Context: Last Friday, the England & Wales Court of Appeal dealt InterDigital the biggest blow (July 14, 2024 ip fray article) that any standard-essential patent (SEP) holder has suffered in court since Motorola Mobility against Microsoft.
What’s new: This morning Ericsson announced a multi-year license agreement with OPPO (July 15, 2024 Ericsson press release). This confirms what ip fray suspected on LinkedIn, where it mentioned OPPO and vivo as potential licensees (July 12, 2024 LinkedIn post by ip fray). Meanwhile, InterDigital is engaging in damage control, trying to explain away the relevance of the 22.5-cent per-unit royalty determination in the UK (July 14, 2024 corporate blog post by InterDigital’s licensing chief).
Direct impact: OPPO has entered into various major license agreements, notably Huawei and the two Nordic wireless innovators Ericsson and Nokia. The fact that Ericsson and OPPO reached an agreement without having to resort to litigation further isolates InterDigital, which is still suing OPPO and keeping OPPO out of the German market, as well as Lenovo, which is embroiled in litigation with Ericsson. As for InterDigital’s take on the UK decision, the numbers speak a clear language as yesterday’s ip fray chart visualized, and the fact that the hundreds of millions of devices covered by the royalty determination are mostly from the pre-5G era is of limited relevance, if any, as explained below.
Wider ramifications: At a time where antitrust authorities, other government officials and lawmakers are taking ever more interest in SEP matters, the present flurry of developments is certain to be watched closely.
Ericsson’s second-quarter results indicated that a license deal with a large smartphone maker had been struck. The last time that a major SEP licensor announced a license agreement with an unnamed smartphone maker involved Xiaomi, but Xiaomi and Ericsson are known to have entered into a license deal a few years ago (too early for a renewal). Today’s press release by Ericsson confirms that it’s OPPO.
OPPO is a company that increasingly also emphasizes the importance of its own patent portfolio. It will be interesting to see which outbound license deals OPPO is going to strike in the future. But just like OPPO may at some point elect to enforce patents, it’s also true that Ericsson occasionally finds itself on the receiving end of patent infringement lawsuits (July 2, 2024 ip fray article on $847 million verdict).
Lenovo is one of those rare cases where Ericsson has to litigate, and ip fray believes that dispute should settle sooner rather than later, though there always is a risk of protracted litigation.
Between InterDigital and Lenovo, a settlement would also make sense now, but it’s hard to see how InterDigital can expect to receive substantially more on a per-unit basis on Lenovo’s future device sales than the outcome of two rounds of UK litigation, with the appellate panel including judges who are reasonably sympathetic to patent holders. For instance, Lord Justice Birss wrote a concurrence in which he expresses the view that he’d rather have awarded InterDigital a higher per-unit royalty.
Yesterday, InterDigital’s licensing chief Eeva Hakoranta explained in a corporate blog post why InterDigital believes the UK royalty determination “is not a decision which can be used to assess a future- looking reference with a completely different technology sales mix during the 5G era – for Lenovo, or any other party.” For the avoidance of doubt, Mrs. Hakoranta is one of the industry’s most well-respected licensing executives. But it’s obvious that (and why) she is trying to explain away the significance of the UK royalty determination.
The UK royalty determination spans a long period: from 2007 through the end of 2023. For everything starting January 1, 2024, a new UK proceeding is underway.
That means the vast majority of the relevant devices were made before the 5G era. But a 5G license, with the rare exception of the situation between Qualcomm and Transsion (which will be the subject of another article soon), is a “multimode” license: it covers 5G as well as the earlier standards for backwards compatibility reasons. That means a 5G phone can also connect to 4G networks, for instance.
The number of 2G phones that Lenovo sold must have been very low. Most of the relevant sales will have been in more recent years rather than ages ago, as one can tell based on the amount of interest. At a rate of 4% per year, compounded quarterly (meaning there’s a lot of interest on interest) we’d be talking about a far larger amount of interest if there had been a huge level of sales in the late 2007s and early 2010s. For example, under that interest formula, the total interest rate including interest on interest for payments that were due 10 years ago would be 47% by now.
The actual amount of interest indicates that most of the royalty obligations are from recent history, meaning that 2G and 3G royalties are not really relevant. At least we’re talking about 4G for the most part. That leads us to the question of whether 5G is, in reality, more expensive (on the licensing front) than 5G. For smartphone it’s not.
InterDigital’s published rates show only a gradual change from 4G to 5G. And that change does not appear to be supported by the license fee that Apple agreed to pay to InterDigital under the latest seven-year agreement as compared to what Apple paid before.
Licensing expert Eric Stasik published his observations on how cellular royalty rates evolved between 2012 and 2023 (June 20, 2024 LinkedIn post by Avvika founder Eric Stasik). It appears that smartphone makers are not paying more for 5G than for 4G licenses. InterDigital has had some growth in recent years, but in the end they will have to explain to a court of law why they should be entitled to a 5G premium if others don’t manage to be paid more. They would need to raise arguments such as a higher share of essential patents.
Again, InterDigital’s Apple deal does not suggest that a 4G rate is not a reasonable comparable for 5G, nor will that be the case for any deal between InterDigital and OPPO, which is simply consistent with the overall industry (non-)trend. Automotive is a more complex story: the same lobbyists who complain about Avanci’s 5G rate being higher than the 4G rate put out a report just a couple of weeks earlier that shows 5G objectively adds enormous value to the car industry (July 12, 2024 ip fray article).
Here, again, is a simple mathematical fact to consider (which was already mentioned in yesterday’s article): the UK appeals court raised the per-unit rate by 29% over the High Court’s decision, but it would have had to raise it by 185% to arrive at InterDigital’s proposed rate. That means the discrepancy between InterDigital’s “ask” and the court’s “award” is just too much to be bridged by any such argument as 5G allegedly costing more than 4G.
InterDigital points to the Munich I Regional Court’s view that at least one would have to take inflation into account when relying on the UK royalty determination. But inflation in the overall economy is the wrong measure here. It’s about whether royalties increased at that rate. Even InterDigital’s published rates assume a relatively low cap for the per-device price, which minimizes the impact of inflation on actual royalty income.
For the InterDigital-Lenovo dispute, there is no question that unless they settle, the England & Wales High Court will have to set a rate for devices sold starting January 1, 2024, and that finding can be appealed again by the losing side (or by both sides if either party is unhappy with some parts of the decision). In the meantime, the German judiciary has to look again at the question of whether InterDigital is a willing licensor (which the England & Wales Court of Appeal declined to decide) and Lenovo a willing licensee (where Lenovo’s argument is that they are prepared to pay the amount that came out of two rounds of UK litigation).