Bitech Engineering v The Muir Electrical Company Proprietary Limited

REASONS FOR JUDGMENT 1 The applicant seeks the leave of the Court pursuant to O 22 r 2(1)(d) of the Federal Court Rules to discontinue the whole of this proceeding. The respondents consent to that leave being granted. However, there is a dispute between the parties as to the appropriate order for costs to be made in light of the discontinuance of the whole of the proceeding. 2 The applicant seeks an order for costs in its favour. The respondents seek an order for costs in their favour. In order to explain the costs orders which I will make shortly it is necessary briefly to traverse the history of this proceeding and other related proceedings. 3 The applicant is a company incorporated in the Republic of Ireland. It is the patentee of Australian Patent No 621713 for an invention described in the patent as "Apparatus for simulating flames" (the Patent). The essential object of the invention is to achieve a realistic simulation of flames emanating from a simulated combusting log or coal fire. The Patent has application in electric and gas fired domestic room heaters. 4 In late 2006, the applicant became aware that certain models of electric flame heaters were being sold by various retailers and suppliers which the applicant believed infringed the Patent. In addition to the present proceeding, the applicant instituted four other proceedings against the suppliers and retailers of the allegedly infringing electric flame heaters. 5 It is not necessary to say much about those other four proceedings. I heard those four proceedings together and delivered judgment in those proceedings on 26 November 2009 (Bitech Engineering v Garth Living Pty Ltd (2009) 84 IPR 78). The applicant was unsuccessful before me as far as its claims for infringement of the Patent were concerned. However, on appeal, the Full Court concluded that the Patent had been infringed and upheld the appeal (Bitech Engineering v Garth Living Pty Ltd [2010] FCAFC 75). As yet, there has been no special leave application to the High Court. The four matters were remitted to me by the Full Court for the purpose of dealing with the applicant's claims for damages or, in the alternative, an account of profits. 6 Three of the other four matters are being case managed by me in order to ready them for hearing. The fourth of those matters is subject to a Motion with which I will deal later today. 7 The present proceeding was commenced on 10 January 2007 and was first listed before the Court on 15 February 2007. By Administrative Order made in Chambers on 14 February 2007, it was adjourned to 3 April 2007. Before the proceeding was commenced, the solicitors for the applicant wrote a letter of demand to the respondents dated 6 September 2006. That demand included the following: : Our client prefers to give retailers such as The Good Guys the earliest opportunity to consider and avoid potential liability. On this basis, we have instructed to give The Good Guys one final chance to resolve this matter before our client issues proceedings. Accordingly, our client seeks that The Good Guys provide us with a written agreement to:

1 Immediately refrain from stocking, selling, offering and advertising for sale the Electric Flame Heaters, and any other product which infringes the Patent; 2 Cancel or withdraw immediately any current orders for Electric Flame Heaters; 3 Deliver up as directed by our client any Electric Flame Heaters which The Good Guys may still have in stock; 4 Provide to us information in relation to quantities of stock obtained, sales figures and pricing information (both wholesale and retail) on a per unit basis for the Electric Flame Heaters; 5 Provide us with documentation such as invoices, delivery dockets, receipts, order forms or any other documentation which identifies the source of manufacture, distribution, supply, importation and/or sale of the Electric Flame Heaters. 8 The solicitors for the applicant required that their demands be met by 13 September 2006. 9 In a subsequent letter, sent a few days later, the solicitors for the applicant informed the respondents of the fact that the applicant had commenced proceedings against Garth Living Pty Ltd and Cohen Nominees Pty Limited for infringement of the Patent (proceeding NSD 1681 of 2006) and enclosed a copy of the Application and Statement of Claim in that proceeding. 10 On 13 September 2006, the respondents, through their in-house counsel, replied to the letters of demand which had been sent by the solicitors for the applicant to the respondents. The response was in the following terms: We note the contents of your letter and advise as follows:

1. Our store does not currently stock, sell, offer or advertise for sale heaters to which you refer, nor is it our future intention to do so; 2. We have no current orders for the relevant heaters; 3. We have no stocks of the relevant heaters; 4. This information is archived and confidential and will not be made available in the absence of a formal order to produce; 5. Refer 4. We note that none of the relevant heaters have been available in our store for a considerable period and only a few were ever stocked. 11 Paragraphs 4 and 5 in the respondent's letter related to paragraphs 4 and 5 of the letter of demand dated 6 September 2006. 12 The solicitors for the applicant then complained that the respondents' response to their demands was inadequate. The asserted inadequacies were essentially: (1) The failure to provide information as to the numbers of allegedly infringing products sold, the costs of those products and the revenue earned from the sale of those products; and (2) The failure to commit in a binding way to the various demands made in the original letter of demand. 13 Further correspondence ensued to which I need not refer. As mentioned at [7] above, this proceeding was then commenced on 10 January 2007. 14 The allegation made by the applicant in the Statement of Claim filed in the present proceeding was that the respondents had infringed the Patent by selling or participating in the sale of the MS5 electric flame effect heater (and only that heater). The applicant did not allege at that time that the respondents had sold or participated in the sale of any other allegedly infringing heater. In the originating process, the applicant sought injunctive relief as well as consequential delivery up orders and damages or an account of profits. 15 The originating process was served upon the respondents shortly after 10 January 2007. There was then a further exchange of correspondence which culminated in a letter from the solicitors for the respondents to the solicitors for the applicant dated 13 February 2007. That letter contained a proposal for sensibly managing the present proceeding in light of the ongoing contest taking place in the other four proceedings. The terms of that letter were relevantly: Australian Registered Patent No. 621713 Basic Engineering Ltd and Bitech Engineering -v- The Muir Electrical Company Pty Ltd and Anor Federal Court Proceedings No. NSD 44 of 2007

We also refer to your telephone conversation with Scott Reid, of our office, on 9 February 2007.

Your client alleges breach of patent over products our clients purchased from a manufacturer in good faith. Our clients were not aware of any patent issue at the time the items were purchased or sold at a retail margin. Our clients neither deny or admit there has been a patent infringement.

Our clients do not have a commercial interest in defending this matter. Between 21 March 2006 and 17 October 2006, our clients sold 7 flame heaters for the total price of $1,698.18. Our clients' retail sales margin was $447.18. We enclose, by way of disclosure, a copy of our clients' spreadsheet outlining the sales of the units.

Our clients do not wish to incur further legal costs to defend such a trivial matter. In our view, your client's costs to pursue this matter against our clients are likely to outweight [sic] any pecuniary award it may receive, if any at all. We also note that your client may not obtain any award of damages due to the provisions of section 123 Patents Act 1990 ("the Act").

Further, whilst your client may be entitled to final injunctive relief (which is also not admitted), our clients have already provided multiple assurances that they do not continue to stock nor do they intend to sell any further flame heaters and are prepared to consent to orders 1 and 2 in your application. Our clients also do not object to orders 3 &.4 of your application although they do not currently possess or control any of the items referred to therein.

As stated previously, the issue of whether the flame heaters do in fact breach your client's patent is a matter that will be ventilated in the proceedings against Garth Living Pty Ltd ("the Garth proceedings"). At this stage, we have not been provided with a defence in relation to the Garth proceedings.

If the court does find that the flame heaters infringe your client's patents, then our clients concede that your client may have an entitlement to relief (subject to the provisions of section 123 of the Act). However, it is unreasonable to propose that our clients be put to the expense of preparing a case that will, in most respects, be identical to that prepared by Garth Living, and in which it has no particular position or interest.

Our, clients will abide the decision of the court in the Garth proceedings which will determine your client's allegations. Our client does not wish to incur the cost of participating in those proceedings, as it has no commercial or legal interest in the outcome.

• our clients' agreement to consent to orders 1 and 2 of your client's application; • our clients' non-objection to orders 3 and 4 of your client's application; • our clients' preparedness to abide the court's ruling in the Garth proceedings on the breach of patent issue, your client will not lose any advantage by agreeing to stay the proceedings pending the outcome of the Garth proceedings. If your client succeeds in proving that Garth Living's flame heaters breaches its patent, then your client can still pursue our clients. In our view, it is unnecessary to have the court's resources utilised on this matter at this stage.

The arrangement proposed by our clients is reasonable and is an attempt to provide both your client and ours with a solution that will achieve their commercial aims. Whilst we appreciate that you may have instructions to pursue infringement proceedings relentlessly, surely it is in your client's interests to minimise its own legal expenses in a matter in which the respondent is cooperative.

We intend to raise this issue with Her Honour at the directions hearing, which we propose to attend by telephone.

Please let us know whether your client is prepared to reconsider its position and consent to an [sic] direction that the proceedings be stayed pending the outcome of the Garth proceedings. We note that should this course be adopted then an appearance at the directions hearing may not be necessary.

Our client reserves it rights to rely on this letter in relation to the issue of costs. 16 On 14 February 2007, the solicitors for the respondents provided the information as to sales which had been originally sought back in September 2006 and pressed for subsequently. There then followed one or two other letters designed to clarify the information provided on 14 February 2007. 17 By 19 February 2007, the parties had arrived at a sensible in principle arrangement for minimising costs on both sides of the present proceeding which nonetheless protected the interests of both parties pending the determination of the other four proceedings. 18 The arrangements reached in that correspondence were not embodied finally in orders made by the Court until 14 August 2007. 19 In light of further information provided to the solicitors for the applicant by the solicitors for the respondents, it was necessary to include within the holding arrangements agreed amongst the parties protection in respect of the FG150 model electric flame heater. The need for this additional protection was one of the reasons that there was some delay in finalising the precise terms of the in principle agreement reached on or about 19 February 2007. 20 On 14 August 2007, undertakings were provided by the respondents and orders made in the following terms: THE COURT NOTES THAT:

1 Each of the Respondents undertakes to the Applicant that it will abide by such findings as are made by the Court in Federal Court of Australia Proceedings Nos. NSD 1681 of 2006 (Bitech Engineering v Garth Living Pty Ltd & Anor) and NSD 105 of 2007 (Bitech Engineering v Flameglow Pty Ltd) (together, the Main Proceedings) or any Court on appeal from the Main Proceedings in relation to: 1.1 the validity of Australian Patent No. 621713 (the Patent); and 1.2 the infringement of the Patent by the exploitation of the MS5 Electric Flame Effect Heater (Reference No. DBL 2000A-MS5) (the MS5 Heater) and the Flameglow FG 150 Floor Standing Model with Glass Door Heater (FG 150 Heater), and will not seek in this or any other proceeding to challenge those findings. 2 Each of the Respondents undertakes to the Court, until the determination of these proceedings or further order, that it will not, without the licence of the Applicant, in Australia and during the term of the Patent, whether by itself, its directors, officers, servants, agents or otherwise howsoever, hire, sell, use, import, market, promote, advertise, distribute, offer for sale or otherwise exploit or authorise any other person to exploit: 2.1 the MS5 Heater; 2.2 the FG 150 Heater; 2.3 any apparatus for simulating flames, the apparatus comprising a source of light, simulated flame effect means for reflecting said light to simulate flames, simulated fuel means to simulate a bed of combusting fuel, and screen means on which to view an image of the simulated flames, said screen means being positioned between the said flame effect means and said simulated fuel means, said screen means being capable of diffusely transmitting light reflected by said flame effect means and also being capable of reflecting light from said simulated fuel means so that the simulated flames appear to emanate between the simulated fuel means and an image of the latter means reflected in said screen means; 2.4 any apparatus in accordance with paragraph 2.3 wherein said screen means is a translucent or transparent panel or panels having a partially reflective surface and a diffusing surface; 2.5 any apparatus in accordance with paragraph 2.4, mounted in or forming part of a casing having a transparent front panel through which the simulated fuel and the screen means are visible; 2.6 any apparatus in accordance with paragraph 2.5, wherein the front panel is both transparent and reflective whereby multiple front-to-back images of simulated fuel means are provided and the simulated flames appear to emanate from different regions in an extended bed of fuel; 2.7 any heating appliance incorporating the apparatus described in paragraphs 2.3 to 2.6 inclusive, or otherwise infringe any of the claims of the Patent. BY CONSENT, THE COURT ORDERS AND DIRECTS THAT: 3 The First Respondent deliver up on oath to the Applicant or its nominated agent for destruction within 14 days all units of the MS5 Heater and the FG 150 Heater and all advertising and marketing material for the MS5 Heater and the FG 150 Heater whatsoever in the possession, power, custody or control of the First Respondent. 4 The Second Respondent deliver up on oath to the Applicant or its nominated agent for destruction within 14 days all units of the MS5 Heater and the FG 150 Heater and all advertising and marketing material for the MS5 Heater and FG 150 Heater whatsoever in the possession, power, custody or control of the Second Respondent. 5 The parties have liberty to apply on 3 days notice, including for the purpose of having further orders or directions made following the determination of the Main Proceedings. 6 The matter be stood over generally pending any party exercising liberty to apply in accordance with paragraph 5 above. 21 Since 14 August 2007, there have been three listings before me, one on 16 December 2009, one on 28 July 2010 and one this morning. The first of those involved the management of the matter in light of the fact that an appeal was then on foot. The second was made necessary by the success of the appeal and involved requiring the respondents to file an affidavit dealing with the financial information which had previously been provided in February 2007. The matter was listed today in order finally to dispose of the matter and to deal with the question of costs.

Consideration 22 Both parties accept that the question of costs thrown up by the circumstances which I have outlined above is a matter within the discretion of the Court. The Rules do not provide for any automatic consequence insofar as costs are concerned by reason of the discontinuance of a proceeding pursuant to the leave of the Court. 23 There are, however, some helpful statements of principle which should guide the exercise of that discretion. In Rickus v Motor Trade Association of Australia Superannuation Fund Proprietary (2010) 265 ALR 112 at [117]-[119], the Full Court said: [117] In Re Minister for Immigration and Ethnic Affairs; Ex parte Lai Qin (1997) 186 CLR 622; 143 ALR 1 (Ex parte Lai Qin), McHugh J discussed some general principles applicable to the award of costs in Australian courts. At 624, his Honour said that, after a hearing on the merits, as a general rule, the successful party is entitled to his or her costs. It is success in the action that usually controls the exercise of the court's discretion in respect of costs. At CLR 624-5; ALR 3-4, his Honour also said: In an appropriate case, a court will make an order for costs even when there has been no hearing on the merits and the moving party no longer wishes to proceed with the action. The court cannot try a hypothetical action between the parties (Australian Securities Commission v Aust-Home Investments Ltd (1993) 44 FCR 194 at 201; 116 ALR 523 at 530; 11 ACSR 136 at 143). To do so would burden the parties with the costs of a litigated action which by settlement or extra-curial action they had avoided. In some cases, however, the court may be able to conclude that one of the parties has acted so unreasonably that the other party should obtain the costs of the action (Australian Securities Commission v Aust-Home Investments Ltd (1993) 44 FCR 194 at 201; 116 ALR 523 at 530; 11 ACSR 136 at 143). In administrative law matters, for example, it may appear that the defendant has acted unreasonably in exercising or refusing to exercise a power and that the plaintiff had no reasonable alternative but to commence a litigation. Thus, for example, in R v Gold Coast City Council; Ex parte Raysun Pty Ltd [1971] QWN 133, the Full Court of the Supreme Court of Queensland gave a prosecutor seeking mandamus the costs of the proceedings up to the date when the respondent council notified the prosecutor that it would give the prosecutor the relief that it sought. The Full Court said that the prosecutor had reasonable ground for complaint in respect of the attitude taken by the respondent in failing to consider the application by the prosecutor for approval of road and drainage plans.

Moreover, in some cases a judge may feel confident that, although both parties have acted reasonably, one party was almost certain to have succeeded if the matter had been fully tried. This is perhaps the best explanation of the unreported decision of Pincus J in South East Queensland Electricity Board v Australian Telecommunications Commission (unreported, Federal Court of Australia, 10 February 1989) where his Honour ordered the respondent to pay 80% of the applicant's taxed costs even though his Honour found that both parties had acted reasonably in respect of the litigation. But such cases are likely to be rare.

If it appears that both parties have acted reasonably in commencing and defending the proceedings and the conduct of the parties continued to be reasonable until the litigation was settled or its further prosecution became futile, the proper exercise of the cost discretion will usually mean that the court will make no order as to the cost of the proceedings. This approach has been adopted in a large number of cases (footnotes omitted).

[118] In Mineralogy Pty Ltd v National Native Title Tribunal [1998] FCA 1700, the Full Court accepted that, when this court is considering the question of costs in relation to an application for leave to discontinue proceedings pursuant to O 22 r 2(1)(d) of the Federal Court Rules, the appropriate test to apply is that which was explained by McHugh J in Ex parte Lai Qin at CLR 625; ALR 3-4. The Full Court held that, in most cases where there has been no trial on the merits, it is not appropriate in determining an issue of costs to make a prediction as to the outcome of the hypothetical case. That approach was followed by Rares J in Clark v ING Life Ltd [2007] FCA 1960 at [16]. See also O'Neill v Mann [2000] FCA 1680 at [11]-[13] (per Finn J) and J H Lever & Co Pty Ltd v Maniotis (2005) 215 ALR 773 ; [2005] FCA 252 at [3] per Mansfield J. [119] In our judgment, the question of costs thrown up by the grant of leave to the trustee to discontinue the trustee's proceedings and the subsequent discontinuance of those proceedings was one which had to be determined in light of that discontinuance and having regard to the circumstances in play at the time that that discontinuance was put into effect. As at 28 July 2008, there had been no hearing of the appellant's cross-claim and no determination on the merits of the issues raised in that cross-claim. If the question of costs occasioned by the discontinuance of the trustee's proceedings had been determined at that time, that question would have been considered in circumstances where there had been no hearing on the merits of the claims made by the trustee in its proceedings and would have fallen squarely within the principles enunciated by McHugh J in Ex parte Lai Qin. In a case such as the present, it would have been inappropriate for a judge to enter into a detailed examination of all relevant facts and circumstances in order to determine whether or not the bringing and maintaining of the trustee's proceedings up to 28 July 2008 had been reasonable. 24 The usual order as to costs is that the successful party should have the benefit of an order for costs against the unsuccessful party. In the present case, the substance of the matter is that the applicant should be regarded as having succeeded in its patent infringement case against the respondents. The question for consideration then is: Was the applicant guilty of misconduct of such a character as to disentitle it to the benefit of an order for costs? (Oshlack v Richmond River Council (1998) 193 CLR 72 at [69]-[70] (pp 97-98)). I do not think that the applicant was guilty of such misconduct. 25 The present case is somewhat unusual in that the discontinuing party not only has the benefit of the Full Court's decision, the effect of which in part was that both the MS5 electric flame heater and the FG150 electric flame heater infringed the Patent, but also has the benefit of the undertakings and orders given and made on 14 August 2007. The consequence of the Full Court's decision combined with undertakings given and orders made on 14 August 2007 is that the applicant should be taken as having succeeded in its contention that both the MS5 electric flame heater and the FG150 electric flame heater infringed the Patent, not only in the other four proceedings, but also for the purposes of this proceeding. 26 The applicant submitted that it was entitled to bring and was justified in bringing proceedings for infringement of the Patent and that it has behaved reasonably at all times. In particular, Counsel for the applicant pointed to the fact that the infringement of the Patent as alleged has been established and that the applicant was driven to commence the proceedings because the respondents did not meet the reasonable demands made of them by the solicitors for the applicant. The respondents submit that the conduct of the applicant has been unreasonable and that it should never have commenced the proceeding in the first place or at least should have discontinued the proceeding in early 2007 in light of the insignificant amount at stake, as demonstrated by the financial information provided by the solicitors for the respondents to the solicitors for the applicant at that time. 27 The respondents' submissions ignore the fact that, in addition to pecuniary relief, the applicant has always claimed injunctive relief and delivery up of the infringing heaters. Those submissions also ignore the fact that it was not until 14 February 2007 that the respondents provided the sales and financial information which had been sought by the applicant's solicitors in September 2006. 28 The respondents, whilst asserting quite early in the story that very few of the MS5 electric flame heaters had been sold by them, nonetheless did not immediately enter into satisfactory binding arrangements, in light of the claims made against them in the correspondence and ultimately in the originating process. Nor did the complete picture of the sales made by them become clear until some months after the present proceeding was commenced. 29 I think that the applicant was entitled to commence the proceeding and was justified in doing so in light of the failure on the part of the respondents promptly to satisfy in substance all of the demands which had been made upon them in the letter from the solicitors for the applicant to them dated 6 September 2006. I do not think it was unreasonable for the applicant to act as it did. 30 On the other hand, once the solicitors for the respondents were engaged, the conduct on the part of the solicitors for the respondents in managing their clients' position and the litigation has also been entirely reasonable, it seems to me. Reasonable efforts were made to come to a satisfactory arrangement in light of the other proceedings. By 19 February 2007, I think that the respondents had put themselves in a position where, subject to one or two things which I am about to say, they should not be required to pay costs incurred after that date. 31 The exceptions to what I have just said are the appearances in Court on 3 April 2007, 3 July 2007, 14 August 2007, 16 December 2009 and 28 July 2010. I think that the applicant is entitled to have its costs of and incidental to those appearances, because they were all necessary in order either to give effect to the arrangements reached amongst the parties or to manage this matter in light of the appeal and subsequently the Full Court's decision. 32 For the reasons which I have explained, the orders of the Court will be: (1) I order that, pursuant to O 22 r 2(1)(d) of the Federal Court Rules, the applicant have leave to discontinue the whole of this proceeding as against the respondents. (2) I order that any Notice of Discontinuance sought to be filed pursuant to the leave granted in subpar (1) above be filed and served by 8 October 2010. (3) I order that the respondents pay the applicant's costs of and incidental to the proceeding up to and including 19 February 2007. (4) I order that the respondents pay the applicant's costs of and incidental to the appearances before the Court on 3 April 2007, 3 July 2007, 14 August 2007, 16 December 2009 and 28 July 2010. (5) I order that the respondents pay the applicant's costs of and incidental to the argument concerning costs which took place before me today. I certify that the preceding thirty-two (32) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Foster.