Australian Mud Company Pty Ltd v Coretell Pty Ltd

BASIS OF THE APPLICATION 2 Pursuant to r 40.02(a) of the Federal Court Rules 2011 (Cth), parties may apply to the Court for an order that costs be awarded in their favour, other than on a party/party basis. The principles are very well established. They include the undue prolongation of cases by groundless contentions. As a recent example, see Labelmakers Group Pty Ltd v LL Force Pty Ltd (No 4) [2013] FCA 1227 per Tracey J (at [27]). 3 The respondents rely on my decision in Manday Investments Pty Ltd v Commonwealth Bank of Australia [2011] FCA 681 where, after collecting the relevant principles (at [44]-[45]), I refused a claim for indemnity costs (at [48]-[49]), saying: 44. In connection with the Bank's claim for indemnity costs in relation to the deletion of the unconscionable conduct claim, the applicants accept that normally upon discontinuance of a part of a claim, the respondent is entitled to costs thrown away to be taxed on a party-party basis at the conclusion of the proceeding (O 62 r 3 FCR). 45. The applicants also accept that in special circumstances there may be a departure from the convention: see, for example, Barrett Property Group Ltd v Metricon Homes Pty Ltd (No 2) [2007] FCA 1823 per Gilmour J (at [3]-[5]) where his Honour said: 3 An award of costs is in the discretion of the Court or Judge except as provided by any other Act: Federal Court of Australia Act s 43(2). The discretion must be exercised judicially. In the normal course, costs are ordered to be paid on a party and party basis: Colgate-Palmolive Company v Cussons Pty Limited [1993] FCA 536; (1993) 46 FCR 225 at 232; Re Wilcox; Ex parte Ventura Industries Pty Ltd (No 2) (1996) 72 FCR 152 at 158 per Cooper and Merkel JJ. A costs order is not intended to punish the unsuccessful party but rather to compensate the successful party: Hurst and Devlin v Education Queensland (No 2) [2005] FCA 793 at [5]. This is so even where the ordinary practice is departed from. The aim is not to punish or deter future litigants but simply to compensate a party fully for costs which normal party-party costs could not be expected to do, where it was unreasonable for that party to be subjected to any expenditure of costs, such as where a hopeless proceeding is brought: Cirillo v Consolidated Press Property Ltd (No 2) [2007] FCA 179 at [4]- [5]. Any departure from this general rule requires a special reason: Access For All Alliance (Hervey Bay) Inc v Hervey Bay City Council [2007] FCA 974 at [10]; Pacific Publications Pty Ltd v Next Publishing Pty Ltd [2005] FCA 971 at [5]. The categories in respect of which departure from the usual rule are contained are not closed: John S Hayes & Associates Pty Limited v Kimberley-Clarke Australia Pty Limited (1994) 52 FCR 203; Jianshe Southern Pty Ltd v Turnbull Cooktown Pty Ltd (No 2) [2007] FCA 903 at [32]. 4 In Colgate-Palmolive, (at p 233) Sheppard J identified various categories which might give rise to an award of indemnity costs. These include:  the making of allegations of fraud knowing them to be false, and the making of irrelevant allegations of fraud;  evidence of particular misconduct that causes loss of time to the Court and to other parties;  the commencement or continuation of proceedings for an ulterior motive;  wilful disregard of known facts or clearly established law;  the making of allegations which ought never to have been made or the undue prolongation of a case by groundless contentions; and  an imprudent refusal of an offer to compromise. 5 Whatever the case, the Court should not make such an order for costs unless there is some clear basis or "some special or unusual feature in the case": Pacific Publications at [5]. … 48. On this aspect of the argument I rule in favour of the applicants. I accept that there are appropriate cases for the award of costs on an indemnity basis and appropriate cases where costs orders (including indemnity costs) are ordered to be paid forthwith. I do not consider that this is one such case. The applicants' decision not to pursue the unconscionable conduct claim may well be sensible. For the reasons stated by the respondents, it is a claim which would inevitably meet with considerable difficulty. That does not, however, elevate the claim to one which was so inevitably hopeless and unmeritorious from inception that it should never have been advanced. Decisions relied upon by the Bank do support the conclusion that the claim would be unlikely to succeed, at least as pleaded. Whether it was the arguments advanced by the Bank or the applicants' own analysis of their position, it was sensible to discontinue that aspect of the claim having regard to its prospects in the manner in which it had been pleaded which in turn depends upon the facts upon which the pleading could be based. Nevertheless, an order for indemnity costs, let alone indemnity costs payable forthwith (whether 50% of the costs or some other amount), would be reserved only for the more obvious and serious cases. This case does not fall into that category. 49. It is not apparent to me that the Bank would not be appropriately and adequately compensated as to its party and party costs by an order that the applicants do pay the costs of the Bank thrown away as a result of the amendment following taxation (or agreement) at completion of the proceeding and regardless of the outcome of the proceeding. 4 The applicants initially sought costs of the entire proceedings generally on an indemnity basis payable forthwith. In the alternative, the applicants sought costs on an indemnity basis only in relation to particular aspects of the case, which I think is appropriate. 5 In my view, a substantial amount of time was wasted before and at trial by the respondents advancing arguments which realistically had no prospect of success. In the exchanges on the question of indemnity costs in written submissions, the respondents primarily repeated the same arguments, which were consistently rejected in my primary reasons. This was somehow intended to demonstrate the reasonableness of the arguments advanced before and at trial. It would be a further wastage of resources to reproduce in their entirety the considerable written exchanges on the topic of indemnity costs.

Prior use 6 This challenge in the cross-claim depended largely on the evidence of Mr Bradford, whom I found to be a disaffected and unhappy ex-employee (at [161]-[163]) whose account was, and should have been, more seriously examined by the respondents before resting such heavy reliance upon it. As noted, a consequence of relying so heavily on Mr Bradford's evidence was that the applicants were required to lead evidence from seven witnesses in response to contradict his evidence of 'demonstrations'. Six of these people were independent, unaligned third party witnesses whom the applicants were required to subpoena to give evidence. Almost all of them were required for cross-examination. The main purpose of the cross-claimant calling Mr Bradford was to prove his allegation that 50 ACT Tools had been delivered before the Priority Date. There was abundant evidence available to the cross-claimant to demonstrate that Mr Bradford's version of events was incorrect. It was clear on the contemporaneous documents available to the parties that commercialisation of the ACT Tools had not occurred before the Priority Date. I refer to my findings at [620] and [643]-[644] of the primary decision. 7 The respondents say they had no knowledge of any of the asserted and extensive prior use activity pleaded by the cross-claimant during the entirety of the earlier trial of the proceeding before Justice Barker and, subsequently, for the first instance proceedings that I heard. The prior use activity (which I found did not occur) remained unknown for several more years until Mr Bradford commenced giving his 'instructions' to the respondents. The respondents, in the face of my findings to the contrary, say there was no reason for Coretell to doubt any aspect of his 'instructions'. The respondents say further that Mr Bradford established: extensive prior use activity in Australia before the Priority Date, an order placed by Imdex (Ace Drilling) on Chardec for delivery of ACT Tools from Chardec to Imdex prior to the Priority Date, and a delivery of all or some of those tools from Chardec to Imdex (Ace Drilling). The respondents also complain of inadequate discovery of documents by the applicants made relevant by Mr Bradford's evidence and the Coretell amended pleadings. 8 The respondents also rely upon the evidence of other witnesses, whom they contend supported the recollections of Mr Bradford, which in turn supported their argument that the cross-claimant was both entitled and obliged to run the invalidity prior use challenge. 9 I cannot accept the respondents' submissions. Even if they thought they had come across genuine valuable evidence at the time of Mr Bradford's first affidavit, by the time they had received the independent evidence in response filed by the applicants it should have been obvious that Mr Bradford's contentions were at best mistaken and, at worst, seriously lacking in plausibility. I dealt with this in the primary judgment at [164], when I said: The applicants filed affidavits from seven witnesses in response to the contentions raised by Mr Bradford in his first affidavit. In every instance, his version of events was contradicted. I do not believe that they could all be wrong. The evidence in response made clear that Mr Bradford and the respondents had, as the applicants' submit, 'overreached this aspect of the case'. The evidence from the witnesses for the applicants was essentially confirmed and corroborated by contemporaneous documents. 10 Throughout the respondents' indemnity costs submissions on 'prior use' they re-ventilate the same arguments they advanced at trial, disregarding the findings made against such arguments. For example, the respondents persist in their contention that there was an order for 50 ACT Tools in about June 2004, when there was an express finding at [571] that there was no such order. 11 Similarly, a contention that the applicants gave inadequate discovery is intended to support an argument that if the respondents had more documents, and more timely access to documents, that they would not have persisted with the arguments advanced. I have previously concluded there was no deficiency or default in compliance with the discovery orders: Australian Mud Company Pty Ltd v Coretell Pty Ltd (No 2) [2014] FCA 723 (at [8]). I accept largely the applicants' submissions reflected in the following sub-paragraphs, that documents showing the correct version of events were available to the respondents at the time Mr Bradford provided his final affidavit account in the following manner or, at least, well before giving his oral evidence. The timing of disclosure of the documents identified at [643] of the primary reasons and Mr Bradford's access to them was rather as follows: (a) Mr Parfitt's email - this document was available for inspection by Mr Bradford subject to Nicholas J's order of 9 May 2013 (and was otherwise described in the body of Mr Parfitt's affidavit) before Mr Bradford's second affidavit was sworn; (b) the invoice - was also a document disclosed confidentially by Mr Parfitt that was similarly available for Mr Bradford's inspection before swearing his second affidavit pursuant to Nicholas J's order of 9 May 2013; (c) air waybills issued by Chardec - were adduced by Mr Parfitt to verify deliveries described in Customs documents obtained on subpoena by the respondents (the substance of which was 'not accepted' by Mr Bradford). Although the annexures were confidential, the relevant particulars of the consignments were set out in a schedule within the body of Mr Parfitt's third affidavit sworn 19 December 2013; (d) email from Ms Gregg to Mr Parfitt of 23 September 2004 - was a document disclosed confidentially by Mr Parfitt that was available for Mr Bradford's inspection before swearing his second affidavit; (e) Imdex's subsequent payments to Chardec on 15 November 2004 and 7 January 2005 reflected in Imdex's bank statements - the bank statements simply confirmed the payment of invoices disclosed in Mr Weston's first affidavit to which Mr Bradford was granted access before swearing his second affidavit; and (f) access to documents produced under the respondents' subpoena to Imdex was granted by Registrar Trott on 6 February 2014 (some 9 weeks and 4 days before trial). Mr Bradford was able to be shown his email of 8 September 2004 on the basis that he was the author of that document pursuant to the confidentiality regime. 12 The respondents have complained that certain documents, for example, are key. An email from Mr Parfitt was possibly unable to be shown to witnesses under the confidentiality regime. While I am unpersuaded as to the accuracy of this submission for the above reasons, in any event, it was always open for an application to be made if there were any doubt as to what documents could be seen by what witnesses. No such application was pursued. 13 Further, a number of the key documents were emails from Mr Bradford which he was certainly entitled to examine without any breach of confidentiality protocols, as he was the author. 14 The applicants have made out their entitlement to costs on an indemnity basis in relation to the prior use allegation.

Lack of innovative step 15 The claim for indemnity costs in respect of this failed ground of invalidity was put on the basis that the ground was agitated despite Coretell having no evidence on which to base the allegation. Reference is made to the Court's finding at [671] to this effect: This case for Coretell is difficult to advance because, as I perceive it, they adduced no evidence to support the case. Additionally, although there was evidence led by Professor Tapson on this topic, he was not cross-examined on this issue. In those circumstances, while it could be dispensed with altogether, I propose to examine the issue, but not at great length. 16 The respondents did, however, advance submissions on lack of innovative step at [73]-[99] of their closing submissions on invalidity. The submissions accept that Professor Tapson was not cross-examined on this issue, but say that this was because he was not a relevant 'person skilled in the art'. (This, I pause to observe, is once again directly contrary to my express finding (at [718]).) Accordingly, the respondents say that any evidence he could advance on that issue would have no weight. Further, there is no support, the respondents say, for any contention that this invalidity ground of lack of innovative step was unarguable, unreasonable or lacked any prospect of success. 17 As the applicants say, the respondents were provided a number of opportunities to not press aspects of their very multi-pronged defence and cross-claim, yet declined to refine the challenge, thus exposing the applicants to further costs. 18 Notwithstanding this, on balance, especially in contrast to the prior use argument (which fruitlessly occupied a very significant amount of time), as a matter of impression, I consider that the applicants will be adequately compensated with a conventional costs order in relation to the aspect of the case dealt with under this heading. I would not order indemnity costs in relation to lack of innovative step.

Non-compliance with s 40(2)(c) and s 40(3) 19 The basis for the argument for indemnity costs on this topic was that there was no basis for the making of the challenge under s 40(2)(c) and s 40(3) of the Patents Act 1990 (Cth), the Court finding 'there is no evidence to support Coretell's argument that the claims are ambiguous to such an extent' (at [733]). Additionally, in relation to the ground under s 40(3) of the Act, findings were made (at [736]): … There is no evidence in support of the assertion that a skilled person could not readily understand what is claimed for lack of clarity as to whether the claim concerned a unitary or two part device. There is no support for the lack of clarity ground. This ground is rejected. 20 Essentially, the respondents' argument on this topic is to advance their trial argument once again, which they make clear will be part of the argument to be run under appeal in any event. 21 As found in the primary reasons, the assertion of lack of clarity was not supported by any expert evidence. Nonetheless, for the same reasons in relation to lack of innovative step, I would not order indemnity costs under this heading.

False suggestion or misrepresentation 22 As the applicants correctly say, this was another allegation made without foundation, yet the respondents refused to abandon it. Again, I found that there was no support, no evidence and no validity in the contention that the alleged misrepresentation of omitting information from the specification of the patents was material to their grant (at [695]). 23 Once again, the respondents do little more than re-agitate and rely upon their written trial submissions which, by definition, were not accepted in the primary judgment. Nonetheless, for the same reasons in relation to lack of innovative step, I would not order indemnity costs under this heading.

Non-compliance with s 40(2)(a) 24 The cross-claimant's contention as to s 40(2)(a) of the Act was rejected in the primary judgment (at [729]) where I said: The applicants contend, and I accept, that Coretell has not adduced evidence from any such person to that effect, nor is there any evidence to support the contention that a skilled person would be incapable of achieving the required result that the core sample would be held in fixed relation to the inner tube as claimed by following the description. The applicants contend, and I accept, that the sufficiency grounds fails on this basis. 25 Once again, the respondents do little more than re-agitate and rely upon their written trial submissions which, by definition, were not accepted in the primary judgment. 26 Nonetheless, for the same reasons in relation to lack of innovative step, I would not order indemnity costs under this heading.

Secret use 27 The argument in support of the claim for indemnity costs in respect of the secret use contention is essentially the same as for the prior use contention. I do not propose repeating it. 28 The respondents rely upon the same style of response as for 'prior use'. The passages in the primary judgment dealing with this issue appear at [737]-[757] and [656]-[667]. 29 Consistently with my approach to the failed prior use application and for the same reasons, I consider there was no proper basis to pursue and persist with this ground of invalidity and that this must, or should have been obvious to the respondents. The lack of a plausible foundation for the claim, the clash between the claim and contemporaneous documentation and its pursuit in the face of evidence of independent third parties to the contrary made it obvious that it should not have been pursued. 30 I allow the applicants' application for indemnity costs in respect of the ground of invalidity going to secret use.

No method of manufacture 31 The applicants, I think fairly, say that this was a matter in respect of which the respondents' evidence fell well short of supporting such an allegation, but, undeterred, the respondents persisted with the claim and made submissions in support of it that were untenable. 32 Once again, the respondents do little more than re-agitate and rely upon their written trial submissions which, by definition, were not accepted in the primary judgment. 33 Nonetheless, for the same reasons in relation to lack of innovative step, I would not order indemnity costs under this heading.

Misleading or deceptive conduct and injurious falsehood 34 As the applicants observe, these challenges were unavailable to the respondents in circumstances where no evidence was available to substantiate the causes of action. Despite being afforded the opportunity to withdraw these claims prior to closing, the respondents persevered with the claim of misleading or deceptive conduct. They only withdrew the injurious falsehood claim following the completion of evidence on 22 July 2013. 35 Once again, the respondents do little more than re-agitate and rely, again, upon their written trial submissions which, by definition, were not accepted in the primary judgment. 36 Nonetheless, for the same reasons in relation to lack of innovative step, I would not order indemnity costs under this heading.

WHO SHOULD BEAR THE COSTS? 37 By my orders of 23 March 2016, after receiving written and oral submissions on the topic, I ruled in favour of the applicants' application that all of the respondents, which includes the cross-claimant, should be responsible for the costs awarded pursuant to those orders. 38 I indicated at the time of that ruling that I would provide short reasons for the order that was made that each of the respondents be liable for the costs of the cross-claim. 39 The applicants say that the respondents sought to limit their liability to pay costs in relation to the extensive cross-claim, which was pursued only by Coretell (the first respondent). The applicants argue that, by doing so, the respondents are maintaining the strategy of the third respondent, Mr Kleyn, of using Coretell to shelter the assets of the group, which reflects the finding I made in the primary reasons at [269]. Having heard evidence in relation to the financial position of the cross-claimant, I am far from persuaded that the cross-claimant would have the capacity to meet an appropriate costs order. The applicants submit that this is an affront to justice as the respondents were prepared to use the cross-claimant to run 'every claim imaginable' with or without foundation in the hope of invalidating the patents, but wish now to avoid the consequences of having done so. The applicants submit that it is just and equitable that the Court exercise its discretion under s 43 of the Federal Court of Australia Act 1976 (Cth) to award costs in this manner. The applicants also refer to the High Court decision of Knight v FP Special Assets Ltd (1992) 174 CLR 178 (at 192-193), in which it was observed that it is appropriate to recognise a general category of cases in which an order for costs should be made against a non-party: where the party to the litigation is an insolvent person or a man of straw, where the non-party has played an active part in the conduct of the litigation, and where the non-party or some person on whose behalf he or she is acting or by whom he or she has been appointed has an interest in the subject matter of the litigation. As the High Court said (at 193): 'Where the circumstances of a case fall within that category, an order for costs should be made against the non-party if the interests of justice require that it be made.' The applicants contend that it is clear that Mr Kleyn, Mincrest and Kleyn Investments ought to additionally bear the adverse costs of the cross-claim for at least the following reasons: (1) The bulk of the evidence was directed to the cross-claim and it took the vast majority of the hearing time. It was plainly a defensive cross-claim, made in response to infringement allegations against each of the respondents. Each of Mr Kleyn, Mincrest and Kleyn Investments had an interest in, actively participated in and stood to benefit from the outcome of the cross-claim. In this regard, each of those entities relied on all of the invalidity grounds pleaded in the cross-claim in their defence of each and every infringement allegation made against them. It was not a cross-claim peculiar to the cross-claimant. (2) The cross-claimant was a 'man of straw'. It is clear, and I have already found, that the respondent companies were operated jointly and interdependently and that Mr Kleyn was the controlling mind and will of the group, and had previously engaged in conduct to divest the cross-claimant of assets and transfer them to other companies within the group (namely, Mincrest and Kleyn Investments) in order to frustrate the judgment: see my findings at [59], [302], [382] and [393] of the primary reasons. (3) There is cause for concern that Mr Kleyn may see to it that Coretell is stripped of any assets it does have, just as he did so with Mincrest in the previous proceedings before Justice Barker: see my findings at [393] of the primary reasons. AMC submits that the observations of Middleton J in Re Sturmer and Town of Beaverton (1912) 2 DLR 501 are apt, where his Honour said (at 572): The Court always had power to award costs against the real applicant when the motion was made by him in the name of the man of straw for the purpose of avoiding liability. The courts were never so blind as to be unable to see through the flimsy device nor so impotent as to be unable to act. 40 Although the respondents refer to the order as a non-party costs order, I doubt whether that description, while technically accurate, properly reflects the position for the reasons set out above (not least of which is that all of the respondents adopted Coretell's assertions in the cross-claim). The respondents argue that it would be unjust to make a 'non-party' costs order, and that the cases in which that will be done would be 'rare and exceptional': see, for example, Vestris v Cashman (1998) 72 SASR 449 per Lander J (at [64]). They argue that such an order should only be made in the clearest of cases. The respondents appear to dispute that the cross-claimant could be described as being 'a man of straw'. My firm impression is that the description is apt. I say that because the business records, which were examined closely at trial, revealed that, apart from a brief period in late 2012, Coretell did not employ any of the numerous staff involved in the tool business, nor did it incur operational expenses, such as the cost of plant and equipment, office expenses and related costs inevitably associated with a very substantial core tool business. Apart from a single motor vehicle, it did not own any of the plant or equipment at the Maddington Warehouse. I concluded that Mr Kleyn established the cross-claimant to avoid the consequences of litigation while continuing to exploit the cross-claimant through the other incorporated respondents. This process included divesting assets from companies exposed to litigation. I have already made these findings that Mr Kleyn's attempt to transfer and separate the business to the cross-claimant was a fabrication, which cannot now be challenged at this juncture of the first instance proceedings. 41 There is no doubt at all that Mincrest, Mr Kleyn and Kleyn Investments all played an active role in the proceedings. Mincrest and Kleyn Investments transferred significant sums of money to the cross-claimant, which were used, in part, to fund the proceedings. Mr Kleyn himself was centrally involved in the entirety of the respondents' case for the reasons I made abundantly clear in the primary reasons. Each of Mincrest, Mr Kleyn and Kleyn Investments have a commercial interest in the subject matter of the litigation, including the patent infringement. Mr Kleyn has personally participated in the relevant acts of exploitation. The evidence at trial was replete with examples of distribution agreements, supply invoices, and manufacturing invoices for core tools in the name of the other corporate respondents. There is no doubt that each respondent had an interest in and stood to benefit from the fruits of the litigation as pleaded, including the cross-claim. 42 As already noted above, it is of particular significance that each of Mincrest, Mr Kleyn and Kleyn Investments made positive pleadings in their defence that the patents were invalid and relied upon each of the grounds in the cross-claim in their defence. As noted in Probiotec Limited v The University of Melbourne (2008) 166 FCR 30 by Rares J (at [62]-[63]), Finn J agreeing, this is an important factor to take into account. See also Farmitalia Carlo Erba SrL v Delta West Pty Ltd (1994) 28 IPR 336 per Heerey J (at 339). 43 There is no doubt, in my view, that the costs order against all respondents is appropriate and necessary in the interests of justice.

CONCLUSION 44 For the foregoing reasons, the order in respect of costs made by my orders of 23 March 2016 will be varied so as to award the applicants costs to be paid by the respondents on an indemnity basis in respect of the issues arising out of the allegations as to prior use and secret use. As the orders indicate, otherwise the applicants' costs are to be paid by the respondents on a party-party basis. I certify that the preceding forty-four (44) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice McKerracher.

SCHEDULE OF PARTIES NSD 2082 of 2011 Respondents Fourth Respondent: KLEYN INVESTMENTS PTY LTD ACN 118 967 687 (TRADING AS CAMTEQ INTERNATIONAL SERVICES) Cross-Respondents Second Cross-Respondent REFLEX INSTRUMENTS ASIA PACIFIC PTY LTD ACN 124 204 191