Are natural justice and client-attorney relationship the only factors to decide the contours of confidentiality and confidentiality clubs?
In a decision with wide ramifications, the High Court of Delhi recently held in InterDigital Technology vs Xiaomi Corporation, a heated SEP-FRAND dispute, that parties’ employees cannot be precluded from confidentiality clubs since such preclusion failed on the touchstones of natural justice and attorney-client relationship.
The issue of confidentiality club came up during a patent infringement suit filed by InterDigital in July 2020 against Xiaomi violating its 3G and 4G SEPs.
Since enforcement of SEP is guided by the patentee executing licences on FRAND (Fair, Reasonable and Non-Discriminatory) terms with the defendant and also the third-party implementers, InterDigital itself requested the Court to set up a confidentiality club proposing a two-tier structure:
(i) 1st Tier (Outer Tier) – nominated advocates, external experts and representatives who may be party employees. Members to get access to confidential correspondence covered by a Non-Disclosure Agreement between the parties.
(ii) 2nd Tier (Inner Tier) – all Tier 1 representatives barring party employees. Members to have access to third party FRAND licence agreements.
Xiaomi opposed this structure claiming the absence of its representatives (other than its advocates) in the inner tier would cripple its defence against InterDigital’s claim of FRAND compliant licences.
Court makes room for Xiaomi’s representatives
On December 16, 2020, the court held that keeping Xiaomi’s representatives away from the licence agreements proposed to be included in the inner tier would be antithetical to, and destructive of, most fundamental notions of natural justice and fair play.
It also delved into attorney-client relationship to say that keeping Xiaomi representatives away from the inner tier would interfere with its right to defend itself and go against the Bar Council Rules since without the express instructions of its clients, Xiaomi’s advocates (who are not their in-house counsel) would be defenceless.
InterDigital was given liberty to redact information from confidential documents, but the same could not be relied on to establish a case for injunction against Xiaomi.
Judgement opens a Pandora’s Box in SEP jurisprudence
The sweeping view adopted by the Delhi High Court that a party’s representative must never be excluded from the confidentiality club needs to be reconsidered since:
(i) It subverts the entire purpose of confidentiality clubs.
The decision overlooks the catastrophic damage SEP owners and their third-party licensees will suffer if the defendant’s employees have access to their FRAND agreements. Allowing a party’s representative access to such business-sensitive information gives the defendant an advantage which, certainly, shouldn’t be resulting from an action of infringement. In cases where third-party licensees refuse to disclose their agreement, the SEP owner will either risk breach of confidentiality for sake of court procedure or have the infringement claim falling flat.
(ii) Once the Court had recognized that InterDigital and its licensees did stand to suffer, it should have protected their interests too rather than extending third-party and business-sensitive information to Xiaomi by opening the confidentiality club to its representatives.
(iii) Even if hypothetical, there is logic in the argument that while InterDigital will have to produce its third-party FRAND agreements, Xiaomi gets to stay silent about royalties it pays to other third-party Standard owners. ‘Not only must justice be done, it must also be seen to be done’, in keeping with the aphorism, there must be symmetry in the disclosure obligations on both parties to the dispute. Though the analysis of third-party FRAND agreements of the SEP owner is important, it is equally important to know the rates that the defendant-implementor is paying to other SEP owners for patents in the same field.
(iv) The decision is also in the face of established market practice that FRAND licence agreements are based on arm’s length negotiations conducted with honesty and good faith, rather than disclosure of confidential third-party agreements.
(v) Natural Justice vis-à-vis Confidentiality
Natural justice is the bedrock of justice. But not over breach of confidentiality and the consequential harm. The UK Supreme Court in the landmark case Al-Rawi v Security Service recognized that exceptional regimes (such as IPR) may require precluding access to sensitive documents by party employees, keeping in mind the greater need to maintain confidentiality of sensitive information.
Industry practice, as well as Xiaomi’s own admissions in SEP disputes in other jurisdictions that certain highly confidential information could, in principle, be kept away from party employees, stands testament to the fact that negotiating FRAND licences without disclosing third-party agreements is both fair and equitable.
(vi) Client-Attorney relationship and the Right to Defend
Providing access only to advocates and external experts does not preclude Xiaomi from having any discussion on FRAND issues. All that the experts and advocates cannot disclose to Xiaomi (had InterDigital’s claim been allowed) is the terms and covenants of third-party FRAND agreements rather than disabling Xiaomi from instructing its counsel well.
This decision takes a different view from previous orders in Indian SEP space by claiming that none before it addressed unique aspects such as the attorney-client relationships and natural justice.
While that may be true, it fails to address some key findings in previous orders, such as in Ericsson v Xiaomi which recognized the dangers in sharing sensitive information with party employees, since it confers them with an irreversible and unfair advantage in a highly competitive market.
Departing from Indian cases for a moment, recent decisions in the UK denied Xiaomi’s and Oppo’s in-house counsel access to third-party FRAND agreements. The Appeal Court upheld the High Court’s decision, attorneys and external experts are good enough for filtering of relevant documents at initial stages given the need to preserve third-party confidential information from being placed in competitors’ hands.
(vii) Judicial precedents have established that natural justice is subject to the facts of each case, and the legal framework governing a situation.
Recently, the Delhi High Court itself had promulgated rules governing commercial disputes. One of these rules specifically allows formation of confidentiality clubs with only advocates and external experts.
The instant decision is silent on whether the High Court of Delhi would have introduced such a provision, if it violated natural justice!
(vii) Can an Implementor-Defendant comment on whether the rates being paid by third-party licensees are FRAND?
Xiaomi has no locus to comment on whether the terms which have already been executed by third-party implementors with InterDigital are compliant with FRAND obligations.
The focus of the dispute, and potentially that of the law in SEP disputes in India, seems to have shifted to whether an SEP owner’s executed, third-party agreements were FRAND compliant, rather than determining if the offer made to the defendant in the suit was FRAND complaint.
Such shifting of the scope of the dispute is like opening a barrage of cases with each licensee joining in to contest the FRAND compliance of its agreements with an SEP owner.
Future through the lens of the instant order
The instant order has sent ripples across the SEP jurisdiction and the Standard owners have been caught unawares with their position being prejudiced and confidentiality of their licences subverted.
It might be an early speculation but the decision can hit India’s position as a promising jurisdiction for fair adjudication and patent protection and scuttle its steady rise on the charts of ease of doing business.
SEP owners (more particularly those situated in India or negotiating with Indian implementers) will find it increasingly difficult to initiate discussions and execute FRAND agreements. Implementers may refuse to negotiate, citing risk of disclosure in third-party litigations or even use the logic of this decision to demand access to third-party confidential agreements as part of their tactic to delay executing a FRAND licence.
Caught between this dilemma of disclosure and confidentiality will be the standard owner who may either have to risk breaching its confidentiality obligations, or choose not to litigate in India altogether to maintain confidentiality.
The court ought to have looked at the larger picture and decided the contours of confidentiality in terms of the rights and interests of all affected entities, rather than deciding the constitution of a confidentiality club from the lens only of the implementor who is defending an SEP infringement dispute.