Re Acryline Paints and Membrane Pty Ltd v Raymond Brooks and International Liquid Plastics Pty Ltd [1990] FCA 269 (2 August 1990)

FEDERAL COURT OF AUSTRALIA

Re: ACRYLINE PAINTS and MEMBRANE PTY LTD
And: RAYMOND BROOKS and INTERNATIONAL LIQUID PLASTICS PTY LTD
No. WA G79 of 1990
FED No. 420
Trade Practices

COURT

IN THE FEDERAL COURT OF AUSTRALIA
WESTERN AUSTRALIA DISTRICT REGISTRY
GENERAL DIVISION
French J.(1)

CATCHWORDS

Trade Practices - misleading or deceptive conduct - breach of implied terms of contracts - breach of duty of confidence - manufacture and sale of heat insulating paint - secret formula purchased by applicant - whether serious case to be tried - balance of convenience - injunction granted.

Trade Practices Act 1974 s.52

Bullock v The Federated Furnishing Trade Society of Australasia (No. 1) (1985) 5 FCR 464

HEARING

PERTH
2:8:1990

Counsel for the applicant: Mr M. Odes

Solicitors for the applicant: Messrs. Parker and Parker

Mr R. Brooks appeared on behalf of himself and the Second Respondent.

ORDER

Upon the applicant undertaking to pay to any party adversely affected by the interlocutory injunction such compensation (if any) as the Court thinks just, in such manner as the Court directs.
1. Until the determination of the action or further

order the first respondent and the second respondent
whether by itself, its directors, officers, servants or
agents be restrained from manufacturing, causing to be
manufactured, offering for sale, selling or otherwise
dealing in trade or commerce with Specialised Paint made
in accordance with the Insulpaint formulae or any of them
as defined in the statement of claim or the Insulpaint
formulae varied by the use or non-use or choice of
thickening agents or extended fillers unless such
variation or variations constitute a substantial
departure from the formulae.
2. Until the determination of the action or further
order the first respondent be restrained without the
licence, authority or consent of the applicant from in
any way inducing, aiding or abetting the second
respondent or any person whatsoever to manufacture, cause
to be manufactured, offered for sale, sell or otherwise
deal in trade or commerce with Specialised Paint made in
accordance with the Insulpaint formulae as defined in the
statement of claim or the Insulpaint formulae varied by
the use, non-use or choice of thickening agent or
extended fillers unless such variation or variations
constitute a substantial departure from the formulae.
3. Until the determination of the action or further
order, the first respondent and the second respondent
whether by itself, its directors, officers, servants or
agents be restrained from infringing the copyright of the
applicant in the Acryline Product Data Sheet as defined
in the statement of claim by reproducing, publishing
and/or adopting or authorising the reproduction,
publication and/or adaptation of the Acryline Product
Data Sheet or a substantial part thereof.
4. Liberty to the applicant to apply on the question of
the provision of information relating to the manufacture
of Bagray No. 1.
5. Liberty to the parties to apply on 48 hours notice
to vary or discharge the injunction.
6. The costs of the motion be costs in the cause.

Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

DECISION

Between 1976 and 1985 Raymond Brooks developed a formula for the manufacture of a heat insulating paint known as "Insulpaint". In 1985 he applied for patents for the formula in Australia and internationally. The abstract of his international application lodged in the name of Tihana Pty Ltd described the invention in the following terms:

"Paints and painting compositions, especially
those having insulation properties, in particular thermal
insulation. The present invention provides for the
addition to a hardenable base, of silica, or bagasse or a
combination of both, as well as a method of production of
the coating composition. Preferable the hardenable base
will form a high build coating when dried or hardened."

In 1986 Acryline Limited was incorporated in New South Wales to acquire this and other formulae developed for the manufacture of specialised paints and membranes. Brooks was a director of that company. He was also and has been since 25 June 1985, the Managing Director and major shareholder of International Liquid Plastics Pty Ltd ("ILP").

2. On 17 March 1988, NZI Capital Corporation Limited, acting under a registered equitable mortgage, appointed receivers over Acryline's assets and undertakings. On 5 August 1988 Acryline's receivers sold its assets to Lindau Pty Ltd, a company formed in New South Wales, which later changed its name to Acryline Paints and Membranes Pty Ltd ("Acryline Paints"). The assets included:

"the intellectual property relating to the Vendor's
business which means and includes all the know-how,
expertise, formulations, information, patents, trademarks
(whether at common law or registered), trade secrets and
manufacturing and application processes relating to
paints and membranes owned by the Vendor and the
Assignors whether used in carrying on the Vendor's
business or otherwise..."

Also among the assets sold under the Sale Agreement were patents and trademarks set out in a schedule to the written agreement, documents and records providing information relating to the processes and products used in carrying on the vendor's business, the copyright subsisting in the various materials and any other confidential information relating to the processes of paint and membrane manufacture and application used by Acryline Limited. Brooks was a party to the agreement as one of a group comprising Tihana Pty Ltd, Acryline Paints and Membranes (Hong Kong) Ltd and himself, designated in the recitals as "the Assignors". Clause 3 which specified the assets being sold including the intellectual property, provided that the "Vendors and Assignors have agreed to sell..." the various classes of property there set out. Clause 8 provided:
"8(a) The Vendor and the Assignors agree to assign to

the Purchaser on completion the whole of the right, title
and interest in and to the intellectual property and to
execute such forms of transfer or assignment as may be
required by the Purchaser to effectively transfer and
assign the intellectual property, particularly the
patents and trademarks specified in Schedule 4, together
with such other of the intellectual property as is
capable of transfer by delivery.
(b) The Vendor shall, on completion,
procure the delivery to the Purchaser of the said
forms of transfer or assignment required by the Purchaser
pursuant to clause 8(a)."

3. According to William Robinson, the Chairman of Directors of Acryline Paints, negotiations began about the same time with Brooks with a view to an agreement under which ILP might manage the business of Acryline Paints and ILP or Brooks acquire equity in the company. These negotiations proved to be protracted with the major stumbling block being the equity component. However while they were proceeding Brooks agreed that for the time being ILP would manage and conduct the Acryline Paints business. The agreement, according to Robinson, was partly in writing, partly oral and partly by conduct and was concluded between Brooks and himself. It provided in substance that ILP and Brooks as an employee of ILP, were to conduct and manage the business of Acryline Paints for a remuneration of $60,000 per annum. Brooks would be actively involved in overseeing its day to day operation and the manufacture and sale of Insulpaint from Acryline Paints' Sydney Office. He took possession of the assets which had been sold to Acryline Paints and operated the business from August 1988 until July 1989. That operation required the manufacture of paint in accordance with the Insulpaint formula and the sale of such paint ordered by customers of the business. Celtite Australia Pty Ltd which had, prior to the sale agreement, manufactured Insulpaint for Acryline Limited, continued to do so in accordance with the Insulpaint formula on orders placed by Brooks on behalf of Acryline Paints.

4. ILP was paid $60,000 per annum for Brooks' services until the end of July 1989 when he wrote on behalf of ILP tendering its resignation as manager. The resignation was accepted but Brooks was engaged immediately thereafter as a technical consultant on terms confirmed in a letter dated 4 October 1989 from Larry Circosta on behalf of Acryline Paints. The terms of the engagement, according to Robinson, included a weekly payment of $500 plus a commission to be based on Insulpaint sales. The weekly payment was not mentioned in the letter. It was paid, according to Robinson, from August 1989 until 12 December 1989.

5. Brooks' evidence of the arrangements between ILP and himself and Acryline Paints differed somewhat from Robinson's. As early as June 1988 he had been negotiating with Robert Martin of Accord Investments, a former director of Acryline Limited who, he said, was acting on behalf of the Perth based businessmen, including Robinson, who ultimately purchased the Acryline assets through the company initially known as Lindau Pty Ltd. Martin had told him that if his group were successful in its bid to purchase the assets of Acryline, it would need his services. He said that he agreed with Martin that he would provide his services to the company in consideration for a $60,000 annual consultancy fee payable to ILP together with 20% of the listed shares, a directorship and reimbursement of car expenses. The new company was to have, he said, sufficient funds to allow further research and development on its product and to develop a sales program. This agreement was never put in writing but sealed with a handshake between himself and Martin.

6. Brooks said he agreed to the sale because of the terms of the agreement which he understood he and Martin had reached. He commenced operating the Acryline Paints business at leased premises in Sevenhills in July 1988. In August 1988 he met Robinson who discussed the objects of the company with him and asked for his advice and ideas and requested he submit a business plan. At the end of October 1988 he sent a facsimile to Robinson in Perth requesting confirmation of the terms of the agreement with Martin and received a return facsimile informing him that the only matter that had been agreed to was his remuneration. The following month he flew to Perth where a meeting of Acryline Paints' shareholders was held. He told the shareholders that he would wait in the foyer of their offices for 15 minutes and if they had not within that time, decided to accede to his request for the agreed terms, he would cease to act as consultant. About 5 minutes later, he said, two shareholders, Bennett and Urquhart, told him that the four points had been agreed to and that he would receive written confirmation within seven days.

7. On 11 November 1988 he was sent a letter by Robinson setting out the terms on which he would be offered a 20% equity in the business. That required, among other things, a payment of $100,000 and a pro-rata contribution to additional working capital as required. This was not consistent with Brooks' understanding of the agreement that had been reached with Martin. According to his evidence, he battled with Robinson over the equity question for the next six months, making himself ill in the process. On 31 July 1989 he resigned. Curiously his letter of resignation made no reference to his differences with the company. It was written on ILP letterhead and said:

"This letter will serve to inform you of our
decision to resign from the management of your company
Acryline Paints and Membranes Pty Ltd.
The decision to resign our services is due to the
continued ill health of our principal Mr Raymond Brooks
who has been advised by his doctors to take a six month
leave of absence.
We wish you success in your business."

8. About a week or so after his resignation he suggested to Larry Circosta, the Sydney Manager, that he would be prepared to advise Acryline Paints on technical matters for a payment of 20 cents per litre of all paint sold. Circosta wrote to him on 4 October 1989 in the following terms:

"Further to the resignation as management
consultants to Acryline by your company International
Liquid Plastics Pty Ltd and our subsequent conversations,
we are please (sic) to confirm the following:
1. Effective 1 August 1989, a consultancy fee will
be paid on a monthly basis as further described below.
2. The fee will be based on a calculation of 20
cents per litre on paint sold during the month and
therefore paid wherever practical before the end of the
following month.
3. The fee will be based on all existing paint
product handled while in the product range of Acryline
and on all paint product developed by your company which
is subsequently manufactured and sold on an exclusive
basis by Acryline.
4. The fee will be payable while Acryline staff have
reasonable access to Ray Brooks to assist in any areas
that may be considered of commercial importance to the
Acryline Business.
5. The agreement shall be considered terminated
should either party give notice of termination in writing
within 90 days of that required date.
We thank you for your past efforts and look forward
to a continued and mutually rewarding association."

9. In November 1989, on Robinson's evidence, Pauline Dudley, Brooks' former secretary still employed by Acryline Paints in its Sydney office, told him that Brooks on behalf of ILP, had placed orders with Celtite for paint to be manufactured according to the Insulpaint formula. This was confirmed on 23 November 1989 in telephone conversations he had with Michael Marciniak and Lesley Grantham of Celtite, and again when he met with Grantham in his office on 18 December 1989. On the latter occasion Grantham showed him an order form and invoices reflecting an order placed by ILP on 6 September 1989 for batches of A500 insulating paint. The reference "A500" is one used by Acryline Paints for one of the Insulpaint formulae. Attached to the invoices were "batch notes" containing the A500 formula used. This, according to Robinson, was the procedure followed by Celtite when manufacturing specialised paint for Acryline Paints using Insulpaint formulae.

10. Again on 22 December 1989 he was informed by Grantham that Brooks had in that month sent to Celtite on behalf of ILP, an order for the manufacture of a product referred to by Brooks as "Insultec", which order was accompanied by a written formula differing in only certain minor respects from the Insulpaint formula previously referred to. As to that formula Robinson said that it differed from the Insulpaint formula only in that it contained Cellosize, which is a common thickening agent for water based paints and lacked Q Cells which are extended fillers for paints. He was told by Grantham and believed that the paint manufactured in accordance with the Insultec formula was substantially identical to that manufactured in accordance with the Insulpaint formula. These matters and other references to communications between Grantham and Robinson were confirmed by a separate affidavit sworn by Grantham on 20 July 1990. Pauline Dudley swore a similar confirming affidavit on 17 July.

11. Grantham told Robinson that the paint manufactured by Celtite under the September order was manufactured in accordance with the Insulpaint formula and provided to ILP in cans with the name "Acryline Insulpaint" on the label. There is evidence to support the inference that the paint was sold on ILP's own account. Brooks was said to have shown Pauline Dudley a cheque for payment of $25,000 made out to ILP for paint provided by it to a firm called Heat and Graffiti. The money was never received by Acryline Paints and it emerged in March 1990 that Heat and Graffiti had stocks of paint under the description "Acryline Insulpaint - Batch 1272". This was the batch number on one of the Celtite batch notes relating to the September order. Robinson said he wrote to Brooks about this on 23 November 1989 but received no reply. The Insultec ordered in December was said to have been made by Celtite substantially in accordance with the Insulpaint formula subject to the variation already mentioned in relation to the thickeners and the non-use of extended fillers. This paint was forwarded directly to Centurion Paints in Darwin and the Wilhamina Club at Rooty Hill in New South Wales. Centurion had been a client of Acryline Paints until September 1989. Robinson says that ILP through Brooks continues to sell paint under the names Insultec 1 and Insultec 2. The consultancy agreement was terminated on 21 December 1989 by Robinson. At that time he had also received advice from Pauline Dudley that Acryline Paints was losing clients to Brooks in New South Wales. A further report to like effect was sent on 2 July 1990.

12. Letters of demand were sent to Brooks and ILP by Acryline Paints' solicitors on 3 May 1990 seeking various undertakings, but none were given.

13. Robinson produced a Product Data Sheet for Insultec used by ILP. A copy was exhibited to his affidavit along with the Acryline Paint Product Data Sheet for Insulpaint. As to that, it is sufficient to say that their similarity of language and format supports the inference that the ILP document was copied from the Acryline Paints document. Evidence was also given of the importance of Insulpaint sales in the overall product sales of Acryline Paints. Between August 1988 and June 1989 they accounted for about 70% of total sales. Robinson contended that should Brooks or anyone else be allowed to continue to manufacture and sell Insulpaint under the name "Insultec" and/or to use the Insulpaint formula, the goodwill and reputation of Acryline Paints would be seriously and irrevocably damaged and Acryline Paints threatened with closure. The company, he said, is seeking smaller and cheaper premises as a result of the substantial drop in their sales of Insulpaint.

14. Brooks maintained on the other hand that he had formulated Insultec as a new heat reflective coating in September 1988 and proceeded to market it under that name. On 10 May 1990 he had lodged a patent application, PK0064, in respect of the formula. Some 640 litres was manufactured and purchased from Celtite on 25 January 1990 and a further 440 litres on 16 February 1990. He denied that he had at any time ordered Insulpaint formula to be manufactured for himself or ILP by Celtite. He had made an arrangement with Michael Marchiniak, a chemist employed by Celtite, for that company to manufacture additional products for ILP. He gave Marchiniak formulae for those additional products. Celtite had been manufacturing for ILP since 1987. Brooks regarded himself as a paint manufacturer in his own right, with his own company products. In relation to the order placed on 6 September 1989 for batches of A500 insulating paint, he said that the use of the term "A500" was simply a matter of habit as at that time he had not decided on a name for his new formula. For this reason he used the words "Insulating Paint". He could not account for the batch formula exhibited to Robinson's affidavit along with his order form and the Celtite invoice. He was unable to comment on the claim that paint shipped on his behalf by Celtite bore the label "Acryline Insulpaint" because he did not handle the shipment. It was sent directly from Celtite's factory to ILP's customer in Brisbane. He agreed that he had supplied Heat and Graffiti with insulating paint as the result of an order placed with ILP by the managing director of that company. He also agreed that he had placed an order for Insultec with Celtite in December 1989. That was the name he had applied to his new product, being short for "Insulating Technology". The formula for his product, he said, was submitted to Marchiniak of Celtite in September 1989.

15. Brooks claimed that all the membrane type paints use common raw materials. The major difference between Insulpaint and Insultec was in special additives, which are the subject of his patent application. He produced a report by Mr W.L. Anderson, a consultant chemical engineer, with apparently substantial experience in the paint industry. Anderson's report purported to "compare and contrast" "two paint formulae", copies of which had been given to him by Brooks on 25 July 1990. It appears from this that Anderson was simply referred to written formulations and asked to compare them. One of the formulations was said to relate to Insulpaint, the other to Insultec. Anderson concluded, on the basis of that information that they were "two basically different coatings". Referring to Grantham's comment to Robinson that the Insultec paint manufactured by Celtite for ILP was made substantially in accordance with the Insulpaint formula, Brooks said:

"As Celtite are completely unaware of the secret
ingredients in these insulating coatings, this is
obviously a wrong statement for Granthem (sic) to make."

16. He claimed that many years of research experience had gone into all of his paints. He had never used the Insulpaint formula. It was at least 4 years old and was substantially superceded by new technology. As to the Product Data Sheets, he said they were composites of other companies' sheets. This is a common practice in the industry and he was totally unaware that he was doing anything wrong. He indicated that he will rewrite the data sheets, although the information contained in them will remain basically the same.

17. As to the damage done to Acryline Paints, Brooks said that the total sales of Insultec from September 1989 to June 1990 were about $20,000. Acryline Paints' losses he attributed to its own incompetence and adverse weather conditions. He rejected the contention that Acryline Paints would suffer from his continuing activities. And as to the effect of the grant of an injunction on ILP's activities he said:

"If an injunction were granted to the Plaintiff, not
only would this put ILP out of business, but it would
also put at least another 20 small businesses into
serious jeopardy as well, as their companies have been
built around Insultec. ILP and the small businesses have
already been extensively harmed by the actions of
Robinson acting on behalf of Acryline Paints which
effectively stopped our production from February to July
1990."

The Causes of Action

18. The applicant's statement of claim recites the sale agreement to which Brooks was a party and pleads an implied term that:

"...neither Brooks nor companies under his control
would, after the execution of the Sale Agreement, for
their own benefit or profit, use, exploit or otherwise
deal with the intellectual property rights sold to
Acryline Paints pursuant to the Sale Agreement without
the consent or authority of Acryline Paints."

The interim service agreement made in August 1988 is also pleaded and an implied term that:

"(a) neither ILP nor Brooks would use, exploit or
otherwise deal with the Insulpaint Formulae and other
intellectual property rights sold to Acryline Paints as
aforesaid for their own benefit or profit;
(b) neither ILP nor Brooks in conducting and
managing the said business would at any time act in bad
faith and contrary to the interests of Acryline Paints.
(c) neither ILP nor Brooks would make a secret
profit during the duration of the Service Contract.
(d) neither ILP nor Brooks would deal with or in
any way use any trade secret or confidential information
belonging to Acryline Paints other than for the purpose
of performing the Service Contract."

The Insulpaint formulae were said to be unique among formulae for insulting paints manufactured or sold in Australia or elsewhere and to constitute a trade secret or confidential information.

19. By placing orders for specialised paint made in accordance with the Insulpaint formulae with Celtite Australia and taking delivery of that for his own benefit and profit and that of ILP, Brooks was said to have been in breach of the implied terms of the sale agreement and also of the service contract. And by allowing the Insulpaint formulae to be copied, used or exploited in trade or commerce without the consent or authority of Acryline Paints he was said to be acting in breach of a duty of confidence to that company arising out of the sale and service agreements respectively. And the orders placed with Celtite and the sales made to paint merchants and members of the public are said to have involved representations by ILP that it was acting for the owner of the Insulpaint formulae and had authority and consent of the owner to manufacture those paints. It was also said to be representing that it owned the Insultec formula. The various representations are said to have been misleading or deceptive and to have constituted a contravention of the provisions of s.52 of the Trade Practices Act 1974 by ILP. There was also a claim for Brooks failure to deliver up and disclose certain information and know-how relating to the manufacture of Bagray No. 1, a substance used in the preparation of Insulpaint. As to that it should be noted that during the proceedings Brooks indicated that he was at all times willing to make that information available to Acryline Paints. Other representations were alleged arising out of Brooks' activities and infringement of Acryline Paints' copyright in the Acryline Product Data Sheet.
The Criteria for the Grant of Interlocutory Relief

20. The discretion of the Court in deciding whether or not to grant interlocutory injunction relief is regulated by the requirements that the applicant must show a serious question to be tried and that the balance of convenience favours the order sought. The two factors are interdependent. An apparently strong claim may lead a court more readily to grant an injunction when the balance of convenience is fairly even. A more doubtful claim which nevertheless raises a serious question to be tried may attract interlocutory relief if there is a marked balance of convenience in favour of it - Bullock v The Federated Furnishing Trade Society of Australasia (No. 1) (1985) 5 FCR 464 at 472. In the exercise of that discretion the usual caveat should be entered that findings of fact made for the purposes of the grant of interlocutory relief are provisional based upon evidence which may in some cases be incomplete or which might not be admissible at trial.

21. The present case is one in which there is some significant conflict and confusion of evidence on the question of the precise arrangements between Acryline Paints and Brooks from time to time. More importantly, there appears to be a sharp conflict in the evidence on the nature of the paint now being manufactured and marketed by ILP and the extent to which Brooks and ILP were responsible for the particular formulation applied by Celtite in response to the September and December 1989 orders. That conflict will only be resolved definitively at trial. For present purposes it is sufficient to say that I am satisfied that there is serious case to be tried on the question of the alleged breaches of contract and duty of confidence. On the papers the case could not be dismissed as a weak one although in so saying, I am conscious of the fact that Mr Brooks appeared for himself and for his company without the benefit of legal assistance and, apart from some informal advice received in Sydney, suffered the usual burdens of the unrepresented litigant trying to communicate his case with clarity to the Court.

22. As to the balance of convenience, I am satisfied that on Brooks' contentions an injunction restraining him from manufacturing or selling Insulpaint or minor variations thereof would not substantially interfere with his business as he claims he has not manufactured or sold that product which he regards as superceded. Nor should there be any inconvenience from a restraint imposed in relation to the reproduction of the Acryline Product Data Sheet as he has stated his intention in any event to rewrite the data sheet used by his company. As to the provision of information relating to the manufacture of Bagray No. 1, Brooks has indicated from the witness box that he is prepared to make that information available to Acryline Paints. Given that the applicant seeks a mandatory injunction in relation to this and one expressed in fairly wide terms, I think the better course is to allow Brooks the opportunity to tender the information voluntarily. If this does not result in satisfaction from Acryline Paints point of view, it will have liberty to apply on that question.

23. The principal interlocutory relief sought on the motion would restrain, inter alia, the manufacture or sale "Specialised Paint made in accordance with or substantially in accordance with the Insulpaint formulae as defined in the Statement of Claim". In my opinion the words "substantially in accordance with" leave too much room for uncertainty on the part of the respondents as to the state of their obligations. In my view and having regard to the minor variation which is alleged by Acryline Paints to have existed between the Insulpaint and Insultec formulae, I consider that an injunction can and should be framed to cover those differences and differences of a like character. The respondents will be enjoined from the manufacture or sale of paint produced according to the Insulpaint formulae or those formulae varied by the use or non-use or choice of thickening agent or extended fillers. It may be that there will be a case where the choice of thickening agent or filler would constitute a substantial departure from the formulae. And there will be a qualification to exclude such substantial departure from the operation of the injunction. However in that regard the respondents take the risk of contempt proceedings if they endeavour to market an Insulpaint formula varied only in relation to those components.

24. For these reasons the orders will be as set out in the Minute herewith.