Industrial Galvanizers Corporation Pty Ltd v Safe Direction Pty Ltd

1. INTRODUCTION 1 In Industrial Galvanizers Corporation Pty Ltd v Safe Direction Pty Ltd [2018] FCA 1192 (primary judgment), I delivered my reasons for finding the patent in suit invalid and dismissing the applicant's claims. These reasons assume familiarity with the primary judgment and adopt the abbreviations in it. The substantive proceedings concerned allegations advanced by Ingal of infringement of the Final Patent by Safe Direction in the making and selling of the RamShield product. Ingal also alleged that Mr Wallace authorised the infringing conduct of Safe Direction and was liable as a joint tortfeasor in respect of the alleged infringements. Ingal alleged that Safe Direction and Mr Wallace were liable to pay damages, including additional damages for patent infringement, or alternatively to give an account of profits they have made from their infringing conduct. In addition, Ingal contended that Safe Direction had engaged in conduct in breach of the Australian Consumer Law as contained in Schedule 2 of the Competition and Consumer Act 2010 (Cth) (ACL). Ultimately, Safe Direction did not deny infringement but advanced a cross-claim that challenged the validity of the claims of the Final Patent. Safe Direction also denied the ACL claims. Mr Wallace denied that, in the event that the Final Patent was held to be valid and infringed, he authorised the infringement or was liable as a joint tortfeasor. 2 I found in favour of Safe Direction on the external fair basis issue, with the consequence that the claims of the Final Patent were found to lack novelty in light of the Safe Direction Patent. I did not accept Safe Direction's internal fair basis challenge. Against the prospect that I was wrong in concluding that the Final Patent was invalid, I considered the claims made against Mr Wallace and found that he was not (or rather, would not be) liable as a joint tortfeasor with Safe Direction or as a person who authorised Safe Direction to infringe the Final Patent. I also found that Safe Direction would not be liable for additional damages. Finally, I rejected Ingal's claim that Safe Direction had contravened s 18 of the ACL. The result reflected a substantial success for Safe Direction and Mr Wallace. 3 Following the delivery of the primary judgment, I directed that the parties confer as to the appropriate orders to be made to give effect to the reasons given. The parties have agreed in large measure to those orders, although they are in dispute on the question of costs. As a consequence, I have made orders dismissing the amended originating application and revoking claims 1-14 of the Final Patent. The revocation order is stayed pending any appeal. 4 The following issues now arise for determination in relation to the question of costs. 5 First, the respondents submit that, as they are the successful parties to the litigation, Ingal should pay their costs. Ingal submits that it should pay only 50% of the costs of Safe Direction and 80% of Mr Wallace's costs on a party/party basis. In relation to Safe Direction, Ingal submits that this is because Safe Direction brought a broad cross-claim challenging the validity of the Final Patent, which included grounds based on lack of inventive step and lack of utility. Those claims were abandoned late in the proceedings on 7 July 2017, one month after Safe Direction's evidence was filed, a few weeks before Ingal's evidence was due to be filed on 1 August 2017 and just under two months before the commencement of the hearing on 28 August 2017. Ingal had conducted the proceedings on the basis that the abandoned grounds were in issue, and had incurred costs as a result. Further, Safe Direction was unsuccessful with respect to its internal fair basis claim, and Ingal submits that an apportionment is appropriate in that context. Further, Safe Direction initially denied that the RamShield product possessed the essential integers of claims 11 and 12 of the Final Patent, but ultimately at the trial admitted the presence of those features. Ingal's expert, Professor Grzebieta, addressed those integers in his evidence which would not have been necessary had the respondents admitted infringement from the outset. This final submission relating to infringement was also the basis for Ingal's submission that it should only be liable for 80% of Mr Wallace's costs. 6 Secondly, Ingal submits that each party should pay its own costs with respect to the issues relating to the innovation patent. Ingal initially advanced a case based on the infringement of two patents, the Final Patent and an innovation patent. It submits that it was necessary to allege infringement of both patents because of a potential difference in outcome relating to their validity. As it transpired, Safe Direction abandoned its cross-claim for invalidity based on lack of innovative step on 7 July 2017, and as a result of that abandonment, Ingal considered that it was no longer necessary to advance allegations based on two patents. It accordingly withdrew its claim for infringement of the innovation patent and costs of that claim were reserved. 7 Thirdly, Ingal contends that each party should bear its own costs in respect of an interlocutory application filed on 4 July 2017 relating to the question of discovery of documents from the respondents concerning the authorisation/joint tortfeasance claims made against Mr Wallace. It submits that the correspondence indicates that the respondents did not properly engage with Ingal's discovery request until the last minute, which necessitated the bringing of the interlocutory application and the incurring of costs. 8 Fourthly, the respondents seek indemnity costs based on; first a letter dated 29 January 2016, which was sent before the commencement of proceedings to Ingal's solicitors by McCabes Lawyers who, at that time, were acting for both respondents; and secondly Ingal's amendment of the Final Patent, which took place after the RamShield product and/or Safe Direction patent were publicly available. 9 Fifthly, Mr Wallace seeks indemnity costs based on a without prejudice offer contained in a letter dated 4 July 2017 and also a formal notice of offer of compromise made by Mr Wallace to Ingal on the same date.

Consideration 10 There is no doubt that in complex intellectual property cases, and patent cases in particular, the Court may exercise its discretion to award costs on an issues basis. In Les Laboratoires Servier v Apotex Pty Ltd [2016] FCAFC 27; (2016) 247 FCR 61 (Servier), the Full Court (Bennett, Besanko and Beach JJ) said as follows: [297] There are two general approaches to the award of costs that have general application and have been the subject of numerous decisions: (1) The successful party is generally entitled to its costs. That is, costs usually follow the event. (2) It is also the case that a successful party may be awarded less than its costs, or there may be an order apportioning costs, on the basis of success on the issues. [298] This has been recently reiterated by the High Court (per French CJ, Kiefel, Nettle and Gordon JJ) in Firebird Global Master Fund II Ltd v Republic of Nauru (No 2) (2015) 90 ALJR 270 at [6], where their Honours observed that if the event of success cannot be seen as contestable, having regard to how separate issues have been determined, then: 'There are no special circumstances to warrant a departure from the general rule, and good reasons not to encourage applications regarding costs on an issue-by-issue basis, involving apportionments based on degrees of difficulty of issues, time taken to argue them and the like.' [299] Section 138(3) of the Act provides a number of separate grounds on which a patent may be revoked. Proceedings for revocation of a patent commonly raise a number of those grounds. Each is recognised as important and if such a ground is established then the patent, which, if valid, grants a monopoly, is liable to be revoked as invalid. It is not only in the interests of the party seeking revocation that an invalid patent be revoked; it is also in the public interest. That is not to say, however, that a party should invoke grounds that cannot be properly and reasonably supported by consideration of the patent and, where relevant, by evidence or grounds which are not seriously arguable. [300] The practice has developed that where a party relies on grounds that are not established and where time has been expended and costs incurred as a consequence, that party, although it may ultimately be successful, might not recover all of its costs. This, in turn, may depend on whether evidence and argument can be separated. For example, evidence from the skilled worker in the art may be relevant to different grounds of revocation and to an understanding of the patent for the purposes of construction and disclosure. Further, the question of apportionment is a matter of discretion and generally does not lend itself to mathematical precision, by reference to time or to importance. In any event, as the primary Judge recognised, it has not hitherto been the case that such a successful party which obtains an order for revocation of the patent is ordered to pay the patentee's costs. [301] On the other hand, Courts have been increasingly concerned, generally, to use all proper means to encourage parties to consider carefully what matters they will put in issue in their litigation. This has led to decisions whereby the successful party does not recover all of its costs where it has been unsuccessful on a discrete issue or in what is decided to be an unmeritorious objection. While it is acknowledged that, ordinarily, costs follow the event, the wide discretion in awarding costs has led to circumstances where a successful party who has failed on certain issues may be ordered to pay the other party's costs of them (as discussed in Hughes v Western Cricket Association (Inc) [1986] ATPR 40-748 per Toohey J), although warnings have been stated that care should be taken in such a course and consideration be given to whether the issues on which the successful party failed are clearly dominant or separable (Waters v PC Henderson (Australia) Pty Ltd (1994) 254 ALR 328 at 330 to 331 per Mahoney JA) and to whether the issues involved different factual enquiries in the one proceeding or multiple causes of action, even if based on a common substratum of fact. 11 In Idenix Pharmaceuticals LLC v Gilead Sciences Pty Ltd (No 2) [2018] FCAFC 7, the Full Court (Nicholas, Beach and Burley JJ) said: [3] The power of the Court in relation to costs is well established. Section 43 of the Federal Court of Australia Act 1976 (Cth) gives the Court a wide discretion in awarding costs. The exercise of the Court's discretion is not without principles or practices; it must be exercised judicially (Les Laboratoires Servier v Apotex Pty Ltd (2016) 247 FCR 61 at [305] per Bennett, Besanko and Beach JJ). The ordinary rule is that costs follow the event, although a successful party may be awarded less than its costs, or costs may be apportioned, based upon success on the issues (Firebird Global Master Fund II Ltd v Republic of Nauru (No 2) (2015) 327 ALR 192; [2015] HCA 53 at [6] per French CJ, Kiefel, Nettle and Gordon JJ; Les Laboratoires Servier at [297] to [298] and [303]). 12 In relation to the first issue identified in paragraphs [5] above, I do not consider that the lack of success of Safe Direction on the issue of internal fair basis warrants deviation from an award of the whole of the costs. It was a minor aspect of the case in terms of the evidence led and there was a substantial overlap between the evidence and submissions going to the question of external fair basis (on which Safe Direction was successful) and the internal fair basis question. I take the same view in relation to the decision on the part of the respondents to admit infringement of claims 11 and 12 of the Final Patent. Safe Direction had earlier conceded infringement of other claims (subject to the question of validity) and it was ultimately a decision on the part of Ingal to press infringement of multiple claims. 13 However, the decision of Safe Direction to abandon two grounds of invalidity advanced in its cross-claim challenging the validity of the Final Patent, lack of inventive step and lack of utility does have a costs consequence adverse to Safe Direction. Whilst I accept that parties should not be discouraged from sensibly refining and abandoning issues as they mature prior to trial, the award or apportionment of costs should not be seen as punishment, but rather a consequence of a party changing its position to the detriment of another. As noted in Servier at [301], the Courts have been increasingly concerned, generally, to use all proper means to encourage parties to consider carefully what matters will be put in issue in their litigation. There is, of course, a degree of self-interest in a party shedding issues that may be time-consuming and which may not succeed. The earlier abandonment of an issue reduces that party's exposure to costs at a later date. However, as a matter of principle it is appropriate that where a cross-claim advances potentially significant evidentiary issues such as lack of inventive step and then subsequently abandons them, the party so abandoning should pay the costs thrown away as a result. 14 As to the second matter of costs relating to the innovation patent (outlined in paragraph [6] above), Ingal indicated on 10 August 2017, some weeks prior to the hearing, that its claim for the infringement of the innovation patent would not be pressed. On 9 June 2017, Safe Direction had filed its expert evidence in the form of an affidavit from Dr Plaxico. That affidavit did not address the question of innovative step, and on 7 July 2017, Safe Direction confirmed that it would not advance either its innovative step arguments in relation to the innovation patent, or any inventive step or utility arguments in relation to the Final Patent. Ingal submits that it was the abandonment of the innovation step aspect of the cross-claim that meant that there was no forensic benefit for it in proceeding with infringement in respect of the two patents. It contends that there should be no order as to costs in respect of its decision to abandon reliance on the innovation patent. 15 The flaw in this reasoning, however, is that it was Ingal that elected to sue on two patents rather than one, thereby building redundancy into the proceedings against the prospect of failing to defend a cross-claim for invalidity against one or other of the patents. That is a logical step, but not the step for which the respondents should bear the costs consequences. In my view, the decision to sue upon and then abandon its claim for infringement on the innovation patent leads to the conclusion that Ingal should pay the respondents' costs relating to the innovation patent. 16 In relation to the costs of the discovery interlocutory application (outlined in paragraph [7] above), I have considered the correspondence between the parties prior to and after the filing of that interlocutory application. I do not consider that it reveals, as Ingal submits, a failure on the part of the respondents properly to engage with Ingal's discovery request. In my view, the costs of the interlocutory application, which were directed towards the unsuccessful claim against Mr Wallace, should follow the event. 17 In the result, subject to the question of indemnity costs to which I refer below, I do not consider that it is appropriate or necessary to apportion costs. Rather, in my view this is a situation where Ingal should pay the entirety of the costs of its claim against each of the respondents and the costs of the cross-claim brought by Safe Direction. Some adjustment should be made to account for the fact that Safe Direction abandoned its claim for lack of inventive step and lack of utility. In the normal course, it would be obliged to bear the costs thrown away by reason of its amendment of its cross-claim. In the present case, it is tempting to suggest a small percentage reduction in the costs payable by Ingal to accommodate this allowance. However, such an approach would, on the state of the evidence, be entirely arbitrary. There is no evidence to give guidance as to the quantum of those costs. They may well be minimal. Regrettably, that will have to be left to the taxing process, in the event that the parties are unable to agree on a figure. I consider it better to make a separate order that Safe Direction pay the costs incurred by Ingal, thrown away by reason of its abandonment of those two grounds of revocation. 18 The fourth issue between the parties concerns the question of whether or not Ingal should be obliged to pay costs on an indemnity basis as a result of two factors. The first factor is the content of the letter dated 29 January 2016 sent by the solicitors for (at that time) both of the respondents to the solicitors for Ingal. In it, the respondents foreshadow the successful outcome of their arguments in relation to the external fair basis issue, the ACL issue, and the issue arising in respect of the alleged personal liability of Mr Wallace. The second factor to which the respondents point is Ingal's amendment of the Final Patent, which took place at a time after the RamShield product and/or Safe Direction Patent were publicly available. The respondents submit that the amendment was a deliberate attempt to extend Ingal's patent rights for specific anti-competitive purposes, and that the assertion of those extended rights in the proceedings was made with full knowledge of the reasons why the enforcement of such extended rights would fail. 19 In my view, these factors, alone or in combination, do not warrant an order for indemnity costs. 20 The Court's discretion to award costs permits an award of indemnity costs: sub-ss 43(2), (3)(g) Federal Court Australia Act 1976 (Cth); rule 40.02(a) of the FCR. The following propositions inform the exercise of the discretion: (a) Indemnity costs can properly be awarded in appropriate cases where there is some "special or unusual feature in the case to justify the court exercising its discretion in that way"; (b) Such orders are designed for "compensating a party fully for costs incurred, as a normal costs order could not be expected to do, when the Court takes the view that it was unreasonable for the party against whom the order is made to have subjected the innocent party to the expenditure of costs"; (c) Such circumstances may include where allegations are made "which ought never to have been made", and where "the applicant, properly advised, should have known that he had no chance of success" or "persists in what should on proper consideration be seen to be a hopeless case". See Melbourne City Investments Pty Ltd v Treasury Wine Estate Limited (No 2) [2017] FCAFC 116 at [5], internal citations omitted. 21 The categories in which the Court will depart from the usual rule and award indemnity costs are not closed: Jianshe Southern Pty Limited v Turnbull Cooktown Pty Limited (No 2) [2007] FCA 903 at [32]. In John S Hayes & Associates Pty Ltd v Kimberly-Clark Australia Pty Ltd [1994] FCA 550; (1994) 52 FCR 201 at 203, Hill J said: … care must be taken not to circumscribe the discretion by reference to closed categories. It is not a necessary condition of the power to award costs that a collateral purpose be shown. The categories warranting the exercise of discretion are not closed … In each case it will be necessary to look at the particular facts and circumstances to see whether an exercise of discretion. 22 A patentee is entitled to amend its patent, subject to compliance with the terms of the Patents Act 1990 (Cth) (Patents Act) (see Chapter 10). If the amendment is compliant, then the patentee is also entitled to sue for infringement of the amended claim. The pursuit of monopoly rights afforded by statute is, plainly enough, contemplated by the terms of the Patents Act and cannot per se be regarded as any form of malfeasance. Essentially, the question of entitlement to indemnity costs in the present case depends on whether it was unreasonable for Ingal to advance its case to final hearing, notwithstanding the content of the letter of 29 January 2016. In my view, it was not. Whilst Safe Direction was accurate in its prediction as to the outcome of the proceedings, in my view it cannot be said that Ingal, properly advised, should have known that it had no chance of success. The construction of the Final Patent advanced by Ingal was, in my view, arguable and, although it was ultimately not found to be persuasive, it was not unreasonable for Ingal to maintain the view that it should proceed to trial. 23 The fifth and final argument is advanced by Mr Wallace alone. On 4 July 2017 he served a letter and notice of offer of compromise on Ingal. The notice of offer of compromise offered to compromise the proceedings insofar as they concerned Mr Wallace on the following basis: (1) Ingal's claims against Mr Wallace be dismissed. (1) Each party to bear his or its own costs incurred up to the date of acceptance of the offer. (2) The offer is inclusive of costs. (3) The offer is open to be accepted for 14 days after service. (4) The offer is made without prejudice, save as to costs. 24 The letter also states that the offer was made in accordance with the principles of Calderbank v Calderbank [1975] 2 All ER 333 (Calderbank). It sets out in some detail the basis upon which Mr Wallace contended that the claim by Ingal would fail. It concludes by stating that Mr Wallace had incurred in excess of $130,000 in costs, including disbursements, from the commencement of the proceedings. It states that Mr Wallace was prepared to settle the proceeding on the terms included in the offer of compromise. It states that the offer represented a reasonable compromise in view of the fact that Ingal would ultimately fail in the proceedings, should it continue until judgment, and would be obliged to pay Mr Wallace's costs. It also states that if Ingal did not accept the offer of compromise, then the costs consequences provided by rule 25.14(2) of the FCR would apply. 25 Rule 25.14 provides as follows: (1) If an offer is made by a respondent and not accepted by an applicant, and the applicant obtains a judgment that is less favourable than the terms of the offer: (a) the applicant is not entitled to any costs after 11.00 am on the second business day after the offer was served; and (b) the respondent is entitled to an order that the applicant pay the respondent's costs after that time on an indemnity basis. (2) If an offer is made by a respondent and an applicant unreasonably fails to accept the offer and the applicant's proceeding is dismissed, the respondent is entitled to an order that the applicant pay the respondent's costs: (a) before 11.00 am on the second business day after the offer was served - on a party and party basis; and (b) after the time mentioned in paragraph (a) - on an indemnity basis. 26 Mr Wallace submits that rule 25.14(1) of the FCR has been satisfied by the offer of compromise because Ingal has obtained a judgment less favourable than the offer. That is because the claims against Mr Wallace will be dismissed and a costs order will be made in favour of Mr Wallace, whereas the offer of compromise offered that there be no costs consequence in return for Ingal dropping its claims against him. He submits that this creates a rebuttable presumption in favour of indemnity costs, citing Specsavers Pty Ltd v The Optical Superstore Pty Ltd [2012] FCAFC 183; (2012) 208 FCR 78 at [21]. He submits that the onus is on Ingal to show why an indemnity costs order should not be made. Alternatively, Mr Wallace relies on rule 25.14(2) of the FCR, and the principles applicable to Calderbank offers. He submits that it was unreasonable for Ingal not to accept the offer contained in the offer of compromise together with the Calderbank letter. 27 Ingal submits that rule 25.14(1) of the FCR is not enlivened unless the offer made involves a genuine compromise, citing Romero v Farstad Shipping (Indian Pacific) Pty Ltd (No 4) [2017] FCA 120 (Romero) at [73]. Ingal submits that the offer of compromise does not involve a genuine compromise because it does not engage with the dispute, being that Ingal was seeking injunctive and other relief in respect of the infringement of the Final Patent. It submits that a settlement with Mr Wallace would not resolve the difficulty that, had Ingal been successful against Safe Direction, and had resolved the proceedings against Mr Wallace, then, based on Mr Wallace's offer, he would not have been restrained from authorising or acting as a joint tortfeasor in respect of the infringement of the Final Patent, including through a company other than Safe Direction. It submits that the absence of any offer to cease the conduct complained of meant that there was no genuine compromise. 28 When considering rule 25.14(1) of the FCR, it is not necessary to establish that Ingal acted unreasonably: Romero at [73]; Skyy Spirits LLC v Lodestar Anstalt (No 2) [2015] FCA 575 at [5] (Perram J); IFTC Broking Services Limited v Commissioner of Taxation [2010] FCAFC 31; 268 ALR 1 at [9], [12] (Stone, Edmonds and Jagot JJ). There nevertheless must be a genuine compromise in order for rule 25.14(1) of the FCR to be enlivened: Romero at [73]. 29 The difficulty for Ingal, however, is that the offer made by Mr Wallace represented, on any view, a substantial compromise on the question of costs. The Calderbank letter states that costs in the amount of $130,000 had been incurred. I can also readily infer from the date of the offer and also from the fact that Mr Wallace was separately represented in the proceedings from at least 20 July 2016 that the costs to date were likely to have been substantial. The offer represented, in effect, an inexpensive means by which Ingal could withdraw from engagement with Mr Wallace and represents a substantial element of compromise in forgoing a potential entitlement to recover costs that had been incurred up to the date of the offer; Barnes v Forty-Two International Pty Ltd (No 2) [2015] FCAFC 19 (Siopis, Flick, Beach JJ) at [18]. It is, in my view, not to the point that Mr Wallace would not be bound by any injunction ordered against Safe Direction in the event that the compromise was accepted. Mr Wallace is a separate party to the proceedings and his position must be considered separately. 30 Accordingly, in my view, Ingal should pay Mr Wallace's costs on an indemnity basis from the date of the expiry of the offer of compromise. It is not necessary, therefore, for me to consider the consequence of the alternative offer made in accordance with the principles in Calderbank. However, for similar reasons to those given in relation to the 29 January 2016 letter, in my view it was not unreasonable for the Calderbank offer to be rejected, even though it came at a time that was fairly close to the hearing of the matter. To reach such a conclusion is not inconsistent with the view that I have taken in relation to the offer of compromise, given the content of rule 25.14(1) of the FCR; Romero at [73], [84] and [85]. The issues of patent construction and external fair basis were, as I have said, not so untenable as to render it unreasonable for Ingal to adhere to its position in the face of the offer. 31 Accordingly the orders that I will make are: (1) The Cross-Claimant pay the costs of the Cross-Respondent thrown away by reason of the amendment of the cross-claim to abandon the lack of inventive step and lack of utility claims, as agreed or taxed. (2) Subject to: (a) Order 1 of these orders; (b) Order 2 of the orders made by the Court in this proceeding on 7 February 2017; (c) Order 2 of the orders made by the Court in this proceeding on 24 March 2017; (d) Order 6 of the orders made by the Court in this proceeding on 10 August 2017; the Applicant pay the First Respondent's costs of the proceeding, including any reserved costs on a party/party basis, as agreed or taxed. (3) Subject to: (a) Order 4 of the orders made by the Court in this proceeding on 7 February 2017; (b) Order 4 of the orders made by the Court in this proceeding on 24 March 2017; (c) Order 6 of the orders made by the Court in this proceeding on 10 August 2017; the Applicant pay the Second Respondent's costs of the proceeding, including any reserved costs, as agreed or taxed. (4) The Second Respondent's costs to be paid by the Applicant as referred to in order (3) above be paid as follows: (a) For costs incurred before 7 July 2017, those costs are to be paid on a party/party basis; and (b) For costs incurred on and after 7 July 2017, those costs are to be paid on an indemnity basis. I certify that the preceding thirty one (31) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Burley.