http://ipkitten.blogspot.com/2023/07/unpacking-idc-v-lenovo-part-ii-general.html
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.
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