Indemnity costs in patent cases
We assess the Federal Court’s approach to indemnity costs in recent patent cases.
The Federal Court of Australia has a wide discretion to order that an unsuccessful party in patent litigation pay the legal costs of a successful party. A successful party will, however, rarely recover the full amount of its costs.
Indemnity costs represent a significant increase in compensation over the usual 'party-party' costs, but they are rarely awarded by the Federal Court. In this article, we consider the Federal Court’s recent approach to indemnity costs, and circumstances that can give rise to an award of indemnity costs in patent cases.
A party considering making an offer to resolve a dispute should ensure that the offer represents a genuine compromise so that, if the offer is unreasonably rejected, the court is more likely to award indemnity costs.
The Federal Court has jurisdiction to award costs in patent proceedings before it, the power to do so being discretionary in nature (s 43 of the Federal Court of Australia Act 1976 (Cth) (the Act)). The usual rule for an order as to costs is that the costs are “as between party and party” (r 40.01 of the Federal Court Rules 2011 (Cth) (the Rules)). However, a party entitled to costs may apply for an order that costs be awarded other than as party-party costs (r 40.02(a) of the Rules), including that costs be awarded on an indemnity basis.
The court’s discretion to order costs is exercised to ensure that litigation costs remain fair and proportionate. The court’s discretion to depart from an order for party-party costs is unfettered, although the discretion must be exercised judicially and not arbitrarily or capriciously. The court must also have regard to any failure by a party to comply with the overarching purpose of the civil practice and procedure provisions, which is to facilitate the just resolution of disputes according to law as quickly, inexpensively and efficiently as possible (ss 37N(4) and 37M(1) of the Act). The court will not exercise its discretion to award indemnity costs unless there is some special or unusual feature or the justice of the case requires it.
It is important to remember that the purpose of a costs order is to compensate the successful party, not to punish the unsuccessful one. However, an award of party-party costs does not fully reimburse the successful party for its costs. Rather, it is designed to recoup “only the costs that have been fairly and reasonably incurred by the party in the conduct of the litigation”.
Indemnity cost orders
An award of indemnity costs is not punitive but is intended to compensate a successful party fully for costs incurred, as a normal costs order could not be expected to do. The circumstances in which it is appropriate for the court to make an indemnity costs order are not closed, as each case turns upon its own facts, but a losing party unreasonably subjecting a successful party to the expenditure of costs is a recurring theme. The following circumstances have been considered by the court to warrant the award of indemnity costs:
- where the applicant, properly advised, should have known that it had no chance of success
- where the moving party persisted in what should, on proper consideration, have been seen to be a hopeless case
- where the applicant’s case was always clearly foredoomed to fail and it ought to have known this to be so
- where an application is wholly untenable and misconceived
- where an applicant persisted in prosecuting a proceeding without regard to the evidentiary difficulties in the case
- where an applicant unreasonably rejected an offer or compromise that it failed to improve upon in litigation.
It can be inferred from these circumstances that the deficiencies in the losing party’s case must be sufficiently manifest and clear such that it can be inferred that the losing party would or should have appreciated them at the time proceedings were commenced or continued, at least if it had given proper consideration to, or had been properly advised about, the merits of its case. Thus, in assessing whether a case can be said to “have no chance of success”, or to be “hopeless” or “foredoomed to fail”, it is not sufficient for the successful party to argue that the losing party’s case was simply weak or tenuous as the court must have regard to the following:
- access to the courts is not to be discouraged
- the court would not wish to discourage a party from discontinuing a weak case that is getting worse, merely for fear of incurring indemnity costs for doing so
- if a weak or tenuous case fails, the usual order for costs is seen as sufficient compensation for the successful party;
- experience shows that apparently weak cases can sometimes succeed
- the law develops by reason of all kinds of cases including the apparently weak case
- 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).
In assessing where the losing party has unreasonably rejected an offer or compromise, the court will, without the benefit of hindsight, have regard to the extent of the compromise offered and the losing party’s prospects of success, assessed at the time the offer was rejected. The Full Court of the Federal Court has taken the following (non-exhaustive) circumstances into account in determining whether the rejection of an offer was unreasonable:
- the stage of the proceeding at which the offer was received
- the time allowed to the offeree to consider the offer
- the extent of the compromise offered
- the offeree’s prospects of success, assessed as at the date of the offer
- the clarity with which the terms of the offer were expressed
- whether the offer foreshadowed an application for indemnity costs in the event of the offeree rejecting it.
It is evident from these circumstances that assessment of the 'unreasonableness' of a refusal of a settlement offer is a broad-ranging inquiry that is not restricted to consideration of the amount of the compromise offered.
The court has noted a distinction between assessing the unreasonableness relevant to bringing and maintaining a case and the unreasonableness of rejecting an offer to settle. In the former instance, the relevant issue is addressed by answering whether or not it was or should have been apparent that the case was hopeless.
We discuss below some recent patent cases that are illustrative of the court’s current approach to awarding indemnity costs.
Vector Corrosion Technologies Limited v E-Chem Technologies Ltd  FCA 519
Vector v E-Chem concerned two proceedings, the first for alleged infringement of a patent (the Infringement Proceeding) and the second seeking entitlement to a patent of the respondents (the Entitlement Proceeding). Vector failed in both cases. The respondents sought indemnity costs in both cases.
In the Entitlement Proceeding, Jagot J declined to depart from the usual party-party costs order. Jagot J was persuaded that Vector’s case, while apparently weak and 'never a good case', was one that was nevertheless arguable and not hopeless, and so bringing it could not be regarded as unreasonable conduct. Her Honour also found:
- although Vector had changed its case in the Entitlement Proceeding over time, the essence of the case had remained the same
- while the evidentiary basis for Vector’s assertions developed and changed over time, it was not apparent that the respondents’ earlier costs were all thrown away or unreasonably incurred
Jagot J held similar views about the Infringement Proceeding, namely that Vector’s case, while weak, was arguable. Her Honour decided not to award indemnity costs for the whole of the Infringement Proceeding, even though only four weeks before the trial Vector consented to orders that the Infringement Proceeding be dismissed, that the asserted claims of its patent be revoked and that it pay the respondents’ costs.
However, her Honour concluded that indemnity costs should be awarded to the respondents because of Vector’s unreasonable rejection of a 'Calderbank' offer and an offer of compromise made by the respondents on 24 June 2019.
Jagot J considered the following factors to indicate that Vector had acted unreasonably in not accepting the offers:
- Vector rejected the offers four days after they were made on the basis that it could not assess the merits of the respondents’ invalidity arguments and that the patent was entitled to the presumption of validity.
- There was no need for the respondents to provide Vector with expert evidence to support their contention that the amended claims were not fairly based on the specification.
- Mr Whitmore, the President of Vector, 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”
- It could be inferred that Mr Whitmore must always have known that the amended asserted claims were of seriously questionable validity.
- The doubtful validity of the claims asserted by Vector was reinforced by the fact that Vector’s attempts to obtain equivalent amendments in Vector’s European patent had previously been rejected.
- 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. Vector knew that this had been the position of the respondents from the outset and must also be taken to have known from all of the circumstances that the attempt to amend the claims to capture the respondents’ process involved, at best, a significant stretch of the terms of the specification and a significant overreach.
- The Calderbank letter also stated the amount of legal costs incurred by the respondents as at the date of the letter.
- The offers made involved: (a) Vector’s claims being dismissed, (b) the respondents’ cross-claim for revocation being dismissed, and (c) the respondents foregoing all costs as against Vector. The offers 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.
Jusand Nominees Pty Ltd v Rattlejack Innovations Pty Ltd (No 2)  FCA 867
Murray Engineering sought orders for Jusand to pay its costs on an indemnity basis based on an offer of compromise to Jusand. Rofe J declined to order that Jusand pay Murray Engineering’s costs on an indemnity basis, finding that Murray Engineering had failed to discharge its onus of demonstrating why Jusand’s rejection of the offer was unreasonable. Rofe J found:
- At the time the offer was made, Jusand had raised in correspondence on three occasions the issue of Murray Engineering’s entitlement to costs for its separate representation in the proceeding paid by Jusand in the event that Jusand was unsuccessful.
- Murray Engineering elected not to respond to Jusand on the issue of the costs of its separate representation. Absent any explanation as to why the rule against double representation would not apply, Jusand continued to maintain its view that in the event that it was unsuccessful, it would not be required to pay Murray Engineering’s costs. On this view, Murray Engineering’s offer did not represent much of a compromise for Jusand.
- Murray Engineering’s offer was not accompanied by any correspondence detailing perceived difficulties with Jusand’s case or an explanation of why Murray Engineering considered it reasonable for Jusand to accept the offer in the circumstances at the time of the offer.
- The award of indemnity costs in patent cases is rare, particularly in the absence of a Calderbank offer or offer of compromise.
- The onus is on the party seeking indemnity costs to demonstrate clearly from the evidence that the losing party’s conduct was unreasonable, whether for bringing or maintaining a hopeless case or rejecting an offer to settle, in subjecting an innocent party to the expenditure of costs.
- The party seeking indemnity costs based on a Calderbank offer or offer of compromise must also be able to demonstrate that its own conduct during negotiations did not contribute to the losing party rejecting the offer.
- Parties to litigation considering making an offer to resolve a dispute should ensure that the offer represents a genuine compromise so that, in circumstances where the offer is unreasonably rejected, the court is more likely to award indemnity costs.
 Dictionary, Schedule 1 to the Rules.
 Australian Competition and Consumer Commission v Colgate-Palmolive Pty Ltd (No 5)  FCA 246 at 
 Vector Corrosion Technologies Limited v E-Chem Technologies Ltd  FCA 519 at , .
 Anchorage Capital Partners Pty Limited v ACPA Pty Ltd (No 2)  FCAFC 112 at -; Wills v Chief Executive Officer of the Australian Skills Quality Authority (Costs)  FCAFC 43 at ; Hood v Down Under Enterprises International Pty Limited (No 2)  FCAFC 106 at ; and Treasury Wine Estates Limited v Maurice Blackburn Pty Ltd (No 2)  FCAFC 38 at .
 Maddocks acted for the successful respondents in Vector Corrosion Technologies Limited v E-Chem Technologies Ltd  FCA 519.
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