If you play with fire, you might get burnt – Full Court confirms Trafalgar warning letters on invalid innovation patent breach ACL but are not unjustified threats

Rakman International Pty Limited v Boss Fire & Safety Pty Ltd [2023] FCAFC 202

19 December 2023

Full Federal Court of Australia

Nicholas, Burley and Rofe JJ

Highlight

This case highlights the importance of wording in letters sent by patentees or licensees to customers of potential infringers, and the liability that may follow.  Where the patent is invalidated, such letters can breach the Australian Consumer Law and result in liability of the sender, even while falling short of unjustified threats of patent infringement.

Background

This judgment deals with an appeal from two proceedings, Rakman International Pty Limited v Boss Fire & Safety Pty Ltd [2022] FCA 464 (reported in our 2022 Patent Case Review) and Rakman International Pty Limited v Boss Fire & Safety Pty Ltd [2022] FCA 1113 (costs judgment).  The appeal proceedings were brought by patentee Rakman International Pty Ltd and its exclusive licensee Trafalgar Group Pty Ltd (together, Trafalgar) for infringement by Boss Fire & Safety Pty Ltd of Rakman’s innovation patent no 2017101778 (Patent).  Boss cross-claimed for revocation and alleged letters sent by Trafalgar Group Pty Ltd to builders contained unjustified threats and contravened the Australian Consumer Law (ACL).

The Patent is an innovation patent directed to a device known in the field as a ‘fire transit’, which directs services such as electrical cables and water pipes through a wall while preventing the spread of fire through it.

Relevant to the patent aspects of the case, the primary judge found that:

• the five claims of the Patent would have been infringed, but all claims are invalid: 1-4 for lack of novelty, and claim 5 for lack of innovative step;
• letters sent by Trafalgar Group Pty Ltd to potential Boss’ customers (Trafalgar Letters) were misleading and deceptive and contravened s 18 of the ACL, but were not unjustified threats in breach of s 128 of the Patents Act 1990 (Cth) (the Act); and
• Trafalgar must pay Boss’s costs on a party-party basis up to the approximate date of an offer of compromise made by Boss, and after that on an indemnity basis.

In this appeal the Full Federal Court upheld the primary judge’s findings in the patent aspects of the case but overturned the costs decision.  The parties have until 4 March 2024 to file for special leave to appeal to the High Court of Australia.   As at the date of writing no special leave request has been filed.

Key Issues

The key issues in the appeal were the validity of claim 5 of the Patent (a method claim), and whether the Trafalgar Letters breached the ACL and/or amounted to unjustified threats under s 128 of the Act.

ACL claim

The Full Court found no error in Yates J’s conclusion that statements in the Trafalgar Letters that supply, installation and use of the Boss device could infringe the Patent were misleading, at least because they made no reference to the fact that the Boss device would have to be installed in a particular way to infringe.  Trafalgar admitted that the Trafalgar Letters represented that certain conduct would infringe the Patent, but departed from that position in closing submissions at first instance, arguing that the letters read as the whole should be understood as a statement of belief as opposed to factual representations.  The Full Court held that “the respondents were entitled to notice of this change prior to the evidence so that they could have regard to it in cross-examining the author of the letter”.

The primary judge found that Boss suffered loss and damage due to lost opportunities to supply its device to parties who received the Trafalgar Letter.  His Honour referred to communications from one recipient which abruptly ended negotiations with Boss, stating they “don’t want to get involved in any legal issues with [Boss] or Trafalgar…[w]e’d prefer to stay away from it, as it could have additional costs for [us]”.  The Full Court dismissed Trafalgar’s arguments that the customer had other causes to cease negotiations (such as performance issues with the device), as not related to an appealable error.

Unjustified threats

Justice Yates held that the statements in the Trafalgar Letters did not amount to unjustified threats under s 128 of the Act because the letters expressly stated that Trafalgar did not intend to assert its patent rights against the recipients (as they were taking legal action against Boss).  Boss submitted this was an erroneous finding because:

• the Trafalgar Letters would have raised in the minds of recipients of the letters their own potential liability for infringement, and insufficient weight was given to the evidence about how customers interpreted the letter;
• Yates J’s finding was inconsistent with the reasoning in CQMS Pty Ltd v Bradken Resources Pty Ltd [2016] FCA 847 (CQMS). That case concerned a general notice to customers also sent after commencing infringement proceedings against their supplier, which included a statement that the dispute was only with the supplier, but which was found to be an unjustified threat.

The Full Court confirmed that assessment of a communication for the purposes of s 128 is determined objectively and is a question of fact.   It distinguished the present case from CQMS because the Trafalgar letter read “…we stress that Trafalgar is not intending to assert its patent rights against your use of the method protected by the Trafalgar patent… “[r]ather we are addressing the infringement at the point of supply of infringing products by our court action against BOSS”.  Their Honours noted that the “we stress” indication was more extensive than the equivalent wording CQMS, and the second sentence brought the potential for disrupted supply to mind in the recipient of the Trafalgar letter, rather than any threat of infringement proceedings against the recipient.

Their Honours ultimately found at [101]:

‘… the Trafalgar Letter skated close to the edge of the precipice beyond which unjustified threats lay. Whilst the Trafalgar Letter was undoubtedly a threat, which appeared to achieve its intended aim- to scare away Boss’ customers, it was not a threat of patent infringement proceedings against those customers as required by s 128.’

Claim 5 of the Patent novel but lacking innovative step

Dependant claim 5 was to a method relating to installation of the device “including the step of marking a line on the external object so as to depict the proposed centre line of the barrier”.  Trafalgar argued that, having found that pre-priority demonstrations of devices anticipated the product claims but did not disclose this step with sufficient clarity to anticipate claim 5, Yates J erred in finding this step to be a trivial addition such that the claim lacked an innovative step.  Boss challenged the novelty finding.

Their Honours dismissed both grounds of appeal, including by finding that the claimed means of marking the line did not make a substantial contribution to the working of the invention (i.e. it lacked innovative step).  The Court therefore did not consider it necessary to address Boss’ contention that Yates J erred in failing to find the claims of the Patent were not infringed.

Costs

Boss made an offer of compromise during the proceedings in which it proposed discontinuance of the claim and cross-claim, and payment by Trafalgar of 80% of Boss’s costs on a party-party basis.  Trafalgar rejected the offer despite Boss having filed evidence by then of the pre-priority demonstrations going to validity of the claims, and which Trafalgar did not substantively challenge at trial.

Trafalgar challenged the indemnity order for the post-offer costs., contending that Yates J erred in finding that it was unreasonable for Trafalgar to reject the offer.  The Full Court agreed because:

• it only offered discontinuance of the cross-claim, so Boss had no contractual obligation not to bring fresh revocation proceedings; and
• party-party costs are generally around 66% of actual costs (as opposed to 80%).

The Full Court remitted the costs proceeding to Yates J, including to determine whether to apply a discount based on matters either abandoned by or decided against Boss.

Outcome

The Full Court dismissed the Trafalgar appeal against primary judge’s finding they breached the ACL and Boss suffered loss and damage, and claim 5’s lack of innovative step.  Similarly, it dismissed Boss’s cross-appeal against the finding of no unjustified threats, and challenge to the finding claim 5 was novel.  Only the primary judge’s indemnity costs order was overturned, and this has now been remitted.

Implications

This case is an unusual example of a finding of misleading and deceptive conduct by sending letters to prospective customers of a potential infringer, where no unjustified threats were found.  The specific wording on the letters in this case were key in this regard.  It also serves as a reminder that offers of compromise must be plainly reasonable and consider the realities of taxation, even if the offeree was “armed with information that they were not likely to succeed in in their case”.

About Pearce IP

Pearce IP is a boutique firm offering intellectual property specialist lawyers, patent attorneys and trade mark attorneys to the life sciences industries (in particular, pharmaceutical, biopharmaceutical, biotech, ag-tech and food tech).  Pearce IP is the 2021 ‘Intellectual Property Team of the Year’ (Lawyers Weekly Australian Law Awards) and was shortlisted for the same award in 2022.  Pearce IP is ranked in IAM Patent 1000 and Managing IP (MIP) IP Stars, in Australasian Lawyer 5 Star Awards as a ‘5 Star’ firm, and the Legal 500 APAC Guide for Intellectual Property.

Our leaders have been recognised in virtually every notable IP listing for their legal, patent and trade mark excellence including: IAM Patent 1000, IAM Strategy 300, MIP IP Stars, Doyles Guide, WIPR Leaders, 5 Star IP Lawyers, Best Lawyers, and Australasian Lawyer 5 Star Awards, and have been honoured with many awards including Australian Law Awards – IP Partner of the Year, Women in Law Awards – Partner of the Year, Women in Business Law Awards – Patent Lawyer of the Year (Asia Pacific), Most Influential Lawyers (Changemaker), among other awards.