27 March 2016

Upaid v Telstra – Here’s How We Deal With NPEs in Australia!

WoundedUpaid Systems Ltd is a ‘non-practising entity’ (NPE) – sometimes referred to as a ‘patent troll’ – which sued Australia’s largest telecommunications carrier, Telstra Corporation Ltd, back in August 2013 for the alleged infringement of two Australian patents relating to making online purchases of goods and/or services from mobile devices.  More specifically, Upaid alleges that various subscription operations performed in relation to Telstra’s MOG online music streaming service (formerly Bigpond Music) infringe its patents when conducted using a mobile device.

Some two-and-a-half years later, Justice Yates in the Federal Court of Australia has issued an interlocutory, i.e. provisional, decision comprising more than 500 paragraphs (Upaid Systems Ltd v Telstra Corporation Limited (No 3) [2016] FCA 227) in which Upaid’s various allegations of infringement are largely described in unflattering terms along a spectrum from ‘untenable’ to ‘confusing and embarrassing’!

Furthermore, even where the court has determined that Upaid may have some prospect of overcoming Telstra’s objections, it has found that Upaid’s corresponding case, even after all this time, still does not correctly or adequately identify details of Telstra’s alleged infringements.

It is not that Upaid has not been given ample opportunity to develop its case.  It has had multiple opportunities to address deficiencies identified by Telstra.  It has been granted access to internal documentation of how Telstra’s relevant operational and billing systems work.  It has even been given the opportunity to question Telstra employees on these factual matters.  Yet still the NPE is struggling even to outline an arguable case for infringement.

While the court has not yet completely killed-off Upaid’s case, in my view it certainly seems likely to have been mortally wounded.  While there remains a possibility of appeal (the time for either party to apply for leave has been extended until 12 April 2016), the recent judgment leaves Upaid with very little scope to make out a case with any reasonable prospects of success.  The court has all but struck out Upaid’s entire case in relation to one of the two Upaid patents at issue, and has offered only a limited opportunity for Upaid to try to rectify the deficiencies in its case in relation to the other.

So What Went Wrong?

Setting aside any inherent weakness in Upaid’s case, the big problem it has faced to date is one that I identified when I reported on the first interlocutory judgment in this matter, back in December 2013.  As an NPE, not itself mired in the business and technology of providing services competing with Telstra’s, Upaid is at a distinct disadvantage.  Whereas a practising company can be expected to have a good understanding of the technology employed by its competitors, an NPE may have less comprehension of the technical operations of an accused infringer, and may therefore be reliant upon inference and observation of end results as a basis for its allegations.  Furthermore, an NPE perhaps has a greater incentive to make somewhat speculative allegations, given that its primary objective is to secure licensing revenues.  A competitor will more commonly sue for infringement in order to maintain an advantage in the marketplace as the sole supplier of its patented products or services.

As Upaid has discovered to its detriment, the Australian Federal Court Rules require substantial detail to be provided in relation to the activities said to constitute infringement.  In short, in this country it is nowhere near enough to run around pointing fingers at alleged infringements on the basis that they might look, walk and quack a little bit like a claimed duck.  You need to provide sufficient information, at the outset, to inform the accused infringer fairly precisely of the case they will be required to answer.

Near-Farcical Proceedings

The long delay in reaching the current, still preliminary, status of the case is not for want of any activity on the part of either Upaid or Telstra.  As I reported in December 2013, Upaid’s Christmas gift from the Federal Court of Australia that year was to strike out its ‘particulars of infringement’ (i.e. the pleadings setting out the basis for Upaid’s case against Telstra), and ordering it to file, by the end of February 2014, a replacement meeting the requirements of the Federal Court Rules to identify one or more ‘types’ of infringement alleged to have occurred, along with at least one specific example of each type.

What followed borders on farcical.  Upaid obtained Telstra’s consent to two extensions of time, and finally filed its amended particulars on 17 March 2014.  Telstra again objected that these were inadequate.  Much correspondence, amendment, and court directions then ensued.  By the end of August 2014, Telstra had delivered a total of 213 pages containing some 1,860 questions or requests, in reply to which Upaid’s responses amounted to 297 pages.  Upaid’s consolidated particulars in relation to Telstra’s alleged infringements are 171 pages in length.

By October 2014, Upaid apparently believed that it was ready to file a consolidated document including all of the resulting particulars of Telstra’s alleged infringement.  Telstra, for its part, filed an interlocutory application seeking to have the consolidated particulars again struck out, and/or for the court to grant summary judgment in its favour, on the basis that Upaid had failed to establish a case of infringement having any reasonable prospects of success. 

Upaid’s response was to apply for discovery (i.e. orders compelling Telstra to provide details of how its accused systems operate) and for ‘leave to interrogate’ (i.e. orders permitting it to question certain individuals in relation to Telstra’s relevant operations), so that it would be in a better position to further improve its particulars.  That application led to a second judgment (Upaid Systems Ltd v Telstra Corporation Ltd (No 2) [2014] FCA 1377) on 16 December 2014, partially granting Upaid’s applications.

Incredible Complexity

Telstra’s application to have Upaid’s case dismissed was eventually heard on 11 and 12 March 2015.  In addition to documentation and other information obtained through discovery and interrogation of Telstra employees, Upaid relied upon evidence from a technical expert, one of its solicitors, and its Chief Information Officer.  Telstra also adduced evidence pertinent to its contention that it so clearly could not be infringing Upaid’s patent claims (at the very least, not in the manner particularised) that the court should grant judgment in its favour.  Insofar as this evidence is discussed by the court, much of it has been redacted in the published decision, presumably on the basis that it comprises Telstra confidential information.

So complex had the case become (and, remember, this is still a preliminary proceeding) that the court took a year to hand down its decision, which is 524 paragraphs in length!  And, despite these statistics, this is indeed a very much cut-down and provisional decision, because the court has only considered the issues relating to infringement of one claim of each of Upaid’s two patents (claim 1, in each case).

In its consolidated particulars, Upaid identified six different ‘types’ of infringement in relation to each of the two patents at issue (i.e. 12 types in total).  Telstra, in turn, raised six objections to the way in which Upaid was attempting to ‘map’ the first claim of each patent onto its MOG music subscription service.  In principle, this results in 72 combinations (i.e. six objections to each of six types of infringement for each of the two patents) that the court would need to consider.  Fortunately, not all of these raised distinct issues, reducing the number of combinations somewhat.

The Court’s Findings

In relation to Australian patent no. 2008203853, the court has found that Upaid failed to particularise, or argue, any tenable case for infringement, in the face of Telstra’s objections.

In relation to Australian patent no. 770646, the court has found that Upaid failed to particularise any tenable case for infringement, but that its submissions at the hearing departed from the particulars in ways that left unclear whether or not Upaid might be in a position to present an arguable case.

As a result, the court is proposing to to strike out Upaid’s case on infringement of claim 1 of the 853 patent.  Somewhat generously, given all that has taken place so far, it is proposing to give Upaid yet another opportunity to amend its particulars of infringement in relation to the 646 patent.  The matter has been listed for a further appearance (directions only, i.e. no further substantive submissions on any outstanding matters) on 26 April 2016.

Conclusion – and a Final Punchline

The very strong implication of Justice Yates’ conclusions, as I read them, is that the abject failure of Upaid’s case in relation to claim 1 of the 853 patent will carry over to the other asserted claims, all of which are of either commensurate or narrower scope than claim 1.  Furthermore, I sense real scepticism as to whether Upaid has any genuine prospects of pleading a tenable case in relation to the 646 patent.  If so, then Upaid’s case is looking to be dead in the water.

The situation may yet get far worse for Upaid because if the court issues summary judgment in favour of Telstra, it will also be entitled to receive its costs from Upaid.  I could only guess at what the proceedings have cost the two parties thus far, but the combined total would almost certainly exceed a million dollars, and Upaid is facing not only paying its own legal bills, but also a substantial proportion of Telstra’s.  So, who would want to be an NPE in Australia?

But wait, because the punchline is still to come: Telstra shut down the MOG service in Australia as of 31 August 2015, for reasons unrelated to the litigation with Upaid!


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