#6669 - Hospital Products V. United States Surgical Corporation - Commercial Remedies BCL

Hospital Products v. United States Surgical Corporation

Facts

U.S.S.C. is a manufacturer in the United States of surgical stapling devices and disposable loading units. In November-December 1978 U.S.S.C. agreed with the fourth respondent, Alan Richard Blackman, to appoint him as U.S.S.C.'s exclusive Australian distributor as from 1 April 1979. In or about February 1979, by agreement between U.S.S.C., Blackman and Hospital Products International Pty. Ltd. (“H.P.I.”) (then known as Hospital Products of Australia Pty. Ltd.), H.P.I. was substituted for Blackman as the proposed distributor. H.P.I. acted as the exclusive distributor in Australia of U.S.S.C.'s products from 1 April 1979 until 25 December 1979 when H.P.I. terminated the distributorship. That termination was accepted by U.S.S.C. by telex on 10 January 1980.

On 25 December 1979 H.P.I. began to supply to its existing customers for U.S.S.C.'s products and to market generally products which were for all relevant purposes identical to those of U.S.S.C. but which were contained in packages identifying them with H.P.I., not with U.S.S.C. Initially the products were of U.S.S.C. manufacture and were sterilized and repackaged by H.P.I., in some cases with components manufactured by H.P.I. Gradually the components manufactured by H.P.I. increased so that ultimately it marketed products entirely of its own manufacture.

The development by H.P.I. of its own manufacturing capacity had been proceeding, un-known to U.S.S.C., from a time before the commencement of the distributorship, by a process known as “reverse engineering”, involving the measurement and analysis of U.S.S.C. components and the construction of tools, moulds and dies for the production of copies. In connexion with the “reverse engineering”, H.P.I. engaged the fifth respondent, I.R.D. Engineering Services Pty. Ltd. (“I.R.D.”), a company which eventually came under the control of Blackman. Later, towards the end of 1980, H.P.I. began to market its products in the United States through the second respondent, Surgeons Choice Inc. (“S.C.I.”), a wholly-owned subsidiary of H.P.I.

In June 1981 the business and assets of H.P.I. and of I.R.D. including the issued capital of S.C.I. were acquired by the appellant. Blackman and H.P.I. acquired control of the appellant.

Order made by the lower court: as against H.P.I. and Blackman to payment of an amount equal to the profits made by H.P.I. by selling surgical stapling products, other than products manufactured by U.S.S.C. and sold in U.S.S.C.'s packages, on the Australian market between 1 December 1979 and 30 November 1980 and such payment to be secured by an equitable lien over the assets held by H.P.I. representing the proceeds of the sale by H.P.I.

Holding

Mason J

General rule

The principle, accepted by the courts below, is that the fiduciary cannot be permitted to retain a profit or benefit which he has obtained by reason of his breach of fiduciary duty:. A fiduciary is liable to account for a profit or benefit if it was obtained (1) in circumstances where there was a conflict, or possible conflict of interest and duty, or (2) by reason of the fiduciary position or by reason of the fiduciary taking advantage of opportunity or knowledge which he derived in consequence of his occupation of the fiduciary position.

Apportionment of Profits – First Instance

McLelland J. confined the profit or benefit obtained by H.P.I. to the profits which it made during the “headstart” period which ceased in November 1980 when H.P.I. stopped selling on the Australian market. McLelland J. found:

“The development of its manufacturing capacity in breach of its [H.P.I.'s] equitable obligation to U.S.S.C. prior to the termination of the distributorship gave H.P.I. a very considerable lead-time advantage in getting its own products on the market…. The advantage represented by this headstart, which it would not have received had it not breached its fiduciary duty, provided H.P.I. with a springboard which, together with its fraudulent conduct prior to the termination of the distributorship in filling orders for U.S.S.C. clinical products with its repackaged product and creating a situation where H.P.I. repackaged or manufactured products would be supplied in lieu of U.S.S.C. clinical products in circumstances calculated to mislead consumers, enabled it to have the benefit of a market in Australia which otherwise would have been a market for U.S.S.C. products.”

Apportionment of Profits – Court of Appeal

The Court of Appeal found that the true measure of the profit or benefit was represented by all the assets of H.P.I. as at 10 January 1980. In rejecting the view that the “headstart” was the correct yardstick, the court considered that as at 10 January 1980, the date of termination of the distributorship, H.P.I. would not have been able to develop a manufacturing capacity had it attempted to do so on that date, and not before. This was because the raising of very substantial finance was an essential preliminary to the establishment of manufacturing capacity and H.P.I.'s status as exclusive Australian distributor of U.S.S.C.'s products was a sine qua non to its ability to raise that finance.

By way of reinforcing this conclusion the Court of Appeal stated that the assets held by H.P.I. on 10 January 1980 had been acquired, created or developed by the misuse of U.S.S.C.'s distributorship, for the purpose of or in the course of the commission of breaches of its fiduciary duties.

Profits made from US Market – no breach – no accountable

Whether H.P.I. is accountable for (1) profits made from sales of its surgical stapling devices in the United States market, and (2) its assets generally raises two separate questions. The first point to be made about sales in the United States — one which McLelland J. considered decisive — is that the ambit of the fiduciary relationship and the contractual obligations with which it was associated, i.e., the promise not to compete and the promise not to damage U.S.S.C.'s market, was restricted to the market in Australia. However, it does not follow as a matter of principle or logic that the profits for which H.P.I. is liable are necessarily restricted to profits made within the ambit, geo-graphical or otherwise, of the fiduciary relationship. As a fiduciary H.P.I. is liable for any profits made in breach of its fiduciary duty, even if they happen to be made outside the area of the fiduciary relationship. If, for example, the responsibilities of the Victorian manager of a company with a nation-wide business are limited to Victoria, this geographical limitation on his responsibility gives him no immunity from liability to account for profits which he makes in Western Australia in competition with his employer by making use in breach of his fiduciary duty of knowledge or an opportunity gained in his fiduciary position: see Green and Clara Pty. Ltd. v. Bestobell Industries Pty. Ltd.(78); McLeod and More v. Sweezey(79); and Pre-Cam(80). Although these are cases in which the defendant turned to his own advantage confidential information or knowledge acquired in his capacity as a fiduciary, they clearly illustrate that limitations on the ambit of the fiduciary relationship cannot be invoked as limitations on the fiduciary's liability to account for profits resulting from his breach of duty.

However, the second and decisive point to be made in connexion with possible profits arising from United States sales is that what gave the secret development of manufacturing capacity during the term of the distributorship the character of a breach of fiduciary duty was H.P.I.'s intention that the capacity should be exploited for the purpose of appropriating to H.P.I. U.S.S.C.'s Australian product goodwill. The development of manufacturing capacity with a view to competing with U.S.S.C. in the United States market only during the distributorship would not have amounted to a breach of duty, though it would unquestionably have triggered a termination by U.S.S.C. of the distributorship, had U.S.S.C. been aware of the development. And it is clear from the findings of fact made in the courts below that at all material times H.P.I. intended to use its manufacturing capacity to compete in the United States market as well as in the Australian market.

In some circumstances it may be proper to hold a fiduciary liable to account for a profit or benefit arising from the pursuit of an activity which did not amount to a breach of fiduciary duty but for the circumstance that the activity was also undertaken for the purpose of obtaining another profit or benefit which was a breach of fiduciary duty. If the breach of fiduciary duty is a sine qua non in the sense that the pursuit of the activity for the purpose of obtaining the legitimate profit or benefit could not have been undertaken as a practical business operation on its own without seeking also to obtain the forbidden profit or benefit, then there is much to be said for the view that the fiduciary's liability to account should extend to all profits and benefits. The problem seems not to have been explored in the courts below. There was no occasion to do so in the Court of Appeal because U.S.S.C. obtained more extensive relief. And, although at first instance U.S.S.C. sought in its statement of claim an account of...