Clifford Chance

The long-awaited judgment relates to a dispute between Lenovo (who, amongst other consumer electronic devices, manufacturers mobile telephones) and InterDigital (a technology research and development company) over the terms of a licence to InterDigital's portfolio of standard essential patents (SEP) for 3G, 4G and 5G technologies.  This is the second time the English High Court has determined a global FRAND rate for SEPs, following the Supreme Court's landmark ruling in Unwired Planet in 2020.

The trial itself took place at the beginning of 2022, with further evidence in December 2022 and final submissions in January 2023.  In addition to this trial, there have been four technical trials between the parties; three of which have found that InterDigital’s patents are valid and essential, and judgment is outstanding on the fourth. A fifth technical trial, if pursued, is still to be heard.   

Summary

As a consequence of the three technical trials, InterDigital had established its right to a FRAND determination for certain patents making up its SEP portfolio. In the case the judge, Mr Justice Mellor, was asked to consider two key questions:

1. What royalty rate would be fair, reasonable and non-discriminatory ("FRAND") for a licence to Lenovo to use the applicable patents owned by InterDigital and which had been declared essential to the operation of the 3G, 4G and 5G standards set out by the European Telecommunications Standards Institute? 

Mellor J. determined that a global per-unit rate of $0.175 per cellular unit would be appropriate. This translated to Lenovo having to make a lump sum payment of $138.7 million for past sales, including when sales figures backdated to 2007 were accounted for.

The Judge also concluded that limitation periods (i.e. the application of relevant statutory time bars that would otherwise curb the recovery of old historical infringing acts) did not apply to his assessment back to 2007. That is because Lenovo was considered as a willing licensee and would therefore make some proportionate payment for all applicable uses of the technology.  

2. Was InterDigital entitled to an injunction in respect of the infringed patents?

For an injunction to be appropriate Lenovo would need to have acted as an unwilling licensee and InterDigital as a willing licensor.  Whilst Interdigital argued that Lenovo's conduct constituted that of an unwilling licensee, Mellor J. held that provided Lenovo accepted the royalty rate he had determined, Lenovo would be considered as a willing licensee and therefore no injunction would be granted.

SSOs and SEPS: some background concepts

SEPs are patents which claim an invention that is used when implementing certain technical standards that are integral to the interoperability, compatibility and safety of industry products, processes or systems.  The technical standards are designated by standard setting organisations (SSOs), and patentees who hold relevant patents are incentivised to notify those patents for designation as being "standard essential".  The relevant SSO in this case is the European Telecommunications Standards Institute (ETSI), which has been instrumental in developing the standards for enabling global cell phone technologies such as 3G, 4G and 5G.  Under ETSI's intellectual property rights policy, the owners of SEPs are required to give an irrevocable undertaking in writing that they are prepared to grant licences of their SEPs on fair, reasonable and non-discriminatory (FRAND) terms.  This aims to reduce the monopoly SEP owners hold over the industry, whilst still allowing them to be fairly compensated for their inventions.

Key takeaways from the judgment

It is the first case to follow the Supreme Court's Unwired Planet ruling that English courts can set global FRAND royalty rates for standardised industries and illustrates how the rates should be determined.

• How did the Court determine the rate? The parties presented what they each considered to be the relevant comparable licence agreements (i.e. particular licences that Interdigital had previously granted to other licensees). Of the selection proposed, the Judge selected a licence agreement between InterDigital and LG from 2017 as “the best comparable and the best place to start” due to LG's and Lenovo's similar market share and coverage of 3G, 4G and 5G sales in both developed and emerging markets.  The Judge used the comparable licence to conclude that a willing licensor and willing licensee would agree to a global per-unit rate of $0.175 per cellular unit. This translated to a lump sum of $138.7 million when sales figures backdated to 2007 were accounted for.  This figure was much closer in range to Lenovo's offer of $80 million, compared to the $337 million figure sought by InterDigital. 
• InterDigital had also proposed using a "top-down cross-check" (i.e. working out what the total royalty rate for all SEPs should be on a mobile phone and then dividing this up between patent owners to work out their share of the royalty rate). This approach was rejected by the Judge.
• Notably, Mellor J held that the rate should not be determined by the price of the relevant devices incorporating the SEPs, because such price may be influenced by unrelated factors including the device's additional features or the status of its brand.  The Judge also stated that InterDigital's practice of agreeing to "volume discounts" (i.e. large rate discounts, in some cases up to 80%, for licensees with larger sales volumes) was "plainly" discriminatory to smaller licensees, and "exactly what FRAND is supposed to avoid".  He did not decide, however, whether any volume discounts (even if relatively small) would be FRAND.

A licensee should pay in full for the past infringement of SEPs, regardless of any limitation periods.

• The Judge concluded that a willing licensee would not seek to avoid making payments of FRAND royalties by taking advantage of limitation periods. Mellor J. explained that the FRAND rate being determined was not a damages payment for patent infringement, and that it was therefore not subject to statutory limitation periods.  The claim was instead a hybrid claim: an action in tort for patent infringement but with the primary aim of entering into a contractual arrangement on FRAND terms.  Furthermore, from a practical perspective, adjusting for limitation periods under the laws of different jurisdictions (e.g. 3 years in China vs 6 years in the UK and US), would have likely presented a serious barrier to the English court's ability to determine global FRAND rates. 
• This principle could be a powerful way of guarding against patent holdout (where implementers delay agreeing to a licence for as long as possible in order to pressure SEP holders to accept terms below a fair or reasonable return before expiry of the limitation period) in the future.

Provides guidance on parties' conduct when negotiating FRAND licences and what is considered to be willing/unwilling behaviour.

• To be considered willing and offering FRAND terms, a licensor must "provide the information necessary for a willing licensee to evaluate an offer", including the number of units covered, the royalty rates or total sum paid and the standards involved in previous licences. InterDigital’s transparency initiative involving publishing rates from January 2020 on its website did "not go nearly far enough" to meet this requirement.
• Willingness is more about the terms of the offers and if they are FRAND, as opposed to what processes have been followed and behaviours exhibited. Mellor J. found that InterDigital did not act as a willing licensor because it had consistently sought "supra-FRAND rates".
• The test for a willing licensee would be whether it accepted the Court’s determination of the FRAND rate.  The Judge indicated that Lenovo would be subject to an injunction in respect of the infringed SEPs had it not accepted (albeit late in the proceedings) the licence terms set in the judgment.

Comment

Overall, the ruling is likely to be disappointing to SEP owners because of the Court's decision to determine a global royalty rate, a failure to find Lenovo was an unwilling licensee, and its rejection of the top-down approach in calculating the royalty rate.  The Judge's findings that limitation periods were not applicable to the royalty to be paid will, however, serve as a valuable precedent for SEP holders and remove some of the jeopardy of the patent holdout assuming the SEP holder is willing to have the English courts set FRAND terms on a global basis. 

This is far from the end of the story, however.  InterDigital has already announced its plans to appeal the decision on several points.  Furthermore, with the forthcoming launch of the UPC and the European Commission's recent announcement in March of a draft regulation which has, as part of its intention, the creation of a new FRAND determination procedure, the SEP and FRAND setting arrangements are set to continue to evolve for the forthcoming future.