Sovereign Hydroseal Pty Ltd v Steynberg [2020] FCA 1084

An application for preliminary discovery of documents relating to the constituents of a ‘sealing composition’ and methods of using it to seal passages was granted in circumstances where an exclusive licensee of the asserted patent suspected infringement by a third party based on past employment, access to confidential information, information from a private investigator, and the similarities of the processes being carried out by both parties. The scope of the discovery order was limited due to the financial circumstances of the respondent.

Background

Sovereign Hydroseal Pty Ltd (Sovereign) is the exclusive licensee of Australian Patent No. 2012216392 (392 Patent) which relates to a method and composition for sealing passages such as cracks, joints and voids in concrete structures and geological formations using a sealing composition. The sealing composition, which includes a mix of latex and additional components, is delivered into a passage under pressure in order to seal the structure from water ingress.

Together with the joint patentees, Relborgn Pty Ltd and Triomviri Pty Ltd, Sovereign sought an order for preliminary discovery of documents to be produced by Mr Johannes Steynberg (Steynberg), a former employee of Sovereign operating a business called ‘H2O Seal’, pursuant to which a process was being used for sealing cracks and joints involving a ‘liquid rubbery substance’ injected by pumps. Sovereign contended that it required production of these documents on the basis that it did not have sufficient information to decide whether to start a proceeding against Steynberg in respect of causes of action for patent infringement, breach of confidence, breach of contract, and contempt.

During the period July 2008 to June 2009, when Steynberg was employed by Sovereign, he had received training on how to seal a passage in a body such as a geological formation with a seal composition, including insight into types of equipment as well as details of the materials and compositions used. For the purposes of his work, Steynberg had access to Sovereign’s confidential information including details of product specifications and formulations, processes involving those products, customer records and customer information.

Since cessation of his employment by Sovereign in 2009, Steynberg had held multiple business interests in Queensland in relation to waterproofing and water sealing. On two separate occasions in 2009 and 2011, Steynberg established businesses which were subsequently deregistered after settlements with Sovereign. On both occasions, Steynberg was alleged to have infringed on the intellectual property of Sovereign, which he denied. Justice McKerracher declined to take into account material from these previous disputes, other than in a general sense by way of common background. However, his Honour noted that it was relevant to showing that Steynberg had some opportunity to acquire relevant information.

In September 2019, Sovereign became aware of Steynberg’s involvement in H2O Seal by way of a ‘flyer’ on the H2O Seal business, internet-based searches, and enquiries made by a private investigator. The investigator obtained information that indicated Steynberg was using a product called ‘N-LICS’, and that H2O Seal used ‘a natural nano-technology rubber grout injected under pressure into the voids sealing cracks and joints’. Concerned that Steynberg was using at least one method of sealing cracks and joints that infringes the method claimed in the 392 Patent, Sovereign applied for preliminary discovery under Rule 7.23 of the Federal Court Rules 2011 (Cth). Other related issues included Steynberg’s alleged contraventions of contractual obligations and injunctive orders entered, as part of earlier proceedings in 2011.

Arguments

Steynberg did not contest that Sovereign subjectively believed that it may have a right to obtain relief, but argued that the belief was not reasonably held. Steynberg argued against Sovereign’s allegations as follows.

  1. The photos on the flyer did not ‘reveal any confidential information of Sovereign’ and ‘it would be difficult to conclude that [Sovereign] has a reasonable belief’ based on them.
  2. The material filed by Sovereign included evidence of Steynberg employing a blend of rubber emulsions injected under pressure into a passage, which convert from liquid to solid via coagulation, but did not reveal whether Steynberg was using the same formula as Sovereign. Accordingly, Steynberg argued, the evidence and Sovereign’s contentions were insufficient to ground a reasonable belief as defined in subrules 7.23(1)(c) that he may be using the same method, process or composition as Sovereign such that a potential patent infringement claim may arise.
  3. Steynberg further alleged that Sovereign had engaged in misleading or deceptive conduct by accusing him of using ‘very similar chemicals and methods’ previously used in his H2O Control Systems business, but that the present proceedings had not revealed he had been doing so.
  4. Finally, Steynberg pressed the point that Sovereign’s right to discovery under Rule 7.23 needs to be weighed against Steynberg’s interest in protecting his own intellectual property rights with respect to the methods he had developed and was using from disclosure to Sovereign (his competitor).

Decision

In considering subrule 7.23(1)(a) and (c), the Court found that the evidence established the following.

  1. Even though none of the information provided by Sovereign proved that Steynberg was employing the same method or chemical compositions, the processes being carried out by both parties appeared on their face to be very similar.
  2. It was not clear how more detailed information regarding the precise constituent element of Steynberg’s sealing composition could be obtained outside of the preliminary discovery orders sought, and therefore Sovereign was entitled to test that composition.
  3. Neither a lack of awareness of the 392 Patent, nor the fact that others were apparently using the same process in the market, provided an adequate response to Sovereign’s patent infringement allegation or an answer to Sovereign’s discovery orders.
  4. Steynberg held documents regarding the methods and chemical compositions he used to seal passages which were directly relevant and could help Sovereign in deciding whether to seek relief.

Justice McKerracher concluded that Sovereign had established an adequate foundation for a ‘reasonable belief’ that it may have had the right to obtain relief from Steynberg, and that Steynberg may have had documents directly relevant to that question. In relation to subrule 7.23(b), the Court ruled that in combination with prior enquiries including web-based searches and an investigation, the contested discovery notice served by Sovereign to Steynberg constituted a sufficiently reasonable enquiry.

Considering the requirements for an order to be fulfilled, McKerracher J allowed Sovereign’s application for preliminary discovery subject to the provision of security for the costs of compliance. The order to provide security for costs was made in response to the expansive terms of discovery sought by Sovereign, taking into account concerns regarding Steynberg’s financial capacity to comply.

Significance

This case highlights how preliminary discovery applications can be used by a patentee or exclusive licensee to inform its decision-making in relation to whether to commence a proceeding in respect of potential patent infringement.

The case also confirms the observations made by the Full Court in Pfizer Ireland Pharmaceuticals v Samsung Bioepis Au Pty Ltd (2017) 257 FCR 62 (which we previously analysed here). In terms of subrule 7.23(1)(a), the main point of consideration when granting preliminary discovery orders is not whether the belief in the applicant’s rights to relief is based on speculation, but rather whether the belief resulting from that speculation is a reasonable one. Potential applicants should bear in mind, however, that the scope of discovery sought can be restricted as a result of factors such as the financial capacity of the third party to comply with the order.

This decision is another illustration of the relatively low thresholds for obtaining preliminary discovery in connection with suspected infringement of an Australian patent, particularly for patents that claims compositions or manufacturing processes that cannot otherwise be readily discerned from public information or inspection of product samples (even if such samples can be obtained).

Authored by Chris Byrnes and Duncan Longstaff

New Zealand patent practice has long operated on a “drop-dead” deadline for the filing of a divisional application – once the would-be “parent” case is accepted, the facility to file a divisional application expires, irrespective of the circumstances.  Many have sought an extension/correction on some entirely reasonable grounds – clerical errors, communication problems, time-zone issues, computer failures, you-name-it (all reasons that tend to be looked upon favourably when it comes to Australian practice) – and all have failed.  Along with death and taxes, IPONZ’ drop-dead divisional deadline was one of life’s absolute certainties.

Fast forward to 2019 – and two decisions issued in quick succession from IPONZ that provide some hope for attorneys and applicants alike.  Given the frequency with which NZ’s divisional filing deadline seems to cause issues, readers should expect these two cases to be cited somewhat frequently in future restorative actions.

What’s in a name?

It seems strangely appropriate that a decision entitled “Magic Leap” (Magic Leap, Inc. [2019] NZIPOPAT 8 (30 April 2019)) is one of two discussed in this article.  The other is Primapak LLC [2019] NZIPOPAT 1 (7 January 2019).  The fact situations in Primapak and Magic Leap are fairly similar – with the claims in condition for allowance, an administrative staff member withdrew the postponement of acceptance, thereby allowing both cases to proceed to acceptance.  In both instances, no divisional was filed beforehand.  In both cases, the attorney had received instructions to file a divisional.  This reads squarely on an “error or omission” of the type generally correctable in Australia, but not so in New Zealand.

New Zealand’s “drop-dead” divisional deadline

IPONZ has been historically brutal when it comes to assessing late-filed divisionals.  We’re not talking “the dog ate my homework” here – we’re talking genuine and verifiable fact situations that perhaps ought to evoke some flexibility.  However, conscious of NZ’s status as a net importer of IP, the decision always fell in favour of third-party certainty: the applicant had its chance and failed to take it – and third parties were therefore entitled to act upon it.

For this reason, attorneys practising in New Zealand have been quite legitimately “spooked” by IPONZ’ divisional filing deadline.  Few things invite a sleepless night like timely instructions unable to be acted upon due to an error at the attorney’s end (genuine or otherwise).

But wait – there’s more.  The drop-dead divisional deadline was squarely in the Government’s consciousness during the recent transition from the Patents Act 1953 to the Patents Act 2013.  Significantly, the relevant provision did not change – NZ divisional practice was the way it was because that’s precisely how the Government wanted it.  Or so it seemed…

In both Primapak and Magic Leap, the respective applicants sought leave under subsection 202(1) of the 2013 Act to correct clerical errors, allowing the sought divisional applications to be filed validly.

The decisions are more interesting than the facts

These are very much cases where the findings and their implications are far more interesting than the decisions themselves.  Subsection 202(1) of the Patents Act 2013 provides that the Commissioner may correct an error.  There was no precedent case law on ss.202(1) and as such, ss.88(3) of the Patents Act 1953 was relied upon in the applicants’ submissions; this affords the Commissioner a broad discretion.

Subsection 88(3), however, seemed as problematic as it did helpful to the applicants’ position.  A notice of acceptance did not fall within the specified categories of correctable documents, which of course juxtaposes nicely with the broad discretion afforded to the Commissioner.  Indeed, high-profile failures in Fisher & Paykel Limited [1995] NZIPOPAT 6, Baxter Healthcare SA [2011] NZIPOPAT 2 and American Aerogel Corporation [2011] NZIPOPAT 3 had effectively rendered ss.88(3) somewhat toothless for the purposes of correcting genuine administrative errors.

What was needed, therefore, was a softening of the hard-line stance previously adopted by IPONZ.  Perhaps unexpectedly, IPONZ came to the party.

An action that was taken… is untaken

The Assistant Commissioner found in Primapak—and it was followed by the Delegate in Magic Leap—that despite withdrawal of the postponement of acceptance being a deliberate action taken on behalf of the responsible attorneys, it nonetheless amounted to the required “error” insofar as the client’s express instructions to file a divisional application were not able to be carried out.  Presumably this reasoning could be applied to a broader category of “errors” beyond merely withdrawing the postponement of acceptance via the IPONZ website. Regulation 52(2) of the Patents Regulations 2014, which requires that a request for antedating a divisional be filed at the same time as the divisional itself, was waived in both instances under Reg.149; the IPONZ website physically prohibited this regulation being complied with at the time the respective divisionals were filed.  This seems entirely reasonable under the circumstances and represents a further softening of IPONZ’ stance in relation to the correction of errors.

Finally, the net effect of both decisions was that the act of erroneously withdrawing the postponement of acceptance was taken never to have been performed.  As such, both “parent” cases were not formally accepted until the postponement expired 12 months after issuance of the first examination report.  By corollary, both divisionals were taken to have been filed during the pendency of their respective parent and were therefore now taken to have been filed validly.

What it all means

In combination, Primapak and Magic Leap provide a safety net that had previously been missing from NZ patent practice.  The divisional deadline isn’t the wholly inflexible invitation to mess up that it may have appeared previously – rather, depending upon the fact situation, and provided that such circumstances are verifiable seemingly to the nth-degree, it may (emphasis on “may”) be possible to late-file a divisional application.

Old Act, new Act and ongoing law reform

The drop-dead divisional filing deadline applies to both 1953 and 2013 Act cases alike.  However, as readers will know, the 2013 Act imposes an additional landmine by way of the 5-year absolute bar on requesting examination.  In combination, these two factors make NZ divisional practice something of a dark art.

New Zealand divisional practice is currently under Government review and, along with many other features of NZ IP law, may rear its head later this year in the long-awaited IP Omnibus Bill.  However, that is not to suggest that this particular aspect of the legislation is slated to change – we’ll just have to wait and see.

The big picture

Trans-Tasman patent attorneys have largely welcomed these decisions.  On the one hand, Australian practice is somewhat accommodating when it comes to correcting genuine errors – and it always appeared somewhat incongruous that the other jurisdiction we service, New Zealand, had assumed a position diametrically opposite.  In terms of our ability to sell the package deal—the “mini-Europe”—any degree of consistency is to be encouraged.

Quite where this leaves those who have tried and failed in the past is uncertain.

Authored by Gareth Dixon, PhD and Chris Byrnes