Context: Two UK appeals involving FRAND (fair, reasonable and non-discriminatory) licenses to standard-essential patents (SEPs) are presently awaiting judgment: Tesla v. Avanci (December 3, 2024 ip fray article) and Lenovo’s pursuit of an interim license from Ericsson (February 18, 2025 ip fray article). Even prior to those two appeals, Optis Wireless appealed a 2023 decision by Mr Justice Marcus Smith, sitting on the High Court of Justice for England & Wales (EWHC) at the time, according to which Apple owed royalties of only approximately $5 million per year, which surprised observers at the time.
What’s new: What must be added to the England & Wales Court of Appeal’s (EWCA) FRAND queue is the Optis v. Apple appeal starting today. In terms of the sheer number and breadth of the issues raised, it is the largest UK (and probably even global) FRAND appeal to date. The EWCA scheduled a five-day hearing to discuss literally dozens of issues the Optis group (which also includes PanOptis and Unwired Planet) has raised.
Direct impact: Based on the redacted version of Optis’s skeleton argument, it appears highly unlikely that the lower court’s ruling will be upheld. What is impossible to predict at this stage, however, is the scope and scale of the adjustments that will be made, and whether the appeals court will arrive at a new number or remand to the EWHC for further proceedings. It is difficult to predict the potential numerical impact, but according to Optis’s skeleton argument, the per-unit royalty could be approximately five times higher even if the judge’s top-down valuation approach (instead of a focus on comparable licenses) was affirmed.
Wider ramifications: Optis criticizes (also through a public-facing campaign) Apple’s alleged hold-out strategies designed to devalue SEPs. One fundamental question related to this appeal is the extent to which Apple can persuade courts to arrive at low FRAND rates based on concessions made by other patent holders, with respect to other patent portfolios, who were unable to wait to get paid. Beyond the question of FRAND valuation, this appeal also tackles another case of extraterritorial overreach by the UK judiciary. After a trial and a post-appeal retrial in the Eastern District of Texas, Mr Justice Smith wanted to bar Optis from continuing its litigation in the U.S. (which involves only past damages).
It is generally difficult to form an opinion on the merits of a FRAND rate appeal. Lengthy and heavily redacted rulings contain interesting information and allow some inferences, but some important data points will always be missing. Pleadings and (even in the U.S.) expert reports remain sealed.
Even when a decision comes down, there are different ways of interpreting it. For example, in InterDigital v. Lenovo, the outcome of the appeal was officially welcomed by both sides, and it cannot even be ruled out that, at least in the short term, the multi-faceted decision (which involved not only FRAND rate-setting principles but also back-royalties) was beneficial to both, just in different ways. The big question is going to be what it means for future renewals between InterDigital and licensees such as Xiaomi. We won’t know for a couple of years, if ever.
The long list of alleged errors that Optis has presented is not a sufficient basis to conclude that Mr Justice Smith made mistakes. Theoretically, an appellant could throw in the kitchen sink hoping that something will stick. But here, the skeleton argument does make points that suggest there are serious issues, even if one takes into account that litigants always view the case through the lens most favorable to them. Here’s an example of something that almost certainly suggests that the EWHC judgment must be overruled at least in part:
In respect of cross licences: the Judge analysed the cross licences by netting off the stack shares, but without factoring in the different volumes of sales by the respective counterparties, which resulted in a wholly inaccurate analysis of the value of the cross licence.
It means the EWHC ignored one of the most basic concepts of any patent licensing negotiation and damages determination, which is called exposure:
Let’s assume that Apple agrees on a cross-license with, say, Nokia. Apple sells huge numbers of phones. Nokia sells network infrastructure products, which are more expensive but the volumes are tiny compared to Apple’s. If the two parties agree on a payment to be made by Apple, it’s like Nokia gets its royalty rate multiplied by Apple’s sales while Apple gets its royalty rate multipled by Nokia’s sales. But what does not matter is the difference between the two rates (if we assume, for the sake of the argument, that it is the key determinant (as it is in a top-down valuation) for the two royalties rates). One party needs the other’s patents for huge numbers of products, and the other with respect to only a low sales volume.
In an abstract example with simple and fictitious numbers, let’s assume two smartphone makers entering into a cross-license: A and B. A sells 100 million phones a year, B sells 1 million. Now, A owns 5% of the relevant SEP stack (for example, 5G multimode), and B owns 2%. Of course, you can say that A’s stack share exceeds that of B by 3% (5%-2%). It just isn’t relevant in any way. Let’s assume, again on a totally fictitious basis and for the sake of having simple numbers to operate with, that the aggregate per-unit royalty per phone (and we also assume A and B make comparable products) is $20. In that case, A will owe B 100 million times $0.40 (2% of $20), and B will owe A 1 million times $1 (5% of $20). As a result, A pays $40 million and gets only $1 million. But A has a far higher stack share.
When an appeal raises an issue like that, it becomes practically impossible to imagine that the lower court’s decision can stand.
There are some points in the skeleton argument that appear similarly compelling. If an appellant has several “no brainer” type of arguments, yet raises many more, then it’s probably not because an avalanche of weak arguments is used for lack of a few strong ones. It’s more likely that the challenged decision does not withstand scrutiny.
To be fair, Mr Justice Smith is the President of the Competition Appeal Tribunal (CATribunal or CAT), and only a part-time patent judge. It is worth noting, however, that the CAT’s review of agency decisions (by the UK Competition & Markets Authority (CMA)) faces a very high standard: unless an aspect of a CMA decision is just legally erroneous or procedurally improper, it must be irrational. That is the term they actually use. It is a very exacting standard, though not as exacting as the colloquial meaning of the word implies. At any rate, ignoring exposure is not rational. Not even in a colloquial sense.
This is not the time and place to talk about other issues. Suffice it to just mention that the judgment was based on neither side’s expert testimony, but the judge came up with his own reasoning. The kind of reasoning that does not take exposure into account.
As for judicial overreach, that problem has recently been discussed a few times in connection with the Nokia-Amazon and Ericsson-Lenovo interim license matters, so there is no need to re-raise the concerns here.
It will be interesting to see what comes out of this appeal. It has implications not only for Optis but for the SEP ecosystem at large.