Key Logic Pty Ltd v Blue Groper Investments Pty Ltd

Introduction 1 These reasons follow the decision in Key Logic Pty Ltd v Blue Groper Investments Pty Ltd [2019] FCA 63 which was handed down on 7 February 2019. Due to the nature of the issues determined in that judgment, the precise form of the orders was subject to the receipt of further written and oral submissions. Those submissions have now been provided. 2 The parties have also made written submissions and been heard orally in relation to the question of costs. 3 The terms and expressions adopted in the initial reasons for judgment are likewise used in these reasons.

Form of orders 4 By the time of the further oral hearing on 27 February 2019, the parties had substantially agreed to the form of the orders which flowed from the reasons originally delivered. Only two issues remain to be determined. 5 Firstly, the applicants sought an order that the third and fourth respondents provide to them, in writing, details setting out how they came to be in possession of copies of the photographs including providing a copy of any correspondence by which the photographs were provided to them. Nothing in the reasons for judgment supported the making of such an order and there is no apparent warrant for making it. Relevantly, the ownership of the photographs was in issue in the main proceedings and orders for discovery were made. Any documents relevant to that issue would have been discovered or, if they were not, an application in respect of them should have been pursued. Further, Mr Fry, the fourth respondent who had possession of the photographs, gave evidence and he was not cross-examined as to their origin. Such a line of cross-examination would have been relevant because the applicants had alleged that the breaches of copyright were flagrant. There is no basis now on which the applicants are entitled to pursue this issue. 6 Additionally, during the oral argument the applicants advanced no authority which would support this form of mandatory injunction. Nor were any cogent reasons advanced as to why the order should now be made. True it is that mandatory injunctions might be made subsequent upon the establishment of contravening conduct. However, the proposed order seeks to go further than remedying the existing breaches. It seeks assistance with the continuing dispute between the applicants and the respondents or some of them. 7 It follows that no order should be made providing the relief sought by the applicants in this respect. 8 Secondly, in order 7(a)(i) the respondents seek the insertion of the date on which the document, referred to in the judgment as the "Evaluation Document", was distributed, said to be April 2016. As the original reasons for judgment show, there was a lack of precision as to the dates on which the contravening conduct occurred. That, of course, is not surprising from the applicants' perspective. They were not in a position to know the date or dates on which that conduct occurred. That was a matter wholly within the knowledge of the respondents. There seems to be no reason why, given the findings made as to the misleading or deceptive nature of the document in question and its distribution, some limit ought be placed on the occasion when the document was distributed. As Mr Travis for the applicants submitted during the course of the oral hearing, the findings made at trial included (at [27]) that the Evaluation Document was also distributed in May 2016. 9 It follows that the orders set out at the commencement of these reasons are those which appropriately flow from the original reasons for judgment in this matter.

Costs 10 The parties made extensive submissions in relation to the costs of the proceedings. A variety of different orders was suggested by the applicants and the respondents. To some degree, ascertaining the appropriateness of the orders sought would require a consideration of the minutiae of the findings in the proceedings and what might be said to be a complex calculation identifying the relative success of the parties. 11 This case is an acute exemplar of an emerging problem in relation to questions of costs. Given the manner in which litigation is now conducted, it appears that questions of costs have become a secondary battle in all actions. The reasons for protracted cost disputes are multifactorial. However, it cannot be denied that modifications to litigation by case management principles have had some influence on this. These days, in all litigation there are statutory obligations of litigants and their legal advisors to conduct litigation in an appropriate manner whereby the real issues in dispute will be tried. Parties are to be admonished for their failure to focus upon only those issues which can properly be said to be contentious. This seems to have given rise to a view that, simply because a party is unsuccessful on an issue in the litigation, some alteration to the usual cost rule should apply. That is not correct. In Stefanovski v Digital Central Australia (Assets) Pty Ltd (No 2) [2018] FCAFC 113 at [2] (Stefanovski) the Full Court of this Court said: The principles upon which the discretion to award costs are to be exercised in this Court are not in doubt. They were recently referred to by the Full Court in GlaxoSmithKline Consumer Healthcare Investments (Ireland) (No 2) Limited v Generic Partners Pty Limited (No 2) [2018] FCAFC 100 where their Honours, Middleton, Nicholas and Burley JJ said at [5] - [7]: [5] The discretion of the Court in relation to costs is well established. As the Full Court recently observed in Idenix Pharmaceuticals LLC v Gilead Sciences Pty Ltd (No 2) [2018] FCAFC 7 (Idenix) at [3]: …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]). [6] Every case must be decided on its own facts. There is no doubt that this Court could address the costs of the appeals and the cross appeals compendiously. In Apotex Pty Ltd v Sanofi-Aventis Australia Pty Ltd (No 3) (Sanofi-Aventis) the Full Court addressed the costs of the appeal and cross-appeal together at [26], despite Apotex failing in its challenge to validity on various grounds (see at [8]). In Tramanco Pty Ltd v BPW Transpec Pty Ltd (No 2) (Tramanco) the Full Court similarly dealt with costs compendiously (at [13]), and noted the difficulties with disentangling the costs of different issues (at [12]). [7] Further, a percentage reduction approach may also be appropriate in some cases. Such an approach was adopted in Idenix and in Sandvik Intellectual Property AB v Quarry Mining & Construction Equipment Pty Ltd (No 2) [2017] FCAFC 158. 12 The respondents referred to the principles identified as a "starting point" in Hockey v Fairfax Media Publications Pty Ltd (No 2) (2015) 237 FCR 127 at 134-5, taken from Hughes v Western Australia Cricket Association (Inc) [1986] ATPR 40-748 (Hughes) at 48,138: 1. Ordinarily, costs follow the event and a successful litigant receives his costs in the absence of special circumstances justifying some other order. 2. Where a litigant has succeeded only upon a portion of his claim, the circumstances may make it reasonable that he bear the expense of litigating that portion upon which he has failed. 3. A successful party who has failed on certain issues may not only be deprived of the costs of those issues but may be ordered as well to pay the other party's costs of them. In this sense, "issue" does not mean a precise issue in the technical pleading sense but any disputed question of fact or of law. (citations omitted) 13 It is inherent in the reasons of his Honour that the concept of "special circumstances" does not mean "extraordinary". Further, the reference to "event" must be kept squarely in mind. That concept was identified by Muir J in Alborn v Stephens [2010] QCA 58 at [8]: The "event" is not to be determined merely by reference to the judgment or order obtained by the plaintiff or appellant, but is to be determined by reference to "the events or issues, if more than one, arising in the proceedings". However, a party which has not been entirely successful is not inevitably or even, perhaps, normally deprived of some of its costs. 14 It is apparent that a judge exercising their discretion to award costs is not to slavishly adhere to the rule that costs follow the event in all cases, but that does not mean that some minute dissection ought take place of the issues on which the parties respectively succeeded. Such an analysis is not called for and nor is it appropriate: see in the appellate context Firebird Global Master Fund II Ltd v Republic of Nauru (No 2) (2015) 90 ALJR 270, 271 [6]. A rather more broad brush approach must be adopted. 15 In the awarding of costs, the Court ought keep in mind that litigation is fluid and dynamic. The nature and scope of all cases vacillate during the course of the proceedings. Issues which appear to have a substantial degree of veracity at the commencement of litigation often diminish in importance whilst those which, at the commencement of the action, seem relatively minor, subsequently assume greater relevance. Indeed, new issues often emerge during the interlocutory stages and assume a centrality of importance. This fluidity is necessarily a function of the interlocutory processes where discovery and the exchange of witness statements clarify or redefine issues. It is a usual aspect of advanced litigation and parties should not suffer detriment merely because arguable issues are advanced in litigation but not successfully. 16 It must also be kept in mind that many issues in a case might only be fully resolved by the presentation of evidence and the effect of cross-examination. Parties are not required to abandon claims or defences which have some merit to them merely because they are not the strongest points in their case. However, where there is no reasonable justification for advancing a claim or raising a point of defence, different considerations necessarily apply.

The offers to settle 17 The applicants sought orders that the respondents pay their costs of the proceedings on an indemnity basis. The foundation of this submission was they had made offers to the respondents pursuant to Part 25 of the Federal Court Rules 2011 (Cth) (the Rules) and had obtained judgment on more favourable terms. Reliance was placed on r 25.14(3) which provides: (3) If an offer is made by an applicant and not accepted by a respondent, and the applicant obtains a judgment that is more favourable than the terms of the offer, the applicant is entitled to an order that the respondent pay the applicant's costs: (a) before 11.00 am on the second business day after the offer was served - on a party and party basis; and (b) after the time mentioned in paragraph (a) - on an indemnity basis. 18 Three offers were made in the proceedings and the only question is whether the applicants have obtained a judgment against the respective respondents that is more favourable than the terms of the offer. 19 The difficulty here is the making of evaluative adjudication as to the respective benefits of the offers made and the judgment given. In cases where a monetary amount is the only or the principal relief sought and obtained, the evaluation between the benefits sought under an offer and the benefits gained by judgment is relatively easy. However, greater complications arise in cases where injunctive and declaratory relief is sought. 20 In their Originating Application the applicants sought prohibitory injunctions as well as mandatory injunctions requiring corrective advertising and the like. They have obtained a variety of orders, however, they have not succeeded in obtaining all of those which they sought. More importantly, they have not obtained orders which reflect the terms on which they offered to settle. 21 Two offers were made to the first and second respondents, and one to the third and fourth respondents. They will be considered in that order.

Offer of 6 October 2016 22 On 6 October 2016, the applicants made an offer to the first and second respondents. At the time they were the only respondents in the action. The offer was inclusive of costs and it can be accepted that the term requiring the respondents to pay $18,000 was on account of the legal costs which had been incurred. The offer also provided that the respondents send corrective notices to persons who received the Evaluation Document, albeit that notice would be without admission of liability. 23 Were those two matters the only terms of the offer it could be said that the judgment obtained by the applicants against the first two respondents was more favourable. However, the offer also provided the following: 3 Within 14 days of acceptance of this offer, the Respondents must provide to the Applicants all originals or copies of documents in their possession or control and whether electronic or otherwise (including the Infringing Photographs and any emails), as received by the Respondents from Mr Ian Fry concerning the Applicants or the Applicants' products, together with a written statement confirming that this has been done and providing full particulars in writing of how the Respondents received each of those documents from Mr Fry; and 4 The Respondents must, at their own cost, otherwise provide the Applicants with all assistance that is reasonably within their ability to provide in the pursuit of claims by the Applicants against third parties in connection with any documents referred to in item 4 above. 24 Paragraph 3 was not confined to the infringing photographs. It extended to all documents received by the first and second respondents from Mr Ian Fry concerning the applicants or any of their products. Necessarily, it may have extended to apply to documents well beyond those relating to the issues in dispute. No order of that nature was ultimately sought and obtained. 25 Further, paragraph 4 would have imposed a significant burden on the first and second respondents. It would have necessitated them being involved in pursuing claims against third parties with whom they had engaged in business. Again, that extraordinarily wide relief was neither sought nor obtained in the proceedings. 26 The difficulty here is that there is no available evaluative framework which might be utilised to compare the respective benefits to the applicants of the terms of the offer on the one hand and the terms of the judgment orders on the other. The applicants cited no authority and provided no assistance as to how the test of "more favourable" as found in r 25.14 might be applied in cases of this nature. This problem will often arise in cases, such as the present, where offers to settle are made in terms which differ from the relief sought in the action. 27 In the circumstances, the Court cannot be satisfied that the terms of the judgment obtained was more favourable to the applicants than the terms of the first offer. It follows that the operation of r 25.14(3) was not enlivened.

Offer of 27 June 2018 28 The second offer made to the first and second respondents provided: 1 The First and Second Respondents pay to the Applicants the sum of $50,000; 2 The First and Second Respondents provide to the Applicants a full list of each person: (a) to whom the Infringing Document was distributed; (b) who has or may have received the document indirectly from the people referred to in subparagraph (a) above, to the best of the First and Second Respondents' knowledge; or (c) to whom the First and Second Respondents made one or more Infringing Representations whether through the Infringing Document through another document or orally. This offer is inclusive of costs. 29 The applicants advanced a substantial argument that the judgment received by them against the first and second respondents was more favourable than this offer. 30 Although the applicants received no award of damages, this offer was inclusive of costs and the sum of $50,000 as at 27 June 2018 would, on any view, have been a relatively small proportion of their costs. Evidence adduced on the hearing on the question of costs disclosed that, at the date of the offer, the applicants had expended around $160,000 in legal costs. As is apparent from the reasons below, the applicants are entitled to an order for costs against the respondents including the first and second respondents. Given the magnitude of this action it is clear that the sum of $50,000 would have been easily spent by the applicants at the date of the offer and, the order for costs in these proceedings, even if on a standard basis, would vastly exceed that amount. 31 The applicants made no substantive submissions explaining why the judgment obtained in this matter was more favourable than the offer. No attempt was made to analyse the offer and compare it to the judgment obtained. Consequently, the question might be synthesised to whether, in substance, the applicants obtained more from the judgment than they sought in the offer. 32 In relation to the amount of money sought, it can be accepted that the sum of $50,000 on account of costs as at 27 June 2018 was less favourable than the award of costs which would be awarded in a case of this nature. The second and more difficult issue concerns the second part of the offer which required the first and second respondents to provide a list of details concerning the Evaluation Document and the identification of any persons to whom any of the misrepresentations were made. However, nothing of this nature was granted by the orders made herein. It is not possible to evaluate the respective benefits of compliance with item 2 of the offer of compromise on the one hand and the performance of the injunctions granted on the other. Whilst it may well be the case that knowledge by the applicants of the identities of the several persons referred to would be useful, it is impossible to weigh, in the absence of other evidence, the benefits obtained in the injunctive relief. Certainly, the relief granted goes some way to providing to the applicants the information which could be derived from the first and second respondents' compliance with item 2 of the offer, however, there is no strict correlation and nothing upon which it is possible to evaluate the respective advantages. 33 In those circumstances, it is not possible to reach a conclusion that the benefit of the judgment was more favourable than the benefits which might be derived from the first and second respondents' acceptance of the second offer. Again, r 24.14(3) was not enlivened.

Offer of 15 November 2017 34 The comments made in relation to the second offer apply equally to the offer made on 15 November 2017. This offer was made to the third and fourth respondents only. Relevantly, it contained a clause in almost identical terms to clause 2 of the second offer which is set out above. For similar reasons, it is impossible to make any evaluative calculation as between the orders made herein and the benefit of that clause. 35 In addition, the third offer sought to secure additional covenants from the third and fourth respondents including the following: 3 The Third and Fourth Respondents send a written notice to each person in the list referred to in paragraph 2 above retracting each Infringing Representation; 4 The Third and Fourth Respondents provide full disclosure to the Applicants as to how they came to be in possession of the Infringing Photographs; 5 The Third and Fourth Respondents return to the Applicants or destroy, at the Applicants' option, any material within their possession previously owned by Exlites Pty Ltd; and 6 The Third and Fourth Respondents irrevocably acknowledge the First Applicants' ownership of all Intellectual Property Rights (as that term is defined in the Deed of Assignment between Exlites Pty Ltd and Key Wholesalers Pty Ltd dated 27 March 2013) previously owned by or registered in the name of Exlites Pty Ltd, and undertake to permanently refrain from challenging the validity of any of those rights. 36 Again, it is impossible to evaluate the benefit which the applicants might have obtained from the agreement of the third and fourth respondents to perform these matters on the one hand and the benefits obtained from the judgment of this Court on the other. It follows that it is not possible to reach any state of satisfaction that the judgment obtained against the third and fourth respondents is more favourable than the terms of the offer of 15 November 2017. Necessarily, r 24.14(3) was not engaged and no order for indemnity costs can be made under that rule. 37 It was further submitted by the respondents that the offers made were "vague and unquantifiable" so as to fall outside the Rules. Except to the extent those criticisms were relevant to the discussion of the difficulties encountered in undertaking any evaluative comparison between the offer and the terms of the judgment, it is unnecessary to further consider them in light of the conclusions already reached.

Applicants' entitlement to costs outside of r 25.14(3) 38 Absent any entitlement to indemnity costs arising under r 25.14(3) the question remains as to what is the appropriate order for costs. 39 Mr Travis for the applicants submitted that it was only in special circumstances that the Court might depart from the ordinary rule that costs follow the event. There is some support for that view: see eg Ruddock v Vardalis (No 2) (2001) 115 FCR 229, 234-5 citing Hughes above cf Stefanovski: but as it said above the bar for "special circumstances" should not be set too highly and the "event" which costs should follow should be properly understood. 40 The applicants claimed that they were entitled to an order for costs in their favour and, in particular, an order that the respondents pay the costs relating to the copyright infringement claim on an indemnity basis. The foundation of the claim for partial indemnity costs arose because it is said that the respondents unreasonably denied their liability in relation to copyright infringement. In support of that submission the applicants rely on the following passages from the original reasons for judgment: 71 It was acknowledged by the respondents, although only at trial, that two of the photographs sent by Mr Fry to Mr Scutter were photographs which had been taken by Mr Arieni and, in respect of which the copyright subsisted in Key Logic. Prior to the trial the respondents had vigorously denied that any of the applicants held any intellectual property rights in the photos. … 128 In its final submissions the respondents conceded both subsistence and ownership of copyright in Key Logic. It was also admitted that on 13 April 2016, Mr Scutter, in his capacity as the director of Blue Groper, created and distributed the Evaluation Document and that: (a) Mr Scutter's reproduction of those photographs in the Evaluation Document was a copyright infringement by Blue Groper; and (b) each email attaching the Evaluation Document that Mr Scutter sent was a further copyright infringement by Blue Groper. 129 They also conceded that Mr Fry's infringement, by emailing the first and third photographs to Mr Scutter on 12 April 2016, was a copyright infringement by Karmic. 130 These concessions were rightly made. That said, given the evidence surrounding these issues was both straightforward and always apparent to the respondents, it is concerning that they were not made earlier in the proceedings. … 163 In the circumstances where there is no unequivocal undertaking not to engage in further infringements it is appropriate injunctions, limited to the type of conduct which gave rise to the past infringements, ought to be granted. That is especially so in circumstances where the respondents failed to make appropriate concessions as to the existence of the infringements until at or around the time of trial. The facts of this case were not complex and knowledge of the infringement must have been known to the respondents from an early stage. Despite that, they sought to obfuscate the question of infringement for their own interests and that undermines any confidence that the Court might have that they will abstain from similar infringing conduct in the future. 41 As appears from the above paragraphs, at the trial the respondents acknowledged the existence and ownership of the applicants' copyright in two of the three photographs specified in the Statement of Claim. They also conceded the infringement. No explanation was given as to why the concession was made so late. The material before the Court rather suggested that it would have been apparent to the respondents that copyright ownership had been assigned to Key Logic. Indeed, as appears from the affidavit of Mr Coates filed on the application for costs, the respondents were provided with the documentation showing the assignment of intellectual property rights to Key Logic on 6 October 2016, shortly after the proceedings were commenced. Whilst the defence filed in the proceedings sought to undermine the veracity of the assignment by reason of its close proximity in time to the liquidation of Exlites, nothing came of that matter. That said, it is not clear when the issues surrounding the liquidation of Exlites and the veracity of the Deeds of Assignment were resolved, at least in the mind of the respondents. Whilst there exists a strong suspicion that the respondents maintained their denial of copyright infringement unreasonably until the trial, the circumstances of this matter do not allow the Court to be satisfied of that to the requisite degree. If the level of satisfaction had been reached sufficient grounds would probably have existed for making an order of the type sought by the applicants. 42 It might also be observed that the partial order for indemnity costs might, in fact, cause more disruption than is justified. The assessment of what work undertaken by solicitors and counsel was in relation to the copyright claim as opposed to the remainder of the issues would be a difficult task. Indeed, there is a danger it would lead to further disputes. 43 In the circumstances there is insufficient material on which the Court might conclude that the respondents' denial of copyright infringement was wholly unreasonable or high handed such as to warrant an order for indemnity costs on that issue: Colgate Palmolive Co v Cussons Pty Ltd (1993) 46 FCR 225.

Applicants' abandoned claims 44 The respondents claim that the usual order for costs ought not be made because of the applicants' maintenance of its claims for damages or an account of profit. The applicants had originally sought such relief and in a significant sum of approximately $500,000. During the interlocutory processes, various orders were made requiring the applicants to give particulars of this claim. Ultimately, it was not until trial that the applicants abandoned all the relief for damages or an account of profits. Mr Travis of Counsel for the applicants denied that there was any unreasonableness in the continued pursuit of that relief until trial. He submitted that the applicants acted reasonably in abandoning the relief at the commencement of the trial when they realised it could not be established. However, he did observe, and correctly so, that the findings in the initial reasons justified the pursuit of a monetary sum. At paragraph 120 of the reasons it was said: 120 Here the consequence of the contraventions by Blue Groper and Mr Scutter was the probable damage to the reputation of the applicants' products in a somewhat limited market. Indeed, that was the intended consequence of the misleading conduct and, in a general sense, the evidence shows that they suffered a loss of sales in the Northern Territory where the contraventions took place. Necessarily, substantial work will be required by the applicants in order to restore their erstwhile market status. 45 I accept that, ultimately, the difficulty in establishing damages dissuaded the applicants from pursuing that part of their claim. Whilst the particulars provided at an early stage of the litigation were optimistic, and probably overly optimistic, a reasonable justification existed for pursuing monetary relief until it was realised that it could not be sustained. 46 The respondents also claimed that it was inappropriate for the applicants to pursue Mr Fry on the basis that he was knowingly concerned in the contraventions of the ACL by Karmic. It seems that at the commencement of the proceeding the applicants acknowledged they would not pursue him on that claim. That said, a claim was pursued against the company of which he was the sole director. Indeed, at one stage the respondents acknowledged in their written submissions that Karmic was liable because it was knowingly involved in the contraventions by Blue Groper and Mr Scutter. That concession was not accepted as it was not supported by the evidence. Nevertheless, it demonstrates that the respondents were not in a position where they could vigorously deny the claims of knowing involvement by Karmic and, in that way, Mr Fry. 47 Taken as a whole, no unreasonableness or impropriety arises from the pursuit of the claim against Karmic or Mr Fry for their knowing involvement in the contraventions of the ACL by Blue Groper or Mr Scutter. Whilst the pleading of the cause of action was woeful, as were the pleadings generally in the case, it could not be said that the claim was hopeless or doomed to fail. Indeed, if the claim had been as hopeless as the respondents now claim, it is a matter of curiosity that they did not seek to strike it out at an early stage in the proceedings. It is, with respect, a little improbable for respondents to claim that causes of action were unreasonably advanced when they have not sought to have them summarily dismissed and indeed, admitted their veracity in their submissions.

The applicants are entitled to costs 48 Overall, the applicants have been substantially successful in the action. A significant part of the proceeding was the vindication of their rights in relation to its copyright and the misleading or deceptive conduct of the respondents or some of them. The infringements and the misleading conduct were engaged in the course of trade or commerce with the intent to injure and damage the reputation of the applicants. It is undoubted that the respondents were successful in doing that and, as was identified in the initial reasons, it will take some significant time for the applicants to restore their market status. The relief obtained in terms of both injunctions and declarations will assist in that endeavour. The obtaining of such relief was a significant and important victory for the applicants. 49 Whilst it can be said that the applicants were unsuccessful in pursuing some of the relief sought, or abandoned it at or around trial, that cannot significantly diminish their success in vindicating their rights. It should be mentioned that the applicants' success has occurred in the face of vigorous opposition. The respondents defended on whatever basis they could, even those which were of slender foundation. 50 Although neither party can be said to have conducted the litigation in an efficient manner nor at a standard which can be expected in this Court, the behaviour of neither side was so egregious that it would warrant some alteration to the ordinary rule one way or the other in relation to costs. That being so, the applicants are entitled to an order that the respondents pay their costs of the proceeding on the standard basis. I certify that the preceding fifty (50) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Derrington.

SCHEDULE OF PARTIES QUD 605 of 2016 Respondents Fourth Respondent: KARMIC LIGHTING PTY LTD ACN 600 193 404