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London High Court Issues UK’s Second-Ever FRAND Determination

March 20, 2023

On March 16, the London High Court of Justice released its long-awaited judgment in InterDigital v. Lenovo, imposing a $138.7M global fair, reasonable, and nondiscriminatory (FRAND) license against defendant Lenovo after finding that neither party’s offers had been FRAND. The rate was closer to what Lenovo had sought (totaling $80M) than US-based InterDigital, Inc.’s proposal ($337M). Notably, the court also found that Lenovo had behaved as a willing licensee during licensing negotiations, but that InterDigital had not acted as a willing licensor due having consistently offered supra-FRAND rates. The court also rejected InterDigital’s proposed rate-setting methodology. This sweeping, 225-page decision marks the second time that a UK court has issued a FRAND determination in a standard essential patent (SEP) dispute.

Unwired Planet v. Huawei: The UK Kicks Off Global Competition over FRAND Jurisdiction

The UK’s first FRAND ruling came in August 2020, when the UK Supreme Court issued its decision in Unwired Planet v. Huawei. That landmark opinion was the first time that a national court held that it may set the terms of a FRAND license for a multinational SEP portfolio and did so. The court based its jurisdiction to resolve licensing disputes over portfolios including non-UK assets because those disputes turn not on patent law but on contract law, since a patent owner’s FRAND commitments stem from contractual agreements made to standard-setting organizations (SSOs).

A subsequent decision in the Unwired Planet litigation also established a unique form of relief called the “FRAND injunction”, which is similar to a normal one in that it bars infringement of the asserted patents but ends if the defendant enters into the FRAND license established by the court. In October 2021, the High Court of Justice clarified the criteria for a FRAND injunction in one of its decisions in the Optis Cellular Technology v. Apple litigation, ruling that when a defendant is deemed to infringe a SEP, it must give its current unqualified consent to be bound by the FRAND license terms determined at a later trial; otherwise, the court will impose a FRAND injunction. The court also held that the SEP owner is entitled to such an injunction even if the court determines that it abused its dominant position and that, given concerns over holdout, to conclude otherwise would be akin to a compulsory license. However, the Court of Appeal also upheld the lower court’s ruling that when an implementer initially declines to accept the court-determined license, it is not permanently barred from later relying upon the patent owner’s FRAND commitment.

As expected, the Unwired Planet decision has since prompted courts in other countries to assert the authority to resolve global FRAND disputes. The second to do so was China, where the Shenzhen Intermediate People’s Court ruled in October 2020 that it would decide a global FRAND license in litigation between Sharp and Oppo. China’s Supreme People’s Court (SPC) upheld that decision in September 2021, holding that a Chinese court may exercise such jurisdiction if a SEP dispute has an “appropriate connection” with China, which may be established through the satisfaction of just one of the applicable factors. Per the decision, those factors include whether the country is the “place where the patent right is granted, the place where the patent is implemented, the place where the patent license contract is signed, or the place where the patent license is negotiated”. The SPC subsequently reaffirmed that holding in its Nokia v. Oppo decision.

Other courts in Europe have also since expressed a willingness to assert global FRAND jurisdiction. In February 2022, the District Court of the Hague issued an interim decision that it could exercise international and territorial jurisdiction over a FRAND case in a declaratory judgment action filed by implementer Vestel against patent pool Access Advance LLC and several of its licensors, due to the fact that one of the licensors (Philips) is based in the Netherlands. The ruling could ultimately end with the court setting the terms of a global FRAND license. Meanwhile, in France, the Tribunal Justiciare de Paris, the first-instance court that gets patent cases, has issued two decisions in which it asserted jurisdiction over global FRAND issues, albeit in cases that settled before a final judgment could be reached. Both rulings—in TCL v. Philips (February 2020) and Xiaomi v. Philips (December 2021)—came in response to complaints with an unusual jurisdictional hook: the implementer plaintiffs sued the relevant SSO, the France-based European Telecommunications Standards Institute (ETSI), alongside patent owner Philips, seeking to compel ETSI to help enforce the patent owner’s FRAND obligation.

InterDigital v. Lenovo: High Court Doubles Down on Unwired Planet

The InterDigital decision, though, could further cement the UK’s role as a key FRAND destination.

As recounted by the authoring judge, High Court Justice Edward James Mellor, the underlying dispute stems from Lenovo’s alleged infringement of InterDigital patents declared essential to various 3G, 4G, and 5G cellular standards, with parallel litigation in the US and China. The UK litigation has involved a total of five scheduled “technical” trials (i.e., trials dealing with infringement): Prior to the FRAND trial, a first technical trial (“Trial A”) ended in InterDigital’s favor and was affirmed on appeal; while a second (“Trial B”) went for Lenovo but was overturned on appeal. Third and fourth technical trials (“Trial C” and “Trial D”) were held after the FRAND trial, the former of which has been decided in InterDigital’s favor, with the latter judgment outstanding. The necessity of the fifth trial (“Trial E”), per the court, “remains to be seen”.

At issue in the FRAND trial were two competing license offers, out of the four pleaded to be FRAND (two on each side) during the course of negotiations. InterDigital’s “5G Extended Offer” encompassed 2G, 3G, and 5G devices, with royalty rates based on those published on its website since early 2020 and adjusted downward for certain embedded discounts: 5% each for a term discount and regional sales mix discount (the latter including situations where certain products were targeted at single regions, or other region-specific carve-outs). InterDigital agreed that the court should determine a lump sum, with past sales (six years prior to the proposed January 1, 2018 effective date) accounting for $199M and future sales for $138M, which would result in a total $337M royalty payment. The blended per-unit dollar rate, based on rounded total handset sales, would amount to $0.498. In contrast, Lenovo’s “Lump Sum Offer” encompassed all sales within the six-year license’s term through the end of 2023 and included a full release for all past sales, with the amount totaling $80M ±15%. Lenovo selected that range as the approximate midpoint between two lump-sum figures, $65.4M and $99.6M: the former based on a range of rates between $0.07 and $0.20 derived from the six allegedly most probative comparable licenses; the latter, based on a blended rate of $0.16.

After recounting that history, the court then dove into an analysis of the parties’ dueling expert testimony on whether those offers had been FRAND—noting that these disagreements spanned “the correct approach to unpacking, selecting comparable agreements and, ultimately deriving a rate or rates for Lenovo in the FRAND range”. The court assessed the testimony of the various experts for both parties throughout the opinion, including criticisms when witnesses appeared overly coached or otherwise biased in favor of the positions taken by the sponsoring party.

For instance, in evaluating the parties’ accounting experts, he highlighted “unrealistic” assumptions made by InterDigital’s expert on SEP licensing practices, Gustav Brismark. Justice Mellor also flagged apparent bias in how the parties’ experts on that topic characterized the parties’ licensing conduct and positions during negotiations, taking particular issue with Brismark’s remark that he had never seen any examples of hold-up behavior by a licensor (i.e., asking excessive license fees leveraging a patent’s declared essentiality or seeking to exclude the implementer from the market). This, too, the court remarked was “unrealistic”, stating that he suspected many licensees have experienced such conduct from licensors to some degree. Notwithstanding these apparent biases, Justice Mellor found the testimony from both of the parties’ industry experts to be “very interesting and useful”, though he found the evidence from Lenovo’s expert on the topic, David Djavaherian, to be “more balanced and realistic”.

Applicable Principles: Justice Mellor Draws on Unwired Planet and Optis Decisions

After giving some background on the parties and their positions, the court then laid out how it derived the applicable law from the various decisions in the Unwired Planet v. Huawei litigation, including the two High Court decisions (the latter relating to remedies), the Court of Appeal Decision, and the Supreme Court decision; the Trial B and Trial F judgments in Optis v. Apple; and the trial A judgment in this case, after which Justice Mellor initially declined to grant an injunction. The court also referred in passing to the EU Court of Justice’s opinion in Huawei v. ZTE, also citing decisions from China (the decision by the Guangdong High People’s Court, Third Instance, in Huawei v. InterDigital) and the US (the Central District of California and Federal Circuit decisions in TCL v. Ericsson), among other cases invoked.

In applying these cases, and in his own ensuing substantive analysis, Justice Mellor focused in particular on Clause 6.1 of the ETSI IPR Agreement, which defines the patent owner’s obligation to license a declared SEP on FRAND terms and was disputed in this case. In doing so, the court placed particular reliance on Unwired Planet, noting that most of the principles in Justice Birss’s High Court decision had not been challenged in subsequent appeals—apart from its holding that “for a given set of circumstances there will only be one set of FRAND terms and only one FRAND rate”, which the Court of Appeal rejected.

The court cited the Supreme Court decision in that case as providing the canonical interpretation of Clause 6.1. As recapped by Justice Mellor here, the court read Clause 6.1 as reflecting a policy that balances the interests of licensors and licensees; as providing, in part, that a SEP owner’s FRAND undertaking amounts to a limit in its right to obtain an injunction, that the only way for an implementer to avoid infringement is to request a license by enforcing the SEP owner’s contractual FRAND obligation, and that an implementer generally has the right to obtain a license covering multiple jurisdictions; and as envisioning that the SEP owner and implementer will negotiate a license on FRAND terms, with disputes to be settled either by agreement or by national courts. Moreover, the court also held that Clause 6.1 does not bar the SEP owner from seeking an injunction through a national court in appropriate circumstances, with the FRAND commitment serving as a check against the threat of an injunction being improperly leveraged to charge excessive rates. The Supreme Court further held that it would not be appropriate to award damages in lieu of injunctive relief in SEP disputes, ruling that this would improperly incentivize hold-out.

Justice Mellor also reaffirmed aspects of the Optis Trial F decision (“Optis F”) that further clarified the interpretation of Clause 6.1, including its ruling that “hold-out by implementers is to be deprecated”. Optis F also explained that anyone desiring to implement an ETSI standard is entitled to a FRAND license on demand from a patent owner that has made a FRAND undertaking, establishing that this “class of beneficiaries is a very broad one”. That said, the Optis F court explained, this entitlement to a license does not provide immunity from suit or from an injunction. Additionally, Justice Mellor noted that he “respectfully agree[s] entirely” with Optis F that when an implementer initially declines to accept the court-determined license, it is not permanently barred from later relying upon the patent owner’s FRAND commitment. Justice Mellor rejected a similar argument from InterDigital here—that Lenovo should be barred from now relying on its FRAND commitment because it initially did not give an unconditional commitment to be bound—because “the SEP owner’s undertaking to ETSI is irrevocable. Thus, provided Lenovo adopt the position of a willing licensee, they are entitled to accept the benefit of that undertaking at any time”.

Furthermore, Justice Mellor drew upon Unwired Planet in summarizing his fundamental approach to SEP royalties. For cellular devices covered by SEPs, he held, royalties should not depend on the price of the device, which reflects other unrelated features as well as the status of the brand: “Accordingly, in terms of SEP licensing, each unit should be viewed as a functional unit, functioning using the relevant generation(s) of the technology. I consider this approach is consistent with, indeed dictated by, the FRAND obligation so that the royalties paid and payable for each functional unit should be the same”. To that end, as detailed later in the opinion, Justice Mellor remarked that different treatment of larger market players can violate the non-discrimination FRAND prong: “As will be seen, many of the creative ways in which InterDigital sought to explain their agreements with the largest market players are inconsistent with this consideration. In short, acceptance of such creativity would involve discrimination”.

Comparable Licenses and Industry Licensing Practices: InterDigital’s Practices Have Become “Distorted”

The court then addressed the parties’ identification of comparable licenses as used to form the basis of their royalty proposals, as well as the “extraction of relevant information from existing PLAs”. Here, the court noted that their “experts took very different approaches” for this part of the case, with further complications caused by the experts “not only using different data, but also using different approaches to the identification of relevant data”.

To assess comparability, Justice Mellor began first with an overview of industry licensing practices, both overall and with respect to InterDigital specifically. In particular, Justice Mellor began by examining the behavior of differently situated licensees, and the extent to which licensors must be flexible to arrive at a negotiated deal. As detailed by the parties’ experts, the court noted, large implementers tend to favor lump sum deals, which also benefit licensors by providing economic certainty and let them offer Net Present Value discounts; while smaller licensees, or those with greater uncertainty or less bargaining power, favor running royalties.

Here, in its attempt to unpack how the parties view the proper starting points for a FRAND negotiation, the court returned to the notions of hold-up and hold-out—explaining that in its view, “[e]very SEP licensing negotiation involves some degree of hold-up or hold-out (and probably both) for as long as the two sides fail to reach agreement”. Such a failure to agree may just as well represent a legitimate difference as to how to value a portfolio or what terms or FRAND, explained Justice Mellor, and does not necessarily mean one party is to blame.

On the other hand, Justice Mellor also indicated that he was more receptive to the notion that in trying to adapt to the current licensing landscape, some licensors—including InterDigital—often go to great lengths to create the impression of a “standard” rate in attempting to set a more favorable default precedent for future negotiations. As noted by Lenovo’s expert David Djavaherian, whose views the court found more “apposite”, when licensors move away from this “standard” rate, they “often seek to introduce ambiguity regarding the rate actually being paid” or other complexities, such as a “change of license structure”, to distinguish such licenses as “non-standard”.

In part, to create impression of a preferred “standard rate”, Djavaherian argued, licensors seek to enter into a greater number of licenses with licensors that are smaller, less experienced, or less sophisticated, where the actual total amount paid is a lower sum that comes out at around the cost of litigation. Where a larger or more sophisticated/better-positioned licensee does not accept those “program rates” and negotiates vigorously to get a lower rate, the licensor seeks to limit its precedential value by “structuring such licenses in a complex way that may be more difficult to unpack” in a way that enables arguments that the rates are really still equivalent to the program rate. To imply that there is no flexibility in pricing is to argue that FRAND rates should be set by licensor with no checks, contended Djavaherian.

Justice Mellor suggested that he agreed InterDigital was engaging in such conduct, saying that he does “not blame InterDigital for developing these practices”, as “they are a natural reaction to having to operate in a difficult licensing environment”. However, based on the experts’ evidence, he stated that he came “to the conclusion that InterDigital’s SEP licensing practices (and, I strongly suspect, of others in the same market) have become distorted by their attempts to secure licences of their SEP technology, against a picture of many (but not all) implementers not complying with their duty to act as a willing licensee”.

The court also examined other points from the parties’ experts, expressing particular criticism of the argument from InterDigital expert Gustav Brismark that SEP royalties should be higher for higher-end devices that will make greater use of technologies like LTE. Justice Mellor countered that he has never seen anything suggesting that SEP royalties should be based on the usage of a particular technology, remarking that FRAND licensing is “complicated (and therefore opaque) enough” without such a requirement, and that ETSI’s materials do not contemplate such a concept. “Rather, my understanding is that the royalty on a 4G/LTE phone, for example, is paid because of the potential of that device to utilise the technology”.

License Must Include Past Sales to Be FRAND

The court diverged from both parties with respect to the treatment of past sales, as experts for Lenovo and InterDigital had each adopted the view that the royalty rates for past sales should be “very considerably lower than the future rates”. Justice Mellor disagreed for several reasons, the first being that this position primarily served to satisfy the parties’ particular objectives. As a general matter, the court cited the “obvious point” made by counsel for InterDigital, in its closing, that ascribing lower rates to past sales incentivizes delay by the implementer so it ultimately has to pay less—indicating that Justice Mellor agrees that this would encourage hold-out. However, the court also noted that allowing past rates to be lower meant that future rates would be higher, which would favor InterDigital. Justice Mellor held that it would not be appropriate to rely on these “subjective assessments” made by the licensor, stating, “It seems to me that the precise date when a lump sum deal is done should not affect the royalty paid per device”.

Rather, Justice Mellor held that “the same rate should apply to past as future”, the same approach followed by the High Court decision in Unwired Planet and in the Central District of California TCL v. Ericsson decision—and, essentially, the “blended rate” approach offered by the defendant, minus breakouts for past and future rates. This is because “InterDigital’s allocations of overall [lump sum] consideration to past and future was somewhat artificial”, as they are not features of the actual agreement under consideration and were not agreed by the licensee. Moreover, the court noted that the usual practice is to derive the per-unit rate by dividing the total consideration by the best-estimate number of units. The court held that this position was independently justified because “FRAND should focus on the money (and other benefits) which pass between licensee and licensor”, and “is not concerned with and should not be affected by either one party’s internal justification for the sum paid or received, nor with the way in which one party seeks to deal with those sums in its accounts”.

Thus, the court held that it is wrong to inject InterDigital’s subjective view “of the ‘value’ in their hands of a particular payment” into the FRAND analysis—or, in other words, to base its positions on FRAND licensing issues on the value of payments when in its own hands, not on the actual payment made, which injects a “significant subjective element into the analysis”.

Volume Discounts Must Reflect the Time Value of Money

Justice Mellor then turned to the volume discounts at issue in some of InterDigital’s other licenses, both generally and as applied to the largest licensees. Here he found that there was no “economic or other justification” for the 60-80% discount offered to the largest InterDigital licensees. Rather, he returned to his earlier criticisms about InterDigital’s business model, finding that these discounts’ “primary purpose is to attempt to shore up InterDigital’s chosen ‘program rates’” and that “[t]heir primary effect is discrimination against smaller licensees”—a point to which neither InterDigital nor its expert “had any answer”.

Justice Mellor then proceeded to rebut the various economic rationales offered in support of these discounts by InterDigital. Among them, he rejected the notion that the discounts reflect economies of scale, finding that this concept does not apply to the “intangible and effectively costless” act of granting a license—aside from transaction costs, which he held can be used to justify at most a small volume discount. Any supposed “economic efficiencies” really just amounted to InterDigital’s internal justification for a rate reduction. Indeed, the court remarked that if anything, economic efficiency would instead serve to justify the opposite approach—to litigate in an attempt to win higher rates closer to “program rates”.

Justice Mellor also doubled down on his earlier point about actual vs. potential usage in rejecting the point that rates should be higher for higher-end devices, which he characterized as a volume discount. While he acknowledged that, for example, higher-end LTE smartphones might include various “optional extras” that make the devices more “attractive to the consumer”, he reiterated that with respect to the cellular standards at issue, such as LTE, “both phones use the same technology”.

Turning more broadly to all types of discounts, the court characterized them as “represent[ing] a series of levers which InterDigital could and did utilise, as they saw fit, in an effort to secure a deal within the constraints which they perceived to apply to their licensing efforts (in particular, the lack of a global dispute resolution procedure and the effect of limitation periods)”. However, Justice Mellor again suggested that InterDigital was not unique, nor necessarily at fault, for doing this, but was instead doing what it felt was needed to survive in the current market:

In saying this, I should not be taken to be criticising InterDigital for doing this. InterDigital were operating a licensing business and it was important for the continuing operation of the business (and its R&D) to ensure it received licensing income and these levers had to be applied in order to achieve this. This is one of the facts of life for SEP licensors operating in a market where the appropriate licence rates have yet to approach any sort of equilibrium.

Above all, the court concluded that the only discounts that were fair and consistent with FRAND were those that “reflect the time value of money (e.g. accelerated receipt of royalties, the advantage to the SEP licensor of receiving a lump sum and so forth)”. As for the other discounts that “do not reflect the time value of money”—those which InterDigital’s expert “assumed” had been factored into offered rates—the court found that those had been used “to shore up the InterDigital ‘program rates’ and therefore contribute to the discrimination against smaller licensees”, as it had done with the volume discounts.

National Limitation Periods Play No Role in Negotiations Between Willing Licensor and Licensee

The court next addressed the issue of limitation periods: whether statutes of limitation in national courts encourage implementers to unduly drag out negotiations and pressure SEP licensors to sue within the limitation period. Here, Justice Mellor explained that he does “not consider that limitation periods have any part to play in a determination of FRAND terms between (necessarily) a willing licensor and a willing licensee, and, indeed, that they are inconsistent with that relationship”. More specifically, he explained, a willing licensor would not “refuse to pay whatever licence fees were eventually determined to be applicable in respect of units produced and sold” outside the limitation period, and would not be considered willing if it did so. Since a “willing licensee would not seek to benefit from delay in agreeing FRAND terms or payment of FRAND royalties”, the court “concluded that a willing licensee will pay in respect of all past units”.

This analysis, Justice Mellor further explained, “ties in with the approach” of Justice Meade in Optis F, in that a defendant found to infringe “must be put to his election: either cease infringement of the SEP found to be valid, infringed and essential to the standard in question (and pay damages for the prior infringements) or take a licence”. It must do so unconditionally, which—per Justice Mellor—“require[s] the implementer to pay at FRAND rates for a retrospective licence to cover past infringements”. That said, the court stopped short of awarding interest on past royalties, as it “remained undecided on the issue”, and allowed the parties to further brief the issue.

InterDigital’s Offer Was Not FRAND

Having articulated all of the considerations above, in light of the aforementioned general principles, the court circled back to the impact of InterDigital having applied a subjective and ex post facto approach in seeking to establish that the prior license agreements assessed by the court each reflected a “structured, uniformly applied licensing programme”. The court then reiterated that it had “formed the view that the overriding consideration for InterDigital in negotiating and agreeing PLAs was to achieve the maximum money from the licensee (whether by way of lump sum or running royalties)”, which the court noted was a “perfectly logical business approach”, just as logical as a licensee’s push to obtain rates that are as low as possible.

Nonetheless, the court determined that it “d[id] not consider InterDigital’s approach was FRAND”, for a variety of reasons. Having already determined that the volume discounts resulted in discrimination, the court further found that since it had already determined that InterDigital’s “assumed discounts” (those already found to be related to the time value of money) were excluded from the FRAND analysis, it followed that the licensor’s “program rates” were “not realistic indicators of FRAND rates for their SEP portfolio”.

The Cases on Comparable Licenses

Having made that determination, the court proceeded to evaluate the sets of comparable licenses offered by both parties—the InterDigital 20 and the Lenovo 7—noting that there was no overlap between the two sides’ licenses. The “principle distinction” between the two groups, explained Justice Mellor, was the number of units covered and the total amount of licensing revenue: the Lenovo 7, which he described as comprised of lump-sum patent license agreements (PLAs) with the “big six licensees” (Samsung 2014, Apple 2016, Huawei 2016, LG 2017, ZTE 2019, Huawei 2020 and Xiaomi 2021) and as accounting for 97.7% of the licensed units within the “universe” of the PLAs under consideration from both parties, with the most relevant 15 PLAs of the InterDigital 20 (all running-rate agreements) accounting for just 2.27%. The Lenovo 7 agreements accounted for nearly $1.9B in total license payments, compared to $208.18M for the 15 licenses flagged by InterDigital.

With respect to the Lenovo 7, the court found no reason to disqualify them as comparables, rejecting each of InterDigital’s counterarguments. The court declined to find that lump sum licenses were unreliable or subject to estimation uncertainty, countering that it was not unusual to have to unpack lump sum licenses—and that their exclusion would paint a “skewed and misleading picture”. Additionally, Justice Mellor found unavailing InterDigital’s argument that the six licensees in the Lenovo 7 had received discounts that Lenovo was not entitled to, a “knotty issue” that he resolved by reference to his earlier rulings on discounts (as recounted above).

In contrast, Justice Mellor found that the PLAs cited by InterDigital were “not relevant comparable licenses at all”, for a variety of reasons—including, as mentioned above, that “the scale of the licensed business in each case was dramatically smaller than that of Lenovo, most by at least an order of magnitude or even two”. Moreover, those smaller licensees were far more driven by their fear of litigation costs, as Lenovo had argued, in some cases accepting InterDigital’s offers with no negotiation at all. Also weighing against comparability was the PLAs’ age (some were old or expired “some time ago”), the fact that some were limited just to 3G or 3G/4G, that some licensees were operating in narrow regions, were leaving all or part of the market, had entered into their licenses due to settlements, or operated in specialty market segments—among other reasons those licensees were differently situated to Lenovo, including the potentially unreliably unpacked license rates detailed previously. Above all, though, the court held that “the overarching reason for rejecting reliance on the InterDigital 20, individually or collectively, is because the Lenovo 7 were clearly far better comparables, with LG 2017 standing out as the best comparable”.

Furthermore, Justice Mellor was not convinced by InterDigital that it had entered into the Lenovo 7 PLAs as a result of hold-out. Despite certain overarching uncertainties—that until recently it was not possible to receive a worldwide FRAND determination from a court, and the “perceived influence of national limitation periods—Justice Mellor indicated that InterDigital could have easily litigated this issue if it felt any of those rates had been depressed by holdout. “In one sense, InterDigital and other SEP licensors have received something of a windfall from the very large increase in cellular device volumes over the years. In short, it is more than able to look after itself”.

Indeed, having secured PLAs with the top six licensees, the court noted that, as Lenovo had argued, InterDigital had effectively established a “market rate” for its portfolio. To the extent any smaller degree of hold-out was baked into those rates, InterDigital’s proposed top-down cross check “might be a way of quantifying” that degree, but as explained later in the opinion, the court “did not find it persuasive in any of its guises”.

The Court Sets a License Rate Based on “LG 2017” Agreement

The court then proceeded to derive a rate-setting method that used the approach of Lenovo’s expert, Paul Meyer. As recounted by the court, Meyer calculated weights to assign the rate from certain sets of PLAs from the Lenovo 7, by reference to unit sales, to arrive at rates for past and future sales. After certain economic adjustments, Meyer’s approach yielded a blended (past and future) rate of $0.16 per unit.

While the court found that Meyer’s was the better method compared to taking any sort of simple averages, it concluded that his was “too crude an approach”, as it placed too little value on LG 2017 and failed to account for the circumstances of each PLA or the evolving state of the handset market over time, as reflected by changing rates.

In particular, the court noted that the earliest license in the group (Samsung 2014) should be viewed with “caution” given the unique considerations that would have been considered with respect to precedential impact; with other outliers given less weight, those that remained, per the court, indicate a gradual decrease in rates over time. Additionally, Justice Mellor highlighted the shift in the mix of cellular generations over time as reflected in each license, and how the mix for Lenovo, as shifting over time, differed from the top six. This, he observed, was because the company 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”.

To account for these additional factors, the court asked the parties’ two experts to work together and construct a new calculation model. Based on the experts’ use of that model and having concluded that “[f]or the period 2012-2018, LG 2017 is plainly the best comparable”, the court then made a series of adjustments. As LG’s sales mix (i.e., its products’ relative shares of cellular generations) was quite similar to Lenovo’s over that period, “Meyer derived an adjustment ratio which was close to 1, 0.947”. Since LG’s split between Developed and Emerging Markets was essentially the “the mirror image of Lenovo’s – approximately 2/3:1/3, whereas Lenovo was almost 1/5:4/5 . . . [as a result,] Meyer derived an adjustment ratio of 0.728”.

After concluding that “the most important adjustment is to reflect the split between Developed and Emerging Markets” and declining to “make any separate adjustment to reflect patent coverage”, the court set “a single adjustment ratio of 0.728 to reflect all the differences between LG and Lenovo, which brings Mr[.] Meyer’s LG 2017 rate of $0.24 down to $0.175”. The court applied that same rate for 2019-2023, discounting certain distinctions for that period: though LG’s license ended in 2020, the court noted the sales mix was the same for the covered period; while “the way that the experts unpacked LG 2017 effectively eliminated any influence of LG exiting the market in July 2021”.

Since the experts’ calculation method included sales figures for Lenovo going back to 2007, the court applied the $0.175 rate to arrive at a lump sum payment of $138.7M.

The Court Rejects InterDigital’s Top-Down Cross-Check Case

Justice Mellor next addressed InterDigital’s top-down case, which it had offered as a cross-check on its comparable licenses case. This case assumed that in an “ideal (hold-out free) world”, a FRAND rate for each generation of technology would have a reasonable maximum value that can then be used to deduce a reasonable rate for a patent owner’s portfolio based on its share of the total universe of patents for that standard. InterDigital acknowledged that this case further assumed the validity and equal technical benefit of each patent. As the court noted, this also assumes that a portfolio’s contribution to a standard derives from number of patents, though there is bound to be variation between portfolios; assumes that all benefits derive only from SEPs, and not unpatented technologies and network infrastructure investments; and ignores the problem of overdeclaration.

The appropriateness of InterDigital’s calculation, under its top-down case, would then be assessed through a hedonic regression, an econometric analysis that attempts to “isolate the fair market value of each of the technology generations over the previous, all other things being equal (‘ceteris paribus’)”—such assumed-equal factors including screen size, processing power, and brand. The result, per InterDigital, would be a range of acceptable rates.

That hedonic regression, and the data used within it, formed the basis for the court’s objections to InterDigital’s top-down case. Among the issues identified by the court were the fact that the exercise averages the value of a standard across all brands over ten years, even though the value of, e.g., LTE varies by brand and by model, which makes it hard to use this model to set a rate for a specific time, brand, model, and average sale price. Given the fact that profit margins vary widely, the court cited as persuasive Lenovo’s point that the model would calculate a higher value for LTE because those manufacturers’ higher prices would pull the overall value upward.

Perhaps most problematic, though, was an issue that has “always troubled” Justice Mellor: the question of who, under this model, is responsible for the “premium” of (i.e., the gains from) adding 3G, 4G, or 5G technology to a handset, the SEP owner or the device maker. The expert advocating for the hedonic regression approach, Jonathan Putnam, argued that the split should be 50/50. As noted by the court, Lenovo had countered that this split was arbitrary, with data suggesting that greater risk was borne by the manufacturers (as InterDigital had been “consistently profitable over the years”, while multiple other phone makers had left the business altogether or had seen huge losses). Also arbitrary, and also incorrect in the court’s view, was the assumption, again, that all value that a standard provides to a consumer stems from the SEPs. Despite the fact that this 50/50 split is a critical step in InterDigital’s hedonic regression analysis, the court noted that it had not actually been pleaded as part of the licensor’s top-down case.

These were all reasons based on which the court determined that it would reject this 50/50 split, or any other. Even without this problematic hedonic regression, Justice Mellor concluded that he could not accept any aspect of InterDigital’s top-down case, since it was used to support a comparables analysis that puts forth rates that lack support and are “inflated and discriminatory”.

The Parties’ FRAND Conduct

–  InterDigital Did Not Act as a Willing Licensor

Justice Mellor then proceeded to address whether the parties’ conduct had been FRAND-compliant. Here, the court reviewed and characterized the parties’ various offers made during the course of negotiations, as well as various communications regarding those negotiations—including emails between the parties and messages exchanged internally.

The court found that InterDigital, in putting forth “numerous offers”, had “used the full suite of mechanisms and levers they had developed to persuade implementers to reach a deal”. With the exception of one offer made in late 2018, Justice Mellor found that “all the offers made and the positions adopted by InterDigital were too high and, in my judgment, outside the FRAND range”.

As a result, Justice Mellor concluded that “by consistently seeking supra-FRAND rates, InterDigital did not act as a willing licensor”—remarking that “there is little or no downside for a licensor in pressing for supra-FRAND rates and thereby not acting as a willing licensor, apart from, of course, the irrecoverable costs of litigation”. In contrast, he observed that only the largest implementers can afford the “significant costs of this type of litigation”.

–  Lenovo Acted as a Willing Licensee

However, Justice Mellor concluded that Lenovo had generally acted as a willing licensee. The conduct here at issue primarily concerned alleged delays during negotiations. While finding that Lenovo had been “slow to move things along”, he found that InterDigital had also, “on occasion, . . . caused delays of equal magnitude”—and agreed with the testimony of Lenovo’s expert David Djavaherian that “the licence negotiation back-and-forth was not perfect on either side”.

Although Justice Mellor held that “Lenovo did drag their heels on occasion and to that extent, did not act as a willing licensee”, he nevertheless determined that “for most of the period of negotiations, my conclusions imply that Lenovo were correct not to agree to any of InterDigital’s offers or positions and justified in seeking information. So, for the most part, Lenovo did conduct themselves as a willing licensee”.

Injunction Should Have Been Issued, but Not as a Result of Defendant’s Conduct

Finally, the court turned to the issue of injunctive relief, for which InterDigital had offered two justifications.

Under its “fact insensitive case”, InterDigital asserted that an injunction is justified based on Justice Meade’s reading of the relevant ETSI clause (6.1) in his judgment after Trial F in Optis v. Apple: that regardless of the conduct of the parties, a party that is selling infringing products without a license and declines to enter into that license is acting unlawfully via its infringement and must be enjoined. On that issue Justice Mellor “agree[d] with InterDigital that Lenovo should have been subject to a FRAND injunction in respect of the Trial A patent (EP558), at the latest from the date of the much-delayed form of order hearing”. Justice Mellor expressed some “regret” that he had not done so immediately after the trial but proposed that after this trial he would “put Lenovo to their election” (i.e., to “either cease infringement of the SEP found to be valid, infringed and essential to the standard in question (and pay damages for the prior infringements) or take a licence”). At that point, Justice Mellor concluded that “they will demonstrate whether they are a willing licensee or not”.

Justice Mellor then turned to InterDigital’s “fact sensitive case”, under which it had argued that Lenovo’s conduct during negotiation amounted to hold-out, as a result of which Lenovo was allegedly no longer a beneficiary of the ETSI undertaking (i.e., of InterDigital’s commitment to offer a FRAND license) and should thus be subjected to an “unqualified” injunction. Lenovo had argued in response that InterDigital had conducted itself as an unwilling licensor, as ultimately determined by the court, and asked the court to consider this in setting a remedy.

Earlier in the opinion, Justice Mellor had expressed some skepticism of the “notion” that InterDigital truly wanted an unqualified injunction, finding this to be “unreal”—remarking that the plaintiff really just wanted to force Lenovo to take a license after a “long period” in which it has acted without one, and not to force the defendant’s products off the market altogether, thereby foreswearing future royalties. Nor, remarked Justice Mellor, would this even be possible in light of InterDigital’s “irrevocable” FRAND commitment.

Ultimately, however, Justice Mellor rejected this part of the case, in large part due to his conclusion that “it was reasonable for Lenovo to reject all the offers made by InterDigital as not FRAND, especially due to the facts that (a) InterDigital failed to provide any information about comparable licences until around July 2018 and (b) the information which was then provided was not reliable since the rates were inflated. . . . Second, for the reasons explained above, Lenovo did not, by their conduct in negotiations, disqualify themselves from being a beneficiary of InterDigital’s undertaking to ETSI”.

Concluding Matters

The court ended its opinion by reiterating its key rulings: that Lenovo is to pay a lump sum of $138.7M, that it “find[s] no value in InterDigital’s Top-Down cross-check in any of its guises”, that neither of the parties’ offers at issue were “FRAND or within the FRAND range” based on the court’s comparables analysis, and that InterDigital’s case on conduct is “[i]n large part rejected”.

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