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

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J U D G M E N T

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Introduction

1.  This is the third Case Management Conference. There are three applications before this court, all made by the Defendant.

2.  First, an application for discovery pursuant to RHC Order 24 rules 3 & 7 by its amended summons dated 12 September 2013. In the amended summons, the Defendant seeks discovery of twelve categories of documents, to be verified on affidavit.  The documents sought were set out in the Schedule to the summons. In the course of the hearing, counsel for both sides agreed that only two categories remained “live” ie Category 1 and Category 2. They both revolve around the question of “Essential Patents”.

3.  Category 1 reads as follows:

“Documents which relate to or evidence the Plaintiff’s ownership or control of ‘essential patent’ rights (as defined in clause 1.6 of the Agreement) for the GSM, UMTS, GPRS, CDMA or CDMA2000 mobile communications technology standards, and any other standard in respect of which the Plaintiff alleges that amounts are due from the Defendant to the Plaintiff pursuant to the Agreement, including but not limited to patent certificates, patent applications, licenses and agreements.”

4.  Category 2 reads as follows:

“Documents which consider, refer or relate to the question whether the patent rights referred to at paragraph 1 above are ‘essential’ (as defined in clause 1.6 of the Agreement) to the standards referred to at paragraph 1 above, including but not limited to internal or external analyses, reports, correspondence, memoranda and minutes.”

5.  In the course of his oral submissions, Mr Stock supplied this court with a revised description of Category 1 and Category 2 documents (as an alternative) as follows:

“1. Patent certificates, patent applications, licences and agreements in respect of the Plaintiff’s ownership or control of “essential patent” rights for the GSM, UMTS, GPRS, CDMA or CDMA2000 mobile communications technology standards, and any other standard in respect of which the Plaintiff alleges that amounts are due from the Defendant to the Plaintiff pursuant to the Agreement.

2. Internal or external analyses, reports, correspondence, memoranda and minutes which consider, refer or relate to the question whether the patent rights referred to at paragraph 1 above are “essential” to the standards referred to at paragraph 1 above.”

6.  Second, an application by summons dated 8 October 2013 for Further and Better Particulars (“FNBP”) of the re-re-amended Statement of Claim. The “live” FNBP sought pertain to paragraphs 1, 29(a), 30(k) and 30 (l) of the re-re-amended Statement of Claim on the Plaintiff’s Essential Patents. 

7.  Third, an application by summons dated 2 October 2013 for leave to adduce expert evidence on the following question ie “In respect of each of the following mobile communication standards, does the Plaintiff own or control patents which are ‘Essential Patents’ within the meaning of clause 1.6 of the Patent License Agreement (meaning that infringement or use of such patents cannot reasonably be avoided in remaining compliant with the standard, including optional implementations therefore, on technical but not solely commercial grounds):

a. GSM;

b. UMTS;

c. GPRS;

d. CDMA;

e. CDMA 2000;

f. Any other standard in respect of which the Plaintiff alleges that amounts are due from the Defendant to the Plaintiff pursuant to the Patent License Agreement.”

together with consequential directions.

8.  The Plaintiff opposes all three applications, principally on the ground that they are irrelevant to any issue that the court has to decide at trial.

Background

9.  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 (“Licensee Licensed Products”) in return for payment of royalties.

10.  In a nutshell, the Plaintiff claims that the Defendant has, in breach of the Agreement, underpaid royalties due and owing to it.  On the basis of the estimate by its nominated independent auditors KPMG, the Plaintiff alleges that the Defendant has underpaid at least €988,023.68.  In the prayer for relief in the re-re-amended Statement of Claim, the Plaintiff claims 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.

11.  The following are express terms of the Agreement: 

(1) Clause 1.6 defines “Essential Patents” to mean, 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.  

(2) Clause 1.7 defines NOKIA Licensed Patents as any Patent which is owned and controlled by the Plaintiff and/or its Affiliates … and which is an Essential Patent in relation to one or more of the Licensed Standards.

(3) Clause 1.11 defines Licensed Standards as the GSM Standard (which includes GPRS specifications) and the UMTS Standard.

(4) Clause 1.12 includes CDMA2000 as an example of Non‑Licensed Standards.

(5) Clause 1.15 defines Licensee Licensed Products as all Subscriber Terminals ie mobile phones which are compatible with the applicable portions of (a) GSM Licensed Standard, (b)  in the case of Dual-Mode GSM/UMTS Subscriber Terminals, both the GSM Licensed Standard and UMTS Licensed Standard.

(6) Clause 4.1 provides that for the licenses, rights and releases granted herein to the Defendant and its Affiliates under NOKIA Essential Patents in respect of LICENSEE Licensed Products compliant with the GSM and UMTS Standards. The Defendant shall make the following payments to NOKIA in respect of all LICENSEE Licensed Products sold by or on behalf of the Defendant or any of its Affiliates.

(7) Clause 4.2.1 provides that royalties are payable in respect of the sale of Licensee Licensed Products in accordance with the rates set out in Annex A. Annex A sets out the rates applicable to various types of products and the standards borne by them.  They include GSM, GSM/GPRS, UMTS, CDMA/UMTS and CDMA/CDMA 2000.

(8) Clause 4.6 provides that the Defendant shall submit periodical royalty reports setting out, inter alia, the quantities, types and sales value of Licensee Licensed Products sold by it.

12.  The Plaintiff’s primary case is that the Defendant has been in breach of Clauses 4.2.1 and 4.6 for failing accurately to calculate, report and pay royalties due to the Plaintiff in respect of the sales of Licensee Licensed Products: paragraphs 30(a) to (f) of the re-re-amended Statement of Claim.

13.  The Plaintiff also alleges in paragraphs 30(k) & (l), as well as 33A, of the re-re-amended Statement of Claim that, in breach of clause 4.4 of the Agreement, the Defendant has manufactured or sold CDMA/UMTS and/or CDMA/CDMA2000 Subscriber Terminals which used the Plaintiff’s “Essential Patents” 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 this breach, the Plaintiff claims an account of all sales of products which used the Plaintiff’s Essential Patents and payment of all royalties found due.

14.  The Defendant’s response to paragraphs 30(k) & (l) of the re‑re-amended Statement of Claim can be found in paragraphs 3 and 38B of the re-amended Defence. The Defendant joins issue with the Plaintiff as to its ownership or control of any patents, the applicability of any such patents to the Defendant’s activities, whether such patents were “Essential Patents” and whether any products sold by the Defendant or its affiliates used any of the Plaintiff’s “Essential Patents”. The Defendant also denies paragraph 33A of the re-re-amended Statement of Claim.

Discovery

The governing principles

15.  The following principles apply to applications for specific discovery under RHC O 24 r 7.

(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: Nokia Corporation v TCT Mobile Limited unrep. HCCL 19 of 2011; 5 August 2013.

16.  An application for discovery under RHC 024 r 3 may be allowed if the following conditions are met ie where it appears (a) from the list itself, or (b) from the documents referred to in it, or (c) from admissions made either in the pleadings of the party making discovery or otherwise, that the party making discovery has or has had other relevant documents in his possession, custody or power.

Essential Patents

17.  I now turn back to the two categories of documents sought and the question of “Essential Patents”.

18.  In the affirmation in support of the application, the Defendant’s solicitor explains the relevance of such documents by reference to Clause 4.4 of the Agreement as well as paragraph 30(k) of the re-re-amended Statement of Claim.

19.  The Defendant’s submissions in this regard are straightforward. The documents sought go to the question whether the Plaintiff owns or controls patent rights which are “essential” to various standards in respect of which it claims, within the definition in clause 1.6 of the Agreement. This is a live issue on the pleadings. It is self-evident that such documents must be in the possession, custody and power of the Plaintiff, and the Plaintiff does not suggest otherwise.  In the absence of discovery, this issue could not be properly and fairly explored in this action - an order for discovery is therefore necessary for disposing fairly of the cause or matter.

20.  Mr Sussex SC, for the Plaintiff, opposes the application along these lines.

21.  First, the claim in paragraph 30(k) of the re-re-amended Statement of Claim (as well as paragraph 30(l)) only relates to CDMA/UMTS and CDMA/CDMA 2000 Subscriber Terminals.  The claim is an alternative claim made in relation to CDMA and CDMA2000 products, in the event that the court takes the view, as contended by the Defendant, that CDMA or CDMA2000 is not a Licensed Standard and hence falls outside the meaning of “Licensee Licensed Product” in respect of which royalties are payable under Clause 4.2.1. The claim has nothing to do with the other standards viz GSM, UMTS and GPRS. Discovery should in any event not be ordered in relation to GSM, UMTS and GPRS.

22.  Second, it is not open to the Defendant, as a licensee under the Agreement, to put into issue the Plaintiff’s ownership of the patents pertaining to any of the standards in question or the “essentiality” of those patents. This is because:

(1)   The Defendant’s obligation to pay royalties under Clause 4.2.1 and to submit royalties reports under Clause 4.6 does not depend on proof of the Plaintiff’s ownership, control or use of any Essential Patents - the obligation is triggered by the sale by the Defendant or its affiliates of Licensee Licensed Products. 

(2)   The parties are bound by the facts stated in the recitals to the Agreement: Spencer Bower Turner, Estoppel by Representation 4^th Ed. pp 195-196. In this regard, the following recitals in the Agreement are pertinent:

“(B) NOKIA owns and controls certain patent rights essential to such [mobile communication and associated] 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 willing to grant LICENSEE licences under such patent rights.”

(3)   As a matter of law, a licensee who has used and enjoyed a licence granted to him by the owner of a patent is deemed to acknowledge the title of his licensor and the validity of the patent, by the mere act of accepting the licence. He is estopped, as against the licensor, from afterwards disputing such title or validity: Noton v Brooks (1861) 158 ER 569, 571; Fuel Economy Co Ltd v Murray (1930) 47 RPC 346, 353 & 359; Kerbing Consolidated Ltd v Dick [1973] RPC 68, 71.

23.  Underlying this submission is that, on a proper construction of the Agreement, the parties have agreed on the rates and royalty terms in respect of CDMA/UMTS and CDMA/CDMA2000 Subscriber Terminals in Annex A which forms part of the Agreement. It follows that notwithstanding the lack of formal notification by the Defendant as required under Clause 4.4, the parties have “effectively” agreed on a separate licence for the use of Essential Patents in relation to the CDMA and CDMA 2000 Standards, and the Defendant’s reporting and payment obligations under Clauses 4.2.1 and 4.6, as well as the recitals, apply mutatis mutandis to any Subscriber Terminals that are made and sold bearing that Standard. Accordingly, the Defendant is estopped from disputing the Plaintiff’s ownership of the Essential Patents in relation to the CDMA and CDMA 2000 Standards.

24.  This court accepts Mr Sussex SC’s first submission, and the part of the second submission regarding estoppel between licensor and licensee as stated in paragraph 21(3) above. This court does not, at this stage, accept Mr Sussex SC’s submissions that the parties have “effectively” agreed on a separate licence for the use of Essential Patents in relation to the CDMA and CDMA 2000 Standards and the Defendant is thus estopped from disputing the Plaintiff’s ownership of the Essential Patents in relation to such Standards. The reasons are these.

25.  First, it is quite clear from paragraphs 30(k) & (l) and 33A of the re-re-amended Statement of Claim that the Plaintiff’s claim for breach of clause 4.4 of the Agreement is confined to the Defendant’s manufacture and sale of CDMA/UMTS and/or CDMA/CDMA2000 Subscriber Terminals.

26.  As for the other standards ie GSM, GPRS and UMTS, they are expressly covered by the definition of Licensed Standards under Clause 1.11 and the definition of Licensee Licenced Products under Clause 1.15 of the Agreement. In relation to these standards, I would hold that the Defendant is estopped from disputing the Plaintiff’s ownership, control, validity or the essentiality of the Plaintiff’s patents rights. As Roper J said in Kerbing Consolidated Ltd v Dick [1973] RPC 68, 71-2:

“As a general proposition a licensee cannot challenge his licensor’s title to a patent interest, or its validity in proceedings founded upon the licence, and if that is so in an action based on contract insistence on compliance with section 85 would be pointless. The position is succinctly stated in the following passage from Spencer Bower and Turner’s Estoppel by Representation, 2^nd ed. 194:

‘On the one hand, a licensee who has used and enjoyed a licence granted to him by the owner of the patent, like a tenant who has been let into possession of the premises demised to him, or a bailee who has received goods on a bailment, is deemed to acknowledge the title of his licensor, and the validity of the patent, by the mere act of accepting the licence, as much as he is by any express recitals and representations to that effect which may be contained in the instrument whereby the licence is conferred, and he is accordingly estopped as against the licensor, from afterwards disputing such title or validity by setting up that the patented invention was not used, or was not useful, or that the patentee was not the first and true inventor thereof or that the specification was defective or was not enrolled within the period prescribed by statute, or on any other grounds’…

I think the words of Charles J, in Wilson v Union Oil Mills Co. Ltd. (1891) 9 R.P.C. 57 are appropriate to the instant case. In Wilson’s case an exclusive licence had been granted and Charles J., said at page 63:

‘I agree that if after making that agreement he had chosen to work the plaintiff’s patent without inquiry, he could not after more than a reasonable time had elapsed, have insisted on the invalidity of the patent. There is authority for that position, and it seems to me to be agreeable to one’s ideas of common sense and of justice. A man has no right to work the patent of another without inquiry for a long time under an agreement whereby he has contracted to pay royalty, and then when he is called upon to pay royalty, to say, ‘Oh, your patent after all is an invalid patent’.”

27.  Mr Stock, for the Defendant, sought to draw a distinction between disputing the validity of the Plaintiff’s patent and the essentiality of it. I do not agree any such distinction is permissible. Essentiality is defined as 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. If the Defendant is allowed to challenge the essentiality of the Plaintiff’s patent rights in relation to GSM, GPRS and UMTS standards, such challenge is in nature no different from saying that the Plaintiff’s patent rights in relation to those standards are invalid or are not useful, the Defendant’s use of them does not constitute an infringement of those patent rights and for that reason the Defendant is not liable to pay the Plaintiff royalties at all – a licensee is simply not permitted to dispute the patent “on any other grounds”.

28.  As for CDMA/UMTS and CDMA/CDMA2000 Subscriber Terminals, the position is different. First, CDMA2000 is specifically included in Clause 1.12 as an example of Non‑Licensed Standards. As a non-licensed standard, it is not covered under Clause 1.15 as a Licensee Licensed Product. Second, the Plaintiff’s pleaded case at paragraph 30(k), (l) and 33A of the re-re-amended Statement of Claim is predicated on the premise that these Subscriber Terminals used the Plaintiff’s “Essential Patents” 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. On the face of it, the Plaintiff’s patent rights in relation to these standards fall outside the initial Agreement between the parties even though, the rates applicable to them, for reasons unexplained, have also been included in Annex A.

29.  At the end of the day, Mr Sussex SC may or may not have a point when he submits the parties have “effectively” agreed on a separate licence for the use of Essential Patents in relation to the CDMA and CDMA 2000 Standards and the Defendant is thus estopped from disputing the Plaintiff’s ownership of the Essential Patents in relation to such Standards. This is not the time to finally adjudicate upon the question. So long as the Plaintiff’s case on breach of Clause 4.4 of the Agreement is as presently pleaded and given that there is no application to strike out the part of the re-amended Defence in answer to the Plaintiff’s case, there is a live issue in relation to the Plaintiff’s ownership and control of Essential Patents in relation to the CDMA and CDMA 2000 Standards.

30.  As existence and possession of the documents sought is not seriously in dispute, I would, in these circumstances, hold that the Defendant has shown a prima facie case of existence, relevance and possession of the two categories of documents sought and that discovery is necessary for disposing fairly of the cause or matter.I would therefore exercise my discretion and allow the Defendant’s application for discovery.

31.  In Deak & Company (Far East) Ltd v NM Rothschild & Sons [1981] HKC 78 at 82, Barker JA explained that a class of documents must be defined by its nature, and an applicant cannot simply identify an issue and ask for all documents relating to it. See also Li Tak Yee Samuel v Societe Generale Bank & anor unrep., HCA2478 of 2009, Anthony Chan J, paras. 39 - 41. It seems to this court that Category 1 and Category 2 documents as described in the Schedule to the Discovery summons will fall foul of this rule. I would therefore grant an order for specific discovery but in terms of the revised description of Category 1 and Category 2 documents supplied by Mr Stock in the course of the hearing, and limit the discovery to only CDMA and CDMA 2000 Standards. I would for completeness grant an order under RHC O 24 r 3, similarly limited to CDMA and CDMA 2000 Standards.

FNBP

32.  In essence, the Defendant seeks full particulars of the patent rights owned or controlled by the Plaintiff which it alleges are “Essential Patents” in respect of all standards which are the subject matter of the Plaintiff’s claim ie GSM, UMTS, GPRS, CDMA, CDMA 2000 and any other standard in respect of which the Plaintiff alleges that amounts are due from the Defendant to the Plaintiff pursuant to the Agreement.

33.  The Plaintiff has answered the request for FNBP in respect of the CDMA/ CDMA 2000 standard. In respect of the other standards ie GSM, UMTS, GPRS and “others”, the Plaintiff has refused to answer and opposed the application on the ground of irrelevance.

34.  For reasons given in the section entitled “Essential Patents”, since this court accepts Mr Sussex SC’s submission regarding estoppel between licensor and licensee, there is no live issue between the parties on the patent rights owned or controlled by the Plaintiff which are “Essential Patents” in respect of the GSM, UMTS or GPRS standard. In these circumstances, it is difficult to see why FNBP in relation to those standards are required. By now, the Defendant should be clear about the nature of the Plaintiff’s case on the “Essential Patents” issue regarding those standards and it is unlikely to be taken by surprise at trial. The issues relating to those standards are sufficiently defined and, as this court has held, no further discovery in relation to those standards is required: Hong Kong Civil Procedure 2014 para. 18/12/1.

35.  Different considerations apply to the Defendant’s request which relates to “any other standard in respect of which the Plaintiff alleges that amounts are due from the Defendant to the Plaintiff pursuant to the Agreement”. Paragraph 2 of the prayer for relief seeks “An account of all royalty bearing sales and sales of products which used the Plaintiff’s Essential Patents other than those for which license fees and royalty terms had been agreed under the Agreement made by the Defendant and/or its affiliates during the currency of the Agreement and all royalty payments due as a result of the same” [emphasis added].

36.  If the Plaintiff’s case is simply that the words underlined only refer to sale of Subscriber Terminals using its Essential Patents in respect of CDMA and CDMA2000 standards, it should say so in its answer to the Defendant’s request for FNBP. If on the other hand, the Plaintiff’s case is that this part of its claim relates not only to CDMA and CDMA2000 Subscriber Terminals, but includes other “standards” or other “products” as well, the Plaintiff should give full particulars of such standards and/or products. This is to enable the Defendant to be clear about the nature of the Plaintiff’s claim as set out in paragraph 2 of the prayer for relief and to avoid surprise at trial. In my view, an order for FNBP in terms of Request 4(h)(iii) dated 12 June 2012 and Request (vi) dated 5 August 2013 are necessary for fairly disposing of the cause or matter: Hong Kong Civil Procedure 2014 para. 18/12/54.

37.  This court will therefore exercise its discretion to grant an order accordingly. 

Expert Directions

38.  For reasons explained above, this court is of the view that there is a live issue on the pleadings in relation to the Plaintiff’s ownership and control of Essential Patents in relation to the CDMA and CDMA 2000 Standards. Expert evidence on these issues is likely to be helpful to the court in resolving the disputes, if any, between the parties. This court is satisfied that it should give leave to the parties to adduce expert evidence, but confined to CDMA and CDMA2000 Standards only. As for “any other standard in respect of which the Plaintiff alleges that amounts are due from the Defendant to the Plaintiff” under paragraph 1(f) of the summons, whether expert evidence is relevant and necessary rather depends on the Plaintiff’s answer to the Defendant’s request for FNBP. I shall withhold making any order in relation to it, but give liberty to the Defendant to restore its application in relation to 1(f) within 14 days after the Plaintiff has complied with this court’s order in relation to the FNBP application.

Setting down

39.  In the course of the hearing, both parties urged this court to set the case down for trial. Their estimated length of the trial varies from three to five days, assuming all three summonses are dismissed.

40.  This court is quite prepared to give leave to set the case down for trial, given that this is a commercial list case and the parties seem prepared to move on. This court will direct the parties to submit their revised estimated length of trial, in light of the results of the three applications, within 21 days from the date of this judgment.

Disposition and costs order nisi

41.  For the above reasons, I shall make the following orders on the Defendant’s applications:

(1)  In relation to the discovery application, this court shall grant an order in terms of paragraphs 1 to 3 of the summons, but confine the Schedule to only CDMA and CDMA 2000 Standards, as discussed in paragraph 31 above.

(2)   In relation to the application for FNBP, this court shall grant an order in terms of paragraph 1 (a) & (b) of the summons, but confine the order to Request 4(h)(iii) dated 12 June 2012 and Request (vi) dated 5 August 2013, as discussed in paragraph 36 above.

(3)   In relation to the expert evidence application, this court shall grant an order in terms of paragraphs 1(d) & (e), 2 to 6 of the summons. 

(4)   Liberty to apply.

42.  As far as costs are concerned, as the parties are roughly equally successful in upholding / resisting the discovery and FNBP applications, there shall be an order nisi that costs be in the cause. There shall also be an order nisi that costs of the expert evidence application be in the cause, as claimed in paragraph 7 of the summons.

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