A recent high-profile court decision from the United Kingdom (UK) shines light on a common abusive standard-essential patent (SEP) licensing tactic that has impeded internet of things (IoT) innovation for years. This case, involving a dispute between InterDigital Technology Corporation (IDC) and Lenovo Group Limited (Lenovo), seemingly has little to do with small businesses but reveals, and provides important context around, SEP licensing abuse that ACT | The App Association members innovating on standardized technology have long experienced.

For context, technical standards like Wi-Fi and 5G are the building blocks for connectivity across countless consumer and enterprise use cases. Use of these standards requires licensing patented technology included in, and claimed as essential to, a standard. Because of a SEP holder’s inherent gatekeeping position, standard-setting organizations (SSOs) that house the development and facilitation of technical standards mitigate a SEP holder’s ability to abuse their heightened market power by requiring a commitment to license their SEPs on fair, reasonable, and non-discriminatory (FRAND) terms. The construct is supposed to ensure that any reasonable user of the standard can get the licenses they need. Yet, in practice, many SSOs do not provide enough clarity as to what FRAND means (including the policy of the European Telecommunications Standards Institute [ETSI], at issue in this case), enabling the systematic exploitation of those ambiguities by SEP holders.

In the dispute between IDC and Lenovo, a UK court sought to determine if IDC’s licensing terms to Lenovo were FRAND. The court found that IDC was unwilling to act in good faith in its negotiations with Lenovo and with past licensees, including small and medium-sized enterprises (SMEs). In making its determination, the court notably found that:

  1. A potential licensee cannot be deemed unwilling to negotiate a license in good faith until a FRAND determination has been made. The court recognized the persistent problem of SEP holders, like IDC in this case, imposing unreasonable terms, including excessive royalty fees, that run afoul of the FRAND commitment (known as patent hold-up), on potential licensees in pain of domestic exclusion. That a licensee does not accept discriminatory royalty rates does not make the licensee per se unwilling to negotiate a license in good faith.
  2. A SEP holder’s FRAND commitment to “any particular implementer” is “irrevocable.” Some SEP holders will discriminate against licensees based on where they sit in a value chain in an effort to license at the end of that chain where they can argue for the licensing fee to include value unrelated to the patented invention itself. In providing this important point, the court reinforces that the “ND” in FRAND indeed means non-discriminatory.
  3. The value of a SEP should not reflect value unrelated to the relevant “functional unit.” The court recognized that royalties payable to the SEP holder by, for example, a mobile phone manufacturer should not reflect the value of the entire phone because the device includes features that do not function based on the SEP technology. The court provided backing to the straightforward concept that value of a SEP should reflect the patented technology itself and should not include surrounding unrelated factors.

And in reaching these important conclusions, the court provided some interesting insights into the tactics used by abusive SEP licensors, noting that IDC routinely and “plainly” discriminated against SMEs in the SEP licensing process. In one instance, the court states:

     “Third and most importantly of all, the sizes of the volume discounts said to be used by InterDigital
plainly discriminate against smaller licensees,
which is exactly what FRAND is supposed to avoid.”

That a court would identify this practice as out of alignment with SEP licensor FRAND behavior is quite important, and such a practice should be concerning to anyone who recognizes the value of an open standards system.

While the UK is still developing its approach to SEP licensing, this case identifies some important principles of the FRAND commitment and identifies actions by SEP holders that are not compliant with that commitment. These findings should be valuable to other UK courts as well as the UK’s Intellectual Property Office and Competition Markets Authority, both of which are engaged with SEP policy consultations that will hopefully result in changes to boost the UK’s competitiveness and support SME innovation. More broadly, the court’s findings discussed above give useful insights to SSOs and other jurisdictions around the world that are developing their own guidance on handling SEP disputes.