Lenovo v InterDigital – The Second UK FRAND Decision

Introduction

On 16 March 2023, the High Court handed down its decision in InterDigital Technology Corp. v Lenovo Group Limited [2023] EWHC 539 (Pat) (link), a dispute centred on the terms to which Lenovo should licence InterDigital’s portfolio of standard essential patents or ‘SEPs’ relating to 3G, 4G, and 5G technology.

Based on a comparable licence approach, the court set a royalty rate of $0.175 per cellular unit, totalling $138.7 million for royalties dating back to 2007 (i.e., beyond the standard limitations period for patent damages), and subsequently added to this amount $46.2 million in interest payments.  This amount represents 35% of the royalty rate sought by InterDigital. In a subsequent judgment regarding costs, Lenovo were held to be the ‘overall winner’, though neither party’s previous offers were held to be FRAND.

Mr Justice Mellor’s decision is the first determination as to a ‘Fair Reasonable and Non Discriminatory’ or ‘FRAND’ royalty rate since that of Birss J in Unwired Planet v Huawei, ultimately approved by the Supreme Court in decision [2020] UKSC 37.

Key Differences from Unwired Planet

Unlike in Unwired Planet, Mellor J had the benefit of a preceding judgment setting a FRAND rate for a global SEP licence under UK procedure. Mellor J’s approach was influenced by previous judgments in both Unwired Planet and also Judge Selna’s judgment in the US case of TCL v Ericsson.

Birss J in Unwired Planet had based the royalty determination on two core parts: an unpacking and scaling of a 2014 licence between Ericsson and Samsung and a top-down ‘cross-check’. However, unlike in Unwired Planet, in InterDigital there were many licences to the portfolio in issue. This was a consequence of the established licensing program run by InterDigital, which licensing program was subject to a great deal of scrutiny at trial in the context of determining the appropriate rate.

Ultimately, Mellor J also relied on a single comparable licence (LG 2017), from which he scaled the royalty to a royalty for the InterDigital-Lenovo licence. However, unlike in Unwired Planet, Mellor J rejected the application of any top-down approach in this case, including as a cross-check on the unpacked and scaled royalty from LG 2017.

In what may become a major development for the global FRAND landscape, the High Court awarded damages in respect of past sales – beyond the standard of limitation periods. The court held that this was FRAND, and in order to do so would remove incentives for implementers to hold out. In a follow-on decision (the ‘form of order’ judgment, [2023] EWHC 1578 – link), Mellor J further held that interest should be paid on the royalties in respect of past sales, amounting in this case to an additional $46.2 million, at a rate of 4% compounded quarterly.

Basis for the Decision

While the English courts follow ‘precedential’ aspects of previous decisions, these only include decided legal points. The use of valuation methodology is not a matter of law in the English courts, but a matter of evidence, and the court is therefore required to consider the written evidence, which the parties have put forward, as well as the cross-examination of the witnesses who gave that evidence.

InterDigital sought to support their case based on 20 comparable agreements. However, the Judge was surprised by the lack of evidential support for the selection of the ‘InterDigital 20’ aside from the analysis conducted on them by InterDigital’s expert witness. This was one of the factors that led the Judge to “reject all of the InterDigital 20 as relevant comparables”, and prefer Lenovo’s proposed comparable agreements, which focussed on bigger and more relevant industry players.

On the Lenovo comparable agreements, InterDigital’s unpacking analysis relied on applying a number of discounts, which Lenovo’s expert suggested were ‘assumed’ rather than being based on evidence of how the agreement was negotiated at the time. These assumed discounts were an important part of InterDigital’s unpacking, and the Judge criticised them as being rationalisations arrived at purely for the purpose of litigation, and noted that InterDigital’s expert had not undertaken any analysis to determine whether the discounts applied in his licence unpacking were economically justifiable.

InterDigital were also criticised in respect of the data used in unpacking certain of the licence agreements, which were internal estimates that appeared to be “self-serving”. Likewise, the Judge concluded that InterDigital’s internal attribution of compensation between past sales and licensed sales had been made in order to enable InterDigital to quote higher future rates for its portfolio. Ultimately, the Judge concluded that InterDigital’s program rates were not a sound basis for a FRAND royalty.

The Judge therefore determined the FRAND royalty based on the agreement between LG and InterDigital executed in 2017, in part because the number of units under the licence was comparable to the number of units under the licence to be settled by the court. There was also relatively good correspondence regarding the mix of sales between cellular generations and the geography of the sales. In adjusting the payment under LG 2017 for the licence in issue, the Judge considered three possible adjustments proposed by Lenovo’s expert:

1. Sales distribution by cellular standard.
2. Sales distribution by geography relative to emerging markets.
3. Sales distribution by geography relative to patent coverage.

In respect of (1), the Judge found the sales mixes of Lenovo and LG to be very close, and in the end only applied the adjustment in respect of (2) as proposed by Lenovo’s expert (calling into question whether the approach of Birss J in Unwired Planet, where a 50% discount was applied to sales in China, was appropriate for the present case based on recent data regarding increasing average selling prices in China). In respect of (3), although a separate adjustment was not applied, the Judge commented that TCL v Ericsson and Unwired Planet provided “strong support” for the notion that a FRAND approach ought to take account of differences in national portfolio strength, subject to the reality that many parties agree global rates incorporating these and other factors.

The Judge, having rejected InterDigital’s case on comparable licenses, also rejected InterDigital’s case on the use of a top-down approach to valuation. InterDigital’s evidence involved a number of inputs, including patent counting studies and the views of industry players and courts as to the aggregate royalty rate for different standards. A particular point of criticism arose from InterDigital’s application of a hedonic regression approach to determining the value of successive standards generations, which the court determined to be more in the nature of an experiment than expert evidence. As a result, the court determined that it was not possible to rely upon the top-down analysis put forward by InterDigital.

The Judge further held that InterDigital did not act as a willing licensor because it was “consistently seeking supra-FRAND rates” and largely rejected InterDigital’s case on conduct, holding that Lenovo would “be put to their election” (i.e. choosing between taking the court’s licence or leaving the UK market) when presented with the licence determined by the court. Subject to the decision of the Supreme Court in Apple v Optis, it seems likely that future UK FRAND cases will progress more directly from disclosure of comparable licenses to rate setting, which is likely to lead to a reduction in costs, and overall time for dispute resolution.

Case Management of FRAND Trials

Mr Justice Mellor also articulated, by way of postscript, a number of case management points to consider for FRAND disputes going forward.

Perhaps most importantly, Mellor J appeared to lament the general lack of transparency regarding comparable licences in the industry.  This issue has not been addressed by the European Telecommunications Standards Institute Intellectual Property Rights Policy and continues to inhibit parties from reaching solutions without resorting to litigation.  One possible solution suggested by Mellor J is for parties to start a UK action and establish a court-monitored confidentiality regime in order to obtain early disclosure.  The parties may then agree to stay the action pending negotiations on the basis of said disclosure.

More generally, the decision notes that FRAND cases require closer case management than was applied in the present case.  By way of example, Mr Justice Mellor found that the trial estimate (15 days) was “plainly inadequate for this trial, in view of the volume of material and the complexity of the issues” and that additional care should have been given in particular to pre-reading time for the Court.  This was particularly the case where respective counsel teams ‘tag-teamed’ distinct parts of the case and were therefore allowed to “decompress and assess their part of the case, whilst the other team is in Court”—unlike the judge.  Mellor J further encouraged parties to focus more on the key issues in the case and utilise the Pre-Trial Review to identify these issues, rather than using it as an opportunity to resolve outstanding procedural points.

What’s Next?

InterDigital have announced their intention to appeal the decision and Mellor J has granted permission on specific points of principle set out in decision [2023] EWHC 1578 (Pat) at paragraph 163, which includes the treatment of past sales and the role of national limitation periods. The appeal will proceed on these points without further evidence, and it is not a general re-hearing. It is highly unlikely the case could be remitted.

In other UK cases, the long-awaited judgment in the Apple v Optis rate setting trial may be appealed, and likewise the Court of Appeal’s judgment in the Apple v Optis ‘willingness’ trial is also due to be reviewed by the Supreme Court.

The Nokia v Oppo FRAND rate setting trial is due to be heard in October 2023, after the High Court ordered Oppo to commit to taking a licence determined by the English court or otherwise leave the UK market.