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Infringement of Essential GSM Patents

Milano, mag 2008

Synapsis, official European Distributor of GSM wireless modules of Qisda (formerly operating under the BenQ brand), and Qisda Corporation have appointed lawyer Gary Guttenberg and his law firm, Law Office of Gary Guttenberg AB,  to briefly explain various legal and commercial issues concerning the infringement of essential GSM patents.

Qisda owns essential patents within the GSM space and Qisda is concerned that certain companies may be using and/or distributing wireless modules which infringe Qisda’s patent rights. As such, the purpose of the presentation at the last M2M Forum was to advise companies against using and/or distributing unauthorized GSM modules and to educate such companies as to the global risks (both commercial and legal) of engaging in such patent infringement.   The intention is to answer the following four (4) questions (from a global perspective):

• What is an essential GSM patent?
• How can a patent holder prove infringement?
• What are the legal and commercial implications of patent infringement?
• Why do indemnities provide only limited, if any, protection?

1. What is an essential GSM patent?

GSM (“Global System for Mobile Communications”) is a standard for mobile communications. An essential GSM patent refers to an invention that must be  used in order for a wireless module to be GSM compliant.

2. How can a patent holder prove infringement? 

The national laws of each country wherein a patent has been granted are applied when gathering evidence and taking legal action against patent infringers in such countries. There are a broad range of mechanisms used in different countries to gather evidence of patent infringement. For example:

a. Court orders to search and seize evidence without prior warning. Under these orders, courts grant patent holders the right to search premises and seize evidence without prior warning in order to prevent the destruction of incriminating evidence. Such searches can take place at a company’s business premises and at trade fairs. 

b. Demands for the production of documents. These demands consist of categories of information listed by the patent holder’s legal counsel and formally demanded from the alleged infringer.

c. Depositions. This process involves the alleged infringer (and its employees and other representatives) being interviewed in order to record the dialogue and use such responses later in written pleadings to the court and/or in trial.  d. Interrogatories . This involves a list of written questions the alleged infringer must answer within a certain period of time. 

e. Request for admissions. This involves a list of statements for which the alleged infringer must simply answer “admit” or “deny.” 

f. Failure to cooperate. In the event of an alleged patent infringer’s failure to comply with any of the foregoing procedures, such party can be subjected to court orders, court sanctions, the presumption of evidence against it, and even a default judgment.

3. What are the legal and commercial implications of patent infringement?

a. Lawsuits. A patent holder can typically file a lawsuit in open court against the infringer. Further, in many countries patent infringement claims can be brought against parties throughout the commercial economy, from original manufacturers and product suppliers, to participants in the distribution channels for the products, to the final purchasers or users. 

b. Limited defenses. Given that a patent grants its owner a monopoly, an alleged infringer cannot defend itself by arguing that it has independently developed or lawfully reversed engineered the invention or otherwise innocently infringed the patent (as may be the case with copyrights and trade secrets).

c. Resource depletion. Defending a claim of patent infringement is a labor intensive and costly endeavor. As such, to defend such a claim, considerable time, energy, operations. For example, defending a claim of infringement can take several years and can easily result in legal costs amounting to millions of dollars, even if such dispute is settled without going to trial.  

d. Frozen assets. Many countries around the world recognize a patent holder’s right to seize assets from an alleged infringer pending the outcome of a trial. This allows the patent holder to ensure there is sufficient money to cover its damages in the event of a favorable verdict. 

e. Injunction. A court can order an alleged infringer to cease and desist from distributing any relevant products pending the outcome of the trial, and this can result in a company becoming unable to fill customer orders.  

f. Damaged reputation. Patent infringement actions are filed in open court and an alleged infringer’s existing and prospective customers thereby become aware of the claims against such alleged infringer. 

g. Lost business. When a company is accused of patent infringement, its existing and potential customers may cancel and/or refrain from placing orders, and this has an immediate impact on the company’s bottom line. Further, such patent infringement itself may constitute a material breach under the agreement with certain customers thereby providing grounds for contract termination and damages. 

h. Patent holder’s damages. A patent holder has the right to recover damages from an infringer which can include lost profits, a reasonable royalty, additional compensation for damage to the patent holder’s reputation as a result of the infringer’s marketing of a poor design, legal costs and attorneys’ fees, and even a multiple of its damages (i.e. triple damages) if the infringement can be shown to have been willful. 

i. Criminal proceedings. In some countries, patent infringement is considered a crime whereby a wrongdoer can be sentenced to imprisonment or required to personally pay a fine.

4. Why do indemnities provide only limited, if any, protection?

Some companies purchasing unauthorized GSM modules from suppliers (i.e. patent-infringing  modules) wrongfully believe that they are well-protected if they obtain a guaranty (known as an “indemnity)” from the supplier. An indemnity is a promise from the supplier (known as an “Indemnitor”) to cover the losses and damages suffered by the company if a third party (for instance, an essential GSM patent holder) sues the company. There are several problems with relying on such indemnities. First and foremost is the fact that the company is sued directly for infringement. The company, therefore, remains liable to the patent holder and must seek compensation for its losses and damages from the Indemnitor. Do you see the problem? If the Indemnitor is already knowingly infringing a patent, what are the odds that it will honor its indemnity to the company?

Let us take a closer look at some of the difficulties in enforcing indemnities:

a. Lack of financial strength. It is said that an indemnity is only as good as the financial strength of the Indemnitor. Should the Indemnitor lack financial strength, the company will, itself, be responsible for the entire costs, losses, and damages resulting from the patent holder’s claims. 

b. Lack of pledged assets. Assuming the Indemnitor has the financial strength, it may still refuse to honor the indemnity. If the Indemnitor has not pledged specific assets to back the indemnity (or otherwise obtained and maintained sufficient insurance from a reputable insurance company with the company as a named beneficiary), the company will be forced to take legal action against the Indemnitor to force the Indemnitor to pay. 

c. Costs in enforcing the indemnity. In the event the company must take legal action against the Indemnitor, this can be very costly and often involves court proceedings in a foreign country (where the Indemnitor is headquartered or has its assets). 

d. Service of a lawsuit in different countries. Lawsuits typically require that the Indemnitor be formally served with legal documents, in some countries such service can only be achieved through diplomatic channels.

e. No Indemnitor assets in the country where the court hearing is held. In the event the Indemnitee takes an Indemnitor to court and prevails, such verdict is only valuable to the extent it can be enforced against the Indemnitor. If the Indemnitor has its assets in its own country and the court ruling is from another country, the Indemnitor’s country may not even recognize the ruling. 

f. Indemnitor bankruptcy. In the event that the Indemnitee is sued by a patent holder, the Indemnitor may simply elect to shut down its business and perhaps re-open a business under a separate identity. 

g. Immunity. If the Indemnitor is wholly or partially state-owned or the litigation in question touches upon national interests somehow, the Indemnitor may assert defenses based upon national interests.