MICHAEL ALEXANDER TRZECIESKI AND ANOTHER v. KAI GRUENENWALD

HCA 910/2011

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 910 OF 2011

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BETWEEN

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D E C I S I O N

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1.  This is an application by the 1st defendant for stay of this action in favour of arbitration pursuant to an arbitration clause in a Memorandum of Understanding dated 25 November 2007 (“MoU”). Alternatively, the 1st Defendant seeks an extension of 14 days from the date of the order to be made on this application for him to file and serve his defence. The Plaintiffs oppose the application to stay. The view of the 2nd Defendant of this application is unknown and the 2nd Defendant is not represented at the hearing of this application.

BACKGROUND

2.  The 1st Plaintiff is the sole shareholder and director of the 2nd Plaintiff.  The 1st Defendant is the majority shareholder and a director of 2nd Defendant.  The terms of two homemade documents are relevant.  They are the MoU and a Letter of Intent dated 25 April 2008 (“LoI”). 

The MoU

3.  The MoU stated that it was made between the 2nd Plaintiff and the 1st Defendant, but the terms of the LoI (as referred to below) suggest that the 1st Plaintiff was also a party to the MoU at least for the purpose of observing the confidentiality obligations therein. 

4.  The relevant terms of the MoU are as follows:

“BACKGROUND

KG (the 1st Defendant) and JBL (the 2nd Plaintiff) are jointly discussing, assessing and negotiating a potential company formation concerning the development, manufacturing and marketing of sex toy products for distribution in the global market (hereinafter referred to as “the Project”) …

WHEREAS the Parties may in these evaluations, discussions and negotiations disclose to each other certain Confidential Information (as defined below); …

1 DEFINITIONS

…

“Confidential information” means any information disclosed in any form whatsoever (including but not limited to, disclosure made in writing, orally or in the form of samples, models, CAD models, sketches, renders, computer programs or otherwise) by the Disclosing Party to the Receiving Party under this MoU provided that ...

“Contemplated Agreements” means any legally binding agreement(s) entered into between the Parties in respect of the Project. …

“Project” means the project defined under the heading “Background” above. …

2 PRINCIPLES OF MOU

2.1 The purpose with this MoU is to confirm and summarise the initial discussions between the Parties with regard to the Project and outline and agree upon the next steps to be taken. Neither Party is under any obligation to enter into any Contemplated Agreement regarding the subject matter of this MoU. Both parties undertake, however, to conduct the future discussions etc. in good faith with the aim to progress and conclude the Project discussions as soon as possible and in accordance with the agreed upon time schedule.

2.2 In the event the Parties are unable to reach a mutually satisfactory agreement for any reason, either Party may terminate the discussions without liability to the other Party. Should either Party decide to terminate the discussions the terminating Party shall immediately inform the other Party in writing about its decision.

3 GENERAL SCOPE OF CO-OPERATION

3.1 It is the intention of the Parties to reach a partnership whereby each Party’s strength will be used to the benefit of both Parties. The objective of the partnership is to ensure the collaborative world class competitiveness of both Parties.

3.2 The general scope of the Parties’ co-operation with regard to the Project is that the Parties will co-operate within the area of development, marketing and distribution of products. In accordance with this:

(1) JBL shall provide know-how and resources to the common product development and resources to support distribution of commonly developed products. …

3.3 For the sake of clarification, nothing in this MoU or in the Contemplated Agreement(s) will be construed as constituting the Parties as legal partners or joint venturers, or as creating any mutually owned legal entities. Unless expressly agreed upon, neither KG nor JBL is receiving no licence under this MoU to any intellectual property rights.

4 THE DEFINITIVE AGREEMENTS

4.1 The contemplated Agreement(s) will be concluded by the Parties or by designated Affiliates. The Parties preliminarily foresee the document structure of the Contemplated Agreement(s) will be as follows:

(i) The Co-operation Agreement, setting out the general scope of and terms for the co-operation with regard the Project;

(ii) project(s) definition document describing the projects. …

5 NON DISCLOSURE OF CONFIDENTIAL INFORMATION

5.1 The Receiving Party shall not disclose Confidential Information to any third Party. This MoU is confidential and may not be disclosed to any third party.

5.2 In addition to the undertaking set out in sub-article 5.1, the Receiving Party shall be liable for:

(i) any loss or other inadvertent disclosure of Confidential Information, and

(ii) any unauthorised disclosure of Confidential Information by persons or entities to whom the Receiving Party under this MoU has the right to disclose Confidential Information, except that ...

6 USE OF CONFIDENTIAL INFORMATION

The Receiving Party is entitled to use Confidential Information but only for the Purpose. …

…

9 NON DISCLOSURE OF DISCUSSIONS

9.1 The Parties acknowledge that the provisions of this MoU shall apply in respect of the content of any such discussions. The undertaking set forth in this Article shall survive the term of this MoU. …

10 TERM

10.1 This MoU shall become effective on the day it has been duly signed by both Parties. The provisions of this MoU shall however apply retroactively to any Confidential Information, which may have been disclosed in connection with discussions and negotiations regarding the Project prior to the Effective Date.

10.2 The relevant confidentiality provisions in this MoU shall remain in force for two (2) years from the Effective Date, except to the extent this MoU is superseded by stipulations of the Contemplated Agreement(s).

10.3 If the Contemplated Agreement is concluded …, then no further Confidential Information shall be furnished hereunder.

11 AMENDMENTS AND COSTS

11.1 Any amendment to this MoU shall be agreed in writing by both Parties and shall refer to this MoU. Any amendment or Exhibit to this MoU shall form an integral part hereof. …

12 GOVERNING LAW AND ARBITRATION

12.1 This MoU shall be governed by and construed in accordance with the laws of SAR of Hong Kong.

12.2  Any and all disputes, differences or questions between the Parties with respect to any matter arising out of or relating to this Agreement shall be finally settled under the Rules of Arbitration of the International Chamber of Commerce, by three (3) arbitrators appointed in accordance with the said Rules. The place of arbitration shall be Hong Kong and the English language shall be used in the proceedings.  …”

5.  The parties agree that, in a nutshell, the MoU provided for the parties to negotiate for a joint venture of adult toys and the negotiations should be done within a time frame.  There is a confidentiality clause to facilitate free flow of information and ideas in the negotiations. There is also an arbitration clause for resolution of disputes arising therefrom.

The LoI

6.  The relevant terms of the LoI are:

“About the co-operation of Jet-Black Limited/Michael Trzecieski (JBL) and Kai Gruenenwald (KG)

JBL and KG started their co-operation in October 2007 with the goal to set up a company to develop and market sensual consumer products. …

A NDA (nondisclosure agreement) has been signed to protect the exchange of information. Both Parties confirmed to guard this confidential information from access by third Parties.

LOEWIE LIMITED (the 2nd Defendant) has been founded to become the corporate business entity of this venture. …

JBL has received extensive design data and has contributed a product related chapter to the LOEWIE business plan.

JBL will transfer product designs into manufacturing stage.

JBL will receive a 12% share in LOEWIE Limited in exchange for the following services:

A Technical Innovations Strategy and Overseeing of Implementation of: USA Patent Applications, US Trademark Applications and US Design Patent Applications, Electrical Product Development, structural design of massagers, embedded software, Identification and Supervision of Manufacturers, Quality Assurance. …

JBL/Michael Trzecieski in particular will contribute about 10 hours/week of their time resources to the tasks listed above.

Under this agreement Michael Trzecieski will file at least three patent applications, which are deemed to be new and inventive, per year for LOEWIE LTD. (total 18 between 2008 and 2013) where these patent applications will be in the field of invention relating to penetrator as well as lay on devices for the adult toy market. …

JBL and LOEWIE LTD will develop a joint product innovation and patent roadmap that will serve as key documentation of the above agreement.

Patent applications filed by Michael Trzecieski in the field of invention relating to penetrator as well as lay on devices that are filed between 2008 and 2013 will be owned by Michael Trzecieski. Issues patents stemming from the patent applications will be licensed by Michael Trzecieski to LOEWIE LTD for ($1 USD each) for LOEWIE LTD to have irrevocable, exclusive and unlimited right of usage of these patents for a period of 15 years from the filing date of the patent application. …

KG has conducted extensive market research, employed an industrial design agency and has funded LOEWIE LTD with EUR50,000. He will work full-time as managing director of LOEWIE LTD starting from June 2008.

Michael Trzecieski will be in a position as Chief Technology Officer (CTO) for LOEWIE LTD. Optionally, if funding permits, Michael Trzecieski can be partially employed by LOEWIE LTD.

A cash or company related expenses, contribution of EUR5,000 to LOEWIE LTD will be made by JBL/Michael Trzecieski within the first year in turn for the 12% shares at the time of signing the shareholders’ agreement.

The 12% in shares of LOEWIE LTD will be issued to JBL in 6 annual blocks of 2% each.  ...”

The working of the MoU and LoI

7.  The LoI is the contemplated agreement or one of which as it sets out the general scope and terms of co-operation between the Plaintiffs and the 1st Defendant with regard to the Project. 

8.  The identification of parties at its beginning shows that the 1st Plaintiff was also a party to the MoU. 

9.  The parties agree that the NDA or nondisclosure agreement referred to in the LoI is the MoU. 

10.  The LoI provides for the contributions to be made by the 1st and 2nd Plaintiffs and the 1st Defendant to the 2nd Defendant.  The return to the 1st and 2nd Plaintiffs for their contributions are the 12 per cent shares of the 2nd Defendant to be issued to the 2nd Plaintiff and, depending on funding, possibly a salary to the 1st Plaintiff for working as the Chief Technology Officer of the 2nd Defendant.

11.  By Article 10.2 of the MoU, the LoI superseded the confidentiality provisions in the MoU to the extent as provided in the LoI.  By Article 10.3 of the MoU, no further confidential information was to be furnished thereunder upon the making of the LoI. 

12.  Regarding the parties to the LoI, the 1st Defendant says that it was made between the 2nd Plaintiff and the 2nd Defendant as they are the only signatories to it.  However, the Plaintiff pleads in the Statement of Claim that the LoI is only the evidence of an agreement and the parties thereto are the Plaintiffs and the Defendants.  I observe without deciding that the Plaintiffs’ position is not unarguable as the LoI has provided for obligations to be discharged by the 1st Plaintiff and the 1st Defendant to the 2nd Defendant. 

13.  Unlike the MoU, which does not create any liability in relation to the negotiations save the confidentiality obligation, the LoI is a legally binding document.  It, however, does not contain any arbitration clause.

THE CLAIM

14.  The Plaintiffs plead in the Statement of Claim that various matters had been discussed between the parties under the confidentiality provisions of the MoU.  They further plead that following the signing of the LoI, the 1st Plaintiff had provided two working samples of the products to the 1st Defendant.  The 2nd Plaintiff, in complying with its own obligations under the LoI, had filed a provisional patent application covering a number of concepts of the products. 

15.  The Plaintiffs then plead that the provisional patent application substantially covered the intellectual property discussed between the parties under the confidentiality provisions in the MoU.  However, I think this averment may not be correct as Article 10.2 of the MoU provided that the confidentiality provisions of the MoU should be superseded by the LoI to the extent as provided by the LoI.  Article 10.3 of the MoU also provided that no further confidential information was to be furnished under the MoU upon the making of the LoI.  If the provision of working samples and filing of provisional patent application were done pursuant to the terms of the LoI, then the confidential information disclosed in them would not be covered by the MoU. 

16.  The Plaintiffs also plead that the 1st Plaintiff had in January 2008 paid his contribution of €5,000 to the 2nd Defendant under the LoI for the 12 per cent shares of the 2nd Defendant by making a working sample of one of his products.  The 1st Plaintiff had also worked with a manufacturer on the layout of the products in order to build a prototype. 

17.  However, the 1st Defendant dismissed the 1st Plaintiff from the 2nd Defendant and later used the 1st Plaintiff’s design and intellectual property in the 2nd Defendant’s product.  Such design and intellectual property had been shown by the 1st Plaintiff to the 1st Defendant on 29 May 2008 after the making of the LoI on 15 April 2008. 

18.  The Plaintiffs then claim the 1st and 2nd Defendants for return of the €5,000 to the 1st Plaintiff and payment for the 1st Plaintiff’s investment for 46 weeks at 10 hours per week from 1 November 2007 to 20 September 2008 valued at US$78,200, the royalties on projected sales valued at €1,128,750 and the loss of profit of the 12 per cent shares of the 2nd Defendant from incorporation to 2013 valued at €568,287.  There is a further claim for breach of contract and alternatively an account of profits and royalties received by the Defendants as a result of the use of the Plaintiff’s intellectual property. 

ANALYSES AND DECISION

19.  Though the Statement of Claim refers to both the MoU and the LoI, it is quite clear that the claim is based on the alleged breach by the Defendants of the LoI by exploiting the intellectual property contributed by the 1st and 2nd Plaintiffs pursuant to the LoI to the 2nd Defendant and ousting the 1st and 2nd Plaintiffs from the 2nd Defendant.

The plaintiffs’ confirmation of nature of claim

20.  Mr Hart for the Plaintiffs also confirmed this morning that the claims are grounded on the LoI and not the MoU.  He also confirmed that the alternative claim for account of profits for the Defendant’s use of the Plaintiff’s intellectual property is put in for abundance of caution.  It is to cater for the event that the court may find no breach of the LoI by the Defendants but that they have wrongfully exploited the Plaintiff’s intellectual property conveyed pursuant to the LoI.

21.  Upon this confirmation of the plaintiffs, it is clear that this action is based on the alleged breach of the LoI by the Defendants.  I again observe without deciding that there does not appear to be a sound basis for the alternative claim for account of profits or any basis for the return of €5,000, payment of US$78,200 or €1,128,750.  This claim could have been presented in a simple and straightforward fashion but for the pleader’s ambition to embrace more than a simple breach of contract claim may allow.  Since this is a claim based on the LoI which does not have an arbitration clause, then there does not appear to be any basis for staying the action for arbitration. 

22.  However, Mr Yuen, counsel for the 1st Defendant, submitted that the LoI is an amendment or exhibit of the MoU.  By article 11. 1 of the MoU, it is an integral part of the MoU, hence it is bound by the arbitration clause in the MoU as well.  I disagree with that.  I do not think the LoI is an amendment or exhibit of the MoU.  It is rather the contemplated agreement or one of them. 

23.  Mr Yuen then argued in the alternative that the LoI came from the MoU and was reached by negotiations within the scope of the MoU, therefore the parties’ intent to arbitrate in terms of the MoU should apply to the LoI.  I again disagree.  The LoI is of a very much different nature from the MoU.  The LoI is the fruit of the MoU and is legally binding. For the MoU, save the confidential provisions to facilitate negotiation, nothing was binding.  I do not think I can infer the intent to arbitrate into the LoI when the parties have not provided for it.

ORDER

24.  In the premises, I dismiss the 1st Defendant’s application for stay on the ground that the claim is based on the LoI which does not have a provision for arbitration.  I therefore allow an extension of time to the 1st Defendant to file and serve his defence within the next 14 days.

25.  I also make a costs order nisi that the 1st Defendant do pay the Plaintiffs half of the cost of this application.  I do not order full costs because the Statement of Claim has failed to present matters in a clear and straightforward manner as it should have.  The presentation of the claims has provided some unnecessary inducement to the 1st Defendant’s application.

26.  I also direct the parties to fix a 9:30 am appointment outside the next 14 days for summary assessments of the amount of costs payable unless an application for variation of the costs order nisi should be made within the next 14 days or the amount can be agreed.