Federal Court of Australia

Calix Limited v Grenof Pty Ltd (No 2) [2023] FCA 832

ORDERS

THE COURT ORDERS THAT:

1.    The costs payable by the applicant pursuant to order 5 made on 28 April 2023 be assessed as follows:

(a)    in respect of the first respondent, on a party and party basis up until 11am on 9 September 2022 and on an indemnity basis thereafter; and

(b)    in respect of the second respondent, on a party and party basis.

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

REASONS FOR JUDGMENT

NICHOLAS J:

1    On 28 April 2023 I dismissed the applicant’s application seeking injunctive and other relief for infringement of claim 1 of the patent in suit.

2    Claim 1 was held to be invalid. I also found that, even if claim 1 was valid, the respondents’ process (“Grenof process”) and products did not infringe. Accordingly, the respondents were successful both in relation to infringement and validity.

3    I previously made an order that the applicant pay the respondents’ costs of the proceeding including the first respondent’s cross-claim. Now before me is the respondents’ application for an order that the applicant pay their costs on an indemnity basis from 11.00am on Friday, 9 September 2022 pursuant to r 25.14(2) or (3) of the Federal Court Rules 2011 (Cth) (“FCR”) or s 43 of the Federal Court of Australia Act 1976 (Cth) (“the Act”).

4    On 7 September 2022, before the second respondent was joined to the proceeding, the first respondent served a formal Notice of Offer to Compromise (“Offer”) to settle the proceeding on terms which included:

(a)    undertakings not to do any of the things in relation to which injunctive relief was sought in paragraphs 2 and 3 of the originating application;

(b)    consent to an order that the first respondent’s cross-claim be dismissed; and

(c)    the first respondent foregoing any claim for its costs as incurred to date in relation to both the claim and the cross-claim, including any reserved costs.

5    Paragraph 1 of the originating application dated 23 August 2021 sought a declaration that the respondent has infringed claim 1 of the patent. Paragraphs 2 and 3 of the originating application sought the following relief:

2.    An order that the Respondent, whether by itself, its servants, agents, employees or related entities (as defined by s 9 of the Corporations Act 2001 (Cth)) be restrained from, during the term of the Patent, without the licence of the Applicant:

(a)    performing the process of claim 1 of the Patent including without limitation the Process referred to at paragraph 7 of the Statement of Claim;

(b)    producing any product utilising a process within the scope of claim 1 of the Patent including, without limitation, producing Product that [sic] referred to in paragraph 7 of the accompanying Statement of Claim (the Product);

(c)    making, selling, supplying, offering, marketing, promoting, advertising for sale or in any way dealing with the Product;

(d)    keeping the Product for the purpose of doing any of the acts referred to in 2(c); and

(e)     authorising the doing of any of the acts referred to in the aforementioned subparagraphs.

3.    An order that the Respondent, whether by itself, its servants, agents, employees or related entities, be restrained during the term of the Patent, without the licence of the Applicant, from infringing claim 1 of the Patent.

6    The Offer was accompanied by a “without prejudice save as to costs” letter dated 7 September 2022 which stated that the applicant’s claim was likely to fail, and the first respondent’s cross-claim was likely to succeed, for various reasons including that the respondents process allows the reaction mixture to boil and does not “control the maximum reaction temperature to near the boiling point”. At the time of the Offer the proceeding had been on foot for more than a year. A mediation conducted by a Registrar of the Court had taken place seven months earlier.

7    Rule 25.14 of the FCR provides:

25.14    Costs where offer not accepted

(1)    If an offer is made by a respondent and not accepted by an applicant, and the applicant obtains a judgment that is less favourable than the terms of the offer:

(a)    the applicant is not entitled to any costs after 11.00 am on the second business day after the offer was served; and

(b)    the respondent is entitled to an order that the applicant pay the respondent’s costs after that time on an indemnity basis.

(2)    If an offer is made by a respondent and an applicant unreasonably fails to accept the offer and the applicant’s proceeding is dismissed, the respondent is entitled to an order that the applicant pay the respondent’s costs:

(a)    before 11.00 am on the second business day after the offer was served—on a party and party basis; and

(b)    after the time mentioned in paragraph (a)—on an indemnity basis.

(3)    If an offer is made by an applicant and not accepted by a respondent, and the applicant obtains a judgment that is more favourable than the terms of the offer, the applicant is entitled to an order that the respondent pay the applicant’s costs:

(a)    before 11.00 am on the second business day after the offer was served—on a party and party basis; and

(b)    after the time mentioned in paragraph (a)—on an indemnity basis.

Note 1:    Costs on an indemnity basis is defined in the Dictionary.

Note 2:    The Court may make an order inconsistent with these rules—see rule 1.35.

8    The first respondent relied both on r 25.14 of the FCR and the general discretion conferred by s 43 of the Act in support of its application that the applicant pay the first respondent’s costs on a party and party basis until 11am on 9 September 2022 and on an indemnity basis thereafter.

9    The application of r 25.14 in this case is complicated by the fact that the Offer made by the respondents was a global offer that offered to settle both the applicant’s claim against the first respondent and the first respondent’s cross-claim against the applicant. The respondents contended that r 25.14(3) applied and that, therefore, the first respondent was not required to establish that the applicant’s failure to accept the Offer was unreasonable. Alternatively, the respondents submitted that if r 25.14(2) applied, then the applicant unreasonably failed to accept the first respondent’s Offer.

10    Because the Offer proposed settlement of both the applicant’s claim and the first respondent’s cross-claim on a global basis, there are obvious difficulties in applying r 25.14(3) to both the respondents’ claim (seeking revocation of claim 1) and the applicant’s claim for injunctive and pecuniary relief. Both parties’ submissions recognise the difficulty that arises and were directed to the question whether the applicant’s failure to accept the Offer was unreasonable under r 25.14(2). Accordingly, I propose to deal with the first respondent’s claim for indemnity costs on that basis.

11    In Anchorage Capital Partners Pty Limited v ACPA Pty Ltd (No 2) [2018] FCAFC 112 (“Anchorage”) the Full Court said at [5]-[8]:

[5]    Section 43 of the Federal Court of Australia Act 1976 (Cth) confers a broad discretion on the Court to award costs in proceedings. In Re Wilcox; Ex parte Venture Industries Pty Ltd (No 2) (1996) 72 FCR 151, Black CJ at 152 stated the principles applicable to a claim for indemnity costs:

    …it is well established that the starting point for any consideration of an application for indemnity costs is that in the ordinary case costs will follow the event and the Court will order the unsuccessful party to pay the costs of the successful party, on a party and party basis, a basis which will fall short of complete indemnity. Nevertheless, the Court has an absolute and unfettered jurisdiction in awarding costs, although the discretion must be exercised judicially. So indemnity costs may properly be awarded where there is some special or unusual feature in the case justifying the Court in exercising the discretion in that way.

[6]    A well-established circumstance justifying an award of indemnity costs is an imprudent refusal of an offer to compromise (Colgate-Palmolive Company v Cussons Pty Ltd (1993) 46 FCR 225 at 233 per Sheppard J). In such cases, a key question is whether the offeree’s refusal of the offer was “unreasonable” when viewed in light of the circumstances existing at the time the offer was rejected (Black v Lipovac & Ors (1998) 217 ALR 386 at 432 per Miles, Heerey and Madgwick JJ; CGU Insurance Ltd v Corrections Corporation of Australia Staff Superannuation Ltd [2008] FCAFC 173 at [75] per Moore, Finn and Jessup JJ).

[7]    The circumstances to be taken into account in determining whether rejection of an offer was “unreasonable” cannot be stated exhaustively but may include, for example:

(a)    the stage of the proceeding at which the offer was received;

(b)    the time allowed to the offeree to consider the offer;

(c)    the extent of the compromise offered;

(d)    the offeree’s prospects of success, assessed as at the date of the offer;

(e)    the clarity with which the terms of the offer were expressed; and

(f)    whether the offer foreshadowed an application for an indemnity costs in the event of the offeree rejecting it.

(Hazeldene’s Chicken Farm Pty Ltd v Victorian WorkCover Authority (No 2) (2005) 13 VR 435 at [25] per Warren CJ, Maxwell P and Harper AJA; Beling v Sixty International S.A. (No 2) [2015] FCA 355 at [25] per Mortimer J).

[8]    An unsuccessful party is not liable to pay indemnity costs merely because it received an offer to settle on terms more favourable than it achieved at trial and rejected that offer (CGU Insurance at [75]; Black at [217]-[218]). As we observed in the Appeal Reasons, albeit in the context of r 25.14(2) of the FCRs, assessment of the “unreasonableness” of an offeree’s refusal of a settlement offer is a broad-ranging inquiry that is not restricted to consideration of the extent or quantum of the compromise offered.

12    The respondents’ framed their submissions by reference to the factors identified by the Full Court in Anchorage at [7]. In that regard, the respondents submitted that:

    the Offer was open for 14 days;

    the compromise was significant;

    the first respondent’s prospects of success, as assessed at the time of the Offer, was strong;

    the Offer was clear; and

    the Offer foreshadowed an application for indemnity costs in the event of the applicant rejecting it.

13    The respondents submitted that the Offer was made when the proceeding was well-advanced, a mediation had been completed, and the evidence on both the claim and cross-claim was substantially complete. They say that the Offer was therefore made at a time when the applicant could reasonably assess its prospects of success on the claim and cross-claim and could properly assess the reasonableness of the Offer. Further, the respondents say that the reasons set out by the first respondent in the letter of 7 September 2022 accompanying the Offer were broadly consistent with some of the reasons given by the Court in dismissing the application and in revoking the relevant patent claim.

14    The applicant submitted that the Court should not be satisfied that the applicant acted unreasonably in rejecting the Offer. Central to the applicant’s submission was its contention that it had not been given a “realistic opportunity” to consider the strength of its position, particularly in relation to the issue of infringement. It submitted that its continuing investigations were hampered by the first respondent’s conduct including statements in an affidavit made by Mr Redfern which were ultimately found to be inaccurate and misleading. The applicant submitted that it was not unreasonable for it to reject an offer that was predicated on information that was inaccurate. In this regard, it also referred to difficulties it had in obtaining access to information in respect of which the first respondent claimed confidentiality.

15    The applicant also drew attention to the fact that at the time it received the Offer it had not been provided with discovery relevant to infringement including documents relevant to the mixing apparatus used and the temperature profiles of the reaction mixture. The applicant referred to observations made by me in the principal judgment at [134] that the documents sought were “clearly relevant and there was no reason why they should not have been disclosed to Calix’s solicitor when first requested”. The applicant submitted that without such discovery it was not unreasonable for it to reject the Offer in September 2022. Other complaints were made by the applicant regarding the production of a video of the Grenof process and the fact that an inspection of the Grenof process did not occur until 8 March 2023.

16    Some months before the Offer was made, the first respondent filed a document entitled “Respondents’ Confidential Position Statement on Infringement” (“respondent’s position statement”) pursuant to orders I made on 17 March 2022 and 1 April 2022. Although the document is expressed to be confidential, the following matters are openly discussed in my reasons for judgment and are, in my opinion, not confidential. At para 12 of the respondent’s position statement, the first respondent asserted:

The Grenof Process results in the production of a very significant amount of steam due to the rapid, uncontrolled boiling of the water in the reaction mixture. The steam produced by the Grenof Process is not the result of “evaporation” (which occurs only from the surface of a liquid and occurs at temperatures lower than the boiling point). The steam produced by the Grenof Process is caused by the rapid, uncontrolled boiling of the water in the reaction mixture resulting in bubbles of water vapour forming throughout the reaction mixture, not just at the surface, and rising to the top before escaping into the atmosphere. In any event, the release of steam by the Grenof Process does not “control the maximum temperature” of the reaction at all. The maximum temperature is wholly uncontrolled. Further, the maximum temperature reached in the Grenof Process is the boiling point of the water in the reaction mixture, which is achieved as quickly as possible, and not “near the boiling point”. Integer 1.5 is therefore not present in the Grenof Process.

17    There is no doubt that from an early stage of the proceeding the first respondent contended that its process was outside the scope of claim 1 for various reasons including, in particular, that the reaction mixture was permitted to boil. The first respondent filed an affidavit of Mr Redfern (whose evidence was the subject of some adverse comment in the reasons for judgment) filed on 7 April 2022 which indicated that, in the Grenof process, the reaction mixture rapidly reached the boiling point in an uncontrolled manner. On the basis of Mr Redfern’s description of the process, Mr Messiter, the first respondent’s independent expert, made an affidavit filed on 2 September 2022 in which he said that the “maximum temperature [in the Grenof process] is limited to the boiling point, rather than to near the boiling point”. By an interlocutory application filed on 2 December 2022, the applicant sought discovery of documents relating to inter alia the temperature of the reaction mixture of the Grenof process. Orders were made on 20 December 2022 for the production of such documents by the first respondent. By a further interlocutory application filed on 23 February 2023, the applicant sought an order allowing its expert and solicitor to inspect the Grenof process. Orders were made on 1 March 2023 to that effect and the inspection took place on 8 March 2023, which was just over two weeks before the hearing commenced.

18    Although the applicant made various complaints about the lack of relevant documentation which would support Mr Redfern’s description of the Grenof process and, in particular, the boiling of the reaction mixture, this is not a matter I regard as significant on the question of costs. A small number of documents were produced by the first respondent in response to orders made on 20 December 2022. Neither the documents produced nor the inspection led the applicant to accept that the reaction mixture in the Grenof process did in fact boil and that, consequently, the method used was outside the relevant claim. Rather, the applicant “doubled down” and filed further expert evidence from Professor Sorrell in which he for the first time developed the theory that, although the reaction mixture appeared to be boiling, it was “superheated” but not boiling. For reasons explained in the principal judgment, this theory was rejected by me and Professor Sorrell was found to be an unreliable witness. In my view, the complaints now made by the applicant in defending the application for indemnity costs should be given little weight.

19    I do not accept that any deficiencies in the first respondent’s production of documents had any bearing on the applicant’s rejection of the Offer. Moreover, the applicant has never explained why it did not seek an order for an inspection of the Grenof process until it filed an interlocutory application seeking such an order on 23 February 2023. Although the applicant asserted at the time that it was prompted to seek that order as a result of further affidavit evidence of Mr Redfern filed in late 2022, the fact is that the question of whether or not the reaction mixture reached its boiling point in the Grenof process was always an issue, and it is difficult to understand why the applicant did not seek an order for inspection much earlier than it did so.

20    With regard to the Offer, I think it was, or at least should have been, apparent to the applicant and its legal advisers, at the time it was received, that the applicant would find it exceedingly difficult to prove, contrary to the first respondent’s affidavit evidence, that the Grenof process did not involve boiling the reaction mixture.

21    As to the cross-claim seeking revocation of claim 1, there were very significant problems with the patent specification in suit which described an invention in which the reaction mixture was permitted to rise to boiling point or near boiling point. As I said in the principal judgment, the complete specification is a confused and muddled document especially when regard is had to the temperature limitation referred to in claim 1. The finding ultimately made in relation to s 40(3) of the Act (ie. “support”) was that the complete specification disclosed a method in which the maximum temperature of the reaction mixture was permitted to reach boiling point whereas the process defined by claim 1 was one in which the maximum temperature of the reaction mixture was near to (but below) boiling point. All of that should have led the applicant to give serious consideration to compromising or, if necessary, discontinuing its claim before it received the Offer. Acceptance of the Offer would have allowed the applicant to withdraw on terms that each party pay its own costs.

22    In its submissions the applicant said that the first respondent’s submission:

… in relation to s 40 (lack of support), that it “ought to have been clear to the Applicant that there was a material disconformity between the invention disclosed in the body of the specification and the invention the subject of the claim it sought to enforce”. This submission is tantamount to stating that Calix’s position as to the validity of its patent was frivolous. There is no evidence to suggest that Calix did not make its claim in good faith or unreasonably relied upon the opinions of its expert, Professor Sorrell.

23    It is not necessary to determine whether the applicant’s proceeding was frivolous. However, I do not consider that the applicant should be permitted to shelter behind the opinions of Professor Sorrell. His evidence was unsatisfactory in a number of critical respects. In any event, the question is not whether the applicant brought its case in good faith or whether it unreasonably relied on the opinions of Professor Sorrell. The question is whether the applicant’s rejection of the Offer was unreasonable. In my view it was.

24    By the time the Offer was made it ought to have been apparent to the applicant that there was a significant disconformity between the description of the invention in the complete specification and the invention of claim 1. That is not a matter in relation to which expert evidence was likely to be helpful to the applicant. What was for the most part required was a comparison between the invention described in the specification and the invention of the claims. The disconformity between the specification and claim 1 was manifest.

25    The Offer presented the applicant with an opportunity to extricate itself from litigation which it should have known, at the time of considering the Offer, it was very likely to lose. While it was open to the applicant to reject the Offer and press ahead on the basis that “something might turn up” or that it might “pull a rabbit out of the hat” it should have appreciated that it ran the significant risk of having to pay the applicant’s costs from that point forward on an indemnity basis on the ground that its rejection of the Offer was unreasonable.

26    The final matter I will mention concerns the applicant’s contention that the Offer, if accepted, would have left unresolved the question of whether the Grenof process infringed claim 1. It is true that the first respondent did not admit that the Grenof process infringed. How could it rationally have been expected to do so unless it was using a method that its evidence unequivocally asserted (evidence accepted in the principal judgment) that it was not using? Acceptance of the Offer would have brought an end to the first respondent’s challenge to the validity of claim 1 and delivered to the applicant undertakings in the form recorded in the Offer. The undertakings proffered directly reflected the injunctive relief sought in the originating application. Instead of accepting the Offer the applicant pressed ahead with what was a wholly speculative case.

27    I am satisfied that the applicant’s rejection of the Offer was unreasonable. In the circumstances, I consider it appropriate to order that the costs payable by the applicant pursuant to order 5 made on 28 April 2023 be assessed, with respect to the first respondent on a party and party basis up until 11am on 7 September 2022 and on an indemnity basis thereafter, and with respect to the second respondent on a party and party basis.

28    The applicant made a submission that certain costs relating to the production by the first respondent of documents in unredacted form which culminated in the orders made on 13 July 2022 should be paid by the first respondent. At the time of making those orders I ordered that “costs be reserved”. In the absence of any further order, those costs will follow the event: see r 40.03 of the FCR. I am not persuaded that any other order should now be made in relation to those costs.

29    Orders accordingly.

Associate:

Dated:    27 July 2023