N.V. Phillip Gloeilampenfabrieken v Ultralite International Pty Ltd

Re: N.V. PHILLIPS GLOEILAMPENFABRIEKEN and PHILIPS LIGHTING PTY LIMITED
And: ULTRALITE INTERNATIONAL PTY LIMITED
No. G352 of 1991
FED No. 452
Patents
(1991) AIPC 90-828
22 IPR 57

COURT

IN THE FEDERAL COURT OF AUSTRALIA

NEW SOUTH WALES DISTRICT REGISTRY
GENERAL DIVISION
Wilcox J.(1)

CATCHWORDS

Patents - Application for interlocutory injunction to restrain alleged infringement - Compact fluorescent tubes - Evidence disputing whether tests disclose infringement - Claim of invalidity - Balance of convenience - Effect of injunction upon respondent's business - Offer by respondent pending determination of the matter to pay $1.00 per unit into a fund under the control of the Court - Adequacy of this amount - Difficulty in assuming damage in a situation where demand appears to outrun supply - Undertaking accepted - Costs of the application.

HEARING

SYDNEY

#DATE 2:8:1991

Counsel for the Applicants : D.E.J. Ryan

Solicitors for the Appplicants : Sly and Weigall

Counsel for the Respondent : D.M. Yates

Solicitors for the Respondent : Blake Dawson Waldron

ORDER

The Court notes that the applicants by their counsel give the usual undertaking as to damages.

That the respondent has already given to the Court an undertaking that, pending the final determination of the matter or further order, it will make and maintain proper and complete records of all sales made by it of compact fluorescent tubes of the kind which forms part of the respondent's Auslamp which is exhibit "A" in these proceedings.

The undertaking now given by the respondent to the Court; namely, that on or before 8 August 1991 it shall cause to be opened, and thereafter shall cause to be maintained until judgment in these proceedings or further order, an interest bearing account in the joint names of J.F. Warburton and I.G. Betts as trustees for the first applicant and the respondent jointly into which account it shall deposit the sum of $1.00 for each compact fluorescent tube of the kind which forms part of the respondent's Auslamp which is exhibit 'A' in these proceedings sold by it, such deposits to be made and held upon the following terms:

a) The deposits shall be made within fourteen (14) days of the receipt of payment for each compact fluorescent tube. b) In the event that the first applicant obtains judgment against the respondent on its claim for infringement of Letters Patent No. 523847, then all sums deposited in the account including interest thereon shall be applied towards satisfaction of any judgment for damages or any judgment for an account of profits which the first applicant may obtain against the respondent on account of such infringement with the balance, if any, of such sums being thereafter paid to the respondent.

c) In the event that the first applicant does not obtain judgment against the respondent on its claim for infringement of Letters Patent No. 523847, then all such sums deposited in the account including interest thereon shall be paid to the respondent d) All bank account fees and taxes are to be paid out of the funds in the account.

And the Court orders that the costs of the application for interlocutory relief be the respondent's costs in the principal proceeding.

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

JUDGE1

This is an application for an interlocutory injunction in a patent case. The applicants, N.V. Phillips Gloeilampenfabrieken and Philips Lighting Pty Limited, are related companies. The first applicant is the registered proprietor of Australian Letters Patent No. 523847, that being a patent in respect of an invention entitled "Low-Pressure Mercury Vapour Discharge Lamp". Pursuant to that patent, lamps are manufactured by one of the Philips companies in Holland. They are distributed in Australia by Philips Lighting. Although these lamps have been available in Australia for some time, market interest has developed only during the last twelve months or so, probably because of increasing public interest in energy efficiency. The applicants claim that the lamps have a life of about 8,000 hours, as compared to the average life of an incandescent light bulb of about 1,000 hours. Moreover, the applicants claim that the lamps use substantially less wattage than conventional light bulbs; that is why they are called energy saving lamps (e.s.l.). A 20 watt Philips e.s.l. is said to provide light equal to a 100 watt conventional globe. In conjunction with various State electricity authorities Philips Lighting is currently running a substantial promotion of the lamps, some 800,000 of which are expected to be imported this year.

The Philips lamp consists of a compact fluorescent tube and an adaptor, both parts being manufactured as a single item. The whole product has to be discarded at the end of the life of the tube.
The respondent, Ultralite International Pty Limited, is an Australian company controlled by four persons: Sir William Keys, the company Chairman, Mr Siung Yang, an Australian citizen who is a qualified engineer and the company's Managing Director, Mrs Stella Leung, a permanent resident of Australia and Mr G.P. So, a Hong Kong national. The company has obtained from the Australian Government a grant of $627,000 to enable it to conduct research into the development and production of energy saving electronic lighting products. Part of that grant has been used to develop an electronic adaptor for driving compact fluorescent tubes such as those manufactured by a number of companies, including companies in the Philips group. According to the respondent, it is possible to use its adaptor in conjunction with the tube component of the Philips lamp. This adaptor is the subject of a pending patent application. It has been approved for sale by the Department of Minerals and Energy, under the Electricity Act 1945; the one adaptor to be so approved. In the case of a composite product, such as that of Philips, the Act does not require any approval.
Ultralite claims that its product has a power factor rating of approximately 0.9, compared with the 0.45 power factor rating of the Philips lamp; meaning that, as compared with the Philips product, the Ultralite adaptor requires only half the amount of electrical current input to produce the same level of light output.
Whatever the advantages of the Ultralite adaptor, the product is useless without a fluorescent tube. Ultralite does not manufacture fluorescent tubes. So it arranged for the supply of tubes to it from China. In April 1991, Ultralite commenced to market as a single product, its adaptor and the imported detachable tube. It adopted the brand name "Auslamp". One advantage of having a detachable tube is that, when it wears out, it may be replaced without replacing the adaptor. Ultralite claims that, not only will one of its tubes equal the life of about seven incandescent tubes; one adaptor will serve for the life of five tubes. The cost of a tube is only about 20% of the cost of a complete lamp. So, if this claim is true, the use of a detachable tube represents a major saving to consumers.
The hearsay evidence of Mr P.W. MacKenzie, Manager of the Patent and Trade Mark Department of Philips Industries Holdings Limited, (the parent of Philips Lighting) is that Philips Lighting became aware of the respondent's product being in the market in early March 1991. I cannot reconcile that evidence with the evidence of Sir William Keys that the product was not released until April, but for present purposes that does not matter. Auslamp samples were purchased by Philips personnel and sent to the Philips headquarters at Eindhoven, Holland. According to an internal Philips report dated 4 June 1991 and addressed by one H. Nienhus to one J.H.M. Evers, the lamps were tested at Eindhoven.
The test results were evaluated by Dr. H.C.G. Verhaar, a chemist employed by N.V. Philips Gloeilampenfabrieken. Dr. Verhaar has worked for the company since 1986, specialising in the field of luminescent materials. In an affidavit read in this application, Dr. Verhaar expresses the opinion, upon the basis of those tests, that the fluorescent tube, imported by Ultralite from China and marketed as part of its Auslamp, infringes Philips' patent. No complaint is made against the adaptor.
Two expert's affidavitis have been read on behalf of the respondent. In the first of those, Professor G.W. Simpson, Associate Professor in the Department of Electrical Engineering at the University of Sydney, analyses the reasoning in Dr. Verhaar's affidavit. He concludes, in effect, that the test results do not enable Dr. Verhaar to reach the opinion which he expresses. It is important to note that Professor Simpson does not say that the Auslamp tube does not infringe Philips' patent. He does not offer an opinion about that matter because he has not done the necessary tests. But he does say that the claim of infringement cannot be regarded as proven on the material before Dr. Verhaar.
The second affidavit was sworn by Mr John Terry, an experienced patent attorney. Mr Terry analyses the patent specification, with reference to the state of knowledge of informed people as at the relevant date. He concludes, in effect, that the claims made in the patent specification were obvious and lacked any inventive step.
This is not the occasion upon which to attempt to reconcile the opinions of Dr. Verharr and Professor Simpson or to evaluate Mr Terry's evidence. Indeed, this would be impossible without oral evidence from the experts, during which their positions could be more fully explained and tested. But each of the three deponents is a person of admitted expertise who has offered a considered opinion with supporting reasons. All three opinions are entitled to respect. All that one can say at this stage is that there is a serious question to be tried in favour of the applicants' contention that the patent is infringed by the fluorescent tube sold by the respondent; but there is also a serious argument to the contrary and a serious question as to the validity of the patent.
When the application for interlocutory relief first came before the Court on 24 July, the applicants offered the usual undertaking as to damages. They said that, if the Court was satisfied that there is a serious question of infringement, an interlocutory injunction ought to be granted. The respondent disputed this position, contending that the balance of convenience dictated a denial of an interlocutory injunction. The respondent offered an undertaking to keep accounts and to co-operate in an early final hearing.
In relation to the balance of convenience, it is necessary to refer to some additional matters of evidence. First, it appears that in December 1990 Phillips Lighting wrote to Ultralite in connection with a product called "Ultrasave Compact Fluorescent Lamp" which it believed was being marketed by Ultralite. Philips Lighting complained of infringement of this same patent. According to Mr Yang, and this would seem to be supported by the Ultralite financial records which are in evidence, the Ultrasave Compact Fluorescent Lamp was not in fact marketed by Ultralite, the present respondent, but by a Hong Kong based company whose name included the word "Ultrasave". Mr Yang was associated with that company, but only in a research role. The Philips letter was sent on to Hong Kong by Ultralite. On 25 January 1991, Ultralite informed Philips Lighting that there would be a response "next month". But the Hong Kong company went out of business shortly afterwards. The Ultrasave lamp was no longer marketed and Philips' complaint lapsed. The significance of the incident, from the applicants' point of view, is that Mr Yang admitted in cross-examination that he learned of the patent at that time, before Auslamp was launched onto the Australian market. Accordingly, say the applicants, the respondent entered the market with knowledge of Philips' position.
The second item of evidence is tendered by Ultralite, in an affidavit of Sir William Keys which is relevantly unchallenged. On 20 May 1991, Philips Industries Holdings published in the "Australian Financial Review" an advertisement, headed "Warning: Compact Fluorescent Lamps" in which it stated that it had recently found that there was on sale in Australia "lamps which are similar in appearance to Philips' energy saving Compact Fluorescent lamps". The advertisement stated that "the parent Philips company holds a basic patent in Australia for such types of lamps (i.e. Australian Patent No. 523847)". The advertisement threatened action by Philips to "protect its rights by taking all necessary steps", including legal action. This advertisement was seen by Mr Yang. He showed it to Sir William Keys. On 25 May Sir William wrote a letter to Mr J. Veeneklass, Chairman of Philips Industries Holdings. In that letter he explained his company's position, stating that it had tried without success to purchase "lamps" - I think that he meant tubes - from Philips to use with Ultralite adaptors. He went on:

"We do not wish to be involved in this dispute between your Company and the Chinese Government as we can use any CFL lamps for our adaptors and ballasts. In fact, we would prefer to use the high quality Philips lamps to match our very high quality adaptors and ballasts. The reason for this, as you may have heard, is that our adaptor L15-240 is the only such adaptor approved in Australia. The Approval No. is N/12108 and it is the only adaptor in the world with True Power Factor of 0.9. Our adaptors are in production now and are being marketed using the Chinese lamps. We are, however, more than happy to change over to your lamps until your dispute with the Chinese Government can be resolved.

At present, we are using 30,000 pieces of PLC13W and 20,000 PLC10W lamps per month, increasing to 50,000 pcs. PLC 13W and 30,000 pcs. PLC10W from January 1992. We would appreciate it very much if you can kindly give a quotation for supplying these lamps to our factory in Hong Kong commencing July 1991. Please give us your best OEM prices. We look forward to hearing from you as soon as convenient, and we would be glad to meet with you to discuss and resolve this matter to our mutual benefit."

Sir William telephoned Mr Veeneklaas to follow up his letter, but he found that he was overseas. He did, however, see Mr M.R. Milman, General Manager of Philips Lighting, on the evening of 30 May. Mr Yang accompanied him. During the course of this meeting Mr Yang informed Mr Milman that Ultralite was getting supplies of fluorescent tubes from China because it could not get Philips tubes. He informed Mr Milman that Ultralite would prefer Philips tubes because of their quality and that Ultralite would be happy to sell Philips its adaptor. Mr Milman replied:

"We will look into buying your adaptor. We will also look at selling you our tubes. However, our own immediate requirements will use up all our supplies of tubes and we could not consider supplying you in any case until April 1992."

Mr Yang replied:

"In the meantime we must trade to stay alive. However we are prepared, without questioning the validity of your patent, as we have not had a chance to investigate it, to offer to pay you a royalty on each of the Chinese tubes used in our lamps."

Although Mr Milman challenged other aspects of Mr Yang's account of this conversation, he did not question the above extracts. There would have been little point in doing so. On the next day, Sir William wrote a letter to Mr Milman confirming Ultralite's position. That letter contained the following conclusion:

"We also wish to purchase your CFLs as we want to produce a top quality product. You have kindly indicated that you will advise us concerning delivery dates, quantities available and price. We are concerned about lamps we already have in stock, and would like to suggest that we dispose of these and pay an appropriate royalty to Philips, until we can get regular and sufficient supplies of your PLC lamps. Any failure on our part to obtain adequate supplies of CFL lamps in a reasonable time frame would gravely prejudice the ability of our company to progress the important work in which we are involved.

We are happy to enter into firm undertaking to purchase all our PLC lamps from Philips as soon as Philips can provide them in the necessary quantity and at an appropriate OEM price. In giving this undertaking, we are accepting in good faith that Philips' assertion that the Chinese lamps do in fact breach their patent even though this fact has not yet been established by an independent testing authority, and, as we understand, it will be challenged by the Chinese government.

As you know, there is a strong public demand for these energy saving compact fluorescent lamps at present, resulting from strong and active promotion of these products by the Australian State governments of Victoria and New South Wales. Considerable public money has been spent on these campaigns and there is apparently a great difficulty in meeting this demand. We look forward to working with you to meet this requirement which will be highly beneficial economically to both individual consumers and to the nation as a whole."

There was no response to that letter. Instead, on 12 June 1991 a solicitor acting for Philips Lighting wrote to Ultralite alleging that its Auslamp infringed Philips' patent and demanding written confirmation that Ultralite would cease to market the product. Ultralite did not give such a confirmation.
On 4 July 1991 Mr Milman responded to the letters of 28 and 31 May. His letter said:

"You will no doubt be aware of correspondence from our solicitor requesting an undertaking that your company cease marketing in Australia, product which infringes Philips patent rights. I am advised no reply has been received to this correspondence. Until we are satisfied that Ultralight International is prepared to cease marketing product which infringes Philips patent rights, we are not able to discuss the possibility of supplying compact fluorescent tubes."

On the following day this proceeding was commenced.

The final matter of evidence is that financial records of the respondent have been tendered. Without revealing the detail, these records show that the respondent is dependent upon the sale of Auslamps for its income. The company has undertaken substantial financial commitments, in relation to premises, plant and staff, in anticipation of revenue from such sales. The practical effect of an interlocutory injunction restraining the sale of Auslamps would be termination of the respondent's only significant source of income. In the absence of some other source - and it is difficult to see what it might be - the company would almost certainly be forced into liquidation.

On 24 July, after the affidavit evidence was read and Mr Yang briefly cross-examined, counsel addressed. During the course of counsel's addresses, I expressed concern about the effect of an interlocutory injunction on the respondent, especially in a case where there was a real question whether the evidence established an infringement and, if so, whether the patent was invalid. At the same time, I suggested that an undertaking to keep accounts might not be sufficient protection for the applicants. The respondent's financial position is not strong. There would be no guarantee that money would actually be available to pay damages or to make an account of profits, if the applicants succeeded. Also, it was uncertain when a final hearing date could be arranged. Although both parties were anxious for an early final hearing, the case raises difficult technical issues. Expert witnesses may have to come from overseas.
Under these circumstances, I suggested that the parties explore the possibility of an arrangement whereby, pending the trial, the respondent would pay into a bank account, controlled by the solicitors for both parties under the supervision of the Court, a specified amount of money in respect of each Auslamp sold. The respondent immediately accepted this suggestion and offered $1.00 per lamp. The applicants thought this too low, their counsel saying that the profit on each Auslamp must be much more than this. As the parties could not agree about the extent of the profit, I thought that there should be evidence on the matter. So I adjourned the further hearing of the application until 1 August, directing the parties to file affidavits on the issue. The respondent undertook to keep accounts in the meantime.
When the hearing was resumed on 1 August each party read one additional affidavit. The new affidavit for the applicants was sworn by Mr L.H.N. Spronken, National Marketing Manager of Philips Lighting. I will not reveal all the figures quoted by Mr Spronken, as both parties wish to maintain commercial confidentiality. It is sufficient to say that Mr Spronken sets out the Australian landed price of each Philips lamp and the average Australian sale price. By deducting the first figure from the second, he reaches a gross margin from which he deducts a figure for variable selling costs. The resultant figure is $6.02 per lamp; this amount being available as a contribution towards fixed and promotion costs and profits. Mr Spronken then says: "Accordingly, the second applicant loses an amount of $6.02 per unit on each sale it does not make". Mr Spronken then refers to Philips' market share. He says that, with an additional supply of lamps procured for the final three months of this year, the market share of Philips Lighting will rise to 65 percent. Mr Spronken then multiplies $6.02 by 65/100 to obtain a claimed loss of $3.91 per lamp.
The calculation undertaken by Mr Spronken is open to two criticisms. In the first place, the patent holder is N.V. Philips Gloeilampenfabrieken, not Philips Lighting. Mr Spronken's calculation relates only to Philips Lighting. It is true that the two companies are closely associated. But they are separate companies occupying different positions in the Philips' chain of manufacture and distribution. I do not think that it is legitimate to measure the loss sustained by a manufacturer-patentee by reference to the loss sustained by a distributor, even if the manufacturer and distributor are related companies.
Secondly, the assumption underlying Mr Spronken's approach is that any sale made by Ultralite will be a sale lost to the other participants in the market, of which Philips will shortly have a 65% share. In many cases, it will be reasonable to make such an assumption, for interlocutory purposes. I suppose that in the case of most manufactures, supply - or at least potential supply - exceeds demand; manufacturers are competing with each other to make sales. But there are indications that this is not the present position in the market for energy saving lamps. It will be recalled that Mr Milman told Sir William Keys on 30 May that Philips' own "immediate requirements will use up all our supplies of tubes" and that Philips could not consider supplying Ultralite until April 1992. In his affidavit, Sir William Keys speaks of the great demand in Australia for the lamps and the difficulty being experienced by manufacturers in coping with it. A letter of 25 July 1991 from Ultralite's distribution agent to a company called Indirect Lighting Pty Ltd, which was tendered by the applicants to show the price currently being sought by Ultralite and which quotes for the supply of 1,000 lamps, refers to Ultralite's stock position being "presently very low".
In short, I do not think that it may properly be assumed that a sale made by Ultralite is a sale lost to the other manufacturers in the market. It would seem that, at least in the short term, the market will absorb all the product manufacturers are able to supply.
The other new affidavit was sworn by Mr Yang. That affidavit sets out the direct costs sustained by the company in marketing a lamp. Those costs are supported by invoices. They are not challenged. Mr Yang also stated the company's current selling price, a figure a little less than $1.00 above the total direct cost per unit. But, when fixed overheads are taken into account, the profit disappears - or nearly disappears, depending on what assumption is made about monthly volume. These fixed overheads are detailed and, once again, not challenged. But the selling price stated by Mr Yang is challenged; and it is true that it is 70 cents below that quoted to Indirect Lighting. Even so, if the costs are correctly stated, it is clear that the profit which will be realised by Ultralite within the foreseeable future, on even the highest projected volume, will not exceed $1.00 per unit.
Counsel for the applicants presses the submission that an interlocutory injunction should be granted. He emphasises Dr. Verhaar's evidence and the fact that the validity of the patent has not been challenged in any of the numerous countries where a patent has issued. He underlines the incident involving the Ultrasave Compact Fluorescent Lamp and says that Mr Yang must have realised that Philips would challenge Auslamp. I think that this latter contention is sound.
Counsel put a further matter. He points to the evidence that Philips Lighting has undertaken an extensive and expensive promotional campaign. He emphasises the evidence that it is a matter of concern to the applicants that a new product such as this should establish a favourable reputation. An inferior compact fluorescent lamp could so disappoint members of the public as to dissuade them from using any such lamps, including Philip's lamps. I accept all of this. I well understand Philips' concern to maintain the reputation of compact fluorescent lamps. An inferior competitive product could do Philips considerable harm.
Notwithstanding all the matters put by counsel, I am firmly of the opinion that it would not be a correct exercise of my discretion to restrain the sale by Ultralite of the Auslamp tube. Although there is material to support the applicants' case on infringement, it is by no means certain that infringement will be proved. Also, the validity of the patent is in question. It would be most unfortunate if, in a proceeding in relation to which the applicants were not in fact entitled to succeed, an interlocutory order was made which had the effect of putting the respondent out of business. As to the applicants' concern about damage to the reputation of compact fluorescent lamps in general, there is no evidence that the respondent's tube is defective. Although Mr Milman's affidavit is replete with generalisations about Chinese compact fluorescent lamps, the applicants have tendered no evidence to support his assertions; and this despite the fact that they have had samples of the respondent's product for some four months.
Finally, as it seems to me, an interlocutory injunction is not necessary in order to safeguard the applicants' position.
On 1 August counsel for the respondent renewed his client's undertaking to set aside $1,00 per lamp, on all sales made prior to the determination of the matter. On the evidence, it seems to me that this is a fair offer. An amount of $1.00 per lamp would seem to be slightly higher than the profit currently being made by Ultralite, even taking the price from that quoted to Indirect Lighting. So the payment of $1.00 per lamp to a fund controlled by the Court ought to provide adequate security to the applicants against an order for the taking of accounts. There is no guarantee that it would cover a damages claim, if the applicants were to select this remedy. There is no evidence about the extent of the patentee's loss. But, given the supply-demand position to which I have referred, the patentee might have difficulty in proving any damages. I think that it might well prefer to claim an account of profits.
I propose to accept the undertaking offered by the respondent. Its form is not in dispute and the amount of $1.00 is appropriate.
Counsel put conflicting submissions regarding costs. Counsel for the applicants seeks the costs of the application, contending that his clients had to take action to stop the infringement of their patent; that, even if they fail to obtain an injunction, the proposed undertaking is a form of interlocutory relief which they have succeeded in obtaining. Counsel for the respondent, on the other hand, not only resists this application; he seeks an order that the applicants pay his client's costs of the application. He points out that his client was always willing to pay a royalty, as Sir William Keys informed Mr Milman on 30 May, and that his client immediately adopted my suggestion of a fund, nominating the figure of $1.00 per unit.
In a case where interlocutory relief is granted after a contested hearing, it is usual to order that the costs of the interlocutory application be applicants' costs in the principal proceeding. But in such a case the applicant has had to approach the Court for relief, and has obtained it over the resistance of the respondent. If, in the present case, I had decided to grant an interlocutory injunction, it would have been appropriate for me to make the usual order; the respondent would have been unsuccessful in its resistance to the application. But, as it happens, the respondent has been successful in resisting the application. It is true that the applicants go away with an undertaking providing them with some security. But I am not satisfied that they had to make this present application in order to obtain that comfort. As the parties did not discuss the quantum of a royalty, I do not know what sum Ultralite would have been willing to pay. But when the suggestion of a fund was made, the respondent immediately accepted it. Had that proposal been earlier put to the respondent, this application probably would not have been necessary.
Under these circumstances, I prefer the submission put on behalf of the respondent. But it goes too far. It would not be appropriate to make an absolute order which would require the applicants to pay the respondent's costs even if they are ultimately successful in the case. I think that the appropriate order is that the costs of the application for interlocutory relief be respondent's costs in the principal proceeding.

[1991] FCA 452

02 AUGUST 1991