FEDERAL COURT OF AUSTRALIA

QPSX Limited ACN 083 702 907 v  Ericsson Australia Pty Ltd ACN 004 071 854

[2004] FCA 1134

PRACTICE AND PROCEDURE – pleadings – statement of claim – strike out motion – embarrassing – failure to disclose reasonable cause of action – claims for breach of contract and misleading or deceptive conduct arising out of execution of agreement – alleged representations as to the proper construction of the agreement – implied from execution and external circumstances – no logical connection to pleaded external circumstances – no representation as to meaning by mere fact of execution – no reasonable cause of action in misleading or deceptive conduct arising from execution of agreement – no logical connection to loss – parts of statement of claim struck out as embarrassing or disclosing no reasonable cause of action

Federal Court of Australia Act 1976 (Cth) s 21

Trade Practices Act 1974 (Cth) s 82

QPSX LIMITED ACN 083 702 907, QPSX COMMUNICATIONS PTY LTD ACN 009 230 666 and QPSX EUROPE GmbH HRB-NR 133459 v ERICSSON AUSTRALIA PTY LTD ACN 004 071 854, TELEFONAKTIEBOLAGET LM ERICSSON ORGANISATION NO 556016-0680, LONGREACH GROUP LIMITED ACN 006 584 596 and LONGREACH NETWORKS PTY LTD ACN 104 959 480

W87 of 2004

FRENCH J

1 SEPTEMBER 2004

PERTH

THE COURT ORDERS THAT:

A.        On the First and Second Respondents’ Motion filed 11 June 2004:

1.         Paragraphs 15-20, 23-27, 30-41, 55, 58, 62-64 and 69 of the statement of claim are struck out.

2.         The Applicants have leave to file and serve a substituted statement of claim on or before 30 September 2004.

3.         The parties have leave to make submissions on the question of costs on or before 21 September 2004.

B.        Directions:

1.         The Respondents are to file and serve their defences to the substituted statement of claim on or before 1 November 2004.

2.         The Applicants are to file and serve any replies by 15 November 2004.

3.         The directions hearing is relisted for 29 November 2004 at 9am.

4.         Liberty to apply.

Note:    Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

REASONS FOR JUDGMENT

ON MOTION TO STRIKE OUT STATEMENT OF CLAIM

Introduction

1                     QPSX Limited (‘QPSX’) and its subsidiaries, QPSX Communications Pty Ltd (‘QPSX Communications’) and QPSX Europe GmbH (‘QPSX Europe’) commenced proceedings in this Court on 4 May 2004 against Telefonaktiebolaget LM Ericsson Organisation (‘LME’), its subsidiary, Ericsson Australia Pty Ltd (‘Ericsson Australia’) and against Longreach Group Limited (‘Longreach Group’) and its subsidiary, Longreach Networks Pty Ltd (‘Longreach Networks’).

2                     The applicants seek a declaration under s 21 of the Federal Court of Australia Act 1976 (Cth) that they and the respondents are parties to a Memorandum of Agreement made on or about 27 August 2003 and that the Memorandum is binding upon them all.  They seek a declaration that on its proper construction the Memorandum contains terms referred to in pars 51 and 52 of the statement of claim.  They claim damages for breach of the Memorandum, and under s 82 of the Trade Practices Act 1974 (Cth) (‘the TPA’), for loss or damage arising out of conduct of Ericsson Australia and LME said to have been in contravention of s 52 of the TPA.  Further orders are sought under s 87.  In addition there is a claim for damages for breach of warranty of authority by Ericsson Australia.

3                     At a directions hearing on 27 May 2004, Carr J ordered that Ericsson Australia and LME file and serve any strike out application by 11 June 2004 and in default thereof that all respondents file and serve defences by 9 July.  On 11 June 2004, Ericsson Australia and LME filed a notice of motion seeking to strike out the statement of claim.  The motion was heard on 24 August 2004 following the filing of written submissions.  For the reasons that follow, most of the statement of claim must be struck out as failing to disclose a reasonable cause of action or as embarrassing in the sense that it raises false issues. 

4                     Before considering the particular attacks made on the pleading it is appropriate to summarise its content.

The Statement of Claim

5                     The following summary is no more than an outline of the allegations made in the statement of claim.  As a matter of convenience it is presented, for the most part, in narrative form, but involves no finding of fact.

6                     The members of the QPSX group each carry on business ‘licensing and otherwise commercialising intellectual property’.  QPSX and QPSX Communicationscarry on that business in Australia and internationally. QPSX Europe carries it on outside Australia.  The respondents are all involved in the manufacture and supply of communications products and services (pars 1 to 7).

7                     QPSX Communications is the registered patentee of patents in the United States of America, Australia, Canada and the United Kingdom. (‘QPSX Communications SAR Patents’) QPSX Europe is the registered patentee of a patent in Germany (‘QPSX Europe SAR Patent’).  The patents each relate to a method and apparatus for segmentation and reassembly technology. The method involves the transmission of variable length messages on a network from a source to a destination in fixed length slots which include a header field and a message segment.  Various steps involved in that method are set out.  The registration dates and numbers of the various patents are particularised (par 8).

8                     Further patents are held by QPSX Communications in the USA, Australia, Canada, the UK and Germany (‘QP Patents’).  They relate to a queuing protocol for a communications network and for queued transmission of information in packets.  The composition of the network is set out. Particulars of the patents are given by reference to their numbers and issue dates (par 9).  The method and apparatus the subject of the SAR Patents and the protocol the subject of the QP Patents are integral parts of a Distributor Queue Dual Bus technology, also known as Queued Packet and Synchronous Exchange technology.  The technology has been an integral part of the International Telecommunications Standard approved by the Institute of Electrical and Electronics Engineers for metropolitan area networks since 1988 (par 10). Another protocol known as Asynchronous Transfer Mode (ATM)  has been described as the networking standard for high speed, high capacity voice, data, video and graphics transmission.  The method which is the subject of the SAR Patents is a fundamental element of the ATM Protocol and incorporated into the International ATM Standard set by the International Telecommunication Union (par 11).

9                     Against this background, an agreement known as the Jtec Contract, was made between QPSX Communications and Jtec Pty Ltd (Jtec) on 18 August 1994.  The contract included terms under which QPSX Communications agreed to sell and Jtec agreed to purchase certain intellectual property known as the ‘QPSX Designs’, which related to products known as Q6 and Q7 and three devices known collectively as the QPSX Chipset.  Under the agreement Jtec was permitted to make full use of the QPSX Designs and was granted a non-exclusive perpetual licence to use the SAR Patents and the QP Patents on and from 18 August 1994 (pars 12 and 13).  The contract was amended by further agreement on 5 December 1997 but the amendments are not material for present purposes (par 14). 

10                  The statement of claim pleads the making of an Assignment Deed in respect of the Jtec Contract.  In March 2001, Jtec sought the consent of QPSX Communications to the assignment of its rights under the Jtec contract to a company in the Ericsson group.  QPSX Communications would not permit such an assignment without negotiating with a company in the Ericsson group the terms upon which it would consent to it (par 15).  Discussions about this took place between representatives of QPSX and LME in May and June 2001 (pars 16 to 20).

11                  The Assignment Deed was executed on 12 July 2001 (par 21).  By that Deed Jtec assigned to Ericsson Australia all of its rights and interests in the Jtec Contract, and the full benefit of the covenants, representations, warranties and acknowledgments given by QPSX Communications to Jtec under the Jtec Contract.  Under the Deed Ericsson Australia assumed the obligations, covenants, representations and warranties given by Jtec to QPSX Communications under the Contract (albeit the syntax of this pleading is somewhat awkward) (par 22).

12                  The Assignment Deed amended the Jtec Contract as assigned.  The various amendments are pleaded (par 22).  On 20 July 2001, QPSX Europe, QPSX Communications and LME entered into a Negotiation Agreement setting out terms upon which negotiations between them were to be conducted about the possibility of LME entering into a world-wide licence with QPSX Communications to use the SAR Patents (pars 23 and 24).

13                  In October 2001, LME’s legal representative, Hoffman Eitle, wrote to Frohwitter, the German solicitors for QPSX Communications and QPSX Europe.  Hoffman Eitle on behalf of LME acknowledged that under the Negotiation Agreement their client was bound to seek QPSX’s consent to disclose confidential information provided by QPSX (par 25).  On 10 December 2001, Hoffman Eitle forwarded a consent form to Frohwitter for execution by QPSX Communications and QPSX Europe relating to the disclosure.  The consent form attached an agreement between LME and a third party supplier, Conexant Systems Inc.  QPSX Communications and QPSX Europe executed the form on that day (par 26).  In late 2001 and early 2002, QPSX and its legal representatives attempted further negotiations with Hoffman Eitle under the Negotiation Agreement.  They were informed by Hoffman Eitle in or about early 2002 that Hoffman Eitle no longer had instructions to act on behalf of LME.

14                  In May 2003, Ericsson Australia sold certain assets to Longreach Group including some which related to the subject matter of the Jtec Contract as amended and which required Longreach Group to be able to exploit the method the subject of the SAR Patents and the protocol the subject of the QP Patents (par 28).  Before that sale, Ericsson Australia was obliged under cl 17.1 of the Jtec Contract to seek and obtain the written consent of QPSX Communications to the assignment of the patent licences to Longreach Group.  Ericsson Australia did not seek or obtain such consent (par 29). 

15                  Between June and August 2003, representatives of QPSX, Ericsson Australia and Longreach Group communicated with each other in relation to the purported assignment of Ericsson Australia’s patent licences to Longreach Group (par 30). The various communications are particularised.  

16                  The statement of claim then turns to the formation of a Memorandum of Agreement between QPSX, Ericsson Australia, LME and Longreach Group.  The latter company was then known as HarTec Limited.  The Memorandum of Agreement lies at the heart of these proceedings.   Negotiations leading up to the execution of the Memorandum are set out at length (pars 30 to 41).  The Memorandum of Agreement was executed on or about 27 August 2003 (par 42).  A copy is annexed to the statement of claim.  The subject matter is described thus: (par 43)

‘43.      The Memorandum was with respect to:

            (a)        the acquisition by Longreach Group of the assets sold by Ericsson Australia, pursuant to the sale pleaded in paragraph 28 herein;

            (b)        replacement of the patent licensing arrangements between QPSX Communications and Ericsson Australia pursuant to the Jtec Contract (as amended by the Jtec Amendment Contract and the Assignment Deed);

            (c)        the further and expanded global licensing of:

                       (i)         Ericsson Australia, LME and related bodies corporate; and

                       (ii)        Longreach Group, Longreach Networks and related bodies corporate,

                        to make broad and unfettered use of the method which is the subject of the SAR Patents, and the protocol which is the subject of the QP Patents, in order to manufacture, use and sell ATM products.

Particulars

                        See paragraphs 1, 2, 3, 7 and 10 of the Memorandum.’

17                  The authority of those who executed on behalf of Ericsson Australia, LME, Longreach Group, QPSX and QPSX Communications is pleaded (pars 44 to 48).  Then it is said (par 49):

‘In the circumstances pleaded in paragraphs 44, 45, 46, 47 and 48 herein, the Memorandum formed a legally binding agreement between:

(a)       QPSX, QPSX Communications and QPSX Europe;

(b)       Ericsson Australia and LME; and

(c)        Longreach Group and Longreach Networks.’

18                  An alternative plea is made that if Mr Darling, who signed the Memorandum on behalf of Ericsson Australia and LME, was not authorised to do so on behalf of LME, it nevertheless formed a legally binding agreement between the other parties named in par 49 (par 50). 

19                  Material terms contained in the Memorandum are pleaded (par 51) along with terms to be implied (par 52).  By those terms the applicants agreed to grant a non-exclusive licence to Ericsson Australia, LME and related bodies corporate and to Longreach Group, Longreach Networks and related bodies corporate to use the SAR Patents, the QP Patents, the QPSX Designs and the QPSX Chipset to manufacture all ATM Products and to sell or use those ATM Products globally.  There was a requirement that within 30 days of the completion of each quarter during the term of the Memorandum Ericsson Australia and LME jointly and, alternatively Ericsson Australia, would:

(i)         provide a report to the applicants setting out the forecast sales for the following quarter and an estimate of the actual Sales Value for the previous quarter;

(ii)        a calculation showing the amount of royalty that is payable to the applicants; and

(iii)       an estimation of the nature of the ATM Product in respect of which sales were made during the previous quarter.

Similar covenants were made by the Longreach Group and Longreach Network jointly.  Covenants under which royalties were to be paid by Ericsson Australia and LME jointly and, alternatively, Ericsson Australia and by Longreach Group and Longreach Network jointly are also pleaded.  There was a specific term that within 30 days of executing the Memorandum the parties to it would use their best endeavours to enter, and procure their related bodies corporate to enter, a further agreement incorporating the terms of the Memorandum and necessary supplementary terms pending the execution of which the Memorandum remained in force between the parties.  The proposed further agreement is called the Further Agreement in the statement of claim.  The various licensees under the Memorandum of Agreement were also responsible for the reasonable legal and travel costs of the applicants associated with its negotiation and execution and that of the Further Agreement provided that the costs did not exceed $50,000.

20                  Breach of the Memorandum of Agreement is alleged against Ericsson Australia and against LME for failure to provide reports, to make royalty payments and to pay the applicants’ reasonable legal and travel costs associated with negotiating and executing the Memorandum and the costs of negotiating the Further Agreement.  In addition, an implied term that the parties would use their best endeavours to finalise the Further Agreement is said to have been breached.  LME is said to have failed to use its best endeavours to procure its related bodies corporate to become parties to the Further Agreement. 

21                  The statement of claim then turns to representations said to have arisen from the execution of the Memorandum.  Paragraph 55 says:

‘In the circumstances pleaded in paragraphs 15-20, 23-27 and 30-41 herein, and by executing the Memorandum as pleaded in paragraphs 44, 45, 46 and 47 herein, Ericsson Australia and LME represented to each of the applicants that:

(a)       the licences granted by the applicants pursuant to the Memorandum, and the Further Agreement, would apply globally to cover ATM Products manufactured, sold or used by LME, Ericsson Australia or related bodies corporate;

(b)       the Licensees pursuant to the Memorandum, and the Further Agreement, would be LME, Ericsson Australia and related bodies corporate;

(c)        Ericsson Australia and LME jointly, alternatively Ericsson Australia, would pay the royalties due in respect of the licences pleaded in paragraph 55(d)(i) herein;

(d)       the terms of the Memorandum had the meaning that:

            (i)         the licences granted by the applicants pursuant to the Memorandum, and the Further Agreement, would apply globally to ATM Products sold by LME, Ericsson Australia or related bodies corporate;

            (ii)        the Licensees pursuant to the Memorandum, and the Further Agreement, would be LME, Ericsson Australia and related bodies corporate;

            (iii)       Ericsson Australia and LME jointly, alternatively Ericsson Australia, would pay the royalties due in respect of the licences pleaded in paragraph 55(d)(i) herein;

(the representations in subparagraphs (a), (b), (c) and (d) above are together the Licence Representations).’

22                  It is said that Ericsson Australia represented to each of the applicants that LME had authorised Ericsson Australia and Mr Darling to negotiate and execute the Memorandum on its behalf (the Authority Representation) (par 56).  Further LME represented to each of the applicants that it would procure and alternatively use its best endeavours to procure the execution of the Further Agreement by its related bodies corporate (the Procurement Representation) (par 57).

23                  The statement of claim alleges misleading or deceptive conduct on the part of the respondents.  In respect of the Licence Representations, par 58 asserts:

‘If, which is denied, the Memorandum does not on its proper construction contain the terms pleaded in paragraph 51(d)-51(j) herein:

(a)       the Licence Representations were, in the circumstances alleged in paragraphs 4, 5 and 28-42 herein, made in trade or commerce;

(b)       the Licence Representations were representations as to future matters;

(c)        the Licence Representations were misleading and deceptive in the circumstances alleged in paragraph 58(b) herein, by reason of s 51A(1) of the Trade Practices Act 1974 (Cth), in that Ericsson Australia and LME did not have reasonable grounds for making these representations;

(d)       further, the Licence Representations were misleading and deceptive if the Memorandum did not on its proper construction contain the terms pleaded in paragraph 51(d)-51(j) herein,

contrary to section 52 of the Trade Practices Act 1974 (Cth).’

Then it is said that if, ‘which is denied’, Mr Darling was not authorised to execute the Memorandum for LME, the Authority Representation was misleading or deceptive contrary to s 52 of the TPA.  The Procurement Representation was a representation as to a future matter and was misleading and deceptive in that LME did not have reasonable grounds for making it and never intended to procure the execution of the Further Agreement by its related bodies corporate.  Reliance is placed upon s 51A of the TPA (par 60).

24                  It is alleged that if the Memorandum does not contain the terms pleaded and if the Licence Representations had not been made, the applicants would have refused to sign the Memorandum without those terms.  Similarly, if Mr Darling were not authorised and the Authority Representation had not been made the applicants would have refused to sign the Memorandum without LME being a party to it (par 62).  A similar pleading is made in respect of the Procurement Representation (par 63).  An alternative plea of involvement in the alleged contraventions on the part of LME is also set out (par 64).

25                  The statement of claim alleges a breach of the warranty of authority attributed to  Ericsson Australia in the event, ‘which is denied’, that LME did not authorise Ericsson Australia and Mr Darling to negotiate and execute the Memorandum on its behalf (pars 65 and 66).

26                  As to loss and damage it is pleaded in par 67:

‘As a consequence of the breaches of the Memorandum pleaded in paragraphs 53(b) and 54(b) herein, the applicants have suffered loss and damage in that they have not been paid any royalties at all by LME or Ericsson Australia for the sale by Ericsson Australia, LME or any of its related bodies corporate, of ATM Products (as defined in paragraph 51(b)) herein)...’

Particulars are given.

27                  Loss and damage flowing from the misleading or deceptive conduct is pleaded in par 68.  It is alleged that because of that conduct and the reliance of the applicants upon it they have suffered or are likely to suffer loss and damage in that they are not parties to a contract to be paid any royalties by Ericsson Australia, LME or any of its related bodies corporate for the manufacture, sale or use of ATM Products outside Australia by LME or any of its related bodies corporate.  Similar loss and damage flowing from the alleged breach of warranty of authority is also pleaded (par 69). 

The Attacks on the Statement of Claim

28                  Ericsson Australia and LME seek to strike out the statement of claim as a whole on the grounds that it fails to disclose any reasonable cause of action and that in various respects it has a tendency to cause embarrassment or delay in the proceedings by raising false issues. 

29                  Ericsson Australia and LME first contend that the pleading of the technology covered by the SAR and QP Patents is irrelevant to any cause of action relied upon in the proceedings and so is embarrassing.  They identify the technology issues by reference to the descriptions of the subject matter of the Patents contained in pars 8 to 11 inclusive. 

30                  The pleading of the technology may be justified as a way of labelling or identifying the Patents by reference to their subject matter.  It plays no other role in the statement of claim that is relevant to any cause of action.  It conveys no implication as to the validity of the Patents.  Although the pleading in this respect may be said to go beyond what is strictly necessary to identify the Patents, I do not consider that it has a tendency to embarrass and I would not accede to the proposition that the relevant paragraphs should be struck out.

31                  It would be sufficient, in the defences, to plead to the existence of the Patents set up in the statement of claim without giving rise to any need for inquiry into the content and nature of the technology and, in particular, without any need for discovery of documents in connection therewith.  For the most part the content of the Patents themselves will either bear out or falsify the description of their subject matter.

32                  Counsel for Ericsson Australia and LME referred to his clients’ anxiety that by admitting the subsistence of the pleaded Patents they might somehow be compromising their position on the validity of those Patents.  There is, in my opinion, no basis for that stated fear which has any bearing upon the statement of claim.  The existence of the Patents may be acknowledged without any implied concession as to their validity.  The attack on pars 8 to 11 of the statement of claim fails.

33                  Ericsson Australia and LME accept that the Jtec Contract is a background agreement which is properly pleaded (pars 12-14).  However they contend that the pleading of a sequence of discussions leading up to the making of the Assignment Deed is unnecessary, there being no actionable representations to be derived from them nor any other fact relevant to any cause of action relied upon.  I accept that contention.  The various communications and dealings set out in pars 15 to 20 are by way of evidentiary background.  They do not have a bearing upon any cause of action.  And although later invoked in par 55 as circumstances relevant to the content of pleaded representations, there is no logical connection shown between those circumstances and the representations relied upon.  I would therefore strike out pars 15 to 20 of the statement of claim as embarrassing.

34                  The pleading as to the execution and content of the Assignment Deed can stand (pars 21 and 22).  The Assignment Deed is referred to in the Memorandum of Agreement.

35                  The Negotiation Agreement has no role to play on the current pleading and the paragraphs relating to it, namely pars 23 and 24, should also be struck out as embarrassing.  So too should pars 25 to 27 which may provide some evidentiary background, but do not raise any factual material relevant to any pleaded cause of action.  And again, although they are invoked in par 55 as circumstances relevant to the content of the pleaded representations, there is no logical connection made which would justify that invocation. 

36                  The sale of Ericsson Australia assets to Longreach Group is referred to in the Memorandum of Agreement and although not strictly necessary, in my opinion can stand (pars 28 and 29).  

37                  The lengthy pleading of negotiations leading up to the formation of the Memorandum of agreement is also unnecessary and embarrassing.  None of the representations pleaded in the case is shown to derive content from them or have any logical connection to those negotiations.  Nor is any relevant representation said to have been made in the course of the negotiations.  Paragraphs 30 to 41 should be struck out as embarrassing.

38                  The execution, terms and breach of the Memorandum support the cause of action in breach of contract and will stand.

39                  When it comes to the pleading of representations arising from the execution of the Memorandum, reliance is placed upon ‘... the circumstances pleaded in paragraphs 15-20, 23-27 and 30-41 herein’, but as previously noted no logical connection is made between those ‘circumstances’ and the representations asserted in par 55.  The Licence Representations which are pleaded in par 55 are in terms representations about the meaning and effect of the Memorandum of Agreement.  It is then said, in effect, that if the Memorandum does not bear those meanings the Licence Representations were misleading or deceptive (par 58).

40                  Counsel for Ericsson Australia and LME submitted that the execution of a document does not involve a representation as to its meaning.  I agree with that submission.  That is not to say that the execution of a document may not involve representations about a party’s capacity and intention to perform any obligations it imposes or representations about the truth or existence of reasonable grounds for warranties contained in it.  There is, however, nothing in the act of signing an agreement that imports a representation as to the meaning of its terms.  Nor is there any logical connection made in this case between the external circumstances relied upon and the Licence Representations.  In my opinion, pars 55 and 58 do not disclose any reasonable cause of action.  A claim based upon misleading or deceptive conduct in connection with the Licence Representations cannot stand. 

41                  Then it is said that if the various representations had not been made the applicants would have refused to sign the Memorandum (pars 62 and 63).  But if that were the counterfactual pleading under which no loss would have arisen, it is not apparent from the pleading how the loss does arise (pars 68 and 69).  That is to say, there are no material facts pleaded to support the necessary claim of loss and damage flowing from the alleged misleading or deceptive conduct. 

Conclusion

42                  In my opinion, the only element of the statement of claim that survives the attack made upon it is the contract claim based upon breach of the Memorandum of Agreement.  In the circumstances I will strike out the following paragraphs of the statement of claim:

Paragraphs 15-20, 23-27, 30-41, 55, 58, 62-64 and 69

There will be leave to replead and I will give directions accordingly.

Associate:

Dated:              1 September 2004