Omnilab and DCN director “knowingly” breached Corporations Act

26 May, 2011 by Sam Dallas

Australian company Omnilab Media could face civil penalties after deliberately helping a former Digital Cinema Network director “plan” and “execute” a breach of the Corporations Act 2001 (Cth), the Federal Court has heard.

DCN – under directors Martin and James Gardiner – started legal proceedings against Omnilab last September after the media company was appointed by the Independent Cinemas Association of Australia (ICAA) to manage and administer the Virtual Print Fees supplied by US studios to assist local cinemas in upgrading from 35mm film to digital projection.


Michael Smith, sole owner of MGS and the third director of DCN – which Omnilab tried to purchase mid-last year – had been negotiating these financial subsidies with US studios on DCN’s behalf since 2008.

However, DCN claimed that Smith, without the approval of his fellow directors, provided Omnilab access to confidential information about the VPF negotiation process, the requirements, responsibilities and functions of a digital integrator under VPF agreements.

Justice Gordon found that Omnilab entered the digital transition market from a “standing start” before improperly acquiring DCN’s proprietary information from Smith.

DCN has, as a result, claimed breach of sections 180-184 of the Corporations Act 2001 (Cth) by Smith and Omnilab. Smith resigned from DCN late last year and the trial began in February.

Omnilab maintained at trial that it was unaware Smith was breaching his duties. However this was soon dismissed.

Justice Gordon said the breaches of fiduciary duty by Smith were “dishonest and fraudulent” and Omnilab was well aware of the actions.

“The dishonest and fraudulent conduct that gave rise to those breaches of duty was conduct in which the Omnilab Parties actually assisted Smith. They assisted him because they not only drafted and approved the plan, but directed the plan.

“The Omnilab parties were involved in Smith’s contraventions of the Corporations Act. Each aided, abetted, counselled or procured the contravention and, alternatively, by act and omission, was directly and indirectly, knowingly concerned in, or party to, the contravention.

“The Omnilab Parties ‘knowingly assisted’ Smith in breaching his fiduciary duties to DCN.”

Late last year, DCN said due to the conflicting reports and confusion, US studios stopped negotiations with DCN and indicated they wouldn’t sign any VPF deal until legal matters were resolved.

This has, in turn, resulted in DCN’s business suffering significant loss and damage, the court heard.

Omnilab could be forced to pay compensation to DCN, among other things, and Smith may be subject to criminal charges (with a maximum of five years' imprisonment).

“Justice Gordon has sent a clear message – corporate piracy is unacceptable,” DCN’s Martin Gardiner said yesterday in a statement.

“Independent cinema owners should be outraged at the actions of those involved in this debacle, as it has put at risk a crucial opportunity for the independent cinema industry.

“It appears unfortunately, that some key players in the industry have decided to put their personal and/or corporate interests before all else.”

The court however didn’t grant an injunction, sought only in late February, to prevent both ICAA and Omnilab to continue negotiating with the US studios.

"First, injunctions are not granted if damages are an adequate remedy. I am not persuaded on the evidence led at this trial limited to the question of liability that damages is not an adequate remedy.

"Secondly, if an injunction was granted, it would prejudice third parties – the ICAA members – from obtaining immediate access to the VPF scheme and the significant financial benefits that flow from it.

" Neither ICAA nor any of its members were joined as parties to these proceedings or given notice of the application. The fact that ICAA was not joined as a party to these proceedings provides the third basis for refusing the injunction.

"ICAA has and retains access to all relevant information. It has pursued and continues to pursue the VPF agreements with the Studios and is entitled to do so.

"Fourthly, as DCN is well aware, ICAA and Omnilab have continued to negotiate with the Studios. Those negotiations have resulted in the agreement between Omnilab and Paramount and the real possibility of other agreements with other Studios.

"Fifthly, under any VPF agreement, there is no evidence to suggest that Omnilab will perform the role of digital integrator. It is said that in any event, ICAA will not appoint DCN to that role."

The court heard Gardiner conceding that he told Smith in August last year that ‘if [DCN] don’t do the VPF’s, no-one will and I will blow them up”.

"Over the balance of his cross examination, his evidence waxed and waned about the precise words he used. Ultimately, he suggested that he “put forward” the fact that: '…commercially, DCN was better off nobody having the VPF and it being an even playing ground than for another party to be offering a 75 per cent rebate on equipment that they sell and set up a network in competition to DCN which would reduce [or] remove the reason for the company to exist'.

“Finally, the evidence disclosed that DCN was unable to perform the functions of a digital integrator to the satisfaction of the studios – it could not provide the minimum number of screens and did not have sufficient financial resources to provide the guarantees sought by the studios.

“In all the circumstances, equitable relief in the form of an injunction is refused. The other relief sought by DCN will be the subject of further hearing.”

DCN is currently considering its position after the judgment, including the forms of relief it will be seeking. The company will request that Justice Gordon refer the matter to the Australian Securities and Investments Commission for further investigation.

“DCN is now looking to the future and the ways in which it can continue to support cinema owners,” Gardiner said.

UPDATE: An orders hearing will no longer take place this coming Monday at the Federal Court in Melbourne. It has been postponed while Justice Gordon considers a range of submissions about the proposed orders.

An Omnilab spokeswoman said no comment would be provided at this stage.

The full case can be read here.