Unpacking IDC v Lenovo (Part III): $0.175 per cellular unit

After explaining the general principles of FRAND the Judge in Interdigital v Lenovo FRAND judgment [2023] EWHC 539 (Pat) calculated what the FRAND rates should be for Lenovo. This is the third instalment of this Kat's analysis.  You can read Part I and Part II here and here.

FRAND – Licensing Terms

InterDigital selected 20 of its previous licences as comparables – the InterDigital 20. Lenovo did not submit any of its own licences, but selected those under which InterDigital licenses with the six largest undertakings (Samsung 2014; Apple 2016; LG 2017; ZTE 2019; Huawei 2020; Xiaomi 2021) in the mobile phone field, later adding Huawei 2016 to make the Lenovo 7. The Judge held that the patent licence agreements (‘PLA’) relied upon by InterDigital were not relevant comparables: the scale of the licensed business in each case was dramatically smaller than that of Lenovo. Their license rates were driven by the fear of litigation costs instead of being the subject of a rigorous valuation of the portfolio in question; a number of the PLAs are old and/or expired some time ago, and consistent with their age they were for 3G or 3G/4G only; in many cases the licensee’s business was largely or entirely confined to one country or region; in several cases the licensee recently announced that it was leaving the market or parts of it; in three cases the licensee had initiated proceedings against InterDigital and was then given a settlement credit which meant they did not need to pay the face value of the royalties in actual cash; five licensees operated in specialist segments of the market; four licensees were either brokers or contract manufacturers ([609]).

As an alternative case InterDigital tried to rely on LG 2017, but the ranges of the rates which InterDigital derived from that PLA was held to have no validity, because these are future only rates, meaning a disproportionately low share of the lump sum consideration was attributed to the past and an excessively large part of the consideration was apportioned to the future ([619]).

The Judge noticed that there was no evidence that the Lenovo 7 were massively affected by hold-out. Moreover, InterDigital did not develop a case on the middle ground – instead their case was that the true value was multiples of the rates derived from the Lenovo 7 ([724]). This led the Judge to conclude that there was no evidence of InterDigital being forced by extensive hold-out to grant discounts of 60%, 70%, or 80% to the largest licensees. He regarded the Lenovo 7 as the best group of indicators of the value of InterDigital’s portfolio, because they are the results of InterDigital’s own assessments of the value of their portfolio for the largest licensees ([726]).

Mr Meyer’s three economic adjustments

Meyer, the accounting expert for Lenovo, applied three economic adjustments to adapt the rates from each PLA to Lenovo’s specific circumstances.

Adjusting for sales distribution by cellular standard

This reflects that each licensee had a different mix of sales by standard. Meyer adjusted the amounts paid under the Lenovo 6 (the Lenovo 7 less Huawei 2016) to what would be paid if each of the Lenovo 6 had the same mix of units by technology as Lenovo ([738]). Mr Bezant for InterDigital in contrast proposed to construct a separate per unit rates for each generation ([745]). The Judge commented that neither approach was perfect but Meyer’s approach was better for adjusting the sales mix because it involved far fewer assumptions ([746]).

Adjusting for sales distribution by geography relative to emerging markets 

This adjustment reflects Lenovo’s sales mix in the Emerging Markets when compared with the relevant PLA in the Lenovo 6. The Judge noticed that the worldwide average selling prices (‘ASP’) by region presented by Meyer demonstrated the trend over 2015 – 2021 that China’s ASPs grew closer to the Developed Market ASPs. This made the Judge doubt whether it remained appropriate to apply 50% discounts to China, as done in the judgment UPHC [2017] EWHC 711 (Pat) ([751]).

In closing InterDigital submitted four reasons on why these adjustments were inappropriate ([752]). On the first reason that Meyer’s approach was not grounded in any indicia which the parties to the relevant PLA would have taken account of at the time, the Judge commented that it amounted to an invitation to ignore relevant data which was now available. He considered that if the data is available which supports a more refined analysis the Court should adopt it ([753]). On the second point that Meyer’s analysis was based on a wrong understanding of the regional approach in UPHC, the Judge clarified that the approach in UPHC concerned the particular situation in that case where the number of relevant SEPs in the Major Market countries was not very large such that declarations of invalidity of even one or two patents could render a country free of Unwired Planet patent protection. This approach does not necessarily translate to larger portfolios such as the present case ([758]). The Judge agreed with the principle in the third point of InterDigital and recognised that he must eliminate double-counting – low average ASPs in Meyer’s emerging markets were partly driven by a higher proportion of lower generation devices sold in those markets, where that difference in the sales mix is already taking into account in the first adjustment ([759]). Commenting on the fourth objection the Judge also agreed that when he adopted any part of Meyer’s analysis, the place of manufacture and the place of sale should be taken into account ([760]).

Sales distribution by geography relative to patent coverage

Agreeing with the reasoning of Judge Selna in TCL v Ericsson quoted in [761] – [762], the Judge considered it appropriate to make an adjustment to reflect InterDigital’s patent coverage. The Judge also kept in mind that parties agree a single global rate which takes into account many factors including patent coverage ([767]).

The Judge concluded on Meyer’s three adjustments that if adjustment 1 is applied there are some overlap with adjustments 2 and 3 on top of adjustment 1. In particular, an approach similar to that in UPHC on the patent coverage is not warranted here because InterDigital has sufficient patent coverage in relevant territories. In addition, Meyer’s approach is in some aspects too crude for the adjustments were applied according to the duration of each of the Lenovo 7. Finally, adjustment 3 has the greatest effect ([791]).

Conclusions on the comparable licences

The Judge rejected all of the InterDigital 20 as relevant comparables ([793]). LG 2017 was considered to be the best comparable. On Samsung 2014, the Judge commented that before that point InterDigital had yet to reach a deal with any big players in the market and there was a strong incentive for them to agree licencing terms with one of the biggest players to encourage the others to licence agreements with them as well. Therefore the rates implied by Samsung 2014 were lower than the FRAND rate. Huawei 2016 was regarded as a counterbalance to Samsung 2014. Apple 2016 was an outlier ([794] – [797]).

The Judge observed that there were limitations in the data available to him and accordingly he declined to derive rates by generation of technology. Since there are many moving parts reflected in the data over time (see [789]) he favoured applying different rates to different periods of time ([803]).

For the period of 2012 – 2018, LG 2017 was considered to be the best comparable. The Samsung 2014 rate is too low, Apple 2016 is an outlier, and ZTE 2019 is not particularly reliable (see also [661]; [687]). Although the Huawei 2016 rate is consistent with the LG 2017 rate, in other respects the former has a very different sales mix and geographical spread, making it a less useful comparable. In terms of adjustments the most significant one is the split between the Developed and Emerging Markets: LG’s split was roughly the mirror image of Lenovo’s. And the Judge declined to make any separate adjustment to reflect patent coverage. Applying the single adjustment ratio of 0.728 to reflect all the differences between LG and Lenovo (it remains a bit unclear to this Kat how the adjustment ratios in the Judgment are calculated), the FRAND rate for 2012 – 2018 is $0.175 per cellular unit ([805] – [807]).

For the period of 2019 – 2023, the contrasting figures for LG against Lenovo show a similar pattern. LG remains the best comparable at least because the sales mixes remain almost identical. Further, the unpacking of LG 2017 eliminated any influence of LG exiting the market in July 2021. For this reason the same rate of $0.175 per cellular unit applies ([808] – [809]).

For 2007 – 2011 there was a lack of reliable data. That Judge therefore adopted the same rate as 2012 – 2018 ([810]).

The $0.175 rate gives a lump sum payment of $138.7 million ([814]). For comparison, InterDigital initially pleaded an amount of $337 million ([20] – [22]) while Lenovo argued for $80 million ± 15% for all sales in the six-year term to the end of 2023 with a full release for all past sales ([26]). It is clear that this is a sum preferable to Lenovo.

The final part of the reporting will be about the second main section of the Judgment on the top-down analysis and the third section on the allegations regarding conduct. It will also include the comments from this Kat on this Judgment.