Bitech Engineering v Garth Living Pty Ltd

The Offer of Settlement is open for acceptance in writing until 4.00pm on Friday 25 July 2008 after which time it will expire.

The Offer of Settlement is made in accordance with the principles applied in Calderbank -v Calderbank (1975) 3 All ER 333 and Cutts -v- Head (1984) 1 All ER 597 and adopted in the Supreme Court of Victoria in MT Associates Pty Ltd -v- Aqua Max Pty Ltd and Anor (No. 3) (2000) VSC 163 and on the basis of the policy considerations referred to by Hon. Justice Byrne in Mutual Community Limited -v- Lorden Pty Ltd (unreported Supreme Court of Victoria, Byrne J. 28 April 1993 at 12-13) as referred to in Stipanov -v- Mier (No. 2) (unreported Sup. Crt. Victoria, Hollingworth J. 22 November 2006); (2006) VSC 424, at para 10.

Should the Offer of Settlement not be accepted by the Applicant, the First Respondent reserves its right to produce this letter to the Court on the question of costs, and to make application to the Court for an award of indemnity costs against the Applicant for all costs of the proceeding from the date of the Offer of Settlement (including any trial).

Should you require clarification in respect to any aspect of the Offer of Settlement, then please contact me.

Please confirm receipt of this correspondence. 17 At the time the offer of 11 July 2008 was made, all questions of liability in the proceeding had been fixed for final hearing in late October 2008. Although Bitech had not put a positive evidentiary case in answer to Garth Living's Cross-Claim, it had by 11 July 2008 undoubtedly expended some costs in seeking to defeat that Cross-Claim. In its Calderbank offer, Garth Living did not offer to pay Bitech's costs of its Cross-Claim. It should have done so. Nor did Garth Living offer to consent to the issue of a s 19 Certificate of Validity in respect of the Patent (as to which see PAC Mining Pty Ltd v Esco Corporation (No 2) [2009] FCAFC 52 at [11] and at [16]). In those circumstances, I consider that the offer which was made by Garth Living fell well short of what was required in July 2008 to found a claim for indemnity costs. 18 Further, by 11 July 2008, much of the expert evidence relied upon at the trial had been filed and served. There was a dispute between the parties' experts as to whether reflected light contributed at all to the flame effect observable on the viewing screen and, if so, to what extent and in what way. There was also a contest as to the true construction of the Patent. These issues were not so obviously weighted in favour of the respondent parties that Bitech should be held to have acted unreasonably in rejecting an offer which, in effect, required it to capitulate. 19 The additional matters to which I have referred in [18] above reinforce my view that, in the circumstances of this case, it would be inappropriate to make an order for indemnity costs in favour of Garth Living. 20 Bitech seeks its costs of the Cross-Claim brought by Garth Living against it. There was some overlap between the infringement proceeding and the Cross-Claim but not such a significant overlap as to justify a special costs order in respect of that Cross-Claim. As Bitech correctly submitted, the Cross-Claim raised substantial issues as to the validity of the Patent including lack of novelty and obviousness. A good deal of time, effort and expense was devoted to these issues both before and during the hearing. The following remarks made by the Full Court in PAC Mining Pty Ltd [2009] FCAFC 52 at [11] are apt: 11 In the present case, the appellants might well have defended (and, as things have turned out, successfully defended) the respondents' case on infringement without putting obviousness or novelty in issue. By putting those things in issue, the appellants introduced into the litigation a range of substantial questions which were ultimately decided against them. Although we accept that an issues-based apportionment of costs is not always appropriate, particularly in a case in which conventional alternatives are agitated, the appellants' obviousness and novelty points in the present case were not merely alternative ways of arriving at the conclusion that they had not infringed the patents in suit. They were that, of course, but they were a good deal more: they challenged the basic validity of the patents. As a result of successfully fending off that challenge, the respondents succeeded in obtaining certificates as to validity which have themselves survived the appellants' appeal. In these respects we make no distinction between the appellants' challenge to validity as expressed in their Defence, and their corresponding challenge in the Cross-claim. From the viewpoint of awarding costs, the reality is that, once that challenge was made in both respects, there was a single case, as it were, on obviousness and novelty which the respondents had to meet. 21 In the present case, I do not think that the issue of fair basis was so significant as to require separate treatment. There will therefore be an order for costs in favour of Bitech in respect of Garth Living's Cross-Claim. 22 Cohen seeks an order for indemnity costs. It contends that Bitech unreasonably rejected a settlement offer made by its lawyers (Bradley Allen) to DLA Phillips Fox on 4 August 2008. That offer was in the following terms, omitting formal parts: WITHOUT PREJUDICE SAVE AS TO COSTS

Cohen Nominees Pty Ltd & Garth Living Pty Ltd ats Bitech Engineering Pty Ltd - Federal Court No. NSD 1681 of 2006

Our client is willing to settle the above proceedings on the basis that the proceedings be discontinued with no order as to costs.

This offer is put on a Calderbank basis which would be used on the question of costs if not accepted and a judgment is ultimately handed down which is on less favourable terms to your client than this offer.

If the offer is not accepted within 21 days we will ask for orders that your client not be entitled to be paid costs, other than the costs of considering the offer, incurred after the receipt of the letter and that our client's costs after that time be paid by your clients and further that this be on an indemnity basis. 23 Bitech ignored this offer. 24 Cohen ceased all involvement with the MS-5 heater (the only model with which it had a connection) in February 2007. It behaved sensibly in meeting the infringement case against it. It made appropriate admissions. 25 The offer made by Cohen on 4 August 2008 was made some two and a half months before the trial. It represented some compromise in that it involved an abandonment by Cohen of any entitlement to its costs. This type of compromise will usually not be material when the Court is considering an application for indemnity costs based upon an allegedly unreasonable rejection of a settlement offer (Vasram v AMP Life Ltd [2002] FCA 1286 at [12]). The offer required Bitech to abandon its claim altogether. The matters mentioned in [18] above are also relevant to my consideration of Cohen's claim for indemnity costs. For all of these reasons, I do not think that Cohen's claim for an order for indemnity costs has been made out. 26 I do not think that there are any other special circumstances in relation to this proceeding which demand any further departure from the usual rule that the costs should follow the event. I will therefore make orders accordingly. 27 DLA Phillips Fox holds in its trust account: (a) $150,000.00 as security for Garth Living's costs; and (b) $150,000.00 as security for Cohen's costs of the proceedings. 28 I will make orders allowing Garth Living and Cohen to access these funds, to the extent that the costs orders as quantified permit, for the purpose of discharging Bitech's net costs liability (if any) to those parties.

Proceeding NSD 43 of 2007 29 Bunnings is the sole respondent in this proceeding. It did not cross-claim against Bitech. Bunnings made a settlement offer on an interim basis on 13 October 2006. That offer did not address final relief. It cannot assist Bunnings in its claim for indemnity costs. 30 On 11 July 2008, Bunnings made a further offer of settlement in which it proposed that Bitech should discontinue its proceeding against Bunnings and pay Bunnings' costs of that proceeding. There was no element of compromise in this offer. It cannot assist Bunnings in its claim for indemnity costs (see Fyna Foods Australia Pty Ltd v Cobannah Holdings Pty Ltd [2004] FCA 1212 at [10]; Vasram [2002] FCA 1286 at [12]). Bunnings has not made out a case for indemnity costs. 31 In this proceeding, I see no reason why costs should not follow the event. I propose to make orders accordingly.

Observations Applicable to Garth Living, Cohen and Bunnings 32 The taxing officer will need to keep in mind that Garth Living, Cohen and Bunnings were all represented by the one Counsel although two firms of solicitors were on the record and briefed the same Counsel. This may well have been a sensible and efficient way for these respondents to have their interests represented before the Court. But neither Cohen nor Bunnings cross-claimed against Bitech and I have now held that some of the costs incurred by Garth Living should not be recovered by it as against Bitech. 33 Care will need to be taken when the costs of these parties are being taxed in order to ensure that the substance of the orders which I propose to make is fairly reflected in the quantification of costs and that there is no double recovery.

Proceeding NSD 105 of 2007 34 Flameglow is the sole respondent in these proceedings. It succeeded in resisting Bitech's claim that it infringed the Patent. It failed in its Cross-Claim for revocation of the Patent. That Cross-Claim was filed on 26 March 2007. 35 It took virtually no part in the final hearing. At [8] in the principal judgment, I said: 8 The unjustified threats Claim will turn on the resolution of the other issues referred to in [6] and [7] above. That Claim was adjourned on 21 October 2008 because Mr Ogilvie, the principal witness to be called by Flameglow in support of that Claim, was ill and could not attend Court when the hearing of the other liability issues took place. The orders made on that occasion and the reasons for them are to be found in Bitech Engineering v Flameglow Pty Ltd [2008] FCA 1583. In addition, Flameglow did not participate to any real extent in the hearing before me. Its participation was confined to seeking to have its unjustified threats claim adjourned and to seeking to read an affidavit sworn by Mr Ogilvie, which I rejected. 36 After I published the principal judgment, I was informed that, on 2 June 2009, Flameglow had been placed into voluntary liquidation. Although there is no evidence of this fact before me at the moment, both parties have made their submissions on costs upon the basis that Flameglow is now in voluntary liquidation. I will proceed upon the basis that Flameglow was placed into voluntary liquidation on 2 June 2009. In due course, I will need to be satisfied by admissible evidence that this is the fact. 37 The effect of the voluntary liquidation of Flameglow is that, as and from 2 June 2009, no action or proceeding is to be proceeded with or commenced against Flameglow except by leave of the Court. Leave may be given on such terms as the Court may impose (s 500(2) of the Corporations Act 2001 (Cth)). 38 Pursuant to s 500(2), Flameglow has sought leave to put submissions on the question of costs. 39 Bitech does not oppose leave being granted to Flameglow for the limited purpose sought. However, Bitech seeks to have its position protected while the balance of Flameglow's Cross-Claim remains on foot. I will address this submission later in these Reasons. 40 I will grant leave to Flameglow to put submissions on the question of costs. That question has to be resolved expeditiously and the liquidation of Flameglow after the hearing should not operate as an impediment to the prompt resolution of all questions of costs. 41 Flameglow seeks an order that Bitech pay its costs of the proceeding on the party/party basis from 22 January 2007 up to and including 24 May 2008 and on an indemnity basis after that date. It seeks those orders because it contends that Bitech unreasonably rejected an offer of settlement made by Flameglow which offer was clearly substantially better than the outcome of the proceeding. 42 The offer of settlement upon which reliance is placed in support of Flameglow's submissions was contained in a Calderbank letter from Flameglow's solicitors to Bitech's solicitors dated 23 May 2008. 43 Omitting formal parts, that letter was in the following terms: WITHOUT PREJUDICE SAVE AS TO COSTS

NSD 104 OF 2007: BITECH ENGINEERING v FLAMEGLOW PTY LTD

We refer to previous communications, especially your letters dated 22 April 2008 and 21 May 2008. Our client puts forward the following by way of resolution of this matter:

1. Our client will not sell the FG150, FG100 and FG400 or any flame effects heater that is substantially similar in its flame effect producing mechanism to the flame effect mechanism of the FG100, FG 150 and FG400, or any other model produced by the Ningbo Jiaqing Machinery Co., Ltd. Our client will consent to an injunction in those terms, without any admission of liability.

2. Our client will not import for sale or distribution the FG150, FG100 and FG400, or any other Flame Effect Heater substantially similar to the FG150, FG100 and FG400 produced by the Ningbo Jiaqing Machinery Co., Ltd or any flame effects heater that is substantially similar in its flame effect producing mechanism to the flame effect mechanism of the FG100, FG 150 and FG400.

4. The Application in these proceedings to be dismissed.

6. This offer remains open for 14 days from the date of this letter.

This letter is written strictly without prejudice, save as to costs, including an application for indemnity costs, on the basis of the principles in Calderbank v Calderbank [1975] 3 All ER 33 and Cutts v Head [1984] 1 All ER 597. 44 This letter was not the first communication between the parties' lawyers relevant to a possible settlement. I do not, however, think it necessary to refer to earlier communications concerning settlement because those communications do not assist the resolution of the present question. 45 The 23 May 2008 letter from Flameglow's lawyers to Bitech's lawyers led to a response in which Bitech's lawyers sought detailed information from Flameglow's lawyers concerning the sale of the allegedly infringing heaters in Australia. It seems that the information sought was required so that Bitech would be in a position to consider what (if any) amount it should seek to obtain as damages or an account of profits from Flameglow as part of any proposed settlement. 46 Subsequently, Bitech's lawyers sent two letters to Flameglow's lawyers dated 24 June 2008. In one of those letters (the shorter of the two), DLA Phillips Fox set out Bitech's counter offer. In the longer of the two letters, DLA Phillips Fox explained in some detail the reasons why that firm considered that its client's counter offer of settlement was perfectly justified when regard was had to the relative merits of the parties' positions. In addition to requiring Flameglow to consent to injunctions, Bitech required that Flameglow pay to it the amount of $1,061,250 within 15 days from the date of any consent order made pursuant to the proposed settlement. The terms contained in Bitech's counter offer reflected an overly optimistic view of Bitech's prospects in the proceedings. 47 There is no evidence before me at the moment suggesting or proving that Flameglow ever responded to Bitech's offer of 24 June 2008 and, if so, what the terms of its response were. Much later, and shortly before the commencement of the hearing, the lawyers for Flameglow wrote a further letter on 24 September 2008 in the following terms, omitting formal parts: NSD 104 OF 2007: BITECH ENGINEERING v FLAMEGLOW PTY LTD

We refer to previous communications, especially your letters dated 22 April 2008 and 21 May 2008 and our reply dated 23 May 2008. Our client confirms its undertaking that:

1. Our client will not sell the FG150, FG100 and FG400 or any flame effects heater that is substantially similar in its flame effect producing mechanism to the flame effect mechanism of the FG100, FG 150 and FG400, or any other model produced by the Ningbo Jiaqing Machinery Co., Ltd. Our client will consent to an injunction in those terms, without any admission of liability.

2. Our client will not import for sale or distribution the FG150, FG100 and FG400, or any other Flame Effect Heater substantially similar to the FG150, FG100 and FG400 produced by the Ningbo Jiaqing Machinery Co., Ltd or any flame effects heater that is substantially similar in its flame effect producing mechanism to the flame effect mechanism of the FG100, FG 150 and FG400.

Our client reserves its right to tender this letter in these proceedings. 48 I was not informed of the existence or terms of the letters to which I have referred at [42]-[47] above until after I published the principal judgment. Those letters were then only drawn to my attention in the context of the present argument concerning costs. 49 Bitech submitted that the offers made in the letters of 23 May 2008 and 24 September 2008 were inadequate because neither offer contained a term which dealt with Flameglow's Cross-Claim and also because there was no offer of a s 19 Certificate of Validity in respect of the Patent. In addition, Bitech submitted that Flameglow's attempt to impose a term to the effect that the offered outcome should be kept confidential was unreasonable and not capable of being part of any Court order. Bitech submitted that the inclusion of this term was fatal to the proposal operating as an effective Calderbank offer. 50 At [7] of the principal judgment, I said: 7 The Claims for a declaration of invalidity and for revocation of the Patent raise the following issues:

(a) Whether the invention defined in Claims 1, 8, 12, 14 and 20 of the Patent was novel;

(b) Whether the invention defined in those Claims involved an inventive step; and

(c) Whether those Claims are fairly based on the matter described in the specification of the Patent. 51 The fair basis issue raised in Flameglow's Cross-Claim overlapped to some extent with the issues raised in Bitech's claim that its patent had been infringed. Further, I consider that it is an unrealistic and overly technical approach to regard Bitech's infringement claim and the issues raised by Flameglow in its Cross-Claim as being wholly separate actions or proceedings. The substance of the matter was that the Cross-Claim was provoked by Bitech's infringement claim and was to some extent bound up with that claim as a matter of forensic reality. 52 In my view, any offer by Flameglow which ignored altogether its Cross-Claim against Bitech did not recognise the reality of the proceedings to which I have referred at [51] above. For these reasons, I think that Bitech's rejection of Flameglow's 23 May 2008 offer was not unreasonable. In any event, for the reasons which I have explained at [18] above, it was not unreasonable for Bitech to proceed in the face of the 23 May 2008 offer. 53 The letter of 24 September 2008, if it was an offer at all, falls well short of dealing with the Cross-Claim and a number of other matters (such as costs) and thus also fails to amount to an offer the rejection of which can be characterised as unreasonable in all the circumstances. 54 Finally, there was no offer at any time to consent to the issue of a s 19 Certificate of Validity in respect of the Patent. 55 Therefore, I think that the appropriate order in respect of Bitech's infringement claim against Flameglow is that Bitech pay Flameglow's costs of that claim on the party/party basis. As was the case with Garth Living, I think that the costs of the Cross-Claim to date should follow the event. 56 The voluntary liquidation of Flameglow creates two further problems: First, Bitech requires leave in order to proceed against Flameglow in respect of the costs of Flameglow's Cross-Claim to date. Given that I have been prepared to grant leave to Flameglow to proceed against Bitech in respect of its costs of Bitech's application, it is only fair and reasonable that I accord to Bitech a corresponding leave. I propose to do so. Second, Bitech has understandably raised the question of whether or not, in light of the fact that it is now in liquidation, Flameglow should be permitted to proceed with the balance of its Cross-Claim (ie that part of its Cross-Claim based upon its allegation that Bitech made unjustified threats against it in respect of the Patent) and, should it be permitted to do so, the terms upon which it might be permitted to do so. 57 As is apparent from the reasons which I gave on 21 October 2008, when the unjustified threats claim was adjourned (as to which see Bitech Engineering v Flameglow Pty Ltd [2008] FCA 1583), Senior Counsel for Bitech sought a special order in respect of costs as part of the terms upon which the adjournment requested by Flameglow should be allowed. At that time, I deferred dealing with those submissions but indicated that Bitech's position would be adequately protected. 58 At the directions hearing held before me on 3 December 2009, Flameglow sought a two week adjournment of the balance of its Cross-Claim in order to allow the liquidators of Flameglow to come to a view as to whether or not that Cross-Claim should now be prosecuted to finality. I agreed to that adjournment but indicated that I expected the liquidators to have come to a firm decision by 16 December 2009, the date to which the matter has been adjourned. 59 I am not presently dealing with the costs of that part of Flameglow's Cross-Claim which comprises its unjustified threats claim. The costs of that claim will be determined when the balance of Flameglow's Cross-Claim is resolved. Notwithstanding the fact that I am not currently dealing with the costs of the unjustified threats claim, the existence of that claim and its unresolved status are both matters which I am entitled to take into account in determining what orders for costs (if any) I should make at the moment. 60 Bitech submitted that I should defer making any costs orders in favour of Flameglow until such time as Flameglow decides whether it wishes to proceed with the balance of its Cross-Claim. The reason for this is obvious. Bitech does not wish to be in a position where it is obliged to pay a sum of money by way of costs to Flameglow in circumstances where its only avenue for recovering its costs in respect of Flameglow's Cross-Claim is to prove in the liquidation of Flameglow. 61 I think that the best course is for me to defer making any costs orders in this proceeding at the moment. Subject to any further submissions that may be made, I would be disposed to make appropriate orders which give effect to the thinking which I have explained at [49]-[55] above. However, given that Flameglow is in liquidation, it may be that I should reflect that thinking in a net costs order in favour of either Bitech or Flameglow, as may be appropriate. Each party should consider its position and be prepared to make final submissions on this question and on all other questions of costs when the matter next comes before me on 16 December 2009. 62 Those submissions should take account of the decision to be made by the liquidators of Flameglow as to whether they propose to cause Flameglow to press its claim for damages for unjustified threats in respect of infringement of the Patent and all historical issues concerning costs (including those arising out of the adjournment of the threats claim on 23 October 2008).

Proceeding NSD 2056 of 2007 63 Hotpoint is the sole respondent in this proceeding. It successfully defended Bitech's infringement case but lost its Cross-Claim for revocation. 64 On 11 October 2007, Hotpoint made an offer to settle the proceeding against it upon terms that it would return all allegedly infringing heaters of a particular model type and not import or distribute further examples of that model. Bitech rejected that offer. 65 That offer did not give to Bitech the usual form of injunction reflecting the monopoly contained in the Patent. 66 Correspondence was then exchanged between DLA Phillips Fox and Hotpoint's lawyers (Rutland's Law Firm) concerning the detail of Hotpoint's offer. 67 I do not think that Bitech's rejection of Hotpoint's offer was so unreasonable as to justify the making of an order for indemnity costs. It is true, of course, that the substance of that offer was better than the result ultimately obtained by Bitech. However, that circumstance alone does not warrant an order for indemnity costs. There has to be an element of unreasonableness in the behaviour of the party rejecting the offer of settlement relied upon in support of the claim for indemnity costs. I do not think that that element is present here. The reasons which I gave at [17]-[18] above in respect of Garth Living's offer are also apt in respect of Hotpoint's offer. 68 Hotpoint filed its Cross-Claim on 23 April 2008. 69 It was submitted on behalf of Hotpoint on the question of costs that: (a) Despite the fact that it had filed a Cross-Claim seeking a declaration of invalidity and an order revoking the Patent, it took no active part in seeking to support those orders either by way of evidence or submissions; and (b) For those reasons, it did not cause additional expense to be incurred by Bitech in defending its Cross-Claim. 70 It is correct, as Hotpoint submitted, that Hotpoint essentially rode on the coat-tails of Garth Living and Flameglow (to the extent to which Garth Living utilised the expert evidence filed by Flameglow) in support of its Cross-Claim. But that is not a reason to absolve Hotpoint from having to pay Bitech's costs of defending that Cross-Claim. In my view, the usual order should be made, that is to say, that Hotpoint, being unsuccessful in the prosecution of its Cross-Claim, should pay Bitech's costs of that Cross-Claim. 71 For these reasons, the appropriate orders in the Hotpoint proceeding are that Bitech should pay Hotpoint's costs of and incidental to its infringement case on the party/party basis and that Hotpoint should pay Bitech's costs of the Cross-Claim on the same basis. I will make orders accordingly. I certify that the preceding seventy-one (71) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Foster.

Associate: Dated: 9 December 2009 Counsel for Bitech Engineering: Mr C Dimitriadis

Solicitor for Bitech Engineering: DLA Phillips Fox

Counsel for Garth Living Pty Ltd, Cohen Nominees Pty Limited and Bunnings Group Limited: Ms J Rawlings

Solicitor for Garth Living Pty Ltd and Bunnings Group Limited: Eales & Mackenzie Melbourne

Solicitor for Cohen Nominees Pty Limited: Bradley Allen Lawyers

Counsel for Flameglow Pty Ltd: Mr MR Hall

Solicitor for Flameglow Pty Ltd: Donaldson Walsh

Counsel for Hotpoint (Aust) Pty Ltd: Ms ST Chrysanthou

Solicitor for Hotpoint (Aust) Pty Ltd: Rutland's Law Firm