The UK High Court of Justice issued its long-anticipated decision establishing a global Fair, Reasonable and Non-Discriminatory (FRAND) royalty rate for a patent portfolio essential to 3G, 4G and 5G cellular technologies. InterDigital Tech. Corp. et al. v. Lenovo Group Limited, Case No. HP-2019-000032,  EWHC 529 (Pat) (Mar. 16, 2023) (Mellor, J.)
InterDigital owns a portfolio of standard essential patents (SEPs) that have been declared essential to the European Telecommunications Standard Institute’s (ETSI) 3G, 4G and 5G cellular technology standards. InterDigital sought to license the SEPs to Lenovo, which implements these cellular standards in its mobile phones, tablets and PCs. After the parties could not agree on the terms under which Lenovo should take a license, InterDigital filed a lawsuit. The High Court held several technical trials in which it found that Lenovo infringed certain of the patents.
Based on the result of the technical trials, the High Court determined that InterDigital had established the right to a FRAND determination of its portfolio. The parties presented two issues regarding FRAND. The first issue was whether the InterDigital license offer was FRAND, and if not, what terms would be FRAND for a license to Lenovo of the InterDigital patent portfolio. The second issue was whether InterDigital was entitled to an injunction based on the parties’ negotiation conduct, including whether InterDigital acted as a willing licensor and whether Lenovo acted as a willing licensee.
The High Court concluded that Lenovo should pay InterDigital a FRAND rate of $0.175 per cellular unit for a worldwide license to InterDigital’s portfolio. The $0.175 rate yields a lump sum payment of $138.7 million for sales from 2007 to the end of 2023. The Court’s FRAND rate determination was closer to Lenovo’s offered rate of $0.16/unit than to InterDigital’s demand of $0.498/unit.
In determining the appropriate FRAND rate, the High Court analyzed whether InterDigital’s proposed rate was comparable to the rate in InterDigital’s other license agreements for SEPs. InterDigital argued that its license offer to Lenovo was consistent with “program rates” under which it had already licensed its SEPs to other companies. The Court, however, rejected InterDigital’s program rates as comparable because the other licenses included volume discounts ranging from 60% to 80% of InterDigital’s program rate. InterDigital argued that Lenovo was not entitled to the same type of steep volume discount and, therefore, those licenses with discounts applied were not comparable licenses for Lenovo. The Court disagreed, finding that the volume discounts applied to those licenses “do not have any economic or other justification” and that their primary purpose was to “shore up InterDigital’s chosen program rates.” The Court further observed that the primary effect of the volume discount in the other licenses was to discriminate against smaller licensees, which is exactly what FRAND is supposed to avoid.
InterDigital tried to bolster its argument that its program rate was FRAND by applying a top-down cross-check. The top-down approach starts with the cumulative value of all royalties that should be paid on FRAND terms for SEP patents, then determines a specific SEP owner’s proportion of those SEP patents to determine its royalty rate. InterDigital argued that its program rates were consistent with the top-down approach. The High Court rejected InterDigital’s top-down cross-check because it conflicted with the actual effective rates in the comparable license agreements.
The High Court also found that Lenovo should pay the FRAND rate for all previous unlicensed sales, even if those sales occurred before the statutory damages limitation period. The Court explained that the damages limitations period does not have a role in the relationship between a willing licensor and a willing licensee in a FRAND negotiation. In the Court’s view, a willing licensee will, notionally or otherwise, set aside funds to pay for its license, and if for some reason the parties cannot come to an agreement during the damages period, a willing licensee would not refuse to pay whatever license fees were eventually determined to be applicable with respect to units produced and sold before the available damages period. Thus the Court concluded that a willing licensee would pay with respect to all past units. The Court also noted that requiring full payment disincentivizes an implementer from refusing to negotiate in good faith or delaying licensing negotiations (i.e., hold-out).
The High Court ultimately concluded that InterDigital was not entitled to an injunction. In particular, the Court found that InterDigital did not act as a willing licensor because it consistently sought supra-FRAND rates during licensing discussions. The Court further concluded that Lenovo was a willing licensee “for the most part.” The Court found that Lenovo was slow to move things along during the negotiation process and thus acted as an unwilling licensee in this respect. Relatedly, the Court commented that InterDigital caused delays of equal magnitude. The Court also found that Lenovo was correct not to agree to InterDigital’s offers or positions and was justified in seeking more information from InterDigital (such as information on comparable license agreements), and in that respect, Lenovo conducted itself as a willing licensee. Ultimately, the Court concluded that whether Lenovo accepted the global rate set by the Court would reveal whether Lenovo was a willing licensee. The Court noted in a postscript that shortly after the draft judgment was provided to the parties, Lenovo agreed to the accept the Court’s FRAND determination, indicating that Lenovo is now a willing licensee.
Practice Notes: The High Court’s decision generally favors implementers, but several aspects benefit SEP owners. A summary of key takeaways is provided below:
- FRAND Rate Determination: The FRAND rates appear to favor implementers. Although SEP owners welcomed the Unwired Planet Huawei decision in which the UK Supreme Court declared competence to set global FRAND rates, the Court’s methodology for determining global FRAND rates in InterDigital v. Lenovo is likely to be unattractive to SEP owners. However, the United Kingdom is likely to remain a leading venue for SEP litigation, given that it is the only jurisdiction other than China (and the United States if both parties make the request) that has stated a willingness to set global FRAND rates.
- Volume Discount Approach: The Court’s rejection of the volume discount approach is generally adverse to SEP owners. Many SEP licensors have program rates but provide discounts on these program rates to incentivize implementers to sign license agreements. Licensees should seek information about discounts (volume or otherwise) that are provided to other licensees and assess whether the stated program rate is actually FRAND. The Court’s rejection of the top-down cross-check is another reason that licensees should seek disclosure of other licenses during negotiations.
- Same Rate Applied to All Previous Uses: The Court’s ruling allows SEP owners to expand their damages window by suing for a determination of a FRAND royalty and requesting that the Court find that the implementer was not a willing licensee because it refused to accept the FRAND rate for all accused products (at least in the United Kingdom). The Court’s finding is likely to be at odds with other jurisdictions, however. For example, it seems unlikely that German or US courts would permit an SEP licensor to asks for damages on time-barred claims, and in fact they might allow an implementer to raise a patent misuse defense.
- Willing Licensor/Licensee and Injunctive Relief: Both SEP owners and implementers should conduct themselves in a manner that demonstrates a willingness to license at FRAND rates. SEP owners should offer rates consistent with the effective rates provided to other licensees. Although implementers should agree to take a license on FRAND rates, they should still demand information from the SEP owner (such as that discussed above) to ensure that the offered rate is FRAND.
In other SEP/FRAND news, the European Commission is reportedly set to announce radical new regulations for SEP licensing in the European Union. According to the draft regulations, the European Intellectual Property Office (EUIPO) will establish a database of SEPs and require companies to register any SEPs before taking legal action. Independent evaluators will check whether the patents are essential to the standard. The European Commission also wants SEP owners to agree among themselves on an aggregate royalty for SEPs covered by a standard. The European Commission also intends to implement a mediation-type process whereby parties can have a neutral evaluator provide a recommendation on a FRAND rate for any SEP patents in dispute. The draft regulations are expected to be released on World IP Day, April 26, 2023.