Koninklijke Philips NV v Asustek Computer Incorporation & Ors

I am asked by the 4^th and 5^th Defendants (HTC) to order the trial of a preliminary issue in a patent infringement action concerning the technology used in mobile phones. The Claim Form and Particulars of Claim were served on 15 December 2015 and a Defence served on the 23February 2016. On the same day as service of the Defence, this application was made and I was told that, if granted, the preliminary issue can be determined at a 2 day hearing in July.

The action concerns infringement of 3 patents and, simultaneously with service of proceedings last December, similar infringement proceedings were brought against HTC in Germany (Mannheim), the Netherlands, France and Delaware. The Claimant (Philips) claims that each of the three patents in suit is essential for the operation of mobile phones using 3G technology and, since HTC phones use this technology, infringement follows. HTC contests whether or not the patents are essential and presents a non-infringement defence.

The phones in issue, or similar ones, have been on the market for 10 years or so and, accordingly, there is no question of urgency as far as relief for Philips is concerned. It was not explained to me why proceedings had not been brought earlier in time and I assume that the reason is irrelevant.

In addition to the HTC parties, another set of Defendants is involved in the proceedings. These Defendants appear to be completely separate and the matter which is sought to be the subject of the preliminary issue does not concern them. These other Defendants, although not HTC (for reasons which I shall later explain), have challenged the validity of each of the patents in suit.

There are many issues of confidentiality surrounding the subject matter of these proceedings and for that reason I will only set out details in so far as they are necessary to make matters sufficiently clear for my decision to be understood.

It is common ground that the infringement proceedings will be complex and substantial and it may be the case that it is appropriate for them to be tried one patent at a time rather than all three together. A case management conference will be fixed in due course at which issues like this may be determined. All that needs to be recognised for present purposes is that the trial of the technical issues is anticipated to be time consuming and expensive.

The preliminary issue which is sought to be determined in July is whether, as a consequence of an agreement Philips reached with a third party (TP) some years ago, HTC has a defence to some or all of the claim. That defence would be by way of licence or similar and has been called the Licence Issue or Licence Defence for convenience. For the purposes of this application, Mr Nicholson, counsel for Philips, conceded that, as a matter of construction, the aforesaid agreement provides HTC with an arguable defence to the infringement claim.

A condition may be attached to the Licence Defence. It is that HTC may only rely on the agreement at its source if and so long as HTC does not challenge the validity of any of the patents which are the subject of the licence. It is for this reason that HTC has not raised validity in these proceedings.

Philips contests whether HTC’s interpretation is the true effect of the agreement it has made with TP (it is to be construed in accordance with some foreign law) and asserts that, in any event, the agreement, or the relevant clause thereof, is void by reason of it being contrary to the anti-competitive provisions of the TFEU.

On 4 April 2016 HTC pleaded out in detail the case which it seeks to be determined by way of preliminary issue. This pleading purports to explain why the Licence Defence is a good one.

As yet there is no pleading by Philips of its competition answer to the Licence Defence and so it is not possible to assess its credibility. However, there is evidence that the matter will be very complicated and will take 5 to 6 weeks of trial time, sometime in 2017, to determine, assuming that the case gets off the ground. Both HTC and Philips accepted this to be a fair summary of the position.

Neither is there a detailed pleading in answer to HTC’s contentions with respect to the Licence Defence, although there is a draft preliminary answer. It does not raise any technical issues.

It is anticipated that the Mannheim court will reach a conclusion on the infringement issue in September 2016. Inquiries have been made as to the procedure in Mannheim and the evidence is that the court, in considering whether to grant any injunction against HTC, may take into account any conclusions this court may express on the Licence Defence, if those conclusions are made known before the end of October 2016 and even if there is, lurking in the background, a competition argument to the effect that the source of the licence is a void agreement.

HTC has not challenged validity of the Philips’ patents in Germany, the reason being the same as in these proceedings – HTC is concerned that the effect of such a challenge will be to deny to it the opportunity to rely on the Licence Defence.

The relevant matters for the court to consider on applications for a preliminary issue were set out recently by Birss J in Wagner International AG v Earlex [2011] EWHC 3897 (Pat), adopting the approach of Neuberger J in Steele v Steele [2001] unreported. The criteria are:

Mr Abrahams QC, who presented the argument for HTC, submitted that whether there should be a preliminary issue or not was reasonably straightforward. He pointed out that the matter was a simple one of construction of the relevant agreement and that, if HTC is right, the expensive and technically difficult patent infringement case will fall away. He went on to point out that if HTC is wrong then the restrictions on HTC challenging validity of the patents in suit will fall away – and the sooner that he is able to plead an invalidity case the better in terms of efficient resolution of the dispute as a whole. Furthermore he contended that, if HTC is wrong on construction, then the whole of the competition case will fall away since it is only there to establish that the relevant clauses which are the source of the Licence Defence are void.

Mr Abrahams submitted that there were 4 key reasons why, given the guidance in Wagner, a preliminary issue was appropriate.

The first was that the Licence Issue was a discrete issue separate from any of the technical issues and would dispose of at least a good part of the case. He drew my attention to the relevant agreement in the context of the state of the pleadings to date (Footnote: ¹) and contended that Philips made really only 2 points about the relevant agreement, neither of which raised any technical matters which might be difficult to resolve at a hearing in July.

The first contentious point was that the relevant agreement was under some foreign law (precisely which is currently confidential and that is why I do not mention it). However, Mr Nicholson, who appeared for Philips, was unable to satisfy me that this created any real difficulty. This court is well used to determining issues of foreign law in relation to construction of contracts and if it be the case that the foreign law is different from English law (and HTC does not contend that it is) then this should present no real difficulty and Mr Nicholson was unable to identify any.

The second contentious point was whether the relevant agreement covered the patents in suit. Mr Abrahams presented the argument as to why they clearly were covered and I can assume there is a contrary argument. What is evident, however, is that the argument does not seem to be a very complicated one or one that is not capable of resolution within the time frame contemplated.

Mr Abrahams’ second reason was related to time-tabling and urgency. He pointed out that the matter was commercially very important to both parties with huge amounts of money at stake and the context was litigation in 4 different jurisdictions with possibly others in the wings. He said that if there were a Licence Defence then this would remove the technical issues of validity and infringement from all those actions.

Moreover and with respect to the proceedings in Germany, he urged that it was crucial for HTC to have a positive answer to the preliminary issue as soon as possible since this could be an important matter which the Mannheim court might take into account later this year should it find that the HTC products infringe Philips’ patents in the proceedings before it. In this respect Mr Abrahams reminded me of Arnold J’s comments in HTC v Apple [2011] EWHC 2396 (Pat), especially [14] – [19], and contended they support his application.

Mr Abrahams’ third reason was that until the Licence Issue is determined HTC cannot be expected to take the risk of challenging the validity of Philips’ patents. He submitted that this gave rise to significant case management issues since other parties in the action were making such a challenge and that HTC wished to join forces with that challenge if it did not have a licence defence. He submitted that it was unfair to force his client to elect whether to go for the Licence Defence or make an invalidity attack when the correctness or otherwise of the Licence Defence could be relatively easily determined.

In this context Philips had sought to take the wind out of HTC’s sails by a letter of 24 March in which it conceded that it would not contend in the UK proceedings that the entitlement to rely on any licence sourced from its agreement with TP fell away if there were a validity challenge. Mr Abrahams jumped on this as illustrating HTC’s difficulties in Germany and elsewhere; challenging validity in the UK might vitiate a licence defence in Germany and elsewhere. Mr Nicholson was not prepared to extend Philips’ concession to other jurisdictions and, therefore, much of the gravamen of Mr Abrahams’ third reason remains.

Mr Abrahams’ fourth reason was that resolution of the construction issue could lead to the action as a whole being disposed of, either by way of settlement or some other compromise. The background to this is that, apparently, the majority of HTC phones may be subject to the Licence Defence. There was sensitivity as to the actual figures but Mr Abrahams was content with the expression that all but the rump was so subject. He submitted that it was very unlikely that the parties would consider it worthwhile to embark upon extremely expensive and difficult litigation if success over the rump were the only prize at stake.

Mr Abrahams complemented his fourth reason by arguing that the Licence Issue needs to be determined one way or the other and that, accordingly, the sooner it is determined the better. His reason was that if HTC succeeds on infringement in the present case then Philips’ likely response will be to bring proceedings based on other patents in its portfolio (Henderson v Henderson permitting, presumably). Since the Licence Defence pertains to all relevant Philips patents (i.e., those allegedly essential to the operation of 3G technology), Mr Abrahams contended that this was an additional point to go into the mix.

Mr Abrahams then turned to the competition case which Philips are threatening to plead in response to the Licence Defence. He characterised this as a crude and naked attempt to delay resolution of the Licence Issue and, in particular, to delay it such that it could not be before the Mannheim court later this summer. He submitted that the competition issue was a desperate and late afterthought to push the Licence Defence into the long grass and that the court should not be intimidated by it, particularly when Philips had not even condescended to put forward a draft of its pleading. In this latter respect, the pleading is due later today so, Mr Abrahams submitted, Philips must have a draft by now which they would have shared with the court if there were anything in it of substance.

There is in the evidence of Ms Rieu an outline of the Philips’ competition case. However, it is very bare. There is an assertion that the relevant clause of the agreement which is the source of the Licence Defence is contrary to Arts 101 and 102 of TFEU, that the agreement is not on FRAND terms and therefore is inconsistent with the policy in relation to essential patents and, therefore, must be void and that there is an appreciable effect on interstate trade. It is not immediately obvious to me why, if the agreement is not on FRAND terms, it is automatically void. Certainly, HTC are not complaining about the terms and if the terms are too favourable to HTC, or others in its position, compared with other licensees Philips might have contracted with, then Philips has its own remedy. However, the evidence contains insufficient detail for me to form any real view about the merits of the points said to be in contention, although I can understand why the parties assert it will be expensive and time consuming to decide.

Mr Abrahams also submitted that the competition case may in any event be stayed since competition authorities may be looking into the issue and this could delay matters for a very long time. He submitted that this should be placed in the context that Philips have known for years that HTC has been relying on the agreement between Philips and TP and it has never previously been suggested the relevant parts of the agreement, or all of it, were void.

Finally, Mr Abrahams referred me to Koninklijke Philips Electronics v Harvard International [2009] EWHC 1600 (Pat) where one of the matters in contention in a patent infringement action was whether licence issues should be heard at the same or a different time as some competition issues (referred to in that case as the FRAND issues), it being common ground that not all issues in the case could be expediently heard together. Although there was some overlap between the competition issues and the licence issues, the degree was not sufficient to persuade the court that the two should be heard together, a persuasive factor being the danger of incurring an enormous amount of costs which may be unnecessary.

Towards the end of his submissions Mr Abrahams reminded me that his application is essentially for efficient and effective case management and that a resolution of the Licence Issue in a 2 day slot in July will have a substantial beneficial effect, even if his clients do not succeed on the issue (for then the competition response falls away).

Mr Nicholson submitted that he had four good answers to HTC’s application and that the right way to deal with the application for a preliminary issue was to dismiss it.

First he submitted that the Licence Issue was not a discrete or complete point at all and he made this submission for two reasons. The most apparent was that the Licence Issue was wholly dependent on the validity of Philips’ agreement with TP, especially the relevant clause thereof. In these circumstances HTC would not be able convincingly to contend it had a licence until the competition issue was determined. Thus the Licence issue and the Competition issue were inextricably linked and it would be folly to pretend otherwise.

The second reason why the Licence Issue was not discrete depended upon whether the patents were actually essential to performance of 3G mobile telephony. Mr Nicholson accepted that Philips had asserted that they were and claimed that they were but pointed out that HTC had contended otherwise. Mr Abrahams, however, submitted that, on the proper construction of the relevant agreement, the licence defence ran against all patents which Philips claimed were essential. This matter is one which could be determined within any preliminary issue.

Mr Nicholson went further, however, and contended that if it be the case that the Licence Defence were a good one on the premise that the patents were essential, then his client might accept what HTC were contending in that respect, i.e. that the patents were not essential at all and so the licence did not run. Mr Nicholson referred to this as the shifting sands scenario and he used it as grist for his argument that it was premature to order a preliminary point now. The corollary might be that if there were a prospect of Philips changing tack if the Licence Issue went against it, then how much better it might be if that issue were determined sooner rather than later. On the other hand these suggestions of volte face on critical issues could be no more than posturing in a somewhat unreal world. I was not very impressed by the point.

Mr Nicholson also argued that the breadth of the agreement would have a clear impact upon whether or not it was anti-competitive; the broader the agreement, the more likely it was to fall foul of competition law and vice versa. He submitted that there would be a classic squeeze and that since the competition point would not be in play on the preliminary issue then there was a real danger of the issue being determined erroneously. I was not impressed by this point either. I would expect HTC to be contending that any consent it could derive from the agreement between Philips and TP was no broader than necessary for it to have a defence to the infringement claim. If that is right, there is no inevitable uncertainty in having the two issues determined separately. The anti-competitive aspect of the agreement is likely to be premised on a construction which affords the minimum by way of defence to the infringement claim, assuming it affords any defence at all.

The second of Mr Nicholson’s four points was that the application was premature as pleadings are not closed, the issues between the parties have not been crystallised and, furthermore, it may be that TP wishes to join into or intervene in the action.

It is true that pleadings are not closed, but they are sufficiently advanced for the court to understand the significance of the Licence Issue. It is also true that directions have not been agreed or ordered with respect to the case as a whole. But that does not seem to me to be a good reason for not ordering the trial of a preliminary issue in July if such is otherwise appropriate.

Mr Nicholson particularly urged what he called the unsettling effect on the whole application if, sometime in the next 3 months, TP applied to join in the process. However, there is no evidence at all that TP is likely to do that and no reasons were put forward as to why it might want to do that. In my judgment this is too speculative a suggestion for it to be attributed much weight.

The third of Mr Nicholson’s points was that the purpose of the application was, as a matter of substance if not form, to support proceedings overseas and in particular Germany. He relied upon Mr Abrahams’ time-tabling point and the need for a hearing of the preliminary issue in July so that the Mannheim court can have the benefit of any conclusions of this court on the Licence Issue before it reaches any decision on whether or not there should be an injunction to restrain HTC.

Mr Nicholson reminded me that the German procedural system for deciding whether or not to grant injunctive relief when infringement has been found but validity not yet decided works perfectly well, that its systems of checks and balances is very well developed and that this court should not damage its own system of administration of justice in the misconceived understanding that it was increasing the likelihood of justice between the parties being obtained in Germany. He submitted that if I were to give any weight at all to the point, then it should be small.

The difficulty I have with this is that I do not accept that if I order the trial of a preliminary issue of the Licence Defence in July then I will do any damage to our system for administration of justice. I would only order such a trial if I were satisfied that such were a good idea taking into account the matters identified in Wagner and the overriding objective articulated in the CPR.

The fourth of Mr Nicholson’s points was that the Licence Issue will make absolutely no difference to what needs to take place regarding the technical trial. This point arises out of the fact that the Licence Defence, even if it is a good one, does not run to all of the allegedly infringing devices. Mr Abrahams has conceded this point but his answer is that the number of devices outside the protection of the Licence Defence is so small that the court can reasonably take the view that the parties will not be willing to incur the expense of full blown patent litigation in respect of them.

Mr Nicholson then went through the Wagner list and supplemented his submissions by direct reference to it. He stressed that matters were at a very early stage and that there was a real risk of multiple judgments if a mere part of one of the issues was rushed into court.

Mr Nicholson stressed his point about overlap with the competition issue and warned that the trial of a preliminary issue could be recipe for disaster. The difficulty I have with that arises from the fact that this application was made on 23 February 2016 and now, some 6 or so weeks later, there is no real clarity in Philips’ case on the point.

I have considered all the points put before me in the context of the Wagner list and also the proportionate management of this action. I am satisfied that the right order is one which provides for determination of the Licence Issue by way of preliminary point in July of this year. I am satisfied that either way the point is determined there is likely to be a substantial saving in costs and use of resources.

It seems clear that if the point is decided against Mr Abrahams, the competition case will not feature in these proceedings (and the fact that it may feature in other proceedings or in front of competition authorities is, in my view, not a matter of much import). I am also satisfied that there is sufficient reason to think that if the point is decided in favour of HTC then the future case management of and conduct of the case in relation to the remaining alleged infringements will be in an environment where the potential cost of the litigation and the consumption of resources may well outstrip its benefits. Mr Abrahams was clear about that and Mr Nicholson voiced no disagreement. I cannot bind the parties but I anticipate that the court at future case management hearings will be reminded of what counsel has said in these proceedings and find an efficient way forward.

I am also satisfied that there is sufficient urgency for the matter to come before the court in July. That date was reserved, so I was told, shortly after the application was made. The context was not only the prospect of an early decision on infringement in the German proceedings, but also one in which HTC has been selling 3G phones for years, phones in relation to which it is important for the parties to know whether or not they are licensed in relation to Philips’ patents.

I am also satisfied that the Licence Point is sufficiently discrete for an early decision on the point to be capable of resolution in a form which will have a significant impact on the litigation as a whole. I reject Mr Nicholson’s submission to the effect that it is premature to order a preliminary point because the pleadings are not closed. The pleadings are sufficiently advanced for the court to appreciate that there is before it a substantial patent action which stands a reasonable chance of being nipped in the bud if the acts complained of are licensed or cannot otherwise be complained of.

To my mind there are compelling reasons for the determination of a preliminary issue in this case and little to be said against it. The application is allowed and the provisional directions that have been considered will be ordered.