FEDERAL COURT OF AUSTRALIA

Blackmagic Design Pty Ltd v Overliese [2011] FCAFC 24

THE COURT ORDERS THAT:

1.    The appeal be allowed in part.

2.    Set aside order 4 made by Jessup J on 24 February 2010 and in lieu thereof order as follows:

4.    Subject to any order previously made for the payment of the costs of a party by any other party:

(a)    The first respondent pay 35 per cent of the costs (including reserved costs) of the applicant, to be taxed if not agreed and the applicant pay 65 per cent of the costs (including reserved costs) of the first respondent, to be taxed if not agreed.

(b)    The second respondent pay 25 per cent of the costs (including reserved costs) of the applicant, to be taxed if not agreed and the applicant pay 75 per cent of the costs (including reserved costs) of the second respondent, to be taxed if not agreed.

(c)    The third respondent pay 35 per cent of the costs (including reserved costs) of the applicant, to be taxed if not agreed and the applicant pay 65 per cent of the costs (including reserved costs) of the third respondent, to be taxed if not agreed.

(d)    The applicant pay the costs (including reserved costs) of the fourth respondent, to be taxed if not agreed.

3.    The appeal be otherwise dismissed.

4.    The appellant pay 90 per cent of the respondents’ costs of the appeal.

Note:    Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules. The text of entered orders can be located using Federal Law Search on the Court’s website.

REASONS FOR JUDGMENT

Finkelstein J

1    I agree in the reasons of Justice Besanko and in the orders his Honour proposes.

Associate:

Dated:    25 February 2011

REASONS FOR JUDGMENT

JACOBSON J

2    I also agree with the orders proposed by Besanko J for the reasons given by him.

Associate:

Dated:    25 February 2011

REASONS FOR JUDGMENT

BESANKO J

Introduction

3    This is an appeal from orders made by a judge of this Court after a trial of a proceeding brought by the applicant against the respondents. The trial judge made one of the orders sought by the applicant but declined to make other orders sought by it. The applicant, which is the appellant before this Court, appeals against the trial judge’s refusal to make orders on certain of its claims. It also appeals quite separately against the order the trial judge made as to costs. The respondents have filed a notice of contention in which they assert that if necessary the trial judge’s orders can be upheld on grounds other than the grounds upon which he relied.

4    The orders made by the trial judge are as follows:

1.    The first, second and third respondents be restrained, whether by themselves, their directors, servants, agents, employees or any of them howsoever, from using or disclosing, anywhere in the world and in any way, the following information of the applicant:

(i)    parts usage figures;

(ii)    actual parts prices paid by the applicant;

(iii)    profit margins of the applicant

contained in the Costs, Allcosts, SDI, Tweak or OC worksheets of any variant of the Excel spreadsheet file entitled ‘Ycalc’, of the Excel spreadsheet file entitled ‘TMP’ or of the Excel spreadsheet file entitled ‘Cashflow’ (referred to in this order as ‘the confidential information’).

2.    [This order is not relevant for present purposes.]

3.    Save as aforesaid, the application be dismissed.

4.    Subject to any order previously made for the payment of the costs of a party by any other party,

(a)    the applicant pay 30% of the costs (including reserved costs) of the first respondent, to be taxed if not agreed;

(b)    the applicant pay one half of the costs (including reserved costs) of the second respondent, to be taxed if not agreed;

(c)    the applicant pay 30% of the costs (including reserved costs) of the third respondent, to be taxed if not agreed;

(d)    The applicant pay the costs (including reserved costs) of the fourth respondent, to be taxed if not agreed.

5    The focus of the appellant’s attack on the appeal is orders 3 and 4.

6     The trial judge dealt with the substantive issues in Blackmagic Design Pty Ltd v Overliese [2010] FCA 13; (2010) 84 IPR 505. He dealt with the costs issues separately in Blackmagic Design Pty Ltd v Overliese [2010] FCA 126.

7    The appellant is a company which is based in Melbourne. It is engaged in the business of the design, manufacture, marketing and sale of hardware and software for broadcast television production, and for consumer and commercial feature film post-production, and of the provision of post-production services for the television and film markets.

8    The trial judge (at [3]) adopted the following description of the appellant’s business taken from an affidavit sworn by its chief executive officer, Mr Grant Petty:

(a)    products that capture and/or play back video to and from a computer in either compressed or uncompressed video;

(b)    products that capture and/or play back audio to and from a computer in either compressed or uncompressed audio;

(c)    products that perform video conversion from one video format to another, including but not limited to SDI to HDMI conversion, HDMI to SDI conversion, SDI to analog video conversion and analog to SDI conversion audio imbedding, SDI audio deimbedding;

(d)    products that generate video synchronisation signals in either standard definition or high definition;

(e)    products that perform video routing and switching in standard definition or high definition;

(f)    products that have video or audio wave form monitoring or testing capabilities (which are currently being developed by BMD but are not yet commercialised) and

(g)    products that perform SDI to DVI conversion for video monitoring in either high definition or standard definition.

9    The trial judge said that ‘SDI’ means ‘serial digital interface’, a high-quality video connection for interfacing between video products and the highest quality uncompressed format. ‘HDMI’ means ‘high-definition multimedia interface’, a compact audio/video interface for transmitting very high quality digital video.

10    This proceeding concerned a product called a video capture card.

11    The first respondent is a computer engineer who worked for the appellant between June 2002 and 5 May 2008. He held the position of Director of Hardware Engineering. The second respondent was employed by the appellant between about April 2006 and 5 May 2008. He held the position of Business Development Manager. The third respondent is a company called Atomos Audio Pty Ltd. The third respondent was incorporated by the first and second respondents on 12 August 2007. The first and second respondents were each directors of the third respondent and they held all of the issued shares in it. The fourth respondent is the second respondent’s wife and she assisted the first and second respondents in certain business activities which were in issue in the proceeding.

12    In outline, the appellant claimed before the trial judge that unknown to it the first and second respondents in January or early February 2008 developed a product which would compete with the appellant’s products. That product was a video capture card which the trial judge referred to as ‘Simple Card’. The appellant’s case was that Simple Card was developed with the assistance of confidential information of the appellant, being the appellant’s parts usage figures, the prices the appellant paid for those parts and the appellant’s profit margins. The details of Simple Card and details of a number of the appellant’s products were contained in worksheets (of which there were various versions) which were part of what the trial judge referred to as the ‘ycalc’ spreadsheet. The first respondent prepared the ‘ycalc’ spreadsheet. The appellant’s case was that at the time the first and second respondents were involved in developing the Simple Card product they were intending to establish a business which would compete with the appellant’s business. The appellant’s case was that none of these matters were disclosed to it.

13    Both of the respondents left the appellant’s employ in early May 2008. The appellant obtained a search order which was executed on 13 May 2008. Versions of the ‘ycalc’ spreadsheet were discovered and the appellant learnt of the details of Simple Card. As I understand it, the respondents never established a business which competed with the appellant’s business. They were restrained from doing so by interlocutory orders made by the Court.

14    The appellant’s case was that on learning of the details of Simple Card it set to work to try to produce a card with the same or similar features. Ultimately, it produced a card called DeckLink Studio. That card was not the same as Simple Card because (so the appellant said) it was necessary for it to produce a better card. Nevertheless, on the appellant’s case the production of DeckLink Studio card was the direct result of it learning of the details of Simple Card.

15    Before the trial judge, the appellant claimed that the respondents should be permanently restrained from using its confidential information. It succeeded on that claim against the first, second and third respondents (see the first order set out in [4] above) and neither the appellant or the respondents complain of the permanent injunction granted by the trial judge against the first, second and third respondents. However, the use of the appellant’s confidential information was also relevant to the other claims made by the appellant. The appellant claimed a wider permanent injunction restraining the first, second and third respondents from ‘designing, developing, producing or marketing for sale Simple Card’. For convenience, I will refer to that injunction as an injunction restraining the production of Simple Card. The appellant failed on this claim before the trial judge and it alleges on appeal that the trial judge erred. The appellant also claimed equitable compensation or common law damages against the first, second and third respondents based on breach of their duties. The claim was that had the first and second respondents disclosed the details of Simple Card to the appellant in January or February 2008, it would have developed the DeckLink Studio card some months earlier than it did and its delay in development is loss to the appellant which it can recover from the first, second and third respondents. The trial judge rejected this claim and the appellant alleges on the appeal that he erred in doing so.

16    Two points should be noted at this stage. First, the liability of the third respondent was put on the same basis as the liability of the first respondent and it will not be necessary to refer to it separately. Secondly, the respondents have not actually competed with the appellant, and the claim for monetary relief is not based on profits made or losses incurred by acts of competition. The claim is that the first and second respondents came upon a product or concept or idea in circumstances where they were in a conflict of interest and duty. They were required to disclose that product or concept or idea to the appellant. Their failure to do so led, on the appellant’s case, to the claimed loss.

17    It is fair to say that the claim for equitable compensation or common law damages was the subject of most of the argument on the appeal. It is convenient if I identify at the outset the duties which are said by the appellant to form the basis of that claim.

18    Before the trial judge and in its notice of appeal, the appellant based, or substantially based, the claim for equitable compensation against the first respondent on an alleged breach of fiduciary duty owed by him to the appellant. The trial judge decided that there was no duty on the first respondent to disclose the details of Simple Card to the appellant because fiduciary duties were proscriptive not prescriptive. The appellant submits on the appeal that a duty to disclose was not the thrust of its allegation. It accepts that fiduciary duties are proscriptive and not prescriptive. It submits that the thrust of its allegations was that the first and second respondents had placed themselves in a position of conflict of interest and duty and that disclosure of that conflict – and that meant the details of Simple Card – was required. On the appellant’s argument the breach of duty was, or at least included, the failure to disclose the details of Simple Card. The claim against the second respondent was based on a term in his written contract of employment. That term was as follows:

18.    Disclosure of Conflict of Interest

The Employee shall make full and complete disclosure to the Company of the existence, nature and extent of any conflict of interest that he may have in any manner or capacity whatever with his duties or obligations under this Agreement.

19    To summarise, the claim against the first respondent was for equitable compensation based on an alleged breach of his duty to avoid a conflict of interest and duty and the claim against the second respondent was for common law damages based on an alleged breach of a contractual provision requiring him to disclose a conflict of interest. If there was any room for the operation of the fiduciary duty to avoid a conflict of interest and duty in the case of the second respondent then the appellant claimed against the second respondent on that basis as well.

20    During the course of the appeal a question arose as to whether the appellant had pursued a claim against the first and second respondents for breach of an implied contractual duty of fidelity or good faith. I will refer to this as an implied contractual duty of good faith. In other words, a question arose as to whether the appellant had conducted a case against the first and second respondents that they had breached an implied contractual duty of good faith by failing to disclose the details of Simple Card to the appellant.

21    As to the appellant’s claim for equitable compensation or common law damages, the trial judge made no findings as to causation or the assessment of the quantum of compensation or damages. This Court is not in a position to decide those matters. We have not been addressed on them at any length and at least the causation issue appears to raise questions concerning the credit of the appellant’s principal witness. I think it is accepted by the parties that if this Court concludes that the trial judge erred in his treatment of the claim then those matters will have to be remitted to the trial judge. For reasons I will give in due course, if a claim based on an implied contractual duty of good faith is open to the appellant then there is a question as to whether this Court is in a position to determine even the issue of breach.

22    In addition to the claims I have already mentioned, the appellant pleaded other causes of action against the respondents. Those causes of action included claims against the first and second respondents under s 182(1) and 183(1) of the Corporations Act 2001 (Cth) (‘Corporations Act’). The trial judge held that the first defendant had contravened s 183(1) for the same reasons he found him to have misused confidential information. However, he said he would only restrain him once. The trial judge said it was not suggested that the appellant had suffered any loss as a result of the first respondent’s contravention of s 183(1) and therefore there was no question of a compensation order under s 1317H of the Corporations Act. The trial judge dismissed the claim against the first respondent under s 182(1) and dismissed the appellant’s claims against the second respondent under both s 182(1) and s 183(1) of the Corporations Act. There is no appeal or cross appeal against those conclusions. It should be noted at this stage that in the context of those claims the trial judge found that what the first respondent did to the advantage of the third respondent (that is, Atomos) was done wholly outside the context of his position with the appellant. The trial judge said (at [91]):

It was done in his own time, on his own computer and at his own premises.

23    The appellant’s claims also included alleged causes of action under the Trade Practices Act 1974 (Cth) (‘Trade Practices Act’) and Fair Trading Act 1999 (Vic) for misleading or deceptive conduct. The first respondent gave certain advice to the chief executive officer of the appellant in late 2007 and then in February 2008 which the appellant alleged constituted misleading or deceptive conduct. The trial judge held that there was no misleading or deceptive conduct and, in any event, the conduct was not in trade or commerce. There is no appeal against those conclusions. The appellant’s claims also included an alleged cause of action for breach of copyright against the first respondent based on certain copying he carried out in early May 2008. This claim was dismissed and there is no appeal against that conclusion. There appear to have been a couple of other claims made by the appellant such as a claim against the first respondent for allegedly inducing the second respondent to breach his written contract of employment. Those are not pursued on appeal and need be noted no further.

The Facts

24    The most important witnesses at the trial were Mr Petty, the first respondent and the second respondent. The trial judge did not make express general findings about the credit of each of these witnesses. He appears to have accepted most of Mr Petty’s evidence and the evidence of the second respondent. He accepted parts of the first respondent’s evidence and rejected other parts. Perhaps because of the way he understood the appellant’s case, the trial judge concentrated on the first respondent’s state of mind between February and May 2008 and his findings with respect to the second respondent’s state of mind are not entirely clear. However, as I will explain, I have been able to reach conclusions about that matter.

25    The other general point to note is that the appellant does not challenge any of the trial judge’s findings of fact, save for his finding that Simple Card did not represent a business opportunity. Whether that is a finding of fact may be debatable.

26    The trial judge found that the appellant launched various products during the period from November 2002 to April 2006. In November 2002, the appellant launched a product called ‘DeckLink’, a capture card, which was, at the time, one of the first 10-bit uncompressed capture cards to work seamlessly with the Macintosh operating system. Some time between November 2002 and April 2004, the appellant launched its ‘DeckLink HD’ (high definition) product. In April 2004, the appellant launched its ‘DeckLink HD Pro’ product which Mr Petty said was the world’s first true 10-bit and 12-bit dual link 4:4:4 and 4:2:2 high-end video capture card suitable for both Macintosh and Windows systems. The appellant also launched what Mr Petty described as its ‘HDLink HD Monitoring Solution’, which allowed customers to use a 24-inch computer monitor for the highest quality HD TV video monitoring. In April 2005, the appellant introduced a new type of video editing product called ‘Multibridge Extreme’ which solved the problem of insufficient space on standard computer ports to add extra audio channels by moving the electronics to an external box. In April 2006, the appellant released its ‘DeckLink HD Extreme’ product, which featured both SDI and analogue input/output connections that switched between high definition and standard definition video.

27    After the first respondent had taken up the position Director of Hardware Engineering, he built up and managed a large hardware engineering team. The trial judge considered that an idea of the first respondent’s responsibilities could be gained from a job specification written by the appellant for the first respondent’s replacement:

Responsibilities

•    To lead hardware development for Blackmagic Design

•    Oversee new product development and design implementation in conjunction with the CEO and Product Managers

•    Define product specifications

•    Manage product timescales and time to market imperatives

•    Manage product testing specifications

•    Manage new part selection and pricing negotiations

•    Manage a bug system and assignment of tasks to engineers as part of a planned product release

•    Joint responsibility, along with the Director of Software, for ensuring interoperability between hardware and software development

•    Authority to Hire and Fire

28    The second respondent was employed by the appellant in April 2006. He executed a written employment contract on 23 November 2006. The written contract contained the following description of his position:

Schedule B: Job Description and Hours of work

•    Business Development Manager – Developing the sales channel for Blackmagic Design, and finding new opportunities for relationships with other manufacturers and industry partners.

As the trial judge put it, the second respondent was, in effect, the head of sales for the appellant.

29    In late 2006 and early 2007, the first and second respondents showed an interest in making electronic products in the audio industry. It is not necessary to set out all the evidence of this. It included the first respondent building a pair of loud speakers at his home and the creation of a spreadsheet named ‘industry.xls’ on 31 May 2007 and modifications to it up to 27 November 2007. It also included the incorporation of the third respondent on 12 August 2007 and the drafting of patent claims to do with loud speakers by the first respondent. In addition, at about this time the first and second respondents were liaising with a design or branding firm about the ‘Atomos concept’.

30    On 28 November 2007 the fourth respondent, at the request of the third respondent, opened an account for Atomos at a collaboration web site called ‘Grouphub’.

31    The trial judge referred to events in late 2007 which he said provided ‘a kind of context’ for the creation by the first respondent of the contentious worksheets in ‘ycalc’. In describing the events, the trial judge referred to the evidence of Mr Petty and the evidence of the first respondent without stating whether he preferred one over the other. I think he must have taken the view that the broad effect of the evidence was the same and where it differed the differences were not material to the issues before him.

32    In late 2007, Mr Petty had an idea for the replacement of all of the appellant’s then existing models with a new one-lane PCI express card, based on the product called ‘Intensity Pro’. The replacement product was to encompass all of the features offered by the other cards in the appellant’s range. The first respondent was opposed to this idea. He considered that it would leave too great an opportunity for a competitor to come up with a much simpler and cheaper card. He was also concerned that Mr Petty’s idea meant that there would be no model which did not have a high definition feature because the inclusion of high definition added considerable cost to the product. Mr Petty did not share the first respondent’s concerns. He considered that his idea would result in a card that was so attractive that people would not want a cheaper card and, in any event, if the appellant needed to come up with a cheaper card it could do so quite quickly.

33    The first respondent set about costing the kind of one-lane card that, on his understanding, Mr Petty had specified. A fellow employee, Mr Hunter, helped in this task. They reached the conclusion that the card would only be about $20 cheaper to build than a new version of the DeckLink HD Extreme which was in development at the time, the DeckLink HD Extreme 2.

34    The trial judge said that the development of the DeckLink HD Extreme 2 was itself the cause of a difference in view between Mr Petty and the first respondent. Mr Petty was of the view that the existing DeckLink HD Extreme would be discontinued simultaneously with the commencement of production of the new product. The first respondent considered this course of action to be a ‘highly risky strategy’.

35    On 10 January 2008, the first respondent created a spreadsheet on his private computer called ‘ycalc.xls’. The following features of the spreadsheets should be noted. First, the spreadsheet consisted of different pages or ‘worksheets’ as they were called. Secondly, the worksheets fell into two different categories, viz, ideas and calculations for audio products about which there was no complaint by the appellant and three worksheets not created before 7 February 2008 which contained details about video products, including products of the appellant.

36    The trial judge found that the first respondent examined an audio product made by a company called ‘Motu’. A short time later, he examined Motu’s V3 HD video product and thought that Motu could quite easily launch a range of SDI video PCI cards which matched the appellant’s range at every level where the appellant had a product.

37    The first respondent then took action in relation to the ‘ycalc’ spreadsheet. He said that he did that because he was concerned about potential competition from Motu and because of his concerns that Mr Petty was specifying a more expensive product than was necessary. He prepared a worksheet in the ‘ycalc’ spreadsheet called ‘SDI’.

38    The first respondent did two things in the SDI worksheet:

1.    He wrote down a list of five video interface cards which he called ‘simplest option’, ‘killer card’, ‘ultracheap SD card’, ‘4 lane megamotha’ and the ‘ultracheap HDMISDI interface’. He set out the components of those products and the costs of those components and he calculated the profits which might be made by those products.

2.    He wrote down the appellant’s products and calculated the costs and profits which might be derived from those products.

39    The first respondent concluded that a hypothetical competitor could well produce products equivalent to the appellant’s products but with a lower cost base.

40    The first respondent raised his concerns about what Motu might do in competition with the appellant with Mr Petty in early February 2008. In a vigorous exchange he was rebuffed by Mr Petty who said that the appellant should not and would not concern itself with what a competitor might do.

41    The trial judge found that the first respondent’s concerns and Mr Petty’s reaction prompted the first respondent to undertake further development of the ‘ycalc’ spreadsheet. He prepared two further worksheets, one entitled ‘costs’ and the other entitled ‘allcosts’. The trial judge said it was not clear on the evidence when, and in what sequence, the first respondent developed the SDI worksheet and the two further worksheets entitled costs and allcosts.

42    The trial judge described the contents of the allcosts worksheet as follows (at [26]):

There was a column with the names of products, the first four of which corresponded with the first four mentioned on the “SDI” worksheet (see para 23 above) and were, respectively, “Simple card”, “Killer card”, “SD card” and “4 lane”. They represented products of the hypothetical competitor. The remainder were products of the applicant, or which the applicant was contemplating introducing. The production cost of each of the applicant’s then products was set out. The major component of that cost, and one which was stated accurately to the cent in the worksheet, was the amount which the applicant would pay to obtain the components that, when assembled, made up the product. Mr Overliese said that these costs figures were “based only on information which I used daily for my work” with the applicant. Mr Overliese included in the worksheet the usage of the parts in question per month from August 2007, details which he also obtained from the applicant’s records to which he had access. The manufacturer’s margin, 65%, was, he said, a “guess” which he applied across the board. However, he said that he knew “roughly” what the applicant’s margins were, because Mr Petty would discuss with him how much profit he would make whenever they talked about the total cost of his ideas for a product.

He described the contents of the costs worksheet as follows (at [27]):

Mr Overliese then created a further worksheet, called “costs”. Into that worksheet, Mr Overliese copied the contents of the “allcosts” worksheet. He added two columns, headed “Bang for buck” and “percent profit”. At the time (ie in early February 2008) he entered data only with respect to the applicant’s products. The cells in the new columns corresponding to the four hypothetical competitors’ products were left empty. The figures in the “bang for buck” column presented the annual unit profit for each of the applicant’s products, and the column headed “percent profit” represented the calculated percentage contribution to overall profits made by the profit on each product.

43    The trial judge said that it was not possible to put a precise date on when the ‘ycalc’ spreadsheet reached this stage of development. Nor was it possible to say when the first and second respondent ‘came to thinking’ that the third respondent might produce video, as well as audio, products. He found that by 2 or 3 February 2008 the first and second respondents at least had a provisional intention that the third respondent should produce video products. He found that prior to 3 February 2008 the first respondent did not envisage that the third respondent would produce video capture cards. He found that the second respondent appreciated that if the third respondent offered the service of an uncompressed card it would ‘cross over’ with the capacities of the appellant’s cards.

44    In early February 2008, Mr Petty raised again his idea of introducing a new one-lane card that might take the place of some of the appellant’s existing products. On 4 February 2008, he sent an email to the first respondent which was in the following terms:

What are your thoughts about reducing some of the features on the one lane version of Decklink Extreme PCIe 2.

We could then enable them if we need to as we want to later.

I was thinking about:

    No 24 fps frame rates, just 1080p/50 and 1080p/5994

    No 3D lookup table?

I am looking for a few things that we can disable, but then instantly enable if we need to in the future. Any ideas?

45    The first respondent responded seven minutes later as follows:

We can easily do both those, which would mean the differences would be:

* Only 8 bit HD (forever)

* No RGB HD in premiere (forever)

* No 3GSDI (ever) – i.e. no 2K or RGBHD

* no 24 frame rates (can be enabled at any time)

* No 3D Luts (can be enabled at any time)

* no HD desktop (could possibly add a RGBYUV s/w conversion?)

* every 3rd frame of HD output is watermarked with a Blackmagic Design logo (could be disabled any time)

46    Mr Petty took the matter further in an email sent to members within the appellant’s organisation on 5 February 2008. Mr Petty’s idea at that point was for a PCI express one-lane version of the DeckLink HD Extreme 2 card to replace the DeckLink SP PCIe and the DeckLink Extreme PCIe cards. The new card would not have a desktop feature, and would be only 8-bit HD, but 10 and 8-bit SD. It would have all the features of DeckLink Extreme and ‘plug into the cheaper machines’. Mr Petty’s idea was that the new card would be sold at a retail price of $695 and produce a profit of $226 per unit. An employee of the appellant, Mr Kristian Lam, responded to Mr Petty’s email, expressing quite obvious reservations about the proposal. The first respondent responded to those reservations, coming to Mr Petty’s defence albeit in a very limited way. The second respondent responded by expressing a preference for SD only at the start and saying it was very important to keep HD Extreme going. Mr Petty terminated this round of exchanges by saying the matter could wait until after the exhibition conducted in April each year by the National Association of Broadcasters in the United States, at which the appellant was a significant exhibitor.

47    There was a telephone call between the first and second respondents in early February 2008. The second respondent was in Japan at the time. The first respondent raised the possibility of the third respondent making products which would compete with the appellant. The second respondent rejected the idea saying to the first respondent, ‘You are crazy’.

48    The trial judge found that there was a good deal of activity involving Grouphub on 7 February 2008. The second respondent uploaded a document entitled ‘Objectives to Outcomes’ which the trial judge described as quite ‘benign’ and I need not mention it any further.

49    The first respondent uploaded onto Grouphub a version of ‘ycalc’ and a message which I will call the first message. It had the subject line ‘ycalc update’ and was as follows:

BOM sheet has 3 cost/price scenarios for a 12ch audio box.

As it stands, it is about right. Whether we do this product or not is of course another matter. “Costs” sheet is interesting: it is BMD’s last 6 months and cost/sale price comparison across the whole product range.

Password is “atomos2924” and is not compatible with Numbers or any other mickeymouse apps :) (squeeek!)

Let me know if this is a problem.

I have some dramatically profitable ideas for SDI products, but have not detailed them yet.

50    The first respondent uploaded a word processor document called ‘marketing plan’. It is not easy to reconcile the trial judge’s findings with respect to this document. At one point in his reasons he states (at [43]):

The “marketing plan” document uploaded by Mr Overliese on to Grouphub on 7 February 2008 contained a series of bulletpointed observations, grouped under the headings “Objectives”, “The Message”, “Target Customer Demographics” and “USPs” (the latter of which represents “Unique Selling Points”). The next (and the largest) section of the document was headed “Competitors”, and named three other companies, including Motu but not including the applicant. Under each company was a listing of the characteristics thereof, including its strengths and weaknesses. The document related only to audio products and the companies trading in them.

Later he states (at [53]):

I refer next to the “marketing plan” document which I have mentioned briefly at para 43 above. It related to the video industry, and was headed “Atomos Video Marketing Plans”. It included details relating to two “competitors”, the first of which was the applicant. The way Mr Overliese (who created this document) set out the details which related to the applicant and those which related to the other potential competitor is instructive. For example:

•    Size

The applicant: “$25m turnover”

The other:

Revenue estimate TBD. Guess around $50M?

Would say around 15 hardware & 10 software engineers, sales offices?

•    Weaknesses

The applicant:

-    Profitability too low, a 20% slump in sales will result in cutbacks.

-    Quality of manufacturing poor, few capabilities and high return rate

-    Marketing & advertising strategy nonexistent

-    Reputation for “cheap, so you get what you pay for”

-    Poor customer support

-    Software very weak and not much chance of improving

The other:

-    Slow and conservative engineering, easy to beat features

-    Actual signal quality does not live up to the reputation – though mostly in spec.

-    Marketing extremely techie, relies almost 100% on sales channel for explanation.

The evidence is that this document was last saved by Mr Overliese on 30 March 2008. To an extent at least, Mr Overliese was using his knowledge of facts about the applicant that would have come to him only in the course of his employment, to develop a video marketing plan for Atomos.

51    The documents before this Court suggest that what his Honour says in the later part of paragraph 43 is not accurate.

52    The first respondent uploaded yet another version of the ‘ycalc’ spreadsheet, together with a message which I will call the second message. It had the subject line ‘SDI products added to ycalc – exciting news’ and was as follows:

I have put down 3 SDI cards we could do, that all start from Intensity and cost/features blow away everything BMD has.

Check the “Killer” card specs: I think it would be a product that really hits the sweet spot. The cheap SD card is $65 cheaper to make than decklink extreme and would be hard to beat on price. Not that I think a price war is a good idea, but that is another story.

53    The trial judge drew certain inferences from the course of events which neither party challenged on appeal. First, he inferred from the first message that the first respondent had in mind details of the appellant’s products. Secondly, he inferred from the second message that as the first respondent had included details of three SDI cards including the ‘killer’ card and a cheap SD card that he was thinking ‘however theoretically and however unrealistically’ that the third respondent might provide SDI cards in competition with the appellant. It was at about this time that the first respondent contacted the second respondent in Japan and had the telephone conversation referred to in [47] above.

54    The second respondent could not view the new spreadsheet on Grouphub on 7 February 2008. On 9 February 2008, the first respondent uploaded a version of the spreadsheet entitled ‘ycalcNOPW.xls’ and that spreadsheet was downloaded by the second respondent.

55    The trial judge said the following of the ‘ycalcNOPW.xls’ spreadsheet uploaded by the first respondent onto Grouphub on 9 February 2008 (at [41]):

It has formed the basis of my description of the various worksheets as set out above. In the “costs” worksheets, it is revealed that Mr Overliese summed the monthly and annual profits with respect to the applicant’s products, and marked that “BMD”, and he performed the like calculation with respect to the products of the hypothetical competitor, and marked that “Atomos”. Mr Overliese sought to defend his actions by pointing out that the worksheet was organised from the applicant’s perspective in the sense that Atomos was the hypothetical competitor whose activities had been the subject of his concerns raised with Mr Petty. I consider, however, that Mr Overliese’s messages on Grouphub on 7 February 2008 give the lie to that self-serving explanation. I accept that, initially, Mr Overliese had no intention of competing with the applicant. However, something happened in the first week of February 2008 (or thereabouts) to cause him (and Mr Young, it seems) at least to give consideration to the notion that Atomos might trade in video products. The most likely inference is that Mr Young’s email of 3 February, together with Mr Petty’s peremptory rejection of any consideration of the potential cost structures of a competitor, caused Mr Overliese to switch his analysis to one in which Atomos would now be in competition with the applicant, but for whatever reason, that is unambiguously what happened on 7 February 2008 or thereabouts.

56    There is a particular topic which I must address at this point. It will be recalled that in an email dated 4 February 2008 (see [44] above) the first respondent said:

*only 8 bit HD (forever)’

57    In the ‘SDI’ worksheet in the ‘ycalcNOPW.xls’ spreadsheet there is an entry (which the trial judge found must have been made by the first respondent before 9 February 2008) which read as follows:

10 bit HD should be doable – if the DMA style is changed.

That entry is in the form of text in the ‘simplest option’ section of the worksheet, associated with a side heading reading ‘software features’.

58    DMA is an acronym for direct memory access. The trial judge set out the first respondent’s evidence as to what he meant by this entry. He accepted the first respondent’s evidence that as at 9 February 2008 (and indeed as at the end of his employment with the appellant) he had not actually worked out, even with a change in DMA, how to achieve 10-bit HD over one lane.

59    The trial judge then turned to consider whether the first respondent had a continuing intention to compete with the appellant. In other words, did he briefly entertain the idea in early February 2008 or did he have an intention to compete with the appellant throughout February, March and April 2008? The trial judge said (at [45]) that it was ‘nigh impossible to arrive at an objective resolution of this point of evidentiary conflict between [the first respondent] and [the appellant]’.

60    The first respondent’s case was that the idea left him as quickly as it had come to him over the course of a few days in the first half of February 2008. There were variations to the ‘ycalc’ spreadsheets on 28 February, 23 March and 7 May 2008 but some of the changes were automatic and the reference to the third respondent was not removed, more because of inertia than anything else. The trial judge said that the question was made more difficult by the fact there was no way of knowing when over a three-month period detailed changes to the spreadsheet were made and by the fact that the first and second respondents continued in their broad proposal to deal in video, as well as audio, products whenever the third respondent should commence business.

61    The trial judge considered subsequent events in an attempt to resolve the issue.

62    The fourth respondent carried out work on 13 February 2008 but as the trial judge made no relevant findings with respect to it I need not mention it any further.

63    On 19 February 2008, the first respondent saved a spreadsheet with a new name, ‘cashflow_iano.xls’.

64    The trial judge made the following finding (at [48]):

A worksheet called “sales” set out the prices, ratios, costs and sales (on “high”, “med” and “low” assumptions) for eight products. They were: “Killer external no SDI”, “Killer external (with SDI)”, “Ultra cheap SD only”, “Basher”, “Flasher”, “Killer 1HD extreme killer 1 x lane PCIE”, “Killer 2 – high end killer” and “Killer 3 – SD only”.

His Honour went on to say (at [48]):

Mr Overliese acknowledged that none of these was an audio device, and that all of them (save “Basher” and “Flasher”) were video devices. However, he said that none of them was a “real product” – they were all no more than “placeholders”. He continued:

This was, you know, conjecture. It was just if we did – you know, if you had a company that had these kind of product line up and, you know, I fiddle around with the cost of goods and the retail price and see what kind of cash flow you’d get for products. … You [ie counsel for the applicant, crossexamining] keep saying we’re making plans all the time, but there’s a difference between making a plan to do something and just playing with an idea.

65    On 4 March 2008, the first and second respondents met. The first respondent subsequently prepared notes of the meeting which were as follows:

Agenda

•    Go over the cashflow_iano spreadsheet and insert realistic sales targets and analyse results

Outcomes

•    Growth goals are realistic and achievable!

•    It is very important, for the strength of the company, to quickly produce as many products as possible in the early stages. This is for company growth and protection from competition.

•    Do video products as early as possible, related to the above point, and the fact that these are strong capabilities we have

•    Sales have three main mechanisms for growth:

1.    Volume (maximization). Sales and marketing techniques to ensure maximum sales of the product by considering and targeting the end users/purchasers

2.    Growth into new markets

3.    Producing products which answer the needs and requirements of end users/purchasers

Actions

Ian

•    Get the windows DDK as quickly as possible for software engineer(s) to start work on drivers

•    Book appointment for lawyers to go over Jeromy’s contract and advise on competitive actions in video market

Jeromy

•    Put sales growth mechanisms into sales plan document

66    The trial judge rejected the first respondent’s evidence that his focus was not then on the sale of video capture cards and that the video products he envisaged getting out more quickly were not capture cards saying that it was ‘hard to take [his] denial seriously’ (at [49]).

67    On 18 March 2008, the first respondent created a word processor document headed ‘business Plan Jeromy Ian Both’. The document was an outline for a business plan and it had bullet-pointed notes under the headings ‘Sales Channel’, ‘Competitive Analysis’, ‘Product Plan’ and ‘Marketing Plan one for Audio, one for Video’. The trial judge found that the notes under ‘Product Plan’ made it clear that both audio and video products were contemplated. Three scenarios were referred to in the document:

1.    All video: 5 video products first year, 5 second year more video

2.    Video start, adding video: 3 video capture, then 2 other video + 2 audio, second year 2 & 2

3.    Audio start, adding video: 3 audio products then 2 video, second year 3 video + 1 audio

Details were provided of the first scenario only:

    Start with 3 video devices:

1.    Killer external SDI

2.    Killer external analog

3.    Killer internal 1 lane

The document also stated:

    Next 2 devices:

1.    Killer Pro x 4 + codec accel

2.    Killer converter SDIDVI single?

3.    Killer audio embedder?

4.    CF – raid

68    The trial judge said that this document was concerned with video capture cards and he said that he was unconvinced by the first respondent’s evidence that he and the second respondent never intended that the third respondent would produce such cards and that the document was another example of purely conceptual work on his part.

69    On 21 March 2008, the first respondent created a word processor document which was, he said, a series of biographical notes about him which might form the basis of a later document that could be used to impress investors in the third respondent. The trial judge drew two conclusions from the document. First, he concluded that the first respondent was still, on 21 March 2008, intending that the third respondent should operate in the video, as well as in the audio market, and secondly, that at the time he created this document the first respondent had in mind his assessment of the potential profitability of video products, derived from his knowledge of the appellant’s cost and profit figures.

70    I have already referred to a finding the trial judge made in relation to the marketing plan document which was last saved by the first respondent on 30 March 2008 (see [50] above).

71    The trial judge inferred from a word processor document created by the first respondent on 1 April 2008 and saved as ‘Plan Overview’ that participation in the market for video products including uncompressed products (which was the appellant’s business) was a significant element of the first respondent’s intentions.

72    In mid-April 2008, the trade show of the National Association of Broadcasters was held in Las Vegas. Mr Petty, the first and second respondents and other senior personnel of the appellant attended. The trial judge said (at [55]):

At the show, a Canadian competitor of the applicant called “Matrox” announced that it would introduce a new 1lane card with 10bit HD capacity for use in conjunction with Macintosh computers. This was, it seems, an announcement of some importance, and the matter was discussed as between Mr Petty and Mr Overliese. Mr Overliese said (to Mr Petty) that it was not possible for the applicant to do 10bit with its DMA, “but that since Matrox claimed it, we could investigate it by changing the DMA”. Mr Petty did not deny Mr Overliese’s account of this conversation, but said that the environment at the show was not conducive to holding confidential discussions about future product ideas, so the issue was not progressed at that stage.

73    The trial judge dealt in some detail with the circumstances in which each of the first and second respondents left the employ of the appellant. I do not need to set out the details. However, two points should be noted. As far as the first respondent is concerned the trial judge found that at the time of his resignation the first respondent had in mind going into business with the second respondent with the third respondent as their corporate vehicle in the production and marketing of audio and video products. As far as the second respondent is concerned, the trial judge found that on 28 April 2008 (which happened to be the date of the first respondent’s letter of resignation) he had no intention of resigning.

74    It is convenient at this point to summarise the trial judge’s factual findings on the important issues. In order to do so it is necessary to have regard not only to matters set out above but also to his Honour’s discussion of the appellant’s claims and also his reasons for judgment as to costs.

75    I think his Honour found that during their employment with the appellant each of the first and second respondents undertook detailed preparations to establish a forthcoming business venture of which the third respondent would be the corporate vehicle.

76    In the second half of 2007 the business venture was to involve the making of electronic products in the audio industry. There is no complaint about the respondents’ proposed involvement in the audio industry.

77    However, at some point, probably in early February 2008, both the first and second respondents formed an intention that the business would also involve making electronic products in the video industry ([46]). The first respondent used confidential information of the appellant in his preparations for the new business. The second respondent received but did not use the first respondent’s workings based in part at least on the appellant’s confidential information.

78    The first respondent formed an intention in early February 2008 that the third respondent would not only make electronic products in the video industry but products which would compete with the appellant’s products and continued to hold that intention in the months which followed. The trial judge rejected the first respondent’s evidence to the contrary ([49], [50], [52], [54]).

79    The trial judge’s findings in relation to the second respondent’s intentions are less clear. I think he found that the second respondent rejected the idea of competing with the appellant’s product on 9 February 2008 ([35]) and despite some indications in his reasons to the contrary (see [32], [41], [50]), I do not think that the trial judge found that the second respondent ever formed an intention thereafter that the third respondent would compete with the appellant ([81]).

Issues on the Appeal

80    There are four issues on the appeal. They are as follows:

1.    Did the trial judge err in not granting an injunction against the first, second and third respondents restraining them from producing Simple Card?

2.    Did the trial judge err in failing to award equitable compensation or common law damages in favour of the appellant against the first, second and third respondents for the loss of the opportunity to develop Simple Card or its equivalent?

3.    Should the appellant be permitted to raise against the first and second respondents a claim based on a breach of an implied contractual duty of good faith?

4.    Even if all of the prior questions are answered against the appellant, did the exercise of the trial judge’s discretion as to costs miscarry?

A permanent injunction against the production of Simple Card

81    The appellant contends that the trial judge should have made a permanent injunction restraining the first, second and third respondents from producing Simple Card.

82    In dealing with this claim, the trial judge noted the appellant’s case as pleaded that the first and second respondents had diverted business opportunities away from the appellant being ‘a card incorporating DeckLink HD Extreme features using [the appellant’s] Intensity 1-lane architecture’, ‘the incorporation of 10-bit video signal capability into a modified 1-lane version of the DeckLink HD Extreme Card’ and ‘the incorporation of 10-bit video signal capability into products utilising [the appellant’s] Intensity 1-lane architecture’, all of which, the trial judge said, referred to the one thing, namely, the ‘Simple card’ on the ‘ycalc’ spreadsheet.

83    The trial judge said (at [92]) that Simple Card did not represent a ‘business opportunity’ at all, but, at the most a product concept of some potential. The appellant contended that it should be regarded as the owner in equity of that concept. The trial judge found that the value of the concept was that 10-bit capability could possibly be achieved over one lane, if the DMA style were changed. However, the trial judge said that the first respondent’s workings had never reached the stage of devising a practical way of producing a card that would perform in that way and using that technology for the benefit of himself or the third respondent. Furthermore, the trial judge said that there was never a business opportunity that was diverted. As an independent basis for his decision the trial judge said that as the first respondent had been out of the appellant’s employ for a period approaching two years, the circumstances referred to provided no basis for a permanent injunction.

84    As I understand it, the appellant’s argument before the trial judge was that the first, second and third respondents had committed actionable wrongs, namely, a diversion of a business opportunity in breach of fiduciary duty in the case of the first respondent and in breach of written contractual term in the case of the second respondent and that the business opportunity or concept was its property in equity. An actionable wrong was present (White v Mellin [1895] AC 154 at 167 per Lord Watson) and, so the appellant contended, the respondents were about to interfere with the appellant’s property rights (Pride of Derby and Derbyshire Angling Association Ld v British Celanese Ld [1953] 1 Ch 149 at 181 per Evershed MR).

85    I think the appellant’s argument must fail, essentially for the reasons given by the trial judge. It seems to me that the trial judge was correct to conclude for the reasons he gave that Simple Card was at the most a product concept of some potential and not something over which there could be a property right.

86    Alternatively, the concept could only be the appellant’s property if there was an obligation on the first or second respondent to disclose the concept to the appellant. Ownership of the concept was not claimed by the appellant on any other basis. For the reasons I will give in relation to the second question there was no obligation of disclosure. This conclusion follows whether or not the rights which the appellant claimed are treated as property rights or rights akin to property: see Moorgate Tobacco Co Ltd v Philip Morris Limited (No 2) (1984) 156 CLR 414 at 438 per Deane J; see also Breen v Williams (1996) 186 CLR 71 (‘Breen v Williams’) at 81 per Brennan CJ; at 90 per Dawson and Toohey JJ; at 111-112 per Gaudron and McHugh JJ; at 128-129 per Gummow J.

87    In the further alternative, the appellant has not advanced any reason for this Court to interfere with the trial judge’s decision that as the first respondent had been out of the appellant’s employ for a period approaching two years, the circumstances referred to provided no basis for a permanent injunction. As I have said, that appears to have formed an independent basis for the trial judge’s decision.

88    The appellant’s rights in terms of its confidential information were infringed by the first, second and third respondents and it obtained a permanent injunction to protect those rights.

89    The appellant submitted that the trial judge’s finding that Simple Card was no more than a product concept of some potential was inconsistent with his rejection of the first respondent’s evidence that the work he was doing on 18 March 2008 was ‘purely conceptual work on his part’. I do not think the two findings are inconsistent because I think the trial judge was talking about conceptual work in two quite different contexts, one being an intention to compete and the other being the ability to make a product there and then.

90    In the circumstances I do not need to deal with the ground in the notice of contention which is relevant to this matter. It is that if Simple Card did represent a business opportunity it comprised the potential to manufacture a high definition video card with a 10-bit capability over one lane. That, it is said, was a matter of public knowledge by mid-April 2008 and therefore no injunction should be issued. The respondents rely on the announcement by Matrox in April 2008 of a new one-lane card with a 10-bit HD capacity for use in conjunction with Macintosh computers. There seems to be force in that submission but there is no need to decide it.

Equitable compensation against the first respondent and common law damages for breach of a written contractual term against the second respondent

91    As I have said, at the trial the appellant claimed equitable compensation against the first respondent, being compensation for the loss it suffered by being unable to produce a card earlier than it did. That loss of opportunity had been brought about (on the appellant’s case) by the first respondent’s failure to disclose his ideas to it.

92    The trial judge interpreted the appellant’s case against the first respondent as being based on an allegation that the first respondent had a fiduciary obligation to disclose the details of Simple Card to the appellant. The alleged obligation was said by the trial judge to be independent of the appellant’s claims of misuse of confidential information, actual or intended activities in competition with the appellant, appropriating something of the appellant’s for the first respondent’s own benefit, the appellant having suffered any actual loss or the first respondent preventing an idea otherwise reaching the appellant. The point was (said the trial judge) that the first respondent had come upon an idea in his own time, but by reference to the appellant’s information, and that the appellant’s case was that the first respondent had a positive equitable obligation to inform the appellant of the idea.

93    The trial judge rejected the appellant’s argument by reference to what he described as well-established authority to the effect that the equitable obligations of a fiduciary are proscriptive, not prescriptive. In Breen v Williams, Gaudron and McHugh JJ said (at 113) that Australian Courts only recognise proscriptive fiduciary duties (see also Gummow J at 137-138). The principle that fiduciary duties are proscriptive and not prescriptive has been applied in a number of cases and the trial judge referred to P & V Industries Pty Ltd v Porto (2006) 14 VR 1, Levy v Bablies [2007] NSWSC 565 (‘Levy v Bablis’) and Wilden Pty Ltd v Green (2009) 38 WAR 429 (‘Wilden Pty Ltd v Green’).

94    The trial judge concluded that there was no obligation on the first respondent to disclose his idea and absent an obligation to disclose there could be no claim for equitable damages.

95    As I have already said, the appellant submits that the trial judge dealt with an argument which it did not advance and that he did not deal with an argument which it did advance. It did not suggest that the trial judge did not deal correctly with the argument he identified.

96    The appellant submits that its claim for equitable compensation against the first respondent was based on a breach by the first respondent of his fiduciary duty to avoid a conflict of interest and duty.

97    The Court’s power to award equitable compensation is not in doubt. In the well-known case of Nocton v Lord Ashburton [1914] AC 932 (‘Nocton v Lord Ashburton’), Viscount Haldane LC affirmed the power of a court of equity to order compensation if a fiduciary has lost his constituent’s property by acting in breach of duty. In McKenzie v McDonald [1927] VLR 134, Dixon A-J, sitting as an Acting Justice of the Victorian Supreme Court, awarded equitable compensation for breach of fiduciary duty where it was not possible to restore the property to a plaintiff. In Breen v Williams, Gummow J said (at 135-136):

The fiduciary will be brought to account for any benefit or gain which (1) has been obtained or received in circumstances where a conflict or significant possibility of conflict existed between the fiduciary duty and personal interest in the pursuit or possible receipt of the benefit or gain or (2) was obtained or received by use or by reason of the fiduciary position or opportunity or knowledge resulting from it. Where the breach of duty produces not a gain to the fiduciary but a loss to the party to whom the fiduciary duty was owed, then the judgments of Viscount Haldane LC in Nocton v Lord Ashburton and of Sir Owen Dixon in McKenzie v McDonald show that there is an obligation to account for the loss by provision of equitable compensation.

(Citations omitted.)

98    The appellant argues that it has suffered a loss, being a loss of opportunity to develop the Simple Card or something similar, in circumstances where a significant conflict or possibility of conflict existed between the first respondent’s fiduciary duty to it and his personal interest in the pursuit or possible receipt of a benefit or gain.

99    In order to succeed in its claim for equitable compensation against the first respondent for the loss of the opportunity to develop Simple Card or a similar card, the appellant must show the following matters. First, it must show that the first respondent acted in a way that gave rise to a conflict of interest, including within that concept a ‘real sensible possibility of conflict’ (Hospital Products Ltd v United States Surgical Corporation (1984) 156 CLR 41 (‘Hospital Products’) at 103 per Mason J (as his Honour then was). Secondly, assuming the first matter is established, the appellant must show that the first respondent had a duty to disclose the conflict. Thirdly, assuming the first and second matters are established the appellant must show that the duty to disclose included the details of Simple Card as shown on the ‘ycalc’ spreadsheet.

100    I start with the first matter. In the well-known case of Aberdeen Rail Co v Blaikie Brothers (1854) 1 Macq 461 at 471; [1843-60] All ER Rep 249, Lord Cranworth LC said:

A corporate body can only act by agents, and it is, of course, the duty of those agents so to act as best to promote the interests of the corporation whose affairs they are conducting. Such an agent has duties to discharge of a fiduciary character towards his principal, and it is a rule of universal application that no one having such duties to discharge shall be allowed to enter into engagements in which he has or can have a personal interest conflicting or which possibly may conflict with the interests of those whom he is bound to protect. So strictly is this principle adhered to that no question is allowed to be raised as the fairness or unfairness of a contract so entered into.

101    The possibility of conflict means a ‘real sensible possibility of conflict’, to use the words of Lord Upjohn in Boardman v Phipps [1967] 2 AC 46 at 124.

102    It seems that there is no absolute prohibition on an employee making arrangements during his employment to compete with his employer after his employment has terminated. It is clear that an employee cannot prepare a position to which he could retreat with a considerable part of his employer’s business should it become necessary or desirable to leave his employer’s employ (Blyth Chemicals Limited v Bushnell (1933) 49 CLR 66 at 82 per Dixon and McTiernan JJ) or secretly develop a manufacturing capacity by surreptitiously copying his employer’s product (Hospital Products at 105 per Mason J). No doubt there are other acts which would amount to a breach of fiduciary duty.

103    In this case, it is necessary to consider what the first respondent did. With an intention of competing with the appellant, he prepared details of possible competing products and he used the appellant’s confidential information in order to cost the possible competing products and then to compare them with the costs of the appellant’s products. However, the decision as to the components of hardware and software comprising the possible competing products was the first respondent’s and not based on a secret or confidential structure plan of the appellant. Furthermore, the value of the idea inherent in the possible competing products lay in the possibility that a 10-bit capability could be achieved over one lane, if the DMA style were changed. That was the trial judge’s finding and even the appellant contended at the trial that Simple Card would have been of great commercial value to it, ‘substantially because it would have had 10-bit capability over one lane’. The first respondent had not developed a product which was capable of immediate production and as the first respondent’s counsel pointed out by reference to evidence given at the trial, further substantial work was required before the product incorporating a 10-bit capability over one lane could be produced.

104    Despite these considerations, I think the first respondent’s conduct had reached the point where there was a real sensible possibility of conflict between his interest and his duties.

105    The second matter raises a difficult question as to what constitutes the breach of the relevant fiduciary duty. On one view there is no duty to disclose a conflict and when judges refer to a duty to disclose in this context it is no more than a shorthand way of referring to the defence of fully informed consent by the principal. As I have said, the law in Australia is that fiduciary duties are proscriptive and not prescriptive. On this view the breach of fiduciary duty is the conduct of the fiduciary in placing himself in a position of conflict. Disclosure is simply a means of avoiding a breach, not a duty. The loss which is recoverable by way of equitable compensation on this view is that which would not have occurred if the conflict had not arisen and not the loss which would not have occurred had disclosure been made. In Hill v Rose [1990] VR 129 (‘Hill v Rose’), Tadgell J said (at 144):

The aim therefore superficially resembles that of the common law award of damages but is achieved, if necessary, not by merely awarding monetary compensation but by way also of granting peculiarly equitable relief such as indemnity and rescission: Robinson v Abbott, at p 368.

Moreover, equity’s approach to providing redress differs from that of the common law in that it depends upon treating the fiduciary’s obligation as one of a personal character to make restitution to the beneficiary or to the trust estate. So much appears from the judgment of Street J in Re Dawson (deceased) [1966] 2 NSWR 211, at pp 214-16, cited with approval by Brightman LJ in Bartlett v Barclay’s Bank Trust Co Ltd (No 2) [1980] Ch 515, at 543. The obligation imposed by courts of equity upon defaulting trustees and other fiduciaries is of a more absolute nature than the common law obligation to pay damages for tort or breach of contract. It follows that the obligation is not limited or influenced by common law principles governing remoteness of damage, foreseeability or causation. The question for consideration is not whether the loss was caused by or flowed from the breach. Rather, as Street J put it in Dawson’s Case, at 215: “. . . the enquiry in each case would appear to be whether the loss would have happened if there had been no breach.”

106    The view that disclosure was a defence, not a positive duty, was favoured by Lindgren J in National Mutual Property Services (Australia) Pty Ltd v Citibank Savings Ltd [1998] FCA 564 and it has the support of a number of writers on the subject: Sealey LS, ‘Some Principles of Fiduciary Obligation’ (1963) 21 CLJ 119; Finn PD, ‘The Fiduciary Principle’, in Youdan TG (ed), Equity, Fiduciaries and Trusts (Carswell, 1989); Glover J, Commercial Equity: Fiduciary Relationships (Butterworths, 1995) [5.50]).

107    The other view is that the duty is not to act in conflict without the informed consent of the principal and that there are many decisions of high authority where the Courts have said that there is a duty of disclosure in circumstances of a conflict of interest and duty. As to the latter part of this proposition, reference may be made to Tracy v Mandalay (1953) 88 CLR 215 at 240 per Dixon CJ, Williams and Taylor JJ; BLB Corporation of Australia Establishment v Jacobsen (1974) 48 ALJR 372 at 378; Walden Properties Ltd v Beaver Properties Pty Ltd [1973] 2 NSWLR 815 at 835 per Hope JA. (See also the Hon Mr Justice Gummow, ‘Compensation for Breach of Fiduciary Duty’, in Youdan TG (ed), Equity, Fiduciaries and Trusts (Carswell, 1989).)

108    It seems to me the first view is the correct one. It seems to me to be the orthodox approach because there is undoubtedly a breach when the fiduciary places himself or herself in a position of conflict. The breach is excused or perhaps does not arise if the principal consents. In other words, it is not enough that there be disclosure, there must be consent. Disclosure is part of a defence.

109    The second matter has not been established. The duty here was a duty to avoid a conflict of interest and duty. The breach was the failure to comply with that duty. An award of equitable compensation involves a comparison between no breach (that is, no conflict of interest and duty) and breach (a conflict of interest and duty). Compliance with the duty does not involve disclosure; rather, it involves avoiding a conflict of interest and duty.

110    As to the third matter, the appellant frankly conceded that it had conducted its case on the basis that to avoid the consequences of the conflict the disclosure required by the first respondent was of the details of Simple Card as shown on the ‘ycalc’ spreadsheet. It had not presented a case (nor had the trial judge considered a case) that it could recover the claimed loss by reference to some lesser form of disclosure. Therefore, even if there was a duty of disclosure, if it did not require disclosure of the details of Simple Card the appellant’s claim for equitable compensation against the first respondent must fail. There is no doubt that the disclosure required to avoid the consequences of a conflict is a full and frank disclosure of all material facts. The identification of the precise information which must be disclosed so that the fiduciary’s principal is kept ‘fully informed of the real state of things’ (Gray v New Augarita Porcupine Mines [1952] 3 DLR 1 at 14 per Lord Radcliffe) is likely to depend on the particular facts of the case before the court. It seems to me that the material facts in this case are the facts which give rise to the conflict, namely, an intention to compete, the use of confidential information to cost products, consideration of alternative products including details of their stage of development and, possibly, some of the details of Simple Card and the involvement of another employee of the appellant. However, I am not satisfied that there was a requirement either to provide the ‘ycalc’ spreadsheet or to disclose all the details of Simple Card shown on the ‘ycalc’ spreadsheet and, in particular the idea that a 10-bit capability could be achieved over one lane, if the DMA style were changed. Having regard to the way in which the case was conducted, that conclusion is fatal to the appellant’s submission.

111    For these reasons, the appellant’s claim for equitable compensation against the first respondent based on a breach of the fiduciary duty to avoid a conflict of interest and duty must fail.

112    The equivalent claim against the second respondent was based on clause 18 of his written contract of employment which I have set out above (at [18]). It must fail by reference to the third matter I have identified in relation to the first respondent. It must also fail for a more fundamental reason. The trial judge did not make a finding that the second respondent had an intention to compete with the appellant. Furthermore, although he found that the second respondent received the confidential information he found that he did not use it. In those circumstances, I do not think that the appellant has established that the second respondent had a conflict of interest and duty.

A claim in contract for breach of an implied duty of fidelity or good faith

113    In the preceding discussion, I have been referring to a fiduciary duty to avoid a conflict of interest and duty in the case of the first respondent, and a written contractual duty concerning the same topic in the case of the second respondent.

114    In the course of oral submissions on the appeal, a question arose as to whether the first and second respondents owed an implied contractual duty of good faith to the appellant and whether that embraced a duty to disclose the details of Simple Card. Towards the end of submissions from both parties on the appeal, the appellant applied to amend its notice of appeal to add a reference to a breach of contract by the first respondent. The respondents opposed the application submitting that it was too late for the matter to be raised. The Court reserved its decision on the application. The appellant did not apply to amend the notice of appeal in relation to the second respondent because there was, so it was submitted, already a reference to a breach of contract of the second respondent.

115    The starting point is the pleadings.

116    The plea in paragraph 6 of the Second Further Amended Statement of Claim (‘Statement of Claim’) is in the following terms:

Fiduciary Duties

6.    Further, by reason of their employment with BMD, Overliese and J Young owed BMD a fiduciary duty, alternatively, it was an implied term of the Overliese Employment Agreement and the J Young Employment Agreement for Overliese and J Young:

(a)    to act with fidelity towards BMD;

(b)    to act in good faith in the best interests of BMD;

(c)    to exploit for BMD’s advantage alone, and to the exclusion of any interest they may have after the end of their employment by BMD, each and every opportunity to expand BMD’s business;

(d)    not to promote their personal interest by making or pursuing a gain for themselves or any other person in circumstances of conflict with BMD;

(e)    after their employment with BMD ceased, not to exploit for themselves or any other person any business transaction or opportunity available to BMD that was current at the time of their departure.

(the Fiduciary Duties).

Particulars

The Fiduciary Duties are implied in order to give business efficacy to the Overliese Employment Agreement and the J Young Employment Agreement as necessary with respect to the employer/employee relationship between BMD and Overliese and J Young.

In their Defence, the respondents admit the duties and terms in paragraphs (a), (b), (c) and (d) only in so far as they relate to the period of employment of the first and second respondents with the appellant.

117    Some general observations may be made. The thrust of the appellant’s fiduciary duty case was put in terms of the duty identified in paragraph 6(d). It will often be the case in the employment context that where a breach of fiduciary duty is alleged by the employer, it will be on the basis of a breach of the conflict rule or the profit rule to adopt the shorthand expressions used by Mason J in Hospital Products (at 103). Nevertheless, the fiduciary duties are part of the duties of good faith owed by a fiduciary to his or her principal. Professor PD Finn in his book, Fiduciary Obligations (Law Book Co., 1977) in ch 15, refers to the fiduciary duty of good faith and includes within this general duty (among others) a duty not to misuse information derived in confidence and a duty to avoid a conflict of duty and interest. None of the duties pleaded in paragraph 6 falls outside this description of a fiduciary duty. At the same time, it is well-established that the contractual relationship between the parties may affect the scope of the fiduciary relationship between them: Hospital Products (at 99 per Mason J). That is a reference to the express terms of the contract.

118    It is well established that in the ordinary case there is an implied contractual duty of good faith owed by an employee to his or her employer. The standard books on employment or labour law contain a discussion of this duty (see, for example, Sykes EI and Glasbeek HJ, Labour Law in Australia (Butterworths, 1972) pages 55-63; Stewart AJ, Stewart’s Guide to Employment Law (2nd ed, Federation Press, 2009) 225-231, Owens R and Riley J, Law of Work (Oxford, 2007) 233-247; Creighton B and Stewart A, Labour Law (5th ed, Federation Press, 2010) 413-423. It may be that some of the implied contractual duties have a fiduciary obligation as their basis. In Concut Pty Ltd v Worrell (2000) 176 ALR 693, Gleeson CJ, Gaudron and Gummow JJ said (at 700-701 [26]):

Contractual obligations and fiduciary duties have different conceptual origins, “the former”, in the words of McLelland J, “representing express or implied common intentions manifested by the mutual assents of contracting parties, and the latter being descriptive of circumstances in which equity will regard conduct of a particular kind as unconscionable and consequently attracting equitable remedies”. Formulations of the obligations of an employee in terms such as those in Pearce and Blyth Chemicals may be understood, Professor Finn has pointed out, as the re-expression of equitable obligations in terms of implied contracts. If so, the importation is well established and beneficial, and nothing turns upon it for present purposes.

(Citations omitted.)

119    The appellant now wishes to assert that the first and second respondents should have been held liable for their failure to disclose the details of Simple Card to the appellant on the ground that such conduct was in breach of an implied contractual duty of good faith. Is it able to do so? In my opinion, it is not able to do so because of the way it conducted its case before the trial judge and because it is too late to raise the matter in the course of the appeal.

120    The case presented to the trial judge was one of a breach of a fiduciary duty to avoid a conflict of interest and duty in the case of the first respondent and a breach of clause 18 of his written contract of employment in the case of the second respondent. The trial judge addressed the appellant’s case in so far as it relied on non-statutory duties as a breach of fiduciary duty in the case of the first respondent and breaches of the written contract of employment in the case of the second respondent. In that context, a proper reading of the appellant’s notice of appeal is a challenge to the conclusions of the trial judge on those matters and not a claim that the first and second respondent had acted in breach of implied contractual duties.

121    The trial judge did not address a claim that the first and second respondents acted in breach of an implied contractual duty of good faith in failing to disclose the details of Simple Card to the appellant. Therefore, he made no findings about the precise scope of such a duty in the case of each of the first and second respondents and the significance (if any) of their respective positions with the appellant and the relevance (if any) to the scope of their respective duties of previous instructions given by the appellant as to the projects in which they were to be engaged. There would appear to be a substantial argument that the second respondent, who was sales manager and who did not formulate the relevant ideas in the ‘ycalc’ spreadsheet or use them, did not have a duty to make disclosure of the ‘ycalc’ spreadsheet. Nor did the trial judge make any findings on breach. There might be a serious question, for example, as to whether the real value of the ‘ycalc’ spreadsheet was the idea that a one-lane 10-bit HD was ‘doable’ if the DMA was changed and that that was not an idea that the first respondent was required to disclose because nobody had made such a product and the evidence in the case suggested that a good deal more work was required before such a product could be produced. The respondents no doubt used the appellant’s confidential information in formulating the details of Simple Card and the appellant was given relief in relation to that. However, the trial judge said that the value of the concept was that 10-bit capability could possibly be achieved over one lane, if the DMA style were changed and indeed that was the thrust of the way in which the appellant presented its own case. Furthermore, although this also applies to the fiduciary duty and written contract claims, there are no findings as to causation and, if all other matters are established, the quantum of damages.

122    In support of its contention the appellant can point to the plea in paragraph 6 of the Statement of Claim and to the fact that in a general sense it was claiming a failure to disclose the details of Simple Card by the first and second respondents. It can also point to the fact that in its notes of written closing it referred to at least one case dealing with the contractual duties owed by an employee to an employer (Robb v Green [1895] 2 QB 315 (‘Robb v Green’)).

123    On the other hand, this was a relatively long and complex case. It raised complex factual and legal issues. The case was clearly put to the trial judge on the basis of a breach of fiduciary duty to avoid a conflict of interest and duty in the case of the first respondent and breach of written terms of a contract in the case of the second respondent. In his closing submissions, counsel for the appellant said that the case was based on paragraph 9(c)(ii) of the Statement of Claim, being the obligations of disclosure to give effect to the duty of fidelity, and certainly not retention for the benefit of the third respondent. He described 9(c)(iv) as ‘a bit of a catch all’ and 9(d) as dealing generally with the failure to advise the appellant of opportunities of which they were aware. Paragraph 9(c)(ii) alleges a diversion by the first and second respondents of a business opportunity away from the appellant in order to exploit for themselves, further and in the alternative, for the third respondent, that business opportunity, in competition with the appellant. The business opportunity is said to be the incorporation of 10-bit video signal capability into a modified onelane version of the DeckLink HD Extreme card. Paragraph 9(c)(iv) refers to the incorporation of 10-bit video signal capability into products utilising the appellant’s Intensity one-lane architecture. Paragraph 9(d) alleges a failure by the first and second respondents to advise the appellant of opportunities available to it of which they were aware and particularises the opportunities in paragraphs 9(a), (b) and (c). A little later in his closing submissions counsel for the appellant said that the primary case is ‘breach of your fiduciary obligation’. None of these statements clearly articulated a case based on breach of an implied contractual duty of good faith. Later, after referring to a series of cases dealing with equitable compensation (Hill v Rose, Nocton v Lord Ashburton, McKenzie v McDonald, Re Dawson (dec’d) [1966] 2 NSWR 211 and Bartlett v Barclays Bank Trust [1980] Ch 515), counsel for the appellant said that the appellant put its claim for ‘damages’ in the alternative, ‘that’s to say under equity arising from this learning alternatively under the Corporations Law’.

124    That is how the case was conducted in the Court below and the trial judge did not err in not addressing a case based on an alleged breach of an implied contractual duty of good faith. The appellant should not be permitted to raise what is in essence a new argument late in the appeal (see Coulton v Holcombe (1986) 162 CLR 1 at 7-8 per Gibbs CJ, Wilson, Brennan and Dawson JJ; see also Thorne v Doug Wade Consultants Pty Ltd [1985] VR 433 at 491-492 per Kaye and Marks JJ). I realise that this Court is not in a position to say what further evidence, if any, might have been called by the respondents had the point been taken. I do not think that is decisive in the circumstances of this case. What is decisive against allowing the amendment is that a major reconsideration of the case by the trial judge would be required. I would refuse the appellant’s application to amend its Notice of Appeal.

125    Before leaving this topic I wish to make the point that it is not clear beyond argument that an implied contractual duty of disclosure would require disclosure of the details of Simple Card. There has been no soliciting of the employer’s clients to switch to the new business (Mason Gray Strange v Eisdell (1989) 31 AILR 271) or recruiting of other staff presently working for the employer (Schindler Lifts Australia Pty Ltd v Debelak (1989) 89 ALR 275) and, as for the appellant’s reliance on Robb v Green, that case does not assist it because the copying of the appellant’s information in this case was the subject of relief granted to the appellant by the trial judge and in any event did not give rise to the particular loss and damage that the appellant claimed. The Court was referred to the decision in British Syphon Co Ltd v Homewood (No 2) [1956] 2 All ER 897 but it is not entirely clear whether the duty in issue in that case was contractual or equitable, although the language used suggests conflict of interest and duty and the relief granted appears to have been equitable.

The trial judge’s orders as to costs

126    The appellant appeals against the trial judge’s orders as to costs irrespective of the outcome of its appeal against the other orders.

127    The trial judge’s orders as to costs were as follows:

Subject to any order previously made for the payment of the costs of a party by any other party,

(a)    the applicant pay 30% of the costs (including reserved costs) of the first respondent, to be taxed if not agreed;

(b)    the applicant pay one half of the costs (including reserved costs) of the second respondent, to be taxed if not agreed;

(c)    the applicant pay 30% of the costs (including reserved costs) of the third respondent, to be taxed if not agreed;

(d)    The applicant pay the costs (including reserved costs) of the fourth respondent, to be taxed if not agreed.

128    These orders include the costs of interlocutory applications where the question of costs was reserved. In this respect, the parties referred the Court to the fact that there were applications for an Anton Pillar or search order and for an interlocutory injunction where the costs of the applications were reserved.

129    The trial judge’s approach to the question of costs involved a number of steps. I put to one side for the present the costs order in relation to the fourth respondent. First, the trial judge noted that each party, that is, appellant and each respondent, had achieved a degree of success and suffered a degree of failure. Secondly, he assessed in percentage terms the degree of success achieved by each party. He considered that the resulting figure represented that party’s prima facie entitlement to costs. Thirdly, he offset the two figures in order to arrive at the figure for costs that the less successful party should pay to the more successful party. For example, in the case of the first and third respondents, the trial judge assessed the appellant’s level of success in the proceeding at 35 per cent and the level of success achieved by each of the first and third respondents at 65 per cent. He then offset the two figures to arrive at the figure of 30 per cent in favour of each of the first and third respondents. I should make it clear at this point that the trial judge’s decision to treat the first and third respondents as being in the same position in terms of costs is not under challenge on the appeal.

130    The trial judge made the point that the case was not one where alternative claims were made, in effect setting up different jurisprudential justifications for relief in respect of particular injurious conduct said to be actionable and he gave as an example of such case a case where a trader passing off his or her business as that of another was also accused of misleading conduct under s 52 of the Trade Practices Act. He said that although the various acts and transactions were related they occurred over a period of months and involved separate subject matters and were said to involve instances of actionable conduct in various respects.

131    The appellant challenged the trial judge’s orders as to costs on three grounds. First, it submitted that he erred in his apportionment of the degree of success achieved by the appellant on the one hand and each of the first, second and third respondents on the other. It was submitted that the appellant’s degree of success as against each of the first, second and third respondents should have been assessed at 75 per cent. Secondly, the appellant submitted that the trial judge erred in offsetting the costs because it assumed that the costs of the various parties were the same. It submitted that there was no evidence that the costs of the various parties were the same. In fact, the Court was told that was not the case and that the respondents were unrepresented between about June or July 2008 and April 2009. The Court was also told that the appellant called 12 lay witnesses and two expert witnesses and that the respondents called three lay witnesses and one expert. It was submitted by the appellant that the offsetting worked a particular injustice in the case of reserved costs because the appellant sought and obtained an Anton Pillar order on proper grounds and obtained an interlocutory injunction which was granted by consent. Thirdly, the appellant submitted that the costs of the fourth respondent should have been the subject of a Sanderson order. In other words, the first, second and third respondents should have been ordered to pay the fourth respondent’s costs. I will consider each of these grounds. The appellant’s submissions must be considered in light of the fact that the trial judge was exercising a discretion and that to justify appellate interference the appellant had to show an error of the type identified in House v The King (1936) 55 CLR 499 at 504-505.

132    There is a good deal of force in the appellant’s first ground and it is only with some hesitation that I have decided that it should be rejected. The submission is particularly strong in the case of the first and third respondents. Considerable evidence and argument appears to have been directed to the authorship, use and intended use of the ‘ycalc’ spreadsheet and its variants. As part of this issue the trial judge was required to examine in detail whether the respondents intended to compete against the appellant. He decided those issues against the first respondent and in the course of doing so rejected the first respondent’s evidence in a number of areas. The other issues in the case do not appear to have occupied as much time as this issue and one of those issues – breach of copyright – was only decided in the respondents’ favour because of an amendment introduced late in the proceeding. Despite these considerations the trial judge was far better placed to make the assessment called for by the approach he adopted and which, as an approach, no party criticised. I cannot detect any error of principle and the result is not so unreasonable or plainly unjust that an error of principle should be inferred. I reject this ground of challenge to the trial judge’s orders as to costs.

133    The second ground of challenge must, in my opinion, succeed. There was sufficient evidence before the trial judge to establish that the costs of the appellant on the one hand, and the first, second and third respondents on the other, were not the same and in fact the former’s costs were likely to be substantially in excess of the latter’s costs. In order to achieve fairness for a party who has a costs order in its favour, that must be taken into account before offsetting or there should be no offsetting until after taxation. It is not a question of penalising a party because that party is unrepresented, as the respondents’ counsel seem to suggest, nor will it result in a party obtaining extravagant costs because of the legal resources devoted to that party’s case. It is a question of a party being fairly compensated for the costs it has incurred with respect to those issues upon which it has been successful. Once a decision has been made that costs should be awarded on an issues basis (a decision made here and, as I have said, not challenged by either party) then a party is entitled to be fairly compensated for the proper costs it has incurred with respect to those issues. The proper costs are determined on a taxation of costs in accordance with well-established principles. There is nothing to indicate that the trial judge took into account the disparity between legal costs. With respect, he ought to have done that. He may have been led into the approach he took by the apparent acceptance by the appellant’s counsel of the offsetting approach. However, that was at a time when the appellant was arguing that it should receive almost all of its costs and I do not think it should be precluded from raising the argument now.

134    The third ground of challenge must, in my opinion, be rejected. The appellant may well be correct when it submits that it was reasonable for it to join the fourth respondent, but it has failed to show anything in the conduct of the first, second and third respondents which would justify a Sanderson order (Gould v Vaggelas (1985) 157 CLR 215 at 229-230 per Gibbs CJ).

conclusion

135    I would allow the appeal but only for the purpose of substituting for the trial judge’s order as to costs the following order.

Subject to any order previously made for the payment of the costs of a party by any other party:

(a)    The first respondent pay 35 per cent of the costs (including reserved costs) of the applicant, to be taxed if not agreed and the applicant pay 65 per cent of the costs (including reserved costs) of the first respondent, to be taxed if not agreed.

(b)    The second respondent pay 25 per cent of the costs (including reserved costs) of the applicant, to be taxed if not agreed and the applicant pay 75 per cent of the costs (including reserved costs) of the second respondent, to be taxed if not agreed.

(c)    The third respondent pay 35 per cent of the costs (including reserved costs) of the applicant, to be taxed if not agreed and the applicant pay 65 per cent of the costs (including reserved costs) of the third respondent, to be taxed if not agreed.

(d)    The applicant pay the costs (including reserved costs) of the fourth respondent, to be taxed if not agreed.

Otherwise, the appeal should be dismissed. In the circumstances, it is not necessary for me to deal with the other grounds in the Notice of Contention. As to the costs of the appeal, the nature of the argument does not warrant a separate order for the fourth respondent’s costs. The respondents have been substantially successful and I would order that the appellant pay 90 per cent of their costs of the appeal.

Associate:

Dated:    25 February 2011