Conversant v LG: No FRAND rate in sight, as the Paris Cour d'appel tackles essentiality and German trade secrets

Paris Cour d'appel veers away from a FRAND
rate, heading straight towards essentiality and
trade secrets 

With the UK courts getting so much attention in the battle for FRAND, it is important to remember that other jurisdictions are issuing as interesting decisions in other FRAND/SEP cases.  Two weeks ago, on 16 April 2019, the Paris Court of Appeal issued its decision in Conversant v LG - the "first noteworthy" decision on FRAND, but one which did not set the FRAND rate.  However, as Kat friend Matthieu Dhenne explains in the following guest report, it nevertheless provides interesting discussions on essentiality and the application of the new French Trade Secrets Act (following the implementation of the EU Trade Secrets Directive - see Kat posts here).

Over to Matthieu who reports from Paris:

"Are French courts ready to rule on FRAND?

While there are some French decisions that deal with SEPs, none of them have decided on the FRAND royalty rate. Indeed, the decision in Samsung Electronics v. Apple (December 8, 2011), seemed to indicate that a decision on the merits could only decide whether a license is FRAND or not - not what the rate is. Since then, only two cases have been determined: Vringo v. ZTE and Conversant v. LG.

In the first case, Vringo initiated an infringement action before the Paris High Court based on two patents declared essential to the UMTS standard. Vringo also sought preliminary injunctions against ZTE. The Court rendered its decision on this injunction on October 30, 2015. Besides challenging validity and essentiality of the two patents asserted, ZTE also argued that “Nokia had undertaken through a contractual provision to grant a license to any person wishing to implement said standard, on [FRAND] terms” and that Vringo was bound by such undertaking. ZTE requested that the Paris High Court appoint at least one expert to calculate the FRAND royalty rate for the license in France. Neither party asked the Court to calculate the appropriate FRAND royalty rate itself. Eventually, ZTE claimed that Vringo had “committed an abuse of dominant position by (i) breaching the obligations undertaken within the framework of European Telecommunications Standardization Institute (ETSI) to grant a license under FRAND terms, (ii) practicing tied selling, (iii) and proceeding to privateering”. The Court succinctly ruled the first patent was invalid and the second one was not essential.

In the second case, Conversant (formerly Core) holds a patent portfolio of which more than a thousand patents have been declared essential to 2G, 3G and 4G standards at ETSI. Core negotiated for several years with LG to license this portfolio; these negotiations failed. In September 2014, Core sued LG at the Paris High Court (“Tribunal de Grande Instance”) for damages, on the one hand, and to fix the royalty rate for telecommunication devices in France, on the other hand. Five European patents were invoked. Judging that no evidence of infringement had been made, the Court dismissed these claims in April 17, 2015. Similar issues were raised on appeal, except that Conversant was only relying on two of the original five patents. It was always alleged that LG infringed both patents and Conversant was asking for the setting of the worldwide royalty rate. LG argued that the patents were invalid, that there was an absence of a FRAND offer and the exhaustion of rights by producing a Nokia - Qualcomm license.

Although the Paris Court of Appeal did not ultimately decide on the setting of the FRAND royalty rate, its judgment is nevertheless interesting because of the analysis of the essentiality that it offers and in that it is, to our knowledge, the first to apply the Trade Secrets Act of July 30, 2018, in  litigation related to patent law.

You can’t always get what you want

In the decision, it was precisely the lack of essentiality of the patents which put a (premature) end to the further discussions by the Court.

Claim 1 of the first patent, EP 0978210, relates to a "method for selecting a base station in a mobile communication system" comprising the two following steps: "identify a bad radio connection between a second base station and a multimode terminal" and "select one of the first base stations according to the measurement of at least one base station signal in the multimode terminal". According to the relevant technical provisions in the UMTS (3G) and LTE (4G) standards, if a radio connection with a quality below a threshold is identified, a measurement step as claimed shall be performed. On the other hand, the terminal may decide not to carry out said measurement if the quality of the radio connection is greater than the threshold. The Court concluded that a terminal that also performs the measurement when a good connection exists would be in accordance with the standards, but would not infringe the patent, so the patent would not be essential to those standards.

Claim 1 of the second patent, EP 0950330, relates to a "user terminal having a wireless interface and a formatting device for formatting a signal to be transmitted on said wireless interface in accordance with a protocol low-level signal formatting apparatus, characterized in that it comprises means for receiving a type signal, said type signal indicating a high level signaling protocol to be used for transmitting said signal, and for formatting said signal in accordance with to this high level signaling protocol". LTE terminals are able to access both "IPv4" and "IPv6" network protocols, which implies, according to the plaintiff, implementing the selection step targeted by this claim. The Court ruled that the patent itself did not distinguish between IPv4 and IPv6, but only referred to th Internet Protocol (IP). In addition, the standard does not explicitly state that the terminal must choose between IPv4 and IPv6 when both are available. It is therefore not possible to consider that such a selection step is required by the standard and therefore that the patent claiming it is essential.

But what about royalties if the patent is indeed infringed, but not essential? A priori, the patentee would no longer be bound by a FRAND commitment. The patentee could then be free to set the royalties of his choice. But before getting to that point, the patentee proves infringement independently of the sole implementation set out by the standard. The French courts would therefore return to the rules of "standard" patent law, as in the case in Vringo judgment.

Trade secrets, NDAs and FRAND licences 

Following an interim order issued in October 2018 (what did the interim order, the Paris Court of Appeal had decided to apply the Trade Secrets Act of July 30, 2018, and more particularly the new article L 153-1 of the French Commercial Code. This article provides that provides that a judge of the French court should take procedural steps to protect trade secrets referred to and disclosed during during litigation. Access to certain documents (including license agreements) were thus limited to the parties' lawyers and certain designated persons who have signed confidentiality agreements (in particular interpreters and economists). Two versions of written court submissions are also routinely filed.  In this case a full written submission was filed, together with a version which omits any reference to confidential information relating to the various license agreements in question. 

The hearing, which took place over three days, had to be managed to address these confidentiality issues.  During the first day, access to the courtroom was restricted to the parties' lawyers and some representatives of the parties. This session was devoted to the most sensitive parts (notably the Nokia-Qualcomm agreement). On the second day, the assessment of the FRAND rate was discussed. Again, access to the courtroom was limited to the above-mentioned individuals, and - when discussing comparable licence agreements - a number of designated experts were permitted access. On the third day, the validity, essentiality and infringement of the patents were discussed, without any access restriction this time.

Companies – patentees and licensees – often do not want to disclose comparable licensing rates in licence agreements, which are the results of lengthy negotiations.   Much of the time the negotiations leading up to licence and the licence itself are subject to confidentiality restrictions, with the negotiations often being governed by a non-disclosure agreement (NDA) and the licence terms including a non-disclosure provision.  Thus, parties will be reluctant to disclose such documents in proceedings if the court in question

The NDA at issue in Conversant governed the Nokia-Qualcomm licence and information, and was governed by German law.  German courts have been famous for not protecting confidential documents at all or to the same extent as other jurisdictions in litigation. At the time of the decision, the transposition of the EU Trade Secrets Directive had not yet been completed in Germany.  On the issue of confidentiality in the SEP context, the Oberlandesgericht Düsseldorf stated, in the Sisvel v. Haier decision in 2017, that a SEP was required to produce comparable license agreements, despite being covered by a NDA. In another decision also issued in 2017 -  Unwired Planet v. Huawei - the same Court stated that the plaintiff's refusal to produce an NDA could lead to the presumption of discriminatory practices while the refusal of the alleged infringer could lead to the conclusion that they were not a willing licensee. 

In Conversant, the French Court was first and foremost bound by the EU Trade Secrets Directive and its implementation under national French law.  The French Judge therefore applied the provisions of the Trade Secrets Act transposing the EU Trade Secrets Directive to protect the confidential information subject to the NDA.  This was particularly important since a German Judge would not have been able to provide such a solution at the time. Not only were the confidentiality provisions set out in an NDA not called into questioned, but the parties are still able to discuss royalty rates with all the necessary elements without destroying the confidence of the regime established by the NDA. This position adopted by the French courts is commercial and constructive.  Parties litigating in the French courts will be reassured that their NDAs will remain in force, while still being able to rely on comparable royalty rates as a benchmark for their damages arguments.

So, although we did not get what we want (i.e, an actual FRAND calculation), the recognition, introduction and application of the procedure for protecting confidential information in licences and negotiations gives parties some satisfaction.  With this regime in place, it won't be too long before the French courts and the new (and increasingly patentee-friendly) judges, discuss (and determine) a FRAND royalty rate…"