NOKIA CORPORATION v. TCT MOBILE LTD

CACV 191/2014

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO 191 OF 2014

(ON APPEAL FROM HCCL 19 OF 2011)

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J U D G M E N T

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Hon Cheung JA :

1.  I agree with the judgment of Barma JA. Accordingly there will be orders in terms of paragraphs 28 and 29 of this judgment.

Hon Barma JA :

2.  This was an appeal against a judgment of Ng J dated 5 February 2014 dealing with applications by the defendant for further and better particulars, discovery and expert directions in proceedings by the plaintiff for alleged breaches by the defendant of a Patent Licence Agreement (“the Agreement”) between the parties dated 31 March 2007.  The plaintiff’s complaint is that the defendant has failed to pay sufficient royalties pursuant to the Agreement.

3.  The Agreement relates to the licensing by the plaintiff to the defendant of certain patent rights relating to the manufacture, use and sale of mobile telephones (referred to in the Agreement as “Subscriber Terminals”).  The plaintiff’s case, in summary, is that it owns certain patent rights that are necessary (or, in the terms of the Agreement, essential) to manufacture mobile telephones that meet certain mobile communication technology standards, and that it entered into the Agreement with the defendant to enable the defendant to exploit such patent rights in order to manufacture such mobile telephones.  However, in breach of the Agreement, the plaintiff says that the defendant has failed to pay it the correct amount of royalties due under the terms of the Agreement.

4.  By its Defence, the defendant raised issues as to the plaintiff’s ownership and control of any relevant patents, the applicability of such patents to the activities of the defendant, whether such patents were “Essential Patents” and whether any of the products manufactured or sold by the defendant used any of the plaintiff’s “Essential Patents”.  All of these matters having been put in issue by the defendant, the defendant sought discovery and further and better particulars as to the plaintiff’s ownership and control of patents essential for the GSM, UMTS, GPRS, CDMA or CDMA 2000 mobile communications technology standards and applied for expert directions to be given to enable expert evidence to be adduced as to these matters.  The proposed directions were resisted by the plaintiff.

5.  Before the judge, the defendant sought to justify the directions sought on the basis that it had put in issue the plaintiff’s ownership and control of relevant patents, and had also put in issue the question whether such patents were indeed essential for the manufacture of mobile telephones to the various mobile communication technology standards referred to in the previous paragraph.  The plaintiff’s resistance to the applications was based on an argument that it was not open to the defendant to deny these matters as it was estopped from doing so.  It appears from the judgment that the type of estoppel relied upon by the plaintiff before the judge was understood by the judge to be what has been called the “licensor/licensee estoppel” whereby a licensee is not permitted to deny his licensor’s title to patents in respect of which he has obtained a licence, or to deny the validity of such patents.  The judge accepted this argument in relation to mobile telephones manufactured by the defendant that met the GSM, UMTS and GPRS standards (which were referred to in the Agreement as Licensee Licensed Products), but not in relation to any mobile telephones that met the CDMA or CDMA 2000 standards).  It also appears from the judgment that the judge took the view that this estoppel was also dispositive, not only of questions of ownership and validity of the relevant patents, but also of any contention as to whether or not the patent in question had been used by the defendant, or was essential for the purposes of the defendant’s manufacturing activities (and hence necessarily had to be used by the defendant for the purpose of manufacturing mobile telephones meeting the GSM, UMTS and GPRS standards).

6.  The judge distinguished between the two groups of standards because the GSM, UMTS and GPRS standards were all expressly covered by the definition of Licensed Standards in clause 1.11 of the Agreement, and by the definition of Licensee Licensed Products in clause 1.15 of the Agreement, but the CDMA and CDMA 2000 standards were not. He therefore regarded the Agreement as covering only the GSM, UMTS and GPRS standards and patents relevant thereto, but not the other two standards, and thought there was an issue as to whether or not any agreement had been reached regarding a separate licence for the use of Essential Patents for the CDMA and CDMA 2000 so as to give rise to an obligation to pay royalties.  In the result, the judge dismissed the applications insofar as they related to the GSM, UMTS and GPRS standards, but acceded to the applications insofar as they related to the CDMA and CDMA 2000 standards.

7.  Dissatisfied with this outcome, the defendant has appealed (with the leave of the judge) against the dismissal of the applications for discovery, particulars and expert evidence in relation to the GSM, UMTS and GPRS standards.  The plaintiff has not sought to appeal against the orders made in relation to the CDMA and CDMA 2000 standards, but has instead sought to further amend its claim to remove all claims involving mobile telephones manufactured by the defendants to such standards, thus limiting its claim to mobile telephones that were manufactured to the GSM, UMTS and GPRS standards, and which fall within the definition of Licensee Licensed Products.

8.  Before us, Mr Yan SC, appearing for the defendant on appeal, submitted that the judge had erred in coming to the conclusion that the licensor/licensee estoppel extended to question of essentiality, so as to debar the defendant from arguing that the plaintiff’s patents were necessarily used by the defendant when manufacturing mobile telephones meeting the GSM, UMTS and GPRS standards.

9.  Mr Sussex SC, appearing for the plaintiff (as he had below), did not appear to really dispute this. However, he suggested that the argument being advanced by the defendant on appeal relating to essentiality or use was a new argument, which had not been run below.  He submitted, pursuant to a respondent’s notice to affirm on different grounds, that the argument that the defendant had not used the plaintiff’s patents (or that such patents were not essential to the manufacture of mobile telephones meeting the relevant standards) was also one which the defendant was unable to raise because of an estoppel, albeit of a different type.  Mr Sussex’s contention was that the defendant was debarred from taking the essentiality point because of either a contractual estoppel, or alternatively an estoppel by convention.  He further contended that both of these forms of estoppel were available to be relied upon by the plaintiff on the basis of its existing pleadings (in particular paragraphs 10 to 16 of the Amended Reply).

10.  Mr Yan disputed these contentions.  He said that it was clear from the judge’s references to essentiality (for example in paragraphs 26 and 27 of the judgment) that this point had been raised below by the defendant, although the types of estoppel now relied on by Mr Sussex in answer to it had not been mentioned before the judge.  He submitted that the contractual estoppel argument was not (at present) adequately pleaded, so we should not permit Mr Sussex to rely on it. He also contended that it was (at least in Hong Kong) an open question whether or not the principle of contractual estoppel should be regarded as good law. And he further submitted that both the contractual estoppel and estoppel by convention arguments were matters which could not be conclusively resolved without going to trial and receiving evidence, so that the issue of essentiality had to be regarded as a live issue at this stage, entitling the defendant to the discovery, particulars and expert directions for which it had applied.

11.  The questions that arise are therefore:

(1)  Was the question of essentiality raised below?

(2)  If so, does the licensor/licensee estoppel relied upon by the judge operate so as to preclude the defendant from raising that question?

(3)  If not, then in relation to contractual estoppel:

   (a)   Is this estoppel one which should be recognised in Hong Kong?

   (b)   If so, is it open to the plaintiff on the pleadings, and should the plaintiff be permitted to rely on it?

   (c)   If so, is it an argument which can only be determined after trial, or can and should it be determined at this stage?

(4)  Alternatively, in relation to estoppel by convention (which Mr Yan, I think accepted was adequately pleaded), is this an argument which can only be determined after trial, or can and should it be determined at this stage.

12.  I think that it is clear that the question of essentiality was raised by the defendant at the hearing below, and that the judge appreciated that essentiality had been put in issue by the defendant in these proceedings (whether or not the defendant was estopped from doing so will be considered below).  Paragraphs 3 and 38B(4) and (5) of the Re-Re-Amended Defence clearly show that this was the defendant’s case – paragraph 3 makes no admission as to the applicability of any patent rights of the plaintiff (the extent of ownership or control of which are not admitted), while paragraph 38B(4) makes no admission as to whether any of the plaintiff’s patents (the reference in the pleading to patent rights owned or controlled by the defendant must be a typographical error) were Essential Patents within the meaning of the Agreement, or as to whether or not the defendant or its affiliates manufactured or sold any products which used any of the plaintiff’s Essential Patents.  And paragraphs 26 and 27 of the judgment clearly show that the judge considered that the question of essentiality was raised by the defendant, as the judge specifically addressed it by reference to the licensor/licensee estoppel.

13.  I think Mr Yan is also right to say that the licensor/licensee estoppel does not, with respect to the judge, assist the plaintiff in relation to the question of essentiality, although it does preclude the defendant from raising questions of ownership and validity (neither of which Mr Yan pressed before us).  It seems to me that the citation from Kerbing Consolidated Ltd v Dick [1973] RPC 68, 71-2 set out in paragraph 26 of the judgment in which this estoppel is discussed shows that it goes to the issues of ownership and validity, but not further.  Although the judge referred, in paragraph 27, to the definition of Essential Patents in the Agreement, it does not seem to me that the definition can expand the scope of the licensor/licensee estoppel so as to extend it beyond its proper bounds.  To the extent that the terms of the Agreement can be prayed in aid by the plaintiff, this must be by way of some other form of estoppel.  This was, I think, recognised by Mr Sussex, who did not seek to contend that the licensor/licensee estoppel was of assistance to him in dealing with the defendant’s attempt to put in issue the question of essentiality or whether the defendant had used the plaintiff’s patents in manufacturing its products.  Rather, as noted above, Mr Sussex contended that the defendant could not raise these arguments because of a contractual estoppel, or alternatively, an estoppel by convention.

14.  In relation to contractual estoppel, Mr Sussex’s argument is that the Agreement itself refers to an agreed state of affairs – that in order to manufacture mobile telephones that are compliant with the GSM, UMTS and GPRS standards, it is necessary to make use of the plaintiff’s patents.  In other words, the plaintiff’s patents are essential for the manufacture of mobile telephones meeting such standards.  That being the agreement between the parties, Mr Sussex submits that the defendant cannot resile from it in these proceedings – it is estopped by the terms of the contract from doing so.  Mr Yan, however, suggests that the Agreement, properly construed, does not refer to any such agreed state of affairs, and that the defendant is therefore free to take issue with the plaintiff’s claim that the defendant has necessarily made use of any of the plaintiff’s patents so as to become liable to pay royalties to the plaintiff.

15.  For present purposes, it seems to me that the following provisions in the Agreement are of particular relevance:

(1)  Recital (A) to (D), which state:

“(A) NOKIA is engaged in research, development and manufacturing of equipment and the provision of services relating to mobile communication and associated STANDARDS.

(B) NOKIA owns and controls certain patent rights essential to such Standards and NOKIA is interested in the technology claimed by such patent rights to be commercially exploited in Mainland China using certain business initiatives.

(C) LICENSEE is interested in obtaining licences under such patent rights of NOKIA for the purposes of manufacture, use and Sale of Subscriber Terminals for such Standards.

(D) NOKIA is welling to grant LICENSEE licences under such patent rights.”

(2)  Clause 1.6, which defines Essential Patents as follows:

“Essential Patents means in relation to a Standard, those Patents (or divisible portions thereof) to the limited extent that infringement or use of such Patents cannot reasonably be avoided in remaining compliant with that Standard, including optional implementations thereof, on technical but not solely commercial grounds.”

(3)  Clause 1.7, which defines NOKIA Licensed Patents as follows:

“NOKIA Licensed Patents shall be taken to mean any Patent which is:

(a) owned and controlled by NOKIA and/or its Affiliates, or which is sub-licensable by NOKIA and/or its Affiliates without compensation to or otherwise incurring liabilities to third parties; and which is

(b) an Essential Patent in relation to one or more of the Licensed Standards.”

(4)  Clause 1.9, which relevantly defines the GSM Standard to include the GPRS specification.

(5)  Clause 1.10, which defines the UMTS Standard.

(6)  Clause 1.11, which defines Licensed Standards as meaning the GSM Standard and the UMTS Standard, but excluding the Non-Licensed Standards (which are defined in Clause 1.12, and include the CDMA 2000 Standard).

(7)  Clause 1.15, which defines LICENSEE Licensed Products as consisting of any and all Subscriber Terminals (defined in Clause 1.13 as being, effectively, mobile telephones) which are GSM Subscriber Terminals, substantially compatible with the applicable portions of the GSM Licensed Standard, GSM/GPRS Subscriber Terminals, substantially compatible with the applicable portions of the GSM Licensed Standard (the difference being referable to whether voice transmission through the devices is circuit-switched or packet switched, and if the former, on the transmission rate), and Dual Mode GSM/UMTS Subscriber Terminals, substantially compatible which the applicable portions of both the GSM Licensed Standard and the UMTS Licensed Standard.

(8)  Clause 4.1, which provides:

“For the licences, rights and releases granted herein to LICENSEE and its Affiliates under NOKIA Essential Patents in respect of LICENSEE Licensed Products compliant with the GSM and UMTS Standards, LICENSEE shall make the following payments to NOKIA in respect of all LICENSEE Licensed Products sold by or on behalf of LICENSEE or any of its Affiliates prior to the Effective Date and during the term of this Agreement” (the Agreement goes on to set out the royalty payments payable, and the manner in which these are to be calculated).”

16.  Mr Yan submitted that the term NOKIA Essential Patent (which are the patents for which royalty payments are required under Clause 4.1) is not defined in the Agreement.  This is correct, but it is, as Mr Sussex pointed out, plain from Clauses 1.6 and 1.7 that this term is synonymous with NOKIA Licensed Patents, as those are patents owned by NOKIA which are essential to the Licensed Standards, in the sense that its use cannot reasonably be avoided in remaining compliant with such standards.

17.  Mr Yan went on to point out that the definition of LICENSEE Licensed Products in Clause 1.15 of the Agreement does not presuppose that these products are covered by any NOKIA Essential Patents, and that the payment obligation under Clause 4.1 would only arise if a licence from the plaintiff were required for the sale of a particular LICENSEE Licensed Product, and that this would only be the case if the sale of such product would infringe the plaintiff’s patent rights.

18.  It is correct that the definition does not refer in terms to NOKIA Essential Patents, but in my view, it is necessary to have regard also to the recitals to the Agreement, in particular Recital (B), by which the parties have acknowledged that the plaintiff owns patents which are essential to the Standards with which the Agreement is concerned (i.e. the GSM and UMTS standards, including the GPRS specification within the GSM standard).  When regard is had to this provision, it seems to me to be clear that having regard to the definition of essentiality in Clause 1.6, the parties have necessarily agreed that the use of the plaintiff’s patents will inevitably occur when Subscriber Terminals (or mobile telephones) substantially compatible with those standards are manufactured. Accordingly, the parties have also agreed that the sale of any LICENSEE Licensed Product (being a mobile telephone compatible with the GSM or UMTS standard) will necessarily infringe the plaintiff’s patent rights, in the absence of a licence, so such a licence, right or release would be required in respect of every LICENSEE Licensed Product produced.

19.  I would therefore agree with Mr Sussex’s submission that the terms of the Agreement embody an agreement by the parties that all LICENSEE Licensed Products manufactured by the defendant would necessarily require the licence conferred on the defendant by the Agreement, as the Agreement is based on the mutually agreed assumption, embodied in the recitals, that products meeting the GSM and UMTS standards will necessarily make use of patents owned by the plaintiff.

20.  Mr Sussex goes on to submit, relying on the English cases of Peekay Intermark Ltd v Australia and New Zealand Banking Group Ltd [2006] 2 Lloyd’s Rep 511 and Springwell Navigation Corporation v JP Morgan Chase Bank [2010] 2 CLC 705, that where the terms of the agreement assume or stipulate a certain state of affairs to be the case, the parties will be bound to proceed on the basis that this is the position for the purposes of the agreement, whatever the true state of affairs may be as a matter of actual fact.

21.  In Peekay, Moore-Bick LJ said, at paragraph 56 of the judgment:

“There is no reason in principle why parties to a contract should not agree that a certain state of affairs should form the basis for the transaction, whether it be the case or not. For example, it may be desirable to settle a disagreement as to an existing state of affairs in order to establish a clear basis for the contract itself and its subsequent performance. Where parties express an agreement of that kind in a contractual document, neither can subsequently deny the existence of the facts and matters upon which they have agreed, at least so far as concerned those aspects of their relationship to which the agreement was directed. The contract itself gives rise to an estoppel.”

22.  In Springwell Navigation, Aikens LJ pointed out (at paragraphs 143 and 144 of the judgment) that there was no reason in principle why parties should not agree what they liked, subject to any principle of law or statute to the contrary, and gave the examples of warranties as to the existence of a state of affairs by the assured in marine insurance contracts, and conclusive evidence clauses in sale contracts.  He regarded such provisions as being commercially useful, in that they enabled the parties to know precisely the basis on which they entered into their contractual relationship.  He concluded (at paragraph 169 of the judgment) that the principles stated in Peekay as good law, which should be followed.

23.  In Hong Kong, the concept of a contractual estoppel has been accepted (albeit obiter) by DHCJ Pow SC in DBS Bank (Hong Kong) Ltd v San-Hot Industrial Company Ltd [2013] 4 HKC 1.

24.  Mr Yan suggested that the concept was one which was relatively new, and had been criticised in academic writings, and submitted that it should not be accepted as good law at this stage.  With respect, I do not agree.  The concept is, in my view, now quite firmly established in English law, and it seems to me (as it did to Aikens LJ) that there are sound reasons for it to be adopted in Hong Kong, as it would promote certainty in contractual relationships, and reduce the scope for disagreement and disputes in the working out of the contract.  I would therefore accept Mr Sussex’s argument that on the proper construction of the contract in this case, the parties have agreed that the plaintiff’s patents are essential for the manufacture of mobile telephones meeting the GSM, GPRS and UMTS standards, and that it is not open to the defendant to contend otherwise in these proceedings.

25.  As to Mr Yan’s argument that a case of contractual estoppel is not open to the plaintiff on its pleadings, I would accept that the plaintiff has not expressly referred to a contractual estoppel in its Re-Amended Reply.  However, it seems to me that all of the necessary contractual provisions have already been pleaded by one or other of the parties, so that there is no impediment to the plaintiff advancing such a case should it wish (as it now does) to do so.  As the estoppel is based on the terms of the contract itself, I do not see that any evidence (other than the contract) will be required to make it out, and there is no reason why it cannot be considered at this stage.

26.  I therefore do not think that it is open to the defendant to dispute the essentiality of the plaintiff’s patents in these proceedings, on the basis that the defendant is estopped by the contract from doing so.

27.  Further, it seems to me that the plaintiff could in this case just as well proceed on the basis of an estoppel by convention, as the contract (in particular by the recitals) clearly shows a mutually assumed state of affairs (i.e. the essentiality of the plaintiff’s patents to the manufacture of mobile telephones meeting the relevant standards) on the basis of which the parties ordered their affairs. In the circumstances of this case, it would clearly be unjust to permit the defendant to resile from what it has agreed.  For this reason also, I consider that it is not open to the defendant to deny the essentiality of the plaintiff’s patents by putting essentiality in issue in these proceedings, and that this is a matter that is capable of being considered at this stage, rather than at trial.

28.  As it is not open to the defendant to take issue with the essentiality of the plaintiff’s patents, it follows that the discovery, particulars and expert directions sought, all of which go to the issue of essentiality, are unnecessary and should not be ordered.  I would therefore uphold the judge’s order (albeit for different reasons), and dismiss this appeal.

29.  So far as costs are concerned, although the main point on which the plaintiff has succeeded was not raised in the court below, it was squarely raised by the respondent’s notice to affirm on different grounds.  I would therefore make an order nisi that the costs of the appeal should be paid by the defendant to the plaintiff, to be taxed on the party and party basis if not agreed, with certificate for two counsel.  So far as the costs of the hearing below are concerned, the judge made an order that costs should be in the cause, and I see no reason to disturb that order.