PAC Mining Pty Ltd v Esco Corporation (No 2) [2009] FCAFC 52 (1 May 2009)

PRACTICE AND PROCEDURE – Costs – Patent infringement proceeding – Respondents resisting allegation of infringement and cross-claiming for revocation on ground of invalidity – Respondents successful on infringement point but unsuccessful on validity point – How costs should be apportioned – Whether respondents entitled to costs generally or only on issues upon which they succeeded.

PAC MINING PTY LTD (ABN 11 007 694 895) and CENTRAL QUEENSLAND MINING SUPPLIES PTY LTD (ABN 11 010 402 990) v ESCO CORPORATION and BRADKEN RESOURCES PTY LTD (ABN 82 098 300 988)
NSD 1076 of 2008

SUNDBERG, JESSUP & MIDDLETON JJ
1 MAY 2009
MELBOURNE (HEARD IN SYDNEY)

IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY	NSD 1076 of 2008

ON APPEAL FROM A SINGLE JUDGE OF THE FEDERAL COURT OF AUSTRALIA

BETWEEN:

PAC MINING PTY LTD (ABN 11 007 694 895)
First Appellant

CENTRAL QUEENSLAND MINING SUPPLIES PTY LTD (ABN 11 010 402 990)
Second Appellant

AND:

ESCO CORPORATION
First Respondent

BRADKEN RESOURCES PTY LTD (ABN 82 098 300 988)
Second Respondent

JUDGES:	SUNDBERG, JESSUP & MIDDLETON JJ
DATE OF ORDER:	1 MAY 2009
WHERE MADE:	MELBOURNE (HEARD IN SYDNEY)

2. In place of Orders 8 and 9 made by the court on 4 July 2008 it be ordered that –

• the respondents/cross claimants pay the costs of the applicants/cross respondents of the Application and the Cross-claim to the extent that those costs relate to the issues raised by paragraphs 8.1, 8.2, 9.1 and 9.2 of the Cross-claim and to the corresponding issues raised by paragraph 9 of the Defence;

• otherwise, the applicants/cross respondents pay the costs of the respondents/cross claimants of the Application and the Cross-claim.

3. The appellants pay the respondents’ costs of the appeal to the extent that those costs relate to the issues raised by ground 2 in the Notice of Appeal.

6. The appellants pay 75% of the respondents’ costs associated with the determination by the Full Court of the parties’ entitlement to costs at first instance and on appeal.

Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.
The text of entered orders can be located using eSearch on the Court’s website.

IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY	NSD 1076 of 2008

ON APPEAL FROM A SINGLE JUDGE OF THE FEDERAL COURT OF AUSTRALIA

BETWEEN:

PAC MINING PTY LTD (ABN 11 007 694 895)
First Appellant

CENTRAL QUEENSLAND MINING SUPPLIES PTY LTD (ABN 11 010 402 990)
Second Appellant

AND:

ESCO CORPORATION
First Respondent

BRADKEN RESOURCES PTY LTD (ABN 82 098 300 988)
Second Respondent

JUDGES:	SUNDBERG, JESSUP & MIDDLETON JJ
DATE:	1 MAY 2009
PLACE:	MELBOURNE (HEARD IN SYDNEY)

1 These reasons deal with questions of costs which have arisen as a result of our judgment on 4 March 2009 in this appeal: PAC Mining Pty Ltd v Esco Corporation [2009] FCAFC 18.

2 The case before the primary Judge involved an action for patent infringement by the now respondents in relation to two claims in one patent (referred to as "Jones II") and one claim in another (referred to as "Jones III"). The now appellants defended the action by denying the allegations of infringement and by contending that both patents were invalid on the grounds of lack of novelty, obviousness, and want of fair basis. They also cross-claimed for revocation on those same grounds. The primary Judge held for the respondents with respect to each of the appellants’ invalidity grounds. On the infringement action as such, his Honour held for the appellants under one of the patents (Jones II), and for the respondents under the other (Jones III).

3 By way of final disposition of the Application and Cross-claim, the primary Judge made the following orders:

• "Hensley System" means the wear assembly for the digging edge of various excavating equipment comprising a shroud, a weld base, and a lock and an adjustment assembly, and as further defined and particularised at paragraphs 11 to 14 of the Statement of Claim dated 6 June 2006.

• "CQMS System" means the wear assembly for the digging edge of various excavating equipment comprising a shroud, a weld base, and a lock and an adjustment assembly, and as further defined and particularised at paragraphs 17 to 18 of the Statement of Claim dated 6 June 2006.

• "PAC Mining System" means the wear assembly for the digging edge of various excavating equipment comprising a shroud, a weld base, and a lock and an adjustment assembly, and as further defined and particularised at paragraphs 15 to 16 of the Statement of Claim dated 6 June 2006.

• "CQMS Lower Wing System" means the wear assembly for the digging edge of various excavating equipment comprising a lower wing shroud, a weld base, and a lock and an adjustment assembly, and as further defined and particularised at paragraphs 19 to 20 of the Statement of Claim dated 6 June 2006.

• "Infringing Articles" means the Hensley System, the PAC Mining System, the CQMS System and the CQMS Ldower Wing System.

1. DECLARES that each of the First and Second Respondents has infringed claim 1 of Jones III by making, selling, supplying, offering to make, offering to sell, offering to supply, and keeping for the purpose of doing the aforementioned things:

(b) component parts of the Infringing Articles that have no reasonable use other than as component parts of the Infringing Articles.

2. ORDERS that, in Australia and during the term of Jones III, the First and Second Respondents (and each of them) be restrained from, whether by their directors, officers, servants or agents or otherwise howsoever, infringing claim 1 of Jones III.

3. ORDERS that within two months, each of the First and Second Respondents deliver up or destroy (at its election), with verification on oath or by affirmation, all of the following things in its possession or control, namely:

(b) component parts of the Infringing Articles that have no reasonable use other than as component parts of the Infringing Articles.

4. ORDERS that there be an inquiry as to damages or profits in relation to the manufacture and sale by the First and Second Respondents of the Infringing Articles.

6. CERTIFIES under s 19 of the Patents Act 1990 (Cth) that the validity of claims 1 and 51 of Jones II was questioned and the claims were found to be valid.

7. CERTIFIES under s 19 of the Patents Act 1990 (Cth) that the validity of claim 1 of Jones III was questioned and the claim was found to be valid.

8. ORDERS that the Respondents pay 80% of the Applicants’ costs of the Application.

9. ORDERS that the Cross-Claimants pay the Cross-Respondents’ costs of the Cross-Claim.

10. ORDERS that the Applicants pay the Respondents’ costs of the present application.

11. ORDERS that, subject to the undertakings given by the Respondents to the Applicants and recorded in paragraph 17 of the Court’s reasons for judgment of 4 July 2008, Orders 2, 3 and 4 above be stayed for 21 days pending the filing of any application by the Respondents for leave to appeal and, thereafter, in the event any such application is filed, until the determination of that application and any appeal filed pursuant to any grant of leave to appeal.

12. DIRECTS that the exhibits be returned to the solicitors for the parties by whom they were tendered upon the solicitors undertaking to keep them safe pending the determination of any appeal.

4 The appellants challenged the primary Judge’s findings of infringement against them. That involved an appeal against the declaration and orders numbered 1 – 4 above. The respondents cross-appealed against his Honour’s dismissal of their infringement claims under the other patent (Jones II). In the cross-appeal, the appellants filed a Notice of Contention the purport of which was to support that dismissal by reference to points which his Honour had decided against them. The appellants also challenged his Honour’s rejection of their case on validity. That involved an appeal against the orders numbered 5 – 7 above.

5 In our judgment on 4 March 2009, we allowed the appellants’ appeal on infringement, we dismissed the respondents’ cross-appeal with respect to Jones II and we dismissed the appellants’ appeal on invalidity. Although, because of our dismissal of the cross-appeal, the point was in a sense moot, we also effectively upheld the appellants’ cross-contention in relation to Jones II. We made the following orders:

1. Orders 1, 2, 3, 4 and 8 of the orders made by the court on 4 July 2008 be set aside.

2. In place of Orders 1, 2, 3 and 4, it be ordered that the Application be dismissed.

5. Each party have leave to file and serve, within 14 days, a memorandum as to –

(a) the order, if any, to be made in place of Order 8 made by the court on 4 July 2008; and/or

(c) each other party have leave, within 14 days of service on it of such memorandum, to file and serve a memorandum in response thereto; and

(d) the firstmentioned party have leave, within 7 days of service on it of such memorandum in response, to file and serve a memorandum in reply thereto.

Each of the appellants and the respondents have taken up the leave granted by order 5 above. Additionally, the appellants have moved, by leave which we granted on the papers on 30 March 2009, for the setting aside of order 9 made by the primary Judge on 4 July 2008. The purport of their motion is that, notwithstanding our dismissal of their appeal on validity, they should not be required to pay the respondents’ costs of the Cross-claim before the primary Judge: indeed, they contend that the respondents should be required to pay their costs in relevant respects.

6 The appellants justify their claim for the costs of the Cross-claim on two bases. First, they submit that the primary purpose of their allegation that the patents in suit were invalid was by way of defence to the respondents’ allegation that the patents were, and had at all material times been, subsisting and valid. The appellants did take that point in their Defence. They submit that their Cross-claim was no more than the "procedural consequence" of their defensive allegation that the patents were invalid. Having now been successful in their defence to the respondents’ case on infringement, albeit on grounds other than those of invalidity, they say that they should have their costs of the proceeding at first instance generally.

7 Secondly, the appellants rely on an open offer of compromise made under O 23 of the Federal Court Rules on 29 August 2007. That offer, which was open for acceptance for 14 days, was in the following terms:

On 12 September 2007, the respondents rejected that offer. In their solicitors’ letter of that date, they said:

The appellants do not rely on a presumptive entitlement to costs arising by the operation of O 23. Nor do they seek indemnity costs. Rather, they say that their offer should be regarded as a powerful discretionary consideration in the court’s determination of their claim for the whole of their costs at first instance, at least since 12 September 2007, because the offer substantially anticipated the final outcome of the case as reflected in the judgment on appeal.

8 The position taken by the respondents is that the costs at first instance should be apportioned by reference to issues. Thus they would pay the appellants’ costs which were referable to the matter of infringement, and the appellants would pay their costs which were referable to questions of validity. They contend that the appellants’ offer of compromise was no more than a proposal for the respondents to capitulate on terms as to costs which did not properly reflect the disproportionate contribution made by preparing the case on invalidity.

9 Turning to the first basis upon which the appellants seek their costs of the cross-claim at first instance, the starting point is the following passage in the judgment of Black CJ and French J in Ruddock v Vadarlis (No 2) (2001) 115 FCR 229, 234-235 [11], by which both sides in the present case submitted we should be guided:

Within the bounds of that general approach to the awarding of costs, the appellants submitted that the court should be reluctant to slice up, in effect, a successful party’s defence by reference to points which succeeded and points which failed. They submitted that a party should be entitled to run alternative points of defence without being penalized for having done so by suffering costs consequences in relation to those which failed. At the general level, we agree with that proposition.

10 As we have indicated above, the appellants then said that their cross-claim was but the "procedural consequence" of them having taken the invalidity point in their Defence. In this respect, they relied on two judgments of single members of the court on applications for security for costs. The first was that of Heerey J in Farmitalia Carlo Erba Srl v Delta West Pty Ltd [1994] FCA 950; (1994) 28 IPR 336. His Honour said (at 341):

The second was the judgment of Tamberlin J in Baygol Pty Ltd v Huntsman Chemical Co Australia Pty Ltd (t/as RMAX) [2004] FCA 1248. His Honour followed Farmitalia. He said (at [27]):

It is submitted on behalf of the appellants that the reasoning of Heerey and Tamberlin JJ is applicable in the present situation, and that the circumstance that Farmitalia and Baygol were concerned with applications for security is not differentiating. We do not agree. The discretion which the court exercises on an application for security may, and often will, involve considerations somewhat broader than those involved in the awarding of costs in a completed proceeding. In the former case, the object is to protect the respondent from the prospect of being unable to recover his or her costs after a successful defence to the proceeding. In such a setting, it is well within the discretion of the court to extend that protection to the costs of a Cross-claim which is reasonably brought as a defensive measure in the light of the applicant’s allegations. By so doing, the court is effectively anticipating that the respondent will, or at least may, succeed on the Cross-claim. By no means does it follow that, if the respondent succeeds neither on the Cross-claim nor on the point of defence with which it is associated, he or she will get the costs of both.

11 In the present case, the appellants might well have defended (and, as things have turned out, successfully defended) the respondents’ case on infringement without putting obviousness or novelty in issue. By putting those things in issue, the appellants introduced into the litigation a range of substantial questions which were ultimately decided against them. Although we accept that an issues-based apportionment of costs is not always appropriate, particularly in a case in which conventional alternatives are agitated, the appellants’ obviousness and novelty points in the present case were not merely alternative ways of arriving at the conclusion that they had not infringed the patents in suit. They were that, of course, but they were a good deal more: they challenged the basic validity of the patents. As a result of successfully fending off that challenge, the respondents succeeded in obtaining certificates as to validity which have themselves survived the appellants’ appeal. In these respects we make no distinction between the appellants’ challenge to validity as expressed in their Defence, and their corresponding challenge in the Cross-claim. From the viewpoint of awarding costs, the reality is that, once that challenge was made in both respects, there was a single case, as it were, on obviousness and novelty which the respondents had to meet.

12 Subject to the relevance of the appellants’ offer of compromise, to which we shall turn presently, we consider that the third proposition enunciated by Black CJ and French J in Ruddock is apposite to the situation created by the appellants’ putting obviousness and novelty in issue in the present case. That is to say, those issues should be regarded as sufficiently discrete to warrant the conclusion that the appellants should pay the respondents’ costs of the resolution of them at first instance.

13 We would not reach the same conclusion with respect to so much of the appellants’ Defence, or of their Cross-claim, as involved the allegation of want of fair basis. As was made clear in our reasons of 4 March 2009, that allegation was a true alternative to the appellants’ main argument on the construction of the patents in suit. In effect, the appellants contended that, if the patents were to be construed as proposed by the respondents, the claims in them lacked a fair basis. The fair basis point was so much wrapped up in the constructional arguments generally that we consider it appropriate to treat them together when considering the matter of costs. The respondents do not contest the appellants’ entitlement to their costs of defending the infringement claims at first instance. That should include the costs of the Defence and the Cross-claim to the extent that they related to the appellants’ allegation of want of fair basis.

14 Turning to the effect of the appellants’ offer of compromise, it is, in our view, important to note at the outset that the appellants do not contend that O 23, as such, gives them a presumptive entitlement to the costs of the Cross-claim. Neither do they claim indemnity costs (in which circumstance it would have been necessary to consider whether the respondents’ rejection of the offer was unreasonable: see CGU Insurance Ltd v Corrections Corporation of Australia Staff Superannuation Pty Ltd [2008] FCAFC 173, [75]). Rather, the appellants rely on the offer as an indication of the terms on which they were prepared to settle in September 2007. They say that costs incurred since then have been incurred because the respondents rejected the position which the court ultimately held to be correct. They contend, therefore, that the respondents should bear responsibility for those costs, on a conventional party and party basis. We consider that it is within the scope of our broad discretion on costs, given by s 43 of the Federal Court of Australia Act 1976 (Cth), to entertain a submission along these lines, notwithstanding that O 23 as such is not relied on.

15 Did the respondents reject the position which the court ultimately held to be correct? As proposed by the appellants in par 1.1 of their offer of compromise, the court did dismiss the Application. In context, the operation of the principle for which Port of Melbourne Authority v Anshun Pty Ltd [1981] HCA 45; (1981) 147 CLR 589 is authority would probably have much the same effect as the contractual bar proposed by the appellants in par 2 of their offer. Insofar as the respondents’ infringement claims are concerned, then, we consider that the offer of compromise corresponds broadly with the result achieved by the appellants as a result of the litigation.

16 In the balance of their offer of compromise the appellants did not, however, propose a disposition of the Cross-claim in terms which correspond with the result achieved by the respondents. The appellants proposed no certificate of validity such as the respondents ultimately achieved. Neither did they propose the making of a simple order that the Cross-claim be dismissed. Rather, they qualified their offer by reference to an apprehended situation in which the respondents were to make any threat to commence fresh proceedings against them for infringement of any of the patents in suit, or in which the respondents in fact commenced such proceedings. This would presumably include a situation in which the appellants embarked on the manufacture and supply of equipment which clearly infringed the patents. This proposal is to be understood against a background in which the respondents were expected to bear their own costs (down to the date of acceptance, if there were to be one) of supporting the validity of the patents which had been challenged by the Cross-claim. In these respects, it is, in our view, quite clear that the appellants’ offer does not represent a result no less favourable to the respondents than that ultimately achieved by them at the conclusion of the proceeding.

17 The appellants did not give the respondents the opportunity to accept only so much of the offer of compromise as was contained in pars 1.1 and 2 thereof. The offer was a composite, undifferentiated, proposal. For reasons explained above, we are not persuaded that it represented an outcome no less favourable to the respondents than that which now obtains as result of our judgment on appeal. We do not, therefore, propose to take the offer into account in our disposition of costs issues with respect to the proceeding at first instance or on appeal.

18 In the result, we propose to order that the appellants should have their costs of the proceeding before the primary Judge, save so much thereof as related to the issues of novelty and obviousness. The respondents should have their costs of that proceeding to the extent that they related to those issues.

19 Turning to the costs of the appeal, we consider that we should take the same approach. The appellants’ appeal involved questions of infringement (on which they succeeded) and of validity (on which they failed). However, for reasons expressed above, we consider that the fair basis aspect of the appeal is appropriately grouped with the infringement aspect. To that extent, the appellants should have their costs of the appeal. With respect to so much of the appeal as related to the question of obviousness, the respondents should have their costs. The primary Judge’s conclusion on the matter of novelty was not the subject of appeal.

20 The cross appeal (which was concerned with one aspect of infringement) was dismissed, while the cross-contentions in the cross appeal of which the appellants gave notice were upheld. In these respects, there is no reason why costs should not follow the event in the normal way.

21 That leaves only the costs of the submissions on costs themselves, ie the matters which we reserved in order 5 made on 4 March 2009 and which have been the subject of these reasons. It would have been necessary in any event to make submissions as to how the primary Judge’s costs orders should be varied to reflect the outcome of the appeal. However, the significant points of contention have related to the appellants’ claim for the whole of their costs at first instance, including the costs of discrete issues on which they succeeded neither before his Honour nor on appeal, and to their reliance on their offer of compromise. We have rejected that claim, and that reliance, and have decided the matter substantially in accordance with the issues-based approach pressed upon us by the respondents. Only in one relatively minor respect – the fair basis point – have we accepted the approach of the appellants. In our view, justice would be done if we were to order the appellants to pay 75% of the respondents’ costs which related to our determination of the parties’ entitlement to the costs of the proceeding below and of the appeal.

I certify that the preceding twenty-one (21) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justices Sundberg, Jessup & Middleton .

Counsel for the Appellants/Cross-Respondents:	Mr JV Nicholas SC with Mr HPT Bevan & Ms J Beaumont

Counsel for the Respondents/Cross-Appellants:	Mr RC Macaw QC with Mr SCG Burley SC

Solicitor for the Appellants:	DLA Phillips Fox

Solicitor for the Respondents:	Mallesons Stephen Jaques

Date of Hearing:	11 & 12 November 2008
Dates of Submissions on Costs:	18 March, 1, 2 & 8 April 2009
Date of Judgment:	1 May 2009

Federal Court of Australia - Full Court

PAC Mining Pty Ltd v Esco Corporation (No 2) [2009] FCAFC 52 (1 May 2009)