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England and Wales Court of Appeal (Civil Division) Decisions
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Cite as:  EWCA Civ 1526
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ON APPEAL FROM THE HIGH COURT OF JUSTICE
Mr Justice Arnold
Strand, London, WC2A 2LL
B e f o r e :
LORD JUSTICE KITCHIN
LORD JUSTICE FLOYD
| KONINKLIJKE PHILIPS N.V.
|- and -
|(1) ASUSTEK COMPUTER INCORPORATION
(2) ASUSTEK (UK) LIMITED
(3) ASUS TECHNOLOGY PTE. LTD
|- and -
|(4) HTC CORPORATION
(5) HTC EUROPE CO. LTD
Mark Vanhegan QC and Adam Gamsa (instructed by Bristows LLP) for the Respondent
Hearing dates: 27-28 June 2017
Crown Copyright ©
Lord Justice Floyd:
Standards and nomenclature
Multiple access and access control
i) time division multiple access ("TDMA");
ii) frequency division multiple access ("FDMA"), and orthogonal frequency division multiple access ("OFDMA"); and
iii) code division multiple access ("CDMA").
The UMTS Standard
The negotiation of the 1998 Agreement
"Philips insisted on an exclusion of TDMA technology from the scope of the 1998 Agreement. Philips viewed the 1998 Agreement as very one-sided in favour of Qualcomm, not least because no value was apparently attributed to Philips' patent portfolio. Philips considered that its TDMA patents should be excluded because the patent positions between Qualcomm and Philips were reversed in respect of TDMA technology as compared to CDMA technology."
The relevant terms of the 1998 Agreement
"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)."
"'CDMA Wireless Industry Standard' means standards for public code division multiple access communications including but not limited to IS-95A, IS-96A, IS-127, ANSI J-STD-008, the proposed ETSI UMTS standard, their subsequent releases, revisions and derivations, and any local and regional standards based substantially thereon, any wireless local loop or wireless PBX (private branch exchange) systems based substantially thereon, and the Globalstar Satellite System. For the purposes of this Agreement, including but not limited to determining whether a patent is a CDMA Technically Necessary Patent, CDMA Wireless Industry Standard includes all of the above-described standards and systems but does not include the GSM standard or any other standard which utilizes a TDMA over-the-air interface."
"3.1.1 Subject to the terms and conditions of this Agreement, including but not limited to timely payment of the royalties set forth herein, QUALCOMM grants to PCC a personal, nontransferable, worldwide and nonexclusive royalty-bearing license under QUALCOMM's Patents solely for Wireless Applications to (a) make (and have made), import, use and sell, lease or otherwise dispose of PCC Licensed Products, and (b) to make (and have made) CDMA ASICs and Components (provided that the material features of such CDMA ASICs have been designed by or for PCC and which designs are owned and used exclusively by PCC) and import, use and sell, lease and otherwise dispose of CDMA ASICs and Components but only if such CDMA ASICs and Components are included as part of and within complete PCC Licensed Products Sold by PCC (or as replacement parts for PCC Licensed Products previously sold by PCC).
3.1.2 QUALCOMM hereby grants to Philips a personal, nontransferable, worldwide, non-exclusive, fully-paid and royalty free license under QUALCOMM's Patents to make (and have made), import, use and sell, lease or otherwise dispose of Components."
"Philips hereby grants to QUALCOMM a personal, nontransferable, worldwide, nonexclusive, fully-paid and royalty-free license under Philips' Patents solely for Wireless Applications to make (and have made), import, use and sell, lease or otherwise dispose of QUALCOMM Licensed Products. No other, further or different license is hereby granted or implied."
i) HTC is a "CDMA licensee" of Qualcomm pursuant to a Subscriber Unit License Agreement dated 20 December 2000 ("the SULA");
ii) Qualcomm has designated HTC as a "CDMA Technically Necessary Patent Beneficiary" in writing to Philips;
iii) The patents are "CDMA Technically Necessary Patents" because they have been claimed by Philips to be essential to the UMTS standard;
iv) The UMTS standard is a "CDMA Wireless Industry Standard";
v) The 1998 Agreement is governed by Californian law, according to which a third party beneficiary such as HTC can enforce the covenant and deploy it as a defence to a claim for patent infringement.
i) The alleged infringements arise from HTC's implementation of HSPA in its 3.5G mobile telephone handsets. Philips contend that these acts are excluded from the scope of clause 4.3 because implementing HSPA is not "an act of infringement relating to a CDMA Wireless Industry Standard" as defined in clause 1 of the 1998 Agreement ("Issue 1").
ii) Clause 4.3 contains a proviso preserving Philips' right to assert any of its patents against any entity for an act of infringement relating to any TDMA equipment or system. Philips contends that HSPA utilises a TDMA system and HTC's devices are TDMA equipment within the meaning of the proviso ("Issue 2").
iii) Philips contends that the covenant not to sue extends only to CDMA Technically Necessary Patent Beneficiaries who are dealing in Qualcomm Licensed Products, such as integrated circuits manufactured and supplied by Qualcomm pursuant to the 1998 Agreement. This point only affects some of HTC's chipsets, namely those it purchases from one of Qualcomm's competitors, Mediatek ("Issue 4").
The judge's findings of Californian law
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).
The judge's reasoning on Issues 1 and 2
i) HTC's case was that Philips claimed that the patents in suit were essential to (in one case) Release 5 and (in the other cases) to Release 6 of UMTS TS 25.214, which was a Technical Specification forming part of the UMTS standard. HSDPA was introduced in 2002 as part of Release 5 and HSUPA introduced in 2004 as part of Release 6, and these were "subsequent releases" of "the proposed ETSI UMTS standard" within the meaning the definition of CDMA Wireless Industry Standard in the 1998 Agreement.
ii) Philips' case was that the definition of CDMA Wireless Industry Standard in clause 1 was restricted to standards which specify "pure" CDMA, that is to say systems in which the primary means by which individual users' traffic services are separated is code division alone, and excludes any system which utilises a TDMA over-the air interface.
i) The parties' purposes in entering into the 1998 Agreement. Philips' purpose was essentially to obtain a licence in respect of cdmaOne/IS-95, which was a pure CDMA system. Further, it wanted to exclude TDMA from the agreement. On the other hand Qualcomm's strategy was to support worldwide adoption of its CDMA technology, instead of GSM or TDMA. As a result Qualcomm required counterparties to grant it rights in relation to cdmaOne/IS-95, but had no need to obtain rights in relation to TDMA or hybrid systems.
ii) The late stage in the negotiations that the wording "the proposed ETSI UMTS standard" was included.
iii) The fact that no royalties were payable to Philips, and no reduction in the royalties payable to Qualcomm under the 1998 Agreement. Philips said it was commercially unreal for the licence to extend beyond pure CDMA in those circumstances.
iv) Subsequent conduct of Qualcomm. This consisted of certain statements in so-called White Papers published by Qualcomm summarising third-party (including Philips) intellectual property rights benefitting Qualcomm's customers in January 2004 and January 2008.
"In my judgment the definition of CDMA Wireless Industry Standard is reasonably susceptible of both parties' interpretations. HTC's strongest points are that it expressly includes "the proposed ETSI UMTS standard" and its "subsequent releases, revisions and derivations" and that, by the date of the 1998 Agreement, it was known that UMTS would include the Delta concept, which was a hybrid system. On the other hand, the closing words of the definition indicate that standards which include TDMA are not covered. In these circumstances it is legitimate to turn to the extrinsic evidence to resolve the ambiguity. As discussed above, I consider that the extrinsic evidence supports Philips' case as to what the parties intended. I do not consider that it is necessary to resort to the contra proferentem rule; but if it is, I consider that this also supports Philips' case. Accordingly, I conclude that the definition of CDMA Wireless Industry Standard is to be construed in manner contended for by Philips, that is to say, as being restricted to pure CDMA standards (in the sense explained above). Since HSPA is not a pure CDMA system, the Patents are not covered by clause 4.3."
The appeal on Issues 1 and 2
HTC's arguments on Issue 1 and 2
"Qualcomm was … aware by the time the 1998 Agreement was entered into that its WCDMA technology had been selected by ETSI to be incorporated into UMTS and so was seeking to develop a licensing strategy that would enable it to obtain a dominant position in UMTS Technology Markets and UMTS Chipset Merchant Markets."
Philips' arguments on Issues 1 and 2
"46. This exclusion was added to the definition of CDMA Wireless Industry Standards as well as separately in the covenant not to assert in clause 4.3. I recall that the feeling at the time was that the agreement was very one-sided in favour of Qualcomm in the sense that the primary consideration for the licence to Qualcomm's CDMA system was the royalty payments from Philips. Qualcomm did not attribute any value to Philips' CDMA patents, as was reflected in the royalty rate to be applied …
I recall at the time that there was a strong feeling in Philips that TDMA should be excluded because the patent positions as between Qualcomm and Phillips were reversed for TDMA. The 1998 agreement was regarded as strictly limited to CDMA only."
"50. While Philips were involved in this process, the personnel directly engaged in the licensing negotiations with Qualcomm were not. We had a general awareness of what was going on and understood that one of the proposals was based on CDMA. Not long after the 1998 agreement was entered into, I recall that Qualcomm pushed to establish a single worldwide CDMA standard for 3G. Qualcomm's stance on the choice of technology for 3G is recorded in the ITU press release… Qualcomm's public position on a single worldwide CDMA standard as recorded by the ITU is consistent with my recollection of Qualcomm's approach to the 1998 agreement as strictly limited to CDMA only."
i) A response filed by Qualcomm at a meeting in March 1998, after the date of the agreement, commenting on the ETSI proposal for UMTS. Qualcomm's position was that the proposals adopted at the January meeting (and in particular concept Alpha) were not as good as Qualcomm's pure CDMA proposal. Going forward it was Qualcomm's view that there should be only one proposal and that should be based on Qualcomm's own proposal, rather than concept Alpha.
ii) The ITU Press Release, referred to in paragraph 50 of Mr Amar's statement, again post the agreement, in which Qualcomm stated that it was only prepared to licence its CDMA technology for UMTS if three conditions were met: (i) a single converged CDMA standard set for 3G; (ii) the converged standard accommodated equally the two dominant network standards; (iii) certain disputes on technological points were resolved.
Discussion on Issues 1 and 2
The judge's reasoning on Issue 4
The appeal on Issue 4
HTC's arguments on Issue 4
Philips' arguments on Issue 4
Discussion on Issue 4
Lord Justice Kitchin:
Lady Justice Arden DBE:
||American National Standards Institute
||Application specific integrated circuit|
||Code Division Multiple Access
||Downlink shared channel
||European Telecommunications Standards Institute
||Frequency Division Duplex|
|Frequency division multiple access
||Global System for Mobile Communications|
||High Speed Downlink Packet Access
||High Speed Packet Access|
High Speed Uplink Packet Access
|"IS-95"||Interim Standard 95
|Opportunity driven multiple access
||Orthogonal frequency division multiple access
|Philips Consumer Communications LP|
||Random Access Channel
|Subscriber Unit Licence Agreement|
||Time Division Duplex|
||Time division multiple access|
||Time division synchronous code division multiple access
||Universal Mobile Telecommunications System
Note 1 It is agreed that this is an obvious typographical error for 4.3 [Back]
Note 1 It is agreed that this is an obvious typographical error for 4.3 [Back]