FRAND decisions stack up as High Court rules in Optis v Apple

Following hot on the heels of InterDigital v Lenovo (see here), the High Court has determined FRAND (Fair, Reasonable and Non-Discriminatory) terms for a licence of Standard Essential Patents (“SEPs”) for the third time. Adopting a “top down” approach, the court ordered Apple to pay Optis a total lump sum royalty of $56.43m, plus interest on the amounts due for past infringements.

As with InterDigital, this decision will be of international interest to both SEP owners and implementers of standards, given the limited number of countries whose courts are currently prepared to set such terms.

Background and key issues

Optis own a portfolio of patents that are essential to various standards relating to cellular connectivity. As is common for SEP owners, Optis has given an undertaking to ETSI (the European Telecommunications Standards Institute) to grant licences of its SEPs to implementers of the relevant standards on FRAND terms.

Following four technical trials (one of which remains under appeal), some of Optis’ patents were found to be valid, essential and infringed by Apple. One of the key impacts of those decisions was to establish the English court’s jurisdiction to determine the terms of a global FRAND licence - something that we know from past experience is far easier said than done.

And that is what was at the heart of this trial. What terms would be FRAND and, most importantly, what should the FRAND royalty look like?

The parties’ positions

Whilst FRAND disputes of this kind cover licence terms wider than just the royalties, naturally the royalties tend to take centre stage. In this respect, Optis argued that the FRAND royalty should be calculated on an “ad valorem” (or running royalty) basis. In other words, the FRAND rate should be calculated by reference to a percentage of the average selling price of each relevant Apple product, subject to an average selling price cap.  

As one might have expected, Apple was strongly opposed to ad valorem rates as its handsets typically sell for much more than that of other manufacturers. And, it argued, the reason people paid more for Apple’s handsets had nothing to do with the cellular connectivity technology to which Optis’ SEPs relate. Instead, Apple argued that the FRAND rate should be a lump sum.

What did the court decide?

Ultimately, based on the facts and evidence provided, the court preferred the lump sum approach. In contrast to the approach taken in InterDigital (which determined a per unit rate based on comparable licences in order to generate a lump sum figure), the court in Optis adopted a “top down” approach to determining the amount Apple had to pay. That involved the court seeking to price the value to Apple of the entire stack (i.e. all patents declared to the standard), and then apportioning that price pro rata in line with Optis’ stake in the stack. This resulted in an annual royalty rate of US$5.13m, with the court concluding that Apple should pay Optis US$30.78m for past infringements (based on a 6 year release) plus 5% compound interest, and $25.65m in relation to the future term of the licence (equivalent to 5 years’ annual rate).  

Aside from royalties, the court directed that the licence should be a worldwide 4G multi-standard licence, covering any and all future Apple products, which would run until all of the relevant patents have expired.  It should also include a release for Apple for any past infringements and require Optis to cease any proceedings anywhere else in the world.

Comment 

This is another hefty SEP judgment, weighing in at 283 pages, and it’s a fascinating read (despite the current heavy redactions!).

The headline is that Apple was ordered to pay Optis a total of $56.43m plus interest. But that figure alone doesn’t tell us much – the courts had already found Optis’ patents to be valid, essential and infringed, so Apple was always going to have pay Optis something.

What’s most interesting about this judgment is how the court arrived at this figure. Whilst top down approaches have been considered by the English courts before, they have ultimately been used as a cross-check, rather than as the principal method of determining the FRAND rate. To some extent the court appears to have been forced into this approach given its conclusions on Optis’ comparables (see below), but it will be interesting to see if other courts follow suit. It’s also worth noting that this “top down” approach seems to be broadly in line with the EU Commission’s recent proposals on SEPs, which include a suggested process for determining an aggregate royalty (total maximum price) for using a standard.

The court’s reliance on the comparable licences put forward by Apple in order to value the stack is also noteworthy (with the court describing the Optis comparables as “worse than useless at deriving a rate for Apple to pay”). At first glance, that seems counterintuitive because this case is all about how much Apple should pay for a licence to use Optis’ SEPs. And the court answered that question not by reference to the licences it had before it relating to those same SEPs, but by reference to licences for other parties’ SEPs. However, in the context of valuing the entire stack and given the issues with Optis’ comparables, one can see why the court took this approach.

With InterDigital and Lenovo having been granted permission to appeal their FRAND decision, the EU Commission’s ongoing proposals on SEPs and FRAND, and the FRAND trial in Nokia v OPPO reportedly being listed for October, there is still lots to look forward to in this space!