Koninklijke Philips N.V. v Asustek Computer Incorporation & Ors

Under Californian law, contractual interpretation seeks the parties’ mutual intention by considering the contractual language and admissible extrinsic evidence as a harmonious whole. Particular provisions may be read subject to the agreement’s overall commercial purpose, including an implied limitation where necessary. A covenant not to assert patents must be construed with its express exclusions. Equipment implementing hybrid TDMA/CDMA functionality may therefore fall outside a covenant directed to CDMA standards where the agreement excludes TDMA equipment or systems. A third-party beneficiary cannot obtain broader royalty-free protection for products using a competitor’s chipsets where that construction defeats the commercial interests of both contracting parties.

Philips brought patent infringement proceedings concerning patents said to be essential to the UMTS telecommunications standard. HTC relied on a covenant not to assert patents in a 1998 cross-licensing agreement between Philips and Qualcomm, claiming protection as Qualcomm licensees and third-party beneficiaries.

Following a trial of preliminary issues, Arnold J held that the covenant did not cover HTC’s implementation of HSPA, which used TDMA functionality, and did not extend to HTC products incorporating chipsets purchased from Qualcomm’s competitors: [2016] EWHC 2220 (Pat). HTC appealed on the construction of the CDMA Wireless Industry Standard definition, the TDMA exclusion in clause 4.3, and the scope of protection for non-Qualcomm chipsets.

Appeal dismissed unanimously. Floyd LJ gave the leading judgment, with Kitchin LJ and Arden LJ agreeing.

1. Applicable principles of Californian contract law. Construction seeks the parties’ mutual intention at the date of the agreement. The court considers the contractual language and admissible extrinsic evidence as a harmonious whole. Relevant material may include the circumstances of negotiation, the object and subject matter of the agreement, how particular wording emerged, and subsequent conduct. If the language is reasonably susceptible to competing interpretations, the court determines the intended meaning. Particular clauses remain subordinate to the parties’ overall contractual intention, and a necessary limitation may be implied. Contra proferentem is a residual principle.
2. Issues 1 and 2. The definition of CDMA Wireless Industry Standard expressly included the proposed ETSI UMTS standard and its subsequent releases, revisions and derivations. However, read with the closing exclusion and clause 4.3’s proviso, the agreement was reasonably susceptible to an interpretation excluding standards, or implementations, using a TDMA over-the-air interface. The extrinsic evidence did not compel HTC’s broader construction. The absence of royalties payable to Philips was particularly significant because Philips had the stronger TDMA patent position, while the White Papers supported a narrower scope of licensed rights.
3. The proviso to clause 4.3 excluded acts of infringement relating to any TDMA equipment or system. HSPA equipment was TDMA equipment. It therefore fell outside the covenant, even assuming that HSPA otherwise came within the definition of CDMA Wireless Industry Standard. HTC’s alternative argument concerning later UMTS releases consequently failed as well.
4. Issue 4. Clause 4.3 did not extend to products incorporating chipsets purchased from third parties. Californian law permitted a limitation to be implied where required by the parties’ intended commercial arrangement. Extending the covenant to products using competitors’ chipsets would remove Qualcomm’s commercial incentive to supply chipsets and would be contrary to both parties’ interests. The parties’ subsequent conduct, including Qualcomm’s notifications, White Papers and the SULA, supported that limitation.
5. HTC therefore had no defence under clause 4.3 on any of the three relevant issues. The appeal was dismissed.

1. Court of Appeal (Civil Division): HTC’s appeal was dismissed unanimously in [2017] EWCA Civ 1526.
2. High Court of Justice, Chancery Division, Patents Court: Arnold J decided the preliminary issues against HTC, holding that the covenant did not cover the alleged infringements or products using non-Qualcomm chipsets, in [2016] EWHC 2220 (Pat).