Interdigital and UKIPO consultation highlight that UK is still key
This is an Insight article, written by a selected partner as part of IAM's co-published content. Read more on Insight
|Case mentioned||Interdigital v Lenovo|
|Court||High Court of England and Wales|
|Cause of action||Infringement of SEPs for cellular standards|
Since the UK SEP/FRAND overview was published on 2 December 2022, there have been some interesting developments in the United Kingdom – in the UK High Court and at the UK IP Office (UKIPO) – that are having a significant impact on all those involved in FRAND licensing.
Interdigital v Lenovo
On 16 March 2023, Mr Justice Mellor handed down his long-awaited FRAND judgment in Interdigital v Lenovo. Mr Justice Mellor made some interesting findings and observations from a policy perspective, which will have significant implications in the United Kingdom and other jurisdictions for both SEP holders and licensees.
In this context, the key takeaway is that a licensor is not acting as a ‘willing licensor’ if it makes a supra-FRAND offer. Mr Justice Mellor found that Interdigital was not acting as a willing licensor by making supra-FRAND offers to Lenovo. Following an extensive analysis of the expert evidence, he looked at the licence agreements that Interdigital entered into and unpacked the running royalty rates and lump sum payments with other licensees (large companies and SMEs). He ultimately derived a global FRAND rate for Interdigital’s SEPs for 3G, 4G and 5G at $0.175 per unit, to cover past and future sales to the end of 2023.
Mr Justice Mellor said that Interdigital’s volume discounts given to larger companies (eg, Samsung and Apple), from their headline “program rates”, did not have any economic or other justification. Their primary purpose was to attempt to shore up their programme rates, but the actual effect was discrimination against smaller licensees. Mr Justice Mellor stated that this is exactly what FRAND is supposed to avoid.
Mr Justice Birss (as he then was) touched on this issue of discrimination against smaller licensees in Unwired Planet v Huawei when he noted that “it would not be FRAND, for example, for a small new entrant to the market to have to pay a higher royalty rate than an established large entity”.
Mr Justice Mellor summarised his reasons for considering there had been discrimination against smaller licensees, stating, among other things that:
…in the field of SEP licensing, there is no equivalent to the economies of scale which can be achieved in the manufacture and distribution of physical products. Leaving aside transactional costs in concluding licences […], the licence or permission given to utilise the standardised technology (whether 3G, 4G or 5G) of the SEP licensor is intangible and effectively costless. This does not ignore the costs of R&D, but those are sunk costs.
It is important to keep in mind how implementers like Lenovo are able to access and use each generation of standardised technology. A SEP owner must invest in R&D, make his invention (assume), persuade the relevant ETSI Working Group to adopt his invention into the standard, write, file and prosecute his patent family in various territories and maintain them in force by paying the renewal fees, and declare to ETSI the relevant patent(s) as essential to a relevant standard. The SEP owner makes no explicit transfer of technology to the implementer. Instead, the implementer acquires the technology by buying in chipsets, with the chipset manufacturer bearing the responsibility to give effect to a relevant standard in the chipset.
No doubt chipsets for a given generation of cellular technology will vary in their capabilities and performance, but all will implement the standardised technology along, no doubt, with many optional extras. A more expensive high-end 4GMM chipset might be incorporated into a high-end smartphone with a large touch screen and various other attributes attractive to the consumer. By contrast a lower-end, much more basic phone with the same 4GMM capability may sell for a fraction of the price of the higher end phone. However, in terms of the standardised 4GMM technology, both phones use the same technology. Against this backdrop, I find it difficult to understand why the royalty paid for each of those phones should differ significantly or, for that matter, at all.
…the evidence that volume discounts of a similar magnitude were available from the AVC and HEVC patent pools does nothing to persuade me against my conclusion. I do not need to make any finding about those patent pools, although I suspect they are using volume discounts in the same way as InterDigital, as one of a number of levers they can use (a) to encourage licensees to sign up to a PLA and (b) to justify departing from any published programme rates.
On the other hand, he emphasised that he was not deciding that volume discounts of any magnitude are not FRAND, and suggested that relatively small volume discounts might not take a rate outside of the FRAND range. However, SEP licensors and SEP licensing pools – particularly in the audio and video codec space – will undoubtedly be reviewing their programme rates and looking at the scale of the volume discounts being offered to larger companies.
In relation to the SEP-licensing industry generally, Mr Justice Mellor welcomed the publication of rates, with the goal of creating more transparency in the market, which is a “much-needed commodity”. He was critical of problems caused in the negotiations by Lenovo not having access to adequate information from Interdigital on comparable licences until a confidentiality regime was established in the course of the litigation, although it transpired in the judgment that Interdigital did confidentially share with Lenovo some ‘real rates’ with third parties before the litigation started. Justice Mellor noted that ETSI’s IPR Policy offered no solution to this problem and suggested that a possible solution could be for the parties to start an action, agree to early disclosure of potentially comparable licences under a court-monitored confidentiality regime and agree to a stay of the action to allow the parties to negotiate on the basis of the available information. If those negotiations do not succeed after a limited time, then the action may continue. However, the reality for almost every company is that it does not want to engage in litigation at all.
Early disclosure of FRAND agreements without full-scale litigation might be achieved by seeking similar orders to that sought in Big Bus v Ticketogo, where the court ordered pre-action disclosure of patent licences previously granted by Ticketogo in order to enable Big Bus to quantify the value of a patent infringement claim that Ticketogo had initiated against it (Big Bus v Ticketogo, EWHC 1094 (Pat), 28 April 2015). Pre-action disclosure might offer another solution to avoid expensive litigation.
The lack of transparency of what the real market rates are (rather than the headline rates) is a challenge for all prospective licensees, but particularly for those less experienced in FRAND negotiations. What I call the ‘willing licensee penalty’ can be suffered by the practice of SEP licensors refusing to disclose their claimed benchmark/comparable rates or agreements (even those they rely on), or ‘real’ royalty rates unless there is actual litigation. One potential consequence that might be drawn from this is that companies, fearful of the costs of litigating, are forced to enter into agreements that are not FRAND and where they have been unable to check the veracity of representations made about the claimed FRAND rates being imposed or offered. It can be argued that, from a negotiation and due diligence perspective, SMEs and smaller companies that willingly take licences may be in a worse position than they would have been if they had litigated. It is to be hoped that there will be more transparency in future FRAND cases in the United Kingdom and elsewhere.
UKIPO invites SMEs and small/mid-cap companies to comment
The UKIPO has issued a request for SMEs, small and mid-cap businesses and companies to provide it with feedback on issues and challenges with SEP licensing. The UKIPO is keen to speak with as many companies as possible on a confidential basis, saying that this will help the government to ensure that the SEP ecosystem is functioning effectively as they want it to strike the right balance for entities involved. The UKIPO particularly wants to hear from those involved with the development or production of interoperable products or services that use technical standards. They would like to be informed on issues such as:
- whether companies have sufficient information on how their innovation relates to SEPs;
- if the current system is fair for everyone involved in the licensing and implementing of SEPs, or if change is needed;
- whether, if SMEs have a licence, they were offered it on FRAND terms;
- if they have enough information on the pricing of SEPs that they licence or may licence in future; and
- what their experience has been in respect of licensing disagreements and how they were resolved.
If any SMEs or smaller/mid-size companies make or sell connected products, have received an SEP-related licensing request or have had to consider liability for SEPs in purchasing or supply agreements, the UKIPO has invited them to submit comments via its website.
The deadline for responding is 24 April 2023.