Earlier this year Jagot J of the Federal Court of Australia ordered Generic Health to pay Bayer $25,437,966 in damages plus interest to compensate for lost revenue caused by generic product sales infringing its patent covering the oral contraceptive Yasmin. This damages award exceeded the amount of $19,891,858 which Bayer offered to accept in settlement of the proceedings, in an offer to compromise served under rule 25.14(3) of the Federal Court Rules 2011 (Cth) on 6 May 2015.
In a decision published last week (Bayer Pharma Aktiengesellschaft v Generic Health Pty Ltd  FCA 428 (4 May 2017)), Jagot J ordered that Bayer is entitled to recover its costs of the damages aspect of the proceedings on the higher “indemnity” scale (rather than the usual “party-party” scale). This indemnity costs order was made because of Generic Health’s failure to accept Bayer’s offer to compromise, which represented more favourable terms (ie, less money) than the judgment Bayer ultimately obtained. This means that it will be entitled to recover all actual costs reasonably incurred after the expiry of its offer to compromise. The party-party scale usually results in a costs award of around 50-75% of actual costs. The indemnity costs order covers a 19-month period involving intensive work on its substantial evidence and submissions and the trial hearing regarding the quantification of its damages claim. The costs can therefore be expected to be substantial.
The Federal Court Rules 2011 (Cth) provide a process under which a party to a proceeding can make a “without prejudice” offer to settle the proceeding. A party who does not accept such an “offer to compromise” and obtains a judgment on less favourable terms must pay the other party’s costs on an indemnity basis, and is not entitled to its own costs, from the time after the offer to compromise expires. The offer to compromise is served on the other party to the proceeding but is not filed with the Court and cannot be mentioned in any court documents, unless and until a party asks the Court (after determination of the claims and cross-claims) to make costs orders in light of the other party’s failure to accept the offer. An offer of compromise is therefore similar to a Calderbank offer, although much briefer.
Bayer’s offer of compromise was served 2 months before its first affidavit was filed in the damages enquiry phase of the proceeding and almost 19 months before the conclusion of the damages hearing on 20 December 2016. Jagot J identified a series of circumstances – such as Generic Health’s sophistication and resources as a generic pharmaceutical company and consequent knowledge of pricing and other implications of its generic launch – that supported her conclusion that the offer was reasonable and failure to accept it should lead to an indemnity costs award:
“The objective circumstances indicate that Generic Health, if it had wished to do so, could have sufficiently informed itself about its overall exposure to liability for infringement of Bayer’s patent when the offer was made for the purpose of deciding whether or not the offer represented a genuine compromise (which it did). This is so despite the fact that, when the offer was made, Bayer had not quantified its claim for damages or filed its evidence in support.
…[H]ad it wished to do so, Generic Health would have had no real difficulty in assessing its maximum total liability for the infringement and had no reason to suppose that Bayer, if forced to litigate, would claim anything materially less than that maximum amount. The fact that Generic Health sought no explanation from Bayer as to how it had calculated the amount of the offer, when the precision of the amount indicates that it resulted from a calculation, supports my conclusion that Generic Health was not interested in whether the offer represented a genuine compromise.
…Generic Health [which subsequently made a lower settlement offer, after seeing Bayer’s evidence] was prepared to chance its hand to save itself some $6 million by seeing if Bayer could discharge the onus of proof on it under s 115 [of the Patents Act 1990 (Cth)] to establish that the patent specification in its unamended form had been framed in good faith and with reasonable skill and knowledge.
This decision is salient reminder of the potential significance of offers of compromise (and similar Calderbank letters) in Australian intellectual property litigation. In particular, careful consideration needs to be given to the time at which such offers are made and received, and the extent to which they might need to analysed by the receiving party to properly assess their reasonableness.