Accurate predictive biomarkers of response to immune checkpoint inhibitors (ICIs) are required for better stratifying cancer patients to ICI treatments. Here, we present a new concept for a bioassay to predict the response to anti-PD1 therapies, which is based on measuring the binding functionality of PDL1 and PDL2 to their receptor, PD1. In detail, we developed a cell-based reporting system, called the Immuno-checkpoint Artificial Reporter with overexpression of PD1 (IcAR-PD1) and evaluated the PDL1 and PDL2 binding functionality in tumor cell lines, patient-derived xenografts, and in fixed-tissue tumor samples obtained from cancer patients. In a retrospective clinical study, we found that the functionality of PDL1 and PDL2 predicts response to anti-PD1, and functionality of PDL1 binding is a more effective predictor than PDL1 protein expression alone. Our findings suggest that assessing the functionality of ligand binding is superior to staining of protein expression for predicting response to ICIs.