Federal Court of Australia Hood v Down Under Enterprises International Pty Limited (No 2) [2022] FCAFC 106 Appeal from: Hood v Bush Pharmacy Pty Ltd [2020] FCA 1686 Hood v Bush Pharmacy Pty Ltd (No 2) [2021] FCA 138 File numbers: NSD 265 of 2021 NSD 266 of 2021 Judgment of: YATES, MOSHINSKY AND ROFE JJ Date of judgment: 22 June 2022 Catchwords: PRACTICE AND PROCEDURE – costs – offer to compromise – Calderbank offer – whether unreasonable to fail to accept offer – appropriate order as to costs in relation to cross-claim involving two distinct issues – where each side successful in relation to one of those issues Legislation: Federal Court Rules 2011, rr 25.01, 25.14 Cases cited: Anchorage Capital Partners Pty Ltd v ACPA Pty Ltd (No 2) [2018] FCAFC 112 Davies v Lazer Safe Pty Ltd (No 2) [2019] FCAFC 118 GlaxoSmithKline Consumer Healthcare Investments (Ireland) (No 2) Ltd v Generic Partners Pty Ltd (No 2) [2018] FCAFC 100 Kimberly-Clark Australia Pty Ltd v Multigate Medical Products Pty Ltd [2011] FCAFC 86 State Street Global Advisors Trust Company v Maurice Blackburn Pty Ltd (2022) 399 ALR 704 Wills v Chief Executive Officer of the Australian Skills Quality Authority (Costs) [2022] FCAFC 43 Division: General Division Registry: New South Wales National Practice Area: Intellectual Property Sub-area: Patents and associated Statutes Number of paragraphs: 29 Date of last submissions: 7 June 2022 Date of hearing: Determined on the papers Counsel for the Appellant NSD265/2021 NSD266/2021: Dr G O'Shea Solicitor for the Appellant HWL Ebsworth Lawyers NSD265/2021 NSD266/2021: Counsel for the Respondent Ms SJ Hallahan NSD265/2021: Solicitor for the Respondent Gadens Lawyers NSD265/2021: Counsel for the Respondent Mr SY Reuben with Ms JM Whitaker NSD266/2021: Solicitor for the Respondent Malcolm McDonald & Co NSD266/2021: ORDERS NSD 265 of 2021 BETWEEN: JOHN JAMES DAVID HOOD Appellant AND: DOWN UNDER ENTERPRISES INTERNATIONAL PTY LIMITED (ACN 127 755 971) Respondent AND BETWEEN: DOWN UNDER ENTERPRISES INTERNATIONAL PTY LIMITED (ACN 127 755 971) Cross-Appellant AND: JOHN JAMES DAVID HOOD Cross-Respondent order made by: YATES, MOSHINSKY AND ROFE JJ DATE OF ORDER: 22 JUNE 2022 THE COURT ORDERS THAT: 1. Paragraphs 5 and 6 of the orders made by the Full Court on 4 May 2022 be vacated. 2. Paragraph 8(a) of the orders of the primary judge be set aside and in lieu thereof it be ordered: (a) 100% of the respondent/cross-claimant's costs of the application on a party/party basis, excluding the costs referred to in (b) and (c) below; and 3. There be no order as to costs in relation to the cross-appeal. Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011. ORDERS NSD 266 of 2021 BETWEEN: JOHN JAMES DAVID HOOD Appellant AND: NATIVE OILS AUSTRALIA PTY LTD (ACN 154 612 487) Respondent order made by: YATES, MOSHINSKY AND ROFE JJ DATE OF ORDER: 22 june 2022 THE COURT ORDERS THAT: 1. Paragraph 2 of the orders made by the Full Court on 4 May 2022 be vacated. 2. The appellant pay the respondent's costs of the appeal on a party/party basis, as agreed or taxed. [Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.] REASONS FOR JUDGMENT THE COURT: Introduction 1 On 4 May 2022, the Full Court gave judgment in relation to three appeals: Hood v Down Under Enterprises International Pty Ltd [2022] FCAFC 69 (the 4 May 2022 reasons). The parties were given the opportunity to make submissions on costs. In two of the appeals, the parties sought a different costs order from that provisionally made by the Full Court. These reasons deal with the issues of costs. They should be read together with the 4 May 2022 reasons. We adopt the abbreviations used in the 4 May 2022 reasons. 2 The two appeals in respect of which costs issues arise are: (a) Mr Hood's appeal in relation to Down Under Enterprises (NSD 265 of 2021); and (b) Mr Hood's appeal in relation to Native Oils (NSD 266 of 2021). 3 We will consider each appeal in turn. Appeal relating to Down Under Enterprises 4 The substantive orders made on 4 May 2022 in relation to this appeal (and the associated cross-appeal) were that the appeal be dismissed and the cross-appeal be allowed in part. The orders made on 4 May 2022 included an order that Mr Hood pay Down Under Enterprises' costs of the appeal. There is no issue about that costs order. The costs issues relate to the costs of the proceeding below, and the costs of the cross-appeal. 5 The cross-appeal raised two principal issues: (a) whether the primary judge erred in his conclusion that the Patent did not lack an inventive step (referred to as the "Inventive Step issue"); and (b) whether the primary judge erred in concluding that Down Under Enterprises had contravened the Australian Consumer Law (referred to as the "Australian Consumer Law issue"). 6 In relation to those issues, we concluded that: (a) the primary judge did not err in relation to the Inventive Step issue; and (b) the primary judge erred in concluding that Down Under Enterprises contravened the Australian Consumer Law. 7 Our provisional views in relation to costs (both as regards the corresponding proceeding at first instance (NSD 1271 of 2017) and the cross-appeal) were reflected in paragraphs 5 and 6 of the orders made on 4 May 2022 in NSD 265 of 2021. In circumstances where Down Under Enterprises has filed a submission seeking different costs orders, we consider the issues of costs afresh. Costs relating to the corresponding proceeding at first instance 8 The costs orders made by the primary judge in the corresponding proceeding at first instance were as follows: 8. The applicant/cross-respondent pay: (a) 70% of the respondent/cross-claimant's costs of the application on a party/party basis excluding the costs referred to in (b) and (c) below; and (b) the respondent/cross-claimant's costs referable to the applicant/cross-respondent's application for orders under s 105 of the Patents Act 1990 (Cth) on a party/party basis; and (c) the respondent/cross-claimant's costs referable to the applicant/cross-respondent's claim of trade mark infringement to be assessed on an indemnity basis. 9. The respondent/cross-claimant pay 14% of the applicant/cross-respondent's costs of defending the cross-claims filed in this proceeding and in proceedings NSD1267/2017, NSD2175/2017, NSD2176/2017 and NSD1272/2017 on a party/party basis. 9 The competing positions of the parties as regards costs can be summarised as follows: (a) Mr Hood accepts that paragraph 8(a) of the orders of the primary judge dated 26 February 2021 should be set aside and in lieu thereof it be ordered that Mr Hood pay 100% of Down Under Enterprises' costs of the application on a party/party basis, excluding the costs referred to in paragraphs 8(b) and 8(c) of the primary judge's orders. However, he submits that no other change should be made to the primary judge's costs orders. (b) Down Under Enterprises relies on an offer to compromise that it made on 5 February 2018 (before the commencement of the hearing at first instance) to pay Mr Hood $10,000 inclusive of costs, and Mr Hood's failure to accept that offer. The offer to compromise is annexed to an affidavit of Stephanie Rawlinson affirmed 10 May 2022. Down Under Enterprises also relies on the fact that, as a result of the Full Court's judgment, Mr Hood's Australian Consumer Law claim has failed. Down Under Enterprises submits that paragraphs 8 and 9 of the orders of the primary judge should be set aside and in lieu thereof it be ordered that Mr Hood pay: (i) Down Under Enterprises' costs of the proceeding at first instance (i.e. the application and the cross-claim), excluding the costs referred to in (ii) below, up to 11.00 am on 7 February 2018 on a party/party basis, and thereafter on an indemnity basis; and (ii) Down Under Enterprises' costs referable to Mr Hood's claim for trade mark infringement, to be assessed on an indemnity basis. 10 Rules 25.01 and 25.14 of the Federal Court Rules 2011 relevantly provide as follows: 25.01 Offer to compromise (1) A party (the offeror) may make an offer to compromise by serving a notice, in accordance with Form 45, on another party (the offeree). … 25.14 Costs where offer not accepted … (2) If an offer is made by a respondent and an applicant unreasonably fails to accept the offer and the applicant's proceeding is dismissed, the respondent is entitled to an order that the applicant pay the respondent'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. 11 The principles applicable to r 25.14 were considered in two recent Full Court judgments: see Wills v Chief Executive Officer of the Australian Skills Quality Authority (Costs) [2022] FCAFC 43 at [21]-[23]; State Street Global Advisors Trust Company v Maurice Blackburn Pty Ltd (2022) 399 ALR 704 at [122]-[123]. 12 In our view, Down Under Enterprises has not established that Mr Hood acted unreasonably in failing to accept the offer to compromise, having regard, in particular, to the extent of the compromise offered and the offeree's prospects of success assessed as at the date of the offer. We note that, in the Costs Judgment, the primary judge reached the same view in respect of Mr Hood's rejection of a comparable offer by New Directions, in circumstances that did not include a successful Australian Consumer Law claim: see the Costs Judgment at [29], [51]. 13 Accordingly, we do not accept Down Under Enterprises' submission that it should be paid costs on an indemnity basis in respect of the period after 11.00 am on 7 February 2018. 14 Insofar as Down Under Enterprises submits that paragraph 9 of the orders of the primary judge should be set aside, it follows from the above that we do not accept that submission. We also note that the primary judge made a comparable order in the proceeding involving New Directions notwithstanding the service of a comparable offer to compromise by New Directions. 15 It follows that we consider the appropriate order to be that paragraph 8(a) of the orders of the primary judge be set aside and in lieu thereof it be ordered: (a) 100% of the respondent/cross-claimant's costs of the application on a party/party basis, excluding the costs referred to in (b) and (c) below; and Costs in relation to the cross-appeal 16 The competing positions of the parties can be summarised as follows: (a) Mr Hood submits that there should be no order as to costs in relation to the cross-appeal. (b) Down Under Enterprises submits that Down Under Enterprises' cross-appeal on inventive step was "entirely defensive". Accordingly, Down Under Enterprises submits that there should be no order as to costs in relation to the cross-appeal on inventive step: see Kimberly-Clark Australia Pty Ltd v Multigate Medical Products Pty Ltd [2011] FCAFC 86 at [90]. Down Under Enterprises submits that Mr Hood ought to pay its costs of the cross-appeal on the Australian Consumer Law claim (in respect of which it was successful). On this basis, Down Under Enterprises submits that Mr Hood should be ordered to pay 30% of Down Under Enterprises' costs of the cross-appeal. 17 There is no dispute between the parties that it is appropriate for the Court to adopt an issues-based approach to the question of costs of the cross-appeal. Both parties' submissions proceed on the basis that the cross-appeal involved two issues, and that this should be reflected in the costs order for the cross-appeal. The difference between the parties concerns the costs treatment of the Inventive Step issue. 18 A claim for patent infringement and a cross-claim for patent invalidity are typically treated as separate events upon which the ordinary rule applies as to costs: see GlaxoSmithKline Consumer Healthcare Investments (Ireland) (No 2) Ltd v Generic Partners Pty Ltd (No 2) [2018] FCAFC 100 at [8]; Davies v Lazer Safe Pty Ltd (No 2) [2019] FCAFC 118 at [7]. In the circumstance of the present case, there was little overlap between the infringement issues raised by the appeal and the inventive step issue raised by the cross-appeal. In these circumstances, they are appropriately treated as distinct events for the purposes of costs, notwithstanding that there was a defensive aspect to this aspect of the cross-appeal. 19 In circumstances where the cross-appeal raised two distinct issues (the Inventive Step issue and the Australian Consumer Law issue) and each party was successful on one issue, we consider the appropriate order to be that there be no order as to costs in relation to the cross-appeal. Appeal relating to Native Oils 20 The substantive order in this appeal was that the appeal be dismissed. There was no cross-appeal. 21 In circumstances where Native Oils has sought a variation of the costs order that we made on 4 May 2022, we consider the costs issue afresh. 22 The competing positions of the parties as regards costs can be summarised as follows: (a) Mr Hood accepts that there should be an order that he pay Native Oils' costs of the appeal. He submits that this should be on a party/party basis. (b) Native Oils relies on a Calderbank offer that it made on 25 June 2021 and a letter dated 13 July 2021 by which it increased that offer. By the letter dated 13 July 2021, Native Oils offered to resolve the appeal on the basis that: it would pay Mr Hood $20,000; each party would bear its own costs of the appeal; and each party would bear its own costs of the proceeding at first instance (in place of the costs orders made by the primary judge). The Calderbank offer and the letter dated 13 July 2021 are annexed to an affidavit of Malcolm McDonald sworn on 11 May 2022. The offer was not accepted by Mr Hood. On the basis of the offer and the non-acceptance, Native Oils seeks an order that Mr Hood pay Native Oils' costs of the appeal on a party/party basis up to 11.00 am on 29 June 2021 and thereafter on an indemnity basis. 23 The principles applicable to Calderbank offers are well-established. It is sufficient to refer to Anchorage Capital Partners Pty Ltd v ACPA Pty Ltd (No 2) [2018] FCAFC 112 at [6]-[8]. 24 The key issue is whether Mr Hood's refusal of the offer (or the offer as improved by the 13 July 2021 letter) was "unreasonable" when viewed in light of the circumstances existing at the time the offer was rejected. The Calderbank offer was made approximately two months before the hearing of the appeal, and the improved offer about six weeks before that hearing. 25 Insofar as the offer included that the parties bear their own costs of the proceeding at first instance (in place of the existing costs orders of the primary judge), this offered a benefit to Mr Hood (as it was likely that the effect of the existing costs orders was that Mr Hood would need to pay an amount to Native Oils). However, it was not possible for Mr Hood to quantify that benefit at the time of the offer. In correspondence exchanged between the parties (annexed to the affidavit of Mr McDonald), the lawyers for Mr Hood sought details as to the costs incurred by Native Oils and an itemised bill of costs. The lawyers for Native Oils responded that Native Oils' costs and disbursements were "in the vicinity of" $230,000. In our view, Native Oils could have done more to substantiate its costs in the face of Mr Hood's concerns that the costs appeared to be excessive (although an itemised bill of costs may not have been necessary). At the time of the offer, Mr Hood was facing a costs order at first instance which, in practical effect, required him to pay his own costs (which he must have known) plus Native Oils' party/party costs (which he did not know beyond the assertion made), subject to Native Oils paying 14% of Mr Hood's cross-claim costs (which Mr Hood also must have known). The problem is that Mr Hood had no real visibility on what Native Oils' party/party costs were. Native Oils made no attempt to justify its assertion that its costs and disbursements were in the vicinity of $230,000 and it is conspicuous that, even in this appeal, it has not put on evidence of its costs of "the application including the costs of the application for orders under s 105 of the Patents Act 1990 (Cth) on a party/party basis" (as ordered by the primary judge). 26 Native Oils submits that its offer (as improved) was better than "the best alternative result that the Appellant could achieve even if [he] were to win the Appeal and obtain an account of profits", based on Native Oils' evidence as to its gross sales within Australia ($23,098). If and to the extent that it is submitted that the improved offer represented a better outcome than Mr Hood could achieve if the appeal were successful, we do not accept this submission. The offer provided for each party to bear its own costs of the proceeding at first instance and on appeal. If Mr Hood succeeded in the appeal, he may have been awarded his costs of proceeding at first instance and on appeal. 27 While Mr Hood's contentions for the appeal were not strong, they were at least arguable. 28 Having regard to the indeterminate quantum of the offer, and the other facts and circumstances referred to above, we are not persuaded that it was unreasonable for Mr Hood to reject the offer (or the improved offer). 29 Accordingly, we consider the appropriate order to be that Mr Hood pay Native Oils' costs of the appeal on a party/party basis, as agreed or taxed. I certify that the preceding twenty-nine (29) numbered paragraphs are a true copy of the Reasons for Judgment of the Honourable Justices Yates, Moshinsky and Rofe. Associate: Dated: 22 June 2022