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.
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