Australia – No Country for Troll’d Men (or Women)?

Upaid Systems Ltd v Telstra Corporation Limited [2013] FCA 1441 (23 December 2013)

Upaid Systems Ltd, a company which some regard as a patent troll, has stumbled at the first hurdle in its infringement case against Telstra (which I first reported back in August).  Specifically, a judge of the Federal Court of Australia has found that Upaid has failed to meet its obligations to provide an adequate statement of its case, i.e. to identify, with sufficient particularity, at least one instance of each type of infringement alleged to have been committed by Telstra.

The court has given Upaid until 28 February 2014 to file amended documents, stating its allegations in sufficient detail.

I have said before that I do not consider Australia to be a fertile hunting ground for patent trolls, because the patent litigation system in this country lacks a number of the characteristics that make the trolls’ enforcement-based business models so effective in the US.  And while Upaid may not qualify as a classic ‘troll’, the court’s finding that it has failed to plead its case adequately highlights some of the challenges that a true patent troll would face in Australia.

Two things are particularly notable about the court’s decision:

1. Upaid’s particulars were found to be inadequate despite what appears to have been a reasonable effort to describe specific examples of alleged infringement by Telstra, confirming that the court was not willing to ‘bend’ or relax the rules simply because the task of particularising the infringement case might be regarded as difficult; and
2. as a result of its failure, Upaid has been ordered to pay Telstra’s costs (i.e. necessary expenses and reasonable attorney fees) of its application to compel Upaid to provide an adequate statement of its case.

As a result, four months after commencing proceedings Upaid has yet to make any real progress in its infringement case against Telstra.  On the contrary, by the time it has paid its own legal bills, and the costs ordered in favour of Telstra, Upaid will certainly be out-of-pocket to the tune of at least some tens of thousands of dollars, and possibly more, just for dealing with this preliminary aspect of the case.  A true patent troll, hoping for a quick win in the form of a settlement at a cost below that of proceeding to trial, would have to be considering cutting its losses at this point.

Making this decision even more interesting – and the case worthy of watching from an international perspective – is that the two notable features listed above, i.e. a high standard for pleading a case of infringement, and fee-shifting, are both key elements of the Goodlatte Innovation Act 2013 which was recently passed by the US House of Representatives.

This case suggests that raising the requirements for pleading an infringement case can have a significant impact on the ability of patent trolls – and perhaps on inadequately-prepared non-practising entities (NPEs) in general – to bring unreasonable and disruptive lawsuits.

Requirement for Particulars

According to Rule 34.42(3) of the Federal Court Rules 2011, in a proceeding for infringement of a standard patent, the statement of claim must include particulars of the alleged infringements that specify ‘which of the claims of the complete specification are alleged to be infringed’ and give ‘at least one instance of each type of infringement alleged’.

On the one hand, this rule reduces the burden on the applicant (and, indeed, on the court and the respondent) by requiring only a single instance of each type of infringement, rather than all instances of each type.  On the other hand, it raises the questions of what constitutes a ‘type of infringement’, and how much detail is required of each ‘instance’.

The court made a number of observations relevant to these questions (at [32]-[35]):

1. a ‘type of infringement’ is not the same thing as infringement of a particular claim;
2. a claim may be infringed by specific acts that can be characterised according to type;
3. there may be more than one type of infringement of a single claim;
4. the rule distinguishes between a type of infringement and instances of that type;
5. it is only necessary for an applicant to particularise and prove a single instance in order to establish liability for infringement by acts of the relevant type;
6. however, with regard to relief (i.e. damages or an account of profits) the applicant can rely on other instances of those acts;
7. there is a distinction between what might be described as a ‘mere example’ of infringement and the instantiation of a type of infringement with which Rule 34.42(3) is concerned – if only an example of infringement is given, the relief to which the applicant is entitled will be confined to further instances of the very same infringing conduct;
8. identification of acts sufficient to constitute a type of infringement may well involve difficult questions of characterisation;
9. where a type of infringement is capable of being characterised so as to cover a range of substantively similar acts of a common type, the particulars should make this clear; and
10. the onus lies with the applicant to ensure that the scope of its intended case has been particularised according to the rule.

The task of the applicant at trial is to prove its case on infringement in relation to the specific instances set out in its particulars.  If successful, it may then be able to extend the court’s findings to additional acts of the same type for the purposes of assessing the quantum of pecuniary relief, but it should not expect to extend liability to additional types of infringement that were not originally particularised.  While the court identified specific cases in which this may have occurred in the past, it was concerned not to allow a situation to develop ‘where there is a risk that a hearing on liability is seen as little more than a staging post on the way to yet another hearing to determine new substantive questions of infringement beyond the type or types of infringement particularised and already ruled on’ (at [43]).

A lack of sufficient detail in the particulars is therefore not only unfair to the respondent (i.e. Telstra), which is entitled to adequate notice of the case it will be expected to answer at trial, but is also liable to result in inefficiencies and complications at later stages of the proceedings.

Upaid’s Particulars

The two Australian patents identified in Upaid's suit are AU 770646 and AU 2008203853. In order to illustrate the deficiencies in its particulars, it is sufficient to look at claim 1 of the ‘853 patent as an example.

The ‘853 patent relates to ‘a convergent communications system that provides mobile commerce, electronic commerce and communication services through existing communication switches without specific hardware located at those switches.’

Broadly speaking, claim 1 provides for an authorised communications network user to make payments for services based upon a preconfigured payment mechanism which utilises a financial network which is separate from the communications network.  An example might be a subscriber with a mobile phone being able to register credit card details with their network operator, and then subsequently charge payments to the registered credit card using their mobile phone.

But that is only a rough description of the claim broadly speaking. The actual claim is in the following terms:

A convergent communications method employing a rule set, comprising:

1. determining, for an authorized user, at least one payment rule applicable at that time for authorizing a transaction and resultant settling of an account of the authorized user in response to an instruction received via at least one communication network;
2. applying the at least one payment rule for authorizing the transaction;
3. charging the account, according to the at least one payment rule, in real time if the transaction is authorized; and
4. settling charges to the account by one of a plurality of transaction providers in accordance with at least one settlement rule, said charging and settling performed utilizing at least one financial network, separate from the at least one communication network.

The claimed invention therefore includes a number of specific requirements, such as the use of ‘payment rules’ for authorising and charging accounts, the reception of ‘an instruction’ via the communication network, and the use of ‘settlement rules’ for charging and settling via a ‘financial network’.  In order to succeed in its infringement case, Upaid must establish the presence of all of the elements of this claim in the accused acts by Telstra.

Its particulars, however, read more like my broad characterisation of the claim above:

(a) Telstra operates a system which enables authorised users of its 3G and NextG^® networks to use a device which has been registered for use with those networks:

(i) outside Australia in places which Telstra has advertised as being available for international roaming, either with or without a separate activation; and
(ii) to acquire goods and services from Telstra or third party merchants through Telstra’s BigPond portal.

(b) Telstra offers and supplies the services particularised in paragraph 1(a) above on its pre-paid and post-paid service plans for use on basic mobile phones, smartphones and tablets. Such service plans are available for purchase on Telstra’s website at www.telstra.com.au and at Telstra shops located in every State and Territory of Australia.
(c) Telstra supplies such services to individual and corporate customers.
(d) Upaid is unable, prior to discovery and inspection herein, to provide further details of all of Telstra’s aforesaid infringing conduct but at the trial of this proceeding will rely upon and claim relief in respect of all such conduct.

The court found this to be insufficient (at [45]):

… Upaid will need to establish Telstra’s exploitation of a convergent communications method employing a rule set having the features set out in the balance of the claim. … . What has been provided is no more than an overarching allegation of infringement of certain claims that refers to the operation of a system which enables authorised users to carry out generally described acts. These generally described acts do not themselves engage with the specific features of the invention defined in claim 1. Indeed, taken at face value, the statement refers to acts outside the patent area that cannot constitute an infringement. Moreover, to say that a system enables users to do certain things does no more than speak of the possibility, but not the actuality, of infringement or threatened infringement. (Emphasis in original.)

‘Further and Better’ Particulars

In the face of a request from Telstra for ‘further and better’ particulars, Upaid sent a letter in September 2013 in which it set out various examples of Telstra service options which it asserts correspond with the specific features of its patent claims.

The court found that these, too, were inadequate (at [67]):

Telstra submits that the giving of these examples illustrates that there are multiple potentially infringing methods, rather than a single method by which different services (or a different combination of services) are provided. The method by which Telstra provides a service or combination of services differs according to the features of the service or combination of services being provided. Telstra also submits that, where Upaid identified “transaction providers” and a “financial network” as including Telstra’s acquiring bank and Visa (and, in some cases, the customer’s issuing bank), it is clear that the acts of third parties are relied on. Telstra submits that Upaid should give particulars of the legal basis for attributing liability to Telstra in respect of third party acts. I accept those submissions.

It is not enough to provide examples of potential infringement. Rule 34.42(3) requires that types of infringement be identified, along with at least one instance of each type.  While it may be that a specific example is, in fact, an instance of a type, this does not discharge to onus on the applicant actually to identify the type, and to particularise the manner in which it is said to infringe one or more patent claims.  As the court said, at [74]:

Upaid’s obligation is not merely to provide examples of infringement but to particularise an instance of each type of infringement alleged. The present indications are that it has not done so.

Furthermore, the court was unimpressed with Upaid’s attempt to argue that this task is unnecessary and unduly burdensome (at [71]):

Compliance with the requirements of r 34.42(3) is not an unnecessary task. In my view, such compliance will serve to clarify the issues that are likely to be in dispute in the present case.

Conclusion – Challenges for NPEs?

None of this establishes that Telstra does not infringe any of Upaid’s Australian patent claims.  What it means, however, is that Upaid will need to set out its allegations in greater detail if it wishes to proceed with its case against Telstra.

And while the court has been critical of the the lack of precision in Upaid’s pleadings, this does not mean that Upaid is a ‘patent troll’, that its case necessarily lacks merit, or that it has commenced proceedings merely to pressure Telstra to settle.

However, there is no question that Upaid is an NPE, and it is possible that this, in itself, raises the barriers to successfully asserting patent infringement claims in the Australian Federal Court.  In patent cases involving disputes between active competitors, adequacy of the patentee’s particulars is rarely an issue.  A practising company can be expected to have a good understanding of the technology employed by its competitors – after all, it is undoubtedly providing similar goods and services itself.  An NPE, however, may have less comprehension of the technical operations of the accused infringer, and may therefore be more likely to rely upon inference and observation of end results as a basis for its allegations.  Upaid’s experience demonstrates that this may not be sufficient.

As for the US position, it is my understanding that NPEs and patent trolls in that country frequently commence litigation on the basis of very broad characterisations of the respondent’s allegedly infringing conduct.  As can be seen in this case, there is absolutely no way that such imprecision would be tolerated by the Federal Court in Australia.

It will therefore be interesting to see whether the key provisions of the Goodlatte bill will also be passed by the US Senate and, if so, what effect the requirements for greater specificity in pleading infringement actually have in practice.  If the standards in the US were to be raised anywhere close to those imposed by the Australian Federal Court upon Upaid – and if the costs of dealing with insufficient pleadings were to be borne, as here, by the applicant – life could become much more difficult, and less profitable, for patent trolls!

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Tags: Australia, Federal Court practice, Infringement, Litigation, Trolls