What’s new in FRAND & SEPs?- Interdigital Technology Corporation & Ors. v Lenovo Group Limited & Ors.
In March 2023 we saw another large SEP FRAND dispute before the English High Court reach judgment: InterDigital v Lenovo.This case is useful for several reasons: First the judge was willing to publish a redacted judgment and only share the full judgment with the parties and those in the appropriate level of the confidentiality regime because it contains a considerable amount of information confidential to one of the parties and/or third parties. This should give confidence to litigants that the English courts are willing to be commercially sensitive. Second, the case examines the lessons from Unwired Planet authorities and gives guidance on what should be expected in FRAND negotiations on licences.
The most interesting part of the decision for potential litgiants is the analysis of the negotiations that the parties attempted. The Court found that neither party’s offer was fair, reasonable and non-discriminatory (‘FRAND’) and that the FRAND terms for a licence to the Defendant were $0.175 per cellular unit. InterDigital’s argument that their offer was FRAND based on a top-down approach with a formula to determine their share of Standard-Essential Patents (‘SEPs’) was rejected. The Court did recognise there are difficulties for a SEP licensor having to sue to enforce their SEP in many different jurisdictions and such should be taken into account, but found that Lenovo’s offer was too low to be FRAND. The judge criticised both parties for their entrenched position and said that they should have explored the middle ground before coming to the Court. The judgment spends some time considering the analysis in the case of Unwired Planet, and suggests disputes on SEP FRAND licences should consider using formal ADR procedures rather than requiring adjudication by a judge.
This case concerns the terms of a licence for InterDigital’s portfolio of patents declared essential to the European Telecommunications Standards Institute (‘ETSI’) 3G, 4G and 5G Standards. The proceedings were case-managed into six trials, five technical and one FRAND trial. The purpose of the FRAND trial was to identify fair, reasonable and non-discriminatory terms. Two Technical Trials had taken place at the time of the trial, with InterDigital prevailing in Trial A and Lenovo initially prevailing in Trial B. Three further Technical Trials were scheduled after the FRAND/Non-Technical Trial, with InterDigital prevailing in Trial C.
The parties identified two headline issues for the Court to determine:
- Whether InterDigital’s January 2020/5G Extended Offer is FRAND and if not, what terms are FRAND for a licence to Lenovo; and
- What remedy is appropriate, and in particular, whether InterDigital is entitled to an injunction in respect of the asserted patents. This is referred to as the ‘Conduct Argument.’
On the second headline issue, InterDigital maintained that Lenovo is not entitled to enforce the European Telecommunications Standards Institute (ETSI) undertaking, because they did not fall within the class of beneficiaries of the ETSI undertaking. InterDigital maintained this case on two separate bases:
- The first was termed ‘the fact sensitive case,’ in which InterDigital relied on Lenovo’s alleged general conduct in negotiations. InterDigital alleged that Lenovo adopted at all material times a strategy of deliberate hold-out and that their conduct demonstrates that Lenovo – despite protestations to the contrary – had no intention to work the standard under a licence from InterDigital. On this basis, InterDigital sought an unqualified injunction against Lenovo.
- The second was termed ‘the fact insensitive case,’ in which InterDigital relied upon the two alternative ways in which Meade J. found Optis to be entitled to injunctive relief in Optis F. InterDigital says each of those two ways applied here and do not depend on or require any finding of fact as to Lenovo’s conduct. On this basis, InterDigital sought a FRAND injunction.
Lenovo’s counter-attack on the fact sensitive case was based on the submission that InterDigital had not conducted themselves in negotiations as a willing licensor. More broadly, Lenovo submitted that, when assessing the remedies for InterDigital, the Court should have regard not only to Lenovo’s behaviour but also to InterDigital’s behaviour throughout the negotiation process. Consequently, the stage was set for the judge to look closely at behaviours. It is therefore interesting to observe that early in the judgment, the judge said this:
“InterDigital’s arguments about injunctive relief, it seems to me, are driven not by a desire to keep Lenovo’s standard compliant products off the market (i.e. in the future) but much more by a desire to obtain recompense for the long period during which Lenovo has been selling standard-comp.”
The judge also noted that:
“…over the years InterDigital made a number of offers (actually 14) to Lenovo, and Lenovo made a limited number (2) of counter-offers, a total of four offers were pleaded to be FRAND – two from each side –but the trial concentrated on … [only] two.”
The Parties’ Submissions
InterDigital claimed that Lenovo should take a licence to InterDigital’s portfolio of patents declared essential to the ETSI 3G, 4G and 5G Standards. InterDigital established their right to a FRAND determination and their position was further strengthened by the judge’s finding that InterDigital’s undertaking to ETSI is ‘irrevocable’ under French law.
Both parties agreed that the comparables case should be based on the rates InterDigital offered and agreed with other substantial entities during the same period. However, on the comparables case, there was no overlap in the parties’ final chosen comparables, so the Court had a large number of example licences to consider.
In relation to the 5G Extended Offer, the Claimant argued that, based on the International Data Centre’s data of Lenovo’s 2G, 3G, 4G and 5G sales, their January 2020/5G Extended Offer was FRAND. InterDigital also proposed a top-down case as a cross check for their primary comparables approach. As is well known, top-down approaches have been applied in various cases including UPHC, TCL v Ericsson, In Re Innovatio IP Ventures and Huawei v Conversant. The experts in this case accepted that in principle, top-down analyses can be informative, and in this case they used this top-down approach formula:
‘ARBTOTAL = ARBInterDigital / ShareInterDigital
Where: (i) ARB is Aggregate Royalty Burden,
(ii) ARBTOTAL is the implied royalty for the total stack of 4G SEPs, by way of example,
(iii) ARBInterDigital is the aggregate royalty for InterDigital’s 4G SEPs, and
(iv) ShareInterDigital is InterDigital’s share of 4G SEPs.’
InterDigital argued that this formula could be used to take a posited InterDigital royalty rate and multiply it up in proportion to InterDigital’s share of the SEPs for each generation of technology. This generates an implied royalty for the total stack (referred to as the ‘aggregate royalty burden’ or ARBTOTAL), which can be checked against third parties or against their so-called ‘hedonic regression’ analysis, which was defined as:
‘[A]n econometric analysis which seeks to isolate the fair market value of each of the technology generations over the previous, all other things being equal (‘ceteris paribus’). Thus, holding the screen size, processing power, brand and an array of other features of a device steady, it seeks to answer the question ‘how much more is a phone worth by reason of the presence of the new technology generation’. In outline, hedonic analysis does so by identifying the variables assessed as being relevant to the price of a mobile device, including the fair value of the technology generation, and through a regression analysis of a substantial enough data set assigning to each a fair market value.’
InterDigital sought to use patent counting studies to establish InterDigital’s share of 3G, 4G and 5G SEPs. According to InterDigital there were then three elements for adjusting the comparable licence to make it FRAND for Lenovo:
- Sales distribution by cellular standard.
- Sales distribution by geography relative to emerging markets.
- Sales distribution by geography relative to patent coverage.
Patent coverage concerns the number of SEPs in each jurisdiction where the prospective licensee is active. Where there is a low number of SEPs in a jurisdiction (as there were in some of the jurisdictions in Unwired Planet),there is a risk that some countries might go patent-free (i.e. if a patent was revoked, there would no longer be patent protection in that country for the licensor). It was submitted that in such a case, it would be reasonable to have a higher-cost FRAND licence in those jurisdictions to combat such risk.
Lenovo argued that the perceived difficulties of a SEP licensor having to litigate in many different jurisdictions and the impact of this on the FRAND rate should be taken into account. This would mean that the SEP licensor would be likely to give a volume discount to those companies who would have the capacity to hold out against agreeing the SEP license by litigating in numerous jurisdictions. In these circumstances, Samsung was given a volume discount of around 80% and Apple around 60%. InterDigital’s case was that Lenovo was entitled to a volume discount of around 30%. Lenovo said it should be much higher. Lenovo agreed with the three methods for potentially adjusting the comparable licence, but disagreed with the application of those methods.
Under the Conduct Argument, each party argued that the other party was not a willing licensee/licensor, respectively.
The Court found that InterDigital’s January 2020/5G Extended Offer ($337 million) was not FRAND, but that neither was Lenovo’s Lump Sum Offer ($80m +/-15%). The FRAND terms for a licence to Lenovo were the rate of $0.175 per cellular unit for the period, which came to a total of $138.7 million. The judge largely dismissed InterDigital’s claim on Conduct, opining that Lenovo would take a licence at FRAND rates, but saying that this will be proved only when Lenovo decided whether or not to take the licence at the rate that he set. What this decision shows is that conduct of the parties is key, and the judge was willing to look at conduct and draw conclusions that affected his assessment of what was FRAND.
Lessons from the Judgment
The judgment mostly found in favour of Lenovo ,and determined that the FRAND terms for a licence to Lenovo to the end of 2023 were between the offers that the two parties had given. Commercially, this favoured Lenovo. The judge rejected InterDigital’s top-down approach which Lenovo submitted had not been used by any licensor or licensee as a method of deciding what price should be paid for rights in issue in the past.
Ultimately the Court based its decision on the rate InterDigital had offered and agreed with other substantial entities during the same period, especially the LG 2017 licence, which was considered the best comparable. LG 2017 then had to be adjusted as follows:
- The sales mix (i.e. between 2G, 3G and 4G) was very similar (very little adjustment needed with an adjustment ratio of 0.947, where 1 is no adjustment needed); and
- The split between Developed and Emerging markets was very roughly the mirror image between Lenovo and LG 2017, leading to an adjustment ratio of 0.728.
The judge considered that the split between Developed and Emerging Markets was the most important adjustment, and he applied the 0.728 adjustment ratio to change the LG 2017 rate of $0.24 down to $0.175, the judge declined to make any separate adjustment to reflect patent coverage, and opted for a single adjustment. The judge considered that InterDigital had sufficient patent coverage in all the relevant jurisdictions to make the chance of any jurisdiction becoming patent free ‘extremely remote.’ In this way, he distinguished the facts between this case those of Unwired Planet.
There were also a number of other factors that the Court made observation on:
- Volume discounts do not have any economic or other justification. Instead, their primary purpose is to attempt to shore up InterDigital’s chosen rates. Their primary effect is discrimination against smaller licensees;
- The likelihood (though it was not completely clear due to all the moving parts) that InterDigital had gradually decreased its overall rates over time;
- The change in the mix of generations over the 2014-2021 period; and
- The fact that Lenovo’s handset business had a different emphasis to the other top handset suppliers, catering for those who did not need or want to pay for the latest generation of technology, particularly in Emerging Markets.
While the judge distinguished this case on the facts from the analysis by Birss J. (as he then was) in Unwired Planet he considered the case law in depth to guide him and declared the Unwired Planet decision ‘masterful.’ This judge was not looking to provide a different analysis to Unwired Planet, but rather to build an understanding of how to use the previous judgment to reach the right outcome. The judgments together run to over 1700 paragraphs of technical analysis, which will be very helpful for potential FRAND litigants going forward, especially with regard to what factors the Court is willing to take into account when considering FRAND rates and which will be discounted.
With regard to future cases, the judge also provided guidance on the efficient running of such, so that the Court can most effectively come to its decision.This guidance included the following:
- Where possible the data sources that the parties rely on should be the same. If the parties cannot agree on such early on, then the Court should rule on such;
- Equally, the parties should agree to an early disclosure of potentially comparable licences under a Court-monitored confidentiality regime, and attempt to negotiate at that point.
- Where a party is using a form of analysis that is unusual or experimental (such as the hedonic price regression) it should be clearly managed as such, rather than allowing it to be argued over in depth before establishing what value they have;
- There should be better use of the Pre-Trial Review (‘PTR’), to allow the trial judge to be told which issues are still outstanding to be decided at trial. Lists of Issues should be granular rather than high level;
- Ensure that trial estimates are sufficient (including plenty of time for judicial pre-reading). In this case they were clearly too tight. Where there are different Counsel teams conducting different parts of the case, consideration must be made that the judge will not have the chance to decompress like Counsel would.
- It is important to focus on the issues that really matter rather than wasting time of peripherals.
- More generally, expert witnesses should not raise new points in cross-examination. Where a rebuttal of another expert is needed, that should be in the form of an additional expert report.
With this decision the English Courts have once again shown a willingness to grapple with the challenges of the SEP FAND licensing world, and we doubt this will be the last such trial in England.
 InterDigital Technology Corporation & Ors v Lenovo Group Ltd (FRAND Judgment – Public Version)  EWHC 539 (Pat) (16 March 2023).
 Ibid. at 488.
 ‘Trial F’ in Optis v Apple  EWHC 2564 (Pat) at 285 and at 288/341.
 Above n. 1 at 12.
 Above n. 1 at 19.
 Above n. 1 at 45.
 Above n. 1 at 46.
 Above n. 1 at 823.
 Above n. 1 at 735.
 Unwired Planet International Ltd v Huawei Technologies Co. Ltd & Anor  EWHC 711 (Pat) (05 April 2017).
 Above n. 1 at 458.
 Above n. 1 at 947.
 Above n. 1 at 876.
 Above n. 1 at 805.
 Above n. 1 at 807.
 Above n. 1 at 791.
 Above n. 1 at 758.
 Above n. 1 at 495.
 Above n. 1 at 789(v).
 Above n. 1 at 800.
 Above n. 1 at 802.
 Above n. 1 at 165(i).
 See above n. 1 at 174.
 Above n. 1 at 948-956.