Flourish Pty Ltd v Daratech Pty Ltd

[1996] FCA 231

CATCHWORDS

CORPORATIONS - application to set aside statutory demand on the basis of genuine dispute - test to be applied in determining genuine dispute - whether representations as to enforceability and strength of a patent were misleading and deceptive - whether "genuine dispute".

Corporations Law s.459G, 459H
First State Computing v. Kyling (1995) 13 ACLC 939

VG3737\95 FLOURISH PTY. LTD. (ACN 007 148 692) AND DARATECH PTY. LTD. (ACN 006 598 198)

MERKEL J.
MELBOURNE
20 MARCH 1996

IN THE FEDERAL COURT OF AUSTRALIA
VICTORIAN DISTRICT REGISTRY
GENERAL DIVISION  No. VG 3737 of 1995

FLOURISH PTY. LTD.
  (ACN 007 148 692)
  Applicant

- and -

DARATECH PTY LTD
  (ACN 006 598 198)
  Respondent

Coram:Merkel J

Place:Melbourne

Date:        20 March 1996

MINUTES OF ORDER

THE COURT ORDERS THAT:

1. The application of 7 December 1995 be dismissed.

1. The applicant shall pay the respondent's taxed costs of the application including reserved costs.

........ ........ ........ ........ ..

Note:Settlement and entry of orders is dealt with in Rule 36 of the Federal Court Rules.

IN THE FEDERAL COURT OF AUSTRALIA
VICTORIAN DISTRICT REGISTRY
GENERAL DIVISION  No. VG 3737 of 1995

FLOURISH PTY. LTD.
  (ACN 007 148 692)
  Applicant

- and -

DARATECH PTY LTD
  (ACN 006 598 198)
  Respondent

REASONS FOR JUDGMENT

HIS HONOUR: In this matter the applicant is applying pursuant to s.459G of the Corporations Law to set aside a statutory demand of the respondent dated 22 November 1995 for the sum of $153,000.

The grounds relied upon are that there is a genuine dispute about the debt, or that the applicant has an offsetting claim under section 459H of the Corporations Law.

The demand was made in respect of a debt alleged to be due under an agreement made on 18 July 1995 pursuant to which the applicant acquired certain rights and entitlements in relation to the invention, the subject of Australian Patent No. 654656 and New Zealand Patent No. 235121.

Under the agreement, the balance due of $153,000 was not paid on the due date, being 31 August 1995. 

In substance, the applicant contends that certain representations were made which induced it to enter into the agreement which were misleading or deceptive and that as a consequence it has a genuine dispute or an offsetting claim in the terms of section 459H.

The misrepresentations said to have been made were oral and in writing.  The oral misrepresentation was that:

The patents were strong and would be enforceable in the event of infringement.

It seems on the evidence that that misrepresentation was said to have been made at a time when the application for the patent was pending in Australia. 

The written representation, which was also made prior to registration of the patent, was set out in a letter from the respondent to the applicant dated 11 April 1994 was that the respondent:

...believes the patents are strong and will enforce them against any infringement.

For present purposes, I assume the representations as alleged were both made and were both relied upon to induce the applicant to enter into the agreement. 

It seems that the issue before me is whether the applicant has adduced evidence which can satisfy me that there is a plausible contention requiring investigation, or that its claims may have some substance.  In that regard I refer to the discussion in First State Computing v Kyling (1995) 13 ACLC 939 at 948.

The issue before me is whether the test, as stated by me, and which was relied upon by counsel for the applicant, has been satisfied in the present case. 

Two preliminary matters need to be stated. 

First, counsel for the applicant stated that it was not contended that the respondent misrepresented its belief or state of mind concerning the strength of the patent or its enforceability.  Rather, it was said that as a matter of objective fact, the statements as to the strength and enforceability of the patent, which I have set out above, were misleading, deceptive or otherwise a mis-statement of the true facts.

Second, in the course of argument I expressed concern at the generality and lack of specificity in the evidence relied upon by the applicant which did not even include the registered patent. I specifically asked counsel for the applicant at the conclusion of his submissions, and prior to the submissions of counsel for the respondent, whether the evidence he had adduced was all the evidence he wished to rely upon.  Counsel wished to consider that matter, but argument concluded without any request for time to file further evidence.

In those circumstances, I must approach the matter solely on the basis of the extraordinarily skimpy evidence adduced. 

I turn first to the issue of enforceability of the patent. I take that representation as relating to the entitlement and capacity to enforce the patent once an arguable case of infringement has been detected. The patent was registered by the date of the agreement and no reason or material was put forward as to why it would not be enforceable under Part XIII of the Patents Act 1952. What was relied upon was a statement by a chemist who
was the inventor of the technology the subject of the invention which was contained in paragraph 8 of the affidavit of John Zuccon, where he states: 

8.I refer to paragraph 6 of Jordan's affidavit and confirm that I have a concern regarding the difficulty in being able to detect any infringement of the patent.  This difficulty therefore affected the value and enforceability of the patents.  Further, I informed Mr Jordan that the technology is not worth $170,000 or even the $17,000 which I believe has been paid as a deposit to Daratech.  I further told Mr Jordan that there is similar technology available for sale between $20,000 and $30,000.

Notwithstanding the statement about the link between detection and enforceability in paragraph 8, it seems to me that a concern about difficulty in detecting infringement is not evidence that goes to the enforceability of the patents in question, as I have stated that issue to arise.  At best, the evidence may raise an issue about detecting infringements, but the representation relied upon related to enforceability as set out by me rather than difficulty in detection. 

The statement, offered no explanation of the factual basis for the concern. It is so general and lacking in specificity, that absent further evidence, which was not sought to be adduced, I would not be prepared to act on the material before me to conclude that a genuine dispute arises in relation to the misrepresentation relied upon as to enforceability.

The substantial matter said to be mis-stated was that the patent is not a "strong one".  Again, as with "enforceability" it must be understood that that statement was made at a time when the application for the patent was pending.

I have some difficulty understanding what the statement means, but I accept that it was made in respect of the patent then being applied for, and apparently for the purpose of inducing the applicant to acquire certain patent rights. In that regard, I am prepared for present purposes to assume that it contained some representation as to the validity and utility of the patent when granted, i.e. by reference to the rights conferred under the Patents Act. The evidence set out in paragraph 8 above of the affidavit of John Zuccon is relied upon to support a case that the statement as to the strength of the patent was not a correct one.

No evidence was adduced or submissions put questioning the validity of the patent or the existence of any grounds to seek its revocation under Part XI of the Act. I was not referred to any defect or problem under any section of the Patents Act. It was only said that the "concern" about detection of infringement did not make the patent a strong one. Again, in some general
sense I can accept that a patent's value may be affected by difficulties in detecting infringement. 

I have no evidence before me that the applicant, which had been the licensee in respect of the invention for some time, relied upon the representation made in some way that relates to it being misleading as to the matter of detection of infringement.

The applicant may rely upon a further statement in the material, which was in paragraph 7 of the affidavit of Raymond George Berry which was as follows:

In or about August 1995 I was informed by John Zuccon, a chemist formerly in the employ of Daratech and verily believe that the patent registered by Daratech is probably not enforceable, as its component parts are similar to or the same as most other procedures being used in commercial or hobby practices.  It is therefore almost impossible to differentiate the patented process from existing common practice.

Again, this statement, which has not been amplified upon and explained only in part by Mr Zuccon, is very general. Without some explanation of the basis for it, in my view it does not go far enough to establish evidence as to a mis-statement of fact, even applying the low threshold test which I have referred to above for the applicant on an application such as the present.

The paragraph does not contain any statement that the applicant relied upon the representations made as conveying some statement relating to the issue of detection of infringement of which it, notwithstanding its past experience in relation to exploiting the technology, was unaware at the time it entered into the agreement of 18 July 1995. 

Some of the generality of the foregoing evidence adduced on behalf of the applicant was explained in an affidavit of the solicitor for the respondent sworn on 13 February 1996.

In paragraph 4 of that affidavit the solicitor said:

Mr Zuccon also told me and I verily believe that the technology uses a combination of two chemicals, glycerol and sorbitol to preserve in a supple and fresh looking state plant foliage.  Previous treatment compounds had only used glycerol.  Mr Zuccon told me and I verily believe the technology was a significant improvement on pre-existing glycerol technology as it was the first treatment that allowed economic long-term preservative of foliage without leeching of the plant's colouring or preservative through the plant's surfaces.

In paragraph 6 he deposed as follows:

I specifically discussed with Mr Zuccon allegations made by Flourish to the effect that Daratech had made misrepresentations to Flourish concerning the value and enforceability of the patents.  What Mr Zuccon told me does not reconcile with paragraph 7 of Mr Berry's affidavit sworn 12 December 1995.  Specifically, Mr Zuccon and I verily believe that -

(a)The technology the subject of the patents has value to Flourish.  Flourish is the major company involved in preservation of plant foliage in Australia.  In Mr Zuccon's view the patents would not be a good investment for another company because of set-up costs to enter the dried foliage market and the size of a market Flourish already dominates.

(b)The patent can be infringed by including sorbitol and glycerol in the preserving compound.  As mentioned above, previously only glycerol was used.  Unless continual inspection and testing is undertaken, it can be difficult to detect the infringing introduction of sorbitol, as leeching only occurs after time and in certain weather conditions.  It was not Mr Zuccon's view that the process the subject of the patents was the same as other procedures for preserving foliage being used in commercial or hobby practices.  Mr Zuccon told me the process was unique and had advantages over other commercially available uses.  His concern was that it may be difficult to detect infringement in a market that had a number of small operators.

Mr Zuccon did not dispute that explanation in his affidavit in any significant respect.  That evidence goes some way to explaining the difficulties in detection which were left unexplained in the applicant's material.   In my view the problems of detection referred to do not bear upon the strength of the patent as such or its enforceability.  It indicates practical rather than legal difficulties in detecting infringement which may have some bearing on the value of the patent to the applicant.  Notwithstanding those matters I am not sufficiently satisfied that any of the representations made and said to be relied upon by the applicant in the submissions before me relate to the issue of detection of infringement of the patent or were understood by the applicant to relate to that issue.

Further, as I have already indicated it is also important that the applicant has not said that it was unaware of or misled as to those practical difficulties when it entered into the agreement. 

Finally, on the evidence before me I could not conclude that the difficulty of detection by reference to product composition as explained is an unusual
or unexpected one.  It just means that some form of detection such as chemical testing rather than visual observation may be necessary in order to ascertain whether there is infringement or an arguable case of infringement. One suspects that such difficulties were inherent in the nature of the invention.

Nothing in the evidence suggests that that was unknown to the applicant at the time of the agreement.  That has particular significance in view of the applicant's status as licensee for some considerable period prior to the agreement. 

For those reasons I am not satisfied that the applicant has discharged the onus of establishing the necessary criteria, as stated above, for setting aside the statutory demand on the evidence relied upon and the submissions made before me. 

Accordingly, I dismiss the application of 7 December 1995 and order that the applicant pay the respondent's cost of the application.

I certify that this and the preceding 5 pages are a true copy of the Reasons for Judgment of the Honourable Justice Merkel

Associate:

Dated:

Heard:20 March 1996

Place:Melbourne

Judgment       20 March 1996

Appearances:   Mr. N. Payne instructed by Home Wilkinson & Lowry appeared for the applicant.

Mr. R. Hay instructed by Davies Ryan deBoos appeared for the respondent.