Unpacking IDC v Lenovo (Part I): The approach on unpacking and comparing prior licence agreements

Following IPKat’s breaking news on the Interdigital v Lenovo FRAND Judgment, this Kat finally managed to digest and analyse the detail of the Judgment.  This is Part I of the detailed reporting on that Judgment.

The Judgment is divided into three sections. First, the comparables case, second, the top-down analysis, and third, the allegations regarding conduct ([16]). This is the second time that the English court determined what terms are FRAND ([165]). Mellor J, the Judge, explained that in very general terms he adopted the same approach as that of Birss J in Unwired Planet v Huawei [2017] EWHC 711 (Pat) ([42]). The applicable principles are described in [165] – [270], with previous case law listed in [165]. The principles applicable to conduct are reviewed in [172] – [242], and those on the comparables and top-down cases in [243] – [270]. On the comparables and top-down cases the Judge observed that the royalties should not depend on the price of the device, which reflects many other features and the status of the brand. This consideration is fundamental in the approach of the Judge. This observation also applies to Standard Essential Patent (SEP) licensors who may have various levels of bargaining power which may in addition change over time ([247] – [249]).

Section 1 – the comparables case

The comparables case is divided into two parts. First, the identification of relevant comparable licences. Secondly, the consideration on how information should be deployed to reach a FRAND rate which is applicable to Lenovo ([271] – [272]).

On the general SEP licensing landscape, the Judge noted that the larger implementers favour lump sum deals, that a lump sum agreement brings economic certainty to a licensor, and that smaller licensees and/or those with an uncertain outlook or less bargaining power are likely to prefer a running royalty agreement ([276]). ‘[…] when the sums payable by the larger implementers (often lump sum deals) are at least a degree of magnitude higher than the costs of litigation, it seems logical to assume that the unpacked rate is more likely to represent the ‘true value’ of the licensed technology.’, while ‘[…] where the costs of litigation would be around or greater than the total sum payable under a licence, it is far more likely that the implementer has little choice but to accept what the licensor is demanding’ ([288]). He rejected the argument that the royalty in SEP licensing of mobile devices should depend on usage. He did not find any support in the ETSI materials on this suggestion. Instead, the royalty on a 4G/LTE phone is paid because of the potential of that device to use the technology ([291]).

The InterDigital/Bezant approach to unpacking and comparison

In InterDigital's offers various discounts may be applied. They include ([143]):

i)  Fixed-fee discount: a licensee would be eligible for a fixed fee (‘FF’) discount if it entered into a lump sum or fixed fee licence.

ii) Time value of money discount: typically around 10% per annum but higher at certain points, and in part based on InterDigital’s cost of capital.  Mr Grewe, InterDigital’s witness, described the FF discount as accounting for the value InterDigital places on the certainty of the sum they receive, whereas the Time Value of Money discount accounts for the increased value InterDigital places on money received today rather than in the future.

iii) Term discount: a licensee would be eligible for a term discount if it agreed to a licence of 3 years or more in length, with the discount increasing from 3% at 3 years to a maximum of 10% at 10 years.

iv) Pre-payment discount: which only applied to running royalty (‘RR’) licences where sums were paid in advance.

v) Volume discounts.

vi) Regional Sales Mix Discount: a licensee is eligible if a proportion of their products are manufactured and sold in China primarily for use in China, which are subject to a 50% discount.

vii) Renewal Discount: this is a discretionary discount, both in terms of when it might be offered and, if offered, the amount.  Mr Grewe said the discount was something in the range of 5-20% and was available to be offered if a licence was renewed early or about the time a previous licence was expiring. 

Two steps were used by Mr Bezant, InterDigital’s accounting expert, to return their Licensee Effective Rate (‘LER’) to the Pre-Discount Rate (‘PDR’), as seen in the Figure below. First, from the LER the effect of any payment structure-related discount is disapplied to obtain a Common RR-Basis Rate (‘CBR’). Then the effect of any other discount, in particular licensee specific discounts, is disapplied to obtain the PDR ([300]; Fig. 5-1 in [301]). When calculating the PDR any licensee specific discount (volume, regional, term, and renewal) is unwound but only after past sales have been removed: the PDR is a future only rate ([301]). It is generally correct to assume that the PDR represents what Mr Bezant regarded to be the true value of the licence rights ([321] – [322]). The PDRs are not actual royalty rates charged to a licensee ([382]).

From the expert evidence the Judge held that the discounts applied by Mr Bezant are assumed, and that these assumed discounts are rationalisation internal to InterDigital ([342]).

The Lenovo/Meyer approach to unpacking and comparison

Mr Meyer, the accounting expert on behalf of Lenovo, first derived both past and future rates and an overall blended rate blending past future, from each Patent Licence Agreement (‘PLA’). He then applied three economic adjustments (Sales distribution by cellular standard; Sales distribution by geography relative to emerging markets; Sales distribution by geography relative to patent coverage – [735] (more on that later) to adapt the rates from each PLA to Lenovo’s specific circumstances ([365]).

The approach to past sales

The Judge considered it incorrect to base the analysis on the subjective assessments by InterDigital on how much of a lump sum should be attributed to past sales releases. These assessments were made by InterDigital at least in part to be able to quote higher future rates ([422]).

The Judge decided to adopt the same approach as in Unwired Planet v Huawei [2017] EWHC 711 (Pat) and in the US judgment TCL v Ericsson (C.D. Cal. Dec. 21, 2017) (Selna, J.) to apply the same rate to past as future. There are two accumulative or alternative reasons. First, Interdigital had significant flexibility in how they apportion an overall lump sum consideration to a past release. This is artificial. These allocations did not feature in the particular PLA and were not agreed with the licensee. Further, they do not reflect how the market assesses the rate from a lump sum licence which derives a per-unit rate by dividing the total consideration by the best estimate of the number of units covered. The second reason is that FRAND rates should focus on the money and other benefits which pass through the licensee and licensor. FRAND is not concerned with and should not be affected by one party’s internal justification for the sum ([423] – [426]).

Comments

The part of the Judgment already contains remarks on what a willing licensor and a willing licensee should behave, which the parties may want to bear in mind in future negotiations. [202] notes that a licensor is not willing if it refuses to provide information necessary for a willing licensee to evaluate an offer which has been made. [205] comments that a willing licensee does not sit back and wait for demands from the licensors.

Another point worthy of attention is that Mellor J differed from the conclusion of the US Court of Appeals in TCL v Ericsson 943 F.3d 1360 (Fed. Cir. 2019) that the release term was in substance compensatory relief for TCL’s patent infringements when deciding worldwide FRAND terms. Mellor J indicated that this conclusion implies that the US court has jurisdiction to determine worldwide damages for patent infringement. But this is not the position in the UK. Furthermore, a willing licensee is willing to and does pay an appropriate rate for all past sales worldwide, thereby regularising the position of a willing licensor and a willing licensee. This is not paying damages for patent infringement  ([252],iii)). Mellor J also did not find any of Judge Selna’s reasons for rejecting a dollar-per-unit rate persuasive  ([269]).