. Main office should be on the Pipe networks data map to make connectivity relatively painless as we'll be using pipe from existing ASX co-lo to nearby DC to start and then pipe to new ASX later as pipe have the necessary connectivity due to winning the ASX connectivity contract as well as being reasonable vendors despite being bought be [sic] TPG. That means the eventual office should be in one of the Pipe zones on the northern side of the harbour eventually to be frugal, North Sydney, St Leonards or Chatswood. An office north side with virtual office in CBD for meetings could be the most frugal option for a month or two especially if the north side office was the flat attached to my house I guess …
Interested in hearing your thoughts.
(Emphasis added.)
As that email exchange records, by this time when Hurd was still an employee and officer of Zomojo, he had developed the Crosswise ATS to the point where he had secured investors, he had resolved ownership of the technology, he was finalising the terms of the Crosswise Heads of Agreement and he had given serious consideration to the location of, and the manner in which, his new and current business would operate in the near future.
125 The next day, 29 December 2010, Hurd was again busy. At about 6:00am, he received a response from Gilbert. Again, Gilbert had gone through the previous day's email and responded to each aspect. By 1:00pm, Hurd had prepared version "3" of the Crosswise Heads of Agreement and emailed it to Gilbert. The amendments were drafted by Hurd and were of substance. Hurd described them to Gilbert as follows:
Extended the hook for Zepto to Crosswise to ten years, 5+5, so Crosswise can keep Zepto on the hook for inexpensive development as long as it likes over the next decade. Clarified explicity [sic] that no license fees or royalties within ten years for Zepto to ensure certainty.
Added words to clarify the license is perpetual and exclusive for an ASX-product oriented exchange within Australia. Words allow for use of the tech as a broker's internaliser which is path I wish to allow for Zepto.
Added funds tfr within 15 HK days of signing to suit.
Added a first right of refusal for other shareholders within a two year term.
Confidential information added as per other foundation candidate.
…
Please mark up any changes, fix typos, etc in the current draft heads and feed back as you see fit. Hopefully we're close.
The Crosswise Heads of Agreement included a confidentiality clause. Hurd admitted that the clause was included because the information that was to be exploited by the Crosswise ATS in connection with the proposed business activities was commercially sensitive and confidential – it had value if it were known to persons outside the Crosswise ATS venture. Interestingly, at least at that time, "all information provided by Crosswise" was considered by Hurd to be "confidential": see definition of "confidential information" in the Crosswise Heads of Agreement.
126 Things progressed unabated in January. On 4 January 2011, Metromatics sent a further email to Hurd seeking to follow up the NDA which Hurd had not returned: see [117] above. Hurd replied on the same day and supplied a signed NDA.
127 Crosswise Heads of Agreement were executed on 7 January 2011 by Hurd (as project manager), Zeptonics (as developer) and investors. Gilbert and Mrs Trine Gilbert invested $200,000 in exchange for 40,000 shares in Zeptonics. The Agreement recorded that:
An Australian corporate shell with no history of activity, Ramazza Pty Ltd, with Matt Hurd originally as the sole shareholder and director will be the starting entity for reconstitution and renaming. Currently it has 100 shares owned by Matt Hurd, these will be split 1,000 to 1 to make a total of 100,000 shares. 200,000 new shares to be issued to the Foundation Investors at $5.00 per share.
Each of Mr Clint Maddock (Maddock) and Mr David Hoddle (Hoddle) also entered into a Crosswise Heads of Agreement. Maddock invested $200,000 in exchange for 40,000 shares in Zeptonics. Hoddle invested $100,000 in exchange for 20,000 shares in Zeptonics. Neither Hurd nor Zeptonics signed the agreements.
128 The following day, Saturday, 8 January 2011, Hurd emailed Gilbert, Maddock and Hoddle. Relevant parts are extracted below. The passages drafted by Gilbert are in italics. Hurd's responses are in Roman:
Thank you for your trust and support. Much appreciated. David, just as it was good to meet Clint this week, I look forward to catching up with you at some stage.
Please find attached three signed heads of agreement for Clint, David and myself representing 500K Aud or 5% shareholding of Crosswise as foundation investors. I expect Wes and Adrian to provide theirs next week and the others shortly after.
Sounds good. I will look to resign next week so that I may return signed agreements the next day.
We are all very looking forward to this new chapter in our lives and making a difference in the Australian financial community.
Indeed. Will be a very busy and interesting year as we shake things up.
Clint, David and myself may change the legal entities holding the shares prior to the shareholders agreement being drawn up as we are all governed by different tax structures.
Sure. Best to pin it down early to avoid any potentially taxable events on transfer.
I had the sign off today from compliance for the shareholding and am able to act as a non-executive director and offer advice as long as I am not paid for these roles whilst in Newedge employment.
That's good news. I'll prepare the paperwork for your directorship.
Please counter sign the agreements and return to the respective mail addresses above for our records.
Will return next week along with some banking details.
Mike, we'll chat about the level of detail you wish to be involved in.
I'm very much looking forward to this chapter and am looking forward to making it a success for us all.
…
(Emphasis in bold added.)
Hurd believed, incorrectly, that by signing the Crosswise Heads of Agreements after he resigned from Zomojo, he might not be in trouble for breaching his obligations as the co-managing director of Zomojo. Hurd conceded that he did not offer Zomojo an opportunity to invest in the Crosswise ATS and that the Crosswise ATS was in direct competition with Zomojo's ATS.
129 On 10 January 2011, another Crosswise Foundation Investor – Mr Wessel Brent van der Scheer – entered into a Crosswise Heads of Agreement with Hurd and Zeptonics. Van der Scheer invested $100,000. Hurd had been introduced to van der Scheer two or three years earlier while he was on Zomojo business in Hong Kong. Hurd now had secured the majority of his "foundation investors" for the Crosswise ATS.
130 The next morning, Monday, 11 January 2011, Hurd telephoned Robinson and told him he was resigning from Zomojo. Robinson asked him what he was going to do. Hurd said he was planning to do something in the "ATS space" and might also do some higher risk trading. Again, that statement was false. As the detailed factual analysis reveals, Hurd was already in the "ATS space" and, on his own admission, in direct competition with Zomojo's ATS. Robinson told Hurd he was concerned that what he proposed was too close to Zomojo's business. Robinson asked Hurd to rethink his decision. A few minutes later, Hurd sent the following email to Robinson and Heddle:
Please accept this is a resignation from my various roles connected with Zomojo P/L, Zomojo Trading P/L, Zomojo Services P/L and any other associated entities including directorships, company secretariats and public officership where applicable.
Thank you for making the journey interesting and worthwhile. I'll wait for your input on to how best to manage the exit.
Hurd's evidence was that following his resignation on 11 January 2011 he intended to immediately devote himself to the setup of the Crosswise ATS, prior to serving out any notice period. And that is what Hurd did. Hurd told Newham, by instant messaging, that he "mentioned it to the [sic] G and I". 'G' was a reference to Robinson. 'I' was a reference to Heddle.
131 Later that day, Hurd emailed Mr Tim Berry at Tibra Capital (Tibra), a trader on stock exchanges all over the world. Previously, Hurd had tried (without success) to secure Tibra as one of the Crosswise Foundation Investors. Hurd's email on 11 January 2011 relevantly stated:
… Things have moved on a little. Have had a pleasing degree of interest and have completed the Foundation round, resigned just today from Zomojo and will be getting on with the set up.
Will be interested in talking to you about the Platform Investor round which would seem to suit your timing. May be of particular interest to you as I may be able to work the tech such that Crosswise may be able to give you a faster reaction time to the ASX from ASX market data than you may get natively even with the matching process in the middle, at least whilst in the Bondi Junction locale before the move to the newer data centre.
132 Tibra was interested. Tibra responded the next day by email in the following terms:
… We're a trading on stock exchanges all over the world and are interested in your product.
We are interested in your 10G Fibre and 1G copper solutions as well as a mix of 10G/1G interfaces. We are also interested in the latency for those different flavours of your device.
We're interested if you are able to tell us what the lead time usually is for one of these devices, as well your support options, and pricing models.
133 Hurd did not inform Zomojo that he had received this email. And Hurd had a difficulty. His response to Mr Paul James (James), also of Tibra, dated 12 January 2011 is self explanatory:
We will arrange for a NDA.
Only semi-public product is the Opticast unit you see on the web. Will pass on a spec sheet once the NDA is in place and organise a meet.
Planning a bunch of other quite low latency products but release dateline is yet to be properly planned. 1–3µs 1G/10G/40G ethernet cards with integrated timing. World's fastest 10G 24 port switch (double digit ns port to port) though it has limited L2 functionality. 48/64 port L3 data centre switch at 300ns. Some sub-micro exchange protected DMA stuff. Integrated timing throughout the range is the planned theme so you can track to a level of several nanos where packets have been in a rack/data centre environment.
(Emphasis added.)
The products referred to in this email are identified at [282]-[285] below.
134 On 16 January 2011, Robinson sent a long email to Hurd. The email proposed solutions to the problem posed by Hurd's desire to leave Zomojo. The email was in the following terms:
From the Zomojo point of view, we would like to maintain a relationship with you, ideally as close as possible to the current arrangements (employee and director). Failing that, our strong desire would be to maintain a formal consulting relationship.
Also, my initial understanding of the ongoing responsibilities of company directors is such that much of what you have proposed doing outside of Zomojo would create a problematic situation which I would very much like to avoid.
…
… The simplest approach which ticks all the boxes from my point of view would be to have you nominate a list of projects that you are keen on and, subject to the development of a sensible business plan, to empower you with a budget and office and other agreed resources to enable you to work on bringing them to fruition.
135 Of course, Robinson's offer was made ignorant of critical facts – Hurd's plans were already well advanced. Hurd took no steps to rectify Zomojo's ignorance. The next day, 17 January 2011, Hurd rejected Robinson's offer made and then made the following statement:
I fully understand my ongoing legal obligations including those with respect to confidential information including patents and trade secrets. Zomojo is in a good place with its trading and I believe with the new technology being rolled out over the next few months it will continue to improve its performance. The business is not at risk and continues to grow stronger.
Again, that statement was false. Zomojo's business was at risk and the risk was Hurd and his activities.
136 Robinson tried again, later in the day. He sent a further email to Hurd:
I was very sorry to receive your mail. From the contents I assume that any idea of looking any further for an intermediate solution is not acceptable to you. I guess we now get to the point of managing the situation as cleanly as possible.
You mention that you fully understand your legal obligations regarding confidential information and trade secrets. In my view there are other issues that we need to resolve/understand, including the non-compete obligations in your employment contract, but perhaps more far-reaching, your obligations to Zomojo as a former director. I think it would be helpful for all of us if the firm got some legal advice which we would happily share with you. Once in possession of a better view of the legal boundaries of the problem I would suggest a process where we aim to document and agree on acceptable areas of activity so as to avoid the prospect of any grief down the track.
137 Zomojo's staff were informed of Hurd's resignation on 18 January 2011. The next day, Robinson provided Hurd with a copy of legal advice Zomojo had obtained concerning his resignation.
138 On 20 and 21 January 2011, Hurd and Zeptonics entered into Crosswise Heads of Agreements with three additional Crosswise Foundation Investors. Each investor contributed $100,000 in exchange for 20,000 shares in Zeptonics. Hurd did not tell Zomojo about the investments made by these Crosswise Foundation Investors.
139 On Sunday, 23 January 2011, Hurd emailed the Crosswise Foundation Investors stating:
The first funds transfer has arrived, so activity beyond the planning is starting. Time spent this weekend on setting up the temp office to support a month or two's activity. Part time office assist and first tech (beyond myself) should start this week. I will be full time officially from Feb 11th but am currently at more than full time equivalent in time allocation. Logos, stationery, web, virtual CBD office, accounting, etc, kicking off.
…
Will register the change of entity name to Crosswise …
140 Hurd should not have been engaging in this Crosswise ATS related activity. He knew that the obligations he owed to Zomojo prevented him from doing so. His evidence about this issue was inconsistent and contradictory as the following passage of transcript reveals:
The evidence you give before her Honour, you change it every time I put to you a document which contradicts what you've said?—Yes. I'm sorry. I was trying to give the right impression. I feel like I spent very little time on – on the project. I did spend a couple of days, two or three days working hard on it. Then I realised I shouldn't be doing it, and I stopped.
HER HONOUR: When you say you realised you shouldn't be doing it, what was the thing that had changed for that period, as distinct from the period before you had resigned?
There were two things. I think I had received notice from Zomojo about my obligations, and also my wife told me, you know, that I – I shouldn't be doing this, and I agreed. So I stopped.
DR COLLINS: But you sought to convey to her Honour, didn't you, Mr Hurd, that in the 30 day notice period you gave from Zomojo you spent very little or no time on Crosswise activities?—Yes, that's right. I said I did some paperwork and things like these letterheads and things.
But you were seeking to convey to her Honour that you were acting faithfully to your duties as a continuing employee of Zomojo during your 30 day notice period. That's what you wanted her Honour to believe, isn't it?—Yes.
Yes?—Yes.
And that wasn't true, was it?—I feel it was true because I wasn't in the office. I had been sent home. I started to do some things, and then I realised I shouldn't do anything.
Yes, because during the period when you were working at more than full-time equivalent in time allocation on Crosswise business, you were not acting faithfully to your obligations to Zomojo, were you?—That would be correct.
What a careful reader will notice is that Hurd failed to explain what had changed between the period before his resignation and the commencement of his notice period. The answer, of course, was nothing. If Hurd's conduct was wrong in the notice period (and it was), his conduct was wrong prior to the notice period. Moreover, the evidence he gave was not the truth – it was the evidence he thought he should give to create "the right impression".
141 Hurd did not stop. On 24 January 2011, Hurd sent a copy of Zeptonics' NDA to Tibra. On 25 January, Robinson met Hurd in Sydney. Hurd would not disclose what he was working on and said he wanted to seek legal advice. Some might say it was too late.
142 Also on 25 January 2011, Newham told Robinson that he was resigning from Zomojo and that he "might be" going to work with Hurd. Three days later, on 28 January 2011, after receiving an email from Robinson, Newham resigned and offered a 28-day notice period. On about 31 January 2011, Hurd sought legal advice from DibbsBarker about employing Zomojo staff. Hurd's evidence on this topic was unrepentant. He stated that he sought the advice of DibbsBarker: "[b]ecause the staff had expressed interest and … obviously it would be nice to have my mates there, I got some legal advice." At around that time, either in late January or early February 2011, Hurd had discussions with both Snowdon and Mr Matthew Fitzpatrick (another Zomojo employee) (Fitzpatrick) about his plans after Zomojo. In relation to the former, Snowdon's evidence was that Hurd told him about his plans after leaving Zomojo, which included an ATS, and that he (Hurd) was working with his lawyers on a way to bring Zomojo staff over to Zeptonics. In relation to the latter, both men (Hurd and Fitzpatrick) expressed a mutual desire to work together in the future. The possibility of Hurd developing an ATS in competition with Zomojo's ATS was, in Fitzpatrick's words, something which was "floating around". Fitzpatrick gave evidence that he sought Newham's advice at this time as to whether he might be able to obtain future employment from Hurd.
2.10 February 2011 onwards – staff recruitment
143 On 2 February 2011, a Zomojo shareholders' meeting was held where the shareholders unanimously passed resolutions to remove Hurd as a director and company secretary and to appoint a Mr Dean Boyle (Boyle) as director and company secretary. After the shareholders' meeting, Hurd met with Robinson and Heddle. Robinson took a note of the meeting. At the conclusion of the meeting with Hurd, Robinson suggested that it would be easier to deal with staff and customers if Hurd based himself at home for the remainder of his notice period. He spent most of the remainder of his notice period based at his home.
144 Whilst at home supposedly serving out his notice period, Hurd continued to work on Zeptonics. On 3 February 2011, Hurd emailed Kowalewski at Advantage PCB seeking to ensure that Hurd had been provided with the "latest and correct PCB designs for OptiCast and mechanicals". His message to Kowalewski was that he hoped that there would be some more work for him after the notice period ended on 11 February.
145 On 8 February 2011, Hurd and Robinson held a without prejudice meeting. The events of that meeting were not in evidence. However, an email exchange between Hurd and DibbsBarker was tendered and put to Hurd during cross-examination. That email exchange recorded that, at 10:12am on 9 February 2011, Hurd sent his lawyers a list of "areas of keen interest". Legal professional privilege was asserted over the attached list. At 5:10pm, Mr Scott Sloan (Sloan), a partner of DibbsBarker, responded to Hurd. Sloan indicated that he had had a discussion with "Richard", presumably Robinson's advisor, and that "[h]e also indicated that Zomojo strongly believed that [Hurd] had induced an employee to leave and join you." Hurd replied to Sloan at 8:19pm. Hurd said:
Priorities for myself are to work out a strategy where they cannot gain injunctive relief against Crosswise or Zeptonics and be prepared to fight a compensation battle in the future if we can't reach a compromise. Perhaps company memberships in the wife's name, etc. Interested in ways to minimise the target, especially if there is a suitable structure so it remains my problem and not a problem with the Crosswise entity as the investors wouldn't be enamored [sic] with such [a] mess. Perhaps we will need a court to settle the employment agreement, thinking out loud …
Would like to know which employee they believe I have solicited as many have requested I take them but my standard line has been that I may not be able to. The three names I've mentioned I have said I would like to find a way if I legally can but that may not be possible. Scott Newham resigned as he was sick of the crappy work he was doing at the time and he expected to be picked up by me, I asked him not to as it may make it complicated for me and there was no certainty I could employ him, but, alas he did anyway. I do feel a [sic] obligation to him and, as discussed, need to find a reasonable strategy to bringing him and other staff across.
(Emphasis added.)
Hurd's email was put to him during cross-examination. His evidence was that the reference to "three names I've mentioned" was to Newham, Snowdon and Fitzpatrick. As that email revealed, Hurd had decided on a path – a failure and refusal to face up to and resolve the legal issues he alone had created and, to the extent possible, to avoid them by obstruction and deception.
146 On 21 February 2011, Hurd sent a further email to the Crosswise Foundation Investors. The email included a portion headed "staff". Hurd told the investors that he "[e]xpect[ed] one new starter next week and two more in 4-6 weeks. More on the phone." As events turned out, Newham commenced at Zeptonics the next week (28 February 2011), Fitzpatrick after four weeks (28 March 2011) and Snowdon after six weeks (8 April 2011). Hurd's evidence was that those timings were purely coincidence.
147 On 22 February 2011, Hurd sent emails to Fitzpatrick and Snowdon in identical terms:
I know that you have expressed interest in working with me again in the future but I've been told quite clearly that whilst employees are employed by Zomojo, including their notice period, I cannot suggest or entice them to work with me.
Hurd accepted that the emails were sent on the advice of his lawyers. Hurd rejected any suggestion that the intended effect of the emails was to entice Fitzpatrick and Snowdon to resign from Zomojo, serve their notice periods and then apply to Hurd for employment. Irrespective of Hurd's intention, however, it is clear that the emails had precisely that effect. Snowdon gave evidence that, upon receipt of Hurd's email, he understood that he should resign, serve out his notice period and then apply for a job with Hurd. Fitzpatrick rejected the suggestion that the email prompted him to adopt that course, but the evidence was that, no more than three days later, he resigned and commenced serving out his notice period.
148 Hurd's desire to hire his "mates" from Zomojo required some lateral thinking. Hurd accepted that the use of a recruitment firm was a step advised by his lawyers, DibbsBarker. So, on 25 February 2011, Hurd met with Mr Richard Center (Center), a representative from a recruitment agency, known alternatively as Mantech and Global Powertex. Hurd knew Center from his time at Zomojo because Zomojo had used Mantech for its own recruitment purposes. The meeting was preceded by an email on 24 February 2011 in which Hurd had said:
Richard,
Time for a chat tomorrow sometime? Got something a bit different to discuss with you.
149 At the meeting, Hurd told Center he would engage him to recruit staff for Zeptonics but that, if any of the staff which were hired were Zomojo staff, Hurd would seek a reduced fee. Hurd accepted that at the meeting he specifically mentioned Newham, Fitzpatrick and Snowdon to Center. The agreement they struck, which was recorded in Hurd's email sent at 1:19pm on that day, was that Hurd would pay Center $10,000 to recruit three "known names". I accept that Newham, Fitzpatrick and Snowdon were the three "known names" and that, in essence, the agreement between Hurd and Center was one where Center would attempt to act as an intermediary to enable Hurd to recruit Newham, Fitzpatrick and Snowdon in exchange for a payment of $10,000.
150 Later on the same day, 25 February 2011, Center placed an advertisement on the website "seek.com.au". Newham's last day at Zomojo was 25 February 2011. Newham gave evidence that after he left the office he went home, found the advertisement on "seek.com.au" and sent a job application to Center. Newham knew to do so because Hurd had told him.
151 On 28 February 2011, Center sent Hurd an email attaching Newham's resume. Hurd's evidence was that Center used his Global Powertex email address because Center was concerned about using the same brand under which he did business with Zomojo. Center asked Hurd to let him know if he wanted Center to organise an interview. Hurd described Center as "being cute" when he asked if an interview would be necessary because Hurd had already indicated to Center that "if Zomojo employees applied, such as Mr Newham, I would – I would, no doubt, hire them". Newham was offered a job by Zeptonics on the same day, 28 February 2011, and commenced work on 6 March 2011.
152 On 10 March 2011, Snowdon tendered his resignation. Hurd found out about Snowdon's resignation at or around the time he resigned. On 18 March 2011, Center sent Hurd an invoice for $10,000. Hurd paid the invoice on 23 March 2011 despite only one "known name" having been hired.
153 On 25 March 2011, a Friday, Fitzpatrick finished at Zomojo. Over the weekend, Fitzpatrick spoke to Newham. Newham told him to look for a job on "seek.com.au". Fitzpatrick later spoke to Hurd. Fitzpatrick asked Hurd if he could apply for the job to which Hurd responded "ok". At 9:50am on Monday, 28 March 2011, Hurd sent an email to Center: "I hear Matthew Fitzpatrick has left Zomojo and is looking for work. Anything up for him to respond to?" Evidently there was because at 9:56am Fitzpatrick sent an email to Center responding to an advertisement seeking a "C++ zealot". Center sent Fitzpatrick's email to Hurd at 10:07am. At some point during the day, Hurd contacted Fitzpatrick by instant message and asked if he had time for a quick telephone discussion. Hurd and Fitzpatrick spoke by telephone that day. Fitzpatrick was evasive in his answer to the question of when, precisely, he was hired by Hurd. Fitzpatrick commenced work on 31 March 2011.
154 On 6 April 2011, Snowdon finished at Zomojo. Hurd learnt "shortly after" of that fact. On 7 April 2011, Hurd drafted a job advertisement which was specifically directed at a "hardware guy". Hurd rejected the contention that it was specifically directed at Snowdon. The job advertisement which Hurd drafted and sent to Newham at 11:53am that morning bore Zomojo's name, not Zeptonics. Hurd's evidence was that he obtained a copy of an old Zomojo advertisement from the internet and simply reproduced it, with the name changed, for Zeptonics' purposes. On either 7 or 8 April 2011, Snowdon found the advertisement on "seek.com.au" and, at 1:40pm on 8 April 2011, sent his application to Center. Center forwarded Snowdon's application to Hurd at 3:28pm. Center took the opportunity to make another "cute" comment to Hurd, saying in his email that: "Dave approached me, and I would have to say, he is definitely going to interest you. He seems to have had significant impact on system performance on a trading system at a small company called Zomojo." Snowdon was hired on the same day. In fact, Hurd sent an email to another Zeptonics employee attaching Snowdon's application and saying "[n]ewbie for us". Hurd's evidence was that the decision to hire Snowdon was made with little deliberation: "There would have been no doubt. All he had to say was 'Hello'." On 13 April 2011, Snowdon commenced at Zeptonics.
2.11 March 2011 onwards – Zeptonics' activities after Hurd left Zomojo
155 On 9 March 2011, Hurd emailed SunGard Global Trading (Singapore) Pte Ltd (SunGard) attaching a sheet entitled "Zeptonics" which stated:
Our core strength is low latency technology.
Please note that this document's content is covered by the NDA between Zeptonics and Sunguard [sic]. Please keep confidential, on a need to know basis, as many aspects of this document are sensitive.
Core product groups planned
Matching engine platform
• Single digit microsecond latency from clients' perspective
• >1,000,000 orders per second
• Familiar protocol – similar to Nasdaq UFO – HFT oriented
• FIX to HFT translation
Protected DMA gateways
• Protected customised risk, API, protocol checking
• Single digit microsecond overhead using HFT protocol
• FIX to HFT translation
• Can do sub-microsecond with custom hardware
Network equipment
• ZeptoNIC – 1G, 10G, 40G network interface card family
o 1 to 3 microsecond overhead IP/UDP
• ZeptoSwitch – 1G / 10G / 40G Ethernet switch family
o world's fastest 10G Ethernet switch, first under 100ns
o full function data centre Ethernet fabric switch at 300ns
• ZeptoWatch – integrated timing for nanosecond oriented packet tracing
o integrated timing in most ZeptoNIC and ZeptoSwitch
o in-band nanosecond oriented time traces throughout a datacenter
• OptiCast - single digit nanosecond packet replication device
o suits market data replication for an exchange or broker
…
Investors have invested in Crosswise which has a service agreement with Zeptonics to provide the matching platform and other technology for the Crosswise business.
As part of the Crosswise venture, Zeptonics is actively developing:
• OptiCast,
• ZeptoNIC,
• two ZeptoSwitches,
• matching engine platform, and
• some protected DMA elements for matching engine integration.
…
It is understood Sunguard [sic] has some mutual interest in most areas Zeptonics is developing. Primary interest is in developing low latency market access gateways. ....
Zeptonics is willing to consider a variety of ways to get a relationship moving forward.
(Emphasis in original.)
The email is important. Zeptonics sought to keep the information confidential. The core product groups planned by Zeptonics and the products that Zeptonics was actively developing were listed. They included OptiCast and products entitled "ZeptoNIC" and "ZeptoSwitch" and what became ZeptoAccess KRX.
156 On the same day, 9 March 2011, Hurd, Zeptonics and Takaho Daley entered into a Crosswise Heads of Agreement whereby Mr Daley, another Crosswise Foundation Investor, invested $100,000 for 20,000 shares in Zeptonics.
157 Just over a month later, on 15 April 2011, Hurd emailed SunGard, stating:
Please find attached a draft services contract for the OSE gateway. Let me know if this suits.
The HKEx AMS project the lads have estimated 16 weeks and priced at $120k.
We have created a new legal vehicle Zepto DMA Pty Ltd [Zepto Markets] which we should attached [sic] future work to and perhaps change this contract to.
Also, FYI we have kicked off our project to deliver a low latency 100Mb / 1Gb card to eliminate the requirement of a switch acting as a fast interface for 10Gb delivery but that is likely to take four or five months to complete given the current state of the world's semiconductor pipeline.
In fact, Zepto Markets DMA Pty Ltd (Zepto DMA) was incorporated on 20 April 2011. Hurd was the sole director and shareholder until 22 February 2012. It later became known as Zepto Markets Pty Ltd (Zepto Markets). The "gateway" was a reference to what became ZeptoAccess KRX. The last reference in the paragraph to "a low latency 100Mb/1Gb card" was a reference to ZeptoNIC.
158 Advantage PCB continued to work for Zeptonics on OptiCast. On 25 May 2011, Snowdon (as a principal of Zeptonics) emailed Advantage PCB. Snowdon provided the first draft of the ZeptoNIC schematics. Snowdon described the ZeptoNIC under the headings "Description of the board", "Placement", "Pin swapping", "Manufacturing" and "Layout". Snowdon described the board in the following terms:
This is a board which is designed to prototype our ideas with respect to several products. Three products in particular: a network card, a switch and a second-generation opticast device. The primary components are four SFP+ ports, a Virtex-6 FPGA which has 10G transceivers built in (the GTHs) and …
(Emphasis added.)
Snowdon's evidence was that the "network card" was a reference to "ZeptoNIC"; the "switch" was a reference to the product entitled "ZeptoMUX" and the "second-generation Opticast device" was a reference to the product entitled "ZeptoLink". Snowdon accepted that ZeptoLink was a packet replication device.
159 On 8 June 2011, a Services Agreement between SunGard and Zepto DMA (as it was then known) was executed (the SunGard Agreement) in relation to what became ZeptoAccess KRX. By cl 3, Zeptonics was to provide "Services" to SunGard. The "Services" were defined to mean:
• Develop a "Protected Direct Market Access Service" gateway to the Stock Exchange Hong Kong (SEHK) for the purposes of trading stock.
• Upon delivery of the Deliverables to [SunGard] (the Start Date), Zeptonics will grant to [SunGard] … an exclusive, royalty-free licence (including the right to sublicense to a third party approved in writing by Zeptonics) to use the Deliverables in an unlimited number of instances, on an unlimited number of servers, for a period of 16 weeks from the start date, for the sole purpose of determining whether the Deliverables meet the Technical Specifications and can be used in a production environment.
"Deliverables" was defined as "[t]he binary code for a 'Protected Direct Market Access Service' gateway to the Stock Exchange Hong Kong for the purposes of trading stock". The base fee was US$100,000. SunGard paid the base fee.
160 In June 2011, Chardaloupas of Newedge contacted Hurd again. Hurd's evidence was unclear on what precipitated their email communications. Nevertheless, on 16 June 2011, Hurd sent Chardaloupas a long email setting out Zeptonics' capabilities, including:
…
We should put a mutual NDA in place before I mention the stuff below, so please treat as confidential. May I send our standard NDA to you or do you have one that is easier for your legal dept to execute?
Project work would look something like this if we were to proceed:
We have four options for a TMX gateway:
1. Gateway server, software only, specific LAN cards, HFT protocol or Fix to Stamp or FIX, latency sub ten microseconds, (4-8 micros likely)
2. Gateway server, FPGA-Lite, HFT to Stamp or FIX, sub five microseconds (2-4 micros likely)
3. Gateway server, FPGA-Full, HFT to Stamp or FIX, sub microsecond (sub 0.2 microseconds likely at 10G, capable of perhaps sub -0.1 microsecond (yes negative) using a little HFT magic with a 1G TMX interface)
4. Client risk (direct to exchange/no gateway), an FPGA solution in a client's machine with an embedded Newedge risk gateway in the card with remote connectivity back to a Newedge risk system we would build for you. No gateway latency and the latency through the card from their software would be competitive with any other solution. The card would present as a regular LAN card to the client.
…
Our FPGA cards will be available in July and represent a new type of FPGA approach as they are capable of 10Mb/100Mb/1G/10G across all four ports and support novel single digit nanosecond (typically <0.004 microsecond) packet replication overhead for market data replication and special redundancy techniques. We have our own IP in house and can deliver solutions we fondly call FPGA 2.0 which are a little bit beyond other vendors FPGA solutions thanks to our years of experience fighting on the financial trading front with such hardware. [Reference to ZeptoNIC].
We could work with you on a TMC+ basis or on a fixed price basis, half up front, half at completion with no cost at all if latency SLAs fail to be met to eliminate the project risk for you.
Schedule and cost estimates:
1. Software $C 250k, 8 to 16 weeks
2. FGPA (sic)-lite, $C 500k, 10 to 20 weeks depending on feature set
3. FPGA-full, $C 750k, 4 to 9 months, 6 months likely
4. +$C 200k for risk server, linux LAN driver and embedded Newedge control, +$100k for MS LAN driver if required. FPGA cards approximately $C 10k each.
Let me know of your interest in further Chi-X Canada and Alpha interfaces.
I'd expect support costs to be around $100-200k per year depending on scope and platform you would choose.
If you require some period of exclusivity for Toronto we are happy to discuss how to price that.
We do have a funded joint venture in progress that may lead to 30 exchange interfaces around the global for a large financial ISV in its early stages with the first gateways rolling out in Asia. If this comes to full implementation it would be likely that first level and second level support would migrate to their staff, however we could negotiate for you to be inside or outside the tent as you would prefer. [Reference to Crosswise ATS].
We are also planning a sub 200 nanosecond (0.2 microseconds) Nasdaq UFO/Ouch risk appliance which will have 24 10G ports, one for the exchange and the rest for clients but that is a late Q3 or Q4 proposition at this stage. A 48 port device in Q1/2012.
We also have in development a market data replicator that has 50 SFP+ ports 10Mb to 10G capable (50 ports so we can say it is a TeraBit device) that allows any incoming channel to be mapped to any and multiple outgoing channels with less than 0.0009 microseconds (9 ns) of latency. Good for market data sharing and good for simply plugging cables from an external source into a top of rack and all server cables, 10G, 1G, fibre channel, etc, into the device and configuring remotely by config file or web interface what cables you'd like hooked up to which other cables. Remote cable management with packet replication capabilities is something I've long sought in my trading over the years. Should be available Q3. We're calling it ZeptoCast. [Reference to OptiCast which was later known as ZeptoCast and then ZeptoLink].
We have the world's fastest 10G switch like device in the wings. First product will be 24 10G only SPF+ ports, sub 100 nanoseconds, one up link port, 23 client ports. Client ports can't talk to each other so we're calling it ZeptoMux. 48 port one in early 2012. [Reference to ZeptoMUX].
Expecting to release a 10G ZeptoSwitch with L2 switching capabilities with a speed somewhat less than 200 nanoseconds port to port but have yet to confirm the latency. Product plans should emerge in late July for this. [Reference to ZeptoSwitch].
For risk gateways, we can often achieve negative latency with 1G or 100Mb (or slower) interfaces using special trading tricks but it is quite dependent on the protocols and technical infrastructure deployed by the pool operator in the co-lo as well as the customer order type focus. For 10G we typically couldn't do much better than 200ns, so no negative latency tricks, but we're working on some new tricks to push that closer to 100ns with risk checks but that is still in development. [Reference to ZeptoRisk, later known as ZeptoAccess KRX].
I'd imagine Newedge is probably after something a bit more canned and ready to roll than what we can offer, but if there is interest I'd be glad to have a discussion.
(Emphasis added.)
The email is and remains important. It recorded what Hurd had been developing, and the state of development, for each of Zeptonics' products. The products referred to in the mail are identified by the phrase [Reference to …]. It also recorded, as was the fact, that Zeptonics' development built on the years of work undertaken by Zomojo.
161 On 18 June 2011, Chardaloupas responded, promising to provide a NDA and to arrange a conference call early in the next week. There was no evidence as to what occurred thereafter and it was not put to Hurd that a conference call in fact took place.
162 On 30 July 2011, Graham Smith, of Newedge, sent a "1st round, 'light' version RFP" to Hurd for him to complete. Hurd's response, on 12 August 2011, was negative. Hurd said that:
After some consideration we don't think it is appropriate for Zeptonics to bid for business with Newedge at this stage. As we have no product in production, only test, our technology base is clearly not ready for the broad application that you are seeking nor for the support necessarily required for as many implementations as you will require. …
In summary, we are targeting a release of a UDP based sub 200ns risk protected gateway appliance late 2011 with a sub 300ns TCP based release in 2012. We can build negative latency solutions for some but not all exchanges. Also, we would be interested in building a hardware embedded NIC based gateway with distributed risk for those clients who insist on no gateways yet SEC rule compliance is required. …
Please note that Zeptonics is currently engaged in negotiations with a global service provider which may enable us to support the technology on a global basis which we expect to conclude shortly, perhaps as early as tomorrow.
(Emphasis added.)
The "global service provider" to which Hurd had referred was SunGard. The "NIC based gateway" was a reference to Hurd also marketing what later became ZeptoNIC.
163 On 26 and 27 August 2011, Hurd and other staff of Zeptonics gave a presentation entitled "Crosswise: Introducing Australia's Newest ATS Project". The presentation slides were in evidence. Relevantly, the presentation contained the following claims about the Crosswise ATS:
1. "[t]echnology entity founded by Matt Hurd" and "[b]ackground in trading systems development and proprietary trading is unique";
2. "[s]ingle digit microsecond client experience";
3. "[c]reative use of hardware and software";
4. "[l]atency budget", showing a traversal time of 9 microseconds for a round trip, with wire time over 200 metres of less than 2 microseconds for a round trip;
5. "[m]atch latency" of 2.4 microseconds;
6. "[d]emo gear" and "[d]emo setup" showing engine, monitor with Endace card, client and optical splits;
7. order profile graphs and summaries showing latency distributions;
8. "[r]edundancy", describing the use of a deterministic engine, and physical optical splits to allow assured replication;
9. "[h]igh order rates allows cash and derivative market integration"; and
10. "Nasdaq UFO/OUCH inspired protocol" and "[e]mbedded firewall".
164 Hurd further communicated with Chardaloupas between 22 and 28 September 2011. Hurd sent Chardaloupas an email on 22 September 2011 which attached a "brief overview of the framework we're talking about". Hurd quoted a price of $C2 million, but thought that "this price makes the project cost unreasonably high for you". Hurd also attached the presentation slides from the Crosswise ATS presentation given in the last week of August. Hurd said "[t]he presentation is a bit lame without the demo and talk but it does have some relevant snippets relating to ZeptoRisk and ZeptoLink which may be of interest." Hurd gave evidence that he sent the presentation to Chardaloupas because he was proud of the demo and wanted to "drum up business". The presentation contained claims in respect of ZeptoMUX (and a picture of a device), ZeptoLink and ZeptoRisk (later known as ZeptoAccess KRX).
165 At some point prior to 28 September 2011, Chardaloupas replied to Hurd. The reply email was not in evidence. Hurd's email, on 28 September 2011, which quoted portions of Chardaloupas' email and provided a response, was in evidence. Relevant parts are extracted below. The passages sent by Chardaloupas are in italics. Hurd's answers were inserted by him and are not italicised:
Thanks for the continued interest. I do think your continued interest speaks volumes that you actually do indeed understand what your clients are looking for which was not always easy to find when I was wearing a trading hat. Your clients will end up pretty happy, and perhaps a little surprised, with a no intervening device solution and I expect the new rules in Canada and the US will cause quite a deal of customer churn and opportunity for those firms that get it right.
Thanks for the informative follow-up. The documents read very well – even I understand them. Crosswise is the most exciting development I have read in a long time. I couldn't help but notice Fitz and Scott Newham are part of the team too, good going.
Dr David Snowdon from the old firm too, so a nice contingent here.
I had a successful trip to Chicago. One of the key items discussed with my internal colleagues was a Canadian pre-trade risk imitative with senior members (Kassey Oulhadj – head of esolutions, Antoine Babule – CAO Americas, and Rod Wilmer – CEO Newedge Canada). The Canadian piece has been budgeted and allocated for 2012. While a regulatory decision and implementation timeline remains uncertain; internally I managed to raise the profile and this is now just as visible as the US piece.
I respectfully suggested and asked for Canada's piece [to] be carved out separate from the US.
I provided an overview of your technology as you had guided me from previous emails and verbal discussions. The solutions and latency figures were intriguing to all. Cost was brought up and I did provide the initial investment dollar amount. It drew mixed feedback, I was told I could proceed.
I am proceeding to write a formalized business case. May I ask Matt, should I put in the $2 mm CAD as the initial outlay? Are there tangible considerations such as small equity stake, exclusivity, etc.
Or do you think by 2012 you may have proceeded to offer a more cost-effective solution?
Any additional thoughts and feedback you have is welcome.
$2 mm CAD would be the initial outlay to build out access to the eight market places you mentioned in your DEA summary, I'd imagine it would include a gateway for each market place, a centralized linux appliance for risk serving and a couple of client FPGA cards. I'd imagine annual support after the first year would be around $100k per marketplace. Additional FPGA cards for clients would be a little under $10k per card.
Will things be cheaper later in 2012? Perhaps. Certainly I don't think we'll be selling 750k gateways and I think the price will be 100 to 500k per gatway [sic] depending on the country, latency and integration requirements, mostly likely 200-300k per sub micro gateway which is not too different from $2M for 8. Expect a few players in the sub-microsecond space but not too many in the 100-300ns range for a while.
Some degree of equity in ZeptoRisk and exclusivity for Canadian marketplaces could be entertained. As mentioned, we have had a couple of approaches on the global deal side and further interest from the Crosswise investing banks in taking on board investing in ZeptoRisk as a venture similar to the structure we are organising for for [sic] Crosswise Global Tech. Our main position there is the firms we would prefer to deal with on the equity side are part of the Crosswise deal and we haven't wanted to sidetrack the Crosswise deal regardless of their expressed interest as it is hard enough to keep them focused on a single outcome without confusing the investment horizon. Our thought there is to build an FTEN competitor called ZeptoDMA or ZeptoRisk or some such with about $6M of capital raised for 30%. Haven't really considered Newedge as a partner in this as I know how difficult it is for the firm to work across global boundaries. I guess a small consideration also would be that I'd be somewhat concerned that some of the IB's might get annoyed with Zepto given the interest they've already expressed and then finding out they've been beaten by Newedge to the punch but the relief to this is the strong interest they've all expressed in using the product. Sub 200ns for Nasdaq seems to catch the eye of many.
…
166 On 17 October 2011, a Software Licence Agreement was executed between Leading Investments & Services Co (Leading) and Zeptonics (the Leading Agreement) to supply ZeptoAccess KRX. Clause 1 of the Leading Agreement stated:
Licensor [Zeptonics] grants Licensee [Leading] a non-exclusive and non-transferable right limited to a period of one year to use the Software as a direct market access gateway to support trade to and from KRX. "The Software" means the direct market access gateway software built for KRX.
167 Clause IV of the Leading Agreement required the Licensee to conduct "Acceptance Tests" within a defined period to "confirm that the Software [was] properly working". The "Acceptance Tests" were "the tests reasonably necessary to satisfy a negative latency of less than -250 microseconds as set out in Appendix A". Appendix A described negative latency, noting that the latency advantages could be demonstrated by "comparing latencies with the magic tricks turned on and turned off and comparing median KRX response times". Hurd's evidence was that the phrase "magic tricks" was used so as not to give anything away. Hurd considered negative latency to be a matter of commercial sensitivity. A couple of weeks later, on 3 November 2011, Zeptonics met the first delivery milestone and Leading paid approximately $160,000 to Zeptonics.
168 In about November 2011, Karonis commenced working for Zeptonics in a marketing capacity. Hurd's evidence was that Karonis worked on an unpaid basis until February 2012. In Hurd's words, Karonis "just turned up and asked for a desk". On 18 November 2011, Karonis sent an email to a Dr Young Seock Shin (Shin), a principal of KB Securities, on behalf of Zeptonics. Karonis introduced himself by saying "I have started working with Zeptonics since the beginning of this week." In a further email on 21 November 2011, Karonis described the products which Zeptonics was developing for the Korean market which included ZeptoAccess KRX:
Right now we are in the final stages of development of a KRX order gateway and KRX market data gateway.
The main attributes of this gateway are:
• ETA for go live mid December 2011
• Asset classes covered: Futures and options.
• The order gateway achieves negative latency through various programmatic techniques that are the fruit of a long experience on KRX by the Zeptonics team
• The market data gateway achieves equally negative latency for the same reasons plus the added advantage of specific custom hardware (FPGA).
• The order gateway includes pre-trade risk checks. A User Interface is provided to the broker to configure risk settings and monitor exposures in real time. Risk settings will only be managed by the broker.
• The order gateway can provide the following types of access for the end customer (Buy-Side or prop-desk)
o FIX API (4.2)
o Virtualised KRX NextGen API (This allows to integrate seamlessly trading applications that have already been developed by Buy-Side customers)
o Zeptonics HFT API
• The whole platform will run on specific Hardware provided by Zeptonics. This allows for guaranteeing performance and efficiency of QA.
• The Zeptonics team can remotely manage and maintain the platform as a managed service.
Some additional remarks:
• It would be relatively straightforward to extend the asset classes to Equity, Warrants. This could be done in Q1 2012.
• It is possible to integrate risk with post-margin DMA Powerbase settings or other existing DMA functions. In our initial discussions we should focus on risk as we want to fully cover your requirements with PowerBase and/or Back Office integration
As a next step I would propose to organize a phone call with your team.
Objective would be to focus on your specific needs around orders, market, risk as well as support model and make sure we can cover them.
169 A budget was prepared for Zeptonics' expected revenues for the 2012 to 2013 financial year. The budget projected licence fees of $3,127,500 payable as follows:
| Licence Fees | July | August | Sept | Oct | Nov | Dec | Jan | Feb | March | April | May | June |
| Newedge | 62500 | 62500 | 62500 | 62500 | ||||||||
| Getco | 250000 | 62500 | 62500 | |||||||||
| Korea x 4 | 250000 | 250000 | 62500 | 250000 | 312500 | |||||||
| BALM | 100000 | 100000 | 100000 | 100000 | 100000 | 150000 | 125000 | 125000 | ||||
| Hong Kong | 250000 | 62500 | ||||||||||
| Leading | 165000 | |||||||||||
| 3127500 Total | 165000 | 162500 | 350000 | 350000 | 162500 | 100000 | 500000 | 212500 | 250000 | 250000 | 62500 | 562500 |
The budget was prepared on an assumption that, during that financial year, Zeptonics would generate licence fees from four new Korean gateway deals beyond Getco, Newedge and Leading. Hurd gave evidence that only the Newedge and Leading deals had been concluded as at that date.
170 Hurd gave further evidence that:
1. the Newedge payment of $62,500 for August was unpaid but he expected it to be paid, along with the other three instalments;
2. the Getco payment of $250,000 was unpaid and Hurd did not expect it to be paid because there was no concluded deal with Getco;
3. he was optimistic that Zeptonics might sell one or two gateways in Korea, rather than the four which were budgeted for;
4. the BALM (Bank of America, Merrill Lynch) payments were unpaid and would not be paid because there was no concluded deal with BALM;
5. the reference to "Hong Kong" was a reference to SunGard and Hurd expected that Zeptonics might be able to build a gateway but had not started that work yet; and
6. the Leading payment of $165,000 was unpaid but he expected it to be paid.
171 Hurd's evidence regarding the remainder of the budget was that:
1. of the projected revenues of $10,227,500, he was unsure what the actual amount would be but he thought it would be less because Zeptonics was more focused on ZeptoMUX and ZeptoLink and it did not have the "money to push forward on the gateway business";
2. of the projected consulting fees of $2,100,000, he was unsure of the current level of projected fees but no fees had been derived; and
3. of the projected sales of $5,000,000, Zeptonics had received "a couple of hundred thousand dollars in orders" and, by 30 June 2013, Hurd had hoped to "get a few million dollars out of it".
172 In October 2011, Hurd submitted an application for funding to Commercialisation Australia, a component of which was ZeptoMUX, described as "the world's lowest latency 10G Ethernet switch device with pre-production prototypes working in the lab". Funding was also sought for ZeptoLink.
2.12 Hurd's conduct and Hurd as a witness
173 Hurd's conduct was reprehensible. As noted earlier, except for admissions against his interests, I cannot and do not accept his evidence unless, and only to the extent that, his evidence was corroborated by independent contemporaneous evidence. He was neither a person of truth nor of integrity. In that context, the following additional facts and matters are relevant:
1. during the course of his evidence, Hurd admitted on no less than 26 occasions that what he wrote or said was false, a lie or both. However, as noted at [5] above, that evidence itself had problems. Hurd gave evidence he thought would advance his case as he saw it. Hurd was, and remained, focussed on securing for himself an advantage over Zomojo whilst consciously disregarding his legal and ethical obligations. He "adapted" his evidence accordingly;
2. Hurd filed on behalf of Zeptoip Pty Ltd (Zeptoip) a patent application that was based upon Zomojo's speculative transmission and transmit fragmentation techniques, which he knew about only because he had been employed by Zomojo as its co-managing director;
3. Hurd continued to access Zomojo's online Commonwealth Bank account records long after he ceased to be employed by Zomojo, and after the commencement of these proceedings; and
4. Hurd established a complex structure including some seven different companies and, after the commencement of these proceedings, arranged for the transfer of his shareholdings in those companies to the corporate trustee of a trust of which he is a beneficiary. The only conclusion to be drawn was that Hurd's strategy was to make it as difficult as possible for Zomojo to obtain relief in respect of his misconduct, a strategy that he embarked on no later than early February 2011: see [145] above.
174 The relevant contractual provisions are set out at [18]-[29] above. For the purposes of this analysis, the following provisions of the Service Agreement are relevant:
1. under the heading "Responsibility", cll 3.1, 3.3, 3.4 and 3.5: see [19]-[21] above;
2. under the heading "Confidentiality", cl 9: see [26] and [27] above;
3. under the heading "Inventions and Assignment", cl 10: see [23] above; and
4. under the heading "Future Employment", cl 12: see [24] and [25] above.
3.2 Confidentiality and Confidential Information
3.2.1 Clause 9 of the Service Agreement– Confidentiality
175 It is necessary to deal with cl 9, which related to confidentiality, in some detail. Its terms are set out at [26] and [27] above.
176 There are three issues – is it valid and if so, what does it cover and how long does any restraint operate.
177 Hurd submitted that to the extent that cl 9 purported to restrict his ability to use know-how and techniques, not capable of protection by equity, the clause was invalid. Hurd submitted that the lack of a time limit upon the restriction in cl 9 was a further basis for its invalidity. Hurd also contended that because Zomojo's alleged confidential information was a "combination claim", and the confidential information was not severable from Hurd's general know-how, that was a further basis for declining to grant relief.
178 Zomojo submitted that there was no legal foundation for the contention that a contractual restraint which exceeded the restraint imposed by equity should be read down or was invalid. Zomojo's submission was that know-how, being knowledge acquired by an employee during the course of his or her employment, while not protected by equity, was capable of protection by a contractual covenant. However, even if the restraint in cl 9 was too broad, Zomojo submitted the clause could be read down by virtue of the provisions of s 4(1) of the Restraints of Trade Act 1976 (NSW) (the Restraints Act).
179 The relevant principles to be applied in determining the validity of cl 9 of the Service Agreement may be summarised as follows:
1. an obligation can be imposed by contract to keep information confidential and that obligation can extend to cover subject matter which is not protected by an equitable duty of confidence: Wright v Gasweld Pty Ltd (1991) 22 NSWLR 317 at 329, 335 and 340-341; Del Casale v Artedomus (Aust) Pty Ltd (2007) 73 IPR 326 at [34]-[36], [38], [46], [48], [50], [51], [77], [87], [92], [102], [118], [134] and [140] and Reed Business Information Pty Ltd v Seymour [2010] NSWSC 790 at [36];
2. employers are entitled to protect by contractual covenant the use of information that is the result of work, experimentation and expense: Exchange Telegraph Company Limited v Central News Limited [1897] 2 Ch 48 at 53-54; AB Consolidated Ltd v Europe Strength Food Co Pty Ltd [1978] 2 NZLR 515; Interfirm Comparison (Aust) Pty Ltd v Law Society of New South Wales [1975] 2 NSWLR 104 at 117; Industrial Furnaces Ltd v Reaves [1970] RPC 605 at 617 and International Scientific Communications Inc v Pattison [1979] FSR 429 at 434;
3. the know-how, or knowledge of how to solve particular problems or the knowledge of methods not necessarily shared by others, acquired by an employee during his or her employment, while ordinarily not protected by equity, is capable of being protected by a contractual covenant: Printers & Finishers Ltd v Holloway (No 2) [1964] 3 All ER 731 and 735-736; Wright at 329; Commercial Plastics Ltd v Vincent [1965] 1 QB 623 at 642 and Milwell Holdings Ltd v Johnson (1988) 12 IPR 378 at 391-3;
4. a contractual restraint upon the use of confidential information or know-how may be enforceable provided it is reasonable, in the sense of being necessary for the adequate protection of the interests of a party: Brightman v Lamson Paragon Ltd (1914) 18 CLR 331 at 335 and Reed Business Information at [36];
5. whether a restraint is reasonable is a question of law and not of fact: Attorney-General (Cth) v Adelaide Steamship Co Ltd (1913) 18 CLR 30 at 35; Buckley v Tutty (1971) 125 CLR 353 at 377; Amoco Australia Pty Ltd v Rocca Bros Motor Engineering Co Pty Ltd (1973) 133 CLR 288 at 317-318; Drake Personnel Ltd v Beddison [1979] VR 13 at 19 and Cream v Bushcolt Pty Ltd (2004) ATPR 42-004 at [23] and [30];
6. in determining whether a restraint is reasonable the court should consider what is necessary to protect the legitimate interests of the person asserting the restraint in the circumstances of the case, assessed from the date of making the contract and making the best possible estimate of probabilities and contingencies then foreseeable: Amoco at 318; Drake Personnel at 25; Woolworths Ltd v Olson [2004] NSWCA 372 at [40] and Reed Business Information at [36]; and
7. where, as here, the restraint concerns confidential information, the circumstances to be considered by the Court include:
7.1 the extent to which the information is known outside the business;
7.2 the skill and effort expired to collect the information;
7.3 the extent to which the information is treated as confidential by the employer;
7.4 the value of the information to competitors;
7.5 the ease or difficulty with which the information can be duplicated by others;
7.6 whether it was made known to the employee that the information was confidential; and
7.7 whether the usages and practices in the industry support the claim of confidentiality,
Reed Business Information at [36].
180 Clause 9 was in broad terms. It included "information relating to the business of [Zomojo], including existing and future products and services", "information relating to the technology, infrastructure, strategic plans, business plans, research, development … of [Zomojo]", "the work (including computer programs) performed by the Managing Director pursuant to this agreement" and "any other information which the Managing Director ought reasonably to be aware is confidential". It prohibited use, or disclosure to a third party, by Hurd of that information at any time during or after his employment for a purpose not related to the business of Zomojo.
181 The starting point in determining the reasonableness (and therefore the validity) of cl 9 is a consideration of what was necessary to protect Zomojo's legitimate interests in the circumstances of the case, assessed from the date of making the Service Agreement and making the best possible estimate of probabilities and contingencies then foreseeable: see [179(6)] above.
182 The Service Agreement was entered into on 2 December 2005. As early as May 2005, Hurd identified that "[s]ecrecy and staff retention is very important to maintaining proprietary advantage". One of the principal risks that Zomojo faced was "important staff leaving with enough IP [intellectual property] in their heads to competitively hurt the venture": see [9] above. Hurd's own contemporaneous analysis was a reasonable estimate of the probabilities and contingencies then foreseeable. It was foreseeable that Zomojo's only market advantage would be its proprietary methods and techniques. It was therefore necessary, in order to protect Zomojo's legitimate business interests, that its employment agreements contain some form of restraint upon the use of "confidential information". The Service Agreement was an agreement specifically prepared for Hurd and Heddle, being the two co-managing directors. Because they would both necessarily be privy to all of Zomojo's confidential information, it was necessary that the confidentiality provision be drafted widely, to capture more information than would otherwise be protected by equity.
183 Further, the nature of the information sought to be protected itself is relevant. As Hurd stated in the Zomojo Trading Proposal, Zomojo's trading system would comprise code, "developed from scratch", and technology, "derive[d] from what is commonly used in modern super computing clusters". In Hurd's view "a typical sys[tem] admin has more than enough skill to build, maintain and administer such technology with no additional training". What then was the "confidential information" that Zomojo sought to protect using cl 9 of the Service Agreement?
184 It is necessary to precisely frame the allegedly confidential information which Zomojo sought to protect. Chapman filed an affidavit which exhibited a schedule listing 108 claims of "confidential information" (the Chapman Schedule). In its closing submissions, Zomojo narrowed the categories of confidential information which it claimed Hurd had misused to:
(a) The latency, throughput and fault tolerance/redundancy features of [Zomojo's ATS]. Hurd used that information in designing, developing, raising funds for, and marketing the Crosswise ATS.
(b) Zomojo's implementation of fast ordering, speculative transmission and transmit fragmentation techniques in its [NICs and Gateways]. Hurd used that information in designing, developing and marketing ZeptoNIC, ZeptoMUX and the ZeptoAccess KRX gateway.
(c) The integration of timestamping, logging and passthrough functionality into the firmware of [Zomojo's NICs]. Hurd used that information in designing, developing and marketing ZeptoNIC.
(d) Zomojo's proprietary communication and scheduling framework 'ion'. Hurd used that information in designing and developing the 'nexus' communication and scheduling framework.
Chapman was cross-examined about each of the claims in the Chapman Schedule.
185 Hurd adduced expert evidence from Dr Oliver Diessel, a senior lecturer in the School of Computer Science and Engineering at the University of New South Wales, with expertise in the area of reconfigurable computing. It is important to understand the evidence of Dr Diessel. Dr Diessel conducted a review of the computer science literature to assess whether each technique, or a similar technique to that, listed in the Chapman Schedule had been used before or referred to before. If Dr Diessel could find an example of a technique used elsewhere, Dr Diessel concluded that the claim was not confidential. A summary of Zomojo's remaining claims and the evidence adduced by Chapman and Dr Diessel's about the confidential aspect or aspects of each claim is contained in Confidential Annexure A.
186 Before turning to summarise the conclusions to be drawn from Confidential Annexure A, it is necessary to address Zomojo's criticisms of Dr Diessel's approach. Dr Diessel accepted that he was "not a member of the high frequency trading community". Zomojo submitted that his conclusions regarding the "novelty", or otherwise, of the individual techniques the subject of Zomojo's claims for confidentiality under cl 9 were therefore of limited utility to the Court. I accept that his views were of limited utility. Limited utility does not mean of no utility.
187 For example, adopting Dr Diessel's definition of "confidentiality" (see [185] above), a number of Zomojo's confidentiality claims remained capable of being confidential. In particular, Dr Diessel accepted that there was no reference in the computer science literature of which he was aware:
1. to any ATS with the combination of features described in paragraphs 63 to 74 of the Chapman Schedule;
2. to fast ordering, speculative transmission and transmit fragmentation techniques of the kind described in paragraphs 32-38 and 52 of the Chapman Schedule; or
3. to any NICs with timestamping, logging and passthrough functionality integrated into the firmware, as detailed in paragraphs 6, 7 and 8 of the Chapman Schedule.
188 Finally, and most importantly, Dr Diessel accepted that the combination of techniques found in each of Zomojo's NICs, Zomojo's Gateways, and its prototype ATS, were likely to contain novel ideas that were not available in a single place in the low latency literature and that would be of value to companies engaged in low latency trading that did not already know about, or use, those techniques.
189 For those reasons, the claims listed under each heading in Confidential Annexure A (with the exception of Ion), in combination, are capable of satisfying the definition of "Confidential Information" in cl 1 of the Service Agreement and are capable of forming the subject matter of the protection in cl 9 of the Service Agreement. That is, the following combination of techniques was each capable of being protected, namely:
1. the techniques listed in paragraphs 63-74 (inclusive) of the Chapman Schedule relating to Zomojo's ATS;
2. the techniques listed in paragraphs 32-38 and 52 (inclusive) of the Chapman Schedule relating to Zomojo's NICs;
3. the techniques listed in paragraphs 6, 7 and 8 of the Chapman Schedule relating to timestamping, logging and passthrough; and
4. the techniques listed in paragraphs 32-38 and 52 (inclusive) of the Chapman Schedule relating to Zomojo's Gateways.
190 The Ion framework does not fall into the same category. Dr Diessel did not express a view as to the novelty of Zomojo's Ion framework, beyond observing that "[w]hile it may not be documented, it can be expected that all HFT companies have developed similar technology". The other evidence did not provide a sufficient basis for concluding that it was entitled to the same protection.
191 Hurd's contention that the fact that the "techniques" described in [189] above are confidential only in combination is an impediment to their confidentiality or to the enforceability of cl 9 is rejected. Confidential information may comprise a combination of integers which are, individually, old and/or the subject of common knowledge: British Celanese Ltd v Courtaulds Ltd (1935) 52 RPC 171 at 193; see also Wood and Amolite Ld v Gowshall Ld (1937) 54 RPC 37 at 39-40; Harrison v Project & Design Co (Redcar) Ltd [1978] FSR 81 at 85 and RLA Polymers Pty Ltd v Nexus Adhesives Pty Ltd (2011) 280 ALR 125 at [45]. This case is a clear example of that principle at work.
192 Next, the scope of cl 9. It was envisaged that Zomojo's technology would comprise both old and new techniques used in combination. In order to protect the systems which Zomojo developed, it was therefore necessary for Hurd's confidentiality obligations to extend to cover what would otherwise be considered know-how. Further, it is clear that, in the course of Zomojo's business, it developed new hardware and new techniques which were not originally envisaged. Like any development process, that hardware and those techniques represented incremental improvements upon the preceding hardware and techniques.
193 The factors listed by Ball J in Reed Business Information at [36] are instructive. Taking each factor in turn:
1. while some individual components of the information may be known outside of Zomojo, the combinations were not: see [188] above;
2. significant skill and effort was expended to collect and develop the information: see [11], [38]-[64] and [183] above;
3. the information was treated as highly confidential by Zomojo: it required potential customers to enter into NDAs (see, for example, [55] above) and Hurd accepted that Zomojo's techniques were its greatest asset and worthy of protection;
4. the information would have been very valuable to Zomojo's competitors – Hurd wrote in the Zomojo Trading Proposal that Zomojo's entire competitive advantage stemmed from its ability to utilise its proprietary technology to the exclusion of others: see [9] above;
5. while individual components of the information could be and were duplicated by others (for example, the Endace card duplicated the timestamping features of Zomojo's NICs), Chapman and Dr Diessel agreed that there were no other examples of the combinations of technology employed by Zomojo in the low latency trading field: see [188] above;
6. Hurd was of course aware that the information was confidential; and
7. there was no evidence of usage or practice in the industry generally.
194 Based on the considerations above, cl 9 was reasonable in terms of the scope of information it sought to protect.
195 Hurd submitted that a further basis for the invalidity of cl 9 was that it was not restricted to a particular time period. Zomojo submitted that there is no prohibition in law on a permanent restraint and relied upon Tropeano v Riboni [2005] VSC 229. That case concerned the sale of an accounting business in Northcote, Melbourne. The restraint clause relevantly provided that:
The Vendors shall not:
(a) At any time in the future practice as Accountants for any client (except Atlantis International Pty Ltd) for whom work has been performed by either of the vendors at any time in the three years prior to the date of settlement;
(b) Practice as accountants within the area specified by the map attached to this contract and marked as schedule 8 for a period of three years from the date hereof.
196 After the sale of the business, the vendor acquired an interest in another accounting firm. After the purchaser commenced proceedings against the vendor, the vendor took steps to contact the clients of the firm that had been sold and invite them to engage his new firm to do their accountancy work. Gillard J described the vendor's conduct as a "blatant" breach of the restraint in subclause (a). Subclause (b) was limited to three years. Subclause (a) was unlimited as to duration. In holding that the restraint (as a whole) was valid, Gillard J considered the following factors at [93]:
• The vendors over a period of years had built up a goodwill based on personal loyalty.
• The vendors were of Italian background as were the bulk of their clients.
• Mr Riboni purchased the goodwill and the name of the firm.
• Naturally he wished to protect himself against the real risk of clients leaving and reverting to the former vendors. This was appreciated by the parties and well understood by them, hence the subterfuge on the takeover of not revealing the purchase to the clients for some time.
• The price, which was a substantial price in the circumstances, was reached and agreed on the basis that there would be the restraint clause in this form.
• The restraint clause did not restrain either vendor from pursuing his vocation provided it was a certain distance from the firm.
• On the takeover of the business Mr Riboni, to preserve his client base, continued the practice under the same name, from the same premises, with the same staff.
As the factors suggest, the whole of the value of the business consisted in its existing client base and the goodwill which had been built up over many years. The potential for that goodwill to be eroded by the vendor was a risk which would persist well beyond a certain, finite time period.
197 That position may be contrasted with the present case. The information protected by cl 9, while valuable in the short term, had a limited "shelf life". The Zomojo Trading Proposal (see [9] above) noted that "ZoMojo [sic] has the opportunity to make hay whilst the arbitrage sun is shining". The opportunity was recognised as short to medium term, at best. The technology was changing at a rapid pace and it continues to do so. It is neither necessary nor reasonable for cl 9 to contain no limitation as to time.
198 Zomojo submitted that if the Court were of the view that the restraint in cl 9 of the Service Agreement was in any way excessive, then by reason of s 4(1) of the Restraints Act it would not follow that it was invalid.
199 By s 4(1) of the Restraints Act, restraints of trade are "valid to the extent to which [they are] not against public policy, whether [they are] in severable terms or not". Hurd's submission simply stated that the entire clause must go. That submission is rejected. The Restraints Act enables the Court to read cl 9 as if it were in a form consistent with public policy. Clause 9 will be reasonable, and consistent with public policy, only to the extent it imposes the restraint specified in cl 9 for a limited period of time. Consistent with the considerations listed above, that period of time is one year.
200 A plank of Hurd's argument was that equity would not protect "know-how" or what was said to be "in his head" and therefore this Court should not uphold Zomojo's claims for confidentiality. That contention was misconceived.
201 Equity will restrain a former employee who seeks to use an employer's information as a 'springboard' to gain a head start, even where that information is capable of being independently ascertained: Terrapin Ltd v Builders Supply Co (Hayes) Ltd [1967] RPC 375 at 391; Seager v Copydex Ltd [1967] 1 WLR 923 at 931-2; Mense & Ampere Electrical Manufacturing Co Pty Ltd v Milenkovic [1973] VR 784 at 791 and Deta Nominees Pty Ltd v Viscount Plastic Products Pty Ltd [1979] VR 167 at 194-5.
202 The springboard doctrine seeks to prevent the misuse by one party of another's confidential information in order to bring out its own product in a manner or time that it would not otherwise have been able to achieve: Terrapin at 391; Aquaculture Corporation v New Zealand Green Mussel Co Ltd (1985) 5 IPR 353 at 383; Dart Industries Inc v David Bryar & Associates Pty Ltd (1997) 38 IPR 389 at 408-9; RLA Polymers at [70]-[75]. The doctrine is founded on a concept of fairness. Parties are free to use information that becomes public so long as they do not take advantage of the 'head start' of having the knowledge ahead of the public: Aquaculture Corporation at 383. As Goldberg J said in Dart Industries at 408-9:
In short, if a person wishes to design a product without it being alleged the person has used confidential information he must proceed through an independent design sequence and not use confidential information as a springboard to jump through the sequence.
203 Here, none of the Respondents adduced evidence concerning the design sequence that led to the development of any of their products. Mere assertion that development of a product occurred in or about [x] is insufficient. Zomojo's evidence that certain information was confidential coupled with Hurd's acknowledgement that secrecy and staff retention was very important to Zomojo maintaining its proprietary advantage (see [9] above) founds the inference that Hurd used that knowledge of Zomojo to advance the development of his products.
204 The fiduciary duties owed by Hurd to Zomojo were not in dispute. There were two sources – the Corporations Act and the common law. Hurd's statutory duties, relevantly, are to be found in ss 181(1) and 183(1) of the Corporations Act. Section 181(1) provides:
A director or other officer of a corporation must exercise their powers and discharge their duties:
(a) in good faith in the best interests of the corporation; and
(b) for a proper purpose.
205 Section 183(1) provides:
A person who obtains information because they are, or have been, a director or other officer or employee of a corporation must not improperly use the information to:
(a) gain an advantage for themselves or someone else; or
(b) cause detriment to the corporation.
206 The parties accepted that in addition to the statutory duties, Hurd owed fiduciary duties of fidelity and good faith and that those fiduciary duties extended to him in his capacity as a director, company officer with a senior managerial post and as an employee: Hodgson v Amcor Ltd [2012] VSC 94 at [1359]-[1362].
207 The most recent statement of that fiduciary duty was set out by the High Court in Pilmer v Duke Group Ltd (in liq) (2001) 207 CLR 165 at 197-199:
… [T]he fiduciary is under an obligation, without informed consent, not to promote the personal interests of the fiduciary by making or pursuing a gain in circumstances in which there is "a conflict or a real or substantial possibility of a conflict" between personal interests of the fiduciary and those to whom the duty is owed.
208 As Zomojo submitted, the "overriding duty of a fiduciary is the obligation of undivided loyalty": Hodgson at [1359]. An overriding duty that incorporates "twin themes" of avoiding conflicts of interest and avoiding misuse of the fiduciary position. For employees, duties of fidelity end when a person's employment is terminated: Hodgson at [1370]. For directors, fiduciary obligations may continue subsequent to the termination of the relationship that initiated them: Cook v Deeks [1916] 1 AC 554.
209 The analysis addresses the following issues in turn:
1. Date and effectiveness of Hurd's resignation: Section 4.1 at [210]-[223];
2. Period prior to 12 February 2011: Section 4.2 at [224]-[305];
3. Period after 11 February 2011: Section 4.3 at [306]-[351]; and
4. Claims against Corporate Respondents: Section 4.4 at [352]-[368].
4.1 Date and effectiveness of Hurd's resignation
210 It is necessary to determine Hurd's status between 11 January 2011 and 11 February 2011 (inclusive).
211 Hurd gave notice of his resignation from his various roles at Zomojo by an email he sent to Robinson and Heddle, the other directors of Zomojo, on 11 January 2011 in the following terms:
Please accept this is a resignation from my various roles connected with Zomojo P/L, Zomojo Trading P/L, Zomojo Services P/L and any other associated entities including directorships, company secretariats and public officership where applicable.
212 What was the legal effect of this email? Hurd's position changed. In the Further Amended Defence he filed before trial, he admitted that he was one of Zomojo's two co-managing directors from 2 December 2005 until 11 February 2011. During Hurd's opening and closing submissions, his Counsel submitted that his resignation from each of the positions listed "was effective from 11 January 2011", save that he remained an employee until 11 February 2011. Zomojo submitted that Hurd's resignation as a company officer became effective on 2 February 2011 and that Hurd's employment did not cease until 11 February 2011.
213 It is necessary to differentiate between Hurd's resignation as a company officer, his resignation as a co-managing director and his resignation as an employee.
214 Hurd's resignation as a director and company secretary of Zomojo was governed by the Corporations Act and cl 8 of Zomojo's Constitution. Section 203A of the Corporations Act requires that a written notice resigning as a director be served at Zomojo's registered office. Did Zomojo's Constitution provide for an alternative method of service?
215 Clause 8 of Zomojo's Constitution provided that:
A director may retire from office by giving written notice to the company at its registered office. The resignation is effective at the time stated in the notice, provided that it is after the time the notice was given. If not, the notice is effective immediately it is given.
(Emphasis added.)
216 As is apparent, cl 8 of Zomojo's Constitution (which reflects s 203A of the Corporations Act) also required that a written notice resigning as a director be served at Zomojo's registered office.
217 On 11 January 2011, Zomojo's registered office was in Clarence Street, Sydney. No written notice of resignation was given by Hurd to Zomojo at its registered office. The evidence disclosed that Robinson was not at that office when he received the email. The only other recipient of the email, Mr Heddle, did not give evidence.
218 Contrary to Hurd's submissions, neither the Corporations Act nor Zomojo's Constitution provided for resignation by email. There is no provision in the Corporations Act which permits it. Hurd's email did not comply with any of the prescribed methods of service in s 109X(1) of the Corporations Act. A notice was not left at, or posted to, Zomojo's registered office: s 109X(1)(a). A copy of the notice was not delivered personally to a director of Zomojo: s 109X(1)(b). Moreover, the Electronic Transactions Act 1999 (Cth) and s 28A of the Acts Interpretation Act 1901 (Cth) do not lead to a different result.
219 Hurd's reference to, and reliance upon, cl 147 of Zomojo's Constitution as authorising service of his resignation notice by email was misplaced. Clause 147 provides that:
A notice is to be treated as received in accordance with the following:
…
• if it is … sent electronically, on the business day after it is sent.
A company may have a designated company email address to which formal notices are to be sent. There was no evidence to suggest that Zomojo had designated an email address for receipt of formal notices under Zomojo's Constitution. Hurd's email was addressed to Robinson and Heddle, the two other directors of Zomojo. Does that constitute effective notice to Zomojo's registered office? No. It was not a notice served at Zomojo's registered office as required by cl 8 of Zomojo's Constitution.
220 On 2 February 2011, a Zomojo shareholders' meeting was held where shareholders unanimously passed resolutions removing Hurd as a director and company secretary. Hurd was removed as a director and company secretary of Zomojo with effect from 2 February 2011. Notice of removal of Hurd as a director of Zomojo was lodged with the Australian Securities and Investments Commission on 10 February 2011. That notice does not alter the legal significance of the resolution of the board of Zomojo on 2 February 2011.
221 Hurd remained an employee (titled a co-managing director) until 11 February 2011. Hurd's resignation as a co-managing director was addressed by cl 16 of Zomojo's Constitution. Clause 16 of Zomojo's Constitution provided that:
The clauses in this Constitution that apply in relation to the resignation, disqualification and removal of a director apply to the managing director with any necessary qualifications. The directors may remove the managing director from office, but only in accordance with the company's contract of employment with that person.
222 Under cl 8.9 of his Service Agreement, Hurd was entitled to terminate the Service Agreement by giving one month's notice. Hurd's email of 11 January 2011 constituted that notice. Hurd's notice period under his employment contract expired on 11 February 2011. Hurd remained an employee until 11 February 2011. Zomojo did not remove him as a managing director (pursuant to cl 16 of Zomojo's Constitution). Hurd remained in that position – as a co-managing director – until 11 February 2011.
223 There are therefore two relevant periods, considered further below: the period prior to 12 February 2011 and the period after 11 February 2011. Each will be considered in turn.
4.2 Period prior to 12 February 2011
224 Prior to 12 February 2011, Hurd was both an employee (co-managing director) and officer (director and company secretary) of Zomojo. He owed contractual, statutory and common law duties to Zomojo: see [174]-[208] above. Consideration of the alleged breaches by Hurd of those duties may be grouped into the following categories:
1. diversion of the Newedge opportunity;
2. development and marketing of OptiCast (and ZeptoLink);
3. development and marketing of the ZeptoMUX, ZeptoNIC, ZeptoSwitch, ZeptoRisk, Zepto Match and ZeptoAccess KRX; and
4. development and fundraising in respect of the Crosswise ATS.
4.2.1 Diversion of the Newedge opportunity
225 The factual matters relevant to Hurd's diversion of the Newedge opportunity are set out at [69], [75]-[76] and [79]-[82] above. In short, Hurd failed to disclose to Zomojo a request for services from Newedge which was directed to him in his capacity as co-managing director of Zomojo. Further, he attempted to appropriate the benefit of a further offer for himself in his capacity as director and shareholder of Zeptonics.
226 Zomojo submitted that Hurd's conduct amounted to breaches of cll 3.1, 3.3, 3.4 and 3.5 of the Service Agreement, a breach of ss 181(1) and 183(1) of the Corporations Act and a breach of Hurd's fiduciary duties of fidelity and good faith. Hurd conceded that his failure to refer the Newedge opportunity on or about 14 September 2010 to Zomojo, and the indication that he would instead take up that opportunity, were breaches of the fiduciary duties he owed to Zomojo. Hurd's admission as to a breach of the fiduciary duties he owed to Zomojo must extend to include a breach of one or more of ss 181(1) and 183(1) of the Corporations Act: Futuretronics.com.au Pty Ltd v Graphix Labels Pty Ltd (2009) 81 IPR 1 at [44] and [46] and Links Golf Tasmania Pty Ltd v Sattler (2012) 292 ALR 382 at [700]. Hurd's concession said nothing about the alleged breaches of the Service Agreement. It is necessary to consider each clause in turn.
227 First, cl 3.1: see [19] above. Clause 3.1 required that Hurd diligently perform the "Services" which were defined to include the duties in Item 2 of Sch A and such other duties as were consistent with the position to which the co-managing director had been appointed. There can be no doubt that Hurd's failure to disclose the enquiry from Newedge on 14 September 2010 (see [69] above) was a failure to diligently perform the Services. That enquiry directly requested Hurd, in his capacity as co-managing director of Zomojo, to indicate whether Zomojo would be able to build a "FIX adaptor" for Newedge. Hurd responded positively to that request. Chardaloupas was encouraged by Hurd's response. Hurd had potentially secured Newedge as a customer for Zomojo. However, Hurd did not further engage with Newedge on behalf of Zomojo. Hurd was on sabbatical. There was no evidence of what became of Newedge's request for a "partner to build [Newedge] a FIX adaptor". Not only did the specifically-defined Services impose an obligation on Hurd to disclose a request for Zomojo to provide a quotation for services, such an obligation formed part of the duty he owed to Zomojo "consistent with the position to which the Managing Director [had been] appointed". No other conclusion is open.
228 Chardaloupas followed up Hurd's response on 21 September 2010: see [69] above. Hurd again failed to respond. On 28 September 2010, Hurd then took a step which no employee or officer of any entity can or should take. He chose to respond, not on behalf of Zomojo, but from his Zeptonics email address: see [75] above. That action in and of itself was a breach of cl 3.1. But the breaches did not end there. Hurd's response (sent in breach of cl 3.1 of the Service Agreement) prompted a further enquiry from Chardaloupas. Hurd took that opportunity to spruik Zeptonics and his OptiCast idea. That action was another breach of cl 3.1.
229 Then, on 2 October 2010, Gilbert (who had been copied as a recipient of Hurd's earlier emails) sent Hurd an email seeking "a discussion with [Hurd] concerning a global pre market risk tool (API)" (the October Enquiry). It was unclear whether Gilbert intended to direct the October Enquiry to Zomojo or Zeptonics. It was likely he simply replied to Hurd's earlier email. It was also unclear whether Gilbert's new request related to Chardaloupas' earlier offer or was, in fact, a further offer. In any event, the October Enquiry directly engaged Hurd's obligations under cl 3.1. Gilbert was "seeking a company to build [an API] for Newedge on a global basis". In Hurd's words, it was "not a trivial [nor] inexpensive undertaking". Hurd did not disclose this further opportunity to Zomojo. In fact, he sought to take it for himself. Hurd told Gilbert that Zomojo could not take the opportunity. Hurd gave evidence that his view was that Zomojo's negotiations with TD Securities precluded it from taking up the further Newedge opportunity. The existence of those negotiations is irrelevant. They cannot and do not excuse Hurd's failure to disclose the October Enquiry, and therefore Newedge's offer of the opportunity, to Zomojo. That aspect of Hurd's conduct was a third breach of cl 3.1 of the Service Agreement.
230 Second, cl 3.3: see [20] above. It provided:
Unless absent on leave or through illness or injury, the Managing Director shall devote the whole of his time and attention to the performance of the Services during normal business hours and at such other times as may reasonably be necessary to the business of [Zomojo], …
231 Did Hurd breach cl 3.3 in his communications with Newedge? In other words, can it be said that these communications were engaged in by Hurd at a time when he was absent on leave or were they done during normal business hours or such other times as were reasonably necessary to the business of Zomojo or reasonably required by the Board. Hurd was on sabbatical during September 2010. It was unclear when he returned to work at Zomojo. Hurd's dealings with Chardaloupas occurred during September 2010 and Zomojo did not allege a breach of cl 3.3. Hurd's dealings with Gilbert in respect of the October Enquiry were on 2 October 2010, a Saturday. There are two issues: (1) was Hurd still on sabbatical on Saturday, 2 October 2010 and, (2) if not, was a Saturday a time when it was reasonably necessary to the business of Zomojo that Hurd devote the whole of his time and attention to the performance of the Services? The parties' submissions did not address either of those questions. Hurd told Chardaloupas on 28 September 2010 that he would "not be back in the Zomojo office until next week". The inference to be drawn is that Hurd intended to return from sabbatical on Monday, 4 October 2012. There is then the question of whether Hurd's sabbatical leave included, or excluded, the weekend of 2 and 3 October 2010. Again, the parties' submissions do not address this point. In the end, that question is unnecessary to resolve because given the proximity of the communication to Hurd's return to Zomojo, Hurd's position in Zomojo and the nature of Zomojo's business, it is reasonable to conclude that that Saturday was a day on which it was reasonably necessary for Hurd to devote his time and attention (or at least part of it) to the performance of the Services. The vicissitudes of conducting business over multiple time zones necessitate that a person holding such a position in such a business may reasonably be required to attend to company business on a Saturday. His conduct in relation to the October Enquiry was a breach of cl 3.3 of the Service Agreement.
232 Third, cl 3.4 of the Service Agreement: see [21] above. At all times Hurd was to "use his best endeavours to promote the interests of [Zomojo]". Hurd's failure to disclose Chardaloupas' enquiry and his attempt to divert the October Enquiry were also in breach of cl 3.4: see [69], [75]-[76] and [79]-[82] above. Hurd failed to use his best endeavours to promote the interests of Zomojo and – at least in relation to the October Enquiry – he sought to promote Zeptonics' interests not only ahead of, but in complete place of, Zomojo's.
233 Fourth, and finally, cl 3.5: see [21] above. Hurd's emails to Chardaloupas and Gilbert made it clear that he was directly involved or interested in another business or occupation: see [75]-[76] and [81] above. Hurd was involved in developing and marketing a product (which Hurd conceded was OptiCast) and in offering services (including Zeptonics' ability to build a "global pre market risk tool"). Those activities constituted a breach of cl 3.5. Hurd's communications with Chardaloupas and Gilbert provide the evidence of the activities of Hurd that were in breach of cl 3.5.
4.2.2 Development and Marketing of OptiCast
234 From about September 2010 onwards, Hurd engaged in a lengthy course of conduct which included inventing, designing, developing, marketing and attempting to sell the device which became known as OptiCast, all while still a director and employee of Zomojo.
235 The facts relating to Hurd's development and marketing of OptiCast are set out at [70]-[141] above. The evidence was that OptiCast was a "24 port or 48 port 19 inch rack mount splitter box" which utilised an optical splitter to achieve very low latency packet replication.
236 Zomojo submitted that Hurd's conduct amounted to breaches of cll 3.1, 3.3, 3.4, 3.5, 9 and 10 of the Service Agreement, a breach of ss 181(1) and 183(1) of the Corporations Act and a breach of Hurd's fiduciary duties of fidelity and good faith. Further, Zomojo submitted that ZeptoLink, a product sold by Zeptonics, was in fact an evolution of OptiCast and was caught by cl 10 of the Service Agreement.
237 Hurd conceded that in developing the device that became OptiCast, he breached his fiduciary duties. Hurd's admission that, in developing the device that became OptiCast, he breached the fiduciary duties he owed to Zomojo must extend to include a breach of one or more of ss 181(1) and 183(1) of the Corporations Act: see [226] above. Two substantive issues remained in dispute. First, Hurd failed to address the allegation that in the course of developing and marketing OptiCast he breached various clauses of the Service Agreement and, secondly, Hurd expressly denied any relationship between OptiCast and ZeptoLink.
4.2.2.2 Breaches of the Service Agreement
238 Turning first to the alleged breaches of cll 3.1, 3.3, 3.4 and 3.5 of the Service Agreement. The content of those clauses has been addressed earlier: see [19]-[21] and [227]-[233] above. Set out below, by reference to the various clauses of the Service Agreement is a list, cross-referenced to the facts, of those aspects of Hurd's conduct in developing the device that became OptiCast that was in breach of the Service Agreement.
Breaches of cll 3.4 and 3.5 of the Service Agreement
239 Each of the following steps taken by Hurd prior to 12 February 2011 in developing the device that became OptiCast were a breach of cll 3.4 and 3.5 of the Service Agreement. The steps identified establish contraventions of the relevant clauses in at least two respects. Each step taken by Hurd (while he was a co-managing director of Zomojo) was itself in breach of his contractual obligations to use his best endeavours to promote the interests of Zomojo (cl 3.4) and not to be directly or indirectly involved or interested in any other business or occupation which materially interfered with the performance of the Services or competed in any respect with Zomojo's business (cl 3.5). Moreover, the steps cumulatively establish that the development of the device that became known as OptiCast was in breach of cll 3.4 and 3.5. The steps included:
1. Hurd's email to AusOptic on 23 September 2010 that he "had another little enterprise, Zeptonics …": see [71]-[72] above;
2. Hurd's email correspondence with Tabb Group on 24 September 2010 and again on 27 September 2010 that he had "a little start-up just about to release a product …": see [73]-[74] above;
3. Hurd's further email to AusOptic on 29 September 2010 that he had "preannounced on www.zeptonics.com.au and already [had] a couple of interested parties …": see [77] above;
4. Hurd's post to the "Beowulf" blog on 4 October 2010 that he was "associated with a somewhat stealthy start-up …": see [83] above;
5. Hurd on behalf of Zeptonics entering into a NDA with Cavium Networks on 7 October 2010: see [84] above;
6. Hurd's email to Tresmine on 12 October 2010 stating that beside running Zomojo, he had a project "out of [his] garage" that he had been running, "www.zeptonics.com": see [85] above;
7. Hurd on behalf of Zeptonics entered into a NDA with Chopper Trading on 13 October 2010, then sought to market Opticast (as it was then known) to them and provided them with a copy of the Opticast specifications sheet on 15 October 2010 and finally, told them on 23 October 2010 he would arrange for an Opticast to be delivered for evaluation once production was complete: see [86]-[88], [91] and [96] above;
8. Hurd's email correspondence with Ascendtek on 15 and 22 October 2010 in which he stated he was building various platforms and products and obtained information about the latency performance of particular products sold by Ascendtek: see [93] and [95] above;
9. during October 2010, Hurd used a contractor, Kowalewski at Advantage PCB to develop the design of Opticast (as it was then known). Hurd emailed Tresmine on 25 October 2010 that his PCB designs should be ready "late this week" and seeking recommendations for a designer for a particular product: see [97] above;
10. on Friday, 29 October 2010, at 11:08am, (during normal working hours at Zomojo) Hurd contacted Kowalewski using his Zeptonics' email address to progress the development of the schematics for Opticast (as it was then known): see [98] above;
11. during November 2010, Hurd worked on the schematics for OptiCast with Kowalewski and, in doing so, sought advice from Zomojo staff during normal working hours at Zomojo and instructed Kowalewski and at least one Zomojo staff member to keep his "extra-curricular" activities secret: see [102]-[104] above;
12. on 23 November 2010, Kowalewski provided Hurd with draft chassis drawings for OptiCast: see [109] above. On Friday morning, 26 November 2010, (again during normal working hours at Zomojo) Kowalewski emailed Hurd at Zeptonics:
Just between you and me, Matt Chapman's Z10 is slipping while I'm finishing your job. As the driver for both jobs can you give me your take on your job Vs Matt's?
Matt won't need to know why his job is slipping if you choose for me to finish yours. If I surmise the extra work from your email, there's going to be another two or so days …
Hurd admitted that there was a conflict between the task Kowalewski was doing for Zomojo and the task he was doing for Zeptonics. Hurd responded by email that morning: see [109] above;
13. Hurd's email correspondence with Pregastis in relation to Zeptonics' products on 9 December 2010: see [112] above;
14. by mid December 2010, Advantage PCB had finished its work on OptiCast. On Monday, 13 December 2010, it invoiced Hurd at Zeptonics and the invoice was subsequently paid: see [116] above;
15. Hurd's email correspondence with Metromatics on 14 December 2010 about the availability of silicon NICs for use in OptiCast: see [117] above;
16. Hurd's email correspondence with Tibra on 11 and 12 January 2011, when, in response to Tibra expressing interest in low latency devices, Hurd offered the OptiCast unit that could be viewed on Zeptonics' website as well as other low latency products: see [131]-[133] above;
17. Hurd providing Tibra with a Zeptonics NDA on 24 January 2011 as a precursor to Hurd providing Tibra with a specifications sheet for OptiCast: see [141] above; and
18. Hurd's email correspondence with Kowalewski on 3 February 2011 seeking to obtain the latest PCB designs for OptiCast and mechanicals: see [144] above.
Breaches of cll 3.1 and 3.3 of the Service Agreement
240 The steps taken by Hurd prior to 12 February 2011 in developing the device that became OptiCast were also in breach of cll 3.1 and 3.3 of the Service Agreement. In addition to breaches of his contractual obligations to use his best endeavours to promote the interests of Zomojo (cl 3.4) and not to be directly or indirectly involved or interested in any other business or occupation which materially interfered with the performance of the Services or competed in any respect with Zomojo's business (cl 3.5), the steps set out at [239] above which were taken by Hurd in developing the device that became OptiCast also breached his contractual obligation to "diligently perform the Services" (cl 3.1) and his contractual obligation (unless absent) to devote the whole of his time and attention to the performance of Services during normal business hours and at such other times as may reasonably be necessary to Zomojo's business (cl 3.3).
Breach of cl 9 of the Service Agreement – Confidential Information
241 Turning next to the alleged breach of cl 9 of the Service Agreement.
242 Zomojo's submissions did not identify how Hurd misused Zomojo's confidential information in developing OptiCast. There was no evidence of which of the components of confidential information, either individually or collectively, Hurd utilised in inventing OptiCast. Hurd invented OptiCast while he was employed by Zomojo but that fact alone does not inevitably lead to the conclusion that he used Zomojo's confidential information. The claim under cl 9 of the Service Agreement in respect of the OptiCast fails.
Breach of cl 10 of the Service Agreement – Inventions and Assignment
243 Clause 10 of the Service Agreement headed "Inventions and Assignment" was in the following terms:
10.1 The Managing Director … assigns to [Zomojo]:
a. all inventions, discoveries and novel designs whether or not registrable as designs or patents throughout the world;
b. the entire copyright throughout the world in all writing (including but not limited to product designs, product sketches, computer software, source code, object code, flow charts, programmer's notes and other documentation and all adaptions, alterations or modifications of any computer software, source code or object code),
created previously while in [Zomojo's] employ, created now or created in the future as a result of or pursuant to his performance of the Services.
10.2 In addition to disclosing any inventions, discoveries, designs or copyright works referred to in the preceding clause, the Managing Director shall disclose and, if required by [Zomojo], assign to [Zomojo] any other inventions, discoveries, designs or copyright works devised or created by the Managing Director at the request of [Zomojo] during a period for which the Managing Director has been paid by [Zomojo].
10.3 The Managing Director shall both during this agreement and after the expiry or termination of this agreement do all such acts and things, and sign all such documents, as [Zomojo] may reasonably request to secure [Zomojo's] ownership or rights to inventions, discoveries, designs or copyright works referred to in clauses 10.1 and 10.2.
10.4 The Managing Director shall make prompt and full disclosure to [Zomojo] of the evolution, discovery or invention of any invention.
10.5 The Managing Director irrevocably appoints [Zomojo] as his attorney to execute all such documents and do all such things as are required to be executed or done to give effect to the provisions of this clause.
(Emphasis added.)
244 It comprised a number of elements:
1. Hurd agreed to assign to Zomojo all inventions, discoveries and novel designs and copyright in all writing created "previously while in [Zomojo's] employ, created now or created in the future as a result of or pursuant to his performance of the Services" (emphasis added): cl 10.1;
2. Hurd was required to disclose and assign "any other inventions, discoveries, designs or copyright works created by [him] at the request of [Zomojo]" (emphasis added) during the period in which he had been paid by Zomojo: cl 10.2; and
3. Hurd was required to make prompt and full disclosure of "the evolution, discovery or invention of any invention": cl 10.4.
245 Hurd accepted that by developing the device that became OptiCast, he breached his fiduciary duties. Hurd also breached the Service Agreement: see [239]-[240] above. Was Hurd required, under cl 10 of the Service Agreement, to assign to Zomojo the device that became OptiCast? The answer is yes.
246 Hurd denied that OptiCast was an invention. Hurd's position was that the device described in the specifications sheet he supplied to Chopper Trading on 15 October 2010 (see [91] above), was not an actual invention but what he "hoped to invent". In support of his position that there was no actual invention, each time a document was put to him describing OptiCast, Hurd's response was the same – that the claims he made to third parties about OptiCast (including specific characteristics and performance parameters) were lies and that OptiCast did not exist. I reject that evidence. In any event, Hurd's eagerness to establish that OptiCast was "not an invention" is an irrelevant distraction.
247 Under cl 10.1, Hurd was obliged to assign all "inventions, discoveries and novel designs" as well as "the entire copyright throughout the world in all writing (including but not limited to product designs, product sketches, computer software, source code, object code, flow charts, programmer's notes and other documentation and all adaptions, alterations or modifications of any computer software, source code or object code)". Even if OptiCast was not an "invention", it was certainly a discovery or novel design. There was in existence extensive writings relating to OptiCast that had been developed not only by Hurd but also others (including Kowalewski and other Zomojo staff). Those writings included specifications sheets, PCB designs, schematics and circuitry. Each of those was a copyright work.
248 The next question posed by cl 10.1 was whether that "work" was:
... created previously while in [Zomojo's] employ, created now or created in the future as a result of or pursuant to his performance of the Services.
The answer is yes. OptiCast was created while he was employed by Zomojo, including during Zomojo's normal business hours.
249 Next, cl 10.2. It is complementary to cl 10.1. It refers to "any other inventions, discoveries, designs or copyright works devised or created by [Hurd]". Hurd submitted that cl 10.2 did not apply because OptiCast was not an invention, discovery or design created "at the request of the company" and therefore cl 10.2 was irrelevant. Zomojo submitted that, on its proper construction, the phrase "at the request of the company" in cl 10.2 identified the inventions, discoveries or designs that he was required to assign after having disclosed them to Zomojo. Zomojo's construction is the preferred construction. If Hurd's construction of the clause was adopted, cl 10.2 would be rendered otiose.
250 Clause 10.2 has two parts. First, it restates and reinforces cl 10.1. It then imposes an additional obligation – that Hurd disclose to Zomojo any other inventions, discoveries, designs or copyright works devised or created by him while employed by Zomojo. If, after disclosure, Zomojo requests Hurd to assign those inventions, discoveries, designs or copyright works to it, he must do so. Clause 10.1 addresses those inventions, discoveries, novel designs and writings created as a result of or pursuant to Hurd's performance of the Services. Clause 10.2 is dealing with a different situation – inventions that fall outside the reach of cl 10.1. If, as Hurd submitted, that the words "at the request of the company" in cl 10.2 were intended to limit the reach of cl 10 to inventions devised "at the request of the Company", cl 10.2 would be otiose.
251 The next question is whether OptiCast was caught by cl 10.2? The answer is yes. It was an invention, discovery, design or copyright work devised or created by Hurd, a co-managing director, during a period for which he had been paid by Zomojo and which he was required to disclose to Zomojo. If he had, Zomojo would have asked him to assign it to them.
252 Zomojo alleged ZeptoLink was an evolution of OptiCast and/or was similar to OptiCast and that because, as has been found, OptiCast was developed and marketed by Hurd through Zeptonics while he was still a director and employee of Zomojo, Zomojo was entitled to have ZeptoLink assigned to it pursuant to cl 10 of the Service Agreement.
253 Hurd's evidence was limited. He asserted, without proof, that development of ZeptoLink commenced in April 2011 at the earliest when a vendor to Zeptonics suggested that Zeptonics might find its chip useful in a low latency product and that, while ZeptoLink was originally called ZeptoCast, it was not similar and was certainly not the same as OptiCast. He also asserted that he did not "work on ZeptoLink whilst employed by Zomojo". Assertion, without more, is insufficient: see [203] above.
254 There are two separate pieces of contemporaneous evidence. It is to those that I now turn. First, specifications sheets for OptiCast and ZeptoLink and a product brochure for ZeptoLink and, secondly, an email sent from Snowdon (a principal of Zeptonics) to Advantage PCB on 25 May 2011.
255 The specifications sheet for Opticast (as it was then known), which Hurd provided to Chopper Trading on 15 October 2010 (see [91] above), listed the following features:
● Single port input – SFP+
● 16 or 48 port output – SFP+
● Model A = 1G or 10G, selectable by external switch
● Bidirectional Output Port 1 – Rx/Tx
● Unidirectional Output Port 2 – 16/48 - Tx
● Bidirectional air flow for flexible cooling aisle support
● Redundant power
● SPF+ interfaces compliant with SFF-8431
● Typical power consumption 27W/79W for 16/48 fully populated ports
● Max power consumption 60W/120W for 16/48 fully populated ports
● 90-264 VAC 600kHrs MTBF 85% eff. power
● 0C to 70C operating environment
● Operating altitude 3000m
● Start up delay < 2 seconds
● Minimum output rise/fall time 30 picosecondsB
● Some pretty lights
● < 9 nanosecond port to port latency
(5 to 7 ns typical latency)
256 The specifications sheet for ZeptoLink, which was undated save for "© 2012" which appears in the footer of the document, described ZeptoLink as a "network device that delivers re-configurable network connections and packet replication with a negligible latency" and "a 50-port layer 1 circuit switch that can electronically create a circuit between each of its outputs and any input port, forwarding data in around 5 nanoseconds". The specifications sheet for ZeptoLink listed the following features:
Performance highlights
● World's lowest latency ~ 5ns
● Fastest 1-to-49 replication
● Ideal for broadcast and monitoring
● Multiple 1-to-1 (and/or multiple 1-to-n) connections
● Convenient remote re-patching
● 10Mb/s to 10Gb/s throughput
● Hot swap redundant fans and PSUs
257 An undated product brochure for Zeptonics entitled "Product Overview – an overview of the vision, strategy and products in the Zeptonics' pipeline" was also in evidence. Hurd's evidence was that it originated in late 2011. The claims were similar to those in the brochure about ZeptoLink:
ZeptoLink's key feature is its latency: port to port in under 9 nanoseconds, or <0.009 microseconds. …
● Another new type of device
● 50 ports – 10Mb to 10G
● Terabit capable, not just Ethernet
● Replicates any received packet to any group of ports
● Approximately 4-8 nanoseconds port to port latency
● Useful for:
● Market data replication 1 RX to 50 TX ports
● Or other publishing, e.g. vols
● Redundancy support via N way replication
● Replication for audit
● Remote data centre config
● plug in all cables from outside and from rack
● Configure linkages and replication remotely
● Port to port latency
● Signal integrity: CDR + EDC for various speeds
● Redundant, hot swap power and fans
● Integrated local/remote config & management
258 The specifications sheets of the two devices bear some similarities. Both devices are targeted at a common aim; low latency packet replication. How each device achieved that aim was not explained. I accept that two devices may possess similar qualities while still functioning in different ways. In the end, understanding the way each device achieved the common aim – low latency packet replication – is unnecessary. It is unnecessary because of the second piece of contemporaneous evidence – an email Snowdon (as a principal of Zeptonics) sent to Advantage PCB of 25 May 2011 in which he described ZeptoLink as a "second generation opticast": see [158] above. It must be recalled that Advantage PCB had worked on the schematics for OptiCast from at least October 2010: see [98] above. Advantage PCB knew and understood OptiCast. Describing what became known as "ZeptoLink" as a "second-generation Opticast device" was Snowdon's method of telling Advantage PCB that this was not new but a development.
259 Snowdon's description was contemporaneous and, I find, accurate. Snowdon resiled from it during cross-examination. Snowdon's evidence on that matter is rejected. He was an unsatisfactory witness. He was arrogant, defensive and not a truthful witness. He gave evidence that he thought would advance Zeptonics' case and when faced with prior inconsistent statements, his response was as follows:
And that was the true fact. The ZeptoLink was simply an evolution of what had been the Opticast idea? I wouldn't describe it that way.
The fact was he had and he did. Indeed, Hurd himself, at one point, conceded that OptiCast was renamed ZeptoCast and that ZeptoCast was subsequently renamed OptiCast. Hurd also resiled from that evidence. Hurd's attempts to resile from admitting the connection between the OptiCast and ZeptoLink are rejected. It is contrary to the contemporaneous evidence: see [254]-[258] above.
260 Chapman and Associate Professor Philip Leong gave evidence about the two devices. Neither Chapman nor Associate Professor Leong actually examined an OptiCast or a ZeptoLink. Neither device was in evidence. Chapman concluded that the only differences between OptiCast and ZeptoLink was that whereas OptiCast used an optical splitter to replicate packets, ZeptoLink uses an electrical splitter; and whereas OptiCast split a single signal into a fixed number of signals, ZeptoLink has a flexible mapping functionality. Chapman described the latter change as simply a "by-product" of the change from an optical, to an electrical, splitter. Chapman was cross-examined. Despite these differences, I find that ZeptoLink was an evolution of OptiCast for the purposes of cl 10 of the Service Agreement and that it should be assigned to Zomojo.
261 The position with respect to cl 9 of the Service Agreement was different. Zomojo's submissions did not identify how Hurd misused Zomojo's confidential information in developing ZeptoLink. There was no evidence of which of the components of confidential information, either individually or collectively, Hurd utilised in inventing ZeptoLink. Hurd invented OptiCast while he was employed by Zomojo but that fact alone does not inevitably lead to the conclusion that he used Zomojo's confidential information. The claim under cl 9 of the Service Agreement in respect of ZeptoLink fails.
4.2.3 Development and fundraising of the Crosswise ATS
4.2.3.1 Introduction
262 The factual matters relevant to Hurd's development and fundraising in respect of the Crosswise ATS are set out at [90], [93], [94], [95], [101], [105], [106], [107], [108], [110], [111], [112], [113], [114], [115], [118], [119], [120], [121], [122], [123], [124], [125], [127], [128], [129], [130], [131], [132], [133], [138], [139], [140], [142], [146], [155], [156], [160], [163], [164] and [165] above. Hurd conceived of, developed, marketed and sought investors for the Crosswise ATS, all while still a director and employee of Zomojo.
263 Zepto Match is the matching engine component of the Crosswise ATS. Hurd conceded that fundraising activity in respect of Zepto Match or a like product began in late 2010 but contended that no development began until 7 March 2011. It is appropriate to consider Zepto Match with the Crosswise ATS.
264 Zomojo submitted that Hurd's conduct amounted to a breach of cll 3.1, 3.3, 3.4, 3.5, 9 and 10 of the Service Agreement, a breach of ss 181(1) and 183(1) of the Corporations Act and a breach of Hurd's fiduciary duties of fidelity and good faith. Hurd conceded that by engaging in preparatory activity that led to fundraising of the Crosswise ATS up to 11 January 2011, he breached his fiduciary duties. Hurd's admission as to a breach of his fiduciary duties must extend to include a breach of ss 181(1) and/or 183(1) of the Corporations Act: see [226] above. Hurd's concession said nothing about the alleged breaches of the Service Agreement. Further, the date of 11 January 2011 was deliberately chosen by Hurd to seek to exclude the execution of the Crosswise Heads of Agreement later in January 2011. I reject the implication that Hurd was somehow relieved of any of his duties, contractual, statutory or fiduciary, on 11 January 2011. It is necessary to deal with each clause in turn.
4.2.3.2 Breaches of the Service Agreement
265 The content of cll 3.1, 3.3, 3.4, 3.5, 9 and 10 of the Service Agreement has been considered earlier: see [19]-[21] and [227]-[233] above.
Clauses 3.4 and 3.5 of the Service Agreement
266 Each of the following steps taken by Hurd prior to 12 February 2011 in developing the Crosswise ATS was in breach of cll 3.4 and 3.5 of the Service Agreement. The steps identified establish contraventions of the relevant clauses in at least two respects. Each step taken by Hurd (while he was a co-managing director of Zomojo) was itself in breach of his contractual obligations to use his best endeavours to promote the interests of Zomojo (cl 3.4) and not to be directly or indirectly involved or interested in any other business or occupation which materially interfered with the performance of the Services or competed in any respect with Zomojo's business (cl 3.5). Moreover, the steps cumulatively establish that the development of the Crosswise ATS itself was in breach of cll 3.4 and 3.5.
1. Hurd's email correspondence with ABN Ambro on 10 November 2010 about a project out of his garage that he had been running, "www.zeptonics.com" which has three phases including an ATS and Hurd's subsequent correspondence and discussions with ABN Ambro: see [106]-[107] above;
2. Hurd emailed Nunan of CredX on 3 December 2010 stating that he had figured out how to build a "sub micro exchange platform": see [110] above;
3. in early December 2010, Hurd prepared the Crosswise Conceptual Brief which Hurd admitted contained similar claims to those made by Zomojo in respect of its ATS: see [54], [57] and [113] above;
4. on 9 December 2010, Hurd contacted potential investors (including Samsung, ABN Amro, CredX, Optiver and SIG) requesting them to invest in the Crosswise ATS and provided them with a copy of the Crosswise Conceptual Brief: see [115] above;
5. on 16 December 2010, Hurd contacted additional potential investors (including Newedge and other persons at SIG) requesting them to invest in the Crosswise ATS and provided them with a copy of the Crosswise Conceptual Brief: see [118]-[119] above. Hurd conceded that when he stated to potential investors that he had been involved in developing "a matching engine, a risk gateway and the like", he meant that he had been involved, through his position at Zomojo, in doing those things and that his knowledge that a sub-10 microsecond medium latency ATS was possible, that it could achieve throughput of more than a million orders per second, and that it could have a robust and secure design, because that is what Zomojo had achieved with its ATS prototype: see [118] above;
6. on 17 December 2010, Hurd emailed CredX attaching a copy of the Crosswise Conceptual Brief and stating that he had "a couple of immediate bites" from investors: see [120] above;
7. on 20 December 2010, Hurd emailed Gilbert of Newedge enclosing a copy of the Crosswise Heads of Agreement for investment in the Crosswise ATS: see [122] above;
8. on 23 December 2010, Hurd emailed SIG stating he had two Foundation Investors already for the Crosswise ATS but wanted the SIG name on board (see [123] above) and emailed ABN Amro stating that having obtained commitments from investors, he expected to be working through the preliminary work in January (see [123] above). Hurd's intentions were clear – to continue to seek to obtain Crosswise Foundation Investors with a view to establishing the Crosswise ATS while still employed at Zomojo. Hurd was eager to get a start;
9. on 28 December 2010, Hurd emailed Gilbert at Newedge about securing a further Crosswise Foundation Investor. Hurd acknowledged that the value in making the Crosswise ATS work was the technology as he expected that technology would converge over the next three years with differences in latency becoming moot: see [124] above;
10. on 29 December 2010, Hurd emailed the Crosswise Heads of Agreement to Gilbert: see [125] above;
11. on 7 January 2011, Gilbert, Mrs Gilbert, Maddock and Hoddle, all Crosswise Foundation Investors, executed the Crosswise Heads of Agreement: see [127] above. Hurd conceded that he included a confidentiality clause because the information to be exploited by the Crosswise ATS in connection with the proposed business activities was commercially sensitive and confidential in the sense that it had value if it were known to persons outside the Crosswise ATS venture;
12. on 8 January 2011, Hurd emailed three of the Crosswise Foundation Investors (Gilbert, Maddock and Hoddle) thanking them for their support and stating that he would look to resign the following day so that he could return signed Crosswise Heads of Agreement the next day: see [128] above;
13. on 10 January 2011 (the day before he resigned), Hurd entered into a further Crosswise Heads of Agreement with another Crosswise Foundation Investor he had met through Zomojo: see [129] above;
14. on 11 January 2011, Hurd resigned with the intention of immediately devoting himself to the Crosswise ATS and, on the same day, informed Tibra of that fact: see [130]-[131] above;
15. on 20 and 21 January 2011, Hurd and Zeptonics entered into Crosswise Heads of Agreement with three further investors: see [138] above; and
16. on 23 January 2011, Hurd emailed the Crosswise Foundation Investors stating: "I will be full time officially from Feb 11th but am currently at more than full time equivalent in time allocation. Logos, stationery, web, virtual CBD office, accounting, etc, kicking off." Hurd conceded that he was aware that he should not have been engaging in this Crosswise ATS related activity, due to the obligations he owed to Zomojo: see [139] above.
Breaches of cll 3.1 and 3.3 of the Service Agreement
268 Hurd had taken substantial steps to develop and fundraise for the Crosswise ATS before the cessation of his employment at Zomojo. By way of example only:
1. by late October or early November 2010, Hurd's evidence was that he thought the idea of an ATS as the centrepiece of his future business was a "good prospect";
2. on 10 November 2010, Hurd sent an email to van der Poort which stated that he had "had some interest expressed to [him] in developing a local ASX competitor" and proposing "three parallel stages" for the development of an Australian ATS: see [106] above;
3. on 3 December 2010, Hurd sent an email to Nunan of CredX stating that he had figured out how to build a "sub micro exchange platform for a couple of thousand racks", which would "make things interesting": see [110] above. Hurd conceded during cross-examination that what he meant was that he had "worked out while [he was] still at Zomojo that an ATS could be developed using standard equipment rather than customised equipment";
4. Hurd accepted that, by 3 December 2010, he had in fact conceived of the method and the design for a sub 10 micro exchange platform using standard equipment;
5. on 9 December 2010, Hurd sent the Crosswise Conceptual Brief to Pregastis (and six other people). The Crosswise Conceptual Brief described "[a]n ATS powered by innovative technology with a mutually supportive participant ownership structure", "< 10 microseconds median latency response to and from client systems", "> 1,000,000 orders per second throughput", "robust and secure design", "latency and other service monitoring provided to members", "Crosswise will deploy robust Australian developed technology with a single digit microsecond median latency from the customers' point of view. This will be the world's fastest exchange platform. Further progress to a sub-microsecond platform has been designed and will be developed in the fullness of time" and "[t]he protocol will be a familiar protocol with a choice of an efficient and simple Nasdaq-UFO-like protocol and/or an even more familiar BATS/Chi-X like FIX implementation. Market data will be a simple fixed structure UDP broadcast": see [112]-[115] above; and
6. on 23 January 2011, Hurd sent an email to the Crosswise Foundation Investors stating that he was "currently at more than full time equivalent in time allocation": see [139] above.
269 During cross-examination, Hurd attempted to suggest that he had not, in fact, invented or designed the Crosswise ATS in October to December 2010 or January 2011 and that he was undertaking only marketing and fundraising activities at that time. I reject that evidence. The Crosswise Conceptual Brief was a detailed document which set out how the proposed ATS would function. The document was designed to solicit investments, potentially raising over a million dollars. The document referred to further progress toward a sub microsecond platform as having already been designed. Hurd's evidence was that he wanted to "hit the ground running" once he had served out his notice period with Zomojo. As at 23 January 2011, he was "at more than full time equivalent in time allocation". By February 2011, Hurd had raised at least $800,000 from Crosswise Foundation Investors and entered into Crosswise Heads of Agreements with them. It is simply inconsistent with that evidence, and implausible, that Hurd would have prepared a detailed document, such as the Crosswise Conceptual Brief, and intended to "hit the ground running" with nothing more than a bare conception of what it might be possible to do with off-the-shelf hardware.
270 Steps taken by Hurd prior to 12 February 2011 in developing the Crosswise ATS were also in breach of cll 3.1 and 3.3 of the Service Agreement. In addition to breaches of his contractual obligations to use his best endeavours to promote the interests of Zomojo (cl 3.4) and not to be directly or indirectly involved or interested in any other business or occupation which materially interfered with the performance of the Services or competed in any respect with Zomojo's business (cl 3.5), the steps set out at [267] above, which were taken by Hurd in developing the Crosswise ATS, also breached his contractual obligation to "diligently perform the Services" (cl 3.1) and his contractual obligation (unless absent) to devote the whole of his time and attention to the performance of Services during normal business hours and at such other times as may reasonably be necessary to Zomojo's business (cl 3.3).
Clause 9 of the Service Agreement
271 Zomojo alleged that Hurd used his knowledge of the latency, throughput and fault tolerance / redundancy features of Zomojo's ATS in designing, developing, raising funds for and marketing the Crosswise ATS: see [189(1)] above. The evidence established that Hurd's knowledge of what could be achieved by an ATS, whether using off-the-shelf hardware or otherwise, was wholly informed by his experience with Zomojo's attempts to develop and market an ATS over the preceding three years. Hurd accepted that his claim of having "figured out how to build a sub micro exchange platform" was something he had "worked out while [he was] still at Zomojo" Further, he had worked out how to build that platform using standard equipment, again, while at Zomojo and as a function of his duties at Zomojo. In Hurd's words: "we discussed at Zomojo several times that standard networking gear was now fast enough that it made much of the Zomojo FPGA network card irrelevant for that space." Finally, during cross-examination, it was put directly to Hurd that the claims regarding the Crosswise ATS which he made in the Crosswise Conceptual Brief were based squarely upon knowledge he had acquired at Zomojo:
… And in the attached Crosswise conceptual brief where you describe a platform with the highlights identified in the bullet points, you were drawing upon the knowledge you had derived by reason of your role as the co-managing director of Zomojo over the period from July 2005 onwards?—I was drawing upon my knowledge as a technical person knowing that that kind of tech was now available off the shelf.
Yes. You knew that a sub-10 microsecond medium latency alternative trading system was possible, because that is what Zomojo had achieved with its prototype Rapide?—I knew it was possible to achieve with commodity hardware at that stage in time.
Mr Hurd, did you understand my question?—I'm not sure I understood the inference.
HER HONOUR: Don't worry about the inference.
…
HER HONOUR: You have just got to answer the question?—I knew it was possible because of Zomojo's tech, that's correct.
DR COLLINS: Thank you. And you knew it was possible for an alternative trading system to achieve throughput of more than a million orders per second, because that's what Zomojo had achieved with its ATS prototype?—That and other things. Yes.
And you knew, didn't you, that an alternative trading system could have a robust and secure design, because that is what Zomojo had achieved with its ATS prototype Rapide?—Yes, and because of other platforms too.
(Emphasis added.)
Hurd's Crosswise ATS was based upon his knowledge of what Zomojo's ATS was designed to achieve. There were striking similarities between the Crosswise Conceptual Brief and the presentation slides which Zomojo used during its roadshows in respect of its ATS: see [54], [57] and [113] above.
272 At several points during his examination in chief and his cross-examination, Hurd attempted to posit alternative sources from which he obtained knowledge of what could be achieved using off-the-shelf hardware. I reject that evidence. It was self-serving and generalised. Further, given the specialised nature of the information, it was inherently unlikely that Hurd would have obtained that information from a source other than his then employer who possessed that very information and had recently developed its own ATS (with Hurd's intimate involvement) possessing largely the same qualities.
273 Zomojo also relied upon the evidence of Associate Professor Leong to demonstrate the similarities between Zomojo's ATS and the Crosswise ATS. Associate Professor Leong's comparison revealed the following similarities:
1. "Zomojo's Rapide accelerated trading solutions (ATS) technology … is similar to Crosswise … Both have less than 10 microsecond order response time targets …";
2. "[f]or ATS fault tolerance, the following technologies are employed: parallel matching engines; optical splitters so as not to introduce added latency; and deterministic matching engines …"; and
3. "[b]oth companies focus on Korean exchange options and futures contracts".
274 Hurd's expert, Dr Diessel, did not undertake any comparison of Zomojo's ATS and the Crosswise ATS. He accepted that he could find no example in computer science literature of an ATS with the combination of features possessed by Zomojo's ATS: see [188] above.
275 Given the substantial steps taken by Hurd prior to 12 February 2011, the detailed documentation concerning the Crosswise ATS he prepared and the similarities between the claims made by Hurd about the Crosswise ATS and the features of Zomojo's ATS, I find that Hurd used Zomojo's confidential information consisting of the latency throughput and fault tolerance redundancy features of its ATS (see [189(1) above) in breach of cl 9 of the Service Agreement.
Clause 10
276 The facts supporting a finding that Hurd breached cl 9 of the Service Agreement also establish that Hurd conceived of, or invented, the Crosswise ATS prior to 12 February 2011. For those reasons, the Crosswise ATS was an invention, discovery or novel design caught by one or more of cl 10.1 and cl 10.2 of the Service Agreement. Hurd's failure to disclose the Crosswise ATS was a breach of cl 10 of the Service Agreement.
4.2.4 Development and marketing of ZeptoMUX, ZeptoNIC, ZeptoSwitch and ZeptoAccess KRX
277 The factual findings about Hurd's development and marketing of ZeptoMUX, ZeptoNIC, ZeptoSwitch and ZeptoAccess KRX prior to 12 February 2011 are set out at [110] and [133] above. Zomojo alleged that Hurd conceived of the ZeptoMUX, ZeptoNIC, ZeptoSwitch and ZeptoAccess KRX and then proceeded to market those products to Nunan of CredX in December 2010 (see [110] above) and James of Tibra in January 2011 (see [133] above), while he was still a director and employee of Zomojo.
278 Zomojo submitted that Hurd's conduct in relation to those products amounted to a breach of cll 3.4, 3.5, 9 and 10 of the Service Agreement, a breach of ss 181(1) and 183(1) of the Corporations Act and a breach of Hurd's fiduciary duties of fidelity and good faith. Hurd denied that he conceived of the relevant products prior to 12 February 2011.
279 When Hurd invented or conceived of the ZeptoMUX, ZeptoNIC, ZeptoSwitch and ZeptoAccess KRX was far from clear. As noted, Zomojo placed considerable reliance on Hurd's email to Nunan of CredX in December 2010 (see [110] above) and his email to James of Tibra in January 2011 (see [133] above). Those emails are important. It will be recalled that those emails, among other things, referred to "a sub micro exchange platform for a couple of thousand racks", the Crosswise ATS.
280 Hurd was cross-examined about his claim to Nunan in the December 2010 email (see [110] above) that "I've got a design I've worked through for the world's fastest 10G switch", during which the following exchange occurred:
… And when you said:
I've got a design I've worked through for the world's fastest 10G switch.
Was that a reference to the Z10 card?--No.
Was it a reference to a design that you had in fact done?--No, it was just my view that an FGPA (sic) may be able to do those speeds.
So when you said "I've got a design", that was another lie, was it?--It was a – it was a conception in my head that because of the 30 to 50 nanoseconds time in an off FGPA (sic) chip, you may be able to get to a switch design that could be at that speed.
I see. So you had a design in your head for the world's fastest 10G switch?--I had a thought it may be possible.
You had a design in your head?--No, because it's not possible, so obviously I didn't.
281 By 12 January 2011 Hurd was, naturally, further advanced. Hurd required an NDA from Tibra to be in place before providing a specifications sheet for OptiCast because he was not prepared to share information about Zeptonics' products or plans without having a confidentiality agreement in place with potential customers.
282 But it is the balance of the email and the products listed in the final paragraph of the email that are important: see [133] above. There were four products listed, namely:
1. "1–3µs 1G/10G/40G ethernet cards with integrated timing";
2. "World's fastest 10G 24 port switch (double digit ns port to port) though it has limited L2 functionality";
3. "48/64 port L3 data centre switch at 300ns";
4. "Some sub-micro exchange protected DMA stuff".
Hurd did not tell Zomojo about any of these products or the ideas for them.
283 Hurd was cross-examined about these products. He was asked to identify the name given to the product by Zeptonics and asked whether, as at January 2011, there was in existence a Zomojo product or products that were similar. The second and third products may be put to one side – they were never built.
284 In relation to the "1–3µs 1G/10G/40G ethernet cards with integrated timing" (which was a reference to the product that became ZeptoNIC), Hurd admitted in cross-examination that:
1. it was a reference to a network interface card;
2. "integrated timing" was a reference to a timestamping functionality integrated into the firmware of the network interface card;
3. at that time (January 2011), Zomojo had integrated timing on its Z1 and Z10 network interface cards; and
4. the product described in the email is the product that became ZeptoNIC, which is now marketed by the Zeptonics companies as an Ethernet card with integrated timing.
285 In relation to the "some sub-micro exchange protected DMA stuff", Hurd stated that this was a reference to the product that became Zeptonics' gateway although Zeptonics built a software, not a hardware, gateway and the current gateway is not sub-micro.
286 Against that background it is necessary to address Zomojo's claims in relation to the development and marketing of the other products ZeptoMUX, ZeptoNIC, ZeptoSwitch and ZeptoAccess KRX prior to 12 February 2011.
4.2.4.2 Evidence regarding creation of each device
287 There are two issues – what is the device and when was it first developed?
ZeptoMUX
288 The specifications sheet for ZeptoMUX was in evidence. It was undated save that "© 2012" appears in the footer. The specifications sheet described ZeptoMUX as:
A 23-to-1 multiplexing switch that's purpose-built for latency-sensitive trading. Broadly speaking, the ZeptoMux is a 10GbE layer 2 switch that's been stripped of non-essential functionality and re-imagined as a multiplexer/de-multiplexer, or mux.
(Emphasis in original.)
289 ZeptoMUX was described as a device enabling 23 "downstream client ports" to communicate with a single "upstream host port". In that sense, it is the opposite of ZeptoLink. Rather than quickly replicating a single data stream to multiple clients, the stated functionality of ZeptoMUX is to enable those multiple clients to communicate quickly with a single host. The specifications sheet listed what are described as "use cases". One example given involved the use of ZeptoMUX in an exchange to "create a faster, fairer link between multiple gateways and the matching engine". The benefits of using ZeptoMUX in that situation include reduced latency and "[i]n addition, the exchange would be fair – the first message to hit the ZeptoMux would be the first message to hit the exchange. … The market would be made fair by ZeptoMux's determinism."
290 When did it exist? Hurd said there was a prototype of ZeptoMUX in existence in 2011 and that in October 2011 he "got a fully fledged version into the lab". However, in his affidavit evidence, Hurd said the ZeptoMUX was Snowdon's idea, not his, and that Snowdon conceived of ZeptoMUX in April or May 2011. Hurd did not suggest that "world's fastest 10G 24 port switch" (see [110], [133] and [280] above) became the ZeptoMUX. And at no point during Hurd's cross-examination was it put to him that what he was referring to in his emails was ZeptoMUX or what became ZeptoMUX. As is readily apparent, it cannot be concluded that Hurd's "10G 24 port switch" was the ZeptoMUX or that it was created by Hurd prior to 12 February 2011.
ZeptoNIC
291 Hurd's evidence as to the nature of the ZeptoNIC is considered at [284] above. As to when the ZeptoNIC was created, Hurd gave contradictory evidence. Initially, his evidence was that Zeptonics did not start work on ZeptoNIC until March 2011 at the earliest. That evidence was false. As just noted, Hurd accepted during cross-examination that his reference in January 2011 to a "1–3µs 1G/10G/40G ethernet cards with integrated timing" was a reference to ZeptoNIC. I accept that the ZeptoNIC was created by Hurd prior to 11 January 2011 and, therefore prior to 12 February 2011.
ZeptoSwitch
292 ZeptoSwitch was a hypothetical product which was never developed. Hurd accepted that he had "preliminary discussions with potential vendors" in 2010 whilst still employed by Zomojo, but contended that no work was done on the product until March 2011. It was not put to Hurd that his claimed "48/64 port L3 data centre switch at 300ns" (see [133] above) was ZeptoSwitch or what became ZeptoSwitch. It cannot be concluded that ZeptoSwitch was created by Hurd prior to 12 February 2011.
ZeptoAccess KRX and ZeptoRisk
293 ZeptoAccess KRX, formerly known as ZeptoRisk, was a direct market access gateway designed for use on the KRX. Hurd gave evidence that he did not conceive of the idea until March 2011 and it was developed by another Zeptonics staff member.
294 However, Hurd accepted that the reference to "[s]ome sub-micro exchange protected DMA stuff" (see [133] above) was a reference to a gateway: see [285] above. Hurd also accepted that, putting the distinction between hardware and software and micro and sub-micro to one side, the gateway which Zeptonics ultimately developed was the same as the gateway being referred to in his email. It was not put to Hurd that what he was referring to was in fact ZeptoAccess KRX or ZeptoRisk. That is not determinative, however, Hurd's evidence was that Zeptonics' gateway technology had, at various times, been known by different names. Further, it was not disputed that Zeptonics did, in fact, develop a gateway. It entered into an agreement with SunGard in order to supply one: see [159] above. Hurd's reference to "[s]ome sub-micro exchange protected DMA stuff" was a reference to ZeptoAccess KRX (formerly known as ZeptoRisk) or what became ZeptoAccess KRX. ZeptoAccess KRX was created by, or at the very least, commenced to be created by Hurd prior to 12 February 2011.
4.2.4.3 Breaches of the Service Agreement
Cll 3.4 and 3.5 of the Service Agreement
295 The content of cll 3.4 and 3.5 of the Service Agreement has been considered earlier: see [19]-[21] and [227]-[233] above.
296 Hurd's emails to Nunan of CredX on 3 December 2010 (see [110] above) and to James of Tibra on 12 January 2011 (see [133] above) record that in relation to the development and marketing of what became known as ZeptoNIC and ZeptoAccess KRX, Hurd's conduct was in breach of both cll 3.4 and 3.5. Put simply, Hurd was not using his best endeavours to promote the interests of Zomojo when he wrote to Nunan and James and sought to promote products which had been developed, or were in the process of being developed, by him and his company Zeptonics. Further, those emails provide further evidence that Hurd was directly involved in another business which materially interfered with the performance of the "Services" and which competed with the business of Zomojo, in breach of cl 3.5.
Cl 10 of the Service Agreement
297 The contents, and proper construction, of cl 10 have been considered earlier: see [243]-[251] above.
298 Consistent with the express terms of cl 10, Hurd was obliged to disclose and assign to Zomojo each of the inventions, discoveries and novel designs referred to in Hurd's email to Nunan of CredX in December 2010 (see [110] above) and his email to James of Tibra in January 2011: see [133] above. In relation to those inventions, discoveries and novel designs, the evidence disclosed only that:
1. the "1–3µs 1G/10G/40G ethernet cards with integrated timing" was a reference to what became ZeptoNIC (see [284] and [291] above); and
2. the "some sub-micro exchange protected DMA stuff" was a reference to what became ZeptoAccess KRX: see [294] above.
ZeptoNIC and ZeptoAccess KRX should therefore be assigned to Zomojo by reason of Hurd's conduct prior to 12 February 2011.
Cl 9 of the Service Agreement
299 Turning to the alleged breaches of cl 9 of the Service Agreement. It is necessary to again deal with each device in turn.
300 First, ZeptoMUX. Zomojo alleged that Hurd used his knowledge of Zomojo's implementation of fast ordering, speculative transmission and transmit fragmentation techniques in designing, developing and marketing the ZeptoMUX. In support of that contention, Zomojo referred to Hurd's emails to Nunan of CredX on 3 December 2010 (see [110] above) and to James of Tibra on 12 January 2011 (see [133] above). Those emails did not refer to and did not extend to ZeptoMUX. Those emails referred to what Hurd described as the "world's fastest 10G switch", not the ZeptoMUX. Zomojo submitted that ZeptoMUX was a product which evolved from the switch which Hurd conceived of and referred to as the "world's fastest 10G switch". That proposition was not put to Hurd. It is not open to conclude that Hurd used Zomojo's confidential information in the development of the "world's fastest 10G switch" or the ZeptoMUX. Although Hurd admitted that Zeptonics used "partial packet processing" and speculative transmission techniques in ZeptoMUX, the use of "partial packet processing" and speculative transmission techniques was not in breach of cl 9 of the Service Agreement because those elements, on their own or in combination, were not "confidential information" for the purposes of that clause: see [189] above.
301 Second, ZeptoNIC. Zomojo alleged that Hurd used his knowledge of Zomojo's implementation of fast ordering, speculative transmission and transmit fragmentation techniques and the integration of timestamping, logging and passthrough functionality into the firmware of Zomojo's NICs in designing, developing and marketing the ZeptoNIC. Hurd's email to Nunan described the invention of "1–3µs 1G/10G/40G ethernet cards with integrated timing", which Hurd accepted was a reference to the ZeptoNIC: see [284] and [291] above. Hurd accepted that Zomojo's NICs and the ZeptoNIC were physically similar: both possessed 4 SFP ports on the left hand edge (although the ZeptoNIC used the updated SFP+ design), both utilised an FPGA as the central component, both featured an 8 lane PCI express connection on the lower edge and both allowed time synchronisation via a firewire connector. Further, Hurd accepted that he integrated timestamping functionality into the ZeptoNIC and that the ZeptoNIC had logging and passthrough functionality. For those reasons, Hurd used Zomojo's confidential information, including the integration of timestamping, logging and passthrough functionality, in the design and development of the ZeptoNIC in breach of cl 9 of the Service Agreement: see [189(3)] above.
302 Third, ZeptoSwitch. Zomojo did not identify which aspects of its confidential information Hurd was alleged to have used in designing, developing and marketing the ZeptoSwitch. I reject the contention that Hurd used Zomojo's confidential information, either prior to his departure from Zomojo, or otherwise, in relation to ZeptoSwitch.
303 Fourth, ZeptoAccess KRX. Zomojo alleged that Hurd used his knowledge of Zomojo's implementation of fast ordering, speculative transmission and transmit fragmentation techniques in designing, developing and marketing the ZeptoAccess KRX. The reference to "[s]ome sub-micro exchange protected DMA stuff" was a reference to what became ZeptoAccess KRX: see [294] above. Hurd gave evidence that during 2009, when he was a co-managing director of Zomojo, "fast ordering" was first implemented in Zomojo's systems. Hurd's further evidence was that "fast ordering" entailed "the notion of sending part of the packet early". Put another way, fast ordering is a particular implementation of transmit fragmentation. Hurd admitted that he used partial packet processing techniques and speculative transmission techniques in ZeptoAccess KRX. Hurd's admission that the ZeptoAccess KRX used speculative transmission, the process of "starting to transmit an outgoing packet before it's known whether or not it will be required", involved an admission that Hurd used "fast ordering" and transmit fragmentation. That was a breach of cl 9 of the Service Agreement because Hurd used "confidential information" being Zomojo's confidential information in relation to Zomojo's Gateway: see [189(4)] above.
4.2.4.4 Breach of Hurd's Fiduciary Duties
304 Hurd admitted breaches of his fiduciary duties arising out of the preparatory activity that led to fundraising for the Crosswise ATS up to 11 January 2011 and the development of OptiCast, and those admissions must extend to include a breach of ss 181(1) and/or 183(1) of the Corporations Act: see [237] and [264] above. Hurd's email to Nunan of CredX in December 2010 (see [110] above) and his email to James of Tibra in January 2011 (see [133] above) include aspects in relation to the Crosswise ATS. Those emails provide a further basis for Hurd having breached his fiduciary (and statutory) duties he owed to Zomojo as a result of the development and marketing of the other products referred to in the two emails. That finding necessarily extends to include ZeptoNIC and ZeptoAccess KRX, formerly known as ZeptoRisk.
4.2.5 Conclusion
305 If the clock had stopped at the close of 11 February 2011, the position reached would have been:
1. in relation to the diversion of the Newedge opportunity, Hurd breached his fiduciary duties, ss 181(1) and 183(1) of the Corporations Act and cll 3.1, 3.3, 3.4 and 3.5 of the Service Agreement: see [226]-[233] above;
2. in relation to the development and marketing of OptiCast (which became ZeptoLink), Hurd breached his fiduciary duties, ss 181(1) and 183(1) of the Corporations Act and cll 3.1, 3.3, 3.4, 3.5 and 10 of the Service Agreement: see [237]-[240], [243]-[251], [252]-[260] and [304] above. Hurd had not however breached cl 9 of the Service Agreement because there was no evidence of which of the components of confidential information Hurd utilised in inventing OptiCast: see [241], [242] and [261] above. Hurd was obliged to assign OptiCast (which became ZeptoLink) to Zomojo;
3. in relation to the Crosswise ATS, Hurd breached his fiduciary duties, ss 181(1) and 183(1) of the Corporations Act and cll 3.1, 3.3, 3.4, 3.5, 9 and 10 of the Service Agreement: see [264]-[276] and [304] above. Hurd was obliged to assign the Crosswise ATS to Zomojo;
4. in relation to ZeptoNIC, Hurd breached his fiduciary duties, ss 181(1) and 183(1) of the Corporations Act and cll 3.4, 3.5, 9 and 10 of the Service Agreement: see [296], [298], [301] and [304] above. Hurd was obliged to assign ZeptoNIC to Zomojo;
5. in relation to ZeptoAccess KRX, Hurd breached his fiduciary duties, ss 181(1) and 183(1) of the Corporations Act and cll 3.4, 3.5, 9 and 10 of the Service Agreement: see [296], [298], [303] and [304] above. Hurd was obliged to assign ZeptoAccess KRX to Zomojo; and
6. ZeptoMUX (see [288]-[290] and [300] above) and ZeptoSwitch (see [292] and [302] above) were not in existence and, to the extent relevant, Zomojo failed to establish that either device used or incorporated Zomojo's "confidential information".
4.3 Period after 11 February 2011
306 After 11 February 2011, Hurd was no longer an employee (co-managing director) or officer (director and company secretary) of Zomojo. Nevertheless, he continued to owe contractual obligations (cll 9, 10 and 12 of the Service Agreement) and fiduciary duties to Zomojo: see [23]-[27] and [208] above. After leaving Zomojo, Hurd continued to develop and market existing products and further products which drew substantially upon his knowledge of Zomojo's techniques.
307 Consideration of the alleged breaches by Hurd may be grouped into the following categories:
1. development and marketing of OptiCast, ZeptoCast and then ZeptoLink;
2. development and marketing of ZeptoMUX, ZeptoNIC, ZeptoSwitch and ZeptoAccess KRX;
3. further development and marketing of the Crosswise ATS;
4. dealings with Newham, Snowdon and Fitzpatrick;
5. Zepto Markets and SunGard; and
6. Zeptonics and Leading.
4.3.1 Development and marketing of OptiCast, ZeptoCast and then ZeptoLink
308 After 11 February 2011, Hurd set about further developing and marketing OptiCast – a product that became known as ZeptoCast and then ZeptoLink.
309 So, for example, after 11 February 2011, Hurd not only continued to design and develop but was in fact marketing ZeptoLink: see [155] above. That conduct continued: see [158], [160], [164], [254] and [256]-[259] above. That conduct was, and remained, in breach of the fiduciary duties Hurd continued to owe to Zomojo and s 183(1) of the Corporations Act: Spotless Group Ltd v Blanco Catering Pty Ltd (2011) 93 IPR 235 at [27]. That conduct did not, however, breach cl 9 of the Service Agreement because there was no evidence of which of the components of confidential information Hurd utilised in inventing OptiCast: see [241], [242] and [261] above.
4.3.2 Further development and marketing of the Crosswise ATS
310 On 26 and 27 August 2011, Hurd and other Zeptonics staff made a presentation entitled "Crosswise: Introducing Australia's Newest ATS Project": see [163] above. The similarities between that presentation and that made in relation to Zomojo's ATS were striking: cf [54] and [57] above. The similarities were not coincidental. They exist because the form and content of Zeptonics' presentation had its genesis in Zomojo: see [271] above. In fact, Hurd conceded that those similarities were not a matter of pure coincidence, his evidence was that "[he] prepared the first set and [he] prepared the second set". That was not the only further development and marketing of the Crosswise ATS: see [155], [156], [160], [163], [164] and [165] above.
311 That conduct was, and remained, in breach of the fiduciary duties Hurd continued to owe to Zomojo, s 183(1) of the Corporations Act and cl 9 of the Service Agreement.
4.3.3 Development and marketing of ZeptoMUX, ZeptoNIC, ZeptoSwitch and ZeptoAccess KRX
312 The factual matters relevant to Hurd's development and marketing of ZeptoMUX, ZeptoNIC, ZeptoSwitch and ZeptoAccess KRX (aka ZeptoRisk) after 11 February 2011 are set out at [155], [157]-[162], [166], [167] and [288]-[294] above.
313 Zomojo submitted that Hurd's conduct in respect of each amounted to a breach of cl 9 of the Service Agreement, s 183(1) of the Corporations Act and his fiduciary obligations of fidelity and good faith. The content of cl 9 has been considered earlier: see [175]-[199] above. It was valid and enforceable for a period of one year after termination of the Service Agreement: see [199] above. The content of s 183(1) of the Corporations Act and Hurd's fiduciary duties has also been addressed: see [204]-[208] above.
314 In summary, the steps taken by Hurd in relation to development and marketing of ZeptoMUX were as follows:
1. on 25 May 2011, Snowdon sent an email to Advantage PCB which attached schematics for the ZeptoMUX: see [158] above;
2. on 16 June 2011, Hurd told Chardaloupas he had "the world's fastest 10G switch like device in the wings", which was the ZeptoMUX: see [160] above;
3. on 26 and 27 August 2011, Hurd and others at Zeptonics gave a presentation in respect of the Crosswise ATS which included claims and details in respect of ZeptoMUX: see [163]-[164] above; and
4. in October 2011, Hurd submitted an application for funding to Commercialisation Australia, a component of which was ZeptoMUX, described as "the world's lowest latency 10G Ethernet switch device with pre-production prototypes working in the lab": see [172] above.
315 Further, a series of specifications sheets, undated save for "© 2012" in the footer, detailing the features of ZeptoMUX were in evidence. Hurd was cross-examined regarding a document entitled "Zeptonics: Product Overview": see [257] above. That document also included claims about Zeptonics' "fabric technology", including ZeptoMUX. Hurd was also cross-examined regarding a document entitled "Negative Latency". That document stated that "Zeptonics is setting new latency benchmarks with our ZeptoMux (<120ns), … coming into production in 2012".
316 The evidence was consistent with the conclusion that, following the cessation of his employment by Zomojo, Hurd continued to develop and market the ZeptoMUX.
317 None of that conduct breached cl 9 of the Service Agreement, Hurd's continuing fiduciary duties owed to Zomojo or s 183(1) of the Corporations Act: see [300] above.
318 As a result of Hurd's conduct prior to 12 February 2011, ZeptoNIC was designed and developed in breach of cl 9: see [301] above. Of course, that position did not alter after 11 February 2011. Moreover, after 11 February 2011, Hurd continued to design, develop and market ZeptoNIC: see [155], [157], [158], [160] and [162] above.
319 A product brochure released in late 2011 included the following claims about ZeptoNIC:
ZeptoNIC v1 is a 4 port 100Mb to 10G capable FPGA 8 lane PCIe Gen2 network interface card (NIC) with timing and packet replication support.
… The broad range of bandwidth support for direct connection to low bandwidth exchanges such as OSE and TSE, low latency signal integrity features and single digit nanosecond packet replication engine integration make this card unique.
… As a general network interface the card will have the advantage of integrating with the ZeptoChron timing framework via its on board support for PPS and serial timing signals.
Even if contrary to the views earlier formed (see [301] above), Hurd had not used Zomojo's confidential information prior to 12 February 2011, by late 2011 it was evident that he had used his knowledge of Zomojo's implementation of fast ordering, speculative transmission and transmit fragmentation techniques and the integration of timestamping, logging and passthrough functionality into the firmware of Zomojo's NICs in designing, developing and marketing the ZeptoNIC after 11 February 2011 in breach of cl 9 of the Service Agreement and in breach of the continuing fiduciary duties owed to Zomojo and in breach of s 183(1) of the Corporations Act.
320 As noted above, the claims about ZeptoSwitch fail at the outset: see [292] and [302] above. There was no evidence about what steps, if any, Hurd took after 11 January 2011 in relation to ZeptoSwitch.
4.3.2.4 ZeptoAccess KRX
321 As a result of Hurd's conduct prior to 12 February 2011, the ZeptoAccess KRX gateway was designed and developed in breach of cl 9: see [303] above. Of course, that position did not alter after 11 February 2011. Moreover, after 11 February 2011 Hurd continued to design and develop a direct market access gateway, both in relation to the KRX and otherwise: see [155], [157], [159], [160], [162], [163]-[168] and [293]-[294] above. In summary, those steps were as follows:
1. on 9 March 2011, Hurd sent a specifications sheet to SunGard which described the features of "Protected DMA gateways": see [155] above;
2. on 16 June 2011, Hurd sent an email to Chardaloupas describing the features of Zeptonics' "risk gateways": see [160] above;
3. on 30 July 2011, Hurd declined to bid for Newedge's business but mentioned that Zeptonics was "targeting a release of a UDP based sub 200ns risk protected gateway appliance late 2011 with a sub 300ns TCP based release in 2012": see [162] above;
4. on 26 and 27 August 2011, Hurd and Zeptonics' staff gave a presentation regarding the Crosswise ATS which included details and specifications for ZeptoRisk: see [163]-[164] above;
5. on 28 September 2011, Hurd sent an email to Chardaloupas discussing the design and implementation of eight gateways for Newedge: see [165] above; and
6. on 21 November 2011, Karonis, on behalf of Zeptonics, sent an email to Shin which described the features of Zeptonics' gateways and stated that "[r]ight now we are in the final stages of development of a KRX order gateway and KRX market data gateway": see [168] above.
322 In October 2011, Zeptonics entered into the Leading Agreement: see [166]-[167] above. Zeptonics agreed to provide a direct market access gateway to the KRX. Hurd accepted that negative latency was the main selling point. The Leading Agreement included a "description of negative latency" which stated that "[t]hese savings can be measured quite accurately by comparing latencies with the magic tricks turned on and turned off and comparing median KRX response times". Hurd accepted that the reference to "magic tricks" was deliberately designed to obscure the precise techniques used by Zeptonics to achieve negative latency.
323 In early 2012, Zeptonics prepared a negative latency specifications sheet which was used to explain the concept to potential clients. The specifications sheet described the features of a product known as "ZeptoDMA Korea". Hurd gave evidence that was one of the names by which ZeptoAccess KRX was formerly known. Hurd accepted that speculative transmission was one of the methods Zeptonics used to achieve negative latency, which was used in ZeptoAccess KRX.
324 Further, a specifications sheet, undated save for "© 2012" in the footer, detailing the features of ZeptoAccess KRX was in evidence. Hurd was cross-examined regarding another document entitled "Zeptonics: Product Overview": see [257] above. That document also included claims about Zeptonics' "fabric technology", including ZeptoRisk.
325 Hurd's conduct was, and remained, in breach of the fiduciary duties Hurd continued to owe to Zomojo, of s 183(1) of the Corporations Act and of cl 9 of the Service Agreement: see [303]-[304] and [305(5)] above.
4.3.4 Dealings with Newham, Snowdon and Fitzpatrick
326 The factual matters relevant to Hurd's dealings with Newham, Snowdon and Fitzpatrick are set out at [92], [99], [101], [108], [142], [145]-[154] above. In Hurd's own words, he "had a hope that some Zomojo employees would come across and that's why [he] sought some legal advice to make sure that [he] didn't do anything that would breach [his] employment contract".
327 Zomojo submitted that Hurd's conduct amounted to a breach of cl 12.1(b) of the Service Agreement. Hurd submitted that cl 12.1(b) was a restraint of trade which was prima facie void. Even if cl 12.1(b) was valid, Hurd submitted that he had not breached cl 12.1(b) on its terms because the clause prohibited the making of an offer of employment and neither he nor Center actually approached Newham, Fitzpatrick or Snowdon. Rather, each approached him. In the alternative, if the restraint was effective even where the staff sought out and requested that employment, Hurd submitted that none of Newham, Fitzpatrick or Snowdon were actually employees of Zomojo at the time when the relevant offers of employment were made. As a result, and because cl 12.1(b) did not prohibit counselling or procuring a person to resign, Hurd submitted that he had not breached cl 12.1(b).
328 There are two issues: (1) what is the proper construction of cl 12.1(b) of the Service Agreement and (2) in light of that construction, was Hurd's conduct a breach?
329 Turning to the first issue, Hurd's submissions raise two matters concerning the construction of cl 12.1(b). First, does it apply where it is the relevant employees who seek out the employment? Second, does it extend only to the enticement of current employees of Zomojo? It is unnecessary to resolve either question because:
1. Hurd in fact approached each of Newham, Snowdon and Fitzpatrick: see [142] and [147]-[154]; and
2. the relevant conduct occurred prior to the end of the notice periods of each employee: see [142] and [145]-[154] above.
330 Turning to the second issue, Hurd's conduct began in late 2010. Hurd and Newham discussed OptiCast using instant messages in October 2010: see [92] above. In late 2010, Hurd took Newham into his confidence about his frustrations with Zomojo and his future plans. Hurd had been in similar discussions with Snowdon in late 2010: see [99] above. Fitzpatrick was the last to be informed of Hurd's plans. Nevertheless, Hurd's discussions with him occurred prior to the end of Hurd's notice period and before Fitzpatrick had even indicated his desire to resign from Zomojo: see [142] above.
331 None of those steps, taken alone, constituted a breach of cl 12.1(b). Hurd had not offered employment to any of Newham, Snowdon or Fitzpatrick or counselled or procured anyone else to do so. Further, cl 12.1(b), in its terms, applies only after termination of the Service Agreement between Hurd and Zomojo.
332 However, by the end of January 2011, or early February 2011, each had not only discussed with Hurd the fact that Hurd intended to leave Zomojo and start a new business, but each had expressed a desire to work with Hurd again in the future. Hurd reciprocated that desire in each case.
333 On 28 January 2011, Newham resigned: see [142] above. On about 31 January 2011, Hurd sought advice from DibbsBarker about employing former Zomojo employees: see [142] above. His motivation for seeking that advice was telling. He gave evidence that "the staff had expressed interest". Hurd's evidence was calculated to suggest that he took no positive step to enliven that interest and that, as he submitted, the staff would have followed him anywhere.
334 The advice Hurd eventually received from DibbsBarker was not in evidence. An email exchange between Hurd and DibbsBarker on 9 February 2011, however, was in evidence. As mentioned at [145] above, in response to the suggestion that Hurd had enticed a Zomojo staff member to resign, Hurd said to Sloan that:
Would like to know which employee they believe I have solicited as many have requested I take them but my standard line has been that I may not be able to. The three names I've mentioned I have said I would like to find a way if I legally can but that may not be possible. Scott Newham resigned as he was sick of the crappy work he was doing at the time and he expected to be picked up by me, I asked him not to as it may make it complicated for me and there was no certainty I could employ him, but, alas he did anyway. I do feel a [sic] obligation to him and, as discussed, need to find a reasonable strategy to bringing him and other staff across.
(Emphasis added.)
335 The matters emphasised in the quote from Hurd's email above suggests several things: (1) he had discussions with "many" employees but delivered a standard response which was that he "may not be able to", (2) he had already mentioned Newham, Snowdon and Fitzpatrick to DibbsBarker as potential targets for recruitment, (3) Newham "expected" to be hired by Hurd and, although Hurd had discouraged him and there was "no certainty" Hurd could employ him, Hurd felt an obligation to him and (4) Hurd needed to find a "reasonable strategy" for bringing Newham and other staff across. At that time, Newham was still employed by Zomojo and was serving his notice period. In the circumstances, it is open to infer that Hurd had earlier indicated to Newham that he might be able to employ him, although there was no certainty, and that Newham subsequently resigned from Zomojo.
336 On 22 February 2011 Hurd sent an email to each of Fitzpatrick and Snowdon in the terms considered at [147] above. That email was sent on DibbsBarker's advice. Further, as mentioned at [147] above, it had the effect of causing Fitzpatrick and Snowdon to resign, serve out their notice period and approach Hurd (via Center) for employment. Snowdon gave evidence that he interpreted the email as suggesting that he do so.
337 By 25 February 2011, Hurd had made an arrangement with Center which Hurd accepted was focused on recruiting three "known names", who were Newham, Snowdon and Fitzpatrick: see [148]-[149] above. Hurd would not have taken that step, and offered to pay Center $10,000, if his intentions with respect to Newham, Snowdon and Fitzpatrick had not become more certain. It is open to infer that Hurd then intended to make offers of employment to each of Newham, Snowdon and Fitzpatrick. That arrangement coincided with Newham's last day at Zomojo. Center placed an advertisement on "seek.com.au" and Newham subsequently found and responded to that advertisement all on the same day: see [150] above. I reject the suggestion that the timing was purely coincidence. Hurd was acting on the advice of DibbsBarker as to the "reasonable strategy" that he should adopt. Hurd accepted that the strategy which was proposed included the use of a recruitment firm. I do not accept that it was purely coincidence that the giving of that advice, Hurd's decision to act on the advice, Hurd's meeting with Center, Center's placing of a job advertisement and Newham's responding to that advertisement all occurred on the same day.
338 Zomojo submitted that the process of using a recruitment agency to engage Newham, Fitzpatrick and Snowdon was a sham. I accept that submission. Hurd sought DibbsBarker's advice, and acted upon it, because he had a desire to employ Newham, Fitzpatrick and Snowdon. While he couched the promises he had made to Newham in terms of there being "no certainty" as to whether he could employ him, I accept that the reason he felt "a [sic] obligation" was because he had agreed to offer Newham employment. I also accept that he "need[ed] to find a reasonable strategy to bringing [Newham] and other staff across" for the same reason. Hurd's email to the Crosswise Foundation Investors confirms Hurd's state of mind on 21 February 2011 (that is, prior to Newham's last day at Zomojo) (see [146] above). Hurd gave the investors a timeline for the recruitment of further employees which was nearly identical with what eventually occurred. Hurd stated that he was "awaiting legal clearance on process to hire". I accept that, by then, Hurd's plans were essentially fully formed, subject only to "legal clearance". His emails to Fitzpatrick and Snowdon the next day were sent in furtherance of those plans and pursuant to that "legal clearance".
339 In those circumstances, Hurd breached cl 12.1(b). While it was Newham, Snowdon and Fitzpatrick who ultimately applied for the jobs which they were given, and it was Center who facilitated that process, Hurd's conduct in breach of cl 12.1(b) occurred well before that date. He had indicated to each of Newham, Snowdon and Fitzpatrick that he would employ them, subject to "legal clearance". On about 22 February 2011, he obtained "legal clearance". I do not accept that Hurd sent the email to the Crosswise Foundation Investors and engaged Center all on the mere hope that Newham, Snowdon and Fitzpatrick would each apply for jobs. The course which Hurd adopted was deliberate and calculated. He would not have adopted it without some assurance that each of Newham, Fitzpatrick and Snowdon were willing and able to engage in it. By canvassing their interest, indicating that he would hire them and adopting the course above, Hurd breached cl 12.1(b).
340 That leaves a legal issue – was cl 12.1(b) invalid as a restraint of trade? The principles concerning the validity of a restraint have been addressed earlier in relation to cl 9: see [179] above. Two principles are of particular significance in the context of cl 12: (1) whether a restraint is reasonable is a question of law and not of fact (see [179(5)] above) and in determining whether a restraint is reasonable the Court should consider what was necessary to protect the legitimate interests of the person asserting the restraint in the circumstances of the case, assessed from the date of making the contract and making the best possible estimate of probabilities and contingencies then foreseeable (see [179(6)] above).
341 The terms of cl 12 are set out above: see [24]-[25] above.
342 The Service Agreement was entered into on 2 December 2005. As noted at [9] above, as early as May 2005, Hurd identified that "[s]ecrecy and staff retention is very important to maintaining proprietary advantage". One of the principal risks that Zomojo faced was "important staff leaving which enough IP [intellectual property] in their heads to competitively hurt the venture" see [9] above. Hurd's own contemporaneous analysis was a reasonable estimate of the probabilities and contingencies then foreseeable. It was foreseeable that Zomojo's market advantage would be its proprietary methods and techniques and, consistent with view, it was Zomojo's staff that had Zomojo's proprietary methods and techniques "in their heads". It would be an odd result if Hurd was entitled to thwart the limitation on using Zomojo's proprietary methods and techniques simply by hiring Zomojo's employees. It was therefore necessary, in order to protect Zomojo's legitimate business interests, that its employment agreements contain some form of restraint upon offering employment or business opportunities to Zomojo's employees (cl 12.1(b)). The clause was not invalid.
4.3.5 Zepto Markets and SunGard and Zeptonics and Leading
343 The facts relevant to Hurd's dealings with SunGard and Leading are set out at [155], [157], [159], [166], [167] and [170] above.
344 Zomojo submitted that Hurd breached cl 12.1(c) of the Service Agreement by causing Zepto Markets to enter into the SunGard Agreement and by causing Zeptonics to enter into the Leading Agreement. Hurd submitted that cl 12.1(c) was a restraint of trade which was prima facie void. Hurd further submitted that, even if cl 12.1(c) was valid, a breach of cl 12.1(c) will only be established where the company the subject of the breach is "involved with the trading of securities on any of the exchanges listed in item 10 of Schedule A".
345 In the Amended Statement of Claim dated 9 September 2012, Zomojo alleged that Zeptonics and Zepto Markets were both entities that fell within cl 12.1(c). Hurd gave evidence that neither Zeptonics nor Zepto Markets conducted any trading of securities on any of the exchanges listed in Item 10 of Sch A. In his written submissions, Hurd admitted that he had offered advice and assistance in the restraint period to a company that was involved in trading on a named exchange, but contended that such a breach did not make good the pleaded allegation. Presumably, the companies which Hurd's admission related to were SunGard and Leading, not Zeptonics and Zepto Markets. Zomojo did not challenge Hurd's claim that Zeptonics and Zepto Markets were not involved in any trading of securities. Rather, at the conclusion of the trial, Zomojo sought leave to file a Further Amended Statement of Claim which addressed the evidence led at trial and, most, importantly, Hurd's admission. Zomojo sought leave to amend the allegation to plead that SunGard and Leading, instead of Zeptonics and Zepto Markets, were the subject of the alleged breaches of cl 12.1(c). Hurd objected to Zomojo being granted leave. He did not specify any ground of objection. I would permit the amendment.
346 Hurd breached cl 12.1(c) by causing Zepto Markets to enter into the SunGard Agreement and by causing Zeptonics to enter into the Leading Agreement. Hurd offered advice and assistance to SunGard and Leading. SunGard and Leading were both "involved with the trading of securities on any of the exchanges listed in item 10 of Schedule A": see [24] and [344] above.
347 That leaves the remaining legal issue – was cl 12.1(c) invalid as a restraint of trade? The principles have been addressed earlier: see [179] above.
348 Again, the starting point in determining the reasonableness (and therefore the validity) of cl 12.1(c) is a consideration of what was necessary to protect Zomojo's legitimate interests in the circumstances of the case, assessed from the date of making the Service Agreement and making the best possible estimate of probabilities and contingencies then foreseeable: see [179(6)] above. The circumstances surrounding the entry into the Service Agreement are summarised at [8]-[37] above.
349 Was it necessary to protect Zomojo's legitimate business interests that the Service Agreement contain some form of restraint upon Hurd being employed by, providing services or advice or otherwise assisting any company or entity involved with the trading of securities on any of the exchanges listed in Item 10 of Sch A? The answer is yes. The terms of cl 12.1(c) were limited in time: see cl 12.
350 As to its subject matter, it is also limited to entities and activities "involved with the trading of securities". As Hurd's initial proposal for Zomojo recorded (see [9] above), one of Zomojo's advantages was its speed. That speed came from its technology. It was foreseeable that Zomojo's market advantage would be its proprietary methods and techniques and, consistent with view, it was Zomojo's staff that had Zomojo's proprietary methods and techniques "in their heads". Consistent with that analysis, it was reasonable to restrain Hurd from assisting Zomojo's competitors for a period of 12 months. Hurd's own contemporaneous analysis was a reasonable estimate of the probabilities and contingencies then foreseeable. It was therefore necessary, in order to protect Zomojo's legitimate business interests, that its employment agreements contain some form of restraint upon the activities identified in cl 12.1(c) for a period of 12 months.
4.3.6 Conclusion
351 Arising only from the conduct after 11 February 2011, the position is:
1. in relation to the development and marketing of OptiCast (which became ZeptoLink), Hurd breached his fiduciary duties and s 183(1) of the Corporations Act: see [309] above. Hurd did not however breach cl 9 of the Service Agreement because there was no evidence of which of the components of confidential information Hurd utilised in inventing OptiCast: see [308]-[309] above.
2. in relation to the Crosswise ATS, Hurd breached his fiduciary duties, s 183(1) of the Corporations Act and cl 9 of the Service Agreement: see [310]-[311] above;
3. in relation to ZeptoNIC, Hurd breached his fiduciary duties, s 183(1) of the Corporations Act and cl 9 of the Service Agreement: see [318]-[319] above;
4. in relation to ZeptoAccess KRX, Hurd breached his fiduciary duties, s 183(1) of the Corporations Act and cl 9 of the Service Agreement: see [321]-[325] above;
5. in relation to his dealings with Newham, Snowdon and Fitzpatrick, Hurd breached cl 12.1(b) of the Service Agreement: see [326]-[342] above; and
6. in relation to the SunGard and Leading Agreements, Hurd breached cl 12.1(c) of the Service Agreement: see [343]-[350] above.
4.4 Claims against Corporate Respondents
352 Zomojo's claims against each of the Corporate Respondents may be divided into two categories:
1. a knowing assistance claim against all of the Corporate Respondents in respect of Hurd's breaches of his fiduciary duties; and
2. a claim against Zeptonics, MD Hammer Pty Ltd (MD Hammer) and Zepto Markets for inducing Hurd to breach cl 12 of the Service Agreement.
353 Zomojo submitted that Zeptonics, Crosswise Pty Ltd (Crosswise), Zepto Markets, Zepto Fabrics Pty Ltd (Zepto Fabrics), Zeptoip and Trademach Pty Ltd (Trademach) each knowingly assisted in Hurd's breaches of fiduciary duties and therefore were liable to account for any resulting gains. Zomojo abandoned its claim that MD Hammer knowingly assisted Hurd's breaches of fiduciary duty.
354 There are two limbs of accessorial liability: knowing receipt and knowing assistance. To succeed against a person under the first limb it must be established that property acquired through a breach of a fiduciary duty has been received by the person in the knowledge that such property was received in breach of a fiduciary duty: Belmont Finance Corporation v Williams Furniture Ltd (No 2) [1980] 1 All ER 393; Linter Group Ltd (in liq) v Goldberg (1992) 7 ACSR 580 at 623–6; Farrow Finance Company Ltd (in liq) v Farrow Properties Pty Ltd (in liq) [1999] 1 VR 584 at [152]; Robins v Incentive Dynamics Pty Ltd (in liq) (2003) 175 FLR 286 at 299–30. To succeed under the second limb it must be shown that the person gave assistance to a fiduciary with knowledge of a "dishonest and fraudulent design on the part of the trustee or fiduciary": Farah Constructions Pty Ltd v Say-Dee Pty Ltd (2007) 230 CLR 89 at [160]. Zomojo relied upon the second limb.
355 Zomojo relied on the following matters as establishing the elements of knowing assistance in respect of each Corporate Respondent:
1.1 Hurd was at all times a director and secretary and the controlling mind of Zeptonics;
1.2 Hurd was, until 22 February 2012, the holder of all the issued shares in Zeptonics;
1.3 Hurd caused Zeptonics to enter into the Leading Agreement; and
1.4 Zeptonics developed, marketed and markets the products OptiCast, ZeptoCast, ZeptoLink, ZeptoMUX, ZeptoNIC and ZeptoAccess KRX;
2.1 Hurd was at all times a director of Crosswise;
2.2 Hurd was, until 22 February 2012, the holder of 100,000 of the 300,000 ordinary shares in Crosswise;
2.3 Hurd raised significant funds for Crosswise; and
2.4 Crosswise developed and marketed the Crosswise ATS, including by presentations at which Hurd made representations as to the latency, throughput and redundancy capabilities of the Crosswise ATS;
3. In respect of Zepto Markets:
3.1 Hurd was at all times a director of Zepto Markets;
3.2 Hurd was, until 22 February 2012, the holder of all the issued shares in Zepto Markets;
3.3 Hurd caused Zepto Markets to enter into the SunGard Agreement; and
3.4 Zepto Markets is engaged in the business of marketing and selling Zeptonics' gateway products, such as ZeptoAccess KRX, to professional traders and institutions;
4. in respect of Zepto Fabrics:
4.1 Hurd was at all times a director of Zepto Fabrics; and
4.2 Zepto Fabrics was incorporated for the purpose of exploiting ZeptoMUX, ZeptoLink and any future products related to networks or fabrics;
5. in respect of Zeptoip:
5.1 Hurd was at all times a director of Zeptoip;
5.2 Hurd caused Zeptoip to file a patent application relating to what he calls "negative latency", but which is in fact an implementation of Zomojo's fast ordering, speculative transmission and transmit fragmentation techniques; and
5.3 Zeptoip is engaged in the lodgement of all patents and trademarks concerning Zeptonics' business;
6. in respect of Trademach: Trademach is a party to a licensed trading agreement with a Japanese asset management company involving the use of Zeptonics' products, and has tested trades on the KRX futures and options exchange.
356 Hurd submitted that Zomojo failed to particularise what assistance was actually given. It was not put to Hurd that any assistance was given with knowledge of a fraudulent or dishonest design. In fact, in Hurd's submission, there was no evidence that there was such a fraudulent or dishonest design in the first place. Hurd submitted that Zomojo had to meet a high standard of proof to establish a dishonest and fraudulent design, and it had failed to do so.
357 Zomojo has to meet a high standard of proof: Briginshaw v Briginshaw (1938) 60 CLR 336; see also Bell Group Ltd (in liq) v Westpac Banking Corp (No 9) (2008) 39 WAR 1 at [4726]. It has met that standard. Hurd engaged in a prolonged course of conduct designed to benefit his own interests, rather than Zomojo's interests, which involved numerous breaches of his contractual, statutory and fiduciary duties. That course of conduct began long before Hurd's employment with Zomojo ceased and included a deliberate attempt to conceal his conduct from his employer and not to attract their suspicions. Hurd's conduct was a most fundamental breach of the obligations owed by employee to employer and by director to company. Hurd attempted to take for himself inventions which were conceived as a result of the use of Zomojo's confidential information and opportunities which presented themselves to him as a result of his position as managing director of Zomojo. Hurd's conduct evinces the requisite "dishonest and fraudulent design".
358 As to the assistance that was given, Zeptonics and Crosswise were corporate vehicles which Hurd established to take the benefit of his breaches of duty: see [355(1) and (2)] above. Zeptonics was the entity through which Hurd developed and marketed ZeptoLink (including OptiCast and ZeptoCast before it), ZeptoMUX, ZeptoNIC and ZeptoAccess KRX. Zeptonics was the contracting party through which Hurd entered into the Leading Agreement.
359 Crosswise was the entity through which Hurd solicited and obtained investors and marketed and developed the Crosswise ATS. Zepto Markets, formerly Zepto DMA, was a company Hurd established to "attached [sic] future work to and perhaps change this contract to" (referring to the SunGard Agreement). Zepto Markets was engaged in the business of marketing and selling Zeptonics' gateway products, such as ZeptoAccess KRX, to professional traders and institutions. Hurd established Zepto Fabrics on 7 March 2012 to exploit the ZeptoMux and ZeptoLink and any future products related to networks or fabrics. Also on 7 March 2012, Hurd incorporated Zeptoip, to hold Zeptonics' intellectual property including patents and trade marks. Hurd caused Zeptoip to file a patent application relating to what he called "negative latency", but which was in fact an implementation of Zomojo's fast ordering, speculative transmission and transmit fragmentation techniques.
360 On 14 February 2012, Hurd established Trademach. In March 2012, Trademach started conducting test trades on the KRX futures and options exchange. On 15March 2012, Trademach entered into a licence agreement with Leading, which relates to, among other things, the use of Zeptonics' products.
361 Each of Zeptonics, Crosswise, Zepto Markets, Zepto Fabrics, Zeptoip and Trademach provided assistance to Hurd. Hurd's knowledge of his own dishonest and fraudulent design is to be imputed to Zeptonics, Crosswise, Zepto Markets, Zepto Fabrics, Zeptoip and Trademach: Endresz v Whitehouse [1998] 3 VR 461; Morlea Professional Services Pty Ltd v Richard Walter Pty Ltd (in liq) (1999) 96 FCR 217; Yore Contractors Pty Ltd v Holcon Pty Ltd (1990) 2 ACSR 663 and Ford H, Austin R and Ramsay I, Principles of Corporations Law (Butterworths, subscription service) at [16.220] (Service 77).
4.4.2 Inducing breach of contract
362 Zomojo's written submission focused on cl 12.1(c) and the SunGard and Leading Agreements. Zomojo contended that:
1. Zeptonics induced Hurd to breach cl 12.1(c) of the Service Agreement by entering into the Leading Agreement; and
2. Zepto Markets induced Hurd to breach cl 12.1(c) of the Service Agreement by entering into the SunGard Agreement.
The Further Amended Statement of Claim, however, also pleaded that Crosswise and MD Hammer induced Hurd to breach cl 12.1(c) of the Service Agreement in various ways.
363 The elements of the tort of inducing breach of contract are well established. The tort is committed where a party intentionally induces a third party to breach a contract between the third party and another: Williams v Hursey (1959) 103 CLR 30. An essential element of the tort is the party's intention to bring about a breach of the contract: Short v The City Bank of Sydney (1912) 15 CLR 148 at 160; Independent Oil Industries Ltd v Shell Co of Australia Ltd (1937) 37 SR (NSW) 394 at 414-15. The party must be shown to have had some knowledge of the contract, or at least its existence: J T Stratford & Son Ltd v Lindley [1965] AC 307; Greig v Insole [1978] 3 All ER 449; Boral Bricks NSW Pty Ltd v Frost (1987) Aust Torts Reports 80-097 at 68,608. Where the party is a corporation, knowledge and intention on the part of an officer will suffice: Fightvision Pty Ltd v Onisforou (1999) 47 NSWLR 473. It must also be shown that the breach of the contract has caused some damage or at least that damage can be inferred from the circumstances: Exchange Telegraph Company Limited v Gregory & Co [1896] 1 QB 147; Goldsoll v Goldman [1914] 2 Ch 603; Bents Brewery & Co Ltd v Hogan [1945] 2 All ER 570; Greig v Insole [1978] 3 All ER 449 at 490.
364 Zomojo submitted that in the present case the elements of the tort were established from the fact that:
1. Hurd was at all times a director and secretary and the controlling mind of Zeptonics;
2. Hurd was at all times a director of Zepto Markets;
3. Hurd caused Zeptonics to enter into the Leading Agreement, by signing the agreement on its behalf;
4. Hurd caused Zepto Markets to enter into the SunGard Agreement, by signing the agreement on its behalf; and
5. it could be inferred that Zomojo had suffered damage.
Again, Zomojo's written submissions did not address the pleaded allegations against Crosswise and MD Hammer. They may be put to one side.
365 Hurd's primary position was that Zomojo was unable to establish any relevant breach of cl 12(c) (a view rejected at [346] above). Hurd's secondary submission was that there was no evidence that Zeptonics and/or Zepto Markets or Mr Hurd knowingly breached the Service Agreement. In other words, Hurd submitted that neither he nor the relevant companies engaged in the conduct which constituted a breach of cl 12(c) with the requisite subjective intention. To the extent that submission is still relevant, it is rejected.
366 Hurd accepted during cross-examination, with a qualification, that the SunGard Agreement was entered into for the purpose of trading stock on the Hong Kong Stock Exchange. Hurd qualified his answer by saying "[t]he purpose was to build a prototype to demonstrate that we could do it and then perhaps to extend the relationship". Hurd also accepted that the Leading Agreement was entered into by Zeptonics to provide advice and assistance in respect of trading on the KRX, within a 12 month period after Hurd finished at Zomojo. At that time, Hurd knew of the terms of the Service Agreement. He was not indifferent or ignorant of them. He had recently sought advice in respect of cl 12.1(b) from DibbsBarker: see [142] above. It is beyond doubt that Hurd was aware of the obligation imposed upon him by cl 12.1(c).
367 As was said in Independent Oil Industries at 414-415, "[i]t is necessary to establish that the third party knew of the contract, knew that the doing of a particular act by one of the parties to it would be a breach of it, and with that knowledge procured the party to do the act": see Allstate Life Insurance Co v Australia & New Zealand Banking Group Ltd (1995) 58 FCR 26 at 38-39. Put another way, "the alleged tortfeasor must intend that what he is inducing will be a breach of contract": Allstate at 42. That is precisely the situation here. Hurd's stated intention was, among other things, to provide advice and assistance in respect of trading on the KRX and to do so within the restraint period. Hurd knew of the Service Agreement and knew that the doing of a particular act by him would be a breach of it. And, of course, the common link was Hurd. Hurd's knowledge can be and should be attributed to each of Zeptonics and Zepto Markets: Endresz v Whitehouse [1998] 3 VR 461; Morlea Professional Services Pty Ltd v Richard Walter Pty Ltd (in liq) (1999) 96 FCR 217; Yore Contractors Pty Ltd v Holcon Pty Ltd (1990) 2 ACSR 663 and Ford H, Austin R and Ramsay I, Principles of Corporations Law (Butterworths, subscription service) at [16.220] (Service 77). Zeptonics and Zepto Markets, fixed with that knowledge, procured Hurd to do the acts.
368 Accordingly, on its face, Zeptonics and Zepto Markets induced Hurd to breach cl 12.1(c) of the Service Agreement.
369 The conduct of Hurd, and the associated conduct of the Corporate Respondents, may be divided into five discrete categories for the purpose of determining the relief to which Zomojo is entitled. The categories are:
1. breaches of cll 3.1, 3.3, 3.4 and 3.5 of the Service Agreement, s 181(1) of the Corporations Act and Hurd's fiduciary duties;
2. breaches of cl 10 of the Service Agreement;
3. breaches of cl 9 of the Service Agreement, s 183(1) of the Corporations Act and Hurd's fiduciary duties;
4. breaches of cl 12.1(b) of the Service Agreement; and
5. breaches of cl 12.1(c) of the Service Agreement.
5.1 Breaches of cll 3.1, 3.3, 3.4 and 3.5 of the Service Agreement, s 181(1) of the Corporations Act and Hurd's fiduciary duties
370 Zomojo referred to this category as Hurd's "misconduct while Zomojo's Co-Managing Director and Employee". "Misconduct" is an apt title for capturing the broad variety of activities in which Hurd engaged. The relevant breaches are referred to at [225]-[240], [262]-[270], [277]-[296] and [305] above.
371 As against Hurd, Zomojo sought damages and:
Injunctions restraining Hurd, and his officers, employees or agents howsoever, for 12 months from the date of judgment, from engaging directly or indirectly in any conduct that profits from or takes advantage of Hurd's breaches of the Service Agreement, the Corporations Act and his fiduciary obligations.
372 Zomojo also submitted that it was entitled to the following injunctions:
(a) an injunction restraining Hurd for 12 months from the date of judgment from being directly or indirectly involved or interested in any business or occupation that competes in any respect with the business of Zomojo, including (without limitation) each of the corporate Respondents, and from providing advice, assistance or services to any company or entity engaged in any such business or occupation;
(b) a mandatory injunction requiring Hurd to assign, or procure the assignment of, each of Opticast, Zeptocast, ZeptoLink, ZeptoMUX, ZeptoNIC, ZeptoAccess KRX and the Crosswise ATS to Zomojo;
(c) a mandatory injunction requiring Hurd to deliver up to Zomojo, or to procure the delivery up to Zomojo of, all prototypes and parts of prototypes, and products or parts of products, in his possession, power or control or in the possession, power or control of any of the corporate Respondents, relating to or based on Opticast, Zeptocast, ZeptoLink, ZeptoMUX, ZeptoNIC, ZeptoAccess KRX and the Crosswise ATS; and
(d) a mandatory injunction requiring Hurd to deliver up to Zomojo, or to procure the delivery up to Zomojo of, all documents (including electronic documents and files) in his possession, power or control or in the possession, power or control of any of the corporate Respondents, that record or refer to any of the prototypes or products known as or based on Opticast, Zeptocast, ZeptoLink, ZeptoMUX, ZeptoNIC, ZeptoAccess KRX and the Crosswise ATS.
373 Hurd made no submission as to the appropriate relief arising from his admitted breaches of fiduciary duty, save that there should be no assignment of any of his inventions.
374 Each of the duties which Hurd owed and breached – contractual, statutory and fiduciary – entitle Zomojo to a different form of relief. For breach of contract, the remedy is damages or, in some cases, specific performance. For breach of s 181(1) of the Corporations Act, the remedy is a compensation order (ss 1317H and 1317J(2)) and/or an injunction (s 1324). For breach of fiduciary duty the remedies are more flexible, and may include damages, account of profits, the creation of a constructive trust and/or an injunction.
375 Here, Zomojo only seeks damages and injunctions. Hurd's breaches entitle Zomojo to damages. By way of summary, Hurd has been found to have breached:
1. cl 3.1, by failing to diligently perform the Services whilst he was engaged in marketing and sales activities in respect of OptiCast and the Crosswise ATS;
2. cl 3.3, by failing to devote the whole of his time and attention to the performance of the Services during normal business hours and at such other times as were reasonably necessary in respect of Newedge;
3. cl 3.4, by failing to use his best endeavours to promote the interests of Zomojo and, in fact, promoting the interests of Zeptonics and/or Crosswise in preference to the interests of Zomojo; and
4. cl 3.5, by being directly involved in another business (Zeptonics and Crosswise) which interfered with Hurd's performance of the Services and competed with the business of Zomojo.
376 Further, Hurd admitted a breach of fiduciary duty (see [226], [237] and [264] above) in relation to:
1. the failure to refer the Newedge opportunity on or about 14 September 2010 to Zomojo, and the indication that he would take up that opportunity;
2. developing the device that became OptiCast (and ultimately ZeptoLink); and
3. the preparatory activity that led to fundraising of the Crosswise ATS up to 11 January 2011.
377 The quantification of damages flowing from those various breaches is to be determined at a later hearing. Is Zomojo entitled to the injunctions that it seeks? Appropriate injunctions must be tailored to the findings of breach. In the present case, Zomojo is entitled to the following injunctions:
(a) that Hurd assign, or procure the assignment of, each of OptiCast, ZeptoLink, ZeptoNIC, ZeptoAccess KRX and the Crosswise ATS to Zomojo;
(b) that Hurd deliver up to Zomojo, or to procure the delivery up to Zomojo of, all prototypes and parts of prototypes, and products or parts of products, in his possession, power or control or in the possession, power or control of any of the corporate Respondents, relating to or based on Opticast, ZeptoLink, ZeptoNIC, ZeptoAccess KRX and the Crosswise ATS; and
(d) that Hurd deliver up to Zomojo, or to procure the delivery up to Zomojo of, all documents (including electronic documents and files) in his possession, power or control or in the possession, power or control of any of the corporate Respondents, that record or refer to any of the prototypes or products known as or based on Opticast, ZeptoLink, ZeptoNIC, ZeptoAccess KRX and the Crosswise ATS.
Those injunctions are necessary and appropriate. If made, they render the first injunction sought by Zomojo unnecessary and inappropriate.
5.2 Breaches of cl 10 of the Service Agreement
378 As against Hurd, Zomojo sought damages, declarations and injunctions. The declarations and injunctions sought were in the following terms:
13A Declarations that:
(a) Hurd breached his obligations under clause 10.4 of the Service Agreement by failing to make prompt and full disclosure to Zomojo of the evolution, discovery and invention of each of ZeptoLink (formerly known as OptiCast and ZeptoCast), ZeptoMux and the Zeptonics' ATS; and
b) Hurd is required to assign to Zomojo, or procure the assignment to Zomojo of, each of ZeptoLink (formerly known as OptiCast and ZeptoCast), ZeptoMux and the Zeptonics' ATS, and Zomojo is entitled by clause 10.5 of the Service Agreement to execute all documents and do all such things as are necessary to effect each such assignment as Hurd's attorney.
13B Mandatory injunctions requiring Hurd:
(a) to assign, or procure the assignment of, each of the Zeptonics' Products to Zomojo;
(b) to deliver up to Zomojo, or to procure the delivery up to Zomojo of, all prototypes and parts of prototypes, and products or parts of products, in his possession, power or control or in the possession, power or control of any of the Second to Eighth Respondents, relating to or based on the Zeptonics' Products; and
(c) to deliver up to Zomojo, or to procure the delivery up to Zomojo of, all documents (including electronic documents and files) in his possession, power or control or in the possession, power or control of any of the Second to Eighth Respondents, that record or refer to or are based on any of the Zeptonics' Products or any prototypes of the Zeptonics' Products.
Zomojo sought injunctions against each of the Corporate Respondents to require them to take all steps necessary to give effect to the injunction sought against Hurd.
379 Hurd denied that Zomojo was entitled to any of the relief it claimed.
380 Hurd's breaches of cl 10 of the Service Agreement entitle Zomojo to damages. The quantification of those damages is to be determined at a further hearing. Is Zomojo entitled to the injunctions that it seeks? Having regard to the form of the injunctions granted in relation to the breaches of cll 3.1, 3.3, 3.4 and 3.5 of the Service Agreement, s 181(1) of the Corporations Act and Hurd's fiduciary duties, further injunctions are unnecessary and inappropriate. That leaves Zomojo's application for declarations. Again, having regard to the form of the injunctions granted above, the declarations sought are unnecessary and inappropriate.
381 Zomojo sought injunctions to compel each of Zeptonics, Crosswise, MD Hammer, Zepto Markets, Zepto Fabrics, Zeptoip and Trademach to take all steps necessary to give effect to the fact that Hurd must assign, or procure the assignment of, each of OptiCast, ZeptoLink, ZeptoNIC, ZeptoAccess KRX and the Crosswise ATS to Zomojo. There was nothing to suggest that if an injunction was granted in those terms that the relevant entities would not take all necessary steps. If that position changes, then Zomojo may make any necessary application.
5.3 Breaches of cl 9 of the Service Agreement, s 183(1) of the Corporations Act and Hurd's fiduciary duties
382 As against Hurd, Zomojo sought damages and injunctions and, in relation to the breach of fiduciary duties, damages or an account of profits. Zomojo submitted that the appropriate injunctions were:
(a) an injunction restraining Hurd for 12 months from the date of judgment from being involved directly or indirectly in any business or occupation that is engaged in the development, marketing or supply of any ATS, and from supplying any advice or services to any business or entity that is engaged in the development, marketing or supply of any ATS;
(b) an injunction restraining Hurd, directly or indirectly, for 12 months from the date of judgment, from using or disclosing all or any part of the techniques of fast ordering, speculative transmission and transmit fragmentation as described in paragraphs 32–38 and 52 of Dr Chapman's confidential annexure MC-1, and of negative latency as described in exhibit 67, in connection with any prototypes or products for use in trading on equities or derivatives markets, including (without limitation) ZeptoNIC, ZeptoMUX and the ZeptoAccess KRX gateway;
(c) an injunction restraining Hurd, directly or indirectly, for 12 months from the date of judgment, from developing, marketing or supplying any NICs for use in trading on equities or derivative markets, including (without limitation) ZeptoNIC, that have integrated into their firmware timestamping, logging or passthrough functionality as described in paragraphs 5–8 of Dr Chapman's confidential annexures MC-1, or timing and packet replication support as described on page 526 of exhibit 66, and from supplying advice or services to any business or entity that is engaged in the development, marketing or supply of any such NICs;
(d) an injunction restraining Hurd, directly or indirectly, for 12 months from the date of judgment, from developing, marketing or supplying any communication or scheduling frameworks, for use in trading on equities or derivative markets, that abstract different types of data (including, without limitation, UDP, TCP, ASCII files, binary files, compressed binary files and shared memory ring buffers) so that no code changes are required to interact with different types of inputs and outputs, and/or which manage the progression of time and the order in which events are returned from multiple input streams so that simulation results are reproducible deterministically, including (without limitation) the Nexus framework referred to in paragraph 18(d) of the report of Professor Leong dated 5 October 2012; and
(e) a mandatory injunction requiring Hurd to deliver up to Zomojo, or to procure the delivery up to Zomojo of:
(i) all documents (including electronic documents and files) in his possession, power or control or in the possession, power or control of the corporate Respondents, that record or refer to; and
(ii) all prototypes and parts of prototypes, and products or parts of products, in his possession, power or control or in the possession, power or control of the corporate Respondents, that incorporate in whole or in part:
any or all of the following:
(A) fast ordering, speculative transmission and/or transmit fragmentation;
(B) negative latency;
(C) integrated timestamping, logging and/or passthrough on NICs;
(D) timing and/or packet replication support on NICs;
(E) communication and scheduling frameworks for different types of data; and
(F) the Nexus framework referred to in paragraph 18(d) of Professor Leong's report dated 5 October 2012.
383 Hurd denied that Zomojo was entitled to any of the relief it claimed.
384 Hurd's various breaches entitle Zomojo to damages and, in relation to the breach of fiduciary duties, damages or an account of profits. Zomojo will need to make the necessary elections and any subsequent assessment will be determined at a later hearing. Of course, Zomojo cannot recover twice.
385 Appropriate injunctions must be tailored to the findings of breach. Having regard to the form of the injunctions granted in relation to the breaches of cll 3.1, 3.3, 3.4 and 3.5 of the Service Agreement, s 181(1) of the Corporations Act and Hurd's fiduciary duties, further injunctions are unnecessary and inappropriate. In particular, there is no foundation (legal or factual) for an injunction restraining Hurd for a period of 12 months from the date of judgment. In light of the injunctions granted and the entitlement to damages or an account of profits, the additional relief is unnecessary and inappropriate.
386 Zomojo submitted that the Court should grant an injunction restraining Hurd for a period of 12 months from the date of judgment having regard to the so-called "springboard cases". In Zomojo's submission, those cases demonstrate that the Court will restrain an ex-employee from taking advantage of the head start gained from a misuse of confidential information for a period following the cessation of employment, which is often referred to as "gardening leave". Zomojo referred the Court to RLA Polymers in support of that proposition. That case concerned three ex-employees of RLA Polymers who were alleged to have misused confidential information, in breach of their duties of confidence, to develop and bring to market, more quickly than they otherwise would have, their own competing products. Ryan J provided a useful summary of the springboard cases at [70]-[73].
387 The first case referred to by Ryan J was Saltman Engineering Co Ltd v Campbell Engineering Co [1963] 3 All ER 413. In that case, Lord Greene observed at 415 that confidentiality may subsist in:
… a formula, a plan, a sketch, or something of that kind, which is the result of work done by the maker upon materials which may be available for the use of anybody; but what makes it confidential is the fact that the maker of the document has used his brain and thus produced a result which can only be produced by somebody who goes through the same process.
388 A breach of confidence therefore occurs where an employee entrusted with that information misuses it, in the sense that they save themselves the trouble of going through an inventive process and instead obtain the necessary information either from the original drawings or from the tools made in accordance with them.
389 The next case considered by Ryan J was Terrapin. In that case Lord Roxburgh coined the phrase "springboard", describing the doctrine at 391 as:
… a person who has obtained information in confidence is not allowed to use it as a spring-board for activities detrimental to the person who made the confidential communication, and spring-board it remains even when all the features have been published or can be ascertained by actual inspection by any member of the public.
390 Lord Roxburgh considered that the aim of the law in this area was to place the party in breach of the obligation of confidence "under a special disability in the field of competition in order to ensure that he does not get an unfair start". The parallels with this case are obvious – Zomojo alleges that Hurd has misused confidential information in order to bring products to market far sooner than he would have otherwise been able to, thereby gaining an advantage by reason of his breach.
391 Ryan J noted that, as stated by Prichard J in Aquaculture Corporation at 383, no breach of confidence will occur:
… so long as he takes no advantage, derived solely from having had information in advance of the general public, the confidant is free to use the information in the same way as any other member of the public – even to the detriment of the person who confided in him.
392 Ryan J concluded with Goldberg J's statement in Dart Industries at 408-409, upon which Zomojo placed particular emphasis, that:
In short, if a person wishes to design a product without it being alleged the person has used confidential information he must proceed through an independent design sequence and not use confidential information as a springboard to jump through that sequence.
393 Of course, Zomojo does not allege that Hurd breached his equitable duty of confidence. Zomojo seeks to rely upon these authorities, by way of analogy, in support of its claim for an injunction restraining Hurd from using any confidential information for a further period of 12 months.
394 I do not accept that the authorities support Zomojo's claim. If this were a springboard case, as Prichard J stated in Aquaculture Corporation, provided he took no advantage, Hurd would be free to use to use the information in the same way as any other member of the public – even to the detriment of the person who confided in him – without breaching his obligation of confidence. Zomojo's claimed injunction would restrain him, for a further period of 12 months, from doing that he would otherwise be permitted to do. Zomojo submitted that the appropriate relief ought to prevent Hurd from further developing, marketing, or supplying the Zeptonics suite of products that incorporated the head start which Hurd obtained from his breach of confidence. However, Zomojo's injunction would also restrain Hurd from using the techniques identified in Confidential Annexure A even if he undertook an independent design sequence to properly conceive of those techniques. In that sense, Zomojo's proposed injunction went further than the springboard cases would permit. As Zomojo's Counsel submitted during closing submissions, Zomojo sought to impose the opposite of a head start on Hurd; a "late start" or a "handicap". The springboard cases do not support the grant of such relief.
395 There are other reasons not to grant the relief sought. First, the Court is unable to fashion an injunction that would prevent Hurd from misusing the confidential information, to obtain a head start, while still enabling Hurd to undertake an independent design sequence. Second, the relief already granted has the effect of depriving Hurd of the fruits of his misuse of the confidential information. Hurd will now need to start afresh nearly two years down the track. The effect of cl 9 of the Service Agreement would have ceased in February 2012. Accepting that it may have taken Hurd up to 12 months to engage in an independent design sequence, no further relief is necessary. To impose a further "late start" would be to impose an additional penalty upon Hurd which is neither necessary nor justified.
396 Zomojo sought declarations that each of Zeptonics, Crosswise, MD Hammer, Zepto Markets, Zepto Fabrics, Zeptoip and Trademach hold the profits they have derived by reason of their assistance and participation in Hurd's misuse of Zomojo's confidential information as constructive trustees for the benefit of Zomojo, and are liable to account to Zomojo for those profits. Zomojo abandoned the claim in respect of MD Hammer.
397 Hurd opposed the declarations on the ground that the knowing assistance of each Corporate Respondent was not established. Hurd made no submission on the appropriate relief if knowing assistance was established.
398 Each of Zeptonics, Crosswise, Zepto Markets, Zepto Fabrics, Zeptoip and Trademach knowingly assisted and participated in Hurd's breach of his fiduciary obligations. A person who knowingly assists and participates in a fiduciary's breach of duty holds any property thereby acquired as constructive trustee for the person to whom the fiduciary duty was owed: Barnes v Addy (1874) LR 9 Ch App 244, 251-2; Consul Development Pty Ltd v DPC Estates Pty Ltd (1975) 132 CLR 373 at 378, 397 and 408 (Stephen J, with whom Barwick CJ agreed).
399 Appropriate declarations must be framed with reference to the findings of assistance or participation in respect of each Corporate Respondent. The relevant findings are set out in [358]-[360] above. Accordingly, declarations should be made in the following terms:
1. Zeptonics holds the profits it has derived by reason of its development and marketing of ZeptoLink (including OptiCast and ZeptoCast), ZeptoNIC and ZeptoAccess KRX and entry into the Leading Agreement as constructive trustee for the benefit of Zomojo, and is liable to account to Zomojo for those profits.
2. Crosswise holds the profits it has derived by reason of its fundraising, marketing and development of the Crosswise ATS as constructive trustee for the benefit of Zomojo, and is liable to account to Zomojo for those profits.
3. Zepto Markets holds the profits it has derived by reason of its marketing and sale of ZeptoAccess KRX as constructive trustee for the benefit of Zomojo, and is liable to account to Zomojo for those profits.
4. Zepto Fabrics holds the profits it has derived by reason of its exploitation of ZeptoLink as constructive trustee for the benefit of Zomojo, and is liable to account to Zomojo for those profits.
5. Zeptoip holds the profits it has derived by reason of its assistance of, its lodgement of or holding of any patents concerning Zomojo's confidential information as constructive trustee for the benefit of Zomojo, and is liable to account to Zomojo for those profits.
6. Trademach holds the profits it has derived by reason of its entry into a licensed trading agreement involving the use of ZeptoLink (including OptiCast and ZeptoCast), ZeptoNIC and ZeptoAccess KRX as constructive trustee for the benefit of Zomojo, and is liable to account to Zomojo for those profits.
5.4 Breaches of cl 12.1(b) of the Service Agreement
400 As against Hurd, Zomojo sought damages. Hurd denied that Zomojo was entitled to the relief claimed.
401 Hurd's breaches of cl 12.1(b) of the Service Agreement in relation to the employees (see [326]-[342] above) entitle Zomojo to damages. The quantification of those damages is to be determined at a further hearing.
5.5 Breaches of cl 12.1(c) of the Service Agreement
402 As against Hurd, Zomojo sought damages. Zomojo also sought damages against Zeptonics and Zepto Markets for inducing Hurd's breach of the Service Agreement. Hurd denied that Zomojo was entitled to any of the relief it claimed.
403 Hurd's breaches of cl 12.1(c) of the Service Agreement in relation to Leading and SunGard (see [343]-[350] above) entitle Zomojo to damages. The quantification of those damages is to be determined at a further hearing.
404 Zomojo is also entitled to damages from Zeptonics and Zepto Markets for inducing Hurd's breach of the Service Agreement: see [362]-[368] above. The quantification of those damages is to be determined at a further hearing.
405 Hurd was issued options under the ZEOP: see [16] above. By 30 June 2009, all the options had been converted to ordinary shares in Zomojo, held by Hurd's nominee, Jolene. Hurd then caused Jolene to acquire 96,000 further ordinary shares in Zomojo in three tranches of 32,000 shares – on 30 June 2007, 30 June 2008 and 30 June 2009. Hurd's entitlement to those additional shares arose under cll 4.2(a) and 4.6 of the Service Agreement. In May 2010, with the consent of the Board, Hurd caused Jolene to sell 7,810 of its shares in Zomojo to the HFSF and a further 3,500 shares to Louise Heddle as trustee for the Louise Heddle Family Trust.
406 When Hurd left Zomojo's employ, Jolene held 484,690 shares, and the HFSF held 7,810 shares, in Zomojo (collectively, the Hurd Shares). This section of the reasons considers the factual and legal issues in relation to the Hurd Shares.
407 The ZEOP and the ESOP were established in December 2005: see [12]-[15] above. The need for the ZEOP and the ESOP was readily apparent to Hurd as early as May 2005. In the original Zomojo Trading Proposal dated 31 May 2005, drafted by Hurd, Hurd recognised that staff retention was critical to Zomojo's success. His view at that time was that the principal risk to Zomojo – "important staff leaving with enough IP [intellectual property] in their heads to competitively hurt the venture" (see [9] above) – could "only truly be managed by having sufficient staff incentive schemes or by limiting information flow concerning the whole of the business": see [9] above. The ZEOP and ESOP were intended to provide the necessary incentives.
408 On 14 October 2005, Brash emailed the draft Plan Deed and Offer Booklet for the ESOP to Robinson: see [12] above. Robinson forwarded Brash's email, and the attached documents, on the same day to Heddle and Hurd. Robinson used Hurd's email address "matthurd@acm.org". In the covering email, Brash said that "the main document still to come is the Plan Information Booklet". The draft Offer Booklet contained a provision dealing with the sale of shares by employees after ceasing their employment with Zomojo. The provision differentiated between "bad leavers", being persons who ceased employment in circumstances that entitled Zomojo to dismiss them without notice, and other departees: see [35] above.
409 On 2 December 2005, Robinson, Heddle and Hurd each signed resolutions establishing the ZEOP and the ESOP and approving the issue of 400,000 options pursuant to the ZEOP to Hurd: see [14] above. Rule 9.3 of the Plan Rules for the ZEOP contemplated that shares could be issued to any person or entity nominated by the holder of the options. Hurd intended to have his shareholding in Zomojo held by Jolene, a company in which his father and mother were the directors and shareholders. Jolene entered into a Shareholder Agreement Accession Deed with Zomojo on 2 December 2005.
410 Recital 4 of the Plan Deed for the ESOP noted that the "terms of issue upon which employees will acquire shares are to be set out in the offer booklet containing the invitation to participate in the Plan and the information booklet, which are set out as Schedules to this Plan Deed … and which are to be sent to eligible employees selected by the Board". Clause 1.2 of the Plan Deed stated that the "Plan Deed sets out general provisions governing how the Plan generally is to be operated, and the offer booklet and information booklet in the Schedule to this Plan Deed … sets out the provisions to be incorporated into contracts between Zomojo and employee participants". The Offer Booklet and the Plan Information Booklet were not attached as Schedules.
411 On 2 December 2005, Hurd was issued with 400,000 options in Zomojo. Hurd's entitlement to the options derived from cll 4.2(a) and 4.5 of the Service Agreement. Hurd accepted the options on 2 December 2005. In accepting the options, Hurd signed a ZEOP acceptance document which stated:
l, the undersigned, accept the offer to take up the number of options set out below, being options to acquire ordinary shares in Zomojo Pty Ltd (Zomojo) to be issued in accordance with the Zomojo Employee Option Plan.
I authorise you to place my name on the register of option holders in respect of the options taken up by me, and I agree to be bound by the terms and conditions of the offer, the Plan Rules, the Constitution of Zomojo and Zomojo's Shareholder Agreement in force from time to time, in respect of any options granted and any shares issued as a result of the exercise of the options.
412 On 5 December 2005, Brash emailed the Plan Information Booklet to Robinson. Robinson forwarded Brash's email on the same day to Heddle and Hurd. Robinson again used Hurd's email address "matthurd@acm.org". In his witness statement in reply, Hurd stated that he never received the 5 December 2005 email from Robinson. In his oral evidence, Hurd said he believed that he would have received it, and had no reason to think otherwise. Hurd did receive the 5 December email from Robinson. That finding is important in light of the matters raised by Hurd in support of his contention that the Plan Information Booklet did not bind him: see [439]-[461] below.
413 The email of 5 December 2005 also contained a covering explanation about what was attached to that email and about "fitting the documents together". The email explained that the Plan Information Booklet operated as a Schedule to the Plan Deed of the ESOP. In particular, the covering email included statements that:
Please find attached the ESOP's Plan Information Booklet, which as far as I am aware is the last document to be provided for this project.
So that you have the ESOP documents all in one place, also attached for convenience are the following documents which were originally sent to you on 4 October:
• Plan Deed, and
• ESOP Offer Booklet – clean & marked up slightly revised versions, including an Application Form, a Tax Election Form and a Share Transfer Form – and the associated Excel mail merge document.
Please note the following comments.
1. Fitting the documents together: To remind you how these documents fit together: the ESOP is constituted by the entering into of the Plan Deed pursuant to the 'stage 2' Board minutes previously provided, and the Offer Booklet and the Plan Information Booklet constitute schedules to the Plan Deed. I have ensured the attached Plan Information Booklet is in line with the ESOP Offer Booklet, clause 4.6 of the Employment Agreements, and with section 4 of the Employee Ownership Strategy paper last sent on 8 November 2005. To open the Word version of the Offer Booklet, you will be prompted to select the attached Excel spreadsheet (it might be easier if you first save the Excel document to a location so you know where to find it when prompted to select it).
…
414 Clause 4.7 of the Plan Information Booklet for the ESOP entitled "Selling Your Shares on Cessation of Employment" was set out at [35] above.
415 The clause differentiated between "bad leavers" and other employees ceasing employment. In the case of the former, the Board had a discretion to determine within 30 days after the cessation of employment by notice in writing that the shareholder must transfer any shares in Zomojo to Zomojo or its nominee for an amount equal to any loan then outstanding to Zomojo: cll 4.7(a) and (b). In other cases, Zomojo could elect by notice in writing to procure a subsidiary to purchase the shares on trust for the purposes of the ESOP on the basis of a "Plan valuation formula", being five times the previous financial year's pre-tax profit divided by the total number of shares on issue, and then multiplied by the number of shares being sold: cl 4.7(c).
416 Hurd progressively exercised the 400,000 options issued to him on 2 December 2005, with the result that by 30 June 2009, all the options had been converted to ordinary shares in Zomojo, held by Hurd's nominee, Jolene. By Rule 13.2 of the Plan Rules for the ZEOP, Jolene (as Participant) was "permitted or obliged to deal with Shares if the Participant would be permitted or obliged to do so had the Shares been acquired pursuant to the [ESOP]": see [31] above.
417 Hurd caused Jolene to acquire 96,000 further ordinary shares in Zomojo in three tranches of 32,000 shares on 30 June 2007, 30 June 2008 and 30 June 2009. Hurd's entitlement to those additional shares arose under cll 4.2(a) and 4.6 of the Service Agreement. In May 2010, with the consent of the Board, Hurd caused Jolene to sell 7,810 of its shares in Zomojo to the HFSF and a further 3,500 shares to Louise Heddle as trustee for the Louise Heddle Family Trust. Therefore, when Hurd left Zomojo's employ, Jolene held 484,690 shares, and the HFSF held 7,810 shares, in Zomojo (the Hurd Shares).
418 On 4 March 2011, the Board of Zomojo passed a resolution by which Zomojo elected to purchase the Hurd Shares and to make a without prejudice offer to Hurd for the Hurd Shares applying the formula in special rule 2 of the Plan Information Booklet set out in cl 4.7(c): see [35] above. Robinson's uncontroverted evidence was that the resolution was passed after some discussion at the Board meeting as to whether the bad leaver provision contained in the Plan Information Booklet ought to be exercised. The bad leaver provision was not invoked at that time. Robinson's evidence was that:
We were aware of the bad leaver provisions at that point and I think even in the minutes it said that we contemplated that, but on the balance we only had a bad feeling at that point.
419 The same day, Zomojo wrote to Hurd giving him notice that Zomojo elected to procure its subsidiary, Zomojo Staff Holdings Pty Ltd (Zomojo Staff Holdings), to purchase the Hurd Shares on the basis of the formula in cl 4.7 of the Plan Information Booklet. The purchase price was based upon an application of the formula to a pre-tax profit figure for the 2009/10 financial year of $1,157,255. The application of the formula led to Zomojo offering to procure the purchase of the Hurd Shares for $1,424,802.50 (the 4 March offer).
420 On 15 March 2011, Hurd rejected the 4 March offer. Hurd disputed the pre-tax profit figure upon which the 4 March offer was based. Hurd asserted that Zomojo's pre-tax profit for the financial year to 30 June 2010 was $4,998,329 and that, when the relevant formula was applied to that figure, the amount payable for the Hurd shares was $6,154,280.
421 It was common ground that the pre-tax profit figure referred to in Hurd's 15 March 2011 letter was derived from Zomojo's MYOB records. That figure was similar to the figure stated in a profit and loss statement prepared by Hurd Senior, for the year to 30 June 2010, which showed Zomojo's pre-tax profit to be $4,995,035.55.
422 After receiving Hurd's 15 March 2011 letter, Zomojo caused its then solicitors to engage Geoffrey Sincock (Sincock) of Deloitte Private Pty Ltd (Deloitte) to provide an expert opinion as to Zomojo's pre-tax profit for the year ended 30 June 2010. In cross-examination, it was put to Robinson that he had engaged Deloitte in order to "get a lower number" in respect of the pre-tax profit. Robinson rejected that proposition, stating:
No. I retained Deloitte for the purposes of getting the correct number given that there was a dispute between the number I had used and the number that Mr Hurd had responded with.
I accept that evidence.
423 Hurd placed considerable reliance upon an email exchange between Robinson and Boyle to support the contention that Zomojo was acting other than in good faith. Boyle replaced Hurd as a director of Zomojo: see [143] above. On 21 April 2011, Robinson told Boyle that Deloitte had enough information from Hurd Senior to produce accounts in accordance with the Australian Accounting Standards (AAS) for use in the valuation of the Hurd Shares. Boyle responded the same day saying:
I'm looking forward to seeing the suggested numbers from Deloittes now … I hope there's a big fat minus sign in there.
424 Sincock provided a report to Zomojo's then solicitor on 13 May 2011. Sincock concluded that the pre-tax profit of Zomojo for the year to 30 June 2010 was $371,706. In the report, Sincock explained that in forming his opinion of the pre-tax profit of Zomojo for the year to 30 June 2010 he had referred to Zomojo's MYOB books of account, undertaken discussions with management and applied the relevant AAS. Hurd Senior conceded in his evidence that he had not applied relevant AAS in the preparation of the profit and loss statement and that he had made erroneous assumptions in respect of the proper characterisation of at least two items of research and development that had the effect of inflating the profit figure.
425 Sincock's report explained that the difference between his calculation, and the calculations made by Hurd Senior, turned on the proper characterisation of certain research and development expenses. Hurd Senior had capitalised those expenses in the balance sheet, which in Sincock's opinion was inconsistent with AAS 138, which deals with the proper treatment of intangible assets. Sincock expressed the view that none of the research and development costs that had been capitalised by Hurd Senior met the criteria for capitalisation in AAS 138, and that they accordingly had to be expensed through the profit and loss statement in the financial year during which they were incurred. Zomojo provided a copy of Sincock's report to Hurd.
426 On 26 May 2011, Hurd's then solicitors wrote to Zomojo's then solicitors, disputing the conclusions reached in Sincock's report. Hurd's solicitors stated that Hurd intended to obtain his own expert report and, in order to enable him to do so, sought access to specified information.
427 On 15 June 2011, Zomojo's solicitors responded. The letter addressed two issues: the provision of information to enable Hurd's expert to determine the pre-tax profit for the financial year ended 30 June 2010 and Hurd's obligations to Zomojo. In respect to the second issue, the letter stated that:
As you would be aware, your client has obligations to our client arising out of his employment contract, his previous position as a director of the company and at common law. As you are no doubt aware, your client and the directors of our client have had numerous discussions since 11 January 201l. During those discussions we are instructed that your client has repeatedly provided assurances that he was aware of and would honour his obligations to our client.
Despite these assurances, it is now understood that your client is in breach of such duties and has been in breach for months prior to him resigning from our client. We draw your attention to the following:
• on 21 September 2010 your client registered the domain name "www.zeptonics.com";
• shortly thereafter, your client used that website to describe an 'Opticast' fast switch product (http://www.zeptonics.com/Home/opticast-faq);
• that same month, your client posted on an internet forum information that he was involved in a "somewhat stealthy start-up". Some details regarding this "stealthy start-up" were provided including a reference to the domain name "www.zeptonics.com" and information that the product being developed by your client was originally designed for low-latency trading;
• the work undertaken by your client last year regarding the design of an 'Opticast' prototype circuit board;
• your client has a company incorporated in New South Wales. In early 2011 the name of the company was changed to Zeptonics Pty Ltd. Your client and a Mr Matthew Rochford are the directors. Your client is the only shareholder; and
• your client is presently pitching a product to the market that is equivalent to our client's product.
In addition to the above matters, we are also concerned that your client has solicited employees away from our client and has employed them in his Zeptonics business.
…
Your client not only engaged in the unlawful activities set out above but also concealed such conduct from our client. Had our client been aware of this material as at the date of the exercise of the option to acquire [the Hurd Shares], our client would have had the ability to elect to recover [the Hurd Shares] pursuant to the 'Bad Leaver' provisions in the Employee Share Ownership Plan.
The letter gave notice of Zomojo's intention to transfer the Hurd Shares on 29 June 2011.
428 On 28 June 2011, Hurd adopted a different approach. He offered to accept the sum proposed in the 4 March offer, namely $1,424,802.50, without waiving his rights in respect of Zomojo's dealing with the shares or their value. Zomojo's solicitors rejected that proposal by a letter dated 30 June 2011.
429 On 30 June 2011, the Board of Zomojo passed the following resolutions:
Resolution: Separation of funds to purchase the shares
It is recognised that Mr Matt Hurd disputes the value at which the shares should be transferred.
Zomojo hold $1,424,802.50 in an interest bearing account for the sole and exclusive purpose of purchasing shares from Jolene (TAS) Pty Ltd and Hurd Family Superannuation Fund, pending resolution of the dispute with Mr Hurd concerning the value of shares held by Jolene (TAS) Pty Ltd and Hurd Family Superannuation Fund.
Resolution: Valuation of shares held by Jolene (TAS) Pty Ltd and Hurd Family Superannuation Fund
Pursuant to the terms of the Zomojo Employee Share Ownership Plan (and as stated in clause 4.7 of the Plan Information Booklet) the consideration in respect of the Jolene (TAS) Pty Ltd and Hurd Family Superannuation Fund is to be calculated as follows: 5 x pre-tax profit for FY 2010 divided by 2,000,000 shares on issue and multiplied by the number of shares being sold.
The only independent assessment of pre-tax profit available to Zomojo is that given by Deloitte. This valuation, applied to special rule 2 of clause 4.7(c) of the Plan lnformation Booklet, gives rise to the following consideration:
• 484,690 shares of Jolene (TAS) Pty Ltd, valued at $450,761.70;
• 7,810 shares of Hurd Family Superannuation Fund, valued at $7,263.30.
Should it transpire that the proper consideration of the shares held by the Jolene (TAS) Pty Ltd and the Hurd Family Superannuation Fund exceeds the amount set out in this resolution, then the increased amount will be the consideration and the documents amended accordingly.
Resolution: Plan Administrator to effect transfer of shares held by Mr Matt Hurd in Jolene (TAS) Pty Ltd and Hurd Family Superannuation Fund
Pursuant to the terms of the Zomojo Employee Share Ownership Plan (and as stated in clause 4.7 of the Plan lnformation Booklet) Jolene (TAS) Pty Ltd and Hurd Family Superannuation Fund should be asked to sign transfers of their shares to Zomojo Staff Holdings Pty Ltd as follows:
• 484,690 shares from Jolene (TAS) Pty Ltd, valued at $450,761.70;
• 7,810 from Hurd Family Superannuation Fund, valued at $7,263.30.
If the transfers are not signed within 14 days, the board, acting as Plan Administrator, will sign the transfer on behalf of Jolene (TAS) Pty Ltd and Hurd Family Superannuation Fund. The transfer will be deemed to take effect on 29 June 2011.
Zomojo advised Hurd of those resolutions by a letter dated 4 July 2011.
430 On 15 July 2011, Hurd's then solicitors wrote to Zomojo's solicitors, asserting that the resolutions passed by Zomojo on 30 June 2011 were invalid because a special majority was not achieved. That allegation was not pursued in these proceedings. However, Hurd did contend that the 30 June 2011 resolutions were invalid on other grounds. Those contentions will be addressed in Section 6.4 below.
431 On 19 July 2011, Zomojo caused the Hurd shares to be transferred to Zomojo Staff Holdings and caused payments totalling $458,025 to be made to Jolene and the HFSF's bank accounts. Hurd was told that had occurred on 19 July 2011.
432 Zomojo sought to recover, as damages, the payments totalling $458,025 it made to Jolene and the HFSF for the Hurd Shares. Zomojo submitted that if it had known of Hurd's activities before he "tendered" his resignation, it would have been entitled to dismiss Hurd immediately and would not have been obliged to pay, and would not have paid, Jolene and HFSF for the Hurd Shares. That is, Zomojo submitted that Hurd was a "bad leaver" within the meaning of cl 4.7(b) of the Plan Information Booklet.
433 Under the Service Agreement, Zomojo was entitled to dismiss Hurd immediately if he committed "any material breach of the Managing Director's obligations and duties under this agreement or any agreement or arrangement with the Company which is, in the reasonable opinion of the Board, material …": cl 8.1. Where Hurd was dismissed pursuant to cl 8.1 of the Service Agreement, he was not "entitled to any further compensation or damages other than pro rata salary and accrued annual leave to the date of the termination": cl 8.2.
434 Zomojo submitted that if it had known of the nature and extent of Hurd's wrongdoing, Zomojo would have dismissed him immediately under cl 8.1 of the Service Agreement. Zomojo submitted that while Hurd still owed contractual, statutory and equitable obligations to Zomojo, he was engaged in clandestine conduct against the interests of Zomojo of the most reprehensible kind, including designing, developing, raising funds for and marketing products that used Zomojo's confidential information, with the intention of then marketing and supplying those products in direct competition with Zomojo. As Zomojo submitted, no responsible board, had it known of Hurd's misconduct, would have done anything other than to dismiss him summarily.
435 However, because Hurd concealed his misconduct, Zomojo submitted that it was deprived of the opportunity to dismiss Hurd immediately under cl 8.1 of the Service Agreement and therefore deprived of the entitlement to invoke the bad leaver provision in cl 4.7(b) of the Plan Information Booklet.
436 The contention that Zomojo would not have been required to make any payment in respect of the transfer was predicated on the basis that cl 4.7(b) stated that the only sum payable to a bad leaver in respect of the transfer of shares was an amount equal to the bad leaver's voluntary loan repayments. Hurd did not have any loan amount outstanding when he ceased his employment at Zomojo.
437 Hurd submitted that there were a number of reasons why Zomojo was not entitled to damages equal to the amount of the payments it made for the Hurd Shares. First, the Plan Information Booklet (including cl 4.7(b)) did not form part of the ESOP and, secondly, even if it did, Hurd was not a "bad leaver". Thirdly, even if Hurd was a bad leaver, cl 4.7(b) was a penalty and invalid. Fourthly, if cl 4.7(b) was not a penalty, cl 4.7(b) did not extend to all of the Hurd Shares. Fifthly, the resolutions passed by the Board of Zomojo on 30 June 2011 were invalid and Zomojo breached implied obligations of good faith and fair dealing in connection with the acquisition of the Hurd Shares. Sixthly, assuming Hurd was not a bad leaver, it is necessary to consider what price should be paid for the Hurd Shares and, in particular, the inconsistency between cl 4.6(e)(ii) of the Service Agreement and cl 4.7 of the Plan Information Booklet. Finally, it is necessary to consider Hurd's submission that Zomojo's acquisition of some or all of Hurd's Shares was oppressive and therefore contrary to s 232 of the Corporations Act.
438 I will deal with each issue in turn.
6.3.1 Did cl 4.7(b) form part of the ESOP and bind Hurd?
439 Hurd's stated position was that the Plan Information Booklet (which included cl 4.7(b)) did not form part of the Services Agreement or the ESOP. Put simply, Hurd submitted that he "did not sign up" to the Plan Information Booklet and no clause of any of the signed contracts expressly included it or incorporated it. Zomojo's position was to the contrary.
440 It is necessary to start with Brash's email of 5 December 2005 which attached the Plan Information Booklet for the ESOP: see [34] and [412] above. I have already concluded that on or about 5 December 2005, Hurd received the email and the Plan Information Booklet: see [34] and [412] above.
441 Next, Hurd submitted that, even if he had notice of the Plan Information Booklet forwarded by the email of 5 December, he was not bound by it. The first matter upon which Hurd relied in support of this conclusion was that the Plan Information Booklet was only a draft and had not been finalised. I reject that submission. A marked up and a clean copy of the Plan Information Booklet was provided. I reject the contention that the covering email sought instructions about aspects of the Plan Information Booklet. On its face, it did not. The covering email explained what was being sent by Brash in relation to the ESOP and how the documents fitted together.
442 The next basis for Hurd contending that he was not bound by cl 4.7(b) was the contention that because the clause may have had an adverse effect on Hurd's rights, it was necessary for reasonably sufficient notice of the existence of cl 4.7(b) to have been given to Hurd and it was not: cf L'Estrange v F Graucob Limited [1934] 2 KB 394 at 402-403; Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd (2004) 219 CLR 165 at [54]; Parker v South Eastern Railway (1877) 2 CPD 416; The Balmain New Ferry Company Ltd v Robertson (1906) 4 CLR 379 at 386; Council of the City of Sydney v West (1965) 114 CLR 481 at 485-6 and 491-2; J Spurling Ltd v Bradshaw [1956] 2 All ER 121 and Thornton v Shoe Lane Parking Ltd [1971] 2 QB 163.
443 Taken at its highest, Hurd submitted that the Court must take into account the proportionality of the notice required to bring terms and conditions to the notice of another party. So, the more onerous the term, the greater the effort that must be taken to bring the clause to the other party's attention. Whether that is an accurate statement of the relevant legal principle is open to doubt. It is unnecessary to resolve that issue. Even if it is assumed that cl 4.7(b) was and remained onerous, Hurd had notice of it (see [34] and [412] above) and that notice was sufficient. It must be recalled that Hurd was aware from as early as May 2005 of the need to provide incentives to staff to stay with Zomojo in order to protect Zomojo: see [9] above.
444 The next basis for Hurd contending that he was not bound by cl 4.7(b) was the contention that Hurd did not "sign up to" cl 4.7(b) and no clause of any of the signed agreements expressly included or incorporated it. That contention is also rejected.
445 By cl 4.5 of, and Item 7b of Sch A to, the Service Agreement, Zomojo agreed, as soon as practicable after 2 December 2005, to issue to Hurd options to acquire 400,000 shares with a zero exercise price, subject to the vesting restriction in cl 4.5(c) of the Service Agreement. On 2 December 2005, in compliance with its obligations under cl 4.5 of, and Item 7b of Sch A to, the Service Agreement, Zomojo issued to Hurd a letter of offer to participate in the ZEOP. On 2 December 2005, Hurd accepted the letter of offer and agreed to be bound by the terms and conditions of the letter of offer and, among other matters, the Plan Rules for the ZEOP in respect of the options and any shares issued as a result of the exercise of the options: see [411] above.
446 As noted at [31] above, Rule 13.2 of the Plan Rules for the ZEOP stated that:
The Participant shall be permitted or obliged to deal with Shares if the Participant would be permitted or obliged to do so had the Shares been acquired pursuant to the [ESOP].
447 Hurd exercised each of the options. When his employment with Zomojo ceased, the 400,000 shares had been issued to his nominees. By operation of Rule 13.2 of the Plan Rules, the nominees were permitted or obliged to deal with the 400,000 shares in accordance with the terms of the ESOP.
448 Hurd's specific complaint was that the Plan Information Booklet was not incorporated because it was not communicated. That contention had been addressed: see [443] above. The Plan Information Booklet (which included cl 4.7(b)) did form part of the ESOP and Hurd was bound by it.
449 The next limb of Hurd's argument is that the board of Zomojo did not avail itself of the right (if it had one) to enforce cl 4.7(b) and is therefore precluded from seeking to rely upon it. To understand that contention, it is necessary to revisit the minute of the meeting on 4 March 2011: see [418] above. The evidence reveals that there was discussion at that meeting of cl 4.7(b) and that the bad leaver provision was not invoked. That is true. But it is necessary to understand why it was not invoked. Zomojo "only had a bad feeling at that point": see [418] above. That is the only conclusion to be drawn as at 4 March 2011. There was no evidence to suggest that by that date Zomojo had notice of any of the myriad of Hurd's contraventions prior to that date: see Section 4.2 above.
450 As a result, contrary to Hurd's submissions, it cannot be said that Zomojo was confronted with a choice between two inconsistent rights: cf United Australia Ltd v Barclays Bank Ltd [1941] AC 1 at 30 adopted in Sargent v ASL Developments Ltd (1974) 131 CLR 634. The factual foundation for the choice did not exist. Or, as the High Court stated in ASL Developments Ltd, for the doctrine of election to operate, there must be an element of knowledge on the part of the elector: at 642. Stephen J in ASL Developments Ltd described the knowledge an elector must possess in the following terms at 642-624:
The extent of knowledge of relevant facts necessary for the doctrine of election to apply has been described as "full knowledge of the material facts" (Bennett v L & W Whitehead Ltd (1926) 2 KB 380, at p 410). In Elder's Trustee & Executor Co Ltd v Commonwealth Homes & Investment Co Ltd (1941) 65 CLR 603 a knowledge of circumstances such as will provide information from which the decisive fact giving rise to the legal right is "a clear if not a necessary inference" was held to be sufficient: at 617.
The extent of knowledge will no doubt usually give rise to little difficulty; it is when the nature of the requisite knowledge is in issue, whether knowledge of the facts giving rise to the legal rights suffices or whether, on the contrary, there must also be knowledge of the right of election as between two available, inconsistent legal rights, that contrariety exists. …
In the present appeals I conclude that … all that need be established in order for the doctrine of election to apply is knowledge by the vendors of the facts giving rise to inconsistent legal rights; the appellants are to be taken to know of their rights of rescission conferred by cl. 16 and, of course, of their right to enforce the contracts according to their terms. If they then knew of the relevant facts giving rise to the rights of rescission, that is, the existence of a planning scheme affecting the lands sold, that is enough to invoke the doctrine. …
(Emphasis added.)
451 As at 4 March 2011, Zomojo did not know the relevant or material facts giving rise to the inconsistent legal rights.
452 Hurd then submitted that even if the Plan Information Booklet (including cl 4.7(b)) was applicable, he was not a "bad leaver" within the meaning of cl 4.7(b).
453 Hurd submitted that cl 4.7(b) is only engaged in circumstances where Hurd could be dismissed without notice. However, the right to dismissal in cl 8.1 of the Service Agreement as follows:
The Company may terminate this agreement immediately by notice in writing if the Managing Director:
a. commits any breach of the Managing Director's obligations and duties under this agreement or any agreement or arrangement with the Company which is, in the reasonable opinion of the Board, material;
b. in the reasonable opinion of a Managing Director is guilty of conduct tending to bring the Managing Director or the Company or any Related Body Corporate or Associated Company into disrepute;
…
454 Hurd's short point was that termination under cl 8.1 of the Service Agreement required notice in writing, whereas the bad leaver provisions in cl 4.7(b) only applied if somebody was entitled to be terminated without notice. Put another way, cl 4.7(b) could never be invoked because Zomojo had contracted out of the right to dismiss without notice. That submission is rejected.
455 Hurd conflated two ideas: notice being the act of notifying an employee that they had been terminated and notice being the period between termination and cessation of employment. In other words, dismissal with notice without a notice period and dismissal with notice and with a notice period. Dismissal of an employee, whether immediately or with a notice period, does not occur by telepathy. It requires some form of communication, or notice, to be given by the employer to the employee. The right to dismiss Hurd referred to in cl 4.7(b) of the Plan Information Booklet was substantively the same right to dismiss found in cl 8.1 of the Service Agreement – immediate dismissal but without a formal notice period.
6.3.3 Was cl 4.7(b) a penalty?
456 Hurd's next submission was that, even if the Plan Information Booklet was applicable, cl 4.7(b) of the Plan Information Booklet is void as a penalty. For the reasons stated below, I accept that cl 4.7(b) is void as a penalty.
457 Clause 4.7(b) provided Zomojo with a discretion as to the price for which it may cause its nominee to acquire the shares of an employee or an employee's nominee, where the employee was a bad leaver: see [35] above. By clause 4.7(b), the Board had the discretion to require the shares to be transferred for an amount equal to the employee's loan outstanding, or to permit the shares to be retained and sold in accordance with the provisions of the Shareholder Agreement. Zomojo submitted that a discretionary clause of this kind is not a penalty: Rouen v Ryan [2001] NSWCA 230 at [27] and [29].
458 Whether a clause is a penalty is a question of construction that must be determined as a matter of substance, viewing the agreement as a whole: O'Dea v Allstates Leasing System (WA) Pty Ltd (1983) l52 CLR 359 at 399, 368 and 375. The clause is judged at the time that the contract was made: Dunlop Pneumatic Tyre Company Limited v New Garage and Motor Company Limited [1915] AC 79 at 86-7, Allstates Leasing System at 368; Lordsvale Finance Plc v Bank of Zambia [1996] QB 752 at 762; Ringrow Pty Ltd v BP Australia Pty Ltd (2005) 224 CLR 656 at [12]; Spiers Earthworks Pty Ltd v Landtec Projects Corporation Pty Ltd (No 2) (2012) 287 ALR 360 at [22].
459 Recently, the High Court summarised the principles in relation to the penalty doctrine in Andrews v Australia and New Zealand Banking Group Ltd (2012) 86 ALJR 1002. The principles relevant to the present case were:
1. in general terms, a stipulation prima facie imposes a penalty on a party (the first party) if, as a matter of substance, it is collateral (or accessory) to a primary stipulation in favour of a second party and this collateral stipulation, upon the failure of the primary stipulation, imposes upon the first party an additional detriment, the penalty, to the benefit of the second party. The collateral or accessory stipulation is described as being in the nature of a security for and in terrorem of the satisfaction of the primary stipulation: at [10];
2. the penalty doctrine is not engaged if the prejudice or damage to the interests of the second party by the failure of the primary stipulation is insusceptible of evaluation and assessment in money terms. It is the availability of compensation which generates the "equity" upon which the court intervenes; without it, the parties are left to their legal rights and obligations: at [11];
3. the clause will be a penalty if the forfeiture goes beyond a genuine pre-estimate of damages: at [14] and [15]; and
4. an act of forfeiture in a contract able to be read down as a penalty is not restricted to breaches of a contract: at [46] to [50] and [78].
460 What then is the position here? As at December 2005, it was understood by Zomojo (and Hurd) that Zomojo's principal business risk was "important staff leaving with enough IP [intellectual property] in their heads to competitively hurt the venture": see [9] above. Zomojo and Hurd knew that if Hurd left Zomojo, with knowledge of its technology, techniques and ideas, and deployed that technology, techniques and ideas to the detriment of Zomojo and for his own personal advantage or the advantage of a third party, Hurd could destroy or substantially affect the value of the company. It was for that reason that the clause was included.
461 That last proposition is significant – that the clause was inserted because Zomojo and Hurd knew that if Hurd left Zomojo, with knowledge of its technology, techniques and ideas, and deployed that technology and those techniques and ideas to the detriment of Zomojo and for his own personal advantage or the advantage of a third party, Hurd could destroy or substantially affect the value of Zomojo. The fact that the extent of the damage was not known and could not be known demonstrates that the clause goes beyond a genuine pre-estimate of damages. The clause is a penalty.
6.3.4 Did cl 4.7(b) apply to all of the Hurd Shares?
462 It is strictly unnecessary to consider the extent of the application of cl 4.7(b). However, it is appropriate to address the issue. Zomojo submitted that all of the Hurd Shares were subject to the operation of cl 4.7(b) of the Plan Information Booklet. It is important to outline how this issue arises.
463 There were two categories of shares. Hurd caused Jolene to acquire 96,000 ordinary shares in Zomojo in three tranches of 32,000 shares on 30 June 2007, 30 June 2008 and 30 June 2009. Hurd's entitlement to those shares arose under cll 4.2(a) and 4.6 of the Service Agreement. Those shares were acquired pursuant to the terms of the ESOP (which included cl 4.7(b) of the Plan Information Booklet).
464 What then is the position of the 400,000 shares issued to Jolene as a result of Hurd exercising the options issued to him on 2 December 2005? Zomojo submitted that they were equally subject to the operation of the bad leaver provision in cl 4.7(b) of the Plan Information Booklet. Hurd submitted that they were not.
465 The starting point is the Shareholder Agreement. A holder of ordinary shares in Zomojo was entitled to dispose of shares in Zomojo only in prescribed ways: cl 45. One of those ways was pursuant to an employee benefit scheme: cl 45(a). An "employee benefit scheme" was defined in cl 26(e) as "the adoption of a profit sharing, bonus, share option, share incentive … for the benefit of the officers or other employees" of Zomojo. That included both the ESOP and the ZEOP: see also cl 36 of the Shareholder Agreement. No party suggested that any of the other prescribed methods were relevant to the present circumstances.
466 The next issue is whether cl 4.7(b) applied to the 400,000 shares issued to Jolene as a result of Hurd exercising the options issued to him on 2 December 2005? The answer lies in the provisions of the Plan Rules.
467 As described at [31] above, upon the exercise of options, the "Participant" agreed to be bound by the Plan Rules, Zomojo's Constitution and the Shareholder Agreement (Rule 9.6): see also definition of "Participant" in Rule 39. The "Participant" undertook not to take any action which would infringe the restrictions on sale of shares imposed by Rule 13 (cl 9.7): see also Rule 13.2 at [31] and [446] above.
468 The Plan Rules did not otherwise address disposal of shares. Why? Because the Plan Rules were subject to and to be "administered in a manner consistent with Zomojo's philosophy underpinning share ownership by Employees in the Group": see cll 2.2 and 9.6 of the Plan Rules. For those reasons, the 400,000 shares issued to Jolene as a result of Hurd exercising the options issued to him on 2 December 2005 were also subject to the ESOP and, in particular, cl 4.7(b) of the Plan Information Booklet.
469 In May 2010, with the consent of the Board, Hurd caused Jolene to sell 7,810 of its shares in Zomojo to the HFSF. Whether those shares were issued under the ESOP or were originally shares issued to Jolene as a result of Hurd exercising the options issued to him on 2 December 2005 is irrelevant. Those 7,810 shares were also subject to the operation of cl 4.7(b) of the Plan Information Booklet.
470 Zomojo would be entitled by reason of Hurd's breaches of his obligations under the Service Agreement to be put back in the position it would have been but for the breach – not having paid out the $458,025 that was paid by Zomojo for the Hurd shares. However, if Zomojo had known of Hurd's misconduct and terminated the Service Agreement immediately and treated Hurd as a bad leaver for the purposes of cl 4.7(b) of the Plan Information Booklet, cl 4.7(b) would be held invalid as a penalty. As a result, Zomojo would not have been entitled to require the Hurd Shares to be transferred to Zomojo Staff Holdings without the payment of any sum to Hurd or his nominees.
6.4 Validity of the Resolutions made by the Zomojo Board on 30 June 2011
471 On 30 June 2011, a meeting of the Board of directors of Zomojo was held by conference call. The minutes of the meeting record the following discussion.
The Chairman verbally advised of the following:
• The meeting was called to deal with the transfer of Matt Hurd's shares, noting that Matt Hurd left Zomojo in February 2011 and Zomojo agreed in early March 2011 to purchase his shares;
• There has been some 'to and fro' about the price Matt Hurd should receive for his shares;
• The employee share plan provides a formula for the price: 5 x pre-tax profit for FY 2010 divided by 2,000,000 shares on issue and multiplied by the number of shares being sold. The formula is not in dispute, but the value of pre-tax profit is;
• When Zomojo first exercised the option to purchase Matt Hurd's shares, Zomojo calculated the price on the basis of a pre-tax profit figure of $1,157,255 as prepared by John Hurd. Applying the formula, this gave a purchase price of $1,402,208.17 for Jolene (Tas) Pty Ltd and $22,594.33 for the Hurd Family Super Fund;
• Matt Hurd objected to this valuation, stating that the appropriate pre-tax profit figure was $4,998,329. Matt Hurd made a counter offer of $6,056,686.24 for Jolene's shares and $97,593.76 for Hurd Family Super Fund's shares;
• Zomojo then sought independent expert advice from Deloitte, which calculated pre-tax profit (in accordance with the Australian Accounting Standards) at $371,706. This put the consideration for Jolene's shares at $450,761.70 and the consideration for Hurd Family Super Fund's shares at $7,263.30. Zomojo has given Matt Hurd's lawyers the documents that Deloitte relied upon and Matt Hurd is getting his own independent valuation. We have not heard when we can expect to receive this valuation;
• Matt Hurd has now offered to execute the transfer for the sum of $1,424,802.50 but it is not clear whether this is in full payment or part payment of the shares;
• In the circumstances, Zomojo must ensure that the consideration paid for the shares is the proper consideration. Zomojo cannot wait in limbo for this process to unfold;
• It was proposed then that the following occur:
o Matt Hurd's shares (held by Jolene (TAS) Pty Ltd and Hurd Family Superannuation Fund) be transferred to Zomojo Staff Holdings Pty Ltd, effective as at 29 June 2011;
o the transfer forms be sent to Jolene (TAS) Pty Ltd and Hurd Family Superannuation Fund for signing within 14 days;
o if the forms are not signed within the stipulated period, that the Plan administrator sign the share transfer forms on behalf of Jolene and Hurd Family Super Fund and Zomojo Staff Holdings Pty Ltd sign as purchaser; and
o Zomojo issue new share certificates to Zomojo Staff Holdings, updating its register and informing ASIC.
• Given Matt Hurd's latest offer of $1,424,802.50, it is proposed that this sum be placed in an interest bearing account of Zomojo not for use as operating capital pending resolution of the price to be paid in respect of the shares the subject of the transfers.
The resolutions passed at that meeting are set out at [429] above.
472 Hurd submitted that the resolutions were not valid because they were not made in accordance with the procedure for meetings of the Board provided for in the Shareholder Agreement.
473 Clause 22(e) of the Shareholder Agreement required each director to be given "at least 7 days written notice of a Board meeting and [to] be provided with the agenda and any relevant papers at that time". However, cl 22(e) also provided that the notice requirement "may be waived for a particular meeting by all Directors in office at that time".
474 Hurd submitted that short notice was given of the 30 June 2011 Board meeting and that one of the directors, Ms Wilson, was present at the meeting but did not agree to waive the notice requirement. Ms Wilson is Hurd's sister. Hurd's submission that the meeting of 30 June 2011 was irregular and that irregularity has the effect of invalidating the resolutions passed on 30 June 2011 is without foundation both factually and legally.
475 First, the facts. Hurd did not dispute that the minute of the Board meeting held on 30 June 2011 accurately reflected the business transacted at that meeting: see also s 251A(6) of the Corporations Act. The resolutions were not circulated in any detail before the meeting. However, Robinson's uncontroverted evidence was that:
1. he had emailed Ms Wilson about teeing up a time for the 30 June 2011 meeting and in that email he had mentioned that the meeting was to deal with the transfer of the Hurd Shares;
2. the directors agreed on the time and were all on the call together;
3. Ms Wilson did not at any time object that there had been short notice given for the meeting; and
4. Ms Wilson voted against the resolutions that were passed at the meeting.
Ms Wilson did not give evidence at the trial.
476 Next, ss 1322(2) and (3) of the Corporations Act provide that:
(2) A proceeding under this Act is not invalidated because of any procedural irregularity unless the Court is of the opinion that the irregularity has caused or may cause substantial injustice that cannot be remedied by any other order of the Court and by order declares the proceeding to be invalid.
(3) A meeting held for the purposes of this Act, or a meeting notice of which is required to be given in accordance with the provisions of this Act, or any proceeding at such a meeting, is not invalidated only because of the … non-receipt by any person of notice of the meeting, unless the Court, on the application of the person concerned, a person entitled to attend the meeting or ASIC, declares proceedings at the meeting to be void.
(Emphasis added.)
477 Sections 1322(4) and (6) were recently considered in Oil Basins Limited v Bass Strait Oil Company [2012] FCA 1122:
67 It is well established that s 1322(4) is a remedial provision to be interpreted liberally: Elderslie Finance Corp Ltd v Australian Securities Commission (1993) 11 ACLC 787; Winpar Holdings Ltd v Goldfields Kalgoorlie Ltd (2001) 166 FLR 144; Re Golden Gate Petroleum (2010) 77 ACSR 17 at [38] and the authorities listed therein. Indeed, the Court's discretion is unfettered except for the requirements in s 1322(6): Re NRMA Ltd [2003] FCAFC 206 at [21] and Re Wood Parsons Pty Ltd (in liq) (2002) 21 ACLC 111 at [52]. The orders can be retrospective: Wood Parsons at [52]. And the relief can be conditional: s 1322(4).
68 "Proceeding" is interpreted broadly. It includes any procedure required to be taken if a company wished to achieve particular legal consequences (Re Broadway Motors Holdings Pty Ltd (in liq) (1986) 6 NSWLR 45 at 56 and Winpar Holdings at [65]) and applies whether the proceeding is a legal proceeding or not: s 1322(1)(a).
…
71 The reference to "no substantial injustice" in s 1322(6)(c) (emphasis added) has been held to refer to a real and not insubstantial or theoretical prejudice. Whether there is real injustice requires a weighing of any prejudice if the order is made against the prejudice which would be suffered by other members and creditors of the company if an order was not made: Gangemi v Osborne [2009] VSCA 297 at [62] citing Re Compaction Systems Pty Ltd & the Companies Act [1976] 2 NSWLR 477 at 493. …
Those principles apply equally to s 1322(2).
478 In the present case, the question of short notice of the 30 June 2011 Board meeting is of a procedural nature (Nenna v Australian Securities and Investments Commission (2011) 198 FCR 32 at [50]-[81]), it was not put to Robinson that the directors were not acting honestly on 30 June 2011 and, finally, there was no evidence that the alleged short notice caused or may have caused any substantial injustice. For those reasons, if it were necessary to do so, the business transacted at the 30 June 2011 Board meeting would be validated under s 1322(2) of the Corporations Act.
6.5 Alleged Failures to Act Fairly and Breach of Implied Terms to Act in Good Faith
479 The Respondents alleged that there were implied terms of the Service Agreement, the Shareholder Agreement and the ESOP that Zomojo would act in good faith and deal fairly with Hurd and Hurd's nominees in the exercise of Hurd's contractual rights. The principal contention was that by passing the resolutions of 30 June 2011 that had the effect of causing the Hurd shares to be transferred to Zomojo Staff Holdings for $458,025, Zomojo breached those implied terms, and failed to deal fairly with Hurd. These contentions should also be rejected.
480 First, the relevant legal principles. Implied terms to act in good faith and to deal fairly are not implied into all commercial contracts: Service Station Association Ltd v Berg Bennett & Associates Pty Ltd (1993) 45 FCR 84 at 96-7; Vodafone Pacific Ltd v Mobile Innovations Ltd [2004] NSWCA 15 at [191]; Australian Hotels Association (NSW) v TAB Ltd [2006] NSWSC 293 at [78]; Maitland Main Collieries Pty Ltd v Xstrata Mt Owen Pty Ltd [2006] NSWSC 1235 at [56]; Driveforce Pty Ltd v Gunns Ltd (No 3) [2010] TASSC 38 at [12]. As was recently stated by the Victorian Court of Appeal in Specialist Diagnostic Services Pty Ltd (formerly Symbion Pathology Pty Ltd) v Healthscope Pty Ltd [2012] VSCA 175 at [86], it cannot be accepted that an obligation of good faith should be implied indiscriminately into all commercial contracts: see also Burger King Corporation v Hungry Jack's Pty Ltd (2001) 69 NSWLR 558 at [163]-[167].
481 Next, where (as here), there is a detailed written contract entered into between commercial parties of equivalent bargaining power, a term will ordinarily be implied only if it meets the tests laid down in BP Refinery (Westernport) Pty Ltd v President, Councillors and Ratepayers of the Shire of Hastings (1977) 180 CLR 266 at 283 and Codelfa Construction Pty Ltd v State Rail Authority of NSW (1982) 149 CLR 337: see also Specialist Diagnostic at [87]; Burger King at [163]-[167].
482 What then is sought to be implied? Hurd submitted that what should be implied was an obligation for Zomojo to act in good faith and to deal fairly with Hurd and Hurd's nominees in the exercise of Hurd's contractual rights.
483 At the time that the Service Agreement, the Shareholder Agreement and the ESOP were entered into, it is reasonable to conclude that the parties did not intend Zomojo to be deprived of its contractual right under cl 4.7(b) when an employee was a bad leaver. Indeed, in Hurd's own words, it was integral to the establishment of Zomojo that there be an employee share ownership scheme that provided incentives to employees to stay with, and loyal to, the company. It was recognised that if employees left Zomojo with knowledge of its technology, techniques and ideas, they could destroy the whole of the value of the company. Clause 4.7(b) was one of the contractual provisions designed to address that concern.
484 It is then necessary to look again at the relevant provisions. Clause 4.7(b) of the Plan Information Booklet gave the Board a discretion, where an employee was a bad leaver, to acquire the shares held by the employee or the employee's nominee for the amount of any loan outstanding by the employee to Zomojo. Clause 8.2 of the Service Agreement provided that if Hurd's employment was terminated by reason of him committing a breach of his obligations and duties, he would not be entitled to any further compensation or damages other than pro rata salary and accrued annual leave. There was nothing unfair about those provisions. Parties are free to retain their economic autonomy and liberty: Russell v Trustees of the Roman Catholic Church for the Archdiocese of Sydney (2007) 69 NSWLR 198 at [112]. Put another way, it was neither reasonable nor necessary for the terms identified by Hurd to be implied: Burger King at [167].
485 Moreover, even if contrary to the view formed, implied duties of good faith are to be implied into the Service Agreement, Shareholder Agreement and ESOP, they were not breached. There are two aspects to be kept in mind. First, the implied terms are to be understood in the context of the express rights afforded to Zomojo by cl 8.2 of the Service Agreement and cl 4.7 of the Plan Information Booklet. Such implied duties of good faith do not require a party to subordinate that party's own interests, so long as the pursuit of those interests does not entail an unreasonable interference with the enjoyment of a benefit conferred by the express terms of the contract: Overlook Management BV v Foxtel Management Pty Ltd [2002] NSWSC 17 at [65].
486 Next, the facts relied upon by Hurd to constitute a breach of any implied term. They are not capable of constituting a breach. In particular, none of the facts support a finding that Zomojo "took steps to minimise its balance sheet".
487 Hurd submitted that striking a price of $458,000 was a breach. In particular, he submitted:
At the heart of the bargain for the purchase of shares between Mr Hurd and Zomojo was that Zomojo would pay a price in buying back the shares that reflected their value. The very existence of a formula to ascertain that price indicates that this was contemplated by both parties. This is not a matter where the Court needs to decide whether one party's obligation to act honestly and with fidelity to the bargain might conflict with its own interests: a healthy share price would indicate a healthy company.
The mischief that the law seeks to remedy in reading into contracts an implied term of good faith and fair dealing is a cynical exercise of a power by one party in order to deprive the other of a true reflection of the bargain made. If Zomojo took steps to minimise the true position the 2010-2011 accounts in order to short change an employee-director, this is just such a cynical exercise deserving of the Court's intervention.
(Emphasis added.)
488 The relevant facts are set out at [407]-[431] above. The bargain made included cll 4.7(b) and 8.2 of the Service Agreement. It is true that a significantly lower number was expected as a result of Deloitte "recasting the accounts" and that Robinson and Boyle were hopeful of Deloitte arriving at a fairly low number. But none of that evidence is consistent with Zomojo seeking to deprive Hurd of the bargain he made with Zomojo or with Zomojo taking steps to minimise the true position of the 2010-2011 accounts in order to short change Hurd.
489 Hurd then contended that Sincock was given assumptions that "were just wrong". In support of that contention, Hurd produced a table which sought to analyse the five research and development projects and, in particular, the state of those projects for the purposes of determining whether or not it was appropriate to capitalise the costs of those projects. There was insufficient factual material before the Court for it to consider the state of those projects and, in particular, whether one or more of the projects satisfied AAS 138. In fact, subsequently, Hurd submitted that an issue for determination at the quantum hearing was whether the research and development costs should have been capitalised.
490 Next, Hurd submitted that the Court should find that Robinson and Boyle were actively working to keep the figures arrived at by Deloitte low. That contention is rejected. Zomojo retained Deloitte, Deloitte asked for information, information was provided (including from Hurd Senior) and Deloitte prepared the report. Sincock gave evidence. He was a witness of truth. There was no, and could be no, suggestion, that Deloitte acted improperly.
491 Finally, Hurd referred to the fact that Robinson knew that the last sale of shares in Zomojo was at $14.25 per share and that the sale to Hurd was $0.93 per share. That is true. But it is necessary to understand that the sale price of $14.25 per share was calculated by reference to the same contractual provisions but in relation to a different financial year. Further, that sale price was calculated based on accounts prepared by Hurd Senior which did not comply with AAS 138.
492 After receiving advice from Deloitte, Zomojo changed its mind about the price to be paid for Hurd's shares. Zomojo benefitted from that change in position. Zomojo intended to satisfy its contractual obligation and, while doing so, wanted to pay as low a price as possible. Its remaining directors knew that the last sale was at $14.65 per share. None of that conduct, taken on its own, or collectively, is improper.
493 The contention that the act of retaining Deloitte when Zomojo was unhappy with the number in the accounts was in bad faith is absurd. As Robinson said, there was a dispute. Hurd Senior was the accountant. Any company would have sought independent advice on the issue. The further contention that the instructions to Deloitte produced a very low number and that the instructions were given in bad faith is not proved: see [422] and [488]-[490] above.
494 In electing to acquire the Hurd Shares for $458,025, Zomojo did no more than exercise the discretion available to it under cl 4.7 of the Plan Information Booklet, by applying the formula set out therein based upon a pre-tax profit figure that had been supplied by Deloitte. In so acting, Zomojo did not act in bad faith or unfairly to Hurd or his nominees.
6.6 Amount to be paid for the Hurd Shares
495 The next two issues concern the amount payable for the Hurd Shares and Zomojo's application for rectification of the Service Agreement. In short, Hurd submitted that the price Zomojo was required to pay for the Hurd Shares was higher than the $458,025 that was paid by Zomojo and that there was no basis for rectification. Zomojo contended to the contrary. Given the conclusion reached above, it is strictly unnecessary to consider these issues. However, given the level of distrust and animosity between the parties, it is necessary to say something about each of these issues.
496 First, the principles of construction. Hurd submitted that there were three relevant principles. The principles were not in dispute. First, the construction of commercial contracts is to be determined by reference to what would be understood by a reasonable person having background knowledge of the circumstances which were common to both parties in the situation they were in at the time of contract: Maggbury Pty Ltd v Hafele Australia Pty Ltd (2001) 210 CLR 181 at [11]. Next, that construction requires consideration not only of the text of the contract, but also the surrounding circumstances known to the parties, and the purpose and object of the transaction: Pacific Carriers Limited v BNP Paribas (2004) 218 CLR 451 at [22]; Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd (2004) 219 CLR 165 at [40] and Lion Nathan Australia Pty Ltd v Coopers Brewery Ltd (2006) 156 FCR 1 at [46]. Third, the contract will be interpreted in a way which will result in a sensible and businesslike meaning: Australian Broadcasting Commission v Australian Performing Rights Association Limited (1973) 129 CLR 99 at 109. Fourth, where two constructions are open, the Court will avoid consequences that are unreasonable, unjust or inconvenient: TCN Channel Nine Pty Limited v Hayden Enterprises Pty Limited (1989) 16 NSWLR 130 at 146. Fifth, where there is doubt about the meaning of a clause in a contract, it will be construed against the person for whose benefit it was inserted: Johnson v The Edgware & Co, Railway Co (1866) 35 Veav 480. However, that presumption only applies if the Court cannot reach a conclusion as to the construction of the provision in question: St Edmundsbury & Ipswich Diocesan Board of Finance v Clark (No 2) [1975] 1 WLR 468. Generally, any ambiguity will be construed against the person who drafted the agreement. The last principle is wider than the contra proferentem rule, and is applied generally to circumstances where a party tenders a printed form: State Lotteries Office v Burgin [1993] NSWCA 254 and North v Marina [2003] NSWSC 64.
497 The relevant contractual provision is cl 4.6(e)(ii) of the of the Service Agreement It states that, on cessation of employment:
the Company is able to arrange for the purchase of the shares [acquired under clause 4.6] from the Managing Director for an amount equal to 5 x the Company's previous financial year's pre-tax profit, and if the Company does not choose to do so the Managing Director will be able to sell the shares then or at a later time in accordance with the Company's shareholder agreement.
It is inconsistent with cl 4.7(c) of the Plan Information Booklet which provided that Zomojo had an option to purchase shares on the basis of a "Plan valuation formula" being "5 x the previous financial year's pre-tax profit divided by the total number of shares on issue, and then multiplied by the number of shares being sold": see [35] above.
498 Hurd contended that the formula for compulsory acquisition of the Hurd Shares was misapplied in two ways. First, Hurd submitted that cl 4.6(e)(ii) of the Service Agreement was misapplied on its terms because Zomojo applied the formula provided for in cl 4.6(e)(ii) but then divided the figure by the number of shares held. Second, Hurd submitted that the pre-tax profit that was used was not the true pre-tax profit, but a number inappropriately adjusted downwards. The second issue has been addressed and dismissed in Section 6.5 above.
499 In relation to the first issue, Zomojo's answer was that cl 4.6 was irrelevant for two reasons. First, cl 4.6(e)(ii) is not expressed in mandatory terms; it contemplates that Zomojo might choose not to acquire shares held by Hurd and, secondly, that the Hurd Shares were subject to the terms of the ESOP. For the reasons set out above, I accept that the Hurd Shares were subject to the ESOP: see [466]-[469] above.
500 Given the views formed, it is strictly unnecessary to consider the inconsistency between cl 4.6(e)(ii) of the Service Agreement and cl 4.7(c) of the Plan Information Booklet. However, the following matters should be noted. First, a literal construction of the first part of cl 4.6(e)(ii) would lead to the absurd result that, if Zomojo chose to do so, it could acquire any shares purchased by Hurd under cl 4.6 of the Service Agreement for a price equivalent to five times the whole of Zomojo's pre-tax profit for the previous year, irrespective of the number of shares held by him. In other words, a shareholder with a single share would receive the same price as a shareholder holding 1 million shares. Such a result would be commercially irrational and cannot have been intended by the parties. But that is not the only problem with a literal construction of the first part of cl 4.6(e)(ii). Such a construction would also be inconsistent with cl 4.7(c) of the Plan Information Booklet: see [35] above.
501 For those reasons, I would accept Zomojo's submission that it is both appropriate and reasonable to construe the first part of cl 4.6(e)(ii) so that it was consistent with the "Plan valuation formula" in cl 4.7(c) of the Plan Information Booklet. As the Court said in Westpac Banking Corporation v Tanzone Pty Ltd [2000] NSWCA 25 at [19]-[23], the words "should be construed so as to avoid the absurdity by supplying omitting or correcting words": citing Fitzgerald v Masters (1956) 95 CLR 420 and Watson v Phipps (1985) 63 ALR 321; Cooper Brookes (Wollongong) Pty Ltd v Commissioner of Taxation (Cth) (1991) 147 CLR 297. This is not a case of mere unreasonableness. The present case fell into the absurdity category. Therefore, as a matter of construction, the reference to "5 x the Company's previous financial year's pre-tax profit" in the first part of cl 4.6(e)(ii) should be taken to be a shorthand reference to the "Plan valuation formula" in clause 4.7(c) of the Plan Information Booklet.
502 Although it is unnecessary to resolve this inconsistency, it is appropriate to address the alternative mechanism proposed by Zomojo – rectification. Zomojo submitted that there was an obvious, common mistake in cl 4.6(e)(ii) of the Service Agreement that ought to be rectified by equity to reflect the true agreement between the parties. Zomojo submitted that the objective intention of the parties in relation to the formula in cl 4.6(e)(ii) of the Service Agreement was to be found in the formula in cl 4.7(c) of the Plan Information Booklet and, therefore, the omission in cl 4.6(e)(ii) was clearly and precisely identified.
503 Hurd contended that there was no basis for rectification. It is unnecessary to rehearse the relevant legal principles. Hurd's objections to rectification were described as "procedural hurdles". I will deal with each "hurdle" in turn.
504 First, Hurd contended that there was no formal claim for rectification or any articulation of the remedy and that the rectification claim by way of defence to cross claim was procedurally improper. That contention is rejected. There was a claim for rectification and the remedy was articulated: para 3(b)(iv) of the Amended Defence to Cross-Claim. The fact that a separate claim was not commenced seeking rectification of cl 4.6(e)(ii) is not a bar. Moreover, as is readily apparent, such relief was unnecessary.
505 Next, Hurd points to the prejudice allegedly caused by Zomojo's delay in seeking rectification. Hurd's evidence was that he would have taken a different course prior to the resolution approving the transfer of his shares to Zomojo Staff Holdings. I reject that evidence. It must be recalled that at that time, the formula was not in dispute. What was in dispute was one of the integers in the formula – the calculation of the pre-tax profit. For the same reasons, Hurd's contention that Zomojo waived any right to seek rectification of the clause is rejected. Moreover, as noted earlier (see [494] above), Zomojo did not act in bad faith or unfairly to Hurd or his nominees in acquiring the Hurd Shares.
506 Hurd, Jolene and the HFSF submitted that Zomojo acted oppressively by passing the resolutions of 30 June 2011 that had the effect of causing the Hurd Shares to be transferred to Zomojo Staff Holdings for $458,025. They further contended that cl 4.7(b) of the Plan Information Booklet was itself oppressive.
507 Section 232 of the Corporations Act provides that the Court may make an order under s 233 if the conduct of a company's affairs is oppressive to, unfairly prejudicial to, or unfairly discriminatory against a member or members whether in that capacity or in any other capacity. Section 53 of the Corporations Act defines the "affairs" of a company.
508 Whether conduct is unfair or oppressive is assessed objectively through the eyes of a commercial bystander: Aqua-Max Pty Ltd v MT Associates Pty Ltd (2001) 3 VR 473 at [54]; Wayde v NSW Rugby League Ltd (1985) 180 CLR 459; Morgan v 45 Flers Avenue Pty Ltd (1986) 10 ACLR 692 and Endoline Pty Ltd v Drapac [2012] VSC 156 at [272]. The Court will look at the issue of oppression by considering the impact on the oppressed, not the intention of the alleged oppressor: M Dalley & C Pty Ltd; Re (1968) 1 ACLR 489.
509 If the conduct is so unfair that reasonable directors would not have thought it fair, then relief will be granted. The conduct is considered in its context and separate instances of conduct may, cumulatively, constitute oppression: Aqua-Max at [61] and Endoline at [272]. Although relief for oppression is based in the Corporations Act, equitable considerations have a role to play in determining whether relief should be granted.
510 Hurd submitted that the "starting point for the oppression claim is the overwhelming evidence that the sale of Mr Hurd's shares was substantially below value". In support of that contention, Hurd further submitted that:
There is no evidence that Mr Hurd agreed to the oppression. He never signed the Information Booklet. The draft by Dr Brash had a discussion of a fairer formula. The formula in the Service Agreement is in different terms. It cannot be said that Mr Hurd knowingly sacrificed his rights (as was the case in Re Terri Co Pty Ltd (1987) 12 ACLR 457; 6 ACLC 402).
If the Deloitte figures were right, 2009/2010 was an unusually low profit year. Alternatively, the cross claimants assert that the ESOP itself was an act of oppression. If the ESOP was allowed to operate in the way that the Zomojo [sic] alleges, it is an instrument of oppression. There is an obvious cross-over with the rectification suit because equity should not facilitate the oppression by further reducing the amount payable to Mr Hurd.
511 That submission is rejected. There was no oppression. Zomojo applied cl 4.7 of the Plan Information Booklet according to its terms. Hurd had notice of it: see [443] above. It caused Zomojo Staff Holdings to acquire the Hurd Shares for fair value, being the value arrived at by applying the "Plan valuation formula", based upon a pre-tax profit figure determined by an independent and reputable firm, Deloitte. It gave Hurd 14 days' advance notice of its intentions. It applied cl 4.7 despite the fact that, as the facts have emerged, Hurd was a bad leaver within the meaning of cl 4.7(b) of the Plan Information Booklet.
512 Hurd's contentions are rejected.
513 At the conclusion of the trial, three issues remained outstanding. Counsel for the parties provided a short note which addressed the competing contentions on those issues. Each issue is addressed in turn.
7.1 Amendments to Zomojo's pleadings
514 Zomojo's application for leave to amend its Application and Statement of Claim addressed two broad categories of amendments; amended relied and amendments to Zomojo's claim that Zeptonics and Zepto Markets induced Hurd to breach cl 12.1 of the Service Agreement. The second matter has been addressed earlier: see [345] above.
515 In relation to the first, leave to amend should be granted. The amended relief was directed to the injunctions and declarations sought by Zomojo. That relief necessarily must be moulded to fit the findings at trial: Farrow Finance at [178]. Hurd did not contend that he suffered any prejudice and none can be identified.
7.2 Paragraphs 92–95 of Hurd's written submissions
516 This issue concerns the proper calculation of the "pre-tax" profit of Zomojo and, in particular, whether or not it was appropriate to capitalise the costs of research and development projects: see [489] above. Given the findings made, that issue does not arise for further determination or consideration.
7.3 Future conduct of the trial
517 At the conclusion of the trial, Zomojo sought to expand the issues to be determined by the Court by these reasons for judgment. That application was opposed by the Respondents. Put simply, the parties could not agree on the manner in which the trial would be split.
518 Orders were made on 23 October 2012 for the hearing of paras 6 to 16 (inclusive) of the Further Amended Cross-Claim and the corresponding paragraphs of the Amended Defence to Cross Claim to be conducted separately and as part of the quantum hearing.
519 Given the findings that have been made, the only issues that remain to be determined concern quantification of Zomojo's claim for damages and, where appropriate, taking an account of profits. As a result, the orders of 23 October 2012 should be varied to reflect the manner in which the trial was conducted, namely, a trial on liability only.
| I certify that the preceding five hundred and nineteen (519) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Gordon. |
Associate:
Confidential Annexure A – Summary of evidence concerning "novelty" of Zomojo's confidential information
REDACTED FOR CONFIDENTIALITY
