Nature's Blend Pty Ltd (ACN 126 406 488) v Nestle Australia Ltd

introduction 1 On 10 March 2010 the Court dismissed the applicants proceeding with costs: Nature's Blend Pty Ltd v Nestle Australia Ltd [2010] FCA 198. In its submissions prior to the hearing on 28 January 2010 the respondent gave notice that it would wish to be heard as to the type of costs order which ought to be made if the matter were dismissed. 2 On 13 April the respondent filed and served submissions seeking an order that the applicants pay its costs of the application on a party-party basis until 17 June 2009, being the day after an offer of compromise in accordance with O 23 r 11(6) of the Federal Court Rules was made, and on an indemnity basis thereafter. In the alternative, the respondent seeks an award of indemnity costs under common law principles.

background 3 On 19 March 2009 the applicants' solicitors sent a letter of demand to the respondent asserting, amongst other things, infringement of the trade mark 'LUSCIOUS LIPS', passing off and a breach of ss 52 or 53(d) of the Trade Practices Act 1974 (Cth). A further letter was sent on 31 March 2009. 4 On 3 April the respondent's internal adviser sent an email to the applicants' solicitors stating as follows: I refer to our recent telephone conversation regarding this matter and confirm my advice that we strongly deny your claim that our use of the term "luscious lips" on the back panel of our Allen's Retro Party Mix pack constitutes trade mark infringement and in view of this we will not be providing any of the undertakings/acts requested in your letter of 19 March, 2009. As discussed however we have recently updated the packaging for this particular product and when doing this we reduced some of the text on the back panel and this included removing the word "luscious" before "lips". I have attached a scanned copy of the new pack for your information: …this packaging is in the process of being rolled out and I would expect it to be in store soon. 5 The applicants filed their application on 15 May 2009. 6 On 26 May 2009 the respondent's solicitors sent an open letter to the applicants' solicitors relevantly stating as follows: We act for Nestle Australia Ltd (Nestle). On 19 March 2009, you sent a letter of demand to our client alleging infringement of your clients' Australian Registered Trade Mark 1165481 LUSCIOUS LIPS (Trade Mark), contraventions of sections 52 and 53(a), (c) and (d) of the Trade Practices Act 1974 (Cth) and related provisions in the Fair Trading Act 1987, and passing off. We note that the Trade Mark is registered for a very broad range of goods in class 30, and understand that the only product manufactured under the Trade Mark are your clients' LUSCIOUS LIPS jellies and chocolates. The basis for the allegations contained in your clients' demand related to use of the words 'luscious Lips' in the list of confectionery items on the rear panel of our client's Allen's Retro Party Mix product packaging at that time. This list included other alliterative expressions - "cool Cola bottles", "radical Racing Cars" and "partying Pineapples". A copy of this packaging is attached and marked "A". We are instructed that Ms Bessell on behalf of our client telephoned you on receipt of your letter, and also responded by email sent on 3 April 2009. In both communications all claims were denied and the email attached examples of new packaging that had been redesigned by Nestle in its usual course of business. The new packaging removed all extraneous descriptors and confined references to the confectionery items to simple nouns. Thus the descriptor "luscious Lips" was changed to "lips". A further copy of the new packaging is attached and marked "B". We are instructed that this packaging has been on the market since at least 23 April 2009. We are further instructed that Nestle heard nothing further from you until service of the Application and Statement of Claim in the above proceedings on 15 May 2009. Your clients' claims to commercial activity and reputation necessary to support any of the Trade Practices Act, Fair Trading Act and passing off claims are entirely unsupported by any particulars. The particulars of Nestle's conduct that your clients seek to impugn are confined to the wording on the superseded packaging described above, and a document said to reproduce the same wording and to exist on Nestle's website. Neither we nor our client can locate the document by searching the expression "luscious lips". It is clear that the expression "luscious Lips" used on Nestle's previous packaging was not trade mark use, and that it is extremely unlikely that such a description would cause confusion with your clients' product. Indeed, the statement of claim contains no allegation of use by Nestle of the Trade Mark as a trade mark. There are no instances of confusion referred to. Further, in the knowledge that Nestle's current packaging uses the word "lips", not the expression "luscious lips", your clients nonetheless plead that our client threatens to continue its "wrongful conduct" (which continues to be denied). Your clients' claim is manifestly weak and strikes our client as an attempt to use court proceedings to extract payment of a sum on the basis that Nestle is a substantial corporation. It is Nestle's intention to treat all matters in a commercially fair and sensible manner. Accordingly, we are instructed to invite your clients discontinue the Federal Court proceedings on or before 29 May 2009 with no order as to costs. If your clients agree, Nestle will not seek its costs. This proposal remains open for acceptance until 4pm on Thursday, 28 May 2009. In the event that your clients do not agree, or if no response is received in the specified timeframe, our client will claim all of its costs in these proceedings at the appropriate level, including our costs of appearing on 29 May 2009, and we are instructed to produce this letter to the Court on that day. In the meantime, and without admissions, Nestle undertakes to refrain from using the words 'luscious lips' as a trade mark on any lip-shaped confectionery, its packaging or promotion for so long as the Trade Mark remains validly registered. We await your early response. 7 The applicants did not accept this proposal. On 16 June 2009 the respondent's solicitors served an offer of compromise on the applicants' solicitors in the following form: OFFER OF COMPROMISE (Order 23, rule 3) Pursuant to Order 23 of the Federal Court Rules, the Respondent makes the following offer of compromise, which is open to be accepted for a period of 14 days from the date of this offer: 1. The Respondent undertakes to refrain from using the words 'luscious lips' as a trade mark on any confectionary, its packaging or promotion, for so long as Australian Trade Mark Registration 1165481 remains registered. 2. The Respondent will pay the Applicants the sum of $5,000 inclusive of costs. 8 In accordance with O 23 r 5(3) an offer of compromise must remain open for at least 14 days, beginning on the day after it was made. Thus the offer expired on 1 July 2009. It was not accepted by this or any later date. 9 On 22 June 2009, nine days before the respondent's offer expired, the respondent filed and served its Defence. Relevantly, the respondent: · admitted use of the words 'luscious Lips' on the rear of its Retro Party Mix product; · denied that the use of those words constituted use as a trade mark within the meaning of the Trade Marks Act 1995 (Cth) (the Act); · said that 'luscious Lips' was intended to convey, and did convey to consumers a laudatory description of some of the respondent's confectionary; · said that its well known trade mark 'Allens' was prominently displayed on the front of the packaging and served the function of distinguishing its confectionary; and · said that further or alternatively, it used the term in good faith to indicate the kind and quality of its goods within the meaning of s 122(1)(b)(i) of the Act. 10 In accordance with an order of 25 September 2009, the question of quantum was postponed pending the determination of all questions of liability. The hearing on liability took place on 28 January 2010. 11 On 10 March 2010 the Court dismissed the applicants' claims with costs. On 31 March 2010 the applicants filed a notice of appeal.

The respondent's submissions 12 The respondent submits that these facts give rise to a rebuttable presumption in favour of indemnity costs under O 23 r 11(6) which provides: If: (a) an offer is made by a respondent and not accepted by the applicant; and (b) the respondent obtains an order or judgment on the claim to which the offer relates as favourable to the respondent, or more favourable to the respondent, than the terms of the offer; then, unless the Court otherwise orders: (c) the respondent is entitled to an order that the applicant pay the respondent's costs in respect of the claim incurred up to 11am on the day after the day the offer was made, taxed on a party and party basis; and (d) the respondent is entitled to an order that the applicant pay the respondent's costs in respect of the claim incurred after that time, taxed on an indemnity basis. 13 The respondent submits that the judgment of the Court is clearly as favourable as or more favourable to it than the terms of its offer of compromise: it is not enjoined in any way and, rather than the respondent paying $5,000 to the applicants, the applicants are now liable for the respondent's costs. This satisfies the terms of r 11(6) and the authorities show that it is now incumbent on the applicants to establish why the prima facie position as to indemnity costs should not operate in this case. 14 Alternatively, the respondent submits that if its offer of compromise falls outside the scope of O 23 (which it denies) then the respondent should still be awarded its costs on an indemnity basis from the date of expiry of its offer because it was imprudent or unreasonable for the applicants to reject the offer. The parties were agreed as to the law applicable to Calderbank offers and it is not necessary to expound the relevant principles in any detail. Essentially, the respondent submits that the applicants were on notice at all material times of the factual and legal matters upon which they would lose their case and ought to have accepted the respondent's offer, enjoyed the benefit of the respondent's proposed undertaking notwithstanding the weakness of the applicants' case, and received a payment and be relieved of the considerable risk of having to pay the respondent's mounting costs as well as their own.

Applicants' submissions 15 In summary, the applicants contend that: · the letter of 16 June 2009 was not a relevant offer such that the presumption in r 11(6) did not crystallise; · even if r 11(6) operates then the Court should otherwise find that the nature and circumstances of the offer were such that indemnity costs should not follow; or · alternatively, if r 11(6) does not apply then it was neither unreasonable nor imprudent to reject the offer. 16 The applicants rely on the recent decision of Kenny J in Nutrientwater Pty Ltd v Baco Pty Ltd (No 2) [2010] FCA 304 (Nutrientwater), which they submit demonstrates that it is necessary to consider the offer and circumstances to determine whether the rule properly crystallises. Such an approach prevents parties being penalised when in fact what is offered is not a genuine compromise. 17 The applicants point to a number of factors to support their contentions recorded at [15]. · The respondent's undertaking in its letter of 16 June 2010 was limited to "use as a trade mark". This wording had the effect that the respondent could have denied that the use of the words 'luscious Lips' on its packaging was use as a trade mark (as it had always done) and then continued using the words without breaching its undertaking. · The "imponderables" of the case, as that word was used in Nutrientwater at [35], makes hindsight an inappropriate standard by which to assess the prospects of success of the applicants' case. The applicants' failure at trial on the issue of "use as a trade mark" was ultimately a matter of impression of the trial judge and this cannot be predicted with certainty. Also, the applicants could not have known that the respondent would have succeeded in its good faith defence. · The respondent's offer was not accompanied by any explanation which elaborated the basis of the offer and why it should be accepted. Prior letters included only assertions. · At the time of offer the applicants were not aware of the monetary amounts they would have received if successful. Also, the amount offered, $5000, was less than their costs to date. Further, the applicants submit that the monetary aspect of the offer does not represent a compromise taking into account the variables in the proceeding as known to the parties. · Unlike in Nutrientwater, the applicants' prospects of success were stronger because it had the benefit of a registered trade mark and did not need to prove reputation to secure the primary relief. · The offer made by the respondents is unclear as to what was to be compromised. If it was intended to compromise all claims and types of relief (including interest) then this should have been specified. If the sum of money offered is inclusive of interest then O 23 r 4(2) requires the offer to specify the amount that is in respect of interest. 18 With respect to indemnity costs at common law, the applicants submit that it was neither unreasonable nor imprudent for them to reject the offer. They rely on the same factors listed above. In particular, they submit that at the time of the offer they were not yet in a position to assess what they would be compromising and that the quantum of the offer meant that it was not a genuine offer.

consideration 19 The Full Court recently considered r 11(6) in Futuretronics.com.au Pty Ltd v Graphix Labels Pty Ltd [2009] FCAFC 40. Justices Tamberlin, Finn and I said at [10]: In dealing with rule 11(4), which also uses the expression appearing in rule 11(6) - "unless the Court otherwise orders" - Hely J in Port Kembla Coal Terminal Ltd v Braverus Maritime Inc (No 2) (2004) 212 ALR 281 at [17], after referring to Heerey J's observation in an earlier case that "compelling and exceptional circumstances" must exist before the Court would "otherwise order", said: "Once an offer is made, and a judgment no less favourable obtained, a rebuttable presumption in favour of indemnity costs is created. It then becomes incumbent on the defendant to show reason why the presumption should not crystallise. Correctly understood, Heerey J was explaining the operation of the Rule, rather than impermissibly attempting to place a fetter on the exercise of the court's discretion. ... [H]is Honour was not seeking to do more than to convey that the prima facie position should only be departed from for proper reasons which, in general, only arise in an exceptional case..." We agree with these remarks about rule 11(4) which in our view are applicable to rule 11(6). We have concluded at [5] that the appellant's refusal of the August offer was reasonable. There is little difference between that and the later offer. It was less attractive than the earlier one. The appellant would have to pay 75% of the respondents' taxed costs instead of the parties bearing their own costs. If the present question was whether the rejection of the later offer was unreasonable, we would have said it was not. However, it is established that the fact that an unsuccessful litigant acted reasonably in rejecting an offer under rule 11(4) (and its counterparts in other jurisdictions) is not of itself a sufficient reason to displace the operation of the rule. [emphasis added] 20 The appellants appear to be challenging both the enlivening of the rebuttable presumption in r 11(6) and, in the alternative, the crystallising of the presumption in favour of the respondent. On the former, the requirements of O 23 r 11(6) were satisfied: an offer was made by the respondent which included an undertaking and an amount of $5000, and the court order eventually obtained by it was clearly "as favourable, or more favourable" to it than the terms of the offer because the claims against it were dismissed with costs. Authorities suggesting that O 23 r 11 does not cover situations where the applicant fails altogether in its claim pre-date the introduction of r 11(6): Nutrientwater at [13]. 21 The question then is whether the applicants have shown sufficient reasons as to why the presumption should not crystallise. In Vawdrey Australia Pty Ltd v Krueger Transport Equipment Pty Ltd [2009] FCAFC 156 at [187] Lindgren J observed that the presumption "should be departed from only for proper reasons which, generally speaking, will arise only in an exceptional case". More recently in Nutrientwater, Kenny J found that on the facts before her "the circumstances are relevantly 'exceptional', and the Court should depart from the prima facie position for which rule 11(6) provides". 22 The respondent's offer on 16 June 2009 needs to be viewed in the light of all the circumstances. It comprised two limbs: an undertaking to refrain from using the words luscious lips "as a trade mark on any confectionary, its packaging or promotion" and a payment of $5000 inclusive of costs. Of course, implicit in the offer was the additional benefit to the applicants that the respondent would not be seeking its own costs. 23 In the letter of 26 May 2009 set out at [6] the respondent, through its solicitors, denied use of the words 'luscious lips' as a trade mark. This denial was also contained in its Defence filed on 22 June 2009. The respondent ran the same argument at the hearing and ultimately I held that the respondent's conduct was not use as a trade mark. The successful argument was based on facts and legal authorities known to the applicants before the offer of compromise expired on 1 July 2009. Therefore the applicants had sufficient information to assess their prospects of success: cf Nutrientwater. 24 The applicants point out that the respondent's undertaking was limited to "use as a trade mark" and that given the respondent's denial of this fact it could "have continued to place the words 'luscious lips' on the rear of its packaging without contravening its undertaking". This argument has only an initial attraction. When considered in light of the respondent's previous advice that it had already amended its packaging, the applicant had a level of comfort that once all existing packaging had been sold, the alleged infringing conduct would cease. The respondent's solicitors had used the same wording in their letter of 26 May 2009. Having regard to the amendment of the packaging, I think it unlikely that the respondent intended to offer an undertaking that had no practical effect so long as it denied its conduct was use as a trade mark. It is more likely that the words "use as a trade mark" were the product of careless drafting. In any event, the applicants did not object to these words on either occasion on which they were used, and they did not seek clarification as to the respondent's intentions in that regard. Nor was the r 11(6) offer rejected for the reason now propounded. 25 In light of the 26 May 2009 letter and to a lesser extent the Defence filed nine days before the offer expired, I do not attach weight to the fact that the respondent's offer was not accompanied by an explanation. The applicants had already been made aware of the respondent's position. 26 The "imponderables" argument recorded at [13] has no substance. The matters that influenced Kenny J in connection with a comparable argument are recorded at [35] of Nutrientwater. Her Honour held that such matters illustrated that the trial had 'its own dramatic momentum' which made hindsight an inappropriate standard by which to assess the strength of the applicant's case prior to the end of the trial. For example, Kenny J was generally impressed by the frankness of the respondent's witness which assisted the respondent's case, and found the applicant's witness's evidence unhelpful. In contrast, in the present case the applicants' witnesses were not cross‑examined, and the evidence of the respondent's sole witness, Ms Haylock, played no part in the determination that there was no use as a trade mark or that the words "luscious lips" were descriptive or laudatory of the confectionary. There were no features in the present case which would make hindsight an inappropriate standard. In my view, on receipt of the offer, an assessment of the merit of the respondent's contention that there had been no use of the mark as a trade mark should have shown that the applicants' case was weak, and that it was provident to accept the offer of compromise. 27 Although only $5000 was offered, the compromise included an undertaking not to use the words "luscious lips" and by implication, the respondent agreed not to seek its own costs. Although the $5000 may have been less than the applicants' costs incurred before the date of the offer, I do not accept that the "monetary aspect of the offer does not represent a compromise taking into account the variables in the proceeding as known to the parties". 28 The contention that the applicants' prospects of success were stronger than those in Nutrientwater does not appeal to me. Each case depends on its own facts, and I do not derive any assistance from a comparison of the two cases. 29 I do not agree that the offer was unclear as to what was to be compromised. Having regard to the context provided by the earlier correspondence, it is clear that in exchange for the matters offered by the respondent the application was to be dismissed. The respondent was not obliged by O 23 r 4 to propose an all‑embracing release clause covering possible future disagreements between the parties. It was simply offering an undertaking and a monetary sum to get rid of what it regarded as an irritating proceeding. The complaint that the offer did not comply with O 23 r 4(2) has no merit. This subrule provides that if a sum of money is offered which includes an interest component, the amount of interest must be specified. The context in which the $5000 was offered was that the respondent denied any liability to make any payment to the applicants. Accordingly there was no interest component to be specified. 30 The applicants have not satisfied me that the prima facie position established by r 11(6) should be departed from. Accordingly, the respondent is entitled to costs on an indemnity basis in accordance with the rule.

I certify that the preceding thirty (30) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Sundberg.