Sandoz Pty Ltd v H. Lundbeck A/S

Federal Court of Australia (Full Court)|2021-03-30|Before: Beach JJ

Counsel for the JM Hennessy SC with AR Lang Appellant/Cross-Respondent:

Solicitor for the Appellant/Cross-Respondent: Clayton Utz

Counsel for the Respondents/Cross-Appellants: AJL Bannon SC with LA Merrick and C Cunliffe

BETWEEN: SANDOZ PTY LTD ACN 075 449 553 Appellant

AND: H. LUNDBECK A/S First Respondent

LUNDBECK AUSTRALIA PTY LTD ACN 070 094 290 Second Respondent

AND BETWEEN: H. LUNDBECK A/S First Cross-Appellant LUNDBECK AUSTRALIA PTY LTD ACN 070 094 290 Second Cross-Appellant

AND: SANDOZ PTY LTD Cross-Respondent

order made by: NICHOLAS, YATES AND BEACH JJ DATE OF ORDER: 30 March 2021

In respect of the costs of the proceeding heard by the primary judge: (a) the respondents pay 50% of the appellant's costs of the amended application as agreed or, in default of agreement, as taxed; and (b) the appellant pay the respondents' costs of the discontinued cross-claim as agreed or, in default of agreement, as taxed.
The respondents/cross-appellants pay 75% of the appellant/cross-respondent's costs of the appeal and cross-appeal as agreed or, in default of agreement, as taxed. Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

BETWEEN: SANDOZ PTY LTD ACN 075 449 553 Appellant

AND: CNS PHARMA PTY LTD ACN 121 515 400 Respondent

AND BETWEEN: CNS PHARMA PTY LTD ACN 121 515 400 Cross-Appellant AND: SANDOZ PTY LTD Cross-Respondent

order made by: NICHOLAS, YATES AND BEACH JJ DATE OF ORDER: 30 march 2021

In respect of the costs of the proceeding heard by the primary judge: (a) the respondent pay 50% of the appellant's costs of the application as agreed or, in default of agreement, as taxed; and (b) the appellant pay the respondent's costs of the discontinued cross-claim as agreed or, in default of agreement, as taxed.
The respondent/cross-appellant pay 75% of the appellant/cross-respondent's costs of the appeal and cross-appeal as agreed or, in default of agreement, as taxed. Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

Background 1 In this matter we allowed the appeal by Sandoz Pty Ltd ("Sandoz") against the judgment of the primary judge's orders awarding declaratory relief, damages and costs to H. Lundbeck A/S ("Lundbeck A/S"), Lundbeck Australia Pty Ltd ("Lundbeck Australia") and CNS Pharma Pty Ltd (collectively "the Lundbeck parties") (Sandoz Pty Ltd v H. Lundbeck A/S [2020] FCAFC 133). The parties have filed affidavit evidence and written submissions in support of what they submit are the appropriate costs orders that should be made in relation to both the appeal and the proceedings before the primary judge. 2 Sandoz seeks its costs on an indemnity basis for the entirety of the proceedings before the primary judge and the appeal. Alternatively, it says that it should be awarded costs of the proceedings before the primary judge prior to 11.00am on 28 September 2018 on a party/party basis, and its costs of the proceedings before the primary judge on and after that date, and its costs of the appeal, on an indemnity basis. In support of these contentions it relies on an offer of settlement made on 7 August 2012 and related correspondence, and a subsequent offer of compromise dated 26 September 2018 made pursuant to r 25.01 of the Federal Court Rules 2011 (Cth) ("FCR"). Evidence relied on in support of Sandoz's position appears in affidavits made by its solicitor, Mr John Collins, dated 1 and 11 September 2020. 3 The Lundbeck parties' position in relation to costs is more complicated. They seek the following costs orders: (a) the Lundbeck parties pay Sandoz' costs of the trial in NSD 647 of 2014 and NSD 824 of 2016 with the exception of costs incurred in relation to the following issues (the "Lundbeck Issues"): (i) the construction and validity of the Patent; (ii) the scientific issues underlying whether Sandoz' escitalopram products infringed the Patent; (iii) whether ss 78 and 223(10) of the Patents Act 1990 (Cth) ("the Act") provided Sandoz a defence to infringement; (iv) whether Lundbeck Australia was an exclusive licensee of the Patent; (v) whether s 123 of the Act or discretionary factors should preclude the award of damages; (vi) Sandoz' cross-claim; and (vii) the quantification of damages (including the 25% Discount); (b) Sandoz pay the Lundbeck parties' costs of the trial in NSD 647 of 2014 and NSD 824 of 2016 in relation to the Lundbeck Issues; and (c) the Lundbeck parties pay 70% of Sandoz' costs of the appeals. 4 In support of their contention the Lundbeck parties rely on affidavits made by their solicitor, Mr Stephen Stern, dated 1 and 8 September 2020. 5 It is necessary to refer to the history of the proceedings heard by the primary judge for the purposes of determining what costs orders should be made in lieu of those made by her Honour. 6 The proceedings before the primary judge were heard over 11 days in April to May 2018 ("the first round") and 6 days in October 2018 ("the second round"). 7 When Lundbeck commenced proceedings against Sandoz, it also commenced proceedings against three other generic suppliers: Alphapharm, Apotex and Aspen. All of these proceedings were heard together during the first round of the hearing. However, after the first round of the hearing concluded, the claims against Alphapharm and Aspen were discontinued and, subsequently, the claim against Apotex was settled. By the time the second round of the hearing commenced, Sandoz was the sole remaining respondent.

The 7 August 2012 Calderbank Offer 8 About two years prior to the commencement of the infringement proceeding brought by the Lundbeck parties against Sandoz, Sandoz made an offer of settlement by letter dated 7 August 2012 sent by Griffith Hack (who were then acting for Sandoz) to Corrs Chambers Westgarth ("Corrs") who have at all relevant times acted for the Lundbeck parties. This offer is relied upon by Sandoz in support of its application for indemnity costs of the proceedings before the primary judge and the appeal. The offer was expressed to be "[w]ithout prejudice save as to costs" but said nothing about the possibility of it being relied upon in support of an application for indemnity costs. In a letter dated 23 June 2011, to which no settlement offer was attached, Griffith Hack had raised the possibility that Sandoz would seek indemnity costs if it was successful in its defence to any action brought for patent infringement. On 1 December 2016, a further letter was sent this time by King & Wood Mallesons ("KWM") on behalf of Sandoz again raising that possibility and referring to the earlier letter. 9 In the 7 August 2012 settlement offer Sandoz offered to pay Lundbeck A/S the sum of $1,000,000 (exclusive of GST) in settlement of any claims for infringement of the Patent and on various other terms which would have, if accepted, seen Sandoz withdraw from the proceeding then before the Administrative Appeals Tribunal in which Sandoz and other generic suppliers were seeking to overturn the decision of the Commissioner of Patents to extend the time within which Lundbeck could apply for an extension of the term of the Patent. 10 An applicant's failure to accept an offer not made in accordance with r 25.04 and which offers the applicant an outcome that is more favourable than that ultimately achieved by the applicant does not give rise to any presumptive entitlement to indemnity costs. Such an offer is, however, relevant to the exercise of the Court's discretion in relation to costs including determining whether there should be an order for indemnity costs. 11 One matter that we think is particularly significant apart from the amount of the offer is the stage at which the offer was made and the absence of any information in the letter which might be used by Lundbeck A/S to assess the reasonableness of the offer at a point of time when the dispute was still relatively inchoate. 12 In our view neither the settlement offer of 7 August 2012 nor the letters of 23 June 2011 or 1 December 2016 provide a basis for requiring the Lundbeck parties to pay an order for indemnity costs.

The 26 SEptember 2018 Offer of Compromise 13 Sandoz further relies on both r 25.14(1) and r 25.14(2) which provide: 25.14 Costs where offer not accepted (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. 14 The notice of offer to compromise relied on by Sandoz is dated 26 September 2018. The offer was expressed to be on an inclusive of costs basis and open for acceptance for 14 days after service. The offer was as follows: 1. The Respondent/Cross-Applicant offers to pay to the Lundbeck Parties the total sum of AU$4,600,000 in full and final settlement of all claims and cross-claims the subject of NSD 647 of 2014 and NSD 824 of 2016. 2. The applications and cross-claims in NSD 647 of 2014 and NSD 824 of 2016 each be discontinued. 3. There be no order as to costs. 15 The offer of compromise was served about one week prior to the second round of the hearing that commenced on 2 October 2018. 16 In our view r 25.14(1) has no application in the present situation. This is because none of the Lundbeck parties obtained a judgment in its favour. The applications filed by them in the two proceedings (NSD 647 of 2014 and NSD 824 of 2016) were ultimately dismissed. 17 In Commissioner of Taxation v Crown Insurance Services Ltd (No 2) [2012] FCAFC 182 Lander and Foster JJ), having set out r 25.14(1) and r 25.14 (2) of the FCR, stated at [29]-[32]: [29] Rule 25.14(2) is couched in different terms to rule 25.14(1), which applies when a respondent has made an offer and the applicant succeeds in the proceeding, but obtains a judgment that is less favourable than the terms of the offer. Rule 25.14(1) does not require an examination as to whether the applicant unreasonably failed to accept the offer as is required in rule 25.14(2). The costs consequences, subject of course to the exercise of discretion, follow if the applicant obtains a judgment less favourable than the respondent's offer. [30] Rule 25.14(2) applies where the respondent has served an offer of compromise on the applicant and the applicant's proceeding is subsequently dismissed. It addresses the circumstance addressed by O 23 r 11(6) of the FCR as they appeared from 2 August 2008. [31] Rule 25.14(2) requires an investigation into whether the applicant has unreasonably failed to accept the offer before the respondent is entitled to indemnity costs after the offer was served. [32] If rule 25.14(2) were in similar terms as rule 25.14(1), a respondent could put himself or herself at an advantage by filing an offer for $1, and if the applicant's proceeding were dismissed, the respondent could claim to be entitled to costs on an indemnity basis for that offer, which was never a genuine offer to settle the proceeding. That result was recognised, as the Full Court had in Seven Network Limited v News Limited, as being an unfair result. Rule 25.14(2) has been drawn so that if the respondent makes an offer of compromise, it has to be an offer that the applicant has unreasonably failed to accept before the respondent can rely upon the offer for obtaining an order for indemnity costs. 18 The next question is whether r 25.14(2) applies and, in particular, whether the Lundbeck parties unreasonably failed to accept the offer of compromise. 19 Sandoz submitted that it was unreasonable for the Lundbeck parties not to accept the offer of compromise given the substantial sum offered and that, given the stage at which the proceedings before the primary judge had reached, the Lundbeck parties would have been well placed to assess the reasonableness of the offer. 20 We are not persuaded it was unreasonable for the Lundbeck parties to reject the offer of compromise. As the Lundbeck parties' submitted, the arguments they advanced in support of their construction of the settlement agreement were not unmeritorious. The construction of the relevant clause adopted by her Honour was one which denied the existence of the licence upon which Sandoz relied. The Lundbeck parties submitted, in our view correctly, that the fact that the primary judge construed the settlement agreement as conferring a licence limited to two weeks, is a strong indicator that it was not unreasonable for the Lundbeck parties to reject Sandoz's offer. 21 The Sandoz offer to pay damages in the amount of $4.6 million (inclusive of costs) was modest given the damages claimed by the Lundbeck parties and was made at a relatively late stage of a lengthy and complex proceeding before the primary judge. By the time the offer of compromise was served, the Lundbeck parties would have incurred substantial costs. The proceedings before the primary judge culminated in a judgment in favour of Lundbeck A/S in the amount of $16,219,000 plus interest and a judgment in favour of Lundbeck Australia in the amount of $1,369,000 plus interest both exclusive of costs. 22 When considering Lundbeck's cross-appeal against the primary judge's decision to apply a discount of 25% when assessing damages, we held that, had Sandoz's appeal not succeeded, it would have been necessary to increase the amount awarded to the Lundbeck parties on the basis that the appropriate discount should have been in the order of 2% or 3% rather than the 25% adopted by the primary judge. In all the circumstances, we do not think it was unreasonable for the Lundbeck parties to reject Sandoz's offer of $4.6 million (inclusive of costs).

Subsequent Correspondence and Proceedings 23 There were some other matters relied upon by Sandoz in support of its application for indemnity costs. These matters were also relied upon in support of Sandoz's submission that, whatever the outcome of Sandoz's application for indemnity costs, "… it would not in any event be appropriate to discount Sandoz's costs, it having been successful in the proceedings". They included various letters written by KWM to Corrs reiterating that, if Sandoz's defence based on the settlement agreement was ultimately successful, then it would seek its costs on indemnity basis. 24 Sandoz also referred us to evidence showing that Lundbeck A/S took active steps to keep the terms of its settlement agreement with Sandoz confidential and that, in October 2011, it obtained injunctive relief prohibiting the disclosure of the contents of that document to KWM. This included applying to the New South Wales Supreme Court for injunctive relief restraining Sandoz from disclosing the settlement agreement to Mallesons Stephen Jaques (as KWM was then known). We note that those proceedings were commenced by Lundbeck A/S in 2011, several years prior to the commencement of the infringement proceedings in 2014. The suggestion behind Sandoz's submission seemed to be that this conduct was in some way inappropriate. 25 We do not think that Lundbeck A/S's conduct in obtaining injunctive relief restraining disclosure of the settlement agreement could warrant any order for indemnity costs. Brereton J of the New South Wales Supreme Court granted injunctive relief because, on our reading of his Honour's reasons, there was a risk that Sandoz might disclose the terms of the settlement agreement to KWM in circumstances where that firm was acting not only for Sandoz, but also for other generic suppliers who were contesting the Commissioner's decision to extend the time within which Lundbeck A/S could apply for an extension of the term of the Patent: H Lundbeck A/S v Sandoz Pty Ltd (2011) 94 IPR 613. 26 Once it is appreciated that KWM were acting for parties to whom the firm was not entitled to disclose the terms of the settlement, then the steps taken by Lundbeck A/S to protect the confidentiality of the settlement agreement could hardly be characterised as unreasonable. In any event, the orders made by Brereton J were, as we have mentioned, made in separate proceedings commenced years before the infringement proceedings. There is no relevant connection between Lundbeck A/S's conduct in bringing those proceedings against Sandoz and the Lundbeck parties' conduct of the infringement proceedings.

The Application for a separate question 27 The evidence indicates that on 23 December 2016 Sandoz filed interlocutory applications seeking various orders relevant to the question of whether or not it had a good defence based on cl 3 of the settlement agreement. In particular, it sought summary dismissal of the infringement proceedings brought against it on the basis of the licence arising under cl 3.1 and, alternatively, sought to have this question decided as a separate question in advance of the trial of the proceedings which had, by this time, been fixed for hearing commencing on 16 April 2018. 28 There was an interlocutory hearing before the primary judge on 31 January 2017 at which there was debate about the utility of dealing with the licence issue by way of separate question. During the course of that hearing the primary judge was advised that Sandoz also wished to rely on a defence based on s 223(10) of the Act. The hearing was then adjourned. 29 The hearing of the interlocutory application resumed before the primary judge on 9 March 2017 by which time Sandoz had amended its interlocutory application to seek to have the question of its defence based on s 223(10) of the Act also decided as a separate question. By that amended interlocutory application Sandoz made clear that it was no longer seeking summary dismissal. Sandoz submitted that the hearing of the separate questions arising under cl 3 of the settlement agreement and s 223(10) of the Act would be relatively short and that if either of those questions was decided in Sandoz's favour, would be a dispositive of the case brought against it. The primary judge was not persuaded that it was desirable to make orders for separate determination of either question. Her Honour's reasons, which were recorded in the transcript of the interlocutory hearing, reflect an understandable concern that a separation of issues as proposed by Sandoz may ultimately lead to an increase in costs.

The Relevant Principles 30 The Court's discretion to award costs under s 43 of the Federal Court of Australia Act 1976 (Cth) (the "FCA Act") is broad. But it is a power that must be exercised judicially and in accordance with well-established principles. As stated by French CJ, Hayne, Bell, Gageler and Keane JJ in Gray v Richards (No 2) (2014) 315 ALR 1 at [2]: The disposition of costs is within the general discretion of the court. Ordinarily, that discretion will be exercised so that costs are awarded to the successful party, but other factors may have a significant claim on the discretion of the Court [Stewart v Atco Controls Pty Ltd (In liq) (No 2) (2014) 252 CLR 331 at 334 [4]]. The disposition which is ultimately to be made in any case where there are competing considerations will reflect a broad evaluative judgment of what justice requires. 31 The relevant principles were summarised by the Full Court in EMI Songs Australia Pty Limited v Larrikin Music Publishing Pty Ltd [2011] FCAFC 92 as follows at [9]: Costs are in the discretion of the Court (Federal Court of Australia Act 1976 (Cth) s 43). The discretion is broad but is to be exercised judicially. The fundamental purpose of the discretion is to compensate the successful party, not to punish the unsuccessful party. The furtherance of the goal of compensation means that, in general, a successful party will obtain an order for costs in its favour (Oshlack v Richmond River Council (1998) 193 CLR 72; [1998] HCA 11 at [65]-[68]). However, "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…" (Hughes v Western Australian Cricket Association (Inc) (1986) ATPR 40-748 at 48,136). If apportionment of costs is appropriate, the object is not mathematical precision (Dodds Family Investments Pty Ltd (formerly Solar Tint Pty Ltd) v Lane Industries Pty Ltd (1993) 26 IPR 261 at 272) but a result that best reflects the interests of justice in the overall circumstances of the case. See also Ruddock v Vadarlis (No 2) (2001) 115 FCR 229 at [11] per Black CJ and French J. 32 Sandoz relied on the decision of the Full Court in Les Laboratoires Servier v Apotex Pty Ltd (2016) 247 FCR 61 ("Servier"), a patent case in which the Full Court set aside the trial judge's order that the alleged infringer (Apotex) pay 66.67% of the patentee's (Servier) costs of the proceeding in respect of both infringement and validity issues even though Apotex had been successful in obtaining an order for revocation of the patent. The Full Court in Servier held at [306] that the trial judge's exercise of discretion had miscarried because his Honour failed to consider the extent to which there was a common substratum of fact in respect of issues on which Apotex had either succeeded or failed. It was also held that the trial judge failed to give full consideration as to whether the raising of those issues was justified: see House v The King (1936) 55 CLR 499. The Full Court held that Servier should pay 40% of Apotex's costs of the proceedings (subject to some immaterial exceptions). We will say more about that decision later in these reasons. 33 One of the authorities referred to by the Full Court in Servier was the decision of White J in Hockey v Fairfax Media (No 2) (2015) 237 FCR 127. In that case his Honour referred to some of the well-known authorities including those which caution against the making of costs orders on an issues basis if the issues are not "clearly dominant or separable" where it will ordinarily be appropriate to award the costs of the proceeding to the successful party without attempting to differentiate between those issues on which it was successful and those on which it failed. White J stated at [88]: However, courts are now more ready to apportion the costs awarded to a party who succeeds in only some of the claims he or she brings. This may reflect the increasing factual and legal complexity of modern litigation and the multiplicity of factual and legal issues it entails, and the tendency of applicants to pursue multiple claims involving different factual enquiries in the one proceeding. It may also reflect an encouragement by the courts to applicants to exercise some discrimination in their selection of the claims they litigate. It is to be remembered that the inclusion of multiple causes of action in the one proceeding, even if based on a common substratum of fact, adds to the costs of the pleadings, interlocutory activity, preparation and presentation of the evidence at trial as well as of the trial itself. Nowadays, courts are particularly conscious of their role in attempting to control the cost of litigation. 34 The approach referred to by his Honour is one that is often taken in patent litigation where a party who successfully challenges the validity of a patent on various grounds, but fails on others, is awarded only a proportion of its costs of the cross-claim. This approach is usually taken due to the complexity of the issues involved and the costs and time which may be associated with proof of matters relevant to those issues: see, for example PAC Mining Pty Ltd v Esco Corporation (No 2) [2009] FCAFC 52; Tramanco Pty Ltd v BPW Transpec Pty Ltd (No 2) [2014] FCAFC 58; Idenix Pharmaceuticals LLC v Gilead Sciences Pty Ltd (No 2) [2018] FCAFC 7.

Sandoz's cross-claim seeking relief for breach of contract and misleading conduct 35 The cross-claims filed by Sandoz in each of the proceedings show that Sandoz was not itself seeking orders for the revocation of the patent but was seeking damages for breach of contract and misleading and deceptive conduct. Relevant extracts from the Lundbeck parties' outline of closing submissions dated 2 May 2018 make clear that Sandoz's cross-claim was bound up with the proper construction of the settlement agreement and some related correspondence. According to those submissions, Sandoz's cross-claims would simply fall away in the event that the questions relating to the proper construction of the settlement agreement and the related correspondence were determined in the Lundbeck parties' favour. 36 On the second day of the second round of the hearing, Senior Counsel for Sandoz informed the primary judge that Sandoz no longer pressed its cross-claims. Sandoz's notices of discontinuance were not filed until 25 October 2018 but it is apparent that the proceedings against Sandoz were conducted on the basis that the cross-claims had been abandoned on 3 October 2018. 37 The evidence before us shows that on 23 October 2018 the primary judge's Associate wrote to the solicitors for Sandoz requesting that it file notices of discontinuance in order to formalise the discontinuance. Why Sandoz had not filed its notices of discontinuance before then is not explained by the evidence. Nor does the evidence include a copy of any order granting Sandoz leave to discontinue or any indication that the discontinuance was filed with the consent of the Lundbeck parties: cf. FCR r 26.12(2). But in light of the email correspondence of 23 October 2018 it may be inferred that the primary judge gave Sandoz leave to file the notices of discontinuance. 38 There is no suggestion that the notices of discontinuance were filed by consent or that any order was made pursuant to r 26.12(7) of the FCR which would relieve the cross-claimants of their liability to pay Lundbeck parties' costs of their cross-claims. In those circumstances there may be no need for us to make any further order in relation to the costs of the cross-claims. Nevertheless, in case there is any suggestion that the costs orders made by the primary judge on 19 February 2019 (requiring Sandoz to pay the Lundbeck parties' costs of the proceedings) may have displaced the operation of r 26.12(7), we propose, for the avoidance of doubt, to make an order requiring Sandoz to pay the Lundbeck parties' costs of the cross-claims filed by Sandoz in the proceedings brought against it.

The Lundbeck parties' applications for injunctive and pecuniary relief for patent infringement and misleading conduct 39 Notices of discontinuance were filed by the Lundbeck parties in their proceedings against Alphapharm on 11 April 2018, Aspen on 8 June 2018 and Apotex on 16 October 2018. Although the notice of discontinuance in relation to the proceeding against Apotex was not filed until after the primary judge reserved her judgment, it appears that Apotex ceased to play any active role in the proceedings prior to the second round of the hearing as a result of a settlement Apotex made with the Lundbeck parties. 40 The evidence shows that Apotex had filed a cross-claim challenging the validity of the patent and that it prosecuted that claim until the settlement. The validity of the patent was no longer in issue following the settlement. That said, it is apparent that this is a case in which questions of the proper construction of the relevant claims and the various validity issues that had been argued by Apotex were closely related. 41 In final submissions to her Honour, as was later confirmed in writing after the hearing concluded, Sandoz made clear that it pressed its non-infringement argument based on the proper construction of the Patent but did not contend the Patent was invalid as a result of any particular construction. Sandoz relied upon certain evidence and submissions that had been relied upon by Apotex in the first round of the hearing in support of the contention that the Sandoz products did not infringe. That material was identified in an email from Sandoz's solicitors to her Honour's Associate dated 26 October 2018. 42 The primary judge drew attention to some of the difficulties that arose as a result of Apotex having settled with the Lundbeck parties prior to the second round of the hearing. Her Honour stated at [35]-[38]: [35] The fact that Sandoz alone remains as a respondent creates some practical difficulty. To explain, Sandoz did not challenge the validity of the 144 patent, but it did defend Lundbeck's infringement proceedings on various grounds including the proper construction of the 144 patent. In so doing Sandoz relied on Apotex's expert evidence and submissions. Apotex's submissions about construction were part of its case that the 144 patent is invalid or, if valid, should be construed in a manner which meant that Apotex's products (and thus also Sandoz's products) did not infringe. As noted, however, the proceedings against Apotex settled, but only after the hearing in relation to the invalidity and the proper construction of the 144 patent. [36] I sought clarification of Sandoz's position. Sandoz said that it pressed its non-infringement argument based on the proper construction of the 144 patent as articulated by Apotex, but did not contend the patent was invalid as a result of any particular construction. [37] The difficulty is that given that the hearing took place in the way that it did it is not possible to identify the construction argument other than in the context of Apotex's invalidity argument. As a result, in these reasons for judgment I refer to and deal with Apotex's invalidity argument, but I do so only for the purpose of explaining my conclusions about Sandoz's construction and associated non-infringement argument. Sandoz's construction argument relied on one aspect of Apotex's case, which may be described as the "separated, isolated or pure" (+)-enantiomer argument. Sandoz did not adopt Apotex's so-called "molecule" construction argument. However, in order to understand the competing constructions, and thus Sandoz's position as the sole remaining respondent, it is necessary to explain all aspects of Apotex's arguments. [38] Sandoz also adopted other submissions of various generic parties about certain issues. For ease of reference I have attributed all of those submissions in these reasons to Sandoz but, in reality, many of the submissions were made by one or other generic party before the cases against them were settled and which Sandoz adopted. 43 Sandoz's non-infringement argument, which had also been relied on by Apotex, was referred to by her Honour as the "separated or isolated or pure (+)-enantiomer" argument. According to this argument, there could be no infringement unless the active ingredient in the pharmaceutical compositions supplied by it was 100% pure (+)-enantiomer. This was a non-infringement argument but it also had a vital role to play in the challenge to the validity of the Patent based on lack of novelty, lack of fair basis, and lack of clarity, which Apotex advanced during the first round of the hearing. Apotex's contention was that if, on the proper construction, the relevant claims contained any trace of the (−)-enantiomer, then the relevant claims were invalid on one or more of those grounds. 44 The primary judge found that Sandoz was bound by an issue estoppel in relation to the proper construction of claim 1 of the Patent which precluded it from maintaining its construction argument. The estoppel arose as a result of the Full Court decision in Alphapharm Pty Ltd v H Lundbeck A/S (2015) 234 FCR 306 (referred to by her Honour and in this judgment as "FFC#3") to which Sandoz was a party. Her Honour rejected Sandoz's contention that its products were not within the scope of claim 1 on that basis. She also considered that the expert evidence which was relied upon by Sandoz in support of its construction of claim 1 and concluded that Sandoz's construction of the claim was wrong in any event. That being the case, her Honour held that Sandoz's defence to infringement based on the presence of trace, trivial or insignificant amounts of the (−)-enantiomer in its products could not succeed even in the absence of the issue estoppel. 45 In her reasons for judgment the primary judge went on to consider the arguments previously advanced by Apotex in support of its challenge to the validity of the relevant claims. For the most part these arguments depended for their success on the same construction point upon which Sandoz and the other generic parties had each relied. It is apparent from her Honour's reasons that she dealt with these validity issues merely for the purpose of further elucidating the construction issue and her reasons for deciding it in the Lundbeck parties' favour.

Consideration 46 One matter of significance is that Sandoz defended the claims against it not merely on the basis that it had a good defence under cl 3 of the settlement agreement and s 223(10) of the Act, but also on the basis that, on its proper construction of claim 1, Sandoz's products were not within the scope of the claim. This was an issue that gave rise to substantial legal and factual issues as to the proper construction of the relevant claims when considered in light of the common general knowledge, the relevant expert evidence, the effect of previous judgments of the Court, and the physical composition of Sandoz's products. These issues were entirely separate from the cl 3 and s 223(10) submissions. 47 Not only did Sandoz fail to persuade the primary judge that its construction of the Patent was correct, her Honour also found that Sandoz was bound by an issue estoppel arising out of a prior determination in proceedings to which it was a party that precluded Sandoz from maintaining the very construction on which it relied. 48 We have considered the fact that Sandoz applied to have the defence based on cl 3 of the settlement agreement and the defence based on s 223(10) of the Act separately determined. However, we do not think that this is a matter that carries any significant weight when determining what costs order should be made. 49 Sandoz relied on the fact that the Lundbeck parties resisted the application to have the cl 3 issue and the s 223(10) issue separately determined. Sandoz submitted that it was therefore not unreasonable for it to rely on other defences at the trial before the primary judge. 50 We do not think this is the appropriate way of framing the question with which we are now concerned. If we were to conclude that it was unreasonable for Sandoz to rely on various other defences against the possibility that its defences based on cl 3 or s 223(10) might fail, then that would more than likely lead us to conclude that Sandoz should pay the costs incurred by the Lundbeck parties in resisting those defences. However, we do not make any finding that it was unreasonable for Sandoz to rely on any one or more of those defences. 51 Further, it could never have been assumed that the Lundbeck parties would not seek to appeal an unfavourable determination of the separate questions. In those circumstances we respectfully agree with the primary judge that dealing with the cl 3 and the s 223(10) issues separately had the potential to generate significant extra costs and delay even if one or both of those questions was determined in Sandoz's favour. The position may have been different if Sandoz had offered to confine its defence to those points as a condition of dealing with them by way of separate question. However, no such concession appears to have been made. At all relevant times Sandoz sought to maintain a defence of non-infringement based on the construction argument to which we have previously referred. 52 It is also important to recall that Sandoz was ultimately unsuccessful at trial before the primary judge in relation to both the defence based on cl 3 of the settlement agreement and s 223(10) of the Act. And while Sandoz was successful on appeal in relation to cl 3, we also found that the primary judge was correct to hold that s 223(10) did not provide Sandoz with a good defence to the Lundbeck parties' claims. 53 It remains to consider whether it is appropriate to make an order requiring Sandoz to pay some part of the Lundbeck parties' costs in so far as their costs related to issues upon which the Lundbeck parties succeeded or whether, short of that, it is appropriate to deprive Sandoz of its costs in relation to such issues notwithstanding that the proceedings against it were ultimately dismissed. 54 This is a clear case in which it is appropriate to deprive Sandoz of the costs it incurred in defending the infringement case on the basis of a construction of the Patent previously rejected in FFC#3. The question then is whether this should merely result in a reduction of the costs that should be awarded to Sandoz or whether there should be an order requiring Sandoz to pay some part of the Lundbeck parties' costs. 55 Sandoz placed particular reliance on the following statement of the Full Court in Servier at [303]: Without amounting to an absolute rule, the principle remains that, subject to certain limited exceptions generally linked to the disentitling conduct of the successful party, a successful party in litigation is entitled to an award of costs (Oshlack per McHugh J at [67]-[68], in dissent but not in this aspect of the principle and with whom Brennan CJ agreed). That is not to punish the unsuccessful party but to compensate the successful party. There is no absolute rule that, in the absence of disentitling conduct, a successful party is to be compensated by the unsuccessful party, nor is there a rule that there is no jurisdiction to order a successful party to bear the costs of the unsuccessful party (Oshlack at [40] per Gaudron and Gummow JJ). However, the Courts have been slow to order a successful party to pay the costs where it has been unsuccessful on some issues. In Mok v Minister for Immigration, Local Government and Ethnic Affairs (No 2) (1993) 47 FCR 81, Keely J was of the view (at 84) that, without attempting to fetter the discretion, this power ought to be exercised only where the Court, on a consideration of all of the circumstances, has concluded that the raising of an issue by the applicant on which it has failed was so unreasonable that it is fair and just to make the order. 56 The Full Court went on to state at [304]-[305]: [304] As the High Court (per Mason and Deane JJ, with whom Brennan J relevantly agreed) observed in Norbis v Norbis (1986) 161 CLR 513 at 519, discretionary remedies may be transformed into remedies which are granted or refused according to well-settled principles which guide the exercise of a discretion. This transformation promotes consistency in decision-making, the need for which may be a countervailing factor to the width of the discretion. As Gageler J observed in Comcare v PVYW (2013) 250 CLR 246 at [139]: While a rule or principle developed by an appellate court to guide the exercise of a statutory discretion does not itself have the force of law, "[t]here may well be situations in which an appellate court will be justified in setting aside a discretionary order if the primary judge, without sufficient grounds, has failed to apply a guideline in a particular case" and "[w]here there is nothing to mark the instant case as different from the generality of cases, the failure will suggest that the discretion has not been soundly exercised". (References omitted.) [305] However, there is no limitation on the power granted in s 43 that is not found in the words used ([Probiotec Ltd v University of Melbourne (2008) 166 FCR 30] at [47]). The discretion is unconfined, except insofar as the subject matter, scope and purpose of the legislation indicate otherwise, yet it falls to be exercised judicially (Probiotec at [47], [50]). 57 We do not consider the power to order that a successful party pay costs in relation to discrete issues on which it failed may only be exercised in circumstances where the successful party's reliance on such an issue was unreasonable. There may well be other factors that fall short of what might be characterised as unreasonable conduct which may lead the Court to conclude that justice requires that the successful party pay some part of the unsuccessful party's costs. However, we do accept that the Court will exercise particular caution before ordering a party who successfully defended a proceeding to pay the unsuccessful party's costs even where the issues upon which the successful party failed are (as here) sufficiently separate from those upon which it succeeded. 58 One of the particular difficulties arising in this case is that because there were various proceedings against different respondents heard together (at least during the first round of the hearing) a significant amount of the hearing time is likely to have been taken up by proof of matters relevant to particular respondents only. Further, it appears from the evidence before us, that a considerable amount of the evidence relied upon by Apotex was ultimately not relied upon by Sandoz. 59 Another matter that creates difficulties when seeking to settle upon appropriate costs orders in this matter is that Apotex and the other generic suppliers settled their proceedings. All of the notices of discontinuance filed in the proceedings brought against those generic suppliers indicate that they were filed on the basis that there be no order as to costs. There is no other evidence to indicate what the terms of their settlements with the Lundbeck parties were or whether any of them made any contribution under such settlements to the Lundbeck parties' costs. 60 These are all matters which in our view weigh against the making of any order that requires Sandoz to pay any part of the Lundbeck parties' costs except in so far as they are solely referable to the cross-claims. 61 We are mindful that there was a significant overlap at least in the legal issues arising out of the cross-claim and the meaning and effect of cl 3(1) of the settlement agreement. However, it seems likely that a significant portion of the evidence relied upon by Sandoz in support of its cross-claims could not have been admissible if the Sandoz defences had been confined to a defence based on a licence conferred by cl 3(1). 62 We are satisfied that a substantial amount of preparation and hearing time related to issues that were separate from the issues upon which Sandoz succeeded (primarily cl 3 and s 79 of the Act). Even though Sandoz was ultimately successful, it is not in the interests of justice that it be granted all of its costs of the proceedings. 63 The parties' affidavit evidence includes detailed analyses of the transcript, written submissions and the primary judge's reasons for judgment, which are said to support the exercise of the discretion in favour of the parties' competing positions. For the most part we have not found either analysis particularly helpful. As is made clear in the authorities, the task involved in apportioning costs in a matter such as this is not a mathematical exercise and involves a large measure of judicial estimation. However, our strong impression is that a substantial amount of the time occupied during both rounds of the hearing before the primary judge related to the non-infringement defence based on the construction of the relevant claims, s 78(b)(i), and s 223(10) of the Act upon which issues Sandoz was unsuccessful. 64 No party asked us to remit any of the costs issue to the primary judge for further consideration. In those circumstances, we must do the best we can based on the limited information in the appeal books, the primary judge's reasons, the submissions of the parties and the affidavits that have been filed by their solicitors. 65 In the result, we consider that there should be an order that the Lundbeck parties pay 50% of Sandoz's costs of the applications filed in each of the proceedings against Sandoz. This excludes the costs of the discontinued cross-claims which will be the subject of a separate order in favour of the Lundbeck parties.

Costs of the appeal and cross-appeal 66 As previously mentioned the Lundbeck parties submitted that they should be required to pay only 70% of Sandoz's costs of the appeal, including the cross-appeal. Sandoz submitted that it should have all its costs of the appeal and the cross-appeal but that, if the Court took the view that there should be some reduction in the costs payable by the Lundbeck parties, then that reduction should be no more than 5% or 10%. 67 We consider that it is appropriate to reduce the costs payable by the Lundbeck parties to take account of the discrete issues upon which Sandoz was unsuccessful in the appeal proceedings. Sandoz's appeal based on cl 3 of the settlement agreement and, as against Lundbeck Australia, s 79 of the Act, was successful. Sandoz also succeeded in relation to the calculation of pre-judgment interest and the consumer law claim (the latter being subsidiary to the question of patent infringement). However, it was unsuccessful on all other issues, including, on the cross-appeal, whether the 25% discount imposed by the primary judge when assessing the Lundbeck parties' damages was excessive, and on the appeal, the s 223(10), and the standing of Lundbeck Australia as exclusive licensee. Against that background, we do not think the discount proposed by Sandoz is sufficient to do justice between the parties. 68 In our view, taking into account the fact that Sandoz was the successful party in the appeal and the cross-appeal, but also having regard to its lack of success on discrete issues, we think that it is appropriate to order that the Lundbeck parties pay 75% of Sandoz's costs of both the appeals and the cross-appeal. 69 Orders accordingly. I certify that the preceding sixty-nine (69) numbered paragraphs are a true copy of the Reasons for Judgment of the Honourable Justices Nicholas, Yates and Beach.

Court (Federal Court of Australia Act 1976(Cth)s 43).

Federal Court Rules 2011(Cth)rr 25.01, 25.14, 26.12

Patents Act 1990(Cth)s 223(10)

At a glance

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Judgment (26 paragraphs)

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Legislation Cited (4)

Cases Cited (23)