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Bremworth Limited (Formerly Cavalier Corporation Limited) v Pebblemill Limited [2023] NZHC 1059 (5 May 2023)

Last Updated: 1 December 2023

JUDGMENT OF DUNNINGHAM J

This judgment was delivered by me on 5 May 2023 at 2 pm, pursuant to r 11.5 of the High Court Rules

Registrar/Deputy Registrar Date:

BREMWORTH LIMITED (FORMERLY CAVALIER CORPORATION LIMITED) v RADFORD YARN TECHNOLOGIES LIMITED [2023] NZHC 1059 [5 May 2023]

Contents

Glossary.....................................................................................................................

Introduction [1]

The development of the Periloc felting process [7]

The history of Radford Yarns [24]

The sale of Radford Yarns [43]

The sale and purchase agreement and related documents [55]

The purchase of the remaining 25 per cent of RYT shares [69]

The establishment of Pebblemill [76]

Development of the PF2 and the 2015 WIRL research agreement [83]

Attempts to formalise the ongoing relationship [94]

Events after May 2017 [102]

Breach of confidence in equity [108]

Who has standing to bring the claim for alleged misuse of confidential

information? [109]

What is the IP claimed to be confidential information? [117]

The legal principles applying to breach of confidence in equity [124]

Does the information have the necessary quality of confidence? [128]

The plaintiffs’ submissions [128]

The defendants’ submissions [131]

Discussion [135]

Sliver feed and delivery systems, [redacted] [146]

The modified felting liquor [150]

Liquor delivery system [154]

The yarn feed and delivery systems [160]

The tube tensioning system [168]

The tube technology [171]

Development of and modifications to the rotors [176] Development and modifications to a cabinet/batch drying system [180] Unique felted yarn specifications [185]

If the information was confidential, is it now in the public domain? [187]

Was the IP imparted in circumstances importing an obligation of confidence?

........................................................................................................................... [195]

Are the defendants using the confidential information? [200]

Affirmative defences [227]

The defendants’ submissions [230]

The plaintiffs’ submissions [250]

Can the defendants establish the defence of estoppel? [266]

Was there the creation or encouragement of a belief or expectation by the plaintiffs? [273]

Was there reliance by the defendants? [292]

Will there be detriment to the defendants? [297]

Is it unconscionable to revoke the expectation that the defendants can use the Confidential Information? [298]

The other defences [300]

Breach of contract [301]

Clause 25 of the 2011 SPA [302]

Clause 4 of the IP Deed [309]

Clause 12 of the 25% SPA [314]

Breach of restraint of trade [318]

The terms of the restraint of trade [318]

The alleged breach [322]

What are the geographical limits of the restraint? [328]

Was there a breach? [340]

Was the restraint of trade superseded by the employment agreement? [347]

Relief [349] Orders [358]
Costs [359]

Suppression [360]

Glossary

Introduction

• [1] Felting is the process by which wool or other animal fibres are agitated in a suitable fluid medium causing the fibres to entangle and create a strong and stable textile product. It has been used for centuries to make garments and rugs.

• [2] While the basic elements of the felting process have long been understood, in the 1970s and 1980s, the International Wool Secretariat (IWS) developed a novel process to manufacture felted wool yarn. This was done using a machine which came to be named the Periloc. The Periloc process was promoted by the IWS in a wide range of countries, with the hope it would be adopted by wool processors. The IWS continued to develop the Periloc machines and associated processes until the early 1990s, when the IWS abandoned the Periloc development programme.

• [3] An enterprising New Zealander, Edward Radford, acquired some early IWS Periloc prototype machines and then other commercially–made Periloc machines. Starting out on his rural property near Christchurch, he worked on the machines and the associated systems until he had a viable business creating felted yarn products of reliable quality with interesting designs. That business was then sold to a subsidiary of Cavalier Corporation Ltd (Cavalier) in early 2011.¹ The agreement for sale and purchase expressly recorded that the intellectual property (IP) of Mr Radford’s business was transferred to the Cavalier subsidiary. A related agreement licensed the use of the IP back to Mr Radford for approximately three years to make products which did not compete with Cavalier. Mr Radford also agreed to restraints of trade. However, once that IP deed expired, the parties operated under arrangements and understandings which were not formally documented and which departed from the terms of that IP deed.

• [4] The parties are now in dispute over the extent of the IP rights which were sold to Cavalier’s subsidiary in 2011. They also dispute whether Mr Radford’s new business, Pebblemill Ltd (Pebblemill), can now compete with Cavalier by supplying

1. The company changed its name to Bremworth Ltd on 30 August 2021, but at all material times it was known as Cavalier Corporation Ltd, so I refer to it as Cavalier, although in evidence it was usually referred to as Bremworth.

felted yarn to other carpet and rug manufacturers, using Periloc technology which he has developed even further in the interim.

• [5] The issues which arise are numerous and complex. They require a detailed understanding of the factual background. That background includes:

(a) how the Periloc technology was developed;

(b) the extent to which this technology was in the public domain at the time Mr Radford acquired the Periloc machines;

(c) the contractual arrangements entered into at the time of the sale of Mr Radford’s business to Cavalier’s subsidiary; and

(d) what occurred in the subsequent years, when Mr Radford was, for much of the time, both an employee of the Cavalier subsidiary and undertaking commission work for that company through his new business, Pebblemill, which continued to produce felted yarn.

• [6] That background is necessary to determine the key issues in this case which are:

(a) What IP was sold to Cavalier’s subsidiary in 2011?

(b) Was any of that IP confidential information?

(c) If so, are the defendants using that confidential information (including further developments of it) in breach of their obligations in either contract or equity?

(d) If the defendants are using that confidential information, have the plaintiffs acquiesced in that use, or are they otherwise estopped from bringing their claims?

(e) In respect of the restraint of trade entered into in 2012, is it enforceable, and if so, has it been breached?

The development of the Periloc felting process

• [7] When Mr Radford’s brother, Jack Radford,² gave evidence he observed that “[t]he wool industry in [New Zealand] is very small, and it is quite collaborative”. I would go further. During the period in which the Periloc technology was developed, the wool industry internationally was closely connected and collaborative. Indeed, one of the unusual features of the case was that all of the witnesses giving expert evidence knew some or all of the parties in this litigation and had worked alongside them at some point in their careers.

• [8] This theme of collaboration to promote the use of wool and to develop new wool products was reflected in the work of various organisations in New Zealand and overseas in the 1970s and 1980s. One of these organisations was the New Zealand Wool Board, a woolgrower funded organisation established to promote New Zealand wool and wool products to the global market. Another organisation was the Wool Research Organisation of New Zealand Inc (WRONZ) which undertakes research into new wool products and uses. It has a wholly-owned subsidiary, Wool Industry Research Ltd (WIRL), which undertakes research into innovative uses of wool fibre products with a view to improving the prices for New Zealand strong wool.

• [9] The IWS was established in 1937 as a partnership of the Wool Boards of Australia, New Zealand and South Africa, to promote the sale of wool on behalf of member countries. The IWS opened a technical centre in Ilkley, Yorkshire, in 1968. At that centre, it undertook research on a range of wool technologies, and shared the results of that research with its member organisations. At its peak, the IWS had 40 branches worldwide and employed more than 1,000 staff, a large proportion of which were wool textile technologists.

² Mr Radford’s brother is Joseph Radford but was commonly referred to as Jack Radford.

• [10] Mr Radford began working for the New Zealand Wool Board in 1970 and was seconded to the IWS from 1974 to 1976. It was during this period that he worked with Dr John Pitts, who was working on a process for felting wool yarns on a commercial scale, particularly for use in carpets. Dr Pitts explained that felted wool was well suited to carpet use. It did not shed fibre readily and was more resistant to compression, which meant a felted yarn carpet would wear better than a carpet made of non-felted yarn.

• [11] While there were existing processes for felting wool yarn in batches, this was laborious and costly, and the results were often poor. Furthermore, as the yarns were not separated during the felting process, yarn-to-yarn entanglement could occur. To address this, an engineer in the Netherlands came up with the idea of passing individual yarns through an agitated tube to achieve felting of continuous lengths of yarn.

• [12] Mr Briaire, another engineer in the Netherlands, created a machine to test this concept. Dr Pitts then took on the task of developing Mr Briaire’s machine at the IWS Technical Centre. He led a specially formed task group which worked on this project over 12 years. The goal was to improve the process and machinery so it could be used for the commercial manufacture of felted yarns for wool carpets.

• [13] Dr Pitts described the process he developed as follows:

(a) Yarn is fed, tensionless, through heated felting liquor to a flexible tube.

(b) The flexible tube is mechanically agitated by six (or more) equally-spaced rotating arms or rotors.

(c) The flexing and partial compression of the tube by the rotors resembles the action of a peristaltic pump causing the yarn to rapidly move forward through the tube.

(d) The felting liquid is drawn into and pumped through the tube, and the yarn progressively changes in length and diameter based on the available space in the tube.

(e) Towards the output end of the tube, the yarn is subjected to the greatest mechanical agitation and felting occurs.

(f) The felted yarn is then physically withdrawn through squeeze rollers.

(g) The degree of felting is determined by the throughput speed of the yarn and the level of mechanical agitation caused by the rotor speed.

(h) Production capacity is determined by the number of ends of yarn per machine and yarn throughput speed.

• [14] Dr Pitts created the name “Periloc” to describe the process as it combined the concepts of “peristalsis” (being the movement of successive compression waves) and the apparent “locking” of the fibres through the Periloc process. The diagram which follows was incorporated in an article produced by Dr Pitts in the 1970s shows key features of the original prototype machine developed by the IWS.

• [15] On 2 May 1975, the IWS or Mr Briaire applied to patent Mr Briaire’s novel method and the Periloc machine. A United States patent was granted on 21 September 1976 for the Periloc machine (the US 129 patent).

• [16] In the early 1980s, the IWS manufactured at least five commercial prototype Periloc felting machines under the US 129 patent. The IWS prototypes included some design developments which differed from the US 129 patent. First, instead of a six-bar rotor design, a 12-bar rotor design was introduced with six inner bars and six outer bars. This enabled significantly higher rotor speeds and productivity. Second, the IWS prototype tensioned the felting tubes individually using pneumatic cylinders, rather than collectively. This ensured that all ends of the felting tubes were under the same tension regardless of any differences in the lengths of the tubes, which could be caused by the tubes stretching as they were used. Third, the initial Periloc machine used silicone tubes, but these were not very durable. The IWS trialled different materials including natural rubbers as well as synthetic materials. They found that polyurethane felting tubes were more durable.
• [17] The IWS prototypes were disclosed to a number of yarn manufacturers for commercial evaluation and development. The outcomes of those trials were reported back to the IWS so that they could understand what issues arose.

• [18] Following the commercial evaluation of the IWS prototypes, the IWS wanted to build industrial scale versions of the Periloc machine. It engaged Hollandse Signaalapparaten BV (Signaal) in the Netherlands to manufacture industrial scale machines based on the principal IWS prototype. Between 1982 and 1987, Signaal produced around 32 Periloc machines.

• [19] Dr Pitts explained the Signaal Periloc machine was a much improved felting machine from the IWS prototypes, with sophisticated input and output creels.³ The key changes they incorporated following the trials in commercial mills were:

(a) the felting tubes were tensioned collectively with a lever and counterweight system;

(b) a proper automatic input creel was included which would draw the yarn from yarn packages or slub/slivers from cans, and provide a tensionless feed to the felting tube; and

(c) microwave drying tubes were used so the yarns could be passed through and delivered dry to be put into packages.

• [20] On 29 December 1982, Signaal applied to patent its modified tensioning system for its yarn felting machines. A United States patent was granted on 12 March 1985 (the US 592 patent).

• [21] The Signaal Periloc machines were sold to wool processors in various parts of the world.

3. Being frames for delivering the yarn from large bobbins into the machine and then for guiding them out of the machine once felted and into cans or other containers for dying.

• [22] On Mr Radford’s return to New Zealand in 1976, he continued working for the New Zealand Wool Board. During this time he maintained his interest in the Periloc system and kept up his association with Dr Pitts and his work when they met at overseas conferences.

• [23] In 1981, on Mr Radford’s recommendation, the New Zealand Wool Board purchased a 15-end IWS-designed and manufactured Periloc prototype machine as a demonstration model. The term “end” refers to the number of strands of yarn that could be processed through the machine at one time. The New Zealand Wool Board encouraged members of the New Zealand textile industry to access the machine at WRONZ or to borrow it for commercial product development and performance evaluation. Mr Radford says both Feltex Carpets Ltd and Cavalier purchased one of the first commercial machines produced by Signaal around 1983–1984. While it does not appear that Feltex Carpets produced a carpet using Periloc felted yarn, Cavalier produced at least two felted broadloom products in the mid-to-late 1980s using their Signaal Periloc felted yarn.

The history of Radford Yarns

• [24] In 1989, after 20 years with the New Zealand Wool Board, Mr Radford says he was looking for a change and decided to pursue his interest in the Periloc felting process. Through his contacts at the IWS, including Dr Pitts, he arranged to purchase some of the IWS’s older equipment. Specifically, he acquired three four-end felting rotor boxes from the IWS. Using the knowledge he had acquired during his time at the IWS and the New Zealand Wool Board, and working with a local engineer, he built a simple felting machine from two of these rotor boxes.

• [25] He explains that the felting machine included the following features:

(a) an infeed roller, with a variable speed drive;

(b) a squeeze roller set with variable speed drive;

(c) two rotor boxes, with a single six-bar rotor in each box;

(d) a weir overflow system;

(e) a heated tank;

(f) a circulating pump;

(g) flowdown; and

(h) simple input and output creels.

• [26] He also explains that this machine used an individual tube tensioning system similar to that the IWS had been using before it was superseded by newer developments. This system worked on a counterweight system where weights were attached to nylon cables which were attached directly to the individual tube holders.

• [27] Using this felting technology, Mr Radford and Jack Radford founded Homestead Yarns Ltd (Homestead Yarns) in 1990, although it was not formally incorporated until 1992. It used the felted yarn technology to produce hand knitting yarns.

• [28] The business proved to be successful and, in due course, Homestead Yarns purchased or built additional plant to ramp up production. This included acquiring three Mackie gilling machines⁴ and, a Saco-Lowell roving frame⁵ and building a cabinet drying room. Although still based at Mr Radford’s rural property, the business grew and, in order to increase production capacity, the IWS commercial prototype machine was acquired from the New Zealand Wool Board. This machine is referred to in these proceedings as PF1. In late 1992, the business relocated to industrial premises in Hornby. The business then acquired a 20-end Signaal Periloc felting machine from Feltex Carpets.

• [29] In 1995, Homestead Yarns had the opportunity to purchase the 40-end Signaal Periloc machine that Dr Pitts had been using for production trials and development

⁴ Gilling is a process that straightens and aligns wool fibres.

⁵ Roving is a process that draws out a gilled sliver of wool fibres and twists it into a yarn or “roving”.

work at IWS, along with a 10-end Signaal Periloc machine. At the same time, Mr Radford acquired IWS’s considerable stock of felting tubes, tube components and other accessories. In addition, because Dr Pitts was retiring, he gave Mr Radford a range of documents and technical reports relating to the development of the IWS Periloc technology, as he wanted to ensure his work continued to be used.

• [30] The Signaal 40-end machine was installed at Homestead Yarns in 1995 and was operational by 1996. In 1966, Homestead Yarns changed its name to Radford Yarn Technologies Ltd (Radford Yarns).

• [31] Up until this point, much of Radford Yarns’ business had been producing yarns for handknitting. However, sales of handknitting yarns fell dramatically in the mid-1990s and Mr Radford realised he had to diversify quickly in order to survive, which included making felted yarn for carpets and rugs. Although considerable effort went into promoting his company’s felted yarn, buyers were not willing to pay the price premium for felted yarns over spun yarns. This led Mr Radford to decide that Radford Yarns would need to differentiate its products and develop more interesting yarn constructions which would give carpets and rugs a point of difference that would appeal to customers.

• [32] By the late 1990s, Radford Yarns considered its felting process was well enough developed to carry its yarn construction into broadloom yarns,⁶ and it began to focus on producing unique yarn styles that could be sold at a premium. The aim was to consistently produce new and exciting yarn constructions, primarily with slub and two-colour effects. Slub yarn is a type of yarn that has random variations in thickness along each strand of yarn. The thick part is the “slub”. This required development or modification of the yarn spinning systems, primarily the roving machine. Another innovation was a “space-dyed” pinstripe yarn, being a yarn which is dyed in two or more colours along its length to create colour patterns.

• [33] The slub yarn developed by Radford Yarns was well received but, as Mr Radford explains, the [redacted] system [redacted] they developed in 1995 had

6. That is, yarn suitable for broadloom carpets, being carpets which are woven in wide widths suitable for wall-to-wall carpeting.

some inherent control issues. These issues meant the slub yarn was occasionally being formed inconsistently, with “rogue” slubs and excessively thin places between the slubs. It was these production issues that led Radford Yarns to develop what Mr Radford described as the [redacted] system in 2001. It used [redacted]. It also had [redacted] which allowed Mr Radford and his staff to easily change the [redacted] settings to produce different yarns. The combination [redacted] enabled Radford Yarns to produce a much more consistent product and to make slubs of different sizes, shapes, lengths and colour.

• [34] Around 1997, Radford Yarns began doing some product development work for Cavalier. One of the first products Cavalier showed interest in was a single-colour slub yarn. However, Radford Yarns was also attracting interest from other carpet manufacturers. For example, in 1999, Woolshire Carpets in the United States launched a felted broadloom product called “Slubs n Nubs” which was based on Radford Yarns’ felted slub yarn. Mr Radford says this product put Radford Yarns “on the map”. Unique Carpets Ltd, another United States manufacturer, asked Radford Yarns to produce a relatively simple felted yarn for a broadloom range in 2000. This led to other felted yarns being developed for its carpet ranges. Further overseas customers came on board in the early 2000s.

• [35] During this period, Radford Yarns was also producing more felted yarns for Cavalier using colour and slub effects. These included “Kashi” (a simple single coloured slub) and “Dupion” (which had [redacted]). Given the company’s ongoing growth, it moved to larger premises in 2006. While sales were affected by the Global Financial Crisis in 2008, Radford Yarns continued to develop innovative yarn products, with the company winning the best technical yarn category with a variegated wool felt yarn in the 2009 New Zealand Wool Awards.

• [36] During this period, there were yet further modifications made to the Periloc machines, and Radford Yarns worked with contractors in the engineering and technology fields to implement some of these improvements. For example, Radford Yarns engaged Tasman Textiles Technologies Ltd (Tasman) which was run by Kees van Luijk, a former research scientist from WRONZ. Tasman was involved in enhancing the capability of the [redacted] machine. Tasman also produced [redacted].
• [37] In 2003, there was a significant electrical fire at Radford Yarns. It damaged the 40-end Signaal felting machine that had been purchased from IWS. Again, Tasman was contacted to help recommission it. Mr van Luijk suggested the machine not just be repaired, but upgraded, [redacted]. Tasman undertook this work [redacted] as part of the rebuild of the machine.

• [38] In 2005, Radford Yarns employed Ian Craw as a development engineer. He had an existing contracting business, Rain Ltd (Rain). While Mr Craw was employed by Radford Yarns, Mr Radford says that when there was engineering work, it was done under contract with Rain as Rain owned the specialised engineering equipment which was required to undertake such work.⁷

• [39] Mr Craw was involved in replacing the collective tensioning system on Radford Yarns’ Signaal Periloc felting machines [redacted].

• [40] While Mr Radford says the idea of [redacted], the actual tube tensioning system was designed, developed and manufactured by Mr Craw. It included the following features:

[redacted]

• [41] This system was trialled on a three-end felting machine before implementing it on the 40-end machine in 2006. Because it was successful, it was also installed on the 20-end Signaal machine in 2008 and, in 2010, to the 10-end Signaal machine, which was also upgraded [redacted] at the same time.

• [42] In 2006, Radford Yarns entered into an agreement with Cavalier for the provision of felted yarn, in particular, for its Dupion and Tussore carpets. In 2009, Cavalier sought to enlarge its high-end woollen carpet range and differentiate its products by using unique yarn systems. Mr Victor Tan, Cavalier’s chief financial officer and company secretary, recounts that Mr Colin McKenzie, who was then Cavalier’s chief operating officer, put forward a proposal to take a 50 per cent stake in

7. Although Cavalier contests that the work was done by Rain as opposed to Mr Craw as an employee.

Radford Yarns. From Cavalier’s perspective, it saw a risk that Radford Yarns would supply the broader carpet market if exclusivity was not secured. This is because Radford Yarns was the only commercial supplier of felted yarns for broadloom carpets and its felted yarns were unique and not commercially available from other yarn suppliers. Acquisition of Radford Yarns would meet Cavalier’s strategic goal of “exclusively secur[ing] technology that is truly unique, cannot be replicated, has consumer appeal and fits with our marketing philosophy and brands”.

The sale of Radford Yarns

• [43] On 4 December 2009, Radford Yarns sent a letter to Mr McKenzie. It proposed a process by which the parties could investigate the purchase of Radford Yarns by Cavalier. This involved Cavalier buying either the entire shareholding in the company or a majority shareholding with Radford Yarns’ senior management retaining a minority shareholding. It also proposed key Radford Yarns’ staff (being Mr Radford and Michael Ingram) remaining as employees of the company to “ensure continuity”. The proposal also anticipated that an acknowledgement would be given “that the intellectual property associated with felted yarns supplied to Cavalier is owned by [Radford Yarns]”.

• [44] During 2010, discussions continued over how the purchase would proceed. By April, the proposal involved a purchase of assets which included “fixed assets, stocks, IP, trade secrets, [and] customer lists” of the company rather than the shares. The parties proceeded with due diligence on this basis. Various documents were exchanged which referred to Radford Yarns’ IP. For example, in May 2010, a bundle of documents described as “business information” was forwarded to Cavalier by email. It included statements that Radford Yarns had purchased IWS technology and “[e]nhanced [it] to the commercialization stage over 15 years” so they were now recognised as “world leaders in yarn felting science and technology”.

• [45] Discussions regarding the acquisition of Radford Yarns by Cavalier became more focused in late 2010. These discussions were conducted for Cavalier by Mr Wayne Chung, Cavalier’s chief executive, Mr Tan and Mr McKenzie. On Radford Yarns’ side, the negotiations were conducted by Mr Radford and Jack Radford, who

was a former chartered accountant and director of Radford Yarns. Mr Radford says his brother ran the financial side of the discussions, while he dealt with the technical and operational aspects.

• [46] As the due diligence process progressed, Cavalier produced lists of questions which it sought responses to. Some of these focused on the IP which it was acquiring should it purchase the assets of Radford Yarns. In a 31-page document sent 17 September 2010, Radford Yarns responded to a number of Cavalier’s questions including on IP. The document outlined the “enhancements” Radford Yarns had made to the yarn felting technology since commencing operations. Specifically, it said “the business has made an enormous commitment to R & D, both process development and product development”. It explained that Radford Yarns had been able to “optimize felting conditions and to develop appropriate controls to ensure we had a commercially viable industrial process”. Radford Yarns also said it had developed “a felting tube capable of delivering 500+ hours of consistent performance”. It said it had modified the original rotor “to maximize productivity, and improve yarn quality”. It had also developed “a felting medium and management system that enhanced felting performance and ensured the production of consistent, contaminant free yarns”. It also pointed to the development of “specialized spinning technology” and of “felted yarn constructions”.

• [47] On 14 October 2010, Jack Radford emailed Mr Tan stating:

One thing that you may want to consider is the fact that the felting technology is “ locked in in house”. Over the past 12 months we have worked with EFI Engineering Ltd to develop a reproducible engineering model that we own [and] we have demonstrated the implementation with F4. We own this technology.

• [48] The following day, Mr Tan emailed Jack Radford. He confirmed the Cavalier Board was supportive of the proposal to acquire the assets of Radford Yarns but sought clarification of, among other things, “the position with regards to the Radford Yarn intellectual property”. On 8 November 2010, following a meeting in October, Cavalier sent a checklist of matters to be addressed by Radford Yarns before a sale and purchase agreement (and related agreements) could be drafted.
• [49] In terms of IP, Cavalier sought the following information:

• - [Radford Yarns] to confirm what it actually acquired from the IWS back in 1995 and to provide the documentation to support that acquisition so that [Cavalier] can satisfy itself as to [Radford Yarns’] title to the intellectual property and that there is no risk/likelihood of this being contested here or anywhere else in the world in future

• - Intellectual property to be defined in the widest possible sense to capture all present intellectual and industrial property rights conferred by law and whether owned by [Radford Yarns] or the shareholders of [Radford Yarns], including, but not limited to:

• patents, designs, copyright, rights in circuit layouts, trademarks, know how, business names, brand names, trade names, domain names, inventions, product names, trade secrets, moral rights, the right to have confidential information kept confidential and other results of intellectual effort in the scientific, technological, bio- technological, industrial and commercial fields, whether or not registered or capable of registration;

• any application or right to apply for registration of any of those rights; and

• all renewals and extensions of these rights.

• - [Radford Yarns] to review and add to the definition of intellectual property where required

• - [Radford Yarns] to confirm whether the sale and purchase agreement will be conditional on [Radford Yarns] (1) assigning to Newco of the confidential agreements that are currently being negotiated by [Radford Yarns] with key suppliers or (2) procuring these key suppliers enter into confidentiality agreements direct with Newco[.]

• [50] On 18 November 2010, Radford Yarns responded to the checklist. In it, Radford Yarns assured Cavalier that:

... the current state of Radford Yarn felting technology is vastly superior and fundamentally different to that reflected in both patent applications. ... Over the past ten years Radford yarn have invested significant resources into developing an understanding of the process of felting and this has resulted in the development of technology and systems to now claim it as [a robust] industrial process. ... Radford Yarn experimented and abandoned [the patented tube tensioning system] a number of years ago and developed a sophisticated [redacted] tensioning system. This system is unique to Radford Yarn.

• [51] The response went on to say that the company had had approaches from a number of European manufacturers to share or sell aspects of Radford Yarns’ technology to them, but it had refused. It also said there was “no risk or likelihood of

the intellectual property ever being contested” because Radford Yarns had extensively modified the technology to “the stage that it differs significantly and materially from earlier versions”.

• [52] In the response, Radford Yarns described the IP as including:

(a) a physical library of “approved master samples”;

(b) a database of production specifications to which access was “controlled” and noting in addition, that “[a] good knowledge of Radford Yarn’s modified machinery and in house knowledge and training is required to produce felted products that meet the customer approved master samples”;

(c) “production know how” based on product and production knowledge and engineering knowledge acquired over the years;

(d) a database of all product developments to which access was restricted; and

(e) an in-house quality system for its processes.

• [53] Radford Yarns’ also provided the following assurances as to the protection of the IP:

We have identified all of [sic] external contractors who have been involved in the development of the felted yarn technology over the past 2 years. Prior to this all development work was undertaken in house by company employees and the provisions of the employment contracts regarding confidentiality applied.

The external contractors that have been involved include:

• EFI Engineering Ltd

• Bartlett Electrical Ltd

• Swarm Intelligence Ltd

• Jag Engineering Ltd
• Tasman Textiles Ltd

Revised confidentiality agreements, that are assignable to Newco, have been prepared for each and these will be executed over the next week. A copy of a [sic] agreement is attached.

• [54] The same document also outlined a proposal that had been discussed regarding Mr Radford’s continuing use of the felting technology. The document recorded that Mr Radford would retain an old felting machine at his home address in Prebbleton, as a “hobby/retirement project”. It said it would be used for the production of “apparel/novelty/exotic yarns”. The key elements of the proposed agreement were:

(a) Mr Radford would acknowledge that the purchasing entity owned the felting technology and associated IP;

(b) the purchasing entity would license the use of the felting technology to Mr Radford “in areas [that] do and will not compete with [the purchasing entity]”;

(c) the licence would be for a period of three years and renewable entirely at the purchasing entity’s discretion; and

(d) if the licence was not renewed, then Mr Radford would cease all felted yarn manufacturing using the purchasing entity’s felting technology.

The sale and purchase agreement and related documents

• [55] The sale and purchase agreement was executed on 18 February 2011 (“the 2011 SPA”). The parties to the agreement were Radford Yarns as vendor, Curlicue Ltd (Curlicue), a wholly-owned subsidiary of Cavalier, as purchaser, and Mr Radford and Jack Radford as minority shareholders and guarantors.

• [56] The 2011 SPA provided for Curlicue to acquire the assets and the business of Radford Yarns, for the purchase price of $6,505,000 plus GST. The assets of the business were defined to include “the Intellectual Property Rights”.
• [57] The term “Intellectual Property Rights” was defined in the 2011 SPA as follows:

... all present intellectual and industrial property rights conferred by law, including:

(a) patents, designs, copyright, rights in circuit layouts, trademarks (whether registered, pending registration or unregistered), know how, business names, brand names, trade names, domain names including the Domain Names, inventions, product names, trade secrets, moral rights, the right to have confidential information kept confidential and other results of intellectual effort in the scientific, technological, bio-technological, industrial and commercial fields, whether or not registered or capable of registration;

(b) any application or right to apply for registration of any of those rights; and

(c) all renewals and extensions of these rights.

• [58] As part of the 2011 SPA, Radford Yarns provided a warranty confirming that, to the best of its knowledge, it owned, or had or would have, enforceable licences or other contractual rights to use all of the IP used in the business. In particular, it provided the following warranty in relation to what were described as “Significant Intellectual Property Rights”:

All Intellectual Property Rights of significance to the Business (including, but not limited to the Felting Process, the know-how, processes and formula (whether acquired or developed by it) that are used in the felting of wool and other fibres howsoever developed and whether embedded in products or in machinery and equipment) are owned by the Vendor and form part of the Assets.

• [59] “Felting process” was defined in the 2011 SPA as:

... the felting process involving a machine comprising flexible guide tubes which perform such an oscillating motion that axial forces act on the slivers of yarn or yarns supplied to the separate guide tubes to achieve the felting of the slivers or yarns. Such a machine was known from the Dutch patent application No. 74,06622 (now expired) and U.S. Patent No. 3,981,129 (now expired). The process includes all technical improvements by the Vendor and specifically includes tube tensioning systems, slivery delivery systems, tube technology and related systems, liquor management systems, and related control systems.

• [60] In an associated transaction to the 2011 SPA, the Radford brothers and Mr Ingram, the general manager of Radford Yarns, acquired a 25 per cent shareholding in Curlicue.

• [61] The 2011 SPA set out a number of conditions precedent to completion. These included that Mr Radford would be employed by the purchaser and Jack Radford would have a consultancy contract. There was also a condition that at least 85 per cent of the employees of the business would accept employment with the purchaser. In practical terms this meant that Curlicue would become Radford Yarns, and as part of the agreement, Radford Yarns agreed to relinquish that name. In April 2011, Curlicue was renamed Radford Yarn Technologies Ltd (RYT).

• [62] At the same time as the 2011 SPA was being negotiated, an IP deed was being negotiated, to allow Mr Radford to continue to develop, manufacture and sell apparel novelty exotic yarns using the IP which had been transferred under the terms of the 2011 SPA.

• [63] A draft IP deed was prepared by Mr Radford’s lawyer and provided to Cavalier on 18 January 2011. Over the ensuing month the draft agreement was exchanged between the parties with minor comments and changes being made to it each time. While Cavalier expressed concerns about Mr Radford continuing to use the IP, in the end, given the provisions of the agreement and the trust between the parties, the terms of the deed were settled.

• [64] The deed was signed by Mr Radford on 18 February 2011 (the IP Deed). Under the IP Deed it was explained that Mr Radford had:

... developed commercial applications for the purpose of manufacturing apparel yarns and other novel and exotic yarns for non-floor covering applications ... using the intellectual property, know-how and technology relating to felting which [RYT] has agreed to acquire from [Radford Yarns].

• [65] The IP Deed granted Mr Radford a licence on terms and conditions, including that he confirmed, acknowledged and warranted that he would only use the IP for:

(a) the production of apparel, novelty and exotic yarns, using a combination of wool and other fibres, provided that these yarns cannot

also be used in floor covering products, including without limitation, carpets and rugs;

(b) the development of know-how and methods which may lead to improvements to [RYT’s] IP to assist [RYT] in the production of new products.

• [66] Under the IP Deed, Mr Radford agreed to “keep the [RYT] IP confidential and not to disclose any part of the know-how or intellectual property rights relating to the [RYT] IP to any other person”.

• [67] The IP Deed also provided that any improvements which Mr Radford developed to the RYT IP “shall be the property of [RYT] and shall become part of the [RYT’s] IP”.

• [68] The IP Deed was specified to terminate on 31 December 2013. It signalled the possibility of an extension at RYT’s “absolute discretion”. It also stated the Deed could be terminated if Mr Radford ceased to be an employee, consultant or shareholder of RYT.

The purchase of the remaining 25 per cent of RYT shares

• [69] Following the purchase of Radford Yarns’ assets in February 2011, Mr Radford was employed as RYT’s product development manager. However, the acquisition of Radford Yarns coincided with a challenging period for the woollen and carpet industry. Carpets made from synthetic fibres came to dominate market share. As Mr Tan explains, wool’s estimated share of the carpet market in New Zealand fell from more than 70 per cent to 15 per cent. Because of this, Cavalier began investigating options for consolidating its yarn manufacturing operations.

• [70] On 7 December 2012, Cavalier entered into an agreement to purchase the balance of the RYT shares from the Radford brothers and Mr Ingram (the 25% SPA). Mr Tan understands that the purchase of the remaining RYT shares was prompted by the plans to shift and consolidate its yarn manufacturing operation, even though these plans did not eventuate until much later. Jack Radford says, however, that the share purchase was motivated by the fact that Cavalier was no longer treating RYT as an independent business within the Cavalier group, but was treating it “as simply a piece

of the larger, vertically integrated [Cavalier] supply-chain”. This led to disagreement between the Mr Ingram and Cavalier staff, particularly around pricing strategies, as Jack Radford considers prices were being set on what would give the wider Cavalier group the best profit margins rather than on what would enhance RYT’s profitability, and this greatly reduced its value to the minority shareholders who did not have a stake in the wider Cavalier group. I accept Jack Radford’s explanation as most likely the primary driver.

• [71] Whatever the reason, the remaining shares in RYT were sold to Cavalier for

$530,000, a considerable drop on the price of $850,000 paid for the shares as part of the suite of transactions entered into at the time of 2011 SPA.

• [72] The 25% SPA included restraints of trade. Mr Radford entered into a six-year restraint of trade, while his brother Jack, and Mr Ingram agreed to four-year restraints. Pursuant to the restraints, they undertook to not:

(a) engage in a business or an activity that is:

(i) the same or substantially similar to the Business or any material part of the Business; and

(ii) in competition with the Business or any material part of the Business;

(b) solicit, canvass, approach or accept an approach from a person who was at any time during the 12 months ending on the Completion Date, a customer of [RYT] with a view to obtaining their custom in a business that is the same or similar to the Business and is in competition with the Business;

(c) interfere with the relationship between [Cavalier and its subsidiaries] and their customers, employees or suppliers; or

(d) induce or help to induce an employee of [Cavalier and its subsidiaries] to leave their employment.

• [73] Clause 10.4 stated that the restraint would “apply only if the activity ... occurs within New Zealand or Australia”.

• [74] The 25% SPA provided a specific exception to the restraint for Mr Radford, stating at cl 10.5(c) that it did not restrict him from:

... manufacturing apparel and exotic yarns that do not compete with the Company’s products for such period as the Company shall, in its sole discretion, determine and otherwise in accordance with the terms of the intellectual property agreement between Edward Charlton Radford and the Company.

• [75] Following the completion of the 25% SPA, Mr Radford was appointed to the position of RYT international sales manager, commencing on 1 January 2013.

The establishment of Pebblemill

• [76] On 3 March 2011, following the sale of Radford Yarns’ assets to Cavalier’s subsidiary Curlicue, Mr Radford incorporated a new company, Pebblemill. Through Pebblemill, Mr Radford continued to develop new felted yarn constructions and supply them to apparel and craft markets, and to rug manufacturers, particularly to his son, Nick Radford, for his rug business, Nick Radford Rugs Ltd (Nick Radford Rugs).

• [77] Before Pebblemill’s incorporation, and while the IP Deed was still being negotiated, work had started on getting the original IWS prototype machine (PF1) out of storage and functional, presumably in anticipation of the IP Deed being concluded. Mr Radford turned to Mr van Luijk, from Tasman, to help him recommission the PF1. They upgraded the mechanical variable speed drives to electronic variable speed motors (VSDs) [redacted]. They also reduced the number of the ends on the machine from 27 to 20 to match the ends on a 20-end hank reel Mr Radford had acquired. The PF1 still had the Signaal collective tensioning system which they decided to retain. Mr Radford explains that Mr van Luijk sourced the components they needed, including [redacted] and the VSDs. Tasman also upgraded the squeeze rollers [redacted]. The PF1 was ready for use by late 2010.

• [78] Mr Radford also kept in touch with Mr Craw from Rain. Mr Radford had seen that [redacted]. In 2012, he had Rain modify the PF1 by installing an equivalent [redacted] tube tensioning system to the one he had developed for Radford Yarns, but using [redacted]. He says the tensioning system Rain installed on the Pebblemill machine proved quite successful in reducing friction issues and he passed the information regarding [redacted] on to RYT.
• [79] It is clear there was a great deal of trust and confidence between the parties during this period. Cavalier respected Mr Radford’s deep expertise in yarn felting technology. A symbiotic relationship developed between Cavalier and Pebblemill whereby, even when the IP Deed terminated in 2013, Cavalier continued to commission Pebblemill to produced felted yarn and also facilitated Pebblemill supplying some of Cavalier’s customers directly.

• [80] The symbiotic relationship between RYT and Pebblemill was illustrated by the fact that RYT permitted its facilities to be used to dispatch Pebblemill’s knitting yarns. RYT also assisted Pebblemill to move to Pebblemill’s new premises in 2016, only charging Pebblemill for third party costs of the move. RYT staff, including Ms Venessa Cooper, the administration manager, and Mr Mark Hussey, the felting technical manager, facilitated commission work being directed to Pebblemill and were aware of at least some of the developments at Pebblemill that occurred in order to better undertake this work.

• [81] Mr Hussey acknowledged in evidence that there was “quite a synergy” between RYT and Pebblemill during this period. It was clear to me there was an amicable and informal relationship between the staff at RYT and Mr Radford (who was known to all as “Woody”) at the time. For example, when Mr Hussey was questioned about how often he would liaise with Mr Radford about Pebblemill’s production capacity and its ability to undertake commission orders, Mr Hussey said:

It’s quite a difficult question to answer and the reason I’ll say that is because Woody, we all worked in the same office as well. ... we would ... at the end of the day ... have a sit around and have a bottle of wine together and talk about things...

• [82] A further connection between the parties was that Mr Radford’s son’s business, Nick Radford Rugs, was located in the same premises as RYT. Mr Hussey acknowledged that everyone at RYT knew Nick Radford. RYT sold raw materials to Nick Radford Rugs and Mr Radford said this was in the knowledge that it would be made into felted yarn by Pebblemill. Mr Radford also says that the fact Pebblemill was supplying its own customers, including the customers listed in sch 1 to the statement of claim, was known to Mr McKenzie, who became chief executive officer of Cavalier in February 2012.

Development of the PF2 and the 2015 WIRL research agreement

• [83] After Pebblemill was established, including after the IP Deed had expired, Mr Radford was continuing to look for ways to develop and improve the Periloc felting machines. Mr Radford says that in late 2014 he began discussing ideas he had for improving the output of felted handknitting yarn with Mr Van Luijk. [redacted].

• [84] [redacted].

• [85] Mr Radford and Mr van Luijk wanted to get some external funding to assist with developing this project. They submitted an application for funding to WIRL in late 2014 and the project was approved.

• [86] In its 2015 research agreement with WIRL, the “background IP” included:

• Tube technology: This encompasses the particular recipe for the tube material, wall thickness, extrusion parameters, hole dimensions and placing, and method of hole forming.

• Tube tensioning system: A reliable, accurate and repeatable tube tensioning system is of the utmost importance in guaranteeing repeatable results between and within batches. The current Pebblemill felter fulfils these criteria.

• Liquor additives to promote felting. Again the current recipe has been fine-tuned over a long period of time to ensure optimal felting, scouring and productivity.

• Expertise in choosing optimal combination of tube diameter, tube tension, rotor rpm, liquor temperature and delivery speed to produce desired felting effect on a specific yarn.

• [87] With funding approved in early 2015, Mr Radford and Mr van Luijk built a prototype [redacted] and conducted yarn production trials for approximately a year. During this time they made a number of changes to the prototype and refinements to the process, including to the:

(a) [redacted];

(b) [redacted];

(c) tube tensioning arrangements;

(d) tube threading arrangements;

(e) location of felting tube pressure release holes;

(f) temperature of the bath and liquor;

(g) methods of heating;

(h) liquor composition;

(i) [redacted];

(j) [redacted]; and

(k) optimal production rates.

• [88] Using the lessons they learned from their extensive trials on the initial prototype machine, they developed a stage two prototype which was a more sophisticated four-end prototype. They trialled the stage two prototype through early to mid-2017 with a wide range of yarns and ran some small scale commercial jobs through it, up to a maximum of 100 kg. Those trials were ultimately successful but showed them they needed to refine the prototype even more.

• [89] They then prepared a stage three prototype with 10 ends, which took it to a commercial prototype status. They used new [redacted]. This machine is the machine which is now referred to as the PF2. Mr Radford says this machine has been producing commercial quantities of yarn with good results.

• [90] By mid-2019, Mr Radford considered [redacted] proof of concept and prototypes had been fully validated. He then began designing a [redacted] machine which is currently nearing completion. This is the machine which was referred to in the proceedings as PF3. He says this machine is still a work in progress and they are still [redacted].
• [91] Pebblemill has also acquired and commissioned other pieces of equipment that it uses in its processes to produce felted yarn. These include:

(a) two gilling machines from Chargeurs which produce slivers for roving or other processing;

(b) a semi-worsted spinning frame from WRONZ to produce handknitting yarn for sale;

(c) two Ingolstadt apron finishers from RYT in 2011, [redacted]; and

(d) a flyer roving machine purchased in 2015. It was manufactured in 1975 in France and is unmodified.

• [92] Pebblemill has also developed a six-colour machine which it commenced work on in 2016. It is based on an existing Caipo machine which was developed in the 1980s. However, this machine has taken Pebblemill around two years to develop, in conjunction with Mr van Luijk from Tasman. [redacted].

• [93] [redacted].

Attempts to formalise the ongoing relationship

• [94] Mr Radford says that while Mr McKenzie was chief operating officer, Cavalier was not concerned with Pebblemill supplying yarn to apparel and craft customers or even to rug manufacturers. The two of them discussed this, including after the IP Deed expired, without any concerns being expressed. From Mr Radford’s perspective, Cavalier’s “red line was clear, it just didn’t want Pebblemill to copy its yarn constructions (Dupion, Tussore etc) or supply felted yarns to its competitors, for example Godfrey Hirst, who could then make and supply broadloom carpet into Australasia”.

• [95] Pebblemill moved to new premises in mid-June 2016 as it had outgrown its existing premises, being the shed on Mr Radford’s property. This was around the time that Cavalier advised it was locating the RYT business to Whanganui. Indeed, RYT

subsequently transferred its assets to another Cavalier subsidiary, Cavalier Spinners Ltd, on 31 August 2016, and RYT became a dormant company from that point forward.

• [96] In its new premises, Pebblemill set up its existing plant, plus new plant which had been purchased from Palmerston North. It employed three RYT staff who had taken early redundancy. Mr Radford and his team began development work to upscale their production, including building an input creel for the Periloc felting machine, plus an output creel to enable them to drop yarn into cans rather than putting it into hanks. They also installed the liquor tank and began developing and building a cabinet dryer as they were aware that RYT would be dismantling theirs, leaving Pebblemill without the ability to dry yarn. Without such a drying facility Pebblemill would not have been able to process the commissioning work it was getting from Cavalier. Mr Radford said he regularly discussed progress of Pebblemill’s move with Mr Hussey and Ms Cooper from RYT.

• [97] In around December 2016, Mr Radford understood that his position at RYT was to be disestablished, although Cavalier’s view was not consistent with that. Instead, Cavalier understood that Mr Radford was retiring. Around March 2017, representatives of Cavalier met with Mr Radford where they say his impending retirement was discussed. However, there was clearly some misunderstanding between the parties about whether Mr Radford was being made redundant or was retiring. On 14 May 2017, Mr Radford wrote to Cavalier saying he had not received any written communication regarding the terms of his redundancy, nor the date when it would take effect. Mr Paul Alston replied the next day saying he was “surprised by this email”, saying it was Cavalier’s “collective understanding” that he was going to retire. While Cavalier understood this was to be in April, this was subsequently extended to the end of May, as Mr Alston said:

There were some items that we needed to close off (eg: the license (sic) agreement, the handover of customers and any that you would continue to supply with your own business – we are still waiting for your feedback on these items).

• [98] It seems this miscommunication between the parties over the reason for Mr Radford’s departure from Cavalier contributed to the tensions which emerged between them.
• [99] Mr Radford left RYT on 31 May 2017. Mr Tan says that after Mr Radford advised his plans to leave, “we agreed that he could continue to use [Cavalier’s] IP in the manner contemplated in the IP Deed” except the licence would be extended to include:

(a) specific yarns that may be required by his son Nick Radford;

(b) specific yarns that were produced by Cavalier at that time for specific overseas customers, but which it wished to relinquish because of the small quantities involved; and

(c) any other yarns as approved by Cavalier in writing from time to time.

• [100] On 8 May 2017, Cavalier sent Mr Radford a list of customers that RYT had supplied in the previous year. It set out five customers that Cavalier would continue to supply and asked Mr Radford to advise which of the remaining customers Pebblemill would like to supply going forward. The following day, a draft licence agreement was sent to Mr Radford which reflected Mr Tan’s proposed agreement set out above, but imposed a three-year term on the licence.

• [101] On 19 May 2017, Mr Radford responded to the draft agreement saying it was “too all-encompassing”. He said “[n]early all of the IP you are trying to protect is already in the public domain, and has been since IWS developed Periloc felting in the 1980’s”. Cavalier replied to Mr Radford saying the new draft agreement was almost identical to the original IP Deed, but with more flexibility in his favour. The matter was still not resolved by 1 June 2017 when Mr Radford’s employment ended, although Cavalier was still saying it was “keen to get something that works for both parties” but protected Cavalier.

Events after May 2017

• [102] In the end, no new licence agreement was entered into and, on 1 June 2017, Russell McVeagh, acting on behalf of Cavalier and its subsidiaries, wrote to Mr Radford’s lawyer raising Cavalier’s concerns that Mr Radford was using Cavalier’s IP to produce felted yarns without authorisation.
• [103] Mr Radford’s lawyer responded on 22 June 2017. The letter asserted that the only IP which was included in the 2011 SPA and which was not already in the public domain was:

(a) methods for creating unique and exclusive end products from felted yarn in which the “point of differen[ce] (or IP) was created at the yarn formation stage”; and

(b) a formulation for the felting liquor.

• [104] The letter also asserted that Pebblemill had, at Cavalier’s request, produced carpet yarn for Cavalier’s customers and, more recently, had suggested Pebblemill supply those customers directly. The letter said Cavalier had therefore waived any rights it had under the restraint of trade. Finally, it gave an assurance that Mr Radford:

... has no intention of going into large scale manufacturing of carpet yarns to supply customers who your client wishes to service. My client has no intention of competing with your client or copying any of the exclusive products made by your client and it has always restricted its activities to short runs of yarns which your client does not wish to supply to customers. It has also supplied short runs of yarns for rug manufacturing because your client has stated that it does not wish to produce yarn for this particular market.

• [105] In or around July 2017 Mr Alston and Mr Tan from Cavalier met with Mr Radford. Mr Tan says that Cavalier proposed allowing Mr Radford to service smaller customers it did not want to retain, subject to Mr Radford agreeing to a licence agreement. Mr Alston reported to the Cavalier Board that Mr Radford had “not been working with NZ yarns and Colin Mckenzie and has no interest in doing so”, saying that Mr Radford “is fully aware of our intellectual property rights”. While Mr Radford denies they had such a meeting, I am satisfied the three did have a discussion to this effect as the content of it is recorded in a contemporaneous report to Cavalier’s Board. This was well before the litigation and I have no reason to doubt it was an accurate summary of what the three discussed.

• [106] Cavalier continued to ask Pebblemill to process felted yarn on commission until late 2017, and in September 2017 Cavalier was emailing smaller customers to say it would no longer supply them with felted yarns. Cavalier also was considering

whether to refer some of these unwanted customers to Pebblemill in late 2017, which was after Mr Radford had said he would not sign a new IP Deed.

• [107] However, in early 2019, Cavalier’s sales representative said that Nick Radford Rugs appeared to be producing broadloom carpets from felted yarn which looked identical to Cavalier’s products. Cavalier also became aware that Mr Radford had visited two of their customers in the United States, being Dixie Group Inc and Unique Carpets. On 12 March 2019, Russell McVeagh wrote a cease and desist letter to Mr Radford’s lawyer requiring Mr Radford to cease all supply, manufacture and use of products that used Cavalier’s intellectual property and technology. The parties engaged in correspondence but made no headway and ultimately these proceedings were issued.

Breach of confidence in equity

• [108] The plaintiffs’ core claim is for a breach of confidence in equity. While the plaintiffs rely on aspects of the contractual arrangements as supporting the existence of an obligation of confidence on the defendants in respect of certain IP acquired by RYT, they advance their claim primarily in equity. They assert that Cavalier owns confidential information which the defendants were obliged not to use or disclose except as authorised and which the defendants have used in breach of that obligation.

Who has standing to bring the claim for alleged misuse of confidential information?

• [109] The claim for breach of confidence in equity was initially brought by Cavalier alone. However, in opening submissions, the defendants signalled, for the first time, that Cavalier could not bring this claim as the confidential information was owned by RYT under the terms of the 2011 SPA.

• [110] As a consequence, Cavalier sought leave to join RYT as plaintiffs, but it still maintains that Cavalier was the proper plaintiff as it acquired the relevant IP which is claimed to be confidential information when RYT ceased operation in 2016.
• [111] I granted leave to Cavalier to join RYT in a decision issued on 14 September 2022.⁸

• [112] While Cavalier sought and obtained consent to add RYT as a plaintiff, Cavalier maintains it is the correct plaintiff and it owns the confidential information which is the subject of these proceedings. In support of this assertion, it relies on the evidence of Mr Smith who is the sole director of RYT and the chief executive of Cavalier. He asserts that the confidential information is owned by Cavalier. A similar assertion was made by Mr Tan in his affidavit dated 20 January 2022.

• [113] Furthermore, the plaintiffs say the defendants have acknowledged that Cavalier now owns the relevant confidential information, noting that the defendants admitted in their statement of defence dated 8 May 2020, that as part of Cavalier’s acquisition of RYT, what was described as the Cavalier IP (which included the relevant confidential information) was legally and beneficially assigned from the vendor and Mr Radford to Cavalier. Similarly, in the pleadings exchanged prior to hearing, the defendants admitted that Cavalier acquired the relevant IP (which included the confidential information). In any event, as the primary claim is brought as a breach of confidence in equity, the plaintiffs say such obligations may arise outside contract, and here the allegation is that the defendants are using Cavalier’s confidential information without its authorisation.⁹

• [114] The plaintiffs say that it is not surprising there is no formal evidence that Cavalier owns the IP other than the evidence of Mr Tan, given the late stage at which this assertion was made. Thus, Cavalier’s position is that it took over ownership of the IP following the cessation of business by its subsidiary RYT and this is confirmed in Mr Smith’s affidavit.

• [115] In the circumstances, given the evidence by Cavalier that it now owns the relevant confidential information following the cessation of RYT’s business, and in the absence of evidence to contradict this, I am satisfied that Cavalier can bring this claim.

⁸ Bremworth Ltd (formerly Cavalier Corp Ltd) v Pebblemill Ltd [2022] NZHC 2352.

⁹ AB Consolidated Ltd v Europe Strength Food Co Pty Ltd [1978] 2 NZLR 515 (CA) 520–521.

• [116] Even if I was wrong in that conclusion, then it is clear that RYT has, since terminating operation in 2016, granted Cavalier a broad implied exclusive licence to use the claimed confidential information. Cavalier would consequently have standing to prevent the misuse of that confidential information if such can be established.

What is the IP claimed to be confidential information?

• [117] Cavalier and RYT plead that as part of the 2011 SPA, Cavalier purchased all of Radford Yarn’s IP including “techniques, trade secrets, know-how, processes, formulae, technical data, programmes, software, opinions, statements, and any information generated from any of the aforesaid in relation to the manufacture of unique felted yarns”.

• [118] The statement of claim then identifies in detail what the plaintiffs allege to be confidential information, including:

(a) know-how around a method of manufacturing unique and exclusive felted yarns comprising a number of elements that individually and together constitute Confidential Information, including:

(i) the development of, and modifications to, sliver feed and delivery systems [...] to produce slub yarns and colour effects;

(ii) the use of a modified “liquor” ... in the felting machine where liquor describes the liquid that fills the top tank and felting tubes;

(iii) the development of, and modifications to, a liquor management system ... to achieve streak-free results and avoid excessive foaming from the felting process;

(iv) modification to a Periloc machine ... to enable the production of consistent felted yarns on a commercial scale for use in carpets and rugs;

(v) the development of, and modifications to, a cabinet/batch drying system ...; [and]

(vi) the development of unique felted yarn specifications for [Cavalier] and export yarn customers, including know-how around the production of consistent slub yarns, Tussore-type slub yarns, core yarns, pin stripe yarns and other custom products[.]

The subsequent subparagraphs of the statement of claim elaborate on the various elements claimed to constitute the confidential information, and I refer to this collectively as the Claimed Confidential Information in the balance of the judgment.

• [119] Importantly, the plaintiffs do not assert that the Claimed Confidential Information includes:

(a) the technology that was embodied in the IWS or Signaal Periloc machines purchased by Radford Yarns; nor

(b) anything set out in the expired patents.

• [120] The plaintiffs say the acquisition of the Claimed Confidential Information was the primary reason for Cavalier acquiring the assets of Radford Yarns. It formed part of the goodwill for which $2,362,657 plus GST was paid as part of the overall purchase price of $6,505,000 plus GST.

• [121] The plaintiffs say the defendants have breached the duty of confidence owed to Cavalier by having used, and continuing to use, the Claimed Confidential Information by manufacturing and selling felted yarns without Cavalier’s or RYT’s authority.

• [122] The plaintiffs seek injunctive relief requiring the defendants not to:

(a) further disclose the Claimed Confidential Information to any person or entity;

(b) use the Claimed Confidential Information; and

(c) supply or sell, or make offers to supply or sell, yarn that is manufactured using the Claimed Confidential Information to any person or entity.

• [123] They also seek an order requiring the defendants to provide “a full account of any conduct they have already engaged in” that would have breached such orders had they been operative when the conduct occurred, along with an inquiry into damages.

The legal principles applying to breach of confidence in equity

• [124] The three traditional elements required to support an action for breach of confidence were identified by Megarry J in Coco v A N Clark (Engineers) Ltd.¹⁰ First, the information must have the necessary quality of confidence about it, second it must have been imparted in circumstances importing an obligation of confidence and, third, there must have been an unauthorised use of that information to the detriment of the party communicating it.

• [125] In respect of the first element, the relevant indicia of confidentiality were comprehensively described by the Court of Appeal in Skids Programme Management Ltd v McNeill as follows:¹¹

[80] Information will have the requisite characteristic of confidence if it is the product of thought and work. The nature of the allegedly confidential material must be considered. There can be various indications of confidentiality. The degree of thought and work expended to produce the material is to be considered. If the material is unique or a trade secret this may indicate that it has the quality of confidentiality. If the material has commercial value that will be an indication that it has the necessary quality of confidence. The fact that the person who has used the material would otherwise need to have done a lot of work to create it, and that work has been avoided, can be relevant. So too is the extent to which the owner has itself considered the material confidential and taken steps to preserve and guard its secrecy, if any, taken by the user if they indicate a perception that the work is confidential.

• [126] The second requirement, which is for the information to be communicated by the plaintiff to the defendant in circumstances importing an obligation of confidence, has been expanded over time as it does not readily fit all circumstances where a claim for breach of confidence is advanced. Indeed, in this case, Mr Radford always had access to the Claimed Confidential Information as he is said to have created it. What is at issue here is whether, following the sale to RYT, he could still use it to the extent that he has. Thus, the second element is perhaps better expressed more broadly as requiring the information to have come to the knowledge of the defendant in circumstances where the defendant has notice, or is held to have agreed, that the

¹⁰ Coco v A N Clark (Engineers) Ltd [1969] RPC 41 (Ch) at 47.

¹¹ Skids Programme Management Ltd v McNeill [2012] NZCA 314, [2013] 1 NZLR 1.

information is confidential, and where it would be just in all the circumstances that the defendant be precluded from using or disclosing the information.¹²

• [127] Those core elements have also been supplemented in case law by further requirements. In particular, there is a requirement that the plaintiff be able to identify with specificity, and not merely in global terms, that which is said to be the confidential information in question.¹³ Where the information is a mixture of confidential information and unprotectable know-how, the plaintiff must separate out one from the other.¹⁴

Does the information have the necessary quality of confidence?

The plaintiffs’ submissions

• [128] The plaintiffs say that the Claimed Confidential Information has always been treated as confidential by the parties. This is demonstrated by:

(a) the description of the information provided by Radford Yarns through the due diligence process;

(b) the terms of the 2011 SPA and the fact the IP was a key part of the assets being acquired from Radford Yarns; and

(c) Cavalier’s requirement that Mr Radford and Radford Yarns take steps to obtain confidentiality deeds from the third parties they had used to develop the yarn felting system as part of concluding the 2011 SPA.

• [129] In respect of (c) above, one confidentiality deed between Radford Yarns and a third party contractor acknowledged that Radford Yarns developed “know-how, processes and formula that are used in the felting of wool and other fibres” and that information is confidential and not to be used by the contractor for their commercial benefit. Under another confidentiality deed the contractor agreed that:

¹² Attorney-General v Observer Ltd [1990] 1 AC 109 (HL) [Spycatcher] at 281.

¹³ Corrs Pavey Whiting & Byrne v Collector of Customs (Vic) [1987] FCA 266; (1987) 14 FCR 434 at 443.

14. Highley Ltd v Vodafone NZ Ltd HC Auckland CIV-2006-404-2870, 9 Mach 2007 at [10] citing J Katz Laws of New Zealand Intellectual Property: Confidential Information at [79].

(a) all intellectual property in the Felting Machines and components including the designs, drawings, method of construction and operational methods used in connection with those machines and components (the Radford IP) are the property of Radford Yarns and [the contractor] will not directly or indirectly claim any rights to any of the Radford IP or use for the benefit of [the contractor] the Radford In particular,;

(b) [The contractor] will not manufacture or cause any other person to manufacture, either directly or indirectly, felting machines and components using any of the Radford In particular[.]

• [130] The plaintiffs also deny that the Claimed Confidential Information is, either in part, or in combination, in the public domain. They say that no person other than Cavalier, RYT, Pebblemill or Mr Radford has the knowledge or expertise to manufacture felted yarns using the Claimed Confidential Information.

The defendants’ submissions

• [131] The only information which the defendants concede is confidential is the felted yarn specifications which Mr Radford developed for Cavalier, and which Mr Radford has neither used nor disclosed.

• [132] The defendants, otherwise deny that the Claimed Confidential Information possesses the necessary quality of confidence to attract protection. They say information that is public knowledge is not confidential.¹⁵ Further, the defendants deny that this is a case where information has been collated with skill and labour from discrete sources and adapted into a novel process.¹⁶ Instead, the defendants say that:

(a) the Claimed Confidential Information is readily locatable in publicly available documents which were disseminated by organisations such as the IWS and WRONZ;

(b) the know-how and associated processes and equipment for achieving wool felting using the Periloc technology was disclosed in the publicly available documents;

¹⁵ Saltman Engineering Co Ltd v Campbell Engineering Co Ltd [1963] 3 All ER 413 (CA) at 415.

¹⁶ As was the case in AB Consolidated Ltd v Europe Strength Food Co Pty Ltd, above n 9, at 522.

(c) Mr Radford and Pebblemill’s use of the felting technology reflects the process described in the public documents, and the machine which they are using is an original IWS Periloc prototype machine; and

(d) Pebblemill’s [redacted] machines (the PF2 and PF3) have been developed over seven years using the publicly available information as the starting point for their development.

• [133] Accordingly, the defendants say:

(a) there is no resultant novel process;

(b) there is no collocation of information from disparate sources but, rather, there is the use of known technology which would usually be found together;

(c) the Periloc felting technology is used by other parties around the world, such as Danspin, which produces felted yarns using the same process; and

(d) various witnesses in this proceeding including Mr Ingram, Mr McKenzie and Mr Cuthbertson were independently familiar with the process and not just isolated parts of it, and anyone sufficiently interested could obtain information about the process from the publicly available source material.

• [134] The defendants say that, in reality, the Claimed Confidential Information is really a “bundle of unspecific know-how” and a lack of any specific discrete process, or formula, or innovation shows there is nothing that can readily be held to be novel and therefore protectable.

Discussion

• [135] There is no doubt that the core elements of the Periloc felting system to the extent they had been developed by the late 1980s comprise publicly available

information. Indeed, Mr Cuthbertson, a wool technologist who was formerly employed by the New Zealand Wool Board, confirmed there was an active programme promoting the Periloc felting technology to the wool industry as widely as possible. Dr Pitts also confirmed that, while he was working on the project, he would share information as “the more people that we could get interested in using the process the better”.

• [136] I acknowledge, as the plaintiffs say, there is no clear evidence that any of the documents created by the IWS or associated bodies are currently available to the public. When Dr Pitts was asked how someone could get a copy of such documents, he repeatedly gave answers such as “I don’t honestly know how to [go] around getting a copy of it now”. Similarly, Mr Cuthbertson, when asked where the IWS diagrams could be found, said “I wouldn’t have known where to start, to be honest”. Furthermore, Mr Cuthbertson confirmed that WRONZ did not hold Dr Pitts’ reports and does not have a library other than scanned copies of WRONZ documents. That appears to be consistent with Joseph Radford’s claim when negotiating the 2011 SPA that the technology was “locked in in house”.

• [137] However, whether or not the documents are readily available and accessible now, I do not consider the plaintiffs can properly claim such information is confidential when it was the subject of publications disseminated to the wool industry at large. Information which was never intended to be confidential does not become confidential simply because time has passed and few people are now aware of it.

• [138] The real issue is whether the Claimed Confidential Information:

(a) is a material development to the existing Periloc felting technology;

(b) has the necessary quality of confidence; and

(c) has not subsequently been placed in the public domain, in particular, through two film recordings which have been made of the Periloc felting process at RYT and then Cavalier and which are publicly available to view on the internet.

• [139] The contractual documents make it clear that Radford Yarns and Mr Radford were transferring confidential trade secrets and protectable know-how to RYT. This information was the result of years of research and expenditure which took the Periloc system from what Mr Hussey described as machinery which was “clumsy to work on, difficult to get yarn consistency and having quite a number of running problems” to machines which allowed Radford Yarns to make “quality yarn in commercial quantities”.

• [140] In an application to the Wool Industry Network in or around 2008 for funding to develop the technology, Mr Radford and Mr van Luijk summarised the position as follows:

Most felting processes employed suffer from a number of limitations that restrict the scope of development as a mainstream yarn manufacturing technology; the degree of uniformness (or levelness) of an individual end of yarn being one of the major ones. ... The intellectual property associated with felted yarn that has been developed by Radford Yarn Technologies Ltd is considerable. Over the past 15 years over $2,000,000 has been spent on developing the technology. The current development being proposed, while important, represents a relatively small contribution in terms of the investment made to date.

It was for that reason that Radford Yarns proposed to retain ownership of any IP developed through the application. Such statements are at odds with the defendants’ position now, which is that the developments were based on information which was in the public domain or were trivial.

• [141] Similar representations to those in the Wool Industry Network application were made to Cavalier during the due diligence process, including, in particular, that “the current state of the Radford Yarn felting technology is vastly superior and fundamentally different to that reflected in both patent applications”. Radford Yarns specifically referred to the [redacted] tensioning system it had developed, saying it was “unique to Radford Yarn”. The representations that Radford Yarns owned unique intellectual property relating to all aspects of the yarn felting process was then embodied in the 2011 SPA as discussed at [57]–[59] above.
• [142] My view that certain components of the IP sold to Cavalier in 2011 were confidential information is supported by the claims made in the 2015 WIRL research agreement that Pebblemill’s “background IP” included:

• Tube technology. This encompasses the particular recipe for the tube material, wall thickness, extrusion parameters, hole dimensions and placing, and method of hole forming.

• Tube tensioning system. A reliable, accurate and repeatable tube tensioning system is of the utmost importance in guaranteeing repeatable results between and within batches. The current Pebblemill felter fulfils these requirements.

• Liquor additives to promote felting. Again the current recipe has been fine-tuned over a long period of time to ensure optimal felting, scouring and productivity.

• Expertise in choosing optimal combination of tube diameter, tube tension, rotor rpm, liquor temperature and delivery speed to produce desired felting effect on a specific yarn.

• [143] The wording of this part of the 2015 WIRL research agreement reflected the definition of “Intellectual Property” provided by Radford Yarns when negotiating the 2011 SPA. This claim is also consistent with the evidence of Mr Cuthbertson, the defendants’ expert who worked for WIRL between 2011 and 2022, who said he perceived Mr Radford and Radford Yarns as “world leaders” in felting technology.

• [144] Accordingly, there is clear evidence that, at the time the parties entered the 2011 SPA and afterwards, they each treated aspects of the felting technology developed by Radford Yarns (whether by 2011 or later) as valuable confidential information. The question now is to what extent was the relevant IP confidential information given the parties’ divergent positions.

• [145] To answer that I now go on to discuss the Claimed Confidential Information and consider whether it can be classified as confidential in light of the evidence I have heard. I leave the issue of whether it has subsequently been disclosed by the plaintiff, so it is no longer confidential, to later in this judgment. I also only consider the technology at the point of the 2011 SPA. Any developments to the Claimed Confidential Information which occurred after the sale to RYT, and which are alleged to be being used by the defendants, involve claims of breaches of Mr Radford’s

employment obligations and the Employment Relations Authority has exclusive jurisdiction to determine such matters.¹⁷

Sliver feed and delivery systems, [redacted]

• [146] While the defendants say the use of stepper and servo motors¹⁸ for textile applications is in the public domain and commonplace, Cavalier does not accept that the specific know-how around the use of [redacted], is in the public domain.

• [147] I am satisfied that the use of [redacted], is a novel process which has the necessary quality of confidence. It was a major advance enabling innovative felted yarns to be produced on a commercial scale. Indeed that was a key reason why Cavalier was so keen to gain exclusive rights to the Radford Yarns’ technology. It was a commercially desirable innovation. Importantly, Mr Cuthbertson acknowledges he has not seen [redacted] in the wool industry other than at Cavalier and Pebblemill. He also accepted that [redacted] would need to be developed. It is also significant that Galan, a textile machinery manufacturer, did not appreciate why or how RYT needed [redacted] and had to be instructed by RYT on this technology.

• [148] I also consider that the software which was developed for Radford Yarns by Tasman for this purpose was clearly confidential information. Although Mr Radford says he worked on the basis that Tasman owned the intellectual property, I consider this is inconsistent with:

(a) the principle that a party that commissions another party to create intellectual property is the owner of the copyright in that intellectual property;¹⁹

(b) the fact that Tasman signed a confidentiality agreement at the time of the sale to RYT which expressly confirmed that all intellectual property

¹⁷ Under the Employment Relations Act 2000, s 161(1); and FMV v TZB [2021] NZSC 102, [2021] 1 NZLR 466.

¹⁸ Servo and stepper motors are mechanisms used to control the motion, position and speed of a machine component. A servo motor is a more sophisticated version of this technology compared to a stepper motor. A servo motor is a closed-loop system, meaning it has a feedback mechanism and can instantly correct any slippage from the desired output.

¹⁹ Copyright Act 1994, s 21(3).

in the felting machines and components and their operational methods belonged to Radford Yarns;

(c) the fact that Tasman was a party to the 2015 WIRL research agreement and was aware Pebblemill was claiming ownership to the background IP, not Tasman; and

(d) the fact that Radford Yarns provided assurances that it owned the intellectual property to the software involved in the Periloc machines at the time of the sale.

• [149] Thus, this aspect of the technology, at the point to which it had been developed in February 2011, has the necessary quality of confidence about it to be confidential information.

The modified felting liquor

• [150] The parties accept that the use of a felting liquor containing a detergent is essential to the felting process and that information is not confidential. Furthermore, the IWS recommended to wool processors the use of a surfactant (specifically Sodalkon 215 km), in water as part of the Periloc felting process. WRONZ recommended that the concentration of the lubricant in the felting liquor should not exceed 0.5 per cent and that the temperature should be no greater than 60 C.

• [151] I therefore accept that the generic requirements for a successful felting liquor were in the public domain. That said, I consider significant effort went into selecting, and experimenting with, appropriate additives, both before and after the sale to RYT. However, Mr Hussey’s evidence focusses on the developments to the recipe after the sale. [redacted]. Similarly, RYT experimented with different dispersants to find the most effective product.

• [152] It is clear that, first, Radford Yarns, then RYT, went through a long process of trial and error to settle on the most effective combination of products. This is clearly confidential information, although I am only able to consider the formula as it was developed at the point of sale, and it seems most of the evidence focused on later

developments to produce an effective felting medium. However, I take some comfort in my conclusion that the felting liquor formula developed by Radford Yarns at the time of the 2011 SPA was confidential information given the acknowledgement by Mr Radford’s lawyer, David Stock, in his letter of 22 June 2017, that the intellectual property which passed at the time of sale included the felting liquor which his client had developed.

• [153] Accordingly, I accept the recipe for the felting liquor which had been developed by Mr Radford through trial and error at the time of the 2011 SPA is confidential information.

Liquor delivery system

• [154] As Mr Cuthbertson explains, the original IWS machines used for trials and demonstration purposes did not need a sophisticated liquor delivery system, but to use the process commercially there was a need to develop a system that dealt with holding, heating, circulating and replenishing the liquor.

• [155] The plaintiffs agree that all Periloc machines require a system for heating the liquor which the yarn passes through, pumping it from a bottom tank to a top tank, and for dumping the spent liquor and replenishing it. However, it says the specific system Radford Yarns developed is confidential information.

• [156] The original Periloc machine did not have [redacted] incorporated. That was developed by Radford Yarns in the late 1990s [redacted]. Mr Hussey explains that a consistent liquor management system is important because it enables the production of streak-free yarns and therefore higher quality felted carpets and it avoids issues that reduce production capability, such as excessive foaming.

• [157] Mr Hussey explains that the system that Radford Yarns developed, and which was acquired by RYT, [redacted].

• [158] The liquor delivery system Radford Yarns developed is [redacted] to achieve consistency. [redacted].
• [159] While much was made of how the liquor was circulated, including the details of how liquor was delivered to felting tubes through an overflow mechanism, I consider these were features which were the logical and inevitable result of needing to lubricate the rotors. Similarly, the need to heat the liquor to an identified temperature range was a fundamental part of the Periloc process and not confidential information. However, I am satisfied that [redacted], is confidential information.

The yarn feed and delivery systems

• [160] The plaintiffs claim the following aspects of the yarn feed and delivery systems developed by Radford Yarns are confidential information:

(a) [redacted];

(b) mechanisms to keep each end of the yarn separate and not tangled as it is drawn from the input creel and fed into a felting tube;

(c) input and delivery speeds;

(d) yarn count and stand time before felting;

(e) the assembly of squeeze rollers to remove excess liquor before the drying process;

(f) a mechanism to remove steam around the [redacted] squeeze rollers; and

(g) improvements to the output creels.

• [161] Mr Hussey describes how Radford Yarns developed systems for delivering the yarn slivers into and from the Periloc machines more consistently, saying the original feed systems were “rudimentary”. This was done with the assistance of Mr Craw from Rain. He explains the system developed by Mr Radford and Mr Craw uses [redacted]. Radford Yarns then commissioned EFI Engineering Ltd (EFI), to rebuild [redacted] in

2010. After some trial and error, [redacted] was developed which Mr Hussey says “worked perfectly”.

• [162] The machines, which were then sold to Cavalier, [redacted]. Radford Yarns also developed the use of a fan in front of the machine to stop steam condensing on the feed rollers and causing the wet rollers to overfeed the yarn.

• [163] Similarly, Mr Hussey describes changes which Radford Yarns implemented to the original squeeze roller assemblies on the felting machines. The squeeze rollers draw the felted yarn out of the felting zone and remove excess liquid from it. The squeeze rollers were originally located inside the frame of the machine which meant they were hard to get out and replace, particularly when bearings failed. If the yarn was not squeezed out properly, this could affect the quality of the yarn. Around 2009, Mr Craw modified one of the felting machines by moving the squeeze rollers to the outside. He also made the squeeze rollers out of polyurethane and stainless steel, and he changed the size of the squeeze rollers, the shaft, the bearings and lubrication. Mr Craw then installed pneumatic cylinders to control the squeeze rollers [redacted], whereas previously they were lever controlled. Progressively, the squeeze roller assemblies were modified on the other machines before the sale to RYT.

• [164] Mr Hussey also explains how the output creels were improved to convey the felted yarn from the machine and then to lay the yarn in the cans in which they were dried. Mr Hussey describes practical adjustments which were made to the creel to avoid yarn entanglement. He describes different improvements which were made to the output creel but, in particular, in 2010, he explains that EFI designed a new output creel to match the upgrade of the BF1 from handling 20 to 40 ends. The new creel could lay the ends into 40 cans. [redacted].

• [165] I accept that Radford Yarns’ delivery and feed system was developed through trial and error as explained by Mr Hussey. However, I also accept that the concepts of input creels, yarn guides and tension control of yarns and slivers were contained in a number of articles published in the 1980s. To a large extent, I consider the features of the yarn feed and delivery systems are the same or similar to those which existed on the IWS prototype machines and the Signaal Periloc machines, or are inevitable and

obvious mechanisms which would be required, such as guides or pegs to keep the yarn ends separate as they are fed into the machine, and devices to prevent yarn wrapping or entangling. Similarly, as the number of ends going through the machine increases the need to build an enlarged output creel must follow.

• [166] Features such as using an off-the-shelf fan as a steam control mechanism cannot be described as confidential information. Similarly, squeeze rollers were incorporated as part of the original IWS machines and are essential to the process. Changing their location and the materials they were constructed from to more durable materials is also a logical and obvious development.

• [167] Thus, the only parts of the yarn feed and delivery system which I consider are confidential information are [redacted].

The tube tensioning system

• [168] The plaintiffs claim the tube tensioning system developed by Mr Craw is critical to the operation of the Periloc machine and, as Mr Cuthbertson confirms, is “the most important improvement that has been made to the original IWS machine”. Radford Yarns acquired its machines with collective tube tensioning systems. As Mr Hussey explained, these were problematic because it was impossible to keep the tension of all the felting tubes the same. This resulted in variations in the felted yarn and an uneven effect in the final carpet. It also meant the felting tubes that were tensioned more tightly wore out more quickly. Mr Radford’s idea was to [redacted]. Cavalier claims a unique [redacted] tensioning system was subsequently created by Mr Craw in around 2005. Indeed, it was described as “unique” by Radford Yarns in the due diligence process.

• [169] Cavalier says that [redacted]. What Mr Craw developed was different [redacted] in numerous ways, including [redacted]. There were then various developments after Mr Craw’s system was implemented, [redacted].

• [170] I accept, as Mr Radford recorded in the 2015 WIRL research agreement, that “[a] reliable, accurate and repeatable tube tensioning system is of the utmost importance in guaranteeing repeatable results between and within batches”.

Mr Nathan Collins, from EFI, described the tube tensioning system developed by Radford Yarns as “quite different” to the tensioning system on the original machines. While Mr Cuthbertson accepted that the Craw tube tensioning system was “an improved derivative” of what was on the original IWS machine, he agreed it was “critical” to the operation of the machine. Thus, while I accept that [redacted], I am satisfied the tube tensioning system which was independently developed and refined by Radford Yarns was a significant development and can properly be considered confidential information.

The tube technology

• [171] The plaintiffs accept that felting tubes are integral to the Periloc process and form part of the information disclosed in the expired patents. They also accept that polyurethane tubes were recommended by the IWS and that the need for pressure release holes in the tubes is not confidential information. However, Cavalier maintains that the particular composition of its felting tubes is confidential information, as is the ratio of tube diameter to wall thickness, its process for curing tubes, as well as the particular number, location, size and arrangement of holes in its tubes, which was developed through trial and error.

• [172] While the IWS gave some recommendations [redacted], it is clear that Radford Yarns and subsequently RYT have not followed those recommendations. Through ongoing research, they addressed the issues with felting tubes cracking and needing to be replaced frequently. The developments include settling on the specific type of polyurethane to be used for the tubes, the relevant diameter to wall thickness ratio for the tubes, [redacted], and the number, position and size of the holes in the felting tubes. As Mr Hussey explains, these specifications were developed as a result of “a lot of trial and error”.

• [173] The fact that both Mr Radford and Cavalier considered their tube technology was confidential was demonstrated by a request Mr Radford received from a carpet manufacturer, Brink & Campman, in 2017 for the supply of felting tubes for that firm’s Periloc machine. That firm requested 200 m of a particular felting tube. Mr Radford said he would first need to get Cavalier’s approval. Mr Radford did confer with

Cavalier and both parties agreed they were uncomfortable with providing felting tubes to Brink & Campman. Brink & Campman requested 100 m of tubes again in 2018. On that occasion, it said it was having difficulties with the new tubes and had to change them every three hours. Mr Radford said that the samples Brink & Campman sent him of their felting tubes showed they were of a “much different construction to ours”. Similarly, Mr Radford confirmed the IWS tubes were different, saying that the stock of original IWS tubes he had generally had [redacted],

• [174] Mr Cuthbertson confirms that the right composition of the felting tubes would have been critical to the commercial use of the Periloc machines and he acknowledged that to use the IWS machine in a commercially viable way, someone would have had to trial different tubes to find the right composition. Mr Radford also confirms the importance of the positioning and formation of the holes in the tube, noting that the optimum arrangement could achieve tube lives in excess of 500 hours, but tube life would be impaired if holes were positioned incorrectly.

• [175] I am satisfied that the tube technology including tube dimensions, composition, hole spacing, [redacted] for the felting tubes was confidential information and the parties treated it as such.

Development of and modifications to the rotors

• [176] The plaintiffs assert the development of, and modifications to, the rotors, including the use of stainless steel, the number of cylindrical bars, the diameter of each cylindrical bar and the method to fix the cylindrical bars to the rotor shaft, constitute confidential information.

• [177] Mr Hussey gives evidence of trialling different rotor configuration options and rotor speeds at Radford Yarns before opting for the original six-bar rotor and 18 mm bar diameter on the machine which was sold to RYT and which came to be referred to as the BF1. Mr Hussey also describes EFI making some modifications to the rotors on the BF1 and BF2 and installing dampening bars on the rotors in 2010 to prevent the tubes from excessively vibrating and prematurely wearing out the tubes and tube holder system parts. EFI subsequently installed a new dampening bar on the BF4 when it rebuilt that machine. However, Mr Collins from EFI confirms the dampening

bars were based on what was previously on the BF4. EFI also installed a quick release system on BF1 and BF2 which made tube replacement quicker and more efficient. Mr Hussey also explains that [redacted] and this was a “significant improvement”.

• [178] It is difficult to glean from this what truly novel development there was that constituted confidential information, apart from the inputs to developing the software for the programmable logic controller (PLC). The change to using stainless steel is not, in my view, a sufficiently novel development to be claimed as confidential information. It seems both the six-bar and 12-bar rotor configurations were present on original Periloc felting machines, and no one pointed to any clearly novel development to the rotors which was confidential information acquired as a result of the 2011 SPA. This is in contrast to Pebblemill’s subsequent developments on the machines it owns (the PF2 and PF3), which Mr Cuthbertson describes as “mind-blowingly clever and ... original to Pebblemill”, and thus is Pebblemill’s confidential information.

• [179] Again, I consider the only confidential information in this category which was sold to RYT was the software for the PLC [redacted].

Development and modifications to a cabinet/batch drying system

• [180] The plaintiffs claim that the know-how around the drying of felted yarns in a drying room where wool is dried in cans with hot air circulated through the cans, including from below, is confidential information. Mr Hussey describes how Radford Yarns developed a cabinet drying system which comprised a drying room built above ground with hot air flowing up through openings in the floor where the drying cans would sit in order to dry the yarn. Mr Hussey says that he had not seen a cabinet drying system like this.

• [181] Mr Collins says when EFI built the second cabinet dryer for RYT, they based their design on the existing cabinet dryer. He says he would not have thought of building a similar dryer with that control system if he had not seen the existing dryer.

• [182] Mr Cuthbertson gave evidence that the cabinet dryer concept was often used in the wool textile industry, although this was in respect to dyeing and then drying

wool tops²⁰ and soft wound yarn packages and did not use cans. Mr Collins also accepts that cabinet batch dryers have commonly been used in the textile industry, but he did not accept that they would typically work in the way that Cavalier’s cabinet dryer worked. How they would operate would depend on the function.

• [183] The most important aspect of the cabinet drying system was [redacted].

• [184] Having considered the evidence, I do not accept the concept of the cabinet drying system is confidential information. It was an existing concept which was adapted to dry felted yarn. However, the monitoring and control of the cabinet drying system [redacted] is, in my view, confidential information.

Unique felted yarn specifications

• [185] The plaintiffs maintain the intellectual property involved in developing specifications for various yarn products for Cavalier and its customers, including slub yarns, Tussore-type slub yarns, core yarns, pinstripe yarns and other customer products, is confidential information. Mr Hussey gave evidence about the development work undertaken by Mr Radford to produce the unique felted yarn specifications for Cavalier and other customers. RYT owned product specification sheets which recorded a “general recipe” for what needed to be done to create a particular felted yarn product and, as Mr Hussey explains, they would be “core IP of [Cavalier]” which Cavalier would wish to protect from its competitors.

• [186] There can be no doubt that the unique felted yarn specifications developed for Cavalier are confidential information and that is not denied by the defendants.

If the information was confidential, is it now in the public domain?

• [187] The above discussion has already touched on the questions of whether the Claimed Confidential Information was in the public domain before Radford Yarns agreed to sell it to Curlicue. Cavalier expressly says it makes no claim to information disclosed in the patent applications or the machines built by Signaal and Periloc.

20. Mr Radford explains that a wool top is raw wool that has been washed, untangled and combed, so it is ready for further processing.

Rather, it claims the developments to those machines, and the associated systems, by Radford Yarns (and subsequently RYT)²¹ are the confidential information in question. I have also explained that information which was in publicly available documents, such as the papers prepared by Dr Pitts, could not claim the necessary quality of confidence even if the material would now be very difficult to access.²²

• [188] However, the defendants say that to the extent Cavalier could claim confidentiality in the processes it acquired and developed, confidentiality has not been maintained in that information, because it has been put on public display by RYT and Cavalier, and then uploaded to YouTube on the internet for the general public to see. Specifically, the defendants claim that in October 2012, RYT gave reporters access to its premises to film its Periloc felting processes and technology. The resulting video discloses the following elements of the process:

(a) fans;

(b) tensioning bars;

(c) rollers, including driven rollers;

(d) peg bars;

(e) human machine interface (HMIs);

(f) squeeze rollers and pegs;

(g) output creel;

(h) drying cans with holes; and

(i) the tower inside the drying cans.

²¹ Although, as already noted, I have no jurisdiction to decide whether there has been use or disclosure of confidential information obtained by Mr Radford during his employment with RYT, as that is within the exclusive jurisdiction of the Employment Relations Authority.

²² Above at [133]–[135].

• [189] Similarly, in 2017, Cavalier again allowed its felting process and technology to be filmed for the express purpose of teaching New Zealand students about those processes and technology. Again, this video depicts:

(a) input rollers;

(b) peg bars;

(c) input creel;

(d) drying cans;

(e) towers in drying cans;

(f) the manner in which the output creel lays the yarn into the drying cans;

(g) reservoir of liquor;

(h) weir system;

(i) squeeze rollers; and

(j) output creel.

• [190] I accept that, to the extent to which these videos disclose aspects of the felting process, even if Cavalier could claim the information was confidential prior to their publication, it can no longer claim confidentiality. Where the owner of confidential information chooses to make it publicly available, he or she cannot insist that they intended to keep it confidential. Publication is the very antithesis of maintaining an obligation of confidence.

• [191] However, I do not consider the videos disclosed as much as the defendants claim they did. As the plaintiffs submit, most of the witnesses could only identify parts of the machinery and processes in the videos because they were already familiar with them. For example, when Mr Hussey was asked whether one video showed

[redacted], he says “I can’t see [redacted]. I can see yarn going into a tank and I can just see ... what looks like wires at the back”. When asked about [redacted], he says “if I was looking at it and hadn’t seen it before I would have no idea to be honest”.

• [192] Similarly, when Mr Collins was shown the 2012 video and asked to identify aspects of the technology, he acknowledges that he knew that what certain items were because he was familiar with it. For example, when asked if he could see squeeze rollers, he acknowledges he could, but said “[a]nyone ... unfamiliar with the machine looking at that they’d have no idea what that was”. After confirming that a “black thing” was VSD, he says that he could not tell that by just looking at it, but “because I installed it”.

• [193] I accept, however, that the mechanical aspects of the cabinet batch drying system, including the use of drying cans with a central tower and holes on the exterior, the arrangements for drawing the yarn slivers into and from the Periloc machine on input and output creels, and the separation of yarn by peg bars, are all clearly visible on these videos. Thus, even if they had been confidential information, they can no longer be considered to be so.

• [194] While the plaintiffs say no evidence has been adduced as to how many times the 2012 video has been viewed by the general public (or competitors), that is not the material issue. The material issue is whether the plaintiffs can still claim confidentiality in those aspects of the system which they were prepared to have filmed and made available for public viewing. That said, the information which I have held to be confidential information could not have been gleaned either in whole or in part from the videos. For example, the system for manufacturing and preparing the tubes, the details of the tube tensioning system, the formula for the liquor, and the software used to run the PLC and HMI, are not disclosed on these videos, and the plaintiffs can maintain their claim to them being confidential information.

Was the IP imparted in circumstances importing an obligation of confidence?

• [195] As already discussed, it is not always necessary that the confidential information was imparted to the defendant by the plaintiff, but that the defendant is

privy to that information in circumstances where the defendant has notice, or has agreed, that it is confidential.

• [196] While the defendants say that neither Cavalier nor RYT has disclosed information to Mr Radford as he has always been privy to it, that does not preclude Cavalier from asserting that, at the date of the 2011 SPA, obligations of confidence arose. In that regard, I accept the plaintiffs’ submission that Mr Radford has:

(a) claimed he is selling unique IP, which Mr Radford said was “locked up”, and so others could not access it;

(b) agreed to have Radford Yarns’ contractors sign confidentiality agreements;

(c) transferred that information to RYT for valuable consideration; and

(d) contemporaneously acknowledged that the information is confidential in the IP Deed.

I am satisfied that in those circumstances, Mr Radford knew he now had knowledge of that information in circumstances where he had agreed to obligations of confidentiality in respect of it.

• [197] Importantly, the IP Deed was also a formal acknowledgment that confidential information had been transferred to RYT and Mr Radford was no longer free to use it except on the terms that RYT imposed in that agreement. Specifically, the IP Deed allowed the use of the technology for:

(a) the production of apparel, novelty and exotic yarns using a combination of wool and other fibres provided that these yarns cannot also be used in floor covering products, including without limitation, carpets and rugs[.]

• [198] By entering into the IP Deed, Mr Radford acknowledged that he needed a licence from Cavalier in order to operate the PF1 because to do so would involve using the IP, including confidential information, which he had transferred to RYT.
• [199] I accept, therefore, that the confidential information was made available to Mr Radford and Pebblemill in circumstances which imported an obligation of confidence. He had chosen to transfer confidential IP, to RYT and to use it only on terms agreed by RYT. He cannot now resile from that position and suggest, as he is, that the yarn specifications were the only confidential IP purchased as part of the sale.

Are the defendants using the confidential information?

• [200] I have found that the following of the Claimed Confidential Information is confidential information and has not subsequently been placed in the public domain (the Confidential Information):

(a) the use of [redacted];

(b) the Radford Yarns felting liquor recipe;

(c) [redacted];

(d) the use of [redacted];

(e) the software for the PLC which controls [redacted];

(f) the [redacted] tensioning system developed by Mr Craw;

(g) the tube technology as developed by Radford Yarns including tube dimensions, composition, hole spacing, [redacted] for the felting tubes;

(h) the software for the PLC which controls [redacted];

(i) the system for monitoring and controlling the drying cycle of the cabinet drying system [redacted];

(j) the unique felted yarn specifications developed for Cavalier.

• [201] While the claim for breach of confidence requires there to be an unauthorised use, that can only be determined after considering the defences of acquiescence or

estoppel. For that reason, in this part of the decision I focus only on whether the defendants are using the Confidential Information. For completeness, I do not understand the plaintiffs to raise disclosure as a concern, noting Mr Radford’s disclosure to Pebblemill was implicitly authorised by the plaintiffs who knew Mr Radford was producing felted yarn through the vehicle of Pebblemill from the outset.

• [202] To establish whether Pebblemill was using the Claimed Confidential Information, the parties called expert evidence from Mr Collins and Mr Cuthbertson, who were tasked with inspecting the operations at Cavalier and Pebblemill and to provide opinions on the similarity or otherwise of the technology used by the two manufacturers. This was a particularly fraught subject as Pebblemill now claims to have significantly modified its felting machines (the PF1, PF2 and PF3) and says that those modifications are confidential information which it should not have to disclose to Cavalier. Pebblemill objected to Mr Hussey undertaking the inspection on the grounds that it would reveal highly sensitive commercial trade secrets to its competitor Cavalier. This issue was the subject of a pre-trial ruling, where Associate Judge Paulsen determined the terms on which Cavalier could inspect Pebblemill’s machines.²³

• [203] Mr Collins, an experienced industrial engineer, was called by the plaintiffs to undertake this comparison. His expertise or independence was not challenged by the defendants and Mr Cuthbertson, the expert for the defendants, did not disagree with Mr Collins’ technical conclusions. While, through his association with EFI, he had worked on the Periloc machines both at Radford Yarns and at RYT, I accept he was a thorough, careful and independent witness.

• [204] Mr Cuthbertson, the independent expert called by the defendants, is an experienced technologist in the wool industry, although I accept, as the plaintiffs say, he is not an engineer. He confirmed that, when he reviewed the machinery, he “really assessed it more from what the machinery was doing and the basics of how it was doing (sic) rather than the engineering modifications and whatever that you know

²³ Cavalier Corporation Ltd v Pebblemill Ltd [2022] NZHC 419, (2022) 166 IPR 206.

might’ve been made to it”. I accept, too, that through his association with Mr Radford during his time with WIRL, he formed a view that Cavalier’s claim was “unfair”. Furthermore, Mr Cuthbertson’s close involvement in the project to develop the PF2 under the research agreement with WIRL raised a risk of him being inadvertently biased towards the defendants. However, I do not consider his association with Mr Radford and Pebblemill unduly influenced the evidence he gave on the similarities and differences between the technology of the two companies.

• [205] The conclusions reached below are largely drawn from the expert evidence of Mr Collins, Mr Cuthbertson, and also, Mr Ian Robinson, an engineer employed by Swarm Intelligence Ltd, who specialises in the design, coding and commissioning of PLC systems, with accompanying HMI. His evidence, which compared Cavalier’s PLC and HMI with Pebblemill’s, and drew conclusions as to whether there was copying, was uncontested.

• [206] I have accepted that the use of [redacted] is confidential information. As Mr Cuthbertson acknowledges, you would need “knowledge of what you’re trying to achieve” and an appropriate technologist, to develop the necessary software. Mr Robinson explains that Pebblemill advised him that [redacted] are “off the shelf products that Pebblemill engaged a third party to commission”. This is consistent with Mr Radford’s evidence that his six-colour machine was independently developed drawing on other existing technology (the Caipo machine). Mr Robinson clearly accepts that statement at face value and, [redacted]. Accordingly, I have no evidence to suggest that Pebblemill is using Cavalier’s confidential information in relation to this aspect of the felting process. To the contrary, the only evidence is that the technology Pebblemill is using was independently developed.

• [207] While I have held that the liquor recipe developed by Radford Yarns, including the particular combination of low-foaming surfactant and dispersant used, is confidential information, I accept that Pebblemill has formulated its own felting liquor recipe which it now uses. Although Mr Hussey gave evidence that, while at RYT, Mr Radford was instrumental in developing a novel surfactant which was then manufactured by a company, [redacted], at RYT’s request, that product [redacted], was not part of the confidential information which was transferred at the time of sale. If

Cavalier wishes to assert that Pebblemill’s past use of it breaches an obligation of confidentiality, that is related to Mr Radford’s employment and is beyond the jurisdiction of this Court to consider.

• [208] Accordingly, I am satisfied there is no use by Pebblemill of the confidential liquor recipe developed by Radford Yarns.

• [209] The only aspect of the liquor delivery system which I found to be truly confidential information is the [redacted], Accordingly, while much time was spent on discussing the similarities and differences between other aspects of Cavalier’s and Pebblemill’s liquor delivery system, that is irrelevant to the plaintiffs’ claim. In any event, I also accept that the liquor delivery system used at Pebblemill is less sophisticated than that at Cavalier [redacted].

• [210] In respect of the aspect I have found to be confidential, Mr Robinson’s evidence is crucial. He compares the programs for the liquor delivery system on the Cavalier Periloc machines and the Pebblemill ones in considerable detail. Given the similarity of the machines each company owns, he is satisfied that a comparison of the BF1 with the PF1 is a representative comparison between the two companies. He notes a number of the functions of the program are similar, although he properly accepts that that, in itself, does not indicate one is copied from the other. However, he points out that:

(a) all the PLC inputs of the PF1 are present in the BF1, although there are additional inputs in the BF1; and

(b) the PLC output of the BF1 and the PF1 are broadly similar.

• [211] He points out that screenshots of the T4 data files for the two machines have 32 data addresses that are “essentially identical”, as are the four steps in the C5 data file. He concludes it is not possible that someone with knowledge of one file could allocate 32 timers in the same consecutive order, with essentially the same descriptions in the second file, without having reference to the first file. He says this is “regardless of how much intrinsic knowledge that person had of the first file or the felting machine

process generally”. He also observes that “rung comments / annotations that accompany the program source code ... provide explanation for the meaning of the instructions in the rung ... [so] any similar or identical comments will be particularly relevant to ... whether one file is a copy of or based upon another”. Again, he considers the rung comments are identical for the PF1 and the BF1. This is, in his view, “incontrovertible proof that the two files originate from the same source”.

• [212] He then goes on to consider the different program functions of the PLC pointing out where there are aspects which are the same or similar. Specific to the liquor delivery system, [redacted].

• [213] In the end, after discussing all the different functions of the PLC, he concludes that “a [Cavalier] felting machine program was used in the production of a Pebblemill felting machine program ..., or the [Cavalier] and Pebblemill felting machine programs were all produced from the same source file ... There are changes in control in the Pebblemill files, as compared to the [Cavalier] files, although appearing minor in nature”.

• [214] On the balance of probabilities, and given the software for the PLC was developed by Radford Yarns before the sale to RYT, I am satisfied that the PLC [redacted], and which is part of the PLC program controlling a range of functions on the felting machines, was developed using Cavalier’s confidential information.

• [215] The same conclusion applies to [redacted] which controls the yarn feed and delivery systems: the defendants are using Cavalier’s confidential information. However, I did not find that the mechanical aspects of those systems were confidential information. In any event, most aspects of this technology was filmed and made publicly available by Cavalier so if it was confidential, it no longer is. Any similarities in the physical aspects of the yarn feed and delivery systems are not a use of confidential information.

• [216] I have concluded that while the concept of [redacted] is not novel, the [redacted] tensioning system which Radford Yarns developed was a significant development and was critical to the commercial operation of the machines. Mr Collins

concludes that the PF1 and PF2 have a tensioning system in the same configuration as Cavalier’s machines. However, he considers the PF3 has a different system. Mr Collins’ view was that parts of the PF1’s tensioning system were “taken directly from [Radford Yarns].” In particular, he notes the hinging arms with plastic tube holders were an exact copy of ones he designed for Radford Yarns. However, he also notes there had been some improvements to the PF1 in that [redacted]. However, he is satisfied they performed the same function as on the Radford Yarns’ tube tensioning system. He also points out some differences in the PF2 from the Cavalier machines. [redacted].

• [217] Mr Radford also explains that the PF2 did not use [redacted]. Finally, Mr Radford explains that the PF3 had a tube tensioning system which was “still in development”. [redacted].

• [218] It is difficult to be precise about the extent to which each tube tensioning system relies on the system which was sold to RYT, and to assess to what extent changes to the system are genuinely novel or have springboarded off the system sold to RYT. However, based on the evidence, I am satisfied the PF1 and PF2 are using aspects of this confidential information, albeit there have been some subsequent modifications to the system. I am not satisfied, though, that the system on the PF3 is in the same position. Mr Collins, as an independent assessor, considers the tensioning system on that machine is different from that on PF1 and PF2, an opinion I accept. I therefore consider the PF3 is not using this confidential information.

• [219] While the use of flexible felting tubes, punctured with holes to release pressure, is an integral and publicly available aspect of the Periloc felting process, I have accepted that Radford Yarns, through a process of trial and error, developed a tube technology system which supported the commercial viability of the Radford Yarns’ technology and was treated as confidential.

• [220] Mr Collins’ evidence was that the felting tubes used by Pebblemill “appeared to be a direct copy of what is used on [Cavalier’s] machines”. In particular, he noted that the tubing:

(a) looked to be the same product that Cavalier uses;

(b) used the same bronze ferrels on the tube ends as Cavalier did; and

(c) was punched with holes in the same way as Cavalier’s tubes were punched.

The only difference was that [redacted].

• [221] The two firms also source felting tubes from the same supplier, with the same composition and the same tube diameter to wall thickness ratio. Finally, both Pebblemill and Cavalier [redacted]. I am satisfied that Pebblemill is continuing to use the knowledge that Radford Yarns built up in terms of tube composition and size and tube curing. In terms of the hole position, [redacted]. However, the evidence demonstrated that holes were placed in the same alignment by the two companies and the knowledge of where to place those holes, according to Mr Radford, had been developed over “20 years of trial and error”.

• [222] However, the design of the tube ends or ferrels used by Pebblemill to connect the felting tubes to the Periloc machines was very similar, if not identical, to the old IWS or Signaal connectors. Given those were in the public domain, because of their use by the IWS, that is not a use of confidential information.

• [223] The only aspects of the rotor design which I found was confidential information was the [redacted]. Again, Mr Robinson’s evidence is critical here. His conclusion after analysing the rung comments for the software is that they are “identical in PF1 and BF1” and this cannot be a coincidence. Again, I am satisfied therefore that Pebblemill is using the software for the PLC which is Cavalier’s confidential information.

• [224] In respect of the cabinet drying system, the only aspect which I have found to still be confidential is the method of monitoring and controlling the drying cycle of felted yarns [redacted]. The physical elements of the drying system, even if confidential, were clearly displayed to the world at large in the videos which were

taken of the RYT, and then Cavalier, drying process. The evidence was that the Cavalier dryer had a very sophisticated control system which [redacted]. However, the plaintiffs accept that the control system of Pebblemill’s dryer is less sophisticated than the control system of Cavalier’s and the software for the PLC and HMI of Pebblemill’s dryer is unlikely to have been copied from the software for the PLC and HMI of Bremworth’s cabinet dryers. I therefore do not accept that Pebblemill is using Cavalier’s confidential information relating to its cabinet drying system.

• [225] Finally, it was not disputed that the felted yarn specifications which were sold to RYT were confidential information. There was evidence that Mr Radford offered to replicate some yarn which was produced by Radford Yarns, but that would relate to yarns which were developed during his employment at RYT. That is not something I can enquire into.

• [226] In summary, the Confidential Information the defendants are using is:

(a) the PLC [redacted];

(b) the PLC [redacted];

(c) aspects of the confidential tube tensioning system on the PF1 and PF2; and

(d) know-how relating to tube composition, size and curing.

Affirmative defences

• [227] To this point, I have only discussed whether the Claimed Confidential Information is in fact confidential and, if so, whether Mr Radford and Pebblemill are using any of it, outside the terms of the IP deed.

• [228] While the defendants have denied they are using information which is confidential, they say even if they have, they have defences to the plaintiffs’ claim because:

(a) they were authorised to do so by the plaintiffs on terms where it would now be untenable to revoke that authorisation (authorisation);

(b) the plaintiffs’ conduct towards the defendants clearly represented that the defendants were free to use that information for their own purposes without any time restriction and the defendants have relied on that representation to their detriment (estoppel); and/or

(c) the plaintiffs have acquiesced in the use of that confidential information, such that it would now be inequitable or unconscionable to grant them the relief sought (acquiescence).

• [229] These defences arise from the conduct which occurred between the parties following the expiry of the IP deed at the end of 2013 until 2017 when the plaintiffs first attempted to have Mr Radford agree to a further licence agreement. During this period, neither party made any efforts to negotiate a renewal of the IP Deed or any other formal agreement. However, it is clear that some degree of use of the Confidential Information was authorised by Cavalier. The question is whether Mr Radford and Pebblemill were led to believe they were authorised to use the IP indefinitely, and for what purposes, such that it would now be unconscionable to terminate that authority.

The defendants’ submissions

• [230] In support of their authorisation claim, the defendants rely on the evidence of an ongoing informal arrangement between the parties which arose prior to the expiry of the IP Deed. This involved senior staff at Cavalier and RYT, particularly Mr McKenzie, who was chief operating officer, and then chief executive and managing director, of Cavalier, encouraging and commissioning Mr Radford and Pebblemill to produce felted yarn, including for rug and carpet production. Specifically, Mr McKenzie gave evidence that he encouraged Mr Radford “to dabble in the non-tufted carpet categories, so there was rugs, apparel and craft yarns, so any spill over or new developments that came out of that product development work and had potential for tufted carpets or machine made carpets, we would have first rights or access to that”. Mr McKenzie says he was largely responsible for deciding who

Mr Radford could and could not supply yarns to during Mr McKenzie’s time at Cavalier.

• [231] Mr Tan acknowledges there were regular meetings about “who [Mr Radford] and Pebblemill could and couldn’t supply”. He also acknowledges, that if the end customer was too small for Cavalier to supply, then Cavalier would be happy for Mr Radford and Pebblemill to supply that customer. This is consistent with Mr Radford’s evidence that RYT and Cavalier were aware that Pebblemill was producing felted yarn for RYT’s and Cavalier’s customers, including rug manufacturers, as they were supplying the raw materials to Pebblemill. Mr Radford’s understanding from discussions with Mr McKenzie was that Cavalier’s only concern was that Pebblemill not copy RYT’s yarn construction nor supply felted yarns to its competitors who could then supply broadloom carpet to its competitors in Australasia.

• [232] The defendants submit that it is clear that Cavalier and RYT knew that Pebblemill continued to use and develop the Periloc felting technology following the expiry of the IP Deed. Despite that, they never sought to terminate the licence or purchase the IWS protoype machine Mr Radford was using. Furthermore, they derogated from the terms of the IP Deed, even while it was on foot, because they permitted Mr Radford and Pebblemill to:

(a) produce felted rug yarn for sale; and

(b) produce felted rug and carpet yarns on commission for Cavalier and RYT.

Furthermore, Cavalier and RYT referred their own customers to Pebblemill when they no longer wanted to supply that customer. For example, I accept Mr Radford’s evidence that in around 2017, Ascend Rugs was referred to Pebblemill to source its felted yarn directly from Pebblemill.

• [233] Mr Hussey confirms that RYT relied on Pebblemill’s felting capabilities for both non-carpet and carpet yarn. Furthermore, for a period of time, RYT included the production capacity of Pebblemill on its production board, and Mr Hussey confirms

that Pebblemill made commissioned yarns for Cavalier for use in rugs and carpets, including after RYT moved its operations to Whanganui.

• [234] The defendants point to numerous invoices for commission work over the period 2012 to 2017 where Pebblemill was commissioned by RYT and Cavalier to produce felted carpet yarn using the Periloc felting technology, including the Confidential Information, which the plaintiffs now claim Pebblemill had no right to use. Importantly, they note that by January 2017, orders from Cavalier made up 50 per cent of Pebblemill’s sales and 80 per cent of its production.

• [235] As the defendants point out, the evidence also shows that RYT supplied Pebblemill with materials to produce felted yarn and other yarn products, or would allow suppliers, such as Chargeurs, to directly charge Pebblemill for yarn stock. Mr Hussey confirms that RYT supplied yarn to Pebblemill and dyed product that was then sold to Pebblemill. RYT would also supply Pebblemill with wool tops and coarse wool that were “only suitable for making rugs and carpet”. On one occasion, a shipment of wool was redirected by Cavalier to Pebblemill to facilitate a commission job.

• [236] The defendants also say that Cavalier and RYT were well aware that Pebblemill was supplying its own third party customers directly. Mr Tan says “the senior team at [Cavalier]” were happy to work collaboratively with Mr Radford and Pebblemill by allowing Mr Radford “to continue to develop yarns which is his expertise, his interests whilst leveraging off the work that he does effectively”. Similarly, Mr Hussey confirms that he knew Pebblemill was making felted yarn for Nick Radford Rugs and, on one occasion, for Artoz Rugs.

• [237] The symbiosis between the two companies was also evident in the fact that Pebblemill shipped its commercial yarn to RYT and tended to do its commercial dispatch using the RYT facility. This was approved by Ms Cooper, the administration manager at RYT. In addition, Mr Radford gave evidence, which I accept, that Pebblemill would use the cabinet dryer and drying cans on the RYT properties “on a daily basis” to dry its felted yarns. When Pebblemill relocated in 2016, RYT assisted in the move by organising transport services for the relocation and these services were

invoiced to Pebblemill at cost. RYT would supply other assistance to Pebblemill, and the evidence shows that as late as 2016, RYT was invoicing Pebblemill for goods and services including the supply of defoamer, the cost of dispatching orders for Pebblemill customers, and wages for RYT staff working on Pebblemill products.

• [238] The defendants submit that, in all those circumstances, there has been authorisation by the plaintiffs of the ongoing use of the Confidential Information, such that it has reached the point where the defendants can continue to use that information and are not bound to close down the business which they have built up.

• [239] In advancing this submission, the defendants refer to the decision in Regina Glass Fibre Ltd v Schuller.²⁴ In that case, Mr Schuller granted a sole and exclusive licence to Regina Glass Fibre Ltd (Regina Glass) to use a number of patents to manufacture and sell glass fibre in the British Commonwealth (except Canada). He agreed to provide know-how in the form of the advice and knowledge during the course of the licence.²⁵ As part of the agreement, Mr Schuller continued to be entitled to conduct research in connection with glass fibre making, but any improvements would be communicated to Regina Glass, and it had the right to the exclusive use of those improvements should it wish.²⁶ When the agreement expired after 15 years, Mr Schuller claimed that all Regina Glass’s rights reverted back to Mr Schuller and the licence ceased. However, the Court of Appeal held that Regina Glass’s rights did not cease following the termination of the licence saying: ²⁷

... in many cases, as in this one, when confidential information or know-how is given so as to enable the business to be established, it is given for all time. When the agreement comes to an end, there is no right to acquire further information, but the recipient can go on using that which he has already received. He is not bound to close down the business which he has built up by using it.

• [240] The defendants say this case demonstrates there is no general proposition of law that when confidential information is given under an agreement, and the

²⁴ Regina Glass Fibre Ltd v Schuller [1972] FSR 141 (EWCA Civ).

²⁵ At 142–143.

²⁶ At 143–144.

²⁷ At 146.

agreement comes to an end, that the right to use the confidential information also comes to an end. Rather, it is a matter of interpretation of the relevant agreement.

• [241] While the defendants accept that where the right to use confidential information is given for a limited purpose it can be revoked where it is sought to be used outside that limited purpose,²⁸ they say that is not the position in the present case. Specifically, the defendants submit that the Regina Glass principle is appropriately applied in the present case because:

(a) the licence to use the allegedly confidential information was granted to Mr Radford to enable him to start a business;

(b) the licence evolved into an informal arrangement between the parties that began before the expiry of the IP Deed and continued after it expired;

(c) under the arrangement between the parties there was no “limited purpose” for which the allegedly confidential information was licenced to Mr Radford and Pebblemill. Rather, Mr Radford had free rein to use it as long as he did not cross the limited boundary that Mr McKenzie indicated which was to copy RYT’s yarn constructions or supply broadloom carpet manufacturers in Australasia;

(d) the arrangement did not contemplate the revocation of the right to use the Periloc felting technology. At no time, for at least four years following the expiry of the IP Deed, did RYT or Cavalier indicate that the clock was ticking on his rights; and

(e) during that time Mr Radford and Pebblemill grew their business and invested further in their equipment and technology, even moving into larger premises. That growth was largely a consequence of the commissioning work which Pebblemill got from Cavalier and RYT. In other words, it was driven by them.

²⁸ Saltman Engineering Co Ltd v Campbell Engineering Co Ltd, above n 15.

• [242] The defendants say that, in all those circumstances, an injunction could be fatal to the business. To be forced to close it down, in circumstances where the plaintiff was the instigator of it being built up, would be both unfair and inconsistent with the principle in Regina Glass.

• [243] The same facts relied on to support authorisation are also relied on by the defendants to support an affirmative defence of estoppel. They point out that estoppel can turn what was once a revocable licence into an irrevocable one, citing Plimmer v Mayor of Wellington.²⁹ In that case, the appellant erected a wharf under a revocable licence from the government. He subsequently erected and then extended a jetty.³⁰ When, some 32 years later, the structures were vested in the Mayor of Wellington pursuant to statute, the plaintiff claimed compensation under the Public Works Act 1882.³¹ The Privy Council held that when the Government encouraged the plaintiff to extend the jetty in 1856, the licence the appellant had ceased to be revocable.³² Accordingly, an equitable right arose which was an interest in land giving rise to a right for compensation if acquired under the Public Works Act.³³

• [244] In this case, the defendants say it was reasonable to understand Cavalier and RYT’s conduct as representing ongoing permission to use the Confidential Information. Pebblemill clearly relied on that representation to continue to grow its business. For example, it relied on the receipt of commissioning orders from the plaintiffs as permission to fill those orders and therefore to continue to use the technology it was using to do so.

• [245] There would be significant detriment to Mr Radford and Pebblemill if they were now to be prohibited from using the allegedly confidential information as they may well need to shut up the felting business depending on the scope of the injunction. In the defendants’ submission, the defence of estoppel responds to both the claim for breach of confidence and the claim for breach of restraint of trade.

²⁹ Plimmer v Mayor of Wellington (1884) 9 App Cas 699 (PC).

³⁰ At 705.

³¹ At 707.

³² At 710.

³³ At 714 – 715.

• [246] Finally, the defendants refer to the equitable defence of acquiescence to say that the plaintiffs acquiesced to the defendants’ conduct, such that it would now be inequitable to allow the plaintiffs to seek relief.

• [247] In that regard, the defendants refer to the decision in Dominion Rent A Car Ltd v Budget Rent A Car Systems (1970) Ltd where the defence of acquiescence to the use of a brand name was accepted.³⁴ That case involved the use by Mutual Rental Cars (Auckland) Ltd (Mutual) of the Budget brand name and logo. It was held that Budget Australia acquiesced in Mutual’s use of the Budget brand name for a number of years and Mutual had expended at least some money and effort in exploiting the name. Accordingly, Mutual acquired, by Budget Australia’s acquiescence and encouragement, “a permanent right to use the name Budget”.³⁵

• [248] By analogy, the defendants say that, from December 2013 to the middle of 2017, the plaintiffs acquiesced to the use of the Confidential Information by them. Indeed, the plaintiffs actively encouraged them to continue by commissioning felted yarns from Pebblemill, supplying resources and raw materials to Pebblemill, and outsourcing unwanted customers to Pebblemill. The plaintiffs then continued to acquiesce to this alleged use from the middle of 2017 until around mid-2019, during which time they knew about, but did not object to, Mr Radford and Pebblemill’s continued use.

• [249] As a direct result of that conduct, Pebblemill became an established felting business and it invested in equipment and technology. The defendants say it would be entirely unconscionable for Cavalier and RYT to now assert that it had granted a revocable licence.

The plaintiffs’ submissions

• [250] The plaintiffs reject the pleaded defences. They accept the defendants were permitted to use the Confidential Information under a revocable licence and say that, in effect, the IP Deed continued on foot. For example, Mr Tan says the IP Deed was

³⁴ Dominion Rent A Car Ltd v Budget Rent A Car Systems (1970) Ltd [1987] NZCA 13; [1987] 2 NZLR 395 (CA).

³⁵ At 415.

not formally reviewed or renewed, but he assumed that “the parties continued the existing arrangement on an informal basis”. The plaintiffs say there is nothing unusual about a party permitting another to use confidential information in some circumstances and not in others. They say it was clear that any licence was limited and certainly not perpetual or irrevocable.

• [251] The plaintiffs say it was not until Mr Radford left the plaintiffs’ employ in May 2017 that it became apparent to them there might be any differences around what constituted Cavalier’s IP, and that occurred when Mr Radford refused to sign a licensing arrangement with Cavalier for use of the Claimed Confidential Information by Pebblemill in May 2017. Mr Tan says he was very surprised by the defendants’ lawyers’ response which argued the scope of Cavalier’s IP was significantly more limited than Cavalier was claiming.

• [252] Cavalier then says it took further steps to ensure the defendants were aware that they had no ongoing right to use the Confidential Information. For example, around July 2017, Mr Tan and another Cavalier representative, Mr Alston met with Mr Radford and were assured by Mr Radford that he had not been working with NZ Yarns Ltd and Mr McKenzie to start a competing felting operation. Mr Alston reported back to the board that Mr Radford was “fully aware of our intellectual property rights”. At the same meeting in July 2017, Cavalier representatives said that the defendants could serve the smaller customers of Cavalier which Cavalier did not want to retain as long as a licensing agreement for the use of the IP was agreed to.

• [253] On 7 August 2017, Mr Tan and Mr Radford again discussed the licensing agreement. However, no licensing agreement was concluded. Despite that, Cavalier understood the defendants were servicing certain agreed smaller customers, and Mr Tan says he believed that Pebblemill was “too small to supply more of [Cavalier’s] customers”. When, early in 2019, Cavalier became aware that Mr Radford approached two of their customers in the United States, Dixie Group and Unique Carpets, a cease and desist letter was written by the plaintiffs’ lawyers.

• [254] In resisting the defence of estoppel, the plaintiffs say they did not know that Pebblemill was supplying third parties outside the scope of the informal licence, or,

where they suspected it, they were given assurances that no such supply was occurring. Furthermore, Cavalier did not know that Pebblemill had been developing a new prototype Periloc machine from 2015 (the PF2) and was in the trial phase of a new production Periloc machine (the PF3) until it received evidence of that in the course of these proceedings.

• [255] The plaintiffs also say that Pebblemill did not disclose the extent of its supply to rug and carpet manufacturers, including to Cavalier’s customers. They say Mr Radford did not tell Cavalier that Pebblemill was supplying Prestige Carpets over 10,000 kgs of felted yarn between 2015 and 2017, and that Pebblemill supplied Brink & Campman “on the side”. In 2017, Mr Radford discussed with Delos the fact that any supply from Pebblemill to Delos needed to be hidden from Cavalier. Cavalier did not know that in April 2018, Pebblemill had supplied Tai Ping Carpets following a cancelled order with Cavalier.

• [256] For these reasons, Cavalier says it cannot be said that it failed to object to the defendants’ use of the Confidential Information to manufacture felted yarns for any party other than those it had expressly agreed to under the IP Deed, or which were known commissions for Cavalier or Nick Radford Rugs, or were agreed with Mr McKenzie or other staff members.

• [257] The plaintiffs also deny that Cavalier’s suggestion that Pebblemill take on smaller customers in 2017 was a representation that the defendants were allowed to use the Confidential Information to supply third parties without restriction. The plaintiffs accept that in March 2017, Mr Radford was advised that he could serve certain customers that Cavalier wished to relinquish, as set out in an email from Cavalier to Mr Radford dated 8 May 2017. Similarly, Mr Tan confirms that Cavalier agreed, on Mr Radford leaving RYT, that he could continue to use the IP in the manner contemplated in the IP Deed, except that he could extend the scope of the licence to supply:

(a) his son Nick Radford;

(b) specific yarns for overseas customers of Cavalier which Cavalier wished to relinquish because of the small quantities involved; and

(c) any other yarns as approved by Cavalier in writing from time to time.

A copy of a draft licence agreement to that effect was emailed to Mr Radford on 9 May 2017.

• [258] In the same month, Mr Radford responded to a request from Carpet Maker (Thailand) Co Ltd saying: “I am unable to quote prices at present as you are technically still a Cavalier customer and I am still contracted to Cavalier”. The plaintiffs say it was clear, therefore, that Mr Radford appreciated he was constrained by the terms of the informal licence and which were confirmed in the draft licence agreement. The plaintiffs say that from the point the draft licence agreement was offered, but Mr Radford refused to sign it, Cavalier had made its position clear and it could not be estopped from relying on its rights in contract and equity.

• [259] The plaintiffs say that, in any event, any belief or expectation supposedly created by them permitting the defendants to do work outside the terms of the IP Deed did not create or encourage a reasonably held belief that the defendants could use the Confidential Information in perpetuity and for any purpose, or that Cavalier would no longer enforce its contractual or equitable rights if the informal licence was breached. Specifically, they say the belief or expectation that was encouraged was that any use by the defendants of the Confidential Information was confined to specific circumstances that were dictated by Cavalier and could be revoked at any time. No belief or expectation was created beyond that and if it had been, then it was not reasonably held. This is because the defendants:

(a) were aware of the contractual backdrop which made it clear that the use of the Confidential Information was confined to specific limited circumstances;

(b) appreciated the unusual nature of Cavalier permitting Mr Radford to retain the PF1 machine as an innovative solution to enable Mr Radford

to continue to make yarns that did not compete with those of Cavalier; and

(c) appreciated the mutual benefits gained by the parties in enabling an informal licence to continue whereby Cavalier’s smaller customers could be serviced.

• [260] In addition, the plaintiffs say there is no evidence the defendants relied on the plaintiffs’ conduct and representations to their detriment by investing in “substantial further equipment, facilities and personnel” to manufacture the felted yarns using the Confidential Information. They say there also is no evidence to support the assertion that they might need to be shut up shop as a felting business if they are prevented from using the Confidential Information.

• [261] They say that as the defendants knew (or should have known) that any informal licence was revocable, any costs the defendants incurred in manufacturing felted yarns for Cavalier using the IP under the informal licence was done as part of an ordinary commercial bargain that the defendants received the benefit of. There was no expenditure of time or money that was rendered worthless because Cavalier now seeks to revoke that licence.

• [262] The plaintiffs reject the defendants’ reliance on the case in Regina Glass.³⁶ They point out that the case turns on the true construction of the relevant agreement in that case. In Gurry on Breach of Confidence, the authors note:³⁷

Regina Glass v Fibre should not be seen as supporting the wide proposition [that the recipient can go on using the information he or she has already received]. Rather, it is argued, that Regina Glass v Fibre emphasizes that, in the absence of express provisions that deal explicitly and comprehensively with the parties’ obligations post-termination, the court will consider all of the circumstances of a case and may, as a result, imply a term permitting know-how to continue being used.

• [263] The plaintiffs say this is not such a case given the very limited purpose for which the defendants could use the Confidential Information, and the fact the IP Deed

³⁶ Regina Glass Fibre Ltd v Schuller, above n 24.

37. Tanya Aplin and others Gurry on Breach of Confidence (2^nd ed, Oxford University Press, Oxford, 2012) at [8.146].

evidences the parties’ intentions that Cavalier had full discretion to terminate the licence, which is consistent with how it acted in 2017 by having its lawyers write to Mr Radford’s lawyers.

• [264] In respect of the affirmative defence of acquiescence to the claim for breach of confidence in equity, Cavalier submits it has not acquiesced to any continuing use of the Confidential Information outside of the specific circumstances that were agreed to in the informal licence between the parties. Furthermore, there was no inordinate delay in the present case. Cavalier actively addressed concerns as they arose regarding the use of the Confidential Information.

• [265] The plaintiffs also submit that the case is clearly distinguishable from Dominion Rent A Car.³⁸ They say that, in that case, there was no apparent limitation on the use of the relevant IP, whereas here, Cavalier consistently and repeatedly raised the scope of its rights with the defendants and addressed concerns as they arose. Furthermore, they say Cavalier had no knowledge of much of the defendants’ activities including of the construction of the PF2 and PF3 machines. In those circumstances, they submit it would be entirely inappropriate to find that the informal licence between the parties is now irrevocable.

Can the defendants establish the defence of estoppel?

• [266] The complexities of this case arise largely because of what was permitted to be done outside the terms of the IP Deed and, in particular, after the IP Deed terminated in December 2013. Instead of formalising the ongoing arrangement between the parties, they allowed it to evolve in a way that was convenient to all parties at the time. I also accept that even before the IP Deed expired, the plaintiffs had extended it informally by commissioning Pebblemill to do work outside its terms.

• [267] I am satisfied that Mr Radford complied with the terms of the IP Deed during its term, and only supplied felted yarn outside the terms of the deed when that was permitted by Cavalier. I also consider Cavalier knew that Mr Radford was with development work, at least on the PF1 machine, and encouraged him to do so during

³⁸ Dominion Rent A Car v Budget Rent A Car Systems (1970) Ltd, above n 34.

the term of the IP Deed because the fruits of that work would be shared with Cavalier. In that regard, I note that the move to [redacted], which proved to be successful in reducing friction issues on the tube tensioning system, was passed on to RYT by Mr Radford, and RYT, in due course, made the same modification to its machines.³⁹

• [268] By December 2013 when the IP Deed expired, the relationship between the parties was significantly intertwined. Each used the other to support its business and although the IP Deed was not renewed, there was clearly an ongoing acceptance of Mr Radford and Pebblemill using the Confidential Information. The issue is whether this occurred in circumstances which reasonably led the defendants to believe they had an irrevocable right to use the Confidential Information (whether for limited or unlimited purposes), such that it would now be inequitable to insist on the defendants relinquishing that right through one of the pleaded defences.

• [269] I begin by addressing the defence of estoppel, as if the representation pleaded by the defendants meets the requirements of an estoppel by representation or by silence, there is then no need to consider acquiescence, as it seems to me that the defence of acquiescence in the particular circumstances of the case would not involve materially different findings from the claimed estoppel defence. Acquiescence involves “calculated (that is, deliberate and informed) inaction by [the plaintiff] or standing by, which encouraged [the defendant] reasonably to believe that [the defendant’s] omissions were accepted or not opposed by [the plaintiff]”.⁴⁰ In this case the reference to the defendants’ “omissions” would, of course, be to the defendants’ actions.

• [270] The elements of an estoppel are well established. They comprise:⁴¹

(a) the creation or encouragement of a belief or expectation by way of conduct or words;

(b) reliance on that belief or expectation by the other party; and

39. The fact that the [redacted] were only installed in RYT’s machines around 2014 does not mean Mr Radford did not pass this on during the term of the IP Deed.

⁴⁰ Byrnes v Kendle [2011] HCA 26; (2011) 243 CLR 253 at [79].

⁴¹ Gold Star Insurance Co Ltd v Gaunt Co Ltd [1998] 3 NZLR 80 (CA) at 86.

(c) detriment.

• [271] These elements must give rise to circumstances where it would be unconscionable for the relevant party to deny or go back on the belief or expectation they have encouraged.⁴²

• [272] In this case, the issue is whether RYT/Cavalier’s conduct reasonably gave rise to an expectation or belief that:

(a) the use of the Confidential Information was no longer revocable; and

(b) the use of the Confidential Information was no longer restricted by the terms of the IP Deed.

Was there the creation or encouragement of a belief or expectation by the plaintiffs?

• [273] Here, the allegations are not simply that Cavalier was silent in the face of the defendants’ continued use of the Confidential Information after the IP Deed expired, but Cavalier actively encouraged the use of it to supply both itself and its customers. In that regard, I accept there is ample evidence that Cavalier actively encouraged Pebblemill to continue on in a business that it knew was using the Confidential Information. By these actions, Cavalier clearly conveyed that it was not concerned about the use of the Confidential Information in and of itself, at least where that was useful to Cavalier or where it did not compete directly with Cavalier’s production of felted wool carpets.

• [274] There can be no doubt that Cavalier encouraged Pebblemill to develop its capacity to produce felted yarn without the protection of a formal agreement.

• [275] While Mr Hussey says he did not recall RYT commissioning Pebblemill to supply felted carpet yarn while that company was still operating in Christchurch and after the move to Whanganui, when invoices were put to him in evidence, he accepted that occurred. Mr Hussey then acknowledges that at the time of the move he was busy

⁴² National Westminster Finance NZ Ltd v National Bank of NZ Ltd [1996] 1 NZLR 548 (CA)at 549.

with the production side of the business, and the shift to Whanganui, which is why he had “no recollection of all this stuff happening”.

• [276] Similarly, Mr McKenzie says he “encouraged [Mr Radford] to dabble in the non-tufted carpet categories” which was using felted yarn outside the parameters of the IP Deed. He also says he was aware that “there were some developments” to the felting machines prior to his departure from Cavalier in May 2015.

• [277] I am satisfied that Cavalier clearly encouraged a reasonable belief by Mr Radford and Pebblemill that continued use of the Confidential Information, without a time bar, was permitted. This conclusion is supported by the following circumstances:

(a) Cavalier had not required the IP Deed to be renewed;

(b) Cavalier continued to commission work from Pebblemill which included yarn for use in rugs and carpets;

(c) Pebblemill was being supplied by RYT with wool that was only suitable for use in floor coverings;

(d) the commission work for RYT/Cavalier came to comprise 80 per cent of Pebblemill’s production; and

(e) Cavalier knew that Pebblemill had taken on staff, built new machinery and moved into commercial premises in order to undertake this work.

• [278] What I do not accept, however, was that a belief or expectation was encouraged by Cavalier that such use was for unlimited purposes. All the parties acknowledged that the use was subject to limitations and Pebblemill’s business was built on that understanding. For example, Mr McKenzie said that during his time as chief executive, the only limitation was “[i]f they were a competitor of Cavalier particularly in Australia then it was a no go”. This reflected his evidence-in-chief where he said:

the redline for [Cavalier] was that we wouldn’t let [Pebblemill or Mr Radford] supply felted yarn within Australasia for the broadloom carpet market. To a lesser extent we were concerned about the USA and UK markets, although that related to potential market extension for [Cavalier]”.

• [279] The question of what Mr Radford understood to be the limits of the use is complicated by the fact that Mr Radford was also subject to the restraint of trade in the 25% SPA which continued in force until December 2018. He acknowledges in evidence that there were restrictions on who he could supply, but he does not differentiate between the terms of the restraint of trade and the terms of the informal arrangement for use of the Confidential Information. For example, Mr Radford acknowledges in cross-examination that, in 2017, he was “contracted to Cavalier” and could not quote prices to Carpet Maker (Thailand) “at present”. This suggests he was aware he could not compete with Cavalier until the restraint of trade lifted rather than that he understood his right to use the Confidential Information was limited.

• [280] However, leaving aside the overlay of the restraint of trade, it is tolerably clear that Mr Radford also understood the permission to use the Confidential Information was not unlimited. Mr Radford acknowledges in cross-examination that the arrangement he had with Mr McKenzie allowed him to produce yarns for rug manufacturers, such as his son Nick Radford, as “long as it wasn’t competitive with Cavalier”. While he acknowledges that Mr McKenzie did not expressly say he could supply rug manufacturers, he says Cavalier was supplying him with “coarse micron wools which were only suitable for carpets or rugs”, and so, by implication, was aware he was supplying rug manufacturers and did not object. However, there was no suggestion he understood he could use the Confidential Information to make yarn for broadloom carpet, or for rug manufacturers that were seen as competitors of Cavalier, without Cavalier’s permission.

• [281] In that regard, there are also communications referred to in evidence which suggest Mr Radford knew the boundaries of what Pebblemill was permitted to do under the informal arrangement but, as time went on, he began to push them. For example, Mr Radford supplied samples to Brink & Campman. Mr Radford admitted he was trying to win Brink & Campman’s business, but that he did not disclose that to Cavalier and this was done at the same time that Cavalier had asked him for assistance

to resolve the issue that Cavalier was having with its own supply of felted yarn to that firm. There can be no doubt that this activity fell outside the scope of any use of the Confidential Information that Cavalier had authorised or encouraged, which is why Mr Radford did not disclose this to Cavalier.

• [282] Mr Radford also acknowledges that the fact Cavalier was commissioning him to produce yarns for ASA, a rug manufacturer, and provided him with the colour specifications spreadsheet for ASA yarns in order to do that, did not authorise him to supply ASA in competition to Cavalier. He agrees that “ASA orders had to go through [Cavalier] and [he] couldn’t take them [himself]”.

• [283] In February 2017, Pebblemill supplied a sample batch to Delos, a rug and carpet manufacturer, which Mr Radford said approached him in late 2016 because they were concerned about continuity of supply from Cavalier. Mr Radford acknowledges that in an email exchange with Delos in June 2017, he chased up an unpaid invoice from February saying “I hope it didn’t get confused with Radford/ Cavalier stuff!”. Delos replied that it did not as, “[w]e were carefull (sic)”. I am satisfied this request to Delos not to disclose their business arrangement to Cavalier, was clear evidence that Mr Radford knew he was not permitted to supply Delos, whether it was for samples or larger orders.

• [284] Furthermore, as already discussed in this judgment, I am satisfied there was a discussion between Mr Radford, Mr Alston and Mr Tan in July 2017 whereby he acknowledged Cavalier’s ownership of the IP. While I did not have any details of what was discussed, this is an acknowledgment by Mr Radford that he did not have an unfettered right to use the Confidential Information.

• [285] Overall, I consider the plaintiffs encouraged a belief or expectation the defendants could use the Confidential Information and build up a business on that basis, so long as they were not using it for floor covering applications, except for supply to Nick Radford Rugs or other manufacturers where agreed with Cavalier.
• [286] Cavalier’s actions were not sufficient to displace the reasonable belief Mr Radford and Pebblemill could use the Confidential Information for limited purposes.

• [287] The email from Mr Alston to Mr Radford on 8 May 2017 reinforced the belief or expectation that he was able to continue to use the Confidential Information, including for rug and carpet manufacture, where those customers were not supplied by Cavalier. The email included a list of customers which RYT had supplied in 2016. The first five customers, who purchased the greatest volumes of felted yarn product from RYT, were the ones “which Cavalier intends to continue to supply”. The email went on to say “if you can let us know the ones which you would like to supply going forward then we can get the communication going”.

• [288] I accept, as Mr Radford said, this proposal was not suggested to be conditional on a formal agreement being signed, but appeared to continue the existing arrangement where Pebblemill was able to supply smaller rug and carpet manufacturers that Cavalier/RYT was not interested in supplying.

• [289] I do not consider the fact that a draft licence agreement was sent very shortly after this email was sent can undo the effect of the beliefs or expectations that had been set up over the intervening years. Cavalier only sought to have the power to revoke the licence by proposing a new licence agreement once it no longer had Mr Radford in its employ, and when it became concerned that Mr Radford was:

(a) querying how much of the Claimed Confidential Information was in fact confidential; and

(b) looking to service customers in competition to Cavalier.

• [290] The fact that in June 2017, Cavalier’s lawyers wrote to Mr Radford’s lawyers expressing concerns Mr Radford was using the Confidential Information without authorisation and reserving its rights to take action, does not change what occurred up to this point. Furthermore, Cavalier continued to make it clear that the use of the

Confidential Information could be ongoing if it continued to be for limited purposes. For example, in an email of 9 August 2017 from Mr Tan to Mr Radford, Mr Tan said:

[a]s we all agreed, we need to progress matters so that your position, in so far as your ongoing use of Cavalier’s IP is concerned, is clear ... You will also let us know which customers you wish to supply so that we can let everyone know, but it appears you are only looking at a couple.

• [291] While the plaintiffs suggest that the belief or expectation created or encouraged was not reasonably held, a distinction needs to be made between the ability to continue to use the Confidential Information and the scope of that authorisation.

Was there reliance by the defendants?

• [292] I accept Mr Radford’s evidence that in reliance on Cavalier’s actions, Pebblemill went from a backyard operation set up at his rural property to a commercial production facility operating from commercial premises. In particular, I accept that Cavalier knew about and assisted with Pebblemill’s relocation to commercial premises in mid-2016. It also knew that Pebblemill was:

(a) employing some of RYT’s staff who took early redundancy;

(b) building a cabinet drier as Pebblemill would no longer have access to the one at RYT once it was dismantled; and

(c) building new input and output creels to enable Pebblemill to drop yarn into cans rather than into hanks.

• [293] While Mr Hussey says he did not know that Pebblemill was building new input and output creels, installing a new liquor tank for its machines, nor building its own cabinet dryer, I prefer Mr Radford’s evidence that he regularly talked about these developments with Ms Cooper and Mr Hussey. Mr Hussey did not deny that such conversations were had, but simply said that he did not recall them. However, like the commissioning work, I think he had simply put these events out of his mind. In any event, when pressed, Mr Hussey said he went to Pebblemill’s premises off Halswell Junction Road where he saw “a new development of a machine”, which demonstrates he was aware that Pebblemill was investing in its technology. He also

knew Mr Radford purchased a roving machine from a Palmerston North business because he said he saw it in storage.

• [294] Given the two businesses’ mutual interest in felted yarn production and the need for RYT to use Pebblemill to support its operation, I think it implausible that Mr Radford would not have shared details of his increasing capacity to produce felted yarn with key RYT staff. However, there is no doubt he did not tell them of his work developing the PF2 and PF3 as he saw this as the product of his own labour and efforts.

• [295] As already identified in the foregoing discussion, I am satisfied that a belief or expectation that the Confidential Information could continue to be used was created by Cavalier and RYT allowing Mr Radford’s business to develop from a home business to a fully commercial operation which was actively supported by RYT and Cavalier. It was entirely reasonable in those circumstances for Pebblemill, as Mr Radford said, to invest “a significant amount of money moving to bigger premises and investing in new equipment [to] service RYT’s ongoing requirements”. One of the reasons for Mr Radford saying he would not sign the new IP agreement was that he was “still working within the arrangement I had reached with Colin McKenzie and RYT years ago”. As a matter of logic, no sensible businessman would have undertaken this development had there been any reason to believe RYT/Cavalier would revoke it.

• [296] I also consider that had RYT stayed in Christchurch, the relationship would likely have continued without interruption. The decision to move the RYT operation to the North Island, combined with the end to Mr Radford’s employment, seems to have triggered the decision of Cavalier management to claw back the expectations that had been built up over several years. It also encouraged Mr Radford to look to develop new clients as commission work from RYT tailed off.

Will there be detriment to the defendants?

• [297] I am satisfied that if the ability to use the Confidential Information was revoked, as the plaintiffs say it should be, there would be detriment to the defendants. While that detriment is not quantified in monetary terms, there is an obvious evidential foundation for concluding that the defendants would suffer detriment. They have invested money in building a business, acquiring assets and hiring staff which would

not have been incurred had there been any reason to think that Cavalier would terminate the agreement at will. It would go to the core of their business because information such as the felting tube technology used by both companies is fundamental to the operation. While the defendant could potentially commission new software to operate the PLC, it is difficult to see how they could conduct the business without using information such as the tube technology.

Is it unconscionable to revoke the expectation that the defendants can use the Confidential Information?

• [298] That then brings me to the last consideration, which is whether it would now be unconscionable for Cavalier to go back on the belief or expectation that it had encouraged in the defendants. The belief or expectation that the plaintiff encouraged was that the defendants could go on using the Confidential Information and establish a business in reliance on that, as long as the business was for yarns for apparel or other non-floor covering applications, or for Nick Radford Rugs, or for other floor covering manufacturers where that was agreed with Cavalier. Essentially, that confirms the terms of the draft IP Deed sent on 9 May 2017 as to the use of the Confidential Information, but without imposing a set term on it. I am satisfied that it would now be unconscionable for Cavalier to withdraw permission to use the Confidential Information on those terms when it allowed the Pebblemill business to expand in reliance on the authority to use it, and the defendants would suffer the detriment I have described above.

• [299] However, should Mr Radford and Pebblemill wish to actively compete with Cavalier in the rug and carpet market, it will need to do so without relying on the Confidential Information, or alternatively, it will need to negotiate a fresh agreement with Cavalier to enable it to do so.

The other defences

• [300] Having discussed the claimed defence in estoppel, and having found that, at least in part, that has been established, there is no need to consider the alternate defences which rely on the same factual grounds. In my view, they would be likely to lead to the same conclusion in any event. In particular, I consider the principles in

Regina Glass have some application here. This is because the plaintiffs continued to encourage Pebblemill’s business to grow for several years after the IP Deed terminated. It is this factor which points to the Confidential Information being able to continue being used, albeit only for the purposes from which its use was encouraged, and not the fact the Confidential Information was initially allowed to be used under the IP Deed.

Breach of contract

• [301] The plaintiffs claim that Mr Radford has breached contractual terms which imposed a duty of confidence on Mr Radford and as a result, has caused loss and damage to Cavalier and RYT. The clauses that are relied on by the plaintiffs are:

(a) cl 25 of the 2011 SPA;

(b) cl 4 of the IP Deed; and

(c) cl 12 of the 25% SPA.

Clause 25 of the 2011 SPA

• [302] Clause 25.1 of the 2011 SPA sets out confidentiality obligations placed on the parties to that agreement. It states:

Each party will keep this Agreement and its terms and any confidential information about any other party to this Agreement which was obtained during the course of negotiations relating to this Agreement, confidential and no party will make any public disclosure or announcement of this Agreement or its terms without the prior consent of the other parties.

• [303] The plaintiffs say that “Confidential Information” was defined in the 2011 SPA as “all information not publicly known which is used in, or otherwise relates to, the Business”. “Business” in turn was defined as “the yarn manufacturing and yarn sales business carried on by the Vendor under the name Radford Yarn Technologies”. Accordingly, the plaintiffs say that the Claimed Confidential Information was imparted during the sales process and, much as is argued under the equitable claim, the continued use of that technology by Mr Radford to conduct Pebblemill’s business is a breach of that contractual obligation.
• [304] Mr Radford, however, says this is a ubiquitous confidentiality clause which is intended simply to protect confidential information relating to:

(a) the fact of the agreement;

(b) the terms of the sales and purchase agreement; and

(c) other parties’ information disclosed or obtained during negotiations.

• [305] Mr Radford says the natural and ordinary meaning of cl 25 does not, and cannot, extend to either:

(a) Radford Yarns’ confidential information; or

(b) confidential information held by Mr Radford.

Accordingly, Mr Radford says this clause is simply not engaged when considering the allegations made by the plaintiffs.

• [306] The extent and purpose of this clause is a question of contractual interpretation, that is, of ascertaining “the meaning which the document would convey to a reasonable person having all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract”.⁴³ I accept that when the clause is given its natural and ordinary meaning, it is limited in the way Mr Radford says. It places an obligation of confidence on the parties in respect of information that relates to the:

(a) fact of the agreement;

(b) terms of the agreement; and

(c) other parties’ information disclosed or obtained during negotiations of the agreement.

43. Investors Compensation Scheme Ltd v West Bromwich Building Society [1997] UKHL 28; [1998] 1 WLR 896 (HL) at 912.

• [307] Clearly, Mr Radford did not obtain confidential information during the negotiations for the 2011 SPA. The Confidential Information (to the extent I have found it to be so) was information already held by Mr Radford and Radford Yarns and which was to be transferred to RYT as a result of this agreement.

• [308] Accordingly, there has been no breach of cl 25 of the 2011 SPA.

Clause 4 of the IP Deed

• [309] Clause 4 of the IP Deed provides as follows:

[Mr Radford] agrees to keep the [RYT] IP confidential and not to disclose any part of the know-how or intellectual property rights relating to the [RYT] IP to any other person.

• [310] The RYT IP was defined in the recitals to the IP Deed as “the intellectual property, know-how and technology relating to felting which [RYT] has agreed to acquire from [Radford Yarns]”. Again, the plaintiffs assert that Mr Radford owed a duty of confidence pursuant to this clause to Cavalier and RYT, and has breached this duty of confidence.

• [311] However, leaving aside the question of whether the duty of confidentiality contained in cl 4 survived the expiry of the IP Deed in 2013, the clause is limited to preventing Mr Radford from disclosing confidential information including the Claimed Confidential Information. It did not prevent him from using any confidential information contemplated by the IP Deed whether in his personal capacity or, given Cavalier’s knowledge of and acquiescence to it, through Pebblemill. That said, I consider it is implicit in the IP Deed that the use of the information is only permitted to the extent described in cl 3.

• [312] Accordingly, because there is no evidence that Mr Radford has disclosed the Confidential Information, except to Pebblemill which Cavalier clearly was aware of and condoned as consistent with Mr Radford exercising his rights under the IP Deed, the claim of breach of cl 4 of the IP Deed must fail.
• [313] The more relevant question, albeit not pleaded, is whether there has been a breach of cl 5(a) by which Mr Radford agreed that, on termination of the agreement, he would “cease the manufacture of felted yarns which uses either directly or indirectly any of the [RYT] IP, including improvements thereto pursuant to clause 6”. However, that is an issue which engages the pleaded defences of acquiescence and estoppel which I have already addressed. I have held that Cavalier and RYT are estopped from withdrawing permission for Mr Radford and Pebblemill to use the Confidential Information for the purposes set out in [298] above.

Clause 12 of the 25% SPA

• [314] The last contractual document that the plaintiffs’ pleadings rely upon in support of their allegations of misuse of confidential information is the 25% SPA. The plaintiffs did not address this aspect of the claim in closing submissions. However, the relevant clause, cl 12.12, is found in the “Miscellaneous” section of the 25% SPA and provides:

A party must not use or disclose confidential information of the other party (which for the avoidance of doubt shall include the potential restructuring of the Company referred to in this agreement), and must keep the terms and existence of this agreement and the confidential information of the other party confidential except where:

(a) the information is public knowledge (but not because of a breach of this agreement) or the party has independently created the information;

(b) disclosure is required by law or a regulatory body (including NZX Limited) and, in the case of the Purchaser [Cavalier], the Purchaser [Cavalier] considers it reasonable or necessary to disclose the existence of this agreement to the stock exchange on which it is listed;

(c) use or disclosure is made for the purposes of this agreement (and disclosure is made on the basis that the person keeps the information confidential); or

(d) the other party agrees in writing to the disclosure of its confidential information.

• [315] As Mr Radford point out, the relevant parties to the agreement are Cavalier and Mr Radford and this limits the scope of the confidential information which is protected by the clause. The clause does not govern confidential information which is owned by RYT, which is not a party to this contract, and therefore cannot bring this claim.
• [316] As a result, I accept Mr Radford’s submissions that a plain and natural reading of this clause limits the obligations of confidence placed upon Mr Radford to the following:

(a) Cavalier’s confidential information (which at the time the 25% SPA was executed did not include the IP owned by RYT);

(b) RYT’s confidential information relating to its potential restructure; and

(c) the existence and terms of the 25% SPA.

• [317] Accordingly, cl 12.12 of the 25% SPA is irrelevant to the plaintiffs’ claim for breach of confidential information and the claim for breach of this clause fails.

Breach of restraint of trade

The terms of the restraint of trade

• [318] Cavalier seeks to enforce the restraint of trade found at cl 10.2 of the 25% SPA. Under the restraint, Mr Radford undertook that for six years from 14 December 2012, he would not:

(a) engage in a business or an activity that is:

(i) the same or substantially similar to the Business or any material part of the Business; and

(ii) in competition with the Business or any material part of the Business;

(b) solicit, canvass, approach or accept an approach from a person who was at any time during the 12 months ending on the Completion Date, a customer of [RYT] with a view to obtaining their custom in a business that is the same or similar to the Business and is in competition with the Business;

(c) interfere with the relationship between the [Cavalier Group of Companies] and their customers, employees or suppliers; or

(d) induce or help to induce an employee of the [Cavalier Group] to leave their employment.

The “Business” was defined as “the yarn manufacturing and yarn sales business carried on by [RYT] and all associated activities or processes including, but not limited to, the research into and development of the underlying yarn systems”.

• [319] Clause 10.4 of the 25% SPA provides “The undertakings in this clause 10 apply only if the activity prohibited by clause 10.2 occurs within New Zealand or Australia.”

• [320] Clause 10.5 provided exceptions to the restraint. Those included the following:

(c) in the case of Edward Charlton Radford, manufacturing apparel and exotic yarns that do not compete with the [RYT’s] products for such period as the [RYT] shall, in its sole discretion, determine and otherwise in accordance with the terms of the intellectual property agreement between Edward Charlton Radford and [RYT].

• [321] At cl 10.6(a), Mr Radford acknowledged that “all the prohibitions and restrictions in this clause 10 are reasonable in the circumstances and necessary to protect the goodwill of the Business”.

The alleged breach

• [322] Cavalier claims that Mr Radford breached the restraint of trade by:

(a) accepting an approach from a person who was a customer of Cavalier at any time in the 12 months prior to 14 December 2012, with a view to obtaining their business in competition with Cavalier, through the supply of felted yarns, in breach of cl 10.2(b) of the 25% SPA; and

(b) interfering with Cavalier’s relationship with certain customers of Cavalier in breach of cl 10.2(c) of the 25% SPA.

• [323] As a consequence, Cavalier seeks:

(a) a declaration that Mr Radford breached the restraint of trade clause;

(b) an order that Mr Radford provide a full account of any conduct he is engaged in in breach of the restraint of trade clause; and

(c) an inquiry into damages as a result of his breach of the restraint of trade clause.

• [324] Mr Radford, however, resists these claims, starting by citing the proposition that a restraint is prima facie void and unenforceable unless it can be demonstrated to be reasonable by the party seeking to enforce the restraint.⁴⁴

• [325] In resisting enforcement of the restraint against competing with RYT Mr Radford says:

(a) any supplies which were not for broadloom carpet did not compete;

(b) the six year duration of the restraint was unreasonable;

(c) the geographical restriction did not restrict manufacture in New Zealand but rather the supply of such products to customers in New Zealand and Australia;

(d) neither Cavalier nor RYT attempted to enforce the restraint against supply to parties outside of New Zealand; and

(e) RYT has not been in business since 31 August 2016 and so there is no RYT business which Mr Radford could have competed with since that date.

• [326] Mr Radford also says there has been no breach of the undertaking at cl 10.2(c) not to interfere with the relationship between the Cavalier group of companies and their customers, employees or suppliers. This is because:

(a) the customers which Cavalier alleges were supplied, as listed in sch 2 to the statement of claim, were based outside New Zealand and Australia;

⁴⁴ Brown v Brown [1980] 1 NZLR 484 at 491.

(b) the arrangement with Mr McKenzie permitted the supply of felted yarn to the customers in sch 2;

(c) Cavalier or RYT had in most cases decided not to supply the relevant party, so there could be no relationship to interfere with; and

(d) to the extent the customers in sch 2 remained customers after 31 August 2016, they were Cavalier Spinner’s customers, not RYT’s.

• [327] Finally, Mr Radford says that his employment agreement, which concluded on 21 December 2012 and contained a one year restraint of trade following termination of employment, superseded all other agreements with Cavalier, including the 25% SPA. That agreement stated that it “will supersede all previous negotiations, commitments, representations, agreements and communications, either written or oral, between you and [Cavalier]” and so only that restraint of trade could be argued to apply.

What are the geographical limits of the restraint?

• [328] The first issue to determine, as a matter of interpretation, is where the restraint of trade in the 25% SPA applied. Cavalier argues that cl 10.4, which says the undertakings only applied if the activity prohibited by cl 10.2 “occurs within New Zealand or Australia”, is not limited to the supply of customers based in New Zealand and Australia, but applies to the supply to customers anywhere in the world if the supply emanates from New Zealand or Australia. Cavalier says to restrict the restraint to supply to New Zealand and Australia would not serve the purpose of protecting the goodwill of RYT’s business given many of its customers in the 12 months prior to the completion date of the 25% SPA and all but one of the customers listed in sch 2 of the statement of claim were based outside of New Zealand and Australia.

• [329] Cavalier also says that Mr Radford acknowledges in cross-examination that the restraint applied outside New Zealand and Australia when he gave the following responses:
  17. So you accept that the restraint in relation to [Cavalier] applied to customers overseas?

A. The restraint as it applied to [Cavalier]?

17. Yeah, so the restraint on Pebblemill to supply [Cavalier] customers applied to customers overseas?

A. Yes, because –

Q. Outside Australia and New Zealand.

A. Because the rest of the world was part of [Cavalier’s] playground.

Q. Right.

A. Or they were planning that that would be the case.

• [330] However, Mr Radford says the restraint was not intended to restrain Mr Radford from producing competing yarns within New Zealand and Australia, but rather, to restrict him supplying such products to customers in New Zealand and Australia. They say this must have been the case given that:

(a) At the time the 25% SPA was entered into, Mr Radford was in the business of manufacturing apparel and exotic yarns in Christchurch. The Pebblemill manufacturing business was plainly permitted under the IP Deed and was specifically allowed under the restraint in the 25% SPA.

(b) The parties knew that Mr Radford, through Pebblemill, was manufacturing yarn from his premises in Christchurch and Cavalier commissioned him to do this.

(c) Mr Radford was an RYT employee and was to continue being a Cavalier employee based in Christchurch.

(d) Mr McKenzie also confirms he was aware Mr Radford intended to continue to produce felted yarn using the original IWS Periloc felting machine.

Mr Radford says, adopting the approach of the Supreme Court to contractual interpretation, a reasonable person appraised of all these background facts would not consider the geographic limitation related to the place of manufacture, but to the place of supply.⁴⁵

• [331] Irrespective of the parties’ intent, Mr Radford says it would be plainly unreasonable to enforce any alleged geographic limitation on the manufacture of competing yarns from New Zealand and Australia in the circumstances of this case because:

(a) it would undermine the economy in Pebblemill’s business because it would require Pebblemill to relocate its operation to a location outside New Zealand and Australia;

(b) the ability of Pebblemill’s business to produce yarn to its full capacity is in the interests of the public generally and a restriction would therefore impinge the rights of the public; and

(c) it was unnecessary for the protection of Cavalier and RYT’s legitimate interests to prevent Mr Radford (through Pebblemill) from manufacturing products in Christchurch.

• [332] I accept the correct interpretation of cl 10.4 of the restraint is that it only applied to the supply to customers based in New Zealand and Australia and did not apply to the supply from New Zealand or Australia to customers based outside those countries.

• [333] The purpose of the restraint of trade in cl 10.2(a) is to protect the goodwill of RYT’s business by preventing competition with the business or any material part of the business. That clause is two-pronged. Under it, the vendors are restrained from engaging in a business which is:

(a) the same or substantially similar to Cavalier’s yarn manufacturing and supply business; and

⁴⁵ Bathurst Resources Ltd v L & M Coal Holdings Ltd [2021] NZSC 85, [2021] 1 NZLR 696.

(b) which is in competition with that business.

• [334] In order to give cl 10.4 of the restraint some purpose, it must restrict the geographical location of where activities which compete with Cavalier’s business or any material part of it can occur.

• [335] The act of manufacturing yarn on its own, does not meet these conjunctive requirements. It is the supply of the yarn to businesses which Cavalier would otherwise be supplying which is sought to be prevented. Manufacturing yarn to supply to a business outside New Zealand or Australia is not in breach of the restraint of trade. To suggest that it applies to yarn manufactured in New Zealand no matter where it was supplied to would be to render the geographical restrictions in cl 10.4 redundant. While Cavalier had aspirations to supply its felted yarn products worldwide, those aspirations cannot override the clear wording of the restraint which governed competition within the New Zealand and Australian market. The fact that this market was selected was consistent with Mr McKenzie’s view that “the redline for [Cavalier] was that we wouldn’t let [Pebblemill] or [Mr Radford] supply felted yarn within Australasia for the broadloom carpet market”.

• [336] All bar one of the companies listed in sch 2 to the statement of claim were based outside New Zealand or Australia. Accordingly, the approaches to those companies were not in breach of the restraint of trade. Consequently, I only need to consider the other arguments raised by Mr Radford in relation to the enforceability of the restraint of trade in respect of Artoz Rugs, an Australian rug manufacturer.⁴⁶

• [337] I consider there was a reasonable interest to protect at the time the restraint of trade was entered into. As Cavalier submits, the purchaser of the goodwill of a business has a legitimate interest in seeking protection for that goodwill by obtaining a covenant which reasonably restricts the vendor from competing in a similar type of business.⁴⁷ While Mr Radford emphasises the public interest in facilitating competition, I accept there is also a public interest in upholding such restraints to encourage entities with the necessary capital and expertise to acquire and undertake

⁴⁶ Albeit the yarn was supplied to Thailand where Artoz manufactures its carpets.

⁴⁷ Brown v Brown, above n 44, at 499.

commercial exploitation of a vendor’s technology without the risk that the vendor could compete.⁴⁸

• [338] While the duration of the restraint is long and, in practical terms, extended the four year restraint entered into at the time of the 2011 SPA, that was explicable in the circumstances of the case. While Mr Radford and the two other minority shareholders continued to hold shares in RYT, they had a vested interest in maintaining its viability as a business. That situation changed on the sale of the remaining shares, and it was legitimate for Cavalier to seek a fresh restraint of trade. Importantly, in this case, the restraint of trade had both the significant geographical limitation discussed above and it contained the exception which allowed Mr Radford to operate his own yarn products business, which, at that time, was pursuant to the IP Deed. Those were material exceptions to the restraint which enabled Mr Radford to carry on business while protecting the plaintiffs’ right to exploit the technology and IP they had acquired from him.

• [339] In light of those significant exceptions to the coverage of the restraint, I am not prepared to find the duration and extent of the restraint were unreasonable.

Was there a breach?

• [340] As noted above, Artoz Rugs was an Australian rug manufacturer, and was a customer of RYT in the 12 months prior to the 25% SPA being effected. The restraint therefore covered this customer. The evidence showed that from June to September 2015 emails were exchanged between Mr Radford and Mr Steve Clayton of Artoz Rugs. On 26 June 2015, Mr Radford gave a price per kilogram for 500 kg of what is described, in the subject line as “2400texSlub”. Mr Clayton then sent a further email on 13 September 2019 advising he now only needs 400 kg and enquires about how long the order would take and who the purchase order should be sent to. Mr Radford replied telling him to email the purchase order to him at Pebblemill. The last email exchange refines the details of how much is to be ordered and reiterates the earlier quoted price of AUD 18.60/kg.

⁴⁸ Fletcher Aluminium Ltd v O’Sullivan [2001] NZCA 92; [2001] 2 NZLR 731 (CA) at [39].

• [341] The next email exchange is in May 2017, where Mr Clayton emailed Mr Radford saying “[y]ou were going to send me current yarn price for 2200 Tex Felted Slub Yarn”. Mr Radford replied saying they can “produce 130kg bail of 2040 Slub for you” and gave various price options for freighting it to Artoz’s manufacturing facility in Thailand. It is clear from the 2017 emails that a supply did occur as a consequence of the 2015 emails because Mr Radford says “the price will be higher than for the 400kgs we delivered to Bangkok in Jan 2016”. There is, therefore, evidence of Mr Radford approaching or accepting an approach from a person who was at any time during the 12 months ending on the completion date, a customer of RYT with a view to obtaining their custom in a business that is the same or similar to the RYT business and is in competition with RYT.

• [342] If the exchanges described above occurred without RYT’s knowledge or authority, then on their face, there would appear to be a breach of the restraint at cl 10.2(b). However, there was evidence that RYT knew about the supply to Artoz and did not object. Specifically, Mr Hussey says he knew that Cavalier was supplying Pebblemill with raw materials to produce felted yarn for rugs and carpets, and he was “aware for one of the jobs that was done for Artoz that we carted some material and sent it down to him.” In my view, this is clear evidence that the supply to Artoz was authorised by Cavalier or, at the very least, acquiesced to by Cavalier and, for this reason, cannot be shown to be an actionable breach of the restraint of trade.

• [343] Given this conclusion, strictly speaking I do not need to address Mr Radford’s last argument which is that as RYT sold its yarn manufacturing business to Cavalier Spinners Ltd in mid-to-late 2016, there is no business with which Mr Radford could compete. However, in the interests of completeness, I do.

• [344] Mr Radford points out the restraint in cl 10.2 prohibits him from engaging in a business or activity that is “in competition with the Business or any material part of the Business” or from approaching or accepting an approach from a person who was a customer of RYT at the time of the 25% SPA with “a view to obtaining their custom in a business that is the same or similar to the Business and is in competition with the Business”. In each case “the Business” is defined as the business “carried on by the Company”, that is, RYT.
• [345] In my view, the restraint of trade is drafted in the expectation that it is competition with RYT which must be protected against. This is because the term “Business” is expressly defined as the business “carried on” by RYT. That is in contrast to references to “the Purchaser Group” in other clauses (and in particular 10.2(c) and (d)) which is defined as being “the Purchaser [Cavalier] and each of its subsidiaries”. The “Business” is not defined as the business being carried on by any member of the Purchaser Group. I do not consider the fact that restructure of Cavalier was being contemplated assists Cavalier. If that was known, there was even more reason to describe the “Business” more generally and not confine it to the activities of RYT.

• [346] In light of those observations, if the felted yarn manufacturing business is transferred to another entity, there can no longer be any risk of competition with RYT’s business. This would preclude the exchange with Artoz Rugs which took place in 2017 from being a breach of the restraint of trade under cl 10.2(b). While it could be an interference with the Purchaser Group and their customers under cl 10.2(c), I did not hear argument on that possibility, and do not consider it further. In any event, acquiescence would be a potential defence given RYT’s previous knowledge of, and assistance given to Pebblemill, when Pebblemill supplied Artoz with felted yarn.

Was the restraint of trade superseded by the employment agreement?

• [347] An unsatisfactory aspect of this case was that, after filing its claim, Cavalier was obliged to withdraw aspects of the claim insofar as they related to alleged breaches of Mr Radford’s duty of confidence arising pursuant to his employment agreements as a result of the Supreme Court’s decision in FMV v TZB.⁴⁹ That decision held that, under s 161(1) of the Employment Relations Act 2000, the exclusive jurisdiction of the Employment Relations Authority extended to all issues that arise “during the course of the employment relationship and in a work context”.⁵⁰

• [348] I accept this bars me from enquiring into allegations of use of any further developments to the Confidential Information after Mr Radford’s employment started.

⁴⁹ FMV v TZB, above n 17.

⁵⁰ At [93].

It also bars me from considering and deciding on the effect of the restraint of trade contained in the 21 December 2012 employment agreement. I can only consider the restraints associated with the purchase of the Radford Yarns’ business and the balance of the RYT shares. If, as Mr Radford claims, those are superseded by the employment agreement, that it is something which must be taken up in the Employment Relations Authority, although it strikes me as unsatisfactory that such interconnected issues must be dealt with in different jurisdictions.

Relief

• [349] I have made findings which tread a midline between the respective positions of the parties. The plaintiffs have had some success on their claim for breach of confidence. I have found that they acquired confidential information under the 25% SPA, and yarn was supplied by the defendants to carpet and rug manufacturers outside the terms of any agreement with the plaintiffs, or under any other form of authorisation by the plaintiffs. For example, the transactions referred to in [255] above occurred without the plaintiffs’ knowledge, and therefore fell outside the terms of any arrangement authorised or encouraged by the plaintiffs.

• [350] However, I have made findings as to the extent of what is the plaintiffs’ confidential information as set out at [200] above, which are more confined than was claimed by the plaintiffs. I have also held that the plaintiffs are now estopped from prohibiting the use of the Confidential Information as long as it continues to be used for the purposes that the defendants were led to believe were authorised.

• [351] As a consequence, the relief which the plaintiffs seek under their primary cause of action for breach of confidence in equity is not entirely appropriate. The relief sought is as follows:

(a) an order to the effect that the defendants may not:

(i) further disclose the Confidential Information to any person or entity;

(ii) use the Confidential Information; nor

(iii) supply or sell or make offers to supply or sell, yarn that is manufactured using the Confidential Information to any person or entity;

(b) an order that the defendants must within 30 days of any order to the above effect, provide a full account of any conduct they have already engaged in that would have breached the above orders had they been operative when the conduct occurred; and

(c) an inquiry into damages as a result of the defendants’ breaches of duty of confidence.

• [352] In light of my findings, I consider it is appropriate to make more confined orders regarding the defendants’ right to use or disclose the Confidential Information. These orders will encapsulate the terms which I consider the plaintiffs led the defendants to believe applied through the work they encouraged or authorised the defendants to undertake. I consider this includes supplying felted yarn to Nick Radford Rugs and to other rug and carpet manufacturers which Cavalier agreed may be supplied or which it advised in its email of 8 May 2017 could be supplied by the defendants.

• [353] While the defendants may feel this is unduly restrictive, this is the logical consequence of the commercial agreements they entered into in 2011. The defendants are free to otherwise compete with Cavalier as long as they do not use the Confidential Information.

• [354] I have considered whether it is necessary to make the order proposed in [351](b) above, requiring further disclosure, given disclosure of such transactions with customers or potential customers was required as part of the discovery process for these proceedings. While there is no reason to think that those disclosure requirements have not been complied with, such disclosure only related to the position up to the time of hearing. It is possible that there is further evidence of use or disclosure of the Confidential Information, including supplying yarn that is manufactured using the

Confidential Information, outside what was authorised or encouraged by Cavalier. Accordingly, I will make this order out of an abundance of caution.

• [355] The plaintiffs have sought an inquiry into damages as a result of the defendants’ breaches of duty of confidence. I will make an order to this effect, although the evidence shows that supplies to rug and carpet manufacturers without the plaintiffs’ knowledge are limited and relate largely to supplying samples to customers of Cavalier with a view to supplying them in the future. It is difficult to see what damage arises as a consequence of a supply of samples, as opposed to supplying a production order. Furthermore, some of these customers (for example, ASA) are customers which Cavalier had stopped supplying, or was planning to stop supplying in any event and I also consider it unlikely that damage arises to Cavalier in those circumstances. The question of damages (if any) would, in my view, be a matter which is best resolved by negotiation between the parties.

• [356] The plaintiffs have failed in their claim for breaches of the restraint of trade in the 25% SPA and for breach of cl 4 of the IP Deed and cl 12 of the 25% SPA, so the relief sought in respect of those claims is declined.

• [357] Finally, there is the issue of costs. This is less straightforward than might normally be the case given the limited success the plaintiffs have had, and the success that the defendants have had in defending many elements of the plaintiffs’ claim. My initial view is that this is a case where costs should lie where they fall, although I am prepared to receive submissions on this issue, should the parties be unable to agree.

Orders

• [358] Accordingly, I make the following orders:

(a) the plaintiffs own the Confidential Information described at [200];

(b) the defendants may not use or disclose the Confidential Information in any way except for the following purposes:

(i) for the production of apparel, novelty and exotic yarns using a combination of wool and other fibres, provided that these yarns cannot also be used in floor covering products, including without limitation, carpets and rugs, except as provided in (ii) and (iii) below;

(ii) for the production of yarns that may be required by Nick Radford Rugs Limited;

(iii) for the production of any other yarns, including for manufacturers of floor covering products, as approved by Cavalier in writing from time to time, and for those customers which Cavalier advised Mr Radford in its email dated 8 May 2017 that it would no longer be supplying;

(c) an order that the defendants must within 30 days of any order to the above effect, provide a full account of any conduct they have already engaged in that would have breached the above orders had they been operative when the conduct occurred; and

(d) an inquiry into damages as a result of the defendants’ breaches of duty of confidence.

Costs

• [359] Costs are reserved. If costs cannot be agreed:

(a) any application for costs is to be filed and served within 30 working days of the date of this decision;

(b) any submissions in response are to be filed and served within a further 10 working days; and

(c) any submissions in reply are to be filed and served within a further five working days.

Suppression

• [360] The defendants seek suppression in respect of aspects of the defendants’ evidence because it describes developments they have made to the Periloc yarn felting process which they consider constitute confidential information. The plaintiffs also wish to maintain confidentiality in the IP they acquired from Radford Yarns where that is appropriate. The scope of the suppression orders required is unclear at this stage.

• [361] Accordingly, in the interim, the entire judgment is suppressed and may only be released to counsel. Counsel may discuss the judgment with their clients but counsel for the plaintiffs must not disclose information that the defendants have claimed is confidential.

• [362] Counsel are to consult and within 30 working days are to advise the Court, preferably by way of joint memorandum, what redactions are required to prevent publication of information which is claimed to be commercially confidential:

(a) in the version of the judgment to be released to the plaintiffs; and

(b) in the version of the judgment to be made publicly available.

Solicitors:

Russell McVeagh, Auckland Hudson Gavin Martin, Auckland