Comment on Mannheim Regional Court IP Bridge v. TCT

Several courts have emphasised that non-discrimination in FRAND licensing does not require the patentee to apply a “one size fits all” approach. In Unwired Planet v. Huawei the UK courts allowed any kind of discrimination as long as the resulting royalty rate is equal or below the fair and reasonable rate set by the court. This concept named “no hard-wired discrimination” effectively abolishes the non-discrimination requirement in FRAND.

In Sisvel v Haier the German Federal Court of Justice (FCJ) chose a different approach and applied the binding European competition law rules against excessive and discriminatory pricing (Article 102 TFEU). According to the FCJ, there is not just one fair and reasonable royalty rate. Rather FRAND is regarded as a range of fair and reasonable rates from which the patentee may choose in each individual case. Still, different rates cannot be applied arbitrarily, but require some objective justification and a balancing of interests.

A recent decision by the Mannheim Regional Court in a case between IP Bridge and TCT (case 2 O 136/18, judgement of 21 August 2020) added another interesting aspect to the non-discrimination branch of FRAND. According to the Mannheim Regional Court applying the same royalty rate to all licensees can also be discriminatory, if the licensees are substantially different.

The plaintiff in the Mannheim case had based its royalty calculation on a top-down approach. The plaintiff had first estimated an adequate overall royalty rate for all LTE essential patents of 8.8% of the sales price of a smart phone. This overall royalty amount was then applied to an industry wide average sales price for smart phones worldwide from 2011 to 2016 to arrive at one specific royalty amount for all LTE essential patents. This overall LTE royalty amount was then multiplied with the plaintiff’s share of relevant LTE essential patents to arrive at one specific royalty amount for the plaintiff’s own LTE portfolio.

The defendant did not accept this offer, but made a slightly modified counter offer. The counter offer was based on the same top-down approach and overall LTE royalty rate. The plaintiff’s share in the overall LTE patents was not challenged either. However, the plaintiff asserted that its own smartphone range is in the low to mid-price segment and therefore the overall average sales price is too high. The industry-wide average sales price includes high-priced premium smartphones with much higher profit margins, which distort the royalty calculation for low to mid-price smartphones. Consequently, the defendant applied the mutually accepted royalty rate to the average price of its own product range and calculated a reduced royalty amount on this basis.

The Mannheim Regional Court held that the plaintiff’s offer was not FRAND. The average sales price for the entire worldwide smartphone range resulted in a royalty rate, which was too high when applied to the defendant’s range of low-priced budget smartphones. In the court’s view, the royalty rate has to reflect a fair share in the profits achievable by the defendant with its products. Accordingly, the defendant’s calculation was accepted as FRAND. In this context, the court also rejected the plaintiff’s arguments that a patentee is not obliged to subsidise price dumping by charging lower royalty rates for budget products. The court remarked that according to the available evidence the defendant did not apply any dumping practices, but merely focused on budget and mid-price products.

This first instance decision shows that a “one size fits all” approach may indeed lead to comparatively high royalty rates for low price products. From this perspective, a royalty rate calculated as a percentage of the licensee’s actual sales price appears more adequate. However, applying a percentage to the actual sales prices could also lead to disproportionately high royalty rates for premium smartphones, which generate additional profit margins e.g. by the use of valuable materials, superior components, additional functions or sophisticated design. Therefore, a single royalty amount based on the value provided by the use of the respective standard in the devices and not on profit margins or retail prices of various manufacturers may also have its merits.

With its decision, the Mannheim Regional Court addressed an interesting issue, which was not discussed in detail so far by other courts in FRAND cases. It remains to be seen whether this case continues and which perspective the higher courts will take on this issue.