Federal Court of Australia

Derma Pen LLC v Biosoft (Australia) Pty Ltd (Security for Costs) [2022] FCA 885

ORDERS

THE COURT ORDERS THAT:

1.    The parties bring in a short minute of order to give effect to these reasons within 7 days.

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

REASONS FOR JUDGMENT

PERRAM J:

1    The First Respondent, Biosoft (Australia) Pty Ltd (‘Biosoft’), and the Third Respondent, Mr Stene Marshall, seek an order for security for costs against both Applicants, Derma Pen LLC (‘LLC’) and Derma Pen IP Holdings LLC (‘Holdings’). Both LLC and Holdings are incorporated in Delaware. Neither conduct business in Australia nor have any assets here.

Applicable Principles

2    The principles governing the granting of an order for security for costs are well-established. The power of the Court to make such an order is found in s 56 of the Federal Court of Australia Act 1976 (Cth) (‘the Federal Court Act’) and r 19.01 of the Federal Court Rules 2011 (Cth) (‘the Rules’). Section 56 of the Federal Court Act relevantly provides:

56 Security

(1)     The Court or a Judge may order an applicant in a proceeding in the Court, or an appellant in an appeal under Division 2 of Part III, to give security for the payment of costs that may be awarded against him or her.

(2)     The security shall be of such amount and given at such time and in such manner and form, as the Court or Judge directs.

…

(5)     This section does not affect the operation of any provision made by or under any other Act or by the Rules of Court for or in relation to the furnishing of security.

3    Rule 19.01 of the Rules is in the following terms:

19.01 Application for an order for security for costs

(1) A respondent may apply to the Court for an order:

(a)     that an applicant give security for costs and for the manner, time and terms for the fiving of the security; and

(b)     that the applicant’s proceeding be stayed until security is given; and

(c)    that if the applicant fails to comply with the order to provide security within the time specified in the order, the proceeding be stayed or dismissed.

4    Whether or not the Court in fact makes such an order is a matter of discretion. This discretion is a broad one and is unfettered, subject only to the limitation that it must be exercised judicially, having regard to the merits of each case: see Commissioner of Taxation v Vasiliades [2016] FCAFC 170; 344 ALR 558 (‘Vasiliades’) at [71]-[75] per Kenny and Edelman JJ; Madgwick v Kelly [2013] FCAFC 61; 212 FCR 1 at [6] per Allsop CJ and Middleton J.

5    In Concrete Mining Structures Pty Ltd v Cellcrete Australia Pty Ltd (No 2) [2016] FCA 360, Edelman J (at [13]) listed a number of factors which the Court may consider when determining whether to grant security for costs. These include, inter alia:

(a)    The likelihood of an applicant being unable to pay a respondent’s costs;

(b)    Whether the application for security is oppressive;

(c)    Whether the award of security would deny an impecunious applicant a right to litigate;

(d)    Whether any persons standing behind an applicant have offered any security or personal undertaking to be liable for the costs, and if so, the form of that security or undertaking;

(e)    Whether an applicant has any rights which it can exercise against assets of the respondent to satisfy an order for costs in its favour; and

(f)    The prospects of success of an applicant’s claim.

6    What weight, if any, is to be afforded to each of these factors will turn upon the particular circumstances of the case.

The Respondents’ Applications

7    In their written and oral submissions, the First and Third Respondents focussed upon two matters which were said to militate in favour of a grant of security: (i) the likelihood that the Applicants would be unable to meet an adverse costs order if it were made against them (i.e. (a) above); and (ii) the fact that the Applicants are ordinarily resident outside of Australia.

8    The principles governing the second of these matters may be outlined shortly:

9    Ordinarily, the fact that a party bringing proceedings is resident out of, and has no assets within, Australia will be a significant circumstance militating in favour of the Court granting security for costs. This is so unless there are countervailing circumstances that properly justify the refusal of the application: Vasiliades at [75]. As McHugh J observed in PS Chellaram & Co Ltd v China Ocean Shipping Co (1991) 102 ALR 321 at 323:

To make or refuse to make an order for security for costs involves the exercise of a discretionary judgment. That means that the court exercising the discretion must weigh all the circumstances of the case. The weight to be given to any circumstance depends not only upon its own intrinsic persuasiveness but upon the impact of the other circumstances which have to be weighed. A circumstance which may have very great weight when only two or three circumstances have to be weighed may be of minor significance when many circumstances have to be weighed. However, for over 200 years, the fact that a party, bringing proceedings, is resident out of the jurisdiction and has no assets within the jurisdiction has been seen as a circumstance of great weight in determining whether an order for security for costs should be made. Indeed, for many years the practice has been to order such a party to provide security for costs unless that party can point to other circumstances which overcome the weight of the circumstance that that person is resident out of and has no assets within the jurisdiction.

10    This position is consistent with the protective purpose for which security for costs is granted. The Court’s purpose in making such an order is to ensure that a respondent will have a fund available within the jurisdiction of the Court against which, if successful in its defence, it can enforce a judgment for costs in its favour: see Energy Drilling Inc v Petroz NL (1989) ATPR 40-954 at 50, 422 per Gummow J; Maxim’s Caterers Limited v Magnona Pty Ltd (No 1) [2010] FCA 450 (‘Maxim’s’) at [6] per Jagot J; Vasiliades at [72].

11    In the present case, it is neither contested that the Applicants do not conduct business in Australia nor that they have no assets here. Although there was some dispute between the parties as to where the Applicants were domiciled, for the reasons I give below, I do not consider this dispute to be material. The critical question, therefore, is whether there are countervailing circumstances supporting the refusal of the application. For the reasons which follow, I conclude that:

    In relation to the First Respondent, there are no sufficient countervailing circumstances to refuse a grant of security against LLC or Holdings. However, there are circumstances which warrant the amount of security being limited to the costs of enforcing a judgment of this Court in a foreign place (Utah); and

    In relation to the Third Respondent, there are sufficient countervailing circumstances to support the refusal of a grant of security in relation to LLC, but not Holdings. In relation to Holdings, there are circumstances which warrant the amount of security being limited to the costs of enforcement in Utah.

Consideration

The Assets of LLC

12    Exhibit 1 is a copy of a judgment of the United States District Court in and for the District of Utah, Central Division (‘District Court’). It shows that on 9 May 2017:

(1)    LLC obtained a default judgment against Mr Marshall in the sum of USD11,907,320.00;

(2)    LLC obtained a judgment for his attorneys’ fees and costs against Mr Marshall in the sum of USD3,668,007.53; and

(3)    LLC obtained default judgments for the same amounts against 4EverYoung Limited, Biosoft (Aust) Pty Ltd, and Equipmed International Pty Ltd. Biosoft (Aust) Pty Ltd is the Second Respondent in the present proceeding and is in liquidation. It has filed a submitting notice save as to costs.

13    Neither Biosoft nor Mr Marshall suggested that these judgments have been affected by any appeal (indeed, it appears that Mr Marshall unsuccessfully appealed to the Court of Appeals for the Tenth Circuit). I therefore accept that LLC owns a judgment debt in the sum of USD15,575,327.53 against Mr Marshall and the other entities mentioned in (c). Making the assumption that the judgment debt against the Second Respondent which is in liquidation is worthless, no submission was made by Biosoft or Mr Marshall that the judgment debts against the other entities or Mr Marshall were worthless.

14    Mr Marshall did submit that he had had financial difficulties in dealing with the Utah proceeding. However, that does not erase the judgment debt and I do not see how it can provide an avenue by which I may ignore it in an assessment of LLC’s assets. He also submitted that at the time the judgment was obtained, LLC was not the owner of the DERMAPEN mark. The proceeding in Utah concerned, inter alia, the alleged infringement of that mark by the defendants including Mr Marshall. Accepting that to be so, I do not see that it permits me to treat the judgment debt as if it did not exist. It might provide a basis for Mr Marshall to seek to set aside the default judgment and it might ultimately afford Mr Marshall a defence to LLC’s present claim against him based on the Utah judgment debt. However, it provides no basis for pretending that the judgment debt against Mr Marshall is not presently an asset in a security for costs analysis. If Mr Marshall had led evidence that he was presently seeking to set aside the judgment debt in Utah on this basis, it might have been appropriate to consider the likely outcome of that application in terms of assessing the issue of security. However, the short of the matter is that debt is not impugned by Mr Marshall and whilst that remains the case, I do not consider myself at liberty to disregard it on the basis that he might one day impugn it. In that regard, whilst it is conceptually possible that he might successfully resist the enforcement of the judgment debt in this country, this would not have the consequence that it ceased to exist as an asset in Utah.

15    Mr Marshall also submitted that a contractual document at the heart of the Utah proceeding, the Sales Distribution Agreement, had been automatically terminated once LLC went into Chapter 11 protection. This was said to undercut the reasoning in the judgment. The observations made in the preceding paragraph apply equally to this argument.

16    I therefore conclude that LLC has an asset in Utah worth USD15,575,327.53 and that part of that asset is an entitlement to have Mr Marshall pay LLC that sum.

The Assets of Holdings

17    Holdings is presently the owner of the United States (‘US’) DERMAPEN word mark, registration number 4096295. On 8 August 2014, LLC filed for Chapter 11 protection in the United States Bankruptcy Court for the District of Utah (‘Bankruptcy Court’). At that date, the owner of the DERMAPEN mark was LLC. On 19 December 2014, that court concluded that the filing was not in good faith and granted two motions to dismiss. In the course of doing so, it noted that the trade mark assets of LLC were said by it to be worth USD6 million. I was not taken to any other evidence about the value of the mark. Biosoft submitted that there was no evidence that LLC was presently trading and that this was a matter which might impact its value. I do not accept that submission. To read the Bankruptcy Court’s judgment and the District Court’s judgment is to apprehend that the DERMAPEN mark is the subject of longstanding and vigorously contested litigation in more than one place and appears to be something which a number of entities think is worth litigating about. I think it would be unwise to speculate about its value beyond that which is disclosed in the Bankruptcy Court’s judgment. The USD6 million value put on the trade mark by LLC was contrary to its interests in that proceeding since its existence established that it was not in the kind of financial distress which would warrant Chapter 11 protection (which was part of the reason the Chapter 11 proceeding was dismissed). In my view, that suggests that it is reliable. Subsequent to the failed Chapter 11 proceeding, the DERMAPEN mark was assigned (by two assignments) to Holdings. I therefore accept that Holdings owns an asset worth USD6 million. Neither Biosoft nor Mr Marshall nominated any other value for the DERMAPEN mark.

The Third Respondent’s Application: Outcome

LLC

18    I have concluded above that Mr Marshall is indebted to LLC in the sum of USD15,575,327.53. This makes his security for costs application ambitious. If he obtains a judgment for costs against LLC at the end of these proceedings, he may set off his judgment for that sum against the much larger judgment sum owed by him to it. I consider this to be a countervailing circumstance which properly justifies the refusal of his application for security.

Holdings

19    Mr Marshall is not indebted to Holdings so that the same argument does not apply. Ms St John, Counsel for the Applicants, submitted that any judgment for costs against the Applicants would most likely be a joint liability. I do not accept this submission. LLC, but not Holdings, is suing Mr Marshall on the judgment debt it obtained against him Utah. LLC and Holdings are together suing Mr Marshall in relation to the ownership of the Australian marks together with other related intellectual property claims. It is possible that Holdings and LLC may have different levels of success. For example, it may emerge that the owner of the Australian marks is Holdings and not LLC. Correspondingly, LLC may fail on its claim on the Utah judgment debt. I do not speculate about the likelihood of these outcomes but point to them merely to underscore the speculative nature of the proposition that any judgment for costs will necessarily be a joint one against Holdings and LLC.

Since Holdings has an asset worth USD6 million, it would be inappropriate to approach the question of security on the basis that it will be unable to meet any judgment for costs. From this it follows that I also reject the submission advanced by Mr Marshall that there is a lack of ‘any proper evidence’ as to the Applicants’ finances and that this weighs ‘heavily in favour’ of a grant of security. In any event, it is the onus of the party who is seeking security to establish that the other party will be unable to pay their costs. Although the Court is cognisant of the evidentiary disadvantage which the party seeking security is at in applications of this kind, the onus of proof remains squarely with the First Respondent: see Cornelius v Global Medical Solutions Australia Pty Ltd [2014] NSWCA 65; 98 ACSR 301. In that circumstance, it would be inappropriate to consider any absence of ‘proper evidence’ to be a factor favouring a grant of security to him. More is this so when the evidence which is available indicates that Holdings owns substantial assets in the form of judgment debts which are not suggested to be worthless.

20    On the other hand, however, since Holdings has no presence in Australia against which a judgment for costs may be enforced, I accept in principle that Mr Marshall must be protected from any ‘unacceptable disadvantage’ that he might face by reason of the Applicants’ foreign residence: Maxim’s at [6]; Austin, Nicols & Co Inc v Lodestar Anstalt [2009] FCA 1228 at [23]-[24] per Lindgren J. In the present circumstance, the available evidence suggests that this would require Holdings to put up security for the costs involved in obtaining a judgment for costs in the place where Holdings has its assets. Such an approach may be appropriate where, as is the case here: (i) there are arrangements in place for the enforcement of Australian judgments in the jurisdiction of a foreign applicant; and (ii) the Court is satisfied that the applicant has sufficient assets within that jurisdiction to satisfy a costs order in the proceedings: Maxim’s at [6]-[13]; Berry v Inovia Security Pty Ltd [2014] FCA 357 at [34] per Buchanan J; CME Blasting & Mining Equipment Ltd v Rock Tool Refurbishment Solutions Pty Ltd [2021] FCA 160 at [46]-[49] per Besanko J.

21    Since the demonstrated assets of Holdings consist of the DERMAPEN mark, the next question would concern the location of that intangible asset. Neither side led any evidence about this.

22    Expert evidence was led by the Applicants from Mr Gabe Peterson Wright who is an experienced US attorney practising in San Diego. That evidence indicated that a judgment of this Court for an amount of costs could be registered under the provisions of the Uniform Foreign-Country Money Judgments Recognition Act, Utah Code Ann § 78B-5-450 (2020) (‘the Utah Statute’) which came into effect in Utah in 2020. That law does not require that the defendant should be domiciled in Utah in order for a judgment to be registered and it does not require the defendant to have assets in Utah. Although Mr Wright was asked to assume that Holdings was domiciled in Utah, this assumption does not appear to be connected to any of the requirements of the Utah Statute.

23    Mr Marshall did not submit that execution against the DERMAPEN mark would be impossible in Utah and there was no evidence to that effect. In the absence of any evidence about US law on this question, I proceed on the default basis that US law is the same as Australian law: Neilson v Overseas Projects Corporation of Victoria Ltd [2005] HCA 54; 223 CLR 331 at [125] per Gummow and Hayne JJ, [249] per Callinan J, and [275] per Heydon J. In Australia, it would be possible to levy execution against a trade mark asset in any state or territory. I therefore conclude that Mr Marshall may use any judgment registered against Holdings under the Utah Statute to levy execution against the DERMAPEN mark in Utah.

24    There was a dispute between the parties as to where Holdings was domiciled. For the reasons in [22] above, this debate does not matter. If, contrary to my view, it does matter, I am not satisfied that Holdings is domiciled in Utah. It is apparent from the records of the Trade Marks Office that as at 31 March 2015, Holdings maintained an address at 7430 Creek Rd, Suite 303, Sandy, Utah. However, in a more recent record of a proceeding to cancel the mark, Holdings’ office is recorded as being at West Bay Drive, Suite 301, Largo, Connecticut. West Bay Drive, Largo is in Florida, not Connecticut. However, regardless of where this address actually is, it is not in Utah. There is no other tolerably clear evidence about where Holdings maintains its office.

25    Mr Wright thought that if the registration of the costs judgment were not contested and proceeded in a straightforward fashion it would cost about USD20,000 to enforce a judgment for costs in Utah. If the registration were resisted, it would cost around USD50,000. During the hearing, Ms St John tendered as Exhibit 2 a draft deed poll in favour of Mr Marshall and Biosoft by which Holdings and LLC promised not to oppose any registration proceeding and not to seek security for costs in any such proceeding. Subsequently, an executed version of that deed poll executed by both Holdings and LLC was annexed to an affidavit which was read without objection. For reasons I give at the end of these reasons, I am satisfied that this deed poll is enforceable by Mr Marshall against Holdings and LLC.

26    Mr Marshall then submitted that it would be more difficult to enforce a judgment against an intangible asset such as the DERMAPEN mark. As I have explained above, I do not accept this submission. Even if I had, it would not lead anywhere. If the DERMAPEN mark were situated in Australia, however, the situation would be the same. It might be the case that the cost of attorneys’ fees to enforce a judgment against intangible property in Utah exceed what they would cost in Australia. I would accept at a very high level of generality that this difference can be the subject of a grant of security. There was, however, no evidence of any such difference and therefore no basis upon which it might be given effect. There is the further difficulty that an award in relation to this difference involves an assumption that in the face of a registered judgment under the Utah Statute, Holdings would decline to meet the judgment and put Mr Marshall to the task of executing against the DERMAPEN mark. At present, there is no metric available in the evidence by which this risk could be measured.

27    In those circumstances, I am satisfied that Mr Marshall ought to be granted security in relation to Holdings in a sum which reflects the cost of enforcing a judgment in Utah. Because of the existence of the deed poll (to which I will return) I am satisfied that it is appropriate for that sum to be the lesser sum of USD20,000. As the evidence of Mr Wright demonstrates, there are arrangements in place for the enforcement of a judgment of this Court in Utah: cf. Fina Research SA v Halliburton Energy Services Inc [2002] FCA 1331. In any event, Mr Marshall did not contest that execution against the DERMAPEN mark, owned by Holdings, was possible: cf. Farmitalia Carlo Ebra SrL v Delta West Pty Ltd (1994) 28 IPR 336. In those circumstances, there is no ‘unacceptable disadvantage’ to the Third Respondent.

The First Respondent’s Application: Outcome

28    The evidence shows that LLC has a substantial asset, namely the judgment debt of USD15,575,327.53 against, inter alia, Mr Marshall. No evidence was led to suggest that this judgment debt was worth less than its face value (beyond Mr Marshall’s attempts to impugn it for reasons which I have concluded are not procedurally open). Likewise, as I have explained, Holdings owns the DERMAPEN mark which the evidence suggests is worth USD6 million. It would therefore be inappropriate to award Biosoft security for costs on the basis that LLC or Holdings is likely to be unable to meet any judgment for costs.

29    On the other hand, as with Mr Marshall’s application in relation to Holdings, I accept that Biosoft should have security to cover it for the costs of obtaining the registration of any Australian judgment for costs in Utah. I am satisfied that LLC’s judgment debt is situated in Utah because that is where the judgment was given. I am satisfied that Biosoft may register any costs judgment against LLC under the Utah Statute. For the reasons I have given in the case of Mr Marshall, I am satisfied that Biosoft can register a costs judgment against Holdings under the Utah Statute and, if necessary, levy execution against the DERMAPEN mark in Utah.

30    In the event that I be wrong in my view that domicile is irrelevant to the registration of a foreign judgment under the Utah Statute, I record my conclusion that, unlike Holdings, LLC is domiciled in Utah. A number of factors point in this direction: (a) LLC brought the proceeding against Mr Marshall and the other defendants in Utah; (b) the register of the US Trade Marks Office repeatedly records LLC as maintaining its address in Utah (although at various different offices); (c) a deed of assignment dated 22 December 2014 recites LLC as having its offices in Utah; (d) a motion filed by LLC with the Trade Marks Office on 4 March 2021 records an address in Utah; (e) the Sales Distribution Agreement records an address for LLC in Utah; and (f) an application filed by LLC with the State of Utah for authority to transact business for a foreign limited liability company records LLC’s principal place of business at an address in Utah.

31    As in Mr Marshall’s case, I conclude that Biosoft should have the lower figure of USD20,000 security to cover it against the costs of seeking registration of any costs judgment against Holdings under the Utah Statute. I do so because of the deed poll. Unlike Mr Marshall, it should also have a further USD20,000 security to cover it against the costs of registering a costs judgment against LLC.

The Deed poll

32    The final executed version of the deed poll was signed by Mr Michael Anderer as ‘the sole operating manager’ for both LLC and Holdings: Annexure JNL-9. The earlier version which became Exhibit 3 was signed by him as a director. Both Mr Marshall and Biosoft took the point that Mr Anderer was not a director of either entity since this was a position which did not exist under Delaware law. This caused the adjournment of the proceedings so that a Notice to Produce could be issued seeking corporate records of both entities. This resulted in the reading by Holdings and LLC of another affidavit of their solicitor, Mr James Lawrence.

33    Mr Lawrence’s affidavit annexed three agreements, being the:

(1)    First Amended and Restated Operating Agreement of Derma Pen IP Holdings, LLC dated 15 July 2018;

(2)    First Amended and Restated Operating Agreement of Derma Pen, LLC dated 1 August 2019; and

(3)    First Amended and Restated Operating Agreement of FD Holdings, LLC dated 1 May 2018.

34    Mr Lawrence’s affidavit establishes that, at present, Holdings and LLC are owned by FD Holdings LLC and that Mr Anderer is the ‘manager’ of each of those entities. The provisions of the agreements are, relevantly, the same.

35    Clause 9.1 provides that the management of each entity is vested in a board of managers to be elected by the members. Clause 9.2 provides that the board of managers has authority to do various acts. The grant of authority is sufficient to authorise the execution of the deed poll. By cl 9.3(a) the board of managers is to consist of three managers. Clause 9.3(b) then provides:

(b)     Appointment and Election. The Managers shall be elected by the Majority in Interest of the Members. As of the Effective Date, the Managers are Michael E. Anderer. A Majority in Interest of the Members can demand an election of the Managers on the Board of Managers at any time.

36    These two provisions contain two inconsistencies. Clause 9.3(a) suggests that the board consists of three persons whereas, on the effective date, clause 9.3(b) says that the board of managers ‘are Michael E. Anderer’. I would interpret this to mean that as at the effective date, there is one manager, namely, Mr Anderer. So construed cl 9.3(b) is inconsistent with cl 9.3(a) in a second way, namely, that the latter suggests that the managers are to be elected.

37    The question is how two such inconsistent provisions are to be reconciled. No evidence was led about how the law of Delaware would approach this problem. I therefore apply Australian company law by default. By s 140(1) of the Corporations Act 2001 (Cth), the constitution of a company takes effect as a contract between the company and its members, between the company and its directors, and between the members themselves. The inconsistency is therefore to be resolved by contractual principles. As a matter of contract law, cls 9.3(a) and (b) are to be reconciled by giving cl 9.3(b) primacy as the more specific provision. So far as elections are concerned, cl 9.3(a) does not apply to the initial appointment of Mr Anderer but does apply to the appointment of any subsequent managers.

38    Whilst cl 9.3(a) requires there to be three managers it is overridden by cl 9.3(b) where Mr Anderer is in office at the effective date. Clause 9.3(b) would, however, require three managers if Mr Anderer ceased to be in office.

39    Consequently, properly construed, cl 9.3(b) has the effect that Mr Anderer is the board of managers of each of Holdings and LLC. Since each has the capacity to execute the deed poll, I therefore conclude that Mr Anderer has authority to sign the deed poll as the manager of each entity and that it is enforceable against LLC and Holdings.

Result

40    I will order Holdings to put up security in the amount of USD20,000 for Mr Marshall but dismiss his claim in relation to LLC. I will order Holdings and LLC each to put up USD20,000 for Biosoft in the form of a bank guarantee or other form of security upon which the parties can agree. The parties should bring in short minutes of order to give effect to these conclusions within 7 days. If agreement cannot be reached on the terms of the minute then the matter may be relisted to resolve any outstanding questions including, if necessary, costs. On the question of costs, my tentative view is that the position of the Applicants has been largely vindicated.

Associate:

Dated:    29 July 2022