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14 Feb 2017

Archos S.A. v. Koninklijke Philips N.V., NL, District Court of The Hague, 10 February 2017, citation number: ECLI:NL:RBDHA:2017:1025

Prior to this case, Philips had brought three patent infringement cases regarding UMTS SEPs against Archos in the Dutch court’s accelerated regime. In response, Archos filed this case on the merits, purely regarding the FRAND questions at stake, in the normal procedural regime, which due to the court’s rigid schedules is no longer necessarily slower than the accelerated regime. Philips also initiated cases against Archos in Germany and France.

The various infringement cases concerned patents EP1440525, EP1685659 and EP1623511, which Philips had declared as being essential to the HSPA option in the UMTS standard by declarations to ETSI of 15 January 1998 and 26 November 2009. On the 5th of June 2014 Philips brought its UMTS and LTE patent portfolio and license program to the attention of Archos by letter. In this letter Philips pointed out that by bringing onto the market products with UMTS and LTE technology, Archos infringes Philips’ patent rights. Philips explained in its letter that it is possible to take a FRAND license with regard to these patents and invited Archos to enter in to discussion

Various meetings took place between the parties and Archos felt the offer by Philips was not FRAND. Archos responded with an offer of its own, which it deemed to be FRAND.

The court first lists the negotiation history and the exact royalty rates proposed by both parties (about a factor 10 apart from one another), before coming to the declarations that Archos claimed, namely that Philips’ offer was not FRAND, and that Archos’ offer was FRAND (and additionally, to declare that Archos’ offer was in fact higher than FRAND).

The court then analyses the negotiation history and contrary to Archos’ position that Philips offer was not FRAND and not negotiable, concludes that it was in fact Archos who failed to negotiate those points unacceptable and held off on further negotiations:

[4.3] (…) In this, it must be taken into account that until the decision of the European Court of Justice in the matter of Huawei/ZTE, the initiative for taking a license was in the case law laid with the user of the standard and is not so much with the SEP holder, at least, section 6.22 of the decision of this court in the matter of Philips/SK Kassetten, as well as the Orange Book decision of the German Bundesgerichtshof were generally understood in that way. The, on this crucial point, contrary decision of the Court of Justice came on 15 July 2015 and in the opinion of the court formed a new moment for negotiation between parties. Philips in accordance with that decision took the initiative with its offer of 28 July 2015. In the meeting subsequently planned on 3 September 2015, Archos however still appeared to slam the door shut by, as has been established without contest, indicating that if Philips wanted more than a few thousands of euros it would have to take legal action against Archos. In that light, it seems unfitting that Archos reproaches Philips to have not been open to negotiation, or at least that position is insufficiently substantiated.

The court further examines the various substantial arguments raised by Archos, inter alia that Philips packaged its UMTS and LTE portfolios into one proposed license deal, that that proposal failed to depart from the correct share of Philips SEP patents in the UMTS pool, made use of royalty stacking, did not apply a technical quality weighing and finally did not depart from a Smallest Saleable Patent Practising Unit (SSPPU, here: the Qualcomm baseband chip) point of view.

Packaging two technologies together is not in itself a problem, the court finds, although that could be different if Archos would make products that would only require a license under the LTE SEPs but not under the UMTS SEPs. That is not the case here, so the court goes on to consider in how far the Philips offer (based on its share of SEPs in the UMTS standard) can be regarded as being FRAND:

Although parties are in dispute regarding the (technical) importance of the SEPs of Philips to the UMTS standard, but it is undisputed that the share that Philips has in absolute numbers of SEPs in the UMTS SEP portfolio as such is an important factor in the assessment of the FRANDness of Philips’ offer (and that of Archos). Both parties, however, arrive at different absolute numbers.

Archos, in this regard, refers to the report of their expert. Archos’ expert has searched the ETSI IPR database of SEPs , filed with the European Patent Office (EPO) in the period from 1-1-1996 until 24-12-2015, for the keyword UMTS (and LTE) (see Archos’ expert 1st report, p. 21). Archos’ expert arrived at 2130 patent families for the UMTS standard, (Archos’ expert response report, p. 30). In that number Philips would have a numerical share of 2.5%, of which roughly 0.7% remains according to Archos’ expert, after a quality weighing (Archos’ expert 1st report, p.37 and Archos’ expert response, p.42). Philips has countered that by alleging that this method has resulted in a great deal of by-catch without any relevance and that the quality weighing by Archos’ expert is incorrect.

The court agrees with Philips’ criticism of the Archos’ expert report, however, in that searching for the keyword “UMTS” in this manner would not give a realistic reflection of the total number of SEPs for UMTS. Philips offers a counter expert, who – by use of the dSEP database – arrives at a numerical Philips share of 5.1% in the UMTS SEP portfolio (55 EP patents on a grand total of 1069).

The court also follows Philips in its criticism of the Archos’ expert report in that one should in this case only look at mobile phone and not infrastructure-related patents, and that the methodologies and calculations used by Archos’ expert are insufficiently clear:

In addition to the aforementioned objections that are inherent to Archos’ points of departure regarding the numerical share, Philips also rightly pointed out that in a considerable part of the report Archos’ expert has employed methodologies and calculations that have not or insufficiently been made clear. Moreover, a not insignificant part of that report is rather speculative in nature.

Firstly, the weighting of the technical usefulness of the Philips patents must be pointed out, in which Archos’ expert makes use of the number of citations (so-called “forward citations”), and the number of independent patent claims. It is made insufficiently clear by either Archos’ expert or Archos why these are really relevant factors for the technical value of an SEP. This is all the more problematic, because Archos’ expert because of its weighting of the (technical) quality of the Philips SEPs arrives at a significant reduction in the numerical share (from 2.5% to 0.7% numerically weighted share). Without further substantiation the outcome of this weighing performed by Archos’ expert is even less plausible in view of the analysis carried out by another licensee during its negotiations with Philips. The licensee, like Archos a manufacturer of consumer end products, identified a share for Philips of 9.78% (rounded off: 9.8%) in the number of truly relevant UMTS SEPs. The fact that this analysis was carried out and its outcome were confirmed by the expert prof. [C] (GP8, p. 17 and further). The court will set aside the criticism from Archos regarding the expertise of [C], because for that factual finding no real expertise is required.

In the end, none of the points raised by Archos comes to any real effect, since the court mainly follows Philips’ position that Archos should simply have negotiated further on those points it did not consider to be FRAND. Since Philips is able to offer relevant comparables in its licensing efforts, the court finally rejects Archos’ request for a declaration that Philips’ offer was not FRAND.

That leaves Archos’ own offer, for which it sought a declaration of FRANDness, but request that also fails:

Archos alleges that its offer of 12 January 2016 (secondary claimed relief II) is FRAND. Already because of the fact that this offer (in section 2.8 it has been demonstrated that this calculation comes down to about 7 cents per product) is lower by a factor 10 that Philips’ offer ($0.75/1.-) and departs from an incorrect (or at least insufficiently substantiated) share of Philips in the relevant UMTS SEPs for mobile phones. The court furthermore points to the further criticism – held to be in part correct above – of the report by Archos’ expert that was presented as substantiation of Archos’ offer.

In the end, Archos’ requested declarations are denied and the court orders Archos to pay most of the legal costs.

The  Dutch doctrine of pre-contractual good faith (in short, no putting undue pressure – such as the threat of an injunction – on the other party during negotiations) is again referred to in this judgment: litigating a SEP patent against someone is presented in the light of the (Dutch) doctrines of ‘abuse of right’, ‘pre-contractual good faith’ and the (European) doctrine of abuse of a dominant position in the sense of article 102 TFEU. These arguments are well known from earlier FRAND case law in the Netherlands, like LG Electronics/Sony and Samsung/Apple.

This judgment is one of the first FRAND decisions to come out of the patent court of the Netherland since Huawei/ZTE and in fact after those decisions in LG Electronics/Sony and Samsung/Apple. After those two latter decisions, some observers doubted whether the Dutch court managed to find a respectable balance between the commercial need to keep talking during litigation on the one side, without losing one’s claim to an injunction due to the Dutch doctrine of pre-contractual good faith on the other.

This decision shows the court is willing to address FRAND issues in-depth, demonstrated here by the court getting to grips with FRAND royalty calculation methods, such as alternative technologies and the SSPPU approach. But pre-contractual faith still appears to play an important role. It must, however, be noted that the court does indicate in several places that Archos failed to fulfil its burden of proof and did not substantiate its arguments as well as it might (at least in the court’s view) have done. These points are worth further study for anyone interested in initiating a FRAND debate in the Netherlands, but it also means that it is therefore a matter of some conjecture what Archos might have achieved had it not stopped negotiating and been able to provide more in the way of the substantiation that the court now says it misses.

A copy of the judgment can be read here.

Headnote: Maurits Westerik, Bird & Bird