Unpacking IDC v Lenovo (Part IV): top-down cross check; allegations regarding conduct; permission to appeal

This is the final part of this Kat’s analysis on Interdigital v Lenovo FRAND judgment [2023] EWHC 539 (Pat). The first three parts can be found here, here, and here.

Waiting for appeal

SECTION 2 – INTERDIGITAL’S TOP-DOWN CROSS-CHECK

InterDigital’s top-down case was advanced as a cross check for their primary comparables case ([815]). InterDigital proposed that the total aggregate royalty burden equals the aggregate royalty burden of InterDigital divided by InterDigital’s share of the patents assessed as essential for that generation of technology ([821]). The appropriateness of the total aggregate royalty burden can be assessed by reference to other statements of the approximate size of the total aggregate royalty burden, for example from the hedonic regression analysis ([822]). Hedonic regression seeks to isolate the fair market value of each of the technology generations over the previous, all other things being equal (such as the screen size and the processing power).

The Judge declined to put any weight on InterDigital’s top-down analysis. The main reason is that InterDigital argued that the top-down analysis supported the rates in their 5G Extended Offer, and the Judge had founded those rates to be inflated and discriminatory ([881]; see also the Judge’s conclusion in [873]). The Judge also observed in [878] that the hedonic price regression analysis was an experiment inserted into this trial via expert report without the usual procedural safeguards (in particular, proving facts by experiments).

SECTION 3 – ALLEGATIONS REGARDING CONDUCT

The final main section of the Judgment is on the allegations regarding conduct of the parties. After explanation on the history from [888], the Judge observed from [921] the overall picture: Lenovo were justified in seeking further information and/or assurances about the rates which other similarly situated implementers were paying. And InterDigital’s reliance on publicly available information from their SEC filings can be misleading ([923]). By consistently seeking supra-FRAND rates, InterDigital did not act as a willing licensor ([928]). For the part of Lenovo, they did drag their heels on occasion and to that extent they did not act as a willing licensee ([931]). But for most of the negotiation, Lenovo was correct not to agree to any of InterDigital’s offers and justified in seeking information. So for the most part Lenovo did conduct themselves as a willing licensee ([932]).

The overall conclusions of the Judgment are:

944. The result of my comparables analysis above is that the lump sum which Lenovo must pay to InterDigital for a FRAND licence down to 31.12.2023 is $138.7m.

945. I find no value in InterDigital’s Top-Down cross-check in any of its guises.

946. Based on the outcome from my comparables analysis, I find that neither InterDigital’s 5G Extended Offer nor Lenovo’s Lump Sum Offer were FRAND or within the FRAND range.

947. In large part, I reject InterDigital’s case on conduct. Ultimately, however, Lenovo will be put to their election, at which point they will demonstrate whether they are a willing licensee or not.

Form of Order Judgment; permission to appeal

There is a subsequent Form of Order Judgment [2023] EWHC 1578 (Pat) which is just as important. The Judge awarded interest on the principle sum, because if Lenovo had been under a running royalty licence they would have made four payments annually, each one shortly after the end of each quarter ([21]). InterDigital should be compensated now for the delay in receipt of those sums ([29]). He awarded interest at the rate agreed between the parties in the draft licence i.e. 4% compounded quarterly. On the cost, the Judge had no doubt that Lenovo were the overall winner of this trial: see reasons in [60]) with additional adjustments on the costs explained in [66] – [69].

Then it moved on to the inevitable topic of appeal. InterDigital advanced four grounds of appeal. On Ground A ‘the rate to be derived from the LG licence’ although the Judge considered it to include some points of principle, it was wrapped up in challenges of factual evaluations in the main Judgement ([120], [124], [129]). InterDigital did not have a real prospect of success on Ground A ([170]). Ground B ‘Mr Meyer’s economic adjustments’ are considered to be merely a possible consequence of success on Ground A ([136]). For Ground C ‘top down cross check’ the Judge thought the check was never powerful enough to revive their comparables case ([138]). Ground D ‘unwillingness finding against InterDigital’ does not appear significant ([147] – [148]).

The Judge summarised the points of principle which he decided in the main Judgment and granted permission to appeal on them as follows ([163]; [171]):

i) First, whether national limitation periods have a role to play in the relationship between willing licensor and willing licensee. [446 iii)], [431]-[433] & [520]-[535].

ii) Second, whether account should be taken of the subjective and/or ex post facto views of one party as to the value to it of a patent licence. [446 i)], [448]-[457] & [553]-[555].

iii) More specifically, what is the correct approach, in the unpacking analysis, to the valuation of past and future sales. Even more specifically:

a) whether the Court is bound to accept InterDigital’s allocations of Lump Sum consideration to past and future sales, the resulting supposed heavy discounting of past sales and the inflated future rate [446 v)], [391]-[426]; and

b) whether the fact that an allocation to past sales has been audited is relevant.

iv) Third, whether volume discounts said to have been applied to the largest InterDigital licensees (60%-80%) have any economic justification or are FRAND or whether they result in discrimination against smaller licensees [446 ii)] & [495]-[507].

v) Plus, whether other discounts said to have been applied by InterDigital (other than those concerned with the time value of money) are FRAND [516]-[519].

vi) Fourth, whether it is appropriate for the Court to seek to eliminate or discourage hold-out e.g. by finding that a willing licensee must pay royalties on all unlicensed sales [446 iv)] & [540]-[545].

vii) Fifth, whether interest should be awarded on the principal sum derived from the comparables analysis: FRAND Judgment [547]-[552] & [4]-[33] of the Form of Order Judgment.


Comments

With a significant number of crucial points of principle under appeal this Kat looks forward to the reasonings of the Court of Appeal. Suffice to say that a significant part of the Judgment involved factual assessments, and with the less-redacted Judgement [2023] EWHC 1583 (Pat) now published different implementers will no doubt look at that Judgment very carefully to glean information for the negotiations which a patentee may be reluctant to disclose.

FRAND is an emerging area of law, and, in addition to the ratios, the obiter comments from the Judge could be of equal value. For example, he could not decide that Lenovo’s refusal to agree to an arbitration was the act of an unwilling licensee ([920]). He had considerable doubt that a SEP licensor which has been demanding supra-FRAND rates and was an unwilling licensor can automatically transform itself into a willing licensor simply by offering third-party adjudication of FRAND terms whilst continuing to demand supra-FRAND rates. Having started a third-party adjudication the licensor needs to present terms with the rates at least in the FRAND range ([155] & [160] of the Form of Order Judgment). But which range is FRAND? The licensor and licensee will certainly have different ideas eventually to be solved by a lengthy judgment like this. A more efficient alternative is probably what Lord Justice Arnold proposed in the appeal from Trial F between Optis and Apple ([2022] EWCA Civ 1411; this appellant judgment itself is under appeal before the UK Supreme Court) in [115]: ‘The only way to put a stop to such behaviour is for SDOs like ETSI to make legally-enforceable arbitration of such disputes part of their IPR policies.’