InterDigital Technology Corporation & Ors v Lenovo Group Ltd & Ors

Factual and Procedural Background

This opinion concerns an appeal by the Claimants ("Company A") and a cross-appeal by the Defendants ("Company B") against an order of Judge Mellor dated 27 June 2023. The dispute relates to the amounts payable by Company B for a licence on fair, reasonable and non-discriminatory ("FRAND") terms of Company A's portfolio of patents declared essential ("standard-essential patents" or "SEPs") to a telecommunications standards institute for 3G, 4G and 5G standards.

The judge held that Company B should pay a lump sum of $138.7 million covering sales from 1 January 2007 to 31 December 2023, plus interest at 4% compounded quarterly amounting to $46.2 million, totaling $184.9 million. Company A claimed a lump sum of $388.5 million plus interest of $129.3 million, totaling $517.8 million. Company B contended that no payment was due for sales prior to 27 August 2013 and that interest should not have been awarded or should be reduced.

The core legal question involved the correct treatment of past sales when determining FRAND terms. Company A argued that the judge failed to account for non-FRAND factors affecting prior licences when setting the lump sum. Company B argued that no royalties should be payable for sales outside the limitation period and challenged the interest award.

The case involved multiple technical trials addressing validity, essentiality, and infringement, followed by a FRAND trial. After the main judgment, Company B gave an undertaking to take a licence on the terms ultimately determined to be FRAND. The judge’s detailed main judgment and a subsequent judgment on interest ("the FOO judgment") form the basis of this appeal.

Legal Issues Presented

1. Whether Company B must pay royalties for sales prior to the relevant limitation period (i.e., whether past sales outside that period are payable under a FRAND licence).
2. Whether interest should be awarded on past royalties, and if so, at what rate, basis, and for what period.
3. Whether the lump sum royalty rate derived from the LG 2017 licence was correctly determined, including the treatment of discounts and non-FRAND factors.
4. Whether the judge erred in rejecting Company A's top-down cross-check valuation method.
5. Whether Company A was a willing licensor during the negotiations.

Arguments of the Parties

Company A's Arguments

• The judge failed to properly adjust the royalty rate derived from the LG 2017 licence to account for non-FRAND factors, particularly the heavy discounting of past sales, resulting in an understated FRAND rate.
• The correct per unit rate from LG 2017 should be the future sales rate ($0.61), adjusted appropriately for Company B’s circumstances, yielding a significantly higher lump sum payment.
• The top-down cross-check method should have been given weight as it indicated the judge’s derived rate was too low compared to aggregate royalty burdens recognized in other cases.
• The judge should have declared Company A a willing licensor, as this affects the interpretation of the FRAND obligation.

Company B's Arguments

• Limitation periods are relevant and should bar payment for sales prior to six years before proceedings commenced; thus, no royalties should be payable for sales before 27 August 2013.
• Interest should not have been awarded on past royalties, or if awarded, it should be at a lower rate, simple interest, and/or for a shorter period.
• The judge’s blended rate from LG 2017 is correct and consistent with the evidence; the future-only rate proposed by Company A is inflated and unsupported.
• The comparable licences relied upon by Company A were not depressed by hold-out and thus represent reliable indicators of value.
• Company A’s conduct in seeking supra-FRAND rates and failing to provide sufficient information undermines entitlement to interest and justifies limiting payments to within limitation periods.

Table of Precedents Cited

Court's Reasoning and Analysis

The court undertook a detailed and multifaceted analysis of the FRAND terms applicable to the licence of Company A's SEP portfolio to Company B. Central to the analysis was the assessment of comparable licences ("the Lenovo 7" and "the InterDigital 20") and the appropriate royalty rate per unit.

The judge found that past sales must be included in the royalty base and that limitation periods have no role in defining FRAND terms. This is because FRAND terms reflect the agreement between a willing licensor and willing licensee from the date of first infringement, and it would be inconsistent with FRAND to reward delay or allow implementers to benefit from limitation defenses. The court rejected Company B's argument that royalties should be limited to sales within six years prior to proceedings.

The judge also addressed the practice of heavy discounting of past sales in prior licences, attributing this to non-FRAND factors such as the territorial nature of patents and limitation periods. The court held that these non-FRAND distortions should be corrected in determining the FRAND rate.

When unpacking lump sum licences, the judge rejected reliance on subjective internal accounting allocations of consideration between past and future sales, preferring an objective measure dividing total consideration by total units. The judge preferred the blended rate approach over splitting past and future rates separately.

Of the comparable licences, the judge found the "LG 2017" licence to be the best comparable and used the blended per unit rate derived from it as the basis for determining the FRAND rate for Company B, adjusted for Company B's sales characteristics. The judge rejected the other comparables as less relevant or reliable.

The judge found that Company A's 5G Extended Offer and Company B's lump sum offer were both outside the FRAND range. The judge also rejected Company A's top-down cross-check valuation as inconsistent with the comparables analysis.

Regarding interest, the judge held that interest should be awarded on past royalties to reflect the time value of money, at the rate agreed by the parties for late payments under the draft licence (4% compounded quarterly). The court rejected arguments that no interest should be awarded due to Company A's conduct or lack of losses.

On appeal, the court upheld the judge’s rejection of limitation as relevant and the award of interest. However, the court found an internal inconsistency in the judge’s approach to the per unit rate derived from LG 2017: the judge found heavy discounting of past sales was a non-FRAND distortion but failed to adjust the blended rate accordingly. The court concluded that the per unit rate should be adjusted upward from $0.24 to an estimated $0.30 to correct for this inconsistency, with a corresponding adjustment to the conversion ratio.

The court emphasized that the judge's multifactorial evaluations were entitled to deference unless flawed by error of principle or logic, but found the identified inconsistency justified correction without remittal. The court rejected Company B's arguments that the judge erred in the treatment of interest or the inclusion of past sales.

Finally, the court found no reason to overturn the judge’s finding that Company A was not a willing licensor, but noted that this finding is of limited relevance given the parties’ current positions and the determination of FRAND terms.

Holding and Implications

The court’s final decision is to allow the appeal by Company A in part and dismiss the cross-appeal by Company B.

The court UPHELD the judge’s ruling that Company B must pay royalties on all past sales, rejecting the relevance of limitation periods in the FRAND context.

The court UPHELD the award of interest on past royalties at 4% compounded quarterly.

The court MODIFIED the per unit royalty rate derived from the LG 2017 licence, increasing it from $0.24 to $0.30, and adjusted the applied conversion ratio accordingly, resulting in a higher lump sum payment than originally awarded.

The court REJECTED Company A’s top-down cross-check valuation as a reliable indicator for FRAND terms.

The court MAINTAINED the judge’s finding that Company A was not a willing licensor, but found no practical purpose in declaring this formally given the current status of the licence.

The direct effect is that Company B must pay a higher lump sum royalty plus interest, reflecting a corrected FRAND rate. No new precedent altering the fundamental principles on limitation or interest was established, but the decision clarifies that internal accounting allocations should not distort FRAND rate determinations and that courts may correct non-FRAND distortions in comparable licences.