For your (external) eyes only – confidentiality clubs

Confidentiality clubs have become a standard feature of English patent and trade secret litigation. Now, the High Court has clarified that "external eyes only clubs" – which are particularly restrictive – will only be appropriate in exceptional circumstances (TQ Delta LLC v Zyxel Communications UK Ltd [2018] EWHC 1515 (Ch)).

Confidentiality clubs have become a standard feature of English patent and trade secret litigation. Now, the High Court has clarified that "external eyes only clubs" – which are particularly restrictive – will only be appropriate in exceptional circumstances (TQ Delta LLC v Zyxel Communications UK Ltd [2018] EWHC 1515 (Ch)).

What are confidentiality clubs?

IP proceedings often revolve around valuable and commercially sensitive trade secrets. Confidentiality clubs enable a party who must disclose confidential information to the other side to limit disclosure of that information to a small number of individuals from the opposing party. The receiving party can then prepare its case without jeopardising the confidential nature of the information.

Often, the exact terms of confidentiality clubs are hotly debated between the parties. "External eyes only" confidentiality clubs ("EEO clubs") seek to restrict the ring of individuals with access to the information to the receiving party's external solicitors, counsel and independent experts, (excluding directors and employees of the party itself). The disclosing party may suggest an EEO Club because it has very real concerns that the receiving party might gain an unfair commercial advantage if it is told the confidential information in question. In certain cases, disclosure may even give rise to competition issues (e.g. disclosure of pricing information in a market where there are very few competitors). The receiving party may complain, nevertheless, that it needs its internal people to know the information so that they may have informed discussions with the party's lawyers, attend the full trial and understand all the reasons for any judgment.

The facts

The patents in suit were declared essential to the implementation of certain technology. TQ Delta was therefore required to license those rights to Zyxel. Zyxel sought disclosure of TQ Delta's licences with third parties in order to enable the court to determine what would constitute reasonable and non-discriminatory licence terms between the parties.

TQ Delta proposed an EEO Club restricting disclosure to Zyxel's external solicitors, counsel and independent experts. Zyxel objected to this arrangement claiming that two named individuals from its group should also have access to the patent licences to allow Zyxel to run its case properly.

6 points of guidance

UK court proceedings are conducted on the basis of the principle of "natural justice". This has a number of strands: A party has a right to know the case against it and evidence on which the case is based. A party is entitled to have the opportunity to respond to any such evidence and to any submissions made by the other side. The other side may not advance contentions or adduce evidence of which it is kept in ignorance. The UK courts are very reluctant to deviate from the principle of natural justice and will rarely hear IP matters in private ("in camera").

Against this backdrop, Carr J reviewed the recent authorities on EEO Clubs and distilled 6 points of guidance:

1. "parties may choose to agree an external eyes only tier, as in Unwired Planet [2017] EWHC 3083 (Pat);
2. confidentiality club agreements are often essential in intellectual property cases, which cases require disclosure of confidential information. In such cases, a regime for disclosure which limits access to sensitive documents to specific individuals within one of the parties, in order to protect confidentiality, is now commonplace;
3. redactions to documents can be made to exclude material which is confidential and irrelevant to the dispute;
4. external eyes only access to individual documents of peripheral relevance, whose disclosure would be damaging, may be justified in specific cases; as in IPCom v HTC Europe [2013] EWHC 52 (Pat);
5. in certain exceptional cases, external eyes only access to specific documents of greater relevance might be justified, at least at an interim stage;
6. however, in the absence of exceptional circumstances, each party must be able to see and discuss with its lawyers the relevant parts of the key documents in the case."

The judge went on to say that:

"the authorities…establish that it is exceptional to limit access to documents in the case to external eyes only, so that no representative from the party which is subject to the restriction can see and understand those documents. An external eyes tier does not require justification for the restriction by reference to individual documents. It enables one party to decide to exclude all representatives of the opposite party from access to any document that it chooses, and places the onus on the party seeking access to apply to court to obtain it. That approach, in my judgment, is wrong in principle." (emphasis added)

On this basis, the Judge ruled that EEO Clubs would usually be incompatible with the right to a fair hearing under Article 6 of European Convention on Human Rights, and also with the principles of natural justice and the obligations of lawyers to their clients.

Ultimately, Carr J ruled that TQ Delta's licences should be disclosed to certain Zyxel personnel as they were likely to be highly relevant to the questions in dispute and because otherwise:

1. "Zyxel would potentially be precluded from hearing and understanding the arguments and evidence on FRAND licence terms being advanced by TQ Delta.
2. The Zyxel lawyers would have to construct arguments and put together evidence without any input from their clients.
3. Zyxel would not be able to see, let alone approve, the arguments being advanced by their lawyers or the evidence being drafted by their experts.
4. The proceedings would be bedevilled on Zyxel's side by the constant need for their lawyers to monitor what Zyxel could be told about the case and which documents being prepared for the case they could be shown.
5. It would be impossible to take informed instructions as to whether to accept any Part 36 or other offers made by TQ Delta in the course of proceedings.
6. It would be practically impossible for Zyxel to have an informed discussion with their lawyers about the appropriate terms of any Part 36 offer to be made by them.
7. Zyxel would be substantially excluded from the trial, having to sit outside while the debate took place in the courtroom".

The disclosure order was effectively postponed for 14 days to allow the parties to apply to set aside or vary the decision. At the time of posting, we are not aware of any appeal against the decision by either party.

Comment

Receiving parties who are asked to agree to an EEO Club now have a helpful decision on which to rely when arguing for a standard confidentiality club to include members of their own internal team. The burden will be on the disclosing party to justify the need for more restrictive arrangements.

A disclosing party should aim to identify confidential documents as early as possible. Documents whose value and confidentiality can be preserved adequately by means of a standard confidentiality club agreement or by redaction, should be dealt with accordingly. In other cases, there may be an incentive for both parties to agree an EEO Club for certain classes of document (e.g. where there is a mutual interest in withholding certain terms of a FRAND licence).

For confidential documents which are highly commercially valuable or sensitive, the disclosing party must be ready to justify why it would be fair and proportionate to subject those documents to an EEO club and explain why the other side is unlikely to be prejudiced by such an arrangement when running its case. If the information can be protected by another less restrictive method, such as redaction, the court is very unlikely to permit an EEO Club.