FEDERAL COURT OF AUSTRALIA

Review 2 Pty Ltd v Redberry Enterprise Pty Ltd (No. 2) [2008] FCA 1805

COSTS – settlement offer and offer of compromise under O 23 of the Federal Court Rules (Cth) purportedly made by respondent/cross-claimant to the applicants/cross-respondents – applicants/cross-respondents rejected offers – O 23 r 11(6) not in operation when the purported offer of compromise was rejected – no presumptive entitlement to indemnity costs under O 23 of the Rules – whether rejection of offers imprudent or unreasonable – whether applicants/cross-respondents advanced groundless contentions – no award of indemnity costs

Federal Court of Australia Act 1976 (Cth) s 59(4)

Legislative Instruments Act 2003 (Cth) s 12(2)(b).

Federal Court Rules (Cth) O 5 r 11, O 23

Global Brand Marketing Inc v YD Pty Ltd (2008) 76 IPR 161 cited

Coshott v Learoyd [1999] FCA 276 cited

Dukemaster Pty Ltd v Bluehive Pty Ltd [2003] FCAFC 1 referred to

Seven Network Ltd v News Ltd (2007) 244 ALR 374 referred to

John S Hayes & Associates Pty Ltd v Kimberly-Clark Australia Pty Ltd (1994) 52 FCR 201 cited

Colgate-Palmolive Company v Cussons Pty Ltd (1993) 46 FCR 225 cited

Hamod v New South Wales (2002) 188 ALR 659 cited

University of Western Australia v Gray (No 21) [2008] FCA 1056 cited

REVIEW 2 PTY LTD (IN LIQUIDATION) (ACN 067 634 360) and REVIEW AUSTRALIA PTY LTD (ACN 122 295 836) v REDBERRY ENTERPRISE PTY LTD (ACN 093 946 260)

VID 286 OF 2007

KENNY J

28 NOVEMBER 2008

MELBOURNE

THE COURT ORDERS THAT:

1.                  The applicants pay the respondent’s costs of the application.

2.                  The cross-claimant pay the cross-respondents’ costs of the cross-claim.

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.

REASONS FOR JUDGMENT

introduction

1                     On 24 October 2008, the Court dismissed the applicants’ claim against Redberry Enterprise Pty Ltd for infringement of a design registered under the Designs Act 2003 (Cth).  I refer to this design as the Review Design.  At the same time, the Court also dismissed Redberry’s cross-claim for design registration invalidity: see Review 2 Pty Ltd v Redberry Enterprise Pty Ltd [2008] FCA 1588.  

2                     The question of costs now falls for determination.

further background and settlement offers

3                     Before considering the question of costs, it is necessary to set out some aspects of the procedural history and settlement offers made by the parties prior to the trial. The details of the settlement offers were included in the parties’ written submissions in support of the costs orders they seek: see O 23 r 8 of the Federal Court Rules (Cth).

4                     The proceeding began on 10 April 2007 when the first applicant filed an application and a statement of claim.  On 18 May 2007, Redberry filed its defence.  Shortly thereafter, by a letter dated 1 June 2007, Redberry, through its then solicitors, Rose Chai Lawyers and Consultants, made an offer to settle the proceeding for the sum of $1,862 – said to be the amount of profit made by Redberry in selling the allegedly infringing garments – plus the first applicant’s reasonable legal costs.  This was Redberry’s first settlement offer.  The amount offered was said to be the profit made by Redberry on 133 imported garments sold at a price of $20 per garment less $6.00 as costs per garment. The letter also offered Redberry’s undertaking that Redberry would cease to import, distribute or sell the garments. This offer was made “without prejudice except as to costs” and was open until 3.00 pm on 8 June 2007.

5                     In the following week, Redberry filed and served an unverified list of documents.  On 13 June 2007, Redberry swore its list of documents, which included reference to documents showing that Redberry had made the 133 garment sales as claimed.  Redberry said that copies of these documents were sent to the applicants’ solicitors on 25 June 2007.

6                     By a letter dated 8 June 2007, the first applicant rejected Redberry’s offer. In that letter, the first applicant offered to settle the matter on the basis that Redberry: (1) provide a written undertaking that it would cease and forever refrain from importing, selling or distributing garments infringing the Review Design; (2) would immediately deliver up any remaining stock of the allegedly infringing garments; and (3) pay the first applicant the sum of $200,000 for damages and costs. 

7                     On 4 July 2007, the parties attended Court-ordered mediation, which was unsuccessful. By notice of motion dated 11 July 2007, the first applicant sought: (1) leave to join Review Australia Pty Ltd as the second applicant in the proceeding; (2) leave to file an amended defence and amended statement of claim; and (3) summary judgment against Redberry.  Also on 11 July 2007, Redberry gave notice that its solicitors on the record had become Clayton Utz.

8                      After the hearing of the motion on 10 August 2007, the Court made various orders, including dismissing the motion and granting the first applicant leave to join Review Australia as the second applicant.

9                     On 17 August 2007, Redberry filed its amended defence and a cross-claim. On 21 August 2007, Redberry, through Clayton Utz, made an offer of compromise, relying on Order 23 of the Rules.  By this offer, Redberry offered to compromise the claim and cross-claim on the basis that: (1) Redberry would pay the sum of $20,000 to the applicants/cross-respondents, plus costs as taxed or agreed; (2) the payment would be made within 28 days after acceptance of the offer; and (3) the offer would be open for acceptance for 14 days beginning on the day after service of the notice. In its covering letter, Redberry stated that the offer was made “[w]ithout prejudice save as to costs”.  The letter also stated that the offer was exclusive of costs and that, if accepted, Redberry would also pay the applicants’ costs in respect of the claim and cross-claim, as agreed or taxed on a party and party basis, incurred up to and including the day the offer was accepted.

10                  By a letter dated 31 August 2007, the applicants rejected Redberry’s second offer of compromise, but offered to settle the matter on the basis that Redberry: (1) provide a written undertaking in the terms sought in its earlier letter of 8 June 2007; (2) deliver up any remaining stock of the garments; and (3) pay the applicants/cross-respondents the sum of $100,000 for damages and costs. 

11                  On 21 September 2007, following a request for security for costs by Redberry, the second applicant provided an undertaking to the Court that it would pay any costs orders made against the first applicant in favour of Redberry.

the parties’ submissions

12                  The applicants submit that costs should follow the event and the proper orders should be that:

1.                  the applicants pay the respondent’s costs of the claim; and

2.                  the cross-claimant pay the cross-respondents’ costs of the cross-claim.

13                  In support of these costs orders, the applicants make numerous submissions, including the following:

1.                  The effect of Redberry’s letter of 21 August 2007 and the accompanying offer of compromise is that there were two offers: (a) an offer to settle the applicants’ claim by payment of $20,000 plus party/party costs of the claim; and (b) an offer to dismiss the cross-claim and pay the applicants’ party/party costs of the cross-claim.

2.                  An applicant’s rejection of an offer of compromise made under O 23 of the Rules, where an applicant wholly fails in the proceedings, will not ordinarily result in an award of indemnity costs unless the rejection was “imprudent or unreasonable”.

3.                  Even under O 23 r 11(4) of the Rules, the mere refusal of an offer followed by a judgment no less favourable than the offer does not automatically lead to indemnity costs.

4.                  Where a party advances an entitlement to an award of costs on a higher than party/party basis, it carries the onus of establishing the other party’s conduct was imprudent or unreasonable.

5.                  On account of the following factors, it was not imprudent or unreasonable for the applicants to have rejected Redberry’s 21 August 2007 offer because:

1.1              The questions for determination on the claim and cross-claim were in respect of a new designs regime and accordingly, the outcomes could not be predicted with certainty.

1.2              There was close similarity between the allegedly infringing garment and the Review Design, and the question of whether the differences were sufficient to reach a conclusion that there was no infringement was a matter of the judge’s impression, which could not be predicted with certainty.

1.3              This was not a claim that was bound to fail, or even, more likely than not to fail.

1.4              The result turned upon the judge’s impression, which was in favour of the applicants’ case up to the point of considering the prior art.

1.5              There was a close similarity between the garment in question in this proceeding and the dresses in Review Australia Pty Ltd v New Cover Group Pty Ltd [2008] FCA 1589. The fact that there was no infringement in this proceeding but infringements in the New Cover proceeding, and taking into account the state of discovery, the limited prior art relied upon at the time of the offer and Redberry’s prior instances of copying, it was not unreasonable for the applicants to have considered that Redberry’s garments were infringing.

1.6              To have accepted Redberry’s offer of compromise at that time would have required the applicants to accept, in effect, that a person in China had independently conceived a design that was startling similar to the applicants’ design and at the same time when another retailer – New Cover Group Pty Ltd – was also selling a dress remarkably similar to the applicants’ design.  It should be borne in mind that the Court made an award of $85,000 in damages against New Cover.

1.7              The prior art relied on by Redberry at the time of the offer was limited to 9 items, although supplemented to an eventual tally of 120 items. The case that the applicants were required to meet on the cross-claim (and indirectly on the claim to the extent that the cross-claim fed into the defence of the claim) was not known at the time of the offer.

1.8              It was reasonable for the applicants to believe that Redberry, as a wholesaler, would have imported substantially larger quantities than 133 garments and, therefore, the sum offered to have understated the amount of damages that might be obtained.  

1.9              The applicants could not have predicted that the Court would accept Mr Liu’s evidence.

1.10          The issue of whether Redberry could be regarded as the maker of infringing garments if it commissioned their manufacture outside Australia was not pleaded in the defence and was raised by the Court when judgment was reserved.

1.11          Redberry’s letter of 21 August 2007 did not indicate with sufficient particularity how and why the applicants’ case must fail and why the amount offered was such that its refusal would be unreasonable.

1.12          The applicants’ counter-offer in its letter dated 31 August 2007 “cannot sensibly bear on the question of whether their rejection of [Redberry’s] offer was unreasonable or imprudent, and should therefore be disregarded”.

14                  Redberry’s primary submission is that the applicants should pay the whole of Redberry’s costs on an indemnity basis.  Redberry makes the following submissions in support of this costs order:

1.                  The applicants summarily rejected the two settlement offers made by Redberry. Redberry’s first offer of compromise was commercially reasonable and its rejection was unreasonable in light of both the legal position of the first applicant and commercial interest of the Review group more generally.

2.                  It is clear from the applicants’ counter-offers and their conduct in the proceeding generally that the bulk of the damages claim was seen as being additional damages under s 75(3) of the Designs Act based on Redberry’s alleged previous history in copying garments designed and created by others. Therefore, although it may be said that the applicants were not in a position to quantify their claims until the full extent of infringement was verified through discovery, it is fair to assume that confirmation of the extent of the alleged infringement was not the reason for rejection of Redberry’s offers.

3.                  The applicants’ claim, which rested in a claim for additional damages, was completely misconceived. This is illustrated by the rejection of the evidence of past alleged copying as being irrelevant and the finding that Redberry satisfied s 75(2)(b) of the Designs Act.

4.                  The applicants’ position was unreasonable from the beginning.  To pursue a claim for $200,000 in general damages and $400,000 in additional damages when the alleged infringement constituted the admitted importation and sale at $20 each of 133 garments is of itself unusual.  To do so in the face of reasonable commercial offers of settlement is unreasonable.

5.                  The proceeding was commenced by the wrong party. In particular, Review 2 had already transferred the Review Design to Review Australia on 28 February 2007 when the proceeding was issued on 10 April 2007. Thus, the claim was bound to fail at least until Review Australia was joined as a party on 10 August 2007.

6.                  The conduct of the applicants in seeking to re-open and re-litigate past claims involving unproved allegations of infringement, which were both irrelevant and subject to written terms of settlement and releases. As a result, a substantial amount of time was spent on these irrelevant matters.

7.                  The fact that the proceeding was one of the first under the new Designs Act was no justification in rejecting the reasonable commercial offers of settlement.

15                  Furthermore, Redberry relied on the terms of the offer of compromise of 21 August 2007 and O 23 of the Rules in support of its claim for indemnity costs in respect of the claim and cross-claim. In relation to the costs of the claim, Redberry submitted that by virtue of O 23 r 11(6) of the Rules, it was entitled to:

1.                  its party/party costs on the claim to 11am on 22 August 2007; and

2.                  its costs on the claim from 11am on 22 August 2007 onwards on an indemnity basis.

16                  Subsequently, Redberry filed additional costs submission, with leave, to address the fact that, as the Court noted, O 23 r 11(6) did not commence operation until 2 August 2008.  In these submissions, Redberry submitted that, if the Court were bound to follow Dukemaster Pty Ltd v Bluehive Pty Ltd [2003] FCAFC 1, in order for an award of indemnity costs to be made, the test was whether it was imprudent or unreasonable to reject the offer of 21 August 2007.

17                  In relation to the costs of the cross-claim, Redberry submitted that it was to be treated as an “applicant” for the purposes of O 23 of the Rules: see O 5 r 11 and O 23 r 1 (where an “applicant” is defined to include a “cross-claimant” and a “respondent” is defined to include a “cross-respondent”). Accordingly, in reliance on O 23 r 11(4) of the Rules, Redberry submitted that it was entitled to:

1.                  its party/party costs on the cross-claim up to 21 August 2007; and

2.                  its costs on the cross-claim from 22 August 2007 onwards on an indemnity basis.

consideration

18                  The parties agreed that, in proceedings such as this, the Court would ordinarily order that the unsuccessful party or parties pay the costs of successful party or parties on the claim and cross-claim respectively: see, e.g., Global Brand Marketing Inc v YD Pty Ltd (2008) 76 IPR 161. Thus, ordinarily, the applicants would pay Redberry’s costs of the application and Redberry would pay the cross-respondents’ costs of the cross-claim.  In this case, however, the position is complicated by Redberry’s offers of settlement.  

19                  I turn first to Redberry’s latest offer of compromise of 21 August 2007, which invoked O 23 of the Rules.  The offer complied with the formal requirements of the order, which are set out in O 23 r 3.  The offer also provided a time for acceptance in accordance with O 23 r 5(3).

20                  Currently, O 23 r 11(6) of the Rules applies “[i]f … an offer is made by a respondent and not accepted by the applicant; and … the respondent obtains an order or judgment on the claim to which the offer relates as favourable to the respondent, or more favourable to the respondent, than the terms of the offer”.  If applicable, this provision creates a presumptive entitlement in the respondent to indemnity costs after 11 am on the day after the offer was made.  This provision is, however, a comparatively new one, having commenced operation only on 2 August 2008.  The provision cannot apply to Redberry’s offer of compromise, which was made in the preceding year, in August 2007: see Federal Court of Australia Act 1976 (Cth), s 59(4) and the Legislative Instruments Act 2003 (Cth), s 12(2)(b).

21                  As at August 2007, the only provision in connection with costs following an applicant’s rejection of a respondent’s offer of compromise was O 23 r 11(5), which deals with the position “[i]f … an offer is made by a respondent and not accepted by the applicant; and … the applicant obtains judgment on the claim to which the offer relates not more favourable than the terms of the offer”.  If applicable, this provision also creates a presumptive entitlement in the respondent to indemnity costs.  The provision cannot apply to Redberry’s offer of compromise, however, because the applicant not only rejected the respondent’s offer but was wholly unsuccessful in the claim.  In this circumstance, O 23 r 11(5) of the Rules has no application:  see Coshott v Learoyd [1999] FCA 276 at [37] per Wilcox J; Dukemaster [2003] FCAFC 1 at [6] per Sundberg and Emmett JJ; and Seven Network Ltd v News Ltd (2007) 244 ALR 374 at [32] per Sackville J.

22                  Further, Redberry cannot rely on the terms of O 23 r 11(4) in relation to the applicants’ rejection of the offer to compromise its cross-claim.  Order 23 r 11(4) applies “[i]f … an offer is made by [cross-claimant] and not accepted by the [cross-respondent]; and … the [cross-claimant] obtains judgment on the claim to which the offer relates not less favourable than the terms of the offer”.  Although it gives rise to a presumptive entitlement to indemnity costs in favour of the offeror in the circumstances to which it applies, it cannot apply here because the cross-claimant’s cross-claim was wholly unsuccessful. 

23                  The authorities recognise that the making of an offer outside O 23 by a respondent, which is rejected by an applicant who turns out to be wholly unsuccessful, is a matter to be taken into account in determining the nature of the costs order to be made.  In such a case, a respondent claiming indemnity costs must show that the rejection of the offer of compromise was imprudent or unreasonable: see Dukemaster [2003] FCAFC 1 at [7]; University of Western Australia v Gray (No 21) [2008] FCA 1056 at [36] per French J; and Seven Network 244 ALR 374 at [39] and [51].  Where a cross-claimant makes an offer, which is rejected by a cross-respondent, and the cross-claimant ultimately fails, the position is quite different since there is little, if any, basis for saying that the rejection of the offer of compromise was imprudent and unreasonable.

24                  The question is, therefore, whether or not it can be said that the applicants acted imprudently or unreasonably in rejecting Redberry’s offer of compromise in relation to the applicants’ claim.   Plainly enough, even in the present circumstances, the mere refusal of an offer of compromise is not sufficient to satisfy this test: see John S Hayes & Associates Pty Ltd v Kimberly-Clark Australia Pty Ltd (1994) 52 FCR 201 at 206 per Hill J and Dukemaster [2003] FCAFC 1 at [7].  Although the refusal of the offer is a factor to take into account, it is not determinative on the question of indemnity costs.  As Sackville J said in Seven Network 244 ALR 374 at [65], “the court is required to consider whether the rejection of the offer of compromise was unreasonable by considering, among any other relevant circumstances, the strengths and weaknesses of the applicants’ case, looking at the claim prospectively at the time the offer was made” (emphasis original). 

25                  The following factors support the conclusion that the applicants’ rejection was not imprudent or unreasonable.

1.                  The Designs Act introduced a comparatively new statutory framework and, as at August 2007, there were few decisions under the Act concerning the issues arising in this case.  The authorities, therefore, provided limited guidance as to the likely outcome.    

2.                  The applicants’ claim was tenable.  It was not unreasonable.  There were what I referred to as “clear similarities between the Review Design and the design embodied in the Redberry garment”; and there was also the direction in s 19(1) of the Designs Act to be considered.  Of course, the directions in ss 19(2)(a), (c) and (d), 19(3) and (4) had to be borne in mind and standard of the informed user applied.  The application of this standard depended, however, on the evidence adduced at trial, including the evidence of Ms Mudie.  Her affidavit had not been filed and served – let alone read – at the time Redberry made its offer.  The prior art, which was significant in this case, was also not fully explored until the trial.   As at August 2007, the prior art relied on by Redberry was apparently limited to between 9 to 12 items: see the particulars under [7] to the Amended Defence and Cross Claim filed on 17 August 2007.  Many more items formed part of the prior art relied on at trial.  Further, had the applicants been successful, they might ordinarily have expected damages or an account of profits, at their election.  Had they been successful, they might reasonably have expected to recover rather more than the amount Redberry offered.  I doubt that the difficulties the applicants faced at trial in connection with their claims for general damages and additional damages would have been apparent to them at the time of            the rejection of the offer of compromise.  In one sense, these difficulties were the product of a relatively new legislative regime as applied to the fashion industry, most of which became manifest at trial.    

3.                  As I acknowledged in my earlier reasons for judgment, had the applicants’ claim for infringement been made out, a question would have arisen as to whether Redberry could successfully invoke s 75(2)(b) of the Designs Act.   Consideration of this issue led to consideration of evidence adduced by Redberry, including the evidence of Mr Liu.  It may be recalled that, although I ultimately accepted his evidence as essentially truthful, it is correct to say, as the applicants did, that there were some unexplained deficiencies in his account.  His evidence was not available to the             applicants at the time of the offer and hence it is not open to the applicants to rely on these deficiencies in explaining their rejection of the offer.  I accept, however, that, even at time of offer, the applicants might reasonably have perceived that there were aspects of Redberry’s case that tended against accepting Redberry’s account of things and that it would have been difficult for them then to have predicted how these matters might turn out at the trial.

4.                  I accept that neither the applicants nor Redberry raised the issue as to the effect of   commissioning manufacture outside of Australia.

5.                  Further, neither the offer of compromise nor the letter accompanying it contained a statement of reasons as to why Redberry believed that the application would fail: see Dukemaster [2003] FCAFC 1 at [8].  As Sundberg and Emmett JJ there said:

Whatever the position may be with an offer made under Order 23, a Calderbank offer, or any offer of compromise outside the regime in Order 23, is unlikely to serve its purpose of attracting an indemnity award of costs if the rejecting applicant fails to recover more than what is ordered, unless the offer is a reasonable one and contains a statement of the reasons the offeror maintains that the application will fail.

26                  I do not consider that there are countervailing matters that outweigh these considerations.  Accordingly, viewed as at 31 August 2007, it was not imprudent and unreasonable for the applicants to reject Redberry’s offer of compromise so far as the applicants’ claim was concerned.

27                  It may follow from this discussion that the rejection of Redberry’s earlier settlement offer also provides no basis for an award of indemnity costs.  Further, as at 1 June 2007, when this earlier offer was made, the applicants knew comparatively little about Redberry’s case.  The applicants had Redberry’s defence but, as they noted in their letter rejecting the offer, as at 8 June 2007, they did not have the respondent’s verified list of documents or copies of documents showing that only 133 of the allegedly infringing garments had been imported.   The letter containing the offer did not contain any statement of reasons as to why Redberry believed that the application would fail.

28                  Redberry relied on the fact that Review Australia was not joined as a party to the proceeding until 10 August 2007.  The omission of Review Australia was clearly an oversight, which was capable of ready amendment without prejudice to the parties.  This omission was of little moment at the time and it was remedied. It provides little support for Redberry’s claim for indemnity costs.

29                  Relying on the accepted propositions that the undue prolongation of a case by groundless contentions and other misconduct that improperly wastes time and increases expenses may attract an award of indemnity costs, Redberry also made much of the applicants’ allegations that Redberry was essentially a copyist.  Redberry submitted that the applicants’ pursuit of these allegations wasted a considerable amount of Court time and substantially increased the parties’ costs.  

30                  The applicants were unsuccessful on this aspect of their case: see Redberry [2008] FCA 1588 at [85]-[87].  By itself this does not establish misconduct on their part; and nor does it establish that they sought to advance “groundless contentions” in the sense used in the authorities: see Colgate-Palmolive Company v Cussons Pty Ltd (1993) 46 FCR 225 at 233 per Sheppard J.  The applicants pressed these arguments in good faith.  The arguments were not so untenable that it could be said that the applicants acted unreasonably in pressing them.  Much of the applicants’ conduct in this regard is attributable to the newness of the statutory regime, especially in its application to the fashion industry.  In the circumstances, I would not take the view that the applicants’ conduct with regard to this aspect of their case was so unreasonable as to justify an award of indemnity costs: see Hamod v New South Wales (2002) 188 ALR 659 at [20] per Gray J, with whom Carr and Goldberg JJ agreed.

31                  With the benefit of hindsight, some of the applicants’ assumptions about their position proved misplaced, and the quantum of their claim to pecuniary relief – should they prove to be successful – now seems a little high. Hindsight is, however, an unreliable guide in such an application as this.  Having regard to all the circumstances of the case, this is not an occasion for the award of indemnity costs against the unsuccessful parties.  I would not regard the conduct of the applicants’ case as relevantly unreasonable.  Accordingly, I would make the usual order, given the outcome of the proceeding.  For the reasons stated, I would order that: (1) the applicants pay the respondent’s costs of the application; and (2) the cross-claimant pay the cross-respondents’ costs of the cross-claim.

Associate:

Dated:         28 November 2008