FEDERAL COURT OF AUSTRALIA

Leica Geosystems Pty Ltd v Koudstaal [2012] FCA 1337

THE COURT ORDERS THAT:

1.    The interlocutory application filed 4 July 2012 be dismissed.

2.    The second respondent pay the applicants’ costs of and incidental to the interlocutory application filed 4 July 2012, to be taxed if not otherwise agreed.

Note:    Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

REASONS FOR JUDGMENT

1    Before me is an interlocutory application filed on 4 July 2012 by the second respondent in the substantive proceeding, Automated Positioning Systems Pty Ltd (“APS”). Although a number of interlocutory orders were sought in that application, the only ones pressed at the hearing were:

    that there be summary judgment for APS against the applicants;

    that the applicants pay APS’ costs of and incidental to this proceeding on an indemnity basis; and

    such further or other order as the Court thinks fit.

2    The first respondent, Mr Koudstaal, took no part in this interlocutory proceeding.

3    In their originating application filed 24 February 2012 the applicants to the substantive proceeding have sought a number of orders in the nature of declaratory and injunctive relief, as well as damages or compensation, in relation to alleged use of confidential information, including the applicants’ source code, by both respondents.

4    Before considering the interlocutory application before me it is useful to consider the background facts to the proceedings.

Background

5    The first applicant is a company incorporated according to Australian law. The second applicant is a company incorporated according to the law of Switzerland. The third applicant is a company incorporated according to the law of the United States of America. The first and third applicants conduct business together under the name Leica Geosystems Mining (LGM).

6    The second and third applicants separately own source code and related software. The second applicant owns source code and related software for an original fleet management system and machine guidance system known as PitOps (also known as Leica Classic). The third applicant owns source code and related software for an enhanced fleet management system known as Jigsaw (also known as mineOPS). It is convenient to refer to this source code and software cumulatively as “LGM’s source code”.

7    It does not appear to be in dispute that copyright subsists, and has subsisted at all material times, in LGM’s source code.

8    The first applicant has a licence in respect of both copyright and use of the third applicant’s software and LGM’s source code.

9    In March 2004 the first and second applicants entered into commercial agreements whereby, inter alia, copyright in LGM’s source code was assigned to and vested in the second applicant, and the first applicant retained a non-exclusive licence in respect of both copyright and use of LGM’s source code.

10    The first respondent, Mr Koudstaal, was employed by the first applicant as a software engineer on or about 10 May 2010. The first applicant’s employment of Mr Koudstaal was pursuant to the terms of a written employment agreement dated 29 April 2010 (“the employment agreement”). The employment agreement included competition and confidentiality clauses, materially as follows:

6.    No Competition and Confidentiality during employment

6.1    Obligation

You shall not without the Employer’s prior written consent, do any of the following while employed by the Employer:

…

(b)    disclose or use any Confidential information, except:

(i)    disclosure or use in the proper course of your duties;

(ii)    for information which is freely available to the public; or

(iii)    to the extent you are required to disclose information by law or requirement of any regulatory body.

Confidential Information includes, without limiting its ordinary meaning, information whether oral, written or recorded electronically and including all copies or extracts, known to you or in your possession or control, relating to Group’s affairs, transactions, customers or business in your possession or control, including information which may come into your possession or control in the course of and by reason of employment with the Employer, whether or not the same was originally supplied by the Employer.

Group means the Employer and any Related Body Corporate (within the meaning given to that term by the Corporations Act 2001 (Cth) from time to time, and includes:

(a)    Leica Geosystems AG of Heinrich-Wild-Strasse CH9435, Heerbrugg, Switzerland, and its subsidiaries;

(b)    Hexagon AB of Cylindervagen 12, Box 112, SE-131 26 Nacka Strand Sweden, and its subsidiaries.

7.    Your Obligations After Employment Ceases

7.1    Separate Provisions

Clauses 7.2 and 7.3, each Time Period and each Area in the Schedule have effect as if they consisted of separate provisions, each being severable from the other. If any one or more of the restraints resulting from a combination of those variables is unenforceable or illegal:

(a)    the fact shall not affect the other mentioned restraints; and

(b)    the unenforceable or illegal restraint or restrains will be deemed severed from and will form no part of this agreement.

7.2    Confidentiality

(a)    Within each of the Time Periods and each of the Areas in the Schedule, you covenant in favour of the Employer that you will not, without the prior written consent of the Employer, use or disclose to any person any Confidential Information. Without prejudice to any other available remedy, the Employer may recover any loss sustained by the Employer or profit obtained by you as a result of any use of Confidential Information contrary to this agreement.

(b)    Clause 7.2 (a) does not apply to:

(i)    the disclosure of information that is freely available to the public;

(ii)    disclosures required of you by any applicable law or requirement of any regulatory body.

…

8.7    Return of the Employer’s property

On termination of this agreement and whenever requested by the Employer, you shall immediately deliver to the Employer all books, documents, papers, materials, credit cards, software, computer files, access keys, motor vehicles and other property of the Employer which may then be in your possession or under your power or control.

…

Schedule 1

(1)    The Time Periods mentioned in each of the following periods in clause 7 of the agreement are:

(i)    for a period of 1 month after the date of termination of your employment;

(ii)    for a period of three months after the date of termination of your employment;

(iii)    for a period of six months after the date of termination of your employment;

(iv)    for a period of one year after the date of termination of your employment; and

(v)    for such other time as Confidential Information held by you retains its quality of confidentiality.

11    Mr Koudstaal resigned from the first applicant’s employment effective 3 November 2011. On that date Mr Koudstaal signed a Termination Checklist, which included a statement to the effect that he had returned the first applicant’s property, did not have in his possession any property belonging to the first applicant or its related entities, and that he understood that any information obtained by him relating to the business or affairs of the first applicant remained its sole property and would remain confidential.

12    Mr Koudstaal commenced employment with APS on 7 November 2011 as a software engineer.

13    In their Statement of Claim filed 24 February 2012 the applicants claimed, in summary, as follows:

    before ceasing employment with the first applicant, Mr Koudstaal downloaded and took with him a copy of LGM’s source code, which was then further reproduced and downloaded on to his external hard drive (paragraphs 20 and 21).

    shortly thereafter, Mr Koudstaal commenced employment with APS (paragraph 22).

    in the course of his employment with APS, Mr Koudstaal is using or has used that copy of LGM’s source code to work on software products for APS, and/or has provided a copy of LGM’s source code to APS (paragraph 23).

    APS knew, or ought to have known, these facts, and has therefore received LGM’s source code in circumstances that import an obligation of confidence owed by APS to the first applicant and/or the second and third applicants (paragraph 24).

    In or about January 2012 Mr Koudstaal made statements to Ms Stefana Vella, a subcontractor of the first applicant, to the effect that he had taken a copy of LGM’s source code when he left the employment of the first applicant (paragraph 25).

    Mr Koudstaal has acted in breach, and is in continuing breach, of his employment agreement with the first applicant, as well as his statutory obligations under s 183(1) of the Corporations Act 2001 (Cth) as an officer of the first applicant, and the equitable obligation of confidence owed to the first applicant (paragraph 27).

    In these premises, APS has acted in breach, and is in continuing breach, of the equitable obligation of confidence owed to the first applicant and/or the second and third applicants (paragraph 28).

    Mr Koudstaal has infringed the applicants’ copyright in LGM’s source code, and APS has infringed (by its employee Mr Koudstaal) the copyright in LGM’s source code, and continues, or threatens to continue, to infringe that copyright (paragraph 31).

    Mr Koudstaal and APS knew or ought to have known that their acts constituted an infringement of the applicants’ copyright (paragraph 32).

    Mr Koudstaal and APS have each converted the copies of LGM’s source code to their own use (paragraph 33).

    The infringements of the applicants’ copyright in LGM’s source code were committed in flagrant disregard of the applicants’ rights, and the applicants have suffered and will suffer loss and damage (paragraphs 34 and 35).

    Further and alternatively, by reason of the infringements of copyright Mr Koudstaal and/or APS has made and continues to make profits (paragraph 36).

Interlocutory application

14    APS applies for an order pursuant to r 26.01(a) of the Federal Court Rules 2011 (Cth) against the applicants, on the basis that the applicants have no reasonable prospect of successfully prosecuting the proceeding or part of the proceeding against APS.

15    Rule 26.01, so far as material, provides:

26.01    Summary judgment

(1)    A party may apply to the Court for an order that judgment be given against another party because:

(a)    the applicant has no reasonable prospect of successfully prosecuting the proceeding or part of the proceeding; or

16    In this proceeding, it appeared common ground that the key issue for consideration by the Court was whether the applicants had “no reasonable prospect of success” in prosecuting its claims, which is a principle common to r 26.01(1)(a) and s 31A of the Federal Court of Australia Act 1976 (Cth) (“Federal Court Act”), such that authorities on s 31A are useful in considering r 26.01. In my view it is appropriate to consider the submissions of the parties on that basis.

17    APS claims that the applicants lack the evidentiary basis necessary to pursue their claims against APS with any reasonable prospect of success because, in summary:

    In relation to the breach of confidence claim against APS:

o    the three elements essential to a cause of action for breach of the equitable duty of confidence are:

(i)    that the information must be of a confidential nature;

(ii)    that the information must be communicated in circumstances importing an obligation of confidence; and

(iii)    that there must be an unauthorised use of the information to the detriment of the party who communicated it.

o    there is no evidence that APS received LGM’s source code, or had actual or constructive knowledge of use of that code by Mr Koudstaal in the course of his employment. In particular:

▪    pursuant to an order of this Court of 24 February 2012, an independent computer expert, Mr Paul Bouwer of Dialog Information Technology, entered APS’ premises on 27 and 28 February 2012 in order to search for listed things on “any data storage device… apparently the property of one or other of the respondents”. Mr Bouwer reported the results of his search on 28 February 2012 (in a report annexed to the affidavit of Mr Joshua Henderson affirmed 28 February 2012) and concluded that nothing of consequence was found on any of APS’ data stores in the execution of his search;

▪    Mr Dushyantha Wimalsuriya, the Chief Executive Officer of APS, has deposed in his affidavit sworn 4 July 2012 that APS was not aware that Mr Koudstaal had a copy of any code from the applicants until the substantive proceedings were served on APS. Further, Mr Wimalsuriya has deposed that APS is able to track precisely which lines of software code were written by Mr Koudstaal, and Mr Wimalsuriya’s review of that code did not suggest that Mr Koudstaal was using the applicants’ code;

▪    Mr Ajoy Ghosh, a computer expert who has provided a report on instructions from the applicants’ solicitors annexed to his affidavit sworn 9 August 2012, did not find any evidence of LGM’s source code migrating from Mr Koudstaal’s computer and storage devices to APS’ computer systems;

▪    even apart from the lack of evidence of breach by APS, the factual basis on which the applicants allege an equitable obligation of confidence was imposed on APS is not borne out by the evidence. There is no evidence that Mr Koudstaal used a copy of LGM’s source code to work on APS software, or, even if he did, that APS knew or ought to have known that Mr Koudstaal was doing so; and

▪    the complete absence of evidence to support the case of the applicants supports a finding that the applicants cannot be said to have any reasonable prospects of successfully prosecuting its breach of confidence claim against APS.

    In relation to the breach of copyright claim against APS:

o    there is no allegation that, if Mr Koudstaal downloaded a copy of LGM’s source code before leaving the employment of the first applicant, APS was in any way involved in the alleged reproductions of the source code, or that Mr Koudstaal was even employed by APS at the time of those alleged reproductions; and

o    there is no evidence that Mr Koudstaal provided a copy of LGM’s source code to APS. Instead, the evidence of the independent computer expert Mr Bouwer reveals that there was nothing of interest on APS’ computer system.

18    The applicants oppose the interlocutory application, in summary on the following grounds:

    The power to dismiss an action summarily is not to be exercised lightly: Spencer v Commonwealth (2010) 241 CLR 118 at [24] and [60] and Tropical Reef Shipyard Pty Ltd v QBE Insurance (Australia) Ltd [2011] FCAFC 145 at [31].

    Summary judgment is inappropriate where there are factual issues capable of being disputed and in dispute: Spencer at [25].

    There is evidence that Mr Koudstaal downloaded LGM’s source code on to his external hard drive on 2 and 3 November 2011, before ceasing employment with the first applicant. This evidence is apparent from the report of Mr Ghosh.

    On 28 January 2012 Mr Koudstaal told Ms Vella that he was using LGM’s source code to assist him in his work at APS (affidavit of Ms Vella affirmed 24 February 2012 paragraph 29).

    These facts must be considered in light of the evidence that:

o    APS is an aggressive competitor of the first applicant;

o    source code is a critical part of developing new software;

o    APS needed to have a fleet management system to be competitive with the first applicant and it is apparent from its website that APS now has a fleet management system which involves machine guidance; and

o    APS has been approaching employees and clients of the first applicant, and a number of staff of the first applicant, including Mr Koudstaal, have left to work for APS.

    The evidence establishes to at least the requisite interlocutory level that there has been unauthorised copying of LGM’s source code by Mr Koudstaal, and supports the likelihood of further reproductions of parts of LGM’s source code by Mr Koudstaal while an employee of APS.

    APS is at least vicariously liable for Mr Koudstaal’s tortious conduct in infringing the applicants’ copyright and commercially exploiting those infringing copies, such conduct being committed in the course of Mr Koudstaal’s employment with APS.

    The inference may and should be drawn that Mr Koudstaal was reproducing and accessing the relevant material in the course of his employment with APS because the relevant reproductions were done for the intended pursuit of APS’ interests, or the intended pursuit of Mr Koudstaal’s contract of employment with APS. This is likely to be clarified by discovery by each of the respondents.

    In these circumstances the applicants have good, or at least reasonable, prospects of successfully establishing vicarious liability of APS for copyright infringements by Mr Koudstaal.

    In relation to the essential requirements for an action for breach of the equitable obligation of confidence:

o    all requirements are established to the requisite interlocutory level in respect of LGM’s source code;

o    even if APS innocently received confidential information, the Court has jurisdiction to enjoin APS if it is established that the initial wrongdoing which brought about the misuse of confidential information would be carried into effect by APS’ conduct (Dart Industries Inc v David Bryar & Associates Pty Ltd (1997) 38 IPR 389 at 406);

o    the evidence clearly supports, to at least the requisite interlocutory level, the conclusion that APS had actual or constructive notice of the confidentiality of this information being used by Mr Koudstaal, such that it is liable to be restrained by injunction from further use or disclosure of it. APS is also liable, if the applicants substantiate their case, to accounting and tracing remedies; and

o    in these circumstances, the applicants have reasonable prospects of establishing direct liability of APS for breach of confidence.

Consideration

19    The leading authority in relation to the interpretation of s 31A of the Federal Court Act, and the concept of an applicant having “no reasonable prospect of success” in prosecuting litigation, is Spencer. In that case the applicant’s claim had been summarily dismissed pursuant to s 31A. Subsequently, the Full Court of the Federal Court dismissed Mr Spencer’s appeal from the decision at first instance. Mr Spencer sought special leave to appeal to the High Court from the decision of the Full Court.

20    The High Court found that the proceedings in the Federal Court were not appropriate for summary dismissal pursuant to s 31A. The High Court granted special leave to appeal, and, instanter, allowed the appeal.

21    The members of the High Court discussed in detail the meaning of the term “no reasonable prospect of success”. Principles emerging from the judgments of their Honours include the following:

    The legislation permitting summary dismissal of cases is designed to deal with cases that are not fit for trial at all (at [21]).

    The types of case s 31A contemplates include those where (at [22]):

o    the pleadings disclose no reasonable cause of action and their deficiency is incurable;

o    there is unanswerable or unanswered evidence of a fact fatal to the pleaded case and any case which might be propounded by permissible amendment; and/or

o    the case is “frivolous or vexatious or an abuse of process”.

    The exercise of powers to summarily terminate proceedings must always be attended with caution (at [24]).

    Where there are factual issues capable of being disputed and in dispute, summary dismissal should not be awarded to the respondent simply because the Court has formed the view that the applicant is unlikely to succeed on the factual issue (at [25]).

    Where the success of a proceeding depends upon propositions of law apparently precluded by existing authority, that may not always be the end of the matter (unless the success of proceedings is critically dependent upon a proposition of law which would contradict a binding decision of the High Court) (at [25]).

    The fact that the proceeding involves consideration of important questions of law, and potentially complex questions of fact, may militate against summary dismissal (at [26]).

    It is important to keep in mind that the central idea about which the provisions pivot is “no reasonable prospect” of success. The choice of the word “reasonable” is important. To that extent, the enquiry to be made is whether there is a reasonable prospect of prosecuting the proceeding, rather than an enquiry directed to whether a certain and concluded determination could be made that the proceeding would necessarily fail (at [51]-[52]).

22    In this proceeding I am mindful of the submission of APS that, on the current state of the evidence before the Court, there is no evidence to substantiate the applicants’ claim that APS is, inter alia, in possession of LGM’s source code or had any knowledge of Mr Koudstaal’s appropriation of LGM’s source code. However, while this may currently be the state of the evidence, I am not satisfied that an order for summary dismissal of the proceedings against APS is warranted.

23    I form this view for the following reasons.

24    First, it is clear that the proceeding is at a relatively early stage in progressing to trial. Discovery has not been completed. It is likely that further evidence will be forthcoming beyond that which has been produced for the purposes of the interlocutory hearing.

25    Second, there is already considerable evidence before the Court supporting an inference that Mr Koudstaal downloaded LGM’s source code before leaving the employment of the first applicant, and was still in possession of that source code in 2012. In particular, there is evidence that:

    on 2 November 2011, over a period of approximately seven hours, while still employed by the first applicant but after having given notice, Mr Koudstaal copied on to his external hard drive numerous files containing LGM’s source code, executable programs, and documentation (report of Mr Ghosh paragraphs 2 and 41).

    on 3 November 2011, over a period of approximately five hours, Mr Koudstaal copied another 190,542 files on to his external hard drive (report of Mr Ghosh paragraphs 2 and 41; affidavit of Mr Stephen Roberts affirmed 15 March 2012 paragraphs 17-30).

    In his affidavit affirmed 15 March 2012 (at paragraph 30), Mr Roberts deposes that the material downloaded on 3 November 2011 included the following detailed confidential information in respect of the business of the first applicant:

o    client lists;

o    comprehensive version lists by customers – details of what software versions are being used by each client by product type;

o    access codes, including IP address, passwords and other login information for a selection of clients’ mining sites;

o    training manuals;

o    release notes;

o    test procedures; and

o    internal documentation on software development including user development guides, interface guides to other systems, application and algorithm logic and software design guides for the process raw data service for IMS.

26    Third, it does not appear to be in dispute that APS is a competitor of the first applicant. Inferences at this interlocutory stage are open to the Court, from the timing of relevant events, that Mr Koudstaal, in downloading LGM’s source code and commencing employment with APS several days later, downloaded LGM’s source code with the knowledge of, or at least for the purposes of his employment with, APS.

27    Fourth, there is evidence that source code is a critical part of developing new software (affidavit of Ms Vella affirmed 24 February 2012 paragraphs 10 and 12; affidavit of Mr Roberts sworn 24 February 2012 paragraph 12).

28    Fifth, there is evidence that, since his employment by APS, Mr Koudstaal has accessed the source code he downloaded whilst in the employment of the first applicant, and that he has or may have used that source code in the course of performing his duties for APS. In particular:

    On 24 January 2012 the relevant files were copied from Mr Koudstaal’s hard drive on to his laptop computer (report of Mr Ghosh paragraph 41).

    On 27 January 2012 simulations were run on Mr Koudstaal’s laptop in which he accessed material containing the relevant source code (report of Mr Ghosh paragraphs 2e and 46b). The applicants submit that there a number of ways such access could have assisted both the first and second respondents in development work Mr Koudstaal was undertaking for APS.

    On or about 28 January 2012 Mr Koudstaal told Ms Vella that he was using LGM’s source code to assist him in his work at APS, in particular working on a new product (the drill program) (affidavit of Ms Vella affirmed 24 February 2012 paragraph 29).

29    Sixth, there is evidence that APS has acquired a fleet management system involving machine guidance, in respect of which LGM’s source code could have been important in development (affidavit of Mr Roberts sworn 24 February 2012 paragraphs 41 and 44(f)).

30    Seventh, while APS points to the failure of independent computer expert Mr Bouwer to find anything of consequence on any of APS’ data stores in the execution of his search pursuant to Anton Piller orders of this Court, for the purposes of this interlocutory proceeding I accept Mr Cobden’s submission that the search conducted by Mr Bouwer was, of necessity:

    limited by the terms of the search (namely by keywords);

    inconclusive; and

    conducted by a person unfamiliar with LGM’s source code.

31    To that extent, I am not persuaded that the failure of Mr Bouwer to find any information of consequence is a conclusive basis upon which to summarily dismiss the applicants’ case against APS.

32    Eighth, as was originally observed by Megarry J in Coco v A N Clark (Engineers) Ltd [1969] RPC 41 at 47-48 (and much cited since) it is clear that equity will intervene to restrain an actual or threatened breach of confidence involving disclosure of information where:

(i)    the information is of a confidential nature;

(ii)    the information is communicated in circumstances importing an obligation of confidence; and

(iii)    there is an unauthorised use of the information to the detriment of the party who communicated it.

33    Mr Wimalsuriya deposes in his affidavit sworn 4 July 2012 that APS recruited Mr Koudstaal through the employment website seek.com.au, as is their standard method, and that has been no “poaching” of employees of the applicants as they claim (paragraphs 3-6). However, there is material before the Court to support inferences that LGM’s source code:

    is information of a confidential nature;

    was communicated to Mr Koudstaal in circumstances importing an obligation of confidence; and

    has been used by Mr Koudstaal to the detriment of the applicants.

34    Even if APS did not “poach” Mr Koudstaal, this does not mean that Mr Koudstaal could not have used LGM’s source code in the course of his employment with APS, and/or that APS staff were unaware of either Mr Koudstaal downloading the source code or the use of the source code in the APS workplace. To this extent, I consider that it remains open to the Court to find that APS has been party to a breach of the duty of confidence, simply because it is inequitable for a person to be in receipt through its employee of confidential information and then to profit from it. This is a recognised principle of long standing, explained, for example, by Swinfen Eady LJ in Lord Ashburton v Pape [1913] 2 Ch 469 at 475 in the following terms:

The principle upon which the Court of Chancery has acted for many years has been to restrain the publication of confidential information improperly or surreptitiously obtained or of information imparted in confidence which ought not to be divulged. Injunctions have been granted to give effectual relief, that is not only to restrain the disclosure of confidential information, but to prevent copies being made of any record of that information, and, if copies have already been made, to restrain them from being further copied, and to restrain persons into whose possession that confidential information has come from themselves in turn divulging or propagating it.

35    Ninth, I do not accept for the purposes of this interlocutory proceeding that the pleadings cannot support a finding of vicarious liability of APS for conduct of Mr Koudstaal in respect of a breach of copyright claimed by the applicants. I note in particular the acknowledgement of the concept of vicarious liability in copyright by Gummow J in WEA International Inc v Hanimex Corporation Ltd (1987) 17 FCR 274 at 283.

Conclusion

36    In the circumstances of this case, I do not consider it can be said that the applicants have “no reasonable prospect” of successfully prosecuting the substantive proceeding or part of the substantive proceeding against APS. It follows that the proper order is to dismiss the interlocutory application. It is also appropriate, in my view, to order that APS pay the costs of the applicants on a party and party basis, to be taxed if not otherwise agreed.

Associate:

Dated:    27 November 2012