England and Wales High Court (Chancery Division) Decisions

IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
PATENTS COURT

		Royal Courts of Justice Strand, London, WC2A 2LL
		30th October 2003

Mr Justice Laddie:

1. This is the judgment in an application for security for costs in this action. The defendants say that this action, which has a current trial estimate of five to seven days, will involve them in incurring costs of just over £600,000. They say that the claimant, a limited company, does not have the assets to pay any order for costs if the defendants win.
2. This is not the first application for security which has been made in this case. An earlier application was made which came before the Master. He made an order for security in the period up to and including the case management conference. Apparently £120,000 was asked for, though for a longer period, and he made an order for £60,000 which sum has been forthcoming.
3. The defendants now seek security up to and including the trial. As I have indicated already, they say their total costs will be just over £600,000, and Mr. Meade, who appears on their behalf, asks for security to cover the whole of the period up to and including the trial including sums to top up the security ordered in respect of the period up to the CMC. As I indicated to Mr. Meade during the course of argument, save in cases where it appears that there has been a significant change in circumstances, I do not think it would be appropriate to revisit the issue of security in respect of the period for which an order for security has already been made where that order has not been appealed.
4. So I am only concerned with the period from the CMC forward to the end of the trial. In respect of that period, the sum which Mr. Meade's clients says they will incur by way of costs comes to some £490,000. They ask for some two thirds of that, say about £320,000 by way of security. There is no dispute between the parties that the claimant cannot pay that sum or any sum like it. It is effectively without readily realisable assets of its own. The question therefore is whether or not this is a case in which security should be ordered, a major argument before me being that an order for security may have the effect of stifling this litigation.
5. The factors which a court should take into consideration in determining whether or not to order security are set out in the decision of the Court of Appeal in Keary Developments Limited v. Tarmac Construction Limited [1995] 3 All E.R. 534, and in particular in the judgment of Peter Gibson L.J. starting at p.539. As the learned Lord Justice there points out, the court has a complete discretion whether to order security, but the possibility or probability that the claimant company will be deterred from pursuing his claim by an order for security, is not, without more, sufficient reason for not ordering security. Major factors which have to be taken into account include whether or not the injustice if the claimant is prevented from pursuing a proper claim by an order for security outweighs or is outweighed by the injustice caused to the defendants if no security is ordered and at the trial the claimant's claim fails, so that the defendant finds himself unable to recover his costs.
6. When considering whether or not the court should be moved by the prospect of a claim being stifled, it can take into account a number of considerations including whether or not the claimant's lack of funds is due to wrongdoing of the defendants. Peter Gibson LJ also said that in some cases it may be appropriate to have regard to the claimant's prospects of success, although at the security stage it may well be the court can come to no reasonable conclusion one way or another whether the claimant is going to succeed or not. However, perhaps the most important passage in the judgment is as follows:

"6. Before the court refuses to order security on the ground that it would unfairly stifle a valid claim, the court must be satisfied that, in all the circumstances, it is probable that the claim would be stifled. There may be cases where this can properly be inferred without direct evidence (see Trident International Freight Services Ltd v. Manchester Ship Canal Co [1990] BCLC 263. In the Trident case there was evidence to show that the company was no longer trading, and that it had previously received support from another company which was a creditor of the plaintiff company and therefore had an interest in the plaintiff's claim continuing; but the judge in that case did not think, on the evidence, that the company could be relied upon to provide further assistance to the plaintiff, and that was a finding which, this court held, could not be challenged on appeal.

However, the court should consider not only whether the plaintiff company can provide security out of its own resources to continue the litigation, but also whether it can raise the amount needed from its directors, shareholders or other backers or interested persons. As this is likely to be peculiarly within the knowledge of the plaintiff company, it is for the plaintiff to satisfy the court that it will be prevented by an order for security from continuing the litigation (see Flender Werft AG v Aegean Maritime Ltd [1990] 2 Lloyd's Rep 27." (p 540)

7. As I have said, it is not in dispute that the claimant company cannot meet an order for costs if one is made against it. It will have exhausted all its resources well before the trial. The claimant has offered a further £50,000 to include the trial. Where that £50,000 is coming from is not made clear, but in any event the defendants do not accept it.
8. The arguments before me have ranged over a very wide field. Two or three of them, however, deserve particular consideration. Perhaps I can start at what might be considered the wrong end. That is to say the size of the cost liability which the claimant faces if it loses this action. I have already said that the defendants solicitors say that the total cost to their clients will exceed £600,000. For the period from now to the end of the trial the bill will be about £490,000. This is a very substantial sum indeed.
9. The claimant says that it would not be appropriate to base any determination of whether security should be ordered on those figures because it is said that the future bill of £490,000 is grossly excessive. Of course, if that is so it is a major factor which must be taken into account in determining what proper level of security, if any at all, should be granted.
10. However, this issue has been treated in a very surprising manner in my view by the claimant. It is a matter of common experience and on applications for security the claimant puts in evidence, either from its solicitors or from cost clerks, explaining what the proper order for costs would be were the claimant to lose the action, and then that is countered by evidence from the defendant, also again from solicitors or a cost clerk explaining why the bills anticipated by the defendant are reasonable and realistic. The court then looks at the evidence before it and comes to a conclusion as to what costs are likely to be incurred by the defendant and what part of those costs would be recovered on a normal assessment.
11. In this case, although the claimant has challenged the figures for costs put forward by the defendants, it has not put in evidence either from its solicitor or from a cost clerk. Instead it has taken two courses. First it has has put in evidence from a patent agent who does not claim to have any expertise at all in relation to how solicitors charge for costs and does not claim to have any expertise or experience of High Court patent infringement proceedings. He claims to have experience of patent litigation and he names two cases in which his firm was involved, both of those being cases in the Patents County Court, those being cases in which no solicitors were involved. I should mention that it is well known that in one of the two cases his firm's bill to its client, the claimant, reached just under £1.5 million. He then gives evidence as to how he thinks this case should be conducted in the High Court, how many solicitors should be employed in dealing with the case, how many hours should be spent on various parts of the preparation for trial. He expresses the view that there is too much prior art in this case and so on. In my view this evidence is wholly valueless. Even now I do not understand why the claimant's solicitors did not put in evidence challenging the defendant's assessment of their future costs if there were good reasons to challenge them.
12. The second way of attacking the defendants' assessment of their future costs is as follows. Mr. Davis, who appears on behalf of the claimant, put in a skeleton argument. With it was a schedule in which he set out what he thought should have been the right costs or a proper estimate of the future costs of the defendants. He estimated how much time he thought solicitors should spend talking to clients, talking to experts and the like. With respect to Mr. Davis, he also has no expertise in running a High Court infringement action from a solicitor's point of view. He has never had to conduct the exercise of evidence gathering, selecting experts, going through disclosure, discussing details with the clients on a day to day basis and so on. I consider his schedule also to be valueless. The result is I am left with relevant evidence on one side only, that is to say from the defendants, as to what their costs are likely to be.
13. I should add this, that at one stage Mr. Davis said that I should regard the costs being contemplated by the defendants as being wholly disproportionate. He said that this was really a terribly easy case. Although it deals with the operation websites on the internet, this was a very, very easy case and it would be proper for me to look at the overall figure for the defendants' costs and to decide that costs of the sort which the defendants anticipate cannot be appropriate for a case like this.
14. I do not consider it my function to decide on policy grounds whether there should be a cap on the costs of patent litigation. That is a matter for the legislature. But, in any event, I do not accept the submission that I should look at this as a simple little case. It was the claimant who decided to bring this action in the High Court, not the County Court, and at an earlier stage before the dispute as to security had arisen it assessed this case as being a complexity three to four out of a maximum of five – such an indication of complexity being called for in the Patent Court practice directions for the purpose of indicating to the court how difficult the case is. I find it difficult now to accept, when issues of costs arise, that the assessment of the complexity of this case should be changed.
15. So it seems to me that I should work on the basis that the defendants' estimate of future costs in the sum of £490,000 is reasonable and that they are seeking security in the sum of about £320,000. Although at one stage the claimant argued that this was a case where its impecuniosity had been caused by the actions of the defendants, rightly in my view, this was not a matter pressed by Mr. Davis during oral argument. Similarly, Mr. Davis, rightly in my view, did not press an argument that this was a case where his client was overwhelmingly likely to succeed at the trial. As he puts it, at this stage I could do nothing more than say that the claimant may or may not succeed at the trial and that the prospects are neutral.
16. I think Mr. Meade suggests that that is too flattering of the claimant's prospects of success, not least because in the past it has stated that its patent is in need of amendment. In fact they have prepared to amend it, a course on which they have singularly failed to follow through. I think Mr. Davis is right. At this stage I cannot make any assessment as to the prospects of success. This may be a case which the claimant can win but I will regard it as equally possible that it may lose.
17. The issue is really one of stifling. Two points arise. First of all, is it true that this claim will be stifled if an order for security in the sum requested by the defendants is made? Second, even if it was, is that a justification either for not ordering security or for cutting it back significantly. As will be apparent from the passage from the judgment of Peter Gibson L.J. which I have quoted above, it is for the claimant to satisfy the court that it will be prevented by an order for security from continuing the litigation. The word "prevent" occurred not only in that passage in Peter Gibson L.J.'s judgment but earlier on as well. The question I have to look at therefore is whether an order for security, if made in the sum requested, would make it impossible for the claimant to proceed, bearing in mind it is for the claimant to make that out not for the defendants to disprove it.
18. When this matter commenced the claimant was clearly aware that it needed to put in evidence not only of its own lack of funds, but also the lack of resources available to it whether from directors, shareholders or other backers. This was addressed in a witness statement of Andrew McGregor Ritchie who is a director of the claimant company. It was served on 9 October 2003. That was same day, that a witness statement of Mark Bernstein was also served on behalf of the claimant. The relevance of that I will come to in a moment.
19. Mr. Ritchie addressed himself to what he referred to as "the financial resources" of the shareholders. Those shareholders include himself, three others and Mr. Bernstein. He sets out figures which show what those financial resources are, and he came to a conclusion that taking everything into account there was a deficit of £12,500 when one took into account the assets and liabilities of both of the shareholders and the company. As far as the company was concerned, he said all it had was cash of around £12,000. But interestingly at paragraph 34 of his witness statement he referred to Mr. Bernstein and said the following:

"Bernstein, who owns around 16% of the company, has earned around £10,000 in the last six months."

20. As I have said, Mr. Bernstein was at the same time swearing another witness statement on behalf of the company and it is not suggested that this evidence was being given without Mr. Bernstein knowing that it was being put before the court.
21. The defendants came back and criticised this evidence fairly strongly. They put forward material which they had discovered which suggested that the "financial resources", of the shareholders was somewhat larger than had been indicated in Mr. Ritchie's witness statement. Amongst other things, they pointed to information which suggested that Mr. Bernstein, who is something of an entrepreneur, had a far larger income than Mr. Ritchie had indicated. They suggested that the evidence that Mr. Bernstein had received £10,000 in the last six months was misleading in that their inquiries suggested that he had received very large sums indeed although over a longer period. The evidence put in by the defendants was that Mr. Bernstein had received somewhere between £800,000 and £1 million.
22. This resulted in a further witness statement of Mr. Bernstein dated 14 October. Mr. Bernstein is a chartered accountant besides being something of an internet entrepreneur and in this witness statement he states that he has in the past made and lost vast paper fortunes in the internet world. He says that he lives a comfortable lifestyle. He discloses that he has a family country house which was valued at £435,000 three years ago and in respect of which there is a £150,000 mortgage. He does not explain why this asset which, even on this old valuation, would leave him with £285,000 of equity, was not referred to earlier. He discloses he also has a half share in a house in France which cost him £220,000 in respect of which he has a £175,000 mortgage. He late explains that he has also spent £75,000 on this house, so there appears to be about £120,000 of equity in that property. Once again, why this was not referred to earlier is not explained.
23. Perhaps what is most surprising is paragraph 8 of this witness statement which reads as follows:

"The defendants claim that I have earned around £844,000 in the three years 2000 to 2002. This is probably roughly correct. This amounts to perhaps £475,000 after tax..."

24. He explains how the sum is made up. Once again, neither in this witness statement nor at any subsequent stage did Mr. Bernstein or anybody on the claimant's side seek to explain why Mr. Ritchie had only referred to Mr. Bernstein having an income of £10,000 in the previous six months.
25. That, however, is not the end of the matter. Even with this evidence, the defendants were not satisfied that a complete disclosure of the assets available behind the scenes to support the claimant had been made. They asked questions and in particular they asked for an explanation of whether or not Mr. Bernstein had received significant sums of money from investments he had in two other businesses called GeoCities and Riapu. Mr. Bernstein came back in a further witness statement and disclosed that he had received £200,000 from GeoCities and about £107,000 in January of this year from another investment. Once again, why these were not disclosed in the earlier evidence was not addressed, let alone explained.
26. Mr. Meade says that even if one looks simply at Mr. Bernstein's position, not only does he clearly have significant assets but it is not safe to assume that all his assets have been disclosed even now. It is not that Mr. Meade invites me to find that Mr. Bernstein has actively hidden further assets. It is just that he says that I should not conclude that the claimant has discharged the onus on it to properly and fully disclose all the assets available to Mr. Bernstein. I think there is a lot in the point. I think the absence of any explanation for the really significant omissions in the evidence going to the financial resources of this particular shareholder are to be regretted and must leave one worried that all that Mr. Bernstein has done is disclosed assets only after the defendants have made it apparent that they are aware of the existence of those other assets.
27. Furthermore, I have now got additional evidence supplied in a second witness statement of Mr. Ritchie. This sets out in a very truncated form the estimated asset position of the other four shareholders. That is Mr. Ritchie, Mr. Blanchard, Mr. Collard and Mr. Bradshaw. In fact it does not set out the asset position of Mr. Bradshaw because, apparently, he is in the process of being divorced and for some weeks has been travelling in South America and cannot be contracted. So estimates can not be made of his financial position. For present purposes I will therefore assume Mr. Bradshaw has no assets. As far as Mr. Ritchie, Mr. Blanchard and Mr. Collard are concerned, however, according to the figures given by Mr. Ritchie in his second witness statement, they have net assets to the value of £220,000, £250,000 and £255,000 respectively.
28. It appears to me that even if one leaves Mr. Bradshaw to one side and even if one is to assume that Mr. Bernstein has disclosed everything and has no other assets besides the two houses which he has referred to, those four shareholders have somewhere in the region of £1.25 million of assets. Of course, they may well not wish to put those assets behind the litigation run by their company, and if they were to put those assets behind the company it might be uncomfortable for them. But I fail to see how it could be said that there are not sufficient assets behind the company in the shareholders and directors to support his litigation if the shareholders and directors were minded to do so. So I do not accept that the claimant has shown that it is prevented from continuing this litigation, or would be prevented from continuing this litigation, if security in the sum requested was ordered.
29. In saying that, I have not addressed another part of the evidence put in by Mr. Bernstein to the effect that he has been in contact with third party funders. He does not suggest in his evidence that the prospects of getting third party funding are hopeless. Indeed, as Mr. Meade points out in his skeleton argument, one is left somewhat in the dark as to precisely what the prospects of obtaining third party funding are.
30. As I have mentioned already, the onus is on the claimant to show that ordering security would stifle this action. I have come to the conclusion that the claimant is far from doing that. But even if it had been able to show that security would stifle this action, would that justify refusing the security or reducing its amount? As I have mentioned already, in the Keary decision, Peter Gibson L.J. said that possibility or probability that the claimant company will be deterred from pursuing its claim by an order for security is not, without more, a sufficient reason for not ordering security. Indeed, I would add this, the whole point of the statutory provisions allowing one to seek security against a company which has inadequate assets, will be defeated if it were possible simply to say that because the company cannot pay, making an order for security would stifle litigation and therefore the order for security should not be made.
31. So the question is, if this would stifle the litigation, is it appropriate to make an order for security notwithstanding that? I have already indicated that Mr. Davis accepts that this is not a case where he can ask me to come to a prima facie conclusion that this is a strong case where his client has a better than evens chance of succeeding.
32. In the end it seems to me it comes down to this, the patent in issue has been transferred to the claimant so that the inventors and the funders behind the exploitation of it can take the benefit of the veil created by incorporation. They will be able to take the profits made by exploitation of the patent, but by using a corporate vehicle they will be shielded from losses.
33. I can see no reason on the facts of this case why the defendants should be put in the position where they have to conduct this litigation in the certain knowledge that even if they succeed they will have to bear their own costs. In my view this is a case where security is appropriate, and I will order security in the sum of £320,000.