Kavanagh Balloons Proprietary Ltd. v Cameron Balloons Ltd.

LORD JUSTICE PETER GIBSON: By this appeal Cameron Balloons Ltd, the defendant in an action concerning the infringement and validity of a patent, challenges the award of costs made by His Honour Judge Fysh QC in the Patents County Court on 7th April 2003 in paragraph 11 of his order. There is no challenge to paragraph 10 of the order, requiring the defendant to pay the costs relating to the evidence of three named persons including Peter Vizzard.

The claimant, Kavanagh Balloons Proprietary Limited, is an Australian company carrying on business manufacturing hot air balloons. It is the proprietor of a patent (European Patent (UK) No 0671322) entitled "Improvements in the Construction and Control of Inflatable Balloons". The patent was for a number of variations on a type of vent for manoeuvring the balloons vertically and rapidly deflating such balloons for landing.

The defendant makes and sells hot air balloons. It was the licensee of the claimant for a product known as Smart Vent which was covered by claim 3 of the patent. The licence agreement entered into in 1994 was terminated on 19th February 1998 by the claimant. It claimed that subsequently to the termination of the licence the defendant infringed the patent by making, displaying and keeping in the United Kingdom hot air balloons within the scope of the patent. Proceedings were commenced on 28th December 2000. The defendant defended the proceedings on the ground of prior use, anticipating some of the claims of the patent. The prior use also formed the basis for an attack on other claims on the ground of obviousness.

There was no issue on the main allegation of infringement at the trial. It was accepted that if the claims under attack were valid, they were infringed. However, an allegation by the claimant that claim 4 of the patent was infringed by a proposed construction advertised by the defendant failed. This issue did not take up much time before the judge. The result of the action was that prior use was held to have been established. This invalidated claims 1, 8 and 9 of the patent. Claims 2 and 10 were held to be obvious. Claims 3 and 11 were held not to be obvious and to have been infringed by the Smart Vent balloon.

The defendant by letter dated 22nd June 2001 made a defendant's Part 36 offer which, as the judge said when giving judgment on costs, uncannily predicted most of the conclusions at which the judge arrived. The judge said that in fact the defendant had done rather better than the offer because of its success on claim 4. It had offered to submit to an injunction on that. The judge divided the costs into those for two periods. The first was from the commencement of proceedings until the expiry of the 21-day period for accepting the Part 36 offer, that is 13th July 2001. The second period was from 14th July 2001 until the date of his order. In respect of the first period the judge said that not very much had happened in the action and ordered each side to bear its own costs. In respect of the second period the judge said this:

In giving permission to appeal the judge said that he was "aware that the whole issue of costs in the Patents County Court is of interest to practitioners". Whether that is a sufficient reason for granting permission to appeal to this court I respectfully doubt, as it cannot be right that the practice in relation to costs should differ as between patent cases in the County Court and those in the High Court. If the judge had in mind the comments made by this court in Warheit v Olympia Tools Ltd [2003] FSR 6 expressing surprise at the amount of costs for a two-day trial in the Patents County Court, that is not relevant to any issue that was before the judge at that point, nor is it relevant on this application. However, that said, the issues that have been raised in the present case, to my mind, do justify an appeal to this court.

The relevant principles governing the award of costs are set out in CPR Part 36 and Part 44. By Part 36.20:

By rule 44.3:

Mr Wyand QC for the defendant submits that the judge erred in making no order for costs in respect of this period to which the normal rules in rule 44.3 apply. Mr Wyand acknowledges that both sides were in a sense successful, but he relies on the approach adopted by this court in David West v Fuller Smith and Turner Plc [2003] EWCA Civ 429. There this court held that where there was insufficient material upon which a judge could have arrived at a conclusion as to who had been practically and commercially successful, and where the issues were so clearly distinct that it cried out for treatment that reflected the relative magnitude of the issues upon which the claimant had failed and succeeded, the best approach, and the correct approach, was to consider the relative importance, in terms and time of money, of the issues and to arrive at a fair allocation of costs having regard to those paragraphs: see paragraphs 4 and 6 of the judgment of Pumfrey J delivering the first judgment in this court. Mr Wyand submits that on an issue by issue approach the claimant won an issue involving about 5 per cent of the costs, whereas the defendant won the issue involving about 95 per cent of the costs. He acknowledges that in addition one can take account of the fact that there were other general costs necessarily incurred at that time. He points out that the Part 36 offer was preceded by the service of particulars of objection, giving full particulars of the prior use, and that was before the preparation of experts' reports. Mr Wyand therefore initially asked for 90 per cent of the defendant's costs to be paid by the claimant, though he was prepared to accept that a slightly lower proportion might be thought appropriate.

Mr Henry Ward for the claimant urges to us have in mind the background to this case and, in particular, the involvement of Mr Vizzard, who was a direct competitor of Mr Kavanagh of the claimant company. In the autumn of 1994 Mr Vizzard first disputed the validity of the claimant's patents and in Australian patent proceedings he alleged prior use by a Mr David Wilsey. Mr Ward told us that Mr Vizzard fostered a certain amount of support for his cause among the ballooning community, and Mr Mike Bauwens, giving evidence for the defendant, had let slip at the trial in the present case that he was giving evidence "in support of the movement". We are told that it was apparent at the trial, when Mr Vizzard gave evidence and was cross-examined by video link, that he had put evidence based on falsified documents before the Australian Patent Office in opposition to the claimant's patent and abandoned the Australian proceedings when informed that he would be cross-examined. It was Mr Vizzard who first informed Mr Cameron of the defendant company that there had been prior use. Mr Cameron was suspicious of Mr Vizzard, as he acknowledged, but he said that he was persuaded by the evidence. Mr Vizzard was a witness for the defendant, and the judge found that he was a witness in whom the judge had no confidence, and by the end of the case the defendant did not rely on the disclosures to him.

Mr Ward relies on the remarks of Schiemann LJ in Firle Investment Ltd v Datapoint International Ltd [2001] CP Reps 101.

On the issue relating to the first period, I am persuaded by Mr Wyand that the judge did make an error of principle. This case, like the David West case, seems to me to be one where it is appropriate and just to look at the different issues raised in the case and to regard them as being clearly distinct from each other. If the judge had been assessing the costs at the end of the trial, there having been no Part 36 offer, and the defendant had suggested that the costs should be awarded on an issue by issue basis, it seems to me that in respect of the issue of prior use it would have been appropriate to award costs on the basis of the outcome on that issue. The same approach should be adopted in respect of the first period. There is no doubt that the issue of prior use commanded a great deal of time, and that the bulk of the costs was incurred in respect of that issue. On that issue the defendant succeeded. In my judgment therefore this is a case, as in the David West case, where it is proper for this court to interfere with the judge's exercise of discretion. Having regard to all the circumstances, I would order the claimant to pay 75 per cent of the costs of the defendant in respect of that period.

Mr Wyand submits that the judge was wrong to consider it unjust to order the claimant to pay all the defendant's costs after the Part 36 offer on the ground that this was a prior use case turning on the vagaries of the witness box as distinct from consideration of documents. Mr Wyand argues that the prior use was by persons independent of the parties to the litigation and that both sides were in equal difficulty in assessing the evidence. He draws attention to paragraph 10 of the order made by the judge requiring the defendant to pay costs relating to the evidence of Mr Vizzard and the other two witnesses. He pointed out that the result was that the defendant had to pay 100 per cent of the costs of the claimant in respect of witnesses who are unsatisfactory, whereas the claimant had to pay only 60 per cent of the defendant's costs in respect of the witnesses who were satisfactory. He says that if the judge was correct in his approach, no defendant who makes a Part 36 offer in a case which turns on the evidence of independent witnesses could hope to get all his costs even though the claimant fails to better the Part 36 offer. He submits that the judge approached the question of injustice from wrong principles.

Mr Ward submits on this issue that the judge again made no error of principle and correctly exercised what he called the judge's discretion in the light of the particular circumstances of the present case. I do not accept that the judge has a discretion. The wording of rule 36.20 is quite clear. It requires the court to make an order in favour of the offeror, if the offer is not accepted and is not beaten, save only in one circumstance, and that is if the court considers it unjust to make such order.

Mr Ward says that when a party to litigation receives a Part 36 offer, he is normally in a position to assess his evidence and to make a decision as to the wisdom of continuing in the light of that offer. Mr Ward contrasts the present case. He relies on the remarks of Lord Woolf MR in Ford v GKR Construction Ltd [2000] 1WLR at page 1403, where Lord Woolf was commenting on the necessity for a party receiving a Part 36 offer before the commencement of litigation to be provided with the information required to enable that party to assess whether to accept the offer. Lord Woolf drew attention to the fact that the normal consequences of not accepting an offer does not apply where it is unjust that it should do so. Thus it might be unjust if the recipient of the offer had tried to obtain from the offeror relevant information which the offeror alone possessed but had been refused. For my part, I do not derive from the Ford case anything which favours Mr Ward. On the contrary, it seems to me to be a clear pointer to the fact that the injustice, if it is to be found to occur, is as a result of the party making the offer either misleading the offeror or withholding information which should have been disclosed to enable the offeree to decide whether to accept the offer. The particulars of objection had been served before the Part 36 offer was made and were detailed. Of course, the veracity of the witnesses depended on their performance in the witness box, but that is a common occurrence in litigation generally. That uncertainty does not seem to me to be a sufficient reason for finding it unjust to make the order which rule 36.20(2) requires to be made in the absence of injustice.

Mr Ward suggests that the witnesses were connected with Mr Vizzard, and he relies in particular on Mr Bauwens' reference to "the movement". I am not able to agree that the fact, if it be a fact, that there was such a movement leads to the conclusion that there would be some injustice in awarding costs to the defendant. In this particular case Mr Cameron cannot properly be accused of being any part of any such movement. The witnesses were independent of him and he was entitled, in my judgment, to advance the case that he did relating to prior use.

In my judgment the judge has erred in principle in treating the prior use defence and the absence of documents as allowing him to conclude that it was unjust to order the claimant to pay the defendant's costs. The plain purpose of rule 36.20 is to encourage parties to settle by requiring the offeree who does not accept an offer and does not beat it to pay all the costs of the other party, unless injustice can be seen to result. The court should be circumspect in finding injustice if it is not to undermine the utility of the rule. The judge referred to nothing other than the prior use defence and the absence of documents in explaining why he found it unjust. For the reasons which I have given, I can see no injustice present here.

In my judgment therefore on this issue too, with all respect to the judge, he erred in principle. I would therefore allow the appeal in respect of the second period and order that the claimant pay all the defendant's costs in respect of that period other than what is covered by paragraph 10 of the judge's order.

LORD JUSTICE JACOB: I agree. I would only add a little.

As regards the Part 36 offer, if it had been accepted, this litigation would not have gone on. The cause of the litigation continuing was the failure to accept that offer. Nothing short of some sort of injustice, (as the rule provides) should stop the application of the common sense rule that he who unnecessarily causes the litigation to go on and loses should pay.

As regards the first period and the judge's observation that the issue of costs in the Patents County Court is of interest to practitioners, it seems to me that it is essential that those who run patent actions consider very carefully making or defending allegations or defending them if they are likely to incur a lot of costs. I think that the party who lets such a point run to trial and loses it ought simply to pay the costs of it. In this case that would have been the position if there had been no Part 36 offer and the case had run to trial. I see no reason why things should be different simply because there was a Part 36 offer at an early stage.