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TQ Delta LLC v Zyxel Communications UK Ltd. and Ors., UK High Court of Justice
28 September 2018 - Case No. HP-2017-000045,  EWHC 2577 (Pat)
11 October 2018 - Case No. HP-2017-000045,  EWHC 2677 (Pat)
The Claimant, TQ Delta LLC, acquired patents that had been declared as essential to the DSL standard under the so-called “ITU Recommendations” from a company called Aware Inc. (Standard Essential Patents, or SEPs)  . The ITU Recommendations require from the SEP holder to make its patents accessible to users on Fair, Reasonable and Non-Discriminatory (FRAND) terms and conditions  . The Defendants, Zyxel Communications UK Ltd. and Zyxel Communications A/S, manufacture and sell various types of equipment complying with the DSL standard  .
The Claimant brought an infringement action against the Defendants before the UK High Court of Justice (Court) based on two SEPs it holds  . The proceedings involve, on the one hand, technical issues concerning the validity, essentiality and infringement of the SEPs in question and, on the other hand, the licensing of these SEPs on FRAND terms  .
Prior to service of the statements of case, the Court ordered the Claimant to disclose licence agreements concluded with third parties, covering also the SEPs in suit (comparable agreements)  . The Claimant requested the Court to establish an “external eyes only” regime with respect to comparable agreements, especially a licence entered with a company called Zhone (Zhone licence) as well as a licence concluded with another company referred to as company “X” (X licence). In June 2018, the Court dismissed Claimant’s motion  . After that, the Court ordered standard disclosure, requesting both parties to search for documents relevant to the case and produce so-called “disclosure statements”, containing the documents identified  .
In its disclosure statement, the Claimant included only the licences concluded by Aware Inc. with third parties covering also the patents in suit (of which he possessed only redacted copies; “Aware licences”), the assignment agreement signed with Aware Inc., the inter partes correspondence with the latter as well as a few public validity findings made by the US Patent and Trademark Office on certain patents of its portfolio  .
The Defendants, who had obtained unredacted copies of the Aware licences directly from Aware Inc.  , complained that the Claimant’s disclosure was not appropriate and set out various categories of documents which, in their view, should have been in disclosure  . Accordingly, the Defendants requested an order for standard disclosure to be repeated, backed this time by a so-called “unless order” (meaning that non-compliance with the order will be sanctioned by the dismissal of Claimant’s claims)  .
On 28 September 2018, the Court made an order requesting disclosure of the following specific categories of documents by the Claimant  :
- Documents concerning the assignment of patents from Aware Inc. to the Claimant (besides the assignment agreement itself);
- documents regarding to the assessment of the (technical) essentiality of the patents in suitIbid, pages 5 et seq., and
- documents concerning the Claimant’s royalty calculationIbid, pages 6 et seq..
On the other hand, the Court refused to order disclosure of documents relating to the negotiations leading to the Zhone licence, the X licence and the Aware licences, documents concerning licensing negotiations between the Claimant and third parties which have not resulted in a licence yet  , as well as documents regarding to assessments of the validity  or the technical significance of Claimant’s patents within the standard  .
With judgment dated 11 October 2018, the Court set forth the specific terms of the order  . Since the Court held that the Claimant did not carry out a proper search for existing documents under the previous standard disclosure order, it required the Claimant to conduct such a search and deliver a new statement of disclosure  . In addition, the Court ordered the Claimant to disclose the aforementioned specific categories of documents, ruling that failure to comply with this order, will lead to the dismissal of Claimant’s claim  .
B. Court’s reasoning
The Court explained that disclosure can be refused only with respect to documents not relevant to the case and/or documents which are relevant but might have been privileged or disproportionate to search for  . In the Court’s eyes, proportionality comes in play in this context under two aspects: On the one hand, the cost and complexity of searching for and extracting the relevant material should be considered  . On the other hand, the impact of the documents on the trial as well as the cost and complexity of deploying any material which is produced in the proceedings needs also to be taken into account  .
Further, the Court made clear that disclosure cannot be refused on the grounds that documents referring to a specific transaction (e.g. a licensing agreement) are subjective in nature (whereas FRAND is objective); in the Court’s eyes, even then, the acts of individuals working in a field is capable of being evidence on what “reasonable business people” might do in similar circumstances  .
On this basis, the Court held that documents concerning the assignment of the SEPs in suit from Aware Inc. to the Claimant should be disclosed  . The fact that the Claimant had disclosed the assignment agreement itself does not mean that further disclosure is not necessary  . Documents referring to the assignment might be “potentially highly relevant information” in FRAND-related trials, since they could provide insights into how different parts of the patent portfolio assigned were valued, offering (presumably “at arm's length”) a “concrete data point” for the respective valuation  .
The Court further found that documents concerning the assessment of whether the patents in suit are (from a technical perspective) essential to the DSL standard should also be disclosed  , because it is particularly relevant to know what proportion of the patents which were assigned to the Claimant by Aware Inc. are essential to the DSL standard  .
Furthermore, the Court requested disclosure of documents referring to the Claimant’s royalty calculation, since they were regarded as “directly relevant” to the case  . The fact that respective documents were prepared in connection with previous litigation between the parties in the United States does per se hinder disclosure, unless litigation was the “dominant purpose” for which the documents were made  . In other words, the litigation privilege applies only to documents created in litigation to put forward arguments about what is and is not FRAND in court; on the contrary, documents which – in Claimant’s practice as a licensing company – led to the creation of the royalty rates and other terms in FRAND offers are subject to disclosure  .
On the other hand, the Court held that disclosure of documents relating to the negotiations which had led to the Zhone licence, the X licence and the Aware licences was not required  . Although such documents might, in principle, be relevant to the case (particularly for demonstrating what the parties may have said in the licensing negotiations about the value of the patents and their relevance to the standard)  , the Court found that disclosure of documents related to the Zhone licence and the X licence would be disproportionate in the present case, since it would have limited probative value  . This is because the Defendants had argued that the Zhone licence was not a relevant comparable agreement  . In addition, none of the parties advanced the X licence as a comparable agreement in connection with the royalty rates; in the Court’s eyes, the fact that it might be comparable in relation to other licence terms, did not have “significant utility” for the case  . With respect to documents related to the negotiations of the Aware licences, the Court refrained from ordering disclosure, because it was convinced that the Claimant was not in possession of such documents  .
Regarding to documents concerning licensing negotiations between the Claimant and third parties the Court held that, although these documents might be relevant to the case, their disclosure would also be disproportionate in light of the rather limited probative value that they are likely to have  .
Furthermore, the Court explained that documents referring to the individual technical significance of a patent within a standard (in a sense that some patents might be of higher value to the standard than others), were not relevant in the present case, since no party pleaded that respective considerations need to be taken into account for the royalty determination  . In this context, the Court expressed doubts about whether a method of determining royalties based on such considerations is workable in practice at all  .
The Court finally refused disclosure of documents relating to the validity of Claimant’s patents  . Insofar, the Court followed the usual practice of UK Courts in patent cases, according to which, as a rule, unspecific disclosure relating to patent validity is refused  .
-  TQ Delta LLC v Zyxel Communications, UK High Court of Justice, 28th September 2018, Case-No. HP-2017-000045,  EWHC 2577 (Pat), page 1.
-  Ibid, page 1.
-  Ibid, page 1 et seq. With respect to the relationship between the “technical trials” (that means the proceedings concerning the validity, essentiality and infringement of the SEPs in suit) and the “non-technical trial” regarding to FRAND licensing see, TQ Delta LLC v Zyxel Communications, UK High Court of Justice, 21st November 2017, Case-No. HP-2017-000045,  EWHC 3305 (Pat); summary available at caselaw.4ipcouncil.com/english-court-decisions/tq-delta-llc-v-zyxel-communications-ewhc
-  TQ Delta LLC v Zyxel Communications, UK High Court of Justice, 13th June 2018, Case-No. HP-2017-000045,  EWHC 1515 (Ch), paras. 25 and 30; summary available at caselaw.4ipcouncil.com/english-court-decisions/tq-delta-llc-v-zyxel-communications-and-ors-ewhc
-  Ibid, TQ Delta LLC v Zyxel Communications, UK High Court of Justice, 13th June 2018.
-  Q Delta LLC v Zyxel Communications, UK High Court of Justice, 28th September 2018, Case-No. HP-2017-000045,  EWHC 2577 (Pat), page 2.
-  Ibid, page 2.
-  Ibid, page 3.
-  Ibid, page 7.
-  Ibid, pages 5 et seq.
-  Ibid, pages 6 et seq.
-  Ibid, page 5.
-  Ibid, page 6.
-  TQ Delta LLC v Zyxel Communications, UK High Court of Justice, 11th October 2018, Case-No. HP-2017-000045,  EWHC 2677 (Pat).
-  Ibid, pages 2 et seq.
-  TQ Delta LLC v Zyxel Communications, UK High Court of Justice, 28th September 2018, Case-No. HP-2017-000045,  EWHC 2577 (Pat), page 2.
-  Ibid, page 4.
-  Ibid, pages 3.