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Thursday, 27 June 2013

Which comes first - patent infringement or FRAND? "Patent infringement", says Birss J (Part I)

The AmeriKat has figured out
one strategy: keeping warm in
the garden during the English summers
(courtesy of Joe Delaney)
As a litigator, you spend your days grappling with legal strategy, client demands and barrister wrangling.  However, it is often the procedural strategy that can tie your brain into knots.  What applications and orders should you be making to the court?  When should you do so?  What judge should you try to get before?  Save for whatever tactical interim application a party may be dreaming up, it is the Case Management Conference (CMC) that can be all important to a case.  Under English procedural rules, the CMC comes after the pleadings have been finalized and before the meat of the case takes place (disclosure of evidence, witness statements, expert reports, experiments, etc).  The output of the CMC is an Order for Directions which governs the conduct of the rest of the case to trial, for example, what issues will be heard at trial and in what order.

It was a CMC earlier this month before Mr Justice Birss (who has, this week, been knighted) where the age old question of "which came first" was determined.  Although not of the chicken-egg variety, the question in Vringo v ZTE (UK) Limited and ZTE Corporation [2013] EWCH 1591 was just as philosophical:   Which comes first - a trial on patent infringement or a trial on FRAND issues?  The answer is, of course, a trial on patent infringement. 

Background

"Show me your SEP, and I will show
you a willing licensee"
The claimant, Vringo, is the owner of a global portfolio of over 500 patents relating to telecommunications infrastructure, internet search and mobile telecommunications (in almost the exact words of Mr Justice Birss and Wikipedia).  The bulk of its patent portfolio was purchased from Nokia in August 2012.  It claims that a substantial proportion of its patents and portfolio are standard essential patents (SEPs).  Vringo has approximately 138 individual granted SEPs in various jurisdictions and a further 248 applications which may yet mature into granted SEPs.  

Last year, Vringo commenced two patent infringement proceedings against ZTE(UK) Limited, who is involved in the manufacture of mobile phones primarily in Asia, for infringement of six patents (3 patents per case) relating to mobile phone and telecommunication systems which it says are SEPs.  For SEPs to be declared SEPs by ETSI, the organization responsible for promulgating such standards, the patentee must be prepared to grant licences to them under FRAND terms, i.e. "fair, reasonable and non-discriminatory".  Vringo is prepared to offer ZTE Corporation a global portfolio licence on the whole of its global SEP portfolio which it says is made on FRAND terms.  Vringo addressed the FRAND offer to ZTE Corporation as, it argued, ZTE Corporation was the natural entity to be the licensee of the global licence and, similarly  should be made a party to the proceedings in order to be bound by the court's determination.  

The arguments

Cracking the egg of patent infringement, before the
FRAND chicken can be hatched
At the CMC, Vringo requested declarations in the following terms to be determined at a FRAND trial to be held before the trial on validity and/or infringement:
1.  That the terms of its offer was an offer to licence its patents on FRAND terms and is therefore not obliged to offer to licence any of its SEPS on any other term.   
2.  In the alternative, it requested that the court declare that the terms of its offer complied with the Claimant's obligations to make a licence available to ZTE in respect of the patents in suit.   
3.  In the further alternative, Vringo requested that the court make a declaration as to what would constitute an offer to licence to the Defendants its patents on FRAND terms.   
4.  A declaration that in all the circumstances  the Defendants had no entitlement to an individual licence to the patents in suit if they are found to be both valid and infringed by ZTE (UK) Limited.  
With similar patent infringement proceedings and/or disputes commenced in Germany, France, Australia and the in the US (there against InterDigital), Vringo contended that it was the terms of the global offer that was the real dispute between the parties.  If the court could determine the royalty to be paid by ZTE Corporation to Vringo for a global licence then the whole international dispute could vanish.  The court should, therefore, address this first and order that the FRAND trial be heard first.  

Judge Robart - the man
of the moment in the
CAFC
But what if the patents turn out not to be valid and/or infringed (a determination that would come only after the FRAND trial is heard if Vringo has its way)?  Well, Vringo argued, the court will be able to take into account evidence about the strength of the patents, validity and infringement at the FRAND trial.  Indeed, Judge Robart in Microsoft v Motorola had heard a full trial over a number of days and settled RAND terms of a portfolio licence of Motorola's US patents including arguments on the strength of the patents and F/RAND. There is no reason why the English court could not do the same.  In fact, Judge Robart's conduct of the Microsoft v Motorola case illustrated a trend in the courts and competition authorities globally "to seek to resolve the problems caused by large portfolios of SEPs and questions of FRAND licences in this way instead of having costly and expensive patent trials."  Vringo thus asked the US court hearing its case against InterDigital to determine the issues of FRAND first before hearing the case on validity and infringement.

Vringo also cited the dicta of Mr Justice Floyd (as he then was) in IPCom v Nokia [2009] EWHC 1017 where, when asked to order a trial of a preliminary issue to determine the FRAND licence terms in relation to IPCom's patent in suit, he stated that:
"...What is at stake between parties in portfolio patent litigation of this kind is usually the sum of money which will enable the grant of a worldwide licence under the entire portfolio. The preliminary issue seeks to get to the heart of that question, without the need to try the validity of 15 patents and the infringement of 3 of them, and a variety of ancillary defences."
Floyd J refused to order the preliminary issue hearing because the proceedings had already progressed sufficiently far to address validity and infringement of the patents on the merits.  But, responded Vringo, the court still indicated that it was a good idea in principle had only it been raised earlier.  Further, Mr Justice Kitchin (again, as he then was) in Philips v Alba did order that the issues of FRAND be tried prior to the merits of the patents in issue.  

ZTE argued that structuring the case in that way would be a massive undertaking with hundreds of patents in issue in the portfolio, truckloads of evidence about the strength of the portfolio with a likely trial about the validity and infringement of the patents inside the FRAND trial and references to the Court of Justice on competition issues.  The patent infringement trials should therefore come first.  

With Vringo contending that the royalty due is $2.50 for smartphones, $1.50 for other handsets and 1.5% of the revenue on any infrastructure and ZTE contending that all of the six patents are invalid and/or infringed, the parties are far apart.  The basis of that difference, held Birss J, was a fundamental disagreement about the validity and the relevance of the patents, i.e., "whether this portfolio has any value at all".  

Continued in Part II here.  

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