Surgibit IP Holdings Pty Limited v Ellis (No 2)

Surgibit IP Holdings Pty Ltd and Orthopedic Innovation Pty Ltd (the plaintiffs) seek an order pursuant to s 6(1) of the Foreign Judgments Act 1991 (Cth) that part of the judgment obtained by the plaintiffs against Liam Ellis and Cingular Pty Ltd (the defendants) in the United States District Court for the Northern District of Illinois, Eastern Division (the US court) (the US Judgment) be registered as a judgment of this Court.

The uncontroversial part of the US Judgment was entered by Button J in 2016 and included the base amount of damages (before it was trebled) and an amount of US$3,610 for costs (not including attorney fees): Surgibit IP Holdings Pty Limited v Ellis [2016] NSWSC 359.

The further part of the judgment sought to be registered relates to two components of the award of damages pertaining to triple damages and attorney fees. The order is sought only against Mr Ellis (the defendant) as proceedings have been resolved against Cingular Pty Ltd. The only issue between the parties is whether those parts of the US Judgment are penal in nature such that they ought not be registered as a judgment of this Court. The defendant bears the onus of proving this matter.

Having regard to the agreement between the parties, except as to the single issue identified above, the facts can be summarised relatively briefly. It appears that there is a convention in the US court that documents which are filed and judgments are numbered sequentially. Thus, an initiating process is Document 1 and is referred to as “Dkt 1”. I will adopt the convention in these reasons.

The plaintiffs filed a Complaint for Patent Infringement on 11 December 2013 (the Complaint), Dkt 1. In Count IV, at [31]-[34] of the Complaint, the plaintiffs alleged that the defendants, knowing of the plaintiffs’ patents-in-suit have deliberately made and sold “Cinglebit” surgical drill bits and have infringed and induced others to infringe the patents-in-suit. The plaintiffs alleged that the defendants’ infringement was “wilful, deliberate, and in conscious disregard for and wilfully blind” to the plaintiffs’ rights under the patents-in-suit. They claimed reasonable attorneys’ fees under 35 U.S.C. §285 and treble damages under 35 U.S.C. §284.

35 U.S.C. §285 provides:

35 U.S.C. §284 provides:

There was correspondence in February, March and April 2014 between the plaintiffs’ US attorneys and US attorneys who appeared to be instructed on behalf of the defendants. At various times the defendants’ attorneys sought extensions of time from the plaintiffs to file a response (defence) to the Complaint.

On 10 March 2014 the defendants filed a document with the court themselves (not through their attorneys) which was not in accordance with the rules and was not served on the plaintiffs (Dkt 18). As the defendants did not have a lawyer on the record, Dkt 18 was referred to as a “pro se filing”. In this document the defendants objected to the jurisdiction of the US court on the basis that: “The defendants named do not conduct commercial activities in the United States”. They also alleged that there were proceedings on foot in Australia concerning ownership of the intellectual property. It appears that this latter allegation was put forward as a discretionary reason why the US court ought not exercise jurisdiction over the plaintiffs’ claim.

Notwithstanding the requests for extension that had been made on their behalf the defendants did not file a response to the Complaint or otherwise appear. On 22 April 2014 the plaintiffs filed a motion to hold the defendant in default (for failing to appear and failing to file a response) and to strike or summarily deny the defendant’s pro se filing as based on “knowing falsehoods” (Dkt 28).

The plaintiffs’ arguments in support of Dkt 28, which are set out in the document itself, included the following:

The defendants were apparently held in default in this action by reasons delivered by the Court (Dkt 40). Although Dkt 40 is not in evidence it is referred to in the reasons for Default Judgment against the defendants (Dkt 44) as follows:

The US court entered default judgment against the defendants on 20 June 2014 (Dkt 44). The court said, of present relevance:

On 30 July 2014 the plaintiffs filed a motion for an order to show cause why the defendants should not be held in contempt of court (Dkt 49). On 1 August 2014 the US court by Order to Show Cause (Dkt 52) ordered the defendants to show cause by 5 September 2014 why they should not be held in contempt for “violating” the orders made in Dkts 44 and 48 and why they should not be ordered to pay a civil fine of $250 per day for noncompliance with the court’s orders and why they should not be ordered to pay the plaintiffs’ attorney fees and costs in connection with the motion to show cause.

On 5 September 2014 the US court made an order adjudicating the defendants to be in civil contempt (Dkt 54). The US court ordered that the plaintiffs were entitled to damages in the form of attorney fees for seeking the contempt order; a fine of $250 per day and that the defendant be arrested and kept in custody for a period of 6 months until the contempt was purged.

The plaintiffs filed a motion for a liquidated default judgment against the defendants (Dkts 64 and 66). By judgment dated 5 February 2015 (Dkt 74), the US court found as follows.

The US court related the further history of the matter in the following terms:

Accordingly, the Court made orders which included the following:

To work out whether whole or part of a foreign judgment is relevantly penal, it is helpful to identify the policy behind the rule of private international law which is presently relevant. In Attorney-General (United Kingdom) v Heinemann Publications Australia Pty Ltd (1988) 165 CLR 30; [1988] HCA 25, the High Court (Mason CJ, Wilson, Deane, Dawson, Toohey and Gaudron JJ) accepted, at 43-47, that the principle behind the unenforceability of foreign penal and revenue laws was that they are manifestations of a foreign sovereign’s power and that the effect of the rule was to prevent the enforcement outside the territory of the foreign sovereign of claims based on or related to the exercise of foreign sovereign power: see also Huntington v Attrill [1893] AC 150 at 156-158.

In the present case, this principle operates to require an analysis of whether the treble damages and attorney fees ordered by the US court were penal in the sense that they were ordered to punish or otherwise sanction the defendants for their conduct towards the US court as distinct from their conduct towards the plaintiffs either in the US court or generally in the market place. It was common ground that the defendant bore the onus of proving that the treble damages and attorney fees were penal such that this Court ought not register a judgment that comprised or included them.

Mr Cutler, who appeared on behalf of the defendant, accepted that neither triple damages nor attorney fees were necessarily penal. He instanced a situation where damages were increased because of commercial misconduct, rather than litigation conduct and accepted that such damages would not fall within the penal exception to the enforcement of foreign judgments.

However, Mr Cutler submitted that the reasons of the US court in the present case indicated that both the awards of attorney fees and triple damages had a penal element. The defendant relied heavily on the wording of [13] of Dkt 44 in support of his submission that “lack of respect for the judicial process” was at least part of the reasoning for ordering the defendants to pay both triple damages and attorney fees. The defendant submitted that where a judgment is ordered for that reason it is relevantly penal and ought not be registered by this Court because enforcement by this Court would involve this court in punishing the defendant for its conduct towards the US court. Mr Cutler accepted that the orders appeared also to be based on the merits but contended that it was not possible to perform any apportionment or sever the damages so as to distinguish the part that was penal from the part that was not.

Mr Cutler relied on the following passage from Bergin J’s judgment in Schnabel v Lui [2002] NSWSC 15:

Mr Hogan-Doran, who appeared for the plaintiffs, contended that the principle articulated in Schnabel v Lui was limited to situations where the foreign court had made orders which had not been complied with and damages were awarded or awarded on a higher basis as a consequence. He argued that it was only in these circumstances that the policy behind non-enforcement of foreign judgments on the grounds that they were penal had any relevance. He drew a distinction between court rules, such as a rule which requires a response to a pleading to be filed within a particular time, and court orders where a court makes an order in the particular case which requires a party to do or refrain from doing a particular thing, such as an order for discovery. He submitted that there were relevantly no court orders that were breached by the defendant and, accordingly, the reference to “lack of respect for the judicial process” was a reference to something other than breach of court orders. He submitted that the principle in Schnabel v Lui was not attracted and the case ought be distinguished.

In order to deal with the defendant’s argument it is necessary to identify what the US court decided and the basis on which it did so. It is evident from the narrative set out above that there were contempt proceedings brought against the defendants following their failure to show cause. None of the costs consequences of that aspect of the proceedings were included in the judgments in Dkts 44, 48 and 74 which are sought to be enforced.

As was made clear by the US Court in Dkt 74, the judgments in Dkts 44 and 48 remained in full force, as supplemented by Dkt 74.

In Dkt 44 the US court made findings of wilful infringement which caused and continues to cause the plaintiffs “irreparable harm” ([12]). It also found that the case was exceptional for the purposes of 35 U.S. §285 (which relates solely to attorney fees) on the basis of the defendants’ “lack of respect for the judicial process and this court” and because of the merits of the plaintiffs’ claim ([13]). The US court said further (as extracted in full above):

The word “accordingly” in this context is ambiguous. The preceding sentence deals solely with attorney fees under 35 U.S.C. §285. Thus, I am not satisfied that “accordingly” is intended to be read as linking triple damages to the lack of respect for the court. Indeed, in Dkt 74, the US court said (in the passage extracted and emphasised above) that the treble damages were ordered because, inter alia, the defendants’ infringement was wilful. Rather, I consider that the word “accordingly” is a reference to what was said in [12] about the irreparable harm caused to the plaintiffs by the defendants’ infringements. The citation of Octane Fitness, LLC v. ICON Health & Fitness, Inc., U.S. 134 S.Ct.1749 (2014) (Octane Fitness) appears to be referable solely to the question of costs (attorney fees) rather than triple damages since that case concerned the question whether it was necessary to prove independently sanctionable misconduct in litigation before attorney fees pursuant to 35 U.S. §285 could be ordered. The Court in Octane Fitness opined, at 9:

For these reasons I am not satisfied that the award of treble damages was made on the basis of lack of respect for the court, much less failure to comply with the US court’s orders. Rather, it appears from the reasons that the damages were trebled because of the defendants’ wilful breach of the patents-in-suit. This does not contain the necessary penal element to prevent its enforcement in this jurisdiction: see also Old North State Brewing Co. v Newlands Services Inc. (British Columbia Court of Appeal) (1998) 113 B.C.A.C. 186 at [16], [49]-[52]; and SA Consortium General Textiles v Sun & Sand Agencies [1978] QB 279 (CA). Nor was such an award contrary to public policy in Australia: Benefit Strategies Group Inc v Prider (2005) 91 SASR 544 at [73] (Bleby J, Vanstone and Anderson JJ agreeing).

Even if I am wrong in my interpretation of the basis on which the US court awarded treble damages, I am not satisfied that this element of the US Judgment contains the necessary penal element. As my reasons on this point are the same as for my conclusion with respect to attorney fees, they are set out below.

Turning to the award of attorney fees, it appears that there were two aspects to the present case which led the US court to consider that it was “exceptional” within the meaning of 35 U.S. §285: first, the defendants’ wilful infringement of the patents-in-suit; and, secondly, the defendants’ misconduct in the litigation, which was separate from the contempt proceedings.

I accept and take into account the unchallenged evidence of James R. Higgins, Jr, the plaintiffs’ US attorney, whose opinion is relevant because regard should be had in determining whether the US Judgment contains a penal element to how the matter is regarded under US law. Mr Higgins said, of present relevance:

In the present case the defendants’ litigation misconduct did not include breach of any court order such as would bring it within the category considered by Bergin J in Schnabel v Lui. Relevantly, it amounted to no more than a refusal to respond to the filed complaint in a way which complied with the rules of court. This distinction is consistent with Schnabel v Lui and supported by Hung Fung Enterprises Holdings Ltd v The Agricultural Bank of China [2012] HKCA 251, which cited Schnabel v Lui with approval. In that case the Hong Kong Court of Appeal declined to enforce the double interest component of a judgment from the People’s Republic of China (PRC) which had been awarded to penalise the plaintiffs for not complying with the orders of the PRC Courts to pay the judgment sums within ten days of the judgment sums coming into effect.

The distinction between court rules and court orders is relevant in the present case. Court rules, of themselves may be regarded as the rules by which parties to civil litigation are to conduct themselves towards each other in the absence of court orders. Where these rules are not complied with by one party, it is the other party which suffers, usually by having to bear a costs burden in drawing the non-compliance to the court’s attention in order to obtain an order to carry the matter forward. While the court is involved, it is only involved tangentially, since it has not made an order which was breached. Rather, its procedures have not been complied with.

The distinction is significant. Where higher damages or attorney fees are awarded because of non-compliance with court rules there is no relevant penal aspect for the purposes of the private international rules relating to the recognition of foreign judgments. However, where, as in Schnabel v Lui or Hung Fung Enterprises Holdings Ltd v The Agricultural Bank of China, the higher award or costs order is, in effect, a punishment imposed on a litigant for failure to comply with a court order, that higher award or costs order cannot form part of the amount of the judgment that is registered outside the foreign forum since it is no part of a foreign court’s function to enforce the governmental interests of a foreign state by enforcing a sanction imposed by one of its courts. This is not to say that all consequences of breach of court orders will be penal. The basis for orders made consequent on breach must be analysed in each case before this determination can be made.

All that has occurred in the present case is that the defendants’ conduct in the market place with respect to infringement has attracted an award of treble damages and their conduct both in the market place and in the litigation has warranted the ordering of attorney fees. The defendants, by seeking extensions of time for filing a response and not filing one, by taking unmeritorious points about service and by filing documents which did not comply with the court rules, have caused the plaintiffs to expend additional money in attorney fees. As referred to above, the pro se document ought not have been filed because Cingular Pty Ltd was a company and could only appear by a lawyer. The plaintiffs had to bring a motion to set it aside as a preliminary step to the obtaining of default judgment against the defendants. Their filing of the pro se document was not independently sanctionable and did not amount to a breach of any court order; it merely failed to comply with the rules. In that sense, it showed a “lack of respect for the court”.

The defendants’ conduct in the US court in the present case is to be distinguished from the situation in Schnabel v Lui which concerned breach of court orders relating to discovery where one party refused to discover the documents which would have enabled the other party to establish its loss. In ordering treble damages, the foreign court in Schnabel v Lui was punishing the defendant for breaching the court order for discovery. Because it is not for this Court to punish a party on behalf of a foreign court, that element of the damages in Schnabel v Lui was not enforceable in this jurisdiction.

For the reasons given above, the award of attorney fees in the present case was not relevantly penal since the award was not made as a sanction for any breach by the defendants of court orders, as distinct from their non-compliance with court procedure, which caused the plaintiffs to expend funds on their attorneys. This is sufficient to determine the question. However, it is also relevant that because the attorney fees were no more than was required to reimburse the plaintiffs in full for their expenditure on lawyers, they contained no element of penalty per se (being an amount over and above the actual monies spent on lawyers). In these circumstances the defendant has not established that the award of attorney fees was relevantly penal such as would prevent this Court from registering the judgment for that amount.

As calculations are required to convert the judgment sum into $A, the parties asked me to publish my reasons and invite the parties to agree on the calculation of the relevant judgment sum in order that judgment can be entered in the correct amount. The plaintiffs are entitled to recognition and enforcement of the balance of the US Judgment, being the $A equivalent of the following:

In these circumstances, I make the following direction.