FEDERAL COURT OF AUSTRALIA Sareena Enterprises Pty Ltd v Prospex Profile Pty Ltd [2000] FCA 1527 PRACTICE AND PROCEDURE – pleadings – whether application should be dismissed – whether statement of claim should be struck out – where statement of claim does not sufficiently set out a cause of action - whether it is necessary for a statement of claim to describe information claimed to be confidential in relation to an action for breach of confidence – whether it is necessary for a statement of claim to indicate the origin of representations said to give rise to a breach of s 52 of the Trade Practices Act 1974 (Cth) – whether sufficient to plead that a respondent induced a breach of contract INTELLECTUAL PROPERTY – confidential information – whether it is necessary for a statement of claim to describe the information claimed to be confidential CONTRACTS – enforceability by third party – where the parties to a contract purport to vary that contract to benefit a third party – whether third party can enforce the contract as varied CONTRACTS – inducing breach of contract – whether sufficient to plead that a respondent induced a breach of contract – necessity of pleading that the respondent intentionally or knowingly induced the breach of contract TRADE PRACTICES – consumer protection - whether it is necessary for a statement of claim to indicate the origin of representations alleged to give rise to a breach of s 52 of the Trade Practices Act 1974 (Cth) Federal Court Rules O11 r 16, O 20 r 2 Dey v Victorian Railway Commissioners (1948-1949) 78 CLR 62 at 91 applied General Steel Industries Inc. v Commissioner for Railways (N.S.W.) (1964) 112 CLR 125 at 129 applied Empire Shipping Co Inc v Owners of the Ship "Shin Kobe Maru" (1991) 104 ALR 489 referred to Pancontinental Mining Ltd v Posgold Investments Pty Ltd (1994) 121 ALR 405 referred to Banque Commerciale S.A. en Liquidation v Akhil Holdings Ltd (1990) 169 CLR 279 at 286 applied Balkin and Davis Law of Torts 2nd ed. 1996 at p. 603 SAREENA ENTERPRISES PTY LTD V PROSPEX PROFILE PTY LTD N 1101 of 2000 STONE J 27 OCTOBER 2000 SYDNEY IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY N 1101 OF 2000 BETWEEN: SAREENA ENTERPRISES PTY LTD APPLICANT AND: PROSPEX PROFILE PTY LTD & ORS RESPONDENT JUDGE: STONE J DATE OF ORDER: 27 OCTOBER 2000 WHERE MADE: SYDNEY THE COURT ORDERS THAT: 1. The statement of claim be struck out. 2. The applicant be given leave to file an amended statement of claim. 3. The costs of the notice of motion be reserved. Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules. IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY N 1101 OF 2000 BETWEEN: SAREENA ENTERPRISES PTY LTD APPLICANT AND: PROSPEX PROFILE PTY LTD & ORS RESPONDENT JUDGE: STONE J DATE: 27 OCTOBER 2000 PLACE: SYDNEY REASONS FOR JUDGMENT 1 By notice of motion dated 20 October 2000, the first, second and fourth respondents in these proceedings moved that the application in this matter be dismissed or, alternatively, that the statement of claim be struck out. No appearance has yet been filed on behalf of the third respondent and in referring to the respondents in these reasons I do not refer to the third respondent unless this is specified. The application, supported by the statement of claim, was filed on 16 October 2000 and set down for directions 30 November 2000. The applicant is seeking a number of orders against the respondents including a declaration that certain information (the "Information") is confidential to the applicant and an order restraining the respondent from disclosing or using the Information. In addition the applicant seeks relief under the Trade Practices Act 1974 (Cth) in respect of misleading or deceptive conduct. 2 On 20 October 2000, the respondents sought expedited service of their notice of motion and an early hearing of that motion. The reason given for the urgency, subsequently supported by affidavit evidence, is that a float of the second respondent, Prospex Interactive Limited, is in progress. The prospectus was lodged with the Australian Securities and Investment Commission on 6 October 2000 and the offer period commenced on 16 October 2000. A minimum subscription of $5,000,000 must be reached before the second respondent can gain access to the prospectus funds. Because these proceedings have been brought, the underwriter of the float is entitled to withdraw from the float. If this occurred the prospectus would lapse, any application monies would have to be refunded to investors and the respondents would each suffer very significant loss both actual and potential. 3 The respondents assert that there is absolutely no merit in the applicant's claim and ask that the proceedings be dismissed by exercise of the Court's power under O 20 r 2 of the Federal Court Rules. This rule gives the Court power to stay or dismiss proceedings that disclose no reasonable cause of action, are frivolous or vexatious or an abuse of the process of the Court. 4 The authorities dealing with this and similar powers are numerous and quite unequivocal. The power should be exercised in only a very clear case: Dey v Victorian Railway Commissioners (1948-1949) 78 CLR 62 at 91. In General Steel Industries Inc. v Commissioner for Railways (N.S.W.) (1964) 112 CLR 125 at 129 Barwick CJ commented that: "At times the test has been put as high as saying that the case must be so plain and obvious that the court can say at once that the statement of claim, even if proved, cannot succeed; or 'so manifest on the view of the pleadings, merely reading through them, that is a case that does not admit of reasonable argument'; 'so to speak apparent at a glance'. As I have said, some of these expressions occur in cases in which the inherent jurisdiction was invoked and others in cases founded on statutory rules of court but although the material available to the court in either type of case may be different the need for exceptional caution in exercising the power whether it be inherent or under statutory rules is the same." 5 In whatever way the test is expressed, it would clearly be inappropriate to exercise the power to dismiss where deficiencies of the statement of claim might be rectified by a wholly or partially amended statement of claim. Although the statement of claim in this case has serious deficiencies, I am not able to say that it discloses a hopeless case or one which could not admit of reasonable argument. Therefore, despite Mr Webb's cogent argument that, in all the circumstances of this case, summary dismissal is the appropriate course, I do not propose to dismiss the proceedings. 6 In their notice of motion the respondents sought, as an alternative to dismissal of the proceedings, an order that the statement of claim be struck out and the applicant be ordered to file an amended statement of claim. The Court's power to strike out part or all of the pleading is found in O 11 r 16. The rule applies where a pleading – (a) discloses no reasonable cause of action or defence or other case appropriate to the nature of the pleading; (b) has a tendency to cause prejudice, embarrassment or delay in the proceeding; or (c) is otherwise an abuse of the process of the Court. 7 The same authorities referred to above also emphasise that, like the power to dismiss proceedings, the power to strike out pleadings must be used sparingly and with discretion. The Court is not entitled to strike out a pleading if the case is fairly arguable. The question is not whether the facts pleaded are in themselves sufficient to give rise to a cause of action but whether it would be open to the applicant upon the pleading to prove facts at the trial which would constitute a cause of action: Empire Shipping Co Inc v Owners of the Ship "Shin Kobe Maru" (1991) 104 ALR 489; Pancontinental Mining Ltd v Posgold Investments Pty Ltd (1994) 121 ALR 405. 8 It will assist in explaining my reasoning in this case if I set out the relevant parts of the statement of claim commencing at clause 5 and excluding what might be referred to as the boiler-plate provisions concerning the legal status of the respondents as corporations. "5. In or about 1997 and 1998 there was developed by Shane Dale and deployed commercially by Shane Dale and the Third Respondent, trading as Surroundpix, a proprietary system of making available on a computer screen a series of photographic images which when viewed were perceived by the viewer as presenting a 360ş virtual image of a location on an object (the "System"). PARTICULARS The System consisted of the use of: (a) a specially designed and calibrated tripod head for use with a digital camera; (b) a custom-made camera lens and adaptor; (c) a computer program to compress the images for faster viewing over a modem; and (d) a JAVA applet (being a computer program) to eliminate the distortion in the original image or series of images and allow the viewer to control the viewing perspective. 6. The System involved the use of information which was confidential to Shane Dale and the Third Respondent and which was not, prior to the Sale Agreement referred to in paragraph 9 hereof, disclosed by them to any other person, and then only pursuant to the Sale Agreement (the "Information"). 7. The circumstances referred to in paragraphs 5 and 6 gave rise to an obligation of confidence on the Third Respondent not to: (a) disclose or allow the Information to be disclosed to any person or persons other than Shane Dale and National Telecoms Pty Limited or person authorised by it (including the Applicant); or (b) use the Information or allow the information to be used except within the business of Surroundpix (until October 1999) or of the Applicant (after October 1999) or as authorised by the Applicant. 8. The Applicant has not authorised the Third Respondent to: (a) disclose, or (b) use, the Information other than as stated in paragraph 7. 9. By agreement made in or about October 1999 (the "Sale Agreement") Shane Dale and the Third Respondent, as the proprietors of the Information, agreed, in consideration of the payment to each of them of the sum of $20,000 and the allotment to each of them of shares representing 25% of the issued capital of the Applicant, to assign all their right, title and interest in the Information to a holding company to be formed by the parties to the Sale Agreement to be used in a business to be operated by the Applicant. PARTICULARS OF AGREEMENT The Sale Agreement was in writing and was between National Telecoms Pty Limited of the one part and Shane Dale and the Third Respondent of the other part. A copy of the Sale Agreement may be inspected by arrangement at the offices of the Applicant's solicitors. 10. In or about October 1999 the parties to the Sale Agreement agreed to vary the Sale Agreement so that Shane Dale and the Third Respondent, as the proprietors of the Information, would assign all of their right, title and interest in the Information to the Applicant. PARTICULARS OF VARIATION The variation of the Sale Agreement is to be inferred from the conduct of the parties subsequent to entry into the Sale Agreement. 11. In or about October 1999 Shane Dale and the Third Respondent, pursuant to the Sale Agreement as varied, assigned all of their right, title and interest in the Information to the Applicant. 12. It was a term of the Sale Agreement, inter alia, that the parties thereto would: (a) continue to make disclosure to each other of details of intellectual property and other confidential information relevant to the assets (including the Information) transferred to the Applicant; (b) not use any such confidential information to damage or detract from the business interests of the other or others; and (c) not disclose particulars of any such confidential information to any third party without the express prior written consent of the other or others. PARTICULARS Clauses 18 and 19 of the Sale Agreement (as varied). 13. In or about late 1999 or early 2000 the Third Respondent, in breach of his equitable obligations of confidence and of his obligations under the Sale Agreement: (a) disclosed the Information to the First Respondent; and (b) used or allowed the Information to be used by persons whom he was not authorised so to do. 14. In or about 1998 the Second Respondent, or alternatively the First Respondent, commenced the business of providing products for use by the real estate industry. 15. The First Respondent has, in the course of its business, since at least February 2000, offered to interested persons, including real estate agencies, the opportunity to use a product known as "Gogo7" (the "Gogo7 Product") which product makes use of the System and of the Information. 16. The Fourth Respondent and, through him, the First Respondent, have been aware, since at least December 1999, of: (a) the fact that the Information is confidential to the Applicant; (b) the Third Respondent's contractual obligations and obligations of confidence with respect to the Information as stated in paragraph 7. PARTICULARS The Fourth Respondent with Mr Rod Lambert in December 1999 sought from the Applicant the right to use the System, and in July 2000 the Fourth Respondent was involved in an attempt to resolve a dispute between the Applicant and the Third Respondent arising out of the Sale Agreement. \ 17. The Second Respondent has published, or caused to be published, in trade or commerce, a draft prospectus (the "Draft Prospectus") relating to a proposed capital raising on behalf of the Second Respondent which includes representations that: (a) the Gogo7 Product is the property of the First Respondent; (b) the First Respondent, or a company in the Prospex Group, was the developer of the Gogo7 Product (the "Representations"). PARTICULARS The Draft Prospectus appears on the web site of the Second Respondent at www.gogo7.com.au. 18. In the circumstances, the Representations were misleading or deceptive or likely to mislead or deceive in contravention of Section 52 of the Trade Practices Act, 1974. 19. In the circumstances the Fourth Respondent has: (a) induced the Third Respondent to breach his contractual obligations under the Sale Agreement in relation to the Information; (b) been knowingly involved in the contravention of Section 52 of the Trade Practices Act, 1974 by the First Respondent by making the Representations. PARTICULARS The involvement of the Fourth Respondent is to be inferred from his role as the sole director of the First Respondent and Executive Director and Chief Executive Officer of the Second Respondent. 20. By reason of the foregoing the Applicant has suffered loss and damage. The Applicant claims the relief specified in the application." 9 The gravamen of the applicant's complaint as set out in the statement of claim is that the respondents have used information which, to their knowledge, is confidential to the applicant, without the applicant's authorisation and have represented themselves as being entitled to do so. However, although the nature of the complaint is clear, I have come to the conclusion that, as a pleading, the statement of claim is fundamentally flawed. It does not state the case that must be met by the respondents with the precision and clarity necessary to ensure that the requirements of procedural fairness are satisfied: Banque Commerciale S.A. en Liquidation v Akhil Holdings Ltd (1990) 169 CLR 279 at 286. 10 In summary, counsel for the respondents, Mr Webb, identified two main problems. First, the confidential information at the heart of the matter is never identified either in the statement of claim or in the additional particulars which were supplied to the respondents on 23 October 2000. While it is not required that the statement of claim include a full specification of the confidential information, it is necessary that the information be identified so that the respondent can understand the case it has to answer and know how to direct its defence. The statement of claim asserts that the confidential information is included in the system referred to in paragraph 5 but that information is not identified. Secondly, the basis of the applicant's claim to the confidential information is not at all clear. At times the applicant's right seems to be based on contract and at times on property but in neither case are the material facts necessary to establish such a claim pleaded. I return to this second difficulty in my discussion of paragraphs 7-12. 11 These problems permeate the whole of the statement of claim and infect almost every paragraph. While I do not intend go through all of the instances in which it is deficient, I will now turn to some individual paragraphs to illustrate some of the problems I have identified. Paragraph 5 12 Here the system which the applicant claims was developed by the third respondent and another party, is referred to as a "proprietary system". It is not clear what is the significance of this claim or in what sense the system is "proprietary". The phrase is at best a legal conclusion and the paragraph does not identify the facts on which the conclusion is based. Paragraphs 6 and 7 13 It is alleged that the system described in paragraph 5 "involves the use" of the confidential information. The system itself is not said to be confidential and in neither paragraph is the information described or identified. Paragraphs 7 – 12 14 It is alleged in these paragraphs that the applicant has a right (proprietary or otherwise) to control the use of the Information. The chain of circumstances by which the applicant is said to have acquired that right is not detailed in any convincing way. The restriction on the third respondent's right over the Information is said to arise from the Sale Agreement first referred to in paragraph 6 (exhibit A2 in these proceedings). It is nowhere alleged that the applicant was a party to that agreement. 15 It is alleged (paragraph 10) that the Sale Agreement, which initially provided for a holding company to have the intellectual property rights, was varied to provide for assignment of the Information to the applicant. However, if the applicant was not a party to that agreement the variation would not, in the normal course of events, give that applicant any rights to enforce that variation. 16 It is alleged in paragraph 11 that the Information was assigned to the applicant. Again this is a statement of a legal conclusion. The facts that might support that conclusion are not pleaded. In other words, it is nowhere made clear how the applicant came by the rights to the Information which are essential to support this application. 17 I make these comments conscious of the intense controversy concerning the nature of confidential information, whether it is property, whether it is capable of being assigned and, if so, what is necessary for there to be an effective assignment. For present purposes it is not necessary for me to express an opinion on this vexed question. However there may well be insuperable obstacles here for the applicant. 18 The difficulty cannot be avoided by interpreting the rights as being contractual rather than proprietary as it is not alleged that the applicant was a party to the Sale Agreement. Paragraph 11 of the statement of claim alleges that the Sale Agreement was varied and in accordance with that variation the parties assigned the information to the applicant. It does not allege that the applicant was a party to the contract. Paragraphs 17 – 18 19 It is further alleged in the statement of claim that the respondents are guilty of misleading or deceptive conduct within the meaning of s 52 of the Trade Practices Act 1974. It is alleged in paragraph 17(a) of the statement of claim that the prospectus contains representations that the "Gogo7 product" is the property of the first respondent. Paragraph 17(b) alleges that the prospectus contains representations that the first respondent or a company in the Prospex Group was a developer of that product. At the very least the passage or passages of the prospectus which are said to give rise to the representations alleged must be identified. Paragraph 19 20 This paragraph alleges that the fourth respondent induced the third respondent to breach his contractual obligations under the Sale Agreement in relation to the Information. As indicated above, the statement of claim does not allege that the applicant is a party to the Sale Agreement. 21 Mr Webb also submitted that it is not sufficient to plead that the Fourth Respondent induced the Third Respondent to breach his contractual obligations. He submitted that, in order to establish a cause of action it is necessary to plead that the Fourth Respondent intentionally or knowingly induced the breach of contract. I agree that this is a defect in the pleading: Balkin and Davis Law of Torts 2nd ed. 1996 at p. 603. Evidence 22 During the hearing of the Notice of Motion, I admitted evidence in relation to proceedings No. 1540 of 2000 in the Equity Division of the Supreme Court of New South Wales provisionally, subject to relevance. The evidence was not relevant to my decision on the Notice of Motion. However, I reserve my position as to its relevance to the substantive proceedings, which will depend on the matters pleaded in any amended statement of claim and defence. 23 For these reasons I have decided to strike out the statement of claim and give leave to the applicant to file a new statement of claim. 24 In so doing I am aware that I am giving the applicant the benefit of considerable doubt. It is not clear to me that all of the deficiencies in the statement of claim can be overcome. However I should not prejudge that issue. But I should emphasise that my decision to allow the applicant to file an amended statement of claim should not be taken as indicating that a subsequent motion in relation to the amended statement of claim could not be successful. In view of the urgency of the matter which I have referred to earlier in these reasons I am prepared to allow only a very short period for this to be done. I understand that this will place both parties under considerable pressure but given my doubts as to the viability of this claim and the exposure of the second respondent, which has been put in evidence before me, this may not be able to be helped. 25 Accordingly, I order that the statement of claim be struck out and the applicant be given leave to file an amended statement of claim. I certify that the preceding twenty-five (25) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Stone. Associate: Dated: 2 November 2000 Counsel for the Applicant: Mr R J Webb Solicitor for the Applicant: Sprusons Solicitors Counsel for the First, Second and Fourth Respondents: Mr A I Tonking Solicitors for the First, Second and Fourth Respondents: Hopgood Ganim Date of Hearing: 24 October 2000 Date of Judgment: 27 October 2000