TQ Delta v ZyXEL: essential reading for SEP owners
This case is essential reading for SEP holders. It is a helpful reminder of the law of obviousness, where the invention is the identification of the problem, not the solution. It also offers some useful guidance on the procedural issues regarding SEP and (F)RAND trials and guidance on when a (F)RAND injunction will be granted. It is also instructive to consider the positions being run by both parties as to the calculation of a RAND royalty.
Unwired Plant v Huawei
In Unwired Planet v Huawei  EWCA Civ 1244 the English Court of Appeal held that, if a standard essential patent (SEP) owner establishes that one of its SEPs is valid, essential and infringed, having determined the terms, the English Patents Court is likely to oblige a prospective licensee to take a global, SEP portfolio licence or be injuncted in the UK. This is, potentially, a powerful tool for SEP holders.
TQ Delta v ZyXEL
Following Unwired Planet v Huawei four SEP cases were listed to be heard in 2019 before the English Patents Court, the first being TQ Delta v ZyXEL  EWHC 562 (Ch). This claim concerned Digital Subscriber Line technology, namely that commonly used to provide fixed line broadband Internet to residential and commercial premises, the two patents in suit being: EP 1,453,268 (which related to multicarrier communication with variable overhead rate); and EP 1,792,430 (which related to cyclic redundancy checksums counter normalisation). Here the court found one of the two patents, EP 1,453,268, to be valid and infringed, with the other invalid. It has subsequently granted an injunction. The case moves to a reasonable and non-discriminatory (RAND) trial in September 2019, which should mean a determination of all of the issues at first instance within two and a half years of issue.
The patents in suit were acquired by TQ Delta from Aware in 2012. TQ Delta first contacted ZyXEL in 2013 and, having failed to reach agreement, commenced proceedings in the USA in December 2013. Subsequent negotiations did not bear fruit, with both parties maintaining that each had made RAND offers for the global portfolio, but that the offers had been refused.
In July 2017, TQ Delta commenced parallel infringement proceedings in the UK and ZyXEL counterclaimed for invalidity. ZyXEL also brought an anti-injunction law suit in the USA, but this proved unsuccessful. It did serve, however, to provoke a dispute between the parties as to whether ZyXEL’s US lawyer had submitted to the US court that the UK courts were “troll friendly”; a dispute which was not well received by the court.
Inventive problem, obvious solution?
With regard to the validity of EP 1,792,430, TQ Delta accepted that once the problem addressed by the patent was known, the claimed solution was obvious. However, it contended that the invention lay in perceiving the problem at the priority date. Before deciding the issue, Mr Justice Carr provided a useful review of the relevant case law.
He first addressed Actavis v Novartis  EWCA Civ 82, in which Jacob LJ considered that an invention could lie in the perception of a problem as follows:
“Moreover the [problem/solution approach] does not really cope well with cases where the invention involves perceiving that there is a problem, or in appreciating that a known problem, perhaps ‘put up with’ for years, can be solved. Take for instance the ‘Anyway up Cup’ case, Haberman v Jackel International  FSR 683. The invention was a baby's drinker cup fitted with a known kind of valve to prevent it leaking. Babies drinker cups had been known for years. Parents all over the world had put up with the fact that if they were dropped they leaked. No-one had thought to solve the problem. So when the patentee had the technically trivial idea of putting in a valve, there was an immediate success. The invention was held non-obvious, a conclusion with which most parents would agree. Yet fitting reasoning to uphold the patent into a [problem/solution approach] would not really work. For by identifying the problem as leakage and suggesting it can be solved, one is halfway to the answer – put in a valve.”
Mr Justice Carr noted, however, that the problem in Haberman v Jackel International, while described by Jacob LJ as identifying the problem, was in fact properly characterised as a case of long felt want (namely, the problem had been known for a very long time) and commercial success. He invited counsel for TQ Delta to find alternative authorities, but they were unable to do so.
He went on to consider the approach of the European Patent Office (EPO), quoting from Case Law of the Boards of Appeal as follows:
“The posing of a new problem did not represent a contribution to the inventive merits of the solution if it could have been posed by the average person skilled in the art (T 109/82, OJ 1984, 473). It also had to be taken into consideration that it was the normal task of the skilled person to be constantly occupied with the elimination of deficiencies, the overcoming of drawbacks and the achievement of improvements of known devices and/or products (see T 15/81, OJ 1982, 2; T 195/84, OJ 1986, 121). In T 532/88 the board confirmed the established principle that to address a problem simply by looking for ways of overcoming difficulties arising in the course of routine work did not constitute inventiveness.
In T 971/92 the board emphasised that the appreciation of conventional technical problems which formed the basis of the normal activities of the notional person skilled in the art, such as the removal of shortcomings, the optimisation of parameters or the saving of energy or time, could not involve an inventive step. The appreciation of a technical problem could thus only contribute to the inventive step in very exceptional circumstances.”
Summarising, he concluded that in a field where the person skilled in the art regularly confronts technical problems and is used to solving them, if a real problem exists, she or he is likely to be aware of it. In such circumstances, the identification of the problem would rarely amount to an inventive step. Applying this to the facts, he concluded that EP ‘430 was obvious. He agreed with ZyXEL’s reasoning that: “... it required no invention to perceive [the problem]. On the contrary, it would have been evident to the skilled person from consideration of ADSL2/02 [the prior art standard], when read in the light of common general knowledge ... [I]nsofar as relevant, events subsequent to publication of ADSL2/02 refuted any suggestion of an unresolved, longstanding problem.” This serves to demonstrate the difficulties in establishing inventive step where the invention is (purported to be) the perception of the problem, not the solution.
Liability & RAND, concurrent or consecutive?
There is an ongoing discussion before the English Patents Court as to the appropriate order of the liability and (F)RAND hearings, concurrently or consecutively and, if consecutively, whether the liability or FRAND hearing should be heard first.
The prevailing view has been that there needs to be a determination that at least one of the patentee’s SEPs is valid, essential and infringed for the court to determine the terms of a FRAND licence. The reasoning for this is a combination of case management and when the court should exercise its equitable discretion. The rationale broadly being that, if no patent is found to be valid, essential and infringed, then court time and cost is saved by avoiding a hearing on FRAND. This follows the practice of bifurcated liability and quantum trials in the UK.
At the case management conference in TQ Delta v Zyxel  EWHC 3305 (Pat), Mr Justice Carr made the following comments which casts doubt on this practice:
"… It has become the practice in this jurisdiction that FRAND trials should come after technical trials. It is a practice that may need to be reviewed following the recent jurisprudence of the Court of Justice in Huawei Technologies (C-170/13) and the judgment of Birss J in Unwired Planet v. Huawei. If the real dispute between the parties is the issue of a global licence for a global portfolio, it is worth considering whether it makes sense to allow one or more technical trials to take place, as a peg on which to hang the non-technical trial, or whether it would be better case management for the non-technical trial to come first. If the FRAND trial is heard first, and a defendant wishes to say that it does not need to take any licence under any of the patents, the defendant is not compelled to take the licence, and may take the chance that it will subsequently be injuncted in infringement proceedings. But this is not the occasion to rule upon this question, as the parties have accepted that the technical trial should come first."
However, as the parties were agreed that the issues relating to validity and infringement of the patents should be tried separately from, and before, the non-technical trial relating to RAND (as was the convention), Mr Justice Carr did not need to decide the issue. Rather, a timetable with the technical trials being listed to be heard in October 2018 with a RAND trial to follow in January 2019.
Shortly before exchange of evidence in the technical trial, however, ZyXEL issued an application on 01 June 2018 seeking to adjourn the technical trial to the window for the RAND trial in January 2019 and to adjourn the RAND trial from that window to an unspecified date following judgment on the technical trial. This was because of ZyXEL's concern that its chosen expert for the technical trial would not be in a fit state to give evidence. Had the application succeeded it would have meant a considerable delay to the RAND trial. However, at the hearing of the application, a compromise was found with both trials being heard together in January 2019. This, again, shows an appetite by the court to hear the RAND issues concurrently (if not before the liability issues).
In the end, Statements of Case on RAND were exchanged on 25 July 2018 and, as a result of various changes to the pleadings, the deadline for expert evidence on the RAND trial was pushed back to 07 December 2018. Then on 14th December 2018 ZyXEL applied to strike-out aspects of TQ Delta's expert evidence and made a further application in respect of disclosure, seeking a schedule of privileged documents. The result of the hearing was that TQ Delta was given an election as to whether the RAND trial, fixed for January 2019, should be adjourned or whether it should forego certain material that it wished to rely upon in the case, but which it had not pleaded. TQ Delta agreed to the adjournment and, after a contested hearing, the RAND trial was listed for September 2019.
This serves to demonstrate that the court appears open to hearing (F)RAND issues either before or at the same time as the technical trials. This could be advantageous to SEP holders who want an early determination of what is FRAND (to use against the defendant but also other prospective licensees).
Injunction before or after the RAND trial?
Following the liability trial, it fell to be determined whether an injunction should be awarded pending the outcome of the RAND trial.
The English Patent Court has a discretion as to whether to grant an injunction and, if so, whether that injunction should be subject to certain conditions. In SEP cases, a balance is to be struck between the patentee and the implementer. This was summarised by the Court of Appeal in Unwired Planet:
"… These implementers must be able to use the technology embodied in and required by the standard provided they are prepared to pay a FRAND rate for doing so, for otherwise the owner of the relevant patent rights would be able to charge excessive licensing fees. So any implementer must be able to secure a licence on FRAND terms under all the SEPs it needs to produce and market its products which meet the standard ...
... But there is another side to the coin which needs some elaboration at this point. Just as implementers need protection, so too do the SEP owners. They are entitled to an appropriate reward for carrying out their research and development activities and for engaging with the standardisation process, and they must be able to prevent technology users from free-riding on their innovations. It is therefore important that implementers engage constructively in any FRAND negotiation and, where necessary, agree to submit to the outcome of an appropriate FRAND determination.”
In this instance, ZyXEL argued that an injunction was disproportionate as the patent in suit was due to expire on 25 June 2019, before the RAND trial. Failing this, it argued that the injunction should be stayed or subject to certain carve-outs.
In response, TQ Delta responded that ZyXEL had “held out”, postponing for as long as possible any payment whilst infringing standards essential patents. The commercial rationale being that it could retain the royalty fees due and invest those while exhausting the resources and will of the opposite party. In doing so, TQ Delta pointed to the fact that, on ZyXEL’s case, there were 775 patents essential to the standard, but it had not paid a royalty in relation to any of them. It also noted that ZyXEL had changed its position as to whether it would accept whatever licence was ultimately determined by the Court to be RAND.
Mr Justice Carr concluded that this was a case of “hold-out” and, therefore, it was proportionate to grant an injunction. As to whether there should be a stay of the injunction or a carve out, Mr Justice Carr declined noting that there was no substantive evidence of prejudice (and, in particular, unquantifiable prejudice) to ZyXEL’s customers. Permission to appeal was refused by the court.
When addressing the question of the RAND hearing, Mr Justice Carr provided a summary of the parties’ respective position on the appropriate RAND royalty rate. Post-Unwired Planet, it is instructive to see how SEP owners and prospective licensees are advancing their cases.
TQ Delta has adopted a comparable licence approach. It relies upon two licences which it alleges to be comparable: first, a licence known as the Zhone licence; and secondly, a licence which was described as "the confidential December licence".
ZyXEL's case is based upon a "profits available" or "economic benefits" approach. It contends that the terms of the licence for one or more SEPs 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 it alleges 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.
Mr Justice Carr remarked that each side's approach to the case was very different, not just in detail but in principle. However, he noted that the court was very well placed to address such disputes, particularly given its experience of patent licences of right, references to the Copyright Tribunal and Wrotham Park damages. He concluded that, with active case management, any RAND trial would be relatively quick and simple.
- Haberman v Jackel International  FSR 683
- TQ Delta v Zyxel  EWHC 3305 (Pat)