Mr Justice Carr grants TQ Delta injunction after finding ZyXEL "holding out" in latest SEP battle

The only effective way to injunct the AmeriKat

"Injunction, injuntion, what's your function....?"  For those who, unlike the AmeriKat, did not grow up on Schoolhouse Rock, that joke won't make any sense (see video here), but it is a question that is being asked across Europe's court rooms, especially in the context of telecoms litigation.  Last week, the AmeriKat was unable to make her flight to attend a fascinating conference on this topic in Germany (reports of the event to follow thanks to some Kat friends).  It was only too bad that the event was not held after the latest decision of Mr Justice Carr in the TQ Delta v Zyxel saga was published.  The decision - [2019] EWHC 745 - was published on Thursday, although the high level ex tempore decision was made on 18 March 2019 at the Form of Order hearing which followed the judges's earlier decision of 11 March that one of the two SEPs owned by TQ Delta ("the '268 Patent") was valid, essential and infringed by ZyXEL (see Kat post here).

At the Form of Order on 18 March, Henry Carr J:

• Held that ZyXEL was "holding out"
• Granted an injunction with immediate effect
• Refused ZyXEL's submissions that no injunction should be granted or, at least, should be carved out to allow pending orders to be fulfilled
• Refused permission to appeal his technical and injunction decisions 
• Awarded 68% of TQDelta's costs, with 60% payable on an interim costs basis

Oooof.  So not a great day in Court for ZyXEL.  So what were Mr Justice Carr's reasons?  

Injunctive relief 

Mr Justice Carr granted an injunction with immediate effect.  

ZyXEL argued that an injunction would be disproportionate in circumstances where the '268 Patent expires in less than two months, on 25 June 2019.  In the alternative, it submitted that an injunction should be stayed or there should be a carve out to allow ZyXEL to supply certain orders.   TQ Delta argued that this was "a very serious case of 'hold out'" which the judge should factor into his discretion to grant an injunction.  "Hold out" is where an implementer delays paying a SEP owner "whilst infringing [SEPs], because it wants to hang on to its money and exhaust the resources and will of the opposite party."  

TQ Delta relied on the dicta in of Kitchin LJ (as he then was).  At [53] and [54] of the Court of Appeal's decision in Unwired Planet v Huawei [2018] EWCA Civ 2344 he set out the balance that must be struck between implementers and SEP owners.  Implementers must be able to use the technology embodied and required in the standards provided they are willing to enter into a FRAND licence.  SEP owners also need protection in that: 

"...They are entitled to an appropriate reward for carrying out their research and development activities and for engaging with the standardisation process, and they must be able to prevent technology users from free-riding on their innovations. It is therefore important that implementers engage constructively in any FRAND negotiation and, where necessary, agree to submit to the outcome of an appropriate FRAND determination."

TQ Delta argued that ZyXEL was not a willing licensee because they had "gamed the system" and constantly changed their position as to whether they would be bound by and take a Court determined RAND licence.  These allegation stemmed from a history of negotiations between the parties dating back to 2013 in which no agreement had ever been reached and the fact that ZyXEL had never paid any SEP owner in respect of any of the 775 SEPs used.  Further, after seeking clarification that ZyXEL would enter into whatever RAND licence the Court determined, ZyXEL's solicitors stated  that this was not the case, particularly were the Court to hold that the RAND licence should be global and/or to TQ Delta's entire DSL patent portfolio.  In those circumstances, ZyXEL's solicitors said

"...then our clients and the other members of their Group will need to consider whether to enter that license (as appropriate). That decision will depend upon the terms that the Court has decided are RAND."

Later on in the proceedings and before the technical trials, TQ Delta repeated the question again and also asked for a similar confirmation in respect of a UK portfolio licence (as opposed to a global one).  ZyXEL said they would be prepared to take a UK portfolio licence on the terms in its RAND Statement of Case.  However, they would still not commit to be bound by any Court determined RAND licence, irrespective of whether the Court determined that the portfolio licence should be global or UK only.  ZyXEL also stated that the Court should not grant an injunction to stop its sales in the UK in the event that it was not prepared to enter into a global portfolio licence with TQ Delta.  The question was repeated again, without a substantive response, and then again.  In response to that chaser, ZyXEL's solicitors expressed uncertainty as to the meaning of "willing licensee" stating:

"You assert that "the question of whether your clients are willing licensees is relevant to whether the court should grant an injunction if it concludes that at least one of the patents in suit is valid and infringed". We disagree. We refer you to paragraph 5 of the prayer for relief of your client's Amended Particulars of Claim. Said paragraph set out your client's conditional claim for injunctive relief; it makes no reference whatsoever to whether or not our clients are 'willing licensees'.

Further and in any event, the term 'willing licensee' is not an established term of art in relation to the exercise of the court's equitable jurisdiction to grant injunctive relief, has no clear or certain meaning and your client has made no attempt to explain what it means by such a term".

At the hearing before Mr Justice Carr, ZyXEL's position was that because the '269 Patent was soon to expire and before any RAND licence is settled by the Court, they were not seeking a RAND licence.  That is a choice they are entitled to make, held Mr Justice Carr, but the question was whether they could avoid an injunction having made that election [remember, the '268 Patent was found valid and infringed].

In light of the background, Henry Carr J held that there was evidence of "hold-out" by ZyXEL because ZyXEL:

• had not paid any royalties to TQ Delta (or any patent holder) in respect of any SEPs.
• had "blown hot and cold" as to whether they will accept whatever licence is determined by the Court as being RAND.
• had refused to "agree to submit to the outcome of an appropriate [RAND] determination" and yet have claimed the benefit of the RAND undertaking; c.f. Unwired Planet at [54].  

ZyXEL said granting an injunction with 3 months left to run on a patent was disproportionate.  Further, it would not enable ZyXEL to know the terms of any RAND licence which it could or could not accept.  Mr Justice Carr rejected that submission.  At paragraphs 13 and 14, the judge stated that adopting such a position would:

"...enable ZyXEL to benefit from their strategy of hold-out, including their refusal to submit to the outcome of an appropriate RAND determination, whilst still seeking to benefit from the RAND undertaking. ZyXEL would avoid an injunction, and if the terms of a RAND licence are not as they wish, could refuse to enter into a licence on the terms deemed appropriate by the Court

It seems to me that to deprive the patentee of injunctive relief in these circumstances would be unjust. It would, in effect, amount to a compulsory licence by the court in circumstances where the Defendants have elected not to enforce the RAND undertaking in respect of the '268 patent. This, in my judgment, would be wrong in principle."

Stay of or carve-out from injunction

Mr Justice Carr rejected ZyXEL's application for stay and carve out of the injunction.  He did not find there to be any convincing evidence to support either application.  In respect of the application to stay the injunction for a month (to allow ZyXEL to do whatever), the judge held this was not supported by the evidence.  In respect of the application that the injunction should have a carve-out to allow certain pending orders be fulfilled so that customers who are expecting their orders would not be inconvenienced, Mr Justice Carr again found there to be no evidence from relevant customers and no disclosure of the contracts that might evidence any prejudice to customers.

Permission to appeal

Mr Justice Carr refused permission to appeal the technical patent decision and the grant of the injunction.  His reasons on the second are the most interesting.  At paragraph 22, he held that 

"I consider that it would be wrong to grant permission, the Court of Appeal already having indicated at [53] – [54] of Unwired Planet v Huawei the correct general principles. I also bear in mind that were I to refuse injunctive relief it would amount to a compulsory licence of the patentee's exclusive rights and deprive it of meaningful protection in circumstances where the Defendants have elected not to enforce the RAND undertaking. Whether to grant an injunction in these circumstances is an exercise of discretion, from which it is difficult to appeal. For those reasons I do not consider that an appeal would have any real prospect of success and I refuse permission to appeal."

Costs of a technical trial & payment on account

Mr Justice Carr ordered that ZyXEL pay 68% of TQ Delta's costs of the technical trial, 60% of which should be an interim payment of costs.

ZyXEL argued that it was premature to award costs of the technical trial, as the "prize" is whatever form of relief will be obtained and, in particular, whether or not there will be a determination of a RAND rate for TQ Delta's portfolio.  On the status of the RAND determination, in light of the recent events,  TQ Delta indicated its intention to amend the RAND pleadings to seek a declaration as to the portfolio RAND terms. ZyXEL have indicated an intention to apply to strike out that pleading.

Mr Justice Carr held it was not premature to award costs.  ZyXEL did deprive TQ Delta of at least part of their claim - in that the other patent was held to be invalid, but TQ Delta established that the '268 Patent was valid and infringed and will obtain relief at the subsequent damages inquiry/determination.  There was no evidence before the judge that showed that such an inquiry would produce a small sum, disproportionate to the costs expended by both parties. He also commented that since there was no Calderbank offer (i.e. an offer made to settle a case without prejudice to arguments on costs) made by ZyXEL that he was shown, there was  reason to postpone dealing with the costs of the technical trial.

Is this injunction a surprise?  

Some commentators had previously considered that following the UP and Huawei v ZTE case law, an injunction would  be unlikely to be granted before a F/RAND determination.  There now does not seem to be such a bright line.  Whether this is that surprising in circumstances where injunctive relief is an equitable remedy (and thus dependent on the facts and circumstances of each case), the AmeriKat has her own personal doubts.  But, as such, the grant of the injunction in this case was, indeed, fact specific.  The evidence before the Court was that there was flip-flopping on the implementer's position on whether it would be bound by the Court's' ultimate RAND determination.  Further, the fact that the '268 Patent was soon to expire seemed, to Merpel, to have been used as another strategy to try and duck out of the RAND determination. Ultimately, it seems that if there is evidence before the Court that an implementer is ducking and diving from its side of the F/RAND bargain, then the Court may not look particularly favorably upon such conduct (even before a F/RAND determination).

The AmeriKat looks forward to the debate on this case.  Do readers think an injunction should have been granted?