Image from here.
In a recent order, the Delhi HC decided on the terms of the constitution of the Confidentiality Club in certain connected SEP suits. Confidentiality clubs, as agreed-upon mechanisms to restrict the dissemination of confidential documents and materials in certain suits to only the necessary personnel, do have their criticisms. For example, by restricting access to valuable information around standard “essential” patents, even though they are contained in different license agreements. In this way, confidentiality clubs can lead to situations where the plaintiffs retain a high level of information asymmetry vis-à-vis implementers, enabling a higher licensing fee extraction. The problem exacerbates considering the already weaker position that the defendant-SEP implementer occupy in the market (Interested readers can refer to the posts here, here, and here).
The current order deals with three matters, all involving Nokia as the plaintiff, and different defendants (Asustek Computer, Acer, and Hisense Group). The SEP in question pertained to Nokia’s High Efficiency Video Coding Standard (HEVC/H.265) used in multimedia products. The underlying suits are concerned with alleged infringing acts of the defendants, and the plaintiff had filed applications for the constitution of a confidentiality club. In this post, I first summarize the conditions of the confidentiality club’s constitution and then offer my remarks.
Not So Brief Summary of the Order:
The first plank of contention was concerned with the inclusion of defendants’ in-house representatives in the club. Despite the initial opposition, Nokia ended up consenting to its participation. Still the Court referred to past case law, including Interdigital v Xiaomi where the permissibility of in-house officials’ inclusion in confidentiality clubs had been affirmed. Nokia itself had consented to such inclusion in a past case. And finally, the present parties are involved in corresponding foreign litigation on the same subject matter, where the constituted club contains in-house representatives. Consequently, the opposition to in-house representatives was devoid of legal merit. Nokia wanted the defendants to nominate the same in-house representatives as the ones who were part of the proceedings before the Unified Patent Court Munich and the German District Courts. The Court found Nokia’s request to be reasonable, especially in light of the limited pool of officials available with the defendants.
Nokia’s next prayer was for the imposition of a limited-licensing restriction on defendants’ in-house representatives. It wanted these members of the club to be prohibited from negotiations with the third parties (without their consent) whose agreements were before the club, for a period of two years. Nokia’s licensees might be the defendants’ competitors and the latter could derive unfair advantage from the licensees’ commercially sensitive information. But the Court here chose to disagree with Nokia. Its disagreement hinged on Nokia’s inability to demonstrate the misuse of the third-party information by defendants. To protect the interest of third-party licensees, the Court chose a lesser restraining alternative :As long as the third party is given a full and prior disclosure that its agreements are available to the defendant and still it decides to deal with its in-house representatives, no prejudice would be caused to the third party. Also, the Court highlighted Nokia’s inconsistent position in the foreign litigation where it had not asked for a similar restriction on the defendants. On that one order in Interdigital v Oppo cited by Nokia where this bar had been imposed, the Court noted that the same had been a consent order and the corresponding foreign proceedings therein also had identical restrictions.
Nokia had also asked for permission to file redacted versions of confidential documents. Defendants highlighted the necessity to have complete access to these documents to ascertain the comparable licensing terms and also judge whether the royalty rates being negotiated were FRAND or not. The Court found a compromise: Nokia will be allowed to redact portions of the documents that were agreed between Nokia and the third party to remain confidential. The Court added a rider: no information shall be withheld that formed the basis of the determination of FRAND rate. Citing Xiaomi, the Court ordered the non-redacted versions to be filed as well which would be accessible to the defendants’ counsels, but not the in-house representatives. Moreover, the defendants would be allowed to pray for disclosure of the redacted portions on a document-to-document basis. Essentially the Court would have to assess the justifiability and fairness of the redactions. This however I believe would just prolong the proceedings unnecessarily.
And finally, Nokia was also ordered to disclose all comparable licenses to the confidentiality club. This would enable the defendants to undertake a complete evaluation of the terms and then assess the FRAND-compatibility of the royalty terms being offered. Nokia could not have the discretion to select which licenses to disclose.
Congruence, Competitive Edge, and Confidentiality:
This order’s assessment reveals certain key takeaways. The first notable one is the Court’s attempt to ensure congruence of the confidentiality club’s constitutive terms with those before UPC Munich and the German District Courts. Whether it be the names of the defendants’ in-house representatives or the absence of the limited-licensing restrictions, the order refers to the state of proceedings going on before these foreign adjudicatory forums.. An IAM article notes that German Courts have been preferred forums for SEP litigation for multiple reasons, including the proclivity towards a patentee-friendly application of law.
Nokia’s prayer for the negotiating bar on defendants’ representatives, looked from a more general perspective, is a contentious issue . Even if the order in the Oppo litigation was based on parties’ consent, that in itself doesn’t discount the underlying reasons for the need for such restrictions. The Court termed Nokia’s concerns around harm to third-party licensees as presumptive prejudice, which could be waived by third-party licensees. What it implies then is that the third party has to decide between the two courses of action: (i) participate in negotiations with the defendants and thus waive off allegations of prejudice, or (ii) refuse to engage with them. Here the Court’s preoccupation appears to be with ensuring the maximum efficacy of the FRAND determination procedure by not imposing any unwarranted fetters on the defendants , who were also concerned that such a bar would interfere with their ongoing negotiations with third parties and put them at a competitive disadvantage. More fundamental is another question: what harm was Nokia even referring to? It seemingly revolves around some notion of competitive advantage which can be reasonably argued to be a concern not for courts to worry in SEP matters.
Another crucial observation on the case pertains to the Court’s treatment of confidentiality concerns. Beginning from Xiaomi, the jurisprudence on confidentiality clubs has been benevolent towards the allowance of in-house representatives in confidentiality clubs. (see here and here for recent jurisprudence). Xiaomi’s one line of reasoning was that advocates can only act on the instructions from the client. If the client doesn’t have access to the third-party agreements, it will be unable to engage meaningfully with the negotiations around fixation of FRAND rates. Contrarily, a coordinate single bench in Interdigital v Oppo had warned against the inclusion of in-house stakeholders. Oppo reasoned that the internal officials, in having access to third-party documents, can benefit their employers by utilizing the gained information in negotiations with those third parties. Such an accrued benefit defeats the club’s purpose by jeopardizing the confidential information’s integrity. Nokia had cited this case but the Court was quick in pointing to Oppo’s actual decision: in-house representatives had been allowed. Oppo itself had also stated that internal officials can be included, but certain reasonable restrictions will have to be imposed.. What counts as ‘reasonable’ is anyone’s best guess. Also, we need greater judicial clarity on aspects such as what exact benefits the confidential information gives to the defendant, and the metric of classifying information as sensitive.
It is here that the permission to redact confidential portions (an acceptable practice worldwide as well) comes as a balancing attempt to satisfy Nokia’ concerns. Xiaomi had, however, observed that the defendant can challenge the redaction if the redacted content is necessary to maintain a substantial defence. My opinion is that this evaluation sounds easier said than done. There may be information that occupies the core of the overlapping venns of (i) confidentiality and (ii) materiality to FRAND determination. Will then concerns of confidentiality be given a short shrift?
Providing the SEP implementor with access to comparable licensing agreements is a crucial component to FRAND negotiations. It has been argued that reliance on comparable licensing documents provides the most market reliable manner to set FRAND rates or assess the FRAND compliance of the proposed rates. Without knowing what had been offered to the third parties, neither potential licensees nor the court can determine the offer’s FRAND compliance. This method also has its criticism: if the comparable agreements themselves stand UnFRANDly, then any subsequent assessment in a case will also be coloured. The present order in decreeing the disclosure of all comparable licenses still is a welcome step. Readers will recall the Ericsson-Lava SEP case (covered here and here) where Lava’ insistence on getting access to Ericsson’s third party agreements during negotiations had been taken to be in bad faith; this made Lava an unwilling licensee. Nokia unequivocally recognizes the implementor’s interest in getting hold of all comparable agreements for an optimal assessment of FRANDness.
The order in this Nokia litigation adds to the growing jurisprudence around confidentiality clubs. The courts should endeavour to seek greater clarity, on a principled basis, on the relationship between the SEP patentee, implementer, and the third-party licensees. Such an inquiry will help in charting clearer pathways to reconciling the concerns of confidentiality and the optimal access to information for better FRAND negotiations.