Australian Mud Company Pty Ltd v Globaltech Corporation Pty Ltd

Federal Court of Australia|2024-05-01|Before: Ms P, Besanko J

The Respondents pay the Applicants costs of the proceeding from 26 March 2019 as follows: (a) from 26 March 2019 up to 11:00am on 22 February 2023, on a party and party basis; and (b) from 11:00am on 22 February 2023 on an indemnity basis.
If the parties are unable to agree to the quantum of costs in Order 1: (a) those costs be assessed on a lump sum basis in an amount to be determined by a Registrar of the Court in accordance with the procedures specified in the Federal Court Costs Practice Note (GPN-Costs); (b) the Applicants file and serve their material in support of a lump sum costs claim in accordance with paragraphs 4.10 to 4.12 of the Costs Practice Note (GPN-Costs) (Costs Summary); (c) within 28 days of the Applicants' service of the Costs Summary, the Respondents file and serve any Costs Response in respect of the Respondents' Costs Summary in accordance with paragraphs 4.13 to 4.14 of the Costs Practice Note; and (d) the Registrar be directed pursuant to r 1.37 of the Federal Court Rules 2011 (Cth) to determine the quantum of the lump sum for costs payable in such manner as he or she deems fit including, if thought appropriate, on the papers. Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

Introduction 1 These reasons deal with orders I made on 7 March 2024 and orders I will make as to costs. 2 I delivered reasons with respect to the applicants' claim for pecuniary relief by way of damages and an account of profits in relation to the infringement of an Australian Standard Patent on 20 February 2024 (Australian Mud Company Pty Ltd v Globaltech Corporation Pty Ltd (No 5) [2024] FCA 58 (Globaltech (No 5)). I adopt the abbreviations which I used in those reasons, except where it is convenient to address both respondents, and those reasons should be read with these reasons. 3 I made the following orders upon delivering the reasons: 1. The proceeding be adjourned to a date to be fixed (after hearing from the parties) for the making of final orders. 2. The parties be heard as to any other orders.

The Orders made on 7 March 2024 4 I indicated in my reasons that I wished to hear the parties further concerning any tax paid in relation to the account of profits. The amount for account of profits had been calculated on a pre-tax basis. Globaltech made a claim for a modest discount of 5% to reflect the possibility that it will not be able to recover the tax it has paid or there will be a delay in recovering by way of credit or refund the tax it has paid. I referred to the approach to this issue adopted by Nicholas J in Aristocrat Technologies Australia Pty Ltd v Konami Australia Pty Ltd (No 3) [2022] FCA 1373; (2022) 170 IPR 42 (Konami). Globaltech made a submission in response as did Reflex. 5 I said in Globaltech (No 5) ([at 284]) that it was unclear to me whether further evidence was necessary in respect of this claim. I said that was a relevant consideration because I would not allow further evidence, other than an arithmetical calculation. I indicated that I would hear the parties further with respect to this claim. The second matter where I indicated to the parties that I wished to hear further from them related to whether interest should be calculated on the profits minus amounts allowed for taxation. In this respect, Globaltech submitted that the taxation component of profits made should be excluded from the calculation of interest and that that simply reflected the fact that Globaltech did not have the benefit of the use of any amounts paid away as tax and it should not be required to disgorge such amounts. Globaltech submitted that was the approach taken by Nicholas J in Konami (at [486]) and is the approach that should be taken here. The two issues of tax and interest are linked in that if there is no allowance for tax paid, there would be no deduction in interest having regard to tax paid. 6 The proposed minutes of order advanced by the applicants contained separate orders with respect to the damages award and the account of profits. However, the applicants submitted that both orders should be made against both respondents. The respondents agreed that it was appropriate to make separate orders with each order also containing an allowance for interest. However, the respondents submitted that although the order as to damages could be made against both respondents, the order in relation to the account of profits should be made only against the first respondent. It was that respondent which had made the profits. The respondents submitted that each order should have a time period inserted in the orders and the respondents sought an addition to the proposed orders that the monies be paid within 28 days. The Federal Court Rules 2011 (Cth) make provision for payment within 14 days and no persuasive reason for departing from the Rules was advanced. 7 I received written submissions from the parties which addressed these issues. Both parties in their oral submissions largely reinforced the arguments they had put in their written submissions. 8 With respect to an allowance for tax paid, the applicants submitted that Globaltech had not adduced any evidence that tax was paid by it in relation to the 2016 to 2019 infringement period. By way of contrast, in Konami evidence of tax paid was central to the decision of Nicholas J. His Honour had before him independent accounting evidence for Konami that it had paid $4.2 million in income tax and that that reflected a notional rate of 25% over the relevant period. The applicants submitted that evidence that tax was paid was not adduced by Globaltech and that it was necessary and its absence was fatal to Globaltech's claim that a discount for tax paid is appropriate in the circumstances of this case. The applicants further submitted that the Court would not assume that Globaltech had paid any tax on its profits or speculate as to the amount of tax that might have been paid. It was not enough for Globaltech to show that Globaltech had generated profits because that does not establish that tax was paid on those profits in any particular amount or at any particular rate relative to those profits. The failure of Globaltech to bring forward any evidence leads to an inference that such evidence would not have assisted its case (Blach v Archer (1774) 98 ER 969 at 970; Jones v Dunkel [1959] HCA 8; (1959) 101 CLR 298 at 320-321). 9 The applicants also submitted that it was unlikely that Globaltech had in fact paid tax having regard to the fact that Globaltech's general ledgers did not include any line items referable to the payment of income tax in the 2016 to 2019 infringement period. Globaltech's profit and loss statements record income referred to as "R & D Grant" or "R & D Tax Incentive" which Ms Wright considered to be a tax incentive that Globaltech received in the form of a tax offset. 10 The applicants made an additional submission to the effect that Globaltech had not adduced any evidence as to the possibility that it might not obtain a credit or refund or experience delays in doing so. By contrast, there was extensive evidence as to that matter in Konami and it was on that basis that Nicholas J allowed a 15% discount of the 25% tax component. 11 As to whether the allowance for interest should be reduced for tax paid, the applicants submitted that the evidence did not establish any amount paid by Globaltech for income tax and it followed that there was no basis for excluding any component of the profits from the calculation of interest payable by Globaltech. 12 In response to these submissions, the respondents submitted that further evidence was not necessary on the issue of whether or not a discount for taxation should be allowed. Furthermore, the respondents submitted that there was no evidence that the first respondent had not paid tax during the relevant period, or had paid tax other than at the corporate tax rate. The respondents indicated that it would address in oral submissions the decision in Konami and Bayer Pharma Attiengesellschaft v Generic Health Pty Ltd [2017] FCA 250; (2017) 124 IPR 23 at [340]. With respect as to whether interest was payable on the profits amount reduced to reflect the tax paid, the respondents' submissions were to the effect that the tax component of the profits to be awarded to the applicants should be excluded from the calculation of interest. 13 As I have said, the submissions were largely repeated at the hearing. 14 With respect to the taxation issue, counsel for the respondents submitted that the financial statements of Globaltech in fact recorded that tax had been paid by the respondents. 15 Counsel for the applicants dealt with the issue of whether the order for an account of profits should be made against both respondents. He said that the matter ought to have been raised at the substantive hearing. There was evidence that the party who was involved in the relevant agreement was the first respondent and that it was the one that supplied the tools. It was not suggested in terms that the second respondent made profits. Counsel for the applicants submitted that this matter ought to have been raised at the substantive hearing and properly dealt with then and that it was very late to deal with it now. He said that that was all he wished to say about the matter and that he did not want to take further time on the matter. He said that even if I considered it appropriate to restrict Order 3 to the first respondent only, there is no dispute that Order 2 should be referable to both respondents because they are both liable for the damage that was suffered. 16 I do not consider that the financial statements to which counsel for the respondents referred establish that tax was paid on the profits. In my opinion, if there is a claim for tax paid, then it is incumbent on the person or entity making such a claim to prove that tax was paid. That has not been done in this case and no allowance should be made. This conclusion also deals with the argument that interest should be calculated by reference to the amount of the account of profits minus an allowance for interest. 17 I think the order for the account of profits should be made against the first respondent only because it is that entity that made the profits. 18 It was for these reasons that I made the following orders on 7 March 2024: 1. Pursuant to s 37AF of the Federal Court of Australia Act 1976 (Cth), access to and disclosure (by publication or otherwise) of paragraph 11 of the judgment dated 20 February 2024 is redacted and not to be published or disclosed to anyone other than: a. any judge, employee, or other personnel of this Court; b. the legal representatives of the parties instructed in this proceeding who are permitted access pursuant to the existing agreed confidentiality regime between the parties in this proceeding (Confidentiality Regime); and c. any other person who is permitted access pursuant to the Confidentiality Regime. 2. The Respondents pay the Applicants damages pursuant to s 122(1) of the Patents Act 1990 (Cth) in the amount of $3,827,009 plus interest pursuant to s 51A of the Federal Court of Australia Act 1976 (Cth) in the amount of $1,327,274. 3. The First Respondent pay the Applicants, by way of an account of profits pursuant to s 122(1) of the Patents Act 1990 (Cth), the amount of $2,121,807 plus interest pursuant to s 51A of the Federal Court of Australia Act 1976 (Cth) in the amount of $682,545. 4. Within 4 business days of these orders, the parties confer and supply to the chambers of Justice Besanko draft short minutes of order in respect of costs. 5 Insofar as the parties are unable to agree to the terms of the draft short minutes of order referred to in order 3: a. the areas of disagreement are to be set out in mark-up; b. within 6 business days of these orders, the Applicants file and serve submissions (limited to 3 pages) in respect of the costs orders; c. within 8 business days of these orders, the Respondents file and serve submissions (limited to 3 pages) in respect of the costs orders; d. within 9 business days of these orders, the Applicants file and serve any submissions in reply (limited to 3 pages) in respect of the costs orders; and e. the issues in respect of the costs orders be determined on the papers.

The Orders as to Costs 19 The issue between the parties is whether the applicants, who were successful, are entitled to indemnity costs against the respondents. The background to the issue was set out in reasons I delivered on 20 February 2024 (Globaltech (No 5) at [2]): Liability was heard and determined before relief. The issue of liability included the determination of a claim for infringements of the patent and a cross-claim that the patent is invalid. I delivered reasons on 26 November 2018 (Australian Mud Company Pty Ltd v Globaltech Corporation Pty Ltd [2018] FCA 1839; (2018) 138 IPR 33) and made orders on 14 December 2018. I made declarations of infringements of the patent, granted injunctions and dismissed the cross-claim. My decision was the subject of an appeal to the Full Court of this Court which was dismissed (Globaltech Corporation Pty Ltd v Australian Mud Company Pty Ltd [2019] FCAFC 162; (2019) 145 IPR 39). There was then an application to the High Court for special leave to appeal which was also dismissed. 20 The claim for pecuniary relief was heard on 14, 15, 16 and 19 June 2023 and the reasons were delivered on 20 February 2024. The orders which were made immediately upon delivery of the reasons have already been set out (at [3]). 21 There was then an application by the respondents for a stay which I refused. The parties could not agree as to the appropriate orders following the reasons for judgment delivered on 20 February 2024. I have set out the orders I made on 7 March 2024 (at [18]) and they included a timetable with respect to submissions on costs and an order that the issue be determined on the papers. The two orders which are relevant for present purposes are those in paragraphs two and three. 22 The particular point of significance for present purposes is that the order as to damages was made against both respondents, whereas the order dealing with the amount for the account of profits was made against the first respondent only. 23 By Notice of offer to compromise dated 20 February 2023 and directed to the respondents, the applicants offered to compromise their claim for pecuniary relief in the proceeding following the final determination of liability as against the respondents and that offer was made in the following terms, relevantly: 1. Within 7 days of acceptance of the offer, the parties will submit consent orders to the Court in the following terms: 1. In full and final resolution of the applicants' claim for pecuniary relief in this proceeding, the respondents will pay the applicants $7,100,000, inclusive of interest, within 28 days of the date of this order. 2. For the avoidance of doubt, the Court notes that the amount in paragraph 1 of these orders does not include any amounts payable in respect of costs. 24 The total amounts the first respondent is required to pay the applicants by reason of the orders of the Court made on 7 March 2024 exceeded the amount of $7,100,000 inclusive of interest by an amount of $374,368 (interest being calculated as at the date of the offer). The total amount both respondents were ordered to pay the applicants is $2,121,807 plus $682,545. 25 The applicants seek the following order with respect to costs: 1. The Respondents pay the Applicants costs of the proceeding from 26 March 2019 as follows: (a) from 26 March 2019 up to 11:00am on 22 February 2023, on a party and party basis; and (b) from 11:00am on 22 February 2023 on an indemnity basis. 26 The respondents submit that the appropriate order with respect to costs is as follows: The Respondents pay the Applicants costs of the proceeding from 26 March 2019 on a party and party basis, as agreed or assessed pursuant to Order 2 below. 27 The parties agree that the costs orders should commence on 26 March 2019. They disagree as to whether indemnity costs should be paid to the applicants from 22 February 2023. 28 The respondents' argument is that the respondents jointly were ordered by the Court to pay $5,154,283 (i.e., the amount for damages) which is below the amount of the offer. The respondents contend that, in those circumstances, the offer does not operate by reason of the Rules to give the applicants the right to indemnity costs. 29 The relevant rule is r 25.14(3) of the Federal Court Rules 2011 (Cth) and that rule is in the following terms: 3. If an offer is made by an applicant and not accepted by a respondent, and the applicant obtains a judgment that is more favourable than the terms of the offer, the applicant is entitled to an order that the respondent pay the applicant's costs: (a) before 11.00 am on the second business day after the offer was served - on a party and party basis; and (b) after the time mentioned in paragraph (a) - on an indemnity basis. 30 The respondents submitted that there is nothing untoward or opportunistic on their reliance on a strict interpretation and construction of the terms of the offer made in the Notice of offer to compromise. They submitted that the offer is made to both respondents and it was made several months before the applicants made their split election as set out in my reasons for judgment (at [6]). They submitted that there would have been no difficulty in the applicants making an offer which involved a certain amount with respect to damages and a different amount with respect to an account of profits. The respondents referred to Rakman International Pty Ltd v Boss Fire & Safety Pty Ltd [2023] FCAFC 202 (Rakman International) to support the proposition that the language in a Notice of offer to compromise is important. The respondents also submitted that the decision in Stead v Fairfax Media Publications Pty Ltd (No 2) [2021] FCA 65; (2021) 386 ALR 237 (at [26]) should not dissuade the Court from adopting a different approach. In any event, the "practical consequence" is that the applicants seek a payment from both respondents jointly. In short, the respondents' argument is that the offer was addressed to both respondents and, therefore, the relevant amount is the amount both respondents were ordered to pay. On that approach, it is clear that the judgment is not more favourable than the terms of the offer. 31 In reply to the respondents' submissions, the applicants advanced six submissions. 32 First, the applicants submitted that there is no dispute that the combined effect of the orders made on 7 March 2024 is that the applicants were entitled to a payment of $7,474,368 inclusive of interest as at the date of the offer which is $374,368 more than the terms of the offer. The submission made by the applicants is that they are in a "better position" by proceeding to judgment rather than the position they would have been in had the respondents accepted the offer. The judgment is more favourable than the terms of the offer. 33 This submission as stated is correct to a point. However, the respondents' point is that the offer was made to both of them and the applicants did not obtain a more favourable judgment against the second respondent. 34 I think the first submission made by the applicants is to be given some weight, but is not by itself sufficient to be decisive. 35 Secondly, the applicants submitted that the offer was clear and there would have been no difficulty for the respondents to accept it on a global basis. 36 This submission is correct, but in view of the respondents' argument, it does not really advance the matter. 37 Thirdly, the applicants referred to the fact that there is evidence that the first and second respondents were related entities in the sense that as at April 2023, Mr Khaled Hejleh was the managing director of both respondents (Australian Mud Company Pty Ltd v Globaltech Corporation Pty Ltd (No 3) [2022] FCA 1189 (Globaltech (No 3)) at [52], [77] and [235]) and the respondents' corporate relationship and business operations as at October 2022 were set out in Globaltech (No 3) at [234]-[254]. The second respondent had no employees. The applicants submitted that, in those circumstances, it was not necessary or appropriate for the offer to have been divided into particular amounts referable to each of the damages and profits claims, or have been capable of acceptance by each respondent. In that regard, they referred to Rafferty v Time 2000 West Pty Ltd (No 5) [2010] FCA 873; (2010) 87 IPR 593 at [21] and [33] and WSA Online Ltd v Arms (No 2) [2006] FCAFC 108 at [18]. They submitted that an offer directed to the first respondent and separately to the second respondent would have created difficulties in terms of the respondents determining between themselves the amounts payable jointly or by the first respondent only. 38 This submission is to be considered with the fifth submission. 39 Fourthly, the applicants submitted that the operation the respondents give to r 25.14 is artificial and unrealistic. They submitted that in the case of a claim and cross-claim, global offers to settle both the claim and cross-claim may give rise to an indemnity costs order under r 25.14. It is not necessary for the offer to be directed to the claim and separately to the cross-claim (Kismet International Pty Ltd v Guano Fertilizer Sales Pty Ltd (No 2) [2013] FCA 705 at [41]-[43]). 40 This submission in terms of the reference to a global offer in relation to a claim and cross-claim is correct, but this is quite different from an offer to two respondents, particularly if they are completely independent of each other. 41 Fifthly, the applicants submitted it is not the case that they would have been in a more favourable position under the offer because the applicants would have been able to look to both respondents for payment of the offered sum. At the time of the offer, the second respondent did not trade and had as its sole purpose the provision of management services to the first respondent and the second respondent had no assets. It was the first respondent that had the assets and was conducting the business. In other words, the applicants' argument is that the offer was not more favourable to them. The amount of the offer is one thing, the practical benefit to the applicants is another. 42 Finally, the applicants sought to distinguish Rakman International. There is a difference between an offer to discontinue a claim and a cross-claim and the dismissal of both. There is no such difference in this case. 43 This submission is correct. There is a clear difference between a discontinuance and a dismissal which would be significant to the party considering the offer. 44 In my opinion, there should be an order that the respondents pay indemnity costs as claimed by the applicants. I agree, in substance, with the applicants' third and fifth submissions. The first and second respondents are closely related parties; the first respondent is the operating company and the second respondent has no assets or employees. I cannot think that those in the Globaltech Group who considered the offer would have placed any weight on the difference between the two respondents. They would have considered the offer from the point of view of the amount of the offer. 45 The following orders sought by the applicant should be made: 1. The Respondents pay the Applicants costs of the proceeding from 26 March 2019 as follows: (a) from 26 March 2019 up to 11:00am on 22 February 2023, on a party and party basis; and (b) from 11:00am on 22 February 2023 on an indemnity basis. 2. If the parties are unable to agree to the quantum of costs in Order 1: (a) those costs be assessed on a lump sum basis in an amount to be determined by a Registrar of the Court in accordance with the procedures specified in the Federal Court Costs Practice Note (GPN-Costs); (b) the Applicants file and serve their material in support of a lump sum costs claim in accordance with paragraphs 4.10 to 4.12 of the Costs Practice Note (GPN-Costs) (Costs Summary); (c) within 28 days of the Applicants' service of the Costs Summary, the Respondents file and serve any Costs Response in respect of the Respondents' Costs Summary in accordance with paragraphs 4.13 to 4.14 of the Costs Practice Note; and (d) the Registrar be directed pursuant to r 1.37 of the Federal Court Rules 2011 (Cth) to determine the quantum of the lump sum for costs payable in such manner as he or she deems fit including, if thought appropriate, on the papers. I certify that the preceding forty-five (45) numbered paragraphs are a true copy of the Reasons for Judgment of the Honourable Justice Besanko.

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