Transparent patentees

If you are a patent holder and you would rather keep the commercial terms of your existing licences just to yourself and your licensees, take care when seeking to persuade other parties to take a licence.

You may not be able to keep existing terms to yourself, particularly if there is an ultimate threat of litigation against the potential licensee.

Recent cases in England, and an increased drive in Europe to encourage fair licensing terms, show that courts are increasingly willing to assist parties to avoid costly litigation (with the threat of injunctions), and to help them agree an appropriate licence instead.

The courts can do this is by making the negotiation of licence terms as transparent and fair as possible by using their case management powers to order disclosure of documents, specifically of licences, both during and now before proceedings have started.

Parties to litigation in England are obliged to disclose the existence of documents upon which they rely and documents which adversely affect or support their case and/or that of any other party. If the documents disclosed are privileged then they can be withheld from inspection by the other side. In general terms, however, if a document is confidential or contains commercially sensitive information that is not a bar to its inspection. The disclosing party would need to put in place specific protection, such as a confidentiality club, if it wished to restrict disclosure (for example to the other party’s lawyers or identified persons).

Disclosure is usually ordered by the Court once the litigation has started and after pleadings have closed. The Court also has the power to order pre-action disclosure¹ of documents against a would-be party to the potential litigation if that would help avoid the litigation, assist in disposing fairly of the litigation (by, for example, limiting the issues), or generally avoid unnecessary costs. Preaction disclosure must be limited and will not be ordered where it is perceived by the Court as an attempt by the applicant to ‘fish’ for documents.

In England there are also specific rules for disclosure in patent litigation which are designed to limit the burden of disclosure.² Documents which relate to the validity of a patent are only required to be disclosed if they fall within the period two years before or after the earliest priority date of the patent.³ Also, an alleged infringer of a patent often provides a product and process description in relation to the infringement, instead of providing standard disclosure.

The courts have broad case management powers to deal with cases justly and at proportionate cost. This includes the manner in which disclosure is dealt with.

In patent cases, the courts are mindful that disclosure can often be a costly exercise and of little utility. In Edwards Lifesciences AG,⁴ the judge described the disclosure exercise in relation to validity as ‘a monumental waste of time and money’ and said that it ‘provided a salutary reminder that disclosure in patent actions cost a great deal and was rarely of any use’.

He emphasised that ‘the court and the parties should be more robust in ensuring that disclosure exercises were not futile and that any disclosure was necessary and proportionate’.

In other words, the Court should take a pragmatic approach to its use of disclosure, and consider whether disclosure would be useful either for the purposes of case management, or would help settlement, or in fact would enable the enforcement of a party’s rights, not just in the UK but elsewhere. If so, the Court will normally order disclosure.

In some industries, for example the telecoms industry, many aspects of technology are protected by a thicket of patents, and it has become increasingly difficult to operate without contravening third party patent rights. Patent owners (including patent licensing companies, often referred to as non-practising entities (NPEs)) sometimes use litigation (or the threat of litigation) as a tool for maximising their licence income.

In patent cases it is usual for the Court to assess damages after the trial for infringement and validity has been concluded. In some cases the cost of litigating will far outweigh the damages available to the successful party.

The problems for any potential defendant are knowing whether it is worthwhile defending an action in view of the value of any likely royalty payment (should a licence be available) or forming a view as to potential exposure. The Court is aware that if licensing terms are not agreed before litigation is started the cost of fighting infringement actions can be disproportionate to the value of what is at stake.

In many instances knowing the value of previous licences granted by the patentee would be of great help. However, this information is closely guarded and commercially confidential to the wouldbe licensor. There is a tension here. Disclosure of existing licence terms will assist the licensee but will inevitably curb the advantage the patentee might have had in the licence negotiations. The English courts have recently addressed this issue – and have favoured the potential defendant/licensee.

Earlier this year, the English High Court ordered pre-action disclosure against a patentee licensing company, forcing it to disclose the terms of existing licences to enable the alleged infringer to decide whether it should take a licence for the sake of commercial expediency, or defend patent infringement proceedings.⁵

Big Bus, a company which operates open top bus tours, had been approached by a patent licensing company, Ticketogo, to take a patent licence for an internet ticketing system. It already had over 60 licensees, mainly in the transport sector but some also in the entertainment sector. A series of pre-action letters were sent by Ticketogo with demands for Big Bus to take a licence as the other licensees had done, and on one occasion Ticketogo attached a list of its existing licensees.

Big Bus made an ‘unprecedented’ strike and applied for pre-action disclosure of all of Ticketogo’s existing licences. It reasoned that it needed to understand the level of licence fee it was expected to pay in order to assess whether it was commercially more sensible to take the licence or defend any future infringement proceedings, knowing that a significant portion of its litigation costs were likely to be irrecoverable, even if it won at trial.

The judge granted the order for the preaction disclosure by the patentee of all of its comparable licences (those in the transport sector).

The court applied a two-stage test, assessing whether: (i) the documents could be subject to pre-action disclosure; and, if that was the case (ii) the court should exercise its discretion to order such disclosure.

Stage 1:

Under the relevant rules,⁶ the court has the power to order pre-action disclosure of documents provided that (i) those documents would be disclosed anyway in the proceedings and (ii) disclosure is desirable to dispose fairly of or avoid the litigation or to save costs.

Ticketogo made the point that with IP cases it is usual to have a split trial with liability first and quantum being heard only if liability had been established. It followed that disclosure on quantum takes place much later. In response the Judge made it clear that liability and quantum could be tried together.⁷

The judge accepted Big Bus’s position that the costs of fighting any patent case could outweigh the quantum of any claims, and cited examples from his own case load to support this. He also accepted the submission ‘that disclosure of the existing licences is desirable since it would allow Big Bus to establish the value of Ticketogo’s claim and thus assist the resolution of the dispute by an informed settlement.’ For these reasons the judge considered the first stage of the test to be satisfied.

Stage 2:

The court then went on to consider whether it should exercise its discretion to order the pre-action disclosure. The following issues were considered: (i) the confidentiality of the licences; (ii) the burden of disclosing the licences; (iii) the commercial implications on Ticketogo of disclosing the licences; and, (iv) whether disclosure of documents going to quantum was necessary from Big Bus as well.

The judge considered it straightforward for Ticketogo to write to each of its licensees ahead of any disclosure thus giving them notice to object to the court, with any objections being most likely overcome by the establishment of a confidentiality club to maintain confidentiality and limit the persons who could inspect the documents.

Ticketogo argued that the forced disclosure of its licences would quash its freedom to negotiate, as knowledge of other licensees’ royalty rates would hamper its ability to maximise fees. The judge did not consider this a valid objection: ‘Availability of price information is one of the key requirements for the proper functioning of any market, and I see no reason why the market for patent licences should be an exception to that rule. Why should Big Bus be obliged, if it does not wish to litigate, to accept whatever royalty rate Ticketogo now sees fit to offer it, if a court would award less by [way] of [sic] damages? Accordingly, I consider that it is appropriate to exercise my discretion in favour of disclosure.’

Ticketogo submitted that Big Bus ought to be able to evaluate the appropriate royalty rate independently, as other licensees had done. The judge disagreed. He felt that there was no good reason why Big Bus should have to fight and lose the case in order to find out what it had to pay Ticketogo.

Ticketogo finally submitted that if disclosure was ordered against it, then disclosure for quantum should also be ordered against Big Bus. Counsel for Big Bus accepted in principle that this was a fair request; ‘what was sauce for the goose was sauce for the gander’. The judge encouraged the parties to reach an agreement in this respect. In this case, Ticketogo had set out its position too late for the Judge to deal with it in the hearing.

In the Big Bus case the patentee was a licensing company and so there was some logic in the potential licensee knowing what terms are made available to others to arrive at any potential licence terms. However, the same logic arguably applies even if licences are not routinely available. Knowing whether there are licensees and potential royalty rates would often be very relevant information for any potential defendant in forming a view as to potential damages and whether to defend a claim in the first place.

The threat of pre-action disclosure of this type against a would-be patent licensor is clearly a valuable addition to the armoury of a threatened infringer. However, should a party wish to follow Big Bus’s example of seeking disclosure of a patentee’s licensing terms then it should beware of the potential quid pro quo: it may be ordered to give early disclosure of the extent and value of its own alleged acts of infringement.

Parties should also note that the Big Bus case is pending appeal. Both patentees and licensees await the appeal decision with interest.

The English courts are not alone in encouraging parties to provide early details of licensing terms.

In the recent Huawei case, the Court of Justice of the EU (CJEU) on a referral from the Regional Court of Dusseldorf⁸ put further pressure on patent holders, especially holders of standard essential patents (SEPs) who have given a commitment to offer licences, to agree licence terms that are appropriate and (in the case of SEPs) on FRAND (fair, reasonable and non-discriminatory) terms.

In Huawei, the CJEU ruled that an application for an injunction brought by a holder of a SEP may constitute abuse of a dominant position, unless, prior to bringing the action, the patent owner has provided the alleged infringer (after the alleged infringer has expressed its willingness to conclude a licensing agreement) with a specific, written offer for a licence on FRAND terms specifying, in particular, the royalty and the way in which it is to be calculated.

While the CJEU did not comment on how the FRAND terms were to be assessed, there is now clear guidance that SEP holders must first offer a licence on FRAND terms if they are to avoid an allegation of abuse of a dominant position.⁹ If the terms of any licence cannot be agreed then ultimately they could be decided by an independent body such as a court or arbitrator.

One way to assist in arriving at appropriate FRAND terms would be by disclosure of existing comparable licences. We wait to see how the national courts will apply the Huawei decision. But certainly this and the Big Bus decision indicate that (at least in England and Wales) we are likely to see more intervention from the courts, using their broad case management powers to order parties to disclose commercial licensing arrangements so as to assist with early resolution of cases.