Orion Marine Limited v Leybourne
[2021] NZHC 3207
•26 November 2021
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE
CIV-202-404-2488
[2021] NZHC 3207
UNDER Part 18 of the High Court Rules 2016 and/or the inherent jurisdiction of the Court UNDER
the Patents Act 2013
BETWEE
ORION MARINE LIMITED
First Plaintiff/First Counterclaim Defendant
DARREN PAUL LEYBOURNE
Second Plaintiff/Second Counterclaim Defendant
Cont/…
Hearing: 28 June 2021 Appearances:
A Hyde and AM Ryder for the Plaintiffs/Applicants G Arthur for the Defendant/Respondent
Judgment:
26 November 2021
JUDGMENT OF ASSOCIATE JUDGE SUSSOCK
This judgment was delivered by me on 26 November 2021 at 4.30pm pursuant to r 11.5 of the High Court Rules
Registrar/Deputy Registrar
Solicitors:
Goodwin Turner, Auckland Keegan Alexander, Auckland Clifton Chambers, Wellington
ORION MARINE LTD v SEALEGS INTERNATIONAL LTD [2021] NZHC 3207 [26 November 2021]
VLADAN ZUBCIC
Third Plaintiff
SMUGGLER MARINE LIMITED
Fourth Plaintiff/Third Counterclaim Defendant
DAVID JEFFERY PRINGLE
Fifth Plaintiff
PAULINE SIGNA PRINGLE
Sixth Plaintiff
ANDSEALEGS INTERNATIONAL LIMITED
Defendant/Counterclaim Plaintiff
Introduction
[1] When the defendant, Sealegs International Ltd, first sued Orion Marine Limited and others for breach of copyright in 2016 Sealegs obtained an interim injunction preventing Orion and the other parties from producing, displaying or selling allegedly infringing products until Sealegs’ claim was determined. As a condition of that injunction, Sealegs gave an undertaking as to damages so that if it did not establish that its copyright was infringed, Sealegs would pay those parties the loss suffered as a result of the injunction.
[2] Sealegs succeeded in its copyright claim at first instance1 but not in the Court of Appeal.2 Leave to appeal to the Supreme Court was declined in December 2019.3
[3] Orion and others now sue on the undertaking seeking $6.8 million in damages plus interest and costs.
[4] Sealegs has filed a statement of defence and counterclaim pleading that any production, display or sale by Orion or the other parties would have infringed Sealegs’ patent and so no amount is owing on the undertaking.
[5] Orion and the other plaintiffs in this claim apply to strike out the counterclaim and the parts of the defence relying on patent infringement on the basis that the pleadings are an abuse of process. Orion and the other parties submit that the pleadings offend against the rule in Henderson v Henderson,4 as the breach of patent claim could and should in all the circumstances have been brought together with the copyright claim.
[6] Orion and the other parties say that either Sealegs substantively abandoned its patent claim or deliberately misled the courts and the plaintiffs as to its intention in this regard. They submit that allowing Sealegs to bring the patent claim would cause
1 Sealegs International Ltd v Zhang [2018] NZHC 1724.
2 Zhang v Sealegs International Limited [2019] NZCA 389, [2020] 2 NZLR 308.
3 Sealegs International Ltd v Zhang [2019] NZSC 147.
4 Henderson v Henderson (1843) 67 ER 313 (Ch).
unjustifiable prejudice to them, that they are owed redress pursuant to the undertaking and to delay this further is insupportable.
[7] Furthermore, they say that there is an absence of good faith in bringing the breach of patent claim now when it has not been raised for more than six years after the products were first manufactured or sold and it has not been brought against other parties selling similar products.
[8] In response to the question of Sealegs’ right to defend itself, Orion and the other plaintiffs say access to the Courts is not unlimited, as the strike out rules make clear, and that there is no right to access the courts to perpetrate an abuse.
[9] Sealegs pleads illegality and cost of manufacture defences but the plaintiffs say both defences rely on Sealegs succeeding in its counterclaim for patent infringement but that the counterclaim cannot succeed because it is an abuse of process. Both defences must therefore be struck out.
[10] Finally, the plaintiffs submit that breach of patent does not qualify as illegality for the purposes of the equitable defence so that the illegality defence cannot be relied upon in any event.
Issues
[11] The overriding question in this application is whether in all of the circumstances Sealegs’ counterclaim and defences relying on breach of patent ought to be struck out as an abuse of process. To answer this question the parties are agreed that the Court needs to ask whether the patent claim could and should have been brought together with the copyright proceedings. The Court then needs to consider whether there are any other circumstances relevant to whether the pleadings ought to be struck out.
[12]The questions that need to be answered in deciding the application are:
(a)Could the patent claim have been brought in (or with) the copyright and design registration proceedings (“Copyright Proceedings”)?
(b)Should the patent claim have been brought in (or with) the Copyright Proceedings including:
(i)Did Sealegs abandon its patent claim?
(ii)If not, did Sealegs deliberately mislead the Court?
(iii)How does Sealegs’ 2017 amendment of the patent impact on whether the patent claim should have been brought?
(iv)Would it be a collateral attack on the Court of Appeal decision to permit the breach of patent claim now?
(v)Is there otherwise unjustifiable prejudice to Orion and the other plaintiffs if the breach of patent claim is allowed to proceed?
(vi)Is there an absence of good faith by Sealegs?
(c)Would strike out be a justified limit on Sealegs’ right to defend itself (including consideration of Sealegs’ pleaded defences)?
[13] I begin by briefly summarising the factual background before setting out the legal principles in relation to strike out and considering the Henderson v Henderson principle as applied by previous authorities to understand the test to be applied. I then consider the questions as set out above.
[14] For the remainder of this judgment when I refer to Orion and the other parties together, I refer to them as the “Applicants” by reference to the strike out application. This is to avoid confusion given the opposite roles played by the parties in the Copyright Proceedings. I refer to the defendant, Sealegs, as Sealegs.
Factual background
[15] The background to these proceedings is set out in detail in the Court of Appeal decision in the Copyright Proceedings, Zhang v Sealegs International Limited.5 A brief overview of the facts largely taken from that decision is set out below.
[16] Sealegs produces boats with three-wheeled amphibious attachments that allow the boats to be driven between land and water.
[17] Mr Bryham first came up with the idea for the Sealegs amphibious system, incorporating Sealegs in May 2000. Mr Leybourne, the second plaintiff, joined Sealegs in April 2004. He was initially involved in the construction, repair and servicing of Sealegs’ boats but in 2006 shifted from day to day operational work to project management. Mr Zubcic, the third plaintiff, joined Sealegs in February 2008 as a mechanical and design engineer.
[18] Mr Leybourne left Sealegs on 30 November 2011, at which time the Court of Appeal judgment records that he had no plans for other employment.
[19] On 28 September 2012 Mr Leybourne, together with Mr Zhang, a director of a Chinese company that manufactured and marketed amphibious craft known as “Surfcon”, set up Orion Marine. Their intention was to design and manufacture a new amphibious system with Mr Zhang providing the funding as the sole director and shareholder.
[20] On 2 February 2013 Mr Zubcic resigned from Sealegs and accepted an offer of employment at Orion, starting work on the design and development of Orion’s amphibious system known as the S25-4WD.
[21] The early years of Orion were intertwined with Sealegs as Sealegs engaged Orion to assist with various projects, including what was known as the SL100 project. This project had a “stop start” history due to funding difficulties.
5 Zhang v Sealegs International Limited, above n 2.
[22] By the end of 2014 Orion had designed and built its own four-wheeled amphibious attachment kit known as the S25-4WD. Mr Bryham from Sealegs viewed this craft at the 2015 Shanghai Boat Show. The Court of Appeal judgment records that Mr Bryham considered it to be a substantial copy of the Sealegs system and that a discussion took place between Mr Bryham and Messrs Leybourne and Zhang about whether the two companies and their products could exist together in the market. Mr Bryham’s evidence is that Mr Leybourne told him that the Surfcon craft would not be sold outside the Chinese market. That information together with his view that the Surfcon craft looked inferior to the Sealegs system were factors Mr Bryham said led to his view that Sealegs should endeavour to negotiate a distribution agreement notwithstanding his concerns about copyright infringement. It appears that such an agreement was never reached.
[23] The fourth plaintiff in this proceeding, Smuggler Marine Ltd, is owned and operated by Mr and Mrs Pringle, the fifth and sixth plaintiffs. Smuggler is a boat manufacturing business whose product range includes rigid inflatable boats (RIBs) between four and 11 metres in length.
[24] Sealegs and Smuggler entered into an agreement in 2011 or 2012 for Sealegs to supply its amphibious leg kits together with technical drawings and instructions to enable Smuggler to install the systems on the hulls of its craft. Difficulties in the companies’ relationship arose in around April 2015. Mr Pringle and Mr Leybourne discussed the possibility of Orion producing a three-wheel drive amphibious system for installation in the Smuggler boats in place of the Sealegs’ system. At that stage however Orion was not in a position to do so because it was committed to the completion of the SL100 project for Sealegs.
[25] In October 2015 Mr Leybourne resumed discussions with Mr Pringle regarding the three-wheel drive system Smuggler had sought in anticipation of Orion’s work on the SL100 for Sealegs coming to an end.
[26] By mid-2016 Orion was invoicing Smuggler for the supply of the S25-3WD amphibious system. Smuggler then announced in the September 2016 issue of the Boating New Zealand magazine that it would be unveiling a special craft at the Auckland On Water Boat Show on 29 September 2016.
[27] The Court of Appeal decision records that Mr Allen of Pipers Patent Attorneys had been engaged by Sealegs and visited Smuggler purporting to be interested in purchasing a Sealegs type boat. Mr Pringle showed Mr Allen photos of the new Smuggler boat and told Mr Allen that the amphibious system had been designed by an ex-Sealegs’ employee and that the boat would be on show at the Auckland On Water Boat Show in September.
[28] On 9 September 2016 Sealegs filed proceedings in the High Court at Auckland claiming that Orion, Mr Leybourne, Mr Zubcic, Smuggler Marine, the Pringles and others had infringed its copyright and its registered design.6 At the same time Sealegs applied for an interim injunction restraining Orion and the associated parties from displaying or selling the S25-3WD pending a full trial of its claim, with the intention of restraining exhibition at the Auckland Boat Show. Faire J declined to make any orders pending 28 October 2016.7
[29] Mr Bryham of Sealegs viewed the Orion S25-3WD and S25-4WD systems at the Auckland Boat Show and, on the basis of his limited view, considered the latter to be a copy of Sealegs’ port and starboard rear leg assemblies.
[30] On 12 December 2016 a memorandum was filed on behalf of Sealegs seeking a priority fixture for the copyright infringement claim. As a result, the Court allocated a four week hearing commencing on 25 September 2017.
6 CIV-2016-404-2256.
7 Sealegs International Ltd v Zhang [2016] NZHC 2274.
[31] On 19 December 2016, Peters J granted the injunction sought by Sealegs.8 The Applicants were, from that date, prevented from manufacturing or selling the S25- 3WD amphibious system. The High Court subsequently clarified that the injunction equally applied to Orion’s S25-4WD system.9
[32] Orders were made allowing Sealegs to inspect the S25-3WD in April 2017.10 The Applicants submit that, despite obtaining these orders, Sealegs took no steps to prosecute its claim. Concerned with the lack of progress, steps were taken by counsel for the Applicants to progress the Copyright Proceedings to trial. Those steps are discussed in further detail below as they are relevant to the question of whether Sealegs abandoned its patent claim. For the purposes of this background, it is sufficient to say that the Copyright Proceedings went ahead on 2 October 2017, the start only slightly delayed from the original 25 September 2017 date.
[33] On 12 July 2018 the High Court decision was delivered, Davison J holding that the Applicants had infringed Sealegs’ copyright but not its registered design, with an injunction remaining in place.11
[34] On 27 August 2019, the Applicants succeeded in their appeal to the Court of Appeal.12 Sealegs subsequently sought leave to appeal to the Supreme Court but was declined on 13 December 2019.13
[35] Following the Supreme Court leave judgment, concerns were raised by the Applicants as to allegedly defamatory remarks made about them in a Sealegs newsletter in December 2019. In response to those concerns, Mr Henry wrote to the Applicants’ solicitors in January 2020 to say that they would shortly be served with proceedings for breach of patent and breach of confidence.
[36] Correspondence continued between the parties throughout 2020, some on a without prejudice basis.
8 Sealegs International Ltd v Zhang [2016] NZHC 3143.
9 Sealegs International Ltd v Zhang, above n 1, at [14].
10 At [24]–[27], and [30].
11 Sealegs International Ltd v Zhang, above n 1.
12 Zhang v Sealegs International Ltd, above n 2.
13 Sealegs International Ltd v Zhang, above n 3.
[37] Finally, in December 2020, the Applicants commenced this proceeding claiming damages for the period during which they were wrongly injuncted. The Applicants are seeking damages of $6,823,000 (plus additional damages yet to be quantified) plus interests and costs in reliance on Sealegs’ undertaking as to damages.
[38]Sealegs’ statement of defence pleads, inter alia:
(a)Any production, display or sale of the Orion amphibious system or Smuggler boats with the Orion amphibious system (the system the subject of the interim injunction) would have been a breach of NZ Patent 526705 (“the patent”).
(b)No compensation should be ordered for losses sustained from an inability to conduct an unlawful business (illegality defence).
(c)No loss or damage was suffered through the inability to conduct their businesses because all profit would have been payable to Sealegs as patent damages or an account of profits (cost of manufacture defence).
[39] In addition to the defences pleaded, Sealegs counterclaims that the Smuggler boats fitted with the Orion amphibious system and the supply of the Orion amphibious system infringed and continue to infringe the patent. The counterclaim relates to the Orion amphibious system and Smuggler Strata 700 boat manufactured before the interim injunction and the current Orion amphibious system and Smuggler Strata 800 boat manufactured after the discharge of the injunction.
[40] The Applicants’ reply to the statement of defence denies the relevant allegations and says the pleadings are an abuse of process. No statements of defence to the counterclaim have been filed.
Strike out principles
[41] The strike out application is made pursuant to r 15.1 of the High Court Rules 2016. This provides that the Court may strike out all or part of a pleading if it:
(a)discloses no reasonably arguable cause of action, defence, or case appropriate to the nature of the pleading; or
(b)is likely to cause prejudice or delay; or
(c)is frivolous or vexatious; or
(d)is otherwise an abuse of the process of the court.
[42]The principles applying to strike out are set out in Attorney-General v Prince14
as endorsed by the Supreme Court in Couch v Attorney-General:15
(a)the pleaded allegations of fact are presumed to be true, unless they are entirely speculative and without foundation;
(b)the pleaded causes of action or defence must be so clearly untenable the Court can be certain they cannot succeed;
(c)the jurisdiction is to be exercised sparingly and only in a clear case;
(d)the jurisdiction is not excluded by the need to decide difficult questions of law requiring extensive argument; and
(e)the Court should be slow to strike out a claim in any developing area of the law.
[43] In Commissioner of Inland Revenue v Chesterfields Preschools Ltd, the Court of Appeal explained:16
Rule 15.1(1)(d) – “otherwise an abuse of the process of the court” – extends beyond the other grounds and captures all other instances of misuse of the court’s processes, such as a [proceeding] that has been brought with an improper motive or [is] an attempt to obtain a collateral benefit.
The rule in Henderson v Henderson
[44] Henderson v Henderson is a long-standing authority for the proposition that parties to litigation can be bound not just on points expressly pleaded but on every other point properly the subject of the same litigation and which the parties, exercising reasonable diligence, might have brought forward at the same time.17
[45] As the House of Lords held in Johnson v Gore Wood & Co the public interest underlying the Henderson v Henderson principle is the same as underpins res judicata or cause of action and issue estoppel: there should be finality in litigation and a defendant should not be oppressed by successive suits.18
14 Attorney-General v Prince [1998] 1 NZLR 262 (CA) at 267.
15 Lendlease Capital Services Pty Ltd v Arena Living Holdings Ltd [2021] NZCA 386 at [6], citing
Couch v Attorney-General [2008] NZSC 45, [2008] 3 NZLR 725 at [33].
16 Commissioner of Inland Revenue v Chesterfields Preschools Ltd [2013] NZCA 53, [2013] 2 NZLR 679 at [89].
17 Henderson v Henderson, above n 4.
18 Johnson v Gore Wood & Co [2002] 2 AC 1 (HL).
[46] Lord Bingham delivered the leading judgment in that case, with which the remainder of the Court agreed. His Lordship began his consideration of “abuse of process” with the fundamental principle that:19
The rule of law depends upon the existence and availability of courts and tribunals to which citizens may resort for the determination of differences between them which they cannot otherwise resolve. Litigants are not without scrupulous examination of all the circumstances to be denied the right to bring a genuine subject of litigation before the court.
[47]Lord Bingham then described the test for abuse as follows:
The bringing of a claim or the raising of a defence in later proceedings may, without more, amount to abuse if the court is satisfied (the onus being on the party alleging abuse) that the claim or defence should have been raised in the earlier proceedings if it was to be raised at all. I would not accept that it is necessary, before abuse may be found, to identify any additional element such as a collateral attack on a previous decision or some dishonesty, but where those elements are present the later proceedings will be much more obviously abusive, and there will rarely be a finding of abuse unless the later proceeding involves what the court regards as unjust harassment of a party. It is, however, wrong to hold that because a matter could have been raised in earlier proceedings it should have been, so as to render the raising of it in later proceedings necessarily abusive. That is to adopt too dogmatic an approach to what should in my opinion be a broad, merits-based judgment which takes account of the public and private interests involved and also takes account of all the facts of the case, focusing attention on the crucial question whether, in all the circumstances, a party is misusing or abusing the process of the court by seeking to raise before it the issue which could have been raised before.
[48] Lord Bingham emphasised that no hard and fast rule could be formulated to determine whether abuse would be found (or not) on given facts.
[49] Lord Millett in a concurring judgment explained that while the exact relationship between the Henderson v Henderson principle and the defences of res judicata or cause of action and issue estoppel may be obscure, his Lordship considered the principle “as primarily an ancillary and salutary principle necessary to protect the integrity of those defences and prevent them from being deliberately or inadvertently circumvented.”20
19 At 22.
20 At 59.
[50]Lord Millett went on:
It is one thing to refuse to allow a party to relitigate a question which has already been decided; it is quite another to deny him the opportunity of litigating for the first time a question which has not previously been adjudicated upon. This latter (though not the former) is prima facie a denial of the citizen’s right of access to the court conferred by the common law and guaranteed by article 6 of the Convention for the Protection of Human Rights and Fundamental Freedoms.
[51]Lord Millett described the test for abuse as being:
There is, therefore, only one question to be considered in the present case: whether it was oppressive or otherwise an abuse of the process of the court for Mr Johnson to bring his own proceedings against the firm when he could have brought them as part of or at the same time as the company’s action. This question must be determined at the time when Mr Johnson brought the present proceedings and in the light of everything that had then happened. There is, of course, no doubt that Mr Johnson could have brought his action as part of or at the same time as the company’s action. But it does not at all follow that he should have done so or that his failure to do so renders the present action oppressive to the firm or an abuse of process of the court. As May LJ observed in Manson v Vooght … it may in a particular case be sensible to advance claims separately. In so far as the so-called rule in Henderson v Henderson suggests that there is a presumption against the bringing of successive actions, I consider that it is a distortion of the true position. The burden should always rest upon the defendant to establish that it is oppressive or an abuse of process for him to be subjected to the second action.
[52] On the facts of Johnson v Gore Wood the Court held that it would not be an abuse of process for the plaintiff to bring his own proceedings against a law firm when he could have brought the claim as part of and at the same time as his company brought proceedings against the firm.
[53] In Stuart v Goldberg Linde the English Court of Appeal allowed an appeal reinstating a second proceeding brought by Mr Stuart in 2005 against Goldberg Linde arising out of the same background facts as a proceeding brought in 2000, also against Goldberg Linde.21 The first proceeding was for breach of an undertaking to pay Mr Stuart US$350,000. In the second proceeding, Mr Stuart repeated many of the assertions in the earlier proceedings but alleged that in reliance upon Goldberg Linde’s misrepresentations, Mr Stuart had entered into a contract with a third defendant, Mr Vardinoyannis (“Mr V”). It was then alleged Mr V had been induced to breach that
21 Stuart v Goldberg Linde [2008] EWCA Civ 2, [2008] 1 WLR 823.
contract as a result of derogatory and untrue statements made about Mr Stuart by Mr Linde of Goldberg Linde. Damages were claimed for misrepresentation and inducing breach of contract.
[54] Mr Stuart had known the facts relevant to the inducement claim before the trial of the first proceeding and had been aware of the falsity of some of the statements on which the misrepresentation claim was based. Goldberg Linde applied to strike out parts of the claim as an abuse of process.
[55] At first instance the application to strike out was successful. The result was confirmed on first appeal but the Court of Appeal allowed the further appeal, permitting the second proceeding to proceed. Both Lloyd LJ and Sir Anthony Clarke MR considered that the Master at first instance and the Judge in confirming the Master’s decision were wrong in finding delay and the strength or weakness of Mr Stuart’s case in the second proceeding relevant, with Sir Anthony Clarke MR holding:22
As to delay, if the action is not otherwise an abuse and is not statute barred (or perhaps infected by laches) I can see no reason why the Claimant should not be permitted to advance it. Equally, as to the merits, if the action cannot be struck out as bound to fail and if it is not a case in which it would be appropriate for the court to give summary judgment for the Defendant under [Civil Procedure Rules] Pt 24, I cannot see why it should not be permitted to proceed unless it is otherwise an abuse of process.
[56] Each of the Judges in Stuart v Goldberg Linde emphasised that the focus must be on all of the circumstances of the particular case.23
[57] The Judges disagreed, however, as to whether it was reasonable to expect Mr Stuart to raise the possibility of further proceedings with the first defendants and the Judge in the first proceeding. Sir Anthony Clarke MR held that the possibility of further proceedings should have been raised so that the Court could decide whether one or more trials were required and when. In his Lordship’s view:24
22 At [85].
23 At [24], 71 and [98].
24 At [96]–[97].
The time for such a decision to be taken is before there is a trial of any of the issues. In this way the underlying approach of the [English Civil Procedure Rules], namely that of co-operation between the parties, robust case management and disposing of cases, including particular issues, justly can be forwarded and not frustrated.
[58] Lloyd LJ, by contrast, considered that the first instance Judge erred in regarding the claimant’s position in seeking solely to enforce the undertaking as unreasonable.25
[59] Turning to the New Zealand cases relied on, the Applicants referred to BDM Grange Ltd v Trimex (New Zealand) Ltd, where a party had abandoned an amendment to its pleading proposing to raise a claim which they then sought to bring in later proceedings.26 The Court held that it would be an abuse of process to allow the later claim.27
[60] The Applicants submit that this case is analogous to BDM Grange v Trimex as, in their submission, Sealegs made a conscious decision, with the benefit of advice, not to bring a patent claim in 2016/2017.
[61] Sealegs responds that patent infringement is quite different to copyright infringement and there is no reason why the two proceedings should be brought together. Nor did Sealegs attempt to bring a patent infringement proceeding in the Copyright Proceedings. There was therefore no tactical litigation decision not to pursue a cause of action when confronted with discontinuance or abandonment. There was no discussion and therefore informed decision about the risks of a finding of abuse or estoppel.
[62] Furthermore, Sealegs submits BDM Grange is distinguishable as the Court held the claim in the second proceeding was clearly hopeless, so being an example of a case where the merits are relevant (as referred to in Stuart v Goldberg Linde28).
25 At [50].
26 BDM Grange Ltd v Trimex (New Zealand) Ltd [2017] NZHC 1259.
27 At [28]–[40].
28 Stuart v Goldberg Linde, above n 21, at [85].
[63] In Dotcom v District Court at North Shore the Court of Appeal described the rule in Henderson v Henderson as “proscribing proceedings by instalment as an abuse of process, and collateral attack on res judicata where the points could have been made in the initial proceeding.”29 This decision followed the Court of Appeal confirming that Mr Dotcom was eligible for extradition.30 Mr Dotcom brought judicial review proceedings focussed on the legitimacy of search and arrest warrants preceding a police raid of Mr Dotcom’s home. Counsel submitted that the issues with the warrants had not been raised in the extradition proceedings because the issues had not been identified until later. The Court of Appeal had no difficulty upholding the High Court decision to strike out seven out of eight causes of action for judicial review, holding that “the raising of further grounds as an afterthought — particularly in circumstances where parallel statutory rights of appeal have been pursued — renders the current applications for review an attempt to reopen the earlier litigation”31
[64] In Burden v ESR Group (NZ) Ltd,32 a recent decision in the copyright context, the High Court confirmed that it is wrong to find that it is necessarily an abuse of process to raise a matter in later proceedings simply because it could have been raised in earlier proceedings, saying that is too dogmatic an approach,33 as held in Johnson v Gore Wood.34
[65] In Burden the plaintiff in the first proceeding successfully alleged secondary copyright infringement by the importation of infringing furniture. In the second proceeding, the same plaintiff alleged primary copyright infringement against the same defendant in relation to the same furniture relying on the same artistic works. The defendant applied to strike out the second proceedings including on the basis that it offended against the Henderson v Henderson principle.
[66] The High Court held it would not be an abuse to permit the claim for primary infringement where the issue of primary infringement was not before the Court in the first proceeding, saying that to deny the plaintiff the right to pursue a claim for primary
29 Dotcom v District Court at North Shore [2018] NZCA 442 at [34].
30 Ortmann v United States of America [2018] NZCA 233, [2018] 3 NZLR 475.
31 Dotcom v District Court at North Shore, above n 37 at [34].
32 Burden v ESR Group (NZ) Ltd [2019] NZHC 1546.
33 At [67].
34 Johnson v Gore Wood & Co, above n 18, at 31.
infringement would be to deny their rights under s 27 of the New Zealand Bill of Rights Act 1990.35 Venning J accepted there would be further costs in defending the second proceeding but held that was not determinative, commenting that all actions involve cost and inconvenience to the defendant; the question is whether the second action is oppressive.36
[67] The Court of Appeal allowed the appeal but did not disagree with the High Court’s finding on abuse of process.37 Instead it found that the allegation of primary infringement had actually been made in the first proceeding so the proper course was to allow amendment to the claim in that proceeding. The outcome was still that the plaintiff was allowed to pursue a claim for primary copyright infringement in a second trial, notwithstanding that it had already pursued secondary copyright infringement to trial.
[68] The Supreme Court dismissed the application for leave to appeal but recorded that there was scope for argument on the correctness of the Court of Appeal’s approach.38 It held that if the proposed amendments to the first proceeding were not within the proper scope of that proceeding (as the High Court concluded), there were strong interests of justice considerations in allowing the second proceeding to continue.39 The Supreme Court said that the conclusions arrived at by both the High Court and the Court of Appeal that the plaintiff may claim in relation to primary infringement,, albeit by different routes, was entirely consistent with the interests of justice.40
[69] After consideration of the cases above, it is clear that the Henderson v Henderson principle cannot be reduced to a simple test of could and should the second proceeding have been brought in or with the first proceeding. All of the circumstances must be taken into account.
35 At [70]–[72].
36 At [74].
37 Burden v ESR Group (NZ) Ltd [2020] NZCA 560.
38 ESR Group (NZ) Ltd v Burden [2021] NZSC 22.
39 At [16].
40 At [15].
[70] Furthermore, the question of whether the second proceeding should have been brought needs to be considered in the context of the claimant being denied their right to bring a claim (or raise a defence) if the proceeding is struck out. To respond to this I have included as a final question: whether strike out would be a justified limitation on Sealegs’ right to bring a claim or raise a defence (as set out in the Issues section at the outset).
[71] I now consider the questions set out in the Issues section to assess whether in the circumstances of this case the Applicants meet the threshold for establishing abuse of process justifying strike out.
Could patent infringement proceedings have been brought in (or with) the Copyright Proceedings?
[72] The Applicants submit that prior to Sealegs filing its copyright infringement claim in late 2016:
(a)Sealegs had been aware of the S25-4WD since 2014, and discussed at the time whether it infringed Sealegs’ patent;
(b)Sealegs’ representatives carefully inspected the S25-4WD at the Shanghai Boat Show in early 2015;
(c)a representative of Sealegs’ patent attorney had visited Smuggler and closely examined the S25-3WD, drawing a sketch of the mechanism that was considered sufficient to support an injunction application.
[73] Furthermore, shortly after filing the copyright infringement claim, Sealegs’ representatives closely inspected the S25-3WD when it was displayed at the September 2016 Auckland On Water Boat Show. In October 2016 Sealegs filed a memorandum stating that it was going to bring a separate patent infringement claim. In public, Sealegs’ representatives were making statements to the effect that Sealegs would prosecute to the full extent of the law.
[74] In response, Sealegs says that while theoretically, Sealegs could have brought a claim for patent infringement, practically it could not because there was no prospect of the patent claim being heard in September 2017 together with the Copyright Proceedings. In Sealegs’ submission, the Applicants had made it abundantly clear that they would not allow any process that risked the September 2017 trial date.
[75] The contemporaneous documents appear to support the submission that the plaintiffs would have opposed the addition (or hearing together) of the patent claim if the consequence was losing the September 2017 trial date. I consider these documents below in more detail when considering whether Sealegs should have brought the patent claim. Rather than actual barriers to bringing a patent claim, these are issues that would have arisen if one had been brought. They are more relevant therefore to whether a patent claim should have (rather than could have) been brought.
[76] Sealegs submits that another reason for not bringing the patent claim is that it applied to amend its patent in March 2017 and that it could not bring a patent infringement proceeding until the patent was amended.
[77] Sealegs’ evidence shows an application to amend the patent was made on 14 March 2017. The application was accepted by the Commissioner of Patents (“Commissioner”) on 21 August 2017. It was then publicly notified and no opposition to the amendment was filed. The amendment was therefore allowed by the Commissioner on 26 October 2017.
[78] Section 85(2) of the Patents Act 2013 provides that the Commissioner must not allow a patent to be amended while any relevant proceeding (which includes a patent infringement proceeding) is pending.
[79] Sealegs submits therefore that if it had commenced a patent infringement proceeding, the Commissioner could not have amended the patent.
[80] The Court may allow a patent to be amended during a proceeding41 with the process governed by rr 22.9 to 22.16 of the High Court Rules. That process includes:
41 Patents Act 2013, s 89.
(a)notification to the Commissioner of an intention to make an application to amend;42
(b)the Commissioner publishing an advertisement of the proposed amendment;43
(c)any person (not just the other party to the infringement proceeding) giving written notice to the patentee of an intention to oppose;44
(d)the patentee making an interlocutory application to amend the patent, serving the application on the other party and any person who has given notice;45
(e)the Court giving directions on whether and on what terms the application to amend is allowed to proceed and whether oral or affidavit evidence is required;46
(f)usually a pre-trial interlocutory hearing on the application to amend;47
(g)the Court giving judgment on the application to amend with a copy of the order being lodged with the Commissioner;48 and
(h)the Commissioner advertising the order if the application to amend is allowed.49
[81] Counsel for Sealegs submits that the above process takes many months so it could not have commenced a patent infringement claim in June 2017 with a trial date in September 2017 (or even a trial date in early 2018).
42 High Court Rules 2016, r 22.10.
43 Rule 22.11.
44 Rules 22.11(3)(b) and 22.12.
45 Rules 22.13 and 22.14.
46 Rule 22.15.
47 Ian Finch (ed) James & Wells Intellectual Property Law in New Zealand (3rd ed, Thomson Reuters, Wellington, 2017) at [2.9.3]–[2.9.4]; Polytherm Industries v Dux Engineers (1997) 10 PRNZ 381.
48 High Court Rules, r 22.16(1)(a).
49 Rule 22.16(1)(b).
[82] The Applicants’ response is again that the application to amend is not an actual barrier to bringing a breach of patent claim. The Applicants question Sealegs’ evidence on the amendment, saying that only Mr McKee Wright refers to it in his affidavit so it cannot have been a genuine reason for not bringing the patent claim.
[83] The application to amend the patent was not filed until March 2017 so I agree that this did not prevent the patent claim being brought originally but it is relevant to whether the patent claim should have been brought. I discuss amendment of the patent further below when I discuss that question.
[84] Finally on the question of whether a patent infringement claim could have been brought, Sealegs’ counterclaim and particulars of breach plead that both the Smuggler Strata 700 boats that preceded the interim injunction and the new Smuggler Strata 800 boats that have been launched since the discharge of the injunction infringe the patent. As Sealegs submits, the claims alleging breaches of patent arising after the final result in the Copyright Proceedings obviously could not have been brought at the same time as the Copyright Proceedings.
[85] I conclude in answer to the first question that technically a patent claim could have been brought together with the Copyright Proceedings at least in respect of the original system developed. Sealegs could not have brought a patent infringement proceeding in 2016, however, in respect of a model of boat not launched until 2019. As Sealegs submits, this highlights the extreme consequences of the strike out application, that it seeks to strike out a claim even against a new model.
[86] Before moving to the next question, I record that the Applicants say the point that the breaches of patent could not have been brought because they relate to the new Smuggler Strata 800 boat launched since the discharge of the injunction was raised for the first time in submissions for this hearing and not in the defendant’s notice of opposition. The Applicants filed a further affidavit by Ms Pauline Pringle to support its opposition to this point, seeking leave for the further evidence to be admitted (which is granted).
[87] As referred to above, the breaches of patent pleaded by Sealegs relate to both the system that was the subject of the injunction and a new system released after its discharge. It appears unsurprising, therefore, that Sealegs raised this point in submissions as the strike out application seeks to strike out the whole of Sealegs’ claim. There may be other disputes on the evidence. Because of the conclusions I have reached, however, I do not need to reach a view on these issues.
Should a patent infringement claim have been brought in 2016/2017?
[88] I consider below the six questions set out in the introduction as relevant to this issue.
Did Sealegs abandon its patent claim?
[89] To answer this first question, I begin with a chronology from the contemporaneous documents.
[90] In the submissions filed on behalf of Sealegs in support of its application for an interim injunction dated 26 October 2016, Sealegs described the nature of the proceedings in its opening paragraph as follows:
The trial is expected to take 4-6 weeks as whilst not pleaded at present, the plaintiff will issue a proceeding based on the infringement of the patent it holds protecting the amphibious boat design in a separate proceeding, which the defendants will most likely seek to have heard at the same time.
[91]Then at paragraph [3]:
The plaintiff today seeks an interim injunction based on the design registration and the copyright it holds and being aware of its obligation to seek the earliest fixture when granted an interim injunction has decided to keep the more lengthy patent proceedings separate leaving it to the defendant to decide if it wants to apply to have the two proceedings heard at the same time which will greatly extend the court trial time and could thereby delay the substantive trial of the proceeding supporting the interim injunction.
[92] In the judgment granting the interim injunction, Peters J relied on the fact that there would be a trial of the claim in nine months:50
In my view, a “standstill” for the relatively short period to trial is the most prudent course and the course best designed to do justice to all concerned.
[93] Following the ordering of the injunction, and a number of initial skirmishes in relation to its scope, the Applicants filed a memorandum dated 26 May 2017. This expressed the Applicants’ concerns in regard to the failure of Sealegs to take any steps to progress the proceeding despite a trial having been allocated to commence in fourth months. The memorandum recorded:
We acknowledge that the parties have been trying to resolve the case between them but, given that no outcome has yet been agreed and may not be agreed in the immediate future, it is imperative that the proceeding is not allowed to fall into neglect and the September fixture be forfeited as a consequence.
Unusually, it is [the Applicants] who will suffer most if the September fixture is not maintained. This is because their ability to do business has been, and continues to be, severely curtailed by the [interim injunction].
[94] Later in the same memorandum, Orion’s counsel said in relation to the injunction:
In the absence of any resolution between the parties, it simply is not an option for the defendants to lose the September fixture. Importantly, the order was made, at least in part, on the basis that a trial would go ahead in September. If [Sealegs] is not committed to that fixture, then it is submitted that the order must be lifted so as to avoid irreparable harm to the defendants.
[95]The matter was then listed for the Duty Judge List on 31 May 2017.
[96]On 30 May 2017, Orion’s counsel filed a further memorandum noting at [7]:
… the following steps remain to be taken in this proceeding before trial can proceed in September this year:
(a)…
(b)Close of pleadings. In addition to needing to amend its statement of claim to remedy the errors therein, the plaintiff has previously signalled an intention to amend its claim to include a cause of action regarding alleged patent infringement, but as yet has taken no steps to do so. Although no close of pleadings date has yet been set, counsel
50 Sealegs International Ltd v Zhang, above n 8, at [44].
submit that if such amendment does not take place forthwith, [Sealegs] should be declined leave to do so.
[97]The timetable directions proposed in the memorandum included at [11(c)]:
(c) Amended statement of claim (remedying current deficiencies and pleading any claim as to breach of patent) to be filed/served by 5pm, Friday, 16 June 2017.
[98] Counsel for Sealegs filed a memorandum in response, saying in relation to the proposed timetable direction:
30 June 2017 – suggested date
[11c] [Sealegs] has always asserted that once inspection and the report is completed they will amend the pleading shortly thereafter, this can be done by Friday, 30 June 2017. It can be signalled that it is unlikely (but subject to the inspection in 11(b)) any cause of action relating to the patent will be filed.
[99] In a Minute issued on 31 May 2017, Woolford J made timetable orders by consent, directing Sealegs to file an “amended statement of claim (remedying current deficiencies and pleading any claim as to breach of patent) to be filed/served by 5.00pm, Friday, 30 June 2017”.51
[100] The Minute included orders to complete inspection by 23 June 2017. Inspection took place and on 30 June 2017 Sealegs filed an amended statement of claim. No claim for patent infringement was included.
[101] The trial commenced on 2 October 2017. Mr Maurice Bryham gave the leading evidence for Sealegs. In his evidence, he said:
[Sealegs] believes that Orion’s design is a breach of the patents, but given the Court had a fixture available on the 25th September 2017 [Sealegs] has decided not to add a patent cause of action to this proceeding, leaving the patent to be used in the US, Australia, EU and other jurisdictions should the [Applicants] try to infringe the patents rights in those regions.
51 Sealegs International Ltd v Zhang HC Auckland CIV-2016-404-2256, 31 May 2017 (Minute), at [5(c)].
[102]And in relation to the inspection:
On 6 June 2017 pursuant to the Court order, I was able to closely inspect but not dismantle the Smuggler boat fitted with the S25-3WD system attached. At the time of that inspection the key decisions we were making was the finalisation of our pleadings and a decision as to whether or not we would add a cause of action under the Sealegs patent. Looking at the boat I formed the opinion that they were attempting to avoid the claims of the Sealegs patent which was part of the claim integers records that the front wheel in the lifted position can be used as a bumper. The defendants have attempted to cover part of the front wheel with a cowling, however the fact that they have constructed something forward of the bow does not on my understanding of the patent, escape from the patent claims. Due to the availability of a copyright trial date in September, the plaintiff decided not to add a cause of action under the patent, but will deal with this issue should the defendants attempt to sell the boat in any other jurisdiction where Sealegs has have patent protection [sic].
[103]Later in his evidence Mr Bryham said:
Sealegs believes there is patent infringement, but is only pursuing the simpler copyright infringement at this stage.
[104] Finally, for the purposes of this chronology, the Court of Appeal held in its decision allowing Orion’s appeal:52
[42] However issues concerning Sealegs’ patents and their validity are not raised by this appeal. For, as Mr Bryham stated in evidence, while he believed the appellants’ design was a patent infringement, because of the impending trial date Sealegs decided not to add a patent cause of action in the New Zealand claim but to pursue what he referred to as the simpler copyright infringements leaving the patent to be relied on in the United States, Australia and other jurisdictions should litigation arise there.
[105] The Applicants submit that by proposing in their 30 May 2017 memoranda that any patent claim must be brought by 30 June 2017 Orion and the other parties were taking up the option of a joint proceeding as offered by Sealegs in its 26 October 2016 submissions. But, as Sealegs submits, the Applicants’ 30 May 2017 memorandum only referred to adding a patent claim to the Copyright Proceedings. It did not address the possibility of a separate patent claim or applying to have the two proceedings heard at the same time. If this was the Applicants taking up the option, it needed to be much more clearly expressed.
52 Zhang v Sealegs International Ltd, above n 2, at [42].
[106] This is particularly the case when the position had significantly changed between the 26 October 2016 submissions when Sealegs made that suggestion and the 30 May 2017 memorandum when the trial was less than four months away.
[107] In the Applicants’ submission, however, the intent and effect of the 31 May 2017 order is still clear and it was two-fold: it required that any patent claim be brought in the same proceeding as the Copyright Proceeding, and that this be done by a particular date.
[108] The Applicants submit that it is well within the powers of the Court to make such an order, particularly given that Sealegs consented to it without any reservation. They submit that Sealegs understood at the time that it elected not to bring a patent claim by 30 June 2017 that it was abandoning this claim in New Zealand.
[109] In addition, the Applicants say Mr Bryham expressly advised the Applicants and the High Court that Sealegs would not bring a patent claim in New Zealand as outlined above.
[110] Finally, the Applicants rely on the passage from the Court of Appeal judgment to submit that Sealegs clearly abandoned any patent infringement claim in New Zealand.
[111]In my view, the position is not as unequivocal as the Applicants contend.
[112] The timetable order on 31 May 2017 was clearly made by Woolford J in the context of ensuring that the Copyright Proceedings went ahead in September 2019.
[113] The memorandum filed on behalf of the Applicants in advance of that Minute can only mean that Sealegs should be declined leave to bring the patent claim in (or together with) the Copyright Proceedings. Sealegs could not be declined leave to bring a patent claim on a standalone basis if that claim had not previously been brought and was within the limitation period. The context was clearly that if Sealegs wished to bring its patent claim together with the Copyright Proceedings, it needed to do so in accordance with the timetable orders agreed.
[114] Mr Bryham’s evidence at trial can only be relied on as being consistent with the position that Sealegs abandoned its claim in June 2017 because it was only given once the hearing had begun in October 2017.
[115] In any event, in the first two passages from Mr Bryham’s evidence relied on by the Applicants he refers to the fact that the Court has a fixture available on 25 September 2017 for the copyright trial. He expressly states that Sealegs has decided not to add a patent cause of action to this proceeding. Later he says “at this stage”. The plaintiffs submit that the reference to “at this stage” must refer back to his earlier evidence where he said there would be no patent claim in New Zealand. But Mr Bryham’s evidence was that there would be no patent claim “in this proceeding”.
[116] I accept Mr Bryham does say that it leaves the patent to be used in other regions but that may equally mean that the patent could be relied upon in those other regions during the period in which the injunction was in force in New Zealand.
[117]In my view Sealegs did not clearly abandon its patent claim.
If not, did Sealegs deliberately mislead the Court and the other parties?
[118] The extracts from the submissions and memoranda referred to above do not support the alternative submission that Sealegs deliberately misled the Court.
[119] Furthermore, the passage from the Court of Appeal referred to above suggests that it did not understand that Sealegs had abandoned its patent claim, commenting that it was because of the impending trial date that Sealegs decided not to “add” a patent claim to the proceeding. If the Court of Appeal did not understand that Sealegs was abandoning its claim, it is difficult for the plaintiffs to argue that Sealegs deliberately misled the Court.
[120] Furthermore, the Applicants have not pleaded estoppel as one would expect if there is an allegation that they were deliberately misled.
How does Sealegs’ 2017 patent amendment impact on whether the patent claim should have been brought?
[121] Although the Applicants raise issues with the evidence filed for Sealegs in relation to the amendment and question why only one of Sealegs’ witnesses refers to it, there is no question that the patent was being amended from March 2017 and that the relevant statutory provisions prevent proceedings in relation to that patent, except in accordance with the particular process set out in the High Court Rules. This process could not have been followed if the September 2017 hearing date was to be maintained. It appears likely that the Applicants would have strongly opposed any adjournment of the trial date and that the continuation of the interim injunction may have depended on that date being maintained.
[122] A further point made by counsel for Sealegs was that the public notification of the proposed amendment in August 2017 should have made it very clear that Sealegs may seek to rely on its patent. As counsel for Sealegs submits, to suggest that Sealegs was somehow being tricky is inconsistent with the public nature of patents and the amendment process.
[123] The amendment to the patent therefore supports Sealegs’ position that the Court ought not to find that Sealegs should have brought its patent claim in 2017.
Would it be a collateral attack on the Court of Appeal decision to permit proceedings now?
[124] The Applicants submit that although they accept different legal tests apply to copyright and patent infringement, there is considerable overlap between the two proceedings arising from:
(a)the same parties, the same factual background and the same works alleged to be infringing; and
(b)the need for the Court to understand and assess the function performed by the Applicants and Sealegs’ works, in order to consider the originality (copyright) or inventiveness (patent) of Sealegs’ products, as expressed in the copyright works and patent.
[125] The Applicants say that in the Copyright Proceedings, extensive evidence was given by the Applicants to explain the amphibious mechanisms and the engineering behind them. A court considering a breach of patent would also need to have this evidence before it by way of background and explanation. In the Applicants’ submission, such evidence would have “done double duty” if the patent and copyright proceedings were brought concurrently.
[126] The Applicants accept that the question of originality in copyright is ordinarily quite different to the assessment of inventiveness in patent law. They submit however that the unique nature of Sealegs’ copyright infringement claim creates overlap between these two questions in the circumstances of this case.
[127] The Applicants say that the collocation of features upon which the copyright claim was based closely resemble integers appearing in Sealegs’ patent and that this was conceded by one of the witnesses for Sealegs when he was cross-examined in the copyright infringement trial. The Applicants say that this means that the copyright infringement proceedings indirectly involved an analysis of numerous integers of Sealegs’ patent and the extent to which the collocation of those integers derived from any skill or effort.
[128] The evidence referred to in support of the submission that there was such a concession by Sealegs does not in my view go so far as to support the submission that the features upon which the Copyright Proceedings were based “closely resemble” integers appearing in Sealegs’ patent. In my view there is only agreement that there is some overlap rather than a concession that they closely resemble each other.
[129] In any event, a close resemblance is not sufficient to justify strike out where the Applicants accept that whether there has been a breach of patent has not yet been determined.
[130] The Applicants further submit that the fact that the Court of Appeal found that the combination of features appearing in the Sealegs amphibious assembly is entirely and obviously dictated by the function it performs53 is unquestionably relevant to
53 Zhang v Sealegs International Ltd, above n 2, at [121]–[122].
validity of the Sealegs’ patent. Any attempt therefore to prove a breach of Sealegs’ patent would require, at least to some extent, a collateral attack on the Court of Appeal’s decision.
[131] The Applicants say that it follows from the above that although the legal tests on copyright and patent infringement are distinct, there is sufficient overlap deriving from the works at issue and the nature of Sealegs’ Copyright Proceedings that any patent infringement claim should have been brought concurrently.
[132] Sealegs strongly disputes this, saying that in the Copyright Proceedings Sealegs needed to establish that:
(a)there is an artistic work in which copyright can subsist; and
(b)copyright does subsist in the work because the work is original; and
(c)the plaintiff owns the copyright; and
(d)copyright in the work has been infringed because the allegedly infringing item is a copy of a substantial part of the artistic work.54
[133]By contrast, to establish patent infringement, Sealegs will need to show that:
(a)it is the owner of the patent; and
(b)the allegedly infringing item has all the essential features of one or more claims of the patent.
[134] Put simply, copyright protects the expression, not the idea; a patent protects the idea, not the expression.
[135] Sealegs submits that the difference between patent and copyright infringement is far greater than between primary and secondary copyright infringement which the Supreme Court held in Burden v ESR Group (NZ) Ltd are sufficiently different for second proceedings not to be an abuse of process.55
54 Finch, above n 47, at [2.9.3].
55 Burden v ESR Group (NZ) Ltd, above n 38.
[136] In response to the Applicants’ submission that in this particular case there is more overlap than usual, Sealegs makes a number of submissions.
[137] Firstly, Sealegs says there is no overlap in the evidence on infringement. Whether Sealegs owns artistic works, whether the Orion amphibious system looks like Sealegs’ system and whether any such similarity is due to copying is irrelevant to a patent infringement claim. The only question for patent infringement is whether the Smuggler boat has all of the integers of one of the patent claims. The level of inventiveness in the Sealegs’ patent does not affect patent infringement. This is in contrast to copyright where the level of originality is relevant to infringement in assessing whether there is reproduction of a substantial part.
[138] Secondly, it is only if the Applicants challenge Sealegs’ patent that the level of inventiveness in Sealegs’ patent may become relevant.
[139] If such a challenge is brought, Sealegs submits that the Applicants overlook the differences between copyright originality and patent inventiveness. Copyright originality requires a determination of whether Sealegs’ amphibious system, as shown in the artistic works relied upon, was dictated by the functional operability of the leg. It is a simple question of how much original thought and effort was required.
[140] Patent inventiveness on the other hand requires a determination of whether the invention as claimed in the patent was inventive at the priority date. The invention can lie in the very idea, even if it is simple to put into practice once conceived. Functionality does not detract from inventiveness: it can be the very basis of inventiveness.
[141] The Court of Appeal in Zhang v Sealegs reviewed and confirmed the conventional dichotomy between expression (copyright) and ideas (patents), with the Court criticising the High Court decision for applying criteria for patentability to a copyright proceeding.56
56 Zhang v Sealegs International Ltd, above n 2, [124] and [145].
[142] Furthermore, Sealegs says the Applicants’ position in the Court of Appeal relied on “the clear conceptual differences in the monopolies granted by patent and by copyright”.57
[143] Sealegs finally submits that even the Applicants do not suggest that the actual findings of fact in relation to copyright originality could be determinative of patent inventiveness.
[144] This final point is very important in considering whether the counterclaim or defence is an abuse of process, because the origins of the Henderson v Henderson principle are to avoid collateral attack on the res judicata or cause of action and issue estoppel principles. If the Applicants do not go so far as to submit that the findings on the matters on which the claims could overlap could be determinative then there is real difficulty in finding the pleadings are an abuse.
[145] It is clear from the above, in my view, that allowing the breach of patent counterclaim and defences to proceed would not be to allow a collateral attack on the Court of Appeal decision. This does not therefore provide support for the application to strike out.
Is there otherwise unjustifiable prejudice to the Applicants?
[146] The Applicants submit it will inevitably cost more for the breach of patent claim to be heard separately from the Copyright Proceedings. But as Venning J held in Burden, extra cost is not determinative of whether a claim should have been brought.58
[147] If Sealegs had succeeded in the Copyright Proceedings it may have decided not to bring its breach of patent claim against the Applicants (and nor would the Applicants have had to defend such a claim) so this does not suggest an abuse of process.
57 At [73].
58 Burden v ESR Group (NZ) Ltd, above n 32, at [74].
Is there an absence of good faith by Sealegs?
[148] The Applicants submit that the fact that the patent claim is only being brought now shows an absence of good faith by Sealegs, as it could have been brought anytime within the last six or seven years and has only been brought now as an evasive manoeuvre when Sealegs has been called on to honour its undertaking.
[149] But it appears reasonable for Sealegs to have waited. Sealegs made it clear from when the Supreme Court issued its decision that it would bring a breach of patent claim. It is not a situation therefore where the claim came as a surprise following the filing of the Applicants’ claim in reliance on the undertaking.
[150] The Applicants further submit that no claim has been brought against any of the many other parties who purchase Orion’s amphibious mechanism in the same way that Smuggler does.
[151] In my view this does not take the Applicants very far. The question of whether the patent has been breached needs to be considered in the context of the damages claim. The fact that Sealegs has not filed proceedings against other parties at the same time may be for a number of reasons and, without more, does not suggest an absence of good faith.
[152] The Applicants submit further that the fact that the breach of patent is not a legitimate defence to the Applicants’ claim further shows an absence of good faith. This is discussed below in considering Sealegs’ right to defend itself.
Would strike out be a justified limit on Sealegs’ right to defend itself or bring a claim?
[153] This final question ensures that all of the circumstances are considered when deciding this application.
[154] The Applicants submit that the right of access to the courts is not unlimited and may be curtailed when a party seeks to abuse the process. They point to r 15.1 in support of this, saying a limit on the right of access is the entire premise for this rule.59 The Applicants say further that it is supported by s 5 of the New Zealand Bill of Rights Act 1990.
[155] But this depends on abuse of process being established in the first place. If the abuse of process limb of r 15.1 is solely relied upon and no abuse has been established, then Sealegs’ right to defend itself or bring a claim must be protected.
[156] The Applicants submit further that in any event the defences pleaded are not legitimate defences to the damages claim, relying on the decision of the United Kingdom (“UK”) Supreme Court in Les Laboratories Servier v Apotex Inc (“Servier”).60
[157] In Servier a claim for damages on an undertaking was made by Apotex following its successful defence of a patent infringement claim by Servier. As in this case, an interim injunction had been ordered. Parties related to Apotex and Servier were involved in patent infringement proceedings in Canada where, by contrast, Servier’s claim had succeeded.
[158] As in Servier, Sealegs’ statement of defence pleads two grounds on which the alleged breach of patent affects the claim to damages under the undertaking:
(a)illegality; and
(b)cost of manufacture.
Illegality
[159] Servier sought to defend the claim by Apotex for damages on the undertaking in the UK on the basis that any product Apotex would have sold in the UK would have
59 High Court Rules, r 15.1.
60 Les Laboratories Servier v Apotex Inc [2014] UKSC 55.
been produced in Canada in breach of patent. Apotex’s business in the UK would therefore, Servier submitted, have been illegal and so no damages ought to be awarded.
[160] Lord Sumption, with whom the remainder of the Court agreed, found that patent infringement did not qualify as illegality or unlawfulness for the purposes of the equitable defence.61 In his Lordship’s view, committing a civil wrong, in this case patent infringement, was insufficient turpitude to justify a refusal of damages.
[161] Sealegs submits that two years after Servier (and as foreshadowed in Servier62) the UK Supreme Court reconsidered Tinsley v Milligan63 and Servier (among others) in Patel v Mirza and significantly reshaped the law on illegality in the UK.64 The Supreme Court effectively overturned Tinsley and Servier, replacing the rule-based approach with a new policy-based three-stage test considering:
(a)the purpose of the prohibition in question;
(b)any other relevant public policies that would be rendered ineffective or less effective by denial of the claim; and
(c)whether the result contended for is proportionate to illegality.65
[162] The New Zealand Supreme Court referred to Patel v Mirza in Horsfall v Potter.66 After reviewing recent authorities, including Patel, the Supreme Court appeared to approve of the approach to illegality in Patel. In Horsfall the illegality was the enforcement of an illegal contract.
[163] Sealegs submits that the position in Servier that civil wrongs such as patent infringements do not engage the illegality defence is not (or ought not to be) the position in New Zealand (and nor is it now in the UK) and that the Court should adopt the three-stage test set out in Patel for determining whether the illegality defence ought to succeed.
61 At [28].
62 At [57] – [64].
63 Tinsley v Milligan [1994] 1 AC 340.
64 Patel v Mirza [2016] UKSC 42.
65 At [120]; as summarised in Horsfall v Potter [2017] NZSC 196, [2018] 1 NZLR 638 at [54].
66 Horsfall v Potter at [54].
[164] As the current application is a strike out application, Sealegs submits that it is not the appropriate context for the necessary consideration of policy and the boundaries for illegality, which requires instead the benefit of full evidence and submissions.
[165] This is said to be especially so because the allegation that there is no reasonably arguable defence was not raised in the notice of application to strike out and was only raised in submissions. Sealegs has not therefore been given a proper opportunity to present its case.
[166] Perhaps as a result of this, the Applicants, rather than arguing that illegality is not a legitimate defence on a stand-alone basis, submit that it is evidence of an absence of good faith and an aspect of the circumstances that need to be considered in deciding whether there would be an abuse of process if the pleadings were not struck out.
[167] Whether or not it is argued on a stand-alone basis or not, the law on illegality in this context is not sufficiently settled to discard the defence. Furthermore, in the context of strike out for abuse of process the merits of the defence are only relevant if the defence is clearly hopeless.67
Cost of manufacture defence
[168] In addition to the illegality defence, Servier also discusses the cost of manufacture defence pleaded by Sealegs. This is defined in Servier as a defence that allows damages for patent infringement to which a party would be entitled to be treated as an additional cost of manufacture and taken into account in assessing damages on an undertaking.68
[169] Lord Toulson recorded that Apotex recognised that in calculating its damages under the undertaking, it must offset both the actual costs of manufacture and the amount which it would have had to pay in the Canadian action as damages for
67 Stuart v Goldberg Linde & Ors, above n 21, at [57].
68 Servier, above n 60, at [7].
manufacturing the tablets in breach of the Canadian patent.69 His Lordship recorded that the result may be that Apotex will be unable to establish any loss.70
[170] In making these comments, Lord Toulson referred to the fact that in an enquiry into damages on an undertaking, as a matter of general principle the Court’s task is to put the parties seeking to enforce the undertaking in the same position as if the injunction had not been granted.71 His Lordship referred to Hoffmann La Roche & Co AG v Secretary of State for Trade and Industry where Lord Diplock said:72
[The court] retains a discretion not to enforce the undertaking if it considers that the conduct of the defendant in relation to the obtaining or continuing of the injunction or the enforcement of the undertaking makes it inequitable to do so, but if the undertaking is enforced the measure of the damages payable under it is not discretionary. It is assessed on an enquiry … at which [the] principles to be applied are fixed and clear. The assessment is made on the same basis as that on which damages for breach of contract would be assessed if the undertaking had been a contract between the plaintiff and the defendant, that the plaintiff would not prevent the defendant from doing that which he was restrained from doing by the terms of the injunction.
[171]Lord Toulson considered that the order made by the Court of Appeal in Servier
accorded with Lord Diplock’s method of assessment, saying that:73
Apotex will recover whatever sum may be left after deducting, from the proceeds of the lost sales, both the costs of the sales and the amount for which it would have had to account to Servier in the Canadian proceedings by way of damages for patent infringement. The result, Etherton LJ said, would never be offensive to comity with Canada nor infringe English public policy.
[172] Lord Toulson contrasted this with the order being sought by Servier which would have potentially placed it in a better position than if the English injunction had not been obtained.
[173] This would be exactly the position in this case if the cost of manufacture defence were struck out: the Applicants may recover more for their loss of profit than if the interim injunction had not been ordered.
69 At [49].
70 At [53].
71 At [52].
72 Hoffmann La Roche & Co AG v Secretary of State for Trade and Industry [1975] AC 295 at 361.
73 Servier, above n 60, at [52].
[174] The Applicants submit that the illegality and cost of manufacture defences rely on Sealegs succeeding in its counterclaim. But in Servier no counterclaim was pleaded yet the defences were still raised and considered by the Court.
[175] Sealegs submits that even if the counterclaim ought to be struck out (which it denies) there would still be no basis on which to strike out the defences. In Sealegs’ submission, contrary to the Applicants’ submission, a party pleading defences to a claim pursuant to an undertaking is not reneging on the undertaking nor is it unconscionable or unfair.
[176] I accept this is the position with damages on the undertaking being assessed on ordinary contractual principles without any element of punishment.
[177] In this case, the Applicants have not established that it would be an abuse of process for the counterclaim to proceed and so I do not need to decide whether the allegations in the statement of defence ought to be treated differently than the counterclaim.
[178] In conclusion on this final question, strike out would not, in my view, be a justified limit on Sealegs’ right either to bring a counterclaim or to plead defences based on breach of patent.
Result
[179] For the reasons discussed above, the Applicants have not established that in the circumstances of this case it would be an abuse of process for Sealegs to be permitted to plead defences relying on a breach of patent or to bring a counterclaim on that basis. The plaintiffs’ application to strike out parts of Sealegs’ statement of defence and the whole of its counterclaim is therefore dismissed.
Costs
[180] Sealegs have succeeded and so in the usual course would be entitled to costs. Counsel for Sealegs submitted costs ought to be awarded on a 2B basis following the event. My preliminary view is that this would be appropriate. I ask the parties to
confer and attempt to agree costs. If agreement cannot be reached, memoranda of no more than five pages (not including supporting documents) may be filed, on behalf of Sealegs within 20 working days of this judgment and on behalf of the Applicants within a further 10 working days.
Associate Judge Sussock
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