A defensive non-assert? Philips v Asustek and HTC

This GuestKat cut her patent litigation teeth on smart phones - back in the day when smart phones were not so smart.  She therefore had a wave of nostalgia delving into the acronyms of mobile telecommunications standards in the recent Court of Appeal decision of Koninklijke Philips N.V. v Asustek Computer Incorporation, HTC Corporation and others [2017] EWCA Civ 1526.  The judgment concerns an appeal from a decision of Arnold J on a preliminary issue [2016] EWHC 2220 (Pat), regarding the construction of a California law governed patent cross-licensing agreement containing a covenant not to assert patents against third parties. 

Background

HTC are the third party beneficiaries of a covenant contained in a 1998 cross-licence agreement between Qualcomm Inc and the Claimant, Philips. At trial of the preliminary issue, Arnold J held that the covenant did not cover HTC's acts of alleged infringement complained of by Philips in patent infringement proceedings brought in the English High Court. The three patents in issue concern High Speed Packet Access (HSPA) and have been declared essential by Philips to the Universal Mobile Telecommunications System (UMTS) standard developed under the European Telecommunications Standards Institute (ETSI). 

The cross-licence is governed by the laws of the state of California.  It was common ground between the parties that under California law extrinsic evidence is admissible as an aid to interpretation to a greater extent than under English law.  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.  There was evidence of California law before the judge at first instance and he made extensive findings as to the relevant California law - none of these findings was challenged on appeal (see summary of findings at paragraph 32(i) to (ix) of appeal decision). 

HSPA was added to the UMTS standard in 2002 (enabling handsets to download data at high speeds) and in 2004 (for uplink data transfer).  The alleged infringing HTC handsets implement releases 5 and 6 of UMTS, and have HSPA.  HSPA is a hybrid TDMA/CDMA system. 

Covenant not to assert

The relevant extracts of the cross-licence provide as follows:

"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.' "..."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".

The clause also provides that "nothing in this Section 4.3[1] 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)."

"CDMA Wireless Industry Standard" is defined as standards for public code division multiple access communications including but not limited to a number of specified standards "including the proposed ETSI UMTS standard" and their "subsequent releases, revisions, derivations".   This definition also expressly excludes any standard "which utilizes a TDMA over-the-air interface".  

HTC argued that they are covered by the covenant not to sue, because (i) they have been designated a "CDMA Technically Necessary Patent Beneficiary" in writing by Qualcomm to Philips; (ii) the patents have been declared essential to the UMTS standard; and (iii) the UMTS standard is a "CDMA Wireless Industry Standard".  Philip submitted that the alleged infringements arise from HTC's implementation of high speed packet access (HSPA) which is not an act of infringement of a "CDMA Wireless Industry Standard".

Decision

The key issue on appeal was whether the non-assert covenant reached through and prevented Philips from bringing patent infringing claims covering HSPA - a hybrid CDMA/TDMA system that did not exist at the time the cross-licence was entered into. 

Had the drafters of the cross-licence expressly resolved the dilemma by stating in the HTC argued that the definition of CDMA Wireless Standard was completely clear, and expressly included the proposed ETSI UMTS standard within the definition?  Or did the exclusion for TDMA - which had been requested by Philips - mean that a hybrid TDMA/CDMA was excluded? 

Following an extensive analysis of contemporaneous events and witness evidence including the purpose of the cross-licence, the negotiations and drafts back and forth, the Court of Appeal concluded that the judge had not reached an incorrect conclusion and the appeal was dismissed.  The most significant factor was the absence of an express provision for payment of royalties to Philips.  This meant that had Philips been licensing its TDMA patents, it was doing so for nothing, yet the evidence showed that Philips had a much stronger position in TDMA than Qualcomm.  This was a "clear indicator that, if there is a practical and realistic construction of the agreement which does not result in Philips giving away its TDMA rights, then that construction should be adopted".  The equipment that implemented HSPA was TDMA equipment, and the covenant not to assert did not provide HTC with a defence to patent infringement. 

This is not the end of the story - HTC have other defences which await trial. The IPKat will keep you posted.