NOKIA CORPORATION v. TCT MOBILE LTD

HCCL 19/2011

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMMERCIAL ACTION NO 19 OF 2011

____________

_______________

J U D G M E N T

_______________

Introduction

1.  This is an application by the Plaintiff for specific discovery from the Defendant pursuant to RHC Order 24 rule 7.  By its summons dated 4 March 2013, the Plaintiff seeks discovery of three categories of documents, to be verified on affidavit.  The documents sought were set out in the Schedule to the summons. But before I turn to the Schedule itself, it is necessary to give a brief synopsis of the background facts so that the application can be more easily understood.

Background

2.  The Plaintiff is said to be the owner of patent rights essential to certain mobile communication technology standards. It entered into a Patent Licence Agreement dated 31 March 2007 (“the Agreement”) with the Defendant whereby the latter was licenced to make products incorporating those standards in return for payment of royalties.

3.  It was an express term of the Agreement, at Clause 4.7, that:

(1)   The Plaintiff was entitled to nominate independent auditors to examine and audit all relevant records of the Defendant and its Affiliates that might contain information bearing upon the amount of royalties payable;

(2)   The Defendant was obliged to prepare and keep full, clear and accurate records that would permit the auditors to ascertain the proper amount of royalties payable by the Defendant.

4.  InNovember 2010, the Plaintiff gave the Defendant notice of the nomination of KPMG to conduct an audit pursuant to the Agreement regarding royalties payable by the Defendant. 

5.  On 30 November 2010, KPMG provided the Defendant with a preliminary data request setting out the documents it required for its initial analysis work. The Plaintiff alleged the Defendant had failed to comply with the request.

6.  KPMG conducted fieldwork at the Defendant’s premises in Shenzhen on 13-17, 20-21 December 2010.  The Plaintiff again alleged that during the fieldwork, the Defendant refused to cooperate and failed to provide the auditors with all documents and data sought; and of those which were actually provided, they were not in the appropriate format, and no copies were allowed to be taken away from the premises.

7.  In June 2011, KPMG produced a draft report (“the Draft Report”).

8.  Relying on the Draft Report, the Plaintiff claimed that the Defendant had, in breach of the Agreement, underpaid royalties due and owing to it.  On the basis of KPMG’s estimates, the Plaintiff alleged that the Defendant had underpaid at least €988,023.68. 

9.  In the prayer for relief in the re-amended Statement of Claim, the Plaintiff claimed for, inter alia, an account of all royalties and other monies due under the Agreement, and payment of sums found due including €988,023.68, as well as damages for breach of the Agreement.

10.  In the re-amended Statement of Claim, the Plaintiff further alleged that, in breach of clause 4.4 of the Agreement, the Defendant had manufactured or sold CDMA/UMTS Subscriber Terminals and/or CDMA/CDMA 2000 Subscriber Terminals which used the Plaintiff’s “Essential Patents” (as defined in the Agreement) other than those for which licence fees and royalty terms had been agreed, without notifying the Plaintiff, first agreeing licence fees or royalty terms with the Plaintiff or paying the Plaintiff licence fees or royalties. For that breach, the Plaintiff also claimed an account of all sales of products which used the Plaintiff’s Essential Patents and payment of all royalties found due.

11.  The key points pleaded in the Amended Defence, summarised in Mr Stock’s skeleton argument, were:

(1)   The Defendant denied that the audit conducted by KPMG was a valid audit pursuant to clause 4.7 of the Agreement. It asserted that KPMG was not independent.

(2)   The Defendant denied that it had failed to fully cooperate with KPMG or failed to provide KPMG documents and information relevant to the audit, in breach of the Agreement.

(3)   The Defendant denied the alleged underreporting of royalties save for an amount of €71,846, which it has since paid. 

(4)   Clause 4.4 of the Agreement was an agreement to agree or an agreement to negotiate and was void and/or unenforceable.

The documents sought

12.  I now turn back to the Schedule of documents sought.

13.  §1 of the Schedule provides as follows:

“All documents in their original format (electronic or otherwise) which the Defendant provided KPMG with access to in connection with the audit performed pursuant to the Patent License Agreement dated 31 March 2007 on 13-17 and 20‑21 December 2010.”  (“Category 1”)

14.  §2 of the Schedule seeks

“All documents which the Defendant provided KPMG access to in response to the following request from KPMG dated 30 November 2010” (“Category 2”)

15.  It then goes on to enumerate eleven sub-categories of documents. Since Mr Ling has indicated in his skeleton submission that he would no longer pursue three of them, that leaves only eight sub-categories for consideration as follows:

“2(b)   “The Defendant's sales and returns records for LICENSEE Licensed Products”

2(c)    “The Defendant's inventory data for LICENSEE Licensed Products, including inventory movement file for the entire period of review”

2(ca)   “A master product list with a complete and accurate product hierarchy including the attributes of the products (including the mobile communication technology standard(s) that applied to each product), the product and SKU numbers and the product manufacturer's name(s)”

2(d)   “The Defendant's price lists for LICENSEE Licensed Products”

2(e)   “Supporting documentation for discounts and other deductions claimed by the Defendant in arriving at the Net Selling Price of LICENSEE Licensed Products”

2(ea)   “A company structure chart detailing the Defendant's corporate partners, related companies and entities”

2(eb)   “Defendant's affiliated sales records for the period of the audit”

2(g)   “The Defendant's reconciliation of sales data to its general ledger and financial statements” ”

16.  §4 of the Schedule provides as follows:

“Documents enumerated as Items 4, 6, 7, 18, 19, 37, 38, 59 and 60 of the Defendant's List of Documents dated 6 June 2012 in electronic (i.e. Excel or other spreadsheet) format.” (“Category 4”)

The governing principles

17.  The following principles apply to applications for specific discovery under RHC O 24 r 7 and Counsel on both sides are largely agreed on them.

(1)   There is no jurisdiction to make an order unless there is sufficient evidence or prima facie case that: (a) the documents or classes of documents exist which the other party has not disclosed; (b) the documents relate to a matter in issue in the action; and (c) the documents are in the possession, custody or power of the other party.  

(2)   Once it is established that those three prerequisites for jurisdiction do exist, the court has a discretion whether or not to order discovery. 

(3)   The Court will not make an order unless the discovery sought is necessary either for disposing fairly of the cause or matter or for saving costs.

(4)   The order must identify with precision the documents or categories of documents which are required to be disclosed, for otherwise the person giving discovery may find himself in serious trouble for swearing to a false affidavit, even though doing his best to give an honest disclosure.

(5)   Where discovery is sought in relation to a class of documents, it is important that the class should not be defined or described too widely, and should not be defined so as to include documents which are not relevant.

(6)   Despite the Peruvian Guano test for relevance, “fishing” is not allowed, and discovery should not be oppressive. 

(7)   Statements in a party’s affidavit of documents are conclusive. The respondent may answer an application for specific discovery by an affidavit stating that he does not have the documents, and this will be conclusive at the interlocutory stage.

See: Berkeley Administration Inc v McClelland [1990] FSR 381 at 382; Lee Nui Foon v Ocean Park Corp (No 1) [1995] 2 HKC 390 at 391-3; Paul’s Model Art GMBH v UT Ltd [2006] 1 HKC 238 at §§24 & 32; Tai Fook Futures Ltd v Cheung Moon Hoi Jeff [2006] 4 HKC 81 at §§33 to 35.

Discussion

Category 4

“Documents enumerated as Items 4, 6, 7, 18, 19, 37, 38, 59 and 60 of the Defendant's List of Documents dated 6 June 2012 in electronic (i.e. Excel or other spreadsheet) format.”

18.  Category 4 can be dealt with first.

19.  In the course of the hearing, Mr Stock indicated to this court that, without admission of any obligation to do so, the Defendant was prepared to give specific discovery of this Category save for Item 4 of the Defendant’s List of documents dated 6 June 2012 (“Defendant’s List”) which the Defendant could not presently locate, and the same had been offered to the Plaintiff shortly prior to the hearing. Mr Ling, for the Plaintiff, told this court that the offer was acceptable to his client. There being no issue between the parties in relation to this Category, an order will be made accordingly. If the Defendant cannot locate Item 4 in electronic format, it can just say so in the affidavit to be made.

Category 1

“All documents in their original format (electronic or otherwise) which the Defendant provided KPMG with access to in connection with the audit performed pursuant to the Patent License Agreement dated 31 March 2007 on 13-17 and 20-21 December 2010.”

20.  At the outset, this court would like to make this clear: on the pleadings, there is no doubt that issues exist between the parties as to inter alia the validity and accuracy of the Draft Report and whether the Defendant was in breach of the Agreement for failing to allow KPMG to examine all data and documents pertaining to the audit. In these circumstances, this court is of the view that the documents to which KPMG was provided access during the audit are relevant and necessary for disposing fairly of the cause or matter.

21.  The Defendant’s principal objection to the entire application was that there was no or no sufficient evidence (or no prima facie case) to show the existence of relevant documents in its possession, custody or power which have not already been disclosed. Rather, the purpose of the Plaintiff’s application was to question the Defendant about the sufficiency of the discovery it has given and to seek explanation from the Defendant in respect of some of the documents disclosed. That is not the proper function of specific discovery.

22.  On the evidence before this court, it would appear that the Plaintiff was anxious to find out whether the Defendant has given sufficient discovery, in particular, the extent to which the Defendant’s List has disclosed all the data and documents which KPMG has been provided access to during the audit. This is borne out by a letter dated 11 January 2013 (“the Letter”) from the Plaintiff’s solicitors to the Defendant’s solicitors in which the former alleged that “It is, however, unclear, whether any or all of this material [previously shown to KPMG during the audit] has been included in your client’s discovery to date. We would therefore request that you clarify the position…”. Given the lack of response to the Letter, the Plaintiff issued the summons for the present application on 4 March 2013.

23.  There is force in the Defendant’s objection. From the Plaintiff’s two affidavits in support of the application, it is wholly unclear why it is said (or the extent to which it is said) the Defendant has failed to disclose all the data and documents which KPMG has been provided access to during the audit. This is hardly surprising since according to the 2^nd affidavit of Mr Simon Baker, KPMG did not have a complete catalogue of the data and documents provided to it during the audit. If so, it can safely be deduced that the Plaintiff would not be able to adduce evidence to show any deficiency in the Defendant’s discovery in this respect. This is confirmed by the absence of such evidence in the Plaintiff’s two affidavits. 

24.  It is trite law that it is not a function of specific discovery to give a party an opportunity to check up on whether his opponent has given sufficient discovery: Berkeley Administration Inc v McClelland [1990] FSR 381. If a party does not believe his opponent, the proper course to take is to explore the matter in cross-examination at trial.

25.  Further, it is for the party seeking specific discovery to adduce sufficient evidence, or put up a prima facie case, that inter alia relevant documents exist which the other party has not disclosed. This goes towards the court’s jurisdiction to make an order for specific discovery: Lee Nui Foon v Ocean Park Corp (No 1) [1995] 2 HKC 390.

26.  In my view, there is no evidence nor a prima facie case that the Defendant has failed to fully disclose the documents which KPMG has previously been provided access to during the audit. The application in relation to Category 1 must, for this reason alone, fail.

27.  In any event, the court would not be inclined to exercise its discretion to make an order in terms of Category 1. This is because it would be practically impossible to comply with or monitor such an order, and courts do not make orders in futile.

28.  An order for specific discovery must identify with precision the documents or categories of documents which are required to be disclosed. A general description like the one found in §1 of the Schedule would only work if it is accompanied by a list. The Defendant’s solicitor has stated in an affirmation that the Defendant did not have a complete record of what was shown to KPMG during the audit. It is therefore unclear how the Defendant can confidently make an affidavit saying whether it has (or has not) disclosed all Category 1 documents. Equally, the Plaintiff has stated in an affidavit that KPMG did not have a complete catalogue of the data and documents shown to it during the audit. It is therefore also unclear how the Plaintiff can verify the Defendant’s affidavit, if one is to be made.

Category 2

“All documents which the Defendant provided KPMG access to in response to the following request from KPMG dated 30 November 2010”

29.  It is readily apparent from the opening words of Category 2 and Mr Ling’s skeleton submission that just like Category 1, the Plaintiff is seeking disclosure of the documents to which KPMG was provided access during the audit. This is also confirmed by the affidavit of Mr Simon Baker, solicitor for the Plaintiff, where he said at paragraph 3 that “The Plaintiff’s application for specific discovery relates to the data and documents which KPMG were provided access to and relied upon in performing their audit of the records of the Defendant and its Affiliates in relation to the royalties payable under [the Agreement].”

30.  The Defendant’s solicitor suggested in his affirmation that the two categories were “repetitive” since no information had been provided by the Defendant to KPMG otherwise than during the audit itself, and this was not challenged in the course of the hearing.  

31.  That may well be so, but there is a valid distinction between the two categories of documents in that Category 2 is divided into sub‑categories. If the Plaintiff is able to demonstrate a prima facie case that the three prerequisites for jurisdiction do exist in relation to any sub‑category, the court still has a discretion whether or not to order disclosure. That was what Mr Ling, in the course of hearing, endeavored to do.

32.  The Defendant maintained its principal objection to the application and submitted that there was no or no sufficient evidence (or no prima facie case) to show the existence of relevant documents in its possession, custody or power which have not already been disclosed.

33.  In his oral submissions to this court, Mr Ling concentrated on 3 sub-categories ie 2(d), 2(e) and 2(eb).

2(d)   “The Defendant's price lists for LICENSEE Licensed Products”

34.  As far as 2(d) is concerned, it is admitted in the Amended Defence that this sub-category of document has previously been provided to KPMG for review: in KPMG’s documentation, this was called “floor price list”. It is also clear from the Defendant’s List at #5 that the Defendant has disclosed what is called “Copy indicative price list for 2007 – 2010”. The Plaintiff was anxious to find out whether the two were the same and actually asked the Defendant in so many words in the Letter. A simple yes or no from the Defendant would have obviated the need for argument. Unfortunately, there was no reply.

35.  I accept Mr Stock’s submission that it was for the Plaintiff to adduce evidence (or make out a prima facie case) that the Defendant has given insufficient discovery. Unless the Plaintiff can establish that the Defendant has omitted to disclose what has previously been shown to KPMG, its application should fail. From the Plaintiff’s point of view, it is unfortunate that it cannot adduce any evidence to show what KPMG called “floor price list” has not been disclosed – it just does not know. In these circumstances, while this court has some sympathy for the Plaintiff, I cannot accede to its application regarding 2(d).

2(e) “Supporting documentation for discounts and other deductions claimed by the Defendant in arriving at the Net Selling Price of LICENSEE Licensed Products”

36.  As far as 2(e) is concerned, the position is slightly different. Mr Ling was able to refer this court to paragraph 35(5) of the Amended Defence in which it is pleaded that:

“During the audit, the Defendant provided to KPMG documents to substantiate the discounts applied to arrive at the Net Selling Price, including a ‘Production Framework Agreement’ between the Defendant and its manufacturer. Further, the Defendant explained to KPMG that the Defendant has ‘co-op’ fund arrangements with its purchasers, whereby discounts are provided in exchange for marketing activities carried out by those purchasers in respect of the Defendant’s products. The Defendant provided to KPMG documentation supporting the ‘co‑op’ fund arrangements, including ‘co-op’ fund agreements...”

37.  In the course of the hearing, Mr Ling indicated to this court that he was prepared to limit himself to such co-op fund agreements, which are nowhere to be found on the Defendant’s List.

38.  In my view, 2(e) is sufficiently precise as a class of documents for the purpose of specific discovery. Given the Defendant’s own plea at paragraph 35(5) of the Amended Defence, it cannot be heard to say this sub‑category is defined too widely or that it has difficulty in complying with any order to be made. A fortiori, when the Plaintiff is now confining itself to just the co-op fund agreements. In so far as Mr Stock complained that the Plaintiff has not specifically asked for it in the Schedule or that an application for such agreements should have been made under RHC O 24 r 10, it seems to this court that the complaint was overly technical and relevant only to costs, at most.

39.  I am satisfied that an order for specific discovery can and should be made in relation to 2(e), limited to co-op fund agreements.

2(eb) “Defendant's affiliated sales records for the period of the audit”

40.  Finally, 2(eb). It is pleaded in the Amended Defence that this sub‑category of document has previously been provided to KPMG for review. It is also clear from the Defendant’s List at #7, 19, 38 and 60 that the Defendant has disclosed what it called “Copy Sales Data” for 2007 ‑ 2010. The Plaintiff was anxious to find out whether the documents disclosed included affiliated sales and actually asked the Defendant to confirm the position in the Letter. Again, there was no reply.

41.  In my view, this sub-category suffers the problem similar to 2 (d). Unless the Plaintiff can establish that the Defendant has omitted to include affiliated sales in its discovery, its application should fail. There is nothing in the Plaintiff’s two affidavits in support which demonstrates such an omission on the part of the Defendant. In these circumstances, this court cannot accede to its application regarding 2(eb).

Disposition

42.  For the above reasons, I shall make the following orders on the Plaintiff’s application:

(1)   The Defendant do, within 14 days from the date hereof, make and file an affidavit stating whether any of the documents and/or classes of documents specified in the Schedule annexed to the Summons dated 4 March 2013 are or have at any time been in its possession, custody or power, and, if not, then when it parted with those documents and/or classes of documents and what has become of them. Provided that the Schedule is to be amended by:

(a)    deleting paragraphs 1, 2(a) to (d), (ea) to (g);

(b)   replacing the existing wording in paragraph 2(e) by “the co‑op fund agreements referred to in paragraph 35(5) of the Amended Defence”.

(2)   The Defendant do within 14 days thereafter make available to the Plaintiff for inspection the documents and/or classes of documents specified in the Schedule as amended which are in its possession, custody or power.

(3)   Liberty to apply.

43.  As far as costs are concerned, the parties are hereby directed to file and exchange written submissions on costs within 14 days from the date hereof for disposal on paper.

44.  Lastly, I thank Counsel on both sides for their helpful submissions.