Nutrientwater Pty Ltd v Baco Pty Ltd

background 4 The first applicant, Nutrientwater Pty Ltd, filed its fast track application on 25 July 2009. The fast track statement, which accompanied the application, asserted claims against Baco for passing off and breaches of ss 52 and 53 of the Trade Practices Act 1974 (Cth), and sought declaratory, injunctive and other relief, including damages. Essentially, Nutrientwater claimed that the appearance of Baco's 'Grassroots' enhanced water products was so similar to the appearance of its 'NutrientWater' enhanced water products as to misrepresent to an ordinary reasonable consumer that the Baco products were the products of Nutrientwater; and/or the Baco products were manufactured and sold with Nutrientwater's approval; and/or Baco's business was the business of Nutrientwater or sponsored by or affiliated with Nutrientwater's business. 5 On 13 July 2009, before Baco had filed its fast track response, Baco made a proposal for settlement of the case. In a letter of the same date, which accompanied what Baco described as an offer of compromise, Baco's solicitors said: We note, this offer is served pursuant to order 23 and in accordance with order 41 of the Federal Court Rules …, and remains open to be accepted until the expiration of 14 days after service of this notice. 6 The offer of compromise was to the following effect: TAKE NOTICE that the Respondent offers to compromise this proceeding on the basis that the Respondent pays the Applicant $3,000.00 in full and final settlement of all claims in the proceeding inclusive of costs. THIS OFFER is served pursuant to Order 23 and in accordance with Order 41 of the Federal Court Rule (Vic) [sic], and remains open to be accepted until the expiration of 14 days after service of this notice. Baco did not receive a response to the letter. 7 On 27 July 2009, the date the offer expired, Baco filed its fast track response. In its response, Baco denied the claims against it and denied that its Grassroots products incorporated any feature of Nutrientwater's products that was distinctive of Nutrientwater. Baco's asserted that features shared by the parties' products were, as at May 2009 when Baco first sold its Grassroots products, common to the trade in the Australian market for enhanced waters, including the market-leader, vitaminwater (a Coco-Cola Amatil Ltd product) and Spring Valley Smart Water (a product of Schweppes Australia Pty Ltd). In addition, Baco asserted that there were features of its Grassroots products that distinguished its products from those of Nutrientwater and other competitors in the enhanced water market. 8 On the first day of the trial, Nutrientwater applied for leave to amend its application and fast track statement, essentially by joining the second applicant, LMBB Pty Ltd, as a party. Nutrientwater's promotion and sales of its enhanced water products were said to be pursuant to a license granted by LMBB, and Nutrientwater asserted that there was as a result some uncertainly as to which entity was the holder of relevant goodwill and the proper plaintiff for the passing off action. Baco did not oppose the joinder, and the Court granted the leave sought. The addition of LMBB had no impact on the evidence led at trial. 9 The trial took place over 3 days, from 18 November 2009 until 20 November 2009. 10 On 6 January 2010, the Court dismissed Nutrientwater's application, chiefly upon the basis that the applicants had not established a relevant reputation in those features of the NutrientWater products that Baco had allegedly appropriated; and that, while the get-up of Baco's products incorporated some features used by the applicants and other market competitors, Baco had sufficiently distinguished its products from those of Nutrientwater through branding (including name and logo) and other features of their packaging and design, so as not to be likely to deceive or mislead potential consumers as to their trade source or association.

Consideration 11 The principles applicable to an order for costs on an indemnity or solicitor and client basis are well-established. The starting point in considering an application for costs on the higher scale is that ordinarily costs are payable on a party and party basis. Section 43 of the Federal Court of Australia Act 1976 (Cth) confers upon the Court a wide discretion in relation to costs. This discretion must be exercised judicially. Indemnity costs may properly be awarded where there is some special or unusual feature in the case justifying a departure from the ordinary rule: Re Wilcox; Ex parte Venture Industries Pty Ltd (No 2) (1996) 72 FCR 151. 12 The Rules recognize and provide for some of these circumstances. The common law recognizes others: see, for example, Colgate-Palmolive Company v Cussons Pty Ltd (1993) 46 FCR 225 at 233, where Sheppard J discussed some circumstances that might warrant an order for costs on an indemnity basis. The principles are well-known, and need not be elaborated here. 13 In the present case, the parties' disagreement as to costs centred on the application of O 23 r 11(6) of the Rules, which commenced operation on 2 August 2008. Rule 11(6) applies in the circumstances described in paragraphs (a) and (b) of that rule, including where an applicant fails altogether to obtain relief after a respondent has made an offer of compromise. Previous statements to the effect that O 23 r 11 did not cover such a circumstance pre-date the introduction of rule 11(6): see, e.g., McDonald v Parnell Laboratories (Aust) (No 2) (2007) 164 FCR 591 at 597 and Seven Network Ltd v News Ltd (2007) 244 ALR 374 at 381. 14 Order 23 r 11(6) 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 11 am 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. 15 Baco supported its argument that it should have indemnity costs from 14 July 2009 on the basis that: 1. Baco had made an offer of settlement to Nutrientwater on 13 July 2009 pursuant to O 23 r 11, which was not accepted; 2. judgment in the proceeding was in terms less favourable to Nutrientwater (and LMBB) than the terms of the offer; 3. Baco was at all material times willing and able to perform the offer if it had been accepted; and 4. there were no compelling and exceptional circumstance that justified departing from the presumption provided by O 23 r 11(6). 16 It was common ground that Baco's offer of settlement complied with the formal requirements of Order 23; that the offer was not accepted; and that the order that Baco obtained is "as favourable … or more favourable to" it than the terms of the offer. Rule 11(6) of Order 23 applies (and Baco is entitled to indemnity costs against Nutrientwater after 14 July 2009) "unless the Court otherwise orders" or the Court accepts Nutrientwater's submission that, for purposes of rule 11(6), there was no offer in the first place. 17 On the one hand, Baco submitted that, where rule 11(6) applies, the rule gives rise to a presumption that the respondent is entitled to indemnity costs; and that this presumption can only be rebutted by a showing of "exceptional circumstances". Baco argued that there were no such circumstances here, and that it was thus entitled to indemnity costs. 18 Baco further argued that, even if rule 11(6) did not apply, Baco had a common law entitlement to indemnity costs from the date of the expiry of the offer of compromise (27 July 2009) because Nutrientwater's failure to accept the offer was unreasonable or imprudent. Baco maintained that, at the time the offer was made, Nutrientwater "had all the information it needed to make an informed decision as to the reasonableness of the offer and its likely prospects of success at trial"; that Nutrientwater's claims were "ambitious"; and, in particular, there was substantial doubt that Nutrientwater would be able to establish any reputation in the indicia over which it claimed proprietary rights since Nutrientwater "knew that [it] had copied that indicia from the US version of [vitaminwater] and that the Australian version of [vitaminwater] which carried the same indicia was, by the relevant date, the clear market leader in the enhanced water category in Australia". Baco noted (amongst other things) that there was a significant lack of evidence of relevant consumer confusion; and that the applicants were "ultimately completely unsuccessful". Baco summarised its common law position as follows: The Court should find that, in the circumstances, the burden of the risk in proceeding with the claims, given the making of the offer to pay some money to the first applicant …, the willingness of the respondent at the time of the making of the offer to absorb its own costs, the making of significant changes (at considerable cost) by the respondent to its get-up, and in the absence of competing consumer evidence … lay significantly with the first applicant. The respondent conducted itself appropriately in setting up a proper basis for a commercial resolution, which the applicants were unreasonable in rejecting. 19 On the other hand, Nutrientwater argued that Baco's proposal was not an offer that enlivened rule 11(6) because: (1) the proceeding primarily concerned an application to restrain the sale of Baco's products in Australia rather than a claim for damages; (2) an offer to pay a nominal amount ($3,000) without any compromise on the primary issue - a change to Baco's packaging - was not a serious and reasonable offer aimed at compromising the dispute between the parties; (3) the offer was made as soon as the proceeding began and when the fast track response had not been served; and (4) the offer was not accompanied by any explanation as to the reasons why Nutrientwater's case was doomed to fail and the offer should be accepted. 20 Nutrientwater relied on the same factors in support of its argument that, even if rule 11(6) applied, the Court should exercise its discretion not to grant indemnity costs. On this limb of its case, Nutrientwater also submitted that, at the time the offer was made, it was not in a position to assess its prospects at trial. Nutrientwater noted that: (a) it only received Baco's fast track response shortly before the close of business on the day the offer expired; (b) there had been no discovery and it was unaware of Baco's design process; (c) no proposed evidence had been filed and served; and (d) it did not yet know the precise scope of the confusion evidence that might be led at trial, including whether other witnesses would come forward after the release of Baco's Grassroots products. Moreover, according to Nutrientwater, bearing in mind the trifling amount mentioned in the offer, there are sound policy reasons why the Court should exercise its discretion against the award of indemnity costs. 21 Finally, Nutrientwater contended that, if rule 11(6) was inapplicable (as it submitted), no common law principle justified Baco receiving indemnity costs, chiefly because its rejection of Baco's offer was neither imprudent nor unreasonable. In this regard, Nutrientwater substantially relied on the factors previously mentioned. Nutrientwater also contended that, despite its lack of success, it had at all times acted reasonably. 22 Although the parties' submissions raised numerous issues, it is unnecessary to consider all of them in these reasons. This is because, in the circumstances of the case, I would reach the same result whether the indemnity costs issue is considered by reference to O 23 r 11(6) or common law principles. 23 If rule 11(6) is applicable in this case (contrary to Nutrientwater's submissions), then the rule would operate as discussed in Futuretronics.com.au Pty Ltd v Graphix Labels Pty Ltd ("Futuretronics") [2009] FCAFC 40 at [10]. In Futuretronics, a Full Court (constituted by Tamberlin, Finn and Sundberg JJ) said: 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). See most recently Vawdrey Australia Pty Ltd v Krueger Transport Equipment Pty Ltd [2009] FCAFC 156 at [187] per Lindgren J, observing that the presumption created in the circumstances mentioned in rule 11(6) "should be departed from only for proper reasons which, generally speaking, will arise only in an exceptional case". 24 The Court in Futuretronics held (at [11]) that, in that case, the rejection of a compromise offer expressed to be subject to O 23 was not unreasonable, but that this was "not of itself a sufficient reason to displace the operation of" rule 11(4). As the position under rule 11(6) was the same, the appellant had "not satisfied [the Court] that the prima facie position established by rule 11(6) should be departed from" and the respondents were entitled to indemnity costs pursuant to that rule. 25 The terms of rule 11(6) and the reasons in Futuretronics show that, where a relevant offer of compromise is made, it will be incumbent on the non-accepting party to establish why the prima facie position as to indemnity costs under the rule should not operate in relation to that party. 26 If rule 11(6) was inapplicable, because, as Nutrientwater submitted, Baco's proposal was not an offer for the purposes of the rule, then the effect of the proposal on liability for costs would be subject to common law principles. If the proposal were an offer for common law purposes, then an award of indemnity costs in Baco's favour from 27 July 2009 would be justifiable if it could be said that Nutrientwater's rejection of the offer was imprudent or unreasonable. 27 As Sundberg and Emmett JJ said in Dukemaster Pty Ltd v Bluehive Pty Ltd [2003] FCAFC 1 ("Dukemaster") at [7]: The mere making of an offer of compromise and its non‑acceptance, followed by a result more favourable to the offeror, does not automatically lead to an order for payment of costs on an indemnity basis: John S Hayes & Associates Pty Ltd v Kimberley‑Clark Australia Pty Ltd (1994) 52 FCR 201 at 204‑206; MGICA (1992) Pty Ltd v Kenny & Good Pty Ltd (No 2) (1996) 70 FCR 236 at 239. The applicant for a more generous award must show that the rejection of the offer was imprudent or plainly unreasonable: NMFM Property Pty Ltd v Citibank Ltd (No 2) ("NMFM") (2001) 109 FCR 77 at 98; Australian Competition & Consumer Commission v Australian Safeway Stores Pty Ltd (No 3) [2002] FCA 1294 at [28]; Sydney Markets Ltd v Sydney Flower Market Pty Ltd [2002] FCA 283 at [16]‑[17] and [23]. 28 In the particular circumstances of this case, it is unnecessary to decide whether or not Baco's proposal was an offer for the purposes of rule 11(6) or the common law. This is because, having regard to the circumstances to which I am about to refer, Nutrientwater has shown that: (1) the presumption in rule 11(6) should not crystallize; and (2), so far as the common law is concerned, its rejection of the offer was neither imprudent nor unreasonable. Accordingly, I would not award indemnity costs under rule 11(6) or the common law; and Baco's indemnity costs application must fail. 29 The circumstances to which I would particularly refer are as follows. First, there is the extent of the compromise offered. This was slight. By its fast track application, Nutrientwater applied for various forms of relief, including declarations, injunctions and damages. Baco's offer of compromise was to pay $3,000 in settlement of all claims "inclusive of costs". The offer did not address the relief sought for injunctions and declarations, and was for a modest pecuniary amount. 30 Baco sought to justify this offer by reference to the fact that, after it received a letter of demand from Nutrientwater on 16 December 2008 and before the market release of its new products, Baco changed the products' get-up at some significant cost to it. Given Nutrientwater's subsequent response in commencing this proceeding, however, these changes were plainly insufficient to satisfy Nutrientwater. Further, whilst the relevance of these prior changes from Baco's perspective is clear enough, the fact these changes were made at some expense to Baco did not transform Baco's offer to Nutrientwater into a commercially reasonable one; and nor did it transform it into an offer imprudent to refuse. 31 On no view could the offer be so described. Rather, the offer, even if not accurately described as just a 'walk away offer', was not far from such an offer. Save for Baco's modest payment of $3,000 to Nutrientwater, each party was to walk away from the proceeding bearing its own costs. There are authorities to the effect that a defendant's offer to settle on the basis that each party bears its own costs is not a Calderbank offer and, in any event, may not be considered a genuine offer of compromise: see Dresna Pty Ltd v Linknarf Management Services Pty Ltd (In liq) (No 2) [2006] FCA 755 at [20]; Australian Competition and Consumer Commission v Universal Music Australia Pty Ltd (No 2) (2002) 201 ALR 618 at [59]-[60]; McKerlie v State of New South Wales (No 2) [2000] NSWSC 1159; Vasram v AMP Life Limited [2002] FCA 1286 at [12]; and Fyna Foods Australia Pty Ltd v Cobannah Holdings Pty Ltd (No 2) [2004] FCA 1212 at [10]. It is unnecessary to consider whether these authorities directly assist here and whether a similar approach should apply in the context of O 23 r 11(6). It is sufficient to say that the extent of the compromise involved is a relevant consideration in determining whether there should be a departure from the prima facie position in r 11(6); or whether the rejection of the compromise offer was unreasonable or imprudent for common law purposes: compare Fyna Foods at [11] and Vasram at [13]. 32 Secondly, the offer of compromise was made before Nutrientwater had sufficient information realistically to assess its prospects of success in light of Baco's position. This was chiefly because it did not know Baco's position at the time it received and was to consider the offer. As noted already, Nutrientwater filed its fast track application and statement on 25 June 2009. Nutrientwater received Baco's offer of compromise on 13 July 2009 and that offer expired 14 days later on 27 July 2009. Baco's fast track response was said to be served on Nutrienwater's solicitors at around 4 pm on 27 July 2009. This was not denied. Baco thus closed the offer before Nutrientwater had an opportunity to consider it in light of Baco's response. The offer had almost expired by the time this response was received. 33 Thirdly, when Baco's offer of compromise was made, it was not accompanied by any statement by Baco as to why it maintained that the Nutrientwater application would fail and/or its offer should be accepted. In Dukemaster at [8], in relation to offers of compromise not within O 23 r 11(6), Sundberg and Emmett JJ said: Whatever the position may be with an offer made under Order 23, a Calderbank offer, or any offer of compromise outside the regime in Order 23, is unlikely to serve its purpose of attracting an indemnity award of costs if the rejecting applicant fails to recover more than what is offered, unless the offer is a reasonable one and contains a statement of the reasons the offeror maintains that the application will fail. 34 Of course, the position is different under rule 11(6), where a not unreasonable rejection of an offer of compromise is not a sufficient reason to displace the presumption to which the rule gives rise; and the failure to provide sufficient information to permit the rejecting party to assess its prospects is not sufficient of itself to displace the presumption. These factors may, however, form part of the total circumstances that satisfy the Court that it is appropriate in the particular case to depart from the prima facie position otherwise established by the rule. 35 Fourthly, the applicants' case was not such that from the outset it could have been characterized as without prospect of success. The applicants failed and, with the benefit of hindsight, perhaps it might be said that this result might have been anticipated at some point prior to the end of the trial. Precisely when this point of anticipation came into being is not clear. This is partly because there were some imponderables, as Weinberg J referred to like matters in Dresna at [18]. For example, Mr Mark Epstein was a credible witness, and I was generally impressed by his frankness. This assisted Baco's case, particularly in setting out the circumstances surrounding the packaging and get-up of its Grassroots products. Had I formed a different view, the applicants' case may have been stronger. Also, by way of example, I note that I ultimately found that the consumer confusion evidence was not probative of the applicants' claim; and that the evidence of Mr Partridge was not helpful. It may be recalled that he alone testified as to confusion between the applicants' and the respondent's products. There are other examples of this kind: it is unnecessary to refer to them all. What they illustrate is that the trial in this case as in some other cases had its own dramatic momentum, which makes 'hindsight' an inappropriate standard by which to assess the strength of the applicants' case prior to the end of the trial. The applicants' case was responsibly contested and, whilst it might have been seen as problematic (to use Weinberg J's language again) in some respects, particularly given the presence of vitaminwater and the other participants in the enhanced water market prior to May 2009, the cogency of its case was likely diminished in a number of ways that might well not have been anticipated prior to trial. 36 The above-mentioned are the chief factors that lead me to conclude that: (1) the circumstances are relevantly 'exceptional', and the Court should depart from the prima facie position for which rule 11(6) provides; (2) if rule 11(6) is inapplicable, the rejection of the offer was neither unreasonable nor imprudent within the meaning of the common law test. These same factors also support the conclusion that an award of indemnity costs would not serve the policy that such an award is intended to serve in circumstances such as these - to encourage a litigant to give careful consideration to its legal position and to engage in a practical way in discussions with a view to settlement. 37 As noted earlier, Nutrientwater referred to other factors, which it said were relevant to the Court's appraisal. Perhaps so, but none were as important in this case as the above-mentioned - the extent of the compromise, timing, the lack of information as to Baco's response, and the nature of the claims made by Nutrientwater against Baco. 38 It follows from the foregoing discussion that I would reject Baco's submission that Nutrientwater received no further significant information through discovery, exchange of proposed evidence, or the trial that would have "allowed it to make a better assessment of its prospects". 39 For the reasons stated, the appropriate order is that the applicants pay the respondent's costs of the proceeding on a party and party basis. I would further order that the respondent pay the applicants' costs of this application for indemnity costs on a party and party basis.

I certify that the preceding thirty-nine (39) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Kenny.