http://ipkitten.blogspot.com/2023/08/unpacking-idc-v-lenovo-part-iii-0175.html
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.
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