Re Westaflex (Aust) Pty Ltd; Uniflex (Aust) Pty Ltd and Edward Paul Sterling v Cecil Howard Wood; Heacon Products Pty Ltd and Smiths Industries Pty Ltd (Trading As Heacon Products) [1990] FCA 5; 18 IPR 1 (17 January 1990)

FEDERAL COURT OF AUSTRALIA

Re: WESTAFLEX (AUST.) PTY. LTD.; UNIFLEX (AUST.) PTY. LTD. and
EDWARD PAUL STERLING
And: CECIL HOWARD WOOD; HEACON PRODUCTS PTY. LTD. and SMITHS
INDUSTRIES PTY. LTD. (trading as HEACON PRODUCTS)
No. V G414 of 1989
FED No. 23
Practice and Procedure
18 IPR 168

COURT

IN THE FEDERAL COURT OF AUSTRALIA
VICTORIAN DISTRICT REGISTRY
GENERAL DIVISION
Gray J.(1)

CATCHWORDS

Practice and Procedure - appeal - stay of judgment below - principles on which granted - whether special rule for injunctions in patent cases - appropriate undertakings and conditions.

Patents - injunction to restrain infringement - stay pending appeal - principles on which granted - whether special rule - appropriate undertakings and conditions.

Federal Court of Australia Act 1976 s.29

HEARING

MELBOURNE
17:1:1990

Counsel for the appellants: Mr G. Ritter QC and Mr Mcowan

Solicitors for the appellants: Eggleston, Clifton-Jones & Co.

Counsel for the respondents: Dr. C. Pannam QC and Mr. B. Caine

Solicitors for the respondents: Minter Ellison

DECISION

This is an application pursuant to s.29 of the Federal Court of Australia Act 1976, in which a stay is sought of certain orders made by the Supreme Court of Victoria on 21st December 1989. The appellant Westaflex (Australia) Pty. Ltd. is a company which manufactures, and the appellant Uniflex (Australia) Pty. Ltd. is a company which distributes, a form of flexible ducting for use commonly with air conditioning. The appellant Edward Paul Sterling is the managing director of both of those companies.

2. The flexible ducting made and distributed by the appellant companies is claimed to constitute an infringement of a patent held by the respondent Cecil Howard Wood. The respondents Heacon Products Pty. Ltd. and Smiths Industries Pty. Ltd. are companies which are former licensees to manufacture and distribute flexible ducting pursuant to the patent.

3. In two actions, which were brought in the Supreme Court of Victoria, the respondents as plaintiffs sued the applicants as defendants, alleging infringements of the patent. On 8th December 1989, reasons for judgment were delivered by the Supreme Court. The court found that infringements had occurred and were occurring by the activities of the appellant companies. Judgment was pronounced and orders were made on 21st December. The orders included an injunction against each of the appellant companies, restraining it from manufacturing or distributing the infringing product, and an order for delivery up of the products which had been found to infringe. There were also various other orders. On the same day, notice of appeal to the Full Court of the Federal Court of Australia was filed. An application was made that day to the Supreme Court for a stay of the orders. That application was refused on the basis of material which was then put before the court. The court, however, did grant a limited stay for twenty-four hours, to enable an application for a stay to be made to this court. That was done on 22nd December and Woodward J. granted a stay on conditions. Application has now been made for the continuance of that stay.

4. At the outset, the appellants offered certain undertakings. They undertook to prosecute their appeal with all reasonable expedition. They gave the usual undertaking in damages. They undertook to keep full and proper accounts, sufficient to enable an assessment of sales or profits to be made in respect of any sales of the alleged infringing product in the interim, and they also undertook not to divest themselves of any valuable assets or sell any goods of the kind covered by the injunction otherwise than in the ordinary course of business. A further undertaking was given by the appellant Mr. Sterling, to procure and provide to the respondents a bank guarantee in the sum of $100,000, guaranteeing the payment up to that sum of any compensation that might be ordered pursuant to the undertaking in damages.

5. There has been some argument as to the correct principles to be applied in cases such as this. It appears from cases that were referred to by Mr. Ritter QC, who appeared with Mr. McGowan on behalf of the appellants, that the courts have recently been engaged in some re-examination of those principles. It is sufficient, as it seems to me, to make reference to a passage from the judgment of the Court of Appeal of New South Wales in Alexander and Others v. Cambridge Credit Corporation Ltd. (Receivers Appointed) and Another (1985) 2 NSWLR 685, at pp 694-695, where the Court said:
"In our opinion it is not necessary for the

grant of a stay that special or exceptional
circumstances should be made out. It is
sufficient that the applicant for the stay
demonstrates a reason or an appropriate case
to warrant the exercise of discretion in his
favour.
There are other principles to be kept in mind.
The onus is upon the applicant to demonstrate
a proper basis for a stay that will be fair to
all parties: ... The Court has a discretion
whether or not to grant the stay and, if so,
as to the terms that would be fair. In the
exercise of its discretion, the Court will
weigh considerations such as the balance of
convenience and the competing rights of the
parties before it: Attorney-General v
Emerson (1889) 24 QBD 56. Where there is a
risk that if a stay is granted, the assets of
the applicant will be disposed of, the Court
may, in the exercise of its discretion, refuse
to grant a stay: cf Clyne v Deputy
Commissioner of Taxation (1982) 56 ALJR 857.
Sometimes as a condition of the grant of a
stay, where funds are available, a court will
impose on the applicant the payment of the
whole, or part, to the judgment creditor:
Andrews v John Fairfax & Sons Ltd (1979) 2
NSWLR 184. Even where no order is made for
the payment of part of a verdict, it is not at
all unusual for the Court, in the exercise of
its discretion, to grant a stay on terms that
the appellant give to the judgment creditor
security in terms defined by the Court as
appropriate to the fair adjustment of the
rights of the parties."

Dr. Pannam QC, who appeared with Mr. Caine for the respondents, submitted that a special and more strict rule applies in the case of injunctions in patent cases. He referred to some English cases of respectable age and then to a more recent judgment of the English Court of Appeal in Minnesota Mining and Manufacturing Company v. Johnson and Johnson Limited (1976) FSR 139. At pp 144-145, Buckley L.J., with the concurrence of Goff L.J., stated the current principles with respect to stays of injunctions in patent cases in the following terms:

"It is not in dispute that where a plaintiff
has at first instance established a right to
a perpetual injunction, the court has a
discretion to stay the operation of that
injunction pending an appeal by the defendant
against the judgment. On what principles
ought such a discretion to be exercised? The
object, where it can be fairly achieved, must
surely be so to arrange matters that, when the
appeal comes to be heard, the appellate court
may be able to do justice between the parties,
whatever the outcome of the appeal may be.
Where an injunction is an appropriate form of
remedy for a successful plaintiff, the
plaintiff, if he succeeds at first instance in
establishing his right to relief, is entitled
to that remedy upon the basis of the trial
judge's findings of fact and his application
of the law. This is, however, subject to the
defendant's right of appeal. If the defendant
in good faith proposes to appeal, challenging
either the trial judge's findings or his law,
and has a genuine chance of success on his
appeal, the plaintiff's entitlement to his
remedy cannot be regarded as certain until the
appeal has been disposed of. In some cases
the putting of an injunction into effect
pending appeal may very severely damage the
defendant in such a way that he will have no
remedy against the plaintiff if he, the
defendant, succeeds on his appeal. On the
other hand, the postponement of putting an
injunction into effect pending appeal may
severely damage the plaintiff. In such a case
a plaintiff may be able to recover some remedy
against the defendant in the appellate court
in respect of this damage in the event of the
appeal failing, but the amount of this damage
may be difficult to assess and the remedy
available in the appellate court may not
amount to a complete indemnity. It may be
possible to do justice by staying the
injunction pending the appeal, the plaintiff's
position being suitably safeguarded. On the
other hand it may, in some circumstances, be
fair to allow the injunction to operate on
condition that the plaintiff gives an
undertaking in damages or otherwise protects
the defendant's rights, should he succeed on
his appeal. In some cases it may be
impossible to devise any method of ensuring
perfect justice in any event, but the court
may nevertheless be able to devise an
interlocutory remedy pending the decision of
the appeal which will achieve the highest
available measure of fairness. The
appropriate course must depend on the
particular facts of each case."

It appears from this passage in the judgment of the English Court of Appeal that the principles to be applied in a case such as the present do not differ greatly from those which are to be applied on a normal application for a stay. The object of achieving perfection in justice in any event is one which may well lie beyond any court but it is that for which the court must strive in an application of this nature.

6. It was conceded by Dr. Pannam that the appeal which has been brought from the judgment of the Supreme Court of Victoria in the present case is not a specious appeal. The application for a stay was based on two grounds, the first being related to the likely delay before the appeal can be heard and the second to the effect of that delay on the appellant companies. As to the first, it does appear that there is a strong likelihood that the appeal will not be able to be heard until the June sittings of the Full Court in Melbourne. Some chance may exist that the matter can be brought on as a matter of urgency in the sittings of the Full Court in Canberra, but its hearing in Full Court sittings in March in Melbourne, or in February in Sydney, would be entirely dependent upon some other appeal dropping out of one of those lists. I should therefore deal with the matter on the basis that the probable date of hearing of the appeal will be June 1990.

7. As to the effect of such a delay on the appellant companies, there has been much evidence on affidavit, some of it controversial, and there has been some cross-examination on both sides. I propose to state my findings relatively simply. I am satisfied that somewhere about half of the appellant companies' turnover in their business involves the sale of flexible ducting. Much of the rest of the appellant companies' business depends upon its connection with the sales of that flexible ducting. As the appellants' affidavits put the matter, they have endeavoured to put themselves forward as conducting a "one stop shop" business for air conditioning requirements. There is a tendency for customers to purchase all that they need, whether for commercial or for domestic air conditioning, from the one company. It follows that, if the appellant companies are unable to sell flexible ducting, there will be a dramatic impact on their business. The direct impact will be the loss of approximately half of their turnover. The indirect impact will be a loss of sales of other products commonly purchased in conjunction with flexible ducting.

8. I am satisfied on the evidence that, in those circumstances, it will be impossible for the appellant companies to trade profitably and, indeed, it is likely that they will incur substantial losses in the period leading to the hearing and determination of the appeal. Accompanying those financial losses will be a substantial loss of goodwill. The evidence is that they have established customers and that those established customers would be slow to return, if they returned at all, after they had been driven elsewhere for the purchase of their air conditioning requirements. Such a loss of goodwill may well be irrecoverable in the future. Thirdly, the appellant companies say, and I accept, that they would be likely to lay off a number of employees if their business suffered a substantial downturn. They also say, although I regard it as of somewhat less weight, that the public will be deprived of them as a competitor to Bradford Insulation, which is the only other supplier of ducting of this kind in Australia. Finally there are, on the evidence, some existing contracts, which the appellant companies would be unable to fulfil if the injunction were to operate, and their inability to fulfil those contracts would give rise to at least the potential for claims by the contractors for damages, or for liquidated demands laid down in the contracts. Accordingly, I am satisfied that the appellant companies would suffer substantial adverse effects to their business by the continuance of the orders of the Supreme Court and they may well be unable to survive without going into liquidation.

9. Against this, it is put by Dr. Pannam that the appellant companies are the authors of their own misfortune. It is true that they have carried on for some considerable time, in disregard of pending litigation, their activities of manufacturing and distributing the disputed flexible ducting. They have taken the risk that they would lose the litigation. Not only have they continued to carry on those activities, but the evidence is that they have expanded them in recent times. They have made no provision at all for the risk of losing the proceedings and have simply continued, during what seems to have been a substantial delay in the proceedings coming on for trial in the Supreme Court, to make profits as best they could and to expand their business. Other opportunities have presented themselves for the development of alternative products, but the appellant companies have been too busy making and distributing the disputed flexible ducting to investigate to a substantial extent those other opportunities.

10. Perhaps more importantly, Dr. Pannam argues that in the event that the appeal is unsuccessful, the appellant companies might well be unable to meet claims for damages, or for an account of the profits, to the date of the judgment of the Supreme Court, and if that be right, then the effect of staying the orders of the Supreme Court would be to cause the appellant companies to carry on business at the expense of the respondents. I am mindful of the difficulties involved in that, but in an endeavour to frame an order which will be fair to both parties, it seems to me that the appropriate order would be to grant a stay, but to make it conditional upon the sorts of undertakings proposed by the appellants, with some modifications.

11. In the first place, I do not think that the original offer of $100,000 by way of bank guarantee from Mr. Sterling was sufficient. It is true that Mr. Sterling was not and is not to be subject to any claim for damages or for an account of profits personally. Those claims are restricted to the appellant companies. Nevertheless, undoubtedly, as managing director of the two companies, he has a concern for their future viability. He does have a potential liability for costs of the Supreme Court proceedings in the event that the appeal fails. The amount of the costs which, on the evidence, the respondents have paid to their solicitors in respect of the Supreme Court proceedings is $269,412 and it is likely that a substantial portion of that sum will be recovered after taxation of costs, in the event that the appeal fails.

12. Further, the respondents are entitled to elect between damages and an account of the profits and have not yet made that election. As to the respondent companies, their entitlement will be up until April 1988, when they ceased to be licencees. The respondent, Wood, will have an entitlement that continues for a longer time than that.

13. On any view of the evidence, the amounts which are claimed might very well be substantial and may exceed the capacity of the appellant companies to pay. Further, the evidence discloses a practice in past years of the appellant companies declaring dividends in favour of their shareholders and the shareholders lending back those dividends. In the year ended 30th June 1989 dividends totalling $268,322 were declared by one of the appellant companies and lent back to it. Those dividends were justified as being for tax reasons. Whatever the reason, they were declared and paid, notionally at least, a relatively short time before the trial of the proceedings in the Supreme Court, and the fact that they were lent back, of course, places the shareholders in the position of competing with the judgment creditors for the assets of the company in the event that the appeal might fail.

14. For these reasons, I think it just that Mr. Sterling ought to provide some appropriate security to the extent of $250,000 as a condition of the granting of a stay. In reply, Mr. Ritter, on behalf of Mr. Sterling, offered an undertaking that Mr. Sterling would, within seven days of this day, provide security in the sum of $100,000, either by bank guarantee or by cash lodged in an appropriate trust account, and would provide further security within 30 days of this day in the sum of $150,000. In my view, those conditions would be sufficient to meet what I regard as a fair order in all of the circumstances. Otherwise, I would propose that the revised proposed undertakings handed up by Mr. Ritter in the course of argument should be given, subject to a couple of amendments which will involve the appellant companies undertaking not to encumber assets or to incur debts otherwise than in the ordinary course of business. I therefore propose to grant an order for a stay, subject to those undertakings and conditions.