Appeals Court Annuls $1.5 Million ‘Unjustified Threats’ Damages Award

Under section 128 of the Australian Patents Act 1990, a person or company that has been unjustifiably threatened with patent infringement proceedings may seek an injunction to prevent the threats from continuing, and the recovery of any damages sustained as a result of the threats.  These provisions may be invoked pre-emptively by an accused infringer, for example against a patent holder that may be trying to inhibit competition by making vague or dubious claims.  However, they may also be invoked defensively, in response to the actual commencement of infringement proceedings by a patent holder that has initially made threats by way of a cease-and-desist letter.  As the law has developed in Australia, an application for relief from unjustified threats will be successful in any case in which it ultimately turns out that a patent is invalid or not infringed, regardless of how objectively reasonable the patentee’s original belief may have been.

I have written on a number of previous occasions of my concerns about the operation of the unjustified threats provisions in the Patents Act.  Most recently, in August 2016, I discussed the difficulties faced by a patentee in raising and seeking to resolve a dispute prior to commencing proceedings – as required under the Civil Dispute Resolution Act 2011 – without incidentally opening itself up to a subsequent unjustified threats claim.  At around the same time, a single judge of the Federal Court of Australia (Barker J) issued an 870 paragraph judgment (Australian Mud Company Pty Ltd v Coretell Pty Ltd (No 7) [2016] FCA 991) awarding damages of A$1,506,859 against the Australian Mud Company Pty Ltd (‘AMC’) for making unjustified threats against Coretell Pty Ltd, following a number of years of patent infringement proceedings in which AMC was ultimately unsuccessful.  (For earlier articles on this dispute see Innovation Patent Claims Once Again Construed Narrowly, Australian Appeals Court Further Clarifies ‘Purposive Construction’ and Australian Federal Court Considers Patent Attorney Privilege.)

If you think (as I do) that $1.5 million seems like an excessive amount of damage to have resulted from the sending of a fairly typical letter of demand, then I am pleased to report that you would be correct.  A Full Bench of the Federal Court of Australia has now wholly overturned the ruling of the original judge and ordered that, instead, Coretell’s claim for damages should be dismissed with costs: Australian Mud Company Pty Ltd v Coretell Pty Ltd [2017] FCAFC 44.  In doing so, the Full Court has highlighted the importance of establishing causation, i.e. that damage is sustained as a result of the threats.  In particular, the judgment cautions against failing to distinguish properly between damage sustained as a result of the threat of infringement proceedings and damage sustained as a result of infringement proceedings themselves.

This is, to my mind at least, a welcome development in the law.  While it does nothing to prevent the unjustified threats provisions being invoked by an accused infringer in response to proceedings commenced on the basis of a reasonably-held belief that a patent is being infringed, it significantly limits the practical impact of the provisions in such circumstances.  I imagine that it would be rare for substantial damage to be sustained merely as a result of an initial threat of proceedings in any case where infringement proceedings are actually commenced within a reasonable period of time, allowing for some efforts to resolve the dispute prior to litigation.

Background

The factual background to the dispute is complex and contested, and the evidence of various people involved along the way is recounted in some detail in the original 870 paragraph judgment.  The key events relating to the threats are that:

1. on 14 November 2006 AMC’s lawyers sent a letter to Mincrest Holdings Pty Ltd (‘Mincrest’ – a company related to Coretell) alleging patent infringement, and threating Federal Court proceedings;
2. between November 2006 and at least February 2007, further letters passed back and forth between AMC’s lawyers and Cortell’s lawyers, including further threats of infringement proceedings by AMC; and
3. on 2 July 2007 AMC commenced infringement proceedings.

Prior to the commencement of proceedings, Mincrest and Coretell were responsible for the design, manufacture, trialling and hiring of a first tool called ‘Camteq’.  In doing so, they had engaged the services of a Mr Barker to develop and manufacture the tool.  Following the commencement of proceedings, Mr Barker was unwilling to continue his involvement in the development due to his concerns about being implicated.  Coretell subsequently engaged Procept Pty Ltd, an engineering firm based in Melbourne, to develop the tool.  Procept, however, declined to continue to develop the Camteq product, and instead designed a new tool from scratch, which became a product called ‘ORishot’.  AMC alleged that both the Camteq and ORishot tools infringed its patents.

A ‘Miscarriage’ of Reasoning

Coretell’s damages case was based on an argument that were it not for AMC’s threatening letters, it would have continued development and commercialisation of the Camteq tool.  Coretell claimed that in withholding the Camteq tool from hire and sale it sustained damages in the sum of $3,290,386.  The primary judge accepted the general proposition, but disagreed with aspects of Coretell’s damages calculation, assessing the correct amount at $1,506,859, plus interest.

On appeal, the Full Court declared that ‘[t]he primary judge’s order that [AMC] pay to [Coretell] damages for unjustified threats in the sum of $1,506,859 was based on a process of reasoning which miscarried’ (at [1]).  In the characteristically polite manner by which Federal Court judges slap down other Federal Court judges when they get things wrong, the Full Court allowed (at [16]) that:

First, the primary judge was confronted with a number of other issues ... which he was required to consider. Second ... the process of appeal has itself enabled the issues to be articulated with a clarity that would not necessarily have been apparent in the midst of a lengthy hearing involving substantial challenges to the credit of the principal witness for Coretell, Mr Kleyn, and a wide range of factual issues in dispute. Third, and as a result, the task of the primary judge was by no means straightforward.

AMC’s case relied upon a different characterisation of Coretell’s activities during the period between the first threat letter in November 2006 and the commencement of infringement proceedings in July 2007.  AMC contended that the Camteq tool was still being developed and tested throughout this period, and was not at the time a properly functioning product that was available for commercial marketing and supply.  Coretell subsequently abandoned further development of the Camteq tool, and instead developed and marketed the ORishot tool.  AMC argued that as these circumstances existed irrespective of the threats, it could not be concluded that Coretell had sustained any damage as a result of the threats.

The Importance of Causation

The Full Court found that there is a strong requirement to establish causation in order to make out a case for an award of damages (at [23]):

Section 128 of the Patents Act permits “recovery of any damages sustained by the applicant as a result of the threats”. The requirement of causation, expressed in terms of damage “as a result of” the threats is fundamental to the operation of the section. To the extent that Coretell suggested that damage was axiomatic if development of the Camteq tool was impeded in any way by the threats; it is wrong. Damage as a result of the threats must be proved on the balance of probabilities.

 
The Court drew an analogy with the role of causation in cases of negligence, citing (at [24]) Tabet v Gett [2010] HCA 12, in which Hayne and Bell JJ noted that ‘damage’ (in negligence) refers to some detrimental ‘difference’, and that it ‘must be demonstrated (in the sense that the tribunal of fact must be persuaded that it is more probable than not) ... that a difference has been brought about and that the defendant’s negligence was a cause of that difference. The comparison invoked by reference to “difference” is between the relevant state of affairs as they existed after the negligent act or omission, and the state of affairs that would have existed had the negligent act or omission not occurred.’  The Full Court went on to say (at [25]-[26]) that:
 

The unusual aspect of a provision such as s 128 is that the relevant event which must cause the difference is not the negligence of a defendant but the making of the threats. Given that the threats with which the provision is concerned are threats of “infringement proceedings” the question which has previously arisen is whether damage has been sustained as a result of the threat of infringement proceedings or as a result of infringement proceedings themselves. ...
 
The distinction between damage resulting from threats and from proceedings may be critical in a particular case.

 
The Full Court’s most stinging rebuke of the primary judge’s reasoning is then to be found at [27]:
 

Given these matters it necessarily follows that we disagree with the primary judge’s statement at [804] of his reasons that the distinction between sales lost as a result of the threats and sales lost as a result of the proceedings is “semantical”. The difference is not semantical. It is a distinction which the statute requires to be drawn because the only recoverable damage is damage sustained as a result of the threats. Damage sustained as a result of the proceedings is not compensable. This is not to say that there cannot be different types of damage. Nor is it to say that the one type of damage cannot have more than one cause. But it is to say that in every case where a threat of infringement proceedings is followed by the commencement of infringement proceedings that there will need to be a close focus on the question whether the causal relationship between the threats and the damage is made good. The fact that the primary judge turned to the issue at [804] of his reasons and dismissed the distinction as one of semantics is suggestive of error.  (Emphasis added.)

The sentence that I have bolded in the above passage is the one I find most encouraging.  The Full Court is making a clear statement here about the particular care that must be taken when a patentee actually follows-through on a threat of infringement proceedings – something that is more often than not a sign that it has a genuine and reasonable belief that its patent is valid and infringed.

We can therefore hope that defendants in patent infringement cases may in future be less inclined to pursue retaliatory, as opposed to well-founded, claims for relief from unjustified threats.

Welcoming Justice Burley to Patents Jurisprudence

As another point of interest, I believe that this is the first patents judgment to bear the name of Justice Stephen Burley.  Justice Burley was appointed to replace Justice Annabelle Bennett on the Federal Court last year, commencing on 23 May 2016 following a distinguished career at the Bar, to which he was admitted in 1993, taking silk in 2007.  As a barrister, Stephen Burley specialised in intellectual property law, and was particularly respected and sought-after in patent matters.  He was lead counsel for Apple in its Australian litigation against Samsung between 2011 and 2014.  I worked with him only once, on the application to the High Court for special leave to appeal the Full Federal Court decision in the RPL Central case.  Sadly, that application was denied, although we would in any event have lost Justice Burley’s services to the Federal Court had we been successful.  Nonetheless, I consider it a privilege to have had this brief opportunity.

The Bar’s loss (as undoubtedly it has been) is the Federal Court’s gain.  While it is difficult to know the extent of the role played by any single judge in a joint opinion such as this one, I anticipate that we will see many more sound judgments in future patent cases with Justice Burley’s name attached.

Conclusion – ‘Unjustified Threats’ Appropriately Limited

The right to sue someone for making unjustified threats of patent infringement proceedings exists primarily as a mechanism for accused infringers to address manifestly baseless allegations of patent infringement, thereby restricting the incentive for patent holders to make speculative, anticompetitive, or just plain extortionate threats.  I do not believe, however, that unjustified threats provisions were ever intended to provide a defendant with an additional remedy in a case in which a genuine dispute as to infringement and/or validity of a patent results in court proceedings.

Where infringement proceedings are actually commenced, any ‘damage’ sustained by the accused infringer as a result of a preceding threat is likely to be negligible, and often indistinguishable from the effect of the proceedings themselves.  After all, what action is a defendant likely to take in response to a threat of legal action that they would not – at a minimum – take in response to being sued?

The Full Court decision in this case (rightly, in my view) limits the scope of the unjustified threats provisions in two ways.  First, it makes clear that causation is the key element in establishing damage, which must be sustained as a result of the threats themselves.  Second, it emphasises the importance of evidence – the onus lies with the accused infringer to prove, on the balance of probabilities, that damage was sustained as a result of the threats.

Tags: Australia, Damages, Unjustified threats