Federal Court of Australia

Vector Corrosion Technologies Limited v E-Chem Technologies Ltd [2022] FCA 519

ORDERS

THE COURT ORDERS THAT:

1.    Order 3 of the orders made on 19 May 2021 be vacated.

2.    The applicant/cross-respondent pay the first to fifth respondents’/cross-claimants’ costs of the proceeding and the cross-claim:

(a)    on a party-party basis up to and including 25 June 2019; and

(b)    on an indemnity basis on and from 26 June 2019.

Note:    Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

ORDERS

THE COURT ORDERS THAT:

1.    The respondents’ costs of the proceeding in order 2 of the orders made on 9 March 2022 (order 2) exclude the respondents’ costs of seeking to vary order 2 to claim indemnity costs.

2.    The respondents pay the applicant’s costs of seeking to vary order 2, as agreed or taxed.

Note:    Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

REASONS FOR JUDGMENT

JAGOT J:

1.    Background

1    In Vector Corrosion Technologies Limited v E-Chem Technologies Ltd [2022] FCA 188 (the principal judgment or PJ) I made orders including an order dismissing Vector’s amended originating application in proceeding QUD 117/2019.

2    These reasons for judgment are to be read with the principal judgment. Terms defined in the principal judgment have the same meaning in these reasons for judgment.

3    By its amended originating application in proceeding QUD117/2019, Vector had claimed sole or joint entitlement to the E-Chem patent. In the principal judgment I dismissed Vector’s claims and made an order for costs against Vector, subject to a regime permitting the parties to apply to vary the costs order. The respondents now seek indemnity costs of the QUD117/2019 proceeding, referred to as the entitlement proceeding.

4    In the principal judgment at [345] I referred to Vector also having commenced proceeding QUD649/2018 alleging that the respondents and related companies had infringed Vector’s Australian high voltage anode patent and the respondents and E-Chem’s related company, Duoguard Australia Pty Ltd, having cross-claimed for revocation of the asserted claims of Vector’s Australian high voltage anode patent. Proceeding QUD649/2018 was resolved by consent orders made on 19 May 2021 dismissing Vector’s infringement claims, revoking the asserted claims of Vector’s Australian high voltage anode patent, and otherwise dismissing Duoguard’s cross-claim. As permitted by order 4 of the orders made on 19 May 2021, the respondents now seek indemnity costs of proceeding QUD649/2018, referred to as the infringement proceeding.

5    I have concluded that:

(1)    the respondents’ claim for indemnity costs of the entitlement proceeding should be rejected; and

(2)    the respondents’ claim for indemnity costs of the infringement proceeding should be accepted having regard to an offer of compromise and a Calderbank offer made in that proceeding.

2.    Respondents’ submissions

6    According to the respondents, Vector instituted and prosecuted both sets of proceedings in an attempt to cause the respondents’ business to fold under the substantial costs of the litigation. They said that this inference should be drawn from Mr Whitmore’s threat in January 2011 that if the respondents did not pay Vector a licence fee to use E-Chem’s technology, the respondents risked incurring “the high costs of litigation in faraway places like Australia”, as was noted at PJ [343]. They said that this inference is also supported by the following circumstances.

7    In the principal judgment at [385] I found that Vector had engaged in extreme and unreasonable delay in bringing its entitlement claims in order to maximise its commercial advantage against the respondents. The same conclusions would apply to the infringement proceeding. The respondents say that it should be inferred from the delay that Vector knew its claim in the entitlement proceeding was weak. The delay also increased the costs of the proceedings due to the extended period of relevance and the need for the respondents to refresh their memories by reference to documentary material dating back 18 years. The delay may be inferred to have contributed to the loss of documents such as the advice received by Fosroc on lack of entitlement to the E-Chem patent, a fact which I noted at PJ [315].

8    The respondents noted that in the principal judgment at [385] I said that if Vector had succeeded in the entitlement proceeding then, by its unreasonable and inordinate delay, Vector would obtain a substantial and unjustified windfall benefiting from the time, money and effort of the respondents (at no charge to Vector) and the resulting prejudice to the respondents borders on the incalculable. The respondents therefore were entitled to defend the proceeding robustly and should be fully compensated for doing so.

9    The respondents submitted that Vector did not have a reasonable basis upon which to commence the entitlement proceeding. The case ultimately pursued did not emerge until Vector filed a second further amended statement of claim. The second further amended statement of claim brought such a substantial change to Vector’s case that the respondents should have all of their costs up to the date of filing that second further amended statement of claim on an indemnity basis (and not just the costs thrown away by reason of the amendments as per order 3 of the orders of 15 September 2020).

10    The respondents submitted that Vector never acquired any potentially relevant rights from Fosroc to support the entitlement proceeding: PJ [362]–[373]. The respondents say that by bringing proceedings based on its assertion of a right it never obtained, Vector’s “deficiency is of a fundamental nature and is of an entirely different character to a party bringing proceedings and merely failing to make out its claim”. Vector must be taken to have known of this deficiency by reason of the subsequent agreements it procured from Fosroc in 2019. Vector also refused to provide relevant parts of the agreements between it and Fosroc under which Fosroc purportedly assigned its rights to the E-Chem patent to Vector, further evidencing the weakness of its position.

11    In the third further amended statement of claim in the entitlement proceeding, Vector abandoned its claims of misuse of confidential information. Those claims were hopeless as they depended on the proposition that the E-Chem invention used information in the Fosroc 2004 application, a proposition the Court rejected: PJ [254], [280] and [283].

12    Vector’s case in the entitlement proceeding continued to change during the hearing including as follows:

(1)    on 21 May 2021, only four weeks before the trial commenced, Vector informed the respondents that Mr Sergi and Mr Zakers would not be called. This led to wasted costs associated with evidence prepared in response to these witnesses;

(2)    on 27 June 2021, three days before the trial commenced, Vector informed the respondents that Mr Simpson would not be called. This led to further wasted costs associated with evidence prepared in response to his evidence; and

(3)    Vector prepared extensive affidavit evidence from an independent expert, Dr Lambert (comprising two lengthy affidavits in respect of the entitlement proceeding), had him participate in joint conferrals with the respondents’ independent expert witnesses (over some weeks) and prepare a joint expert report and then, four weeks before the hearing, decided not to call him. This led to extensive wasted costs in the preparation of responsive affidavit evidence by Drs John and Ackland. The basis for Vector’s decision not to call Dr Lambert is not difficult to discern. Dr Lambert substantially agreed with Drs John and Ackland about what the inventive concept of the Fosroc 2004 application was, what the inventive concept of the E-Chem patent was, and that they were different.

13    Vector also engaged in extensive criticism of the respondents’ witnesses in the entitlement proceeding, and their recollection of the relevant events from 2003–2006. That criticism was unfounded, but also cynical, given that Vector avoided exposing any of its witnesses from the relevant period to cross-examination at all.

14    The infringement proceeding depended on the validity of Vector’s asserted claims of its Australian high voltage anode patent. From May 2012 Vector was aware that the respondents contended the asserted claims of Vector’s Australian high voltage anode patent were invalid insofar as they depended on a “two-step” process because this was not fairly based on the specification as filed. The respondents consistently maintained this position.

15    Vector informed the respondents that it did not intend to prosecute the infringement proceeding on 17 May 2021, less than four weeks before the proposed hearing. It did so only after receipt of the joint expert report in which the experts, including Vector’s expert, Dr Lambert, agreed that the “Fosroc 2004 Application does not describe or disclose a method other than one which involves a sacrificial anode assembly”. That is, it did not disclose a “two-step” process. Consistent with this, in the principal judgment at [254] the Court found that the relevant priority document, the Fosroc 2004 application, did not involve: (a) use of a sacrificial anode in two phases, (b) production of a higher current in the first phase mode of use of the anode, or (c) production of a lower current in the second phase mode of use of the anode. Accordingly, Vector’s case in the infringement proceeding (including its defence of the revocation cross-claim) was hopeless.

16    Further, the alleged infringing Duoguard Hybrid Anode System did not include an integer of Vector’s Australian high voltage anode patent, relevantly being “wherein the power supply is otherwise isolated from the environment such that current can only flow into and out of the power supply via the sacrificial anode and the connector”. Despite being put on notice of this by the respondents in a letter of 24 June 2019 and the respondents’ expert evidence (as well as the particulars of invalidity) Vector briefed its expert with a wrong version of the relevant claim which Vector had sought but had not been granted (“wherein the power supply is otherwise isolated from the environment such that the current can only flow into and out of the power supply”). The error was not corrected until the preparation of the joint expert report when Vector’s expert, Dr Lambert, agreed, by reference to the correct claim language, that “the Duoguard Hybrid Anode System allows for some current to discharge from the titanium connector of the anode into the concrete and hence does not fulfil the above statement”.

17    Vector asserted eight patent claims against the respondents: five independent claims (being 14, 27, 28, 29, and 31) and three dependent claims (being 18, 19, and 24). None of the additional independent claims added any benefit over claim 14. Vector should have confined the asserted claims to reduce unnecessary costs.

18    Accordingly, the respondents should have their costs of the infringement proceeding on an indemnity basis.

19    Alternatively, in the infringement proceeding, the respondents rely on an offer of compromise pursuant to r 25.01 of the Federal Court Rules 2011 (Cth) (the Federal Court Rules) and a Calderbank letter of the same date to settle the infringement proceeding to support a claim for indemnity costs on and after 11 am on 26 June 2019. The respondents contend that Vector unreasonably refused both offers. Relevantly:

(1)    both offers were open for acceptance until 5pm on 9 July 2019, being 15 days after service of those offers;

(2)    Vector rejected both offers on 28 June 2019;

(3)    Vector’s prospects of success in relation to infringement and invalidity, assessed as at 24 June 2019, were low. The Calderbank letter identified the missing integer from the Duoguard Hybrid Anode System (see above) and the bases for the asserted claims being invalid (see above relating to the lack of any fair basis for the two-step claims);

(4)    Mr Whitmore was a person skilled in the art and “a sophisticated businessperson with a clear understanding of how patent rights can operate to Vector’s advantage”: PJ [379]. Accordingly, Vector was well-placed to assess the reasonableness of the offers when they were made;

(5)    Vector had many years to consider its position on infringement and invalidity prior to commencing the infringement proceeding;

(6)    the validity of the claims to the equivalent European patent (which were in relevantly similar terms to the asserted claims) was rejected on 6 May 2011 because of the impermissible introduction of the two-step process; and

(7)    the Calderbank letter was a good deal for Vector. As set out in the letter (summarised in the respondents’ submissions):

the Respondents’ total costs as at 24 June 2019 were approximately $146,000 (excluding the costs of the security for costs application). A significant portion of those costs, $131 000, had been substantiated in the first affidavit of Benjamin Lee Miller dated 2 May 2019 filed in support of the Respondents’ security for costs application. Further, Vector was aware, by reason of Mr Miller’s security for costs affidavit that Mr Miller had estimated the Respondents of [sic] costs for Infringement/Revocation Proceeding and the Entitlement Proceeding (based on the information then available to the Respondents and on Vector’s pleaded cases at that time) to be in the range of $1,250,000 (plus GST) and $1,400,000 (plus GST). Had Vector accepted the Offers, it would have avoided having to pay any of those costs, and been permitted to keep its invalid claims, which have now been revoked.

3.    Vector’s submissions

20    Vector submitted that in respect of the entitlement proceeding, no inference could be drawn that it instituted and prosecuted the proceedings in an attempt to cause the respondents’ business to fold under the substantial costs of the litigation. Mr Whitmore’s statement about the negotiation of a licence agreement avoiding the high costs of litigation was accurate and reasonable.

21    According to Vector, while Vector could have brought the entitlement proceeding earlier, it pursued the same objective by seeking to amend the claims to Vector’s Australian high voltage anode patent and the infringement proceeding commenced in September 2018.

22    Further, as Mr Whitmore has explained, part of the reason for the delay was the ongoing settlement discussions, interrupted by two proceedings in respect of amendments that Vector sought to the claims of its Australian high voltage anode patent.

23    Further again, Vector said:

…many cases will involve delay of some degree. The limitation period for contractual and tortious claims allows cases to be brought six years after a claim arises (and for tort this can be from when damage is suffered, which may be well after the breach occurred). Delay of eight (or ten) years is only moderately longer than six years, but is also in a context where the Act does not include any limitation period (cf section 120(4) for infringement actions).

24    Vector submitted that it had a reasonable basis upon which to advance its entitlement claims, both as initially pleaded and as considered in the principal judgment. This was the same basis upon which Vector obtained the amendments to its Australian high voltage anode patent claims, relying on the priority document, the Fosroc 2004 application.

25    According to Vector, its case in the entitlement proceeding did not fundamentally change. Further, Vector’s principal factual witness for its entitlement case, Mr Robert Viles, died during late 2020, shortly before the original hearing date. That adversely impacted Vector’s case.

26    Further, the original hearing dates of the entitlement proceeding were vacated because the respondents’ affidavits were late and, once received, were too voluminous for Vector to deal with before the hearing.

27    In the face of criticism from the respondents as to the adequacy of the sale and purchase agreement(s) in achieving an assignment of rights, Vector attempted to improve its position in the entitlement proceeding. Vector submitted that this conduct is not in any way improper.

28    Vector noted that it did not pursue all of the pleaded claims in the entitlement proceeding, but will be liable for costs associated with them in any event, as part of costs of the proceeding. A party should not be discouraged from streamlining and refining its case by being too readily subjected to indemnity costs orders in respect of any such arguments. The respondents also abandoned pleaded defences that it advanced in its written and oral opening submissions (including equitable estoppel, proprietary estoppel, promissory estoppel, waiver, election and laches). Indemnity costs should only be ordered if it can be readily shown that the abandoned claims were hopeless.

29    Further again, Vector’s decision not to call certain witnesses shortened the hearing of the entitlement proceeding and resulted in savings for the parties. It is not conduct that was any way improper.

30    Overall, Vector said that in the context of the entitlement proceeding:

Vector advanced a case for entitlement to the E-Chem Patent that was not accepted by the Court, once it had undertaken the necessary analysis and evaluation of the evidence, including following cross-examination, and weighed up the competing submissions. In particular, this involved assessing how the inventive concept in the E-Chem Patent should be characterised, and whether the nature of the work undertaken at Fosroc by the named inventors shortly beforehand was sufficiently closely connected to that inventive concept such that an entitlement claim arose (either as owner, or as co-owner).

While Vector refined and narrowed its case, there was nothing about that conduct, or the manner in which it advanced its case, that should be censured by an indemnity costs order in order to do justice between the parties.

31    According to Vector, in respect of the infringement proceeding, there also should be no indemnity costs orders.

32    Vector noted that hindsight must be avoided.

33    Vector obtained the amendments to its Australian high voltage anode patent claims, relying on the priority document, the Fosroc 2004 application. As such, Vector submitted that it was reasonably arguable that the 2004 Fosroc application disclosed the two steps as described in claim 14, notwithstanding that they were disclosed in the context of those steps occurring within the sacrificial anode assembly described in that application.

34    According to Vector, it was reasonably arguable that the integer (“wherein the power supply is otherwise isolated from the environment such that current can only flow into and out of the power supply via the sacrificial anode and the connector”) was present in the Duoguard Hybrid Anode System as Dr Lambert’s view was that while a “very small current could be discharged from the titanium connecting wire, this assumes the wire is uninsulated and has not formed a protective oxide film”. Further, while Dr Lambert had initially been given the incorrect form of claim 14, it can be seen from his analysis that nothing turned on the word “the”. Dr Lambert’s evidence was the basis for Vector’s case. It was not hopeless.

35    Vector’s assertion of eight patent claims was not excessive, and according to Vector is a modest number of claims to be asserted in a patent infringement case.

36    Vector submitted that its rejection of the offers from the respondents in the infringement proceeding was not unreasonable at that time as:

(1)    the offers were served on 24 June 2019 after each party had served its first round of evidence, but before they had prepared and filed their evidence in answer;

(2)    the offers were made on a “walk away” basis which remains relevant to the assessment of the reasonableness of Vector’s rejection of them;

(3)    the de minimis current point that was addressed above in relation to infringement and referred to in the Calderbank offer was far from hopeless and, at that time, the respondents had not filed their evidence in this regard;

(4)    the respondents’ invalidity arguments were not bound to succeed and, at the time of the offers, Vector was not bound to have reached that conclusion acting reasonably; and

(5)    the fact that one party accurately predicts an adverse outcome of a proceeding and notifies that position does not of itself make the pursuit of that unsuccessful claim unreasonable.

4.    Consideration

37    The relevant principles were not in dispute between the parties.

38    The Court has a broad power to award costs in proceedings, including indemnity costs, under s 43 of the Federal Court of Australia Act 1976 (Cth). While the purpose of an indemnity costs order remains compensatory, the basis for such an order is a conclusion that the unreasonable conduct of a party (be it bringing or persisting in a case the party should have known was hopeless, causing unnecessary costs to be incurred, prolonging a hearing, bringing or persisting in a case for an ulterior motive, or otherwise) should result in full compensation to the other party for the costs incurred.

39    A detailed explanation of the principles to be applied may be found in Australian Competition and Consumer Commission v Colgate-Palmolive Pty Ltd (No 5) [2021] FCA 246; (2021) 151 ACSR 26 at [6]–[12]. The reasoning in Palmer v Premiair Aviation Maintenance Pty Ltd [2022] FCA 185 does not establish any new or different principle. In that case, the lawyer’s explanation for the discontinuance of the proceeding supported an inference that the applicant should have known the proceeding was doomed.

40    I am not persuaded that I should infer that Vector commenced and prosecuted the proceedings for the ulterior purpose of causing the respondents’ business to fold under the substantial costs of the litigation. In particular:

(1)    Mr Whitmore’s threat in January 2011 that if the respondents did not pay Vector a licence fee the respondents risked incurring the “the high costs of litigation in faraway places like Australia” does not support the inference the respondents propose. Drawing attention to potential litigation costs is a legitimate negotiating tactic. The relevant issue is not Mr Whitmore’s negotiating tactics but whether it might be inferred that he knew or reasonably ought to have known Vector’s claims were hopeless; and

(2)    I am unable to infer from the mere fact of Vector’s unreasonable delay in commencing the proceedings that Vector knew its claims were weak. Nor am I able to infer that the delay after 2011 significantly increased the cost of the proceedings given that the most important time period was 2003–2006.

41    The respondents were entitled to defend the proceedings robustly, but accepting that fact does not mean that Vector’s conduct unreasonably subjected the respondents to the costs of the litigation.

42    The changes in Vector’s case in the entitlement proceeding over time are not as fundamental as the respondents contend. The essence of the case, that the respondents came up with the inventive concept of the E-Chem patent while employed by Fosroc, was always the same. The evidentiary basis for that assertion developed and changed over time, but it is not apparent that the respondents’ costs before the second further amended statement of claim were all thrown away or unreasonably incurred.

43    Vector’s attempts to shore up its rights by further agreements with Fosroc do not prove that Vector knew its claims were hopeless. I infer that the further agreements were attempts to perfect that which Vector believed had been achieved by the initial agreements.

44    The fact that I found that Vector had never acquired any potentially relevant rights from Fosroc does not have the significance the respondents propose. It is a finding consequential upon my conclusions that Fosroc itself held no rights enabling it to claim priority for its own patents over the E-Chem patent. The assertion that Vector must be taken to have known of this deficiency by reason of the subsequent agreements it procured from Fosroc in 2019 is not self-evident. As noted, I infer those further agreements were an attempt to perfect that which Vector believed (wrongly) had already been achieved. A wrong belief does not call for indemnity costs unless the party holding that belief knew or reasonably should have known it to be wrong.

45    The wrangling about the production of all relevant parts of the agreements said to give rise to this assignment of rights does not support an inference that Vector thought that its case was hopeless. While Vector ought not to have cavilled with the production of all parts of the relevant documents, that kind of dispute is an ordinary part of litigation.

46    The abandonment of the misuse of confidential information claims should not result in indemnity costs unless the claims should never have been made in the first place. The confidential information claims were based on the same essential case as all of the other claims in the entitlement proceeding, that is, that the respondents came up with the inventive concept of the E-Chem patent while employed by Fosroc.

47    Vector did abandon all of its proposed witnesses close to the hearing other than Mr Whitmore. No doubt these were forensic decisions reflecting a view that the other witnesses did not assist Vector’s case. However, it is not possible to infer that the filing of that evidence or reliance on it to the point of abandonment involved unreasonable conduct on Vector’s part. The decision not to rely on those witnesses also must have considerably shortened the length of the hearing. The Court would not wish to discourage a party from making sensible forensic decisions that certain evidence adds nothing. An order for indemnity costs is on the cards only if, acting reasonably, the evidence should not have been filed at all or should have been abandoned at an earlier point in time, before the other party incurred costs in answering that evidence. I cannot so conclude.

48    A separate issue is whether, having made those forensic decisions, it was then unreasonable for Vector to continue the entitlement proceeding. That depends partly on the viability of the entitlement claims from the outset (discussed below).

49    Vector did extensively cross-examine the respondents in the entitlement proceeding. I do not agree that this was a cynical exercise. While judges are probably predisposed to consider that all cross-examinations could be materially shorter, I am not persuaded that the cross-examination in the entitlement proceeding ventured into the undue or unreasonable in terms of length.

50    The issue remains whether it should be inferred that Mr Whitmore (the directing mind of Vector) knew or reasonably should have known Vector’s claims in the entitlement proceeding were hopeless either from the outset or at some time before the hearing, for example, when Vector decided not to call witnesses other than Mr Whitmore.

51    In Colgate-Palmolive Wigney J identified at [11] that cases concerning indemnity costs:

use expressions which suggest a high degree of certainty concerning the deficiencies in the losing party’s case. It would appear not to be enough that the losing party’s case was simply weak or tenuous… the deficiencies must be sufficiently manifest and clear such that it can be inferred that the losing party would or should have appreciated them when the action was commenced or continued, at least if they had given proper consideration to, or been properly advised about, the merits of their case.

52    The assessment as to whether a case can be said to “have no chance of success” is to be made without the benefit of hindsight: Colgate-Palmolive at [12].

53    The reasons a case must be more than simply weak or tenuous to justify an indemnity costs order include that: (a) access to the courts is not to be discouraged, (b) if a weak or tenuous case fails, the usual order for costs is seen as sufficient compensation for the successful party, (c) experience shows that apparently weak cases can succeed, (d) the law develops by reason of all kinds of cases including the apparently weak case, and (e) there is a category difference between a weak case (which may improve over the course of a hearing) and a doomed case (subject to a manifest deficiency incapable of remedy). For all these reasons (and probably more) bringing and maintaining an apparently weak, but nevertheless arguable, case to the courts is not treated as unreasonable conduct.

54    I consider that the entitlement proceeding falls into this category. It was never a good case, but it was arguable. Even when Vector decided to call only Mr Whitmore, the case remained arguable. The case did not have a manifest flaw which doomed it to fail. As the evidence of the respondents emerged and remained unshaken throughout cross-examination, Vector’s case became tenuous, but it was not unreasonable for Vector to test the respondents’ evidence.

55    For these reasons, I am unable to accept that Vector’s conduct in the entitlement proceeding involves the kind of unreasonableness sounding in indemnity costs, despite my ready acceptance in the principal judgment at [174] that Dr Glass’s feeling vexed by Vector was understandable. It follows that no amendment should be made to the usual order as to costs made on 9 March 2022 in the entitlement proceeding. The respondents’ costs in the entitlement proceeding also should not include the costs of seeking to vary order 2 to obtain an indemnity costs order. Rather, Vector should have the benefit of a costs order in its favour to that extent on the usual basis.

56    Leaving aside the offers, I hold similar views about the infringement proceeding. The case was arguable, even if weak. It became more tenuous after the joint expert report was filed, but that prompted the discontinuance of the infringement proceeding and Vector consenting to revocation of the asserted claims to the extent they relied on the asserted two-step process.

57    While Vector always had the information enabling it to make the same assessment (that the amended claims of its high voltage patent were invalid), that is not the relevant question. The question is whether Vector’s assessment, that it could maintain the validity of the asserted claims amended to include the two-step process, was unreasonable. The fact that Vector obtained the amendments does not prove the invalidity or falseness of its application for amendment. To the contrary, no such inference of that kind can be drawn. Had the application for amendment been manifestly hopeless, it may be inferred that the amendments would not have been granted. While I accept that Vector must always have known the amended claims were vulnerable to a validity challenge, I do not infer that it must have known those claims were doomed to be found invalid. There were strong arguments for the invalidity of those claims, but I am not persuaded the strength of this case meant Vector’s position was hopeless. The fact that in the entitlement proceeding I made findings (PJ [253]–[277]) indicating invalidity does not prove that Vector’s case was doomed from the outset. And again, the Court would not wish to discourage a party from discontinuing a weak case that was getting worse, merely for fear of incurring indemnity costs for doing so.

58    Nor am I persuaded that the error in the instructions to Dr Lambert was other than a slip. It is also not apparent that the error was material in the way the respondents propose. Vector’s position on the de minimis current issue was not hopeless.

59    I do not accept that Vector having relied on eight claims was unreasonable. Again, while judges dealing with these cases would invariably wish for fewer claims to be put in issue, simply relying on eight claims when fewer might have done is not the kind of unreasonableness that would result in indemnity costs.

60    The real issues in the infringement proceedings are the offers. I agree with Vector that, in principle, the fact that one party accurately predicts an adverse outcome of a proceeding and notifies that position does not of itself make the pursuit of that unsuccessful claim unreasonable. In this case, however, the offers were made and not accepted. There are a number of considerations which indicate that Vector acted unreasonably in not accepting the offers. In particular:

(1)    Mr Whitmore was a person skilled in the art and a “a sophisticated businessperson with a clear understanding of how patent rights can operate to Vector’s advantage”: PJ [379];

(2)    given this and the circumstances disclosed in the principal judgment, I infer that Mr Whitmore must always have known that the amended asserted claims were of seriously questionable validity;

(3)    the dubiousness of the validity of those claims was reinforced by the fact that Vector’s attempts to obtain equivalent amendments in Vector’s European patent had been rejected in 2011. Mr Whitmore must have known that he was fortunate to have obtained the amendments to Vector’s Australian patent; and

(4)    having obtained the amendments to Vector’s Australian patent, Vector obtained significant potential benefits in its negotiations with the respondents. But having obtained those benefits did not mean that Vector was compelled to commence or maintain the infringement proceeding.

61    Further, the offers were made on the same day (24 June 2019). The Calderbank letter clearly identified that Vector’s amended asserted claims were invalid on the basis that the claims were not fairly based on the specification, in that in the specification the power supply was limited to the cell itself and there was no two-step process disclosed. Vector knew that this had been the position of the respondents from the outset. Vector must also be taken to have known from all of the circumstances (as disclosed in the principal judgment) that the attempt to amend the claims to capture the two-step process, while necessary to obtain priority over the E-Chem patent, involved, at best, a significant stretch of the terms of the specification and, at worst, a significant overreach.

62    The Calderbank letter also disclosed that the respondents had incurred approximately $146,000 in costs to that time excluding the security for costs application.

63    The offers made involved: (a) Vector’s claims being dismissed, (b) the respondent’s cross-claim for revocation being dismissed, and (c) the respondents foregoing all costs as against Vector.

64    The Calderbank letter said Vector was “highly unlikely to receive a more favourable outcome in a judgment after trial than the offer set out in this letter. In our view, therefore, it would be unreasonable for your client to reject the offer in this letter”. While this assertion does not make it so, the offers were serious and involved a real compromise by the respondents of value to Vector, in that Vector would pay no costs incurred by the respondents to date and its amended claims would remain unchallenged by the respondents.

65    Vector rejected the offers on 28 June 2019 (the fourth day after they were made). The response also asserted that Vector could not assess the merits of the respondents’ arguments regarding the asserted invalidity of its amended claims and the patent was entitled to the presumption of validity. The response said further that as Mr Whitmore was an overseas resident the time for acceptance of 9 July 2019 was “clearly unreasonable”. The letter proposed mediation.

66    I do not accept that Vector was unable to assess the asserted invalidity of its amended claims on the ground of lack of fair basis within the time for which the offers were open. Had lack of time been an issue, Vector could have requested an extension of the period of the offers but did not do so. It was plainly unwilling to accept the offers. The respondents did not have to provide Vector with expert evidence to support its contention that the amended claims were not fairly based on the specification. Being a person skilled in the art, Mr Whitmore was well able to assess the weakness of Vector’s position given that the respondents had moved for revocation of those claims. I infer that, acting reasonably, Mr Whitmore must have appreciated at the time of the offers that: (a) Vector’s infringement case was weak, (b) the respondents had strong prospects of succeeding in their revocation claims, (c) the further costs to be incurred by the respondents in the infringement proceeding would be substantial, and (d) the offer would give Vector the substantial benefit of avoiding any costs payment of the respondents’ costs to date and would enable Vector to retain the amended claims. To this must be added another important fact. Vector had commenced the entitlement proceeding in February 2019. Accordingly, Vector’s position did not depend on the infringement proceeding.

67    In all of these circumstances I consider that it was unreasonable of Vector not to have accepted the offers for the purposes of r 25.14(2) of the Federal Court Rules and otherwise under the relevant principles relating to Calderbank offers. In response to the submissions for Vector (where not otherwise discussed above):

(1)    there is a difference in assessing the unreasonableness relevant to the bringing and maintenance of a case and the unreasonableness of not having an offer to settle. In the former, the relevant issue is only whether or not it was or should have been apparent the case was hopeless. In the latter, the circumstances relevant to the assessment of the issues of reasonableness do not require the conclusion that it was or should have been apparent the case was hopeless. If that were so, there would be no scope for indemnity costs depending on non-acceptance being unreasonable unless it was or should have been apparent the case was hopeless. That is not and has never been the approach to the issue of reasonableness for non-acceptance of an offer;

(2)    as a corollary of (1), it is not necessary that it be apparent that a proceeding is hopeless in order for non-acceptance of an offer to be unreasonable;

(3)    all of the considerations discussed above in respect of Vector’s non-acceptance of the offers contribute to the conclusion that its non-acceptance was unreasonable; and

(4)    Industrial Galvanizers Corporation Pty Ltd v Safe Direction Pty Ltd (No 2) [2018] FCA 1612 at [22] does not suggest to the contrary. That paragraph is not dealing with an offer to settle.

68    For these reasons, Vector should be ordered to pay the respondent’s costs of the infringement proceeding on an indemnity basis on and after 26 June 2019.

Associate:

Dated:    9 May 2022

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