FEDERAL COURT OF AUSTRALIA Sandvik Intellectual Property AB v Quarry Mining & Construction Equipment Pty Ltd (No 2) [2016] FCA 613 File number: VID 259 of 2013 Judge: JESSUP J Date of judgment: 1 June 2016 Catchwords: COSTS – Patent infringement proceeding – Cross-claim alleging invalidity on multiple grounds – Applicants' infringement case hypothetically successful but Patent held to be invalid on limited grounds – Whether applicants entitled to costs of infringement case – Whether respondent entitled to costs of abandoned elements of invalidity case – Offers of compromise – Whether unreasonably rejected. Legislation: Federal Court of Australia Act 1976 (Cth) s 37M Federal Court Rules 2011 (Cth) r 25.14 Date of hearing: Heard on the papers Date of last submissions: 19 April 2016 Registry: Victoria Division: General Division National Practice Area: Intellectual Property Sub-area: Patents and associated Statutes Category: Catchwords Number of paragraphs: 31 Counsel for the Applicants: Dr W Rothnie Solicitor for the Applicants: Phillips Ormonde Fitzpatrick Counsel for the Respondent: Mr S Burley SC with Mr C Dimitriadis SC and Mr C Burgess Solicitor for the Respondent: Wilde Legal ORDERS VID 259 of 2013 BETWEEN: SANDVIK INTELLECTUAL PROPERTY AB First Applicant SANDVIK MINING AND CONSTRUCTION AUSTRALIA (PRODUCTION/SUPPLY) PTY LTD ACN 008 640 908 Second Applicant AND: QUARRY MINING & CONSTRUCTION EQUIPMENT PTY LTD (ACN 002 572 303) Respondent JUDGE: JESSUP J DATE OF ORDER: 1 JUNE 2016 THE COURT ORDERS THAT: 1. The applicants pay the respondent's costs, except costs incurred in connection with the following allegations: (a) that the invention was not a manner of manufacture; (b) save in respect of Claim 6, that the claims in the Patent were not clear and succinct; (c) save in respect of Claim 7, that the claims in the Patent were not fairly based; (d) save in respect of the introduction of Claim 7 into the Patent, that the amendments to the Patent sought by the applicants in March 2006, and subsequently made, were obtained by fraud, false suggestion or misrepresentation; and (e) that the invention had been anticipated by the use of semi-automatic drilling rigs with Sandvik male/female right-hand rope thread extension drill rods at Angus Place Colliery in New South Wales. 2. The respondent pay the applicants' costs incurred only in connection with the allegations excepted from the operation of the previous order. Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011. REASONS FOR JUDGMENT JESSUP J: 1 On 11 March 2016, I dismissed the Amended Originating Application in this proceeding, made revocation orders in the terms sought by the respondent and laid out a timetable for the making of written submissions on costs. Those submissions have now been filed. These reasons deal with the subject of costs. 2 It was submitted on behalf of the respondent that it had been wholly successful in the litigation, and that costs ought to follow the event. It was submitted on behalf of the applicants that their infringement case had been substantially successful and that the respondent had abandoned, at a late stage, a number of its challenges to the validity of the Patent. Both of those circumstances ought to be factored into the court's discretionary judgment as to the costs that ought to be paid, and by whom. 3 The applicant's infringement case was not substantially successful. It was wholly unsuccessful. The findings which I made at paras 248-270 of my reasons of 11 March 2016 were, as I made clear, for the sake of completeness only and so that a factual record would exist in the event that it later became important. That part of my reasons also now makes its own small contribution to the resolution of the applicants' opposition to the respondent's costs claim. In relation to so much of the respondent's Defence as was not tied to its challenges to the validity of the Patent, it is implicit in the applicants' position that the respondent ought not to have put those matters in issue at all. Although I rejected the respondent's denials, as ought to be clear from my reasons, it would be a considerable step to conclude that they should not have been made. In the absence of a systematic submission on behalf of the applicants that it should have been obvious to the respondent that there was no foundation for its denials, this is not a step which I would be prepared to take. 4 That reasoning applies also, of course, to the costs of the applicants' misleading conduct case, which was wholly dependent on the validity of the Patent. 5 Whether the respondent should recover the costs of its invalidity case, both in its Defence and in its Cross-claim, is, of course, another matter altogether. In relation to aspects of that case that were abandoned, or were unsuccessful at trial, the applicants submit not. 6 It is submitted on behalf of the applicants that the respondent maintained, at least until trial, a number of challenges to the validity of the Patent, namely, those which related to manner of manufacture, clarity, fair basis and false suggestion. None was persisted with. True enough, answers the respondent, but these challenges depended, either wholly or to an extent, upon the applicants' infringement cases under Claims 6 and 7 of the Patent, which were kept alive until the second-last day of the trial, being abandoned only at the outset of final submissions on behalf of the applicants on 8 September 2015. 7 As to manner of manufacture, the applicants are mistaken in their submission that the ground was maintained until trial: it was dropped on 7 November 2014. Nonetheless, and although little in the way of costs may be involved, I cannot understand why the respondent should be entitled to its costs incurred in prosecuting this aspect of its Defence and Cross-appeal. Nothing was put to me by way of justification for the original inclusion of this ground. 8 As for lack of clarity, lack of fair basis and false suggestion, it is the case that these grounds were abandoned only at the point of final submissions. The question is whether the applicants' abandonment of its infringement case under Claims 6 and 7 is sufficient to absolve the respondent from the responsibility of having made, and retained until trial, these grounds in its Defence and Cross-appeal. 9 The respondent's lack of clarity challenge in its original Particulars of Invalidity, filed on 3 July 2013, reads, one would have to say, like a shopping list. No claim escaped critical attention. In some respects, the respondent could not have been expecting the applicants to take it seriously: Claim 3, for example, was said not to be clear and succinct insofar as it used the term "drill rod". This and many other particulars of lack of clarity were removed when the respondent's Amended Particulars of Invalidity were filed on 7 November 2014. At the same time, new particulars were added. All claims were included in the respondent's lack of clarity challenge, including Claim 5, notwithstanding that that claim had, since 17 October 2014, no longer been part of the applicants' infringement case. 10 That remained the position until 24 August 2015, when the respondent filed its Statement of Facts and Contentions as to Invalidity. It contended that "all asserted claims" were invalid for want of clarity. By "asserted claims" the respondent intended a reference to the claims upon which the applicants relied in their infringement case, that is, all seven claims except Claim 5. However, notwithstanding the respondent's then particulars which, as stated above, were comprehensive, it was only Claim 6 that received any specific attention. In respect of the other claims, the respondent said only that its particulars "may become relevant depending on the approach adopted by Sandvik and the course of evidence at the hearing, and will be addressed to the extent necessary in due course". It is, with respect to those involved, difficult to appreciate how the deployment of a lack of clarity objection could be left on such a contingent basis on the eve of the trial. 11 As it happened, the course of the trial itself did not alter things so far as the objection was concerned. In its final written outline, filed after the evidence was complete, the respondent added nothing of substance to what it had said on 24 August 2015. 12 Save in respect of Claim 6, there is nothing before the court to justify the respondent's lack of clarity case. I am bound to treat it as, in effect, an ambit claim made at an early stage of the proceeding with a view to keeping all options open. That is not, in my view, a sufficient basis to warrant the exercise of the court's costs discretion favourably for the respondent. To award the respondent its costs of making this objection, and keeping it alive until the last day of the trial, would, in an environment where every encouragement is given to parties in all cases to identify the real issues between them at an early stage, be to send the wrong signal altogether. Moreover, to make such an award would, in the circumstances I have outlined, work an obvious injustice on the applicants. 13 The respondent's original fair basis challenge also related to all of the claims in the Patent. By 7 November 2014, that challenge was confined to Claims 5 and 7. That remained the situation until the filing, on 24 August 2015, of the respondent's Statement of Facts and Contentions as to Invalidity, at which point the challenge to the validity of Claim 5 for lack of fair basis was dropped. No attempt was ever made on behalf of the respondent to justify having advanced that challenge; or, for that matter, to justify originally having advanced a fair basis challenge to the claims generally. In relation to Claim 7, I accept the respondent's submission that it was the applicants' reliance on that claim in their infringement case that warranted the retention of the fair basis objection. I also accept their submission that the applicants' abandonment of that aspect of their case provided the occasion for the respondent to drop this challenge to the validity of Claim 7. But the same cannot be said in the case of the fair basis challenge to the other claims. I can see no justification for imposing on the applicants a requirement to pay the respondent's costs incurred in this department of its case. 14 The respondent introduced its false suggestion ground in its original Particulars of Invalidity filed on 3 July 2013. It related to all claims. Until the end, that remained the case, although the ground was confined to Claims 1, 2, 3, 4, 6 and 7 as advanced in the respondent's contentions filed on 24 August 2015. The point was, it seems, that, when making amendments to the specification in March 2006, the applicants failed to mark up a number of passages which were the subject of the amendments, including Claim 7 which was new. To the extent that the false suggestion ground related to Claim 7, therefore, the abandonment of the applicants' infringement case under that claim provided a defensible basis for dropping of the ground in the Defence and Cross-claim. In other respects, however, the respondent has advanced no justification for relying on the ground, and the costs award made in its favour will reflect that dimension of the matter. 15 It was also submitted on behalf of the applicants that the respondent ought not to have its costs of the whole of its lack of novelty case. This involved two aspects of that case. The first related to the Wilson Mining prior use point, where it was put that it "should have been apparent" to the respondent that the lowermost drill rod was not driven at its female end. As a basis for denying costs to the respondent, I would not accept that submission. This area of the debate is covered, in my view, by the proposition that a party in the position of the respondent is obliged to bring forward the whole of its novelty case, and should not be penalised by reason of the court's assessment, at the end of a contested trial, of what "should have been apparent" to it along one dimension of that case. 16 The other aspect related to an affidavit sworn by David McCloskey, which the respondent caused to be filed on 31 July 2014. He said that he worked for "Sandvik" (possibly the second applicant) between about 1986 and 1995, where he designed drill rods and systems for drilling in underground mines. Having referred to Sandvik's introduction into Australia of right-hand rope-threaded drill rods in the 1980s, Mr McCloskey said: One project on which I worked with such an extension drilling system was at Baal Bone colliery in Lithgow New South Wales in about 1988. For that project, we used a single boom track mounted drilling rig and hexagonal male/female rods which had an API taper thread profile of my own design. The drilling and uncoupling procedure for the project was as described in paragraphs 32 to 43 above. A drive adaptor was not used. Subsequently, in about 1989, I worked on a project at Angus Place colliery, where a similar system was used but with male/female right hand rope thread drill rods supplied by Sandvik. This project used SIG (Swiss Industrial Gesellschaft) drill rigs that had been adapted for right hand rotary drilling in coal mines, having previously been designed for rotary percussive drilling. The drilling and uncoupling procedure was again as described in paragraphs 32 to 43 above. A drive adaptor was not used. I attended Angus Place colliery on many occasions for this project, going underground to observe the extension drilling system in operation. During the period from 1988 to 1995, I designed hexagonal male/female right hand rope thread drill rods in a number of sizes which were supplied by Sandvik, including sizes R19, R22 and R25. Sandvik led the coal mining industry in converting to the use of rope threads, and in my experience, these drill rods were commonly used in extension drilling operations in coal mines in Australia by 1995. 17 Albeit that these instances of the use of drill rods were not then included in the respondent's Particulars of Invalidity, by Interlocutory Application filed on 10 September 2014, the respondent sought discovery orders in the following terms: 1. All documents recording, evidencing or relating to the work at Angus Place Colliery described in paragraph 45 of the affidavit of David McCloskey sworn 23 June 2014, involving the use of an extension drilling system with male/female right hand rope thread drill rods supplied by Sandvik. 2 A document or documents recording the features of the hexagonal male/female right hand rope thread drill rods developed by Mr McCloskey and supplied by Sandvik during the period from 1988 to 1995, as referred to in paragraph 47 of the affidavit of Mr McCloskey sworn 23 June 2014. 3 A document or documents recording the total number of units sold or supplied in Australia prior to June 1997 of: (a) each of the drill rods referred to in paragraph 2 above; and (b) any other male/female right hand rope thread drill rods sold or supplied by Sandvik during that period. 4 The files relating to the design of such drill rods referred to in paragraph 48 of the affidavit of Mr McCloskey sworn 23 June 2014, including without limitation the drawings and sketches referred to in that paragraph. On 10 October 2014, a discovery order was made, by consent, in the terms sought by the respondent. On 7 November 2014, the respondent filed Amended Particulars of Invalidity which included a new novelty citation, namely, the use of drilling systems at the Angus Place Colliery as described by Mr McCloskey. 18 Presumably, the discovery so ordered was duly given by the applicants, and they prepared to resist this aspect of the respondent's invalidity case. To a large extent the affidavit of Steven Lee Weaver sworn on 13 April 2015 was concerned with it. I was informed by counsel for the applicants that, "shortly before trial", the respondent indicated that it did not propose to read Mr McCloskey's affidavit. Its pre-trial contentions, filed on 24 August 2015, made no reference to that affidavit or to what was said to have been the use of the invention at Angus Place. The applicants now submit that the respondent should not have its costs in relevant respects, and that they should have their costs of resisting this aspect of the respondent's case. 19 In its costs submissions in reply, the respondent proposed that its decision not to read Mr McCloskey's affidavit was part of what was described as the cut and thrust of litigation, and did not justify an apportionment of costs. With respect to those involved, I do not consider this to be a very satisfactory response to the applicants' point. Particularly in a discretionary environment conditioned by the terms of s 37M of the Federal Court of Australia Act 1976 (Cth), a respondent to a patent infringement action should be able to justify the introduction and later abandonment of a discrete novelty citation on a more credible ground than that it was all part of "the cut and thrust of litigation". 20 The result of what I have decided above is that the respondent should have its costs of the proceeding, including the Cross-claim, other than costs incurred only in connection with – (a) the allegation that the invention was not a manner of manufacture; (b) save in respect of Claim 6, the allegation that the claims were not clear and succinct; (c) save in respect of Claim 7, the allegation that the claims were not fairly based; (d) save in respect of the introduction of Claim 7, the allegation that the amendments to the Patent sought by the applicants in March 2006 and subsequently made were obtained by fraud, false suggestion or misrepresentation; and (e) the allegation that the invention had been anticipated by the use of semi-automatic drilling rigs with Sandvik male/female right-hand rope thread extension drill rods at Angus Place Colliery in New South Wales. 21 To the extent that the applicants incurred costs resisting those allegations, they should be paid by the respondent. 22 I turn now to the respondent's submission that part of the costs to which it becomes entitled under the orders to be made this day should be taxed on an indemnity basis. There were three relevant offers of compromise under Pt 25 of the Federal Court Rules 2011 (Cth) which the respondent made during the course of the proceeding: on 23 October 2013, on 7 February 2014 and on 29 August 2014. 23 The offer of 23 October 2013 was for the respondent to pay $500,000 and the applicants' costs. It was open for acceptance for 28 days. It was not accepted. The question which now arises, under r 25.14(2) of the Rules, is whether the applicants' failure to accept the offer was unreasonable. Plainly, only in respect of matters on which the respondent ultimately succeeded could an affirmative answer to this question credibly be proposed. 24 In the Statement of Claim, filed on 2 April 2013, it was alleged that the respondent had infringed Claims 1, 2, 4, 5, 6 and 7 of the Patent. In its Particulars of Invalidity filed on 3 July 2013, and absent any deferral of the priority date, the respondent alleged that the invention, so far as claimed in Claims 1, 2 and 4, had been anticipated by the prior use at Ellalong Colliery. It alleged that the invention, so far as claimed in all claims, was obvious. Had the controversy then been decided consistently with my reasons of 11 March 2016, the respondent's novelty case would have been determined in its favour in relation to Claims 1, 2 and 4, and, save in relation to one of the aspects of Claim 6, its inventive step case would also have been determined in its favour. But that one aspect was something upon which the applicants ultimately prevailed. Acceptance of the respondent's offer would have required the applicants to abandon what was then a dimension of their infringement case which went beyond any claim ultimately held to be wholly invalid, namely, that which arose under one aspect of Claim 6. Eventually the applicants themselves did abandon that part of their case, but that was a judgment made only with the wisdom that comes from a close consideration of all the evidence and participation in a contested trial. 25 To that I would add a further observation about the Ellalong Colliery dimension of the respondent's invalidity case. At this point – 23 October 2013 – the applicants had nothing more than a compendious, high-level, reference to the extension drilling system as used at that location. In the respondent's particulars, it was said that "[t]he machinery or apparatuses so used no longer exist …." No documentary evidence of the use was referred to. On the other side of the ledger, as it were, I have not been favoured with any explanation of how the sum of $500,000 was arrived at, nor of the extent to which it might have corresponded with the damages award which the applicants might have anticipated achieving in the event of a successful outcome; nor, one must add, of how the advantage to the applicants, in the event of such an outcome, of obtaining a perpetual injunction against the alleged infringing conduct had been factored in, if it had. In this state of affairs, it is by no means self-evident that the applicants were acting unreasonably in not accepting the sum of $500,000 plus costs as the price for abandoning their infringement case against the risk that the relevant claims might be held to be invalid on the strength of evidence such as was foreshadowed by the particulars referred to. 26 The question presently under consideration is not whether the applicants were unsuccessful on a particular point – or overall, for that matter – or would have been wise to settle on the terms proposed by the respondent. I am not concerned with the question whether an "event" might be identified, and on which the respondent has succeeded, which costs ought to "follow". Rather, the question is whether the applicants were unreasonable in their failure to accept the respondent's offer. In the light of what would reasonably have appeared to the applicants as an infringement case of some strength, what this comes down to is whether they were acting unreasonably in not recognising that the claims on which they sued would most likely be held to be invalid. In my view they were not. 27 It was submitted on behalf of the respondent that the applicants ought to have been aware from the outset that the specification did not describe the best known method of performing the invention, notwithstanding that the respondent itself was not, at that stage, sufficiently informed about the matter to take the point in their particulars. Whatever the merit of that proposition in the broad, however, I could not hold it to have been unreasonable of the applicants to have failed to perceive a weakness in their own case that was raised neither in the Defence nor in the Cross-claim. 28 The offer of 7 February 2014 was for the respondent to pay $300,000 and the applicants' costs, and for the Application and the Cross-claim to be dismissed. It was open for acceptance for 28 days. It was not accepted. This offer was perhaps clearer than the first offer (in making explicit what had been implicit, namely, that the parties' cases would be dismissed), but was otherwise less attractive to the applicants than the first. For the reasons I have given, I take the view that the applicants' failure to accept the second offer was not unreasonable. 29 The offer of 29 August 2014 was for the Application and the Cross-claim to be dismissed and for the applicants to pay the respondent's costs of the Application and the Cross-claim. It was open for acceptance for 28 days. It was not accepted. It will be evident from my reasons above that, in relation to costs, the applicants have bettered this offer to a limited extent. Although the "less favourable" and "more favourable" concepts invoked by subrr (1) and (3) of r 25.14 are not directly applicable under subr (2), I find it hard to see how a party who is better off, in relation to costs, in the final disposition of a matter by the court might be regarded as having been unreasonable in his or her failure to accept the less favourable offer. 30 By then the applicants had, of course, the respondent's evidence-in-chief. This gave them a much better idea of the strength of the respondent's case. But it provided no cause for the conclusion that the applicants were unreasonable to prefer litigation over acceptance of the respondent's offer. The applicants had what I would accept was a very legitimate basis upon which to place the evidentiary basis of the alleged use at Ellalong vigorously in contest. Had matters gone otherwise, they might have prevailed in that department of the case. On the matter of inventive step, the applicants had the support of Mr Charlton in their project to undermine the opinions of Dr Fuller. That part of the case was very much in play, and the issues concerned were difficult in a number of respects. Again, the applicants' choice of litigation over settlement on what would have been most unfavourable terms cannot be criticised in terms that would invoke the operation of r 25.14 of the Rules. 31 For the above reasons, there will be no indemnity costs order in favour of the respondent. I certify that the preceding thirty-one (31) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Jessup. Associate: Dated: 1 June 2016