FEDERAL COURT OF AUSTRALIA Davies v Lazer Safe Pty Ltd (No 2) [2018] FCA 971 File number: WAD 670 of 2015 Judge: MCKERRACHER J Date of judgment: 28 June 2018 Catchwords: COSTS – costs of patent proceeding – where both the claim for infringement and cross-claim for invalidity were dismissed – appropriate costs order following the judgment as to liability – assessment of the relative success of the parties – Calderbank and other offers made – effect of those offers Legislation: Federal Court Act 1976 (Cth) s 43 Cases cited: Davies v Lazer Safe Pty Ltd [2018] FCA 702 GlaxoSmithKline Consumer Healthcare Investments (Ireland) (No 2) Limited v Generic Partners Pty Limited (No 2) [2018] FCAFC 100 Tramanco Pty Ltd v BPW Transpec Pty Ltd (No 2) [2014] FCAFC 58 Date of hearing: Determined on the papers Date of last submissions: 22 June 2018 (Applicants) 15 June 2018 (Respondent) Registry: Western Australia Division: General Division National Practice Area: Intellectual Property Sub-area: Patents and associated Statutes Category: Catchwords Number of paragraphs: 19 Counsel for the Applicants: Mr ADB Fox Solicitor for the Applicants: DLA Piper Australia Counsel for the Respondent: Mr GJ Fitzgerald QC Solicitor for the Respondent: Wrays Lawyers Pty Ltd ORDERS WAD 670 of 2015 BETWEEN: KEVIN STEPHEN DAVIES First Applicant TRICLOPS TECHNOLOGIES PTY LTD (ACN 117 350 464) Second Applicant AND: LAZER SAFE PTY LTD (ACN 090 113 572) Respondent JUDGE: MCKERRACHER J DATE OF ORDER: 28 june 2018 THE COURT ORDERS THAT: 1. The applicants pay the respondent's costs of the proceeding, to be taxed if not agreed and to the extent of: (a) 30% of the respondent's costs of the proceeding on a standard or party/party basis up to 3 August 2016; and (b) after that date for the remainder of the proceeding, 30% of the respondent's costs of the proceeding on an indemnity basis. Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011. REASONS FOR JUDGMENT MCKERRACHER J: 1 These reasons deal with the question of costs following a judgment delivered in Davies v Lazer Safe Pty Ltd [2018] FCA 702 (the Liability Judgment). By the Liability Judgment I dismissed the claim for infringement and the cross-claim for invalidity and made directions for the parties to file submissions on costs to be determined on the papers. The applicants' position 2 The applicants seek an order that 'each party bear its own costs of and incidental to the claim and the cross-claim'. 3 The applicants argue that such an order is appropriate even though the costs of a cross-claim as to invalidity are almost invariably in patent proceedings greater than the costs incurred in the infringement suit. Nonetheless as each party failed in its respective applications it is contended to be appropriate that each party should bear their own costs. Alternatively, the applicants say that a separate order could be made as to costs reflecting the ordinary rule that costs should follow the event, but they acknowledge that such an order would be likely to give rise to a taxation procedure which would not be in the interests of the disposition of the proceeding. The respondent's contentions 4 The contentions for the respondent were supported by an affidavit disclosing offers which were made by the respondent to the applicants. The orders sought by the respondent are: (1) The applicants pay the respondent's costs of the proceedings as follows, such costs to be taxed forthwith in default of agreement: (a) 50% of the respondent's costs of the proceeding on a standard or party/party basis up to 3 August 2016; and (b) after that date for the remainder of the proceeding, 50% of the respondent's costs of the proceeding on an indemnity basis. The 'winner' of the proceedings 5 The respondent suggests that 'the event', for the purpose of determining the issue of 'costs following the event', cannot solely be resolved by reference to infringement and invalidity. In addition to the infringement and invalidity issues, there was a third substantive issue decided in the proceeding and addressed in the Liability Judgment, namely, the proper construction and scope of the claims of the Patent. On that issue, the respondent contends that it was wholly successful as the applicants' broad construction of the Patent was rejected. See particularly at [235]-[238] of the Liability Judgment where I said: 3.5 Conclusion on construction 235 Integer 1.5 and integer 1.6 of claim 1 require the safety system as claimed to engage in recognition of regions of obstructions by reference to shadow maps and their shapes, and require the comparison with either stored known safe or unstored unknown hazardous shadows of obstructions. 236 This reading is based on references to 'recognition', 'boundaries' and 'regions' in the claim, the disclosures in the specification discussed above and is also supported by Mr Appleyard's evidence. 237 The construction was also supported in part by Mr Acheson's acceptance in cross-examination that: (a) a 'shadowed region' is an 'area' and that an area is a two-dimensional construct; (b) the word 'boundary' or 'boundaries' of a shadowed region involves establishing the perimeter or outline of the shadowed region; and (c) an 'edge' is part of a boundary. 238 Further, and even if this construction, which is narrower than that advanced by the applicants, is wrong, the proper construction of claim 1 requires the boundary determination of an obstruction claimed by recognising a realistically substantial portion or part of the shadowed region, so as to determine a sizable portion of the outline or shape of the obstruction, in contrast to a dot, spot, point or edge of any such region. 6 It follows, the respondent says, that it won on two of the three main issues, construction and infringement; with the applicants winning on only invalidity. 7 The respondent also contends that in a practical and commercial sense it won because it is free to market its products despite the asserted patent monopoly: Tramanco Pty Ltd v BPW Transpec Pty Ltd (No 2) [2014] FCAFC 58 per Allsop CJ, Greenwood and Nicholas JJ at ([13]). 8 Adopting a broad and global approach to determining the costs of the proceeding as urged by some authorities, the respondent submits that it was the winner in the case with a judgment in its favour on construction and infringement and freedom to market its products. Nonetheless it accepts having lost on validity that some deduction to its costs claim is appropriate. 9 The respondent says that its case on validity was relatively narrow. It relied primarily on two prior art patents and one prior art patent/use. The latter was the subject of a late amendment in the event the Court accepted a broad construction of claim 1 of the Patent as further evidence was adduced for the applicants. The witnesses (except for Mr Berry for the respondent, who did not deal with validity) gave evidence on infringement, construction and validity. The respondent says that, sensibly viewed, this was not a case where the majority of the time was spent on validity, rather time was mostly spent on construction and infringement. It points to the considerable time and expense spent in answering interrogatories administered by the applicants, preparing a detailed product description and preparing evidence addressing the manner of operation of the respondent's products, as well as the background to the relevant art. The respondent argues the case was more about construction and infringement than validity. The respondent contends it would be fundamentally unfair for the respondent to be deprived recovery of any costs at all on the basis that it brought the cross-claim, which it submits it would not have brought but for the infringement claim against it. I accept this submission. Indemnity costs 10 As indicated, various offers were made to the applicants' solicitors before and during the course of the proceedings. Five letters were sent between 23 October 2015 and 24 March 2017. The existence of those letters has now been made known by an affidavit of the respondent's solicitor accompanying these submissions. I accept the respondent's contention that the letters raised three broad themes, namely: (a) the respondent informed the applicants that its Lazer Safe products did not infringe the Patent and the proceedings should never have been commenced; (b) the invalidity cross-claim was defensive and would not have been brought but for the infringement claim; and (c) Lazer Safe offered to settle the proceedings on the basis that both the claim and cross-claim be dismissed – which was the actual result of the judgment. 11 In more detail the following matters arose from the correspondence: (a) a 23 October 2015 letter, sent before the proceedings commenced, set out the respondent's case on non-infringement as to integers 1.5 and 1.6 – which were ultimately vindicated in the Liability Judgment; (b) a 16 December 2015 letter, sent at the time of filing the respondent's appearance, complained that the applicants had started the proceedings without knowing how the Lazer Safe systems worked – which was clearly borne out in the proceedings; (c) a 3 August 2016 letter, sent on a without prejudice basis save as to costs immediately after a mediation, contained an offer to settle the proceedings on the basis that both the claim and cross-claim be dismissed and also indicated that Lazer Safe would seek indemnity costs in the event that the claim was dismissed on the basis that its products did not infringe the Patent – which was the precise outcome of the Liability Judgment; (d) a further letter on 3 August 2016 complained about the applicants' statement on infringement and again identified the inadequacies of the infringement allegations of integers of claim 1 – which were ultimately held not to be infringed in the Liability Judgment; (e) a 24 March 2017 letter, sent on a without prejudice basis save as to costs, shortly after the case management conference listed shortly prior to the trial said that: (i) the respondent was confident of a finding of non-infringement based on the simple fact that its products involved the use of one segment deemed obstructed to trigger a stop command; (ii) the respondent's primary position was that its products simply did not infringe the claims of the Patent based on any reasonable interpretation of claim 1; (iii) the cross-claim was defensive and would not have been brought but for the infringement action; and (iv) even if the Patent survived the attack on its validity, a finding of non-infringement was a 'win' for the respondent. 12 The applicants did not accept any of these offers. I accept the respondent's submission that the applicants have done no better in the litigation than the offer made by the Calderbank letter dated 3 August 2016. The respondent contends that the applicants were unreasonable in not accepting that offer. 13 Although there was a further exchange of offers of compromise between the parties after these letters a few weeks before the trial began on 12 June 2017 the applicants' offer was confined to the invalidity cross-claim. The applicants on 23 May 2017 offered to agree to the dismissal of the cross-claim with no order as to costs. The respondent's offer involved settling both the claim and the cross-claim but with a contribution of $100,000 from the applicants towards its costs representing, what is said to be, a significant compromise as its costs were then over $300,000. Nevertheless, the 3 August 2016 offer by the respondent was a clear and earlier offer to settle the entire proceedings on a more favourable basis to the applicants. 14 The respondent contends that taking these matters into account in determining the appropriate costs order in the exercise of discretion under s 43 of the Federal Court Act 1976 (Cth), the Court ought to recognise the respondent's ultimate success in the litigation and make an order in its favour for payment of costs, reflecting its failure on the invalidity cross-claim. The alternate position put for the respondent in relation to a 50% discount of costs in the orders sought (set out above) would be that the applicants pay one-third of such costs. However, the respondent stresses that the discount on costs should reflect the party's real relative success and make an allowance for the unsuccessful cross-claim, whilst also taking into account the applicants' unreasonable pursuit of the infringement claim. In citing unreasonableness, the respondents point to the correspondence between the parties and the respondent's offer in the 3 August 2016 letter to settle on the basis actually determined in the Liability Judgment. 15 The respondent contends that the applicants' proposal that each side bears its own costs fails to reflect the relative success of the parties. Consideration 16 As the Full Court (Middleton, Nicholas and Burley JJ) stated yesterday in a similar patent dispute outcome in GlaxoSmithKline Consumer Healthcare Investments (Ireland) (No 2) Limited v Generic Partners Pty Limited (No 2) [2018] FCAFC 100 (at [6]-[7]): 6 Every case must be decided on its own facts. There is no doubt that this Court could address the costs of the appeals and the cross appeals compendiously. In Apotex Pty Ltd v Sanofi-Aventis Australia Pty Ltd (No 3) [2014] FCAFC 126 ('Sanofi-Aventis') the Full Court addressed the costs of the appeal and cross-appeal together at [26], despite Apotex failing in its challenge to validity on various grounds (see at [8]). In Tramanco Pty Ltd v BPW Transpec Pty Ltd (No 2) [2014] FCAFC 58 ('Tramanco') the Full Court similarly dealt with costs compendiously (at [13]), and noted the difficulties with disentangling the costs of different issues (at [12]). 7 Further, a percentage reduction approach may also be appropriate in some cases. Such an approach was adopted in Idenix and in Sandvik Intellectual Property AB v Quarry Mining & Construction Equipment Pty Ltd (No 2) [2017] FCAFC 158. 17 In my view, while the respondent has acted reasonably, its submissions overstate the position in a number of respects. I consider that the respondent is entitled to a contribution to its costs, but at a more modest level than initially sought. The reasons for that reduction are that while I accept that the respondent has had 'commercial success', I do not accept that there were three events or three cases. 'Construction' has general relevance. Further, the invalidity case on which the respondent failed was multi-faceted and substantial. But for the various offers, a costs order as sought by the applicants would be closer to the mark. 18 But the failure to accept a Calderbank or similar offer should have consequences, especially when it is supported by the very reasoning on which the ultimate outcome turned. It is not sufficient an answer for the applicants to say that they were still seeking more information on the respondent's product. The applicants instituted the proceedings based on infringement. The invalidity cross-claim was clearly defensive only. Acceptance of the applicants' 28 May 2017 offer to compromise would never have solved the respondent's difficulty of having to contend with the applicants' claim, which ultimately failed. 19 The infringement claim, based as it was on a broad construction of the Patent claims, had the consequence that there would be a cross-claim as to validity if such broader construction were upheld. The broad construction was not upheld. In circumstances where the applicants instigated this litigation and failed to accept any of the reasonable offers which were advanced, the applicants should bear some portion of the respondent's costs to recognise its success. In my view the appropriate order which takes all those matters into account is a version of the orders sought by the respondent but which substitutes in each of paras (a) and (b) 30% rather than 50%. I certify that the preceding nineteen (19) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice McKerracher. Associate: Dated: 28 June 2018