InterDigital v Lenovo: the key takeaways
InterDigital v Lenovo is the second judgment following a UK FRAND trial (after Unwired Planet) to set the terms of a global SEP licence, with a third (Optis v Apple) expected shortly.
While largely consistent with earlier decisions, the InterDigital judgment does appear to represent a shift away from the UK’s predominantly SEP friendly approach, to something a little more nuanced.
Since Unwired Planet, it has been clear that the UK courts will grant an injunction on a valid and infringed SEP unless and until the implementer in question agrees to take a FRAND licence, which will (in most cases) be global.
As to timing, the Court of Appeal confirmed in Optis v Apple, that an implementer found to infringe a valid SEP must undertake to enter into the court-set FRAND licence as soon as there is a finding of validity and infringement (ie, before any FRAND determination is actually carried out) or be viewed as an unwilling licensee and subject to a ‘FRAND injunction’—an injunction that is lifted as soon as the undertaking is given or the licence entered into.
In this context, the fact that InterDigital were entitled to a global portfolio licence once they had established the validity and infringement of one of their SEPs, and that Lenovo would be injuncted if they did not agree to take that licence, is unsurprising.
What is likely to be of more interest to SEP owners, however, is Justice James Mellor’s finding that limitation periods “have no role in the relationship between willing licensee and willing licensor”.
Instead, in his view, “a willing licensee … is willing to and does pay an appropriate rate for all past sales worldwide”, so that the FRAND royalty payment to which InterDigital is entitled, which will also attract interest, covers all of Lenovo’s global sales since 2008.
While this principle, if upheld on appeal, would clearly enhance the attractiveness of the UK as a venue for SEP owners to enforce their portfolios, it must be balanced against those aspects of the judgment that are more implementer friendly.
Chief among these aspects are: (i) the rate set by the court of $0.175 / cellular unit (against the $0.498 sought by InterDigital); and (ii) the confirmation that an implementer, no matter how ‘unwilling’ it may previously have been, can never forfeit irrevocably the benefit of the ETSI FRAND undertaking—unless expressly disclaimed, as it was in TQ Delta v ZyXEL.
Royalty rate decision
A lot of attention has rightly been focused on the rate set by the UK court, which is much lower than that sought by InterDigital. To illustrate this, it is worth considering that while InterDigital was asking for $337 million in royalties from 2018, the court found that the sum due should be $138.7 million from 2008.
In rejecting InterDigital’s arguments as to rate, Mellor was critical of both the comparables InterDigital relied on and the methodologies used in InterDigital’s ‘top-down’ analysis. In terms of the former, InterDigital’s difficulty was that a large proportion of the market (well over 90%) had been licensed at rates far lower than those sought from Lenovo.
While InterDigital’s position was that these licences (referred to as the Lenovo 7) were infected by hold-out and, therefore, not indicative of the FRAND rate for the portfolio, the remaining licences (referred to as the InterDigital 20) were considered largely irrelevant because of the nature of the licensees, the dates of the licences and the technology covered.
While Mellor noted that InterDigital’s licensing practices had developed (in his language, “been distorted”) against a general background of many implementers failing to behave as willing licensees, and that the Lenovo 7 may have been influenced, to a degree, by hold-out, in the end he found that the best comparable was a 2017 licence with LG, which he used as the starting point for his analysis.
Perhaps more troubling for InterDigital (and SEP owners in general) was the finding that the volume discounts that underpinned the Lenovo 7 “plainly discriminate against smaller licensees”.
This arguably marks a departure from Unwired Planet, where it was held that there was no ‘hard edged’ non-discrimination element to FRAND that required Huawei to be offered the low rates that had been negotiated by Samsung.
In Unwired Planet, the Supreme Court held that, as long as a single royalty price list was available to all market participants, FRAND did not require licences to be granted on terms equivalent to the most favourable ones previously agreed.
While the circumstances in InterDigital are clearly different (in terms of the proportion of the market covered by the lower rates), it seems that the principle elucidated in Unwired Planet may only go so far.
That is, while it may be possible to grant lower rates to some of the market / a proportion of licensees without rendering your headlines rates discriminatory, once a threshold— yet to be established—is crossed, the balance may shift such that the more favourable licensee rate becomes the non-discriminatory FRAND rate.
Supra-FRAND strategy backfires
Another apparent departure from Unwired Planet relates to Mellor’s finding that “by consistently seeking supra-FRAND rates, InterDigital did not act as a willing licensee”. While the practical ramifications of this finding were limited (in that InterDigital is still entitled to a global licence and a FRAND injunction, notwithstanding its non-FRAND conduct), had the test set out in Unwired Planet been applied (where only making offers so high that they would effectively amount to a refusal to license would be non-FRAND), it seems possible that the outcome may have been different.
A pervading theme of the judgment is the need for greater transparency in SEP licensing, and Mellor was critical of InterDigital in this regard. Even though certain details of InterDigital’s licences are typically made available through its SEC filings, the judge regarded these figures as affected by ‘creative accounting’ and, therefore, unreliable.
Mellor was firmly of the view that, “the SEP universe would be able to converge on and agree FRAND terms very much more quickly if the basics of each SEP licence were made public … In other words, the market for mobile telephony SEP licences would work very much more smoothly with transparency of what terms had been agreed in the past”.
Consistent with this principle, in the comparables analysis, he was reluctant to take account of any factor that would prevent “the objective measure” of a given SEP licence being readily ascertained.
As such, he found that the subjective views of the relevant parties to any licence should be set aside, and also that the only discounts that should form part of any unpacking analysis are those that relate to the time value of money.
He was hopeful that such an approach would provide the market with more reliable indicators of the rates implied by SEP licences, where those agreements are publicly available.
UK as ‘the’ FRAND litigation venue?
Pending an appeal, which InterDigital has indicated it will seek permission for, the decision provides further guidance on what SEP owners and implementers can expect from the UK courts. In particular, it confirms that licensing offers and practices will be subject to forensic scrutiny, which could act as a deterrent for licensors.
If, however, the comparables position is favourable, the removal of limitation as a factor may tip the balance in favour of a UK determination. In this regard, although FRAND trials in the UK have, to date, been relatively slow and expensive, the approach to comparable licences (and other valuation exercises) adopted by Mellor should assist in streamlining matters.
As to scheduling, the recent decision in Kigen v Thales confirms that a FRAND determination can be scheduled and heard in advance of any patent trials.
Further, as a non-EU country, the UK will remain outside any SEP dispute resolution regime adopted by the EU, in particular the EU Intellectual Property Office (EUIPO)-based scheme that the Commission looks set to propose this month.
Under this regime, SEP owners will be required to register their patents with the EUIPO, which will conduct essentiality checks on at least a proportion of them. Once registered, a SEP will not be enforceable against an implementer until a EUIPO-led FRAND determination process has concluded.
The Commission’s proposals—perceived by most as implementer-friendly—could, if adopted, have wide-reaching consequences for SEP litigation in Europe, effectively side-lining EU national courts and the Unified Patent Court, and leaving the UK as the only alternative European FRAND venue.
Tess Waldron is a partner at Powell Gilbert. She can be contacted at: tess.waldron@powellgilbert.com
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