Gun case lobs confidentiality grenade on NDA breaches
The recent decision of the Queensland Supreme Court in Madritsch KG v Thales Australia has thrust the humble NDA and its oft-used but seldom-negotiated and seldom-considered provisions into the spotlight in Queensland. The case confirms that breaches of NDAs will carry real consequences.
This case concerns a rifle used by the Australian Defence Force and other armies around the world called the Austeyr. Perhaps inspired by the movie Rambo III, released in 1988, the rifle has since been manufactured with an accessory rail below the barrel on which a grenade launcher may be mounted (@ ). However, there was a problem with the gun in that when a grenade was launched in this way, it would cause the gun to stop firing until the operator re-cocked it (@ ).
In late 2010/early 2011, the Commonwealth of Australia selected the defendant, Thales, to develop a new model of the Austeyr which did not suffer from the above problem (@ ). Thales apparently had an exclusive supply arrangement with the Commonwealth (@ ). Prior to this, the Commonwealth had engaged Thales to develop solutions to the problem and although Thales had undertaken some work on this, none of it seemed to work and Thales was looking for other options.
One plaintiff, Madritsch, is an Austrian (not Australian) company which manufactures and supplies variants of the Austeyr around the world. Since 2008, it has also supplied a grenade launcher attachment and around that time it became aware of the above problem with the gun (@ ). It subsequently developed "kits" that could be supplied to users of the guns to fix the problem (@ ). Madritsch used a local agent in Australia, the other plaintiff, Nioa.
In February 2011, Nioa introduced Thales to Madritsch and made Thales aware of the Madritsch "kits" that would solve the problem with the gun (@ ). As is normal in technology contract negotiations, Madritsch insisted on there being an NDA in place prior to revealing any of its confidential information. A tripartite NDA between the parties was entered into on 8 June 2011 (@ ) - the key terms of which are explored below.
Reps from Thales subsequently requested 6 sample kits for Thales to fit and test to the rifles it was manufacturing (@ ). It appears that Madritsch was concerned that the final negotiated terms of the NDA did not adequately protect its intellectual property and confidential information to a level where it would be comfortable to supply the kits (@ ), so Thales subsequently sent an "Intentions Letter" to Madritsch and Noia which stated:
"If, upon testing of the modified weapons, the Madritsch Solution is technically and commercially suitable, then it is Thales Australia’s intention to enter into a technology licence arrangement with NIOA/Madritsch for access to and commercialisation of the Madritsch IP. If the Madritsch Solution is not suitable for our purposes, then Thales agrees to return all components to Madritsch, and to not use the Madritsch IP for any purpose whatsoever."
Following this, the parties entered into a separate NDA dated 19 August 2011 (@ ). The key terms of the NDA were all typical terms which are encountered in NDAs every day. These included (@ -:
a definition of "Purpose" being discussions in relation to the modification of the gun in order to overcome the problem of the bolt unlocking upon firing of an underslung grenade launcher;
a definition of "Proprietary Information" being any information or data in whatever form, nature or media including technical, commercial information, test results, improvements, models, specifications and intellectual property (etc);
time-limited (five years) obligations to keep Proprietary Information confidential and only disclosed to a party's reps who have a need to know it and solely for the Purpose;
a time-unlimited obligation not to reverse-engineer/disassemble another party's Proprietary Information;
an obligation to disclose to the other party any breach of the NDA; and
a boilerplate 'entire agreement' clause which had the effect of superseding the original NDA.
The NDA was governed by the laws of New South Wales, where Thales's factory was located.
Following entry into this NDA, Madritsch released the test kits to Thales along with detailed manuals and specifications (@ ). The kits came in unassembled form, which allowed Thales to examine them carefully and identify the alterations made by Madritsch [@ ). Thales then assembled the kits and tested them on the guns. This revealed that the Madritsch kit completely fixed the problem (@ ).
Following positive feedback from Thales to Madritsch/Noia, a draft licence agreement was sent to Thales with a very high licence fee and royalty structure payable by Thales. In evidence, representatives from Thales said they found the proposed licence fees to be "farcical".
The evidence reveals that Thales then continued on with its internal development of its own solutions to the problem with the guns. This was because Thales was not prepared to pay the high licensing fees and royalties requested by Madritsch/Noia.
Both Thales and Madritsch attended the Paris trade show in June 2012 and Thales was displaying a modified Austeyr gun. A rep from Madritsch inspected the gun on display and became concerned that Thales had incorporated the Madritsch solution into the gun. At this time, Thales had not returned the test kits nor had the parties entered into any licensing agreement - all they had at this point was the NDA and the Intention Letter (@ ).
Madritsch and Noia brought an action for breach of contract, breach of duty of confidence and misleading and deceptive conduct in contravention of s 18 of the Australian Consumer Law.
Was there a breach of the NDA by Thales?
The Court deduced that Thales's miraculous advancement in its design of the gun in time for the Paris trade show was as a result of leveraging information which came to it as a result of the information and kits provided by Madritsch in accordance with the NDA and the Intention Letter.
The evidence established that the individuals within Thales who were aware of the information provided by Madritsch were directly involved and supervised the development of Thales's own "internal" fix to the problem with the guns. This was found to be a breach by Thales of the obligation under the NDA not to use the Madritsch Proprietary Information for any purpose other than the discussions which precipitated the NDA in the first place (@ -). Thales did not notify Madritsch of this breach, which itself was a breach of the NDA (@ ).
However, Madritsch did not succeed in establishing that Thales:
had disclosed the confidential information to persons who did not have a need to know it (@ )
copied the confidential information (@ )
reverse-engineered the Madritsch design (@ -)
Thales's defence was that the information relied upon to modify the gun was already known to it or it was the mere application of the laws of physics, which cannot be protected (@ ). Further, they contended that the information was in fact not confidential as the Madritsch kits had been supplied to other third parties at the time it was supplied to Thales (@ ). Lastly, Thales contended that the covenants in the NDA were unenforceable as unreasonable restraints of trade (@ ).
On these points, the Court found:
Thales did not "already know" the information in the Madritsch designs because it was the specific attributes of the component of their solution which allowed the problem to be solved. It was not the information alone, but the information as aspects or elements of a successful mechanism, that was important. Thales did not know this until Madritsch disclosed it in September 2011.
the Madritsch information was confidential. The Court adopted the long settled principle that to be protected the information must have the necessary quality of being confidential, such that the release of it would be injurious to the owner or of advantage to rivals (@ ). Confidentiality is a relative and not absolute concept. Information must be inaccessible before it can be considered confidential. It follows that confidentiality is context- and fact-sensitive (@ ). Thales was able to produce its own internal version at a lower cost than it would otherwise have incurred and it was able to do so in a shorter time than if it had to do its own research, development, design and testing (@ ). The fact that Madritsch had disclosed the kits to certain members of the Austrian army as part of its own testing program did not take away the necessary qualities of confidence that remained with the information (@ -).
the NDA was governed by the laws of NSW, which has the Restraints of Trade Act 1976 (NSW) which renders restraints of trade unenforceable to the extent that they are against public policy (i.e. where it is reasonably necessary for the protection of the legitimate interests of the parties and reasonable in the interests of the public (@ ). The Court found that the restraints in the NDA were enforceable as they were not against public policy - they were necessary to protect Madritsch's legitimate interests (@ ). There is a public interest in the development of better technologies. It is promoted by reasonable restraints on copying work that is otherwise confidential, valuable and the result of effort (@ ). The Court noted that because the obligation in the NDA to not reverse-engineer was not time bound, it might be unenforceable as against public policy (@ ).
Was there a breach of the duty of confidence by Thales?
Madritsch also contended that Thales breached an equitable duty of confidence by making use of the information that its solution fixed the particular problem in the specific way that it did (@ ).
The Court found that when Thales received Madritsch's confidential information, Thales owed a duty not to make any unauthorised use of it to the detriment of Madritsch (@ ). When Thales used the information to further develop its own internal design, this was to the detriment of Madritsch and they did not authorise it to occur (@ ). As a result, Thales is accountable to Madritsch for any profits it acquired by this improper use of the confidential information, and they may be able to recover equitable damages or compensation for loss suffered as a result of Thales's breach of this duty (@ ).
Did Thales engage in misleading and deceptive conduct?
The misleading and deceptive conduct Madritsch complains of is the emails sent by Thales creating an impression that Thales was still willing to discuss a commercial deal to license the Madritsch kits, when all the while, in reality, Thales was proceeding with its own development work, leveraging the Madritsch technology which had been disclosed to it under NDA.
Thales sent emails to Madritsch/Noia stating that the delay in responding to the proposed licence agreement was due to "a number of key personnel being on leave etc". Thales also represented that they intended to conduct "a full financial and legal assessment" of the Madritsch proposal.
In fact, by this time, Thales had already determined that the proposed deal was "farcical" and they had no intention of conducting any further assessment of it. When Noia followed up with Thales, Thales responded that "will get back to you about the discussions once we have finalised our assessment of your proposal" -- which was a lie.
It was not until July 2012 that Thales emailed the other parties to notify them that Thales "did not require the Madritsch solution and would not make any counteroffer for a licensing arrangement". The judge noted that this was the "first honest communication from Thales on this topic in nearly six months" (@ ).
In the result, Thales was found to have engaged in misleading and deceptive conduct "by leading them to believe that Thales had a continuing interest and even an intention to enter into a sub-licence agreement with Nioa for the Madritsch Solution. By engaging in that conduct, Thales contravened s 18 of the ACL." (@ ).