In March 2023, the UK High Court of Justice issued the country’s second-ever determination of a global fair, reasonable and nondiscriminatory (FRAND) license in InterDigital v. Lenovo. Now, the UK Court of Appeal has issued its long-awaited appellate judgment in that case, ruling in part that the lower court applied flawed reasoning in its rate-setting analysis—as a result, increasing the per-unit rate for defendant Lenovo from $0.175 to $0.225 and the total lump sum awarded to plaintiff InterDigital, Inc. from $138.7M to $178.3M. However, as was the case for the lower court’s ruling, the final rate here was far closer to the one sought by Lenovo.
Unwired Planet and Subsequent Rulings
As noted in RPX’s prior coverage, the UK’s first global 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 standard essential patent (SEP) portfolio and exercised that power—grounding its jurisdiction not in patent law but in 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 2023, the Court of Appeal affirmed in Optis v. Apple that an adjudged infringer must agree to take a license even when the court has not yet set the terms of the FRAND license if it wishes to avoid an injunction. However, the Court of Appeal also upheld the lower court’s ruling that an implementer is not permanently barred from later relying upon the patent owner’s FRAND commitment (in other words, from belatedly agreeing to a FRAND license) if it initially declines to accept the court-determined license, agreeing that it would be “unfair and unprincipled” to prevent the implementer from changing its mind.
The High Court’s FRAND Judgment in InterDigital v. Lenovo
As mentioned above, the UK’s second global FRAND determination came in the High Court judgment in InterDigital v. Lenovo. Following a series of “technical trials” dealing with issues of infringement, validity, and essentiality, the court held a “FRAND trial” in January and February 2022 to set the terms of a FRAND license. At issue in that trial were two competing offers. One was InterDigital’s “5G Extended Offer”, which the court here characterized as covering 3G, 4G, and 5G, with royalty rates based on Lenovo’s “Average Selling Price”, subject to various “caps and floors”, and adjusted downward for certain embedded discounts. The patent owner argued that the court should award a lump sum rather than a running royalty, with $199M representing “past” sales (covering the six years prior to a January 2018 effective date) and $138M for “future” sales, for a total of $337M. 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%.
– Review of FRAND Principles
The High Court’s resulting 225-page FRAND decision, written by Justice Edward James Mellor, began with a detailed recitation of the applicable FRAND principles set forth by the Supreme Court in Unwired Planet: In addition to laying out UK courts’ global FRAND jurisdiction and power to impose FRAND injunctions, the Supreme Court held that the nondiscrimination prong of the FRAND obligation is general, not hard-edged—meaning that a patent owner is not required to offer terms at least as favorable as those offered to a similarly situated licensee (as the patent owner may properly offer a lower rate, for example, to early adopters), but rather that it must merely offer a fair market price without discriminating between licensees based on their “individual characteristics”. As also recounted by Justice Mellor, the Supreme Court held that if an implementer is infringing, the SEP owner offers a FRAND license, and the implementer rejects it, the “remedy of an injunction is neither inappropriate nor disproportionate”.
Additionally, the Supreme Court held that nondisclosure agreements are generally permissible during negotiations as long as parties negotiate in an “impartial and honest” manner, and that implementers may wish to minimize risk by setting aside a “financial contingency” for “reasonable” license fees. Furthermore, it held that a willing implementer must not merely wait for a FRAND license offer but actively seek one out. More broadly, the Court held, the European Court of Justice’s 2015 Huawei v. ZTE decision confirms that FRAND is a process, under which SEP owners and implementers must negotiate in good faith and not behave in a manner that respectively promotes holdup or holdout in order to be deemed willing licensors or licensees.
In explaining this framework on appeal, the Court of Appeal also held that the “best guide” for determining a FRAND rate is to use comparable licenses, despite three overarching challenges: the need to “unpack” licenses to enable sufficient comparison due to differences in how terms are expressed; the need to made adjustments where a license is not sufficiently comparable to the license under consideration; and the related issue where a license may not be comparable because one party was not sufficiently willing or where the license was entered due to “compulsion”, “pressure”, or some other form of “market distortion”.
– FRAND Issues Addressed at Trial
The impact of certain market realities on SEP licensing practices was one of the central issues discussed at trial, as set forth in dueling expert testimony. Justice Mellor agreed with a Lenovo expert that 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, by entering 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.
In agreeing that the plaintiff appeared to be engaging in such conduct, Justice Mellor notably remarked 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”.
Notably, Justice Mellor 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”. Relatedly, as noted further below, the court also held that limitation periods (statutes of limitations)—which factored into the periods for which rates were sought—should not play a role in FRAND determinations.
Given these and other findings, Justice Mellor determined that InterDigital’s offer had not been FRAND, placing this conclusion against the backdrop of the court’s broader view of InterDigital’s licensing practices—finding 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)”, and also determining in part that certain volume discounts offered to InterDigital’s largest licensees were unduly discriminatory.
– The Court’s Rate-Setting Analysis
The court then proceeded to assess the proper FRAND rate by evaluating two sets of comparable licenses respectively offered by the parties—the so-called “InterDigital 20” and “Lenovo 7”. There was no overlap between the two sides’ licenses, the “principle distinction” being the number of units covered and the total amount of licensing revenue: the Lenovo 7 were 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 accounted for 97.7% of the licensed units within the “universe” of the PLAs under consideration from both parties, while the most relevant 15 PLAs of the InterDigital 20 (all running-rate agreements) accounted 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.
While Justice Mellor found no reason to exclude any of the Lenovo 7, he found that the PLAs cited by InterDigital were “not relevant comparable licenses at all”, for a variety of reasons—including the “dramatically smaller” size of the licensees relative to Lenovo; the fact that those smaller licensees were far more driven by their fear of litigation costs, in some cases accepting InterDigital’s offers with no negotiation at all; their age; limits in the covered cellular technology; narrower regional markets; the fact that some were entered as part of settlements, and that some licensees operated in specialty market segments.
The court then proceeded to apply a rate-setting methodology based on the approach of Lenovo’s expert, Paul Meyer, that began with LG 2017 as the best comparable for the relevant time periods and applied an adjustment ratio of 0.728 to account for the fact that the split between “Developed and Emerging Markets” was virtually flipped for LG and Lenovo (the court opting not to account for differences in the mix of cellular generations in both sets of covered products). Applying that ratio to the $0.24 rate derived for LG resulted in a $0.175 rate for Lenovo, and thus a $138.7M lump sum. In a subsequent “form of order” decision, Justice Mellor ordered Lenovo to pay 4% in interest on past sales for reasons detailed further below; with the resulting $46.2M in interest, this brought the total award to $184.9M.
The Decision on Appeal
– Past Sales: Limitation Periods Should Pay No Role in FRAND Determinations
The UK Court of Appeal issued its appellate ruling on July 12 in a decision authored by Lord Justice Richard David Arnold. The court began its opinion with two issues raised by Lenovo on cross-appeal, the first of which was the High Court’s treatment of past sales. Lenovo argued that the court had been wrong to rule that it should pay a royalty for sales made before a six-year limitation period (statute of limitations). Here, Lord Justice Arnold agreed with Justice Mellor’s holding that limitation periods have no role 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”. Justice Mellor, as cited by Lord Justice Arnold by reference, held that a “willing licensee does not sit back and wait for demands from SEP licensors”, but rather actively seeks out the licenses it needs and sets aside funds for those licenses. A willing licensor would also 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”, Justice Mellor “concluded that a willing licensee will pay in respect of all past units”.
Lord Justice Arnold further held that there “[t]here should be no discrimination in favour of implementers who are slow to take a licence and against implementers who are quick to take a licence”—adding that [i]f anything, it should be the other way around”. Among other points, Lord Justice Arnold additionally rejected Lenovo’s argument that ignoring limitation periods would incentivize SEP owners to make excessive claims, countering that under Unwired Planet, a SEP owner may not enforce its rights until it makes an offer on terms a court agrees are FRAND. Moreover, further to the contrary, Lord Justice Arnold found that Lenovo’s approach would incentivize implementers to delay, because “after six years, every day of delay is a day’s lost royalties for the SEP owner”. Stopping implementers’ reliance on limitation periods, the court underscored, would require SEP owners to simultaneously bring litigation in every territory.
– Interest: Within the Court’s Power, and Properly Awarded Here
Lord Justice Arnold also rejected Lenovo’s challenge of the lower court’s interest ruling, beginning with its argument that the court lacked the power to award interest in this case. In part, Lord Justice Arnold agreed with the lower court’s decision that a willing licensor and willing licensee would have agreed to the payment of interest on past sales. More specifically, as cited by the Court of Appeal, Justice Mellor had determined that as a general matter, if money should have been paid in the past, interest should be paid to compensate the person who did not have that money for the lack of its use; that in the context of this dispute, the LG 2017 license found to be the most closely comparable discounted future sales by 10%, with no discount for past sales; and that InterDigital’s conduct did not warrant the denial of interest, as this confuses the question of what is FRAND (under which the issue of interest falls) and the process of FRAND determination.
Additionally, Lord Justice Arnold affirmed Justice Mellor’s rejection of Lenovo’s argument that InterDigital should be denied interest due to certain conduct on its part: that it had sought supra-FRAND royalties, failed to provide Lenovo with adequate information during negotiations, and sought an “unqualified” injunction on the basis that Lenovo was an unwilling licensee. Rather, the Court of Appeal found that Justice Mellor’s determination that InterDigital’s conduct did not warrant the withholding of interest was “an evaluative decision which the judge was well placed to make”, and one with no demonstrated flaw in its reasoning. Similarly, the court deferred to Justice Mellor’s determination of a 4% interest rate, as derived from the figure for late payments from the parties’ agreement, as an “evaluative decision” with no apparent issues in reasoning—also declining to accept arguments that would limit the period for which interest would be paid and that simple, rather than compound, interest should be used, holding that the former “does not accurately reflect the time value of money”.
– Per-Unit Rates: Lower Court’s Reasoning Was Flawed
Lord Justice Arnold then turned to InterDigital’s challenge of the per-unit rate in the license set by Justice Mellor—including both the per-unit figure derived from the comparable LG 2017 license, and the adjustment ratio applied to “reflect the characteristics of Lenovo’s sales”. Here, Lord Justice Arnold held that there were “three flaws in his reasoning”, the first of which is that it is “internally inconsistent”. On the one hand, Justice Mellor had found that InterDigital and other SEP owners had been forced to follow a “practice of heavy discounting of past sales” due to the need for “territory-by-territory enforcement” prior to Unwired Planet and due to limitation periods, and had determined that this practice was not FRAND. Yet on the other hand, Justice Mellor “declined to make any correction at all to the blended rate per unit derived by [Lenovo expert Paul] Meyer from LG 2017 in order to eliminate these non-FRAND factors when determining a FRAND rate for Lenovo”. When Justice Mellor applied a $0.24 per unit rate derived from LG 2017 (characterizing this rate as “surprisingly precise, for reasons detailed below)—multiplying this by a 0.728 adjustment rate (one that was “astonishingly precise)—it was “implicit in this that the rate of $0.24 per unit was a FRAND rate for LG”. Not only was such a finding not found in the main judgment, Lord Justice Arnold observed, it was also “difficult to reconcile” this with the judge’s finding that the “Lenovo 7” licenses (which included LG 2017) were not FRAND “in every particular”.
The second flaw in Justice Mellor’s reasoning, per the Court of Appeal, was that he “was not justified in rejecting Mr Meyer’s allocation of the lump sum paid by LG between past sales and future sales”. Rather, Lord Justice Arnold agreed with InterDigital: that Justice Mellor was wrong to have done so because he had otherwise preferred Meyer’s approach to unpacking, since “it approximates far better to what someone in the market would do with the available information”; because Meyer and InterDigital expert Mark Bezant treated past sales in a similar way; and because they even arrived at similar per-unit rates from LG 2017, while “LG’s own allocation of value between the past and future components of LG 2017 was more weighted to the future than InterDigital’s allocation, implying an even heavier discount for the past”. As such, Lord Justice Arnold found that Justice Mellor should have concluded that the $0.09 per-unit rate for past sales and the $0.61 per-unit rate for future sales that Meyer derived from LG 2017 were the “best available evidence” on what LG had respectively paid for past and future sales.
The third flaw in Justice Mellor’s reasoning, Lord Justice Arnold explained briefly, was that the former “seems to have lost sight of the points that (i) the court’s task is to estimate what rate would be FRAND for Lenovo, which is not a task that admits of the kind of mathematical precision which the judge applied, and (ii) a range of rates may be FRAND, and the SEP owner is only required to offer the FRAND rate most favourable to itself”.
That said, while Lord Justice Arnold reiterated that Justice Mellor was wrong not to correct for the non-FRAND factors identified above, Lord Justice Arnold determined that it also does not follow that he should have applied Meyer’s $0.61 unit rate, as argued by InterDigital: Just because past rates had been depressed by these non-FRAND factors did not mean that future rates had not been inflated. Rather, the appellate court noted that Justice Mellor found that InterDigital had sought to increase its future rates to compensate for “the heavy discounts it had been forced to concede on past sales”, a finding not disputed by InterDigital.
What remained was the appropriate correction, given Lord Justice Arnold’s determination that “the increases in the future rates in Lenovo 7 went a considerable way towards redressing the balance, but not all the way”. With the above principle that counseled against “mathematical precision” in mind, Lord Justice Arnold proceeded to apply the same two-step approach as used by the lower court: “first identifying an appropriate per unit rate from LG 2017 and then adjusting that rate for Lenovo”. After identifying a royalty from the “Apple 2016” license that Judge Mellor had identified as the “upper bound” due to Apple’s “unique status in a market”, Lord Justice Arnold agreed with Lenovo that this rate should be adjusted downward, albeit (as argued by InterDigital) “not too far”, due to the fact that the blended rates from the other Lenovo 7 licenses were lower (and accepting the lower court’s finding of comparability as to those licenses). The result was a $0.30 per-unit rate for LG, up from the $0.24 per-unit rate from the High Court’s judgment.
As for the original adjustment ratio of 0.728, Lord Justice Arnold rejected InterDigital’s argument that the court should apply Meyer’s future-only adjustment ratio of 0.803. Rather, while he agreed that a correction was warranted, he held that “[t]he highest ratio that I consider that can be justified is 0.75. Again, this is not a precise figure, but an estimate”.
That 0.75 adjustment ratio, as applied to the $0.30 LG rate, resulted in a per-unit figure for Lenovo of $0.225. Multiplying this by the final number of infringing units used by the lower court, the court set a new lump sum award of $178.3M, asking the parties to calculate the interest due at the 4% rate decided by Justice Mellor.
Lord Justice Arnold then briefly disposed of the remaining issues raised by InterDigital, including the lower court’s rejection of its top-down cross-check—for which it had argued that the multimode aggregate royalty burden was 1%, far below what anyone had suggested before. Here, the appellate court again declined to accept the cross-check, agreeing with Justice Mellor that it was inconsistent with the results of the comparables analysis—albeit, less so for the correct rate determined on appeal.
Finally, Lord Justice Arnold declined to reassess whether InterDigital had been a willing licensor. While Justice Mellor determined that it had been unwilling, based on the fact that it had “that it had consistently sought supra-FRAND rates from Lenovo”, the appeals court here observed that in light of its judgment that “the FRAND rate is higher than the judge’s rate, that inevitably places a question mark over the judge’s finding”. Nonetheless, Lord Justice Arnold held it was not necessary to decide this question the only question here is “what sum of money is FRAND”, meaning that the parties’ past “willingness or otherwise . . . is simply irrelevant’.
See “London High Court Issues UK’s Second-Ever FRAND Determination” (March 2023) for a deep dive on Justice Mellor’s prior decision in this case.
