The Court of Appeal says hold out should not be rewarded. But that is exactly what it has done 

By Matteo Sabattini 

The English Court of Appeal issued a bombshell ruling on 28 February when it found that Ericsson had breached its obligations as an SEP licensor by seeking injunctions against Lenovo in several jurisdictions, despite the Chinese company undertaking to accept a global licence on FRAND terms determined by an English court. 

Lenovo had asked the UK courts to intercede. Ericsson, the patent owner and plaintiff in a dispute than involves litigation in North America and Europe, had never done so.  

A few days after the ruling, the Swedish company was labelled an unwilling licensor because it declined to enter an interim licence on terms set out by the Court of Appeal. 

But the facts of this case illustrate the impossible situation SEP owners face when implementers fail to play by the rules. If this decision is not overturned (Ericsson is appealing to the UK Supreme Court), expect such behaviour to become much more common. 

“A textbook example of hold out” 

Lenovo has manufactured and sold devices that implement cellular standards since 2008. Ericsson says it has been trying to negotiate a licence under its SEPs – to no avail – for that entire time, more than 16 years.  

Apart from a 2011 licence entered into by Motorola Mobility three years before Lenovo acquired it, Lenovo “have never held a licence from Ericsson and have not paid for their exploitation of Ericsson’s SEPs”, the Court of Appeal judgment states. 

Sixteen years is a long time. Here is a photo of a cellular phone Lenovo started selling in 2009, the 3G-powered OPhone: 

Good-faith counterparties in the SEP market do not simply fail to reach a consensus after 16 years of sincere negotiations. This situation is the product, Ericsson contends, of a sustained strategy of hold out in which Lenovo has sought to avoid taking a licence by any means necessary. 

“Not to be condoned” 

If Ericsson is right that Lenovo has engaged in a deliberate, 16-year campaign of hold out, the Court of Appeal said, then “[such] behaviour is not to be condoned”. But because Lenovo offered to enter an interim licence in 2023 and ultimately pay FRAND terms set by an English court, “Lenovo cannot be accused of holding out now” (emphasis added), the decision continued. 

Thus, the clock is reset and 2023 becomes Year Zero. How fortunate that Ericsson is a large, well-resourced company. How many other patent owners – individuals, SMEs – would be able to survive this length of time with no positive progress towards a licence? 

Patents are time-limited rights, generally valid for a period of 20 years from the filing date. Most UK patents spent between two-and-a-half and four years pending before grant, according to a report from 2013. If an innovator is expected to wait up to four years for an issued patent and then deal with hold out for another 16, then the patent’s fundamental promise of a time-limited right to exclude means very little.   

Under UK law, someone who uses and controls land or property without the permission of the registered owner can claim ownership for themselves under the doctrine of adverse possession after just 10-12 years. At what point does the infringement of intellectual property through a deliberate strategy of hold out turn into de facto expropriation? 

A fundamental asymmetry 

Despite stating that hold up and hold out are two evils equally to be avoided, the Court of Appeal cast a harsh eye on Ericsson’s attempts to get even the slightest amount of leverage in this 16-year standoff. It is often assumed that licence negotiations are imbalanced in favour of patent holders. This is hardly the case. In fact, in the SEP space, nothing could be further from the truth. 

Unlike almost any other market, a standards implementer gets to use the technology before it has agreed to pay anything at all. It continues to enjoy the use of this product as it negotiates what price it will pay. In the SEP world, implementers know there is very little leverage on the other side. That allows companies to hold out until they judge the conditions to be in their favour.  

Forum shopping encouraged 

Why would a company that has held out for well over a decade with little consequence suddenly undertake to enter an interim licence and accept FRAND terms decided by English courts? 

In background to the dispute, Lord Justice Arnold observes that implementers are increasingly eager to have UK courts set global FRAND rates, noting that: “This change in implementers’ attitudes may be explained by the fact that, in two recent cases, the FRAND terms determined by the Patents Court were significantly closer to those offered by the implementers than to those sought by the SEP owners.” 

With this latest ruling, a UK court has not only agreed to set a FRAND rate at the request of just one of the parties, but it has also issued a decision that undermines patent enforcement proceedings in other jurisdictions. This will encourage further forum shopping by infringers. They are likely to seek to move more disputes to the UK (and China, where courts have taken similar positions). 

IP rights holders must be free to sue for infringement in any jurisdiction where they hold patents and where the alleged infringer has sales or manufacturing activities. If left unchecked, forum shopping by infringers will further undermine both national patent rights and the global IP system.  

Hold out plus forum shopping effectively allows infringers to choose both the time and the place of royalty adjudication. It creates an opportunity for free riders to enjoy the use of someone else’s technology for as long as they like while retaining total control over which country’s courts should determine the amount they ultimately owe. This will not be to the benefit of innovation. 

Unfair competition 

The Court of Appeal refused to accept the strong case put forward by Ericsson that Lenovo was a uniquely unwilling licensee engaged in classic hold out behaviour. At trial, Lenovo blamed Ericsson for the protracted failure of negotiations. Though the High Court had previously ruled for Ericsson in denying Lenovo’s request for an interim licence, it did not attempt to apportion blame for anything that happened prior to 2023.   

One clue as to who is at fault is the list of companies that did obtain a licence from Ericsson during that time. Just a few of them are named in the High Court decision: Apple, Samsung, Xiaomi and Oppo.  

These are hardly pushovers. They are savvy companies with excellent IP licensing teams and plenty of resources to litigate when it’s to their advantage. They would not accept terms they believed would put them at a competitive disadvantage to their peers. Nor has paying royalties to Ericsson prevented each of these companies from achieving commercial success in the highly competitive mobile phone market. 

Hold out harm patent owners. But it hurts implementers who play by the rules, too. It skews fair market competition.  

Free riders should not be able to hold out for years and then get the same deal as their competitors. The ETSI IPR Policy makes plain that the FRAND commitment presupposes a willing licensee – that it takes two to tango. The only way to have a level playing field is to deprive unwilling licensees of the benefits of the FRAND contract. That means companies pursuing this course will run the risk of injunctions and pay more in the end. 

Yet the UK courts appear ready to go in the opposite direction: rewarding hold out with generous financial terms. 

Hold out pays 

“Lenovo will not be rewarded by the English courts for having held out in the past,” the Court of Appeal declares. The financial terms contemplated in the judgment suggest otherwise.  

Ericsson can expect “realistic interest” on past royalties going all the way back to 2008, Lord Justice Arnold wrote. Elsewhere, the Court noted that the 4% annual interest rate compounded quarterly upheld in the InterDigital v Lenovo case “helps to ensure that implementers are not rewarded for hold out”. 

But really discouraging free riding would entail a punitive rate of interest rather than one which is close to what the UK government pays for long-term borrowings. As FRAND expert Eric Stasik points out, the default interest for transactions without consumers involved under German law is nine percentage points above the basic rate of interest. This would provide a robust disincentive to hold out. 

How was the 4% rate in InterDigital v Lenovo arrived at? It was the interest provided for late payments under a licence agreement entered by the two parties. The court observed that across the comparable licences introduced by the parties, “the lowest rate was 3% and a common rate was 10%” for late payments. 

A fairer approach would use a rate based on one or both companies’ cost of capital. This figure represents the minimum return that a company expects to earn on its investments, so it more accurately reflects the economic impact of delayed royalty payments. In the InterDigital v Lenovo case, the High Court heard evidence that InterDigital’s weighted average cost of capital (WACC) for the previous five to 10 years was 10.5%, and that this figure was fairly typical for InterDigital’s industry.  

During the Court of Appeal arguments in the InterDigital v Lenovo case, Lenovo had argued that there should be no interest on past sales whatsoever.  

A rational response 

Key to the Court of Appeal’s ruling was its belief that “any rational SEP owner would want to be paid sooner rather than later”.  

Ericsson protested that interim payments are not all that useful because, since they are subject to future adjustments in a final verdict, they cannot properly be recognised as revenue under GAAP principles.  

On the other side of the ledger, by entering the interim licence, Ericsson would effectively be walking away from injunctions it had obtained from other courts and de facto subscribing to the notion that Lenovo had not been an unwilling licensee. In other words, it would be giving up a lot for nothing.  

The court dismissed this argument, fundamentally misunderstanding the financial realities of operating as a publicly traded company.  

Is Ericsson a rational actor? It is a $277 billion business accountable to its shareholders. Refusing to enter the interim licence with Lenovo in the wake of the Court of Appeal’s decision was a big call to make. The fact that the Swedish company has taken this course shows just how far off base the Court of Appeal judgment was. 

Matteo Sabattini is executive adviser, government affairs at Sisvel 

This article was prepared by him in a personal capacity. The opinions expressed within it are the author’s own and do not necessarily reflect the views of Sisvel. The content is for informational purposes and should not be taken as legal advice.