04 December 2016

Appeals Court Throws NPE Upaid a Lifeline in Patent Claims Against Telstra

Life ringBack in March this year I wrote about an interlocutory (i.e. provisional, or interim) decision of Justice Yates in the Federal Court of Australia, in which he described claims of patent infringement made by Upaid Systems Ltd against Australia’s largest telecommunications carrier, Telstra Corporation Ltd, as being everything from ‘untenable’ to ‘confusing and embarrassing’.  (As a quick recap, Upaid is a ‘non-practising entity’ (NPE) – or, less flatteringly, a ‘patent troll’ – which sued Telstra 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.)

Specifically, Justice Yates found, in relation to Australian patent no. 2008203853, that Upaid failed to particularise, or argue, any tenable case for infringement at any time, while in relation to Australian patent no. 770646, it had failed to particularise a tenable case for infringement, but that its submissions at the hearing departed from the particulars in ways that left unclear whether or not it might be in a position to present an arguable case.  His Honour thus proposed to strike out Upaid’s case on infringement of claim 1 of the ‘853 patent, but generously offered it a further opportunity to amend its particulars of infringement in relation to the ‘646 patent.

Had the court proceeded with these orders, it would, in all likelihood, have eviscerated Upaid’s case against Telstra.  In reporting an earlier ruling in this dispute, I suggested that the reason for Upaid’s extremely poor performance may be that, as an NPE, not itself mired in the business and technology of providing services competing with Telstra’s, it may well have a reduced understanding of the technical operations of a major national telecommunications carrier, and may therefore be reliant upon inference and observation of end results as a basis for its allegations.

Unwilling, it seems, to accept almost certain defeat, Upaid applied for leave to appeal to a Full Bench of three judges of the Federal Court.  The matter was heard before Justices Perram, Jagot and Beach on 14 and 15 November 2016, and judgment handed down on 22 November 2016: Upaid Systems Ltd v Telstra Corporation Limited [2016] FCAFC 158.

The Full Court has delivered a glimmer of hope to Upaid, partially granting leave to appeal, and allowing the appeal in relation to the primary judge’s order in relation to the ‘853 patent.  Instead, the court has ordered that Telstra’s application for summary dismissal of Upaid’s infringement claims against it be dismissed, and that Upaid be given an opportunity to file and serve further and better particulars of its infringement case in relation to the ‘853 patent (albeit that the scope of this opportunity remains to be determined by Justice Yates).

This ruling is undoubtedly a lifeline to Upaid, for which all hope had appeared to be lost.  Indeed, it now seems quite likely that the case will proceed to a full trial, unless it is settled in the meantime.

Issues On Appeal

On appeal, Upaid argued that Justice Yates was in error in ordering summary dismissal of its infringement case concerning claim 1 of the ‘853 patent and in not allowing Upaid to file and serve further and better particulars of its infringement case concerning the ‘853 patent.

As a quick review of how complex Upaid’s claims had become, this is what I said about it when I wrote about the original decision:

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 issues were simpler on appeal.  Firstly, the court was required to consider only one of the two patents (i.e. the ‘853 patent).  Secondly, Justice Yates’ treatment of four of the original ‘types’ of infringement as only two distinct forms – depending on whether the Telstra customer has a pre-paid or post-paid mobile service – was not challenged on appeal.  Thirdly, Upaid dropped its appeal in relation to the other two ‘types’ of infringement.  Thus, an original case comprising up to 72 possible combinations was reduced to just two for the purposes of the appeal.

The questions which arose for consideration on appeal related to the presence of ‘distinct and separate’ steps of ‘charging’ and ‘settling’ in Upaid’s patent claims:
  1. a ‘charging’ step occurs when a Telstra customer purchases third-party goods or services via their mobile phone, the cost of which is debited against the customer’s Telstra account, rather than requiring a separate account with the third-party provider; and
  2. a ‘settling’ step occurs when the charge to the customer’s account is credited in some manner in order to collect the debt incurred by the purchase of the third-party goods/services.
At first instance, Justice Yates considered the separate cases of pre-paid and post-paid mobile services, and found that Upaid had ‘no reasonable prospect of success’ in either case (which is the test for grant of summary judgment under section 31A of the Federal Court of Australia Act 1976):
  1. in a pre-paid service, the customer’s existing credit is used to pay for the third-party goods/services, and his Honour considered Upaid’s argument that there are, conceptually, two distinct steps involved to be ‘untenable’; and
  2. in a post-paid service, the third-party charge is simply added to the customer’s account for inclusion in the next monthly bill, and his Honour went so far as to call Upaid’s argument that this involved a distinct ‘settling’ step to be ‘nonsensical’.
Upaid argued on appeal that both of these conclusions of the primary judge were erroneous.

Appropriateness Of Summary Judgment in Patent Cases

In this case, as in most patent litigation, a key step in determining whether or not there has been an infringement is ‘claim construction’.  This is simply legalese for ‘working out what the terms in the patent claims actually mean’.  Clearly, in order to determine whether some act infringes a claim, it is necessary to have a clear understanding of what the claim encompasses.  The challenge with summary dismissal of an infringement claim is that the process of construction often requires the submission of expert evidence, since terminology must generally be understood from the perspective of a skilled worker in the particular field of the invention.

If a matter cannot be decided without evidence, then it is necessary to proceed to a full trial so that the relevant facts can be placed before the court.  This requirement precludes summary dismissal of an infringement claim in such cases, because without the evidence a judge is in no position to determine whether or not the claim has any ‘reasonable prospect of success’.

This does not mean, however, that patent infringement claims can never be the subject of summary dismissal.  The Full Court cited a couple of UK cases to illuminate the issue.

In Virgin Atlantic Airways Ltd v Delta Air Lines Inc [2011] EWCA Civ 162 (cited at paragraph [51] of the Full Court decision) Jacob LJ observed that:

... Whilst the general rules as to summary judgment apply equally to patent cases as to other types of case, there can be difficulties, particularly in cases where the technology is complex. If it is, the court may not be able, on a summary application, to form a confident view about the claim or its construction, particularly about the understanding of the skilled man. On the other hand in a case such as the present, where the technology is relatively simple to understand, there is really no good reason why summary procedure cannot be invoked. No one should assume that summary judgment is not for patent disputes. It all depends on the nature of the dispute.

Subsequently, in Nampak Plastics Europe Ltd v Alpla UK Ltd [2014] EWCA Civ 1293 (cited at paragraph [52] of the Full Court decision) Floyd LJ further observed that:

It follows ... that, on a summary judgment application such as this, it is necessary for a party who claims that the court is inadequately equipped to decide an issue of construction to identify, perhaps in only quite general terms, the nature of the evidence of the common general knowledge which he proposes to adduce, and to be in a position to explain why that evidence might reasonably be expected to have an impact on the issue of construction. If that party is not able to do so, it is open to the court to conclude that he is simply hoping that “something may turn up” and that his defence does not have the necessary “reality” to avoid summary judgment....

The Full Court accepted (at [54]) that ‘in the case before the primary judge, the technology was not complex’ and that ‘no common general knowledge was being put forward or relied upon by either party as informing the question of what was meant by ordinary English words in their context.’  However, while generally avoiding express criticism of the approach taken by the primary judge (notwithstanding the strong terms in which some of his Honour’s conclusions were expressed), the Full Court also noted (at [57]) that:

...it may be said that if Upaid’s construction of the relevant integers (as applied to the uncontested factual matrix relating to the products/services and how they were paid for) is reasonably arguable on the face of the specification (given that on this premise expert evidence is of little assistance), then it may not be appropriate to say that the relevant claims of Upaid have no reasonable prospect of success.

Unravelling the double-negative in that statement, the Full Court seems to be suggesting that Justice Yates should perhaps have given Upaid’s construction somewhat more credence than he did.

Overturning Summary Dismissal

The Full Court was prepared to take a broader view of the requirement for ‘distinct and separate’ charging and settling steps in Upaid’s patent claims.  In particular it noted, at [61], that ‘[d]istinctiveness or separation may have physical, functional or transactional dimensions.’

In relation to pre-paid services, the Full Court observed (at [66]) that:

...albeit that there are no physically separate steps, we do not see why it cannot be argued with reasonable prospects of success (based on the proper construction of the integers of claim 1) that there are notionally two separate steps. One is a debit entry (the “charging”) and the other is a reduction in the credit balance (the “settling”), albeit that one proceeds arithmetically and almost instantaneously after the other.

Arguing the point appears to have done Telstra no favours before the Full Bench of the court, which (at [67]) described the debate as ‘interesting’, and noted a number of questions raised that might be regarded as requiring a full trial to resolve.  The court therefore determined that the summary dismissal order in relation to infringement by the pre-paid services should be set aside.

With regard to post-paid services, the Full Court was not so readily persuaded that Justice Yates had erred.  You might think, based on your own experience of such things, that any ‘settlement’ of a charge in the case of a typical post-paid service occurs when the customer pays their monthly bill which includes the charge.  The Full Court seems to have thought so (at [77]).  However, later settlement of this kind would not bring the service within the patent claims.  Upaid has therefore relied upon a somewhat more convoluted argument whereby the debt is supposedly settled when Telstra adds the charge, increasing the balance of the customer’s account, thereby extending additional credit to the customer by way of ‘settlement’.  I would not worry if you do not follow this.  As the Full Court (under)stated at [74], ‘[o]ne may be forgiven for finding this to be a little counter-intuitive at first.’

Nonetheless, the Full Court noted at [80] that, since its conclusion with regard to pre-paid services would require consideration of claim 1 at trial in any event, there would be little benefit in denying Upaid the opportunity to present its case in relation to post-paid services, should it wish to do so.  The court therefore determined that the summary dismissal order in relation to infringement by the post-paid services should also be set aside.

Conclusion – A Fairly High Bar for Summary Dismissal

The fact that the Full Court has relied primarily on UK authorities in relation to the circumstances in which a patent infringement claim might be summarily dismissed indicates that this specific issue has received very little judicial consideration in Australia.  This decision appears to set the bar fairly high, which is encouraging for patent owners.

The reality is, however, that patent cases are often evidence-heavy, with technical experts almost always being employed to address factual questions regarding knowledge and practices in the relevant field of technology.  Even where the claim language may appear relatively plain and simple, there are many perfectly ordinary words that may have specialised meanings within a specific field.

The question posed by the Federal Court Act is not whether the patentee’s infringement claim is reasonable, but whether it can be said to have ‘no reasonable prospect of success’.  In practice, it is likely to be a rare patent case in which the complex questions of mixed fact and law can be sufficiently understood without the benefit of both sides’ evidence that any reasonable prospect of success may be readily dismissed.

In other words, I would not expect to see too many successful applications for summary dismissal in Australian patent infringement cases in light of this decision.  Good news for patentees, perhaps, though not so great for accused infringers.


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