Court of Appeal: Costs rules for patent cases apply to budgeting

Judge should have taken financial position of the claimant into account

The High Court was wrong to rule that the requirement to take into account a party’s financial circumstances in patents cases did not apply to costs budgeting, the Court of Appeal has ruled.

It went on to limit the defendant’s budget to £4m as a result, £2.5m less than had been approved.

The background to Parsons v Convatec Ltd [2026] EWCA Civ 1357 is a claim for employee inventor compensation under section 40 of the Patents Act 1977. Section 106(1) says that, in determining whether and what costs to award in such cases, the court “shall have regard to all the relevant circumstances, including the financial position of the parties”.

At first instance, Mr Justice Richards held that this did not apply to costs budgeting and, even if it did, he would not have exercised his discretion to take into account Dr David Parsons’ financial position relative to that of Convatec, even while acknowledging that “his means are modest and limited”.

Dr Parsons is an analytical chemist who worked for Convatec, a medical products and technologies company, for 32 years. He claims to have devised a number of inventions and values his claim for compensation at £366m. Convatec disputes the claim in its entirety.

Despite being for more than £10m, Dr Parsons proposed, and Convatec agreed, that there should be costs management. This was principally so that he could obtain after-the-event (ATE) insurance.

The policy is currently limited to £800,000 and covers the payment of disbursements by way of loan at 10% interest and a fee for each payment as well as costs orders in favour of Convatec. Around £198,000 had so far been drawn down.

The parties filed and exchanged costs budgets last December. Dr Parsons had incurred just under £2.7m and sought approval of a further £5.3m in future costs. Convatec had incurred £4.2m and sought approval for £10.2m.

In January, Richards J undertook a conventional costs budgeting exercise on the assumption that section 106 was inapplicable, approving future costs of £4.7m for Dr Parsons and £6.5m for Convatec.

He went on to hold that section 106 did not apply to costs budgeting. In case he was wrong on this, he then considered what order he would have made and rejected three proposals advanced by Dr Parsons. These were limiting the budgeted costs to: the Intellectual Property Enterprise Court’s scale costs; the amount available from Dr Parsons’ ATE cover, then £664,000; or to one-third of his own budget.

Instead, he said he would “prefer to wait until later in the process when all relevant circumstances, including financial position, can be considered”.

Giving the unanimous decision of the Court of Appeal, Lord Justice Arnold ruled that the judge was wrong on section 106.

A decision in 2015 by Lord Justice Floyd that it only applied when costs were awarded was not binding as it was made by a single judge dealing with an application for permission to appeal along with an order for costs protection.

Rather, Arnold LJ said Dr Parsons was correct that the phrase “determining… what costs… to award” in section 106 “embraces each step on the critical path to a decision as to what costs to award”, and that this included approving costs budgets.

The claimant’s criticisms of how the judge considered how he would have exercised his discretion were also “well founded”.

“In some cases, however, it can be hard for a judge in such a position to put out of his mind the reasons why he has decided the issue of law the way he has when exercising his discretion,” said Arnold LJ.

“In my view it can be seen from the judge’s reasoning that he did fall into that trap. In addition, it is notable that he considered the effect on Dr Parsons’ claim of failing to restrict Convatec’s budgeted costs when considering the interpretation of section 106(1), and not when exercising his discretion.

“Even then, he failed to take into account Dr Parsons’ need for a reasonable degree of certainty at this stage that Convatec will not recover the full extent of its provisionally approved budget if it is successful.”

Given that the highest award of damages to date under section 40 was £2m, this included how any damages could be wiped out by the extra ATE premium for more cover or by the success fee of a litigation funder.

Neither party asked for the case to be remitted, so the court reconsidered the matter itself. Arnold LJ agreed with the judge’s view that none of the three proposals advanced by Dr Parsons was acceptable. But a fourth proposal made during the appeal, to limit Convatec’s budget to £4m, won favour.

This was “better aligned with the rationale of reflecting the different incidence of taxation on the parties” – given that Dr Parsons has to pay VAT at 20% on his costs but Convatec can obtain an input tax credit for the VAT it pays and it can obtain a deduction against its corporation tax liability.

Arnold LJ said: “It is also a figure that is much closer to the figure approved by the judge for Dr Parsons’ future costs. In my view Convatec ought to be able properly to defend Dr Parsons’ claim on a budget of £4m.”

Patrick Green KC and Ben Norton (instructed by Kingsley Napley) for the appellant. Robert Marven KC and Chris Aikens (instructed by Freshfields) for the respondent (section 106 appeal)