TCT Group Pty Ltd v Polaris IP Pty Ltd

REASONS FOR JUDGMENT 1 BACKGROUND [1] 2 RELEVANT LAW [8] 3 SUBMISSIONS [13] 4 CONSIDERATION [20] 5 DISPOSITION [33]

BACKGROUND 1 On 14 December 2022, I directed that the parties confer and supply to my chambers draft short minutes of order giving effect to my reasons in TCT Group Pty Ltd v Polaris IP Pty Ltd [2022] FCA 1493 (decision). The parties have agreed that the consequence of the decision is that the two innovation patents the subject of the infringement claim advanced by the respondents (Polaris) must be revoked and declarations must be made to the effect that Polaris made unjustifiable threats of infringement of the claims of the patents in breach of s 128 Patents Act 1990 (Cth). With these reasons, I make orders to that effect. However, the parties have been unable to reach agreement on the question of costs, which I address below. These reasons adopt the definitions set out in the decision and assume a broad familiarity with it. 2 The applicants (TCT) contend that they should have their costs on a party and party basis until 22 July 2021 and thereafter on an indemnity basis on the basis of the application of FCR 25.14(3) and s 43 of the Federal Court of Australia Act 1976 (Cth) (the Act). Polaris contends that costs should be awarded on a party and party basis only. Both parties contend that some discounts should be applied, having regard to the result. 3 TCT relies on an affidavit affirmed by its solicitor, Timothy Francis, in support of their contentions. It annexes a Notice of Offer of Compromise dated 20 July 2021 in which TCT proposed that: (1) Polaris pay TCT the sum of $200,000 (excluding GST) within 28 days; (2) Polaris provide undertakings to the Court that they would not make any representation that the Orion Hinges fall within the scope of the claims of the patents or that the exploitation of those hinges infringes or is likely to infringe the patents; (3) The proceedings (being the claim and the cross claim) otherwise be dismissed with no order as to costs. 4 Mr Francis' affidavit annexes a bundle of invoices and an excel spread sheet that sets out the total costs incurred by TCT up until the date of the Offer. In summary, he gives evidence that TCT's total costs as at 19 July 2021 were $292,690.60 and that in substance the Offer was that TCT would accept 68% of those costs but also allowed Polaris' patents to remain in force whilst avoiding Polaris' exposure to pay TCT's costs in the event (as occurred) that it was unsuccessful in the proceedings. 5 Mr Francis also annexes a letter of 10 July 2020 from TCT's then solicitors to the solicitors acting for Polaris, denying that the Orion product infringes Polaris' patents, contending that if the claims were infringed they were nevertheless invalid and alleging that Polaris had made unjustified threats. 6 The proceedings were filed on 9 September 2020. The 485 patent was filed on 30 March 2020. On 1 July 2020, Polaris and the second respondent (Glass Hardware) sent a letter before action to TCT, threatening the commencement of infringement proceedings. On 10 July 2020, the solicitors for TCT sent the letter summarised in [5] above. On 9 September 2020, TCT commenced the proceedings by a claim seeking the revocation of the 485 patent. On 20 November 2020, Glass Hardware filed a cross claim asserting infringement of the 485 patent. 7 The 918 patent was filed on 21 October 2020 and certified on 28 January 2021 and subsequently the proceedings were amended to include, on the part of TCT, allegations that it was invalid and, on the part of Polaris, that its claims had been infringed by the Orion Hinges. The Offer was made on 20 July 2021.

RELEVANT LAW 8 In Idenix Pharmaceuticals LLC v Gilead Sciences Pty Ltd (No 2) [2018] FCAFC 7, the Full Court (Nicholas, Beach, Burley JJ) said at [3]: The power of the Court in relation to costs is well established. Section 43 of the Federal Court of Australia Act 1976 (Cth) gives the Court a wide discretion in awarding costs. The exercise of the Court's discretion is not without principles or practices; it must be exercised judicially (Les Laboratoires Servier v Apotex Pty Ltd (2016) 247 FCR 61 at [305] per Bennett, Besanko and Beach JJ). The ordinary rule is that costs follow the event, although a successful party may be awarded less than its costs, or costs may be apportioned, based upon success on the issues (Firebird Global Master Fund II Ltd v Republic of Nauru (No 2) (2015) 327 ALR 192; [2015] HCA 53 at [6] per French CJ, Kiefel, Nettle and Gordon JJ; Les Laboratoires Servier at [297] to [298] and [303]). 9 Section 43(1) of the Act relevantly provides: (1) The Court or a Judge has jurisdiction to award costs in all proceedings before the Court (including proceedings dismissed for want of jurisdiction) other than proceedings in respect of which this or any other Act provides that costs must not be awarded. This is subject to: (a) subsection (1A); and (b) section 570 of the Fair Work Act 2009; and (c) section 18 of the Public Interest Disclosure Act 2013. 10 Sections 43(2) and (3) direct attention to the discretionary nature of the manner in which the power to award costs can be exercised: (2) Except as provided by any other Act, the award of costs is in the discretion of the Court or Judge. (3) Without limiting the discretion of the Court or a Judge in relation to costs, the Court or Judge may do any of the following: (a) make an award of costs at any stage in a proceeding, whether before, during or after any hearing or trial; (b) make different awards of costs in relation to different parts of the proceeding; (c) order the parties to bear costs in specified proportions; (d) award a party costs in a specified sum; (e) award costs in favour of or against a party whether or not the party is successful in the proceeding; (f) order a party's lawyer to bear costs personally; (g) order that costs awarded against a party are to be assessed on an indemnity basis or otherwise; (h) do any of the following in proceedings in relation to discovery: (i) order the party requesting discovery to pay in advance for some or all of the estimated costs of discovery; (ii) order the party requesting discovery to give security for the payment of the cost of discovery; (iii) make an order specifying the maximum cost that may be recovered for giving discovery or taking inspection. Note: For further provision about the award of costs, see subsections 37N(4) and (5) and paragraphs 37P(6)(d) and (e). 11 FCR 25.14(3) provides: (3) If an offer is made by an applicant and not accepted by a respondent, and the applicant obtains a judgment that is more favourable than the terms of the offer, the applicant is entitled to an order that the respondent pay the applicant'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. Note 1: Costs on an indemnity basis is defined in the Dictionary. Note 2: The Court may make an order inconsistent with these rules - see rule 1.35. 12 FCR 1.35 provides: The Court may make an order that is inconsistent with these Rules and in that event the order will prevail.

SUBMISSIONS 13 TCT submits that viewed globally, and as a matter of substance, they obtained judgment substantially more favourable than the Offer because they now have the benefit of: (1) declarations of invalidity of all of the claims of the patents; (2) declarations that the threats of infringement were unjustifiable; (3) orders that the claims be revoked; and (4) being positioned to recover substantially more than $200,000 for costs incurred. 14 In the decision at [397] I said: No doubt the parties will wish to argue the question of costs. My first impression is that TCT should have its costs of the cross-claim and the bulk of its costs in its claim insofar as they concern the invalidity of the patents. However, although TCT succeeded in its invalidity case on a number of grounds, it advanced a number of unnecessarily repetitive grounds, particularly in the challenges it brought to the patents for lack of novelty and lack of innovative step. In my preliminary view, allowance should be made, possibly on an indemnity basis, for the unnecessary costs spent in relation to two of the four prior art documents ultimately relied upon. Parties should be discouraged from bringing unnecessary claims. 15 TCT submits that the prior art was advanced in the context of contested issues of construction concerning each of 5 claims of 2 patents. Claims 1 and 4 of the 485 patent were held to lack novelty over two of the prior art documents (being US015 and CN860) and all claims were held to lack an innovative step over US 015. The third prior art document, WO499 was advanced with only integer 1.4 ("adapted to locate") being in issue. The fourth, AU 327, was advanced as "particularly relevant" to claims 4 and 5 of the 485 patent, with only two integers of claim 4 remaining in dispute, of which one (integer 4.4; "adapted to locate") was found not to be disclosed. TCT submits that the repetitive nature of the grounds is a consequence of the analysis required and of Polaris' decision to add the 918 patent to the proceedings. 16 TCT submits that the expert evidence and the trial was conducted efficiently in relation to the prior art, and that any indemnity costs order based on individual prior art documents would likely be difficult, if not impossible, to quantify and the court should attempt to avoid, so far as possible, creating circumstances in which the quantification of costs will become complex and costly, citing Dometic Australia Pty Ltd v Houghton Leisure Products Pty Ltd (No 2) [2019] FCA 57 at [35]. 17 Polaris submits that it achieved a considerable measure of success on a number of issues in dispute in that it established infringement (subject to the question of validity), and succeeded in resisting challenges to the 485 patent on the basis of lack of novelty in relation to WO499 and AU327 and lack of innovative step on the basis of WO499, CN860 and AU327. It also succeeded in defending the validity challenge to the 918 patent on the basis of lack of innovative step in light of WO499, US015, CN860 and AU327. In addition, it defended the misleading and deceptive conduct claim and succeeded in its ACL claim in relation to the packaging. Polaris submits that taking account of the number of issues on which it was successful and the costs incurred by reason of TCT's reliance on unnecessarily duplicative prior art, and applying a broad brush to the question, TCT should have its costs but reduced by 40%. 18 Polaris contends that FCR 25.14 is not enlivened because TCT has not established that the judgment was more favourable than the Offer. It submits that: (a) As noted, Polaris achieved considerable success in aspects of the claim and the cross claim; (b) The proceeding was commenced on 9 September 2020, yet TCT's costs as set out in the affidavit of Mr Francis include $40,406 incurred between June 2020 and the commencement of proceedings. Accordingly the court cannot determine that they are appropriately characterised as being incurred in the "conduct of the litigation" citing The State of Victoria v Sportsbet Pty Ltd (No 2) [2012] FCAFC 174 at [14] - [15]; and (c) Taking into account an allowance for taxation, it is clear that TCT has not established that as at 20 July 2021 it would have been entitled to $200,000 by way of costs as taxed. 19 Polaris submits in the alternative that if FCR 25.14 is enlivened, it is appropriate for the Court to exercise its discretion under FCR 1.35 not to enforce it. It submits that the Offer was made at a very early stage, no affidavit evidence had yet been served, the parties had not exchanged notices to admit and dispute and it was reasonable in all of the circumstances for the Offer not to be accepted, citing Kismet International Pty Ltd v Guano Fertilizer Sales Pty Ltd (No 2) [2013] FCA 705 at [48], [57] - [59] and Sydney Equine Coaches Pty Ltd v Gorst [2017] FCAFC 34 at [23]. Otherwise, it submits that any indemnity costs award should be discounted by 40%, citing Aristocrat Technologies Australia Pty Ltd v Konami Australia Pty Ltd (No 4) [2022] FCA 1501 at [18].

CONSIDERATION 20 In my view, costs should be awarded in favour of TCT on a party and party basis up until 11am on 22 July 2021 and thereafter on an indemnity basis subject to a small discount of 10%. 21 FCR 25.14(3) is engaged if an offer is made by an applicant that is not accepted by a respondent and the applicant obtains a judgment that is "more favourable" than the terms of the offer. Unlike FCR 25.14(2), it is not necessary for TCT to establish that the failure to accept the Offer was unreasonable. The assessment of whether the Offer was more favourable than the outcome is to be based on a broad, evaluative assessment having regard to whether, in substance, the state of affairs yielded by the decision is more favourable than the state of affairs yielded under the Offer; Stead v Fairfax Media Publications Pty Ltd [2021] FCA 65 at [26]; Henley Arch Pty Ltd v Henley Constructions Pty Ltd (No 2) [2022] FCA 231 at [28]. Furthermore, in proceedings involving both a claim and cross-claim, an offer of compromise available for acceptance on a global basis may be considered by reference to only one of either FCR 25.14(1) or (3), because they are not two separate proceedings; Kismet International Pty Ltd v Guano Fertilizer Sales Pty Ltd (No 2) [2013] FCA 705 at [43] - [44]; Damorgold Pty Ltd v Blindware Pty Ltd (No 2) [2018] FCA 364 at [52], [62]. 22 I accept the submission advanced on behalf of TCT that the Offer on its part to receive $200,000 in payment of its costs represented a good approximation of its costs at the time of the Offer. The evidence of Mr Francis demonstrates that the solicitors' actual costs at that point in time was well in excess of that amount. The figure sought was 68% of the solicitors' actual costs, which might be said to approximate the party and party costs of TCT at that time. Although, as Polaris submits, some $40,000 of those costs were incurred prior to the filing of the initiating process, one can readily infer that these were costs fairly and reasonably incurred in advance of the commencement of the proceedings for the purpose of the proceedings. Those costs do not fall into any of the categories of costs that are to be disallowed on taxation under FCR 40.30(b); Sportsbet at [14] - [15]. 23 The Offer had the result, if accepted, that the patents remained on foot and Polaris would have been free to assert them against third parties, assert them against TCT in the event that it launched different products to the Orion Hinges and include them in its accounting records as assets. It also resolved the unjustified threats aspect of the proceeding. 24 Taken together, these matters lead me to the view that TCT has achieved an outcome that is more favourable than the Offer. It is now free to sell the Orion Hinges and products similar to those hinges and its customers may acquire them without impediment. It has also succeeded in its claim that Polaris made unjustifiable threats. The patents that were deployed against TCT are to be revoked. Accordingly, FCR 25.14(3) is engaged. 25 I would add that a further matter in favour of this finding is the fact that TCT will undoubtedly achieve an outcome more favourable than the Offer in monetary terms, because it is the beneficiary of a costs order in its favour. There was no evidence before me as to the value of that order. Counsel for TCT informed me from the bar table that those costs were in excess of $1 million. It is not necessary to quantify such costs. It is sufficient to note that they are likely to be significant. 26 The Offer was made on 20 July 2021, after proceedings for the invalidity of the 485 patent had been on foot for 10 months and proceedings for the invalidity of the 918 patent had been on foot for three months. Detailed Particulars of Invalidity had been filed. Polaris had retained patent attorneys and solicitors to represent them and, it may be inferred, was in a good position to ascertain the likely success or failure of the construction argument that formed the foundation for the contention advanced by Polaris that the claims of both patents lacked novelty in light of the fact that their priority dates should be deferred; see Section 7 of the decision. Having regard to these matters, I do not consider that it is appropriate to exercise the discretion under FCR 1.35 to vary the application of FCR 25.14(3). 27 I now turn to the question of whether it is appropriate to discount the costs order. There is no dispute that it is within the power of the Court to do so, notwithstanding that FCR 25.14(3) is engaged; see, for instance, Aristocrat at [18]. 28 I have noted that there was a degree of duplication in the invalidity case advanced by TCT. In particular, it advanced four prior art documents as the basis for assertions that the 485 patent lacked novelty and that all of its claims lacked an innovative step, and the same documents as the basis for a challenge to the 918 patent based on lack of an innovative step. In the result, TCT succeeded in invalidating claims 1 and 4 of the 485 patent for want of novelty in light of the disclosures of US015 and CN860 and succeeded in establishing lack of innovative step in relation to all of the claims of the 485 patent on the basis of US015, but otherwise failed in its challenge. 29 Having close regard to the prior art documents advanced, in my view, it was wholly unnecessary for TCT to advance at least half of these prior art documents. Even had it succeeded in establishing that all four prior art documents anticipated the claims of both patents (and/or lacked innovative step), it is important that a party early in proceedings evaluate the necessity of the grounds to be relied upon. It is not a virtue that a claim has been found to be invalid on multiple grounds. Such an approach rather suggests that the party asserting those grounds has failed to exercise the discernment necessary to achieve the overarching purpose articulated in s 37M of the Act that the just resolution of disputes be achieved as quickly, inexpensively and efficiently as possible. It is even less of a virtue where a party fails to establish invalidity on multiple, but repetitive grounds. Needless to say, s 37N requires parties to a civil proceeding to conduct the proceeding in a way that is consistent with the overarching purpose. Although it has often been remarked that the discretion to award costs is unfettered, s 37N(4) specifically requires the Court, in exercising the discretion to award costs, to take into account any failure to act consistently with the overarching purpose; LFDB v SM (No 2) [2017] FCAFC 207 at [7] (Besanko, Jagot and Lee JJ). 30 In the present case, TCT adopted the view that four prior art documents should be advanced to establish either novelty or lack of innovative step. Even allowing for nuanced differences in construction between them, in my view, two of those documents were wholly unnecessary. I see no reason why Polaris should have to bear the costs of TCT's approach of including superfluous documents out of more abundant caution. Rather, in my view, TCT are to bear Polaris' party and party costs in that respect. 31 It is true that the additional prior art documents did not occupy a great deal of time at trial; see decision at [256]. Nevertheless, in my view, it is appropriate to make an adjustment to the costs payable to TCT on an indemnity basis by 10% to ensure that Polaris does not bear the burden. This is a rough approximation to accommodate the appropriate adjustment attributable to those items of prior art; see EMI Songs Australia Pty Ltd v Larrikin Music Publishing Pty Ltd [2011] FCAFC 92 at [9] (Emmett, Jagot, Nicholas JJ); Sandoz Pty Ltd v H Lundbeck A/S (No 2) [2021] FCAFC 47 at [31] (Nicholas, Yates, Beach JJ); Aristocrat at [5]. 32 Polaris submits that, as a result of its success on other aspects of the case, a larger discount should be applied to the costs. In particular, it submits that it succeeded on infringement. However, this was a construction point tied up with the primary invalidity ground involving the lack of support and priority date questions, and the other aspects on which Polaris were successful were in the order of de minimis.

DISPOSITION 33 In the result, the costs order will be: The respondents/cross-claimants are to pay 90% of the applicants' and first to fourth cross-respondents' costs of the proceeding (including the cross-claim): (a) on a party and party basis up to 11 am on 22 July 2021; and (b) thereafter on an indemnity basis. 34 If the parties are unable to agree on the quantum of costs, I will order that those costs be assessed on a lump sum basis by a Registrar of the Court. I certify that the preceding thirty-four (34) numbered paragraphs are a true copy of the Reasons for Judgment of the Honourable Justice Burley.

SCHEDULE OF PARTIES NSD 1013 of 2020 Cross-Respondents Second Cross-Respondent ASTRAL HARDWARE PTY LTD ACN 624 872 322 Third Cross-Respondent LIANG XUE Fourth Cross-Respondent XINGYING CHEN Fifth Cross-Respondent POLARIS IP PTY LTD ACN 625 343 964