Refusals to grant SEP licenses and SEP provisioning

The Court of Appeal decision in the case of Interdigital vs Lenovo [[2024] EWCA Civ 743] [https://www.bailii.org/ew/cases/EWCA/Civ/2024/743.html ] dated 12th July 2024 raises several areas of interest in the context of the SEP/FRAND debate. As well as the headline-grabbing Court assessed rate of $0.225 per unit, which has been declared a victory by InterDigital, Lord Justice Arnold made some observations in relation to the business of SEP licensing generally

It is noteworthy that Lord Justice Arnold made clear that, under the ETSI IPR policy, licenses to SEPs must be made available to every market participant. As was noted in the Unwired Planet vs ZTE Supreme Court deicsion: "the terms and conditions on offer should be such as are generally available as a fair market price for any market participant, to reflect the true value of the SEPs to which the licence related and without adjustment depending on the individual characteristics of a particular market". Lord Justice Arnold stated (at para.188): "FRAND terms reflect the value of the SEPs in the portfolio and must be available to any market participant".

The Judge may not be aware of the industry wide issue that many companies encounter in getting SEP licenses, and may not have been aware that several SEP holders steadfastly refuse to grant licenses to market participants that want one. He is of course absolutely right that holders of SEPs under the ETSI IPR Policy should not be permitted to refuse licenses to those companies seeking them. That was never envisaged by the ETSI Policy and I have written the paper on this before with Dave Djavaherian [https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4231645 ]. It would be interesting to see how Lord Justice Arnold would approach that issue if it came before him.

The second, and related issue, concerns his comments that implementers should take active steps to approach SEP holders and to make provision for the royalty rates that might be payable. This again brings to the fore an age-old practical problem which has been around since the days of GSM about how companies can realistically do that when there are hundreds of companies that have declared patents to be essential to the 3G, 4G and 5G standards, when many of those companies simply don’t take any steps to seek to monetise their portfolios, and when studies show that something like 80% of declared SEPs, when tested, turn out to be invalidated, not essential or not infringed. In the mid-nineties, with GSM, there were a comparative handful of patents and patent holders and an approach to patent holders was realistic.

I’m aware of at least one European smartphone brand (an SME) that in 2022 actively approached several large SEP holders to obtain 3G and 4G SEP licenses for their smartphones. One SEP holder did grant a license, whilst InterDigital and another SEP holder steadfastly refused to do so, and another, whilst acknowledging the request, never sent details of their license terms. Back in the early 2000's when I was General Counsel at an SME phone manufacturer called Sendo we actively approached most of the larger patent holders seeking SEP licenses - most did never even bother to reply.

So in practical terms, and away from the Court of Appeal, there are real issues that face implementers, even those that want a license and want to understand the costs of market entry so they can price their products accordingly.

In addition to that, even if a company like InterDigital was willing to grant a license on FRAND terms, what would those license terms look like? And what should an implementer provision for? In InterDigital‘s case, would it be their desired “jackpot” rate published on their website for 4G handsets (0.5% of net selling price with a floor of $0.25 and a cap of $1.00)? Or would it be the rate of $0.225 that the Court of Appeal has declared is the FRAND rate for InterDigital’s portfolio of 3G and 4G SEPs? Or would it be the rate of $0.22 per unit charged to Samsung, or the $0.44 per unit rate charged to Huawei, or the $0.52 per unit rate charged to Apple of $0.52 per unit (these are the rates InterDigital represented to Lenovo were paid by these companies). Again, it would be interesting to know what a UK Court would expect a company to do in that instance.

We know from several recent cases that the published rates of large SEP holders differ hugely from the rates actually paid by most of the market. SME and smaller licenses are particularly disadvantaged because they do not have the funds to go to Court and are forced to enter into licenses based on representations made by SEP holders that the rates charged are FRAND. They suffer what I call the “willing licensee penalty“ because companies that go to Court get to see the actual market rates, whereas willing licensees are not able to do so because SEP holders hide behind their self imposed confidentiality obligations. Lord Justice Arnold said [again at para.188]: "There should be no discrimination in favour of implementers who are slow to take a licence and against implementers who are quick to take a licence. If anything, it should be the other way around". There can be no justification to charge an SME (who approaches an SEP holder to take a SEP license) four (4) times the amount charged to a large multinational.

In any event, given the revelations in recent cases of the real amounts payable by large companies, and the true market rates of the SEP portfolios, one has to question what the value of a SEP published rate is at all. Perhaps it’s a signal from one dominant SEP holder to other dominant SEP holders of what prices they are seeking to charge for their portfolio?

The comments of Lord Justice Arnold clearly highlight another reason why we need the European SEP Regulation and to increase transparency. And what the market needs is real and true transparency and not just the jackpot rates that SEP holders publish and force SMEs and smaller companies to take.

What we preferably need is for SEP holders to grant free SEP licenses to SMEs to enable them to innovate using the standards the SEP holders want to proliferate. I have proposed a solution for that and am continuing to engage with SEP holders and SMEs.