Intellectual property ownership
Intellectual property is designed to provide a business with a commercial advantage. It builds a wall of exclusivity around a product so that competitors cannot sell products with the same trade mark or that are covered by the owner’s patent or registered design.
But there may be some who wish to breach the wall and get a share of that competitive advantage. Then, if the product and its protection are worth it, the IP owner needs to defend the wall by sending letters of demand to infringers, negotiating settlements and, sometimes, suing a recalcitrant infringer. The legal costs of this defensive activity are costs of the business, like R&D or marketing expenses.
IP enforcement action is therefore a commercial undertaking. Its main aim is to stop the infringing conduct – stop the damage to the business – repair the wall. If money is obtained from the alleged infringer, that is a good result and will typically be used to offset the legal costs incurred.
But IP court action (litigation) is not intended to be a money-making exercise. There are no million-dollar payouts as may occur in personal injuries litigation. A business must understand the risks of litigation, and what it is trying to achieve, before pressing the IP litigation button.
I would never lightly recommend that a client sue an infringer. Many years ago, when I was a law student, I did work experience at a solicitor’s office. The partner said to me words that I have never forgotten:
The job of a lawyer is to keep their client out of court.
I have blogged about the Pinnacle Runway v Triangl trade mark infringement case here and explained how it demonstrates the risks of litigation here. Justice Murphy has delivered his third judgment in the case: Pinnacle Runway Pty Ltd v Triangl Limited (No 3)  FCA 1379 (25 September 2020). It shows, in tragic detail, what can go wrong in litigation.
Pinnacle v Triangl – brief facts
Pinnacle accused Triangl of infringement of the trade mark DELPHINE, which was registered for swimwear. Before litigation was commenced, Triangl agreed to stop using DELPHINE for its bikinis and not use it again, but without offering compensation. One would have thought Pinnacle’s commercial objectives had been achieved. However, it chose to sue Triangl in the Federal Court and lost.
There have been several curious aspects of this litigation noted in my blogs, but, curiouser and curiouser, whilst the case is being appealed – and the result may be overturned – both parties requested the trial Judge to determine their liability for the other side’s legal costs arising from his Honour’s original decision. The reason for this, Justice Murphy surmised was:
… because the costs incurred by the parties are so substantial in comparison to the damages that could have been recovered, the issue of costs looms large in the appeal.
Unfortunately, this case appears to have become mostly about the legal costs. It exemplifies the need for caution in suing in the first place, and its corollary, trying to exit litigation under a settlement that is not ideal, but can be tolerated.
Paying the other side’s legal costs
When one party sues another for IP infringement, normally the successful party will be entitled to a proportion of the costs that they must pay to their lawyers. (In Pinnacle v Triangl the Judge estimated this to be about 60% of actual legal costs). However, in some circumstances, a Court can award “indemnity costs”, which will pretty much cover all their legal costs. A common situation where this can occur is where one party has made a settlement offer to the other side and the offer has been unreasonably rejected.
As Pinnacle was unsuccessful, it would ordinarily be ordered to pay about 60% of Triangl’s legal costs. In Pinnacle No 3 Triangl claimed that it was entitled to more of its costs – indemnity costs – because it had made a series of settlement offers that Pinnacle had rejected.
Purpose of litigation
Parties to Federal Court litigation should not conduct the litigation however they like. Section 37M of the Federal Court Act 1976 (Cth) (the Act) provides for the “overarching purpose” of litigation, which is to facilitate the just resolution of disputes as “quickly, inexpensively and efficiently as possible”, including:
… the resolution of disputes at a cost that is proportionate to the importance and complexity of the matters in dispute.
The Act requires the parties to conduct the proceeding in a way that is consistent with the overarching purpose and, if they fail to do so, the Court can penalise them when it decides who is to pay the legal costs.
By the end of the case, Pinnacle had spent approximately $281,000 in costs, according to Justice Murphy’s estimate, whereas, if it had been successful, it could have been awarded about $2,500 in damages. Unsurprisingly, the Judge considered that these costs were disproportionate to the value of what was being litigated.
The settlement offers
During the course of the litigation, Triangl had made three settlement offers – of $40,000, $45,000 and $70,000. Pinnacle made one counter-offer of $56,000 shortly after Triangl’s $40,000 offer. Triangl estimated that its offers were split $2,000 for damages and the rest for Pinnacle’s legal costs.
The problem was that Triangl’s two later offers did not come in quick succession. The $45,000 offer was made four months after its $40,000 offer, and the final $70,000 offer was made about eight months after the $40,000 offer, nine days before the trial commenced. By the time that Triangl increased its $40,000 offer by $5,000, Pinnacle’s legal costs had increased by about $30,000, so, financially, the negotiations were going backwards for Pinnacle.
Was Pinnacle unreasonable to reject Triangl’s offers?
Justice Murphy held that it was unreasonable for Pinnacle to reject each of Triangl’s monetary offers. Pinnacle needed to come to grips with the weaknesses in its case, which were apparent by the time the $40,000 offer was made. There was a real risk that Pinnacle would lose the case.
Pinnacle did not trust the profit figures that Triangl had disclosed for the sale of its bikinis (a common sentiment in litigation). However, Justice Murphy noted that, on the facts as known by Pinnacle, if successful, Pinnacle would only be entitled to, at best, a proportion of Triangl’s profits (not all) and there was a real risk that damages would be “paltry”.
Indeed, excluding irrelevant legal costs, the $40,000 offer probably covered both possible damages and Pinnacle’s recoverable legal costs at that time. Pinnacle also knew that, if it rejected the $40,000 and continued with the litigation, its legal costs position would only worsen. Justice Murphy considered that Pinnacle, by rejecting Triangl’s three monetary offers and counter-offering $56,000, was hoping to get a better offer – but this did not come.
Justice Murphy held that Pinnacle had to pay Triangl’s legal costs on the standard (roughly 60%) basis until the $40,000 offer, and on an indemnity basis afterwards. This was in addition to paying its own lawyers’ costs.
The Pinnacle litigation shows that it can be difficult for a party to extricate themselves from litigation, if, for example, they believe that the other side is being unreasonable or is unwilling to negotiate, or a settlement offer is inadequate. Care must always be taken in pressing the litigation button in the first place. Once litigation has commenced, however, it is crucial to consider the process commercially, weighing up the potential risks and benefits as they are known at the time, always with a keen eye on what the party set out to achieve as well as the running tally of its own legal costs and those of the other side.
This article provides general information only, and is not intended as legal advice specific to your circumstances. Please seek the advice of a legal professional if you have any particular questions.
© Margaret Ryan, Melbourne, Victoria, 2020