Townsend Controls Pty Ltd v Gilead

[1989] FCA 263

Re: TOWNSEND CONTROLS PTY LTD; GIDEON GILEAD and DOTAN GILAD
And: GIDEON GILEAD and DOTAN GILAD; JAMES DUNSTONE TOWNSEND;
TOWNSEND CONTROLS PTY LTD and VINIDEX TUBEMAKERS PTY LTD
No. G84 of 1988
FED No. 263
Practice and Procedure

COURT

IN THE FEDERAL COURT OF AUSTRALIA

SOUTH AUSTRALIA DISTRICT REGISTRY
GENERAL DIVISION
Von Doussa J.(1)

CATCHWORDS

Practice and Procedure - Security for costs - application by cross-respondents against cross-claimants - cross-claimants resident outside the jurisdiction - meaning of "applicant" in Federal Court Rules O.28, r.3(1)(a) - principal action brought under Patents Act 1952, s.121 in respect of a threat of proceedings for infringement - cross-claimants holders of patent - cross-claim for damages for infringement - whether cross-claimants are in substance the party attacking - policy behind Patents Act, s.121.

Federal Court of Australia Act 1976, s.56, 59 Federal Court Rules, O.28, r.3(1)(a)

Patents Act 1952, s.121

Willey v. Synan (1935) 54 CLR 175

Neck v. Taylor (1893) 1 QB 560

Buckley v. Bennell Design and Constructions Pty Ltd (1974) 1 ACLR 301

John Arnold's Surf Shop Pty Ltd(In Liquidation) v. Heller Factors Pty Ltd and Allert (1979) 22 SASR 20

Specialised Building Materials Pty Ltd v. EU Occusted Pty Ltd (1981) 37 ACTR 8

Bell Wholesale Co. Ltd v. Gates Export Corporation (1984) 2 FCR 1

Barton v. Minister for Foreign Affairs (1984) 54 ALR 586

Energy Drilling Inc v. Petroz NL & Ors G.1361 of 1988, Gummow J., 3 May 1989 (unreported)

Skinner & Co. v. Perry (1893) 10 RPC 1

Mechanical Services (Trailer Engineers) Limited v. Avon Rubber Co. Ltd (1977) 94 RPC 66

HEARING

ADELAIDE

#DATE 26:5:1989

Counsel for the applicant &
Cross-Respondents : Mr P.A. McNamara

Solicitor for the applicant &
Cross-respondents : Fisher Jeffries

Counsel for the respondents &
Cross-Claimants : Mr D.C. Kennelly

Solicitor for the respondents &
Cross-Claimants : Knox & Hargrave

ORDER

The cross-claimants give security for costs to the cross-respondents in the amount of $15,000, to take the proceedings down to 31 July 1989.

Such security is to be in a form agreed between the solicitors for the parties, failing which in a form acceptable to the District Registrar.

Liberty be granted to the cross-respondents to apply to seek further security in respect of the proceedings on and after 1 August 1989.

Subject to the cross-respondents filing and serving their defence and cross-claim for revocation, that the cross-claim be stayed until such security has been provided.

The costs of the present motion be costs in the substantive proceedings.

There will be liberty to apply.

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

JUDGE1

This is a motion for security for costs by the cross-respondents against the cross-claimants.

1. In the principal action Townsend Controls Pty Ltd seeks injunctive relief and damages pursuant to s.121 of the Patents Act 1952 against the first respondent in respect of threats of proceedings for infringement of Australian Letters Patent number 516536 ("the Australian patent") for an invention of a drip irrigation tube. It is common ground that Townsend Controls Pty Ltd claims to have developed in Australia a drip irrigation tube known as "Vinitape" and has applied for patent protection. Townsend Controls Pty Ltd has entered into a licence agreement with Vinidex Tubemakers Pty Ltd pursuant to which the latter company is manufacturing and selling Vinitape in Australia. The first respondent is the registered proprietor of the Australian patent, and by various letters has threatened actions for infringement against Townsend Controls Pty Ltd, Vinidex Tubemakers Pty Ltd and others who distribute and use Vinitape.

2. The application in the principal proceedings was served by leave of the Court on the first respondent in Israel. He is a citizen and resident of that country. In interlocutory proceedings subsequently it emerged that the second respondent (who was joined as a respondent in the course of an application by Townsend Controls Pty Ltd for an interlocutory injunction) has acquired a twenty-five per cent interest in the Australian patent from the first respondent who is his father. The second respondent is also a citizen and resident of Israel.

3. The respondents' defence in the principal action alleges that the threats were justified as the Vinitape product infringes the Australian patent. In their cross-claim they seek, as cross-claimants, relief for infringement of the Australian patent against the original applicant, Townsend Controls Pty Ltd, and against James Dunstone Townsend and Vinidex Tubemakers Pty Ltd who have been joined in the action as cross-respondents. Extensive particulars of the alleged infringements have recently been given by the cross-claimants. Under the timetable set for the completion of interlocutory steps the time allowed to the cross-respondents to file their defence and a cross-claim seeking revocation has not yet expired. However it is common ground that I should decide the present application on the footing that the cross-respondents will seek revocation of the Australian patent.

4. The affidavit in support of the application for security for costs provides prima facie evidence that the cross-claimants have no assets within the jurisdiction. There is no answering affidavit from the cross-claimants. They have not asserted that they are impecunious or that an order for security would frustrate their cross-claim. Earlier affidavits on file disclose that Israel is not a convention country within the meaning of the Federal Court Rules. The present notice of motion has been argued on the footing that there is no statutory or other procedure in Israel which would enable the cross-respondents, if successful in the cross-claim, to register and enforce a judgment or order for costs in Israel. It has not been suggested that on the material before the Court, the Court should form a view one way or the other as to the merits of the contentions of the parties in the cross-claim.

5. The cross-respondents rely in particular on O.28, r.3(1)(a) of the Federal Court Rules which provides :
   

"3(1) Where, in any proceeding, it appears to the Court on the application of a respondent -

(a) that an applicant is ordinarily resident outside Australia;

(b)...

(c) ...

(d) ...

the Court may order that applicant to give such security as the Court thinks fit for the costs of the respondent of and incidental to the proceeding."

Mr P.A. McNamara, who appeared for the cross-respondents, submits that "applicant" includes a cross-claimant in respect of a cross-claim. It is conceded that where a cross-claim is in substance part of a defence to the principal action, security for costs should not be ordered against a cross-claimant. However it is submitted that where in substance the cross-claimant is the "attacker" in the litigation it should be treated as an "applicant" and may properly be ordered to give security for costs. The cross-respondents rely in particular on Willey v. Synan (1935) 54 CLR 175. In that case an order for security for costs which had been made against a plaintiff resident outside the jurisdiction was set aside on the ground that he was, in substance, in the position of a defendant in the proceedings. The plaintiff had commenced the proceedings to recover coins seized by Customs after receiving notice that unless recovery proceedings were instituted the coins would be condemned. Latham C.J. at pp 179-180 said :

"The plaintiff contends that, even if he is ordinarily resident beyond the jurisdiction, he is really a party attacked, not a party attacking, and that therefore he is substantially in the position of a defendant and should not be ordered to give security for costs. It was held in Maatschappij voor Fondsenbezit v. Shell Transport and Trading Co. (1923) 2 KB 166 that the Court when considering an application for security for costs should be guided by the substance and not by the form of the matter. The Court 'orders security for costs against the foreign attacker, not against the foreigner defending himself or his property from attack' (1923) 2 KB at p 177. Thus, in interpleader proceedings, a party who is a defendant in the issue, but who is substantially in the position of a plaintiff initiating an action and is a foreigner residing abroad, may properly be ordered to give security for costs, though as a general rule a defendant cannot be ordered to give such security (Tomlinson v. Land and Finance Corporation (1884) 14 QBD 539). But if for mere convenience a litigant who resides abroad is made plaintiff in an interpleader issue, but he does not substantially occupy the position of the plaintiff commencing an action, he will not be ordered to give security for costs (Belmonte v. Aynard (1879) 4 CPD 221."

and Dixon J. at p 184 said :

"The principle is that a party to judicial proceedings, who resides beyond the jurisdiction, should not be required to give security for costs unless, however the parties are arranged upon the record, he is the person invoking or resorting to the jurisdiction for the purpose of establishing rights or obtaining relief. If he does avail himself of the remedies the jurisdiction provides in order to obtain affirmative relief or redress, he may be ordered to give security, although he becomes a defendant in the action."

1. Mr McNamara contended that even though one of the cross-respondents, Townsend Controls Pty Ltd, had initiated the principal proceedings, and even though all three cross-respondents intended to seek revocation of the Australian patent, they were in reality parties being attacked. It was the cross-claimants who disturbed the Australian market for Vinitape by first making threats of infringement proceedings, and when protective action was taken by Townsend Controls Pty Ltd over the threats under s.121, it was the cross-claimants who attacked again with the cross-claim for infringement. The proposed claim for revocation, it is submitted, is in the nature of a response to that attack. The cross-respondents contend that the proper course which the cross-claimants should have pursued was to commence proceedings in the first place for infringement. Had they done so, then clearly O.28, r.3(1)(a) would have applied to them as applicants.

2. The cross-claimants opposed the order. Mr Kennelly on their behalf presented an able argument which has its genesis in the Court of Appeal decision in Neck v. Taylor (1893) 1 QB 560. Lord Esher M.R. at p 562 said :
   

"Where the counter-claim is put forward in respect of a matter wholly distinct from the claim, and the person putting it forward is a foreigner resident out of the jurisdiction, the case may be treated as if that person were a plaintiff, and only a plaintiff, and an order for security for costs may be made accordingly, in the absence of anything to the contrary. Where, however, the counter-claim is not in respect of a wholly distinct matter, but arises in respect of the same matter or transaction upon which the claim is founded, the Court will not, merely because the party counter-claiming is resident out of the jurisdiction, order security for costs; it will in that case consider whether the counter-claim is not in substance put forward as a defence to the claim, whatever form in point of strict law and of pleading it may take, and, if so, what under all the circumstances will be just and fair as between the parties; and will act accordingly. Therefore, the Court in that case will have a discretion. It is clear to me in the present case that the counter-claim is not in respect of a matter wholly distinct from and independent of that upon which the claim is based; on the contrary, it arises out of the very same transaction in respect of which the action is brought."

Lindley L.J. at p 563 said :

"I am of the same opinion. The matters set out in the counter-claim appear to me to be of such a nature and so closely connected with the cause of action that, whatever according to legal technicalities they may be called, they are, in substance, in the nature of a defence to the action."

Lopes L.J. at p 563 said :

"In cases of this kind we ought, I think, to have regard, not so much to the record, construed according to the strict rules of pleading, as to the substantial position of the parties to the record. Bearing that in mind, it seems to me that the facts set up in this counter-claim are in the nature of a defence, arising as they do out of the same set of circumstances as the claim; and therefore it would not be right to require the defendant to find security for costs, although she is resident abroad."

1. Neck v. Taylor has been followed in the Court of Appeal in New South Wales in Buckley v. Bennell Design and Constructions Pty Ltd (1974) 1 ACLR 301, and by the Full Court of South Australia in John Arnold's Surf Shop Pty Ltd (In Liquidation) v. Heller Factors Pty Ltd and Allert (1979) 22 SASR 20. A useful illustration of the application of Neck v. Taylor may also be found in Specialised Building Materials Pty Ltd v. E.U. Occusted Pty Ltd (1981) 37 ACTR 8.

2. Mr Kennelly argued that in the present case the form of the proceedings do reflect the substantial position of the parties. The proceedings were initiated under s.121 of the Patents Act. That section, by its terms, makes it clear that it is a defence for the respondents to prove that the acts in respect of which proceedings were threatened constitute, or, if done, would constitute an infringement of a patent. The defence filed by the respondents to the principal action pleads the fact of infringement as the defence. The cross-claim arises out of the same matrix of facts and cannot be treated, so it is submitted, as wholly distinct from the principal proceedings. The position of the cross-claimants should therefore be likened to that of the plaintiff by counter-claim in Neck v. Taylor.

3. The power to order security for costs is to be found in s.56 of the Federal Court of Australia Act 1976. That section empowers the Court or a Judge to order "a plaintiff" to give security for costs. The notion of "a plaintiff" includes not only a plaintiff in the strict technical sense but a party who, in substance, is the party invoking the Court's jurisdiction for the purpose of establishng rights or obtaining relief in the sense laid down in Willey v. Synan and Neck v. Taylor.

4. Order 28, r.3, promulgated pursuant to the rule making power in sub.s.59(1) of the Federal Court of Australia Act, does not limit the general discretionary power conferred by s.56: Bell Wholesale Co. Ltd v. Gates Export Corporation (1984) 2 FCR 1 at 3. Even in a case where the party against whom the order for security for costs is sought is, in substance, clearly an applicant who meets the description in O.28, r.3(1)(a), the Court has a discretion to refuse to order security: Barton v. Minister for Foreign Affairs (1984) 54 ALR 586 and Energy Drilling Inc. v. Petroz NL & Ors, G.1361 of 1988, Gummow J., 3 May 1989, as yet unreported. However, if the cross-claimants were before the Court as applicants in an action for infringement of the Australian patent against the present cross-respondents, I think it would be a proper exercise of the discretion to order that they give security for costs, having regard in particular to the absence of evidence that such an order will frustrate their claim, and the likely difficulty which the cross-respondents would encounter if they succeeded and endeavoured to enforce an order for costs in Israel. However that is not how the proceedings have developed.

5. It is important, in my view, to have regard to the policy consideration which lies behind s.121 of the Patents Act. The section is designed to protect manufacturers and traders from patentees, licencees and others seeking to obtain or extend a monopoly by unwarranted allegations of infringement and threats of proceedings. In Skinner & Co. v. Perry (1893) 10 RPC 1 at p 8 Bowen L.J. said :
   

"The legislature desires that threats of patent actions shall not hang over a man's head; that the sword of Damocles, in such a case, should either not be suspended, or should fall at once..."

Section 121 provides the statutory machinery to enable the party threatened to bring down the sword. The provisions of s.121 give no right to a patentee to make a threat. The purpose of the section, on the contrary, is to provide a statutory remedy for a person against whom a threat is made by a patentee who embarks on "self help" measures instead of enforcing his claimed monopoly by instituting proceedings for infringement. The position is very helpfully stated by Graham J. in Mechanical Services (Trailer Engineers) Limited v. Avon Rubber Co. Ltd. (1977) 94 RPC 66 at pp 74-75 :

"Although the wording of the section might be clearer and the heading at first sight may create the impression that it is giving a right on the part of the person making the threats to do so if such threats can ultimately be shown to be justified, this is not in my judgment the correct view of the legal effect of the section construed as a whole in its context of the Patents Act 1949

(UK).

A patentee's first and proper remedy when he considers the defendant is infringing is to bring an action for infringement, without making any threats at all. This is however in the life of the market place no doubt a counsel of perfection and, patentees and travellers being human as they are, no doubt threats against potential defendants will continue to be made. That does not mean to say that the law approves of such action, which, as already stated, can obviously cause serious damage which it is often difficult or impossible to recover. On the other hand there is good reason for saying that a patentee who proves that his patent is valid and has been infringed by a defendant ought not to be liable for an action for damages in respect of threats which he is able, in any action brought by virtue of the section, to show are justified.

What the section therefore does is to give to the person threatened (the plaintiff) a right to damages and an injunction against the continuance of the threats in question unless the person making the threats (the defendant) is able to justify them in any action under the section. The section gives a right to the plaintiff but not to the defendant. The latter is only given a shield or defence when he is able successfully to prove justification. He is not given any right to make a threat even if in fact it ultimately turns out to be justified. As patentee he can perfectly well bring his action for infringement without making a threat."

1. In my view Mr McNamara is correct in submitting that in substance the "attackers" in the proceedings before the Court are the cross-claimants. In the first instance they should have commenced proceedings for infringement of the Australian patent, and by that means endeavoured to enforce their rights in Australia to the monopoly which they say is theirs by virtue of the Australian patent. I detect no difference in the statements of principle in Willey v. Synan and in Neck v. Taylor. However the facts in Willey v. Synan are more closely analogous to the instant case.

2. In the circumstances I am satisfied that the cross respondents have made out a case for an order for security for costs against the cross-claimants.

3. I have so far considered the matter on the footing that James Dunstone Townsend and Vinidex Tubemakers Pty Ltd stand in the same position as Townsend Controls Pty Ltd. That however is not so. James Dunstone Townsend and Vinidex Tubemakers Pty Ltd have been brought into the proceedings as cross-respondents. They are not parties to the principal proceedings. Mr Townsend is the managing director of Townsend Controls Pty Ltd and may well have a close interest as a shareholder or otherwise in the fortunes of Townsend Controls Pty Ltd. That however is not alone sufficient ground for disregarding the independent corporate identity of Townsend Controls Pty Ltd. The relationship between Mr Townsend and Townsend Controls Pty Ltd on the one hand and Vinidex Tubemakers Pty Ltd on the other hand is far from clear. On the information before the Court the arguments addressed by the cross-claimants in opposition to the order for security for costs appear to be irrelevant to the position of Vinidex Tubemakers Pty Ltd.

1. The amount of the security which should be ordered is another question. Three weeks commencing on 21 August 1989 have been set aside for the trial. On the footing that the trial will occupy that period, the solicitor for the cross-respondents has deposed to an estimate of the likely costs of the three cross-respondents. That estimate however appears to be on a solicitor and own client basis. It is not clear whether the estimate includes costs already incurred, much of which would relate to hearings over an interlocutory injunction made against the respondents. I do not think an order for security for costs should include costs which are referable to the principal proceedings for relief under s.121. The order should relate to the costs to be incurred by the cross-respondents in respect of the infringement proceedings. The cross-respondents propose not merely to defend the cross-claim but to seek revocation. That is a relief which may raise issues not raised by the cross-claim. I do not think that the order for security for costs should extend to issues peculiar to a claim for revocation. At this stage the pleadings are not closed, and no decision has been made whether the trial in August should be confined to questions of liability. As the trial date approaches the issues to be determined will become clearer.

2. At this stage I therefore propose to order that the cross-claimants give security for costs to the cross-respondents in the amount of $15,000 to take the proceedings down to Monday 31 July 1989. Such security is to be in a form agreed between the solicitors for the parties and, failing such agreement, it is to be in a form acceptable to the District Registrar. I grant liberty to the cross-respondents to apply to seek further security in respect of the prosecution of the proceedings on and after 1 August 1989. I also order that subject to the cross-respondents filing and serving their defence and cross-claim for revocation, that the cross-claim be stayed until such security has been provided.

3. The costs of the present motion should be costs in the substantive proceedings. There will be liberty to apply.