An Alternative to Delhi HC’s Approach on Confidentiality Clubs in InterDigital-Xiaomi SEP Dispute

We’re pleased to bring to you a guest post by Abhilasha Nautiyal, analysing the recent Delhi High Court decision on confidentiality clubs in InterDigital v. Xiaomi (also discussed by Nikhil and Anupriya earlier here, here and here) and proposing an alternative to it.

Abhilasha is an attorney at Ira Law, a firm that she co-founded with other colleagues. Prior to this, she was a partner at an IP law firm. She graduated from the Army Institute of Law and then pursued a master’s in law from Harvard Law School. She’s written guest posts on the blog earlier as well: ‘Antitrust Scrutiny in Patent Licensing Disputes: An Alternative Approach to Delhi HC’s Decision in Monsanto v. CCI’, ‘Transborder Prosecution History Estoppel in Patent Litigation?‘, and ‘Copyright Infringement Suits Invoking Right to Receive Royalty: Square Peg in a Round Hole?‘.

Abhilasha advises/represents SEP owners on issues related and unrelated to those discussed in the post.

An Alternative to Delhi HC’s Approach on Confidentiality Clubs in InterDigital-Xiaomi SEP Dispute

Abhilasha Nautiyal

The Delhi High Court’s recent view on confidentiality clubs in InterDigital Technology Corporation & Ors. v. Xiaomi Corporation & Ors., a litigation involving standard essential patents (SEPs), may have severe adverse consequences on not just the litigating patent owner but also its existing licensees. In recent posts on the blog (see here and here), it has been argued that the court’s conclusion was an effective solution. However, in my opinion, when the impact of the court’s conclusion is examined, it appears that a better and more balanced alternative is available.

In this note, I have explored (a) the basis of legal acceptance of confidentiality clubs in intellectual property (IP) litigation under Indian law, (b) whether in the facts of InterDigital v. Xiaomi (InterDigital), the outcome was the most effective solution, and (c) a proposed alternative.

Confidentiality clubs in IP litigation under Indian law

Ordinarily, legal proceedings are public and the right to representation the norm. However, principles of natural justice have been modified in special circumstances.

In the context of intellectual property litigation, courts have recognized the need to protect confidential information which is relevant to the litigation but may be put at risk by its disclosure during the proceedings. One reason for doing so is that protecting confidential information has its own benefits which in turn benefit the public.

The Delhi High Court Original Side Rules, 2018 introduced ‘confidentiality clubs’ as a part of the court’s procedure to allow limited access to confidential documents/ information.

The Vestergaard litigation before the Delhi High Court led to the creation of one of the early confidentiality clubs in IP litigation in India. A division bench of the Delhi High Court in this case examined the legal basis for production of documents and took note of the need to create such a club to protect the documents so directed to be produced since these documents contained confidential information of a party to the proceedings.

The following portion of the Vestergaard judgment shows the logic that the court applied while directing the creation of a confidentiality club:

The documents of the defendants pertaining to the production of its product and the details with respect thereto including the manufacturing process, contents and other confidential information including the copyrights which defendants may have in data base etc. are no doubt relevant and material to the matters in controversy at this stage of deciding the injunction application but the most important aspect is that what if the claim of the defendants is true that their product is different than that of the plaintiffs and if the plaintiffs have access to such confidential information then great prejudice and irreparable injury will be caused to the defendants because their confidential information will stand known to the plaintiffs who are their competitors.

It appears that the argument that a party’s right to legal representation would be curbed if only external members were added to a confidentiality club was not considered in this decision. However, the division bench’s view which regarded the protection of confidential information from a party’s competitor as most important is instructive of the balancing act performed by the court.

What happened in InterDigital

It is now well accepted that courts may limit access to confidential documents/ information disclosed during litigation proceedings. However, the scope of this limitation has been in the news of late after the Delhi High Court in InterDigital rejected a request to limit the membership of a confidentiality club for comparable patent licenses that would be disclosed by InterDigital to only the external representatives of Xiaomi.

The court in InterDigital was faced with a situation requiring a balancing act where it needed to assess the interests of and prejudice caused to both parties involved in the litigation. On the one hand, InterDigital, an SEP owner, wanted to rely on comparable licenses to demonstrate that it complied with its licensing obligations and the offers made by it to Xiaomi, an implementer, for licensing its SEPs were fair, reasonable, and non-discriminatory.

Comparable licenses would usually be licenses which InterDigital had entered into with companies which are similarly placed as Xiaomi. These other licensees are likely to be Xiaomi’s competitors. Comparable licenses have also been used by courts globally to determine the appropriate royalty in SEP disputes and would be material to the dispute at hand.

On the other hand, Xiaomi ought to be in a position to respond to InterDigital’s reliance on licenses it categorizes as comparable since these may form the basis of a court’s opinion on royalty determination. However, comparable licenses contain confidential information of Xiaomi’s competitors and impose non-disclosure obligations for both the licensee and the licensor therein.

In effect, the court had to delicately balance the interests of the two parties and then decide the limitations on access to comparable licenses. The court concluded that the business interests of InterDigital, howsoever legitimate, cannot prevail over the paramount consideration of grant of fair opportunity, and natural justice to Xiaomi, to meet the case set up by InterDigital. The choice, between these two competing considerations, in my view, is Hobsonian in nature.

The conclusion that commercial interest cannot always prevail over natural justice is well founded. However, courts have modified principles of natural justice to balance these with commercial interest, especially confidential information, where appropriate. An SEP owner’s commercial interest does not exist in vacuum and is actually the compensation that a patent owner is entitled to in return for use of its invention. Therefore, by disregarding the prejudice that would be caused to the rights of the patentee, the court in effect failed to give due weightage to public interest.

It would be pertinent to examine the impact a disclosure of such comparable licenses to Xiaomi would have on InterDigital and / or its licensees. Comparable licenses may contain information such as sales figures of non-publicly traded licensees. They may also contain confidential information such as the structure of licensing (e.g. lump sum or running royalty) which indicate the commercial choices and positions of licensees. Confidential information in such licenses may also include sales volume expectations, product categories which are yet to be launched, and details of other collaborations between the parties. Such commercially sensitive information in the hands of a competitor such as Xiaomi would prejudice the licensee.

The access of such information by Xiaomi is likely to have at least the following consequences: a) it will be able to use this information directly while defending itself in a royalty rate determination before the court, and b) Xiaomi may be able to use this information to unfairly compete in the market, including in negotiations with InterDigital.

The court appears to have overlooked the adverse effect of the second consequence mentioned above. In fact, the decision may encourage ‘patent hold out’ behaviour by unwilling licensees since willing licensees who took licenses for InterDigital’s SEPs without litigation probably did not have access to comparable licenses at the time of entering into a license (as InterDigital probably could not have disclosed these licenses due to non-disclosure contractual obligations that bind it and its licensees). An unwilling licensee would be encouraged to litigate to also gain access to its competitor’s sensitive commercial information.

Further, the use of its competitors’ confidential information by Xiaomi in negotiations with InterDigital will provide Xiaomi an unfair advantage over its competitors. In fact, access to commercial information of competitors may harm and distort competition in the market.

As courts in other countries have held, the obligation on SEP owners to license SEPs on fair, reasonable, and non-discriminatory terms does not mean that identical licenses have to be offered to all licensees. Hence, competition amongst SEP licensors (at the upstream level) and amongst SEP licensees (at the downstream level) is not eliminated by the obligation to license on fair, reasonable, and non-discriminatory terms.

A proposed alternative

 A conclusion that a party in litigation can never be excluded from becoming a member of a confidentiality club appears to be incorrect, especially since this situation is contemplated in the Delhi High Court Original Side Rules, 2018. Furthermore, setting up a confidentiality club without a specific ‘purpose’ and ‘use’ limitation on Xiaomi’s representatives is likely to harm the market.

In the facts of InterDigital, the court should have evenly balanced the interests of both parties and, at the very least, limitations should have been introduced to ensure that Xiaomi does not exploit this information for purposes beyond the litigation (e.g. in negotiations) and it does not misuse this information to adversely impact competition in the market. One way of achieving this could have been to restrict Xiaomi’s representatives admitted to the confidentiality club from participating in other commercial operations of the company such as licensing negotiations with InterDigital and price setting for the relevant products. A specific ‘purpose limitation’ restricting the use of the confidential information in comparable licenses to the ongoing litigation ought to have been introduced for the company representatives. Lastly, the terms of the confidentiality club should have included deterrent terms to incentivize members’ compliance with their confidentiality obligations.