Southern Cross Industrial Group Pty Ltd v Mickala Lighting Towers Pty Ltd

Federal Court of Australia|2022-05-23|Before: Downes J

The strike out application which was accepted for filing on 21 February 2022 is dismissed.
The respondents pay the applicant's costs of and incidental to the strike out application referred to in Order 1.
By 6 June 2022 and pursuant to r 19.01 Federal Court Rules 2011 (Cth), the applicant provide security for the first and second respondents' costs of and incidental to the originating application and statement of claim up to (but not including) the first day of trial in the amount of $200,000 in a form acceptable to the respondents.
The applicant pay the respondents' costs of and incidental to the security for costs application which was accepted for filing on 21 February 2022.
If the applicant fails to comply with Order 3, the proceeding is stayed until further order.
The respondents have liberty to apply for further security for their costs on five business days' notice to the applicant.
Within 7 days of the applicant providing security in accordance with Order 3, the applicant shall: (a) inform the Associate to Downes J that security has been provided; and (b) file and serve an amended originating application and amended statement of claim which are substantially in the form of the documents which are part of annexure "RJF-3" to the affidavit of Rebecca Forsyth filed on 25 March 2022 and, to the extent that the applicant requires leave to file those documents, it has that leave.
Within 42 days of the applicant providing security in accordance with Order 3, the applicant shall file and serve a Position Statement on Infringement within the meaning of [6.12] of Intellectual Property Practice Note (IP-1).
Within 28 days of service of the applicant's Position Statement on Infringement, the respondents shall file and serve their defence and any cross-claim along with a Position Statement on Infringement within the meaning of [6.13] of Intellectual Property Practice Note (IP-1).
Within 28 days of service of the respondents' Position Statement on Infringement and their defence and any cross-claim: (a) the applicant shall file and serve any reply and any defence to the cross-claim; (c) the parties shall approach the Associate to Downes J for the purposes of listing this matter, and QUD470/2019, for a case management hearing. Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

Introduction 1 This is a proceeding in which the applicant sues for infringement of an expired innovation patent, being Australian Innovation Patent No. 2013100095. The proceeding was commenced by originating application and statement of claim which were accepted for filing on 23 December 2021. 2 At the first case management hearing held on 4 February 2022, counsel for the respondents raised complaints about aspects of the originating application and statement of claim in the context of a proposed strike out application. Reference was made to correspondence having already been exchanged about these alleged defects. Counsel for the respondents also indicated that an application for security for costs would be made. 3 At that case management hearing, the proposed strike out application and security for costs application were set down for hearing on 28 April 2022. Two separate applications were subsequently accepted for filing on 21 February 2022. 4 Prior to the hearing of the strike out application, the applicant agreed to amend the originating application and statement of claim in its solicitor's letter dated 2 March 2022. By that letter, it also agreed to provide a Position Statement on Infringement within the meaning of [6.12] of the Intellectual Property Practice Note (IP-1). This had the consequence that many of the respondents' complaints fell away. 5 The hearing of the strike out application proceeded by reference to the proposed amended originating application and amended statement of claim which were attached to the solicitor's letter dated 2 March 2022 and which form part of annexure "RJF-3" to the affidavit of Rebecca Forsyth filed on 25 March 2022. 6 At the hearing of the applications, a related matter was listed for a case management hearing (being proceeding QUD470/2019). That proceeding was commenced on 26 July 2019. It was brought by the same applicant, relates to the same patent and has the same or similar issues as this proceeding. The second respondent is the same in both proceedings but the corporate respondents are different (although they are related). 7 On 18 October 2019, an order was made by Greenwood J in QUD470/2019 by consent that the applicant provide security for the respondents' costs in the amount of $200,000 in a form acceptable to the respondents and that, in the event that the security ordered is not provided within the time specified, the proceeding be stayed until such security has been provided. On 13 August 2020, an amended statement of claim was accepted for filing. Nothing further occurred to progress that proceeding until 28 April 2022 when an order was made that QUD470/2019 be managed, heard and determined together with this proceeding. 8 For the reasons below, the strike out application will be dismissed and the applicant will be ordered to provide security for the respondents' costs in the amount of $200,000 on certain terms and with liberty to apply for further security. Costs should follow the event in relation to both applications.

The relief sought 9 By the strike out application, the respondents apply to set aside the originating application, with leave to file an amended originating application. The respondents also apply to strike out the statement of claim, with leave to file an amended statement of claim. Alternatively, the respondents apply to strike out paragraphs 6, 11 to 21, 23 to 25 and 28 of the statement of claim, with leave to replead. The respondents also seek an order that the applicant file and serve a Position Statement on Infringement within the meaning of [6.12] of IP-1, and an order that they also provide one in accordance with [6.13] of IP-1.

Position Statement on Infringement 10 As to the application for orders relating to a Position Statement on Infringement, this application was not pressed at the hearing on 28 April 2022, and this is presumably because the applicant agreed to consent to orders regarding Position Statements by its solicitor's letter dated 2 March 2022. 11 Paragraph 6.12 of IP-1 provides that, in an appropriate case, a party who alleges patent infringement may be required to provide a Position Statement on Infringement which concisely states the facts and matters relied upon in support of such an allegation, including by reference to the particular integers of any claim alleged to have been infringed. Having regard to the allegations proposed to be made by the applicant in the amended statement of claim, and to the parties' agreement that the applicant should provide a Position Statement, I am satisfied that this is an appropriate case. 12 Paragraph 6.13 of IP-1 states that: Similarly, a party who is alleged to have infringed a patent may be required to provide a Position Statement on Infringement which concisely states the facts and matters relied upon in answer to the allegation of infringement, including whether it involves a legal question (eg. where there is an issue as to the proper construction of a claim) or a factual question (eg. whether a product or process is within a claim properly construed). In most cases, it will not be acceptable for a respondent who is already apprised of the applicant's case, merely to assert that the applicant is "put to proof" in the absence of a clear articulation by the respondent of why it says it does not infringe. 13 The respondents accept that they should provide a Position Statement within the meaning of [6.13] of IP-1, and it would assist the applicant and the Court for one to be provided as this will identify and narrow the issues in dispute, including as to the proper construction of the claims of the patent. 14 For these reasons, I will make orders about the filing and service of Position Statements on Infringement by the parties in accordance with the timeframes proposed by the applicant in its draft order which was attached to the 2 March 2022 letter. No submissions were made by the respondents that these timeframes were not appropriate.

Application to set aside the originating application and strike out the statement of claim 15 As to the application to set aside the originating application and to strike out the statement of claim as a whole, these applications were pressed at the hearing of the applications even though the written submissions of the applicant filed on 22 April 2022 made plain that the applicant proposed to file and serve the amended originating application and amended statement of claim, which the respondents had received on 2 March 2022 and which the respondents accepted had addressed the majority of their complaints. 16 The consequence of the proposed amendments was that only paragraph 2 of the amended originating application and paragraph 12 of the amended statement of claim remained the subject of specific complaint by the respondents. They were described during the hearing by counsel for the respondents as the "outstanding issues". 17 However, even if the complaints about these particular paragraphs were valid, it was not apparent from the respondents' submissions why this justified the drastic consequence that the entire originating application should be set aside and the entire statement of claim should be struck out. 18 In any event, it is not necessary to decide this issue because, for the reasons which follow, I have determined that the impugned paragraphs are not deficient with the consequence that the application to set aside the originating application and strike out the statement of claim must fail.

Paragraph 2 of amended originating application - claim for a springboard injunction

The claimed springboard injunction 19 Paragraph 2 of the amended originating application seeks the following order: 2. A permanent springboard injunction restraining the First Respondent, whether by itself, its directors, officers, servants, agents, or otherwise, and the Second Respondent, from infringing or threatening to infringe that patent, by engaging in the following acts within Australia without the licence or authority of the Applicant: (a) making, hiring, selling or otherwise disposing of any of the Mickala Lighting Tower Products (as defined in paragraph 7 of the Statement of Claim) or any product falling within any claim of the 095 Patent which were made in, or imported into, Australia during the term of the 095 Patent; (b) offering to make, sell, hire or otherwise dispose of any of the Mickala Lighting Tower Products, or any other product falling within any claim of the 095 Patent, which were made in, or imported into, Australia during the term of the 095 Patent; (c) using any of the Mickala Lighting Tower Products, or any other product falling within any claim of the 095 Patent, which were made in, or imported into, Australia during the term of the 095 Patent; (d) keeping the Mickala Lighting Tower Products, or any other product falling within any claim of the 095 Patent, which were made in, or imported into, Australia during the term of the 095 Patent for the purpose of doing any of the things described in subparagraphs 2(a)-(c) hereof; and (e) authorising any other person to engage in any of the acts described in subparagraphs 2(a)-(d) hereof. 20 Relevantly to the springboard injunction which is sought, the amended statement of claim pleads the following material facts (in summary): (1) the applicant is the registered proprietor of the innovation patent which expired on 30 January 2021: [4] and [5]; (2) from a date presently unknown to the applicant but before 30 January 2021, the first respondent made, imported, sold, hired, supplied or disposed of and offered to do these things in relation to certain lighting towers, which was an exploitation of those products in Australia during the term of the patent: [6] and [7]; (3) by its conduct, the first respondent infringed certain claims of the patent (during its term) with which conduct the second respondent was also involved: [20] and [21]; (4) the respondents threaten and intend to continue, after the expiry of the patent and unless restrained by the Court, to commercially exploit the lighting towers which were made in, or imported into, Australia by the first respondent during the term of the patent: [23]; (5) by reason of the acts of infringement of the patent, the applicant will continue to suffer loss and damage if the respondents are not restrained: [24]. This includes loss of profits and diminution in value of the patent; (6) by reason of the acts of infringement of the patent, the respondents will earn substantial profits to which they are not entitled: [25]. As to this, the particulars to [25] state that further particulars may be provided after discovery. 21 The thrust of the respondents' complaint is that, in circumstances where the patent has expired, the claim for a springboard injunction requires the plea of material facts in the accompanying statement of claim which identifies the unwarranted advantage obtained by the respondents, which plea does not exist in this case. The respondents also submit that no basis upon which the applicant claims a springboard injunction has been pleaded in the amended statement of claim. 22 The respondents submit that a springboard injunction "must be framed in a form and with a duration that is proportionate to [the] unwarranted advantage". The respondents complain that the springboard injunction which is sought in the amended originating application is not so framed and that it is therefore deficient.

Relevant authorities 23 In Streetworx Pty Ltd v Artcraft Urban Group Pty Ltd (No 2) (2015) 110 IPR 544; [2015] FCA 140, Beach J considered an application for a permanent springboard injunction where the infringement of certain claims of an innovation patent had been established at trial. In that case, Streetworx sought an injunction restraining AUG from, effectively, "fulfilling the council contracts (the springboard injunction)". In respect of the springboard injunction, Streetworx submitted that whilst AUG was not intending to supply an infringing product to the councils per se, nevertheless AUG had obtained the council contracts through the use of an infringing product, and should not be permitted to procure or retain such an advantage from that infringement. 24 It was observed by Beach J at [68]-[71] of that decision that: A "springboard injunction" is an injunction usually in final form that may be granted to restrain an infringer from engaging in an act, even though that act would otherwise be lawful, in the sense of not infringing the claim(s) of the relevant patent(s). Such an injunction is designed to deprive the respondent of a benefit that may have been produced by a prior infringing act. So, if a respondent has "built up a bridgehead or springboard into a market", by such a prior infringing act, such an injunction may be granted and designed to deprive the respondent of that benefit by restraining future conduct, even though that future conduct may not be infringing: Smith & Nephew Plc v Convatec Technologies Inc [2014] RPC 22; [2014] EWHC 146 (Pat) (Smith) at [116] to [117] per Birss J. A springboard injunction is usually granted in the context of confidential information cases rather than patent cases: Terrapin Ltd v Builders' Supply Co (Hayes) Ltd [1967] RPC 375 at 391 per Roxburgh J. But I do not doubt that a springboard injunction can be granted in a patent infringement case. Section 122(1) of the Patents Act 1990 (Cth) provides that "relief which a court may grant for infringement of a patent includes an injunction…". The word "for" does not confine the circumstance to only enjoining an act of infringement. The concept of "for" can embrace enjoining an act where it is not the infringing act, but has its foundation in an earlier act in the causal chain that was infringing. Moreover, s 23 of the Federal Court of Australia Act 1976 (Cth) would also provide adequate power; s 122 is not an exhaustive codification for injunctive relief in the present context. (emphasis original) 25 At [73]-[75] of that decision, Beach J also stated that: In considering whether to grant such an injunction in a final form, the following factors are significant. … First, the nature and quality of any unwarranted advantage needs to be identified. One needs to identify with precision the relationship between the past unlawful activity and the threatened otherwise lawful conduct but unwarranted advantage. … Second, the injunction must be framed in a form and with a duration that is proportionate to and linked with the unwarranted advantage such that the injunction does no more than to enjoin the conduct conferring such an unwarranted advantage. 26 The form of injunction sought in Streetworx appears at [13] of the judgment, contained no limitation as to duration and is in similar form to the springboard injunction sought in paragraph 2 of the amended originating application. 27 In Mastec Australia Pty Ltd v Trident Plastics (SA) Pty Ltd (No 3) [2018] FCA 99, White J referred to Streetworx at [9], [10], [20] and [21] and stated at [8] that: [The term "springboard injunction"] sometimes refers to the restraint of future lawful conduct when the respondent has, by previous unlawful conduct obtained a head start in a market. The injunction then prevents the respondent from deriving a benefit from its previous unlawful conduct, even though its future conduct may be lawful. … 28 In Mastec, like in Streetworx, an application was made for a permanent springboard injunction albeit in a misuse of confidential information case. The form of injunction sought appears at [4] of the judgement and did not contain any limitations such as duration. 29 At [14] of Mastec, White J observed that a springboard injunction "is usually limited to the period which it would have taken the respondent to have produced the product without making use of the confidential information". White J cited the decision of Roger Bullivant Ltd v Ellis [1987] FSR 172 in which Nourse LJ stated at 184: All these observations support the view that the injunction should not normally extend beyond the period for which the unfair advantage may reasonably be expected to continue. That is in my judgment the period for which an injunction should normally be granted in springboard cases. 30 At [23] of Mastec, one of the reasons for refusing the permanent injunction sought was that it "would not be proportionate to the advantage obtained…given the time which has elapsed since its misuse of the confidential information commenced". 31 In IPC Global Pty Ltd v Pavetest Pty Ltd (No 4) (2017) 124 IPR 101; [2017] FCA 260 at [25]-[26], Moshinsky J adopted the statement of principles in Dal Pont GE, Law of Confidentiality (LexisNexis Butterworths, Australia, 2015) that: Any remedial response must, accordingly, be proportionate to the advantage secured in breach of the duty of confidentiality. 'Springboard' relief merely aims to restore the parties to 'the competitive position they each set out to occupy and would have occupied but for the defendant's misconduct'. Any remedial response that goes further may not only unjustly enrich the plaintiff and punish the defendant, neither of which falls within equity's mandate, but threaten the broader public interest by unduly restraining legitimate competition. 32 In summary, the following propositions arise from these authorities: (1) a springboard injunction is able to be granted in a patent case, including by way of final relief; (2) s 122(1) Patents Act 1990 (Cth) and s 23 Federal Court of Australia Act 1976 (Cth) do not impose any specific requirements as to the form of a springboard injunction which can be sought in a patent infringement case; (3) a springboard injunction can be obtained which enjoins otherwise lawful conduct which has its foundation in an earlier act in the causal chain that infringed a patent; (4) the unfair advantage alleged to have been obtained must be identified by the party seeking the springboard injunction so as to justify the restraint of otherwise lawful conduct; (5) the form of springboard injunction which is granted should be proportionate to, and linked with, the unfair advantage obtained by the infringing conduct. This can mean, but does not necessarily mean, that the injunction is granted for a limited period; (6) if the springboard injunction which is sought is not proportionate to the unfair advantage obtained by the infringing conduct, then the injunction is likely to be refused.

Consideration 33 The applicant's pleaded case identifies that the unfair or unwarranted advantage which will be obtained by the respondents (if not restrained) is that they will continue to commercially exploit lighting towers which were made in, or imported into, Australia by the first respondent during the term of the patent, and will earn substantial profits to which they are not entitled. 34 For this reason and contrary to the respondents' submissions, the applicant has pleaded an unwarranted advantage alleged to have been gained by the respondents. 35 Further, having regard to the material facts pleaded in the amended statement of claim (which are summarised above), it cannot be said that no basis upon which the applicant claims a springboard injunction has been pleaded in the amended statement of claim. 36 The form of the springboard injunction in this case seeks to enjoin the commercial exploitation of all lighting towers which were unlawfully made or imported into Australia during the term of the patent. 37 The act sought to be enjoined (commercial exploitation) has its foundation in an earlier act in the causal chain that was infringing (importing or making the lighting towers during the term of the patent). It is aligned with the material facts which are pleaded in the amended statement of claim. 38 The injunction is in a form which is able to be granted by the Court, having regard to s 122(1) Patents Act and s 23 Federal Court of Australia Act. 39 Having regard to the statements contained in the authorities referred to above, with which I respectfully agree, it is not correct that an applicant can never claim a springboard injunction in the form contained in paragraph 2 of the amended originating application. 40 Nor is it correct to say that, if the springboard injunction sought does not contain a limitation as to duration (for example), it is defective on its face and is liable to be struck out. It may transpire that the springboard injunction sought by the applicant in this case is proportionate to the unwarranted advantage which the applicant is able to establish at trial. The applicant should not be shut out from pursuing that relief even if such an outcome might be arguably unlikely. In this regard, I am mindful of the recent statement of principle of Wigney J (with whom Anastassiou J agreed at [329]) in KTC v David [2022] FCAFC 60 at [125]: Normally the power to strike out should be exercised only in plain and obvious cases, where no reasonable amendment could cure the alleged defect or deficiency: … The power is discretionary and should be employed sparingly and only in a clear case "lest one deprive a party of a case which in justice it ought to be able to bring"… (citations omitted) 41 The issue of whether the springboard injunction sought is proportionate to the unfair advantage obtained by the infringing conduct will depend upon the factual findings which are made at trial. As occurred in Streetworx and Mastec, the issue of whether the permanent springboard injunction sought is proportionate to the unfair advantage which is established is a matter for determination by the trial judge when deciding whether to grant it. It is not an appropriate matter for determination on a strike out application. 42 For these reasons, I reject the respondents' criticisms of paragraph 2 of the amended originating application and would not strike it out had it appeared in that form in the originating application.

Paragraph 12 of the amended statement of claim 43 Paragraph 12 of the amended statement of claim pleads as follows: Further, the Mickala Lighting Tower Products are each a lighting tower: (a) wherein the LED lighting unit has at least one -24V (or24V meaning, on the proper construction of claim 2, approximately 24V) LED light assembly having a plurality of LED elements; and (b) the alternator has a voltage output of approximately 24V electrically connected to the [sic] at least one -24V (or24V meaning, on the proper construction of claim 2, approximately 24V) LED light assembly. 44 The respondents submit that the proper construction of "-24V" as it appears in the context of claim 2 of the patent is in issue between the parties and that, accordingly, there should be a separate plea of the meaning of "-24V" rather than a plea of the proper meaning in parenthesis. It is submitted that as "construction of the phrase is in issue between the parties, clear pleadings on this point are essential". 45 The relevant question on the strike out application is whether paragraph 12 identifies the issues that the applicant wants the Court to resolve and states the material facts on which it relies to give the respondents fair notice of the case to be made against them at trial: cf rr 16.02(1)(c) and 16.02(1)(d) Federal Court Rules 2011 (Cth). In my view, paragraph 12 meets these requirements. 46 Contrary to the respondents' submissions, it is not to the point that the construction of "-24V" is "in issue between the parties". Rule 16.21 of the Rules is "concerned only with the adequacy of the pleading": Takemoto v Moody's Investors Service Pty Limited [2014] FCA 1081 at [17]. 47 Even if the construction of "-24V" in the claim of the patent is "in issue between the parties", this does not require the construction contended for by the applicant to be pleaded in a separate paragraph provided that its claimed construction can be understood from the face of the pleading (which it can be). It is apparent from the respondents' submissions that they understand what is being alleged by the applicant in paragraph 12 of the amended statement of claim. This is not surprising. In this regard, it should be recalled that the power to strike out pleadings is to be exercised with caution and a pedantic approach should not be pursued: Takemoto at [20]. 48 Further, as the parties will be exchanging Position Statements on Infringement, the respective positions of the parties on the proper construction of the claims of the patent will be articulated in any event (to the extent that they will not be otherwise apparent from the pleadings). 49 For these reasons, I reject the respondents' criticisms of paragraph 12 of the amended statement of claim and would not strike it out had it appeared in that form in the statement of claim.

Conclusion 50 For these reasons, the strike out application will be dismissed.

Security For Costs 51 In the security for costs application, the respondents sought an order that, pursuant to r 19.01 of the Rules, the applicant provide security for the respondents' costs in the amount of $450,000.00. 52 At the hearing, the respondents reduced the amount sought to $300,000.00. 53 For the reasons below, an order will be made that the applicant provide security in the amount of $200,000.00 for the respondents' costs up to (but not including) the first day of trial.

Relevant principles 54 Section 56 of the Federal Court of Australia Act provides: 56 Security (1) The Court or a Judge may order an applicant in a proceeding in the Court, or an appellant in an appeal under Division 2 of Part III, to give security for the payment of costs that may be awarded against him or her. (2) The security shall be of such amount, and given at such time and in such manner and form, as the Court or Judge directs. (3) The Court or a Judge may reduce or increase the amount of security ordered to be given and may vary the time at which, or manner or form in which, the security is to be given. … 55 Rule 19.01 of the Rules relevantly provides: 19.01 Application for an order for security for costs (1) A respondent may apply to the Court for an order: (a) that an applicant give security for costs and for the manner, time and terms for the giving of the security; and (b) that the applicant's proceeding be stayed until security is given; and (c) that if the applicant fails to comply with the order to provide security within the time specified in the order, the proceeding be stayed or dismissed. … 56 In All Class Insurance Brokers Pty Ltd (in liquidation) v Chubb Insurance Australia Limited [2020] FCA 840, Allsop CJ summarised the relevant principles at [41]-[42] as follows: Section 56 of the Federal Court of Australia Act does not expressly impose any threshold to be met before the Court considers the various discretionary matters. However, the applicant's inability to pay the costs of the respondent remains an important consideration in the exercise of the Court's discretion. The Court's discretion to require the provision of security for costs is broad and the factors informing the exercise of that discretion cannot be stated exhaustively. The only limitation is that the discretion be exercised judicially: Bell Wholesale Co Ltd v Gates Export Corporation [1984] FCAFC 29; 2 FCR 1 at 3. The matter which lies at the heart of the discretion is one of fairness, both in terms of whether security should be granted, and if so, in what amount: Madgwick v Kelly [2013] FCAFC 61; 212 FCR 1 at 21 [92]. The Court aims to achieve a "balance between ensuring that adequate and fair protection is provided to the defendants, and avoiding injustice to an impecunious plaintiff by unnecessarily shutting it out or prejudicing it in the conduct of the proceedings": Rosenfield Nominees Pty Ltd v Bain & Co (1988) 14 ACLR 467 at 470 (Giles J). 57 The other relevant factors beyond an applicant's impecuniosity which were identified by Allsop CJ at [43]-[44] include: (a) whether the application for security for costs has been brought promptly; (b) the strength and bona fides of the applicant's case; (c) whether the applicant's impecuniosity was caused by the respondent's conduct which is the subject of the claim; (d) whether the respondent's application for security is oppressive, in the sense that it is being used merely to deny an impecunious applicant a right to litigate; (e) whether there are any persons standing behind the company who are likely to benefit from the litigation and who are willing to provide the necessary security; and (f) whether there are aspects of public interest which weigh in the balance against the making of an order. 58 In Jasmin Solar Pty Ltd v Trina Solar Australia Pty Ltd [2020] FCA 1018, Derrington J summarised at [97]-[98] the principles relevant to the process of assessing the quantum of security as follows: The process of assessing the amount of security is necessarily one which requires a broad brush approach, taking into account the information available to the Court. In the exercise of the discretion the Court must weigh the objective of ensuring an adequate and fair protection for the parties seeking security against avoiding injustice to the applicant: Pathway Investments Pty Ltd v National Australia Bank Ltd [2012] VSC 97 [55]. As to the quantum of security, in Lynx Engineering Consultants Pty Ltd v The ANI Corporation Ltd t/as ANI Bradken Rail Transportation Group (No 3) [2010] FCA 32 [25], it was observed that the Court does not order security for a complete and certain indemnity of an applicant's costs but calculates that which is sufficient such that the security is neither illusory nor oppressive, neither too little nor too much, substantial but not in the nature of an indemnity.

Consideration 59 There are two issues which arise on the security for costs application: (1) whether the discretion to make an order for security is enlivened; and (2) if so, what is the quantum of security which is appropriate?

Whether there is a reasonable basis to consider the applicant may have an inability to pay the costs of the respondents 60 The first issue is whether there is a reasonable basis to consider that the applicant may have "an inability to pay the costs of the respondent", which, as outlined by Allsop CJ in All Class, is "an important consideration in the exercise of the Court's discretion." 61 The applicant's financial statements as at 30 June 2021 which were signed by the applicant's directors (Mr Sean Worsley and Mr Heath Strickland) formed part of the applicant's evidence in response to the security for costs application. These statements were not audited but had been prepared by the applicant's external accountants, S.H. Tait & Co. The statements included these notes: The directors of SOUTHERN CROSS INDUSTRIAL GROUP PTY LTD are solely responsible for the information contained in the special purpose financial statements, the reliability, accuracy and completeness of the information and for the determination that the significant accounting policies adopted as set out in Note 1 to the financial statements are appropriate to meet their needs and for the purpose that the financial statements were prepared. … Since a compilation engagement is not an assurance engagement, we are not required to verify the reliability, accuracy or completeness of the information provided to us by management to compile these financial statements. Accordingly, we do not express an audit opinion or a review conclusion on these financial statements. The special purpose financial statements were compiled exclusively for the benefit of the directors of SOUTHERN CROSS INDUSTRIAL GROUP PTY LTD who are responsible for the reliability, accuracy and completeness of the information used to compile them. We do not accept responsibility for the contents of the special purpose financial statements. 62 The same notes appeared on the applicant's unaudited financial statements as at 30 June 2019 and 30 June 2020 which were in evidence and were also prepared by S.H. Tait & Co. These versions of the 2019 and 2020 financial statements were not signed by the directors. 63 The reliability of these financial statements of the applicant was cast into doubt by the evidence of Mr Steven Hermann, a former director of the applicant, which is contained in an affidavit filed in the Supreme Court of Queensland and which formed part of the evidence on the security for costs application. 64 Mr Hermann deposes, amongst other things, that: I am a former director and former general manager of [the applicant]. … Throughout my employment at [the applicant] I played an active hands-on role in all facets of the business… … SERIOUS FINANCIAL IRREGULARITIES IN SOUTHERN CROSS GROUP Tax avoidance measures I am concerned about the serious financial irregularities in the Southern Cross Group. I am aware that Sean Worsley on the advice of S.H. Tait & Co [accountants for the applicant] has caused the Southern Cross Group to enter into various transactions with a cavalier attitude towards the correct treatment of assets or the Southern Cross Group's taxation liabilities. For example Sean Worsley has suggested to characterise fleets of lighting towers (that were on long term contracts) to short term contracts so as to be entitled to an instant asset write-off … on the basis that he did not, "think they will be checking out where each individual tower has been working." … Boat depreciated as a "Lighting Tower" … Shortly thereafter Sean Worsley and Stephen Amos from S.H. Tait & Co devised a strategy: (a) for [the applicant] to purchase a boat through a finance facility with NAB; (b) to mis-describe the boat on [the applicant's] asset register as a "lighting tower"; (c) to maximise the depreciation on the boat over a year with a view to writing the asset off; (d) to repay the NAB loan in its entirety once the depreciation had taken effect at the end of the 12 months and remove the boat from the company's books for Sean Worsley's personal use; and (e) to delay the company tax submissions to the ATO until the boat had been removed from the books and the accounts had been normalised. … I have since become aware by virtue of my role as a director of the Southern Cross Group, that [the applicant] has depreciated the vessel in its quarterly BAS statements to give effect to the scheme … … As a former director of entities in the Southern Cross Group and a director of a current shareholder I am concerned to ensure that the financial irregularities with respect to the [boat] are remedied. … … By this I understood him to mean that Stephen Amos had assisted [the applicant] in the structuring of its taxation affairs so as to minimise the tax paid and an independent accountant could potentially discover the financial irregularities that had occurred … … I am aware of a number of serious financial irregularities that have occurred in the Southern Cross Group books in my time at the company at the behest of Sean Worsley and at the implementation by Stephen Amos of Tait & Co, which I detail above. I am concerned to ensure that: (a) any financial irregularities are corrected; and (b) [the applicant's] books and records are true and accurate. (emphasis original) 65 In resisting the security for costs application, the applicant relied upon affidavit evidence of Mr Schultze, the applicant's Chief Executive Officer, rather than either of its directors who were responsible for the information which was provided to the external accountants to enable the financial statements to be prepared. The applicant submitted that, based on Mr Schultze's affidavit evidence, there was "no rational basis to believe that Southern Cross will be unable to pay the Respondents' costs if it is unsuccessful". 66 In making this submission, the applicant relied primarily on the unaudited financial statements referred to above which Mr Schultze generally discussed by reference to what appeared in them but who did not himself depose that their contents were true. 67 In circumstances where a former director of the applicant has deposed to serious financial irregularities within the applicant's business and its financial records, which irregularities has the involvement of one of the directors who signed the 2021 financial statements and the external accountants who prepared the financial statements, an affidavit from a current director deposing to the accuracy of the applicant's financial statements should have formed part of the applicant's material in response to the security for costs application. That there is no such affidavit is of concern. 68 The applicant dismisses the evidence contained in the affidavit of Mr Hermann, submitting that the claims within it should be given no weight, because there "is no basis for knowing whether they're true or not or whether they're just some rant of a disenchanted former employee who says various things and who's suing, or has sued, in that proceeding, [the applicant]". 69 However, Mr Hermann's evidence cannot be discarded so lightly. That is because he is a former director and general manager of the applicant who had "an active hands-on role in all facets of the business". 70 In circumstances where the applicant's financial statements have not been audited, the external accountants have not conducted any verification of the reliability, accuracy or completeness of the information provided to them to prepare the statements, no director of the applicant has come before this Court to swear to their accuracy and two of the three sets of financial statements have not even been signed by the directors, Mr Hermann's evidence provides a reasonable basis to consider that the applicant's financial statements cannot be accepted at face value and the correctness of the net asset position of the applicant, and the other financial information in those statements, must therefore be seriously doubted. 71 Having regard to these matters, I am satisfied that there is a reasonable basis to consider that the applicant may have an inability to pay the costs of the respondents at the conclusion of this proceeding.

Other relevant matters 72 The application for security for costs has been brought promptly, being within two months of the commencement of proceedings. 73 The award of security will not stifle the litigation. 74 The applicant submitted that it would suffer prejudice from the making of an order for security because providing a bank guarantee might affect its credit rating and getting a bank guarantee would require money to be put into the bank and be "dead money that can't be touched for the period". 75 However, it was not explained (and there was no evidence) which demonstrated how providing a bank guarantee would affect the credit rating of a corporation which purports to have such significant assets (including cash reserves). 76 Further, the claimed prejudice to the applicant cannot be regarded as that serious in circumstances where the applicant previously agreed to provide security in the amount of $200,000.00 in QUD470/2019 without demur. 77 In any event, any prejudice to the applicant must be weighed against the need to ensure that "adequate and fair protection is provided to the [respondents]": All Class at [42]. 78 Taking all of these matters into account, I am satisfied that an order should be made that the applicant provide security for the respondents' costs.

What quantum of security for costs is appropriate? 79 The remaining issue then is the appropriate quantum of security. 80 As referred to above, a "broad brush approach" is taken in determining the appropriate quantum of security. Indeed, as stated by French J (as his Honour then was) in Bryan E Fencott and Associates Pty Ltd v Eretta Pty Ltd (1987) 16 FCR 497 at 515, the "process of estimation embodies to a considerable extent, necessary reliance on the 'feel' of the case after considering relevant factors". 81 Mr Anthony Conaghan, the solicitor for the respondents, estimated the recoverable costs of this proceeding to be in the range of $542,425.00 to $755,625.00. Such estimate was confirmed as being "fair and reasonable" by Ms Roslyn Walker of Costacomp, an expert costs consultant. 82 The respondents' estimate is made on certain assumptions, including that the trial on liability alone will be "at least 5 days and may run to 10 days" and that certain expert evidence will be required to be adduced. Mr Conaghan accepts that there will be a significant overlap in issues of law and fact between this proceeding and QUD470/2019 but states that this proceeding includes allegations in relation to four new products in addition to the six impugned products in QUD470/2019. 83 In circumstances where a defence has not yet been filed in this proceeding, it follows that the issues in dispute in this proceeding have not yet been identified. This means that any present estimates as to trial length and the nature of expert evidence which will be required must carry less weight to some extent. Further, until the pleadings in this proceeding are closed, the overlap between the legal and factual issues in this case and QUD470/2019 is unknown. 84 For these reasons, I agree with the applicant's submission that there is likely to have been some overestimation by Mr Conaghan. For the same reasons, I also consider it to be premature to grant security for the respondents' costs of the trial. 85 If the costs of the trial are deducted from Mr Conaghan's estimate (using the lower end of the ranges provided), and the balance is multiplied by 65% as was done by Mr Conaghan, this gives a total of approximately $340,000.00 as representing estimated recoverable costs up to the first day of trial and at the lower end of the range. 86 Taking a broad brush approach and on the basis that the costs are likely to have been overestimated and the respondents will be able to apply for further security if required, the appropriate course is to order that the applicant provide security for the respondents' costs in an amount of $200,000.00. 87 That amount provides adequate and fair protection for the respondents in relation to a reasonable level of their costs up to, but not including, the first day of trial without being overly burdensome to the applicant. 88 Such security can be provided in a form acceptable to the respondents (which was the form of order which the applicant accepted in QUD470/2019). I certify that the preceding eighty-eight (88) numbered paragraphs are a true copy of the Reasons for Judgment of the Honourable Justice Downes.

Federal Court Rules 2011(Cth)rr 16.02(1)(c), 16.02(1)(d), 19.01

Patents Act 1990(Cth)s 122(1)

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