04 May 2013

Success Fees and ATE Premiums in the Patents County Court: Henderson v All Around the World Recordings Ltd

As I mentioned in "Intellectual Property Litigation - the Funding Options" 10 April 2013, it was possible until the 31 March 2013 for a litigant to enter an agreement with his or her solicitors and counsel known as a conditional fee agreement ("CFA") whereby the lawyers would look to the other side for payment not only of their assessed costs but also of an uplift known as a success fee and the premium for insurance against their own and the other side's costs in case of failure known as after-the-event ("ATE") insurance if they won the case or obtained a satisfactory settlement. As I also mentioned in that article, it is still possible to enter a CFA but any success fee and ATE insurance premium must now be paid by the successful party - usually out of any damages or accountable profits he or she may receive.

On 1 Oct 2010 CPR Parts 63 and 45 and the corresponding Practice Directions were amended for proceedings before the Patents County Court ("the PCC").  Those amendments, which I discussed in detail in the "New Patents County Court Rules" of the 31 Oct 2010, controlled the time that could be spent on proceedings before the PCC and limited the costs that could be recovered from the other side to £50,000 for the determination of liability and £25,000 for an inquiry as to damages or account of profits.

After legal aid for business disputes was abolished by para 1 (h) of Schedule 2 to the Access to Justice Act 1999 I, like most intellectual property practitioners, was asked almost as a matter of course by many solicitors and their clients to accept instructions on a CFA. Although I looked into the possibility on a couple of occasions I never actually entered a CFA and I explained why in my article of 10 April 2013.  There was never very much scope for CFAs in intellectual property litigation for the reasons I gave in "No Win No Fee" on the NIPC website on 14 July 2011.  As I also observed in my 10 April article there was even less scope for CFAs in the Patents County Court with scale costs and capped totals.

The widely held assumption that the £50,000, £25,000 and stage costs caps excluded success fees and ATE premiums was challenged in Henderson v All Around the World Recordings Ltd and Another (No. 2) [2013] EWPCC 19 (27 March 2013). This was an action for infringement of a performer's rights which Judge Birss QC (as he then was) decided in Henderson v All Around the World Recordings Ltd and Another [2013] EWPCC 7 (13 Feb 2013). The claimant had entered a CFA with specialist solicitors and counsel.  Her solicitors' costs were £88,103.50 plus VAT £17654.70, her counsel's fees were £8,285 plus VAT of £1,657 and her disbursements were £889.67 plus VAT of £168.73. Her solicitors' success fee was 60% and her counsel's 100% which would have produced a grand total of £232,676.20 had it been allowed. She had not been entirely successful and the costs of an unsuccessful copyright claim and half the costs of an application were awarded against her but she had succeeded overall.  The question for Judge Birss QC was how much of those costs he should award in view of the £50,000 limit.

The claimant's case was compelling. His Honour summarized her counsel's argument at paragraph [17]:
"He submitted that the key was Miss Henderson's lack of means combined with the imbalance of power in this case between the individual claimant and the defendant record company. Mr Pearson reminded me of certain passages in my judgment in which I referred to the imbalance between Miss Henderson and All Around the World. He submitted that the presence of this combination made this case highly unusual and sufficiently exceptional to justify the course he proposed. Otherwise the claimant would simply not get justice in this case. As an individual singer songwriter with no means the claimant had no other course to take. She could not have argued the case on her own, she needed to seek legal assistance and advice from specialist solicitors and counsel like Fladgate and Mr Pearson. She had to take out an ATE insurance policy since the alternative if she lost would be bankruptcy and that would have caused her to lose her copyrights in her other music since such rights would be subject to the bankruptcy. If the cap is not lifted, Miss Henderson will remain liable for these sums but will not recover them from the defendant. She will have to pay them out of the money she presumably will recover by way of damages or an account of profits from the defendant. He argued that it is likely that the sums due will to a considerable extent be eaten up by the costs over and above the cap. These problems all arose from the combination of Miss Henderson's lack of means and the imbalance of power between an individual musician and a powerful record company. Mr Pearson repeated his point that this combination of factors was highly unusual and so to lift the cap now would not undermine the certainty of the Patents County Court costs capping procedure. He said that justice in this case simply could not be done without removing the costs cap."
The costs cap is contained in CPR 45.31:
"(1)    Subject to rule 45.32, the court will not order a party to pay total costs of more than –
(a) £50,000 on the final determination of a claim in relation to liability; and
(b) £25,000 on an inquiry as to damages or account of profits."
The CPR 45.32 exception applies where a party has behaved unreasonably.and that was not the case here. Although on its face CPR 45.31 seems quite clear the claimant's counsel argued that the court had a discretion to depart from it in circumstances other than those provided by CPR 45.32. In support of that contention the claimant relied on paragraph [20] of Judge Birss QC's judgment in  Westwood v Knight [2011] EWPCC 11 (11 May 2011):
"Rule 44.3(1)(b) provides that the court has a discretion as to the amount of costs but despite that it is clear that the limits at the various stages and the overall £50,000 limit are intended to be adhered to. The purpose of the limits is to aim for certainty for litigants (see section 5 Costs Recovery in the Final Report of the IPCUC's Working Group on Proposals for Reform of the Patents County Court). The correct approach must be to apply the limits if they can possibly be applied, recognising however that in the end the court always has a discretion as to costs (CPR r44.3) and that includes as to the amount of costs. It is a discretion which in my judgment will very rarely (if ever) be exercised to exceed the limits set by Section VII. For one thing specific exceptions are provided for (r45.41(2)). Furthermore to exercise a discretion on a wider basis in all but the most rare and exceptional case would undermine the very object of the scale in the first place. For the scale to give a measure of certainty to litigants, it has to possible to be sure that the limits will apply well before any costs are incurred and most likely before any action has even commenced. Before they embark on litigation to enforce their intellectual property rights (or defend themselves) the potential users of the Patents County Court system need to be able to make a prediction in advance as to their likely costs exposure. Their legal advisers need to be able to say with confidence that the costs capping provisions can be relied on."
The defendant submitted that passage was wrong and invited the judge to reconsider it.  His Honour accepted the invitation noting that there had been no argument on the discretion point in Westwood and that he could now decide the point with the benefit of proper argument from lawyers on both sides. He decided at paragraph [12] that he did have discretion to depart from the cap but that he should exercise his discretion very sparingly:
"Rule 44.3 is the general rule about costs applicable under the CPR. Costs are within the court's discretion and that includes the amount. The exercise of that discretion is strongly conditioned by the special rules about costs in the Patents County Court but in my judgment it has not been excluded entirely by the rules. I can only refer again to what I said in Westwood. The discretion exists but to exercise it to depart from the cap in anything other than a truly exceptional case would undermine the point of the costs capping system."
Judge Birss exercised that his discretion as follows. First  he assessed summarily the claimant's costs after deducting the sums awarded to the defendant but without taking the success fee and ATE insurance premium into account and found that she was entitled to £33,546.25 made up of £2,920 counsel's fees and £30,626.25 solicitors' fees plus VAT. Next he decided that the claimants counsel and solicitors were entitled to a 60% success fee and awarded them £1,752 and £18,375.75 respectively. He awarded the claimant a total of £52,484.25.

However, he refused to award her the ATE premium for the following reasons:
"[38] First I am not satisfied this is a sufficiently exceptional case to justify disapplying the cap. Although there was an imbalance of power between the claimant and the defendant, as a factor alone or as one combined with the claimant's lack of means, this does not take the case into truly exceptional territory. Moreover insofar as the argument was an attempt to seek to paint the defendant in a bad light, I reject the submission that the defendant's conduct explained in my main judgment, as a whole, was such as to justify any departure from the normal costs approach in the PCC. Given the circumstances in this case, if it was fair to disapply the costs capping system, that would create considerable and highly unwelcome uncertainty about costs in the PCC and would weaken access to justice for other litigants.
[39] Second I accept Mr Harbottle submission about the High Court. A litigant who wishes to recover a reasonable proportion of the totality of his of her legal costs has a clear option available, to litigate in the High Court. In that system none of the problems now faced by the claimant would arise. I do not agree that the case would simply have been transferred to the PCC if it had been commenced in the High Court. Mr Pearson submitted that justice would not be done if I did not depart from the costs cap. That submission would have provided solid grounds for the claimant to argue in favour of keeping her case in the High Court. Indeed if it was a concern to the claimant or her legal advisers in the first place, the case should have been begun in the High Court.
[40] As I have repeated on numerous occasions hitherto, the point of the Patents County Court is to facilitate access to justice for smaller litigants in intellectual property cases. To make a costs award which risks causing a winning claimant to be deprived to a significant extent of the fruits of her victory is very unwelcome. However I believe what is really happening in this case is an example of a psychological phenomenon I have become familiar with in the PCC. When the risk was in the future, the claimant wished to litigate in the Patents County Court to protect herself against the risk of an adverse costs award. That is why proceedings were brought and pursued in this court with this costs regime. The impact of the PCC cap on the claimant's actual costs if she won was predictable. If the claimant had lost, the costs cap would have been strongly relied on. The claimant was able to enforce her intellectual property rights in this case because of the predictability of the costs cap remaining in place. She was relying on it. Now that the claimant has won, the uncertainty has evaporated. The balance of risk and reward is now entirely different. In today's circumstances it now seems to the claimant quite unfair that the cap prevents her from recovering a higher share of her costs. But that is because the position after judgment is very different."
So what lessons can be drawn from this case? First, success fees and ATE premiums are caught by the CP45.31 costs cap but the court does have a discretion to allow them in exceptional circumstances.  In this case, the judge allowed the claimant just over £50,000 to cover the lawyers' success fees but he would not award her the ATE premium for the reasons set out above. It may be hard but everybody knows what hard cases make. The second lesson is that not every case is suitable for the Patents County Court. In this case the problem was the costs cap.  In others it will be the 2 day limit for trials or the limited time available for each issue.  There was been a wholesale stampede from the provincial Chancery District Registries and County Courts to the Rolls Buildings and I have to say that I have been part of that stampede. Perhaps we should revisit those courts especially now that costs are managed much more strictly in all civil courts.

If anyone wants to discuss this case or any of the issues please call me on +44 (0)20 7404 5252 or contact me through Facebook, Linkedin, twitterXing, or my contact page.

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