Consequential loss - a state of confusion

Posted by Paul Jeffreys and Paul Kallenbach

Contracts are used to allocate risk between the contracting parties.  One mechanism for doing so in a contract is by using limitation and exclusion of liability clauses.  These clauses have the effect of:

• in the case of a limitation of liability provision - limiting the requirement for one party to compensate another party to losses up to a specified amount; and
• in the case of an exclusion of liability provision - completely excluding the requirement for one party to compensate another party for particular types of loss.

A common type of loss that is often completely excluded in technology contracts is 'consequential' loss (sometimes also referred to as 'indirect' loss).  Until recently, a rather ancient line of English cases had been followed by Australian courts in interpreting the meaning of 'consequential loss'.   Unfortunately, more recent Australian authority has lent varying interpretations to this phrase, giving rise to uncertainty in the interpretation of exclusion clauses in commercial contracts.

The purpose of this blog post is to briefly summarise the varying interpretations of 'consequential loss' in those Australian jurisdictions that have considered the issue.

The traditional English (and, until recently, Australian) approach

Under English law (which Australian courts have followed until recently), 'consequential loss' has been interpreted as losses that satisfy the following two elements:^[1]

• the loss does not arise naturally as a result of a breach; and
• the loss was in the contemplation of the parties at the time of the contract and results as a probable result of a breach.

One difficulty with this approach is that, if the parties dispute whether a particular loss happens to be a 'consequential loss', the party seeking damages will have to prove that the particular loss was in the contemplation of the parties at the time of entering into the contract. 

Victoria, New South Wales and South Australia

The Australian re-interpretation of 'consequential loss' began with the 2008 decision of the Victorian Court of Appeal in Environmental Systems Pty Ltd v Peerless Holdings Pty Ltd ^[2] (Peerless). The approach in this decision was subsequently approved by the New South Wales Court of Appeal ^[3] and the South Australian Supreme Court.^[4]

The Court in Peerless created a distinction between:^[5]

• normal losses - being a 'loss that every plaintiff in a like situation will suffer'; and
• consequential losses - being 'anything beyond the normal measure … incurred through breach'.

Consequential losses were deemed by the Court to include loss of profits or additional expenses incurred as a result of the breach.

 

Unfortunately, the precise scope of what constitutes a 'normal loss' remains open.   Minter Ellison Partner Cameron Ross, in considering Peerless, has observed:^[6]

While it is clear that "normal loss" is different from "natural loss" [a key concept under the English interpretation] ... the judgment in Peerless does not provide guidance on what constitutes this measure of damages and when a party is in a similar situation.  The question whether a loss is categorised as a "normal loss" ... will inevitably be determined by the context and nature of the contract and the breach.

Despite these ambiguities, it can probably be said that the interpretation of 'consequential loss' in Victoria, New South Wales and South Australia is now somewhat broader than the original English position.  As a consequence, where a contract excludes liability for 'consequential loss, losses that may previously have been considered 'open game' may now be covered by the exclusion clause, and accordingly no longer be recoverable from the party in breach.^[7]

Western Australia

The Western Australian Supreme Court has recently rejected both the English and Peerless approach, instead adopting yet another method of interpreting 'consequential loss'.^[8]

In Regional Power Corporation v Pacific Hydro Group Two Pty Ltd [No 2]^[9] (Regional Power), Justice Kenneth Martin expressed his approval for the opinion of Professor J W Carter that both the English and Peerless approaches were 'artificial' and that they approached 'the expression 'consequential loss' from particular legal perspectives rather than a commercial perspective which will vary from case to case'.^[10]

The Court instead preferred an approach based on principles set out by the High Court in Darlington Futures v Delco Australia Pty Ltd^[11] (Delco), in particular, the principle that the meaning of an exclusion or limitation clause must be 'determined by construing the clause according to its natural and ordinary meaning, read in light of the contract as a whole'.^[12]

This principle does not, by itself, provide much guidance as to the meaning of 'consequential loss' in any particular circumstance  However, the factors considered on the facts of Regional Power may provide some guidance as to the practical application of this approach.  More specifically, in deciding whether the loss in Regional Power was a 'consequential loss', the Court considered the following factors:

• the wording of the exclusion clause;
• other clauses in the contract that deal with, or contemplate, the breach event;
• any references in the contract to the maintenance and operation of the relationship between the parties; and
• the character and responsibilities of the parties (in Regional Power, one of the parties was the State Energy Commission of Western Australia), including the commercial sophistication of the parties.

Queensland, Tasmania, the Australian Capital Territory and the Northern Territory

 

No courts in the remaining Australian states and territories have had an opportunity since Peerless to consider their jurisdiction's preferred approach to interpreting 'consequential loss', with one minor exception.

 

In Queensland, Justice Douglas distinguished the Peerless interpretation of 'consequential loss' in MGC Properties Pty Ltd v Tang^[13] (Tang).  His Honour did so because the relevant clause in Tang was an indemnification clause in a guarantee and indemnity deed, rather than a contractual exemption clause.  In the context of the indemnity, 'consequential loss' meant losses flowing from a default by the indemnifier.^[14]  The judgment shows that '[t]he natural meaning of "consequential loss" may alter depending on the context and the nature of the document'.^[15] However, as the context in Tang is distinguishable from the usual contractual exclusion clause, there remains uncertainty in Queensland as to what approach a first instance court might take.

 

We would assume that trial judges in Queensland, Tasmania, the Australian Capital Territory and the Northern Territory will, in accordance with the High Court's position on judicial precedent, follow the decisions of the intermediate appellate courts in Victoria and New South Wales, unless the trial judge is 'convinced that the interpretation is plainly wrong'.^[16]  Having said that, it didn't take much for Justice Kenneth Martin to divert from the Peerless approach in Regional Power.

 

Application in practice

 

Until the High Court renders a decision on the meaning of 'consequential loss', the issue will remain unsettled in Australian law.  It therefore remains prudent for parties in their contracts to expressly set out the types of loss that they wish to exclude (for example, loss of profits, loss of revenue, loss of goodwill or loss of business opportunity), as well as those losses that the parties agree should be recoverable from each other. 

The rather unsavoury alternative is for the parties to leave it to the courts to divine the meaning of this term - and therefore the contractual allocation of risk between them - from the contradictory patchwork of Australian jurisprudence in this area.

---

 

[1] Hadley v Baxendale (1854) 9 Ex 341; 156 ER 145. Also see Croudace Construction Limited v Cawoods Concrete Products Limited [1978] 2 Lloyd's Rep 55. ↩
[2] (2008) 19 VR 358 (Peerless). The Peerless decision has been applied subsequently in Victoria in Papadopoulos v MC Labour Hire Services Pty Ltd (No 4) (2009) 24 VR 665 and Rod Investments (Vic) Pty Ltd v Abeyratne (No 2) [2009] VSC 278. ↩
[3] Allianz v Waterbrook [2009] NSWCA 224. ↩
[4] Alstom Ltd v Yokogawa Australia Pty Ltd (No 7) [2012] SASC 49 at [286]-[289] per Bleby J. ↩
[5] Peerless at 386-387 [87] per Nettle JA (Ashley and Dodds-Streeton JJA concurring). ↩
[6] Cameron Ross, 'A loss of no consequence' (2010) 84(4) Law Institute Journal 27 (Ross), 28. ↩
[7] Ross, 27. ↩
[8] The most notable decision is Regional Power Corporation v Pacific Hydro Group Two Pty Ltd [No 2] [2013] WASC 356 (Regional Power), as discussed in the body of this article. However, Peerless was doubted in an earlier Western Australian decision: Valentine Falls Estate Pty Ltd v Smec Australia Pty Ltd [2010] WASC 319 at [6] per Sanderson M. ↩
[9] [2013] WASC 356. ↩
[10] Regional Power at [94] per Kenneth Martin J quoting Carter J W, 'Exclusion of Liability for Consequential Loss' (2009) 25 Journal of Contract Law 118, 133. ↩
[11] (1986) 161 CLR 500 (Delco). ↩
[12] Delco at 510 per Mason, Wilson, Brennan, Deane and Dawson JJ. ↩
[13][2009] QSC 322 (Tang). ↩
[14] Tang at [21]-[25] per Douglas J. ↩
[15] Ross, 29. ↩
[16] Farah Constructions v Say Dee Pty Ltd (2007) 230 CLR 89 at 151-152 [135] per Gleeson CJ, Gummow, Callinan, Heydon and Crennan JJ. ↩

Sherlock Holmes and the case of the literary character copyright protection

Posted by Nicole Reid ● Partner: Paul Kallenbach

Image courtey of gregwake

How is a character in a literary work, as distinct from the literary work itself, protected by copyright? This issue may arise in the case of fan fiction, sequels and parodies, where a character from an existing work is used in the new work, without many of the other elements of the original work being copied.

A United States court has recently considered the copyright protection of the fictional characters Sherlock Holmes and his colleague and friend, Doctor John Watson. It found that the characters are in the public domain, other than their characteristics that were only introduced in stories which are still under copyright. However, especially in Australia, the copyright protection of a character separate from the literary works in which he or she appears is not simple.

The Sherlock Holmes decision

The recent case came about because an expert in the Sherlock Holmes canon, Leslie Klinger, wanted to have published a collection of new stories inspired by and featuring the Sherlock Holmes and Dr Watson characters. However, he and his publisher had been threatened by the owner of copyright in the Sherlock Holmes stories (a company owned by members of the late Sir Arthur Conan Doyle's family) with an infringement claim unless a licence was obtained. He sought a declaratory judgment that no permission would be required to use various story elements. The elements in question are listed in his statement of material facts, and include various characteristics of Holmes and Watson, as well as a number of other characters.

The Sherlock Holmes character is in an interesting position in the US, because it was developed over a number of novels and stories by Conan Doyle, which have different copyright statuses under US law. Copyright in the novels and most of the stories has expired, but there remain ten stories that are still protected by copyright in the US. This is because when the term of copyright protection was extended in 1998, the extension applied only to works published in 1923 or after, so it only affected some of the Sherlock Holmes stories.

The Court found that the plaintiff was only entitled to a declaratory judgment that he was entitled, without permission, to use the story elements that were introduced in the pre-1923 stories. The story elements that were only introduced in the post-1923 stories were still protected by copyright (including that Dr Watson had a second wife and a background as an athlete).

The copyright owner had argued that the characters of Sherlock Holmes and Dr Watson would remain protected by copyright for as long as any of the stories were within their copyright term, on the basis that they were complex characters developed over the course of all of Conan Doyle's works. The Court rejected this argument, and instead followed authority that had held that 'increments of expression' in later works, including storylines and character traits, can be protected by copyright separately from earlier, related works. This applies even if it means that characteristics of individual characters are effectively divided between copyright protection and the public domain until all of the works delineating these characteristics have entered the public domain.

Copyright in literary characters in Australia

In this case, the plaintiff was apparently concerned about protecting his right to create 'derivative works' based on Conan Doyle's works. A derivative work is defined in US law as one that is based on one or more existing works. Previous case law referred to by the court has held that a sequel or series featuring the same characters as an earlier work is a derivative work.

In Australia, it is less clear that a literary work featuring characters from an earlier work would necessarily infringe any copyright in the earlier work. This is because there is no exclusive right of a copyright owner to create derivative works. The adaptation right in relation to literary works is limited to the creation of translations, picture versions, dramatic versions (of non-dramatic works) and non-dramatic versions (of dramatic works).

Accordingly, in Australia, the Sherlock Holmes character as delineated in Arthur Conan Doyle's works would (if still protected by copyright) only be protected from being appropriated for use in another novel or short story by the reproduction right. An Australian court would need to consider whether a sufficiently substantial part of a copyright work was reproduced via the appropriation of one or more characters, and any other related story elements, from the work. This would depend on a consideration of the distinctiveness of the character in the original work and the quality and quantity of the elements of the original work that had been reproduced. US law appears not to require the same amount of appropriation as would be required in Australia to make out reproduction of a substantial part, and thus provides stronger protection to literary characters.

Although the outcome in the Sherlock Holmes case seems reasonable on its face, it will not necessarily be easy to apply in practice. It seems to us that it would be difficult to determine when a particular character trait was introduced, and whether it has been used in a subsequent work. A character is developed not only by simple references to his or her characteristics, but by descriptions of their thoughts, interactions and actions. To what extent will a court need to delve into literary interpretation in order to determine the traits that been bestowed on that character, and when that trait was developed?

Conan Doyle's estate has also filed an appeal, so perhaps the sequel will provide some more answers.

Online review websites and the ACCC

Posted by Paul Jeffreys and Paul Kallenbach

Have you ever shopped online and found it difficult to choose between by a myriad of products?  With more than 50% of Australians now buying online, consumers increasingly do not have the chance to physically inspect the good they are interested in purchasing, or to communicate directly with prospective service providers.  So they are increasingly looking to online reviews to help them decide which way to turn.

Online review platforms are websites or apps that provide information to prospective purchasers about particular goods or services. The platforms may be found on independent review websites (think tripadvisor.com, urbanspoon.com and yelp.com.au) or sections of other websites that contain product reviews (such as amazon.com).  These platforms offer a compelling proposition - customers have the opportunity to become better informed about goods and services, while businesses obtain free access to market feedback.  It is increasingly apparent, however, that the information contained on review websites is not always reliable.  This has started to cause legal consternation, particularly in the social media sphere, where business are required to take steps to ensure that their online presence does not contain misleading or inaccurate content (see our previous blog post on this topic here).

The issue of misleading material on online review platforms has caught the attention of the Australian Competition and Consumer Commission (ACCC), which recently released a guidance report on how businesses should deal with the challenges of potential misleading information on review platforms. The ACCC, as the regulator of Australia's consumer laws, has powers under the Australian Consumer Law (ACL) to take enforcement action in respect of misleading conduct in trade or commerce.   The ACCC has, of course, taken on the issue of misleading online content before:

• In July 2010, Jetplace Pty Ltd, the operator of an adult social networking and dating site known as 'redhotpie', was found to have engaged in misleading and deceptive conduct by generating 1,300 fake user profiles programmed to automatically send customised messages to other (real) members.[1] This was despite the website clearly stating that 'each and every profile you see on our website was place by a person just like you – someone who came to our site and registered'.
• In February 2011, the ACCC successfully prosecuted Allergy Pathway, an operator of clinics for the diagnosis and treatment of allergies, and its sole director, in relation to misleading third party content posted on Allergy Pathway's Facebook page, on the basis that it had become aware of that content but had chosen not to do anything about it.[2]
• In November 2011, removalist business Citymove paid a $6,600 infringement notice after admitting that it had posted testimonials on its own website purporting to be genuine customers.[3]
• In January 2014, P & N Pty Ltd and P & N NSW Pty Ltd (Euro Solar) and Worldwide Energy and Manufacturing Pty Ltd (Australian Solar Panel), manufacturers and suppliers of solar panels, were ordered to pay collective pecuniary penalties of $125,000 for, amongst other things, publishing fake online testimonials.[4]

These cases indicate the caution that businesses need to exercise, both in terms of the content they post on their own website or social media channels, and also in dealing with third party content on those channels (including the expectation, set by the Federal Court, that businesses must promptly remove misleading third party content of which they become aware).  The guidance report issued by the ACCC signifies a further escalation in the battle against misleading online content.

The ACCC report highlights five areas that independent online review platforms should consider:

(i) Disclosing commercial arrangements with reviewed businesses: Where commercial relationships exist between review platforms and reviewed businesses, the review platform risks breaching the ACL if it does not disclose to customers the nature of the relationship. The guidance report provides the example of the platform prominently stating that '[Review platform] receives a commission/fee for each purchase from [reviewed business] booked through this site'.

(ii) Detecting and removing fake consumer reviews: The guidance report recommends that review platforms tackle fake reviews by providing customers the opportunity to complain about or 'flag' potentially suspect reviews in addition to conducting either automated or manual internal reviews of content. The report provides factors to consider in deciding whether a review may contain fake material, including where a review uses overly positive of 'marketing-speak' and whether there has been a 'spike' in reviews about a particular business over a limited period of time.

(iii) Incentivised consumer reviews: Where an online review platform offers an incentive for users to conduct a review of a particular good or service, the platform should disclose this prominently to users (e.g. next to an aggregate (average) rating out of five or above posted comments). The guidance report provides the example of the following disclosure example: 'Some/all reviewers of [reviewed business] received a voucher [or other benefit] from [review platform] in exchange for their review'.

(iv) The omission of credible consumer reviews, inflated (average) reviews and the 'big picture': The report warns against the creation of a misleading overall impression by a body of reviews (e.g. where a platform selectively removes or edits negative reviews). It is also recommended that where a platform displays an aggregated (average) rating system, the total number of reviews should be also stated (to give customers an understanding of the sample size).

(v) Dealing with businesses who have received unfavourable reviews on your platform: The report recommends that reviewed business be provided with an opportunity to post a public response to negative reviews.

The report provides similar recommendations to businesses hosting their own review platforms. In particular, the ACCC warns against anybody writing reviews when they have not experienced the product themselves. This includes, in the words of the ACCC, to 'not encourage family and friends to write about your business without disclosing their personal connection with your business in that review'.

With online shopping becoming more central to consumers, the ACCC has increased exposure on the issue of misleading online product reviews.   Hosts of independent online review platforms and any businesses with review platforms on their websites need to be aware of risk mitigation strategies necessary to ensure that they are not breaching consumer protection laws.

 

[1] Australian Competition and Consumer Commission v Jetplace Pty Ltd [2010] FCA 759.

[2] Australian Competition and Consumer Commission v Allergy Pathway Pty Ltd (No 2) [2011] FCA 74.
[3] http://www.accc.gov.au/media-release/accc-removalist-admits-publishing-false-testimonials.
[4] http://www.accc.gov.au/media-release/145000-penalty-for-fake-testimonials-and-false-solar-energy-country-of-origin-representations.

 

 

New year, new proposed amendments to IP laws (and the return of some amendments from 2013)

Posted by Nicole Reid and Paul Kallenbach

The Federal Government has released an exposure draft of the Intellectual Property Laws Amendment Bill 2014 (Bill) and a consultation paper seeking comments on the draft by 7 February 2014.

The draft of the Bill is based on the Intellectual Property Laws Amendment Bill 2013 (2013 Bill), which was introduced into parliament in May 2013 but lapsed on the calling of the September 2013 federal election.  However, several changes have been made to the 2013 Bill.

Crown use

Significantly, the provisions of the 2013 Bill amending the Crown use provisions in the Patents Act 1990 (Cth) have been removed.  These provisions had been intended to implement one of the outcomes of the Productivity Commission Inquiry into Compulsory Licensing of Patents, to make it clearer when the Crown use provisions can be invoked.  They would have provided that an authority or authorised person may exploit a patented invention for the purposes of providing a service that the Commonwealth, State and/or Territory governments have the primary responsibility for providing or funding, as long as the Crown had first attempted to negotiate with the patent owner, and then obtained the relevant Minister's approval of the Crown use.

Due to concerns that were raised about the potential breadth of these provisions, they will be the subject of a further, separate consultation process.

Compulsory licensing of patented pharmaceuticals for export

Some changes have also been made from the 2013 Bill to the provisions allowing for the Federal Court to grant compulsory licences to enable Australian organisations to manufacture generic versions of patented pharmaceuticals and export them to countries experiencing health crises.  These provisions are intended to implement the Protocol amending the World Trade Organization Agreement on Trade-Related Aspects of Intellectual Property (TRIPS Agreement), which was accepted by Australia in 2007.

As amended, these provisions of the Bill allow the Federal Court to grant a compulsory licence to exploit (not merely to 'work', as in the 2013 Bill) a patented invention where the Court is satisfied that:

• the pharmaceutical product covered by that patent is to be imported to an 'eligible importing country' (which will be specified in regulations by reference to the list annexed to the TRIPS Agreement) by, or with the authorisation of, that country;
• the proposed use of the pharmaceutical product is to address a public health problem in the eligible importing country in circumstances of national emergency or other extreme urgency, or by the public non-commercial use of the product;
• except in circumstances of national emergency or extreme urgency, the applicant has attempted for a period of 30 days to obtain a licence from the owner of the invention; and
• the applicant, the eligible importing country and any importer will take reasonable measures to prevent the pharmaceutical product from being used for a purpose other than addressing the public health problem that the compulsory licence was granted to address.

The patent owner is required to be paid remuneration, which will either be agreed with the licensee or ordered by the Federal Court taking into account the economic value to the eligible importing country of the licensed use of the invention.

The provision in the 2013 Bill that allowed for the Federal Court to order a further compulsory licence of any other patent (and the grant of a cross-licence) where the applicant would not be able to exploit the pharmaceutical product without infringing that other patent.  Instead, the applicant for a compulsory licence will need to make separate applications in respect of the two inventions (which may, however, be heard together) and there is no provision for the granting of a cross-licence.  These provisions had been criticised as being unclear and unnecessary.

Other amendments

The Bill also:                  

• extends jurisdiction in plant breeder's rights matters to the Federal Circuit Court (formerly the Federal Magistrates Court);
• provides for a single trans-Tasman patent attorney regime and single patent application and examination processes for Australia and New Zealand; and
• makes other minor technical and administrative changes to the various intellectual property statutes.

Jurassic Park's dinosaur wrangler validly sacked for 'grossly offensive and disgusting' Facebook comments

Posted by Rory Jolley and Michael Tehan

The Fair Work Commission has again this week confirmed that employers may validly sack employees for injudicious use of social media use – whether at work or not.   The message to employees is clear: you need to think carefully before making comments on social media relating to your employment.

Cameron Little had been employed with Credit Corp Group Ltd (Credit Corp) for over three years when he chose to use his Facebook account to criticise an organisation, Christians Against Poverty (CAP), with which his employer had professional dealings. Mr Little did not identify himself on Facebook as an employee of Credit Corp; rather he held himself out as a 'Dinosaur Wrangler' working for 'Jurassic Park'.

Credit Corp's business involved the collection of consumer debt that had been written off by the original lender.   CAP was a third party organisation which assisted its clients with their debt obligations (and dealt with Credit Corp in this context).

On 27 June 2013, while on annual leave, Mr Little posted on the CAP Facebook page:

For reals bro, you should put a little more of funding into educating consumers on how the world works rather than just weaselling them out of debt, blah blah blah, give a man a fish/teach a man to fish.

He also posted:

No thanks, just take my advice and try to educate people about things like 'interest' and 'liability' rather than just weasel them out of contracts. #simple

CAP was able to identify Mr Little as an employee of Credit Corp.  Despite Mr Little's listed occupation, he had, some six days previously, posted the following on Facebook:

On behalf of all the staff at The Credit Corp Group I would like to welcome our newest victim of butt rape, Jack Hoye. I'm looking Forward to sexually harassing you behind the stationary cupboard big boy.

Not surprisingly, CAP alerted the business as to the circumstances, and Mr Little's employment was terminated shortly afterwards.   Mr Little subsequently lodged an unfair dismissal application.   In defending himself, Mr Little stated (amongst other things) that he thought his Facebook page was private.   He conceded, however, that other employees of Credit Corp were among his Facebook friends.

In finding that the dismissal was not unfair, Deputy President Peter Sams noted that Credit Corp had policies dealing with and prohibiting the kind of conduct engaged in by Mr Little.  He indicated, however, that it would not have mattered if the situation was otherwise.   He stated that written polices were hardly necessary for an employee like Mr Little to recognise that his comments about CAP were likely to damage his employer's reputation, and that the 'deeply offensive' sexual comments made about the new employee were 'grossly offensive and disgusting'.

Deputy President Sams also found that the fact that Mr Little made the Facebook comments in his own time was of no consequence, as it was not when the comments were made that was important, but the effect and impact of those comments on the employer and on other employees.  He stated that, whilst Mr Little was perfectly entitled to hold and express personal views, he could not do so in a manner which adversely affected his employer's reputation and viability.

Finally, Deputy President Sams stated that he had trouble accepting that Mr Little believed his Facebook page was private.   In any event, he said, the maintenance of the page's privacy settings were Mr Little's responsibility.   This follows from the clear warning delivered by a Full Bench of the Fair Work Commission in last year's Linfox case when rejecting an appeal against a finding that a dismissal for certain offensive Facebook comments was unfair. In that case, the Full Bench stated:

It is apparent ... that the findings of the Commissioner as to the Applicant’s understanding about the use of Facebook were an important part of the circumstances taken into account in concluding that the dismissal was unfair. It is also apparent that, with increased use and understanding about Facebook in the community and the adoption by more employers of social networking policies, some of these factors may be given less weight in future cases.

This case is one more in a growing body of case law developed by the Fair Work Commission relating to the discipline of employees in relation to their use of social media.  It is now beyond doubt that discipline may be appropriate where comments made online are sufficiently injurious to an employer.  Of course, it would be better if such comments are not made at all.  To minimise this risk so far as possible, an employer should have in place a good social media policy, and ensure that its staff are properly trained.  Should anything untoward then occur, the employer will be well placed to appropriately deal with the situation.

Enforcing IP rights globally - evidentiary challenges

Posted by Matt Davies and Paul Kallenbach

The recent decision of the Australian High Court in Aristocrat Technologies Australia Pty Ltd v Global Gaming Supplies Pty Ltd [2013] HCA 21(Aristocrat) serves as an intriguing illustration of the evidentiary challenges confronting those seeking to enforce their intellectual property rights in a global marketplace.

The somewhat complex facts involved the manufacture and refurbishment of pokies machines in Australia by the respondent (Global) which were sold to purchasers located principally in South America.  The applicant (Aristocrat Tech) alleged that infringing copies of its computer programs (constituting the games and the artwork displayed on the gaming machines) were contained within the refurbished machines. 

Interestingly, of the 54 impugned export transactions identified by Aristocrat Tech, which involved some 618 pokies machines, there was no evidence identifying precisely which components in each machine were allegedly infringing. This was the case even following the execution of search orders in respect of Global's premises.

In an attempt to overcome this evidentiary hurdle, Aristocrat Tech tendered a number of business communications, including 6 email chains between Global and certain international purchasers. These emails were described on appeal as 'essential' to the primary judge's reasoning process and His Honour's conclusion that, although their content did not reveal an offer to act in a manner constituting an infringement of the Copyright Act, it did indicate a 'willingness to assist the "serial counterfeiters" in South America in carrying out their actions'.

On appeal to the Full Federal Court, Global argued, and the Full Court held, that use of the emails to demonstrate the credit of the witnesses and the existence of a joint venture which involved the production and sale of infringing pokies machines amounted to tendency evidence.  This finding was made notwithstanding the absence of the term 'tendency' in the primary judge's written decision.

Section 97 of the Evidence Act 1995 (Cth) creates a general rule excluding the use of tendency evidence with exceptions when evidence is considered by the court to be of 'significant probative value' and provided that strict notice requirements are complied with.  As Aristocrat Tech did not recognise that the evidence it adduced was tendency evidence, the notice requirements were ignored and consequently, on appeal to the Full Court, the evidence was ruled to be inadmissible.

The importance of this case is underscored by the High Court's decision to refuse special leave yet still publish reasons for its decision (something it is not required to do).  In finding the decision made by the Full Court to have been reasonably open, the joint judgement of the High Court stated: 'it would be difficult to find a clearer indication of the use of evidence as indicative of a tendency'.

Aristocrat provides a reminder of the strict requirements accompanying the use of tendency evidence, and that the assessment of whether evidence is being adduced to establish a tendency will be a matter of substance over form.  It is also highlights the practical evidentiary hurdles facing those seeking to enforce their intellectual property rights globally.

Apotex v Sanofi-Aventis continued: High Court upholds patentability of methods of medical treatment - but finds no infringement

Posted by Nicole Reid and Paul Kallenbach


Image courtest of opensourceway

The High Court has handed down its decision in the litigation between Sanofi-Aventis and Apotex. The case concerns Apotex's proposal to sell a generic version of Sanofi-Aventis' leflunomide drug, ARAVA®, for which Apotex obtained registration on the Australian Register of Therapeutic Goods (ARTG).

 

The background to this case is set out in our post on the first instance decision.   In brief, Sanofi-Aventis had a patent for the compound leflunomide, which expired in 2004.   It also obtained a secondary patent that claims a method of preventing or treating psoriasis using leflunomide (Patent), and its infringement proceedings against Apotex relied on that Patent.  Leflunomide is used in Australia to treat psoriatic arthritis and rheumatoid arthritis, but not psoriasis alone, and these were the indications for which Apotex's generic version was approved.   However, psoriasis and psoriatic arthritis are now understood to be related disorders, and almost all patients with psoriatic arthritis will have, or are likely to develop, psoriasis.   The administration of leflunomide will treat both disorders.

 

In the first instance proceeding, Apotex raised a number of invalidity challenges against the Patent in addition to asserting non-infringement.   However, Apotex only asked the High Court to consider:

• whether the Patent was invalid on the basis that it was not a 'manner of manufacture' within the meaning of section 18(1) of the Patents Act 1990 (Cth), because it was a method of medical treatment; and
• if the Patent was valid, whether Apotex had infringed the Patent.

 

Manner of manufacture

 

A majority of the High Court held that the invention the subject of the Patent was a manner of manufacture, upholding the view of the Full Federal Court (the majority of which had regarded this position as 'representing orthodoxy in Australian patent law').

 

In separate judgments, Chief Justice French, and Justices Crennan and Kiefel, reviewed the history and earlier judicial interpretation of the 'manner of manufacture' requirement, and held that methods of medical treatment were patentable manners of manufacture.   Chief Justice French found that, despite statements by some courts that methods of medical treatment were not patentable, the judicial authority evidenced no 'clear and consistent foundation' for their exclusion.

 

Justices Crennan and Kiefel (with whom Justice Gageler largely agreed) listed a number of reasons for their view, including, 'critically', the lack of a distinction on economic or ethical grounds between product claims and combined product/method claims (which are patentable), and method claims.

 

The majority of the Court applied the test that, in order to be a manner of manufacture, the invention not be 'essentially non-economic', and pointed to the economic interest in ensuring that individuals are fit and healthy.   It was, however, noted by the Court that methods of medical treatment that are do not constitute use of a pharmaceutical product (for example, procedures used by medical staff in physically treating patients) may still fall outside the scope of what is patentable on the basis of this test.

 

In dissent, Justice Hayne held that a method of prevention or treatment of human disease is not a manner of manufacture, on the basis it does not have its own 'economic utility'.   His Honour interpreted previous authority as requiring that, in order for a method to be patentable, the method itself must have economic utility (as distinct from the outcome of applying that method having economic utility).   This sets a higher bar than the 'essentially non-economic' test applied by the rest of the Court.   In Justice Hayne's view, the effect of using a medical treatment on an individual is personal to that individual, and can only indirectly be said to have an economic effect, by enabling that individual to make a more valuable contribution to economic activity.

 

Infringement

 

The Full Federal Court had held that Apotex had infringed the Patent under section 117 of the Patents Act, which deals with indirect infringement.   Section 117 provides that the supply of a product to a person: 

• for any use to which the supplier has reason to believe the person will put the product; or
• in accordance with any instructions for use of the product, or inducements to use the product included in advertising,

will also infringe a patent if that use of the product by the person would infringe the patent.

 

Apotex's product information document, as approved under the Therapeutic Goods Act 1989 (Cth), stated that its drug was to be used for the treatment of rheumatoid arthritis and psoriatic arthritis, and expressly stated that its use to treat 'psoriasis that is not associated with manifestations of arthritic disease' was not indicated.   Despite this, the Full Federal Court held that Apotex's supply would be infringement under section 117 because it would treat any psoriasis that the patient had, even if it was not administered for that purpose, and almost every person who has psoriatic arthritis will also have or develop psoriasis.   The Full Federal Court also found that Apotex had reason to believe that its generic leflunomide product would be used to treat psoriasis, even though this was not listed as an indication.

 

The High Court overturned this decision on infringement.   It held that the Patent would not be infringed by a person who administered Apotex's leflunomide product for the purposes of treating a condition other than psoriasis, and section 117 could not render Apotex liable for contributory infringement where there was no primary infringement.   The High Court also placed weight on the fact that Apotex's product was registered on the ARTG only for the indicated uses (namely, psoriatic and rheumatoid arthritis).  In that context, it could not be said that Apotex was either instructing or inducing people to use its product in accordance with the patented method, or that it had reason to believe that they would do so.

 

This decision is valuable because it is the first High Court decision confirming that methods of medical treatment are patentable manners of manufacture, in the face of some lingering doubts from earlier case law.  Even though the Patent was upheld, however, the two decisions of the lower courts finding infringement were overturned.  The High Court gave Sanofi-Aventis' secondary patent a narrower scope of operation, meaning that generic pharmaceutical manufacturers may be able to circumvent method patents by drafting their product information documents to specifically exclude the patented use.