Stephen Korniczky, Sheppard Mullin partner

Stephen Korniczky and Sheppard Mullin Richter & Hampton made good law for smartphone makers a year ago on the valuation of standard-essential patents. Now, they're bringing those same arguments about fair, reasonable and non-discriminatory (FRAND) royalties to new industries: automotive technology and the industrial internet of things.

On Tuesday, Sheppard sued IP powerhouse InterDigital Inc. on behalf of u-blox, a Swiss developer of cellular modules used in automobile navigation systems and other connected devices. U-blox accuses InterDigital of demanding “exorbitant non-FRAND” royalties for patents that are essential to practicing the 2G, 3G and 4G wireless standards.

The San Diego federal court complaint also contends that InterDigital is discriminating against u-blox by charging some competitors lower rates. Additionally the suit, which seeks a judicial declaration of a FRAND rate for InterDigital's 2G, 3G and 4G portfolio and an an order restraining InterDigital from discussing its license with customers, accuses InterDigital of making threats to u-blox customers about u-blox's license status.

“InterDigital appears intent to pressure u-blox into a license that is not FRAND by interfering with u-blox's important customer relationships,” u-blox contended in a complaint signed by Korniczky.

InterDigital told The Recorder through a spokesperson that the company is disappointed that u-blox has chosen litigation and that it is willing to negotiate or settle the matter through arbitration.

U-blox's arguments echo those made by the same Sheppard team on behalf of TCL Communication Ltd. in its groundbreaking 2017 trial with Ericsson Inc. That suit turned on the commitment patent owners make in exchange for participating in new technology standards. The case is now the subject of intensive appellate litigation at the Federal Circuit.

TCL prevailed on U.S. District Judge James Selna of the Central District of California to adopt a “top-down” methodology for valuing Ericsson's standard-essential patents (SEPs)—that is, determining an aggregate royalty for all patents essential to the standard, and then calculating Ericsson's proportional share. The result was that TCL owed a royalty of about 0.4 percent per phone for practicing the 4G standard, rather than the 1.5 percent Ericsson had been seeking. TCL argued that the top-down methodology prevents “royalty stacking,” where the cumulative effect of individually negotiated licenses outweighs the value of the technology.

Ericsson, flanked by a squadron of amici curiae including InterDigital, is arguing to the Federal Circuit that there was no evidence of royalty stacking in the TCL case, and Selna therefore should have looked instead at actual comparable licenses that Ericsson negotiated with other smartphone makers “in the real world.”

“In general, [Selna's] methodology for analyzing FRAND royalty terms would lead to systematic undercompensation of patent owners,” InterDigital argues in its amicus brief, signed by Wilson Sonsini Goodrich & Rosati partner David Steuer.

The appeal is on track to be argued this spring.

TCL, Motorola, Huawei and Samsung are among the companies that have been litigating the contours of the FRAND commitment in various courts over the last several years. Apple, Qualcomm and the Federal Trade Commission are set to thrash out the antitrust implications of non-FRAND licensing in a series of trials beginning Friday.

“We saw this fight play out in the smartphone industry, and now it's being fought on new battlefields,” Korniczky said in an interview this week. “The difference is the TCL decision now provides a FRAND methodology that gives companies the ability to fight back against the SEP owners.”

U-blox has been licensing InterDigital's 2G, 3G and 4G patents since 2011. Rather than smartphones, its modules are used in automobile navigation systems, and for locating and connecting everything from wearable fitness devices to shipping containers.

Over the years u-blox has come to believe that it's paying too much for InterDigital's patents. When a previous license expired in 2017, InterDigital allegedly made threats directly to u-blox's customers. The specifics are redacted from u-blox's complaint, but the company says they've caused customers to “question u-blox's credibility and reliability, and to lose their trust in u-blox.” The company is seeking a TRO to block any further such communications.

“InterDigital has no incentive to negotiate FRAND terms because in the past it has been able to force u-blox into license extension agreements that required u-blox to continue paying the existing exorbitant non-FRAND rates,” Korniczky writes. “InterDigital is thus able to hold u-blox hostage by threatening its customers when the existing license agreement expires.”

InterDigital spokesman Patrick Van de Wille noted that Interdigital agreed to extend u-blox's license in 2017. “We're disappointed that u-blox has resorted to litigation rather than continuing to discuss a further extension of its license,” he said. “We remain perfectly willing to negotiate in good faith with u-blox for a license to our cellular patents on FRAND terms and conditions, and even to go to arbitration if we can't reach agreement. Any assertions by u-blox to the contrary are without merit.”

In addition to claiming that InterDigital is seeking too high a rate, u-blox contends that the company is unfairly discriminating among competitors, “by demanding u-blox pay higher royalty rates than other implementers, including free riders,” Korniczky writes in the complaint.

In the TCL case, Selna concluded that Ericsson had discriminated against TCL and its lower-priced phones by demanding a minimum floor on its royalties, rather than charging a pure percentage of the phone's sale price as it had other customers.

Dave Carey, u-blox's senior vice president for cellular product strategy, said his company has been negotiating with InterDigital for more than two years without a resolution. The company “needs to protect our customers and compete on an international basis. Therefore, u-blox has requested the courts to resolve the matter.”