England and Wales Court of Appeal (Civil Division) Decisions

IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
BIRMINGHAM DISTRICT REGISTRY
HHJ PURLE QC
[2014] EWHC 3351 (Ch)

		Royal Courts of Justice Strand, London, WC2A 2LL
		06/10/2015

Lord Justice Floyd:

1. This is an appeal from the decision of HHJ Purle QC sitting as a deputy High Court Judge in the Chancery Division dated 10 September 2014 on an application for summary judgment. The claimant Optaglio Limited ("Optaglio"), who is the appellant in this court, brought proceedings for breach of directors' duty against the defendants and respondents Mr Tomas Tethal and Mr Philip Hudson. The judge granted summary judgment in favour of the respondents. With the permission of Lewison LJ, Optaglio appeals, contending that the case is not suitable for summary judgment. By their respondents' notice Mr Tethal and Mr Hudson contend that the judge should have dismissed the claim as lacking bona fides, or as inadequately pleaded, or should in the alternative have made a conditional order.
2. The alleged breach of duty consists in the withdrawal of a UK patent application which had been filed, for the benefit of Optaglio, in the name of Mr Tethal, on 18 April 2007. The application, No 0707494.1, was made for an invention "to provide a nano-featured layer structure and method of producing the same". The idea, in very general terms, was to manufacture electronic components such as diodes in planar rather than "stack" form, and to use an embossing technique to achieve this.
3. Optaglio specialises in the manufacture of optical technology including devices for producing holographic images. Examples of these are holographic security foils and labels for security applications. Optaglio was founded by Mr Hudson in about 2000. Mr Tethal was appointed a director in 2001. It grew to be a successful company, obtaining a turnover, according to Mr Hudson, of some £15 million by 2006. By that date it had a subsidiary company in the Czech Republic, Optaglio s.r.o. Mr Hudson was located there from 2006. In January 2006 Mr Vladimir Zhukov had acquired, through a company under his control, approximately a 90% shareholding in Optaglio.
4. The patent application which lies at the heart of this dispute arose in the following way. In mid 2006 Mr Tethal attended a lecture given by Professor Song of the University of Manchester ("the University") concerning planar diodes and transistors. Optaglio had developed microstructure embossing techniques, and Mr Tethal realised that there was potential for combining the ideas being discussed by Professor Song and Optaglio's manufacturing techniques.
5. The University had established a spin-off company called Plastic E Print Limited, subsequently called Nano ePrint Limited ("NePL") to explore possible commercial markets for Professor Song's ideas. In September 2006 the University, a company called The University of Manchester Intellectual Property Limited and Optaglio entered into a Mutual Confidential Disclosure Agreement ("the first MCDA") to enable the exchange of confidential information for preliminary evaluation purposes. At the end of 2006 and the beginning of 2007 Optaglio started tests with the University under the terms of the first MCDA. According to Mr Tethal, the results looked promising in the laboratory. Mr Libor Kotacka was the employee at Optaglio who was responsible for the co-operation programme. A further MCDA ("the second MCDA") was entered into on 2 April 2007 between the University, a consultant called Dr Lupo, Optaglio and NePL.
6. In the spring of 2007 Optaglio became aware that Professor Song intended to speak at a conference in Cambridge on 17-18 April 2007. A decision was taken to file a patent application as a defensive measure to guard against anything said by Professor Song becoming part of the state of the art and thus destructive of any later attempt to patent the ideas which were then under discussion. The application was filed on 18 April 2007 in Mr Tethal's name. The defendants say that the decision to file in Mr Tethal's name was taken because it was appreciated that there might be concerns over whether the application contained information confidential to NePL, and in the knowledge that the application could later be assigned to the appropriate party or parties.
7. At a meeting with Mr Zhukov on 16 May 2007 it was agreed that Mr Tethal would be Optaglio's sole representative on the project with NePL. This decision about representation was communicated to NePL by Mr Hudson on 23 May 2007.
8. It appears that by 24 May Mr Hudson had disclosed the existence of Optaglio's patent application to Mr Richard Price of NePL with the explanation that it had been filed as a defensive measure against Professor Song's possible disclosure in Cambridge. On that day NePL wrote to Optaglio to point out that the application "appears to contain elements of confidential information provided by Prof Song to Optaglio both in the context of Optaglio as a technical collaboration partner and also as a proposed investor in Plastic ePrint Ltd." The letter went on to explain NePL's understanding of the information it or the University had disclosed to Optaglio and the information Optaglio had disclosed to NePL/the University. The letter also refers to Optaglio's "recent proposal to assign the application to the University in return for a commercial agreement on origination of PEPL nanostructures (based on Optaglio's proprietary e-beam lithography process)".
9. Also in the background at this time was an offer by the DTI to NePL of a development grant of some £600,000 for a low cost manufacturing platform for high-throughput electronics production. The offer recognised that part of the grant would go to Optaglio. Included in the bundles are the minutes of a meeting on 26 June 2007 between Optaglio s.r.o. and NePL. The minutes record those present for Optaglio as being Mr Tethal, Mr Zhukov and Mr Kotacka, with Mr Price and Prof Song being present for NePL. The first topic of discussion was the DTI program. NePL stressed the importance of intellectual property rights, which was to be NePL's main asset. NEPL's position was that joint ownership of IP was "less attractive".
10. Mr Zhukov denies being present at the June 26 meeting. Mr Kotacka says Mr Zhukov was not present, but produces minutes of a different meeting, held on 26 January 2007 to support his recollection. Mr Kotacka says that Mr Zhukov would not have been present at a technical meeting, but the meeting on 26 June 2007 seems to have been more strategic than technical.
11. On 11 July 2007 NePL wrote to Mr Tethal outlining its position with regard to future collaboration with Optaglio. The letter offered:

i) a non-exclusive licence to manufacture and sell radio frequency identification ("RFID") products in certain territories in the markets of brand protection and security;

ii) a non-exclusive worldwide licence for origination based on NePL designs;

iii) that Optaglio would be a preferred supplier to NePL;

iv) in return Optaglio would:

a) pay royalties on sales of RFID products;

b) pay royalties on sales of origination;

c) pay a technology access fee of no less than £200,000 within 2 years;

d) recognise that all IP related to NePL background IPR whether or not developed under the collaborative technical development would be owned by NePL except relating to e-beam lithography equipment and tools;

e) accept that any licence would be conditional on the assignment to NePL of Optaglio's patent application.

12. There was a further meeting in Manchester on 8 October 2007 at which Optaglio explained its position. This led to a letter from NePL dated 12 October in which disappointment was expressed that it had not been possible to reach agreement. The letter made the point that any agreement would have to be on the basis that Optaglio committed to withdraw the patent application.
13. On 22 October 2007 Mr Tethal made some counter proposals which included this sentence:

"Optaglio further agrees to arrange with [NePL] such model, which enables both parties the use of the patent applied for…"

14. On 23 October 2007 NePL replied with revised proposals, accepting some aspects of Optaglio's proposal of 22 October. They requested however that the patent application be withdrawn as part of the deal and as soon as possible to avoid disclosure of any confidential NePL information.
15. On 30 October 2007 Mr Tethal wrote:

"After my discussion with our majority shareholder, Mr Zhukov, and as I have already indicated, Optaglio's standpoint is as follows …"

16. Mr Tethal then set out that standpoint and summarised in a chart the two sets of proposals of Optaglio and NePL respectively. The Optaglio proposals included as item 4 the use of the patent equally by both parties, whereas NePL's proposal was that the patent be withdrawn.
17. On 30 October 2007 NePL wrote to Optaglio making some concessions but insisting that agreement be reached by 1 November, in view of the fact that NePL was already in advanced discussions with other partners. On the same day NePL provided Optaglio with details of some prior published patents in the field of embossing.
18. On 2 November 2007 Mr Tethal emailed Mr Price of NePL to say that he had received the decision of Mr Zhukov to go further with the collaboration "on the base of our last discussion and letters". Mr Tethal says in his evidence that he had Mr Zhukov's express instructions that the application be withdrawn. Mr Zhukov denies this.
19. Mr Price replied to Mr Tethal the same day, asking that Mr Tethal or Mr Hudson initial the DTI offer letter, and stating that he would make arrangements for the agreement for the DTI project. In the meantime he suggested a separate evaluation agreement.
20. On 7 November 2007 NePL wrote to Optaglio. Mr Price said:

"I agree that the issue of the UK patent should now be closed with the withdrawal of the filing made in April. Our own information and research indicates that this application would be unlikely to succeed given the prior art that has been found."

21. On 6 December 2007 Optaglio and NePL entered into a holding agreement relating to a future collaboration agreement ("the Evaluation Agreement"). Mr Hudson signed this agreement on behalf of Optaglio. Appendix 3 of the Evaluation Agreement contains terms of a future collaboration agreement which are expressly stated not to be legally binding, but which include a requirement for Optaglio to withdraw the patent application in order to prevent disclosure of confidential information and know-how.
22. On 31 December 2007 Mr Hudson ceased to be a director of Optaglio. On 7 January 2008 the application was withdrawn before publication. On 18 January 2008 the collaboration agreement was signed. The collaboration agreement was referred to before us as "the DTI agreement".

The claimant's case

23. Optaglio's case is that the withdrawal of the application was negligent and that the defendants fell below the level of skill, care and competence required of directors, either under their service contracts or pursuant to section 174 of the Companies Act 2006. It is common ground that the test to be applied is a high one. It must be shown that the decision complained of went beyond a mere error of commercial judgment. It must be one which no reasonable director could have reached.

The respondents' case

24. The respondents contend that the patent application was withdrawn in the proper and skilled exercise of their duties as directors. In particular, in return for the withdrawal of the application, Optaglio obtained the continued co-operation of NePL where that continued co-operation was otherwise in jeopardy.

The judgment of HHJ Purle QC

25. In the course of setting out the relevant history, the judge stated at paragraph 17 that it was pleaded at paragraph 33 of the defence that Optaglio was required to withdraw the Application as a pre-condition to continuing collaboration with NePL and in particular as a condition to obtaining NePL's agreement to execute the DTI agreement. The judge stated that it was quite clear on the documentary evidence alone that there was no realistic prospect of establishing the contrary.
26. Having set out his account of the history, the judge first asked whether it was seriously arguable that the decision to withdraw the application was in breach of any duties owed by the directors. He concluded that it was not for the following reasons:

i) Optaglio perceived that it was on weak ground: both parties appreciated that Optaglio's position was at best precarious and if it wished to have the benefit of long term collaboration with NePL it would have to give way. Mr Price had explained in evidence that the protection of intellectual property rights by NePL was its chief concern as that was its only operating asset. In those circumstances, it was open to a director of Optaglio acting reasonably to agree to the withdrawal of the patent application as part of the price of entry into the DTI agreement and for enabling the evaluation agreement to proceed.

ii) All the directors had on the evidence acquiesced in "the decision". The suggestion that they could all have been acting in breach of duty was fanciful.

27. Next, the judge decided that the claim against Mr Hudson faced the insuperable difficulty that he was not ultimately a party to the decision to withdraw in January 2008, when that decision was finally taken and put into effect.
28. It was not therefore necessary for the judge to decide whether the shareholders had consented (under the Duomatic^[1] principle), but he concluded that:

"it seems perfectly plain that Mr Zhukov must have known of the withdrawal of the application and that his evidence to the contrary has no chance of being believed."

29. In relation to that finding the judge said this at paragraph 26 of his judgment:

"I am conscious that this is a summary judgment application, but it is well established that where there is credible contemporaneous material which contradicts bare assertions or denials, the court can on a summary judgment application take that material into account and give it appropriate weight. There are numerous instances where Mr Zhukov's evidence is contradicted by other material."

30. The judge also concluded that, on the material before him there was no arguable case of loss, because:

i) given the time elapsed since the alleged breach, it was significant that no detailed material about loss had been put forward;

ii) by withdrawing the application, very substantial further costs were avoided in connection with the application;

iii) Optaglio did proceed with the evaluation stage with NePL, but the process did not work and the collaboration petered out;

iv) NePL had not appropriated the project for their own benefit. The project had simply petered out and had no prospects of commercial success.

The legal principles

31. It is well settled that an application for summary judgment should not be allowed to develop into a mini-trial of disputed issues of fact. On the other hand:

" …that does not mean that the court has to accept without analysis everything said by a party in his statements before the court. In some cases it may be clear that there is no real substance in factual assertions made, particularly if contradicted by contemporary documents. If so, issues which are dependent upon those factual assertions may be susceptible of disposal at an early stage so as to save the cost and delay of trying an issue the outcome of which is inevitable" see ED&F Man Liquid Products Ltd v Patel and another [2003] EWCA Civ 472 at paragraph 10.

32. Given the nature of the summary judgment test, the court can only dispose of factual issues in this way when there is no real prospect of the evidence of one side on that issue being accepted. I would add that it is incumbent on a judge giving summary judgment on the basis that an account of a witness is to be disbelieved to explain with reasonable particularity what it is about the contemporary record or other evidence which justified rejecting his evidence.

The issues on the appeal

33. The issues appear to me to be these:

i) did the judge misdirect himself as to the approach to summary judgment?

ii) was the judge justified in holding that it was not seriously arguable that the withdrawal of the application was a breach of duty?

iii) if the withdrawal of the application was a breach of duty, was it established to the summary judgment standard that all shareholders, in particular Mr Zhukov, had acquiesced in the breach?

iv) was the judge justified in holding that the claimant's case against the second defendant faced an insuperable difficulty because the second defendant ceased to be a director at the end of 2007?

v) was the judge justified in dismissing the case on the ground that there was no arguable case of any loss?

Misdirection in law

34. Mr Jonathan Cohen, who appeared for Optaglio, takes issue with paragraph 26 of the judge's judgment where the judge refers to using credible contemporaneous material to contradict bare assertions or denials and "give it appropriate weight". He suggests that this passage indicates that what the judge thought he was engaging in was a process of weighing up and balancing conflicting evidence. That was inappropriate on a summary judgment application. Mr Mold, who appeared for the respondents, submits that the judge was simply reflecting the passage from ED&F Man Liquid Products which I have quoted above.
35. I think that the reference to giving the contemporary material appropriate weight is somewhat ambiguous. In order to justify disposing of a factual issue at the summary judgment stage the contemporary material must be sufficient to allow the court to say that the contrary assertion has no real prospect of success. This is not really a question of weight, or of weighing competing material. However, if I were otherwise satisfied that the judge had applied the principles correctly, I would not have been inclined to allow the appeal on this ground alone.

Breach of duty

36. Mr Cohen submitted that the judge was not entitled to make the findings of fact on which he based his conclusion that there had been a breach of duty. They were conclusions on complex issues of fact which were in dispute. It was not accepted that Optaglio regarded, or was justified in regarding, the patent application as weak or precarious. He relied on a variety of materials which he said showed this to be the case. Thus for example in April 2007 Mr Price of NePL wrote to Professor Song warning him against disclosing the methodology for achieving successful nano-embossing, as this belonged to Optaglio. Moreover Mr Tethal's evidence supported the case that the application depended, at least in part, on Optaglio's confidential information. He had said expressly that it was for this reason that he had, at least initially, argued for joint exploitation of the rights.
37. Mr Cohen argued that there were two potential explanations in play as to why the respondents, as directors, reasonably authorised the abandonment of protection for proprietary technology. The first was that such protection was legally indefensible, in the sense that it could not lead to valid protection if ultimately tested in court. The second was that it was perceived commercially that there was more to be gained by abandoning the protection than there was in attempting to hang on to it. On the first of these points, the judge had not explained how he reached the conclusion in paragraph 22 of his judgment that Optaglio perceived their position as being weak and that of NePL as being strong. On the second point, the judge had also not explained how he had arrived at the conclusion in paragraph 17 of the judgment that Optaglio was required to withdraw the application as a condition of collaboration and that Optaglio had no prospect of establishing the contrary.
38. Building on Mr Tethal's evidence that he believed the application to include Optaglio proprietary information justifying joint ownership, Mr Cohen submitted that nothing had changed. He showed us paragraph 28 of Mr Tethal's witness statement which asserted that, on reviewing the prior art sent by NePL on the evening of 30 October 2007 Mr Tethal came to the conclusion that "the value of our Application was much lower than I had appreciated". Mr Cohen submits that Mr Tethal was not saying that the application was of no value to Optaglio. Mr Tethal subsequently relied on having been directed by Mr Zhukov to accept NePL's position on abandonment of the application. Although Mr Tethal says that this seemed to him to be the right decision, he also says that he does not know Mr Zhukov's precise reasons for taking it.
39. Mr Tethal suggests in his witness statement that the application was withdrawn in consultation with Optaglio's patent attorneys, but Mr Cohen notes that there is no suggestion that proper legal advice was taken by the directors as to the future of the application or the consequences of withdrawing it. There does not appear to have been any opportunity for Mr Tethal to take any advice on the impact of the prior art sent by NePL on 30 October.
40. Mr Cohen accepted that Optaglio found itself in a position where its collaboration partner sought the withdrawal of the application and threatened to withdraw from the collaboration if this did not occur. However he submitted that it was still arguable that a breach of duty occurred. The collaboration was not essential to Optaglio's successful exploitation of its technology.
41. Mr Mold submitted that the comprehensive accounts given by the respondents and Mr Price in their witness statements supported by contemporaneous documents justified the findings the judge made on these issues. He took us through these documents in some detail, focusing in particular on NePL's statements in correspondence about the strength of their position.
42. I do not think the judge was justified in saying that it was established to the high standard necessary for summary judgment that Optaglio considered its patent position to be weak or precarious. There is no contemporaneous material to show that Optaglio believed that the combination of their confidential technology with aspects of the work on which NePL were engaged was not capable of producing useful patent protection. In fact there is documentary evidence which at this stage points the other way. Mr Tethal's invention record spoke of the potential for the invention in glowing terms. Furthermore the fact that NePL were at one stage asking for an outright assignment of the application is not without relevance in assessing its perceived value.
43. It is true that there was some concern over whether the application was made in breach of the first and second MCNDAs. But whether or not this would be fatal to the applications is a highly complex matter. The MCNDAs contained exclusions for matter in the public domain. There was plainly some material in the public domain about what NePL were doing, not least the first lecture given by Professor Song which had triggered Mr Tethal to think about combining the technologies. It is certainly arguable that any director knowing what Mr Hudson and Mr Tethal knew would consider Optaglio's position to have some merit.
44. I also do not think that the judge was justified in holding at this stage that the commercial pressures on Optaglio were such that it had no option but to withdraw the application. Whilst the correspondence from NePL shows them to be very keen to get the application out of the way, it also shows them to have been keen to pursue the collaboration. The focus on the communications from NePL merely shows their negotiating position, which a reasonable director would not be bound to accept.
45. I therefore disagree with the judge's conclusion in paragraph 22 that it was unarguably the case that it was open to a director to agree to the withdrawal of the application in the circumstances of this case without any breach of duty. It may be that at a trial the position of the respondents will turn out to be justified, but I do not regard the issue as suitable for summary judgment.

Shareholder consent

46. Mr Cohen submits that there was a stark evidential dispute between the parties as to whether Mr Zhukov had acquiesced in the withdrawal of the application. The respondents' case (in particular that of Mr Tethal) that Mr Zhukov was the master of Optaglio's destiny and expressly approved the withdrawal of the application was flatly denied in Mr Zhukov's evidence. He had said in terms that he had at no time provided any decision or consent for the withdrawal of the application and had rejected the respondents' allegations in full. He pointed out that there was no documentary evidence showing Mr Zhukov's consent to the withdrawal of the application. Mr Cohen submitted that the Judge was simply unable, on a summary judgment application, to find that the respondents were telling the truth and that the appellant's witnesses were not. Mr Zhukov's denial that there was shareholder consent was not unreal; it was a matter to be tested at trial.
47. Mr Mold submitted that Mr Zhukov's bare denials are not enough and are not credible in the light of the contemporaneous documents. He relied on the fact that it had been pleaded that the decision to withdraw the Application was 'authorised by the shareholders of Optaglio at the relevant time' and this had not been denied in the Reply, but simply not admitted. He pointed to numerous instances where he said that the documents showed Mr Zhukov's close involvement with the affairs of the company and in particular the involvement with NePL. He also submitted that Mr Kotacka's evidence that he was not aware of the withdrawal of the application was contradicted by the contemporary record.
48. I start with the judge's finding. It was that Mr Zhukov "must have known" of the withdrawal of the application. This is not a promising start, as if Mr Zhukov is to be held to have given his consent to the decision to withdraw the application, it must be informed consent. It is not enough to show that he had the means of knowledge if he did not in fact know. This is particularly important because Mr Hudson made clear in his evidence that Mr Zhukov did not speak English, and such conversations as he and Mr Zhukov had were conducted through Mr Zhukov's partner Mary. Consequently great care needs to be taken as to the inferences which it is possible to draw from the fact that Mr Zhukov was or may have been sent copies of documents.
49. The judge reached this conclusion having been "taken through a considerable amount of material (much more than I have referred to)". Unfortunately, the judge does not identify precisely what any of this material is. Mr Cohen submits, I think rightly, that the material the judge has referred to must be that set out in paragraph 15 of his judgment:

"It is however disputed by Mr Zhukov in his evidence that he approved the withdrawal of the application, yet the DTI agreement, which provided for the grant of a licence on fair terms, made sense only upon the footing that the application had by then been withdrawn, because the patent application, if capable of being proceeded with to a successful conclusion, would have obviated the need for a licence. The first defendant, on 17 January 2008, told Mr Willis [another shareholder] by email that he had sent a copy of the contract to Mr Zhukov and that he agreed with his signing it. Moreover, Mr Willis on 17 January 2008 sent an email to the first defendant and to Mr Zhukov concerning the agreement. The first defendant on 18 January 2008 sent emails to Mr Willis and Mr Zhukov dealing with Mr Willis' concerns. Although those emails did not in terms deal with intellectual property rights, it does show that Mr Zhukov must have known what the terms of the DTI agreement were which should have alerted anyone reading it properly including Mr Zhukov to the fact (which the first defendant says Mr Zhukov knew and approved of anyway) that the application had been withdrawn."

50. The judge therefore attached considerable weight to the fact that it was said that any reasonable person reading the DTI agreement would realise that the patent application had been withdrawn. We were taken through the terms of the DTI agreement relating to IPR ownership. There were elaborate provisions relating to IPR generated as a result of the agreement, so called "resulting IPR". The agreement also referred to "background IPR", that is to say IPR controlled by any party independently of the project, intended to be listed in a schedule to the agreement. We have not seen this schedule and there may be a question mark over whether it ever existed. The agreement does not require the abandonment of any IPR by any party. I am afraid I simply do not follow the judge's reasoning that the agreement only made sense if the Optaglio application was abandoned, or why if it was not abandoned and capable of being successfully prosecuted to a granted patent it would have obviated the need for a licence. I disagree with the judge that the DTI agreement would make it plain that the application had been abandoned. All the more so to someone who does not speak English.
51. The judge also appears to have placed some reliance on the fact that Mr Zhukov said that he had not attended the meeting with NePL on 26 June 2007 when the minutes of the meeting record his presence. Whilst this is no doubt good cross-examination material for Optaglio to deploy at trial, it does not cast direct light on whether Mr Zhukov knew of the intention to withdraw the application. There is nothing in the minutes themselves which refers to the withdrawal of the application. Even if withdrawal of the application was discussed at that stage, it does not follow that Mr Zhukov was aware of the decision taken later to withdraw it. Moreover it is not entirely clear to me that Mr Tethal is saying that he remembers Mr Zhukov attending the meeting, rather than simply relying on the document.
52. There was other material which Mr Mold deployed to show that Mr Zhukov knew or ought to have known of the decision to withdraw of the application. It is true that some of it showed that Mr Zhukov had been sent documents relating to aspects of the negotiations. I am afraid to say that none of it persuaded me that the judge was justified in holding that Mr Zhukov unarguably gave informed consent to the withdrawal of the application. I therefore do not think the judge was justified in concluding on a summary judgment application that the withdrawal of the application was authorised by all the shareholders.

The case against the second defendant

53. There is no dispute that by the date at which the application was in fact withdrawn in January 2008 Mr Hudson had ceased to be a director of NePL. However Mr Cohen submits that the judge was wrong to say Mr Hudson was not a party to the decision to withdraw the application, and wrong to conclude that the decision was not taken until January 2008.
54. It is true that a decision was taken in May 2007 that Mr Tethal would be the main contact on the Optaglio side in the relationship between Optaglio and NePL. It appears that this may have been due, at least in part, to the fact that Mr Hudson had a potential conflict of interest arising out of an indirect shareholding in NePL. Nevertheless Mr Hudson continued to be alive to the progress of negotiations and wrote a long memo to Mr Tethal in September 2007 which begins "You have asked me to facilitate the discussions between yourself and NePL…" and concludes with a recommendation to withdraw the application.
55. Mr Hudson was also the representative of Optaglio who signed the Evaluation Agreement on 6 December 2007 (along with Mr Tethal who signed for Optaglio s.r.o.). This document expressly contemplated, although in a non-binding way, that the application be withdrawn. Instructions were given to Optaglio's patent attorneys to withdraw the application on 21 December.
56. On the basis of these materials I disagree with the judge that it was established to the summary judgment standard that Mr Hudson was not a party to the decision to withdraw the application and that he was not a director at the time the decision was taken. It may well be that at trial Mr Hudson will be able to distance himself sufficiently from the decision that was taken. It would in my judgment be wrong to prevent Optaglio from seeking to establish that he was a party to it.

Loss

57. Mr Cohen submitted that at least so far as they were based in contract, Optaglio's claims did not require loss. In any event there was loss. The loss consisted of either the wasted expenditure in making the application and in the necessary research, or the lost profits from exploitation of the process under the protection of a patent.
58. It is necessary to distinguish between absence of loss and difficulty in establishing it. I have no doubt that Optaglio will have difficulty in showing loss, but I cannot accept the judge's reasons for saying that they have lost nothing. Even if one puts to one side statements made in the early stages of the collaboration, such as Mr Tethal's statement that the invention had the potential to "bring total revolution" to the production of circuits, transistors and diodes, later material which Mr Cohen showed us certainly does not justify the conclusion that the technology had proved unworkable. Thus Mr Price was expressing qualified optimism for the use of Optaglio's core technology in December 2009, albeit doubting whether success could be achieved in the last 6 months of the project. In March 2010 Mr White of NePL referred to the fairly imminent possibility of licensing revenue. In July 2010 an article in Holography News was quoting Mr Hudson and Mr White continuing to extol the virtues of the technology.
59. The fact that the collaboration did not proceed, and that Optaglio did not in the end take a licence is not in my judgment conclusive against the existence of any loss. It is enough to say that I accept as arguable Mr Cohen's submission that it will need to be investigated at trial what the position would have been if Optaglio had succeeded in securing some relevant IP protection for themselves. The fact that the collaboration was not pursued in the circumstances as they in fact existed after the assumed breach is not in my view fatal to a successful claim for loss.
60. The judge emphasised that there was no pleading and no developed case of loss at this stage, which he considered told against Optaglio because of the time which had elapsed since the withdrawal of the application. This is a fair point, but it has to a degree been overtaken by events as Optaglio has put forward draft amended particulars of claim which set out the claimed loss in more detail.

Lack of bona fides

61. Mr Mold submitted that even if the judge was not justified in granting summary judgment, he should instead have dismissed the case as lacking in bona fides. He gave six reasons why the court should so hold:

i) the lack of merit of the claim;

ii) the delay of almost 6 years since the withdrawal of the application, given that Mr Zhukov and Mr Kotacka clearly knew about the withdrawal of the application at the time;

iii) the absence of any detailed case on loss, particularly given the length of time that Optaglio has had to prepare one;

iv) the account given by Mr Tethal and Mr Hudson of other actions taken by Mr Zhukov against other former employees and associates, disclosing a pattern of unmeritorious legal proceedings against persons formerly connected with him;

v) this modus operandi supports the inference that Mr Zhukov has a vendetta which he is pursuing through these proceedings;

vi) the unreliable witness evidence put forward by Optaglio.

62. This is an ambitious argument. Once it is accepted that the claim is not susceptible to summary judgment, and that there is an arguable case of substantial loss, it would be an extreme step to take to prevent Optaglio from pursuing it. We heard brief argument as to the appropriate test for staying or striking out an action on the ground that it is brought for an ulterior purpose. In JSC BTA Bank v Ablyazov [2011] EWHC 1136 (Comm); [2011] 1 WLR 2996 Teare J agreed with the observation of Bridge LJ in Goldsmith v Sperrings Ltd [1977] 1 WLR 478 that:

"... if it can be shown that a litigant is pursuing an ulterior purpose unrelated to the subject matter of the litigation and that, but for the ulterior purpose, he would not have commenced proceedings at all, that is an abuse of process."

63. However Teare J went on to cite what Simon Brown LJ had said in Broxton v McClelland [1995] EMLR 485:

"Only in the most clear and obvious case will it be right to strike out proceedings as an abuse of process so as to prevent a plaintiff from bringing an apparently proper cause of action to trial."

64. I do not regard the matters relied on by Mr Mold, individually or collectively, as coming remotely close to satisfying these exacting requirements. I have dealt with the merits of the claim above. I consider that they have the requisite degree of conviction to avoid striking out, and do not think it would be right to draw any inference about lack of good faith from what it is possible to discern of the merits at this stage. So far as delay is concerned, this is a weak indicator of collateral motive, given that the law allows a party deliberately to delay within the limitation period. It is impossible to asses the significance of other actions brought by Mr Zhukov without embarking on an assessment of their merits, which Mr Mold did not invite us to undertake. Whether, overall, it is fair to characterise Optaglio's evidence as unreliable is a matter better left to the trial judge.
65. I would not, therefore, be prepared to hold that the action was brought in bad faith.

Pleading

66. The judge did not have to decide whether to dismiss the claim for inadequacy of the particulars of claim, but said that he would not have done so without giving Optaglio an opportunity to amend in the light of the criticisms made. The judge's approach was a manifestly fair one, and I see no reason why we should differ from it.
67. As I have foreshadowed, Optaglio has now addressed some of the criticisms of the original particulars of claim in draft amended particulars of claim annexed to its supplementary skeleton on this appeal. Mr Cohen invites us to allow the amendments. Mr Mold submits that we should instead strike out the original particulars for their inadequacy.
68. Given my conclusion on summary judgment, I see no purpose in striking out the original particulars of claim. Instead, I consider that we should allow the amendments to the particulars put forward by Optaglio. In the main the amendments simply elaborate Optaglio's case along the lines on which it was developed before us.

Conditional order

69. The respondents submit that Optaglio should be required to pay 70% of the respondents' estimated costs into court as a condition of continuing with their claim. As the White Book commentary explains at paragraph 24.6.6 a conditional order:

"will be made if it appears to the court that, in respect of some claim or defence or issue, it is possible that the claim, defence or issue may succeed but it is improbable that it will do so. "

70. I am not persuaded that we should make such a conditional order in respect of the respondents' costs. As the commentary in the White Book goes on to explain, the court does not make conditional orders just because it considers a claimant's case to be weak. The court is normally reluctant to be drawn into assessments of the merits of a claim beyond that necessary for deciding whether it has a realistic prospect of success: see per Simon Brown LJ in Olatawura v Abiloye [2002] EWCA Civ 998. In his skeleton argument Mr Mold relies in addition on "the suspicion that the claim may not be bona fide". I would require more solid grounds than those advanced to drive me to the conclusion that we should impose a conditional order.

Conclusion

71. I would allow the amendments to the particulars of claim in the form annexed to Optaglio's supplemental skeleton. I would allow the appeal and set aside the order for summary judgment.

Lord Justice Lewison

72. I agree.

Lady Justice Black

73. I agree too.

Note 1    Re Duomatic Limited [1969] 2 Ch 365    [Back]