Specsavers Pty Ltd v The Optical Superstore Pty Ltd

IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY GENERAL DIVISION NSD 119 of 2010

AND: THE OPTICAL SUPERSTORE PTY LTD (ACN 095 737 894)

JUDGE: KATZMANN J DATE: 21 JUNE 2012 PLACE: SYDNEY

REASONS FOR JUDGMENT 1 This judgment is concerned with the costs of a claim for damages made under an undertaking given at the time of the imposition of an interlocutory injunction. 2 Specsavers Pty Ltd ("Specsavers") obtained the injunction against The Optical Superstore Pty Ltd ("The Optical Superstore") to stop an advertising campaign based on a television advertisement about multifocal prescription glasses broadcast from 4 February 2010 until 10 February 2010. Specsavers alleged that the advertisement ("the Standard TVC") and another advertisement ("the Tailor Made TVC") were misleading or deceptive and therefore contravened ss 52(1) and 53(e) of the Trade Practices Act 1974 (Cth) ("TPA"). 3 On 4 June 2010 I pronounced judgment on liability, finding in favour of Specsavers on the claim with respect to the Tailor Made TVC but against them on the claim concerning the Standard TVC - the claim the subject of the interlocutory injunction. Consequently, I discharged the injunction: Specsavers Pty Ltd v The Optical Superstore Pty Ltd (No. 2) [2010] FCA 566. Specsavers abandoned their claim for relief. Consequently, two issues remained to be determined. The first was the question of the costs of the first part of the proceeding. The second was The Optical Superstore's claim for damages under the undertaking. 4 The hearing on damages did not take place until late 2011. On 17 May 2012 I held that the respondents had proved that they had suffered damage and made a number of findings and directed the parties to bring in orders giving effect to them. I also determined the question of the costs of the first part of the proceeding. See Specsavers Pty Ltd v The Optical Superstore Pty Ltd (No 3) [2012] FCA 504. On 8 June 2012 I made orders that Specsavers pay the respondents damages in the sum of $90,636 including interest. This judgment is concerned with the costs of the second part of the proceeding. 5 Specsavers asked to be heard on this question. My provisional view was Specsavers should pay the respondents' costs. This is the order that the respondents seek. Notwithstanding the respondents' success, Specsavers argue that the Court should order that the respondents pay their costs, first on a party and party basis until 11.00 am on 9 September 2011 and thereafter on an indemnity basis. The alleged justification for a costs order in favour of the unsuccessful party is that, given the way the respondents put their claim for damages, it could not be said that they were in fact successful; reasonable offers of compromise were met with no response; and the respondents lost the argument on most of the critical issues. 6 The claim for indemnity costs is based on an offer of compromise made under the Federal Court Rules 2011 ("the Rules") that Specsavers served on 7 September 2011. The offer, which was open for 14 days, took the following form: (a) [Specsavers] pay [The Optical Superstore] the sum of $100,000 (inclusive of GST, if any); (b) [Specsavers] pay [The Optical Superstore's] costs of the proceeding in respect of the Standard TVC on a party/party basis; (c) [The Optical Superstore] pay [Specsavers] costs of the proceeding in respect of the Tailor-Made TVC on a party-party basis; and (d) the proceeding otherwise be dismissed. 7 No further offer of compromise was made, despite the fact that on 20 October 2011 the second to eighth respondents were added. 8 The Court has a general discretion to award costs: Federal Court of Australia Act 1976 (Cth) ("FCA Act"), s 43. It must, of course, be exercised judicially, and not against a successful party except where there is a reason for doing so that is connected with the case. Ordinarily, however, costs follow the event and a successful litigant should recover costs, unless there are special circumstances justifying a different order: Ruddock v Vadarlis (No 2) (2001) 115 FCR 229 at [9], [11] per Black CJ and French J. 9 Rule 25.14(1) of the Rules provides that: 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. 10 In the event that the conditions triggering the operation of the rule are made out, despite the terminology the rule creates a rebuttable presumption in favour of, rather than an entitlement to, indemnity costs. The reason is that the Court may make an order inconsistent with the Rules (see r 1.35), which is equivalent to the "otherwise orders" provision that appeared in O 23 r 11(6) of the former Rules: Kooee Communications Pty Ltd v Primus Telecommunications Pty Ltd (No 2) [2011] FCAFC 141. The onus is on the party resisting the order to show why it should not be made: cf. Futuretronics.com.au Pty Ltd v Graphix Labels Pty Ltd [2009] FCAFC 40 at [10]. 11 It is common ground that for relevant purposes Specsavers is a respondent and that The Optical Superstore and its licensees (the second to eighth respondents) are applicants. 12 Several issues arise. How should the costs up to the time of this offer be assessed? Should costs follow the event? Was The Optical Superstore in fact successful? Did it act unreasonably? Was the offer made on 7 September 2011 an offer of compromise under the Rules? If so, was the sum awarded less favourable than the terms of the offer? Even so, could the offer bind the licensees who had not then been added to the proceeding? If not, what should happen about their costs?

The evidence 13 Lynne Peach, Specsavers' solicitor, swore an affidavit setting out the relevant history and annexing the relevant correspondence. The respondents filed no evidence. They merely relied on a number of documents said to cast light on the meaning of the terms of the September 2011 offer of compromise. Importantly, the evidence indicates that Specsavers made several offers to settle the proceeding and on each occasion those offers were met with silence. The evidence does show that, before the second to eighth respondents were added (in October 2011), the parties participated in a mediation, but there is no evidence about whether The Optical Superstore's position was any different there. The mediation was presumably conducted in confidence and there was evidently no agreement to waive confidentiality. 14 The evidence Specsavers relied upon is summarised below. 15 On 9 June 2010 Specsavers served an offer of compromise purportedly in accordance with O 23 of the former Rules in which it proposed that the Court make a declaration that the Tailor Made TVC contravened ss 52 and 53(e) of the TPA, that each party pay its own costs and that the proceeding be otherwise dismissed. The Optical Superstore did not respond to the offer. 16 A mediation took place on 14 October 2010. Four days later Specsavers' solicitors (Minter Ellison) wrote to the solicitors for The Optical Superstore (Maddocks) stating, amongst other things: … our client finds it difficult to see how your client will demonstrate that it (scil.) suffered any damage as a result of the injunction … In particular, we note that: (a) the [Standard] TVC was broadcast for 7 days during the period between 4 February 2007 to 10 February 2010; (b) it is not uncommon in this industry for advertisements to only run for 1 week; (c) there was no gap in your client's advertising as it caused the Tailor Made TVC to be broadcast from 6 February 2010 to 11 February 2010; and (d) in paragraph 28 of your client's Defence dated 26 February 2010, it is said that the [Standard] TVC may now be out of date and accordingly it had no further intention to cause the advertisement to be broadcast. 17 Specsavers claimed that in the circumstances its "walk away" offer of 9 June 2010 was reasonable and it would continue to rely on it. Nonetheless, it made a further offer to settle on the basis that Specsavers pay damages of $100,000 (inclusive of GST, if any), the terms of any settlement be kept confidential, and the proceedings be otherwise dismissed. 18 The offer was open until 12 pm on 19 October 2010. The concluding paragraph read: If the remaining issues in this proceeding proceed to Court and your client obtains a result no more favourable than the offer in this letter against Specsavers, Specsavers intends to produce this letter together with its earlier offers to the Court on the question of costs. Specsavers will seek an order that your client pay its costs from the date of this letter on a scale in excess of the usual party/party costs including, but not limited to, indemnity costs, in accordance with the principles applied in Calderbank v Calderbank [1975] 3 All ER 333. 19 The Optical Superstore did not respond to this offer either. 20 Specsavers made another offer to settle the proceeding on 7 September 2011. This was the offer of compromise to which I referred in [5] above. 21 By this time, the parties had had discovery and a good deal of evidence had been filed and served, including four affidavits from Greg Meredith, a forensic accountant qualified on behalf of The Optical Superstore. After the offer was made, both parties filed and served further evidence. That evidence included an affidavit from Andrew Ross, a forensic accountant qualified for Specsavers, which called into question many of Mr Meredith's assumptions, and provided an alternative calculation of damages - far lower than that proposed by Mr Meredith. The affidavit was emailed to the solicitors for The Optical Superstore on 16 September 2011 (during the time the offer was running) but it was provided on the understanding that it would not be given to their client. A redacted version was provided on 22 September 2011 - the day after the offer of compromise expired. 22 On 16 November 2011, the first day of the hearing on damages, Specsavers made a final offer of settlement. The offer reduced the sum proposed in the second offer of compromise to $50,000, retained the proposed costs orders in relation to the first part of the proceeding, but envisaged that Specsavers would pay none of the respondents' costs after 4 June 2010. Thereafter, the proposal was that the respondents would pay Specsavers' costs on a party-party basis. There was no response to this offer either.

Costs to the time of the September 2011 offer of compromise

Were the respondents successful? 23 Mr Studdy SC, who, with Mr Bevan, appeared for Specsavers, accepted that the starting point is that costs should follow the event. But, as I indicated earlier, Specsavers' position was that The Optical Superstore essentially failed. I disagree. It is true that The Optical Superstore initially claimed over $1.5 million in damages and the sum awarded is a tiny fraction of what was claimed. It is also true that many of the assumptions upon which its case depended were not made out. Nevertheless, Specsavers defended the damages claim, not merely because it was greatly inflated. Nor did it simply challenge the assumptions. Specsavers argued that the respondents were entitled to nothing because they could not show that the injunction had deprived them of a valuable chance of profiting from the Standard TVC or any associated advertising campaign. As is obvious from the award, the respondents prevailed in that respect. In the circumstances, it is proper to proceed on the basis that the respondents were successful.

Did the respondents act unreasonably? 24 Specsavers do not rely on the first offer of compromise. Rather, they claim that The Optical Superstore acted unreasonably in declining to respond to the several offers they made and, for this reason, should recover no costs. 25 The discretion to award costs must be exercised in the way that best promotes the overarching purpose of the civil procedure provisions of the FCA Act and Rules: FCA Act, s 37M(3). That purpose is to facilitate the just resolution of disputes according to law and as quickly, inexpensively and efficiently as possible: FCA Act, s 37M(1). Parties have a duty to conduct proceedings (including settlement negotiations) in a way that is consistent with the overarching purpose: FCA Act, s 37N(1). Their lawyers are required to take account of that duty and assist their clients to comply with it. In exercising the discretion to award costs, I am obliged to take into account any failure to comply with the duty imposed by s 37N(1) or (2). 26 It does not seem to me that The Optical Superstore, at least, conducted the proceedings, in particular the settlement negotiations, in a way that is consistent with the overarching purpose. With his customary eloquence, Mr O'Bryan SC, the respondents' counsel, argued that his clients' position was not unreasonable. Rather, he submitted that Specsavers offers were "wholly unreasonable". Presumably, I was invited to infer that this meant that no response was called for. 27 The first offer was said to be unreasonable because it made no allowance for The Optical Superstore's costs, although Specsavers had failed in its claim concerning the Standard TVC. I observe that it also made no allowance for damages under the undertaking. The second offer purported to cover both costs and compensation under the undertaking, but in an amount said to be unreasonable. 28 Whether or not Specsavers' offers were unreasonable does not seem to me to bear upon The Optical Superstore's conduct. Even if they were, that would not excuse its silence in the face of the several overtures Specsavers made to settle the proceeding. The Optical Superstore appears to have treated Specsavers offers with contempt. It chose not to dignify any of them with a response. A party genuinely committed to conducting a proceeding in a way that is consistent with the overarching purpose would, at least, respond to an offer of settlement. Mr O'Bryan argued that the terms of the undertaking invited the Court to determine the amount of compensation resulting from the imposition of the interlocutory injunction. This is no answer. It was always open to the parties to agree on the value of the claim and invite the Court to enter judgment by consent. As Mr Studdy and Mr Bevan put it in their written submissions, The Optical Superstore failed to engage in the process of seeking to resolve the proceeding. The Optical Superstore may have thought that Specsavers' offers indicated that any negotiations were likely to prove fruitless but, in the absence of evidence to explain its position, I am not able to draw any inference in its favour. 29 As a result of The Optical Superstore's apparent intransigence the parties were put to considerable expense and the proceedings were protracted. At the time of the first two offers, no evidence had been filed in relation to The Optical Superstore's claim for damages. Before I pronounced judgment last month, more than 40 affidavits were filed in connection with this question, including four from Mr Meredith with reports attached (totalling nearly 300 pages). These reports generated a 97 page report from Mr Ross (excluding the annexures). I cannot say that all the expense was unnecessary, but I did find that many of the assumptions given to Mr Meredith and underpinning the claim were not made out. Doubtless, too, some of the expense incurred in preparing (and responding to) four reports might have been avoided if Mr Meredith had been provided with all the relevant material before finalising his opinion. I do not have any evidence about the amount of costs either party incurred but I am certain the costs expended in pursuing the damages claim were substantial and greatly exceeded the amount of damages recovered. Mr O'Bryan relied on the uncertainty surrounding the valuation of the damages, but this is scarcely unusual. There was no dispute at the hearing that the respondents were only entitled to damages to reflect the value of the lost chance (if any) that but for the interlocutory injunction, they would have derived a profit from the Standard TVC. Yet, Mr Meredith's calculations made no allowance for contingencies and there is nothing in the evidence tendered on the costs application to show that The Optical Superstore did either. 30 Rule 40.08 enables a party to apply to the Court for an order that any costs and disbursements payable to another party be reduced by an amount specified by the Court where the applicant has claimed damages and been awarded a sum less than $100,000. Specsavers did not invoke the rule but it is open to the Court to exercise the power on its own initiative (r 1.40). The former rule (O 62 r 36A(1)), which applied when the proceeding started and when The Optical Superstore indicated it would enforce the undertaking, provided for an automatic one-third reduction in costs (including disbursements), unless the Court or a Judge otherwise ordered. 31 In my view, The Optical Superstore should recover costs but there should be a reduction to reflect the size of the award and the fact that the costs necessarily incurred were out of proportion to the amount recovered (and therefore the value of the claim). The order should also reflect The Optical Superstore's failure to fulfil its duty under s 37N. I therefore propose that Specsavers pay The Optical Superstore 65% of its costs and disbursements.

Was the offer made on 7 September 2011 an offer of compromise under the Rules? 32 The Optical Superstore did not contend that the offer of compromise was not an offer made under the Rules. Provided the judgment obtained was less favourable than terms of the offer, the presumption in favour of indemnity costs would therefore apply, although it could not bind the licensees who were not then parties to the proceeding. The next question, then, is whether the judgment by The Optical Superstore was less favourable than the terms of the offer.

Was the judgment less favourable than the terms of the offer? 33 As the sum mentioned in the first paragraph of the offer was greater than the amount of damages awarded to all eight respondents, there is no room for doubt that the judgment sum was less favourable than the amount proposed in the first paragraph of the offer. But the offer must be read as a whole. As Tamberlin J said in Brother Industries, Limited v Dynamics Supplies Pty Ltd [2008] FCA 126 at [6] of the predecessor of r 25.14: it is necessary to have regard to the terms of the orders in their totality. While an individual order may in its terms suggest a different conclusion to the one ultimately reached by the Court, no single particular order is determinative. It is necessary to weigh the overall effect of all the orders made. The word "favourable" in O 23 r 11(4) requires a balancing of the relative impacts of all the orders. 34 Mr O'Bryan argued that the offer unambiguously made no allowance for the costs of the second part of the proceeding and, for this reason, the judgment was not less favourable than the terms of the offer, it being reasonable to assume that the successful party would recover costs in addition to its damages. Alternatively, he submitted, it was ambiguous in its terms and the ambiguity should be resolved in The Optical Superstore's favour. While not disputing the assumption in Mr O'Bryan's principal argument, Mr Studdy submitted that the offer provided (in effect) for the costs of all the proceeding relating to the Standard TVC and that necessarily included the claim for damages under the undertaking. Consequently, on any view of the matter, the offer was more favourable than the amount awarded to the respondents. 35 I reject Mr O'Bryan's primary argument but I accept his alternative submission. I think the offer was ambiguous. At the time it was made, the question of the costs of the first part of the proceeding remained to be determined. Although it is possible to read Specsavers' offer in the way Mr Studdy urged, the references to the costs of the proceedings in respect of the two TVCs could be construed as references to the costs of the first part of the proceeding only and not to encompass the costs of the claim under the undertaking. A careful reading of the earlier offers gives rise to the inference that this was Specsavers' intention. 36 By the time the September 2011 offer of compromise was made, the bulk of The Optical Superstore's costs had been incurred. Because I am persuaded that the did not make provision for the costs of the claim under the undertaking, I am not satisfied that the judgment was less favourable than the terms of the offer. Of course, that does not mean that the offer should necessarily be ignored. It may be taken into account in the exercise of the Court's discretion. Still, in all the circumstances and having regard to the level of costs likely to have been incurred by this point in time, I do not think it could be said that The Optical Superstore was imprudent or unreasonable in failing to accept it. 37 I therefore reject Specsavers' claim for indemnity costs from 11.00 am on 9 September 2011. It follows that The Optical Superstore's costs of the claim under the undertaking after the offer of compromise should be paid on the same basis as before.

What costs, if any, should be awarded with respect to the claims by the licensees? 38 No offer was ever made to the licensees. Nevertheless, there should be a reduction in their costs, too, because of the size of the award. As the licensees were not separately represented and The Optical Superstore also stood to benefit from any award in their favour, their costs should be paid at the same rate as The Optical Superstore's.

Conclusion 39 Although The Optical Superstore and its licensees pitched their claim at an unrealistically high level, their failure to recover anything like it does not mean that they were not successful overall. Specsavers' claim for indemnity costs fails because the judgment was not less favourable than the terms of the offer. The respondents should therefore recover costs. But the judgment sum was less than $100,000 and the likely costs disproportionate to the true value of the claim. The Optical Superstore's failure to respond to several overtures to settle the proceeding amounts to a failure to act consistently with the overarching purpose of the civil practice and procedure provisions of the Act and Rules. Costs should be reduced by 35% to reflect these considerations. I certify that the preceding thirty-nine (39) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Katzmann.