Rafael Advanced Defense Systems Ltd v Mectron Engenharia, Industria E Comercio SA

On 3 March 2017 Phillips J. granted the Claimant a without notice injunction restraining the Defendant from, inter alia, divulging confidential intellectual property to third parties. The Defendant and two third parties who were notified of the injunction oppose the continuation of the order. This is my ruling on the question whether the injunction should be continued until final arbitral award.

The Claimant (“Rafael”), an Israeli company, is the developer of communications technology and hardware known as BNET. The Defendant (“Mectron”), a Brazilian company, entered into a contract with the Brazilian Air Force (“FAB”) in June 2012 for the provision of a communications system (“the LBR2 project”). It is common ground that contract (“the Prime Contract”) contemplated that Mectron would use Rafael’s BNET technology. At about the same time Rafael and Mectron entered into a non-disclosure agreement. On 1 May 2013 Rafael entered into a contract with Mectron for the supply of BNET (“the Supply Contract”).

In early 2015 Odebrecht (the parent company of Mectron) entered into discussions with Rafael for the purchase of Mectron’s communications business. Those negotiations ended in March 2015 because the parties could not agree on price. At the end of 2015 Odebrecht announced that it was looking for an investor in the whole of Mectron. When it was decided that that was not possible Odebrecht decided in March 2016 to pursue the sale of Mectron’s communications business. Elbit, another Israeli company and a competitor of Rafael, concluded a letter of interest with Odebrecht giving Elbit an exclusivity period to complete a deal. In April 2016 Rafael learnt of rumours that Odebrecht was seeking to conclude negotiations with a potential buyer, AEL, another Brazilian company, but one which had a relationship with Elbit.

On 19 May 2016 Mectron and AEL concluded a share purchase agreement. The communications part of Mectron’s business was to be transferred to a newly created company and AEL would then purchase the shares in that company. The share purchase agreement provided for certain agreements to be assigned including the Prime Contract. The Supply Contract between Rafael and Mectron was not, however, amongst those contracts to be assigned. A clause in the agreement contemplated that the Supply Contract might be terminated by agreement but if that were not possible payments would be made by AEL to Mectron compensating it for payments made to Rafael in which case the deliverables received by Mectron under the supply contract would be transferred. However, if such transfer was not “permitted” then Mectron would refrain from transferring them and would not use them for any purpose.

In June 2016 representatives of Rafael sought to discuss a way forward with FAB involving collaboration between AEL and Rafael with protection of Rafael’s intellectual property rights in the BNET technology. In July 2016 representatives of Rafael met with FAB at the Farnborough Air Show and raised the possibility of a joint venture between Rafael and Stefanini (another Brazilian company ) and FAB.

On 19 July 2016 by letter Rafael sought assurances from Mectron that Rafael’s confidential information disclosed to Mectron under the Supply Contract between Rafael and Mectron would be protected.

On 8 August 2016 Rafael informed FAB that it intended to propose the acquisition of Mectron’s communications business by Rafael and Stefanini. But on the same day the Brazilian competition authority, CADE, approved the Mectron/AEL sale. That approval was challenged by Rafael on 23 August 2016 but CADE rejected the challenge.

In September 2016 Rafael met with FAB and urged FAB to reject the Mectron/AEL sale.

On 14 September 2016 Mectron replied to Rafael’s letter of 19 July 2016. Mectron confirmed that “is in full compliance with all its confidentiality and non-disclosure obligations, including those arising from the Supply Contract executed with Rafael.”

On 23 December 2016 a meeting took place between Rafael and COPAC, another Brazilian agency. COPAC said that it intended to approve the Mectron/AEL sale “as long as the BNET technology was retained.” COPAC expected Rafael and Elbit to seek agreement as to how Rafael could continue to provide the BNET technology.

On 1 January 2017 a meeting took place between the CEOs of Rafael and Elbit in Israel. Although Elbit suggested that they would use Rafael’s technology and would protect its intellectual property rights no agreement was reached.

On 2 January 2017 AEL advised Rafael by letter that it had agreed to buy Mectron’s communications business including the Prime Contract between Mectron and FAB. AEL asked for Rafael’s assurance that Rafael would continue to supply “the best and most compete technological solutions under the Sub-contract and will support Mectron Com in the program.” Rafael replied on 9 January 2017 that the matter would be discussed between the CEOs of Rafael and Elbit.

On 19 January 2017 there was a meeting in Brazil between Rafael, Stefanini and FAB during which FAB was pressed to prefer the proposed Rafael/Stefanini joint venture. There was also a meeting with Odebrecht concerning Rafael’s wish to purchase Mectron’s communications business. Odebrecht was unable to discuss such a proposal before 15 March 2017.

On 7 and 8 February 2017 there were discussions between Rafael and Elbit but no agreement was reached. Rafael told Elbit that Rafael was on the point of seeking an injunction. On 13 February 2017 Rafael wrote to COPAC raising its IP concerns and repeating the joint venture proposal. On the same day FAB wrote to Mectron giving its conditional and informal consent to the Mectron/AEL sale.

On 20 February 2017 there was a meeting at COPAC’s offices in Brasilia between Rafael and COPAC. Rafel was informed that COPAC had approved the sale to AEL “on the express basis that AEL must deliver LBR2 according to its current specification i.e. including Rafael’s BNET technology.”

On 21 February 2017 amendments were made to the Mectron/AEL share purchase agreement whereby the parties acknowledged the need to protect third parties’ IP rights and for key employees to sign Non-Disclosure Agreements. Certain Mectron employees who had been trained in Israel were eliminated from the list of key employees.

On 22 February 2017 Rafael made clear to AEL that it did not consent to any assignment of the Supply Contract between Rafael and Mectron to AEL.

Also on 22 February 2017 (though the letter is in fact dated 19 February 2017) Rafael wrote to Mectron. This was the first communication between Rafael and Mectron since 14 September 2016. Rafael made clear that it did not consent to any assignment of the Supply Contract to AEL and requested an undertaking that Mectron would not assign that contract. Rafael reserved its right to seek injunctive relief. Although no undertaking was sought protecting Rafael’s IP rights it is clear from the terms of the letter (“there is substantial deployment of our Confidential Information and Background Intellectual Property…within the performance between us of the Supply Contract”) that protection of such rights was Rafael’s concern.

The final event on a busy 22 February 2017 was that the Mectron/AEL sale was closed.

No reply was received by Rafael to its letter to Mectron. That was probably because of the Brazil Carnival which had started on or about 17 February and continued to 5 March 2017.

In the meantime Rafael applied to the Commercial Court in England seeking without notice interlocutory relief against Mectron, though informal notice of the application had been given on 2 March 2017. This court made an order on 3 March 2017 restraining Mectron from assigning the Supply Contract and from permitting AEL or Elbit from using Rafael’s IP rights as defined in the Supply Contract. That order was served that day by email.

On 6 March 2017 Mectron replied to Rafael’s letter dated 19 February (but sent on 22 February). Mectron confirmed that it “will not assign any rights or delegate any duties under the Supply Contract to any third parties without the previous consent from Rafael, pursuant clause 33 of the Supply Contract.” Mectron added: “Furthermore, as already stated in our letter of September 14, 2016, we confirm that no Confidential Information or Background Intellectual Property of Rafael, in connection with the Supply Contract, has been transferred, assigned, or disclosed to any third parties.” Although I was invited to draw adverse inferences from Mectron’s failure to mention the injunction I was not persuaded that it was appropriate to do so. The letter was a response (although delayed, probably because of the Carnival) to Rafael’s letter dated 19 (22) February and it seems to me possible that it was thought appropriate to reply to that letter first before responding to the injunction which would no doubt require legal advice.

On 7 March 2017 Rafael wrote to FAB saying that it was willing to collaborate with AEL/Elbit and to supply the BNET technology but that negotiations were required to agree the terms and the protection of Rafael’s IP rights. Rafael said that “with the goal of starting this negotiation, we have taken the following action: …. (b) we have approached the court of UK… and received an interim relief which delays the assignment of the LBR2 contract to NewCo/AEL until an understanding is reached between the parties that assures the protection of Rafael’s IP and Know-how.” Adverse comment was made on this letter. But, whilst this letter suggests that Rafael viewed the injunction as a device to promote negotiations between the parties, I do not consider that Rafael had any improper collateral purpose in seeking the injunction. The aim and object of the injunction was to protect Rafael’s IP rights and Rafael was entitled to seek injunctive relief to further that aim and object.

Since this is a quia timet injunction Rafael must show that there is a serious issue to be tried as to there being a real risk that Mectron intends, unless restrained by this court, to transfer Rafael’s IP to AEL (and hence to Elbit), in breach of the Supply Contract. Miss O’Sullivan QC, on behalf of Rafael, submitted that there is such a risk because Elbit and AEL cannot perform the Prime Contract without the use of the BNET technology. Since Rafael has refused to consent to the assignment of the Supply Contract between it and Mectron that will only be possible if Rafael’s rights are violated. Mr. Stanley QC, on behalf of Mectron submitted that there is no such risk because Mectron has always made clear that it respects the confidentiality and non-disclosure terms of its Supply Contract with Rafael. It said so on 14 September 2016 and it said so on 6 March 2017. Mr. Houseman QC, on behalf of Elbit, pointed out that there is evidence (a) from Mectron that although it would be desirable to use the BNET technology it considered that the LBR2 project could be delivered without that technology and (b) from Rafael that it learnt in July 2016 that AEL was intending to provide a separate solution based upon Elbit’s technology.

Whether or not the LBR2 project can be delivered without the BNET technology, the fact that Mectron has consistently recognised and acknowledged its confidentiality and non-disclosure obligations to Rafael appears to me to pose a problem for Rafael on its application to continue the injunction. If that is Mectron’s true and honest state of mind it strongly suggests that there is no serious issue to be tried as to there being a real risk that Mectron intends, unless restrained by this court, to transfer Rafael’s IP to AEL (and hence to Elbit), in breach of the Supply Contract.

In this regard reference was made by Mr. Stanley to Bridlington Relay Ltd. v Yorkshire Electricity Board [1965] 1 Ch 436 at p.445 where Buckley J. said at p.445 that

“it would be wrong for this court in quia timet proceedings to compel this defendant to do something which it appears to be willing to do without the imposition of an order of this court.”

Reference was also made to Kitzing v Fuller [2016] EWHC 804 (Ch) where HHJ Hodge QC, sitting as a judge of the Chancery Division, said at paragraph 30:

“In all cases where injunctive relief is sought, one must pose the question: Is there a real risk that the defendant will do the works or undertake the activities sought to be enjoined? … On that basis, and consistently with the authorities, including the statement of Lord Eldon, the Lord Chancellor, in Coffin v Coffin (1821) Jacob’s reports 70 at 72 that:

‘The court never grants injunctions on the principle that they would do no harm to the defendant, if he does not intend to commit the act in question: but if there be no ground for the injunction, it will not support it…’

it would not be appropriate for the court…to grant interim injunctive relief.”

Miss O’Sullivan’s answer to this difficulty was to say that Mectron, and in particular Mr. Amaro, the President of Mectron, were not being frank with the court. She submitted that Mectron in fact intended to disclose Rafael’s IP to AEL and Elbit.

It was said that Mectron had an incentive to disclose the IP because the Prime Contract required the use of that technology. Although the Prime Contract was not before the court Miss O’Sullivan submitted that the court could be sure that the Prime Contract required the use of the BNET technology. This was because COPAC had reportedly stated on 23 December 2016 and on 20 February 2017 that AEL must deliver the LBR2 project using Rafael’s BNET technology. Mr. Stanley accepted that the Prime Contract contemplated the use of the BNET technology but was unable to confirm that it required the use of that technology. (It was not in evidence.) Mr. Houseman, as I have already said, referred to passages in the evidence which suggested that the use of BNET technology was not a requirement of the Prime Contract.

I accept that whether the use of the BNET technology was a requirement of the Prime Contract or was merely contemplated by the Prime Contract Mectron had, or may have had, in either case an incentive to use and thereby disclose the BNET technology to those who were not entitled to see it. But the fact that Mectron had or may have had an incentive to do something which is not permitted by its Supply Contract with Rafael does not mean that there is a real risk that Mectron will or may succumb to that temptation. Mectron has said, twice, that it respects its confidentiality and non-disclosure obligations. The question I must ask myself is whether there is a real risk that Mectron is not telling the truth.

Miss O’Sullivan submitted that there was good reason to consider that Mr. Amaro was not telling the truth. His evidence as to the protections Mectron had put in place to protect Rafael’s IP gave cause for concern, aspects of his evidence were disingenuous and other aspects were lacking in frankness.

It was said that the steps Mectron was supposedly taking to protect Rafael’s IP were inadequate safeguards. Thus, although the list of key employees who would be retained on the project had been reduced to eliminate those thought to have knowledge of Rafael’s IP some surprising personnel remained on the list, including for example the project manager. Further, although documentation was to be reviewed to identify all material IP it was unclear what was actually being done to protect the interests of Rafael. Mr. Amaro dealt with the matter of key employees in his second witness statement. It seems to me that serious attempts have been made to ensure that those with knowledge of the BNET technology are not transferred but that if any are transferred, notwithstanding those attempts, they have to sign a Non-Disclosure Agreement. Whilst I accept that Rafael may well continue to have concerns about Mectron’s actions (for example no further particulars have been given of the steps being taken to identify sensitive information) it does not seem to me that those concerns can fairly be translated into concerns as to Mectron’s good faith or honesty when it says that it respects the confidentiality and non-disclosure obligations of the supply contract with Rafael. There does seem to me to be substance in Mr. Amaro’s evidence that the AEL/Mectron contract had been “specifically structured to avoid any violation of Rafael’s intellectual property rights or its rights under the Supply Contract.”

It was said that in paragraphs 45 and 55 of his first witness statement and in paragraph 8 of his second witness statement Mr. Amaro was being disingenuous, essentially because he has failed to deny that it was a requirement of the Prime Contract that the BNET technology be used. It is necessary to read paragraphs 53-56 of his first witness statement together. He is dealing with Mr Miller’s account of the meeting with COPAC on 20 February 2017 in which it was reported that the sale to AEL was approved so long as the BNET technology was used. Mr. Amaro doubts that account because (a) it is not clear precisely what words were reported to Mr. Miller as having been used by COPAC, (b) the LBR2 specification is not set out in the Supply Contract but is set out in the Prime Contract, (c) Mectron and AEL consider that the project can be delivered to specification without that technology and (d) COPAC did not say in terms in its letter dated 13 February 2017 that it was necessary for the BNET technology to be used.

This response was said to be disingenuous because Mr. Amaro had failed to deny that use of the BNET technology was a requirement of the Prime Contract, which contract had not been disclosed because it would show that to be the case.

In his second witness statement at paragraph 8 Mr. Amaro denied that that was the reason why the Prime Contract had not been disclosed. The reason it had not been disclosed was that it was a sensitive defence contract which it would be a criminal offence to disclose.

I was not persuaded that these passages are or may be disingenuous. Mr. Amaro had stated earlier in his statement that Mectron had subcontracted with Rafael for part of the LBR2 system and that Rafael had developed the BNET technology “that would support the development of the LBR2 system”. In paragraph 54 he said that Mectron and AEL consider that the LBR2 project could be delivered to specification without the use of the BNET technology. It seems to me that Mr. Amaro is denying that use of the BNET technology is a requirement of the Prime Contract. This cannot be a surprise to Rafael because it was clear to Mr. Miller of Rafael in July 2016 that AEL envisaged delivering the LBR2 project without the use of the BNET technology.

A number of points were taken under this heading. It was said that the matters raised by Mr. Amaro in his witness statement had not been mentioned by Mectron in its correspondence. But in Mectron’s two letters of 14 September 2016 and 6 March 2017 Mectron responded to the questions asked by Rafael. It was further said that in paragraphs 57-58 of his witness statement Mr. Amaro failed to mention the injunction issued by this court on 3 March 2017. However, the title to this section of the statement expressly mentions the injunction and paragraph 60 explains why there was no need for the injunction. Finally, it was said that no undertakings were offered. But in circumstances where Mectron had confirmed its “full compliance with all its confidentiality and non-disclosure obligations” (long before the injunction) and confirmed (after the injunction) that no confidential information had been disclosed to any third party it was not obvious that undertakings for the future were required. The terms of the Mectron/AEL contract, including the amendments made on 21 February 2017 make clear Mectron’s intention to abide by its obligations to Rafael.

There are also factors which suggest that there is no reason to doubt the good faith and honesty of Mectron in saying that it respects its confidentiality and non-disclosure obligations. Thus the share purchase agreement between Mectron and AEL dated 19 May 2016 recognised that Rafael’s consent to the transfer or use of its “deliverables” was required. Further, Mectron’s position was not only stated after the injunction had been obtained but had been stated long before it was granted on 14 September 2016. Third, when it was clear that Rafael’s consent was not forthcoming amendments were made to that share purchase agreement giving further protection to Rafael’s IP. All these matters suggest that Mectron’s stated position is their honest and true position.

The import of Miss O’Sullivan’s submission is that whilst Mectron has said that it has complied with its obligations it secretly intends to break them in the future. That is a serious allegation to make but I am not persuaded that there is a real risk that it is true.

For these reasons there is no serious issue to be tried as to their being a real risk that Mectron intends, unless restrained by order of this court, to break its confidentiality and non-disclosure obligations.

Miss O’Sullivan submitted, in the alternative, that there is risk of inadvertent loss or leakage of confidential data. This alternative submission was not developed. It seems to me that in principle an injunction is designed to restrain deliberate wrongdoing by a party rather than accidental or inadvertent wrongdoing. An injunction may very well cause a party to be more careful in its treatment of confidential information but that is not the basis upon which injunctions are granted. I do not consider that the injunction can be maintained on the basis of this alternative submission.

For these reasons I have concluded that it would not be appropriate to continue the injunction granted without notice by this court on 3 March 2017.

I shall deal shortly with the other matters which were argued.

There is no dispute that damages would not be an adequate remedy for Rafael. But it was submitted by Mr. Stanley in writing, though not orally, that damages would not be an adequate remedy for Mectron because the injunction may cause FAB not to approve the Mectron/AEL contract. This however seems wholly speculative in circumstances where CADE and COPAC have approved it. I was told in the hearing to regard FAB and COPAC as one and the same. Thus, had it been relevant, the balance of convenience would have been in favour of continuing the injunction.

I was not persuaded that there was any delay by Rafael in commencing its proceedings for an injunction. The report of the meeting on 20 February 2017 appears to have been the reason for commencing proceedings on 3 March 2017.

It was suggested that the necessary “urgency” required by section 44 of the Arbitration Act 1996 was self-induced in that the ICC arbitration and in particular the process of appointing an emergency arbitrator could and should have been commenced when AEL informed Rafael that agreement had been reached with Mectron. But Rafael concentrated in January and February on seeking to persuade FAB to prefer the proposed joint venture between Rafael and Stefanini and in seeking a solution with Elbit. The injunction was sought after the report of the meeting on 20 February 2017 when COPAC approved the sale to AEL. Had it been necessary to decide I would not have held that the necessary “urgency” had been self-induced.

It was further said that when commencing the proceedings before this court arbitration proceedings before the ICC should have been commenced. This was recognised by Rafael who undertook before Phillips J. to commence arbitration proceedings as soon as practicable. In the event they were not commenced until 14 March 2017. This does not appear to me to be as soon as practicable and Miss O’Sullivan apologised on behalf of Rafael for that delay. It is essential that undertakings given when obtaining without notice relief are complied with. Since the injunction is not being continued for other reasons I need not consider whether this delay would itself have justified refusing to continue the injunction.