FEDERAL COURT OF AUSTRALIA

DB Marketing Solutions Pty Ltd (formerly known as Auto Xtreme Electronics Pty Ltd) v Cause [2014] FCA 1026

SUBJECT TO THE USUAL UNDERTAKINGS AS TO DAMAGES THE COURT ORDERS THAT PENDING FURTHER ORDER OF THIS COURT, MR TRENT CAUSE BE RESTRAINED FROM:

1.    Any activity involving or related to the selling, installation, servicing and the maintaining of electronic equipment in trucks and vehicles within Australia.

2.    Directly or indirectly conducting any business which is similar to or competes with the applicants' business or any part of the applicants' business within Australia.

3.    Any activities involving or related to the advertising of or the selling, installation, servicing and the maintaining of electronic equipment in trucks and vehicles within Australia.

THE COURT ORDERS THAT:

1.    Adjournment of the applicants' interlocutory application filed 12 September 2014 be refused.

2.    Costs be reserved.

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

REASONS FOR JUDGMENT

1        This is an urgent interlocutory application for interim injunctive relief commenced by the applicants, DB Marketing Solutions Pty Ltd, against the respondents. The application was filed on 12 September 2014 pending the grant of final relief. The applicants seek an interim injunction restraining the first, second and third respondents from:

1.    Advertising or trading the first and second respondents partnership business registered as On Highway Electronics ABN 67 918 445 405 for any activity involving or related to the selling, installation, servicing and the maintaining of electronic equipment in trucks and vehicles within Australia.

2.    Directly or indirectly conducting or otherwise concerned with or interest in any business which is similar to or competes with the business or any part of the applicants' business within Australia; and

3.    Any activities involving or related to the advertising of or the selling, installation, servicing and maintaining of electronic equipment in trucks and vehicles within Australia.

2        The primary relief claimed by the applicants is in the nature of:

    Declarations that the conduct of the respondents constitute;

o    contraventions of their employment contracts with the applicants;

o    contraventions of certain shareholders agreements;

o    contraventions of s 182(1) and s 183(2) of the Corporations Act 2001 (Cth) ("Corporations Act");

o    contraventions by the first and second respondents of their fiduciary duties to the applicants.

    Permanent injunctions in the terms sought by the applicants by way of interlocutory relief.

    An account of profits and alternatively damages (at the applicants' election) for breaches of contract, s 182(1) and s 183(2) of the Corporations Act and/or the respondents' fiduciary duty.

    Costs and interest.

3        At the hearing the respondents, through their Counsel, orally sought an adjournment of the applicants' interlocutory application until 3 October 2014, in addition to directions concerning the filing of material.

4        The applicants rely on four affidavits filed in this proceeding, namely two affidavits sworn by Ms Maria Nemeth on 11 September 2014 and 15 September 2014, an affidavit affirmed by Ms Davina Aliota on 10 September 2014, and an affidavit of service sworn by Ms Michelle Schuon on 15 September 2014. Ms Nemeth is a partner of Hunt and Hunt, the solicitors for the applicants, and Ms Aliota is corporate counsel in the employ of WorldMark Pty Ltd, which owns all shares in the first applicant. I note that the holding company of both WorldMark Pty Ltd and the first applicant is WorldMark Group Holdings Pty Ltd, which is the second applicant in this proceeding. These affidavits cumulatively set out the background facts claimed by the applicants.

5        In summary, the applicants claim as follows:

    In or about October 2009 the first applicant entered into a contract of sale to purchase the business owned by Playing to Win Pty Ltd and the Untouchable Unit Trust. The business was trading as Auto Xtreme Sound Security Communications.

    Following the sale, the business traded as Auto Xtreme Electronics. A number of employees previously employed by the vendors of the business continued to work in the business. These employees included the first respondent Mr Trent Cause, and the second respondent Mr Ashley Cause.

    Mr Trent Cause was employed by the first applicant in the Auto Xtreme business subject to an employment agreement.

    Mr Ashley Cause was employed by Motor One Group Pty Ltd, a company which was a wholly owned subsidiary of WorldMark Pty Ltd, subject to a contract for services agreement. I note that no signed copy of an employment agreement could be produced by the applicants.

    On or about 31 December 2010 Mr Trent Cause was offered, as part of his remuneration, shares in the second applicant. The terms of the share offer were set out in a shareholders agreement, as well as in a Deed of Adherence and Variation executed by Mr Trent Cause. Mr Trent Cause was allotted shares in the second applicant, namely:

o    32,265 "A" class shares on 1 June 2011;

o    25,000 $1.00 ordinary shares on 1 June 2011;

o    113,636 $1.76 ordinary shares on 25 July 2012;

o    50,000 $2.00 ordinary shares on 22 August 2013;

Mr Trent Cause sold 138,636 ordinary shares at $2.00 each on 6 June 2013, and 50,000 ordinary shares at $2.25 on 20 January 2014. It is not in dispute that he continues to hold the "A" class shares in the second applicant.

    In his position of General Manager of Auto Xtreme Mr Trent Cause was entrusted by the WorldMark Group to foster and develop relationships with automotive car and truck dealers.

    The terms of the shareholder agreement to which Mr Trent Cause was a party included an agreement in clause 17.1 that he would not, for a period ending 12 months after he held an interest in any share, directly or indirectly compete with the business of Auto Xtreme. In clause 17.2 of that agreement Mr Trent Cause acknowledged that the restriction was imposed in order to protect the legitimate interests of the business and that monetary damages would not be an adequate remedy if there was a breach of the terms of the shareholders agreement. It is not in dispute that "shares" in the shareholders agreement was defined as meaning "ordinary shares" only.

    Clause 14 of Mr Trent Cause's employment agreement provided that he would not for a period of up to 12 months after the conclusion of his employment with Auto Xtreme engage in or be involved in any business which competes with the business of Auto Xtreme and would not seek to induce any employee of Auto Xtreme or its related entities to be engaged in or involved in any business which competes with Auto Xtreme.

    Mr Trent Cause was retrenched by the first applicant in or about November 2013 and Mr Ashley Cause ceased performing services for the applicants in or about June 2014.

    On 30 April 2014 the business name of "On Highway Electronics" ABN 67 918 445 405 was established by a partnership conducted by Mr Trent Cause and Mr Ashley Cause. The internet domain www.onhighwayelectronics.com was registered on 7 May 2014 by Ms Vanessa David, who is the domestic partner of Mr Trent Cause.

    On 11 June 2014 Mr David Cochrane, the Operations Manager for Queensland for the business of the applicants, met with Mr Trent Cause and Mr Ashley Cause, who informed Mr Cochrane that they were going into business for themselves and were targeting existing clients of Auto Xtreme in the trucking industry. Mr Cochrane informed Mr Steven Wheeler, the State Manager for Queensland, of this.

    On 12 June 2014 Mr Wheeler spoke to Mr Trent Cause and asked why he was going into competition given that Mr Trent Cause was a shareholder of WorldMark. Mr Trent Cause said that he needed the money as he had not worked since he left WorldMark in November 2013. Mr Wheeler suggested that Mr Trent Cause and Mr Ashley Cause approach him for contractor jobs or they could make an offer for the trucking clients of the first applicant's business.

    The Chief Financial Officer of the second applicant, Mr Stuart Davies, wrote to Mr Trent Cause and Mr Ashley Cause on or about 17 June 2014 requiring them to desist from engaging in conduct contrary to their contractual obligations. Subsequently Mr Wheeler had telephone conversations with Mr Trent Cause over a period of six to eight weeks to ascertain if the dispute could be resolved. Those discussions ended in August 2014 when no acceptable solution was achieved.

    Since early 2014 five of the six major trucking clients to which Auto Xtreme provided services have ceased requesting services from the applicants. These clients represent approximately 18% of the Queensland division of Auto Xtreme's 2013-2014 budgeted sales. The turnover of the applicants' business in Queensland has been reduced by one-third.

6        The applicants contend in summary that:

    There are serious questions to be tried as to whether the respondents are in breach of the relevant shareholders agreement, the relevant employment agreements, and the relevant services agreement.

    Mr Trent Cause is the registered proprietor of rural land in Bunjergen in Queensland. Mr Ashley Cause is the registered proprietor of property at Camp Hill in Queensland. The applicants are in no position to identify whether there is equity in the property from which an award of damages could be satisfied.

    The applicants have a number of fixed costs in their business and plan revenue around the fixed costs of the business in order to operate at a profit.

    The first applicant's business customers are only known to the respondents by reason of information the respondents had available to them by being employed by the first applicants' business and their respective positions.

    The applicants paid an amount in the sum of $2 million for the goodwill of the Auto Xtreme business less than four years ago.

CONSIDERATION

7        In light of events at the hearing there are now two interlocutory applications before the Court. It is appropriate to first consider whether the applicants' application should be adjourned, as sought by the respondents. The applicants strongly opposed the prospect of adjournment of the hearing of their interlocutory application.

Adjournment

8        Whether it is appropriate to order an adjournment in particular circumstances is an issue of discretion for the Court: Aon Risk Services Australia Ltd v Australian National University (2009) 239 CLR 175 at [5]; Jago v District Court of NSW (1989) 168 CLR 23 at 47; Goldberg v Morrow [2004] FCA 1490 at [36]; Trivett v Zoccoli [2002] WASCA 138. In this case the respondents submit that the Court ought grant an adjournment because, in summary:

    There is a serious question whether the restraints allegedly imposed on the respondents by agreements with the applicants, and in particular on Mr Trent Cause, are contrary to principles espoused in such well-known cases as Nordenfelt v The Maxim Nordenfelt Guns & Ammunition Co Ltd [1894] AC 535.

    The adjournment being sought by the respondents is not long, merely sufficient time to enable them to time to prepare a proper case to answer the applicants' claim.

9        While these submissions have force, in the circumstances I am not prepared to accede to the respondents' application for adjournment. I have formed this view because:

    While the application was brought on at relatively short notice, this is not uncommon in respect of interlocutory injunction applications, nor unreasonable where an applicant seeks restraint of conduct which is causing significant injury to its business interests.

    The respondents were represented both by solicitor and Counsel, and to that extent had had an opportunity to provide instructions to their legal representatives to meet the applicants' claim at this interlocutory stage, including preparation of affidavit material.

    It was not in dispute that there had been extensive discussions between the applicants and the respondents over a period of approximately six to eight weeks in relation to the applicants' complaints concerning the respondents' conduct. To that extent it would appear that the respondents had been provided with some notice of the applicants' grievances, and potential claims in this Court. It is difficult at this stage to infer that the respondents would have been taken by surprise by the interlocutory application filed on 12 September 2014.

    Extensive material was provided by the applicants in support of their interlocutory application, including relevant agreements. No indication was given at the hearing by Counsel for the respondents as to the type of material which the respondents proposed to file to answer this material, such that I could assess the benefits of an adjournment as sought. Indeed, it is possible that no further material of substance could be filed by the respondents.

    Counsel for the respondents was able to meet the respondents' interlocutory claim to the extent of referring to relevant case law including Nordenfelt. Further, it is clear that Counsel was able to make submissions at the hearing concerning the question whether the Court should, at this stage, order interlocutory relief. Indeed the majority of the hearing constituted submissions by the parties in relation to this question.

10        It follows that the respondents' application for adjournment should be dismissed. I will now turn to consideration of whether the applicants have substantiated their application for interlocutory relief.

Interlocutory injunctive relief

11        The evidence upon which the applicants rely in this proceeding is, to a considerable degree, hearsay evidence. Matters are the subject of deposition by the solicitor and corporate counsel of the applicants, relating information given to them by officers of the applicants. In my view however there is evidence sufficient to support this application at an interlocutory level. I have formed this view in light of the fact that this is an interlocutory hearing, for which evidence has been produced urgently and to a less rigorous standard than that required in a substantive hearing (cf observations in United Motor Search Pty Ltd v Hanson Construction Materials Pty Ltd (No 2) [2014] FCA 277 at [63]; Palm Springs Ltd v Darling [2002] FCA 277 at [20]; Pampered Paws Connection Pty Ltd v Pets Paradise Franchising (QLD) Pty Ltd (No 2) [2008] FCA 1716 at [17]; Australian Securities Commission v Macleod (unreported, Gummow J, 3 August 1992) at [2]; Australian Competition & Consumer Commission v Pauls Ltd [1999] FCA 1750; (2000) ATPR 41-747 at [52]; ICAP Australia Pty Limited v BGC Partners (Australia) Pty Limited [2007] FCA 467 at [6]).

12        As the applicants have correctly identified, the key questions requiring determination by the Court in relation to an application for interlocutory injunctive relief are whether:

1.    There is a serious question to be tried as to the applicant's entitlement to relief; and

2.    The applicant is likely to suffer injury for which damages will not be an adequate remedy; and

3.    The balance of convenience favours the granting of an interlocutory injunction.

(Australian Broadcasting Corporation v O'Neill (2006) 227 CLR 57 at [19] per Gleeson CJ and Crennan J).

13        In this case the applicants have partially substantiated their case.

Serious question to be tried

Mr Ashley Cause

14        I am not satisfied that the applicants have substantiated their claim of a serious question to be tried as against Mr Ashley Cause. As was clear at the recent hearing, the highest that the applicants' case against Mr Ashley Cause stands is that he was employed by or otherwise party to a service agreement involving one or other of the applicants. No signed employment contract to which Mr Ashley Cause was a party was produced by the applicants in this proceeding.

15        To the extent that Mr Ashley Cause was an employee, the applicants also rely on s 182 and s 183 of the Corporations Act which provide:

182    Use of position—civil obligations

Use of position—directors, other officers and employees

(1)    A director, secretary, other officer or employee of a corporation must not improperly use their position to:

(a)    gain an advantage for themselves or someone else; or

(b)    cause detriment to the corporation.

Note:    This subsection is a civil penalty provision (see section 1317E).

(2)    A person who is involved in a contravention of subsection (1) contravenes this subsection.

Note 1:    Section 79 defines involved.

Note 2:    This subsection is a civil penalty provision (see section 1317E).

183    Use of information—civil obligations

Use of information—directors, other officers and employees

(1)    A person who obtains information because they are, or have been, a director or other officer or employee of a corporation must not improperly use the information to:

(a)    gain an advantage for themselves or someone else; or

(b)    cause detriment to the corporation.

Note 1:    This duty continues after the person stops being an officer or employee of the corporation.

Note 2:    This subsection is a civil penalty provision (see section 1317E).

(2)    A person who is involved in a contravention of subsection (1) contravenes this subsection.

Note 1:    Section 79 defines involved.

Note 2:    This subsection is a civil penalty provision (see section 1317E).

16        Not only do these sections impose obligations on employees they also are civil penalty provisions. I take the seriousness of such a claim into account in determining whether there is a serious question to be tried.

17        While it is likely that Mr Ashley Cause was an employee or contractor of one of the applicants, the material before the Court simply does not support a finding to this effect, much less does it raise a serious question to be tried in respect of alleged contraventions of an agreement with any of the applicants.

Mr Trent Cause

18        The evidence concerning Mr Trent Cause is, however, much stronger. Material before the Court indicates that Mr Trent Cause was a principal of a business acquired by the applicants. It is reasonable to draw an inference that it was for this reason that he was party to agreements restraining him from competing with the applicants in the terms set out in clause 17 of the shareholders agreement and clause 14 of the employment agreement described earlier in this judgment. While the respondents raise a reasonable question as to whether the restraints in these agreements are lawful, there is ample authority to support the proposition that employers may legitimately protect their business interests being affected by former employees using their knowledge and influence over customers (for example Herbert Morris Ltd v Saxelby [1916] 1 AC 688 at 709; Lindner v Murdock's Garage (1950) 83 CLR 628 at 654; Birdanco Nominees Pty Ltd v Money (2012) 36 VR 341; Pearson v HRX Holdings Pty Ltd (2012) 205 FCR 187).

19        There is strong evidence before the Court that Mr Trent Cause is conducting a business in competition with that of the applicants. In particular, Ms Nemeth deposes as to statements by Mr David Cochrane (the Operations Manager for Queensland), Mr Steven Wheeler (the State Manager for Queensland) and Mr Stuart Davies (the Chief Financial Officer of the second applicant) concerning the business established by Mr Trent Cause following the cessation of his relationship with the applicants. Further, there is evidence to support findings that Mr Trent Cause continues to be subject to restraints imposed by his employment and shareholder agreements with the applicants, and will be so restrained until the later of the expiry of 12 months from the conclusion of his employment agreement or final disposition of ordinary shares in the second applicant. Prima facie, Mr Trent Cause is contractually restrained from competing with the applicants until 20 January 2015 (that is, 12 months after the final disposition on 20 January 2014 of ordinary shares held by him).

20        As I noted earlier in this judgment, there is also evidence before the Court that the Queensland business of the applicants is suffering, potentially because of competition with Mr Trent Cause and his new business. There is no evidence before me that there is any other competitor to the business of the applicants who could be drawing business away from the applicants. Further, the alleged damage to the business of the applicants as claimed by Ms Nemeth appears to coincide with the cessation of the business relationship between the applicants and Mr Trent Cause.

21        I also note that in the sense that it does not appear to be in dispute that Mr Trent Cause was previously an employee of the first applicant, at the very least there is a serious question to be tried as to whether he has used information obtained by him in his previous role with the applicants to the detriment of the first applicant, contrary to s 183 of the Corporations Act.

22        I am satisfied that there is a serious question to be tried in relation to Mr Trent Cause in respect of the substantive relief claimed by the applicants.

The partnership

23        In relation to the third respondent the claim of the applicants perforce relies upon the fact that it is a firm, the partners of which are Mr Trent Cause and Mr Ashley Cause. Evidence before the Court indicates that they are partners, having registered the business name "On Highway Electronics" on 30 April 2014.

24        At the hearing Mr Cooke for the applicants directed my attention to s 9 of the Partnership Act 1891 (Qld) ("Partnership Act"). Relevantly s 9(1) provides:

9    Partners bound by acts on behalf of firm

(1)    An act or instrument relating to the business of a firm, other than an incorporated limited partnership, and done or executed in the firm-name, or in any other manner showing an intention to bind the firm, by any person authorised to bind the firm, whether a partner or not, is binding on the firm and all the partners.

25        Further, I note s 8 of the Partnership Act which materially provides:

8    Power of partner to bind the firm

(1)    Every partner in a partnership, other than a firm that is a limited partnership or incorporated limited partnership, is an agent of the firm and his or her other partners for the purpose of the business of the partnership, and the acts of every partner who does any act for carrying on in the usual way of business of the kind carried on by the firm of which the partner is a member bind the firm and his or her partners, unless—

(a)    the partner so acting has in fact no authority to act for the firm in the particular matter; and

(b)    the person with whom the partner is dealing either knows that the partner has no authority, or does not know or believe the partner to be a partner.

26        While a business name has been registered in the name of a partnership, there is no indication that the third respondent is a legal entity separate from Mr Trent Cause and Mr Ashley Cause, such as to be capable of being sued in its own right as is the case with an incorporated limited partnership under s 72 of the Partnership Act (cf BFI Optilas v Blyth [2002] EWHC 2693 (QB) where the Court considered – but rejected – an application for interim injunctive relief brought by a company against two former employees and the limited liability partnership of which they were members). The fact that a business name has been registered does not mean that the partnership can be sued, or restrained, except insofar as proceedings can be commenced against the individual partners to that firm. In any event in circumstances where I am not satisfied that there is a serious question to be tried concerning Mr Ashley Cause in his capacity as an individual, there is no serious question to be tried concerning Mr Ashley Cause in his capacity as a partner of a firm, notwithstanding that the other partner to this firm is Mr Trent Cause. Further, it is difficult to identify the relevance of s 8 or s 9 of the Partnership Act where any contractual restraint of Mr Trent Cause's apparently predated the partnership with Mr Ashley Cause.

27        I am not prepared to order interim injunctive relief against the third respondent as named on the pleadings.

The applicant is likely to suffer injury for which damages will not be an adequate remedy

28        In relation to the interlocutory relief sought by the applicants concerning Mr Trent Cause, I am satisfied at this interlocutory stage that Mr Trent Cause would not be in a position to adequately compensate the applicants pursuant to an order for damages should the applicants be successful in the substantive proceedings.

29        First, although there is evidence before the Court (in the affidavit of Ms Nemeth filed 11 September 2014) to support a finding that the applicants paid the vendors of the Auto Xtreme business (including Mr Trent Cause) the sum of $2 million, and further that Mr Trent Cause has sold shares allotted to him in relation to the sale of that business, nonetheless there is also evidence that Mr Trent Cause is in need of funds and that it is for this reason that he has commenced the On Highway Electronics business.

30        Second, while there is evidence before the Court that Mr Trent Cause is the owner of a rural property at Bunjurgen in Queensland, Ms Nemeth deposes that this property, which is of unknown value, is subject to a mortgage of an unknown amount to the Commonwealth Bank of Australia.

31        Certainly no submissions were put to me at the recent hearing from which I could infer that Mr Trent Cause could satisfy any damages award should the applicants be successful in the substantive proceeding.

32        In circumstances where there is a real question as to whether a respondent is in a financial position to satisfy a potential damages award, the Court is entitled to infer that injunctive relief is justified: Sempra Metals & Concentrates Corporation v Tritton Resources Ltd [2006] NSWSC 1209; cf Lord Diplock in American Cyanamid Co v Ethicon Ltd [1975] AC 396 at 408.

Balance of convenience

33        In this case there is evidence to support a finding at an interlocutory stage that the business of the applicants is significantly suffering from the activities of Mr Trent Cause, because of his intimate knowledge and experience of the industry in which the applicants operate and his previous position with the applicants. Further, there is evidence that Mr Trent Cause was previously paid substantial amounts in respect of the acquisition of the applicants' business in both cash and shares, but is now conducting a business in competition with that of the applicants contrary to contractual obligations he has previously incurred and which remain ongoing.

34        In addition to these considerations, I note that, prima facie, the contractual restraints preventing Mr Trent Cause from competing with the applicants will cease to operate on or about 20 January 2015. A refusal by the Court at this stage to grant an interlocutory injunction would practically mean that those restraints cease to have any effect from this point, save as to any remedy the applicants can pursue in damages.

35        While it may be that Mr Trent Cause would suffer financially if he is restrained at this interlocutory stage from continuing to operate a business in competition with that of the applicants, in my view the balance of convenience favours a restraint of his conduct pending determination of substantive matters claimed by the applicants.

36        However, I note that the applicants are also seeking an interlocutory injunction to restrain Mr Trent Cause from having an interest in any business which is similar to or competes with the applicants' business. I am not satisfied that such a restraint is necessary to maintain the status quo pending resolution of final issues concerning Mr Trent Cause. In my view an order restraining Mr Trent Cause from directly or indirectly conducting any competing business or being involved in competing activities is adequate to address the possible contraventions by Mr Trent Cause of his contractual obligations and ongoing injury to the applicants' business interests.

CONCLUSION

37        In my view the Court should order limited interlocutory injunctive relief against Mr Trent Cause. It is also appropriate that the legal representatives of the parties should produce draft directions for consideration by the Court to take the matter forward to final hearing.

Associate:

Dated:    22 September 2014