Litigation and Dispute Resolution

The non-contractual ties that bind

6 September, 2018

In the recent (22 November 2016) decision of Link 2 Pty Ltd v Ezystay Systems Pty Ltd [2016] NSWCA 317, the NSW Court of Appeal had cause to re-visit the test of whether information is confidential and the meaning of a restraint against using certain confidential documents.

Link 2 Pty Ltd (Link 2), the first appellant, owns and operates a student accommodation business. Mr Greg Riches, the third appellant, is the sole director and secretary of the company.

Ezystay Systems Pty Ltd (Ezystay), the first respondent, also provides student accommodation services. Prior to the establishment of Link 2, Mr Riches was a director and shareholder of Ezystay and various other companies in the Ezystay group.

Ezystay commenced proceedings in the Supreme Court of NSW alleging, amongst other things, that Mr Riches had used and/or copied Ezystay’s confidential information for the benefit of Link 2. The confidential information identified including documents referred to in the proceedings as the ‘Business Manual’ and ‘Systems Manual’ (Manuals). The evidence established that Mr Riches had retained copies of the Manuals (he said “inadvertently”) subsequent to execution of the Deed of Settlement governing his exit from the Ezystay group.

Ezystay was largely successful at first instance before Bergin CJ in Eq.  Pursuant to the orders made by her Honour, the appellants were prohibited from directly or indirectly using or copying the Manuals or documents derived therefrom (Permanent Injunction).

The appellants sought the leave of the NSW Court of Appeal to challenge the making of the Permanent Injunction. They contended that the primary judge erred on various grounds, including in finding that the Manuals were confidential.

Effect of the Permanent Injunction

The relevant question as to whether the appellants required leave to bring the appeal was whether there was a realistic prospect that the appeal would change their wealth by more than the monetary threshold ($100,000). If not, leave was required.

The appellants submitted that that this question should be answered in the affirmative on the basis that if the Permanent Injunction precluded them from using any of the practices or procedures described in the Manuals, then there was a “real and substantial risk” that Link 2 would not be able to operate its student accommodation business at all (which generated revenue of around $1 million and made a profit of around $90,000 in the past financial year) and would be insolvent.

The Court of Appeal (Ward JA; with whom Bathurst CJ and Leeming JA agreed) rejected this submission as follows (at [97]-[98]):

“… the difficulty I have with the appellants’ submission as to the realistic worth or value of the issue raised in their challenge to the terms of [the Permanent Injunction] is that nothing in that order is addressed to the question of what practices or procedures may be adopted in the provision of student accommodation by Link 2 in the future. Rather, it is addressed to the use or copying of certain business documents or documents (derived) from them.

To take a simple example, it cannot seriously be suggested (nor do I understand the respondents to be suggesting) that if Link 2 provides weekly cleaning of the accommodation premises this would be a use or copying of the Manuals …”

The Permanent Injunction would, for example, restrain the appellants from having “physical reference” to Ezystay’s confidential documents when compiling their own documents (at [146]).

In the circumstances, the Court of Appeal was not persuaded that the commercial effect of leaving the Permanent Injunction as presently framed “would be the potential loss of an income producing business (let alone the inevitable loss of such a business)”. Accordingly, leave to appeal was required.

The Court of Appeal decided that leave to appeal should not be granted – including for the reason that the Permanent Injunction as it stood did not give rise to a substantial injustice to the appellants. It went on to express its views on the various grounds of appeal, including on the question of whether the Manuals contained confidential information.

Did the information have the necessary quality of confidentiality?

In Wright v Gasweld (1991) 22 NSWLR 317, Kirby P referred to “the spectrum which runs between information which is:

(i)         Publicly available or trivial;
(ii)        Common to a particular trade or calling even if not publicly known;
(iii)       Confidential information properly so called;
(iv)       Secrets that attract equitable protection whether or not there is a contractual agreement

At first instance, Bergin CJ in Eq noted that the Business Manual “contains the model (processes and steps) pursuant to which Ezystay operates its business. … It is a gathering together of steps to be taken within the business process which (it would be hoped) if followed would give Ezystay a competitive edge over other businesses in the same market.” Her Honour also noted that “there are some aspects of the contents of the Business Manual, for instance, the Welcome Letter and the Departure Letter that cannot on their own be confidential information because they are provided to the students on arrival and on departure respectively … However that does not mean that the Business Manual cannot be said to be confidential”. In all the circumstances, including that access to the document was restricted to certain senior persons within the group and that Ezystay had expended time and cost in putting together the detail of the document, her Honour concluded that the Business Manual  was confidential.

As for the Systems Manual, Bergin CJ in Eq noted that this had been prepared by Mr Riches with the assistance of others for submission to the Sydney College of English. It had four sections entitled “Introduction to Ezystay”, “Accommodation”, “Terms and Conditions” and “Operations and Procedures”. The appellants submitted that the document simply provided a broad overview of the services provided by Ezystay, and that it was designed to be in the nature of advertising. The appellants further submitted that the information in the Systems Manual fell into categories (i) and (ii) in Wright v Gasweld. Her Honour stated: “There is no doubt that the Systems Manual includes material referring to attributes of Ezystay’s business of which a person could become aware upon staying in Ezystay’s accommodation. Although it includes reference to these attributes, skill and work has obviously gone into compiling it and it appears to have been in preparation for a tender for the business of a prospective client”. Her Honour concluded that the Systems Manual also contained confidential information.

Views of the Court of Appeal on confidentiality of Manuals

After reviewing the reasoning of the primary judge as summarised above, the Court of Appeal stated at [113] that (emphasis added):

The appellants employed a veritable thesaurus of terms to describe what they contend was the banality of the information claimed by the respondents to be confidential. However, the real issue … is whether skill and ingenuity were used in the compilation of the Manuals so as to confer confidentiality on the finished product notwithstanding the commonplace nature of much of their contents.”

The Court of Appeal referred at [124] to the following statements of Campbell JA in Del Casale v Artodemus (2007) 73 IPR 326 (emphasis added):

… information is “of a confidential nature” if it is not “public property and public knowledge”, or if it is “constructed solely from materials in the public domain”, to which “the skill and ingenuity of the human brain” has been applied. This is a fairly undemanding test”.

The Court of Appeal concluded at [130] that had it been necessary to determine, the primary judge did not err in concluding that the compilation of information embodied in the Manuals “involved a sufficient degree of skill and ingenuity to meet the (fairly undemanding, according to Del Casale) test required in order to make the Manuals confidential”. The Manuals were found to be confidential “as a compilation of the information, not because much of them was confidential if taken alone” (at [143]).

Take-home points

  1. The confidential quality of information does not depend on its being in the nature of a trade secret. The test is less demanding than that.
  2. The fact that much of the information in a document is publicly available or common knowledge is no impediment to a document being confidential, provided it can be said that the maker has used “skill and ingenuity” in bringing the document into being.
  3. A restraint against using and/or copying certain confidential documents is not the same as a restraint against using the ideas and information contained with the documents. The former will not prohibit the creation of future documents ‘from scratch” that incorporate the same or similar ideas to those contained in confidential documents.

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