Unpacking IDC v Lenovo (Part II): General principles of FRAND explored

This is the second part of this Kat's analysis on Interdigital v Lenovo FRAND judgment [2023] EWHC 539 (Pat).

FRAND – General Principles

The Judge underlined the importance of the following points of principle in his consideration ([446]):

i)  Generally, in the unpacking of any allegedly comparable PLA, whether account should be taken of the subjective views of either SEP licensor or SEP licensee.  I have already touched upon a key example of this, in relation to the treatment of past sales, above, but the issue has wider ramifications.

ii) Whether InterDigital’s system of discounts, with particular emphasis on its volume discounts, as assumed in Mr Bezant’s analysis, is consistent with FRAND.

iii)  Whether limitation periods have a role to play in the relationship between willing licensor and willing licensee.

iv)  How to eliminate or discourage hold-out.

v) Whether discounts (often substantial) in relation to past sales should be part of a FRAND analysis, plus a related issue of whether interest should be awarded on ‘past’ royalties.

vi)  Whether it would be discriminatory against Lenovo not to apply the sort of discounts (e.g. for volume, for past sales) applied in the allegedly comparable InterDigital PLAs. 

The Judge observed that InterDigital’s practice of heavy discounting for the past is due to two factors: one, the influence of limitation periods and two, the difficulty in recovering damages for infringement in many countries ([444]).

The Judge noted that the accounting rules of InterDigital provided them with significant leeway to apportion sums received, which injected a significant subjective element into the analysis ([453]). On the volume discounts applied to the largest InterDigital licensees (which are in the range of 60% - 80%) the clear conclusion was that they did not have any economic or other justification ([495]). The reasons are as follows. First, in the field of SEP licensing, there is no equivalent to the economies of scale which can be achieved in the manufacture and distribution of physical products ([496]). Second, the licensee does not care about InterDigital’s internal justification for the reduction and may not know anything about it ([497]). Third and most importantly, the size of the volume discounts discriminates against smaller licensees, an anathema to FRAND ([499]). Fourth, in terms of the standardised 4G technology phones use the same technology. The royalties paid for each of those phones should not differ significantly or at all. InterDigital’s rationalisation is ex post facto intended to increase the actual rates via the notion of volume discounts ([502] – [503]).  Fifth, the Judge did not see any separate flow of value to the licensor from the volume discounts, separate from the advantage of receiving a large lump sum ([504]). The Judge however accepted that relatively small volume discounts may be FRAND ([507]).

On the other discounts the Judge saw them as a series of levers which InterDigital could and did use to secure a deal ([517]). The Judge accepted that the discounts which reflect the time value of money are entirely fair and consistent with FRAND. But any other discounts are used, along with the volume discounts, to shore up InterDigital’s programme rates and therefore discriminate against smaller licensees. The Judge again mentioned that no view had been formed to whether the size of InterDigital’s other discounts were justifiable ([519]).

On whether the limitation periods are relevant when assessing what a willing licensee and a willing licensor would agree, the Judge concluded that they do not have a role in the relationship between them and indeed they are inconsistent with that relationship. A willing licensee would not refuse to pay FRAND licence fees for units produced and sold before the limitation periods ([528]). If a willing licensee does not need to pay in respect of all past units, this would insert into the FRAND process an ongoing perverse incentive to delay the agreement or setting of FRAND terms for as long as possible ([529]). The policy reasons behind the national limitation periods is not in the view of the Judge sufficient to override the fundamental relationship of a willing licensor and a willing licensee ([530]). The Judge recognised that eliminating the limitation periods may encourage a SEP licensor to wait to see what an implementer’s actual sales have been and then license retrospectively, but had two potential solutions: one is to withhold an award of interest on past royalties and secondly for ETSI to refine the rules ([535]). The Judge remained undecided on whether interest should be awarded on past royalties ([548], [552]).

Some of the effects of the Judge’s findings on the points of principle are these. Lenovo must pay the royalties on their past sales. Further, one principle reason prompting heavy discounting of past sales as mentioned in [444] has now been removed ([556]). Another effect is that it is necessary to leave aside any subjective views from either the licensor or the licensee, for example in the unpacking analysis ([560]). This means setting aside the subjective views from InterDigital as to what portion of a lump sum they attributed to the past and future. This prevents artificial inflation of future rates ([563], [564]).

This Kat has understood that the Judge's comments on limitation periods has caused the most raised eyebrows and, to Merpel at least, seems to be supplementing the judicial determination of global FRAND terms by English Courts with the will of legislatures, both domestic and foreign.   Will have to await the Court of Appeal's verdict on this particularly important point that impacts FRAND negotiations and rates.