Fermiscan Pty Ltd, Fermiscan Australia Pty Ltd, Fiberscan Pty Ltd v Veronica Jean James

8 The second and third elements of the overall controversy concern the operation of an agreement entered by Dr James, Fermiscan Limited ("Fermiscan"), Fermiscan Aust and Fiberscan in settlement of proceedings in the Federal Court of Australia brought against Dr James by those three companies. (I will refer to this agreement as the "Settlement Agreement".) The second element concerns whether Dr James breached what can be called, at this introductory point, a "non-disparagement" provision of the Settlement Agreement, by things she has said about the first and second inventions, and persons associated with the appellants. The third element concerns whether certain provisions of the Settlement Agreement which operate in a manner referable to certain breaches of the Settlement Agreement by Dr James are penalties and so void and unenforceable. 9 For the reasons that follow I would dismiss the appeal with costs.

The first question: does the second invention fall within the assignment clause of the Assignment Agreement? 10 The primary judge answered "no" to this question. I agree with his answer, but would express my reasons therefor somewhat differently.

Dr James' background 11 Dr James is a physicist and mathematician who has for decades undertaken study and research in diffraction analysis, quantum physics and biophysics.

The first invention 12 The first invention was a product of Dr James' professional research and work. There was no issue but that the Australian patent could be discussed as the relevant embodiment of the first invention and that no separate reference to the United States patent was required. The Australian patent, filed as an international application published under the Patent Cooperation Treaty, had an application date of 10 December 1999 and a publication date of 26 June 2000. 13 The title of the first invention was: "Using Hair to Screen for Breast Cancer". 14 The abstract read as follows: "A method for detecting the presence of a gene responsible for a pathological state; or the pathological state itself in a patient comprising exposing at least one hair from the patient to fibre X-ray diffraction and detecting changes in the ultrastructure of the hair. An instrument (1) for detecting the presence of a gene responsible for a pathological state; or the pathological state itself, using a hair sample, comprising: an X-ray source (2) producing a beam of X-ray radiation; a sample stage for positioning said hair (3) sample within said beam; a detector to detect the scattering of said X-ray beam caused by said hair sample; and a display means (9) associated with said detector for displaying the output thereof (9a, 9b, 9c and 9d); whereby patterns of output related to the presence of said gene or said pathological state are displayed for interpretation." 15 The description of the technical field was introduced by the following paragraph: "The present invention relates to a method of testing the presence of a gene responsible for a pathological state, or the pathological state itself, in biological material in which the molecules are regularly arrayed. Specifically, the present invention relates to analysing hair for detecting the presence of BRCA I gene, the presence of breast cancer per se , the presence of prostate cancer and a confirmatory diagnosis for Alzheimer's disease." 16 After the description of the technical field, there was a section entitled "Disclosure of the Invention" which contained the following paragraph: "It has now been surprisingly found that fibre x-ray diffraction studies using synchrotron radiation can reveal clear and consistent changes in the ultrastructure of hair from breast cancer patients."

17 There was no debate about the fact that x-ray diffraction was a technique or process well-known in the scientific and industrial community and part of the common general knowledge: see Minnesota Mining and Manufacturing Company v Beiersdorf (Australia) Limited [1980] HCA 9; 144 CLR 253 at 287-295 (the 3M case). 18 After providing a disclosure of the invention, there was a brief description of the drawings and a description of the best method for carrying out the invention. Ten examples were then given all of which used hair, whether scalp or pubic. After the examples were given the following was stated under the heading "Discussion": "Although the number of samples investigated so far is in total over 400, the reproductibility of the results is most encouraging. The flexibility of this technique and the fact that using synchrotron sources each sample takes seconds to measure and only minutes to interpret makes its possible use as a rapid and accurate diagnostic tool for breast cancer, prostate cancer, and Alzheimer's disease." 19 The industrial applicability of the invention was then described as follows: "It should be clear that the present invention will find wide applicability in the medical field, particularly in the area devoted to detecting the propensity of a subject to breast cancer, prostate cancer, and Alzheimer's disease." 20 There were 17 claims defining the invention. The primary judge referred to the claims principally by reference to claims 1 and 13. 21 Claims 1 to 17 were as follows: "1. A method for detecting in a patient, the presence of a neoplastic and/or neurological condition; or for detecting a gene responsible for a neoplastic and/or neurological condition when said neoplastic or neurological condition has a genetic basis, comprising exposing at least one hair from the patient to fibre X-ray diffraction and detecting changes in the ultrastructure of the hair. 2. The method according to claim 1 wherein the X-rays are derived from synchrotron radiation or other monochromatic X-ray sources with energies between 5 and 25 keV. 3. The method according to claim 2 wherein when synchrotron radiation is used, the source is a low-angle synchrotron facility. 4. The method according to claim 2 wherein the monochromatic X-rays are used, said rays have a wavelength between 0.06 and 0.20 nm. 5. The method according to any one of claims 1 to 4 wherein the hair is taken from the scalp or pubic area of a person. 6. The method according to any one of claims 1 to 5 wherein the hair is washed in distilled water, dried prior to testing, positioned perpendicular to the direction of the beam and held taut during exposure. 7. The method according to any one of claims 1 to 6 wherein the hair is exposed to X-rays for a period of between about 5 seconds to about 5 weeks. 8. The method according to claim 7 wherein the exposure time is approximately 20 or 60 seconds when using synchrotron radiation from third and second generation synchrotrons respectively. 9. The method according to any one of claims 1 to 8 wherein the gene is breast cancer gene. 10. The method according to any one of claims 1 to 8 wherein the pathological state is breast cancer. 11. The method according to any one of claims 1 to 8 wherein the pathological state is prostate cancer. 12. The method according to any one of claims 1 to 8 wherein the pathological state is Alzheimer's disease. 13. An instrument when used in a method according to any one of claims 1 to 12, said instrument comprising: an X-ray source producing a beam of X-ray radiation; a sample stage for positioning said hair sample within said beam; a detector to detect the scattering of said x-ray beam caused by said hair sample; and a display means associated with said detector for displaying the output thereof; whereby patterns of output related to the presence of said gene or said pathological state are displayed for interpretation. 14. The instrument according to claim 13 wherein the X-rays are derived from synchrotron radiation or other monochromatic X-ray sources with energies between 5 and 25 keV. 15. The instrument according to claim 14 wherein the synchrotron radiation is used, the source is a low-angle synchrotron facility. 16. The instrument according to claim 14 wherein when monochromatic X-rays are used, said rays have a wavelength between 0.06 and 0.20 nm. 17. A method for detecting the presence of a gene responsible for a pathological state; or the pathological state itself, said method substantially as hereinbefore described with reference to any one of the examples." 22 Claims 1 to 12 and 17 were for methods of bringing about a result, that is for detection of the presence of a gene or of a pathological state by subjecting hair to x-ray diffraction, synchrotron radiation or other monochromatic x-ray sources or from the radiation sources identified in the examples. 23 Claims 13 to 16 were product or article or instrument claims when used in a method otherwise claimed in claims 1 to 12.

The notion of article and method claims 24 The distinction between product and method or process claims is well-known in patent law: see by way of example only, the definition of the word "exploit" in the Dictionary in Schedule 1 of the Patents Act 1990 (Cth); T A Blanco White Patents for Inventions (4th Ed Stevens & Sons 1974) at 94 and 96; and W. Aldous et al Terrell on the Law of Patents (13th Ed Sweet & Maxwell 1982) at 14. The article or the process can be the manner of new manufacture the subject of letters patent: see the definition of "invention" in Schedule 1 of the Patents Act. 25 There could be no doubt that the claims, using as they did, well-known techniques of radiation diffraction were combination claims in the sense discussed by Aickin J in the 3M case at 266: "The patent thus claimed is a combination patent in the proper sense of that term, ie it combines a number of elements which interact with each other to produce a new result or product. Such a combination may be one constituted by integers each of which is old, or by integers some of which are new, the interaction being the essential requirement." Hair as an essential integer 26 Thus understood hair and its use was an essential integer of all the claims in the first invention.

The commercial agreements of the parties 27 It was against the background of the first invention that the parties on 11 November 2004 entered into their contractual arrangements to develop the commercial potential of the first invention. 28 By the Assignment Agreement it was recited as follows: "A. The Assignor is the owner of an invention (hereinafter referred to as "the Invention") of the Inventor which is the subject of United States Patent No 6,718,007 and Australian Standard Patent No 776585 each entitled USING HAIR TO SCREEN FOR BREAST CANCER (hereinafter referred to as "the Patents"). B. The Assignor has agreed to assign to the Assignee all rights in and with respect to the Invention and the Patents and all Letters Patent and like rights issued with respect to or arising from the Invention in all countries of the world, and the Assignee has agreed to exploit the Invention and all Improvements thereof, upon and subject to the terms and conditions of this Agreement." The word "Invention" was defined in cl 1.1 as follows: "'Invention' means the Invention referred to in the Recitals and includes any Registered Rights in respect thereof." The phrase "Registered Rights" was defined in cl 1.1 as follows: "'Registered Rights' means national patents and regional patents of any kind, (including petty patents or innovation patents, and patents of importation and design), certificates of invention and utility models, registered designs, copyright in drawings (excluding trade marks), as well as any regulatory approvals required for the exploitation of the Invention or any product embodying the Invention in any country, and applications or proposed applications for any of them, relation to the Invention and any Improvements, and: (a) any further filings or applications therefor in Australia or elsewhere based on the Invention or any Improvement; and (b) all patents of addition, continuations, continuations in part or divisions of the foregoing and any substitute applications, and 'Registered Right' means any one of them." This definition of "Registered Rights" introduced the defined word "Improvement" which was defined in cl 1.1 as follows: "'Improvement' means any invention, discovery, modification, adaptation or improvement, whether patentable or not, which can be used to reduce manufacturing or assembly costs of the products of the exercise of the Invention or improve the performance of any product or process, increase the service or shelf life of any such product, broaden the applicability of any process employed in or toward the Invention or range of uses of any product thereof or create a wholly new product or component or process which replaces or is an enhancement of the subject matter of the Invention, devised by or for the Assignor and/or the Inventor, or vested in the Assignor and/or the Inventor, and whether or not the use of which by any person other than the Assignor and/or the Inventor or the Assignee would infringe any Registered Right, and shall mean and include all and any Registered Rights in respect thereof."

29 Clause 2 was the operative assignment provision, cl 2.1 of which was as follows: "2.1 In consideration of the payments to be made as referred to in clause 4.1 the Assignor and the Inventor hereby: (a) assign to the Assignee its entire right, title and interest in and to the Invention and the Registered Rights, including the Patents; (b) assign to the Assignee all Intellectual Property rights in the Information supplied under this Agreement and belonging to the Assignor and/or the Inventor; (c) in those countries where any part of the Information is not regarded as a property right, grant to the Assignee an exclusive licence to exploit such Information during the Term; and (d) grant to the Assignee a non-exclusive licence to exploit the Background Intellectual Property in each country of the world during the Term." 30 The phrase "Intellectual Property" was defined in cl 1.1 as follows: "'Intellectual Property' means all rights in relation to patents, copyright, registered designs, registered and unregistered trade marks, trade secrets, know-how and confidential information and all other intellectual property as defined in article 2 of the Convention establishing the World Intellectual Property Organisation of July 1967, and including without limitation, mask works and circuit layouts and all rights vesting therein, whether created before or after the date of this Agreement."

31 The word "Information" was defined in cl 1.1 as follows: "'Information' means any one or more of the following and the information contained therein: (a) drawings, formulae and other descriptions; (b) process specifications; (c) material specifications, including scientific and technical information known regarding chemical compounds, the makeup and behaviour of identified suspensions, proteins or enzymes; (d) performance specifications; (e) purchasing specifications; (f) procedures for experiments and tests, and experimental and test data relating thereto; (g) apparatus setup and operation information; (h) written or otherwise recorded technical information; (i) information furnished under clause 3 below, relating to the Invention or any Improvement, the method and any manner in which the Invention or any Improvement may be used or the products of the Invention or any Improvement."

32 The phrase "Background Intellectual Property" was defined in cl 1.1 as follows: "'Background Intellectual Property' means such Intellectual Property owned by the Assignor and/or the Inventor, or which the Assignor and/or the Inventor is/are entitled to license, and which is necessary for the exploitation of the Invention and any Improvements by the Assignee in accordance with this Agreement."

33 Clause 4, entitled "Obligations of the Assignee", contained cl 4.1 providing for the payments in consideration of which the assignments were made in cl 2.1. Clause 4.1 was as follows: "4.1 In consideration of the assignments and rights granted by the Assignor and Information and the performance of the services to be furnished and rendered by the Assignor to the Assignee hereunder Assignee shall pay to the Assignor: (a) the Purchase Price on the date of this Agreement; and (b) promptly when due and payable, all amounts which shall become due and payable by Assignee pursuant to any other provisions of this Agreement." 34 Clause 3, entitled "The Assignor and the Inventor to supply Information and Improvements", contained cll 3.1 and 3.2, as follows: "3.1 The Assignor and the Inventor will forthwith and at no further charge disclose to the Assignee all Information in the possession, custody or control of the Assignor, the Inventor and/or any related body corporate or associate in relation to the commercial exploitation of the Invention and any Improvements and hereby grants to Assignee the right to use such Information and, at the cost of the Assignee, will provide copies of all Information to the Assignee. 3.2 The Assignor and the Inventor will notify the Assignee of any Improvements and will supply to the Assignee upon request therefore in writing reproducible copies of manufacturing drawings and engineering specifications relating to such Improvement."

35 The word "exploit" was defined in cl 1.1 as follows: "'exploit' as used herein means: (a) to make, hire, sell or otherwise dispose of any product embodying the Invention, to offer to make, hire, sell or otherwise dispose of such products, to use or import any such product, or keep any such product for the purpose of doing any of these things, and to the extent that the Invention is a method or process, to use the method or process or do any such act in respect of the product of such process; (b) in relation to any copyright work or subject matter other than a work, or to a design or any circuit layout, semiconductor chip or mask work, which is included in the Patents or in the Information, to reproduce or copy the same, or otherwise exercise any of the rights of the owner of such rights in respect thereof; (c) in relation to any confidential information included in the Information, to use such information for the purposes only of exercising the rights under (a) and/or (b), but not to disclose such information to any third party unless permitted by the terms of this Agreement, and to grant any person a licence to do so in accordance with this agreement."

36 The Consultancy Agreement was executed on 11 November 2004 by Dr James and Fermiscan Aust. 37 By cl 2.1 Fermiscan Aust engaged Dr James on the terms of the Consultancy Agreement. The engagement was non-exclusive: cl 2.2. 38 Dr James' duties were set out in cl 4; her specific duties being set out in cl 4.1 as follows: "During the Engagement the Consultant will provide any technical, creative, marketing, financial, managerial and related services to the Company as the Company reasonably requests and the Consultant acting reasonably agrees from time to time." Her general duties set out in cl 4.2 required her to act with professional skill with a view to promoting, advancing and improving the "Business" ("Business" was defined in the recitals to mean "the sale of diagnostic processes"), to comply with requests of Fermiscan Aust, make regular reports and provide services. 39 By cl 4.3 it was stated that it was initially expected that Dr James would provide eight hours per week in consultancy. 40 Clause 6 provided for fees as follows: "During the Engagement, the Company will pay to the Consultant: (a) a retainer at the rate of $24,000 per year payable by equal monthly instalments in arrears on the last day of each month; (b) a fee at the rate of $150 per hour for time spent by the Consultant in the performance of her duties under this Agreement payable within fourteen (14) days of receipt of the Consultant's invoice therefor."

41 Clause 7 provided for consulting fees. Clause 7.1 acknowledged and agreed as follows: "(a) this Agreement is being signed contemporaneously with the Assignment Agreement; (b) as at the date of this Agreement, the Company is uncertain as to the further costs of maintaining and registering the Intellectual Property and that the Company is not able to assess the degree of utilisation or profitability which the Company will derive from the Intellectual Property; and (c) the Consultant is aware from her discussions with Professor Bevan Reid, a director of the Company, that he Company will lodge a patent in respect of certain work carried out by him and the Company expects that the exploitation of Professor Reid's patent will substantially overlap with the possible utilisation of the Intellectual Property." Clause 7.1 also contained the following provision referable to cl 7.2; "For the purpose of clause 7.2, the Company will in good faith take all reasonable steps to exploit the Intellectual Property in accordance with proper commercial practice." The phrase "Intellectual Property" was defined in cl 1.1 as follows: "'Intellectual Property' means the invention, registered rights and related intellectual property assigned to the Company pursuant to the Assignment Agreement."

42 Clause 7.2 was entitled "Additional consulting fees" and was as follows: "Subject to the disclosure by the Company to the Consultant contained in clause 7.1 and in consideration of the future personal contribution the Company expects to receive from the Consultant from introduction of companies and members of the medical and scientific community and her understanding of the processes involved in the utilisation of the Intellectual Property the Company will pay the Consultant additional consulting fees for the period of twenty (20) years commencing on the date of this Agreement amounts equivalent to two percent (2%) of the Company's gross sales revenue and monetary value of all other benefits resulting from the Exploitation of the Intellectual Property or if Exploitation is not on arm's length commercial terms, which would have been receivable by the Company if the Exploitation had been on arm's length commercial terms, such additional consulting fees to be calculated and paid within one (1) month after the end of each calendar quarter." The word "Exploitation" was defined in cl 1.1 as follows: "'Exploitation' has the meaning given to the term 'exploit' in clause 1.1 of the Assignment Agreement."

43 Clause 11 was entitled "Discoveries" and was as follows: "11.1 Information The Consultant represents and warrants that: (a) she will immediately inform the Company of any matter relating to the Intellectual Property which may come to her notice during the Engagement which may be of interest or of any importance or use to the Company or its Related Bodies Corporate; and (b) she will immediately communicate to the Company any proposals or suggestions relating to the Intellectual Property occurring to her during the Engagement which may be of service for the furtherance of the business of the Company or its Related Bodies Corporate. 11.2 Inventions The Consultant represents and warrants that without limiting or affecting clause 11.1: (a) she will immediately communicate to the Company any and all processes, inventions, improvements, innovations, modifications and discoveries which she may make either alone or in conjunction with others in the course of the Engagement ('Inventions'), whether or not the Inventions are capable of being protected by copyright, letters patent, registered design or other protection ('Protection') and (b) she will negotiate in good faith with the Company for the Company if it so desires to take an assignment from the Consultant of all rights which may be acquired by it in relation to the Inventions and to vest title in them in the Company absolutely and for the Company to obtain Protection for the Inventions."

44 Clause 12 provided for an option to Dr James to purchase the "Intellectual Property" from Fermiscan Aust for $100 in the event of one or other of the events or circumstances in cl 12.1 (a) or (b) occurring, they being: "(a) Fermiscan Limited ACN 101 718 931, the holding company of the Company does not have paid up capital exceeding $5 million prior to 31 March 2005; or (b) the Company does not have a diagnostic service incorporating part of the Intellectual Property or based on the Intellectual Property or any part thereof available to the public at one location in one major city in one country for payment of a fee within a period of three (3) years after the date of this Agreement. …"

45 Clause 14 provided for termination: at will by Dr James (cl 14.1) by Fermiscan Aust; for breach or other serious act (cl 14.2); and termination was not to prejudice accrued rights (cl 14.3). 46 Clauses 7 and 12 survived termination: cl 25.

The proper construction of these commercial agreements and the question of whether the second invention is covered by the assignment in cl 2.1 of the Assignment Agreement

The second invention 47 Whilst the proper construction of these agreements is to be carried out to ascertain their meaning on the date signed, it is nevertheless helpful to understand the content of the second invention to appreciate the arguments. It will also be necessary to look at the second invention for the second element of the controversy - the disparagement issue. 48 The second invention is contained in an international PCT application with a filing date of 3 January 2008 and a publication date of 17 July 2008. 49 The abstract in the application reveals at once the conceptual relationship with the first invention: "The invention provides a method of detecting neoplastic or neurological disorders comprising exposing skin or nails to X-ray diffraction and detecting changes in the ultrastructure of the skin or nails, and also provides an instrument when used in the method of detection." 50 It can be seen that instead of hair as in the first invention, skin or nails is or are subjected to x-ray diffraction in order to detect bodily disorders. 51 The application described the background art and a summary of the invention as follows: "Background Art There is at present no completely reliable, non-invasive test for neurological and neoplastic disorders. Whilst specific changes in the diffraction patterns of hair have been established for breast and colon cancers and Alzheimer's disease (WO 00/34774), this test has complications resulting from cosmetic hair treatments such as dyes, back-combing and even brushing and by transportation through security X-rays either at airports or in the post. In addition, many neoplastic and neurological disorders do not cause a change in the ultrastructure of hair, and therefore this test is very limited, for example prostate cancer and melanoma, even at Grade 7, do not show any changes in the structure of hair. Therefore, there would be an advantage if it were possible to provide an alternative test for many of these conditions which may overcome at least some of the above-mentioned disadvantages or provide a useful or commercial choice. SUMMARY OF THE INVENTION The invention describes a test which provides early, low cost, totally non-invasive yet reliable tests, which could possibly be low-cost mass screening for neurological and neoplastic disorders, using samples of biological material which can be harvested at remote locations, which samples do not deteriorate with correct storage." 52 The nine claims of the second invention in the PCT application were as follows: "1. A method of detecting neoplastic or neurological disorders in a subject, the method comprising exposing biological material of the subject to fibre X-ray diffraction, and detecting changes in the ultrastructure of the biological material, wherein the biological material is a skin or nail sample, and wherein when the biological material is a skin sample, the neoplastic disorder is not BRACI [sic] - related breast cancer. 2. The method of claim 1, wherein the X-rays are derived from an X-ray source with energies between 5 and 25 keV and wavelengths between 0.06 and 0.20 nm. 3. The method of claim 2, wherein the source is a low-angle synchrotron facility. 4. The method of any one of claims 1 to 3, wherein the biological material is a skin sample and the neoplastic disorder is prostate cancer or BRCAI - unrelated breast cancer. 5. The method of any one of claims 1 to 3, wherein the biological material is a nail sample and the neoplastic disorder is breast cancer or colon cancer. 6. The method of any one of claims 1 to 3, wherein the biological material is a nail sample and the neurological disorder is Alzheimer's disease. 7. An instrument when used in the method of claim 1, the instrument comprising: an X-ray source producing a beam of X-radiation; a sample stage for positioning the biological sample within the beam; a detector for detecting scattering of the X-ray beam; and a display means associated with the detector for displaying the output of the detector; whereby patterns of output related to the presence of the disorder are displayed for interpretation. 8. The instrument of claim 7, wherein the X-rays are derived from a monochromatic X-ray source with energies between 5 and 25 keV and wavelengths between 0.06 and 0.20 nm. 9. The instrument of claim 8, wherein the source is a low-angle synchrotron facility." The first and second inventions 53 Considerable expert evidence was led before the primary judge, which his Honour dealt with at [38]-[41] of his reasons. His Honour was able to resolve the controversy without detailed consideration of that evidence. No complaint was made on appeal about that approach. No attempt was made by either party to examine in detail that expert evidence. 54 The appeal proceeded on the essential common ground that:

(a) X-ray diffraction was a well-known scientific technique.

(b) Each of the first and second inventions is a combination patent, the essential integers of which include, in relation to the first invention, hair, and in relation to the second invention, skin and nails.

(c) The diffraction patterns of the subject matter (hair, skin and nails) if relevant pathological conditions exist will be different in recognisable ways to the diffraction patterns of the relevant subject matter if the person does not have the pathological condition. There is thus a reference bank of data against which to compare the diffraction pattern of the subject matter of the person in question.

(d) Whilst the first invention particularly identifies breast cancer, prostate cancer and Alzheimer's disease (see claims 10, 11 and 12 and the description of its industrial applicability) and whilst the second invention particularly identifies prostate cancer, breast cancer, colon cancer and Alzheimer's disease, both are wider in that claim 1, in each invention, extends to neoplastic or neurological disorders. 55 Professor Alan Rae described in para 25 of his affidavit of 8 May 2009 the invention in the second invention in a way in a way which I do not understand to be controversial for present purposes: "The invention in the James Patent Application is the detection and identification of additional features of the diffraction pattern of samples of skin and nails that indicate specific clinical conditions are likely. The absence of these features indicates the very likely absence of the relevant clinical conditions. The patent application refers specifically to skin and nails only and to certain clinical conditions."

The approach of the primary judge 56 The appellants argued that the second invention was an Improvement (within the meaning of that word in cl 1.1 of the Assignment Agreement) on a number of bases before the primary judge as set out in [45] of his Honour's reasons: "… the second invention was an 'Improvement' as defined of the first because it was a 'modification, adaptation or improvement' that could be used: (1) to 'impove the performance of' the first invention; (2) to 'broaden the applicability of any process employed in or toward' the first invention; (3) to 'create a wholly new product … or process which replaces' the first invention; or (4) to 'create a wholly new product … or process which … is an enhancement of' the first invention." 57 The primary judge rejected each of these arguments. Only one is now pressed: a variant of (3) above. It is now said that the second invention is a "discovery or invention … which can be used to … create a wholly new … process which replaces … the subject matter of the Invention …" 58 This was very much a subsidiary argument of the appellants below. His Honour dealt with it briefly at [79] of his reasons as follows: "As to 'replacement': there was no evidentiary material that would enable the conclusion to be drawn that the second invention would or might replace the first. There was no evidence to show why the two could not sit together, with one or the other being used as circumstances might require. In this context, Dr James gave evidence in cross-examination that there were practical (mechanical or procedural) difficulties of undertaking analysis using the second invention compared to the first (T59.20-.25, T60.30-.33). That evidence was not challenged, and was not controverted by other evidence. In my view, Dr James sought to give accurate and truthful evidence and I have no hesitation in accepting what she said, either generally or in those particular answers. Those answers provide good reasons why a test based on the second invention would not always, or in all circumstances, replace a test based on the first invention. On the contrary, that evidence suggests that one or other of the tests might be used depending on a number of site-specific and patient-specific factors." The arguments of the parties on appeal and their disposition 59 It is convenient to deal first with three arguments of the respondent, Dr James. The first argument was that the Assignment Agreement did not assign the second invention because it (the second invention) did not exist as at 11 November 2004. 60 I reject this submission. Whilst cl 2.1 of the Assignment Agreement did not clearly address future discoveries that may fall within the definition of Improvement, cl 2.1 is to be construed in accordance with equity's willingness to treat an attempted assignment of property of which the assignor is not the present owner as a contract to convey the property when the assignor becomes the owner of it, if there is value - as there was here: J A Morrison and H J Goolden Norton on Deeds (2nd Ed Sweet & Maxwell 1928) at 559; Re Ellenborough [1903] 1 Ch 697; and Glegg v Bromley [1912] 3 KB 474 at 486 and 491. Nothing in the Assignment Agreement or the Consultancy Agreement is to the contrary of this approach. 61 Indeed, the terms of the definition of "Improvement" implicitly, the terms of the definition of "Intellectual Property" explicitly, and the terms of cll 2.1 (a) (through the definition of "Registered Rights"), 2.1 (b) and 3.2 explicitly, reflect an intention for the assignment clause to encompass the assignment of a future discovery or invention contemplated by the definition of "Improvement". 62 Whilst it is correct that cl 11.2 of the Consultancy Agreement provides (implicitly) for later processes, inventions, improvements, innovations, modifications and discoveries to be disclosed to Fermiscan Aust and for negotiation in good faith for an assignment for such, that clause should be read as subject to the particular assignment of the "Invention" and the "Registered Rights" in cl 2.1 (a) of the Assignment Agreement which both expressly and implicitly refer to future discoveries or inventions. 63 The second argument of the respondent concerned the notion of "replacing" the "subject matter of the Invention". The notion of "replaces" the "subject matter of the Invention" related, it was argued by the respondent, to the practical supplanting of the first invention in the marketplace. This was the primary judge's view that was implicit in his approach: there being no evidence that this had occurred, the second invention was not (yet) able to be characterised as an improvement. 64 I reject this submission and thereby necessarily, respectfully, disagree with the primary judge's approach. This is a commercial agreement. It is to be read in a businesslike way against a background of parties of a professional and business character with some familiarity of patent law, language and discourse. Patents, after all, were the essential subject matter of the Assignment Agreement. 65 It is unlikely that business people would intend an agreement for assignment of intellectual property rights to depend upon the evaluation of market success in so general an expression. That is not what "replaces" means. That said, the notion of replacing "the subject matter of the Invention" has its elusiveness. I agree with the appellants' submissions that the phrase "the subject matter of the Invention" means the claims of the first invention. This notion of "subject matter" of an invention is closely tied to notions of the nature of patentable inventions and their drafting and scope: Terrell on the Law of Patents (13th Ed) Ch 2 and Blanco White Patents for Invention (14th Ed) Ch 2. The expression "subject matter of the invention" is sometimes used to express the notion of the disclosure in the specification of the inventive step or the area or subject matter to which the advance in the invention is related: see generally, Lockwood Security Products Pty Ltd v Doric Products Pty Ltd (No 2) [2007] HCA 21; 235 ALR 202; 81 ALJR 1070; Ex parte Celotex Corporation [1937] HCA 31; 57 CLR 19; Kauzal v Lee [1936] HCA 39; 58 CLR 670; Gum v Stevens [1923] HCA 48; 33 CLR 267; Minerals Separation Ltd v Potter's Sulphide Ore Treatment Ltd [1909] HCA 42; 8 CLR 779; Cullen v Welsbach Light Company of Australasia Ltd [1907] HCA 3; 4 CLR 990; Olin Corporation v Super Cartridge Co Pty Ltd [1977] HCA 23; 180 CLR 236; Welch Perrin Co Pty Ltd v Worrel [1961] HCA 91; 106 CLR 588; R v Commissioner of Patents; Ex parte Martin [1953] HCA 67; 89 CLR 381; McGlashan v Rabett [1909] HCA 85; 9 CLR 223. On other occasions, the expression is used by reference to the claims: Hargans v Commissioner of Patents [1932] HCA 60; 48 CLR 609; Ballantyne v Aktiebolaget Separator [1915] HCA 20; 19 CLR 620; N Guthridge Limited v Wilfley Ore Concentrator Syndicate Limited [1906] HCA 10; 3 CLR 583. See also British United Shoe Machinery Co Ltd v A Fussell & Sons Ltd (1908) 25 RPC 631 at 651 for the flexible and variable meaning of the word "invention". 66 Here in the definition of "Improvement", the parties were clearly seeking to identify what would pass with the assignment of the first invention. The definition of "Invention" self-refers to "Invention". That is a reference to invention used in the sense of the invention for which the monopoly has been granted: that is as bounded by the claims. 67 The "Improvement" upon those claims can be seen to encompass the workshop enhancements of the Invention as well as something broader: "the wholly new product or component or process which replaces or is an enhancement of the subject matter of the Invention". 68 The understanding of the definition of "Improvement" is assisted not only by the words of the definition, but also by the sense of the word being defined: Commissioners of Customs and Excise v Savoy Hotel Ltd [1966] 1 WLR 948 at 952 E and 954-955; Delaney v Staples [1992] 1 AC 687 at 692; and Favelle Mort Limited v Murray [1976] HCA 13; 133 CLR 580 at 588-589. 69 The analysis is by reference to the "wholly new product or component or process" (terms reflective of the article/process distinction referred to earlier); one must see whether it "replaces" the subject matter of the Invention, that is its scope as claimed. 70 The third argument of the respondent concerned the phrase "wholly new" in "wholly new … process". The process was not wholly new, it was submitted, because one integer of the combination in the 2004 PCT application was the well-known x-ray diffraction process. 71 I reject this argument. I do not think that such weight should be placed on the word "wholly". The product, component or process which is to be assigned need not be patentable: see line 2 of the definition of "Improvement". Nevertheless, the product or component or process which is patentable as a new (that is novel) combination patent producing a new result as discussed by Aickin J in the 3M case, is relevantly wholly new. It is within the definition if it "replaces or enhances the subject matter of the Invention". It would make no commercial sense for the definition of "Improvement" to cover both workshop improvements and processes which do not reuse any known techniques within the overall process, but not to cover new processes which reuse some known technique as an integer in the new combination process patent. 72 The appellants submitted that the second invention "replaces" the claims in the first invention because the former provides a claimed alternative for the latter. I do not agree. Here "replace" means to take the place of or become a substitute for; but of, and for, what? The answer is: the claims in the first invention. Conceptually, and recognising that the subject matter of the clause is identifying things or processes sufficiently close to the two patents (the Australian and United States) such as to be assigned with them, the notion of replacement of the claims must refer to a new product or component or process which encompasses the claims of the first invention and thereby takes the place of or substitutes for them. Thus, a new product or process with one or more further integers in addition to the claims of the first invention would replace it. It may or may not be an infringement, it may or may not be a patentable combination patent, but it need not be patentable. 73 To argue, as the appellants do, that the second invention replaces the first by giving an alternative to the detection of pathological conditions amounts to a construction of "Improvement" of a width that encompasses new patents which can bring about the same industrial application as the first invention. The appellants sought to limit the width of their argument by requiring the use of some (but not all) of the integers of the first invention. They submitted that x-ray diffraction was used in the second invention for the same or similar purpose and so the second invention was an alternative for the first and so a replacement. 74 That was not what was intended by "Improvement". The subject matter of the Invention, was its claimed scope, part of which was the use of hair. The second invention does not enhance or replace those claims, because those claims (as a whole and as a combination patent) are not part of the second invention. The second invention does not replace the first. 75 For these reasons, the second invention was not part of the assignment. The second question: did Dr James breach the Settlement Agreement? 76 In my view Dr James did not breach the Settlement Agreement.

The background to the Settlement Agreement 77 The background to the Settlement Agreement was a suit in the Federal Court brought by Fermiscan Aust and Fiberscan against Dr James for patent infringement (of the first invention) and for damages under the Trade Practices Act 1974 (Cth), s 82 and at common law. 78 Relevantly, the statement of claim pleaded Dr James' responsibilities and acknowledgments under the Consultancy Agreement. 79 The pleader alleged that Dr James made various representations in trade and commerce that were "misleading and deceptive", as follows in para 47 of the statement of claim: "47.1 The methodology of analysing the x-ray diffraction patterns of hair samples cannot be replicated without the respondent's personal involvement. Particulars (a) A telephone communication in May - August 2006 to Sue Mitchell, a journalist for the Australian Financial Review; (b) A telephone communication in May - August 2006 to A/Professor Tay Sun Kuie. 47.2 Fermiscan does not have the capacity itself to commercialise the invention. Particulars Email from the respondent to Gary Garton 12 May 2006. 47.3 No one in the employ of Fermiscan has the necessary knowledge or credibility in the required science. Particulars Email from the respondent to Leon Carr dated 8 May 2006. 47.4 No one in the employ of Fermiscan have [sic] the skills to commercialise the invention. Particulars Email from the respondent to Richard Toltz sent on 29 or 30 May 2006. 47.5 The only pathological state to which the Patents apply is breast cancer. Particulars Statement to Gary Corino in March 2006."

80 The falsity of the representations was set out in para 48 of the statement of claim, as follows: "Each of the representations was false in that: 48.1 The methodology of analysing the x-ray diffraction patterns of hair samples can be replicated without the respondent's personal involvement; 48.2 Fermiscan does have the capacity itself to commercialise the invention; 48.3 The Patents applied not only to breast cancer but to all other pathological states."

81 In para 51 of the statement of claim, loss of an unparticularised nature was claimed to have been suffered by Fermiscan Aust. 82 The statement of claim also alleged that Dr James had failed to return documents, had breached her duty of confidentiality and had refused to work with two employees of the Fermiscan group (Dr Peter French and Mr Gary Corino) in the commercialisation of the first invention. 83 On 8 September 2006, Bennett J in the Federal Court made search and seizure orders against Dr James on the application of Fermiscan Aust and Fiberscan in support of the claim. The allegation was that Dr James retained documents to which the Fermiscan appellants were entitled. 84 A defence and a cross-claim were filed in October 2006.

The Settlement Agreement 85 The matter settled in December 2006 by a "Deed of Release and Settlement" entered into by Fermiscan, Fermiscan Aust, Fiberscan and Dr James (to which I have referred and will continue to refer as the "Settlement Agreement"). 86 By cl 2.1 Dr James acknowledged the entitlement of the applicants to certain documents and information taken from her computers in the execution of the search and seizure order. 87 Clause 2.2 required Dr James to take certain steps, as follows: "Forthwith after the execution of this Deed James will: (a) make herself available and will meet with two executives of Fermiscan Australia Dr Peter French ('French') or Leon Phillip Carr ('Carr') or both of them as Fermiscan Australia directs in any particular case and faithfully and fully discuss the information to facilitate all documentation to be revealed; and (b) thereafter assist Fermiscan and Fermiscan Australia apply the Information as Fermiscan Australia may reasonably require from time to time. Such meetings will unless Fermiscan Australia otherwise agrees take place in Sydney or other venue as agreed and Fermiscan Australia will pay James' reasonable travelling, accommodation and per diem costs (food and drinks) in connection therewith. Once the documentation has been revealed to the mutual satisfaction of Fermiscan, Fermiscan Australia and James, the advance referred to in 6.1 shall be paid forthwith by Fermiscan Australia to James at her direction. Pending the revealing of the information to the mutual satisfaction of Fermiscan, Fermiscan Australia and James, the advance shall be paid to the trust account of Gilshenan & Luton, Westpac Banking Corporation, Cnr Queen & George Streets, Brisbane, BSB: 034-000 Account No. 000516, within 3 days of the execution of this Deed which sum shall be held in trust. Should any dispute arise as to whether the obligations of any party under Clause 2.2 have been or failed to have been discharged, the parties shall submit to a determination of an independent referee." 88 Clauses 2.3 and 2.4 concerned payment by Dr James and a covenant not to sue, as follows: "2.3 Payment by James James agrees to pay Fermiscan Australia and Fermiscan jointly the sum of Seven hundred thousand dollars ($700,000) on the following terms: (a) Subject to clauses 2.4 and 6.3 below the sum of five hundred thousand dollars ('First Amount') will be received by Fermiscan Australia by deducting all Fees or Royalties payable to James and applying the same towards satisfaction of the First Amount as and when Fees or Royalties are payable to James as referred to in clause 4 of this Deed until the First Amount has been fully paid and satisfied. (b) The sum of two hundred thousand dollars ('Second Amount') which will only become payable by James to Fermiscan Australia and Fermiscan jointly in the event James commits a breach of the provisions of Clause 2.2 and/or 5 of this Deed. (c) Fermiscan Australia is hereby irrevocably directed by James without any further consent, direction or authorisation being required to apply all Fees or Royalties payable to James towards satisfaction of the First Amount as and when Fees or Royalties are payable to James as referred to in clause 4 of this Deed until the First Amount has been fully paid and satisfied. 2.4 Covenant Not to Sue Fermiscan and Fermiscan Australian covenant with James they will not take or maintain any action against James in respect of the First Amount or the Second Amount unless James breaches clauses 2.2 and/or 5 of this Deed in which case the First Amount and the Second Amount will become payable forthwith."

89 By cl 4 Fermiscan covenanted that Dr James' entitlement to fees in the nature of royalties pursuant to cl 7.2 of the Consultancy Agreement was of full force and effect. 90 Clause 6 provided for an advance of $100,000 to Dr James, as follows: "6. Advance Against Fees or Royalties 6.1 Advance Subject to James complying with Clause 2.2(a) Fermiscan Australia will pay James the sum of One hundred thousand dollars ($100,000) ('Advance') as non-refundable advance on account of Fees or Royalties and which advance is to be recouped by Fermiscan Australia deducting all Fees or Royalties payable to James and applying the same in repayment to Fermiscan Australia of the Advance until the whole of the Advance has been fully repaid. 6.2 Authority Fermiscan Australia is hereby irrevocably directed by James without any further consent, direction or authorisation being required to apply all Fees or Royalties payable to James towards satisfaction of the Advance as and when Fees or Royalties are payable to James as referred to in clause 4 of this Deed until the Advance has been fully repaid and satisfied. 6.3 Cashflow The repayment of the Advance is to be deducted from Fees and Royalties payable to James in priority to payment by James of the First Amount." 91 In cl 5, Dr James covenanted that she would not do certain things. This is the clause that she is alleged to have breached. It provided as follows: " Conduct James covenants with Fermiscan and Fermiscan Australia and each of them that as and from the date of this Deed she will not disparage or make any statements or take any action which would: (a) tend to injure or damage the reputation or standing of Fermiscan or Fermiscan Australia or their respective trades or businesses or any diagnostic tests offered or to be offered or made available by or through either of them; or (b) tend to injure or damage the reputation or standing or call into question the abilities or capabilities of any of the respective Directors, officers or employees of Fermiscan or Fermiscan Australia." 92 Clause 8 required each party to the agreement to act in good faith. 93 By cl 21, Fermiscan and Fermiscan Aust were to cause written reports to be provided to Dr James as to royalties, gross sales revenue and the monetary value of exploitation. 94 The Settlement Agreement is to be given a business-like interpretation in accordance with its purpose of settling the dispute and, in cl 5, protecting the goodwill of the Fermiscan group. Part of the background to the Settlement Agreement and cl 5 was the alleged behaviour of Dr James described in para 47 of the statement of claim ([79] above). 95 It is also important to understand that Dr James received valuable benefits from this agreement: the termination of a potentially costly law suit, and a $100,000 advance on royalties. She also undertook a number of obligations of contractual importance, cll 2.2 and 5 among them, promising in cl 8 that she would perform her obligations in good faith. 96 Before turning to the behaviour complained of a number of further comments about cl 5 are appropriate. First, the word "disparage" is used, but without any direct object following it. It can, however, be seen to refer to disparaging "the reputation or standing of Fermiscan … or through either of them" in (a) and "the reputation or standing" and "the abilities or capabilities … of Fermiscan or Fermiscan Australia" in (b). A degree of textual flexibility is thus called for by reason of the syntax of the chapeau and the insertion of the phrases "tend to injure or damage" at the beginning of (a) and (b) and of the phrase "or call into question" in (b). 97 The word "disparage" can be seen to have a connotation of treating slightingly or bringing reproach or discredit or belittling. By way of contrast any action which would tend to injure or damage the reputation or standing of the persons, businesses, trades or diagnostic tests is somewhat more neutrally expressed and thus potentially wider in scope.

The behaviour of Dr James complained of 98 The Amended Commercial List Statement made complaint about a number of publications of Dr James:

(a) the submission on 3 March 2008 of an article to the International Journal of Cancer ("the IJC") entitled "Fibre diffraction of fingernails provides a highly accurate early diagnosis of disease".

(b) the sending on 12 June 2008 of a letter to Professor Harald zur Hausen, Editor in Chief of the IJC and in particular two statements therein, as follows: "(1) I believe that using the techniques discussed here, I have been able to eliminate the problems of reproducibility found by other researchers using hair samples. (2) I would prefer the authors of a recent paper published in your journal, (Corino G L, French P W, Int J Cancer 2007; 22 (4) 847-856) be excluded from the review process because of the number of completely incorrect statements published in that paper, which I have addressed in a subtle way in this paper, and a known conflict of interest." (c) the manuscript of Dr James entitled "Biometric Diagnosis" dated 3 January 2008 forming part of the PCT application for the second invention and in particular (as set out in the particulars to para 44 of the Commercial List Statement): "… the statements under the heading 'BACKGROUND ART' to the effect that Fermiscan's diagnostic tests are of 'very limited' application and there is an 'advantage' in developing an 'alternative test' to overcome the limitations and disadvantages of the Fermiscan diagnostic tests." (The text of these statements is set out at [51] above.)

99 The primary judge set out the complaints of the appellants in [99]-[101] of his Honour's reasons: "[99] Mr Martin submitted that the materials to which I have referred breached cl 5 of the deed. His analysis resembled the analysis of a publication for the purposes of ascertaining whether or not it was defamatory. As to the journal article, he submitted that: (1) it was critical of the plaintiffs' diagnostic test using the first invention and the Australian patent, thereby suggesting a 'major problem' with its marketing; (2) it criticised the plaintiffs' diagnostic process by suggesting that it had disorders that could not easily be overcome; (3) it suggested that a diagnostic test using nails would avoid those problems; and (4) it suggested that a diagnostic test using nails would be more trouble-free and cost effective than the plaintiffs' test. [100] As to the letter to Professor zur Hausen, Mr Martin submitted that: (1) the letter suggested that there were problems with reproducibility in x-ray diffraction tests based on hair and the use of nails would produce superior results; (2) accordingly, a reader would have reservations and doubts about the Fermiscan Group and their tests, and would think the lesser of the group and those tests; (3) a reader would call into question the business of the Fermiscan Group, because it was reliant on the efficacy of the diagnostic test that it proposed to market; (4) Mr Corino and Dr French had written a scientific paper containing a number of completely inaccurate statements: Mr Martin submitted that this would cause a reader to doubt their ability; and (5) likewise, the reference to their known conflict of interest would cause a reader to think the lesser of them. [101] As to the PCT application, Mr Martin submitted that the statements in it tended to disparage the Fermiscan Group's diagnostic test, and thus: (1) might damage the reputation or standing of the companies in that group; and (2) might injure or damage that diagnostic test." The approach of the primary judge 100 The primary judge recognised that cl 5 extended beyond disparagement, saying that disparagement had a "mental element" whilst a "tendency to injure or damage" did not: see [107] and [108] of his Honour's reasons. At [108] the primary judge said: "In any event, in my view, there is a non-dichotomous distinction between the concepts of disparagement on the one hand and tendency to injure or damage on the other, reflecting respectively the presence or absence of some such mental element. One could do or say something which tended to injure or damage the reputation, business or products of another without intending to achieve that result. On the other hand, as a matter of language, one would not ordinarily be said to disparage the business, reputation or products of another unless one used language intended or calculated to achieve that result." 101 The primary judge concluded that none of the statements were disparaging, saying at [109]: "… because none of the statements [are] phrased in a slighting or depreciating way, or in a way that was calculated to bring discredit on the plaintiffs et cetera. Nor is there any evidence that Dr James intended to achieve that result; and it was not put to her that she did."

102 In reaching this conclusion, the primary judge said that the context of each publication must be examined. The context here was scientific discourse in which there was a public interest in discussion of findings and opinion: see [114]-[118] of his Honour's reasons. 103 The primary judge noted at [119]: "There is no suggestion in this case that any of the statements made by Dr James were made in bad faith, or with the intention of harming the plaintiffs, their tests, their employees et cetera. Nor was it put that they were made without a proper basis in the science. On the contrary, so far as I understand the science, it seems to be clear that her comments were soundly based on the material then known to her (and others)." (There was no challenge to these findings.)

104 In this context, the primary judge referred to the evidence of Professor Stephenson who deposed to the usual and expected process of scientific discussion which can involve questioning, comment and sometimes critical scrutiny and contradiction: see [121]-[123] of his Honour's reasons. The primary judge used this to conclude that robust debate existed in and was important to the scientific community: see [125] of his Honour's reasons. This assisted the primary judge in understanding the context of the statements of Dr James. 105 The primary judge also referred to the evidence of Professor zur Hausen that "it is standard procedure for all authors to suggest preferred reviewers or to request that one or another be excluded": see [126] of his Honour's reasons. In that context, the primary judge concluded that the letter concerning Mr Corino and Dr French was not disparaging: see [127] of his Honour's reasons. 106 The primary judge then turned to the tendency to injury or damage. At [129] he said: "… As I have said, it is possible - at least, as a matter of language - that a statement or action could tend to injure or damage the reputation or standing of something even if it did not disparage that thing. A perfectly honest and accurate statement, made in neutral terms and without any element of slighting or depreciating or discrediting, might nonetheless tend to cause injury or damage."

107 The primary judge at [130] refused to read down the width of the words "tend to injure or damage" by taking meaning from their place beside "disparage" or by reference to considerations of scientific debate. 108 By reference to the pleading and the formulation of the issues in the procedural steps before the trial primary judge, the primary judge summarised the statements of Dr James complained of at [136]: "(1) statements to the effect that the use of x-ray diffraction of human hair as a diagnostic tool had limitations because of problems of disorder and reproducibility, and because of the relative fragility and susceptibility to damage of the material to be tested; (2) statements to the effect that x-ray diffraction tests on human skin or nails (in particular, the latter) would overcome those limitations and disadvantages; and (3) statements to the effect that the latter tests had a further advantage in that they might be available for the diagnosis of a wider range of conditions that the former test." 109 The primary judge concluded at [137]-[141] that the first category could not have the relevant tendency to injure or damage for four reasons (said to be two reasons at [137]):

(a) Dr James said no more in her paper than the contents of the Corino and French paper. (See paras 19 and 20 of Professor Stephenson's affidavit.)

(b) Dr James' paper was shown to or read by very few people.

(c) To the extent that Dr James' comments on the first invention went beyond the comments in the Corino and French paper there was only a limited audience and thus no real likelihood of the requisite tendency.

(d) The propensity for injury or damage came from the underlying facts, already in the public domain from the Corino and French paper, not from Dr James' report of the facts. The limited republication of such facts was unlikely to have any effect in the real world. 110 The second and third categories of statements were dealt with on the same or similar bases.

The parties' submissions and disposition of the issue 111 The appellants complain in essence by reference to two propositions. First, that his Honour's reasons ignore the element of tendency to injury the reputation or standing of the tests. Secondly, that his Honour failed to address the letter to Prof. zur Hausen that was said to call into question the abilities or capabilities of Corino and French. 112 At its simplest, the appellant's submission were that Dr James agreed not to say anything which was critical of the first invention; for to do so tended to injure its reputation or standing. Thus, to say (even if true, and there was no suggestion otherwise) that there were limitations or aspects of lack of reliability in the first invention necessarily tended to injure or damage the reputation or standing of the diagnostic tests comprised in the first invention. For instance the complaint about the PCT application for the second invention reduced to the proposition that it conveyed the following two meanings:

(a) the diagnostic test to be offered by Fermiscan and its group companies had complications and was very limited; and

(b) the diagnostic test using nail and skin would overcome at least some of the disadvantages of the diagnostic test offered by Fermiscan and its group companies. 113 The complaint about the IJC article reduced to the following propositions:

(a) that there was a major disorder problem with the diagnostic test to be offered by Fermiscan and its group companies;

(b) that the major disorder problem with the diagnostic test to be offered by Fermiscan and its group companies could not be easily overcome;

(c) that the diagnostic test using nails eliminated the disorder problems which had plagued the diagnostic test to be offered by Fermiscan and its group companies; and

(d) that the diagnostic test using nails provides a more trouble-free and cost-effective test than the diagnostic test to be offered by Fermiscan and its group companies. 114 The complaint about the letter to Prof zur Hausen reduced to the following propositions:

(a) there were problems with 'reproducibility' in fibre diffraction tests that used hair;

(b) there was a superior test to the Fermiscan Test that would use X-ray diffraction of fingernails rather than hair; and

(c) that Messrs Corino and French had co-authored a scientific paper that contained a number of completely inaccurate statements. 115 At the outset, I do not think anything turns on the precise extent of publication of the journal, the PCT application and the letter to Prof zur Hausen. The article was a scholarly and reputable one; the PCT application is on the internet; and Prof zur Hausen is an influential person in the relevant scientific community. If the statements have the relevant tendency to injury or damage the reputation or standing of the entities, their businesses or trades, the diagnostic tests or the officers of the entities, the publication was not so minimal as to deny their quality as statements or acts of that kind. 116 The submissions of the appellant placed great weight on the meaning of "tend" or "tendency" being to incline in operation or effect, lead or conduce as to same result or condition. It was on this foundation that they criticised the primary judge's approach as one restricted to the proof of (actual) damage. The submission was that if the words were critical then, by that fact, there was a tendency to injure or damage the reputation or standing. I do not agree. Whether or not a statement or an act is conducive in operation or effect to some result or condition depends upon a number of factors, including the character of the reputation or standing, the context of the statement, the identity of the maker of the statement and the audience. In order to assess the tendency of the statement to injure or damage, it is necessary to evaluate these matters.

117 I do not propose to set out all the impugned statements. The parties helpfully identified in written submissions and notes of evidence what was said about them. I draw the following conclusions. 118 I do not see how any of the statements made by Dr James could have had a tendency to injure or damage the reputation or standing of Fermiscan or Fermiscan Aust. 119 Nor do I see how the statements could have had a tendency to injure or damage the reputation or standing of their businesses, other than through having a tendency to injure or damage the reputation or standing of the diagnostic tests comprised in the first invention. None of the statements tended otherwise to affect the goodwill or good name of Fermiscan or Fermiscan Aust. Rather, the submissions of the appellants concentrated upon the fact that criticisms were said about the tests themselves and in particular their limitations and the overcoming of those limitations by the second invention. 120 The notion of a reputation or standing of a diagnostic test is not entirely straightforward. Nevertheless, they are the words used in the contract and business meaning must be given to them. In my view, in that context, they mean the reputation or standing of the tests for efficacy as diagnostic tests. It was in that sense that the appellants put their submissions that any criticism of them as diagnostic tests necessarily tended to injure or damage their reputation or standing because such statements pointed out limitations or drawback on effectiveness. 121 As I indicated earlier I do not accept this simplistic approach. The reputation or standing of the diagnostic tests is one to be assessed as a matter of fact from what is known about the tests, the claims of the underlying patent and the practical utility and effectiveness of the tests. The evidence to which the parties pointed makes clear that there were at all times well-known and discussed issues as to the limitations of the tests relying on the first invention. These limitations were discussed by Corino and French. It is true, as the appellants pointed in their submissions, that Corino and French in their article discussed how they had overcome these difficulties, in particular by reference to new methodologies. I do not conclude that because Corino and French expressed a view that they had overcome at least some of the problems with hair diagnostic testing that that necessarily creates or forms the unqualified reputation or standing of the diagnostic test. The reputation or standing of the diagnostic test is to be assessed by all the material. Such as it is, as was pointed to by the parties, the diagnostic tests based on the first invention were generally seen to have some difficulties and limitations which may well have been able to be overcome in the light of what Corino and French said. The Australian Government Department of Health and Ageing in a report on the diagnostic test indicated that there was a difficulty with the reproducibility of the technique. The reputation of the diagnostic test is also to be judged in the context of the laudatory statements in the Australian Stock Exchange announcements. That, however, does not define the reputation. There was in evidence a number of newspaper and journal articles in March 2008 which were widely published in Australia: The Gold Coast Bulletin, Australasian Science Online, Canada Online, the West Online, the Sydney Morning Herald Online, the National Nine News Online, the Brisbane Times Online, the Adelaide Advertiser Online, the New Zealand Herald Online, the Canberra Times Online which all carried stories about the diagnostic test for breast cancer using hair needing improvement. These public statements in these journals and internet sites postdated the impugned conduct of Dr James. However, they are, to a degree, reflective of the prior reputation of the diagnostic tests within the scientific community. 122 It is in this context that Dr James made the statements which are impugned. As the primary judge said the statements are not said to have been made otherwise than in good faith; nor was it sought to be made out that they were either lacking foundation or inaccurate. The context is, as Dr Stephenson identified in his evidence, the legitimate expression of scientific views in an appropriate scientific context. The IJC is a referee journal and the PCT application was a legitimate and lawful expression of a new invention in which Dr James was expressing the state of the prior art. 123 In essence, I do not see the covenant as one which should be construed as an agreement never to say anything which called into question, in any way, the efficacy of diagnostic tests under and pursuant to the first invention. Such a broad clause would in effect prevent Dr James from engaging in any scientific discourse in her chosen field of lifelong speciality in relation to any discovery or invention which might be seen to improve upon the first invention or which might, for it to be explained, require a discussion of the operation and limitations of diagnostic tests by the first invention. 124 The reputation or standing of the diagnostic tests is one to be assessed by reference to both the strengths and weaknesses of the diagnostic tests that are recognised to be part of its reputation. I am not satisfied, on the evidence relied on by the parties, that there is any relevant tendency to injure or damage. 125 As to the allegation that the statements in the letter to Dr zur Hausen had a tendency to injure or damage the reputation of Messrs Corino and French I do not think that there is any basis for that conclusion. The letter stated the following in this respect: "I would prefer that the authors of a recent paper published in your journal [identifying Corino and French] be excluded from the review process because of the number of completely incorrect statements published in that paper, which I have addressed in a subtle way in this paper and a known conflict of interests." 126 This is no more than assertion by Dr James that her professional peers had made errors (completely incorrect statements) published in that paper. This does not tend injure their reputation or standing. It is a matter of scientific discourse. The notion that they may have a "conflict of interest" in this context is neither surprising nor in any way having a tendency to injure their reputation or standing. Dr James was not imputing any impropriety. The imputation that I take from the letter is that because of this significant disagreement in the relevant results it would not be appropriate for them to referee. 127 In all the circumstances I agree with the primary judge and am of view that there has been no breach proven of cl 5 of the Settlement Agreement.

The third question: did the Settlement Agreement contain a penalty? 128 Strictly this issue does not arise because of my view on there being no breach of cl 5. The following is therefore relevant should I be wrong in that conclusion. 129 Amongst the relief claimed by the appellants was the payment of $700,000 pursuant to cl 2.4 of the Settlement Agreement. The Commercial List response to this claim was that cl 2.4 was a penalty and accordingly void and unenforceable. 130 At the hearing before the primary judge submissions were directed to both cll 2.3 (b) and 2.4 as being penal in character. 131 The primary judge concluded that both cll 2.3 (b) and 2.4 were penal. As to the latter, his Honour said at [169]: "… I would conclude that cl 2.3(a), read in conjunction with cl 2.4, does impose a penalty in the circumstances in which cl 2.4 takes effect." 132 I agree with the primary judge's conclusions, though I would express my reasons somewhat differently.

133 The characterisation of a clause as penal or not depends upon the proper construction of the contract and the intentions of the parties ascertained thereby: Dunlop Pneumatic Tyre Company Limited v New Garage and Motor Company Limited [1915] AC 79 at 86-87 (point 2, in Lord Dunedin's celebrated statement of principle); Ringrow Pty Ltd v BP Australia Pty Ltd [2005] HCA 71; 224 CLR 656 at 663 [12], stating that Lord Dunedin's statement of principle expresses the law in Australia; Waterside Workers' Federation of Australia v Stewart [1919] HCA 63; 27 CLR 119 at 128 and 131-132; Boucaut Bay Co Ltd (In Liquidation) v Commonwealth [1927] HCA 59; 40 CLR 98 at 107; Interstar Wholesale Finance Pty Ltd v Integral Home Loans Pty Ltd [2008] NSWCA 310; 257 ALR 292 at 320 [100]. The resolution of this appeal does not require any examination of the limits of the ascertainment of the contractual intention of the parties and whether, and in what circumstances, the court will characterise a provision as penal or not despite the apparent words of the parties: cf C J Rossiter Penalties and Forfeiture (Law Book Co 1992) at 27-36. 134 The issue for resolution, through the process of construction of the contract and an examination of the inherent circumstances is whether the clause was contractually intended to operate as a deterrent against breach, the object of the clause being to prevent the commission of a breach of the contract by coercing compliance ("in terrorem" - see point 2 in Lord Dunedin's statement of principle) or whether it was intended as an agreed pre-estimated sum representing compensation to be paid upon breach and thus addressing the consequences of breach: Dunlop at 86-87, Waterside Workers' Federation at 129; and see also Luong Dinh Luu v Sovereign Developments Pty Ltd [2006] NSWCA 40; [2006] NSW Conv R 56-146 at [30] (Bryson JA, with whom Handley JA and McColl JA agreed). 135 Lord Dunedin said that the "tests" in point 4 of his statement of principle, "if applicable to the case … may prove helpful, or even conclusive": Dunlop at 87. 136 Many of the complexities that arose in Interstar are absent here. In particular, there is no doubt that the operation of each of the impugned clauses is conditioned on breach. 137 Clause 2.3 of the Settlement Agreement provided for payment. Clause 2.3 cannot be read other than in the context of cl 2.4. The payment for which cl 2.3 provided was part of the consideration of settling the Federal Court proceedings. The extrinsic evidence as to the settlement revealed that the parties understood that significant costs had been expended. The settlement discussions revealed that the appellants told Dr James (through her legal representatives) that they had costs of $500,000. A sum of $1 million was sought. The parties, after bargaining as to settlement, agreed to final terms. There is no suggestion in the evidence of the settlement negotiations that any part of the $700,000 referred to in cl 2.3 or the sums of $500,000 and $200,000 were the subject of discussion as having a commercial purpose of acting as an agreed pre-estimate of damages for breach of cl 2.2 or cl 5. Rather, such sums were, as described in cl 2.3, part of the consideration for settling the existing litigation. This appears from the face of the Settlement Agreement and appears from the evidence of the negotiations. 138 Clauses 2.3 and 2.4 read together provide that $700,000 is agreed to be paid, but that payment and that obligation was on terms that:

(a) $200,000 was only payable upon committal of a breach of cl 2.2 or cl 5 by Dr James;

(b) $500,000 "will be received" (meaning in the circumstances, is payable) out of fees and royalties, unless Dr James breaches cl 2.2 or cl 5, in which case it was payable forthwith (by Dr James from her own resources). 139 The appellants submitted that the whole $700,000 was a sum due suspended only by the covenant not to sue in cl 2.4. Alternatively, the provisions in cll 2.3(b) and 2.4 were merely an acceleration of a due debt and so fell outside the principles of penalties. Alternatively, the sums can be seen as a genuine pre-estimate of damages not shown to be extravagant in the sense discussed by Lord Dunedin in Dunlop at 86 at point 4(1) and in Interstar at 331-334 [142]-[158]. 140 As to the $500,000 in cl 2.3(a), this is the payment of consideration. It is untouched by the law of penalties. 141 The only operation of the law of penalties possible in relation to the $500,000 is that by accelerating and changing the mechanism of payment cl 2.4 acts as a penalty. That is what the primary judge concluded. 142 The appellants relied on the decision of this Court in Hunt v Kallinicos [2009] NSWCA 5 at [18]-[22] (per Handley AJA with whom Giles JA and Bell JA agreed). The acceleration principle discussed in Hunt is one which can be stated as follows: if a sum is payable by instalments and it is provided that in the event of one instalment not being punctually paid all fall in and become immediately payable the acceleration is not a penalty: O'Dea v Allstates Leasing System (WA) Pty Ltd [1983] HCA 3; 152 CLR 359 at 366 (Gibbs CJ); Acron Pacific Limited v Offshore Oil NL [1985] HCA 63; 157 CLR 514 at 518 (Mason ACJ, Wilson, Brennan and Dawson JJ); Thompson v Hudson (1869) LR 4 HL1 at 15-16 (Lord Hatherley LC); Wallingford v Mutual Society (1880) 5 App Cas 685 at 696 (Lord Selborne LC) at 702 (Lord Hatherley), 705-706 (Lord Blackburn) and 710 (Lord Watson). 143 On the proper construction of the Settlement Agreement that is not the position here. The sum of $500,000 was agreed to be paid and to be received (and thus be payable) out of a fund of fees and royalties in the future. This stream of income was to come from the successful commercialisation of the first invention. There was nothing in the surrounding circumstances to enable one to view such returns to be a commercial certainty. The obligation to pay $500,000 was, in substance, conditional on money being earned by the commercialisation of the first invention. Upon breach, not of a term being an indulgence by way of part payment, but of other terms, this limited obligation changed into one that was unconditional or absolute to pay a lump sum in full forthwith. As a matter of substance (Interstar at 320 [100]) this was a significant change to the obligation to pay by way of more onerous terms by the transformation of a substantially conditional obligation deferred in performance into an absolute one being immediately performable. The change operated only upon breach. It had no apparent contractual purpose as a pre-estimate of any damage. The contractual purpose of this more onerous operation of cl 2.3, brought about by cl 2.4 to pay a lump sum forthwith rather than to see deductions from a stream of royalties which may not eventuate was only to coerce performance of cll 2.2 and 5. Clause 2.4 insofar as it operated to make the $500,000 payable forthwith was a penalty and thus void and unenforceable. 144 As to the $200,000 provided for by cl 2.3 (b), this sum was not payable except if a breach of cl 2.2 or cl 5 occurred, in which case it was payable forthwith. As with the change to the legal responsibility of Dr James to pay the $500,000, nothing in the commercial background or context or the terms of the Settlement Agreement supports the conclusion that this payment, conditioned on breach, was intended as an agreed pre-estimate or assessment of damages for breach of either cl 2.2 or cl 5. To the contrary, to the extent that the chapeau of cl 2.3 makes the $200,000 legally "due" (subject to cl 2.3 (b) and cl 2.4) it is as part of the consideration for settlement of the Federal Court proceedings. Clause 2.3(b) it can be seen to take its place as a form of encouragement or coercion for the performance of cll 2.2 and 5. 145 The absence from the text or context of any indication that the sums in question or the terms in question were, or were part of, a genuine pre-estimate of damage that might flow from any breach of cl 2.2 or cl 5 is important: see Clydebank Engineering & Shipbuilding Company Limited v Don Jose Ramos Yzquierdo Y Castaneda [1905] AC 6 at 19; Commissioner of Public Works v Hills [1906] AC 368 at 375-376; and Campbell Discount Co Ltd v Bridge [1962] AC 600 at 622 (Lord Radcliffe). It assists in the conclusion that the contractual purpose of the clause and the objective intention of the parties was not to deal with the consequences of breach, but to coerce performance. 146 Thus construed, and the intended contractual purpose and operation of cll 2.3(b) and 2.4 becoming clear, one does not need to consider the different tests of Lord Dunedin in paras (a) and (c) of point 4 of his statement of principle. An examination of the terms and conditions of the Settlement Agreement in its context leads to the conclusion that no part of cll 2.3 and 2.4 was intended to operate or did operate as a genuine pre-estimate of damages claims to compensate for breach of cl 2.2 or cl 5. Rather cll 2.3(b) and 2.4 were intended to operate and did operate only as coercion to performance. 147 Nevertheless, the parties' put submissions as to the different operation of Lord Dunedin's tests in paras (a) and (c) of point 4 and both sides called in aid my judgment in Interstar. 148 Paragraphs (a) and (c) of point 4 in Lord Dunedin's statement of principle were dealing with two subjects. Paragraph (a) was dealing with breach of one term. That was the position in Interstar, where I discussed at 331-334 [142]-[158] the notions of extravagance and unconscionability as they had been considered by the High Court in AMEV-UDC Finance Limited v Austin [1986] HCA 63; 162 CLR 170, Ringrow and Esanda Finance Corporation Ltd v Plessnig [1989] HCA 7; 166 CLR 131 and this Court in AMEV Finance Ltd v Artes Studios Thoroughbreds Pty Ltd (1989) 15 NSWLR 564. I expressed the views (at 333 [153]) that the High Court's adoption in Ringrow of Lord Dunedin's statement of principle in Dunlop required para (a) of point 4 to be applied and that that was accurately paraphrased by Brennan J in Esanda Finance v Plessnig at 143 as follows: "To apply this test, it is necessary to identify the breach prescribed by the clause which imposes the supposed penalty and to ascertain the measure of loss which might follow from that breach." 149 Paragraph (c) of point 4 in Lord Dunedin's statement of principle was directed to circumstances where the clause said to be a penalty provides for payment on the breach of more than one provision. Paragraph (c) is to be read with Lord Dunedin's discussion at 88-89 of Lord Watson's speech in Lord Elphinstone v Monkland Iron and Coal Co Limited (1886) 11 App Cas 332, from which speech para (c) had been taken by Lord Dunedin. In Dunlop at 89 Lord Dunedin said: "I think Elphinstone's Case ... or rather the dicta in it, do go this length, that if there are various breaches to which one indiscriminate sum to be paid in breach is applied, then the strength of the chain must be taken at its weakest link. If you can clearly see that the loss on one particular breach could never amount to the stipulated sum, then you may come to the conclusion that the sum is penalty. But further than this it does not go; so, for the reasons already stated, I do not think the present case forms an instance of what I have just expressed." 150 Thus to apply the presumption in para (c), one examines cll 2.2 and 5 and assesses whether it can be said that breach of either clause could ever amount to the stipulated sum, here $200,000 and $500,000 (in respect of the latter sum recognising that its penal character is its accelerated payment as one lump sum). 151 The primary judge examined cll 2.2 and 5 and said the following at [157] and [168]: "[157] Further, it is apparent that breaches of each of the clauses in question - 2.2 and 5 - may be serious, may be trivial or may occupy some intermediate ground between those extremes. But the stipulated sum of $200,000 is payable regardless of the nature, characterisation (as serious or trivial) or consequences of any such breach. Thus, in my view, the presumption to which Lord Dunedin referred arises and should be applied. … [168] There was no attempt made in the evidence to relate the financial impact of the operation of cl 2.4 (insofar as it concerned the First Amount) to any quantification of the likely damages flowing from breaches of cll 2.2 or 5. Again, the operation of cl 2.4 takes no account of the fact that breaches of those clauses may be serious, trivial or somewhere in between."

152 The finding that breaches of cll 2.2 and 5 could be trivial was attacked. It was stated that breaches of these clauses would always be serious. I do not agree. Nevertheless, this attack had an error implicit within it that was common to the primary judge's approach. It is not critical that a clause may be broken in a trivial or serious way for the application of para (c) of point 4. The question is, taking the least serious clause (as the "weakest link" of the chain - Lord Dunedin in Dunlop at 89), does the impugned penal sum exceed the greatest loss that could flow from the breach of that clause. This is to be judged at the date of the entry into the contract: Integral at 320 [100]. I am not persuaded that breach of either cl 2.2 or cl 5 might not (cf Esanda Finance v Plessnig) have very serious financial consequences for Fermiscan or Fermiscan Aust. In this context, para (d) of point 4 of Lord Dunedin's principles in Dunlop, at 87-88 should be noted (though para (d) was not quoted by the High Court in Ringrow): "On the other hand: (d) It is no obstacle to the sum stipulated being a genuine pre-estimate of damage, that the consequences of the breach are such as to make precise pre-estimation almost an impossibility. On the contrary, that is just the situation when it is probable that pre-estimated damage was the true bargain between the parties."

153 These contusions do not, however, save the clauses in question here (cll 2.3(b) and 2.4). Lord Dunedin's paragraphs under point 4 are presumptions or tests to use in the process of contractual construction and the ascertainment of the true operative character of the clauses. For the reasons I have already given, these clauses had no intended contractual role to compensate for breach of cll 2.2 and 5, their contractual function reflecting the objectively ascertained intention of the parties was to coerce compliance with cll 2.2 and 5. 154 Clauses 2.3(b) was a penalty, as was cl 2.4 insofar as it sought to change and accelerate the payment obligations in cl 2.3(a). 155 For these reasons I would dismiss the appeal with costs. 156 IPP JA: Allsop P has identified three questions which arise in this appeal. 157 The first question is whether the second invention falls within the assignment clause of the Assignment Agreement. I agree with His Honour, for the reasons he expresses, that this question is to be answered in the negative. 158 The third question is whether cl 2.3 and cl 2.4 of the Settlement Agreement were penal and, hence, unenforceable. 159 Cl 2.3 is set out in [87] of Allsop P's reasons. Although on the face of the chapeau to cl 2.3, Dr James' undertaking to pay $700,000 appears to be absolute, on analysis it is - in substance - conditional. 160 By cl 2.3(a) the "First Amount" (that is, $500,000 out of the $700,000) is payable only out of "Fees or Royalties" payable to Dr James. By cl 4 of the Settlement Agreement (set out in [33] of Allsop P's reasons), the "Fees or Royalties" in question are "fees in the nature of royalties pursuant to cl 7.2 of the Consultancy Agreement." Cl 7.2 is set out in [42] of Allsop P's reasons. Clause 7.2 provides that the "Fees or Royalties" are the equivalent of 2% of Fermiscan Australia's gross sales revenue and the monetary value of all other benefits received from the exploitation of the first invention. 161 At the time the Settlement Agreement was entered into there was no certainty as to whether Fermiscan Australia would receive any revenue or any other benefits from exploiting the first invention. Indeed, at the trial, it was not suggested that the first invention had by then produced any revenue or other benefits. 162 It follows that the payment of the $500,000, being the First Amount or any part thereof, was conditional on Fermiscan Australia receiving revenue or other benefits from the exploitation of the first invention out of which the $500,000 or any part thereof could be paid. 163 By cl 2.4, on breach of the Settlement Agreement the $500,000 becomes payable "forthwith". That is, the $500,000 becomes payable even though Fermiscan Australia may not have received any revenue or other benefits from the exploitation of the first invention. 164 Hence, cl 2.4 does not provide for the acceleration of the date of payment of an existing absolute obligation to pay. In effect, clause 2.4 converts a conditional obligation to pay the $500,000 (or any part of that sum depending upon any receipt of revenue or other benefits from the exploitation of the first invention), into an absolute obligation to pay the $500,000, in full, forthwith. 165 Accordingly, I agree with Allsop P (as he observes in [142] of his reasons) that insofar cl 2.4 operates to make the$500,000 payable forthwith, it is a penalty and thus void and unenforceable. I also agree with his Honour's reasons for coming to this conclusion. 166 I also agree, for the reasons set out by Allsop P, that the obligation created by the Settlement Agreement, requiring Dr James to pay $200,000 on breach is a penalty and, accordingly, void and unenforceable.

167 Having come to these conclusions concerning the third question, it is not necessary for me to deal with the second question and I express no view in that connection. 168 I agree with the orders Allsop P proposes. 169 HANDLEY AJA: In this appeal I have had the great advantage of reading the reasons for judgment of the President and Ipp JA in draft. I agree that the appeal fails and should be dismissed with costs but wish to express shortly my reasons for concurring in those orders.

Improvement 170 I agree substantially with the reasons of the President for concluding that the second invention, with its application date of 3 January 2008, was not an "improvement" as defined in cl 1.1 of the Assignment Agreement of 11 November 2004. In my opinion the concept in that definition of an invention which "replaces or is an enhancement of the original subject matter of the [first] invention" refers to the subject matters defined in the claims of that invention. The subject matter is the product or process defined by a claim. 171 In my opinion a new product or process falling within that language would be one, as so defined, which omitted one of the essential integers of a claim in the patent for the first invention, to give the same or a better result, or one which added a new essential integer to give a better result and thus "enhance" it. 172 A simpler product or process which omitted an essential integer would replace the product or process as originally claimed because it would be simpler, cheaper, or quicker. One would not exercise the invention in the old way if an essential integer could be omitted for the same or a better result. Likewise if the addition of a new essential integer conferred an advantage. The product or process as originally claimed would be replaced by the improvement. It is clear that the second invention was not an improvement within the definition in cl 1.1 so construed. A combination may be "wholly new" in patent law although it consists of integers which are old and well known, provided the combination itself is new. 173 This construction is reinforced by the provisions dealing with "Improvements" in the Consultancy Agreement which was also executed on 11 November 2004. Clause 11.2(a) obliged Dr James to immediately communicate to the Company "all … inventions, improvements … and discoveries which she may make … in the course of the Engagement". Clause 11(2)(b) obliged her to negotiate in good faith with the Company if it desired to take an assignment of the rights in relation to such inventions etc. 174 These documents executed on the same day must be read together: Toohey v Gunther (1928) 41 CLR 181, 196. It is therefore clear that some inventions made by Dr James in her special field after November 2004 would not be improvements covered by the Assignment Agreement which the companies did not have to pay for, but would be improvements within the Consultancy Agreement which the companies would have to pay for. Inventions which did not replace the subject matter of the first invention or were not an enhancement of it in the sense referred to above were not within the Assignment Agreement, but were within the Consultancy Agreement. The second invention is in the latter category. The appeal on this issue therefore fails.

The Settlement Agreement of December 2006 175 Clause 5 of this Agreement, which is set out in para [90] of the President's reasons has two limbs. As I read the clause Dr James covenanted that she will not "disparage … (a) the reputation or standing of Fermiscan or Fermiscan Australia or their respective trades or businesses or [of] any diagnostic tests offered … by … them" or (b) "the abilities or capacities of any of [their] … Directors … or employees". She also covenanted that she will not "make any statements or take any action which would … tend to injure or damage" the same persons or things. 176 The drafting is somewhat clumsy and a little compressed, but the intention is clear. The verb "disparage" must have a subject matter, and this can only be the reputations etc. referred to in paras (a) and (b) although in terms these appear to relate only to statements etc which tend to injure or damage. 177 With respect I differ from the view of the trial judge when he said at [107] that disparagement had a mental element. He was however correct when he said that language could disparage if it was "calculated to achieve that result". By "calculated" in this context I understand him to refer to language which had the natural or probable effect of achieving that result. I agree with Allsop P that the extent of publication is not relevant on the question of breach, and in any event, as with a defamatory statement, the Court cannot expect to know the full extent of the direct and indirect republication that has occurred or will occur. 178 The paper by Mr Corino and Dr French is important because it acknowledged problems in the use of the first invention. Statements by Dr James which conveyed the same information could not injure or damage the reputation of the diagnostic tests of the first invention once that had been affected by the disclosure in the Corino French paper. 179 However I am unable to agree that Dr James's statement in her letter to Professor Harold Zur Hansen of 12 June 2008 that the Corino French paper contained a "number of completely incorrect statements" was other than disparaging. She may have addressed those statements in her paper "in a subtle way" but there was nothing subtle about this statement in her letter. This was expressed, not as her opinion, but as a scientific fact on which there was no room for another opinion. On the other hand she was entitled to object to them reviewing her work, and to draw attention to their conflict of interest. The identification of such a conflict does not disparage the person or persons involved or tend to injure or damage their reputation. Persons of the highest integrity may find themselves in a situation of conflict. 180 In my opinion therefore the statement about the Corino French Article in the letter to the Professor was a breach of cl 5 of the Settlement Agreement. I agree with the President, and for the reasons he has given, that the other matters complained of were not breaches of cl 5.

Penalty 181 The relevant terms of the Settlement Agreement are quoted or summarised in the President's reasons. Clause 2.3(a) provided for Dr James to pay $700,000 to the Company, but only by being offset against possible future fees payable to her for consultancy services or royalties for the exploitation of the first invention. However, under cl 2.4, on a breach inter alia of cl 5, the un-recouped balance of the $500,000 would become payable by Dr James, along with the further sum of $200,000 provided for by cl 2.3(b). 182 The companies may have had some underlying entitlement to the $700,000 for their costs of the Federal Court proceedings and their damages, or under a compromise of those claims, but the Settlement Agreement did not create an unconditional obligation to pay that amount in any event sooner or later. The sum of $200,000 would only ever become payable on a relevant breach of contract. If the first invention was not a commercial success the $500,000, or the balance after offsetting any fees otherwise due to Dr James, would only ever become payable on a relevant breach of contract. 183 I agree with Allsop P and Ipp JA that these payments cannot be regarded as a genuine pre-estimate of the damage the companies would suffer as a result of a breach of cl 5. If, as I would hold, the letter to Professor Zur Hansen was a breach of cl 5 and he told no one else about its contents and did not use it against the companies in any way (and there was no evidence that he did either of these things) the companies would have suffered no actual damage as a result of that breach. In these circumstances cl 2.4 cannot be as a genuine pre-estimate of the damage suffered by the companies from that breach. 184 The appellants also relied on the cases which establish that provision for the acceleration on breach of a contract to pay a debt by instalments is not a penalty. The cases were reviewed in Hunt v Kallinicos [2009] NSWCA 5 at [18] - [22]. 185 This principle has no application here for several reasons. Clause 2.3 did not embody an unconditional agreement to pay a debt by instalments. The debt of $500,000 might never become payable. In reality there was no present debt at all, payable in the future, but only the possibility that such a debt might come into existence. This, as a matter of substance, was the effect of cl 2.3, and in equity the form of the clause could not disguise its substance. The position under cl 2.3 is analogous to the penal bonds of yesteryear which gave rise to the jurisdiction of equity to relieve against penalties. 186 Clause 2.3 was not analogous to the agreements for the payment of debts by instalments in the cases reviewed in Hunt v Kallinicos (above). The provision for acceleration in cl 2.4 was not triggered by the failure to pay part of the "debt", on time, but by a breach of contract which had nothing to do with the debt or its payment. In my judgment therefore cl 2.4 was a penalty and the appellants are not entitled to recover any part of the $700,000. The appeal fails on all issues and should be dismissed with costs.

DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated.