DICTOGRAPH INTERCOM CORPORATION LTD v. MICRO ELECTRONICS LTD AND ANOTHER

Copyright - confidential information - ex parte Anton Pillar order - effect of failure to make full disclosure - balance of convenience now wrong test should be balance of justice (Francome v. Mirror Newspapers followed).

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JUDGMENT

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Preliminary

1. By a writ dated the 24th of July 1984 and amended on the 19th October 1984, the Plaintiff claims a declaration that certain drawings and technical data relating to an automatic telephone dialer conceived by the Plaintiff and manufactured by the Defendant are confidential information, and is the property of the Plaintiff. The Plaintiff also seeks an injunction to restrain the Defendants from making use of such information and infringing its copyright in those certain drawings supplied to it by the Plaintiff. The plaintiffs also seek to restrain the defendants from passing off any of the units not manufactured without the approval of the plaintiff.

2. The writ also seeks an order for the delivery up of all documents containing this confidential information and for delivery to the plaintiff's solicitors of any of the units in the possession of the defendants and also the drawings in which the plaintiff claims copyright.

3. Simultaneously with the issue of the writ the plaintiffs applied ex parte for an Anton Pillar order authorising their solicitors to enter the defendant's premises and to seize and detain all such units and drawings. This order was granted by Mr. Justice Jones on the 24th July and was duly executed. Relevant documents and some 14,700 units were seized. Also found were some unit cases on which the name and logo of the plaintiff had been wholly or partially removed. The return date of the summons was the 1st of August 1984 and on that date the matter was adjourned and eventually came on for hearing before me on the 5th of November. On the 9th of November at the conclusion of the hearing I delivered an oral judgment in which I refused to make the order sought and said I would give fuller reasons in writing. This I now do.

History of claim

4. The plaintiff has for a considerable period of time been designing and marketing telephone accessories under the trade name "Dictograph". They made inquiries in Hong Kong in 1981 with a view to finding a manufacturer for some electronic telephone accessories and that eventually in December 1982 there was a meeting, arranged by the Hong Kong Department of Industry, Trade and Commerce, attended by Messrs. Bernard and Ronald Zau, joint managing directors of the 1st Defendant, their marketing manager Mr. William Tong and the president of the Plaintiff company, Mr. R. W. Walton. This seems to be no doubt that there was general agreement at this meeting that the 1st Defendant would manufacture the Plaintiff's telephone accessory products in a Joint venture. The terms and conditions of that joint venture were, unfortunately, not then reduced to writing. In January 1983 Mr. Ronald Zau went to Canada and a further meetings was held with Mr. Walton and other officials of the Plaintiff company. There was then an exchange of letters between the Plaintiff and the 1st Defendant regarding the arrangements. In the letter from the Plaintiff to the 1st Defendant dated the 8th of February 1983 mention is made of a product being a hand held cordless dialing device which was called the "Dial It". On the 14th of March 1983 the Plaintiff sent a telex to the 1st Defendant and it is this document which it says contains confidential information. The telex sets out details of the perameters for the Dial It, such as the number of numbers which can be stored in its memory and other technical details.

5. Mr. Walton, in a further affidavit, exhibited certain further drawings which he had commissioned from a Mr. Tillson and from Messrs. Williamson and Lalande in Canada. These drawings relate to the appearance of the product. They were paid for by the Plaintiff but were not expensive. Technical drawings were prepared in Hong Kong by employees of the 1st Defendant. These were highly technical and exact drawings as were necessary for actual manufacture. The 1st Defendant also had design work done on the product by Messrs. Armitage & Associates for which they were paid a sum in excess of HK$100,000.00 by the Defendant. Production was then started and the products were shipped to the Plaintiffs in Canada and presumably sold on to customers. The Plaintiffs had requested from the Defendant and had been supplied with a list of its customers in North America.

6. It was also a part of the agreement between the parties, although not embodied in any particular document, that the 1st Defendant would contribute to the funding of research and development of other telephone accessory products as well as the "Dial It". There seems to be no dispute that in fact the 1st Defendant paid US$40,000.00 to the Plaintiff for that purpose, but there is no exact breakdown of how much was spent on the "Dial It". Eventually however the Plaintiff complained that funds for research were not being received and gradually relations between the parties worsened. Mr. Ronald Zau went to Canada and a meeting was held but no agreement was reached. Eventually Mr. Walton sent a telex to the 1st Defendant saying that the agreement between them was at an end and that any undelivered units still in the possession of the 1st Defendant were held on behalf of the Plaintiff.

7. The 1st Defendant then commenced proceedings in the United States of America claiming that the "Dial It" product was owned by a joint venture between the Plaintiff and the 1st Defendant and seeking an injunction from preventing the Plaintiff from manufacturing the product with any other company. Copies of this proceeding were attached to Mr. Walton's affidavit. Eventually an order was made by the Court in California whereby the Plaintiff was allowed to find another manufacturer provided that manufacturer gave an undertaking of confidentiality in respect of any drawings or information it received.

Material non-disclosure

8. The 1st Defendant submits that the Plaintiff's application for the injunction and other orders should be dismissed without even going into the merits of the case on the basis that the Plaintiff has failed to make full and frank disclosure when applying for the ex parte order. That is fatal to its case even if the situation is remedied by further affidavit. The principles are set out in the well-known cases of R. v. Commissioners of Inland Revenue Ex Parte Princesse de Poliqnac [1917] 1 K.B. 486 and Thermax Limited v. Schott industrial Glass Limited (1981) F. S. R. 289. Those cases establish that when application is made ex parte the applicant must make full and frank disclosure of all matters within its knowledge which the Court might consider relevant when deciding whether to make the order or not and that even if the non-disclosure is due to an error of judgment and is not deliberate the same consequences follow i.e. the order must be discharged without investigating its merits. There is however some conflict in the authorities as to whether a Plaintiff is thereby barred from applying for another order. In Bank Mellat v. Mohammad Ebrahim Nikpour (1982) Commercial Law Reports 159 it was held that because there had been an unfair advantage obtained by the making of the first order, no subsequent order should be made. Slade, L.J. in concurring in that judgment said that it was the applicant's duty to state any defence which they anticipated would be relied upon by the other side. However in Yardley & Company Limited and Others v. Higson and Others (1984) Fleet Street Reports 304 the Court of Appeal, of which Slade L.J. was a member, held that non-disclosure of a material fact on the first application was not fatal to the grant of equitable relief on a subsequent occasion when the fact was disclosed to the Court. It is difficult to reconcile those two cases, but I would prefer to follow that of Yardley in that I think the Court should consider first of all whether or not the non-disclosure had been deliberate or inadvertent and secondly what was the effect of that non-disclosure. I think the Court should have a discretion and the applicant should not necessarily be barred from further relief if the circumstances warranted.

9. Counsel for the 1st Defendant relies on the failure of the Plaintiff to state the size and background of the 1st Defendant. In Thermax v. Schott Industrial Glass Browne-Wilkinson J. said:-

"As time goes and the granting of Anton Pillar orders becomes more and more frequent, there is a tendency to forget how serious an intervention they are in the privacy and rights of defendants. One is also inclined to forget the stringency of the requirements as laid down by the Court of Appeal. In my judgment the rule of full disclosure to the Court is almost important in Anton Pillar than in other ex parte applications. Since Anton Pillar orders give compulsory rights of inspection, once those inspections have taken place, the information procured from it is in the hands of the other side and the situation is irreversible.".

I

10. In the Thermax case the evidence before the judge making the ex parte order suggested that the Defendant company was a creature of three ex-directors by which they were carrying out a nefarious business whereas in fact it was a wholly owned subsidiary of Schott Class Limited which was in turn a part of the very famous group controlled by the Carl Zeiss Foundation.

11. While an illegal act is not less so because it is done by a large company it seems to me that when a judge is considering the making of an Anton Pillar order he must consider the likelihood of the Defendant concealing documents, destroying evidence and of the fact that the applicant, if granted his order, has a right to inspect all the documents and other material in the possession of the Defendant. It seems to me that the size and background of the Defendant company is always a relevant matter and should be disclosed.

12. The Plaintiff did not disclose the fact that US$40,000.00 had been paid by the 1st Defendant to the Plaintiff as funding for research and development. They also failed to disclose that the technical drawings and the work done by Armitage & Associates had been paid for by the 1st Defendant. Mr. Garland for the Plaintiff says that it is by no means clear what proportion of the US$40,000.00 went to the development of the Dial It product and that as manufacturers of the device it was only normal that the technical drawings and other research necessary for its production should be paid for by the 1st Defendant. Even so, this was information which should have been disclosed.

13. In Mr. Walton's affidavit he refers to the United States proceedings brought by the 1st Defendant and says that the injunction sought was refused. As part of the Court papers exhibited there is what purports to be a copy of an order which does just that. It appears however that this order, which is not signed, was in fact never made by the American Court and was merely a draft order prepared by the Plaintiff's Counsel. In fact, as is shown by a transcript exhibited to an affidavit of Mr. Bernard Zau the Court made an oral order which was not a refusal of the application. I am satisfied that this was not a deliberate attempt to mislead the Court but nevertheless quite clearly what was contained in Mr. Walton's affidavit was incorrect.

14. That the allegation that the 1st Defendant had sold "Dial Its" in Singapore which had not gone through the Plaintiff's channels proved to be incorrect and various telexes and other documents now produced indicate such was not the case. In particular it is submitted that these documents show that any illegal products sold in Singapore came not from Hong Kong but from the United States of America. Again, the relevant documents should have been exhibited though I can understand it is difficult to exhibit all relevant documents in a case of this complexity.

15. That the information referred to in the affidavit in support of the ex parte application that some 5,000 units had been removed from the 1st Defendant's factory proved to be incorrect when the order was executed and of the 15,000 units which were supposed to be there. Some 14,700 were in fact delivered up. The information referred to was from an anonymous informant alleged to be in the employment of the 1st Defendant. I think the Court is entitled to act on that sort of information if it so thinks fit, although it indicates the danger of doing so. I do not however think this was a material non-disclosure by the Plaintiff.

16. While there have been these matters of non-disclosure and in one case incorrect disclosure this was a complicated transaction and it would have been perhaps difficult for the Plaintiff to have filed an affidavit which covered all possible points. I think the affidavit should have covered the points which have been raised and the submission of the 1st Defendant that it was entitled to have the order discharged forthwith was not without merit. However I do not think the non disclosures and incorrect disclosures were sufficiently serious, bearing in mind all the circumstances of this case, to require that I discharge the order forthwith without considering the merits of the matter. There will therefore be no order on the Defendants summons for dismissal on that ground.

Is there a serious issue to be tried

17. There are two affidavits from Mr. Walton now before me, each of which has a substantial number of exhibits. There are two affidavits from Mr. Bernard Zau which are very substantial in size and which again contain many pages of documents. There have been lengthy arguments addressed to me on the questions of copyright and confidentiality. These arguments have been presented with the well-known ability of both Counsel engaged in this matter. I do not think there is any point in me going through those arguments and the various documents in any detail. I am quite satisfied that there is clearly a serious and triable issue between the parties on several aspects and I certainly should not attempt in any way to try the issue on the affidavits. I am therefore satisfied that the first requirement laid down in American Cyanamid Company v. Ethicon Limited [1975] A.C. 396 is present.

The balance of justice

18. I turn therefore to the question of what was until recently referred to as the balance of convenience. This phrase has however recently been disapproved by Donaldson M.R. in Francome and Another v. Mirror Group Newspapers Limited and Others (1984)l W.L.R. 892. At 898, he said: -

"What then should we do? I stress, once again, that we are not at this stage concerned to determine the final rights of the parties. Our duty is to make such orders, if any, as are appropriate pending the trial of the action. It is sometimes said that this involves a' weighing., of the balance of convenience. This is an unfortunate express. bur business is .justice, not convenience. We can and must disregard fanciful claims by either party. Subject to that, we must contemplate the possibility that either party may succeed and must do our best to ensure that nothing occurs pending the trial which will prejudice his rights. Since the parties are usually asserting wholly inconsistent claims, this is difficult, but we have to do our best. In so doing, we are seeking a balance of justice, not of convenience.".

Clearly those considerations are very much present in this case. The Plaintiff has conceived and undoubtedly has valid claims in respect of this product and no doubt does not wish that product, whether or not it bears its own name, to be on the market unless it is authorised by the Plaintiff itself. The main ground that Mr. Garland argued was that if the 1st Defendant is allowed to continue marketing and manufacturing the product the Plaintiff will have no control over its quality. Mr. Walton in his affidavit said that some 20% of the units received by his company were defective and had to be repaired by them at no cost to the final coustomer. No documents by way of letters or other material were however exhibited to support that allegation. In the Statement of Claim which has now been filed that percentage has gone up to 30%.

19. There is no dispute that the 1st Defendant is a very large company and has manufactured a very wide range of products. While there is clearly a danger that the product will not be manufactured to the standard required by the Plaintiff I do not consider it is a very substantial risk. Furthermore the 1st Defendant has undertaken that the product will not be marketed under the Plaintiff's name or logo and will bear nothing visible on it which would identify with the Plaintiff. On the other hand, the 1st Defendant had a considerable stock of the units on hand until the Anton Pillar order was executed. It has a large quantity of expensive components in a godown ready to be assembled. It has outstanding bills owing to various firms in Japan in respect of those components. It has received letters, including one from a well-known firm of solicitors, threatening action unless payment is made. It is well-known that products of this sort are novelty items ever. if in fact they are of good quality and serve a useful function. It is submitted that if immediate steps are taken it is still not too late to put the units on sale before Christmas, but that any further delay must render that impossible.

20. The 1st Defendant will keep full records and while damage to reputation is of course difficult to quantify, I do not hink it is a grave dnager here. Damages by reason of sales made by the 1st Defendant can be quantified. The Plaintiff has given an undertaking in damages and that is supported by a statement of its managing director Mr. Walton that the company has an annual turnover of US$25 million. lst Defendant has however exhibited a report from Dun and. Bradstreet which states that the Plaintiff has 17 employees and estimated annual sales of US$1½ million. I am by no means satisfied as to the ability of the Plaintiff to meet a very substantial claim for damages which I think the 1st Defendant may well have if the injunction is granted.

21. As I am satisfied that the justice of the matter requires that the application be refused. If the balance was equal I would have to consider two other matters, that is the preservation of the status quo and the merits of the case presented by each of the parties. The status quo does favour the 1st Defendant and certainly the Plaintiff does not in my view have an overwhelmingly strong case.

Decision

22. There will be no order on the Plaintiff's summons. The Plaintiff may inform any of its customers that any "Dial Its" not bearing its logo and name are not its product and it is in no way responsible for their quality. On Counsel's undertaking I also order that any "Dial It" units produced or marketed by the 1st Defendant from the date of this order shall not bear the name "Dial It" or the Plaintiff's name or logo at any place which could normally be seen by a retail customer. The same provision will apply to any booklet, guarantee, or other written material supplied with the units.

23. The costs of this application will be in the cause.

Security for costs

24. The 1st Defendant has applied for security for its costs and that is not opposed. A skeleton bill of costs has been produced and I regard the amount there as reasonable. I also have in mind the fact that this application has lasted considerably longer than what was estimated. There will be an order that the Plaintiff provides security for the Defendants' costs in the sum of $170,000.00 to the satisfaction of the Master within 14 days. All proceedings, apart from the filing of a defence, are stayed until such security is given.