Extel Communications Pty Ltd v Techdyne International Pty Ltd [2002] FCA 1537

FEDERAL COURT OF AUSTRALIA

Extel Communications Pty Ltd v Techdyne International Pty Ltd [2002] FCA 1537

PRACTICE – discovery – inspection – trade secrets – whether competitor can inspect – appropriate conditions Printers and Finishers Ltd v Holloway (1961) 78 RPC 77 followed Warner-Lambert Co v Glaxo Laboratories Ltd (1975) 92 RPC 354 followed

EXTEL COMMUNICATIONS PTY LTD and EXTEL SALES PTY LTD v TECHDYNE INTERNATIONAL PTY LTD, XIAOLIN LI (also known as SALLY LI and SALLY LEE), DEAN PHILLIP SHARPLES and SUNNY LAO (also known as

ZHI HUI LAO) V 758 of 2001 FINKELSTEIN J 10 DECEMBER 2002 MELBOURNE

IN THE FEDERAL COURT OF AUSTRALIA

VICTORIA DISTRICT REGISTRY V758 of 2001

BETWEEN: EXTEL COMMUNICATIONS PTY LTD and

EXTEL SALES PTY LTD

Applicants

AND: TECHDYNE INTERNATIONAL PTY LTD,

XIAOLIN LI (also known as SALLY LI and SALLY LEE), DEAN PHILLIP SHARPLES and

SUNNY LAO (also known as ZHI HUI LAO)

Respondents

JUDGE: FINKELSTEIN J

DATE: 10 DECEMBER 2002

PLACE: MELBOURNE

REASONS FOR JUDGMENT 1 This action is for alleged breach of copyright and breach of confidential information. In broad detail this is how the applicants put their case. They have developed a digital pair-gain product and an analogue line concentrator, which is a specific type of pair-gain system. In simple language, a pair-gain system allows a large number of subscribers to share a smaller number of telephone lines. Instead of each subscriber being directly connected to an exchange, a connection is made at the subscriber end to a device called a remote unit. Each remote unit is connected by a number of link lines to an exchange unit. When a subscriber wishes to use the telephone, if a remote unit-exchange unit link is available, connection is immediate. Otherwise a busy tone advises the subscriber to call again. A pair-gain system comprises a subrack, a front end interface unit, an exchange unit and a remote unit. Some of these units contain software. The applicants claim copyright in relation to the documents brought into existence in developing the systems and that the systems are confidential. They say that the systems were disclosed to two of their employees, the second and third respondents who, in breach of their duties, established the corporate respondent to use the confidential information and the copyright for the design and manufacture of their own system. They seek relief in the action accordingly. 2 It is common ground that the respondents misused the information and breached the applicants' copyright in their source code by bringing into existence a software line concentrator and digital pair-gain system for sale in China. This concession is made in relation to what in this action is referred to as Huansun Version # 1. But the respondents claim that they later created a new source code for another product (referred to as Huansun Version # 2) and that source code does not infringe the applicants' copyright or breach any obligation of confidence owed to the applicants. 3 Some work has already been done on testing the applicants' allegations. At the request of the respondents I ordered that two independent computer experts, Mr MacGregor who had been engaged by the applicants and Mr Montgomery who represents the respondents, should confer "for the purpose of investigating the existence and extent of any (a) copying of; or (b) derivation from or reliance upon" the applicants' programs in code recorded in the products manufactured by Huansun. The experts were also ordered to report on the results of their investigation. To facilitate their task, the parties were required to provide the experts with detailed information much of which is, or is claimed to be, confidential. The experts said that the precise task assigned to the them gave rise to an ambiguity that necessitated the preparation not only of a joint report but also a separate report by each of them, unfortunately adding to the cost of the exercise. Be that as it may, the experts are agreed that, with some minor exceptions, there is no objective similarity between the applicants' source code and the code used in Huansun Version # 2 and that the latter code has not been derived from the former. 4 The applicants are unhappy with the conclusion reached by the experts. They say that one difficulty which has arisen is that only an expert with close familiarity with the applicants' source code and its idiosyncrasies could identify the "fingerprints" of copying. Mr Toland, the executive director of the first applicant, said in his affidavit that "in order for an independent computer programmer, for example, Mr McGregor, to become sufficiently familiar with the Extel source code to be able to identify the idiosyncrasies of the Extel software and its functionality to the point where a subtle fingerprint might be discovered in the Respondents' source code would, in my opinion, take several months or more of full time work. The cost would be prohibitive. On the other hand, Andrew Somers [an employee of the first applicant] and I, as authors of the original source code, would be able to carry out such an investigation (perhaps in the company of Extels' legal advisers or Mr MacGregor) in a relatively short period of time and at a greatly reduced cost." He went on to make the same comment in relation to the development by the respondents of the Huansun hardware, which it is alleged is based on the applicants' drawings, component lists and tolerance details. Mr Toland said that the task of learning about these details could occupy an expert "for in excess of six months and possibly a year" and the duration of the investigation would be substantially less if it was undertaken by Mr Toland and other Extel staff. 5 This brings me to the point on which the parties are in dispute. The applicants ask that Messrs Toland, Ross (another director) and Somers be permitted to inspect the respondents' documents, including those documents that are claimed to be confidential. This course is strongly resisted. The respondents do not object to disclosure to an independent adviser or expert, including someone other than Mr MacGregor, who could then inform the applicants whether or not their copyright has been infringed. But they say that it would be wrong to make their confidential documents available to the applicants, who are competitors and who may, consciously or unconsciously, make use of the information that will be derived from those documents to the respondents' disadvantage. 6 It is accepted on both sides that confidentiality is not itself a valid basis for resisting inspection. Prima facie a party is entitled to production for inspection and copying of documents disclosed in a list of discoverable documents unless some recognised head of privilege is available. On the other hand, there are cases which, in the context of trade secrets or confidential information, acknowledge that the usual rule is not always appropriate and give guidance as to the approach that the courts should take in those situations. In Printers and Finishers Ltd v Holloway (1961) 78 RPC 77, for example, the Master of the Rolls, Lord Evershed, pointed out that the court must try to give proper protection to a party's secrets, but always bearing in mind that, at the end of the day, the court must make an order which will enable it to reach a proper conclusion in the case and decide the issues between the parties as quickly as possible. Now the leading case is Warner-Lambert Co v Glaxo Laboratories Ltd (1975) 92 RPC 354. The case holds that before making an order for inspection the court should be careful not to subject a party to any unnecessary risk of its trade secrets being exposed to a competitor. Buckley LJ (who delivered the principal judgment) said (at 358) after referring to a number of authorities that were in point: "None of these cases purports to lay down a form of order suitable for universal use. Nor, I think, does any of them indicate that the court might not in appropriate circumstances at a later stage in the action have directed disclosure to a wider class of persons or on different terms. In my judgement, the court must in each case decide what measure of disclosure should be made, and to whom, and upon what terms, having regard to the particular circumstances of the case, bearing in mind that, if a case for disclosure is made out, the applicant should have as full a degree of appropriate disclosure as will be consistent with adequate protection of any trade secret of the respondent." That is to say, the court must strike a balance between the natural wish of one party to have his trade secrets protected and the natural wish of the other to see any documents that may support his case. 7 After some initial hesitation, I have decided to accede to the applicants' request to have at least Mr Toland inspect the disputed documents, but on the basis that the inspection will be subject to a number of important safeguards, which I will now mention. The inspection may take place at the applicants' solicitors' office on their undertaking not to allow the documents to be removed from their office without the leave of the court or the respondents. The inspection will be carried out by Mr Toland in the presence of an expert (Mr MacGregor might be the appropriate expert) and the applicants' solicitors (with counsel if they wish) and no other person without the leave of the court or the respondents. The respondents must be offered the opportunity of having a representative present while Mr Toland carries out his inspection. An undertaking must be given by Mr Toland not to take any notes or make any memoranda or copies of the documents. If there is to be any record it must be made by the expert, the solicitors or counsel. There must be an undertaking by the applicants and Mr Toland that they keep any information gained during the inspection confidential and will not use it save for the purposes of this proceeding. There should be a similar undertaking from anyone else who attends the inspection. 8 My reasons for allowing inspection follow. First, I can see no prima facie basis for disbelieving Mr Toland's assertion that a person with sufficient familiarity with the applicants' source code and knowledge of its hardware is in a better position to discover whether they have been copied than a person without that knowledge. In any event I accept that it would be much less expensive to have such a person conduct the inspection than to require an independent expert to be properly educated to carry out the task. Secondly, the trial has been fixed to begin on 14 April 2003 and the respondents wish to hold that date. If I were to reject the application I fear that the applicants will ask for more time to prepare for the hearing. The fact that this action commenced as long ago as July 2001, at which time injunctions were granted against the respondents, would make me disinclined to postpone the trial, but that does not entirely eliminate the danger. Thirdly, in virtue of the imposition of the safeguards, the risk that the respondents' secrets will be taken is not great. In this respect I believe that there is a mass of material which must be inspected, indeed so much that even the experts did not have sufficient time to look at all of it. For this reason I do not think that Mr Toland will be able to retain much of the information, although I cannot discount completely that he may get the benefit of some new ideas. Finally, there will be Mr Toland's personal undertaking not to make use of any of the information. I do not believe the risk of him breaking the undertaking is great because if there is a breach it is likely to be discovered by the respondents 9 The applicants should bring in short minutes of orders to give effect to these reasons. I certify that the preceding nine (9) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Finkelstein.