TWO WAY MEDIA LTD v. PCCW LTD AND OTHERS

HCIP 6/2019

[2023] HKCFI 659

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

INTELLECTUAL PROPERTY PROCEEDINGS NO. 6 OF 2019

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REASONS FOR DECISION

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1.  In the hearing on 8 December 2021, I made an order requiring the Plaintiff to provide security for costs in the sum of $5,500,000. I now give my reasons.

2.  In this action, the Plaintiff is claiming against the Defendants for infringing the Hong Kong Standard Patent No. 1156749B entitled “Multicasting method and apparatus” (“the Patent”), both as granted and as published in the request to record.  The Patent was granted on 31 July 2015 and expired on 7 May 2017.  The Plaintiff commenced the present action against the Defendants for infringing the Patent on 14 June 2018, long after the expiry of the Patent.  Accordingly, the only meaningful relief sought by the Plaintiff in this action is damages or an account of profits.

3.  The Defendants deny infringement and dispute the validity of the Patent.  In any event, the Defendants deny that the Plaintiff is entitled to damages or an account of profits by reason of s 81(1)  of the Patents Ordinance (Cap 514).  The Defendants’ case is that they were not aware, and had no reasonable grounds for supposing, that the Patent, or the application for the Patent, existed prior to the expiry date of 7 May 2017.  In fact, the relevant technologies underlying the services provided by the Defendants complained of (i.e. the Defendants’ closed, private Internet Protocol television (IPTV)  system and the Defendants’ Over-The top (OTT)  systems)  were all commenced before the grant of the Patent.

4.  After the filing of the pleadings in the main action, the parties have agreed that the issues relating to knowledge should be tried as preliminary issues (“the Preliminary Issues”).  As mentioned above, the only meaningful relief the Plaintiff is seeking in this action is the monetary relief.   If the Plaintiff fails in the trial on the Preliminary Issues, it is unlikely that the Plaintiff will proceed further with the action.  On the other hand, even if the Plaintiff succeeds in the Preliminary Issues, the Defendants will continue to defend against the action in relation to infringement and validity.

5.  There is no dispute between the parties in respect of the principles to be applied in considering an application for security for costs on the ground that the plaintiff is ordinarily resident out of the jurisdiction.

6.  The Plaintiff is a limited partnership existing under the law of the state of Colorado in the United States with its address also in Colorado. Based on the guidance of the Court of Appeal in Dracco Netherlands BV v Simba Toys Gmbh & Co KG[1], the starting point is that the Plaintiff should be required to provide security for costs as this is ordinarily just to do so.  This is particularly so given that the Plaintiff has admitted that it has no assets, apart from the Patent, in Hong Kong.  Nor does it have any commercial or industrial establishment in Hong Kong.  In so far as the Patent is concerned, the Patent has long expired and there is no evidence showing that it has any value.

GROUNDS FOR OPPOSING THE ORDER FOR SECURITY FOR COSTS

7.  In opposing the Defendants’ security for costs application (“the Application”), the Plaintiff is relying on the following grounds:

(i)  The ordering of security for costs against the Plaintiff would be inconsistent with Hong Kong’s obligations under the Agreement on Trade-Related Aspects of Intellectual Property Rights (“the TRIPS Agreement”)  to treat nationals of other World Trade Organization (“WTO”)  members no less favourably than Hong Kong’s own nationals.

(ii)  There is no difficulty to enforce in Colorado any Hong Kong judgment that orders the Plaintiff to pay the Defendants’ costs.

(iii)  The giving of security will inevitably and materially strain the Plaintiff’s resources.

(iv)  The Plaintiff has a strong case on the merits of the claim.

8.  I agree with Mr Wong, counsel for the Defendants, that none of the above contentions has any merit.

(i)  Obligations under the TRIPS Agreement

9.  The contention based on the TRIPS Agreement is misconceived.

10.  First, under O 23 r 1(1)(a), the residency of the plaintiff is only one of the gateways through which security for costs may be ordered against the plaintiff.   The court is entitled to consider other factors when exercising its discretion to grant the security or not against a foreign plaintiff, including whether the plaintiff has any assets within the jurisdiction, whether there is any arrangement for reciprocal enforcement in place, whether the plaintiff has any assets in the foreign jurisdiction, the merits of the case, whether there is a local co-plaintiff, etc.  The rationale behind the rule is that it is usually difficult and costly to enforce any judgment for costs against foreign plaintiff.  The plaintiff however can demonstrate to the court why no security should be ordered against it.  Hence, O 23 r 1(1)(a)  is not discriminatory or potentially discriminatory based on nationality as alleged.[2]

11.  In this Application, the Defendants do not seek security only on the basis that the Plaintiff is ordinarily resident out of jurisdiction.  It is only one of the grounds.  The Defendants also rely on other grounds such as: (i)  it will be difficult and expensive to enforce any costs order against the Plaintiff in the foreign jurisdiction; and (ii)  it is just to do so having regard to all the circumstances of the case.

12.  Second, even if the ordering of security against foreign plaintiffs in intellectual property cases are considered as treating them “less favourably”, which I do not accept, this is exempted from the national treatment requirement under Article 3 of the TRIPS Agreement and is accordingly expressly allowed.[3]

13.  In fact, the question of whether Article 3 of the TRIPS Agreement would exempt a foreign plaintiff from providing security for litigation costs has been considered by the Austrian court.  The Austrian court held that even if the TRIPS Agreement applies directly to Austrian law, Article 3 of the TRIPS Agreement provides for extensive exceptions to the principle of national treatment, one of which concerns the provision of security for litigation costs which is excepted under Article 2(3)  of the Paris Convention for the Protection of Industrial Property.  The court therefore held that Article 3 of the TRIPS Agreement is as a matter of principle not applicable to questions of security for litigation costs.  It also recognized that security for costs is a procedural instrument known in many TRIPS member states and serves to protect the defendant in the event it prevails.[4]

14.  Third, in so far as the Plaintiff contends that under Article 3(2)  of the TRIPS Agreement, exceptions are permitted: (i)  only where such exceptions are necessary to secure compliance with the laws and regulations which are not inconsistent with the provision of the TRIPS Agreement; and (ii)  where such practices are not applied in a manner which would constitute a disguised restriction on trade, such contention is equally misconceived for the reasons explained in §§18-21 of the 5^th affidavit of Luk Ching Ping Theresa (“Luk”).[5]

15.  The view that the ordering of security for costs does not contravene the TRIPS Agreement is further shared by the Hong Kong Intellectual Property Department.[6]

16.  It should further be noted that, over the years, the courts in Hong Kong have consistently granted security for costs against foreign plaintiffs of WTO member states who sought to enforce their intellectual property rights in Hong Kong.

17.  I also agree with Mr Wong that, in any event, the TRIPS Agreement itself does not have any legal force or effect in Hong Kong and it only applies in so far as and to the extent that it is specifically transposed and incorporated into local Hong Kong law via the enactment of local legislation. As Article 3.1 of the TRIPS Agreement has not been incorporated into local Hong Kong laws, this provision has no legal effect or applicability in Hong Kong.

(ii)    Difficulty in enforcement in Colorado

18.  The Plaintiff then contends that there will be no difficulty in enforcing any costs order against the Plaintiff in Colorado.   The Plaintiff relies on the expert opinion given in the affirmation of Mr Jonathan B Boonin, who is a qualified lawyer in the United States, in support of such allegation.

19.  In reply, the Defendants rely on the contrary expert opinion given in the affirmation of Mr Brent R Owen (“Owen”), who is also a qualified lawyer in the United States, to show the uncertainty whether the Colorado courts would recognise and enforce a costs order made by the Hong Kong court.  Owen also outlines the many expensive and time-consuming grounds which may be used by the Plaintiff to defeat or delay the recognition of a costs order made by the Hong Kong court.

20.  The authorities show that difficulties of enforcement is one of the numerous factors to be taken into account in deciding whether to order security for costs.  The fact that it may be possible to enforce the costs order, or that it may ultimately be enforced, is neither here nor there.  The pertinent question is whether there are any difficulties in the enforcement process.[7]

21.  The Hong Kong courts have accepted that whilst the United States has a common law system, there is no reciprocal enforcement of judgments between Hong Kong and the United States under the Foreign Judgments (Reciprocal Enforcement)  Ordinance (Cap 319)  and it is therefore necessary for a successful party to institute proceedings in the United States to enforce a Hong Kong judgment or order on costs.  The Hong Kong court has further held that the proposition in Nasser v United Bank of Kuwait[8], that it may be incumbent upon the defendant to show some basis for concluding that enforcement would face substantial obstacle or extra burden meriting the protection of an order for security for costs where the plaintiff resides in a common law country and there is legislation enabling reciprocal enforcement of judgment by registration, clearly has no application where there is no legislative arrangement for reciprocal enforcement of judgments between Hong Kong and the United States.  This is the case in this Application.  In such circumstances, the courts have accepted that there will “naturally be some delay and additional costs if the defendant has to enforce a judgment or order on costs against the plaintiff in the USA”.[9]

22.  I do not propose to discuss the expert opinion given in the aforesaid affirmations in great details here.  Having read these affirmations, I am satisfied that there are serious arguments available to the Plaintiff to defeat or delay the execution of a costs order made by the Hong Kong court.  The uncertainties will make it more difficult, time and costs consuming to enforce any costs order in Colorado, in particular when there is no legislative arrangement for reciprocal enforcement of judgments between the two jurisdictions.  Coupled with the fact that the Plaintiff has adduced no evidence showing that it has any assets in Colorado or indeed any other states in the United States, the Plaintiff cannot rely on such ground to oppose the Application.

(iii)   Strain on the Plaintiff’s resources

23.  The Plaintiff also contends that provision of security will inevitably and materially strain its resources.  The founder of the Plaintiff, Mr James Butterworth (“Butterworth”), alleged that the Plaintiff is also “funding” actions on the same patented invention elsewhere.  He went on to make a bare assertion that the Plaintiff has paid more than US$30 million in legal fees to date.  Yet no documentary evidence has been produced in support of such allegation.  There is also no evidence to show how much funds the Plaintiff actually has overall and therefore what percentage the present security amount constitutes in respect of its overall assets or funds.  Butterworth then said having its resources tied up as security for costs in the present action will “greatly affect” the Plaintiff’s cash flow and stifle its ability to pursue these and the other related proceedings.  Again, this is nothing but a bare assertion which is wholly unsupported by any documentary evidence.

24.  Apart from the fact that these are only bare assertions, there are other grounds to show that the Plaintiff’s contention has no merit.

25.  First, there is no evidence showing that the Plaintiff is impecunious or is otherwise unable to provide security for costs.  In fact, Butterworth’s evidence shows the contrary.  If what he told the court were true, the amount of security sought only represents a tiny fraction of the legal costs allegedly paid by the Plaintiff, and it is also the Plaintiff’s evidence that it has received “substantial” payments in the other proceedings in the United States, Canada and Germany.

26.  Second, the contention that no security for costs should be granted against the Plaintiff so as to facilitate it to have more funds to commence or continue various proceedings against other parties in other jurisdictions is totally unmeritorious.  The Defendants should not be deprived of security for costs simply because the Plaintiff chooses to sue a lot of different parties in different jurisdictions at the same time, which is in any event irrelevant to the court’s discretion when determining whether or not to grant security for costs against a plaintiff.  In fact, the fact that there are multiple proceedings taken place around the world means that the Plaintiff may be liable to substantial adverse costs orders if it loses those actions.  This makes it more important for the Defendants to have security for costs to protect their position in the present action.

27.  Third, the fact that there may not be any order for security for costs in the proceedings elsewhere is entirely irrelevant.  In any event, Butterworth has deliberately omitted to mention that in respect of some of the jurisdictions, the defendants are in fact not able to apply for security for costs as a matter of law.

28.  Hence, I reject the Plaintiff’s opposition based on such ground.

(iv)    Merits of the Plaintiff’s claim

29.  The Plaintiff further contends that it has a strong case on the merits on the Preliminary Issues.  However, I agree with Mr Wong that it is not appropriate for this court to go into the details of the merits of the case and turn the Application into a mini-trial of the Preliminary Issues.  In any event, there is simply insufficient evidence at this stage to enable this court to form a view on the strength of the parties’ respective case, let alone whether the Plaintiff has a high degree of probability of success.  Bearing in mind that the threshold is very high, the Plaintiff has plainly failed to show a high degree of probability of success on the Preliminary Issues.

30.  In the hearing itself, the Plaintiff made an application (“the Leave Application”)  for leave to adduce further evidence contained in the 2^nd affirmation of Butterworth which solely deals with the merits of the claim.  I refused the Leave Application on the following grounds:

(i)  No supporting affirmation has been filed to explain the substantial and inordinate delay in making the Leave Application.

(ii)  There is nothing to show the relevance of such new evidence in the context of an application for security for costs.

(iii)  It would be inappropriate to turn the Application into a mini-trial on the merits of the claim.

(iv)  The hearing would have to be adjourned if the court were to allow the Leave Application, resulting in prejudice to the Defendants.

31.  For the reasons given above, the Plaintiff has failed to demonstrate why this court should not order its provision for security for costs.

QUANTUM OF THE SECURITY

32.  It is trite law that the court should adopt a broad brush approach in considering the quantum of the security and should not condescend to a line by line evaluation of the skeleton bill.

33.  The Defendants request the Plaintiff to provide security in the sum of $9,283,209.97 for the costs of the present action up to and inclusive of the date of the first CMC for the determination of the Preliminary Issues.  The Defendants’ revised skeleton bill of costs (“the Bill)  has been exhibited as “LCPT-31” to Luk’s 7^th affidavit.  In the Bill, the Defendants are claiming about $1.3 million as the costs incurred by the Defendants in the mediation lasting for over 16 months.

34.  The Plaintiff contends that the Defendants are not allowed to claim the following costs as part of the security:

(i)  costs incurred in the main action in relation to the substantive issues of the Defendants’ alleged infringement of the Patent and the validity of the same, the determination of which have been stayed, such that Defendants are only allowed to claim costs incurred and to be incurred in relation to the Preliminary Issues; and

(ii)  costs incurred in relation to the mediation, which are alleged to be in the cause of the stayed proceedings.

35.  The Plaintiff also contends that the costs claimed in the Bill are highly excessive and unjustified for the following reasons:

(i)  The amounts claimed are not on a “party and party” basis.

(ii)  The Defendants’ solicitors have a large team, and rely on counsel from the United Kingdom, foreign patent attorneys and other unidentified agents and experts.

(iii)  On the question of infringement, the Defendants merely deny infringement and it is for the Plaintiff to prove them.

(iv)  On the issue of validity of the Patent, the very many prior art documents cited in the Particulars of Objections are basically the same as those cited by the defendants in the other cases.

(v)  On the Preliminary Issues, the Defendants’ solicitors claim extensive work instructing and briefing senior and junior counsel on matters relating to the whole action, rather than just the Preliminary Issues, which are largely fact based.

(vi)  The internal costs of the Defendants are not recoverable.

(vii)  The claims in the Patent are not particularly complex, and the Defendants should understand their own IPTV and OTT architectures and the associated equipment used for measuring customer access and real-time streaming.

36.  I do not propose to address each of these objections in great details here except to say the following:

(i)  O 23 r 1 of RHC and s 52A(1)  of the High Court Ordinance (Cap 4)  give the court the power to order a plaintiff to provide security to cover the costs of and incidental to the entire and whole of the proceedings and it does not carve out parts of the proceedings which have been stayed.  Security for costs may also cover costs already incurred in the suit.[10]

(ii)  When the parties were negotiating the terms of the order to be made by the court to stay the proceedings pending mediation and the determination of the Preliminary Issues, the Defendants had already filed the Application claiming security for costs incurred and anticipated to be incurred in relation to the main action.

(iii)  There is no dispute that the parties have agreed in §13.3 of the mediation agreement that all costs, fees and expenses arising from and incidental to the mediation shall be treated as costs recoverable in the cause of the proceedings in the event that mediation fails.  Further, costs of mediation that takes place after the commencement of proceedings are costs incidental to the action under s 52A(1)  of the High Court Ordinance and the court has jurisdiction to make order for payment of such costs.

(iv)  Apart from the fact that some of the costs claimed are excessive, there is nothing to suggest that the Bill was prepared on basis other than “party and party” basis.

(v)  There is nothing in the Bill to suggest that the Defendants have claimed internal costs of the Defendants as legal costs.

(vi)  Due to the complexity of the Patent and the technology involved, the Defendants’ legal team (as opposed to the Defendants themselves)  is not and cannot be expected to be familiar with the technology which is very specialized, and has to spend substantial time to understand the Patent, the technology involved, the nature of the claims, the nature of the services provided, and the existing prior arts, as well as to hold some serious discussions with the Defendants’ technical staff in order to provide proper advice to the Defendants for the purpose of defending the proceedings.  All of these had to be and were rightly done at the early stage in order for the Defendants to genuinely consider and make an informed decision as to whether and how to defend the action, or whether to settle the claims.

37.  Nevertheless, the amount of security claimed by the Defendants is excessive.  Further, it is not the practice of the court to order security on a full indemnity basis.[11] Taking into account all the circumstances of the case, I am of the view that the appropriate amount for the security is $5,500,000.  I therefore so ordered.

38.  I also summarily assessed the costs of the Application and the Leave Application in the respective sums of $850,000 and $100,000.