Bayer Pharma Aktiengesellschaft v Generic Health Pty Ltd

1. Subject to paragraph 11 of the orders made on 8 May 2013, the respondents pay the applicants' costs of the proceedings: (a) on a party-party basis up to 11.00am on 11 May 2015; and (b) on an indemnity basis thereafter. Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

JAGOT J: 1 These reasons for judgment relate to costs, the only outstanding issue in this matter. 2 On 16 March 2017 I published reasons for judgment explaining why Bayer should succeed in its claim for damages for infringement of its patent (Bayer Pharma Aktiengesellschaft v Generic Health Pty Ltd [2017] FCA 250). Subsequently, I ordered the respondents to pay Bayer $25,437,966 in damages plus interest. This amount exceeds the amount of $19,891,858 for which Bayer offered to settle the proceedings in an offer of compromise served on 6 May 2015. 3 Bayer seeks orders for costs in its favour on a party-party basis up to 11 May 2015 and an indemnity basis thereafter under r 25.14(3) of the Federal Court Rules 2011 (Cth). The rule, and the various statements of principle about its operation are clear, but that does not mean that the application of the rule and the principles to any particular set of factual circumstances is necessarily straightforward. In the present case, a number of factors have persuaded me that I should not make an order under r 1.35 of the Rules inconsistent with r 25.14(3), with the consequence that orders as sought by Bayer for indemnity costs ought to be made. Those factors are as follows: (1) It is for the party seeking to rebut the presumption in r 25.14(3) to persuade the Court to make an inconsistent order under r 1.35 (Futuretronics.com.au Pty Ltd v Graphix Labels Pty Ltd [2009] FCAFC 40 at [10]). (2) The objective circumstances indicate that Generic Health, if it had wished to do so, could have sufficiently informed itself about its overall exposure to liability for infringement of Bayer's patent when the offer was made for the purpose of deciding whether or not the offer represented a genuine compromise (which it did). This is so despite the fact that, when the offer was made, Bayer had not quantified its claim for damages or filed its evidence in support. (3) Generic Health's evidence on the issue of costs consisted of an affidavit from its solicitor who, while experienced in patents cases, did not have the experience and expertise available to Generic Health (a large generic manufacturer of pharmaceuticals) which, I infer, before or at least by the time the offer was made: (a) knew the price of Yasmin (because it set its own price for Isabelle materially below that of Yasmin); (b) knew or had a good idea about Yasmin's total market share and thus the potential total revenues available for the sale of the Yasmin molecule (matters it must have considered before launching Isabelle); (c) knew the costs of manufacturing, supply and sale of Isabelle (a generic version of Yasmin) and its own margin on the sale of Isabelle; (d) knew the profit it had made on Isabelle; (e) knew that its solicitors held information about Bayer's EBIT on the sale of Yasmin for the period 2006 to 2011 to which access could have been requested on the giving of a confidentiality undertaking; (f) contrary to the submissions for Generic Health, did not have a reasonable basis to assume it would be rebuffed if it had sought access to this information for the purpose of assessing the offer (because, in short, Generic Health's case based on s 115 of the Patents Act 1990 (Cth), in my view, was merely speculative, being based on nothing more than the hope that Bayer might not discharge its onus of proof); (g) knew that Bayer was considering launching Pettibelle as a result of the sale of Isabelle, as the introduction of a generic version by an originator company is a known strategic response to a generic competitor entering the market; (h) knew that Bayer, from 26 June 2014, had in fact launched Pettibelle at a substantially discounted price compared to Yasmin and continued to sell Pettibelle at that discounted price; (i) knew that Bayer intended to claim damages for the period of infringement before the amendment of the patent on 14 December 2012; (j) knew that Yates J had rejected the contention that Bayer had engaged in covetous claiming in Bayer Pharma Aktiengesellschaft v Generic Health Pty Ltd [2012] FCA 1510; (2012) 99 IPR 59 (the amendment decision); (k) knew that the patent in its unamended form had been based on overseas applications prepared under the supervision of Dr Broesamle, an experienced European patent attorney and highly qualified chemist, and by Plougmann and Vingtoft, which could readily have been identified as a firm of highly regarded patent attorneys; (l) knew that Bayer's position was that the amendment was not proposed "to overcome any prior art or, indeed, to address any other asserted, apparent or possible ground of invalidity" (at [26] of the amendment decision); and (m) had had the opportunity to cross-examine Dr Broesamle at length and knew that Yates J had concluded that nothing which emerged suggested "any untoward or inappropriate conduct on the part of Bayer Pharma which, on the present state of the evidence, would warrant criticism of Bayer Pharma by the Court" in respect of the amendments (the amendment decision at [218]). (4) As explained further below, these inferences I draw about Generic Health's knowledge (or capacity to become aware if it had wished to do so when the offer was made) compel me to conclude that, had it wished to do so, Generic Health would have had no real difficulty in assessing its maximum total liability for the infringement and had no reason to suppose that Bayer, if forced to litigate, would claim anything materially less than that maximum amount. The fact that Generic Health sought no explanation from Bayer as to how it had calculated the amount of the offer, when the precision of the amount indicates that it resulted from a calculation, supports my conclusion that Generic Health was not interested in whether the offer represented a genuine compromise. This is also confirmed by the fact that, before the hearing and when Bayer's claim was the subject of evidence, Generic Health made its own offer for a lesser amount than Bayer's offer. The difference between the amount Bayer claimed and Generic Health's offer represented the damages for the infringements before the amendment of the patent based on s 115 of the Patents Act. In other words, Generic Health was prepared to chance its hand to save itself some $6 million by seeing if Bayer could discharge the onus of proof on it under s 115 to establish that the patent specification in its unamended form had been framed in good faith and with reasonable skill and knowledge. (5) Nothing in the evidence from Generic Health's solicitor suggested that she had sought or obtained instructions from Generic Health to the effect that, despite the matters set out in (3) above, it was unable to assess whether or not the offer represented a genuine compromise because it did not know or could not estimate the quantum of Bayer's claim when the offer was made. 4 As a result, Generic Health has not persuaded me that I should make an order inconsistent with r 25.14(3). 5 To add some detail to the propositions which I have expressed in summary form above, it is not in dispute that Generic Health is in the business of generic pharmaceutical products. Its arrangements in respect of Isabelle disclose that it is a sophisticated entity which must be taken to be intimately familiar with the pharmaceutical industry in Australia. It is impossible to believe that it decided to introduce Isabelle without having detailed information available to it about the market share of Yasmin and the revenue potentially available for the Yasmin molecule. Generic Health must be taken to have carefully priced Isabelle relative to Yasmin in order to give itself the best opportunity to obtain a material share of the available revenue for itself. The idea that Generic Health had no knowledge of the total revenue available from Yasmin sales is implausible. Equally, by the time that offer was made (and no doubt before) Generic Health knew how much it had to pay to obtain its supply of Isabelle, knew its sales of Isabelle, and knew what profit it was making on these sales. From this it would not have been difficult for Generic Health to work out its maximum liability to Bayer for the loss Bayer suffered by reason of the infringement of the patent. 6 Given that Isabelle could only be substituted for Yasmin, Generic Health would have had no reason not to expect Bayer's claim to be that every sale of Isabelle was a lost sale of Yasmin. Generic Health also knew that Bayer had introduced Pettibelle at a reduced price compared to Yasmin and had said it might do so as early as 2012 as a result of the need to address the market disruption caused by Isabelle. It had no reason to expect that Bayer's claim, in these circumstances, would not include its loss as a result of the introduction of Isabelle. While Bayer had not quantified its claim at the time it made its offer there was no basis on the part of Generic Health to assume that Bayer would do anything other than claim every amount which it could reasonably argue had been lost as a direct result of the infringement. The losses caused to Bayer in terms of every sale of Isabelle and Pettibelle being a lost sale of Yasmin must have been within Generic Health's contemplation as the foundation of Bayer's claim, and Generic Health, had it wished to do so, must have had sufficient information to make a reasonable estimate of the likely quantum involved as well exceeding the quantum of the offer. 7 The fact that, before the offer was made, Generic Health's solicitors specifically asked about Bayer's intention to claim damages for the period before the amendment and were informed that Bayer intended to do so, taken with the fact that Generic Health's own offer, made just before the hearing on damages commenced, represented Bayer's claim less some $ 6 million (representing the pre-amendment damages), suggests that Generic Health did not turn its mind to the question whether Bayer's offer, at the time it was made, involved a genuine compromise of the claim. Had it turned its mind to that question, I consider that Generic Health could have readily ascertained that the offer did represent a genuine compromise even without access to the confidential exhibit to Mr Peace's affidavit which disclosed Bayer's EBIT for the years 2006 to 2011. After all, Generic Health did not dispute Bayer's submission that the evidence disclosed that Generic Health itself had paid a royalty of about $8.2 million to its parent company (the second respondent) for the manufacture of Isabelle and earned about $9 million in profits in circumstances where Isabelle sold for at least $10 less per three month packet than Yasmin. 8 The affidavit from Generic Health's solicitor, to the extent relevant to this issue, says only that when she received the offer she did not know the quantum of the claim or the basis upon which the claim would be calculated and nor, to her knowledge, did Generic Health. So much may be accepted. Ms Owen does not say that Generic Health had made no estimate of the claim against it at the time the offer was made. She does not say that it was not obvious to her or to Generic Health that Bayer's claim was for loss it had suffered in circumstances where the only product for which Isabelle could be substituted was Yasmin and Bayer, to Generic Health's knowledge, had introduced Pettibelle in response to Isabelle. She does not say that Generic Health was unable to estimate Bayer's claim. She does not say that she or anyone else within her firm discussed the offer with Generic Health or decided that it could not be assessed because of lack of information. 9 This is not a case in which Bayer made an offer and then changed its case. The sole reason for Generic Health's contention that an order inconsistent with r 25.14(3) should be made is that, when it made its offer, Bayer had not informed Generic Health of the quantum it claimed so that, as I understand it, Generic Health was not able to ascertain if the offer represented a genuine compromise or not. While I do not doubt that an offer made before notice of the quantum of a claim may well mean that a party is unable to assess whether an offer represents a genuine compromise, and that such a circumstance also may well constitute proper reason to make an order inconsistent with r 25.14(3), the bare statement - that Bayer had not yet given notice of the quantum of its claim - does not reflect the full spectrum of circumstances relevant in the present case. The objective facts, which I have identified above, support an inference of sufficient knowledge on Generic Health's part at the time the offer was made to make an assessment of the genuineness of the offer as a compromise of Bayer's claim. In the circumstances of this case, Generic Health has not adduced sufficient evidence to support a contrary inference when it is the party which bears the persuasive burden for any departure from r 25.14(3). It has not adduced any evidence at all from an officer of Generic Health who might be taken to have familiarity with the factors and circumstances identified above, such as Mr de Alwis, General Manager and Director of Generic Health, who swore two affidavits in the proceeding including one relating to Generic Health's profits from Isabelle for the purpose of Bayer electing between an account of profits and damages (an election made before Bayer made its offer). 10 It follows that orders should be made as sought by Bayer in respect of costs. I certify that the preceding ten (10) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Jagot.