http://ipkitten.blogspot.com/2023/06/unpacking-idc-v-lenovo-part-i-approach.html
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]).
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