BULOVA CORPORATION AND ANOTHER v. SAN MA INDUSTRIAL LTD

HCA 1831/2013
HCA 1912/2013

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NOS. 1831 & 1912 OF 2013

_____________

____________________

DECISION

____________________

1. This is an application for security for costs against the Defendant.

Background

2. The Plaintiffs’ claims in this consolidated action include a claim under s 89 of the Patents Ordinance (Cap 514) that allows any person aggrieved to bring an action to restrain threats of patent proceedings.

3. The Defendant is the proprietor of Hong Kong Short Term Patent No HK1134634 (“the Patent”).

4. The Defendant sent letters before action to at least 16 watch shops in Hong Kong threatening patent infringement proceedings in relation to “Calibrator” watches manufactured and sold by the 1^st Plaintiff.  These letters demanded the shops to cease dealing in the alleged infringing products.

5. On 27 September 2013, the Plaintiffs commenced proceedings in HCA No 1831 of 2013 against the Defendant claiming for, inter alia, an injunction to restrain the Defendant from making the threats of infringement and a declaration that the Patent is invalid.

6. On 8 October 2013, the Defendant commenced proceedings in HCA No 1912 of 2013 against the Plaintiffs for infringement of the Patent.

7. After the commencement of these proceedings, the Plaintiffs sought an undertaking from the Defendant to stop sending threatening letters.  The Defendant declined to do so and the Plaintiffs therefore applied for an interlocutory injunction to stop such threats.

8. On 18 October 2013, I granted an interlocutory injunction pending a full hearing restraining the Defendant from sending further threatening letters.  The Defendant subsequently agreed to this injunction remaining in place until trial.  On the same day, I also made an order for the consolidation of the said 2 actions with the Plaintiffs and the Defendant in HCA No 1831 of 2013 as the Plaintiffs and the Defendant respectively in the consolidated action.

9. On 28 January 2014, the Plaintiffs took out the present summons applying for security in the sum of $1,857,782 against the Defendant to cover the Plaintiffs’ costs up to the conclusion of the exchange of witness statements and expert reports.

10. On 8 April 2014, the Defendant filed a notice to discontinue all the counterclaims against the Plaintiffs in the consolidated proceedings.

11. On 16 April 2014, the Plaintiffs and the Defendant jointly signed the notice of consent for the discontinuance of all the counterclaims against the Plaintiffs in the consolidated proceedings.

12. The application for security for costs was heard by me on 14 August 2014.  In that hearing, I was told that the parties had tried to settle the dispute in these proceedings and so they asked me to withhold the handing down of the decision.  On 12 December 2014, the Plaintiffs’ solicitors wrote to the court informing me that the parties had failed to reach a settlement and applying for the delivery of the decision.  Because of this, the present decision is handed down quite some time after the hearing.

Application for security for costs

13. The Plaintiffs’ application is made under s 905 of the Companies Ordinance (Cap 622)[1] and O 23 r 1(b) of the RHC.  It is the Plaintiffs’ case that, under these provisions, a defendant to a threats action who maintains that the patent is infringed is in the position of a plaintiff and can be ordered to provide security for costs.

14. O 23 r 1(3) specifically provides that a party who is “in the position of a plaintiff” may be ordered to provide security for costs under O 23.

15. On the other hand, s 905 only provides that a plaintiff in an action, which is a limited company, may be ordered to pay security for costs.  However, in relation to security for costs application under the Companies Ordinance, Ma CJHC (as he then was) held in Brand Farra Buxbaum LLP v Samuel-Rozenbaum Diamond Ltd[2] that, in deciding whether a party is a plaintiff, the court looks to the substance and not the form.  He said[3]:

“In determining whether a party is to be regarded as a plaintiff, the court must examine the situation as a matter of substance and not form. Thus, the fact that a party is named plaintiff is not by itself determinative of this question. For instance, a counterclaiming defendant may in some circumstances be required to provide security for costs.”

16. Ma CJHC held further that, in making this determination, the court needs to determine who the true “attacker” is[4].

17. The dicta of Ma CJHC were made in the context of a security for costs application under s 357 of the old Companies Ordinance (Cap 32).  However, since the wordings of the old s 357 and the new s 905 are substantially the same, the dicta are also applicable for the security for costs applications under the new Ordinance.

18. Under both O 23 r 1(b) and the Companies Ordinance, the test as to whether security should be granted is whether there is evidence to believe that the company will be unable to pay the other side’s costs if ordered by the court to do so.  Under O 23 r 1(b), there is also an additional requirement that the party against whom security for costs is sought is a nominee.

Position of a plaintiff

19. I then turn to the merits of the application. First, I find that the Defendant is, for the purpose of the security for costs application, a true “attacker”.

20. I accept the submission of Mr Clark, counsel for the Plaintiffs, that threats action in patent cases under s 89 of the Patents Ordinance is essentially a defensive action.  It allows a “person aggrieved” by threats that have been made of patent infringement to bring an action to prevent the threats continuing and to seek damages for those that have been made.  An essential element of the cause of action is that a threat has been made.  An action cannot, therefore, be brought unless a patentee has already taken steps to enforce his patent rights by threatening proceedings.

21. In the present case, the Defendant does not seriously dispute that it had sent out all the threatening letters to the watch shops.  The Defendant is defending the threats claim on the basis that the Plaintiffs had infringed the Patent.  In substantiating such defence, the Defendant has to prove the infringement of the Patent, and in so doing, the Defendant is in the position of a plaintiff.

22. That is actually provided in s 89(2) of the Patents Ordinance, which reads as follows:

“In any such proceedings the plaintiff shall, if he proves that the threats were so made and satisfies the court that he is a person aggrieved by them, be entitled to the relief claimed unless –

(a) the defendant proves that the acts in respect of which proceedings were threatened constitute or, if done, would constitute an infringement of a patent; and

(b)  the patent alleged to be infringed is not shown by the plaintiff to be invalid in a relevant respect.”

23. It therefore follows that, if the treat has been admitted, the defendant will open the case to prove infringement[5].

24. Taking into account such specific feature of the threats proceedings, the Defendant is clearly the true “attacker” in the present case.  It sent numerous threatening letters to the watch shops selling the Plaintiffs’ watches and as a result the Plaintiffs were forced to commence the proceedings to stop the making of such threats.  In substance, the sending of the threatening letters was the first step taken by the Defendant to enforce its rights under the present dispute.  Hence, despite that the Defendant took the superficial step in discontinuing all the counterclaims against the Plaintiffs for infringement of the Patent, the Defendant is still in the position of a plaintiff for the purpose of the security for costs application.

Defendant as a nominee

25. I also find that the Defendant is a nominee under O 23 r 1(b) to which the Patent was assigned to avoid potential liability for costs.

26. The original applicant for and registrant of the Patent was one Mr Wong Chit Yin (“Mr Wong”).  After the Patent was registered, initial warning letters were sent in Mr Wong’s name in May 2013.  The Patent was then assigned to the Defendant, which is 60% owned by Mr Wong, soon after this by an assignment dated 13 June 2013 and was registered on 29 August 2013.

27. According to the evidence presented to the court, the Defendant appears to have no business other than being the holder of the Patent.

28. Based on these facts, the only logical conclusion that can be reached is that the Patent was assigned to the Defendant by Mr Wong so as to avoid personal liability for costs in any possible legal actions.  The Defendant is therefore a nominee.

Inability to pay costs

29. The fact that the Defendant has no other business other than being the holder of the Patent is not denied by Mr Wong on behalf of the Defendant who only states that the Patent is a valuable intangible asset.

30. Despite that, no evidence of the value of the Patent is given.  In opposing a security for costs application, it is the burden of the opposing party to prove the value of an intangible asset such as intellectual property[6].

31. In any event, the Plaintiffs are seeking to invalidate the Patent.  If the Plaintiffs succeed in this part of the case, the Patent will have no value.  Further, as demonstrated by the past assignment to the Defendant, the Patent can be easily assigned to another before the costs are taxed and can be enforced.  In such circumstances, the court has strong reasons to doubt the Defendant’s ability to pay costs.

32. For the above reasons, I find that the Defendant is in a “position of a plaintiff” and a nominee who will be unlikely able to pay any costs if ordered to do so.  I therefore order the Defendant to provide security for the Plaintiffs’ costs.

Quantum of the security

33. The Plaintiffs claim for security in the sum of $1,857,782 to cover their costs up to and including the exchange of witness statements and expert reports.

34. Some of the principles relevent to the amount of security can be listed out as follows[7]:

(i)     the amount of security awarded is in the discretion of the court, which will fix such sum as it thinks fit, having regard to all the circumstances of the case;

(ii)    as the case may be settled in the future, the court, in determining the amount of security for the future estimated costs, may make an arbitrary discount but there is no hard and fast rule;

(iii)    even if a skeleton bill of costs were to be provided by the applicant, the court may not condescend to a line by line evaluation of the bill but instead may adopt a “broad-brush” approach; and

(iv)    “sufficient” security or security that in all the circumstances of the case is just does not mean complete security.

35. I agree that the fees included in the Plaintiffs’ estimated Bill of Costs are excessive.

36. Firstly, the hourly rates charged by the solicitors far exceed the hourly rates usually allowed in the High Court for party and party taxation.

37. Secondly, it may or might not be necessary for all the handling solicitors to attend the hearings listed in the Bill of Costs.

38. Thirdly, it may not be necessary to engage a senior counsel at the early stage of the proceedings.

39. Fourthly, the expert fees claimed by the Plaintiffs are excessive.

40. As mentioned above, I do not propose to conduct a line by line evaluation of the individual items in the estimated Bill of Costs.  Adopting a “broad-brush” approach, I am of the view that a sum of $800,000 is a just amount in the present case.

41. I therefore make the following order:

(i)     the Defendant do give security for the Plaintiffs’ costs in this action up to the conclusion of the exchange of witness statements and expert reports in the sum of $800,000 by paying the said sum into court within 21 days;

(ii)    there be liberty to the Defendant to apply to extend the time for the payment of the security and to vary the form of the security; and

(iii)    there be liberty to the Plaintiffs to apply for further security;

(iv)    the parties do attend the listing office within 14 days to fix a date for CMC.

42. The Plaintiffs also ask for an order to the effect that, in the case of default of payment by the Defendant, the Defence be struck out and judgment in favour of the Plaintiffs be entered against the Defendant for the relief claimed in the Statement of Claim.  At this stage, I am not prepared to make such order.  If default occurs, the Plaintiffs can then make an application to the court to obtain the appropriate sanction against the Defendant.

43. I also make an order nisi that the costs of the security for costs application be to the Plaintiffs which shall be made absolute 14 days after the date of the handing down of this decision.