SNF (Australia) Pty Ltd v Ciba Specialty Chemicals Water Treatments Limited

JUDGE: DAVIES J DATE: 28 august 2015 PLACE: MELBOURNE

application 1 On 3 August 2015, the Court dismissed the interlocutory application by the Applicant ("SNF") to set aside final orders in the trial on liability on the basis of fresh evidence that SNF claimed was not available to it at the time the trial was conducted. The Respondents ("Ciba") have now applied for an order that their costs be paid by SNF on an indemnity basis pursuant to s 43 of the Federal Court of Australia Act 1976 (Cth) ("FCA Act") and r 40.02(a) of the Federal Court Rules 2011 (Cth).

principles 2 The usual rule is that where the Court orders that the costs of one party to litigation be paid by another party, the order is for payment of those costs on a party/party basis. To order the payment of costs on an indemnity basis, some special or unusual feature in the case must justify a departure from the ordinary practice: Colgate-Palmolive Company v Cussons Pty Limited (1993) 46 FCR 225; [1993] FCA 801 at 230-234 (FCR) ("Colgate-Palmolive"); Seven Network Limited v News Limited (2009) 182 FCR 160; [2009] FCAFC 166 at [1102]. In Hamod v New South Wales [2002] FCA 424; (2002) 188 ALR 659 at 665 ("Hamod"), the Court (per Gray J, with whom Carr and Goldberg JJ agreed) explained the principle as follows: Indemnity costs are not designed to punish a party for persisting with a case that turns out to fail. They are not awarded as a means of deterring litigants from putting forward arguments that might be attended by uncertainty. Rather, they serve the purpose of compensating a party fully for costs incurred, as a normal costs order could not be expected to do, when the court takes the view that it was unreasonable for the party against whom the order is made to have subjected the innocent party to the expenditure of costs. There is ample authority that the discretion to award indemnity costs is ordinarily enlivened if a proceeding has no prospects of success: Gersten v Minister for Immigration & Multicultural Affairs [2001] FCA 260 at [19]; Dowling v Fairfax Media Publications Pty Ltd (No. 2) [2010] FCAFC 28 at [44]. Misconduct that causes loss of time to the Court and to other parties has also been held to justify such an order: Colgate-Palmolive at 233. In Xat Ky v Australvic Property Management Pty Ltd (No 2) [2007] FCA 1785, Middleton J awarded indemnity costs where "there was a considerable loss of time, inconvenience to the parties and the Court, and a wilful disregard to established law": at [12]. However, as Sheppard J cautioned in Colgate-Palmolive at 234, whilst the circumstances in which indemnity costs have been ordered provide a guide for the exercise of discretion, the question must always be whether the particular facts and circumstances of the case in question warrant the making of an order for payment of costs other than on a party/party basis.

ciba's submissions 3 In the present case, the award of indemnity costs was said by Ciba to be justified for the following reasons. 4 First, Ciba raised the highly unusual nature of the interlocutory application, the enormous volume of evidence filed by SNF in support of the interlocutory application and the very substantial costs incurred by Ciba in responding to the interlocutory application. In further support, Ciba pointed out that at a directions hearing on 20 May 2014, it had sought an order that the question of whether it had an obligation to provide the discovery as alleged be heard separately and prior to other questions arising from the interlocutory application. SNF was said to have resisted this on the basis that it also alleged estoppel. SNF then filed 14 affidavits from 11 witnesses. Ciba referred to the reasons for decision at [87]-[92], [185], [199] and [206] which contain criticisms concerning some of the evidence adduced by SNF. Ciba also pointed to the length of the hearing, being 10 sitting days, which, it was claimed, was attributable to the insistence by SNF that it file such substantial evidence and resulted in Ciba incurring very substantial legal costs. Ciba stated that those costs were greater than the costs incurred by it in respect of the original trial, and that the volume of the evidence filed, the number of witnesses appearing and the length of the hearing on the interlocutory application was roughly equivalent to that of the original trial. Ciba also emphasised that the appellate process in this proceeding had, by 15 March 2013, run its course. It was submitted that whilst a litigant, such as Ciba, can expect to incur out of pocket legal costs associated with the usual appellate process, it would be quite unjust for Ciba now to be saddled with the burden of substantial additional costs, incurred in respect of what Ciba claimed was a highly unusual and fundamentally flawed application, brought long after special leave to appeal was refused. 5 Secondly, it was submitted that SNF pursued its pleaded case in support of the interlocutory application in wilful disregard of clearly established law. Ciba referred to the reasons for decision at [30] and [46] in relation to SNF's pleaded case, and the case on which it opened, that Ciba was required to give discovery of documents "which related to Ciba's development pathway" as relevant to innovative step because they "bear on the extent to which the invention represents an advance over the art". Ciba submitted that the case was pursued by SNF in disregard of clear Full Court authority that "the advance in the art" criterion does not apply to innovative step, citing Dura-Post (Aust) Pty Ltd v Delnorth Pty Ltd (2009) 177 FCR 239 at [72], [77] and [79] per Kenny and Stone JJ. It was submitted that the untenable nature of that case was reflected in the fact that it was abandoned by SNF in closing submissions without explanation. 6 Thirdly, it was submitted that SNF pleaded, pursued and then abandoned without explanation numerous other claims in the interlocutory application which, properly advised, it should have known had no chance of success. It was submitted that this was conduct which caused loss of time to the Court and to Ciba and justifies the award of indemnity costs. The following specific examples were given: (a) SNF pleaded in its Particulars of Conduct filed in July 2014 that Ciba ought to have discovered the disputed documents pursuant to its "novelty discovery obligations", even though SNF had never previously pleaded, at any stage in this proceeding, that the Orebind or Yoganup Process anticipated Ciba's patents. This claim was only abandoned in December 2014, after both parties had filed their evidence; (b) SNF also abandoned its estoppel case in December 2014. By that time, Ciba had already filed its evidence responding to the pleaded claim of estoppel; (c) In December 2014, SNF pleaded a new claim based on an agreement alleged to have been made concerning the ambit of discovery. That claim was abandoned in closing submissions. By that time, there had been substantial cross-examination by both parties concerning the alleged agreement. It was submitted that this claim wasted Court time and unnecessarily inflated the costs of the hearing of the interlocutory application; (d) Ciba also relied on the fact that it was not until SNF had filed its closing submissions that it abandoned its pleaded claim that Ciba ought to have discovered documents concerning its development pathway. It was submitted that the abandonment at that stage was, on any view, a gross delay because of the untenable nature of that claim which, it was said, should never have been pursued. 7 Fourthly, it was submitted that SNF pleaded and pursued its interlocutory application in wilful disregard of known facts, namely that even if the disputed documents were discoverable, the interlocutory application would have failed because of the repeated failure of SNF and its solicitors to act with reasonable diligence prior to the trial in the liability hearing. It was submitted that this background must, at all relevant times, have been known to SNF and its solicitors, referring to the facts as found in the reasons for decision at [195] that Mr Schroeter had not been given basic advice regarding secret use, and at [200], that SNF failed to act on discovered documents and other available information. 8 Fifthly, it was submitted that the conduct of SNF in filing the interlocutory application, without notice, has caused the undue prolongation of a case by groundless contentions with a considerable loss of time, inconvenience to the parties and to the Court and in wilful disregard to established law in the attempt to reopen the case. It was submitted that the application has substantially delayed the recovery by Ciba of pecuniary relief in respect of conduct held by Kenny J, in a judgment delivered in 2011, to infringe its patents. 9 Sixthly, it was submitted that the conduct of SNF in seeking to challenge the validity of Ciba's patents was precisely the sort of conduct sought to be discouraged by s 19(2) of the Patents Act 1990 (Cth). Section 19 provides as follows: (1) In any proceedings in a court in which the validity of a patent, or of a claim, is disputed, the court may certify that the validity of a specified claim was questioned. (2) If a court issues a certificate, then, in any subsequent proceedings for infringement of the claim concerned, or for the revocation of the patent so far as it relates to that claim, the patentee, or any other person supporting the validity of the claim is, on obtaining a final order or judgment in his or her favour, entitled to full costs, charges and expenses as between solicitor and client, so far as that claim is concerned. 10 Accordingly, it was submitted, the justice of the case requires an award of indemnity costs as, it was said, the interlocutory application was brought by SNF without any proper foundation in law or fact and the Court found against SNF on every one of the issues that the parties agreed the Court was to determine. Further, it was submitted that SNF had pleaded, pursued and then abandoned at a late stage, and without any explanation, numerous highly unusual claims that were always bound to fail by reason of the failure of SNF and its solicitors to exercise reasonable diligence prior to the original trial. It was submitted that such conduct was antithetical to s 37M and s 37N of the FCA Act and should be discouraged by an award of indemnity costs.

snf's submissions 11 SNF submitted that an award of indemnity costs was not justified and that costs should be awarded on a party/party basis. 12 It was submitted that the highly unusual nature of the application cannot justify the award of costs on an indemnity basis. SNF submitted that the application concerned the very serious question of whether Ciba had complied with its discovery obligations in the proceeding. Given the seriousness of the issue SNF was entitled to make the application and should now not be punished by an indemnity costs order merely because it was unsuccessful in doing so. 13 It was submitted that Ciba's assertion that SNF resisted a separate question was not entirely accurate, as the transcript of the directions hearing on 20 May 2014 indicated that SNF's senior counsel only raised concerns concerning this approach. SNF noted that the Court then indicated that counsel should confer on the form of a separate question and evidence but Ciba subsequently did not press for a separate question. 14 SNF also cavilled with Ciba's claim that the length of the hearing was attributable to SNF filing voluminous evidence on the substantial validity questions. It was submitted that SNF was required to file substantive validity evidence to establish that there was, at least, a real possibility of a different outcome, and that Ciba's concession was only provided after that evidence had been filed. Furthermore, SNF contended that as a result of Ciba's concession, the substantive validity evidence filed by both parties did not affect the length of the hearing. 15 SNF also pointed to the fact that SNF could not have made the application sooner than it did because it was not aware of the matters underlying the application until after all the avenues of appeal had been exhausted. Further, it was said, this was a factually and legally complex application, involving difficult and complicated questions of law, and the making of an order for indemnity costs on this basis would unnecessarily discourage parties from bringing complex applications before the Court. 16 SNF further submitted that it did not pursue its case in wilful disregard of clearly established law. It was submitted that the law on the scope of discovery obligations in respect of an allegation of lack of innovative step remains far from settled with little, if any, authority dealing directly with the issue. Moreover, it was submitted that SNF's reference to "advance in the art" was explained in its opening submissions in the context of whether the variation over a prior disclosure makes a substantial contribution to the working of the invention. It was said that this was not abandoned by SNF in closing. 17 SNF also submitted that it appropriately narrowed its case during the application and that the vast majority of the evidence filed and submissions made and relied upon by Ciba was unaffected by SNF abandoning certain issues. 18 It was also submitted that SNF did not pursue its case in wilful disregard of clearly established facts. It was put that SNF had no means of forecasting the Court's findings on diligence as Ciba did not provide detailed submissions regarding the failure of SNF to act with reasonable diligence. Thus, it was submitted, the precise documents and acts upon which Ciba relied only became apparent during the hearing of the application. 19 Finally, Ciba submitted that s 19(2) of the Patents Act is inapplicable as that section is directed to subsequent infringement or revocation proceedings involving a certified patent, not to an application of the type which was made by SNF. 20 Accordingly it was submitted for SNF that there are no special or unusual features of an unmeritorious or improper nature surrounding the interlocutory application or SNF's conduct of it which would justify an award of costs on an indemnity basis.

consideration 21 There is no doubt that the interlocutory application has substantially delayed the finalisation of the pecuniary relief to which Ciba is entitled under the orders of Kenny J. There is also no doubt that there will have been considerable cost, time involved and inconvenience to Ciba in responding to claims that were subsequently abandoned and in defending the application generally on which SNF ultimately was wholly unsuccessful. Nonetheless, I am not persuaded that I should depart from the usual rule and make an award of costs in favour of Ciba on an indemnity basis. 22 First I do not accept that the application was pursued in wilful disregard of the knowledge that SNF's solicitors had not acted with reasonable diligence. The parties were in substantial dispute over the claim that SNF's solicitors had failed to act with reasonable diligence. The finding against the solicitors turned on an evaluation of the solicitors' conduct in light of the substantial body of evidence considered as a whole, including cross examination, which, in final analysis, led the Court to reach that conclusion. It could not be said, in my view, that there was no arguable basis at all on which to refute the claim that SNF's solicitors had not acted with reasonable diligence. 23 Secondly, I do not consider that it can be said that the application was bound to fail in law, although aspects of the claim do lend themselves to criticism. SNF was plainly put on notice by Ciba's opening submissions that the application was bad in law, in so far as it was based upon a claim that documents relevant to Ciba's development pathway were discoverable in respect of the lack of innovative step ground in the infringement proceeding. SNF appeared to accept that submission as it abandoned that claim in those terms, without explanation, in closing submissions and recast the obligation to discover in terms of the two key variations found by Kenny J to be the relevant variations from the pleaded prior art for the purpose of the s 7(4) of the Patents Act analysis in respect of innovative step. Whilst SNF's argument that the reformulation was not a different claim was not accepted by the Court, it could not be said that there was never any legal basis, on the case presented by SNF, upon which it could be claimed that Ciba was obliged to make discovery of the disputed documents. 24 Thirdly, I accept that the several iterations of the Particulars of Conduct and subsequent abandonment of claims will have contributed to the work involved in, and the time taken for the hearing of, the interlocutory application. However, it was incumbent upon SNF's legal practitioners as part of their professional duties to abandon those claims that were bound to fail and to proceed only on those claims that had some proper and arguable basis. Ultimately, whilst the Court did find against SNF on every one of the issues which the parties agreed that the Court was to determine, the difficulty in formulation and the decision to abandon certain claims did not mean that the application was, from the outset, wholly unmeritorious and lacking any arguable or proper basis. 25 Finally, I do not accept the submission for Ciba that the nature of the interlocutory application, the volume of evidence and the very substantial costs incurred by Ciba are special or unusual features in this case to justify the award of indemnity costs. The unusual nature of the application was borne out of the complaint that Ciba had not complied with its discovery obligations which, if established, would have provided the foundation for an exercise of power by the Court to set aside orders on the basis of fresh evidence. There was voluminous evidence filed, but there were numerous factual matters in dispute that required the Court's determination, reflecting the complex factual and legal matrix of the application. I do not think that it can be said that a considerable amount of that evidence was irrelevant or so peripheral that it should not have been adduced. Moreover, whilst it is undoubted that the preparation for the hearing of the application was made more complex because of changes by SNF as to how it put its case, and the very late abandonment of some of the claims, I do not think that it can be said that these matters themselves constitute some special or unusual feature justifying indemnity costs. It is a feature of litigation that in the course of litigation, positions change and claims are properly abandoned upon consideration that they ought not to be advanced. It is undoubted that Ciba has been put to additional expense in consequence, but, as the Full Court stated in Hamod at [20], indemnity costs are not designed to punish a party for persisting with a case that turns out to fail. The usual order for costs is the law's way of dealing with the expense incurred by a successful party in bringing or defending a claim: Colgate-Palmolive Company v Cussons Pty Limited [1993] FCA 536 at [43]. 26 I do not consider that s 19(2) of the Patents Act has material bearing upon the question of costs. That section is directed at a different action. In the present case, the claim was based upon the contention of a failure by Ciba to comply with its discovery obligations. 27 Accordingly, for these reasons I reject the application for costs on an indemnity basis. I certify that the preceding twenty-seven (27) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Davies.