Dometic Australia Pty Ltd v Houghton Leisure Products Pty Ltd

Solicitor for the Respondents and Cross-Claimant: Norman Waterhouse Lawyers

BETWEEN: DOMETIC AUSTRALIA PTY LTD ACN 086 366 305 First Applicant

AND: HOUGHTON LEISURE PRODUCTS PTY LTD ACN 609 139 880 First Respondent

FINCH AUSTRALIA PTY LTD ACN 144 713 646 Second Respondent

AND BETWEEN: HOUGHTON LEISURE PRODUCTS PTY LTD ACN 609 139 880 Cross-Claimant

AND: DOMETIC AUSTRALIA PTY LTD ACN 086 366 305 First Cross-Respondent DOMETIC SWEDEN AB Second Cross-Respondent

JUDGE: WHITE J DATE OF ORDER: 31 JanuARY 2019

1. The Applicants pay 30% of the Respondents' overall costs in the proceedings. Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

WHITE J: 1 On 19 October 2018 I published my reasons for dismissing both the claim of the Applicants (collectively Dometic) that the Second Respondent (Finch) had infringed a Patent of the Second Applicant and the cross-claim of the First Respondent (Houghton) that the Patent was invalid: Dometic Australia Pty Ltd v Houghton Leisure Products Pty Ltd [2018] FCA 1573 (the Principal Judgment). Formal orders giving effect to these reasons were made on 31 October 2018. 2 This judgment concerns the costs of the proceedings. It has required the Court to take account of the fact that Dometic was wholly unsuccessful in its claim of infringement, the fact that Houghton was wholly unsuccessful on its cross-claim seeking declarations for invalidity, the Respondents' reliance on an offer made under Pt 25 of the Federal Court Rules 2011 (Cth) (the FCR), the Respondents' lack of success (or, at least, complete success) on some interlocutory applications, as well as some incidental matters. 3 Dometic submits that the Court should order it to pay 75% of the Respondents' costs in relation to its application (excluding any costs associated with Houghton's invalidity defence) and Houghton to pay Dometic's costs on the cross-claim. 4 The Respondents' primary position is that Dometic should pay their costs of the whole proceedings on a party-party basis to 12 May 2017 and on an indemnity basis thereafter. Their alternative position is that Dometic should pay 85% of their costs on a party-party basis.

The submission that the cross-claim was wholly defensive 5 It is appropriate to address first the Respondents' submission that the Court should regard Houghton's cross-claim as entirely "defensive", with the effect that the costs involved in its prosecution should be regarded as costs it had incurred in the successful defence of Dometic's claim. This was so, they submitted, because the cross-claim had been advanced only in the event that Dometic's allegation of infringement succeeded. Had Dometic not alleged infringement, so the submission ran, Houghton would not have commenced or maintained the allegation of invalidity. 6 In support of this submission, the Respondents referred to [8] in the Statement of Claim on the cross-claim which alleged: If, on a proper construction of the claims of the Patent, the Belaire Unit infringes any of the claims of the Patent, each of the claims of the Patent [is], and at all material times [has] been, invalid and liable to be revoked on the grounds set out in the Particulars of Invalidity dated 27 March 2017 filed with the Statement of Cross-Claim. (Emphasis added) 7 The Respondents' solicitor, Mr Tye, has deposed: If the infringement claim had been discontinued by Dometic, Houghton was prepared to discontinue the validity claim. (Emphasis added) 8 The Respondents also referred to the manner in which Houghton had expressed some of the pleaded Particulars of Invalidity, noting that three had commenced with the words "If a "centrifugal fan" in Claim 1 includes an axial fan" or an equivalent. 9 I do not consider it appropriate to proceed on the view of the cross-claim advanced by the Respondents. In particular, I consider it appropriate to determine the claims for costs by reference to the substantive issues agitated in the proceedings, and not by reference to the motive or subjective intention of the parties with respect to the pursuit of their respective claims and defences. 10 In the first place, if the claims of invalidity were made only as a defence to Dometic's infringement claim, there was no need for the cross-claim at all. That is because the Respondents had, in their filed Defence to Dometic's Statement of Claim, asserted the invalidity of the Patent. The issues of invalidity could have been agitated in the context of that Defence. By filing the cross-claim, Houghton went further and sought positive relief in its favour. 11 Secondly, the Notice of Cross-Claim by which the cross-claim was commenced contained claims for relief which were freestanding and independent of Dometic's infringement claims. There was nothing in that Notice to indicate that the relief was claimed only in the event that Dometic's infringement claim succeeded. The fact that the plea in the filed Defence and the claim in the cross-claim involved a single issue does not alter that characterisation. 12 Thirdly, considered objectively, para [8] of the Statement of Claim on the cross-claim should not be regarded as indicating that the cross-claim was conditional upon the success of the infringement claim. It is more natural to understand it as raising an independent claim, as though it commenced "even if on a proper construction of the claims of the Patent, the Belaire Unit infringes any of the claims of the Patent …". 13 This understanding of the plea is consistent with the manner in which the Respondents conducted the trial. Neither the written or oral opening submissions of the Respondents indicated that the cross-claim was wholly defensive in nature. Nor was this made apparent in the closing submissions. Those submissions did not contain any indication that the Court need not consider the cross-claim in the event that it dismissed the Respondents' infringement claim. The manner in which the Respondents conducted the trial indicated that Houghton sought the declaration that the Patent was invalid even if the infringement claims failed. In other words, had the Court found that there was no infringement and the Patent was invalid, it would, pursuant to s 138(3) of the Patents Act 1990 (Cth), have revoked the Patent. 14 Fourthly, I do not consider that the manner in which Houghton expressed the Particulars of Invalidity assists the Respondents' present submission. As noted in the Principal Judgment at [316], the words on which the Respondents rely presently introduced something of a straw man into the proceedings, as neither party had contended that the term "centrifugal fan" in the Patent included an axial fan. 15 In my view, the position is similar to that decided upon by the Full Court (Sundberg, Jessup and Middleton JJ) in PAC Mining Pty Ltd v Esco Corporation (No 2) [2009] FCAFC 52: [11] [T]he 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. 16 Accordingly, I consider that the issues of costs should be determined on the basis that Houghton chose to pursue a defence and cross-claim on which it was wholly unsuccessful.

The Rules of Court offer by the Respondents 17 Next, the Respondents submitted that the Court should take account of a Notice of Offer to Compromise which they had served on Dometic on 12 May 2017. They submitted that this offer had been made pursuant to r 25.01 of the FCR. That rule provides that "a party (the offeror) may make an offer to compromise by serving a notice, in accordance with Form 45, on another party (the offeree)". The substantive terms of the written offer served on 12 May 2017 were as follows: The Respondents/Cross-claimant offer to compromise all claims in this proceeding, including the cross-claim. The offer is that: 1. The Claim be dismissed; 2. The Cross-Claim be dismissed; 3. For the avoidance of doubt, the undertaking provided by the Applicants in the Order made on this proceeding on 27 March 2017, continue permanently. This offer is in addition to costs. In relation to costs: 4. The Applicants are to pay the Respondents' costs of the proceeding, other than in relation to the costs specified in item 5 below; 5. The Cross Claimant shall pay costs incurred by the Cross-Respondents in relation to the Cross-claim in the period from 28 March 2017 to 12 May 2017. This offer of compromise is open to be accepted for 14 days after service of this offer of compromise. This offer is made without prejudice. 18 In substance, the offer of "compromise" was that each of the claim and cross-claim be dismissed; that Houghton pay Dometic's costs in relation to the cross-claim (it had been commenced on 28 March 2017); and that, other than the costs of the cross-claim, Dometic pay the Respondents' costs "of the proceeding". 19 The Respondents sought to invoke r 25.14 in respect of this offer. That Rule provides (relevantly): 25.14 Costs where offer not accepted (1) If an offer is made by a respondent and not accepted by an applicant, and the applicant obtains a judgment that is less favourable than the terms of the offer: (a) the applicant is not entitled to any costs after 11.00 am on the second business day after the offer was served; and (b) the respondent is entitled to an order that the applicant pay the respondent's costs after that time on an indemnity basis. (2) If an offer is made by a respondent and an applicant unreasonably fails to accept the offer and the applicant's proceeding is dismissed, the respondent is entitled to an order that the applicant pay the respondent'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. (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. 20 The Court encourages the making of realistic proposals for the settlement of proceedings before it. "Every encouragement should be provided to parties to bring forward serious and responsible proposals to settle their litigation, or some aspects of it, and for the parties in receipt of such proposals to give them their early and earnest consideration": Novozymes A/S v Danisco A/S (No 2) [2013] FCAFC 55 at [15]. Part 25 of the FCR is one means by which the Court provides that encouragement. 21 The Respondents' primary submission was that r 25.14(1) is applicable. Counsel submitted that Dometic had obtained a judgment less favourable than the terms of the offer, within the meaning of that sub-rule, because it had obtained a dismissal of the cross-claim. In support of this submission, counsel referred to Elecspess Pty Ltd v LED Technologies Pty Ltd [2013] FCAFC 116; (2013) 215 FCR 95 in which, at [22], Besanko and Jessup JJ said: [W]e cannot accept the correctness of the … observation … that, under the old rules, the situation where a respondent made an offer to an applicant, where the offer was not accepted, and where the applicant's proceeding was dismissed, was not expressly dealt with. It was to cover a situation of that kind that r 11(6) was introduced in August 2008. The most obvious situation in which a respondent obtains judgment on a particular claim is one in which the claim is dismissed. … 22 The next step in counsel's submission was that, as r 25.14(1) is applicable to the dismissal of the cross-claim, it should also be regarded as applicable to the dismissal of Dometic's claim. 23 There is a material difference between r 25.14, on the one hand, and O23 r 11(6) in the Federal Court Rules 1979 which was considered in Elecspess, on the other. That is that the former O23 r 11(6) did not make the distinction between the obtaining of a judgment less favourable than the terms of the offer and the dismissal of the proceedings which is made in subrr (1) and (2) of r 25.14. The fact that subr (2) addresses the circumstance in which an applicant's proceeding is dismissed indicates, impliedly, that that circumstance is not encompassed by subr (1). 24 In Commissioner of Taxation v Crown Insurance Services Ltd (No 2) [2012] FCAFC 182, Lander and Foster JJ explained the inter-relationship between r 25.14(1) and (2) as follows: [29] Rule 25.14(2) is couched in different terms to rule 25.14(1), which applies when a respondent has made an offer and the applicant succeeds in the proceeding, but obtains a judgment that is less favourable than the terms of the offer. Rule 25.14(1) does not require an examination as to whether the applicant unreasonably failed to accept the offer as is required in rule 25.14(2). The costs consequences, subject of course to the exercise of discretion, follow if the applicant obtains a judgment less favourable than the respondent's offer. [30] Rule 25.14(2) applies where the respondent has served an offer of compromise on the applicant and the applicant's proceeding is subsequently dismissed. It addresses the circumstance addressed by O 23 r 11(6) of the FCR as they appeared from 2 August 2008. [31] Rule 25.14(2) requires an investigation into whether the applicant has unreasonably failed to accept the offer before the respondent is entitled to indemnity costs after the offer was served. [32] If rule 25.14(2) were in similar terms as rule 25.14(1), a respondent could put himself or herself at an advantage by filing an offer for $1, and if the applicant's proceeding were dismissed, the respondent could claim to be entitled to costs on an indemnity basis for that offer, which was never a genuine offer to settle the proceeding. That result was recognised, as the Full Court had in Seven Network Limited v News Limited, as being an unfair result. Rule 25.14(2) has been drawn so that if the respondent makes an offer of compromise, it has to be an offer that the applicant has unreasonably failed to accept before the respondent can rely upon the offer for obtaining an order for indemnity costs. 25 Further, and in any event, the dismissal of the cross-claim does not mean that Dometic obtained a judgment "less favourable than the terms of the offer". For the purposes of the relevant comparison in this case, the costs must be excluded. Accordingly, even if it can be said that Dometic obtained a judgment by the dismissal of the cross-claim, that judgment is not "less favourable" than the terms of the offer. It is instead equivalent to those terms. 26 In my opinion, it is r 25.14(2) which is relevant presently. I accept the submission of the Respondents that the fact that their offer related to both the claim and the cross-claim does not preclude r 25.14(2) being applied with respect to the global offer: Kismet International Pty Ltd v Guano Fertilizer Sales Pty Ltd (No 2) [2013] FCA 705 at [41]-[45]. 27 There remains a question, however, as to whether the Respondents' offer constituted "an offer to compromise" of the kind contemplated by r 25.01. It is well established that the purpose of Pt 25 of the FCR is to promote the settlement of proceedings by the making of offers of settlement involving genuine compromise and, therefore, that if an offer does not involve genuine compromise on the part of the offeror, the Part is not enlivened: Romero v Farstad Shipping (India Pacific) Pty Ltd (No 4) [2017] FCA 120 at [73] (and see the authorities cited therein); The Anderson Group Pty Ltd v Tynan Motors Pty Ltd (No 2) [2006] NSWCA 120, (2006) 67 NSWLR 706 at [8] (and see the authorities cited therein). As Giles J noted in Hobartville Stud Pty Ltd v Union Insurance Co Ltd (1991) 25 NSWLR 358 at 368, "[c]ompromise connotes that a party gives something away". 28 In my view, the Respondents' offer cannot be characterised as a genuine offer of compromise in this sense. In effect, the offer contemplated only that each party would discontinue its claim or cross-claim (as the case may be) and pay the costs of the other with respect to that claim or cross-claim. It did not involve an offer by the Respondents to do more than r 26.12(7) of the FCR would have required if they had discontinued the cross-claim. The Respondents did not offer any concessions with respect to the amount to be paid by Dometic in the event that it discontinued the primary claim. It was not, for example, an offer by the Respondents to pay their own costs, or to accept only a portion of their costs, in respect of the claim in the event that it was discontinued or dismissed. The offer was, in effect, for a complete, although mutual, capitulation. 29 Counsel for the Respondents sought to avoid this characterisation of the offer by a submission that the offer was not just for costs on a taxed basis but the costs to date. That is, had Dometic accepted the offer, it would have received more than taxed costs in respect of the cross-claim in respect of the period to 12 May 2017. I do not accept that submission. The offer did not contain any indication that costs on some scale other than party-party costs were intended. Considered objectively, the offer was for party-party costs only. Moreover, if the offer was for payment of the costs actually incurred, the proposal that Dometic should pay the Respondents' actual costs instead of taxed costs in respect of the proceedings can hardly be regarded as an offer of compromise. In these circumstances, I do not consider that the offer can be characterised as a genuine offer of compromise so as to attract the operation of r 25.14(1). 30 Even if that conclusion is wrong, I would not regard Dometic's rejection of the offer as being unreasonable. The terms of the offer seem to have been drafted carefully so as to make the distinction between the costs which each party would pay turn on the proceeding each had instituted, rather than on the issues raised in the proceedings as a whole. Acceptance of the offer would have required Dometic to pay the Respondents' costs of the entire proceedings, other than those incurred in relation to the cross-claim in the period from 28 March to 12 May 2017, which the Respondents were to pay. This would have meant that Dometic would not have been paid its costs with respect to the challenge (ultimately unsuccessful) to the validity of the Patent raised in the Defence to its Statement of Claim and, indeed, Dometic would have had to pay the Respondents its costs in respect of that aspect of the proceedings. It is not necessary presently to discuss how an apportionment between the costs incurred by Dometic in relation to the defence of invalidity, on the one hand, and the costs incurred on the cross-claim with respect to invalidity, on the other, would have been achieved. However, if the Respondents took the same approach in May 2017 as they took in the submissions concerning the present claims for costs, they would presumably have contended that, because the cross-claim was "defensive", the costs incurred with respect to the issue of invalidity formed part, at least in large part, of their defence to the claim of infringement and, therefore, costs to be borne by Dometic. At the very least, there was uncertainty about these matters. 31 In these circumstances, I would not regard Dometic's failure to accept the Respondents' offer as unreasonable. This conclusion makes it unnecessary to address the other matters to which Dometic referred in contending that their failure to accept the offer had not been unreasonable. 32 For these reasons, I consider that it is not appropriate to take account of the r 25.14 offer in the decision concerning costs.

A single order for costs? 33 Dometic's primary position was that it was appropriate for the Court to make separate orders for costs with respect to the claim and the cross-claim. It submitted that on that basis, it should pay the Respondents' costs on the claim of infringement, and the Respondents should pay its costs with respect to the invalidity claim. 34 In support of that approach, Dometic referred to GlaxoSmithKline Consumer Healthcare Investments (Ireland) (No 2) Limited v Generic Partners Pty Limited (No 2) [2018] FCAFC 100 in which the Full Court said at [8]: A claim for patent infringement and a cross-claim for patent invalidity are typically treated as separate events upon which the ordinary rule applies as to costs: see PAC Mining Pty Ltd v Esco Corporation (No 2) [2009] FCAFC 52 and Damorgold Pty Ltd v Blindware Pty Ltd (No 2) [2018] FCA 364. Departure from this position is usually taken in complex patent cases where the relevant issues concern a "common substratum of fact" (see eg Les Laboratoires Servier v Apotex Pty Ltd [2016] FCAFC 27 at [306]) or may have been "wrapped up" with other issues (see eg Sanofi-Aventis at [23]-[25]) or could not be "readily disentangled" (see eg Tramanco at [12]). See also Damorgold Pty Ltd v Blindware Pty Ltd (No 2) [2018] FCA 364 at [56]-[61]; Dincel Construction System Pty Ltd v AFS Systems Pty Ltd (No 3) [2017] FCA 919; Uniline Australia Ltd v SBriggs Pty Ltd (No 2) [2009] FCA 920, (2009) 232 FCR 136. 35 I do not understand these authorities as establishing an immutable principle. On the contrary, each indicates that much may depend on the nature of the proceedings, including whether the matters raised in the cross-claim were "true alternatives" to the defence, the inter-relationship between the issues, and the time occupied in the pre-trial preparation and in the trial itself on the respective issues. Other considerations are also pertinent, including the desirability of costs orders being expressed in a form which will enable their ready quantification. The Court attempts to avoid, so far as possible, creating circumstances in which the quantification of costs will, by itself, become complex, protracted and costly: Hockey v Fairfax Media Publications Pty Ltd (No 2) [2015] FCA 750; (2015) 237 FCR 127 at [120]. Such an approach was applied in a patent context in Lockwood Security Products Pty Ltd v Doric Products Pty Ltd (No 2) [2007] FCAFC 172. See also Encompass Corporation Pty Ltd v Infotrack Pty Ltd [2018] FCA 942. 36 The Respondents contended for a single order for costs as their alternative position. They submitted that, on this basis, Dometic should pay 85% of their costs in the proceedings. 37 During the course of the oral submissions, counsel for Dometic accepted that a "global costs order" would be appropriate and submitted that, on that basis, an order that the Respondents pay 10% of Dometic's costs would be appropriate. 38 It is reasonable to suppose that the costs incurred by each party in respect of the claim and cross-claim would be approximately similar. Neither party submitted to the contrary. 39 In my view, a single order for costs is appropriate in the present case. I consider that to be so having regard to the matter just mentioned, because it was not suggested that the Court should consider the position of Finch and Houghton separately, because account can be taken in the determination of an appropriate order of the issues upon which the parties succeeded and failed, and because of the advantages it will provide in the ultimate quantification of costs. 40 The principal matters which bear upon the determination of an appropriate single order are these: (a) Dometic failed on its infringement claim, and the Respondents failed on their invalidity claim; (b) substantial costs were incurred by both parties in relation to Dometic's interlocutory application of 17 February 2017 seeking injunctive relief. Ultimately, Dometic did not pursue that application. Not all of the costs incurred in relation to the interlocutory application were wasted as some of the evidence was used in the trial; (c) although Dometic's claim that Houghton had authorised the alleged infringement failed, its claim that Houghton was an accessory to the conduct of Finch would have succeeded (had Finch been otherwise found to have infringed the Patent) (Principal Judgment at [194]); (d) Dometic's interlocutory application seeking leave to adduce evidence from Dr Gonzalez failed (Principal Judgment at [48]-[58]); (e) costs were incurred with respect to the interlocutory applications of Houghton concerning the means by which its witnesses on the invalidity issue would give evidence; and (f) costs were incurred with respect to Houghton's interlocutory application to amend its Particulars of Invalidity. 41 Dometic submitted that account should be taken in addition of the settlement offer it made in the letter from its solicitors on 26 May 2017. The terms of that offer were: [O]ur clients wish to resolve the proceedings against Houghton, including the question of costs, as expeditiously as possible. To this end, and so that both parties can avoid the need for further contested applications to the court (on the question of costs), our clients are prepared to settle the matter on the basis that: (a) the infringement proceedings against Houghton be discontinued on the basis that there be no order as to costs; (b) as between each other, each of Houghton, Dometic Australia Pty Ltd and Dometic Sweden AB bear its own costs in relation to the question of infringement; (c) as between each other, each of Houghton's, Dometic Australia Pty Ltd's and Dometic Sweden AB's costs in relation to the question of invalidity be each party's costs of Houghton's cross-claim; (d) Houghton undertakes not to exploit the patent in suit or assist any other party to do so; (e) Houghton will ensure that its name, address and trade marks are not used or associated with the Belaire 3200 Units; (f) the terms of the settlement remain confidential; and (g) the settlement be formalised in a brief deed of settlement, to be executed as soon as possible. 42 I do not regard this settlement offer as pertinent to the resolution of the costs issues. Dometic did not claim (and could not have claimed) that it had bettered the costs offer. The fact that Dometic had been willing to engage in settlement discussions does not advance the matter. 43 I consider that the costs should be apportioned in the following manner. On my assessment, approximately 60% of the trial was concerned with Dometic's infringement claim and approximately 40% with the Respondents' invalidity claim. Prima facie therefore, Dometic should pay 60% of the Respondents' costs and the Respondents pay 40% of Dometic's costs. As indicated earlier, it is reasonable to suppose that the costs incurred by each party in relation to each aspect of the matter were approximately similar. Accordingly, netting these amounts off results in Dometic paying approximately 20% of the Respondents' overall costs. 44 In my view, there should be some upward adjustment in the Respondents' favour to the figure of 20%. This is necessary to take account of the wasted costs on the interlocutory application for injunctive relief which, ultimately, Dometic did not pursue and the costs occasioned by Dometic's interlocutory application with respect to Dr Gonzalez. 45 In my view, justice will be done by an order that Dometic pay 30% of the Respondents' costs, on a party-party basis, of the overall proceedings.

Conclusion 46 For the reasons set out above, there will be an order that Dometic pay 30% of the Respondents' overall costs in the proceedings. I certify that the preceding forty-six (46) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice White.