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In the highly contentious and rapidly evolving area of standard essential patents (SEP), the recent decision of the Court of Appeal of England and Wales in has reinforced the principle that parties are responsible for running their cases. In placing limits on judicial discretion, the court reaffirmed the primacy of real-world comparables when valuing fair, reasonable and non-discriminatory (FRAND) licences.

The dispute concerned the licensing of mobile telecommunications patents. Optis, the appellant, held patents declared to a standards setting organisation to be essential to 4G (LTE) standards and was therefore the SEP holder. It sought royalties based on a licence it had granted to Google. Apple, the implementer of the SEPs, put forward a lower lump-sum valuation based on its own licensing history.

The trial court agreed with neither approach, rejected expert valuation evidence and used its own methodology to decide the annual value of the patent stack. By averaging many licences, including Apple’s deals with other SEP holders, and using Optis’s estimated stack share of 0.38%, the judge fixed a global lump-sum licence fee of USD56.43 million. The appeal centred not on the actual costs of FRAND-compliant licences, but on how such sums were calculated.

The Court of Appeal, allowing the appeal, held the trial judge’s approach to be procedurally unfair, unsupported by trial evidence and flawed in principle. Dismissing the evidence of accountancy experts who had relied on accepted methods to unpack lump sums into per-unit rates was unjustified. Unpacking was a necessary, if imperfect, tool to compare licences differing in structure, location and time.

The judge’s averaging method was arbitrary, involving subjective assumptions and statistical cherry-picking. The parties had no opportunity for scrutiny or rebuttal, violating the right to fair process.

FRAND licensing determinations assess actual, reliable licensing deals. The court held that judicial discretion may interpret such agreements, but cannot adopt its own homemade economic model. This was particularly so for one that downplayed sales volume, portfolio strength and market context.

The court made clear a number of matters. The first is the primacy of comparable licences. This refers to licences similar in subject matter, scope, and negotiating context, involving the same SEP portfolio. Next, unpacking methods are legitimate. Whether done on a free release, simple or blended discount basis, unpacking extracts consistent pricing metrics from lump-sum agreements.

Royalty formatting is flexible. Lump sums, fixed per-unit (DPU) rates, or ad valorem royalties can all be FRAND. The right format depends on market practices and the implementer’s business model. Negotiation behaviour matters. Parties must show good faith and willingness in agreeing FRAND terms. Here, both sides adopted inflexible positions, Optis demanding ad valorem rates and Apple sticking to per-unit figures (DPU).

Importantly, expert evidence matters. Although unpacking is subjective, involving personal judgment, it is no ground for rejecting expert evidence. Courts need such input because commercial licences are complex and multifactored. Judges cannot substitute their own untried models, particularly in cases involving SEPs and FRAND terms.

Lastly, SEP holders frequently resorting to hold-ups and hold-outs adopted by implementers may discredit comparable licences wholesale.

As well as leading to greater predictability of UK FRAND litigation, the decision cautions SEP holders and implementers to look at robust comparable licences before contemplating litigation. Although courts may adapt methods to fit novel situations, they cannot disregard the evidentiary foundations of expert analysis. Judicial innovation must be grounded in transparency, due process and a respect for adversarial testing.

This decision provides clarity for SEP licensors and licensees. Reasoned, well-supported licensing offers, based on past market practice, carry more weight than theories or rigid frameworks. The Optis case is a return to the principle that valuation must be grounded in commercial reality, not judicial intuition. As the latest 5G, AI and IoT SEP litigation looms, this will surely be seen as a landmark case.

Essenese Obhan is the managing partner and Urvashi Singh is an associate at Obhan & Associates