Reported Decision : [2000] 50 IPR 74 New South Wales Supreme Court CITATION : Forkserve Pty Ltd v Pacchiarotta [2000] NSWSC 979 CURRENT JURISDICTION: Equity Division FILE NUMBER(S) : SC 2338/1999 HEARING DATE(S) : 4 and 5 October 2000 JUDGMENT DATE : 5 October 2000 Forkserve Pty Limited (P) PARTIES : Luigi Pacchiarotta (D1) Steven Pacchiarotta (D2) JUDGMENT OF : Young J COUNSEL : J T Johnson (P) P Beale and R C Pontello (D) SOLICITORS : English Kearns (P) McGrath Dicembre & Co (D) CATCHWORDS : INTELLECTUAL PROPERTY [112]- Confidential information- What constitutes- Identity of customers- How far ex employee may use knowledge. LEGISLATION CITED : Corporations Law, s 232(5) & (6) (as in force in 1998 - see now ss 182-184) Re City Equitable Fire Insurance Company Ltd [1925] Ch 407 Faccenda Chicken v Fowler [1984] ICR 589 Health Services for Men Pty Ltd v D'Souza (2000) 48 NSWLR 448 Kone Elevators Pty Ltd v McNay (1997) 19 ATPR 41-563 CASES CITED : Ormonoid Roofing & Asphalts Ltd v Bitumenoids Ltd (1930) 31 SR (NSW) 347 Peninsular Real Estate Ltd v Harris [1992] NZLR 216 Robb v Green [1895] 2 QB 315 Rosetex Company Pty Ltd v Licata (1994) 12 ACSR 779 Weldon & Co v Harbinson [2000] NSWSC 272 Wright v Gasweld Pty Ltd (1991) 22 NSWLR 317 DECISION : Proceedings dismissed with costs including reserved costs. THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION YOUNG J THURSDAY 5 OCTOBER 2000 2338/99 - FORKSERVE PTY LTD v PACCHIAROTTA JUDGMENT 1 HIS HONOUR: The plaintiff is a company whose principal business is servicing and repairing forklift trucks. The defendants, who are brothers, are qualified mechanics. The first defendant was employed by the plaintiff from 13 January 1997 to 31 December 1998, and the second defendant from 18 September 1995 to 27 January 1999. 2 The first defendant set up his own business, L & S Forklift Repairs. The business name was registered on 14 December 1998. The first defendant says the business started on about 4 January 1999, trading under that name until 30 June 2000 when the first defendant changed his method of business to trading under the appropriate corporate vehicle. 3 After his employment with the plaintiff ceased, the second defendant took employment with an independent employer in the area of forklift truck servicing. However, on at least one occasion during early 1999 when he was on holidays from his employment with the plaintiff, the second defendant assisted his brother in distributing business cards, touting for the first defendant's business. 4 The departure of the first defendant from the plaintiff's employ on 31 December 1998 occurred without any prior warning. The plaintiff was particularly concerned about this because a year previously it had suffered a departure from its business of a person whom it alleged had taken part of its business away with him, namely, Mr Leon Jack, the son of the proprietors of the plaintiff, Ron and Sharon Jack. Indeed, during 1998 Mr Ron Jack had conducted loyalty motivation sessions with his employees, impressing on them the need for loyalty to the business so that it would prosper and succeed. A few days before Christmas 1998 the first defendant gave notice to terminate his employment. This caused the plaintiff to become particularly concerned that some more of its business might be lost. In January 1999 the plaintiff gave a notice of termination to the second defendant to leave its business. 5 The plaintiff's suspicions grew until it was convinced that the defendants had taken some notebooks containing the names and addresses of the plaintiff's customers and that the defendants were openly canvassing those customers. The plaintiff accordingly commenced these proceedings by summons on 13 May 1999, seeking orders restraining the defendants from soliciting or approaching for the purpose of provision of servicing of forklifts any persons or companies whose names had been obtained by the defendants from the plaintiff's records with consequential orders. On 3 September 1999, a statement of claim was filed seeking such injunctions, an order for delivery up of records, damages under section 1317HD of the Corporations Law and ancillary orders. 6 The principal claim in the pleadings and in the affidavit evidence was that the business of the plaintiff was conducted as follows. Each serviceman, including the two defendants, was issued with a small, spiral bound notebook which could be put in the serviceman's pocket. The procedure that was laid down was that when a serviceman finished a job he would ring in to the base and the person in control of the base would give the serviceman the name of the next customer to be serviced and that the employee would write down the name and address of the customer in the spiral bound notebook and then proceed to that address. Mrs Jack gave evidence that this procedure was devised because it would be very easy for a serviceman to take with him a notebook in his pocket, jot down the information and proceed to the address. The plaintiff claims that when the defendants left its employ, there were no notebooks which the defendants had used left on the premises and, accordingly, it must follow that the notebooks were in the possession of the defendants. This, it claimed, is reinforced by the fact that the defendants had in fact called on some of the then customers of the plaintiff and, indeed, some former customers of the plaintiff are now customers of the first defendant. 7 The defendants' reply was simply that they did not have any notebooks. They admit that they generally surveyed the potential market and that this would have included customers of the plaintiff. They deny that the first defendant specifically targeted any such customers or that the second defendant assisted him. The first defendant believes that of his 45 current customers, only 6 were former customers of the plaintiff. The evidence was that the plaintiff had about 450 customers. 8 Having set the scene, it is convenient to consider the issues that arise in this case under the following heads: (A) Credibility of witnesses; (B) Did the defendants remove any notebooks? (C) Did the defendants by using notebooks or any other material use confidential information of the plaintiff? (D) The issues arising under s 232 of the Corporations Law; (E) Whether any remedy should be given; (F) The result of the case including the question of costs. 9 (A) The plaintiff's case, to a great degree, was what one might describe as based on circumstantial evidence or even based on res ipsa loquitur type material. The plaintiff's case was essentially that the notebooks existed, every serviceman had one, therefore the defendants had them. The notebooks were not in the company's possession at the time the defendants left the plaintiff's employ, ergo, the defendants must have had them. The procedure of the company was to have the details of customers recorded in the notebooks. The defendants accordingly had that information. The defendants had in fact made contact with former customers, ergo, the defendants must have used the notebooks or other sources of information as to the plaintiff's customers, for their own purposes. 10 It is of course understandable that the plaintiff was not in possession of direct information, because the information as to what material the defendants used for canvassing was kept close to the defendants' chests. Mr J T Johnson of counsel for the plaintiff, who said and did everything that could possibly have been said and done for the plaintiff, made great play of some problems with the evidence of the defendants. However, even if the whole of the defendants' evidence is rejected, which is not the case, in the absence of any particular admissions the mere fact that the defendants' evidence is rejected as unreliable does not prove the plaintiff's case. If the defendants' evidence is rejected as unreliable and there is no other evidence, one does not necessarily form the view that the plaintiff must be right. 11 Six witnesses gave evidence by way of affidavit, of whom all but Mr Ron Jack were cross-examined. The cross-examination was useful, but it did not actually affect the credibility, to my mind, of any of the witnesses. 12 On the defendants' side, both defendants and Mr Spurrier, an officer of CSR, a customer of both parties, gave evidence. I generally accept their evidence. However, as Mr Johnson pointed out, some of the evidence from the first defendant must be suspect. Mr Spurrier's evidence and supporting documents show that CSR must have been told the first defendant was going out on his own by 15 December 1998. Again the fact that the first defendant's firm was called L & S Forklift Repairs makes it hard to accept that the second defendant was not the "S". The first defendant's evidence that the second potential member of the firm is his infant son Nathan is also hard to accept. There were also various other disingenuous pieces of evidence as to how the letter box drops and distribution of business cards was conducted without prior information as to where the plaintiff's customers were. However, despite these defects, I generally found the evidence given by the defendants' witnesses was reliable. 13 That evidence was that the first defendant did make preparations for the setting up of his own business during the month of December 1998 and that he may have mentioned to CSR the fact that he was going out on his own, that the first defendant did make use of his knowledge as to certain customers of the plaintiff, but that he is to be believed when he says that he did not use any notebooks, and that he is to be believed when he says that his procedure while working for the plaintiff was to make a note of the customers' addresses in an order book rather than to use the notebooks, and that those order books were given back to the plaintiff at the end of his employment. 14 Indeed, Mrs Jack herself, when she gave evidence, made it clear that the office procedures that were laid down for the servicemen were not always followed and indeed, she found it virtually impossible to police them. She said that instead of complying with the systems which were put in place, servicemen would often have to reconstruct their records from the records kept by the service manager. 15 (B) As to the notebooks, the plaintiff's evidentiary material on this issue was very scanty. I have really already canvassed it, that is, that each servicemen was issued with a notebook, the notebooks were to be used to write down names and addresses of customers, notebooks were issued to the defendants, and these are not now in the possession of the plaintiff. 16 That calls for suspicion, but the defendants, as I say, denied it. The first defendant was not asked anything on that denial in his cross-examination, though the second defendant was, but he denied any knowledge about notebooks. Indeed, Mr Johnson's lengthy cross-examination of the first defendant focussed on whether the addresses of the customers of the plaintiff were known to the first defendant because he had done work for them as an employee rather than because he obtained the addresses from the notebooks. 17 The plaintiff bears the onus and virtually relies on evidence of general practice. As I accept the defendants' denials, it must follow that I must find that the plaintiff has not established that the defendants took the notebooks or utilised them. 18 (C) The question is whether, in using the notebooks or other material, the defendants used confidential information of the plaintiff. Various general propositions should be noted before I deal with the facts of this particular case. (1) There is a distinction between confidential information and know-how. An employee is entitled to take with him or her, when quitting employment, general knowledge and skills acquired whilst an employee. Those general skills or know-how become part of the employee's personal property, even though he or she would not have acquired them had it not been for the employer. Of course I am speaking of cases where there is no contractual restraint. (2) At the very least, without a contractual restraint a former employer is not entitled to restrain a former employee from competing with the employer after termination of the employment. (3) An employee is not entitled to appropriate to himself or herself the employer's confidential information which he or she came to know in the course of the employment: Ormonoid Roofing & Asphalts Ltd v Bitumenoids Ltd (1930) 31 SR (NSW) 347 at 355. Generally what is confidential information is a question of fact: Wright v Gasweld Pty Ltd (1991) 22 NSWLR 317 at 334-5. Generally speaking, a useful way of testing whether information is confidential information is the tripartite classification made by Goulding J in Faccenda Chicken v Fowler [1984] ICR 589 at 589-590, conveniently repeated in the judgment of the English Court of Appeal which affirmed that decision which is reported in [1987] Ch 117 at 133-134. Goulding J said that the three classes were essentially, in my paraphrase: (1) Information of a trivial nature or which is easily accessible; (2) Know-how which may have originally been confidential, but which has become part of the employee's skill and knowledge; (3) Specific trade secrets so confidential that even though they may necessarily have been learned by heart, and even though the servant may have left the service, they can not be used for anyone's benefit but the master's. 19 I would note that normally, lists of customers and their requirements may constitute confidential information: see Robb v Green [1895] 2 QB 315. However, as Bryson J shows in Weldon & Co v Harbinson [2000] NSWSC 272 at paras 67-72, such information is not necessarily confidential, or may be at a low order of confidentiality, depending on the particular circumstances; see also Wright v Gasweld Pty Ltd (1991) 22 NSWLR 317 and my decision in Kone Elevators Pty Ltd v McNay (1997) 19 ATPR 41-563. Even though the actual result in that case was reversed by the Court of Appeal at (1997) 19 ATPR 41-564, those matters were not gainsaid. 20 Bryson J, in the Weldon case at [72], dealt with a distinction between a written list of customers and an employee remembering who the customers were. There is some doubt in the authorities as to how far an employee can make use of his or her memory of customers as distinct from a list. I consider that the proposition in Heydon, The Restraint of Trade Doctrine 2nd ed (Butterworths, Sydney, 1999) p 80, correctly states the law, namely, "The employee cannot remove, whether by using paper or using memory, a material part of the former employer's business records; but the employee can approach a particular customer or client whom that employee can recall without a list or deliberate memorisation". That proposition is, I believe, supported by the decision of Peninsular Real Estate Ltd v Harris [1992] 2 NZLR 216 at 221. 21 I should note that there is an additional complication in that the so-called lists in the notebooks were not made by the plaintiff, but (assuming they existed) were actually made by the servicemen themselves. However, as it would seem the plaintiff company always owned the notebooks, the probability is that even though the entries were made by the servicemen, the notebooks, including the entries, were the property of the plaintiff; see Health Services for Men Pty Ltd v D'Souza (2000) 48 NSWLR 448. 22 With these considerations in mind, I turn to the facts of the case. 23 In the absence of it being established that the defendants removed any notebooks or other documents, the mere fact that the defendants called on some people who were customers of the plaintiff would not of itself be sufficient to constitute a breach of confidential information. 24 There is no evidence to enable me to come to the conclusion that there was a deliberate memorisation of any records of the plaintiff. 25 Mr Johnson relies on pieces of evidence such as the fact that the business card of Mr Clark of Plumbers Supplies at Penrith was on the desk of Mr Walls, the business development manager of the plaintiff during December 1998, and that the evidence clearly shows that the defendants made special efforts to canvass Mr Clark early in January 1999. Although this and a couple of other incidents raise suspicion, I do not consider that even with this material it is more likely than not that the defendants used confidential information to their own advantage. 26 (D) Section 232(5) and (6) of the Corporations Law as in effect in December 1998 is as follows: "232(5) An officer or employee of a corporation, or a former officer or employee of a corporation, must not, in relevant circumstances, make improper use of information acquired by virtue of his or her position as such an officer or employee to gain, directly or indirectly, for an advantage for himself or herself or for any other person or to cause detriment to the corporation. (6) An officer or an employee of a corporation must not, in relevant circumstances, make improper use of his or her position as such an officer or employee to gain, directly or indirectly, an advantage for himself or herself or for any other person or to cause detriment to the corporation". 27 It is the Corporations Law in force as at December 1998 and January 1999 to which I must look. However, as is common, the sections have been rearranged and the corresponding provisions are now in ss 182 to 184 of the Corporations Law in its present form. 28 As I said in Rosetex Company Pty Ltd v Licata (1994) 12 ACSR 779, the general coverage of the obligations under s 232 are not to any major extent wider than the duties under the general rules of equity. There are some extensions made by the statute in that there is taken away some problems of privity, there is conferred a statutory right to receive damages or compensation where under the general law there would only be an account of profits and other ancillary advantages. However, generally speaking, if there has been no improper use of information under the general equitable principles, there is no improper use of information under the statute. This is logically so when one remembers that sections like s 232 were originally taken by the drafters of the 1958 Victorian Companies Act and the 1961 New South Wales Companies Act from the equitable duties set out by Romer J in Re City Equitable Fire Insurance Company Ltd [1925] Ch 407. 29 Thus it follows that as there is no breach under the general rules of equity, there is no breach under s 232. 30 Mr Beale, who appeared for the defendants, suggested in his submissions that an employee under s 232(5) and (6) should be read down to an employee in the nature of an officer of the corporation, that is, some sort of executive employee. The argument is one that can briefly be expressed by saying noscitur a sociis. I do not consider this argument is correct, and favour the submission of Mr Johnson that "employee" must be read widely. However, that has still not enabled the plaintiff to succeed under this head. 31 (E) It follows that as the plaintiff fails on the merits, no remedy should be given. 32 (F) I need to decide this case on the pleadings. The evidence does show some possible breach of an implied contractual duty of faithfulness by the defendants before termination of their employment with the plaintiff. However, that was not pleaded. Although, as Mr Johnson says, it may only have come out during the evidence, attention was drawn to it and the pleadings were not amended. Accordingly, I do not need to spend time on the submissions made about that sort of breach. The case was commenced as one of breach of confidentiality. Putting it in a nutshell, there were suspicions that were probably reasonably held in the light of all the circumstances by the plaintiff, but there has not been enough evidence to support them. 33 There was some criticism made by Mr Johnson of the fact that Mr Leon Jack and Mr Fryer, a former service manager of the plaintiff (who is now working for Mr Leon Jack) were not called. Again one can work out why the plaintiff did not call them, and one can readily see why the plaintiff thought that it was suspicious that the defendants did not call them, but the mere fact that they were not called again does not permit the plaintiff to succeed in the absence of other evidence. 34 So far as costs are concerned, costs follow the event. There were some reserved costs in connection with an application for security for costs, and they must go with the costs of the suit. Mr Beale made an application for indemnity costs with respect to the application for security for costs on the basis that the plaintiff had been deliberately obstructive when that application was being put together, as a result of which it took much longer and involved more work than it otherwise would have. Even assuming this was so, those costs would be taken up under the normal costs rule, and I cannot see any reason why that fact makes for indemnity costs. 35 The only exhibits were documents which, unless anyone makes an application for their return, should remain with the papers. 36 Thus I order that the proceedings be dismissed with costs, including reserved costs. **************** Last Modified: 10/24/2000 DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. 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