Construction of Terms in Cross-Licensing Agreements: Koninklijke Philips N.V. v Asustek Computer Incorporation and Others

Author Milkerfish
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Court of Appeal (Lady Justice Arden and Lord Justices Kitchin and Floyd)  Koninklijke Philips N.V. v Asustek Computer Incorporation and Others [2017] EWCA Civ 1526 (11 Oct 2017) 

Jane Lambert

In FRAND 8 Oct 2017 I discussed the terms upon which patents for inventions that are essential to a standard are licensed.  I noted that courts around the world had held that those terms should be fair, reasonable and non-discriminatory - in other words, FRAND. The Court of Appeal's decision in
Koninklijke Philips N.V. v Asustek Computer Incorporation and Others [2017] EWCA Civ 1526 (11 Oct 2017) concerned the construction of a clause licensing such patents. It is important to note, however, that none of the judges who heard the appeal mentioned the acronym, FRAND, and it appeared only twice in the judgment of the trial judge.

The case turned on the construction of this clause:

"QUALCOMM Option to Obtain Covenant Not to Assert. Philips hereby grants QUALCOMM an option to designate any or all of its existing and future CDMA licensees as a 'CDMA Technically Necessary Patent Beneficiary.' QUALCOMM may exercise its option at any time and from time to time throughout the term of this Agreement, each time by sending written notice to Philips identifying each new CDMA Technically Necessary Patent Beneficiary. Philips, on behalf of itself and its Affiliates, hereby covenants that, as to each CDMA Technically Necessary Patent Beneficiary, Philips and its Affiliates will not assert any of their CDMA Technically Necessary Patents against any manufacture, use, sale, importation of equipment and/or components, or other acts of infringement, relating to a CDMA Wireless Industry Standard of a CDMA Technically Necessary Patent Beneficiary; [first, irrelevant proviso]; provided, however, that nothing in this Section 4.3 shall prohibit or otherwise limit Philips' right to assert any of its patents against any entity for infringement relating to any TDMA equipment or system (including, without limitation GSM, IS-54, PCS-1800, and PCS-1900)."

To understand this clause you need to know that  "QUALCOMM" refers to Qualcomm Incorporated ("Qualcomm"), a US multinational semiconductor and telecommunications equipment company that designs and markets wireless telecommunications products and services, and "Philips" to the Dutch electronics giant  Koninklijke Philips N.V and its subsidiaries. The clause appeared in a cross-licensing agreement between Qualcomm and Philips that the parties entered on 26 Feb 1998. The background to that agreement was discussed by the trial judge, in paragraphs [58] and [63] of his judgment (see Koninklijke Philips NV v Asustek Computer Incorporation and others [2016] EWHC 2220 (Pat) (9 Sept 2016). The abbreviation "CDMA" stands for "code division multiple access" which is one way of regulating mobile phones' access to their nearest base station and "TDMA" stands for "time division multiple access" which is another.

Qualcomm had nominated the HTC Corporation and HTC  Europe Co. Ltd. ("HTC") as Technically Necessary Patent Beneficiaries in accordance with the above clause. Philips had declared three of its patents essential to an ETSI (European Telecommunications Standards Institute) standard known as the Universal Mobile Telecommunications System ("UMTS").  HTC supplied equipment that complied with the UMTS standard without a licence from Philips whereupon Philips sued HTC for patent infringement. As part of its defence, HTC relied on Philips's covenant not to assert its patents against Technically Necessary Patent Beneficiaries.

The question whether the covenant extended to alleged infringements in relation to compliance with the UMTS standard was tried by Mr Justice Arnold as a preliminary issue. He decided that it did not. HTC appealed against his decision to the Court of Appeal.

The 1998 agreement was governed by California law of which Lord Justice Floyd identified the following principles:

"i) The goal of contractual interpretation is to discern the mutual intention of the parties as at the date of the contract.
ii) Intention is determined from objective manifestations of the parties' intent both in the language of the contract and in extrinsic evidence. I would add that we were told that it was common ground that, as in this jurisdiction, evidence of the parties' actual, subjective intentions is not relevant.
iii) Where there is a dispute about the meaning of contractual language, there is a two-stage test for determining the correct construction. First the court asks whether the language is reasonably susceptible to the interpretation urged by each party. Secondly, if it is, the court asks what the parties intended the language to mean.
iv) However broad the terms of the contract may be, the contract extends only to those things in respect of which it appears the parties intended to contract. Particular clauses of a contract are subordinate to this overall intent, so the court may imply into a term a limitation that is necessary to make the clause conform to the apparent object of the parties.
v) Admissible extrinsic evidence includes: the circumstances under which the parties negotiated or entered into the contract; the object, nature and subject matter of the contract; how and why particular language emerged from the parties' negotiations; and the subsequent conduct of the parties.
vi) Extrinsic evidence may be used to aid interpretation, even if the contract language appears unambiguous on its face. Thus, extrinsic evidence may demonstrate that the contract is in fact reasonably susceptible to more than one interpretation. In theory, where the terms of the agreement are clear and explicit the language of the agreement will govern. In practice, however, the language of the agreement and extrinsic evidence are considered as a harmonious whole, both to ascertain whether there is an ambiguity and also so as to resolve any ambiguity.
vii) The conduct of the parties following execution of the contract is admissible extrinsic evidence and is considered as one of the most reliable means of ascertaining the parties' intent. This includes a party's unilateral conduct, even if unknown to its counterparty, although in the latter situation less weight may be accorded to the evidence. Once a dispute arises as to the meaning of a contract, a party's conduct is no longer probative of intent.
viii) Interpretations that lead to absurd results are not favoured by the California courts. For example, it is an absurdity to suggest a reasonable business entity would contractually obligate itself to operate without regard to its business interests.
ix) If the foregoing principles do not produce a clear answer, the Californian courts construe the contractual language against the party that supplied the language in question (a contra proferentem rule)."

Applying those rules, Mr Justice Arnold found it necessary to adduce extrinsic evidence which supported the case that the covenant was not intended to the UMTS standard.  Relying on the same extrinsic evidence, he also found that the UMTS fell within the proviso. On appeal, HTC criticized the judge's need to rely on extrinsic evidence at all and the conclusions that he drew from it. The Court of Appeal reviewed Mr Justice Arnold's reasoning and considered the extrinsic evidence but were not persuaded that he came to an incorrect conclusion. They also agreed that any broader construction of the clause would lack commercial efficacy.

Should anyone wish to discuss this case, the construction of contracts or licensing in general, he or she should call me on +44 (0)20 7404 5252 or send me a message through my contact form.

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