Federal Court of Australia

Howden Australia Pty Ltd v Minetek Investments Pty Ltd (Leave to Amend) [2022] FCA 1557

ORDERS

THE COURT ORDERS THAT:

1.    The Applicants serve on the Respondents by 4.00 pm on 20 December 2022, a new form of the proposed Further Amended Originating Application and Second Further Amended Statement of Claim dealing with the issues outlined about the definition of the Minetek Mixed Flow Fan.

2.    The Respondents indicate to the Applicants and to the Associate to Justice Perram its position on those documents by 4.00 pm on 22 December 2022.

3.    The interlocutory application be stood over to a further case management hearing at 9.30 am on 6 February 2023.

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

REASONS FOR JUDGMENT

(REVISED FROM TRANSCRIPT)

PERRAM J:

1    This is an application by Howden to file a Second Further Amended Statement of Claim and a Further Amended Originating Application. The amendments to the statement of claim are to §§50A and 58A and, if granted, would have the effect of including in the claim an allegation that by reason of the use of the confidential information, the Minetek Mixed Flow Fan is subject to a constructive trust in favour of the Applicants. The differences between §§50A and 58A are not material. The corresponding relief is sought in §4A of the proposed Further Amended Originating Application.

2    Paragraph 4A makes clear that the proposed constructive trust is sought as an alternative to the Applicants’ claim for damages, or an account of profits, or its claim for equitable compensation. That is to say a claim for the constructive trust only arises if, for whatever reason, the Court comes to the conclusion that damages, an account of profits, or equitable compensation are not appropriate remedies, or alternatively, if for some reason it becomes obvious that none of those remedies is useful to the Applicants. The only circumstance discussed during the hearing where it appeared that the constructive trust claim might have some relevance was the one which would arise in the circumstance that the Respondents became insolvent.

3    The next thing to note about the proposed declaration sought in §4A is that it is sought over the Minetek Mixed Flow Fan ‘either in whole or in part’. The expression ‘Minetek Mixed Flow Fan’ is not defined in the proposed Further Amended Originating Application, although the Second Schedule to the application provides a list of definitions. It was accepted in the course of argument that it would be necessary if there were to be a grant of leave for the Minetek Mixed Flow Fan to be defined. As an interim measure, Mr Hennessy SC who appeared for the Applicants submitted that the definition which appeared in the originating application of the ‘High Output Axial Fan’ was likely to be very similar to what the Court could expect in due course would be the definition of the Minetek Mixed Flow Fan.

4    Assuming that to be so, the definition of High Output Axial Fan provides in part as follows:

… means the mixed flow fan product offered for supply and promoted for possible supply by Minetek Pty Ltd …

5    This definition is intended to facilitate the allegations which are made in the statement of claim relating to breach of confidence. Leaving out a lot of detail, the pleading seeks to demonstrate that the Minetek Mixed Flow Fan was developed using the Applicants’ confidential information. The nature of that allegation is such that the mixed flow fan being discussed is of a somewhat conceptual nature; that is to say the pleading seeks to talk of the concept of the mixed flow fan and to demonstrate that that concept has been developed using the confidential information. That gives rise, at least as matters presently stand, to a problem if that definition is now fed back into a claim for constructive trust.

6    In truth, what the Applicants want is a constructive trust over actual fans; so much was conceded by Mr Hennessy in the course of argument. Indeed, he accepted that what the Applicants really wanted was, if the question arose, a constructive trust over any of the mixed flow fans which were sitting on the factory floor. He eschewed any suggestion that the Applicants might be entitled to a constructive trust over mixed flow fans which had been sold to customers in the past and, at the same time, also eschewed any suggestion that there might be a tracing remedy in relation to any proceeds of sale arising from those fans. So there is, it follows, a drafting problem with the way in which the claim is currently articulated.

7    The pleading seeks to demonstrate that the Respondents’ fan has been developed using its confidential information and then seeks to impose a constructive trust onto that rather conceptual notion. It was accepted in the course of argument that if leave to amend were granted, this problem would be addressed. The next issue is that the question of whether a constructive trust will be or should be imposed upon the fan is not one which will be considered at the upcoming hearing.

8    The hearing of this matter is scheduled for three weeks in April next year. That hearing, however, is only concerned with the question of liability. On the face of it, the question of whether a constructive trust ought to be imposed is not a question which will arise at the trial. Mr McMeniman for the Respondents submitted that it would be necessary for the Court, at the liability hearing, to make a particular finding of fact, even if the question of whether the constructive trust itself would not be considered at that hearing.

9    The factual matter which would need to be considered was the proposition that the Respondents’ mixed flow fan would not have come into existence but for the use by the Respondents of the confidential information. That was an issue which would inevitably need to be tried on a factual basis at the liability hearing. I accept in principle that that would be correct. It would be wasteful for the Court to postpone that question to the remedies hearing. Because of its nature, it is tied up with the broad morass of factual issues which are involved in the liability hearing. However, it only arises if the Applicants actually seek at the liability hearing to demonstrate that the Respondents’ mixed-flow fan would not have come into existence but for the use of the confidential information.

10    During the course of the hearing, Mr Hennessy clarified that the Applicants’ case was a springboard case, and it would not be seeking to demonstrate that the fan only came into existence by reason of the use of its confidential information. It seems to me to follow that, at least in terms of prejudice, there is no prejudice to the Respondents at the liability hearing. In light of the concession which has been made, there will simply be no alteration to the factual circumstances of the trial. It follows that I accept Mr Hennessy’s argument that the question of whether the trust will be imposed is purely a remedial question, and that that question will not arise until the remedies hearing. Whilst one cannot be entirely clear about these matters, it is unlikely that the remedies hearing will be next year.

11    With that in mind, one turns then to the question of timing. The amendment application was brought in November this year. It is based on the proposition only that the Applicants’ confidential information was used by the Respondents in the making of its fan. That has always been the Applicants’ contention. More recently, the Respondents have come to the view that at least some of the Applicants’ confidential information was taken. This was not always their position, but in litigation, positions often change. The issues which remain in the hearing are: whether the information, or all of it, is confidential, how much of the information was taken and how much of it was used. The scope for debate between the parties remains significant.

12    Ms Owen, who is the solicitor for the Applicants, swore an affidavit in support of the interlocutory application. She said that when the Applicants received the most recent affidavit evidence from the Respondents of Mr Bourcier, who was formerly an employee of the First Applicant, she became aware that he was admitting for the first time that some confidential information had been taken, and she says that this cemented her view that it might be a good idea to seek a constructive trust. I do not doubt the veracity of that evidence, but it has always been the Applicants’ contention that the confidential information had been taken.

13    Whilst it is no doubt forensically a relief for the Applicants that, at least to an extent, Mr Bourcier has also come to that view, that does not seem to me to affect the timing of when the constructive trust allegation should have been brought. On the other hand, as I have explained, given that a remedies trial is some way off, relatively speaking, the application to amend is brought well in advance of the hearing. And as I have already indicated, I am satisfied that, at the liability trial, there is no particular prejudice which will be faced by the Respondents.

14    Now that it is accepted that the case is a springboard case and that the use of the confidential information is not a sine qua non of the existence of the fans, Mr McMeniman submits that, as a matter of law, it is not possible for the Court to impose a constructive trust. The Court is presently concerned with an application to amend pleadings, however, it is established that the Court ought not to grant leave to add a cause of action if that cause of action is liable to be struck out.

15    Mr McMeniman’s submission is, essentially, that the constructive trust claim actually meets that requirement. Put another way, if the pleading currently contained a constructive trust claim, the Respondents submit that the pleading ought to be struck out. In making the submission, Mr McMeniman took me to the decision of Laddie J in Ocular Sciences Ltd v Aspect Vision Care Ltd [1997] RPC 289 (‘Ocular Sciences’). And, in particular, to some passages at pages 415-416.

16    That case concerned an action for breach of confidence, and was also a pleading debate. His Honour considered the well-known decision of LAC Minerals Ltd v International Corona Resources Services Ltd [1989] 2 SCR 574 (‘LAC Minerals’), and then went on to say at 416:

What the plaintiffs are asking for is the imposition of a constructive trust over a part of the defendants business and assets. Unlike LAC Minerals, there is no question here of the defendants having diverted their business or assets, or any part of them, from the plaintiffs. Furthermore even if it is said that part of the defendants’ business and assets have been contaminated by breaches of confidence, that contamination is small and technically inconsequential. In my view it would be quite wrong to impose a constructive trust over such a minor fraction. It was not clear to me how a constructive trust imposed on such a fraction would work. Who would decide what repairs or modifications should be carried out to equipment, who should pay for them, who should decide what to do with obsolete equipment and if AVCL was to be floated on the stock exchange, who would decide at what price and on what terms? I can see attractions in a suitable case of imposing a constructive trust over a complete discrete item of property but imposing such a trust over a part only raises additional problems. On the above grounds alone I would come to the conclusion that this is not a proper case for the imposition of a constructive trust.

17    And then he went on to say:

However, since the imposition of a constructive trust is part of the equitable armoury of the court, the considerations which may affect the court’s willingness to grant an injunction also have a part to play. Mr Males suggested that if the court was unwilling to grant an injunction against the use of confidential information, the imposition of a constructive trust becomes all the more necessary. I do not agree. Most of the reasons which have led me to refuse that type of injunctive relief, have made me come to the conclusion that this is not a case where it would be right for the court to exercise its discretion in the plaintiffs’ favour by imposing a trust.

18    Neither Mr McMeniman nor Mr Hennessy took me to the Canadian decision of LAC Minerals. But Mr McMeniman did take me to the Full Court of this Court’s decision, in Polwood Pty Ltd v Foxworth Pty Ltd [2008] FCAFC 9; 165 FCR 527 (‘Polwood’), a decision of Finn, Bennett and Greenwood JJ. Mr McMeniman took me to [87]-[89] of that judgment:

Though the pleadings and aspects of Polwood’s submissions could be taken as suggesting that Polwood was relying at large — and impermissibly: see Australian Broadcasting Corporation v Lenah Game Meats Pty Ltd (2001) 208 CLR 199 at [98]ff — on the notion of unconscionable behaviour to prevent Foxworth asserting its rights as joint inventor, it has resiled from this and has tied the claim to breach of confidence. Foxworth’s alleged wrong is its use of the confidential information in asserting that it is a joint inventor. The relief sought is that Foxworth holds its rights on trust for the sole use and benefit of the appellants. The essence of the grievance Polwood had would seem to be that while Foxworth may have contributed to the invention — “1 per cent, or 5 per cent, or 10 per cent” — as joint inventor it would be entitled under s 16(1)(a) and (b) of the Act to an equal undivided share in the patent when granted and to exercise the exclusive rights for its own benefit without accounting to the other co-owner, Polwood.

This is not an appropriate case in which to enter in any detail upon the question when a constructive trust may appropriately be imposed upon a proprietary advantage obtained in consequence of a breach of confidence: but see LAC Minerals Ltd v International Corona Resources Ltd [1989] 2 SCR 574; Ohio Oil Company v Sharp 135 F (2d) 303 (1943); Meagher RP, Gummow WMC, Lehane JRF, Equity: Doctrines and Remedies (4th ed, Butterworths, 2002), pp 1141-1142. The archetypal case, we would note though, has been one where the confidential information related to the quality or value of property in which an interest was then acquired to the wrongdoer’s gain in breach of confidence: eg LAC Minerals Ltd [1989] 2 SCR 574 above. The present is far removed from such a case.

The alleged breach of confidence relied upon by Polwood seems to be different in character from that found by his Honour (which related to Foxworth’s use of the information for its own purposes after the expiry of the licence). The reasons given for refusing proprietary relief were notably brief. But what we take from them is equally apt to the present case (assuming without deciding in Polwood’s favour both that Foxworth committed a breach of confidence in the manner now alleged and that the invention itself was capable of being the subject matter of a trust). The confidential information was conceptual in character and, though it was used in developing the PSU, it was augmented by Foxworth’s expenditure of much time, energy and inventive skill. His Honour made no finding of the actual extent of the contribution so made by Foxworth, but he did find that it was inventive. In these circumstances, it cannot properly be said that the invention was attributable solely to the confidential information used. Absent any contractual entitlement to the advantage of Foxworth’s exertions, Polwood has no proper basis for claiming that all of the advantage produced by those exertions ought belong to it because some part of it was contributed to by the confidential information used. We would note in passing that Polwood denies that it should be obliged to make any allowances to Foxwood for its time etc, in the event that proprietary relief were to be granted.

19    I accept that these [88]-[89] are certainly statements which would appear to be problematic for a contention that a constructive trust can be imposed in a springboard case.

20    However, I am not called upon to decide that question. I am called upon to decide a different question, which is whether it is arguable that a constructive trust can be imposed in a springboard situation. On the materials on the case law I have been taken to, which is only Polwood and Ocular Sciences, I am not satisfied that the proprietary remedy is not arguable in the requisite sense. It may be that it turns out to be correct. However, on what has been argued before me this morning, I am not prepared to conclude that it is unarguably so. In circumstances where I have concluded that there is no particular prejudice to the Respondents in allowing the claim to advance, and where I have also concluded that the timing of the raising of the application does not mean that the application should be refused, I propose, subject to one matter, to grant the Applicants leave to amend in the fashion they have foreshadowed.

21    That one matter is that the definition of the Minetek Mixed Flow Fan has to be adjusted, so that it serves two distinct purposes. First, it must continue to operate as it currently operates, as an important cog in the confidential information case. By that I mean it must continue to operate as I have referred to it before in a conceptual sense. Secondly, it needs to be changed so that the constructive trust claim – which is now understood to be a claim over actual, physical fans sitting on the Respondents’ factory floor – makes sense. That seems to me merely to be a question of drafting.

22    What I will do is to stand the interlocutory application over, and grant the Applicants a short period of time to formulate an amended version of the Second Further Amended Statement of Claim and Further Amended Originating Application which addresses these from a drafting perspective. I would then anticipate that that should be circulated to Mr McMeniman, and his consent sought – not as to the amendment – but as to whether he thinks the amendment achieves a solution to the problem which has been identified. So I think the only orders I make will be of a procedural nature.

23    The orders I will make are:

(1)    The Applicants will serve on the Respondents by 4.00 pm on 20 December 2022, a new form of the proposed Further Amended Originating Application and Second Further Amended Statement of Claim dealing with the issues outlined about the definition of the Minetek Mixed Flow Fan.

(2)    The Respondents indicate to the Applicants and to the Associate to Justice Perram its position on those documents by 4.00 pm on 22 December 2022.

(3)    The interlocutory application be stood over to a further case management hearing at 9.30 am on 6 February 2023.

Associate:

Dated:    21 December 2022