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Sisvel International S.A. vs ZTE Italy s.r.l. and Europhoto Trading s.r.l.

18 January 2016 - Case No. 2695/2016 R.G.

On 10 December 2015, Sisvel International S.A. started a preliminary injunction proceeding before the Court of Turin against ZTE Italy, the Italian branch of smartphone manufacturer ZTE Corporation, and Europhoto Trading s.r.l., a reseller of ZTE devices based in Turin. Sisvel enforced its European patent EP 1 264 504 (“EP504”), which was declared essential to the UMTS standard by a declaration of 10 April 2013 in accordance with the ETSI IPR Policy. EP504 was a part of the “Sisvel Wireless Patents” portfolio, allegedly covering technical features of the GSM, GPRS, UMTS and LTE standards.

ZTE Italy s.r.l. is a company that is part of the group controlled by ZTE Corporation and is active in the importation, sale and marketing in Italy of different devices, including smartphones. These devices are sold, among others, by Europhoto Trading S.r.l., which operates through three outlets sales in Turin.

Sisvel purchased ZTE 'Blade S6' and 'Blade Vec 4G' mobile phones from one of the Europhoto sales outlets in Turin.

In 2012, Sisvel found that companies within the ZTE group were marketing products incorporating technology protected by Sisvel's patents without being authorized to do so. Sisvel sent a letter to ZTE in December 2012, stating that it held a number SEPs, including EP504, and that it was willing to offer ZTE a license on FRAND terms.

Sisvel and ZTE started negotiations and the parties entered into a Non-Disclosure Agreement (NDA) on 3 September 2013. In clause 12 of the NDA, Sisvel agreed not to enforce its patents against ZTE Corporation and its affiliates for three years from the date of signing of the NDA. [1]

In the course of the negotiations, Sisvel provided claim charts to ZTE in order to evaluate the licensing offer, but negotiations continued with difficulty.

With a letter dated 30 June 2014, Sisvel communicated to ZTE the termination of the automatic renewal of the NDA. With a second letter dated 13 October 2014, Sisvel communicated to ZTE, for a second time, the termination of the NDA. However, the negotiations went on for a while and in November 2015 Sisvel made a final licensing offer, which ZTE rejected claiming that it was not FRAND.

B. Court’s reasoning

The court rejected Sisvel’s preliminary injunction request with a decision dated 18 January 2016. [2] Referring to the principles established by the CJEU in the Huawei v ZTE case [Huawei], the court noted that Sisvel had negotiated the potential FRAND license only with ZTE Corporation, the parent company. [3] However, Sisvel had neither informed ZTE Italy, the Italian subsidiary, of the alleged patent infringement, of its intention to bring preliminary injunction proceedings, or of the technical features covered by the patent claims that were considered essential to the telecommunications standards. It followed that, according to the court, Sisvel did not meet the Huawei obligations vis-à-vis ZTE Italy and therefore could not be granted an injunction. [3]

The court added that, in any case, the covenant-not-to-sue clause included in the NDA specifically prevented Sisvel from filing an infringement action against ZTE Corporation and its affiliates, including ZTE Italy. [4] Although Sisvel had sent a letter to ZTE Corporation to unilaterally terminate the NDA before the beginning of the proceedings, this termination was ineffective under a reasonable interpretation of the NDA. [5] In particular, the termination communicated by Sisvel to ZTE Corp. in the letter dated 13 October 2014 was found not legitimate (and therefore ineffective) under the interpretation of clause 8 of the NDA. Clause 8 states that "the agreement shall be effective from its date – 3.9.2013 - and shall remain in force for three years, being automatically renewed for additional one-year periods unless terminated by either party by notice given at least 60 days prior to an annual renewal date, or unless no information has been exchanged between the parties during the year preceding each annual renewal date, whereupon this agreement shall terminate on that renewal date, or at any time upon thirty days' notice by either party". It is noted by the court [6] that the last sentence of clause 8 ("or at any time upon thirty days' notice by either party") clearly refers only to the second hypothesis of automatic annual non-renewal, i.e. the case of failure to exchange information during the year preceding each annual renewal date. And the clause seems interpretable as meaning that, in such a case, the agreement terminates on the said renewal date or, if neither party takes action on that date to give notice of termination, it expires at any time thereafter upon 30 days' notice given by either party. [3] The fact that the last clause refers only to the second case of non-renewal is clear both from a syntactical construction of the clause and from the fact that any other interpretation would deprive of meaning the provision of the first case of notice preventing annual renewal. As stated by the court, [3] a contract is to be interpreted in such a way that its provisions make full sense. The legitimacy of this conclusion, the court continued, [3] derives from the application of the laws of the United States and the Commonwealth of Virgina (that is the law applicable to the present contract under clause 14 of the NDA), since it gives effect to the so-called covenant-not-to-sue clause, i.e. the commitments not to sue that establish a permanent prohibition of legal action, with the consequence that, a fortiori, only temporary contractual prohibitions of action are admissible (as in the present case). In any case, Sisvel’s waiver of right-to-sue appears to be lawful also under the Italian law, given that there are no non-negotiable rights involved and that no legal prohibition has been infringed, so that the waiver appears to fall within the scope of private bargaining autonomy and to be admissible.

Therefore, the court held that Sisvel could not bring an action concerning the “Sisvel Wireless Patents” portfolio against any of the ZTE companies until 3 September 2016 (i.e. three years after the NDA was signed). [3]

The court issued a preliminary injunction against Europhoto s.r.l. While Europhoto argued that they had stopped selling ZTE phones, the court stressed that this was not sufficient to exclude the risk of a future infringement. [2]

  • [1] Specialized IP Court of Turin, 4 March 2016 – Sisvel International S.A. vs ZTE Italy S.r.l. and Europhoto Trading S.r.l. Pg 4, para 1
  • [2] Ibid, pg 4, para 1
  • [3] Ibid
  • [4] Ibid, pg 7, para 2.2
  • [5] Ibid, pg 6, para 2.2
  • [6] Ibid pg 7, para 2.2