For the half-year to 30 June 2014, the IPKat's regular team is supplemented by contributions from guest bloggers Alberto Bellan, Darren Meale and Nadia Zegze.

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Thursday, 27 June 2013

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

The discussion


Telling the difference between
the two types of cases is as easy as
telling the difference between
these two kittens. 
There are two kinds of cases, commenced Birss J:  

(1)  Those where a defendant argues that the patent being asserted against it is invalid and/or not infringed but where the defendant concedes even if it is valid and infringed its only worth $X; and
Here, the court can resolve the value of $X before deciding on the merits of the infringement case.  The English courts have referred to this mechanism both in the High Court (Floyd J's dicta in Nokia v IPCom) and Birss J when he was sitting in the Patents County Court in relation to copyright cases:
"In cases like this the preliminary issue being decided is on a tangible basis. If the claimant wins, the damages or royalty will be X. It is clear what conditions are required to be satisfied for the determination of the preliminary issue to apply. Once the preliminary issue has been decided and the rate has been found to be X, the parties are not compelled to stop fighting about the merits of the patent. A settlement may ensue but, if it does not and at the later trial the patent is invalid, nothing will be due at all. The preliminary issue is binding but it is not a finding that the defendant must pay the sum found. On the other hand, if the patent is held valid and infringed, then of course the finding on the preliminary issue will take effect."
(2)  Those cases where a court could determine the rate and terms which would be arrived at as the outcome of a notional negotiation between a willing licensor and licensee to negotiate without (and before) fighting a trial on the merits about the underlying rights.
In this case, the court can consider the strength of the patents on the basis Vringo proposed just like how negotiators would.  The royalty rate arrived at would be different from that arrived at in the first case (i.e., it would be one with a healthy discount). This is the basis proposed by Vringo.  
However, in this case ZTE is not prepared to be bound by the outcome of the determination that Vringo proposes.  So even if the FRAND trial is heard first, it does not in fact bring the proceedings to an end.

The Court of Justice - balancing
sail boats on a knife's edge
since 1952
If this is the case, argued Vringo, then ZTE cannot be said to be a willing licencee at all.  And why does this distinction matter?  Well, the question of injunctions of course (especially given the parallel proceedings in Germany).  As the judge stated:  

"The concept of a willing licensee arises in this context as follows. There is what I will call a general idea (without expressing a view on whether it is right or wrong) that when a patent is an SEP, if a defendant is a willing licensee, then it may be that the patentee is not entitled to obtain an injunction against the defendant, whereas if the defendant was not a willing licensee, then the defendant may be subject to the risk of an injunction. This issue has developed in Germany and questions have been referred to the Court of Justice dealing with these issues. It arises in Germany at least in part as a result of the bifurcated procedure where a defendant in an infringement court can find itself in a position in which the patent is found to be infringed -- that is to say it covers the standard -- and is therefore facing an injunction a long time before validity has been determined by the Federal Patent Court. Any problem of this kind caused by bifurcation is not an issue here. ["Save for the fact that Vringo's case theory seems to be, in a sense, to bifurcate the case by getting the FRAND issues tried first in order to force a settlement before the validity issues can be tried", comments the AmeriKat]
This case is a long way from having to consider whether to grant injunctive relief; after all, according to ZTE, the patents are all invalid and/or not infringed. However, in any case I reject the idea that the stance being taken by ZTE in this jurisdiction can fairly be said to mean that ZTE is not a willing licensee. ZTE has said it is willing to take a FRAND licence on any patent found valid and infringed. In my judgment, a defendant accused of patent infringement by a patentee who claims to have a standards essential patent is and must be entitled to say, "I wish to know if this patent is valid or infringed or not before I take a licence". Such a stance cannot fairly be described as unwillingness. 
So here the defendant is entitled, in my judgment, to adopt a contingent position. In a contingent case like this, there is no basis on which the court could compel the defendants to accept a licence arrived at by approaching the matter as if the licensee was willing to take a licence without having a judicial determination of validity and/or infringement. 
Looking at it the other way, if, once the patent trials are heard, for example, say Vringo's alleged SEPs were found invalid, it would be absurd for Vringo to say it still wanted to have a trial to determine a FRAND royalty rate applicable in the United Kingdom. The rate would be zero. Equally, say Vringo won all the patent trials hands down and then conducted a FRAND trial, it would equally be absurd for ZTE at that trial to say, "Oh but these are weak patents likely to be invalid or not infringed and the royalty should correspondingly be less"

Mr Justice Birss then distinguished the cases cited by Vringo. Microsoft v Motorola was a case where the court could settle terms in the knowledge that their determination would resolve the dispute.  InterDigital v ZTE is case where ZTE is, contrary to their position in the English proceedings, willing to be bound by a licence settled by the US court regardless of validity and infringement being heard later.  In the Philips case, the defendants were prepared to conduct a FRAND trial on the basis that the patents were valid and infringed.

The decision

"No, you can't make me!" - ZTE digging its claws in
on FRAND.....
On the question of whether a FRAND trial should be held first, the judge stated that the burden of the FRAND trial was much heavier than anticipated by Vringo and would commit the parties to significant costs and time given the portfolio of hundreds of patents.  If both sides were willing to be bound by the outcome of one court, then there would be no reason why the English court could not resolve issue of FRAND in helping the parties reach a global resolution of the dispute.  However, a defendant cannot be compelled or coerced by the court to be placed into a position of accepting that course;  it is entitled to challenge validity and infringement of the patents in suit.

Just because Vringo has patent rights, held Birss J, it does not have the right to compel a defendant to enter into a licence.  If the defendant wishes to challenge validity, then the determination of the FRAND first is "a major distraction" and "potentially misleading"  creating an "idea that the defendant owes a sum determined as if it was willing to negotiate without determining validity or infringement."  The judge therefore refused to schedule a trial of the declarations sought by Vringo before the outcome of at least one of the two patent infringement cases were heard.

Sir Colin Birss
The judge also noted that, courtesy of some quick "back of the envelope" calculations, that the figures in dispute
"are comparable to the sorts of value of cases routinely now heard in Patents County Court. I am not suggesting that these patents should be transferred to the Patents County Court, but it is an indication that it may be sensible to adopt some of the elements of active case management in the Patents County Court system, in order to ensure that a proportionate approach to these patents is taken. That is another reason why a large FRAND trial would not be sensible before these patent trials."
"You can take the judge out of the PCC, but not the PCC out of the judge", concludes the AmeriKat.

In light of this decision, the name of the game for defendants facing patent infringement relating to SEPs seems to be as follows:  refuse to be bound by the court's determination of FRAND terms, thus compelling validity to be tried first permitting you to try and knock out the patents before any FRAND terms can be set.  Helpfully, the court has held that such "unwillingness" does not make a defendant and "unwilling licensee" potentially subject to an injunction. However, as referred to by Birss J in his decision, the AmeriKat looks forward to seeing what effect this dicta could have pending the Dusseldorf court's recent preliminary reference to the Court of Justice in the Huawei case.

In the meantime, for those of you tracking Vringo's litigation, CEO Andrew Perlman has this top tip for you:  "In terms of our ZTE litigation, what people should be looking for I think is the October fifteenth hearing that's scheduled in Mannheim, Germany".  Mark your calendars, ladies, gentleman and Kats.

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