HID Global Corporation v Keycorp Limited [2009] FCA 87 (13 February 2009)

Last Updated: 16 February 2009

FEDERAL COURT OF AUSTRALIA

HID Global Corporation v Keycorp Limited [2009] FCA 87

PRACTICE AND PROCEDURE – preliminary discovery – whether all reasonable inquiries have been made – whether the applicant had sufficiency of information

Federal Court Rules (Cth) O 15A r 6

Alphapharm Pty Ltd v Eli Lilly Australia Pty Ltd [1996] FCA 391 referred to
CGU Insurance Ltd and Others v Malaysia International Shipping Corporation Berhad [2001] FCA 1223; (2001) 187 ALR 279 referred to
Dartberg Pty Limited v Wealthcare Financial Planning Pty Ltd and Another [2007] FCA 1216; (2007) 164 FCR 450 referred to
Hooper and Others v Kirella Pty Ltd; Transfield Pty Ltd v Airservices Australia [1999] FCA 1584; (1999) 96 FCR 1 cited
Leighton Contractors Pty Ltd v Page Kirkland Management Pty Ltd [2006] FCA 288 cited
Malouf v Malouf [1999] FCA 710 cited
Matrix Film Investment One Pty Ltd v Alameda Films LLC [2006] FCA 591 referred to
Quanta Software International Pty Ltd v Computer Management Services Pty Ltd (2000) 175 ALR 536 cited
St George Bank Ltd v Rabo Australia Ltd and Another [2004] FCA 1360; (2004) 211 ALR 147 cited

HID GLOBAL CORPORATION v KEYCORP LIMITED
NSD 1718 of 2008

COWDROY J
13 FEBRUARY 2009
SYDNEY

IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY	NSD 1718 of 2008

BETWEEN:

HID GLOBAL CORPORATION Applicant

AND:	KEYCORP LIMITED Respondent

JUDGE:	COWDROY J
DATE OF ORDER:	13 FEBRUARY 2009
WHERE MADE:	SYDNEY

THE COURT ORDERS THAT:

1. Pursuant to O 15A r 6 of the Federal Court Rules (Cth) the Respondent give discovery to the Applicant of the documents referred to in paragraphs 1(a), (b), (c) and (d) of the application.
2. Costs be reserved.
3. The proceedings be listed for directions for costs at 9.30 am on 4 March 2009.
   

Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.
The text of entered orders can be located using eSearch on the Court’s website.

IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY	NSD 1718 of 2008

BETWEEN:

HID GLOBAL CORPORATION Applicant

AND:	KEYCORP LIMITED Respondent

JUDGE:	COWDROY J
DATE:	13 FEBRUARY 2009
PLACE:	SYDNEY

REASONS FOR JUDGMENT

1. The applicant (‘HID’) applies for an order pursuant to O 15A r 6 of the Federal Court Rules (Cth) (‘the Rules’) requiring the respondent (‘Keycorp’) to give discovery to HID of those documents identified in the application.
2. Order 15A rule 6 of the Rules provides:

Discovery from prospective respondent
Where:
(a) there is reasonable cause to believe that the applicant has or may have the right to obtain relief in the Court from a person whose description has been ascertained;
(b) after making all reasonable inquiries, the applicant has not sufficient information to enable a decision to be made whether to commence a proceeding in the Court to obtain that relief; and
(c) there is reasonable cause to believe that that person has or is likely to have or has had or is likely to have had possession of any document relating to the question whether the applicant has the right to obtain the relief and that inspection of the document by the applicant would assist in making the decision;
the Court may order that that person shall make discovery to the applicant of any document of the kind described in paragraph (c).

FACTS

3. HID is a manufacturer of secure identity solutions and contactless smartcard technology for physical access control, having its international headquarters in Irvine, California, in the United States of America. HID is a wholly owned subsidiary of ASSA ABLOY, a Swedish corporation specialising in door opening security technology.
4. Keycorp is a corporation registered in New South Wales.
5. In or about 19 July 2008 William Edward West III (‘Mr West’), the Chief Financial Officer of HID, became aware through a third party namely Mr John Dukellis of Dukellis Capital Advisory, that Keycorp was intending to dispose of its business including its smartcard business. HID wished to acquire only that portion of Keycorp’s undertaking. However, Mr West was informed that Keycorp had already entered into an exclusivity arrangement with a prospective purchaser for the whole of the business.
6. Shortly thereafter Mr Dukellis informed Mr West that Keycorp was nevertheless prepared to entertain offers for the purchase of its entire business. Since HID was keen to acquire such business in order to secure the smartcard operations, it was prepared to enter negotiations for the whole of Keycorp’s undertaking. Accordingly, Mr West instructed Mr Dukellis to enter negotiations.
7. On 1 August 2008 Mr Dukellis reported to HID that he had discussions with Mr Ken Carr, the Chief Executive Officer (‘CEO’) of Keycorp. Mr Dukellis was informed by email dated 1 August 2008 from Mr Carr that Keycorp did not wish to proceed with any negotiations. However, Mr Dukellis thereafter had a conversation with Mr West in which Mr West was informed that Mr Carr had told Mr Dukellis that the exclusivity arrangement with the prospective purchaser had lapsed due to some failure by the bidding party to perform, and that in consequence Keycorp was free to discuss the sale of only the smartcard business even though Keycorp was continuing its discussions with the original bidder.
8. On 2 August 2008 a letter was sent by email to Mr Robert Bishop, the Chairman of Keycorp, attaching an expression of interest by HID to purchase the smartcard business for the sum of $33,500,000, subject to conditions.
9. On or about 4 August 2008 Mr West travelled to Sydney accompanied by Mr Dukellis and Mr Tim Moxon, HID’s Mergers & Acquisitions Director. On 5 August 2008 they attended a lunch at a Sydney restaurant with Mr Ken Carr and Ms Melissa Letford, Keycorp’s general counsel (‘the lunch meeting’). Mr West has deposed that in such meeting he raised with Mr Carr the subject of the exclusivity arrangement which had been referred to in the email from Keycorp dated 1 August 2008. Mr West alleges he said to Mr Carr:

I thought that the exclusivity had lapsed. I don’t want to start doing due diligence and developing a bid if Keycorp is still required to give another party exclusivity.

10. Mr Carr is alleged to have responded:

Exclusivity has lapsed and is no longer an issue. We are free to do a deal with you, provided you can put together terms acceptable to us. The only issues in the way of doing a deal with HID are timing, price and certainty of terms.

11. HID claims that in consequence of such discussion, HID decided to embark upon its due diligence into Keycorp’s smartcard business so that it could then proceed to prepare a formal offer. HID engaged solicitors and accountants for this purpose and such consultants were provided access to Keycorp’s due diligence data room on 7 August 2008. Due diligence commenced on that day.
12. In the ensuing two weeks HID and its legal advisors engaged in negotiations with Keycorp concerning the terms of a possible sale agreement for the sale of the smartcard business. On 18 August 2008 Mr Moxon forwarded to Ms Letford a draft letter offering to purchase the business for $31,500,000.
13. On 19 August 2008 Mr West had a telephone conference with Mr Moxon, HID’s solicitors, Mr Carr and Ms Letford, during which Mr Carr referred to various issues which were still to be addressed. Mr West alleges that Mr Carr stated words to the following effect:

I encourage you to keep conducting due diligence and see if you can address those issues.

14. On 19 August 2008 a revised offer was forwarded by HID to Mr Bishop, the chairman of the board of directors of Keycorp. The proposed consideration of $31,500,000 remained unchanged.
15. On 21 August 2008 HID forwarded to Mr Bishop a binding letter of offer for the sum of $31,000,000 for the purchase of the smartcard business.
16. No response was received to such letter and accordingly on 22 August 2008 a further letter was forwarded to Mr Bishop relating to such offer. However, on 25 August 2008 Keycorp issued an announcement through the Australian Stock Exchange that it had entered into an agreement with an unnamed party for the sale of its smartcard business in the amount of $25,300,000. The successful purchaser was an entity known as Gemalto.

HID’s application

17. HID claims that Keycorp may have engaged in misleading and deceptive conduct in breach of the Trade Practices Act 1974 (Cth) (‘the Trade Practices Act’) by leading HID to believe that Keycorp was not bound by an exclusivity agreement whilst HID was undertaking due diligence. HID seeks to claim its costs and expenses of undertaking such due diligence; damages representing the loss of opportunity to purchase Keycorp’s smart card business; and the loss of a chance to obtain the financial benefits that might have accrued to it over time arising from the ownership of the smartcard business. HID has also foreshadowed a possible claim under the principles of promissory estoppel.
18. HID seeks limited discovery of Keycorp’s records to determine whether in fact its belief that Keycorp has engaged in conduct proscribed by the Trade Practices Act is justified. For these reasons it seeks the following documents (‘the documents’):

(a) any exclusivity agreement made after 1 January 2008 relating to the purchase or possible purchase of the smartcard business of Keycorp Limited (Keycorp), entered into between Keycorp and the party which ultimately purchased Keycorp’s smartcard business (or any related entity of that party) (the Exclusivity Agreement);
(b) all documents created after 1 January 2008 recording or referring to any lapsing, termination or breach of the Exclusivity Agreement, including any correspondence between the parties to the Exclusivity Agreement which refers to any lapsing, termination or breach of the Exclusivity Agreement;
(c) all documents created after 1 January 2008 recording any consideration of whether, at any stage, Keycorp was bound or continued to remain bound by any exclusivity arrangement pursuant to the Exclusivity Agreement, including any correspondence between the parties to the Exclusivity Agreement which refers to Keycorp being bound or continuing to remain bound by the Exclusivity Agreement; and
(d) all correspondence and other documents created after 1 August 2008 referring to or evidencing any statements or representations made to HID with respect to the existence, operation or lapsing of any exclusivity arrangement pursuant to the Exclusivity Agreement.

19. In support of its application HID submits that its belief would be confirmed if it had access to the documents,. It submits that its belief that it may have a cause of action against Keycorp is justified in view of the fact that the offer made by Gemalto which was ultimately accepted by Keycorp for its business was $25,300,000, namely $5,700,000 less than that offered by HID. HID submits that the only commercially reasonable explanation for Keycorp accepting the lower offer was that Keycorp was still bound, or believed there was a real risk it was still bound, by the exclusivity agreement with Gemalto.

Keycorp’s response

20. Keycorp opposes the application, claiming that the evidence relied upon by HID should not be accepted. Mr West was extensively cross-examined, especially in relation to his recollection of the conversation with Mr Carr said to have taken place at the lunch meeting. It was put to Mr West that the allegation that the exclusivity arrangement had been terminated was inconsistent with all relevant documentation. It was further put to Mr West that he had failed to mention in his affidavit that he had received a letter from Keycorp dated 4 August 2008. Such letter, stamped ‘draft’ and unsigned, (‘the draft letter’) stated inter alia:

Our directors do not have enough comfort in your approach, at least enough to cancel our existing strategy and we would need to resolve the above before commencing any negotiations for the sale of the Smartcard Assets. This is particularly so given we are well down the path of negotiations with another party and have given that party exclusivity, subject to a narrow fiduciary out.

21. Based upon such evidence Keycorp submits that the Court could not be satisfied that HID has reasonable cause to believe that it has or may have the right to obtain relief in the Court; that even if it were accepted that the alleged representation by Mr Carr was made, there is uncertainty whether any reliance was place upon such statement; and that HID had determined to commence its due diligence operation before the conversation at the lunch meeting, at such time when the existence of the exclusivity arrangement and negotiations between Keycorp and Gemalto was known and the effect of which was uncertain.
22. Keycorp relies upon the fact that any reimbursement of costs and expenses for conducting the due diligence and negotiations was the subject of specific provisions in the letter from HID to Keycorp of 2 August 2008, the draft offer of 19 August 2008, the revised draft offer of 20 August 2008 and the offer of 21 August 2008. In such letters it was made plain that such costs would be reimbursed by Keycorp only if the draft offer by HID was accepted. Accordingly, Keycorp submits that HID pursued a course knowing that it risked incurring its own costs if it were the unsuccessful bidder.
23. Keycorp relies upon its letter of 4 August 2008 to HID which confirmed that it had an exclusivity arrangement with the other potential purchaser and its conduct in repeatedly rejecting the draft offers made by HID was wholly consistent with its stated attitude towards HID’s offers.
24. Keycorp submits that HID was aware at all times that it was at risk of being the unsuccessful bidder for the smartcard business as both HID and Keycorp were clearly in the stage of preliminary negotiations. Keycorp submits that despite the early stage of negotiations, HID was attempting to secure exclusivity for itself in the knowledge that an exclusivity arrangement with Gemalto had already been entered into. For the above reasons, it is submitted that the Court should not accept Mr West’s statement that the exclusivity arrangements had lapsed.

FINDING

Is there reasonable cause to believe?

25. In ascertaining whether there is reasonable cause to believe that the necessary elements exist for a cause of action, the Court must determine that there is at least a reasonable cause ‘to believe that each of the elements of the relevant cause of action might be established’: see Middleton J in Dartberg Pty Limited v Wealthcare Financial Planning Pty Ltd and Another [2007] FCA 1216; (2007) 164 FCR 450 at [44].
26. Such test is objective. There is no requirement that every element of the potential cause of action in fact exists but rather that there may be entitlement to relief: see Hooper Hooper and Others v Kirella Pty Ltd; Transfield Pty Ltd v Airservices Australia [1999] FCA 1584; (1999) 96 FCR 1 at [39]; Malouf v Malouf [1999] FCA 710 at [16]; Quanta Software International Pty Ltd v Computer Management Services Pty Ltd (2000) 175 ALR 536 at [24]; Alphapharm Pty Ltd v Eli Lilly Australia Pty Ltd [1996] FCA 391; St George Bank Ltd v Rabo Australia Ltd and Another [2004] FCA 1360; (2004) 211 ALR 147 at [26]; Leighton Contractors Pty Ltd v Page Kirkland Management Pty Ltd [2006] FCA 288 at [5].
27. The foreshadowed cause of action under the Trade Practices Act is largely predicated upon the alleged conversation which took place during the lunch meeting in which Mr Carr is said to have stated that exclusivity in relation to the potential purchaser no longer existed.
28. The Court has taken into consideration the fact that such conversation is challenged and that such statement is inconsistent with the documentation and with Keycorp’s refusal to accept any of the offers for the purchase by HID of Keycorp’s smartcard business. However, there is some evidence to suggest that Keycorp may have been willing to negotiate with HID. The draft letter, having indicated that negotiations were ‘well down the path’ with the other party which had exclusivity, then invited HID to undertake a week of due diligence. The draft letter stated:

We would be willing to offer you a one week due diligence period (which could start almost immediately). Within a further 5 business days, you must confirm your price, the amount of the hold back and the period of such hold back. That price must be final, with the only variation being in the nature of ordinary working capital adjustments as at Closing. Given the stage of our existing negotiations, we would only consider an offer that included a non refundable deposit of 10% of the proposed purchase price, to ensure that we are not disadvantaged over and above our present strategy.
Further, we would expect a settlement date of 30th August 2008.

29. If exclusivity existed as at 4 August 2008 with Gemalto it is difficult to reconcile why such an invitation would have been made to undertake due diligence and to fix a possible settlement date of 30 August 2008. The draft letter was apparently intended to be relied upon, otherwise it is not possible to determine any reason for it being sent by Keycorp to HID.
30. The evidence of Mr West also establishes that in the two weeks following 5 August 2008, meetings were held between the legal advisors of HID and Keycorp concerning the terms of a possible share sale agreement relating to the smartcard business. Further, in response to HID’s draft offer of 18 August 2008 to Keycorp to establish possible terms for the purchase of the business, Keycorp’s legal advisor, Ms Letford, responded suggesting amendments to numerous clauses and concluded:

I look forward to talking with you when you have had a chance to consider the above.

31. These two facts suggest that Keycorp was willing to negotiate with HID and are, on the available evidence, impossible to reconcile with Keycorp’s claim that it was bound by exclusivity to deal only with Gemalto.
32. The Court has considered the claim by Keycorp that there is no evidence of reliance by HID upon any statement, assuming it were made at the lunch meeting by Mr Carr that exclusivity had terminated. Against such submission, the Court notes the evidence of Mr West that it was only after the assurance was provided by Mr Carr that exclusivity no longer existed that HID directed its accountants and lawyers to undertake due diligence.
33. Taking into account the above maters, the Court concludes that there is reasonable cause to believe that HID may have the right to obtain relief from Keycorp pursuant to s 52 of the Trade Practices Act.

Have all reasonable enquiries been made?

34. Keycorp submits that HID knew on 22 July 2008 of the exclusivity arrangement between Keycorp and Gemalto and that such became obvious from a press release published on 1 September 2008. It submits that HID should have made inquiries of Gemalto to ascertain whether it had any exclusive arrangements with Keycorp. Accordingly, Keycorp submits that HID has failed to make ‘all reasonable inquiries’ as referred to in O 15A r 6(b) of the Rules.
35. Keycorp submits that a letter of HID’s solicitors dated 27 August 2008 notified Keycorp of HID’s anticipated claim under the Trade Practices Act, and that no qualification or doubt existed concerning HID’s intention. Reliance is also placed upon the statements by Mr West in his affidavit to the effect that representations by Keycorp were misleading and deceptive. Based upon the facts, Keycorp submits that no basis exists for preliminary discovery. Keycorp submits that the inference can be drawn from such statements that HID was able to make a decision whether to commence proceedings against Keycorp.
36. The necessity to make enquiries from other sources was considered by Tamberlin J in CGU Insurance Ltd and Others v Malaysia International Shipping Corporation Berhad [2001] FCA 1223; (2001) 187 ALR 279 at [23]- [27]. At [25] his Honour said:

The provision does not contemplate an order where some reasonable inquiries have been made but rather where all reasonable inquiries have been made. It appears to contemplate a reasonable exhaustion of alternative sources of information and, in any particular case, involves a pragmatic balancing of considerations. The power of the Court arises after the applicant has made all reasonable inquiries and finds that there is insufficient information to enable a decision to be made.

37. There is no evidence of any attempts made by HID to ascertain from Gemalto whether the exclusivity arrangement existed. However, the question is whether it is reasonable to expect that HID would, prior to commencing litigation, inquire of Gemalto whether it held an exclusivity arrangement. That is, whether it was reasonable to expect that it would ask its competitor to provide information which relates solely to a commercial transaction made between Gemalto and Keycorp, in respect of which HID was an unsuccessful bidder.
38. The Court is not persuaded that it was reasonable for HID, a commercial competitor of Gemalto, to have made such inquiries of Gemalto concerning the existence of any exclusivity arrangement between Gemalto and Keycorp. Therefore, such an inquiry was not necessary to satisfy the first requirement of O 15A r 6(b), namely that HID make ‘all reasonable inquiries.’
39. The Court considers that any confidence exhibited by HID in its pre-trial correspondence relating to the likelihood of initiating proceedings against Keycorp is not relevant to the issue to be determined under O 15A r 6(b). The only issue is whether, having made all reasonable inquiries, HID does not possess sufficient information to institute proceedings.

Adequacy of information available to HID Global

40. Keycorp submits that HID is seeking material which will strengthen or enhance a decision to commence proceedings, rather than to provide what is reasonably necessary to enable the decision to be made, especially in relation to Category (1)(d) of the application which seeks Keycorp’s corroborative material. Such purpose would be contrary to the purpose of O 15A r 6 of the Rules.
41. Further, Keycorp submits that HID has not justified any basis upon which it is necessary for each of the categories of documents to be discovered to enable it to assist in making a decision to commence proceedings for relief under the Trade Practices Act.
42. In Matrix Film Investment One Pty Ltd v Alameda Films LLC [2006] FCA 591 at [14] Tamberlin J referred to the principle that ‘O 15A r 6 is to be beneficially construed and given the fullest scope that its language will reasonably allow, with the proper brake on any excesses lying in the discretion of the Court in the light of the specific circumstances’. However at [19] his Honour referred to the necessity for an applicant for preliminary discovery to show ‘more than a mere assertion that there is a case against a prospective respondent’. His Honour continued:

The purpose of preliminary discovery is not to produce material which will strengthen or enhance a decision to commence proceedings but rather what is reasonably necessary to enable the decision to be made.

43. In Alphapharm, Lindgren J at [50] said that it was not adequate that a party ‘hopes to be comforted in taking the decision which it already has sufficient information to enable it to take’.
44. If an exclusivity agreement in writing between Keycorp and Gemalto exists, it may contain details concerning the date or events causing its expiry. Accordingly, the existence of any such agreement would be a significant matter to HID in its determination of whether it should commence the foreshadowed litigation. Further, any correspondence between Keycorp and Gemalto which might indicate that Keycorp treats the exclusivity agreement to be at an end could also be of significance for such purpose. Any written memorandum or record, for example of a telephone conversation, between Keycorp and Gemalto relating to the termination of such exclusivity agreement in the relevant period, namely between 4 August 2008 and 25 August 2008, would serve the same purpose.
45. The Court does not regard the claim for preliminary discovery as being one designed to strengthen or enhance the decision to commence proceedings. No such decision has yet been made, although HID has grounds for believing that it may be entitled to make a claim under the Trade Practices Act and possibly under promissory estoppel. The documents are sought for the purpose of providing sufficient information to enable a decision whether to make a claim. In this respect, any documents of the kind referred to in subparagraph 1(d) of the Application could be relevant.
46. The Court is satisfied that HID does not have sufficient information to institute proceedings. The present circumstances are accordingly different to those considered by Lindgren J in Alphafarm.
47. For the above reasons, the Court grants the application for preliminary discovery, in respect of the documents referred to in paragraphs 1(a), (b), (c) and (d) of the application.
    

I certify that the preceding forty-seven (47) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Cowdroy.

Associate:

Dated: 13 February 2009

Counsel for the Applicant:	Mr Kidd
Solicitor for the Applicant:	Allens Arthur Robinson
Counsel for the Respondent:	Mr Fleming QC with Mr McGrath
Solicitor for the Respondent:	Henry Davis York

Date of Hearing:	17 December 2008
Date of Judgment:	13 February 2009