FRAND lessons from the UK Court of Appeal ruling in InterDigital v Lenovo

There are notable throughlines from past landmark cases in the latest UK FRAND ruling

By Donald Chan

Last month, the Court of Appeal for England and Wales handed down its judgment in the InterDigital v Lenovo case, one of just three in which a UK court has set a global FRAND rate. Both litigants found something to celebrate in the second-instance decision: InterDigital welcomed the $55 million uplift in its total payout and praised the finding that all past sales dating back to 2007 must be paid for, with interest; meanwhile, Lenovo signaled its satisfaction with the per-unit royalty of $0.225 cents and publicly offered the same amount for a forward-looking licence.

There has been a lot of public discussion on which side came out better. The more important question is what lessons can be drawn about the UK approach to FRAND cases, and how this might impact the practice of licensing in the cellular SEP space.

Here are five takeaways based on my own reading of the judgment.

1. FRAND determination in the UK is more an art than a science

The decision reaffirms that FRAND rate-setting is not an exact science in UK courts. Instead, it is often a process that involves finding a middle ground between the parties’ positions. Here is how Lord Justice Birss described the process of arriving at the pre-adjustment royalty rate of $0.30 in the appeal decision:

“… we know $0.24 is a bit too low. We also know on the judge’s findings that InterDigital’s $0.61, or a number close to it, would be far too high. $0.30 is the next highest logical figure to arrive at moving upwards a modest amount from LG 2017”.

A similar method was employed to calculate the adjustment ratio of .75 which resulted in the $0.225 per-unit royalty.

This is reminiscent of how Birss LJ determined the 4G SEP stack as part of the 2017 Unwired Planet decision. Holding that Huawei’s position of 1,812 was “much too high” and Unwired Planet’s position of 355 was “much too low”, the court halved 1,812 (906) and doubled 355 (710), then took an average of the two figures and rounded it (“Splitting the difference takes one to 800. Standing back, about 800 is fair and in my judgment an appropriate figure”).

2. The rate is what you pay, not what you say

The court again endorsed the use of ‘simple unpacking’ to compare rates across comparable deals – that is, dividing the total sum paid by the number of past and future units covered. As stated in the first-instance judgment: “FRAND rates should focus on the money (and other benefits) which pass between licensee and licensor […] FRAND is not concerned with and should not be affected by either one party’s internal justification for the sum paid or received.” For potential future litigants, it is critical to consider how comparable deals will stack up when examined under this simple rubric – regardless of how they are dealt with in either party’s accounts.

3. Strong comparable evidence is crucial

UK courts continue to favour comparable analysis in FRAND cases, and this latest judgment is dismissive of the top-down method proposed in the case. InterDigital was unable to convince the panel that the simpler of its two top-down cross-checks should have been considered, with Lord Justice Arnold agreeing with the first-instance judge that comparables analysis was a “much more reliable basis for estimating FRAND”.

This means potential parties to UK FRAND litigation should not over-rely on top-down royalty calculation methods and should ensure that offers they make are backed by strong comparable licence evidence.

4. Heavy discounting of past sales is not FRAND

The court took a welcome stance against holdout in requiring Lenovo to pay for all past sales and refusing to eliminate or lower the interest imposed. The judgment states that implementers should not be rewarded for delay – regardless of whether the delay is their fault. The judges also acknowledged that long delays in licensing negotiations tend to harm SEP holders disproportionately.

In revising the royalty rate upward from the first-instance judgment, the judges held that the heavy discounting of past sales in comparable agreements – a common industry practice – had been forced on InterDigital and other SEP owners and was not FRAND. The justices agreed with the first-instance judge that this situation represents a “market-wide distortion which the court was required to correct”.

5. Willingness not relevant to FRAND rate determination (at least in this particular case)

The court acknowledged that its upward revision of the royalty rate placed a question mark over the first-instance judge’s holding that InterDigital had acted as an unwilling licensor. However, the Court of Appeal declined to delve into this question. The past willingness of the parties, it held, is irrelevant to the rate-setting exercise. “[T]he only question is what sum of money is FRAND. Subject to any further appeal to the Supreme Court, that question has now been resolved,” Arnold LJ stated.

However, this approach stems from how InterDigital crafted its original pleading, in which it asked the judge to determine 1) whether its offer was FRAND, and 2) if not, what terms are FRAND. That is why the Court of Appeal adopted its overall approach of seeking to determine what a willing licensee and willing licensor would agree in a hypothetical situation.

Future plaintiffs who want the court to take the counterparty’s behaviours into account can be expected to take note of this and craft their pleadings accordingly.

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With another Court of Appeal case in the books, the UK continues to develop a distinct approach to FRAND cases. If either party is as pleased with the result as its statements suggest, we will likely see more actions play out in this venue.

Donald Chan is Sisvel’s Director FRAND & Royalties

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.