06 August 2017

The Meteoric Rise and Spectacular Fall of Damages for Unjustified Threats of Patent Infringement

Unjustified Violent ThreatOn 19 August 2016, a single judge of the Federal Court of Australia issued a ruling awarding damages of A$1,506,859 against the Australian Mud Company Pty Ltd for making unjustified threats of patent infringement proceedings against Coretell Pty Ltd: Australian Mud Company Pty Ltd v Coretell Pty Ltd (No 7) [2016] FCA 991.  Less than a year later, however, a different judge has ‘reluctantly’ dismissed a claim for damages allegedly arising from threats of infringement proceedings made to the public at large via a trade publication: Mizzi Family Holdings Pty Ltd v Morellini (No 3) [2017] FCA 870.  This follows a decision in March of this year, by a Full Bench of the Federal Court on appeal, overturning the Australian Mud damages award.

I first wrote about the Mizzi Family Holdings litigation back in January 2014, following the initial findings in December 2013 of a single judge of the Federal Court that the respondent, Daryl Morellini, had not infringed an innovation patent for a ‘cane billet planter’ owned by Mizzi, and that all prior threats of infringement proceedings were therefore unjustified.

The first relevant threat in the Mizzi case had not been made directly to Morellini, but rather had been directed to the cane growing industry more generally through the combination of an advertisement and an article that appeared in the Canegrowers Magazine of 5 April 2010.  The advertisement had been placed by Mizzi, and included a notice of its patent application.  The article was authored by one Mr Terry Hurlock of Invention Pathways Pty Ltd, who had worked in conjunction with Mizzi’s patent attorneys, and was entitled ‘Infringement Danger’.  This juxtaposition of the advertisement identifying the patent application with the article warning about the potential consequences of infringement was found by the court to constitute ‘unjustifiable threats’, in the circumstance that the patent was not actually infringed.  A second threat was said to have been made in June 2011, after another cane grower, one Mr Girgenti, used Morellini’s planter, and Mizzi made a verbal allegation of infringement and demanded the payment of a royalty.

The initial decision in the Mizzi case was followed by a second judgment of the primary judge, on questions of costs and declaratory relief in relation to the unjustified threats (Mizzi Family Holdings Pty Ltd v Morellini (No 2) [2014] FCA 807), an appeal to a Full Bench of the Federal Court, decided in February 2016 (Morellini v Mizzi Family Holdings Pty Ltd [2016] FCAFC 13), and now the most recent decision on damages related to the threats.  Through all of this, the fundamental original finding of the primary judge – that the patent was not infringed – has remained undisturbed.

The major difficulty for Morellini in demonstrating damage was the requirement, emphasised by the Full Court in Australian Mud, to establish causation between the threats themselves and the damages claimed.  The court found (at [20]) that:

There is no direct evidence that anybody declined to deal with Mr Morellini as a result of the threats. It seems that even before the newspaper article on 5 April 2010, there was a degree of reluctance concerning any such dealings. That reluctance cannot have been attributable to the threats. Mr Morellini has not demonstrated that any adverse effect resulted from either of the threats. The newspaper article may well have been widely read within the sugar industry, but there is no reason to believe that the incident involving Mr Girgenti was a matter of common knowledge. Some people in the industry may have heard of it. In either case such knowledge may have reinforced previous perceptions, but that is largely speculative.

As we shall see, unjustified threats provisions were originally enacted to curb anticompetitive, abusive, coercive, or extortionate use of the patent system.  Yet here in Australia we have two recent cases of patentees acting apparently from a good-faith belief that their patents were valid and infringed, and with an arguable case to this effect at first instance and on appeal before a Full Court, in which the prosecution of unjustified threats claims clearly resulted in proceedings becoming significantly more protracted, complex, and costly, than they might otherwise have been.  For a brief period, we hit a high water mark for unjustified threats with a judge awarding over one and a half million dollars in damages, before this was sensibly and firmly reversed on appeal.  Ultimately, neither accused infringer received any award of damages.

How and why did this happen?  What is wrong with the Australian law in relation to unjustified threats that a Federal Court judge could make an astronomical seven-figure award of damages, when the correct sum was zero?  Or that the parties in long-running infringement proceedings would devote such resources to an argument that ultimately brought no benefit to any of them, under provisions that were not originally intended to apply in such circumstances?  And what can be done to fix this situation?

A Brief History of Unjustified Threats

The ‘modern’ Australian law on unjustified threats has its origin in the 19th century English case of Halsey v Brotherhood (1881) 19 Ch D 386.  Mr Halsey and Mr Brotherhood were competing manufacturers of that quintessentially industrial-era product, the steam engine.  Brotherhood, however, maintained a competitive edge by ‘systematically threatening’ to sue Halsey’s customers for infringing his patents. He never did actually sue, finding that his threats were sufficient to achieve the desired effect: to stop Halsey’s customers from buying his engines.

Halsey sought an injunction against Brotherhood to prevent him from making the threats, but the courts held that the common law provided no protection unless it could be shown that Brotherhood acted with malice.  This decision was sufficiently controversial that, In 1883, the UK Parliament intervened and introduced a statutory remedy for those aggrieved by groundless threats of patent litigation.

While a corresponding provision did not find its way into the original Australian Commonwealth patents legislation, the Patents Act 1903, it was added by amendment in 1909.  The resulting section 91A stated that:

Where any person claiming to be the patentee of an invention, by circulars, advertisements, or otherwise, threatens any other person with any legal proceedings or liability in respect of any alleged infringement of the patent, any person aggrieved thereby may bring an action against him, and may obtain an injunction against the continuance of such threats, and may recover such damages (if any) as he has sustained thereby, if the alleged infringement to which the threats related was not in fact an infringement of any legal rights of the person making such threats.

Provided that this section shall not apply if the person making such threats with due diligence commences and prosecutes an action for infringement of his patent.

A broadly equivalent provision was maintained in section 121 of the Australian Patents Act 1952, however the final proviso (i.e. that actual commencement and prosecution of infringement proceedings precludes a claim for groundless threats) was omitted.  The 1952 Act also expressly provided for a patentee accused of making groundless threats to counterclaim for infringement, and for the alleged infringer to apply for revocation of the patent, within the same proceedings, as well as protecting legal practitioners and patent attorneys from proceedings, when acting on behalf of a client.

Provisions in essentially the same terms have been carried over in section 128 to 132 of the current legislation, the Australian Patents Act 1990, under the heading of ‘unjustified threats of infringement proceedings’.

Problems with ‘Unjustified Threats’ Provisions

While I believe that it is appropriate to protect the public against unjustified threats by patent owners, I am no great fan of the existing provisions.  I believe that they adversely impact patent-owners who are acting in good faith, and that they are also counter to the wider public interest, in that they provide an incentive for patentees to ‘sue first and ask questions later’, contrary to the intent of the Civil Dispute Resolution Act 2011 which seeks to encourage parties to resolve disputes before they reach the courts. 

Under the current provisions, an accused infringer has the right to sue a patent owner who has made the threats even if they have a pretty sound case, i.e. good reason to believe that their patent is valid and infringed.  Once an action for ‘unjustified threats’ has commenced, the patentee’s best course of action is likely to be a cross-claim for infringement.  This will often lead to a counterclaim that the patent is invalid and liable to be revoked.

The end result, then?  Full-blown, time-consuming and expensive proceedings in the Federal Court of Australia on infringement and validity of the patent.

And the situation is no better if the patentee actually commences infringement proceedings, since the accused infringer can can still bring a cross-claim alleging that the original threats were unjustified, in addition to the usual cross-claim that the patent is invalid.  Again, rather than primarily providing a mechanism to discourage groundless threats and intimidation, the current provisions add further complications and expense to proceedings relating to patent infringement and validity.

The best that can be said of the current situation is that, with damages resulting from unjustified threats being almost impossible to establish in any genuinely contested infringement proceedings, in the wake of the Full Court’s Australian Mud decision, accused infringers will perhaps be less inclined, as a practical matter, to pursue such claims.  But the fact that bad statutory provisions have effectively been neutered by the courts is no reason to leave them sitting, unamended, on the books.

Looking to the UK for Guidance on Reform

While Australia has persevered with a legal framework for unjustified threats that is now over 60 years old, the UK has reviewed and adjusted its laws in this area a number of times.  The most recent development is the Intellectual Property (Unjustified Threats) Act 2017, which received Royal Assent on 27 April 2017, and should come into effect in  October 2017.

The UK law had previously evolved to allow some threats relating to the most serious infringements to be made, by distinguishing between ‘primary’ and ‘secondary’ acts of infringement.  The objective of these laws was to allow a patent owner to threaten the trade source of the infringement (such as the manufacturer or importer) with impunity but not to threaten softer targets (such as retailers or customers, as occurred way back in the Brotherhood case).

However, in practice drawing the distinction between primary and secondary acts of infringement turned out to be problematic, particularly where primary and secondary acts are carried out by the same party.  Amendments to the UK patent legislation in 2004 allowed a threat to be made to those who had made or imported a product, or used a process, even if the threat also referred to other secondary acts.

The most recent amendments go further, and apply to all intellectual property rights, rather than to patents only.  The new UK provisions:
  1. clarify the meaning of a ‘threat’, by setting out a test for whether a communication contains a threat, which essentially asks whether a reasonable person would understand that an IP right exists, and whether someone is intending to bring proceedings for infringing that IP right; and
  2. expressly identify threats that are not actionable, defining ‘permitted communications’ and ‘permitted purposes’ with the aim of providing for information to be exchanged to resolve disputes, and to comply with the requirements of the UK equivalent of Australia’s Civil Dispute Resolution Act.

The Economic Cost of Unfit ‘Unjustified Threats’ Provisions

To get the economists on board, I note that in making its recommendations for reform, the UK Law Commission estimated that ongoing benefits will result in total savings to businesses of around £1.66 million each year, due both to a reduction in the number of cases in which unjustified threats provisions will be engaged, and a reduction in the level of advice required even in cases where it is engaged.  And although there is less patent litigation in Australian than in the UK, cases such as Australian Mud and Mizzi Family Holdings illustrate just how significant the resources expended on unjustified threats litigation can be, for absolutely zero benefit to the accused infringer. 

The first-instance decision on unjustified threats in Australian Mud, for example, runs to 870 paragraphs, and followed five days of hearings in the Federal Court, almost entirely on the question of damages – and was wholly overturned on appeal.  That should never have happened, and it would not have happened had the Australian law been similar to the new UK legislation, firstly because the respondent would have been regarded as a ‘primary’ infringer, and secondly because the ‘threats’ could have been made within the safe harbour of the ‘permitted purposes’ provisions.

As for Mizzi Family Holdings, the publications and verbal allegations in that case are probably the kind of thing that the unjustified threats provisions are intended to discourage.  The presence of a clear statutory definition for what constitutes a ‘threat’ may have assisted in alerting Mizzi and Invention Pathways to the potential consequences of their actions, and thus prevented the issue from arising in the first place.  At the very least, this aspect of the case may have been settled at an earlier stage, instead of resulting in protracted proceedings on the threats issue, with a finding of no damages being handed down six years after the original infringement application was filed, and over three and a half years after the primary judge first found that the respondent had not infringed the patent in question.

Conclusion – Reform of ‘Unjustified Threats’ Provisions Overdue

Just the two cases of Australian Mud and Mizzi Family Golding have generated private costs to the parties, and public costs through the Federal Court, probably totalling in the millions of dollars, in relation to only the unjustified threats aspects.  In both cases it was found that unjustified threats had been made, and under the current legislation those threats were therefore automatically actionable.  However, in neither case were any damages ultimately awarded.  Indeed, even though it has become fairly common for accused infringers to raise unjustified threats in Federal Court proceedings, I am unaware of any recent case in which a substantive award of damages has resulted.

The original intent of groundless/unjustified threats provisions in the UK patent law was to prevent abuses of the patent system such as those perpetrated by Brotherhood.  Rent-seeking and so-called ‘patent trolls’ remain a concern in the modern patent system (although this is not currently a significant problem in Australia), and there is thus still a place for laws designed to restrain and contain bad actors.  However, the existing unjustified threats provisions are most-commonly invoked by accused infringers involved in genuine disputes over patent infringement and validity, where they generally incur a cost without any resulting public or private benefit (except, perhaps, to the lawyers involved in the case).

The current provisions are therefore, in my opinion, clearly not fit for purpose.  The law should ensure that abusive behaviour can be curtailed, without further complicating litigation between parties with genuine disputes, or thwarting the spirit of the Civil Dispute Resolution Act.

Reform along the lines of recent UK legislation would go a long way towards achieving a better balance.  It is past time for Australia to follow suit.


Post a Comment

Copyright © 2014
Creative Commons License
The Patentology Blog by Dr Mark A Summerfield is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike 3.0 Australia License.