Update on October 10, 2024: InterDigital somehow retracted or modified its press release with a subsequent email. This is very confusing. Hard to tell what is going on. InterDigital may have made a statement that was inaccurate or in breach of the arbitration agreement.
Context: Research and licensing firm InterDigital and Lenovo have been embroiled in a multi-jurisdictional standard-essential patent (SEP) dispute. While InterDigital is entitled to substantial back-royalties as a result of about 15 years of unlicensed use and the England & Wales Court of Appeal (EWCA) increased the per-unit royalty by almost 30%, the UK outcome was still far below the royalty rate InterDigital sought and typically gets (see the charts and the analysis in a July 14, 2024 ip fray article). Despite InterDigital having sought far higher rates than withstood judicial scrutiny in the UK, German courts enjoined Lenovo (and declined to stay the enforcement of an injunction), thereby providing yet another indication of German SEP enforcement being dysfunctional (July 17, 2024 ip fray article). The Unified Patent Court (UPC) is in the process of developing a new body of SEP case law that should be more balanced (as discussed in the previous ip fray article).
What’s new: Today, InterDigital and Lenovo announced a license agreement that settles their litigation in court, but the financial terms of which are subject to binding arbitration (October 9, 2024 press release by InterDigital). There will typically never be an announcement of the royalty rate determined in arbitration, but it may be possible to deduce the numbers from InterDigital’s financial reports and the license terms could become the subject of debate in future FRAND disputes involving one of those parties.
Direct impact: Lenovo can now continue (or resume) its German sales. It is unlikely that Lenovo would have entered into this arbitration agreement without pressure from German SEP enforcement. It is impossible to know whether the terms of the arbitration agreement (such as what FRAND standard shall be applied and what arguments will be considered by the arbitrators) favor one side or the other, or are simply balanced. There was a potential hold-up situation due to the ongoing enforcement in Germany, making it a possibility that the terms of the arbitration agreement are more favorable to InterDigital, even if maybe only slightly so.
Wider ramifications: This is another example of Alternative Dispute Resolution (ADR) enabling parties to withdraw SEP-related lawsuits. Previously, InterDigital entered into a similar agreement with Samsung (January 3, 2023 press release by InterDigital). In that case, the parties were presumably on the brink of litigation as the timing suggests that a previous license agreement had just expired when the announcement was made.
Announcement: In this context it’s worth mentioning that ip fray is preparing a podcast series (independently, but with official support from Ericsson), and the first one of those podcasts will be all about existing ADR options for SEPs with a speaker from an organization that has tremendous expertise in ADR (and particularly also SEP-related ADR) as well as lawyers who are highly knowledgeable in this field.
Guidance from the UK courts must have helped InterDigital and Lenovo to “agree to agree.” They don’t know yet how much will be paid, though the agreement to arbitrate (or a side letter to that one) might set out a minimum payment obligation for Lenovo. What the announcement doesn’t say either is whether Lenovo will make interim royalty payments to InterDigital under the agreement, but that is a possibility, too.
The dispute didn’t reflect favorably on either party. InterDigital tried to inflate royalty rates by forcing small companies (who lacked the resources to mount a proper defense in the event of infringement litigation) into agreements on supra-FRAND terms, and the UK judiciary didn’t accept those agreements as comparable business terms. Lenovo, however, was unlicensed for an unusually long period.
FRAND arbitration is a question of parameterization unless parties agree to leave everything, even the definition of the FRAND standard, to the arbitration panel. One question over which parties routinely disagree is whether FRAND is defined as a number at the lower or higher end of the range, potentially even somewhat outside the range, or the middle of the range. For example, a wording that considers any royalty demand to be FRAND as long as it is not clearly abusive favors the SEP holder as it could even be a (moderately) supra-FRAND number.
The dispute showcased the fundamental difference between the German and UK approaches to SEP disputes. In the UK, the lower court set a rate and the appeals court adjusted it upwards, though the result was still far closer to Lenovo’s than Ericsson’s position. The Munich I Regional Court didn’t want to make a proper FRAND determination with experts, but also declined to take the UK outcome seriously. At the end of this month, the European Commission, represented by outside counsel, will try to convince the Munich Higher Regional Court that Huawei v. ZTE must be applied sequentially (August 4, 2024 ip fray article), which in this case would have required considerably scrutiny of InterDigital’s royalty demand.
Lenovo is still embroiled in SEP litigation with Ericsson. The Office of Unfair Import Investigations (OUII) of the U.S. International Trade Commission (USITC, or just ITC), a U.S. trade agency with quasi-judicial powers, sided with Ericsson on FRAND (September 18, 2024 ip fray article).