Litigants can strategically use the threat of indemnity costs to optimise their position in patent proceedings: Vector v E-Chem [2022] FCA 519.

Key takeouts

  • The Federal Court has broad powers to award indemnity costs where unreasonable litigation conduct of one party means the other party should be more fully compensated for its litigation costs.
  • Litigants can use the threat of indemnity costs to stop their counterparty running a hopeless case; but the Court won't award indemnity costs for a case that is weak, but arguable.
  • Offers of compromise and Calderbank offers are important tools, because if a counterparty unreasonably rejects an offer and receives a less favourable decision following trial, the counterparty can be liable for indemnity costs.

Parties litigating patents in the Federal Court should take the time, in parallel with preparing their substantive case for trial, to consider making strategic settlement offers during the proceedings and applying for indemnity cost orders following a successful judgment, as Justice Jagot's recent decision highlights (Vector v E-Chem [2022] FCA 519).

Background to Vector v E-Chem

Vector claimed to be entitled to ownership rights in E-Chem's patent for a process of treating concrete (AU2006224340). Alternatively, Vector claimed for revocation of E-Chem's patent on the basis that E-Chem was not entitled to it. Vector said the inventors came up with the invention while employed by a precursor company of Vector. Vector sued E-Chem and its directors, who were the named inventors of the patent.

Following trial, Jagot J rejected Vector's claims in their entirety and awarded costs against Vector. Her Honour found that Vector engaged in "extreme and unreasonable" delay in bringing its claims to maximise its commercial advantage (Vector v E-Chem [2022] FCA 188).

In a separate proceeding, Vector alleged that E-Chem infringed another patent, owned by Vector, and E-Chem cross-claimed for revocation. This proceeding was dismissed by consent, with costs awarded against Vector.

Costs judgment

E-Chem sought indemnity costs on two grounds:

  1. First, for the entirety of both proceedings, on the basis that Vector started the proceedings in an attempt to cause E-Chem's business to fold under the costs of litigation. E-Chem said Vector knew its claims were weak and purposely caused unreasonable delay in the litigation (Vector threatened proceedings in 2011, but only commenced the infringement proceeding in 2018 and the entitlement proceeding in 2019).
  2. Alternatively, for the period following Vector's refusal of an offer of compromise and Calderbank offer in the infringement proceeding, because Vector unreasonably refused the offers.

Jagot J rejected E-Chem's application on the first ground, but agreed with E-Chem and awarded indemnity costs on the second narrower ground. Her Honour highlighted that the basis of an indemnity costs order is that a party's unreasonable litigation conduct "should result in full compensation to the other party for the costs incurred". Her Honour gave the following as examples of such conduct: bringing or persisting in a hopeless case, causing unnecessary costs to be incurred, prolonging a hearing, or bringing or persisting in a case for an ulterior motive.

In our experience, indemnity costs orders allow a party to recover a significantly higher percentage of its recoverable legal costs than party-party cost orders, but rarely allow a party to recover the entirety of its costs.

E-Chem's claim for indemnity costs of entire proceeding rejected

E-Chem's claim for indemnity costs for the entirety of both proceedings failed, because while the Judge described Vector's claims as potentially "weak" and "tenuous", they were not "hopeless" or "doomed" so as to justify indemnity costs. Vector was ordered to pay E-Chem's costs of the entitlement proceeding on a party-party basis only, excluding E-Chem's costs of its application for indemnity costs. The costs of the infringement proceeding were affected by E-Chem's settlement offer, as explained in the following section of this note.

The following factors led Jagot J to the conclusion that Vector's conduct did not warrant an order of indemnity costs of the entirety of both proceedings:

  1. Vector's statement prior to the proceedings that E-Chem risked incurring the “the high costs of litigation in faraway places like Australia” was a legitimate negotiating tactic, and irrelevant as to whether Vector's claims were hopeless.
  2. Vector's unreasonable delay in starting proceedings did not mean Vector knew its claims were weak.
  3. While Vector changed its entitlement case over time (including to abandon misuse of confidential information claims), the essence of the case remained the same: that the inventors came up with the E-Chem patent while employed by a precursor company of Vector.
  4. Vector abandoned all of its witnesses close to trial except one (the President of Vector), but this did not mean it was necessarily unreasonable for Vector to originally file their written evidence. The Court did not want to discourage litigants from making sensible forensic decisions to drop witnesses where doing so would reduce the trial length.
  5. In the infringement proceeding, Vector asserted eight patent claims. While "fewer might have done", this was not excessive and not unreasonable conduct that would justify indemnity costs.

The decision highlights the high bar that an applicant for indemnity costs faces. It suggests that in patent cases, indemnity cost orders covering the entirety of a proceeding will be rare, given that parties are usually sophisticated and represented by specialist IP lawyers, and given that the technical issues often make it difficult to determine that a case is hopeless from the outset. Indemnity costs orders covering particular issues in a patent proceeding are more likely, for example the costs of responding to a particular ground of invalidity that had no prospect of success. In this case, E-Chem did not apply for an issue based costs order of this kind.

E-Chem's awarded indemnity costs following settlement offer in infringement proceeding

E-Chem did succeed however in its claim for indemnity costs following its settlement offers in the infringement proceeding. In the context of the infringement proceeding, E-Chem sent Vector a formal offer of compromise under rule 25.01 of the Federal Court Rules and a Calderbank offer. E-Chem sent the offers in June 2019, nine months after Vector commenced the infringement proceeding. It was not until almost two years later, in May 2021, that the infringement claim and revocation cross-claim were eventually dismissed by consent.

Offers of compromise and Calderbank offers are important strategic tools which entitle the offeror to apply for indemnity costs if the offeree unreasonably rejects the offer and the trial judgment is less favourable to the offeree. Offers of compromise are made under the Federal Court Rules, and their rejection gives rise to a presumption of indemnity costs (unless there is a real reason why the Court should not make such an order). Calderbank offers are made under the common law, and their unreasonable rejection is an important discretionary factor in favour of an indemnity costs order. Parties often serve both kinds of offers simultaneously as a "catch all". The offers are made "without prejudice" and are only put before the Court when determining the cost orders following the substantive judgment.

Returning to Vector v E-Chem, E-Chem's offers involved Vector's infringement claims and E-Chem's revocation cross-claim being dismissed and E-Chem foregoing all costs against Vector. The offers noted that Vector's patent was invalid and that E-Chem has incurred $146,000 in costs to that time.

Justice Jagot concluded that Vector was "plainly unwilling" to accept the offers and its rejection of the offers was unreasonable because:

  1. Vector's President was a person skilled in the art and "a sophisticated businessperson with a clear understanding of how patent rights [could] operate to Vector’s advantage", who must always have known Vector's patent was of "seriously questionable validity";
  2. E-Chem's offers involved a "real compromise" of value to Vector, as Vector would have paid no costs incurred by E-Chem to the date of the offers and Vector's patent would have remained unchallenged; and
  3. if Vector considered it did not have time to consider the offers, Vector could have requested an extension (E-Chem's offers gave Vector 15 days to respond, but Vector responded in 4 days).

Her Honour ordered Vector to pay E-Chem's costs of the infringement proceeding on an indemnity basis from the date stated in the offers (two days after they were made). Vector is therefore liable for indemnity costs in the infringement proceeding for a period of three years, in which time the E-Chem parties filed nine affidavits and the Court held three case management and interlocutory hearings. E-Chem is likely to have incurred significantly greater costs in the entitlement proceeding which went to trial, and for which it was awarded costs on a party-party basis only.