Posted: February 14th, 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

One Response

  1. Josef Schmidt says:

    Reply to Maurits Westerik’s (Coupry LLP), criticism of Archos S.A. v Koninklijke Philips N.V., NL, District Court of the Hague, citiation number: ECLI: NL: RBDHA:2017:1025 and Mannheim Landgericht. 1.7.2016. Aktenzeichen: 7O209/15 (https://www.jusmeum.de/urteil/lg_mannheim/lg_mannheim_7-O-209-15)

    By Josef Schmidt (prepared in personal capacity)

    Key Take Away

    By bringing an action for a declaratory judgment, Archos, represented by Allen & Overy, had the full burden of proof that Philips’ royalty rates where not FRAND. With this full burden of proof, Archos legal counsel had to present clear and unambiguous facts, which are proven beyond any discussion, in order to succeed. Such a task is impossible to achieve. Alternatively, the Archos legal team could have tried to convince the court that the burden of proof was on Philips as SEP holder under the principles set forth in Huawei v. ZTE. Since Archos failed also in doing this, its action was bound to fail. This was not the responsibility of the Archos economic expert, but that of the Archos litigation team.

    For Philips legal team, represented by Honygh Rokh Monegier, it was sufficient to simply cast doubt on Archos’ arguments to succeed in its defence. This is an extreme strategic advantage in a case dealing with the fairness and reasonableness of a license offer in the absence of publicly available and undisputed data on comparable royalty rates. Therefore, even though both parties presented opinions by economic experts, the court’s decision is not the outcome of a “battle of experts”, but rather based on the procedural rules relating to the burden of proof.

    Furthermore, the work of the Archos expert did not only serve in the Dutch proceedings, but also served as a basis in the German Court proceedings in Mannheim. There, in fact, an injunction was prevented against Archos on the grounds that Philips had failed to adequately disclose how it had come to the conclusion of the economic worth of its FRAND royalty rate. The Court ruled that this was not commensurate with the Landmark decision Huawei vs. ZTE. Here, the economic testimonial played a key role and Archos aggressive litigation strategy proved to be a success. Clearly, from Archos point of view, not losing the German markets was crucial to its business.

    1. Context of the dispute and previous decision in Mannheim

    Philips sued Archos (and other defendants such as HTC, Wiko and Asus) in several jurisdictions under patents, which are essential for either UMTS or LTE. In the infringement cases, the defendants raised the FRAND defence under Huawei v. ZTE. So far, this FRAND defence has been successful in the Mannheim District Court. The Dutch Courts have not yet dealt with the FRAND defence in the infringement cases brought by Philips in The Hague.

    The Mannheim decision in Philips v. Archos, in which Philips’ claim for an injunction was dismissed is cited in the enclosed Archos v. Philips decision. In short, Mannheim held that it was Philips’ obligation as a SEP holder to make a FRAND offer before bringing the action for an injunction and that Philips had failed to give a proper explanation why its license offer to Archos should be FRAND (see quotes in para 2.9 in the enclosed judgment):

    “The Mannheim Landgericht held in its judgment of 1 July 2016 (Aktenzeichen: 7 O 209/15) that Philips abused its dominant position by enforcing the relevant patents against (the German subsidiary of) Archos, because Archos may be considered a ‘willing licensee’ and Philips in its offer of 28 July 2015 failed to substantiate why that would be FRAND.”

    As SEP holder Philips had to justify its royalty rates and explain and prove the underlying facts.

    2. Different burden of proof in Archos v. Philips in The Hague

    The case Archos brought against Philips in The Hague, even though it concerned the same dispute, was fundamentally different, because it was not about a FRAND defence in a patent infringement case, but about an action for a declaratory judgment by a downstream innovator. Archos sued Philips and asked for a declaration that Philips’ royalty rate was not FRAND. This is surprising, since Archos obviously does not have any information about Philips’ previous licenses or royalty rates offered to other market participants. Nevertheless, according to the general principles in the Netherlands, as plaintiff Archos had to explain and prove the facts required for its action to succeed. This could have been different, if Archos had relied on the fact that the relevant facts are known to Philips, but not to Archos. However, Archos did not make this legal argument. This is explained in detail in Section 4.2 of the judgment:

    „In view of the fact that Archos relies on the legal consequences of aforementioned facts and rights, it has the obligation to furnish facts and the burden of proof under article 150 of the Dutch Code of Civil Procedure. Archos has not argued any other division. It has also not argued that Philips would have a greater obligation to furnish facts, for instance because (only) Philips would have the information on the ‘FRANDness’ of the offer…The question that now needs to be addressed is whether Archos has sufficiently substantiated its assertion that Philips’ offer is not FRAND. The court’s answer to this question is no, and considers as follows.“

    Thus by initiating the proceedings as plaintiff and by failing to make any arguments on the burden of proof, Archos was faced with the full burden to prove that Philips’ offer was not FRAND and Philips could limit itself to criticising Archos’ arguments. This is exactly the opposite situation as in the Mannheim case, where Philips had the burden of proof, and different from the UK High Court case Unwired Planet v. Huawei, where the Court considered the arguments of both parties to make its own FRAND assessment.

    The entire judgement by the District Court in The Hague in Archos v. Philips is based on Archos’ burden of proof, which is cited in numerous places in the reasons. This unequal burden of proof is one key reason why Archos’ claim was dismissed, as can be seen e.g. in Sec. 4.6 and 4.8:

    “By merely criticizing Scott´s report, as Archos does in 7.24-7.29 of its Reply, it loses sight of the fact that it has the obligation to furnish facts and that is has the burden of proof in respect of the numbers it provides (see legal ground 4.2).”

    “Archos´ criticism that the Stasik article would be too old (2010), fails to appreciate the fact that it is Archos that needs to come up with facts (see legal ground 4.2).”

    The Court’s criticism that Archos failed to undertake a technical assessment of the Philips patent portfolio relied not with the economic expert, but shows that Archos failed to hire a technical expert. However, even if Archos had done so, the costs of a technical analysis of the patent portfolio would have been exceedingly high, given the sheer amount of patents Archos allegedly infringed.

    Moreover, it appears that Archos’ lawyers did not sufficiently respond to factual assertions made by Philips so that the Court could assume that Philips factual assertions are correct. This can be seen e.g. in Sections 4.4 or 4.6 where the Court remarks that Archos has not “specifically responded” or “not challenged” factual statements by Philips or that Philips’ factual statements were “not contested” or “not disputed” or a relevant point “has not been argued” by Archos.

    3. Archos failed to raise arguments in negotiations

    Another important aspect of the decision is the fact that in the Court’s view Archos had not raised the relevant arguments in negotiations before bringing its declaratory action. The Court apparently expects the willing licensee to enter into meaningful discussions with the SEP holder. Presently, the Court was of the impression that Archos was not prepared to discuss royalty rates with Philips, but “slammed the door” on Philips without a reasonable justification for doing so. Following this behaviour, the Court obviously found it inappropriate for Archos to criticise Philips’ offer in the subsequent court case (see Sec. 4.3):

    “In line with this judgment, Philips took the initiative with its offer of 28 July 2015. During the meeting of 3 September 2015, Archos, however, subsequently slammed the door shut, as has been established and not contradicted, by saying that if Philips wanted more than a few thousand Euros it would have to initiate legal proceedings against Archos. In view of the above, it is inappropriate of Archos to accuse Philips of not being open to negotiations, or at least this is insufficiently substantiated.”

    This pre-trial conduct of Archos has apparently also influenced the Court and damaged Archos’ credibility, as can be seen in Sec. 4.10, 4.11 and 4.12:

    “In view of the above, there is merit in both positions and both of the positions can be criticized as well. It seems to the court that a balance can be reached during the negotiations.”

    “Philips has argued, and this was not disputed, that this aspect has never been addressed by Archos during the negotiations.”

    “This argument fails as well, and reference is made here to Philips’ defence discussed above, that such objections should have been part of the negotiations.”

    4. Conclusion

    The economic justification of the FRAND royalty rate, or rather the lack of thereof, played an important role in the German proceedings, where an injunction against the firm was prevented. In the Netherlands, the case was determined on procedural aspects, which left the entire burden of proof on Archos; a sheer impossible task, given the amount of patents infringed and the limited budget Archos had at its disposal. Clearly, this case was not decided on the grounds of economic testimonials, but on the basis of a litigation strategy, which left the full burden of proof with Archos.

    With this full burden of proof, Archos legal counsel had to present clear and unambiguous facts, which are proven beyond any discussion, in order to succeed. Such a task is impossible to achieve. Alternatively, the Archos legal team could have tried to convince the Court that the burden of proof was on Philips as SEP holder under the principles set forth in Huawei v. ZTE. Since Archos did not do this either, its action was bound to fail. This was not the responsibility of the Archos economic expert, but that of the Archos litigation team.

    For Philips it was sufficient to simply cast doubt on Archos’ arguments to succeed in its defence. This is an extreme strategic advantage in a case dealing with the fairness and reasonableness of a license offer in the absence of publicly available and undisputed data on comparable royalty rates. Therefore, even though both parties presented opinions by economic experts, the Court’s decision is not the outcome of a “battle of experts”, but rather based on the procedural rules relating to the burden of proof.

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