TQ Delta v ZyXEL – ZyXEL found to have engaged in "hold-out" and injuncted in advance of RAND trial

In two further instalments in the ongoing TQ Delta v ZyXEL saga, Mr Justice Henry Carr has handed down a judgment concerning the length and timing of the RAND trial and a judgment granting TQ Delta an injunction on the basis that ZyXEL has practised a strategy of "hold-out". We report on the outcome of the technical trials in another Transceiver article.

Timing of the RAND trial

At the RAND trial, the Court will determine what are Reasonable And Non-Discriminatory terms for a licence to TQ Delta's portfolio of Digital Subscriber Line ("DSL") standard essential patents ("SEPs").

The infringement proceedings were originally served in July 2017. At a CMC in November 2017, the technical trial was set for October 2018 with a RAND trial to follow in January 2019. Compared to other FRAND/RAND cases, this was a relatively quick timetable to a RAND trial.

For various reasons, the technical trial was moved to January 2019 and heard by Mr Justice Henry Carr. Prior to judgment in the technical trial, a hearing took place to determine a dispute regarding the length of the RAND trial and when it should be listed for. ZyXEL wanted a longer trial listed in April 2020 at the earliest, whereas TQ Delta had proposed various dates between April and September 2019.

The parties are advancing different methodologies for calculating the RAND rate.

TQ Delta's pleaded case is to adopt a comparable licence approach, potentially with a top-down cross-check. These are methodologies that were used in the Unwired Planet v Huawei litigation. This will involve an analysis of TQ Delta's existing licences on the basis that they are a good indication of what rate would be negotiated by parties seeking to agree a licence for the portfolio. The cross-check involves working out a royalty burden for all DSL SEPs and what proportion is attributable to the SEPs in the TQ Delta portfolio.

ZyXEL's case is based upon a "profits available" or "economic benefits" approach. It contends that the terms of the licence should reflect the economic value of the patented technology. It argues that the licence fee should be determined by assessing a share of the profits that are currently made by ZyXEL from the manufacture of the DSL equipment in issue, then apportioning a fraction of that to DSL functionality, then apportioning that fraction as representing TQ Delta's share of the overall patent pool essential to the DSL standards in issue.

Notwithstanding the fact that TQ Delta and ZyXEL are advancing different methodologies for calculating the RAND rate, Carr J was critical of the suggestion that these issues were complex and would require a long trial. He said that RAND/FRAND hearings should be relatively straightforward and simple following the Court of Appeal's decision in Unwired Planet v Huawei¹. He also drew parallels with the long established procedure in the Copyright Tribunal of applying what are essentially RAND considerations when dealing with collective licensing schemes.

In the end, Carr J directed that the RAND trial should be heard in September 2019 before Birss J with an estimate of 10 days and an additional 2 days reading.

Background to the grant of injunction

As mentioned, the technical trial was heard in January 2019, with one asserted patent being found valid and infringed, and the other being invalid. Interestingly, the patent held to be valid is due to expire in June 2019, ie three months before the RAND trial has been scheduled to take place.

In light of this, ZyXEL argued that the grant of an injunction in the intervening period would be disproportionate. However, ZyXEL also refused to take a licence on whatever terms the Court determines to be RAND. In response, TQ Delta accused ZyXEL of pursuing a strategy of "hold-out", whereby an implementer postpones payment to a SEP owner for as long as possible in a bid to exhaust the resources and will of the SEP owner, thereby avoiding a licence.

Carr J considered the balance that is sought to be stuck between the interests of SEP owners, who undertake to licence their patents on FRAND / RAND terms in exchange for their technology being incorporated into a standard, and the interests of implementers, who need to be able to access standardised technology in exchange for paying a FRAND / RAND rate for doing so. He also referred to the comment of Kitchin LJ at paragraph [54] of Unwired Planet v Huawei that it is "important that implementers engage constructively in any FRAND negotiation and, where necessary, agree to submit to the outcome of an appropriate FRAND determination".

Carr J was not impressed by ZyXEL's behaviour throughout the proceedings, and decided that ZyXEL had engaged in "hold-out". He considered that to deny TQ Delta an injunction "would enable ZyXEL to benefit from their strategy of hold-out."

Key to the judge's decision were the facts that ZyXEL had not paid any royalties to TQ Delta (or any other patent holder) in respect of any standards essential patent and had changed its position as to whether or not it would accept a RAND licence on terms to be determined by the Court. Carr J considered that not granting an injunction would deprive the patentee of "meaningful protection" as it would amount to the Court granting a compulsory licence to TQ Delta's infringed patent in circumstances where ZyXEL had elected not to enforce the RAND undertaking².

ZyXEL asked for a stay of the injunction so that it could fulfil existing orders. It argued that a failure to do so would inconvenience customers. Again, Carr J was not convinced. He considered that a lack of evidence from ZyXEL's customers, and failure to disclose the terms of the respective contracts to demonstrate any prejudice, meant that a stay of the injunction was not justified.

Comment

Those who work on FRAND/RAND disputes may be surprised at Carr J's comments on how straightforward trials of these matters should be. Whilst Unwired Planet v Huawei clarified some aspects of the law on FRAND determinations, the area is still developing, and the actual exercise of determining what would be FRAND/RAND for a specific portfolio of SEPs is often a time consuming and complex issue.

The decision whether or not to grant an injunction is discretionary and will therefore always depend on the specific circumstances of a case. However, the grant of an injunction against ZyXEL prior to a RAND/FRAND determination is a stark reminder that the UK Court is prepared to take action in circumstances where a party is found to be pursuing a strategy of "hold-out".

[1]Unwired Planet v Huawei [2018] EWCA civ 2344.

[2] ie ZyXEL's position was that it did not seek a licence as TQ Delta's only patent found to be infringed will expire shortly. ZyXEL had therefore elected not to rely on TQ Delta's undertaking to grant a RAND licence to its SEPs as a defence to an injunction.