Vuly Property Pty Ltd v Yang

GREENWOOD J: 1 On 26 November 2014, Mr Wei Yang filed a patent application under the provisions of the Patents Act 1990 (Cth) (the "Act") bearing the title "A type of frame structure used for trampolines and the trampolines". 2 The applicant in the principal proceedings in this Court, Vuly Property Pty Ltd ("Vuly"), made an application to the Commissioner of Patents under s 36(1) of the Act for an order that Vuly is the "eligible person" in relation to the invention disclosed in the patent application. An "eligible person" in relation to an invention means a person to whom a patent for the invention may be granted under s 15 of the Act: Schedule 1 to the Act. 3 On 12 October 2015, the Deputy Commissioner of Patents, acting as delegate of the Commissioner, rejected Vuly's application and declared that Mr Yang is the eligible person for the purposes of the patent application. 4 On 3 November 2016, Vuly filed a "Notice of appeal (intellectual property)" in this Court seeking an order that the decision of the Commissioner of Patents be set aside; a declaration that Vuly is an eligible person in relation to the invention disclosed in the specification filed in relation to the patent application; and a declaration that Mr Yang is not an eligible person in relation to the invention so disclosed. The notice of appeal is filed pursuant to s 36(5) of the Act and although the proceeding is described as a notice of appeal, the notice invokes an exercise of the Court's original jurisdiction. Accordingly, the questions in issue will be heard de novo and decided upon the evidence put before the Court. 5 To that end, the Court made directions on 22 November 2016 to the effect that evidence at the trial be by affidavit; Vuly file and serve its evidence-in-chief by 27 January 2017; Mr Yang file and serve his evidence-in-chief by 28 February 2017; Vuly file and serve its evidence in reply by 14 March 2017; and, the parties participate in good faith in a mediation to be conducted by a Registrar of this Court by 10 April 2107. 6 On 6 February 2017, Mr Yang filed an interlocutory application by which he seeks an order under s 56 of the Federal Court of Australia Act 1976 (Cth) (the "FCA Act") and r 19.01(1)(a) of the Federal Court Rules 2011 (Cth) that Vuly provide security for the payment of costs which may be awarded against it in Mr Yang's favour. The amount sought by way of security is $90,000 either in the form of an unconditional bank guarantee or by payment of that sum into Court. Mr Yang seeks an order that the proceeding be stayed until such security is provided. Mr Yang also seeks an order that should Vuly fail to comply with an order for the provision of security by a relevant date, Vuly's proceeding be dismissed with costs. The security for costs application is also made in reliance upon s 1335 of the Corporations Act 2001 (Cth). 7 The application is supported by an affidavit of Mr Xiao Zhang affirmed 6 February 2017; further affidavits of Mr Zhang affirmed 17 February 2017 and 24 February 2017; and an affidavit of a costs assessor, Mr Ivan Garrett affirmed 6 February 2017. 8 Vuly relies upon two affidavits of Mr David Matthew Hall sworn 20 February 2017 and a further affidavit of Mr Hall sworn 1 March 2017. Vuly also relies upon aspects of a confidential document which is a licence agreement made between Vuly, an entity called Vuly Pty Ltd (both entities collectively described as "Vuly" in the licence document) and a company called Spin Master Ltd. 9 Some of the background matters are these. 10 A search of the records maintained by the Australian Securities and Investments Commission ("ASIC") shows that Vuly is a company registered on 16 October 2012 as an Australian proprietary company. Its "registered office" is 457 Grassdale Road, Gumdale, QLD and its "principal place of business" is 95 Ingleston Road, Wakerley, QLD. It has one $1.00 share on issue to Vuly Holdings Pty Ltd ("Holdings"). Vuly has a Director, Mr Joe Andon. Mr Andon is also the Company Secretary. His address is 457 Grassdale Road, Gumdale, QLD. Mr Zhang attaches to his affidavit of 6 February 2017, a website search for an entity called Vuly Trampolines Pty Ltd, dated 31 January 2017. It has a Showroom at 95 Ingleston Road, Brisbane. That address is described as the "Vuly Showroom and HQ". Mr Zhang says that he also inspected the website on 25 November 2016 which revealed the same information as appears in the extract of 31 January 2017. It seems inferentially clear enough that Vuly does not conduct the business of Vuly Trampolines Pty Ltd. Mr Zhang also refers to an extract of a land title search which he conducted. It reveals no land title records in the name of Vuly. 11 As a result of these matters, Mr Yang's lawyers, Bennett & Philp (Mr Zhang), wrote to the then solicitor for Vuly (Mr Luke Fox) on 25 November 2016 expressing concern that Vuly would be unlikely to be able to pay Mr Yang's costs if an order for costs were to be made in his favour. Mr Zhang invited Vuly to identify whether Vuly has significant assets within Australia or whether Vuly engages in significant trading activities in Australia. Mr Zhang invited Vuly to provide security for Mr Yang's costs. There was no response and Mr Zhang again wrote to Mr Fox on 6 December 2016 and again on 13 December 2016. Mr Fox responded on 13 December 2016 advising that he had not been able to obtain instructions from Vuly. On 14 December 2016, Mr Fox responded and suggested that Mr Yang was wasting time and money on a "spurious fishing expedition about our client's finance and commercial arrangements". Mr Fox said that Vuly had the capacity to pay a costs order. Mr Fox also asserted that Vuly is the owner of intellectual property rights of substantial value and that it has substantial income as a result of those rights. On 14 December 2016, Mr Zhang responded and said that the intellectual property rights did not give "any realistic comfort" to Mr Yang and those rights did not represent assets of sufficient liquidity so as to constitute a realistic fund against which Mr Yang might enforce an order for costs. 12 On 9 February 2017, Mr Zhang served the interlocutory application and supporting affidavits upon Mr Fox. On 13 February 2017, Mr Zhang received an email from Mr Hall advising that he had been appointed to act for Vuly on 8 February 2017. Mr Hall requested Mr Zhang to provide him with copies of the relevant papers. The application had been set down for hearing on 20 February 2017. 13 On 13 February 2017, Mr Hall responded by letter and agitated the merits of Vuly's position having regard to its ownership of certain registered trade marks, pending trade mark applications, patents, pending patent applications and registered designs. Mr Hall also said that these assets had been taken up under licence by Vuly Trampolines Pty Ltd in its business. Mr Hall also asserted that an "upfront payment" and further payments under the licence agreement (mentioned at [8] of these reasons) suggested that Vuly would have the capacity to pay any costs order Mr Yang might obtain against Vuly and, more particularly, in the face of all of that material, Mr Yang could not be satisfied that Vuly would not be able to pay any costs order he might obtain against Vuly. 14 Mr Hall's letter attached a schedule of patents, registered designs and trade mark applications in support of all those matters. As to the patent applications, six applications have been filed in the name of Vuly and one has been granted. As to the registered designs, there seem to be 13 registered designs and two have been certified. As to the trade marks, four seem to be registered and the marks in question are "Vuly2" (two registrations), "Angel" and "Blade". As to the other trade mark applications, they have either lapsed or are under examination with extension fees having been paid to enable that to occur. One application is "under examination - deferred". 15 When the matter came before the Court on 20 February 2017, a question arose as a result of a search of the current position in relation to Mr Yang's patent application as to whether the application had lapsed. Accordingly, the interlocutory application was adjourned with the consent of both parties to enable enquiries to be made so as to identify the correct status of Mr Yang's patent application. Those enquiries resulted in a communication from IP Australia confirming that the patent application had not lapsed and that the final date for acceptance would be a date three months from the determination of the present Federal Court principal proceedings. 16 For the purposes of the hearing on 20 February 2017, Mr Hall swore an affidavit on 20 February 2017 in which he said these things: 4 Mr Joe Andon, the director of [Vuly], tells me, and I believe that: a. the Appellant [Vuly] has no liabilities; b. [Vuly] is part of a consolidated group, and no separate accounts are prepared for [Vuly]; c. the consolidated group achieved a significant net profit in the last financial year and has achieved a significant net profit in the current financial year; d. those figures are kept confidential on the basis that they are commercially sensitive; and e. he would be willing to prepare accounts demonstrating the surplus of assets over liabilities for [Vuly] if the court requires it on appropriate terms of confidentiality. 17 The adjourned application came on for hearing on Wednesday, 1 March 2017. 18 Vuly relies upon Mr Hall's affidavit of 20 February 2017 in which he attaches copies of the results of searches of records of the Australian Patent Office, the Australian Trade Marks Office and the Australia Designs Office. By these attachments, Mr Hall formally puts in evidence the material earlier provided to Mr Zhang. Mr Hall says that Mr Andon is the Chief Executive of Vuly and each of the companies in the Vuly group including Vuly Pty Ltd and Vuly Trampolines Pty Ltd. Mr Hall says that he is told and believes to be true that Vuly owns substantial intellectual property rights in Australia including copyright entitlements and information properly described as confidential information in relation to design concepts, engineering drawings, manufacturing drawings, test data, dyes, casts and moulds used in connection with the exercise of Vuly's intellectual property. Mr Hall says that Mr Andon says that Vuly licenses its intellectual property to Vuly Trampolines and Vuly Trampolines uses it in the conduct of its business of manufacturing, marketing and selling trampolines and trampoline equipment and accessories. He says, based on Mr Andon's information, that Vuly Trampolines generated annual revenue of some millions in the 2014/2015 financial year (the precise figures may well be confidential) with sales of a substantial number of units (and again, the numbers may be confidential) and since then sales revenue, numbers of units sold and profit generated has continued to grow "substantially" (although no data is given in relation to these matters). Mr Hall says that each of the valuable intellectual property assets will be available, if needed, to satisfy any obligation Vuly might have to Mr Yang to pay costs. Further, Mr Hall, for Mr Andon, says that Vuly owns other intellectual property rights in countries other than Australia and Vuly has granted a license to a Canadian company to use particular Vuly intellectual property in accordance with the licence agreement of 21 September 2015. Mr Hall sets out elements of the licence agreement. I will return to those matters later in these reasons. 19 In Mr Hall's affidavit of 1 March 2017, he says that Vuly is a wholly owned subsidiary of Holdings (that is, Holdings is the owner of the single issued $1.00 share in Vuly) and that Holdings owns 100% of the issued shares in Vuly Trampolines Pty Ltd (which conducts the business of manufacturing and marketing trampolines), Vuly Pty Ltd (which holds the intellectual property rights with Vuly), Vuly Admin Pty Ltd and Vuly Imports Pty Ltd. Holdings is also the sole shareholder of two foreign corporations, Vuly (Qindao Sports Equipment) Co Ltd (a company incorporated in the People's Republic of China) and Vuly USA Operations Corp (a company incorporated in California). Mr Andon is the Chief Executive of all of these companies. 20 As to the licence agreement, I will be circumspect about it given the confidential character of the document. As already mentioned, two entities in the Vuly group grant rights to the licensee. The two entities (Vuly and Vuly Pty Ltd) are collectively described as Vuly. The effective date of the agreement is 1 September 2015. It automatically renews (unless earlier terminated in accordance with s 10 of the document) for successive 12 month periods beginning on 1 January 2016. The rights have been renewed and not otherwise determined under s 10. It is accurate to say that the agreement provides for substantial payments over time with an upfront payment. It is not necessary to set out the quantum of those payments. The payments might be made to one or other of the two Vuly entities or both in a particular apportionment. 21 Apart from the confidential licence agreement, Mr Hall attaches to his affidavit of 1 March 2017 two documents (also confidential) described as a profit and loss statement and a balance sheet. These two documents reflect the combined position of "all of the Australian entities in the Vuly Holdings corporate group, including Vuly, as at 31 December 2016, prepared on a consolidated basis". Thus, it is not possible to identify the financial position of Vuly, individually. 22 The principles governing the exercise of the discretion under s 56 of the FCA Act are uncontroversial. The principles (and questions to be asked) are these: (1) The application should be brought promptly. (2) As a general rule, where Vuly's claim is prima facie regular, the Court should proceed on the basis that the claim is bona fide with a reasonable prospect of success, unless there is evidence to the contrary. (3) If Vuly is impecunious, is its impecuniosity caused by the conduct of Mr Yang? (4) Is Mr Yang's application for security oppressive in the sense that the application is being brought merely to defeat or deny an impecunious party a right to litigate the question in issue? (5) Are there individuals standing behind Vuly who are likely to benefit from the litigation and, if so, are those persons willing to provide security? (6) If there are individuals standing behind Vuly who are likely to benefit, have any of those individuals offered a personal undertaking to be liable for the costs which might be awarded against Vuly in Mr Yang's favour and, if such an undertaking has been offered, what form does it take? (7) Are the proceedings taken by Vuly essentially "defensive" in the sense that Vuly is directly protecting itself against Mr Yang's attack and thus forced to litigate to do so? 23 Vuly says that two matters arise on the application. 24 The first is whether there is a real risk that Vuly will not meet an adverse costs order. Vuly contends that Mr Yang has not discharged the burden of proof he has assumed in bringing the application. The second question is whether Mr Yang would ever be entitled to an indemnity by way of a costs order because the "Matter Cost Summary Report" put in evidence by Mr Yang's solicitors suggests that an entity controlled by Mr Yang, Itechsport Pty Ltd, is liable to pay the fees and thus, Mr Yang has no liability to pay the fees and ought not be entitled to an indemnity in respect of the fees. 25 As to the first question, Vuly also says that it was incorporated on 16 October 2012; it has a range of intellectual property both locally and internationally; that intellectual property generates significant income streams which annually exceed the amount required by way of security; Vuly has no liabilities; and Vuly has an excellent "credit score". As to the question of no liabilities, Vuly relies upon the affidavit of Mr Hall at para 4 quoted above. It may be that the entity "Vuly" has no liabilities. However, it should be noted that the consolidated accounts for the group reflect current and non-current liabilities. Vuly also says that the evidence discloses that "the group" earned revenue of substance in the 2015 financial year as already mentioned. 26 Vuly made further oral submissions in support of those arguments and others. For present purposes, I simply propose to identify the factors which have informed my exercise of the discretion under s 56 of the FCA Act. 27 I take this view: (1) The application has been brought promptly. (2) I accept that as to the question of whether Vuly has reasonable prospects of success, the factor is a neutral one. I am not in a position to form any particular views about that matter. There are some aspects of the notice of appeal which are odd in the sense that the document lacks any precision in identifying the real basis upon which it is contended (even as a proposition) that Vuly is "an" or "the" eligible person in relation to the invention the subject of the patent application. Nevertheless, I am not satisfied that there is evidence which suggests that Vuly's application should be treated as anything other than one which has, for these purposes, "reasonable prospects of success". (3) The application was filed on 6 February 2017 and it was served on Mr Fox on 9 February 2017 after issues had been raised with Vuly as early as 25 November 2016 which still remained the subject of instructions to be obtained as at 13 December 2016. A response came in the letter of 14 December 2016 from Mr Fox. The documents were also then provided to Mr Hall on 13 February 2017. Between approximately 10 February 2017 and 1 March 2017, Mr Joe Andon had an opportunity to file an affidavit in which he directly and affirmatively could have sworn to the financial standing and position of Vuly. He could have filed an affidavit swearing to the accuracy of the financial information relating to the company, its assets and its background. He has filed no such affidavit at all. On one view, it may well be that the information to which Mr Hall deposes on information and belief at para 4 of the affidavit of 20 February 2017 is inconsistent with the profit and loss statement and the balance sheet. At para 4(a), Mr Andon, through Mr Hall, says that Vuly has no liabilities. That might well be strictly correct. However, it nevertheless would have been helpful if Mr Andon had sworn directly to those matters having regard to the liabilities reflected in the financial documents. (4) Mr Andon is a man that stands to benefit from the proceedings. He offers no undertaking. (5) Although it is true that the confidential licence agreement shows significant potential earnings, those earnings are payable to two entities collectively described as "Vuly". One of those entities is Vuly and another is not. Revenue payable to either one or both of those entities in whatever proportions may be determined (as between them) as appropriate, is simply unclear. Certainly, there is no guarantee that the payments to be made under the licence agreement will be paid to the present litigant, Vuly. (6) Although Vuly is part of a group of companies, none of the companies in the group have offered any undertaking to meet a costs order made against Vuly should Vuly be unable to pay a costs order. (7) Although it is true that the evidence suggests an integrated inter-dependent relationship between at least Vuly and Vuly Pty Ltd on the one hand, and Vuly Trampolines Pty Ltd on the other, such that an inference might be open that the Vuly group has an interest in ensuring Vuly's ongoing financial integrity as a licensor of intellectual property necessary to the primary business undertaking conducted by Vuly Trampolines Pty Ltd, that circumstance alone is not a complete answer to the present application in the sense of being determinative of whether Mr Yang has discharged the burden required to be discharged or not. It is but one factor. If it is so transparently plain that Vuly group entities, having a strategic interest in preserving Vuly's financial integrity, will, put anecdotally, come to the rescue should Vuly not, for any reason, be able to pay a costs order against it in favour of Mr Yang, it would have been a very straightforward matter for Mr Andon to say so and proffer an undertaking from, for example, Vuly Trampolines Pty Ltd or Vuly Pty Ltd. (8) There is no particularly good reason why, in circumstances where Vuly may not be the beneficiary of the payments under the confidential licence and none of Mr Andon or any of the other Vuly entities he controls have shown any willingness to overtly and expressly stand behind Vuly by offering an undertaking which could so easily have been offered (and, had it been offered would probably have obviated the costs and expenses of the present application), Mr Yang should be left in the position where he might be forced to enforce a costs order by taking whatever recovery and insolvency related steps might be necessary to put himself in a restitutionary position in relation to costs. (9) As to the indemnity point, I am not satisfied that the records put on by Mr Yang's solicitors suggest that Mr Yang has no liability in respect of the costs of the proceeding. (10) I also note that Vuly although required to put on its evidence-in-chief by 27 January 2017 has failed to file any evidence-in-chief. Although I accept that a failure to comply with the directions order to put on evidence-in-chief by 27 January 2017 is not a circumstance upon which one can draw an inference that Vuly would be unlikely to comply with an order for costs should such an order be made against it, it is disappointing that Mr Andon has chosen not to put on an affidavit in which he expressly deals with the financial position of Vuly and in which he might have taken the opportunity to explain why Vuly has not been able to comply with the obligation cast upon it to put on evidence-in-chief by 27 January 2017. (11) It may be that the identified intellectual property assets might be able to be realised should Mr Yang find himself in a position where he is forced to issue a winding-up notice to Vuly; file a creditor's petition based upon non-compliance with the winding-up notice (should that occur); apply to the Court for the appointment of liquidators to Vuly (should that be necessary); and wait for the liquidators to secure a sale or further or other licence of intellectual property rights. Mr Yang would then need to wait until a dividend is declared after the payment of the costs and expenses of the liquidation so as to see whether the dividend provides him with restitution of the full quantum of the costs. Because there is evidence that the IP rights (in which Vuly has an interest) have some value, this case is in a different category to that of Austin, Nichols & Co Inc v Lodestar Anstalt [2009] FCA 1228 and NV Sumatra Tobacco Trading Company v British American Tobacco Australia Services Ltd (2008) 79 IPR 286. 28 For all of these reasons taken together, I am satisfied that an order for security for costs ought to be made in order to protect Mr Yang. 29 As to the quantum, an affidavit has been put on for Mr Yang sworn by a costs assessor, Mr Garrett. Mr Garrett has assessed the costs likely to be incurred in undertaking a body of work described by reference to the security for costs application; the evidence stage; mediation; steps leading up to trial; costs up to the first day of the trial and matters of general care and consideration. This material forms the basis of the quantification sought by Mr Yang at $90,000. It seems to me that the security to be provided up to and including the commencement of the trial leaving aside the costs of the security for costs application and any mediation ought to be in an amount of $60,000. I so order. Mr Yang is to have his costs of the interlocutory application and there is no reason why those costs should be held over until the end of the matter. I certify that the preceding twenty-nine (29) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Greenwood.