MIRADRY, INC v. LAM SIK YUEN JAMES (also known as JAMES LAM)

HCMP 1142/2018 and
HCMP 1143/2018 and
HCA 1751/2018
(Heard Together)
[2018] HKCFI 2452

HCMP 1142/2018

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 1142 OF 2018

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AND

HCMP 1143/2018

MISCELLANEOUS PROCEEDINGS NO 1143 OF 2018

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AND

HCA 1751/2018

ACTION NO 1751 OF 2018

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(Heard Together)

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DECISION

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1.  This is an application by the plaintiff in the three sets of proceedings before the court for the continuation of Mareva injunction orders granted by B Chu J on 27 July 2018 and continued by Mimmie Chan J on 3 August 2018 (“Mareva Orders”). Under the Mareva Orders, the defendants were restrained from disposing of or dealing with or diminishing the value of their assets of up to US$1,954,500.

2.  The plaintiff is a company incorporated in Delaware with its headquarter in California. It, together with its affiliates, are engaged in the business of selling novel medical devices including what is known as the miraDry System (“System”) and bioTip (collectively “Products”). The System is the only device cleared by the Food and Drug Administration of the USA and the China Food and Drug Administration for non-invasive treatment of primary axillary hyperhidrosis. The Products are said to be innovative technologies and the plaintiff holds a number of intellectual property rights in relation to them.

3.  The injunction in HCMP 1142/2018 was granted under section 45 of the Arbitration Ordinance (Cap 609) (“AO”) in aid of London arbitration proceedings against the defendant (“James Lam”). James Lam is allegedly the perpetrator of the scheme which forms the subject matter of all three actions. He was the Asia Pacific Managing Director of the plaintiff until he effectively resigned on 12 February 2018.

4.  The injunction in HCMP 1143/2018 was also granted under section 45 of the AO in aid of arbitration proceedings in California against the defendant therein (“Coach Li”). Coach Li was formerly employed by the plaintiff as the Regional Marketing Manager of one of the plaintiff’s subsidiaries until he effectively resigned on 14 February 2018. Whilst employed by the plaintiff, he reported directly to James Lam.

5.  The injunction in HCA 1751/2018 was granted against the defendants in that writ action (ie Tsui and Mrs Lam): 

(1) Tsui was the sole legal representatives, director and manager ofa company known as廣州源動貿易有限公司 (“Sun Brain GZ”) until March 2017 when he was replaced by James Lam.  He was also a shareholder of Sun Brain GZ (with James Lam) and a shareholder and director of Sun Brain (Hong Kong) Limited (“Sun Brain HK”).  The two companies were allegedly the corporate vehicles used by James Lam to carry out the scheme in question.  They are referred to by the plaintiff as the “Competing Business”.  

(2) Mrs Lam (wife of James Lam) held the registration of a website and domain name which was allegedly used as part of the scheme.

THE PLAINTIFF’S BUSINESS MODEL AND THE SCHEME IN QUESTION

6.  The plaintiff sells the Products in the Asia Pacific Region through a series of exclusive distributorships, with each distributor granted the exclusive right to sell in one specific territory (single or multiple countries).  A distributor in one territory is not permitted to advertise, promote or sell the Products in any other territory.  Further, upon the termination of a distributorship, each distributor is generally required to provide an inventory of all Products in their possession and to destroy any Products not repurchased by the plaintiff or any successor distributor appointed for the territory.

7.  It is alleged that James Lam together with the other defendants carried out the three illegal plans in parallel.  The plans and their involvement were concealed from the plaintiff.  First, it is said that James Lam attempted to acquire the plaintiff and thereby takeover the business of selling the Products.  The “Takeover Plan” failed when the plaintiff was acquired by another US company (Sientra, Inc) on 26 July 2017.  Further, James Lam also attempted to acquire the exclusive distributorship of the Products for China, Taiwan and Hong Kong.  The “Distributor Plan” also failed at the end when the plaintiff appointed Paragon Meditech Co Ltd (“Paragon”) instead. 

8.  However, the “Illicit Stockpiling Plan” was put into effect.  In short:

(1) From about June 2016, James Lam arranged for the CompetingBusiness to secretly and illicitly acquire stockpiles the Productsby procuring the plaintiff’s distributors to order large quantitiesof the same which were then passed on the Competing Business.

(2) From July 2017, James Lam used the Competing Business to sell and/or rent out the illicitly stockpiled Products, in direct competition with the plaintiff.  Sun Brain GZ was falsely represented as the exclusive authorised distributor of the plaintiff in China.  This was done surreptitiously when James Lam was still under the employ of the plaintiff.

(3) The plan also involved the use of false documents by James Lam purporting to authorise Sun Brain GZ as the Southern China exclusive distributor of the plaintiff and to authorise MEHECO (defined below) as the plaintiff’s exclusive distributor in China as opposed to the plaintiff’s legitimate distributor (ie Paragon). 

(4) A website (www.miradrys.com) (“Misleading Website”) was created in March 2018 which was confusingly similar to the plaintiff’s website and domain name of www.miradry.com. The contact details of Sun Brain GZ was listed in the Misleading Website.

(5) As a result of the activities of the Competing Business, there isconfusion in the Chinese market as to the identity of plaintiff’s authorised distributor.

9.  In light of the allegations, James Lam is said to be in breach ofthe non-compete clauses in his employment agreement (clause 7(a) and (b)) and in breach of fiduciary duties and duties of fidelity owed to the plaintiff. The claim against him is supported by an opinion of London solicitors.

10.  Coach Li is also said to be in breach of clause 5 of his employment agreement with the plaintiff.   The claim against him is supported by opinion of Californian lawyers.

11.  As against Tsui and Mrs Lam, the case against them is one of dishonest assistance and unlawful means conspiracy.  The plaintiff places reliance on Tsui’s directorship of Sun Brain HK and that he was the sole legal representative, director and manager of Sun Brain GZ.  For Mrs Lam, the registration of the Misleading Website in her name in March 2018 is the main evidence against her.

GROUNDS FOR DISCHARGE

12.  Ms Fong for the defendants argued that the ex parte Orders against the defendants ought to be discharged and the following points were taken in her skeleton argument:

(1) By reason of material non-disclosure (“MND”) concerning:

(a) The production costs of the Systems and short shelf life of the bioTips resulting in a misleading calculation of the alleged loss of US$3,213,000.

(b) The definition of the Competing Business.  Ms Fong argues that the term is misleading because even if there was in fact any competition, it was with the plaintiff’s distributors rather than the plaintiff. 

(2) The plaintiff has no locus in obtaining the Mareva Orders because the plaintiff is a different entity from Miramar Labs,the employer of James Lam and Coach Li under their respective employment agreements.

(3) There is no arguable case against Tsui and Mrs Lam because:

(a) Sun Brain GZ and Sun Brain HK are separate legal entities and their corporate veil should not be pierced.

(b) The Misleading Website was registered by James Lam in Mrs Lam’s name without her knowledge and approval.  Issue is taken on the actual state of her knowledge.

13.  Given how the matter was presented in court and my views onhow the grounds should be categorised, I shall deal with Ms Fong’s points in a slightly different order.

DISCUSSION

Good arguable case

14.  The applicable principles in respect of Mareva injunction are well known and whether there is a good arguable case is the starting point.  Having considered the documents which goes to the merits of the plaintiff’sclaims, I am satisfied that there is plainly a good arguable case against each of the defendants.

15.  It is said that the scheme operated by the defendants were first discovered in around May 2018 when there was confusion in the Chinese market as to the identity of the plaintiff’s authorised distributor.  The plaintiff encountered difficulties in conducting the investigation in question as the Asia Pacific team (including James Lam) was by then replaced. Further, during his employment with the plaintiff, James Lam used his personal computer rather than a company computer.In order uncover the scheme in question, the plaintiff’s staff had to trawl through a large amount of records on the company server.

16.  Despite the aforesaid, a significant amount of documents wereeventually located and placed before the Court to demonstrate that prior to his resignation, James Lam was already playing an active role in the three plans in question and the other defendants were assisting him.  Although hewas unable to take over the plaintiff’s business or obtain the distributorshipof the Products, he managed to acquire, through Sun Brain GZ, a significantamount of the Products through either China Medical Equipment & TechnicalService Company (“MEHECO”) (the PRC distributor of the plaintiff until it was replaced by Paragon) or Wonik who was the Korean distributor.

17.  In his resignation letter dated 12 January 2018, he claimed that he received an offer to serve as VP Asia Pacific from a “medical device company involved in respiratory equipment and disposable with no competition with Miramar Labs Inc.”  There was a clear attempt to conceal his roles in the Competing Business.

18.  The role he played in the Competing Business whilst he was an employee of the plaintiff is not only in breach of his duty of fidelity butalso clause 7 of his employment agreement prohibiting any planning for any business competitive with the plaintiff.  There is also clear evidence that he has since at least 2016 started raising funds for the Competing Business. 

19.  In particular, I have been taken to: (i) a distribution agreementwith MEHECO dated 1 January 2018 signed by James Lam purportedly onbehalf of the plaintiff; (ii) a letter of authorisation confirming MEHECO asexclusive distributor of the plaintiff in China; and (iii) a letter of authorisationpurportedly authorising Sun Brain GZ as the plaintiff’s exclusive distributor in Southern China for three years.  On the face of the evidence before me, there is clearly a good arguable case that all the documents were signed by him without proper authority. 

20.  Further, the contemporaneous documents also revealed that James Lam had strongly advocated for the appointment of MEHECO as the plaintiff’s distributor for China and he managed to convince the plaintiff of its suitability despite reservations from others.  As a result, the plaintiff entered into a 1-year exclusive distributorship with MEHECO on 30 March 2016.  The documents before the court revealed the close relationship between James Lam and Robert Huang (VP of Sales) of MEHECO.  Given the role played by MEHECO in the “Illicit Stockpiling Plan”, there are basis to believe that James Lam’s efforts in supporting MEHECO’s appointment was part of the “Illicit Stockpiling Plan”.

21.  Coach Li was involved extensively from an early stage.  For example, in a PowerPoint presentation attached to an email from James Lam to Robert Huang on 25 April 2016, James Lam was already described as the Chairman of the new “China Project” and Coach Li was the “VP Business Development”.  The presentation also described a plan for establishing 100 armpit clinics in China and for the business to “become one of the biggest aesthetic equipment/devices supplier in China”.  In the section entitled “Huge Opportunity in China Aesthetic Market”, it is said that “miraDry offers a unique market position which can provide a strong pillar in this business proposal and predictable income to support the plan”.

22.  Insofar as Tsui is concerned, he was described in an email fromJames Lam to C J Lee of Wonik dated 22 June 2017 as the general managerof Sun Brain HK and spends most of his time in the Guangzhou office.  Hisroles in the Competing Business cannot be explained away by a bare denial and it is not possible to accept, at this stage, that he has no knowledge of the breaches on the part of James Lam and Coach Li.

23.  In respect of Mrs Lam, the evidence regarding Misleading Website is also difficult to explain away. Although it is suggested that anyone could have registered the domain name in question in her name andJames Lam also suggested that she knew nothing about the registration, there is plainly a good arguable case that she has played some part in James Lam’s plans and that she was either dishonestly assisting or had a role to play in the alleged conspiracy.  I am not prepared to accept at this stage that she was ignorant and played no part as she attempted to suggest.

Locus standi

24.  Very sensibly, Ms Fong for the defendants did not place too much emphasis on issues in respect of good arguable case.  In her written submissions, she took issue with the plaintiff’s locus standi seeking to suggest that the plaintiff is a different entity from “Miramar Labs Inc”, the employer of James Lam and Coach Li under their respective employment agreements.  In response, Mr Chain (for the plaintiff) summarised in a table the relevant documents in respect of incorporation and change of name on the part of the plaintiff’s holding company (originally known as Spacepath and now miraDry Holdings) and the plaintiff (incorporated as “Foundry Newco X Inc” and now “miraDry Inc”).  The confusion arose because both companies were, at one stage, known as “Marimar Labs Inc”.  Although there was some confusion created by this, I am satisfied that there is reallynothing in this point and it would appear that the plaintiff was the employer of both James Lam and Coach Li.

Definition of competition

25.  Ms Fong also argued any competition created by the Competing Business is with the plaintiff’s distributors rather than the plaintiff as the Products sold by Sun Brain GZ would only reduce the market share of the plaintiff’s distributors.  She complained that the use of the term Competing Business is “misleading, confusing and conceptually fallible”.  This was advanced as a MND point by Ms Fong.

26.  The plaintiff responded by contending that the sale of the Products conducted by Sun Brain GZ in the PRC were sales being taken awayfrom the plaintiff’s exclusive distributor (ie Paragon) which in turn reducedthe number of units that would be purchased from the plaintiff, the production costs of which have already been incurred.  Further, the distributors have assumed financial risks and had to meet minimum sales target under their distribution agreements with the plaintiffs.  The unauthorised sales would drive down sale price and the unauthorised sellers would also free-ride on any marketing activity conducted by the distributor.

27.  On a proper analysis, the point advanced by Ms Fong has to dowith whether the plaintiff has a good arguable case rather than a MND matter.  I am of the view that looking at the matter in the round, the activities of the Competing Business were operating in competition with the plaintiff.  This is particular so when there is evidence that the Competing Business was selling bioTips that were already expired.  This creates direct competition with the plaintiff over new orders to be placed by authorised distributors.  I therefore reject the defendants’ point in this regard.

Quantum

28.  Although initial framed as a MND point, Ms Fong took no serious issue with the suggestion that this issue is really part of the court’s consideration on whether there is a good arguable case. This was the most controversial issue at the hearing before me.

29.  The plaintiff’s initial position at the ex parte stage was an ambitious one.   It was suggested that a conservative estimate of the loss and damages is in the sum of US$3.21 million.  This is based on “actual loss” in the sum of US$1,954,500 and a projected loss of US$1,259,100 for 2019.  The Court was not satisfied with the claim for projected loss and granted an order in respect of the “actual loss” only.

30.  The calculation of the “actual loss” is also problematic.  Thisfigure was arrived at by using US$52,500 as the unit cost for each “System”. It is then said that a “conservative estimate of the Systems stockpiled by the Competing Business is at least 30”, and a total of US$1,575,000 was calculated on this basis.  For bioTips, on the basis that 85 boxes were heldby MEHECO and 30 by BP Biotech (another distributor) and that they were supplied to Sun Brain GZ, the total number was 115 boxes.  Adopting a unit costs of $3,300, the total amount involved was US$379,500.

31.  The actual number of Systems and bioTips involved in the stockpiling plan is unclear in the evidence before me and I agree that the plaintiff is only able to come up with an estimate on the basis of the documents that they managed to locate.  Given the background outlined above, it is not surprising that the evidence presented by the plaintiff is incomplete.  On the other hand, James Lam is clearly in possession of such information but has failed to adduce any evidence in this regard.  On this basis, I can only accept the figures put forward by the plaintiff as a reasonable estimate at this interlocutory stage.

32.  However, I have difficulty accepting that the plaintiff should be entitled to what is in effect gross profit.  Even if one is to proceed on the basis that the plaintiff should be entitled to claim for loss of profit, I see no reason why gross profit figures should be accepted.  Mr Chain argued that the situation here is unique because the costs of producing the Products that the plaintiff was unable to sell by reason of the defendants’ breaches have already been incurred and although the plaintiff is sitting on the stocks in question, this is really a matter of mitigation at the end of the day. 

33.  I have serious doubts over the correctness of the plaintiff’s approach in assessing loss of profit.  I appreciate assessment of the loss is not an exact science and there is scope for taking a broad-brush approach, but I see no reason why gross profit figures should be used.  Recognising the difficulty, Mr Chain put forward alternative calculations based of net profit figures with a 58.5% margin and the loss on that basis is US$1,143,382.50 (ie US$1,954,500 × 58.5%).  Doing the best we can at this stage, I am prepared to accept this figure for the loss of profit claim.

34.  A number of other points were taken by Ms Fong on quantum.  For example, she criticised the plaintiff for not adducing evidence on production costs of the Products and that in relation to the bioTips, there was a shelf life of only two years and this should have an effect on quantum.  These are points that can be taken against the plaintiff when all the evidence is before the court or arbitrators at the substantive hearing of disputes.  However, given the defendants have adduced very little evidence on quantum and the difficulty that the plaintiff had in gathering evidence at this stage, I am satisfied with the revised figures proposed by the plaintiff for the present purpose.

Sun Brain GZ and Sun Brain HK being separate legal entities

35.  Ms Fong also argued that even if the plaintiff can establish Sun Brain GZ and Sun Brain HK were used to carry out the Illicit Stockpiling Plan, to hold that Tsui was liable for the liabilities of the two companies would necessarily mean that the corporate veil is pierced.

36.  I am satisfied that there is nothing in this point.  The two companies were clearly used by James Lam and the other defendants to conduct the acts in question.  Tsui cannot hide behind the companies and there is no need to pierce corporate veil to find him liable for dishonest assistance.  As explained by Lord Mance in Central Bank of Ecuador v Conticorp SA [2015] UKPC 11 (23 March 2015) at §50: “… [a]cting as anofficer of one company, a person may dishonestly procure or assist a breachof duty by the director of another company, in which case such person maymake liable for dishonest assistance both himself personally and the company of which he is an officer.  Otherwise, individuals acting as officers of a company could never commit any wrong, tortious or equitable.” 

Other factors

37.  All the defendants have assets within jurisdiction and given the facts highlighted above, the balance of convenience is clearly in favour of granting and continuing the Mareva Orders.  In addition, given the conduct of each of the defendants and their role in scheme orchestrated by James Lam, I am satisfied that there is a clear risk of dissipation if the Mareva Orders are not continued.

ORDER

38.  In the circumstances, I am satisfied the Mareva Orders ought to be continued until trial or further order but the amount restrained should be reduced from US$1,954,500 to US$1,143,382.50 being the fall-back position of the plaintiff.

39.  I also make a costs order nisi that costs of the applications be in the cause of the three sets of proceedings.