FEDERAL COURT OF AUSTRALIA

Neurizon Pty Ltd v Jupiters Limited [2004] FCA 1380

INTELLECTUAL PROPERTY – patents – infringement – application for permanent injunctions based upon alleged breaches of respondents’ undertakings not to infringe the applicant’s patent – whether the modified jackpot system infringes the patent – issue estoppel – ultimate finding – comparison of findings necessary with respect to the question of obviousness and with respect to further infringement

Statutes

Federal Court of Australia Act 1976 (Cth) s 23

Patents Act 1990 (Cth) ss 18(1)(b)(ii), 7(2), 122(1)

Cases

Aktiebolaget Hässle v Alphapharm Pty Ltd (2002) 212 CLR 411 Cited

Blair v Curran (1939) 62 CLR 464 Cons

Cardile v Led Builders Pty Ltd (1999) 198 CLR 380 Refd

Carl Zeiss Stiftung v Rayner and Keller Ltd (No 2) [1967] 1 AC 853 Cons

Egri v DRG Australia Ltd  (1988) 19 NSWLR 600 Refd

Kuligowski v Metrobus [2004] HCA 34 Cons

Murphy v Abi-Saab (1995) 37 NSWLR 280 Cons

Pelechowski v Registrar, Court of Appeal ( NSW) (1999) 198 CLR 435 Cons

Ramsay v Pigram (1968) 118 CLR 271 Cons

Ramsay v Pigram and Jackson v Goldsmith (1950) 81 CLR 446 Refd

NEURIZON PTY LTD v JUPITERS LIMITED, JUPITERS MACHINE GAMING PTY LIMITED, EASTERN SUBURBS LEAGUES CLUB LIMITED, WYNNUM MANLY LEAGUES CLUB LIMITED, QUEENSLAND LIONS SOCCER CLUB

Q44 OF 2003

KIEFEL J

BRISBANE

27 OCTOBER 2004

AND

THE COURT DECLARES THAT:

1.         The respondents have further infringed claims 1, 2, 4, 5, 12, 13, 17, 18 and 21 of the applicant’s patent by their use of the method or system described herein as the ‘modified Cougar system’ being that disclosed in Annexure H and Exhibit DMHConfidential to the affidavit of David Matthew Hall filed 1 September 2004 and described in the affidavit of Neil Spencer filed 7 September 2004 and Exhibit ABK3Confidential to the affidavit of Arnold Barry Kopff filed 1 September 2004 and have thereby breached the undertakings made on 17 August 2004.

THE COURT ORDERS THAT:

2.         Seven days from the date hereof the respondents, by themselves, their directors, officers, servants, agents or otherwise howsoever be restrained from using, in connexion with electronic gaming machines, and from marketing, promoting, advertising, distributing, offering for sale or otherwise disposing of, manufacturing and exploiting the Cougar jackpot system referred to in the reasons for judgment of 5 August 2004 ([2004] FCA 1012) and the modified Cougar system referred to in order 1 above.

3.         The Court notes the undertaking of the first and second respondents, to provide to the solicitors for the applicant, within forty-eight hours of implementing the currently proposed changes, the source code of the modified jackpot, on the undertaking by the applicant’s solicitors that the copy of the source code provided will be kept confidential and will only be disclosed to the applicant’s technical expert and not to the applicant or Mr Steven Johnson.

4.         The respondents pay the applicant’s costs of the application, including any reserved costs.

Note:    Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

AND

REASONS FOR JUDGMENT

1                     On 5 August 2004 I made orders following upon a hearing of all issues in these proceedings, save for damages, declaring that the respondents had infringed claims, 1, 2, 4, 5, 12, 13, 17, 18, and 21 of the applicant’s patent.  The respondents’ cross-claims were dismissed.  Amongst those claims was a claim that the invention lacked an inventive step and would have been obvious to a person skilled in the art.  The question of further orders, by way of injunctions against the respondents, was stood over. 

2                     On the adjourned date, 17 August 2004,  the respondents offered general undertakings not to infringe the applicant’s patent, which were accepted by the applicant and the Court.  It is now alleged by the applicant that the respondents have breached those undertakings by their continued use of the Cougar jackpot system which was the subject of findings in the proceedings.  The respondents contend that they have modified the system such that it no longer infringes.  Moreover, they rely upon a finding made in connexion with the issue of obviousness as determining conclusively that the system now utilised is non-infringing. 

3                     It is hardly conducive to notions of finality of litigation that another question of infringement needs to be tried so soon after final judgment and whilst an appeal is pending.  It suggests a level of determination, on the part of the respondents, to find a way around the applicant’s patent, but it was not suggested, at this point, that the respondents did not have a belief in the correctness of their view.  Orders for contempt are no longer pursued by the applicant.

4                     The application now brought by the applicant, for permanent injunctions based upon alleged breaches of the respondents’ undertakings, would seem to be a matter which a trial judge ought to determine.  The arguments presented for the respondents however created some difficulty.  This arose, in large part, because the application involved a new and different question of infringement which, from the respondents’ point of view, had to be determined by reference to the reasons for judgment in the first proceedings.  The arguments presented for the respondents involved the interpretation of a particular finding on the issue of obviousness.  The interpretation of the reasons extended to the meaning of the term ‘game-based system’, in a way which was not argued at trial and which appeared to travel beyond the findings.  The respondents’ witnesses not only sought to construe the judgment, they offered their view as to the correctness of parts of it.  The respondents’ argument based upon issue estoppel required a finding as to whether the ‘modified Cougar system’ (as it was called on the application) implements a solution arrived at by the respondents’ witness on the issue of obviousness.  Findings such as these might cause some difficulty for the appeal.  On the view I have taken of the matter, and of the true issues which are raised before the Court, I have regarded much of the respondents’ material as irrelevant and potential problems were not realised. 

5                     The first, and on one view the only, question for the Court is whether the modified Cougar system infringes the patent, although this was not an approach favoured by the respondents. 

6                     I will not reiterate the patent claims save for claim 1.  I do not understand the respondents to suggest that injunctions should not be made with respect to the other claims, the subject of earlier findings of infringement, in the event that it is found that claim 1 has continued to be infringed.  Claim 1 defines the invention as:

‘1.        A method of awarding a prize in a gaming system comprising at least one electronic gaming machine, characterised in that the probability of each electronic gaming machine winning the prize is dependent upon at least some of the amount wagered on that electronic gaming machine during an elapsed period.’

7                     (I shall, as before, refer to an electronic gaming machine as an ‘EGM’).

8                     I do not propose to set out my findings as to the operation of the Cougar system.  They appear in my reasons ([2004] FCA 1012) at [59]-[71].  The principal issue was whether the probability of an EGM winning in that system was dependent upon some of the amount wagered in an elapsed period.  Apart from earlier contending that the phrase ‘an elapsed period’ was meaningless, which contention was rejected, the respondents contended that, due to the rapidity of polling in the Cougar system, it could not be said that account was taken of amounts wagered in a period of time.  Rather, the Cougar system was said to be a ‘game-based’ system like the Hyperlink system.  The Hyperlink system had earlier been described in the background to the reasons as follows (at [13]):

‘The Hyperlink jackpot system is what has been described as ‘game-based’.  In essence it may be said that the probability of winning a jackpot in that system is dependent upon the amount wagered on a single game on that EGM. …’

9                     And later in findings at [63]:

‘The respondents sought to liken the Cougar system to a purely game-based system, such as Hyperlink.  The Hyperlink system differs from the Neurizon method because it attempts to award a jackpot each time a game is played.  Its jackpot award has no reference to time but to the amount wagered on the game. …’

10                  The Cougar jackpot system was found to infringe in these terms (at [71]):

‘The probability of an EGM winning in the Cougar system does depend upon the amount wagered in a period of time in the past.  The period is measured by successive meter responses.’ 

11                  The operation of the modified Cougar system was said not to be the subject of dispute amongst the parties’ experts.  In particular there seems to be an acceptance of Mr Kopff’s description (in par 20 of Exhibit ABK3Confidential to his affidavit of 1 September 2004):

‘The Amended Source Code and the Modified Jackpot operates in the following way:

a)         On receipt of a valid meter response, a check is undertaken to determine that the turnover meter difference for the relevant EGM (being the turnover reported since the last meter response) and the number of games played on that EGM since the last meter response is greater than zero. The determination of the difference between the two values reported at consecutive meter responses is still calculated by subtracting from the most recent value for turnover (and now games played) the next most recent value that was received in response to the previous meter response.

b)         The method or system then calculates the ‘contribution’ to be used in determining whether or not the jackpot has been won. ‘Contribution’ is calculated by dividing the net turnover meter difference by the number of games played between successive meter responses. In effect, this averages the amount wagered on the relevant EGM between subsequent meter responses across the number of games played in the same period on the relevant EGM.

c)         As a result of using integer arithmetic, any fractional part of the remainder is lost, as part of that calculation. In order to ensure that any fraction is taken into account, the method or system then calculates the so called ‘fix up’ value. The fix up value is calculated by multiplying the contribution (obtained in the previous step) by the number of games played on the relevant EGM between successive meter responses. That product is then subtracted from the turnover meter difference for the relevant EGM.

d)         For each game that is reported to have been played on the relevant EGM, the system then tests if the jackpot has been triggered.  This is achieved by running around the loop once for each game played, passing the contribution and the fix up amount (in respect of the first game only) to the jackpot trigger device. After the jackpot trigger test has been performed in respect of the first game, the fix up amount is unconditionally set to zero so as to ensure that the fractional part or fix up is only counted once.

e)         The jackpot trigger device indicates whether or not the jackpot hit has occurred each time it is passed a ‘contribution’ in the loop.’

12                  From this it would appear that turnover is detected in the same way as before.  It is the amount bet in the period between poll responses (‘the period’) which initiates the jackpot system.  Further explanations of the modified system were provided by Mr Jackson and by senior counsel for the respondents and were not disputed.  The essential differences in the modified system arise from the provision of information about the number of games played and from the averaging of the amount bet on games.  The system, or more particularly the site controller, now takes account of the stroke meters, which is to say the information as to the number of games played in the period.  This information is used to allow a jackpot draw for each game which has been played in the period.  The system now employs an approximation of an average of the amount bet on each game by taking the total amount bet in the period and dividing it by the number of games played in the period.  This does not apply when only one game is played in the period. The average is not a true average, as Mr Kopff explains in the passages set out above, but I shall continue to use the term.  The average of the amount bet is then used to weight the probability of a win on the EGM.  An additional feature of the system is that, because there is a separate jackpot draw for each game, there could be two or more jackpot wins in the period.  This may increase the opportunity for an EGM to participate in a jackpot draw, but does not affect its probability of a win. 

13                  These modifications do not in my view change the operation of the Cougar system from that previously considered so as to take it outside claim 1.  As before, as Mr Kopff points out, a jackpot draw is not initiated because a game has been played, but as a result of turnover being recorded in response to a poll of an EGM.  The turnover of the relevant EGM in the period between responses is still used in the probability of a win calculation. I do not understand this to be denied.  It was not suggested that the probability of win was now dependent only upon the amount wagered on an individual EGM.  Adding an average amount bet per game to the probability equation does not detract from its dependence upon the amount bet in the period.  Mr Kopff points out that, regardless of whether turnover in the period is divided by a figure, has something added to it or subtracted from it, turnover, or some of the turnover, is still utilised in the determination of a probability of a win.  In that event it would seem to me that claim 1 continues to be infringed. 

14                  I did not understand the respondents to suggest to the contrary of Mr Kopff’s analysis, although their experts maintained some other criticisms of his approach.  Rather the respondents argued that, nevertheless, the modified Cougar system could be said to be properly ‘game-based’ and therefore exempt from the findings on infringement.  In doing so it seems to me that the respondents have constructed a meaning of ‘game-based’ not found in the reasons for judgment.  I do not propose to revisit or reconsider what game-based might mean beyond what has been said in those reasons. 

15                  Mr Jackson summarised the respondents’ position as being:

‘As the jackpot trigger calculation is performed once for each game using the average turnover per game, my opinion is that the Modified Code implements a game-based system, rather than a system which only uses total turnover received during an elapsed period’.

16                  The respondents’ submissions took the matter no further, save to highlight their approach as one which relied upon there being a greater emphasis upon individual games.  From this it may be concluded that the modified Cougar system has a connexion, or a stronger connexion, with individual games.  It does not however, in my view, convert it to a system where the probability of winning a jackpot is dependent upon the amount wagered on a single game.  In Hyperlink, not only did it attempt to award a jackpot each time a game was played, the probability depended upon the amount wagered on that game. 

17                  The respondents’ principal argument seeks to circumvent an assessment of whether there continues to be an infringement in the way found in the reasons for judgment and a finding, if one were necessary, that the modified Cougar system remains turnover-based.  The argument rests upon one paragraph in my findings on the issue of obviousness concerning the respondents’ witness, Mr Spencer.  He had not seen the patent but was given a series of problems to answer to which he found ‘solutions’.  In doing so, it was submitted, he effectively identified the invention.  The findings concerning Mr Spencer’s evidence were in these terms (at [156] - [161]):

‘[156]The first problem identified for Mr Spencer was the collection of data from EGMs, which cannot be synchronised with each EGM’s game cycle, the problem being latency in the communications system.  In some cases there could be six games played between data collections.  If the controller collected credits bet information for the purpose of centrally determining the random event based on credits bet on each game there would be a real likelihood that many played games would be issued.  They would be contributing to the jackpot pool with no chance of a win.

[157]  Mr Spencer considered that the problem of the speed at which individual game data was collected by a central controller could be overcome by accumulating credits for any games played between data collection events and incrementing the jackpot pool based on the aggregate bet amount since the last increment for that EGM.  The method of incrementing the jackpot pool is based on adding a proportion of the amounts bet to the jackpot pool, not the number of games played.

[158]  The second problem identified was a system, namely the Frankovic system, which is deterministic in the sense that the probability of an EGM winning increases as the pool increases towards its predetermined maximum limit.  Mr Spencer’s solution was to use a random algorithm to trigger jackpots based on time of day or X minutes since the last trigger.  It would also be possible to base jackpot values to be awarded on one day as a proportion of total turnover on a previous day or period.  It would not be necessary then to use a fixed jackpot maximum value.

[159]  The third problem was where a player has multiple wagers and the probability of a win is no longer proportional to the wager.  His solution would be to implement a trigger mechanism in a remote jackpot controller whereby inputs from multiple EGMs would be compared against a random trigger value and jackpot prizes would be awarded when the trigger condition has been met.  He goes on:

‘To overcome problems with network latency in this solution, I would enhance my earlier solution of aggregating bet amounts between inputs into the jackpot controller and require the jackpot controller to receive from the EGD the total amount of bets and the total number of games played since the last input into the jackpot controller.  The controller would then calculate the average bet per play and use this to assess whether or not the trigger had been satisfied.’

[160]  Mr Spencer’s solution is based upon the average amount wagered on each game. The amount wagered between the time when information is received by the jackpot controller is aggregated.  The EGM informs the controller of the total amount of bets and the total amount of games played and the average amount wagered on each game is calculated.  That average is then used to determine the probability of a win.  The average amount bet might be compared against a trigger value.  His solution might involve a comparison between EGMs of the amount bet, but it might also be applied to each EGM.

[161]  It is possible to identify in Mr Spencer’s solution a period which has elapsed, given that it is concerned with the amount wagered in the time between information or “inputs” to the jackpot controller.  He would fix it by time and does not contemplate the period being fixed by events.  Mr Spencer’s solution does not however use the amount wagered in that elapsed period in the probability calculation.  His solution takes the average amount wagered on each game to influence the probability of an EGM winning.  This would appear to be a game-based solution.  It does not have the characteristics of the Neurizon patent.’

18                  The respondents rely upon the statement in paragraph 161 that Mr Spencer’s solution does not use the amount wagered in the elapsed period in the probability calculation and to the reference to it being game-based.  It is submitted that, on the premise that the modified Cougar system is an implementation of Mr Spencer’s solution, this finding determines the question about how his solution works by comparison with the Neurizon system and the applicant is estopped on the issue.  The issue in question, which it is said was addressed in the finding, was identified by the respondents as:

‘Does the Spencer solution use the amount wagered in an elapsed period, being the period between information input, in the probability calculation?’

19                  In Kuligowski v Metrobus [2004] HCA 34 at [40], the High Court referred with approval to the decision of Barwick CJ in Ramsay v Pigram (1968) 118 CLR 271 at 276:

‘… an estoppel is available to prevent the assertion in those proceedings of a matter of fact or of law in a sense contrary to that in which the precise matter has already been necessarily and directly decided by a competent tribunal in resolving rights or obligations between the same parties… . The issue thus determined, as distinct from the cause of action in relation to which it arose, must have been identical in each case.’

20                  In support of the submission that the determination of an issue of fact, or of law or of mixed fact and law, may be binding regardless of whether the cause of action in each case is the same, the respondents also relied upon the decision of Clarke JA in Egri v DRG Australia Ltd  (1988) 19 NSWLR 600 at 610.  His Honour there applied Ramsay v Pigram and Jackson v Goldsmith (1950) 81 CLR 446 at 460 (see at 610 and 611).  The respondents’ point is that it does not matter here if the current issue is one of infringement but formerly the issue was obviousness. 

21                  The respondents’ submissions do not in my view focus upon the proper identification of the question which was the subject of determination in the judgment.  They appear to rely upon an inference that some parts of paragraph 161 themselves identify the issue enunciated by the respondents (at [18] above).  As Gleeson CJ pointed out in Murphy v Abi-Saab (1995) 37 NSWLR 280 at 288, it is essential to determine what the author of the reasons was required to decide.  Blair v Curran (1939) 62 CLR 464 and Carl Zeiss Stiftung v Rayner and Keller Ltd (No 2) [1967] 1 AC 853 (‘Carl Zeiss Stiftung’) held that only a decision about a matter which it was necessary to decide can create an issue estoppel.  In Carl Zeiss Stiftung, at 965, in a passage referred to by Gleeson CJ, Lord Wilberforce said:

‘… One way of answering this is to say that any determination is involved in a decision if it is a ‘necessary step’ to the decision or a ‘matter which it was necessary to decide, and which was actually decided, as the groundwork of the decision’ … And from this it follows that it is permissible to look not merely at the records of the judgment relied on, but at the reasons for it, the pleadings, the evidence … and if necessary other material to show what was the issue decided.’

22                  And in Blair v Curran, at 532-533 Dixon J said:

‘Nothing but what is legally indispensable to the conclusion is thus finally closed or precluded.  In matters of fact the issue-estoppel is confined to those ultimate facts which form the ingredients in the cause of action, that is, the title to the right established.  Where the conclusion is against the existence of a right or claim which in point of law depends upon a number of ingredients or ultimate facts the absence of any one of which would be enough to defeat the claim, the estoppel covers only the actual ground upon which the existence of the right was negatived.  But in neither case is the estoppel confined to the final legal conclusion expressed in the judgment, decree or order.  In the phraseology of Coleridge J. in R. v Inhabitants of the Township of Hartington Middle Quarter ((1855) 4 E. & B. 780 at p. 794), the judicial determination concludes, not merely as to the point actually decided, but as to a matter which it was necessary to decide and which was actually decided as the groundwork of the decision itself, though not then directly the point at issue. 

…

But matters of law or fact which are subsidiary or collateral are not covered by the estoppel.  Findings, however deliberate and formal, which concern only evidentiary facts and not ultimate facts forming the very title to rights give rise to no preclusion.  Decisions upon matters of law which amount to no more than steps in a process of reasoning tending to establish or support the proposition upon which the rights depend do not estop the parties if the same matters of law arise in subsequent litigation.’

23                  The relevant claim, on the part of the respondents, in the proceeding was that the invention was not patentable under s 18(1)(b)(ii) of the Patents Act 1990 (Cth) (‘Patents Act’) because there was no inventive step.  The respondents’ claim required it to show that the invention would have been obvious to a person skilled in the art in light of common general knowledge in the patent area before the priority date:  see s 7(2).  Such a decision, which is essentially one of fact, would be reached if it were shown that such a person would be led directly and as a matter of course to the invention or its essential characteristics:  Aktiebolaget Hässle v Alphapharm Pty Ltd (2002) 212 CLR 411 at 433, par [53].  These are the questions which then required determination.  Findings on either of them, or their negative, could have been an ultimate finding and one necessary and legally indispensable to the conclusion concerning patentability.  And they would provide a basis for appeal, which is one way of testing the quality of the decision:  see Murphy v Abi-Saab at 288.  In the present case the negative was, impliedly, found.  That is to say the invention was not accepted as obvious to a skilled person in the way described above. 

24                  Mr Spencer’s evidence was put forward to show that he, as a skilled person, did take the necessary path and was led to the characteristics of the applicant’s invention.  In particular it was sought to show, in effect, that he considered the use of amounts wagered in an elapsed period in calculating the probability of a win.  That was not accepted.  I shall go no further as to the respondents’ interpretation of the findings at paragraph 161.  It seems to me that however they are interpreted they can only be findings on the evidence along the way to the conclusion that the invention was not obvious to a skilled person in the way required.

25                  A consideration of the policy underlying issue estoppel and the conduct of the earlier proceedings confirms me in my view that it could not be intended to prevent the applicant from arguing (assuming the modified Cougar system to in fact incorporate Mr Spencer’s solutions) that the system as modified by those solutions contains the elements of its patent claims, towards a conclusion of infringement.  No such questions arose for determination in the prior proceedings.

26                  On the view I have taken it is not necessary for me to deal with the remaining contention, as to whether Mr Spencer’s ‘solution’ is in fact implemented by the modified Cougar system.  The applicant did not pursue a contention that it was not, on the basis that the issue did not properly arise, and I do not think in these circumstances that that is sufficient to found a concession as the respondents contend.  In relation to this question I observe only that the matter is not free from difficulty. 

27                  There will be declarations that the respondents have breached the undertakings filed on 17 August 2004.  I consider they are necessary in the event that there are any further infringements by the respondents and to put the matter beyond doubt.  There will be injunctions specific to the present and former infringing conduct, namely the use of the Cougar system and the Cougar system as modified.  In my view no purpose is to be served by general injunctions which reiterate only the respondents’ obligations not to infringe by other means.  I understand that the respondents will need some few days to disconnect the present system.  Their proposal is to use the Hyperlink system.

28                  The applicant also seeks orders that the first and second respondents be required to provide a copy of their source code, on undertakings as to confidentiality, in the event that, at any time, they make a further change to the Cougar jackpot system.

29                  There is no doubt that the Court has power under s 122(1) Patents Act  and s 23 Federal Court of Australia Act 1976 (Cth) to grant relief for infringement which includes an injunction.  The applicant submits that the order sought is one which gives effect to the Court’s injunction and that it is necessary, both in view of the history of the matter and because it was suggested, during the course of the hearing, that the first and second respondents consider that the Hyperlink system ‘with polling’ would not infringe.  Without the order, it is submitted, the applicant would have no way of monitoring compliance with the injunctions.   The prospect is that they may attempt such a system.  An analogy is drawn by the applicants as to the powers utilised in Anton Piller orders and Mareva injunctions which are said to protect the Court’s jurisdiction and prevent its process being rendered inconsequential:  see Cardile v Led Builders Pty Ltd (1999) 198 CLR 380 at 425 per Kirby J.  His Honour also observed in Pelechowski v Registrar, Court of Appeal (NSW) (1999) 198 CLR 435 at 481, pars [139]-[140] that a Court otherwise empowered to grant injunctive relief can make orders subsequent to it, such as those preventing the removal of property. 

30                  I accept, as the applicant points out, that it may be difficult for it to find out the detail of what the respondents are using and marketing as their jackpot award system from time to time.  Nevertheless I do not think it could be said that the orders sought are in aid of the injunctions granted.  They seek to establish a system of monitoring for future possible infringement of a different kind.  I do not propose to make the orders sought.

31                  The first and second respondents offer an undertaking with respect to what they currently propose as changes in the event that the Court finds that the modified Cougar system infringes.  It is to the effect that, within forty-eight hours of implementing the currently proposed changes, they will provide a copy of the source code of the modified jackpot on the previous undertakings as to confidentiality.

32                  The applicant also sought directions in order to advance its claim for damages.  It is concerned that it will suffer substantial delays even though it may have a hearing of the respondents’ appeal in February next.  I am not satisfied that the substantial cost of preparing the damages claim is warranted in the interim.  The questions on infringement and validity are substantial and complex.  A judgment on the appeal is therefore desirable before further costs are incurred.  The earlier order splitting the hearing recognises this.  I do not consider the applicant will be prejudiced to any great extent by awaiting the outcome on the appeal. 

33                  There will be an order that the respondents pay the applicant’s costs.   The applicant was for the most part successful.  In that respect the applicant no longer pursues an order for indemnity costs. 

Associate:

Dated:              27 October 2004