Aerotel Ltd v Wavecrest Group Enterprises Ltd & Ors

This appeal is from a judgment of HHJ Fysh QC sitting as a Deputy High Court Judge, [2008] EWHC 1180 (Pat). He held Aerotel’s UK patent No. 2,171,877 invalid. If the patent had been valid it would have been infringed.

The patent is about a method of making telephone calls and a telephone system. There were several bases for the Judge’s finding of invalidity, namely obviousness over a number of pieces of prior art and that the patent was for subject-matter excluded by Art. 52 of the EPC. The particular pieces of prior art over which the Judge found obviousness were (1) a system in use in the USA called WATS (Wide Area Telephone Service) or ENFIA (Exchange Network Facilities for Interstate Access); (2) Japanese Patent Application №. 56020371 A (‘Matsuda’) (3) BT’s Account Call system and PBXs (Private Branch Exchanges) and call processors based on minicomputers.

Our prior reading of the skeleton arguments and the judgment made it clear that the principal attack was based on the WATS system. It seemed to us that if Aerotel could succeed on their appeal as to the finding of obviousness over this, then it was unlikely that any of the other objections would stand up; but if Aerotel failed on this point, then their appeal as a whole must fail. At the outset of the hearing therefore, we asked counsel whether it made sense for us to hear the argument about WATS first, only going on to consider argument about the other objections if we considered that Aerotel’s argument about that was successful or likely to be so. They so agreed, with Mr Iain Purvis QC for the defendant, Wavecrest, indicating, albeit faintly, that even if he lost on WATS, other grounds of defence might still succeed.

So we heard the WATS argument first, for about 3 hours. After deliberation we concluded that the attack on the Judge’s finding of obviousness over WATS failed and so informed the parties. That made it unnecessary to hear further argument on other points.

Thus it is that I turn to give my reasons for dismissing the appeal on the WATS point.

The patent comes from a different and seemingly long-gone era in terms of telephone technology. Its priority date is January 1985 and it expired in January 2006. In 1985 in this country BT was still the only major provider of telephone services, deregulation having only recently happened. Mobile phones hardly existed; insofar as they did they were very expensive both to buy and use besides being brick-shaped and sized and having limited coverage. All telephones were connected by landlines. Save for call-boxes, they were owned (or hired) by people who had contracts with telephone companies. The companies (in the UK almost entirely BT) provided their service essentially on credit – your regular bill depended on usage. The cost of calls, particularly long distance or international, was lots more than it is today.

In this country (though not in the US where the changeover was more advanced) most telephones were of the “pulse dialling” type, not the push-button tone-dialling type we have today. The latter is called DTMF (‘Dual-tone multifrequency’). DTMF phones “had the advantage that they were readily compatible with the new generation of automatic, electronic and computer assisted telephone operations” (Judgment [26]). In particular you could use DTMF phones to send signals such as a PIN code back up the line but you could not do that with a pulse phone.

To get over the latter fact auxiliary tone-generating devices (tone diallers) were made available. “These were hand-held tone generating devices which were readily available (though they were rather expensive [£45 in UK]) both in the US and in this country. These devices enabled a pulse-dial telephone temporarily to become available for tone dialling. The device was applied to the telephone microphone and the numbers manually entered on the keyboard of the device” (Judgment [28]).

Telephone exchanges were also largely antediluvian by today’s standards:

At the priority date there were four principal types of local exchange:

(i)The so-called ‘Strowger’ exchange (which worked only with pulse dial telephones), used a flexibly positioned moving uniselector,

(ii)

The electronic exchanges which were being introduced at the time. They were regarded as being more efficient than Strowger exchanges,

(iii)

Crossbar exchanges, and

(iv)

Early digital exchanges. (Judgment [29])

At the time the change to digital was thus under way. Although it had not yet gone very far, those in the business would have known that the next few years would be times of rapid change and, with increasing use of computers (themselves rapidly increasing in power and capacity as well as falling in price) that the industry would be undergoing a massive transformation. Many things not possible then, either at all or for commercial reasons, were going to be so in the future.

Other matters also formed part of the common general knowledge. The Judge sets them out. It is unnecessary to recite them here, save to observe that the WATS system was also well-known. I return to the details of this later.

The patent is pitched at a very high level of generality. No actual working equipment is described. It assumes the skilled man will be able to implement the ideas disclosed. So although it proposes equipment of various sorts, it does so only by their function.

It begins with a recitation of problems about using the existing conventional telephone networks. In summary these are:

The patent summarises what it claimed the position to be:

“Thus there is a long felt need for a system which enables making telephone calls including local or toll calls conveniently, inexpensively and from any telephone. Thus if a party wants to make a call, be it a local call or a long distance national or international call, he should be able to accomplish the call from the nearest available telephone.”

In fact, as we shall see, all but one of the alleged problems (such as they were) had been eliminated by the WATS system. It is in passing strange that the patentee did not acknowledge this, given that WATS formed part of the common general knowledge of a person skilled in the art, and even more so given the fact that the patent is obviously written by reference to the US telephone system where WATS was in widespread use.

The patent then goes on to describe its idea in general terms. It is embodied both by reference to an apparatus and a method of making a call. The most generalised form of the idea is embodied in corresponding claims, claim 1 for the method and claim 9 for the apparatus. Before us it was common ground that the two claims stood or fell together so far as obviousness was concerned. Although it is a little longer, claim 1 (the method) gives the feel of how the invention works and is thus the better of the two to set forth. I do so as broken up into agreed elements:

The patent has a block diagram. An uncontroversial simplified form of this is as follows:

The diagram shows a little more detail than the very simplified diagram considered by this Court in Aerotel v Telco [2007] RPC 117 (where the business method/computer program objection was considered). The detail consists of a more accurate depiction of the so-called tandem (US expression for “trunk”) exchange and shows the “special exchange” simply behind one of these rather than linked to two. The differences are not material.

The way it works is that the caller dials the number of the special exchange and inputs his special code (PIN) and then the number he wants to speak to. The special exchange has a memory which contains the credit attributable to that special code. A computer compares the minimum cost of the call to be made with that credit. If there is enough credit the caller is put through (back via the tandem exchange). The computer monitors the usage against the diminishing credit. If it runs out, the caller is cut off. If it is not before the call is terminated, the special exchange remembers the balance, which is available for next time.

An uncontroversial conceptual diagram of the system looks like this:

The calling party has his own account and a special code for it. He dials the WATS Line Share Equipment, inputs his special code and the number he wants to talk to. The equipment is designed so as to use the cheapest available connection route. If the phone used by the caller is not DTMF but pulse dial he would have to have a tone dialler to be able to transmit his special code.

The equipment puts him through and records his usage. The cost of the amount of usage is calculated (not whilst the call is being made) and billed on the caller’s account (not the account of the phone from which the call was made). In both this diagram and that of the patent the inner path (shown in red in non-monochome versions of this judgment, such as is available on BAILLII) is the path of a conventional call, not using the system of the patent or WATS as the case may be.

The Judge provides more detail at [89] – [93] but it is unnecessary for present purposes.

There was no dispute that the structured Windsurfing test as set out in Pozzoli v BDMO [2007] EWCA Civ 588 at [23] is helpful:

Nor was there any dispute about this. In Biogen v Medeva [1997] RPC 1 at p. 45 Lord Hoffmann said when discussing the issue of obviousness:

“The need for appellate caution in reversing the judge’s evaluation of the facts is based upon much more solid grounds than professional courtesy. It is because specific findings of fact, even by the most meticulous judge, are inherently an incomplete statement of the impression which was made upon him by the primary evidence. His expressed findings are always surrounded by a penumbra of imprecision as to emphasis, relative weight, minor qualification and nuance (as Renan said, la vérité est dans la nuance), of which time and language do not permit exact expression, but which may play an important part in the judge’s overall evaluation. It would in my view be wrong to treat Benmax as authorising or requiring an appellate court to undertake a de novo evaluation of the facts in all cases in which no question of the credibility of witnesses is involved. When the application of a legal standard such as negligence or obviousness involves no question of principle but is simply a matter of degree, an appellate court should be very cautious in differing from the judge’s evaluation.”

Given the latter approach, Mr Carr recognised that he had to identify errors of principle made by the Judge. He submitted there were four:

Before considering these specifically I should deal with a general theme running through most of them. Mr Carr submitted that the invention had been a very considerable commercial success. It can indeed be a powerful indication of non-obviousness if it is shown that the alleged invention has led to commercial success. The question “why was it not done before?” is compelling if there is no adequate answer (e.g. that the cited prior art is only just before the priority date, or that the success is due to marketing).

Laddie J found for the patentee in Haberman v Jackel [1999] FSR 683. He rejected the suggestion that a baby-drinker fitted with a valve requiring a minor partial pressure to open it was obvious even though such valves were well-known ways of preventing leakage. What turned the case was the immediate and substantial success of the invention – dealing as it did with an old problem that must have been known to every parent. Laddie J said this at p.699:

To be of value in helping to determine whether a development is obvious or not it seems to me that the following matters are relevant:

(a)

What was the problem which the patented development addressed? Although sometimes a development may be the obvious solution to another problem, that is not frequently the case.

(b)

How long had that problem existed?

(c)

How significant was the problem seen to be? A problem which was viewed in the trade as trivial might not have generated much in the way of efforts to find a solution. So an extended period during which no solution was proposed (or proposed as a commercial proposition) would throw little light on whether, technically, it was obvious. Such an extended period of inactivity may demonstrate no more than that those in the trade did not believe that finding a solution was commercially worth the effort. The fact, if it be one, that they had miscalculated the commercial benefits to be achieved by the solution says little about its technical obviousness and it is only the latter which counts. On the other hand evidence which suggests that those in the art were aware of the problem and had been trying to find a solution will assist the patentee.

(d)

How widely known was the problem and how many were likely to be seeking a solution? Where the problem was widely known to many in the relevant art, the greater the prospect of it being solved quickly.

(e)

What prior art would have been likely to be known to all or most of those who would have been expected to be involved in finding a solution? A development may be obvious over a piece of esoteric prior art of which most in the trade would have been ignorant. If that is so, commercial success over other, less relevant, prior art will have much reduced significance.

(f)

What other solutions were put forward in the period leading up to the publication of the patentee's development? This overlaps with other factors. For example, it illustrates that others in the art were aware of the problem and were seeking a solution. But it is also of relevance in that it may indicate that the patentee's development was not what would have occurred to the relevant workers. This factor must be treated with care. As has been said on more than one occasion, there may be more than one obvious route round a technical problem. The existence of alternatives does not prevent each of them from being obvious. On the other hand where the patentee's development would have been expected to be at the forefront of solutions to be found yet it was not and other, more expensive or complex or less satisfactory, solutions were employed instead, then this may suggest that the ex post facto assessment that the solution was at the forefront of possibilities is wrong.

(g)

To what extent were there factors which would have held back the exploitation of the solution even if it was technically obvious? For example, it may be that the materials or equipment necessary to exploit the solution were only available belatedly or their cost was so high as to act as a commercial deterrent. On the other hand if the necessary materials and apparatus were readily available at reasonable cost, a lengthy period during which the solution was not proposed is a factor which is consistent with lack of obviousness.

(h)

How well has the patentee's development been received? Once the product or process was put into commercial operation, to what extent was it a commercial success. In looking at this, it is legitimate to have regard not only to the success indicated by exploitation by the patentee and his licensees but also to the commercial success achieved by infringers. Furthermore, the number of infringers may reflect on some of the other factors set out above. For example, if there are a large number of infringers it may be some indication of the number of members of the trade who were likely to be looking for alternative or improved products.

(i)

To what extent can it be shown that the whole or much of the commercial success is due to the technical merits of the development, i.e. because it solves the problem? Success which is largely attributable to other factors, such as the commercial power of the patentee or his license, extensive advertising focusing on features which have nothing to do with the development, branding or other technical features of the product or process, says nothing about the value of the intention.

I do not suggest that this list is exhaustive. But it does represent factors which taken together may point towards or away from inventiveness. Most of them have been addressed in this case.

And of course commercial success may give real point to the patentee’s oft-asked question, “why was it not done before?”

Mr Carr submitted that commercial success was a powerful factor in Aerotel’s favour here. I do not see that. For here there is a counterquestion to “why not done before?” It is “why was it not done after?” A grateful market did not immediately fall upon this invention, saying “this is the answer to our problems.” When the invention was made known absolutely nothing happened. The world beat a path to the door of Ralph Waldo Emerson’s inventor of a better mousetrap, but the path to Aerotel’s door remained untrodden.

I must explain. Aerotel does not itself make or sell anything. It is a company formed to exploit the present patent and its corresponding patents in other countries, particularly the US. The priority date is January 1985 and the application was published in Europe in 1986. Yet no one is said to have used the invention until 1994. From then on there was increasing use, but none of it was by virtue of anything done by or with Aerotel. A variety of telephone prepayment businesses just started up: there is no suggestion that any of them even got the idea from the Aerotel patent. There is no suggestion that any one of them came seeking a licence. Mr Carr’s skeleton argument asserts that the invention “helped change the industry” and “created a new market which did not exist before”. Nothing like that was proved and it is totally improbable.

So how then did Aerotel make money from the patent? By litigation and the threat of litigation against users. And principally in the US. That is unimpressive, for it is notorious that at least from the middle-90s the US patent litigation scene had become immensely pro-plaintiff. A defendant faced with the possibility of litigation had to take into account all of the following matters: (1) the right of the patentee to insist upon jury trial (juries are apt to be pro-plaintiff); (2) the general level of damages awarded in the US – by juries; (3) the real possibility of triple damages for wilful infringement; (4) the fact that even if a defendant won he would have to pay his own, very considerable, legal costs; and (5) the fact that until the decision of the Supreme Court in eBay v MerckExchange U.S. No. 05–131 (2006) there was a strong view that even a non-exploiting patentee who won would get an injunction as of right.

We know that Aerotel entered into licensing arrangements. But we know little more than that. There is no evidence as to why people took licences. I see no reason to suppose they did so for any reason other than the considerable downside risk they would avoid.

Even disregarding the money and the settlements however, Aerotel are able to point to the simple fact that starting in 1994 there has been an increasing business in prepayment telephone cards. However that is not enough to prove that the invention as disclosed and claimed in the patent is the cause of this business. Many other factors will or may have been at work – the actual cost of telephone calls has fallen so that the amount of prepayment for a worthwhile amount of call has fallen, the money that may be saved if special routing is invoked, the fact that the delivery of the user’s special code is achieved by scratchcards (which provide the essential tight security) may all serve to explain the growth of the business. And besides, as least as far as this country is concerned, the invention simply could not be used until there were enough DTMF phones around (tone diallers can hardly have been commercially practical and certainly were not proved to be significant commercially).

Mr Carr submitted that Wavecrest had not shown the success was due to any of these or other matters. But that is to misplace the evidential onus of proof. If a patentee seeks to rebut an allegation of obviousness by an assertion of commercial success of his invention it is down to him to prove that the success is due to the invention. Where a number of other factors may explain the success, unless he can show they were irrelevant or largely so, he will not have proved what he needs.

Here that is particularly pertinent, given the long otherwise unexplained delay in any use of the invention. The adoption of prepayment from the mid-90s is entirely ascribable to factors other than the invention – or to be more precise is not shown to be ascribable to the invention given the existence of other factors.

The Judge dealt with commercial success from [138] onwards. As regards the money made by licensing he said this:

[144] Successful licensing may of course have been the result of a number of variables which have nothing to do with the Patent (or its US equivalent): commercial considerations, the notorious cost of IP litigation, the parties’ respective negotiating skills and so on. In my view, this evidence fails to provide any assistance to Aerotel and their case on commercial success has not I think, been made out.

There was ample material upon which he could base that conclusion. It cannot be faulted here.

I turn to another matter. It is that all but one of the so-called problems of the prior art set out in the patent, were not in fact problems at all. They had already been solved by WATS. So, for instance, a salesman could use his company’s special WATS code to make a phone call. So there is indeed a considerable amount of hyperbole in the patent. Another example of hyperbole is its suggestion that the use of credit cards “often results in mistaken charges”. That was never proved and seems improbable.

Of all the so-called problems of the patent only one item was not “solved” by WATS – the question of credit.

It is with that in mind that one can consider the differences between the inventive concept and WATS (Pozzoli/Windsurfing step 3). Comparing the two diagrams above, all the differences are in the top right box. In WATS the apparatus of the box checks the caller’s special code, puts him through and meters the usage against his account. In the patent, the apparatus checks the caller’s special code against his credit, puts him through, meters the usage in terms of cost and cuts him off if there is no money left.

The differences are entirely ascribable to one single idea, pre-payment. They are all reflected in the individual elements of the claim. Once you decide on pre-payment and no credit, the rest follows.

So did the Judge trivialise the problems as submitted by Mr Carr? The Judge said this at [55]:

However, in the light of what has been discussed in the preceding section, like Lewison J [in the Telco case [2006] EWHC 997 (Pat) [6]], , I am inclined to read this catalogue of difficulty and inconvenience with a pinch of salt in the light of what was already on offer to callers at the time.

And at [148]:

A lesser angle on motivation to move to pre-payment may I think relate to the ‘detriments’ spoken of on p 2 of the Patent. I have found these to be thin and unconvincing to say the least and it may be that this too has some bearing on why telephone companies concentrated first on their new generation of post-pay services.

I can see nothing in principle wrong with this. As I have shown the patent does indeed significantly overstate the problems of the prior art. The only “problem” lay for those users who did not have accounts. It is hardly inventive to propose running a business by requiring cash up front for the services rendered.

Next, did the Judge wrongly misstate the inventive concept? What he said was:

[126] …As for the ‘inventive concept’, this was conveniently epitomised by Mr Chandler and is worth re-stating:

The inventive concept claimed in the Patent is a system and method for making prepaid telephone calls conveniently and inexpensively from any available telephone…The system includes a special exchange which sits behind the local exchange and thus obviates the installation of specialised telephones or equipment on each telephone line.

Mr Chandler was Aerotel’s expert. Mr Purvis acidly observed that the Judge can hardly be faulted for adopting that. Mr Carr tried to escape that by taking us to the expert report and reading on. He suggested Mr Chandler was adding to what he was saying the concept was. But he was not – he was identifying what he said were its advantages.

Moreover, quite apart from that evidence coming from Aerotel’s expert, I can see nothing wrong it. It is indeed the essence of the claimed invention; all the features of the claim follow as a matter of logic from it.

So there is nothing in this complaint, no error of principle here.

The third suggested point is ignoring the evidence of what was going on at the time and particularly the expert evidence as to this. Mr Carr made much the same point about both WATS and what was going on at BT.

So far as WATS is concerned his point was that despite its existence no one before the date of the patent, or indeed after, seems to have modified WATS so that it could operate on a pre-payment basis. Mr Purvis said it was never proved that that was not done, but the court has to take the evidence as it is and I am content so to assume. What is one to make of it? Hardly that introducing a pre-payment variant of WATS was commercially practical (remember the security problem) and commercially worthwhile at the date of the patent. Yet unless it was, the point has no significance.

As to BT Mr Carr relied on two matters. First he showed us some evidence about the unsatisfactory nature of the old, button A and button B telephone boxes and the fact that at the time there was pressure within BT to “move forwards” (the words of a BT employee called Mr Empringham). Second he showed us a BT market survey of the time entitled “Cashless Calling”. He drew attention to the fact that it did not contemplate the idea of the patent: it contemplated other ideas, not as good in his submission, namely a Phonecard (pre-paid and useable only with phones with special readers), an automatic telephone credit card to be read by dedicated card terminals and verified by a PIN number, and a “charge to special account” service where the caller dialled a special number followed by a PIN number – this would be post-billed.

I am wholly unimpressed by these points. True it is that the old phone boxes were unsatisfactory – but any of the proposals would overcome that. As to the market survey, it did in fact consider a credit limit, as Mr Purvis spotted for the first time on appeal. It is not clear that it would be a limit which involved cutting off the caller when it was exceeded and there is no evidence about it. So I would disregard it. Even so, it by no means follows that the Aerotel idea would have been suitable to BT’s commercial needs at the time. After all it still had an essentially tied consumer base – and little interest in competition or the market for creditless persons. Most telephones could not be used without the fairly impractical and expensive tone dialler. Things that BT could offer and charge to its existing consumers were bound to be at the forefront of BT thinking.

One might have taken a different view of the BT evidence if the invention was shown to be commercially worthwhile in 1985 – for then it would have missed something valuable. But that is far from being so.

The Judge was well aware of what was going on at BT: some of it was pleaded and there were three BT witnesses. I cannot see he made any error in failing to conclude inventiveness having regard to the evidence as whole.

The final alleged error is allegedly using hindsight in relation to WATS. The Judge said:

[155] Had the skilled worker been invited to conduct work on the WATS reselling system to improve it or say, to make it more commercially attractive, he would I think, have inevitably considered both forms of payment. Let us assume that for some commercial reason his attention had been directed to the pre-pay alternative. He would of course have been aware that the ‘WATS box’ was a computer-driven switch used in connection with a post-payment service. But he would also appreciate that the ‘WATS box’ containing processors and other items, could be enhanced for use to record information relating not only to customers’ PIN codes (as it was already doing for post-payment systems) but also to record and monitor call credit as well – and disconnect.

[156] As I have frequently said, in this enquiry one is not concerned with computer matters, capacity, hardware, software methodology and so forth. That is simply not part of the claimed invention. It was available to the skilled worker on demand as part of the team and it would not I think, have been a problem.

[157] The answer to the fourth Windsurfer question is in my view easily answered in the light of the foregoing. I do not consider that the adaptation of WATS resale lines to accommodate pre-payment for the telephone calls it handled involved an inventive step. Pre-payment could be catered for with the ‘WATS box’ by computers modified to support the enhanced functionality which the change demanded. This too involved no inventive step.

Mr Carr submitted that the whole notion of the skilled worker being asked to improve WATS was hindsight. So the notion of modifying it so as to work on pre-payment was itself hindsight.

I do not agree. The submission has built within it the notion that the idea of pre-payment was inventive – for if the idea is known the skilled worker could hardly miss contemplating using it – though he probably would not actually do so unless it was commercially practical and attractive. And since any transaction can only run on credit or by pre-payment, it seems to me, as it did to the judge, that merely proposing pre-payment is not inventive.

Accordingly I can see no error of principle by the Judge. I would dismiss this appeal.

I agree.

I also agree.