BLOG: The court of appeal of The Hague issued an important ruling on 7 May 2019 in the case of Koninklijke Philips N.V. against Asustek Computers INC, ASUS Europe B.V. and Asus Holland B.V. The matter of dispute was a Standard Essential Patent (SEP) owned by Philips, regarding wireless communication. Philips submitted EP 1 623 511 (EP 511) as SEP for the (HSUPA-protocol) for the UMTS-standard. Philips initiated licensing negotiations with ASUS, and eventually made an offer. After the licensing negotiations failed, Philips requested, among others, an injunction and damages. Firstly, the court of appeal considered the novelty and inventiveness of the patent, deciding that the patent was valid (overruling the district court of The Hague) and infringed. ASUS argues that Philips is not entitled to enforce the patent, as 1) Philips acted in breach of the ETSI-requirements, particularly not having reported the patent in time as essential and that 2) Philips’ offer was not in line with the FRAND-principles set out in Huawei / ZTE, for not having set out why the offer would be FRAND. ASUS argued the offer was not FRAND.
ASUS argues that Philips acted in breach of the ETSI-requirements, as it did not submit its patent in time. EP 511 was filed on 20 April 2004 and granted on 7 March 2007. Philips was involved in establishing the particular part of the standard that has this patent implemented. Philips submitted the patent to ETSI on 26 November 2009, for the part of the standard as decided on in December 2006. According to ASUS, Philips breached its disclosure requirements by submitting EP 511 at such a late stage.
According to ASUS, the aim, when creating a standard, is to make use of mainly royalty free technology. ASUS stated that article 4.1 of the ETSI IPR Policy aims to ensure that the working groups can make an informed decision between the suggested technologies, so they can choose as many royalty free alternatives as possible. According to ASUS, as Philips only disclosed its patent after the standard was determined, Philips has lost its right to enforce its patent, as enforcement would result in abuse of its dominant position.
This argument is rejected by the court, as ASUS has not cited any article or paragraph from the ETSI IPR Policy that shows that the aim of article 4.1 is to ensure that as much royalty free technology as possible is implemented in the standard.
In contrast, the court considers that article 3 of the Policy (”Policy Objectives”) shows that it is the aim of ETSI to ”create standards and technical specifications that are based on solutions which best meet the technical objectives of the European communications sector”. It is therefore a further aim to decrease the risk as much as possible that a SEP is not available for licensing, and to find a balance between ”the needs of standardization for public use in the field of telecommunication and the rights of the owners of IPR’s”. This means that it is expected from SEP holders that they are willing to grant licenses under FRAND terms. The aim is thus to create a technical optimal standard, which is also confirmed in a statement Mr Weiler, who is the current chairman of the Board of the ETSI. Philips had furthermore provided a general FRAND undertaking for all patents which would be essential, which Mr Weiler noted was sufficient to comply with the objectives of the ETSI IPR policy. In such a case, a FRAND license was available in any case and reporting a patent only after the decisions made in the standardization process thus would not in any way be disadvantageous for the availability of a license. On the contrary, early submission would lead to “over declaration” as patentees will then declare patents essential just to be sure, while the standard must still be finalized and is still subject to change.
The court of appeal distinguished from the Rambus decision of the Commission and a Dutch judgment in Philips / LG as those related to two standards for which it was established that the aim would be to arrive at a royalty free standard (SDRAM/DDR and JPEG respectively), unlike for the UMTS standard.
According to the court, the fact that Philips submitted its patent later on in the procedure of establishing a standard did thus not in any way harm the (potential) users of the UMTS-Standard to obtain licenses and there would be no abuse a dominant position.
Huawei / ZTE
The court of appeal then discussed whether Philips’ offer was contrary to FRAND-principles and contrary to Huawei / ZTE. The court repeats the step-by-step plan as put forward by the European Court of Justice (ECJ) in the Huawei / ZTE-case. The court notes however, that these steps are to be regarded as guidelines for good faith negotiation between parties. The court notes that it does not understand the ruling to be that not strictly complying with these steps would every time in all circumstances constitute an abuse of a dominant position, regardless of the further circumstances. The court explicitly refers to Birrs J in Unwired Planet v Huawei and notes this was approved by the English Court of Appeal. The court of appeal then goes on to consider the balance between the SEP holder and the SEP user. On the one hand, the SEP holder is expected to inform the SEP user of its SEP, to be the first to make a license offer and to negotiate in good faith before initiating an injunction, in order for the negotiations to be conducted without pressure from the threat of an injunction. On the other hand, the SEP user must adopt a willing attitude and in particular must not apply any delaying tactics, which means, among other things, that he must make a written counterproposal in the short term if he does not want to accept the license offer from the SEP holder.
On the basis of the statements from the representative of Philips, the court of appeal comes to the conclusion that Philips informed ASUS of its SEPs, well in advance of bringing the present proceedings. Philips showed itself prepared to enter into a license agreement on FRAND terms and thus complied with its obligation to notify.
Furthermore, according to the court of appeal, it appears that ASUS did not show itself as a ‘willing licensee’ during the negotiations. The court took into consideration that ASUS did not take any initiative to negotiate. The non-constructive attitude of ASUS during negotiations, for example not bringing the technical-relevant employees to meetings and not replying to Philips on the terms of the license agreement, was determinative for the court of appeal to decide that ASUS’ goal was to avoid substantive discussion on the terms and to simply cause delay. These are to be seen as delaying tactics, from which SEP users have to refrain. Furthermore, ASUS also did not make a counteroffer. The court emphasizes that the fact that ASUS mentioned that they were willing to negotiate is not sufficient, if they do not actually show that they are willing to negotiate.
Due to the absence of the actual willingness on the part of ASUS to negotiate in good faith, Philips was actually not obliged to make a license-offer at all and was therefore free to start an action for an injunction right away. Although not obliged to, Philips put forward such a license-offer anyway, after which ASUS stated in their defence that this offer was not compliant with the conditions set forward in the Huawei / ZTE-case, because Philips did not specify if and why this offer was FRAND.
The court of appeal ruled that it cannot be concluded from the Huawei / ZTE-case that the SEP holder should explain in its license offer why that offer would be FRAND, just as that condition is not explicitly or implicitly included with regard to the counter offer by the SEP user.
The court refers to the wording “the amount of the royalty and the way in which that royalty is to be calculated” of paragraph 63 of the Huawei / ZTE judgment. The court notes the background as being a question from the German Bundesgerichtshof in light of the Orange Book decision which determined that the user must first put a proposal forward. In light of the question who should make the first offer, the Bundesgerichtshof had asked what should be included in the first offer and whether the offer should contain all the provisions that are usually included in licensing agreements in the technical field concerned. In that light, the court of appeal understands paragraph 63 of Huawei / ZTE to stress that the ECJ considers it particularly important that the offer which must be first made by the SEP holder sets out not only what the royalty fee is, but also the modality of how to calculate the royalty. The court notes that there are many modalities for the calculation of the royalty (for example, based on the entire product or only a part of it, percentages, purchase and selling prices, costs, staggered pricing, etc.).
Finally, the court notes that even if it would have ruled that Philips had to make a FRAND offer (which it did not have to), Philips was free to claim the injunction, because ASUS refrained from responding promptly and in good faith to the standard licensing agreement sent by Philips.
In this regard, the court also notes that a counteroffer made by an unwilling licensee only after the SEP holder instituted proceedings can only result in obligation for the SEP holder negotiating in good faith with the SEP user parallel to the proceedings, but cannot result in the initiated proceedings against an unwilling licensee being considered – in retrospect – as an abuse of the dominant position, or that the SEP holder may be expected to postpone the proceedings. That would provide unacceptable room for delaying tactics on the side of a SEP user.
Any actual constructive rapprochement by ASUS in response to the offer made by Philips has not shown by ASUS following Philips’ offer. The mere assertion in the procedural documents that ASUS is prepared to negotiate is – certainly in view of the background of the dispute – insufficient. Philips was therefore not obliged to enter into further negotiations parallel to the proceedings.
ASUS’ behaviour is thus qualified as hold-out as defined by Huawei / ZTE, which obstructs a FRAND defence, whether based on competition law, the pre-contractual good faith or on the FRAND declaration.
ASUS cannot be regarded as a willing licensee and the court of appeal is of the opinion that Philips was thus free to enforce its patent by starting proceedings against ASUS. In this case, the court of appeal thus notes that the question whether Philips actually has a dominant position within the meaning of article 102 TFEU, as well as the question whether the first offer of Philips met the FRAND conditions, then need not to be answered.
  EHWC 700 (pat) at 744: “However the judgment does not hold that if the circumstances diverge from the scheme set out in any way then a patentee will necessarily abuse their dominant position by starting such a claim. In those circumstances the patentee’s conduct may or may not be abusive. The scheme sets out standard of behaviour against which both parties behaviour can be measured to decide in all the circumstances if an abuse has taken place. ”
Peter van Gemert and Hester BorgersSubscribe to our daily newsletter Back