Digi International Inc v Stallion Technologies Pty Ltd

[2001] QSC 442

THE SUPREME COURT

[2001] QSC 442

OF QUEENSLAND

BRISBANE  No S 7240 of 2001

BETWEEN:                

DIGI INTERNATIONAL INC.
Plaintiff

AND:

STALLION TECHNOLOGIES PTY LTD

A C N:  010 592 837

Defendant

REASONS FOR JUDGMENT

B.W. Ambrose J.

Delivered the 28^th day of November 2001

CATCHWORDS:                PRACTICE – TRIAL OF ISSUES – where action for relief for alleged infringement of patent – where discovery not complete – where plaintiff has not elected remedy sought – whether overlap of expert evidence on issues of liability and quantum of damages – whether issues of liability and quantum of damages should be tried separately

DISCOVERY AND INTERROGATORIES – PRODUCTION AND INSPECTION – CONFIDENTIALITY – where action for relief for alleged infringement of patent – where possible commercial advantage from discovery of some documents – whether discovery should be limited to documents relevant to liability – whether order for confidentiality should be imposed

Legislation:  Trade Practices Act 1974 (Cth) ss 52, 53 and 55

Patents Act 1990 (Cth) ss 122(1), 117 and 117(2)

Federal Court Rules O 29 r 2

Uniform Civil Procedure Rules 1999 rules 211, 214, 354, 361, 423, 423(4), 483(1), 485 and 482; Chapter 7 Part 1

Cases:Novartis Crop Protection Australasia Pty Limited v Orica Australia Pty Limited and Anor [2001] FCA 1013, considered

Reading Australia Pty Ltd v Australian Mutual Providence Society [1999] FCA 718, considered
Arnold v Attorney-General for State of Victoria; ex parte Fielder Gillespie Pty Ltd [1984] 2 Qd R 339, followed
Magellan Petroleum Australia Limited v Sagasco Amadeus Pty Ltd [1994] 2 Qd R 37, followed

Counsel:   P D McMurdo SC for the plaintiff
  J V Nicholas SC for the defendant

Solicitors:  Mallesons Stephen Jacques solicitors for the plaintiff
  Phillips Fox solicitors for the defendant

Hearing Date:            13 November 2001

[1] This is an application by the defendant (“Stallion”) in an action in which the plaintiff (“Digi”) seeks relief against it for infringement of its Australian patent and for loss it suffered as the result of conduct and representations made by it, contrary to the provisions of ss 52, 53 and 55 of the Trade Practices Act 1974.

[2]      There is currently pending in the United States of America, another action between Digi and a wholly owned American subsidiary corporation of Stallion, where substantially the same issues relating to infringement of its American patent are in issue.

[3]      It is clear from the material, that Digi is a much larger and wealthier corporation than Stallion.  It conducts its business in many countries (including Australia); it employs many people and has a significant annual income.  Stallion, on the other hand, employs a relatively small number of people and its business turnover is quite modest in comparison with that of Digi.

[4]      Stallion seeks an order that the issues of liability and quantum in Digi’s action be tried separately.  A consequential order is sought that disclosure of documents, which is yet to be made in the action, be confined initially to disclosure of documents which are relevant to the issue of liability only.

[5]      The pleadings in the action have closed.  Stallion denies Digi’s assertions of fact and law upon which it relies to establish infringement of its patent by Stallion.  In addition, however, Stallion seeks a declaration that the patent registered by Digi in Australia, was at all material times invalid and seeks an order revoking that patent.  In the alternative, it seeks an order revoking each claim of that patent found to be invalid.

[6]      Stallion has filed particulars of the alleged grounds of invalidity of Digi’s patent.

[7]      Detailed particulars of Digi’s statement of claim have been provided.

[8]      They are contained in 57 paragraphs extending over 17 pages and relate to issues of liability founded upon the Patents Act 1990 and the Trade Practices Act 1974.

[9]      No particulars of damage suffered as a consequence of the alleged breaches of obligation imposed upon the defendant by that legislation have been provided or sought.  Paragraph 34 of the claim pleads broadly that the plaintiff “has suffered and will continue to suffer loss and damage”

[10]      The only particulars of such loss or damage given in the statement of claim are –

“(i)     Lost sales;

(ii)       Lost profits;

(iii)       Reduction in the value of the Patent and licences thereof;

(iv)      Damage to the good will and reputation of the plaintiff; and

(v)       Such particulars as are later provided.”

[11]      The parties agree that determination of the issues of liability raised by the pleadings upon the particulars given, will take at least 10 days if determined separately from those relating to quantum.

[12]      There is no estimate of the likely length of the determination of issues relating only to quantum.

[13] Under s 122(1) of the Patents Act 1990, Digi, in its infringement action, must elect at the close of evidence on quantum, to seek either an award of damages or an account of profits.

[14]      Presumably, Digi sues also for damages under the Trade Practices Act to allow it to claim damages under that Act whatever the relief it elects to pursue in its action for infringement of its patent.  There was no debate as to the measure of damages in either the infringement proceedings or the Trade Practices Act proceedings or as to whether damages recoverable in one are subsumable in the other.

[15]      Reference was made to comments in various authorities to the effect that the burden in preparing to meet the relief claimed by a plaintiff for infringement of a patent, when it need not elect whether to seek damages or to seek an account of profits until the close of evidence on issues of both liability and quantum, is a consideration which supports the “normal practice” in Australia of ordering the separate determination of the issues of liability and quantum in a patent action.  It was submitted that indeed generally speaking, plaintiffs in such an action seek an order for trial of those issues separately so that delay may be avoided in obtaining the principal relief sought by way of injunction.

[16]      There is no estimate or agreement as to the time that might be devoted to the determination of issues of quantum claimed under the Patents Act and/or the Trade Practices Act should that issue be determined separately.

[17]      In my view, looking at the period of time during which the alleged patent infringement and consequences of breach of the Trade Practices Act occurred and the time likely to be spent assembling and calling evidence relevant to available relief should Digi succeed in its claims for infringement and the damages recoverable should it also establish a breach by Stallion of its obligations owed to Digi under the Trade Practices Act, a very significant time might be spent in preparing for the determination of and in having determined the issue of quantum of damages and/or account of profits sought by Digi in its claim.

[18]      For Digi, it is contended that Stallion’s application for trial of issues of liability and quantum separately is premature.  It contends that it would be desirable if disclosure of documents relevant to determination of all issues pleaded were completed; it might then be more reliably determined whether the issues in the action should be tried separately.

[19]      For Stallion it is pointed out that, upon the issue of quantum of damage or other relief recoverable under the Patents Act and the Trade Practices Act it might be expected that there would be a great deal of documentary evidence that would have to be disclosed.  It is pointed out that should Digi fail in its action, or should some claims under its patent be found to be invalid, disclosure of documents relevant only to quantum as the pleadings now stand, would serve no purpose and yet be enormously time consuming and expensive.

[20]      It is contended that in the action currently pending in the United States of America, issues of liability and quantum are not being tried separately.  The American action, of course, will be tried before a jury.  No submissions were made as to any legal or practical constraints that there may be under the American legal system in trying issues of liability and quantum separately in actions of this sort when the ultimate determination of such actions must be by a jury.  I therefore give no consideration to that circumstance in determining whether according to the “normal practice” in Australia, in the circumstances of the present case, the issues of liability and quantum should, as a matter of convenience and to avoid the incurring of unnecessary expense in preparing for trial, be tried separately.

[21]      In Novartis Crop Protection Australasia Pty Limited v Orica Australia Pty Limited and Anor [2001] FCA 1013, Stone J, in a patent action where the applicant claimed that the first respondent’s patent was invalid and the respondent cross claimed for infringement of that patent, rejected the contention of the respondent that the application for an order that the issue of quantum of damages or an account for profits be heard separately and subsequent to the hearing of the issue of liability was premature and ordered that the issue of quantum of damages be heard separately and subsequent to the determination of the issues of liability.

[22]      Her Honour observed (para 8) that should the applicant succeed on either of two issues it raised in the patent action that would be a complete defence to the respondent’s cross claim and there would be no necessity to determine issues relating to quantum of damage or an account of profits.  There would consequently be a substantial cost saving for all parties to the action.  Her Honour observed that the order sought by the applicant would save both time and costs by substantially narrowing the issues to be determined at trial – presumably taking into account the potential to avoid considering questions relating to damages or to an account of profits altogether in the event that the applicant succeeded on the question of liability.

[23]      Her Honour distinguished the decision of Branson J in Reading Australia Pty Ltd v Australian Mutual Providence Society [1999] FCA 718. That was a case where the only relief sought by the applicant was in respect of alleged misleading and deceptive conduct in contravention of s 52 of the Trade Practices Act 1974.

[24]      Under O 29 r 2 of the Federal Court Rules the court had power to order that the question of liability be determined separately from the question of the relief available should liability be established.  At para 9 of the judgment Her Honour observed –

“Ultimately the issue for the court to determine when consideration is been given to the making of an order under O 29 r 2 is whether it is ‘just and convenient’ for the order to be made (Arnold v Attorney-General for State of Victoria).  There are classes of proceedings in which it is commonly recognised that it is just and convenient for an order under O 29 r 2 to be made.  One such class is proceedings concerning intellectual property rights where an applicant can not be compelled to make an election as between damages and an account of profits at least until all of the evidence has been received so that, if an order has not been made separating the determination of the issues of liability and relief, the parties will have to call evidence to deal with both damages and an account of profits…”

[25]      Her Honour observed that in the case before her where the plaintiff sought relief by way of declarations which was discretionary and involved consideration of relevant loss and damage allegedly suffered in an action where other relief was also sought under the Act and where questions of estoppel raised involved consideration of detriment suffered by the person alleging estoppel, that there was a risk that in seeking to try the issues of liability separately “questions touching on the applicant’s claim for damages will arise.”  She observed at para 13 that –

“…It would almost certainly result in witnesses who have given evidence on the hearing of the preliminary question being required to give evidence again at a later stage in the proceeding.  As to some, if not all, of such witnesses it is likely that the Court would be required to form a view as to their credibility for the purpose of determining the preliminary issue.  This could cause embarrassment, and possibility found an application for the judge who determined the preliminary question to disqualify himself or herself from continuing to hear the matter.”

[26]      At para 14 she observed that there was no reason to conclude that the preliminary determination of any question touching on the respondent’s liability would be likely to lead to a settlement of the proceedings as a whole.

[27]      In my view, Reading Australia Pty Ltd v AMP Society lends little support to Digi’s opposition to the order sought by Stallion in this case for the trial of issues of liability and quantum separately.  That was a case where the applicant pursued a single cause of action based upon the Trade Practices Act where there was no constraint on a plaintiff’s claim for relief of the sort imposed by s 122(1) of the Patents Act 1990. It fell outside the class of proceedings “in which it is commonly recognised that it is just and convenient for an order under O 29 r 2 to be made”.

[28] The relief claimed in this action pursuant to ss 52, 53 and 55 of the Trade Practices Act 1974 does not on the pleadings seem to raise any of the considerations militating against trial of the issues of liability and quantum separately to which Branson J referred in Reading Australia Pty Ltd v AMP Society. 

[29] Under r 483(1) of the Uniform Civil Procedure Rules 1999 it is provided –

“483(1) The court may make an order for the decision by the court of a question separately from another question, whether before, at, or after the trial or continuation of the trial of the proceeding.”

[30]      Under r 485 it is provided inter alia –

“485 The court may, in relation to a decision of a question under this part, as the nature of the case requires —

(a)dismiss the proceeding or the whole or part of a claim for relief in the proceeding; or

(b)         give judgment, including a declaratory judgment; or
(c)         make another order.”

[31]      Under r 482 “question” is defined to include –

“…a question or issue in a proceeding, whether of fact or law or partly of fact and partly of law, and whether raised by pleadings, agreement of parties or otherwise.”

[32]      On the material before me, I conclude that the issues of liability in Digi’s cause of action involving patent infringement and in Stallion’s counterclaim to have the patent declared invalid will both be determined largely upon conflicting expert evidence concerning the novelty of Digi’s invention and whether it involved “an inventive step” at the time of its registration.  Questions such as obviousness and whether the system, the subject of Digi’s patent, was really unpatentable as a mere “collocation” or “kit of parts” will also be determined upon expert evidence.  Such expert evidence will include that from persons skilled in computer technology and an understanding of combinations of computer hardware and software which produce the results produced by both Digi’s “invention” and Stallion’s equipment said to infringe Digi’s patent.  One might suspect that evidence of patentable novelty in a new combination of pre-existing inventions will be given by persons expert in computer technology to assist in determining issues of liability in both Digi’s infringement action and Stallion’s cross action to revoke registration of Digi’s patent.

[33]      Digi’s claim for damages under the Trade Practices Act will depend entirely on its success in its patent infringement action and in Stallion’s cross claim for a declaration that the patent is invalid and its revocation on that ground.

[34]      With respect to the issue of quantum, however, one would expect that there will much expert evidence called from accountants.  That evidence will almost certainly involve consideration of financial records of both Digi and Stallion covering the period of time in issue upon the pleadings.  It seems likely that there will also be expert valuation evidence called – probably from persons also expert in the field of accountancy - based upon inferences founded inter alia upon financial records of various kinds disclosed by the parties to the action.  Common experience suggests that subsequent to initial disclosure it is likely that requests will be made for further disclosure based upon the content of documents already disclosed.

[35]      I think it likely that there will more “waves of disclosure” in respect of the issues of quantum than there will be in respect of the issues of liability.

[36] I am unpersuaded on the pleadings and particulars given as they presently stand, that there will be any significant “overlap” of evidence called on liability with that called on quantum. There may of course, be some overlap in evidence called as to the commercial success of the plaintiff’s patented system and also of the defendant’s use of equipment alleged to amount to a patent infringement on the liability issue but to my mind it would be only a very small fraction of the evidence which would be led on the issue of quantum generally. Similarly, to the extent that liability involves consideration of s 117 of the Patents Act – infringement of the patent by the supply of a product for a use which would infringe that patent - it is contended that there may be some overlap of the evidence called on liability and that called on quantum. It is said that the factual issues raised under s 117 of the Act, involve what were the possible uses of equipment supplied by Stallion in alleged infringement of Digi’s patent; and precisely how Stallion promoted products which it supplied in the alleged infringement of that patent. It is contended that there would be “a likely substantial overlap in terms of relevant documents and evidence”; however, it was fairly conceded by counsel for Digi that the evidence likely to be called concerning infringement by the supply of products by Stallion would constitute, a relatively small part of the overall evidence to be called on liability.

[37] To my mind, there would be relatively little evidence relating to quantum, which would be called on issues of liability for consideration under s 117 of the Act. Moreover, I should think the analysis of evidence common to both issues to the extent that it did “overlap” would be different depending upon to which of the issues of liability and quantum it was addressed. One would suspect that most of the quantum evidence – and there would be a significant quantity to be called and supported by documentation and expert accounting analysis etc would require only a most perfunctory analysis in a relatively broad way in determining issues to be determined under s 117 of the Act.

[38]      For Digi it was indicated that it was not required to elect now whether to seek relief by way of damages or by way of an account of profits in its patent infringement action. I rather gathered that there would probably be no such election until after all the evidence on quantum had been led although it was conceded that Digi “might elect before the trial – after disclosure had been completed and the plaintiff’s case had been better prepared”.  It was contented on behalf of Digi that it might give further attention to the question of election in the infringement action when it considers with respect to the question of liability, the strength of Stallion’s case that it has not supplied the product in issue for “an infringing use”.  It was conceded that very often “the quantum case can be complicated”.

[39]      Understandably, counsel for Digi conceded that if it were to fail on liability it would be better for everybody that “it fail by a shorter earlier hearing than not”.

[40]      Counsel for Digi was unable to refer to a single infringement case where an order had not been made for the separate trial of issues of liability and quantum.  I was referred only to the judgment of Branson J to which I have referred, in a case in which relief was sought only for breach of obligation under the Trade Practices Act.

[41]      If the issues of liability and quantum in this case are separately tried, in my view, the following results will probably (or at least hopefully) be achieved –

(1)If Digi fails on the issues of liability it will be unnecessary to assemble or call evidence relating to damages or account of profits upon the infringement cause of action or relating to damages in the action based upon the Trade Practices Act.

(2)Because much of the evidence on the issue of quantum will involve the disclosure and examination of commercial records held by both Digi and Stallion and much of the expert evidence called upon the issue will involve an analysis of those records, as will indeed any valuation evidence called, the resulting costs of these procedures may be avoided.

(3)There will be little overlap of any evidence that may be called on quantum with evidence already called on liability.

(4)Should the case be prepared and tried on the issue of liability before it is prepared and tried on the issue of quantum, there should be a much earlier determination of Digi’s entitlement to the principal relief sought – an injunction restraining the alleged infringement - than would be the case should the whole case on liability and quantum be prepared and conducted together.

(5)Should Digi succeed on the issue of liability, the prospect of the parties reaching a settlement on the issue of quantum will be enhanced by the provisions of Uniform Civil Procedure Rules rules 354 and 361.  It will be open to Stallion to make a realistic or even over generous offer at the earliest stage possible after the issue of liability has been determined to avoid incurring obligations to pay Digi’s and its own costs should Digi not recover a judgment more favourable than an offer made by Stallion.  This is a relevant consideration in this case having regard to the disparity in the size and financial resources of the parties.

[42] As a matter of discretion I am loath to permit circumvention of the mandatory constraint as to the relief which a plaintiff may ultimately claim in an infringement action imposed by s 122(1) of the Patents Act, which normally leads to separate trials of issues of liability and quantum by giving weight upon this application to the joinder of a second cause of action relying essentially upon the same facts but based upon the Trade Practices Act with the result that an account of profits may be obtained in the infringement proceedings and damages otherwise irrecoverable in those proceedings by reason of election may also be recovered in the same proceedings under the Trade Practices Act.

[43]      At the end of the day I have come to the conclusion that I should make the order that is normally made in cases of this kind, even if not “invariably” made as suggested by counsel for the defendant.

[44]      In addition to ordering that the issues of liability and quantum be tried separately I take the view also that disclosure which is the next step in the proceedings should be limited to disclosure of only those documents relevant to the issue of liability.  Documents relevant only to the issue of quantum ought not be disclosed prior to determination of the issue of liability. 

[45]      Under Uniform Civil Procedure Rules r 423 Digi and Stallion must each disclose the substance of expert evidence to be relied upon on the issue of liability, and the identity of such expert witnesses. Neither party prior to the determination of the issue of liability should attempt to disclose particulars of such expert evidence relating only to the issue of quantum.

[46] Although the matter was not addressed upon the application it might be desirable if an order were made that expert witnesses to be called by Digi and Stallion confer, prepare and file a document setting out areas of agreement and disagreement and the reasons for the disagreement under r 423(4). Such a step would probably more clearly and succinctly elucidate the real issues for determination upon the expert evidence called on the issue of liability.

[47]      I propose to give the parties liberty to apply to seek such an order.  In the event that neither party makes such an application, it is my view having regard to the time estimated for determination of the issue of liability, that this case will in all likelihood, be managed and on management the court may of its own volition, make such an order irrespective of the submissions made on behalf of the parties, with a view to reducing the length of the hearing upon trial. 

[48]      A second matter that was debated was the appropriate steps to be taken to preserve the confidentiality of documents liable to disclosure under Uniform Civil Procedure Rules rules 211, 214 and other rules in Uniform Civil Procedure Rules Chapter 7 Part 1.

[49]      For the defendant, it is contended that confidentiality can be protected by an order made having the effect of “a US style protected agreement”.

[50] I have considered the arguments advanced as to the nature of an order to be made and/or undertakings given designed to protect confidentiality of documents disclosed relating to the issue of liability. Looking at the evidence generally, I rather suspect that protection of confidentiality will probably be more important with respect to disclosure of documents relating to assessment of quantum which may deal with marketing strategies. To a minor extent, however, some such documents may have relevance to some of the issues of liability – particularly with reference to s 117(2) of the Patents Act. They may also have some relevance on the issue of obviousness to the extent that that is canvassed on the issue of liability.

[51]      To the extent that a party to this action wishes to protect a document disclosed as a confidential one, it seems to me that the practice that has operated for many years in Queensland and reflected in ex parte Fielder Gillespie Pty Ltd [1984] 2 Qd R 339 and Magellan Petroleum Australia Limited v Sagasco Amadeus Pty Ltd [1994] 2 Qd R 37 is sufficient to protect documents claimed to be confidential. An order made along the lines of that made by McPherson J in ex parte Fielder Gillespie Pty Ltd at 341-2 and that made by White J in Magellan Petroleum Australia Limited at 43-44 is appropriate in this case.

[52]      In the event that it is desired to disclose the content of disclosed documents marked “confidential” to a person other than those specified in an order of the kind made in ex parte Fielder Gillespie and in Magellan Petroleum Australia Ltd, leave of the court can be sought to disclose those documents and depending upon the circumstances, constraints may be imposed upon and undertakings required of the person to whom such disclosure is sought to be made for the purpose of obtaining advice, calling evidence etc.

[53]      I take the view that to the extent that any disclosed documents marked “confidential” may prove of commercial advantage to the other party should any persons become aware of the content of those documents, orders of the sort to which I have referred, will sufficiently protect confidentiality. The ultimate sanction of course, of the breaching of an undertaking as to such confidentiality will be that appropriate to a contempt of court.

[54]      I make the following orders –

(1)        The issues of liability and quantum in this action are to be tried separately.

(2)        The issues of liability are to be tried before the issues of quantum of      damages.

(3)        The first disclosure of documents under Uniform Civil Procedure Rules Chapter 7 Part 1 Division 1 be made by the parties only on issues of liability and no disclosure be made of documents relevant only to issues of quantum until after the determination of issues of liability.

[55]      I will make an order to protect confidentiality of disclosed documents along the lines of orders made in Magellan Petroleum Australia Limited and ex parte Fielder Gillespie Pty Ltd to which I have referred.  A draft order to be submitted by the parties should contain the names of all persons to whom disclosure may be made and as well the form of undertaking to be given by such persons.

[56]      I give the parties liberty to apply.

[57]      I order that the plaintiff pay the defendant’s standard costs of and incidental to its application for trial of the issues of liability separately from the issues of quantum to be assessed.

[58]      I order that the parties costs of other matters debated upon the application be their costs in the cause.