Townsend Controls Pty Ltd v Gilead, G

[1990] FCA 250

Re: TOWNSEND CONTROLS PTY LIMITED
And: GIDEON GILEAD; JAMES DUNSTONE TOWNSEND; TOWNSEND CONTROLS PTY LTD and
VINIDEX TUBEMAKERS PTY LIMITED
No. G84 of 1988
FED No. 250
Patents
21 IPR 520

COURT

IN THE FEDERAL COURT OF AUSTRALIA

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

CATCHWORDS

Patents - assessment of damages for unjustified threats - whether losses alleged were caused by the threats referred to in the statement of claim - whether losses caused by decision to await the outcome of cross-claim for infringement - claim for damages dismissed.

HEARING

ADELAIDE

#DATE 31:5:1990

Counsel for the applicant: Mr P.A. McNamara

Solicitors for the applicant: Fisher Jeffries

No appearance for respondent.

ORDER

The claim by Townsend Controls for damages pursuant to s.121(1) of the Patents Act 1952 be dismissed.

No order as to costs of the proceedings subsequent to 22 September 1989 in relation to the question of damages.

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

JUDGE1

On 22 September 1989 I delivered judgment on the principal claims for relief made in the application and in two cross-claims. In the result, on the application orders were made under s.121 of the Patents Act 1952 firstly restraining the respondent Gilead from continuing to threaten action for infringement of Australian Letters Patent No. 516536 ("the Gilead Patent") and secondly that the applicant ("Townsend Controls") recover from the respondent damages for the loss sustained by it in consequence of the making of the threats referred to in the statement of claim. The respondent's cross-claim for infringement of the Gilead Patent was dismissed, and on the further cross-claim by Townsend Controls, James Dunstone Townsend ("Mr Townsend") and Vinidex Tubemakers Pty Limited ("Vinidex") an order was made that the Gilead Patent be revoked. Details of the proceedings are contained in the earlier reasons for judgment.

1. The proceedings have now been brought on for further hearing to assess the damages sustained by Townsend Controls in consequence of the threats referred to in the statement of claim.

2. To understand the way in which the claim for damages is formulated, it is necessary to outline the development of a form of drip irrigation tube by Townsend Controls, the manufacture, distribution and sale of which were alleged by the respondent to infringe the Gilead Patent. Since about 1982 Townsend Controls through its managing director, Mr Townsend, has worked on the development of the tube which later became known as "vinitape". On 20 September 1983 Mr Townsend lodged an Australian patent application in respect of the tube entitled "Irrigation Hose", and subsequently Townsend Controls lodged further patent applications in respect of variations and improvements in relation to the development of vinitape. On 18 April 1985 Townsend Controls entered into a licensing agreement with Vinidex for the exploitation of vinitape and the various patent applications. In essence the agreement provided for the grant by Townsend Controls to Vinidex of an exclusive licence of its rights in respect of the patent applications, and for Townsend Controls to act as a consultant to Vinidex to further develop and improve the vinitape product. Thereafter Mr Townsend worked closely with Vinidex, and for a time had the title of "Manager of Vinidex Irrigation Division".

3. In 1986 Vinidex commenced to produce working samples of vinitape but it was not until December 1987 that limited commercial releases occurred. Samples were released to a small number of agricultural users as part of a testing programme.

4. In the meantime, in about July 1987 Mr Townsend learned of the Gilead Patent which was described as an invention of "a foil tube and a method and apparatus for producing the same". The respondent is a citizen of Israel. Mr Townsend visited him in Jerusalem. The respondent led Mr Townsend to believe that the apparatus described in the Gilead Patent had successfully produced a drip irrigation tube. Mr Townsend indicated a desire to negotiate concerning the purchase of rights conferred by the Gilead Patent to avoid any potential conflict arising from the manufacture of vinitape. However the discussion between Mr Townsend and the respondent faltered when the respondent failed to produce a sample of foil tube for inspection. The first of the threats referred to in the statement of claim was then made. In a telex dated 7 August 1987 addressed to Mr Townsend at Vinidex the respondent threatened to take "all necessary legal steps" against anyone manufacturing, distributing or using vinitape. In my earlier reasons for judgment I held this telex to be a threat within s.121 of the Patents Act. Notwithstanding the telex, the parties continued to correspond. On 1 October 1987 the second threat referred to in the statement of claim was made. The threat was contained in a letter from a lawyer in Jerusalem acting on the respondents' behalf. The letter was addressed to Townsend Controls and Vinidex, with copies to various directors and officers of both companies. That letter demanded that Townsend Controls and Vinidex cease the manufacture and distribution of vinitape, and threatened action for infringement of the Gilead Patent. On 23 December 1987 solicitors in Adelaide acting for Townsend Controls responded to the letter of 1 October 1987 denying various allegations made in it including the allegation that vinitape infringed the Gilead Patent, and requesting that the respondent withdraw his "groundless threat of action" for infringement.

5. Then followed the third threat referred to in the statement of claim which was made in a letter dated 26 January 1988 from the lawyer in Jerusalem acting for the respondent. This letter was addressed to the Adelaide solicitors of Townsend Controls, but copies were again sent to directors and officers of Vinidex and Townsend Controls. The letter confirmed the threat of action made in the earlier letter of 1 October 1987. That letter appears to have concluded, at least for many months, correspondence between the parties.

6. The application which commenced these proceedings was not issued until 19 September 1988. The application was confined to seeking relief under s.121 of the Patents Act in respect of the above three threats. It is necessary to briefly record the course of events which followed in these proceedings. On 26 October 1988 Townsend Controls obtained leave to serve the proceedings in Israel. Service occurred on 30 November 1988. The respondent entered an appearance on 21 December 1988. The first directions hearing occurred on 7 February 1989. At that time the respondent and his son were in Adelaide. The respondent instructed solicitors who appeared on his behalf at the directions hearing. On 9 February 1989 the respondent filed an affidavit in support of an application seeking leave to join Mr Townsend and Vinidex as respondents to a proposed cross-claim. A draft of the cross-claim was exhibited. It contained a claim for infringement of the Gilead Patent pleaded against Townsend Controls, Mr Townsend and Vinidex.

7. Discussions were resumed between Mr Townsend and the respondent in February 1989 in Adelaide. At some of these discussions a representative of Vinidex was present. The respondent continued to assert the validity of the Gilead Patent and his intention to pursue his cross-claim for infringement. The respondent made further threats of action for infringement of the Gilead Patent. Threats to take action against distributors and end users were made by the respondent in correspondence and in discussions with Mr Townsend and the representative of Vinidex. Threats were also made at this time to actual and potential distributors and users of vinitape. These threats included a circular letter entitled "NOTICE TO THE PUBLIC - WARNING" which was widely distributed to people in the irrigation industry whose identity was ascertained from the yellow pages. The circular letter included the statement:
   

"Any person, company, or association using, purchasing, or selling the drip tube 'Vinitape' after publication of this notice will be sued by legal action for damages of $100,000, confiscation (even during irrigation in the field) and destruction of the 'Vinitape', the infringing product, under the Commonwealth of Australia Patent Act 1952".

On an urgent application by Townsend Controls an interlocutory injunction was granted on 3 March 1989 against the respondent and his son (who was then claiming to hold an interest as part owner in the Gilead Patent) to restrain further threats by them. On 8 March 1989 the cross-claim by the respondent seeking relief for infringement of the Gilead Patent was filed. On 9 March 1989 the injunction was extended to run until trial and the trial was set down for hearing on 21 August 1989.

1. At the trial the respondent did not appear. The circumstances surrounding his non-appearance are set out in the earlier reasons for judgment. At the commencement of the trial counsel for Townsend Controls sought to amend the statement of claim to include a claim for relief in respect of the threats made in about February 1989, including the threats in the circular letter. Notice of the proposed amendments had not been given in advance to the respondent and leave to amend was refused. The judgment entered in favour of Townsend Controls on 22 September 1989 for damages to be assessed was confined to damages sustained by reason of the three threats referred to in the statement of claim. No application has since been made to amend the pleadings to extend the proceedings to cover threats made after January 1988.

2. Townsend Controls now claims that it sustained damages totalling $606,600 by reason of the threats. Notice of the claim for that amount (set out in an affidavit of Mr Townsend sworn on 19 January 1990) was served on the respondent, but he has not appeared on the present hearing.

3. The claim is one of startling magnitude, particularly when one reflects on the observation in Blanco-White "Patents for Inventions" 4th ed. at para 12-315:
   

"In the ordinary way, the damage that a threat causes to the person threatened is small: he has only to consider his position, and if he feels the threat unjustified, to disregard it. What ordinarily causes the heavy damage is threats to a man's customers, causing them to take their business elsewhere . . ."

1. Here, the only relevant threats, the three referred to in the statement of claim, were threats made to Townsend Controls and Vinidex, not threats to customers. The formulated claim is comprised as follows:
   (a) lost royalties from the sale of Vinitape. Under the licence agreement between Townsend Controls and Vinidex, Townsend Controls would receive a royalty of 3% on the sale price of Vinitape. Mr Townsend, in his affidavit quantifying the claim says:
   

"Essentially, pending termination of this action, Vinidex was not willing to proceed with the development and marketing of Vinitape as a result of the threats made by Gilead. As a result, there has been at least a one year delay in the development and marketing of Vinitape."

Royalties on one year's sales are estimated at $57,000

(b) loss of sale of production technology to off-shore customers. Under the licence agreement with Vinidex, Townsend Controls was entitled to 60% of the profit expected to be made on the sale or licensing of production lines for the production of vinitape to off-shore customers. Townsend Controls and Vinidex, in August 1989, anticipated the sale or licensing of two production lines per year, that being the maximum number which could be manufactured, although the demand was anticipated to be greater. On this basis it is alleged that sales or licences lost to off-shore customers would be lost for all time. Assuming that there was a delay of one year in the development and marketing of vinitape caused by the threats, Townsend Controls claims $300,000 being 60% of the anticipated profit of $250,000 from each of two off-shore customers.

(c) loss of consulting income received by Townsend Controls from Vinidex. Pursuant to an agreement first reached between the two companies in about September 1983 Townsend Controls prior to March 1989 was receiving a consultancy fee of $4,800 each calendar month. After March 1989, allegedly as a result of the threats made by the respondent, the consultation required by Vinidex was reduced, and Townsend Controls entered into a new consultancy agreement for a period of one year at a monthly fee of $4,000. Mr Townsend, in his affidavit quantifying the claim, estimates the loss in consultancy fees as follows:

1. An $800 reduction in consultancy fees due to Townsend Controls per calendar month for a period of twelve months, from March 1989 to March 1990, totalling $9,600;

2. A loss of consultancy fees which Townsend Controls would have expected to receive from Vinidex during the period of expansion and overseas licensing of the vinitape product and of vinitape production lines, which I estimate would have been a further period of five years beyond March 1990 at the rate of $4,000 each calendar month, totalling $240,000.

The above amounts produce the total claim of $606,600.

1. In Terrell on the Law of Patents (13th ed.) at para 13.24 the following observations are made concerning the amount of damages for a threat found to be unjustified:
   

"The measure of damages was that ordinarily applicable in the cases of tort, and damages could only be recovered if they were the natural and reasonable consequences of the threats (see Horne v. Johnston Bros., 38 RPC 366 at p 372) and had to be due to the threats alone. In Unger v. Sugg 9 RPC 114 at 118 Lord Esher MR said: 'But then what is the liability? It must be for damage done by the threats - not damage done by anything else. They (i.e. the defendants) are not liable for damage which is the result of any rumour getting about in the trade which is not their act. They are liable for the damages caused by their own act - the threats which they have made, and which they have caused to be made known to the people to whom their circulars were given.' The defendants will not be liable for damage caused by threats not authorised to be made by them. . ."

1. The evidence which Townsend Controls has adduced in support of its claim is confined to affidavit evidence from Mr Townsend and from Mr Facey, the general manager - finance and administration and the company secretary of Vinidex. Of particular significance are the affidavits filed before the trial on the principal issues in opposition to an application for an adjournment of the trial made by Mr Gilead. Mr Townsend in his affidavit sworn on 2 August 1989 deposed that the limited commercial release of vinitape in December 1987 continued until about May 1988. At that time it became apparent, from field tests, that the tape was splitting as the result of manufacturing problems. Between May 1988 and August 1988 modifications were made to the manufacturing machinery in order to improve the quality. In about August 1988 Mr Townsend considered that modifications enabled the production of a commercially acceptable product. A decision was then made that all previous tape should be scrapped. In September and October 1988 limited quantities of the improved vinitape were produced for commercial sale. It quickly became apparent that the previous problems had not been eliminated. The tape continued to split. Once again production ceased until further improvements were made. In about February 1989 an executive committee of Vinidex approved changes to production techniques submitted by Mr Townsend. In March 1989 production recommenced.

2. Upon this evidence I am led to conclude that until March 1989 the three threats referred to in the statement of claim caused no loss to Townsend Controls. It would appear that the threats were not taken seriously nor treated as justified. Townsend Controls and Vinidex pressed on undeterred with the development of vinitape.

3. Mr Townsend's affidavit sworn on 2 August 1989 continues:
   

"14. In March 1989 production recommenced. Testing of the resulting product demonstrated that the main problem, splitting, had been solved by the modifications which had been performed to the machine. During this time, very small samples of the form of Vinitape then being produced were given away free of charge to growers in order to determine its performance in the field. At the same time, the material was tested internally. The tests showed that the product was now capable of being released onto the wider market with confidence in its ability to perform. However, in or about April 1989 it was decided by Vinidex not to pursue actively the development of any market for Vinitape either in Australia or overseas until this action was determined. In particular, the 'notice to the public' which was circulated by or on behalf of Gilead in about March 1989 had in my opinion created some reluctance in the market place, and on the part of Vinidex, to market Vinitape prior to resolution of this action. (The source of my belief in these last two matters is information received by me from one Mike Dorge, Sales Manager of Vinidex in Queensland, in April 1989)."

As the exploitation of vinitape and the decision to proceed with or halt the exploitation was in the hands of Vinidex, the affidavit of Mr Facey is important. Vinidex is a company at arm's length from Townsend Controls. Mr Facey in his affidavit sworn on 2 August 1989, deposes:

"4. In or about April this year, it was decided by the Chief Executive Officer of Vinidex, Mr David Sumner, in consultation with me and with the Marketing Manager of Vinidex, Mr Neil Mahoney, (Messrs Sumner, Mahoney and I comprise what is know (sic) as the Executive Committee of Vinidex) not to market the form of irrigation tape which had previously been manufactured and distributed under the name 'Vinitape'. That decision was made in consequence of Gilead's cross action and on the basis that the trial would commence on 21st August 1989. It was decided that Vinitape would only be produced to meet any unsolicited order which may have been received.

5. The decision not to market Vinitape was motivated by an unwillingness to expend substantial sums of money developing and establishing a market for that product, both in Australia and overseas which, in the event that Vinidex loses the cross action, Vinidex would be unable to supply in the future. Further, as Vinidex would be obliged to account to Mr Gilead for its profits from the sale of Vinitape (to the extent that the form of tape previously being distributed by Vinidex infringes Mr Gilead's patent) should Vinidex lose the cross action, it was considered that marketing of Vinitape was commercially unjustified. Equally, distribution and marketing activities both in Australia and in other countries, have been suspended."

Mr Facey's evidence bears out the conclusion that it was not the three threats referred to in the statement of claim which caused Vinidex to stop manufacturing and marketing in about April 1989, but events which occurred subsequently. In my opinion the evidence fails to establish that any of the heads of loss alleged by Townsend Controls were caused by the three threats referred to in the statement of claim. On the contrary the evidence establishes that the relevant decisions by Vinidex were caused mainly by the commencement and prosecution of the cross-claim for infringement. The various threats made by the respondent to actual and potential distributors and users of vinitape in about February 1989 may also have played a significant part in the decision by Vinidex, but those threats are not the basis of the present claim. I therefore make no finding whether those threats were a material cause of loss of the kind alleged by Townsend Controls.

1. In view of the conclusion I have reached it is not strictly necessary to say anything more about the formulation by Townsend Controls of its claim. However I point out that the first two heads of claim for lost royalties and loss of off-shore sales or licensing of production lines assume that the exploitation of the vinitape product was delayed by twelve months. The evidence however is that the decision to await the outcome of the action was not made by Vinidex until March or April 1989. Judgement was given on 22 September 1989, about six months later. No reason has been advanced why manufacture and sales could not be immediately resumed. As for the third head of loss, the claim for loss of consultancy income, the renegotiated consultancy agreement, which expired in March 1990, resulted in a drop of consultancy fees of $9,600. The additional sum of $240,000 is claimed on the footing that, but for the threats, consultancy fees would have continued at least until March 1995, and that as a result of the threats all consultancy fees from March 1990 will be totally lost. No evidence has been adduced as to what transpired at the expiry of the renegotiated agreement. The court has not been informed whether some new agreement has been reached, and if so, on what terms. In any event, the evidence fails to advance any persuasive reason why, once the cross-claim was dismissed and the Gilead Patent revoked, there would be prospective losses of consultancy work, or how such losses could be related to the respondent's threats. On the evidence no part of the claim of $240,000 can be supported.

2. The affidavit evidence as to the quantum of the losses caused by the decision by Vinidex to stop exploitation of vinitape, at the most, could not support a claim exceeding:
   

Lost royalties $28,500 Lost off-shore sales or licensing $150,000 Loss of consultancy fees $9,600

1. However the formulated claim was based on predictions made before marketing of the perfected vinitape commenced. Actual experience of sales of that product would give a much more reliable indication of any loss which the delay of six months may have caused. When the assessment of damages came on for hearing on 19 May 1990, almost eight months had expired since judgment was delivered dismissing the cross-claim for infringement, and revoking the Gilead Patent. No evidence has been led either from Townsend Controls or Vinidex about market experience in this time. Had I been persuaded by the evidence that the threats by the respondent referred to in the statement of claim had caused any loss to Townsend Controls I would have invited the company to consider its position in light of this lack of evidence: cf Skinner and Co. v. Shew and Co. (1894) 2 Ch 581 at 595-596. Maybe Townsend Controls would have wished to call further evidence. However as the evidence established that the loss alleged was not caused by those threats there was not point in doing so.

2. For these reasons I hold that Townsend Controls has failed to establish any loss caused by the threats referred to in the statement of claim. The claim for damages under s.121 of the Patents Act is dismissed. There will be no order as to the costs of the proceedings subsequent to 22 September 1989 in relation to the question of damages.