Unpacked: Patents Court determines FRAND terms for Samsung-ZTE global cross-licence

The English Patents Court has determined the terms of a global FRAND (Fair, Reasonable And Non-Discriminatory) cross-licence between Samsung and ZTE, landing on a FRAND lump sum balancing payment from Samsung (as net payer) to ZTE of $392m.

Whilst the English courts have determined the terms of global FRAND licences three times previously (see our earlier commentary here, here and here), this is the first time that they have determined the terms of a FRAND cross-licence.

We unpack the FRAND royalty aspects of this decision below.

Background

Samsung and ZTE both own a portfolio of patents that are essential to various standards relating to cellular connectivity. As is common for standard essential patent (SEP) owners, both parties have given undertakings to ETSI (the European Telecommunications Standards Institute) to grant licences of their respective SEPs to implementers of the relevant standards on FRAND terms.

The current dispute between Samsung and ZTE arose out of failed negotiations to renew a SEP cross-licence agreement between them that had expired at the end of 2023 (the 2021 PLA). Those negotiations having failed, in December 2024, Samsung brought proceedings in the UK asking the English courts, amongst other things, to determine the terms of a global FRAND cross-licence. 

Perhaps unsurprisingly, the key area of disagreement between the parties related to price. Both parties agreed that Samsung would be the net payer under any new cross-licence, but they disagreed about the amount of that net payment. Samsung’s position was that it should not have to pay more than $200m, whereas ZTE was asking for $731m. 

In order to reach a conclusion on what was FRAND, the court had to determine a number of important factors, including: which comparable licence to use in the valuation process, the mechanics of unpacking that licence and repacking it into the court-determined licence, and any adjustments needed to account for non-FRAND factors. 

Choice of comparable licence

Both parties pleaded their cases based on comparables, but there was a dispute about which comparable(s) the court should use.

Samsung submitted that the court should use the 2021 PLA or, alternatively, ZTE’s 2020 licence agreement with Apple (ZTE-Apple licence), under each of which ZTE’s patents were being licensed (the Big Two).

ZTE, however, argued that those weren’t appropriate to use as comparables due to the impact of certain non-FRAND factors that were in play when they were entered into. Instead, ZTE argued that it would be more appropriate to use certain licences entered into by Samsung with Ericsson, Nokia and InterDigital (ENI licences). Under each of these licences, Samsung was the net payer and so the key patents being licensed were third party patents. 

The court concluded that the ENI licences were not suitable as comparables as the patent portfolios covered were very different to ZTE’s portfolio. Ericsson’s, Nokia’s and InterDigital’s expertise at licensing, as well as their willingness to litigate, also led the court to conclude that there was likely a “very substantial non-FRAND factor” at play in each. 

The Big Two, however, were found to be appropriate comparables, despite both being severely affected by non-FRAND factors. Perhaps surprisingly, the court ultimately preferred the ZTE-Apple licence over the parties’ own previous agreement (the 2021 PLA) because it found the ZTE-Apple licence was less affected by non-FRAND factors, required less adjustment, didn’t involve certain complications relating to 5G and, consequently, was slightly easier to unpack.

Mechanics of unpacking and repacking

Once the main comparable had been chosen, it needed to be unpacked to calculate the effective royalty rate implied by it and then repacked into the court-determined licence to give a lump sum figure. 

To account for the non-FRAND factors impacting the ZTE-Apple licence – particularly a price reduction given due to that licence being one of ZTE’s first licences-out and the depressed figure ZTE received for its 5G portfolio – the court notionally increased the lump sum paid under the ZTE-Apple licence by 21%.

As far as unpacking and repacking were concerned, the parties largely agreed on the general approach but there were a number of disputes, including on the following.

For unpacking:

• Whether to use an ad valorem or DPU (dollar per unit) approach when unpacking the notional balancing payment for handsets – the court landed on DPU.
• How to treat past sales under the ZTE-Apple licence – with the court finding that the general impact of US sanctions on ZTE, together with ZTE’s need to bring money in quickly, at the time that licence was negotiated would be best reflected as an 80% discount for past sales, with no allowance for interest on those sales.
• The method to be used to forecast future sales.
• The specific weightings to be used for the various standards for 4GMM and 5GMM devices.
• Whether expired patents should be included in the denominator when calculating stack shares – the court found they should not.

For repacking:

• Whether adjustments to account for portfolio strength should only include patent families with a granted member or whether those with applications only should also be included – the court concluded that patent families with applications only should be included.
• The adjustment to be made to account for differences in geographic sales distribution between Apple and Samsung.
• Whether past sales that were not covered by the 2021 PLA should be included and paid for in the court-determined licence and, if so, the rate of interest – the court found they should be included and paid for with interest at 5%.

Applying all of this to the facts before it, the court concluded that the FRAND lump sum balancing payment due from Samsung to ZTE under the court-determined licence should be $392m.

Comment               

This is another useful example of the English courts’ approach to assessing FRAND royalties and is the first time that the English courts have determined such royalties in a cross-licence scenario.

As with the majority of the courts’ previous decisions, the parties and the court adopted a comparables approach to determine the royalties payable and the court’s judgment reflects the “broad axe” approach that we have seen from previous Court of Appeal decisions. A number of novel points were, however, addressed and so this decision is another must-read for those involved in the sector.

The judgment does not, however, require ZTE to enter into this licence. ZTE has not given an undertaking to the English court to take a licence on these terms and has brought its own claim in China for a determination of global FRAND terms. 

It remains to be seen whether either party will appeal (although all previous first instance FRAND royalty decisions in the English courts have been) and how this decision may impact and interact with the ongoing FRAND royalty proceedings in China. 

Either way, with the UK Supreme Court due to hear arguments on the correct approach to determining FRAND terms for global SEP licences in the Summer, and, separately, to determine whether the English courts have jurisdiction to determine FRAND terms at the request of an implementer where the licence is offered by an intermediary as part of a patent pool, this year is expected to be another huge year for the English courts in the SEP/FRAND licensing space.