Stop press: High Court hands down FRAND judgment in Samsung v ZTE

The High Court has today handed down its judgment in Samsung v ZTE, determining the FRAND terms of a global cross-licence between the parties. This is the first cross-licence FRAND determination to reach judgment in the UK.

The decision provides detailed guidance on determining FRAND terms using the comparable licences method, particularly in identifying what the Court called “good comparables” and what adjustments should be made to account for any non-FRAND factors which may have affected those licences.

Key points from the decision

• The Court set a FRAND lump sum of $392 million for the licence. This was a cross-licence, so is the balancing payment in favour of ZTE.
• The Court determined the FRAND rate using the comparable licences method, rejecting the top-down cross-check put forward by ZTE on the basis that, on the facts of this case, it was excessively sensitive to its underlying assumptions.
• The Court held that ZTE’s own licences with Apple and Samsung, described in the judgment as the “Big Two”, were the best starting point for determining a FRAND rate, but found both were severely affected by non-FRAND factors.
• The Court held that the presence of non-FRAND factors did not disqualify those licences as comparables, and that such factors could instead be addressed through appropriate adjustments.
• The Court ultimately relied only on one of the Big Two, ZTE’s licence with Apple, finding that it gave rise to less difficulty when unpacking. It preferred using a single best comparable as a starting point, rather than combining a good comparable with a less good one, which it considered impractical and contrary to case law such as the guidance in Cimetidine.
• The Court made what it accepted were not “surgical” adjustments to account for non-FRAND factors, including treating the Apple lump sum as 21% higher to reflect a 12.5% first licence discount and a 5% discount given that ZTE had not achieved full value for 5G. The Court also assumed that past sales had been discounted by 80% to reflect the impact of sanctions and ZTE’s need for rapid cash.
• Consistent with previous FRAND decisions in the UK, the Court found that interest on all past sales must be paid, in this case, at a rate of 5%. 

The “Big Two” licences and non-FRAND factors

The non-FRAND factors identified in the judgment included:

• ZTE’s constrained negotiating position following US sanctions
• Its minimal experience in out-licensing at the time of the negotiation
• A marked imbalance in bargaining strength against highly experienced counterparties 

The Court also considered that ZTE was in a position in which it would have been perceived as having only low willingness and/or ability to litigate its patents by infringement proceedings, whereas Samsung and Apple were much better placed to defend any such claims.

The Court did not find that this amounted to “hold-out” by either Samsung or Apple. However, it did find that, as a result of these factors, ZTE realised only a low price in each of the Big Two and that ZTE is entitled now to insist on full FRAND value in the licence determined by the Court.

Preference for the ZTE-Apple licence

The Court based its determination on the ZTE licence with Apple, which it preferred given that it gave rise to less difficulty when unpacking. This is because the fact that it was an agreement with a different licensee could be satisfactorily allowed for and:

• It was less affected by non-FRAND factors, so required less adjustment, and less subjective adjustment
• It did not have the complication of being a partial licence of 5G 

The Court found that using both of the Big Two would amount to combining a good comparable with a less good one, which would be impractical and contrary to the guidance established in Cimetidine and reiterated in later case law.

Adjustments applied by the Court

The Court assessed the adjustments to be made in a way that it accepted was not “surgical”, finding that:

• ZTE had effectively given Apple a reduction of 12.5% (one eighth) because it was concluding its first out-licence
• ZTE had given another reduction of 5% because, given the facts established in this case, ZTE achieved a somewhat depressed amount for its 5G portfolio 

The combined effect of these is that the lump sum paid should notionally be treated as 21% higher.

The Court also found that the general pressure on ZTE from the US sanctions and the associated need for rapid cash was severe and was best reflected, as a past sales discount of 80% notionally having been given, on top of the first licence discount and 5G reduction.

Rejection of other comparables

A central dispute in this case concerned the appropriate comparables. The Court noted that it should look at the whole situation in the round and that, had there been major problems with using the Big Two or the ZTE-Apple licence, it would have been open to taking a more lenient view of other licences. However, in this case, it rejected the other licences for the reasons set out below. 

• The Samsung licences with Ericsson, Nokia and InterDigital that ZTE’s valuation case relied on were unusable due to the portfolios of those three counterparties being “so different” from ZTE’s portfolio; the considerations mentioned by the Court included the counterparties’ great expertise at out-licensing and, particularly, their willingness and ability to litigate, which indicated significant non-FRAND elements in the outcomes.
• The four other Samsung licences with NEC, Docomo, Datang and Sharp, as well as the Samsung licence with Huawei which both parties rather “tentatively” identified as potentially offering a middle ground, did not provide a reliable basis to proceed. The Court found that these licences were too internally inconsistent and divergent from other licence sets for it to be possible to identify a FRAND pattern or standard or “going rate” on which the Court could rely.
• Three of ZTE’s own licences with Vivo, Oppo and Xiaomi were not contended for by either party, and the Court agreed that they were not useful on the basis that they could not reliably be unpacked, whether or not they were comparable.

Conclusion

This decision shows that the Court is willing to consider and grapple with non-FRAND factors affecting comparable licences, and to reflect those factors through appropriate adjustments rather than excluding such licences altogether. It also demonstrates that the Court is open to using either a single licence or a set of licences as the basis for its determination, depending on which provides the most reliable foundation in the circumstances.

Notably, in this case Samsung has undertaken to enter into the licence determined by the Court but ZTE has not (since otherwise it would effectively have been abandoning the Chongqing proceedings). It therefore remains to be seen how the parties will respond to this judgment in the context of their wider global dispute.