The Conversant judgment: FRAND licences between patent law and business secrecy
The judgment rendered by the Paris Court of Appeal on 16 April 2019 in the Conversant v. LG case raised hopes of seeing the French judge (finally) rule on the setting of royalties FRAND license. This hope was in vain. Nevertheless, this decision has interesting aspects, particularly concerning the analysis of essentiality and trade secrets.
1. At ease formerly Core) holds a portfolio of patent law Over a thousand have been declared essential patents for standards 2G, 3G and 4G from the European Telecommunications Standards Institute (ETSI). Core negotiated for several years with LG in order to achieve a licence for this portfolio; these negotiations failed. Thus, in September 2014, Core assigned LG before the Paris High Court (TGI) in order to obtain damages, on the one hand, and to have the royalty rate for telecommunication devices fixed LG, on the other hand. Five European patents were invoked. Judging that no proof of infringement had been provided, the TGI rejected these claims in April 2015. Identical questions were raised on appeal, except that At ease was now only invoking two of the five initial patents. The defendant pleaded the invalidity of the patents, the absence of a FRAND offer, and the exhaustion of rights by producing a licence. Nokia – Qualcomm.
2. Although the Court of Appeal ultimately did not rule on the determination of the FRAND royalty rate, its judgment is nonetheless interesting due to the analysis of essentiality it offers and because it is, to our knowledge, the first to apply the law of 30 July 2018 on the protection of trade secrets in patent law litigation.
3. In the judgment under review, it was precisely the lack of essentiality of the patents that brought the Court's developments to an (premature) end.
In this case, claim 1 of the first patent, EP 0978210, concerned a « Method for selecting a base station in a mobile communication system » comprising the following two steps: « identify a bad radio connection between a second base station and a multimode terminal» and «Select one of the first base stations based on the measurement of at least one base station signal in the multimode terminal »According to the relevant technical descriptions of UMTS (3G) and LTE (4G) standards, if a radio connection of below-threshold quality is identified, a measurement step as claimed must be performed. In contrast, the terminal may, or may not, decide to perform the said measurement if the radio connection quality is above the threshold. The Court concluded that a terminal which also performs the measurement when there is a good connection would comply with the standards, but would not infringe the patent, which would therefore not be essential to the said standards.
Regarding the second patent, EP 0950330, it bore, according to its claim 1, on a « user terminal comprising a wireless interface and a formatting device for formatting a signal intended to be transmitted over said wireless interface in accordance with a low-level signal formatting protocol, characterised in that it comprises means for receiving a type signal, said type signal indicating a high-level signalling protocol to be used for transmitting said signal, and for formatting said signal in accordance with said high-level signalling protocol »LTE terminals are capable of accessing both «IPv4» and «IPv6» network protocols, which implies implementing the selection step covered by this claim. Thus, according to the applicant, the subject matter of claim 1 is implemented. The Court ruled that the patent itself, although filed after the creation of IPv4 and IPv6, did not distinguish between these versions and only referred to Internet Protocol (IP). Furthermore, the standard does not explicitly state that the terminal must choose between IPv4 and IPv6 when both are available. It is therefore not possible to consider that such a selection step is required by the standard and thus that the patent claiming it is essential.
4. One question, and not a minor one at that, remains at the end of these developments: What royalties if the patent is actually infringed and not essential? In principle, in such a scenario, the patent holder would no longer be bound by a FRAND commitment. The patent holder would then be free to set royalties of their choice. That said, this scenario can only come about if the patent holder proves infringement independently of the mere implementation of the standard. We would therefore revert to the rules of «standard» patent law. This position also aligns with that adopted by the TGI in the case Vringo where one patent was revoked while the other was found to be non-essentialTGI Paris, 30 October 2015, Vringo v ZTE, Case no 13/06691).
5. Furthermore, regarding the trade secret, following an interim order made in October 2018, the Paris Court of Appeal decided to apply the law of 30 July 2018 and, more particularly, the new Article L. 153-1 of the Commercial Code. Access to certain documents (in particular, the licensing agreements) was thus restricted to the parties' lawyers and to certain designated individuals who had signed confidentiality agreements (in particular, interpreters and economists). Two versions of the written submissions were also filed: one complete version and a redacted version, from which all references to confidential information relating to the various licensing agreements in question were removed. Finally, the hearing took place over three days. During part of the first day, access to the courtroom was limited to the parties' lawyers and a few representatives of the said parties. This private session was dedicated to the most sensitive documents (the agreement Nokia-Qualcomm notably). On the second day, the determination of the FRAND rate was discussed. Again, access to the courtroom was limited to the aforementioned individuals, as well as a number of designated experts, for part of the day – when comparable licence agreements were disclosed. On the third day, the validity, essentiality and infringement of the patents were discussed, with no access restrictions this time.
Few companies wish to disclose the rates of licences comparables themselves often resulting from long negotiations. It should be noted in this regard that in Germany the transposition of the trade secrets directive has not yet been completed and that the’Court of Appeal de Düsseldorf stated, in the decision Sisvel v Haier, in 2017, that the holder of a SEP was required to produce comparable licence agreements, even though they were covered by a Confidentiality agreement (hereinafter referred to as the «NDA»)OLG Düsseldorf, 30 March 2017, Sisvel v Haier, case no I-15 U 66/15). In another decision also made in 2017, Unwired Planet v Huawei, the same Court held that the claimant's refusal to produce a non-disclosure agreement (NDA) could suggest discriminatory practices, whereas the alleged infringer's refusal could lead to the assumption that they were not a voluntary licensee. It was then judged that the following terms were reasonably likely to be covered by an NDA: (i) limiting disclosure to only four named employees of the defendant, (ii) requiring confidentiality obligations to survive the termination of the employment contract, (iii) imposing a contractual penalty of €1 million, and (iv) providing for limited exceptions to the confidentiality obligations, which exceptions the defendant would have to demonstrate.OLG Düsseldorf, 14 Dec. 2016 and 17 Jan. 2017, Unwired Planet v. Huawei, Case No. I-2 U 31/16).
7. The French judge can therefore be proud of having applied the provisions resulting from the directive's transposition law on trade secrets before the German judge can do the same in his country. Not only is confidentiality not compromised, but furthermore the parties are likely to debate comparables behind closed doors with all the necessary elements. We can therefore, for our part, only welcome this application of the Act of 30 July 2018, particularly as the confidentiality of the procedure perhaps constitutes the only positive aspect of the implementation carried out by the French legislator, which is otherwise very lacking (see our commentary on this law in Recueil Dalloz 2018, page 1817).
8. So of course we haven’t had exactly the decision we were hoping for, but both the grounds relating to essentiality and the exemplary introduction of the procedure specific to trade secrets lead us to believe that the Court, whilst modernising the said procedure, is reminding us of some fundamentals concerning patent infringement. And perhaps in this way, patents, already highlighted in the case Vringo, will play a greater role in FRAND negotiations in the future, in France as elsewhere in the world.