Context: Ericsson and Lenovo are suing each other over (mostly) standard-essential patents (SEPs) in several countries. Four months ago it became known that Lenovo incredibly claimed to be entitled to a net royalty payment from Ericsson despite a somewhat comparable SEP holder, Nokia, receiving payments from Lenovo (May 22, 2024 ip fray article).
What’s new: A pleading filed by the Office of Unfair Important Investigations (OUII, commonly referred to as the “ITC Staff”) finds Ericsson in compliance with its FRAND licensing obligations, casts serious doubt on Lenovo’s own conduct in various ways, describes one of Lenovo’s arguments as “disingenuous” and reveals that Lenovo wants Ericsson to pay approximately $1.4 billion per year for a license to Lenovo’s SEPs while Lenovo would pay Ericsson less than 1% of that amount. That number flies in the face of everything that is known about market rates for SEP licenses.
Direct impact: The United States International Trade Commission (USITC or just ITC) is a trade agency with quasi-judicial powers. The ITC Staff does not make the decisions but participates as a third party in some investigations. Its views are not binding on the Administrative Law Judge (ALJ) hearing the case in question, much less on the Commission, the ITC’s top decision-making body, but bears significant credibility with, and is frequently adopted by, the actual decision makers. The ITC Staff believes at least one claim of each of the four SEPs-in-suit is valid and infringed, making a U.S. import based on four SEPs a possibility.
Wider ramifications: The ITC Staff’s findings could serve as persuasive authority in Ericsson’s favor in other jurisdictions, such as in Latin America and the UK. From a comparative law point of view it is worth nothing that the standard applied by the ITC Staff is, at first sight, closer to the German Sisvel v. Haier case law than the ECJ’s Huawei v. ZTE framework, but the ITC hears expert testimony on FRAND rates. The implementer’s conduct is also considered, but unlike in Germany, cases are usually not resolved primarily (if not purely) on that basis.
The FRAND section of the ITC Staff’s corrected post-trial brief, a public version of which has now become available on the ITC’s electronic docket, states the following assessment upfront:
The weight of the evidence shows that Ericsson complied with its FRAND commitment by negotiating in good faith. Further, the Staff submits that there is no credible evidence that Ericsson has engaged in patent hold-up in its negotiations with Lenovo.
On dozens of pages, the ITC Staff analyzes the course of the negotiations, the parties’ litigation conduct and some of their key arguments. To the extent that Lenovo argues it is already licensed to a third of Ericsson’s SEPs under a prior (Motorola Mobility) license agreement, the ITC Staff does not see how even that would tip the scales in Lenovo’s favor. The same applies to a gradual difference in the average selling price per Lenovo smartphone. Even if one agreed with Lenovo on those points, Ericsson would still not have acted in bad faith.
The passage on Lenovo’s February 18, 2024 counteroffers is remarkable to say the least, given that every neutral observer of the cellular SEP licensing business would realistically expect Lenovo, not Ericsson, to be the net licensee, but also because Lenovo made two offers for a license to its own SEPs, one of which doesn’t even include the sale of devices, a highly unusual if not unprecedented structure. All emphases in the quoted passage below are also in the original.
Over two months after Lenovo filed a complaint asserting Lenovo’s 5G patents, Lenovo sent a counteroffer to Ericsson on February 18, 2024. […] A summary of the terms is below:
- Lenovo would pay $0.289 per device to Ericsson for a license to Ericsson’s standard essential cellular patents, which Mr. Mulgrew calculated to be about $11.6 million per year. […]
- Lenovo offered two options for a license to Lenovo’s 5G portfolio:
- Make and internally use option: Ericsson would pay 0.465% of its infrastructure equipment revenue, but only receive the right to “make or internally use” infrastructure equipment liable for patent infringement and only be released from liability “[u]pon expiration of the Term (but not any early termination thereof), and only if no customer of Ericsson pursued any patent or other intellectual property rights against Lenovo or its Affiliates.” Ms. Petersson stated that this option would cost “hundreds of millions of U.S. dollars . . . per year.” […]
- Make, use, or sell option: Ericsson would receive license rights to sell its infrastructure equipment, but would pay 0.465% of network operator’s services revenue for the portion of that revenue that was “facilitated by Ericsson’s equipment market share,” which Lenovo estimated was 28.1% of over $1 trillion per year. Mr. Mulgrew confirmed that based on his calculations, Ericsson would pay about $1.4 billion per year, which over the 5 year license term would amount to around $7 billion. […]
Lenovo does not do itself any favors by taking such outlandish positions.
The fact that the ITC Staff considers Lenovo’s double standards “disingenuous” doesn’t reflect favorably either:
Lenovo argues that Ericsson improperly sought an injunction with its first offer. […] As an initial matter, in the Staff’s view, it appears disingenuous for Lenovo to argue that filing a lawsuit on the same day as sending an offer where Lenovo filed an ITC complaint against Ericsson on 5G SEPs two months before making its first offer to Ericsson.
This gets even better (or worse, depending on one’s perspective) because the ITC Staff notes that “Ericsson engaged in negotiations for at least two years before filing the complaint, and those negotiations have continued after the complaint was filed.”
The filing contains a chart that shows Lenovo’s expert projected future average selling prices for smartphones that would be contrary to the actual trend in the market, compared to which Ericsson’s expert assumes slightly higher prices, but Lenovo’s expert assumed far higher ones.
Diplomatically, the filing says that “[t]he Staff is of the view that Lenovo technically is not an unwilling licensee because Lenovo agreed to be bound by the UK Rate-Setting Action,” but the ITC Staff figured out that Lenovo actually doesn’t even want to be bound by a FRAND determination in U.S. district court: Lenovo clearly favors the UK.
A thinly-veiled hold-out allegation is that “it appears to the Staff that Lenovo has at least delayed resolving these issues through negotiations.”
Given that the ITC Staff “is of the view that at least one claim of each asserted patent is infringed and not invalid,” there is now considerable risk to Lenovo. A U.S. import ban over several SEPs not unrealistic. The ALJ has to decide, the Commission may adopt or review the decision, and Lenovo could hope for a Presidential veto. But sooner or later it will need a license to Ericsson’s patents, and the idea of Ericsson making a net payment to Lenovo (let alone a billion-dollar amount per year) cannot be taken seriously. Litigants often take extreme positions, but what Lenovo has been doing in the dispute with Ericsson appears counterproductive.