Security for legal costs in cross-claims for patent invalidity

The usual position in relation to security for costs in disputes before the Federal Court of Australia is that a respondent (including a cross-respondent) may make an application for security for its legal costs to insulate itself if it is successful in defending the allegations made by an applicant against it.  What is the situation regarding security for costs where a respondent ‘cross-claims’ for revocation of a patent because it alleges that it is invalid and should never have been granted in the first place?

Security for costs generally in the Federal Court

Rule 19.01(1) of the Federal Court Rules 2011(Cth) (Rules) describes the conditions on which a respondent to proceedings may make an application to the Court for an order that:

• “an applicant give security for costs and for the manner, time and terms for the giving of the security;
• that the applicant’s proceeding be stayed until security is given; and
• 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”.

Sub-rules 2 and 3 of Rule 19.01 describe the form of the material that the respondent must submit to the Court and the matters to be included in a supporting affidavit:

• “whether there is reason to believe that the applicant will be unable to pay the respondent’s costs if so ordered;
• whether the applicant is ordinarily resident outside Australia;
• whether the applicant is suing for someone else’s benefit;
• whether the applicant is impecunious; and
• any other relevant matter”.

The effect of this rule is to make applicants think twice before initiating frivolous legal proceedings.

The source of the Court’s power to award security for costs

The broad discretion to order security for costs (and vary any such an order) is contained in s56 of the Federal Court of Australia Act 1976 (Cth).   This has been considered by Kenny and Edelman JJ in the case of Commissioner of Taxation v Vasiliades [2016] FCAFC 170.  As their Honours said:

“The discretion conferred by s 56 is a broad one, subject only to the limitation that it must be exercised judicially”.

What if the respondent cross-claims for invalidity of the patent it is accused of infringing?

Invalid is the opposite of valid, and denotes a patent that does not conform to the requirements to be accepted as a patent.  ‘Invalidity’ is the word used to describe proceedings that are commenced (often by way of cross-claim) seeking to have a patent revoked on the basis that it does not conform to the requirements for a patentable invention as required by the Patents Act 1990(Cth) (Patents Act), and therefore should never have been granted letters patent in the first place.  In essence, if a patent is invalid, it will be held to never have been valid (similar to void ab initio – void from the beginning).

When faced with allegations of patent infringement it is possible that the respondent’s “best defence” is to cross-claim for invalidity of the patent in question, potentially exposing it to an application for security for costs pursuant to Rule 19.01. The following specific grounds exist for seeking to revoke both innovation and standard patents, with sections cited referring to the respective sections of the Patents Act:

• lack of novelty (section 7(1) and section 18) (Lack of Novelty);
• lack of inventive step (section 7(1) and section 18) (standard patent) (Inventive Step);
• lack of innovative step (section 7(1) and section 18) (innovation patent) (Innovative Step);
• the invention is not useful (section 18(1)(c)) (Usefulness);
• the invention was secretly used in the patent area before the priority date of the claim (section 18(1)(d)) (Secret Use);
• is not a manner of manufacture within the meaning of section 6 of the Statute of Monopolies (section 18(1)(a)) (Manner of Manufacture); and
• other grounds for invalidity:
  • patent obtained by fraud, false suggestion or misrepresentation (section 138(3)(d)) (Fraud);
  • failure to disclose the best method known to the patent applicant of performing the invention (section 40(2)(aa)) (Best Method); and
  • the claim or claims must be clear and succinct and supported by matter disclosed in the specification s40(3) (Fair Basis).

What’s the position in relation to security for costs by a cross-claimant?

The issue of security for costs brought by a respondent in response to an applicant’s claim for infringement, was one of the matters considered by Rares J in Pilkin v Sony Australia Limited [2018] FCA 1018 (28 June 2018) (Pilkin).  The case involved allegations that Sony Australia Limited (Sony) and four (4) other respondents had infringed Australian innovation patent number 2010101517 (517 Patent). The patentees were Messer’s Vitaly Pilkin and Vladimir Miroshnichenko who passed away after the commencement of proceedings.  Pilkin and Miroshnichenko (Applicants) claimed that each of the respondents had infringed the 517 Patent by selling their PlayStation Vita PCH 1000 series product (Vita Device).

Mr Pilkin was self-represented and did not appear at this interlocutory hearing as he agreed to the matter being heard on his submissions.

Counsel for Sony foreshadowed a ‘defensive’ cross-claim for invalidity of Pilkin’s patent on the grounds of lack of novelty, innovative step and support.  There were several problems with the case presented by the Applicants which Rares J dealt with quite respectfully.  It was said therefore at 30 by Rares J that ‘In that situation I think it is appropriate to proceed only to assess a sum appropriate to award as security to enable Sony Australia to investigate and prepare their defence and cross-claim’

Factors to be considered in making a security for costs order against a cross-claimant alleging invalidity?

Rares J at 33 in Pilkin cited Baygol Pty Ltd v Huntsman Chemical Co Australia Pty Ltd t/a RMAX [2004] FCA 1248 at [27]- [28], where Tamberlin J summarised the applicable principle as:

“…a cross-claim for revocation in the present case is in nature, substance, and effect a defence to the infringement action.  If the cross-claim succeeds and the patent is revoked then the claim for infringement does not succeed.“

The question, according to Heerey J in Farmitalia [Carlo Erba Srl v Delta West Pty Ltd [1994] FCA 950; (1994) 28 IPR 336] was to look at the substance of the application for revocation to determine whether the proceeding is essentially defensive.  Heerey J continued and stated that the case on invalidity is a ‘matter of defence’.   It was further stated that the cross claimant (Delta-West’s) assertion of invalidity is in substance as well as form, a defence to a claim of infringement with the result being that security for costs was less likely.

The position of Rares J is consistent with the view of Kenny J at 50 in Axent Holdings Pty Ltd v Compusign Australia Pty Ltd (No 2) [2017] FCA 1102 where it was said in relation to an application for security for costs by the second respondent Hi-Lux Technical Services Pty Ltd that:

“for present purposes, it may be accepted that the counter-claim for revocation of the patent on the ground of invalidity is defensive to Axent’s infringement claim, and that this characterisation may be relevant to the question of whether or not an order for security for costs should be made“.^[1]

Links and further references

Cases

Brehm v Stretch Studio Aus Pty Limited [2020] FCA 1381

Axent Holdings Pty Ltd v Compusign Australia Pty Ltd (No 2) [2017] FCA 1102 (18 September 2017)

Pilkin v Sony Australia Limited [2018] FCA 1018 (28 June 2018) at [33]

Commissioner of Taxation v Vasiliades [2016] FCAFC 170

Probiotec Limited v The University of Melbourne (2008) 166 FCR 30 at [62]-[64]

Farmitalia Carlo Erba Srl v Delta West Pty Ltd (1994) 28 IPR 336 at 341

Baygol Pty Ltd v Huntsman Chemical Co Australia Pty Ltd t/a RMAX [2004] FCA 1248 at [27]-[28] and at [31]-[34]

Legislation

Federal Court Rules 2011 (Cth)

Federal Court of Australia Act 1976 (Cth)

Patents Act 1990 (Cth)

Federal Court of Australia Practice Notes

IPR Practice Note

Further information about patent litigation

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Disclaimer

This article contains general commentary only.  You should not rely on the commentary as legal advice.  Specific legal advice should be obtained to ascertain how the law applies to your particular circumstances.

[1] see Probiotec Limited v The University of Melbourne [2008] FCAFC 5; 166 FCR 30 at [63] (Rares J, with whom Finn and Besanko JJ agreed), citing Baygol Pty Limited v Huntsman Chemical Co Australia Pty Limited t/a RMAX [2004] FCA 1248 at [31] (Tamberlin J) and Farmitalia Carlo Erba SrL v Delta West Pty Ltd (1994) 28 IPR 336 at 339-341 (Heerey J).

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