IpsofactoJ.com: International Cases [2000] Part 5 Case 15 [NZCA]


COURT OF APPEAL, NEW ZEALAND

Coram

Empress Abalone Ltd

- vs -

Langdon

KEITH J

DOOGUE J

FISHER J

23 AUGUST 2000


Judgment

Keith J

  1. The appellant, Empress Abalone Ltd, produces abalone pearls. It employed the first defendant, Richard Langdon, from February 1996 to July 1999 at Kaikoura where it was undertaking, in conjunction with the University of Canterbury, a research project. In September 1996 it obtained funding for the project, through its nominee who was a major shareholder, from the Foundation for Research, Science and Technology ("FRST").

  2. In proceedings brought in the Employment Court, the employer claimed that Mr. Langdon had breached his duties of fidelity and confidentiality by applying for patents for various methods of growing half pearls, also known as mabé pearls, and for related actions. It sought relief based on the proposition that it was entitled to any interest or ownership in the patent applications and in the related intellectual and other property.

  3. Judge Palmer dismissed the claim, essentially on the basis that Mr. Langdon’s employment was limited to processes for the growing of spherical pearls, and not half pearls, half pearls being the subject of the statement of claim. A critical step in his reasoning was that that very same limitation was to be found in the FRST project to which Mr. Langdon’s employment was closely tied and from the funds for which he was paid. The Judge also held that Mr. Langdon in fact made the invention in his own time and without using any materials or facilities of his employer. In addition to appealing against the dismissal of its claim, the employer also appeals against the costs judgment made against it.

  4. The appeal to this Court is limited to questions of law and, as well, decisions on the construction of employment contracts are excluded from that jurisdiction: Employment Contracts Act 1991 s135. This Court has consistently held that that exclusion does not prevent it from considering questions of principle such as the approach adopted by the Employment Court to the interpretation of employment contracts; e.g. Wellington College of Education v Scott [1999] 1 ERNZ 98,101.

  5. There is no dispute between the parties about the law concerning the ownership of inventions in situations like the present. They agree with the statement of principle in Blanco White, Patents for Inventions and the Protection of Industrial Designs (5th ed 1983), para 7-004:

    Where an employee in the course of his employment made an invention which it was part of his duty to make, the law imported into the contract of employment a term that the invention is the property of the employer.

  6. The main difficulty in the cases, that text continues, is usually that of determining whether the invention concerned was made in the course of the employment or, in other words, whether it is something that it was the employee’s job to invent (para 7-005). Mr. McGinn, for the appellant, challenges the "very narrow" construction given by the Employment Court to Mr. Langdon’s employment, that is the construction that he was employed to work only on the project which focused solely on spherical pearls. The Judge, he contends, was wrong to reject the propositions that the employment included research into abalone pearls generally or that he was employed to invent.

  7. Mr. McGinn’s second contention is broader. It emphasises the closeness of the connection between the invention and the employer’s business which is principally based on half pearls. The Judge, it is said, failed to have regard to the extent of the employer’s interest in mabé pearl production and to how closely Mr. Langdon’s invention was connected to that business. The argument continued that it is a breach of the duty of fidelity between the employer and employee for the employee to compete with an employer while still employed. That duty is said to arise from decisions of English Courts in patent cases and of this Court in employment cases. It is convenient to consider this broader contention first.

  8. The suggested principle of law is, we think, stated too widely. It is not supported either by the cases or by principle. It would mean, for instance, to recall the famous lines of Ralph Waldo Emerson, that had Empress Abalone manufactured mousetraps as well as pearls, Mr. Langdon, although employed only in respect of pearl production, would not have been allowed to turn his inventive mind for the benefit of himself and humanity to the manufacture of a better mousetrap. As Mr. Couch said for Mr. Langdon, any such invention should belong to the inventor, in the absence of a contractual or other legal obligation to the contrary. The English cases to which we were referred support that limit. In those in which the employer succeeded the inventions were discovered by the employees in the course of the duties of their employment. The cases include British Syphon Co Ltd v Homewood [1956] RPC 225, 230-231; Worthington Pumping Engineering Co v Moore (1902) 20 RPC 41, 46; and Sterling Engineering Co Ltd v Patchett [1955] AC 534. By contrast a Registrar in the Department of Ophthalmology in a Glasgow hospital was held entitled to the invention he had made which related to his work; Greater Glasgow Health Board’s Application [1996] RPC 207. He was paid by the Health Board. His duties were clinical responsibilities which took just over 80 hours a week. His job description included a number of items not described as duties including participation in teaching. He was also "expected to avail himself of the facilities provided" for basic and clinical research. The evidence of his head of department was that the Registrar was not contracted to do research but that he was able if he wished to become involved with the University side of the Institute to further his career by contributing to the University’s teaching and research. Jacob J came to "the very, very clear conclusion that when he made that invention he was not acting in the course of his duties" (using the statutory language which now governs this matter in the United Kingdom, but which is commonly thought to be declaratory of the common law; e.g. [1996] RPC at 210). His duty to treat patients did not extend to devising new ways of diagnosing and treating them. While his invention might be a useful accessory to his contracted work, it was not really part of it. To recall Blanco White, the invention is the property of the employer only if the employee made it in the course of employment as part of the employee’s duty.

  9. The decisions of this Court which Mr. McGinn cited in support of his very broadly stated duty of fidelity are Tisco Ltd v Communication and Energy Workers Union [1993] 2 ERNZ 779 and Big Save Furniture Ltd v Bridge [1994] 2 ERNZ 507. As a matter of general principle, counsel said, the duty of fidelity prevents an employer acting in a manner which could be said to harm the business of the company. The second case was cited only for the proposition that a finding of dishonesty was not essential to establishing a breach of fidelity, but that is not in issue here.

  10. Mr. McGinn extracted this sentence from the Tisco judgment delivered by Cooke P in support of his statement of general principle ([1993] 2 ERNZ at 782):

    Any conduct by an employee which is likely to damage the employer's business, for instance by impairing its goodwill, or to undermine significantly the trust which the employer is entitled to place in the employee, could constitute a breach of duty.

  11. The tentative nature of that statement appears from the further comment on the same page that what the Court had said "may serve to clarify matters by bringing out that the kind of conduct illustrated by this case could be found to be a breach of the duty of employees. Of course the question will ultimately be one of fact in any case." We come back to the facts of this case. What was the employer here "entitled" to expect of the employee? What was the extent of the duty arising from the employment?

  12. That brings us to Mr. McGinn’s more particular argument. What was the scope of the contract? Did the intellectual and related property in issue come within it? The answers to both questions are not helped by the fact that the parties did not conclude a written contract of employment. We also recall the limits on our role. It is not for us to decide exactly how the contract is to be construed. Our concern is with questions of principle and approach.

  13. The critical part of the Judge’s reasoning appears in the last five pages of his judgment where, as already indicated, he emphasises the FRST project. That passage is of course to be seen in the context of the judgment as a whole. Early in his survey of the evidence the Judge refers to the McKenzies, principal shareholders of Empress Abalone, as "highly material witness to all major aspects of the plaintiff’s case". Following that survey he turned to "the issues". What was "essentially at issue between the parties" was whether the intellectual property belonged to the employer or to the employee. The final pages of that section emphasise the contract for the research and development project. "This project plan is obviously of very considerable importance to the parties in this case, and more particularly Empress and Mr. Dick Langdon". The Judge then sets out the objectives of the project. He "re-emphasise[s] that this executive summary [in the project documents] is concerned with research and development into spherical pearls ....", sets out other passages supporting that understanding and concludes this part of the judgment by saying that the mabé (semispherical) implants were to be used for control purposes.

  14. At the end of a summary of counsel’s argument, he states that he has found in favour of Mr. Langdon. We now return to the critical final five pages of the judgment. It begins with the passage from Blanco White quoted earlier (para [5]) and with extracts from Mr. Couch’s submissions for Mr. Langdon. There is then a reference to the acceptance by Mr. McKenzie in evidence that Mr. Langdon had invented the intellectual property in issue — the only reference at this crucial stage of the judgment to the evidence of those "highly material witnesses". The Judge also held at that point, as mentioned earlier, that Mr. Langdon had made the particular invention in his own time and without using the employer’s materials or facilities.

  15. The true issue in the case, the Judge continued, was whether the invention of an improved design of mabé bead was within the scope of what Mr. Langdon was employed to do. We have no difficulty with that statement of the issue. Rather our difficulty arises from the Judge’s approach to the construction of the contract of employment. The difficulty is that, in the next, concluding part of the judgment, the Judge limits himself to the FRST project : a contract for the cultivating of spherical pearls and "mabé implants [being used] primarily as control features to the contract’s avowed purpose of culturing spherical pearls". The Judge does then mention Mr. Langdon’s "unfortunate ongoing secrecy" but the implication must be that the secrecy relates only to his own affairs. He concluded by further quoting from Mr. Couch’s submissions which again are tied back to the "very specific [FRST] project plan".

  16. The error of law in that crucial part of the judgment is to fail to have regard to other evidence bearing on the scope of Mr. Langdon’s employment. The project contract to which Mr. Langdon of course was not a party — nor indeed was his employer, at least formally — cannot provide the whole answer. What in fact did he actually do in the course of his employment at Kaikoura? He was in charge of his employer’s activities there, according to the evidence of the McKenzies and others. His situation was in sharp contrast for instance to the Glasgow Registrar and was nearer to the "alter ego" of the Company in the Worthington case (para [8] above).

  17. It is not for us to assess that evidence and determine the scope of the contract that is excluded from this Court’s jurisdiction by s 135 of the Employment Contracts Act. We can, however, give a brief indication of some of the evidence that was properly relevant to determining the scope of the contract and which is not mentioned expressly or impliedly at the relevant part of the judgment:

    • Mr. Langdon was employed because of his vast experience in respect of the culturing of pearls in paua.

    • He was employed at the expense of Empress Abalone for the early months of 1996 before the FRST project was approved.

    • He answered "definitely not" to the question whether he thought that his employment was conditional on the happening of any event before he could be employed; and to the question whether his employment was conditional on funding being granted for the project work he answered "Not in my recollection, no".

    • He did some work associated with a private project the McKenzies were wanting to establish about 14 kilometres north of Kaikoura; Mr. Langdon in evidence said he was not happy about doing this work as it was not what he was employed to do, but Mr. McKenzie gave him little choice.

    • Dr D R T Schiel, the University of Canterbury zoologist who was involved in the FRST project on behalf of the University, said this about Mr. Langdon’s role and the developments occurring in the course of the project:

      It was intended that in my supervisory capacity I would review progress at least monthly. I visited the Kaikoura facility on a weekly basis except when from time to time my other commitments intervened. Mike McKenzie was the Project Manager and I am aware that he visited the facility from time to time also, but our visits did not often coincide. Dick Langdon was responsible for the day to day running of the project at the facility and the project contractors placed a lot of trust in Dick Langdon to look after the on-site aspects of the project.

      In the course of the project a number of developments occurred relating to mabé including the successful trialing of new positions for mabé nuclei implants allowing for more mabé to be inserted into each paua. So far as I am aware, the ramp idea was also discovered in the course of the project, although I cannot say when or which individual first raised it during the project. I can remember discussing the ramp idea at Kaikoura while Dick Langdon was still working on the project but, again, I could not say when that was. I can recall Mike McKenzie and I discussing a drawing of a mabé nucleus with a ramp included to assist in nacre deposition at the base of the implant. Again I cannot say specifically when that discussion took place other than it was during the course of the project. In my view, this discovery was made as part of a team approach in the same way as other discoveries were made, such as improvements in the water reticulation system.

      Given the anticipated synergies of the team approach to this project and those of this type, I find it difficult to ascribe the ramp discovery to one individual acting independently and without relying on the resources of the project and the ideas of the project team.

  18. There is evidence, as Mr. Couch carefully pointed out, supporting the narrower view of the contract adopted by the Judge:

    1. The proposal to FRST for funding of the project showing its nature and Mr. Langdon’s involvement.

    2. The budget showing Mr. Langdon’s salary wholly attributed to the project.

    3. Invoices showing the Appellant claimed the whole of Mr. Langdon’s salary as a cost of the project.

    4. An exchange of correspondence between FRST and the employer confirming Mr. Langdon was working full time on the project.

  19. Had that evidence been used and been assessed against that mentioned in para [17] as supporting a wider reading of the contract, no doubt an argument could have been made that the finding of the narrower construction of the contract had a foundation in the evidence, with the consequence of there being no error of law. But that is not the present case. The relevant part of the judgment turns solely on the limited character of the FRST project documentation. As a result, the Judge’s approach to the construction of the contract was too narrow in law.

  20. It follows that the appeal succeeds. The matter is referred back to the Employment Court for it to reconsider the matter in light of this judgment and in particular 15 to 18.

  21. The appellant is entitled to $5,000 costs in this Court and to reasonable disbursements, including the travel and accommodation expenses of counsel, to be fixed by the Registrar if the parties cannot agree. It follows from the result of the substantive appeal that the costs order made in favour of the present respondent in the Employment Court is set aside. The Employment Court is to consider what costs order should be made in respect of that earlier stage in the light of the result of its reconsideration of the matter.


Cases

Wellington College of Education v Scott [1999] 1 ERNZ 98; British Syphon Co Ltd v Homewood [1956] RPC 225; Worthington Pumping Engineering Co v Moore (1902) 20 RPC 41; Sterling Engineering Co Ltd v Patchett [1955] AC 534; Greater Glasgow Health Board’s Application [1996] RPC 207; Tisco Ltd v Communication and Energy Workers Union [1993] 2 ERNZ 779; Big Save Furniture Ltd v Bridge [1994] 2 ERNZ 507

Legislations

Employment Contracts Act 1991: s.135

Authors and other references

Blanco White, Patents for Inventions and the Protection of Industrial Designs (5th ed 1983)

Representations

T J McGinn for the Appellant (instructed by T J McGinn, Christchurch)
A A Couch for the Respondents (instructed by James & Wells, Christchurch)


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