Time is money: Court of Appeal confirms interest is payable on, and limitation periods do not apply to, past royalties due in FRAND claims

The Court of Appeal has handed down its much anticipated decision in the FRAND licence dispute between InterDigital and Lenovo. Both parties had appealed aspects of the High Court’s FRAND judgment, which was handed down just over a year ago, with Lenovo challenging certain aspects of the High Court’s findings relating to past royalties and InterDigital challenging the High Court’s assessment of the lump sum royalty payable by Lenovo. 

In dismissing Lenovo’s appeals, the Court of Appeal confirmed that limitation periods are irrelevant when determining FRAND rates and that interest is payable on past royalties. The court did, however, accept parts of InterDigital’s appeal, ultimately increasing the lump sum royalty payable by Lenovo by $40m (plus interest).

Background

Developing and maintaining an integrated telecommunications infrastructure requires industry-wide compatibility. To achieve this, the European Telecommunications Standards Institute creates universally applicable industry standards for telecom businesses to implement. Those standards often incorporate patented technologies, effectively requiring telecom companies to seek licences to use the underlying “standard essential patents” (SEPs) or risk patent infringement when implementing a standard. To balance the equation, SEP holders must license SEPs on Fair, Reasonable, and Non-Discriminatory (FRAND) terms. 

In this case, after multiple rounds of litigation, Lenovo was found to have infringed certain of InterDigital’s UK SEPs. The High Court was then tasked with determining the terms of a global FRAND licence, in particular with respect to royalties, which it did back in June last year (see our blog). 

High Court decision and grounds of appeal 

At first instance, the High Court favoured a “comparables approach” to the FRAND calculations over a top-down analysis. This required the court to review a number of allegedly comparable licences put forward by both parties, with the court ultimately singling out just one - a 2017 LG licence proposed by Lenovo - to be the best comparable. The court used that licence to derive a blended royalty rate (covering both past and future sales) of $0.24 per unit. However, acknowledging that the 2017 LG licence wasn’t directly comparable to Lenovo’s position, this figure was adjusted by a ratio of 0.728 to account for the differences between LG and Lenovo’s commercial positions. This provided a per unit royalty rate of $0.175 for Lenovo. The court then applied this rate to the full period of Lenovo’s relevant sales (2007-2023), leaving a total lump sum royalty of $138.7 million for Lenovo to pay. In a subsequent judgment, the court awarded InterDigital interest on that sum at a rate of 4% (compounded quarterly), making the total amount payable by Lenovo $184.9 million. 

Both parties appealed aspects of that first instance decision. Lenovo challenged the application of interest and argued that it should not have to pay anything in respect of the period before 27 August 2013 (the date 6 years before commencement of the proceedings) due to the impact of limitation periods. InterDigital challenged the per unit rate calculated by the High Court and the basis for that calculation. 

Court of Appeal decision 

Limitation periods 

The Court of Appeal agreed with the High Court that limitation periods are irrelevant to the assessment of FRAND terms and that Lenovo should therefore be required to pay royalties on all past sales. It reasoned that the courts’ role in assessing what is FRAND is to determine what would be agreed between a willing licensee and a willing licensor. In its opinion, a willing licensee would agree to pay for all uses it has made of the SEP owner’s patents from the day it started to use them. The court accepted that if there had been a settled industry practice of releasing sales that were more than six years old when negotiating licences then that would be relevant to assessing what is FRAND. But no such practice was found.

The court was also concerned that applying a limitation period would incentivise implementers like Lenovo to delay seeking a FRAND licence – “after six years, every day of delay is a day’s lost royalties for the SEP owner”. Whilst Lenovo argued that ignoring limitation periods would create a “perverse” incentive for SEP owners to make excessive demands, the Court of Appeal disagreed as an SEP owner can never get better terms than FRAND from the court. And, in the event of truly egregious conduct by a SEP owner, the court can rely on other sanctions (e.g. denying or reducing interest and costs sanctions).

Interest on past sales 

The Court of Appeal also agreed with the High Court that interest should be payable on royalties for past sales to reflect the time value of money and because that is what a willing licensor and willing licensee would agree. Whilst the High Court had accepted that it could withhold interest on royalties in appropriate cases, the Court of Appeal agreed that this was not such a case. As for the rate, basis and period of interest awarded, the Court was not persuaded that there was any flaw in the High Court’s reasoning which justified its interference.

Per unit rate and adjustment ratio

Finally, the Court of Appeal agreed with the High Court that using comparable licences was a much more reliable basis for estimating the FRAND rate in this case than the “top-down” cross-check (which sought to establish a value for the standard as a whole and then assigned a proportion of that to InterDigital based on InterDigital’s share of the SEPs for the standard). 

However, it identified several errors in the High Court’s assessment of the per unit rate derived from the 2017 LG licence. Of most importance, the Court of Appeal found that the High Court’s assessment was “internally inconsistent” because, on the one hand, the judge was clear that a non-FRAND factor (heavy discounting for past sales) had been forced on InterDigital and other SEP owners in their negotiations with implementers, including those leading to the 2017 LG licence. Yet, on the other, the judge did not make any correction to the per unit rate derived from the 2017 LG licence to account for that. This led the Court of Appeal to conclude that a per unit rate of $0.24 was too low. But it was also satisfied that InterDigital’s claimed rate of $0.61 was “far too high”. On this basis, the court decided to increase the rate from $0.24 to $0.30 (which it acknowledged was an estimate, rather than a precise figure). For similar reasons, it also increased the adjustment ratio from 0.728 to 0.75 (noting that InterDigital had asked for 0.803). All of this resulted in a final per unit royalty rate of $0.225, which resulted in a total royalty (pre interest) of $178.3 million – an increase of approximately $40m.

Comment

This is another significant SEP judgment from the English courts and the first time the Court of Appeal has considered the correct treatment of a SEP implementer’s past sales. 

The court’s confirmation that limitation periods are not relevant when assessing FRAND royalties, and that interest will be payable on royalties relating to past sales, will be seen as good news for SEP owners. Whether Lenovo will consider seeking permission to appeal either of these points to the Supreme Court remains to be seen, but Kirkland & Ellis (who represented Lenovo) have publicly hinted that they might. 

Still, it is not all good news for InterDigital, as, even with the $40 million uplift it received, the total royalty remains over $200 million shy of its $388.5 million claim and closer to Lenovo’s case at $108.9 million. 

More generally, the Court of Appeal criticised the mathematical precision undertaken by the High Court in determining the FRAND rate at first instance, and emphasised that the court’s task is to “estimate” what rate would be FRAND. It will be interesting to see whether this will lead to simpler calculations (and perhaps faster judgments) in future FRAND cases.