Background

Our mobile phones must be able to communicate with the phone networks. Our mp3 music players must be able to decode the information that we download from the internet and turn that information into the music that we want to hear. And, our digital television decoders must know how to make the pictures from the signals received at the aerial. How can a manufacturer be certain that its products will be compatible with third party products or data?

If the mp3 data was always guaranteed to be formatted in a particular manner, the manufacturer would know how its music player must decode that format and could be certain that its products would work. Similarly, the mobile phone manufacturer could make and sell phones if it was guaranteed that the signals that it would receive would be in a particular structure.

Such guarantees are provided by the use of "standardisation". A system, such as a mobile phone system, is described in documents that make up the "standard" to which products must be manufactured. Such standards may prescribe anything from the strength of the outer casing of a product to extremely detailed consideration of data formats. Manufacturers of such systems follow that description and the result is guaranteed compatibility.

In a world where digital convergence is increasing, standardisation is becoming increasingly common which undoubtedly assists manufacturers in producing viable equipment. However, standards are often created by committees, where the committees are formed by representatives of the very manufacturers that wish to use the standards. Therefore, the technology that they submit for use in the standards may well be protected by intellectual property rights such as patents. As there is an obligation to use the standard, manufacturers will have no option other than to use the patents. Such patents are therefore said to be "Essential" to the standard. It is not difficult to see that such a situation is likely to cause disputes between parties in their "patentee" guise and others wishing to use the standard. It is little wonder that such standards have recently started to fall under the scrutiny of the Courts.

Why not just consider infringement and validity? What is different?

In the world of patents, if a manufacturer uses a third party's patents without a licence the usual approach, if negotiations are unsuccessful, is to commence infringement proceedings and ask the Court for an injunction to stop further infringement. However, when standards are involved, the position can be different. Those parties using or developing the standard may be contractually bound to deal with their intellectual property in a particular way. In some cases, patentees are bound to license their Essential patents on Fair, Reasonable and Non- Discriminatory (or FRAND) terms. Further, parties wishing to enforce their patents may also be manufacturers and so, in turn, obliged to use the patents of other parties. Their patents may be infringed but they may, in turn, be infringing other parties' patents at the same time.

The reality is that most manufacturers can find a solution by cross-licensing. But, in order to do so, they need to assess how many of the patents that are said to cover a standard are in fact Essential.

One may consider that proceedings under section 71 of the Patents Act 1977 would provide some assistance. Section 71 allows a party to provide details of its product or process to a patentee and ask the patentee to acknowledge that the product or process does not infringe the patent. If the acknowledgement is not received, proceedings can be started in Court to show that there is no infringement and for the Court to make a declaration to that effect. In the world of standardisation, this approach can be less than ideal for several reasons, including:

• The parties would have to go through a long and complex trial for every product that the manufacturer wanted to sell, against every patent that the patentee regarded as infringed;

• It would take approximately 12 to 18 months between asking for the acknowledgement and obtaining the declaration from Court and, in fast moving technical areas, the product could become redundant in that time; and

• Further patents may grant in the meantime which the manufacturer also needs to "clear".

In the circumstances, determining whether a patent is Essential or not often can provide a much faster, cheaper and more commercially acceptable solution to the manufacturer. This is the approach that has been taken recently by Nokia in its actions against InterDigital in the UK Courts.

Nokia v InterDigital

InterDigital is a US based company that owns a portfolio of patents that it has declared to ETSI as Essential to 2G and 3G mobile phone technology. ETSI (the European Telecommunications Standards Institute) is a partner in the standards setting authorities for second generation and third generation (2G and 3G respectively) mobile telephony. Nokia, the wellknown mobile phone manufacturer, wished to know which of InterDigital's patents were necessarily used in the manufacture of 2G and 3G mobile telephones. The UK actions, which relate to the Essentiality of the patents applicable to the UK, are discussed below.

The 2G action

In June 2004, Nokia commenced an action against InterDigital in the UK Patents Court. As commenced, its purpose was to revoke three of InterDigital's patents that it had declared to ETSI as Essential to 2G mobile phones. As the patents were said to be Essential, Nokia considered that InterDigital must be putting a very broad construction upon the patent claims and pleaded this position so as to demonstrate InterDigital's difficulty - broad claims being much easier to revoke than narrow claims. InterDigital attempted to strike out that part of Nokia's pleading and, during the hearing of InterDigital's application, Nokia re-cast its pleading so as to request a declaration from the Court that the patents were not Essential to the 2G standard. The Court allowed the amendment and InterDigital appealed the decision.

InterDigital raised a number of issues at the appeal but all were rejected. The Court of Appeal held that the meaning of "Essential", as defined by ETSI, was clear and that the meaning of the standard was clear. Therefore, it was possible to carry out an exercise to determine whether a patent was Essential by ascertaining whether it was possible to work within the standard whilst not infringing the patent. The issue was therefore clearly enough defined that it could be the subject of the Court's inherent jurisdiction. InterDigital also argued that Nokia were seeking only an "advisory opinion" from the Court as finding that the patents were not Essential would not finally determine the position between the parties as it was possible that a non-Essential patent could still be infringed. The Court of Appeal rejected this position, finding that there was a "real, live, commercial question between the parties".

The 2G action settled after a 26 day trial but before judgment was handed down. The issues relating to the requested declarations had been left over until after trial and, accordingly, the action did not go any further towards resolving the position. However, a further action had already been commenced by Nokia at the time of the settlement. The new action related to 3G technology and the associated standards for such mobile phones.

The 3G action

In July 2005, Nokia commenced a second UK action against InterDigital, asking for a declaration that thirty or so of InterDigital's patents were not Essential to the standards covering 3G technology. In this action, revocation of the patents was not requested. As they had in the 2G action, InterDigital attempted to dispose of the action, asking the Court either to set aside service of the proceedings on the basis that the court did not have jurisdiction or declined to exercise its jurisdiction, or alternatively to strike out the action or for summary judgment.

InterDigital relied on a number of issues in support of its application. One issue of particular interest was its argument that the 3G action differed from the 2G action because, in the 2G action, counsel for InterDigital had informed the Court of the patents that InterDigital considered were Essential to the 2G standards. It argued that it was this assertion of Essentiality which had swayed the Court of Appeal but that it had studiously avoided making such an assertion in the 3G action. Therefore, InterDigital claimed that there had been no assertion of a right upon which Nokia could found an action for a declaration. Pumfrey J heard the application and rejected this argument. He said:

"If the patentee is unwilling to either affirm or deny that these patents are in the present state of things essential, that fact alone indicates the existence of a relevant issue".

InterDigital had also argued that the mere declaration of patents to ETSI did not amount to an assertion in any event, as the declaration to ETSI included that the patents may be "potentially essential".

Pumfrey J rejected this argument and found that "an assertion that would be understood as meaning "may well be essential" would be sufficient to found a properly constituted action for declaratory relief". Pumfrey J based his findings on a line of authority from Guaranty Trust Company of New York v Hannay & Co, Messier-Dowty Limited v Sabena SA and Financial Services Authority v Rourke. These cases established the following principles:

• The correct approach to the question of whether to grant negative declarations was one of discretion rather than jurisdiction;

• The use of negative declarations should be scrutinised and their use rejected where it would serve no useful purpose, but where such a declaration would help ensure that the aims of justice were achieved, the Court should not be reluctant to grant a negative declaration; and

• Before a Court can properly make a negative declaration, the underlying issues must be sufficiently clear to render it properly justiciable.

Nokia had dealt with the third issue at the hearing by demonstrating the comparison between one of the patents and the standard. Pumfrey J also had the benefit of having heard the 2G action and was therefore able to conclude that a proper determination to Essentiality could be made.

InterDigital also relied on the recent case of Unilever v Procter & Gamble and a reference in that judgment to dicta from Hoffman J in Barclays Bank v Homan. Hoffman J said that "In my judgment Re Clay, Clay v Booth [1919] 1 Ch 66 is authority for the proposition that a party against whom no claim had been formulated cannot sue for a declaration of liability".

Considering the question of whether there was a "formulated claim" on which Nokia could rely, Pumfrey J found that "… to approach an international standards body and suggest that the use of a particular invention is [essential] necessarily involves a "formulated claim" against potential users of the standard… In my view it is wrong for a member of ETSI who has made a declaration of essentiality to suggest that it is either unprepared or unwilling to have the substance of the declaration tested… I do not think that this is a case of forcing an unwilling plaintiff who has not formulated his case into Court. On the contrary, the case is formulated".

Pumfrey J considered the grounds raised by InterDigital as to why the Court should not exercise its discretion and rejected them as "quite inappropriate to be decided at this stage of the action" and that they, in any event, had "a flavour of the grounds that were advanced… in the 2G action".

Pumfrey J therefore rejected the application and, at a Case Management Conference in July 2006, set a timetable, culminating in a trial in October and November 2007. InterDigital appealed the decision to the Court of Appeal.

The 3G Action - The Court of Appeal Decision

The Court of Appeal heard the Appeal from Pumfrey J's decision on 6 November 2006 and handed down judgment on 5 December 2006. InterDigital's appeal was rejected and the action was allowed to proceed to trial. Jacob LJ made the following points:

• The Court did have jurisdiction as a matter of law. The Civil Procedure Rules state, at rule 40.20, that "The Court may make binding declarations whether or not any other remedy is claimed".

• The Court will normally decline to grant a declaration in favour of a party against whom no claim has been formulated for the obvious reason that there is no real point in doing so. In this case though, there was a real point in so doing and "Nokia had a manifest and real commercial interest in a decision of the kind sought. They are "technically infringing" if they are wrong".

• Although the decision would only apply to the UK jurisdiction, it would likely have commercial repercussions beyond the UK and particularly in Europe where the principles of patent construction are converging.

• Not just anyone could apply for the kind of declaration that Nokia sought: there would have to be a real commercial reason for the person seeking the declaration to have standing to do so. "An interest in making 3G telephones which must therefore comply with the standard is clearly sufficient".

• The distinction between the 2G case and the 3G case was a "distinction without a difference. InterDigital have made an assertion to the industry as a whole that the patents in suit are essential".

Carnworth LJ also noted that Messier- Dowty was decided after Unilever. He noted also the conclusion of Lord Woolf MR in Messier-Dowty: "The development of the use of declaratory relief in relation to commercial disputes should not be constrained by artificial limits wrongly related to jurisdiction. It should instead be kept within proper bounds by the exercise of the courts discretion".

What next?

One of the concerns raised by counsel for InterDigital was a possible "floodgates" problem if the 2G and 3G actions were allowed to proceed i.e. that, if such actions were allowed, the courts would be inundated with similar claims. This argument was rejected and it was noted that since the 2G case in November 2004 and InterDigital's failed strike out application in 3G in April 2005, there had not been such a flood of claims. There are however three cases in the UK Courts which are considering essential patents which are worth keeping under review.

• The first case to be heard is that of Qualcomm v Nokia. Qualcomm is requesting a declaration that a patent is Essential to the 2G standards. This matter is due to be heard in July 2007

• Secondly, a case running semiconcurrently with the Nokia 3G action is that of Ericsson v Samsung which commences in the UK Patents Court in November 2007. This will involve the court in assessing whether the terms offered by the parties in inconclusive crosslicensing negotiations complied with the FRAND criteria, and should give guidance on how to calculate what amounts to a FRAND rate. A trial in 2008 will assess how the FRAND standard for royalties relates to the terms which could apply were a compulsory licence to be imposed on the holder of both Essential and non-Essential patents under Article 82 of the Treaty of Rome.

• The case of SanDisk Corporation v Koninklijke Philips NV is due to be heard starting on 25 February 2008. SanDisk is requesting a declaration from the Court that three of the patents owned by Philips and others are not essential for SanDisk's mp3 players. SanDisk is also asking for revocation of the patents.

Comment

2007 may be the year when Essential patents, FRAND and standardisation make their mark on patent litigation in Europe. The breadth of the actions that are coming to trial will hopefully ensure that those working in markets subject to standardisation will be provided with some much needed guidance as to how best to deal with the many patentees that seek royalty payments. Although ETSI was invited by the Court of Appeal to the hearing of the 3G appeal, it declined to appear for what the Court stated to be "good reasons". No doubt however they will be watching the proceedings closely, to determine the effect, if any, that the litigation will have on future standardisation exercises. However, it is notable that Jacob LJ decided that, in the 3G appeal, Nokia had standing to bring its claim because it manufactured equipment that was required to work to the standard. It remains to be seen whether a party that does not manufacture would have the same standing to commence proceedings.

In the meantime, manufacturers of equipment the subject of standardisation can take heart from the findings of the Courts to date, which have recognised that the commercial reality for these companies is often one of licensing of Essential patents and that the best judicial assistance that can be provided may require stepping outside the common boundaries of infringement and validity.