Microsoft Corporation v CPL Notting Hill Pty Ltd (No 8)
[2022] FedCFamC2G 1033
Federal Circuit and Family Court of Australia
(DIVISION 2)
Microsoft Corporation v CPL Notting Hill Pty Ltd (No 8) [2022] FedCFamC2G 1033
File number(s): SYG 1205 of 2016 Judgment of: JUDGE BAIRD Date of judgment: 6 December 2022 Catchwords: INTELLECTUAL PROPERTY – COPYRIGHT – COSTS – form of final orders – declarations made – whether injunctive relief appropriate – injunctive relief not warranted in the circumstances – compensatory damages – lost licence fee basis – whether costs under Federal Court scale appropriate – whether indemnity costs appropriate – apportionment of costs – costs of first trial – costs of retrial – costs as between respondents – Federal Court scale appropriate – whether letter constituted Calderbank offer – whether offer unreasonably refused – indemnity costs appropriate from date of offer – pre‑judgment interest Legislation: Competition and Consumer Act 2010 (Cth), Schedule 2 Australian Consumer Law
Copyright Act 1968 (Cth) ss 36, 115, 131D
Federal Circuit and Family Court of Australia Act 2021 (Cth) ss 211, 214
Federal Circuit and Family Court of Australia (Division 2) (General Federal Law) Rules 2021 (Cth) rr 1.06, 22.02, Schedule 2
Federal Circuit Court of Australia Act 1999 (Cth) s 79
Federal Court Rules 2011 (Cth) Pt 25, Pt 40
Cases cited: A2B Australia v Oz Power Group [2020] FCCA 2623
Adidas AG v Pacific Brands Footwear Proprietary Limited (No. 4) [2013] 308 ALR; [2013] FCA 1335
Autodesk Pty Ltd v Cheung [1990] 17 IPR 69
Calderbank v Calderbank (1975) 3 All ER 333
CGU Insurance v Corrections Corporation of Australia Staff Superannuation Property Limited [2008] FCAFC 173
Chen v Chan [2009] VSCA 233
CPL Notting Hill Pty Ltd v Microsoft Corporations [2019] FCA 223
Falkingham v Peninsula Kingswood Country Golf Club [2014] VSC 483
Hamod & Anor v New South Wales & Anor [2004] FCA 424
Henley Arch Pty Ltd v Del Monaco (No 2) [2020] FCCA 1911
Louis Vuitton Malletier SA v Knierum [2004] FCA 1584
Mann TravelPty Ltd v Skyscanner Ltd (No 2) [2022] FedCFamC2G 33
Mann Travel Pty Ltd v Skyscanner Ltd [2021] FedCFamC2G 263
Melbourne City Investments Pty Ltd v Treasury Wine Estates Limited (No 2) [2017] FCAFC 116
Microsoft Corporation v CPL Notting Hill Pty Ltd (No 7) [2022] FedCFamC2G 590
Otter Products v Haydon [2021] FedCFamC2G 13
Swancom Pty Ltd v The Jazz Corner Hotel Pty Ltd [2022] FCAFC 157 (13 September 2022)
Universal Music Publishing Pty Ltd v Palmer (No 2) [2021] FCA 434
Division: Division 2 General Federal Law Number of paragraphs: 136 Date of last submission/s: 6 December 2022 Date of hearing: 6 December 2022 Place: Sydney Counsel for the Applicants: No appearance by or on behalf of the applicants Counsel for the Respondents: Mr C Truong KC with Mr C Thompson Solicitor for the Respondents: Henley Legal ORDERS
SYG 1205 of 2016 FEDERAL CIRCUIT AND FAMILY COURT OF AUSTRALIA (DIVISION 2)
BETWEEN: MICROSOFT CORPORATION (and others named in the Schedule)
First Applicant
AND: CPL NOTTING HILL PTY LTD (and others named in the Schedule)
First Respondent
order made by:
JUDGE BAIRD
DATE OF ORDER:
6 DECEMBER 2022
THE COURT DECLARES THAT:
1.The First Respondent, by pre-installing Windows 7 Pro software onto the hard drives of 30 new computers built by the First Respondent, and to which the First Respondent affixed loose Certificates of Authenticity (COAs) acquired by the Third Respondent on 9 June 2015, reproduced Windows 7 Pro in a material form without the licence of the First Applicant and thereby infringed the First Applicant’s copyright in Windows 7 Pro under s 36(1) of the Copyright Act 1968 (Cth).
2.The Third Respondent authorised the infringing acts of the First Respondent referred to in the declaration made in paragraph 1 by supplying the First Respondent with the Windows 7 Pro and loose COAs it had acquired on 9 June 2015, and thereby infringed the First Applicant’s copyright in Windows 7 Pro under s 36(1) of the Copyright Act.
THE COURT ORDERS THAT:
3.Pursuant to s 115(2) of the Copyright Act, the First Respondent pay compensatory damages for copyright infringement to the First Applicant in the amount of AUD$5,911.75 and interest on this sum up to the date of judgment pursuant to s 211 of the Federal Circuit and Family Court of Australia Act 2021 (FCFCoA Act).
4.Pursuant to s 115(2) of the Copyright Act the Third Respondent pay compensatory damages for copyright infringement to the First Applicant in the amount of AUD$121.50 and interest on this sum up to the date of judgment pursuant to s 211 of the FCFCoA Act.
5.Pursuant to r 22.02(2) of the Federal Circuit and Family Court of Australia (Division 2) (General Federal Law) Rules (Cth) 2021 (GFL Rules) the Applicants jointly and severally pay the costs of the Second and Fourth Respondents in the proceeding (noting for more abundant caution, that the costs include the costs of the first trial and the retrial) comprising their proportion of the costs incurred on behalf of all the Respondents, and the costs incurred exclusively on their behalf:
(a)on a party and party basis up to and including 20 August 2018; and
(b)on an indemnity basis after 20 August 2018,
as agreed or to be taxed in accordance with Part 40 of the Federal Court Rules 2011 (Cth) (FCRules).
6.Pursuant to r 22.02(2) of the GFL Rules the Applicants jointly and severally pay the costs of the First and Third Respondents of the proceeding (noting for more abundant caution, that those costs include the costs of the first trial and the retrial) in the following proportions on the following bases:
(a)80% of costs on a party and party basis up to and including 20 August 2018; and
(b)100% of costs on an indemnity basis after 20 August 2018,
as agreed or to be taxed in accordance with Part 40 of the FCRules.
7.The proceeding otherwise be dismissed.
OTHER MATTERS:
8.The Court notes that by the above declarations and orders the stay effected by paragraph 1 of the order of the Federal Court of Australia (O’Callaghan J) made 29 September 2020 is dissolved.
Note: The form of the order is subject to the entry in the Court’s records.
Note: The Court may vary or set aside a judgment or order to remedy minor typographical or grammatical errors (r 17.05(2)(g) Federal Circuit and Family Court of Australia (Division 2) (General Federal Law) Rules 2021 (Cth)), or to record a variation to the order pursuant to r 17.05 Federal Circuit and Family Court of Australia (Division 2) (General Federal Law) Rules 2021 (Cth).
REASONS FOR JUDGMENT
(ex tempore, revised from transcript)Judge Baird
introduction
On 30 September 2022 I gave my reasons for concluding that the first applicant, Microsoft Corporation, was entitled to relief for copyright infringement against the first and third respondents limited to 30 unlicenced installations of Windows 7 Pro, and otherwise rejecting all claims brought by the applicants: Microsoft Corporation v CPL Notting Hill Pty Ltd (No 7) [2022] FedCFamC2G 590 (Reasons).
As the respondents, whom I will refer to as the CPL parties unless it is otherwise appropriate, have submitted before me, the Court’s Reasons are necessarily extensive. The applicants, whom I will refer to as the Microsoft parties unless it is necessary to refer to them individually, brought wide-ranging claims against the CPL parties for alleged infringements of copyright and registered trade marks, as well as misleading or deceptive conduct in breach of Schedule 2 of the Competition and Consumer Act 2010 (Cth), the Australian Consumer Law (ACL).
In my Reasons I concluded that:
(a)Microsoft succeeds in its copyright claim under s 36(1) of the Copyright Act 1968 (Cth) against the first respondent, CPL Notting Hill, for reproduction by pre‑installation in respect of 30 relevant instances, and against the third respondent, CPL Distribution Pty Ltd, for authorising that reproduction;
(b)pursuant to s 115(2) Copyright Act, compensatory damages limited to the 30 relevant instances for the above copyright infringements should be awarded;
(c)pre‑judgment interest should be awarded;
(d)declaratory relief, so limited, was appropriate; and
I said I would hear the parties further as to the appropriateness of injunctive relief.
I otherwise rejected what I have described in the Reasons as the broader supply case. That supply case brought by the Microsoft parties was, in short compass, allegations that CPL Distribution had supplied CPL Notting Hill with “at least 1467” (and on other counts, 1617) loose certificates of authenticity (COAs) for Windows 7 (comprising both Windows 7 Professional and Windows 7 Home Premium) “in the course of carrying out business”, which supply was not licenced and which resulted in the alleged large scale reproduction of Windows 7 on new computer systems.
By reason of the matters I set out in my Reasons, including at [781], I gave the parties an opportunity to consider my Reasons and to make submissions concerning what orders I should make to reflect those Reasons, and to deal with costs. I stood the proceeding over for directions to 9 November 2022.
The parties have provided written submissions. There has been substantial agreement as to the terms of declarations. There has been no agreement on the question of costs, damages, or as to injunctive relief.
The CPL parties’ provided written submissions dated 8 November 2022 including proposed final declarations and orders. The Microsoft parties provided written submissions dated 18 November 2022 including proposed final declaratory relief and orders. The CPL parties filed short reply submissions dated 25 November 2022.
The CPL parties sought a short oral hearing, which I had previously foreshadowed would occur. Mr Truong KC and Mr Thompson of junior counsel have appeared for the CPL parties by Microsoft Teams before me today.
The applicants’ legal representatives informed my Chambers by letter to the Court dated 1 December 2022, copied to the CPL parties’ solicitors, that the Microsoft parties were content to rely on their written submissions, and by a further email to Chambers dated 5 December 2022, the applicants’ solicitors reiterated their position.
Declaratory relief
I concluded at [779] of the Reasons that declaratory relief, limited to the findings I made, is appropriate. Relevantly, in the Reasons the Court found that:
(a)the first respondent (CPL Notting Hill), by pre-installing Windows 7 Pro onto the hard disks of 30 new computers it built, and to which it had affixed loose COAs acquired by CPL Distribution in June 2015, reproduced Windows 7 Pro in a material form without the licence of the first applicant (Microsoft) and thereby infringed Microsoft’s copyright in Windows 7 Pro under s 36(1) of the Copyright Act; and
(b)the third respondent (CPL Distribution) authorised these acts of reproduction by CPL Notting Hill and thus also infringed Microsoft’s copyright in Windows 7 Pro.
There is no question that the Court has power and a wide discretion to grant declaratory relief in matters within its original jurisdiction, which includes copyright infringement: Copyright Act s 131D. Such declaratory relief has been granted, inter alia, where it provides a foundation for the later inquiry into damages.
The CPL parties proposed a form of declarations I have made today as an appropriate form of declaratory relief, and the Microsoft parties have made some minor changes to the proposed declarations which the CPL parties have accepted. In turn, I am satisfied that declarations in the forms proposed, with some clarifying amendments, are appropriate to make. I make those declarations.
Remaining issues
As I have said, the parties otherwise remain at issue. The CPL parties identify the following issues for the Court to determine:
(a)whether injunctive relief should be granted;
(b)the amount of compensatory damages under s 115(2) of the Copyright Act as against CPL Notting Hill and as against CPL Distribution;
(c)the amount of pre‑judgment interest; and
(d)as to costs, and whether it is an appropriate case for indemnity costs to be awarded.
The Microsoft parties identify the principal outstanding issues as being:
(a)whether injunctive relief is warranted as an adjunct to the declaratory relief;
(b)s 115(2) damages for copyright infringement;
(c)the costs of the first and second trials; and
(d)the question of indemnity costs.
Injunctive relief
The Microsoft parties say that injunctive relief is warranted, whilst the CPL parties say it is not. The Microsoft parties have proposed separate injunctions for each of the first and third respondents, and say that the form of injunctions they propose take into account the Court’s remarks at Reasons [780] and the last sentence of Reasons [781].
Microsoft puts its submissions, in short, as follows:
(a)it is appropriate that injunctions are made to ensure the infringing conduct is not repeated, and this is particularly so because of “the vigour with which the [CPL parties] contested the copyright infringement case concerning the ‘retail sales’ (which were found to be infringements)”;
(b)at all times, the Microsoft parties say, the CPL parties denied infringement whilst admitting engaging in the conduct relevant to the “retail sales case”; and
(c)the CPL parties contended (defensively) at all times that such conduct was licenced (or otherwise approved) by Microsoft.
The Microsoft parties concede that there has been a significant passage of time since the conduct occurred, but say that ought not diminish the appropriateness of making injunctive orders at this time. They say:
[7]…There is a benefit in the Court’s declarations being bolstered by injunctive relief, so as to ensure that the public message emerging from this case is that CPL’s [the first and third respondents, although I note that the Microsoft parties define all four respondents collectively as CPL] infringing conduct is not condoned and future conduct of the same kind is prohibited. Otherwise, the impression left by declaratory relief alone is that CPLs conduct, if repeated, would not infringe Microsoft’s rights. Whilst the injunctive relief proposed is limited to Windows 7 Pro, the general message to the public is, of course, that infringement of any Microsoft software is liable to declaratory and injunctive relief, which is an appropriate message, given CPL purports to be a reputable dealer in computers and computer technology.
The CPL parties accept that the Court has power to grant injunctive relief for copyright infringement, but, referring to Finkelstein J’s decision in Louis Vuitton Malletier SA v Knierum [2004] FCA 1584 at [13]‑[17] amongst other cases, observe that even where infringement of an intellectual property right has been established, in order to obtain a permanent injunction the plaintiff has the burden to establish that there is a risk that the defendant will engage in infringing conduct in the future.
In Louis Vuitton Finkelstein J at [15] stated the true position is this:
…The basis for the grant of an injunction in an intellectual property case is in every respect the same as in any other case. The plaintiff must show that there is a risk that the defendant will engage in infringing conduct in the future. If the plaintiff is unable to make good that proposition, he [sic] will not obtain an injunction.
At [17] his Honour stated:
On the question of proof of the risk of repetition some judges have been prepared to infer that risk simply from past infringement. But the better view is expressed by Laddie J in Coflexip SA v Stolt Comex Seaway MS Ltd [1999] 2 All ER 592, where he said (at 605) that it is simply not right to treat [all intellectual property right] infringers as “bad apples”.
That caution as expressed by his Honour is apposite to the present case.
I should also note, contrary to the Microsoft parties’ submissions, it does not necessarily follow that where a party defends itself, even where it loses, that injunctions are warranted. As Finkelstein J identified, the question is, is there a risk of repeated conduct.
For the following reasons I am not persuaded that it is appropriate in this case to grant permanent injunctions whether in respect of Windows 7 Pro or Windows 7 more generally. It does not follow that because there has been infringement – and I have found infringement of Windows 7 Pro in 30 instances – that there is a risk of further infringements. As Finkelstein J said in Louis Vuitton, that there has been infringement does not mean that the corporate respondents are “bad apples” and will, again, infringe.
As the CPL parties submitted, the CPL parties’ witnesses were wholly believed on all critical issues. Moreover, the Microsoft parties were wholly unsuccessful in seeking to impugn the credit of any of the respondents’ witnesses and no adverse findings were made against them. Further, the authorisation cases against the second and fourth respondents (the corporate respondents’ directors) failed.
The contest between the parties has been protracted and bitterly fought. It seems to me that there is a sufficient salutary lesson taught in this case by the fact of being sued and of the pursuit by the rights holder against an infringer.
In my view, the fact of declarations being made identifying the infringing conduct suffices to send a clear public message. As Robertson J said in Adidas AG v Pacific Brands Footwear Proprietary Limited (No. 4) [2013] 308 ALR; [2013] FCA 1335 at [7] “the Court should not issue idle or empty orders”.
Further, I am not persuaded that there is any relevant threat or sufficient risk of further infringement. It is over seven years since the impugned conduct. The evidence is, and I was satisfied that, the corporate respondents are reputable businesses, and have acquired and sold, and are reputable dealers in, computers and computer technology including dealing in licensed copies of Microsoft’s computer programs. There is no evidence before me of any likelihood of a repeat infringement.
As I have found in my Reasons, the Windows 7 Pro products are superseded technology. Windows 10, which replaced in its entirety Windows 7, was first released to the public in Australia from 29 July 2015: see first, Reasons at [171]‑[172], where I footnoted that the Microsoft parties put in evidence the Windows Lifecycle fact sheet, and see also footnote 77. At [781] of my Reasons I noted further, that the last supplies to the OEMs (relevant to system builders licences) was in the last quarter of 2016. (I note that in my Reasons at [781] the cross‑reference to [196] and [197] (sic) is an incorrect cross‑reference, and should be to [171] and [172]. I will treat the cross‑reference as so corrected.) In these circumstances, I do not consider there is utility in any injunction.
I am otherwise satisfied that there is a long absence of the Windows 7 product from the Australian market, and accordingly that any order restraining CPL Notting Hill or CPL Distribution, or both of them, from further pre‑installing or authorising Windows 7 Pro on new computers without a licence from Microsoft, would serve no useful purpose and be, as said by his Honour Robertson J in Adidas AG, “idle or empty”.
I decline to award injunctive relief.
compensatory Damages
In my Reasons I concluded that Microsoft should be awarded compensatory damages under s 115(2) of the Copyright Act against CPL Notting Hill for reproduction by pre‑installation of Windows 7 Pro and against CPL Distribution for authorising that reproduction in respect of and limited to the 30 relevant instances: Reasons at [702]‑[714] and [778].
The first point to note is that, at Reasons [711], I referred to a lost licence fee, net‑of‑rebate, of USD$85.45. That was incorrect. That fee is a net‑of‑rebate fee of what the evidence shows was the listed fee for Microsoft 7 Home Premium, not the relevant fee for a commercial OEM licence of Windows 7 Professional.
The evidence is that, at the relevant time, namely 9 June 2015, and indeed, through the whole period of the alleged infringements, the Microsoft fee for system builder licences was gross USD$130, and that there was applicable a rebate fee of $4.05 per licence.
In my Reasons I accepted the Microsoft parties’ submission that s 115(2) Copyright Act compensatory damages are to be determined on the lost licence fee basis. That is, the opportunity to charge a fee in respect of the supply of the equivalent number of system builder packs as they have been able to establish have been infringed, in the present case, the 30 relevant instances: Reasons at [702]‑[708]. I was satisfied and concluded that awarding compensatory damages on a lost licence fee basis was appropriate.
I identified the confidential evidence of Mr Noble, the applicants’ in-house solicitor, as to quantum, and subject to the issue of rebates, accepted that evidence. As I said at Reasons [711]‑[714], in the circumstances, and given the exchange rate is likely different than it was in 2019, I gave the parties an opportunity to consider my Reasons and to make submissions concerning the amount I should award by way of compensatory damages under s 115(2) of the Copyright Act for the 30 relevant instances.
I there noted that the Microsoft parties submitted, for the purposes of attributing infringing conduct of a CPL party to both the CPL companies, that the companies are the one business and no distinction can be drawn between them. I also accepted as having merit, the CPL parties’ submission that any damages or award against a CPL party should not be cumulative since any damage arises from a single course of conduct and Microsoft would, at most, have received a single licence fee from the sale of the system builder pack purchased by CPL Distribution and supplied to it by CPL Notting Hill for use when building a new computer.
I also noted at Reasons [714] that, nonetheless, reproduction and authorising reproduction are separate infringements and that compensatory damages, in respect of the 30 relevant instances, should be awarded in an amount that recognises the separate infringements of each of CPL Notting Hill and CPL Distribution. That said, the award of damages on a lost licence fee basis is an award to be calculated by reference to what would be a reasonable licence fee under what has been described as the “user principle”.
Her Honour Katzmann J in Universal Music Publishing Pty Ltd v Palmer (No 2) [2021] FCA 434, at [368] to [396], by reference to her considered examination of the authorities distilled the applicable principles as follows:
(a)the user principle may be applied by considering what would have been the price charged to the infringer for permission to use the copyright work, and to estimate the damage in that way;
(b)the remedy attempts to rectify the wrongful act by requiring payment of an amount that would have made the use lawful, and even if the plaintiff has suffered no actual detriment, including no loss or an opportunity that would have been exercised to license the use of the intellectual property;
(c)the user principle may be applied even if the facts show that the owner of the relevant property would never have licensed it to the infringer (despite some earlier dicta to the contrary); and
(d)while there is a restitutionary element to the award of such damages, it should not be seen exclusively in those terms. Rather, the award is one manner by which a wrongful act is rectified and focuses upon both the reasonable value of the wrongful acts to the defendant and their reasonable price to the claimant.
The CPL parties identify the correct licence fee, according to Microsoft’s evidence, was USD$130, and the rebate was USD$4.05, which equated to a list price net‑of‑rebate licence fee of USD$125.95. Noting that the exchange rate at the date of judgment (in this instance the parties are agreed as being the date of my Reasons) is US$1.00 equals AUD$1.5647, and applying that exchange rate, the net‑of‑rebate lost licence fee in respect of the 30 instances totals AUD$5,911.75.
The CPL parties submit that that fee, however, would be excessive, and that the better measure in any event, is the Australian dollar fees for which CPL Distribution in fact acquired over 2000 system builder packs from Microsoft’s authorised distributors, which contained copies of Windows 7 Pro, at actual prices varying from about AUD$100 to about AUD$190, and almost always less than AUD$170. The CPL parties further submit that it should be inferred that the distributor’s price included a profit margin. Accordingly, the actual licence fee received by Microsoft was lower, and a calculation of the net fee to Microsoft would need to take into account its marginal costs for producing and distributing system builder packs.
The CPL parties submit that, accounting for a 10 percent profit to the distributor, the total licence fee received by Microsoft would have been no more than about AUD$4,000, even before allowing for any of its own costs. The CPL parties submit that, following on from what I said in my Reasons at [714], each of CPL Notting Hill and CPL Distribution should bear separate liability which, combined, constitutes no more than the reasonable licence fee resulting from the infringements that Microsoft lost the opportunity to recoup in proposed sales orders. These submissions have merit.
The Microsoft parties, however, submit that the CPL parties’ approach of splitting the amounts equally between the corporate respondents is inappropriate because it applies an analysis which was not Microsoft’s evidence in the proceeding, nor what I said in my Reasons at [708]‑[714] (which applied Microsoft’s US dollar evidence), and further that it ignores that it would have been CPL Distribution alone that would have paid the lost licence fee.
Microsoft then submits, in relation to CPL Notting Hill, that given it acquired infringing items from a related CPL entity, it would not have paid a licence fee in respect of that transaction, and in the circumstances “… It is not appropriate simply to let CPL Notting Hill’s conduct go without reprimand (which CPL parties appear to accept as a proposition given its proposed orders involve a section 115(2) damages award against CPL Notting Hill) …”
Microsoft submits that the Court should make an award “at large”, consistent with the principles in Autodesk Pty Ltd v Cheung [1990] 17 IPR 69 at 75-76 per Wilcox J. In that case, Microsoft says, because the licence fee approach was not appropriate to apply to Mr Cheung and where 14 copies of AutoCAD programs had been seized, the Court awarded damages at large in the amounts of $10,000 to one applicant and $5,000 to another applicant. Here, Microsoft submits there are twice as many infringements, Autodesk was decided in 1990, and therefore, having regard to inflationary considerations, damages at large in the amount of AUD$30,000 (or AUD$1,000 per licence fee) should be awarded against CPL Notting Hill. This figure is also justifiable, Microsoft submits: (submissions at [11])
…on the basis that CPL Notting Hill, as a significant player in the CPL business as a whole, should be admonished for its role in the infringing conduct. The award should not be a trivial sum – to do so would fail to recognise that CPL Notting Hill’s conduct was egregious and warrants reprimand.
I do not accept the Microsoft’s parties’ submissions.
It is apparent from the above that the Microsoft parties confuse the role of compensatory damages with the role of additional damages pursuant to s 115(4) of the Copyright Act. I have rejected the Microsoft parties’ claim for additional damages.
Further, as I identified in my Reasons, the Microsoft parties in their closing submissions propounded a licence fee test for s 115(2) damages on the basis of lost licence fees. Whilst they made submissions both on the bases whether there would or would not be a rebate, their closing submissions identified quantification of s 115(2) Copyright Act damages on both bases of lost licence fees (i.e., gross, and net). They also submitted that there were no or negligible production costs. They did not cavil with the lost licence fee basis. The reference in the Microsoft parties’ closing submissions to Autodesk is to be seen in that context. Indeed, in Autodesk Wilcox J said at 75, observing that the licence fee approach to assessment has often been applied:
The approach has the attraction of precision. In a case where the court may infer that, presented with a choice between paying the licence fee and not using the work, the infringer would have paid the licence fee, the approach is also a logical one.
In Autodesk, the only evidence before the Court was of the 14 copies seized on an Anton Piller order, and the claim for damages was on the basis of loss of profit. It is, in my respectful view, a “world away” from the present case (adopting the words of Mr Thompson of counsel in distinguishing Autodesk). Further, in Universal at [373], Katzmann J, respectfully suggested of the view (apparently thought by Black CJ and Jacobson J in Aristocrat Technologies Australia Pty Ltd (No 4) (2015) 241 FCR 564; [2007] FCAFC 40) that damages should not be assessed on the basis of the user principle when as a matter of fact a licence would not have been granted:
...that that view appears to be based on a misunderstanding of the authorities. There seems to be no reason in principle to support such a view, particularly in the face of the long line of patent infringement cases in which the contrary position has been accepted and is now orthodox.
and at [384]-[385], observed that the remarks of Black CJ and Jacobson J were obiter dicta and not seriously considered dicta at that.
In Universal at [386], Her Honour noted in respect of Autodesk:
The copyright owner (Autodesk) sought damages on the basis of lost profits from lost sales. It did not mount a case for damages based on a reasonable licence fee.
Her Honour then observed (Universal at [389]), that:
… since Columbia and [Autodesk] and also Microsoft –[three cases discussed by her Honour], …the Federal Court has held that, even in cases in which a licence would not have been granted, a reasonable licence fee determined under the user principle provides a useful basis for determining the amount of damages “at large”. [Her Honour then referred to a number of more recent Federal Court and High Court authorities]
In this case, I found that damages should be assessed by reference to the lost licence fee principle. The Microsoft parties in their closing submissions submitted that the assessment should be by reference to Microsoft’s list price licence fees for the relevant product at the relevant time.
The evidence is that CPL Distribution had acquired, as I have said, over 2000 system builder licences from Microsoft’s authorised distributors in the relevant period, and it is to be inferred that CPL Notting Hill pre-installed and supplied such licences. In these circumstances, the evidence is that there is a willing licensee, and that Microsoft is in the business of being a willing licensor.
The question, in my view, remains: at what fee would Microsoft Corporation have licensed a system builder pack for Windows 7 Pro or, what would have been the licence fee at which Microsoft Corporation would have licensed a system builder pack for Windows 7 Pro in the relevant period, specifically on 9 June 2015? As the award under s 115(2) is compensatory, the user principle provides a relevant and appropriate guide to answer the question. That question is answered, as I have said above, by Microsoft’s then current licence fee of US$130 subject to a rebate.
I discussed with counsel in oral hearing this morning whether it was appropriate to make one order against both of the corporate respondents or two separate orders as against both respondents. I consider that it is appropriate to make two separate orders for damages, but to thereby acknowledge that the amount of the licence fee that Microsoft would receive is its one then current licence fee, and that that fee permitted a supply by the distributor of a system builder pack and its pre‑installation and then its use.
Whilst Microsoft has not provided evidence of its pricing relationship with its authorised distributors, and it can be inferred that some profit margin or at least revenue margin would be retained by the authorised distributor, and that Microsoft would receive an amount net of that margin, I am not prepared to speculate as between Microsoft and its distributors what the particular fee structure would be. The evidence before me is that of a list price and a price net‑of‑rebates.
In the circumstance where CPL Distribution did not receive a rebate, I consider that the appropriate course to follow in awarding s 115(2) damages is to, first, award damages against CPL Notting Hill in the sum of AUD$5,911.75, which I have reached as follows:
(1)the list price for Windows 7 Pro of US$130 less the rebate of US$4.05, equating to US$125.95 per licensed copy of Windows 7 Pro;
(2)30 x US$125.95, being a total of US$3,778.20 (that is a licence fee net-of-rebates for each of 30 instances); and
(3)applying the exchange rate at judgment (that is, as proposed by all parties, the date of my Reasons) of USD$1 = AUD$1.5647, the sum of A$5,911.75.
This then leaves the question of compensatory damages as against CPL Distribution.
In the circumstances, I consider it is reasonable to proceed on the basis that Microsoft would not have paid, because it did not pay, a rebate of US$4.05 to CPL Distribution, and that CPL Distribution pay by way of s 115(2) Copyright Act compensatory damages the difference between US$130 and US$125.95, that is, for each of the 30 relevant instances, applying the above exchange rate, the amount of damages I will award against the third respondent is AUD$121.50.
Whilst the above may lack some precision, I consider that the above awards best provide compensation to Microsoft on the basis of its lost licence fees under the user principle, and do not double count nor stray into the territory of s 115(4) Copyright Act additional damages.
Interest on damages
Finally, on the question of damages the parties agree that pre‑judgment interest is payable on each sum which is due to be paid by CPL Notting Hill and CPL Distribution.
The parties appear to be agreed as to the relevant interest rates for pre‑judgment interest. It suffices to state that pre‑judgment interest should be calculated from when the Microsoft parties commenced the proceeding on 13 May 2016, and that interest is not to be compounded: see the Federal Circuit and Family Court of Australia Act 2021 (Cth) (FCFCoAAct) s 211(4)(a).
Pre‑judgment interest is calculated at the Reserve Bank of Australia cash rate plus 4 percent, and is payable to today, when I make these orders. The CPL parties propose, and the Microsoft parties have stated they are content to adopt, the approach to interest which I will reflect in the orders without undertaking the calculation myself.
Costs
The default position in this Court is that costs, when ordered, are assessed as provided by schedule 2 of the Federal Circuit and Family Court of Australia (Division 2) (General Federal Law) Rules 2021 (Cth) (GFL Rules) (formerly part 1, schedule 1 of the Federal Circuit Court Rules 2001 (Cth)). See generally in this regard what I said in Otter Products v Haydon [2021] FedCFamC2G 13 delivered on 15 September 2021, two weeks after the GFL Rules came into being.
Thus, where in a particular case this Court’s Rules are insufficient or inappropriate, or the circumstances warrant, the Court may make what is known as “otherwise orders”, that is, it may apply, relevantly, the Federal Court Rules 2011 (Cth) (FC Rules): see r 1.06(2) of the GFL Rules and the non‑limiting application by r 1.06(3) of the provisions of particular FC Rules set out in schedule 1 to the GFL Rules.
The relevant principles are well-established. Pursuant to ss 214(2) and (3) of the FCFCoA Act, in force since 1 September 2021 (formerly set out in section 79 of the Federal Circuit Court of Australia Act 1999 (Cth)) this Court has a broad discretion to order costs.
I have summarised this Court’s approach to the exercise of its discretion in relation to orders for costs in a number of matters, including under the former Act in Henley Arch Pty Ltd v Del Monaco (No 2) [2020] FCCA 1911 at [7] to [12], and also in Mann Travel Pty Ltd v Skyscanner Ltd [2021] FedCFamC2G 263 at [45] to [47].
In sum, the Court’s discretion is broad but is to be exercised judicially and in the context of the relevant Court rules. The general rule is that costs follow the event. The first basis on which the Court will order costs is according to the Court event based scale set out in schedule 2 of the GFL Rules.
Costs may be awarded on a party and party basis, or on an indemnity basis. Pursuant to r 22.02(2) of the GFL Rules this Court may set the amount of the costs or the method of calculation, or refer the costs to taxation in accordance with Part 40 of the FC Rules.
The Court’s ability to order costs under the Federal Court scale is well known and accepted. In Henley Arch at [12] I said:
[12]This court’s ability to order costs under the Federal Court scale is well known and accepted. Whether it is reasonable in the circumstances to do so, however, is a matter to be resolved having regard to the principles I have adverted to above, and the individual circumstances, including achieving a just outcome given the facts and law at issue in the proceeding. The matter is not to be resolved with some formulaic approach: see generally an earlier decision of this court in Washington v Qantas Airways Limited [2014] FCCA 1413; (2014) 107 IPR 144.
The Microsoft parties say that costs should be awarded in their favour, whilst accepting a discount on the basis that they did not succeed on all issues. The CPL parties say that costs should be awarded in their favour as the CPL parties were the victor in the larger case (the supply case), and the Microsoft parties succeeded only in a very small part of their claims.
There are two main issues on costs. First, as to which way the costs should flow and whether any discount should be applied, and secondly, whether indemnity costs are appropriate.
In their written submissions the Microsoft parties agree that the principal issue in dispute between the parties is the question of costs, and whilst they accept the general proposition that costs of the first trial be costs in the second trial, the Microsoft parties also submit that the Court is at liberty to determine the question of costs of the first trial and invite the Court to revisit the matter of the first trial.
I wish to say first that the declarations and orders I make today do not and are not intended to cavil with or displace the order made by O’Callaghan J in the Federal Court of Australia in CPL Notting Hill Pty Ltd v Microsoft Corporation [2019] FCA 223 upon his Honour’s allowing the appeal by the respondents from the orders of the first Judge in this Court, namely, O’Callaghan J’s order:
Subject to any order of any court that hears any retrial, the costs of the first trial be costs in the second trial.
These orders that I make today give effect to the order that the costs of the first trial be costs in the second trial. I see no reason to make any order other than the costs of the first trial are costs in the second trial, and my orders for costs should be understood as on that basis and on that foundation.
The situation as between the individual respondents, that is, the second and fourth respondents, Ms Li and Mr Wang, differ from the circumstances pertaining to the corporate respondents, that is, CPL Notting Hill and CPL Distribution.
Dealing first with the individual respondents, the Microsoft parties accept that the individual respondents should be entitled to their costs of the first and second trials given they successfully defended all claims advanced against them. They propose a discount because those individual respondents did not succeed on a number of issues advanced by them in their defence, and propose a discount in the vicinity of 50%.
Given that overall the individual respondents succeeded in defending claims advanced against them, that certain defences did not find favour with the Court in the present case does not, in my view, in the exercise of my discretion, warrant any discount from the full entitlement of the individual respondents to their costs. The orders I will make in respect of the costs of the individual respondents are to be understood on that basis.
The CPL parties have proposed a particular wording for the costs of the individual respondents, which wording, in part, the Microsoft parties submit might cause confusion and be liable to mislead. In those circumstances I have amended the wording proposed by the CPL parties to include wording which, in an endeavour to provide guidance to the assessment of costs, both makes clear that the costs of the first trial are costs in the second trial, and that the individual respondents’ recoverable costs are the costs incurred exclusively on the individual respondents’ behalf, and also their proportion of the costs incurred on behalf of all of the respondents.
The Microsoft parties note that the appropriate share of any costs incurred by all of the respondents should be apportioned between the respondents, and that submission appears to be non‑controversial, however I do not propose to further specify as to the apportionment.
In the present case the parties are agreed that it is appropriate at least that the costs be ordered pursuant to the Federal Court “scale” and that according to that scale that they be either as agreed or taxed pursuant to Part 40 of the FC Rules.
As I have said, although the Court’s discretion is broad it must be exercised judicially. So much is not controversial. Thus the award must be based on facts connected with or leading up to litigation, and not by reference to irrelevant or extraneous considerations.
Further, in the absence of good reason to the contrary, a successful litigant should receive their costs. The CPL parties referred me to the general principles as set out in the Victorian Court of Appeal decision in Chen v Chan [2009] VSCA 233 at [10], and I will set out and adopt the following general principles there set out (emphasis added by the CPL parties):
(1)The general rule is that costs should follow the event. Absent disqualifying conduct, the successful party should recover its costs even where it has not succeeded on all heads of claim.
(2)The Rules of Court permit significant flexibility in determining questions of costs. In particular, the court is entitled to examine the realities of the case and will attempt to do “substantial justice” as between the parties on matters of costs.
(3)Where there is a multiplicity of issues and mixed success has been enjoyed by the parties, a court may take a pragmatic approach in framing the order for costs, taking into consideration the success (or lack of success) of the parties on an issues basis. Generally, if such an order is made, it is reflected in the successful party being awarded a proportion of its costs but not the full amount.
(4)A court may, when fixing costs in a claim where there has been mixed success, take into account complications which it considers will arise in the taxation of costs, as part of its consideration of the overall interests of justice.
(5)Where a court determines to make an order apportioning costs, then it does so primarily as “a matter of impression and evaluation”, rather than with arithmetical precision, having considered the importance of the matters upon which the parties have been successful or unsuccessful, the time occupied and the ambit of the submissions made, as well as any other relevant matter.
(6)Where a number of parties have had the same representation, there is a “rule of thumb” as to the apportionment of costs, namely that, where some of those parties have been successful and others have not, each successful party is only entitled to his or her proportion of the costs incurred on behalf of all, plus the costs, if any, incurred exclusively on his or her behalf. The primary issue for determination in such a case is that of fairness as between the parties, having regard to the manner in which the trial, or appeal, has been conducted.
(7)Usually, an order for costs will be made on a party/party basis. But an order for costs on a solicitor/client or indemnity basis may be made where special or unusual circumstances have been demonstrated, for example, by establishing misconduct in the proceeding, that the proceeding was brought for an ulterior purpose, or that it was patently unreasonable to institute, or maintain, the proceeding. Special circumstances may also include the making of an allegation of fraud which is not proved. (footnotes omitted) (emphasis added).
Where there is a mixed outcome, as it may be said there is in the present case, then the above considerations in Chen v Chan are of great assistance. Consistently with Chen v Chan, and more recently, the Full Federal Court in Swancom Pty Ltd v The Jazz Corner Hotel Pty Ltd [2022] FCAFC 157 (13 September 2022) distilled the principles governing costs as follows at [133]:
Section 43 of the Federal Court of Australia Act 1976 (Cth) confers jurisdiction on the Court to award costs. The award involves the exercise of a discretionary judgment: Foots v Southern Cross Mine Management Pty Ltd [2007] HCA 56; (2007) 234 CLR 52 at [25]. The disposition to be made in any case where there are competing considerations will reflect a broad evaluative judgment of what justice requires: Gray v Richards (No 2) [2014] HCA 47; (2014) 89 ALJR 113 at [2]. That said, ordinarily, a successful party is entitled to an award of costs in its favour in the absence of special circumstances justifying some other order: see Ruddock v Vadarlis (No 2) [2001] FCA 1865; (2001) 115 FCR 229 at [11]; Oshlack v Richmond River Council [1998] HCA 11; (1998) 193 CLR 72 at [67], [134]; Victoria v Sportsbet Pty Ltd (No 2) [2012] FCAFC 174 at [6]–[7]. As the primary judge uncontroversially observed at CD[20], although usually the discretion is exercised in favour of a successful party, “a successful party may be deprived of a proportion of its costs, or even required to pay costs to the other party, if the successful party succeeded only upon a portion of its claim, or failed on issues that were not reasonably pursued, or where the result of the litigation might be described as mixed”. The primary judge also recognised that “the mere fact that a court does not accept all of a successful party’s arguments does not make it appropriate to apportion costs on an issue by issue basis”. JCHPL does not take issue with the correctness of those principles.
I note that the following other relevant considerations will include the failure or loss on discrete claims or issues and the time occupied in relation to them: Falkingham v Peninsula Kingswood Country Golf Club [2014] VSC 483 at [21] per Robson J.
The CPL parties submit that the threshold question arises in the present case which parties were, as a matter of substance, successful, first as to the respondent directors, which I have addressed above. Secondly, in respect of the corporate respondents (the first and third respondents) they submit that as a matter of impression and evaluation, having regard to the importance and complexity of the matters in which they were wholly successful, the corporate respondents were also the successful party in this proceeding.
They point to the following factors. First, the real and live contest between the parties in their evidence and at trial was the broader supply case. That supply case was prosecuted with a lot of vigour and in the face of many responses the respondents had provided prior to trial. The only claim that succeeded against the respondent companies, that of the retail supply in respect of 30 pre‑installations, was a very small and confined component of the applicants’ overall case, and has led to a low damages award.
The CPL parties submit, and I accept, that the evidence and submissions relevant to this part of the proceeding occupied very little time at trial, as is reflected in the few paragraphs of my Reasons relevant to these claims. The facts in which this part of the Microsoft parties’ claim was based were largely the subject of admissions as to conduct: Reasons [5], [619], [624], and [625].
The only substantive issues that the Court had to decide on which the Microsoft parties succeeded was whether the admitted conduct of the respondent companies in pre-installing Windows 7 Pro was done without the licence of Microsoft: Reasons [627] to [647], and if so whether the respondent companies could show they were innocent infringers, which I considered at Reasons [692] and [701] concluding that the innocent infringement defence was not made out.
Secondly, a large part of the parties’ cases, and consistently demonstrated by my Reasons, and consistent with the time occupied at trial, was the contest of the supply case. This case was a case that included an unpleaded case which the CPL parties’ senior counsel has characterised as tantamount to fraud, which was maintained throughout and to the conclusion of the trial, and which the Court has found was not pleaded.
Of the 782 paragraphs in my Reasons, a preponderance was directed towards the supply case. In the course of my Reasons the Court dealt with pleading issues, witness credit issues, admissibility of documents, and detailed written and oral submissions on facts and inferences solely directed to the Microsoft parties’ case that CPL Distribution had allegedly supplied 1417, or alternatively 1567 COA labels (of 1617 labels, including the retail case in issue) to CPL Notting Hill. The Court has rejected this claim in my Reasons for overlapping reasons, including but not limited to that the case at trial departed from the pleadings, that I accepted as credible and plausible the CPL witness’ evidence on critical issues, consistent with CPL documentary records, and that documents relied upon by the Microsoft parties were variously ruled inadmissible or alternatively to which the Court attached little or no weight.
The CPL parties’ senior counsel submitted before me today that the Microsoft parties had to deal with the case of rival records which they never really grappled with but rather “doubled down”. Further, as the parties’ opening and closing submissions showed, and also in separate submissions, the case was very much a credibility case pressed against the respondents’ witnesses. The Court had the benefit of affidavit evidence, supplementary oral evidence, a view, cross‑examination, lengthy and comprehensive submissions on admissibility as to records, and as to credit, but on each critical issue the supply case failed.
As to the retail case, the CPL parties opposed that case as well whilst admitting the conduct. The evidence showed that the CPL parties’ position consistently since 2016, and maintained throughout the case from the receipt of the letter of demand in January 2016 through the first trial, on appeal, and through the retrial, was that their conduct was limited to the one acquisition by CPL Distribution of Windows 7 Pro and loose COAs on 9 June 2015, and the pre‑installation and supply of 30 Windows 7 Pro and affixed loose COAs in the period from about June 2015 to prior to the letter of demand.
Subject to what the CPL parties submitted about indemnity costs, to which I will turn to next, the CPL parties submitted that the Microsoft parties should pay at least 90 per cent of the costs of the respondent companies, and that this appropriately reflects how the retrial was conducted in terms of the importance and complexity of the issues to be determined, and the apportionment of time that was occupied at retrial and in my Reasons in resolving the supply case (approximately nine-tenths of the time) when compared to the very limited retail case based on the admitted conduct of the respondent companies on which Microsoft succeeded (approximately one-tenth of the time).
Having regard to the extent of discovery in the case, the extensive affidavit material filed, the many days of hearing, and the lengthy written submissions, all reflected in a judgment of over 700 paragraphs, the CPL parties submitted that this apportionment was very generous to the applicants. They submitted that Microsoft’s:
...minor copyright win was a Pyrrhic one. It lost the real battle which it went to great lengths to try to win and which the respondents dedicated substantial resources to successfully defend.
The Microsoft parties submitted that the applicants should have an award of costs in their favour, given their success in the proceeding. They accept that since the Microsoft parties did not succeed with respect to the supply case the award of costs in its favour should be discounted in the vicinity of 50% of its costs in the retrial and also the first trial. The Microsoft parties submitted that the CPL parties vigorously defended all claims made against them, and that the CPL parties:
...challenged Microsoft’s very lifeblood, being its licensing terms and regimes in the marketplace to protect and monetise its intellectual property rights.
In their submissions on costs before me the Microsoft parties revisit the submissions at first trial by reference to a number of paragraphs and topics. The Microsoft parties submit that the CPL parties’ approach necessitated extensive evidence from Microsoft as to its licensing arrangements in the marketplace, which the CPL parties challenged, and in the end the CPL parties’ bid failed and it was found to infringe with respect to the retail case, and that Microsoft (the Microsoft parties) should therefore be entitled to its costs with respect to the retail case and also with respect to the supply case. So far as CPL relied on the same licensing arguments to defend the case, the Court should take into account other arguments that the CPL parties failed on when defending the retail and supply cases, for example, the defence of innocent infringement.
The Microsoft parties also submitted that the CPL parties’ conduct regarding both the first trial and the retrial should be applied to discount costs further.
Subject to what I say in respect of indemnity costs below, applying the guidance from Chen v Chan and Swancom, taking into account the way the case was agitated, the way the case was run, the energy at retrial, cross-examination by senior counsel, and the Microsoft parties’ disavowing the unpleaded fraud case, but nonetheless presenting serious wrongdoing as part of the merits of Microsoft’s case, as is evident from my Reasons considered as a whole, on balance, as a matter of impression and evaluation, I am persuaded that it is appropriate to order that the applicants pay the corporate respondents’ costs but with a discount of 20%, that is the costs as to 80%, and in so doing to seek to be fair as between the parties for that portion of the case in which the Microsoft parties succeeded, the 30 relevant instances which formed part of the retail case.
In my view awarding costs in favour of the corporate respondents but discounted to 80% of party and party costs, and subject of course to what I shall say now about indemnity costs, reflects the whole of the claims, balancing those claims, and having regard to what I have said above. I consider what is reflected in that position is a broad evaluative judgment of what justice requires.
In sum, whilst Microsoft succeeded on the retail case, that case occupied little time, little effort, and was a characterisation of largely admitted conduct which position as to admitted conduct was prosecuted by the CPL parties from January 2016.
As to the Microsoft parties’ submissions in relation to its licensing arrangements, I do not accept that a preponderance of the evidence of the applicants’ witnesses was directed to those licensing arrangements as relevant to the 30 instances. Indeed, there were deficiencies in the production of relevant licences during the course of the applicants’ evidence through a number of affidavits. Those matters took time and expense which, in the hands of applicants whose business is licensing, should have been able to be avoided or at least minimised.
The CPL parties submit that this is an appropriate case, however, for an order for indemnity costs to be made against the Microsoft parties. Indemnity costs are not punitive in nature but serve the purpose of compensating a party fully for the costs incurred, as a normal costs order could not be expected to do when the Court takes the view that it was unreasonable for the party against whom the order is made to have subjected the innocent party to the expenditure of those costs.
I set out the relevant principles in relation to indemnity costs in A2B Australia Limited & Anor v OZ Power Group Pty Ltd [2020] FCCA 2623 at [17] to [20]:
Indemnity costs
[17]As defined in the Dictionary to the FCRules, costs on an indemnity basis means costs as a complete indemnity against the costs incurred by the party in the proceeding, provided that they do not include any amount shown by the party liable to pay them to have been incurred unreasonably in the interests of the party incurring them. Costs on an indemnity basis are to be distinguished from costs as between party and party, which costs are defined in the Dictionary as only those costs that have been fairly and reasonably incurred by the party in the conduct of the litigation.
[18]Leaving aside the circumstances of r.25.14(3) (see above at [14], and below, at [19]), it is well-settled that costs should not be ordered on an indemnity basis unless there is some special or unusual feature of the case that justifies departure from the ordinary practice. The Applicants referred to Re Wilcox; ex parte Venture Industries Pty Ltd (No 2) (1996) 72 FCR 151 per Black CJ at [152]. See also, TSG Franchise Management Pty Ltd v Cigarette & Gift Warehouse (Franchising) Pty Ltd (No. 3) [2016] FCA 828, in which Davies J explained the principle for an award of indemnity costs at [7], referring to the Full Court of the Federal Court of Australia decision in Hamod v New South Wales [2002] FCA 424; (2002) 188 ALR 659, at 665 (per Gray J, Carr and Goldberg JJ agreeing):
Indemnity costs are not designed to punish a party for persisting with a case that turns out to fail. They are not awarded as a means of deterring litigants from putting forward arguments that might be attended by uncertainty. Rather, they serve the purpose of compensating a party fully for costs incurred, as a normal costs order could not be expected to do, when the Court takes the view that it was unreasonable for the party against whom the order is made to have subjected the innocent party to the expenditure of costs.
The cases illustrate the appropriateness of awarding costs on an indemnity basis where there has been particular misconduct that caused a loss of time to the Court and to other parties, where proceedings were commenced or continued in wilful disregard of known facts or clearly established law, where allegations were made which ought never to have been made, or where the proceeding was unduly prolonged by groundless contentions …
[19]A well-established circumstance justifying an award of indemnity costs is an imprudent refusal of an offer to compromise. 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: CGU Insurance Ltd v Corrections Corporation of Australia Staff Superannuation Ltd [2008] FCAFC 173 at [75] per Moore, Finn and Jessup JJ.
[20]Relevant circumstances to be taken into account in determining whether rejection of an offer was “unreasonable” may include: the stage of the proceeding when the offer is made, the time allowed to consider the offer, the extent of compromise offered, the offeree’s prospects of success assessed at the date of the offer, the clarity with which the terms of the offer are expressed, and whether the offer foreshadowed an application for an indemnity costs in the event of rejection: See Hazeldene’ Chicken Farm Pty Ltd v Victorian WorkCover Authority (No 2) (2005) 13 VR 435 at [25]; Beling v Sixty International S.A. (No 2) [2015] FCA 355 at [25].
As the CPL parties accept, there must be some special or unusual feature of the case that justifies departure from the ordinary practice. Referring to Hamod & Anor v New South Wales & Anor [2004] FCA 424 and Melbourne City Investments Pty Ltd v Treasury Wine Estates Limited (No 2) [2017] FCAFC 116, this may include where the overarching duty has not been met, or where a party raises unmeritorious arguments before the Court or otherwise conducts itself inappropriately in the litigation, see the Federal Court’s Practice Note (GPN‑COSTS) and the GFL Rules, rr 1.06(2) and 1.06(3), to which I have already referred.
The CPL parties in their written submissions identify two broad features of the present case that, in their respectful submission, would warrant an order for indemnity costs:
(1)an unsuccessful fraud case that was pursued which departed markedly from the cases pleaded;
(2)there were problems with critical parts of the affidavit evidence relied on by the applicants; and
(3)the terms of a letter dated 20 August 2018 sent by the CPL parties’ solicitors in the week before the first hearing (a Calderbank letter).
Microsoft submits that what the CPL parties are seeking to do is have the Court punish Microsoft for having made serious allegations against the CPL parties, but in circumstances where, whilst the Court ultimately rejected the Microsoft parties’ supply case, there were no findings made of the kind, for example, that Microsoft should never have brought that case against CPL.
The Microsoft parties submit that the Court dealt at length in the Reasons as to the extensive evidence relied upon by Microsoft to advance the supply case, and submitted this supported the bona fides of its concerns and the reasons why it brought the case against the CPL parties.
The Microsoft parties reiterate the basis for seeking an award of additional costs (the Microsoft parties refer to an award of additional damages, however, this is inappropriate in the circumstances).
The Microsoft parties submit that the CPL parties’ application for indemnity costs involves nothing more than a sweeping assertion that Microsoft should be punished for bringing the supply case.
With respect, that is not how I understand the CPL parties’ submissions, nor the matters to which the CPL parties’ senior counsel has taken me in oral submissions, reflecting the written submissions.
The CPL parties submit, and I accept, that it is the accumulation of the circumstances of the above three matters at [105] that make this an appropriate case which warrants indemnity costs. The CPL parties seek to be compensated for their costs, not to punish the Microsoft parties for unsuccessfully bringing the supply case.
The CPL parties say, first, that the Microsoft parties sought to bring a surreptitious fraud case or one of serious wrongdoing, and that they did so seeking to pursue a case at trial and in closing which departed markedly from the case as pleaded. It was, I accept, a case that in substance involved an alleged conspiracy after the issue of the proceeding to create and discover falsified records, to deliberately conceal or destroy other records and to collude in fabricating sworn evidence: Reasons at [99] to [118]. These matters were relied upon by the Microsoft parties as part of the merits of their case relevant to liability and also foundational to a claim for additional damages. Because the matter was not properly pleaded, in my view it is fair to say, that the Microsoft parties did not give proper notice to the CPL parties of the case they sought to pursue.
Whilst holding the Microsoft parties to their pleaded case, as my Reasons disclose, the way the retrial was run and what the submissions required was that the Court consider (and it thereafter rejected) that unpleaded case concerning fraud and fraudulent concealment, or as it could otherwise be said, of serious wrongdoing.
Secondly, in this respect, it is relevant that it was open to the Microsoft parties to abandon those allegations of serious wrongdoing and of creation and discovery of falsified records, concealment and destruction of other records and collusion, before trial or even at trial, in circumstances where the CPL parties had put the Microsoft parties on notice of who the respondents’ witnesses called at trial would be.
I consider it relevant that the Microsoft parties were well aware of the issue of post‑proceeding conduct before the first trial, and before the first trial, that is, in 2018, they did not amend the pleadings so as to put the respondent parties and the Court properly on notice of the claims that I have identified above of conspiracy, creation and discovery of falsified records, concealment and collusion.
Thus, in circumstances where on remittal the Court prior to the hearing had dealt with proposed amendments by both parties, largely rejecting the late amendments sought in the pursuit of the above case, that notwithstanding the express disavowal by Mr Cobden SC in opening, the Microsoft parties pursued that case in cross‑examination and in their conduct of the hearing, in my view, tends to an award of indemnity costs.
The second matter on which the CPL parties rely is, as they put it, serious problems with critical parts of the affidavit evidence relied on by the applicants. It suffices to note what has been said at my Reasons at least in the following paragraphs: [148], [310], [357] and [467].
I consider it fair to say that the matters to which I have adverted are not merely administrative mistakes, but indicative of a presentation and argument of a particular case of which I made the observations that I set out at Reasons [148]. I do not consider it necessary to reiterate what I there said, save to say that a considerable amount of my Reasons, time at hearing and in submissions and thereafter in addressing these evidenced deficiencies could and should have been avoided or at least minimised by greater attention to and observation of the overarching purpose.
The last matter on which the CPL parties rely is the existence of the letter sent on 20 August 2018 (see [105] above). I note here that in reviewing and considering the parties’ submissions, I did not turn to the matter of the so-called Calderbank letter until I had formed my views on declaratory relief, injunctive relief, and damages, and also on the mixed outcome of the proceeding as it is reflected in costs, apart from the question of indemnity costs, that is, what I have said above.
Mr Ng in an affidavit filed in support of the Microsoft parties’ written submissions for final orders attaches a copy of the CPL Parties’ 20 August 2018 letter (Letter) at the end of a substantial exhibit. My attention was drawn to that Letter by Mr Truong KC in oral submissions this morning.
I have set out in a number of cases the position in relation to Calderbank offers. The first matter to note is that this Letter is not in the form of an offer of compromise under the FC Rules, but that, notwithstanding that matter, the Court may consider that a letter has effect as a Calderbank letter: Mann Travel at [54]. A party may be entitled to rely upon an offer of compromise even if it does not comply with the requirements of Part 25 of the FC Rules, under the principles in Calderbank v Calderbank (1975) 3 All ER 333.
A circumstance justifying an award of indemnity costs is an imprudent refusal of an offer of compromise. Thus, 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: CGU Insurance v Corrections Corporation of Australia Staff Superannuation Property Limited [2008] FCAFC 173 at [75], per Moore, Finn and Jessup JJ.
In the present case, therefore, the question is whether it was unreasonable to refuse the offer contained in the Letter. The Letter was sent just under a week before the first hearing on 20 August 2018 and expired on the Friday before the hearing commenced, Friday, 24 August 2018. In the Letter the respondent CPL parties made an offer without prejudice, save as to costs. They offered to settle the proceeding on the basis of an order (4) that the corporate respondents, the first and third respondents, pay to the first applicant, that is, Microsoft, “opportunity loss in the sum of $10,000, which is full and final”, and other consent orders to the effect:
1.Save as stated below the proceeding otherwise be dismissed.
2.Applicants release all Respondents and their servants & agents from any claim with regards to this application.
3.No order as to the costs of the proceeding.
4.[As above, (4) that] the first and third respondents pay to the first applicant opportunity loss in the sum of $10,000, which is full and final.
5.Parties bear their own legal costs.
The respondents’ solicitors invited the applicants’ solicitors or their clients to contact the respondents’ solicitors if any of the above terms were, in their view, unclear or otherwise required clarification.
The Letter was sent at a time when the pleadings were finalised, discovery was complete and affidavit evidence had been filed. The Letter otherwise relevantly explained the following:
(a)Microsoft’s authorized tier one distributors were at the relevant time selling Windows 7 Pro for between AUD$139 and AUD$169;
(b)only 50 COAs were purchased from Mr Chen of LDS, 15 were returned and 5 went missing.
(c)the respondents dispute the authenticity of the invoices said to support the allegations in respect of the 1,617 COAs except the invoice for 50 COAs dated 9 June 2015.
I am satisfied that in the Letter the CPL parties gave cogent reasons why the Microsoft parties should accept their offer, and that the Microsoft parties at this advanced stage of discovery and affidavits knew both the Microsoft parties’ case and the CPL parties’ case.
The risk that the Microsoft parties were exposed to at that time was a substantial costs order against them. It is apparent that the Microsoft parties made a considered decision at an advanced stage of the proceeding, that is, just before the first trial, to reject the offer, refusing in effect to accept that the broader supply case mounted by them could fail.
Whilst it is the case that the Court could not have made orders with respect to each and every element of the offer made, it is also the case that dismissal of the proceeding would deal as a matter of finality with the claims made in the application, as indeed the final orders I make will do.
A fair reading of the Letter is that the sum of $10,000 offered was a payment determined by reference to the 30 relevant instances on which the Court has now found the Microsoft parties succeeded. Accordingly, the Calderbank offer would have been a better outcome for the Microsoft parties than they obtained at the retrial before me. I am satisfied that the Calderbank offer expressly dealt with the retail case by way of damages – opportunity loss – and that it was unreasonable in the circumstances then prevailing for the Microsoft parties to reject the offer.
I am not persuaded that merely because the Letter says that the CPL parties consider they have “good prospects of defending your client’s claim in respect of the 50 COAs purchased from Mr Chen of LDS”, that has a consequence that no ground is given with respect to the retail case as submitted by the Microsoft parties.
Expressing a view that its conduct was defensible whilst offering to consent to an order for payment of an amount that was greater than the extant licence fee then obtained by Microsoft in respect of Windows 7 Pro OEM products is sufficient to comprise a special circumstance enlivening the jurisdiction for indemnity costs in the circumstances.
I find that, in the circumstances the Calderbank offer set out by the Letter would have been a better outcome for the Microsoft parties than they obtained at the retrial, as reflected in my Reasons and the orders I make today. I find that it was unreasonable in the circumstances then prevailing for the Microsoft parties to reject the offer, noting that the offer expressly dealt with the retail case by the first and third respondents’ offer to submit to an order to pay to the first applicant an “opportunity loss in the sum of $10,000, which is full and final”.
Accordingly, I make orders as to costs in respect of the individual respondents, the second and fourth respondents, that their costs be paid on a party and party basis up to and including 20 August 2018, and thereafter on an indemnity basis.
I make orders that the applicants pay the corporate respondents, the first and third respondents, their costs up to and including 20 August 2018, on a party and party basis as to 80% of their costs, and thereafter 100% of their costs on an indemnity basis. These costs to be either agreed or taxed in accordance with Part 40 of the FC Rules.
One final matter. In the formulation of the costs orders I have distinguished between the percentage of costs before and after 20 August 2018 in respect of the corporate respondents to take into account that success that Microsoft has had in relation to the 30 instances. I make no such distinction as to percentage of party and party costs or indemnity costs in respect of the individual respondents on the basis that the simple orders for party and party costs and indemnity costs will be applied in the usual course and without other discount.
I so order.
I certify that the preceding one hundred and thirty-six (136) numbered paragraphs are a true copy of the Reasons for Judgment of Judge Baird. Associate:
Dated: 11 January 2023
SCHEDULE OF PARTIES
SYG 1205 of 2016 Applicants
Second Applicant
Third Applicant
MICROSOFT PTY LTD (ACN 002 589 460)
MICROSOFT REGIONAL SALES CORPORATION
Respondents
Second Respondent
Third Respondent
Fourth Respondent:
MR WEI LI
CPL DISTRIBUTION PTY LTD
MR WANG JIN
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