New South Wales Supreme Court CITATION : Freedom Motors Australia Pty Limited v Vaupotic [2003] NSWSC 506 HEARING DATE(S) : 5-9 May 2003 JUDGMENT DATE : 12 June 2003 JURISDICTION: Equity Division JUDGMENT OF : Davies AJ DECISION : Matter to be relisted for hearing on relief. CATCHWORDS : Master & Servant - confidentiality - whether restrictive convenants entered into - employees' implied duty of good faith - whether employees entitled to establish competing business - whether employer's process a trade secret. LEGISLATION CITED : Corporations Act 2001, s 182(1) Fair Trading Act 1987 Amber Size and Chemical Co. Limited v Menzel [1913] 2 Ch 239 Ansell Rubber Co. Pty Ltd v Allied Rubber Industries Pty Ltd [1967] VR 37 Balston Limited v Headline Filters Limited [1987] FSR 330 Faccenda Chicken Ltd v Fowler [1985] FSR 105; [1987] 1 Ch 117 Hivac Limited v Park Royal Scientific Instruments Limited and Ors [1946] 1 Ch 169 CASES CITED : Industrial Rollformers Pty Limited v Ingersoll-Rand (Australia) Limited [2001] NSWCA 111 Nordenfelt v Maxim Nordenfelt Guns & Ammunition Co Ltd [1894] AC 535 Robb v Green [1895] 2 QB 315 Saltman Engineering Co. Ltd & Ors v Campbell Engineering Co. Ltd (1948) 65 RPC 203 Wessex Dairies Limited v Smith [1935] 2 KB 80 Wright v Gasweld Pty Ltd (1991) 22 NSWLR 317 Freedom Motors Australia Pty Limited (First Plaintiff) PARTIES : Mulco Tool & Engineering Pty Limited (Second Plaintiff) Stan Vaupotic (First Defendant) Leonardo Fabian Garcia (Second Defendant) FILE NUMBER(S) : SC 4303/02 DA Smallbone (Plaintiffs) COUNSEL : In Person (First Defendant) In Person (Second Defendant) SOLICITORS : Doherty Partners (Plaintiffs) IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION DAVIES AJ Thursday, 12 JUNE 2003 4303/02 - FREEDOM MOTORS AUSTRALIA PTY LIMITED & ANOR v STAN VAUPOTIC & ANOR JUDGMENT 1 DAVIES AJ: In these proceedings, two employers, Freedom Motors Australia Pty Limited ("Freedom") and Mulco Tool & Engineering Pty Limited ("Mulco"), seek damages and other orders in relation to the alleged misuse of confidential information by two former employees, Stan Vaupotic and Leonardo Fabian Garcia. There are also claims under the Fair Trading Act 1987, in respect of misleading and deceptive conduct, and a claim of passing off. 2 Mulco, a company associated with Freedom, took over, in 2000, the performance of the work done in the course of Freedom's business. However, there does not appear to be any issue arising out of that. The case proceeded on the assumption that both plaintiffs have a joint interest in the outcome of the proceedings. 3 During the hearing, Freedom was represented by Mr D Smallbone of counsel. The defendants appeared in person. Mr Garcia conducted the proceedings on behalf of both defendants. Mr Vaupotic, who was born in Slovenia, suffered a brain haemorrhage at birth, as a result of which he is illiterate in the English language or virtually so. The comprehension of written documents other than drawings and the like is generally beyond him. 4 Mr Arnold Van Mullekom is the sole director and shareholder of Freedom. He and his wife are the directors and shareholders of Mulco. The day-to-day management of Freedom and of Mulco has been left to Mr Mullekom's son, Robert Van Mullekom, his nephew, Geert Van Mullekom, and his son-in-law, Ronald Keijzers. 5 I consider that much of the evidence given by the Van Mullekoms was unreliable. That is principally because I have concluded that the facts are otherwise than they have stated them to be. However, it is clear that Mr Arnold Van Mullekom gave answers in cross-examination that he considered to be in his best interests. In general I have concluded that the Van Mullekoms have tailored their evidence to enhance their prospects of success. Mr Garcia was equally unreliable. It is plain from his conduct that he has acted without conscience and that he has been prepared to mislead. I have had more difficulty in assessing Mr Vaupotic's credibility. I have the impression that some of his evidence was overstated and that he was always aware of where his best interests lay. Nevertheless, I have not identified any significant evidence that he gave as being incorrect. I have treated his evidence with reserve. Introduction 6 The business of Freedom commenced in 1997. Mr Arnold Van Mullekom's friend, Ton Van Dillen, had a business in the United States converting motor vehicles for wheelchair access. His firm specialised in providing rear-end access for Chrysler mini vans, which were popular in the United States. In 1997, Chrysler began to export its Chrysler Voyager to Australia. These vehicles were particularly suited to the type of modification which Mr Van Dillen undertook. 7 In Australia at the time, there were being produced a Toyota Hiace with a lift in the back and a Holden taxi with a built-on rear section, like a bubble. Mr Van Dillen's conversions were different, being achieved without extending the vehicle and with little change to the external appearance of the vehicle. Mr Van Dillen's conversions left the vehicle looking like a normal car. 8 The Voyager had a rear door which lifted up. Mr Van Dillen's conversion involved cutting a rampway down the middle of the floor of the vehicle and lowering a ramp from the end of the vehicle to the roadway. A person in a wheelchair was then able to travel up the external ramp and along the ramp in the vehicle to a position where the person could move from the wheelchair onto a seat, even on to the driver's seat. The conversions were automatic, so that the backdoor of the car opened with a remote control and the disabled person could drive a wheelchair into the car and could lift himself or herself from the wheelchair into the driver's seat and move the driver's chair forward where it was locked into position with the same strength as a normal seat. 9 Mr Van Dillen agreed to assist Mr Van Mullekom to commence business in Australia. Mr Van Mullekom inspected the modification methods adopted by Mr Van Dillen. Mr Van Mullekom made sketches of critical design features. He obtained three prototype conversion kits, made detailed notes of critical design features and carefully observed the production methods and techniques used. He was warned by Mr Van Dillen not to leave drawings about and not to put the details of the conversion in writing where they could pass into the hands of future competitors. Mr Domingo Miranda and his son Daniel came to Australia to assist in the new business. 10 Mr Arnold Van Mullekom gave evidence that, on commencing business, Freedom spent the first half of the year in setting up. A prototype car was finished completely just before Christmas 1997. Freedom did three conversions in the first half of 1998. Mr Van Mullekom gave evidence that his company based its conversions on the information obtained from the United States. Freedom made changes as a result of trial and error. Changes were recommended by a certifying engineer and changes were also suggested by Chrysler. Mr Van Mullekom said that an operating loss of $351,916 was incurred by Freedom in its first trading year, mainly because of the initial cost involved in establishing the business. 11 Mr Garcia joined Freedom in March 2000, in the role of Marketing and Technical Manager. He had not had prior experience in the automobile field. In the course of his employment, Mr Garcia became aware of all aspects of Freedom's business. On 2 April 2002, he registered the business name "Wheelchair Accessible Vehicles". On 16 May 2002, Mr Garcia resigned from his employment, effective 30 May 2002. On 1 June 2002, he commenced a business in which he competed directly with Freedom. Mr Garcia attracted the first defendant, Mr Vaupotic, to work with him. Mr Vaupotic was an excellent tradesman. He was very experienced in motor body repairs and motor body building for he had conducted a smash repair business for many years. The two of them did the work. No other employee was engaged. 12 In the result, Mr Garcia used the expertise which he and Mr Vaupotic had gained as employees of Freedom to set up a business competing with Freedom in converting vehicles for wheelchair access in a manner similar to Freedom's process. Mr Garcia was able to set up his business immediately for he knew all of Freedom's techniques. He and Mr Vaupotic could carry them out. He was aware of the suppliers to Freedom and he used them. He was aware of the differences there were between the different types of vehicles which Freedom converted and he knew the suitability of those vehicles. He adopted basically the same pricing policy, although he undercut Freedom. General Principles 13 An employee has a duty to be honest and diligent in the employer's business and not to abuse confidence in matters appertaining to his employment. However, unless it be contrary to an express term, the employee, after leaving the employment, may lawfully set up a business of the same nature as that carried on by his employer and, provided that he acts fairly, may deal with persons who were customers of his late employer, and so compete with his employer in business. See Smith's Law of Master & Servant, 6th Ed., pp 88, 92; Robb v Green [1895] 2 QB 315; Wessex Dairies Limited v Smith [1935] 2 KB 80; Hivac Limited v Park Royal Scientific Instruments Limited and Ors [1946] 1 Ch 169. An employee has, during his employment, an obligation of good faith towards the employer and therefore to keep confidential that which the employer considers to be confidential and desires to be kept confidential. After the employment has ceased, the obligation of good faith to the employer does not continue and the former employee must keep secret only those matters the secrecy of which a court will protect. In considering this issue, a court will take into account the general and important principle of public policy that there should be freedom of trade and that, in the public interest, persons should not be unduly restrained from carrying on their chosen occupation. The more that information can be identified as a trade secret private to the employer, the more likely it is that the secrecy will be protected by a court. The more that information can be identified as part of the general stock of knowledge which the former employee must use in carrying on his occupation, the less likely it is that the alleged confidentiality of the information will be protected. 14 In Wright v Gasweld Pty Ltd (1991) 22 NSWLR 317, Gleeson CJ expressed the issue in this way at p 329:- "… a case such as the present involves a tension between two competing considerations of public policy. An employer is not entitled to protect himself against mere competition by a former employee, and the corollary of that is that the employee is entitled to use skill, experience and know-how acquired in the service of the former employer in legitimate competition. It is in the public interest that this should be so: Stenhouse Australia Ltd v Phillips [1974] AC 391 at 400. At the same time the law will protect trade secrets and confidential information, and will intervene to prevent their misuse. The decision of the Court of Appeal in England in Faccenda Chicken Ltd v Fowler [1987] Ch 117 illustrates the importance, when there is a conflict between these two principles, of a close examination and accurate categorisation of the nature of the alleged trade secret or confidential information." 15 As Gleeson CJ pointed out, it is in the public interest that employees, on leaving an employment, be entitled to trade freely, even in competition with their former employer. This principle has often been stated. In Nordenfelt v Maxim Nordenfelt Guns & Ammunition Co Ltd [1894] AC 535, Lord Macnaghten said at p 565, "the public have an interest in every person's carrying on his trade freely; so has the individual". 16 Three categories of information have been developed with a view to explaining the distinction between information which, absent a contractual restraint, an employee may use after leaving his employment and information which he may not use. In Faccenda Chicken Ltd v Fowler [1985] FSR 105 at 114-115, Goulding J said:- "In my view information acquired by an employee in the course of his service, and not the subject of any relevant express agreement, may fall as regards confidence into any of three classes. First there is information which, because of its trivial character or its easy accessibility from public sources of information, cannot be regarded by reasonable persons or by the law as confidential … Secondly, there is information which the servant must treat as confidential (either because he is expressly told it is confidential, or because from its character it obviously is so) but which once learned necessarily remains in the servant's head and becomes part of his own skill and knowledge applied in the course of his master's business … If an employer wants to protect information of this kind, he can do so by an express stipulation restraining the servant from competing with him … Thirdly , however, there are, to my mind, 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 cannot lawfully be used for anyone's benefit but the master's." [emphasis added] 17 On appeal in Faccenda Chicken Ltd v Fowler [1987] 1 Ch 117, Kerr, Neill and Nourse JJ held at p 137 that Goulding J had erred in suggesting that an employer could protect the use of information in the second category by means of a restrictive covenant, even though the information did not include either a trade secret or its equivalent. That view has since been criticised in Dean's The Law of Trade Secrets at pp 207-210. The view of their Lordships has also been rejected by the Court of Appeal of this Court. In Wright v Gasweld Pty Ltd, Gleeson CJ, Kirby P and Samuels JA all accepted that confidential information which was not a trade secret could be protected by a restrictive covenant. See also Balston Limited v Headline Filters Limited [1987] FSR 330 at 348. 18 However, the judgment of their Lordships in Faccenda Chicken Ltd v Fowler illustrates the types of factors which should be taken into account in determining whether or not information has sufficient confidentiality to gain it the protection of the law. See, particularly, pp 137-139. Contracts 19 It is alleged by the plaintiffs that Mr Garcia, when he joined the organisation in early 2000, entered into an agreement which defined "confidential information" widely and which also contained a covenant applicable for a period of two years restraining the carrying on of any business which was similar to the business carried on by Freedom. That agreement was in writing but Mr Garcia did not sign it. The evidence of Mr Arnold Van Mullekom was that Mr Garcia expressed agreement with its terms and that, accordingly, Mr Van Mullekom put the seal of the company on the agreement and signed it on behalf of Freedom. Mr Garcia denied that he had agreed to the terms. 20 Although I am satisfied that Mr Garcia has very little credit and would say almost anything to promote his own interests, I prefer his evidence on this point to that of Mr Van Mullekom. Mr Van Mullekom plainly overstated his evidence. Thus, at one stage, he said that he had kept a note of his conversation with Mr Garcia. Later in his evidence, he had to concede that he did not keep a note of it. In my view, Mr Van Mullekom's evidence on this point is unreliable. 21 The evidence shows that Mr Van Mullekom gave the document to Mr Garcia and that Mr Garcia expressed reservations about it. As Mr Van Mullekom was going away for some time, he asked a member of staff, Louise O'Brien, to arrange for Mr Garcia to sign an ordinary employment agreement which would hold the matter until Mr Van Mullekom returned. Ms O'Brien arranged for an ordinary agreement form to be signed. Thereafter, the first agreement was forgotten. It was not progressed. The seal of the company and Mr Van Mullekom's signature were put on it at a later stage. I suspect that may have been for the purposes of this case. 22 There were aspects of the original agreement with which Mr Garcia was dissatisfied. Mr Van Mullekom said that the only part of the document with which Mr Garcia expressed dissatisfaction were the words "or arising from the Employee's position as a Director and Shareholder of the Company and as a Beneficiary of the Trust". However, these words would not have held up execution of the agreement. They did not apply to Mr Garcia. They were irrelevant to his circumstances. They could have been struck out on the spot. I am satisfied that Mr Garcia did express dissatisfaction and that Mr Van Mullekom intended to discuss the matter further when he returned. However, he forgot to do so. 23 Accordingly, there was no agreement as set out in that first document. Mr Garcia did not commence employment on the basis of its terms. Nor is he estopped from denying that fact. I am satisfied that Mr Garcia made it plain that he did not agree with the document. 24 Subsequently, on or about 13 April 2000, Mr Garcia signed the contract of employment which had been prepared by Louise O'Brien. His signature was witnessed by Ms O'Brien. The contract contained the following clause, "It is a condition of employment that confidentiality is maintained. If/when you leave our employ, you will not divulge anything to another party/person about the methods used, knowledge gained about conversions or any other company matter". 25 That clause is part of Mr Garcia's employment contract, in addition to the duties which the law implies. However, the contractual term is not of great significance. It is not alleged against Mr Garcia in these proceedings that he communicated confidential information to another person. The significance of the clause is rather that Freedom considered the information about its conversions to be confidential and Mr Garcia accepted that point. 26 The position of Mr Vaupotic is more complex. Two agreements were drawn up. The larger one included a privacy clause in these terms:- "The employee must not disclose to any person, or make any use of any information or material in respect of any projects/jobs and customer/suppliers which has been obtained during the course of their employment with the employer". 27 Much of the smaller agreement was similar to the agreement which Mr Garcia signed. However, it included the following clause:- "Mr Vaupotic must not disclose to any person, or make any use of, any information or material in respect of any projects he will be working on while an employee of MTE (Mulco Tool & Engineering Pty Limited). During and after employment with MTE, Mr Vaupotic shall not directly or indirectly be involved in any business similar to that presently conducted by the company. This clause is without limit in time". The original of this agreement cannot be found. The signatures on the copy in evidence are carbon copies. 28 Evidence was given by Mr Robert Van Mullekom that he gave the two agreements to Mr Vaupotic for his consideration. He said that he explained to Mr Vaupotic that the company considered that its processes were very confidential and that they must not be disclosed to any other person. Mr Ronald Keijzers was also present at the conversation. He confirmed this aspect of the conversation. He saw Mr Robert Van Mullekom give the two contracts to Mr Vaupotic. After Mr Vaupotic had left, he said to Mr Robert Van Mullekom that he did not expect that Mr Vaupotic would sign the agreement containing the restrictive covenant. 29 Mr Vaupotic gave evidence that he took the documents home. They were read to him and explained to him by his wife. He said that he was happy with the larger agreement and that he signed that document and returned it to the office. Mr Vaupotic gave evidence that he considered the smaller agreement for another week or two but formed the view that he would not sign it. He said that he then returned the agreement unsigned to the office. Mr Vaupotic said that he was particularly dissatisfied that the agreement specified a salary of $700 gross per week. He wished to have a salary of at least $700 net per week and had expected to receive it. 30 The larger agreement was signed by Mr Vaupotic on 11 September 2001. Robert Van Mullekom later signed as witness but his evidence is that he did not actually witness Mr Vaupotic's signature. The smaller document contains a signature which is not inconsistent with Mr Vaupotic's signature but it is practically indecipherable and appears to have been written tentatively. The name Stan Vaupotic is printed underneath it. The printing of that name does not seem to be in the same handwriting as Mr Vaupotic's printing of his name on the larger agreement. It is more likely to be the writing of the witness Geert Van Mullekom. 31 The agreement now bears the signature of Geert Van Mullekom as witness. He gave evidence and was cross-examined. I am of the view that he has no useful recollection of the events surrounding his placing his signature as witness on the document. He gave evidence that Mr Vaupotic's signature was on the document when he put on his signature as witness. However, as I have said, it is likely that the name "Stan Vaupotic" is in his handwriting. That leaves only the signature of Mr Vaupotic to identify. 32 There are a number of factors which lead me to think that Mr Vaupotic did not execute the document. The first is that Mr Vaupotic, when giving evidence, appeared to be genuinely concerned about the salary which was stated. He appeared genuine when he said that he wanted at least $700 net per week, which was the salary he obtained about two months later. 33 A second point is that Mr Vaupotic did not return the two documents together. He returned first the larger agreement with which he was satisfied. He had signed that. The other document was returned probably about two weeks later. 34 A third point is that the Van Mullekoms seem to be prepared to add to documents if to do so would assist them. I have already mentioned the placing of the seal on the first agreement that was handed to Mr Garcia. The two agreements concerning Mr Vaupotic have the signatures of Robert Van Mullekom and Geert Van Mullekom as witnesses, yet neither can say that they witnessed his signature. Another example is a document called a "warning memo" which was sent to Mr Vaupotic in March 2002. At the bottom is the statement, "I've been given this warning: signed by Stan Vaupotic". Then follows a signature. The signature is nothing like any other signature by Mr Vaupotic which is in evidence. I am satisfied that Mr Vaupotic did not sign it. 35 A fourth point is that the original of the subject agreement is not in evidence. It was said that only the copy could be located. One would have expected the copy to be given to Mr Vaupotic and the original to be kept by Freedom. Freedom was the party which would have wished to enforce it. 36 Finally, for there to be a carbon copy, the two copies of the agreement would have had to be together, interleaved with carbon, when the original was signed. Thus, Mr Vaupotic must have been present with Geert Van Mullekom when the contract was signed. Someone must have placed the copies together and inserted the carbon. When the document was signed, Geert Van Mullekom should have given one copy, one would expect it to be the copy, to Mr Vaupotic. 37 No witness has given evidence of such a formal process. The evidence of Geert Van Mullekom was to the contrary. He gave this evidence, inter alia: "Q. So you cannot recall whether Stan signed it or did not sign it? A. It was signed. I don't know how to explain it. Stan took it home to read and when he brought it back it was already signed or not, I don't remember. Then I witnessed it and I took it. … Q. Do you say you saw Mr Vaupotic sign it? A. I didn't say that. I said I can't recall that. Q. So if you didn't see Mr Vaupotic sign it how can you say Mr Vaupotic signed it? A. I know his signature. … Q. So there is doubt in other words? A. There is doubt that he did it in front of me; I don't remember. … Q. Let's just take it quietly now. I just want you to tell us what you can remember about this day, if you can remember anything. If you can't remember, do not say anything that you can't remember. But it is important for us to get just your actual recollection. A. Can I think for a moment? Q. Yes, please do. A. I remember that he came in the office, my office, with that contract, and that he handed it to me. It can be the signature was already on it when he gave it to me and then I signed it afterwards. Q. Do you remember the conversation? A. No I don't." 38 By contrast, Mr Vaupotic's evidence was clear and direct: "Q. How did you return that document to Mulco Tool and Engineering? A. I gave these documents (the larger agreement) to Geert the next day. The other one was at home because we disagreed on it. It went in a week later, 2 weeks later. Q. How did you get it into- - A. I went up to Geert, I gave it to Geert and said "I disagree" and I walked out." 39 Moreover, Geert Van Mullekom's evidence as to the warning notice was most unsatisfactory. He gave this evidence: "Q. I ask you again, is it Mr Vaupotic's signature? A. Yes. Q. Definitely is Mr Vaupotic's signature? A. Yes." Subsequently, Geert van Mullekom conceded that the signature on the warning notice was different from all other signatures of Mr Vaupotic. 40 In the absence of evidence from a handwriting expert I would not make any positive finding against Geert Van Mullekom. However, I consider it not unlikely that all the writing on the carbon copy of the contract and the signature on the warning notice were his. I do not suggest that this occurred as a result of ill-will or fraud. Geert Van Mullekom had earlier been married to Mr Vaupotic's sister. He and Mr Vaupotic had had a joint interest in a business of smash repairs. It is quite possible that Geert Van Mullekom considered that he was assisting Mr Vaupotic and the plaintiff by completing necessary formalities. 41 In these circumstances, I am satisfied as a matter of probability that the contract was not executed by Mr Vaupotic. I accept his evidence that he said to Geert Van Mullekom that he disagreed with the document. However, the fact that Mr Vaupotic had in his hands a copy of the contract which contained the confidentiality clause was sufficient to draw to Mr Vaupotic's attention the fact that his employer regarded its methods of conversion as confidential to itself. 42 In the result, neither defendant was bound by a contractual restraint more extensive than that which the law would imply in his contract of employment. No contract or estoppel arose from the fact that both defendants undertook employment. They both made it clear that they did not accept the terms of the written agreement which they did not sign. Confidentiality of the Process 43 The details of a manufacturing process may be confidential. Amber Size and Chemical Co. Limited v Menzel [1913] 2 Ch 239. 44 In Ansell Rubber Co. Pty Ltd v Allied Rubber Industries Pty Ltd [1967] VR 37, Gowans J said at p 49:- "There is very little in these English cases to enable one to identify a 'trade secret'. But some collation of the characteristics may be attempted, without trying to make it an exhaustive statement. Its subject-matter may not be a process in common use, or something which is public property and public knowledge, but if it is the result of work done by the maker upon materials which may be available for the use of anybody, so as to achieve a result which can only be produced by somebody who goes through the same process, it will be sufficient. All of its separate features may have been published, or capable of being ascertained by actual inspection by any member of the public, but if the whole result has not been achieved, and could not be achieved, except by someone going through the same kind of process as the owner, it will not fail to qualify by reason of the publication. It may derive from a maker in another country without losing its character, if it is used, or entitled to be used, by the owner alone in the country in which the owner operates. There is no suggestion of the need for invention. Little can be gathered of the degree of secrecy required beyond what is implied in what is said. But it is a fair inference from what is said that the employer must have kept the matter to himself and from his competitors. The emphasis in the cases is on the confidence." 45 Likewise, in Saltman Engineering Co. Ltd & Ors v Campbell Engineering Co. Ltd (1948) 65 RPC 203, Lord Greene, with whom Somervell and Cohen LJJ agreed, said, inter alia, at p 215:- "The information, to be confidential, must, I apprehend, apart from contract, have the necessary quality of confidence about it, namely, it must not be something which is public property and public knowledge. On the other hand, it is perfectly possible to have a confidential document, be it a formula, a plan, a sketch, or something of that kind, which is the result of work done by the maker upon materials which may be available for the use of anybody; but what makes it confidential is the fact that the maker of the document has used his brain and thus produced a result which can only be produced by somebody who goes through the same process." 46 Freedom was carrying out a process which was not carried out by any other person in New South Wales or it appears until recently, in Australia. The process was commercially very successful in the United States. It was unique in Australia in the sense that other rear-end conversion methods arrived at a very different result. Inevitably, Freedom wished to keep its technique of conversion confidential to itself. 47 Mr A Van Mullekom gave evidence that he had the assistance of his friend, Ton Van Dillen, who conducted a similar business in the United States and who regarded his knowledge as extremely confidential. Even with the assistance he was given, it took a considerable amount of experimentation before Mr A Van Mullekom was satisfied that his conversion process was entirely satisfactory. The development process took approximately six months. During this period, it was not only Freedom who gained experience but also the suppliers of parts such as springs and exhaust systems. Accordingly, Freedom obtained knowledge which was not available to the public generally as to all the steps that had to be taken to make the conversion a satisfactory system and knowledge also of suppliers who were aware of the particular problems which the conversions faced with respect to suspension, exhaust systems and the like. 48 No doubt, some other person could have reverse engineered the process by obtaining a converted vehicle and obtaining details of all the modifications that had been done. Of course, such a task would have required a degree of dismantling as not all the modifications, such as the strengthening of the seats, would have been apparent just by looking at the vehicle. Even then, the person would not have been aware of all the suppliers of parts, including the suppliers of the springs and mufflers. 49 Mr Van Mullekom gave evidence that, until the defendants set up business, Freedom was the only company in Australia offering this type of conversion. It was pointed out to Mr Van Mullekom in cross-examination that a firm, Automobility, is now advertising on the Internet a business in Melbourne carrying out similar conversions. However, if Automobility has managed to establish such a business, the inference would be that this was only as a result of reverse engineering and after a period of experimentation. It would not show that the plaintiffs' information was not confidential, at least in New South Wales. 50 Nevertheless, I do not accept Mr Van Mullekom's evidence as to the inherent confidentiality of the processes used. It was not backed up by evidence from an independent engineer. I prefer Mr Vaupotic's evidence on this point, although it was somewhat overstated. So far as I can ascertain from the evidence before the Court, Mr Van Dillen's concept was a novel concept, but the actual techniques used in its implementation were relatively standard. Once Chrysler Voyagers and other vehicles had been converted for members of the public, the concept itself became a matter of public knowledge. 51 The present case is not similar to Industrial Rollformers Pty Limited v Ingersoll-Rand (Australia) Limited [2001] NSWCA 111, where there was confidentiality in particular dimensions and tolerances and in which evidence had been given that, to reverse engineer the tolerances, a manufacturer would need to measure numerous examples of the product over a long period of time and even then attempts at reverse engineering may fail. 52 In the present case, so far as I can ascertain, generally available materials and techniques generally known in the motor repair and motor rebuilding businesses were used. Mr Arnold Van Mullekom claimed confidentiality in the sequence in which the work was done. However, I consider that any experienced motor vehicle repairer would readily understand in what sequence the various tasks should be undertaken. In general, I consider that there was no measurement or dimension which was, of itself, crucial, and that almost any step could have been replicated in a different manner. There were alternatives available to the various steps that were taken. 53 By way of example I should set out some of the passages from Mr Van Mullekom's affidavit in response to an affidavit sworn by Mr Garcia. Mr Van Mullekom deposed:- "I say that the marking and cutting out of the floor of a converted vehicle are very important parts of the conversion process. It is critical that the markings on the floor of the vehicle are in the centre of the vehicle and parallel to each other and that the floor is marked with the correct dimensions otherwise the tray will not ultimately fit properly or properly balance." I see nothing in the nature of a trade secret in the technique of cutting out a part of the floor of a vehicle and inserting therein a tray or ramp. My impression is that competent and experienced motor body builders would know how to do that. Mr Vaupotic said, for example, that before he had joined Freedom he had lowered a floor of a vehicle so as to enable it to take motorcycles. No doubt the work of conversion has to be done competently but that is not to say that the techniques used are techniques having trade secrecy. 54 Mr Van Mullekom deposed:- "In relation to paragraph 2(g) of Mr Garcia's affidavit, Mr Garcia is correct in stating that Freedom Motors does not purchase new shocks but rather modifies the existing shocks to accommodate the extra suspension height. I do not regard the fact that Mr Garcia claims to buy a longer shock to be a change of substance in the re-configuration of the suspension system of a converted vehicle." This passage illustrates the point that there was no precise step in the conversion which was critical and which involved a trade secret. At all or practically all stages of the conversion, there were alternative steps that could be taken without diminishing the effectiveness of the conversion. 55 Mr Van Mullekom deposed:- "In relation to paragraph 2(i) of Mr Garcia's affidavit, I say that if Mr Garcia does extend the support arms of the sway bar rather then the sway bar itself, then I do not consider this to be a design difference of any significance. In my view, there would be no difference in effect or function if the sway bar is extended or alternatively if the support bars are extended." Again, this paragraph demonstrates that alternative steps could be taken without affecting the overall nature or success of the conversion. Mr Van Mullekom referred to design. However, the present case does not include a claim for breach of copyright in the design of the conversion. 56 I have used these three passages simply as illustrations of the point that I have not identified any aspect of the conversion that should be regarded as involving a trade secret or confidentiality of such a nature that it would be protected by the Court. My overall impression is that the design of the conversion had a degree of novelty about it when it first appeared, for it was new in Australia, but the actual techniques used in the conversion process were standard techniques. 57 I consider that much of the difference in the evidence given by Arnold Van Mullekom on the one hand and Mr Garcia and Mr Vaupotic on the other can be explained by the fact that the Van Mullekoms were engineers but they did not have prior experience in motor body building and repair. Mr Vaupotic, for his part, was very experienced in this field. What Mr A Van Mullekom considered to be a confidential process developed after the receipt of confidential information and after trial and error, seemed to Mr Vaupotic to be merely an appropriate way of carrying out the conversion which Freedom performed. 58 It is indeed a noticeable feature of the conversion process that every vehicle has an individual conversion. The plaintiffs' process allows for variations in dimensions and design having regard to the needs of the customer, including the size of the customer's wheelchair. There may be more or less seats and different configurations of seats depending upon the customer's needs. The plaintiffs did not produce and hold standard parts for insertion in vehicles, although they presumably held some stocks of parts that they acquired from other manufacturers. 59 It follows that the knowledge of the conversion process which Mr Garcia and Mr Vaupotic gained whilst in the employee of Freedom was information which formed part of their general stock of knowledge which they were entitled to use absent the existence of a contractual restraint precluding them from doing so. 60 The use of such knowledge was permitted in Balston Ltd v Headline Filters Ltd where Scott J, referring to information known by an employee during his employment, said at p 344:- "The contention is that the defendants must carry out a series of experiment which, it must be supposed, will lead to the conclusion that 'Y' per cent. weight for weight is the most efficient concentration. But how can the second defendant exclude from his mind his knowledge that 'Y' per cent. or something very near to it, will constitute a satisfactory solvent concentration? Why should he experiment with 'X' per cent or with 'W' per cent when he knows that neither will be as satisfactory as 'Z' per cent or 'Y' per cent? The suggestion that a person in the position of the second defendant should be required to carry out experiments before being allowed to use the knowledge and experience he already has is, in my view, hopelessly artificial. The question must be fairly and squarely faced. Can the second defendant use his knowledge and experience gained while in the first plaintiff's employ in order to compete with the first plaintiff, or can he not? It is not, in my view, a possible answer to say that he can only do so after he has carried out a series of, to him, meaningless experiments." At 351-2 his Lordship said:- "This case is, in my view, yet another example of an attempt by an employer to use the doctrine of confidential information to place fetters on the ability of ex-employees to compete. Technologically based industries abound. All have what they regard as secrets. Employees, particularly those employed on the scientific or technical side of the manufacturing business, necessarily acquire knowledge of the relevant technology. They become associated with technological advances and innovations. Their experience, built up during their years of employment, naturally equips them to be dangerous competitors if and when their employment ceases. The use of confidential information restrictions in order to fetter the ability of these employees to use their skills and experience after determination of their employment to compete with their ex-employer is, in my view, potentially harmful. It would be capable of imposing a new form of servitude or serfdom, to use Cumming-Bruce L.J.'s words, on technologically qualified employees. It would render them unable in practice to leave their employment for want of an ability to use their skills and experience after leaving. Employers who want to impose fetters of this sort on their employees ought in my view to be expected to do so by express covenant. The reasonableness of the covenant can then be subjected to the rigorous attention to which all employee covenants in restraint of trade are subject. In the absence of an express covenant, the ability of an ex-employee to compete can be restricted by means of an implied term against use or disclosure of trade secrets. But the case must, in my view, be a clear one. An employee does not have the chance to reject an initial entry into employment. To fetter his freedom to compete by means of an implied term can only be justified, in my view, by a very clear case. The present is, to my mind, a long way from that." Breach of Good Faith 61 Nevertheless, it is clear that the second defendant, Leonardo Garcia, used confidential information of the plaintiffs to enable him to establish his competing business. 62 Mr Garcia created a document, which was intended for distribution to interested parties, which was entitled "WAV Business Plan 2002". The document commenced:- "The company name WAV represents Wheelchair Accessible Vehicles. It has been put into place for the disabled and taxi industry for disabled transport. I, the director of the company, have been working for this industry for 2 ½ years as a Sales and Technical Manager for disabled transport in another company. My responsibilities for this company were to get it off the ground in terms of design, marketing and production. In this time I have achieved all responsibilities and now believe it is time to develop my gathered experience to grow my own company and establish my own visions without boundaries." 63 Needless to say, Mr Garcia was dishonest in that document for, at the time when Mr Garcia joined Freedom, it had already been in business for three years producing conversions. The Business Plan went on to list the persons and organisations with whom Mr Garcia had had contact, who were of course the persons and organisations with whom he had contact as an employee of Freedom. The Business Plan listed the vehicles most commonly used in the conversion process and the detailed costing and pricing of those conversions. These details were substantially based upon the cost and price schedules which had been developed by Freedom for its own purposes. Mr Garcia had played a part in their preparation. The information contained in these documents of Freedom was confidential to itself. It did not produce them for distribution to the public. 64 The WAV business plan was first produced by Mr Garcia on 10 May 2002, a little less than a week before he gave notice of his resignation which was effective on 30 May 2002. In preparing the document, Mr Garcia used and substantially copied cost and price schedules which were confidential to Freedom. 65 Moreover, I am satisfied that Mr Garcia took with him a substantial quantity of information which was confidential to Freedom. Mr Garcia had a computer at his home which, whilst he was an employee of Freedom, he had often used for the purposes of the business of Freedom. An order of the Court was made entitling the plaintiffs to send an expert to examine that computer. Mr Garcia took the computer from his own home to his business premises on 30 October 2002. The plaintiffs' expert, Adam Daniel, arrived about 10.00am. Mr Garcia informed Mr Daniel that his wife had wished to remove something from the computer on the previous night and had somehow lost all the information stored on the computer. Mr Garcia said he had reinstalled some programs. 66 Mr Daniel, took an "image" of the hard drive of the computer. Subsequently, from this "image", examination disclosed that the hard drive contained the Windows 98 SE operating system and that the installation of this operating system had commenced at 5.10am on 30 October 2002, the day of the inspection. The hard drive contained no accessible files written prior to the installation of the Windows 98 SE operating system. It followed that the hard drive had been re-formatted at some previous point in time. The re-formatting of a hard drive overrides all of the file systems information making it impossible for the files previously held on the hard drive to be accessed or retrieved. The data on the hard drive had been effectively "deleted" by the re-formatting. 67 Using specialist techniques, Mr Daniel was able to retrieve information which had been on the computer at some time but had been deleted. Because the previous operating system had been deleted along with the information, Mr Daniel could not say when any particular document had been deleted. 68 Mr Garcia gave evidence that he had deleted all information relating to Freedom before he left Freedom's employment and that the problem which had occurred with his computer had occurred the previous day when his wife had made an incorrect entry. I reject this evidence of Mr Garcia. He had been aware that there was to be a court ordered inspection of his computer. Presumably his wife was also aware of that. Neither had any justification for attempting to delete anything from the computer. Mr Garcia had no justification for re-formatting his computer. He had no justification for inserting the new operating system, and he had no justification for installing the few bits of information from his own business which he did install. Mr Garcia's evidence that he did these acts innocently lacks any credibility. I am satisfied that the substance of the information which Mr Daniel located on the hard drive was on the drive immediately before Mr Garcia's activities on the night of 29 October and the morning of 30 October 2002. 69 Amongst the documents retrieved by Mr Daniel and which had been rendered unavailable by the re-formatting of the computer were many drawings, some relating to Mr Garcia's business and some relating to the business of Freedom, some of these latter documents having been drawn by Mr Garcia whilst he was in Freedom's employment. There were quotation forms and order forms which set out the detailed pricing of items involved in the conversion. These were details of cost and price varying with the type of vehicle to be converted. There was Freedom's "Terms and Conditions of Sale". There were quotations and invoices of Freedom. There were internal memoranda between officers of Freedom. There was a report of inspection showing items that required attention to bring a particular vehicle, a Kia Carnival, into compliance with the regulations. There were letters which Mr Garcia had written to customers of Freedom whilst he was in its employment. And there was a schedule setting out the order in which the work of conversion was to be undertaken and the hours of labour required for each stage. 70 I am satisfied that Mr Garcia used this confidential information to enable him to start up his competing business. He did not rely just on his general knowledge. He had before him and used Freedom's records to enable him to structure his business. He used those records for that purpose whilst he was still in Freedom's employment. When he resigned he had on his computer and he kept on his computer for his own reference the many documents which I have mentioned which were confidential to Freedom. 71 There is no general restriction on a former employee of a business from contacting customers of the business, although the employee may not copy and take away lists of customers. In general, an employee is entitled to offer his services freely to members of the community, including customers of his former employer. Even so, information about customers can be confidential. In the present case, the information had a potential to be confidential because the needs of the customers varied and the prices which were quoted or charged were individual prices. Freedom would justifiably have regarded information as to potential customers and their needs and the prices which Freedom had quoted as confidential. This is particularly as the number of customers was small, only about 25 a year. 72 The documents of Freedom which Mr Garcia had retained on his computer were documents of the type which, in Saltman Engineering Co. Ltd & Ors v Campbell Engineering Co. Ltd were held to be confidential. See, e.g., p 215. 73 Mr Garcia gave no consideration to any such confidentiality. For example, Mr RG Dobson gave evidence that, in December 2001 or early 2002, he and his wife had been given an inspection and test drive of a converted Chrysler Voyager by Freedom and that they had decided to purchase the vehicle and have it converted by Freedom as soon as superannuation funds became available. Mr Dobson gave evidence that, on or about 7 May 2002, he received a telephone call from Mr Garcia in which Mr Garcia said that he was about to start up his own business and that, if Mr Dobson dealt with him, he would give him a $3,000 discount off the price that Freedom Motors would charge. Mr Dobson discussed the matter with his wife and, on the following day, phoned Mr Garcia to say that he was happy with the proposal. Subsequently, after his superannuation monies had became available, he purchased in July 2002, an appropriate vehicle. He then delivered the vehicle to Mr Garcia for conversion. The total sum paid for the conversion was $15,000 which, from the other documents in evidence, appears to be substantially less than the price which Freedom would have charged. 74 A Mr Clayton Brooke gave evidence that he had received a quotation from Freedom on 23 November 2001 in relation to a Mercedes Vito vehicle. In April 2002, he had further discussions with Mr Garcia about the conversion of a Chrysler Voyager vehicle. In about the middle of May 2002, Mr Garcia said that he was about to go out on his own and he suggested that Mr Brooke should deal with him. Mr Brooke agreed to do so. On 22 May 2002, Mr Brooke was given an invoice on WAV letterhead for a price of $20,000. The invoice was dated a month later, 21 June 2002. Notwithstanding that, Mr Brooke paid the amount of $20,000 into Mr Garcia's bank account on 23 May 2002, that is, whilst Mr Garcia was still an employee of Freedom. Mr Garcia subsequently performed the conversion. 75 The conduct of Mr Garcia in relation to these two customers was reprehensible, for at the time Mr Garcia was an employee of Freedom. His conduct breached the duty of good faith which he owed to his employer. 76 Another example is that Freedom gave a quotation for the repair of a damaged Voyager to a Mr Gold on 14 March 2002. On 31 July 2002 WAV sent to Mr Gold an identically worded quotation with the addition, "Note: Price includes loan car for two days." 77 The extent to which Mr Garcia engaged in like conduct with other customers is unclear. Mr Garcia was sales manager and inquiries were referred to him. The evidence does disclose that during his employment Mr Garcia had many conversations with potential customers of Freedom and that these customers subsequently had their conversions done by Mr Garcia after he had commenced his own business. The inference can fairly be drawn that, during the time of his employment, Mr Garcia was active in diverting potential customers of Freedom to the business which he, Mr Garcia proposed to establish. 78 In some cases, it may have happened that Mr Garcia approached, after 1 June 2002, customers with whom he had dealt whilst an employee of Freedom and persuaded them to deal with him instead. It seems to me probable that, in the course of doing so, Mr Garcia used information in the nature of names, addresses, and telephone numbers and also the special needs of the customers and of prices quoted or discussed, information which Freedom would have regarded as confidential to itself. Mr Garcia went beyond the stage where he merely used the general knowledge, experience and skill which he had gained in Freedom's business for the purpose of establishing his own business. He used information which was unknown to other persons in the trade, information which was confidential to Freedom. 79 Mr Garcia was entirely unrestrained by conscience in seeking to make use of Freedom's information. For example, evidence on commission has been given by a Carolina Fratti, who was a telephonist with Freedom for a substantial period including April and May 2002. Ms Fratti and Mr Garcia both spoke Spanish. Ms Fratti gave evidence that, before Mr Garcia left Freedom's employment, he asked her if she wanted a job. He said that he wanted information of clients who called in to Freedom, like phone numbers and names. He said that he would pay her. Ms Fratti rejected the proposal. Ms Fratti was cross-examined at length. I have read through the transcript. In my view, the substance of her evidence was not shaken and should be accepted. 80 As a result of acting in this way, in breach of the obligation of good faith which he owed to his employer, Mr Garcia was able to establish his business immediately he left Freedom. He had the knowledge and experience which he had gained from Freedom. He had vital documents covering all aspects of Freedom's business. He had the assistance of Mr Vaupotic, who was very experienced in the practical aspects of carrying out the conversions. And he had a source of customers, being customers whom he had diverted from Freedom. Mr Garcia had the advantage of a springboard into business to which he was not entitled. 81 In the present case, Campbell J granted an interlocutory restraining order on 11 October 2002. Mr Garcia appears to have taken little notice whatever of his Honour's order, save to change his suppliers so that he no longer dealt with any businesses or persons which had supplied parts and materials or services to Freedom. Logbook 82 It is claimed that Mr Garcia took from Freedom's premises without permission a document entitled "The Chrysler Conversion Logbook" which is exhibit AVM8 to the affidavit of Mr Arnold Van Mullekom dated 20 September 2002. However, although there was proof that the logbook disappeared and that it was in a position where Mr Garcia could have obtained it, I am not satisfied as a matter of probability that Mr Garcia took the logbook. Most, if not all of the material in the logbook was information of which Mr Garcia had knowledge. It was not a work to which Mr Garcia would have had need to refer for technical information. Passing Off 83 It is alleged that Mr Garcia passed off his business as being a business of or connected with Freedom by registering the business name "Wheelchair Accessible Vehicles". From early 2002, on plaques attached to converted vehicles, Freedom used the words "Wheelchair Accessible Vehicles" in association with the name "Freedom Motors Australia". I assume that Mr Garcia adopted the name "Wheelchair Accessible Vehicles" believing that it would assist him to take business away from Freedom. However, in the name which he used in practice, the letters "WAV" were prominently displayed. I consider that there was no passing off. The words "Wheelchair Accessible Vehicles" were simply descriptive of the products which both businesses and other businesses produced. Freedom had no claim to a monopoly of those words. By their use, Garcia was not passing off his personal business as Freedom's business although he perhaps emphasized his past connection with Freedom, which he was entitled to do. Enticement 84 The plaintiffs claim that Mr Garcia enticed Mr Vaupotic to leave Freedom's employment. However, Mr Vaupotic made it clear that he was dissatisfied with the conditions under which he was working. He had a period off work in March 2002 and he took another period off work before he finally ceased to work for Freedom. I accept Mr Vaupotic's evidence on these matters. It is not in dispute that he was given a written warning. The situation was that Mr Vaupotic was displeased with his employment and Freedom was displeased with his behaviour and absences from work. Secret Commission 85 It is claimed that Mr Garcia entered into an arrangement with Peter Donnelly Automotive Pty Limited to be paid a secret commission in return for referring customers of Freedom to Peter Donnelly Automotive Pty Limited for the purchase of their vehicles. It is alleged that Mr Garcia made a claim on Peter Donnelly Automotive Pty Limited for payment of the commissions which he thought was due to him and that, not having been paid, he made a second claim. It has been proved that he made these claims. However, there is no evidence that he was paid. I am not satisfied, on the balance of probabilities, that he did receive the commissions. Misleading and Deceptive Conduct 86 A number of publications issued by Mr Garcia were misleading and deceptive: (i) An advertising flyer distributed in October 2002 was misleading in that it suggested that WAV was the first to convert Chrysler Voyager vehicles and that the idea of doing so was Mr Garcia's. It was also misleading in that it suggested that WAV had performed modifications on a range of vehicles which included not only the Chrysler Voyager but also the Kia Carnival, the Toyota Tarago, the Mercedes Benz Vito, the Volkswagen Transporter, the Citroen Berlingo and the Holden Commodore. (ii) The following statement which appeared in an advertisement in an edition of the Paraquad Magazine was misleading:- "Freedom Motors has obtained a court order that stops us from using their specialised knowledge or methods in the conversion process of rear access vehicles. However we are glad to inform you that "WAV" uses its own unique and distinctive method in converting vehicles for rear access. With over 20 years experience in modification of all types of vehicles and with every vehicle independently engineered it is our opinion that "WAV" has the most superior rear access conversion in the market place." These words were misleading in suggesting that WAV had 20 years experience in modification. Its experience in modification was only a few months. Even Mr Vaupotic's relevant experience in modification was limited to his time with Freedom and with WAV. The advertisement was also misleading in suggesting that the method of conversion was unique and distinctive. It was simply an adaptation or variation of the style of conversion which Freedom had introduced to Australia in 1997. I am not prepared to hold that the statement was misleading insofar that it stated that WAV has "the most superior rear access conversion" . There is no independent evidence comparing or contrasting Freedom's and WAV's conversions. Corporations Act 87 The plaintiffs claim that Mr Garcia breached s 182(1) of the Corporations Act 2001. I am prepared to make such declaration in relation to Mr Garcia's dealings with Mr Dobson and Mr Brooke. However, no penalty was sought and an injunction would not be appropriate. Orders 88 These findings would entitle the plaintiffs to some relief against Mr Garcia. The plaintiffs are entitled to damages or an account of profits. An order for delivery up of documents might be justified. However, the documents on the hard drive had been deleted by the reformatting in October 2002. Moreover, the documents are, by now, largely out of date. In Balston Limited v Headline Filters Limited at 341, Scott LJ questioned whether an injunction could ever be justified simply to deprive a contract-breaker of the fruits of his breach of contract. I prefer not to form a concluded view on the relief without hearing counsel and the defendants further. Presently, it does not seem to me that the findings would justify any relief against Mr Vaupotic. I shall list the case for further hearing on the aspect of relief. ********** Last Modified: 06/24/2003 DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated.