Judge Kaplan of S.D. New York recently issued a preliminary injunction to enjoin ZTE from further disclosing information subject to a non-disclosure agreement (NDA) that ZTE had entered with Vringo to potentially settle worldwide patent litigation between them that concern FRAND-obligated standard essential patents that Vringo had purchased from Nokia.  This is an interesting case to read when considering NDAs for purposes of settlement discussions in general, as well as when they involve SEPs.

Background

In 2013, Vringo and ZTE agreed to meet to discuss settlement, and they entered an NDA for those discussions “to create an environment for productive discussions with good faith settlement offers.”  During their December 10, 2013 meeting, patent owner Vringo made a 40-page presentation marked confidential under the NDA that, among other things, included Vringo’s settlement proposal.  No settlement was reached.  Soon thereafter, on February 21, 2014, ZTE started an antitrust lawsuit in China claiming that Vringo abused its market position by refusing to license its essential patents on FRAND terms.  ZTE’s complaint relied on confidential information under the NDA and attached Vringo’s confidential 40-page presentation from their settlement discussions.  Vringo did not find out about this until four months later when it received a copy of the complaint from the Chinese court.

In April 2014, ZTE also filed a complaint against Vringo with the European Commision (“EC”).  Vringo had an opportunity to respond to the EC complaint.  So Vringo reached-out to ZTE about getting a waiver under the NDA to allow Vringo to disclose information to the EC in response to the Complaint.  ZTE did not reply before Vringo’s response time, so Vringo filed redacted materials with the EC.  A week after that, ZTE responded it would agree to such a waiver for information directly relevant to the EC complaint and only if ZTE also was permitted to do so.

Later, in June 2014, Vringo learned for the first time about ZTE’s Chinese complaint and disclosure of confidential information subject to the NDA.  Vringo then filed this suit for breach of the NDA.

Decision

At the outset of the case, Judge Kaplan had ruled that “the pleadings establish the existence and terms of the NDA and defendants breach thereof.”  The instant decision ruled on Vringo’s motion for a preliminary injunction that would enjoin ZTE from further breaching the NDA as well as seeking to enjoin ZTE from further pursuing the Chinese action.  Judge Kaplan applied the four typical factors used to determine whether a preliminary injunction is warranted:

  1. Vringo is likely to ultimately succeed on the merits of its breach of contract claim;
  2. Vringo is likely to suffer irreparable harm if preliminary injunctive relief is not granted;
  3. The balance of the equities tip in Vringo’s favor over ZTE; and
  4. Entering an injunction is in the public interest.

Vringo Likely To Succeed.  Judge Kaplan ruled that Vringo is likely to succeed in proving that ZTE breached the NDA, especially given that he already ruled as such on the pleadings.

ZTE argued that Chinese law should govern here and, under Chinese law, ZTE was required to provide the information as part of its complaint to the Chinese court.  Judge Kaplan disagreed.  No law required ZTE to bring the complaint in the first instance.  Further, the Chinese procedural rule requiring a complaint to specy “the claim and its supporting facts and grounds” and “evidence and the source thereof” did not require ZTE to submit the confidential information and ZTE’s assertion otherwise “is nothing more than gamesmanship.”  Further, the NDA expressly states that it should be govern by the laws of New York and there was sufficient contacts with New York to enforce that provision:

Vringo maintains its principal place of business in New York and sought protection under its laws when entering into the NDA.  ZTE knew this, executed the NDA, and then sent it back to Vringo in New York.  The parties, in agreeing to have the law of New York govern their contract, selected the laws of a State that has a reasonable relationship and significant contacts to the contract and that choice must be enforced by this Court.

Judge Kaplan also rejected ZTE’s argument that the NDA is unenforceable under New York law as “an agreement to suppress evidence.”  The NDA was a permissible agreement between private parties about use of information in private litigation.  New York has a strong public policy encouraging settlement and “[t]here can be no doubt that the NDA was entered into for the explicit purpose of facilitating candid settlement discussions.”  Further, the NDA permits disclosure of confidential information “upon a request from a governmental entity or third party whether by a discovery request or a subpoena.”  Thus, “it was entirely lawful for Vringo and ZTE to agree that they would not use information exchanged in settlement discussions in any judicial proceedings.”

Vringo Threatened With Immediate Irreaparable Harm.  Judge Kaplan found that the irreparable harm requirement was met because “Vringo, in the absence of a preliminary injunction, probably would suffer injury in the future that could not be undone even if it prevails in this action.”  Harm from disclosure is imminent absent an injunction, because ZTE continues to believe that an NDA cannot prohibit submitting evidence of an antitrust violation.  ZTE did not start complying with”the clear and unequivocal terms of the NDA “until after the court entered a TRO.

Judge Kaplan found that continued disclosure by ZTE of confidential information would cause irreparable harm to Vringo’s business by impacting licensing negotiations with other parties, stating:

Vringo’s business depends substantially on the value of its patent portfolio, which it licenses to third parties.  The disclosure of Vringo’s Confidential Information, including its proposal to settle years of ZTE’s alleged patent infringement, would impact the prices others would pay to obtain licenses as well as the prices its competitors would offer for their licenses.  Indeed, once such commercially-sensitive information becomes public knowledge, it can “not be made secret again.”  In short, the disclosure of that information would have a lasting and immeasurable harm to Vringo’s business.

Balance of the Equities Favor Vringo.  Judge Kaplan found that Vringo would be irreparably harmed absent an injunction by ZTE continuing to disclose Vringo’s confidential information.  In contrast, entering an injunction would prevent ZTE from not disclosing information that ZTE had agreed in the NDA that it would not to disclose.

Public Interest Favors Injunction.  Judge Kaplan found that the public interest favors the preliminary injunctive relief he would give, which would enjoin ZTE from further disclosing confidential information but would not enjoin the Chinese proceedings themselves.  Thus, international comity concerns are addressed, because the injunction would not prevent the Chinese court from evaluating its antitrust action.

Scope of Preliminary Injunction.  Judge Kaplan would not enjoin ZTE from continuing with its Chinese antitrust action.  A key reason was that a determination that ZTE breached the NDA in this case would not resolve the Chinese action, a key factor when a U.S. court determines whether to enjoin a foreign action.

Judge Kaplan also would not order ZTE to withdraw the information it submitted in the Chinese action, finding that Vringo — while close — had not met its burden to obtain such affirmative or “mandatory” injunctive relief at this early stage in the case.  But he remained open to a mandatory injunction at the end or later stages of the case.

Judge Kaplan ultimately entered a preliminary injunction that prohibits ZTE from further disclosing any more confidential information.