BREAKING: Apple has effectively prevailed over the Optis Wireless patent licensing firm in the High Court of Justice (formerly known as the England & Wales High Court, still commonly abbreviated as EWHC). Optis will receive only approximately US$5 million per year from Apple, and we're talking about a worldwide standard-essential (SEP) portfolio license covering all Apple products implementing cellular connectivity, even "a hypothetical Apple car, retailing at a hypothetical US$100,000 and using the Standard for Cellular Connectivity."
Let's face it: London is not the city of milk and honey for SEPholders. After the Unwired Planet v. Huawei decisions by the High Court, Court of Appeal, and UK Supreme Court, some thought the United Kingdom would become one of the world's most attractive SEP enforcement destinations. In March, Mr Justice Mellor--also almost one year after the related trial--handed down his InterDigital v. Lenovo decision, which overwhelmingly favored the interests of the defendant. One could have a debate over whether InterDigital or Optis is now likely more disappointed, but neither of them can be pleased with the amounts.
The decision already came down on May 10, but it has not been published yet. I've been able to obtain some basic information and snippets from a source I must protect. I had no idea that the judgment had already been entered when I wrote on May 27 that it could be further delayed by Mr Justice Marcus Smith's new merger case (Microsoft v. Competition & Markets Authority, over the $68.7B acquisition of Activision Blizzard King). He not only hears patent cases but is also the President of the Competition Appeal Tribunal of the United Kingdom. I live-tweeted about the initial case management conference last week and subsequently blogged about that case. I'll also comment on next Monday's second case management conference, and I'll be speaking about the application of competition law to SEPs at a London conference on Tuesday that is keynoted by Mr Justice Smith and organized by Concurrences together with King's College London. I look forward to meeting some of my readers there. I very rarely attend in-person events.
Getting back to Optis v. Apple:
It's possible that Optis will appeal the decision. If it standards, Apple gets a global lifetime license (including backroyalties) to that patent portfolio for roughly $60M (including interest). Optis wanted a lot more--in fact, so much more that Apple even threatened with leaving the UK market should the UK part of the dispute result in an obligation to take a worldwide license at a rate Apple would have deemed excessive. Apple withdrew the threat, but it shows that they were afraid of a worst-case scenario far in excess of what the High Court has now decided.
Some of Apple's arguments for bringing down the royalty rate were rejected, and that includes Apple's favorite SEP devaluation argument, which is that the smallest saleable patent-practicing unit (SSPPU) should serve as the royalty base. Mr Justice Smith authored an entire section "to explain why the SSPPU approach is, in [his] judgement, indefensible." Wow. "[I]ndefensible."
Interestingly, Mr Justice Smith even agreed with Apple that the baseband chipset "does contain the relevant technology." And Optis did not really dispute that the market value of that one is approximately $25. Then Mr Justice Smith notes that--at that price--"[t]he product is, however, unlicensed." And he rejected the idea that if a baseband chipset maker generates a profit of maybe $5 on the $25 component, it "should pay for the licence out of the US$5 profit, and that this therefore constituted the absolute limit that ought to be paid by anyone."
Mr Justice Smith did not mince words as he criticized Apple's SSPPU argument:
"Indeed, it is quite absurd to presuppose that the manufacturer of a baseband chipset would forego any part of their profit unless absolutely compelled to do so. It is much more likely that baseband chipset manufacturers would increase the price of their product to reflect the added value to purchasers of that product of having a licence to the SEPs comprising the stack. Absent extremely clear market evidence, the assumption that the baseband chipset manufacturer would absorb the costs of the licence and not pass them on is almost certainly both unsafe and wrong. Certainly, it cannot be assumed."
Mr Justice Smith made adjustments to Optis's share of the 4G SEP stack, and (presumably because not all of Optis's infringement assertions succeeded) based that patent owner's share of the total royalty stack on an even lower percentage (we're talking about less than 1%) than its ownership share. He did not find Apple to have been an unwilling licensee who would no longer be entitled to a FRAND license.
One key overlap between Mr Justice Smith's approach in Optis v. Apple and Mr Justice Mellor's in InterDigital v. Lenovo is that the patent holder's proposed comparable license agreements were rejected because the respective licensees were smaller players:
"[G]iven the nature of Optis’ counterparties to the Optis Comparables – generally small players in the market, with low or at least not massive sales volumes – there is a question whether these licences properly reflect a FRAND rate for a counterparty like Apple."
By contrast, all of the comparable license agreements that Apple asked the court to rely on where agreements between Apple and other parties:
"The Apple Comparables are all licences where the common factor is Apple. Apple sought and obtained licences to different portfolios with different counterparties. This means there is no direct comparable with the portfolio in issue before me (which is a factor pointing away from the usefulness of the Apple Comparables), but some insight is gained into the value of the Stack as a whole, and the value attributed (at least so far as a company the size of Apple is concerned) to different portfolios held by different counterparties. The size and commercial “clout” of the licensee may be (I do not say is) a relevant factor in terms of royalties in any event."
The decision spans almost 300 pages, and I have yet to obtain and digest the document in its entirety. I did, however, want to share some of the most important and interesting aspects of the ruling now--not least also with a view to the Tuesday conference (The Innovation Economics Conerence for Antitrust Lawyers), where Mr Justice Smith may also say something about the valuation of FRAND-pledged SEPs.
