As previously announced, on Friday the Court of Appeal for England and Wales published its
decision in InterDigital Technology Corp. v. Lenovo Group Ltd. The principal opinion is by Lord Justice
Arnold, with short concurring opinions by Lord Justices Nugee and Birss. In earlier proceedings before the Patents
Court, Mr. Justice Mellor had awarded InterDigital a lump-sum royalty in the
amount of $138.7 million, covering sales by Lenovo from January 1, 2007 through
December 31, 2023, and later supplemented by interest in the amount of 4% compounded
quarterly for a total of $184.9 million.
On appeal, InterDigital argues that the award should be much higher
($388.5 million + interest = $517.8 million total); and Lenovo argues that the amount should be $108.9
million total, covering sales only from August 27, 2013, and excluding
interest. The Court rejects Lenovo’s
arguments and
increases the base award, but only from $138.7 to $178.3 million. Much of Lord Justice Arnold’s thorough and
thoughtful opinion recounts the lower court decision. For purposes of brevity, I will focus here on
only the most essential points.
First,
one of the issues before the trial court was whether InterDigital could recover
past royalties only for the six-year statute of limitations period preceding
the filing of the complaint (that’s where Lenovo’s August 27, 2013 date comes
from). Mr. Justice Mellor concluded that
the answer was no, and the Court of Appeal affirms, stating that the statute of
limitations has “no part to play in the assessment of FRAND terms,” for the
reasons given by the lower court (para. 186).
In the court’s view, “[a]n implementer such as Lenovo requires a licence
from the first day it implements the relevant standard(s)”; “a willing licensee
would not sit back and wait for demands from SEP owners, but would pro-actively
contact SEP owners . . . and would put
money aside for the payment of royalties. . . . It follows that an implementer
should not be rewarded for delay, whether the delay is the fault of the
implementer or not” (paras. 187, 189).
The Court rejects the argument that this “create[s] a perverse incentive
for SEP owners to make excessive demands,” since they “can never get better
than FRAND terms from the court”; and states that, to the contrary, applying
the statute of limitations would “create[ ] an incentive for implementers to
delay: after six years, every day of delay
[would be] a day’s lost royalties for the SEP owner” (paras. 192-193). As I previously stated in my analysis of the
trial court’s opinion, I think this is correct.
Second,
for basically the same reasons, the Court concludes that the trial court had
authority to order the implementer to pay interest, compounded, on the judgment:
208. There are a
number of different statutory bases for an award of interest, but it is common
ground that none is applicable here. Interest is available in cases which lie within
equity’s exclusive jurisdiction, but it is common ground that this is not such
a case. The general rule of English common law is that the court has no power,
in the absence of any agreement, to award interest as compensation for the late
payment of a debt or damages: Sempra Metals Ltd v Inland Revenue Commissioners
[2007] UKHL 34, [2008] 1 AC 561 at [5] (Lord Hope of Craighead). It is common
ground that Lenovo has not agreed to pay interest on past sales.
209. In the
absence of any jurisdictional basis in statute, equity or contract, it is
common ground that the power to award interest can only arise on the ground
that this is what a willing licensor and a willing licensee would agree. Lenovo
argues that the judge was wrong to hold that a willing licensor and a willing
licensee would agree to the payment of interest. In my judgment the judge was
correct for the reasons he gave in the FOO [form of order] judgment at
[15]-[29] (paragraphs 162-165 above). . . .
213. In my view the overriding
consideration is that it is a very widely accepted principle that the timing of
a payment of money should be economically neutral. As the judge noted, Messrs
Bezant and Meyer agreed that the economically correct approach was to convert
past royalties to present value using a relevant interest rate to reflect the time
value of money. Furthermore, both Mr Bezant and Mr Meyer applied this principle
when unpacking the Lenovo 7 by calculating the present value of future payments
using an appropriate discount rate. Lenovo accepts that they were right to do
this for future payments, but the logic is the same for past payments. As the
judge noted, this was recognised by Lenovo’s own licensing expert Mr
Djavaherian, who said in his second report that “[d]elay can generally be
remedied financially via interest payments and the like”.
214. This principle is particularly applicable in the present context for the
reasons I have discussed in relation to the issue of limitation, namely that
(i) implementers need a licence from day 1, (ii) in principle terms should be
agreed with effect from that date and (iii) there should be no incentive for
implementers to delay. All of these factors point to the conclusion that a
willing licensor and a willing licensee would agree to the payment of interest
so as to ensure that the passage of time was cost-neutral to both sides.
The Court further concludes that the trial judge acted within the scope
of his authority in awarding interest, setting the rate at 4% (which actually
is lower than InterDigital’s borrowing costs over the relevant time period, see
para. 221), and compounding it. Again, I
agree fully; as I have often stated, the correct application of the
compensatory principle requires that courts take into account the time value of
money.
Third,
the Court adjusts the royalty upwards, but not by as much as InterDigital was hoping for. Mr. Justice Mellor had concluded that there
should be a single rate to cover both past and future sales, and had relied on
one single license, LG 2017, to calculate that rate. The LG license had different rates for past
and future sales, however, so the trial judge had applied a blended rate which
Lenovo’s expert calculated to be $0.24 per unit. This was then multiplied by 0.728 “to reflect
the characteristics of Lenovo’s sales, resulting in a figure of $0.175 per unit”
(para. 228). Lord Justice Arnold perceives
three flaws in the trial court’s reasoning:
252. The first, and most important,
flaw is that it is internally inconsistent. On the one hand, the judge was very
clear that the heavy discounting for past sales which had been forced upon
InterDigital and other SEP owners in their negotiations with implementers,
including those leading to LG 2017, was not FRAND for the reasons I have
discussed above. He was also clear that Lenovo could not benefit from these non-FRAND
factors by relying upon the non-discrimination requirement of FRAND. On the
other hand, he declined to make any correction at all to the blended rate per unit
derived by Mr Meyer from LG 2017 in order to eliminate these non-FRAND factors
when determining a FRAND rate for Lenovo.
253. Thus the judge used the
(surprisingly precise) blended rate per unit of $0.24 per unit which Mr Meyer
derived from LG 2017. In order to arrive at a FRAND rate for Lenovo, the judge
simply multiplied that figure by the (astonishingly precise) adjustment ratio
of 0.728 to arrive at $0.175 per unit. It is implicit in this that the rate of
$0.24 per unit was a FRAND rate for LG. Not only did the judge make no such finding
in the main judgment, however, but also any such finding would have been difficult
to reconcile with the judge’s findings I have summarised in paragraph 229 above.
On the contrary, the judge specifically rejected the assumption in Lenovo’s argument
that the Lenovo 7 were FRAND “in every particular” at [435] (paragraph 85 above).
. . .
272. The second flaw in the judge’s
reasoning is that the judge was not justified in rejecting Mr Meyer’s
allocation of the lump sum paid by LG between past sales and future sales for
the reasons given by InterDigital (paragraphs 232-238 above). Lenovo’s seventh
submission fails satisfactorily to answer those points. . . .
275. The third flaw in the judge’s
reasoning is that he seems to have lost sight of the points that (i) the
court’s task is to estimate what rate would be FRAND for Lenovo, which is not a
task that admits of the kind of mathematical precision which the judge applied,
and (ii) a range of rates may be FRAND, and the SEP owner is only required to
offer the FRAND rate most favourable to itself. . . .
277. Although I have concluded that
the judge was wrong not to make any correction for the non-FRAND factors he had
identified, it does not begin to follow that he should have applied the future
per unit rate of $0.61 derived from LG 2017 by Mr Meyer, as claimed by
InterDigital. The fact that the rates for past sales in the Lenovo 7, and in particular
LG 2017, were depressed by those non-FRAND factors, does not mean the rates for
future sales were not inflated. On the contrary, the judge found that InterDigital
had sought to increase its rates for future sales in order to compensate for the
heavy discounts it had been forced to concede on past sales, and InterDigital
does not challenge that finding. . . .
279. In my view, the FRAND per unit
rate for LG cannot exceed the figure of $[REDACTED] derived by Mr Meyer from
Apple 2016. The judge considered that this represented an upper bound ([661],
paragraph 110 above; [797], paragraph 138(iii) above). He also found that Apple
occupied a unique status in a market ([661]). Neither of these findings has
been directly challenged by InterDigital. Furthermore, I accept Lenovo’s point
that the fact that all of the blended figures derived by Mr Meyer from the
other PLAs in the Lenovo 7 are lower indicates that the rate for LG should be
lower than the Apple rate, although I agree with InterDigital that this point
cannot be taken too far once comparative volumes and the adjustments required
are borne in mind. I also accept that the judge’s views as to the comparability
of each of the other six PLAs should be taken into account even though he
relied in the end only on LG 2017.
280. Al l in all, I consider that the highest per unit rate for LG that can
be justified as being FRAND is $0.30. I do not pretend this is a precise
figure. It is not: it is an estimate. . . .
282. Ground B [InterDigital’s
argument concerning the adjustment ratio to be multiplied by the above rate] is
consequential upon ground A. The adjustment ratio of 0.728 used by the judge
was a blended past and future adjustment ratio calculated by Mr Meyer. Mr Meyer
also calculated a corresponding future-only adjustment ratio of 0.803. InterDigital
says that this figure should be used for the same reasons as the future-only
per unit rate should be used.
283. In my view the answer to this
ground is the same as for ground A. InterDigital is justified in contending
that a correction is required, but it does not follow that the future-only
adjustment ratio should be used. The highest ratio that I consider that can be
justified is 0.75. Again, this is not a precise figure, but an estimate.
Lord
Justice Nugee expresses some reservations concerning InterDigital's appeal, but concurs in the judgment; and Lord
Justice Birss concurs with some further explanation of why he agrees with Lord
Justice Arnold’s resolution of the final rate.