Tuesday, 4 January 2011

Patents, Penalties, Prejudice and Poker: it's litigation costs again

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Intellectual property solicitor and litigation expert Chris Ryan is also something of an academic, which explains both the content of the following note and its timing.  PatLit is grateful to Chris for sharing his experience and his perspectives with us on a subject that is never far from any patent litigant's thoughts: costs. Writes Chris:
"The English law approach to litigation costs is capable of generating something akin to a game of poker. It culminates in the moment when, at the end of trial, the loser produces the “without prejudice save as to costs” offer it made previously and invites the court to penalise the winner for having fought on in the face of an offer that it ought to have accepted. One of the rules of the poker game seems to have changed as the result of a non-IP case decided last November. It is a case which, embarrassingly, I missed when running a session on the topic during the last weekend of teaching on the Nottingham Trent University LLM in IP Litigation in December. This note is based on the correction I sent out to the attendees shortly before Christmas.

But first, for those from non-poker playing jurisdictions, the relevant English Court rules are these:
• The loser will normally be ordered to pay most of the winner’s legal costs, unless the party emerging as overall winner lost on more issues than it won or has behaved badly in some respect.
• But if the loser previously made an offer to settle on terms that the winner has not beaten at trial the costs burden may be substantially reversed, with the loser being awarded the costs from the date when the winner should have accepted the offer.
• Offers like these (which are not disclosed to the trial judge until after a decision has been reached) can have particular power when made by a claimant because the defendant who fails to better the offer at trial may then be ordered to pay the claimant’s costs assessed on a more generous basis plus interest on both damages and costs, at a penal rate.
• Defendant offers do not play a large part in IP litigation but the process is capable of providing a claimant with a potent weapon if it makes an offer at the outset to accept, for example, an injunction plus £1 in damages.
• Such offers sometimes (but not always) follow the formal requirements imposed by Part 36 of the Civil Procedure Rules (Offers to Settle, here). They may be taken into account, under the Court’s discretion, even if the formalities have not been followed, but certainly the full advantages of a claimant’s offer are much less likely to be achieved if the offer did not comply with the Part 36 requirements.

One of the issues I covered in teaching was the rule (CPR 36.9(2)) that permits a Part 36 offer to be accepted at any time, unless it has been withdrawn. I drew attention to CPR 36.10(4)(b), which provides that where an offer is accepted outside the deadline for acceptance imposed by the offeror (normally 21 days) then “if the parties do not agree the liability for costs, the court will make an order for costs”.

I made the point that if an offer stated that it would be deemed to be withdrawn if not accepted within the deadline, the offeror would maintain a strong position. If the other side subsequently decided that it did, after all, want to accept the offer it would have to persuade the offeror, in effect, to renew it. And the offeror would then be able make the renewal conditional on the other side agreeing to pay all costs up to the date of the renewed offer, possibly at a fixed figure. But if the offer had remained open for acceptance the offeror would probably find itself facing a further court application and arguments that the normal costs rule should not be imposed because, for example, the offeror’s conduct had been part of the reason for late acceptance, or that the costs claimed were excessive.

Subsequently the extremely well-informed David Musker drew my attention to the case of C v D & D2 [2010] EWHC 2940 (Ch), decided by Warren J on 16 November 2010, which undermines the recommended strategy. The Judge decided that an offer that automatically comes to an end according to its own terms is not capable of constituting a Part 36 Offer. No doubt it might still be taken into account, as a without prejudice save as to costs offer, when the court comes to exercise its discretion as to the appropriate costs order to impose at trial. But, as a matter of policy, the particular sanctions that are imposed by Part 36, particularly on a defendant, for not accepting an offer that is then beaten at trial should only be available to an offeror who has left his offer open for acceptance. The Judge first summarised the main argument put to him in favour of this approach, as follows:

“The policy of Part 36 can thus be identified, under this argument, as being to encourage a defendant to accept a reasonable Part 36 offer from the claimant but so that, if the offer is not kept open, by being withdrawn or changed detrimentally, the sanction ceases to apply. The successful offeror can take the benefit of the provisions only, as the quid pro quo, if he has left it open to the offeree to accept the offer…

“It would not be consistent with that policy for there to be a time-limited offer making the defendant subject to the risk of the rule 39.14(3) sanction [defendant to pay indemnity costs plus enhanced rate interest] whilst not obliging the claimant to leave his offer open”

Then, later, he approved that line of argument in the following terms:

“In my judgment, a time-limited offer, as I have described it, is not capable of being a Part 36 offer. I consider that the structure of Part 36 in general and the provisions of rule 36.2(2) and rule 36.14(6) in particular, establish that an offer must be capable of acceptance unless and until withdrawn by service of a notice within rule 36.9(2), although an offer may also be changed; but if its terms are less advantageous, the costs sanction under the rule 36.14(6) do not apply.”

Perhaps it was never appropriate for the poker player to say, in effect, that he would withdraw his chips from the table if his opponent did not fold immediately. Now Warren J has confirmed that it is definitely against the rules of the house".

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