Some reflections on InterDigital’s resounding Court of Appeal win over Lenovo in the UK

Late last week, we received an extremely positive decision from the Court of Appeal in the UK in our FRAND licensing dispute with Lenovo which rejected Lenovo's appeal in its entirety and increased the lump sum Lenovo must pay for a license to our cellular portfolio.

The decision is a resounding victory for InterDigital on all key points: The Court increased the payment for a license to our cellular SEP patents through the end of 2023 by more than $55 million; the Court confirmed that Lenovo should pay for a license for all past sales going back to when Lenovo first started selling 3G devices in 2007, with interest; the Court ruled that Lenovo should pay the costs of the appeal; and the Court denied Lenovo's application for permission to appeal to the UK Supreme Court. The judgment increased the lump sum that Lenovo must pay to just over $240 million, roughly three times the $80 million Lenovo offered in the litigation.

Notably, the UK litigation has taken five years and this license expired at the end of 2023, hence, this decision deals purely with Lenovo´s past exposure, leaving them currently unlicensed to our cellular SEPs.

Understandably, we are pleased with our win and believe that the court's decision will have significant and positive consequences for other SEP-owning innovators, particularly by addressing some of the imbalances that exist in the innovation ecosystem, namely aggressive holdout.

In the decision, Arnold LJ corrects what we feel was one of the fundamental flaws and inconsistencies with the original decision from the UK's High Court; the lower court's unpacking of a single comparable license, InterDigital's license with LG from 2017. This single comparable license was affected by non- FRAND factors, driven primarily by a significant amount of 3G and 4G past sales that had accumulated by the time the agreement was struck. Unfortunately, the lower court failed to unwind these non-FRAND factors when unpacking the LG license, which ultimately reduced the amount the High Court found Lenovo was obligated to pay for a license. The Court of Appeal's decision to increase the lump sum license fee to more than $240 million payable by Lenovo for its past sales, better reflects the value of our innovations in 3G and 4G standards.

The Court of Appeal used a rather unscientific methodology to arrive at a notional per unit number for the LG comparable - it simply estimated that LG would have paid 30 cents per unit, and as Arnold LJ states he does "not pretend this is a precise figure. It is not: it is an estimate." However, what is very clear is that this rate is being used for this specific case and circumstances. While I personally believe there are a number of reasons why it should be higher, I respect the court´s decision and note that the decision is ultimately not about this unscientific notional per unit rate used in their process - the decision is about determining a fixed fee license payment for Lenovo based on a single closest comparable license from the 2G, 3G and 4G devices era.

While LG was deemed a comparable to Lenovo given their similar sales volumes and product sales mix over this extraordinarily long past period, this is not a decision which can be used to assess a future- looking reference with a completely different technology sales mix during the 5G era - for Lenovo, or any other party. I agree with the views expressed by the UK High Court and the Regional Court in Munich on this point. In its decision granting an injunction against Lenovo in Germany the Regional Court in Munich spelled out this very fact, concluding that "at least a 30% uplift based on inflation would be mandatory" for any forward-looking license. In dismissing Lenovo´s interim license request, the UK High Court's Justice Reynolds, also voiced skepticism as to using the decision in a future license beginning January 1, 2024, stating he did not "have a high degree of assurance that this is a FRAND rate."

The broader relevance of the Court of Appeal's decision lies in the fact that the court has decided to take an important step to generally address pervasive holdout in the SEP licensing environment. In addition to increasing the license payment, the Court of Appeal makes a number of welcome observations about the realities of SEP licensing. In rejecting Lenovo's arguments regarding the application of limitation periods and interest on past payments, Arnold LJ makes clear that holdout behavior like Lenovo's should not be rewarded.

"There should be no discrimination in favour of implementers who are slow to take a licence and against implementers who are quick to take a licence," he writes. "If anything, it should be the other way around." In short, "an implementer should not be rewarded for delay."

Guidance from ETSI, he points out, makes it clear that, "a willing licensee would not sit back and wait for demands from SEP owners, but would pro-actively contact SEP owners (whose identities can readily be ascertained from ETSI), and would put money aside for the payment of royalties."

The Court also reiterates that the "non-discrimination" aspect of FRAND is not hard edged. SEP owners are not "required to grant license terms to an implementer equivalent to the most favourable licence it has granted to a similarly situated licensee." In other words, FRAND does not mean "one size fits all" it means "similarly situated" licensees should be treated in a similar manner. One cannot compare apples and oranges when looking at FRAND - fixed fee licenses come with a completely different risk profile than running royalties - and this needs to be understood when dealing with FRAND and unpacking fixed fee licenses.

The Court of Appeal also highlights a very important element of FRAND as a range: that it is the SEP holder that has the choice to choose the appropriate terms within this range. As Arnold LJ writes, "…it will be recalled that a range of terms may all be FRAND, but InterDigital is only required to licence its portfolio on the FRAND terms which are most favorable to itself."

Finally, while the Court of Appeal refrained from taking a position on willingness and concluded it had no relevance as the parties had sought to have the court resolution, the court highlighted that neither party had offered a middle ground in the case and as such, it was not appropriate or fair to chastise InterDigital for "going for a jackpot." I will note that I believe that, based on this latest decision, it is clear that over the more than ten years of negotiation with Lenovo, InterDigital has made a number of offers which are well within the FRAND range. The Regional Court of Munich´s observations about Lenovo´s negotiation posture and offers, in turn, speak for themselves.

While I welcome this across-the-board win for InterDigital, Lenovo still remains unlicensed to large parts of our portfolio, including our cellular SEPs. And, while Lenovo seems to prefer litigation over negotiation - I am still hopeful the parties will ultimately find a way to a final amicable resolution providing Lenovo the freedom of operation it wishes to have while also providing InterDigital a fair return for its investments in foundational research and patented technologies which millions of connected Lenovo devices continue to infringe every day.

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