SEPs and FRAND licensing: trending towards transparency?

For only the second time in its history, the English High Court has determined FRAND (Fair, Reasonable and Non-Discriminatory) terms for a licence of Standard Essential Patents (“SEPs”). In a detailed 225-page judgment, Mellor J set a global FRAND rate for Lenovo’s use of InterDigital’s SEPs relating to 2G, 3G, 4G and 5G technology, with Lenovo ultimately being required to pay InterDigital $138.7m.

Given the paucity of countries whose courts are currently prepared to set such rates, the judgment will be of interest internationally to SEP owners and implementers. Mellor J’s comments on whether litigation is the best way to resolve such disputes and his calls for greater transparency also chime with the wider mood music on these topics – including recent proposals put forward by the European Commission – suggesting a general direction of travel for the SEP landscape.

Background and key issues 

As technology continues to advance at pace, the need for interoperability and compatibility is becoming increasingly important. One way industries look to achieve that is through standardisation. The relevant standards are set by standard-development organisations (such as the European Telecommunications Standards Institute in the telecoms sector) and often encapsulate technology that is patent-protected. Those patents that would necessarily be infringed by implementing a particular standard (without a licence) are known as SEPs. Owners of those SEPs are typically required to give an undertaking to grant licences of their SEPs on FRAND terms. Whilst these concepts seek to balance competing interests of SEP owners and implementers, the scope for differences of opinion on what FRAND actually means in practice is readily apparent.

That is what was at the centre of the present dispute. Having previously found that certain InterDigital SEPs were valid and essential, and that they had been infringed by Lenovo, the court had to determine the terms on which Lenovo should take a licence to InterDigital’s SEPs. In other words, the court had to determine what terms would be FRAND.

Key findings on FRAND rate

In order to assess what was FRAND, and in keeping with previous case law, the court considered two different approaches - a ‘comparables’ analysis and a ‘top-down cross-check.’

The comparables analysis required the court to identify any relevant comparable licences that InterDigital had previously entered into and then consider how those licences could be used to arrive at a FRAND rate for Lenovo. A total of 27 comparable licences were proposed by the parties, but ultimately the court singled out just one (an LG licence proposed by Lenovo) to be the best comparable. Even that licence wasn’t perfect, and the Court considered various differences between the LG licence and Lenovo’s position (including sales mix, patent coverage and distribution of sales between developed and emerging markets). As a result, the Court adjusted the LG rate to reflect the different split between sales in developed and emerging markets as between LG and Lenovo. This gave a per-unit rate of $0.175, with Lenovo having to make a lump sum payment of $138.7m to InterDigital.

The ‘top-down cross-check’ on the other hand sought to establish a value for the relevant standard as a whole and then assigned a proportion of that to InterDigital (based on InterDigital’s share of the SEPs for that standard). Ultimately, however, the Court found this approach to be of little value as the results tended to be even higher than the rates in InterDigital’s pleaded offer, which the court had already determined to be inflated and discriminatory based on the comparables analysis.

Comment 

Whilst Lenovo might appear to be the ‘loser’ in having to pay $138.7m, it was always going to have to pay something after the Courts had found InterDigital’s patents to be valid, essential and infringed. The figure arrived at by Mellor J was closer to that which Lenovo had offered ($80m ±15%), than what InterDigital were asking for (at least $337m). So some may see this as a ‘win’ for Lenovo.

Either way, this judgment highlights the complexity of cases of this kind - involving 23 witness statements from 10 different witnesses, a 17-day trial and a 225-page judgment. Unfortunately, this isn’t new in the realm of SEPs and has been noted before. Just a few months ago, Arnold LJ was characteristically direct in Optis v Apple when he described the current system for determining SEP/FRAND disputes as “dysfunctional” (see here). The court’s comments in InterDigital v Lenovo followed a similar theme, casting doubt on whether adversarial litigation is the appropriate manner to resolve such disputes, “because there is (and was in this case) very little, if any, exploration of the middle ground between the positions taken by the two sides.”

To help alleviate some of the problems, the court made it clear that cases like this would benefit from closer case management. For example, agreeing data sources at an early stage, carrying out a proper review of the case and issues at the pre-trial review, and seeking to improve transparency. The Court even suggested a solution could be to make it a pre-condition to starting an action that parties agree to early disclosure of potentially comparable licences and a stay to allow negotiation.

With a FRAND judgment in the Optis v Apple case expected shortly, the European Commission looking to make major changes to the SEP landscape within the EU (including greater transparency and the establishment of an out-of-court dispute resolution procedure for determining global FRAND terms), the EU Commission’s ongoing WTO proceedings against China, and the UKIPO due to report later this year on its SEP consultations (see our brief summary here) and recent questionnaire, there is plenty to look forward to in this area.