This marks the second issue of WilmerHale’s FRAND Quarterly: Navigating the Global SEP Landscape, a bulletin that will highlight developments about the licensing, litigation, and regulation of patents that are or are claimed to be essential to industry standards (SEPs) and are subject to commitments to be licensed on fair, reasonable and non-discriminatory (FRAND) terms. Each quarter, we will cover important developments spanning the globe that impact SEP litigation and FRAND licensing.
The beginning of 2024 saw two overarching trends in FRAND litigation:
- National courts continue to grapple with competing foreign actions: A court in the Eastern District of North Carolina rejected an antisuit injunction that would have prevented Ericsson from enforcing injunctions in Brazil and Colombia. Across the pond, a UK court rejected Lenovo’s request for a declaration of an “interim license” because it concluded that Lenovo’s main purpose for seeking the declaration was to use it as part of its FRAND defense in parallel infringement proceedings in Germany.
- More courts are offering guidance on good faith willingness in licensing negotiations: In India, the Delhi High court labelled Lava an “unwilling licensee” for asking for comparable agreements, suing Ericsson days before a licensing meeting, and not making counteroffers. In China, the Supreme People’s Court set out behavioral guidance for both licensors and licensees to be considered willing in a FRAND negotiation. In the US, a court in the Eastern District of Texas indicated that negotiating in good faith is a reciprocal obligation, but that duty can be discharged if one of the parties fails to negotiate in good faith.
US:
Motion for TRO and antisuit injunction based on global FRAND claim denied where claim would not resolve foreign cases. On February 14, 2024, Judge Terrence Boyle of the Eastern District of North Carolina denied Lenovo Inc.’s motion for a temporary restraining order and antisuit injunction to prevent Telefonaktiebolaget LM Ericsson from enforcing SEP injunctions in Colombia and Brazil. Lenovo claimed that Ericsson had pursued injunctions in these jurisdictions because of their strategic importance as markets and the relative ease of obtaining injunctions from them. Lenovo further asserted that an antisuit injunction was appropriate because, among other reasons, the dispute before the North Carolina court, where Lenovo sought determination of global FRAND royalties, would be dispositive of the Colombian and Brazilian actions. The court disagreed, noting that while Lenovo had a counterclaim asking the court to set FRAND terms for a global cross license, Ericsson also sought a declaratory judgment holding that its past offer to Lenovo was FRAND. The court observed that Lenovo had not committed to accepting Ericsson’s offer if judged to be FRAND and would not be legally required to do so. The court ultimately concluded that it was “not persuaded that resolving the underlying contract issues will force either Lenovo or Ericsson into a global licensing agreement that would resolve the patent infringement claims at the core of the Brazilian and Colombian actions.”
Parties that negotiate FRAND licenses under French law have reciprocal obligation to negotiate in good faith, which may be discharged by the other party’s bad faith. On January 22, 2024, Judge Rodney Gilstrap in the United States District Court for the Eastern District of Texas held that, under French law governing FRAND commitments made to the European Telecommunications Standards Institute, when licensors and licensees negotiate a license for FRAND-committed SEPs, they have a reciprocal obligation to negotiate in good faith. The court rejected Samsung Electronics’ argument that the obligation could never be suspended and agreed with G+ Communications’ that a temporary suspension may be appropriate where one party fails to negotiate in good faith. The court further explained that the obligation would not resume until the deficient party ceased its bad faith behavior. The court also found that, under French law, a party that acts in good faith in FRAND negotiations may recover damages (including, but not limited to, attorneys’ fees and costs) against a party that prevents the execution of a FRAND license through bad faith.
In a separate decision on March 1, 2024 following a jury trial where G+ Communications was awarded damages of $67.5 million against Samsung Electronics for infringement of two SEPs, the court ordered a new trial on the issue of damages. The court expressed concerns that the jury had intended to award a lump sum even though it selected the running royalty option on the verdict form. The court noted that neither party had addressed the concept of a running royalty during trial and that the original verdict form had not specified whether the damages award would be in the form of a running royalty or a lump sum. The court further stated that the parties’ failure to educate the jury about the different concepts during the trial meant that the jury’s damages verdict was not sufficiently reliable. This conclusion was further supported by the fact that the damages award for one of the SEPs went beyond G+’s highest requested per-unit rate and thus lacked evidentiary support. On April 17, a new jury awarded damages of $142 million for the two patents.
Europe:
Proposed EU SEP Regulation: state of play and next steps. On February 28, 2024, the European Parliament overwhelmingly approved a version of the SEP Regulation that had been previously adopted by its Committee on Legal Affairs (JURI) (for more details, please see the previous issue of our newsletter). The JURI report was adopted with 454 votes in favor, 83 against, and 78 abstentions. Different political groups of the Parliament had proposed last-minute amendments to the SEP Regulation, none of which were retained in the approved version.
The Council of the EU (Council) will now need to adopt its own version of the SEP Regulation. Then, the SEP Regulation will enter the “trilogue” process, during which the Commission, the Council, and the European Parliament will negotiate a provisional political agreement on the text. The SEP Regulation would then need to be formally adopted separately by both the Council and the European Parliament. As noted in our previous newsletter, given the scheduled elections for the European Parliament in early June 2024, there may be some delay before the Regulation could come into full force.
UK:
Interim FRAND license denied in Lenovo v InterDigital. In a previous proceeding brought by InterDigital, Mr Justice Mellor set the terms of a FRAND license between InterDigital and Lenovo that expired at the end of 2023. On March 21, 2024, in new a proceeding brought by Lenovo against InterDigital, Mr Justice Richards refused Lenovo’s request for a declaration that an interim license on the same terms as the now-expired license would be FRAND. The court decided that because the primary purpose of the requested declaration was to be deployed as a FRAND defense to InterDigital’s parallel German infringement action, it had no real value in the UK proceedings. Further, the court expressed concern that it was not possible to say with certainty that the terms of the previous 4G license covering a lengthy historic period remained FRAND for a future license that would include 5G. In denying the interim license request, the court also rejected InterDigital’s application to stay the U.K. proceedings in favor of the German proceedings, holding that the German court that is addressing alleged infringement was embarking on a different task than the UK court which is focused on rate-setting. The German infringement hearing took place on April 18, 2024.
UK court issues global FRAND license. On February 16, 2024, Mr Justice Marcus Smith issued the final order and global FRAND license in the Optis v Apple case (HP-2019-000006). The license sets out the essential terms that reflect the FRAND Judgment. Some of the key terms of the license are:
i. Apple’s payment of the total fee of $63.7 million, including interest.
ii. Optis granting a world-wide license covering all of Apple’s products until the expiry of the longest-living of the patents within Optis’ portfolio.
iii. Optis agreeing not to sue Apple and/or not proceeding with any litigation against Apple in relation to any patents in the Optis portfolio in any jurisdiction.
iv. Optis releasing and discharging Apple from all claims of infringement of the patents in Optis’ portfolio and/or any related claims concerning Optis’ portfolio.
v. An assignment of the license is only permissible with the written approval of the UK court.
The UK has jurisdiction to set the FRAND terms of a global cross-license between Lenovo and Ericsson. As reported in our previous update, Lenovo has brought a claim against Ericsson in the UK. In March 2024, the parties battled as to whether the UK should hear the rate-setting claim rather than a U.S. court in the Eastern District of North Carolina (EDNC). On the basis of the U.S. law expert evidence filed by the parties, Mr Justice Richards found that there was a possibility the EDNC will not ultimately determine a FRAND rate for a global cross-license between Ericsson and Lenovo. The court reached that conclusion not just because the EDNC has never actually determined a FRAND rate, but also because of the wording of Ericsson’s complaint. The way Ericsson framed its request to the EDNC makes it conceptually possible for the EDNC to decide that Ericsson “complied with its F/RAND commitment” in negotiating with Lenovo without actually resolving what a FRAND rate actually is.
The court further rejected Ericsson’s argument that as the “net licensor,” Ericsson should have the benefit of deciding what jurisdiction sets a FRAND rate. First, Ericsson’s evidence did not persuade the court that it would necessarily be the net licensor. Second, if the English court has jurisdiction, even if Ericsson were a net licensor, it does not have the unilateral right to require the English court not to exercise its jurisdiction. The court established the English court jurisdiction by characterizing Lenovo’s case as one that seeks the “vindication of the rights inherent” in the Lenovo UK SEP asserted against Ericsson.
Guidance expected on ability of a prospective licensee to bring rate-setting claims in the UK. Since our last update, Tesla has brought a claim against InterDigital and Avanci alleging, among other things, that the Avanci 5G program rate for automotives is supra-FRAND, and that the U.K. court should assess the rate for the entire patent pool. Litigators will not, however, get any guidance from the English court in the Kigen v Thales case – the first case brought by a potential licensee. The trial, which was due to take place in April, was vacated after the parties settled.
India:
The Delhi High Court awards its highest damages in a SEP dispute. On March 28, 2024, Ericsson secured the equivalent of $29 million in damages against Lava, an Indian smartphone manufacturer. This is the highest damages award granted to a SEP owner in India. The decision concluded a nine-year dispute that commenced when Ericsson filed an infringement action over eight of its patents alleged to be essential to the 2G/3G standards. During the dispute, one of Ericsson’s SEPs was revoked and the remaining seven were found to be valid, essential, and infringed by Lava. Although Lava argued that it did not need a license to Ericsson’s SEPs because Lava’s chipset manufacturers were already licensed by Ericsson, the court found that Lava had not demonstrated patent exhaustion and had no indemnity agreements with any of the chipset manufacturers.
Judge Amit Bansal found that Lava deliberately employed hold-out tactics and so had not acted in good faith. In particular, the court criticized Lava for:
i. Asking for comparable agreements. The court considered it a “blatant disregard” of the confidential nature of these agreements for Lava to seek third-party agreements, despite the parties negotiating under a non-disclosure agreement (NDA). The court also considered that ETSI does not impose a duty on SEP owners to disclose comparable agreements.
ii. Suing Ericsson three days before a licensing meeting was scheduled to take place.
iii. Not replying to Ericsson’s March 2013 offer.
iv. Not making a counteroffer to Ericsson.
In determining FRAND royalties, the court refused a method of valuation based on the smallest saleable patent practicing unit (SSPPU) because it concluded that network connectivity is not merely an additional feature for mobile devices but a core functionality. Therefore, the court concluded that using the SSPPU undervalues the contribution of Ericsson’s SEPs to the overall value of the device. The court also held that the prevailing industry practice is to calculate royalties based on the price of end-product devices, concluding that even previous SSPPU supporters (such as the Institute of Electrical and Electronics Engineers Standards Association which is a standard-setting organization) now recognize that end-product level valuation is “more appropriate.”
The court further concluded that Ericsson’s offers to Lava were within the FRAND range. In particular, the court “perused” some of Ericsson’s comparable agreements and found the rates to be similar. The court calculated damages awarded based on the loss of license fees and set a royalty rate, as per Ericsson’s offer, at 1.05% of the net sales value of Lava’s devices, applicable from November 1, 2011 to May 8, 2020, which amounted to $29 million.
China:
China provides guidance on Comparability and Willingness. In January 2024, the China Supreme People’s Court (“SPC”) published its finding in cases brought by Advanced Codec Technologies, LLC (“ACT”) against OPPO and Vivo for alleged infringement of six SEPs for the adaptive multi-rate wideband standard. These cases concerned past damages and the determination of a FRAND rate for China, with the SPC also commenting on behavioral principles to be applied more widely to the conduct of SEP holders and licensees in rate setting cases.
First, the SPC considered the below criteria that should be considered when determining the comparability of a license agreement:
i. Similarity of negotiation circumstances. This factor focuses on the background of the transaction, including the parties’ negotiating conditions, such as whether legal proceedings were initiated and whether there was any threat of injunction.
ii. Similarity of the licensing entities. The commercial positions of licensor and licensee along with their business models, and their relationship will be reviewed.
iii. Similarity of the patents in issue. This factor involves an appraisal of whether the license is for all or a subset of the patents in dispute. Furthermore, an evaluation of the similarities between the quantities or qualities of the licensed patents would be assessed.
iv. Similarity of the license terms. Analysis of the calculation of the license rate, the license scope, the license period, and the payment method would, for example, be assessed within this category.
v. Nationality of the licensee. The SPC noted that the nationality of the licensee would also be considered as a factor, i.e., whether the licensee is a well-known Chinese telecom company.
The behavioral rules that the SPC considered that licensors and licensees should follow when negotiating SEP agreements are as follows:
- Licensors: Must justify their licensing offers and explain why they reject counteroffers. They must also share how royalties are calculated and provide necessary patent details or explanations on technical points if requested.
- Licensees: Can reserve the right to challenge the patent’s validity or essentiality. However, unreasonable licensing requests, delays, or interrupting negotiations without reason would be considered signs of bad faith. The SPC also noted that a licensee could put in escrow the license royalty corresponding to its counteroffer.
