Go compare! Court of Appeal confirms comparables approach for assessing FRAND royalties

The Court of Appeal has confirmed, in Optis v Apple, that a conventional comparables-based approach should be adopted by the English courts when assessing FRAND royalties, overturning the first instance decision and rejecting the High Court’s novel, top-down approach (as to which, see here). In doing so, the Court of Appeal reaffirmed the importance of expert evidence, comparable licences, unpacking and a broad brush approach, ultimately increasing the FRAND royalty Apple has to pay by a factor of ten. 

We take a closer look at the Court of Appeal’s decision below, with a focus on the FRAND royalty valuation aspects.

Background and High Court decision

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 a number of technical trials, some of Optis’ UK patents were found to be valid, essential and infringed by Apple, giving the English courts jurisdiction to determine the terms of a global FRAND licence.

In determining the level of the FRAND royalty due under that licence, the High Court entirely rejected the evidence of the two accountancy experts before it and instead adopted its own approach. That approach was a form of “top down” approach, based on lump sums and averaging, which involved the court seeking to price the value of the entire stack (i.e. all patents declared to the standard) to Apple, and then apportioning that price pro rata to Optis in line with Optis’ stake in the stack. That ultimately led to the court landing on an annual royalty rate of US$5.13m, which equated to a total lump sum royalty of $56.43m (excluding interest) over the 11 year term of the licence.

Optis considered this too low and appealed the court’s valuation assessment on 11 grounds (with 14 additional grounds of appeal raised on other licence terms determined by the High Court).

Court of Appeal sides with Optis

The Court of Appeal agreed with Optis that the judge had made fundamental mistakes by rejecting the expert evidence before him and then adopting his own approach, involving simple averages, to calculating the FRAND rate. Instead, he should have applied a conventional comparables approach – using the unpacked data from the expert evidence, selecting the best comparable licence or licences, and then deriving a rate (per unit or percentage of average selling price) from there.

In spite of this finding, the Court of Appeal concluded that it wasn’t necessary to order a retrial. Instead, it went on to choose five licences as the best comparables (one from Optis, four to Apple) and used those to calculate an estimated dollar per unit rate of $0.15 – a figure which was between the unit rates derived from the Optis and Apple licences, once placed on a common scale. That rate was then converted into a lump sum payment of $502m (excluding interest), based on a total sales volume of 3,347m units over the licence period (2013-2027), with a 10% discount on projected future sales for the period 2021-2027. This resulted in a roughly tenfold increase in the amount Apple has to pay Optis as compared to the lump sum determined by the High Court. 

How to deal with $300m US award

Separately, the Court of Appeal also had to grapple with how it should deal with a potential inconsistency between the terms of the English court-determined global FRAND licence and a parallel judgment of the US court in the Eastern District of Texas (EDTX). At the time of the Court of Appeal hearing, Optis had been awarded $300m in damages in the EDTX proceedings, following a finding that Apple had infringed five of Optis’s US SEPs. Those same SEPs are covered by the global licence determined by the English courts. So the question arose as to how the English courts should deal with the US award of $300m (or whatever the final US award might turn out to be, following appeal). 

Whilst the Court of Appeal believed that the “right answer” would be for the English courts’ valuation to be adjusted to take account of the EDTX judgment, the valuation methodologies adopted by the parties made that impractical. In those circumstances, the Court of Appeal concluded that the “least-worst” solution was for the US judgment (once final) to be treated as a floor for the royalties payable by Apple under the English court-determined licence (i.e. Optis would retain whatever sum is awarded in the US proceedings and, to the extent that the total global royalty payment awarded by the English courts exceeds the final US judgment sum, Apple would need to pay Optis the balance).

Comment

This is another important decision in the SEP space, clarifying the approach the English courts should take when assessing FRAND royalties. It re-establishes the role and importance of expert evidence and unpacking, and provides further support for a broad brush approach – in line with the Court of Appeal’s earlier decision in InterDigital v Lenovo (see blog).

This decision will no doubt be looked on favourably by SEP holders and indicates that the English courts may not be as implementer-friendly as recent decisions may have suggested - although the final sum still remains a long way off from the amount Optis had contended for at trial (which was as large as $7.4bn).