Philips v TCT

12 May 2022 - Case No. 2 U 13/21

http://caselaw.4ipcouncil.com/german-court-decisions/olg-dusseldorf/philips-v-tct

A. Facts

The Claimant, Philips, owns patents declared as essential to the Advanced Audio Coding (AAC) standard. The AAC standard is part of the certification requirements for Google Mobile Services (GMS). GMS certification is needed for the use of Google applications available for smartphones and tablets.

Philips made a commitment towards the relevant standard development organisations (SDOs) [1] to make standard essential patents (SEPs) accessible to users on fair, reasonable and non-discriminatory (FRAND) terms and conditions. Philips joined a patent pool covering AAC-related SEPs administered by Via Licensing Corporation (Via Licensing, respectively Via Licensing pool).

The Defendants are a German and a French subsidiary of the TCT group (TCT) with headquarters in China. TCT manufactures and sells products implementing the AAC standard globally, including in Germany. In 2005, TCT signed an AAC licence with the Via Licensing pool, which was terminated in March 2007.

In December 2016, Philips informed TCT about the infringement of its patents and indicated that, generally, there was the possibility to sign a bilateral license agreement. TCT did not respond. In April 2017, TCT received an offer for a pool licence from Via Licensing but did not react either.

In 2019, Philips filed a lawsuit against TCT before the District Court of Düsseldorf (District Court), asserting – among other claims – also a claim for injunctive relief. In March 2020, TCT declared that it was prepared to take a licence from Philips on FRAND terms. In two subsequent letters sent in May and July 2020, TCT asked Philips to provide an offer for a (bilateral) licence.

In July 2020, Philips replied to TCT, expressing doubts about TCT's willingness to sign a licence and referred the latter to the Via Licensing pool. Philips added that is saw no reason for providing TCT with a bilateral license offer. In August 2020, TCT indicated that it would contact Via Licensing about a pool licence but reiterated that a bilateral offer from Philips was desirable. In October 2020, Philips responded that it considered a pool licence to be a sufficient offer under FRAND principles. In November 2020, TCT insisted again on a bilateral licence offer from Philips. The same request was voiced once again on 15 March 2021 and turned down by Philips on 18 March 2021.

On 1 April 2021, TCT made a (counter-)offer to Philips. Philips rejected this offer on 9 April 2021, during the oral hearing of the case before the District Court.

On 11 May 2021, the District Court granted an injunction against TCT. [2] TCT appealed. With the present judgment, the Higher District Court of Dusseldorf (Court) upheld the injunction. [3] (cited by www.nrwe.de).
 

B. Court's reasoning

The Court confirmed that the patent in suit is infringed. [4]

Furthermore, the Court dismissed the so-called 'FRAND-defence' raised by TCT [5] . TCT had argued that by filing a lawsuit, Philips had abused its dominant market position in violation of Article 102 of the Treaty on the Functioning of the European Union (TFEU) and should, therefore, be denied an injunction.
 

No abuse of market dominance

In the view of the Court, Philips holds a dominant market position within the meaning of Article 102 TFEU with respect to the patent in suit. [6] Market dominance does not per se result from the exclusionary rights arising from a patent; for this, several factors must be met. [7] Decisive for the respective assessment is the determination of the relevant market. For SEPs, an individual licensing market usually exists, provided that – from a technical viewpoint – the patent must be used for complying with a standard developed by an SDO (or a de facto standard), in a way that it is, regularly, not possible to work around the patent without losing functionalities important for a downstream product market [8] . Moreover, it should not be possible to substitute the teachings of the patent and the corresponding standard specification by a different technical design of the product. [8] Against this backdrop, the Court accepted that Philips has a dominant market position. [9] The AAC standard, to which that patent in suit is essential, is a compatibility requirement for Google services within the Android ecosystem. According to the perception of the members of the Court, mobile phones and tablets not supporting Google services are not saleable. [10] A study indicating that 70% of users would not buy mobile phones not compatible with Google services, would – according to the Court – reinforce this finding. [10] What is more, the Court noted that given the market share of the two dominant platforms Android and iOS (more than 99%), phone and tablet manufacturers cannot be expected to develop own operating systems, in order to circumvent the AAC standard. [11] Having said that, the Court stressed, however, that Philips had not abused its market dominant position. [12]

An abuse of market dominance occurs, when a patent owner, who has made a FRAND commitment towards the relevant SDO, (a) refuses to license a willing implementer and files a lawsuit requesting an injunction (and/or the recall and/or destruction of infringing products) against the latter, or (b) does not make sufficient efforts to allow a willing implementer to sign a license agreement on reasonable terms. [13] In the eyes of the Court, the above was not the case here, since TCT had not been willing to obtain a FRAND licence. [14]
 

Notification of infringement

The Court agreed with the District Court that Philips met its duty to provide TCT with an adequate notification of infringement. [15] Since this point was not subject to the appeal, the Court referred to the respective analysis of the first instance ruling. [15]
 

Willingness

Turning to TCT's conduct, the Court concluded that it lacked willingness to sign a FRAND licence. [14]

Regarding the notion of 'willingness' the Court explained that there should be a differentiation between 'general' and 'specific' willingness. [16] 'General' willingness refers to the fundamental willingness of the infringer to take a FRAND licence, as (mainly) expressed through a 'license request' made towards the patent owner. [16] On the other hand, 'specific' willingness refers to the infringer's willingness to accept a concrete license offer of the patent owner, which has been confirmed by the court as FRAND. [16] Lack of 'general' willingness leads to an injunction; in this case, it is not relevant (and should, thus, not be examined by the court), whether a license offer of the patent owner is FRAND or not. [16] Lack of 'specific' willingness can, on the contrary, have negative consequences on the infringer, only when the court has examined the patent owner's offer and established that it is FRAND. [16] If not, the missing 'specific' willingness has no impact. [16]

According to the Court, TCT failed to demonstrate 'general' willingness. [17] The Court highlighted that TCT had not made an adequate 'license request'. [14] A respective request can take the form of a 'blanket' and 'formless' declaration, or can even be made 'implicitly'. [18] The implementer must, however, clearly indicate towards the patent owner the 'general' intention to obtain a licence; according to the Court, mere 'lip service', which is evidently not rooted in the sincere will to sign a licence but rather serves delaying purposes, is not sufficient. [18] On the question of whether a 'license request' made with delay should be taken into account, the Court explained that this can be the case, provided that the request is accompanied by facts clearly showing an 'inner shift' on the side of the infringer away from the previous stalling behaviour. [18] Making a (counter)offer can be an indication of such 'shift', unless the offer is – in terms of content – 'un-FRAND' to a degree which makes clear that the infringer has not abandoned the delaying tactics previously applied. [18]

In the specific case, the Court first criticised the fact that for almost ten years (between the termination of pool licence in 2007 and Philips' notification letter of December 2016) TCT had not indicated towards Philips or Via Licensing that it is willing to sign a new license agreement or that (absent a licence) it does no longer use the AAC standard. [19] Furthermore, the Court considered the fact that TCT had not responded to either Philips' letter of notification or the offer received from Via Licensing in April 2017 as a sign of unwillingness. [20]

This lack of willingness could not be compensated by the letters, which TCT sent to Philips in March, May, and July 2020 (that is more than three years after receipt of the infringement notification in December 2016 and only after the lawsuit was filed). [21] The Court held that said letters do not express a 'shift' in TCT's behaviour, but serve the continuation of the delaying tactics applied up to that point in time. [22] After more than three years, a 'willing' licensee would have – unlike TCT – provided specific reasons why a bilateral licence is preferrable over a pool licence. [23] This holds particularly true when, as it was the case here, the infringer (respectively its parent company) had previously singed a pool licence without questioning this licensing model. [23]

What is more, the Court saw in TCT's insistence on receiving a bilateral license offer from Philips a further attempt to 'block' the enforcement of Philips' rights (and not a seriously meant declaration of willingness to sign a licence). [24] The Court reasoned that TCT could not justify this insistence solely by the – undisputed – fact that Philips is prepared to sign bilateral agreements with third parties. [25] The Court took the view that a patent owner is, in principle, under no obligation to offer a bilateral licence to the implementer besides a pool licence. [26]

The Court further rejected the argument that Philips' refusal to offer a bilateral licence to TCT was discriminating. [27] The Court stressed that the SEP owner can select a model offering both options in parallel, if access to either type of licence is granted based on objective criteria. [28] Philips offers bilateral licences only in exceptional circumstances, that is when the implementer has already signed bilateral agreements with other relevant SEP owners, the bilateral licence covers also other standards apart from the AAC standard, or when a pool licence proves to be unreasonable for other reasons. [29] The Court found that this practice per se raises no concerns. [30]

Moreover, the Court pointed out that Philips' willingness to grant bilateral licences in exceptional cases does not establish a general claim of TCT to be granted such a licence as well. [31] TCT should have demonstrated reasons why – according to Philips' licensing model – a pool licence is unreasonable in the present case, which TCT, however, failed to do. [31] The Court considered TCT's claim that a bilateral agreement would 'fully satisfy' the interests of both parties to be nothing more than an 'empty phrase', given that TCT had not mentioned any reason why this would be the case. [32] Furthermore, the Court was not convinced that TCT followed a 'general business practice' of signing bilateral SEP licences. [33] The Court noted that TCT did not produce a single bilateral license agreement covering the AAC standard signed with another patent owner. [33] Agreements regarding the AAC standard, which refer to different product segments (i.e., television sets) were – according to the Court – not relevant in this respect; it further made no difference that TCT and Phillips were engaged in bilateral negotiations regarding patent portfolios reading on other (wireless) standards. [33]

Apart from the above, the Court reasoned that TCT's counteroffer was no proper basis for negotiations, but a clear demonstration of its continuing intention to delay the trial and license discussions. [34] On the one hand, the Court could not identify a reason why TCT presented the offer only at a very late stage of the infringement proceedings, which did not allow either Phillips or the District Court to deal with the offer in depth, as required. [35] On the other hand, the Court took the view that TCT's offer was also insufficient in terms of content. [36] The offer provided for a lump sum payment, which was calculated based on sales figures for the year 2020 made available by a third-party business service provider. The Court doubted that using third party data instead of the actual sales figures was common practice in the market, since TCT had not offered concrete pleadings in this regard. [37] In addition, the Court criticised the fact that neither tablets nor so-called 'feature' phones (that is older models) were considered for the calculation of the lump sum payment, although they implemented the AAC standard. [38] Finally, the Court was not content with the exclusion of past sales for the period 2016 until 2020 from the royalty calculation either. [39] The Court expressed the view that after years of infringement and refusal to sign an agreement, TCT could obviously not expect to be granted a 'free licence' for past sales by Philips. [39]
 

SEP owner's offer

Having established that absent an adequate 'license request' TCT lacked 'general willingness' to obtain a FRAND licence, the Court found that Philips was under no obligation to present an offer to TCT. [40] In line with the above, the Court saw no need to deal with the FRAND-conformity of Via Licensing's pool license offer from April 2017. [40]
 

• [1] International Organisation for Standardisation (ISO) and International Electrotechnical Commission (IEC).
• [2] Philips v TCT, District Court of Dusseldorf, judgment dated 11 May 2021, Case No. 4b O 83/19.
• [3] Philips v TCT, Higher District Court of Dusseldorf, judgment dated 12 May 2022, Case No. 2 U 13/21
• [4] Ibid, paras.168-250. The Court relied on the amended wording of the patent claims confirmed, in the meantime, by the German Federal Patent Court (Bundespatentgericht), paras.5, 164et seqq., and 249.
• [5] Ibid, paras.252 et seqq.
• [6] Ibid, paras.254 et seqq.
• [7] Ibid, para.257.
• [8] Ibid, para. 258.
• [9] Ibid, para.261.
• [10] Ibid, para.263.
• [11] Ibid, para.265.
• [12] Ibid, paras.269 et seqq.
• [13] Ibid, para.273. The Court pointed out that an offer of the patent owner made prior or at the beginning of negotiations cannot, in principle, by itself amount to an abuse of market dominance, even if the underlying terms would be unfair or discriminating, in case that they were agreed by the parties, para.274.
• [14] Ibid, para.278.
• [15] Ibid, para.276.
• [16] Ibid, para.338.
• [17] Ibid, para.339.
• [18] Ibid, para.280.
• [19] Ibid, para.282.
• [20] Ibid, para.284.
• [21] Ibid, para.286.
• [22] Ibid, paras.286 and 288 et seqq.
• [23] Ibid, para.288.
• [24] Ibid, paras.290 and 339.
• [25] Ibid, paras.292 etseqq.
• [26] Ibid, para.294.
• [27] Ibid, paras.296 et seqq.
• [28] Ibid, para.296.
• [29] Ibid, para.299.
• [30] Ibid, paras.298-300.
• [31] Ibid, para.302.
• [32] Ibid, para.310.
• [33] Ibid, para.312.
• [34] Ibid, paras.318 and 333.
• [35] Ibid, para.320.
• [36] Ibid, para.322.
• [37] Ibid, para.326.
• [38] Ibid, para.327.
• [39] Ibid, para.329.
• [40] Ibid, para.335.